[Senate Hearing 111-987]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 111-987

          PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO 
                              FORECLOSURE

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

                                HEARING

                               before the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

     EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO 
 FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD ON U.S. HOMEOWNERS 
          AND THE HOUSING MARKET DURING THE ECONOMIC DOWNTURN

                               ----------                              

                    NOVEMBER 16 AND DECEMBER 1, 2010

                               ----------                              

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




                                                        S. Hrg. 111-987

 
    PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE

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

                                HEARING

                               before the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

     EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO 
 FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD ON U.S. HOMEOWNERS 
          AND THE HOUSING MARKET DURING THE ECONOMIC DOWNTURN

                               __________

                    NOVEMBER 16 AND DECEMBER 1, 2010

                               __________

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


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

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

                    McGinnis, Acting Staff Director
        William D. Duhnke, Republican Staff Director and Counsel

               Jonathan Miller, Professional Staff Member
                     Marc Jarsulic, Chief Economist
                 Beth Cooper, Professional Staff Member
                 William Fields, Legislative Assistant
                  Drew Colbert, Legislative Assistant

            Mark Oesterle, Republican Deputy Staff Director
                    Jim Johnson, Republican Counsel
                 Jeff Wrase, Republican Chief Economist
            Chad Davis, Republican Professional Staff Member

                    Erin Barry, Legislative Assistant

                       Dawn Ratliff, Chief Clerk
        Levon Bagramian, Legislative Assistant and Hearing Clerk
         Brett Hewitt, Legislative Assistant and Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor


                            C O N T E N T S

                              ----------                              

                       TUESDAY, NOVEMBER 16, 2010

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statement of:
    Senator Shelby...............................................     5
        Prepared Statement.......................................    50
    Senator Akaka................................................    51
    Senator Brown................................................    51

                               WITNESSES

Thomas J. Miller, Attorney General, State of Iowa................     7
    Prepared statement...........................................    53
    Response to written questions of:
        Senator Shelby...........................................   190
        Senator Brown............................................   194
Barbara J. Desoer, President, Bank of America Home Loans.........     8
    Prepared statement...........................................    56
    Response to written questions of:
        Chairman Dodd............................................   195
        Senator Shelby...........................................   197
        Senator Brown............................................   204
R.K. Arnold, President and Chief Executive Officer, Merscorp, 
  Inc............................................................    10
    Prepared statement...........................................    60
    Response to written questions of:
        Chairman Dodd............................................   208
        Senator Shelby...........................................   209
        Senator Brown............................................   212
Adam J. Levitin, Associate Professor of Law, Georgetown 
  University Law Center..........................................    11
    Prepared statement...........................................   102
    Response to written questions of:
        Senator Shelby...........................................   218
        Senator Brown............................................   221
David B. Lowman, Chief Executive Officer for Home Lending, 
  JPMorgan Chase.................................................    13
    Prepared statement...........................................   121
    Response to written questions of:
        Chairman Dodd............................................   224
        Senator Shelby...........................................   225
        Senator Brown............................................   230
Diane E. Thompson, Counsel, National Consumer Law Center.........    15
    Prepared statement...........................................   126
    Response to written questions of:
        Senator Shelby...........................................   235
        Senator Brown............................................   246

              Additional Material Supplied for the Record

Letter from Gibbs & Bruns LLP to Countrywide Home Loans Servicing 
  regarding Pooling Service Agreements...........................   255
Letter from Wachtell, Lipton, Rosen & Katz regarding Gibbs & 
  Bruns LLP letter...............................................   270
Denver Post article, Foreclosure paperwork miscues piling, up, 
  November 14, 2010..............................................   274

                              ----------                              

                      WEDNESDAY, DECEMBER 1, 2010

Opening statement of Chairman Dodd...............................   277

Opening statements, comments, or prepared statement of:
    Senator Shelby...............................................   280
        Prepared statement.......................................   340
    Senator Johnson
        Prepared statement.......................................   340
    Senator Menendez.............................................   280
    Senator Akaka
        Prepared statement.......................................   340
    Senator Tester...............................................   281
    Senator Bailey Hutchison
        Prepared statement.......................................   341

                               WITNESSES

Phyllis Caldwell, Chief, Homeownership Preservation Office, 
  Department of the Treasury.....................................   283
    Prepared statement...........................................   342
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation..   284
    Prepared statement...........................................   352
Daniel K. Tarullo, Member, Board of Governors of the Federal 
  Reserve 
  System.........................................................   286
    Prepared statement...........................................   358
John Walsh, Acting Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................   288
    Prepared statement...........................................   368
    Response to written questions of:
        Chairman Dodd............................................   475
        Senator Johnson..........................................   476
        Senator Brown............................................   477
        Senator Merkley..........................................   481
Edward J. DeMarco, Acting Director, Federal Housing Finance 
  Agency.........................................................   289
    Prepared statement...........................................   381
    Response to written questions of:
        Senator Johnson..........................................   481
Terence Edwards, Executive Vice President, Credit Portfolio 
  Management, Fannie Mae.........................................   321
    Prepared statement...........................................   386
    Response to written questions of:
        Senator Johnson..........................................   483
Donald Bisenius, Executive Vice President, Single Family Credit 
  Guarantee Business, Freddie Mac................................   323
    Prepared statement...........................................   392
Tom Deutsch, Executive Director, American Securitization Forum...   324
    Prepared statement...........................................   399
Kurt Eggert, Professor of Law, Chapman University School of Law..   326
    Prepared statement...........................................   451
    Response to written questions of:
        Senator Johnson..........................................   487

              Additional Material Supplied for the Record

Federal Housing Finance Agency Foreclosure Prevention & Refinance 
  Report, August 2010............................................   500


    PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE

                              ----------                              


                       TUESDAY, NOVEMBER 16, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 3:20 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Christopher J. Dodd, Chairman of 
the Committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order. Let me 
first of all thank my colleagues and our witnesses for their 
patience and indulgence. This is a gathering today with the 
various caucuses meeting, unfortunately not at the same time, 
so it has made this a little awkward to try and schedule, Tim, 
the hearing. But you have all come a long way, my good friend 
Tom Miller, the Attorney General from Iowa as well, so I wanted 
to make sure we could have the hearing and yet accommodate the 
interests of all Members of the Committee. So we moved it to 
this time, Bob, and I am sure Senator Shelby will be here at 
some point shortly, and the idea being that I guess the 
Democratic caucus is sort of wrapping up, but there is a 
Republican caucus which is going to start in about an hour.
    Chairman Dodd. To which you are not invited.
    [Laughter.]
    Chairman Dodd. And so I am going to try, and what I would 
like to do--and I have already asked the witnesses to do this. 
I will make some brief opening comments. Senator Shelby 
obviously will do so as well. And then we will turn to our 
witnesses and ask them if they can to try and abbreviate their 
comments even further so I can then accommodate--and I know 
this is a bit awkward, but to accommodate our Republican 
colleagues who are here, who still have an obligation to get to 
that caucus, in which case our own Members as they come out of 
the caucus will be showing up here. So it is a little different 
than we would normally proceed, but I want to make sure we give 
all Members a chance to be heard, and the witnesses who have 
come a long way with prepared testimony are going to get a 
good, healthy discussion.
    I will also, at the appropriate time when we have a quorum, 
ask the Committee to fulfill its obligation of voting on the 
Diamond nomination to serve on the Federal Reserve Board. As my 
colleagues will recall, at the recess period the nomination 
under the law had to be--was sent back to the White House and 
resubmitted, therefore requiring yet another vote by the 
Committee, even though we have had a hearing and voted on the 
Diamond nomination once before. And so when that time comes, I 
will interrupt the hearing to perform that function, knowing 
that a quorum could slip from time to time.
    So with that in mind, I would like to begin, and I will 
make my own opening comments, and then turn to Senator Shelby 
or Senator Bennett, whoever is here, for any thoughts they may 
have. And then we will turn to our witnesses. So I again thank 
all for participating.
    Richard, how are you? Good to see you.
    The hearing today, as you are all aware, is on the problems 
in mortgage servicing from modification to foreclosure. 
Obviously, it has received a great deal of attention over the 
last number of weeks in the media, and we thought it was 
appropriate that even in this lame duck session we invite those 
who have been involved in it, including our Attorneys General, 
represented by Tom Miller, and others including the 
institutions involved, to come and share their thoughts as to 
where we are with this matter and give us an opportunity to 
move forward. And, obviously, as I prepare to leave, Tim 
Johnson, Richard Shelby, and other Members here will pick up 
this issue. Evan Bayh will be traveling out the door with me, 
and then they will be moving to analyze this issue and respond 
accordingly.
    I want to welcome again and thank our witnesses for 
appearing today and for their testimony about the problems in 
mortgage servicing from modification, as I said, to 
foreclosure. As many of us know, or all of you know, we have 
had numerous hearings on the problems of the mortgage industry. 
In fact, the second hearing that I held as Chairman of this 
Committee in the first week of February 2007 was on the 
residential mortgage markets and the problems. During that year 
of 2007, we had almost 80 different hearings on this subject 
matter at one time or another, including informal gatherings in 
this very room with some of the leading servicing companies in 
the Nation to talk about what plans they had to minimize the 
fallout from the mortgage crisis. So it is a subject matter 
over the last 4 years that this Committee has spent a great 
deal of time and attention on.
    In addition to today's hearing, I intend to have another 
hearing--and, again, I will consult with Senator Shelby about 
timing to do this. We are only here for a couple of weeks. We 
have got the break for Thanksgiving. But if we can, we want to 
fit that hearing in to invite the regulators to come before us 
as well to share with us their thoughts on the subject matter.
    First let me explain what we mean by mortgage servicing. 
When a homeowner takes out a mortgage, that loan is often 
bundled with a pool of similar mortgages and sold in the 
secondary market as a mortgage-backed security, commonly known 
as MBSs. After the origination, all processing related to the 
loan is managed by a mortgage servicing company. The four 
largest banks--JPMorgan Chase, Wells Fargo, Bank of America, 
and Citi--are also the largest mortgage servicers. Mortgage 
servicers bill and collect monthly payments, operate customer 
service centers, maintain records of payments and balances, and 
distribute payments according to the terms of a trust. 
Principal and interest are distributed to the investors of the 
mortgage-backed securities through a trustee. Taxes and 
insurance are paid to local governments and insurers--servicers 
retain a servicing fee. That is a brief description of how this 
is supposed to work.
    It is the problems that have arisen with this process that 
have led me to call the hearing today. It has not generally 
been my habit to quote the Wall Street Journal editorials in my 
Committee statements, but I thought the following from a column 
last month captured perfectly the essence of the issues we will 
examine today. The column is entitled ``A Foreclosure Sitcom.'' 
It starts by saying, ``First we learned America's biggest banks 
could not properly lend.'' It goes on to say:

        Then we learned they could not keep themselves solvent without 
        taxpayer assistance. Then we learned they could not effectively 
        work with troubled borrowers in a bursting housing bubble. And 
        now we have learned they do not even know how to foreclose.

    ``This is more than just a little paperwork problem,'' it 
went on.

        Ohio Attorney General Richard Cordray put it best: `This is 
        about the private property rights of homeowners facing 
        foreclosure and the integrity of our court system, which cannot 
        enter judgments based on fraudulent evidence.'

    This editorial provides a sharp description, in my view, of 
the situation in which millions of Americans find themselves 
today, whether we are talking about a homeowner facing possible 
eviction, an investor in an MBS, or simply an average American 
family watching the value of their home drop as more and more 
homes go into foreclosure around them.
    I want to provide a bit more context, if I can, for today's 
proceedings. In April of 2007, after holding a number of 
hearings on predatory lending, as my colleagues will recall, 
and the foreclosure crisis to which it would lead, I hosted a 
meeting of large mortgage servicers in this very room, 
including regulators, civil rights and consumer groups, and 
others, to discuss ways that we could better prepare for the 
wave of loan defaults and foreclosures many of us expected. 
That summit that we held in this very room resulted in a 
statement of principles to which all participants agreed on May 
2nd of 2007.
    Among the items to which the servicers agreed were the 
following: early contact and evaluation, modification to create 
long-term affordability, and providing dedicated teams or 
resources to achieve the kind of scale many knew would be 
necessary to face the coming tidal wave of foreclosures.
    Unfortunately, rather than living up to these commitments, 
many in the industry wasted a lot of time denying culpability 
for the mortgage problems or arguing that the problems would 
not be as severe as they turned out to be. As a result, we see 
even today, more than 2 years later, a number of points: 
servicers struggling to keep up with demand; numerous and 
repeated cases of lost paperwork; serious allegations by 
investors, including the New York Federal Reserve, and 
advocates of self-dealing at some of the largest mortgage 
servicers in the country and people needlessly losing their 
homes, including, according to some press reports, people who 
have no mortgages on their homes at all.
    More than a month ago, the robo-signing scandal, of course, 
hit the press. Many in the industry were too quick, in my view, 
to call the problems technical alone and to insist that nobody 
is losing a home to foreclosure without cause.
    However, the focus of the robo-signing problem is too 
limited, in my view. Many believe that the robo-signing errors 
are simply the tip of a much larger iceberg, that they are 
emblematic of much deeper problems at the mortgage servicing 
business, problems that have resulted in homeowners, of course, 
losing their homes and unjustifiable foreclosures. In fact, 
servicing practices may be putting homeowners at risk.
    Even the industry now acknowledges that the current 
mortgage servicing business model is broken and is simply not 
equipped to deal with the current crisis. Many observers point 
out that the interests of third-party mortgage servicers are 
not aligned with the interests of either homeowners or 
investors. So, for example, a permanent modification might 
result in a homeowner keeping the family's home and the 
investor being assured of a better return. But that same 
modification could cause the servicer to lose money.
    The upshot is that there could be extensive problems 
throughout the servicing process that may have led to, in the 
words of the Federal Reserve Board Governor Sarah Bloom Raskin, 
and I quote her, ``a Pandora's box of predatory servicing 
tactics.''
    According to Governor Bloom Raskin, these tactics include 
padding of fees, strategic misapplication of payments which can 
sometimes cause the loan to be considered in default, what some 
people call service-driven defaults, and the inappropriate 
assessment of forced placed insurance, which is extremely 
costly to the homeowner.
    To her list let me add other issues that have arisen, 
including failure to properly record transfer and ownership of 
notes and/or mortgages, failure to maintain proper custody of 
title, failure to properly administer the Home Affordable 
Modification Program, failure to meet the requirements of the 
foreclosure process, such as by the use of robo-signers, and 
failure to establish or administer mortgage trusts in 
accordance with applicable law or contractual agreements. This 
hearing will explore these potential problems and their 
implications.
    In addition, the Congressional Oversight Panel has raised 
concerns today that the failure of servicers and others to 
correctly handle mortgages and mortgage documents could create 
systemic risk for the financial system. Professor Levitin will 
also discuss this in his testimony this afternoon.
    This is a very important issue to explore, both here today 
and with the regulators at our next hearing. In my view, we 
created the Financial Stability Oversight Council to examine 
exactly this kind of issue. The FSOC needs to really drill 
down, in my view, and find out the scope of the problem and 
determine the steps that may need to be taken to prevent 
systemic problems from growing, if they conclude that there are 
systemic implications, in fact.
    Let me assure everyone here that I do not want this hearing 
to be simply about casting blame. It is extremely important to 
lay out the problems and challenges, and today's hearing is 
designed to do exactly that. But I also hope we can work toward 
solutions. As we do, we need to keep in mind that bad mortgage 
servicing is far more than a technical issue. At the same time, 
we must all acknowledge that not every delinquent borrower's 
home ought to be saved or can be saved. In my view, we need to 
strike a balance; we need more robust loan modifications, 
including loan modifications that result in real principal 
forgiveness that will finally help put an end to our housing 
crisis.
    At the same time, I hope we can agree that we should 
expedite foreclosures that cannot be prevented. For example, a 
significant portion of homes awaiting foreclosure are vacant 
today in the country. There is no reason in the world to slow 
down the process on these homes. We will need to work together 
going forward if we hope to finally put an end to this housing 
crisis, and I look forward to these witnesses' testimony and 
the comments and questions raised by my colleagues.
    We do have a quorum? Oh, good.
    [Whereupon, at 3:33 p.m., the Committee proceed to other 
business and reconvened at 3:44 p.m.]
    Chairman Dodd. Richard, before you came in, what I said is 
I know you have got a caucus to go to as well, so we are going 
to do this a little differently. You make your opening 
statement; they are going to make brief comments, our 
witnesses.
    Senator Shelby. OK.
    Chairman Dodd. And then I am going to turn to my Republican 
colleagues for questions so that you can get your questions in 
before you have to go to the caucus.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you. You are charitable. We like you 
as Chairman right now. We are going to miss you. Thank you.
    Thank you, Mr. Chairman. I will go back to the subject 
matter now. On October the sixth, I called for an investigation 
into the growing controversy surrounding home foreclosures. At 
this point, there appear to be a number of key issues--Senator 
Dodd has raised a lot of them--that need to be examined very 
thoroughly.
    First, we need to determine the extent of the problem. It 
appears that thousands of so-called robo-signers working on 
behalf of banks to service loans signed foreclosure-related 
court documents swearing that they had personal knowledge of 
the facts of each foreclosure case. It now appears that few, if 
any, of these people had such knowledge that they swore to.
    Second, we need to determine whether the flaws in the 
process led to improper results. In other words, were any 
homeowners foreclosed upon when they should not have been? I 
think that is a big issue.
    Third, we need to examine the activities of the law firms 
that work for the servicers. Many questions have been raised 
regarding the conduct of these firms during their engagement in 
foreclosure proceedings.
    Fourth, what role did the GSEs and the larger 
securitization market play in this debacle? Did their actions 
contribute to the problem? Were Fannie and Freddie complicit in 
any way?
    Finally, we need to examine the role of the regulators 
here. Where were they in this process? What were they supposed 
to be doing, and what were they doing, and if not, why not? I 
think these questions have got to be asked and answered.
    And in order to determine the extent of the problem, we 
need to speak with all of the major servicers. Unfortunately, 
we only have a small subset present today. For example, Allied 
Financial was the first major servicer to recognize that it had 
problems with its process. That firm, among others, Mr. 
Chairman, for some reason is not here today.
    Mr. Chairman, it is my understanding that many, if not all, 
of the law firms under investigation were selected by the 
housing GSEs. In order to best understand how and why these 
firms were chosen, I believe we need to hear from Fannie Mae 
and Freddie Mac. Unfortunately, they also did not make the 
witness list today.
    Perhaps the most complex facet of this examination involves 
securitization. As highlighted in the Congressional Oversight 
Panel's most recent report, the most severe potential fallout 
from this will be found in the securitization market. According 
to that report, this could have a devastating effect on our 
broader financial system.
    On this critical topic, we have a professor from Georgetown 
University, the Iowa Attorney General, and finally the CEO of 
MERS. Each witness has an important viewpoint to share with the 
Committee, but none of them represent the views or perhaps the 
expertise of the securitizers. Given the complexity of this 
issue, perhaps the Committee should have invited others, and 
perhaps, as the Chairman said, maybe have another hearing or so 
regarding the securitization community to answer our questions.
    Finally, the regulators are also significant players here, 
or should be. Each of the major servicers have regulators 
onsite in their operations. How did those regulators miss the 
widespread foreclosure problems at the firms they were supposed 
to be regulating? That is the question. We could ask them, but 
unfortunately, they, too, are not here today, and Senator Dodd 
said he is going to have another hearing.
    Mr. Chairman, I expect this hearing to be focused on the 
foreclosure process. As I have already stated and you have 
mentioned, too, there is a great deal to examine on this topic 
alone. It appears that this hearing will also become a 
foreclosure mitigation hearing. Mortgage modifications is an 
important topic, to be sure, and certainly one that warrants 
its own hearing. But if we are going to examine the issue of 
foreclosure mitigation, I believe we should study the extent to 
which borrower fraud has distorted the modification process and 
inflated overall foreclosure numbers. This is a critical issue, 
considering that the U.S. taxpayer has spent more than $50 
billion on foreclosure mitigation programs. We need to know 
where our mitigation efforts are best directed and where our 
money is being wasted as a result of fraud. I understand that 
there are no witnesses here today that can address the topic of 
borrower fraud, but we should have that.
    Mr. Chairman, I called for a full investigation on this 
matter in early October because I believe that those who face 
foreclosure should, at the very least, know that the process is 
being handled fairly and legally according to the law. While I 
believe that we will learn a great deal from this hearing, I 
hope that it does not represent the Committee's complete 
examination of this important issue and I commend you for 
saying you will look into it some more.
    Chairman Dodd. Well, thank you very much, and obviously 
this is a matter that will go far beyond even the time 
constraints we have over the next couple of weeks in the lame 
duck session. I will be watching C-SPAN from hopefully some 
comfortable spot in January as Tim Johnson and Richard Shelby 
hold extensive hearings on the subject matter, and Bob Bennett 
may be joining me along with Evan Bayh from Indiana and 
watching you go forward.
    [Laughter.]
    Chairman Dodd. Let me turn, first of all, to the Attorney 
General of Iowa. Tom, we thank you very much, and I know you 
have done a lot of work on this issue along with others. In 
fact, the new Senator from the State of Connecticut, of course, 
Dick Blumenthal, the Attorney General of my State for the last 
18 years, I know has worked with you on this issue, as well, so 
we are anxious to hear what you have to say and we will move 
right along.
    I am not going to do extensive introductions of all of you. 
I will put that in the record so that your children and 
families can make sure you were recognized appropriately here 
for your contributions to mankind. Attorney General?

 STATEMENT OF THOMAS J. MILLER, ATTORNEY GENERAL, STATE OF IOWA

    Mr. Miller. Thank you, Mr. Chairman, and thank you, Members 
of the Committee. I think that this hearing makes a lot of 
sense. These are very, very important issues that have 
difficult questions and difficult resolutions but are very, 
very important to Americans. The housing market, the home to 
individuals, very, very important to everybody.
    We have 50 Attorney Generals working together on this 
issue. We have more than half of the banking regulators working 
with us. We have developed over the last 10 years a remarkable 
working relationship with the State banking regulators. We have 
gone through three cases together, major cases, and we have 
worked since 2007 on the Foreclosure Prevention Task Force. It 
is a very important relationship and we work together.
    What the 50 of us and the banking regulators are looking at 
is a series of issues. It was triggered by the robo-signing. 
First of all, let me say very clearly that we do not view that 
as a technical issue. It is an issue that is an affront to 
State courts. Signing an oath to produce a judgment of 
foreclosure in a court is a very, very serious matter.
    We are following sort of the outline of the Chairman, 
Senator Dodd, in terms of looking at other aspects, as well, 
that have appeared in our investigation and we think are 
important. They include other servicing issues, the whole issue 
of the paperwork being lost and people having to start over and 
over again, not hearing from the servicers for two or 3 months. 
That is an issue.
    The modification, the decision concerning modification is 
an important issue. I think that after 3 years, the servicers, 
whoever is making the decision on modification, there should be 
a rhythm. There should be a pattern. They should see patterns 
developing, and very quickly, people fall within modification 
or out or marginally. It is more ad hoc, we think, and that 
just has not come together.
    We are concerned about some of the fees that are charged, 
particularly the forced insurance. We are concerned about 
assignment issues. Those are something that we are looking at. 
The so-called dual track issue is something that is important, 
as well, and by that we mean a person who is working on 
modification and all of a sudden the foreclosure process starts 
at the same time. It is enormously frustrating.
    Second liens create a problem when the banks hold the 
second lien and also do the servicing. There is a dynamic there 
that does not work as well as it should.
    We are talking. We are working a lot with the Federal 
people. The level of cooperation with the Federal agencies, 
particularly Justice and Treasury, is like never before. I have 
been around for a while, worked with a lot of Administrations, 
Democrats and Republicans. We have never had a working 
relationship this good and this productive as we do with this 
Administration.
    We have opened up a dialogue with the investors. We think 
they are an important part of the solution of this whole 
problem and have started productive meetings with them. We have 
had sessions with Bank of America, two sessions recently. They 
have been productive.
    We view this as a chance to solve some or much of this 
problem that has hung on for over 3 years, as Senator Dodd 
outlined. It started as a mess, the robo-signing. We want to 
figure out a way that it leaves the whole situation much better 
than when the mess started, and there are a number of things we 
are working on to try and make sure that this is never repeated 
again. That is, in a way, the simplest and very basic, that 
there is some redress to consumers that are harmed. But then 
how do we develop a way to change the paradigm and the whole 
system so that it works and works much more productively, 
because, as I said before, there is so much at stake for the 
homeowner, for the investor, for the community and the overall 
economy.
    Chairman Dodd. Thank you very much, General. I appreciate 
again your work on this effort and those of your colleagues 
around the country.
    Barbara Desoer is the President of the Bank of America Home 
Loans. She oversees the business that currently accounts for 
almost one in five mortgage originations. Bank of America Home 
Loans has $2 trillion in a servicing portfolio that serves 13 
million customers. She also manages the Bank's home equity 
business and insurance services organization. We thank you for 
joining us.

STATEMENT OF BARBARA J. DESOER, PRESIDENT, BANK OF AMERICA HOME 
                             LOANS

    Ms. Desoer. Thank you, Chairman Dodd and Ranking Member 
Shelby and Members of the Committee. Thank you for the 
opportunity to testify.
    The economic downturn and sustained high unemployment, 
coupled with the housing market collapse, have led to 
challenges far more profound and complex than anyone ever 
anticipated. Importantly, more than 86 percent of Bank of 
America's customers are current on their mortgage. 
Unfortunately, others are in distress. At foreclosure sale, one 
of three properties are vacant, and there are far too many 
abandoned properties in our communities that drive down home 
values in neighborhoods across the country.
    Helping customers remain in their homes wherever possible 
remains Bank of America's number one priority, as evidenced by 
our over 700,000 completed loan modifications. We have reached 
a crossroads between modification efforts and the reality of 
foreclosure. Despite our best efforts and numerous programs, 
for some customers, foreclosure is unavoidable. That has driven 
an increase in the concerns that you and we are hearing from 
our customers.
    It is our responsibility to be fair and to treat customers 
with respect as they transition to alternative housing. We have 
an obligation to do our best to protect the integrity of the 
proceedings of foreclosure, and when that has not happened, we 
accept responsibility for it and we deeply regret it.
    We were the only servicer who stopped foreclosure sales 
nationwide to review our procedures. We know the concerns are 
not just technical issues. We have confirmed that the basis for 
our foreclosure decisions has been correct and accurate, but we 
did not find a perfect process and we are already moving 
forward with the needed improvements.
    As a servicer, we have a responsibility to follow the 
guidelines established by our investors relating to 
modifications and other foreclosure alternatives. Where we can 
act to improve the process alone, we have and will continue to 
innovate. We also need to work with others, and we are 
committed to further improvements.
    First, improve the communication with our customers. A 
frequent source of customer frustration is they cannot deal 
with the same person two times during the process, let alone 
three or four. We have redesigned our loan modification process 
to offer a single point of contact to our customers, and we 
have more than 140,000 customers who are experiencing this 
today. We are in discussions with key stakeholders, like the 
State Attorneys General, to determine how that approach can be 
expanded.
    Second, we know we need to provide greater clarity to our 
customers who are going through the process, and Attorney 
General Miller referenced the parallel foreclosure or dual 
track process of modification and foreclosure. We want to 
partner with you and other key stakeholders to find a way to 
eliminate that dual track to significantly improve the 
understanding of where a customer is in the process.
    Third, we are making improvements to the foreclosure 
process. We determined during our ongoing review that our 
process for preparing affidavits of indebtedness in the 
judicial foreclosure States did not conform to best practices 
in some cases. We have introduced a new affidavit form. We have 
added additional quality controls. And we are implementing new 
procedures for selecting and monitoring the performance of 
outside counsel. We are carefully restarting the affidavit 
process with these and other new controls in place.
    Again, our commitment is to ensure that no property is 
taken to foreclosure sale until our customer is given a fair 
opportunity to be evaluated for all of the programs that exist 
under modification, or if that cannot be done, through a short 
sale or a deed execution. Foreclosure is the option of last 
resort. Thank you.
    Chairman Dodd. Thank you very much. We appreciate your 
testimony.
    Mr. R.K. Arnold is the President and CEO of MERS 
Corporation and its subsidiary, Mortgage Electronic 
Registration, known as MERS. Most of you are familiar with it. 
MERS was created by the mortgage industry participants as a 
central electronic registry with the hopes of streamlining the 
mortgage process by eliminating the need to prepare and record 
paper assignments of mortgages. MERS now registers more than 
half of the mortgage loans originated in the United States. Mr. 
Arnold has been with MERS since its inception in 1996, and we 
thank you for joining us.

    STATEMENT OF R.K. ARNOLD, PRESIDENT AND CHIEF EXECUTIVE 
                    OFFICER, MERSCORP, INC.

    Mr. Arnold. Chairman Dodd, Ranking Member Shelby, Members 
of the Committee, I appreciate the opportunity to be here 
today. If it is all right with you, Mr. Chairman, I would 
submit my remarks for the record.
    Chairman Dodd. That is true of all of you, by the way, and 
any documentation that any of you want to add to your 
testimony, we will just include as part of the record, so 
consider that done.

           Oral Statement of R.K. Arnold, President and Chief
                   Executive Officer, MERSCORP, Inc.
        Chairman Dodd, Ranking Member Shelby and Members of the 
        Committee, my name is R.K. Arnold. I am President and CEO of 
        MERSCORP, Inc. Thank you for this opportunity to appear today.

        MERS is a member-based organization made up of about 3,000 
        mortgage lenders. It maintains a nationwide database that 
        tracks changes in servicing rights and ownership interests in 
        mortgage loans. Today MERS is keeping track of 31 million 
        active loans.

        The MERS database is important to the mortgage industry because 
        it is the only centralized registry in the industry that 
        uniquely identifies each mortgage loan.

        The MERS database is important to individual borrowers because 
        it provides a free and accessible resource where borrowers can 
        locate their servicers, and in many cases, learn who their 
        note-owner is as they change over time.

        The MERS database is important to communities because housing 
        code enforcement officers use it to identify who is responsible 
        for maintaining vacant properties.

        The MERS database aids law enforcement in the detection of 
        mortgage fraud by tracking liens taken out utilizing the same 
        borrower name, social security number, or property.

        MERS also performs another key function: It serves as the 
        mortgagee of record, or the holder of mortgage liens, on behalf 
        of its members as a common agent. MERS is designated as the 
        mortgagee in the mortgage document, and this designation is 
        approved by the borrower at loan closing and then recorded in 
        the appropriate local land records. Serving as the mortgagee 
        enables MERS to receive and maintain updated information as 
        loan servicers and noteholders change over time because we are 
        the central clearinghouse for receipt of mail as mortgagee. One 
        thing that is always clear in a mortgage document is that if 
        the borrower defaults on his obligation, the lender can 
        foreclose. If MERS holds the mortgage lien, foreclosures can 
        occur in two ways: Either the MERS mortgage interest is 
        reassigned in the land records to the lender holding the note 
        and the lender initiates the action on its own, or MERS 
        initiates the action as the mortgagee of record in the land 
        records.

        To do this, MERS relies on specially designated employees of 
        its members, called certifying officers, to handle the 
        foreclosure. To be a MERS certifying officer, one must be an 
        officer of the member institution who is familiar with the 
        functions to be performed, and who has passed an examination 
        administered by MERS. Generally, these are the same individuals 
        who would handle the foreclosure if the lender was involved 
        without MERS. The loan file remains with the servicer as it did 
        before MERS. MERS is not a repository for mortgage documents or 
        promissory notes.

        MERS derives its revenues entirely from fees charged to its 
        members--it makes no money from foreclosures. And MERS does not 
        decide when to foreclose. Foreclosure must be authorized by the 
        note-owner (or noteholder), and it must be done in accordance 
        with our strict rules and procedures, which we regularly 
        enforce and refine.

        For example, it is a key MERS rule that the note must be 
        presented in a foreclosure, which some States do not require. 
        And we prohibited the use of lost note affidavits in 
        foreclosures done by MERS once we learned they were being used 
        as an excuse to not produce the note.

        Earlier this year, when we became aware of acceleration in 
        foreclosure document processing, we grew concerned that some 
        certifying officers might have been pressured to perform their 
        responsibilities in a manner inconsistent with our rules. When 
        we did not get the assurances we thought were appropriate to 
        keep this from happening, we suspended our relationships with 
        those companies.

        When we discovered that some so-called ``robo-signers'' were 
        MERS certifying officers, we suspended their authority until 
        they could be retrained and retested. We are asking our members 
        to provide us with specific plans outlining how they intend to 
        prevent such actions in the future.

        Mr. Chairman, all of us at MERS keenly understand that while 
        owning your own home is a dream, losing that home is a 
        nightmare. As professionals who have dedicated ourselves to 
        helping people realize their dream, we are deeply dismayed by 
        the current foreclosure crisis. We take our role as a mortgagee 
        very seriously and we see our database as a key to moving 
        toward better access to information and transparency for 
        consumers.

        I am hopeful that as people understand more about MERS and the 
        role we play, they will see that MERS adds great value to our 
        nation's system of housing finance in ways that benefit not 
        just financial institutions, the broader economy and the 
        Government, but--most of all--real people.

        Thank you for holding these hearings and inviting MERS to 
        participate.

    Mr. Arnold. Thank you, and I am ready for your questions.
    Chairman Dodd. Well, that was good testimony there. I 
appreciate it.
    [Laughter.]
    Chairman Dodd. Professor, do you want to do the same?
    [Laughter.]
    Chairman Dodd. Professor Levitin, we thank you very much 
for joining us. Professor Levitin is an Associate Professor of 
Law at Georgetown. He specializes in bankruptcy, commercial 
law, financial regulations. He has done extensive research on 
the role of financial institutions in consumer and business 
transactions, including mortgage finance payment systems and 
bankruptcy reorganizations. He also served as Special Counsel 
to the Congressional Oversight Panel, and is currently a Fellow 
at the Center of Law at George Washington University. We thank 
you for joining us.

   STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW, 
                GEORGETOWN UNIVERSITY LAW CENTER

    Mr. Levitin. Well, I hope I can keep my comments as brief 
as Mr. Arnold.
    I want to make clear that I am here today to testify only 
as an academic and not on behalf of the Congressional Oversight 
Panel.
    Over the last few months, the mortgage world has been 
roiled by a number of seemingly unconnected issues: The 
discovery that major mortgage servicers were submitting 
thousands of faulty or fraudulent affidavits in foreclosure 
cases, the emergence of concerns over securitization chain of 
title, and mortgage-backed securities investors put-back 
demands. Although seemingly disparate, these issues are, in 
fact, connected by two common threads, the necessity of proving 
standing in order to maintain a foreclosure action, and the 
severe conflicts of interest between mortgage servicers and MBS 
investors.
    It is axiomatic that in order to bring a foreclosure 
action, the plaintiff must have legal standing. Only the 
mortgagee has such standing. Many of the issues relating to 
foreclosure irregularities, ranging from procedural defects up 
to outright counterfeiting, relate to the need to show 
standing. Thus, problems like various types of false or faulty 
affidavits as well as backdated mortgage assignments and 
altered or wholly counterfeited notes, mortgages, and 
assignments all relate to the evidentiary need to prove 
standing.
    Concerns about securitization chain of title also go to the 
standing question. If the mortgages were not properly 
transferred in the securitization process, then the party 
bringing the foreclosure does not, in fact, own the mortgage 
and therefore lacks standing to foreclose.
    If the mortgage was not properly transferred, there are 
profound implications, too, for investors, as the mortgage-
backed securities they believe they had purchased would, in 
fact, be non-mortgage-backed securities. If so, title on most 
properties in the United States would be clouded and there 
would also be a put-back liability that would greatly exceed 
the market capital of major U.S. banks.
    Put-back claims underscore the myriad conflicts of interest 
between mortgage services and investors. Servicers are 
responsible for prosecuting violations of representations and 
warranties made to investors in securitization deals. Servicers 
are loath to bring such actions, however, not least because 
they would often be bringing them against their own affiliates. 
Thus, Countrywide Home Mortgage Servicing would be bringing 
those claims against Countrywide itself.
    I am guessing that many of you received this morning a copy 
of the American Securitization Forum's White Paper on 
residential mortgage-backed security chain of transfer. It is a 
good document and I agree with most of the legal analysis 
within it, as far as it goes, but that is the problem. The 
problem is that the ASF White Paper neglects to address three 
rather important points.
    First, it fails to address that parties can contract around 
the Uniform Commercial Code, which is what the ASF says governs 
transfers in securitization. Parties are allowed to contract 
around that by the terms of the Uniform Commercial Code, and 
arguably, that is exactly what mortgage securitization pooling 
and servicing agreements do. If that is correct, then the ASF 
White Paper is simply analyzing the wrong law.
    Second, the ASF White Paper neglects to address the 
question of noncompliance with whatever the applicable law is, 
and there are a multitude of potential noncompliance problems, 
such as premature shredding of notes or the signing of 
assignments by purported agents of now-defunct companies. The 
scope of these problems is unclear, but noncompliance with 
transfer rules could void the transfers.
    Third, the ASF White Paper neglects to address the trust 
law issues in securitization. Most residential mortgage 
securitization trusts are governed by New York trust law, and 
New York trust law imposes additional requirements on 
transfers. Arguably, these requirements are not met by many 
securitization deals. New York trust law provides that if a 
transfer does not comport with the trust documents, that 
transfer is void even if the transfer would otherwise comply 
with law. And if the transfer is void, that would mean that the 
trusts do not own the mortgages and therefore lack standing to 
foreclose.
    I want to emphasize that I am not saying that this is the 
case, that there are many unresolved legal issues and there are 
also evidentiary questions. I am not predicting that there is a 
wholesale chain of title problem with residential mortgage-
backed securities. Instead, my point is that there are 
unresolved questions and that the law is not as clear as either 
the American Securitization Forum or any law firm with 
outstanding securitization opinion letter liability would like 
you to believe.
    We do not know how these questions are going to be 
resolved, but some of the potential resolutions have dire 
systemic consequences and Congress should be aware of that 
possibility, because we would do much better being ahead of the 
ball than behind it on systemic risk. When the systemic risk 
aspect is taken into consideration within the context of all 
the other problems in the mortgage securitization world, I 
think it makes a compelling case for early intervention and for 
a global settlement of the foreclosure crisis and investor 
litigation against servicers and securitizers. Only a global 
settlement will help revive the mortgage market, will remove 
the debt overhang from consumers and financial institutions, 
and will help restart the U.S. economy.
    Thank you.
    Chairman Dodd. Thank you very, very much.
    Mr. Lowman, we welcome you to the Committee, as well. Mr. 
Lowman is the Chief Executive Officer of Chase Home Lending, 
responsible for Chase's mortgage and home equity lending 
business, including loan origination servicing and default, as 
well as credit risk management and capital markets. Chase Home 
Lending originates $200 billion in residential markets and home 
equity per year. The company services some six million loan 
customers, and we thank you for joining us.

STATEMENT OF DAVID B. LOWMAN, CHIEF EXECUTIVE OFFICER FOR HOME 
                    LENDING, JPMORGAN CHASE

    Mr. Lowman. Thank you, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee. Thank you for inviting me 
to appear before you today.
    We are committed to ensuring that all borrowers are treated 
fairly and with respect, that all appropriate measures short of 
foreclosure are considered, and that if foreclosure is 
necessary, the process complies with all applicable laws and 
regulations. We take these issues seriously. We regret the 
errors in our affidavit processes and we have worked hard to 
correct these issues.
    I want to emphasize that Chase strongly prefers to work 
with borrowers to reach a solution that permits them to keep 
their homes. Foreclosures cause significant hardship to 
borrowers and communities. Foreclosures----
    [Interruption.]
    Chairman Dodd. Officers? All right.
    [Interruption.]
    Chairman Dodd. OK. Because of disruption subject to arrest, 
I ask that you----
    [Interruption.]
    Chairman Dodd. We stand in recess here for a few minutes.
    [Recess.]
    Chairman Dodd. I would invite those who would like to hear 
the rest of the hearing to join us by sitting down so we can 
hear the rest of the witnesses, and I will just make a point 
here that those who engage in that kind of an outburst, we will 
have to ask you to clear the room. We will ask the officers to 
clear the room. I hope that is not necessary. We are delighted 
to have you here in the room to hear the testimony. It is an 
important hearing.
    With that, now we will go back to Mr. Lowman, your 
testimony.
    Mr. Lowman. Foreclosures cause significant hardship to 
borrowers and their communities. Foreclosures also inevitably 
result in severe losses for lenders and investors. Therefore, 
we always consider whether there are viable alternatives to 
foreclosure.
    Chase adopted its own modification programs in early 2007. 
Since 2009, Chase has offered almost one million modifications 
to struggling borrowers and has completed over 250,000 
permanent modifications.
    Sustainable modifications are not always possible. There 
are some borrowers who simply cannot afford to stay in the 
homes or they have vacated their homes. While we make repeated 
efforts to modify a delinquent loan, sometimes we must proceed 
to foreclosure. A property does not go to foreclosure if a 
modification is in progress. But if the foreclosure has begun 
and a borrower later begins the modification process, our 
investors, including the GSEs, have instructed us to allow the 
two processes to run at the same time. However, we will not 
allow a foreclosure sale if a modification is in progress.
    I understand the focus of the Committee today is our recent 
decision to temporarily suspend foreclosures in a number of 
States. To be clear, we service millions of loans and we make 
mistakes. But when we find them, we fix them. It is important 
to note that the issues that have arisen in connection with the 
foreclosure proceedings do not relate to whether the 
foreclosures were warranted. We have not found issues that 
would have led to foreclosures on borrowers who were current.
    Our recent temporary suspension of foreclosures arose out 
of concerns about affidavits prepared by local foreclosure 
counsel, signed by Chase employees, and filed in certain 
mortgage foreclosure proceedings. Specifically, our employees 
may have signed affidavits on the basis of file reviews and 
verifications performed by other Chase personnel, not by the 
affiants themselves. They may not have signed affidavits in the 
presence of a notary. But the facts set forth in the affidavits 
with respect to the borrower's default and the amount of 
indebtedness, the core facts justifying foreclosure, were 
verified prior to execution of the affidavits.
    We take these issues seriously. Our process did not live up 
to our standards. While foreclosures have been halted, we have 
thoroughly reviewed our procedures and undertaken a complete 
review of our document execution policies. We have also rolled 
out extensive additional training for all personnel involved.
    I would be happy to answer any questions that you might 
have.
    Chairman Dodd. Thank you very much.
    Our last witness, and certainly not the least, is Diane 
Thompson, who is a familiar face to many of us here. She is 
Counsel to the National Consumer Law Center. She has written 
numerous publications dealing with the integrity of the lending 
and foreclosure process. She worked from 1994 to 2007 at the 
Land of Lincoln Legal Assistance Foundation representing low-
income homeowners in East St. Louis. She testified at our 
hearing on loan modifications in July of 2009 before this 
Committee, and I will be particularly interested to hear if she 
believes enough progress has been made since our last hearing 
in July of last year. I thank you again for joining us.

STATEMENT OF DIANE E. THOMPSON, COUNSEL, NATIONAL CONSUMER LAW 
                             CENTER

    Ms. Thompson. Thank you, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee. Thank you for inviting me 
to testify today, and to answer your question, Chairman Dodd, 
no, enough progress has not been made. I was shocked, actually, 
when I took out my testimony from last July to look at it as I 
was getting ready for this, how much of that testimony was 
still relevant.
    I am an attorney with NCLC, and in my work at NCLC I 
provide training and support to hundreds of attorneys 
representing homeowners from all across the country. So I hear 
what is going on in Alaska and in Mississippi on a daily basis, 
as well as in New York and Illinois.
    The recent robo-signing scandal reveals the contempt that 
servicers have long exhibited for rules--the rules of court 
procedure flouted in the robo-signing scandal, the contract 
rules breached by servicers' common misapplication of payments 
and imposition of illegal payments, and the rules for HAMP 
modifications honored, unfortunately, more often in the breach 
than in reality.
    Servicers do not believe that the rules that apply to 
everyone else apply to them. This lawless attitude, created in 
part by financial incentives and too often tolerated by 
regulators, is the root cause of the robo-signing scandal, the 
failure of HAMP, and the wrongful foreclosure of countless 
American families.
    In my written testimony, I provided dozens of examples of 
the harm caused to homeowners by servicers. Many of the 
foreclosure cases that have come to national attention 
involving robo-signing allegations originated due to the 
unnecessary forced placement of insurance, sometimes at more 
than ten times the actual cost of the homeowner's existing 
insurance policy.
    Often, servicers' misrepresentations lead directly to 
foreclosure. In one case cited in my written testimony, a North 
Carolina woman was placed in foreclosure by Chase after 15 
months of timely and full trial modification payments when she 
made the mistake of following the advice of a Chase 
representative to make a partial payment in the 16th month.
    In another case, Bank of America employees told a 
California attorney that the relevant pooling and servicing 
agreement prohibited all loan modifications. Bank of America 
employees went so far as to provide the attorney with what 
appeared to be an electronic snapshot of the relevant section 
of the PSA, but that snapshot converted a comma to a period and 
removed the immediately following clause which provided for 
loan modifications in most circumstances after default.
    These abuses occur because servicers have strong financial 
incentives to deny permanent modifications and in many cases to 
proceed with foreclosure. The illegal fees that push many 
homeowners into foreclosure are profit centers for servicers. 
Servicers usually recover their costs faster in a modification 
than in a foreclosure and servicers and their affiliates also 
profit from post-foreclosure REO sales. Ultimately, these 
actions by servicers strip wealth from investors as well as 
homeowners.
    Unless and until servicers are held to account for their 
behavior, we will continue to see fundamental flaws in mortgage 
servicing with cascading costs throughout our society. The lack 
of restraint on servicer abuses has created a moral hazard 
juggernaut that at best prolongs and deepens the current 
foreclosure crisis, and at worst threatens our global economic 
security.
    Solutions must address the affidavit and ownership issues 
raised most recently, but much more is urgently needed. We must 
require servicers to evaluate homeowners for loan modifications 
before foreclosure, offer modifications where doing so will 
provide a net benefit to the investors, and provide that the 
failure to do so is a defense to foreclosure. Funding for 
mediation and representation of low-income homeowners is 
desperately needed. Principal reduction must be mandated. Both 
Congress and Federal regulators must rein in servicer abuse and 
move toward restoring rationality to our mortgage markets.
    Thank you for the opportunity to testify here today. I am 
happy to answer any questions you may have.
    Chairman Dodd. Thank you very much, Ms. Thompson. I 
appreciate your testimony.
    [Applause.]
    Chairman Dodd. All right, please. Audience, please. This is 
not a rally here, it is a hearing.
    Let me turn to Senator Shelby. As I said earlier, I know my 
Republican colleagues have a caucus and so I have invited 
Senator Shelby and Senator Johanns to go ahead of us here, so I 
will defer any questions I have. Senator Shelby.
    Senator Shelby. Mr. Chairman, I have a number of written 
questions that I would like to be made part of the record for 
the panel.
    Chairman Dodd. Consider it done.
    Senator Shelby. And I have something I want to ask. I will 
start with you, Mr. Arnold, and Ms. Thompson maybe will chime 
in here, I hope. As I understand--I used to do some of this 
many years ago--let us say a bank anywhere in America--we will 
just use my home town of Tuscaloosa, Alabama--a bank makes a 
loan on a home, or a mortgage banker or whoever, and that 
mortgage, that note is signed and the mortgage is recorded at 
the courthouse and the bank owns the mortgage. That is the 
security for the loan.
    Now, it used to be, and correct me if it has changed, that 
they would sell that loan and then they would do an assignment 
of record, say X Bank would assign the record to Y Bank or 
whoever, or pension fund, and that would be recorded and they 
would own the mortgage of record. There would be a record of 
that in the courthouse there. And then if somebody missed four 
or five payments and they foreclosed, you would recite all of 
this in the foreclosure notice, of the default made in certain 
mortgage, dated so and so, to X Bank and subsequently assigned, 
or three or four times, and you would have to do that.
    What has changed? Electronically, what is the problem and 
what has caused it? Did you get away from the basic property 
laws of the State? I do not know. And has that caused some of 
the problem? I realize that in the securitization you might 
take a thousand of these mortgages that I have just talked 
about and you pool them, you securitize them. But still, the 
fundamentals of each one of those homeowners remains: They are 
in debt and the record of their indebtedness. Am I wrong or 
right, and what has changed? I will ask Ms. Thompson next.
    Mr. Arnold. Well, Senator, there has been a great deal that 
has changed.
    Senator Shelby. Tell the Committee.
    Mr. Arnold. Part of that is that the sheer velocity of the 
transactions that you are talking about began to jam up the 
recorders' offices. There would be mistakes in those 
assignments. They would be filed in the wrong order.
    Senator Shelby. Wait a minute. Excuse me. You are saying 
there were mistakes in the courthouses?
    Mr. Arnold. No, Senator.
    Senator Shelby. Well, where were the mistakes?
    Mr. Arnold. Mistakes in the assignments that the banks were 
preparing.
    Senator Shelby. OK. The banks made the mistakes.
    Mr. Arnold. Yes. And that would ultimately cause title 
problems, breaks in the chain of title. It was unnecessary that 
those assignments would be recorded every time----
    Senator Shelby. Why would it be unnecessary to show who 
owned the mortgage before you foreclosed on it? Because 
heretofore you always foreclosed in the name of the holder of 
record, did you not? I guess. Is that right, Ms. Thompson?
    Ms. Thompson. Yes, that is the general rule in most States.
    Senator Shelby. Go ahead, sir.
    Mr. Arnold. And that still happens today even with the 
advent of MERS. What MERS is is a common agent for all of those 
banks, and that way when servicing changes hands, which is 
covered under the Truth In Lending Act, there is a hello/
goodbye letter. Anytime that that changes, that is reflected on 
the MERS system. The MERS----
    Senator Shelby. But is it reflected--excuse me. It might be 
reflected on your computer, but is it reflected in the 
courthouse where the mortgage is recorded.
    Mr. Arnold. MERS is reflected in the courthouse at all 
times, and then if----
    Senator Shelby. Wait a minute. Do they record the 
assignment there at the courthouse? I could go look it up and 
see who owned the mortgage?
    Mr. Arnold. There is no assignment if MERS is the 
mortgagee.
    Senator Shelby. That is what I am getting at. You just said 
there were, so you are correcting yourself. So actually what 
you are doing with the electronic transfer, you have taken the 
place of historically the property laws of the States. Is that 
wrong or right, Ms. Thompson?
    Ms. Thompson. That is correct, and it is true that MERS has 
the case from New York, Romaine; there have been several cases 
where clerks challenged the MERS recordation because it removes 
from the public record any chain of title, and it does 
complicate homeowners' attempts to discover who the current 
holder of their mortgage is.
    Senator Shelby. Well, isn't this part of the problem in the 
foreclosure process? People are saying--I am asking you, Mr. 
Arnold--that you do not really own this mortgage; you have no--
there is no record of you owning it, how can you foreclose on 
it? Is that part of it?
    Mr. Arnold. If there is a foreclosure in the name of MERS, 
which might happen as few as one in ten----
    Senator Shelby. Can you do that legally? Is that the law of 
the land?
    Mr. Arnold. The MERS mortgage can be foreclosed.
    Senator Shelby. No, I asked you a question. Was that the 
law of the land--in other words, you can do this? Because you 
used to could not do that. You had to have the property 
assignment properly recorded in X county to show, would you 
not?
    Ms. Thompson. Whether or not MERS can foreclose in its own 
name is a hotly contested issue.
    Senator Shelby. That is what I am raising.
    Ms. Thompson. It varies State by State. Some States have 
passed legislation allowing MERS to do that. In other States, 
there has been litigation that has allowed MERS to do that. In 
other States, there has been litigation that has forbidden MERS 
from foreclosing in its own name.
    Senator Shelby. So MERS is part of the problem.
    Ms. Thompson. MERS certainly complicates determining who 
the actual ownership and what the correct standing is, and it 
can have the effect of concealing from the public the role of 
major lending institutions in foreclosures.
    Senator Shelby. I do not know if you have answered my 
question correctly or like I want you to, but I am looking for 
the truth of what the problem is. I think that when you 
deviated from the basic property laws of the country, you got 
yourself in trouble. Maybe I am wrong.
    Ms. Thompson. I think that MERS is one piece of the 
problem. I think there are more serious and more complicated 
pieces of the problem.
    Senator Shelby. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Shelby.
    I am going to turn, Bob, with your permission, to Senator 
Johanns. He has to go to that caucus.
    Senator Johanns. Well, thank you. I appreciate the courtesy 
from both Senators.
    Ms. Thompson, help me understand this, if you will. All of 
the abuses that you have described, somebody altering a 
document and trying to mislead someone, I do not think there is 
anybody in the room, probably anybody in the country, that 
would try to claim that that is right. It is not right. I mean, 
fundamentally it is just not right. But I want to kind of drill 
down on the mortgage foreclosure issue itself and try to get 
your help in me understanding this.
    I have done many mortgages through my life. My first 
mortgage was probably when I was in my 20s and bought my first 
house. And my understanding is, complex as those documents 
are--and, you know, they give you a stack about that thick to 
sign. My understanding was that somebody was giving me money 
that would at least partially buy the house--these days maybe 
buy most of the house--and that if I failed to repay that in a 
timely way, they would take the house. I mean, as sad and 
unfortunate as that is, that was kind of the bottom line.
    How many instances have you run into or is it a common 
practice that these foreclosure people are foreclosing on 
properties where, in fact, somebody has not failed to pay? Do 
you see what I am getting to?
    Ms. Thompson. I do, and in my written testimony I believe I 
have three examples of cases where people were not actually in 
default when the foreclosure was initiated.
    Senator Johanns. And let me say again, that is not right. 
But I am trying to figure out if it is 3 million or 3,000 or 
three, because----
    Ms. Thompson. I think it is very--it is certainly more than 
three. I certainly had many examples like that in the course of 
my practice. It is a complicated question because sometimes the 
person is absolutely not in default and they initiate 
foreclosure; sometimes the wrong bank initiates foreclosure. 
And sometimes there is a placement of fees that then makes the 
payment double or triple, and at that point the person does go 
into default. Now, I submit that in that case it is the 
placement of the improper fees that causes the foreclosure, 
even though the person does technically go into default.
    Senator Johanns. Well, let me just say again I do not think 
that is right. And, again, I do not think you are going to get 
much debate from anybody about that. I just do not think that 
is right, and I want to make that clear.
    But, again, for the purposes of this Banking Committee, in 
this area it is so important that we understand what we are 
dealing with. And so at least today you can give me three cases 
where a default was initiated in a situation where the person 
was not in default. Three.
    Ms. Thompson. There are about 26 examples in the written 
testimony, and I believe three of them involve cases where 
there was no default; three of them involve cases where the 
homeowner submitted a partial payment in reliance on a 
representation by the servicer, and the servicer then declared 
a default; and at least three or four of them involve cases 
where people went into default solely because of the placement 
of improper fees.
    It is not uncommon--I think it is very difficult for us to 
assess the magnitude of it, in part because there is no 
meaningful verification of the affidavits that servicers submit 
in a foreclosure process.
    Senator Johanns. Well, you are going to have to----
    Ms. Thompson. To determine whether or not the fees are 
actually correct and the default is correct requires hours, 
often, analysis of the payment histories.
    Senator Johanns. Ms. Thompson, I will make this request to 
you. Again, I am trying to get a notion of the scope of what we 
are dealing with here so we can understand what we are to fix. 
But if this is truly a case where you are telling me out of all 
of the work you have done in this area that you can bring to 
mind three cases where somebody was default--or sued and 
foreclosed upon, that is a whole different dynamic for me than 
if there are 300,000 of them.
    Ms. Thompson. Out of all of the cases that I took, out of 
the hundreds of homeowners that I represented, in virtually 
every case I believe the homeowner was not in default when you 
looked at the surrounding facts.
    Senator Johanns. Would you be able to provide us with some 
information to back up that statement? You just made a 
statement: Out of all of these cases, in virtually every one 
the homeowner was not in default. That really--I find that 
troubling that there would be people out there foreclosing when 
the homeowner is not in default when there are--do you see how 
that does not----
    Ms. Thompson. Yes, and as a legal services attorney, I had 
precious little time, and I only took cases where I believed 
that there was a meritorious defense to the foreclosure. I 
represented in court hundreds of homeowners. Every single one 
of those cases, I believed there was a strong defense that 
would defeat the foreclosure. You can only defeat the 
foreclosure ultimately if you establish that there is not a 
legal default. It is a widespread problem throughout the 
country.
    Senator Johanns. I am a lawyer myself, and although I did a 
little bit of this work in my career, I did not do a lot, so I 
start with that deficiency. But I will tell you there are legal 
defenses and then there are defenses to the fact that, look, my 
client is not in default. And that is what I am trying to get 
to here. How many of those are in defense where you actually 
filed an answer to the foreclosure petition saying you made a 
mistake, my client is fully in compliance, at least in terms of 
the payment of this mortgage?
    Ms. Thompson. Well, again, I do not think that is a simple 
yes or no, because if you have these improper fees, that can 
cause a technical default under the note. But if we are looking 
at the cases where somebody was absolutely not in default, that 
would have been--you know, there is absolutely no question, no 
controversy about their payments, maybe 10 percent of the cases 
that I handled. If we are looking at cases where it was 
something that the servicer did, just the servicer, that 
triggered the default, maybe about 50 percent of the cases.
    Senator Johanns. OK. I will wrap up with this because I am 
over my time. You have even caused me more concern by your 
testimony because, again, if people are doing things that are 
not right, we should stop those things. We all agree to that. 
But what I am trying to get to is this issue of if you have not 
paid and somebody is suing you because you have not paid, then 
I need to know the scope of that problem. And if it is 10 
percent, then, again, that causes me a great deal of concern 
about your testimony.
    So hopefully you can provide more information to this 
Committee to try to clarify what you are saying here, and I 
would welcome that.
    I thank the Chair. I have gone 3 minutes over, and I 
appreciate it.
    Chairman Dodd. No, no, that is fine, Senator. Thank you.
    I would just note again--and then I will turn to Senator 
Bennett and then turn to my colleagues on the Democratic side. 
I had noted in the testimony of Ms. Desoer that 86 percent of 
homeowners are in compliance. Obviously, the number that is 
troubling to me is not the 86 percent, but the 14 percent who 
are not. Normally, as I understand it--and we have talked about 
this. Today, in fact, it is less than 1 percent or something 
around 1 percent under current underwriting standards and the 
like. Normally, though, in normal times, it would be around 2 
percent, people in default. The fact that it is at 14 percent 
speaks of another larger--coming down to the point where 
whether or not someone is in default or not, that is the end of 
the process. There is a lot that occurs before that particular 
moment that really causes so much concern as well. But I would 
just make that point generally.
    Senator Bennett.
    Senator Bennett. Thank you very much, Mr. Chairman.
    Unlike Senator Johanns, I am not a lawyer. My experience 
with mortgages, like his, started with getting one. I have 
defaulted on payments at various times in my career when I 
simply did not have the money. Fortunately, I got it in time to 
make up the payment before any legal proceedings were made. I 
was 60 days late, or whatever it might be. But I know the angst 
that comes with having missed a mortgage payment, worrying 
about what is going to happen if you cannot get the money to 
make it up with sick children and a foster child at home and a 
situation where your own economic circumstance is not good. So 
I have all kinds of emotional reactions to the testimony and to 
the emotional reactions to the testimony. But let me try to 
follow up on Senator Johanns with some of the things he was 
trying to get a hold of.
    We have two people here who are in the business of home 
loans: the president of the Bank of America Home Loans and the 
CEO of Chase Home Lending. I would like your response to the 
testimony we got from Ms. Thompson.
    Ms. Thompson, either deliberately or otherwise, you gave us 
the impression that it was the policy of the servicers--that 
there is a built-in conflict of interest so that it is their 
policy to try to pile on extra fees, to try to force people 
into bankruptcy so they can make more money. And I would like 
those who were on the receiving end of that implication to have 
an opportunity to respond.
    As a businessman--I am not a lawyer, but I am a 
businessman--I would say to the business people in the room, if 
that is indeed your policy, it is a really stupid policy, 
because while you may make a little short-term revenue out of 
such a circumstance, you build in very serious long-term 
consumer resistance to dealing with you. And I do not suggest 
that there are not businessmen and women who are stupid and, 
therefore, that there are not businessmen and women who do 
that. I think there are some who are stupid and who do do that. 
But if I were an employee of any company that was involved with 
this or serving on the board of any company that was involved 
with this and found out that you were deliberately trying to 
maximize short-term profits with these kinds of fees, I would 
say that is about as dumb a thing as you could possibly be 
doing from a business point of view.
    So we have two business people here, and I would like to 
hear your response to this. Ladies first.
    Ms. Desoer. OK, thank you. Senator, we absolutely do not 
sacrifice the long-term brand of Bank of America for the 
opportunity to have short-term gains in fees. At the same time, 
and for what Ms. Thompson referenced relative to our 
inaccurately portraying a PSA that resulted in a bad consumer 
experience, that is an error on our part. We take errors very 
seriously. We do make them. We are not perfect. When they are 
brought to our attention, we work to resolve them just as 
quickly as we can. So I apologize for any error there may have 
been. But, when we do make them, we work quickly to correct 
them because our best financial outcome is aligned with keeping 
homeowners in their homes. And so we have been as creative as 
we can under the circumstances, and unfortunately there are 14 
percent of customers who are delinquent on their mortgages, to 
attempt to reach out, to make offers of Government programs, of 
our own programs, of working with others to try to do 
everything that we can to keep customers in their homes. And 
where that has been possible, we have succeeded 700,000 times 
with permanent modifications that have enabled customers to 
stay in their homes. We continue to work to do that by 
expanding programs, being one of the first in the industry to 
offer a principal reduction program, as an example, under a 
proprietary program to participate in the hardest-hit States of 
the Government funds and to participate in the principal 
reduction portion of that where it is important in States that 
have experienced the most severe depression in home prices.
    At the same time, there is no question that we have to 
balance interests. We put the interests of the customer front 
and center. That is part of the core value of Bank of America. 
But we have to also consider the interests of the investors, 
whether that be Government agencies or private investors, as 
well as our role and responsibility of servicer. We take that 
balancing very seriously. We do not always get it right, but we 
certainly focus on trying to keep the customer in their home, 
and that is where our financial incentives are aligned.
    Senator Bennett. Mr. Lowman.
    Mr. Lowman. Yes, I would echo Ms. Desoer. The fact is we do 
not make money when we foreclose on customers. It is in our 
best interest to figure out ways to make loans perform again. 
And as a result of that we have invested significant effort and 
resources to beef up our modification efforts. We have 6,000 
customer-facing employees. We have 1,900 people that are the 
single point of contact for troubled borrowers. We go through 
an extensive analysis to determine whether or not a borrower is 
eligible for a modification, and as a result, modifications are 
in our best interest and in the interest of the investor.
    Like Ms. Desoer mentioned, we have a balancing act to do. 
We have to do what is right for the borrower, and at the same 
time do what is right for the investor who we have a duty to 
minimize their losses.
    Senator Bennett. Yes, one last comment, Mr. Chairman.
    Chairman Dodd. Yes.
    Senator Bennett. Ms. Thompson, I am sure your information 
is accurate when you say employees of these companies have 
misled people and given them improper advice. If you call an 
IRS agent for advice on your taxes, there is a very good chance 
you will get wrong advice and end up in tax court. Human beings 
do make mistakes, and I would just say to the two 
representatives of the two banks, I hope you are checking your 
training at all times to make sure those kinds of mistakes are 
not made, because as I say, the IRS is a Government agency, but 
it has a history of misleading taxpayers, and they act on the 
basis of the advice they are getting, and then they end up in 
tax court. And it is not a defense to say, ``Well, I did what 
the IRS agent told me.'' That does not matter. You are still--
did you want to comment?
    Mr. Levitin. Yes, Mr. Bennett, I think it is also important 
to actually hear the words of another servicer, and this is a 
public document, Countrywide's third quarter 2007 earnings 
call. Countrywide's president, David Sambol, this is what he 
said, and I quote:

        Now, we are frequently asked what the impact on our servicing 
        costs and earnings will be from increased delinquencies and 
        loss mitigation efforts and what happens to costs. And what we 
        point out is, as I will now, that increased operating expenses 
        in times like this tend to be fully offset by increases in 
        ancillary income from our servicing operation: greater fee 
        income from items like late charges and, importantly, from in-
        sourced vendor functions that represent part of our 
        diversification strategy.

    In 2010, Countrywide settled with the FTC for $108 million 
on charges that it overcharged delinquent homeowners for 
default management services, including mark-ups on some of 
these services that were in-sourced by over 100 percent. So 
that is the head of Countrywide in 2007 basically admitting, 
Yeah, we do sacrifice long term for short term.
    Senator Bennett. As I say, there are some people who are 
stupid.
    Ms. Thompson. Mr. Bennett, if I may, Mortgage Daily News, 
hardly a radical publication, reported in June of this year 
that servicers generally, their profit per loan had increased 
over the previous year despite the fact that foreclosures were 
rising. Servicers' business model is not based on the long-term 
profitability of the loan. It is based on the fees. The fees 
make up a large chunk of their profits because they are allowed 
to retain the fees under the current business models. And that 
is a structural problem with the existing business model that 
incents them to charge and retain the fees.
    Senator Bennett. I think that is something we ought to look 
at.
    Chairman Dodd. Well, I was going to say, I am going to turn 
to Tim Johnson, then Senator Tester, and I am going to forgo 
any questions I have. But I am going to ask to include in the 
record a letter from the New York Fed to, I think it was, Bank 
of America, Bank of New York, and others on October 18th of 
this year.
    Chairman Dodd. This one paragraph goes to the very question 
that Senator Bennett has asked. I will preface it by saying 
that the PSAs, the pooling and service agreements, provides 
that the master servicers shall be entitled to recover 
servicing advances that are:

        customary, reasonable, and necessary out-of-pocket costs and 
        expenses incurred in the performance by the master servicer of 
        its servicing obligation, including, but not limited to, the 
        cost of preservation, restoration, and protection of the 
        mortgaged property.

That is the section of the law.

    The letter from the New York Fed goes on to say:

        Despite the requirements that servicing advances were to be 
        incurred only for reasonable and necessary out-of-pocket costs, 
        the master servicer instead utilized affiliated vendors who 
        marked up their services to a level of 100 percent or more 
        above the market price to provide services related to the 
        preservation, restoration, and protection of the mortgaged 
        property in a fraudulent, unauthorized, and deceptive effort to 
        supplement its servicing income.

    That is from the New York Fed. That is not from--you know, 
with all due respect, this is--so this whole letter, by the 
way--it is a lengthy letter but very worthy, and I think it 
ought to be part of the record because it goes to the heart of 
these issues as well.
    Senator Johnson.
    Senator Johnson. Mr. Levitin, we have heard criticism that 
laws regarding documentation have not evolved quickly enough to 
address innovations in business. Does the law need to be 
changed to ensure proper documentation throughout the mortgage 
process?
    Mr. Levitin. No, sir, I do not believe that is the case. I 
do not think the problem is the law. The law is actually pretty 
good. The problem is really one of compliance with the law, and 
there are, I think, two potential problems.
    According to the American Securitization Forum--and I would 
agree with them, there are two generic ways in which you would 
transfer the notes and the mortgages in a securitization. One 
is that you would negotiate the notes through the procedures 
set out in Article 3 of the Uniform Commercial Code. Just the 
way you would sign the back of the check to negotiate it to the 
bank when you deposit it, similarly, you could sign it, endorse 
it to someone else. That way is fine.
    Alternatively, Article 9 of the Uniform Commercial Code 
allows for promissory notes and mortgages to be transferred as 
part of just a regular--under just a regular contract of sale.
    That system works fine. The first question is whether that 
system was actually the one that governed securitization. The 
answer, I believe--but I cannot say for certain, but I 
certainly believe the answer is now. Instead, I believe that 
what was governing securitization was private contractual law. 
The parties are allowed under Section 301 of Article 1 of the 
Uniform Commercial Code to contract around Article 3 or Article 
9. And I believe that is exactly what they did in the pooling 
and servicing agreements. Pooling and servicing agreements are 
trust documents that create a trust, have a transfer of assets 
to the trust, set for the rights of the mortgage-backed 
security holders, because the trust pays for those assets by 
issuing mortgage-backed securities, and sets forth the rights 
and duties of the servicer.
    The securitization documents themselves, the pooling and 
servicing agreement, call for a rather specific method of 
transferring of mortgage notes. My understanding--and this is a 
secondhand understanding. I want to emphasize this because I 
have not seen more than a handful of loan files. My 
understanding is that generally the requirements set forth in 
the pooling and servicing agreements were not followed, and 
they were not followed in the following way:
    The pooling and servicing agreement says that there has to 
be--when the notes are transferred to the trust, there needs to 
be an endorsement in blank to the trust as well as a complete 
chain of endorsements for all preceding transfers. That means 
that the originator of the loan has to have a specific 
endorsement transferring it to the securitization sponsor, the 
sponsor to the depositor, and then the depositor in blank to 
the trust.
    What I am told is that in the majority of cases that chain 
of endorsements is not there. There is simply a single 
endorsement in blank. That creates a problem because it does 
not comply with the trust documents. That is a severe problem 
because most pooling and servicing agreements are trusts that 
are governed by New York law, and New York law says if you are 
not punctilious in following the trust documents for a 
transfer, the transfer is void. It does not matter if you 
intended it. It is void.
    In addition, there is a very good business reason for 
having that particular form of transfer. A critical concern in 
securitization is to ensure that the assets placed in the trust 
are bankruptcy remote, meaning that if any of the upstream 
transfers to the trust were itself to end up in bankruptcy, 
they could not claw the assets out of the trust. This is to 
protect the mortgage-backed security holders.
    If you do not have that specific chain of endorsements, you 
just have an endorsement in blank turning the note into bearer 
paper, it is going to be very difficult to prove that you have 
that chain of transfers necessary for bankruptcy remoteness. So 
this is the concern.
    Now, I want to emphasize, this is not a problem with the 
law. This is a problem with following the law. So I do not 
think that there is a need to change the law to catch up with 
the market. I think this is, rather, a problem with the market. 
The law itself would have been fine, and historically, these 
procedures were followed. But as volumes grew during the 
housing bubble, securitization volumes, it just became easier 
to disregard the requirements. And you know, just as the 
underwriting standards fell, similarly the transfer diligence 
fell.
    Senator Johnson. Attorney General Miller, given that 
foreclosure is a judicial crisis in many States, what were the 
barriers to recognizing the documentation problems that 
existed?
    Mr. Miller. Well, I think what happened was that recently 
in some litigation people that did the robo-signing were 
deposed and admitted that. And, you know, once that happened, 
then this investigation started in earnest.
    I do not think there was any way for the banking regulators 
just looking at the documents to know that they were robo-
signed as opposed to done properly, as the affidavit said. So I 
think it was really sort of people coming forward, I think, in 
some foreclosure actions that were being defended in an 
aggressive, very capable way, that these disclosures became 
public, and then, you know, I think the Attorneys General, the 
banking regulators, the Federal authorities, class action 
lawyers, and the companies have been energized.
    So I think that what was sort of an unusual occurrence or 
maybe even a happenstance, if we can convert that problem into 
multiple solutions like the ones I talked about earlier, you 
know, we can come out of this much better than we came in. I 
just agree wholeheartedly with Senator Dodd saying that what we 
need is a broad brush, a broadly based look at all the problems 
that he described and I described and try and work with the 
companies and the investors and the Federal regulators to come 
up with a comprehensive resolution that gets us back on track 
and corrects as many problems as we can of those that are on 
the table.
    Senator Johnson. One last question for Ms. Desoer and Mr. 
Lowman. There have been serious questions, concerns raised that 
it is in the best interest not to modify--there have been 
serious concerns raised that it is in the servicer's best 
interest not to modify a loan given the fee structure and 
potential conflict of interest regarding second liens owned by 
a servicer's parent company. Can you address that criticism?
    Ms. Desoer. Certainly, I would be happy to start. We are a 
large servicer of first mortgages and also we have a large 
servicing portfolio, most of which we own, of second lien home 
equity loans and lines of credit at Bank of America, and in 
that context, we do not even take the second mortgage into 
consideration when modifying the first. So it is absolutely not 
an obstacle that stands in our way. We do modifications on 
second liens. We have done 95,000 of them independently of the 
first lien. Also, we were the first servicer to sign up for 
participation in the HAMP 2MP program, which is the second lien 
modification program that now others in the industry, as well, 
are participating in. So the second lien is not an obstacle, 
and has not been an obstacle and does not get taken into 
consideration when we look at modifying a first lien. So it 
does not stand in our way.
    Senator Johnson. Mr. Lowman?
    Mr. Lowman. I would echo Barbara Desoer's comments. The 
second liens do not stand in the way of modifying the first. 
We, too, are participants in Treasury's 2MP program, which has 
just recently been rolled out, which will allow for an 
automatic modification of the second when the first is modified 
and that first is held by another servicer.
    Senator Johnson. My time has expired.
    Chairman Dodd. Thank you very much, Senator.
    Because we have a good number of our colleagues here, if we 
can try and keep it down to about 5 or 6 minutes. Senator 
Tester?
    Senator Tester. I will do my best, Mr. Chairman. Thank you 
very much.
    I want to say, first of all, thank you all for being here. 
I very much appreciate your time. I am very deeply troubled 
about some of the allegations that have been made about 
improper fraudulent servicing and foreclosure processing, and 
what compounds this is the first-hand reports that my office 
has received in Montana. I have reached out to many foreclosure 
counseling agencies in Montana. I have read through some of the 
cases that my staff have worked on in recent months, and I will 
tell you, it is not a pretty picture. There is mismanagement 
that goes far beyond robo-signing and the chain of title 
issues.
    Since the foreclosure crisis began, we have urged 
constituents in danger of foreclosure to be proactive and to 
reach the servicer before they were in trouble. The foreclosure 
process is daunting, to say the least. It is a maze of 
paperwork, computer systems, conflict information. So it is a 
big deal. And the misalignment of the servicer incentives with 
homeowners and investors, I think, is a recipe for disaster.
    I have got a couple of examples and then I want to get to a 
couple of questions. In one example, a constituent of mine from 
Whitehall seeking a modification from Bank of America was told 
by a servicing associate that while the loan modification was 
in review, the homeowner should not make any mortgage payments. 
Let me repeat that. He was told by their servicer, Bank of 
America, not to make any payments, and that if they did, they 
would not qualify for modification. Ultimately, as a result of 
following the directions of their servicer, they were hit with 
interest and penalties and lapse in payments in addition to 
badly damaged credit.
    Then there is a case of a gentleman from Helena who has 
been fighting with BOA for over a year to prove that he should 
not be in foreclosure, despite having the paperwork to prove 
that his modification was approved. He never missed a payment, 
never late with his mortgage. After being told in August, this 
last August, that the bank has confirmed his modification, he 
received a letter 2 weeks later telling him that he was in 
foreclosure along with a foreclosure notice in the paper.
    Now, I do appreciate Bank of America's work to resolve the 
issue. Unfortunately, not everybody calls their U.S. Senator 
when they have a problem. And I am still trying to understand 
how this could go on for a year, in the case of the gentleman 
in Helena, to receive an erroneous foreclosure notice, and this 
was received at a time when, Ms. Desoer, there was a self-
imposed pause of foreclosures in Montana. So I need to know how 
this can happen.
    There are far, far, far too many stories out there, and it 
does not have anything to do with Ms. Thompson's testimony, 
although I very much appreciate it. This is stuff that I am 
getting in my office. We have a State with 950,000 people and I 
have got staff members that are spending a ton of time on this 
issue. I think it is more than an isolated case. If it was the 
folks who were not paying their bills, I get that. I have 
empathy for them and I understand it and we will do what we can 
do to help them. But in this particular case, these folks never 
missed a payment and they are getting hammered. Can you tell me 
how a servicer could ever tell a homeowner not to pay their 
mortgage?
    Ms. Desoer. Thank you for bringing those to my attention, 
and I think our staff has met with your staff to get those 
details and to follow up. We apologize. That is not part of 
what we should be telling homeowners. Of course, homeowners who 
are current who are facing imminent default can be considered 
for the HAMP and other programs if they can demonstrate that 
their payments are at risk, and we take those into 
consideration and do those modifications and we should never be 
advising anyone to----
    Senator Tester. Do you attribute this to an employee who 
screwed up?
    Ms. Desoer. An employee who somehow--yes, unfortunately, 
and--after conversations with your staff, we have gone back and 
reinforced that aspect of our communication to our teammates. 
It is a critical part of our training.
    Senator Tester. I think it is absolutely critical. If I 
take myself and put myself in that position, I mean, in these 
economic times, it is tough enough, and then you have something 
like this happen, it is pretty wild to even think it is 
possible.
    The gentleman from Helena, how is it possible he did not 
receive a letter indicating that he is in foreclosure before 
foreclosure processing has restarted in the State of Montana?
    Ms. Desoer. This goes back to what I referenced in my 
written testimony and my oral testimony about the dual track of 
if someone being delinquent and they go into the start of a 
foreclosure process, and then subsequently we engage in a 
conversation about a modification, the foreclosure sale will 
not take place, but that customer continues to get notices, and 
that is a requirement by certain investors that we do that on a 
parallel path. That is where we think there is an opportunity 
if we work together--and we are talking to the State Attorneys 
General under Attorney General Miller's leadership, to try to 
amend that process because we understand how confusing it is. 
But a customer would not go to a foreclosure sale----
    Senator Tester. OK. And I have run out of time and I am 
just going to make a real quick statement, and I appreciate 
everybody being here today. These particular hearings are not 
particularly enjoyable for me, and I know they cannot be 
enjoyable for you. The fact is that why we are here is not an 
isolated incident, like the Senators before talked about. There 
is no doubt in my mind this is not isolated. Montana is not a 
State where people come to the U.S. Senator just willy nilly. 
They end up in trouble and think they have been wronged, and I 
do not know how many people out there did not come to me and 
end up on the street and they never did anything wrong, and so 
it is crazy.
    So I just want to say in closing, I am going to remain very 
concerned about the scope of this problem, the impact it can 
have on our financial system and on the housing market. I know 
that the Fed is very much focused on it and I hope it is 
something that the Financial Stability Oversight Council will 
take a closer look at. It strikes me that some of the biggest 
servicers have been a little bit glib about their potential 
magnitude of these risks, particularly the risks to their own 
balance sheets. At a minimum, we need to understand these risks 
before the Fed moves forward with guidance on banks to increase 
dividends, because quite frankly, there are not going to be any 
more bailouts. And so it is important that we get this squared 
away simply from a fairness standpoint. I think both sides of 
the aisle can agree on that.
    Mr. Miller, you had a question or a comment?
    Mr. Miller. Just one very quick comment. I agree with you. 
We hear about it more often than it be just isolated, and one 
of the things that is difficult that we hope we can do is get 
to the bottom of how often it happens, why it happens, and how 
it can be stopped. It is a daunting challenge but one that we 
want to work with the banks and with the Feds to figure out why 
this happens and how can be----
    Senator Tester. I just appreciate that. I think if you go 
to what Mr. Levitin said about what the Countrywide CEO said--I 
think it was the CEO that said that--this could be taken care 
of pretty quickly by the servicers, I mean, really quickly by 
the servicers. I mean, to be honest with you, some heads have 
to roll if they are giving that kind of advice. That is just 
the way it is.
    [Applause.]
    Chairman Dodd. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    Mr. Lowman, you made a comment that, if I understood it 
correctly, I wanted to restate it, and that is that GSEs say if 
foreclosure has begun before the modification starts, the 
servicer should continue foreclosure proceedings while underway 
with the modification. Did I catch that correctly?
    Mr. Lowman. You did.
    Senator Merkley. OK. So we have so many folks coming to our 
office in Oregon who over here are working with the servicer to 
modify their loan, but then they are getting foreclosure 
notices, phone calls, agents coming to their door, and they 
keep calling up the servicer and saying, ``I thought we had a 
loan modification underway.'' Is this the result of these dual 
processes going forward together?
    Mr. Lowman. Yes, it is a result of the dual processes, and 
as I mentioned, at Chase, what we have put in place is a 
process that makes sure that if there is a modification in 
process and--if there is a foreclosure in process and you 
initiate a modification during that period of time, that we 
will not allow a foreclosure sale to happen. So we stop the 
foreclosure sale.
    Senator Merkley. So you do not take the final step, but you 
continue kind of the steps leading up to that?
    Mr. Lowman. Correct.
    Senator Merkley. It is just short. This is a story from one 
of my constituents:

        My husband and I signed a loan modification. We were approved 
        September of 2009. It was a steep loan rate and every year our 
        interest went up. We sent in a payment of $577 in certified 
        funds for the modification to become effective. We began making 
        our new payment each time we called in, but there was 
        confusion.
        We got a foreclosure notice in the mail. When we called to ask 
        about it, they would assure us everything is OK. Keep on making 
        your payment, is what they would tell us. We have made our new 
        payment for over a year and are still receiving foreclosure 
        notices. The bank told us our account has not been updated and 
        not to worry.
        We went out of town in October 2010, so last month, and 
        received a `Notice of Foreclosure' on our door. When my husband 
        called the bank, they told him the lender never signed off on 
        our modification, so it was not valid. They were going to try 
        and figure out something and let us know. When I called to 
        check on the account in November, of course, this month, the 
        bank said we are now delinquent. I told them what had happened 
        and asked what we should do. She told me we may qualify for a 
        loan modification. I said, we did that. I told the woman we 
        were approved and had been paying our new payment for over a 
        year. I asked her if she had seen this happen before. The woman 
        said yes. I then asked what happened to the money we paid every 
        month. She told me that it went toward our account, but only as 
        a partial payment.
        Now my husband and I do not know what to do. We want to make a 
        payment, but not if it is just a partial payment. We need help 
        and advice but cannot afford an attorney. It is embarrassing to 
        have your neighbor tell you you have a foreclosure notice on 
        your door. We also had a man come to our house telling us that 
        he was from the mortgage company and wanting to know if we were 
        occupying the property. I said, yes, we live here. This has 
        created a huge strain in our family and caused an enormous 
        amount of stress. Our children have been affected by this, as 
        well.

    I have stacks of these stories of this conflict between 
foreclosure--can't we just change this policy and suspend the 
foreclosure proceedings when a modification is underway, not 
keep it going forward and create this enormous confusion and 
stress for America's families?
    Mr. Lowman. So the new process prescribed by HAMP that was 
instituted this summer would necessitate that we enter into the 
modification process and engage with the customer to initiate a 
modification prior to the commencement of foreclosure. So that 
is the process that is happening today.
    The other major key difference today from in the past is at 
the beginning of the onset of the program, the HAMP program and 
other modification programs, we did things based on the 
statements from the borrower. So we entered into trial 
modification plans based on what they told us over the phone. 
And then we got into the game of collecting documents, not 
getting the documents, I am sure in many cases misplacing the 
documents. But at the end of the day, this period of time just 
took way too long. So the new process is such now that we 
collect the documents before we enter in the trial--set up a 
trial payment. And really the only thing that has to happen in 
order to make that----
    Senator Merkley. Let me cut you off----
    Mr. Lowman.----a permanent modification.
    Senator Merkley. My time is almost out. Have you changed 
your practice to suspend the foreclosure proceedings, not the 
final step, but the whole stream of events?
    Mr. Lowman. We have not.
    Senator Merkley. I just want to put that forward.
    Ms. Desoer, how about with Bank of America? Would that be 
possible, to set aside the foreclosure operation while you are 
in the modification process?
    Ms. Desoer. That is what we are proposing to consider, but 
we cannot do it independently except on our own portfolio of 
loans, and that is why we are working with the State Attorneys 
General on a suggestion to do that.
    Senator Merkley. Well, I think that is one substantial, 
simple step that would have substantial positive consequences, 
because this--the homeowners are completely confused and 
completely stressed by these foreclosure notices, and then 
suddenly in some cases people find out the foreclosure has 
actually gone through, which leads us then to talk about MERS.
    In common law, if you had a stake in a house, you could put 
a lien against the house because you had that stake, and that 
is captured in our modern law with a contract that is a 
promissory note on the contract side and a mortgage lien on the 
property rights side, and the idea is that if your contract 
right is violated, you have a property right to go back and 
reclaim your damages, essentially. But the separation that has 
occurred in MERS between the property law and the contract law 
is creating a lot of court cases.
    We are trying to get the details, but we think there has 
been a case in Oregon that has said, in fact, MERS does not 
have standing if they are not in a situation where they 
actually have damage, and I have your testimony, Mr. Arnold, 
from last year, your deposition where you said MERS suffers no 
damages. They have no economic stake in these mortgages.
    I am very concerned about the legal issues getting 
resolved, in part because this poses a huge systemic risk to 
our banking system as a whole. We are talking here both about 
the rights of the homeowner being honored, but we are also 
talking about confusion that can throw shock waves through an 
already challenged system of home finance in our country that 
is important to all of our homeowners.
    Can any of you kind of comment on what needs to be done to 
make sure both homeowner rights are honored and we do not send 
shock waves through our entire economy with this question?
    Mr. Arnold. Well, Senator, I would say that one thing that 
MERS does is make all of that more clear. The public can look 
at the MERS system and, free of charge, find out who the 
servicer is and who the note holder was. That was never 
available in the public records prior to MERS. So that gives a 
homeowner the two key players that they would have to negotiate 
with for a modification. So with MERS and the land records and 
the MERS system keeping track of the servicers free of charge, 
consumers can get that information and go straight to a 
modification. With regard to the foreclosure, MERS, if the 
foreclosure is done in the name of MERS, we have a nationwide 
requirement that the promissory note be presented at the time 
of foreclosure. That is more strict than most States. Likewise, 
there can be no lost note affidavit in a MERS foreclosure.
    Senator Merkley. So the person who represents MERS at the 
foreclosure proceeding is normally someone you have designated 
as a certifying officer of the company. How many folks have you 
designated as certifying officers, essentially temporarily made 
them members of your company in order to execute this process?
    Mr. Arnold. Well, it is not temporary. It is limited. They 
are limited to seven specific items that they can do for MERS. 
There are 20,000 of those nationwide.
    Senator Merkley. OK. I am sorry. I am out of time. But it 
has created legal confusion and that is an issue and I am 
sorry. Thank you all very much.
    Chairman Dodd. Thank you, Senator.
    Senator Bennet.
    Senator Bennet. Thank you. Thank you, Mr. Chairman. Thank 
you for holding this hearing, although I have to say it is so 
depressing how little we have moved in the last 3 years on 
these questions.
    I wanted to just clear something up because I did not 
understand the answers to the question. On the HAMP program, I 
wrote in February to the Administration suggesting that 
servicers that were part of the HAMP program ought to not be 
able to pursue foreclosure while they were working on modifying 
loans, and it was my understanding that last June the 
Administration put forward a policy like that, and you just 
spoke to that. I am confused about what the status is from the 
servicers' perspective. Are you in a position now to be able to 
say, we are not going to pursue foreclosures while we are doing 
modifications, or it sounds to me like it is not as simple as I 
may have imagined it was, or straightforward.
    Ms. Desoer. We are not in a position to say that we are not 
going to follow the foreclosure process in parallel to a 
modification. If there is a modification in the process of 
being considered, we will not proceed with the foreclosure 
sale. So the work that I suggested that we consider doing, 
which is eliminating that parallel process, has not yet taken 
place.
    Senator Bennet. What are the gating items there preventing 
you from being able to do that, or what----
    Ms. Desoer. Investor requirements.
    Senator Bennet. OK, which brings me actually to my second 
point----
    Ms. Thompson. Senator Bennet?
    Senator Bennet. Yes?
    Ms. Thompson. May I address the question about the HAMP?
    Senator Bennet. Sure.
    Ms. Thompson. That would be Supplemental Directive 10-02, 
which for HAMP does halt the foreclosure process, but only, in 
most circumstances, only for loans that are not yet in 
foreclosure at the time that the modification review is 
initiated, so that if the foreclosure process has already 
started proceeding for one reason or another, that process is 
allowed to continue to the point of sale while the loan 
modification review goes on. So while Supplemental Directive 
10-02 was helpful, it did not relate back to cover loans that 
were already in the foreclosure process.
    Senator Bennet. You have heard the stories here today, and 
I want to say that my office is facing exactly the same thing 
Senator Tester's office is facing. I have had 22 months of town 
hall meetings, people bringing their documents and the 
transcripts of voice mails and e-mails from servicers telling 
them that what they are doing is OK, that they are in 
compliance with the loan, and then they find out that they have 
been hit by a penalty of some kind or another.
    Mr. Chairman, there was an article in Sunday's Denver Post 
that I would ask to be included in the record, and I will not 
go through the two stories, but one of the people that were 
affected by all this sort of ``through the looking glass'' 
business, Wendy Diers, she said, ``We did everything we were 
supposed to do. This is such a boondoggle of a mess,'' she 
described.
    Senator Bennet. And it is a boondoggle of a mess, and I 
think there is some--and the thing that I cannot understand is 
where the misalignment of interest is here, because we have 
millions of people in this country that are underwater in their 
mortgages. We know that. I, for one, do not believe that it is 
possible to prop up the value of all of these houses. That is 
impossible and it would be foolish public policy to do that.
    But it seems it is clearly in the interest of people that 
can pay on their loans at a reduced value and who want to stay 
in their home, it is clearly in their interest to do that, 
right?
    For investors in these securities, it would seem to me that 
it is clearly in their interest to have the homeowner be able 
to do that, because the value of the modified mortgage is worth 
more than the proceeds from a foreclosure sale would be, it 
would seem to me, and I could be wrong. Any of this that you 
want to correct, please correct.
    The third piece is that it is clearly in the interest of 
the adjacent homeowners that that loan be modified and that 
that person remain in their house, because if they do not, the 
value of their house is just going to go down, and that can be 
repeated over and over and over again until the neighborhood is 
actually the entire United States of America, not just one 
place or a State that has been particularly hard hit, but the 
entire economic recovery in many respects rests on our being 
able to get this sorted out. That is a self-interest that would 
seem to be present.
    So the question I have is, and we have had this hearing and 
other hearings and here I am at the end still completely 
unclear where the misalignment is. Why can we not get all of 
the self-interest aligned in a way that will allow us to 
proceed expeditiously so that--not just so that my constituents 
can get on with their lives, which they desperately want to do, 
but so that we can get this economy moving again. Professor?
    Mr. Levitin. I think there are at least two problems. One 
problem is mortgage servicers, and I think you have heard a 
fair amount of testimony already at this hearing about the 
incentive alignment problem. Simply put, foreclosure is either 
less costly or more profitable than modification in many cases.
    The second problem----
    Senator Bennet. Not as far as the investors are concerned, 
right?
    Mr. Levitin. No. This is the servicers----
    Senator Bennet. Right.
    Mr. Levitin.----representing their own financial interests, 
which are--the servicers' financial interests do not match the 
investors'.
    The second problem comes with loans that are not being 
serviced by a third-party servicer but with loans that are 
actually on bank books. There is a strong disincentive for 
banks to recognize losses on mortgages quickly.
    Senator Bennet. What percentage would you say of----
    Mr. Levitin. Around 40 percent of mortgages in this country 
are not securitized. We do not actually know how many mortgages 
there are in the United States, which is just kind of an 
astounding failure, regulatory failure to gather information. 
No one knows the number. Somewhere between 50 and 60 million.
    But of the mortgages that are on bank books, if the bank--
if the loan defaults, the bank can stretch out the period of 
time before foreclosure. That means that the bank is stretching 
out the time before it has to recognize the loss. If the bank 
modifies the loan now, and let us say it writes down principal 
now, it is taking an immediate loss and this is particularly a 
problem with second liens because almost all second lien 
mortgages are on banks' books. There are around $400 billion in 
second lien mortgages out there. That is roughly equal to--they 
are held by the four largest banks, Bank of America, Chase, 
Citi, and what am I forgetting--Wells. That is roughly equal to 
the market capitalization of those four banks. So if they 
started writing off their second lien mortgages, they would 
have no capital left. They would be insolvent. And that creates 
a strong incentive not to recognize losses and to just try and 
pretend that they are not there.
    Senator Bennet. Mr. Attorney General, did you want to 
respond?
    Mr. Miller. Just briefly. First of all, you gave my speech, 
although you gave it better than I give it. I just agree with 
you completely on the fundamental alignment of interests that 
you describe.
    And I think there is a series of factors. Some were just 
mentioned, including the second lien and the recognition of 
loss. In addition, I think there is a question of putting 
enough resources into the servicing process. There has been an 
enormous demand on what they need to do. They have added a lot 
of people. I think they have to add more and add more 
resources.
    And then I think, additionally, the quality of 
decisionmaking that--it is hard to tell, and we hope to get to 
the bottom of this, as well, but I think that in the 
decisionmaking they make on modifications, they are not making 
some of the modifications that they should for a whole variety 
of reasons. In some cases, I think competency. In some cases, I 
am not sure.
    Also, there is a culture here to get over that servicers 
traditionally--their job was to collect money and turn it over 
to investors, and now they are being asked to do something 
totally different, to make these judgments, really to 
underwrite loans maybe for the first time. For someone that is 
used to collecting the full amount, to write off part of it, 
there is a hurdle there. And I think they are getting over that 
hurdle more and more all the time.
    But our belief, the State Attorney Generals' belief is 
that, like yours, that a lot more modifications should be made 
that are not being made. We are going to try and find out why 
that is happening, and as I say, we are working a lot with the 
servicers to figure out what the solution is. But I just--I 
could not agree more with the fundamentals of your question and 
your statement.
    Senator Bennet. Ms. Thompson?
    Chairman Dodd. Could I, just quickly, I appreciate the 
Attorney General's comment on that. But just quickly, I just 
want quick yeses or noes, or very brief answers. Do you 
disagree with what Senator Bennet has said, beginning with 
Barbara?
    Ms. Desoer. No. We are the largest U.S. consumer bank and 
our financial interests are aligned with consumers being 
healthy and the economy recovering. So I agree absolutely, when 
you look at a community and the impact that a foreclosure has 
on a community versus a household being able to stay together, 
a family being able to send their kids to school----
    Chairman Dodd. That is longer than a sentence, Barbara, but 
I appreciate it.
    Ms. Desoer. I am sorry, but we are very aligned. I agree. 
Yes.
    Chairman Dodd. Just quickly, yes or no. I suspect everyone 
is going to agree with what Senator Bennet said. Is that true?
    Mr. Arnold. Yes, sir.
    Mr. Levitin. Yes.
    Mr. Lowman. Yes.
    Ms. Thompson. Yes.
    Chairman Dodd. Again, here we are----
    Ms. Thompson. If I may, we spent at the Center a lot of 
time last year trying to answer that question, why it is that 
servicers have failed to modify, and produced this report 
looking very carefully at the legal and financial incentives 
that they face, and the key charts from that are reproduced in 
the testimony submitted today.
    There are three key recommendations that we believe would 
do a great deal to align servicer incentives with homeowners, 
investors, and the American public at large, and those three 
are what both Senator Merkley and Senator Bennet have talked 
about, ending the two-track system and requiring in all cases 
that evaluation for a loan modification be performed before the 
foreclosure process is initiated and requiring that a loan 
modification be offered to the homeowner if, in fact, it is 
going to provide a net benefit to the investor. So if the 
investor will profit from a loan modification, it should be 
offered to the homeowner before fees start getting tacked on 
and the foreclosure process starts down the road.
    Chairman Dodd. I agree with that.
    Ms. Thompson. That is one. Two is there are complicated 
rules imposed by the credit rating agencies and in the pooling 
and servicing agreements that make it--that reduce repayment of 
servicer expenses when there is a modification. So when there 
is a foreclosure, servicers get repaid off the top before the 
investors get anything, all of their fees and advances, all of 
those broker price opinions, their title work, their 
foreclosure fees, all of that gets paid back directly to the 
servicers when the home is sold in a post-foreclosure sale. The 
repayment of those advances is delayed and much less clear if 
there is a modification, and so that is almost certainly a 
significant disincentive in many cases to perform modifications 
and there ought to be guidance issued that would clarify that 
you can get repaid from the pool when you do a modification for 
your advances so that servicers would get their legitimate 
advances repaid.
    The third thing is we have talked about the role of fees in 
pushing people into foreclosure and encouraging servicers to 
have people in default because then there are these extra fees 
that they can tack on that they can then put in their pocket to 
offset the costs of foreclosure. And so we believe that you 
need to regulate those default fees to reduce the incentives to 
put homeowners into foreclosure.
    Chairman Dodd. Thank you very much.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Too many homeowners in our country, they face the threat 
of----
    Chairman Dodd. Is your microphone on?
    Senator Akaka. Thank you very much, Mr. Chairman.
    Too many homeowners in our country have faced the threat of 
foreclosures, and hearing our witnesses here, I think of Hawaii 
as suffering from this. At this time, the foreclosure rate in 
October was the 12th highest in the nation. In September of 
this year, families in Hawaii faced 67 percent more 
foreclosures than in September 2009, and 172 percent more than 
in September 2 years ago. This underlines how alarming the 
reported problems among mortgage service providers are, and so 
without question, we must do more than we are doing now, and 
our business here really is legislation. Mr. Levitin did 
mention it is not the law. It is not being complied to, and so 
that is not the problem. Many problems have been addressed 
here, and this issue is very complex.
    So let me cut this down to asking three of you, and that is 
Mr. Miller and Mr. Levitin and Ms. Thompson to help us in what 
we are trying to do, and that is what recommendations do you 
have to protect homeowners in foreclosure proceedings from 
abuse of legal practices?
    Chairman Dodd. Ms. Thompson, you just answered that 
question, I thought, pretty well in your last three things you 
said.
    Ms. Thompson. Yes.
    Senator Akaka. Do you have something to add to that?
    Ms. Thompson. I do. We have more recommendations in our 
testimony. One key point about compliance is that you can get 
much better compliance if you fund quality mediation programs 
and you fund legal services attorneys. The mediation programs 
in New York City and Philadelphia are reducing the foreclosures 
there by about 50 percent. People that participate in the 
mediation programs, about 50 percent of those avoid 
foreclosure. So if you can get the servicers into a program 
where they are forced to focus on that particular loan and get 
it out of the automated processes, you are very likely to avoid 
many foreclosures and reduce the numbers dramatically. But 
those programs need to be funded.
    The other thing is that the Dodd-Frank Wall Street Reform 
Act authorized $35 million in funding for legal services for 
legal services programs to assist low-income homeowners and 
tenants facing foreclosure, but that money has not been 
appropriated. All of the robo-signing allegations were only 
discovered, brought to light by aggressive, competent attorneys 
working very diligently to represent their clients. Homeowners 
cannot negotiate these kinds of issues without lawyers. Low-
income homeowners particularly need the lawyers. Funding for 
legal services in foreclosure defense has taken several hits in 
recent years. We urgently need that funding.
    Senator Akaka. Thank you for that.
    Mr. Miller.
    Mr. Miller. I would underscore the funding set of issues. 
We have Federal funding for our hotline in Iowa that is working 
very well to try and help people modify loans and the whole 
system that supports that. Legal services also is terribly 
underfunded by the Congress for, I know, a variety of reasons. 
I am also a former legal services attorney.
    In terms of the substantive legislation, you know, it might 
depend on how we come out with our investigation and our 
resolution and what we find. Hopefully, we can solve these 
issues, but if we can't, you might want to think about 
regulation on the fees----
    Chairman Dodd. Tom, can I jump in there? How long do you 
anticipate you Attorneys General are going to take on this?
    Mr. Miller. It is hard to tell, Mr. Chairman, but we are 
thinking in terms of months rather than a year or longer. But 
it depends really on how far we get, how the negotiations get, 
and as we expand the scope, like you and I believe strongly we 
should, that expands the time somewhat, as well.
    Chairman Dodd. Excuse me, Dan. I apologize.
    Senator Akaka. Sure.
    Mr. Miller. But maybe something on the fees that are 
allowed. I agree that the forced insurance, there has been a 
huge abuse there that need to either be corrected by agreement 
or by legislation. The same thing with the dual track of 
foreclosure and modification at the same time. If you all could 
solve the second lien problem, which I think is a daunting 
problem, we would all appreciate that. You might want to take a 
look at that, as well.
    Senator Akaka. Thank you.
    Mr. Levitin.
    Mr. Levitin. All right. I would certainly support 
everything that Ms. Thompson and Attorney General Miller have 
suggested, but I would also suggest that you might want to 
consider an alternative that would go a bit farther, namely 
taking servicers out of the loan modification process 
altogether. Servicers were never in the loan modification 
business. They are in the transaction processing business and 
we are trying to get them to enter a business line that they 
are not used to doing, and to expect them to succeed in that is 
really asking too much.
    And the way to get them out of that would be having some 
federally administered loan modification program where--you 
could do this under the bankruptcy power. It would not 
necessarily have to be done through bankruptcy courts, even 
though that would certainly be one way, and it would not 
necessarily have to be a repeat of the Chapter 13 cram-down 
legislation that the Senate failed to pass a couple of years 
back.
    You could do this instead through something like a 
mortgage-only bankruptcy chapter where you have an immediate 
triage between homeowners who can pay and those who cannot, and 
if they cannot, have an expedited foreclosure proceeding. So if 
it is an empty house, move it back on the market as fast as you 
can. But if the homeowner can pay, give them a cookie cutter 
modification, including principal reduction, and if you did 
something like that, that would certainly get rid of the second 
lien problem altogether. I mean, you would have another problem 
potentially, which is that you might have four very large 
insolvent banks, but that is a problem that exists whether or 
not you recognize the losses now or later.
    Senator Akaka. Thank you. My time has expired.
    Chairman Dodd. Thank you very much, Senator.
    Senator Reed.
    Senator Reed. You anticipated my question, Professor 
Levitin, which is basically how do we deal with millions of 
individualized cases given the general model of the HAMP 
program, which applied to a specific case requires someone to 
weigh the ability of a borrower to pay, the job prospects, 
etc., which all comes down to some type of impartial--both 
sides respecting the impartiality of the decisionmaker saying, 
well, this is what we are going to do.
    You might be aware that I became aware through Senator 
Whitehouse's hearings in Rhode Island that the Southern 
District of New York, their bankruptcy judges are participating 
in a program like this under their mediation procedures. They 
have taken a step forward, and apparently it is working in that 
they are quickly, as you suggest, finding debtors who in no way 
can pay given their job circumstances, and the pain and the 
uncertainty is over. The pain might linger, but at least the 
foreclosure is completed. But for others, the modifications go 
into effect, they get on with their lives, etc. So I think that 
suggestion is excellent.
    You mentioned previously, and I will get comments from 
others, too, that you were talking about some type of global 
settlement, because of the suggested implications on the 
balance sheets of the banks and the overall economy. What are 
the components, in addition to this bankruptcy-type approach, 
which you suggest should be in this global settlement?
    Mr. Levitin. You need to make sure that there is quiet 
title on real estate in the United States. That is also 
something that bankruptcy can do. That is something that 
bankruptcy courts routinely do, is award quiet title. So that 
is one way of sorting through any of the chain of title 
problems.
    I think, ultimately, our real problem is that there are 
losses in the system and we have to figure out how to allocate 
them. There is not a solution where everyone walks away happy 
with no losses. Right now, those losses are being put on 
mortgage-backed security holders and, frankly, on average 
homeowners, not just the ones in foreclosure but the ones who 
live next door and have the vacant property next to them where 
the lawn is not being watered and so forth.
    The losses have to go somewhere. They can go on the banks. 
They can go on the investors. They can go on the homeowners. Or 
they can go on the Government. Those are the four choices. I 
certainly do not like the losses going on the Government. We 
made a move that way in 2008 and I do not think there is a lot 
of appetite to see that expand. The homeowners----
    Chairman Dodd. Very perceptive of you.
    [Laughter.]
    Mr. Levitin. That might get me tenure.
    [Laughter.]
    Mr. Levitin. I do not think anyone wants to see these 
losses borne by the homeowners, but that is where it is falling 
right now. So really, this is kind of a question between the 
investors and the banks, and frankly, I think the investors 
have really the--are the more innocent party in that they did 
not originate. There were a lot of problems on the origination 
end. That was not the investors' fault. I mean, certainly they 
bought the stuff and they made a market for it, but in many 
cases, the investors are saying now, we thought we were buying 
better paper than you sold us. You said you were selling us B-
plus paper and it turns out this was actually C-plus paper. We 
want our money back.
    But we need to recognize that we have to allocate the 
losses, and we can either just avoid that for a time, but 
recognize that as long as we do not specifically address the 
loss allocation, we are making a choice, and that choice is 
stick all the losses on the homeowners and the investors and 
that is really not where they should be.
    Senator Reed. Let me just make one point, and I do want to 
ask the Attorney General about his comments regarding the 
direction his investigation is going and his recommendations 
and also give the opportunity for the financial representatives 
to respond. This phenomenon, and Ms. Thompson said it here, if 
you look back, it is deja vu. This situation was bad a year 
ago. It is worse today, and it might get worse. If the strategy 
is to just try to hope for a recovery independent of anything 
we do here of solving a problem, we could find ourselves coming 
back here in months or years from now with even a worse 
situation, and investors being more frustrated and more willing 
to sue the banks, etc. So there is, I think, a problem for all 
the institutions, the homeowners, the financial institutions, 
and we have to start moving toward a solution, not simply 
waiting, because it seems to be getting worse in my mind. I 
hope I am wrong, but that is the impression.
    Just quickly, General Miller, will your recommendations 
touch upon some of these discussions we have had in terms of a 
bankruptcy-like approach to settle these individual disputes 
between individual homeowners and banks, take the servicers out 
of the middle, if you will? Will it talk about some type of 
distribution or sharing of the losses, which Professor Levitin 
suggests could be substantial? Just give me an idea of where 
you think you are headed with your recommendations, not 
specifically, but what categories.
    Mr. Miller. You know, there could be some recommendations, 
but the core of what we are trying to do will be an agreement 
with the servicers, with the banks that are servicers, and, you 
know, we are trying to figure out ways to change the paradigm 
with them staying in place. They are not going to agree to the 
kinds of fundamental change that you have talked about.
    So our goal is to change the paradigm within the current 
system so that it functions, and ideally, I think, from our 
point of view, so it functions the way Senator Bennet described 
that it should function. That is certainly our goal, and what 
we want to do is have some provisions--what we are talking 
about now are some provisions, some requirements that they 
would have to live up to--only one contact person, deal with 
the dual track, and other issues, as well.
    And then I think there would have to be some way that it 
would be enforced, maybe a monitor is something we have talked 
a little bit about, maybe some penalties if they do not comply. 
But where we are at right now is to try and change the paradigm 
within the current system of the bank servicers that you see in 
front of you and the other large three.
    We talk about and we struggle with sort of the dysfunction 
of the system. We have not gotten to the point of the 
resolutions you have talked about, but it is a system that was 
designed, as I mentioned, to collect money and turn it over to 
investors and now it is a much different system that has some 
issues concerning reliance on fees to pay for some of the new 
resources they have to bring in that we talked a little bit 
about earlier. The conflict of the second liens are involved 
there.
    But I guess what we are still trying to do is have enough 
change within the current players to resolve some of the issues 
so that we have a much better system, the best system that we 
can have so that when that person comes before them and asks 
for a modification and the calculation is done quickly and 
fairly and accurately and the modification they are requesting 
produces more money for the investor than foreclosing, then 
that happens. I do not think it does happen that often now. I 
think there are some fundamental problems.
    So we are trying to do what I am trying to say. We are 
struggling with how to do that, and if the Committee and the 
Committee staff have any suggestions to us, we would love to 
hear from you. We are talking to the investors. Last week, 
Patrick Madigan, our Assistant who is the lead of this, talked 
to the consumer groups and said what we should do. This is a 
very serious attempt to solve a very difficult problem. We are 
going to do the best we can and let the chips fall where they 
may from that. We will need, ultimately, agreement from the 
banks, and so far, our discussions, as I said, have been 
productive.
    Senator Reed. Well, I appreciate what you and your 
colleagues are doing. It is very important. But just again, 
your process, because of the negotiations, because of the 
complexity, we expect--you expect months from now to have 
recommendations which might take even further time to 
implement, and there is a real question, I think, of do we have 
that time, and not just in terms of the individual homeowners 
but the economy. And if the economy gets worse for reasons not 
directly related to this, such as the sovereign debt crisis 
overseas, etc., then the foreclosure problem we face today, you 
know, the bottom keeps slipping down, down, down, down, down, 
and this problem becomes really tremendous.
    I want to give an opportunity to----
    Mr. Miller. Yes, and we feel all that pressure, by the way.
    Senator Reed. Good. So do we.
    Mr. Miller. I know you do. And again, there will not be 
recommendations. If there is an agreement, there will be an 
agreement and we will go forward right from there.
    Senator Reed. But let me ask Ms. Desoer and then also Mr. 
Lowman this. Implicit in, I think, the comments, and I do not 
want to put words in your mouth, of Professor Levitin is that 
there could be potentially significant losses here, and the 
question really is are efforts being made to minimize your 
losses, which, frankly, if I was a business person, that might 
be my first goal on behalf of the shareholders, or to 
effectively deal with these home mortgage modifications to 
follow the HAMP guidelines, etc.? And I suspect in reality 
there is probably a constant tension and conflict to that. But 
I just want to give you an opportunity fairly to comment on 
this whole discussion with that.
    Ms. Desoer. Thank you for the opportunity. There is not 
conflict in our company. Any dollar, any resource, any 
capability that is needed, our business has the support of 
that. There is nothing more important to recovery of Bank of 
America's brand than doing this right, listening to people like 
Ms. Thompson, understanding the Senators' individual 
situations, dedicating people, training people to do it.
    We have moved people. As General Miller indicated, we have 
had to build a brand new capability, people, process, 
technology, to deliver it. We have moved as many resources, 
experienced underwriters, others who have experience into the 
servicing space to build that. We have made progress, but there 
is no question there is still great inconsistency that we are 
dedicated to eliminating. But it is not a constraint, or it is 
not that someone is saying, no, that will mean a lack of profit 
for the company. This is the most important issue in the 
company and there is no constraint on dollars that we will put 
against it.
    Senator Reed. Mr. Lowman?
    Mr. Lowman. We have sustained billions of dollars of losses 
in this whole crisis as a bank, and I believe our interests 
are, in fact, aligned with other investors. The fact is, the 
best outcome is to keep a person in their home and to keep them 
paying, and we are all advantaged by doing that. We do not have 
anything to gain by having someone go into foreclosure. And so 
I would just echo Barbara's comments. Our interests are aligned 
and we are doing everything we can.
    Senator Reed. Just a final point, and I think this echoes 
one of the recommendations that Ms. Thompson has made and which 
is included in the legislation I have, which is basically to 
require that a full attempt to modify a loan be made prior to 
pursuing foreclosure. That might require renegotiating your 
agreements with the servicers and with the trusts. I do not 
know. But is that something that you would consider as a policy 
initiative for the bank to take immediately?
    Mr. Lowman. Well, I would say that as we have described in 
the HAMP program, it is a requirement today. So we have to 
offer a modification to a customer before we commence with the 
foreclosure process. So by definition, as time goes on, it will 
have to have happened before foreclosure.
    Senator Reed. Ms. Thompson, any comments?
    Ms. Thompson. As I said earlier to Mr. Bennet--first of 
all, Senator Reed, thank you so much for your work on 
supporting servicing reform. We greatly appreciate it and your 
bill, if enacted, would be a very important step forward.
    As I said in response to Mr. Bennet's concerns earlier, in 
our view, the HAMP program--what Mr. Lowman just said is, over 
time, we will see that a modification will be offered, and the 
problem is that ``over time'' means that there are going to be 
tens and hundreds and perhaps millions of foreclosures that 
occur until you get to that point where a loan modification is, 
in fact, offered before a foreclosure, and over time, if you 
are waiting for over time, you are going to see millions of 
dollars of fees piled onto homeowners' accounts, which makes a 
modification much more difficult.
    Senator Reed. A final word. The Chairman has been very 
gracious here.
    Mr. Levitin. I think it is important just to remember that 
HAMP--that requirement that the modification be offered only 
applies to HAMP-eligible loans, and only about one in six loans 
that is currently 60-plus days delinquent is HAMP-eligible. So 
we have a problem of HAMP being a problem that just had too 
narrow of a focus and that really does not solve the problem.
    Senator Reed. Thank you, Mr. Chairman. You are most kind.
    Chairman Dodd. Thank you. Let me just--because these are 
important. Attorney General Miller, at the outset of my opening 
comments, I talked about the importance of getting this 
Financial Stability Council that we established in the 
financial reform bill to anticipate systemic risk and to 
collectively work as a body chaired by the Secretary of the 
Treasury, along with the FDIC and the OCC. There are 10 members 
of that, an independent member, and five others are part of it. 
This seems to me like a classic example, one that we did not 
anticipate necessarily when we drafted the legislation, but 
exactly--I mean, we are in a crisis with this. Now, you could 
argue that it is not yet a systemic crisis that poses the kind 
of risk we saw in the fall of 2008. But no one can argue we are 
not in the middle of a crisis.
    Now, the idea of this, of course, was to minimize crises so 
that they do not grow into the large systemic crises. Have you 
had any contact with the Secretary of the Treasury or is there 
any communication going on between the Attorneys General and 
this Council or the Chairman of it, the Secretary of the 
Treasury, or their office to begin to talk about what the role 
of the Federal Government might be in formulating an answer to 
all of this?
    Mr. Miller. We have not had any contact with the Council. 
We have repeated contact with the Department of Treasury, with 
Assistant Secretary Michael Barr and his staff. We have 
developed a terrific ongoing relationship with them. We talk 
about these issues and try and help and support each other on 
these issues. So we have had a lot of discussions with 
Treasury, but not with that particular Council.
    Chairman Dodd. Again, I talked privately with Senator 
Warner and others. I do not know if Senator Merkley has a 
similar thought. I am going to use this forum here obviously in 
a very public setting to urge the Secretary of the Treasury and 
others to convene that Council, to begin to work with you and 
others so that there is a role here to examine this question in 
seeking broad solutions to this question. So my hope is they 
will hear this request to pick up that obligation that we have, 
I think, laid out in that legislation.
    I want to ask, if I can, also as well both you, Ms. Desoer 
and Mr. Lowman, to respond, if you could, to the suggestions 
that Ms. Thompson made regarding the three that were raised. 
And anyone else can jump in on this, but I would like to get 
your response to them.
    First, she argues the elimination of the two-track system, 
which we just discussed, and as Mr. Levitin pointed out, only 
one in six--and, again, having been very involved in the 
crafting of HAMP, you know, we were trying to put together a 
bill here in this Committee, and it was very awkward and 
obviously trying to get a majority, getting 60 votes and doing 
the best we could to have some answer to all of this at the 
time. It is not exactly what I would have written if I could 
have written it alone and passed it. But it is what we were 
able to get done through a very difficult mine field 
politically here in the institution.
    But I want to get your response to the elimination of the 
two-track system. Forget whether HAMP requires it or not. What 
is in your interest, what would you like to see happen here in 
all of this, regarding that homeowners are fully evaluated for 
loan modification before the foreclosure is initiated?
    Second, she proposes that failure to offer loan 
modification where such a modification is net present 
positive--in other words, where the modification had a better 
return for investors than foreclosure, it would be allowed to 
be used as a defense against foreclosure?
    And, third, the principal reduction should be mandatory 
under HAMP. I have been advocating that for almost 4 years, 
that principal reduction would really address this issue very 
directly. But I would like to get--Mr. Lowman, why don't we 
start with you? We always have Ms. Desoer going first. We will 
have you go first here. Give me your answer to these three. Are 
you in favor of them or not? And why?
    Mr. Lowman. So, first of all, with respect to the two-track 
system----
    Chairman Dodd. Right.
    Mr. Lowman. You know, as I mentioned, the HAMP program 
already requires----
    Chairman Dodd. I know, but forget that for a second. What 
would you like? Would you be willing to accept what she has 
argued for here?
    Mr. Lowman. I think we have to be careful with that, and I 
just believe that, you know, we have now a process inside of 
our company where every defaulted borrower gets linked up with 
a single person and there is single accountability----
    Chairman Dodd. Well, how do you address the point she 
raised earlier? If you are going through and you have got a 
foreclosure process going and all of these costs are mounting 
up, it seems to me you are working against yourself. In fact, 
if you are trying to get some modification here, would it not 
be wiser to go with the modification? Then if that falls apart, 
then go to foreclosure.
    Mr. Lowman. Right. So that is currently what we----
    Chairman Dodd. But it is a dual track. You are going both 
at the same time.
    Mr. Lowman. We actually start the modification process much 
sooner than when a borrower goes--you know, is referred to 
foreclosure. We start the modification process literally with 
the first talk-off.
    Chairman Dodd. OK. So you reject that. Tell me about number 
two.
    Mr. Lowman. So to make sure I understand number two, can 
you repeat it?
    Chairman Dodd. Number two, she proposes--and correct me if 
I misspoke here. She points out that the modification has a 
better return for investors, to investors than foreclosure, 
they be allowed to use that as a defense against foreclosure.
    Mr. Lowman. So today, the way the process works is we, you 
know, run the net present value models that we use to determine 
whether or not we should foreclose or modify. And in the cases 
of where it is in the best interest of the investor to modify, 
we offer a modification.
    Chairman Dodd. Well, if there is a net present value that 
makes it more valuable than foreclosure--I mean, using a model 
is one thing. But, I mean, in these individual cases, if that 
turns out to be the result----
    Mr. Lowman. That we should modify the loan, then it should 
be modified.
    Chairman Dodd. How about number three, principal reduction 
mandatory?
    Mr. Lowman. So principal reduction, first of all, we are 
participating in the HAMP principal reduction program which was 
recently rolled out. All of our analysis indicates that what is 
most important is that borrowers have affordable mortgage 
payments, and we have got lots of experience, having done many 
mods. And we do that by reducing the interest rate, by 
extending the term, and by deferring principal where necessary 
with, you know, no interest attached to that. We as a servicer 
have a duty to our investors to minimize losses, and obviously 
principal forgiveness potentially increases losses.
    And then, last, I think if we want to rebuild the U.S. 
mortgage market and continue to have investors and banks have 
confidence in the market, we need to ensure that the collateral 
values are there.
    Chairman Dodd. Now, I understand that, but going back--and 
I recall 4 years ago making the case. There was a study done on 
a square block in the city of Chicago. One foreclosure in that 
square block immediately caused the lowering of value of every 
other property on that block immediately by 5 percent. You end 
up with two and three foreclosures in a city block, and you 
get, obviously, a larger impact.
    Why wouldn't it make more sense just to go directly at that 
principal issue which makes a greater possibility that 
homeowner will be able to afford that mortgage and avoid the 
kind of cascading effect we see in these neighborhoods, which 
obviously can work to your interests?
    Mr. Lowman. We are able to achieve affordability with the 
tool set that we have today, which includes the deferment of 
principal. So you get to the same end state.
    Chairman Dodd. I wish that were the case.
    Ms. Desoer, how about responding to those three points?
    Ms. Desoer. As I have discussed, we are very open to 
discussing changes for the existing pipeline that is going 
through the dual track to take it away. I agree with Mr. Lowman 
that with everything we have done, hopefully nobody who is 
eligible for a modification ever gets to the start of a 
foreclosure, but we know we have got a pipeline to work 
through, and so we are amenable to that.
    On the second issue, I agree. And then on the third issue 
of principal reduction, we do have a proprietary program that 
we are now executing with 40 States on a principal reduction 
program, and we are participating in the principal reduction 
program of the hardest-hit States with Government funding, and 
those are the places where it is the largest issue.
    Thank you.
    Chairman Dodd. Senator Merkley, do you have any additional 
questions you would like to raise?
    Senator Merkley. Yes.
    Chairman Dodd. I am going to leave the record open, by the 
way, for a few days--this is awkward, obviously, with caucuses 
around here and everything else--for other Members to submit 
questions to the panel.
    Senator Merkley. Thank you very much, Mr. Chair. I just 
wanted to clarify a couple of points.
    One is I know that we sought to create a safe harbor for 
the servicers from the investors so that they were following 
the HAMP program, that they would be in that safe harbor and 
not subject to suits. That is a real concern. Did the safe 
harbor not provide enough protection to disconnect the 
foreclosure track from the modification track? And do we need 
to take action here to provide an expanded safe harbor?
    Because of the constituents streaming in our doors with the 
enormous stress connected with working on a modification and 
yet some other group of folks somewhere within the same 
servicer are pursuing aggressively every single step on 
foreclosure, people are--it just seems like the two parts are 
not talking to each other, and they are enormously stressed 
over this. And it seems like if there is a good-faith 
modification effort under way, the foreclosure process ought to 
be shut down until it becomes clear that modification will not 
work, and then, OK, well, it gears up again.
    What do we need to do to help create the ability--and, Ms. 
Desoer, since you referred to that you are working on this, 
what do we need to do to--do we need to do anything? What needs 
to be done to help create the legal framework that will allow 
you to take a step that would be a tremendous step forward for 
American families?
    Ms. Desoer. Well, first, the safe harbor has enabled us to 
get to some of those 700,000 permanent modifications that we 
have done and certainly the 85,000 that we have done under 
HAMP, because without that not all of our investors would have 
agreed to those modifications as many do today. So that has 
been beneficial.
    On the dual track, for about 23 percent of our servicing 
portfolio where Bank of America is the investor on those 
mortgages, we have the ability to do something about that 
because we have the authority as investor as well as servicer. 
But for the rest of the investors, it would take their approval 
to make a change, and that would include, you know, the 
Government-sponsored enterprises and other private investors as 
well.
    Senator Merkley. So that is a process you are actively 
pursuing? You are requesting those changes in the servicing 
contract?
    Ms. Desoer. That is what we are in the early discussions of 
with the State Attorneys General, seeing if we can use that 
forum to get investors to the table as well for consideration 
in that.
    Senator Merkley. So I did not hear you mention anything 
that we need to do here to provide an additional legal 
framework. Mr. Lowman, your sense, do you need additional legal 
authority to be able to set the foreclosure track aside while 
you are in good-faith modification----
    Mr. Lowman. I am not certain that we have the right safe 
harbor, but, frankly, I would like to follow up on that 
question.
    Senator Merkley. That would be great. This is the last 
question I will ask, though everything we talk about is so 
complex and interrelated, I have 100 questions, but I will 
stick with this one. That is, Mr. Lowman, you noted that your 
services, your interests are aligned, and, Ms. Desoer, that as 
a community bank you have a huge stake in the success of 
families and so forth. But is it different when you are 
contracted to be the servicer but you do not own the loan? You 
do not have a stake in the success of the loan, if you will. 
You have a stake only in the fees generated by the servicing 
unit. In that situation, is it really the case, as Ms. Thompson 
has been laying out, that there are enormous financial 
incentives as a servicer to pursue this foreclosure track? She 
has all these charts and information that she has analyzed. Is 
her testimony fair? Or if it is not, what is she missing?
    Ms. Desoer. As I referenced, we are not perfect. We have 
inconsistencies as we have built our capabilities out, and 
there have been customer issues. I do not deny those, and we 
work every day and we have significantly increased the staff to 
support all of our customers who have those issues while we get 
to the point where we can eliminate the issues that we do have.
    What you have to remember is the financial cost is one 
aspect of it, but the reputation cost to the Bank of America 
brand is a very powerful driver of why we are working as hard 
as we are to get this right and why we listen to customers, 
community groups, yourselves, and certainly working with the 
State Attorneys General. Our interests are aligned in working 
to get this right, that is for a homeowner who has some ability 
to pay and a desire to stay in their primary residence, to stay 
there. It is in all of our best interests to get to a solution 
that enables them to do that by taking advantage of all the 
programs and capabilities and resources that are available. And 
that is what we are committed to make happen.
    Senator Merkley. If I can summarize what I just heard, you 
are not contesting her analysis of the financial incentives 
that certainly favor foreclosure, but that because the 
reputation of the bank is at stake, that balances that out.
    Ms. Desoer. I have not looked at all of the analysis that I 
would need to so I can confirm or deny that with you.
    Senator Merkley. Yes, Professor.
    Mr. Levitin. I would just like to point out that many 
servicers are in a very different situation than Bank of 
America. Bank of America has a major lending business in its 
own name and servicing in its own name. There are plenty of 
servicers, though, that are a servicing unit of a major bank 
but service under a completely different name, and the consumer 
is unlikely to make any connection between any misdeeds brought 
by the servicer and the lending unit.
    Senator Merkley. So, Professor, in that case the financial 
incentives to pursue foreclosure are not offset by, if you 
will, defense of the reputation of the banking institution?
    Mr. Levitin. There would be no--you could not even make 
such a claim. That is correct.
    Senator Merkley. Mr. Lowman, do you want to share your 
thoughts on that?
    Mr. Lowman. Yes. As a servicer, the calculation that is 
used to determine whether to foreclose or to modify does not 
take into account our remuneration as a servicer. And I think 
it is important to note that, as I said earlier, we make money, 
we earn fees on performing loans. And when we modify a loan, we 
get the servicing stream because we have made it a performing 
loan. And to the extent it is a HAMP loan, we get an income 
stream as a result of payment from the Government for having 
successfully modified the loan.
    So I guess I do not agree that we are incented to 
foreclose. We, in fact, I believe, are incented to modify.
    Senator Merkley. Well, I just want to thank you all for 
addressing these complicated issues. I do not think we really 
got into the other big piece of this, which the Chair referred 
to, which is kind of the systemic risk that comes from some of 
the legal issues that are being raised and how we can really 
get our hands around that, which is important to both 
homeowners in terms of their rights and to our economy in terms 
of the availability of credit. But certainly I have learned a 
lot, and thank you very much.
    Chairman Dodd. Let me just say that would hopefully be the 
subject matter of the next hearing on the subject matter 
because I think it is a critical point that we have to address. 
I say this respectfully of others--and I know the Oversight 
Panel made suggestions somehow this was much larger than a 
technical issue. And I am not disagreeing. That may be the 
conclusion. But it is just as premature to make that conclusion 
as it is to suggest it is only a technical problem. So in 
either case, language like that can cause its own distortions, 
and I get a little uneasy without knowing the implications of 
what we are doing, making predictions along those lines.
    I had a chance to talk to Ms. Desoer and just share--and 
correct me if I am wrong on some of these numbers, but I 
thought it was interesting. Thirty percent of all foreclosures 
nationwide are in the judicial States, I think it is 23 of the 
judicial States. Of that 30 percent, 68 percent of the 
foreclosures are in the State of Florida. Is that correct?
    Ms. Desoer. Of the 23 judicial States in Bank of America's 
portfolio of foreclosures, over 60--close to 60 percent are in 
Florida.
    Chairman Dodd. And 70 percent of the foreclosures 
nationwide are in the non-judicial--the 27 States that are non-
judicial States. And, of course, in the non-judicial, the 
burden is on the homeowner as opposed to--I mean, I am 
simplifying this. The Attorney General is probably rolling his 
eyes as I make that kind of broad, sweeping statement. But as I 
read it, basically the burdens shift in a non-judicial and a 
judicial State. And you correct me, Tom, if I am wrong on this, 
but in the non-judicial the burden is on the homeowner to make 
the case they are not able to make their payments and so forth; 
whereas, in the judicial, the burden is more on the servicing 
side of the equation? Am I oversimplifying that?
    Mr. Miller. I think that is right, yes.
    Chairman Dodd. So is there any indication to draw from 
these statistics that 70 percent of the foreclosures are in the 
non-judicial, that there is something about that equation that 
places the burden on the homeowners, why we are seeing so much 
more of the foreclosures occurring in the non-judicial States 
as opposed to the judicial States? Or am I just reading too 
much into these numbers?
    Ms. Desoer. Senator, I think it is more related to economic 
factors like unemployment or housing price declines as to the 
States that are experiencing the greatest level of 
foreclosures. So I do not think Florida is related to the fact 
that it is a judicial or a non-judicial State, but to the 
extent of the economy----
    Chairman Dodd. Well, I agree with that. That would make 
some sense. But, otherwise, where that is not the case, does 
the judicial framework have any strong implication on the 
outcome in terms of a modification versus a foreclosure?
    Ms. Thompson. Senator?
    Chairman Dodd. Yes.
    Ms. Thompson. One point is that, of course, California and 
Nevada are non-judicial foreclosure States.
    Chairman Dodd. Right.
    Ms. Thompson. So that makes a big difference. There are 
some studies that show that being in a judicial foreclosure 
State increases--delays the time to foreclosure, that is 
obvious, and increases slightly the likelihood that you will 
end up with a modification. There is some evidence that being 
in a judicial----
    Chairman Dodd. But not the 37 numbers.
    Ms. Thompson. I would not think the numbers would be that 
high.
    Chairman Dodd. One other point--and, again, I want to thank 
Ms. Desoer for her sharing this information with me. And, 
again, it is a separate subject matter but one that concerns 
me, and that is that when you are getting--the foreclosed homes 
that are bought--it was not 40 percent. They gave me some 
numbers--30 percent. But 30 percent of the foreclosed homes 
that are bought are bought with cash.
    Ms. Desoer. Thirty percent of all U.S. home sales are cash 
purchases, not just the foreclosed.
    Chairman Dodd. I thought it was just foreclosed.
    Ms. Desoer. No.
    Chairman Dodd. Of all.
    Ms. Desoer. Of all U.S. home sales, 30 percent are 
purchased with cash, and I can give you the study that is 
produced monthly that shows the mix of how many new homes 
purchased are purchased for cash or financed with a 
conventional mortgage or financed with an FHA mortgage as an 
example. But 30 percent of last month's--and it has been 
running about that for several months--entire home purchases 
are cash purchases.
    Chairman Dodd. And further--and, again, you correct me if I 
am interpreting these numbers in too broad a context. Of that 
number bought with cash, these are not owner-occupied; these 
are investment properties.
    Ms. Desoer. The vast majority of those purchases are 
investors as opposed to primary homeowners. That is correct.
    Chairman Dodd. And any implications of what that means in 
terms of neighborhoods and so forth, as opposed to having 
owner-occupied versus rental properties?
    Ms. Desoer. If it is concentrated in terms of the mix of 
investors coming into a community, it could mean a shift from 
primary homeownership to rental. But I think the primary 
indication that I was trying to say is that there are investors 
with cash who think that the price of the property is right for 
them to earn a good return as a rental property. And I think in 
certain communities where, as we acquire the real estate for 
our own portfolio after a foreclosure sale, those properties do 
sell relatively quickly.
    Chairman Dodd. And, again, I am a great advocate that we 
need to increase rental stock in the country. One of the 
problems is we have had so much of an emphasis on homeownership 
that we find a limitation of increasing rental stock, and that 
has created its own set of problems. So I would state that. But 
is there any correlation between having less owner-occupied 
properties and the value of other properties in that 
neighborhood?
    Ms. Desoer. I do not know the answer to that.
    Chairman Dodd. Do you have any idea on that, Mr. Levitin?
    Mr. Levitin. No.
    Chairman Dodd. Ms. Thompson, any idea?
    Ms. Thompson. No.
    Chairman Dodd. OK. Well, thank you very, very much. This 
has been--it is a long time but I am glad we--sorry for 
starting late, but otherwise it would have been very difficult 
to hold all of you here. So let me thank all of you for your 
testimony. I will leave the record open so that Members can 
provide some additional questions. But it has been very, very 
helpful to hear what you have had to say, and I am very 
grateful to all of you for coming and sharing your thoughts 
with us.
    Tom Miller, the Attorney General, we thank you for what you 
are doing and how hard you are working at this. And I hope you 
might make that call to the Treasury Department and say you 
would like to be hearing what this Systemic Council is also--
what their thoughts might be on this as well.
    The Committee will stand adjourned.
    [Whereupon, at 6:03 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Thank you Mr. Chairman.
    On October 6th, I called for an investigation into the growing 
controversy surrounding home foreclosures. This hearing represents what 
I understand will be the only examination the Committee intends to 
conduct. I hope that isn't the case.
    At this point, there appear to be a number of key issues that need 
to be examined thoroughly.
    First, we need to determine the extent of the problem. It appears 
that thousands of so-called ``robo-signers'' working on behalf of banks 
that service loans, signed foreclosure related court documents swearing 
that they had ``personal knowledge'' of the facts of each foreclosure 
case. It now appears that few, if any, of these people had such 
knowledge.
    Second, we need to determine whether the flaws in the process led 
to improper results. In other words, were any homeowners foreclosed 
upon when they shouldn't have been.
    Third, we need to examine the activities of the law firms that 
worked for the servicers. Many questions have been raised regarding the 
conduct of these firms during their engagement in foreclosure 
proceedings.
    Fourth, what role did the GSEs and the larger securitization market 
play in this debacle. Did their actions contribute to the problem? Were 
Fannie and Freddie complicit in any way?
    Finally, we need to examine the role of the regulators. Where were 
they in this process? What were they supposed to be doing and were they 
doing it? If not, why not?
    In order to determine the extent of the problem we need to speak 
with all of the major servicers. Unfortunately, we only have a small 
subset present today. For example, Ally Financial was the first major 
servicer to recognize that it had problems with its process. That firm, 
among others, is not here today.
    Mr. Chairman, it is my understanding that many, if not all, of the 
law firms under investigation were selected by the housing GSEs. In 
order to best understand how and why these firms were chosen, I believe 
we need to hear from Fannie and Freddie.
    Unfortunately, they also didn't make the witness list.
    Perhaps the most complex facet of this examination involves 
securitization. As highlighted in the Congressional Oversight Panel's 
most recent report, the most severe potential fallout from this will be 
found in the securitization market. According to that report, this 
could have a devastating affect on our broader financial system.
    On this critical topic we have a professor from Georgetown 
University, the Iowa Attorney General, and finally the CEO of MERS.
    Each witness has an important view point to share with the 
Committee, but none of them represent the views or expertise of the 
securitizers. Given the complexity of this issue, perhaps the Committee 
should have invited someone from the broader securitization community 
to answer our questions.
    Finally, the regulators are also significant players in this 
examination. Each of the major servicers have regulators onsite in 
their operations.
    How did those regulators miss the wide-spread foreclosure problems 
at the firms they were regulating? We could ask them, but, 
unfortunately they are not here today.
    Mr. Chairman, I expected this hearing to be focused on the 
foreclosure process. As I have already stated, there is a great deal to 
examine on this topic alone.
    It appears, however, that this hearing has also become a 
foreclosure mitigation hearing. Mortgage modification is an important 
topic to be sure, and certainly one that warrants its own hearing.
    Nonetheless, if we are also going to examine the issue of 
foreclosure mitigation, we should study the extent to which borrower 
fraud has distorted the modification process and inflated overall 
foreclosure numbers.
    This is a critical issue considering that the U.S. taxpayer has 
spent more than $50 billion on foreclosure mitigation programs. We need 
to know where our mitigation efforts are best directed and where our 
money is being wasted as a result of fraud. I understand that there are 
no witnesses here today that can address the topic of borrower fraud.
    Mr. Chairman, I called for a full investigation on this matter in 
early October because I believed that those who face foreclosure 
should, at the very least, know that the process is being handled 
fairly and according to the law. While I believe that we will learn a 
great deal from this hearing, I hope that it does not represent the 
Committee's complete examination of this important issue.
    Thank you.
                                 ______
                                 
             PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA

    Thank you, Mr. Chairman, for holding this timely hearing. Too many 
homeowners continue to lose their homes to foreclosure. For 
approximately one in five borrowers, the value of their home is less 
than what they owe on it. And, high unemployment rates suggest that 
even more families face difficult financial situations and even more 
borrowers may be at risk of foreclosure now or in the future. These 
challenges are not just isolated to the largest housing markets. 
Hawaii's foreclosure rate in October was the 12th highest in the 
nation.
    Homeowners are under a tremendous amount of financial stress right 
now, which is what makes the recent reports of problems within the 
mortgage servicing industry all the more troubling. The ``robo-
signing'' issue has shed light on other questionable mortgage servicing 
practices that my colleagues on this Committee and I have been hearing 
about from homeowners in our States for quite some time. They have 
reported that servicers are unresponsive, uncooperative, and 
disingenuous throughout the loan modification and foreclosure 
processes.
    Borrowers should expect mortgage lenders and servicers to put forth 
a good faith effort to help them keep their homes. Foreclosure should 
be servicer's last resort, not its preferred outcome. However, 
servicers' decisions to flaunt their protocols and contractual 
agreements indicate that this is not the case.
    We must do more to help distressed borrowers and preserve 
homeownership. This begins with ensuring that servicers are properly 
adhering to modification, refinance, and foreclosure procedures. 
Borrowers should expect servicers to be accessible and to refrain from 
obstructing homeowner assistance efforts. Mortgage modifications and 
refinances must be significant and meaningful so that homeowners do not 
find themselves in the same situation several months later. We also 
have a responsibility to those who have lost their homes--to ensure 
that they have access to alternative housing opportunities, that they 
have the knowledge and resources to meet their other debt obligations, 
and that they are able to rebuild their credit.
    Finally, these failures among mortgage service providers once again 
highlight the need for greater financial literacy. Homeowners are 
borrowers and consumers--they should be able to understand the terms of 
their mortgage agreements and the consumer protection resources 
available to them. They should also have the knowledge and skills to 
overcome foreclosure and other unforeseen financial obstacles.
    Mr. Chairman, I thank you for this opportunity for the Committee to 
examine the prevalence of foreclosures and the actions of mortgage 
service providers. I also thank the witnesses for appearing today, and 
I look forward to your testimonies. Thank you, Mr. Chairman.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN

    Thank you, Mr. Chairman.
    The predatory practices of the mortgage servicing industry are 
remarkably similar to the predatory practices that led to the subprime 
crisis.
    The biggest mortgage servicers have poorly maintained, lost, or 
forged documentation. They ignored the interests of homeowners in 
exchange for outsized profits.
    Each day Ohioans are failed by the modification process. Last 
month, my State had the eighth most foreclosures in the nation--and the 
most of any States represented on this Committee.
    Ohioans interested in merely attempting to modify mortgages often 
end up owing more principal on their loans or having their credit 
scores lowered.
    Instead of trying to stay in their homes, they are saddled with 
back payments, penalties, and late fees.
    And it's happening across Ohio--in large cities and small towns, 
and urban and rural counties that are hit hard by the housing crisis.
    In Perry County, a homeowner was outraged to learn that her 
temporary modification was accompanied by late fees and negative marks 
on her credit report.
    It's the tragic truth that she was luckier than other Ohioans 
because her servicer stopped collection efforts.
    In Cuyahoga County--which had the most foreclosures of any county 
in the State last month--a senior living on Social Security disability 
received collection notices while she was in her trial period.
    When my office contacted the bank about these notices, we were told 
that the mortgage department could not make the collection department 
stop until she got a permanent modification.
    We were told that she should just ignore their collection notices.
    But this same constituent also had her first trial payment double-
billed, causing the bank to tack on $136 in overdraft fees.
    In Geauga County one family asked about her servicer, ``How is it 
possible for a bank, its computers, departments and representatives to 
be so out of touch with one another?''
    Another constituent from Geauga County told my office, ``In 1999, I 
was diagnosed with cancer . I endured two surgeries and a brutal year 
of chemotherapy . . . My experiences with [my servicer] have been worse 
than having cancer.''
    Indifference, foreclosed homes, and broken neighborhoods shouldn't 
be a formula for record profits.
    By far the most complaints that I receive from frustrated Ohioans 
relate to the four largest servicers, who account for more than 55 
percent of all servicing contracts.
    After acquiring big subprime player like Countrywide, Wachovia, and 
Washington Mutual, the four biggest banks are now so large that their 
executives apparently don't know what's happening deep in their own 
securitization and servicing departments.
    In July, I sent these four largest servicers a letter describing 
Ohioans' frustrations with their failed attempts at mortgage 
modifications.
    I received a response letter from one of the banks on September 29, 
affirming its commitment to keeping homeowners in their homes and out 
of foreclosure.
    But that very same day, that bank announced a moratorium on 56,000 
foreclosures in 23 States--including Ohio--because of deficiencies with 
their foreclosure affidavits.
    These big banks tell us that mistakes are isolated and harmless. 
But these problems are not new. They are well documented and are part 
of a longstanding, ugly pattern of homeowner abuse.
    It's a cycle of mistrust and misinformation that deprives families 
of their homes and neighborhoods of their vitality.
    According to a survey of foreclosure counselors released last month 
by the Cleveland Federal Reserve, most modifications take between 120-
240 days to work out.
    In that period paperwork errors like multiple requests, incorrect 
evaluations, and poor internal communications are common.
    It's common enough that last year, a bankruptcy judge in Ohio wrote 
in a decision that mortgage servicers are ``unconcerned with the 
accuracy of records and information.''
    The Department of Treasury's report on the Home Assistance 
Modification Program (HAMP) found compliance problems at three of the 
four biggest servicers.
    Yesterday, the GAO released a report that I had requested on bank 
walkaways.
    The report found that as a result of poor communication from 
servicers, between 14,000 and 34,000 families in cities like Cleveland, 
Akron, and Columbus have been unnecessarily forced out of their homes.
    Vacant and abandoned homes not only diminish surrounding properties 
values, they drain city resources and present a series of public safety 
concerns and risks.
    Why are so many homeowners being kicked out of their houses--even 
when it is not economically beneficial to anyone?
    That's why today's hearing is so important--and why reform to the 
mortgaging servicing industry is long overdue.
    We've seen how ``robo-signings'' are a serious abuse of court 
processes--the Cuyahoga County courts are now asking lawyers to confirm 
that the information in their filings is true.
    Courts are considering whether banks have standing to foreclose or 
whether promissory notes were properly transferred and conveyed.
    There are strong possibilities that banks have wrongfully taken 
homes to which they had no secured claim.
    These are all symptoms of a mortgage servicing industry that is 
broken.
    Servicers claim that homeowners didn't meet their legal 
obligations, so they don't deserve to stay in their homes--that 
homeowners lack ``personal responsibility.''
    But what about institutional responsibility? Should we not hold the 
banks to the same standards they impose on homeowners?
    A Federal judge in Cleveland pointed out 3 years ago, ``Neither the 
fluidity of the secondary mortgage market, nor monetary or economic 
considerations of the parties, nor the convenience of the [banks,]'' 
overrides the banks' duty to follow the law.
    Money and profits should not trump the law.
    And while the courts are playing a role in checking abuse, it is 
Congress's responsibility to empower regulators to oversee the mortgage 
servicing industry.
    As the newly confirmed Fed Governor Sarah Bloom Raskin said last 
week, ``Until a better business model is developed that eliminates the 
business incentives that can potentially harm consumers, there will be 
a need for close regulatory scrutiny of these issues and for 
appropriate enforcement action that addresses them.''
    The new Bureau of Consumer Financial Protection (CFPB) is a perfect 
illustration of how to empower regulatory scrutiny and appropriate 
enforcement.
    Instead of helping homeowners, regulators' responses appear crafted 
to protect the balance sheets of the ``too big to fail'' servicers.
    The CFPB is designed to ensure someone serves American families and 
confronts abusive mortgage servicing practices.
    And stronger oversight means streamlined modification procedures 
and meaningful penalties when servicers fail to comply.
    We should be trying to find ways to keep people in their homes, not 
forcing more houses onto an already depressed housing market.
    This foreclosure crisis affects all of us--homeowners, families, 
neighbors, and State and local governments.
    It is clear that the current system isn't working.
    And it's clear that we won't have economic recovery if our 
neighborhoods are full of foreclosed or vacant homes.
    Thank you, Mr. Chairman.
                                 ______
                                 
                 PREPARED STATEMENT OF THOMAS J. MILLER
                    Attorney General, State of Iowa
                           November 16, 2010

    Chairman Dodd, Ranking Member Shelby and the other Members of the 
Committee, thank you for the opportunity to address you today on this 
important subject.

I. Background and History of the States' Efforts
    While the issues of foreclosures, mortgage loan servicing, and loss 
mitigation efforts are currently receiving substantial attention in the 
press, they are not new to the Attorneys General. Starting over a 
decade ago, the Attorneys General and our partners in the State banking 
departments began numerous enforcement efforts regarding fraudulent 
behavior by lenders in the origination of subprime mortgages. Beginning 
with First Alliance Mortgage Company (better known as FAMCO), then 
followed by the $484 million settlement with Household Finance, and 
finally the $325 million settlement with Ameriquest Mortgage Company, 
at that time the largest subprime lender, the States have had a front 
row seat to the fraud and misconduct in subprime originations.
    This fraud, however, was concealed for years by the unprecedented 
home price appreciation that many areas of the country were 
experiencing. Due to the race to the bottom in underwriting standards, 
as soon as borrowers got into trouble they would simply refinance, 
masking their inability to perform. Accordingly, we knew that as soon 
as the rapid and unprecedented home price appreciation began to stall, 
the fraudulent and fragile underpinnings of the market would be exposed 
and more loans than we could imagine would begin to fail.
    Knowing this, my staff began to explore servicing and foreclosure 
issues in the Spring of 2007. The more we learned, the more concerned 
we grew as it became apparent that servicers were not in any way 
prepared to deal with even a moderate volume of foreclosures. 
Accordingly, in July 2007 my office put out an invitation to every 
Attorney General in the country to attend a summit on foreclosures. The 
purpose was to warn our colleagues that a tidal wave was coming and 
they needed to begin to prepare.
    Out of this meeting, a working group of Attorneys General and State 
bank regulators was formed. This group was later named the State 
Foreclosure Prevention Working Group (``State Working Group''). At the 
beginning, a policy decision was made that this would not be a 
litigation based group, but rather the group would attempt to work 
collaboratively with the mortgage servicing industry in order to find 
solutions to the myriad problems standing in the way of effective loss 
mitigation. Because the problem was mostly contained to subprime loans 
at that point in time, we set up a meeting with the top 10 largest 
subprime servicers in September 2007 and another meeting with the next 
10 largest in November 2007. At these meetings, we were assured by many 
of the servicers that they were adequately staffed and prepared for 
what was coming. Obviously, this did not turn out to be the case.
    In addition, it became clear to the States that we wanted to base 
our decisions on empirical data, not anecdotal stories. Thus, in 
October 2007, the State Working Group became the first governmental 
entity--state or Federal--to collect data on the servicers' loss 
mitigation efforts and results. We used this data to publish five 
reports which provide analysis and commentary on a variety of issues. 
Reports were published in February 2008, April 2008, September 2008, 
January 2010, and August 2010. Unfortunately, our data collection was 
not as robust as it could have been due to the extremely short-sighted 
direction of the Office of the Comptroller of the Currency which forbad 
national banks from providing loss mitigation data to the States.

II. The Impact of Securitization on Servicing
    Many people still talk about ``banks'' generically when discussing 
foreclosure issues. Of course, the old model of a local bank making a 
loan and then keeping that loan on its books has largely disappeared. 
Instead, mass securitization of mortgage loans has become the norm. 
This has produced a radical change in the structure of loan servicing 
and a misalignment of incentives. Many pages can and have been written 
on this subject, and I will not attempt to repeat that discussion hear. 
Described in its simplest form, in most cases ownership of the mortgage 
loan is no longer aligned with the servicing of that loan. This change 
has introduced enormous complexity and has made the task of modifying 
loans and avoiding preventable foreclosures much more difficult.

III. Common Loan Servicing Problems
    In order to understand what has been happening with mortgage loan 
servicing over the last 3 years, it is essential to understand one 
basic truth: the current mortgage servicing system was not designed for 
any of the tasks it is being asked to perform, and it certainly is not 
equipped to perform such tasks at anywhere near the scope and scale of 
the foreclosure crisis. Modern loan servicing was designed to be a no-
touch or low-touch money collection system. Instead, servicers have 
been asked to re-underwrite, or in many cases underwrite for the first 
time, a massive number of loans. Asking servicers to solve the 
foreclosure crisis is akin to putting a square peg in a round hole. The 
servicers, no matter how good their intentions, were simply not 
designed for this problem. Put on top of that the unprecedented scope 
and scale of the foreclosure crisis, and the servicers have become 
completely overwhelmed.
    From this premise flow all of the problems which our office and 
other Attorneys General hear about on a regular basis. For example, we 
are constantly hearing about borrowers who are asked to resubmit their 
paperwork because it was lost multiple times. Because servicers are 
overwhelmed, loss mitigation requests are often delayed and stretched 
out over long periods of time. As a result, the financial documents 
originally submitted by the borrower become stale, triggering multiple 
requests for resubmission. While the servicer is free to lose documents 
as many times as they want or to take as long as they want, the 
servicer often demands strict compliance from the borrower. Thus, no 
matter how many times the borrower has previously submitted his or her 
paperwork, if the borrower fails one time, the loan modification is 
denied. Similarly, many borrowers report that after not hearing from 
their servicer for several months, they will receive a proposed loan 
modification but will be given a very short timeframe (several days) to 
sign and return the document (along with any required financial 
contribution). Again, strict compliance is enforced.
    Perhaps the biggest problem is that loss mitigation and foreclosure 
exist simultaneously on parallel tracks. This leads to problems when 
the left hand does not know what the right hand is doing. Thus, we all 
hear stories of borrowers who thought they were approved for a loan 
modification receiving a notice of a foreclosure sale. In short, the 
fundamental fact that servicing systems are being asked to perform a 
task for which they were not designed has predictably led to a wide 
range of problems in implementing loss mitigation solutions.

IV. The Mortgage Foreclosure Multistate Group
    In a classic example of why it is wise to continue to support our 
constitutional framework of federalism, the States were able to react 
very quickly to the recent robo-signing reports. In very short order, 
all 50 Attorneys General and a committee of State banking regulators 
representing all 50 States formed a multistate group to address this 
problem. We were able to do this for several reasons. First, State 
officials are much closer to the problems in loan origination and 
servicing than our Federal counterparts. Quite simply, citizens know 
who their State Attorney General or banking department is and are much 
more likely to contact us than a 1-800 number in some far away 
location, particularly when it comes to real estate and foreclosures, 
both of which are inherently local issues. Second, the long standing 
relationships formed over the past decade in our mortgage origination 
enforcement actions and more recently, the work of the State 
Foreclosure Prevention Working Group, allowed us to mobilize quickly. 
As in our previous efforts, we are continuing our valuable partnership 
with our State bank regulator counterparts.
    Because we are in the midst of our investigation, I am necessarily 
constrained as to how much I can comment on the specifics. However, I 
can make some general comments.
    First, some have attempted to describe the issue of ``robo-
signing'' as being a mere technicality. This argument shows a certain 
type of arrogance. The home is not only the centerpiece of family life, 
but it is by far the biggest purchase that many people will make in 
their life, and for many their biggest asset. The State foreclosure 
laws are the official method by which the family home can be taken 
away. Given such high stakes, strict compliance is expected. Others 
have suggested that the only relevant facts are that the borrower owes 
the money and has to pay it back. Such statements miss the point 
entirely. We do not say in a criminal prosecution that it is ok for the 
prosecutor to fabricate evidence, so long as the defendant is in fact 
guilty. The outrage over robo-signing is about due process, protection 
of private property rights, and the rule of law. In judicial 
foreclosure States, robo-signing is a fraud on the court. Such issues 
are of the highest importance.
    That being said, I would like to make it clear that the multistate 
investigation is about more than robo-signing. After all, robo-signing 
is only a symptom of the much larger problems with the mortgage 
servicing system. Thus, the multistate group intends to look at issues 
regarding the accuracy of the information used by servicers in the 
foreclosure process, as well as issues such as the imposition of 
various servicing related fees and force placed insurance. The 
multistate group is also interested in some of the issues that are 
being raised regarding the ability or inability of servicers and 
investors to show proper chain of title.
    However, the biggest issue is fixing the loan modification system. 
In many ways, there is not currently a coherent loss mitigation system. 
Instead, there exists a system of ``Russian roulette'' where whether or 
not a borrower receives a modification that will save the family home 
depends in large part on who picks up the phone on the other end. In 
essence, those who are lucky enough or persistent enough to get to the 
right person are the ones who receive quality modifications, regardless 
of the facts of their case. This has to change.
    To be clear, the States do not believe that every foreclosure is a 
tragedy that must be avoided. To the contrary, we have consistently 
stated over the last 3 years that we are only interested in 
modifications where the cash-flow from the modification exceeds the 
expected proceeds from a foreclosure sale. In industry parlance, this 
is a net present value positive modification. Such a modification is a 
win for the servicer, the investors who own the loan, the borrower, and 
the community at large. We strongly believe, however, that many 
borrowers, who under a strict economic analysis should receive a 
modification, are falling through the cracks. We must find a way to 
make sure that all borrowers who have the desire to keep the home and 
qualify for a modification, receive that modification.

V. Conclusion
    In recent weeks, many have opined that the temporary halt on 
foreclosures and foreclosure sales by several servicers was greatly 
damaging the economy. With all due respect, it is the foreclosures in 
the first instance that pose the greatest threat to the economy. While 
certainly it does not make sense to allow vacant properties to linger, 
and such properties should be sold if possible, the looming shadow 
inventory of homes that will become real estate owned and the millions 
of foreclosures yet to come is the true threat that must be avoided. 
Foreclosures at the scale we are currently experiencing, and 
unfortunately will continue to experience for some time, are a public 
policy issue. It is well past time to once and for all tackle the issue 
of foreclosures and loan modifications with the resources and urgency 
it deserves.
    As set forth above, the Attorneys General and the State banking 
regulators have been discussing various issues and quite frankly 
warning the servicing industry for over 3 years. Unfortunately, the 
mortgage servicing industry has been slow to recognize the problems and 
instead responded with a series of half-steps, based on the hope that a 
recovery in the market was just around the corner. Instead, the 
situation has become worse and worse, forcing servicers and secondary 
market investors to take steps that a relatively short time earlier 
were off the table. We believe that there have been many missed 
opportunities over the past few years and are deeply disappointed that 
our many previous attempts at working with the servicers have not been 
as successful as we had hoped. However, the States are determined that 
this time, we will find lasting solutions to the foreclosure crisis.
                                 ______
                                 
                PREPARED STATEMENT OF BARBARA J. DESOER
                 President, Bank of America Home Loans
                           November 16, 2010

Introduction
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to discuss Bank of America's loan 
modification performance and foreclosure process.
    The prolonged economic downturn and sustained high unemployment, 
coupled with the collapse of the U.S. housing market, have led to 
challenges that are more profound and complex than anyone anticipated. 
For a borrower, the prospect of falling behind on mortgage payments due 
to loss of income would be a wrenching personal situation in normal 
times. But these are not normal times, and the traditional solutions of 
the refinance of debt or the sale of a home at sufficient value to 
repay the debt, do not exist for many, which causes great anxiety and 
frustration for borrowers under economic stress. We know you are 
hearing from your constituents, because in many cases your constituents 
are also our customers.
    These customers depend on us--Treasury, GSE's, lenders, and 
servicers to have a solution for their unprecedented needs. The good 
news: we have worked together at extraordinary speed to create 
solutions--like HAMP--and to retool mortgage servicing; adding new 
people, new processes, and new technology capabilities to meet the ever 
increasing needs. Unfortunately, those solutions have not met all of 
the needs nor have they been executed well in some cases.
    It's important to note that despite the hardships most Americans 
are facing, more than 86 percent of Bank of America customers remain 
current and are making their mortgage payment each month. Others are 
unfortunately in distress. Helping these customers remain in their 
homes where possible is a top priority for Bank of America--as 
evidenced by our 700,000 completed loan modifications since 2008.
    Whether one of our customers has just missed his or her first 
mortgage payment or is many months delinquent and at the point of 
foreclosure--Bank of America believes the customer's experience with 
us, from start to finish, must be consistent, accurate, and 
understandable. Our customers are entitled to an experience that gives 
them confidence they are being treated fairly.
    We have, however, reached a crossroads between loan modification 
efforts and the reality of foreclosure. Fortunately, early stage 
delinquencies are stabilizing. The majority of initial volume and 
backlog of customers seeking solutions have been evaluated for 
available programs. We're reaching a peak where some customers will be 
dealing with the reality that despite the myriad of programs and our 
best efforts, foreclosure is unavoidable. That has driven an increase 
in the concerns you and we hear from distressed homeowners, and our 
increases in staffing and foreclosure alternative programs are directed 
at moving through this difficult period. We believe that these efforts 
are working, as every day we reduce the backlog in both modification 
decisions and customer complaints.
    It is our responsibility to be fair, to be responsive and, where a 
foreclosure is unavoidable, to treat customers with respect as they 
transition to alternative housing. We, and those who work with us in 
connection with foreclosure proceedings, also have an obligation to do 
our best to protect the integrity of those proceedings. When and where 
that has not happened, we accept responsibility for it, and we deeply 
regret it. We take seriously our obligation to the customer, the 
investor, the legal process and the economy.
    We also fully understand our obligation to evaluate customers for 
every way to make their payment more affordable, and we are continually 
improving our processes for working with customers.
    When industry concerns arose with the foreclosure affidavit 
process, we took the step to stop foreclosure sales nationwide and 
launch a voluntary review of our foreclosure procedures. Thus far, we 
have confirmed the basis for our foreclosure decisions has been 
accurate. At the same time, however, we have not found a perfect 
process. There are areas where we clearly must improve, and we are 
committed to making needed changes.
    We've also used this opportunity to further evaluate our 
modification program and identify additional enhancements we can make. 
We have done this based on feedback from you, our customers, community 
groups, investors, and from our regulators. We also are committed to a 
constructive dialogue with State Attorneys General, who have taken a 
leadership role on these issues.

Role of the Servicer
    Before I describe the changes we have made in the foreclosure and 
modification processes, I would like to provide some context regarding 
the role of mortgage servicers, the complexity of our portfolio and 
loan modification performance. This context relates directly to the 
changes we are making.
    Traditionally, a mortgage servicer's primary function is to collect 
loan payments from customers and to distribute payments to the 
investors who own the loan. Until recent years, foreclosures were 
ancillary and loan modifications were essentially non-existent. 
Economic conditions--including the loss of income, inability of many 
consumers to pay their mortgages or, when in distress, to sell their 
property--have dramatically increased the volume of modifications and 
foreclosures, severely straining industry systems and resources 
designed around much lower volumes of activity.
    Moreover, Bank of America is constrained by our duties to 
investors; of the nearly 14 million loans in our servicing portfolio:

    23 percent of the portfolio is owned by Bank of America;

    77 percent of the portfolio we service for the investors 
        who own the loans--Fannie Mae and Freddie Mac are the investors 
        on 60 percent of these loans, for example.

    Many investors limit Bank of America's discretion to take certain 
actions. When working with delinquent customers, we aim to achieve an 
outcome that meets customer and investor interests, consistent with 
whatever contractual obligations we have to the investor.
    Duties to investors add complexities to the execution of 
modification programs and can result in confusion for customers. For 
example, Treasury, investors, and other constituencies often change the 
requirements of their modification programs. HAMP alone has had nearly 
100 major program changes in the past 20 months. Fannie and Freddie, as 
investors, have layered on additional requirements, conditions and 
restrictions for HAMP processing. When these changes occur, we and 
other servicers have to change our process, train our staff, and update 
technology. These changes can also affect what is required of the 
customer, for example the need for new or different documentation.

Basic Facts of the Bank of America Portfolio
    With the Countrywide acquisition, Bank of America became the 
nation's largest mortgage servicer--with a servicing portfolio that 
more than tripled post-acquisition to nearly 14 million customer 
loans--1 in 5 of all U.S. mortgages.
    The majority--86 percent--of our customers are current and making 
their mortgage payments on time every month. Fortunately, that number 
is stabilizing. But the segments of the portfolio that are distressed 
include large numbers of customers who are seriously delinquent. Nearly 
600,000 customers have not made a mortgage payment in more than a year; 
of these 195,000 have not made a mortgage payment in 2 years.

Servicer Implementation of Loan Modification Solutions
    To address these drastic economic and industry changes, Bank of 
America has had to undertake a massive retooling since our acquisition 
of Countrywide in 2008 to shift our servicing organization from one 
that simply services loans, to one that also manages customer requests 
for aid as the housing downturn and high unemployment persist. We also 
have built new processes, tools and partnerships with community 
organizations to reach customers who do not respond to loan 
modification offers.
    We've hired and trained more than 10,000 new employees--and now 
have a team of more than 26,000 helping customers who are delinquent. 
To reach customers we've opened bricks and mortar customer assistance 
centers; gone door to door with modification solicitations, and 
participated in more than 500 housing rescue fairs across the country.
    We have completed more than 614,000 proprietary modifications and 
85,000 HAMP modifications. Given the majority of our delinquent 
borrowers are not eligible for HAMP today, proprietary solutions have 
been critical to provide meaningful options for those who fall outside 
the requirements of HAMP. We have completed over 95,000 second lien 
modifications and were the first servicer to implement the Treasury's 
second lien program--2MP.
    We have provided innovative solutions to meet evolving customer 
needs, including the launch of an industry-leading principal reduction 
program earlier this year. Bank of America is also a leader in the 
Hardest Hit Fund program development and is working with Treasury, the 
State Housing Finance Authorities, and others as we attempt to find 
solutions and design programs including principal reduction in the most 
severely impacted States.
    If all home retention options are exhausted, and there is not a 
viable alternative to create an affordable payment, we offer short sale 
and deed-in-lieu solutions that allow customers to avoid foreclosure 
and ease the transition to alternative housing. Earlier this year, we 
launched a proprietary cooperative short sale program that proactively 
solicits customers in late stage delinquency to provide assistance. We 
are also fully operational with Treasury's Home Affordable Foreclosure 
Alternatives (HAFA) program, which streamlines the short sale process 
for borrowers who have been considered for HAMP and offers customers 
relocation assistance of $3,000. We've completed nearly 70,000 short 
sales through the first three quarters of this year.
    We also provide deed in lieu programs that do provide an increased 
cash allotment for expenses such as moving and rental security deposits 
in exchange for the deed to the property in which the customer 
currently resides.
    Our intent is to exhaust all modification, short sale and other 
disposition options before foreclosure. Despite those efforts, far too 
many customers have been impacted by an economy that has left them 
unemployed or severely underemployed to a point that leaves even a 
modified mortgage payment out of reach.
    With that background in mind, I would like to inform you of some 
key decisions and commitments we have made to address concerns we have 
heard from our customers, your constituents and other stakeholders:

Single Point of Contact
    A frequent source of frustration for customers is when they feel 
they are being passed around the system, seemingly never talking to the 
same person twice. We are addressing this by redesigning our 
modification process to offer a single point of contact for every 
eligible borrower. We are in the midst of implementation and more than 
140,000 customers have already been assigned a single case manager to 
whom they can always turn with questions or concerns that arise 
throughout the process. We are also in discussions with key 
stakeholders, like the State Attorneys General, about how this approach 
can be expanded, and refined, to improve the customer experience and 
reduce borrower anxiety during the time they are being considered for 
modifications. We know this goes to the heart of many customer 
complaints that you have heard.

Reform of Dual Track System
    Parallel foreclosure and modification processes are required by 
many investors, and reflect an industry-wide servicing practice. This 
so-called ``dual track'' process has been a source of confusion for 
customers. We want to be a partner with you, State Attorneys General, 
other servicers, and investors in looking for ways to change industry 
practice with respect to evaluation of borrowers for modifications 
after they have been referred to foreclosure to mitigate the very real 
concerns we have heard about that practice.

Customer Status Checklist
    Customers are understandably frustrated when they are unsure where 
they are in the process of modification or foreclosure. To address this 
and provide greater clarity, we are working to create a Customer Status 
Checklist, so that customers will have a document in hand to understand 
their status, the steps they have completed, reasons decisions have 
been made and what additional steps remain.

Housing Rescue Fairs and Outreach
    By establishing a presence in the community, we've had greater 
success reaching customers who have not been responsive to more 
traditional contact methods. We've deployed Customer Assistance Centers 
in areas most impacted by the housing downturn. We've also launched 
mobile home retention teams who travel around the country meeting with 
customers.
    We've had considerable success in working with non-profit partners 
such as Neighborhood Assistance Corporation of America (NACA), National 
Urban League, National Council of La Raza and the National Association 
of Asian Pacific Americans for Community Development. We established 
the Alliance for Stabilizing our Communities--the first national 
multicultural outreach and home retention effort to address foreclosure 
prevention in diverse communities. Through the Alliance, 34 home rescue 
fairs have been completed serving more than 9,800 families. We find 
that the opportunity for customers to work with a trusted non-profit 
and get the chance to meet with their servicer face-to-face can enhance 
the response rates of borrowers and the chance for a successful 
modification, and we are committed to increasing the resources 
committed to face to face contact in 2011--including doubling our 
outreach staff.

Enhanced Transition Services:
    When we cannot change the foreclosure outcome, we can ensure the 
process is respectful. We have been in extensive conversations with the 
Neighborhood Preservation Foundation, the United Way, other non-profit 
agencies, and with HUD to determine how we can most effectively engage 
them to help customers in the transition of households to alternative, 
more affordable housing. We are working with these and other community 
partners to expand support services--relocation assistance, credit 
counseling, and other aid to help customers and rejuvenate 
neighborhoods.

Other Reforms
    Additional reforms and process enhancements may be identified 
through our constructive and continuing conversations with State 
Attorney General Miller and the Executive Committee of the National 
Association of Attorneys General.

Foreclosure Process
    Our commitment at Bank of America and its subsidiaries is to ensure 
that no property is taken to foreclosure sale until our customer is 
given a fair opportunity to be evaluated for a modification to an 
affordable payment or, if that cannot be done, a short sale or deed in 
lieu solution. Foreclosure is the option of last resort.
    We voluntarily launched a foreclosure hold in October 2008 and have 
participated in several others--as new programs were developed and 
launched, in order to ensure no customer goes to foreclosure who has a 
reasonable option to stay in their home.
    We re-evaluate borrowers for home retention options throughout the 
foreclosure process and check to determine whether a borrower is being 
evaluated for a modification all the way up until the day before the 
foreclosure sale. Subject to investor guidelines and the rules of the 
applicable court, we defer the sale dates of borrowers who are being 
evaluated for modifications.
    When a customer is referred to foreclosure sale, the process and 
requirements vary significantly among States. Courts have jurisdiction 
over foreclosures in 23 States (called judicial States). In both 
judicial and non-judicial cases, it is our policy to refer a loan to 
foreclosure only after we have completed a review for modification 
eligibility, assessment of foreclosure alternatives and compliance with 
applicable State law requirements. Also included are several checks to 
ensure the data supporting the foreclosure is both accurate and 
accurately recorded.
    On average, it takes nearly a year from the time a customer 
receives a foreclosure notice until the actual foreclosure sale is 
completed; and for customers in judicial States like Florida that 
timeline can be closer to 2 years. This is not a process that is rushed 
and there are multiple checkpoints and controls along the way to 
prevent wrongful foreclosure--controls that have now been further 
strengthened.

Foreclosure Review and Improvements
    After concerns emerged at other lenders regarding the foreclosure 
affidavit in judicial foreclosure States, Bank of America and its 
servicing subsidiary initiated a review of our foreclosure procedures. 
On October 1, we voluntarily suspended foreclosure judgments in the 23 
judicial foreclosure States while we completed this review.
    One week later, we paused foreclosure sales nationwide as we 
launched a voluntary review of our foreclosure process in all 50 
States. We believe this step was appropriate and responsible in order 
to give our customers confidence they are being treated fairly in the 
process. I would like to share some conclusions we've reached following 
our review, as well as some of our plans to improve our process going 
forward. Let me first offer a quick overview of the typical foreclosure 
process in a judicial foreclosure State. If the internal foreclosure 
review process concludes all other options are exhausted and that 
foreclosure is necessary, the loan is referred to our foreclosure 
operation and to outside foreclosure counsel, who prepare affidavits of 
indebtedness where required and ultimately handle the local foreclosure 
process.
    The decision to refer a loan to foreclosure is made by Bank of 
America after a foreclosure review process that is based on an 
evaluation of our servicing records. This evaluation precedes and is 
independent from the process used to create and execute affidavits of 
indebtedness. The foreclosure affidavit is a summary of the basic facts 
in the foreclosure case (for example, the borrower's name, address and 
delinquent amount). For all GSE loans, we select the outside counsel 
from pre-approved lists created by each of Fannie Mae and Freddie Mac.
    Once Bank of America receives the affidavit from outside counsel, 
we conduct a multi-step quality assessment process to verify the key 
facts underlying the affidavit. After this quality check, the verified 
affidavits are sent to a bank officer for a notarized signature and 
then returned to foreclosure counsel for filing.
    Even though our review has indicated the basis for our foreclosure 
decisions has been accurate, we have identified areas for improvement 
as a result of our intensive review. We are taking the need for 
improvement very seriously and are implementing changes accordingly. 
These changes in the foreclosure process include, among other things, a 
new affidavit form and additional quality control checks.
    Every affidavit will be individually reviewed by the signer, 
properly executed, and promptly notarized. We are carefully restarting 
the affidavit process with these controls in place. We are working to 
replace previously filed affidavits in as many as 102,000 pending 
foreclosure cases that have not yet gone to judgment. Further, with 
regard to both judicial and non-judicial States, we are implementing 
new procedures for selecting and monitoring outside counsel.

Conclusion
    If a Bank of America customer is eligible for a modification, we'll 
help him or her stay in their home. That is in our interest as a 
mortgage servicer and as an owner of loans. And, when foreclosure is 
the necessary outcome, we will pursue it through a respectful process. 
As the loan servicer, the decision is not always in our hands, but 
ensuring a process that is fair, accurate and consistent is our 
accountability. We have worked for 2 years since our acquisition of 
Countrywide to aggressively respond to more than a million customers in 
distress. We don't claim perfection, but we believe we have led with 
innovative ideas and continue to put forward solutions that respond to 
customer needs. That's a responsibility that comes with being America's 
leading consumer bank--and a responsibility every associate at Bank of 
America is working diligently to uphold.
    Thank you and I look forward to your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF R.K. ARNOLD
        President and Chief Executive Officer of MERSCORP, Inc.
                           November 16, 2010

    Chairman Dodd, Ranking Member Shelby and Members of the Committee, 
my name is R.K. Arnold. I am President and CEO of MERSCORP, Inc. and 
its subsidiary, Mortgage Electronic Registration Systems, Inc. I 
appreciate the opportunity to appear before the Committee today to 
explain what MERS is and isn't, its critical role in our nation's 
housing finance system, and how MERS has been affected by the current 
foreclosure crisis.
    I have written testimony and an oral statement that has already 
been delivered to the Committee that I would request be made part of 
the record.

BACKGROUND
    MERS is owned by the mortgage industry\1\ and operated as a 
membership organization. Almost all mortgage lenders (about 3,000) are 
members of MERS, though not all members register all the loans they 
originate on the MERS System.\2\ MERS derives its revenue solely from 
its members.\3\ MERS charges no fees and makes no money from mortgages, 
from the securitization or transfer of mortgages, or from foreclosures 
done in its name.
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    \1\ MERSCORP, Inc. is structured as a privately held stock company. 
Its principal owners are the Mortgage Bankers Association, Fannie Mae, 
Freddie Mac, Bank of America, Chase, HSBC, CitiMortgage, GMAC, American 
Land Title Association, and Wells Fargo. MERS is headquartered in 
Reston, VA.
    \2\ Members tend to register only loans they plan to sell. Wells 
Fargo and JPMorgan Chase are the principal members in this regard. They 
service most of the loans they originate themselves, so registering 
their retail business on the MERS System is of less practical value to 
them. However, when these institutions purchase loans from others, 
known as their correspondent business, they do require that those loans 
be registered on the MERS System.
    \3\ MERS makes its money through an annual membership fee (ranging 
from $264 to $7,500) based on organizational size, and through loan 
registration and servicing transfer fees. MERS charges a one-time $6.95 
fee to register a loan and have Mortgage Electronic Registration 
Systems, Inc. serve as the common agent (mortgagee) in the land 
records. For loans where Mortgage Electronic Registration Systems, Inc. 
will not act as the mortgagee, there is only a small one-time 
registration fee ($0.97). This is known as an iRegistration. 
Transactional fees (ranging from $1.00 to $7.95) are charged to update 
the database when servicing rights on the loan are sold from one member 
to another.
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    MERS serves two important functions. First, it maintains a database 
or registry of mortgage loans, keeping track of changes in servicing 
rights and beneficial ownership interests over the life of the loan. 
Second, it can be designated by its members to serve as the mortgagee, 
or the holder of the mortgage lien, in the public land records. This 
designation is what enables MERS to maintain its accurate database.

MERS AND YOUR MORTGAGE
    The mortgage loan process can be confusing and complex to 
consumers. There is a lot of paperwork generated and many documents to 
be signed. However, two pieces of paper stand out from the rest as the 
most important pieces needed so that the consumer can get a mortgage 
loan. They are: (1) the promissory note, which is a promise by the 
borrower to repay the loan amount to the lender or noteholder; and (2) 
the mortgage (also referred to as the ``deed of trust'' in some 
States), which establishes a lien against the property as collateral 
for the loan and allows the lender (or noteholder) to foreclose on the 
property if the borrower does not repay the loan according to the terms 
of the promissory note. The person who borrows the money is called the 
``mortgagor'' and the holder of the mortgage is called the 
``mortgagee.'' Once the borrower signs both pieces of paper, the 
borrower receives the money to buy the house. To obtain a mortgage 
loan, the borrower must agree that the mortgagee has the right to 
foreclose in the event of a default.
     Another important party in the life of a mortgage loan is the loan 
servicer. The servicer is a company named (by the note-owner) to be the 
interface between the note-owner and the borrower to collect payments 
and remit them to the note-owner. It may become the noteholder for 
purposes of enforcing the terms of the note on behalf of the note-
owner.\4\
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    \4\ The originating lender may be the servicer in some cases.
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    MERS acts as the designated ``common agent'' for the MERS member 
institutions in the land records, which means that MERS holds the 
mortgage lien on behalf of its members and acts on their behalf as 
mortgagee. To accomplish this, at the time of the closing, the borrower 
and lender appoint MERS to be the mortgagee. The designation of MERS is 
prominently displayed on the mortgage document and is affirmatively 
approved by the borrower at closing.\5\ After the borrower executes the 
mortgage document, it is recorded in the public land records with 
Mortgage Electronic Registration Systems, Inc. noted in the index 
prepared by the recorder (or clerk) as the mortgagee. Mortgage loan 
information is then registered on the MERS database.
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    \5\ A copy of a sample mortgage document can be found in Attachment 
One. A short summary of MERS prepared by the Mortgage Bankers 
Association can be found in Attachment Two.
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    These two key pieces of paper in a mortgage transaction follow very 
different paths after they are signed. The mortgage (or deed of trust) 
is recorded in the county land records where an imaged copy is 
stored.\6\ The original mortgage document, with recording data added by 
the county recorder, is returned to the servicer and goes into the 
servicer's master loan file. The note is sent to a custodian (usually a 
regulated depository institution) and is typically bought and sold (and 
thus trades hands) in the normal course of financial activity.\7\ The 
servicer undertakes the obligations to service the loan, but servicing 
rights also may move from one servicing business to another because 
servicing rights are contract rights, which are bought and sold 
independent of any sale of the promissory note. MERS does not receive 
or maintain either the mortgage or the promissory note.
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    \6\ This action tells the world that there is a lien against the 
property. This is done to protect the lender's interest. The recording 
of the mortgage puts future purchasers on notice of any outstanding 
claims against the property.
    \7\ The promissory note is not (and never has been) recorded or 
stored with the county land records office. The note is a negotiable 
instrument that can be bought and sold by endorsement and delivery from 
the seller to the note purchaser. This activity is governed in all 
fifty States by the Uniform Commercial Code (UCC) Article 3.
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    Every time a note or servicer changes hands, a notation of that 
change is made (electronically) on the MERS System by the members 
involved in the sale. In this way, changes in servicing rights and 
beneficial ownership interest in the promissory note are tracked over 
the life of the loan.\8\
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    \8\ The MERS System is the database; MERSCORP, Inc is the 
operating company that owns the database; and Mortgage Electronic 
Registration Systems, Inc (``MERS'') a subsidiary of MERSCORP, Inc., 
which serves as mortgagee in the land records for loans registered on 
the MERS System. For discussion purposes, ``MERS'' may be used in this 
testimony to refer to all three entities unless specifically stated 
otherwise.
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    A fundamental legal principle is that the mortgage follows the 
note, which means that as the note changes hands, the mortgage remains 
connected to it legally even though it is not physically attached. In 
other words, the promissory note is enforceable against the property 
because of the mortgage, but the mortgage instrument itself is not 
independently enforceable as a debt. This principle is not changed when 
MERS is the mortgagee because of the agency relationship between MERS 
and the lender. An agency relationship arises where one party is 
specifically authorized to act on behalf of another in dealings with 
third persons, and the legal definition of a ``nominee'' is a ``party 
who holds bare legal title for the benefit of others.'' Here, the 
language of the mortgage appoints MERS as nominee, or agent, for the 
lender and its successors and assigns for the purposes set forth 
therein. The mortgage also grants MERS broad rights, again as nominee 
for the lender and the lender's successors and assigns, ``to exercise 
any or all'' of the interests granted by the borrower under the 
mortgage, ``including but not limited to, the right to foreclose and 
sell the property; and to take any action required of the lender.'' 
Thus, the language of the recorded mortgage authorizes MERS to act on 
behalf of the lender in serving as the legal titleholder under the 
mortgage and exercising any of the rights granted to the lender there 
under.
    MERS members affirm this agency relationship with MERS in their 
membership agreements, which provide that MERS ``shall serve as 
mortgagee of record'' with respect to each mortgage loan that the MERS 
member registers on the MERS System and provide that ``MERS shall at 
all times comply with the instructions of the holder of mortgage loan 
promissory notes.''

THE MECHANICS OF MERS
    MERS tracks mortgage loans through an 18-digit identification 
number called the Mortgage Identification Number (MIN). With one 
notable exception, the MIN is to a specific home loan what the VIN 
(Vehicle Identification Number) is to an individual automobile. Like 
the VIN, the MIN can be assigned at the earliest stage of the product's 
creation and stays with it for its entire life. However, unlike cars 
which all get a VIN, not all loans get MINs and are registered on the 
MERS System. This is because some loan originators do not use MERS 
when they do not intend to sell the servicing rights. About half of all 
loans active in the United States are registered on the MERS System.
    As the mortgagee of record, MERS receives all notices including 
legal pleadings on actions pertaining to the property such as 
foreclosure notices and complaints, tax sales and eminent domain 
actions, among the many other types of mail. MERS forwards those 
documents electronically to the relevant servicer who will then take 
the appropriate action to respond on behalf of the note-owner and MERS.
    MERS plays an important role for borrowers as the permanent link 
between borrowers and their servicers. If servicers change or if they 
declare bankruptcy, the borrower always has a knowledgeable point of 
contact in MERS. A toll free number, the unique Mortgage Identification 
Number (MIN) and mailing address are prominently included on the first 
page of the mortgage document. MERS also maintains a Web site, which 
serves as another resource for borrowers. MERS is also a means by which 
the borrower can easily identify the note-owner.\9\
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    \9\ The design of the MERS System always anticipated and required 
that borrowers would be able to access the system to determine the 
servicer of their loans. Providing such information to MERS is a 
requirement of membership and loan registration. When Congress acted 
last year to require that borrowers be told when their note is sold and 
the identity of the new note-owner, MERS established, within a matter 
of weeks, a new service called Investor ID. Of the 3,000 members of 
MERS, 97 percent agreed to disclose the identity of the note-owner 
through the MERS System. Fannie Mae opted to be disclosed. Freddie Mac 
chose not to be disclosed.
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    MERS is not part of the decisionmaking process as to which mortgage 
loans the lenders make to borrowers, nor is MERS part of how mortgage 
loans get securitized. It is the note-owner who decides whether a note 
should be sold, or transferred to a trust, or ultimately securitized 
with a pool of other loans.\10\ Loans were securitized long before MERS 
became operational, and in fact, there are loans in securities today 
that do not name Mortgage Electronic Registration Systems, Inc. as the 
mortgagee. What MERS does is eliminate the expense of repeated 
assignments, resulting in lower cost for lenders when they sell the 
loans (represented by the promissory note) to investors. When the note 
is sold, MERS continues to act as the mortgagee for the new noteholder 
because the mortgage interest follows the note when it changes hands.
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    \10\ The issue of whether transfers of residential mortgage loans 
made in connection with securitizations are sufficient to transfer 
title and foreclosure rights is the subject of a ``View Point'' article 
entitled ``Title Transfer Law 101'' by Karen Gelernt that appeared in 
the October 19, 2010 edition of the American Banker. A copy can be 
found in Attachment Three.
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OTHER FACTS ABOUT MERS
    The number of loans registered on the MERS System is substantial. 
Since its establishment in 1997, about 66 million loans have been 
registered and tracked on the MERS System. About half of those loans 
(about 31 million) are active mortgage loans.
    Measured by direct employment, MERS is a relatively small 
organization. About 50 people work for MERSCORP, Inc. in our Reston, 
VA, office. Hewlett-Packard is the MERS technology partner and runs the 
database with an additional 150 people.
    In significant ways, MERS is analogous to the Depository Trust and 
Clearing Corporation (DTCC) that electronically records the assignment 
of stock and bond certificates, thus eliminating the need to create a 
new certificate each time a security is bought or sold. The benefit of 
MERS is similar to that of the DTCC: It reduces the errors associated 
with paper processes and increases system efficiency.\11\ Also like the 
DTCC, MERS is adjacent to the systems that create the data it tracks; 
it is integrated with, but independent of, its member organizations. 
The two primary differences between the organizations are that the DTCC 
holds title to the financial instrument and that it clears trades 
between its participants (including the exchange of funds between the 
counter-parties).
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    \11\ A 1993, 36-page white paper entitled ``Whole Loan Book Entry 
Concept for the Mortgage Finance Industry'' addresses the concepts 
underlying MERS and the problems it was designed to address. It is 
available upon request.
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MERS CERTIFYING OFFICERS
    Mortgage Electronic Registration Systems, Inc. takes the majority 
of its actions as the mortgagee through the use of officers commonly 
referred to as ``certifying officers.'' From inception, the concept of 
certifying officers has always been fundamental to the operations of 
MERS. In the white paper calling for the creation of MERS (referenced 
in footnote 11), it was recognized that members would need to have a 
form of authority to act on behalf of MERS when MERS is the mortgagee 
on their behalf. That authority took the form of electing persons 
(designated by the member) as officers with limited authority to take 
certain actions. The offices to which each of these individuals are 
officially appointed are vice president and assistant secretary. The 
authority granted to these officers is limited to: (1) executing lien 
releases, (2) executing mortgage assignments, (3) initiating 
foreclosures, (4) executing proofs of claims and other bankruptcy 
related documents (e.g., motions for relief of the automatic stay), (5) 
executing modification and subordination agreements needed for 
refinancing activities, (6) endorsing over mortgage payment checks made 
payable to MERS (in error) by borrowers, and (7) taking such other 
actions and executing documents necessary to fulfill the member's 
servicing duties.
    It is important to note that the certifying officers are the same 
officers whom the lenders and servicers use to carry out these 
functions even when MERS is not the mortgagee. MERS has specific 
controls over who can be identified by its members as a certifying 
officer. To be a MERS certifying officer, one must be a company officer 
of the member institution, have basic knowledge of MERS, and pass a 
certifying examination administered by MERS.
    Under the corporate law in Delaware (where MERS is incorporated), 
there is no requirement that an officer of a corporation also be an 
employee of that corporation. A corporation is allowed to appoint 
individuals to be officers without having to employ those individuals 
or even pay them. This concept is not limited to MERS. Corporations 
cannot operate without officers; they can and often do operate without 
employees. It is not uncommon for large organizations to have all its 
employees employed by an operating company and for those employees to 
be elected as officers of affiliated companies that are created for 
other purposes (all corporations are required by law to have officers 
to act for it). Even for loans where MERS is not the mortgagee, 
employees of the servicer are generally delegated the power to take 
actions (e.g., initiate foreclosures) and execute documents (e.g., lien 
releases and assignments) on behalf of the owner of the loan (and the 
servicer, in turn, may further delegate such authority to a third-party 
vendor).

MERS AND FORECLOSURE
    When Mortgage Electronic Registration Systems, Inc. is the 
mortgagee of record, and the borrower is in default on the mortgage, 
and the note-owner decides to foreclose, foreclosure can be undertaken 
in one of two ways: Either in the name of MERS, or in the name of the 
noteholder (which is usually the servicer).
    If the noteholder chooses to foreclose in its own name, under the 
MERS rules, it must be named as mortgagee in the land records. MERS, 
through the MERS member's designated certifying officer, will execute 
an assignment to the foreclosing company and the assignment will be 
recorded in the land records. At this point, MERS no longer holds any 
legal interest in the mortgage, and it plays no further role in the 
foreclosure process. Most loans are assigned out of MERS in this way 
and not foreclosed in the name of MERS.
    If the note-owner chooses to have Mortgage Electronic Registration 
Systems, Inc. foreclose, then the note-owner endorses the note in blank 
(if it has not already done so), making it bearer paper, and grants 
possession of the note to a MERS certifying officer. This makes MERS 
the noteholder. Since MERS is already the mortgagee in the land 
records, MERS is now able to legally begin the foreclosure process on 
behalf of the note-owner. The foreclosure is managed entirely by the 
member institution's MERS certifying officer. This person typically 
works in the default department within the MERS member institution so 
they are familiar with the various State foreclosure requirements. The 
member manages the relationship with the law firm that is handling the 
foreclosure. The member retains the law firm on behalf of MERS and the 
member provides the necessary documents and information to the law 
firm. The member obtains these documents and information from the 
servicing files and system, which are maintained by the member.
    As noted earlier, the MERS certifying officers are the same 
employee officers who handle foreclosure functions for the MERS member 
institutions. Whether a foreclosure is initiated in the name of MERS 
and handled by the certifying officers, or by the lender in its own 
name, the same people would be doing the work. Likewise, the loan file 
remains with the servicer as it did before MERS existed. MERS is not a 
repository for mortgage documents or promissory notes.
    It is important to note that Mortgage Electronic Registration 
Systems, Inc. only initiates foreclosure when it has been instructed to 
do so by the servicer (acting on behalf of the note-owner) or directly 
by the note-owner. MERS has strict rules and procedures governing 
foreclosure, most notably a requirement that the certifying officer be 
in possession of the mortgage note when foreclosing in the name of 
MERS. In addition, pursuant to a 2006 MERS membership rule, no 
foreclosures in the name of MERS are allowed in the State of Florida. 
In the event a MERS member contracts out foreclosure operations to a 
vendor or a law firm, a separate contract is entered into by MERS, the 
MERS member and the contracted firm for the purpose of establishing our 
understanding of the obligations of the parties and for the purposes of 
designating certifying officers. The specific, authorized functions of 
MERS certifying officers are enumerated in a corporate resolution by 
which MERS makes the appointment.
    Because there is a choice whether a foreclosure is done in the name 
of the servicer, note-owner or MERS, one might wonder if there is an 
advantage in choosing one way or the other. The advantage to 
institutions by foreclosing in the name of MERS is that they do not 
need to record an assignment from MERS to themselves, saving them time 
and money. The advantage that some lenders see in not foreclosing in 
the name of MERS is that the MERS rules are strict and require that the 
note be produced. If the lender does not want to do this, the MERS 
member cannot commence a foreclosure action in the name of MERS, but 
must assign the mortgage out of MERS. This is a major reason why most 
loans are not foreclosed in the name of MERS.
    In 2005, when it became apparent to us that foreclosures undertaken 
in Florida were relying excessively on lost note affidavits, MERS 
adopted a rule forbidding the use of lost note affidavits when 
foreclosures were done in the name of MERS in Florida. That rule was 
extended nationally in 2006 and is still in effect today. MERS believes 
that borrowers are entitled to know that the company foreclosing has 
all of the necessary paperwork and rights to do so. Showing up with the 
original note provides the borrower and the court with proof that the 
foreclosing company is the proper party to foreclose.

COMMON QUESTIONS ABOUT MERS STRUCTURE AND ROLE IN MORTGAGE MARKETS
    When servicing rights or promissory notes are sold for loans where 
MERS is not the mortgagee, the usual practice is for the seller to 
execute and record an instrument assigning the mortgage lien to the 
purchaser (commonly referred to as an ``assignment''). Assignments are 
not required by law to be recorded in the land records. The primary 
reason assignments are recorded (in cases where MERS is not the 
mortgagee), stems from the appointment of servicers to administer the 
loan on behalf of the mortgage loan owner. In which case, the servicer 
will be assigned the mortgage lien (thus becoming the mortgagee) in 
order to receive the service of process related to that mortgage loan. 
When Mortgage Electronic Registration Systems, Inc. is the mortgagee 
(i.e., holds the legal title to the mortgage lien), there is no need 
for an assignment between its members because MERS is the common agent 
for them. It is not the case that the assignments are now being done 
electronically through the MERS System instead of being recorded in 
the land records. The need for an assignment is eliminated because 
title to the mortgage lien has been grounded in MERS. Moreover, 
transfers of mortgage notes and servicing rights are not recordable 
transactions (and have never been reflected in the land records) 
because they are not a conveyance of an interest in real property that 
is entitled to be recorded; only the transfer of the lien is a 
conveyance. A promissory note is sold by endorsing the note, and 
delivering it to the purchasers. Servicing rights are non-recordable 
contracts rights. Mortgage Electronic Registration Systems, Inc. 
remains the mortgagee regardless of the number of these non-recordable 
transfers that may occur during the life of the loan. Upon such sales, 
the seller and purchaser update the MERS System of the transfer with 
an ``electronic handshake.'' If the purchaser does not confirm the 
transaction, it is flagged by the MERS System for follow-up. MERS also 
audits its members for the accuracy of the information they provide to 
the MERS System.
    The only reason servicers needed to appear in the county land 
records before MERS was so they could receive legal notices pertaining 
to the property. That role is now played by MERS as their common agent. 
MERS runs a massive mailroom and help desk operation to handle millions 
of legal notices for its members, which makes it far more efficient and 
certain that mail will go to the correct place. Today, if a servicer 
``boxes up'' in the middle of the night and disappears, the homeowner 
can have confidence that legal notices will be delivered to the correct 
successor company without delay.
    The chain of title starts and stops with Mortgage Electronic 
Registration Systems, Inc. as the mortgagee. MERS, as the agent for the 
note-owner, can hold legal title for the note-owner in the land 
records.\12\ The basic concept of a recording statute is that a person 
or company claiming an interest in land protects its interest by 
recording that interest at the county recorder of deeds office. The 
recorded document provides constructive notice to the world of the 
claim. In many States, there is no requirement that a conveyance of 
real estate must be recorded in the land records. The concept of 
nominees appearing in the land records on behalf of the true owner has 
long been recognized. It has never been the case that the true owners 
of interests in real estate could be determined using the land records.
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    \12\ The essential elements of the legal principles underlying MERS 
can be found in ``MERS Under Attack: Perspective on Recent Decisions 
from Kansas and Minnesota,'' an article by Barkley and Barbara Clark in 
the February 2010 edition of Clark's Secured Transactions Monthly. A 
copy of this article can be found in Attachment Four.
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    The use of MERS is in compliance with the statutory intent of the 
State recording acts. When MERS is the mortgagee, the mortgage is 
recorded at the county land records, thereby putting the public on 
notice that there is a lien on the property. As the 1993 white paper 
describing MERS makes clear, at certain time periods, the flow of 
assignments were overwhelming the county recorder system, resulting in 
long backlogs, and in some cases, taking the county recorder over a 
year to record an assignment. Now that assignments are eliminated 
because a common agent like MERS is holding the mortgage lien, the land 
records can operate more efficiently. Multiple assignments can lead to 
errors and uncertainty in the chain of title because assignments were 
often missing, incomplete, inaccurate, or misfiled. In situations where 
the recorded assignment identified the wrong property, the lender had 
not perfected its lien on the right property but had clouded the title 
for some unrelated third party.
    The MERS System also complements the county land records by 
providing additional information that was never intended to be recorded 
at the county level, namely the information about the mortgage loan 
servicer, and now, with the addition of MERS InvestorID, the name of 
the investor.
    Some have raised questions about the reduction of recording fees 
that has accompanied the elimination of the need to record assignments, 
and there have been suggestions that these fees are somehow owed or 
outstanding. Fees are paid for a service performed, and if a document 
is eliminated because it is no longer legally necessary, no fee is due 
and owing because there is nothing to record. Another way to look at it 
is that, because MERS greatly reduces the workload of county recorders, 
the lower operating expenses of the county recorder's office offsets 
the loss in fee income. Moreover, it would be the borrower, and not the 
lender, who ultimately pays the costs of recording assignments, either 
directly or indirectly.\13\
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    \13\ On loans originated by correspondent lenders or brokers (where 
MERS is not the mortgagee), the costs of preparing assignments and the 
associated filing fees are listed on the HUD-1 and paid directly by the 
borrower.
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    The use of MERS is based on sound legal principles. Its legal 
validity has been upheld as it was in the Cervantes, Jackson and In re 
Tucker cases, to just name a few. While there is much support by courts 
for the MERS role as a common agent, there have been cases where there 
have been evidentiary issues, which have resulted in outcomes that do 
not always let MERS, or its members, foreclose without going back and 
proving up the right to take action. States have laws that govern 
foreclosures \14\ and when the process is not followed, it can, and 
should result in a court not allowing it to go forward. In some of 
these cases, judges wanting more evidence or information about MERS 
have made comments about MERS. In light of the recent foreclosure 
crisis, it is probable that MERS will continue to be challenged. But we 
are confident that when courts are provided with all of the facts, MERS 
will continue to prevail.\15\ A MERS case law outline (current through 
October 20, 2010) is available upon request.\16\
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    \14\ Individual States handle real estate foreclosures differently. 
In some States the foreclosure process is judicial, and in some States 
it is non-judicial. Under both systems, timeframes and terms vary 
widely from State to State. A brief, general, description of both 
processes prepared by the Mortgage Bankers Association can be found in 
Attachment Five.
    \15\ Some important recent cases upholding the rights of MERS 
include:

    In re Mortgage Electronic Registration Systems (MERS) Litigation, a 
multi-district litigation case in Federal court in Arizona where the 
court issued a favorable opinion, stating that ``The MERS System is not 
fraudulent, and MERS has not committed any fraud.''
    In re Tucker (9/20/2010), where a Missouri bankruptcy judge found 
that the language of the deed of trust clearly authorizes MERS to act 
on behalf of the lender in serving as the legal title holder.
    Mortgage Electronic Registration Systems, Inc. v. Bellistri, 2010 
WL 2720802 (E.D. Mo. 2010), where the court held that Bellistri's 
failure to provide notice to MERS violated MERS' constitutional due 
process rights.
    Taylor v. Deutsche Bank Nat'l Trust Co., So. 3d, 2010 WL 3056612 
(Fla. 5th DCA 2010), where the court held the MERS mortgage to be valid 
under Florida law, and held that MERS may assign its rights in the 
mortgage to the foreclosing company who holds the note. The Florida 
court also held that where MERS is described as the ``mortgagee under 
the Security Instrument'' the document grants to MERS legal status 
under the UCC, which MERS can assign to the foreclosing bank.
    Deutsche Bank Natl. Trust Co. v. Traxler, 2010-Ohio-3940, where the 
Ohio Court of Appeals recognizes MERS' authority to assign a mortgage 
when designated as both a nominee and mortgagee.
    King v. American Mortgage Network, et al., United States District 
Court, District of Utah, Northern Division (Case No. 1:09-CV-125 TS), 
where the court, interpreting the language of the deed of trust, held 
that MERS had the authority to initiate foreclosure proceedings, 
appoint a trustee, and to foreclose and sell the property.
    \16\ A review of the use of MERS in all 50 States was done by 
Covington and Burling in 1996 and 1997 as part of the due diligence 
associated with the creation of MERS. It is available upon request.
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MERS CONTINUES TO IMPROVE ITS PROCESSES
    In 2009, when it came to our attention that some employees 
designated by member institutions to serve as MERS certifying officers 
were not entrusted by their own institutions with signing authority, 
MERS enhanced its procedures to require that each MERS certifying 
officer be a company officer of the member institution. In addition, 
MERS has developed a primer containing information to be reviewed by 
each prospective MERS certifying officer. To test this knowledge, MERS 
instituted an online examination to make sure prospective certifying 
officers had a basic knowledge of MERS and of their roles and 
responsibilities as MERS certifying officers. MERS requires that these 
certifications be renewed annually, and we also instituted a 
recertification process for current certifying officers who had been 
designated prior to establishment of the online examination. MERS will 
continue to enforce these policies and refine its testing and 
certification program in recognition of the responsibility involved in 
initiating a foreclosure on someone's home.
    When we saw actions were being undertaken to accelerate foreclosure 
document processing, we became concerned that certifying officers might 
be pressured to perform their responsibilities in a manner inconsistent 
with the MERS rules. When we did not receive the assurances we thought 
appropriate that this would not happen, we suspended relationships with 
some prominent players involved in the foreclosure process.
    When we discovered that some ``robo-signers'' were MERS certifying 
officers, we contacted those certifying officers and suspended their 
authority. They will not be recertified until they retrain and submit 
to reexamination, and the members who employed them provide MERS with a 
plan on what will be changed within their companies to prevent this 
from happening again.
    The MERS management team is committed to the highest standards; we 
believe that MERS adds great value to our nation's system of housing 
finance in a way that benefits financial institutions, borrowers and 
the Government. There are many benefits derived from the MERS database:

    The MERS database is available to borrowers to locate their 
        servicers, and in many cases, to identify note-owners.

    For local communities, MERS has become a much-needed link 
        between code enforcement officers and the servicing community 
        to help combat the blight that vacant properties bring to 
        neighborhoods. Over 600 government institutions (cities, 
        municipalities and States) utilize the MERS System for free to 
        look up the property preservation contacts for loans registered 
        on the system. This helps save the code enforcement officers 
        much needed time in searching for the company directly 
        responsible for the upkeep of that vacant property.

    For law enforcement agencies, MERS aids in combating 
        mortgage fraud through the detection of undisclosed multiple 
        liens taken out by fraudsters for the same social security 
        number or property.

    Also, with MERS, lien releases occur quickly at the time of payoff 
for borrowers because there can be no break in the chain of title with 
MERS. And finally, foreclosures in the name of MERS are not allowed 
without the note.

IDEAS FOR THE FUTURE
    The MERS database, coupled with the Mortgage Identification Number, 
is a powerful tool that can be harnessed by the Congress and the 
industry to improve the mortgage finance system. There are a number of 
ideas that are worth considering so that when we emerge from this 
current crisis we have a housing finance system that meets our needs.
    1. All residential home loans should be uniquely identified and 
tracked on a national database, which should include:

  a.  Who is the borrower?

  b.  What/Where is the property?

  c.  Who is the owner of the loan's promissory note (the originator/
        investor)?

  d.  Who is the servicer of the loan (the mortgage company)?

    2. The cost of registration for the loan should be included with 
the other origination fees and disclosed on the HUD-1 at closing.

    3. The national database should also track who has physical custody 
of the original promissory note (the mortgages are always available in 
the county land records).

    4. The database should reflect both current and historical 
information regarding the home loan.

    5. The national unique identifier should be a full life-of-loan 
identifier, from origination through final satisfaction (payoff) and 
lien release.

    6. All Federal data systems that deal with home loans should be 
required to integrate the unique national identification number, so 
that information regarding loans can be linked across multiple data 
sources, e.g., the FHA should be able to look at HUD data, and FDIC 
should be able to look at SEC information, always knowing that they are 
comparing apples to apples. State and local government agencies should 
also be encouraged to adopt the number.
    Mr. Chairman, all of us at MERS keenly understand that while owning 
your own home is a dream, losing that home is a nightmare. As 
professionals who have dedicated ourselves to helping people realize 
their dream, we are deeply dismayed by the current foreclosure crisis. 
We take our role as a mortgagee very seriously and we see our database 
as a key to moving toward better access to information and transparency 
for consumers.
    I am hopeful that as people understand more about MERS and the role 
we play, they will see that MERS adds great value to our nation's 
system of housing finance in ways that benefit not just financial 
institutions, the broader economy and the Government, but--most of 
all--real people. Thank you for holding these hearings and inviting 
MERS to participate.
ATTACHMENTS:

  1)  Sample mortgage document

  2)  MBA Fact Sheet on MERS

  3)  ``Title Transfer Law 101,'' by Karen Gelernt, American Banker, 
        October 19, 2010

  4)  ``MERS Under Attack: Perspective on Recent Decisions from Kansas 
        and Minnesota,'' by Barkley and Barbara Clark, Clark's Secured 
        Transactions Monthly, February 2010

  5)  ``Judicial Versus Non-Judicial Foreclosure,'' Mortgage Bankers 
        Association, October 2010
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
                                 ______
                                 
                PREPARED STATEMENT OF ADAM J. LEVITIN *
      Associate Professor of Law, Georgetown University Law Center
                           November 16, 2010

---------------------------------------------------------------------------
    *Adam J. Levitin in an Associate Professor of Law at the Georgetown 
University Law Center, in Washington, D.C., and Robert Zinman Scholar 
in Residence at the American Bankruptcy Institute. He also serves as 
Special Counsel to the Congressional Oversight Panel, and has been the 
Robert Zinman Scholar in Residence at the American Bankruptcy 
Institute.
    Before joining the Georgetown faculty, Professor Levitin practiced 
in the Business Finance & Restructuring Department of Weil, Gotshal & 
Manges, LLP in New York, and served as law clerk to the Honorable Jane 
R. Roth on the United States Court of Appeals for the Third Circuit.
    Professor Levitin holds a J.D. from Harvard Law School, an M.Phil 
and an A.M. from Columbia University, and an A.B. from Harvard College.
    Professor Levitin has not received any Federal grants nor has he 
received any compensation in connection with his testimony. The views 
expressed in Professor Levitin's testimony are his own and do not 
represent the positions of the Congressional Oversight Panel.
---------------------------------------------------------------------------
Executive Summary
    The mortgage foreclosure process is beset by a variety of problems. 
These range from procedural defects (including, but not limited to 
robosigning) to outright counterfeiting of documents to questions about 
the validity of private-label mortgage securitizations that could mean 
that these mortgage-backed securities are not actually backed by any 
mortgages whatsoever. While the extent of these problems is unknown at 
present, the evidence is mounting that it is not limited to one-off 
cases, but that there may be pervasive defects throughout the 
foreclosure and securitization processes.
    The problems in the mortgage market are highly technical, but they 
are extremely serious. At best they present problems of fraud on the 
court, clouded title to property, and delay in foreclosures that will 
increase the shadow housing inventory and drive down home prices. At 
worst, they represent a systemic risk of liabilities in the trillions 
of dollars, greatly exceeding the capital of the United State's major 
financial institutions.
    Congress would do well to ensure that Federal regulators are 
undertaking a thorough investigation of foreclosure problems and to 
consider the possibilities for a global settlement of foreclosure 
problems, loan modifications, and the housing debt overhang that 
stagnate the economy and pose potential systemic risk.

    Mr. Chairman, Members of the Committee:

    Good morning. My name is Adam Levitin. I am an Associate Professor 
of Law at the Georgetown University Law Center in Washington, D.C., 
where I teach courses in bankruptcy, commercial law, contracts, and 
structured finance. I also serve as Special Counsel to the 
Congressional Oversight Panel for the Troubled Asset Relief Program. 
The views I express today are my own, however.
    We are now well into the fourth year of the foreclosure crisis, and 
there is no end in sight. Since mid-2007 around 8 million homes entered 
foreclosure,\1\ and over three million borrowers lost their homes in 
foreclosure.\2\ As of June 30, 2010, the Mortgage Bankers Association 
reported that 4.57 percent of 1-4 family residential mortgage loans 
(roughly 2.5 million loans) were currently in the foreclosure, process 
a rate more than quadruple historical averages. (See Figure 1.) 
Additionally, 9.85 percent of mortgages (roughly 5 million loans) were 
at least a month delinquent.\3\
---------------------------------------------------------------------------
    \1\ HOPE Now Data Reports.
    \2\ Id.
    \3\ Mortgage Bankers Association, National Delinquency Survey.
---------------------------------------------------------------------------
Chart 1: Percentage of 1-4 Family Residential Mortgages in 
        Foreclosure\4\
---------------------------------------------------------------------------
    \4\ Mortgage Bankers Association, National Delinquency Surveys.

    
    
    Private lenders, industry associations, and two successive 
Administrations have made a variety of efforts to mitigate the crisis 
and encourage loan modifications and refinancings. A series of much 
hyped initiatives, such as the FHASecure refinancing program and the 
Hope4Homeowners have all met what can charitably be described as 
limited success. FHASecure, predicted to help 240,000 homeowners,\5\ 
assisted only a few thousand borrowers before it wound down,\6\ while 
Hope4Homeowners, originally predicted to help 400,000 homeowners,\7\ 
had closed only 130 refinancings as of September 30, 2010.\8\ The Home 
Affordable Modification (HAMP) has also failed, producing 495,898 
permanent modifications through September 2010. This number is likely 
to be a high water mark for HAMP, as new permanent modifications are 
decreasing rapidly while defaults on permanent modifications rise; if 
current trends continue, by year's end the number of active permanent 
HAMP modifications will actually decline.
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    \5\ See, e.g., Press Release, U.S. Dept. of Housing and Urban 
Development, Bush Administration to Help Nearly One-Quarter of a 
Million Homeowners Refinance, Keep Their Homes; FHA to implement new 
``FHASecure'' refinancing product (Aug. 31, 2007), available at http://
www.hud.gov/news/release.cfm?content=pr07-123.cfm; Press Release, U.S. 
Dept. of Housing and Urban Development, FHA Helps 400,000 Families Find 
Mortgage Relief; Refinancing on pace to help half-million homeowners by 
year's end (Oct. 24, 2008), available at http://www.hud.gov/news/
release.cfm?content=pr08-167.cfm.
    \6\ Michael Corkery, Mortgage `Cram-Downs' Loom as Foreclosures 
Mount, Wall St. J., Dec. 31, 2008.
    \7\ Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure, 
Wash. Post. Dec. 17, 2008, at A1.
    \8\ See FHA Single Family Outlook, Sept. 2010, at http://
www.hud.gov/offices/hsg/rmra/oe/rpts/ooe/olcurr.xls-2010-11-02, Row 263 
(note that FHA fiscal years begin in October, so that Fiscal Year 2009 
began in October 2008).
---------------------------------------------------------------------------
    A number of events over the past several months have roiled the 
mortgage world, raising questions about:

  (1)  Whether there is widespread fraud in the foreclosure process;

  (2)  Securitization chain of title, namely whether the transfer of 
        mortgages in the securitization process was defective, 
        rendering mortgage-backed securities into non-mortgage backed 
        securities;

  (3)  Whether the use of the Mortgage Electronic Registration System 
        (MERS) creates legal defects in either the secured status of a 
        mortgage loan or in mortgage assignments;

  (4)  Whether mortgage servicers' have defaulted on their servicing 
        contracts by charging predatory fees to borrowers that are 
        ultimately paid by investors;

  (5)  Whether investors will be able to ``putback'' to banks 
        securitized mortgages on the basis of breaches of 
        representations and warranties about the quality of the 
        mortgages.
    These issues are seemingly disparate and unconnected, other than 
that they all involve mortgages. They are, however, connected by two 
common threads: the necessity of proving standing in order to maintain 
a foreclosure action and the severe conflicts of interests between 
mortgage servicers and MBS investors.
    It is axiomatic that in order to bring a suit, like a foreclosure 
action, the plaintiff must have legal standing, meaning it must have a 
direct interest in the outcome of the legislation. In the case of a 
mortgage foreclosure, only the mortgagee has such an interest and thus 
standing. Many of the issues relating to foreclosure fraud by mortgage 
servicers, ranging from more minor procedural defects up to outright 
counterfeiting relate to the need to show standing. Thus problems like 
false affidavits of indebtedness, false lost note affidavits, and false 
lost summons affidavits, as well as backdated mortgage assignments, and 
wholly counterfeited notes, mortgages, and assignments all relate to 
the evidentiary need to show that the entity bringing the foreclosure 
action has standing to foreclose.
    Concerns about securitization chain of title also go to the 
standing question; if the mortgages were not properly transferred in 
the securitization process (including through the use of MERS to record 
the mortgages), then the party bringing the foreclosure does not in 
fact own the mortgage and therefore lacks standing to foreclose. If the 
mortgage was not properly transferred, there are profound implications 
too for investors, as the mortgage-backed securities they believed they 
had purchased would, in fact be non-mortgage-backed securities, which 
would almost assuredly lead investors to demand that their investment 
contracts be rescinded, thereby exacerbating the scale of mortgage 
putback claims.
    Putback claims underscore the myriad conflicts of interest between 
mortgage servicers and investors. Mortgage servicers are responsible 
for prosecuting on behalf of MBS investors, violations of 
representations and warranties in securitization deals. Mortgage 
servicers are loathe to bring such actions, however, not least because 
they would often be bringing them against their own affiliates. 
Servicers' failure to honor their contractual duty to protect 
investors' interest is but one of numerous problems with servicer 
conflicts of interest, including the levying of junk fees in 
foreclosures that are ultimately paid by investors and servicing first 
lien loans while directly owning junior liens.
    Many of the problems in the mortgage securitization market (and 
thus this testimony) are highly technical, but they are extremely 
serious.\9\ At best they present problems of fraud on the court and 
questionable title to property. At worst, they represent a systemic 
risk of liabilities in the trillions of dollars, greatly exceeding the 
capital of the United State's major financial institutions. While 
understanding the securitization market's problems involves following a 
good deal of technical issues, it is critical to understand from the 
get-go that securitization is all about technicalities.
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    \9\ I emphasize, however, that this testimony does not purport to 
be a complete and exhaustive treatment of the issues involved and that 
many of the legal issues discussed are not settled law, which is itself 
part of the problem; trillions of dollars of mortgage securitization 
transactions have been done without a certain legal basis.
---------------------------------------------------------------------------
    Securitization is the legal apotheosis of form over substance, and 
if securitization is to work it must adhere to its proper, prescribed 
form punctiliously. The rules of the game with securitization, as with 
real property law and secured credit are, and always have been, that 
dotting ``i's'' and crossing ``t's'' matter, in part to ensure the 
fairness of the system and avoid confusions about conflicting claims to 
property. Close enough doesn't do it in securitization; if you don't do 
it right, you cannot ensure that securitized assets are bankruptcy 
remote and thus you cannot get the ratings and opinion letters 
necessary for securitization to work. Thus, it is important not to 
dismiss securitization problems as merely ``technical;'' these issues 
are no more technicalities than the borrower's signature on a mortgage. 
Cutting corners may improve securitization's economic efficiency, but 
it undermines its legal viability.
    Finally, as an initial matter, let me also emphasize that the 
problems in the securitization world do not affect the whether 
homeowners owe valid debts or have defaulted on those debts. Those are 
separate issues about which there is no general controversy, even if 
debts are disputed in individual cases.\10\
---------------------------------------------------------------------------
    \10\ A notable exception, however, is for cases where the default 
is caused by a servicer improperly force-placing insurance or 
misapplying a payment, resulting in an inflated loan balance that 
triggers a homeowner default.
---------------------------------------------------------------------------
    This written testimony proceeds as follows: Part I presents an 
overview of the structure of the mortgage market, the role of mortgage 
servicers, the mortgage contract and foreclosure process. Part II 
presents the procedural problems and fraud issues that have emerged in 
the mortgage market relating to foreclosures. Part III addresses chain 
of title concerns. Part IV considers the argument that the problems in 
foreclosures are mere technicalities being used by deadbeats to delay 
foreclosure. Part V concludes.

I. BACKGROUND ON SECURITIZATION, SERVICING, AND THE FORECLOSURE PROCESS

A. MORTGAGE SECURITIZATION
    Most residential mortgages in the United States are financed 
through securitization. Securitization is a financing method involving 
the issuance of securities against a dedicated cash flow stream, such 
as mortgage payments, that are isolated from other creditors' claims. 
Securitization links consumer borrowers with capital market financing, 
potentially lowering the cost of mortgage capital. It also allows 
financing institutions to avoid the credit risk, interest rate risk, 
and liquidity risk associated with holding the mortgages on their own 
books.
    Currently, about 60 percent of all outstanding residential 
mortgages by dollar amount are securitized.\11\ The share of 
securitized mortgages by number of mortgages outstanding is much higher 
because the securitization rate is lower for larger ``jumbo'' 
mortgages.\12\ Credit Suisse estimates that 75 percent of outstanding 
first-lien residential mortgages are securitized.\13\ In recent years, 
over 90 percent of mortgages originated have been securitized.\14\ Most 
second-lien loans, however, are not securitized.\15\
---------------------------------------------------------------------------
    \11\ Inside Mortgage Finance, 2010 Mortgage Market Statistical 
Annual.
    \12\ Id.
    \13\ Ivy L. Zelman et al., Mortgage Liquidity du Jour: 
Underestimated No More, 28 exhibit 21 (Credit Suisse, Equity Research 
Report, Mar. 12, 2007).
    \14\ Inside Mortgage Finance, 2010 Mortgage Market Statistical 
Annual.
    \15\ Inside Mortgage Finance, 2010 Mortgage Market Statistical 
Annual. From 2001-2007, only 14 percent of second lien mortgages 
originated were securitized. Id. Second lien mortgages create a 
conflict of interest beyond the scope of this paper. In many cases, 
second lien loans are owned by financial institutions that are 
servicing (but do not own) the first lien loan. See Hearing Before the 
House Financial Services Committee, Apr. 13, 2009, ``Second Liens and 
Other Barriers to Principal Reduction as an Effective Foreclosure 
Mitigation Program'' (testimony of Barbara DeSoer, President, Bank of 
America Home Loans) at 6 (noting that Bank of America owns the second 
lien mortgage on 15 percent of the first lien mortgages it services); 
Hearing Before the House Financial Services Committee, Apr. 13, 2009, 
``Second Liens and Other Barriers to Principal Reduction as an 
Effective Foreclosure Mitigation Program'' (testimony of David Lowman, 
CEO for Home Lending, JPMorgan Chase) at 5 (noting that Chase owns the 
second lien mortgage on around 10 percent of the first lien mortgages 
it services). The ownership of the second while servicing the first 
creates a direct financial conflict between the servicer qua servicer 
and the servicer qua owner of the second lien mortgage, as the servicer 
has an incentive to modify the first lien mortgage in order to free up 
borrower cash flow for payments on the second lien mortgage.
---------------------------------------------------------------------------
    Although mortgage securitization transactions are extremely complex 
and vary somewhat depending on the type of entity undertaking the 
securitization, the core of the transaction is relatively simple.\16\
---------------------------------------------------------------------------
    \16\ The structure illustrated is for private-label mortgage-backed 
securities. Ginnie Mae and GSE securitizations are structured somewhat 
differently. The private-label structure can, of course, be used to 
securitize any asset, from oil tankers to credit card debt to song 
catalogues, not just mortgages.
---------------------------------------------------------------------------
    First, a financial institution (the ``sponsor'' or ``seller'') 
assembles a pool of mortgage loans. The loans were either made 
(``originated'') by an affiliate of the financial institution or 
purchased from unaffiliated third-party originators. Second, the pool 
of loans is sold by the sponsor to a special-purpose subsidiary (the 
``depositor'') that has no other assets or liabilities. This is done to 
segregate the loans from the sponsor's assets and liabilities.\17\ 
Third, the depositor sells the loans to a passive, specially created, 
single-purpose vehicle (SPV), typically a trust in the case of 
residential mortgages.\18\ The SPV issues certificated securities to 
raise the funds to pay the depositor for the loans. Most of the 
securities are debt securities--bonds--but there will also be a 
security representing the rights to the residual value of the trust or 
the ``equity.''
---------------------------------------------------------------------------
    \17\ This intermediate entity is not essential to securitization, 
but since 2002, Statement of Financial Accountings Standards 140 has 
required this additional step for off-balance-sheet treatment because 
of the remote possibility that if the originator went bankrupt or into 
receivership, the securitization would be treated as a secured loan, 
rather than a sale, and the originator would exercise its equitable 
right of redemption and reclaim the securitized assets. Deloitte & 
Touche, Learning the Norwalk Two-Step, Heads Up, Apr. 25, 2001, at 1.
    \18\ The trustee will then typically convey the mortgage notes and 
security instruments to a ``master document custodian,'' who manages 
the loan documentation, while the servicer handles the collection of 
the loans.
---------------------------------------------------------------------------
    The securities can be sold directly to investors by the SPV or, as 
is more common, they are issued directly to the depositor as payment 
for the loans. The depositor then resells the securities, usually 
through an underwriting affiliate that then places them on the market. 
(See Figure 2, below.) The depositor uses the proceeds of the 
securities sale (to the underwriter or the market) to pay the sponsor 
for the loans. Because the certificated securities are collateralized 
by the residential mortgage loans owned by the trust, they are called 
residential mortgage-backed securities (RMBS).
    A variety of reasons--credit risk (bankruptcy remoteness), off-
balance sheet accounting treatment, and pass-through tax status 
(typically as a REMIC \19\ or grantor trust)--mandate that the SPV be 
passive; it is little more than a shell to hold the loans and put them 
beyond the reach of the creditors of the financial institution.\20\ 
Loans, however, need to be managed. Bills must be sent out and payments 
collected. Thus, a third-party must be brought in to manage the 
loans.\21\ This third-party is the servicer. The servicer is supposed 
to manage the loans for the benefit of the RMBS holders.
---------------------------------------------------------------------------
    \19\ A REMIC is a real estate mortgage investment conduit, as 
defined under I.R.C.  860A-860G.
    \20\ See Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein 
Contracts: Workout Prohibitions in Residential Mortgage Backed 
Securities, 82 S. Cal. L. Rev. 1075, 1093-98. (2009).
    \21\ See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 
Servicers, 15 Housing Pol'y Debate 753, 754 (2004).
---------------------------------------------------------------------------
    Every loan, irrespective of whether it is securitized, has a 
servicer. Sometimes that servicer is a first-party servicer, such as 
when a portfolio lender services its own loans. Other times it is a 
third-party servicer that services loans it does not own. All 
securitizations involve third-party servicers, but many portfolio loans 
also have third-party servicers, particularly if they go into default. 
Third-party servicing contracts for portfolio loans are not publicly 
available, making it hard to say much about them, including the precise 
nature of servicing compensation arrangements in these cases or the 
degree of oversight portfolio lenders exercise over their third-party 
servicers. Thus, it cannot always be assumed that if a loan is not 
securitized it is being serviced by the financial institution that owns 
the loan, but if the loan is securitized, it has third-party servicing.
    Securitization divides the beneficial ownership of the mortgage 
loan from legal title to the loan and from the management of the loans. 
The SPV (or more precisely its trustee) holds legal title to the loans, 
and the trust is the nominal beneficial owner of the loans. The RMBS 
investors are formally creditors of the trust, not owners of the loans 
held by the trust.
    The economic reality, however, is that the investors are the true 
beneficial owners. The trust is just a pass-through holding entity, 
rather than an operating company. Moreover, while the trustee has 
nominal title to the loans for the trust, it is the third-party 
servicer that typically exercises legal title in the name of the 
trustee. The economic realities of securitization do not track with its 
legal formalities; securitization is the apotheosis of legal form over 
substance, but punctilious respect for formalities is critical for 
securitization to work.
    Mortgage servicers provide the critical link between mortgage 
borrowers and the SPV and RMBS investors, and servicing arrangements 
are an indispensable part of securitization.\22\ Mortgage servicing has 
become particularly important with the growth of the securitization 
market.
---------------------------------------------------------------------------
    \22\ The servicing of nonsecuritized loans may also be outsourced. 
There is little information about this market because it does not 
involve publicly available contracts and does not show up in standard 
data.
---------------------------------------------------------------------------
Figure 2. Private-Label Mortgage Securitization Structure \23\
---------------------------------------------------------------------------
    \23\ See ACE Sec. Corp. Home Equity Loan Trust, Series 2006-NC3, 
Prospectus Supplement (Form 424B5) S-11 (Nov. 21, 2006), available at 
http://www.sec.gov/Archives/edgar/data/1380884/000114420406049985/
v058926_424b5.htm.


B. THE MORTGAGE SERVICING BUSINESS \24\
---------------------------------------------------------------------------
    \24\ This section of my testimony comes from Adam J. Levitin & 
Larry Cordell, What RMBS Servicing Can Learn from CMBS Servicing, 
working paper, November 2010.
---------------------------------------------------------------------------
    The nature of the servicing business in general militates toward 
economies of scale and automation. Servicing combines three distinct 
lines of business: transaction processing, default management, and loss 
mitigation. Transaction processing is a highly automatable business, 
characterized by large economies of scale. Default management involves 
collections and activities related to taking defaulted loans through 
foreclosure. Like transaction processing, default management can be 
automated,\25\ as it does not require any negotiation with the 
homeowner, insurers, or junior lienholders.\26\
---------------------------------------------------------------------------
    \25\ See In re Taylor, 407 B.R. 618 (Bankr. E.D. Pa. 2009), rev'd 
2010 WL 624909 (E.D. Pa. 2010).
    \26\ Arguably servicers have a fourth line of business--the 
management of real estate owned (REO). REO are foreclosed properties 
that were not purchased by third-parties at the foreclosure sale. REO 
management involves caring for and marketing the REO. It does not 
require negotiations with the homeowner (who is evicted) or junior 
lienholders (whose liens are generally extinguished by the 
foreclosure).
---------------------------------------------------------------------------
    Loss mitigation is considered an alternative to foreclosure, and 
includes activities such as repayment plans, loan modifications, short 
sales and deeds in lieu of foreclosure. Loss mitigation is always a 
negotiated process and is therefore labor-intensive and expensive. Not 
only must the homeowner be agreeable to any loss mitigation solution, 
but so too must mortgage insurers and junior lienholders if they are 
parties on the loan. Because each negotiation is separate and requires 
a trained employee, there are very few opportunities for automation or 
economies of scale. Labor expenses are also considered overhead, which 
are all non-reimbursable expenses to servicers. And, to the extent that 
loss mitigation is in the form of a loan modification, redefault and 
self-cure risk always lurk in the background. Moreover, loss mitigation 
must generally be conducted in addition to default management; the 
servicer must proceed with foreclosure even if attempting to find an 
alternative, so the cost of loss mitigation is additive. Yet, while 
taking a loan through foreclosure is likely to involve lower costs than 
pursuing loss mitigation, it may not ultimately maximize value for RMBS 
investors because loss severities in foreclosure can easily surpass 
those on a re-performing restructured loan.
    The balance between these different parts of a servicer's business 
changes over the course of the housing cycle. When the housing market 
is strong, the transaction processing dominates the servicing business, 
but when the housing market is weak, default management and loss 
mitigation become more important.
    The very short weighted average life (WAL) of RMBS trusts combined 
with very low defaults in most economic environments encouraged 
servicers to place disproportionate weight on performing loan 
servicing, which historically has been characterized by small servicing 
fees and enormous economies of scale. Thus, on a typical loan balance 
of $200,000 today, a servicer might earn between $500 and $1,000 per 
year.\27\ Given the low-level of annual income per loan, the short WAL 
of each loan, and low default rates in most economic environments 
before 2006, servicers had few incentives to devote resources to loss 
mitigation, but large incentives to invest in performing loan 
automation to capture the large economies of scale. This left servicers 
wholly unprepared for the elevated level of defaults that began in 
2007.
---------------------------------------------------------------------------
    \27\ Servicing fees are generally 25-50 bps, which translates into 
$500-$1,000 per year in servicing fees.
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C. RMBS SERVICER COMPENSATION
    RMBS servicers' duties and compensation are set forth in a document 
called a ``Pooling and Servicing'' agreement (PSA) also governs the 
rights of the RMBS certificate holders. RMBS servicers are compensated 
in four ways. First, they receive a ``servicing fee,'' which is a flat 
fee of 25-50 basis points (bps) and is a first priority payment in the 
RMBS trust.\28\ This is by far the greatest portion of servicer income. 
This fee is paid out proportionately across all loans regardless of 
servicer costs through the economic cycle.
---------------------------------------------------------------------------
    \28\ Generally the servicing fee is 25 bps for conventional fixed-
rate mortgages, 37.5 bps for conventional ARM loans, 44 bps for 
Government loans and 50 bps for subprime.
---------------------------------------------------------------------------
    Second, servicers earn ``float'' income. Servicers generally 
collect mortgage payments at the beginning of the month, but are not 
required to remit the payments to the trust until the 25th of the 
month. In the interim, servicers invest the funds they have collected 
from the mortgagors, and they retain all investment income. Servicers 
can also obtain float income from escrow balances collected monthly 
from borrowers to pay taxes and insurance during the course of the 
year.
    Third, servicers are generally permitted to retain all ancillary 
fees they can collect from mortgagors. This includes things like late 
fees and fees for balance checks or telephone payments. It also 
includes fees for expenses involved in handling defaulted mortgages, 
such as inspecting the property. Finally, servicers can hold securities 
themselves directly as investors, and often hold the junior-most, 
residual tranche in the securitization.
    Servicers face several costs. In addition to the operational 
expenses of sending out billing statements, processing payments, 
maintaining account balances and histories, and restructuring or 
liquidating defaulted loans, private label RMBS servicers face the 
expense of ``servicing advances.''\29\ When a loan defaults, the 
servicer is responsible for advancing the missed payments of principal 
and interest to the trust as well as paying taxes and insurance on the 
property. They continue to pay clear through liquidation of the 
property, unless these advances are not deemed recoverable.
---------------------------------------------------------------------------
    \29\ In Agency securities, servicers generally stop advancing after 
borrowers owe their fifth payment, at 120 days past due. For GSE loans, 
they are then removed from the securities and taken on balance sheet. 
Servicer advances for the four payments are typically not reimbursed 
until termination.
---------------------------------------------------------------------------
    The servicer is able to recover advances it has made either from 
liquidation proceeds or from collections on other loans in the pool, 
but the RMBS servicer does not receive interest on its advances. 
Therefore, advances can be quite costly to servicers in terms of the 
time value of money and can also place major strains on servicers' 
liquidity, as the obligation to make advances continues until the loan 
is liquidated or the servicer believes that it is unlikely to be able 
to recover the advances. In some cases, servicers have to advance 
years' worth of mortgage payments to the trust.
    While RMBS servicers do not receive interest on servicing advances, 
they are compensated for their ``out-of-pocket'' expenses. This 
includes any expenses spent on preserving the collateral property, 
including force-placed insurance, legal fees, and other foreclosure-
related expenses. Large servicers frequently ``in-source'' default 
management expenses to their affiliates.

D. MONITORING OF RMBS SERVICERS
    RMBS servicing arrangements present a classic principal-agent 
problem wherein the agent's incentives are not aligned with the 
principal and the principal has limited ability to monitor or 
discipline the agent.

1. Investors
    Investors are poorly situated to monitor servicer behavior because 
they do not have direct dealings with the servicer. RMBS investors lack 
information about servicer loss mitigation activity. Investors do not 
have access to detailed servicer expense reports or the ability to 
examine loss mitigation decisions. Investors are able to see only the 
ultimate outcome. This means that investors are limited in their 
ability to evaluate servicers' performance on an ongoing basis. And 
even if investors were able to detect unfaithful agents, they have 
little ability to discipline them short of litigation.\30\
---------------------------------------------------------------------------
    \30\ Investors also arguably lack a strong incentive to care about 
servicer performance. See Levitin & Twomey, supra note __. (Noting that 
resecuritization and investor optimism bias means that investors are 
likely to either be invested only derivatively in subordinated tranches 
or believe that they have selected a tranche that will be ``in-the-
money'' and therefore unaffected by marginal changes in servicer 
behavior).
---------------------------------------------------------------------------
2. Trustees
    RMBS feature a trustee, but the name is deceptive. The trustee is 
not a common law trustee with general fiduciary duties. Instead, it is 
a limited purpose corporate trustee whose duties depend on whether 
there has been a default as defined U.N. the PSA. A failure to pay all 
tranches their regularly scheduled principal and interest payments is 
not an event of default. Instead, default relates to the financial 
condition of the servicer, whether the servicer has made required 
advances to the trust, whether the servicer has submitted its monthly 
report, and whether the servicer has failed to meet any of its 
covenants under the PSA.
    Generally, before there is an event of default, the trustee has a 
few specifically assigned ministerial duties and no others.\31\ These 
duties are typically transmitting funds from the trust to the RMBS 
investors and providing investors performance statements based on 
figures provided by the servicer. The trustee's pre-default duties do 
not include active monitoring of the servicer.
---------------------------------------------------------------------------
    \31\ See, e.g., Wells Fargo Mortgage Backed Securities 2006-AR10 
Trust  8.01 (``Prior to the occurrence of an Event of Default of which 
a Responsible Officer of the Trustee shall have actual knowledge and 
after the curing of all such Events of Default which may have occurred, 
the duties and obligations of the Trustee shall be determined solely by 
the express provisions of this Agreement, the Trustee shall not be 
liable except for the performance of such duties and obligations as are 
specifically set forth in this Agreement, no implied covenants or 
obligations shall be read into this Agreement against the Trustee and, 
in the absence of bad faith on the part of the Trustee, the Trustee may 
conclusively rely, as to the truth of the statements and the 
correctness of the opinions expressed therein, upon any certificates or 
opinions furnished to the Trustee, and conforming to the requirements 
of this Agreement.''). See also Moody's Investor Service, Structured 
Finance Ratings Methodology: Moody's Re-examines Trustees' Role in ABS 
and RMBS, Feb. 4, 2003, at 4. (noting ``Some trustees have argued that 
their responsibilities are limited to strictly administrative functions 
as detailed in the transaction documents and that they have no 
``fiduciary'' duty prior to an event of default.'').
---------------------------------------------------------------------------
    Trustees are generally entitled to rely on servicers' data 
reporting, and have little obligation to analyze it.\32\ Indeed, as 
Moody's has noted, trustees lack the ability to verify most data 
reported by servicers; at best they can ensure that the reported data 
complies with any applicable covenant ratios:
---------------------------------------------------------------------------
    \32\ MBIA Ins. Corp. v. Royal Indem. Co., 519 F. Supp. 2d 455 
(2007), aff'd 321 Fed. Appx. 146 (3d Cir. 2009) (``Royal argues that 
Wells Fargo [the trustee] had the contractual obligation to analyze 
data using certain financial accounting principles and to detect any 
anomalies that analysis might have uncovered. As Royal suggests, this 
analysis may not have been very labor-intensive. Yet, the contract did 
not call for any analysis at all. It simply required Wells Fargo to 
perform rote comparisons between that data and data contained in 
various other sources, and to report any numerical inconsistencies. 
Wells Fargo did just that.'').

        The trustee is not in a position to verify certain of the 
        numbers reported by the servicer. For example, the amount of 
        delinquent receivables and the amount of receivables charged 
        off in a given month are figures that are taken from the 
        servicer's own computer systems. While these numbers could be 
        verified by an auditor, they are not verifiable by the 
        trustee.\33\
---------------------------------------------------------------------------
    \33\ Moody's Investor Service, supra note 31, at 4.

---------------------------------------------------------------------------
    Likewise, as attorney Susan Macaulay has observed:

        In most cases, even if the servicer reports are incorrect, or 
        even fraudulent, absent manifest error, the trustee simply has 
        no way of knowing that there is a problem, and must allocate 
        the funds into the appropriate accounts, and make the mandated 
        distributions, in accordance with the servicer reports.''\34\

    \34\ Susan J. Macaulay, U.S.: The Role of the Securitisation 
Trustee, Global Securitisation and Structured Finance 2004. Macaulay 
further notes that:

    It is almost always an event of default under the indenture if the 
trustee does not receive a servicer report within a specified period of 
time, and the trustee must typically report such a failure to the 
investors, any credit enhancement provider, the rating agencies and 
others. However, the trustee generally has no duties beyond that with 
respect to the contents of the report, although under the TIA, the 
trustee must review any reports furnished to it to determine whether 
there is any violation of the terms of the indenture. Presumably this 
would include verifying that any ratios represented in any reports 
conform to financial covenants contained in the indenture, etc. It 
would not however, require the trustee to go beyond the face of the 
report, i.e., to conduct further investigation to determine whether the 
data underlying the information on the reports presented to it were, in 
fact, true. Virtually all indentures, whether or not governed by the 
TIA, explicitly permit the trustee to rely on statements made to the 
trustee in officers' certificates, opinions of counsel and documents 
delivered to the trustee in the manner specified within the indenture.
    Id.

    Similarly, trustees usually wait for servicers to notify them of 
defaults,\35\ and Moody's has noted that trustees are often 
unresponsive to information from third parties indicating that an 
unreported default might have occurred.\36\ Thus, trustees enforce 
servicer representations and warranties largely on the honor system of 
servicer self-reporting.
---------------------------------------------------------------------------
    \35\ Moody's Investor Service, supra note 31, at 4.
    \36\ Id.
---------------------------------------------------------------------------
    For private-label securities, trustees also lack the incentive to 
engage in more vigorous monitoring of servicer loss mitigation 
decisions. The trustee does not get paid more for more vigorous 
monitoring. The trustee generally has little ability to discipline the 
servicer except for litigation. Private-label RMBS trustees have almost 
no ability to fire or discipline a servicer. Servicers can only be 
dismissed for specified acts, and these acts are typically limited to 
the servicer's insolvency or failure to remit funds to the trust. 
Occasionally servicers may be dismissed if default levels exceed 
particular thresholds.
    Trustees also have no interest in seeing a servicer dismissed 
because they often are required to step in as back-up servicer.\37\ In 
the event of a servicer default, the trustee takes over as servicer 
(which includes the option of subcontracting the duties), and assumes 
the duty of making servicing advances to the trust. The back-up 
servicer role is essentially an insurance policy for investors, and 
activation of that role is equivalent to payment on a claim; a trustee 
that has to act as a back-up servicer is likely to lose money in the 
process, especially when some of the trustees do not themselves own 
servicing operations.
---------------------------------------------------------------------------
    \37\ Eric Gross, Portfolio Management: The Evolution of Backup 
Servicing, Portfolio Financial Servicing Company (PFSC) (July 11, 2002) 
at http://www.securitization.net/knowledge/article.asp?id=147&aid=2047.
---------------------------------------------------------------------------
    Trustees also often have close relationships with particular 
servicers. For example, Professor Tara Twomey and I have shown that 
Bank of America/Countrywide accounts for nearly two-thirds of Deutsche 
Bank's RMBS trustee business.\38\ In such circumstances, trustees are 
unlikely to engage in meaningful monitoring and disciplining of 
servicers.\39\ Amherst Securities points out that early payment default 
provisions are not effectively enforced by trustees, to the point where 
in cases where borrowers did not make a single payment on the mortgage, 
only 37 percent were purchased out of the trust, much smaller amounts 
for loans making only one to six payments.\40\ Thus, for private-label 
RMBS, there is virtually no supervision of servicers.\41\
---------------------------------------------------------------------------
    \38\ Levitin & Twomey, supra note __.
    \39\ See Ellington Credit Fund, Ltd. v. Select Portfolio, Inc., No. 
1:07-cv-00421-LY, W.D. Tex., Plaintiffs' First Amended Complaint, July 
10, 2007 (RMBS residual tranche holder alleging that trustee was aware 
that servicer was in violation of PSA and failed to act).
    \40\ See Amherst Mortgage Insight, supra note __, at 15.
    \41\ For MBS with separate master and primary servicers, the master 
servicer may monitor the primary servicer(s), but often the master and 
primary servicers are the same entity.
---------------------------------------------------------------------------
    GSE and Ginnie Mae securitization have greater oversight of 
servicers. The GSEs serve as master servicers on most of their RMBS; 
they therefore have a greater ability to monitor servicer compliance. 
The GSEs require servicers to foreclose according to detailed 
timelines, and servicers that fail to comply face monetary penalties. 
Recognizing the benefits inherent in effective loss mitigation, Fannie 
Mae places staff directly in all of the largest servicer shops to work 
alongside loss mitigation staff at their servicers.\42\ Freddie Mac 
constructed servicer performance profiles to directly monitor 
servicers, sharing results directly with servicers and rating agencies. 
Since each GSE insures against credit losses on the loans, their 
ongoing monitoring provides consistent rules and a single point of 
contact to approve workout packages and grant exceptions, something 
absent in private label RMBS.
---------------------------------------------------------------------------
    \42\ PMI insurers have recently started to embed staff in servicer 
shops to monitor loss mitigation efforts. Harry Terris & Kate Berry, In 
the Trenches, Am. Banker, Aug. 27, 2009.
---------------------------------------------------------------------------
3. Ratings and Reputation
    Like any repeat transaction business, servicers are concerned about 
their reputations. But reputational sanctions have only very weak 
discipline on servicer behavior.
    While Regulation AB requires servicers to disclose information 
about their experience and practices,\43\ they are not required to 
disclose information about performance of past pools they have 
serviced. In any event, reputational sanctions are ineffective because 
loss severities are more likely to be attributed to underwriting 
quality than to servicing decisions. Rating agencies also produce 
servicer ratings, but these ratings are a compilation of the evaluation 
of servicers on a multitude of characteristics. Rating agencies have 
been known to incorporate features of Freddie Mac's servicer 
performance profiles in their servicer assessments and to incorporate 
loss mitigation performance into their ratings. But details of their 
methodology used to measure these assessments are not disclosed. They 
give no indication of whether a servicer is likely to make loss 
mitigation decisions based solely on the interests of the 
securitization trust. Ratings are also combined with other criteria, 
such as the servicer's own financial strength and operational capacity. 
In other words, servicer ratings go to the question of whether a 
servicer will have to be replaced because it is insolvent or lacks the 
ability to service the loans, with much less weight given to whether 
the servicer acts in the investors' interests.
---------------------------------------------------------------------------
    \43\ 17 C.F.R. Sec.  229.1108.
---------------------------------------------------------------------------
C. THE MORTGAGE CONTRACT AND FORECLOSURE PROCESS
    The mortgage contract consists of two documents, a promissory note 
(the ``note'' or the ``mortgage loan'') and a security instrument (the 
``mortgage'' or the ``deed of trust'').\44\ The note is the IOU that 
contains the borrower's promise to repay the money loaned. If the note 
is a negotiable instrument, meaning that it complies with the 
requirements for negotiability in Article 3 of the Uniform Commercial 
Code,\45\ then the original physical note is itself the right to 
payment.\46\
---------------------------------------------------------------------------
    \44\ The note and the mortgage can be combined in a single 
document, but that is not common practice, both because the mortgage 
can be granted subsequent to the creation of the debt and because of 
borrower privacy concerns about the terms of the note, which would 
become public if the note and mortgage were combined and recorded in 
local property records.
    \45\ See UCC 3-104.
    \46\ UCC 3-203, Cmt. 1 (``An instrument is a reified right to 
payment. The right is represented by the instrument itself.'').
---------------------------------------------------------------------------
    The mortgage is the document that connects the IOU with the house. 
The mortgage gives the lender a contingent right to the house; it 
provides that if the borrower does not pay according to the terms of 
the note, then the lender can foreclose and have the property sold 
according to the terms of the mortgage and applicable State and Federal 
law. The applicable law governing foreclosures is State law.\47\
---------------------------------------------------------------------------
    \47\ There is a Federal foreclosure statute that can be utilized by 
FHA.
---------------------------------------------------------------------------
    State real estate law, including foreclosure law, is non-uniform, 
making it difficult to State what the law is as a generic matter; there 
is always the possibility that some jurisdictions may deviate from the 
majority rule. That said, no State requires a borrower's note to be 
recorded in local land records for the note to be valid, and, as a 
general matter, State law does not require the mortgage to be recorded 
either in order for the mortgage to be enforceable against the 
borrower. Recording of the mortgage is necessary, however, to establish 
the mortgage's priority relative to the claims of other parties, 
including other mortgagees, judgment lien creditors and tax and 
workmen's liens against the property. The basic rule of priority is 
first in time, first in right; the first mortgage to be recorded has 
senior priority. An unrecorded mortgage will thus, generally have 
junior priority to a subsequently issued, but recorded mortgage. The 
difference between enforceability and priority is an important one, 
discussed in more detail below, in the section of this testimony 
dealing with MERS.
    State law on foreclosures is also non-uniform. Roughly, however, 
States can be divided into two groups: those where foreclosure actions 
are conducted through the courts (``judicial foreclosure'') and those 
where foreclosure actions are conducted by private sales (``non-
judicial foreclosure''). This division maps, imperfectly, with whether 
the preferred security instrument is a mortgage or a deed of trust.\48\
---------------------------------------------------------------------------
    \48\ Mortgages sometimes also include a power of sale, permitting 
non-judicial foreclosure. In a deed of trust, the deed to the property 
is transferred in trust for the noteholder to a deed of trust trustee, 
often a local attorney. The note remains the property of the lender 
(the deed of trust beneficiary). When there is a default on the note, 
the lender notifies the deed of trust trustee and the lender or its 
agent is typically appointed as substitute deed of trust trustee to run 
the foreclosure sale.
---------------------------------------------------------------------------
    Mortgage loans cost more in States that have judicial foreclosure; 
what this means is that borrowers in judicial foreclosure States are 
paying more for additional procedural rights and legal protections; 
those procedural rights are part of the mortgage contract; failure to 
honor them is a breach of the mortgage contract. Note, that a default 
on the mortgage note is not a breach of the contract per se; instead it 
merely triggers the lender's right to foreclose per the applicable 
procedure.
    In a typical judicial foreclosure proceeding, the homeowner 
receives a notice of default and if that default is not cured within 
the required period, the mortgagee then files a foreclosure action in 
court. The action is commenced by the filing of a written complaint 
that sets forth the mortgagee's allegations that the homeowner owes a 
debt that is secured by a mortgage and that the homeowner has defaulted 
on the debt. Rules of civil procedure generally require that legal 
actions based upon a writing include a copy of the writing as an 
attachment to the complaint, although there is sometimes an exception 
for writings that are available in the public records. While the 
mortgage is generally filed in the public records, assignments of the 
mortgage are often not (an issue complicated by MERS, discussed below), 
and the note is almost never a matter of public record.
    It is important to understand that most judicial foreclosures do 
not function like the sort of judicial proceeding that is dramatized on 
television, in which all parties to the case appear in court, 
represented by attorneys and judgment only follows a lengthy trial. 
Instead, the norm in foreclosure cases is a default judgment. Most 
borrowers do not appear in court or contest their foreclosures, and not 
all of those who do are represented by competent counsel, not least 
because of the difficulties in paying for counsel. Most borrowers that 
the borrower does not contest the foreclosure or appear in court. In 
most cases, only the lender's attorney appears, and judges routinely 
dispatch dozens or hundreds of foreclosure cases in a sitting. 
Homeowners in foreclosure actions are among the most vulnerable of 
defendants, the least able to insist up on and vindicate their rights, 
and accordingly the ones most susceptible to abuse of legal process.

II. PROCEDURAL PROBLEMS AND FRAUD
    The first type of problems in the mortgage market are what might 
generously be termed ``procedural defects'' or ``procedural 
irregularities.'' There are numerous such problems that have come to 
light in foreclosure cases. The extent and distribution of these 
irregularities is not yet known. No one has compiled a complete 
typology of procedural defects in foreclosures; there are, to use 
Donald Rumsfeld's phrase, certainly ``known unknowns'' and well as 
``unknown unknowns.''

A. AFFIDAVITS FILED WITHOUT PERSONAL KNOWLEDGE (ROBOSIGNING)
    Affidavits need to be based on personal knowledge to have any 
evidentiary effect; absent personal knowledge an affidavit is hearsay 
and therefore generally inadmissible as evidence. Accordingly, 
affidavits attest to personal knowledge of the facts alleged therein.
    The most common type of affidavit is an attestation about the 
existence and status of the loan, namely that the homeowner owes a 
debt, how much is currently owed, and that the homeowner has defaulted 
on the loan. (Other types of affidavits are discussed in sections II.B. 
and II.C., infra). Such an affidavit is typically sworn out by an 
employee of a servicer (or sometimes by a law firm working for a 
servicer). Personal knowledge for such an affidavit would involve, at 
the very least, examining the payment history for a loan in the 
servicer's computer system and checking it against the facts alleged in 
a complaint.
    The problem with affidavits filed in many foreclosure cases is that 
the affiant lacks any personal knowledge of the facts alleged 
whatsoever. Many servicers, including Bank of America, Citibank, 
JPMorgan Chase, Wells Fargo, and GMAC, employ professional affiants, 
some of whom appear to have no other duties than to sign affidavits. 
These employees cannot possibly have personal knowledge of the facts in 
their affidavits. One GMAC employee, Jeffrey Stephan, stated in a 
deposition that he signed perhaps 10,000 affidavits in a month, or 
approximately one a minute for a 40-hour work week.\49\ For a 
servicer's employee to ascertain payment histories in a high volume of 
individual cases is simply impossible.
---------------------------------------------------------------------------
    \49\ See Deposition of Jeffrey Stephan, GMAC Mortgage LLC v. Ann M. 
Neu a/k/a Ann Michelle Perez, No. 50 2008 CA 040805XXXX MB, (15th 
Judicial Circuit, Florida, Dec. 10, 2009) at 7, available at http://
api.ning.com/files/s4SMwlZXvPu4A7kq7XQUsGW9xEcYtqNMPCm0a2hISJ
u88PoY6ZNqanX7XK41Fyf9gV8JIHDme7KcFO2cvHqSEMcplJ8vwnDT/
091210gmacmortgagevs-
annmneu1.pdf (stating that Jeffrey Stephan, a GMAC employee, signed 
approximately 10,000 affidavits a month for foreclosure cases).
---------------------------------------------------------------------------
    When a servicer files an affidavit that claims to be based on 
personal knowledge, but is not in fact based on personal knowledge, the 
servicer is committing a fraud on the court, and quite possibly 
perjury. The existence of foreclosures based on fraudulent pleadings 
raises the question of the validity of foreclosure judgments and 
therefore title on properties, particularly if they are still in real 
estate owned (REO).

B. LOST NOTE AFFIDAVITS FOR NOTES THAT ARE NOT LOST
    The plaintiff in a foreclosure action is generally required to 
produce the note as evidence that it has standing to foreclose. 
Moreover, under the Uniform Commercial Code, if the note is a 
negotiable instrument, only a holder of the note (or a subrogee)--that 
is a party in possession of the note--may enforce the note, as the note 
is the reified right to payment.\50\
---------------------------------------------------------------------------
    \50\ UCC 3-301; 1-201(b)(21) (defining ``holder'').
---------------------------------------------------------------------------
    There is an exception, however, for lost, destroyed, or stolen 
notes, which permits a party that has lost possession of a note to 
enforce it.\51\ If a plaintiff seeks to enforce a lost note, it is 
necessary ``to prove the terms of the instrument'' as well as the 
``right to enforce the instrument.''\52\ This proof is typically 
offered in the form of a lost note affidavit that attests to the prior 
existence of the note, the terms of the note, and that the note has 
been lost.
---------------------------------------------------------------------------
    \51\ UCC 3-309. Note that UCC 3-309 was amended in the 2001 
revision of Article 3. The revision made it easier to enforce a lost 
note. Not every State has adopted the 2001 revisions. Therefore, UCC 3-
309 is non-uniform law.
    \52\ UCC 3-309(b).
---------------------------------------------------------------------------
    It appears that a surprisingly large number of lost note affidavits 
are filed in foreclosure cases. In Broward County, Florida alone, over 
2000 such affidavits were filed in 2008-2009.\53\ Relative to the 
national population, that translates to roughly 116,000 lost note 
affidavits nationally over the same period.\54\
---------------------------------------------------------------------------
    \53\ Cite NY Times.
    \54\ According to the U.S. Census Bureau, Broward County's 
population is approximately 1.76 million, making it .57 percent of the 
total U.S. population of 307 million. Broward does have a significantly 
higher than average foreclosure rate, roughly 12 percent over the past 
2 years, according to Core Logic Loan Performance data, making it 
approximately 3 times the national average.
---------------------------------------------------------------------------
    There are two problems with the filing of many lost note 
affidavits. First, is a lack of personal knowledge. Mortgage servicers 
are rarely in possession of the original note. Instead, the original 
note is maintained in the fireproof vault of the securitization 
trustee's document custodian. This means that the servicer lacks 
personal knowledge about whether a note has or has not been lost.\55\ 
Merely reporting a communication from the document custodian would be 
hearsay and likely inadmissible as evidence.
---------------------------------------------------------------------------
    \55\ The 2001 version of UCC 3-309 permits not only a party that 
has lost a note but a buyer from such a party to enforce a lost note.
---------------------------------------------------------------------------
    The second problem is that the original note is frequently not in 
fact lost. Instead, it is in the document custodian's vault. Servicers 
do not want to pay the document custodian a fee (of perhaps $30) to 
release the original mortgage, and servicers are also wary of 
entrusting the original note to the law firms they hire. Substitution 
of counsel is not infrequent on defaulted mortgages, and servicers are 
worried that the original note will get lost in the paperwork shuffle 
if there is a change in counsel. When pressed, however, servicers will 
often produce the original note, months after filing lost note 
affidavits. The Uniform Commercial Code (UCC) requires that a party 
seeking to enforce a note be a holder (or subrogee to a holder) or 
produce evidence that a note has been lost, destroyed, or stolen; the 
UCC never contemplates an ``inconvenience affidavit'' that states that 
it is too much trouble for a servicer to bother obtaining the original 
note. But that is precisely what many lost note affidavits are 
effectively claiming.
    Thus, many lost note affidavits are doubly defective: they are 
sworn out by a party that does not and cannot have personal knowledge 
of the alleged facts and the facts being alleged are often false as the 
note is not in fact lost, but the servicer simply does not want to 
bother obtaining it.

C. JUNK FEES
    The costs of foreclosure actions are initially incurred by 
servicers, but servicers recover these fees off the top from 
foreclosure sale proceeds before MBS investors are paid. This 
reimbursement structure limits servicers' incentive to rein in costs 
and actually incentives them to pad the costs of foreclosure. This is 
done in two ways. First, servicers charge so-called ``junk fees'' 
either for unnecessary work or for work that was simply never done. 
Thus, Professor Kurt Eggert has noted a variety of abusive servicing 
practices, including ``improper foreclosures or attempted foreclosures; 
imposition of improper fees, especially late fees; forced-placed 
insurance that is not required or called for; and misuse of escrow 
funds.''\56\ Servicers' ability to retain foreclosure-related fees has 
even led them to attempt to foreclose on properties when the homeowners 
are current on the mortgage or without attempting any sort of repayment 
plan.\57\ Consistently, Professor Katherine Porter has documented that 
when mortgage creditors file claims in bankruptcy, they generally list 
amounts owed that are much higher than those scheduled by debtors.\58\
---------------------------------------------------------------------------
    \56\ Kurt Eggert, Comment on Michael A. Stegman et al.'s 
``Preventive Servicing Is Good for Business and Affordable 
Homeownership Policy'': What Prevents Loan Modifications?, 18 Housing 
Policy Debate 279 (2007).
    \57\ Eggert, Limiting Abuse, supra note 21, at 757.
    \58\ Katherine M. Porter, Mortgage Misbehavior, 87 Tex. L. Rev. 
121, 162 (2008).
---------------------------------------------------------------------------
    There is also growing evidence of servicers requesting payment for 
services not performed or for which there was no contractual right to 
payment. For example, in one particularly egregious case from 2008, 
Wells Fargo filed a claim in the borrower's bankruptcy case that 
included the costs of two brokers' price opinions allegedly obtained in 
September 2005, on a property in Jefferson Parish, Louisiana when the 
entire Parish was under an evacuation order due to Hurricane 
Katrina.\59\
---------------------------------------------------------------------------
    \59\ In re Stewart, 391 B.R. 327, 355 (Bankr. E.D. La. 2008).
---------------------------------------------------------------------------
    Similarly, there is a frequent problem of so-called ``sewer 
summons'' issued (or actually not issued) to homeowners in 
foreclosures. Among the costs of foreclosure actions is serving notice 
of the foreclosure (a court summons) on the homeowner. There is 
disturbing evidence that homeowners are being charged for summons that 
were never issued. These non-delivered summons are known as ``sewer 
summons'' after their actual delivery destination.
    One way in which these non-existent summons are documented is 
through the filing of ``affidavits of lost summons'' by process servers 
working for the foreclosure attorneys hired by mortgage servicers. A 
recent article reports that in Duval County, Florida (Jacksonville) the 
number of affidavits of lost summons has ballooned from 1,031 from 
2000-2006 to over 4,000 in the last 2 years, a suspiciously large 
increase that corresponds with a sharp uptick in foreclosures.\60\
---------------------------------------------------------------------------
    \60\ Matt Taibi, Courts Helping Banks Screw Over Homeowners, 
Rolling Stone, Nov. 25, 2010, at http://www.rollingstone.com/politics/
news/17390/232611?RS_show_page=7.
---------------------------------------------------------------------------
    Because of concerns about illegal fees, the United States Trustee's 
Office has undertaken several investigations of servicers' false claims 
in bankruptcy \61\ and brought suit against Countrywide,\62\ while the 
Texas Attorney General has sued American Home Mortgage Servicing for 
illegal debt collection practices.\63\
---------------------------------------------------------------------------
    \61\ Ashby Jones, U.S. Trustee Program Playing Tough With 
Countrywide, Others, Law Blog (Dec. 3, 2007, 10:01 AM), http://
blogs.wsj.com/law/2007/12/03/us-trustee-program-playing-tough-with-
countrywide-others.
    \62\ Complaint, Walton v. Countrywide Home Loans, Inc. (In re 
Atchely), No. 05-79232 (Bankr. N.D. Ga. filed Feb. 28, 2008).
    \63\ Complaint, State v. Am. Home Mtg. Servicing, Inc., No. 2010-
3307 (Tex. Dist. Ct. 448th Jud. Dist. filed Aug. 30, 2010).
---------------------------------------------------------------------------
    The other way in which servicers pad the costs of foreclosure is by 
in-sourcing their expenses to affiliates at above-market rates. For 
example, Countrywide, the largest RMBS servicer, force places insurance 
on defaulted properties with its captive insurance affiliate 
Balboa.\64\ Countrywide has been accused of deliberately extending the 
time to foreclosure in order to increase the insurance premiums paid to 
its affiliate, all of which are reimbursable by the trust, before the 
RMBS investors' claims are paid.\65\ Similarly, Countrywide in-sources 
trustee services in deed of trust foreclosures to its subsidiary Recon 
Trust.\66\
---------------------------------------------------------------------------
    \64\ Amherst Mortgage Securities, supra note__, at 23.
    \65\ Id.
    \66\ Center for Responsible Lending, Unfair and Unsafe: How 
Countrywide's irresponsible practices have harmed borrowers and 
shareholders, CRL Issue Paper, Feb. 7, 2008, at 6-7.
---------------------------------------------------------------------------
    Thus, in Countrywide's 2007 third quarter earnings call, 
Countrywide's President David Sambol emphasized that increased revenue 
from in-sourced default management functions could offset losses from 
mortgage defaults.

        Now, we are frequently asked what the impact on our servicing 
        costs and earnings will be from increased delinquencies and 
        loss mitigation efforts, and what happens to costs. And what we 
        point out is, as I will now, is that increased operating 
        expenses in times like this tend to be fully offset by 
        increases in ancillary income in our servicing operation, 
        greater fee income from items like late charges, and 
        importantly from in-sourced vendor functions that represent 
        part of our diversification strategy, a counter-cyclical 
        diversification strategy such as our businesses involved in 
        foreclosure trustee and default title services and property 
        inspection services.\67\
---------------------------------------------------------------------------
    \67\ Transcript, ``Countrywide Financial Corporation Q3 2007 
Earnings Call,'' Oct. 26, 2007 (emphasis added) (also mentioning ``Our 
vertical diversification businesses, some of which I mentioned, are 
counter-cyclical to credit cycles, like the lender-placed property 
business in Balboa and like the in-source vendor businesses in our loan 
administration unit.'').

    In June, 2010, Countrywide settled with the FTC for $108 million on 
charges that it overcharged delinquent homeowners for default 
---------------------------------------------------------------------------
management services. According to the FTC:

        Countrywide ordered property inspections, lawn mowing, and 
        other services meant to protect the lender's interest in the 
        property. But rather than simply hire third-party vendors to 
        perform the services, Countrywide created subsidiaries to hire 
        the vendors. The subsidiaries marked up the price of the 
        services charged by the vendors--often by 100 percent or more--
        and Countrywide then charged the homeowners the marked-up 
        fees.\68\
---------------------------------------------------------------------------
    \68\ FTC, Press Release, June 7, 2010, Countrywide Will Pay $108 
Million for Overcharging Struggling Homeowners; Loan Servicer Inflated 
Fees, Mishandled Loans of Borrowers in Bankruptcy.

    Among the accusations brought against Countrywide in a recent 
investor notice of default filed by the Federal Reserve Bank of New 
York along with BlackRock and PIMCO, is that Countrywide has been 
padding expenses via in-sourcing on the 115 trusts covered by the 
letter.\69\
---------------------------------------------------------------------------
    \69\ Kathy D. Patrick, Letter to Countrywide Home Loan Servicing LP 
and the Bank of New York, dated Oct. 18, 2010, available at http://
www.scribd.com/Bondholders-Letter-to-BofA-Over-Countrywide-Loans-inc-
NY-fed/d/39686107.
---------------------------------------------------------------------------
    Countrywide is hardly the only servicer accused of acting in its 
interests at the expense of investors. Carrington, another major 
servicer, also owns the residual tranche on many of the deals it 
services. Amherst Mortgage Securities has shown that Carrington has 
been much slower than other servicers to liquidate defaulted loans.\70\ 
Delay benefits Carrington both as a servicer and as the residual 
tranche investor. As a servicer, delay helps Carrington by increasing 
the number of monthly late fees that it can levy on the loans. These 
late fees are paid from liquidation proceeds before any of the MBS 
investors.
---------------------------------------------------------------------------
    \70\ Amherst Mortgage Insight, 2010, ``The Elephant in the Room-
Conflicts of Interest in Residential Mortgage Securitizations'', pp. 
22-24, May 20, 2010.
---------------------------------------------------------------------------
    As an investor in the residual tranche, Carrington has also been 
accused of engaging in excessive modifications to both capture late 
fees and to keep up the excess spread in the deals, as it is paid 
directly to the residual holders.\71\ When loans were mass modified, 
Carrington benefited as the servicer by capitalizing late fees and 
advances into the principal balance of the modified loans, which 
increased the balance on which the servicing fee was calculated. 
Carrington also benefited as the residual holder by keeping up excess 
spread in the deals and delaying delinquency deal triggers that 
restrict payments to residual holders when delinquencies exceed 
specified levels. Assuming that the residual tranche would be out of 
the money upon a timely foreclosure, delay means that Carrington, as 
the residual holder, receives many more months of additional payments 
on the MBS it holds than it otherwise would.\72\
---------------------------------------------------------------------------
    \71\ See Amherst Mortgage Insight, ``Why Investors Should Oppose 
Servicer Safe Harbors'', April 28, 2009. Excess spread is the 
difference between the income of the SPV in a given period and its 
payment obligations on the MBS in that period, essentially the SPV's 
periodic profit. Excess spread is accumulated to supplement future 
shortfalls in the SPV's cash flow, but is either periodically released 
to the residual tranche holder. Generally, as a further protection for 
senior MBS holders, excess spread cannot be released if certain 
triggers occur, like a decline in the amount of excess spread trapped 
in a period beneath a particular threshold.
    \72\ Carrington would still have to make servicing advances on any 
delinquent loans if it stretched out the time before foreclosure, but 
these advances would be reimbursable, and the reimbursement would come 
from senior MBS holders, rather than from Carrington, if it were out of 
the money in the residual.
---------------------------------------------------------------------------
    It is important to emphasize that junk fees on homeowners 
ultimately come out of the pocket of MBS investors. If the homeowner 
lacks sufficient equity in the property to cover the amount owed on the 
loan, including junk fees, then there is a deficiency from the 
foreclosure sale. As many mortgages are legally or functionally non-
recourse, this means that the deficiency cannot be collected from the 
homeowner's other assets. Mortgage servicers recover their expenses off 
the top in foreclosure sales, before MBS investors are paid. Therefore, 
when a servicer lards on illegal fees in a foreclosure, it is stealing 
from investors such as pension plans and the U.S. Government.

D. COMPLAINTS THAT FAIL TO INCLUDE THE NOTE
    Rule of civil procedure generally require that a compliant based on 
a writing include, as an attachment, a copy of a writing. In a 
foreclosure action, this means that both the note and the mortgage and 
any assignments of either must be attached. Beyond the rules of civil 
procedure requirement, these documents are also necessary as an 
evidentiary matter to establish that the plaintiff has standing to 
bring the foreclosure. Some States have exceptions for public records, 
which may be incorporated by reference, but it is not always clear 
whether this exception applies in foreclosure actions. If it does, then 
only the note, which is not a public record, would need to be attached.
    Many foreclosure complaints are facially defective and should be 
dismissed because they fail to attach the note. I have recently 
examined a small sample of foreclosure cases filed in Allegheny County, 
Pennsylvania (Pittsburgh and environs) in May 2010. In over 60 percent 
of those foreclosure filings, the complaint failed to include a copy of 
the note. Failure to attach the note appears to be routine practice for 
some of the foreclosure mill law firms, including two that handle all 
of Bank of America's foreclosures.
    I would urge the Committee to ask Bank of America whether this was 
an issue it examined in its internal review of its foreclosure 
practices.

E. COUNTERFEIT AND ALTERED DOCUMENTS AND NOTARY FRAUD
    Perhaps the most disturbing problem that has appeared in 
foreclosure cases is evidence of counterfeit or altered documents and 
false notarizations. To give some examples, there are cases in which 
multiple copies of the ``true original note'' are filed in the same 
case, with variations in the ``true original note;''\73\ signatures on 
note allonges that have clearly been affixed to documents via 
Photoshop;\74\ ``blue ink'' notarizations that appear in blank ink; 
counterfeit notary seals;\75\ backdated notarizations of documents 
issued before the notary had his or her commission;\76\ and assignments 
that include the words ``bogus assignee for intervening asmts, whose 
address is XXXXXXXXXXXXXXXXX.''\77\
---------------------------------------------------------------------------
    \73\ Brief of Antonio Ibanez, Defendant-Appellee, U.S. Bank Nat'l 
Assn, as Trustee for the Structured Asset Securities Corporation 
Mortgage Pass-Through Certificates, Series 2006-Z v. Ibanez; Wells 
Fargo Bank, N.A. as Trustee for ABFC 2005-Opt 1 Trust, ABFC Asset 
Backed Certificates Series 2005-OPT 1, No 10694, (Mass. Sept. 20, 
2010), at 10 (detailing 3 different ``certified true copies'' of a note 
allonge and of an assignment of a mortgage); http://4closurefraud.org/
2010/04/27/foreclosure-fraud-of-the-week-two-original-wet-ink-notes-
submitted-in-the-same-case-by-the-florida-default-law-group-and-
jpmorgan-chase/ (detailing a foreclosure file with two different 
``original'' wet ink notes for the same loan).
    \74\ http://4closurefraud.org/2010/04/08/foreclosure-fraud-of-the-
week-poor-photoshop-skills/.
    \75\ See WSTB.com, at http://www.wsbtv.com/video/25764145/
index.html.
    \76\ Deposition of Cheryl Samons, Deutsche Bank Nat'l Trust Co., as 
Trustee for Morgan Stanley ABS Capital 1 Inc. Trust 2006-HE4 v. Pierre, 
No. 50-2008-CA-028558-XXXX-MB (15th Judicial Circuit, Florida, May 20, 
2009, available at http://mattweidnerlaw.com/blog/wpcontent/ uploads/
2010/03/depositionsammons.pdf.
    \77\ http://www.nassauclerk.com/clerk/publicrecords/oncoreweb/
showdetails.aspx?id=809395&
rn=0&pi=0&ref=search.
---------------------------------------------------------------------------
    Most worrisome is evidence that these frauds might not be one-off 
problems, but an integral part of the foreclosure business. A price 
sheet from a company called DocEx that was affiliated with LPS, one of 
the largest servicer support firms, lists prices for various services 
including the ``creation'' of notes and mortgages. While I cannot 
confirm the authenticity of this price sheet or date it, it suggests 
that document counterfeiting is hardly exceptional in foreclosure 
cases.
    While the fraud in these cases is not always by servicers 
themselves, but sometimes by servicer support firms or attorneys, its 
existence should raise serious concerns about the integrity of the 
foreclosure process. I would urge the Committee to ask the servicer 
witnesses what steps they have taken to ascertain that they do not have 
such problems with loans in their servicing portfolios.

G. THE EXTENT OF THE PROBLEM
    The critical question for gauging the risk presented by procedural 
defects is the extent of the defects. While Federal Reserve Chairman 
Bernanke has announced that Federal bank regulators are looking into 
the issue and will issue a report this month, I do not believe that it 
is within the ability of Federal bank regulators to gauge the extent of 
procedural defects in foreclosure cases. To do so would require, at the 
very least, an extensive sampling of actual foreclosure filings and 
their examination by appropriately trained personnel. I am unaware of 
Federal bank regulators undertaking an examination of actual 
foreclosure filings, much less having a sufficient cadre of 
appropriately trained personnel. Bank examiners lack the experience or 
training to evaluate legal documents like foreclosure filings. 
Therefore, any statement put forth by Federal regulators on the scope 
of procedural defects is at best a guess and at worse a parroting of 
the ``nothing to see here folks'' line that has come from mortgage 
servicers.
    I would urge the Committee to inquire with Federal regulators as to 
exactly what steps they are taking to examine foreclosure 
irregularities and how they can be sure that those steps will uncover 
the extent of the problem. Similarly, I would urge the Committee to ask 
the servicer witnesses what specific irregularities they examined 
during their self-imposed moratoria and by what process. It defies 
credulity that a thorough investigation of all the potential problems 
in foreclosure paperwork could be completed in a month or two, much 
less by servicers that have taken so long to do a small number of loan 
modifications.

III. CHAIN OF TITLE PROBLEMS
    A second problem and potentially more serious problem relating to 
standing to foreclose is the issue of chain of title in mortgage 
securitizations.\78\ As explained above, securitization involves a 
series of transfers of both the note and the mortgage from originator 
to sponsor to depositor to trust. This particular chain of transfers is 
necessary to ensure that the loans are ``bankruptcy remote'' once they 
have been placed in the trust, meaning that if any of the upstream 
transferors were to file for bankruptcy, the bankruptcy estate could 
not lay claim to the loans in the trust by arguing that the transaction 
was not a true sale, but actually a secured loan.\79\ Bankruptcy 
remoteness is an essential component of private-label mortgage 
securitization deals, as investors want to assume the credit risk 
solely of the mortgages, not of the mortgages' originators or 
securitization sponsors. Absent bankruptcy remoteness, the economics of 
mortgage securitization do not work in most cases.
---------------------------------------------------------------------------
    \78\ Chain of title problems appear to be primarily a problem for 
private-label securitization, not for agency securitization because 
even if title were not properly transferred for Agency securities, it 
would have little consequence. Investors would not have incurred a loss 
as the result of an ineffective transfer, as their MBS are guaranteed 
by the GSEs or Ginnie Mae, and when a loan in an Agency pool defaults, 
it is removed from the pool and the owned by the GSE or Ginnie Mae, 
which is then has standing to foreclose.
    \79\ Bankruptcy remote has a second meaning, namely that the trust 
cannot or will not file of bankruptcy. This testimony uses bankruptcy 
remote solely in the sense of whether the trust's assets could be 
clawed back into a bankruptcy estate via an equity of redemption. The 
Uniform Commercial Code permits a debtor to redeem collateral at face 
value of the debt owed. If a pool of loans bore a now-above-market 
interest rate, the pool's value could be above the face value of the 
debt owed, making redemption economically attractive.
    It can be very difficult to distinguish true sales from secured 
loans. For example, a sale and repurchase agreement (a repo) is 
economically identical to a secured loan from the repo buyer to the 
repo seller, secured by the assets being sold.
---------------------------------------------------------------------------
    Recently, arguments have been raised in foreclosure litigation 
about whether the notes and mortgages were in fact properly transferred 
to the securitization trusts. This is a critical issue because the 
trust has standing to foreclose if, and only if it is the mortgagee. If 
the notes and mortgages were not transferred to the trust, then the 
trust lacks standing to foreclose. There are several different theories 
about the defects in the transfer process; I do not attempt to do 
justice to any of them in this testimony.
    While the chain of title issue has arisen first in foreclosure 
defense cases, it also has profound implications for MBS investors. If 
the notes and mortgages were not properly transferred to the trusts, 
then the mortgage-backed securities that the investors' purchased were 
in fact non-mortgage-backed securities. In such a case, investors would 
have a claim for the rescission of the MBS,\80\ meaning that the 
securitization would be unwound, with investors receiving back their 
original payments at par (possibly with interest at the judgment rate). 
Rescission would mean that the securitization sponsor would have the 
notes and mortgages on its books, meaning that the losses on the loans 
would be the securitization sponsor's, not the MBS investors, and that 
the securitization sponsor would have to have risk-weighted capital for 
the mortgages. If this problem exists on a wide-scale, there is not the 
capital in the financial system to pay for the rescission claims; the 
rescission claims would be in the trillions of dollars, making the 
major banking institutions in the United States would be insolvent.
---------------------------------------------------------------------------
    \80\ This claim would not be a putback claim necessarily, but could 
be brought as a general contract claim. It could not be brought as a 
securities law claim under section 11 of the Securities Act of 1933 
because the statute of limitations for rescission has expired on all 
PLS.
---------------------------------------------------------------------------
    The key questions for evaluating chain of title are what method of 
transferring notes and mortgages is actually supposed to be used in 
securitization and whether that method is legally sufficient both as a 
generic matter and as applied. There is a surprising degree of legal 
uncertainty over these issues, even among banks' attorneys; different 
arguments appear in different litigation. The following section 
outlines the potential methods of transfer and some of the issues that 
arise regarding specific methods. It is critical to emphasize that the 
law is not settled on most of the issues regarding securitization 
transfers; instead, these issues are just starting to be litigated.

A. TRANSFERS OF NOTES AND MORTGAGES
    As a generic matter, a note can be transferred in one of four 
methods:

  (1)  the note can be sold via a contract of sale, which would be 
        governed by the common law of contracts.

  (2)  if the note is a negotiable instrument, it could be negotiated, 
        meaning that it would be transferred via endorsement and 
        delivery, with the process governed by Article 3 of the Uniform 
        Commercial Code (UCC). The endorsement.

  (3)  the note could be converted into an electronic note and 
        transferred according to the provisions of the Federal E-SIGN 
        Act.\81\
---------------------------------------------------------------------------
    \81\ 15 U.S.C. Sec.  7021.

  (4)  The note could be sold pursuant to UCC Article 9. In 49 States 
        (South Carolina being the exception), Article 9 provides a 
        method for selling a promissory note, which requires that there 
        be an authenticated (signed) agreement, value given, and that 
        the seller have rights in the property being transferred.\82\ 
        This process is very similar to a common law sale.
---------------------------------------------------------------------------
    \82\ UCC 9-203. The language of Article 9 is abstruse, but UCC 
Revised Article 1 defines ``security interest'' to include the interest 
of a buyer of a promissory note. UCC 1-201(b)(35). Article 9's 
definition of ``debtor'' includes a seller of a promissory note, UCC 9-
102(a)(28)(B ), and ``secured party'' includes a buyer of a promissory 
note, UCC 9-102(a)(72)(D). Therefore UCC 9-203, which would initially 
appear to address the attachment (enforceability) of a security 
interest also covers the sale of a promissory note. South Carolina has 
not adopted the revised Article 1 definition of security interest 
necessary to make Article 9 apply to sales of promissory notes.

    There is general agreement that as a generic method, any of these 
methods of transfer would work to effectuate a transfer of the note. No 
method is mandatory. Whether or not the chosen process was observed in 
practice, is another matter, however.\83\
---------------------------------------------------------------------------
    \83\ Note that common law sales and Article 9 sales do not affect 
the enforceability of the note against the obligor on the note. UCC 9-
308, Cmt.6, Ex. 3 (``Under this Article, attachment and perfection of a 
security interest in a secured right to payment do not of themselves 
affect the obligation to pay. For example, if the obligation is 
evidenced by a negotiable note, then Article 3 dictates the person to 
whom the maker must pay to discharge the note and any lien security 
it.''). UCC Article 3 negotiation and E-SIGN do affect enforceability 
as they enable a buyer for value in good faith to be a holder in due 
course and thereby cutoff some of the obligor's defenses that could be 
raised against the seller. UCC 3-305, 3-306; 15 U.S.C. Sec.  7021(d).
---------------------------------------------------------------------------
    There are also several conceivable ways to transfer mortgages, but 
there are serious doubts about the validity of some of the methods:

  (1)  the mortgage could be assigned through the traditional common 
        law process, which would require a document of assignment.

     a.  There is general consensus that this process works.

  (2)  the mortgage could be negotiated.

     a.  This method of transfer is of questionable effectiveness. A 
        mortgage is not a negotiable instrument, and concepts of 
        negotiability do not fit well with mortgages. For example, if a 
        mortgage were negotiated in blank, it should become a ``bearer 
        mortgage,'' but this concept is utterly foreign to the law, not 
        least as the thief of a bearer mortgage would have the ability 
        to enforce the mortgage (absent equitable considerations). 
        Similarly, with a bearer mortgage, a homeowner could never 
        figure out who would be required to grant a release of the 
        mortgage upon payoff. And, in many States (so-called title 
        theory states), a mortgage is considered actual ownership of 
        real property, and real property must have a definite owner 
        (not least for taxation purposes).

  (3)  the mortgage could ``follow the note'' per common law.

     a.  Common law is not settled on this point. There are several 
        instances where the mortgage clearly does not follow the note. 
        For example, the basic concept of a deed of trust is that the 
        security instrument and the note are separated; the deed of 
        trust trustee holds the security, while the beneficiary holds 
        the note. Likewise, the mortgage follows the note concept would 
        imply that the theft of a note also constitutes theft of a 
        mortgage, thereby giving to a thief more than the thief was 
        able to actually steal. Another situation would be where a 
        mortgage is given to a guarantor of a debt. The mortgage would 
        not follow the debt, but would (at best) follow the guarantee. 
        And finally, the use of MERS, a recording utility, as original 
        mortgage (a/k/a MOM) splits the note and the mortgage. MERS has 
        no claim to the note, but MERS is the mortgagee. If taken 
        seriously, MOM means that the mortgage does not follow the 
        note. While MERS might claim that MOM just means that the 
        beneficial interest in the mortgage follows the note, a 
        transfer of the legal title would violate a bankruptcy stay and 
        would constitute a voidable preference if done before 
        bankruptcy.
  (4)  the mortgage could ``follow the note'' if it is an Article 9 
        transfer.\84\
---------------------------------------------------------------------------
    \84\ UCC 9-203(g). If the transfer is not an Article 9 transfer, 
then the Article 9 provision providing that the mortgage follows the 
note would not apply.

     a.  There is consensus that this process would work if Article 9 
        governs the transfer of the note.
    Ultimately, there is lack of consensus as to the method of transfer 
that is actually employed in securitization transactions. In theory, 
the proper method should be UCC Article 9 transfer process was adopted 
as part of the 2001 revision of Article 9 with the apparent goal of 
facilitating securitization transactions. Parties are free, however, to 
contract around the UCC.\85\ That is precisely what pooling and 
servicing agreements (PSAs) appear to do. PSAs provide a recital of a 
transfer of the notes and loans to the trust and then they further 
require that the as they set forth specific requirements regarding the 
transfer of the notes and mortgages, namely that there be a complete 
chain of endorsements followed by either a specific endorsement to the 
trustee or an endorsement in blank.\86\ The reason for this additional 
requirement is to provide a clear evidentiary basis for all of the 
transfers in the chain of title in order to remove any doubts about the 
bankruptcy remoteness of the assets transferred to the trust. Absent a 
complete chain of endorsements, it could be argued that the trust 
assets were transferred directly from the originator to the trust, 
raising the concern that if the originator filed for bankruptcy, the 
trust assets could be pulled back into the originator's bankruptcy 
estate.
---------------------------------------------------------------------------
    \85\ UCC 1-203.
    \86\ This provision is general found in section 2.01 of PSAs.
---------------------------------------------------------------------------
    As PSAs are trust documents, they must be followed punctiliously. 
Moreover, most RMBS are issued by New York common law trusts, and well-
established New York law provides that a transaction that does not 
accord with the trust documents is void.\87\ Therefore, the key 
question is whether transfers to the trusts complied with PSAs. It 
appears that in recent years mortgage securitizers started to cut 
corners in order to deal with the increased deal volume they faced 
during the housing bubble, and they ceased to comply with the PSA 
requirements in many cases. Thus, in many cases, the notes contain 
either a single endorsement in blank or no endorsement whatsoever, 
rather than the chain of endorsements required by the PSA and critical 
for ensuring the trust's assets' bankruptcy remoteness.
---------------------------------------------------------------------------
    \87\ NY E.P.T.L. Sec.  7-2.4.
---------------------------------------------------------------------------
    It bears emphasis that the validity of transfers to the trusts is 
an unsettled legal issue. But if the transfers were invalid, they 
cannot likely be corrected because of various timeliness requirements 
in the PSAs.

IV. YES, BUT WHO CARES? THESE ARE ALL DEADBEATS
    A common response from banks about the problems in the 
securitization and foreclosure process is that it doesn't matter as the 
borrower still owes on the loan and has defaulted. This ``No Harm, No 
Foul'' argument is that homeowners being foreclosed on are all a bunch 
of deadbeats, so who really cares about due process? As JPMorganChase's 
CEO Jamie Dimon put it ``for the most part by the time you get to the 
end of the process we're not evicting people who deserve to stay in 
their house.''\88\
---------------------------------------------------------------------------
    \88\ Tamara Keith & Renee Montaigne, Sorting Out the Banks' 
Foreclosure Mess, NPR, Oct. 15, 2010.
---------------------------------------------------------------------------
    Mr. Dimon's logic condones vigilante foreclosures: so long as the 
debtor is delinquent, it does not matter who evicts him or how. But 
that is not how the legal system works. A homeowner who defaults on a 
mortgage doesn't have a right to stay in the home if the proper 
mortgagee forecloses, but any old stranger cannot take the law into his 
own hands and kick a family out of its home. That right is reserved 
solely for the proven mortgagee.
    Irrespective of whether a debt is owed, there are rules about who 
can collect that debt and how. The rules of real estate transfers and 
foreclosures have some of the oldest pedigrees of any laws. They are 
the product of centuries of common law wisdom, balancing equities 
between borrowers and lenders, ensuring procedural fairness and 
protecting against fraud.
    The most basic rule of real estate law is that only the mortgagee 
may foreclosure. Evidence and process in foreclosures are not mere 
technicalities nor are they just symbols of rule of law. They are a 
paid-for part of the bargain between banks and homeowners. Mortgages in 
States with judicial foreclosures cost more than mortgages in States 
without judicial oversight of the foreclosure process.\89\ This means 
that homeowners in judicial foreclosure States are buying procedural 
protection along with their homes, and the banks are being compensated 
for it with higher interest rates. Banks and homeowners bargained for 
legal process, and rule of law, which is the bedrock upon which markets 
are built function, demands that the deal be honored.
---------------------------------------------------------------------------
    \89\ See Karen Pence, Foreclosing on Opportunity: State Laws and 
Mortgage Credit, 88 Rev. Econ. & Stat. 177 (2006) (noting that the 
availability--and hence the cost--of mortgages in States with judicial 
foreclosure proceedings is greater than in States with non-judicial 
foreclosures).
---------------------------------------------------------------------------
    Ultimately the ``No Harm, No Foul,'' argument is a claim that rule 
of law should yield to banks' convenience. To argue that problems in 
the foreclosure process are irrelevant because the homeowner owes 
someone a debt is to declare that the banks are above the law.
V. CONCLUSION
    The foreclosure process is beset with problems ranging from 
procedural defects that can be readily cured to outright fraud to the 
potential failure of the entire private label mortgage securitization 
system.
    In the best case scenario, the problems in the mortgage market are 
procedural defects and they will be remedied within reasonably quickly 
(perhaps taking around a year). Remedying them will extend the time 
that properties are in foreclosure and increase the shadow housing 
inventory, thereby driving down home prices. The costs of remedying 
these procedural defects will also likely be passed along to future 
mortgage borrowers, thereby frustrating attempts to revive the housing 
market and the economy through easy monetary policy.
    In the worst case scenario, there is systemic risk, as there could 
be a complete failure of loan transfers in private-label securitization 
deals in recent years, resulting in trillions of dollars of rescission 
claims against major financial institutions. This would trigger a 
wholesale financial crisis.
    Perhaps the most important lesson from 2008 is the need to be ahead 
of the ball of systemic risk. This means (1) ensuring that Federal 
regulators do a serious investigation as discussed in this testimony 
above and (2) considering the possible legislative response to a 
crisis. The sensible course of action here is to avoid gambling on 
unsettled legal issues that could have systemic consequences. Instead, 
we should recognize that stabilizing the housing market is the key 
toward economic recovery, and that it is impossible to fix the housing 
market unless the number of foreclosures is drastically reduced, 
thereby reducing the excess inventory that drives down housing prices 
and begets more foreclosures. Unless we fix the housing market, 
consumer spending will remain depressed, and as long as consumer 
spending remains depressed, high unemployment will remain and the U.S. 
economy will continue in a doldrums that it can ill-afford given the 
impending demographics of retirement.
    This suggests that the best course of action is a global settlement 
on mortgage issues, the key elements of which must be (1) a triage 
between homeowners who can and cannot pay with principal reduction and 
meaningful modifications for homeowners with an ability to pay and 
speedier foreclosures for those who cannot, (2) a quieting of title on 
securitized properties, and (3) a restructuring of bank balance sheets 
in accordance with loss recognition.
    I recognize that for many, the preferred course of action is not to 
deal with a problem until it materializes. But if we pursue that route, 
we may be confronted with an unmanageable crisis. We cannot rebuild the 
U.S. housing finance system until we deal with the legacy problems from 
our old system, and these are problems that are best addressed sooner, 
before an acute crisis, then when it is too late.
                                 ______
                                 
                 PREPARED STATEMENT OF DAVID B. LOWMAN
        Chief Executive Officer for Home Lending, JPMorgan Chase
                           November 16, 2010

Introduction
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for inviting me to appear before you today. My name is David 
Lowman, and I am the Chief Executive Officer for Home Lending at 
JPMorgan Chase. I am grateful for the opportunity to discuss Chase's 
loan servicing business, our wide-ranging efforts to enable borrowers 
to keep their homes and avoid foreclosure where possible, and the 
recent issues that have arisen relating to affidavits filed in 
connection with certain foreclosure proceedings.
    JPMorgan Chase is committed to ensuring that all borrowers are 
treated fairly; that all appropriate measures short of foreclosure are 
considered; and that, if foreclosure is necessary, the foreclosure 
process complies with all applicable laws and regulations. As I will 
discuss in detail later in my testimony, we regret the errors that we 
have discovered in our processes, and we have worked hard to correct 
these processes so that we get them right. We take these issues very 
seriously.
    Chase services about 9 million mortgages across every State, 
representing over $1.2 trillion in loans to borrowers. In our role as 
servicer, we are responsible for administering loans on behalf of the 
owner of the loan, which sometimes is Chase itself, but more often is 
someone else--a Government-sponsored enterprise (GSE), a Government 
agency (such as the Federal Housing Administration or the Department of 
Veterans Affairs), a securitization trust, or another private investor.
    I will first discuss Chase's extensive efforts to help borrowers 
avoid foreclosure and then discuss the issues that led to our temporary 
halt to some foreclosures, as well as Chase's enhanced procedures for 
the foreclosure process.
    The past several years have been very difficult ones for many 
Americans. We have made extensive efforts during these difficult 
economic times to help borrowers who have fallen behind on their 
payments understand all of their options and, where feasible, to work 
with them in an effort to modify their loans and bring their accounts 
current so that they can keep their homes.
    At the outset, I want to emphasize that Chase strongly prefers to 
work with borrowers to reach a solution that permits them to keep their 
homes rather than foreclose on their properties. As we discuss below, 
solutions may include modification, temporary forbearance, short sales 
or deeds-in-lieu of foreclosure. Foreclosures cause significant 
hardship to borrowers, harm their credit profiles, and depress property 
values in the communities where they occur. Foreclosures also 
inevitably result in severe losses for lenders and investors. 
Therefore, we always consider whether there are viable alternatives to 
foreclosure before proceeding with a foreclosure.
    It is critical to note that the analysis we use in deciding whether 
to proceed with a modification or foreclosure does not take into 
account servicer compensation. Furthermore, if it were considered, 
servicer compensation would tend to favor modification over 
foreclosure. Indeed, the cost for servicers to take a loan to 
foreclosure generally is significantly greater than the cost of a 
modification. With a successful modification, Chase is able to continue 
to service the loan and earn servicer fees; but when a property is sold 
as a result of foreclosure, Chase's role as servicer ends and Chase 
receives no further fees.
    Chase has established modification programs that collectively have 
allowed us to avoid many more foreclosures than we have completed. We 
established these programs starting in early 2007 in recognition of the 
difficult economic conditions that resulted in a growing number of our 
borrowers being unable to make their monthly payments. While we keep 
striving to do even better, our efforts to date have yielded 
significant results. Since January 2009, Chase has offered almost one 
million modifications to struggling borrowers and has completed over 
250,000 permanent modifications under the Home Affordable Modification 
Program (HAMP), Chase's own proprietary modification programs, and 
modification programs offered by the GSEs and FHA/VA. Combined with 
other programs designed to avoid foreclosure, we have prevented over 
429,000 foreclosures since January 2009. Over that same period, we have 
completed over 241,000 foreclosures. In other words: during the last 2 
years, Chase has successfully prevented about two foreclosures for each 
one we have completed.
    Sustainable modifications are not always possible; there are some 
borrowers who simply cannot afford to stay in their homes, 
notwithstanding the modification programs and other foreclosure 
prevention alternatives available. There are other borrowers who are 
not seeking modifications; in the majority of cases that went to 
foreclosure sale in the last quarter, the properties were vacant or not 
owner-occupied.

Our Investment in Foreclosure Prevention
    Our progress in foreclosure prevention derives in part from early 
and significant investments since late 2008. Currently, Chase employs 
over 6,000 customer-facing staff whose focus is working with distressed 
borrowers, and we have more than doubled the number of employees in 
this area in the last 2 years. For more than 6 months, we have assigned 
each borrower a single point of contact who serves as a consistent 
touchpoint for the borrower as he/she seeks a loan modification. More 
than 1,900 dedicated relationship managers serve in this role for our 
borrowers.
    In addition, Chase has made major efforts to reach out personally 
to borrowers and offer assistance with modifications. Since early 2009, 
our employees have met with 115,000 struggling borrowers at the 51 
Homeownership Centers we have created in 15 States and the District of 
Columbia. The Chase Homeownership Centers are a notable example of our 
early efforts to reach borrowers in need. We also have a Homeownership 
Preservation Office, which maintains relationships with national groups 
like HOPE NOW and NeighborWorks, as well as with hundreds of local non-
profit organizations across the country. Our team works closely with 
Government and community leaders on initiatives that focus on 
affordable housing, foreclosure prevention and community 
revitalization. The team also travels across the country and directs 
national outreach events. Over 3.7 million letters have been sent to 
borrowers inviting them to attend these events. More than 54,000 
borrowers have attended one of the hundreds of events held to date.
    We expend great efforts to reach our borrowers and inform them 
about modification alternatives. In the last 2 years, Chase has made 
341 million outbound calls to borrowers. Chase does not wait for 
borrowers to contact us; when we believe a borrower may be at risk, we 
affirmatively reach out to them early to discuss possible modification 
options. While requirements vary by State, generally our outreach to 
borrowers includes numerous calls from a customer service 
representative and letters detailing the nature of the delinquency and 
possible Government and other modification programs. Our borrowers also 
receive a Chase Homeownership and Outreach letter, including any 
information about local events that provide in-person help. When a loan 
becomes more delinquent, a Chase representative may visit the property; 
and generally at 90 days past due, the borrower receives notification 
of intent to foreclose. On average, we contact a borrower over 100 
times before a foreclosure is completed. In addition, our loan 
counselors have fielded over 29 million inbound calls from borrowers 
seeking foreclosure prevention assistance in the last 2 years and 5 
million calls to our dedicated loan modification hotline.

Loan Modification Programs
    Chase's modification programs are focused on helping borrowers stay 
in their homes by making their monthly mortgage payments affordable.

HAMP Modifications
    Chase has supported the Department of Treasury's efforts to 
increase mortgage modifications industry-wide through HAMP, and Chase 
was one of the first major servicers to begin implementing the program. 
Chase mails a HAMP application to every borrower whose loan meets the 
program's eligibility criteria at both 40 and 70 days delinquency. To 
date, we have sent HAMP applications to 900,000 borrowers.
    Chase makes substantial efforts to help borrowers complete the 
necessary paperwork, and any decision denying a HAMP application is 
subject to a rigorous review. Chase also affords borrowers an 
opportunity to appeal denials of HAMP applications by supplementing the 
information in their file. When an application is pending, Chase 
suspends foreclosure sales; and if that application is denied, Chase 
ordinarily will not proceed with the foreclosure sale for a period of 
30 days, provided that an investor does not instruct us to proceed 
sooner.
    If a borrower is eligible for participation in HAMP and is approved 
for a trial modification, we adjust the mortgage payment to 31 percent 
of the borrower's total pretax income, as required by HAMP. To achieve 
this level, as a first step, the loan's interest rate is reduced to as 
low as 2 percent. If this is not sufficient, then the term of the loan 
is extended to 40 years. Finally, if necessary, a portion of the 
principal is deferred until the loan is paid off, and no interest is 
charged on the deferred principal.
    The response to HAMP has been substantial. To date, we have offered 
HAMP trial plans to more than 270,000 borrowers and have over 60,000 
borrowers in active permanent HAMP modification plans through October 
2010. These modifications have benefited borrowers by reducing their 
monthly mortgage payments in most cases. Our borrowers who have taken 
advantage of HAMP modifications realized an average reduction of 28 
percent in their monthly payment.

Modifications for Adjustable Rate Mortgages
    Prior to the introduction of HAMP, Chase implemented several of its 
own proprietary loan modification programs, including several programs 
for adjustable rate mortgages (ARMs). Chase-owned subprime hybrid ARMs 
scheduled to reset for the first time are modified to remain at the 
initial interest rate for the life of the loan. Borrowers qualify for 
this program if they have a clean payment history on a hybrid ARM with 
an interest rate that adjusts after the first two or 3 years. Borrowers 
do not need to contact Chase to benefit from this program; Chase 
implements the rate lock automatically, and borrowers are so advised. 
In cases of hybrid ARM loans that we service but do not own, we use the 
American Securitization Forum (ASF) Fast Track program to reduce 
payment shock. Under this program, qualifying borrowers will have their 
initial ARM rate frozen for 5 years.
    We also have taken action to help borrowers with Chase-owned Pay 
Option ARMs. Chase did not originate or purchase these loans, but 
assumed them through the 2008 acquisition of the mortgage assets of 
Washington Mutual. Chase has developed proactive programs to assist 
current Pay Option ARM borrowers who may be at higher risk of default 
due to factors such as credit score, loan-to-value ratio (LTV), and 
future payment shock. To eliminate any potential payment shock, we 
offer to modify the loan to a fixed payment, keeping the borrower's 
monthly payment at its current amount. For the majority of these 
modifications, the borrower's payment is fixed for the life of the 
loan. Since 2009, Chase has proactively completed about 22,000 Option 
ARM modifications on current loans, worth $8 billion in unpaid 
principal balance.

Chase Custom Modifications
    Borrowers not eligible for HAMP are reviewed on a case-by-case 
basis to determine their suitability for an alternative modification. 
We evaluate these loans by developing an estimated target affordable 
payment of 31 percent to 40 percent of the borrower's gross income. We 
use the lowest percentage for borrowers with the lowest incomes. Once 
the target payment is calculated for the borrower, we test each 
modification option to see if it will get the borrower to an affordable 
payment. As in the HAMP program, we apply a net present value (NPV) 
analysis to each option to determine whether the value of the 
modification exceeds the value expected to be recovered through a 
foreclosure. Chase recommends a modification when that option produces 
both an affordable payment and a positive NPV result.
    Despite our best efforts, not every loan can be modified, for a 
variety of reasons. Most of the mortgages we service are serviced on 
behalf of others; we do not own the loans. We generally owe those third 
parties, which include the GSEs, a contractual duty to maximize the 
return on the investment they made. As noted above, the high costs of 
foreclosure give them (and us) an incentive to consider meaningful 
payment reduction when necessary to effectively modify the loan, but 
modifications that do not maximize the return to investors are 
inconsistent with our duties as servicer. And even aside from our 
contractual duties, the U.S. mortgage market will never return to 
health if investors come to believe that the value of the collateral is 
unreliable.

Other Loss Mitigation Efforts
    For a variety of reasons, loan modifications are not always a 
workable solution. Borrowers who cannot afford their homes, even if the 
payment is substantially reduced, need other solutions. So, in addition 
to loan modifications, Chase also offers borrowers other options to 
avoid foreclosure. These include:

    Short Sales--For borrowers who do not qualify for loan 
        modification or would qualify, but do not wish to stay in their 
        homes, Chase has a program that makes available a short sale in 
        which Chase agrees to a sale to a third party, arranged by the 
        borrower, at a price below the outstanding amount of 
        indebtedness. Since April 2010, Chase has had a program to 
        proactively contact borrowers who have listed their homes for 
        sale and who would be good candidates for short sales. Chase 
        provides these borrowers with a minimum offer that Chase would 
        accept to approve a short sale. Since 2009, Chase has completed 
        more than 83,000 short sales.

    Deed in Lieu--In cases where a short sale is not possible 
        because a sale cannot be arranged within the prescribed period 
        of time, Chase may offer borrowers the option of deeding the 
        property to Chase in full satisfaction of their debt. Since 
        2009, Chase has completed more than 3,400 deeds-in-lieu.

    In addition to short sales and deeds-in-lieu, since 2009, 
        Chase has implemented over 55,000 forbearance, extension and 
        repayment plans to help with a hardship and avoid foreclosure.

Foreclosures
    The decision to foreclose is always a difficult one, but there are 
unfortunately many cases where this alternative is unavoidable. In many 
cases, borrowers are unemployed or otherwise do not or cannot make any 
meaningful payment on their mortgages. In the average case where we 
foreclose, the borrower has not made any payment for 14 months; in 
Florida, where many of our foreclosures have occurred, the average 
period without payment prior to foreclosure sale is 22 months. In some 
cases, the borrower may not have an incentive to pursue a modification; 
of the properties on which we foreclose, a significant percentage is 
vacant or not the owner's primary residence, but rather an investment 
property. In cases where the property is vacant, foreclosure may not 
only be the right economic decision--it also transfers the property 
into a new owner's hands, improving community safety and stabilizing 
neighboring property values.
    We recently announced that we had temporarily suspended 
foreclosures, foreclosure sales, and evictions in a number of States to 
allow for a review and enhancement of our procedures. It is important 
to note at the outset that the issues that have arisen in connection 
with foreclosure proceedings do not relate to whether foreclosure 
proceedings were appropriately commenced. We have not found errors in 
our systems or processes that would have led foreclosure proceedings to 
be commenced when the borrower was not in default.
    Chase has substantial safeguards in place designed to ensure that 
foreclosures are both a last resort and instituted only in appropriate 
cases. A loan is referred to foreclosure only after Chase has made 
substantial attempts to provide the borrower with alternatives to 
foreclosure. Then, as part of the process that can ultimately lead to 
referring a loan to foreclosure, Chase policy requires that all 
delinquent loans be reviewed by its Independent Foreclosure Review 
team. The Independent Foreclosure Review confirms that the loan is past 
due and that Chase has complied with its pre-referral policies, 
including repeated efforts to contact the borrower to discuss 
alternatives. Under Chase's policies, only after the Independent 
Foreclosure Review is complete can a loan be referred for foreclosure 
proceedings. The Independent Foreclosure Review is repeated 2 to 3 
weeks prior to any scheduled sale, and a final check also is performed 
72 hours prior to the sale. If any of these subsequent reviews suggests 
that a loan should not have been referred to foreclosure, we do not 
proceed with the sale. Under our policies, if a loan modification 
process has begun after the commencement of a foreclosure, we do not 
engage in a foreclosure sale if the modification succeeds or until the 
modification process fails. That is not to say we are perfect--we 
service millions of loans, and we sometimes do make mistakes. But when 
we find an error, we fix it.

The Nature of the Affidavit Issues
    Chase's recent temporary suspension of foreclosure operations in a 
number of States arose out of concerns about affidavits prepared by 
local foreclosure counsel, signed by Chase employees, and filed in 
certain mortgage foreclosure proceedings. Specifically, employees in 
our foreclosure operations area may have signed affidavits on the basis 
of file reviews and verifications performed by other Chase personnel, 
not by the affiants themselves. In addition, we discovered other 
related issues in connection with some of these affidavits, including 
instances in which notarized affidavits may not have been signed and 
affirmed in the physical presence of the notary. Nevertheless, the 
facts set forth in the affidavits with respect to the borrowers' 
indebtedness and the amount of the debt--the core facts justifying 
foreclosure--were verified prior to the execution of the affidavits by 
Chase employees consulting the company's books and records, which are 
themselves subject to extensive internal and external controls. 
Therefore, we believe the underlying information about default and 
indebtedness was materially accurate and the issues described above did 
not result in unwarranted foreclosures.
    We take these issues very seriously. Our process was not what it 
should have been; quite simply, it did not live up to our standards. To 
begin to address these issues, we temporarily halted foreclosure and 
related proceedings in certain States because our procedures may not 
have complied with personal knowledge and notarization requirements. In 
late September, Chase temporarily halted all foreclosure proceedings 
and property sales in the 23 States where foreclosure primarily occurs 
through a judicial process and where affidavits are generally filed as 
part of the process. Shortly thereafter, Chase also temporarily halted 
foreclosure proceedings in certain States where foreclosure primarily 
occurs through a non-judicial process in order to assess whether 
similar documentation issues might exist in those jurisdictions. As an 
additional safeguard, Chase also temporarily halted evictions in the 
States in which it suspended foreclosures, as well as in other States 
where Chase-signed affidavits might be used as part of the eviction 
process.
    While these proceedings have been halted, Chase has thoroughly 
reviewed its foreclosure procedures and enhanced them to resolve these 
issues. Briefly, the remedial actions undertaken by Chase include:

    A complete review of our document execution policies and 
        procedures;

    The creation of model affidavits that will comply with all 
        local law requirements and be used in every case, and that will 
        limit factual assertions to those within the personal knowledge 
        of the signer and eliminate any legal conclusions that are 
        outside the signer's personal knowledge;

    Implementation of enhanced procedures designed to ensure 
        that the employees who execute affidavits personally verify 
        their contents and that the affidavits are executed only in the 
        physical presence of a licensed notary;

    Extensive training for all personnel who will have 
        responsibility for document execution going forward and 
        certification of those personnel by outside counsel;

    Implementation of a rigorous quality control double-check 
        review of affidavits completed by Chase employees; and

    Review and verification of our revised procedures by 
        outside experts.

    In addition to enhancing procedures for future foreclosure filings, 
Chase also is working to remedy any issues with affidavits on file in 
pending proceedings. Although Chase's approach will vary based on the 
procedures in individual States, in cases in which judgment has not yet 
been entered, Chase plans to re-verify the material information in 
filed affidavits and file replacement affidavits prepared under the new 
enhanced procedures to eliminate any possible defects in these 
affidavits. Chase is taking other appropriate measures in connection 
with foreclosure matters in which judgment has been entered but a sale 
has not yet occurred.
    We have worked hard over the past month and a half to review and 
strengthen our procedures to remediate the affidavit issues we found. 
We are committed to addressing these issues as thoroughly and quickly 
as possible.
    I hope that my testimony has explained our processes for dealing 
with cases of borrower default, as well as the issues surrounding the 
documentation filed in Chase's foreclosure proceedings and the steps we 
have taken to address them. Foreclosure is a last resort for Chase, but 
when we do foreclose, we are committed to making sure that we do so in 
compliance with applicable law and with respect for the borrower. I 
would be happy to answer questions from the Committee.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM THOMAS J. 
                             MILLER

Q.1. Attorney General Miller, on November 3, the Wall Street 
Journal reported that you and officials from other States told 
Bank of America executives that ``State attorneys general would 
like additional aid to be offered to borrowers, such as further 
principal reductions on certain delinquent loans where people 
owe much more than what their homes are worth.''
    Is it correct that you have asked mortgage lenders or 
servicers that you, in your role as State attorney general, 
would like them to offer more aid to borrowers, such as 
principal reductions?
    If so, how did you balance the competing desires of 
borrowers and lenders to arrive at the conclusion that 
servicers should be offering modified mortgages with principal 
reductions?

A.1. It is estimated that approximately 23 percent of the homes 
in this country have mortgage principal balances that are 
larger than the current fair market value of the property. This 
status is commonly referred to as being ``underwater.'' Many 
different groups, ranging from securities analysts, economists, 
investors in mortgage backed securities, to advocacy groups, 
have been calling for principal reductions for quite some time 
now. The simple proposition is that given the extremely high 
loss severities lenders and investors are suffering in certain 
markets when a home is taken to foreclosure sale, in some 
instances a modification with a significant principal reduction 
still produces more income than the foreclosure sale while 
giving the homeowner sufficient motivation to stay in the home. 
In other words, in appropriate circumstances, principal 
reductions produce a positive net present value for the owners 
of the loan.
    We have consistently stated since 2007 that we are only 
interested in modifications that are net present value 
positive. Principal reductions are just another tool to arrive 
at a sustainable net present value positive modification in 
those markets that have experienced a severe drop in home 
prices over the last 3 to 4 years.

Q.2. Attorney General Miller, you testify, with respect to data 
collection efforts of your ``State Working Group'' which began 
in October 2007, that ``our data collection was not as robust 
as it could have been due to the extremely short-sighted 
direction at the Office of the Comptroller of the Currency 
which forbad national banks from providing loss mitigation data 
to the States.''
    Has data sharing with the OCC improved since you began 
trying to collect data in 2007?

A.2. No. While the OCC and OTS have provided a public service 
by publishing their quarterly Mortgage Metrics Report, they 
have not shared any data directly with the State Attorneys 
General. We do not receive anything in addition to the public 
Metrics Report.

Q.3. Attorney General Miller, you testify that ``We must find a 
way to make sure that all borrowers who have the desire to keep 
their home and qualify for a modification receive that 
modification.''
    Have you found cases in your jurisdiction in which 
homeowners who qualify for mortgage modifications have been 
illegally denied modifications?
    If so, have you pursued legal remedies in Iowa?
    If not, what analysis can you provide that leads you to 
believe that ``many borrowers, who under a strict economic 
analysis should receive a modification, are falling through the 
cracks''?

A.3. My office helped found and helps run the ``Iowa Mortgage 
Help Hotline.'' This is the premier loan modification effort in 
the State of Iowa. We have had over 13,000 Iowans open 
applications with Iowa Mortgage Help and many thousand more 
have contacted the Hotline without formally opening a file. In 
addition, my Consumer Protection Division received almost 600 
complaints regarding mortgage origination and servicing in 2010 
alone. In fact, mortgages are now the number one consumer 
complaint category in my office, representing 14.5 percent of 
all written complaints submitted to my office. The vast 
majority of these complaints involve loan servicing and 
requests for a loan modification.
    Through this front-line experience, we have seen many 
instances of borrowers who through a strict economic analysis 
should have received a loan modification, but for a variety of 
systemic failures by the servicers did not receive such a 
modification. Through the intervention of both the Iowa 
Mortgage Help mediators and my Consumer Protection Division, 
many of these borrowers have received modifications when they 
would have otherwise lost the family home to foreclosure. Keep 
in mind that these modifications were all in the best economic 
interests of the owners of the loan.
    Our experience in this regard is consistently echoed every 
time we talk to HUD approved housing counselors in both Iowa 
and other States, and by my fellow Attorneys General. In fact, 
several of the Senators during the hearing stated that their 
offices have received many complaints with a similar fact 
pattern. If you talk to anyone who has front-line experience 
working directly with borrowers attempting to get loan 
modifications, you will hear countless horror stories where the 
incompetence of the servicers prevented a modification from 
occurring. There is little doubt that many borrowers are indeed 
falling through the cracks.

Q.4. Attorney General Miller, your testimony States that you 
believe ``It is well past time to once and for all tackle the 
issue of foreclosures and loan modifications with the resources 
and urgency it deserves.'' Your statement leads me to conclude 
that you do not believe that efforts by the Treasury Department 
and the Obama administration to address a large and potentially 
growing foreclosure wave have been successful.
    What would you recommend that the Administration do to 
achieve success in battling the issue of foreclosures, and what 
is the economic and distributional analysis upon which you base 
your recommendation?

A.4. I commend the Obama administration for the wide variety of 
efforts it has undertaken to battle the issue of foreclosures. 
While the HAMP program has not been as successful as we all 
hoped, it must be given credit for creating a national standard 
for modifications and bringing considerable stability to a 
chaotic situation. HAMP must be placed in its proper historical 
context. Prior to HAMP there was no coherent national strategy 
with regard to loan modifications. The previous 
Administration's response was the very tepid creation of the 
industry backed HOPE NOW group, consisting of a 1-800 number 
and little else. In large part, the Obama administration's 
efforts have been stymied by the failures of the loan 
servicers. Ultimately, all loan modification programs rely on 
the servicers to fulfill their duties and until the loan 
servicers put sufficient resources into loss mitigation and 
work out their numerous procedural problems, any modification 
program is going to have difficulties.

Q.5. Attorney General Miller, in your testimony you state: ``In 
recent weeks, many have opined that the temporary halt on 
foreclosures and foreclosure sales by several servicers was 
greatly damaging the economy. With all due respect, it is the 
foreclosures in the first instance that pose the greatest 
threat to the economy.''
    There is an absolute need for any servicer to proceed 
legally with a foreclosure sale. However, with blanket action, 
the vast majority of the delayed foreclosures likely were ones 
that would have been executed properly.
    Is it your position that delays in proper foreclosures or 
foreclosure sales do not represent a significant cost to our 
economy? What evidence have you examined to arrive at this 
conclusion?
    If you do believe there is an economic cost to delaying 
forecloses, what do you estimate that cost to be? Has this been 
a factor in your decisionmaking?

A.5. It is my understanding that there has been no Government 
action in regard to any foreclosure delays. All such delays 
were done voluntarily by those servicers who determined on 
their own that they had possibly violated State law in their 
foreclosure procedures. In addition, there has been no blanket 
action. Delays were only instituted by those servicers that 
felt it necessary. It is further my understanding that the 
servicers who did institute delays did not do so for every 
single loan they serviced, but only for those loans where they 
thought violations of the law may have occurred. Finally, the 
State Attorneys General are in the midst of an ongoing 
investigation of multiple servicer practices and a variety of 
State and Federal regulators are also conducting multiple 
examinations and reviews. The early results suggest that 
multiple, serious problems exist within the mortgage servicing 
industry. For all of these reasons, it is hard to conclude that 
``the vast majority of the delayed foreclosures likely were 
ones that would have been executed properly.''
    Furthermore, given the historic levels of property that is 
already owned by the lenders (commonly known as ``real estate 
owned'' or ``REO'') and the very large ``shadow inventory'' 
(homes that could be taken through the foreclosure process to 
completion but have deliberately been withheld by the 
servicers), it is likely that any additional REO properties 
would only further depress property values. Thus, any economic 
damage caused by a several month delay of some foreclosures is 
likely negligible. This is particularly true given the many 
loans that servicers could take all the way through a 
foreclosure sale right now, but the servicers have chosen 
instead to leave these properties in a legal limbo (a state of 
foreclosure purgatory if you will); out of a desire to avoid 
responsibility for the upkeep of these properties and to avoid 
putting any more foreclosed properties onto the real estate 
market. The fact that the servicers themselves are avoiding 
putting more foreclosed properties onto the market severely 
undercuts any argument that a temporary, voluntary delay has or 
will cause significant economic damage.

Q.6. Given the varying State laws that govern foreclosure, 
there must be the opportunity to observe both best and worst 
practices. While foreclosures are not the preferred option for 
any party at the onset of a loan, sometimes it is the path 
forward that presents the least harm to borrowers, lenders and 
the economy. In those instances, it is essential that our 
foreclosure process be effective.
    Which States do each of you feel provide the most efficient 
path forward in foreclosures, while providing borrowers proper 
legal channels in the event that there is a dispute? What is 
the average length of time between original delinquency and 
foreclosure sale in these States?
    Which States do each of you feel have the most problems in 
effectively executing foreclosures? What is the average length 
of time between original delinquency and foreclosure sale in 
these States?

A.6. The fundamental problem in today's mortgage servicing 
market is the policies and practices of the servicers 
themselves, not variations among State foreclosure laws. A 
broad range of financial institutions successfully comply with 
a broad range of differing State, not to mention international, 
laws in their daily operations. The recent servicing problems 
arise not from the differences among State foreclosures laws, 
but from a business model that is not equipped to manage the 
current volume of distressed loans.

Q.7. To better gauge the level of violations surrounding the 
topic of this hearing it is necessary for us to understand who 
is being affected. Admittedly, this question is probably best 
suited for the regulators, and we hope to receive this 
information from them at some point.
    In your research and investigations, how many individuals 
were discovered to have been fully current on their mortgage 
payments but foreclosed upon by their servicer? Please provide 
the data and evidence that you evaluated to arrive at your 
conclusions.

A.7. Harm is not limited to borrowers who are fully current on 
their payments but foreclosed upon. In fact, we are finding a 
wide variety of servicer misconduct and practices which harm 
borrowers in a variety of situations. Other areas of harm 
include, but are not limited to:

  1. The inability of some servicers to complete such simple 
        tasks as properly applying the borrower's monthly 
        payment or properly boarding the loan upon receiving 
        the servicing rights.

  2. The well publicized challenges some servicers are having 
        with one of the mostfundamental facts: proving 
        ownership of the note and the mortgage and the right to 
        foreclose.

  3. The inability of servicers to properly handle loss 
        mitigation requests, including such basic 
        responsibilities as repeatedly losing borrower 
        submitted financial documents and consequently 
        requiring borrowers to repeatedly resubmit such 
        documents. Other examples include foreclosing on 
        borrowers when a loan modification is being considered 
        (the so called ``dual track'' issue); loss mitigation 
        representatives giving borrowers conflicting or 
        incorrect information; failure to respond to borrowers 
        in a timely manner, and so on. In our conversations 
        with housing counselors and legal aid lawyers we have 
        been repeatedly told that there is no rhyme or reason 
        why a particular loan modification request is granted 
        or denied, that the system is arbitrary and capricious 
        and depends mostly on who answers the phone on the 
        other end, not on a principled basis.

  4. We have heard multiple complaints of borrowers who have 
        the money necessary to reinstate their loan, yet cannot 
        find a servicing employee who can accept and apply that 
        money.

  5. We have heard multiple complaints of borrowers who have 
        signed loan modifications, yet the servicer does not 
        recognize the modification and continues to foreclose. 
        My staff has personally intervened on several of these 
        cases and without such intervention we believe a 
        foreclosure would have likely occurred.

  6. Many borrowers have complained that they had a buyer 
        willing to purchase their property for less than the 
        principal balance on the loan, but considerably more 
        than the lender would receive from a foreclosure sale 
        (commonly known as a ``short sale''), but that the 
        servicer was so disorganized that any response came 
        much too late and the buyer walked away, resulting in a 
        much more expensive foreclosure.

  7. We have heard complaints about the servicing of a loan 
        being transferred to a new servicer and the new 
        servicer refuses to recognize either a pending loan 
        modification application or even a completed 
        modification with the previous servicer.

  8. We have heard many, many complaints about servicers 
        imposing thousands of dollars of unjustified fees as 
        part of the foreclosure process. In some cases, these 
        fees have pushed the borrower over the edge and made it 
        impossible for the borrower to save the home.

  9. Similarly, we hear complaints about servicers imposing 
        very expensive ``force-placed'' homeowners insurance, 
        when the borrowers' homeowners insurance was in place 
        the entire time.

    In short, there are many different kinds of harm that 
borrowers suffer due to servicer misconduct and incompetence.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM THOMAS J. 
                             MILLER

Q.1. What improvements should be made to Federal regulation of 
mortgage servicers?

A.1 The number one thing is to elevate the importance of 
mortgage loan servicing. It is my understanding that 
traditionally most effort by Federal banking regulators has 
been focused on the origination of mortgage loans. What we have 
learned the hard way over the last three and a half years is 
that loan servicing is equally as important. Thus, the Federal 
regulators should give loan servicing much more attention in 
their examinations than they have previously. It is also clear 
to me that there is a need for more detailed regulation of 
servicing standards.
    While I support increased Federal regulation of loan 
servicing, it must be made clear that any such efforts should 
be in addition to and not in place of regulation at the State 
level. Some have attempted to blame servicers' current troubles 
on the fact that foreclosure is controlled by State law. 
Nothing could be further from the truth. The servicers' 
troubles are not based on an inability to comply with 
differences in State law, they are much more basic. The simple 
fact is that the current servicing model was never designed for 
the high delinquency environment we are experiencing today and 
the system is fundamentally broken.
    Foreclosure is an inherently local transaction, with 
devastating effects on local neighborhoods and communities and 
serious impacts on city, county, and State budgets. 
Accordingly, State law has controlled foreclosure proceedings 
since the founding of this Nation. Any attempt to use the 
current crisis to preempt State law is deeply misguided.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM BARBARA J. 
                             DESOER

Q.1. During discussion of the dual-track process, you mentioned 
that your ability to halt the practice of ``dual tracking'' of 
loans simultaneously through the modification and foreclosure 
processes could be constrained on loans you are servicing for 
outside trusts, but that you would have the ability to halt the 
dual-track process on loans held in portfolio by Bank of 
America.
    I understand that you are in negotiations with State AGs on 
a potential agreement on this and other aspects of servicing. 
In the meantime, however, many families could continue to be 
confused by this dual-track process.
    Have you unilaterally halted the dual-track process and 
suspended the foreclosure process for loans held by Bank of 
America that are in the review and modification processes? If 
not, do you plan to do so soon? If not, why not, and what would 
need to happen before BofA would halt dual-tracking on its 
loans?

A.1. As your question acknowledges, parallel foreclosure and 
modification processes are required by many investors, and 
reflect an industry-wide servicing practice. The majority of 
the loans we service--approximately 77 percent--are for outside 
investors. We want to partner with Members of Congress, State 
Attorneys General, regulators, other servicers, and investors 
to agree on ways to improve industry practices with respect to 
the evaluation of borrowers for modifications after they have 
been referred to foreclosure. At the same time, we are actively 
working to reduce the borrower confusion that may result from 
dual tracking.
    For borrowers who are referred to foreclosure, Bank of 
America's policies are designed to prevent a loan from going to 
a foreclosure sale, consistent with regulatory directives and 
investor requirements, if the borrower is being evaluated for a 
HAMP or proprietary modification. In addition, for borrowers 
who enter a trial plan after their loan has been referred to 
foreclosure, to the extent consistent with its legal and 
contractual obligations, Bank of America's policy is to suspend 
the foreclosure process, including refraining from scheduling 
sales or causing judgments to be entered, on a basis consistent 
with HAMP for proprietary or traditional loan modifications 
that are successfully performing under the trial plan. Bank of 
America also has introduced an additional review procedure to 
delay foreclosure sales if there is ongoing modification, 
short-sale, or deed-in-lieu activity.
    We are also addressing concerns about customer confusion by 
improving our communication with distressed borrowers. In 
particular, we are redesigning our modification process to 
assign eligible borrowers who have submitted to us at least one 
document in support of their modification application to an 
associate with relevant expertise for help at each particular 
stage of the modification process. We are implementing this new 
approach to modifications, and so far we have paired customers 
with an associate on this basis over 230,000 times. We are also 
implementing a similar model for our short sale and deed-in-
lieu foreclosure alternatives.
    More generally, in the past 2 years, We have committed 
significant resources to helping distressed homeowners, 
including by hiring and training over 11,000 people, so that we 
now have a team of about 30,000 working with customers in 
default. We have also reached out to our customers by opening 
customer assistance centers, going door-to-door to reach 
customers with modification offers, and participating in more 
than 550 housing rescue fairs across the country. We are also 
partnering with non-profits to address foreclosure prevention 
in diverse communities.

Q.2. In response to questions from Senator Johnson, Mr. Lowman 
and Ms. Desoer, you characterized the HAMP 2MP program as a 
good approach to second lien modification. You also noted your 
organizations' participation in 2MP, with Ms. Desoer pointing 
out that Bank of America had been the first servicer to sign up 
for the program. Yet, as of Sept 30, only 21 second lien 
modifications worth $10,500 had been made under 2MP since its 
implementation in March 2010.
    Why, in your opinion, have so few modifications been made 
under 2MP so far? Do you see your organization increasing its 
number of 2MP modifications in the coming months?

A.2. Bank of America was the first servicer to sign up to 
participate in the 2MP second lien modification program. This 
program is limited to borrowers whose first liens are modified 
under HAMP and who agree to a modification of the second lien 
under the terms of the program. If a borrower fails a trial 
HAMP modification, that borrower is not eligible for 2MP. In 
addition, 2MP requires a 3-month trial period for delinquent 
borrowers before the 2MP modification can become effective.
    Phyllis Caldwell, Chief of Homeownership Presentation 
Office of the Department of Treasury, explained to this 
Committee:

        The program uses a third-party database to match second lien 
        loans with first lien loans permanently modified under HAMP . . 
        . The implementation of this database began over the summer. 
        Five 2MP Servicers have already begun matching modified first 
        liens with their corresponding second liens, while the other 12 
        are in some phase of developing systems capacity to do so.

    Bank of America is one of five servicers that have led the 
way in matching modified first liens with corresponding second 
liens. As of the end of December 2010, we had matched 
approximately 29,000 Bank of America second lien customers to a 
permanent HAMP modification of a first lien. We are currently 
working through these matches and issuing modifications to 2MP-
eligible customers.
    Bank of America also has proprietary modifications that it 
applies to second liens independently of 2MP. Since 2008, we 
have completed over 95,000 second lien modifications through 
proprietary or other programs.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM BARBARA J. 
                             DESOER

Q.1. Mr. Levitin, your testimony States that a common response 
from banks--and I assume here you mean servicers--about 
problems in the foreclosure process is that it doesn't matter 
to them because the borrower still owes on the loan and has 
defaulted. As you put it: ``This `No Harm, No Foul' argument is 
that homeowners being foreclosed on are all a bunch of 
deadbeats, so who really cares about due process?'' You say 
that this argument, that you attribute loosely to ``banks,'' 
condones ``vigilante foreclosures: so long as the debtor is 
delinquent, it does not matter who evicts him or how.''
    Does any representative of the servicer industry on the 
panel wish to comment on this?

A.1. Bank of America is committed to treating our customers 
responsibly and fairly. We acknowledge our obligation to do our 
best to protect the integrity of the foreclosure proceedings. 
And when that has not happened, we accept responsibility for 
it, and we deeply regret it.
    We were the only servicer that stopped foreclosure sales 
nationwide to review our procedures. We also halted evictions 
and are only restarting them with 30 days advance notice to the 
borrower of the restart. We know that the concerns are not just 
technical issues. We are already well along in making 
improvements with respect to foreclosure documentation. We take 
seriously our obligation to the customer, the investor, the 
legal process, and the economy.
    Since suspending foreclosure sales and evictions, the Bank 
has implemented new or revised policies and procedures to 
strengthen controls over our foreclosure activities. We also 
have added and redeployed human resources to execute on our 
commitment to improve our processes. We hope that these new 
measures and controls give all stakeholders added confidence 
that foreclosure proceedings, when necessary, will move forward 
with integrity.

Q.2. Ms. Desoer and Mr. Lowman, it is important that this 
Committee has an adequate understanding of the current state of 
affairs as it relates to delinquency and foreclosures. Please 
briefly discuss the following statistics as they relate to your 
companies:

    What is the total number of mortgages that your company 
services?

    How many mortgages are currently in foreclosure?

    What is the average number of days that a borrower is 
delinquent on his or her mortgage at the time of a foreclosure 
sale?

    What percentage of homes are vacant at the time of a 
foreclosure sale?

A.2. Bank of America services nearly 14 million mortgage loans. 
The majority of our customers--86 percent--are current and 
making their mortgage payments on time every month. 
Fortunately, that number is stabilizing. But the segments of 
the portfolio that are distressed include large numbers of 
customers who are seriously delinquent. Of Bank of America's 
1.3 million customers who are more than 60-days delinquent, 
nearly 600,000 have not made a mortgage payment in more than a 
year, and more than 190,000 have not made a mortgage payment in 
2 years.
    The following are delinquency statistics for completed 
foreclosure sales in the third quarter of 2010:

   Eighty (80) percent of borrowers had not made a 
        mortgage payment for more than 1 year.

   The average loan had been in delinquent status for 
        560 days.

   Thirty-three (33) percent of properties were 
        vacant.

   Fifteen (15) percent of properties were non-owner 
        occupied at the time of origination.

Helping our customers remain in their homes where possible is a 
top priority for Bank of America--as evidenced by our nearly 
750,000 completed loan modifications since 2008. This number 
includes over 250,000 mortgage modifications in 2010.

Q.3. This Committee has a responsibility to ensure that actors 
on all sides of the foreclosure process, including servicers, 
are acting legally and in the best interest of our society. We 
must address and remedy situations where this is not the case.
    However, unnecessarily delaying foreclosures is not without 
cost. Representatives of the secondary mortgage market have 
told us that, on average, a delay in foreclosure costs 
approximately $30-40 per day, per home. This is in addition to 
any changes in home values during that time.
    Ms. Desoer and Mr. Lowman, could you discuss what 
additional costs your institutions may incur during a 
foreclosure process if that process is delayed?

A.3. As we stated in our Third Quarter Form 10-Q filing with 
the SEC, Bank of America and its subsidiaries cannot predict 
the ultimate impact or cost of the temporary delay in 
foreclosure sales. If the time to complete foreclosure sales 
increases temporarily, that may result in an increase in 
nonperforming loans and the cash advances that as servicer we 
are required to make to taxing authorities, insurers, and other 
third parties, and may impact the collectability of such 
advances and the value of our mortgage servicing rights asset. 
Delays in foreclosure sales, including any delays beyond those 
currently anticipated, could increase the costs associated with 
our mortgage operations. Delays also may subject us to 
penalties for failing to meet investor foreclosure timelines. 
In addition, delays may adversely impact our held for 
investment portfolio due to real estate value declines 
resulting in decreased foreclosure sale prices.

Q.4. Given this Committee's oversight responsibilities, it is 
vital that we examine the regulatory actions taken before and 
after reports surfaced detailing the problems surrounding some 
foreclosures.
    Ms. Desoer and Mr. Lowman, did your regulator contact you 
prior to any of these press reports to review your foreclosure 
procedures?
    What, if any, directives or recommendations were made by 
your regulator surrounding the definition of ``personal 
knowledge'' as it relates to those in your companies who must 
sign foreclosure documents?
    What, if any, directives or recommendations were made by 
your regulator with regard to the notary process for these 
documents?

A.4. Under the rules and regulations of the Office of the 
Comptroller of the Currency (OCC), a national bank may not 
disclose information concerning examinations or investigations 
performed by the OCC. For example, pursuant to 12 CFR  
4.36(d), a national bank may not disclose non-public OCC 
information to third parties because it is considered the 
property of the OCC.
    Julie Williams, Chief Counsel and First Senior Deputy 
Comptroller, stated the following at a December 2, 2010 hearing 
of the House Judiciary Committee:

        [N]either banks' internal quality control tests, internal 
        audits, nor the OCC's own consumer complaint data suggested 
        foreclosure document processing was an area of systemic 
        concern.

         . . .

        There were no warning signs from internal audit, quality 
        control or even complaints relating to the foreclosure 
        documentation aspect of mortgage servicing, that were 
        triggering red lights for us.

In addition, Ms. Williams stated:

        [Wlhen problems were identified at Ally Bank, which is not a 
        national bank, we immediately directed the eighth largest 
        national bank mortgage servicers to review their operations and 
        take corrective actions. In concert with other regulatory 
        agencies, OCC examiners are now reviewing samples of individual 
        loan files where foreclosures have either been initiated or 
        completed to test the validity of bank self assessments and 
        corrective actions, whether foreclosed borrowers were 
        appropriately considered for loss-mitigation alternatives such 
        as loan modifications, and whether fees charged were 
        appropriate, documents were accurate and appropriately 
        reviewed, proper signatures were obtained and documents 
        necessary to support a legal foreclosure proceeding were 
        provided.

         . . .

        Where we find errors or deficiencies, we are directing national 
        banks to take immediate corrective action.

Q.5. Unfortunately, neither Fannie Mae, Freddie Mac, nor the 
Federal Housing Finance Administration were present at the 
hearing to discuss the ``approved lenders'' list that Fannie 
and Freddie publish to guide servicers as they select in-State 
counsels to act on their behalf.
    Given that, Ms. Desoer and Mr. Lowman, please describe what 
the GSE's require of your firms with respect to these lists, 
and indicate whether there have been any changes to them since 
news of problems with ``foreclosure mills'' began to surface.

A.5. The GSEs place numerous requirements on servicers for the 
loans the GSEs own. Certain of those requirements relate to the 
hiring of outside counsel. With some exceptions, we ordinarily 
select outside counsel with respect to the foreclosure of GSE 
loans from Fannie Mae and Freddie Mac lists of preapproved 
counsel. The GSEs have modified those lists recently.

Q.6. Ms. Desoer, your company must try to execute modification 
programs, but requirements of these programs are often changed 
by Treasury, investors, or other constituencies. You have 
identified in your testimony that in the HAMP program alone, 
there have been nearly 100 major program changes in the past 20 
months.
    Do you believe that the constantly changing requirements 
and restrictions on the Government-sponsored mortgage 
modification programs are confusing to consumers and 
counterproductive to attaining actual mortgage modifications?

A.6. When working with delinquent customers, we aim to achieve 
an outcome that meets both customer and investor interests, 
consistent with our obligations to the investor. Many investors 
limit Bank of America's discretion to make modifications, and 
even when they do not, our legal duties to investors add 
complexities to the execution of modification programs. While 
very few investors have an outright prohibition on 
modifications, their eligibility criteria and requirements 
vary.
    The Treasury Department, investors, and other 
constituencies have frequently changed the requirements of 
their modification programs. These differences and changes 
significantly contribute to the complexity of the modification 
process, strain a servicer's operations and systems, and may be 
a source of frustration and confusion felt by borrowers.
    As I previously testified, HAMP alone has had nearly 100 
program changes in the past 20 months. In testimony before the 
House Judiciary Committee on December 2, 2010, Phyllis 
Caldwell, Chief of the Homeownership Preservation Office of the 
Department of the Treasury, testified that ``we have made so 
many changes'' to HAMP and that ``some would say we've made too 
many changes that the system can't absorb them.'' Fannie Mae 
and Freddie Mac have layered on additional, and in many cases, 
different requirements, conditions and restrictions for HAMP 
processing of the loans they own. When these changes occur, we 
and other servicers have to change our processes, retrain our 
staff, and update our technology. These changes can also affect 
what is required of the customer, including requiring new or 
different documentation. In addition, States also have made 
statutory and regulatory changes to the foreclosure process, 
requiring various types of loss mitigation efforts, all of 
which have to be coordinated with the changing Federal 
directives.

Q.7. Ms. Desoer, your company and other large mortgage 
servicers portray a mortgage-servicing industry that, 
confronted with enormous adjustment challenges, is responding 
well and with, as you say in your testimony, ``extraordinary 
speed.'' From the perspective of large mortgage-servicing 
firms, it sounds as though homeowners facing distress are 
treated with dignity, are offered a wide array of possible 
modification alternatives, and are treated fairly. In striking 
contrast, however, consumer activists portray mortgage 
servicers as profit-centric firms with sloppy record keeping 
and little aversion to cutting corners in order to reach 
foreclosure.
    Ms. Desoer, with stories circulating that homeowners who 
should not have been foreclosed upon are finding their locks 
changed as a result of a sloppy foreclosure process, why should 
I believe industry claims that borrowers are being treated 
fairly and with respect?
    Do you have detailed data, preferably verified by an 
independent party, to show that you have not wrongfully 
foreclosed on homeowners?

A.7. We do not claim perfection, and we address mistakes 
quickly and responsibly when they arise. We also appreciate and 
take seriously the perspective of consumer advocates. We would 
note that the cases reported in the press are often more 
complex than some reports suggest but financial privacy 
concerns prevent us from discussing the specifics of these 
cases publicly.
    After concerns emerged at other lenders regarding the 
foreclosure affidavit process in judicial foreclosure States, 
Bank of America initiated a review of our foreclosure 
procedures. On October 1, 2010, we voluntarily suspended 
foreclosure judgments in the 23 judicial foreclosure States 
while we completed this review. One week later, we paused 
foreclosure sales nationwide as we launched a voluntary review 
of our foreclosure processes in those States as well. We 
believe these steps were appropriate and responsible.
    We have identified areas for improvement as a result of our 
review. We are taking these matters very seriously and are 
implementing changes accordingly. These changes in the 
foreclosure process include, among other things, a new 
affidavit form and additional quality control checks.
    We fully understand our responsibility to be responsive 
and, when a foreclosure is unavoidable, to treat customers with 
respect as they transition to alternative housing. We, and 
those who work with us in connection with foreclosure 
proceedings, also have an obligation to do our best to protect 
the integrity of those proceedings. When and where that has not 
happened, we accept responsibility for it, and we deeply regret 
it.

Q.8. Attorney General Miller's testimony today states the 
following:

        While the servicer is free to lose documents as many times as 
        they want or to take as long as they want, the servicer often 
        demands strict compliance from the borrower. Thus, no matter 
        how many times the borrower has previously submitted his or her 
        paperwork, if the borrower fails one time, the loan 
        modification is denied.

    Do any representatives of the servicer industry wish to 
respond to Mr. Miller's claims?

A.8. Our commitment at Bank of America is to ensure that no 
property is taken to foreclosure sale until our customer is 
given a fair opportunity to be evaluated for a modification. If 
a modification is not possible, we explore a short sale or deed 
in lieu solution. Foreclosure is our last resort.
    We launched a foreclosure hold in October 2008 for 
borrowers potentially eligible for our National Home Ownership 
Retention Program and have participated in several others, as 
new programs were developed and launched, in order to ensure no 
customer who has a reasonable option to stay in their home goes 
to foreclosure sale.
    It is not the case that borrowers are given only one 
opportunity to be considered for a modification. Subject to 
investor requirements, we re-evaluate borrowers for home 
retention options throughout the foreclosure process. 
Modifications can occur after borrowers have failed to respond 
to initial requests for documentation and borrowers are given 
more than one opportunity to provide documentation. We have 
worked hard to improve borrower response rates by partnering 
with non-profits such as the Neighborhood Assistance 
Corporation of America (NACA), the National Urban League, the 
National Council of La Raza and the National Association of 
Asian Pacific Americans for Community Development. It is also 
our policy to check to determine whether a borrower is being 
evaluated for a modification all the way up until the day 
before the foreclosure sale.
    In addition, as noted above in response to Senator Dodd's 
first question, we are redesigning our modification process to 
assign eligible borrowers who have submitted to us at least one 
document in support of their modification application to an 
associate with relevant expertise for help at each particular 
stage of the modification process. We are implementing this new 
approach to modifications, and so far we have paired customers 
with an associate on this basis over 230,000 times.

Q.9. Ms. Thompson testifies that, `` . . . the problems 
occasioned by mortgage servicer abuse run rampant.'' That is a 
strong accusation. Ms. Thompson also frequently, though without 
definition, refers to ``abuses'' committed by servicers and 
``excessive'' fees. She accuses servicers of failing to 
negotiate in good faith and of preparing false affidavits. She 
states that ``Servicers do not believe that the rules that 
apply to everyone else apply to them.'' Their attitude, 
according to Ms. Thompson, is ``lawless'' and they commit 
``wrongful foreclosure on countless American families.'' She 
also states that ``The lack of restraint on servicer abuses has 
created a moral hazard juggernaut that at best prolongs and 
deepens the current foreclosure crisis and at worst threatens 
our global economic security.''
    Do any of the servicer representatives here wish to respond 
to Ms. Thompson's allegations?

A.9. We categorically reject Ms. Thompson's characterization of 
our commitment to serving our customers. We have worked 
aggressively to respond to more than a million customers in 
distress. We don't claim perfection, but we have led with 
innovative ideas and continue to put forward solutions that 
respond to customer needs. That's a responsibility that comes 
with being America's leading consumer bank--and a 
responsibility every associate at Bank of America is working 
diligently to uphold. We fully understand our responsibility to 
be fair, to be responsive and, where a foreclosure is 
unavoidable, to treat customers with respect as they transition 
to alternative housing.
    Unfortunately, we have reached a crossroads between loan 
modification efforts and the reality of foreclosure. The 
majority of our distressed customers have been evaluated for 
available programs or afforded a fair opportunity to be 
evaluated, and many customers will be dealing with the reality 
that despite the range of loss mitigation solutions and our 
best efforts, foreclosure is unavoidable. This will drive an 
increase in the concerns you and we hear from distressed 
homeowners. Our increases in staffing and foreclosure 
alternative programs are directed at respectfully helping 
customers move through this difficult period. We believe that 
these efforts are working, as every day we reduce the backlog 
in both modification decisions and customer complaints.

Q.10. Given the varying State laws that govern foreclosure, 
there must be the opportunity to observe both best and worst 
practices. While foreclosures are not the preferred option for 
any party at the onset of a loan, sometimes it is the path 
forward that presents the least harm to borrowers, lenders and 
the economy. In those instances, it is essential that our 
foreclosure process be effective.
    Which States do each of you feel provide the most efficient 
path forward in foreclosures, while providing borrowers proper 
legal channels in the event that there is a dispute? What is 
the average length of time between original delinquency and 
foreclosure sale in these States?
    Which States do each of you feel have the most problems in 
effectively executing foreclosures? What is the average length 
of time between original delinquency and foreclosure sale in 
these States?

A.10. The processes and requirements governing foreclosure vary 
significantly among States, and in some cases, from one local 
jurisdiction to another. We have not undertaken a review to 
compare the relative efficiency and effectiveness of 
foreclosure regimes in the 50 States. We would note that States 
face varying challenges, including their respective volumes of 
delinquent borrowers and economic conditions.
    As to the average duration of the foreclosure process, for 
the loan population serviced by Bank of America, it takes 
nearly a year, on average, from the time a customer receives a 
foreclosure notice until the actual foreclosure sale is 
completed. The timeline in judicial States is generally longer. 
In Florida, for example, the timeline can be closer to 2 years.
    While Bank of America does not track this data across all 
servicers, we are aware of various third parties that do 
endeavor to provide State-by-State averages. For example, 
RealtyTrac (http://www.realtytrac.com/foreclosure-laws/
foreclosure-laws-comparison.asp) provides information on State-
by-State procedures and foreclosure timelines. The Mortgage 
Bankers Association also provides information on foreclosure 
timelines (see http://www.mortgagebankers.org/
IndustryResources/ResourceCenters/ForeclosureProces). While we 
cannot verify the accuracy of this third party data, we share 
them with you as potential sources of information.

Q.11. To better gauge the level of violations surrounding the 
topic of this hearing it is necessary for us to understand who 
is being affected. Admittedly, this question is probably best 
suited for the regulators, and we hope to receive this 
information from them at some point.
    In your research and investigations, how many individuals 
were discovered to have been fully current on their mortgage 
payments but foreclosed upon by their servicer? Please provide 
the data and evidence that you evaluated to arrive at your 
conclusions.

A.11. As noted in response to question 7 above, when industry 
concerns arose with the foreclosure affidavit process, we took 
steps to stop foreclosure sales nationwide and launch a 
voluntary review of our foreclosure procedures. While we don't 
claim perfection, our review to date indicates that the issues 
with the affidavit process did not affect the basis of our 
foreclosure decisions.
    The decision to refer a loan to foreclosure is made by Bank 
of America after a foreclosure review process that is based on 
a careful evaluation of our servicing records. This evaluation 
precedes and is independent from the process used to create and 
execute affidavits of indebtedness.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM BARBARA J. 
                             DESOER

Q.1. Please describe in detail the reviews that your 
organizations conducted pursuant to your announced moratoriums, 
including: how many employees were involved; how many files 
they reviewed; how much time, on average, an employee spent 
reviewing a file.
    How many errors did you uncover, and what was the nature of 
those errors?
    How did you inform homeowners that their foreclosure 
filings were being reviewed?

A.1. When industry concerns arose with the foreclosure 
affidavit process, we took affirmative steps to stop 
foreclosure sales so that we could review our related 
foreclosure procedures. On October 1, 2010, we voluntarily 
suspended foreclosure judgments in the 23 judicial foreclosure 
States while we completed this review. One week later, we 
paused foreclosure sales nationwide in order to extend our 
voluntary review of our foreclosure process to all 50 States. 
We determined that, out of an abundance of caution, we would 
replace every affidavit of indebtedness in every pending 
foreclosure case.
    The new affidavits will be prepared through an improved 
process, which includes, among other things, a new affidavit 
form to enhance the quality and uniformity of our process and 
additional quality control checks throughout the process in 
order to ensure that the accuracy of each affidavit is verified 
at several key points. We are also adding measures to validate 
that each affidavit is individually reviewed by the signer, 
properly executed, and promptly notarized. In addition, we are 
implementing new procedures for selecting and monitoring 
outside counsel.
    We are taking these matters very seriously and are 
carefully restarting the affidavit process with these controls 
in place.

Q.2. How many files that you reviewed were missing the original 
note?
    A 2007 study found that 40 percent of bankruptcy filings 
involving mortgages were missing the original note. How many of 
your foreclosure filings are missing their original note?

A.2. We believe that our investors hold notes for substantially 
all of the mortgage loans we service, and we rarely prepare and 
file lost note affidavits. It bears note that the fact that a 
note is lost does not mean that the debt is extinguished or is 
unenforceable. The law in all States permits lost notes to be 
enforced and the related mortgages to be foreclosed subject to 
certain conditions.
    While rules and practice over the filing or submission of 
originals or copies of promissory notes vary significantly from 
court to court, if our local counsel is required to file or 
submit the original note or a copy of the original note, we 
request it from the applicable custodian or investor and send 
the original or a copy of the note (or, in those rare cases 
when a note has been lost, a lost note affidavit) to our local 
counsel to be filed or submitted. Your reference to a 2007 
study may be to an article by Katherine Porter entitled 
Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas 
Law Review 121 (2008). Ms. Porter did not study whether 
servicers had access to notes or whether they were filed or 
submitted in foreclosure actions. Her study was limited to 
assessing whether proofs of claim initially filed in bankruptcy 
cases included copies of notes (she did not look at any 
amendments or responses to requests).

Q.3. Do all of your organization's note endorsements comply 
with the requirements of your pooling and servicing agreements?

A.3. Bank of America believes that it has complied in all 
material respects with the mortgage loan document delivery 
requirements of pooling and servicing agreements with respect 
to note endorsements. Trustees or their designated document 
custodian generally have a contractual obligation to review the 
loan documents provided by the seller for conformity with the 
delivery requirements of the pooling and servicing agreement. 
This process is called ``certification.'' If a seller did not 
deliver a proper note endorsement, in the ordinary course this 
error should be identified by the trustee or the document 
custodian as part of the certification process.

Q.4. Have your regulators participated in or overseen your 
reviews, and if so, how?

A.4. Under the rules and regulations of the Office of the 
Comptroller of the Currency (OCC), a national bank may not 
disclose information concerning examinations or investigations 
performed by the ace. For example, pursuant to 12 CFR  
4.36(d), a national bank may not disclose non-public OCC 
information to third parties because it is considered the 
property of the OCC.
    John Walsh, Acting Comptroller of the Currency, testified 
to this Committee on December 1, 2010 that ``[w]hen problems 
were identified outside the national banking system at Ally 
Bank, we immediately directed the eighth largest national bank 
servicers to review their operations and take corrective 
action'' and that the OCC ``began organizing onsite 
examinations at each of those major servicers which are now 
well underway, with more than 100 national bank examiners 
assigned to this task.'' In addition, Mr. Walsh testified at a 
November 18, 2010 hearing of the House Financial Services 
Committee, Housing & Community Opportunity Subcommittee, that 
``[t]he examinations that we're now undertaking on an 
interagency basis are going to just grind right down to the 
most granular detail to understand what has gone on in this 
process; to make sure that those processes are remedied so that 
they operate in a fair and legal manner.''

Q.5. There is some disagreement about whether the problems 
within the loan modification and foreclosure processes were 
isolated incidents, systemic failures, or were caused by rogue 
individuals following mistaken guidelines. Who determines your 
affidavit signing policies and procedures?
    Were your employees following company policy? If so, has 
any employee responsible for designing that policy been 
disciplined, and how?
    Were any employees disobeying company policy? If so, have 
they been disciplined, and how?

A.5. As noted above in response to your first question, we are 
implementing a series of steps to improve our process for 
generating affidavits of indebtedness. Our new policies and 
enhancements to our judicial foreclosure process are designed 
to provide additional assurance that going forward, affidavits 
of indebtedness will be prepared in accordance with best 
practices and all applicable rules. Our efforts include an 
enhanced training program for all employees involved in the 
affidavit process, including affiants and notaries, on the 
revised process and their specific responsibilities. We are 
taking these matters very seriously.

Q.6. An article published in the Cleveland Plain Dealer on 
October 17 titled ``Mortgage Foreclosure Uproar Sweeps Up 
Northeast Ohioans'' told the stories of three Northeast Ohio 
families that had their houses taken from them despite not 
missing any mortgage payments. What is your response to this 
story, and do you believe that such a report is consistent with 
statements like that from Mr. Lowman's written testimony that 
information in your files about ``default and indebtedness was 
materially accurate'' and that foreclosure record-keeping and 
affidavit issues ``did not result in unwarranted 
foreclosures''?

A.6. As noted above in response to Senator Shelby's questions 7 
and 11, when industry concerns arose with the foreclosure 
affidavit process, we took steps to stop foreclosure sales 
nationwide and launch a voluntary review of our foreclosure 
procedures. While we don't claim perfection, our review to date 
indicates that the issues with the affidavit process did not 
affect the basis of our foreclosure decisions.
    We would note that the cases reported in the press are 
often more complex than some reports suggest but financial 
privacy concerns prevent us from discussing the specifics of 
these cases publicly.

Q.7. Mr. Lowman's written testimony says that ``servicer 
compensation would tend to favor modification over 
foreclosure,'' and that ``the cost for servicers to take a loan 
to foreclosure generally is significantly greater than the cost 
of a modification.'' Please describe the compensation structure 
of your mortgage servicing business.

A.7. At Bank of America, foreclosure is the last resort. From a 
business standpoint, a loan modification is the preferred 
solution because foreclosures are almost always more costly 
than modifications.
    For context, of the loans Bank of America has taken to 
foreclosure sale, the foreclosure typically takes 19 months to 
complete from the time of delinquency to actual sale versus a 
loan modification that typically takes 4 months to complete 
from default to workout. The associated servicing-related costs 
to foreclose on average are four times higher than the cost to 
modify a loan.
    The cost of servicing a non-performing loan for an extended 
period of time exceeds any offsetting income from fees. In 
addition, Bank of America suffers the full loss on loans it 
holds for investment.

Q.8. How many second liens do you hold on properties that you 
are also servicing?

A.8. Bank of America owns the second lien on approximately 11 
percent of the portfolio of loans we service.

Q.9. Please describe any barriers to mortgage modifications 
that servicers may encounter.

A.9. As we discussed above in response to Senator Shelby's 
question 6, when working with delinquent customers, we aim to 
achieve an outcome that meets both customer and investor 
interests, consistent with our obligations to the investor. 
Many investors limit Bank of America's discretion to make 
modifications, and even when they do not, our legal duties to 
investors add complexities to the execution of modification 
programs. While very few investors have an outright prohibition 
on modifications, their eligibility criteria and requirements 
vary.
    The Treasury Department, investors, and other 
constituencies have frequently changed the requirements of 
their modification programs. These differences and changes 
significantly contribute to the complexity of the modification 
process, strain a servicer's operations and systems, and may be 
a source of frustration and confusion felt by borrowers.
    As I previously testified, HAMP alone has had nearly 100 
program changes in the past 20 months. In testimony before the 
House Judiciary Committee on December 2, 2010, Phyllis 
Caldwell, Chief of the Homeownership Preservation Office of the 
Department of the Treasury, testified that ``we have made so 
many changes'' to HAMP and that ``some would say we've made too 
many changes that the system can't absorb them.'' Fannie Mae 
and Freddie Mac have layered on additional, and in many cases, 
different requirements, conditions and restrictions for HAMP 
processing of the loans they own. When these changes occur, we 
and other servicers have to change our processes, retrain our 
staff, and update our technology. These changes can also affect 
what is required of the customer, including requiring new or 
different documentation. In addition, States also have imposed 
statutory and regulatory changes to the foreclosure process 
requiring various types of loss mitigation efforts, all of 
which have to be coordinated with the changing Federal 
directives.
    Notwithstanding these challenges, Bank of America has 
completed nearly 750,000 loan modifications since 2008.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD FROM R.K. ARNOLD

Q.1. Last year we enacted the Helping Families Save Their Homes 
Act. The Act added a provision to the Truth in Lending Act, 
known as TILA, which requires loan owners and assignees to 
disclose their identity to homeowners. Now, TILA requires the 
mortgage industry to keep homeowners informed--in writing--
whenever their mortgage is sold, transferred or assigned.
    How does MERS' core function--that of recording MERS as the 
mortgagee of record in public documents and then tracking 
future assignments in its internal, proprietary database--match 
up with the disclosure provisions of the Truth in Lending Act?
    How are homeowners notified about who owns or who services 
their loans--and who has the right to foreclose on them--when 
it is being tracked by MERS?

A.1. The functions and operations of MERS are completely 
consistent with, and supportive of, the provisions of the Truth 
in Lending Act, and in particular, with the original 
requirement for servicers to notify homeowners when the 
servicing rights are transferred, and the new requirement 
implemented by the Helping Families Save Their Homes Act for 
notification of the homeowner when the ownership of a mortgage 
loan changes.
    While the primary responsibility in notifying the borrowers 
of changes in ownership and servicing of a mortgage loan fall 
(respectively) upon the owner and the servicer of the mortgage 
loan, MERS has always attempted to operate in conformance with 
the mandates and directives of TILA. From the outset, the 
MERS' System has allowed borrowers to consult the 
database and determine the identity of the servicer for their 
loan if their loan is registered on the MERS' 
System.
    Following the passage of the Helping Families Save Their 
Homes Act, MERS introduced an optional new service called MERS 
InvestorID that took two steps to help further the Act's 
objectives. First, it added a new feature to the system that 
allows its members to automatically generate an ``Investor 
Transfer Notice'' that informs homeowners of the change to 
their loan's ownership.
    Second, MERS expanded its Web-based servicer look-up system 
(www.mers-servicerid.org) so that a borrower can also determine 
who owns their mortgage loan if their loan is registered on the 
MERS' System. Participation in the InvestorID 
program is optional for MERS members, and members may choose to 
keep the investor identity confidential. However, to date 97 
percent of MERS' 3,000 members have agreed to participate and 
disclose the identity of the owner of the loan. MERS continues 
to work with our remaining members and seeks to have 100 
percent participation. In those cases where the investor 
information is not available, MERS is frequently willing and 
able to work with the borrower and help them secure this 
information through other sources (such as the Web site of 
Freddie Mac, which has opted not to participate in InvestorID 
at this time but has enabled their own Web site, 
www.freddiemac.com, to provide the same service).
    In addition to providing investor information online and 
free of charge, borrowers may also confirm the identity of 
their current servicer through MERS. The same service where 
borrowers can obtain the identity of their investor will also 
identify their current servicer (www.mers-servicerid.org). This 
is particularly useful in detecting fraud for borrowers by 
letting them confirm the content of any hello-and-goodbye 
letter they receive and preventing them from sending a loan to 
the wrong (and possibly fraudulent) address. Regardless of the 
availability of information on the MERS' System, the 
borrower still retains the right under TILA to obtain the 
ownership information from the servicer. The principle legal 
obligation to provide borrowers with this information rests 
with the servicer, and the naming of MERS as mortgagee does not 
diminish or change this duty in any way. MERS' disclosure of 
investor information is and always was intended to be a 
supplement to, rather than a replacement of, this legal right.
    MERS strives to improve the availability and reliability of 
information for all participants in the mortgage finance 
process--borrowers, lenders, investors, servicers, and 
regulator--and we are open to any suggestions that further 
those goals.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM R.K. 
                             ARNOLD

Q.1. Mr. Levitin, your testimony states that a common response 
from banks--and I assume here you mean servicers--about 
problems in the foreclosure process is that it doesn't matter 
to them because the borrower still owes on the loan and has 
defaulted. As you put it: ``This `No Harm, No Foul' argument is 
that homeowners being foreclosed on are all a bunch of 
deadbeats, so who really cares about due process?'' You say 
that this argument, that you attribute loosely to ``banks,'' 
condones ``vigilante foreclosures: so long as the debtor is 
delinquent, it does not matter who evicts him or how.''
    Does any representative of the servicer industry on the 
panel wish to comment on this?

A.1. MERSCORP, Inc. and its subsidiary, Mortgage Electronic 
Registration Systems, Inc., is not a servicer or a 
representative of any servicer or the servicer industry. 
Mortgage Electronic Registration Systems, Inc. serves as a 
common agent for the mortgage finance industry for the limited 
purpose of holding and tracking mortgages. Neither company is 
involved in the servicing of loans and makes no decisions and 
has no role in the any decisions regarding loan modifications 
or loan foreclosures. As such, we have no comment on Mr. 
Levitin's statements.

Q.2. Attorney General Miller's testimony today states the 
following:

        While the servicer is free to lose documents as many times as 
        they want or to take as long as they want, the servicer often 
        demands strict compliance from the borrower. Thus, no matter 
        how many times the borrower has previously submitted his or her 
        paperwork, if the borrower fails one time, the loan 
        modification is denied.

    Do any representatives of the servicer industry wish to 
respond to Mr. Miller's claims?

A.2. MERSCORP, Inc. and its subsidiary, Mortgage Electronic 
Registration Systems, Inc. is not a servicer or a 
representative of any servicer or the servicer industry. 
Mortgage Electronic Registration Systems, Inc. serves as a 
common agent for the mortgage finance industry for the limited 
purpose of holding and tracking mortgages. Neither company is 
not involved in the servicing of the loan and makes no 
decisions and has no role in the any decisions regarding loan 
modifications or loan foreclosures. As such, we have no comment 
on Attorney General Miller's statement.
    However, it should be noted that in 2005, when it became 
apparent to us that foreclosures undertaken in Florida were 
relying excessively on lost note affidavits, MERS adopted a 
rule forbidding the use of lost note affidavits when 
foreclosures were done in the name of MERS in Florida. That 
rule was extended nationally in 2006 and is still in effect 
today. MERS believes that borrowers are entitled to know that 
the company foreclosing has all of the necessary paperwork and 
rights to do so. Showing up with the original note provides the 
borrower and the court with proof that the foreclosing company 
is the proper party to foreclose.

Q.3. Mr. Arnold, your company relies on people who you refer to 
as ``certifying officers.'' These are people who work in 
companies that are members of your system and who your company 
grants certain authorities, such as the authority to initiate 
foreclosures.
    Please explain what authorities are granted to certifying 
officers and the mechanisms that your company has in place to 
monitor the performance and behavior of those officers.

A.3. Mortgage Electronic Registration Systems, Inc. takes the 
majority of its actions as the mortgagee through the use of 
officers commonly referred to as ``certifying officers.'' From 
inception, the concept of certifying officers has always been 
fundamental to the operations of MERS. In the white paper \1\ 
calling for the creation of MERS, it was recognized that 
members would need to have a form of authority to act on behalf 
of MERS when MERS is the mortgagee on their behalf. That 
authority took the form of appointing persons (designated by 
the member) as officers with limited authority to take certain 
actions. The offices to which each of these individuals are 
officially appointed to are vice president and assistant 
secretary.
---------------------------------------------------------------------------
    \1\ In 1993, a 36-page white paper entitled ``Whole Loan Book Entry 
Concept for the Mortgage Finance Industry'' addresses the concepts 
underlying MERS and the problems it was designed to address. It is 
available upon request.
---------------------------------------------------------------------------
    The authority granted to these officers is limited to: (1) 
executing lien releases, (2) executing mortgage assignments, 
(3) initiating foreclosures, (4) executing proofs of claims and 
other bankruptcy related documents (e.g., motions for relief of 
the automatic stay), (5) executing modification and 
subordination agreements needed for refinancing activities, (6) 
endorsing over mortgage payment checks made payable to MERS (in 
error) by borrowers, and (7) taking such other actions and 
executing documents necessary to fulfill the member's servicing 
duties. It is important to note that the certifying officers 
are the same officers whom the lenders and servicers use to 
carry out these same functions above for their company even 
when MERS is not the mortgagee.
    MERS has specific controls over who can be identified by 
its members as a certifying officer. To be a MERS certifying 
officer, one must be a company officer of the member 
institution, have basic knowledge of MERS, and pass a 
certifying examination administered by MERS, which is renewed 
on an annual basis for each individual.
    Concerning the monitoring and oversight of certifying 
officers, as noted in our testimony (see p.19-21), MERS has 
taken actions in the past to help ensure that certifying 
officers were acting in a manner consistent with MERS rules. 
Earlier this year, when we became aware of acceleration in 
foreclosure document processing, we grew concerned that some 
certifying officers might have been pressured to perform their 
responsibilities in a manner inconsistent with our rules. When 
we did not get the assurances we thought were appropriate to 
keep this from happening, we suspended our relationships with 
those companies.
    When we discovered that some so-called ``robo-signers'' 
were MERS certifying officers, we suspended their authority 
until they could be retrained and retested. We are asking our 
members to provide us with specific plans outlining how they 
intend to prevent such actions in the future.

Q.4. Mr. Arnold, does MERS derive any revenue from 
foreclosures?

A.4. No. Neither MERSCORP, Inc. nor its subsidiary, Mortgage 
Electronic Registration Systems, Inc., receive any fees or 
other form of compensation from foreclosures.
    MERS derives its revenue solely from its members. MERS 
makes its money through an annual membership fee (ranging from 
$264 to $7,500) based on organizational size, and through loan 
registration and servicing transfer fees. MERS charges a one-
time $6.95 fee to register a loan and have Mortgage Electronic 
Registration Systems, Inc. serve as the common agent 
(mortgagee) in the land records. For loans where Mortgage 
Electronic Registration Systems, Inc. will not act as the 
mortgagee, there is only a small one-time registration fee 
($0.97). This is known as an iRegistration. Transactional fees 
(ranging from $1.00 to $7.95) are charged to update the 
database when servicing rights on the loan are sold from one 
member to another.
    MERS charges no fees and makes no money from mortgage 
origination or payments, from the securitization or transfer of 
mortgages, or from foreclosures done in its name.

Q.5. Ms. Thompson testifies that, `` . . . the problems 
occasioned by mortgage servicer abuse run rampant.'' That is a 
strong accusation. Ms. Thompson also frequently, though without 
definition, refers to ``abuses'' committed by servicers and 
``excessive'' fees. She accuses servicers of failing to 
negotiate in good faith and of preparing false affidavits. She 
states that ``Servicers do not believe that the rules that 
apply to everyone else apply to them.'' Their attitude, 
according to Ms. Thompson, is ``lawless'' and they commit 
``wrongful foreclosure on countless American families.'' She 
also states that ``The lack of restraint on servicer abuses has 
created a moral hazard juggernaut that at best prolongs and 
deepens the current foreclosure crisis and at worst threatens 
our global economic security.''
    Do any of the servicer representatives here wish to respond 
to Ms. Thompson's allegations?

A.5. MERSCORP, Inc. is not best suited to answer this question. 
MERSCORP, Inc. and its subsidiary, Mortgage Electronic 
Registration Systems, Inc. is not a servicer or a 
representative of any servicer or the servicer industry. 
Mortgage Electronic Registration Systems, Inc., serves as a 
common agent for the mortgage finance industry for the limited 
purpose of holding and tracking mortgages. Neither company is 
involved in the servicing of the loan and makes no decisions 
and has no role in the any decisions regarding loan 
modifications or loan foreclosures. As such, we have no comment 
on Ms. Thompson's statements.

Q.6. Given the varying State laws that govern foreclosure, 
there must be the opportunity to observe both best and worst 
practices. While foreclosures are not the preferred option for 
any party at the onset of a loan, sometimes it is the path 
forward that presents the least harm to borrowers, lenders and 
the economy. In those instances, it is essential that our 
foreclosure process be effective.
    Which States do each of you feel provide the most efficient 
path forward in foreclosures, while providing borrowers proper 
legal channels in the event that there is a dispute? What is 
the average length of time between original delinquency and 
foreclosure sale in these States?
    Which States do each of you feel have the most problems in 
effectively executing foreclosures? What is the average length 
of time between original delinquency and foreclosure sale in 
these States?

A.6. MERSCORP, Inc. is not best suited to answer this question. 
MERSCORP, Inc. and its subsidiary, Mortgage Electronic 
Registration Systems, Inc. is not a servicer or a 
representative of any servicer or the servicer industry. 
Mortgage Electronic Registration Systems, Inc. serves as a 
common agent for the mortgage finance industry for the limited 
purpose of holding and tracking mortgages. Neither company has 
any role in the decisions regarding loan modifications or loan 
foreclosures.

Q.7. To better gauge the level of violations surrounding the 
topic of this hearing it is necessary for us to understand who 
is being affected. Admittedly, this question is probably best 
suited for the regulators, and we hope to receive this 
information from them at some point.
    In your research and investigations, how many individuals 
were discovered to have been fully current on their mortgage 
payments but foreclosed upon by their servicer? Please provide 
the data and evidence that you evaluated to arrive at your 
conclusions.

A.7. MERSCORP, Inc. is not best suited to answer this question. 
MERSCORP, Inc. and its subsidiary, Mortgage Electronic 
Registration Systems, Inc. is not a servicer or a 
representative of any servicer or the servicer industry. 
Mortgage Electronic Registration Systems, Inc. serves as a 
common agent for the mortgage finance industry for the limited 
purpose of holding and tracking mortgages. Neither company is 
involved in the servicing of the loan and makes no decisions 
and has no role in the any decisions regarding loan 
modifications or loan foreclosures.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM R.K. ARNOLD

Q.1. How many individuals are employed by MERS, Inc. and 
MERSCORP, Inc., including vice presidents, assistant 
secretaries, or other ``certifying officers'' designated 
pursuant to corporate resolution?
    Are these employees also employed by other organizations? 
If so, which ones?

A.1. Measured by direct employment, MERSCORP, Inc. is a 
relatively small organization. About 50 people work for 
MERSCORP, Inc. in our Reston, VA, office. Hewlett-Packard and 
Genpact are our technology partners, and they run the database, 
the help desk and mailroom with an additional 150 people 
dedicated to the MERS account.
MERS Certifying Officers
    Mortgage Electronic Registration Systems, Inc. takes the 
majority of its actions as the mortgagee through the use of 
officers commonly referred to as ``certifying officers.'' From 
inception, the concept of certifying officers has always been 
fundamental to the operations of MERS. In the white paper 
calling for the creation of MERS, it was recognized that 
members would need to have a form of authority to act on behalf 
of MERS when MERS is the mortgagee on their behalf. That 
authority took the form of electing persons (designated by the 
member) as officers with limited authority to take certain 
actions. The offices to which each of these individuals are 
officially appointed are vice president and assistant 
secretary. The authority granted to these officers is limited 
to: (1) executing lien releases, (2) executing mortgage 
assignments, (3) initiating foreclosures, (4) executing proofs 
of claims and other bankruptcy related documents (e.g., motions 
for relief of the automatic stay), (5) executing modification 
and subordination agreements needed for refinancing activities, 
(6) endorsing over mortgage payment checks made payable to MERS 
(in error) by borrowers, and (7) taking such other actions and 
executing documents necessary to fulfill the member's servicing 
duties.
    It is important to note that the certifying officers are 
the same officers whom the lenders and servicers use to carry 
out these functions even when MERS is not the mortgagee. MERS 
has specific controls over who can be identified by its members 
as a certifying officer. To be a MERS certifying officer, one 
must be a company officer of the member institution, have basic 
knowledge of MERS, and pass a certifying examination 
administered by MERS.
    Under the corporate law in Delaware (where MERS is 
incorporated), there is no requirement that an officer of a 
corporation also be an employee of that corporation. A 
corporation is allowed to appoint individuals to be officers 
without having to employ those individuals or even pay them. 
This concept is not limited to MERS. Corporations cannot 
operate without officers; they can and often do operate without 
employees. It is not uncommon for large organizations to have 
all its employees employed by an operating company and for 
those employees to be elected as officers of affiliated 
companies that are created for other purposes (all corporations 
are required by law to have officers to act for it). Even for 
loans where MERS is not the mortgagee, employees of the 
servicer are generally delegated the power to take actions 
(e.g., initiate foreclosures) and execute documents (e.g., lien 
releases and assignments) on behalf of the owner of the loan 
(and the servicer, in turn, may further delegate such authority 
to a third-party vendor).
    As of November 15, 2010, MERS has 20,302 certifying 
officers who work with the more than 31 million active loans 
registered on the MERS System.

Q.2. Is Mortgage Electronic Registration Systems (MERS) 
considered a nominee or mortgagee for the mortgages that it 
registers?

A.2. MERS is a mortgagee who holds the mortgage lien in a 
nominee capacity for the lender and the lenders successors and 
assigns. When MERS is named as mortgagee in a mortgage 
document, it holds the legal title to that mortgage, while the 
beneficial interest in that mortgage flows to the owner of the 
promissory note. A MERS mortgage makes clear that MERS is 
acting as the nominee (agent) of the lender-the original owner 
of the beneficial interest in the mortgage-and holds the legal 
title to the mortgage in this capacity.
    Mortgage law is abundantly clear that a promissory note 
owner may empower an agent with the authority to hold and 
enforce a mortgage lien on behalf of the note owner, and that 
courts should make every effort to recognize this agency 
relationship. (See Restatement (Third) Property,  5.4, comment 
e)
    The practice of having an agent hold legal title to the 
mortgage for a note-owner long pre-dates the creation of MERS 
in 1995. It became a standard practice in the mortgage finance 
industry.

Q.3.-1. What is the status of a mortgage if a State court rules 
that MERS has not legally obtained or transferred title?

A.3.-1. As a rule, the mortgage is said to follow the note, 
i.e., that the holder of the note also holds the beneficial and 
equitable (but not legal) title to the mortgage, and transfer 
of the promissory note conveys the beneficial and equitable 
interest in the mortgage. Therefore, the note-holder always has 
the right to foreclose. If a lender has possession of the note 
and seeks to foreclose, the note-holder will be viewed as 
having an equitable assignment of the mortgage because the 
mortgage follows the note. This general principle applies 
whether or not MERS is the mortgagee.
    We are not aware of any State where the law of that State 
prohibits MERS from being the mortgagee, or that MERS has not 
legally obtained or transferred title. There have been a few 
cases that turned on the specific facts of the case and some 
may mistakenly interpret these cases to hold that MERS cannot 
be the mortgagee (e.g., the Maine Supreme Judicial Court 
decision in Mortgage Electronic Registration Systems, Inc. v. 
Saunders, 2010 ME 79, Cum-09-640 (MESC), August 12, 2010). Such 
an interpretation is not correct, in Saunders or any other case 
that we are aware.
    For example, the Saunders court did not hold or state 
anywhere in the opinion that MERS cannot hold a mortgage lien. 
What the court actually concluded is that ``MERS does not 
qualify as a mortgagee pursuant to [Maine's] foreclosure 
statute, 14 M.R.S.  6321-6325.'' (par. 11 of the opinion, 
emphasis added). The statute outlines steps that a mortgagee 
must take to commence and complete a judicial foreclosure in 
that State. It does not specifically define the term 
``mortgagee'' or in any way determine who may be a mortgagee 
under Maine's broader real property law. As for the Saunders 
decision itself, it does not in any way conflict with or 
otherwise repudiates the basic legal principals upon which the 
MERS business model is based.
    When MERS is named as mortgagee in a mortgage document, it 
holds the legal title to that mortgage, while the beneficial 
interest in that mortgage flows to the owner of the promissory 
note. The Saunders opinion acknowledges this very same point. A 
MERS mortgage makes clear that MERS is acting as the nominee 
(agent) of the lender--the original owner of the beneficial 
interest in the mortgage--and holds the legal title to the 
mortgage in this capacity for the lender and successors-in-
interest to the lender.
    A foreclosing party--be it MERS or anyone else--must both 
hold the note and be the mortgagee of record. As the Saunders 
court noted, Maine's adoption of the Uniform Commercial Code 
(UCC) specifically allows the holder of the promissory note the 
right to enforce its terms. The note is the primary evidence of 
the borrower's obligation to repay the debt, and the mortgage 
is subordinate to the note.
    For this reason, MERS rules require that before it will 
move forward with a foreclosure, MERS must be the mortgagee and 
MERS must be the holder of the note. MERS has established rules 
and procedures for foreclosures to ensure that the necessary 
evidence is presented to the court and the claim is clearly 
presented in the pleading. When these rules and procedures are 
followed, MERS foreclosures are successful. It has been noted 
in the press and elsewhere that some courts have held that MERS 
did not have the right to foreclose, despite the fact that MERS 
is named as mortgagee on the document. However, these cases are 
typically the result of a MERS member and/or certifying officer 
failing to follow the established rules and procedures for a 
foreclosure. The MERS member fails to provide the court the 
proper evidence and plead the case appropriately to establish 
the standing and claim for MERS. The most common failing in 
these cases is the failure to provide a copy of the note.
    The court specifically acknowledged--and we agree--that 
MERS holds legal title to the property. We are not aware of any 
court ruling or opinion where MERS has been the mortgagee and 
presented the note as the note holder where the court has found 
that MERS does not have standing to foreclose. Further, we are 
not aware of any court ruling or opinion holding that a 
mortgage naming MERS as the mortgagee is unenforceable or void.

Q.3.-2. Who holds the mortgage? Who holds the right to 
foreclose?

A.3.-2. When faced with the issue of whether MERS can hold the 
mortgage, numerous courts have concluded that pursuant to the 
language in the security instrument, MERS is the mortgagee and 
holds legal title to the mortgage. Courts have also held that 
as the mortgagee, MERS has the authority to commence 
foreclosure, whether judicially or non-judicially, under State 
statutes governing foreclosure. See In re Mortgage Electronic 
Registration Systems (MERS) Litigation, a Multi-district 
litigation case (D.Ariz., Sept. 30, 2010, MDL Docket No. 09-
2119-JAT); Pantoja v. Countrywide Home Loans, et al.--U.S. 
Dist. Ct., 5:09cv016015 (N.D. Cal., 2009); Mortgage Electronic 
Registration Systems, Inc. v. Azize, (965 So. 2d 151, 153-54 
Fla. Dist. Ct. App. 2007); Warque v. Taylor, Bean & Whitaker, 
MERS, et al, 09-1906 (D. Ga. 8/18/2010); Mortgage Electronic 
Registration Systems, Inc., v. Bellistri, 2010 WL 272080 *6, 
para.1A37 (E.D. Mo. July 1, 2010); Ramos v. Mortgage 
Electronic Registration Systems, Inc., et al., 2:08cv01089 (D. 
Nevada., 2009); Athey v. Mortgage Electronic Registration 
Systems, Inc., 2010 WL 1634066 (Tex. App.--Beaumont; Burnett v. 
Mortgage Electronic Registration Systems, Inc., 09-69 (D. Ut. 
2009); Ruben Larota-Florez v. Goldman Sachs Mortgage Co., et 
al., #09cv1181, U.S. Dist. Ct., Eastern Dist. of VA (December 
8, 2009); and Moon v. GMAC Mortgage Corporation, et al, No. 
C08-969Z, 2008 WL 4741492 (W.D. Wash. Oct. 24, 2008).
    Likewise, numerous courts have held that when MERS is the 
mortgagee identified in the security instrument, it has the 
authority to assign its interest in the mortgage or deed of 
trust, and that the assignee of MERS has standing to commence 
foreclosure proceedings. See Lane vs. Vitek Real Estate 
Industries Group, et al., 2:10cv335 (E.D. Cal., 2010); Trotter 
v. Bank of New York Mellon et al, Kootenai County District 
Court, Case No. CV-10-95 (July 2, 2010); Deutsche Bank National 
Trust Co. v. Traxler, 2010-Ohio-3490, the Ninth Judicial 
District Court of Appeal finding that MERS, as the mortgagee 
had the authority to assign the mortgagee and that Deutsche 
Bank, as the assignee, had standing to foreclose; US Bank 
National Assoc. v. Flynn, 897 N.Y.S. 2d 855 or LexisNexis at 
2010 N.Y. Misc. Lexis 511 (March 12, 2010); and Griffin v. 
Wilshire Credit Corporation, et al., Case No. 4:09-CV-715-Y 
(U.S. Dist. Ct., N.D. Texas, June 8, 2010).

Q.3.-3. What are the rights of the investors in the mortgage-
backed security (MBS)?

A.3.-3. With respect to the securitization process, MERS' role 
is limited to assisting investors and servicers to reduce the 
need for assignments to be recorded in the local land records 
when MERS Members trade rights in mortgage loans. While we 
understand generally that investors in mortgage-backed 
securities own the underlying promissory notes which have been 
pooled and securitized, MERS does not participate in the actual 
process of pooling the mortgage loans and issuing the 
securities and is not in a position to comment in detail on the 
rights of the investors to these financial products.

Q.4. If the trustees of the MBS never secured the assets from 
the originators because of their own failure to complete 
diligence, who holds the mortgage?
    What is the impact on the MBS?
    What are the rights of the investors in the MBS?

A.4. MERS is not part of how mortgage loans get securitized. 
That role belongs to the note-owner who decides whether a note 
should be sold, or transferred to a trust, or ultimately 
securitized with a pool of other loans.\2\ Loans were 
securitized long before MERS became operational, and in fact, 
there are loans in securities today that do not name Mortgage 
Electronic Registration Systems, Inc. as the mortgagee. As 
such, MERSCORP, Inc. is not in a position to comment on some 
portions of this question.
---------------------------------------------------------------------------
    \2\ The issue of whether transfers of residential mortgage loans 
made in connection with securitizations are sufficient to transfer 
title and foreclosure rights is the subject of a ``View Point'' article 
entitled ``Title Transfer Law 101'' by Karen Gelernt that appeared in 
the October 19, 2010 edition of the American Banker. A copy was 
provided as attachment 3 of MERS' testimony.
---------------------------------------------------------------------------
    For mortgages where Mortgage Electronic Registration 
Systems, Inc. is the mortgagee, MERS holds legal title to the 
mortgage as nominee and common agent on behalf of the 
originator of the mortgage loan and any successors or assignees 
of the mortgage loan. This does not change regardless of 
whether the mortgage loan is assigned or securitized 
(successfully or unsuccessfully). The beneficial and equitable 
rights to the mortgage move with the promissory note, but the 
legal title remains grounded with MERS.
    The disposition of beneficial and equitable interests in 
the mortgage following a failed sale, transfer or negotiation 
of the promissory note will turn upon the facts of the case, 
but it is most likely that they will ultimately rest with the 
party found to hold the promissory note. However, MERS is not 
in a position to comment upon the specific hypothetical posed 
by this question.
    Other MBS-related aspects of this question are beyond the 
scope of MERS' operation and knowledge. Senator Brown may wish 
to consult the American Securitization Forum's November 16, 
2010 whitepaper, ``Transfer and Assignment of Residential 
Mortgage Loans in the Secondary Mortgage Market.''

Q.5. If the assets are never properly secured for an MBS, who 
is responsible, both legally and financially--the servicers, 
trustees, or investors?
    What is the liability of the law firms that failed to 
conduct proper due diligence?

A.5. MERS and the MERS' System have limited 
involvement in the securitization process. MERS has no role in 
determining whether any loan will be securitized, into what 
asset pool or trust that loan might be placed, or the creation 
of any security that might be issued in reliance upon that 
loan. All of this activity is controlled by the owners of the 
loans and legally occurs outside of the 
MERS' System. It is the obligation of the trustee 
and its custodian to verify and ensure that the conveyance of 
loans to the trust is done correctly. MERS is fundamentally a 
database that tracks servicing rights and beneficial interests 
based on information provide by its members. The rating 
agencies, however, do require that the name of the trustee (or 
the trust) be registered in the investor field on the 
MERS' System following the sale of the loan to the 
securitization trust.
    As a result, this question is beyond the scope of MERS' 
operation and knowledge, and MERS therefore has no comment. 
Senator Brown may wish to consult the American Securitization 
Forum's November 16, 2010 whitepaper, ``Transfer and Assignment 
of Residential Mortgage Loans in the Secondary Mortgage 
Market.''

Q.6. If States reach opposing legal conclusions regarding the 
mortgage holder of record in MERS transactions, what would be 
the impact on MBS that contain mortgages from multiple States?
    What are the rights of the investors in the MBS?

A.6. MERS and the MERS' System have limited 
involvement in the securitization process. MERS has no role in 
determining whether any loan will be securitized, into what 
asset pool or trust that loan might be placed, or the creation 
of any security that might be issued in reliance upon that 
loan. All of this activity is controlled by the owners of the 
loans and legally occurs outside of the MERS' 
System. It is the obligation of the trustee and its custodian 
to verify and ensure that the conveyance of loans to the trust 
is done correctly. MERS is fundamentally a database that tracks 
servicing rights and beneficial interests based on information 
provide by its members. The rating agencies, however, do 
require that the name of the trustee (or the trust) be 
registered in the investor field on the MERS' System 
following the sale of the loan to the securitization trust.
    As a result, this question is beyond the scope of MERS' 
operation and knowledge, and MERS therefore has no comment. 
Senator Brown may wish to consult the American Securitization 
Forum's November 16, 2010 whitepaper, ``Transfer and Assignment 
of Residential Mortgage Loans in the Secondary Mortgage 
Market.''

Q.7. On Thursday, November 18, the Washington Post reported 
that ``[t]he [financial services] industry is seeking 
legislation that would effectively affirm MERS's legality and 
block any bill that would call into question what MERS does.'' 
Is MERS or any of its members seeking Federal legislation? If 
so, please describe the proposed legislation sought by the 
industry.

A.7. MERS has no knowledge of the source or basis for the 
Washington Post report. MERS has not proposed and is not 
seeking any Federal legislation.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ADAM J. 
                            LEVITIN

Q.1. Mr. Levitin, you state that problems in the mortgage 
market potentially ``represent a systemic risk of liabilities 
in the trillions of dollars, greatly exceeding the capital of 
the U.S.'s major financial institutions.''
    The Dodd-Frank Act sets up a Financial Stability Oversight 
Council. According to Section 112 of the Act, the Council is 
supposed to identify risks to the financial stability of the 
United States. You argue that existing mortgage market problems 
are potentially systemic.
    Do you believe that the Council has been appropriately 
engaged on the foreclosure issue, and, if so, what actions has 
it taken to help deal with the issue? If not, what do you 
believe the Council should be doing?

A.1. I am not aware of the Financial Stability Oversight 
Council (FSOC) having taken any meaningful steps to engage with 
potential systemic risks from chain of title problems in 
mortgage securitization. Having clear title to property is 
among the most fundamental components of a modern, functioning 
economy, and any concerns about widespread clouds on title 
necessarily raise systemic risk concerns.
    There are two potential sources of chain of title problems 
for mortgage securitization. The first involves unresolved 
questions of law. There is little that the FSOC can do 
regarding these questions other than note their existence and 
try to reach its own conclusions about how courts might rule. I 
would caution that the FSOC needs to be careful to ask how a 
court might rule, not what it believes to be the proper (or 
convenient) answer. The fact that there is little the FSOC can 
do about unresolved legal questions underscores just how 
troubling it is that a $1.2 trillion private label 
securitization market hinges on debatable legal presumptions in 
its product design. I would underscore that it was the 
unregulated, private-label securitization industry, not the 
GSEs or Ginnie Mae, that designed products lacking either clear 
statutory or caselaw support for their legal structures.
    The other source of chain of title problems for mortgage 
securitization is a compliance question--did mortgage 
securitizations actually get the signatures and move the paper 
the way they were supposed to do in order to be legally 
effective? FSOC can answer this question--if it wants to. To 
determine whether there are widespread compliance problems in 
mortgage securitization, financial regulators could have 
properly trained examiners look at a sufficiently broad 
sampling of loan files in mortgage securitizations. Currently, 
Federal bank regulators lack the expertise to perform this sort 
of examination; mortgage loan documentation is beyond the 
traditional scope of bank examiner duties. If the FSOC were so 
motivated, however, it could have examiner teams properly 
trained to sent to do unannounced, random sampling of 
securitized mortgage loan files.

Q.2. Mr. Levitin, your testimony states that a common response 
from banks--and I assume here you mean servicers--about 
problems in the foreclosure process is that it doesn't matter 
to them because the borrower still owes on the loan and has 
defaulted. As you put it: ``This `No Harm, No Foul' argument is 
that homeowners being foreclosed on are all a bunch of 
deadbeats, so who really cares about due process?'' You say 
that this argument, that you attribute loosely to ``banks,'' 
condones ``vigilante foreclosures: so long as the debtor is 
delinquent, it does not matter who evicts him or how.''
    Mr. Levitin, do you really believe that mortgage servicers 
do not care about due process?
    Does any representative of the servicer industry on the 
panel wish to comment on this?

A.2. I do not believe that mortgage servicers care about due 
process, and I do not think it should be surprising to anyone 
that they do not. Due process has no value to mortgage 
servicers; it only adds to their costs. I believe that like any 
profit maximizing business, mortgage servicers care about their 
bottom line and that they evaluate compliance with the law 
according to this metric: is it more profitable to comply with 
the law or not?
    A sad, but basic reality of consumer finance is that it is 
often profitable for financial service provides to violate the 
law. Consumers are unaware of their legal rights or legal 
violations, and even when they are aware, they often lack the 
resources to stand up for their rights. Moreover, it simply is 
not worthwhile for a consumer to litigate over a violation that 
costs the consumer a few hundred or even a few thousanddollars. 
And when a consumer does make a determined stand for his or her 
rights, it is very easy for the financial service provider to 
claim that the violation of the law was a mistake, apologize, 
and continue violating the law with other consumers. This makes 
it quite profitable to violate the law on a wide-scale, but in 
a manner than only harms individual consumers a relatively 
small amount.
    Seen against this background, it is hard to reach any 
conclusion other than that due process is a hindrance to 
servicers, not a value. It adds to the cost of foreclosures and 
slows down the process, which increases the length of time for 
which servicers must advance payments of principal and interest 
on the defaulted mortgage to their investors for which 
servicers are reimbursed, but without interest. No matter how 
loudly any of the servicers testifying protest that they would 
of course adhere to the law and would never knowingly violate 
consumers due process rights, the plain fact is that they 
routinely do so and will continue to do so as long as it is 
profitable. Servicers' public protestations of morality and 
legality will hardly overcome the basic forces of economics.

Q.3. Given the varying State laws that govern foreclosure, 
there must be the opportunity to observe both best and worst 
practices. While foreclosures are not the preferred option for 
any party at the onset of a loan, sometimes it is the path 
forward that presents the least harm to borrowers, lenders and 
the economy. In those instances, it is essential that our 
foreclosure process be effective.
    Which States do each of you feel provide the most efficient 
path forward in foreclosures, while providing borrowers proper 
legal channels in the event that there is a dispute? What is 
the average length of time between original delinquency and 
foreclosure sale in these States?
    Which States do each of you feel have the most problems in 
effectively executing foreclosures? What is the average length 
of time between original delinquency and foreclosure sale in 
these States?

A.3. There is a tradeoff between efficiency and procedural due 
process. The States that have non-judicial foreclosure have a 
more efficient foreclosure process from the standpoint of 
lenders, in that foreclosures are quicker and less expensive, 
but this efficiency comes at the price of procedural 
protections.
    There is a study that indicates that mortgage availability 
is generally greater (and hence mortgage costs are lower) in 
States with non-judicial foreclosure procedures. See Karen M. 
Pence, Foreclosing on Opportunity, 88 Review of Economics and 
Statistics, 177-82 (2006). This would imply that part of the 
savings from a more efficient foreclosure process are 
transmitted back to mortgage borrowers.
    The mere fact that non-judicial foreclosure results in 
somewhat lower costs of mortgage credit, however, is not alone 
sufficient reason to endorse non-judicial foreclosure. 
Homeowners in States with judicial foreclosure pay slightly 
more for their mortgages, but they gain procedural protections. 
While many homeowners would likely opt for lower up-front 
mortgage costs and fewer procedural protections, there is good 
reason to believe that homeowners are likely to undervalue 
procedural protections in foreclosures: homeowners rarely enter 
into a mortgage thinking that it will end up in foreclosure. 
Because homeowners are likely to think the likelihood of 
foreclosure is more remote than it is, they will underestimate 
the value of procedural protections, a phenomenon known as 
hyperbolic discounting.
    The myriad procedural problems that have become apparent in 
foreclosures today make clear just how valuable due process is 
in foreclosures; it is when homeowners are at their most 
vulnerable that they most need procedural protections. In non-
judicial foreclosure States, a homeowner must bring a quiet 
title action to challenge a foreclosure. The result is really a 
burden shifting from lenders to homeowners. Given the disparity 
in resources between lenders and homeowners, particularly 
homeowners in foreclosure, this sort of burden shifting makes 
due process simply unaffordable for many homeowners.
    While judicial foreclosure adds costs, I believe they are 
worthwhile one from a social standpoint, as judicial 
foreclosure functions as a type of mandatory insurance designed 
to bolster homeownership preservation policies and address the 
adverse selection problem that would ensue if homeowners could 
decide if they wanted judicial or non-judicial foreclosure.
    Ultimately, we need foreclosure processes that strike the 
optimal balance between efficiency and procedural due process. 
I would submit that non-judicial foreclosure systems are so 
lacking in procedural due processes that they are unlikely to 
be the proper balance. Instead, the question is really one of 
the extent of procedural protections within a judicial 
foreclosure system.

Q.4. To better gauge the level of violations surrounding the 
topic of this hearing it is necessary for us to understand who 
is being affected. Admittedly, this question is probably best 
suited for the regulators, and we hope to receive this 
information from them at some point.
    In your research and investigations, how many individuals 
were discovered to have been fully current on their mortgage 
payments but foreclosed upon by their servicer? Please provide 
the data and evidence that you evaluated to arrive at your 
conclusions.

A.4. My research has not examined the issue of the number of 
homeowners who are current but have ended up in foreclosure, 
and I do not know of anyone who has examined this issue 
empirically. Anecdotally, however, there are a troublingly 
large number of examples of homeowners who have ended up in 
foreclosure while current on their mortgages, or who have ended 
up in foreclosure as the result of servicer induced defaults 
for reasons such as improper crediting of payments (such as to 
late fees first, and then to principal and interest) or by the 
imposition of exorbitantly priced force-placed insurance.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM ADAM J. 
                            LEVITIN

Q.1. Please describe any barriers to mortgage modifications 
that servicers may encounter.

A.1. Beyond the problem of mortgage servicer incentives, which 
I address in response to Senator Brown's third question for the 
record, there are two major types of barriers to mortgage 
modifications for servicers.
    First, servicers are often contractually limited in their 
ability to perform modifications. Servicing contracts, known as 
pooling and servicing agreements (PSAs), frequently contain 
limitations on modifications. Most PSAs restrict modifications 
to loans that are in default or where default is reasonably 
foreseeable and limit servicers' ability to extent the term of 
a loan more than a year or so (to the final maturity date of 
any other loan in the securitized pool). PSAs sometimes have 
further restrictions such as limiting the amount by which 
interest rates can be reduced, limiting the number of loans in 
a pool that may be modified, or limiting changes in 
amortization.
    The other major barrier is the presence of junior liens 
(``second liens'') on a property. Servicers are reluctant to 
modify a loan if there is a junior lien on the property because 
any cash flow freed up by the modification benefits the junior 
lien holder. While junior liens are not a per se obstacle, 
their presence makes servicers hesitant to perform 
modifications.

Q.2. What systems should mortgage servicers implement to 
correct their mistakes and compensate the individual homeowners 
who have suffered through the actions of others?

A.2. There is no simple way for servicers to correct their 
mistakes and compensate individual homeowners who have been 
harmed. A starting point would be a thorough review of 
foreclosure procedures to identify all possible mistakes. 
Unfortunately, I do not believe that servicers are capable of 
performing such a review. Servicers as companies and 
particularly servicer employees involved in foreclosure 
operations have very strong incentives not to identify possible 
mistakes. Unless servicers are given such an incentive or an 
honest-broker third party with expertise in the area examines 
hundreds of thousands of foreclosure filings from the past 
several years, it is impossible to truly know the extent of the 
problem or the harm caused. Let me underscore that I do not 
believe that any of the Federal bank regulators have the 
expertise to carry out such an examination, and that some of 
the regulators are frankly compromised when it comes to 
disciplining servicers.
    Once the scope of the problem is determined, then 
compensation questions can be considered. While there might be 
interest from the servicer side in simply creating a 
compensation fund for servicing victims, I am loathe to see 
Kenneth Feinberg as the solution to all of America's problems, 
and am concerned that such an approach would fail to shine much 
needed sunlight on a seriously troubled industry.

Q.3. What are the financial incentives encouraging mortgage 
servicers to foreclose on homeowners?

A.3. There are several financial considerations that encourage 
mortgage servicers to foreclose rather than modify mortgages. 
First, in foreclosure servicers are often able to lard on 
various ``junk fees,'' meaning either fees for services never 
performed, fees for which the homeowner is not actually liable, 
or inflated fees for in-sourced services or services outsourced 
to vendors that provide kickbacks. Because servicers are paid 
off the top of foreclosure sale proceeds, it does not matter 
whether the sale brings in enough to cover the mortgage debt; 
the servicer's claim for various servicing fees and expenses 
will be paid. This means, then, that in most cases--that is 
cases where the debt is actually or functionally non-recourse--
servicers' junk fees are really coming out of the pocket of 
mortgage backed securities investors.
    While a foreclosed loan does not generate servicing fee and 
float income for servicers, junk fees can easily off-set this 
income. Thus, in Countrywide's 2007 third quarter earnings 
call, Countrywide's President David Sambol emphasized that 
increased revenue from in-sourced default management functions 
could offset losses from mortgage defaults.

        Now, we are frequently asked what the impact on our servicing 
        costs and earnings will be from increased delinquencies and 
        loss mitigation efforts, and what happens to costs. And what we 
        point out is, as I will now, is that increased operating 
        expenses in times like this tend to be fully offset by 
        increases in ancillary income in our servicing operation, 
        greater fee income from items like late charges, and 
        importantly from in-sourced vendor functions that represent 
        part of our diversification strategy, a counter-cyclical 
        diversification strategy such as our businesses involved in 
        foreclosure trustee and default title services and property 
        inspection services.

Transcript, ``Countrywide Financial Corporation Q3 2007 
Earnings Call,'' Oct. 26, 2007 (emphasis added). Sambol also 
mentioned that ``Our vertical diversification businesses, some 
of which I mentioned, are counter-cyclical to credit cycles, 
like the lender-placed property business in Balboa and like the 
in-source vendor businesses in our loan administration unit.''
    Countrywide is now owned by Bank of America. I have no 
reason to believe that the fundamental economics of servicing 
acknowledged by Mr. Sambol changed when Countrywide was 
purchased by Bank of America.
    Second, loan modification is expensive. To modify (or 
attempt to modify) a loan is essentially to underwrite a new 
loan. There are costs for doing this in terms of personnel time 
and overhead, as well as pulling a credit report, etc. 
Servicing agreements do not generally provide reimbursement for 
modification expenses. Moreover, not all attempted 
modifications result in an actual modification. Attempted 
modifications still involve expenses, however, Thus, unless a 
servicer believes that its income from a modified loan--
discounted for the likelihood that there will be a modification 
and that the modified loan will redefault--will outweigh both 
the costs of modification and the forgone junk fees that could 
be collected in foreclosure, attempting a modification is a 
losing economic proposition for the servicer.
    HAMP attempts to change these incentives by paying a $1,000 
modification bounty (and assorted other bounties) to servicers 
for each permanent modification. HAMP bounties have to be 
discounted, however, by the fact that only 39 percent of HAMP 
trial modifications successfully converted to permanent status. 
This means that 61 percent of the time servicers put in the 
time and expense to doing a HAMP modification, but receive no 
reimbursement. The net result is that HAMP incentives may 
simply be too small to have their desired effect.
    Finally, servicers are required to advance payments of 
principal and interest (and sometimes taxes and insurance) on 
defaulted loans to mortgage investors. These payments are 
reimbursed out of foreclosure sale proceeds, but without 
interest. This means that there are considerable time value and 
liquidity costs to making advances. The faster a servicer can 
foreclose, the less advancing it has to do. Servicers are often 
concerned that if they modify a loan, the loan will redefault, 
which will increase the total number of months of advances they 
will have to pay.
    In short, residential mortgage servicers are subject to 
strong financial incentives that discourage mortgage 
modification and encourage foreclosure. I do not believe that 
Government foreclosure mitigation programs like the Home 
Affordable Modification Program offer servicers' sufficient 
compensation to overcome these incentives, and I do not believe 
it is appropriate for the Government to be paying servicers to 
perform their contractual duty of maximizing the value of 
mortgages for RMBS investors. Residential mortgage servicing is 
a failed business model, and mortgage servicers are simply 
incapable of handling the current mortgage foreclosure crisis 
in a manner that mitigates the harm to the economy and society 
at large. In light of this, I think it is necessary to consider 
solutions to the foreclosure crisis that remove mortgage 
servicers from the decisionmaking process, be it through 
modification of mortgages in bankruptcy or through a Federal 
agency program modeled on the Home Owners Loan Corporation.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD FROM DAVID B. 
                             LOWMAN

Q.1. In response to questions from Senator Johnson, Mr. Lowman 
and Ms. Desoer, you characterized the HAMP 2MP program as a 
good approach to second lien modification. You also noted your 
organizations' participation in 2MP, with Ms. Desoer pointing 
out that Bank of America had been the first servicer to sign up 
for the program. Yet, as of Sept. 30, only 21 second lien 
modifications worth $10,500 had been made under 2MP since its 
implementation in March 2010.
    Why, in your opinion, have so few modifications been made 
under 2MP so far? Do you see your organization increasing its 
number of 2MP modifications in the coming months?

A.1. Response: Chase routinely modifies second liens, just as 
it does first liens, when appropriate to achieve affordable 
payments for borrowers. From January 2009 through November 
2010, Chase offered over 65,000 second lien modifications of 
which 16,015 were made permanent. Through November 2010, Chase 
had offered 2,319 HAMP 2MP modifications, of which 2,070 were 
completed.
    Chase implemented 2MP in May 2010, making Chase one of the 
first major servicers to do so, but the program did not become 
fully effective under the Treasury's re-issued July 
Supplemental Directive until August 1, 2010. We believe that 
2MP will become more effective over time, as more HAMP 
modifications are implemented on first liens--to be eligible 
for a 2MP modification, a homeowner must have first received a 
HAMP modification of their first mortgage--and as the process 
and common database continue to operate.
    Because to be eligible for 2MP modification a homeowner 
must have received a HAMP modification on their first lien, 
information regarding both liens is necessary to initiate the 
process. Accordingly, Chase's initial efforts under the 2MP 
program focused on borrowers for whom Chase serviced both the 
first and second liens. Once Treasury's loan matching files--
providing information regarding loans serviced by other 
servicers--became available in August 2010, Chase was able to 
expand its efforts to borrowers for whom it serviced only the 
second lien.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM DAVID B. 
                             LOWMAN

Q.1. Mr. Levitin, your testimony states that a common response 
from banks--and I assume here you mean servicers--about 
problems in the foreclosure process is that it doesn't matter 
to them because the borrower still owes on the loan and has 
defaulted. As you put it: ``This `No Harm, No Foul' argument is 
that homeowners being foreclosed on are all a bunch of 
deadbeats, so who really cares about due process?'' You say 
that this argument, that you attribute loosely to ``banks,'' 
condones ``vigilante foreclosures: so long as the debtor is 
delinquent, it does not matter who evicts him or how.''
    Does any representative of the servicer industry on the 
panel wish to comment on this?

A.1. We disagree with Mr. Levitin. Chase is committed to 
ensuring that all applicable laws are followed in the 
foreclosure process. We regret the errors that we have 
discovered in our foreclosure processes, and we are working 
hard to correct these processes so we get them right. At the 
same time, we do not believe that there have been unwarranted 
foreclosures as a result of these issues. Of course, if we have 
made any mistakes, we will fix them.

Q.2. Ms. Desoer and Mr. Lowman, it is important that this 
Committee has an adequate understanding of the current state of 
affairs as it relates to delinquency and foreclosures. Please 
briefly discuss the following statistics as they relate to your 
companies:
    What is the total number of mortgages that your company 
services? How many mortgages are currently in foreclosure? What 
is the average number of days that a borrower is delinquent on 
his or her mortgage at the time of a foreclosure sale?
    What percentage of homes are vacant at the time of a 
foreclosure sale?

A.2. As of November 30, 2010, Chase serviced approximately 8.6 
million home loans. As of November 30, 2010, Chase serviced 
349,586 loans that were in foreclosure, that is, approximately 
4.07 percent of the total loans serviced were in foreclosure. 
The average borrower's loan is 448 days delinquent at the time 
of foreclosure sale.
    In the third quarter of 2010, 11 percent of foreclosure 
sales were of properties that had been owner-occupied, but were 
vacant at the time of sale. In addition, 57 percent of 
foreclosure sales in the third quarter of 2010 were of non-
owner-occupied properties, some of which were also vacant at 
the time of sale. Our best estimate is that 35-40 percent of 
properties are vacant at the time of foreclosure sale.

Q.3. This Committee has a responsibility to ensure that actors 
on all sides of the foreclosure process, including servicers, 
are acting legally and in the best interest of our society. We 
must address and remedy situations where this is not the case.
    However, unnecessarily delaying foreclosures is not without 
cost. Representatives of the secondary mortgage market have 
told us that, on average, a delay in foreclosure costs 
approximately $30-40 per day, per home. This is in addition to 
any changes in home values during that time.
    Ms. Desoer and Mr. Lowman, could you discuss what 
additional costs your institutions may incur during a 
foreclosure process if that process is delayed?

A.3. Delays in the foreclosure process could lead to additional 
fees on the property, such as taxes and insurance, maintenance 
costs of the property, and potentially additional attorneys 
fees, each of which is heavily dependent on the geography of 
the property, the condition of the property, and the loan 
amount.

Q.4. Given this Committee's oversight responsibilities, it is 
vital that we examine the regulatory actions taken before and 
after reports surfaced detailing the problems surrounding some 
foreclosures.
    Ms. Desoer and Mr. Lowman, did your regulator contact you 
prior to any of these press reports to review your foreclosure 
procedures? What, if any, directives or recommendations were 
made by your regulator surrounding the definition of ``personal 
knowledge'' as it relates to those in your companies who must 
sign foreclosure documents? What, if any, directives or 
recommendations were made by your regulator with regard to the 
notary process for these documents?

A.4. Prior to September 30, 2010, when the referenced press 
reports were published, we did not receive specific directives 
from our regulators regarding the definition of ``personal 
knowledge'' or the notary process.

Q.5. Unfortunately, neither Fannie Mae, Freddie Mac, nor the 
Federal Housing Finance Administration were present at the 
hearing to discuss the ``approved lenders'' list that Fannie 
and Freddie publish to guide servicers as they select in-State 
counsels to act on their behalf.
    Given that, Ms. Desoer and Mr. Lowman, please describe what 
the GSE's require of your firms with respect to these lists, 
and indicate whether there have been any changes to them since 
news of problems with ``foreclosure mills'' began to surface.

A.5. Although the question mentions an ``approved lenders'' 
list, we understand the Senator to be seeking information 
regarding the ``approved counsel'' list, which relates to the 
selection of in-State counsel. Fannie Mae and Freddie Mac 
require servicers to use foreclosure counsel that are 
identified on the GSE's lists of approved counsel for each 
State. Although GSE-approved foreclosure counsel have contracts 
directly with servicers and operate under the same agreements 
as non-GSE approved foreclosure counsel, they also will take 
direction directly from the GSEs on GSE-owned loans. Over the 
last 90 days, we have been notified by the GSEs of changes to 
their approved counsel lists.

Q.6. Attorney General Miller's testimony today states the 
following:

        While the servicer is free to lose documents as many times as 
        they want or to take as long as they want, the servicer often 
        demands strict compliance from the borrower. Thus, no matter 
        how many times the borrower has previously submitted his or her 
        paperwork, if the borrower fails one time, the loan 
        modification is denied.

    Do any representatives of the servicer industry wish to 
respond to Mr. Miller's claims?

A.6. Chase attempts to ensure that borrower paperwork is 
received and scanned into Chase's imaging systems thoroughly 
and systematically. One potential reason for multiple requests 
for documents would be the submission of incomplete documents. 
For example, since HAMP regulations have very specific 
requirements for documentation, borrowers who make incomplete 
submissions may need to resubmit a complete set of documents in 
order to qualify for modification under the program.
    Chase has made significant investments in people, 
technology and process improvements to enhance the 
effectiveness of the modification process and reduce borrower 
frustration, especially with the documentation process. 
Specifically:

   Chase has 51 Community Home Ownership Centers 
        (``CHOCs'') throughout the country where borrowers can 
        provide documentation in person and work with a Chase 
        employee to ensure that their package is complete.

   To improve our customer service and our 
        modification process effectiveness, in May 2010 we 
        created a new role--the Relationship Manager (``RM'')--
        to be accountable for each customer through the home 
        retention process. As of November 2010, Chase employed 
        1,921 RMs, and we now assign an RM to each borrower as 
        soon as they contact Chase for assistance due to 
        financial hardship, such as loss of income or other 
        major life event. The RM becomes the single point of 
        contact with Chase for the borrower during the 
        modification process. The RM tells the borrower about 
        our foreclosure-avoidance solutions and helps the 
        borrower complete the needed paperwork so a 
        modification request can be submitted to underwriting. 
        The RM continues to monitor the loan to ensure the 
        process moves forward and will contact the borrower 
        with the ultimate decision on modification. If the 
        borrower is approved for a modification, the RM 
        contacts the borrower to review the approval and assist 
        them with the final steps in the process, which 
        includes reviewing and executing the modification 
        documents. If a modification is not approved, the RM 
        may suggest a short sale or other alternative, 
        depending on the underlying reasons for the denial, and 
        if the borrower agrees, will transfer the borrower to 
        the Chase's Liquidation teams to further discuss other 
        foreclosure avoidance solutions.

   At the end of 2009, Chase implemented imaging 
        technology and created a document repository to 
        centralize the handling of all incoming customer 
        documentation. Customers now are directed to send all 
        communications and documents to this location, which 
        receives and indexes the document to the appropriate 
        loan file for that borrower which is available 
        electronically, eliminating the need to move paper 
        files. Quality Control assures the thousands of unique 
        documents received daily are uploaded in a timely 
        fashion, properly indexed (assigned to the correct 
        loan), and are legible. This new centralized system is 
        available to employees throughout the loss mitigation 
        process. Letters mailed by Chase to customers are also 
        uploaded to this centralized repository, enabling 
        customer-facing staff access to the most current and 
        complete information about the loan.

   Chase implemented the verified model, which 
        requires borrowers to provide all necessary documents 
        prior to being evaluated for a potential solution, 
        across all the portfolios we service. This has slowed 
        the rate at which modification trials are initiated, 
        but it should significantly increase the percentage of 
        trials that lead to permanent modifications.

   Chase policy requires adherence to Treasury's 
        guidance regarding responsiveness to borrowers' 
        requests for modifications. With the implementation of 
        verified trial plans, borrowers are to receive answers 
        within 30 days of submitting a complete request, 
        including all the necessary documents to evaluate the 
        application.

Q.7. Ms. Thompson testifies that, `` . . . the problems 
occasioned by mortgage servicer abuse run rampant.'' That is a 
strong accusation. Ms. Thompson also frequently, though without 
definition, refers to ``abuses'' committed by servicers and 
``excessive'' fees. She accuses servicers of failing to 
negotiate in good faith and of preparing false affidavits. She 
states that ``Servicers do not believe that the rules that 
apply to everyone else apply to them.'' Their attitude, 
according to Ms. Thompson, is ``lawless'' and they commit 
``wrongful foreclosure on countless American families.'' She 
also states that ``The lack of restraint on servicer abuses has 
created a moral hazard juggernaut that at best prolongs and 
deepens the current foreclosure crisis and at worst threatens 
our global economic security.''
    Do any of the servicer representatives here wish to respond 
to Ms. Thompson's allegations?

A.7. Chase believes that Ms. Thompson's allegations are 
entirely unfounded. Chase is committed to ensuring that all 
applicable laws are followed in the foreclosure process. We 
regret the errors that we have discovered in our foreclosure 
processes, and we are working hard to correct these processes 
so we get them right. At the same time, we do not believe that 
there have been unwarranted foreclosures as a result of these 
issues. Of course, if we have made any mistakes, we will fix 
them.
    As to Ms. Thompson's reference to fees, the fees imposed by 
Chase are not excessive. Importantly, Chase does not foreclose 
on borrowers if their loan payments are current but they owe 
fees. Chase applies borrowers' payments to their debt prior to 
applying them to any fees owed.
    It is also critical to note that the analysis we use in 
deciding whether to proceed with a modification or 
foreclosure--which involves a net present value analysis to 
determine what is in the best interest of the investor--does 
not take into account servicer compensation over time. 
Furthermore, if it were considered, which it is not, servicer 
compensation would tend to favor modification over foreclosure. 
Indeed, with a successful modification, Chase is able to 
continue to service the loan and earn servicer fees; but when a 
property is sold as a result of foreclosure, Chase's role as 
servicer ends and Chase receives no further fees.

Q.8. Given the varying State laws that govern foreclosure, 
there must be the opportunity to observe both best and worst 
practices. While foreclosures are not the preferred option for 
any party at the onset of a loan, sometimes it is the path 
forward that presents the least harm to borrowers, lenders and 
the economy. In those instances, it is essential that our 
foreclosure process be effective.
    Which States do each of you feel provide the most efficient 
path forward in foreclosures, while providing borrowers proper 
legal channels in the event that there is a dispute? What is 
the average length of time between original delinquency and 
foreclosure sale in these States?
    Which States do each of you feel have the most problems in 
effectively executing foreclosures? What is the average length 
of time between original delinquency and foreclosure sale in 
these States?

A.8. Each State has different procedures for foreclosures, and 
all provide some mechanism for the borrower to challenge the 
propriety of the foreclosure. Chase is not really in a position 
to weigh the relative efficiency of one State versus another. 
Nationwide, the average borrower's loan is 448 days delinquent 
at the time of foreclosure sale.

Q.9. To better gauge the level of violations surrounding the 
topic of this hearing it is necessary for us to understand who 
is being affected. Admittedly, this question is probably best 
suited for the regulators, and we hope to receive this 
information from them at some point.
    In your research and investigations, how many individuals 
were discovered to have been fully current on their mortgage 
payments but foreclosed upon by their servicer? Please provide 
the data and evidence that you evaluated to arrive at your 
conclusions.

A.9. Thus far, we are not aware of any individuals who were 
current on their mortgage payments but were foreclosed upon by 
Chase. Chase has in place numerous safeguards designed to 
ensure that loans are not referred to foreclosure unless 
foreclosure is appropriate. To begin with, Chase communicates 
with a customer beginning at 5 days after a missed payment, and 
continuing through foreclosure. Outgoing letters and phone 
attempts to discuss modification options commence at 40 days 
past due and continue through foreclosure referral. The average 
number of contacts a borrower receives from Chase before a 
foreclosure sale is 111. These communications should help 
ensure that Chase becomes aware of any errors in its 
calculations of outstanding indebtedness.
    Further, an Independent Foreclosure Review team within 
Chase reviews each loan at two specific points to make sure 
that a loan has been appropriately referred for foreclosure. 
The Independent Foreclosure Review confirms that the loan is 
past due and that Chase has complied with its pre-referral 
policies, including repeated efforts to contact the borrower to 
discuss alternatives. Under Chase's policies, only after the 
Independent Foreclosure Review is complete can a loan be 
referred for foreclosure proceedings. The Independent 
Foreclosure Review is repeated 2 to 3 weeks prior to any 
scheduled sale. A final review is also conducted approximately 
96 hours prior to a foreclosure sale to review the borrower's 
payment history and to ensure that loss mitigation is closed 
and the borrower is not in bankruptcy.
    Of course, if Chase discovers that any foreclosures were 
initiated improperly, it will take action to correct any error.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DAVID B. 
                             LOWMAN

Q.1 Please describe in detail the reviews that your 
organizations conducted pursuant to your announced moratoriums, 
including: how many employees were involved; how many files 
they reviewed; how much time, on average, an employee spent 
reviewing a file.
    How many errors did you uncover, and what was the nature of 
those errors?
    How did you inform homeowners that their foreclosure 
filings were being reviewed?

A.1. Beginning in late September 2010, Chase temporarily halted 
foreclosures in 43 States and territories where documents 
signed by Chase may be required. Since that time, Chase has 
focused on reviewing and enhancing its document execution 
procedures, and training its document execution employees.
    Chase also has put in place a remediation plan designed to 
identify Chase-signed affidavits in each pending foreclosure 
file, and file substitute affidavits based on a reverification 
of the information in the affidavits by the individual 
executing those affidavits. Chase is still in the process of 
implementing this plan and is not able at this stage to provide 
the detailed loan level information sought by this question.

Q.2. How many files that you reviewed were missing the original 
note?
    A 2007 study found that 40 percent of bankruptcy filings 
involving mortgages were missing the original note. How many of 
your foreclosure filings are missing their original note?

A.2. We are not able at this stage in our remediation plan to 
provide numbers of instances in which original notes were 
missing in pending foreclosure proceedings. Chase has not 
historically tracked the frequency of lost note affidavits 
because there has been no need for such information in the 
past. Chase is generally unable to determine the total number 
of lost note affidavits submitted during the timeframe 
identified in the request.
    Two businesses acquired by Chase in 2008--EMC (which Chase 
acquired in March 2008) and Washington Mutual (certain assets 
of which Chase acquired in September 2008)--did use systems 
that kept track of affidavits that were submitted to Chase for 
execution that local counsel characterized as Lost Note 
Affidavits. However, Chase's systems did not keep track of 
whether these affidavits were actually executed and filed. 
Still, the 40 percent figure is extremely high based on our 
general experience.
    Chase is keeping track of the number of Lost Note 
Affidavits submitted in connection with foreclosure actions on 
a going forward basis.

Q.3. Do all of your organization's note endorsements comply 
with the requirements of your pooling and servicing agreements?

A.3. As a general matter, when Chase functioned as the 
depositor for a securitization, it received a certification 
report from the custodian on the deal (often Chase Custody 
Services) certifying its possession of the documentation for 
the loans, including the note, mortgage, and any assignments. 
Generally, per the pooling and servicing agreement, a final 
trust receipt reflecting the certification with respect to the 
loans contained in the securitization was issued to the trustee 
by the custodian. We are not aware of instances in which there 
were material deviations from these procedures in connection 
with securitizations in which Chase was the depositor.

Q.4. Have your regulators participated in or overseen your 
reviews, and if so, how?

A.4. The Office of the Comptroller of Currency is Chase's 
primary regulator and has been conducting an onsite audit of 
Chase (together with the Federal Reserve and the FDIC) since 
early November 2010. Chase has kept the OCC apprised of 
developments relating to foreclosure procedures.

Q.5. There is some disagreement about whether the problems 
within the loan modification and foreclosure processes were 
isolated incidents, systemic failures, or were caused by rogue 
individuals following mistaken guidelines. Who determines your 
affidavit signing policies and procedures?
    Were your employees following company policy? If so, has 
any employee responsible for designing that policy been 
disciplined, and how? Were any employees disobeying company 
policy? If so, have they been disciplined, and how?

A.5. With regard to the portion of your question relating to 
problems within the loan modification processes, we do not 
believe that there have been systemic issues in connection with 
Chase's implementation of HAMP or its own proprietary programs. 
Chase has invested substantially in its loss mitigation efforts 
in recent years because, as I explained during my testimony, 
loan modifications are preferable to foreclosure from the 
servicer's perspective.

    Specifically, with respect to loan modification, Chase has:

   Added more than 9,000 new employees to the Default 
        and Loss Mitigation organization since 2008, more than 
        doubling our staff;

   Chase assigns each new modification applicant to 
        one of approximately 1,900 dedicated Relationship 
        Managers, who are responsible for supporting borrowers 
        who have asked for help throughout the entire mortgage 
        modification process;

   Opened 51 regional CHOCs and a Home Ownership 
        Preservation Office to assist borrowers face-to-face 
        with modification efforts. CHOCs were opened in 
        geographic areas with the highest rates of payment 
        delinquencies and have assisted more than 118,480 
        borrowers through since their launch in early 2009.

   Handled over 32.3 million inbound calls to our call 
        centers from homeowners seeking foreclosure prevention 
        assistance since 2009, including 5.3 million calls to 
        our dedicated customer hotline for modification 
        inquiries;

   Offered over 1 million modifications to struggling 
        homeowners since the beginning of 2009, through HAMP, 
        the GSEs and Chase modification solutions; converting 
        275,152 into permanent modifications;

   Provided a graceful exit through a short sale for 
        over 92,000 borrowers where a homeownership retention 
        solution was not an option;

   Prevented over 467,000 foreclosures through various 
        foreclosure avoidance programs since January 2009;

   Sent more than 3.7 million letters inviting 
        borrowers to attend outreach events;

   Hosted or participated with community groups in 
        more than 1,284 local events since 2009, including 
        multi-day events reaching over 60,000 homeowners to 
        educate and inform homeowners about foreclosure 
        prevention solutions and assist in the completion of 
        required documents;

   Helped the Hope Now Alliance establish a new Web-
        based portal to facilitate the loan modification 
        process for homeowners working with Hope Now counseling 
        agencies and the Hope Now Hotline.

    With respect to the issues that have arisen in connection 
with affidavits filed in foreclosure cases, at all times, Chase 
policy required that its employees verify the accuracy of the 
affidavits prior to their execution, and our understanding is 
that our employees followed this policy. Therefore, we do not 
believe that the affidavits contained material inaccuracies in 
terms of the amount of indebtedness.
    However, prior to approximately June 2010, our policies--
which evolved over time and in the past, differed between Chase 
platforms--did not always require that the same employee who 
reviewed the business records to verify the information in the 
affidavit actually sign it. Rather, during certain periods, 
Chase's policies instructed employees who verified the 
affidavits to bring them to an officer for signature. This 
policy developed in part because it was believed to be 
preferable for an officer of the company to sign the affidavit 
rather than an analyst. In cases where an officer signed the 
affidavit, he or she did so in reliance on the research that 
had been performed by the analyst who reviewed the document 
instead of their own review of the business records.
    Chase's review is ongoing, but thus far we have not 
determined that discipline of our employees is warranted. Our 
review to date indicates that all of our employees believed in 
good faith that they were complying with legal requirements and 
complying with firm policy.

Q.6. An article published in the Cleveland Plain Dealer on 
October 17 titled ``Mortgage foreclosure Uproar Sweeps Up 
Northeast Ohioans'' told the stories of three Northeast Ohio 
families that had their houses taken from them despite not 
missing any mortgage payments. What is your response to this 
story, and do you believe that such a report is consistent with 
statements like that from Mr. Lowman's written testimony that 
information in your files about ``default and indebtedness was 
materially accurate'' and that foreclosure recordkeeping and 
affidavit issues ``did not result in unwarranted 
foreclosures''?

A.6. Chase did not service any of the loans discussed in the 
Cleveland Plain Dealer article.
    We believe that the information in the affidavits we have 
filed regarding the fact of default and the amount of 
indebtedness was materially accurate. This information was in 
fact verified by Chase personnel before the affidavits were 
filed. We are not aware of any individuals who were current on 
their mortgage payments but were foreclosed upon by Chase.
    Chase has in place numerous safeguards designed to ensure 
that loans are not referred to foreclosure unless foreclosure 
is appropriate. To begin with, Chase communicates with a 
customer beginning at 5 days after a missed payment, and 
continuing through foreclosure. Outgoing letters and phone 
attempts to discuss modification options commence at 40 days 
past due and continue through foreclosure referral. The average 
number of contact attempts a borrower receives from Chase 
before a foreclosure sale is 111. These communications should 
help ensure that Chase becomes aware of any errors in its 
calculations of outstanding indebtedness.
    Further, an Independent Foreclosure Review team within 
Chase reviews each loan at two specific points to make sure 
that a loan has been appropriately referred for foreclosure. 
The Independent Foreclosure Review confirms that the loan is 
past due and that Chase has complied with its pre-referral 
policies, including repeated efforts to contact the borrower to 
discuss alternatives. Under Chase's policies, only after the 
Independent Foreclosure Review is complete can a loan be 
referred for foreclosure proceedings. The Independent 
Foreclosure Review is repeated 2 to 3 weeks prior to the 
scheduled foreclosure sale. A final review is also conducted 
approximately 96 hours prior to a foreclosure sale to review 
the borrower's payment history and to ensure that loss 
mitigation is closed and the borrower is not in bankruptcy.
    Of course, if Chase discovers that any foreclosures were 
initiated improperly, it will take action to correct any error.

Q.7. Mr. Lowman's written testimony says that ``servicer 
compensation would tend to favor modification over 
foreclosure,'' and that ``the cost for servicers to take a loan 
to foreclosure generally is significantly greater than the cost 
of a modification.'' Please describe the compensation structure 
of your mortgage servicing business.

A.7. From both a revenue and cost perspective, servicers 
clearly have a greater incentive to enter into an appropriate 
modification rather than to foreclose.
    First, a servicer derives the lion's share of its servicing 
revenue from monthly servicer fees. For GSE loans, payment of 
servicer fees ceases upon borrower default. For other investor-
owned loans, these monthly servicer fees cease upon 
foreclosure. By contrast, if a loan is modified and continues 
to perform, the servicer will receive servicer fees going 
forward. Even if the servicer fees are reduced--for example, as 
may be the case as a result of principal reduction--the 
continued revenue stream is greater than would be received in 
the case of foreclosure, after which there is obviously no 
servicer fee.
    Second, in the event of a HAMP or GSE modification, a 
servicer also receives an incentive fee in the event of a 
successful modification. A servicer receives no additional 
revenue or fees in the event of foreclosure.
    Third, the existence of certain fees charged or expenses 
incurred by the servicer in the event of delinquency--such as 
late payment fees or advances--are typically not incentives to 
favor foreclosure over modification because the servicer, 
provided it does not own the loan, typically receives repayment 
of these fees either way.
    Fourth, the cost of processing a modification is not 
materially different from the cost of foreclosing. Further, a 
modification typically will occur significantly more quickly 
than a foreclosure. Nationally, foreclosures take an average of 
14 months to complete, and in some jurisdictions, much longer.
    Chase has incentive plans for employees involved in the 
modification process, and these plans are aligned with 
borrower-centric outcomes. The incentive plans strike a balance 
between the quality and productivity of these employees. 
Employees involved in foreclosure operations (e.g., affiants, 
notaries, attorney management) are not compensated through 
incentive plans.

Q.8. How many second liens do you hold on properties that you 
are also servicing?

A.8. Chase services 6.83 million first-lien mortgages; of 
those, 1.15 million have a second lien, which also is serviced 
by Chase.

Q.9. Please describe any barriers to mortgage modifications 
that servicers may encounter.

A.9. The number one reason for foreclosure continues to be 
financial problems caused by illness, a job loss, 
underemployment, or other life-changing events. Foreclosures 
cut across all types of people, regardless of factors like 
income level, education or type of house. Simply put, 
foreclosure can affect anyone.
    Borrowers overwhelmed by their circumstances don't know 
where to turn, and they often think that Chase can't (or won't) 
help them. Two of Chase's bigger challenges in helping 
borrowers avoid foreclosure are getting them to call or meet 
with Chase to explain their situation as well as provide a 
complete set of documents to allow for an evaluation of their 
modification application. The majority of people rejected for 
modifications are rejected because they have failed to submit 
the complete set of documents required to evaluate their 
application.
    Chase recognized early in the current crisis that customers 
facing financial stress managing their mortgage payments 
require special attention and dedication to their needs. We 
acknowledged the importance of enhancing customer access and 
service levels to help customers understand their foreclosure 
prevention options, either directly through Chase or through 
our partnerships with community leaders and non-profit credit 
counselors. Regardless of how the customer chooses to engage 
with Chase for homeownership assistance our commitment is to do 
everything in our power to assist in a respectful and timely 
fashion as described in response to question 5 from Senator 
Brown.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY OF DIANE E. 
                         FROM THOMPSON

Q.1. Ms. Thompson, you conclude your testimony by calling for 
legislation or regulations to ``reform the servicing industry, 
to allow for loan modifications in bankruptcy, and to address 
the tax consequences of loan modifications . . . '' These 
actions would, according to you, ``aid in protecting homeowners 
from indifferent and predatory servicing practices and reducing 
the foreclosure surge.'' When analyzing effects of alternative 
possible actions that would affect the mortgage and housing 
markets, you focus on protecting homeowners. Indeed, such a 
focus is welcome and warranted. There is also, of course, a 
need to consider effects of any action on securities holders, 
including retirement funds that help provide interest and other 
income to retirees who continue to struggle in the current 
zero-interest rate environment to live off of the assets they 
accumulated during their working years.
    Ms. Thompson, could you discuss the economic, financial, 
and distributional analysis you have performed to arrive at the 
policy recommendations that you provide in your conclusion?

A.1. You correctly note that my analysis focuses on the 
homeowners. The interests of homeowners have been, in my view, 
almost entirely overlooked during the foreclosure crisis. This 
is particularly unfortunate since it is the failure to pay 
attention to those interests and reduce the foreclosure rate 
that has caused the economic recession.\1\ Preserving 
homeownership, where economically appropriate, has a net 
positive benefit for the society at large and the unnecessary 
destruction of homeownership hurts the rest of us from an 
economic and financial perspective.
---------------------------------------------------------------------------
    \1\ See, e.g., Ben S. Bernanke, Chairman, Board of Governors of the 
Federal Reserve System, Speech at the Federal Reserve System Conference 
on Housing and Mortgage Markets: Housing, Mortgage Markets, and 
Foreclosures (Dec. 4, 2008) [hereinafter Bernanke, Speech at Federal 
Reserve], available at http://www.federalreserve.gov/newsevents/speech/
bernanke20081204a.htm (``Despite goodfaith efforts by both the private 
and public sectors, the foreclosure rate remains too high, with adverse 
consequences for both those directly involved and for the broader 
economy.'').
---------------------------------------------------------------------------
    The impact of the foreclosure crisis has damaged the 
financial interests of many constituencies in this country, 
including securities holders. Aside from the indirect financial 
harm caused by the scale of the financial crisis--the weak 
economy, the slumping interest rates, the outright collapse of 
many securities--foreclosures hurt all homeowners in the 
communities in which they occur. Violent crime increases in 
neighborhoods with increased foreclosures--at twice the rate of 
the increase in the foreclosure rate.\2\ Surrounding neighbors 
watch their housing values plummet and their insurance costs 
increase.\3\ The losses to communities in taxes are 
staggeringly high, amounting to millions to billions of dollars 
in lost taxes.\4\ For securities holders who own homes, or pay 
taxes, or live in neighborhoods with increasing crime, their 
interests are not distinct from those of homeowners subject to 
foreclosure.
---------------------------------------------------------------------------
    \2\ Dan Immergluck & Geoff Smith, The Impact of Single-Family 
Mortgage Foreclosures on Neighborhood Crime, 21 Housing Studies 851 
(2006), available at www.prism.gatech.edu/di17/housingstudies.doc 
(calculating that for every 1 percent increase in the foreclosure rate 
in a census tract there is a corresponding 2 percent increase in the 
violent crime rate).
    \3\ See, e.g., Ctr. for Responsible Lending, Soaring Spillover: 
Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 
69.5 Million Homes Lose $7,200 on Average (2009), available at 
www.responsiblelending.org/mortgage-lending/research-analysis/
soaringspillover-acceleratingforeclosures-to-cost-neighbors-436-
billion-in-2009-alone-73-4-millionhomes-lose-5-900-onaverage.html 
(estimating losses to neighboring property values due to the 
foreclosure crisis at $1.86 trillion dollars); John P. Harding, Eric 
Rosenblatt, Vincent W. Yao, The Contagion Effect of Foreclosed 
Properties, J. of Urban Econ. (forthcoming), available at http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1160354 (finding a 1.2 
percent drop in market value for each additional neighboring home in 
foreclosure; effect drops to 0.6 percent if property in foreclosure is 
one-eighth of a mile away); Dan Immergluck & Geoff Smith, The External 
Costs of Foreclosure: The Impact of Single-Family Mortgage Foreclosures 
on Property Values, 17 Housing Pol'y Debate 57, 69, 75 (2006) (``for 
each additional conventional foreclosure within an eighth of a mile of 
a house, property value is expected to decrease by 1.136 percent''; 
estimating total impact in Chicago to be between $598 million and $1.39 
billion).
    \4\ See, e.g., Staff of the Joint Economic Comm., 110th Cong., 1st 
Sess., The Subprime Lending Crisis: The Economic Impact on Wealth, 
Property Values and Tax Revenues, and How We Got Here (2007), available 
at http://jec.senate.gov/index.cfm?FuseAction=Reports.Reports&Content
Record_id=c6627bb2-7e9c-9af9-7ac7)2b94d398d27&Region_id=&Issue_id= 
(projecting foreclosed home owners will lose $71 billion due to 
foreclosure crisis, neighbors will lose $32 billion, and State and 
local governments will lose $917 million in property tax revenue); 
William Apgar & Mark Duda, Collateral Damage: The Municipal Impact of 
Today's Mortgage Foreclosure Boom, at 4 (May 11, 2005), available at 
www.hpfonline.org/PDF/Apgar-Duda_Study_Final.pdf (estimating costs to 
the city of Chicago per foreclosure upwards of $30,000 for some vacant 
properties).
---------------------------------------------------------------------------
    Retirees are themselves often homeowners,\5\ and all too 
often subject to abusive lending and foreclosure.\6\ For many 
retirees, their home is their largest asset--of far more 
importance to their financial (not to mention psychological and 
social) well-being than their pension funds invested in 
derivatives. The interests of retirees, as a class, are not 
substantially different from the interests of homeowners, as a 
class.
---------------------------------------------------------------------------
    \5\ U.S. Census Bureau, Housing Vacancies and Homeownership T 17 
(2009), available at http://www.census.gov/hhes/www/housing/hvs/
annual09/ann09ind.html (reporting that the 2009 homeownership rates for 
Americans 65 and over was 80.5 percent).
    \6\ AARP Public Pol'y Inst., A First Look at Older Americans and 
the Mortgage Crisis 5 (2008), http://assets.aarp.org/rgcenter/econ/
i9_mortgage.pdf. Cf. Ellen E. Schulz & Theo Francis, High-Interest 
Lenders Tap Elderly, Disabled, Wall St. J., Feb. 12, 2008 (reporting 
that payday lenders concentrate their outlets around subsidized elder 
housing).
---------------------------------------------------------------------------
    Retirees, like all securities holders, have watched 
servicers strip wealth from them by piling on unnecessary and 
excessive fees in foreclosure.\7\ The servicer can either 
collect these fees from the homeowner--reducing the likelihood 
of a successful modification--or collect them from monies 
otherwise payable to the trust upon the conclusion of a 
foreclosure. Either path leaves securities holders poorer. 
Servicing reform benefits all stakeholders in the system-
except, of course, to the extent that servicing reform prevents 
servicers themselves from profiting at the expense of both 
homeowners and securities holders. Our specific proposals focus 
on providing a net benefit to investors as well as homeowners. 
You cite three proposals: reform of the servicing industry, 
allowing loan modifications in bankruptcy, and addressing tax 
consequences for homeowners. Our recommendations include 
requiring servicers to modify loans where doing so would 
provide a net benefit to the investor. There is considerable 
evidence that servicers fail to modify loans, even when the 
investor would benefit from a modification. Investors, 
including pension funds, lose dramatically when servicers fail 
to modify loans and foreclose instead. The foreclosure will in 
many cases cutoff the flow of payments to the ultimate 
beneficiaries of the trust, who are often, as you note, 
retirees, dependent on that income to maintain a comfortable 
standard of living. Available data suggests that those retirees 
and other investors are losing, on average, over $145,000 per 
foreclosure.\8\ They would do much better if more loan 
modifications were made.
---------------------------------------------------------------------------
    \7\ See, e.g., Jody Shenn, Mortgage Investors with $500 Billion 
Urge End of Practices, Lawyer Says, Bloomberg News, July 23, 2010, 
http://www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-
billion-urge-end-of-practices-lawyer-says.html (reporting on letters 
sent to trustees of mortgage pools on behalf of a majority of the 
investors in the pool); Complaint, Carrington Asset Holding Co., L.L.C. 
v. American Home Mortgage Servicing, Inc., No. FST-CV 09-5012095-S 
(Conn. Super. Ct., Stamford Feb. 9, 2009) (complaint alleges that 
servicer's practices regarding fees and post-foreclosure sales were 
costly to investors); Ass'n of Mortg. Investors Press Release, AMI 
Supports Long Term, Effective, Sustainable Solutions to Avert 
Foreclosure; Invites Bank Servicers to Join, Nov. 16, 2010 (citing 
servicers' profit from fees and payments from affiliates as an 
impediment to loan modifications that would be in the interests of 
investors); Letter from Kathy D. Patrick to Countrywide Home Loans 
Servicing, Oct. 18, 2010 (notifying a trust and master servicer of 
breaches in the master servicer's performance).
    \8\ See Alan M. White, Sept. 26, 2010 Columbia Collateral File 
Summary Statistics, http://www.valpo.edu/law/faculty/awhite/data/
sep10_summary.pdf.
---------------------------------------------------------------------------
    Servicers' fee-gouging hurts securities holders. Fees come 
off the top in a foreclosure: servicers get paid before the 
investors do.\9\ When times are good, and equity in homes is 
increasing, securities holders can afford to ignore fees. 
Indeed, until recently, the impact of servicers' fee-skimming 
was largely invisible to investors.\10\ But with one in four 
homes underwater,\11\ and foreclosures at an all time high, the 
cost of those fees is reducing investors' profits.\12\
---------------------------------------------------------------------------
    \9\ See, e.g., Prospectus Supplement, Chase Funding Loan 
Acquisition Trust, Mortgage Loan Asset-Backed Certificates, Series 
2004-AQ1, at 34, (June 24, 2004), available at http://www.sec.gov/
Archives/edgar/data/825309/000095011604003012/four24b5.txt (``[T]he 
servicer will be entitled to deduct from related liquidation proceeds 
all expenses reasonably incurred in attempting to recover amounts due 
on defaulted loans and not yet repaid, including payments to senior 
lienholders, legal fees and costs of legal action, real estate taxes 
and maintenance and preservation expenses.''); Prospectus, CWALT, INC., 
Depositor, Countrywide Home Loans, Seller, Countrywide Home Loans 
Servicing L.P., Master Servicer, Alternative Loan Trust 2005-J12, 
Issuer 56 (Oct. 25, 2005) (``In addition, generally the master servicer 
or a subservicer will retain all prepayment charges, assumption fees 
and late payment charges, to the extent collected from mortgagors); 
Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage 
Loan Trust 2007-FLX5, at S-73 (June 27, 2007):

    Default Management Services

    In connection with the servicing of defaulted Mortgage Loans, the 
Servicer may perform certain default management and other similar 
services (including, but not limited to, appraisal services) and may 
act as a broker in the sale of mortgaged properties related to those 
Mortgage Loans. The Servicer will be entitled to reasonable 
compensation for providing those services, in addition to the servicing 
compensation described in this prospectus supplement.
    Letter from Kathy D. Patrick to Countrywide Home Loans Servicing, 
Oct. 18, 2010 (notifying a trust and master servicer of breaches in the 
master servicer's performance).
    \10\ E.g., Peter S. Goodman, Lucrative Fees May Deter Efforts to 
Alter Troubled Loans, N.Y. Times, July 30, 2009.
    \11\ First American Core Logic Negative Equity Report Q22010, 
available at http://www.corelogic.com/uploadedFiles/Pages/About_Us/
ResearchTrends/CL_Q2_2010_Negative
_Equity_FINAL.pdf.
    \12\ See, e.g., Jody Shenn, Mortgage Investors with $500 Billion 
Urge End of Practices, Lawyer Says, Bloomberg News, July 23, 2010, 
http://www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-
billion-urge-end-of-practices-lawyer-says.html (reporting on letters 
sent to trustees of mortgage pools on behalf of a majority of the 
investors in the pool); Complaint, Carrington Asset Holding Co., L.L.C. 
v. American Home Mortgage Servicing, Inc., No. FST-CV 09-5012095-S 
(Conn. Super. Ct., Stamford Feb. 9, 2009) (complaint alleges that 
servicer's practices regarding fees and post-foreclosure sales were 
costly to investors); Ass'n of Mortg. Investors Press Release, AMI 
Supports Long Term, Effective, Sustainable Solutions to Avert 
Foreclosure; Invites Bank Servicers to Join, Nov. 16, 2010 (citing 
servicers' profit from fees and payments from affiliates as an 
impediment to loan modifications that would be in the interests of 
investors); Letter from Kathy D. Patrick to Countrywide Home Loans 
Servicing, Oct. 18, 2010 (notifying a trust and master servicer of 
breaches in the master servicer's performance).
---------------------------------------------------------------------------
    The reforms we propose are either directly beneficial or 
neutral for securities holders, in addition to the important 
positive impacts these reforms would have in stabilizing the 
housing market and the larger economy.
    Comprehensive servicing reform has two primary components: 
requiring servicers to offer homeowners a modification where 
the modification would provide a net benefit to the securities 
holders and limiting fees to those both reasonable and 
necessary. Securities holders, as much as homeowners, stand to 
benefit from both those reforms.
    Currently, there is only one type of lien that bankruptcy 
judges can never modify in any way: first liens on single-
family principal residences. Loans on vacation homes, boats, 
cars, and corporate collateral can be modified. Even junior 
liens on single-family principal residences can be modified if 
they are wholly underwater, as many are today. By contrast, 
first liens on principal residences cannot be reduced to the 
value of the security interest and the interest rate cannot be 
changed. Securities holders, however, have not suffered larger 
losses from the modification of these other secured loans than 
they have from the foreclosure of home loans: it is the large 
losses on home loans that have driven the current economic 
crisis.
    Judicial modification of secured liens often provides 
creditors (and any ultimate securities holders) with a better 
return than foreclosure. Creditors do not have to absorb the 
same losses in bankruptcy as they do with a forced foreclosure 
sale, with its below market price and out-of-pocket expenses. 
If bankruptcy courts were permitted to modify first-lien loans 
on primary residences by reducing the secured balance to the 
value of the property, securities holders would not be saddled 
with losses as a result of below market prices and mortgage 
servicers' foreclosure costs. Instead, securities holders, who 
are suffering catastrophic losses now, would receive a stable 
flow of income from borrowers able to make ongoing payments on 
the reduced principal balance. Significantly, judicial 
modification in bankruptcy is limited to reducing the loan to 
the actual current value of the home; moreover, bankruptcy 
judges also have long experience balancing the claims of 
competing creditors to maximize returns to creditors. Losses to 
security holders, borrowers, and communities would likely be 
lower if bankruptcy judges had the power to modify residential 
home loans.
    Addressing the tax consequences of loan modifications is 
unlikely to have any significant impact on securities holders 
or on the fisc. Few lay people believe that a reduction in the 
value of a loan to its fair market value is taxable income; 
indeed, existing exceptions to the general rule that any 
reduction in the value of a loan is taxable income mean that 
homeowners who have access to a competent tax attorney or CPA 
are likely to be able to exclude that imputed value from 
income, but these exceptions, and the reporting forms are 
sufficiently complicated that unrepresented homeowners are 
unlikely to be able to avail themselves of the exception. The 
National Taxpayer Advocate has repeatedly identified the 
treatment of cancellation of debt income as a serious 
problem.\13\
---------------------------------------------------------------------------
    \13\ See, e.g., 2007 Nat'l Taxpayer Advocate Report to Congress 13-
33, available at http://www.irs.gov/pub/irs-utl/
arc_2007_vol_1_cover_msps.pdf.
---------------------------------------------------------------------------
    The proposals outlined in my November testimony are 
designed to align the interests of the servicers with those of 
investors and society at large, so that modifications will be 
made when doing so provides a net benefit. In this 
distributional analysis, it is only the servicers who lose. 
Servicers have made more money per loan in the recent times, 
precisely while securities holders are suffering steep losses 
from foreclosures.\14\ The servicers, when loan modifications 
that produce a net benefit to the investor are required before 
foreclosure, when servicing reform limits their ability to 
strip equity by piling on fees, and when bankruptcy judges have 
the power to force modifications that leave securities holders 
better off, will have to find a different business model. 
Instead of using default fees to cushion the cost of default, 
they will have to learn to make modifications and save money 
for both investors and homeowners. This is not an impossible 
goal: indeed, specialty servicers have long proclaimed their 
ability to make money by doing modifications.\15\ Servicers 
should not be allowed to strip wealth from both securities 
holders and homeowners but should be required to provide 
service to both groups in exchange for their substantial fees.
---------------------------------------------------------------------------
    \14\ Servicers Earn More Per Loan, MortgageDailyNews.com, June 29, 
2010.
    \15\ See, e.g., Press Release, Paul A. Koches, Ocwen Fin. Corp. 2 
(Feb. 25, 2010).

Q.2. Given the varying State laws that govern foreclosure, 
there must be the opportunity to observe both best and worst 
practices. While foreclosures are not the preferred option for 
any party at the onset of a loan, sometimes it is the path 
forward that presents the least harm to borrowers, lenders and 
the economy. In those instances, it is essential that our 
foreclosure process be effective.
    Which States do each of you feel provide the most efficient 
path forward in foreclosures, while providing borrowers proper 
legal channels in the event that there is a dispute? What is 
the average length of time between original delinquency and 
foreclosure sale in these States?
    Which States do each of you feel have the most problems in 
effectively executing foreclosures? What is the average length 
of time between original delinquency and foreclosure sale in 
these States?

A.2. The answer to this question depends a great deal on how 
one defines the appropriate goal for an effective foreclosure 
law. Speed is one goal; reducing losses to investors is 
another. A third is providing a fair and transparent process, 
to ensure that homeowners are not wrongfully deprived of their 
home. Speed by itself, as you suggest in the question, cannot 
be the ultimate measure of the effectiveness and efficiency of 
the foreclosure process in any State. Rather, the focus in most 
cases should be on providing a fair process for homeowners and 
reducing losses to investors.
    We should remember that it is not so much the State laws 
that make the foreclosure process efficient or effective as 
servicers' compliance with those laws. Frequently, servicers 
are guilty of failing to process a foreclosure efficiently. 
When servicers fail to comply with long standing requirements 
for affidavit execution or notice to borrowers, their 
procedures are neither effective nor efficient, as they call 
into jeopardy the successful completion of a foreclosure and 
often result in unnecessary and costly litigation. As discussed 
in my testimony, and in response to Senator Brown's questions, 
servicers have significant incentives to process foreclosures 
inefficiently and often do so. That is not the fault of the 
laws (although it may reflect weak enforcement); it is the 
fault of the servicers. The effectiveness or lack thereof 
cannot be judged by the complications created by servicers' 
willful noncompliance.
    NCLC is generally supportive of strengthening weak and 
ineffective State foreclosure laws; we do not believe that a 
Federal foreclosure process would be appropriate. The 
foreclosure process has historically been part of State real 
property law and should remain so. Necessary servicing reform 
can be conducted at the Federal level without undermining 
States' rights in this area traditionally regulated by the 
States. Greater detail on these questions can be found in a 
recent study co-authored by my NCLC colleagues John Rao and 
Geoff Walsh.\16\
---------------------------------------------------------------------------
    \16\ John Rao & Geoff Walsh, Nat'l Consumer L. Ctr., Foreclosing a 
Dream: State Laws Deprive Homeowners of Basic Protections (2009), 
http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/
foreclosing-dreamreport.pdf.
---------------------------------------------------------------------------
    Protections for Homeowners: The foreclosure process in the 
United States falls into roughly two categories: the 
traditional, judicial foreclosure process, which has required 
courts since colonial times to supervise foreclosure 
proceedings and prevent unjust results and a comparatively 
recent ``non-judicial'' process, which allows lenders to 
foreclose without court involvement. Slightly less than one-
half of the States mandate court supervision over residential 
mortgage foreclosures.\17\ In the remaining States, foreclosure 
sales may proceed without any oversight by a court or neutral 
third party. In non-judicial foreclosures, homeowners with 
valid complaints about their treatment by a lender or mortgage 
servicer must hire an attorney to prepare a cumbersome and 
expensive lawsuit in order to stop an imminent foreclosure. In 
some States, they may even be required to post bond in the 
amount of the mortgage loan before the homeowner's challenge to 
the foreclosure can be heard in court. The direct and 
inexpensive access to the courts, as occurs now in the many 
States requiring judicial foreclosure, is essential to an 
effective foreclosure system--one that protects the rights and 
interests of all parties.
---------------------------------------------------------------------------
    \17\ See National Consumer Law Center, Foreclosing a Dream: State 
Laws Deprive Homeowners of Basic protections February 2009, available 
at http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/
foreclosing-dream-report.pdf. This report contains State-by-State 
summaries of the States' foreclosure laws, highlighting features 
related to court access and oversight of loss mitigation actions.
---------------------------------------------------------------------------
    State laws work best to prevent avoidable foreclosures when 
they include concrete options for the homeowner to terminate a 
foreclosure proceeding prior to a sale. For example, several 
State laws provide for a borrower's right to ``cure'' a 
mortgage default before the mortgage holder may accelerate the 
loan and begin foreclosure proceedings. Before taking any 
action to foreclose, the mortgage holder must give the borrower 
a clear notice of the amount due and time within which to pay. 
This legal requirement promotes resolution of potential 
foreclosures before either party incurs any costs. 
Approximately 15 States now provide for this type of pre-
acceleration notice of right to cure, with Massachusetts, New 
Jersey, New York, and Maryland having recently added clear 
statutory notice of right to cure provisions to their 
foreclosure laws.\18\
---------------------------------------------------------------------------
    \18\ National Consumer Law Center, Foreclosing a Dream: State Laws 
Deprive Homeowners of Basic protections February 2009, supra __.
---------------------------------------------------------------------------
    Twenty-two States provide for a right to cure an arrearage, 
pay costs and fees incurred, and reinstate the loan after 
commencement of foreclosure proceedings and up until the time 
of a foreclosure sale.\19\ When borrowers have clear notice of 
a right to reinstate, it is more likely that they will avail 
themselves of this opportunity. They will avoid foreclosure by 
restoring the loan to its original contract terms. In these 
post-acceleration reinstatements the mortgage holder ultimately 
suffers no loss because the borrower must reimburse foreclosure 
costs.
---------------------------------------------------------------------------
    \19\ Id.
---------------------------------------------------------------------------
    In approximately half the States borrowers have some form 
of post-sale redemption right that allows them to pay the sale 
price plus costs and set the foreclosure sale aside.\20\ The 
post-sale redemption periods range from 60 days (North Dakota) 
to 1 year (Iowa, Kansas, Kentucky, Alabama, and Montana). In 
some States redemption rights and timeframes vary according to 
factors such as extent of the borrower's equity in the property 
or whether a third party purchased at the sale.
---------------------------------------------------------------------------
    \20\ Id.
---------------------------------------------------------------------------
    Reducing Losses to Investors: Investors lose enormous sums 
of money in foreclosure, $2.7 billion from foreclosure sales in 
the month of September 2010 alone.\21\ For that month the 
average loss per foreclosed property was $145,636, representing 
a loss of over 58 percent of the original principal per 
loan.\22\ Loan modifications substantially reduce these losses. 
For example, when mortgages were modified to forgive a portion 
of loan principal during September 2010, the recognized loss 
per loan averaged about 20 percent of the typical loan 
balance.\23\ Loans modified under the HAMP program, for 
example, show low redefault rates, less than half those of 
other loan modifications made at the same time, even though the 
HAMP modifications typically do not provide for principal 
reductions and only a temporary below-market interest rate 
reduction.\24\ These and similar modifications targeting 
borrower affordability provide investors with a steady stream 
of payments on the original loan principal. A foreclosure law 
that best facilitates sustainable loan modifications instead of 
foreclosures should be considered most ``effective'' in 
minimizing investor losses.
---------------------------------------------------------------------------
    \21\ Alan M. White, September 26, 2010 Columbia Collateral File 
Summary Statistics, Valparaiso University School of Law, available at 
http://www.valpo.edu/law/faculty/awhite/data/sep10_summary.pdf.
    \22\ Id.
    \23\ Id.
    \24\ Congressional Oversight Panel December 2010 Oversight Report, 
A Review of Treasury's Foreclosure Prevention Programs 34.; OCC/OTS 
Mortgage Metrics Report, Third Quarter 2010 at 37 (reporting a 
redefault rate on HAMP modifications after 6 months of 10.6 percent).
---------------------------------------------------------------------------
    State laws can set a requirement that mortgage holders 
consider loss mitigation options, including a loan 
modification, before a foreclosure sale will be allowed. For 
example, the South Carolina Supreme Court issued an 
administrative order in May 2009 requiring that all foreclosure 
complaints filed in the State describe how a servicer complied 
with any obligation it had to modify a loan under the HAMP 
program.\25\ The Connecticut courts approved a similar order 
that went into effect in September 2010.\26\ In several 
judicial foreclosure States, including New York, Maine, 
Vermont, and Connecticut, legislatures have recently enacted 
statutes requiring mediation or supervised conferences in 
foreclosure cases.\27\ The goal of these sessions is to bring 
representatives of mortgage servicers and the borrowers 
together to consider loss mitigation options that mutually 
benefit all parties. Court-initiated programs in Ohio, Florida, 
Pennsylvania, Kentucky, New Mexico, New Jersey, Indiana, and 
Delaware are now offering similar mediation and conference 
programs.\28\ Particularly where these programs involve use of 
net present value tests to examine the relative benefit to 
investors of an affordable loan modification as opposed to 
foreclosure, the sessions can provide a quick and effective 
means to determine whether foreclosures make economic sense for 
investors under accepted industry standards.\29\
---------------------------------------------------------------------------
    \25\ South Carolina Supreme Court Administrative Order 2009-05-22-
01 (May 22, 2009) at http://www.judicial.state.sc.us/courtOrders/
displayOrder.cfm?orderNo=2009-05-22-01.
    \26\ State of Connecticut Superior Court Mortgage Foreclosure 
Standing Order Federal Loss Mitigation Programs, JD-CV-117 Rev 8/10 
(August 18, 2010) available at http://www.jud2.ct.gov/webforms/forms/
CV117.pdf.
    \27\ Links to the texts of these statutes can be found at the 
National Consumer Law Center Web site: http://www.nclc.org/issues/
foreclosure-mediation-programs-by-state.html.
    \28\ Links to the court Web sites describing these programs are 
available on the same NCLC Web page, http://www.nclc.org/issues/
foreclosure-mediation-programs-by-state.html.
    \29\ The foreclosure mediation programs in effect in Maine and 
Vermont require use of these net present value tests.
---------------------------------------------------------------------------
    Recently, several State legislatures have incorporated 
mediation and conference requirements into non-judicial 
foreclosure procedures. For example, in Nevada, a traditionally 
non-judicial foreclosure State, the courts now supervise a 
statewide mediation program. In Maryland, homeowners may 
request hearings before a State agency to review the servicer's 
loss mitigation activities. Parties to a foreclosure in 
Maryland may also appeal conference decisions to the courts. 
The District of Columbia, another non-judicial foreclosure 
jurisdiction, recently enacted a foreclosure mediation law that 
will go into effect in early 2011.
    Time Frames: Both Fannie Mae and HUD (on behalf of FHA) 
publish guidelines for what they consider to be the reasonable 
timeframes from the initiation of a foreclosure to a sale in 
each of the 50 States.\30\ The expected time to foreclosure 
varies depending on State law and court procedures. Fannie Mae 
and HUD use these guidelines to assess performance of attorneys 
who are paid to conduct foreclosures of FHA insured and Fannie 
Mae owned and guaranteed loans. The guidelines show wide 
variations in foreclosure timeframes from State to State. For 
example, HUD lists three non-judicial foreclosure States 
(Missouri, Rhode Island, and Texas) with timeframes of 3 months 
from the commencement of foreclosure to sale. Nine non-judicial 
States have 4-month timeframes.\31\ On the other hand, HUD's 
permissible timeframes in judicial foreclosures States 
typically run 10 months and longer.\32\ Actual times to 
foreclosure can vary wildly, depending on how aggressive and 
competently a servicer handles a foreclosure, ranging in the 
same State from 30 days to years to complete a foreclosure.
---------------------------------------------------------------------------
    \30\ Fannie Mae Servicing Guide (2010 version) Part VIII, sec. 
104.05, Allowable Time Frames for Completing Foreclosure, https://
www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1012.pdf and HUD 
Mortgagee Letter 2005-30 (July 12, 2005) with attachments, http://
www.hud.gov/offices/adm/hudclips/letters/mortgagee/2005ml.cfm.
    \31\ Alabama, Arizona, Georgia, Mississippi, New Hampshire, 
Tennessee, and Virginia.
    \32\ E.g. 17 months (Iowa), 14 months (New Jersey, Vermont), 13 
months (New York), 12 months (Illinois, Maine, Ohio, Wisconsin), 10 
months (Indiana, Pennsylvania, South Dakota).
---------------------------------------------------------------------------
    Vagaries in the reporting of these timeframes exaggerates 
the discrepancy between non-judicial and judicial foreclosure 
States. The clock starts to run at a different point in time 
for judicial and non-judicial foreclosures. In non-judicial 
foreclosures the initial action is typically the publication of 
a notice of sale or the recording of a notice of default. In 
judicial foreclosures it is usually the filing of a foreclosure 
complaint in a court. But neither point in time measures how 
long it has been from default to the initiation of foreclosure. 
In many cases, the servicers will wait at least 3 months after 
the initial default before commencing a foreclosure, either 
because of contract limitations in the mortgage, or because of 
loss mitigation requirements imposed on Government-insured 
loans and some loans insured with private mortgage insurance, 
or because of custom.\33\ Post-sale redemption periods in some 
non-judicial foreclosure States (Michigan, Alabama, Minnesota 
Missouri and Wyoming) can extend the process beyond the Fannie 
Mae numbers in periods lasting from 3 months to 1 year. The 
time to completed foreclosures in these non-judicial 
foreclosure States is actually more in line with those of 
judicial foreclosure States.
---------------------------------------------------------------------------
    \33\ 24 C.F.R. 203.355(a).
---------------------------------------------------------------------------
    Debates over changes to State foreclosure laws often focus 
on the relative speed of different foreclosure procedures. Some 
industry representatives suggest that longer foreclosure 
timeframes harm consumers because lenders must raise the cost 
of credit on a State-by-State basis in response to lengthening 
of foreclosure timeframes. There is little empirical evidence 
indicating that this actually happens.\34\
---------------------------------------------------------------------------
    \34\ One study by a Federal Reserve Board economist offered some 
limited data on this subject. Karen M. Pence, Foreclosing on 
Opportunity: State Laws and Mortgage Credit, 88 Review of Economics and 
Statistics 177 (February 2006). The author looked for variances in home 
mortgage credit terms in States with judicial and non-judicial 
foreclosure laws. The study concluded that borrowers in judicial 
foreclosure States tended to receive marginally smaller loan amounts 
than those in non-judicial foreclosure States, but found no significant 
disparities in loan terms such as interest rates. The report could not 
conclude that borrowers in judicial States were necessarily worse off 
than borrowers in non-judicial States. According to the report, 
``homeownership might even increase if the judicial protections help 
borrowers remain in their homes.'' The Report noted that further study 
was needed to assess the balance between any minor negative effects on 
credit terms and the benefits that heightened homeowner protections 
create for a housing market.
---------------------------------------------------------------------------
    On the other hand, we now have analytical tools that allow 
us to see how the costs of foreclosure compare to the costs of 
various alternatives to foreclosure. We can easily quantify the 
cost to investors in interest lost during the 5 months 
additional time that a judicial foreclosure may take in 
comparison to a non-judicial foreclosure. However this short 
term incremental cost pales in relation to the overall loss of 
$145,000 that investors incur in the typical foreclosure today. 
Foreclosure laws that allow for full consideration of loss 
mitigation can drastically reduce that loss. In today's housing 
crisis, an analysis of State foreclosure laws that focuses on 
length of foreclosure time is dangerously outdated. An 
effective foreclosure system must provide a framework within 
which an evaluation of the true costs of foreclosure takes 
place in a timely and transparent manner.
    States with Relatively Effective and Efficient Foreclosure 
Laws: The foreclosure laws in New York and Maine include: (1) 
judicial supervision over entry of judgments and sales; (2) 
clear pre-foreclosure notices to borrowers advising them of 
their rights in a potential foreclosure, including a right to 
cure before commencement of proceedings and during proceedings; 
(3) timely referrals to counseling resources; and (4) an 
opportunity for conferences or mediations supervised by neutral 
third parties who can enforce good faith participation by the 
borrower, mortgage holder, and servicer. The laws in 
Connecticut and Vermont similarly encourage efficient review of 
loss mitigation options.
    Because the State laws in New York, Maine, Connecticut, and 
Vermont require court orders to schedule and approve sales, and 
allow time periods to negotiate and cure defaults, the 
foreclosure timelines from initiation of foreclosure to sale in 
these States are longer than in most other States and run from 
9 months to slightly over a year.\35\
---------------------------------------------------------------------------
    \35\ FHA's ``reasonable diligence'' timelines for these States are: 
Vermont (14 months); New York (13 months); Maine (12 months); 
Connecticut (9 months). Vermont, Maine, and Connecticut provide for a 
redemption period between entry of judgment and sale. These redemption 
periods are included in the timelines.
---------------------------------------------------------------------------
    States with Relatively Ineffective and Inefficient 
Foreclosure Laws: Several non-judicial foreclosure States, 
including Georgia, Tennessee, Rhode Island, Virginia, and 
Missouri combine ineffective notice and cure rights, no 
judicial oversight, and a timeframe that gives few homeowners a 
practical opportunity to participate actively in the 
foreclosure process.
    The timelines in Georgia, Tennessee, Rhode Island, 
Virginia, and Missouri are shorter, running about 4 months.\36\
---------------------------------------------------------------------------
    \36\ FHA's ``reasonable diligence'' timelines for these States are: 
Georgia (4 months); Tennessee (4 months); Rhode island (3 months); 
Virginia (4 months); Missouri (3 months). In cases in which the 
mortgage holder purchases the property at the sale, Missouri permits a 
1-year redemption period for a borrower who makes an appropriate 
request within 10 days of sale and posts a bond.

Q.3. To better gauge the level of violations surrounding the 
topic of this hearing it is necessary for us to understand who 
is being affected. Admittedly, this question is probably best 
suited for the regulators, and we hope to receive this 
information from them at some point.
    In your research and investigations, how many individuals 
were discovered to have been fully current on their mortgage 
payments but foreclosed upon by their servicer? Please provide 
the data and evidence that you evaluated to arrive at your 
conclusions.

A.3. Of course, I am not primarily a researcher, nor do I have 
access to the servicers' proprietary databases or an ability to 
conduct a comprehensive review of their loan files. While I did 
provide examples where the servicer wrongfully initiated 
foreclosure in my written testimony, including five homeowners 
who were foreclosed upon while negotiating a loan modification 
and making payments as instructed by the servicer, two 
homeowners who were placed into foreclosure solely because of 
the servicers' improper imposition of fees, three homeowners 
who were foreclosed upon although they were current in their 
required payments, and three cases where the servicer initiated 
foreclosure proceedings in the name of the wrong owner of the 
loan, these examples were illustrative and not exhaustive. As 
you note, regulators with supervisory authority are better 
positioned to review the millions of foreclosure filings than 
I. As we recommend in our testimony, it is essential that the 
regulators begin random sampling of servicers' files to 
determine the extent of the problem we are facing.
    In an attempt to quantify the extent of the problem, absent 
the hard data only careful supervisory exams are likely to 
provide, the National Association of Consumer Advocates, in 
conjunction with NCLC, conducted a survey of attorneys 
representing homeowners in foreclosure. The 96 attorneys from 
34 States reported representing over 1,200 homeowners who had 
been placed into foreclosure by a servicer when they were 
current on their payments. Those attorneys reported 
representing an additional 1,800 homeowners who had been placed 
into foreclosure by the servicer despite making payments as 
agreed under a plan.
    More importantly, this is not a question easily answered. 
By the time homeowners seek legal counsel, they have usually 
spent several months attempting to resolve their dispute with 
the servicer on their own, and sorting out the payment history 
is cumbersome and often uncertain. There are frequently 
divergences between the servicer's records and the homeowner's, 
and reconciling those records can take months, in my 
experience. Several courts have noted that the gross 
inaccuracies pervading servicers' records often make it 
impossible to determine whether a homeowner is in default and 
the extent of any default.\37\
---------------------------------------------------------------------------
    \37\ See, e.g., Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 
(7th Cir. 2003); Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 
281 B.R. 101 (Bankr. D. Mass. 2002); Chu v. Green Point Sav. Bank, 628 
N.Y.S. 2d 527 (2nd App. Dist. 1995) (finding servicers' conduct in 
foreclosing ``frivolous'' and imposing sanctions).
---------------------------------------------------------------------------
    There is also the difference between the homeowner's status 
at the time the servicer declares default and the time a 
foreclosure is formally filed. There is usually a lag of 
several months between the servicer's declaring default and the 
filing of a foreclosure in a judicial foreclosure State; a 
homeowner who was current at the time of the declaration of 
default is unlikely to be current when the foreclosure is filed 
(the servicer will ordinarily refuse payments in that 
circumstance, or homeowners may give up making payments, 
assuming that they will lose the home).
    Moreover, whether homeowners are current on their payments 
or not may depend on whether the servicer accepted the 
homeowner's payments, whether the servicer instructed the 
homeowner to stop making payments, whether the servicer 
properly applied the homeowner's payments, whether the servicer 
charged improper fees or forceplaced insurance. An analysis 
that only looks to the servicers' records as to the homeowners' 
status at the time of foreclosure is likely to miss most if not 
all of these cases where the homeowner was, by any sensible 
measure, current in the payments at the time the servicer 
initiated foreclosure. In my experience representing 
homeowners, it is not uncommon for servicers to initiate 
foreclosure where the homeowner has a good faith basis to 
dispute the servicer's accounting. Furthermore, problems in 
servicing cannot easily be disentangled from problems in 
origination: borrowers may fail to make payments because they 
were told not to, told that the amount owed was a different 
amount, or borrowers may make payments to the wrong entity.\38\ 
Fundamentally, if a loan modification would save the investors 
money, and the borrower qualifies for a loan modification, a 
servicer who initiates a foreclosure is acting wrongfully, in 
violation of their fiduciary obligations to the securities 
holders, in breach of the mortgage contract with the borrower, 
which requires good faith and fair dealing, and, often, in 
blatant disregard of regulatory guidance and HAMP Servicer 
Participation Agreements.
---------------------------------------------------------------------------
    \38\ See, e.g., Karen Weise, ProPublica, One ``Nightmare'' 
Mortgage: Problems from Origination through Foreclosure Nov. 22, 2010, 
http://www.propublica.org/article/one-nightmare-mortgage-problems-from-
origination-through-foreclosure (homeowner sent her payments to 
mortgage broker who failed to forward payments on).
---------------------------------------------------------------------------
    There continue to be press accounts--unrelated to either my 
testimony or the survey--documenting baseless foreclosures. 
Press reports from around the country have documented cases 
where servicers have initiated foreclosure, even though the 
homeowner was current in payments.\39\ In some instances, 
servicers have foreclosed on mortgages that the homeowner had 
already paid off in full.\40\ In other cases, servicers have 
foreclosed on the wrong home.\41\ A recent story in The New 
York Times reports on four separate cases where the servicer 
completed a foreclosure illegally.\42\ In one of those cases, 
the mortgage was paid off; in two of those cases, the homeowner 
was attempting to sort out the confusion following a loved 
one's death. Servicers will frequently refuse to accept 
payments from a spouse, partner, or child following a 
mortgagor's death, despite the fact that Federal law forbids 
servicers from exercising their due-on-sale clauses in this 
context \43\ and despite the fact that ordinary human feeling--
or good business judgment--would suggest allowing the grieving 
survivor to continue making payments without hassle.
---------------------------------------------------------------------------
    \39\ See, e.g., George Gombossy, Bank of America's Christmas 
Present: Foreclose Even Though Not a Missed Payment, ctwatchdog.com, 
Dec. 24, 2010, http://ctwatchdog.com/2010/12/24/bank-of-americas-
christmas-present-foreclose-even-though-not-a-payment-missed; Jon 
Yates, Processing Mistake Leads to Erroneous Foreclosure, Chi. Trib. 
Nov. 23, 2010.
    \40\ See, e.g., Andrew Martin, In Sign of Foreclosure Flaws, Suits 
Claim Break-Ins by Banks, N.Y. Times, Dec. 22, 2010, at A1; Aldo 
Svaldi, Foreclosure Paperwork Miscues Piling Up, Denver Post, Nov. 14, 
2010.
    \41\ See, e.g., Harriet Johnson Brackey, Lauderdale Man's Home Sold 
Out From Under Him in Foreclosure Mistake, Sun Sentinel, Sept. 23, 
2010; Tony Marrero, Bank of America Forecloses on House that Couple Had 
Paid Cash For, St. Petersburg Times, Feb. 12, 2010.
    \42\ Andrew Martin, In Sign of Foreclosure Flaws, Suits Claim 
Break-Ins by Banks, N.Y. Times, Dec. 22, 2010, at A1.
    \43\ 12 U.S.C. 1701j-3.
---------------------------------------------------------------------------
    Servicer abuses are widespread and unquestionably result in 
wrongful foreclosure. Determining the true extent of the 
problem will require careful, independent scrutiny of both 
servicers' and homeowners' records.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DIANE E. 
                            THOMPSON

Q.1. Please describe any barriers to mortgage modifications 
that servicers may encounter.

A.1. In general, the barriers servicers face to mortgage 
modifications have been overstated. The barriers servicers face 
are usually surmountable or of their own making.
    Servicers often complain about staffing shortages. Staffing 
is certainly expensive for servicers, particularly default 
staffing, although servicers continue to have enviable margins 
in their servicing of the majority of loans that are 
performing.\1\ By any reasonable measure though, servicers have 
sufficient staff to perform modifications.\2\ Training and 
supervision of staff may be an issue, as may the implementation 
of procedures to perform loan modifications correctly, but 
those are questions about servicers' will to implement 
modifications, not their ability to do so.
---------------------------------------------------------------------------
    \1\ See, e.g., Mortg. Servicing News, Servicers' Collection Profits 
May Outweigh Cost of Defaults, Dec. 28, 2010 (noting that while default 
servicing is expensive, servicing of performing loans is highly 
lucrative for large servicers, with the direct costs running perhaps 
$60 a year and the principal based mortgage servicing income paid by 
the trust running $450 a year on a midsized prime loan of $180,000).
    \2\ For example, in April of this year, Bank of America reported 
that it had over 15,000 people working in customer outreach. Jennifer 
Harmon, Am Banker, B of A Deploys More Resources from Origination to 
Servicing, Apr. 12, 2010. By October, Bank of America had fewer than 
80,000 HAMP permanent modifications in place. Making Home Affordable 
Program, Servicer Performance Report Through Oct. 2010. That suggests 
that it is taking Bank of America more than two full work days to 
process a homeowner for a HAMP modification-a highly standardized 
application that requires little individual underwriting. Jack 
Guttentag, New Plan to Jump-Start Loan Mods: Web Portal Would 
Centralize Communication, Break Logjam, Inman News, July 20, 2009, 
available at http://www.inman.com/buyerssellers/columnists/
jackguttentag/new-plan-jump-start-loan-mods (noting that it should take 
no more than an hour for a servicer to process a loan modification 
request; at that rate, Chase's 3500 loan modification counselors should 
be able to process at least 70,000 loan modifications a week-
approximately the number of Making Home Affordable modifications that 
Chase has processed in the first 5 months of the HAMP program).
---------------------------------------------------------------------------
    Servicers often assert that investors prohibit 
modifications. As detailed in my written testimony, often those 
representations are entirely false. Most PSAs permit 
modifications of loans in default freely.\3\ Where 
securitizations contain absolute bars to modifications, 
sponsors of those securitizations have successfully petitioned 
the trustee to amend the contract to allow modifications 
generally, so long as the loan is in default or at imminent 
risk of default.\4\ Increasingly, groups representing investors 
call on servicers to perform more loan modifications, including 
principal reductions, and assert that servicers are failing to 
perform modifications, contrary to servicers' wishes.\5\
---------------------------------------------------------------------------
    \3\ John P. Hunt, Berkeley Ctr. for Law, Business, and the Economy, 
Loan Modification Restrictions in Subprime Securitization Pooling and 
Servicing Agreements from 2006: Final Results 2 (July 2010), available 
at http://www.law.berkeley.edu/files/bclbe/Subprime_
Securitization_Paper_John_Hunt_7.2010.pdf (only 8 percent of subprime 
contracts reviewed barred modifications); John P. Hunt, Berkeley Ctr. 
for Law, Business, and the Economy, What Do Subprime Securitization 
Contracts Actually Say About Loan Modification: Preliminary Results and 
Implications 7 (Mar. 25, 2009), available at http://
www.law.berkeley.edu/files/bclbe/
Subprime_Securitization_Contracts_3.25.09.pdf (discussing various 
limitations and quantifying the frequency of limitations); See Manuel 
Adelino, Kristopher Gerardi, and Paul S. Willen, Fed. Reserve Bank of 
Boston, Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, 
Self-Cures, and Securitizations 28 (Publicy Pol'y Paper No. 09-4, July 
6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf. (summarizing several different studies finding no 
meaningful PSA restrictions in a majority of securitizations reviewed); 
Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen 
Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. Research 
& Statistical Affairs, The Incentives of Mortgage Servicers: Myths and 
Realities 22 (Working Paper No. 2008-46) (reporting that of 500 
different PSAs under which a large servicer operated, 48 percent had no 
limitations on modifications other than that they maximize investor 
return; only 7.5 percent of the PSAs had meaningful limits on then 
types of modifications a servicer could authorize); Credit Suisse, The 
Day After Tomorrow: Payment Shock and Loan Modifications (2007), 
available at http://www.creditsuisee.com/researchandanalytics (finding 
that 65 percent of survey PSAs contain no meaningful restrictions on 
ability to modify loans); American Securitization Forum, Statement of 
Principles, Recommendations, and Guidelines for the Modification of 
Securitized Subprime Residential Mortgage Loans 2 (June 2007) (``Most 
subprime transactions authorize the servicer to modify loans that are 
either in default or for which default is either imminent or reasonably 
foreseeable.'').
    \4\ See, e.g., Morgan Stanley Omnibus Amendment (Aug. 23, 2007) (on 
file with author).
    \5\ Jody Shenn, Mortgage Investors with $500 Billion Urge End of 
Practices, Lawyer Says, Bloomberg News, July 23, 2010, http://
www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-billion-
urge-end-of-practices-lawyer-says.html (reporting on letters sent to 
trustees of mortgage pools on behalf of a majority of the investors in 
the pool); Ass'n of Mortg. Investors Press Release, AMI Supports Long 
Term, Effective, Sustainable Solutions to Avert Foreclosure; Invites 
Bank Servicers to Join, Nov. 16, 2010 (citing servicers' profit from 
fees and payments from affiliates as an impediment to loan 
modifications that would be in the interests of investors); Letter from 
Kathy D. Patrick to Countrywide Home Loans Servicing, Oct. 18, 2010 
(notifying a trust and master servicer of breaches in the master 
servicer's performance).
---------------------------------------------------------------------------
    Servicers' delayed recovery of expenses in modifications 
may create a barrier to performing modifications. Servicers 
have two main expenses when a loan is in default: advances of 
principal and interest to the trust and payments to third 
parties for default services, such as property inspections. The 
requirement for advances usually continues until a foreclosure 
is completed, a loan modification is reached, or the servicer 
determines that there is no realistic prospect of recovering 
the advances from either the borrower or the collateral.\6\ 
Financing these costs is one of servicers' biggest expenses.\7\
---------------------------------------------------------------------------
    \6\ Brendan J. Keane, Moody's Investor Services, Structural Nuances 
in Residential MBS Transactions: Advances 3 (June 10, 1994).
    \7\ Ocwen Fin. Corp., Annual Report (Form 10-K) 5 (Mar. 12, 2009).; 
Mary Kelsch, Stephanie Whited, Karen Eissner, Vincent Arscott, Fitch 
Ratings, Impact of Financial Condition on U.S. Residential Mortgage 
Servicer Ratings 2 (2007).
---------------------------------------------------------------------------
    Modifications in general do not allow servicers to recover 
their costs as quickly as foreclosures do.\8\ Servicers' 
advances are taken off the top, in full, at the post-
foreclosure sale, before investors receive anything.\9\ If 
advances of principal and interest payments remain beyond the 
sale value, servicers can usually collect them directly from 
the trust's bank account (or withhold them from payments to the 
trust).\10\ In contrast, when there is a modification, 
servicers are usually limited to recovering their advances from 
the modified loan alone, after required payments to the trust, 
or, if the advances are deemed nonrecoverable, from only the 
principal payments on the other loans in the pool, not the 
interest payments.\11\ As a result, servicers can face a delay 
of months to years in recouping their advances on a 
modification. Modifications involving principal reductions 
compound the problem: they lengthen the time to recover 
advances on any individual modified loan as well as on other 
modified loans, by reducing the amount of principal payments 
available for application to recovery of advances.\12\ Limiting 
recovery of servicer expenses when a modification is performed 
to the proceeds on that loan rather than allowing the servicer 
to recover more generally from the income on the pool as a 
whole, as is done in foreclosure, clearly biases servicers 
against meaningful modifications, particularly modifications 
with principal reduction or forbearance.
---------------------------------------------------------------------------
    \8\ Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, U.S. 
Residential Mortgage Servicer Advance Receivables Securitization Rating 
Criteria 4 (Sept. 10, 2009) (finding that modifications do not appear 
to accelerate the rate of recovery of advances, in part because of high 
rates of redefault).
    \9\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & 
Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. 
Research & Statistical Affairs, The Incentives of Mortgage Servicers: 
Myths and Realities 11 (Working Paper No. 2008-46); Ocwen Fin. Corp., 
Annual Report (Form 10-K) 4 (Mar. 17, 2008) (advances are ``top of the 
waterfall'' and get paid first); Wen Hsu, Christine Yan, Roelof Slump, 
FitchRatings, U.S. Residential Mortgage Servicer Advance Receivables 
Securitization Rating Criteria 1 (Sept. 10, 2009) (same); Prospectus 
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 
2007-FLX5, at S-71 (June 27, 2007) (servicers repaid all advances when 
foreclosure is concluded).
    \10\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 11 
(Mar. 12, 2009) (``[I]n the majority of cases, advances in excess of 
loan proceeds may be recovered from pool level proceeds.''); Prospectus 
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 
2007-FLX5, at S-71 (June 27, 2007) (permitting principal and interest 
advances to be recovered from the trust's bank account); Prospectus, 
CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide 
Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust 
2005-J12, Issuer 47 (Oct. 25, 2005) (limiting right of reimbursement 
from trust account ``to amounts received representing late recoveries 
of the payments for which the advances were made).
    \11\ Monica Perelmuter & Waqas Shaikh, Standard & Poor's, Criteria: 
Revised Guidelines for U.S. RMBS Loan Modification and Capitalization 
Reimbursement Amounts 3 (Oct. 11, 2007).
    \12\ But see Rod Dubitsky, Larry Yang, Stevan Stevanovic, Thomas 
Suer, Credit Suisse, Subprime Loan Modifications Update (2008) 
(discussing how some servicers exploited then existing imprecision in 
the accounting treatment of principal reduction modifications to use 
principal reduction modifications to halt interest advances).
---------------------------------------------------------------------------
    Moreover, since the significant financing costs associated 
with making advances cannot be recovered,\13\ servicers are 
likely to push through a foreclosure quickly when the cost of 
financing advances is climbing, even at the expense of 
investors who might prefer a modification.\14\
---------------------------------------------------------------------------
    \13\ Joseph R. Mason, Mortgage Loan Modification: Promises and 
Pitfalls 4 (Oct. 2007). A large subprime servicer noted in its 2007 
annual report that although ``the collectability of advances generally 
is not an issue, we do incur significant costs to finance those 
advances. We utilize both securitization, (i.e., match funded 
liabilities) and revolving credit facilities to finance our advances. 
As a result, increased delinquencies result in increased interest 
expense.'' Ocwen Fin. Corp., Annual Report (Form 10-K) 18 (Mar. 17, 
2008); see also Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, 
U.S. Residential Mortgage Servicer Advance Receivables Securitization 
Rating Criteria 1 (Sept. 10, 2009) (``Servicer advance receivables are 
typically paid at the top of the cash-flow waterfall, and therefore, 
recovery is fairly certain. However, . . . there is risk in these 
transactions relating to the timing of the ultimate collection of 
recoveries.'').
    \14\ See Complaint at 11-15, ); Carrington Asset Holding Co., 
L.L.C. v. American Home Mortgage Servicing, Inc., No. FST-CV 09-
5012095-S (Conn. Super. Ct., Stamford Feb. 9, 2009) (alleging that 
servicer conducted ``fire sales'' of foreclosed properties in order to 
avoid future advances and recover previously made advances); Kurt 
Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 
Housing Pol'y Debate 753, 757 (2004) (reporting that servicers 
sometimes rush through a foreclosure without pursuing a modification or 
improperly foreclose in order to collect advances); Peter S. Goodman, 
Lucrative Fees May Deter Efforts to Alter Troubled Loans, N.Y. Times, 
July 30, 2009.
---------------------------------------------------------------------------
    The two-track system also impedes servicers' ability to 
perform modifications. Proceeding with a foreclosure before 
considering a loan modification results in high costs for both 
investors and homeowners. These costs--which accrue primarily 
to the benefit of the servicer--can make an affordable loan 
modification impossible. Moreover, the two track system, of 
proceeding simultaneously with foreclosures and loan 
modification negotiations, results in many ``accidental'' 
foreclosures, due to bureaucratic bungling by servicers,\15\ as 
one department of the servicer fails to communicate with 
another, or papers are lost, or instructions are not conveyed 
to the foreclosure attorney. To some extent, the two-track 
system is still mandated by large investors and the FHFA. 
Ending the two-track system would facilitate servicers' ability 
to complete loan modifications.
---------------------------------------------------------------------------
    \15\ For some descriptions of all too typical bureaucratic bungling 
by servicers, see Peter S. Goodman, Paper Avalanche Buries Plan to Stem 
Foreclosures, N.Y. Times, June 29, 2009, and Jack Guttentag, New Plan 
to Jump-Start Loan Mods: Web Portal Would Centralize Communication, 
Break Logjam, Inman News, July 20, 2009, available at http://
www.inman.com/buyers-sellers/columnists/jackguttentag/new-plan-jump-
start-loan-mods.

Q.2. What systems should mortgage servicers implement to 
correct their mistakes and compensate the individual homeowners 
---------------------------------------------------------------------------
who have suffered through the actions of others?

A.2. We believe that servicers must take steps to redress harm 
caused consumers, ensure fair and effective processing going 
forward, and begin complying with existing standards.
    Compliance. Compliance with existing rules and policies 
must come first. Any redress to harmed borrowers is undercut if 
servicers do not stop violating existing standards. We continue 
to hear examples of outright misrepresentations by all of the 
major servicers. Bank of America, for example, has continued to 
require homeowners to sign waivers for its proprietary loan 
modification program, despite representations to the contrary. 
Chase has been sending out letters that implicitly discourage 
homeowners from applying for Pennsylvania's HEMAP program. 
Servicers must comply with both the letter and the spirit of 
the law.
    Improved Processing. In addition to taking steps to comply 
with existing standards, servicers could implement the 
following systems to ease the process for homeowners going 
forward.

   End dual track. Stop the foreclosure process during 
        modification applications (and modifications), even for 
        people already in foreclosure at the time of 
        application.

   Create a single point of contact for each 
        homeowner, one with real decisionmaking authority and 
        ability to follow through.

   Process modification applications in hours instead 
        of months or years. Expedited review.

   Clear in-house escalations for homeowners who have 
        been denied a modification or encountered difficulties 
        in obtaining a modification.

    Redress. Providing redress for homeowners harmed will not 
be easy and would require a significant commitment on the part 
of servicers. There are two basic categories of homeowners who 
have been harmed by servicers' malfeasance: 1) those who have 
lost their homes and 2) those who are still in their homes, but 
have been denied a loan modification, pushed into default, or 
merely had improper fees tacked onto their account. Addressing 
the former category, homeowners who lost their homes, is more 
complex than providing relief to those who have not yet lost 
their homes at a foreclosure sale.
    For homeowners who have not yet lost their home in a 
foreclosure sale, servicers should institute a supervised, full 
review of every file marked in default. This review must 
include a review of the payment history, including the timing 
and application of payments and the validity of fees charged.

   Homeowners found not to be in default should be 
        removed from foreclosure, corrections of credit 
        reporting status must be provided to the credit 
        bureaus, and accounts should be fully corrected.

   All pending foreclosures should be halted while 
        this review takes place, and dual track processing must 
        be stopped on all loans so that the modification review 
        can be completed.

   Fees should be rolled back and limited to 
        reasonable and necessary ones.

   Recalculation of principal balances should be done 
        to account for improperly assessed fees or overcharged 
        interest.

    The servicers should also be required to undertake a review 
of all completed foreclosures. There are two large categories 
of cases for which servicers should attempt to make redress: 
first, cases where the foreclosure was executed on the wrong 
home or where the homeowner was not in default; and second, 
cases where the foreclosure was completed without completing 
the loan modification review process, providing a written 
denial to the homeowner, or failing to offer a qualifying 
homeowner an appropriate modification.

   If the home has not yet been sold to a bona fide 
        third party, the servicer should offer to restore the 
        mortgage, with a reduction of the principal balance to 
        account for all assessed foreclosure fees, as well as 
        any improper fees. If the borrower is in default, the 
        servicer also should provide a reduction of the 
        interest rate to the Freddie Mac Prime Weekly Rate, if 
        that is lower. Such homeowners further should be 
        evaluated for a deeper modification where the monthly 
        payment would be greater than 31 percent of the 
        homeowner's income. As part of those NPV positive 
        modifications, servicers should be required to reduce 
        the principal balance on the loan to the assessed value 
        of the property that the servicer relied on in 
        evaluating the loan for foreclosure originally. 
        Servicers must further provide corrected credit 
        reporting to the credit bureaus to mitigate the 
        negative credit reporting.

   If the home has already been sold to a third party 
        or if the homeowner no longer wishes to retain the 
        home, the servicer should be required to refund to the 
        homeowner all foreclosure fees assessed against the 
        homeowner's account, plus the amount by which the 
        valuation the servicer relied on exceeds the 
        foreclosure sale price. Servicers must also take steps 
        to repair the homeowner's credit in these situations.

No waiver of the homeowner's rights should be required.
    If the homeowner who was subject to a wrongful foreclosure 
cannot be located, the servicer should be required to deposit 
the money that would otherwise be paid to the homeowner into a 
fund for legal services and housing counselors. Funding must be 
available to legal services lawyers to support foreclosure 
litigation, as well as counseling.

Q.3. What are the financial incentives encouraging mortgage 
servicers to foreclose on homeowners?

A.3. As detailed in my report, ``Why Servicers Foreclose When 
They Should Modify,''\16\ the balance of servicer incentives 
leans toward foreclosure over modification.
---------------------------------------------------------------------------
    \16\ Diane E. Thompson, Why Servicers Foreclose When They Should 
Modify and Other Puzzles of Servicer Behavior: Servicer Compensation 
and its Consequences (Oct. 2009), available at www.consumerlaw.org.
---------------------------------------------------------------------------
    Staffing costs: Servicers encounter increased staffing 
costs that are not reimbursed when they modify. In contrast, 
the staffing costs of foreclosures, which are often lower than 
those for modifications, may be outsourced and charged back to 
the trust. Many of those foreclosure staffing needs are 
provided by affiliates or other organizations that provide 
financial compensation to the servicers in exchange for repeat 
business.\17\
---------------------------------------------------------------------------
    \17\ See Complaint para.  15, Fed'l Trade Comm'n v. 
Countrywide Home Loans, Inc., No. CV-10-4193 (C.D. Cal. Jun. 7, 2010), 
available at http://www.ftc.gov/os/caselist/0823205/
100607countrywidecmpt.pdf; (alleging that Countrywide's 
``countercyclical diversification strategy'' was built on its 
subsidiaries funneling the profits from marked-up default fees back to 
Countrywide); Peter S. Goodman, Homeowners and Investors May Lose, But 
the Bank Wins, N.Y. Times, July 30, 2009 (describing Bank of America's 
refusal to entertain three separate short sale offers during 2 years of 
non-payment while its affiliate continues to assess property inspection 
fees); Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter 
Troubled Loans, N.Y. Times, July 30, 2009.
---------------------------------------------------------------------------
    Fees: Servicers get paid off the top in a foreclosure for 
any costs and expenses, before the investors get paid. But when 
a loan is modified, servicers can only collect their fees and 
expenses from the payments on that loan.
    Servicers can charge homeowners and investors more fees in 
a foreclosure than in a modification. There are property 
preservation fees, REO sale costs, attorney fees, and title 
work, to name a few. For example, one servicer recently charged 
the account of a Maine homeowner $600 for cutting the grass, 
once. The servicer charged this ``property preservation fee'' 
multiple times over the course of a few months. The servicer 
tacked these fees onto a petition for deficiency judgment 
against the homeowner; had the homeowner not been able to force 
those fees to be waived, the servicer would likely have 
collected any unpaid amount from the trust, before the 
investors got paid. Additionally, HAMP and other loan 
modification programs may require waiver of late fees, which 
servicers are otherwise entitled to retain.\18\
---------------------------------------------------------------------------
    \18\ See Home Affordable Modification Program, Supplemental 
Directive 09-01 (Apr. 6, 2009).
---------------------------------------------------------------------------
    Pressure from credit rating agencies to expedite 
foreclosures: Credit rating agencies rate servicers' 
performance on the speed to conduct a foreclosure.\19\ Since 
servicers are dependent on the credit rating agencies for 
approval to enter into new mortgage servicing contracts and 
affordable financing, servicers have a strong financial 
incentive to push forward a foreclosure rather than allowing 
for the possibility of a loan modification.
---------------------------------------------------------------------------
    \19\ Diane Pendley & Thomas Crowe, FitchRatings, U.S. RMBS 
Servicers' Loss Mitigation and Modification Efforts 11, 15 (May 26, 
2009); see also Michael Guttierez, Michael S. Merriam, Richard Koch, 
Mark I. Goldberg, Standard & Poors, Structured Finance: Servicer 
Evaluations 15-16 (2004). The rating agencies do not set benchmarks for 
any of these, but expect servicers to develop timelines and 
standardized loss mitigation options for each loan product, with 
reference to the industry standards as developed by Fannie Mae and 
Freddie Mac.
---------------------------------------------------------------------------
    Troubled debt restructuring rules: The troubled debt 
restructuring rules discourage servicers from performing 
permanent modifications, as well as more generally discouraging 
those modifications most likely to be successful-modifications 
that provide deep payment reductions and modifications before 
default. While the TDR accounting rules only apply to loans 
held in portfolio,\20\ preserving the assets of the trust from 
the originators' creditors has required that servicers 
generally categorize modifications using the TDR rules.\21\
---------------------------------------------------------------------------
    \20\ Fin. Accounting Standards Bd., Accounting by Creditors for 
Impairment of Loans, An Amendment of FASB Statement No. 5 and 15, 
Statement of Fin. Accounting Standards No. 114 (1993).
    \21\ FASB has recently altered the rules protecting the bankruptcy-
remote status of the trust. Instead of qualifying as a Special Purpose 
Entity, all ``variable interest entities'' now must be reviewed to 
determine the extent to which the transferring entity maintains control 
and appropriate disclosures provided. This is unlikely to impact the 
weight of the TDR rules directly, but it does change the formal 
mechanism by which bankruptcy-remote status is achieved and evaluated. 
See Transfers of Financial Assets, An Amendment to FASB Statement No. 
140, Statement of Fin. Accounting Standards No. 166 (2009).
---------------------------------------------------------------------------
    FAS 15 generally requires all permanent modifications 
occasioned by the ``borrower's financial difficulties'' to be 
treated as ``troubled debt restructurings.''\22\ A TDR usually 
results in immediate loss recognition and, for loans held in 
portfolio, a cessation of interest payments.\23\ The FAS 15 
rules apply whether the loan is current or delinquent when 
modified. A servicer who modifies a loan pre-default-say an 
adjustable rate mortgage in advance of a rate reset-will have 
to report that loan as a TDR. Many servicers prefer to postpone 
that paper loss, thus converting the paper loss into a real 
loss, at least for the homeowner and investors.\24\
---------------------------------------------------------------------------
    \22\ Fin. Accounting Standards Bd., Accounting by Debtors and 
Creditors for Troubled Debt Restructurings, Statement of Fin. 
Accounting Standards No. 15 at Sec. 2 (1977).
    \23\ Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Fed. 
Reserve Bank of Boston, Why Don't Lenders Renegotiate More Home 
Mortgages? Redefaults, Self-Cures, and Securitizations 23-24 (Publicy 
Pol'y Paper No. 09-4, July 6, 2009), available at http://
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf.
    \24\ Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Fed. 
Reserve Bank of Boston, Why Don't Lenders Renegotiate More Home 
Mortgages? Redefaults, Self-Cures, and Securitizations 23-24 (Publicy 
Pol'y Paper No. 09-4, July 6, 2009), available at http://
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf.
---------------------------------------------------------------------------
    Junior liens: Servicers who own junior liens will be 
reluctant to modify those loans. Homeowners often continue to 
pay on junior liens after they have defaulted on first 
mortgages, because the smaller payment associated with the 
junior lien feels more manageable. As long as that mortgage is 
performing, servicers will be reluctant to recognize a loss, 
even if doing so would enable a greater return on the first 
mortgage.
    Advances: Servicers' requirement to advance the principal 
and interest payments on loans that are in default favors 
foreclosures. Servicers have two main expenses when a loan is 
in default: advances of principal and interest to the trust and 
payments to third parties for default services, such as 
property inspections. Servicers, under their agreements with 
investors, typically are required to continue to advance 
interest on loans that are delinquent until a foreclosure is 
completed.\25\ Financing these costs is one of servicers' 
biggest expenses.\26\ Recovery of these fees (but not the 
financing costs) is more certain and often swifter via a 
foreclosure than a modification.
---------------------------------------------------------------------------
    \25\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & 
Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. 
Research & Statistical Affairs, The Incentives of Mortgage Servicers: 
Myths and Realities 16 (Working Paper No. 2008-46).
    \26\ Ocwen Fin. Corp., Annual Report (Form 10-K) 5 (Mar. 12, 
2009).; Mary Kelsch, Stephanie Whited, Karen Eissner, Vincent Arscott, 
Fitch Ratings, Impact of Financial Condition on U.S. Residential 
Mortgage Servicer Ratings 2 (2007).
---------------------------------------------------------------------------
    Servicers' advances are taken off the top, in full, at the 
post-foreclosure sale, before investors receive anything.\27\ 
If advances of principal and interest payments remain beyond 
the sale value, servicers can usually collect them directly 
from the trust's bank account (or withhold them from payments 
to the trust).\28\ In contrast, when there is a modification, 
servicers are usually limited to recovering their advances from 
the modified loan alone, after required payments to the trust, 
or, if the advances are deemed nonrecoverable, from only the 
principal payments on the other loans in the pool, not the 
interest payments.\29\ As a result, servicers can face a delay 
of months to years in recouping their advances on a 
modification. Modifications involving principal reductions 
compound the problem: they lengthen the time to recover 
advances on any individual modified loan as well as on other 
modified loans, by reducing the amount of principal payments 
available for application to recovery of advances.\30\
---------------------------------------------------------------------------
    \27\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & 
Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. 
Research & Statistical Affairs, The Incentives of Mortgage Servicers: 
Myths and Realities 11 (Working Paper No. 2008-46); Ocwen Fin. Corp., 
Annual Report (Form 10-K) 4 (Mar. 17, 2008) (advances are ``top of the 
waterfall'' and get paid first); Wen Hsu, Christine Yan, Roelof Slump, 
FitchRatings, U.S. Residential Mortgage Servicer Advance Receivables 
Securitization Rating Criteria 1 (Sept. 10, 2009) (same); Prospectus 
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 
2007-FLX5, at 71 (June 27, 2007) (servicers repaid all advances when 
foreclosure is concluded).
    \28\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 11 
(Mar. 12, 2009) (``[I]n the majority of cases, advances in excess of 
loan proceeds may be recovered from pool level proceeds.''); Prospectus 
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 
2007-FLX5, at 71 (June 27, 2007) (permitting principal and interest 
advances to be recovered from the trust's bank account); Prospectus, 
CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide 
Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust 
2005-J12, Issuer 47 (Oct. 25, 2005) (limiting right of reimbursement 
from trust account `` to amounts received representing late recoveries 
of the payments for which the advances were made).
    \29\ Monica Perelmuter & Waqas Shaikh, Standard & Poor's, Criteria: 
Revised Guidelines for U.S. RMBS Loan Modification and Capitalization 
Reimbursement Amounts 3 (Oct. 11, 2007).
    \30\ But see Rod Dubitsky, Larry Yang, Stevan Stevanovic, Thomas 
Suer, Credit Suisse, Subprime Loan Modifications Update 8 (2008) 
(discussing how some servicers exploited then existing imprecision in 
the accounting treatment of principal reduction modifications to use 
principal reduction modifications to halt interest advances).
---------------------------------------------------------------------------
    Although the cost of the advances themselves may be 
recovered, the significant financing costs associated with 
making advances cannot be.\31\ Thus, servicers are encouraged 
to reach a resolution of default as quickly and completely as 
possible, even at the expense of investors who might prefer a 
modification.\32\
---------------------------------------------------------------------------
    \31\ Joseph R. Mason, Mortgage Loan Modification: Promises and 
Pitfalls 4 (Oct. 2007). A large subprime servicer noted in its 2007 
annual report that although ``the collectability of advances generally 
is not an issue, we do incur significant costs to finance those 
advances. We utilize both securitization, (i.e., match funded 
liabilities) and revolving credit facilities to finance our advances. 
As a result, increased delinquencies result in increased interest 
expense.'' Ocwen Fin. Corp., Annual Report (Form 10-K) 18 (Mar. 17, 
2008); see also Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, 
U.S. Residential Mortgage Servicer Advance Receivables Securitization 
Rating Criteria 1 (Sept. 10, 2009) (same) (``Servicer advance 
receivables are typically paid at the top of the cash-flow waterfall, 
and therefore, recovery is fairly certain. However, . . . there is risk 
in these transactions relating to the timing of the ultimate collection 
of recoveries.'').
    \32\ See Complaint at 11-15, Carrington Asset Holding Co., L.L.C. 
v. American Home Mortgage Servicing, Inc., No. FST-CV 09-5012095-S 
(Conn. Super. Ct., Stamford Feb. 9, 2009) (alleging that servicer 
conducted ``fire sales'' of foreclosed properties in order to avoid 
future advances and recover previously made advances); Kurt Eggert, 
Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing Pol'y 
Debate 753, 757 (2004) (reporting that servicers sometimes rush through 
a foreclosure without pursuing a modification or improperly foreclose 
in order to collect advances); Peter S. Goodman, Lucrative Fees May 
Deter Efforts to Alter Troubled Loans, N.Y. Times, July 30, 2009.
---------------------------------------------------------------------------

              Additional Material Supplied for the Record







































                Foreclosure paperwork miscues piling up

               The Denver Post, Sunday, November 14, 2010

                             By Aldo Svaldi

    Brent and Wendy Diers of Fruita thought their foreclosure 
nightmare would end in April when they sent a check to pay off 
their mortgage.
    But more than 6 months later, CitiMortgage hasn't followed 
through on repeated assurances it would release the lien and 
give them title.
    And despite a judge's ruling that they are not in default, 
the lender's law firm, Castle Meinhold & Stawiarski, continues 
to pursue a foreclosure sale.
    ``We are not in default and they do not have authorization 
to sell our house,'' a frustrated Wendy Diers said.
    Although the Diers case is extreme, it is just one of 
several stories of borrowers in Colorado and elsewhere who find 
themselves trapped in a frustrating state of limbo.
     A surge in foreclosures has strained the system across the 
country, creating problems of lost paperwork, uncertain 
ownership on mortgages, and sloppy processing that has forced 
some lenders in recent weeks to pull back.
    And those individuals who fall through the cracks like the 
Dierses find it hard to get out.
    In a phone conversation, the Dierses recorded a 
CitiMortgage employee in May telling them ``rest assured, we do 
have the check. Everything is fine.''
    In July, the couple were told the title was being 
contested. Another CitiMortgage representative, named Jennifer, 
in late July tells them, ``We have the title clear. The 
mortgage has been paid.''
    A Mesa County judge cited the recordings in rejecting 
Castle Meinhold's request to sell the home at foreclosure 
auction.
    ``Under Colorado law, we cannot and will not take further 
action until we have authorization from the court,'' Mesa 
County Public Trustee Paul Brown said.
    Still, the auction date has been postponed, not dismissed. 
The Dierses said they can't figure out what is going on. Public 
trustees don't have the authority to throw out foreclosure 
filings a judge has rejected or to sanction law firms pursuing 
illegitimate claims, Brown said.
    The inability of Castle Meinhold and CitiMortgage to 
straighten out the situation is bordering on harassment, the 
Dierses said.
    Neither firm responded to interview requests.
    The couple don't deny missing payments after Brent suffered 
a work injury and lost his job in 2008.
    But unlike most people in that predicament, they had a 
relative willing to lend them enough to pay off the mortgage, 
more than $212,000 in their case. ``We did everything we were 
supposed to do,'' Wendy said. ``This is such a boondoggle of a 
mess.''
Fees of $1,000 added
    On a smaller scale, the Compo family of Colorado Springs 
also found out how difficult it can be to escape foreclosure.
    The family wanted to modify their mortgage payments after 
their business income dropped. A worker with GMAC Mortgage told 
them they couldn't do so unless they had missed two payments, 
Susan Compo said.
    The Compos started missing payments, but set aside the 
mortgage money into savings. After three different rejections 
for a modification, the family, whose financial situation 
eventually improved, requested a reinstatement statement.
    That statement tells borrowers what they owe to get caught 
up and escape foreclosure. Compo said she sent a check for the 
amount law firm Castle Meinhold requested, about $17,200, due 
Sept. 30.
    But after the check was sent off, the law firm added about 
another $1,000 in charges. The payment didn't arrive at GMAC 
Mortgage until Oct. 12.
    The Compo family didn't find out about the added fees until 
GMAC rejected the check as insufficient.
    ``We don't have the money for the fees,'' Compo said.
    Castle Meinhold didn't return a phone call from The Denver 
Post. But the firm did call the Compos offering to waive the 
additional fees, she said.
    ``I am giving them an opportunity to make this right,'' 
Compo said. ``Let's see what they do.''
Confusion over true creditor
    Even when borrowers simply ask a lender to clear up 
confusion regarding who really owns their mortgage, they can 
face a major headache.
    Most mortgages are sold and resold and eventually land in 
investment pools owned by thousands of investors. Several 
lenders and investment banks also collapsed in 2007 and 2008, 
complicating ownership.
    A Longmont couple, William Hough and Jacqueline Resaul, 
faced that problem when they got behind on mortgages they took 
out with Washington Mutual for their home and two rental 
properties.
    They received letters from Washington Mutual, JPMorgan 
Chase and LaSalle Bank all claiming to be the creditor on their 
loans, said Michael Wussow, an attorney with Stigler Wussow & 
Braverman in Boulder.
    Hough, a developer, got into financial trouble after 
suffering a heart attack that put him into a coma.
    LaSalle Bank, trustee of the investment pools that claimed 
to be holding the mortgages in question, initiated the original 
foreclosures.
    Hough, who once worked as a mortgage broker, asked what he 
thought was a simple request--produce the original notes to 
clear up any confusion.
    LaSalle's law firm in the case, Robert J. Hopp & Associates 
of Denver, failed to produce the notes, although it obtained an 
affidavit from JPMorgan Chase claiming LaSalle was the holder, 
Wussow said.
    A Boulder County judge had enough doubts to throw out two 
of the foreclosures filed in that county. After months of legal 
wrangling, the foreclosures were refiled under JPMorgan Chase, 
which had inherited the note from the failed WaMu.
    While Hopp was conceding in Boulder County court that 
JPMorgan Chase was the actual owner, Wussow alleges they didn't 
tell a Larimer County judge, who approved a foreclosure under 
LaSalle.
    Wussow said he was so ticked off that he filed a motion for 
sanctions against the Hopp law firm and the lenders involved.
    He wants them to pay the $52,000 in attorney fees his 
clients incurred because the paperwork wasn't straight.
    ``That is what I said all along--come with the notes and we 
are done. They made us go through a year of litigation,'' he 
said.
    In a response to the motion, Denver law firm Kutak Rock, 
now representing the lenders, claims Wussow's motion can't be 
brought up under the limited scope of a Rule 120 hearing, where 
judges determine the merits of a foreclosure action. A call to 
the Hopp law firm was not returned.
    After losing their home, Hough and his wife moved to South 
America, where the cost of living was lower, Wussow said.
    But they fought because they felt it important to ensure 
the proper parties foreclose and to not let the big banks run 
roughshod over the system.
    ``I think there should be some sort of requirement that you 
show up with the original note or with a detailed document 
showing the transfers,'' Wussow said. ``They should have the 
right parties foreclosing. They should have been recording 
documents.''


    PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE

                              ----------                              


                      WEDNESDAY, DECEMBER 1, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:34 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Christopher J. Dodd, Chairman of 
the Committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order. Let me 
thank all of you for your presence here this morning, 
colleagues and guests and our witnesses who are being a part of 
this hearing this morning entitled ``The Problems in Mortgage 
Servicing From Modification to Foreclosure.'' And this is the 
second of two hearings we have had. I thought it was a good 
idea to do this, and Senator Shelby also advocated it. You can 
make a case that maybe we should have had you first and had the 
people we had first second, but either way I think it is going 
to be helpful to get the perspective of those of you at the 
table here today.
    Some of you have nothing to do with this other than your 
observations. I know particularly Sheila Bair, of the FDIC, 
this is not your particular responsibility, but you have been 
terrific on these issues, and so we wanted you to be a part of 
the discussion today as to how we ought to proceed, and I am 
grateful to you for that.
    I am going to make a brief couple of opening comments, and 
then I will turn to Senator Shelby and any of our colleagues 
who would like to be heard on some opening thoughts on this. We 
have two panels, so it will take a little time this morning to 
get through this, but I am very grateful to all of you.
    Before I begin, this is likely my--I hesitate to say likely 
my last hearing as Chairman of the Banking Committee, having 
taken over in January of 2007 for Paul Sarbanes, who did a 
wonderful job. As I have told many of you the story, I was 
sitting in the chair where Tim Johnson sits at a hearing in the 
fall of 2006 after Paul had announced the fact that he was no 
longer running--I guess in the spring of 2006--and he put his 
right arm around me at this chair here, and there was chaos 
going on in the Committee room. People were screaming and 
yelling over something that had been said. The police were 
coming in to remove people. And as the screaming was going on 
and the bellowing was occurring, he put his arm around you 
shoulder and said, ``Just think, in 6 months all of this is 
yours.''
    [Laughter.]
    Chairman Dodd. I had no idea what he was predicting for me 
over the next 4 years on the subject matter. So to my 
colleagues and staff and all, I thank you immensely for the 
wonderful support and how enjoyable it has been to work with 
all of you over these past 4 years. In a sense, we are almost 
ending--I am ending here, at least, where we began. As Richard 
will recall in another Committee--I think our second hearing in 
February, the first week in February of 2007, was on the 
foreclosure issues, and we had a series of them, of course, all 
that year, and 2008. For those 2 years, we could not get anyone 
really to pay attention within the administration or others at 
the time. I do not know how many times I heard Bob Menendez 
say, coin the phrase ``the tsunami'' coming. I think that was 
in February or March of 2007, almost 4 years ago talking about 
this as well. And between the two of us up here, that is 54 
years between Shelby and me. That is a long time here, Richard, 
going back to the days of----
    Senator Shelby. I am going to miss you.
    Chairman Dodd. Well, I will miss you as well. I want you to 
know that. So I want to thank all of you, and I particularly 
want to say to all of you here, but particularly Dick Shelby, I 
know the assumption is that obviously people do not report 
about planes that fly, as we say in this business. You only 
hear about the planes that do not make it. But every single day 
people up here work together and get things done. Paul Sarbanes 
had the relationship with Dick Shelby, and I have had it as 
well. We are good friends, and we spend a lot of time together 
far beyond the confines of this Committee room. And for that, I 
will be eternally grateful to this great friend from Alabama 
who has been a good partner. We have not always agreed on every 
issue, but he has been a gentleman and always kept me informed 
as to where things were and how things were progressing, and I 
thank you immensely.
    Senator Shelby. Thank you.
    Chairman Dodd. Anyway, I want to welcome all of the 
witnesses who are here today for their testimony about the 
problem of mortgage servicing. This is a continuation, as I 
mentioned at the outset, of a hearing we held last month at 
which we heard from witnesses within the servicing industry and 
others. Today we will hear from some of the regulators 
responsible for overseeing the industry.
    First let me explain what we mean by mortgage servicing. I 
know all of our witnesses know this, but sometimes I think the 
audience and those who are following this might not understand 
what we are talking about by servicing. Individual mortgages 
are often bundled into pools of similar mortgages and sold in 
the secondary market as a mortgage-backed security. We have 
heard a lot about that over the last 4 years.
    After the origination, all processing--and this is where 
the servicing comes in. All processing related to the loan is 
managed by a mortgage servicing company. Now, the Nation's four 
largest banks--JPMorgan Chase, Wells Fargo, Bank of America, 
and Citi are also the largest mortgage servicers. Mortgage 
servicers have a long list of administrative responsibilities 
from collecting monthly payments, maintaining detailed 
accounting records, paying taxes and insurance premiums, and 
distributing payments to the holders of the mortgage security. 
And for this work, they receive a servicing fee. That is a 
rather abbreviated description, but basically that is the 
purpose and that is what servicing companies do.
    At the last hearing, we learned that many of the servicers 
have not been doing their jobs, and these servicers, including 
many of the Nation's biggest banks, failed to maintain proper 
records, failed to properly administer the Home Affordable 
Modification Program, the HAMP program; hired so-called robo-
signers, submitted thousands of false and possibly fraudulent 
affidavits and in some cases even foreclosed unfairly on people 
who should not have lost their homes.
    Since our last hearing, news reports have suggested that 
the problem may be actually a lot larger than we previously 
thought. I do not wish that to be the case, but evidence seems 
to be mounting that it may, in fact, be the case. An employee 
of the Bank of America testified in court that the bank's 
standard mortgage servicing practices failed to meet basic loan 
documentation requirements--a failure that could call a huge 
number of loans into question. If there are more revelations of 
that nature, this situation could ultimately have ramifications 
for the safety and soundness of the financial system. Investors 
in the mortgage securities market, including the New York Fed 
Reserve Bank and Freddie Mac, are pushing banks to repurchase 
loans that may not have been originated as represented.
    Last month, the Congressional Oversight Panel estimated 
that these lawsuits and repurchasers would ultimately cost 
banks about $52 billion. Subsequent to that report, Barron's 
Magazine used data from a research firm called CompassPoint and 
estimated that the losses to banks could be as high as $164 
billion. Other estimates are even higher still. Now, even for 
Wall Street, that is a lot of money to be talking about.
    It is important also to remember that while it was 
servicers who caused this problem, it is borrowers who are, of 
course, paying the price. Confusion over sloppy and incomplete 
documentation has slowed the mortgage modification process for 
countless borrowers. Conflicts of interest in the industry may 
be incentivizing third-party servicers to actively seek to 
block modifications that would prevent foreclosures but cut 
into their profits. These problems may have resulted in 
problems for borrowers who otherwise may have been able to pay 
their mortgages or in pushing troubled borrowers to foreclosure 
who otherwise may have been able to save their homes with 
reasonable modification efforts.
    At any rate, this is a problem that the servicers should 
have seen coming, in my view. They had plenty of warnings from 
Congress. Sheila Bair, who is with us today, of the FDIC, also 
provided those warnings. Many Members up here--I mentioned Bob 
Menendez, among others in this Committee, going back a long 
time who talked about this literally--in fact, Jim Bunning and 
Jack Reed were talking about it in 2006 in hearings that they 
held in those days. So we are getting near 5 years that we have 
been talking about this issue, and yet here we are still 
watching a problem associated with all of that getting worse is 
possibly the case.
    Whether it was out of greed or ignorance or the failure to 
recognize the disaster on the horizon, we now are left, of 
course, to pick up the pieces of this problem and to try and 
help homeowners caught up in the forces beyond their control 
and to do everything in our power to fix the system and prevent 
these problems again in the future.
    Today we are going to hear from regulators about what they 
did or did not do, what ideas you have as well, and I 
appreciate all of you being here, not only regulators but also 
from the academic world who have followed these questions. What 
do you recommend we do, the Congress do, done by Treasury, done 
by regulators? I do not want to argue and I do not want a lot 
of finger pointing going on as to how we are here. We all know 
where we are. The question now is, What do we do about it? And, 
obviously, this is my last hearing on all of this, but, 
obviously, this Committee will have to pick up this subject 
matter and work on it, and we would like to know what we can do 
to be a part of that solution. I suspect that all of us would 
agree with that conclusion. So today I appreciate, again, your 
participation, and let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Mr. Chairman, I ask that my written 
statement be made part of the record, and other than that, I 
look forward to the testimony of the witnesses.
    Chairman Dodd. Thanks very much.
    Anyone else want to be heard in the opening? Yes, Bob.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Mr. Chairman, first of all, I do not know 
if this is or is not your last hearing, but in the eventuality 
that it is, I want to just say that I think history will record 
that you presided over some of the most tumultuous times in our 
financial system and that the response to that day when 
Chairman Bernanke came before Members of this Committee and 
members of leadership and described in 2008 the challenges and 
the consequences of the potential collapse of a series of 
financial institutions and what they would have meant to this 
country in terms of systemic risk to the entire Nation's 
economy. And I will never forget asking the question: Well, we 
must have enough tools at the Federal Reserve? And his answer: 
If you do not act in the next 2 to 3 weeks, we will have a 
global financial meltdown.
    Chairman Dodd. Yes.
    Senator Menendez. That is what you chaired over, and I 
think history will record that the way in which you led in that 
period of time really helped save our Nation from what would 
have been a new depression, and I appreciate your service very 
deeply.
    Chairman Dodd. Thanks, Bob.
    Senator Menendez. Just a moment on an issue that I have 
been pursuing for some time. You are right, it was in March of 
2007, I think it was Secretary Paulson who was sitting here, 
and I said, you know, I think we are going to have a tsunami of 
foreclosures. And I remember the response as ``I think that is 
an exaggeration.'' I wish he had been right and I had been 
wrong. The reality is that we ended up with we have not even 
seen fully the crest of that tsunami even yet.
    And what I am concerned about is not just for all of those 
families who clearly are under a life-changing set of 
circumstances where their home will be taken away from them, 
but it is even for the greater risk to everyone in a community 
that faces the consequences of multiple foreclosures in their 
neighborhood, the loss of property values, the loss of 
ratables, and all of the consequences that flow from that.
    And so I appreciate that 18 of my colleagues signed with me 
a letter to the Treasury Secretary. One, about the whole issue 
you have discussed, is about the robo-signings, the rubber 
stamping of foreclosures by banks that exercise lax oversight. 
It is not certainly only shocking, but it is one example of how 
banks have mishandled both foreclosures and mortgage 
modification requests. And if the robo-signing is directly 
attributable to banks not doing proper due diligence, which is 
inexcusable when dealing with a matter as monumental as taking 
someone's home away, I think the more important point might 
very well be that banks and servicers are not handling even 
basic foreclosure procedures correctly; it is that they are 
also not correctly evaluating homeowners for mortgage 
modifications. And I have serious concerns about that process.
    I have listened to constituents time and time again who 
talked to me about the horrors still today, even after this 
Committee has raised these issues time and time again, of the 
process that they have gone through. I am concerned that, 
despite the best efforts of the HAMP program, which estimated 
that 79 million families could restructure or refinance their 
homes, we have only had since January of 2010 about 495,000. 
That does not seem to be working in a way that we want it to.
    And, finally, you know, countless constituents have told us 
stories of being stonewalled by banks for very long periods of 
time, of not being told the reasons for their rejection of 
their modification request, of significant delays caused by 
banks losing their paperwork, and trial modifications canceled 
with no rationale. And that just cannot continue to happen, Mr. 
Chairman. So I appreciate that you are having this hearing 
today and the work the Committee will continue to do.
    Chairman Dodd. Thanks very much, Senator.
    Anyone else want to make any opening comments on this? If 
not, we will turn----
    Senator Tester. Just very quickly, if I might, Mr. 
Chairman.
    Chairman Dodd. Yes.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. First of all, I want to express my 
appreciation for your comments on the floor yesterday. I 
thought they were spot on, and I thank you for your leadership 
on this Committee. You will be missed.
    Chairman Dodd. Thank you.
    Senator Tester. Thank you all for being here today, the 
folks on the panel. I appreciate you taking the time. I think 
these are an important set of hearings. It has been 
established, well established I think, that these are 
significant issues, that they are not isolated cases. My office 
has experienced a number of complaints, a significant number of 
complaints, by constituents who have had their places 
foreclosed on and have not been treated fairly. So I think it 
is important that we pay attention to this issue because I do 
not think there has been adequate attention paid to this issue.
    Mortgage servicers have a trust placed in them, but there 
is not a lot of verification that what they are doing is--well, 
there is not a lot of requirements for verification. So 
hopefully these investigations will result in some changes that 
will ensure that homeowners are treated with honesty and 
respect and we can really get down to the root of what the 
magnitude of these problems really are.
    I know that last week many of you, as part of the Financial 
Stability Oversight Council, echoed the concerns and recognized 
the potential risks to our system by this processing problem. 
My hope is that through your investigations we will finally be 
able to understand the full size and scope and its potential 
impact to the financial markets. And then we can move forward 
in a sensible way from there. So thank you all for being here.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Tester, very, very much.
    Anyone else? Are we all set to go with the witnesses? Good. 
Very good.
    Let me introduce them, if I can, very briefly to you. First 
of all, Phyllis Caldwell is the Chief of the Homeownership 
Preservation Office at Treasury, leads the Administration's 
efforts to assist with the home loan conversion process. She 
joined the Treasury in November of 2009, and we thank you very 
much for being with us today.
    Sheila Bair, you could almost sit up on this side of the 
dais, you have been here so often, but obviously with the FDIC, 
and I think all of us acknowledge, Sheila, your tremendous 
participation and efforts over the last 4 years that I have 
been grappling with this, as the Committee has. Again, we 
appreciate you being here today in a sense for your thoughts 
and observations on this as well.
    Dan Tarullo is well known. He used to sit on this side of 
the dais up here, not on this Committee but with Senator 
Kennedy going back years ago, and has been a good friend over 
the years. He is obviously one of the six current Governors of 
the Board of Governors of the Federal Reserve, served in that 
capacity since January of 2009, and was a professor of law at 
Georgetown University, among other things. We thank you, Dan, 
for your observations.
    John Walsh, again a frequent participant in our 
discussions, is the Comptroller of the Currency, oversees that 
office, supervises some 1,500 federally chartered commercial 
banks and about 500 Federal branches of the agencies of foreign 
banks in the United States. He has been with the OCC since 2005 
and previously served as chief of staff, and we thank you for 
your service as well.
    Ed DeMarco, the last witness in our first panel, is the 
Acting Director of the Federal Housing Finance Agency and has 
been doing a very good job, in my view, regulating Fannie and 
Freddie and the 12 home loan banks within the United States. 
Prior to this capacity, he was the Chief Operating Officer of 
FHFA.
    Let me just say, by the way, that with a lot of the 
criticism going on, there is a lot of good news coming out of 
the management as well under this process that was put in place 
a number of years ago, so we thank you for your work as well.
    With that, I would ask--by the way, I want to ask consent 
that all of the opening statements and comments of our 
colleagues will be included in the record, as will all of your 
statements and any supporting documents or information you 
think would be valuable for the Committee.
    With that, Ms. Caldwell, we will begin with you. If you 
could try and keep your statements down to about 5 minutes or 
less, then we can get to the questions and get to our second 
panel as well.

      STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP 
            PRESERVATION OFFICE, DEPARTMENT OF THE 
                            TREASURY

    Ms. Caldwell. Chairman Dodd, Ranking Member Shelby, and 
Members of the Committee, thank you for the opportunity to 
testify before you today on issues surrounding mortgage 
servicing and servicer performance in the Making Home 
Affordable program.
    The foreclosure problems that have recently come to light 
underscored the continued critical importance of the Making 
Home Affordable program launched by Treasury, of which HAMP is 
a part. Preventing avoidable foreclosures through modifications 
and other home retention opportunities continues to be critical 
priority. Foreclosures dislocate families, disrupt the 
communities, and destabilize local housing markets.
    Over the last 20 months, we have developed rules and 
procedures to facilitate meaningful modifications. We have 
urged servicers to increase staffing and improve customer 
service. We have developed specific guidelines and 
certifications on how and when homeowners must be evaluated for 
HAMP and other home retention options. HAMP has strong 
compliance mechanisms in place to ensure that servicers follow 
program guidelines.
    Treasury has built procedural safeguards and appropriate 
communication standards in HAMP to minimize those instances 
where borrowers are dual-tracked, where they are being 
evaluated for HAMP at the same time they are being put through 
the foreclosure process. Specifically, HAMP program guidelines 
require participating servicers of non-agency loans to: 
evaluate homeowners for HAMP modifications before referring 
those homeowners to foreclosure; suspend any foreclosure 
proceedings against homeowners who have applied for HAMP 
modifications while their applications are pending; evaluate 
whether homeowners who do not qualify for HAMP (or who have 
fallen out of HAMP) qualify for private modification programs; 
evaluate whether homeowners may qualify for a short sale or 
deed-in-lieu of foreclosure; and provide a written explanation 
to any homeowner not eligible for HAMP and to delay any 
foreclosure sale for at least 30 days afterwards to give the 
homeowner time to appeal.
    Servicers may not proceed to foreclosure sale unless they 
have tried these alternatives. Servicers must first issue a 
written certification to their foreclosure attorney or trustee 
stating that ``all available loss mitigation alternatives have 
been exhausted and a non-foreclosure option could not be 
reached.'' On October 6, Treasury clearly reminded servicers of 
this existing HAMP rule.
    We have instructed our compliance team to review the ten 
largest servicers' processes and procedures for complying with 
that guideline. If we find incidents of non-compliance, 
Treasury will direct those servicers to take corrective action, 
which may include suspending those foreclosure proceedings and 
re-evaluating the affected homeowners for HAMP.
    In terms of compliance, it is important to remember that 
although Treasury administers the Making Home Affordable 
program and HAMP, it does so through voluntary contracts with 
the servicer versus regulatory or enforcement agency authority. 
Thus, our compliance efforts are focused on ensuring that 
servicers are following the contractual requirements of their 
servicer participation agreements.
    We are looking to ensure that borrowers are being properly 
evaluated for HAMP. Compliance remedies have included: re-
evaluating loans for HAMP eligibility; re-soliciting borrowers; 
enhancing servicer processes; and providing additional training 
to servicer staff.
    To date, almost 1.4 million homeowners have started trial 
modifications, and over 520,000 have started permanent 
modifications. These homeowners have experienced a 36-percent 
median reduction in their mortgage payments, or more than $500 
a month.
    Consider that in the first quarter of 2009, nearly half of 
mortgage modifications increased borrowers' monthly payments or 
left them unchanged. By the second quarter of 2010, 90 percent 
of mortgage modifications lowered payments for the borrower. 
Homeowners today have access to more sustainable foreclosure 
prevention solutions.
    HAMP uses taxpayer resources efficiently. Its pay-for-
success design supports borrowers who are committed to staying 
in their homes by paying out servicer, borrower, and investor 
incentives over 5 years, and the investor, not the taxpayer, 
retains the risk of borrower payment.
    In conclusion, we believe that these foreclosure problems 
underscore the continued need for servicers to focus on 
evaluating borrowers for all home retention options, starting 
with HAMP. We appreciate the efforts of both the Members of 
this Committee and our partners in the housing community in 
holding servicers accountable and improving HAMP's design and 
performance.
    I look forward to taking your questions. Thank you.
    Senator Johnson. [Presiding.] Ms. Bair.

    STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Ms. Bair. Thank you. Senators Johnson and Shelby, and thank 
you, Members of the Committee, for requesting the views of the 
Federal Deposit Insurance Corporation on deficiencies in 
mortgage servicing and the impact on the financial system. It 
is unfortunate that problems in mortgage servicing and 
foreclosure prevention continue to require the scrutiny of this 
Committee. The robo-signing issue is symptomatic of persistent 
shortcomings in the foreclosure prevention efforts of our 
Nation's largest mortgage servicers.
    While the FDIC is not the primary supervisor for these 
companies, we do have a significant interest as the insurer of 
many of these institutions. Through our back-up examination 
authority, our examiners have been working on-site as part of 
an interagency review team at 12 of the 14 major mortgage 
servicers. The weaknesses that have been identified in mortgage 
servicing practices during the mortgage crisis are a by-product 
of both rapid growth in the number of problem loans and a 
compensation structure that is not well designed to support 
loss mitigation measures such as loan modifications.
    The traditional structure of third-party mortgage servicing 
fees, put in place well before the crisis, is based on a flat 
fee that is tied to the outstanding mortgage balance and does 
not provide additional compensation for the proper management 
of distressed loans. The flaws in the structure were not 
evident when the number of problem loans was low. Large 
servicers aggressively automated systems and consolidated 
servicing to maximize short-term returns. However, the historic 
rise in mortgage defaults in recent years has driven up 
servicing cost structures, creating incentives to cut corners 
just at a time that servicers needed to be devoting more 
careful individualized attention to their management of problem 
loans.
    The problems we are seeing go beyond robo-signing and other 
technical documentation issues to include questions regarding 
chain of title and the proper establishment of private sector 
securitization trusts. Their implications are potentially 
serious and damaging to the Nation's housing recovery and to 
some of our largest institutions.
    One implication is the risk of a wider disruption to the 
foreclosure process. A transparent, functioning foreclosure 
process, while painful, is necessary to the recovery of our 
housing market and our economy.
    Another implication is that mortgage documentation problems 
cast a cloud of uncertainty over the ownership rights and 
obligations of mortgage borrowers and investors. Moreover, 
there are numerous private parties and Government entities that 
may have significant claims against firms central to the 
mortgage markets.
    While we do not see immediate systemic risk, the clear 
potential is there. The Financial Stability Oversight Council, 
or FSOC, was established under the Dodd-Frank Act to deal with 
just this type of emerging risk. It is in a unique position to 
provide needed clarity to the market by coordinating consistent 
interpretations of what standards should be applied to 
establishing the chain of title for mortgage loans and 
recognizing the true sale of mortgage loans in establishing 
private securitization trusts.
    While my written statement goes into more detail, there are 
principles, I believe, that should be part of any broad 
agreement among the stakeholders to this issue.
    One, establish a single point of contact for struggling 
homeowners. This will go a long way toward eliminating the 
conflicts and miscommunications between loan modifications and 
foreclosures in today's dual-track system and will provide 
borrowers assurance that their application for modification is 
being considered in good faith.
    Two, simplify loan modification efforts to reduce the 
number of foreclosures. The modification process has become far 
too complicated given the volume of troubled loans and the 
shortage of mortgage servicing resources. The modification 
process needs to be dramatically streamlined. Modifications 
need to be put in place at an early stage of delinquency and 
should provide for a significant reduction in the borrower's 
monthly payment. Our experience at IndyMac shows that these are 
the key factors that determine the long-term success of 
modifications. In exchange, mortgage servicers should have a 
safe harbor that will assure them that their claims will be 
recognized if foreclosure becomes unavoidable.
    Three, invest appropriate resources to maintain adequate 
numbers of well-trained staff and strengthen quality control 
processes. Inadequate staffing, lax standards of care, and 
failure to follow legal requirements cannot be tolerated. 
Servicers need to strengthen their practices, and regulators 
must ensure that servicers adhere to the highest standards.
    Four, tackle the second lien issue head-on. Servicers 
should be required to take a meaningful write-down of any 
second lien if a first mortgage loan is modified or approved 
for short sale. All stakeholders must be willing to compromise 
if we are to find solutions to the foreclosure problem and lay 
the foundation for recovery in our housing markets.
    Thank you for the opportunity to testify, and I look 
forward to your questions.
    Senator Johnson. Thank you.
    Mr. Tarullo.

 STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you, Senator, and Senator Shelby and 
Members of the Committee. Let me build on some of what Sheila 
has said to add a few introductory comments.
    First, on the extent of the problem, which is the question 
Senator Shelby started with at your last hearing, I want to 
first caution that the three--or four, actually--agencies 
represented here are all still in the middle of investigating 
the firms themselves, whether the GSEs or the banking 
institutions. So we need to be provisional in any observations 
that we make.
    But I think with respect to the documentation issue, it is 
already pretty apparent that there are significant weaknesses 
in risk management, in quality control, in audit and compliance 
practices, in staff training, and in oversight of third-party 
providers, such as law firms. The extent of the problem appears 
to vary across firms, but my suspicion is that when all is said 
and done, we are going to find some problems in all servicers, 
large, medium, and small. The problem will be particularly 
acute in some servicers where the difficulties and the 
shortcomings have been the greatest.
    When we look at those problems in the context of all the 
difficulties associated with loan modifications that Senator 
Menendez referred to earlier, it seems to me that we do need to 
have some structural changes in how servicers are organized, 
monitored, and regulated.
    I also want to say a word about put-back exposure. This is 
something which is not directly related to the foreclosure 
documentation problem, but documentation problems have both 
drawn attention to the issue and maybe motivated some investors 
to pursue some additional arguments for why sponsors should 
take mortgages back.
    The exposure here results from the interplay of default 
rates on the underlying mortgages which motivate the put-back 
efforts by the investors who hold the securities and the legal 
liability of a securitizer or originator. This liability could 
be quite significant for some firms, although particularly with 
respect to private-label securitizations, the losses may well 
be spread over a considerable period of time as litigation 
ensues.
    With respect to put-back liability, we had already started 
a process of requiring each of the major holding companies to 
produce to us their comprehensive capital plans, which we are 
supposed to get in early January. That is an exercise apart 
from mortgage foreclosure problems. But as part of that 
exercise, we have asked for an assessment by the firms of the 
put-back liability that they may be facing.
    Turning now to supervisory responses, I noted in my written 
testimony the range of supervisory and enforcement tools that 
are available to the three banking agencies here. I expect that 
many or all of these tools will be used as appropriate with 
respect to specific institutions. So I just note from the 
particular supervisory position of the Federal Reserve that our 
rating of management at the holding company level will be 
influenced by the extent of these problems even if the problems 
occurred in a banking subsidiary.
    As to how these problems have shaped our thinking about 
supervision more generally, I would say, again from our 
perspective, two points are already apparent. First, we need to 
use to its fullest the additional authority given the Federal 
Reserve in Dodd-Frank to send our examiners into non-bank 
affiliates of large holding companies. And second, I think we 
all need to find ways to leverage control process audits of 
some functions in firms into improvements in control processes 
across the firm, because we are never going to be able to audit 
every single control process in all of these institutions.
    Before closing, I want to say a few more words on the loan 
modification issue, but from more of a macroeconomic 
perspective, because I think there is a close relationship, as 
many of you have suggested already, between the foreclosure 
difficulties and the relatively sluggish pace of modifications. 
The race that frequently occurs between a modification of a 
particular mortgage and foreclosure proceedings has more often 
than not been won by the foreclosure process. And, of course, 
we now know that the race was often not being fairly run in the 
first place. But even if it is, there is a larger macroeconomic 
point to be made here. Foreclosures are costly not only for the 
parties involved, but for the housing market and the economy as 
a whole. And while there is no single simple method for gaining 
more of a balance between foreclosures and modifications, I 
wholeheartedly agree with Sheila's perspective that it is 
incumbent on people in industry and at all levels of Government 
to renew attention to measures that can facilitate sensible 
modifications across the country and thereby to help create the 
conditions for a housing recovery which will be, in turn, 
important for supporting renewed stronger growth in our own 
economy.
    Thank you very much.
    Senator Johnson. Mr. Walsh.

 STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE CURRENCY, 
               OFFICE OF THE COMPTROLLER OF THE 
                            CURRENCY

    Mr. Walsh. Thank you, Senator, Ranking Member Shelby, and 
Members of the Committee. I appreciate the opportunity to 
discuss improprieties in the foreclosure process and the steps 
being taken by the Office of the Comptroller of the Currency to 
address them.
    When I appeared before the Committee in September, I 
described early steps to address the foreclosure problem at 
eight of the largest mortgage services the OCC supervises. I 
can report today that we have greatly expanded those efforts to 
address this critical problem, working with other Government 
agencies.
    Let me state clearly that the shoddy practices that have 
come to light, including improperly executed documents and 
attestations, are absolutely unacceptable. They raise questions 
about the integrity of the foreclosure process and concerns 
about whether some homes may have been improperly taken from 
their owners. The OCC is moving aggressively to hold banks 
accountable and fix the problem.
    In recent years, as problem loans surged, the OCC's primary 
focus was on efforts to prevent avoidable foreclosures by 
increasing the volume and sustainability of loan modifications. 
When we saw, using loan-level data from our mortgage metrics 
project, that an inordinate number of modifications initiated 
in 2008 were re-defaulting, we directed national bank servicers 
to take corrective action. Since then, we have seen a sharp 
increase in modifications that lowered monthly payments and 
fewer re-defaults. While these efforts are preventing some 
foreclosures, many families are still struggling and face the 
prospect of losing their home. We owe these homeowners our best 
efforts to assure that they receive every protection provided 
under the law.
    Questions have arisen about the practice of continuing 
foreclosure proceedings even when a modification has been 
negotiated and is in force. We agree that the dual track is 
unnecessary confusing for distressed homeowners and the OCC is 
directing national bank servicers to suspend foreclosure 
proceedings for successfully performing modifications where 
they have the legal ability and are not already doing so. It is 
important to remember, however, that the GSEs and private 
investors dictate the terms for non-HAMP modifications, so this 
option may not always be available to servicers.
    It is also the case that foreclosures are governed by State 
law and requirements vary considerably across jurisdictions. As 
a result, most nationwide servicers hire local firms familiar 
with those requirements. Both Fannie Mae and Freddie Mac 
require servicers to use law firms they pre-approve for a given 
locality.
    The OCC reviews a bank's foreclosure governance process to 
determine if it has appropriate policies, procedures, and 
internal controls necessary to ensure the accuracy of 
information relied upon in the foreclosure process and 
compliance with Federal and State law. We expect banks to test 
these processes through periodic internal audits and their 
ongoing quality control function. Examiners generally do not 
directly test standard business processes or practices, such as 
the validity of signed contracts or the processes used to 
notarize documents absent red flags that indicate systemic 
flaws in those business practices.
    Unfortunately, neither internal quality control tests, 
internal audits, nor data from our consumer call center 
suggested foreclosure document processing was an area of 
systemic concern. When problems were identified outside the 
national banks at Ally Bank, we immediately directed the eight 
largest national bank servicers to review their operations and 
take corrective action. We began organizing onsite examinations 
at each of those major servicers, which are now well underway, 
with more than 100 national bank examiners assigned to the 
task.
    In concert with other regulatory agencies, these examiners 
are reviewing whether foreclosed borrowers were appropriately 
considered for loan modifications, whether fees charged were 
appropriate, documents were accurate and appropriately 
reviewed, and that proper signatures were obtained. We are 
reviewing whether servicers complied with State laws and 
whether they had possession and control over documents 
necessary to support a legal foreclosure proceeding.
    The OCC is also heading an onsite interagency examination 
of the Mortgage Electronic Registration System, or MERS, in 
coordination with the Federal Reserve, the FDIC, and the 
Federal Housing Finance Agency, and we are participating in an 
examination led by the Federal Reserve of lender processing 
services which provides third-party foreclosure services to 
banks.
    Where we find errors or deficiencies, we are directing 
banks to take immediate corrective action and we will not 
hesitate to take an enforcement action or impose civil money 
penalties, removals from banking, and criminal referrals if 
warranted. We expect to complete our examinations by mid- to 
late-December and to determine by the end of January whether 
additional supervisory or enforcement actions are needed.
    Thank you again for the opportunity to appear. I will be 
happy to answer questions.
    Chairman Dodd. [Presiding.] Thank you very much, Mr. Walsh.
    Mr. DeMarco, welcome.

   STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. DeMarco. Thank you. Good morning, Chairman Dodd, 
Ranking Member Shelby, Members of the Committee.
    The recently identified deficiencies in the preparation and 
handling of legal documents to carry out foreclosures are 
unacceptable. Those deficiencies undoubtedly reflect strains on 
a system that is operating beyond capacity, but they also 
represent a breakdown in corporate internal controls and 
management oversight.
    FHFA's goals in this matter are twofold: To ensure that 
foreclosure processing is done in accordance with the servicer 
contract and applicable laws, and to protect taxpayers from 
further losses on defaulted mortgages. Of course, before any 
foreclosure is completed, we expect servicers to exhaust all 
alternatives.
    My prepared statement reviews the actions that FHFA has 
taken to date as well as those underway. It also provides 
context for understanding the problems that have arisen, 
including consideration of the role of servicers and a 
description of the diverse range of foreclosure processing 
requirements.
    As I reported previously to the Committee, the Enterprises, 
Fannie Mae and Freddie Mac, minimize losses on delinquent 
mortgages by offering distressed borrowers loan modifications, 
repayment plans, or forbearance. These loss mitigation tools 
reduce the Enterprises' losses on delinquent mortgages and help 
homeowners retain their homes. Servicers of Enterprise 
mortgages know that these tools are the first response to a 
homeowner who falls behind on their mortgage payments.
    Yet for some delinquent borrowers, their mortgage payments 
are simply not affordable due to unemployment or other hardship 
and a loan modification is not a workable solution. For these 
cases, the Enterprises offer foreclosure alternatives in the 
form of short sales and deeds in lieu of foreclosure. Despite 
these options for a graceful exit from a home, foreclosure 
remains the final and necessary option in many cases.
    As we know, foreclosure process deficiencies have emerged 
at several major servicers. Recently, FHFA provided the 
Enterprises and services a four-point policy framework for 
handling these deficiencies. The four points are rather simply 
stated. First, verify that the foreclosure process is working 
properly. Second, remediate any deficiencies identified in 
foreclosure processing. Third, refer suspicions of fraudulent 
activity. And fourth, avoid delay in processing foreclosures in 
the absence of identified problems.
    Pursuant to that guidance, the Enterprises continue to 
gather information on the full nature and extent of servicer 
problems. Only a small number of servicers have reported back 
to the Enterprises as having some problem with their 
foreclosure processing that needs to be addressed. Still, these 
firms represent a sizable portion of the Enterprises' combined 
books of business. The Enterprises are currently working 
directly with their servicers to ensure that all loans are 
handled properly and corrections and refiling of paperwork are 
completed where necessary and appropriate. To be clear, FHFA 
does not regulate mortgage servicers and the Enterprises' 
relationship with them is a contractual one.
    As conservator of the Enterprises, FHFA expects all 
companies servicing Enterprise mortgages to fulfill their 
contractual responsibilities, which include compliance with 
both the Enterprises' seller servicer guides and applicable 
law. Also, FHFA remains committed to ensuring borrowers are 
presented with foreclosure alternatives. Still, it is important 
to remember that FHFA has a legal obligation as conservator to 
preserve and conserve the Enterprises' assets. This means 
minimizing losses on delinquent mortgages. Clearly, foreclosure 
alternatives, including loan modifications, can reduce losses 
relative to foreclosure. But when these alternatives do not 
work, timely and accurate foreclosure processing is critical 
for minimizing taxpayer losses.
    To conclude, regulatory agencies, including FHFA, are 
carrying out important examination activities that will better 
inform the issue. Thus, identification of further actions or 
regulatory responses should await the results of these 
examinations and evaluation of the information being developed.
    Thank you.
    Chairman Dodd. Thank you very much, Mr. DeMarco.
    Again, I will ask the Clerk to time us on, say, 6 minutes, 
and we will try and stick with that a little bit. Again, we 
have got a large panel here and a second panel to get through, 
so we will try and keep to that time.
    Senator Shelby. Mr. Chairman, is that 6 minutes of 
questions?
    Chairman Dodd. That is 6 minutes of questions for you and 
me, and then for everyone else, it is 6 minutes of time.
    [Laughter.]
    Chairman Dodd. Well, let me begin, Dan, with you, if I can. 
I thought your testimony was--I am sorry, I had to go down to a 
markup downstairs, but I actually read your testimony last 
evening so I am familiar with your point here. You described 
the banking agencies' review of the mortgage crisis and state 
that preliminary findings suggest weaknesses in risk 
management, quality control, audit, compliance practices, 
shortcomings in staff, training, coordination among loan 
modification and foreclosure staff, and management and 
oversight and third-party providers, including legal servicers. 
Aside from that, there were not too many problems, I guess you 
said.
    Anyway, according to experts, including Professor Eggert, 
who will be testifying in the next panel, these problems have 
been documented for years, I think he claims since 2003, by 
actions taken by the FTC, for example. So there was some real 
background to all of this.
    First, I would like to ask you whether or not the other 
agencies that are at the table with you agree with Governor 
Tarullo's conclusions in his testimony, whether or not you feel 
as though what he has said is an accurate description of the 
situation, and then given the apparent severity of these 
problems, I want to ask you, as well, why the various agencies 
that do have regulatory authority have not been taking action 
earlier, the obvious question for us here. Again, there has 
been a lot of evidence. This is not some new information we are 
getting. Why have the agencies not been more aggressive about 
this earlier on? We will start with that.
    Ms. Caldwell. Thank you for the question. I will talk from 
the perspective of the HAMP program, and I think it is 
important, again, just to say that HAMP is a voluntary program 
and we have contractual relationships with the larger servicers 
to participate in the mortgage modification program. We are in 
those largest servicers every month. Certainly, our 
observations have been that they were ineffective in soliciting 
homeowners for HAMP. There was delayed processing of HAMP. 
There was improper use of the Treasury net present value model.
    And as a result of that, actions that we have taken have 
included sending the servicers back to re-solicit certain pools 
of borrowers where we identified they were not solicited. We 
have had them rerun the net present value model. And in January 
of this year, we instituted a temporary review period where we 
said servicers could not decline a homeowner from HAMP until 
they had reviewed and verified the status of their 
documentation, their payment, notified the homeowner of what 
their records showed, and gave the homeowner an opportunity to 
review.
    So again, we agree that there has not been sufficient 
capacity in the servicing shops relative to the magnitude of 
this problem.
    Chairman Dodd. Let me jump to the OCC. John, this is, 
again, not new information. Why have we not been more 
aggressive as regulators here in dealing with this?
    Mr. Walsh. Certainly, it is not new information that there 
have been capacity constraints going back to 2008. As I 
mentioned in my testimony, we had been both gathering more 
information but also conducting horizontal exams in the major 
servicers focused on the modification problems that were 
occurring, and clearly, we had seen a rise in the number of 
complaints through our own system that had indicated problems 
with mortgage modifications. We were in the exam process seeing 
that there were clear deficiencies that were otherwise being 
reported. We were consistently pushing the servicers to hire, 
to train, to adopt the succession of procedures that were 
coming forward from HAMP, to develop their own proprietary 
modification programs, but the push that was being made was 
always trying to get them to ramp up.
    As has been described, a very large surge of problem loans 
was coming into the system. They were clearly not ready for it. 
They have made substantial efforts to improve processing and 
deal with the problems that are there, but they clearly have 
not caught up with the modification piece of it.
    We have now seen the surge of cases move through to 
foreclosure. There was somewhat of a pause going back 6 to 9 
months as HAMP and other programs, in fact, did ramp up and we 
saw increased modification activity. But the foreclosures that 
were coming were an inevitable piece of this. As I mentioned in 
my testimony, we relied upon internal audit quality assurance 
and the other things that are often relied upon to look at 
these large volume activities. But, the institutions failed in 
their oversight of, for example, third-party agents, law firms 
and others. They did not ensure quality assurance both in their 
own activities and in their use of third parties. Clearly, in 
hindsight, we should have seen that that problem was going to 
appear successfully in each link in the chain, but--and so now 
that is where we are focused.
    Chairman Dodd. Dan, do you want to comment on this?
    Mr. Tarullo. So I asked the same question of our people 
that you just asked of us.
    Chairman Dodd. Yes.
    Mr. Tarullo. Everybody has their own supervisees and so 
everybody has a specific story for the specific supervisee. But 
I came away with a few observations.
    One, as John has already said, I think there were a lot of 
supervisory resources focused on servicing and servicers, but 
they were dominantly focused on modification, or the slow pace 
of modifications. I actually asked our folks to pull the 
records of consumer complaints that we collect through the 
Community and Consumer Affairs Division of the Board, and 
dominantly, the complaints about foreclosure are complaints 
from people being foreclosed when they think they are eligible 
for, or should be in, a modification. And so that is where a 
lot of the attention was directed.
    The second thing is that the control process audit that I 
mentioned a moment ago is one that I have now concluded needs 
to be rethought, because what you essentially do is pick out a 
particular function of an institution where you say, OK, there 
may be some problems here. We have heard of some problems here. 
Let us dig in, and you dig in and once you have finished 
digging in, you find difficulties--or do not, but usually do--
and then you take some sort of supervisory action.
    You cannot audit all control process functions. You just do 
not have anywhere near the number of examiners you need. So in 
the absence of specific complaints about specific processes, 
the question is how do you use those audits that you do to try 
to identify or rectify problems elsewhere.
    And although I do not want to push this point too far, 
because I think it is pretty provisional in our own thinking, 
we do have some sense that in institutions where, for example, 
on the modification problems we had been doing a control 
process audit and asking for some changes, that we still see an 
incidence of problems on the strict documentation foreclosure 
side, but they do not seem to be quite as pervasive.
    And so what we are trying to figure out going forward is 
whether there is some sort of causal relationship between 
having done one kind of control audit on the one hand, and on 
the other getting the firm to pay more attention to what it 
does. Or, frankly, Senator, it may be that it was a 
coincidence. But that is my observation at this point.
    Chairman Dodd. Well, thank you for that. Obviously, I have 
a lot more questions, but my time has expired.
    Senator Shelby?
    Senator Shelby. Governor, I would like to follow up on 
something you talked about earlier, and that is risk 
management----
    Mr. Tarullo. Yes.
    Senator Shelby.----and quality control. You alluded to the 
fact that there are obviously weaknesses here. When did you or 
the Fed, or did the Fed realize that there were problems in 
this documentation process dealing with mortgages?
    Mr. Tarullo. For me personally, it was really not very long 
at all, maybe a day or so before the public, because, one 
institution that we are the primary supervisor for, Ally, did 
come in and tell the supervisors of the holding company that 
they had self-identified these problems.
    Senator Shelby. What do you believe is the fundamental 
problem here that needs to be resolved? For example, for years 
and years, you know, we have got State property laws, we have 
got laws that if you buy a home, you execute a note and a 
mortgage. The mortgage is sold, say, to Fannie Mae or somebody 
and they historically used to record the assignment, you know, 
every time a mortgage was sold. Has this electronic system that 
we talk about, is that part of the problem? Or where are we, 
because we are trying to solve this problem.
    For example, if somebody is not paying their mortgage, my 
gosh, you know, I believe that you have got to foreclosure 
unless you agree to modify it or something like that. Now, to 
foreclose, you have got to own that mortgage, in a sense. That 
is the law, is it not?
    Mr. Tarullo. Right.
    Senator Shelby. So where are we, and what do you think 
needs to be done?
    Mr. Tarullo. So I can only give a provisional answer to 
that, Senator.
    Senator Shelby. Sure.
    Mr. Tarullo. But I have to say, getting briefed on the 
extent of the problem, the complexities of national servicers 
doing not just foreclosures but servicing in every State, in 
many counties within particular States, the differences in 
requirements and the continued requirement for physical 
recording obviously is for them a substantially costly 
undertaking.
    Senator Shelby. But those are State property laws, are they 
not?
    Mr. Tarullo. That is right, and, certainly we the 
regulators cannot do anything about them. I suppose you could 
if you decided that it was important to have a national system 
of----
    Senator Shelby. In other words, preempt the State in 
property and recording? That is a strong----
    Mr. Tarullo. Exactly. So that is why I did not propose that 
in my testimony. What I proposed was thinking about national 
standards for servicers----
    Senator Shelby. Let us go back a few years, let us say 
seven, eight, or 10 years ago, 2001, or it will be. Did we have 
those problems then? I mean, for years, we did not have those 
problems. People executed the mortgage, they sold the mortgage, 
they recorded the assignment, they did the documentation, risk 
management, quality control. Did they get too risky, too 
sloppy, too shoddy in what they were doing although they were 
dealing in hundreds of thousands of dollars worth of 
mortgages--billions of dollars worth--and does that taint the 
securities, in a sense, that you sell?
    Mr. Tarullo. Well, so I----
    Senator Shelby. You securitize the mortgage----
    Mr. Tarullo. Right. I would say a couple of things. One, in 
all honesty, we do not know what the situation actually was in 
2001, or at least I certainly do not. We do not know whether, 
if an examination had been done of servicers in 2001, some of 
these issues might have been found. But because housing prices 
were rising and foreclosures were pretty contained, you did not 
have the opportunity for a potential problem in documentation 
to show up at the courthouse door, as it were.
    I do not think there is any doubt but that the enormous 
increase in the servicing operations----
    Senator Shelby. So the volume of the mortgages?
    Mr. Tarullo. A huge volume of the mortgages, absolutely, 
and more concentration in the servicing----
    Senator Shelby. Well, where do we go from here, today? This 
is December 1, 2010.
    Mr. Tarullo. Right.
    Senator Shelby. We have still got this problem. Senator 
Dodd has had a number of hearings. We had other people. Are we 
close to solving this problem, or where are we?
    Mr. Tarullo. From my perspective, Senator, I would not say 
we are close to solving the problem for several reasons. One, 
as I said earlier, I think it is related to the relative 
balance between foreclosures and modifications. Two, I think 
that until you get a more or less integrated approach to----
    Senator Shelby. What do you mean by an integrated approach?
    Mr. Tarullo. I think you need a set of standards that apply 
to servicers whether they are in a national bank----
    Senator Shelby. OK.
    Mr. Tarullo.----an affiliate of a bank, or, and this may be 
increasingly the case in the future, or a non-bank institution.
    Senator Shelby. And what kind of standards are you talking 
about? Are you talking about recording and showing ownership or 
stuff? But we have had that, have we not, for years?
    Mr. Tarullo. Yes. I do not know that we have had clearly 
articulated standards as opposed to requiring firms to have 
their own processes which assure that they abide by the law, 
and so I think what this has shown us is we do need more 
standards and particularly during a period in which there is, 
as I say, sometimes literally a race between foreclosure and 
modification within particular servicers. I think some sense of 
how that race is supposed to be conducted needs to be set forth 
on a standardized basis.
    Senator Shelby. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Senator Reed?
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Bair, the HAMP program, as mentioned, is 
voluntary. It covers roughly, my guess is about 25 percent of 
the modifications. And as a result, for the vast majority of 
the loans, there is no requirement for banks or servicers to 
offer modifications or do most anything. Should we mandate that 
100 percent of loans should at least be evaluated and offered a 
modification?
    Ms. Bair. Well, I think that is a very important 
observation. What we have suggested is to try to have some type 
of global settlement where we could actually leverage all the 
deficiencies we are finding and procedural hurdles that are 
appearing to foreclosure because of lack of documentation and 
not following fully the State and local laws pertaining to 
foreclosure; that if they provide some type of streamlined mod 
and give it some period of time--say 3 months--to see if you 
can rehabilitate the loan, they need to do that first. If the 
loan cannot be rehabilitated, then they could proceed to 
foreclosure, and perhaps law enforcement officials and 
borrowers would agree to waive procedural objections. So I 
think actually trying to take a lemon and make lemonade, this 
might actually provide some additional leverage to get a more 
streamlined modification process for the nongovernment 
modifications.
    Legislation would be an option. I do not know if this is 
possible, though. I guess I am looking for more things that we 
could perhaps implement immediately.
    Senator Reed. Well, again, the legislative process, as we 
prove every day, unfortunately is slow. So----
    Ms. Bair. You are talking about bank regulators.
    Senator Reed. So you are envisioning a regulatory solution 
initially which would use what authorities you have, which are 
substantial, to deal with a host of issues. One is making sure 
everyone is offered or at least evaluated for modification, not 
a small fraction, under half, not voluntary but everybody; 
dealing with issues of quieting title and standing, etc., which 
may require legislation, but at least you could pursue it at a 
regulatory level. The other sets of issues would be the 
capacity of the institutions to do their jobs, which you would 
have to increase. But there is another issue here which is the 
individualized evaluation in the foreclosure process of the 
status of the person. And you are probably aware, I am sure, 
that at least in some districts, the bankruptcy trustees have 
become very active about requiring the paperwork be correct. Is 
that something that you would like to see broadened? Because it 
appears to be within the power, the existing power of 
bankruptcy trustees.
    Ms. Bair. Well, it is not just bankruptcy trustees. In 
judicial States, it is the courts as well. Local courts, as 
well, increasingly are becoming much, much more stringent and 
exacting in terms of requiring proof of good chain of title, 
challenging the MERS process. So I think this is a real issue.
    And, again, as Dan said, we are still collecting the facts, 
but it is not clear to me, depending on how the case law goes, 
that all of these procedural problems can actually be cured. 
And if that is the case, it seems to me we need to think about 
some type of safe harbor provision, again, using that as 
leverage to try to get loan modifications early in the process, 
give the borrower a fighting chance, let them see if it can 
work; if not, then waive the procedural objections and permit 
proceeding to foreclosure.
    But I think this is--getting back to Senator Shelby's 
question, you know, ``how did we use to do it?'' I think 
community banks are still doing it the way they used to do it, 
and, you know, when you are keeping your loans in portfolio, 
servicing them yourselves, you have every economic incentive to 
work out the loan to mitigate your losses. When you separate 
ownership from the loan through the securitization process, the 
same economic incentives are not there. You have this very high 
volume of troubled mortgages that these servicers are trying to 
deal with, with a compensation system that was based on benign 
times when there were very few troubled loans.
    So I think going forward, you know, the compensation 
structure----
    Senator Reed. My time is limited, but essentially what you 
are saying, the model that worked before does not work any 
longer.
    Ms. Bair. It does not. It does not.
    Senator Reed. And we are pursuing this model in the same 
old fashion, just do a little bit more and do a little of this 
and that.
    Ms. Bair. It is not going to work.
    Senator Reed. It is not going to work. Time is of the 
essence. There are huge sets of issues here with respect to the 
legal liabilities of large financial institutions, securities 
law violations, tax law violations, etc. And the sooner there 
is, I think, a coming together of the financial community and 
the regulator, with a coherent program that addresses these 
issues, the better off we will all be. But what I am concerned 
about is that the people who will be left out are the mortgage 
holders who are struggling to stay in their homes--not the 
flippers, not those folks, but people who have seen one spouse 
lose a job, tuition increases, etc., struggling. And until they 
are part of this solution, we are not going to get a total 
solution. That goes to the bankruptcy issue, empowering 
bankruptcy trustees to be much more proactive.
    Let me just turn quickly to Mr. Walsh and Mr. Tarullo. What 
you have pointed out I think can be characterized as severe 
managerial failures in many of these companies. Would that be 
your conclusion, Governor Tarullo, in terms of the way they are 
operating, in terms of how they accumulated these mortgages?
    Mr. Tarullo. As I said earlier, I would want to withhold a 
final characterization, but as I also said, we have already 
seen a lot of problems. And when you see a lot of problems, 
there is some degree of management failure, and I would suspect 
in some institutions a rather substantial degree of management 
failure.
    Senator Reed. Mr. Walsh, your conclusion from your banks?
    Mr. Walsh. I would have to second that. Clearly, when banks 
are self-reporting that they have had major problems, they have 
major problems.
    Senator Reed. And let me ask you what steps you have taken 
in terms of ensuring that the resources are available, that the 
managerial skills are available, that the emphasis from the 
very top of the institution all the way down, and maybe in 
terms of the compensation arrangements which are doled out fit 
this critical national goal of stabilizing the mortgage 
markets, of fixing this issue of the securitization model and a 
servicing model that no longer works. What have you done?
    Mr. Walsh. As I had mentioned earlier, we have certainly 
leaned in hard on the modification part of this and done a 
series of exams and have been focused since 2008 on 
shortcomings in staffing and process and the rest. And the 
banks have improved. They have not improved enough. They have 
not improved fast enough. Now the problem has migrated on to 
the foreclosure process where they have again been caught 
short.
    Clearly there are deficiencies there, but the deficiencies 
that were laid bare by this surge of problems are ones that, 
should these problems pass through and the system returns to 
normal, it may look like its old self. But these problems will 
now have been exposed and the question is how do we deal with 
them over time.
    Senator Reed. Thank you. My time has expired.
    Thank you, Mr. Chairman. Thank you, gentlemen. Thank you, 
Madam Chairman.
    Chairman Dodd. Thank you very much.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. In keeping with 
the normal principle, I did not make any opening comments, but 
I want to thank you for your leadership on this Committee. I 
have been on the Committee 3 of your 4 years as Chairman. I 
asked about ten Senators, when I had the option of coming on 
this Committee, and 9 out of 10 said, ``Whatever you do, do not 
go on the Banking Committee. It is the most boring Committee in 
the Senate.''
    [Laughter.]
    Senator Corker. It has been anything but that. I thank you 
very much for the way that you have handled this Committee. I 
thought your comments yesterday on the floor were just 
outstanding, and for a person who sometimes scratches his head 
and asks is this really worth a grown man's time because of 
some of the issues we get involved in, I want to say that I 
thought it was inspiring; and I hope that we live up to those 
aspirational comments that were made yesterday. So I thank you 
for that, and I hope you will give me another minute in my 
questioning.
    Chairman Dodd. You take as long as you would like.
    [Laughter.]
    Chairman Dodd. The prerogative of the Chair.
    Senator Corker. But, seriously, we have had, as Senator 
Menendez said, numbers of very difficult issues, and I think 
the way Committee Members have interacted with each other has 
been a reflection of your outstanding leadership, and I thank 
you for that.
    Chairman Dodd. As I said, I said this about Senator Shelby 
as well, and my colleagues here know the tremendous job they 
have done on this side. But I would be remiss if I did not 
point out--and I have said this in so many venues and so many 
places, particularly on the financial reform package, the work 
of Senator Bob Corker, working with Mark Warner, working with 
so many people on this side over here made a major, major 
contribution to the effort. And while we all did not come to an 
agreement on it, the effort, I think, made a far better product 
than would otherwise have been the case. And so I will be 
eternally grateful to a guy from Tennessee named Bob Corker for 
your efforts.
    Senator Corker. Thank you. And I plan to attend the Latin 
America hearing later today, having traveled with you to 
Central America and seeing that you could run for president of 
any of those countries. I plan on attending that as well.
    But with that, I will move on to our wonderful witnesses. I 
thank you all for being here. I know Senator Bunning is about 
to get nauseous over here with all of these comments.
    [Laughter.]
    Senator Corker. But, in any event, I thank all of you for 
coming today. I wonder, as it relates to just the 
macroprudential issue of the institutions, the servicers that 
are involved, we have not really talked much about that. We 
have talked about some of the issues. All of us have offices 
that are being flooded with phone calls over problems with 
this. Candidly, you have all been very helpful to us as we have 
tried to navigate that.
    But as it relates to just the macroprudential issue, the 
strength of these organizations, what may happen over time to 
them financially, I would love for Chairman Bair and Mr. 
Tarullo and Mr. Walsh to just respond as to how they see this 
impacting our financial system in general.
    Ms. Bair. Well, as I say in my testimony, we do not see a 
systemic impact at this point, but I think the potential is 
there. We need concerted, proactive action to get ahead of this 
to make sure it does not spin into something that we do not 
want to see.
    I think that there are two key issues. One is what this 
does to the housing market, which could more broadly impact a 
lot of institutions and others. We do need a functioning 
foreclosure process. That is just the unfortunate fact of it. 
And so I think getting this situation cleared up so that 
borrowers on the front-end are given a fair chance at a 
rehabilitated loan. But, if that does not work out, if 
foreclosure is unavoidable, that there is a process to proceed 
that has certainty in terms of ownership and legal rights I 
think is important.
    There are also a lot of potential litigation exposures 
here, and potential for law enforcement actions. And, I do not 
think we have a good handle on that yet. I think we have asked 
the institutions to do their own risk assessment of the 
financial risks that are involved in this, but I think we are 
continuing to collect information and just do not have a good 
handle on it yet.
    Senator Corker. I am aware of a number of those issues, but 
do you have any sense of the order of magnitude, though, of--I 
know you do not know exactly, but is this something that we 
should be concerned about as it relates to especially the large 
servicers and their organizations? Is the magnitude large? Or 
is this something that really does not matter and we ought to 
move on?
    Ms. Bair. I think as Dan said, it could be very 
significant. It could occur over a period of years, but it 
could be quite significant. A lot of it relates to open legal 
issues and how they are resolved. And I think the put-back risk 
is something in particular that the Fed is taking the lead in 
analyzing. So I am sorry, we do not have all the facts yet. A 
lot of it would be determined by how courts might resolve 
various open legal issues, which is why I think that the FSOC 
can provide some leadership and coordinate interpretations now, 
at least where we have appropriate authorities. I think that 
would be helpful.
    Senator Corker. And as you are answering, Mr. Tarullo, in 
these contracts, these servicing contracts, is there typically 
recourse back to servicers? Is there significant recourse back 
to them?
    Mr. Tarullo. Let me echo what Sheila said on the issue of 
the housing market and just add to that something I noted in my 
written testimony, which is until we get a handle on and 
reduction in the overhang of the foreclosed inventory in the 
housing markets, and until we have a process that is moving 
smoothly, I hope both with modifications and with foreclosures, 
there are going to continue to be problems in the housing 
market, and obviously thus for the rest of the economy.
    With respect to put-back risk, that is a function of 
several things. One is the default rate that one anticipates, 
because security holders only want to put back securities when 
there are enough defaults that they are not paying well. That 
we can at least model based on certain macro assumptions.
    Second is the legal set of issues. Those are harder to pull 
apart right now at least. I think Mr. DeMarco can probably give 
you a pretty straightforward answer about put-back liabilities 
with respect to the GSEs. But when you get to private label 
securities, those agreements vary enormously, and the 
representations and warranties in those agreements vary. So 
even if there is litigation over one, that may not tell you 
what the liabilities in others may be.
    The third factor is the particular configuration of the 
defaults and the legal exposure at a particular institution. So 
you could have an institution that securitized a bunch of 
mortgages that are not doing very well but had a set of 
representations and warranties which were either very weak or 
which they met. So it is just going to take time to disentangle 
that. As I said, we are going to take a first stab at getting 
the firms themselves to do it in the capital plan, but that may 
not be final.
    In terms of order of magnitude, Senator, I do not want to 
give you a number. Senator Dodd noted that the order of 
magnitude in public or nongovernmental assessments differs by a 
factor of three or four. We do not have a better number than 
that, but I do think, as I said in my testimony, that with 
respect to some institutions, this could be a significant 
exposure.
    Senator Corker. And before Mr. Walsh--my time is going to 
expire, so if you could maybe, all of you, even respond to 
whether pricing--you know, the servicing pricing seems to be--
obviously, it was priced for no problems, and there are lots. 
What length of time is an appropriate length of time for 
foreclosure? I know in judicial States it is one length of 
time, in non-judicial another, both of which are incredibly 
long. But how long should a foreclosure process take? Is it 90 
days, 100 days? It is probably not 492. And then, last, just 
the issue of conflicts, I know that we have been talking more 
about the mechanisms of servicers, but I know we had an 
amendment on the floor we were unsuccessful in passing over the 
last year and a half, but to me there is a built-in conflict 
with servicers who end up having home equity loans and others. 
That to me is a huge issue that we do need to deal with because 
the fact is I think in many cases they are putting their 
interests ahead of the first mortgage holder, which really 
inverts and greatly changes property rights.
    So with that, I will stop, Mr. Chairman. Thank you for the 
latitude, and hopefully there will be a little bit of a 
response.
    Chairman Dodd. Absolutely. Thank you.
    Do you want to quickly respond to that at all, to Senator 
Corker's point? Does anybody want to jump in on that just 
quickly?
    Mr. Walsh. I mean, I would just say on the systemic piece, 
there is a systemic risk here, but it is unlike the sort of 
market crisis in 2008 or 2009. It is something that appears to 
be something that will be drawn out as we sort through the 
problems that are there, as Governor Tarullo mentioned.
    On the length of the foreclosure process, it tended to 
average 8 or 9 months. Now it is averaging 15 to 18 months. I 
mean, it takes a long time, but it takes a long time by design. 
I mean, it is not supposed to be easy to take somebody's house 
away from them. But it has now become quite drawn out, and the 
question is, you know, do we need to streamline that in some 
way.
    Mr. Tarullo. If I could, Mr. Chairman.
    Chairman Dodd. Certainly.
    Mr. Tarullo. Senator, I completely agree with your 
observation on the first and second liens, and I think that is 
one of the many reasons why we do need to have a more 
consolidated set of standards applicable to servicers, because 
there is an inherent conflict there, and when you observe a 
second lien doing quite well and a first lien moving toward 
default, you do raise your eyebrow a bit.
    Chairman Dodd. Sheila?
    Ms. Bair. Also, I just want to note when we have done our 
own securitization as part of mortgages that we have acquired 
from failed banks, we have tried to implement servicing reform 
so the compensation structure does go up if a loan needs to be 
worked out. There is third-party servicer oversight. We have 
also included servicing reforms as part of our securitization 
safe harbor. And we have also engaged in discussions with our 
fellow regulators about defining qualified residential 
mortgages as part of the Dodd-Frank Act implementation, and 
whether servicing should also be addressed. And I think at the 
top of our list there is a second lien problem so that if a 
servicer is going to service a first lien and own the second 
lien, the securitization documents have to spell out in advance 
what is going to happen if that first lien gets into trouble so 
we do not get into this in the future.
    Chairman Dodd. That is a good suggestion.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    You know, Ms. Caldwell, I mentioned in my opening statement 
that 17 of my colleagues joined with me in a letter to the 
Secretary, and it is our concern about HAMP. We are concerned 
about the servicers and the banks, and I will get to that in a 
minute. But we are also concerned about HAMP, which was 
originally projected to take care of 7 to 9 million homeowners. 
It has fallen far short with about 495,000 permanent 
modifications since January of 2009. At the same time, in 2010 
we are estimating that there is going to be about 3.5 million 
homeowners who will receive foreclosure notices, and less than 
2 percent of the funds allocated for HAMP have been expended. 
Now, something is wrong with that.
    We sent a letter that outlines a series of actions that can 
be done not with congressional approval, simply 
administratively by the Secretary, including a process of 
holding servicers accountable. Treasury offers incentives for 
their participation, but no disincentive or no consequence for 
mistakes. You know, the issue of a Office of Homeowner 
Advocate, the issue of automatic conversions if you have a 
successful trial modification, the issue of revised eligibility 
requirements, the documenting of investor base modification 
denials, the release of net present value analysis. Why can't 
we get that done by Treasury?
    Ms. Caldwell. Well, I heard a lot of suggestions there. Let 
me just first talk in general about the program.
    You know, I think it is important to remember that when we 
started the program, you know, 18 months ago, folks said, 
``Servicers will never sign up for a voluntary program.'' It 
went from zero to over 100 servicers signed up. Then it was, 
``We will never get homeowners in the program,'' and we set a 
goal of getting 500,000 homeowners to trial modifications by 
November. We hit that.
    Then we reached the conversion challenge, and at the 
beginning of 2010, we had about 31,000 permanent modifications 
and a backlog of close to 700,000 trials, and folks said, 
``They will not convert.'' We have gone in the first three 
quarters of this year from 31,000 modifications to over 
500,000. And what we do know about those modifications is that 
they are affordable to the homeowner and based on the OCC OTS 
metrics, they perform better than historical modifications. So 
while we certainly have not hit the numbers we want and 
continue to focus on outreach efforts to homeowners through our 
call centers, through our events, what we do know is that those 
homeowners that are in HAMP have affordable and sustainable 
modifications that have used taxpayer resources wisely. But we 
continue to focus our efforts on outreach, absolutely.
    Senator Menendez. Well, I appreciate your defense of the 
program. I do not quite see it the way you see it. I do not 
think many Members see it the way you see it in terms of what 
our goals are and what the accomplishments are. And so I hope 
that we will get a response from Treasury toward these six, 
seven items that can be done internally administratively, and 
many of us, including many of us on this Committee, think that, 
in fact, would transform that into a much better, more 
successful program. So we would like to get a response from 
Treasury on it.
    Mr. Tarullo, a couple of weeks ago, your colleague on the 
Federal Reserve Board, Sarah Bloom Raskin, said that the 
numerous procedural flaws that have been unearthed are ``part 
of a deeper systemic problem,'' and that as long as the 
business incentives for bank and loan servicers run counter to 
the interest of homeowners, there is a need--and this is her 
word--``a need for close regulatory scrutiny of these issues 
and for appropriate enforcement action that addresses them.''
    Now, to me that makes a lot of sense, and as long as the 
servicers are incentivized to quickly push foreclosures 
through, they will ignore, I think, very often the ordinary 
homeowner's needs and the accompanying dead weight cost of 
foreclosures. How do we get those incentives somehow realigned? 
What steps should banks and regulators such as the Fed take, if 
any?
    Mr. Tarullo. This gets back, Senator, to my point about the 
need for a combined or generally applicable set of standards 
which are going to apply to servicers whether or not they are 
an insured depository institution, an affiliate of an insured 
depository institution, or completely independent.
    I do think that with respect to fair treatment of 
homeowners, with respect to the way in which a servicer deals 
with conflicts it may have as between one lien holder and 
another, with respect to the relationship between the servicer 
and the investors in a securitized mortgage, that the system as 
it is now was simply not developed with the prospect of a large 
number of foreclosures and troubled loans in mind.
    So I think that while you will see problems across the 
board, you are going to need more of an across-the-board 
approach, and that is why I said in my testimony and will 
repeat here, I think we do need more of a national effort to 
impose standards on everybody. We can do things as we are--I 
mean, with respect to one of our institutions where even 
partway through the examination we just see a lot of problems, 
we are pushing them to change now. We do not need to wait for 
the end of the examination. But that kind of step-by-step 
process, one institution by one institution, specific issues 
here, I do not think gets to the larger points that you and 
Senator Corker and others have been raising.
    Senator Menendez. Mr. Chairman, I have one final one. Mr. 
DeMarco, both Freddie and Fannie are participants in the second 
loan modification program which helps a lot of homeowners who 
are struggling with multiple mortgages, and servicers are 
supposed to implement this program by January of this coming 
year. But given the stories we have heard from homeowners and 
consumer advocates about servicers' reluctance to engage in 
second loan modifications, let alone the first loan 
modifications, I am concerned about how the implementation of 
this program is going.
    What rules are in place for ensuring that servicers are 
knowledgeable about the second lien modification program, that 
they actually participate? And how does your agency plan to 
oversee this program to ensure that servicers are in 
compliance?
    Mr. DeMarco. So, Senator, first, the second lien program 
you are talking about is part of the HAMP program, so that is 
administered by the Treasury Department. It is a Treasury 
program.
    But to the general point--and this goes back to some 
comments that were made just a few minutes ago in response to a 
question by Senator Corker--the existence of second liens has 
been very problematic for us in overseeing the Enterprises and 
their loss mitigation activities with respect to first liens. 
And it is really quite turning things upside down to find 
situations--and this is rather common--where borrowers are 
continuing to pay on their second mortgage, and they are not 
paying on their first mortgage. But the property rights here 
actually run first to the first lien holder, and this has been 
a true conundrum in this whole loan modification and loss 
mitigation effort that we have all been engaged in, is to 
figure out that the way this ought to work is that the second 
lien holder ought to be taking the first credit loss here, and 
yet we are continuing to do loan modifications on first liens 
that basically provide protection to second liens.
    So I would share the comments of my colleagues that as we 
think about our housing finance system going forward, I think 
that this is an area that clearly needs addressing. But as we 
go along right now, with second lien--with loan modifications, 
yes, it is very much our expectation as a conservator of Fannie 
and Freddie that the second lien holders be participants in 
providing relief to a troubled homeowner. If the first mortgage 
holder is going to provide relief through a reduced payment, an 
affordable payment, we certainly think that the second lien 
holder ought to be sharing in that.
    Senator Menendez. Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    I am going to say something that you all will not like, but 
in 2006, we had a huge housing crisis in this country. And even 
before that, the mortgage crisis showed its face in 2001 and 
2002 and everything. All you people here have not come up with 
a solution to solve it. All your brains, and you have got a lot 
of them, have not come up with a solution. And I have sat on 
this Committee for 12 years and listened to the same absolute 
gobbledygook from everyone who has come up here. You have not 
had an answer to any of the questions. All you do is deal in 
hyperbole. You do not deal in fact.
    How do you solve the problem? How do you get out the first 
mortgage holder and the second mortgage holder, how do you get 
them out? I cannot believe that with all the brains that are 
sitting at that table that there is not one of you that can 
come up with the answer to solve this crisis--which is about to 
go the wrong way again. If you saw the numbers in 2010 for 
October, you saw them minus 2 percent in housing.
    Now, I am telling you, if it goes badly in November and 
December--because all the programs that we had in place are no 
longer in place, I mean, that supplemented the mortgage market 
and the housing market. And until we get the housing market 
straightened out and the loan market straightened out, we are 
not going to get the economy straightened out.
    Chairman Bair, I know you have heard this before, but it is 
too important not to repeat to you again today. I continue to 
hear from well over 40 Kentucky community banks about the heavy 
hand of your examiners and their supervisors. I have talked to 
you about this before. These banks are not the ones that caused 
the housing mess. But your examiners are blocking them from 
making good loans and forcing them to treat good loans like bad 
ones. Your regional supervisors are even adding more 
requirements on banks beyond what the examiners think are 
necessary. And the biggest complaint is your agency is being 
inconsistent in applying the regulations day to day and bank to 
bank.
    When are you going to do something about this and get off 
the backs of our community bankers?
    Ms. Bair. Well, Senator, whenever this issue comes up, and 
we were discussing it before, if you can give me specific names 
of banks that have had problems, we can review that and make 
sure that whatever our examiners are doing in the field is 
consistent with the policies we have issued in Washington. We 
have issued a lot of policies on this. We want a balanced 
examination approach. We want bankers making good loans.
    The community banks have been doing a better job lending 
than any other sector, certainly much better than the larger 
institutions. So the facts are the community banks have been 
lending. Their loan balances have been maintaining steady 
throughout this crisis. There are some community banks that 
have a lot of troubled commercial real estate loans, and if 
that is the case, they are going to be capital constrained 
because they are going to maintain their capital to absorb 
losses from their troubled commercial real estate loans.
    Senator Bunning. But I am talking about people that have 30 
percent down on a home----
    Ms. Bair. Mm-hmm.
    Senator Bunning.----and can go out--30 percent down used to 
be----
    Ms. Bair. If they have a 30 percent downpayment and have 
income to support the mortgage, they should be approved for the 
mortgage if----
    Senator Bunning. They are not being.
    Ms. Bair. Well, please, give me specific examples. We will 
correct that very quickly.
    Senator Bunning. I will be more than happy to give you 40 
names of 40 banks.
    Ms. Bair. OK, good. We will take a look at all of them.
    Senator Bunning. OK. Mr. Tarullo, Mr. DeMarco, what kinds 
of losses--and Sheila, you can also get in this--what kind of 
losses do you expect the Fed and the GSEs to take on their 
holdings of mortgage and mortgage-backed securities as a result 
of mortgage servicing problems?
    Mr. Tarullo. I can say from our point of view, Senator, the 
mortgage-backed securities which we purchased as part of the 
large-scale asset purchase program last year are only those 
that are guaranteed by Fannie and Freddie. So we do not have an 
independent issue there. We have the guarantee of Fannie and 
Freddie.
    Senator Bunning. OK. Then he will pick it up at Freddie and 
Fannie.
    Mr. DeMarco. Right. So it is something that we are--both 
Enterprises are totaling up and it is a servicer-specific issue 
and it goes to the losses that result from delays in 
foreclosure processing because the individual servicer has a 
problem.
    Senator Bunning. Four trillion, or where are we?
    Mr. DeMarco. No, sir. It is nowhere near that amount. I 
mean, the fact that there is a loss already coming on the 
mortgage because it is seriously delinquent and it is in 
foreclosure has already been reserved for. What we are looking 
at in the foreclosure processing problem is the incremental 
cost of delay and possible litigation that results from this. 
So no, I do not think we are looking at any----
    Senator Bunning. Well, how many foreclosures, then, are we 
still engaged in?
    Mr. DeMarco. I can get that number for you, Senator. We 
report it up here on a monthly basis to the Committee. But I 
would say that----
    Senator Bunning. Well, does somebody on the Committee staff 
have that number?
    Chairman Dodd. We will get it for you.
    Senator Bunning. OK.
    Mr. DeMarco. We will certainly provide it again, Senator. 
We report--just so you understand, we report monthly to the 
Committee----
    Senator Bunning. Well, since you report it, I thought maybe 
they had it.
    Mr. DeMarco. I understand. We report monthly what is called 
the Federal Property Managers' Report in which we report for 
each Enterprise updated data on mortgage delinquencies as well 
as the whole range of loss mitigation activities that are 
taking place, loan modification----
    Senator Bunning. Well, I have got another question and you 
are talking me through it. Are the Fed and the GSEs going to 
aggressively pursue pull-back of mortgages to the originators 
and investment banks to reduce taxpayer losses?
    Mr. DeMarco. I am very much in the process of doing that, 
Senator. At FHFA, we have been quite clear and public about 
that for months. The instruction to the Enterprises, and the 
mortgage servicers know this, is that we will--where there are 
representation and warranty violations by a servicer or loan 
originator, we are having the Enterprises put those loans back. 
In my prepared written statement, I provided data on how much 
was done last year and this year.
    And I would say further, Senator, your question about 
private label mortgage-backed securities, in July, the FHFA 
issued 64 subpoenas to a range of institutions to gather data 
on mortgages in private label mortgage-backed securities that 
the Enterprises hold. This is to gather information to be able 
to assess whether there have been representation warranty 
violations in those securities. This is going to be a long 
process. But FHFA has been committed to it as a necessary part 
of being the conservator and having a responsibility to protect 
the taxpayer.
    Senator Bunning. Sheila, let me explain why you have not 
heard from those bankers. They are afraid to put their names 
forward to figure that the FDIC will jump down their throats 
because they are in total and complete control of who and how 
they can lend money. So that is their reluctancy to come 
forward.
    Ms. Bair. You have my personal assurance that would not 
happen. I have----
    Senator Bunning. I love that.
    Ms. Bair.----to make sure that is not--no, you have my 
personal assurance that will not. I cannot respond, though, to 
generalized issues----
    Senator Bunning. Well, it is no big deal. I will get the 
names----
    Ms. Bair. OK.
    Senator Bunning.----from the head of the Kentucky Bankers 
Association.
    Ms. Bair. That would be fine.
    Senator Bunning. Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you for your leadership on this Committee over the last 2 years 
that I have been on it. It has been an extraordinary 
exploration of the process by which we aggregate capital, 
disburse capital, and the many, many challenges that have 
arisen in the course of mortgage practices, both at the retail 
level and then at the securitization level, and these issues 
are going to continue to reverberate for a long time. We are 
addressing one little slice of it today. But thank you for your 
leadership on Dodd-Frank, a huge effort to try to stabilize our 
financial sector and have it serve our nation well in the 
decades ahead. It has been a pleasure to be a part of your 
team.
    Chairman Dodd. Well, thank you, Senator, and you have made 
a wonderful contribution, as well, to the efforts and I want to 
publicly thank you. As a new Member of the Committee, you 
became very active and played a very important role in the 
process and I thank you for that effort.
    Senator Merkley. Thank you, Mr. Chair.
    I wanted to start, Mr. Tarullo, by asking you a little bit 
about the put-back risk. The numbers that you lay out in your 
testimony are that Freddie and Fannie between them have $13.3 
billion in outstanding repurchase requests. The four largest 
banks have reserves of less than $10 billion. So the reserves 
are not expected to grow, and yet the repurchase requests are 
probably going to grow substantially over the $13.3 billion, 
and that is just Fannie and Freddie, not other investors that 
are----
    This situation, in terms of its systemic risk down the 
road, I believe that the Federal Reserve is conducting a 
detailed examination of this risk. When do you anticipate that 
there will be a point that you will have a report, and is the 
Systemic Risk Council also undertaking this issue?
    Mr. Tarullo. Senator, we have requested the comprehensive 
capital plans from the largest bank holding companies, whether 
or not they are mortgage servicers, I should say. This is an 
independent exercise. But for those which are big servicers, 
obviously, put-back is a significant risk. We have requested 
those plans by the first part of January, which will be the 
occasion, for us digging into each of them for each of the 
institutions with respect to specific issues, and where there 
are issues that may call for supervisory guidance or action, we 
would take those.
    I would not anticipate that we would release firm-specific 
information about that, but obviously we would be happy to 
communicate on our general evaluation of the level of put-back 
risk with respect to the institutions as a whole.
    Senator Merkley. On a scale of one to ten, how big of an 
issue do you anticipate this is going to be?
    Mr. Tarullo. Instead of being evasive, let me just say I am 
going to be evasive and that I will not----
    [Laughter.]
    Mr. Tarullo. I do not want to give you a number on that 
because we really are in the middle of the process right now. 
But I will tell you, if I had to guess, that for a few 
institutions, that number would be reasonably high, and for 
many, it will actually be reasonably low, even if the dollar 
amount is significant, just because these are such big 
institutions.
    Senator Merkley. OK. Thank you very much. I think it is 
important that you flagged it in your testimony and that we 
continue to pay attention to it in a Congressional oversight 
fashion.
    Ms. Caldwell, I wanted to turn to your comments about the 
dual track. I am not sure if I have this word for word, but I 
think you said that you have done procedural safeguards to 
minimize dual track, that is, to make sure that the foreclosure 
process does not move ahead simultaneously with the loan 
modification process. Did I roughly capture your comment?
    Ms. Caldwell. Yes, you did, and I just also want to 
acknowledge the work, Senator, of your staff in providing input 
into the HAMP program and some of those borrower protections 
that were announced in January that did put clarification 
around minimizing the dual-track program, so----
    Senator Merkley. So thank you. We will continue to work 
with you all. But I must say, we are much more worried about 
this than I think perhaps Treasury is, based on your testimony. 
We had recently two major banks here, Chase and Bank of 
America, which said very clearly that it is their policy to 
pursue both tracks simultaneously, that the only factor that is 
kind of a caveat to that is that they do not go through with 
the sale if the modification process is still underway.
    But that process, the foreclosure process going forward 
simultaneously in which the homeowner is receiving notice after 
notice, phone calls, notices posted on their door--I read a 
letter, actually, about one of the homeowners in Oregon--is 
enormously confusing and enormously stressful to our families. 
I wish there was, in fact, a rule in place that said the 
foreclosure track will not be pursued until the modification is 
completed because that would change the dynamic of the 
modification process enormously for the families involved. Is 
that a potential point that Treasury can back, completely 
suspend the foreclosure track until the modification track is 
completed?
    Ms. Caldwell. Again, with respect to the HAMP program, 
servicers may not start the foreclosure process until loans 
have been evaluated for HAMP or until a certain measure of 
outreach efforts to the homeowner has been tried and exhausted.
    Senator Merkley. So----
    Ms. Caldwell. In the hearing----
    Senator Merkley. I am going to interrupt you for just a 
second----
    Ms. Caldwell. OK. Sure.
    Senator Merkley.----because my time is out. Can I pursue 
this for just a second?
    Chairman Dodd. Yes.
    Senator Merkley. Thank you, Mr. Chair.
    The situation is that often when folks seek a modification, 
they are told by the servicer, you need to be delinquent before 
you start this. You need to be one or two or 3 months 
delinquent. At 3 months delinquent or 90 days, then that is 
kind of the official start of a foreclosure process. So now 
that the foreclosure process is underway and the modification 
is being initiated, the banks do not suspend the foreclosure 
process.
    And so essentially--I guess what I am saying is that 
technically, you are making a correct point, is that if no 
foreclosure process has begun, it cannot begin if they are in a 
modification. But so often, the interaction results in the 
family being 90 days behind and therefore triggering the 
foreclosure process before the bank will proceed with the 
modification, and then the foreclosure process is not 
suspended. That is the reality on the ground that all of us are 
seeing with our constituents. And so we need a much stronger 
position in regard to that situation.
    Ms. Caldwell. You know, we completely agree with you that 
the dual-track process is confusing for homeowners, but I just 
want to make sure to clarify that within the HAMP program, we 
issued guidance that effective in June of this year, servicers 
had to stop the process in place and evaluate that homeowner 
for HAMP.
    In the last hearing that this Committee had, the two large 
servicers did testify that for those loans in their HAMP book, 
they do, in fact, stop that process, but that for those loans 
that are subject to other investor guidelines where they are 
not permitted to do so, they cannot. So HAMP does not have the 
authority to override existing investor contracts, but that is 
a specific HAMP guidance that was issued in January of 2010, 
effective in June, and it was done in response to the 
overwhelming complaints we heard during 2009 about confusion 
among homeowners with the process.
    Senator Merkley. I will just conclude with this, then. 
Because of those existing agreements, what you are describing 
has little practical effect because Fannie and Freddie are 
telling those servicers to continue with the foreclosure 
process, not the final sale but the foreclosure process, the 
intermediate steps to get there, and so we have a real problem 
on the ground that needs to be addressed.
    Mr. DeMarco. Senator, if I may, to the extent that concerns 
are about GSE loans, Fannie Mae and Freddie Mac loans, I would 
like to say that it is under our authority. It is not--while it 
is run in tandem with and is meant to be in alignment with the 
HAMP program, those are not HAMP loans per se, and I will be 
glad to speak to the concern you have about dual-tracking with 
respect to what is said about the Enterprises because I think 
that this is a matter of confusion not just for homebuyers, or 
homeowners, but it is confusion in a lot of other places, as 
well.
    I think that the responsibility here and the way this is 
run for Enterprise loans, which is in harmony with what is done 
in the HAMP program, is that as soon as a borrower starts 
missing payments or reaches out and contacts their mortgage 
servicer that they have a difficulty with their mortgage, there 
is a single track, and that is to work on a loss mitigation 
option that is tailored to the particular circumstances of that 
borrower. Foreclosure does not begin, and that is what we 
should be working on.
    But at some point, foreclosure does need to begin, and that 
typically is at 4 months, and as has been reported in the 
testimonies of several of us and has been discussed at this 
hearing, the foreclosure process is extraordinarily long, and 
so I think that we have got to be a little bit careful about 
terms here--to have a dual-track. If you have got a foreclosure 
process that is going to take a year or more, it means that 
while you are going through that foreclosure process, there 
remains an opportunity for the homeowner to cure that loan or 
to qualify for some other kind of loss mitigation activity.
    I fully understand the concern about the confusion for the 
borrowers, and I think we all have a responsibility to be 
working on greater clarity for the borrowers. But at some 
point, once the foreclosure process starts, I am looking at 
having to conserve the assets of these Enterprises on behalf of 
the taxpayer and I do think that I have got a responsibility as 
conservator for the lengthy foreclosure process to be moving 
along if we are not making or hitting a meaningful milestone 
with respect to loss mitigation alternatives that are offered, 
and these offers are numerous.
    So I would just like to sort of leave it at we absolutely 
want the servicers of Fannie Mae and Freddie Mac loans to be 
doing everything possible to come up with an appropriate 
foreclosure alternative starting with a loan modification. That 
must start months before any foreclosure processing would 
start. And if there is meaningful progress and milestones met 
on those loan modification activities, foreclosure will not 
start. But once the foreclosure process does start, I do think 
that there is a responsibility to be moving that along, and 
when a successful trial modification is initiated, consistent 
with the terms of the HAMP program, then we will cease the 
foreclosure proceedings.
    I hope that that helped clarify. This is a very difficult 
issue and it is one we all share, the concern for both the 
homeowner and for the taxpayer.
    Senator Merkley. I am completely dissatisfied. We will 
continue the conversation. And I apologize to my colleagues. I 
am deep into their time----
    Chairman Dodd. No, it is an important question. I thank 
you.
    Senator Merkley. Thank you.
    Chairman Dodd. Senator Bunning asked Mr. DeMarco for 
numbers, and just to put these in the record, between January 
and the end of August, there were 278,409 completed 
foreclosures, and since January to date, the ones that are now 
in process of foreclosure are 761,611. So those are the two 
numbers, and I will put this whole graph in the record, Jim, as 
well.
    Senator Bunning. Thank you.
    Chairman Dodd. I just note, as well, by the way, in this 
chart, and maybe I ought to inquire here, the top five reasons 
for delinquency, and interestingly, the overwhelming number, 
almost 50 percent of delinquencies are curtailment of income, 
and so----
    Senator Bunning. Loss of job?
    Chairman Dodd. Well, you know, it is confusing, because one 
says curtailment of income. There is an unemployment statistic, 
and that only accounts for about 8 percent. I do not know what 
the difference between curtailment of income and unemployment 
is. I started to ask staff the question, what the distinction 
is. I do not want to take up the time of Senator Bennet, but 
someone else may answer that question for me, what the 
distinction is. How do you----
    Mr. DeMarco. Well, curtailment of income could be that 
there is a dual-income household and one person has lost----
    Chairman Dodd. All right.
    Mr. DeMarco. It could also mean reduction in hours and so 
forth.
    Chairman Dodd. But more than likely, it is loss of 
employment? OK.
    Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman, and thank you for 
your leadership of this Committee, for allowing me to 
participate and for your excellent, excellent speech yesterday.
    Chairman Dodd. Thank you very much.
    Senator Bennet. I hope we hear a lot more like that one 
going forward.
    I wanted to go back to an observation Mr. Tarullo made at 
the very outset of this hearing, which were the macroeconomic 
implications of what we are talking about here, because I think 
they are potentially devastating. We had this housing bubble. 
We had this crash. We had a lot of people try to figure out, 
well, how do you preserve these home values, which you know is 
like holding back the ocean.
    But now I am very concerned that we are moving in exactly 
the opposite direction, that because of all of the issues that 
have been raised here, we find ourselves in a place where, 
though it is in the investors' economic interest for a lot of 
these loans to be modified rather than houses foreclosed upon, 
because it is in the homeowners' interest to get modifications 
done, not to be foreclosed upon, and because it is in the 
broader economic interest of this entire country that we do not 
drive housing prices down because we are foreclosing in 
neighborhoods unnecessarily, somehow, we still find ourselves 
incapable of streamlining this process. And I think the dual 
track has a lot to do with it. I think that the observations 
that the servicers made when they were here was that because of 
Fannie and Freddie, they said, they cannot get out of this dual 
track. They cannot find a way to modify the loans in the way 
they want to.
    And I guess the question that I have--sorry for the long 
wind-up--is, is this really an issue about standards, which is 
what you said, national standards, or is it a broken system of 
incentives, and we do not understand the incentives in the 
marketplace here, or is it some combination of those two 
things, because, you know, for us--at least from my point of 
view, this entire conversation has been like watching a slow-
moving train wreck for 22 months. And for the homeowners in my 
State, there have been devastating consequences as a result of 
this. And I am the first to say you cannot hold values up when 
the market drops. It is impossible. What I am worried about is 
that we are engaged in a process of value destruction and 
therefore creating a horrible potential economic consequence to 
the country.
    So I do not know if you want to respond to that, or if 
Sheila or anybody else----
    Mr. Tarullo. I can start, Senator. I am sure others have 
something to say on that.
    Senator Bennet. OK.
    Mr. Tarullo. First of all, obviously, I agree with your 
point about the macroeconomic consequences here.
    Second, in response to your specific question, I think it 
is about standards, but the standards themselves can be about 
incentives. The first lien, second lien issue is a very good 
example of that.
    Senator Bennet. Right.
    Mr. Tarullo. But also, the standards are going to need to 
be about resources, because you have heard a number of us 
mention the inadequacy of resources to deal with foreclosure, 
with modifications, and perhaps even with the ongoing servicing 
of non-foreclosed mortgages.
    So the reason why I come at the standards is not because 
rules are going to be the end-all and be-all, but I think it 
will be an occasion for a consolidated group, whether it is in 
the FSOC or somewhere else, to think about how all these things 
interact and to try to get a more or less uniform set of 
standards and expectations for how this needs to proceed.
    But I do not want to take up more time, because I am sure 
others have more to say.
    Ms. Bair. Well, I guess, as I have indicated before, I 
think we will not fix the securitization market going forward 
unless we deal with the huge economic incentives that have 
really been the key driver of this mess we have, with not 
having servicing done appropriately on these loans. I guess 
that is number one.
    Number two, I think the GSEs really do have a big role to 
play in setting standards in the short term and I think we can, 
as members of the FSOC, the FSOC can play a broader role in 
this process.
    On the question of dual track specifically, one of the 
reasons we have suggested that all servicers be required to 
designate a single point of contact for the borrower is, to 
just acknowledge the reality that in some circumstances, it may 
be a legal requirement that they do dual track. If there is a 
huge backlog, there might be a valid reason to start the 
process. It may be legally required in some jurisdictions.
    But there needs to be somebody talking to the borrower, 
saying if we can get this modification to go through, you will 
not be foreclosed upon. We have a legal requirement to do this, 
but we are explaining it to you. Do not be scared by it. Give 
them a phone number and a real person who is going to answer 
the phone to call if they get confused because of this process. 
And I think this would be operationally challenging for the 
servicers, but I think they should do it, because borrowers are 
confused and scared. The thing that is happening now is that 
people in good faith who want to keep paying on their mortgage 
but cannot make the current payment, need to reduce their 
payment. They are getting caught in this confusing trap, and 
the people who want to game the system and just play it out for 
as long as they can without paying anything are benefiting.
    Senator Bennet. Right.
    Ms. Bair. It is completely upside down. In the short term, 
that would be our solution, with the single point of contact.
    Mr. Walsh. Just to add to that, I think the two actually go 
together. A number of institutions have talked about 
instituting a single point of contact to eliminate confusion in 
that form. But we do agree, and in the conversations we are now 
all too frequently having with servicers, they share the 
concern that the dual track is confusing. If you have entered 
into a modification and are performing under it, you should not 
be getting things in your mailbox and things stuck on the door 
of your house and finding an ad in the paper about the home 
that you live in.
    So where we are--where the servicers have the flexibility 
to do so, we are directing them to halt the foreclosure process 
when there is a mortgage modification in place. But the fact is 
that it is a space that is dominated by contractual obligations 
because of the servicing arrangements, and so in many cases, 
what happens is either through private-label arrangements or 
the GSEs, there are particular rules that apply and I think we 
need to give some attention to sorting that out and trying to 
produce some uniformity.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    You know, let me ask you something. I am sitting here, and 
Senator Bunning in his usual, very forthright manner expressed 
his frustration that others of us have tried to express in less 
direct terms, and I thank my colleague sometimes for his 
directness--he gets to the point very quickly--every person 
represented on this table here today is a member of the 
Financial Services Oversight Commission, the one that we 
established in the Dodd-Frank legislation as one of the major 
points of this bill, to try and anticipate systemic problems, 
chaired by the Treasury. And I realize you are not the 
Secretary of the Treasury, Ms. Caldwell, but nonetheless, you 
are here.
    I have raised it several times here, but the question of 
why we have not been able to come up with some answers, given 
your regulatory authority you have, and again, there may be 
contractual issues that limit even regulators' capacity to be 
able to implement some of these very ideas that you seem to 
agree on would make some sense--a single point of contact, 
various other suggestions have been made--what is the FSOC 
doing? I mean, it is the law of the land now. Are you people 
meeting?
    It seems to me this was a classic case--we did not 
anticipate this one, but here we have, by all of your 
admitting, we have potentially a systemically risky problem 
that can put our economy once again in a tailspin. And the 
issue is, why are you not meeting on this thing? Why am I not 
reading about this Commission that we formed specifically for a 
purpose like this getting together and doing anything about it? 
What is going on?
    Mr. Walsh. In our last FSOC meeting, we had a discussion in 
the private session of the foreclosure issue and then there was 
a presentation by Assistant Secretary Barr in the public 
session on the state of play, and we have a number of efforts 
underway. It is certainly something that has been taken up by 
the Council, but I think with the thought that we need to 
complete the work that is underway, which is due to be 
completed within the next month in the institutions and then 
brought back to the Council at its January meeting. So it is 
certainly something that has been taken on by----
    Chairman Dodd. Well, John, did you talk about--for 
instance, Sheila Bair made some recommendations. Dan has made 
some suggestions. Were those talked about in that meeting, 
these ideas, or are we hearing them for the first time here 
today?
    Mr. Walsh. I do not think that we are hearing ideas for the 
first time, but I would characterize the discussions as being 
at a more general kind of systemic level, at least in that 
first discussion that we held. Once we have details of the 
nature of the problems, we will move on to solutions.
    Chairman Dodd. I apologize. I have two of my colleagues who 
have not asked questions. But also, I realize that five of the 
Members of the ten Members are sitting at this table, and 
again, I have raised this at the past in other hearings. If I 
could have conjured up a fact situation--I did not think we 
would see one this quickly, quite candidly, when the law was 
signed a few weeks ago, that I would be sitting here with a 
bunch of witnesses talking about a systemic problem, and yet I 
do not hear much out of this very entity we created in that 
bill to exactly provide the kind of answers that Jim Bunning 
has raised.
    And I do not expect miracles out of it. Merely the fact 
that you all meet does not necessarily mean you are going to 
have an answer to a very complex problem. But, good Lord, I 
would expect something coming out of this operation other than 
what presently is the case. What better case could you have 
than this one to demonstrate the value of having a Commission 
like this?
    Senator Kohl.
    Senator Kohl. Thank you very much, Mr. Chairman. Like every 
other member----
    Chairman Dodd. Sorry, I apologize. Herb, Evan was here 
before you.
    Senator Bayh. I will be mercifully brief, Herb. Thank you. 
You are very kind.
    First, Chairman, let me thank you, as the others have, for 
your service. I could not help but note that with your changing 
circumstances, mine, and Senator Bennet's, the caucus of those 
of us who have followed our fathers into the Senate is going to 
be somewhat diminished, so we are going to have to count on 
Senator Pryor and----
    Chairman Dodd. Mark Pryor has got it all on his shoulders 
now.
    Senator Bayh. I had no idea until I was talking to Senator 
Bennet yesterday about his father's long commitment to public 
service, so although not in the Senate, he will carry on in 
like spirit. But it has been a pleasure serving with you, and 
although our time here will come to a conclusion, our 
friendship will not. So thank you.
    And thanks to all of you for your service to the public. I 
know that you sacrifice in many ways personally, and I just 
want to--and particularly during the last couple of years and 
all we have been through, I am sure you have been putting in 
yeoman's hours, and I want to thank you and your families for 
your devotion to our country and to meeting the challenges that 
face America.
    I just have two or three quick questions. Mr. Tarullo, I 
would like to start with you, and let me just give you some 
introductory comments. We avoided the worst possible outcome 
with the downturn. The Fed, though, is now engaged in some 
rather extraordinary efforts, which I support, to prevent a 
lapse back into a more sluggish economy. I am referring to the 
quantitative easing. And yet we have other drags on the 
economy. We have lack of consumer confidence. They are 
retrenching. Businesses are sitting on a couple trillion 
dollars because of their lack of clarity about future final 
demand. We have some of the problems of--the sovereign debt 
problems in Europe may have caused more sluggish growth there. 
China may be worried about increased inflation, so they may be 
raising their interest rate. There are a variety of things that 
may serve as a drag upon the economy.
    Where I am going with all this is obviously real estate has 
been a huge drag on the economy. We have been hoping that this 
clearing process would take place, that we would get footing 
under the real estate sector and that that could then not be a 
drag but perhaps contribute to economic growth going forward. 
And yet the dragging out of this whole process runs the risk of 
retarding that.
    From a macroeconomic standpoint, do you have an opinion 
about what kind of risk this presents to the overall economy, 
the fact that this will be a slower process and the clearing 
will take more time and, therefore, be less certainty in the 
real estate market?
    Mr. Tarullo. So, Senator, at this juncture our internal 
forecasts are for housing prices being stable to maybe slightly 
declining, depending on which forecaster you talk to over the 
course of the next year. That obviously is not providing an 
impetus to growth, and as Senator Bennet was suggesting 
earlier--he did not use this term, but I will--there are 
multiple ways in which the housing market can clear, some with 
greater costs, more neighborhood problems, more lost value and 
foreclosures, lower-valued homes because of deterioration and 
the like; some with fewer costs. There are going to be costs in 
any case, and as Sheila said, we are not going to avoid all 
foreclosures by a long shot. But I do think that if we are to 
get housing to be a net addition to GDP growth, we are going to 
need to deal with the overhang of foreclosed homes which are 
undoubtedly having----
    Senator Bayh. The sooner we clear, the better?
    Mr. Tarullo. Absolutely.
    Senator Bayh. More certainty.
    Mr. Tarullo. Depressing effect on the market, as----
    Senator Bayh. Home prices can start rising again, people 
can be confident in purchasing----
    Mr. Tarullo. Right now, Senator, if you just look 
objectively, based on past experience, conditions--finance and 
other conditions for home buying such as pricing and credit--
are actually quite good. But home buying is obviously not 
nearly what people hope it will be. Well, why is that? It is 
for a couple of reasons. One, people may be uncertain about 
their own economic situations. Two, they may think housing 
prices are going to decline some more. And so until we 
strengthen the economy to help deal with number one and clear 
the market to deal with number two, we are going to have--we 
are not going to get----
    Senator Bayh. And the more protracted this foreclosure 
problem, the more that delays----
    Mr. Tarullo. It is an additional----
    Senator Bayh.----recovery.
    Mr. Tarullo.----source of uncertainty.
    Senator Bayh. Right. And with regard to the put-back 
problem, you mentioned that for a couple of institutions this 
may be a material issue. You said that there was a variation in 
the estimates of a factor of three or four, which is a huge 
swing.
    Mr. Tarullo. Right.
    Senator Bayh. But for a couple of them, which I assume must 
be, you know, among the bigger ones, this may be a problem for 
them. If they become significantly affected by this, does that 
present a systemic risk of some kind?
    Mr. Tarullo. First, I want to again underscore the 
tentativeness of everything that I am saying about examinations 
or put-back analysis. But, second, I would say this is why we 
are trying to get ahead of the issue and do it in the context 
of an overall capital plan. So to the degree that any 
institution needs to be reserving more, needs to be doing 
capital preservation, that we are able to give that kind of 
guidance in a timely fashion.
    Senator Bayh. Well, and if they have to be focused on 
capital preservation, then obviously they are not lending, and 
that is yet another drag upon the recovery, isn't it?
    Mr. Tarullo. Well, sure. At this juncture I wish that 
capital requirements were the principal drag upon lending. They 
do not seem to be. The demand factors that you mentioned 
earlier seem to be playing a greater role. But at some point 
they could be, sure.
    Senator Bayh. Right. My last question has to do with I 
think what many people are asking themselves, Chairman. When 
they pick up the paper and they see--there is an understandable 
sense of outrage if someone who has been undeservedly 
foreclosed upon, if the underlying merits did not justify that 
person's home being taken away from him, people say, ``This is 
outrageous. How can this possibly happen?''
    At the same time you read these articles, and it would 
appear that a fair amount of this are just technical paper 
problems that ultimately will be resolved. And so my question 
is: Do any of you have any sense about the percentage of these 
cases that are miscarriages of justice, for lack of a better 
term, and how many of them are purely technical in nature and 
simply postponing the day of reckoning that will inevitably 
come?
    Mr. Walsh. Well, again, we keep mentioning the fact that we 
are still in the middle of these exams, but the indication----
    Senator Bayh. Based upon what you have seen to date.
    Mr. Walsh. Right, but the indications that are coming in 
are that there are not--we are not seeing many cases where the 
wrong person has been identified, they were current on a 
mortgage or kind of working under a modification under which 
they were performing and that sort of thing. These are kind of 
long-dated foreclosure processes taking place where the 
problems are more technical. But, I mean, the fact of the 
matter is there are laws that require certain things to be 
done, and if there is a violation of law, then that is 
unacceptable and you have to cure that problem and remedy that 
situation.
    So even if the problems are more kind of technical in that 
sense, they are legal deficiencies, they have to be fixed. They 
are not legal foreclosures unless those problems----
    Senator Bayh. Well, and those requirements are there for a 
reason. The reason for my two questions--and then I want to 
turn it over to Senator Kohl, who has been very patient--is 
that we are paying a macroeconomic price for the delay in 
resolving this issue. As much as those of us on this side of 
the aisle look for a pain-free resolution--on this side of the 
dais look for a pain-free resolution--that is what politicians 
usually do. Economists remind us that is not possible at the 
end of the day. So the more efficiently we can resolve this, 
while still--you know, even if only one person has been 
unjustly foreclosed on, that is one person too many. So we have 
got to focus on how do you keep that from happening but do that 
in the most efficient way possible so we can allow the process 
to take place and avoid the overall drag to the economy that 
causes every American to suffer. I guess that is the underlying 
purpose of my two questions.
    And the final comment--and then, Chairman, thank you 
again--I really encourage you to look at the misalignment of 
incentives. If we are going to avoid a repetition--there is a 
wonderful saying in law school from many years ago. It is a 
problem susceptible of repetition and yet evading review. We do 
not want that here. This is susceptible of repetition if we do 
not appropriately align the incentives. That is the best way to 
avoid getting back into this morass again. So I would encourage 
your focus on that.
    Again, thank you for your service. Herb, thank you for your 
patience. And, Chairman, it has been a pleasure.
    Chairman Dodd. Thank you very much. I want to thank you for 
your patience and your work on the Committee as well. You have 
been a great asset to this effort over the last few years, and 
I am very grateful to you for that.
    Let me just say, by the way, in my last monologue there 
about the Financial Services Oversight Commission, this is a 
question for the Secretary of the Treasury. He is the Chairman 
of this Commission, and so while I have asked--sort of raised 
the issue to all of you at the table, the question goes back to 
the Secretary, and I would appreciate if you would carry it 
back to him. I would like to know what is going on right here. 
Again, I do not expect miracle answers because you merely 
convene meetings. But it seems to me, again, the idea of 
getting the collective wisdom of people around this table, this 
table that is in front of us as well as others, could really 
help, in my view. So please convey that message.
    Ms. Caldwell. OK.
    Chairman Dodd. Senator Kohl.
    Senator Kohl. Thank you very much, Mr. Chairman. Like 
everybody else on this Committee, I would like to offer my 
praise to you. It has been a pleasure and an honor to serve 
with you, and in my judgment, you are one of the very best 
Senators that the United States has ever had. So thank you for 
everything you have done.
    Chairman Dodd. Thank you.
    Senator Kohl. Chairman Bair, I would like to talk to you. 
In addition to the current home foreclosure crisis, I am also 
concerned about two other crises potentially: farm lending and 
commercial real estate lending. According to the FDIC, farmers 
are falling behind on their loans at a 17-year high. Oftentimes 
collateral for farm operating loans is the farm itself. And so 
if a farmer defaults on an operating loan, not only are they at 
risk of losing their livelihood but also their home. Because of 
the economy and because some farm loans are indeed in trouble, 
several banks are telling us that regulators are seeing farm 
loans as suspect and discouraging community banks from carrying 
farm loans. This attitude is hurting rural America without 
making the banking system any safer.
    What is the FDIC doing to work with banks to make sure 
farmers have adequate access to credit? Would FDIC consider 
issuing guidance on farm loans similar to the commercial real 
estate guidance that was issued last year?
    Ms. Bair. Well, Senator, thank you for that question. I 
think parts of the AG sector are obviously quite strong, but 
other parts, particularly the dairy industry, have been having 
some trouble, and we appreciate that. We do have guidance 
encouraging prudent lending and loan restructuring activities 
applying to small businesses generally and commercial loans 
generally. But I would be very open to doing something specific 
to lending. I think that is a point well taken, and there are 
parts of it that are troubled, and I think providing some 
clarification about our expectations would be something we 
would be very open to.
    Senator Kohl. So I heard you to say that you are willing to 
discuss----
    Ms. Bair. We will be happy to do this, yes. Yes.
    Senator Kohl.----specific guidance on farm loans.
    Ms. Bair. Absolutely. Absolutely.
    Senator Kohl. Well, that is great to hear. Thank you.
    Ms. Bair, because of the decrease in real estate prices, 
many commercial borrowers will not be able to refinance, 
possibly causing mass foreclosures and hurting banks 
nationwide. Community banks are known to have large real estate 
portfolios and will likely be hit hardest by this downturn. 
Community bankers are not certain how regulators will treat 
commercial loans that they have on their books, and this makes 
it very hard for them to lend to small businesses.
    Last year, FDIC and other regulators came up with 
guidelines for when a bank can modify a commercial real estate 
loan. These guidelines said that the lenders would not be 
penalized by examiners for pursuing prudent workout efforts 
with their borrowers. I have heard from bankers that the 
regulatory examiners are not always following these guidelines. 
What can be done to bridge the gulf between what is written 
here in Washington and what is actually happening at the local 
level? Is FDIC serious about giving banks and borrowers a 
chance to work out these loans without freezing a bank's 
ability to make other loans?
    Ms. Bair. Well, yes, for commercial real estate loans, we 
have very specific guidance that we issued with the other 
regulators, encouraging prudent loan workouts. We encourage 
that strongly, just as we have encouraged workouts of 
residential loans as well.
    If the collateral has gone down, that does not immediately 
mean that the loan needs to be criticized. If it is current, if 
the borrower has the capacity to keep making payments, we 
specifically told our examiners that they should not criticize 
the loan. If the borrower runs into trouble, we want it 
restructured. Obviously that needs to be disclosed, and if 
there is some loss taken on the restructuring, that needs to be 
recognized. That is an accounting rule. Even if we wanted that 
to not be the case, it would still be the case under the 
accounting rules. But we have tried to exercise a lot of 
flexibility and provide a lot of guidance in this area, but it 
is just very difficult right now. Parts of the country, 
particularly in several parts of the country, commercial real 
estate still has some troubles.
    The good news is that balance sheets are getting cleaned 
up, the construction development loans in particular, those 
balances have been coming down, and the credit quality of the 
delinquencies and charge-offs are improving. So we are emerging 
from this. But for some banks in particular that have heavy 
concentrations of troubled loans, they need to maintain and 
conserve capital and reserve heavily against expected losses. 
That can constrain their balance sheet capacity to lend. That 
is driven by the fact that they have troubled loans, not by the 
fact that there is an overly harsh supervisory process. But we 
have tried to be very flexible and prudent and continue to 
convey to community banks we want them to lend. As I indicated 
earlier, community banks' loan balances have remained constant. 
Actually for the banks with $1 billion in assets and smaller, 
the loan balances have actually increased during this crisis. 
So community banks as a group have been lending. They are the 
strongest group in terms of size that have been lending through 
this crisis, and I think that should be acknowledged and 
appreciated for what they have been doing.
    So, again, I will make the same offer I gave Senator 
Bunning. If there are specific institutions that feel that our 
policies in Washington have not been consistently applied, we 
would be happy to take a look at those. We welcome that. We 
have an ombudsman that is equipped to do just that. It is not a 
bad thing. We encourage that. We want to make sure our policies 
are appropriately applied.
    But, again, I do not want to raise expectations. There is 
just a lot of troubled commercial real estate loans out there, 
and it is going to take a while to work through them.
    Senator Kohl. Thank you very much.
    Ms. Bair. You are welcome.
    Senator Kohl. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very, very much, and 
good questions. I am going to leave the record open for 
additional questions, but we do have a second panel, and I want 
to give them a chance to be heard.
    I was going to just quickly ask Dan Tarullo--Governor 
Tarullo raised the issue of standards, which I think is a 
terrific idea, personally. I obviously will not be around to 
try to move that along for you, but I like the idea. But I 
wanted to get just a quick acknowledgment or recognition 
whether or not just at first blush--and I would expect 
obviously you want some more details. To the rest of you, is 
that an idea--from Treasury down to FHFA, do you like that 
idea? Is that something you would agree with, you think you 
might agree with or not? I am just curious.
    Ms. Caldwell. Servicing standards?
    Chairman Dodd. Yes.
    Ms. Caldwell. Yes----
    Chairman Dodd. Recommendations to Governor Tarullo.
    Ms. Caldwell. It is something we support, and we have 
tried--as you know, when HAMP was set up, it was set up in part 
to set some servicing standards for the industry.
    Chairman Dodd. Sheila, any thoughts about that?
    Ms. Bair. Yes, very much so. We have tried to address this 
through our safe harbor for banks and would like it to be more 
broadly applied, perhaps through the rulemaking process that is 
going on right now.
    Chairman Dodd. John?
    Mr. Walsh. Certainly given all that we have seen, we need 
to give serious thought to the model here and whether we can 
improve. There is this question of incentives. Are there 
perverse incentives that are operating? Can they be better 
aligned? It certainly is a good time to give that look.
    Chairman Dodd. Mr. DeMarco?
    Mr. DeMarco. Mr. Chairman, as this Committee takes up 
housing finance reform next month, I hope that part of that is 
absolutely standards, and go beyond servicing standards, and 
suggest that there are a range of things in the mortgage 
industry for which assuring where and how standards are 
established, overseen, and enforced should be part of that 
discussion.
    Chairman Dodd. Tim Johnson will be chairing the Committee 
come January. He had to leave to go to a conference call, but I 
have checked with his staff on this. Let me make a request of 
all of you here to submit some very--more than just kind of the 
suggestions and ideas in testimony. And, Dan, obviously, with 
this--we would like to get maybe some very specific ideas. 
Maybe this is something that the Financial Services Oversight 
Commission as a commission might submit to us, some legislative 
ideas and language that could be a part of this Committee's 
consideration over the next month or so. It would be very, very 
helpful. So I will make that request of all of you and, again, 
through the Treasury suggest that maybe that Oversight 
Commission might not be a bad place to come up with these ideas 
to make a single presentation of a number of ideas that will 
allow us to make this more efficient and a single point of 
contact. But, Sheila, you have raised a number of ideas that I 
think have been terrific as well.
    So I thank all of you, and let me echo Senator Bayh's 
comments as well since this will be my last opportunity for 
this particular panel to say thank you. I am very grateful to 
all of you. I have enjoyed immensely working with Treasury and 
FDIC and obviously the Board of Governors and OCC, and I want 
to commend again FHFA. You have done a wonderful job. People do 
not realize the conservatorship that you have taken on, and 
really without you there and without the housing financing 
system, we would be in a lot deeper problem. I think most 
people with knowledge of the issues recognize that. So I want 
to take this opportunity to thank you for the work that you and 
your staff are doing there as well. And, obviously, the 
Committee will look forward to working with you on this as they 
bring up the whole issue of housing finance reforms. So I thank 
all of you very, very much.
    Mr. DeMarco. Thank you, Mr. Chairman, and congratulations.
    Chairman Dodd. Thank you very much.
    Let me invite our second panel to come on up as the first 
panel departs. I will introduce you as chairs are being moved 
around so we get right to it.
    Terry Edwards is the Executive Vice President of Credit 
Portfolio Management for Fannie Mae. In this capacity, he is 
directly responsible for Fannie Mae's foreclosure prevention, 
loss mitigation activities for the single family book business. 
His duties also include executing the Making Home Affordable 
for Fannie Mae, and we thank him.
    Donald Bisenius is the Executive Vice President of Single 
Family Credit Guarantee Business for Freddie Mac. In this 
position, he oversees the sourcing, pricing, and securitization 
of new business, as well as the strategic business process and 
technology redesign for single family credit guarantees. He has 
been with Freddie Mac since 1992 and is a member of Freddie 
Mac's Management Committee.
    Tom Deutsch is the Executive Director of the American 
Securitization Forum. ASF is an organization that works to 
develop a consensus, a frame of thought, of legal, regulatory, 
accounting, and legislative activities for the securitization 
industry. It represents both servicers and investors. That is 
an interesting juggling act, I might point out. I am rather 
interested to hear his comments.
    And, last, Professor Kurt Eggert is professor of law at 
Chapman University School of Law. His expertise is in mortgage 
and lending issues, predatory lending, consumer protection, and 
securitization. And before becoming a law professor, Mr. Eggert 
was a member of the Federal Reserve Board's Consumer Advisory 
Council where for 2 years he chaired the Subcommittee on 
Consumer Credit.
    So, again, I really am grateful to all of you for sitting 
through the last couple of hours. I hope it was somewhat 
helpful. And I will say to you what I said to the last panel. 
Your prepared statements will all be part of the record. I 
would urge you if you could to try and at least paraphrase your 
testimony for us here today, and then we will get to some 
questions for you. But I am very grateful to all of you for 
your willingness to participate in this second hearing on this 
very important and complicated subject matter, as we, I think, 
are all acknowledging here. We all like things to be efficient 
and move quickly, get resolution for people, clarity for 
people--either we can work something out for you or we cannot--
so that we deal with all the issues that Senator Merkley and 
Senator Evan Bayh and others have raised as a result of this 
ongoing and growing problem, it seems, at least temporarily.
    So we will begin in the order that I have introduced you. 
Mr. Edwards, thank you for being with us.

STATEMENT OF TERENCE EDWARDS, EXECUTIVE VICE PRESIDENT, CREDIT 
                PORTFOLIO MANAGEMENT, FANNIE MAE

    Mr. Edwards. Thank you, Chairman Dodd, Members of the 
Committee. Thank you for the opportunity to testify today. My 
name is Terry Edwards, and I am Executive Vice President for 
Credit Portfolio Management at Fannie Mae. This includes 
foreclosure prevention and servicing oversight, which we have 
spent a lot of time on today.
    Fannie Mae is focused on resolving the mortgage crisis 
facing our country. Every day our people come to work with 
clear objectives: to keep mortgage funds flowing, to do 
everything possible to help families avoid foreclosure, while 
being responsible stewards of taxpayer money.
    The good news is these goals are aligned. Keeping people in 
their homes saves taxpayers' money, as does working with people 
to exit the home without the pain of foreclosure of either a 
short sale or a deed in lieu of foreclosure.
    Since the start of 2009, we have helped more than 600,000 
struggling Fannie Mae families avoid foreclosure. This number 
includes 160,000 HAMP mods and 250,000 proprietary Fannie Mae 
mods.
    But the current foreclosure crisis has been difficult and 
unprecedented, and we are far from done. The U.S. housing 
finance system was not set up to handle this tidal wave of 
mortgage defaults, and loan servicers, who have the front-line 
responsibility to work with borrowers who need help have 
acknowledged they are struggling to keep up. So Fannie Mae has 
been taking aggressive actions to ensure borrowers get the help 
they need.
    Although servicers are the primary contact with borrowers, 
we have worked to expand our borrower outreach and education 
efforts so that homeowners who are in trouble know how to seek 
help, understand their options, work with their servicers, and 
avoid scammers. These efforts including launching our 
KnowYourOptions.com Web site and mortgage help centers and 
partnerships with housing counselors in hard-hit communities 
across the country. We have developed a series of workout 
options for servicers to help struggling families keep their 
homes. All of these workout options now dovetail with HAMP, 
meaning if the servicer has collected the documentation 
required for HAMP and the borrower is not eligible for HAMP, 
more than likely they are eligible for a Fannie Mae mod. And if 
home retention is not possible, we offer servicers incentives 
to help homeowners exist through short sales and deed in lieu, 
reducing the burden on borrowers and taxpayers. Our servicers 
do not get any incentives for foreclosures.
    We are working every day with servicers to help them 
improve their performance, and we enforce our contract with 
them when they fall short. Our teams meet with senior servicing 
leadership on a regular and frequent basis to discuss the 
strengths and weaknesses of their operations, best practices 
that we are aware of that we think can help, challenges they 
are facing, plus give us ideas--plus we ask them for ideas 
where Fannie Mae can make their jobs easier so they can serve 
homeowners.
    I have submitted written testimony for the record that 
provides a fuller description of our foreclosure prevention 
efforts to date, but I would like to touch on two recent issues 
here.
    The first involves servicer completion of foreclosure 
affidavits. Fannie Mae's guidelines require that servicers 
comply with all applicable laws and regulations in the 
foreclosure process. In the wake of reports that some servicers 
did not follow procedures, we have instructed our servicers to 
review their policies and procedures regarding affidavits, 
verifications, and other legal documents in connection with the 
foreclosure process. We are also coordinating with our 
regulator, FHFA, to seek appropriate corrective actions. As 
servicers said in recent hearings, they are working hard to fix 
the issue.
    The second issue has been called dual tracking, where a 
borrower receives a foreclosure notice during the loan 
modification process. To clarify, during the critical early 
stages of delinquency, Fannie Mae has a one-track process. 
Servicers have 3 months, and sometimes longer, to process a 
loan modification before starting the foreclosure process. In 
addition, our research shows that borrowers are more likely to 
succeed if a modification process begins early. So we expect 
our servicers to put forth the maximum level of effort to 
communicate with the borrower during the first 90 days of 
delinquency. This means staffing up and implementing the single 
point of contact you have heard servicers talk about. We are 
encouraged because in our meetings with servicers, they say 
that they are on board and committed to adding staff to put the 
single point of contact in place.
    In closing, this housing crisis cannot be solved overnight, 
and we are all frustrated with the time it has taken to get a 
smooth operating process in place for families facing very 
difficult circumstances. Fannie Mae is committed to doing 
everything we can to support the market and to ensure that 
servicers do their job in helping struggling borrowers. I look 
forward to discussing our work with the Committee.
    Thank you.
    Chairman Dodd. Thank you very much.
    Mr. Bisenius.

STATEMENT OF DONALD BISENIUS, EXECUTIVE VICE PRESIDENT, SINGLE 
         FAMILY CREDIT GUARANTEE BUSINESS, FREDDIE MAC

    Mr. Bisenius. Chairman Dodd, Members of the Committee, 
thank you for inviting me to speak here today. I am Don 
Bisenius, head of Freddie Mac's Single Family Credit Guarantee 
Business. I oversee the sourcing, pricing, securitization, and 
performance of single-family mortgages we purchase.
    Today's hearing raises important issues about the integrity 
of the mortgage origination, securitization, and servicing 
practices. As detailed in my written testimony, I would like to 
highlight the following points:
    First, let me start by saying Freddie Mac expects servicers 
of our loans to treat borrowers fairly, with respect, and in 
full compliance with all applicable laws, regulations, and 
Freddie Mac policies. No homeowner with a mortgage owned or 
guaranteed by Freddie Mac should ever worry about losing his or 
her home to an unnecessary or wrongful foreclosure.
    Freddie Mac currently owns or guarantees approximately 12.4 
million single-family mortgages. In both the acquisition and 
ongoing servicing of these loans, Freddie Mac relies on sellers 
and servicers. We do not directly originate loans, and we do 
not directly service loans. Rather, Freddie Mac provides 
guidelines for the origination and servicing of our loans and 
contracts with sellers and servicers to carry out these 
operations. Companies conducting these activities represent and 
warrant to us that they are following our contractual 
requirements. Freddie Mac has ongoing monitoring programs in 
place to test compliance with these requirements. Failure to 
fulfill these obligations creates a liability for either the 
originator or the servicer, including the possibility that they 
will be required to repurchase the loan.
    Second, Freddie Mac has long had policies and initiatives 
in place to help financially troubled borrowers avoid 
foreclosures. In response to the unprecedented mortgage default 
crisis, we have created additional servicer incentives and home 
retention options. In addition to the $5 billion that Freddie 
Mac pays servicers each year for managing the servicing 
process, we offer additional financial incentives for servicers 
to help borrowers keep their homes.
    Third, while Freddie Mac currently owns almost 25 percent 
of all single-family mortgages outstanding in this country, we 
own fewer than 500,000 seriously delinquent mortgages compared 
to the approximately 5 million seriously delinquent mortgages 
nationwide. Our ability to assist troubled borrowers is limited 
to this 10-percent share of the delinquent borrower population.
    Having said that, I want to be very clear. We have 
redoubled our efforts to keep borrowers in their homes. Since 
the beginning of 2009, we have helped nearly 370,000 families 
avoid foreclosure. Through the first 9 months of 2010 alone, 
nearly 211,000 delinquent borrowers with Freddie Mac mortgages 
avoided foreclosure. That is nearly twice the 114,000 who were 
foreclosed upon.
    Finally, the length of time for the average foreclosure of 
a Freddie Mac loan indicates that borrowers are not being 
rushed through the foreclosure process. We require our 
servicers to seek to resolve borrower delinquencies through a 
variety of foreclosure alternatives, including forbearance, 
repayment plans, loan modifications, and short sales. If the 
borrower's delinquency cannot be cured by these methods, 
servicers must move forward with the foreclosure to minimize 
further financial loss and risk to the taxpayer. Currently, the 
nationwide average for completion of foreclosures on a 
delinquent mortgage owned or guaranteed by Freddie Mac is 449 
days, and borrowers whose properties are foreclosed upon are 
behind on their mortgage payments well over a year.
    Our guide does give servicers the authority to stop or 
suspend a foreclosure action whenever there is an opportunity 
for a viable workout. We are aware that the existing processes 
are confusing to some borrowers. We are working with the 
industry to find ways to improve communications and minimize 
any borrower confusion.
    As my testimony makes clear, Freddie Mac has put in place 
policies, procedures, and financial incentives to help 
borrowers avoid foreclosures. We continue to work with our 
conservator and servicers to enhance these efforts and improve 
their execution.
    I will be happy to answer any questions.
    Chairman Dodd. Thank you very much, Mr. Bisenius.
    Mr. Deutsch, how are you? Thank you for being here.

    STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, AMERICAN 
                      SECURITIZATION FORUM

    Mr. Deutsch. Thank you. Chairman Dodd, Ranking Member 
Shelby, Members of the Committee, my name is Tom Deutsch, and 
as the Executive Director of the American Securitization Forum, 
I appreciate the opportunity to participate here today on 
behalf of the 330 ASF member institutions, including those who 
originate the collateral, structure the transactions, serve as 
trustees, trade the bonds, service the loans, and invest the 
capital in the preponderance of mortgage and asset-backed 
securities in the United States.
    In my prepared statement, I highlight some of the key 
aspects of securitization as well as its critical importance to 
the U.S. and global economy. Importantly for this hearing, 
there are nearly 55 million first-lien mortgages in America 
today that total approximately $9.75 trillion of outstanding 
mortgage debt. Approximately three-quarters of that debt, or 
about $7 trillion, resides in mortgage securitization trusts 
and are beneficially owned by institutional investors in the 
United States and around the world, such as pension funds, 
mutual funds, and insurance companies.
    But in my remarks today, I seek to address the concerns 
raised by a few commentators that securitization trusts may not 
actually own the $7 trillion of mortgages that are contained 
within those trusts. For example, a recent Congressional 
Oversight Panel report has even suggested that these issues 
could create systemic risk to the banking sector if loans were 
not validly assigned to securitization trusts.
    But the concerns that have been raised have not been 
supported by substantiation that there are, in fact, signs of 
systemic fails in the process of assignments. Indeed, the 
origins of these concerns is not clear. They are not the result 
of a series of new court cases supporting the legal arguments 
advanced, but instead appear to be largely the result of 
academic theories. In fact, even the Congressional Oversight 
Panel report suggests that, quote, ``the panel takes no 
position on whether any of these arguments are valid or likely 
to succeed.''
    So all of the consequences that flow directly and solely 
from a single mistaken core premise, that is that the trust and 
ultimately investors do not generally own the $7 trillion of 
loans in the trusts, is discussed in great detail in my 
prepared remarks. This core premise is incorrect, and therefore 
the dire consequences of this faulty premise will not follow.
    Just 2 weeks ago, the ASF issued a White Paper on the 
subject that is part of our written testimony that puts to rest 
many of the questions that have previously been raised about 
the ownership of the mortgage loans. In that White Paper, the 
ASF exhaustively studied traditional legal principles and 
processes, including the Uniform Commercial Code and 
substantial case history throughout every one of the 50 United 
States and the District of Columbia and found that traditional 
legal principles and processes are fully consistent with 
today's complex holding, assignment, and transfer methods for 
mortgage loans. In fact, 13 major U.S. law firms listed in 
Exhibit A to that ASF White Paper reviewed it and believe that 
the Executive Summary contained therein represents a fair 
summary of the legal principles presented.
    Although the ASF White Paper assured many of the concerns 
that had previously been presented, some new concerns have been 
raised since that White Paper was published. For example, one 
commentator has proposed that securitizers have not met the 
contractual requirements for a complete or unbroken chain of 
endorsement. In our written testimony, we rebut this academic 
theory in great detail with analysis of the key contractual 
provisions, the intent of the contracting parties, industry 
custom, independent third-party trustee acceptance, as well as 
the relevant case law and UCC applicability. In particular, 
this argument overlooks the key fact that each separate step in 
the chain of transfers of ownership by each party, from the 
originator to the securitization trust, is fully documented by 
a separate contract.
    The proposition itself, though, that the securitization 
legal professionals have uniformly opted out of the use of 
applicable laws, such as the UCC, to set up an even higher bar 
for transfers, but then subsequently and systematically ignore 
that higher bar, appear on the face to be illogical assertions 
and, in fact, as a legal analysis in our written testimony 
demonstrates, are patently false.
    From time to time, though, mistakes in process are certain 
to occur, particularly in a market where 55 million mortgages 
are transferred and/or serviced in the worst housing market 
since the Great Depression, and that is one reason why, in 
particular, typical language in the governing contracts 
provides the opportunity to cure these mistakes to prove 
ownership.
    In conclusion, the ASF greatly appreciates the invitation 
to appear before this Committee to share our views related to 
these current issues. I look forward to answering any questions 
that Committee Members may have. Thank you.
    Chairman Dodd. Thank you very much.
    Professor, welcome.

STATEMENT OF KURT EGGERT, PROFESSOR OF LAW, CHAPMAN UNIVERSITY 
                         SCHOOL OF LAW

    Mr. Eggert. Thank you, Chairman Dodd. I appreciate the 
opportunity to testify today. As a professor, I feel a little 
overwhelmed by the luminaries around me, but I will try to do 
my best to shed some light on what I think is a serious 
problem.
    In the first panel, I kept waiting to hear one of the 
regulators say, here is what we have done to sanction servicer 
misbehavior. We saw it and we acted and we did this. And I did 
not hear that. I hoped if I did not hear that, at least I would 
hear them say, well, here are the kinds of sanctions that we 
can do if servicers misbehave. I did not hear that, either. 
What I heard was, we are investigating it. We are on it. We 
hope to know more in a month or so and then we are going to do 
something.
    My concern is, this is not a new problem. I wrote an 
article on servicer abuse in 2004, and if I wanted to update it 
at this point, what I would need to do is change the name of 
the servicers and add a zero to most of the statistics. And 
otherwise, everything I talked about in 2004 is still 
happening. We have had this problem for a long time. It is not 
just the result of the foreclosure crisis. It is not just the 
result of the added number of defaults. It is a systemic 
problem in the way that servicers are organized and regulated 
and we have to fix it. We did not fix it in 2002. We did not 
fix it in 2003. We have not fixed it yet and it is time to do 
it.
    I say it is a systemic problem. I know that in the last 
version of this panel, there were questions about whether these 
were just anecdotal evidence of issues or whether there was 
proof that it was a larger problem. I would like to note that 
economists have been looking at this, have been looking to see, 
do servicers foreclose more if they are third-party servicers 
rather than if they are servicing stuff that they own. In other 
words, are borrowers more likely to get foreclosed if servicers 
are servicing on behalf of investors or themselves.
    And what the economists have concluded--I mean, there is 
some disagreement on it, but it seems like the trend of the 
investigation is that there is a foreclosure bias by third-
party servicers, that they are more likely to foreclose for 
investors than they are for themselves. That is an important 
fact. Christopher Mayer, an important economist, said that the 
empirical evidence is compelling on this point.
    The next thing I would like to note is that things are 
getting worse. The servicing regulation industry has long been 
kind of unregulated. I think the Federal regulators at a 
certain point looked around and said, who has got the ball on 
this one? How much of this is mine? How much can I regulate? 
And they have not come up with a good answer for that.
    HAMP is a, I think, is a very well intentioned program, but 
as we have heard, it is a voluntary program and it is a program 
that is based on all carrots and no stick, and in fact, baby 
carrots at that. So it addresses only a small part of loans 
that are being serviced and I have not heard of a single 
servicer who has been sanctioned by the HAMP program for 
misbehaving. I mean, maybe that has happened, but that has not 
been broadly broadcast.
    So if HAMP is not doing it and the regulators are not doing 
it, then you have to say, well, maybe the market is doing it. 
Maybe investors are saying, we are going to make the servicers 
do the right thing. But if you look at it, investors have very 
little control over servicers. Servicers I read a recent quote 
from an investor who said, servicers treat us like the 
Thanksgiving turkey. They just decide where to carve.
    And investors, I think, are getting tired of it, are now 
trying to figure out, how can we get together to force 
servicers to do the right thing, because it is important to 
note that this is not just a problem for borrowers. It is a 
problem for investors. Every time a servicer imposes bad junk 
fees on a borrower, every time a servicer forecloses when they 
should modify, there are two victims. There is the borrower and 
there is the investor who does not get the return that they 
should get.
    So we need to--we have to address this if we want to have a 
robust mortgage market, which many people are saying we cannot 
just have the mortgage market run by the Government. We have to 
have a robust private market, and the only way to have that 
happen is to fix the servicer problem and now is the time.
    Thank you.
    Chairman Dodd. Well, thank you very, very much, and let 
me--Senator Merkley and I are here together. In fact, Jeff, do 
you want to move up here? We are going to sit and be 
comfortable, so you are not going to be back in the corner 
there. You are going to be moving up anywhere here come 
January, so get used to those seats.
    You framed my first question, for our two first witnesses 
in this panel, first Freddie and Fannie. During the debate on 
the issue of whether or not we should have had GSE reform as 
part of the financial reform package--I am not going to invite 
that kind of debate again, but nonetheless, there were reasons 
why we did at the time, but pointed out during those debates, 
and you can both correct me if I am wrong, but somewhere 
between 95 and 96, maybe an even higher percent of all 
mortgages are financed and backed by Fannie and Freddie. That 
number is pretty much right, am I correct?
    Mr. Bisenius. Well, that would include FHA, as well.
    Chairman Dodd. That is what I mean. But, roughly, those 
numbers are correct. Well, Professor Eggert has raised an 
interesting question and one that I would have in a sense that 
because of the power you have, and again, we talked about 
regulators doing this or finding out whether or not they do not 
have the authority, what Congress needs to give them to do it, 
but it would seem to me that just FHA and yourselves would have 
a tremendous ability on servicers, given how critically 
important you are to them, that were they to be stripped of GSE 
business, I suspect that might get their attention.
    And so the question becomes, why not? Why have you not done 
more to insist upon servicer reform in dealing with these 
matters since you are directly affected by it, as well? Why 
have you not done this? Why would you not do that?
    Mr. Edwards. So our approach has been to understand the 
problem, get behind the problem, and try to solve the problem.
    Chairman Dodd. Well, we know what the problem is.
    Mr. Edwards. Well----
    Chairman Dodd. The question is, you have got power to do 
this, market power, I mean, to do this.
    Mr. Edwards. We have been trying to do it with influence. 
We have been trying to define the problem for the servicers. As 
I said in my testimony, we----
    Chairman Dodd. If you told them you were going to strip 
those--you no longer are going to get GSE protection, do you 
not think they would jump back through hoops to respond to your 
concerns?
    Mr. Edwards. In some instances, sir, Senator, we have moved 
servicing away from servicers who are not performing. We have 
moved hundreds of thousands of loans where servicers were not 
getting it done. They were at the bottom of the barrel, if you 
will, in terms of servicer performance and we moved servicers 
to where there was capacity in the industry. At the end of the 
day, this problem is a capacity problem. The servicers have not 
staffed up where they need to staff up and they have not fixed 
their process. The process that we have been suggesting since 
the beginning of the year is this approach that you have heard 
a lot about today, the single point of contact.
    And the point is, servicers/originators, large financial 
institutions, have plenty of resources when you need a loan. 
When it comes time to--a difficult time, your most difficult 
time in your financial situation, when you potentially have to 
leave your house, the resources are not there to take care of 
the problem. And what we have suggested is the single point of 
contact where a counselor, in effect, puts their arms around 
the person who is in a jam and explains to them what is going 
on, what do you have to do to stay in your house. If we cannot 
keep you in your house, this is what needs to happen for a 
graceful exit. What is the best thing to do to manage your 
credit report. Literally counsel people on what they need to 
know and understand.
    And the good news is we see our servicers starting to move 
there. It has taken far too long, but the large servicers are 
now using words that we have been using, single point of 
contact. We are hearing them say it. In meetings with us, they 
are saying that they are going there and we are--we know there 
is a solution. Time is our enemy and now it is a function of 
getting the resources in place so the solution can be fixed.
    Chairman Dodd. Well, I appreciate you saying that. I will 
give you a chance to respond, as well. Lost paperwork, 
misapplied payments, and conflicts of self-dealing, I mean, 
there are just a myriad of problems there. And again, we talk 
about market power, but, boy, there is no better market power 
than the two of you have, in my view, with FHA, in being able 
to influence this process, short of a regulatory and 
Congressional mandates.
    What is the answer to this?
    Mr. Bisenius. I would offer just two additional 
observations in addition to what Terry said. One would be I 
think the market power you suggested has clearly come through 
on the front end of the business. Origination quality and 
performance has improved dramatically because of that dominance 
of the GSEs and FHA in the origination market.
    Chairman Dodd. Right.
    Mr. Bisenius. I think in the servicing market it has 
improved some, but as I noted in my testimony and as noted in 
the public facts, the amount of delinquent loans that are 
serviced by servicers for Freddie Mac or Fannie Mae is actually 
a small fraction of the total amount of delinquent loans.
    On our particular book, we have seen significant 
improvement. The number of modifications, the number of HAMP 
modifications on the Freddie Mac portfolio is actually a pretty 
large percentage. I think if you combine it with the ones on 
the Fannie Mae portfolio, it is a large share of the HAMP 
modifications have occurred on the GSE portfolios themselves. 
So I think on our loans, we are beginning to see improvement in 
the performance. I do not know if we are seeing the same 
improvements on loans outside of----
    Chairman Dodd. Well, let me urge you to keep at that. I 
mean, again, I have made the point and it just seemed to me 
that Professor Eggert raised a good question. Short of the 
regulators doing their job, it seems to me that market power 
here, which a lot of people agree with, and I do, as well, 
where it exists, utilization of it can make a big difference.
    Let me ask you, as well, something I wanted to ask the 
regulators, but we took a lot of time with as many Members who 
participated here and did not get to it, but in briefing with 
Fannie and Freddie earlier this week, it became apparent that 
the two of you have somewhat differing modification programs. 
Given the fact there is already too much confusion in the 
process, should you not adopt the same policies? Why are there 
not the same policies?
    Mr. Edwards. We each have different books. We, Fannie and 
Freddie, do not talk. We are in the field with our servicers 
trying to----
    Chairman Dodd. That is not a great answer here.
    Mr. Edwards. There are rules on----
    Chairman Dodd. Why are you not talking?
    Mr. Edwards. We talk through our regulator, but we are not 
able to talk directly because of antitrust issues.
    Chairman Dodd. Well, do you talk to the regulator about 
this?
    Mr. Edwards. Yes, absolutely.
    Chairman Dodd. And FHFA says, no, we are not going to let 
you have the same process?
    Mr. Edwards. We each have our own different books and our 
books perform a little bit differently. We take great pride in 
what we have now done at Fannie Mae, meaning once you have all 
of the HAMP documentation in hand, you do not have to ask the 
borrower for a single other document in order to complete a 
Fannie Mae modification. We think that is a best practice and 
perhaps one that should be adopted. But
    Mr. Bisenius. I only had----
    Chairman Dodd. Well, I do not want to violate the law here, 
but let us say you are sitting next to each other.
    [Laughter.]
    Chairman Dodd. You talk to me, but talk to him, OK? I will 
let you pretend here we are having a conversation together. 
Tell me why we are not doing this. I mean, the confusion, this 
seems like a fairly simple one we might resolve.
    Mr. Bisenius. So you raise an excellent point, and 
actually, we do work closely with FHFA, and in all those areas 
where we can align as closely as possible, we actually do. I 
think HAMP is a good example of that. I think the majority of 
our requirements under HAMP are identical.
    Chairman Dodd. All right. But outside of HAMP, why not in 
the other areas?
    Mr. Bisenius. I think they are relatively close. They are 
not identical. I think it is, in part, as Terry indicates, that 
there are some differences with individual services, individual 
loan types. But I think they are amazingly close in most 
aspects.
    Chairman Dodd. Well, all right. Let me jump to Senator 
Merkley. I did not mean to dominate here. But let me get Mr. 
Deutsch, and I say this respectfully, but I could not help but 
resist that you seem to be a bit conflicted yourself, and I do 
not mean that personally but as a representative of both 
mortgage servicers and investors. Just wearing your hat as a 
representative of investors, let me put that hat on your head 
right now if I can here. How serious a problem do you think the 
servicer conflicts of interest are with regards to, example, 
charging excess fees or force-placing insurance, and do you 
have any suggested solutions? You heard Professor Eggert, or 
you may have read his testimony, that servicers, and I am 
quoting him, ``are loathe to seek put-backs of loans where the 
put-backs would come from their parent companies.'' I wonder if 
you agree with his comment in his testimony.
    Mr. Deutsch. Again, with the hat of investor on----
    Chairman Dodd. Yes.
    Mr. Deutsch. Again, with the hat of an investor on, I think 
our first lien investors are very concerned about servicer 
conflicts internally. They are very concerned about how loans 
are modified, and in particular how they are modified in 
relation to the second lien program. They have had significant 
concerns about how the 2MP program has performed. My 
understanding, the latest data I have seen is that 382 loans 
have gone through that program since its beginning. That number 
may have increased in the last month or two since the last data 
that I have seen. But investors are concerned about that 
conflict. That conflict obviously is seen much more prevalently 
now in a very down economy, particularly in the housing market, 
than we see in a normal time. So it certainly is strained by 
the existing housing market today.
    Chairman Dodd. Do you agree with the comment of Professor 
Eggert I quoted to you, that the servicers are loathe to see 
put-backs at the parent company?
    Mr. Deutsch. Well, I do not think any originator would like 
to buy a put-back back. I mean, ultimately, they are buying 
something at par that is now either delinquent or defaulted, so 
it is worth less than par. So no economic institution----
    Chairman Dodd. But the alternative is worse, is it not?
    Mr. Deutsch. Pardon?
    Chairman Dodd. The alternative of not getting anything back 
from it, it seems to me----
    Mr. Deutsch. Oh, correct, but I think the banks who have 
sold the loans would prefer not to buy them back, and certainly 
investors would prefer them to be bought back if they are 
delinquent in default. I think it is one of the core issues in 
the market right now, is how do we appropriately sell off 
credit risk from the banks' balance sheets to effectively 
isolate that credit risk from the bank and at the same time 
make sure that the representations and warranties that are made 
to the investors, that those loans are actually the way they 
were originated in the manner that they were.
    Chairman Dodd. Well, who is standing up? I think Professor 
Eggert said it. You have got the investor and the homeowner 
that are here, and the two entities here that are being taken 
to the cleaners in the process. Professor Eggert, do you want 
to comment on this?
    Mr. Eggert. Well, I would like to first--Mr. Edwards said 
something very interesting which I have not heard many people 
say, which is we had some servicers who were not performing, so 
in essence, we fired them. They had servicers that they worked 
with that were not going up to snuff, so they fired the 
servicer. How different servicer behavior would be if more 
people could say that.
    Have you ever heard an investor saying, we fired our 
servicer?
    Mr. Deutsch. Yes.
    Mr. Eggert. No. How often?
    Chairman Dodd. Do they, Mr. Deutsch? Have you fired some?
    Mr. Deutsch. Investors do have the ability to fire 
servicers. It is challenging under the pooling and servicing 
agreements. You need a certain mass of investors, whether it is 
25 percent or more, to be able to fire a servicer, but that can 
occur if----
    Chairman Dodd. But it has not yet occurred?
    Mr. Deutsch. It has occurred.
    Chairman Dodd. Oh, it has?
    Mr. Deutsch. It has occurred in instances, and 
particularly--but it has not happened widespread because the 
question is who is a better servicer out there.
    Chairman Dodd. Yes. And the pooling and services agreements 
are--are they too rigid in that sense?
    Mr. Deutsch. Well, the challenge of a pooling and servicing 
agreement is you have a mass, a diffuse set of investors in the 
marketplace----
    Chairman Dodd. Yes.
    Mr. Deutsch.----that have bought into the securitization 
trust. How do you effectively have a captain of that group of 
investors who can charge and lead for that group of investors 
but at the same time not be conflicted and serve their own best 
interest as opposed to the other group of investors.
    Chairman Dodd. Let me turn to Senator Merkley. I have got a 
couple more, but let me turn to my colleague.
    Senator Merkley. Thank you very much, Mr. Chair, and I will 
follow up on your questions related to the put-back with our 
folks, Mr. Edwards and Mr. Bisenius from Fannie and Freddie.
    In the testimony we had earlier, Freddie and Fannie 
together have $13.3 billion of outstanding requests, put-back 
requests, if you will, repurchase requests. At what rate is 
that growing? If none of those were paid off, if that $13.3 
billion sat there, what would the total be a year from now? 
Would we be looking at $20 billion? I want to get a sense of 
kind of a monthly or annual amount of put-back requests that 
are potentially--what is the flow rate, if you will?
    Mr. Bisenius. I do not know if I have the specific flow 
rate associated with that. What I would suggest is actually if 
we have looked over the last few quarters, the share of 
outstanding repurchases or put-backs from Freddie Mac has 
actually been declining. So we may well be kind of past the 
peak of mortgage put-backs and now on the downside of that. So 
for us, it has been declining at a fairly significant rate.
    Senator Merkley. And that would not be because the number 
of folks falling into foreclosure action is declining, so to 
what do you attribute that?
    Mr. Bisenius. Well, I do think it is associated with the 
number of folks who are going seriously delinquent has begun to 
stabilize, and therefore the number of loans being reviewed and 
subsequent repurchase requests are going down. We have worked 
through a huge kind of pipeline of mortgage reviews and 
mortgage repurchases over the last 2 years. So I am simply 
suggesting that we are at the peak today, and I think it is 
declining over the--it has been declining over the last few 
quarters.
    Senator Merkley. OK. So, ballpark, can you tell me between 
the two institutions or for your institution how many more 
repurchase--are we talking a billion dollars a month or are we 
talking about a billion dollars every 6 months?
    Mr. Bisenius. I think it would be hard for me to speculate 
at this point. We can do some analysis and provide those facts 
to you separately.
    Senator Merkley. OK. And Mr. Edwards, can you clarify it 
from your perspective?
    Mr. Edwards. Yes, Senator. So for the third quarter, we 
collected about $1.6 billion. We do not see that pace slowing 
down, and what we have said to--because we get asked this 
question all the time by our customers, our banks, where are we 
in this process, and our answer is we are about 40 percent of 
the way through the process. So we have got another 60 percent 
to go.
    Senator Merkley. OK. So let me lay it out this way, then. 
If the four largest banks have reserves for repurchase of about 
$10 billion, and if we are at $13.3 billion and crudely between 
the two, perhaps $3 billion a quarter additional, and 40 
percent of the way through the process, that means we might 
have the equivalent of a couple of more years at $3 billion a 
quarter. Just back-of-the-envelope math, an additional $24 
billion plus the $13 billion we have now. Are we looking at 
something akin to, over the next 2 years, a total of $30 
billion in requests against $10 billion in reserves?
    Mr. Edwards. First and foremost, the way those reserves--
when we talk about repurchases, we are talking about an unpaid 
principal balance. So original principal balance. So when a 
servicer buys one of those loans back, they do not need dollar-
for-dollar reserves. That loan might be worth 60 or 70 cents on 
the dollar when they take it back, or if it has gone through 
foreclosure, it is more like 50 or 60 cents on the dollar. So 
you have to--we are talking apples and oranges here.
    Mr. Bisenius. Yes. I think in addition to that, one of the 
things I want to highlight about that outstanding number is 
that is the level of repurchase requests. It is not uncommon 
for an originator, once they get the repurchase request, to be 
able to provide information that leads us to rescind that 
repurchase request. So the original loan file gets sent in. We 
review it. We believe there is a defect. We request a 
repurchase. They see what the defect was and are able to cure 
that defect which means the loan is no longer subject to 
repurchase. So that really is a gross number from an exposure 
standpoint in addition to what Terry said.
    Senator Merkley. So I would appreciate some follow-up from 
both of you in giving us some analysis of this issue, because 
essentially the questions I am raising are should this put-back 
situation be considered a serious problem that we should pay 
attention to now because it could be a very sizable systemic 
risk issue for Fannie and Freddie, a risk for specific 
financial institutions, a risk that may not have reserves to 
cover it, but is there a systemic risk on top of that, kind of 
the three components. So often, we are coming into the story 
down the road when it has exploded. If we are at the front end 
of this and we are trying to understand the problem, we need a 
little more analysis to be able to get our hands around it. 
That would be very helpful.
    Mr. Bisenius. I would be happy to provide that.
    Senator Merkley. That would be----
    Mr. Edwards. Senator, if I may, I want to put one other 
thing in context. There is a lot of talk about the number of 
put-backs from the GSEs. When you add up our put-backs in terms 
of percentage of loans sold to us, for each of the years 2005, 
2006, 2007, 2008--those are the big years--we have not gone 
beyond 2 percent of the originations in any one particular 
year.
    Senator Merkley. Thank you for noting that. And these 
numbers that I have been citing are just Fannie and Freddie, so 
there is a lot of other pressure on the financial institutions 
coming from put-backs coming from other quarters that would 
have to be part of a comprehensive understanding of this issue.
    But let me turn to the dual-track issue. When my 
constituents were talking to the case workers on my team about 
the challenges of getting foreclosure notices, foreclosure 
phone calls, even foreclosure postings on their door in the 
process that they were in the middle of loan modifications, the 
explanations for a very long period of time were 
miscommunication within the bank, this unit, this unit. Not so 
long ago, a few weeks ago, we had testimony that essentially 
was along the lines of actually this is the consequence of a 
deliberate dual-track strategy and a couple of the major banks, 
B of A and Chase, testified that while they have the power to 
change that dual-track strategy and they recognize some of the 
shortfalls of it, they can only do so on loans that they have 
control over, but that a tremendous number of the loans they 
service are Fannie and Freddie loans, and that in that case, 
Fannie and Freddie are pushing very hard to pursue both tracks 
aggressively so that the foreclosure can take place as quickly 
as possible if the modification fails.
    I guess that general perspective seems to be supported in 
the testimony that both of you have put forward just from your 
written testimony on where you both address the dual track, and 
here is the dilemma. Everyone benefits, in general, from a 
modification being successful. The investors benefit. Certainly 
the community benefits by having a family in that home. 
Certainly the children benefit from the stability of the family 
staying in that home. Everyone who has a stake in the 
surrounding community--it is not just those who live there, but 
the fact that the dropping home values are driving a national 
cycle that we have not seen the end of yet. That is all tied in 
together.
    So all these incentives, and yet Daniel Tarullo testifying 
earlier noted that despite the preference of modifications over 
foreclosure as a national strategy, that the deck is stacked 
the other direction, and he says that several possible 
explanations for the prominence of foreclosures: Lack of 
service or capacity to execute modifications, financial 
incentives for servicers to foreclose, what appears to be 
easier execution of foreclosures relative to modifications, 
limits on authority of securitization trustees, and conflicts 
between primary and secondary lien holders. So kind of big 
picture, modifications make a lot of sense from a lot of 
perspectives, but the complexity of the mortgage marketplace 
results in a lot of foreclosures in lieu of aggressive pursuit 
of modifications.
    And then we find Fannie and Freddie saying the same. Hey, 
folks, if you are servicing our loans, you have got to 
aggressively pursue foreclosure. And so families are completely 
stressed out and a substantial number--I do not really know the 
percent--but families start to get these foreclosure notices. 
Some of them are walking away from their homes because they 
cannot deal with the pressure of--they think they are trying to 
get a modification, but they have been on the phone four times. 
They have talked to four different people in the pursuit of 
that modification. They have submitted the paperwork three 
times. It has been lost repeatedly. They can never get the same 
story. They are told, make your payments, and they are told, we 
cannot pursue your modification unless you are a month late. 
Then somebody else says, no, we cannot pursue it unless you are 
3 months late. And so in the middle of all that, then the 
foreclosure side starts pounding on their door and families, 
like we are not answering the phone anymore and we are not 
going to open the mail anymore and until the sheriff comes and 
moves us out, or we are just getting out of the house now.
    There is something counterproductive from every quarter 
about this aggressive pursuit of foreclosures at the same time 
that a modification is in process. Is it not possible, because 
since folks are saying that it is really Fannie and Freddie 
that are really helping to drive this dual track, is it not 
possible to find a way to recognize the importance that 
foreclosure may be the ultimate path, but to suspend some of 
the features of your tracking down that path during a period 
where there is legitimate good faith effort by the servicer and 
by the family to get a modification in place, and could that 
not help overall with this picture?
    So I guess I am asking each of you, Mr. Edwards and Mr. 
Bisenius.
    Mr. Bisenius. Let me offer a couple of thoughts around 
that, if I could, Senator. First off, the challenge that you 
highlight, I believe is very real and one that can lead to, as 
you suggest, kind of counterproductive results. It is in our 
interest to have our servicers work with borrowers to try to 
seek a non-foreclosure alternative, to seek a modification, to 
seek a repayment plan, to seek something other than a 
foreclosure. As I mentioned in my testimony, we actually 
provide financial incentives for them to do that and encourage 
them to do that.
    The balancing act we feel, though, is if a non-foreclosure 
alternative cannot be found, every day, every month I wait to 
start that foreclosure process costs. It costs a lot. If you do 
back-of-envelope math, as I suggested in my written statement, 
it is $30 to $40 a day. If we have 300,000 loans sitting in 
foreclosure, that can start to run into the hundreds of 
millions of dollars a month from those delays.
    We have to find a way to remove the confusion, because I 
understand it is a painful process and a confusing process. 
Simultaneously, though, I need to find a way to ensure that I 
am not adding more losses to the taxpayers as a result of our 
actions.
    Senator Merkley. So before I turn to Mr. Edwards, let me 
just pursue that for a moment. And, by the way, I think I am 
way over my time, Mr. Chair----
    Chairman Dodd. That is OK.
    Senator Merkley. Thank you. So essentially, you say when 
there is recognition that a modification cannot be completed, 
then we need to push through to foreclosure. I understand that. 
But what about a policy where you said, if this standard is 
met, a family has applied in good faith for a modification, 
they are in negotiation of that modification, there is perhaps 
a 120-day limit or a 90-day window or something, can you not 
just say, listen, suspend the foreclosure notifications and 
that track. Tell the customer that for the next 90 days or the 
next 120 days while this gets worked out, we are setting that 
aside. Recognize, Mr. and Mrs. Customer, that if it does not 
get worked out, that we will have to restart the foreclosure 
track. But create a window in which the whole emphasis of the 
institution, of the servicer institution, is upon getting that 
modification in place and done. Is something like that workable 
that could be done as a policy?
    Mr. Bisenius. So let me suggest one thing. It is our policy 
that if we have begun some type of a modification, some type of 
a work-out strategy, then we will not initiate the foreclosure 
proceedings until we can work through that. So that is our 
policy. The difference that we have, though, is as the servicer 
has tried to contact the borrower and made good faith effort to 
contact the borrower and yet the delinquency has extended, at a 
point, we begin that foreclosure process. Oftentimes, that is 
the initiator that now gets the borrower to be able to make 
contact with the servicer and some type of work-out option gets 
started. At this point, we have not delayed that. It is 
something we can look at, but if we have begun the foreclosure 
process, we think it is important to continue that.
    Senator Merkley. Right. Well, I would love to continue this 
conversation because I think in some degrees we are passing 
each other, because we are really talking here--I think all the 
Members of this Committee have constituents who are in the 
modification process. We hear from them every single day, and 
yet they are getting those foreclosure notices. They are not 
folks who are ignoring your calls and not responding.
    Mr. Edwards?
    Mr. Edwards. Senator, you made a very key point in that the 
borrower/family is making a legitimate effort, but more 
importantly that the servicer is making a legitimate effort to 
effect the modification. And as I have said in my testimony, 
servicers are not staffed adequately. The issue is inadequate 
staffing, the reason for multiple phone calls, the reason that 
we all read and hear about. Why did I have to tell my story to 
different people over and over and over again?
    And you made another key point, the stress on the family. 
Our work, our focus groups have said that once you get past 
three or 4 months of delinquency, borrowers start to--families 
emotionally start to detach from the home and they are not 
coming back and they are not seeking a modification.
    We need to do everything we can to make sure the servicers 
follow up with their commitment to provide a single point of 
contact. Fannie's and Freddie's process is there is no 
foreclosure track during the first 90 days. There needs to be a 
legitimate effort by both the borrower and the servicer within 
those first 90 days. The servicers need to put forth a 
legitimate effort. They need more staffing. That will allow the 
system to run appropriately.
    Senator Merkley. Thank you very much for your testimony, 
and I encourage every possible effort to try to make this 
modification track work better because it is an abysmal failure 
in terms of national policy right now and our economy and our 
families are going to--are suffering and will continue to 
suffer if we do not figure out how to do it better. Thank you.
    Chairman Dodd. Let me pick up on Senator Merkley's line of 
questioning. I am just thinking out loud here with you, and I 
wanted to ask you about--I presume you have seen or heard some 
of the suggestions that were made by Sheila Bair and Dan 
Tarullo regarding standards and, well, you have obviously 
embraced the notion of a single point of contact and others. 
But let me state the conclusion, and you disagree with me. Do 
you agree--I presume you agree with these suggestions being 
made, or do you disagree with any of the suggestions being 
made?
    Mr. Edwards. Absolutely agree.
    Mr. Bisenius. I have not looked at as much detail to them. 
The point I would add to that one, Mr. Chairman, is Freddie Mac 
has very clear written standards on servicing. So it is not as 
though they are nebulous. They are very clear about----
    Chairman Dodd. Well, we are talking about national 
standards, in a sense. Mr. Deutsch?
    Mr. Deutsch. I would have to look at----
    Chairman Dodd. Well, let me know what you think. I would 
like to hear back because you represent an organization.
    Mr. Edwards. I think it is important to have two things. 
One is it is important to have national standards, but it is 
also important to have one regulatory agency that takes this on 
as its job with an eye to protecting consumers. And I think the 
new Bureau of Consumer Financial Protection, this should be its 
baby. It should say, we are taking over. We are going to write 
the regulations. We are going to make sure that there are 
standards, that standards are enforced, and that servicers who 
do not comply with the standards, who do not live up to the 
standards, will be sanctioned and might even lose their license 
to service. I mean, we have to get serious about that and that 
is the only way to do it.
    Chairman Dodd. It will be good for the investor and the 
borrower.
    Let me ask something, because Jeff Merkley has raised an 
interesting set of questions regarding the dual tracking. It 
seemed to me that one of the major problems we saw underlying 
the mortgage crisis that led to the near financial collapse in 
the country was a lack of underwriting standards that went on 
through the subprime lending. And maybe--I hope I am not naive 
about this. I presume at some point, and obviously facts and 
circumstances can change, that person has lost a job. The 
income is not there. It could also be they did not get a job in 
the middle of all of this. But in addition to hoping something 
can turn around or there is maybe a work-out at a level that 
would allow that family to meet that obligation and stay in 
that home. It is obviously important.
    Is there some capacity in all of this--because obviously, I 
think all of us agree, as well, look, if someone just is not 
going to be able to do this no matter how hard you try in all 
of this, it is better probably to move along because the other 
values of properties in that neighborhood suffer. All the other 
tangential problems that emerge get exacerbated by delaying, 
obviously, a situation. So striking that balance is not easy. 
None of us are suggesting you are going to find a perfect way 
to do this.
    But I wonder if there is any consideration of making a 
determination as to whether or not there is, in a number of 
these cases, just no likelihood, given the economic 
circumstances, beyond the capacity of that family to meet an 
obligation. Do you consider that?
    Mr. Edwards. First and foremost, for people who are 
unemployed----
    Chairman Dodd. Yes?
    Mr. Edwards.----our first offering is 6 months of 
forbearance. So we do not require any payments for that 6-month 
period and hope that the individual will get employed. To the 
extent they get employed, and in all likelihood it is going to 
be at less of an income that they had earlier, we will first 
run them through HAMP, evaluate the documentation, and then 
determine whether or not a HAMP modification or a Fannie Mae 
modification is feasible.
    Chairman Dodd. Yes. I presume you consider other sources of 
income that may be coming in--family support, others that could 
be supporting that conclusion, as well. So it is not just a 
question of a job, necessarily. Is that true, or am I--can a 
homebuyer provide evidence that they have other sources of 
support economically that will allow them to meet a modified--
--
    Mr. Edwards. Absolutely. Other sources of income would need 
to be documented----
    Chairman Dodd. Yes.
    Mr. Edwards.----and then we would set the modification 
appropriately. Let me leave it at that.
    Mr. Bisenius. All I would add to that is we encourage our 
servicers to actually reach out to the borrower just a few days 
after that first missed payment in order to begin to evaluate 
the financial circumstances that the borrower has.
    Chairman Dodd. So you encourage them to do it. But again, I 
come back to the first question I asked you. Why do you not 
demand it of them? They need you. They do not survive without 
you.
    Mr. Bisenius. It is in our servicer guidelines. It is in 
our servicing contract that they reach out to borrowers in 
those first few days after it. So it is demanded as part of our 
contract.
    Chairman Dodd. I would like to see it be tougher than that.
    Professor Eggert, I will give you the last word on this. 
Anything else you want to add to this conversation?
    Mr. Eggert. Well, I wanted to add something about the put-
back issue, if I could.
    Chairman Dodd. Yes.
    Mr. Eggert. And I worry that during the course of the day, 
the discussion of the put-backs has all been in terms of safety 
and soundness of the financial institutions that would have to 
repurchase it. I think it is important to recognize that put-
backs where there has been a breach of representations and 
warranties is an important market discipline for originators of 
loans. Lenders should not be selling loans and breaching their 
representations and warranties.
    Chairman Dodd. Yes.
    Mr. Eggert. And right now, what we are seeing is lenders 
fighting off put-backs, saying, oh, it is--you are just putting 
this back because the loan is in default, but we should not 
have to buy it back. You were a sophisticated investor. You 
knew what you were buying.
    But if you do not enforce representations and warranties, 
the market breaks down. I mean, that is an important part of 
market discipline. I think it is important that Fannie and 
Freddie enforce representations and warranties and put back all 
loans that are appropriate.
    Chairman Dodd. Yes.
    Mr. Eggert. As a taxpayer, I think that is important, and 
also for market discipline, it is a crucial thing.
    Chairman Dodd. Well, thank you. There are other questions I 
was going to----
    Mr. Edwards. Excuse me, Senator.
    Chairman Dodd. Yes?
    Mr. Edwards. Can I make one final point?
    Chairman Dodd. Certainly, you may. Yes.
    Mr. Edwards. I do not want to make any headlines here 
today, so earlier Professor Eggert indicated that Fannie Mae 
had fired servicers. When we moved this servicing, we actually 
got together and worked out an arrangement where the servicer 
agreed to move some of these loans to a place where we had 
better capacity. We did it in such a way that it was a win-win 
for Fannie Mae and the servicer and ultimately for the 
families.
    Chairman Dodd. Well, good. That is encouraging. More of 
that evidence would help us.
    And I am going to submit--there are a couple of other 
questions that I have, but we have kept everyone a long time 
here.
    Jeff, any additional comments you want to make at all, or--
--
    Senator Merkley. I will just close with this comment, and 
that is that the perspective presented by major banks before 
this Committee was that they are suspending the dual track for 
loans that they carry, but they are being forced by Fannie and 
Freddie not to suspend the dual track. You all have come and 
testified, oh, no, we create this window, this 90 days. There 
is either a serious misunderstanding or a serious discrepancy, 
but I would just urge you to try to find a path that is as 
supportive of the modification process as the major banks are 
for their own portfolio loans. Despite your attestations that 
you are doing it, something seems amiss and could be improved.
    Chairman Dodd. It might be, and Jeff, again, we tried this 
4 years ago, or 3 \1/2\ years ago, where we talked about it in 
this room, where we gathered together a lot of the mortgage 
lenders to talk about this very issue, and we had a set of 
principles that we adopted in this room that went nowhere, 
unfortunately, despite the commitments to the contrary. And it 
might not be a bad idea to gather, and you could raise this 
with Tim or others, as a way of gathering both these lending 
institutions, the servicers in a room like this and sit down 
and have that kind of conversation, what is going on, because 
that gap that we are getting--in these hearings, we have one 
panel and then another panel. Getting people together and find 
out where the gaps are here that we are hearing in the 
testimony might be very valuable. That is just a suggestion.
    I thank all of you. Thank you for being here. It is very 
gracious of you to participate in this. Obviously, this is a 
problem that is not going to be resolved in the short term, but 
one that we have got to get behind us for all the reasons that 
have been articulated today. So the Committee thanks you for 
your presence.
    The Committee will stand adjourned.
    [Whereupon, at 12:50 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Thank you, Mr. Chairman, for holding a second hearing on this very 
important topic.
    As I stated in my opening remarks at our last meeting, it is 
important to hear from our regulators.
    They are responsible for overseeing financial institutions, 
detecting these types of problems and formulating credible solutions.
    With that in mind, I look forward to hearing from them on when they 
first discovered these problems, how serious they believe they are, and 
how quickly they can be resolved.
    Additionally, I am interested in hearing from the members of the 
Financial Stability Oversight Council. I would like to know how they 
believe that body has performed and whether it has a role to play in 
addressing these issues.
    Thank you Mr. Chairman.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    Thank you for calling this hearing, Mr. Chairman. There have been 
many disturbing media reports about careless foreclosure practices. 
During our last hearing on this topic, the Attorney General from Iowa, 
Mr. Miller, stated that the regulators' review of documents couldn't 
have caught the robo-signing problems.
    However, I am interested in learning about the steps that have been 
taken to ensure that taxpayers and homeowners get a fair shake in this 
process. I was particularly disturbed by reports of homeowners who were 
in the process of a modification being foreclosed upon. The perception 
that the system is stacked against the individual will further erode 
confidence in our housing markets and delay stability not just for 
housing but potentially for the economy as a whole.
    I look forward to hearing from our witnesses about the steps they 
are taking to ensure that servicing, modification and foreclosure 
guidelines are being followed.
                                 ______
                                 
             PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA

    Thank you, Mr. Chairman. During our first hearing to examine 
shortcomings in the mortgage servicing industry, we heard directly from 
the servicers about the steps that they were taking to address recent 
servicing issues. It was helpful to hear our panel's recommendations to 
remedy the situation and provide long overdue relief to homeowners. I 
left concerned with the extent of the problem, but hopeful that the 
servicers would continue to work with Federal and State regulators 
toward a swift resolution.
    Unfortunately, in the short time between our last hearing and 
today, I continue to hear from homeowners in Hawaii that are facing 
foreclosure and having difficulty working with servicers. Borrowers are 
still faced with unresponsive and obstructive mortgage servicers, and 
they continue to receive conflicting and inaccurate information when 
they contact their lenders and servicers for information about loan 
modifications and other loss mitigation options.
    Borrowers rightly expect their mortgage lenders and servicers to 
work in good faith to help them keep their homes. Instead, servicers 
have flaunted their protocols and ignored contractual agreements in 
favor of foreclosures. It is our responsibility and that of our 
witnesses today to correct these problems in order to preserve 
homeownership and provide much needed relief to distressed borrowers.
    This begins with ensuring that servicers are properly adhering to 
modification, refinance, and foreclosure procedures. Borrowers should 
expect servicers to be accessible, cooperative, and helpful through 
loss mitigation and foreclosure. Mortgage modifications and refinances 
must be significant and meaningful so that homeowners do not re-default 
or find themselves delinquent again several months later. When 
foreclosure is unavoidable, it should proceed in accordance with the 
law in order to avoid documentation defects and proof of title 
uncertainties that have become too common.
    These failures among mortgage service providers also highlight the 
need for greater financial literacy in our country. A lack of financial 
literacy is problematic even before foreclosure. Many borrowers fell 
behind on their mortgage payments because they did not understand the 
terms and features of their loans and they failed to anticipate 
increases in their monthly payments. Others are facing foreclosure 
because they did not plan for unforeseen financial hardships and were 
unable to make their monthly payments when they lost their jobs. 
Homeowners that are delinquent on their mortgages are often unaware of 
the counseling and education resources that are available to assist 
them throughout the loss mitigation and foreclosure processes. Even 
after foreclosure, individuals need a better understanding of how to 
manage their other debt obligations, rebuild their credit once it has 
been damaged, and access alternative housing opportunities.
    Mortgage lenders and servicers must be held accountable for their 
poor business practices, but we should also provide individuals with 
the skills and tools they need to protect themselves. I worked to 
establish and secure funding for a pilot program that provides access 
to pre-homeownership counseling services for prospective homebuyers. 
The program is one example of what must be done to prepare individuals 
for the financial responsibilities that come with homeownership. We 
must continue to invest in financial education and counseling services 
that can develop individuals into more empowered and responsible 
consumers, borrowers, and homeowners.
    It is clear that more must be done to improve mortgage servicing 
practices and the effectiveness of Federal homeowner assistance 
initiatives. I thank the witnesses for joining us today and look 
forward to continuing to work together to improve homeowner protection 
and financial literacy. Thank, Mr. Chairman.
                                 ______
                                 
           PREPARED STATEMENT OF SENATOR KAY BAILEY HUTCHISON

    Thank you Chairman Dodd.
    As we continue to investigate allegations of fraud in the 
foreclosure process, we must remember that these issues are only a part 
of even greater problems with our nation's broader mortgage finance 
system. While today we consider mortgage servicing and compliance with 
foreclosures laws, we must not neglect the need to address and 
restructure our mortgage finance system that to date has cost taxpayers 
more than $150 billion.
    In October, Greg Abbott, the Attorney General of Texas, called on 
30 mortgage loan servicing companies in our State to halt new home 
foreclosures, sales of foreclosed homes, and evictions of people living 
in foreclosed homes. The purpose of this plea was to determine whether 
or not any mortgage loan company employees had participated in unlawful 
practices.
    The Attorney General's request was not made lightly. In fact, it 
was made after several national lenders, including Bank of America, JP 
Morgan Chase, and Ally Financial, halted foreclosures outside of Texas 
to determine whether their practices were sound. And Attorney General 
Abbott was not alone. Attorneys general and regulators in all 50 states 
have joined together to investigate home foreclosures procedures on 
allegations of fraudulent practices.
    As we have all come to learn, the issue at hand is "robosigning," a 
practice used by mortgage loan servicers to expedite foreclosure 
proceedings. Through this practice, employees signed and swore to 
thousands of loan documents and affidavits without so much as verifying 
the information in the document, or, in some cases, without reading the 
information.
    In any economic climate, allegations of foreclosure fraud should 
never be taken lightly. However, these allegations are magnified in our 
nation's ongoing economic downturn. From July 2007 to August 2009, 5.3 
million homeowners saw foreclosure proceeds begin, and 2.5 million of 
these homeowners ended up losing their homes. Over the past year, the 
rate of foreclosure has only accelerated, and we have seen predictions 
that the number of foreclosures across the country may reach 12 million 
before the economy recovers.
    In Texas, one in every 738 housing units is a foreclosure property, 
compared with 1 in every 389 nationally. While Texas has fared better 
than many other states, and the foreclosure and delinquency rates have 
respectively slowed across our State in recent months, there is nothing 
to celebrate. Many of our neighbors in Texas and across the country 
have already endured a foreclosure, and the threat of delinquency and 
foreclosure looms for many others.
    Addressing allegations of fraud in mortgage servicing is very 
important. It is my hope that this hearing will be enlightening and I 
welcome the testimony of these distinguished witnesses.
    However, Mr. Chairman, in addressing mortgage servicing, we must 
not lose sight of the larger elephant in the room: the need to reform 
our broader residential mortgage finance system. While we need to 
ensure that mortgage loan servicing companies are adhering to the law 
in the foreclosure process, we must address what led to the crisis in 
the first place.
    In the wake of this crisis, American taxpayers have poured more 
than $150 billion into Fannie Mae and Freddie Mac, the secondary 
mortgage giants who have traded their Government charter for Government 
control through Federal conservatorship. It is estimated that the total 
cost to taxpayers of this bailout for Fannie Mae and Freddie Mac may 
reach as high as $259 billion. When the bailout of Fannie Mae and 
Freddie Mac is combined with the $700 billion Troubled Asset Relief 
Program ultimately used to inject capital into banks weighed down by 
bad mortgages, and Federal stimulus and spending packages aimed at 
lifting the tattered economy brought down by the mortgage crisis, 
taxpayers have fronted trillions of dollars. Taxpayers have paid an 
even greater amount in lost jobs, lost homes, and lost savings.
    Despite the significant effects of the mortgage crisis, Congress 
has done nothing to address the mortgage finance system, except to 
throw Fannie Mae and Freddie Mac the lifeline of their bailout which we 
have seen grow to more than $150 billion and counting. Mr. Chairman, we 
must not wait any longer to investigate issues that have arisen as a 
result of the mortgage crisis. We must address the root causes of this 
crisis: Fannie Mae, Freddie Mac, and the rest of nation's flawed 
mortgage finance system.
                                 ______
                                 
                 PREPARED STATEMENT OF PHYLLIS CALDWELL
               Chief of Homeownership Preservation Office
                       Department of the Treasury
                            December 1, 2010

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to testify today regarding issues 
surrounding mortgage servicing. This testimony will cover two key 
areas: first, the steps we are taking to ensure that servicers 
participating in the Making Home Affordable (MHA) program are adhering 
to program guidelines in light of the recent foreclosure issues, and 
second, the accomplishments of MHA to date and its impact on mortgage 
servicing.
    The reports of ``robo-signing'', faulty documentation and other 
improper foreclosure practices by mortgage servicers are unacceptable. 
If servicers have failed to comply with the law, they should be held 
accountable. The Administration is leading a coordinated interagency 
effort to investigate misconduct, protect homeowners and mitigate any 
long-term effects on the housing market. While Treasury does not have 
the authority to regulate the foreclosure practices of financial 
institutions, nor to ensure that those practices conform to the law, it 
is working closely with agencies that do have such authority.
    The Financial Fraud Enforcement Task Force, a broad coalition of 
law enforcement, investigatory, and regulatory agencies that brings 
together more than 20 Federal agencies, 94 U.S. Attorneys Offices, and 
dozens of State and local partners, is working to ensure that 
foreclosure practices are thoroughly investigated and any criminal 
behavior is prosecuted. The Federal Housing Administration (FHA) has 
been reviewing servicers of loans it insures for compliance with loss 
mitigation requirements. Additionally, the Office of the Comptroller of 
the Currency has directed all large national bank servicers to review 
their foreclosure management processes--including file reviews, 
affidavit processing, and signatures--to ensure that the processes are 
fully compliant with all applicable State laws. The other independent 
banking regulatory agencies are doing similar reviews of institutions 
under their jurisdiction. Attached to my testimony is a fact sheet 
providing more detail concerning the activities of the coordinated 
interagency effort.
    Because MHA and its first lien program, the Home Affordable 
Modification Program (HAMP), are pre-foreclosure programs, the recent 
reports of robo-signing of affidavits and improper foreclosure 
documentation do not directly affect the implementation of HAMP. But 
these documentation failures reflect the fact that servicers did not 
have the proper resources in place, nor did they have procedures and 
controls in place to prevent this crisis. As we have learned in 
implementing HAMP, servicers were historically structured and staffed 
to perform a limited role-primarily collecting payments. They did not 
have the systems, staffing, operational capacity or incentives to 
engage with homeowners on a large scale and offer meaningful relief 
from unaffordable mortgages.
    The foreclosure problems underscore the continued critical 
importance of the Making Home Affordable Program launched by the Obama 
administration. Preventing avoidable foreclosures through modifications 
and other alternatives to foreclosure continues to be a critical 
national priority. Foreclosure is painful for homeowners; it is also 
costly to servicers and investors. Foreclosures dislocate families, 
disrupt the communities, and destabilize local housing markets. For 
this reason, the Obama administration launched the Making Home 
Affordable program in the spring of 2009, of which HAMP is a key 
component. HAMP is intended to prevent avoidable foreclosures by 
providing financial incentives to servicers, investors and borrowers to 
voluntarily undertake modifications of mortgages for responsible 
homeowners in a way that is affordable and sustainable over time. In 
cases where a modification is not possible, the participating servicers 
must consider other alternatives to foreclosure. As a result, 
throughout the last 20 months, we have worked to develop systems and 
procedures to ensure that responsible homeowners are offered meaningful 
modifications and other foreclosure alternatives. To remedy servicer 
shortcomings, we have urged servicers to rapidly increase staffing and 
improve customer service. We have developed specific guidelines and 
certifications on how and when borrowers must be evaluated for HAMP and 
other loss mitigation options prior to foreclosure initiation. We have 
also continued our compliance efforts to ensure borrowers are fairly 
evaluated and that servicers conduct their operations in accordance 
with Treasury guidelines. MHA has strong compliance mechanisms in place 
to ensure that servicers follow our program's guidelines.
HAMP Procedural Safeguards and Compliance Efforts
    Treasury has built numerous procedural safeguards in HAMP to avoid 
foreclosure sales. Specifically, program guidelines require 
participating mortgage servicers of non-GSE loans to:

    Evaluate homeowners for HAMP modifications before referring 
        them for foreclosure. The focus here is on early intervention. 
        Servicers must reach out to all potentially eligible borrowers 
        when they are only 2 months delinquent and there is a still a 
        viable opportunity to save the loan;

    Suspend any foreclosure proceedings against homeowners who 
        have applied for HAMP modifications, while their applications 
        are pending;

    Evaluate whether homeowners who do not qualify for HAMP (or 
        who have fallen out of HAMP) qualify for alternative loss 
        mitigation programs or private modification programs;

    Evaluate whether homeowners who cannot obtain alternative 
        modifications may qualify for a short sale or deed-in-lieu of 
        foreclosure; and

    Provide a written explanation to any borrower who is not 
        eligible for modification and delay foreclosure for at least 30 
        days to give the homeowner time to appeal.

    Servicers may not proceed to foreclosure sale unless and until they 
have tried these alternatives. They must also first issue a written 
certification to their foreclosure attorney or trustee stating that 
``all available loss mitigation alternatives have been exhausted and a 
non-foreclosure option could not be reached.'' On October 6, Treasury 
clearly reminded servicers of non-GSE loans of this existing 
requirement that they are prohibited from conducting foreclosure sales 
until these pre-foreclosure certifications are executed. It should be 
noted that the GSEs have similar guidelines for their HAMP 
modifications.
    The MHA compliance program is designed to ensure that servicers are 
meeting their obligations under the MHA servicer contracts for loans 
where Fannie Mae or Freddie Mac is not the investor, and uses a variety 
of compliance activities to assess servicers from different 
perspectives. Treasury has engaged a separate division of Freddie Mac, 
Making Home Affordable--Compliance (MHA-C), to perform these compliance 
activities. Employing a risk-based approach, compliance activities are 
performed ranging generally monthly for servicers with the largest 
percentages of potentially eligible borrowers, to at least twice 
annually for the smaller-sized servicers.
    Our compliance activities focus on ensuring that homeowners are 
appropriately treated in accordance with MHA guidelines. As the program 
has evolved, servicers have adapted their processes to incorporate MHA 
programs. Treasury has implemented non-financial remedies that have 
shaped servicer behavior in order to address the most vital issue: the 
ultimate impact on the homeowner.
    As information regarding irregularities in servicer foreclosure 
practices arose, Treasury acted swiftly and instructed MHA-C to review 
the ten largest servicers' internal policies and procedures for 
completing these pre-foreclosure certifications before initiating the 
foreclosure proceedings, and to assess a limited sample of foreclosure 
sales that have occurred since the effective date of the guidance. The 
results of the review are not yet available. However, if MHA-C 
identifies any incidents of non-compliance with HAMP guidelines, 
Treasury will direct servicers to take appropriate corrective action, 
which may include suspending foreclosure proceedings and re-evaluating 
the affected homeowners for HAMP, as well as undertaking changes to 
servicing processes to help ensure that HAMP guidelines are followed 
prior to initiating the foreclosure process.
HAMP's Accomplishments and Its Impact on the Mortgage Industry
    To date, HAMP has achieved three critical goals: it has provided 
immediate relief to many struggling homeowners; it has used taxpayer 
resources efficiently; and it has helped transform the way the entire 
mortgage servicing industry operates. Twenty months into the program, 
close to 1.4 million homeowners have entered into HAMP trials and 
experienced temporary reductions in their mortgage payments. Of these, 
almost 520,000 homeowners converted to permanent modifications. These 
homeowners are experiencing a 36 percent median reduction in their 
mortgage payments-averaging more than $500 per month-amounting to a 
total, program-wide savings of nearly $3.7 billion annually for 
homeowners.
    Early indications suggest that the re-default rate for permanent 
HAMP modifications is significantly lower than for historical private-
sector modifications--a result of the program's focus on properly 
aligning incentives and achieving greater affordability. For HAMP 
modifications made in the fourth quarter of 2009, at 6 months, fewer 
than 10 percent of permanent modifications are 60+ days delinquent. 
According to the OCC's Mortgage Metrics Report, the comparable 
delinquency rates for non-HAMP modifications made in the same quarter 
were 22.4 percent. Regarding HAMP re-defaults, the OCC states, ``These 
lower early post-modification delinquency rates may reflect HAMP's 
emphasis on the affordability of monthly payments and the requirements 
to verify income and complete a successful trial period.''
    Borrowers who do not ultimately qualify for HAMP modifications 
often receive alternative forms of assistance. Based on survey data 
from the eight largest servicers, approximately one-half of homeowners 
who apply for HAMP modifications but do not qualify have received some 
form of private-sector modification. Less than 10 percent have lost 
their homes through foreclosure sales.
    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 borrowers who are committed to 
staying in their homes and making monthly payments, and the investor 
retains the risk of the borrower re-defaulting into foreclosure. No 
taxpayer funds are paid to a servicer or an investor until a borrower 
has made three modified mortgage payments on time and in full. The 
majority of payments are made over a 3- to 5-year period only if the 
borrower continues to fulfill this responsibility. These safeguards 
ensure that spending is limited to high-quality modifications.
MHA Has Been a Catalyst_Setting the Benchmark for Sustainable
        Modifications
    MHA has transformed the way the mortgage servicing industry deals 
with alternatives to foreclosure. Because of MHA, servicers have 
developed constructive private-sector options. Where there was once no 
consensus plan among loan servicers about how to respond to borrowers 
in need of assistance, HAMP established a universal affordability 
standard: a 31 percent debt-to-income ratio, which dramatically 
enhanced servicers' ability to reduce mortgage payments to sustainable 
levels while simultaneously providing the necessary justification to 
investors for the size and type of modification.
    In the year following initiation of HAMP, home retention strategies 
changed dramatically. According to the OCC/ OTS Mortgage Metrics 
Report, in the first quarter of 2009, nearly half of mortgage 
modifications increased borrowers' monthly payments or left their 
payments unchanged. By the second quarter of 2010, 90 percent of 
mortgage modifications lowered payments for the borrower. This change 
means borrowers are receiving better solutions. Modifications with 
payment reductions perform materially better than modifications that 
increase payments or leave them unchanged.
    Moreover, even holding the percentage payment reduction constant, 
the quality of modifications made by servicers appears to have improved 
since 2008. For modifications made in 2008, 15.8 percent of 
modifications that received a 20 percent payment reduction were 60 days 
or more delinquent 3 months into the modification. For modifications 
made in 2010, that delinquency rate has fallen almost in half, to 8.2 
percent. The OCC's Mortgage Metrics Report from 2010:Q2 attributes the 
improvement in mortgage performance to ``servicer emphasis on repayment 
sustainability and the borrower's ability to repay the debt.''
     Spurred by the catalyst of the HAMP program, the number of 
modification arrangements was nearly three times greater than the 
number of foreclosure completions between April 2009 and August 2010. 
More than 3.7 million modification arrangements were started, including 
the close to 1.4 million trial HAMP modification starts, more than 
568,000 FHA loss mitigation and early delinquency interventions, and 
more than 1.6 million proprietary modifications by servicing members of 
the HOPE NOW Alliance.
    Further, it is important to keep in mind that MHA is only one of 
many Administration housing efforts targeting these challenges: the 
Administration has also provided substantial support for the housing 
markets through support for Fannie Mae and Freddie Mac to help keep 
mortgage rates affordable; purchase of agency mortgage-backed 
securities; and an initiative to provide support and financing to State 
and local Housing Finance Agencies (HFAs). These HFAs provide, in turn, 
tens of thousands of affordable mortgages to first time homebuyers and 
help develop tens of thousands of affordable rental units for working 
families.
Responding to a Changing Housing Crisis
    MHA was designed to be a versatile program. MHA includes a second 
lien modification program, a foreclosure alternatives program that 
promotes short sales and deeds-in-lieu of foreclosures, and an 
unemployment forbearance program. Treasury expanded HAMP to include FHA 
and Rural Development mortgage loans through the FHA-HAMP and RD-HAMP 
program, and also introduced a principal reduction option. Finally, 
Treasury introduced a program to allow the hardest-hit states to tailor 
housing assistance to their areas, and worked with FHA to introduce an 
option for homeowners with high negative equity to refinance into a new 
FHA loan if their lender agrees to reduce principal on the original 
loan by at least 10 percent.
Second Lien Modification Program
    The Second Lien Modification Program (referred to as 2MP) requires 
that when a borrower's first lien is modified under HAMP and the 
servicer of the second lien is a 2MP participant, that servicer must 
offer to modify the borrower's second lien according to a defined 
protocol. 2MP provides for a lump sum payment from Treasury in exchange 
for full extinguishment of the second lien, or a reduced lump sum 
payment from Treasury in exchange for a partial extinguishment and 
modification of the borrower's remaining second lien. Although 2MP was 
initially met with reluctance from servicers and investors who did not 
want to recognize losses on their second lien portfolios, as of October 
3, 2010, Treasury has signed up seventeen 2MP servicers, which includes 
the four largest mortgage servicers, who in aggregate service 
approximately 60 percent of outstanding second liens. The program uses 
a third-party data base to match second lien loans with first lien 
loans permanently modified under HAMP. Servicers are required to modify 
second lien loans within 120 days from the date the servicer receives 
the first lien and second lien matching information. The implementation 
of this data base began over the summer. Five 2MP Servicers have 
already begun matching modified first liens with their corresponding 
second liens, while the other twelve are in some phase of developing 
systems capacity to do so. Information on the second lien program will 
be included in upcoming Monthly Servicer Performance Reports as data 
becomes available.
Home Affordable Foreclosure Alternatives Program
    Any modification program seeking to avoid preventable foreclosures 
has limits, HAMP included. HAMP does not, nor was it ever intended to, 
address every delinquent loan. Borrowers who do not qualify for HAMP 
may benefit from an alternative program that helps the borrower 
transition to more affordable housing and avoid the substantial costs 
of a foreclosure. Under HAFA, Treasury provides incentives for short 
sales and deeds-in-lieu of foreclosure for circumstances in which 
borrowers are unable to complete the HAMP modification process or 
decline a HAMP modification. Borrowers are eligible for a relocation 
assistance payment, and servicers receive an incentive for completing a 
short sale or deed-in-lieu of foreclosure. In addition, investors are 
paid additional incentives for allowing some short sale proceeds to be 
distributed to subordinate lien holders. The Home Affordable 
Foreclosure Alternatives (HAFA) Program became effective on April 5, 
2010.
Unemployment Program
    In March 2010, the Obama administration announced enhancements to 
HAMP aimed at unemployment problems by requiring servicers to provide 
temporary mortgage assistance to many unemployed homeowners. The 
Unemployment Program (UP) requires servicers to grant qualified 
unemployed borrowers a forbearance period during which their mortgage 
payments are temporarily reduced for a minimum of 3 months, and up to 6 
months for some borrowers, while they look for a new job. Servicers are 
prohibited from initiating a foreclosure action or conducting a 
foreclosure sale (a) while the borrower is being evaluated for UP, (b) 
after a foreclosure plan notice is mailed, (c) during the UP 
forbearance or extension, or (d) while the borrower is being evaluated 
for or participating in HAMP or HAFA following the UP forbearance 
period. UP went in to effect August 1, 2010. Because no incentives are 
paid under UP, data reports will be based on servicer surveys.
Principal Reduction Alternative
    The Administration announced further enhancements to HAMP in March 
2010 by encouraging servicers to write down mortgage debt as part of a 
HAMP modification (the Principal Reduction Alternative, or PRA). Under 
PRA, servicers are required to evaluate the benefit of principal 
reduction and are encouraged to offer principal reduction whenever the 
net present value (NPV) result of a HAMP modification using PRA is 
greater than the NPV result without considering principal reduction. 
The principal reduction and the incentives based on the dollar value of 
the principal reduced will be earned by the borrower and investor based 
on a pay-for-success structure. Under the contract with each servicer, 
Treasury cannot compel a servicer to select PRA over the standard HAMP 
modification even if the NPV of PRA is greater than the NPV of regular 
HAMP. However, Treasury has required servicers to have written policies 
for PRA to help ensure that similarly situated borrowers are treated 
consistently. The program became operational October 1, 2010 and the 
four largest servicers have indicated an intention to offer PRA to 
homeowners.
FHA Refinance
     Also in March 2010, the Administration announced adjustments to 
existing FHA refinance programs that permit lenders to provide 
additional refinancing options to homeowners who owe more than their 
homes are worth because of large declines in home prices in their local 
markets. This program, known as the FHA Short Refinance option, will 
provide more opportunities for qualifying mortgage loans to be 
restructured and refinanced into FHA-insured loans.
    In order to qualify for this program, a homeowner must be current 
on their existing first lien mortgage; the homeowner must occupy the 
home as a primary residence and have a qualifying credit score; the 
mortgage owner must reduce the amount owed on the original loan by at 
least 10 percent; the new FHA loan must have a balance of no more than 
97.75 percent of the current value of the home; and total mortgage debt 
for the borrower after the refinancing, including both the first lien 
mortgage and any other junior liens, cannot be greater than 115 percent 
of the current value of the home--giving homeowners a path to regain 
equity in their homes and affordable monthly payments. Program guidance 
was issued to participating FHA servicers in September 2010.
HFA Hardest-Hit Fund
    On February 19, 2010, the Administration announced the Housing 
Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA 
Hardest-Hit Fund) for State HFAs in the nation's hardest-hit housing 
markets to design innovative, locally targeted foreclosure prevention 
programs. In total, $7.6 billion has been allocated to 18 states 
(Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, 
Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, 
Ohio, Oregon, Rhode Island, South Carolina, and Tennessee) and the 
District of Columbia under the HFA Hardest-Hit Fund. As of November 1, 
2010, four states were either accepting applications or providing 
assistance (Arizona, Michigan, Ohio and Rhode Island). By the end of 
2010 another three states are expected to begin providing assistance. 
The remaining states are expected to begin providing assistance in the 
first half of 2011.
    Allocations under the HFA Hardest-Hit Fund were made using several 
different metrics. Some of the funds were allocated to states that have 
suffered average home price drops of more than 20 percent from their 
peak, while other funds were allocated to states with the highest 
concentration of their populations living in counties with unemployment 
rates greater than 12 percent or unemployment rates that were at or 
above the national average. In addition, some funds were allocated to 
all the states and jurisdictions already participating in the HFA 
Hardest-Hit Fund to expand the reach of their programs to help more 
struggling homeowners. The applicable HFAs designed the State programs 
themselves, tailoring the housing assistance to their local needs. A 
minimum of $2 billion of the funding is required to be used by states 
for targeted unemployment or under-employment programs that provide 
temporary assistance to eligible homeowners to help them pay their 
mortgages while they seek re-employment or additional employment or 
undertake job training. Treasury also required that all of the programs 
comply with the requirements of EESA, which include that they must be 
designed to prevent avoidable foreclosures. All of the funded program 
designs are posted online at http://www.FinancialStability.gov/
roadtostability/hardesthitfund.html.
Transparency, Accountability, and Compliance
    I would like to provide you with further detail regarding the 
compliance efforts regarding HAMP. To protect taxpayers and ensure that 
TARP dollars are directed toward promoting financial stability, 
Treasury established rigorous transparency and accountability measures 
for all of its programs, including all housing programs. In addition, 
every borrower is entitled to a clear explanation if he or she is 
determined to be ineligible for a HAMP modification. Treasury requires 
servicers to report the reason for modification denials in the HAMP 
system of record. MHA-C's compliance activities, through Second Look 
loan file reviews and other onsite assessments, evaluate the 
appropriateness of the denials as well as the timeliness and accuracy 
of the denial notification to the affected borrowers.
    In order to improve transparency of the HAMP NPV model, which is a 
key component of the eligibility test for HAMP, Treasury increased 
public access to the NPV white paper, which explains the methodology 
used in the NPV model. To ensure accuracy and reliability, MHA-C 
conducts periodic audits of servicers' NPV practices. MHA-C conducts 
two types of reviews related to NPV. For those servicers that have re-
coded the requirements of the NPV model in their processing systems, 
MHA-C conducts onsite and offsite reviews of model accuracy, model 
management, and data integrity and inputs. For those servicers using 
the MHA Servicer Portal, MHA-C conducts reviews of data integrity and 
inputs. Where non-compliance is found, Treasury requires servicers to 
take remedial actions, which can include re-evaluating borrowers with 
appropriate inputs, process changes, corrections to recoded NPV 
implementations, and, for servicers who have re-coded the NPV model, 
reverting back to the MHA Servicer Portal for loans with negative NPV 
results from the servicers' re-coded NPV model until necessary 
corrections have been re-evaluated by MHA-C. In addition, as required 
by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Treasury is preparing to establish a Web portal that borrowers can 
access to run a NPV analysis using input data regarding their own 
mortgages, and to provide to borrowers who are turned down for a HAMP 
modification the input data used in evaluating the application.
    As stated above, servicers are subject to various other compliance 
activities, including periodic, onsite compliance reviews as well as 
onsite and offsite loan file reviews. These various compliance 
activities performed by MHA-C assess servicers' compliance with HAMP 
requirements. Treasury works closely with MHA-C to adapt and execute 
our risk based compliance activities quickly based on changes in the 
program as well as observed trends. The current assessment of the top 
ten servicers' adherence to our pre-foreclosure certifications and 
requirements is one example of how we adapt our compliance activities. 
MHA-C provides Treasury with the results from each of the various 
compliance activities conducted. Treasury performs quality reviews of 
these activities and evaluates the nature and scope of any instances of 
non-compliance, and assesses appropriate responses, including remedies, 
in a consistent manner. As stated earlier, during the beginning of the 
program, and as additional features (e.g., the Second Lien Program) are 
introduced, Treasury's compliance activities and associated remedies 
focus on shaping servicers' behavior and improving processes as 
servicers ramp up or modify their implementation of HAMP. As the 
program and servicers' processes mature, financial remedies may become 
more appropriate and effective in reinforcing Treasury's compliance and 
performance expectations.
Looking Ahead for Housing
    Servicers need to increase efforts in helping borrowers avoid 
foreclosure through modification, as well as other alternatives to 
foreclosure, such as short sales. Furthermore, as we have learned 
through HAMP, servicers must be held accountable for ensuring that 
their foreclosure processes have integrity and are used after all loss 
mitigation options have been exhausted. Treasury's main priority is to 
ensure that first, participating servicers are doing everything that 
they can to reach, evaluate, and start borrowers into HAMP 
modifications, second, if a HAMP modification is not possible, every 
servicer is properly evaluating each homeowner for all other potential 
options to prevent a foreclosure, including HAFA or one of their own 
modification programs, and third, servicers are utilizing programs such 
as UP or the HFA Hardest-Hit Fund to their fullest ability in order to 
prevent avoidable foreclosures.
    Over the past 20 months, we have been actively engaged with 
stakeholders from across the housing sector to find ways to increase 
the pace of new HAMP modifications, improve the characteristics of 
those modifications, and improve the borrower experience. We sincerely 
appreciate the assistance that we have gotten from Members of Congress 
and the advocacy community in strengthening borrower protections, 
incentivizing principal reduction, and assisting the unemployed. And 
most importantly, we value the efforts that Members of Congress, 
counselors and advocates have made in holding servicers accountable.
    Yet, as we deploy a comprehensive suite of loss mitigation options, 
we must remember, as the President noted, not every foreclosure can be 
prevented. Any broad-based solution must aim at achieving both an 
efficient and equitable allocation of resources. This means a balance 
must be struck between affording homeowners opportunities to avoid 
foreclosure while expeditiously easing the transition in those cases 
where homeownership is not an economically sustainable alternative. 
This is especially important in order to lay the foundation for future 
appreciation which will provide a meaningful path to sustainable 
homeownership.
    In the coming months, we will begin to see the impacts of the newly 
launched MHA programs. These programs will reach more distressed 
homeowners and provide additional stability to the housing market going 
forward. In much the same way that HAMP's first lien modification 
program has provided a national blueprint for mortgage modifications, 
these new programs will continue to shape the mortgage servicing 
industry and act as a catalyst for industry standardization of short 
sale, refinance and principal reduction programs. The interplay of all 
these programs will provide a much more flexible response to changes in 
the housing market over the next 2 years.







                                 ______
                                 
                 PREPARED STATEMENT OF SHEILA C. BAIR.
            Chairman, Federal Deposit Insurance Corporation
                            December 1, 2010

    Chairman Dodd, Ranking Member Shelby and Members of the Committee, 
thank you for requesting the views of the Federal Deposit Insurance 
Corporation on deficiencies in mortgage servicing and their broader 
potential impact on the financial system. It is unfortunate that 
problems in mortgage servicing and foreclosure prevention continue to 
require the scrutiny of this Committee. While ``robo-signing'' is the 
latest issue, this problem is symptomatic of persistent shortcomings in 
the foreclosure prevention efforts of our nation's largest mortgage 
servicers. As such, I believe that major changes are required to 
stabilize our housing markets and prevent unnecessary foreclosures.
    The FDIC continues to review the mortgage servicing operations at 
banks we supervise and also those institutions that have purchased 
failed-bank loans under loss share agreements with the FDIC. To date, 
our review has revealed no evidence that FDIC-supervised State-
chartered banks directly engage in robo-signing, and it also appears 
that they have limited indirect exposure through third-party 
relationships with servicers that have engaged in this practice. 
However, we remain concerned about the ramifications of deficiencies in 
foreclosure documentation among the largest servicers, most of which we 
insure. We will continue to work with the primary supervisors of these 
servicers through our backup examination authority. In addition, we are 
coordinating our work with the State Attorneys General (AG) and the 
Financial Fraud Enforcement Task Force--a broad coalition of Federal, 
State, and local law enforcement, regulatory, and investigatory 
agencies led by the Department of Justice--to support efforts for broad 
based and consistent resolution of servicing issues.
    The robo-signing and foreclosure documentation issues are the 
natural result of the misaligned incentives that pervade the entire 
mortgage process. For instance, the traditional, fixed level of 
compensation for loan servicing has been wholly inadequate to cover the 
expenses required to implement high-touch and specialized servicing on 
the scale needed in recent years. Misaligned incentives have led to 
significant underinvestment in the systems, processes, training, and 
staffing necessary to effectively implement foreclosure prevention 
programs. Similarly, many servicers have failed to update their 
foreclosure process to reflect the increased demand and need for loan 
modifications. As a result, some homeowners have received conflicting 
messages from their servicers and have missed opportunities to avoid 
foreclosure. The failure to effectively implement loan modification 
programs can not only harm individual homeowners, but the resulting 
unnecessary foreclosures put downward pressure on home prices.
    As serious as these issues are, a complete foreclosure moratorium 
is ill-advised, as it would unduly prolong those foreclosures that are 
necessary and justified, and would slow the recovery of housing 
markets. The regrettable truth is that many of the properties currently 
in the foreclosure process are either vacant or occupied by borrowers 
who simply cannot make even a significantly reduced payment and have 
been in arrears for an extended time.
    My hope is that the newly established Financial Stability Oversight 
Council (FSOC) will take the lead in addressing the latest issues of 
foreclosure documentation deficiencies and proposing a sensible and 
broad-based approach to reforming mortgage servicer processes, 
promoting sustainable loan modifications and restoring legal certainty 
to the foreclosure process where it is appropriate and necessary.
    In my testimony, I will begin with some background on the robo-
signing and related foreclosure documentation problems and connect 
theses issues to other deficiencies in the mortgage servicing process. 
Second, I will discuss the FDIC's efforts to address identified 
servicing problems within our limited jurisdiction. Finally, I will 
discuss the central role that I believe the FSOC can play in 
facilitating broad agreements among major stakeholder groups that can 
help resolve some of these issues.
I. Robo-Signing and Foreclosure Documentation Problems and Shortfalls 
        in Mortgage Servicing
    The FDIC is concerned about two related, but separate, problems 
relating to foreclosure documentation. The first is referred to as 
``robo-signing,'' or the use of highly automated processes by some 
large servicers to generate affidavits in the foreclosure process 
without the affiant having reviewed facts contained in the affidavit or 
having the affiant's signature witnessed in accordance with State laws. 
Recent depositions of individuals involved in robo-signing have led to 
allegations of fraud based on contentions that these individuals signed 
thousands of documents without knowledge or verification of the 
information contained in the filed affidavits.
    The second problem involves demonstrating the chain of title 
required to foreclose. Some servicers have not been able to establish 
their legal standing to foreclose because, under current industry 
practices, they may not be in possession of the necessary documentation 
required under State law. In many cases, a servicer is acting on behalf 
of a trustee of a pool of mortgages that have been securitized and sold 
to investors in a mortgage-backed securities (MBS) transaction. In MBS 
transactions, the promissory note and mortgage signed by the borrowers 
are held by a custodian on behalf of the securitization investors.
    In many cases today, however, the mortgage held by the custodian 
indicates that legal title to the mortgage has been assigned from the 
original lender to the Mortgage Electronic Registration System (MERS), 
a system encompassing some 31 million active mortgage loans that was 
designed to facilitate the transfer of mortgage claims in the 
securitization process. Securitization often led to multiple transfers 
of the mortgage through MERS. Many of the issues raised about the 
authority of servicers to foreclose are a product of potential defects 
in these transfers and the requirements for proof of the servicer's 
authority. Where MERS is involved, foreclosures have been initiated 
either by MERS, as the legal holder of the lien, or by the servicer. In 
both cases, the foreclosing party must show that it has possession of 
the note and that its right to foreclose on the mortgage complies with 
State law.
    Robo-signing and chain of title issues may create contingent 
liabilities for mortgage servicers. Investors who contend that 
servicers have not fulfilled their servicing responsibilities under the 
pooling and servicing agreements (PSAs) argue that they have grounds to 
reassign servicing rights. In addition, concerns have been raised by 
investors as to whether the transfer of loan documentation in some 
private MBS securitization trusts fully conform to the requirements 
established under applicable trust law and the PSAs governing these 
transactions. While the legal challenges under the representations and 
warranties trust requirements remain in their early stages, they could, 
if successful, result in the ``putback'' of large volumes of defaulted 
mortgages from securitization trusts to the originating institutions. 
The FDIC has been working with the FRB and the Comptroller of the 
Currency (OCC), in our backup capacity, to gather information from the 
large servicers to evaluate the potential financial impact of these 
adverse outcomes.
Long-Standing Weaknesses in Third-Party Mortgage Servicing
    The weaknesses that have been identified in mortgage servicing 
practices during the mortgage crisis are a byproduct of both rapid 
growth in the number of problem loans and a compensation structure that 
is not well designed to deal with these loans. As recently as 2005, 
when average U.S. homes prices were still rising rapidly, fewer than 
800,000 mortgage loans entered foreclosure on an annual basis.\1\ By 
2009, the annual total had more than tripled to over 2.8 million, and 
foreclosures through the first three quarters of 2010 are running at an 
annualized pace of more than 2.5 million. Moreover, the proportion of 
foreclosure proceedings actually resulting in the repossession and sale 
of collateral appears to have increased even more rapidly over this 
period in some of the hardest-hit markets. Data published by the 
Federal Housing Finance Agency show that the percent of total homes 
sales in California resulting from foreclosure-related distressed sales 
increased more than eight-fold, to over 40 percent of all sales, 
between 2006 and 2008.\2\
---------------------------------------------------------------------------
    \1\ FDIC estimate based on data from the Mortgage Bankers 
Association data and the American Housing Survey.
    \2\ ``The Impact of Distressed Sales on Repeat-Transactions House 
Price Indexes,'' FHFA, May 27, 2009, http://www.fhfa.gov/webfiles/2916/
researchpaper_distress%5B1%5D.pdf.
---------------------------------------------------------------------------
    The share of U.S. mortgage loans held or securitized by the 
Government-sponsored enterprises (GSEs) and private issuers of asset-
backed securities has doubled over the past 25 years to represent fully 
two-thirds of the value of all mortgages currently outstanding.\3\ One 
effect of this growth in securitization has been parallel growth in 
third-party mortgage servicing under PSA agreements. By definition, a 
large proportion of the mortgages sold or securitized end up serviced 
under PSAs.
---------------------------------------------------------------------------
    \3\ Source: Federal Reserve Board, Flow of Funds, Table L.218.
---------------------------------------------------------------------------
    The traditional structure of third-party mortgage servicing fees, 
put in place well before this crisis, has created perverse incentives 
to automate critical servicing activities and cut costs at the expense 
of the accuracy, reliability and currency of loan documents and 
information. Prior to the 1980s, the typical GSE mortgage pool paid a 
servicing fee of 37.5 basis points annually, or .375 percent of the 
outstanding principal balance of the mortgage pool. Since the 1980s, 
the typical servicing fee for prime loans has been 25 basis points. 
When Alt-A and subprime mortgages began to be securitized by private 
issuers in the late 1990s, the standard servicing fees for those loans 
were set higher, typically at 37.5 basis points for Alt-A loans and 50 
basis points for subprime loans. While this fee structure provided a 
steady profit stream for servicers when the number of defaulted loans 
remained low, costs rose dramatically with the rise in mortgage 
defaults in the latter half of the last decade. As a result, some 
mortgage servicers began running operating losses on their servicing 
portfolios. One result of a compensation structure that did not account 
for the rise in problem loans was a built-in financial incentive to 
minimize the investment in back office processes necessary to support 
both foreclosure and modification. The other result was consolidation 
in the servicing industry. The market share of the top 5 mortgage 
servicers has nearly doubled since 2000, from 32 percent to almost 60 
percent.\4\ The purpose and effect of consolidation is to cut costs and 
achieve economies of scale, but also to increase automation.
---------------------------------------------------------------------------
    \4\ Source: Inside Mortgage Finance.
---------------------------------------------------------------------------
    Most PSAs allow for both foreclosure and modification as a remedy 
to default. But servicers have continuously been behind the curve in 
pursuing modification as an alternative to foreclosure. A survey of 13 
mortgage servicers conducted by the State Foreclosure Prevention 
Working Group shows that the annual percent of all past due mortgages 
that are being modified has risen from just over 2 percent in late 2007 
to a level just under 10 percent as of late 2009.\5\ At the same time, 
the percentage of past due loans entering foreclosure each year has 
also steadily risen over this same time period, from 21 percent to 32 
percent.
---------------------------------------------------------------------------
    \5\ Analysis of Mortgage Servicing Performance,'' Data Report No. 
4, January 2010, State Foreclosure Prevention Working Group, http://
www.ohioattorneygeneral.gov/ForeclosureReport
Jan2010.
---------------------------------------------------------------------------
    One example of the lack of focus on loss mitigation strategies is 
the uncoordinated manner in which many servicers have pursued 
modification and foreclosure at the same time. Under such a ``dual-
track'' process, borrowers may be attempting to file the documentation 
needed to establish their qualifications for modification and waiting 
for a favorable response from the servicer, even while that servicer is 
at the same time executing the paperwork necessary to foreclose on the 
property. While in some cases it may be reasonable to begin conducting 
preliminary filings for seriously past due loans in states with long 
foreclosure timelines, it is vitally important that the modification 
process be brought to conclusion before a foreclosure sale is 
scheduled. Failure to coordinate the foreclosure process with the 
modification process risks confusing and frustrating homeowners and 
could result in unnecessary foreclosures.
    As described in the concluding section, we recommend that servicers 
establish a single point of contact that can work with every distressed 
borrower and coordinate all activities taken by the servicer with 
regard to that particular case.
II. FDIC Efforts to Address Problems in Mortgage Servicing and 
        Foreclosure Prevention
    Since the early stages of the mortgage crisis, the FDIC has made a 
concerted effort to promote the early modification of problem mortgages 
as a first alternative that can spare investors the high losses 
associated with foreclosure, assist families experiencing acute 
financial distress, and help to stabilize housing markets where 
distressed sales have resulted in a lowering of home prices in a self-
reinforcing cycle.
    In 2007, when the dimensions of the subprime mortgage problem were 
just becoming widely known, I advocated in speeches, testimony and 
opinion articles that servicers not only had the right to carry out 
modifications that would protect subprime borrowers from unaffordable 
interest-rate resets, but that doing so would often benefit investors 
by enabling them to avoid foreclosure costs that could run as high as 
40 percent or more of the value of the collateral. In addition, the 
FDIC, along with other Federal regulators jointly hosted a series of 
roundtables on the issues surrounding subprime mortgage securitizations 
to facilitate a better understanding of problems and identify workable 
solutions for rising delinquencies and defaults, including alternatives 
to foreclosure.
    More recently, the FDIC has been actively involved both in 
investigating and addressing robo-signing and documentation issues at 
insured depository institutions and their affiliates, ensuring that its 
own loss-share partners are employing best practices in their servicing 
operations, and implementing reforms that will better align the 
financial incentives of servicers in future securitization deals.
Supervisory Actions
    The FDIC is exercising both its primary and backup authorities to 
actively address the issues that have emerged regarding banks' 
foreclosure and ``robo-signing'' practices. The FDIC is the primary 
Federal supervisor for nearly 5,000 State-chartered insured 
institutions, where we monitor compliance with safety and soundness and 
consumer protection requirements and pursue enforcement actions to 
address violations of law. While the FDIC is not the primary Federal 
regulator for the major loan servicers, our examiners are working 
onsite under our backup authority as part of an interagency horizontal 
review team at 12 of the 14 major mortgage servicers along with their 
primary Federal regulators. This interagency review is also evaluating 
the roles played by MERS and Lender Processing Services, a large data 
processor used by many mortgage servicers.
    The FDIC is committed to active participation in horizontal reviews 
and other interagency efforts so we are able to have a comprehensive 
picture of the underlying causes of these problems and the lessons to 
be learned. The onsite reviews are finding that mortgage servicers 
display varying degrees of performance and quality controls. Program 
and operational deficiencies may be correctable in the normal course of 
business for some, while others may need more rigorous system changes. 
The level and adequacy of documentation also varies widely among 
servicers. Where chain of title is not sufficiently documented, 
servicers are being required to make changes to their processes and 
procedures. In addition, some servicers need to strengthen audit, 
third-party arrangements, and loss mitigation programs to cure lapses 
in operations. However, we do not believe that servicers should wait 
for the conclusion of the interagency effort to begin addressing known 
weaknesses in internal controls and risk management. Corrective actions 
on problems identified during a servicer's own review or the examiners' 
review should be addressed as soon as possible. We expect each servicer 
to properly review loan documents prior to initiating or conducting any 
foreclosure proceedings, to adhere to applicable laws and regulations, 
and to maintain appropriate policies, procedures and documentation. If 
necessary, the FDIC will encourage the use of formal or informal 
corrective programs to ensure timely action is taken.
Actions Taken as Receiver for Failed Institutions
    In addition to our supervisory efforts, the FDIC is looking at the 
servicing practices of institutions acquiring failed institutions under 
loss-share agreements. To date there are $159.8 billion in loans and 
securities involved in FDIC loss share agreements, of which $56.7 
billion (36 percent) are single family loans. However, the proportion 
of mortgage loans held by acquiring institutions that are covered by 
loss share agreements is in some cases very small. For example, at One 
West Bank, the successor to Indy Mac, only 8 percent of mortgages 
serviced fall under the FDIC loss share agreement.
    An institution that acquires a single-family loss-share portfolio 
is required to implement a loan modification program, and also is 
required to consider borrowers for a loan modification and other loss 
mitigation alternatives prior to foreclosure. These requirements 
minimize the FDIC's loss share costs. The FDIC monitors the loss-share 
agreements through monthly and quarterly reporting by the acquiring 
bank and semiannual reviews of the acquiring bank. The FDIC has the 
right to deny or recover any loss share claim where the acquiring 
institution is unable to verify that a qualifying borrower was 
considered for loan modification and that the least costly loss 
mitigation alternative was pursued.
    In connection with the recent foreclosure robo-signing revelations, 
the FDIC contacted all of its loss-share partners. All partners 
certified that they currently comply with all State and Federal 
foreclosure requirements. We are in the process of conducting a Loan 
Servicing Oversight audit of all loss-share partners with high volumes 
of single-family residential mortgage loans and foreclosures. The FDIC 
will deny any loss-share payments or seek reimbursement for any 
foreclosures not compliant with State laws or not fully remediated, 
including noncompliance with the loss-share agreements and loan 
modification requirements.
Regulatory Actions to Reform Mortgage Securitization
    We also are taking steps to restore market discipline to our 
mortgage finance system by doing what we can to reform the 
securitization process. In July of this year, the FDIC sponsored its 
own securitization of $471 million of single-family mortgages. In our 
transaction, we addressed many of the deficiencies in existing 
securitizations. First, we ensured that the servicer will make every 
effort to work with borrowers in default, or where default is 
reasonably foreseeable. Second, the servicing arrangements in these 
structured loan transactions have been designed to address shortcomings 
in the traditional flat-rate structures for mortgage servicing fees. 
Our securitization pays a base dollar amount per loan per year, 
regardless of changes in the outstanding balance of that loan. In 
addition, the servicing fee is increased in the event the loan becomes 
more complex to service by falling past due or entering modification or 
foreclosure. This fee structure is much less likely to create 
incentives to slash costs and rely excessively on automated or 
substandard processes to wring a profit out of a troubled servicing 
portfolio. Third, we provided for independent, third party oversight by 
a Master Servicer. The Master Servicer monitors the Servicer's overall 
performance and evaluates the effectiveness of the Servicer's 
modification and loss mitigation strategies. And, fourth, we provided 
for the ability of the FDIC, as transaction sponsor, the Servicer and 
the Master Servicer to agree on adapting the servicing guidelines and 
protocols to unanticipated and significant changes in future market 
conditions.
    The FDIC has also recently taken the initiative to establish 
standards for risk retention and other securitization practices by 
updating its rules for safe harbor protection with regard to the sale 
treatment of securitized assets in failed bank receiverships. Our final 
rule, approved in September, establishes standards for disclosure, loan 
quality, loan documentation, and the oversight of servicers. It will 
create a comprehensive set of incentives to assure that loans are made 
and managed in a way that achieves sustainable lending and maximizes 
value for all investors. In addition, the rule is fully consistent with 
the mandate under the Dodd-Frank Act to apply a 5 percent risk-
retention requirement on all but the most conservatively underwritten 
loans when they are securitized.
    We are currently working on an interagency basis to develop the 
Dodd-Frank Act standards for risk retention across several asset 
classes, including requirements for low risk ``Qualifying Residential 
Mortgages,'' or QRMs, that will be exempt from risk retention. These 
rules allow us to establish a gold standard for securitization to 
encourage high-quality mortgages that are sustainable for the long 
term. This rulemaking process also provides a unique opportunity to 
better align the incentives of servicers with those of mortgage pool 
investors.
    We believe that the QRM rules should authorize servicers to use 
best practices in mitigating losses through modification, require 
compensation structures that promote modifications, and direct 
servicers to act for the benefit of all investors. We also believe that 
the QRM rules should require servicers to disclose any ownership 
interest in other whole loans secured by the same real property, and to 
have in place processes to deal with any potential conflicts. Some 
conflicts arise from so-called ``tranche warfare'' that reflects the 
differing financial interests among the holders of various mortgage 
bond tranches. For example, an investor holding the residual tranche 
typically stands to benefit from a loan modification that prevents 
default. Conversely, the higher rated tranches might be better off if a 
servicer foreclosed on the property forcing losses to be realized at 
the expense of the residual tranche. A second type of conflict 
potentially arises when a single company services a first mortgage for 
an investor pool and the second mortgage for a different party, or for 
itself. Serious conflicts such as this must be addressed if we are to 
achieve meaningful long-term reform of the securitization process.
    Therefore, the FDIC believes it would be extremely helpful if the 
definition of a QRM include servicing requirements that, among other 
things:

    grant servicers the authority and provide servicers 
        compensation incentives to mitigate losses on residential 
        mortgages by taking appropriate action to maximize the net 
        present value of the mortgages for the benefit of all investors 
        rather than the benefit of any particular class of investors;

    establish a pre-defined process to address any subordinate 
        lien owned by the servicer or any affiliate of the servicers; 
        and

    require disclosure by the servicer of any ownership 
        interest of the servicer or any affiliate of the servicer in 
        other whole loans secured by the same real property that 
        secures a loan included in the pool.

    Risk retention rules under the Dodd-Frank Act should also create 
financial incentives that promote effective loan servicing. The best 
way to accomplish this is to require issuers--particularly those who 
also are servicers--to retain an interest in the mortgage pool that is 
directly proportional to the value of the pool as a whole. Frequently 
referred to as a ``vertical slice,'' this form of risk retention would 
take the form of a small, proportional share of every senior and 
subordinate tranche in the securitization, creating a combined 
financial interest that is not unduly tilted toward either senior or 
subordinate bondholders.
III. The FSOC Should Play a Central Role in Developing Solutions
    What started a few months ago as technical documentation issues in 
the foreclosure process has grown into something more serious and 
potentially damaging to the nation's housing recovery and to some of 
our largest institutions. First, a transparent, functioning foreclosure 
process is unfortunately necessary to the recovery of our housing 
market and our economy. Second, the mortgage documentation problems 
cast a cloud of uncertainty over the ownership rights and obligations 
of mortgage borrowers and investors. Further, there are numerous 
private parties and government entities that may have significant 
claims against firms central to the mortgage markets.
    While we do not see immediate systemic risk, the clear potential is 
there. The FSOC was established under the Dodd-Frank Act to deal with 
just this type of emerging risk. Its mandate includes identifying risks 
to financial stability and potential gaps in regulation and making 
recommendations for primary regulators and other policymakers to take 
action to mitigate those risks. As such, these issues represent just 
the type of problem the FSOC was designed to address. In addition, the 
difficulties that have been experienced to date in coordinating a 
Government policy response speak to the need for central role by the 
FSOC in negotiating workable solutions with the major parties that have 
a stake in the outcome.
    The FSOC is in a unique position to provide needed clarity to the 
market by coordinating consistent interpretations of what standards 
should be applied to establishing the chain of title for mortgage loans 
and recognizing the true sale of mortgage loans in establishing private 
securitization trusts. The constituent agencies that make up the FSOC 
also have their own authorities that can be used to provide clarity of 
this type. Examples include rulings on standards that determine the 
tax-exempt status of mortgage trusts and standards for the recognition 
of true sale in a failed bank receivership, which the FDIC recently 
updated in its safe harbor regulation.
    We need broad agreements between representatives of the major 
stakeholders affected by this issue so that the uncertainties 
associated with this issue can be resolved as quickly as possible. 
Outlined below are some of the principles I believe should be part of 
any broad agreement among the stakeholders to this issue.

  1.  Establish a single point of contact for struggling homeowners. 
        Servicers should identify a single person to work with 
        homeowners once it becomes evident the homeowner is in 
        distress. This single point of contact must be appropriately 
        authorized to provide current, accurate information about the 
        status of the borrower's loan or loan modification application, 
        as well as provide a sign-off that all loan modification 
        efforts have failed before a foreclosure sale. This will go a 
        long way toward eliminating the conflicts and miscommunications 
        between loan modifications and foreclosures in today's dual-
        track system and will provide borrowers assurance that their 
        application for modification is being considered in good faith.

  2.  Expand and streamline private loan modification efforts to 
        increase the number of successful modifications. To accomplish 
        this end, servicers should be required to intervene with 
        troubled borrowers from the earliest stages of delinquency to 
        increase the likelihood of success in foreclosure mitigation. 
        Modifications under such programs should significantly reduce 
        the monthly payment through reductions in the interest rate and 
        principal balance, as needed, to make the mortgage affordable 
        over the long term. Analysis of modifications undertaken in the 
        FDIC program at Indy Mac Federal Bank has shown that modifying 
        loans when they are in the early stages of delinquency and 
        significantly reducing the monthly payment are both factors 
        that promote sustainable modifications that perform well over 
        time. In exchange for the creation of highly simplified 
        modification programs, mortgage servicers should have a ``safe 
        harbor'' that would give them assurance that their claims will 
        be recognized if foreclosure becomes unavoidable. In addition, 
        streamlined modification programs should be recognized as a 
        best practice in adjudicating disputes with mortgage investors.

  3.  Invest appropriate resources to maintain adequate numbers of 
        well-trained staff. Broad agreements should require servicers 
        to hire and train sufficient numbers of staff to professionally 
        process applications for loan modifications. Further, servicers 
        should be required to improve information systems to help 
        manage and support the workload associated with loan 
        modifications.

  4.  Strengthen quality control processes related to foreclosure and 
        loan servicing activities. Some servicers need to make 
        fundamental changes to their practices and programs to fulfill 
        their responsibilities and satisfy their legal obligations. Lax 
        standards of care and failure to follow longstanding legal 
        requirements cannot be tolerated. Regulators must vigorously 
        exercise their supervisory tools to ensure that mortgage 
        servicers operate to high standards. Servicers need to 
        institute strong controls to address defective practices and 
        enhance programs to regain integrity of their operations. Where 
        severe deficiencies are found, the servicers should be required 
        to have independent third-party monitors evaluate their 
        activities to ensure that process changes are fully implemented 
        and effective. Servicers must also fully evaluate and account 
        for their risks relating to their servicing activities, 
        including any costs stemming from weaknesses in their 
        operations.

  5.  Resolve the challenges created by second liens. Since the early 
        stages of the mortgage crisis, second liens have been an 
        obstacle to effective alternatives to foreclosure, including 
        loan modification and short sales. We must tackle the second 
        lien issue head on. One option is to require servicers to take 
        a meaningful write-down of any second lien if a first mortgage 
        loan is modified or approved for a short sale. All of the 
        stakeholders must be willing to compromise if we are to find 
        solutions to the foreclosure problem and lay the foundation for 
        a recovery in our housing markets.
Conclusion
    We must restore integrity to the mortgage servicing system. We need 
a mandate for dramatically simplified loan modifications so that 
unnecessary foreclosures can be avoided. Servicers need to establish a 
single point of contact to coordinate their communication with 
distressed borrowers. They also need to invest appropriate resources 
and strengthen quality control processes related to loan modification 
and foreclosure. We must finally tackle the second liens head on, by 
requiring servicers to impose meaningful write-downs on second lien 
holders when a first mortgage is modified or approved for a short sale.
    This is the time for all parties to come together and arrive at 
broad agreements that will reduce uncertainty and lay the foundation 
for long-term stability in our mortgage and housing markets. The FSOC 
has a unique role to play in addressing the situation and can provide 
needed clarity on issues such as standards for recognizing true sale in 
securitization trusts.
    Again, thank you for the opportunity to testify on this important 
issue. I look forward to your questions.
                                 ______
                                 
                PREPARED STATEMENT OF DANIEL K. TARULLO
        Member, Board of Governors of the Federal Reserve System
                            December 1, 2010
    Mr. Chairman, Ranking Member Shelby, and other Members of the 
Committee, thank you for your invitation to this morning's hearing on 
problems in mortgage servicing.
    In the first portion of my testimony, I will explain our current 
understanding of the nature and extent of the deficiencies in mortgage 
documentation that have been so apparent in the robo-signing 
misconduct, as well as what the banking agencies are doing in support 
of a broader interagency effort to develop a full picture of these 
problems. I also want to address the issue of so-called put backs of 
mortgage-backed securities (MBS) to mortgage originators or 
securitization sponsors. Though only indirectly related to robo-signing 
and associated servicing flaws, financial exposure resulting from put 
backs could be more significant for some institutions than that from 
documentation flaws.
    In the second portion of my testimony, I will turn to the question 
of appropriate policy responses--with respect to specific regulated 
financial institutions, to supervisory practices more generally, and to 
the structural problems we have observed in the mortgage servicing 
industry, including the discouragingly sluggish pace of mortgage 
modifications. This last point is a matter of concern not only because 
of its significance for the millions of American families who are 
unable to maintain their mortgage payments on homes that have lost 
considerable value in recent years, but also because of the importance 
from a macroeconomic perspective of realizing as quickly and 
efficiently as possible a clearing of housing prices, which would help 
create the conditions for a market recovery.
Mortgage Documentation and other Servicing Issues
    Foreclosure is a legal process initiated to terminate a borrower's 
interest in a property and is permitted only when the borrower has 
defaulted on the debt obligation for a specified period. The process 
allows the lender to sell the property and use the proceeds to satisfy 
the borrower's unpaid debt to the extent it is secured by the property. 
Foreclosure requirements are generally established by State laws and 
each State has its own statutes, rules, and court decisions pertaining 
to foreclosures.
    Some 23 states, known as judicial foreclosure states, require 
foreclosures to be reviewed and approved by a court. Nonjudicial 
foreclosure states have different processes for foreclosures that do 
not require the creditor to obtain court approval for a foreclosure, 
but instead impose varying waiting periods and documentation, filing, 
and notice requirements after a default occurs and before a foreclosure 
sale may take place. In nonjudicial foreclosure states, the homeowner 
typically has access to the court in a foreclosure matter only if the 
homeowner initiates a suit to stop the foreclosure process or seeks 
protection in a bankruptcy court.
    Because mortgage servicers maintain the official accounting of all 
amounts paid and owed by borrowers, they serve as the critical link 
between borrowers and mortgage holders. In addition, servicers manage 
loan defaults, including the negotiation of loan modification and 
repayment plans with borrowers. Should the servicer decide to initiate 
foreclosure, it would often do so as the agent for third parties, such 
as securitization trusts. In this regard, servicers have 
responsibilities to investors holding residential MBS. Servicers also 
have responsibilities to borrowers to maintain accurate and complete 
records of payments received, amounts advanced, notifications made to 
borrowers, and changes of payment terms with respect to any mortgage 
modification discussions.
    Foreclosure documentation typically requires an assertion that the 
agent bringing forth the action has the legal right to foreclose and 
that the loan is in default. The document filings contain details of 
the transactions and the amounts owed. These documents typically 
include attestations signed by individuals who have personal knowledge 
of the facts and who are properly authorized to make such assertions. 
In most jurisdictions, the documents must be signed by these 
individuals in the presence of a notary, following proper notarization 
procedures. Lenders and servicers are responsible for ensuring that the 
individuals who sign these documents are duly authorized and have 
appropriate knowledge of the facts and circumstances. In addition, 
lenders and servicers are responsible for ensuring the accuracy of 
records and the facts recited in the foreclosure documents.
    State and local laws govern the recordation process for real estate 
transfers and mortgage filings and assignments. Given the multiple 
sales and assignments of mortgage loans that often occur, concerns have 
been raised regarding investors' or servicers' rights to initiate 
foreclosure actions. Although State-by-State practices vary 
considerably, generally the noteholder has the right to initiate 
foreclosure, once default has occurred, if an original note can be 
produced and the current holder's ownership is verified. If there is no 
controversy concerning ownership of the note, but rather an inability 
to locate original documents, processes usually allow for foreclosure 
to proceed, albeit at some cost and delay. If there is some question of 
ownership, the investor or servicer may be required to produce evidence 
of ownership before a foreclosure can proceed.
    Since matters regarding real estate titles and foreclosures are 
generally governed by State law, State attorneys general are 
undertaking a joint review of lenders and servicers focusing on the 
reported problems in foreclosures. In addition, numerous Federal 
agencies have launched investigations, including the examinations in 
process by the Federal financial regulators.
    The Office of the Comptroller of the Currency, the Office of Thrift 
Supervision, the Federal Deposit Insurance Corporation, and the Federal 
Reserve are conducting an in-depth review of practices at the largest 
mortgage servicing operations. The interagency examinations and reviews 
focus on foreclosure practices generally, but with an emphasis on the 
internal control breakdowns that led to inaccurate affidavits and other 
questionable legal documents being used in the foreclosure process. The 
agencies are reviewing firms' policies, procedures, and internal 
controls, including sampling loan files. We have also solicited the 
views of consumer organizations to help detect problems at specific 
servicers. The agencies expect the initial onsite portion of our work 
to be completed by the end of the year. The agencies plan to publish a 
summary overview in early 2011 that will describe the range of industry 
practices found in the examinations and identify weaknesses requiring 
remediation.
    The Federal Reserve has supervisory and regulatory authority for 
bank holding companies and their nonbank subsidiaries, as well as for 
approximately 800 State-chartered banks that are members of the Federal 
Reserve System (State member banks), and certain other financial 
institutions and activities. We work with other Federal and State 
supervisory authorities to ensure the safety and soundness of the 
banking industry, foster the stability of the financial system, and 
provide for fair and equitable treatment of consumers in their 
financial transactions. The Federal Reserve is engaged in both 
regulation, which involves establishing the rules within which banking 
organizations must operate, and supervision, which involves reviewing 
the efforts of banking organizations to abide by those rules and 
remain, overall, in safe and sound condition.
    The Federal Reserve serves as the primary Federal regulator for two 
of the 10 largest servicers affiliated with banking organizations, one 
a holding company affiliate and the other a State member bank. The 
Federal Reserve is participating with the other Federal banking 
agencies in examining the foreclosure policies and practices of the 
other large institutions. For additional information on foreclosure 
processes, we have sent a self-assessment questionnaire to other 
Federal Reserve-regulated institutions that engage in mortgage 
servicing but are not part of the interagency examination effort.
    While quite preliminary, the banking agencies' findings from the 
supervisory review suggest significant weaknesses in risk-management, 
quality control, audit, and compliance practices as underlying factors 
contributing to the problems associated with mortgage servicing and 
foreclosure documentation. We have also found shortcomings in staff 
training, coordination among loan modification and foreclosure staff, 
and management and oversight of third-party service providers, 
including legal services. It is for this reason that we expanded the 
review to include an examination of pre-foreclosure loans, or those 
past due but not yet in the foreclosure process, and certain third-
party service providers. As examiners identify weaknesses, they will 
require firms to take remedial action and, when necessary, require 
servicers to address resource shortfalls, training and coordination 
problems, and control failures.
    It is important to recognize that the extent of these problems is 
not the same across all firms. Nonetheless, the problems are 
sufficiently widespread that they suggest structural problems in the 
mortgage servicing industry. The servicing industry overall has not 
been up to the challenge of handling the large volumes of distressed 
mortgages. The banking agencies have been focused for some time on the 
problems related to modifying mortgage loans and the large number of 
consumer complaints by homeowners seeking loan modifications. It has 
now become evident that significant parts of the servicing industry 
also failed to handle foreclosures properly.
    While we are still in the process of determining the extent of 
these problems and the required supervisory response, it is clear that 
the industry will need to make substantial investments to improve its 
functioning in these areas and supervisors must ensure that these 
improvements occur. Moreover, fixing the problems in the mortgage 
servicing industry may also require thinking about some fundamental 
structural changes to the current mortgage system. I will discuss the 
issue of structural solutions to these issues in more detail later in 
my testimony.
Investor Repurchase Requests
    The cost associated with foreclosure documentation problems, 
including robo-signing, are not the only potential liabilities facing 
financial institutions in the wake of the mortgage and housing crisis. 
As losses in MBS have been escalating, investors in MBS and purchasers 
of unsecuritized whole loans are more frequently exploring, and in some 
cases asserting, contractual and securities law claims against the 
parties that originated the loans, sold the loans, underwrote 
securities offerings, or had other roles in the process. The essence of 
these claims is that mortgages in the securitization pools, or sold as 
unsecuritized whole loans, did not conform to representations and 
warranties made about their quality--specifically that the loan 
applications contained misrepresentations or the underwriting was not 
in conformance with stated standards.
    The potential liability associated with contract claims in 
securitizations is usually called put back risk because many of the 
relevant agreements permit the buyer of the mortgages to put them back 
to the seller at par. Buyers can demand that the seller or another 
party that makes representations repurchase the mortgages if defects 
are found in the underlying loan documentation or in the underwriting 
that conflict with the sale agreements. Although the representations 
and warranties in the various agreements vary considerably, they 
frequently require that the defect materially and adversely affect the 
value of the loan before put back rights can be exercised. At the time 
of the put back, the mortgage loan may have become seriously delinquent 
or entered into default. Because underperforming mortgages are 
typically valued substantially less than par, the put back transfers 
any potential loss from the buyer back to the original seller or 
mortgage securitizer.
    Given the poor performance of the mortgage assets, investors, 
including the Government Sponsored Enterprises (GSEs), have sought to 
pursue put back claims through various legal avenues, including 
requesting that mortgage servicers provide underlying mortgage files 
and the requisite documents. A GSE will generally buy a loan out of an 
MBS pool when the loan becomes 120 days delinquent. The GSE will then 
conduct a review of the delinquent loan file, and if it finds that the 
loan did not comply with its underwriting standards, it will request 
that the loan be repurchased by the originator/seller or that the GSE 
be made whole on any credit losses incurred.
    During the third quarter of 2010, Fannie Mae collected $1.6 billion 
in unpaid principal balance (UPB) from originators, and currently has 
$7.7 billion UPB in outstanding repurchase requests, $2.8 billion of 
which has been outstanding for more than 120 days. Freddie Mac has $5.6 
billion UPB in outstanding repurchase requests, $1.8 billion of which 
has been outstanding for more than 120 days. As of the third quarter of 
2010, the four largest banks held $9.7 billion in repurchase reserves, 
most of which is intended for GSE put backs.
    There are also pending claims by some investors alleging that 
underwriters and sponsors of securitizations failed to comply with the 
Federal securities laws covering the offering documents and 
registration statements. These suits specifically reference 
descriptions of the risks to investors, the quality of assets in the 
securitization, the order in which investors would be paid, or other 
factors. Most of these lawsuits are in the early stages, and it is 
difficult to ascertain the probability that investors will be able to 
shift a substantial portion of the losses on defaulted mortgages back 
to the parties that sold the loans or underwrote the offerings.
    While the full extent of put back exposure is for this reason hard 
to specify with precision, the risk has been known for some time and 
has been an ongoing focus of supervisory oversight at some 
institutions. However, in light of recent increased investor activity, 
the Federal Reserve has been conducting a detailed evaluation of put 
back risk to financial institutions. We are asking institutions that 
originated large numbers of mortgages or sponsored significant MBS to 
assess and provide for these risks as part of their overall capital 
planning process.
Supervisory Responses
    The revelation of documentation flaws in foreclosure processes 
raise two kinds of questions for supervisors: First, what actions are 
appropriate and sufficient to respond to problems identified at 
specific regulated banking organizations? Second, what does the failure 
of supervisory examinations to uncover these flaws counsel for future 
supervisory practice?
    With respect to the question of actions aimed at specific 
institutions, the Federal Reserve and the other Federal banking 
agencies have significant supervisory and enforcement tools that can be 
used to address certain types of deficiencies in the foreclosure and 
mortgage transfer process. For example, numerous enforcement tools are 
available to address safety and soundness issues such as inadequate 
controls and processes, weaknesses in risk-management and quality 
control, and certain types of compliance weaknesses in foreclosure 
operations. These tools include supervisory enforcement actions that 
require an institution to correct deficient operations in a prescribed 
period of time and Civil Money Penalties (CMPs) for egregious actions. 
The agencies may also lower examination ratings, which can result in 
limiting the permissible activities and affiliations of financial firms 
and trigger other supervisory reviews and limitations, and restrict the 
ability of institutions to expand. The agencies also have the authority 
to assess CMPs on individuals who are responsible for violations, to 
issue cease and desist orders on responsible individuals, or, if the 
statutory criteria are met, to remove them from banking. In addition, 
we may make referrals to law enforcement agencies, or require 
institutions to file Suspicious Activity Reports, as appropriate.
    Although the examinations are not yet fully completed, based on 
what we have already learned, the Federal Reserve expects to use many 
or all of these tools through the course of our review of foreclosure 
and other mortgage matters. In particular, the Federal Reserve has 
already emphasized to the industry and to institutions we supervise the 
importance of addressing identified weaknesses in risk-management, 
quality control, audit, and compliance practices. The problems that are 
evident to date raise significant reputation and legal risk for the 
major mortgage servicers. These weaknesses require immediate remedial 
action. They will also affect the rating assigned by Federal Reserve 
supervisors to management of bank holding companies, even where the 
servicing activity was in a banking subsidiary of a holding company. In 
addition, the Federal banking agencies expect that employees are 
adequately trained and have sufficient resources to appropriately 
review the facts and circumstances of files when preparing documents, 
and that legal processes are fully and properly followed. Banking 
organizations also must ensure quality control for third-party service 
providers, including legal services.
    With respect to future supervisory practice more generally, two 
points for increased emphasis are already apparent. First, this episode 
has underscored the importance of our using the new authority given the 
Federal Reserve in the Dodd-Frank Wall Street Reform and Consumer 
Protection Act to send our examiners into non-bank affiliates of large 
bank holding companies, including those in large institutions that have 
become bank holding companies only in the last couple of years.
    Second, our experience suggests that the utility of examining and 
validating internal control processes within firms may extend beyond 
improvements to the specific processes subject to the exam. We have 
found that problems in foreclosure practices do not seem as pervasive 
in institutions in which we had previously examined other internal 
control processes, found shortcomings, and insisted on corrective 
action. While we would not draw strong conclusions from such a limited 
experience, it seems possible that a firm may improve its general 
approach to control processes once it has been required to remedy 
problems in discrete areas. If this relationship is borne out, it could 
be a significant advance in supervisory practice, insofar as resource 
constraints will always limit the number of supervisory examinations.
Possible Need for Structural Solutions
    Beyond remedial or punitive measures directed at specific firms and 
future-oriented changes in supervisory practice, structural solutions 
may be needed to address the range of problems associated with mortgage 
servicing. Similarly, the foreclosure documentation problems are 
another reminder of the degree to which foreclosure has been preferred 
to mortgage modification, notwithstanding various efforts to change 
this imbalance. Here again, a more structural solution may be needed.
    The explosive growth of securitization as a vehicle for financing 
mortgages was accompanied by the emergence of a sizable mortgage 
servicing industry--that is, a group of firms servicing mortgages that 
they did not own or, in many cases, that they had not originated. While 
there have surely been economies associated with this industry, there 
have also been chronic problems. It has been increasingly apparent that 
the inadequacy of servicer resources to deal with mortgage 
modifications--an area that was a point of supervisory emphasis--was 
actually a reflection of a larger inability to deal with the challenges 
entailed in servicing mortgages in many jurisdictions and dealing with 
a complicated investor base. For example, foreclosure procedures are 
specifically the province of real property law governed by the states, 
and can vary not only by State, but also within states and sometimes 
even within counties. With or without regulatory changes, it is quite 
probable that servicer fees to securitization trusts will increase to 
reflect the costs associated with the complexities of the contemporary 
mortgage model.
    The impetus for change in the mortgage servicing industry is likely 
only to increase as the advantages of servicing rights for regulatory 
capital purposes become limited after the new Basel III requirements 
are implemented.\1\ It is possible that servicing issues can be 
satisfactorily addressed through the actions of the various primary 
regulators. However, in light of the range of problems already 
encountered, and the prospect of further changes in the industry--
including the possible migration of more servicing activity to non-
banking organizations--it seems reasonable at least to consider whether 
a national set of standards for mortgage servicers may be warranted.
---------------------------------------------------------------------------
    \1\ The proposed Basel III capital rules would simultaneously 
introduce a specific minimum common equity ratio and define ``common 
equity'' so as to limit or exclude consideration of items that may not 
provide the loss absorbing capacity that common equity is supposed to 
represent.
---------------------------------------------------------------------------
    The case for concerted, coordinated action is much clearer with 
respect to the slow-moving pace of mortgage modifications. Regardless 
of the findings that emerge from the examinations underway, and 
remedial actions required to correct past mistakes, this episode has 
again drawn attention to what can only be described as a perverse set 
of incentives for homeowners with underwater mortgages. Homeowners who 
try to obtain a modification of the terms of their mortgages are all 
too frequently subject to delay and disappointment, while those who 
simply stop paying their mortgages have found that they can often stay 
in their homes rent free for a time before the foreclosure process 
moves ahead. Moreover, many homeowners believe, reportedly on the basis 
of communications from servicers, that the only way they can qualify 
for modifications is by stopping their mortgage payments and thus 
becoming delinquent.
    Quite apart from the impact upon families who lose their homes, the 
dominance of foreclosures over modifications raises macroeconomic 
concerns. The number of foreclosures initiated on residential 
properties has soared from about 1 million in 2006, the year that house 
prices peaked, to 2.8 million last year. Over the first three quarters 
of this year, we have seen a further 2 million foreclosure filings, and 
an additional 2.3 million homes were in foreclosure at the end of 
September. All told, we expect about 2.5 million foreclosure filings 
this year and next year and about 2.4 million more in 2012. While our 
outlook is for filings to decline in coming years, they will remain 
high by historical standards. Currently, more than 4.5 million mortgage 
loans are 90 days or more past due or in foreclosure. These numbers 
compare to just 520,000 permanent loan modifications executed under the 
Treasury Department's Home Affordable Modification Program (HAMP) and 
an additional 1.6 million proprietary loan modifications by servicers 
participating in the HOPE NOW Alliance program.\2\
---------------------------------------------------------------------------
    \2\ Written testimony of Phyllis Caldwell, Chief of Homeownership 
Preservation Office, U.S. Department of the Treasury, before the House 
Financial Services Subcommittee on Housing and Community Opportunity 
hearing on ``Robo-Signing, Chain of Title, Loss Mitigation and Other 
Issues in Mortgage Servicing,'' November 18, 2010.
---------------------------------------------------------------------------
    The Federal Reserve believes that in most cases the best way to 
assist struggling borrowers is a mortgage modification allowing them to 
retain their home with an affordable mortgage payment. In a housing 
market where values have declined so much, following a period in which 
all actors relied upon rising house prices to sustain mortgage 
practices, foreclosures simply do not make sense as a preferred 
response. Foreclosures are costly to all parties and more broadly to 
our economy. Lenders and investors incur financial losses arising from 
the litigation expenses associated with the foreclosure process and the 
loss on the defaulted mortgage when the foreclosed property sells at a 
liquidation price that is substantially less than the loan balance. 
Local governments must contend with lower property tax revenue and the 
ramifications of neglected properties that may threaten public safety. 
Additionally, neighbors and neighborhoods suffer potential spillover 
effects from foreclosure sales because foreclosures may reduce the 
attractiveness of the neighborhood or may signal to potential buyers a 
forthcoming decline in neighborhood quality. In the end, an overhang of 
homes awaiting foreclosure is unhealthy for the housing market and can 
delay a recovery in housing markets and the broader economy.
    Several possible explanations have been suggested for the 
prominence of foreclosures: the lack of servicer capacity to execute 
modifications, purported financial incentives for servicers to 
foreclose rather than modify, what until recently appeared to be easier 
execution of foreclosures relative to modifications, limits on the 
authority of securitization trustees, and conflicts between primary and 
secondary lien holders. Whatever the merits and relative weights of 
these various explanations, the social costs of this situation are 
huge. It just cannot be the case that foreclosure is preferable to 
modification for a significant proportion of mortgages where the 
deadweight costs of foreclosure, including a distressed sale discount, 
are so high. While some banks and other industry participants have 
stepped forward to increase the rate of modifications relative to 
foreclosures, many have not done enough. We need renewed attention in 
many quarters of government and the financial industry, and among 
investors in mortgage-backed securities, to the lagging incidence of 
modifications.
Conclusion
    In conclusion, I regret to say that the hangover from the housing 
bubble of this past decade is still very much with us, as revealed both 
in the inadequate capacity of mortgage servicers and the continued 
impact of foreclosed homes on the housing market. While bank regulatory 
agencies can and should respond to specific failings that are being 
identified in our interagency examination, there is a strong case to be 
made that broader solutions are needed both to address structural 
problems in the mortgage servicing industry and to accelerate the pace 
of mortgage modifications or other loss mitigation efforts. Thank you 
very much for your attention. I would be happy to answer any questions 
you might have.








                                 ______
                                 
                   PREPARED STATEMENT OF JOHN WALSH *
                   Acting Comptroller of the Currency
                      Comptroller of the Currency
                            December 1, 2010
Introduction
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     *Statement Required by 12 U.S.C.  250:

     The views expressed herein are those of the Office of the 
Comptroller of the Currency and do not necessarily represent the views 
of the President.
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    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
I appreciate this opportunity to discuss recently reported 
improprieties in the foreclosure processes used by several large 
mortgage servicers and actions that the Office of the Comptroller of 
the Currency (OCC) is taking to address these issues where they involve 
national banks. The occurrences of improperly executed documents and 
attestations raise concerns about the overall integrity of the 
foreclosure process. The loss of one's home is personally and 
financially traumatic for a borrower. Laws in each State establish the 
requirements and process by which that action may be taken. When that 
due process is not followed, it is not a technicality; it goes to the 
propriety of the foreclosure itself. The unacceptable practices that 
have been identified in the past several months warrant the thorough 
investigation that is now underway by the OCC, other Federal bank 
regulators, and other agencies, and demand an appropriate and vigorous 
response.
    The OCC supervises all national banks and their operating 
subsidiaries, including their mortgage servicing operations. The 
servicing portfolios of the eight largest national bank mortgage 
servicers\1\ account for approximately 63 percent of all mortgages 
outstanding in the United States--nearly 33.3 million loans totaling 
almost $5.8 trillion in principal balances as of June 30, 2010.
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    \1\ Bank of America, Citibank, JPMorgan Chase, HSBC, MetLife, PNC, 
Wells Fargo, and U.S. Bank.
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    To date, six large national bank servicers have publicly 
acknowledged procedural deficiencies in their foreclosure processes. 
The lapses that have been reported represent a serious operational 
breakdown in foreclosure governance and controls that national banks 
should maintain. These lapses are unacceptable, and we are taking 
aggressive actions to hold national banks accountable, and to get these 
problems fixed. As soon as the problems at Ally Bank came to light, we 
directed the largest national bank mortgage servicers under our 
supervision to review their operations, to take corrective action to 
remedy identified problems, and to strengthen their foreclosure 
governance to prevent reoccurrences. At the same time, we initiated 
plans for intensive, onsite examinations of the eight largest national 
bank mortgage servicers. Through these examinations we are 
independently testing the adequacy of governance over their foreclosure 
processes to ensure foreclosures are completed in accordance with 
applicable legal requirements and that delinquency affidavits and 
claims that are the basis for the foreclosure are accurate.
    As part of our examinations we also are reviewing samples of 
individual loan files where foreclosures have either been initiated or 
completed to test the validity of bank self assessments and corrective 
actions, and to determine whether troubled borrowers were considered 
for loss mitigation alternatives such as loan modifications prior to 
foreclosure. We have likewise instructed examiners to be alert to, and 
document, any practices such as misapplied payments, padded fees, and 
inappropriate application of forced placed insurance as part of these 
file reviews. Should we find evidence of such occurrences, we will take 
appropriate action. Our examinations are still on-going.
    My testimony provides a brief discussion of how the OCC regulates 
national bank mortgage servicing operations, the recently publicized 
foreclosure problems, and our most recent findings on trends in 
modifications, alternatives to modifications, and foreclosures from the 
OCC and OTS Mortgage Metrics Report. I then describe the OCC's actions 
with respect to loan modifications and problems that have arisen in the 
foreclosure process.
OCC Supervision of Mortgage Servicers
    The Committee's invitation letter requested that my testimony 
include an explanation of how the OCC regulates national bank mortgage 
servicing operations. Mortgage banking at the largest national banks is 
a high-volume, operationally intensive business that requires 
specialized supervision. The majority of the mortgage banking assets in 
the national banking system fall under our Large Bank Supervision 
program, characterized by a continuous onsite examiner presence that 
includes specialists in the mortgage banking, retail credit, consumer 
compliance, and operational risk areas. Our resident examiner teams are 
supplemented by subject matter specialists in our Policy, Legal, and 
Economics divisions, each of whom brings specialized expertise to 
supervision of our mortgage companies.
    Direct supervision is largely based upon supervisory strategies 
developed for each institution that are risk-based and focused on the 
more complex issues. The first step is to identify the most significant 
risks and determine whether a bank has systems and controls to identify 
and manage exposures. Next, we assess the integrity and effectiveness 
of the bank's internal risk management systems and audit, with 
appropriate validation through transaction testing. This is 
accomplished through a combination of ongoing monitoring and targeted 
examinations. The targeted examinations validate that risk management 
systems and processes are functioning as expected and do not present 
significant supervisory concerns. Supervisory strategies will be 
revised, as necessary, to expediently address newly identified or 
emerging risks or concerns, whether at an individual bank or 
systemically across the banking system.
    Examiners generally do not directly test standard business 
processes or practices, such as the validity of signed contracts, or 
the processes used to notarize documents or the actual physical 
presence of notes with document custodians, unless there is evidence of 
a material weakness or breakdown in governance and internal controls 
over these activities. In making such a determination, examiners will 
review on-going quality control activities, internal or third-party 
audits, consumer complaints and relevant publicly available 
information. As warranted, our supervisory activities at individual 
banks will often be supplemented with horizontal reviews of targeted 
areas of heightened risk across a group of banks, as with the 
horizontal review of foreclosure processes currently underway.
    Our supervisory conclusions, including any risk management 
deficiencies, are communicated directly to bank senior management. 
Thus, not only is there ongoing evaluation, but also a process for 
timely and effective corrective action when needed. If warranted, these 
concerns are communicated to management and the Board as ``Matters 
Requiring Attention'' (``MRAs'') in supervisory communications. If 
these concerns are not appropriately addressed within a reasonable 
period, we have a variety of tools with which to respond, ranging from 
informal supervisory actions directing corrective measures to formal 
enforcement actions.
Current Foreclosure Problems
    The current foreclosure problems represent another painful chapter 
of the recent financial crisis, stemming from a record number of 
borrower defaults which has strained servicer capacity to provide loss 
mitigation activities to troubled borrowers and ensure a large and 
growing number of foreclosures are properly processed.
    The concerns about improper foreclosure practices initially 
centered on two issues that deal with the documentation required to 
effect foreclosure actions. The first issue involves requirements under 
some State laws for individuals to sign affidavits attesting personal 
knowledge of the accuracy and completion of required documentation 
essential to a valid foreclosure proceeding. The second issue is 
whether, in similar situations where required by State law, individual 
notaries may have violated procedures in notarizing documentation by, 
for example, notarizing the documents after they had been signed, 
rather than in the presence of the individual signing the affidavit. As 
the situation has evolved, concerns have broadened to include the 
accuracy of all information underlying the foreclosure process, and the 
physical possession and control over documents necessary to foreclose 
on a home. Our examinations are investigating all of these issues.
    The signing and attestation of foreclosure documents are steps 
required by various State laws that govern the legal completion of a 
foreclosure proceeding-and as such, typically represent the final steps 
in what is a very lengthy and resource intensive process that banks 
undertake to deal with seriously delinquent borrowers. The time to 
complete a foreclosure process in most states can take 15 months or 
more and in many cases can be as long as 2 years. Foreclosure 
completion timelines are generally set by investors such as Fannie Mae 
and Freddie Mac, and there are penalties that they may impose on 
servicers that do not meet the timelines mandated by these investors.
    The specific requirements and the legal standards applied for 
determining personal knowledge vary across judicial foreclosure states, 
and thus require servicers to ensure that their processes conform to 
individual State, or in some cases, local law. To assist with meeting 
these requirements, mortgage servicers often outsource some of the 
requisite legal work to law firms familiar with local standards and 
other third parties for input and review. Fannie Mae and Freddie Mac in 
fact require servicers to use law firms approved for particular 
geographies when preparing foreclosure filings. For large mortgage 
servicers that operate nationwide, this often has resulted in use of a 
significant number of third parties--lawyers and other service 
providers--and a panoply of documents used in their mortgage 
foreclosure processes: one large mortgage servicer has indicated that 
they use over 250 different affidavit forms. These operational 
challenges, however, do not absolve the banks from their 
responsibilities to have the appropriate staff, quality controls, and 
an effective audit process in place to ensure that documents are 
accurate and the foreclosure process is conducted in compliance with 
applicable State and local laws.
    Servicers typically move forward with foreclosure proceedings only 
after thoroughly evaluating a borrower's eligibility for loan 
modifications and other alternatives, such as short sales or deed-in-
lieu-of-foreclosures.\2\ As a practical matter, many investors for whom 
loans are serviced, including Fannie Mae and Freddie Mac, require 
servicers to attempt loss mitigation actions, including modifications, 
prior to foreclosing on a home. The largest national bank mortgage 
servicers are participants in Treasury's Home Affordable Modification 
Program (HAMP) and are required to evaluate troubled borrowers to 
determine their eligibility for a HAMP modification. For borrowers that 
fail to qualify for a HAMP loan modification, servicers also typically 
consider whether the borrowers would qualify for a modification under 
their proprietary programs, which generally have more flexible 
criteria. In the vast majority of cases, it is only after these loan 
modification efforts have been exhausted that final foreclosure actions 
are taken.
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    \2\ Short sales refer to sales of mortgaged properties at prices 
that net less than the total amount due on the loans. Servicers and 
borrowers negotiate repayment programs, forbearance, or forgiveness for 
any remaining deficiency on the debt. Short sales typically have less 
adverse impact than foreclosures on borrowers' credit records. Deed-in-
lieu-of-foreclosure actions refer to actions in which borrowers 
transfer ownership of the properties (deeds) to servicers in full 
satisfaction of the outstanding mortgage debt to lessen the adverse 
impact of the debt on borrowers' credit records.
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Recent Trends in Mortgage Modifications and Foreclosure Activity
    Since 2008, the OCC has collected loan level data from the large 
national banks we supervise and published this information in quarterly 
mortgage metrics reports. We have since expanded our data collection 
and reporting efforts and joined with the Office of Thrift Supervision 
(OTS) to publish data on the performance of loans and loan 
modifications, and to highlight trends in loss mitigation activities, 
foreclosures, and re-defaults occurring on mortgages serviced by large 
national banks and federally regulated thrifts. Our most recent report, 
released in September, provides data through second quarter 2010 for 
nearly 34 million first-lien mortgages, totaling nearly $6 trillion in 
outstanding balances--representing approximately 65 percent of all 
first-lien residential mortgages in the country.\3\ Key trends from 
that report are summarized below.
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    \3\ A full copy of the OCC and OTS Mortgage Metrics Report, Second 
Quarter 2010 is available at: http://www.occ.gov/publications/
publications-by-type/other-publications/mortgage-metrics-q2092010/
mortgagemetrics-q2092010-pdf.pdf.
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Overall Mortgage Performance
    As shown in Table 1, the percentage of current and performing 
mortgages remained unchanged from the previous quarter at 87.3 percent. 
The percentage of mortgages 30 to 59 days delinquent increased to 3.1 
percent at the end of the second quarter of 2010, compared with 2.8 
percent at the end of the previous quarter and 3.2 percent a year ago. 
The percentage of seriously delinquent mortgages \4\ was 6.2 percent, a 
decrease of 5.3 percent from the previous quarter but up 16.1 percent 
from a year ago. Foreclosures in process were 3.4 percent of the total 
portfolio, a 1.4 percent decrease from the previous quarter but a 16.1 
percent increase from a year ago.
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    \4\ Seriously delinquent loans are those mortgages that are 60 or 
more days past due and all mortgages held by bankrupt borrowers whose 
payments are 30 or more days past due.


Home Retention Actions
    As shown in Table 2, servicers implemented 902,800 permanent loan 
modifications (shown as ``Other Modifications'' and ``HAMP 
Modifications'') over the past five quarters with HAMP modifications 
accounting for approximately 26 percent of this total. During the 
second quarter 2010, servicers initiated or implemented 504,292 home 
retention actions. This included 273,419 HAMP and other permanent loan 
modifications, an increase of 18.1 percent from the first quarter of 
2010. Loan modifications implemented in second quarter 2010 represent 
13.1 percent of seriously delinquent borrowers, up from 7.9 percent in 
the second quarter 2009. While the number of permanent modifications 
increased, the number of trial modifications and other payment plans 
declined as servicers worked through their portfolio of seriously 
delinquent mortgages to determine borrower eligibility under HAMP and 
each servicer's own proprietary loan modification programs.


Changes to Borrowers' Monthly Payments Resulting From Modifications
    Early in the mortgage crisis, servicers' informal payment plans and 
loan modifications were done in low volume and often resulted in 
mortgage payments that increased or did not change. This traditional 
approach to loss mitigation gave delinquent borrowers experiencing 
temporary financial problems a chance to catch-up on making their loan 
payments. However, as the mortgage crisis deepened, unemployment 
climbed, and the number of delinquent borrowers increased to 
unprecedented levels, it became clear that more formal and permanent 
modifications were needed. The OCC's mortgage metrics data provided 
factual evidence that loan modifications completed in 2008 were 
experiencing high re-default rates. As a result of those high re-
default rates, in March 2009, the OCC directed the largest national 
banks to take corrective action to implement loan modification programs 
designed to achieve more sustainable modifications.
    As a result, servicers have focused efforts on improving the 
quality of their loan modifications and the performance of those 
modifications over time. This is evidenced by the increase in 
modifications that are reducing borrowers' monthly mortgage payments 
and the corresponding decline in re-defaults (as measured by serious 
delinquencies) subsequent to modification since the OCC's direction to 
servicers in 2009. As shown in Table 3, mortgage modifications that 
lowered monthly principal and interest payments increased to more than 
90 percent of all modifications during the second quarter 2010. The 
emphasis on payment affordability and sustainability has resulted in a 
62 percent increase in the average monthly savings in mortgage payments 
from mortgage modifications from a year ago. As shown in Table 4, 
modifications made during the second quarter of 2010 reduced monthly 
payments by an average of $427. 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 savings 
to the consumer of $698 a month. These actions for more sustainable 
payments are also reflected in lower re-default rates for more recently 
modified loans. Modifications made after the end of the first quarter 
of 2009 have experienced about half the re-default rates of 
modifications made prior to that time.\5\
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    \5\ See OCC and OTS Mortgage Metrics, Second Quarter, page 7.
    
    
Home Forfeiture Actions--Short Sales, Deed-in-Lieu-of-Foreclosures, and 
        Foreclosures
    As previously noted, mortgage servicers generally do not proceed 
with home forfeiture actions until they have evaluated the borrower's 
eligibility for a loan modification that would allow the borrower to 
stay in his or her home. Unfortunately, loan modification programs 
cannot help borrowers who simply cannot make even reduced mortgage 
payments. In these cases, servicers turn to home forfeiture actions to 
protect the interests of lenders and investors.
    Completed home forfeiture actions--foreclosure sales, short sales, 
and deed-in-lieu-of-foreclosure actions--totaled 221,474 during the 
second quarter, an increase of 14.2 percent from the previous quarter 
(see Table 5). Short sales and deed-in-lieu-of-foreclosure actions 
increased significantly during the quarter, but they remain only 26 
percent of home forfeiture actions overall. While home forfeiture 
actions increased in the second quarter, servicers implemented about 
2.3 times more home retention actions--loan modifications, trial period 
plans, and payment plans--than total home forfeiture actions.


     The number of newly initiated foreclosures decreased by 21.2 
percent, to 292,072, during the second quarter of 2010, the lowest 
level in more than a year. The lower number is partly attributable to 
the increase in permanent modifications made during the quarter. In 
addition, HAMP guidelines now preclude the servicer from initiating a 
foreclosure action until the borrower has been determined to be 
ineligible for a HAMP modification. Similarly, the number of loans in 
process of foreclosure decreased by 1.8 percent from the previous 
quarter to 1,149,770, reflecting the increases in permanent 
modifications and completed foreclosures during the quarter as well as 
the drop in newly initiated foreclosure actions. Notwithstanding these 
positive trends, we expect the number of foreclosure actions will 
remain elevated as the large inventory of seriously delinquent loans 
and loans in process of foreclosure works through the system.


OCC Supervisory Efforts
Emphasis on Sustainable Loan Modifications and Accurate Financial 
        Reporting
    As the volume of problem loans surged to record levels and has 
worked its way through the financial system, servicers have struggled 
to maintain the needed capacity and resources to effectively deal with 
the number of consumers who require assistance. We have used our 
examination process and our Customer Assistance Group (CAG) to address 
issues as they have arisen.
    Our primary supervisory focus in assessing how servicers work with 
borrowers experiencing payment problems over the past 2 years has 
centered on their efforts to offer sustainable loan modifications that 
avoid foreclosure and allow troubled borrowers to remain in their 
homes. As previously noted, when our mortgage metrics data showed that 
an inordinately high percentage of loan modifications made in 2008 were 
re-defaulting, we directed large national bank mortgage servicers to 
take corrective action and revise their loan modification programs to 
produce loan modifications that resulted in more sustainable loan 
payments. In most cases, this requires concessions on the terms of the 
loan, rather than simply granting a borrower a payment deferral that 
capitalizes arrearages, which was typical in many traditional 
modifications. In addition, in our supervision of national bank 
mortgage servicers we have issued numerous ``Matters Requiring 
Attention,'' requiring improvements in servicers' loan modification 
operations and staffing.
    Some observers have stated that mortgage servicers have an inherent 
conflict of interest in working with borrowers to modify a first lien 
where the servicer holds the second lien on the property. In general, 
all other creditors benefit from a modification of the first lien since 
the modification puts the borrower in a stronger cash-flow position, 
and makes the borrower more likely to be able to make payments on other 
debts. A conflict of interest could arise if the second lien holder 
were trying to overstate the second lien's carrying value (and under-
allocate loan loss reserves) for a troubled borrower. The OCC has 
addressed this potential conflict by directing that second lien holders 
must take steps necessary to understand any potential issues with the 
first lien and ensure that carrying values and loan loss reserve levels 
reflect all risk in the transaction--including any problems the 
borrower might be having on the first lien, even if the second lien is 
performing as agreed.
    The volume of current and performing second liens held by national 
banks behind delinquent or modified first liens remains relatively 
small. The OCC analyzed second liens held by national banks and matched 
more than 60 percent of them ($293 billion) to first-lien mortgages. Of 
these 5,000,000 matched second mortgages, about 6 percent, or 235,000, 
were current and performing but behind delinquent or modified first 
liens. The balance of those current and performing second liens behind 
delinquent or modified first mortgages totaled less than $18 billion. 
The OCC has directed national banks that hold such performing second 
liens to properly reflect the associated credit impairment for those 
second liens through an increase in the allowance for loan losses, or 
in many cases, a charge-off of the loan where appropriate.
Oversight of and Responses to Foreclosure Documentation Issues
    When reviewing a bank's foreclosure governance process, such as 
practices involved with the preparation and filing of affidavits for 
foreclosure proceedings, examiners determine if the bank has 
appropriate policies, procedures, and internal controls in place to 
ensure the accuracy of information relied upon in the foreclosure 
process and compliance with Federal and State laws. An appropriate 
governance process would include the testing of those policies and 
procedures through periodic internal audits and the bank's on-going 
quality control function. In this instance, neither internal quality 
control, internal or third party audits at the largest servicers, nor 
our CAG data revealed that foreclosure document processing was an area 
of concern.
    When the problems at Ally Bank--an institution that is not 
supervised by the OCC--became public, the OCC took immediate action to 
determine if procedural breakdowns at national bank servicers could be 
resulting in similar foreclosure affidavit problems. On September 29, 
2010, we ordered the eight largest national bank servicers to conduct a 
comprehensive self-assessment of their foreclosure management 
processes, including file review and affidavit processing and 
signature. We also made clear that where deficiencies were identified, 
the servicers needed to take prompt action to remedy any improper 
documentation, including as applicable, making appropriate re-filings 
with local courts. Equally important, we also directed banks to 
strengthen foreclosure governance to ensure the accuracy of the 
information relied upon in the foreclosure process and prevent re-
occurrences of documentation problems.
    Concurrent with this directive, we began planning onsite 
examinations at each of these large servicers and their mortgage 
servicing operational centers. Our objectives are to independently test 
and verify the adequacy and integrity of bank self-assessments and 
corrective actions; the adequacy and effectiveness of governance over 
servicer foreclosure processes to ensure foreclosures are completed in 
accordance with applicable legal requirements and that affidavits and 
claims are accurate; and to determine whether troubled borrowers were 
considered for loss mitigation alternatives such as loan modifications 
prior to foreclosure.
    These examinations are now underway at each of the eight servicers. 
The Federal Reserve Board (FRB) and Federal Deposit Insurance 
Corporation (FDIC) are participating in these examinations. The 
examination teams include examiners from the OCC, FRB, and FDIC. The 
OCC has approximately 100 examiners working on this effort. Legal 
support is provided by staff attorneys from both the OCC and FRB. We 
have established an interagency foreclosure review team to provide 
oversight and direction to onsite examination teams to ensure 
consistency in our examination work.
    As noted above, a key objective of our examinations is to determine 
the adequacy and effectiveness of governance over the foreclosure 
process. The scope of work to assess governance is extensive and 
includes an assessment of each servicer's foreclosure policies and 
procedures, organizational structure and staffing, vendor management, 
quality control and audit, loan documentation including custodial 
document management, and foreclosure work flow processes. As part of 
these reviews, examiners are conducting interviews with personnel 
involved in the preparation, review, and signing of foreclosure 
documents. Our objective in conducting these interviews is to 
understand current and past practices with respect to preparation of 
foreclosure documents, whether the staff conducting these functions had 
sufficient knowledge and training, including training in relevant 
requirements, to effectively complete and sign-off on foreclosure 
affidavits, and to help assess the underlying cause of any identified 
deficiencies.
    Examiners will also be reviewing samples of individual borrower 
foreclosure files from judicial and non-judicial states that include 
both in-process and completed foreclosures. In reviewing these files, 
examiners will determine whether foreclosed borrowers were 
appropriately considered for alternative loss mitigation actions such 
as a loan modification. Examiners will also check for the following:

    A documented audit trail that demonstrates that data and 
        information (e.g., amount of indebtedness and fees) in 
        foreclosure affidavits and claims are accurate and comply with 
        State laws;

    Possession and control over the underlying, critical loan 
        documents such as original note, mortgage, and deed of trust to 
        support legal foreclosure proceedings; and

    Evidence that the affidavit and documents were 
        independently and appropriately reviewed, and that proper 
        signatures were obtained.

In addition to these loan file reviews, examiners will review the 
nature, volume, and resolution of foreclosure-related complaints. These 
will include complaints received by the OCC's Customer Assistance Group 
as well as complaints received by the banks.
    Finally, examiners will assess the adequacy of each bank's analysis 
and financial reporting for the potential adverse impact on the bank's 
balance sheet and capital that may arise from the increased time and 
costs needed to correct any procedural errors; losses (if any) 
resulting from inability to access collateral; and expected litigation 
costs. We are directing banks to maintain adequate reserves for 
potential losses and other contingencies and to make appropriate 
disclosures, consistent with applicable Securities and Exchange 
Commission disclosure rules.
    Using our authority under the Bank Service Company Act, we also are 
conducting interagency examinations of two major non-bank mortgage 
service providers. The OCC, in coordination with the FRB, FDIC, and 
Federal Housing Finance Agency, is leading an onsite examination of the 
Mortgage Electronic Registration System (MERS). A key objective of the 
MERS examination is to assess MERS corporate governance, control 
systems, and accuracy and timeliness of information maintained in the 
MERS system. Examiners assigned to MERS will also visit onsite 
foreclosure examinations in process at the largest mortgage servicers 
to determine how servicers are fulfilling their roles and 
responsibilities relative to MERS.
    We are also participating in an examination being led by the FRB of 
Lender Processing Services, Inc., which provides third-party 
foreclosure services to banks. We expect to have most of our onsite 
examination work completed by mid to late December. We then plan to 
aggregate and analyze the data and information from each of these 
examinations to determine whether or what additional supervisory and 
regulatory actions may be needed. We are targeting to have our analysis 
completed by the end of January.
    We recognize that the problems associated with foreclosure 
processes and documentation have raised broader questions about the 
potential effect on the mortgage market in general and the financial 
impact on individual institutions that may result from litigation or 
other actions by borrowers and investors. Obviously, for a host of 
reasons--from fair treatment of borrowers to the fundamentals of the 
mortgage marketplace--mortgage servicers must get this right. We are 
directing banks to take corrective action where we find errors or 
deficiencies, and we have an array of informal and formal enforcement 
actions and penalties that we will impose if warranted. These range 
from informal memoranda of understanding to civil money penalties, 
removals from banking, and criminal referrals.
Conclusion
    The OCC is focused on identifying and rectifying problems so that 
the basic function and integrity of the foreclosure process is 
restored; the rights of all homeowners subject to the foreclosure 
process are protected; and the basic functioning of the U.S. mortgage 
market is stabilized. As we move forward we will continue to cooperate 
with the many inquiries and investigations that are taking place and 
provide updates to the Congress.
OFFICE OF THE COMPTROLLER OF THE CURRENCY OUTLINE FOR UNIFORM SERVICING 
        STANDARDS
General Standards
    Servicers should act responsibly and adhere to the highest 
standards of professionalism in their dealings with borrowers. These 
include:

    Safeguarding and accounting for borrower's funds;

    Acting in accordance with the underlying contractual 
        documents in servicing the loan;

    Striving to act in the best interest of the owner of the 
        loan and the borrower in servicing the loan, including by 
        pursuing loss mitigation options as appropriate;

    Maintaining trained personnel appropriate to servicing 
        workload;

    Maintaining compensation schedules for staff and third 
        party vendors that promote adherence to these standards;

    Maintaining compensation schedules that provide effective 
        incentives to work with troubled borrowers, including early 
        outreach and counseling; to pursue loss mitigation and 
        foreclosure avoidance strategies, to maximize the net present 
        value of the loan; and to maintain adequate levels of 
        appropriately trained staff to respond to current and 
        anticipated demand, including to respond to increases in loan 
        delinquencies.

    Maintaining fee schedules that are reasonable and 
        appropriate to the type, level and cost of the service that is 
        provided, or purpose of the fee;

    Providing timely information to the borrower about the 
        account, including periodic statements of the account;

    Providing timely and comprehensive information to borrowers 
        on matters related to the account, including in response to 
        borrower requests for information or complaints and, as 
        appropriate, about loan counseling and loss mitigation options 
        and services;

    Force-placing hazard, homeowners, or flood insurance on a 
        mortgaged property only when required, to the extent required, 
        and in the amount required after reasonable advance notice to 
        the borrower;

    Adopting internal controls appropriate to the nature and 
        complexity of the servicing operations and conducting periodic 
        assessments to ensure adherence to these standards; and

    Avoiding conflicts of interest.
Payments
    Servicers should adopt and adhere to reasonable procedures for 
handling borrower payments, including:

    Clearly describing the payment amount, and the date, time, 
        and location for payments to be received under the terms of the 
        loan agreement;

    Imposing reasonable cutoff times;

    Crediting payments in a prompt and timely manner, 
        ordinarily on the date of receipt;

    Applying payments, including partial payments, to scheduled 
        principal and interest, before they are applied to fees;

    Avoiding payment allocation processes designed primarily to 
        increase fee income;

    Not imposing late or delinquency fees when the delinquency 
        is attributable solely to nonpayment of late or delinquency 
        fees on an earlier payment;

    Notifying a borrower of the fact that, and reasons why, any 
        payment may not have been credited to the account and how the 
        borrower may make the loan current;

    Correcting any misapplication of borrower funds in a prompt 
        and timely manner;

    Not commingling borrowers' payments with the servicer's own 
        funds except for the time needed to process and clear borrower 
        payments;

    Adopting reasonable policies and procedures for handling 
        payment overages and shortages; and

    Conducting periodic audits of payment processing functions.
Borrower Notices
    Servicers should provide borrowers with full and accurate 
information about their accounts and payment records, including by 
providing the following notices:

    Periodic and annual statements--Servicers should provide 
        borrowers with monthly and annual statements of the borrower's 
        account activity for the preceding period, including 
        information about total amount due; payments of principal and 
        interest; remaining principal balance; itemization of any late 
        or other fees imposed; escrow payments, balances, and 
        deficiencies; any advances made, such as for force-placed 
        insurance; and remaining term of the loan.

    Payment history--Upon request, servicers should provide 
        borrowers within a reasonable time of the request, a statement 
        of the recent payment history of the loan.

    Mortgage servicing transfer--Servicers should provide 
        borrowers with appropriate account and contact information upon 
        transfer of servicing.

    Payoff statement--Upon request, servicers should provide 
        borrowers within a reasonable time of the request, a statement 
        of the total amount required to pay off the loan as of a 
        specified date.

    Late payment notice--Servicers should send borrowers a 
        payment reminder notice after a payment is past due, unpaid, 
        and a late fee has been imposed. Servicers need not send 
        separate notices for each consecutive month in which the loan 
        remains unpaid.

    Schedule of fees--Servicers should provide reasonable 
        disclosure of a current schedule of standard or common fees it 
        may impose. Service fees should be imposed only as authorized 
        in the loan instruments and applicable law or where the 
        consumer expressly requests a specific service at that fee;

    Delinquencies, loss mitigation, and foreclosure notices--
        Servicers should provide borrowers with timely information in 
        the event of a delinquency or default about loss mitigation 
        options offered by the servicers, as well as clear and 
        understandable notices about the pendency of loan modification 
        and foreclosure proceedings. Such information includes the 
        following:

    The nature and extent of any delinquency;

    A list of documentation or other information and any third 
        party approvals the borrower must provide;

    The anticipated or average length of time it may take to 
        process any loss mitigation option or loan modification; and

    The actions the servicer, lender, or owner of the loan may 
        take during the applicable process, such as the circumstances 
        in which the borrower may receive collection and/or foreclosure 
        notices and in which any foreclosure action may be stayed.
Borrower Complaints and Inquiries
    Servicers should act promptly and reasonably in responding to 
borrower inquiries, requests, and complaints, including by taking the 
following actions:

    Maintaining adequate levels of trained customer service 
        personnel to handle complaints and inquiries;

    Providing an address and toll-free number for such 
        complaints and inquiries;

    Providing contact information for the owner of the loan;

    Providing a single and easily accessible point of contact 
        for special inquiries, information and services, such as loss 
        mitigation and loan modifications services, and for delinquent 
        and at risk borrowers; and

    Responding and resolving borrower inquiries and complaints 
        in a prompt and appropriate manner;

    Providing an avenue for escalation or appeal of any 
        disputes;

    Correcting customer accounts, correcting credit report 
        information, and making refunds, as applicable; and

    Maintaining adequate tracking information for such 
        inquiries and complaints.
Delinquencies, Loss Mitigation, Loan Modifications, and Foreclosure 
        Abeyance
    Delinquent loans--Servicers should follow an appropriate set of 
special protocols for servicing delinquent loans that include:

    Promptly alerting the appropriate functional unit(s) that a 
        loan is delinquent;

    Working with borrowers at risk of foreclosure, including 
        early outreach and counseling;

    Employing specially trained staff to work with delinquent 
        loans and borrowers;

    Implementing appropriate procedures regarding notices of 
        delinquencies, assessing late charges, handling partial 
        payments, maintaining collection records, and reporting to 
        credit bureaus;

    Pursuing loss mitigation and foreclosure prevention 
        measures;

    Ensuring compliance with legal requirements;

    Providing for quality assurance review of decisions 
        concerning loss mitigation options or commencement of 
        foreclosure actions.

    Loss mitigation--Servicers should make reasonable and good faith 
efforts, consistent with customary business standards and in accordance 
with applicable laws and contracts, to engage in loss mitigation 
activities and foreclosure prevention for delinquent loans, where 
appropriate. Such activities include considering a deed-in-lieu of 
foreclosure; forbearance; and short sale.
    Loan modification procedures--Servicers also should make reasonable 
and good faith efforts, in accordance with specific protocols 
established by contract and with applicable laws, to modify loans to 
provide affordable and sustainable payments when:

    The borrower is in default or at imminent risk of default 
        on a loan due to financial hardship and is unable to maintain 
        the payments or is unable to make up any delinquent payments, 
        and

    The net present value of cash-flows from the modified loan 
        will exceed that expected from foreclosure.

    Servicers should implement appropriate procedures to ensure that 
documents provided by borrowers and third parties are appropriately 
maintained and tracked and that borrowers generally will not be 
required to resubmit the same documented information that has already 
been provided; that such requests are acknowledged, processed, and 
evaluated in a timely manner; and that borrowers are notified promptly 
of the approval or denial of their modification requests or of the need 
for additional information. Such procedures include:

    Acknowledging receipt of requests for loan modifications 
        and providing information about the designated point of contact 
        for further communications about the request or for appeals;

    Reviewing such requests for documentary sufficiency and 
        notifying a borrower if an application or request is incomplete 
        and describing any additional information that is necessary to 
        complete any application or otherwise enable an evaluation of 
        the borrower's loan modification request;

    Implementing procedures and systems to ensure that 
        reasonable steps are taken, without undue delay, to procure and 
        safeguard all information needed to evaluate and act on a 
        consumer's request for a mortgage modification;

    Completing the evaluation of the borrower's eligibility for 
        a loan modification or other loss mitigation option;

    Notifying the borrower of approval of any modified loan 
        terms being offered or, if applicable, the reasons for denial, 
        such as information on the NPV calculation, and where to obtain 
        additional information or information about housing counseling 
        assistance;

    Implementing and maintaining reasonable procedures and 
        sufficient staffing to ensure full compliance with policies, 
        procedures, and timelines affecting loan modification requests;

    Ensuring that borrowers are not required to waive any 
        claims or defenses as a condition of a loan modification; and

    Implementing policies and procedures to notify foreclosure 
        attorneys and trustees regarding a borrower's status for 
        consideration of a loss mitigation option, including whether 
        the borrower has requested and is being considered for loss 
        mitigation and whether the borrower is in a trial or permanent 
        loan modification and is not in default under the agreement.

    Foreclosure abeyance--Servicers should avoid taking steps to 
foreclose on a property, including referring a mortgage to foreclosure, 
continuing the foreclosure process--whether judicial or non-judicial, 
conducting a scheduled mortgage foreclosure sale, or incurring costs 
for foreclosure-related services that will be imposed on the borrower, 
if the borrower is in a trial or permanent modification and is not in 
default under the modification agreement. A servicer may initiate or 
proceed with the foreclosure process when:

    The borrower has declined to pursue loss mitigation or loan 
        modification actions;

    The borrower is not responding to reasonable requests for 
        information or outreach related to loss mitigation or loan 
        modification efforts;

    The borrower has not submitted information necessary to 
        evaluate the borrower for a loan modification;

    The borrower has been determined to be ineligible for a 
        loan modification; or

    The borrower is in default under the terms of a trial or 
        permanent modification period plan.

    Acting in accordance with guidelines, directives, and notice 
requirements developed by the U.S. Department of Treasury and in effect 
for the Home Affordable Mortgage Program (HAMP) will be deemed to meet 
these standards for loss mitigation, loan modification and foreclosure 
prevention.
Foreclosure Governance
    Servicers should adhere to reasonable procedures in managing the 
foreclosure process including with respect to compliance with legal 
standards and documentation requirements, oversight of third parties, 
staffing and training, and audits. In general, servicers should 
institute controls and procedures that will ensure that foreclosures 
occur only when appropriate and taking into account the status of any 
foreclosure abeyance actions, the facts are documented to support the 
action, and in compliance with applicable laws and investor 
requirements.
    Compliance with legal requirements--Servicers should ensure 
compliance with State law requirements when preparing foreclosure 
affidavits and claims.
    Documentation procedures--Servicers should ensure maintenance of 
sufficient documentation and servicing systems to support foreclosure 
decisions and actions. For example, servicers should adopt internal 
controls and procedures to ensure:

    The accuracy and completeness of the borrower's loan 
        history;

    The accuracy and completeness of representations to courts 
        and other parties in connection with foreclosure or bankruptcy 
        proceedings;

    Compliance with legal requirements;

    Retention of documents that support the foreclosure action 
        in a centralized records system; and

    Remediation of any errors, misrepresentations, or other 
        deficiencies including, for example, correcting errors in a 
        borrower's account.

    Third party/vendor management--Servicers should ensure appropriate 
oversight of third party vendors, including outside legal counsel, by:

    Performing minimum due diligence on the vendor's 
        qualifications, expertise and capacity; reputation and 
        complaints; information security; business continuity; and 
        viability;

    Conducting capacity and concentration analysis of external 
        law firms;

    Ensuring adequacy of third party staffing levels, training, 
        work quality, and workload balancing;

    Ensuring that contracts provide for adequate oversight, 
        including audits and termination upon default, and require 
        third party adherence to these standards;

    Maintaining and evaluating reports on third party 
        compliance with contractual obligations;

    Reviewing any customer complaints about the services of the 
        third party;

    Conducting qualitative assessments and audits of third 
        party work for timeliness and accuracy of filings and completed 
        actions, including foreclosure processes and documentation. 
        External law firms should be treated as third party vendors and 
        standards appropriate for oversight of third party vendors 
        should be applied to such firms; and

    Following up on any performance failures in a timely 
        manner.

    Staffing and training--Servicers should ensure adequate staffing 
levels and training, including:

    Ensuring staffing levels that are appropriate to the 
        current and projected volumes, workload, and technical 
        requirements of foreclosures;

    Providing comprehensive technical training for staff, 
        notaries, and affiants and signors, sufficient to the nature 
        and levels of foreclosure work; and

    Emphasizing accuracy and completeness of work in staff 
        performance, not solely production and volume.

    Quality control and audit--Servicers should ensure comprehensive 
quality control and audit coverage, including:

    Obtaining annual independent attestations of compliance 
        with quality assurance plans;

    Ensuring independent oversight of the foreclosure process;

    Ensuring adequate assessments of all aspects of the 
        foreclosure process, including through reporting metrics that 
        identify trends and potential problems;

    Assessing loan modification and loss mitigation efforts, 
        appropriateness of fees and charges to borrowers, and 
        application of payments and credits;

    Ensuring that foreclosure filing documents and fees, costs, 
        and indebtedness associated with the foreclosure are accurate;

    Evaluating controls and processes used by third party 
        vendors and law firms;

    Evaluating foreclosure-related consumer complaints for 
        indications of any systemic problems; and

    Identifying non-compliance with State laws or rules 
        concerning completion, filing, and notarization of foreclosure 
        affidavits and claims.
                                 ______
                                 
                PREPARED STATEMENT OF EDWARD J. DeMARCO
            Acting Director, Federal Housing Finance Agency
                            December 1, 2010

Introduction
    Chairman Dodd, Ranking Member Shelby and Members of the Committee, 
thank you for inviting me to speak with you today about weaknesses in 
the foreclosure process. The recently identified deficiencies in the 
preparation and handling of legal documents to carry out foreclosures 
are unacceptable. While those deficiencies undoubtedly reflect strains 
on a system that is operating beyond capacity and was never designed to 
handle the volume of nonperforming loans that we are seeing today, they 
also represent a breakdown in corporate internal controls and the 
integrity of mortgage servicing and foreclosure processing. Servicers 
and others within the industry may have attempted to expand the 
resources available to deliver appropriate loss mitigation services, 
including timely and accurate foreclosure processing, but in some 
instances those efforts have been inadequate.
    Since this latest set of difficulties was identified, I have had a 
team of managers and staff from the Federal Housing Finance Agency 
(FHFA) working closely with Fannie Mae and Freddie Mac (the 
Enterprises) to gauge the full scope of the foreclosure processing 
problem and to move forward on foreclosures where appropriate. Our 
goals are two-fold: to ensure that foreclosure processing is done in 
accordance with the servicer contract and applicable laws, and to 
protect taxpayers from further losses on defaulted mortgages. Moving 
forward on foreclosures where appropriate limits taxpayer losses and 
contributes to the ultimate recovery of domestic housing markets. Of 
course, before any foreclosure is completed, we expect servicers to 
exhaust all alternatives.
    With those objectives in mind, I will review the actions that FHFA 
has taken to date, as well as those underway. Before doing so, I will 
provide context for understanding the problems that have arisen, 
including consideration of:

    the role of the servicers, attorneys, and their contractual 
        relationship with the Enterprises when performing loss 
        mitigation and foreclosures and

    the complexities of the system in which State and local 
        laws create a diverse range of requirements that can extend 
        foreclosure timelines, leaving homeowners and homebuyers in 
        limbo, putting home values at risk in neighborhoods with 
        abandoned or vacant properties and slowing the recovery of the 
        housing market.

    Today, Fannie Mae and Freddie Mac own or guarantee 30 million 
mortgages; of those, more than 1.3 million are more than 90 days 
seriously delinquent. As I have reported to the Committee on prior 
occasions, the Enterprises have sought to minimize losses on delinquent 
mortgages by offering distressed borrowers loan modifications, 
repayment plans, or forbearance. These loss mitigation techniques 
reduce the Enterprises' losses on delinquent mortgages and help 
homeowners retain their homes. Servicers of Enterprise mortgages know 
that these loss mitigation options are the first response to a 
homeowner who falls behind on their mortgage payments.
    Yet, for some delinquent borrowers, their mortgage payments are 
simply not affordable due to unemployment or other hardship and a loan 
modification is not a workable solution. In other cases, homeowners 
have decided not to continue payment on their mortgages, perhaps 
because of the decline in value of their house or because personal 
circumstances have changed their desire or ability to retain their 
home. For these cases, the Enterprises offer foreclosure alternatives 
in the form of short sales and deeds-in-lieu of foreclosure. Such 
foreclosure alternatives generally are better for the homeowner, the 
neighborhood, and the Enterprise. Despite these options for a graceful 
exit from a home, foreclosure remains the final and necessary option in 
many cases.
    The sheer volume of delinquent homeowners has put intense pressure 
on servicers, including their loan workout efforts and their 
foreclosure processes. Other hearings and studies have analyzed how and 
why this has happened. The subject of this hearing and our challenge 
today is to identify the full scope and implications of foreclosure 
processing problems and to improve the integrity of the foreclosure 
process at servicers and related parties that are failing to perform to 
required standards.

Breakdowns in the Foreclosure Process and FHFA's Initial Response
    As reports of foreclosure documentation deficiencies emerged at 
several major servicers, FHFA sought to ascertain the full scope and 
nature of the problem. On October 1, I issued a statement that said, in 
part:

        FHFA, as conservator for Fannie Mae and Freddie Mac, supports 
        efforts by the Enterprises to remind servicers and other 
        parties engaged in processing foreclosures to do so in 
        accordance with their seller-servicer agreements and applicable 
        laws and regulations. Where deficiencies have been identified, 
        FHFA has directed the Enterprises to work collectively to 
        develop and implement a consistent approach to address any 
        problems. In addition, FHFA is coordinating with appropriate 
        regulators on this issue. Our goal is to assure the integrity 
        of the foreclosure process and to see that any corrections in 
        processes be tailored to the problem, protecting the rights of 
        borrowers and investors without causing any undue disruption to 
        the mortgage markets.

    On October 13, FHFA built upon its earlier statement by providing 
the Enterprises and servicers a four-point policy framework for 
handling foreclosure process deficiencies, including specific steps 
FHFA expects them to take to assess and remedy the problems. The four 
points are simply stated:

  1.  Verify that the foreclosure process is working properly;

  2.  Remediate any deficiencies identified in foreclosure processing;

  3.  Refer suspicions of fraudulent activity; and

  4.  Avoid delay in processing foreclosures in the absence of 
        identified problems.

    Pursuant to that guidance, the Enterprises continue to gather 
information on the full nature and extent of servicer problems. Since 
then, only a small number of servicers have reported back to the 
Enterprises as having some problem with their foreclosure processing 
that needs to be addressed. Still, these firms represent a sizable 
portion of the Enterprises combined books of business. The issues 
identified to-date range in size and scope, and may not affect every 
delinquent mortgage that a particular servicer is handling. Thus, it is 
difficult to say just how many delinquent Enterprise mortgages may be 
affected and the degree of difficulty in remediating the deficiencies. 
The Enterprises are currently working directly with their servicers to 
ensure that all loans are handled properly and corrections and refiling 
of paperwork are completed where necessary and appropriate. Because the 
file reviews are being performed case-by-case, the full evaluation will 
take a substantial amount of time and resources.
    As made clear in FHFA's October 13th policy framework, if wrongful 
acts in foreclosure processing are discovered, the appropriate remedies 
should be undertaken by servicers, regulators, and law enforcement. 
Simply put, it is not acceptable that servicers and other parties 
involved in foreclosure processing may not have adhered to State and 
local laws. As Conservator of the Enterprises, FHFA expects all 
companies servicing Enterprise mortgages to fulfill their contractual 
responsibilities, which include compliance with both the Enterprises' 
seller/servicer guides and applicable law. We expect the same of other 
parties as well, including law firms working on foreclosure processing 
of Enterprise loans. Finally, to reinforce the duties undertaken by 
servicers, the Enterprises have indicated that they may pursue remedies 
for contractual violations.

The Role of the Servicer
    When an Enterprise purchases a mortgage from an originating lender, 
it contracts with that lender or another bank or financial institution 
to service the loan. The servicer is the main communication point for 
the borrower, accepting all payments and crediting the borrower's 
account.
    When homeowners get behind in payments, the servicer is expected to 
work with the delinquent borrower to set up a repayment plan, modify 
the loan, or, if foreclosure alternatives are not viable, begin 
foreclosure proceedings. Although the Enterprises hold the actual 
promissory notes through document custodians who maintain these records 
separate from the servicers, Fannie Mae and Freddie Mac do not 
themselves accept or process payments or move to modify or foreclose.
    For their work, the servicers get paid by the Enterprises and, 
under the terms of their contracts, each servicer is obligated to 
follow the procedures established by the Enterprise, including 
compliance with all appropriate laws. The Enterprises also provide 
policy guidelines to their seller/servicers. A servicer is 
contractually bound to comply with this guidance; however, the 
Enterprises do not review loan files for each and every mortgage they 
guarantee or purchase. Instead, the Enterprises rely on a 
representation and warranty (rep and warrant) model under which the 
loan originator and loan servicer commit that the loan origination and 
servicing complies with the Enterprise's seller/servicer guide. Under 
the terms of the servicer contracts, the Enterprises can require the 
servicer to pay damages if the servicer does not follow the seller/
servicer guidelines or force the servicer to buy back the loan if the 
loan fails to meet the Enterprises' eligibility guidelines.
    The majority of Enterprise loans are serviced by a few very large 
banks. However, there are hundreds of servicers that hold contracts 
with each Enterprise; many are relatively small institutions. Each 
servicer typically works on behalf of many investors, including 
trustees for private label securities, and must follow the procedures 
and processes set forth in each investor contract. As I will describe 
further below, we are working with other government agencies to review 
foreclosure servicing practices and operations, and where we find firms 
with operational deficiencies, these must be remedied.

Attorneys Specializing in Foreclosure Processing
    In order to complete foreclosures, particularly in judicial 
foreclosure states, servicers often contract with law firms from the 
Enterprises' approved attorney networks (for servicers of one 
Enterprise this is required, for the other, it is optional to use the 
approved network). These law firms have been evaluated by the 
Enterprises before being added to that Enterprise's attorney network. 
By adding a firm to its network, the Enterprise has concluded the firm 
has sufficient capacity and expertise to assist a servicer in need of 
foreclosure processing services. Recently the capacity of some of these 
law firms has also been strained by the volume of foreclosures and the 
burden on the court systems. In light of processing problems we are 
discussing today, it is evident that both Enterprises must take steps 
to improve their selection and oversight of the attorneys in their 
networks.

State Foreclosure Processes and Foreclosure Timelines
    Foreclosure proceedings and requirements are established at the 
State level. Almost half of the states have a judicial foreclosure 
process that relies on the court system. By contrast, foreclosures in 
non-judicial states are managed according to State and local laws but 
handled outside of the court system.
    Both systems have protections for homeowners, and to a large extent 
the essential paperwork and documentation elements are the same across 
all states, although particular requirements vary from jurisdiction to 
jurisdiction. In judicial foreclosure states, individual judges may set 
specific requirements within their courtrooms that are in addition to, 
or differ from, terms established by other judges in that State. 
Servicers and law firms involved in processing foreclosures must be 
aware of and responsive to such particular requirements.
    Both judicial and non-judicial states are experiencing growing 
numbers of foreclosures, which are contributing to long delays between 
a borrower's default and the completion of an associated foreclosure.
    Currently, the time from start to completion of a foreclosure for 
Enterprise loans in non-judicial states typically takes 6 months to a 
year. In judicial foreclosure states, it takes even longer, often 6 
months longer than in non-judicial states and in certain judicial 
states the difference is even greater. Bear in mind, these foreclosure 
periods begin after the loan becomes seriously delinquent, typically 
about 4 months.
    Some reasonable delays in the foreclosure process have been 
expected, appropriately so over the past 2 years, as new loss 
mitigation programs, such as loan modifications, have been introduced. 
These programs have often been accompanied by temporary foreclosure 
moratoria so that homeowners in the foreclosure process could be 
assessed for a modification. Servicers are obligated to follow 
Enterprise guidelines, including evaluating homeowners' for eligibility 
for the various foreclosure mitigation programs I described earlier.
    While FHFA remains committed to ensuring borrowers are presented 
with foreclosure alternatives, it is important to remember that FHFA 
has a legal obligation as Conservator to preserve and conserve the 
Enterprises' assets. As I have said before, this means minimizing 
losses on delinquent mortgages. Clearly, foreclosure alternatives, 
including loan modifications, can reduce losses relative to foreclosure 
and benefit homeowners and neighborhoods, adding some measure of 
stability to local housing markets. But when these alternatives do not 
work, timely and accurate foreclosure processing is critical for 
minimizing taxpayer losses. The direct effect on taxpayers is thus: 
when an Enterprise-guaranteed mortgage is delinquent 4 months, the 
Enterprise removes the mortgage from the mortgage-backed security in 
which it was funded, paying off the security investors at par. The 
delinquent mortgage then goes on the balance sheet of the Enterprise, 
funded with debt issued by the Enterprise, debt supported by the 
Treasury Department's Senior Preferred Stock Purchase Agreement. While 
awaiting foreclosure (or some foreclosure alternative), that loan is 
generating no revenue because the borrower has stopped paying, but the 
Enterprise must keep paying interest on the debt supporting the 
mortgage. The cost of the delay is why it is critical to FHFA's 
responsibilities as Conservator to ensure timely processing of 
foreclosure actions--the cost is ultimately borne by the taxpayer.
    When a homeowner falls behind on their mortgage payments, servicers 
operate on a single track, working through loss mitigation options with 
the homeowner, typically beginning with the HAMP program and followed 
by other loan modification programs or other foreclosure alternatives. 
When all loss mitigation alternatives have been exhausted, the 
servicers are expected to initiate the foreclosure process. 
Furthermore, the Enterprises have instructed servicers to suspend 
foreclosure processing when loss mitigation activities reach certain 
milestones. At times, simultaneous actions are necessary because of the 
long timeframes of the foreclosure process and because borrowers are 
not always responsive to foreclosure alternative offers.
    While the Enterprises have established foreclosure time limits in 
their seller/servicer guides, no servicers have been penalized in 
recent years for exceeding those limits, largely because State and 
local legal requirements, loan modification efforts, the unprecedented 
volume, and various foreclosure moratoria have greatly contributed to 
delays. During this year, FHFA has been working with each Enterprise to 
improve servicers' adherence to these timelines, and to apply penalties 
where justified, but the recent set of issues have further complicated 
that effort.
    Deficiencies in the foreclosure process, including problems with 
affidavits, notaries, and improper practices, appear to be the result 
of inadequate resources for and oversight of servicing operations. The 
pressure from high volumes of foreclosures working through the system 
has surfaced fault lines in the foreclosure process that remain the 
responsibility of management at these companies to identify and fix.

Other Actions Being Taken & Matters for Consideration
    All of us--regulators, lawmakers, investors, and the general 
public--want answers to the questions raised by this most recent 
breakdown in our housing finance market and we want them now. Much work 
is underway to assess the characteristics, extent, and location of 
these problems and conclusions must await the completion of this work. 
Regulatory agencies including FHFA are carrying out important 
examination activities that will better inform the issue. Thus, 
identification of further actions or regulatory responses must await 
the results of these examinations and evaluation of the information 
developed.
    My colleagues can speak to the examination activities they are 
leading, some of which include FHFA participation. In particular, FHFA 
is participating in a multi-agency examination of the Mortgage 
Electronic Registration Systems (MERS). FHFA is reviewing the 
Enterprises' practices with regard to oversight of their 
counterparties, which have been lacking in the past. Neither FHFA nor 
the Enterprises have any regulatory authority with regard to mortgage 
servicers. FHFA's authority is limited to the Enterprises and, as I 
have noted, the Enterprises' relationships with mortgage servicers are 
contractual, not regulatory.
    I do not support a blanket moratorium on foreclosures. The adverse 
consequences of a moratorium outweigh the argued benefits. The costs to 
neighborhoods, taxpayers, and investors would be enormous. Our focus 
should be on fixing problems where they are found and then moving 
forward expeditiously with foreclosure proceedings where foreclosure 
alternatives have been exhausted and where no process deficiencies have 
been identified or they have been remedied. Delay is costing taxpayers 
money and creates undesirable incentives for homeowners to stop paying 
their contracted mortgage obligations.
    To date, Fannie Mae and Freddie Mac, as well as other parts of the 
housing finance industry, have relied on a rep and warrant model, 
whereby one party commits to follow a set of standards and the other 
party trusts that commitment, unless and until a clear violation or 
breach is identified. FHFA is reviewing the Enterprises' practices in 
enforcing reps and warrants and FHFA expects adherence to those 
contract terms with regard to mortgages they purchase and with regard 
to mortgage servicing.
    You have asked me to explain the Enterprises' policies regarding 
repurchases of loans the companies believe to have been originated in 
violation of representations and warranties and the volume of loans you 
expect will be put back to the originators or other parties as well as 
what the FHFA is doing to oversee this process and the implications for 
the financial conditions of the Enterprises.
    With regard to mortgage repurchases, I have also been clear that 
the Enterprises should actively enforce lender compliance with their 
contractual obligations, which includes pursuing repurchases from those 
institutions whose loans did not meet the Enterprises' underwriting and 
eligibility guidelines. Lenders are obligated by the representations 
and warranties they made to the Enterprises to repurchase loans that 
did not meet contractual selling requirements.
    The Enterprises have continued to make progress in enforcing 
lenders' representation and warranty obligations, but outstanding 
repurchase requests continue to be of concern to FHFA. During 2009, the 
Enterprises' lenders repurchased $8.7 billion of single-family 
mortgages, and slightly higher volumes are being repurchased in 2010. 
However, as of the end of the third quarter 2010, Fannie Mae had $7.7 
billion in outstanding repurchase requests, and Freddie Mac had $5.6 
billion in outstanding repurchase requests.
    More than one-third of these repurchase requests have been 
outstanding for more than 90 days. Many of the lenders with aged, 
outstanding repurchase requests are among the largest financial 
institutions in the United States. The delays by lenders in 
repurchasing these loans are a significant concern to FHFA. There are 
ongoing discussions between the Enterprises and lenders to reach a 
workable solution and FHFA is examining its options should these 
requests not be resolved in the normal course of business.
    FHFA remains committed to working with fellow regulators to enhance 
our oversight of the foreclosure process and to ensure market 
participants adhere to State and Federal laws. To further our efforts 
at bringing stability to housing finance, our approach needs to 
continue to focus on offering troubled homeowners an opportunity to 
remedy their payment difficulties. Failing that, homeowners should be 
offered foreclosure alternatives but, after that, foreclosure must 
proceed in a legal and timely manner for the sake of neighborhoods, 
investors, and taxpayers.
    Thank you for this opportunity to testify. I would be glad to 
answer any questions.
                                 ______
                                 
                 PREPARED STATEMENT OF TERENCE EDWARDS
                        Executive Vice President
                Credit Portfolio Management, Fannie Mae
                            December 1, 2010

    Chairman Dodd, Ranking Member Shelby, Members of the Committee, 
thank you for the opportunity to testify today. My name is Terry 
Edwards, and I serve as Executive Vice President for Credit Portfolio 
Management at Fannie Mae, which involves foreclosure prevention and 
servicing oversight.
    I came to Fannie Mae in 2009 from PHH Corporation, where I served 
for three decades in a variety of executive roles, including as 
President and CEO of PHH Mortgage, one of the nation's top ten mortgage 
servicers. My experience with PHH gives me a unique perspective on 
Fannie Mae's expectations for servicers and an understanding of 
servicer operations.
    Let me begin by underscoring Fannie Mae's commitment to providing 
liquidity, stability and affordability to America's housing market, and 
our appreciation for the Government's support that allows us to carry 
out our mission and mandate.
    We fulfill our mission and mandate by purchasing or securitizing 
mortgage loans originated by lenders in the primary mortgage market. 
Since the start of 2009, Fannie Mae has provided over $1 trillion in 
funding for nearly 5 million loans for home purchase, refinancing and 
rental housing.
    As private securitization of mortgages has pulled back dramatically 
over the past 2 years, Fannie Mae recognizes that our commitment to 
serve the market is critical.
    We are also intensely focused on doing everything we can to address 
the foreclosure crisis and keep people in their homes. That includes 
taking affirmative steps to ensure that mortgage servicers carry out 
their responsibilities under our mortgage servicing contracts and 
guidelines--especially in helping borrowers pursue our foreclosure 
prevention alternatives and properly handling the foreclosure process.
    Preventing foreclosures is a top priority for Fannie Mae. 
Foreclosures hurt families and destabilize communities. Neighborhoods 
deteriorate when properties are abandoned or neglected. Vacant homes 
depress nearby property values. Condominium and homeowner associations 
are not paid, creating hardships for those communities. And loans that 
result in foreclosure typically cost taxpayers tens of thousands of 
dollars.
    So our first focus is on keeping borrowers in their homes or 
providing foreclosure alternatives, and we are making measurable 
progress. Since the start of 2009, more than 600,000 borrowers with 
loans owned or guaranteed by Fannie Mae received workouts through 
either Treasury's Home Affordable Modification Program or our own 
additional foreclosure-prevention programs.
    The foreclosure-prevention and resolution operations I lead include 
nearly 1,200 personnel dedicated to working with servicers to help 
borrowers avoid foreclosure and stabilizing communities by putting 
foreclosed homes back into service.
    We are sparing no efforts in helping servicers process hundreds of 
modifications every working day. Not since the Great Depression have so 
many people fallen behind on their mortgages. We have learned a lot 
along the way.
    In addressing our response to the foreclosure crisis, I want to 
underscore that Fannie Mae does not service loans. We rely on the loan 
servicing divisions of major banks and other financial institutions as 
the primary front-line operators and points of contact with the 
borrowers. We pay servicers significant fees during the life of a loan 
to work with borrowers. Servicers are required under our servicing 
contracts to help borrowers in trouble, not just collect payments.
    But as many servicers have acknowledged, they have struggled to 
keep up with the volume of delinquent loans. This is frustrating to 
borrowers. It is unacceptable to Fannie Mae. We are taking significant 
steps to improve servicer performance and enforce their contractual 
obligations to help borrowers.
    I also wish to note that while Fannie Mae owns or guarantees more 
than 35 percent of the single-family mortgages in America, we have a 
significantly smaller percentage of borrowers who are seriously 
delinquent than the industry does as a whole--roughly 4.5 percent of 
our borrowers are 90 days or more behind on their payments, as compared 
to the serious delinquency rate of nearly 9 percent across the 
industry. Still, by historical standards our serious delinquency rate 
represents an extremely large number of borrowers facing difficult 
circumstances, so we continue to focus significant efforts on 
addressing this situation.
    In my testimony, I will describe our foreclosure-prevention 
programs and efforts to ensure loan servicers do everything possible to 
help struggling borrowers and prevent needless foreclosures. I will 
also touch on our efforts to work with servicers as they address and 
remedy the foreclosure processing issues that have come to light in 
recent weeks.

Foreclosure prevention process
    Since the start of the housing crisis, Fannie Mae has adopted a 
wide range of foreclosure prevention initiatives that are the 
responsibility of our servicers to implement.
    These initiatives include the Treasury Department's Home Affordable 
Modification Program, or HAMP. We also have provided additional 
solutions for servicers to offer Fannie Mae borrowers when they do not 
qualify for the Treasury program.
    Since the start of the Treasury program in February 2009, more than 
160,000 struggling borrowers with Fannie Mae mortgages have received 
HAMP permanent modifications. And since the start of 2009, about 
250,000 Fannie Mae borrowers have received our modifications outside of 
HAMP. So in total, we have helped more than 410,000 Fannie Mae 
borrowers modify their loans and stay in their homes.
    We have continued to update and improve these borrower-help 
initiatives to incorporate what works, what borrowers need in order to 
take advantage of their options to keep their homes, and what servicers 
need in order to carry out their responsibilities.
    We have a series of steps that we require servicers to take when 
borrowers fall behind on their mortgages and need help--and sometimes 
even before they miss a payment.
    Let me briefly walk through these steps.
    First, we require servicers to determine whether the borrower 
qualifies for a HAMP modification, which will take their monthly 
payment to a level where their first-lien mortgage debt-to-income ratio 
is 31 percent. These modifications can cut hundreds of dollars from 
their monthly loan payments. HAMP also offers modification for second-
lien loans to bring the entire mortgage payment down to a more 
affordable level.
    Then, if the borrower doesn't qualify for HAMP, we require the 
servicers to determine what kind of hardship the borrower is facing--is 
it a short-term hardship, caused by, for example, medical bills? Or is 
it a long-term hardship, such as a reduction in income?
    If the borrower is facing a short-term hardship, then a servicer is 
required to offer forbearance or a repayment plan. We permit up to 6 
months of payment relief for homeowners who are struggling to make 
their mortgage payments because of unemployment.
    If the borrower is facing a long-term hardship, then we require 
servicers first to offer a HAMP modification. Then they may offer a 
non-HAMP modification that may take the borrower's debt-to-income ratio 
down to 24 percent without requiring the borrower to pay down bank 
credit cards and other debt.
    If none of these modification plans can help the borrowers afford 
their loans, then servicers are required to offer the borrowers several 
options that will help the borrower to avoid foreclosure.
    These foreclosure alternatives include short sales, where the 
lender permits the borrower to sell the property at a price that is 
less than the mortgage debt, and deeds-in-lieu of foreclosure, where 
the borrower essentially deeds the home back to the lender. For deeds-
in-lieu, the borrower is also offered a financial incentive to help 
them relocate to alternative housing under these circumstances, and we 
offer to rent homes back to borrowers.
    While it can be difficult for homeowners to relinquish their homes 
through short sales or deeds-in-lieu of foreclosure, these options 
ultimately are much better for the borrower over the long run than 
foreclosure. The borrower is taking action rather than getting locked 
out of the home, there is less impact on the borrower's credit, and the 
borrower increases his ability to finance a home in the future.
    For example, Fannie Mae has changed our underwriting guidelines for 
borrowers who work with their servicers and take advantage of our 
foreclosure alternatives. If they do, they could qualify for a new 
Fannie Mae-backed mortgage in 2 to 3 years.
    We were also the first to put policies in place to protect 
renters--more than 6,000 of whom have been able to continue to live and 
rent their homes or apartments.
    We provide financial incentives to servicers who are successful in 
getting a borrower to enter into a foreclosure-alternative program. We 
do not pay any incentive fees unless the servicer completes a workout.
    An important element of these foreclosure-prevention alternatives 
is robust borrower-outreach and education. It is in everyone's best 
interest to ensure borrowers understand their options and take 
advantage of the help that is available. This outreach and education 
can help borrowers work more effectively with their servicers and avoid 
scams that unfortunately have arisen in this difficult time.
    Even though the servicers are responsible for borrower contact, 
Fannie Mae has rolled out a number of initiatives to help borrowers 
understand their options and take advantage of available foreclosure 
alternative programs when working with servicers. Let me name just a 
few of these initiatives:
    In August this year, we launched KnowYourOptions.com--a consumer 
Web site that explains every option we have available to avoid 
foreclosure in both English and Spanish. This interactive Web site 
urges the borrower to take action and provides contact information for 
U.S. Housing and Urban Development-approved housing counselors and 
mortgage servicers. So far the site has had over 100,000 unique 
visitors and has been well-received by independent reviewers and 
industry experts.
    We're opening Fannie Mae Mortgage Help Centers where we are 
experiencing seriously delinquent loans in the hardest hit markets 
around the country. These Centers enable Fannie Mae borrowers to walk 
in and receive counseling, provide documentation of their hardship and 
financial documentation to allow them to be considered for a 
modification without the fear of the documents getting lost. We also 
establish a single point of contact to work with the borrower until his 
or her situation is resolved. We've opened these centers so far in 
Miami, Chicago, Atlanta, Los Angeles and Phoenix, and have plans to 
open more centers in Dallas, Philadelphia, Jacksonville and Tampa.
    We also have arrangements with counseling agencies--in Orlando and 
Homestead, Florida, Cleveland, Las Vegas, Detroit and Fort Worth--that 
work on our behalf to counsel borrowers and assist with preparation of 
modification related documents, all with a single point of contact. We 
anticipate expanding these efforts even further over the coming months.
    In addition, we've joined with Treasury to hold borrower outreach 
events nationwide in hard-hit communities. So far we've supported 
Treasury's events in 49 cities and had nearly 50,000 visitors.
    We're also taking steps to make sure Fannie Mae borrowers who do 
reach out to their loan servicers get the response and help they need.
    In the event that Fannie Mae borrowers feel their servicers are not 
properly addressing their mortgage needs, they can contact Fannie Mae's 
call center where cases are reviewed by our ``Second Look'' team.
    We have learned from experience during the past 2 years that hand 
offs in the workout process lead to borrower confusion and costly 
delays. We have informed servicers of what we have learned and a few of 
them are voluntarily moving to deploy a single-point-of-contact model. 
We're in the process of changing our policy to require all servicers to 
use this approach. Our efforts to help borrowers are gaining traction. 
Since the start of 2009, we've helped more than 600,000 Fannie Mae 
borrowers avoid foreclosure by completing more than 410,000 
modifications; 90,000 repayment plans, forbearance plans and other help 
for temporary hardships; and nearly 100,000 foreclosure alternatives--
short sales and deeds-in-lieu of foreclosure.
    While these foreclosure prevention measures are intended to include 
every borrower that needs help, unfortunately not every borrower can be 
helped.
    Some borrowers simply do not reach out for help despite all efforts 
to educate them about their options and make right-party contact. Some 
properties are owned by investors who got overextended. Some borrowers 
simply carry too much non-mortgage debt or do not have sufficient 
income to make even modified mortgage payments.
    In spite of all our efforts to keep people in their homes, 
unfortunately there will be foreclosures.
    When there is no choice but to foreclose on a mortgage, once the 
property comes onto our inventory, we work expeditiously to maintain 
and repair the properties and sell them to new homeowners. Our policy 
is to first find people who will live in the homes because owner 
occupancy tends to help stabilize neighborhoods.
    One of our neighborhood stabilization initiatives is called ``First 
Look.'' It gives buyers who intend to live in the homes, and public 
entities that want to create affordable housing, a 15-day head-start on 
buying the properties before investors can buy them. We also offer both 
the buyers and the real estate agents financial incentives in these 
owner-occupant transactions. Our Web site listing of homes in our 
inventory, called Homepath.com, includes a countdown number on each 
property indicating how many days remain in the First Look grace 
period.
    Since inception through October of this year, we have sold more 
than 35,000 Fannie Mae properties through First Look, and we plan to 
ramp up that number in the coming year.
    In summary, we're taking aggressive steps to ensure that servicers 
provide borrowers with alternatives to foreclosures and reduce the 
impact of the housing and economic crisis on families, communities, the 
economy and taxpayers. Foreclosure prevention is a top priority for our 
company. We have much work ahead of us, and we are fully committed to 
getting it done.

Servicer assistance, accountability and enforcement
    Let me now return to the critical role of servicers in this 
process.
    As I noted earlier, our success depends on the efforts of the banks 
and financial institutions in the mortgage servicing industry. Their 
role is a critical element in addressing the foreclosure crisis and in 
some of the issues that have arisen recently.
    In describing the role of servicers, I would like to quote the 
Acting Director of the Federal Housing Finance Agency (FHFA), Edward 
DeMarco, in his Congressional testimony on November 18, 2010. He 
stated:

        When an Enterprise purchases a mortgage from an originating 
        lender, it contracts with that lender or another bank or 
        financial institution to service the loan. The servicer is the 
        main communication point for the borrower, accepting all 
        payments and crediting the borrower's account.

        When homeowners get behind in payments, the servicer is 
        expected to work with the delinquent borrower to set up a 
        repayment plan, modify the loan, or, if foreclosure 
        alternatives are not viable, begin foreclosure proceedings. 
        Although the Enterprises hold the actual promissory notes 
        through document custodians who maintain these records separate 
        from the servicers, Fannie Mae and Freddie Mac do not 
        themselves accept or process payments or move to modify or 
        foreclose.

        For their work, the servicers get paid by the Enterprises and, 
        under the terms of their contracts, each servicer is obligated 
        to follow the procedures established by the Enterprise, 
        including compliance with all appropriate laws.

    To put it another way, Fannie Mae has a vested interest in ensuring 
that our borrowers get help. But we must rely on our loan servicers, 
who have a binding, contractual obligation to meet our servicing 
guidelines and help borrowers take advantage of our foreclosure-
prevention options.
    Servicers have acknowledged that they have struggled to carry out 
their role and keep up with the volume of borrowers who need help. 
Fannie Mae continues to take a number of steps to help servicers meet 
our guidelines and get the job done.
    First, we pay servicers an incentive based on the type and number 
of modifications they successfully complete. Let me reiterate my 
earlier statement--servicers receive an incentive only if they complete 
a workout--we do not provide any financial incentive to foreclose.
    Second, we have about 200 Fannie Mae personnel dedicated to 
managing our servicer relationships. Many are on the ground at servicer 
shops working with their personnel to answer questions, help them 
understand our guidelines and options for borrowers and to escalate 
issues as they arise.
    Third, we conduct monthly meetings with leadership of servicers. We 
provide extensive training through live Web seminars, recorded 
tutorials, checklists and job aids. We are in constant contact with our 
servicers, listening to their suggestions and offering our own as to 
how the process can be made better.
    In short, we strive to do everything possible to ensure that our 
servicers carry out their responsibilities to help struggling 
borrowers.
    We also hold servicers accountable for carrying out their 
responsibilities. We evaluate individual servicers' strengths and 
weaknesses on a monthly basis. In some cases when our servicers cannot 
meet their obligations, we will transfer the servicing to specialty 
servicers that can do the job more efficiently and effectively.
    Finally, I would like to address the issue known as ``dual 
tracking''--where borrowers may receive foreclosure notices while their 
loan modification applications are in process.
    Let me clarify Fannie Mae's policy. Borrowers are on a single 
track--the home-retention workout track--until they are more than 3 
months behind on their mortgages. During this 3-month period, which can 
be even longer if a modification is in progress, our servicing guide 
permits servicers to delay putting a loan into the foreclosure process. 
Servicers may begin the foreclosure process in fewer days if the 
borrower is not communicating regarding a modification or foreclosure 
alternative.
    We set a timeline for the servicers for an important reason--the 
modification or workout process needs to be completed in a timely way. 
The longer the process takes, and the further in arrears the borrower 
becomes, the less likely it is that the borrower will succeed with a 
modification--and the greater potential there is for loss to Fannie Mae 
and the U.S. taxpayer.
    We know from our research that loans worked out earlier, rather 
than later, in the process are much more likely to succeed. On the 
other hand, each payment the borrower misses increases the likelihood 
of foreclosure.
    To summarize our approach to servicers and borrowers, the home-
retention process functions properly when all participants in the 
process do their parts:
    The borrower needs to reach out to the servicer as soon as he or 
she has a hardship. The borrower also needs to answer and return calls 
from the servicer and provide all of the financial and hardship 
documentation the servicer needs to verify the borrower's situation.
    The servicer needs to assign one person for the borrower to work 
with who is accountable for that borrower until a resolution is 
reached.
    And Fannie Mae provides an array of solutions the servicer can 
offer the borrower, balancing the need to help as many borrowers as 
possible while being responsible stewards of public funds.
Foreclosure process issues
    Finally today, let me address what Fannie Mae is doing about the 
foreclosure process issues that the Committee has reviewed during 
recent hearings, including servicers misapplying payments, losing 
documents, and most recently using ``robo-signers'' to execute 
foreclosure-related affidavits.
    When servicers do not properly follow Fannie Mae guidelines and 
meet their contractual obligations, we take those failures very 
seriously, and we act to address them.
    With respect to the recent foreclosure affidavit issue, Fannie 
Mae's guidelines require that servicers comply with all applicable laws 
and regulations when foreclosing on a property securing a loan that we 
own. Specifically, servicers are required under law to submit 
affidavits in connection with foreclosure proceedings in a number of 
states, primarily those that have a judicial foreclosure process. These 
affidavits are subject to the law of individual states, which generally 
requires the signer to State in the affidavit that he/she has 
``personal knowledge'' of the facts set forth in the affidavit. The 
affidavit typically must be signed in the presence of a notary.
    Following reports that some servicers did not follow proper 
procedures in the administration of the foreclosure process, we have 
taken a number of remedial steps:
    We have issued guidance to our servicers instructing them to review 
their policies and procedures relating to the execution of affidavits, 
verifications, and other legal documents in connection with the 
foreclosure process.
    We are also coordinating with FHFA to seek appropriate corrective 
actions that are in line with the four-point policy framework issued by 
FHFA on October 13, 2010, which calls for actions to 1) verify the 
process; 2) remediate the actual problem; 3) refer suspicion of 
fraudulent activity; and, 4) avoid delay.
    We are tracking delays in order to be in a position to demand 
indemnification from servicers that breach the requirements. We are in 
continuous contact with servicers in order to track and oversee their 
progress.
    We have a number of remedies we may exercise against servicers that 
do not service loans in accordance with our requirements. We have the 
right to require servicers to repurchase the loans they improperly 
serviced, or to pay us damages based on delays caused by their actions. 
We have reiterated with servicers their contractual obligations to us 
for failing to comply with applicable laws and the foreclosure process 
delays. We are preparing to pursue servicers for compensatory fees for 
the costly delays we and the taxpayers are incurring as a result of 
their failure to meet their servicing responsibilities.
    On another front, we are closely monitoring the work performed by 
our Retained Attorney Network. This is a network of law firms across 
the Nation that we have approved to handle our foreclosure proceedings. 
We established the network in 1997. In 2008 we expanded the network and 
made it mandatory for the handling of Fannie Mae foreclosure cases in 
31 jurisdictions. We are now expanding it to all 50 states.
    Having the retained attorney network allows us to improve our 
oversight and management of both the servicers and the attorneys' 
actions during the default process. The network provides the framework 
to hold the attorneys accountable for their performance while giving us 
the authority to provide guidance to the firms, implement new policies 
and cost-saving structures, and audit actions by the firms.
    Firms are selected based on their experience, commitment to 
diversity and in many cases based on recommendations by servicers.
    We expect all cases to be handled in accordance with local law and 
practice, as well as the ethics rules of the applicable bar 
association. When we become aware that the law firms fall short of our 
standards or these requirements, we take action.
    For example, through an internal review of some of the firms 
handling the foreclosure process for our servicers in Florida, we 
confirmed allegations of issues with one of the law firms in our 
network. Working with FHFA, we terminated our relationship with that 
firm. Simultaneously, we expanded our approved attorney network in 
Florida to address capacity needs. We're also enhancing oversight of 
our approved attorney network.
    It is important to note that servicers, in their contractual duties 
to manage the foreclosure process, are required to oversee the day-to-
day activities of the law firms handling our foreclosure and bankruptcy 
cases. We have taken a number of steps this year to establish a more 
robust regimen for monitoring our approved attorney network to ensure 
compliance with proper procedures and operations.
    These steps include frequent onsite monitoring and in-depth 
training. We currently have more than 40 Fannie Mae personnel assigned 
to monitoring the network.
    This year, we hired a third-party law firm to perform audits of the 
firms in our approved network on a regular basis. We focused those 
audits on items such as proper pleading of ownership of the loan and 
compliance with local practice with respect to charging of fees and 
costs. The third-party firm has completed preliminary audits of the 
Florida firms and also those in California, and is in the process of 
auditing the Georgia, New York and Michigan retained attorney firms. We 
also hired an additional third-party firm to review the foreclosure 
process generally to identify any high risk areas where we face legal, 
financial, or reputational risk. The third-party firm will examine all 
inputs to the foreclosure process for which the firms are receiving 
data and documentation from external stakeholders. Our oversight and 
audit function will continue to evolve as we identify issues and 
develop best practices.
    Let me make a final point about the foreclosure process and the 
role of attorneys and servicers. Completion of the foreclosure process 
involves the coordination between the mortgage servicer and the 
foreclosure attorney. Fannie Mae set policies and guidelines to which 
both parties must adhere. In cases where the servicer fails to perform, 
Fannie Mae would be entitled to damages related to the delays. Our 
strategy has been to work with the servicer and the attorney to 
encourage them to perform.
    We have found that we can be most helpful when there is a 
commitment from the servicer's management to perform and there is 
adequate staffing. We are urging our servicers to strengthen both 
management commitment and staffing.

Securitization Trusts--Chain of Title
    There have been reports of various issues involving private-label 
securities, including mortgage document chain of title issues that call 
into question whether the foreclosing party had proper legal authority 
to foreclose. We do not believe that this problem exists for Fannie Mae 
securities.
    The manner in which Fannie Mae requires sellers to transfer 
mortgage notes and mortgages to our company, and in which we further 
transfer those mortgage loans to MBS trusts, is based on established 
law. Fannie Mae's practice with regard to the transfer of mortgage 
notes is designed to ensure an unbroken chain of assignments to Fannie 
Mae from the originating lender.
    In addition, Fannie Mae requires that the original note be 
delivered to Fannie Mae-approved custodians. As part of the acquisition 
process, the custodian certifies that the note has been received, 
contains the proper endorsement, and that other additional requirements 
have been met. The custodian maintains the note and related documents 
on Fannie Mae's behalf in a vault meeting specific fire and security 
requirements.

Repurchases
    The Committee also has asked about our loan repurchase requests to 
lenders. We conduct reviews of delinquent loans and, when we discover 
loans that do not meet our underwriting and eligibility requirements, 
we require lenders to repurchase these loans or compensate us for 
losses sustained on the loans. We also require lenders to repurchase or 
compensate us for loans for which the mortgage insurer rescinds 
coverage.
    In 2009 and during the first 9 months of 2010, the number of 
repurchase and reimbursement requests remained high. During the third 
quarter of 2010, lenders repurchased from us or reimbursed us for 
losses on approximately $1.6 billion in loans, measured by unpaid 
principal balance, pursuant to their contractual obligations.
    As of September 30 of this year, we had outstanding requests for 
lenders to repurchase from us or reimburse us for losses on $7.7 
billion in loans, of which 36 percent had been outstanding for more 
than 120 days.
    Many servicers work with us to resolve repurchase requests. When 
they do not, we are working to recover these payments in accordance 
with our contractual rights.

Conclusion
    In conclusion, Fannie Mae is committed to balancing its dual role--
to help struggling homeowners avoid foreclosure, and be responsible 
stewards of the public funds that support our work and make it possible 
to reduce foreclosures.
    The good news is that the more foreclosures we can prevent, the 
more taxpayer funds we can save.
    To date, we have helped hundreds of thousands of struggling 
homeowners across the country stay in their homes or avoid foreclosure. 
This progress shows that foreclosure prevention efforts can and do 
work. And when they do, it is victory for everyone--the homeowner, the 
neighborhood, the industry and the nation. We also recognize, however, 
that not every foreclosure can be avoided.
    If we can motivate borrowers to work with their servicers, get 
servicers to help them through the broad range of solutions available 
today, we can help more families keep their homes and work through this 
very challenging housing crisis.
    That is Fannie Mae's job. We know we have much more work to do, and 
we are committed to getting it done. We welcome and appreciate the 
thoughts and guidance of the Committee, as we move forward with our 
vital mission to help America's housing market.
                                 ______
                                 
                 PREPARED STATEMENT OF DONALD BISENIUS
                        Executive Vice President
          Single Family Credit Guarantee Business, Freddie Mac
                            December 1, 2010

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee: 
thank you for inviting me to speak today on servicing and foreclosure 
issues. I am Don Bisenius, head of Freddie Mac's Single Family Credit 
Guarantee Business. I have been with Freddie Mac since 1992. In my 
current role, I oversee the sourcing, pricing, securitization and 
performance of single-family mortgages we purchase.
    Today's hearing raises important issues about the integrity of the 
mortgage origination, securitization and servicing processes. To 
understand Freddie Mac's role in these processes, the Committee should 
consider the following:

    Freddie Mac currently owns and guarantees approximately 
        12.4 million single-family mortgages. In both the acquisition 
        and ongoing servicing of these loans, Freddie Mac relies on its 
        sellers and servicers. We don't originate loans, and we don't 
        service loans. Rather, Freddie Mac provides guidelines for the 
        origination and servicing of our loans, and contracts with 
        sellers and servicers to carry out these operations. 
        Institutions conducting these activities with respect to 
        Freddie Mac loans represent and warrant to us that they are 
        following our contractual requirements. Failure to fulfill 
        these obligations creates a liability for either the originator 
        or the servicer, including the possibility that they will be 
        required to repurchase the loan. Freddie Mac actively requires 
        repurchases of mortgages sold to us in violation of 
        representations and warranties, as appropriate. We pay the 
        servicing industry about $5 billion per year to service our 
        mortgages.

    Freddie Mac expects servicers of our loans to treat 
        borrowers fairly, with respect, and in full compliance with all 
        applicable laws, regulations and Freddie Mac policies. No 
        homeowner with a mortgage owned or guaranteed by Freddie Mac 
        should ever worry about losing his or her home to an 
        unnecessary