[Senate Hearing 112-139]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-139




                               before the

                            SUBCOMMITTEE ON

                                 of the

                              COMMITTEE ON
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION




                              MAY 12, 2011


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

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                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         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                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Brett Hewitt, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor


   Subcommittee on Housing, Transportation, and Community Development

                 ROBERT MENENDEZ, New Jersey, Chairman

         JIM DeMINT, South Carolina, Ranking Republican Member

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio                  MARK KIRK, Illinois
JON TESTER, Montana                  JERRY MORAN, Kansas
HERB KOHL, Wisconsin                 ROGER F. WICKER, Mississippi

             Michael Passante, Subcommittee Staff Director


                            C O N T E N T S


                         THURSDAY, MAY 12, 2011


Opening statement of Chairman Menendez...........................     1


A. Nicole Clowers, Acting Director, Financial Markets and 
  Community Investment, Government Accountability Office.........     2
    Prepared statement...........................................    26
Diane E. Thompson, of Counsel, National Consumer Law Center......     6
    Prepared statement...........................................    42
    Responses to written questions of:
        Chairman Menendez........................................   185
Laurie F. Goodman, Senior Managing Director, Amherst Securities..     8
    Prepared statement...........................................   122
    Responses to written questions of:
        Chairman Menendez........................................   186
David H. Stevens, President and Chief Executive Officer, Mortgage 
  Bankers Association............................................    10
    Prepared statement...........................................   129
    Responses to written questions of:
        Chairman Menendez........................................   187
Anthony B. Sanders, Professor of Finance, George Mason University 
  School of Management...........................................    14
    Prepared statement...........................................   172
    Responses to written questions of:
        Chairman Menendez........................................   188
Richard A. Harpootlian, Attorney, Richard A. Harpootlian P.A.....    15
    Prepared statement...........................................   175




                         THURSDAY, MAY 12, 2011

                                       U.S. Senate,
               Subcommittee on Housing, Transportation, and
                                     Community Development,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:12 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Robert Menendez, Chairman of the 
Subcommittee, presiding.


    Chairman Menendez. Good afternoon. This hearing will come 
to order, the hearing of the Banking Subcommittee on Housing, 
Transportation, and Community Development. This is the first 
Subcommittee hearing that I have called as Chairman in the 
112th Congress, and for this hearing I have chosen to focus on 
the need for national mortgage servicing standards, which 
speaks to just how important I believe this subject is not only 
for homeowners and mortgage investors, but for the entire 
lending industry.
    It is of particular concern to the countless New Jersey 
homeowners who have contacted my office, almost all with 
terrible stories about their experience going through 
foreclosure, and many with stories of being either mistreated 
or neglected by mortgage servicers. The typical problems they 
encounter are servicers losing their paperwork, not 
understanding what already happened the last time they called 
since they get a different person each time they call, asking 
them to reapply for modifications numerous times with new 
documentation each time, a lack of transparency as to whether 
their modification requests are being calculated properly, 
ineffective appeals, excessive delays in coming to decisions, 
and a general reluctance by servicers to modify loans in ways 
that would be sustainable in the long run. And we are going to 
hear from some witnesses as to why that might very well be the 
case. Overall, the current process is both emotionally draining 
and ineffective in keeping people in their homes.
    Closely related to homeowner concerns are mortgage investor 
concerns about the conflicts of interest that many mortgage 
servicers face when deciding whether to foreclose or modify a 
loan. In response to all of these concerns, numerous 
commentators have suggested that national mortgage servicing 
standards may be a way to provide consistency, accountability, 
and better homeowner and mortgage investor protections.
    There seems to be an increasing consensus that at least 
some kind of national mortgage servicing standards are 
warranted, and I believe that if they are done in the right 
way, they can actually make mortgage servicers' jobs easier as 
    This is also a timely topic because Federal banking 
regulators, including the OCC, the Federal Reserve, FDIC, and 
OTS, recently issued consent orders as enforcement actions 
against some of the largest banks to require changes in their 
mortgage servicing practices. These actions take a step in the 
direction of developing national mortgage servicing standards, 
but they are also too little and too late.
    The independent Government Accountability Office, the GAO, 
has also released a report recently that speaks to the need for 
national servicing standards related to foreclosures. There 
have also been numerous bills introduced in Congress requiring 
various kinds of national mortgage servicing standards. So I 
have convened this hearing to solicit the views of various 
experts and market participants. I have asked them to comment 
on whether they believe national mortgage servicing standards 
are needed and what exactly should be in those standards, and I 
want to thank all of the witnesses in advance for their 
testimony here today.
    I want to apologize. We were a few minutes late in starting 
because we have a vote that is taking place on the floor. I 
know Senator Merkley, who is very involved in these issues, has 
voted and is on his way here, and so if he wishes to, when he 
gets here I will recognize him. But in the interest of moving 
our process ahead here, let me start off with our first witness 
on this first panel, Nicole Clowers. She is the Acting Director 
of Financial Markets and Community Investment, Government 
Accountability Office. She has testified here before, and she 
is the lead author of a GAO study that Senator Franken and I 
requested and that just came out last week on the Federal 
banking regulators' response to the so-called robo-signing, 
which is the illegal rubber-stamping of foreclosures by 
mortgage servicers in court documents.
    So, Ms. Clowers, thank you for your work. Thank you for 
being here for testimony. I would ask you to summarize your 
testimony in about 5 minutes or so. We are going to include 
your full testimony in the record, and with that, I would like 
to recognize you to start off.


    Ms. Clowers. Thank you, Chairman. Thank you for having me 
here today to talk about our recent work on mortgage servicing 
    As you know, last fall a number of servicers announced that 
they were halting or reviewing their foreclosure practices 
after allegations that foreclosure documents may have been 
improperly signed or notarized. While the servicers resumed 
their foreclosure activities after completing their reviews, 
concerns about servicing practices and the impact of reported 
problems remain. In light of these concerns, you and several 
others asked us to review Federal oversight of the servicing 
    We issued our report last week and concluded that the 
documentation problems revealed the need for ongoing oversight 
of servicers. Although Federal regulators have taken steps in 
recent months to increase their focus on servicing issues, the 
resulting delays in completing foreclosures and increased 
exposure to litigation highlight how the failure to oversee 
whether institutions follow sound practices can heighten the 
risk these entities present to the financial system and create 
problems for the communities in which foreclosures occur.
    As a result, we recommended that the banking regulators 
take various actions, including: one, developing and 
coordinating plans for ongoing oversight of the servicing 
industry; two, ensuring that foreclosure practices are included 
as part of any national servicing standards that are developed. 
In my comments today, I will discuss each of these 
recommendations in more detail.
    First, we recommended that the banking regulators and the 
new Bureau of Consumer Financial Protection work together to 
develop and coordinate oversight plans. Until the problems 
regarding foreclosure documentation came to light, Federal 
oversight of the servicing industry had been limited, in part 
because regulators viewed such activities as low risk to safety 
and soundness. Furthermore, past Federal oversight was 
fragmented and not all servicers were overseen by Federal 
banking regulators.
    In response to reported foreclosure documentation problems, 
banking regulators conducted a review of foreclosure processes 
at 14 servicers. This review found that servicers had generally 
failed to properly prepare documentation and lacked effective 
supervision and controls over their foreclosure processes. 
Examiners also identified a limited number of cases in which 
foreclosures should not have proceeded, even though the 
homeowner was seriously delinquent, including cases where 
foreclosures proceeded against military servicemembers on 
active duty in violation of the Servicemembers Civil Relief 
    Banking regulators plan to follow up with servicers to 
better ensure that they implement agreed-upon corrective 
actions, and the new Bureau also plans to conduct oversight of 
servicing activities. However, the extent to which the 
regulators will conduct ongoing supervision of servicing 
activities in the future as well as the goals for the 
supervision and the roles that each regulator will play have 
not been fully determined. Until these plans are developed, the 
potential for continuing fragmentation and gaps in oversight 
    Second, we recommended that the banking regulators and the 
Bureau of Consumer Financial Protection take steps to include 
foreclosure practices in any national servicing standards that 
are developed. To help address the identified problems and 
concerns with servicing activities, various market 
participants, as you noted, Chairman, have begun calling for 
the creation of national servicing standards, and most of the 
regulators have stated that national servicing standards could 
be beneficial. Regulators and others cite a number of potential 
benefits of implementing standards, including creating clear 
expectations for all servicers, establishing consistency across 
the servicing industry, increasing transparency of servicing 
practices, and promoting accountability in dealing with 
consumers. Regulators have established an interagency process 
to consider these issues in developing national servicing 
    While servicing standards could cover a wide range of 
activities, it is unclear the extent to which they would 
address the identified weaknesses and lack of consistency among 
servicer foreclosure practices and how the standards would be 
implemented. If national servicing standards are developed, 
ensuring that they provide clear expectations for servicers to 
follow as part of the foreclosure process could be a way to 
improve consistency in the servicing industry. Consistent 
expectations for the foreclosure process could also help 
address the limited oversight of the servicing industry that we 
have seen in the past.
    In conclusion, regulators have recently increased their 
oversight of the servicing industry, but additional actions are 
warranted. We made several recommendations to the regulators to 
help strengthen the oversight of this industry. The regulators 
generally agreed with our recommendations, and some are taking 
steps to implement them. We look forward to working with the 
regulators and this Subcommittee to ensure these 
recommendations are fully implemented.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to answer any questions you may have.
    Chairman Menendez. Well, thank you very much, and you are 
so effective. You had 5 seconds left.
    Chairman Menendez. Let me ask you just a couple of 
questions. One is you reported that past Federal oversight was 
limited and fragmented. So if we were to have national 
servicing standards, would that help address this problem?
    Ms. Clowers. It could help address the limited and 
fragmented oversight that we saw. In terms of addressing the 
fragmentation, the servicing standards could help increase 
consistency in both the treatment of the borrower as well as 
increase consistency in regulator oversight of the servicers. 
It could also increase the attention that the regulators give 
to the servicing process and the servicing industry and, 
therefore, help address the limited oversight that we saw.
    Chairman Menendez. And if we were to have national 
servicing standards, what should be included in them?
    Ms. Clowers. The servicing standards could cover a wide 
range of activities, from loss mitigation to the compensation 
model for servicers. We did not evaluate all the potential 
elements. Rather we found that if servicing standards were 
developed, the foreclosure process should be included. OCC has 
developed a set of potential standards that I think could be 
used as a starting point in considering what type of 
foreclosure processes to include. The enforcement orders that 
were recently issued by the regulators also contained elements 
such as a single point of contract that could be another 
starting point as the stakeholders work to develop the 
    I would also note that in 2009 we issued a report outlining 
principles for financial regulatory reform, and I think these 
principles could be useful in the context of developing 
servicing standards as they relate to the foreclosure process, 
including making sure that the goals that we set are clear and 
not conflicting, making sure that all parties are treated 
consistently, considering the regulatory burden placed on the 
industry versus increasing oversight, as well as ensuring that 
they are flexible and forward looking so that we are not 
necessarily fighting the last fight.
    Chairman Menendez. Finally, the banking regulators just 
recently issued a report themselves with reference to their 
review of servicers' practices, and I wonder if you have had an 
opportunity to review that and some of their findings.
    Ms. Clowers. I have. The regulators found significant 
weaknesses in the foreclosure practices of the 14 servicers 
they reviewed. The weaknesses fall into three general 
    There were weaknesses with the documentation process, which 
would include such things as the person signing the affidavit 
not having the personal knowledge of the facts and 
circumstances of the loan as required by law.
    There were also weaknesses with regard to vendor management 
in that the servicers were not providing sufficient oversight 
and due diligence in their oversight of the vendors that they 
use, such as the law firms.
    And, finally, there were a number of weaknesses in what 
would be categorized as governance issues, and this ranged from 
a lack of documented written policies, lack of staffing 
capacity, lack of training, and a lack of controls and quality 
checks to make sure that documentation errors did not occur.
    Chairman Menendez. Good. Let me thank you for your work and 
your testimony. We may have colleagues who are going to ask 
questions in writing in the next couple days, so we appreciate 
your responses to those.
    Ms. Clowers. Absolutely.
    Chairman Menendez. And thank you for coming before the 
    Ms. Clowers. Thank you.
    Chairman Menendez. Let me introduce the second panel as we 
excuse Ms. Clowers and ask them to come up and we will dictate 
the order here as we introduce them.
    Diane Thompson is Of Counsel at the National Consumer Law 
Center and has represented low-income homeowners since 1994, 
and she has testified here before on foreclosure-related 
issues, so welcome back. Diane, please come on up.
    Laurie Goodman is a senior managing director at Amherst 
Securities where she is responsible for research and business 
development. Before joining Amherst, she was the head of global 
fixed income research and manager of U.S. Securitized Products 
Research at UBS, and she is one of the most well respected 
mortgage investor analysts in the country, so we welcome her.
    David Stevens is president and CEO of the Mortgage Bankers 
Association, and he just assumed that role. I think this may be 
his first hearing, so, David, welcome. Members of the Committee 
may recognize Mr. Stevens from his previous role only a few 
months ago as the head of the Federal Housing Administration at 
HUD. He has had a long and distinguished career in the public 
and private sectors.
    Anthony Sanders is a professor of finance at George Mason 
University School of Management. He has written extensively 
about real estate finance and securitization. Thank you, 
Professor. And I am told he is from Rumson, New Jersey, so you 
can have all the time you want.
    Chairman Menendez. All politics is local. Welcome.
    And Richard Harpootlian is a distinguished attorney who has 
tried cases in South Carolina for over three decades, and he 
currently represents thousands of military members, many of 
whom were illegally foreclosed on or overcharged in a class 
action lawsuit, and so we welcome you and your insights in that 
respect as well.
    So thank you all for coming before the Committee. We would 
ask you to limit your oral testimony to about 5 minutes. Your 
entire written testimony will be included in the record, and 
this way we will have some opportunities for some Q&A with you.
    With that, Ms. Thompson, would you begin?

                           LAW CENTER

    Ms. Thompson. Thank you, Chairman Menendez.
    Chairman Menendez. You want to put your microphone on.
    Ms. Thompson. Thank you.
    Chairman Menendez. We want to hear you.
    Ms. Thompson. Thank you for inviting me to testify today. I 
am an attorney, currently of counsel to the National Consumer 
Law Center. In my work at NCLC, I provide training and support 
to hundreds of attorneys representing homeowners from all 
across the country. For nearly 13 years before that, I 
represented low-income homeowners East St. Louis, Illinois. I 
testify here today on behalf of the National Consumer Law 
Center's low-income clients and the National Association of 
Consumer Advocates.
    The time for national mortgage servicing standards has 
come. We have tried reliance on servicers' good faith and 
competent execution. Servicers' good-faith efforts 4 years into 
this Nation's most devastating foreclosure crisis have failed 
to produce results. Serious delinquencies continue to outpace 
modifications by nearly five to one. Homeowners wait on average 
14 months for approval of a permanent HAMP modification and 
often face wrongful foreclosure even after entering into a 
permanent modification. The loan modification process is 
dysfunctional in the extreme.
    For example, high-level Bank of America employees recently 
promised a California homeowner that they would honor a 
modification they had granted the homeowner and cancel a 
pending sale. And yet the foreclosure sale went forward.
    Despite repeated orders from a New York State court judge 
tolling interest on the loan for over 14 months percentage 
Chase's participation in court-supervised mediation, Chase has 
still not complied with its undertakings in that process.
    Litton denied a North Carolina homeowner for failure to 
provide documentation, after sending all requests for 
additional documentation to an address that corresponded to 
neither the homeowner's nor her attorney's.
    Chase foreclosed on a Washington State homeowner who was 
making payments and, then when she called after receiving the 
eviction notice in connection with the foreclosure, denied that 
it had foreclosed. That woman and her family are now living in 
an apartment and are no longer homeowners.
    Loan modifications make economic sense, but servicers 
nonetheless deny modifications because they, the servicers, can 
do better financially by foreclosing than providing permanent 
sustainable modifications and because there are no consequences 
to servicers for failing to provide the modifications.
    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. State regulators have attempted to rein in 
these abuses, but servicers have often sought protective 
shelter in the preemption rulings issued by the Office of the 
Comptroller of the Currency. Recent consent orders announced by 
the Federal banking agencies are of limited reach and threaten 
to undermine the combined and unprecedented efforts of the 
Department of Justice and the Attorneys General of all 50 
    The GSEs--Fannie Mae and Freddie Mac--and their oversight 
agency, the Federal Housing Finance Authority--have failed to 
prioritize loan modifications over foreclosure. Even new 
guidance from the FHFA fails to end dual track--the practice of 
proceeding with a foreclosure and a loan modification at the 
same time.
    The dual-track process must be ended. Key to any national 
servicing standards is the evaluation of a homeowner for a loan 
modification prior to the initiation of a foreclosure. 
Homeowners must be evaluated for and, when appropriate, offered 
a loan modification before a foreclosure. Once a foreclosure is 
started, it takes on a life of its own. Fees mount up and legal 
deadlines must be met. A modification becomes increasingly out 
of reach and accidents happen. Initiating foreclosure before 
completing the loan modification review guarantees wrongful 
    Failing to stop an existing foreclosure proceeding while a 
modification review is underway has the same costs, the same 
risks, and the same results--families turned out on the street 
while awaiting a review on their application or even while 
making payments on a modification.
    In order to prevent wrongful foreclosures, reduce costs for 
both homeowners and investors, and encourage the timely 
evaluation of loan modification applications, the dual-track 
system must be stopped, and stopped absolutely. Recent bills 
introduced by Senator Reed, Senator Brown of Ohio, and today's 
bill introduced by Senator Merkley take this and other 
important steps.
    To promote responsible servicing that serves the interests 
of both homeowners and investors, principal reductions must be 
mandated, fees limited, transparency provided throughout the 
modification process, including the calculation of the net 
present value. Servicers should be prevented from foreclosing 
if they have not complied with these baseline servicing 
    We are at a watershed moment. To date, we have imposed no 
restraints on servicers' excesses. The existing proposals for 
servicing reform from the banking agencies and the FHFA would 
leave the existing dysfunctional system intact. We can do 
better. In my written testimony, I detail the reforms needed. 
We must hold mortgage servicers accountable to the 
stakeholders, homeowners, investors, and the American public.
    I thank you for the opportunity to testify today, and I am 
happy to answer any questions you may have.
    Chairman Menendez. Thank you, Ms. Thompson.
    I want to interrupt the panel for a moment and ask my 
colleague--I know he is under time constraints--whether he 
wishes to make any statement or let the rest of the witnesses 
go, and I would be happy to yield to you first for questioning. 
It depends on your time constraints.
    Senator Merkley. I simply deeply appreciate the folks who 
have come to testify on such an important issue to the health 
of our families and the health of our economy, and I would like 
to have them continue. Thank you.
    Chairman Menendez. Thank you.
    Ms. Goodman.

                       AMHERST SECURITIES

    Ms. Goodman. Mr. Chairman and Members of the Subcommittee, 
I am honored to testify today. My name is Laurie Goodman, and I 
am a senior managing director at Amherst Securities Group, a 
leading broker/dealer specializing in the trading of 
residential mortgage-backed securities. I am in charge of the 
strategy and business development efforts for the firm.
    The purpose of my testimony is to discuss conflicts of 
interest facing mortgage servicers that may stop them from 
acting in the best interests of mortgage investors and 
homeowners. Let me begin by pointing out that the interests of 
mortgage investors and homeowners are largely aligned for two 
    First, the mortgage market is reliant on investors to 
continue to extend credit, allowing borrowers to achieve 
competitive mortgage rates.
    Second, foreclosure is, without question, the worst outcome 
for both investors and borrowers. It is a long and drawn-out 
process in which a borrower is forced from his home, and an 
investor typically suffers a loss on his investment of between 
50 and 80 percent of the loan amount.
    Here are the five inherent conflicts that we see.
    Conflict number one, large first-lien servicers have 
significant ownership interests in second liens and often have 
no ownership interest in the corresponding first lien. The four 
largest banks--Bank of America, Wells Fargo, JPMorgan Chase, 
and Citigroup--collectively service 54 percent of the 1-4 
family servicing in the United States. They own approximately 
40 percent of the second liens and home equity lines of credit 
outstanding. This is a conflict because the servicer has a 
financial incentive to service the first lien to the benefit of 
the second lien holder. Some examples:
    Short sales and deeds in lieu are less likely to be 
approved. If the servicer accepts a short sale offer, the 
second lien, which is held on the balance sheet of the 
financial institution, must be written off immediately. As a 
result, the servicer may be more inclined to reject the short 
sale offer, even if the offer makes sense for the investor and 
borrower. In addition, loan modification efforts are 
suboptimal. Principal reduction is used far less often than it 
should be. National servicing standards should require 
servicers to perform the modification to maximize the net 
present value of the loss mitigation options.
    Conflict two, the servicer often owns a share in companies 
that provide ancillary services during the foreclosure process 
and charges above market rates. These services included force-
placed insurance and property preservation. Even when a 
servicer is not affiliated with the company providing the 
service, they often mark up the fees considerably. These fees 
are added to the delinquent amount of the loan, making it much 
harder for a borrower to become current. Moreover, when a loan 
is liquidated, the severity on the loan will be much higher, to 
the detriment of investors.
    National servicing standards can be used to require 
servicers to keep existing homeowners insurance policies in 
place as long as possible. There should be a prohibition on 
marking up third-party fees. Moreover, following the lead of 
the proposed Attorney General settlement, national servicing 
standards should prohibit a servicer from owning an interest in 
an entity that provides foreclosure-related services.
    Conflict three, conflicts of interest in the enforcement of 
representations and warranties are becoming an increasing issue 
for the market, as indicated by recent litigation. Once a ``rep 
and warrant'' violation is discovered, the trustee is charged 
with the enforcement. However, the trustee does not have the 
information to detect the violations as they do not have direct 
access to the loan files. Servicers who do have the information 
to identify ``rep and warrant'' violations often have a 
financial disincentive to do so as they would be putting the 
loan back to an affiliated entity.
    It is critical to have an independent third party that is 
incented to enforce reps and warrants and has both access to 
the information and enforcement authority. This must be 
achieved through the deal documents. National servicing 
standards should, however, direct servicers to make sure that 
there is an adequate enforcement mechanism for reps and 
    Conflict four, the servicing fee structure is unsuitable to 
this environment. There are many situations in which 
transferring the servicing of a loan on which the borrower is 
delinquent to a servicer that specializes in loss mitigation 
would be the best outcome for both borrowers and investors. A 
number of special servicers have had considerable experience 
tailoring modifications to the needs of individual borrowers 
and tend to provide more hand holding to the borrower post 
modification than what a major servicer can offer. Servicing 
transfer issues are made very difficult as servicers are 
compensated too highly for servicing current loans, not highly 
enough for servicing delinquent loans. If fees for servicing 
current loans were lowered while fees for servicing delinquent 
loans were raised, it would allow the special servicer to be 
adequately compensated for his high-touch efforts. This, in 
turn, would make it much easier to transfer delinquent loans to 
servicers who would do a better job of loss mitigation.
    Conflict number five, transparency for investors is 
woefully inadequate. In a private label securitization, there 
is often a large difference between the monthly cash payment 
the investor expected to receive and what is actually received. 
Moreover, an investor is unable to delve into the cash-flow 
information further as transparency on the action of the 
servicer that would be necessary to reconcile the cash-flows is 
not available. When I receive the statement from my bank each 
month, I balance my checkbook, reconciling the differences. 
Investors want to be able to do exactly this with the cash-
flows from the securitizations in which they have an interest. 
They are unable to. We believe the remittance reports for 
future securitizations should contain loan-by-loan information, 
and that loan-by-loan information should be rolled up into a 
plain English reconciliation. National servicing standards 
should encourage this transparency.
    In conclusion, national servicing standards can go a long 
way toward dealing with the conflicts of interest between 
servicers on the one hand and borrowers and investors on the 
    We appreciate the opportunity to testify on this important 
set of issues. Thank you.
    Chairman Menendez. Thank you.
    Mr. Stevens.


    Mr. Stevens. Thank you, Mr. Chairman, for the opportunity 
to testify here on the need for national mortgage servicing 
standards. On May 1st, I began my tenure as president and CEO 
of the Mortgage Bankers Association, and most recently I served 
as Assistant Secretary for Housing and the Federal Housing 
Commissioner. I have also been actively involved in this 
industry for three decades.
    In 2008, we faced the perfect storm. As the global economy 
collapsed, the subprime market imploded. Many Americans lost 
their jobs. Millions of Americans defaulted on their mortgages, 
putting extraordinary strains on the existing servicing system. 
It is clear that our industry was unprepared to handle these 
unprecedented events and that we made mistakes. Acknowledging 
our mistakes is the first step to rebuild trust in industry and 
our actions. Without trust, the industry is nothing, and by 
trust, I mean the ability of policy makers, thought leaders, 
borrowers, and the industry at large to have faith in the 
products and services that we provide, and we absolutely have 
to do better moving forward.
    I can assure you that the mortgage finance industry and 
servicers in particular have not stood still in addressing the 
mistakes. Many have put in place training, internal controls, 
independent third-party auditors, adding thousands of people 
and improved technology needed to move forward. Presently, 
servicers face a growing number of checks and balances ranging 
from Federal laws and regulations, RESPA and TILA, to 50 State 
laws, regulations that vary, local ordinances, as well as court 
rulings, FHA, VA, Rural Housing Service requirements, et 
cetera. These requirements are in addition to Fannie Mae 
standards, Freddie Mac standards, and other contractual 
obligations. In short, servicers are faced with complex, often 
contradictory rules and regulations, many of which are 
    So what is the answer? A consolidated servicing standard 
could drive these reforms. Creating a servicing standard would 
streamline and eliminate many of the overlapping requirements, 
provide clarity and certainty for borrowers, lenders, and 
investors alike. It is critical that all of the Federal 
regulators involved act in a coordinated manner to establish 
one national consolidated servicing standard that applies to 
the entire industry rather than piling on requirement after 
requirement. A national standard should start with a complete 
analysis of existing servicer requirements and State laws 
governing foreclosures. Developments should include an open 
dialog with stakeholders in the servicing arena, all of whom 
must ultimately implement and comply with the national 
    The MBA has initiated this process by convening a blue 
ribbon Council on Residential Mortgage Servicing. The council 
examined the entire servicing model and is forming 
recommendations to improve the system for all stakeholders.
    I am pleased to announce that today we actually rolled out 
a white paper, which I believe is the first white paper on the 
subject, and ask that it be included as part of my testimony.
     In the white paper, the council aims to examine the 
current servicing model, address public misconceptions relating 
to servicing practices and incentives, and educate the public 
on the role and compensation of servicers. I believe this white 
paper will provide useful information to you and other policy 
makers that are currently debating the national servicing 
standards, and I encourage the Subcommittee to use the MBA and 
its Council on Residential Mortgage Servicing as a resource 
going forward.
    In conclusion, as we develop servicing standards, I will 
urge you to pay careful attention to the interdependence of 
servicing and the impact that change to the servicing system 
will have on the economics of mortgage servicing, tax and 
accounting rules and regulations, and effects of the new 
requirements on Basel capital requirements and on the TBA 
market. Servicing does not exist in a vacuum. Instead, it is 
part of a broader ecosystem which involves all the varied 
elements of the mortgage industry. The housing market remains 
very fragile and, therefore, when considering changes to the 
current model, policy makers we ask be mindful of unforeseen 
and unintended consequences that could ultimately result in 
higher housing costs for consumers and reduced access to 
    As I mentioned at the beginning of my remarks, I have spent 
more than three decades in this industry. Despite what we have 
just lived through and the challenges we continue to face, I am 
optimistic we can successfully address the challenges of the 
mortgage servicing system going forward. And, Mr. Chairman, MBA 
supports reasonable, rational national servicing standards that 
apply best practices to the process to better serve the needs 
of borrowers, servicers, and investors alike. We want to be 
part of the solution and look forward to working with you and 
other policy makers toward that end.
    Thank you.
    Chairman Menendez. Well, thank you, Mr. Stevens. Thank you 
for the spirit in which the association comes here.
    I want to accommodate Senator Merkley, who has been very 
involved in these issues, so to our final two witnesses, if you 
would just forbear with us a moment or a few minutes and 
recognize Senator Merkley, who has some questions of the panel 
at this time.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you for holding this hearing, because I think this issue of the 
complexity of the mortgage markets and the role servicers play 
within the set of parties is an extremely important one to 
figure out.
    And, Mr. Stevens, thank you for your work at the FHA. I 
appreciate the spirit that you bring to trying to address some 
of these key complexities.
    Ms. Goodman, I wanted to ask you one question about the 
conflicts of interest, and that is you put forward--one of your 
concepts was to increase the fees for dysfunctional mortgages 
and decrease the fees for servicing current mortgages, and one 
concern I have had about that is it creates perhaps--well, let 
me explain that I have had many Oregonians tell me that the 
first time they missed a payment was after they had talked to 
their servicer about the change in their financial 
circumstances and the servicer said to them, well, what you do 
is you are eligible for a mortgage modification, and so--but 
first, you have to--you cannot be current, so you need to miss 
three payments or make half-payments for 3 months.
    One of the issues that has come up as to whether there was 
kind of a perverse incentive in the servicer structure in which 
they were getting paid more for loans that were not current 
versus loans that were current, and to put salt into the wound, 
the same families then report that after they missed those 
payments, they were often told, because you are not current, 
you are not a good credit risk for a mortgage modification. 
This is kind of a hellish nightmare position to be in, and your 
recommendation about accentuating the difference between those 
fees, could that make this problem worse?
    Ms. Goodman. I would be very careful about how I would do 
it. I agree that that is definitely a moral hazard issue, and 
what I actually suggested in my written testimony is there is a 
very simple solution to this. Give the GSEs or private label 
investors the ability to move the servicing when the higher 
fees are scheduled to take effect.
    So what that does is I am servicing a current loan. That 
loan goes delinquent. If I do not make that proactive phone 
call to keep that loan from going delinquent, I stand a chance 
of losing that servicing when the higher fee takes effect. You 
have to have something like that in there in order to eliminate 
the moral hazard.
    Senator Merkley. Yes, eliminate that conflict of interest. 
Thank you. That is helpful.
    And, Mr. Stevens, one of the ideas that Ms. Goodman put 
forward was to try to reduce or eliminate the conflict of 
interest, where the servicer who may have originated the loan 
still holds the second mortgage, but no longer the first 
because the first has been sold. It creates distinctions 
between operating on behalf of the trust that holds the first 
mortgage and the interest of the second mortgage. Do you have 
any particular insights on the concepts that she put forward to 
address that?
    Mr. Stevens. These are all subjects I would love to engage 
in a longer discussion with you, Senator, as we have in the 
past on these issues. We have struggled as we work through 
these foreclosure processes over the past several years with 
incentives in the process, incentives on first mortgage 
modifications or principal write-down or foreclosure 
resolution, incentives on seconds, loans held, loans sold.
    The one thing I am challenged by is does the mere act of 
having someone else service the second in any way change the 
outcome as to what could ultimately be write-down on the 
second, and just to articulate that, whether the first lien 
gets modified or protected in any way--in some form, whether 
that second is held on the first lien holder's--on the same 
servicer's balance sheet or another servicer's balance sheet, 
both of those can cause challenges ultimately to having 
anything happen to the second lien. It will ultimately depend 
on how that second lien is valued.
    I think, fundamentally, the thing that is absolutely clear 
is when the loan goes to foreclosure, the second lien gets 
wiped out in its entirety and the bank loses. So fundamentally, 
there should be an incentive to have that loan perform and to 
engage in some sort of modification.
    I think we have communication challenges. Seconds are often 
held on bank balance sheets. First mortgages are held on the 
mortgage side balance sheet. But I am not certain that having 
two sets of servicers in any way resolves the complexity around 
the incentive structure and the ultimate resolution of that 
    Senator Merkley. And to add to this dilemma, the servicer 
of the second, even if the servicer is separate, may find the 
second is fully performing when the first is not, in part 
because there is a line of credit. The family may have chosen 
to say, I need to keep this line of credit valid because it is 
the only way to rescue myself from difficult financial bumps I 
might encounter.
    Mr. Stevens. That is right.
    Senator Merkley. So then you are asking the servicer of the 
second to essentially engage in a process in which the loan 
that is current is--yes, it is messy and difficult----
    Mr. Stevens. Well, and----
    Senator Merkley. ----and I am glad to have you all working 
on it.
    Mr. Stevens. And, Senator, the only thing I would just add 
as a follow-up to that, it needs to be a consideration, is many 
of these second loans were set up as home equity lines of 
credit, as you know. You know this very well. And many small 
businesses in America basically use that as their funding 
resource to operate a small business in this country. That is 
just one example.
    So these are solutions that, as I said in the outset, we 
fully realize the mistakes and lack of preparedness that our 
industry did not have at the time and the mistakes we made, but 
working through these resolutions is critically important, as 
well, because we need to make certain that we are not 
disrupting, again, small business access or the kind of 
incentive misalignment that you just referred to in terms of 
the performing versus the nonperforming first.
    Senator Merkley. Well, thank you all. I am sorry I have to 
leave, but I think just this short conversation shows how 
important this set of issues is in order to taking and 
restoring a healthy mortgage market, which is essential to 
working families being successful in home ownership and 
rebuilding their wealth. Thank you.
    Chairman Menendez. Thank you, Senator.
    Dr. Sanders.


    Mr. Sanders. Chairman Menendez, Ranking Member DeMint, and 
distinguished Members of the Subcommittee, thank you for 
inviting me to testify today. I have been asked to opine on the 
need for national mortgage servicing standards.
    The recent crash of the housing market and the rise of 
unemployment led to a historic surge in serious delinquencies 
and requests for loan modifications, short sales, and related 
transactions. As a result, the residential mortgage servicing 
industry was overwhelmed. Going forward, it is helpful to 
recommend changes to both servicing and securitization 
industries so they can avoid problems going forward as we 
attempt to revive the securitization market.
    In December, Christopher Whalen, Nouriel Roubini, Josh 
Rosner, and others, including myself, wrote a letter to the 
U.S. financial regulators regarding national loan servicing 
standards. Again, I am one of the signors of the letter, but 
not because I wanted to have necessarily a national loan 
servicing standard created by the Government. Rather, I wanted 
to facilitate consideration for servicing companies on how to 
proceed forward.
    Many of the items that were discussed in our letter were 
plausible recommendations, with a few exceptions. And one thing 
I want to point out is that Fannie Mae and Freddie Mac have 
their own servicing standards, which are, again, quite good and 
have been the industry standard for a long time. Since Fannie 
and Freddie can actually mandate servicing standards, that is a 
good place to begin.
    You have just heard Dave Stevens for the Mortgage Bankers 
Association talking about the Blue Ribbon Committee to modify 
the standards that Freddie and Fannie use for the private label 
market and general mortgage servicing in general, and while it 
is very tempting to have the Federal Government regulate loan 
servicing, I would argue that, in fact, since Fannie, Freddie, 
and the FHA basically occupy 95 percent of the space now, they 
are, in fact, regulating the market for national loan servicing 
    But one recommendation that the Whalen letter had that I 
disagree with was risk retention by securitizers, where Dodd-
Frank requires that securitizers retain at least 5 percent of 
the risk of the loans or they do not qualify as QRMs, or 
qualified residential mortgages sold in the securitization 
market. In theory, that retention would lead securitizers to be 
more careful in loan origination, underwriting, and even 
servicing process since many of the services are actually 
captured by the banks. To be sure, 5 percent risk retention 
would be the simplest approach to implement to improve all 
these things. However, risk retention also appears to be the 
least useful approach.
    Once again, housing prices in Las Vegas fell 56 percent 
from peak to trough. Five percent risk retention would have 
been knocked out of the box within months. Therefore, that also 
complicates and exaggerates, or exasperates--makes it worse.
    Mr. Sanders. Sorry. My coffee machine broke this morning.
    Fannie Mae and Freddie Mac along with the FHA do control a 
large segment of the market, but even they have had to file 
repurchase claims on some of the loans sold to them in regards 
to servicing. Therefore, one thing I recommend that bypasses 
both the 5 percent risk retention and also addresses what Ms. 
Goodman talks about is transparency to investors and 
regulators. Greater transparency would permit more accurate 
pricing, better loan servicing, and reduce the asymmetric 
information between securitizers, investors, regulators, and 
    There has already been a movement, as witnessed by what the 
Mortgage Bankers Association is doing. But again, we have 
relied heavily on the reps and warranties which served very 
well to kind of back up the claims on securitized issues. But 
again, just that simple tsunami of requests of loan buy-backs 
and defaults, et cetera, by consumers has made that market a 
little bit tough to deal with.
    Therefore, I recommend in addition to greater transparency 
such as loan level files and also whatever the servicing 
standards are, and I think some of Ms. Goodman's ideas are very 
good, I would also like to propose a securitization 
certificate, which is a little change to the model, but what 
that does is the certificate at origination which follows the 
loan from hand to hand, including all of the relevant 
information, chain of title, but would also include the 
servicing guidelines so everyone is clear that purchases the 
loan exactly what those guidelines are. And again, following 
Freddie and Fannie, I think this would actually be a very 
simple thing to do.
    Thank you very much.
    Chairman Menendez. Thank you, Doctor.
    Mr. Harpootlian.

                        HARPOOTLIAN P.A.

    Mr. Harpootlian. Mr. Chairman, thank you for allowing me to 
be here today. I want to tell you, it is my honor to represent 
over 6,000 service men and women who were wrongfully 
overcharged or foreclosed on by Chase Bank. We resolved this 
case by settlement last week and they are going to receive 
payment of about $56. And Chase has stepped up to the plate and 
is going to do a number of things that are going to benefit 
these 6,000 service men and women and other service men and 
    But what I think is important for this body to know is that 
prior to being caught, if you will, there was no effort on the 
part of Chase--and we can find seeing other financial 
institutions--to monitor the accounts of these service men and 
    Now, the Servicemen's Civil Relief Act goes back to the 
1940s. The concept is fairly simple. If you are deployed and 
fighting in a foxhole in Afghanistan, you should not have to 
worry about the bank taking your house because you cannot keep 
up with the financial affairs at home. Likewise, the Act 
requires that the mortgage interest rate be no more than 6 
percent during that period of time to alleviate some of the 
financial burden on these men and women in uniform.
    What we find is, again, a dysfunctional system. There is no 
way, no method by which the Pentagon or any of the Department 
of Defense informs banks when someone is deployed. There is no 
method other than going to a Web site for the bank to know 
before they foreclose that someone is deployed. Everything is 
put on that servicemember to send their orders to the bank, and 
we found in most instances those got lost somewhere.
    The most important thing to understand is this process 
affects the quality of defense, the quality of effort we get 
from our men and women in the field. I talked to hundreds of 
service men and women, some of whom had SCRA protection, many 
of whom did not, that are worried about the financial welfare 
of their family while they ought to be worrying about bullets 
coming in and shells coming in. And this is a national 
disgrace. It is a national disgrace because these men and women 
are putting their lives on the line for us. Even the ones that 
are not deployed are performing a valuable defense effort and 
    So in my prepared remarks, I have outlined a couple of 
things I think that are important that ought to be enacted. A 
much more streamlined way of financial institutions knowing who 
is deployed, who is not deployed. But more importantly, the 
military itself ought to have resources available. JAG officers 
do a great job, but they are not tasked, if you will, with 
ensuring that the men and women in uniform understand what 
their rights are under the SCRA and they are protected against 
harassment and, I mean, the main plaintiff in this case got 
100--his wife and he got 140 collection phone calls from the 
bank while he was deployed while she was 8 months pregnant and 
while he is flying an airplane in combat. That is wrong and we 
need to stop that.
    The last thing I would say, which may have applicability to 
what the other speakers said here, is things have gotten so bad 
in South Carolina that our Chief Justice has enjoined mortgage 
foreclosures--all mortgage foreclosures--and I put in my 
remarks, unless and until a financial institution certifies 
certain things, and all of those things are--I will briefly 
summarize them. One, that the mortgagor has been served with 
notice of the mortgagor's right to foreclosure intervention by 
means of loan modification or other means of loss mitigation; 
that the mortgagor has been given an opportunity to do that; 
that they have had a full and fair opportunity to submit 
information or data to the mortgagee; that after completion of 
foreclosure intervention process, the mortgagor does not 
qualify and why; and that the notice of the denial of loan 
modification or other means of loss mitigation has been served 
on the mortgagor by mailing and there has been a 30-day period 
after that mailing before they can begin foreclosure.
    This is not a model, but it certainly shows that, at least 
on a State level, our Chief Justice has said this thing is a 
mess and too many people are not being given the opportunity to 
try to modify their loans.
    Most of the people I talk to in uniform could work some 
sort of modification out if the financial institutions allowed 
them to do so. What we have heard here today about beginning 
this process, being told, well, you should miss--you know, we 
cannot help you unless you miss two or three payments, I heard 
that over and over again.
    Thank you for the opportunity to be here today.
    Senator Merkley. Thank you. Thank you all.
    Mr. Stevens, without objection, your white paper is 
included in the record as part of your testimony.
    Let me ask all of you, do all the witnesses here agree that 
some national mortgage servicing standards would be helpful?
    Ms. Thompson. Yes.
    Ms. Goodman. Yes.
    Mr. Sanders. Yes.
    Mr. Stevens. Yes.
    Chairman Menendez. OK. Now, in that respect, I want to ask 
you, if you had to name just three specific national mortgage 
servicing standards that you believe would be most helpful in 
your area of expertise, what would those be and exactly how 
would they be helpful? Ms. Thompson?
    Ms. Thompson. End dual track, both for loans that are in 
foreclosure and for loans that are not yet in foreclosure. Dual 
track must be ended, absolutely.
    The other large recommendation that has many sort of 
subparts is that you have got to create transparency in the 
entire process, so that includes dealing with tracking systems. 
It includes making available publicly the net present value 
test and holding servicers to account to actually make the net 
present value test.
    And the third critical point is that you have to have 
enforceability of all these--of everything you do, there has to 
be enforceability, and one of the things that that means is 
that homeowners have got to be able to raise violations of the 
servicing standards as a defense to foreclosure, because if 
homeowners cannot raise violations as a defense to foreclosure, 
there is really, in the end, not much to stop servicers from 
conducting business as usual.
    Chairman Menendez. Ms. Goodman.
    Ms. Goodman. My number one is that national servicing 
standards should require servicers to perform the modification 
to maximize the net present value of the lost mitigation 
options, and regardless of the conflicts of interest that 
entails for the servicers.
    Second would be addressing the fact that the servicer also 
provides ancillary services during the foreclosure period and 
prohibiting a servicer from owning an interest in an entity 
that provides foreclosure-related services.
    And my third would be better disclosure. That is, better 
transparency in terms of what is happening on the modification 
side, what the cash-flows are on these loans. Again, those are 
my three.
    Chairman Menendez. Mr. Stevens, if you have some. I do not 
want to force people to have some. If you have some.
    Mr. Stevens. I think, generally speaking, getting uniform 
foreclosure time lines, uniform time lines for modification, 
uniform foreclosure requirements nationally versus all the 
State variations would help. I think there is an opportunity, 
Senator, to have some discussions about both dual track and 
single point of contact, which I think are the two most 
commonly vetted items to support better foreclosure processes 
by servicers.
    And I would also suggest that there is an opportunity to 
have a further dialog around minimum servicing compensation, as 
I think all of these things have potential unintended 
consequences that we should talk through. I would love to talk 
through and engage with you or your staff as you work through 
these processes. But clearly, aside from what the two previous 
comments were is that the difficulty of all the various rules 
and regulations State by State, I think, add a level of 
confusion that is unnecessary to the overall process.
    Chairman Menendez. Doctor, do you have any?
    Mr. Sanders. Chairman, first of all, I would recommend that 
the industry move toward more standardization of pooling and 
servicing agreements. Those are the PSAs. Whether it is 
regulated or the industry moves toward it, I am sure as Mr. 
Stevens's MBA is working on, that would be very helpful in 
reducing problems in the future.
    Second, transparency. Not only transparency of the process 
to the consumer, but again, and I want to say this, had we had 
loan-level details about the private label market in the first 
place, we might not have seen the problems that we saw, and 
therefore we might not be sitting here today. But again, 
whether it is loan-level transparency or servicer transparency, 
I think that is an excellent idea.
    And in addition, the one thing that has been left off the 
table, and there is nothing we can do about it, is that, in 
part, the huge housing bubble that blew up and collapsed so 
many consumers and caused us grief and heartache was 
attributable to the Federal Reserve keeping interest rates so 
low for so long and creating a huge asset bubble. There is 
nothing we can do about that, but I just wish we could throw 
that into a servicing standard. Please stop printing money. But 
thank you very much.
    Mr. Harpootlian. I have nothing really to add. Thank you.
    Chairman Menendez. Ms. Thompson, what are the views of 
homeowner advocates on the draft consent orders that were 
recently promulgated by several of the banking regulators, such 
as OCC, the Fed, and FDIC? And let us try to split this, if I 
can, your answer into three parts. What did they get right 
about mortgaging service standards? What did they get wrong, 
from your perspective? And what do they not address that they 
should have addressed?
    Ms. Thompson. Thank you, Chairman. I will start with what 
did they get right. What they got right was that there are 
problems that are endemic throughout the servicing industry, 
that the servicing industry has failed to document virtually 
everything and has gross inadequacies in its foreclosure 
process. That is part of the review, I think, that supports the 
allegations that have been widespread for many years about 
servicer abuses and loss mitigation.
    Beyond that, the orders are not very helpful and are 
potentially harmful in some ways. The orders are vague. They do 
not set out clear standards. They lack any meaningful 
enforcement action. At best, they suggest that the agencies may 
come back and do some enforcement action. These are agencies 
that, unfortunately, do not have a good track record of 
enforcement actions.
    They only look at loans for a very limited timeframe. It is 
2009 and 2010. So we provide no protection for loans going 
forward, no remedies for homeowners who were wrongfully 
foreclosed on before then, even if remedies to homeowners are 
provided. I think we could safely say that we are disappointed.
    Chairman Menendez. Any other comments from any other 
members of the panel on those consent orders?
    Ms. Goodman. They are relatively teethless. I agree with 
Diane 100 percent.
    Chairman Menendez. All right. Let me ask, Ms. Goodman, you 
outlined a series of the conflicts. What do you think is the 
most important of those conflicts of interest from a mortgage 
investor's perspective?
    Ms. Goodman. I actually think the first lien-second lien 
issue, and more broadly the fact that first lien servicers 
oftentimes do not own the first lien. In a GSEs loan, the GSEs 
have the first loss position in the first lien. Servicers do, 
however, own the second lien. In addition, they also own credit 
card debt and auto debt of the borrower.
    You will notice that in a modification, the only thing that 
is really affected is mortgage debt. There is no restructuring 
of the borrower's entire debt. There are two reasons why 
modifications fail. The first is that the borrower has 
substantial negative equity. The second is that he has a back-
end debt-to-income ratio, that is, a total debt burden that is 
unsustainable. And for more successful modifications, you 
really have to address the borrower's overall debt situation. 
There has been an extreme reluctance to do that. And even in 
terms of more successful modifications, respecting lien 
priority and writing off the second completely, or at least a 
greater than proportionate write-down on the second lien versus 
the first lien would help a great deal in eliminating negative 
    So my first order of business would be looking at the 
conflicts of interest between the servicers who own the second 
lien and other borrower debts and do not own the first lien.
    Chairman Menendez. Mm-hmm. And I just want to just stay 
with this conflict of interest question. Flesh out for me a 
little bit more how, number 1, how it is a conflict of interest 
for the mortgage servicer for the primary mortgage on a 
property to also own the secondary mortgage, and how do we best 
address that conflict of interest, from your perspective?
    Ms. Goodman. There are a couple of different ways to 
address that. The reason it is a conflict of interest is 
because you own the second lien, you can make decisions, or 
there is an incentive to make decisions that basically help the 
second lien holder at the expense of the first lien holder. So, 
for example, if a borrower gets a short sale opportunity, the 
servicer may reject that even though it is in the best interest 
of both the investor and the borrower because it essentially 
requires them to wipe out the second lien.
    How do you address it? I think, as Dave mentioned, it is an 
extraordinarily difficult, difficult problem. You can--one way 
is basically to say----
    Chairman Menendez. That is why we get paid the big bucks 
    Ms. Goodman. One way--basically, the easiest way to address 
it is to say if you own the second lien, you cannot also 
service that first lien, or alternatively saying if you service 
that first lien, you cannot own the second lien.
    Let me also mention that in the modification process, the 
first and second liens are oftentimes treated pari passu. So if 
I am making a first lien mortgage going forward, the costs of 
that may well be higher if this becomes institutionalized. So 
you really have to consider how to make it clear to investors 
that lien priority is, in fact, lien priority. I think that is 
just a critical point.
    There are a variety of ways to do that. We seem to be 
unwilling to address the second lien situation on any level. We 
have gone to great lengths to put out QRM standards, which I 
have some real issues with, but basically, there is nothing 
that prohibits that borrower from going out, taking out a 
second lien tomorrow and essentially negating the whole purpose 
of those standards. So I think you have to basically put some 
up-front restrictions on second liens, as well, in order to 
have better mortgages going forward. But certainly, you have to 
respect lien priority.
    Chairman Menendez. Mr. Stevens, do you have any views of 
that? I sort of like heard----
    Mr. Stevens. I do, and actually----
    Chairman Menendez. I thought you might, so----
    Mr. Stevens. Ninety-nine percent of the time, I agree with 
everything Laurie says. I think the challenge here is that I am 
not at all certain that by having someone else service the 
second lien, it is going to change the outcome. I think----
    Chairman Menendez. I heard that in response to a separate 
    Mr. Stevens. And I think, actually, one of the things we 
ought to test for and we ought to think about--``test'' sounds 
a little too clinical--is whether, if it is two different 
servicers, is there perhaps even less incentive? Again, as I 
said earlier, when the first lien ultimately goes to 
foreclosure, if the investor owns a second, as well, they are 
completely wiped out on the second.
    So I am not sure that is necessarily the case when--and I 
will just take this to an extreme--many of the loans originated 
during this boom period in this low-interest rate market when 
stated income loans were created, et cetera, so were not very 
sustainable loans on the first lien basis. So a stated income, 
negatively amortizing ARM on the first lien that some PLS 
investor was ready and willing and able to buy, you know, that 
fundamentally could be part of the challenge of why the 
borrower ultimately went into default. So I understand why the 
investors would like the second liens expunged and have the 
first lien written down, because they hold the--their whole 
interest is in that first lien, just as in the second lien 
holder, their objective is to keep whole on their second lien.
    I spent a couple of years in my last position talking to 
everybody who would come in and talk about their interests, and 
it clearly reflected the businesses they were in. You know, in 
the end of the day, it is a very complicated subject----
    Chairman Menendez. Let me ask you two questions.
    Mr. Stevens. Yes.
    Chairman Menendez. First of all, the mere fact that you are 
a second lien holder basically says, yes, you have certain 
legal rights, but you have inferior rights to the first lien 
    Mr. Stevens. Absolutely.
    Chairman Menendez. So as such, you know that you are taking 
another level of risk, right?
    Mr. Stevens. Correct.
    Chairman Menendez. Second, I understand your view that 
maybe not having different servicers is the answer, but by the 
same token, if I am the servicer and owner of the second lien 
and not the owner of the first, I truly have a, if not an 
actual conflict, a potential conflict in ensuring that, 
somehow, my legal interests and my economic interests are 
preserved. And so I am more reticent to find a way to either do 
a mortgage adjustment or, you know, some principal pay-down or 
reduction because I will be wiped out. I mean, that is, to me, 
pretty obvious. Now----
    Mr. Stevens. Yes, and Senator, I am going to tell you, I do 
not have the answer to this as some others may feel they do. My 
view on this is I do not think it ultimately ends up being that 
simple, because the one thing for certain, having been a banker 
for most of my career, is if I do not keep that first 
performing, I am going to get wiped out completely if I hold 
both. And I am not so certain if you separate those interests 
that second lien holder is going to have any additional 
incentive whatsoever to write down the second when they have 
absolutely no interest in the performing of the first due to an 
obligation as the servicer.
    So, again, I am not arguing necessarily that one solution 
is better than the other. I just think we ought to be very 
thoughtful to make sure that is really the answer to this 
thing, because I can see challenges with the outcomes if we 
said we separate them. That can even make it more 
    Chairman Menendez. Ms. Goodman, let me hear your response.
    Ms. Goodman. My response is twofold. First, the fact that 
you have got the same guy servicing the first and owning the 
second actually does produce some distortions in terms of the 
type of loan modifications you get. You end up with a lot of 
sub-optimal loan modifications.
    So, for example, if you do a first lien proprietary 
modification, you do not have to touch the second. That may not 
be necessarily the best modification for the borrower, but it 
is sure as hell the best modification for the servicer, and it 
is certainly not the best modification for the investor, 
either, because the borrower and investor are fairly well 
aligned there.
    Another instance is the reluctance to approve a short sale 
because you wipe out the second. It may well be the best 
interests of the borrower and the investor, but it is not the 
best interest of the servicer. So I think you get sub-optimal 
loss mitigation because of the conflicts of interest in terms 
of the liens.
    Chairman Menendez. Doctor, did you have an opinion on this? 
I saw you raise your hand.
    Mr. Sanders. Yes. What I wanted to comment on is the 
commercial mortgage, or CMBS market, went through these 
gyrations years before we had the big housing bubble burst, and 
I actually have a study on adverse selection and mortgage 
servicing in the commercial sector, and what we found is that 
the difference between what we call same servicer and different 
servicer was negligible. So I would agree that it is a very 
complicated problem, and in defense of Ms. Goodman, it could be 
a little different for the residential market, but I agree with 
Mr. Stevens that this is going to be such a--you know, there 
are so many competing problems in this industry, I would just 
say that would not be the focal point. I would go to, again, 
examining or total debt as something we really had to consider. 
And bear in mind that many of the PSAs, the servicing 
agreements, were all written back in the day when we were not 
thinking about second mortgages or the big HELOC problem, and I 
think those definitely should be amended going forward.
    Chairman Menendez. Let me ask you just one or two more 
questions and then I will let you go. Principal deductions--
they are not typically offered very often today to borrowers, 
even though we know the borrowers are more likely to simply 
walk away from their homes and decide it is not worth it to 
stay if they are deeply underwater. Why are servicers not doing 
more about principal reductions? Ms. Thompson?
    Ms. Thompson. Principal reductions are the one kind of 
modification that servicers will unequivocally absolutely lose 
money on by doing. Servicers' largest source of income is the 
monthly servicing fee, which is based on the outstanding 
principal. So if they reduce the principal, they are 
guaranteeing themselves a loss of future income.
    Ms. Goodman. Let me also mention that while banks are--
while servicers are not doing principal reductions for others, 
they are doing it for their own portfolio loans. According to 
the OCC OTS Mortgage Metrics Report from the fourth quarter of 
2010, overall, principal reduction was done on 2.7 percent of 
modifications. Seventeen-point-eight percent of portfolio 
loans, however, received principal reduction as part of the 
modification package, 1.8 percent for private investors, and 0 
percent for Fannie, Freddie, and Government-guaranteed loans. I 
realize there are some institutional constraints on Fannie, 
Freddie, and Government-guaranteed loans, but there are 
basically no--there are very few institutional constraints in 
terms of why private investor loans do not receive principal 
reduction in the same proportion as banks' own portfolio loans.
    Chairman Menendez. Mm-hmm.
    Mr. Stevens. I would just add, having been the architect 
for the FHA Short Refi program, which was designed around 
principal write-down, one of the big resistance points is that 
the--for Freddie Mac and Fannie Mae, FHFA put out a letter that 
they will not participate in the principal write-down. That is 
why, I think, one of the reasons why the percentage is point-
zero-one, or whatever it is----
    Ms. Goodman. Yes. Yes.
    Mr. Stevens. ----and it is such a large part of the market. 
It is also, unfortunately, and I hate to make it all sound 
like--I think there are solutions if we work deliberately at 
it, but in the PLS market with trustees in the middle of the 
ultimate investor, getting ultimate authority to do the 
principal write-down with no real safe harbor that would likely 
stand up in the courts becomes a problem for the servicers.
    But without question, as Laurie points out, and I was going 
to say the same, you do see a lot of principal write-down 
mostly where it is occurring on whole loans held by the 
servicers on their own balance sheet, the banks, where clearly 
there are no impediments to them doing the write-down because 
they own the asset themselves. You could also say it is in 
their best interest to do so, potentially, but there are 
clearly restrictions from the secondary market to be able to 
allow the servicer to simply do a principal write-down.
    Ms. Goodman. Can I just say one other thing, and that is I 
would argue that there actually is a safe harbor for doing 
principal reductions on private investor loans and that safe 
harbor comes through the principal reduction alternative of the 
HAMP program. I would like to see that become mandatory if it 
is the highest NPV.
    Ms. Thompson. Senator----
    Chairman Menendez. Net present value.
    Ms. Goodman. Net present value, yes, thank you.
    Chairman Menendez. Just for the record for everybody who 
does not have the acronyms down, so yes?
    Ms. Thompson. Yes. Indeed, I think the HAMP principal 
reduction alternative should be mandatory. It should be 
encouraged. It has been radically underused. There is no reason 
not to use it. That produces modifications that are more 
sustainable, better return for everybody, really.
    On the FHFA point, that underscores the need for national 
servicing standards. The fact that Fannie and Freddie have 
stood in the way of principal reductions, there is no need to 
allow that to continue. They are in a conservatorship. It 
should be possible for Congress to indicate strongly to them 
that they should step out of the way and allow principal 
reductions to happen. Their failure to allow principal 
reductions to happen, I believe, is ultimately costing the 
American taxpayers money.
    Chairman Menendez. That is a concern that I have of my own.
    Mr. Sanders. Well, again----
    Chairman Menendez. I will let you go in a minute, Doctor. 
The largest owner is the Federal Government. At the end of the 
day, it seems to me that there are two interests of the Federal 
Government, and therefore the Federal taxpayer, which is, one, 
whatever we can do to have property values rise, and two, 
whatever we can do to mitigate that loss. But when we fail to 
do principal reduction when it is fitting and appropriate, we 
are not mitigating the loss. We are taking, in my view, a much 
larger loss. And we have the displacement of individual 
families from their homes and we have the consequential fact of 
property values being diminished, which ultimately means that 
ratable bases are diminished, and when ratable bases are 
diminished, mayors have just one of two choices. Either they 
cut services or they raise taxes. It is all a bad scenario.
    Mr. Sanders. Yes. Let us not take this one too lightly, 
because I gave a presentation at Treasury when the Obama 
administration first came in and I said that, really, the only 
solution to this, the negative equity states, will be massive 
principal reductions. Otherwise, we probably are not going to 
have any resolution.
    On the flip side, the moral hazard problem of putting up 
the sign saying, we will do principal reductions or short 
sales, could cause a kind of a massive entrance into doing loan 
modifications with everybody. I would like to have a principal 
write-down, but again, you do not apply for it. Again, it is 
just one of those touchy issues that--I think Mr. Stevens 
probably has looked into this, I think, quite intensively, but 
that is----
    Chairman Menendez. I think there are a lot of moral hazards 
that crossed when we gave out mortgages to individuals who 
should never have been enticed into a mortgage for which they 
did not have the wherewithal to live up to, and there was a lot 
of moral hazard crossed there. There was a lot of moral hazard 
when, because of systemic risk to this entire country's 
economy, we had to go in and resolve for every American 
taxpayer the consequences of institutions that would have 
collapsed but would have created a consequence to every 
    So I agree with you. There is a lot of moral hazard here. 
At some point, though, my concern at this point in time, having 
seen many of those moral hazards already crossed, is the 
question of how do we mitigate the consequences to the Federal 
taxpayer at this point for that which has already been 
determined. And we have, by virtue of Fannie and Freddie, the 
largest single portfolio of that, and that means that the 
Federal taxpayer has the largest single risk. And so in my mind 
is how do we mitigate that so that we walk out as best as we 
can under the circumstances.
    Mr. Harpootlian, I want to close on a note. I appreciate 
the service that you rendered to the men and women in uniform. 
You know, it is pretty incredible that we find ourselves at a 
time in which we have two wars raging abroad, largely unpaid 
for but nevertheless raging abroad, that the men and women in 
uniform would have to worry about their homes being lost where 
their wives or husbands and children are. It is not how a 
grateful Nation says thank you, and it is not how institutions 
who are benefiting from the investments of those individuals in 
their companies should act.
    So I read your greater testimony with interest. I know you 
recommended greater legal support for servicemembers to 
understand and enforce their rights and more cooperation with 
the Department of Defense and financial institutions, and I 
wholeheartedly agree. With reference to your recommendation 
that we should incentivize mortgage modifications and 
discourage foreclosures when it comes to service people, that 
is what some of our current mortgage modification programs are 
trying to do more broadly, not as successful as we would like. 
Do you have any ideas of how that would be tailored to service 
    Mr. Harpootlian. Well, I think that, again, our men and 
women in uniform are sacrificing--I mean, I have heard story 
after story of folks that were in the Reserves that were making 
a pretty good salary ending up in Afghanistan or Iraq. Salaries 
come down dramatically. They cannot make their house payments 
anymore. It just seems to me that at the front end, before--
when they are deployed, somebody in the military ought to sit 
down and do some sort of financial analysis of what their 
situation is.
    There is a Lieutenant Colonel from California who was a 
Reservist in military intelligence. Her husband was making 
about a half-a-million dollars a year and she was making about 
$125,000 a year. She got deployed. His business, RV business, 
shut down. She went from making $125,000 to about $30,000 or 
$40,000. And all that--nobody there to help them, nobody to 
talk to the financial institutions, and they foreclosed on her 
and she is one of our class members.
    But that is an extreme case. I think the Department of 
Defense ought to work something out with the financial 
institutions so when folks, both deployed and not deployed, 
have issues, that there is somebody advocating for them, 
because they are distracted. They are distracted in some 
instances by incoming. In other instances, if they are 
maintaining a jet at Shaw Air Force Base in South Carolina, I 
want them focused on maintaining that jet, not worrying about 
their financial issues. And I think, again, the pay is not 
good, the life is pretty hard, and we ought to do something in 
addition to all this that you are talking about in terms of 
servicing standards, we ought to do something in addition for 
our men and women in uniform.
    Chairman Menendez. All right. Thank you very much.
    Well, I do know this much, and you all have been very 
helpful in beginning, and I underline ``beginning,'' to help us 
understand some of the challenges here. The present system as 
it is is not acceptable and not working, so there has to be 
change. And those who are involved, I hope, will come forth in 
the spirit of embracing the change and helping us structure it 
in a way that both meets the desire to have people obviously 
live up to their obligations, but also be able to stay in their 
    In the absence of having those who are in the industry come 
forth and embrace the necessary changes, then I think that 
there will be changes forthcoming that they might not very well 
appreciate when they have an opportunity to engage. So I hope 
this hearing starts the highlighting of what some of these 
critical issues are and we have to think through as to how we 
best resolve them and have the pendulum strike in the right 
balance. But just the belief that we can tough it out is the 
wrong belief.
    With that, I want to thank all the witnesses for sharing 
their expertise today. I hope, as I said, that we can come 
together to try to improve this process pretty dramatically.
    The record will remain open for 7 days to give everybody an 
opportunity to answer questions in writing. I still have some, 
but I did not want to keep you here longer. And we would 
appreciate your answers as expeditiously as possible.
    So with the thanks of the Committee and with no other 
Senator present, this hearing is adjourned.
    [Whereupon, at 3:33 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
Acting Director, Financial Markets and Community Investment, Government 
                         Accountability Office
                              May 12, 2011

              Senior Managing Director, Amherst Securities
                              May 12, 2011
    I am honored to testify today. My name is Laurie Goodman and I am a 
Senior Managing Director at Amherst Securities Group, a leading broker/
dealer specializing in the trading of residential mortgage-backed 
securities. I am in charge of the strategy and business development 
efforts for the firm. We perform extensive, data-intensive research as 
part of our efforts to keep ourselves and customers abreast of trends 
in the residential mortgage-backed securities market. I would like to 
share some of our thoughts with you today.
    A few quick numbers will serve as background. There is $10.6 
trillion worth of 1-4 family mortgages outstanding in the United 
States. Of those, one half, or $5.4 trillion, is in Agency MBS 
(mortgage-backed securities), $3.0 trillion consists of first lien 
mortgages in bank, thrift and credit union portfolios plus the 
unsecuritized loans on Freddie Mac and Fannie Mae's balance sheet, and 
$1.2 trillion is in private label MBS. Second liens, which are mostly 
held on bank balance sheets, total just under $1 trillion. It is 
important to note that while private label securitizations represent 
only 12.8 percent of the first lien market, they represent 40 percent 
of the loans that are currently 60+ days delinquent.
    Servicers play a critical role in the housing finance market. They 
are the cash flow managers for the mortgage system. If the borrower is 
making his payments, the servicer collects and processes those 
payments, forwarding the proceeds to the investor in a securitization. 
If there is an escrow account, the servicer is charged with making the 
tax and insurance payments. If the loan goes delinquent, the servicer 
is responsible for running the loss mitigation efforts, an endeavor 
that many servicers, especially so-called ``prime'' mortgage servicers, 
had little experience at prior to the crisis. It was never contemplated 
that these servicing platforms would be used to perform default 
management on the current scale. As a result, they have never built up 
a loss mitigation infrastructure. A set of national servicing 
standards, addressing minimum infrastructure requirements to handle the 
servicing of delinquent borrowers within a servicing platform is the 
best way to address this issue, and I am pleased to have input on this 
important topic.
    The servicer is generally paid a fixed percentage of the 
outstanding loan balance for servicing a mortgage. This fee is 
generally too large for servicing loans that are not delinquent, and 
too small to cover the costs of servicing loans which have gone bad. 
There are other sources of income as well. The borrower often makes his 
payment early in the month, and the monies are not required to be 
remitted until mid-month, giving the servicer the right to invest these 
proceeds in the meantime (float). When the borrower goes delinquent, 
servicers charge late fees. There are a number of ancillary fees that 
are charged during the loss mitigation process. Finally, servicing a 
loan allows a firm to cross-sell other financial products to the 
borrower, including auto loans, credit cards, and home equity lines of 
credit. As a result, the servicer often interacts with the borrowers 
across a number of different products, some of which may be in the 
investment portfolio of a related entity. There are some costs as 
well--the servicer will generally advance tax and insurance payments, 
and in private label securitizations are usually obligated to advance 
principal and interest to the extent deemed recoverable.
    The purpose of my testimony is to discuss conflicts of interest 
facing mortgage servicers that may stop them from acting in the best 
interests of mortgage investors and homeowners, and to discuss which of 
these conflicts can be addressed through national mortgage servicing 
standards. Let me begin by pointing out that the interests of mortgage 
investors and homeowners are largely aligned for 2 reasons. First, the 
mortgage market is reliant on investors to continue to extend credit, 
thereby providing the necessary capacity to encourage competitive rates 
for borrowers in pursuit of home financing. Second, foreclosure is, 
without question, the worst outcome for both investors and borrowers. 
It is a long and drawn-out process in which a borrower is forced from 
his home, and an investor typically suffers a loss on his investment in 
the mortgage loans of between 50-80 percent of the balance of the loan 
amount after the home is sold and the various costs are deducted.
    The interests of both the borrowers and investors can be 
marginalized when the loan is serviced by a conflicted party. Here are 
the inherent conflicts we see.
CONFLICT #1: Large first lien servicers have significant ownership 
        interests in 2nd liens and often have no ownership interest in 
        the corresponding first lien mortgage loans that are made to 
        the same borrower and secured by the same property.
    In such cases, the first liens are typically held in private label 
securitizations, the second lien and the servicing rights are owned by 
the same party, often a large bank. The 4 largest banks (Bank of 
America, Wells Fargo, JPMorgan Chase, Citigroup) collectively service 
54 percent of all 1-4 family servicing in the United States. They own 
approximately 40 percent ($408 billion out of $949 billion) of second 
liens and home equity lines of credit outstanding. The securitized 
second lien market is very small. Thus when a first lien in a private 
label securitization is on a property that also has a second lien, that 
second lien is very likely to be held in a bank portfolio, and if it is 
inside a bank portfolio it is often in one of the big 4 banks.
    This is a conflict because the servicer has a financial incentive 
to service the first lien to the benefit of the second lien holder. 
Many time this incentive conflicts with the financial interest of the 
investor or borrower. We outline some of the consequences of this 
    Consequence: Short Sales and Deeds-in-Lieu Are Less Likely To Be 
Approved. An example makes this more intuitive. Assume that a borrower 
has a $200,000 first lien and a $30,000 second lien ($230,000 lien 
total) on a home that suffered a valuation reduction down to only 
$160,000. The borrower is paying on his second lien, but not on the 
first lien. The borrower receives a short sale offer at the market 
value of the property, and asks the servicer (a large financial 
institution) to consider it. If the servicer accepts the offer, the 
second lien (held on the balance sheet of the financial institution) 
must be written off immediately. If the servicer is also the second 
lien holder, he may be more inclined to reject the short sale offer. In 
this case, accepting the short sale offer was clearly in the best 
interests of both borrower and first lien investor. Similarly, a 
servicer will be less likely to accept a deed-in-lieu of foreclosure. 
We believe that national servicing standards should explicitly address 
this issue.
    Consequence: Loan Modification Efforts Are Sub-Optimal. Loan 
modification programs have two issues: they do not address the 
borrower's total debt burden, and they do not address a borrower's 
negative equity position. As a result, the redefault rate has been 
enormous. We believe that both of these shortcomings share, at their 
core, one common trait: conflicted servicers. We look at each in turn.
    Modifications Fail To Address the Borrower's Total Debt Burden. In 
a loan modification, only the mortgage debt is affected. That is, most 
modification programs, including HAMP, the Government's Home Affordable 
Modification Program, look at the payments on a borrower's first 
mortgage plus taxes and insurance, and compare that to the borrower's 
income. This is called the front-end debt-to-income ratio, and an 
attempt is made to reduce the payments to a preset percentage of the 
borrower's income. Consider a bank who services a borrower's first 
lien, second lien, credit card and auto loan. The first lien is in a 
private label securitization, all other debts are on a bank's balance 
sheet. The bank is obligated to modify only the mortgage debt, leaving 
the credit card and auto debt intact. Moreover, the second lien 
mortgage debt is generally treated pari passu with the first lien. 
There are situations in which only the first lien is modified, and the 
second lien is kept intact, making even less impact on the borrower's 
total debt burden.
    Since there is no sense of an overall debt restructuring, the 
borrower is often left with a mortgage payment that is affordable, but 
a total debt burden that is not. For example, the Treasury HAMP report 
shows that the borrowers who received permanent modifications under the 
Home Affordable Modification Program had their front-end debt-to-income 
ratio reduced from 45.3 percent to an affordable 31.0 percent, while 
the median back-end debt-to-income ratio (or total debt burden as a 
percent of income) was reduced from 79.3 percent before the 
modification to a still unsustainable 62.5 percent afterwards. The 
result: a high redefault rate on modifications. For a successful 
modification, a borrower's total debt burden needs to be completely 
    Modifications Fail Because They Do Not Address a Borrower's 
Negative Equity Situation. Consider the 2MP program, the HAMP program 
which applies to second liens. Essentially this program treats the 
first and second lien holders pari passu when the borrower's first lien 
is modified. If there is a rate reduction on the first lien, there is 
also a rate reduction on the second lien; if there is a principal 
write-down on the first lien, the second lien also receives a principal 
write-down. This makes no sense, as the junior lien is by definition 
subordinate to the first lien, and as such should be written off before 
the first lien suffers any loss. And if a modification is done outside 
of HAMP (and there are more non-HAMP or proprietary modifications than 
there are HAMP modifications) the servicer is not compelled to address 
second liens at all.
    The negative equity position of many borrowers would be 
dramatically improved if the second lien was eliminated or reduced more 
in line with the seniority of the lien. Indeed, loan modification 
programs would be markedly more successful if principal reduction were 
used on the first mortgage and the second lien were eliminated 
completely. Our research has shown that a principal reduction 
modification has the highest likelihood of successfully rehabilitating 
a borrower, and will ultimately result in the lowest redefault rate.
    Principal Reductions Are Used in Loan Modifications Less Frequently 
Than They Should Be, Due to Conflicted Servicers. Even with the current 
pari passu treatment on first and second liens, we believe there are 
fewer principal reduction modifications on loans owned by private 
investors than there would be if a related entity of the servicer did 
not own the second lien. That is, we believe banks are reluctant to 
take a write-down on a second lien that is paying and current; as a 
result, they do a first lien modification which is less effective, to 
the detriment of the borrower/homeowner as well as to the private 
investors who own the first lien loan. In addition we believe 
conflicted servicers are counseling borrowers to remain current on 
their second liens, thereby allowing them to postpone the write down on 
the second lien, and increasing the likelihood of a pari passu 
    Principal Reductions Are Also Used Less Frequently Due to 
Distortions in the Compensation Structure. Servicing fees are based on 
the outstanding principal balance. Thus, when a principal reduction is 
done, the servicing fee is reduced, as it is based on a lower principal 
amount. Since it costs more to service delinquent loans than the 
servicer is receiving in fees, and this is exacerbated by the write 
down, it adds to the reluctance to do the principal write down.
    With servicers trying to minimize the write off of second lien 
holdings and maintain servicing fees, it is no surprise that we see 
distorted outcomes for borrowers and investors in loans that banks 
service for private investors.
    Here is some evidence of the distortion. We can see a marked 
difference in servicing behavior for first liens owned by banks and 
those where the first lien is NOT owned by a bank portfolio. According 
to the OCC/OTS Mortgage Metrics report of Q4 2010, banks did a 
principal reduction on 17.8 percent of their first lien portfolio 
loans. These were loans in which they own the first lien, generally own 
the second lien (if there is one), and modified the first lien to 
achieve the highest net present value. By contrast, those same 
financial institutions did a principal reduction on only 1.8 percent of 
loans owned by private investors and 0 percent of Fannie Mae, Freddie 
Mac, and Government-guaranteed loans. While there are major obstacles 
to principal reduction in the case of GSE (Government Sponsored 
Enterprise) loans or Government-guaranteed loans, there are few 
obstacles to doing principal reduction on private investor loans. Only 
a few PSAs (Pooling and Servicing Agreements) prohibit such behavior. 
And the OCC/OTS Mortgage Metric Report numbers for Q4 2010 were not a 
fluke; in the immediately preceding calendar quarter Q3 2010, banks did 
principal reductions on 25.1 percent of their own loans, but on only 
0.2 percent of loans owner by private investors.
    Solution: To Increase the Use of Principal Reductions as a Loan 
Modification Tool. National servicing standards should require that 
servicers perform the modification with the highest net present value, 
which will usually be a principal reduction. Under HAMP, the servicer 
is required to test the borrower for a modification using both the 
original HAMP waterfall, as well as the Principal Reduction 
Alternative, which moves principal reduction to the top of the 
waterfall. If the Principal Reduction Alternative has the highest net 
present value, servicers are not obligated to use it. Use of the 
Principal Reduction Alternative is voluntary, at the discretion of the 
servicer. HAMP should be amended to require the use of the Principal 
Reduction Alternative, if it has the highest net present value of the 
alternatives tested.
    Consequence of Pari Passu Treatment of First and Second Liens: 
Higher First Lien Borrowing Costs. We believe a large error was made in 
opting to treat the first and second liens pari passu for modification 
purposes. The consequence of this is that first mortgages will become 
more expensive, as investors realize they are less well protected than 
their lien priority would indicate. It is very important to realize 
that under present law and practices, a second mortgage can be added 
after the fact, without the first lien investor even knowing it. But 
addition of a second lien significantly increases the probability of 
default on the first mortgage. However, as presently constructed, if a 
borrower gets into trouble, the first and second mortgages are treated 
similarly for modification purposes. Since that raises the risk for the 
first lien investor, it should also increase the cost of debt for the 
first lien borrower. (We haven't seen this reflected in pricing yet, as 
few mortgages have been originated for securitization; most mortgages 
issued since the pari passu decision were insured either by the GSEs or 
the U.S. Government.)
Solutions To Maintain Lien Priority
    What can be done about conflicts of interest inherent in an entity 
servicing a pool of loans and owning the second lien (while the first 
lien is owned by an outside investor)? There are at least 3 alternative 
solutions for newly originated mortgages. The first two require 
congressional consent, while the third would require actions by the 
bank regulatory authorities. These solutions to the reordering of lien 
priorities are beyond the scope of national servicing standards.
    Alternative 1. This solution would contractually require first lien 
investors to approve any second lien (or alternatively, approve any 
second lien with a CLTV [(combined loan-to-value, the ratio of the sum 
of all the liens on the property to the mortgage amount) exceeding a 
preset level, such as 80 percent]. If the first lien holder does not 
approve it, yet the borrower still takes out a second lien, the first 
lien must be paid off immediately (the ``due on sale'' clause is 
invoked). This may sound harsh, but it really is not. Currently, if a 
borrower wants to refinance his first lien, the second lien must 
explicitly agree to resubordinate his lien. The infrastructure to 
arrange these transactions exists and works smoothly. Prohibition of 
excessive indebtedness is common in corporate finance. This is done 
through loan covenants that limit the amount of junior debt that can be 
issued without the consent of the senior note holders. This alternative 
may be required to restart the private mortgage markets and would 
require an amendment to the Garn-St. Germain Depository Institutions 
Act of 1982. That act prohibits the senior lien holder from invoking 
the due-on-sale clause if the borrower opts to place a second lien on 
the property.
    Alternative 2. Place an outright prohibition on second mortgages 
where the combined CTLV exceeds a designated level, such as 80 percent, 
at the time of origination of the second lien.
    Alternative 3. Establish a rule that a lender cannot service both 
the first and second liens while owning only the second lien.
CONFLICT #2: Affiliate Relationships With Providers of Foreclosure 
    The servicer often owns a share in companies that provides 
ancillary services during the foreclosure process, and charges above-
market rates on such. Entities that provide services during the 
foreclosure process that are possibly owned by servicers include force-
placed insurance providers and property preservation companies. (These 
companies provide maintenance services as well as property inspection 
services.) Even when a servicer is not affiliated with the company 
providing the service, they often mark up the fees considerably.
    What is the consequence of affiliates of the servicer charging 
above market fees? Such fees are added to the delinquent amount of the 
loan, making it much harder for a borrower to become current. Moreover, 
when a loan is liquidated, the severity on the loan (the percentage of 
the current loan amount lost in the foreclosure/liquidation process) 
will be much higher, to the detriment of the investor(s) in that 
mortgage. It also tends to make servicers less inclined to resolve the 
loan through a short sale, as fee income that will be earned in the 
interim (as the loan winds its way through a lengthy foreclosure 
process) is quite attractive.
    Problem: Distortion in the Servicing Fee Schedules. We have heard 
assertions that, since servicers are inadequately paid for servicing 
delinquent loans, the related fees are a way to make up the difference. 
It is absolutely the case that servicers are definitely underpaid for 
servicing delinquent loans. However, they are overpaid for servicing 
performing loans. Moreover, ex ante (at the inception of the loan), the 
servicer had agreed to service the loans at the agreed-upon price. It's 
just that ex post (at the present time), given the amount of delinquent 
loans that accumulated versus original expectations, their original 
agreement has turned out to be a bad deal. But in the real world, a 
deal is a deal! For instance, my own firm Amherst Securities Group 
can't agree to a consulting contract at a fixed price, then come back 
and renegotiate because it is more work than we thought it would be.
    Problem: No Disclosure of Fees. Servicers will tell you that the 
services they provide are essential, and they would be provided at 
similar prices by any third party. By owning or having an interest in a 
wider array of services, the servicers also have more control over the 
timing and can more closely monitor the quality of the servicers 
provided. However, neither borrowers nor investors have any way to 
confirm this. The ancillary fees are not broken out in a form that is 
transparent to anyone outside.
    Partial Solution: Make Better Fee Disclosure a Part of National 
Servicing Standards. The New York State Banking Department, in their 
Regulations for Servicing Loans (part 419), requires that servicers 
must maintain a schedule of common fees on its Web site, and must 
include a ``plain English'' explanation of the fee, and any calculation 
details. In addition, the servicer should only collect a fee if the 
amount of that fee is reasonable, and fees should be charged only for 
services actually rendered and permitted by the loan instruments and 
applicable law. Attorneys fees charged in connection with a foreclosure 
action shall not exceed ``reasonable and customary'' fees for that 
work. At the minimum, this type of language should be adopted for 
national servicing standards.
    Force-Placed Insurance Highlights the Conflicts of Interest. The 
servicer, or an affiliate of the servicer often own a share of a force-
placed insurer. This insurance is used to protect the home when the 
borrower is no longer maintaining his existing policies. Given the 
conflicts, it is unrealistic to expect a servicer to make an unbiased 
decision on when to buy this insurance (there is a tendency to buy it 
without trying to retain the homeowner's policy that was already in 
place) as well as how to price it (there is a tendency to price too 
    There have already been several attempts to address this issue. The 
New York State requirements explicitly address force-placed insurance 
(hazard, homeowner's, or flood insurance), and details situations in 
which it should not be used. A servicer is prohibited from (1) placing 
insurance on the mortgaged property when the insurer knows or has 
reason to know the borrower has an effective policy for the insurance; 
(2) failing to provide written notice to a borrower when taking action 
to place insurance; and (3) requiring a borrower to maintain insurance 
exceeding the replacement cost of improvements on the mortgage 
    The State Attorneys' General proposed settlement (circulated in 
March of this year but not yet approved) contains similar provisions 
governing the placement of force-placed insurance. The servicer must 
make reasonable efforts to continue or reestablish the existing 
homeowner's policy if there is a lapse in payment. The servicer must 
advance the premium if there is no escrow or insufficient escrow. If 
the servicer cannot maintain the borrower's existing policy, it shall 
purchase force-placed insurance for a commercially reasonable price.
    However, the Attorneys' General proposed settlement went one step 
further than the New York State requirements--it suggested the 
elimination of the conflict of interest by prohibiting these servicers 
from placing insurance with a subsidiary or affiliated company or any 
other company in which the servicer has an ownership interest.
    Solution: Force-Placed Insurance Conflicts. National Servicing 
Standards can be used to require servicers to keep existing homeowner's 
policies in place as long as possible, as both the New York State 
requirements and the proposed Attorneys' General settlement do. If it 
is not possible to reestablish the existing homeowner's policy, 
measures must be included to make sure the pricing of the purchase is 
reasonable. Moreover, following the lead of the Attorneys' General 
settlement, national servicing standards should prohibit the placement 
of force-placed insurance with a subsidiary, affiliated company, or any 
other company in which the servicer has an ownership interest.
    Solution: Dealing With Other Ancillary Fees. Under the Attorneys' 
General proposed settlement, the servicer cannot impose its own mark-
ups on any third party fees. Subsidiaries of the servicer (or other 
entities where the servicer or related entity has an interest in such a 
third party) are prohibited from collecting third party fees. Moreover, 
servicers are prohibited from splitting fees, giving or accepting 
kickbacks or referral fees, or accepting anything of value in relation 
to third party default or foreclosure-related services. We at Amherst 
Securities Group agree with these recommendations. These ideas should 
become a part of a meaningful set of national servicing standards.
CONFLICT #3: Conflicts of Interest in the Governance of a 
        Securitization, Including Enforcement of ``Representations and 
    While the enforcement of ``rep and warrants'' (representations and 
warranties) does not directly affect borrowers, we believe it is a very 
important topic for investor, and serves to highlight the conflicts 
between servicers and investors.
    Violations involving reps and warrants are becoming increasingly 
common as seen in recent litigation. That is, loans in a securitization 
often do not conform to the representations made about the 
characteristics of these loans. For example, a loan may have been 
represented as an owner-occupied property when in fact it is not; or a 
borrower lied about income to a degree that should have been picked up 
in the origination process; etc. Once a rep and warrant violation is 
discovered, at present the trustee is charged with enforcement [the 
remedy is generally that the sponsor or originator repurchases that 
particular loan out of the pool at par (an amount equal to the original 
balance on the loan less any paid down principal)]. However, the 
trustee does not have the information to detect the violations, they do 
not have direct access to the loan files. Moreover, as they have little 
incentive to detect rep and warrant violations, since the trustee is 
not compensated for detecting violations and the benefits of doing so 
actually accrue elsewhere (to the investors).
    Servicers (who do have the information to identify rep and warrant 
violations) often have a financial disincentive to do so, as they would 
be putting the loan back to an affiliated entity. For example, the 
largest banks often serve as originators, deal sponsors (underwriters) 
and servicers on securitizations. There is nothing wrong with this, as 
long as there is a mechanism to allow for enforcement of the reps and 
    Solution: Properly Enforcing Reps and Warrants. It is critical to 
have a party that is incented to enforce them, and has both access to 
the information and enforcement authority. This can best be achieved 
through an independent third party charged with protecting investor 
rights, who is paid on an incentive basis. Some current deals nominally 
have a third party charged with protecting investor rights, but that 
party is not empowered, does not have access to necessary information 
(the loan files), and is not paid on an incentive basis. This set of 
conflicts should be addressed the PSAs (purchase and sale agreements) 
for new securitizations. National Servicing Standards should direct 
servicers to make sure that there is an adequate enforcement mechanism 
for reps and warrants.
CONFLICT #4: The Servicing Fee Structure Is Unsuitable to This 
    There are many situations in which transferring the servicing of a 
loan on which the borrower is delinquent to a servicer that specializes 
in loss mitigation would be the best outcome for both borrowers and 
investors. A number of special servicers have had considerable 
experience tailoring modifications to the needs of individual borrowers 
and tend to provide more hand holding to the borrower post-modification 
than what a major servicer is staffed to provide. Consequently, the 
redefault rates on modified loans are much lower with specialized 
servicers who focus on loss mitigation.
    Servicing transfer issues are made very difficult, as many deals do 
not provide for adequate servicing fees to encourage such a transfer. 
We made the point earlier that servicers are compensated too highly for 
servicing current loans, not highly enough for servicing delinquent 
loans. If compensation is inadequate, it will be very difficult to 
convince a special servicer to service the loan.
    Solution: Revamp the Servicing Fee Structure. There has been a 
considerable amount of discussion about revamping the structure of 
servicing fees, to allow for lower fees for performing loans and higher 
fees for nonperforming loans. The FHFA has organized a number of 
meetings to discuss these issues, and has outlined the alternatives. If 
fees were to be altered such that fees for servicing current loans were 
lowered while fees for servicing delinquent loans were raised, it would 
allow the special servicer to be adequately compensated for his high-
touch efforts. This, in turn, would make it much easier to transfer 
delinquent loans to servicers who would do a better job at loss 
    There has been some concern about the incentive issues that would 
arise. Given higher servicing fees for servicing nonperforming loans, 
will servicers be dis-incented to make a proactive phone call when a 
borrower misses one payment? Will the originator/affiliate be less 
concerned about the quality of loans they originate? We think there is 
a very simple solution to this--give the GSEs or private label 
investors the ability to move the servicing when the higher fees are 
scheduled to take effect.
CONFLICT #5: Transparency for Investors Is Woefully Inadequate.
    Many of the conflicts are obscured by servicers as a result of the 
poor reporting they provide on a monthly basis. We believe that with 
more transparency, many of these conflicts would be more visible and 
servicers will be less inclined to act against the interests of first 
lien borrowers and investors. In a private label securitization there 
is often a large difference between the monthly cash payment the 
investor expected to receive and what is actually received. Moreover, 
an investor is unable to delve into the cash flow information further, 
as he lacks the information on the actions of the servicer that would 
be necessary to reconcile the cash flows. When I receive the statement 
from my bank each month, I balance my checkbook, reconciling the 
differences. Investors want to be able to do exactly this with the cash 
flows from the securitizations in which they have an interest. There 
are several culprits:

    Insufficient transparency on liquidations. When a loan is 
        liquidated, investors often receive only one number--the 
        recovered amount. Servicers provide no transparency on what the 
        home has been sold for, what advances were made on the loan, 
        what taxes and insurance were, what property maintenance fees 
        were, nor what the costs of getting the borrower out of the 
        house were. A breakdown of these costs/fees would help 
        investors understand severity numbers that were different 
        (often much higher!) than anticipated. It would also allow 
        investors to better compare behavior across servicers, allowing 
        for identification of the most efficient servicers, and 
        exposing the underperformers.

    Insufficient transparency on servicer advances. A servicer 
        usually advances principal and interest payments on delinquent 
        loans, allowing for a payment to the investor even if the 
        borrower is not paying. These advances are required to be made 
        as long as the servicer deems them to be recoverable. There is 
        often little information on which loans are being advanced on, 
        which makes it very difficult for investors to figure out how 
        much cash they should expect.

    Insufficient transparency on modifications. Similarly, when 
        a loan is modified, investors often can't tell how that loan 
        has been modified. Has there been an interest rate reduction, a 
        term extension, a principal forbearance, or principal 
        forgiveness? How long will any reduced interest rate be in 
        effect, and how will it reset? Were any delinquent payments 
        forgiven? While some servicers are better than others at 
        reporting this information, investors are often forced to infer 
        (guess!) it from the payments.

    Insufficient transparency on principal and interest 
        recaptures. When a servicer modifies a loan, the servicer is 
        entitled to recapture the outstanding principal and interest 
        advances. Those amounts, payable to the servicer, have the 
        first claim rights on cash flows of the securitization. 
        Investors often receive less money than anticipated due to 
        these recaptures. There is certainly nothing wrong with 
        servicers recapturing funds they advanced, but investors want 
        to know how much has been recaptured and from which loans.

[NOTE: As an aside, we have often heard assertions that servicers have 
an incentive to speedily move a borrower along in the foreclosure 
process, as they can recover their advances. That charge has never made 
any sense to us. By modifying a loan, servicers can recover advances. 
Moreover, by modifying, the servicer receives bonuses from the U.S. 
Government from using the Home Affordable Modification Program (HAMP). 
Finally, the longer the process, the more ancillary fee income is 
generated for the servicer.]

    The result of the lack of transparency is that investors can't 
reconcile the cash flows on the securitization they have invested in. 
They don't know how much is being advanced, what are the terms of the 
modifications on the modified loans, and how much of the principal and 
interest advances the servicer is recapturing when doing the 
    Solution: Transparency. We believe the remittance reports for 
future securitizations should contain loan-by-loan information, and 
that loan-by-loan information should be rolled up into a plain English 
reconciliation. National servicing standards should encourage this 
    In summary, we have discussed five conflicts of interest between 
servicers and borrowers/investors. They involve the following:

  1.  Servicers often own junior interests in deals they service, but 
        in which they do not own the first liens

  2.  The servicer often owns a share in companies which can be billed 
        for ancillary services during the foreclosure process, and 
        charges above market rates on these services

  3.  There are conflicts of interest in the governance of the 
        securitization, including the enforcement of rep and warrant 

  4.  Servicing transfers can be problematic due to a misaligned 
        servicer compensation structure

  5.  transparency for investors is missing
  President and Chief Executive Officer, Mortgage Bankers Association
                              May 12, 2011
    Chairman Menendez, Ranking Member DeMint, and Members of the 
Subcommittee, thank you for the opportunity to testify on behalf of the 
Mortgage Bankers Association (MBA). \1\ My name is David Stevens, and I 
am President and CEO of MBA. Immediately prior to assuming this 
position, I served as Assistant Secretary for Housing at the United 
States Department of Housing and Urban Development (HUD), and Federal 
Housing Administration (FHA) Commissioner.
     \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 280,000 people in virtually every community in 
the country. Headquartered in Washington, DC, the association works to 
ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand homeownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 2,200 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's Web site: 
    My background prior to joining FHA includes experience as a senior 
executive in finance, sales, mortgage acquisitions and investments, 
risk management, and regulatory oversight. I started my professional 
career with 16 years at World Savings Bank. I later served as Senior 
Vice President at Freddie Mac and as Executive Vice President at Wells 
Fargo. Prior to my confirmation as Commissioner of the FHA, I was 
President and Chief Operating Officer of Long and Foster Companies, the 
Nation's largest, privately held real estate firm.
    Thank you for holding this hearing on the important subject of the 
creation of national servicing standards. I would first like to provide 
some background information as a preface to my remarks, express support 
for the need for national standards, highlight what MBA has done so far 
in examining that need, recommend steps for the process of developing 
comprehensive servicing standards, and suggest principles for those 
    As the housing crisis evolved, industry and policy maker responses 
evolved along with it. An understanding of these developments and their 
context is crucial to a full appreciation of the challenges facing the 
mortgage industry as it works to help borrowers avoid foreclosure and 
in identifying viable long-term solutions.
    The ``Great Recession'' was the most severe economic downturn that 
the U.S. experienced since the Great Depression of the 1930s. It led to 
the failure or consolidation of many of the country's leading financial 
institutions, and from January 2008 to February 2010, the U.S. economy 
lost almost 8.8 million jobs. Government reacted with unprecedented 
policy initiatives, both in terms of fiscal stimulus and other 
Government interventions, and monetary stimulus in the form of near 
zero interest rates and massive purchases of mortgage-backed securities 
and other assets.
    The housing and mortgage markets both contributed to and suffered 
from this crisis. Although not an exclusive list, several factors were 
at play: excessive housing inventory, lax lending standards that 
favored nontraditional mortgage products and reduced documentation, the 
easing of underwriting standards on the part of Fannie Mae and Freddie 
Mac, passive rating agencies and regulation, homebuyers chasing rapid 
home price increases, undercapitalized financial institutions, monetary 
policy that kept interest rates too low for too long, and massive 
capital flows into the U.S. from countries that refused to allow their 
currencies to appreciate.
    According to the Federal Housing Finance Agency (FHFA), home prices 
nationally decreased a cumulative 11.5 percent during the past 5 years, 
with much larger cumulative declines of 40 to 50 percent in the States 
of Arizona, California, Nevada, and Florida, known throughout the 
crisis as the ``Sand States.'' Household formation rates fell sharply 
in response to the downturn, with many families combining households 
and household expenses to save money. And consumers cut spending across 
the board, as they tried to rebuild savings after the shocks to their 
wage income and the declines in the stock market and housing values. 
The residual effects continue today: even though construction of new 
homes remains near 50-year lows, inventories of unsold homes on the 
market remain high, with nearly 4 million properties currently listed, 
and homebuyer demand remains weak.
    Regardless of which factors caused the recession, we do know that 
the nature of the crisis changed over time. Initially, rising rates 
from the Federal Reserve and suddenly tighter regulatory requirements 
regarding subprime and nontraditional loan products stranded borrowers 
who had counted on being able to refinance loans in late 2006 and into 
    As a result, serious delinquency rates on subprime ARM loans (loans 
90 days past due) increased by 50 percent in 2006 and then more than 
doubled through 2007. \2\ Even before their first interest rate reset, 
these loans failed at unprecedented rates. Subprime ARMs originated 
from 2005-2007 have performed far worse than any others in recorded 
     \2\ MBA's National Delinquency Survey.
    Without access to credit for new buyers, home prices in the Sand 
States markets began to fall dramatically. With investors increasingly 
questioning loan performance, the private-label MBS market froze in 
August 2007 and has remained essentially paralyzed ever since. 
Compounding the problem, lending to prime, jumbo mortgage borrowers 
effectively stopped. As liquidity fled the system, fewer potential 
buyers could access credit, and home prices declined further. According 
to the National Bureau of Economic Research (NBER), the economy 
officially fell into recession in December 2007.
    The unemployment rate in January 2008 was 5 percent. Eighteen 
months later, it would be nearly twice as high, following the near 
collapse of the financial sector in the fall of 2008. From that point 
forward, joblessness and loss of income began to drive mortgage 
delinquencies and foreclosures. Serious delinquency rates on prime 
fixed-rate loans were at 1.1 percent in the beginning of 2008. By the 
end of 2009, they approached 5 percent. These loans were traditionally 
underwritten and well-documented with no structural features that 
impacted performance. Many borrowers simply could not afford their 
mortgage payments as they did not have jobs.
    Important policy initiatives were launched during this time period. 
Servicers began large-scale efforts to modify subprime and 
nontraditional loans. Initially, individual servicers and the GSEs 
undertook these efforts voluntarily, but Government and industry 
efforts led to standardization of processes through the Home Affordable 
Modification Program (HAMP). HAMP also benefited proprietary 
modification programs, which could leverage these standardized 
processes. Importantly, the HOPE NOW Alliance \3\ estimates that, as of 
March 2011, almost 3.8 million homeowners have received proprietary 
modifications since mid-2007. Another 7.2 million borrowers received 
other home retention workouts, including partial claims and forbearance 
plans, a key tool supported by the Administration to assist borrowers 
who are unemployed. \4\ The Treasury Department and HUD also report 
that borrowers received an additional 670,186 permanent HAMP 
modifications. \5\ More than 11 million home retention workout options 
have been provided to consumers in 4 years. This is a significant 
accomplishment that took significant manpower and coordination in the 
face of unprecedented turmoil in the mortgage servicing industry and 
servicers should be recognized for what they have accomplished despite 
the industry's problems.
     \3\ Established in 2007, HOPE NOW is a voluntary, private sector, 
industry-led alliance of mortgage servicers, nonprofit HUD-approved 
housing counselors and other mortgage market participants focused on 
finding viable alternatives to foreclosure. HOPE NOW's primary focus is 
a nationwide outreach program that includes (1) over five million 
letters to noncontact borrowers, (2) regional home ownership 
preservation outreach events offering struggling homeowners face to 
face meetings with their mortgage servicer or a counselor, (3) support 
for the national Homeowner's HOPETM Hotline, 888-995-
HOPETM, (4) Directing homeowners to free resources through 
our Web site at www.HOPENOW.com and (5) Directing borrowers to free 
resources such as HOPE LoanPortTM, the new web-based portal 
for submitting loan modification applications.
     \4\ HOPE NOW, Data Report (March 2011).
     \5\ March 2011, Making Home Affordable Program Report.
    However, other public policy efforts, such as those designed to 
delay the foreclosure process, have typically not been effective over 
the longer term. Frequently, there can be a tradeoff between late-stage 
delinquencies and foreclosure starts, as new regulatory or statutory 
requirements delay foreclosure starts one quarter, resulting in a 
temporary increase in the delinquency ``bucket.'' In most cases, 
though, foreclosure starts rebounded in subsequent quarters as backlogs 
were drawn down.
    In summary, the worst recession in living memory has led to the 
worst mortgage performance in our lifetime. Servicers have been 
overwhelmed by national delinquency rates running four to five times 
higher than what had been typical during the prior 40 years for which 
MBA has data. In spite of these market circumstances, servicers have 
worked to help borrowers avoid foreclosure whenever possible.
MBA Supports the Concept of National Servicing Standards
    Presently, servicers face an overwhelming multitude of servicing 
standards and rules, from Federal laws, such as the Real Estate 
Settlement Procedures Act, Truth in Lending Act, and the Dodd-Frank Act 
(just to name a few), to 50 State laws (plus DC), local ordinances, 
Federal regulations, State regulations, court rulings or requirements, 
enforcement actions, FHA requirements, Veteran Affair's (VA) 
requirements, Rural Housing Service (RHS) requirements, Fannie Mae 
standards, Freddie Mac standards, and contractual obligations, such as 
the pooling and servicing agreement (PSA). Almost every aspect of the 
servicer's business is regulated in some fashion, but the rules are not 
always clear, placing servicers in a position of having to guess as to 
the requirements. Also, the evolutionary nature of the housing crisis 
caused significant, near constant changes in these rules. Since the 
introduction of HAMP, a substantial number of major changes and 
additions have been made to the program. Many recent judicial 
challenges to the well-settled law of ownership rights to notes and 
mortgages have placed the very basis of secured lending at risk by 
disrupting note holder's and investor's ability to enforce their 
security interests.
    Adding to the complexity is the fact that no two servicing 
standards are alike. Fannie Mae, Freddie Mac, and FHA guidelines may 
cover the same subjects, but the requirements differ for each. Each of 
the guidelines addresses foreclosure processes, outlining penalties for 
not performing specified collection and foreclosure procedures in 
particular stages of delinquency, foreclosure, or bankruptcy. This 
results in the need for servicers to create specialized teams for each 
investor. FHFA has undertaken a project to align certain portions of 
Fannie Mae's and Freddie Mac's servicing guidelines and create uniform 
requirements. This is a very positive step and we applaud the effort.
    State laws also play into the complexity of servicing regulation. 
Each of the 50 States and the District of Columbia has its own laws 
governing the foreclosure process and other servicing activities. Some 
States require judicial foreclosure proceedings while others are 
nonjudicial foreclosure States. Thus, the servicer must manage the 
nuances of the laws in the various States through its servicing systems 
and work processes. MBA supports uniformity among judicial foreclosure 
laws and nonjudicial foreclosure laws, which have historically been 
within the domain of the States.
    As a result of the unprecedented volumes of nonperforming loans 
during the current cycle, servicers have experienced difficulties in 
their ability to adjust systems and work processes quickly to meet the 
ever-changing regulatory environment, including changes to loan 
modification programs, and the time required to hire and train 
employees for these new processes. We believe a national servicing 
standard would be beneficial to streamline and eliminate overlapping 
requirements. However, a national servicing standard must be truly 
national in scope and not simply another standard layered atop the 
already overwhelming number of servicer requirements.
    In developing servicing standards, we must also pay careful 
attention to the interdependence of servicing and the impact that 
changes to the system will have on the economics of mortgage servicing, 
tax and accounting rules and regulations, and the effect of the new 
requirements on Basel capital requirements and on the To Be Announced 
(TBA) market. Servicing does not operate in a vacuum; instead it is 
part of the broader ecosystem of the mortgage industry. When making 
changes to the current model we need to be mindful of unforeseen and 
unintended consequences that could result ultimately in higher costs 
for consumers and reduced access to credit.
MBA's Servicing Initiatives
    On December 8, 2010, MBA announced the creation of a task force of 
key industry members to examine and make recommendations for the future 
of residential mortgage servicing. The Council on Residential Mortgage 
Servicing for the 21st Century (Council) is being led by MBA's Vice 
Chairman, Debra W. Still, CMB, the President and Chief Executive 
Officer of Pulte Mortgage LLC. In announcing the formation of the 
Council, MBA Chairman Michael Berman, CMB, stated, ``The residential 
mortgage servicing sector has been operating in a time of unprecedented 
challenges, presenting us with a unique opportunity to explore 
potential improvements to business practices, regulations and laws 
affecting the servicing sector and consumers. As the national trade 
association representing the real estate finance industry, we will 
bring together industry experts to take a comprehensive look at the 
current state and ongoing evolution of residential mortgage servicing 
and make recommendations for the future.''
    The Council convened a 1-day public session on January 19, 2011, in 
Washington, DC, titled, ``MBA's Summit on Residential Mortgage 
Servicing for the 21st Century.'' This Summit brought together industry 
leaders, consumer advocates, economists, academics and policy makers 
who took a detailed look at the issues that have challenged the 
industry and started the process of identifying the essential building 
blocks for the future of servicing.
    Keynote speakers and panelists at the Summit discussed problems and 
perceptions from their respective vantage points. Many speakers 
identified the need for a national servicing standard, the need to 
change the compensation structure to better incent servicers in the 
area of dealing with nonperforming loans, and the need for potential 
changes in laws and regulations related to foreclosures and other 
facets of servicing.
    In analyzing the issues that surfaced during the Summit, the 
Council identified three major areas for further study and development 
of policy recommendations:

    Review of existing servicing standards and practices 
        especially in the areas of large volumes of nonperforming 
        loans, foreclosure practices, and loss mitigation practices, 
        including loan modifications. The Council formed a working 
        group to study and make policy recommendations related to a 
        national servicing standard.

    Evaluation of the legal issues related to the foreclosure 
        process, chain of title and other issues. The Council formed a 
        working group to study and make policy recommendations related 
        to legal issues surfaced during the Summit and any additional 
        statutory or regulatory changes deemed appropriate for 
        servicing in the 21st Century.

    Analysis of proposed changes in servicer compensation 
        proposed by the FHFA, Ginnie Mae, Fannie Mae, and Freddie Mac. 
        The Council formed a working group to analyze the proposed 
        compensation structure from the vantage of various stakeholders 
        including large and small servicers, depository and 
        nondepository servicers, and portfolio lender/servicers and MBS 

    While MBA will continue to release several documents to the public 
during the next several weeks, today we issued a white paper that will 
act as an educational tool and provide background information and an 
environmental scan of the events leading up to the current crisis. The 
white paper provides information on what a servicer does, how a 
servicer is compensated, and the perspectives of consumers, regulators, 
and the legal community with regard to servicer performance in the 
current crisis and their policy recommendations. It also contains an 
industry analysis of the criticisms against servicers in order to 
separate real problems from ``urban myths.'' The last chapter 
highlights the Council's next steps to set the course for the future of 
servicing in the 21st century.
    The ``urban myths'' document summarizes several issues and 
misperceptions raised by regulators and consumer groups that have crept 
into the public consciousness during the servicing debate and dialogue. 
For example, the document dispels beliefs that a servicer's 
compensation structure is misaligned whereby servicers have higher 
incentives to foreclose on a delinquent borrower rather than to modify 
a loan.
    The final document in the initial wave will be the Council's 
preliminary views on the four fee proposals currently under 
consideration by FHFA, Fannie Mae, Freddie Mac, and Ginnie Mae. Since 
servicers come in different sizes, ownership structures, specialties, 
etc., each servicer has its own unique motivations or ``hot buttons'' 
for owning servicing.
    The Council's analysis will contrast specific attributes of each of 
the four fee structures against the current fee structure.
    MBA expects to have a preliminary recommendation with respect to 
national servicing standards later this year. The Council plans to 
release in the coming months its preliminary recommendations related to 
foreclosure laws, chain of title issues, and other legal and regulatory 
obstacles to the servicer doing its job in dealing effectively with 
borrowers in default.
Additional Industry Efforts
    In addition to implementing the various loss mitigations programs, 
including HAMP, the industry has supported many other proconsumer 

    Free Borrower Counseling: \6\ Many servicers and investors 
        pay HUD-approved counselors to counsel borrowers on options to 
        avoid foreclosure. Housing counseling is also supported through 
        NeighborWorks America and HUD grantees. These counselors are 
        instrumental in helping to educate borrowers about specific 
        program details and to collect documents necessary to complete 
        loss mitigation evaluations. Counseling is free to borrowers. 
        HOPE NOW, of which MBA is a member, supports the Homeowner's 
        HOPETM Hotline, 888-995-HOPETM, which is 
        managed by the nonprofit Homeownership Preservation Foundation, 
        and operates 24 hours a day, 7 days a week in several 
        languages. The hotline connects homeowners to counselors at 
        reputable HUD-certified nonprofit agencies around the country. 
        As of March 2011, there have been more than 5 million consumer 
        calls into the hotline since inception, and it serves as the 
        Nation's ``go-to'' hotline for homeowners at risk. The U.S. 
        Government uses this hotline for their Making Home Affordable 
        program and noted in its December 2010 report that 1.8 million 
        calls have been fielded by the hotline to date, and more than 
        one million borrowers have received housing counseling 
     \6\ MBA's Research Institute for Housing America recently released 
a study, ``Homeownership Education and Counseling: Do We Know What 
Works?'' which examined the benefits of prepurchase and postpurchase 
counseling. http://www.housingamerica.org/Publications/

    HOPE LoanPortTM (HLP): HLP is an independent 
        nonprofit created by HOPE NOW and its members as a data intake 
        facility to improve efficiency and effectiveness of 
        communications among borrowers, counselors, investors and 
        mortgage servicers. HLP was created to help address the 
        frustration among borrowers, policy makers, counselors, and 
        servicers in the document submission process. HOPE 
        LoanPortTM's web-based system allows a uniform 
        intake of an application for a loss mitigation solution though 
        HAMP, all Federal programs and proprietary home retention 
        programs. It allows for all stakeholders to see the same 
        information, in a secure manner, and delivers a completed loan 
        package to the servicer for action. This web-based portal 
        increases accountability, stability and security for submitted 
        information and increases borrower confidence that that their 
        information will be reviewed and will not be lost. Servicer and 
        counselor steering teams, working together have made the 
        decisions on how best to create and improve the HOPE 
        LoanPortTM system. This portal was designed by a 
        core group of nonprofits including NeighborWorks' 
        America and HomeFree-USA, and six industry servicers who shared 
        in this unique and important mission.
Recommended Steps in Developing National Servicing Standards
    Several regulators have recently specified their own distinct 
standards regarding mortgage servicing, a trend that concerns MBA 
deeply. The State of New York implemented standards late last year for 
loans serviced in the State of New York. The Office of the Comptroller 
of the Currency (OCC) released proposed standards, and has separately 
issued consent orders to specific banks that impose servicing standards 
through enforcement action as opposed to the normal Federal rulemaking 
process. The Federal Reserve and the Office of Thrift Supervision (OTS) 
have likewise issued consent orders to banks and thrifts that they 
regulate, which contain prescriptive servicing requirements. Several 
State attorneys general have proposed a settlement with some larger 
servicers that would impose restrictive standards as an alternative to 
civil litigation.
    Additionally, the SEC and the Bank Regulators are currently 
attempting to impose servicing standards in the proposed origination 
rules related to a qualified residential mortgage (QRM) under the Dodd-
Frank Act. In order to be considered a QRM and exempt from risk 
retention requirements, the proposal would require compliance with 
certain servicing standards. Specifically, the QRM's ``transaction 
documents'' must obligate the creditor to have servicing policies and 
procedures to mitigate the risk of default and to take loss mitigation 
action, such as engaging in loan modifications, when loss mitigation is 
``net present value positive.'' The creditor must disclose its default 
mitigation policies and procedures to the borrower at or prior to 
closing. Creditors also would be prohibited from transferring QRM 
servicing unless the transferee abides by ``the same kind of default 
mitigation as the creditor.''
    MBA is extremely concerned with the inclusion of servicing 
standards in a QRM definition. The QRM exemption was very clearly 
intended under the Dodd-Frank Act to comprise a set of loan origination 
standards only. The specific language of the Act directs regulators to 
define the QRM by taking into consideration ``underwriting and product 
features that historical loan performance data indicate lower the risk 
of default.'' Servicing standards are neither ``underwriting'' nor 
``product features,'' and while they may bear on the incidence of 
foreclosure, they have little, if any, bearing on default. Combining 
origination standards that terminate at loan closing and servicing 
standards that commence at closing and continue for decades in a single 
QRM regulation is problematic, as the regulation must address two 
distinct functions and time frames. Accordingly, MBA strongly believes 
they have no place in this proposal.
    Embedding servicing standards within the proposed QRM regulations 
will have unintended consequences that could actually harm borrowers. 
Specifying a servicing standard as part of QRM is directly contrary to 
achieving a national standard, as QRM as proposed would only represent 
a small share of the market. The proposal requires loss mitigation 
policies and procedures to be included in transaction documents and 
disclosed to borrowers prior to closing. Such a requirement codifies 
the servicer's loss mitigation responsibilities for up to 30 years at 
the time of origination. While servicers today have loss mitigation 
policies to address financially distressed borrowers, these policies 
continue to evolve as regulator's concerns, borrower's needs, loan 
products, technology, and economic conditions evolve. One need only 
look at the variety of recent efforts that have emerged during the 
housing crisis such as HAMP, the Home Affordable Foreclosure 
Alternatives, FHA HAMP, VA HAMP, and proprietary modifications. A 
further example is the different set of loss mitigation efforts 
necessitated by Hurricane Katrina. In both situations, inflexible loss 
mitigation standards would not have been in the best interest of the 
public or investors.
    The QRM proposal is also likely to make servicing illiquid by 
combining ``static'' loss mitigation provisions in legal contracts and 
borrower disclosures with the inability to transfer servicing unless 
the transferee abides by those provisions, even if more borrower-
friendly servicing options become available.
    The proposal also calls for servicers to disclose to investors 
prior to sale of the MBS the policies and procedures for modifying a 
QRM first mortgage when the same servicer holds the second mortgage on 
the property. This adds another level of complexity to the concerns 
raised above, notwithstanding the irrelevance of these provisions to 
underwriting, origination, and statutory intent.
    MBA believes that national servicing standards should start with a 
full analysis of existing servicer requirements and State laws on 
foreclosure. The new standards should be promulgated in a process that 
includes open dialogue with all stakeholders, including Federal 
regulators, State regulators, consumer advocates, servicers, and 
investors in mortgages and MBS. MBA welcomes the opportunity to 
participate and play a constructive role in such a process.
Principles for National Servicing Standards
    MBA believes that one consistent set of standards would be 
beneficial for servicers and consumers. In developing a national 
servicing standard, specific principles should to guide decision 
making. We suggest, at a minimum, the following principles:
a. National Servicing Standards Must Be Truly ``National''
    Of paramount importance to the industry is that any national 
servicing standard be truly national and not yet another requirement on 
top of the myriad existing obligations. Servicers would not have the 
burden of looking to varying standards created by different entities 
(e.g., Federal regulators, State laws, Government agencies, etc.). 
Servicers could reduce staff and third-party experts currently needed 
to follow, track and comprehend varying standards. Errors would be 
reduced. Consumers would benefit by reduced complexity and, ideally, 
easy-to-understand requirements.
b. Process Must Be Transparent and Involve Key Stakeholders
    The process to create national servicing standards must include 
servicers and investors as these parties must ultimately implement the 
new standards and the standards will potentially restrict servicing 
activities and impose additional costs. Although it is likely that the 
newly authorized Bureau of Consumer Financial Protection (CFPB) will 
finalize the standards, given its expansive role in consumer 
protection, industry input must be a crucial part of the process for 
the standards to be workable.
c. Process Must Recognize Existing Requirements
    As previously indicated, servicers are subject to a multitude of 
laws, regulations, and requirements. In many cases, remedies already 
exist for a majority of the perceived problems. In setting national 
standards, regulators must recognize existing rules and adopt them 
without change when they have been fully vetted through the rulemaking 
d. Rules Should Allow Flexibility To Deal With Market Changes
    Rather than prescribe the exact methodology in which servicers must 
conduct their day-to-day operation, a national servicing standard 
should describe the ultimate result the Government wishes to achieve. 
Servicers and investors would be allowed to devise the means to achieve 
the objective that best suits their business model and capital 
structure. Moreover, flexibility would allow servicers to address 
different market conditions and consumer needs. The best example to 
illustrate the importance of flexibility is by comparing today's 
borrower's needs, whereby modifications are critical, to borrowers 
affected by Hurricane Katrina, whereby forbearances were paramount as 
borrowers awaited hazard insurance and Road Home funds.
e. Standards Should Create Uniform and Streamlined Processes
    Processes that servicers must follow need to be simple and uniform. 
Markets operate best with certainty, and servicers need straightforward 
processes that do not differ by product, investor, regulator or State. 
As stated above, one set of standards will limit errors and litigation 
risk, and promote customer satisfaction. Simple processes will yield 
the best results for all consumers and servicers.
f. Standards Must Treat Borrowers Fairly/Recognize Borrower Duties
    MBA strongly believes that borrowers should be treated fairly and 
with compassion. Customers should obtain respectful service, should 
have access to the opportunities to retain home ownership for which 
they qualify, and should understand their options. We also believe that 
borrowers have duties. These include responding to servicer offers of 
assistance, contacting the servicer early in the delinquency, and 
diligence in providing required documents and other fulfillment 
requirements of loan modification programs. These principles, for both 
the servicer and the borrower, must be recognized in the development of 
national servicing standards.
g. Standards Must Treat Servicers Fairly
    National servicing standards should ensure the fair treatment of 
servicers and recognize the economic realities of the servicing 
business. Standards must recognize the costs of delinquency and 
foreclosure, including late fees and other compensatory fees necessary 
to offset the cost of delinquency. Many of the suggested standards 
question these charges, yet these fees are necessary to ensure quality 
customer service, to enable advance payments to bondholders as 
required, and to provide the loss mitigation products borrowers seek. 
We urge policy makers, therefore, to balance the needs of borrowers and 
Potential Components of National Servicing Standards
    Regulators, congressional leaders, consumer advocates, and academia 
have proposed various servicing standards to address perceived problems 
as well as borrower complaints. These proposals differ significantly, 
but the goals appear clear: to improve the customer's experience while 
in the loss mitigation process, to avoid confusion, and to ensure that 
borrowers are treated fairly and given access to loss mitigation. We 
agree with these goals.
    We would like to address several concepts currently under 
consideration as part of the dialogue concerning various proposed 
national standards.
a. Single Point of Contact
    Some regulators and consumer advocates are promoting a single point 
of contact to simplify communications with servicers during the loss 
mitigation process. MBA supports clear and helpful communication with 
the borrower. However, a single-point of contact may have unintended 
consequences, potentially leaving consumers more frustrated and with 
greater delays. There is no unified definition of ``single point of 
contact.'' A plain English definition would imply that a single person 
would be assigned to each borrower and that the borrower would 
communicate only with this person. This is not feasible in the current 
environment and would create numerous problems as servicer call volumes 
fluctuate significantly throughout the day, week, and month.
    First, a single point of contact eliminates the specialty training 
necessary to deliver accurate and timely assistance to borrowers, as 
borrower assistance may range from questions regarding their payment 
history or escrow processes to complicated modifications such as HAMP 
or short sales. A single person cannot be expert in each of these 
highly complex and regulated areas. The result will be delays, 
miscommunication, and/or errors.
    Second, given the current environment, it will be impossible to 
appropriately staff to meet demands as they fluctuate widely. By the 
sheer reality of the situation, borrowers may be subject to significant 
delays and response times if limited to one individual. Even if a 
borrower were able to talk to other knowledgeable servicing team 
members, we are concerned that said borrower could decline and request 
a return phone call from the single point of contact. As a result, the 
borrower will suffer delays and frustration with regard to his or her 
issues and concerns.
    Third, a single point of contact raises concerns regarding staff 
departures, work schedules, business travel, vacations, illness, etc. 
The reality is a single point of contact can never be truly a single 
person. In its purest sense, a single point of contact disrupts a 
servicer's efforts to provide the best service in a specific area of 
expertise. Borrowers must be willing to communicate with other staff 
familiar with the borrower's account, and servicers must have the 
flexibility to structure staff the best way to achieve the principle of 
superior customer service.
b. Dual Track
    Policy makers and consumer advocates continue to call for the 
elimination of so-called ``dual tracking.'' Dual tracking occurs when 
the servicer continues intermediate foreclosure processes while loss 
mitigation activity is underway. Interim foreclosure processes, such as 
notices, rights to hearings, and the like are required by State law or 
the courts and would continue during preliminary loss mitigation 
efforts to ensure the borrower received due process and to avoid 
unnecessarily delaying foreclosure should the borrower not qualify. It 
is important to realize, however, that servicers will not go to 
foreclosure sale (e.g., the borrower will not lose the house) if the 
borrower has provided a complete loss mitigation package sufficient to 
evaluate the borrower for loss mitigation and has provided such 
information in a reasonable time before the foreclosure sale date.
    Successful loss mitigation, however, requires diligence and 
priority on the part of the borrower. Borrowers should submit full 
application packages as soon as possible and prior to initiation of 
foreclosure. Servicers should not be expected to stop foreclosure 
processes, or even a foreclosure sale, if the borrower waits until the 
last minute to request assistance. Moreover, some courts do not allow a 
foreclosure sale to be canceled within 7-10 days of the scheduled sale 
    The halting of the foreclosure process is difficult due to investor 
requirements. As noted above, Fannie Mae, Freddie Mac, and FHA all 
require servicers to meet various foreclosure timelines. Failure to 
meet these timelines, without a waiver, results in penalties to the 
servicer. For example, FHA requires that the servicer start foreclosure 
within 6 months of the date of default. Failure to meet this strict 
deadline by even one day, without a waiver, means the servicer does not 
get reimbursed for almost all of its interest costs (e.g., the 
accumulating arrearage).
    Moreover, State law often provides that various steps must occur at 
specific times or costly steps, such as newspaper publication, must be 
repeated at significant cost to the servicer, foreclosing attorney, 
Government agencies, and, ultimately, taxpayers with regard to 
Government programs.
    Delays have significant monetary impact on the investor and 
servicer. Delays extend the period of necessary advances a servicer 
must pay to investors, increase costs to Government agencies due to 
larger claim filings, result in the loss of equity in the property if 
market values decline, and allow more time for the property to 
deteriorate. In addition to merely delaying foreclosure, a pause can 
result in real hard dollar costs, which today are not fully reimbursed 
to the servicer or the foreclosing attorneys who incur them. This is 
not a sustainable model and can result in millions of dollars of 
unreimbursed costs. A national standard must consider these ``cost'' 
c. Mandatory Principal Write-Down
    The issue of mandatory principal write-down continues to be 
suggested as a means to achieve affordability. While there is no doubt 
principal write-down promotes affordability, there are other means to 
achieve the same affordability without the disparate impact on 
servicers or noteholders. Such options include rate and/or term 
modifications and principal forbearances. A principal forbearance takes 
a portion of the principal and sets it aside in calculating a reduced 
monthly mortgage payment. It is similar to a principal write-down, but 
appropriately gives a portfolio lender or investor the right to recoup 
the set aside principal at a later time, such as when the house is 
sold. FHA, HAMP, and FHA partial claims are principal forbearance 
programs, and we believe they are effective tools.
    The concept of mandatory principal write-down--as opposed to 
principal forbearance--is extremely problematic in secured credit 
transactions for the many reasons MBA has expressed in previous policy 
debates regarding Chapter 13 bankruptcies. The same issues surface if 
servicers are required to accept principal reductions over interest 
rate or term modifications or principal forbearances in the loss 
mitigation waterfall:

    First, the servicer is a mere contractor in the 
        securitization function and thus cannot obligate the note 
        holder or investor to take a permanent loss on the loan. Fannie 
        Mae and Freddie Mac do not accept principal write-downs and FHA 
        and Ginnie Mae do not reimburse for voluntary or mandatory 
        principal write-downs. Servicers, therefore, cannot impose it.

    Second, with regard to private label securities, the 
        securitization documents must specifically provide for this 
        option or the servicer risks litigation. Most securitization 
        transaction documents do not provide for principal write-downs, 
        and some specifically prohibit principal write-downs. We 
        understand there are differences in views from the various MBS 
        tranche holders. Principal write-downs would benefit senior 
        security holders to the detriment of subordinate holders. 
        However, it is inappropriate to forcibly reallocate winners and 
        losers in contradiction to the contract created to protect 
        against these very default scenarios.

    Third, note holders and investors must be able to rely on 
        the contractual terms of their mortgage agreements given the 
        secured nature of a mortgage transaction. It is inequitable to 
        mandate that secured note holders or investors to write down 

    Fourth, without statutory changes, mandatory principal 
        write-downs by the servicer could eliminate Government mortgage 
        insurance \7\ and private mortgage insurance \8\ that currently 
        protect servicers/investors against losses. If mandatory 
        principal write-downs were required without a change to agency 
        guidelines/statutes, servicers--not the investors--would be 
        required to absorb the principal loss. This is an inappropriate 
        role of a servicer, who never priced their compensation to 
        accept first dollar loss. However, servicers have been 
        voluntarily writing down principal balances of loans when 
        appropriate and more often on loans they own and will continue 
        to do so.
     \7\ Today, FHA insurance and VA guarantees protect the servicer 
against principal loss due to foreclosure. However, FHA and VA cannot 
pay the servicer a claim for principal reductions. Authorizing statutes 
do not permit it. Conversely, if the loan went to foreclosure, the 
servicer would have the benefit of the insurance/guarantees and not 
suffer a principal loss.
     \8\ Private mortgage insurance is comparable to Government 
insurance in that it protects lien holders from principal loss in the 
event of foreclosure. Private mortgage insurance protections will be 
lost in the amount of the lien strip.

    In sum, MBA opposes involuntary principal write-down and believes 
it will inhibit the housing market's recovery.
d. Misalignment of Servicer and Investor Incentives
    Another common theme is that servicer incentives are misaligned 
with the interests of investors. While servicing compensation may not 
appropriately compensate the servicer for the multitude of additional 
requirements imposed on them during this crisis, \9\ we do believe that 
there are significant incentives within the existing fee structure that 
encourage appropriate loss mitigation. Fannie Mae, Freddie Mac, and 
Ginnie Mae ultimately designed their programs and concluded that 
servicers should not be paid their servicing fee while the loan is 
delinquent. The theory is that if the servicer is not paid for managing 
the very expensive default process, they will expend resources to cure 
the delinquency or otherwise ensure cash flow--ultimately the goal of 
the investor. This incentive is real for the servicer.
     \9\ Fannie Mae, Freddie Mac, and FHA recognized over a decade ago 
that servicers could reduce their losses by performing 
``extraordinary'' servicing, which involved very complex loss 
mitigation options. MBA was involved in those discussions, which 
ultimately resulted in the incentive payments for successful loss 
mitigation efforts. Unfortunately loss mitigation has become even more 
complex, with the agencies requiring more and more from servicers and 
foreclosure attorneys without compensation. This is not appropriate 
and, thus, we agree that some additional compensation is required. 
Investor contracts should not impose unlimited cost burdens on 
    The greatest financial incentive supporting modifications over 
foreclosures for servicers is the reinstatement of servicing income and 
the servicing asset. A modification immediately reinstates the 
servicing fee income and retains the servicing asset. Assuming a 
borrower remains current under the modified terms, the servicer will 
continue to receive its base monthly servicing fee income (25 basis 
points for GSE servicing and approximately 44 basis points for Ginnie 
Mae servicing) over the life of the loan. In contrast, such income 
ceases during the period of delinquency. In the case of GSE and FHA 
programs, the servicer never gets reimbursed the servicing fee if the 
loan goes to foreclosure. In private label securitizations, the 
servicing fee ultimately is reimbursed to the servicer when the Real 
Estate Owned (REO) is sold, but the reimbursement is without interest. 
In summary, foreclosures result in an early termination or, in the case 
of private label securities, deferment of servicing fee income. 
Modifications, on the other hand, result in the immediate reinstatement 
and continuation of such servicing income. Also, the continuation of 
servicing fee income through a loan modification or other cure provides 
retention of the servicing asset that is otherwise written off upon 
    Modifications also stop costly advances of principal, interest, 
tax, insurance and other expenses, such as property preservation costs, 
and provide for quick reimbursement of these outstanding advances. In 
the case of private label securities, servicers generally must advance 
principal and interest from the due date of the first unpaid 
installment until the property is liquidated through the sale of REO. 
According to LPS's Mortgage Monitor Report, ``as of February 2011, the 
average length of time a loan in foreclosure is delinquent was nearly 
537 days.'' The average number of days a property remains in REO is in 
the range of 116-176 days, according to Clear Capital and the Five Star 
Institute. In many cases, the servicer does not receive full 
reimbursement for those advances. For example, FHA curtails 60 days of 
interest advanced and one-third of foreclosure attorney's fees on all 
foreclosure claims. The GSEs also curtail property preservation 
expenses and attorney's fees when foreclosure steps must be repeated 
due to a foreclosure pause. In sum, servicers are incented to modify 
the loan to reduce the interest costs and capital allocation associated 
with carrying advances.
    MBA supports reasonable national servicing standards that apply 
fair practices for borrowers, servicers, and investors alike and that 
seek to eliminate the patchwork of varying Federal, State, local and 
investor requirements. However, national servicing standards must be 
truly national. Creating different State and local requirements would 
only compound the complexities servicers already face within current 
market conditions.
    Servicers must also be included as stakeholders in the development 
of the standards. It is important to understand why processes are in 
place to avoid unintended consequences. Existing standards should be 
given careful consideration before being replaced. Servicer's use and 
development of successful loss mitigation efforts to date should also 
be recognized.
    We recognize that our industry can and must do better. Given the 
overwhelming nature of the crisis and the ever-changing requirements, 
servicers have tried to meet competing obligations in a rapidly 
changing environment, and we believe that national servicing standards 
can help us accomplish the goal of preventing foreclosures whenever 
    At the same time, in moving toward national servicing standards, 
policy makers must fully recognize the economics of mortgage servicing 
and balance laudable public policy goals against business and market 
realities. Our industry stands ready to play a constructive role in the 
dialogue about how best to achieve this balance.

   Professor of Finance, George Mason University School of Management
                              May 12, 2011
    Chairman Menendez, Ranking Member DeMint, and distinguished Members 
of the Subcommittee, thank you for inviting me to testify today. I have 
been asked to offer opinions on ``The Need for National Mortgage 
Servicing Standards''.
    The recent crash of the housing market and the rise of unemployment 
led to a historic surge in serious delinquencies and requests for loan 
modifications, short sales, and related transactions. As a result, the 
residential mortgage servicing industry was overwhelmed. Going forward, 
it is helpful to recommend changes to both servicing and securitization 
industries so that they can avoid problems going forward as we attempt 
to revive the securitization market.
Servicing Standards
    During a December 1, 2010, hearing, Federal Reserve Board Governor 
Daniel Tarullo stated that ``it seems reasonable at least to consider 
whether a national set of standards for mortgage servicers may be 
warranted.'' Although the Government Accounting Office (GAO) has 
released a report to Congress recommending creation of servicing 
standards, \1\ I agree with the sentiment but disagree with the 
     \1\ Government Accountability Office, ``Mortgage Foreclosures: 
Documentation Problems Reveal Need for Ongoing Regulatory Oversight'', 
GAO-11-433, May 2011.
Pooling and Servicing Agreements
    There already exists pooling and servicing agreements (PSAs). The 
PSA is a legal document that contains the responsibilities and rights 
of the servicer, the trustee, and other parties concerning a pool of 
securitized mortgage loans. If the securitization is public, the 
documents must be filed with the Securities and Exchange Commission.
    It has been suggested that PSAs be uniform and I would agree that 
greater uniformity among PSAs would reduce investor uncertainty. 
However, rather than having it regulated by the Federal Government, 
uniformity of PSAs would seem to be a natural evolution demanded by 
investors in the marketplace.
Broader Servicing Guidelines and Standards
    In December, Christopher Whalen, Nouriel Roubini and others wrote a 
letter to U.S. financial regulators regarding national loan servicing 
standards. \2\ I am one of the signers of the letter, but not because I 
wanted to have national loan servicing standards created by the Federal 
government. Rather, I wanted to open a discussion for consideration by 
servicing companies. Many of the items that were discussed were 
plausible recommendations.
     \2\ ``Open Letter to U.S. Regulators Regarding National Loan 
Servicing Standards'', Christopher Whalen, et al., December 21, 2010, 
    The private sector is able to adopt guidelines and standards for 
loan servicing. For example, the Mortgage Bankers Association (MBA) 
created a task force of key MBA members to examine and issue 
recommendations for the future of residential mortgage servicing. While 
it is tempting to have the Federal Government regulate loan servicing, 
it will be more effective to have an industry group such as MBA provide 
    One of the items recommended in the Whalen letter to regulators 

        As part of your duties under Section 941 of the Dodd-Frank Act, 
        your agencies must develop new standards for the secondary 
        market in mortgage loans. These standards must promote a 
        sustainable securitization market and, in particular, maintain 
        additional ``skin in the game'' for sellers of loans so the 
        excesses and abuses of the past are not repeated. As part of 
        this effort, you will be defining the criteria for the highest 
        quality residential mortgages, those which do not need risk 
        retention. This new definition for what constitutes a qualified 
        residential mortgage should be the gold standard in all areas 
        of mortgage origination, securitization packaging and 
        servicing, and disclosure. \3\
     \3\ Ibid.

    While I agree with the signers that standards could be advantageous 
to investors and consumers, we need to be careful about the 
implementation of standards and rules, such as risk retention, which is 
also an important part of addressing this issue. Ultimately, servicing 
inadequacies are part of the problem of origination risk, which I 
address below.
Risk Retention and Servicing
    Dodd-Frank requires that securitizers retain at least 5 percent of 
the risk in all loans that do not qualify as a Qualified Residential 
Mortgage (QRM) \4\ and are sold into the securitization market. In 
theory, 5 percent risk retention would lead securitizers to be more 
careful in the loan origination, underwriting, and servicing process.
     \4\ A qualified residential mortgage (QRM) is one with a 80% loan 
to value, full documentation, and more traditional underwriting 
standards. Generally includes the 30 year fixed-rate mortgage and 
excludes exotic mortgages such as interest-only mortgages.
    To be sure, 5 percent risk retention would be the simplest approach 
to implement in order to encourage improved loan origination, 
underwriting, and servicing. Unfortunately, risk retention also appears 
to be the least useful approach.
    First, the house price collapse resulted in house price declines 
that far exceeded 5 percent; for example, Las Vegas fell 56 percent 
from peak to trough [see, Figure 1 for the collapse of housing prices]. 
     \5\ Free exchange, ``Recovery Comes to Las Vegas'', The Economist, 
January 26, 2010, http://www.economist.com/blogs/freeexchange/2010/01/
    Second, risk retention does not directly address origination risk 
or servicing risk. \6\ Representations and warrants (reps and 
warranties) that are found in Mortgage Loan Purchase Agreements (MLPA) 
and related documents are supposed to directly address origination 
risk. The avalanche of loan repurchase requests in the aftermath of the 
housing collapse makes reps and warranties less viable for nonagency 
mortgage-backed securities.
     \6\ Origination risk refers to the risk of breaches of 
underwriting standards, misrepresentations, fraud, poor data quality, 
and legal breaches.
    Third, the Federal Housing Administration (FHA), Fannie Mae, and 
Freddie Mac are exempt from risk retention rules. Exempting these 
players in the mortgage market defeats the spirit of risk retention 
since a loan originator will be tempted to sell to or be insured by 
Fannie Mae, Freddie Mac, and the FHA rather than keep the retained 
risk. All financial entities should be subject to risk retention or 
none at all.
    Fourth, given Reg AB (Dodd-Frank 942) and the anticipated 
transparency of the asset-backed securities markets, the retention rule 
implies that Qualified Institutional Buyers (QIBs) are not 
sophisticated enough to understand origination risks and need to be 
protected beyond greater transparency. QIBs (or ``sophisticated 
investors'') such as Fannie Mae, Freddie Mac, PIMCO and others do not 
require the additional security of 5 percent risk retention since they 
perform substantial due diligence and analysis before purchasing 
securities. Furthermore, they would have been expected to understand 
the servicing process and PSAs.
    Moreover, it is unclear how risk retention will be implemented 
(e.g., vertical versus horizontal versus ``L'' cuts) and if it is even 
effective in reducing origination risk.
    There are more effective alternatives to risk retention: 
transparency and improved reps and warranties via an origination 
Greater Transparency
    One solution to origination risk is to provide greater transparency 
to investors. Greater transparency would permit more accurate pricing. 
Greater transparency potentially reduces the asymmetric information 
between securitizers and investors.
    There has already been a movement in the industry toward greater 
transparency. Prospectuses and Prospectus Supplements for both agency 
and nonagency mortgage-backed securities provide detailed breakdowns of 
the underlying loans in terms of critical risk measures such as loan-
to-value ratio, loan type, credit score, etc. In 2006, Freddie Mac took 
loan transparency to a new level by providing a file of loan level 
information. \7\ The nonagency market (as well as the FHA) could 
provide similar loan level disclosure.
     \7\ See data reports provided by Freddie Mac and available at: 
    I would prefer that the securitizers provide transparency 
themselves rather than be forced through regulation. Some investors may 
prefer having less information disclosed which should result in a 
higher expected yield compared to fully disclosed loan information. 
Investors should retain the right to choose how much information that 
they want disclosed by securitizers.
    But additional loan disclosure is just one prong to providing a 
better alternative to retained risk. The other is to enact an 
``origination certificate'' approach to reducing securitization risk.
Origination Certificate
    Even though securitizers could release great loan-level 
information, the market would still be concerned that the information 
is inaccurate. Furthermore, transparency doesn't address servicing 
problems. There should be mechanisms to insure that the disclosed 
information is actually correct and that proper servicing is followed. 
Andrew Davidson and I proposed a ``securitization certificate'' in our 
paper ``Securitization After the Fall.'' \8\ In the paper, we write:
     \8\ Andrew Davidson and Anthony B. Sanders, ``Securitization After 
the Fall'', Second Annual UCI Mid-Winter Symposium on Urban Research, 
``Housing After the Fall: Reassessing the Future of the American 
Dream'', February 2009, http://merage.uci.edu/ResearchAndCenters/CRE/

        We propose a ``securitization certificate'' which would travel 
        with the loan and would be accompanied by appropriate 
        assurances of financial responsibility. The certificate would 
        replace representations and warranties, which travel through 
        the chain of buyers and sellers and are often unenforced or 
        weakened by the successive loan transfers. The certificate 
        would also serve to protect borrowers from fraudulent 
        origination practices.

    The securitization or origination certificate approach has the 
potential to be effective because it directly addresses origination 
risk and contains a fraud penalty. \9\ The origination certificate 
would travel with the loan and would verify that the loan was 
originated in accordance with law, that the underwriting data was 
accurate, and that the loan met all required underwriting requirements. 
This certificate would be backed by a guarantee from the originating 
firm or other financially responsible firm and would travel with the 
loan over its life. The seller must provide a means of demonstrating 
financial responsibility, either via capital or insurance, for the 
loans to be put into a securitization. There should be a penalty for 
violations of reps and warrants beyond repurchase obligations and 
tracking of violations of reps and warrants available to all investors. 
Furthermore, there could a penalty for violations of the servicing 
standard adopted by the securitizer.
     \9\ Andrew Davidson and Eknath Belbase, ``Origination Risk in the 
Mortgage Securitization Process: An Analysis of Alternate Policies'', 
The Pipeline, Andrew Davidson & Co., 2010.
    It is my opinion that risk retention is ineffective at best in 
solving underwriting and servicing issues. Increased transparency and 
loan specific origination certification is a more effective way of 
preventing future problems. And they are best designed and implemented 
by the private sector and not the Federal Government.
    Thank you again for the opportunity to testify. I look forward to 
your questions.

                 Attorney, Richard A. Harpootlian P.A.
                              May 12, 2011
    Mr. Chairman and Members of the Committee, I thank you for the 
invitation to speak on behalf of my clients--Captain Jonathon Rowles of 
the United States Marine Corps and Sergeant George Holloway of the 
United States Army Reserve. I represent these fine men and women in 
uniform along with my cocounsel, William Harvey and Graham Newman.
    As the Committee is aware, our law firms have filed a class action 
complaint against subsidiaries of JPMorgan Chase alleging systematic 
violations of rights guaranteed to our men and women in uniform under 
the Servicemembers Civil Relief Act as it pertains to the financing of 
real estate. I am pleased to report that after intense negotiations we 
have reached a settlement with JPMorgan Chase and are currently 
undertaking the process of informing approximately 6,000 men and women 
in uniform of their entitlement under the settlement. With this case 
and settlement serving as a backdrop, I would like to discuss three 
topics: first, the facts and circumstances leading to the JPMorgan 
Chase litigation and the pending settlement; second, broader problems 
in the home finance industry revealed by the litigation; and third, 
suggestions as to how Congress might address these problems.
I. Jonathon Rowles and George Holloway vs. Chase Home Finance, LLC
    As I noted earlier, the litigation in which I and my cocounsel are 
representing Captain Rowles, Sergeant Holloway, and approximately 6,000 
military men and women stems from violations of the Servicemembers 
Civil Relief Act pertaining to home finance. The opening words of the 
Servicemembers Civil Relief Act establish that the purpose of the law 
is ``to provide for, strengthen, and expedite the national defense 
through protection extended by this Act to servicemembers of the United 
States to enable such persons to devote their entire energy to the 
defense needs of the Nation.'' The venerable nature of these goals is 
undeniable. But to truly grasp the importance of the Act to our Nation 
as a whole, one must examine the history of the legislation through the 
last two centuries.
a. History of the Servicemembers Civil Relief Act
    The roots of the Servicemembers Civil Relief Act lie in the 
Constitution itself. Article I, Section 8 of the Constitution expressly 
grants to Congress the authority to build and maintain our Armed Forces 
in order to guarantee the security of this Nation. With this in mind, 
as early as the Civil War Congress recognized the need to enact 
legislation placing certain restrictions on civil actions that would 
hinder the abilities of an individual soldier or sailor to dedicate all 
of his efforts to defending this country. In 1917, as the United States 
became embroiled in World War I, our Government employed the services 
of Major John Wigmore--then Dean of the Northwestern University Law 
School and author of the famous treatise Wigmore on Evidence--to draft 
the first modern version of the SCRA, then known as the ``Soldiers' and 
Sailors' Civil Relief Act.'' This Act instituted many of the 
regulations that are central features of the modern law, including a 
stay of civil actions and a prohibition of foreclosures upon the homes 
of those on active duty.
    Major Wigmore's Soldiers' and Sailors' Civil Relief Act expired 6 
months after the end of World War I due to a sunset provision included 
in the law. Thus, in 1940, as conflicts throughout the globe again 
escalated into World War, Congress reenacted Major Wigmore's bill with 
some amendments. At the time, Congressman Overton Brooks of Louisiana 
reiterated the vital role the Act played in preserving the Nation's 
defense and recognized the concerns the Act was intended to address.

        This bill springs from the desire of the people of the United 
        States to make sure as far as possible that men in service are 
        not placed at a civil disadvantage during their absence. It 
        springs from the inability of men who are in service to 
        properly manage their normal business affairs while away. It 
        likewise arises from the differences in pay which a soldier 
        receives and what the same man normally earns in civil life.

    The Soldiers' and Sailors' Civil Relief Act has been in effect 
since it was reenacted by Congressman Brooks and others in 1940.
    In April of 2003, as Operation Enduring Freedom in Afghanistan 
progressed, the 108th Congress styled a complete restatement of the 
Act. The bill received broad bipartisan support in the House Committee 
on Veterans' Affairs, boasting as its sponsors then-Chairman 
Christopher Smith of New Jersey and Ranking Member Lane Evans of 
Illinois. In its Report to the House, the Committee expressly noted the 

        Congress has long recognized that the men and women of our 
        military services should have civil legal protections so they 
        can ``devote their entire energy to the defense needs of the 
        Nation.'' With hundreds of thousands of servicemembers fighting 
        in the war on terrorism and the war in Iraq, many of them 
        mobilized from the reserve components, the Committee believes 
        the Soldiers' and Sailors' Civil Relief Act (SSCRA) should be 
        restated and strengthened to ensure that its protections meet 
        their needs in the 21st century.

    Among the protections recognized as necessary in modern society 
were three rights directly implicated in the pending litigation 
involving my clients: (1) a 6 percent cap of interest chargeable on 
debts incurred prior to military service; (2) a prohibition of 
derogatory reports to credit agencies due to eligibility of SCRA 
protection; and (3) limitations upon the ability to foreclose upon 
servicemembers' homes.
    Once favorably reported to the House, the bill gained thirty-nine 
(39) cosponsors from both parties and was passed by the full House by 
425-0. The Senate passed similar legislation with the leadership of 
Senator Lindsey Graham from my home State of South Carolina and the 
differences between the two bills were negotiated without need of a 
conference committee. On December 19, 2003, President George W. Bush 
signed into law the now-restyled ``Servicemembers Civil Relief Act.''
b. Experiences of Captain Rowles and Sergeant Holloway
    The litigation in which we are involved began after Jonathon Rowles 
and his wife, Julia, endured several years of frustration regarding 
their home mortgage with Chase Home Finance, LLC. Our law firms filed 
this lawsuit on behalf of Captain Rowles in July of 2011. Over the past 
several months, we have been contacted by numerous military personnel 
who have experienced similar denials of SCRA protection from Chase's 
subsidiaries. Last month, we filed an amended complaint, adding 
allegations on behalf of Sergeant Holloway.
    Our research revealed what we believed to be systematic failures in 
the maintenance of SCRA protections pertaining to three classes of 
military men and women: (1) those denied the 6 percent maximum interest 
rate on debts incurred prior to military service; (2) those who 
received a blighted credit report as the result of their invocation of 
SCRA protection; and (3) those whose homes were foreclosed upon despite 
SCRA protection.
    A review of the basic facts pertaining to each plaintiff is helpful 
in explaining how these violations came about.
    In February of 2004, the Jonathon and Julia Rowles entered into a 
purchase money mortgage with BNC Mortgage, Inc. In May of 2004, Chase 
Manhattan Mortgage Corporation purchased this loan and, from that point 
in time, the Rowleses made all payments to Chase. After a year of 
making payments on this mortgage, Jonathon Rowles executed a United 
States Marine Corps Reserve contract on August 16, 2005, and received 
Assignment to Active Duty Orders which became effective on January 22, 
2006. Shortly thereafter, Rowles requested in writing that Chase reduce 
the interest rate on the loan to 6 percent pursuant to the SCRA. In 
this letter, Rowles specified January 22, 2006, as the date he entered 
active duty and produced two sets of orders to verify his current 
status. Again on May 2, 2006, Rowles wrote to Chase to request the 6 
percent rate protection under the SCRA. This letter also specified 
Rowles' active duty date and included additional copies of his orders 
and a copy of his previous letter.
    On May 8, 2006, in response to this series of correspondence, Chase 
requested that Rowles provide ``orders and/or an enlistment agreement 
showing the date of original call to duty.'' Again Rowles sent faxes to 
Chase customer service representatives that included handwritten cover 
sheets explaining his active duty orders as well as copies of his 
letters of April 14 and May 2. In a letter dated July 27, 2006--seven 
months after Rowles received his active duty orders--Chase informed 
Rowles that because he had qualified for the protection of the SCRA, 
the company had adjusted the interest rate on the loan to 6 percent 
effective with his May 1, 2006, payment. However, Chase failed to apply 
the statutory interest rate to the loan until August 17, 2006, which 
was the date of the first statement received by Rowles that reflected 
the 6 percent rate.
    The July 27 letter also informed Rowles that his ``loan is 
protected against late fees, adverse credit reporting, and default 
activities. These protections will remain in effect for 90 days 
following your return from active duty.''
    Though Rowles' SCRA protection had been in place for less than 4 
months, Chase mailed Rowles a letter on December 1, 2007, which it 
characterized as a ``required quarterly verification.'' The letter 
included a form which Rowles was instructed to complete and sign in 
order to continue to receive the protection of the SCRA. Rowles duly 
completed the form and returned the letter to Chase. Chase sent 
additional verification letters on December 17, 2008, March 25, June 
22, and December 29 of 2009, and March 22, 2010. In addition to the 
periodic verification letters, no fewer than four times per year since 
July of 2006, Rowles has had to call various Chase customer service 
representatives after being verbally informed or receiving 
documentation indicating that the interest rate on the loan was going 
to be adjusted above 6 percent if he failed to do so. In March of 2008, 
Rowles was forced to request that his commanding officer at Training 
Squadron Eighty-Six in Pensacola, Florida, write to Chase on his behalf 
in order to confirm that he was in fact an active duty Marine.
    In a letter dated January 16, 2007, Chase again informed Rowles 
that he had qualified for the protection of the SCRA and that the 
company had accordingly extended the adjustment on the 6 percent 
interest rate effective February 1, 2007. On April 2, 2008, Chase 
informed Rowles in writing that the company was ``in receipt'' of his 
``request for relief'' under the SCRA and that he should allow three to 
four weeks for review of the request. A subsequent letter dated April 
25, 2008, again informed him that his rate adjustment would be extended 
effective October 1, 2008.
    From the time that Chase applied the 6 percent interest rate to the 
loan until April 2009, Chase would send loan statements to the Rowles 
family indicating the interest rate charged on their loan was, in fact, 
substantially above 6 percent. On information and belief, during this 
time Chase would use various formulas and accounting methods to 
reconcile the higher stated interest rates while effectively only 
charging Rowles at 6 percent.
    This pattern of conduct by Chase caused Rowles to spend 
considerable time communicating with Chase via telephone, e-mail, and 
written correspondence. This time included leave from his unit which 
was spent traveling to meet with Chase representatives in an effort to 
preserve his 6 percent interest rate under the SCRA and to prevent 
Chase from taking threatened actions which are unlawful under the SCRA. 
Finally, in June of 2010, Chase denied Rowles electronic access to his 
account. Thereafter Rowles brought this suit.
    The circumstances giving rise to Sergeant Holloway's allegations 
are much more brief, but gave rise to an injury perhaps worse than that 
of Captain Rowles and his family. On March 30, 2000, Holloway purchased 
a house located in Fountain Inn, South Carolina. At the time of the 
purchase, Plaintiff Holloway was not on active duty. The purchase was 
financed by NVR Mortgage Finance, but the loan was thereafter 
transferred to Chase for servicing. In 2008, Chase initiated 
foreclosure proceedings against Holloway's home which resulted in a 
foreclosure sale on May 4, 2009. Holloway was serving on active duty at 
the time of the sale. Today Sergeant Holloway is serving with the Army 
Reserve in the Afghanistan theater. His mail is addressed to his 
parents' home.
c. Details of the Proposed JPMorgan Chase Settlement
    After Captain Rowles brought to light the potential systematic 
failure of internal SCRA procedures at JPMorgan Chase, Chase began an 
extensive internal review to determine the extent of the mistakes made. 
That review, combined with the efforts of Captain Rowles and Sergeant 
Holloway, has resulted in a settlement that was reached after several 
months of intense negotiations that were supervised by a retired 
Federal judge.
    While this settlement is awaiting final approval of the District 
Court--the hearing of which has been scheduled for November 15, 2011--
the details of the proposal have been made public. In sum, Captain 
Rowles, Sergeant Holloway, and Chase have agreed to a benefits package 
amounting to $48 million of relief to the military men and women who 
were denied SCRA benefits. This figure amounts to an estimated six 
times the actual damages suffered by the class members, including 
refunds of overcharges, full remediation of damage to credit, and 
remediation of all foreclosure actions.
    To its credit, JPMorgan Chase has begun instituting many of these 
reforms even prior to the final approval of the settlement. Chase has 
also asked Captain Rowles to serve as an informal advisor to several of 
its senior officers, providing the company with a ``boots on the 
ground'' perspective of how its policies affect our men and women in 
the military.
II. Systematic Problems Revealed by the Rowles Litigation
    The immediate effect of SCRA violations on our military men and 
women are obvious. Unlawful foreclosures force families from their 
homes. Derogatory reports to credit agencies damage the ability of our 
soldiers and sailors to enter into future financial agreement. 
Excessive charges of interest demand monies which are not owed.
    Perhaps more damaging than these immediate effects, however, is the 
financial stress endured by military families while their loved ones 
serve on active duty. As the stories of Captain Rowles and Sergeant 
Holloway show, the spouses, parents, and children of our military men 
and women are those that inevitably bear the brunt of SCRA violations. 
While her husband was deployed to Korea, Julia Rowles was forced to 
negotiate with Chase representatives while caring for a small child and 
pregnant with another. While he was serving in a war zone, George 
Holloway was powerless to protect his home as foreclosure crept closer.
    I began this written testimony by referring to the stated policy of 
the SCRA: ``to enable [servicemembers] to devote their entire energy to 
the defense needs of the Nation.'' Violations such as those suffered by 
our clients directly defeat this purpose. While on active duty, our 
soldiers have limited time to so much as contact their families. Sadly, 
it appears that over the past few years several thousand men and women 
like Captain Rowles and Sergeant Holloway were forced to spend what 
personal time they did have on the phone with banking officials seeking 
an explanation why their families were being overcharged interest or 
why their home was being foreclosed.
    Obviously companies like JPMorgan Chase need to do more to ensure 
that their internal procedures are refined to ensure that all 
servicemembers entitled to SCRA protection enjoy those rights. As Chase 
has shown with the settlement terms now pending in Federal court, it 
has made the affirmative decision to lead the way in the financial 
industry in crafting more reliable SCRA policies and procedures. But 
based on my experience in this case over the past year, I believe there 
are measures that Congress can take to produce an atmosphere in which 
SCRA violations are greatly reduced. Below are three problem areas that 
can be addressed.
a. Lack of reliable information regarding servicemember status
    As Captain Rowles' situation demonstrates, one of the primary 
problems with SCRA protection is that it can be difficult for the 
financial companies to determine when the ``active duty'' status of 
servicemen ends. As a result, account managers resort to calling the 
families of men and women in the military to obtain some sort of 
verification as to whether the borrower in question is, or is not, 
still ``active duty.'' This repeated contact, however, violates the 
very spirit of the SCRA.
b. Lack of JAG manpower sufficient to protect civil rights
    Many of the SCRA-protected individuals with whom I have spoken have 
emphasized two things: first, the staff at their bases or posts do an 
excellent job of educating them on their SCRA rights; but second, once 
a problem arose with their home mortgages, insufficient staff existed 
to help these servicemen negotiate resolutions with the various home 
finance companies.
    Our clients and those servicemen I have spoken to all speak very 
highly of the JAG services that they receive. However, these attorneys 
are often heavily burdened with other tasks associated with their duty 
and do not have the ability to dedicate sufficient time to SCRA 
c. Lack of incentives to adjust mortgages that can be saved
    After my testimony before the House Veterans' Affairs Committee in 
February, I received phone calls from hundreds of service men and women 
about problems they were experiencing with their mortgage. Some of 
these folks were entitled to SCRA benefits and some were not. But 
during my many conversations I noticed a disturbing trend of borrowers 
who had become no more than a handful of months delinquent on their 
loans only to be threatened with foreclosure.
    There appears to be an atmosphere within the home finance market 
that incentivizes foreclosures and discourages modifications. Numerous 
servicemen I spoke with offered to increase their payments over a 
period of 6 months or less to become current on their loans. As a 
matter of routine, however, the financial institutions replied that 
these men and women immediately pay the balance of the loan--an option 
that is impossible for almost every American--or face accelerated 
collections or even foreclosure.
    Within the State of South Carolina, this problem has reached 
epidemic proportions. In fact, on May 9, 2011, our State Supreme Court 
Chief Justice entered an administrative order dramatically altering the 
means by which foreclosures are litigated in this State. Now, before 
any foreclosure proceedings can proceed, a financial institution must 

        (a) that the Mortgagor has been served with a notice of the 
        Mortgagor's right to foreclosure intervention for the purpose 
        of seeking a resolution of the foreclosure action by loan 
        modification or other means of loss mitigation;

        (b) that the Mortgagee, or its designated agent, has received 
        and examined all documents and records required to be submitted 
        by the Mortgagor to evaluate eligibility for foreclosure 

        (c) that the Mortgagor has been afforded a full and fair 
        opportunity to submit any other information or data pertaining 
        to the Mortgagor's loan or personal circumstances for 
        consideration by the Mortgagee;

        (d) that after completion of the foreclosure intervention 
        process, the Mortgagor does not qualify for loan modification 
        or other means of loss mitigation, in accordance with any 
        standards, rules or guidelines applicable to the mortgage loan, 
        and the parties have been unable to reach any other agreement 
        concerning the foreclosure process; and

        (e) that notice of the denial of loan modification or other 
        means of loss mitigation has been served on the Mortgagor by 
        mailing such notice to all known addresses of the Mortgagor; 
        provided, that such notice shall also state that the Mortgagor 
        has 30 days from the date of mailing of notice of denial of 
        relief to file and serve an answer or other response to the 
        Mortgagee's summons and complaint.

    A copy of this order has been attached to my testimony for your 
review (See, Exhibit A).
III. Suggestions for More Diligent Enforcement of SCRA
    The systematic failure of SCRA protections in the Rowles litigation 
is evidence that the enforcement provisions of the SCRA deserve 
reconsideration. In our review of the law and its application over the 
last 6 months, we believe that there are three areas Congress may 
improve to strengthen the SCRA in hopes of preventing such failures in 
the future.
a. Cooperation between the Department of Defense and financial 
    As noted above, much of the strain suffered by Jonathon and Julia 
Rowles was the result of continuous contact from JPMorgan Chase 
officials seeking written verification that Captain Rowles was still on 
active duty and thus entitled to SCRA protection. There is no provision 
of the SCRA that permits a financial institution to demand such 
verification and the Rowles believe that Chase was overly aggressive in 
pursuing it. At the same time, however, JPMorgan Chase and other 
financial institutions undoubtedly wish to protect themselves from the 
potential of fraud, namely a servicemember continuing to receive SCRA 
benefits long after he or she has been deactivated.
    A solution for this quandary could be found in the creation of a 
liaison office within the Department of Defense designed to work with 
financial institutions to certify when servicemembers are--or are not--
on active duty. Such an office would provide the financial institutions 
with the information needed to determine whether to apply SCRA 
protections while relieving the servicemembers and their families from 
the burden of continuously updating their status.
b. Stronger emphasis on legal support for servicemembers
    Every single class member with whom I have spoken has noted his or 
her gratitude for the assistance they have received from JAG officers. 
However, it appears that JAG is often unable to render remedial SCRA 
support to servicemen that experience problems with their home loans.
    This could be due to several reasons. Obviously lack of manpower 
hinders any ability to respond to this type of situation. But also, JAG 
officers may not be licensed to practice in the civilian courts in 
which their fellow soldiers are experiencing difficulty. For example, a 
JAG officer assigned to Fort Jackson, South Carolina may receive an 
SCRA question from a solider about to lose his home to foreclosure in 
California. It would be highly unusual for that South Carolina-based 
officer to be licensed to appear on behalf of the soldier in the State 
of California to contest the foreclosure. Even if the officer was 
licensed to do so, transporting him or her across the country for this 
one event may not be practical.
    In my opinion, Congress should examine two possibilities that may 
alleviate this situation. First, determine whether JAG possesses 
sufficient manpower to adequately address remedial needs of servicemen 
who need to assert their SCRA protections. Second, examine partnership 
efforts that can be formulated between JAG and State bar associations 
who would be, I am sure, willing to offer pro bono services to the 
military in order to help enforce SCRA rights.
c. Incentivize mortgage modification and discourage foreclosure
    Congress should reexamine the incentives in place that either 
encourage, or discourage, loan modifications. As I noted above, many 
servicemen have offered to accelerate their loan payments over a series 
of months in order to become current on their obligations to the 
various financial institutions. Yet they report what seems to be a 
disturbing trend of preferring foreclosure and/or collections to 
preserving the terms of a loan.
    Federal insurance of mortgages may contribute to this reverse 
incentive. While the specifics of mortgage finance are not my 
professional specialty, it appears that the guaranteed payment 
financial institutions receive from entities such as FHA may be 
encouraging foreclosure rather than loan modification. While I in no 
way suggest that such programs be terminated, I do think that 
considering modifications to these programs that would incentivize loan 
modification could alleviate many of the problems that servicemembers 
are now facing with their mortgages. Consideration of several 
prerequisites to foreclosure as instituted by the South Carolina Chief 
Justice (see, Exhibit A) may serve as a useful starting point.
    I would again like to thank the Committee for the opportunity to 
speak on behalf of our clients and on behalf of the thousands of 
servicemen and servicewomen who have fallen victim to SCRA violations 
in the last several years. As the SCRA recognizes, its protections are 
essential to our national defense. It is my hope that Congress will 
take all steps necessary to ensure the continuing vitality of this law.


Q.1. In your testimony, you provide a stunning array of 
specific examples of homeowners who have had terrible 
experiences with mortgage servicers' actions, most of them 
illegal. In your experience, how widespread are each of the 
homeowner abuses you describe?

A.1. The abuses I catalogued in my May 12, 2011, testimony are 
widespread. Every day, I hear examples of similar abuses. 
Attorneys representing homeowners anywhere in the country have 
similar experiences to relate.
    Last December, in an attempt to quantify the scale of 
servicer abuses, the National Association of Consumer 
Advocates, in conjunction with NCLC, conducted a survey of 
attorneys representing homeowners in foreclosure. That survey 
found that almost 99 percent of the respondents were 
representing a homeowner who had been placed into foreclosure 
while awaiting a loan modification, almost 90 percent of the 
attorneys surveyed were representing a homeowner who had been 
placed into foreclosure despite making payments as agreed, 87 
percent of the attorneys were representing clients who had been 
placed into foreclosure due to a servicer's improper failure to 
accept payments, over 50 percent reported representing 
homeowners who had been placed into foreclosure as a result of 
forceplaced insurance alone, with similar figures reported for 
the impact of illegal fees and the misapplication of payments. 
These figures suggest that all of these abuses are common.
    My testimony provides illustrative examples of several 
different kinds of abuses: the improper solicitation of a 
waiver of some or all of a homeowner's legal rights; servicers' 
failure to honor their agreements with homeowners, whether 
permanent or temporary modifications or short-term payment 
plans; the failure to timely convert a loan modification to a 
permanent modification; foreclosing on homeowners who are 
either awaiting a loan modification review or are in a 
temporary or permanent loan modification; misapplication of 
payments, improper assessment of fees, and abuse of suspense 
accounts; and a failure to offer homeowners a loan modification 
that would have benefited the investor. In my experience, all 
of these abuses are so commonplace as to be unremarkable were 
they not so appalling.

Q.2. Ms. Goodman, Senior Managing Director of Amherst 
Securities, stated in her testimony that mortgage servicers 
should be required to offer borrowers the loan modification 
that has the highest net present value for the investor, not 
just any modification that has a higher net present value than 
foreclosure. Do you agree with that?

A.2. We agree with Ms. Goodman's proposal that servicers be 
required to offer a loan modification with a principal 
reduction where a loan modification with a principal reduction 
offers a greater return to investors than a modification 
without a principal reduction. The failure to make the HAMP 
Principal Reduction Alternative mandatory where the principal 
reduction offers a greater net present value to investors than 
a conventional HAMP modification is illogical and harms both 
borrowers and investors.
    We would oppose any requirement that the servicer be 
required to offer borrowers only the loan modification that has 
the highest net present value for investors in all 
circumstances. There are many circumstances in which the loan 
modification that is most responsive to the homeowners' needs 
may not be the one that returns the highest NPV to investors. 
Indeed, such a rule might impede settlement of litigation and 
interfere with judicial oversight of foreclosure mediation.
    Moreover, we are not sure that such a rule would in all 
cases serve the interests of investors. We are unsure the 
extent to which the NPV test accurately measures the value of 
an increase in the sustainability of a loan modification. 
Recent data from the OCC-OTS Mortgage Metrics Report supports 
our experience that providing deep payment cuts, reducing 
principal significantly, and otherwise structuring loan 
modifications to ensure long term affordability results in 
improved outcomes and lowered redefault rates. Unless the 
redefault rate used in the NPV test dynamically takes into 
account the offered terms of the loan modification, the NPV 
test will likely understate the positive return to investors 
from a loan modification that provides for greater 


Q.1. Can you suggest any methods of doing principal reductions 
for homeowners that would avoid moral hazard? Please explain 
how moral hazard would be avoided.

A.1. We have to stop thinking of borrowers making moral 
choices, and start thinking of borrowers as making economic 
choices. Once we recognize that they are making an economic 
choice, we can design an incentive structure where borrowers 
who need the principal reduction to stay in their home are able 
to obtain it, while those that don't need the principal 
reduction are not envious of those who received it.
    Here are a few possibilities:

    Make it clear that if the borrower accepts a 
        principal write-down, there is a well established set 
        of costs. These costs could include either (1) a shared 
        appreciation feature, in which the borrower shares any 
        future appreciation with the lender; or (2) a Federal 
        tax levy of 50 percent on any future appreciation on 
        the property. The tax levy is the conceptual equivalent 
        of a shared appreciation mortgage, except the borrower 
        share the upside with the Government. We believe a tax 
        would be easier to implement on a broad scale than a 
        shared appreciation feature.

    If the borrower accepts a modification, there is an 
        appropriate ``ding'' to one's credit rating.

    To discourage ``economic defaulters'' who can 
        easily afford their home, lenders will pursue 
        deficiency judgments to the extent possible.

    Let's look at the impact of these actions. A borrower at a 
150 percent loan-to-value ratio would have been apt to default. 
By giving the borrower a principal reduction to say, 115 
percent LTV, the borrower is able to stay in his home. A shared 
appreciation mortgage would be acceptable to the borrower, as 
that is the only way he can afford to continue to own and live 
in the home.
    A borrower with a 120 percent LTV, who is paying his 
mortgage, wonders if he, too, should go delinquent in order to 
obtain a principal reduction. By making the costs of the 
principal reduction explicit (a shared appreciation mortgage, a 
ding to a borrower's credit rating), the borrower at 120 LTV 
would make the rationale decision not too default. He would 
look at the deal his neighbor received, and decide that he 
wouldn't take a principal reduction on these terms. That is, in 
order to receive a principal reduction from 120 LTV to 115 LTV, 
the borrower would have to share his appreciation with either 
the lender or the Government--too large a cost for the limited 
    Again, the best way to combat the moral hazard issue is to 
think about a set of economic frictions designed such that the 
borrower who can afford to pay continues to do so, and the 
underwater borrower who cannot afford to pay his mortgage is 
entitled to a principal reduction (assuming the modification is 
NPV positive).


Q.1. Ms. Goodman, Senior Managing Director of Amherst 
Securities, stated in her testimony that mortgage servicers 
should be required to offer borrowers the loan modification 
that has the highest net present value for the investor, not 
just any modification that has a higher net present value than 
foreclosure. Do you agree with that?

A.1. Ms. Goodman indicated in her testimony that servicers 
should be required to perform principal write-downs on HAMP 
modifications if they present the highest net present value 
[NPV]. She suggested this would mandate principal write-downs 
over other loss mitigation options. MBA does not support 
mandatory principal write-downs.

    The proposal would require bondholders and lien 
        holders, not merely servicers, to accept principal 
        write-downs. As evidenced by the lack of significant 
        principal reductions by portfolio lenders and 
        Government agencies, there is not a uniform view that 
        principal write-downs are the most economical response 
        for lien holders.

    Rate and term modifications and principal 
        forbearance modifications offer the borrower the same 
        affordability during his or her period of hardship, as 
        a principal reduction, but without the permanent 
        impairment to the mortgage asset for the lien holder. 
        As a result, a borrower who ``must'' receive a 
        principal reduction to remain in the home in addition 
        to the same affordable payment through other means 
        (such a principal forbearance) is a strategic 
        defaulter. Strategic defaults should be discouraged, 
        not encouraged.

    The NPV does not test whether a policy, such as 
        principal reduction, will result in greater numbers of 
        defaults, thus greater overall losses to lien holders. 
        If there is a high level of debt forgiveness created by 
        this standard, it is going to increase default 
        frequency associated with high LTV loans. This in turn 
        impacts the NPV assumption, predicting a higher default 
        rate on high LTV loans, thus perpetuating (or self-
        fulfilling) the appearance that principal reductions 
        are the necessary and best outcome. MBA along with many 
        others believe that principal write-downs will cause 
        more delinquencies and ultimately increase the severity 
        of losses.

    The proposal does not offer indemnification from 
        risk for a servicer who performs a principal reduction 
        on behalf of a trust. HAMP safe harbor may not be 
        sufficient protection to alleviate such risk. A mandate 
        to write down would be a taking and could subject the 
        servicer to litigation risk.

    Some PSAs prohibit principal reduction. We do not 
        believe Ms. Goodman's proposal should or will change 
        the ultimate authority of the transaction documents 
        over HAMP.

    In general, efforts could be made to discourage 
        strategic defaults by reversing the exemption to the 
        discharge of indebtedness tax rules for principal 
        residences created by the Mortgage Forgiveness Debt 
        Relief Act of 2007. Prior to this Act, an individual 
        would be subject to ordinary income taxes on the amount 
        of mortgage debt discharged or written down, unless the 
        person was insolvent. With the current exemption to 
        this rule for principal residences, borrowers benefit 
        even more from a principal reduction than a principal 
        forbearance--despite the forbearance achieving an 
        ``affordable payment'' for the borrower.

    This greater the incentive of a principal write-down, the 
        greater the impact on default rates--a critical factor 
        that drives the outcome of the NPV calculation. As 
        previously stated, if Congress wishes to discourage 
        strategic defaults, it could reinstate the discharge of 
        indebtedness rules for principal residences. 
        Individuals would be taxed on the amount of discharged 
        debt to the extent he or she was solvent. The change 
        would start to equalize the incentives between 
        principal write-downs and principal forbearances by 
        reducing the strategic default incentive.


Q.1. Ms. Goodman, Senior Managing Director of Amherst 
Securities, stated in her testimony that mortgage servicers 
should be required to offer borrowers the loan modification 
that has the highest net present value for the investor, not 
just any modification that has a higher net present value than 
foreclosure. Do you agree with that?

A.1. No Response provided.