[Senate Hearing 112-325]
[From the U.S. Government Publishing Office]
S. Hrg. 112-325
HOUSING FINANCE REFORM: NATIONAL MORTGAGE SERVICING STANDARDS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON
EXAMINING NATIONAL MORTGAGE SERVICING STANDARDS AND HOUSING FINANCE
REFORM
__________
AUGUST 2, 2011
__________
Printed for the use of the Committee on Banking, Housing, and Urban
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
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
Laura Swanson, Policy Advisor
Erin Barry, Professional Staff Member
William Fields, Legislative Assistant
Michael Bright, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Levon Bagramian, Hearing Clerk
Jana Steenholdt, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, AUGUST 2, 2011
Page
Opening statement of Chairman Johnson............................ 1
Prepared statement........................................... 21
Opening statements, comments, or prepared statements of:
Senator Corker............................................... 2
Senator Menendez
Prepared statement....................................... 33
WITNESSES
Jack Hopkins, President and Chief Executive Officer, CorTrust
Bank, Sioux Falls, South Dakota, on behalf of the Independent
Community Bankers of America................................... 3
Prepared statement........................................... 33
Faith Schwartz, Executive Director, HOPE NOW Alliance............ 4
Prepared statement........................................... 36
Robert M. Couch, Counsel, Bradley Arant Boult Cummings, LLP...... 7
Prepared statement........................................... 74
Peter P. Swire, C. William O'Neill Professor of Law, Moritz
College of Law of the Ohio State University (via
Teleconference)................................................ 9
Prepared statement........................................... 76
(iii)
HOUSING FINANCE REFORM: NATIONAL MORTGAGE SERVICING STANDARDS
----------
TUESDAY, AUGUST 2, 2011
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. Good morning. I call this hearing to
order.
Thanks to all of our witnesses for joining us this morning.
I would also like to recognize that, for the first time, we
have a witness joining us by Skype. Professor Peter Swire is in
Oregon but was kind enough to start his day early for our
hearing.
Today we will continue the Committee's oversight of
problems in the mortgage servicing industry and explore the
need for a national mortgage servicing standard.
The housing recovery appears to have stalled--in part
because of widespread uncertainty in mortgage servicing.
Borrowers are not certain that servicers are accurately
evaluating them for modifications. Servicers are not confident
that borrowers' documents were submitted properly. And
investors are concerned about how all these factors increase
litigation risk for servicers. Homes that should move through
the foreclosure process are held up because courts and
servicers are concerned that paperwork has not been completed
properly.
We need rules of the road so that borrowers, investors, and
servicers have a clear understanding of the process to follow
both when a borrower is current on payments and also in the
unfortunate event that a borrower becomes delinquent.
Since our first servicing hearing in November of last year,
the Federal banking regulators have found significant problems
and issued consent orders to 14 large servicers; the Federal
Housing Finance Agency amended its seller-servicer guidance to
align Fannie Mae and Freddie Mac's standards for servicing and
improve borrower contact; and the Treasury Department's HAMP
program began issuing servicer report cards--which did not show
promising improvements.
Even more recently, Reuters and AP released investigative
reports detailing ongoing problems in mortgage servicing. I
would like to place those reports into the record.
Given the variety of standards and the continuing problems
that I have mentioned, it is important that we explore a
national mortgage servicing standard.
Several Members of this Committee have already introduced
legislation to create such a standard and mitigate the
foreclosure crisis. Senator Reed is a consistent leader on this
issue, introducing legislation last Congress and again this
Congress. I would also like to recognize Senator Merkley and
Senator Brown for their legislative efforts.
Senator Menendez has also helped in the Committee's
oversight of this issue with a productive hearing in the
Housing Subcommittee.
This is an important issue, and the Committee will continue
to exercise its oversight responsibility.
Before I turn to Senator Corker, I would like to thank him
and his staff for working with me and my staff on these housing
finance reform hearings. Housing finance reform is a large
topic that requires our attention in all aspects, and these
hearings will help us better understand the areas that need
reform.
Senator Corker.
STATEMENT OF SENATOR BOB CORKER
Senator Corker. Thank you, Mr. Chairman, and thanks for
having this hearing. And I certainly welcome all the witnesses,
both here and afar, and appreciate your testimony. I know we
are going to be talking a lot about servicing today, and the
point of view I would like to put forth is if we do that
without paying attention to the mortgage investors, then we are
going down the wrong track. We have got to have private capital
back into mortgages, or rates certainly will not continue to be
low right now, and obviously we are not going to ever get the
private market involved unless we take that into account.
I know we know there are two fundamentally different ways
of going at servicing right now. One is the large, large banks,
and the other is the community banks around the country. And as
we look at either regulations or potentially new laws, we need
to take that into account.
So I welcome you here today. I look forward to your
testimony. And, again, I hope whatever we do we continue to
remember that getting private capital back in the mortgage
market ultimately has to be a big part of what it is we are
focused on. So thank you, and I look forward to your testimony.
Chairman Johnson. Before we begin, I would like to briefly
introduce our witnesses who are here with us today.
Our first witness is Mr. Jack Hopkins, a long-time friend
and a personal resource for me on many South Dakota community
banking issues. Jack is the president and CEO of CorTrust Bank,
a community bank that serves both South Dakota and Minnesota.
Ms. Faith Schwartz is the executive director of the HOPE
NOW Alliance.
Mr. Robert Couch is a counsel at the law firm of Bradley
Arant Boult Cummings LLP and a former General Counsel at HUD.
And, finally, we have Professor Peter Swire, who is
appearing before the Committee via teleconference. Professor
Swire is a professor of law at the Ohio State University and
also a senior fellow at the Center for American Progress.
I welcome all of you here today and thank you for your
time. Mr. Hopkins, you may proceed.
STATEMENT OF JACK HOPKINS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CORTRUST BANK, SIOUX FALLS, SOUTH DAKOTA, ON BEHALF OF
THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. Hopkins. Thank you. Chairman Johnson, Senator Corker,
Members of the Committee, I am Jack Hopkins, president and CEO
of CorTrust Bank, a $660 million asset bank headquartered in
Mitchell, South Dakota. As a third-generation community banker,
I am pleased to represent ICBA's nearly 5,000 members at this
important hearing.
As this Committee considers the development of national
mortgage servicing standards, I have an important point to
make. Community banks are successfully servicing their
portfolios and do not have the widespread servicing problems
reports in the press. I urge you to ensure any effort to create
national standards does not add to the regulatory burden of
community banks. We must preserve the role of community banks
in mortgage servicing, or you will see further consolidation
which will only harm borrowers, especially those in rural and
underserved housing markets.
CorTrust Bank was founded in 1930, at the outset of the
Great Depression, and was built, tested, and proven under
historically challenging economic conditions. We survived the
Great Depression and numerous recessions by practicing
conservative, commonsense lending. We have emerged from the
crisis well capitalized and ready to lend to support the
recovery. CorTrust Bank serves communities in 16 South Dakota
cities, from Sioux Falls to rural communities with populations
of less than 150.
Residential mortgage lending has been an important
component of CorTrust's business since its founding and has
grown more important over the years. Today we have a $552
million servicing portfolio consisting of approximately 5,000
mortgage loans.
Over the years, we have discovered that mortgage lending is
a great way to cement long-term relations with customers and
win the opportunity to serve their additional banking needs. To
further bolster our customer relationships, we need to service
these loans, whether they are subsequently in the secondary
market or held in portfolio. Customers do care about who
services their loans. They value and even seek out local
servicing.
Much of our recent business has come from refinancing
mortgages away from large lenders whose borrowers are
frustrated with remote servicing. Even though at its best it is
a break-even business for us and loan for loan it would be more
profitable to release servicing, we choose to service in-house
because it is central to our community bank business model.
The success of community bank servicing is based on close
ties to customers and communities. Because CorTrust Bank's
servicing team consists of only four people, customers always
know who is on the other end of the telephone or across the
desk.
A customer who dials our 1-800 number will generally get
one of two people on the line. A customer can walk into one of
our 24 locations and deal with a staff person face to face.
Smaller servicing portfolios and better control of mortgage
documents also provide an advantage over the large servicers.
For these reasons, community banks have generally been able to
identify repayment problems at the first signs of distress. Our
staff will contact a late customer on the 16th day, the first
day of delinquency, and find out what their circumstances are
and discuss solutions.
Personalizing servicing combined with conservative,
commonsense underwriting yields exceptional results. Our
average delinquency rate of 1.7 percent is about one-third the
national average and is consistent with other community bank
portfolios. In the history of CorTrust Bank, only a handful of
mortgage loans have gone into foreclosure.
Overly prescriptive requirements should not be applied
across the board. There are many examples of harsh new
requirements. Many of the proposals I have seen would require
us to establish a call center, a prohibitive and unnecessary
expense for a community bank the size of mine. The new Fannie
Mae standards, published in June and scheduled to go into
effect on September 1st, are overly prescriptive and will
reduce our flexibility in using methods that have proven
effective in holding down delinquency rates.
I ask this Committee to urge the Federal Housing Finance
Agency to delay implementation of the new standards for small
lenders with a record of strong performance.
We are also concerned that the FHFA's new compensation
proposal would sharply reduce servicing revenue that currently
only covers costs. Moreover, this proposal creates a perverse
incentive by rewarding the originators and servicers of
nonperforming loans and punishing community banks. The most
significant risk in applying standards that are too rigid and
prescriptive and in reducing servicing income is that it would
cause many community banks to exit the mortgage servicing
business and accelerate consolidation. Any national standards
developed by Congress or the regulators must exempt community
banks. I urge you not to tamper with our success.
Thank you for holding this hearing and for the opportunity
to present the good story of community bank mortgage servicing.
I will be happy to take your questions.
Chairman Johnson. Thank you, Mr. Hopkins.
Ms. Schwartz, you may proceed.
STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW
ALLIANCE
Ms. Schwartz. Thank you. Chairman Johnson, Senator Corker,
and Members of the Committee, thank you for the opportunity to
speak here today. My name is Faith Schwartz. In 2007, I joined
the HOPE NOW Alliance as its executive director.
The foreclosure issues we faced in 2007 were viewed as
short-term subprime issues, and most people thought it would
take a year or two at most to work through. I am approaching my
fifth year at HOPE NOW. The crisis has not abated for many
homeowners. It affects prime credit and nonprime credit
borrowers alike. At times we have been discouraged by the scale
and the persistence of the problems faced on the foreclosure
front. But through perseverance and continued efforts by our
alliance members, including servicers, counselors, and Federal
and State offices, we are seeking more and more homeowners
being helped. We measure some successes by the 4.6 million
permanent modifications completed through May of 2011.
Other efforts have been more difficult to measure. Sadly,
there are cases where homeowners fall through the cracks, and
the industry is persevering through the worst housing crisis
since the Great Depression. Finding ways to help homeowners
achieve stability, we are still here doing what it takes
through many different channels to help homeowners find
resolution. And the comments today are my own and not
necessarily shared by all HOPE NOW members.
I am here to recommend the importance of achieving national
servicing standards. Many efforts are underway toward this
goal, but to achieve it will require extraordinary cooperation
and communication among industry, Government, and other
concerned parties. We all must improve the customer experience
for homeowners at risk of foreclosure. Uniform clear standards
would be a strong step in that direction.
Current economic conditions--underemployment and
unemployment in particular--are challenging for customers who
are trying to maintain their home. Many at-risk homeowners are
frustrated by the inconsistent messages from some loan
servicers when they ask for help. Servicers have made real
improvements here, but more needs to be done to create the
confidence in the servicing system.
Let me be clear. National servicing standards may not
change the final outcomes for many homeowners at risk of
foreclosure. All mortgage customers need consistent servicing
processes that give them timely responses and information on
their options when they experience difficulty in staying
current on their mortgage.
I will address two of the most prominent issues in
servicing: the desire to have a single point of contact and the
dual-track processing of loans going to foreclosure versus the
modification process.
To a frightened homeowner, the single point of contact is
one way to lessen the confusion and explain to homeowners what
steps are required by servicers, investors, and State law. It
is important to emphasize that the servicing system is facing
completely different challenges in today's environment than it
was designed to manage. Over the years mortgage servicing
developed some uniformity in part because the standards for
many loans were set by the GSEs and FHA guidelines.
FHFA, Fannie Mae, and Freddie Mac remain the biggest
influence on servicing practices and standards today. For many
years that worked well, but servicing was primarily a simple
task of processing loan payments on performing loans.
Delinquent loans and troubled borrowers generally were handled
by repayment plans or the sale of a property at a profit. The
current housing crisis completely shifted the demands on the
mortgage servicing, and servicers must now manage millions of
delinquent loans and work with the borrowers on more complex
solutions such as modifications and re-underwriting of loans.
Since initiating the homeowners outreach events in 2008,
HOPE NOW has hosted over 112 events. We have tracked
participating homeowner satisfaction to gauge our success and
adjust the outreach model accordingly. In the past 2 years,
HOPE NOW and the U.S. Treasury's Making Home Affordable has
worked together on outreach. Over half of the borrowers rate
these workshops' experience as excellent.
And, surprisingly, we continue to find that 35 and 40
percent of the participating homeowners are first-time contacts
with their loan servicers. We have seen a change in the
circumstances of at-risk borrowers for up to 30 percent who are
unemployed. Unemployment significantly affects the type of aid
available and highlights the obvious challenges we face in this
crisis.
This offers some insight to the importance of customer
experience regardless of the outcome, and it reinforces the
need for multiple ways to communicate with borrowers who need
assistance. There are multiple efforts underway to improve and
establish servicing standards, particularly for helping at-risk
homeowners. A single uniform standard is needed, but current
initiatives must be evaluated, coordinated, and ultimately
combined to set national standards.
There are many rules and standards that have been put in
place by the various agencies. We have the recent OCC consent
orders for the top 14 banks. We have unique Fannie Mae, Freddie
Mac, and FHA servicer guidelines. We have proposed risk
retention under Dodd-Frank, which includes servicing standards.
We have FHFA, Fannie Mae, Freddie Mac, and Ginnie Mae setting a
new compensation servicing model that affects performing loans
and nonperforming loans. We have the Treasury under Making Home
Affordable offering recent directives on single point of
contact and a 1-year forbearance plan. Note the forbearance
plan does not apply to Fannie Mae, Freddie Mac, or VA loans.
State Attorneys General are under confidential discussions
with top banks to discuss practices and processes that will
indeed lead to standards. The soon-to-be CFPB efforts and
interagency guidelines are also being looked at to effect
standards. All of these efforts must be evaluated before any
decision is made on any single uniform standard.
Just a quick note. I did visit a shop recently, and I
wanted to see what they had implemented on the single point of
contact. Hundreds of people were being trained to handle the
single point of contact rule. Training lasted for 6 weeks. Once
the training was complete, employees had several large black
binders of which to navigate for all the different programs and
processes they had to deliver the message on about what the
options were for the borrower.
The training objective for new hires was to bring
consistency, empathy for the customers, and accuracy regarding
the description of the options available for the borrowers as
well as access to information that would be relevant to the
borrower over the course of the eligibility review.
The training task seemed daunting, but it was indeed
impressive. And some companies are dealing with licensing
single point of contact on the origination process if they are
subject to the SAFE Act under several State laws.
It was enlightening to see how the directives were being
implemented in the real world. All changes must get adapted
into systems, processes, and work flows to educate and train
the full workforce, who in turn will need to communicate
internally and externally on all these directives. And as a
reminder, the single point of contact is not the person who
will perform any of the underwriting, any of the modifications,
or any of the sale processes if there is a short sale in place.
We believe the efforts by various entities currently
underway are moving in a positive direction to elevate
servicing standards and improve the customer experience.
Increased coordination by all entities is needed in order to
make things happen in a timely fashion.
In summary, we recommend the Administration gather all of
the involved parties together to review the servicing standard
initiatives to ensure that definitions and policies agreed to
by regulators, enforcement agencies, and investors align with
one another. That is the time to ensure a uniform set of
standards can be identified and established. Reducing confusion
and friction from the system is very important. As Senator
Corker initially noted, bringing private capital back to the
market is of utmost importance, so looking at standards must be
done thoroughly and cautiously.
The home mortgage is the most important investment in the
lives of many consumers, and it is essential that we get it
right, and the communication to the consumer of the process and
servicing that comes with this investment. The industry
nonprofit partners and servicer members are committed to
working to improve mortgage servicing for consumers.
Thanks for the opportunity for letting me speak today.
Chairman Johnson. Mr. Couch, you may proceed.
STATEMENT OF ROBERT M. COUCH, COUNSEL, BRADLEY ARANT BOULT
CUMMINGS, LLP
Mr. Couch. Good morning, Chairman Johnson, Senator Corker,
and other Members of the Committee. Thank you very much for
letting me appear today to talk about this important issue.
I am not going to spend a lot of time on my background, but
to establish my bona fides, I was General Counsel of HUD,
President of Ginnie Mae, president of one of the most active
mortgage lenders in the South, chairman of the Mortgage Bankers
Association, and president of the Mortgage Bankers Association
of Alabama as well.
First and foremost, I am not here to defend the industry or
be an apologist for the industry. Mistakes have been made, and
there have been some abuses of particular processes. But I am
here to speak about three issues: certainty, fairness, and
State law. I would like to cover all three of those in the
limited amount of time I have.
I would like to start by telling you a story about the last
time I refinanced my own mortgage, about 10 years ago. At the
closing table the agent handed me a document about 15 pages
long, a mortgage. And he said, ``Rob, do you know what this is?
Do you know what it says, what it means?'' I said, ``Well, I
think I do, but tell me what you think it means.'' He said,
``It is very simple. If you pay, you stay. If you don't, you
won't.''
Now, this may seem unduly harsh to a lot of people, but it
is, in fact, the essence of the transaction and the essence of
this hearing in many ways.
It is, I think, instructive to briefly talk about how the
process works. Someone wants to borrow money, goes to a lender,
establishes what their likelihood of repaying that mortgage is
or that loan is, and offers the home that they are about to buy
or refinance as collateral, as security for the mortgage. At
closing they get the money. In return they sign a note that
says, ``I promise to pay this money back, and to secure that
promise, I give you the right to take my home if I do not pay
that money back.''
That certainty in the process allows that loan then to be
sold in the secondary market, many times to pension plans that
you or I may be beneficiaries of, and the money is recirculated
in the marketplace. That is the way the process is supposed to
work.
But, unfortunately, over the past several years, a lot of
uncertainty has, as you mentioned, Chairman Johnson, crept into
the process, and that uncertainty has been in the form of
stretching out the period of time that it takes to foreclose on
the loan. Today it takes, on average, about 400 days from when
a person quits paying their mortgage to when the foreclosure
process is completed. In some States--New Jersey, New York,
Florida--it is a much longer process. And the uncertainty that
has crept into the process has made the functioning of the
market much more treacherous.
If you look today, well over 90 percent of all mortgages,
in order to be done, have to be guaranteed directly by the
Federal Government for the mortgage process to take place. Or
by way of illustration, if you look over the past 3 years,
there have been two private label securities backed by
mortgages done in this country, worth about $500 million. By
comparison, if you go back to 2006, there were hundreds of
securities totaling $723 billion done in that year alone--a
thousandfold decrease for a 3-year period. So the process has
dramatically been affected by this uncertainty, and you need to
be aware of that.
Fairness is also a very important issue, and many of the
efforts that we have seen lately have been designed to be
compassionate to those who cannot or will not pay their
mortgages on time. And I certainly understand that, but that
overlooks the need to be fair to those folks that have been
very diligent in paying their mortgages, which is the vast
majority of people in this country who have mortgages. The
effect of that stretching out of the foreclosure process and
the uncertainty I mentioned before has been to dampen real
estate values across the board across the country for those
folks that have been diligent in paying their mortgages, and I
would hope that you would take those folks into consideration
in your deliberations.
And, finally, State law. I am not here to advocate for or
against a uniform national standard, but I would remind the
Committee that there are 50 States out there with procedures
set up to protect both borrowers and lenders in the process and
make sure the process runs smoothly. I would hope that you
would be mindful of all of those 50--really 51, State and, in
the case of D.C., the district laws designed to do just that.
In sum, in conclusion, please be mindful of certainty,
please be mindful of fairness, and please be mindful of State
law. And please be deliberate about this process.
Thank you very much for the opportunity to talk to you
today, and I would be happy to answer any questions.
Chairman Johnson. Thank you, Mr. Couch.
Professor Swire, you may proceed.
STATEMENT OF PETER P. SWIRE, C. WILLIAM O'NEILL PROFESSOR OF
LAW, MORITZ COLLEGE OF LAW OF THE OHIO STATE UNIVERSITY (VIA
TELECONFERENCE)
Mr. Swire. Thank you, Chairman Johnson and to other
distinguished Members of the Committee. Thank you for inviting
me to participate in this hearing on national mortgage
servicing standards.
As you are aware, I previously committed to speak in Oregon
today, and I thank the Committee and its staff for the great
flexibility of having me testify online today. I believe that
using these online technologies can continue to open up
Congress and our political process to participation by the
American people.
My testimony today draws on two previously published items
which I have provided to the Committee. The first is a report
on mortgage servicing that I published in January of this year.
The second is an article in the Los Angeles Times from March
which describes some of my personal experiences as a homeowner
with the mortgage servicing industry.
As you said, Mr. Chairman, I am now a law professor at the
Ohio State University and a Senior Fellow at the Center for
American Progress. In 2009 and 2010, I was Special Assistant to
the President for Economic Policy, serving under Larry Summers
on the National Economic Council. At the NEC, my biggest task
was to coordinate the interagency process for housing and
housing finance issues. In this role, I worked extensively on
mortgage servicing issues and Fannie and Freddie and the FHA,
and in that role, I met regulated mortgage servicers as well as
many other stakeholders.
My January report was called, ``What the Fair Credit
Reporting Act Should Teach Us About Mortgage Servicing.'' The
report makes a simple point. The sorts of market failures that
led to the creation of the FCRA in 1970 also exist today for
mortgage servicers. The single most important fact is that the
consumers, the homeowners, are not the clients. The clients for
the credit reporting agencies are the companies that pay for
the credit reports, the lenders and employers. The clients for
the mortgage servicers are the companies that pay the services,
and those are the investors in mortgages. Mortgage servicers
owe their legal duties and market loyalties to the investors,
not the homeowners.
Now, in saying this, I am talking about when mortgage
servicing rights are sold, and that appears not to be the model
that Mr. Hopkins's bank follows, where they keep the servicing
in-house, close to the market. But the large majority of
mortgage servicing rights today are sold out into the market to
new buyers of servicing, often the biggest banks.
So the structure of the market that we have today leads to
problems. Consumers have no market or legal checks on the
servicer. The homeowner does not choose the service. That
choice is made by the company usually the one that originates
the loan. If the homeowner has a bad experience with the
servicer, as so many people have, the homeowner cannot even
quit. Even if the homeowner refinances a loan to get away from
the servicer, the servicing market is so concentrated that the
homeowner may get the same servicer all over again the next
time.
Homeowners not only lack any market choice, but they
currently lack legal remedies if the servicer performs badly.
That is why national standards for mortgage servicing are so
important. Where there are no market forces to protect
consumers, then something else should fill the gap. An
effective set of consumer rights could be embodied in national
mortgage servicing standards and I hope that will happen.
Now, I will turn to my dispute with Washington Mutual's
servicing arm in 2006 and 2007. To prepare for this testimony,
I have brought along and reviewed and provided to the Committee
files from my 21-month dispute with Washington Mutual in 2006
and 2007, before the crisis, about flood insurance that they
incorrectly placed on my family's home in Bethesda, and that
dispute was the subject of the Los Angeles Times article.
Our family was a target of what people have called ``force
placed insurance'' and that this Committee has heard about
before. In early 2006, WaMu asked for proof of flood insurance
coverage. My State Farm agent immediately faxed them the
information. It turns out that WaMu had a really cute trick
that I discovered after numerous phone calls. They did not even
process the proof of coverage unless it contained WaMu's
servicing accounting number. So WaMu received the State Farm
certification and simply ignored it and did not tell us until I
found it out several months later, and that was how WaMu could
bill my family for the duplicate flood insurance.
The next cute trick was to pile up late fees on our monthly
mortgage payment. We had automatic payment the first week of
every month, and even WaMu admitted we never missed a payment.
WaMu's practice, though, was to charge for the duplicative
flood insurance with each monthly payment. That meant they
considered our payment too small each month by the amount of
that insurance premium. So then they declared our entire
monthly payment late and charged a late fee of over $170 a
month.
I provided the Committee staff with detailed and
contemporaneous documentation of these and numerous other
problems with our servicer. Eventually, after 21 months and
over 50 calls to customer service, they finally agreed in late
2007 to withdraw the flood insurance and cancel the fees.
In conclusion on this, I feel fortunate that I was able to
get my family's dispute resolved and cancel over $4,000 in
erroneous fees that they wanted to charge me. Most homeowners,
however, are not banking law professors. All of those hours
sitting on hold, waiting for customer service, gave me plenty
of time to think about the flaws in our mortgage servicing
system.
My experience in Government and since has taught me there
are numerous hard-working and talented individuals in the
mortgage servicing industry. I admire the work of Faith
Schwartz and Hope Now and many others. The incentives, however,
do not work for consumers.
In response to Senator Corker's opening statement about
getting private capital back into the market, a goal I very
much share and the Administration has shared, fixing servicing,
which is getting the money to flow properly from the homeowner
to the investor is an essential part of reform. And so I agree
that working on national mortgage standards should be seen as
part of getting the investor part of the thing to work, as
well.
In short, in the absence of market discipline on servicers,
an effective national set of mortgage standards is essential.
There is no other way to have consumers protected.
I thank the Committee for its attention to these matters
and I welcome any questions you may have.
Chairman Johnson. Thank you, Professor Swire.
Mr. Hopkins, small servicers, like your bank, have not been
caught up in the problems that large servicers have. Is that
just due to your size or do you believe that there are other
factors?
Mr. Hopkins. I think that it starts up front. I think we
had strict underwriting standards and we always held strict
underwriting standards. We were not offering a lot of the
exotic products, the Alt ARMs and some of these things that are
creating the problems with the foreclosures now. We did not
believe in the products. Therefore, we did not offer the
products.
So because servicing is a very low-margin business, we felt
it was important to have a good quality portfolio, so we were
always conscious about underwriting our loans very strict up
front. I think it starts right with the underwriting. We keep
our loans in-house. Therefore, we are concerned about what we
put in our portfolio.
Chairman Johnson. Mr. Hopkins, like mortgage origination,
there has been a significant consolidation in the mortgage
servicing industry and the largest banks now service the
majority of the loans in the country. Have borrowers and
communities benefited from this consolidation?
Mr. Hopkins. Absolutely not. I think that is part of the
problems that Professor Swire was dealing with a little
earlier. You know, an article I saw in 2010 showed that the
four largest servicers control 70 percent of the market. So
they do not have the customer contact that we do. I think that
if it was a more diverse market in the servicing side, that the
customers would have a better experience.
Chairman Johnson. Professor Swire, in your testimony, you
recommend a Fair Credit Reporting Act equivalent for mortgage
servicers. Can you expand on what that should include, and how
could it prevent some of the problems we are currently seeing?
Mr. Swire. Thank you, Senator. There are many people
working on the details of what the standards should look like.
I think the point with the FCRA is if there is a mistake being
made about the customer, we actually can go fix it these days,
and when we had mistakes with the servicers, we did not have
those same kind of legal rights, and that is part of what I am
point out. I think single point of contact is clearly a step in
the right direction and the standards should address issues
around dual track so that when people are getting something
fixed, they do not suddenly have the house yanked out of them,
that is part of it. Having disclosures and avoiding conflicts
of interest to make sure that the servicer is doing what is
right for the investor and the customer and not for other parts
of his portfolio, I think those are some of the main categories
of things you would like to see in the standards.
Chairman Johnson. Ms. Schwartz, with a number of different
standards being put forward, would a national mortgage
servicing standard help provide clarity for servicers,
homeowners, and investors?
Ms. Schwartz. Senator, yes, we do believe there is a strong
need for some coordination and alignment on what is going on
today with the regulatory efforts and others on servicing
standards. I would caution the Senator to let this fall out to
find out what is finally happening with the standards through
the AG discussions and the OCC consent orders as we see how it
works through the system before there is another effort to make
new standards without testing how these are coming through.
Chairman Johnson. Mr. Couch, in your testimony, you argued
that homeowners have not been harmed by the problems in
mortgage servicing. Do you disagree with the assessments and
subsequent required changes imposed by the Federal banking
regulators and by FHFA?
Mr. Couch. Senator, in my testimony, I said that in the
event that a borrower has been damaged, he or she should be
entitled to be made whole for those damages. In terms of harm,
it is important to keep in mind that in the case of
foreclosures and this foreclosure process, as I mentioned
before, the length of time during that 400-plus days, depending
on what State you are in, while the process is working, that
borrower is not monetarily damaged. In fact, that borrower is
living rent-free, so to speak, during that period of time.
Now, there are in place in all 50 States mechanisms for
making, if there are damages, making the borrower whole, and I
am suggesting that in every case that should take place. But I
think it is important for the Committee to look at who is
actually being damaged in this process.
Chairman Johnson. My time has expired.
Senator Corker. Go ahead. I will use that chit later.
Chairman Johnson. Yes. Yes.
[Laughter.]
Chairman Johnson. I will proceed to a second round if need
be. Senator Corker.
Senator Corker. There are so few of us here, I am more than
glad for you to take all the time you need, from my
perspective.
But to the witnesses, again, thanks for your testimony. One
of the folks in our office, as we were getting ready for this
hearing, was talking about the fact that a year or so ago, they
had a decision to make as to who they would borrow money from
because they, obviously, being a staffer, had had experience
with what happens with mortgage servicing. They looked at
borrowing money from a community bank, where they would
actually know the person on the other end of the line, and, on
the other hand, looked at some of the larger institutions where
the rates were actually cheaper but they knew they might be put
through a meat grinder if something happened.
And so I use that example to say the customers do have a
choice. I mean, they can choose to go to a smaller institution
and maybe pay a higher fee but have that personalized service,
or go to one of these larger institutions where your file might
be in a warehouse in Kansas someplace. So there is a difference
there, and I know it was a difference that, when I used to
borrow money for commercial loans, I paid attention to.
And I am just wondering, Ms. Schwartz, what your response
would be to that. I mean, people do have a choice.
Ms. Schwartz. Sure, Senator Corker. They do have a choice,
and I would say in the evolution of a $3 trillion market, there
was a lot of buying and selling of mortgages, small lenders and
large ones. Today, most of the mortgage market is controlled
through the investor guidelines, through Fannie Mae, Freddie
Mac, and FHA, of which most--many lenders participate, and
those guidelines really govern how they are serviced.
But to your point, there are choices to be local with your
community banker and go in and see how your payment was applied
versus online or 800 numbers to find out how it is being
processed with larger organizations. There is always a choice.
But they have the right to buy and sell those loans today, and
some do.
Senator Corker. And that is a good point, and so as we--a
lot of the things that we do around here, I mean, we look at
some of the regulatory practices that were put in place with
Dodd-Frank. There is a concern that that just creates greater
consolidation over time. So is there any concern by any of the
witnesses that if we put in place uniform standards by law that
there will be consolidation and maybe it gets even more
difficult than it is?
Ms. Schwartz. If I could follow up on that, I believe you
can have standards and have appropriate protections in place
for smaller servicers or banks that have too much cost and
burden with that, but you can have standards that are fair to
customers and protect----
Senator Corker. Now, how would that work exactly, because
we just went through that with debit and interchange and none
of the community bankers felt like that worked too well. Even
though they were protected, they know, over time, the market is
going to migrate away from them if they are charging a higher
fee than the large institutions. So that is a nice thing to
say, but tell me how that would actually work, and anybody else
that wants to chime in would be helpful.
Mr. Swire. I would have an idea, but do you want to go----
Senator Corker. Go ahead.
Mr. Swire. OK. I did not want to step on Faith. So one of
the basic distinctions for mortgage servicing rights is whether
the bank retains the servicing, keeps them there in their
community bank or whether they get sold to somebody else to do
the servicing, and you can write rules to say, if it is
retained, the customer chose that bank. It is being serviced by
that banking organization. You could also have a dollar limit
if you want to, so that applies up to some amount, so that the
smaller banks that retain servicing are more likely the whole
time you have a customer relation, but once it is sold out into
the national market, that is where the standards apply.
Ms. Schwartz. If I could--oh, go ahead.
Mr. Hopkins. First, if I may step in, one, I think that you
have already defined in here what a small, or a large investor
is. In the Fannie Mae guidelines, I think it defines 65,000
loans as being a small market investor or small servicer.
As far as for the cost, what we are looking at, we do some
servicing for some other banks, primarily for the South Dakota
Housing Development Authority loans, because there are only six
servicers in the State, so I caution that anything--you know,
we do some servicing for other banks, so we do buy some
servicing. But the vast, vast majority, 90-some percent,
probably 98 percent, is our own originated product. So I would
argue that if we are doing our own product, we are looking not
to increase the standards that are so prescriptive. They are
looking at things that would almost force us to have a call
center implemented in order to do that, in order to track all
our contacts with customers.
And to your point earlier when you were talking about the
cost of a mortgage at a community bank versus a large bank, I
do not think, with the markets the way they operate today,
there is a difference in cost, particularly with the new
incentive rules. So I think that the pricing is virtually
identical between a large and a small servicer. We advertise
that we service locally. That is one of our key advertising
points and we are proud of that. And that brings us in
business.
Senator Corker. But I assume you still do not want national
standards that are the same for you as they might be for
JPMorgan or somebody like that, is that----
Mr. Hopkins. No, we do not. I mean, we do not want the
standards that are very prescriptive. We have been successful.
Our delinquency rate shows that. We have been very successful
in servicing, so I am cautious that we have standards that are
requiring us to contact people on nights and weekends when we
do not have those type of issues. Our biggest issues is whether
they pick up the phone. We have gone to the point of using cell
phones so they do not identify the number when they are
collecting, and we change the number monthly.
Senator Corker. Thank you. I noticed I am over my time, Mr.
Chairman.
Chairman Johnson. Ms. Schwartz has a comment to make.
Senator Corker. OK.
Ms. Schwartz. Oh, I would just say, I think there are ways
to create standards where the regulatory oversight body can
work with the smaller community banks or others to say, are you
satisfying single point of contact? Do you have a customer
service or abandonment rate that is very low that you are
really taking care of your customers? And of course, they just
testified they do. But larger companies may have different
processes in place because they are a higher volume shop and,
therefore, they need some different structural concepts. In all
cases, though, there are ways to be flexible with standards to
accommodate customer protections as well as the banks' and
investors' needs.
Senator Corker. Thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Well, thank you, Mr. Chairman. Mr.
Chairman, I ask unanimous consent that my statement be included
in the record at the beginning.
Chairman Johnson. It will be.
Senator Menendez. Thank you.
Mr. Chairman, thank you for holding the hearing and I
appreciate the testimony that I have read of the witnesses. I
have a few questions and I am hoping that you can all help me
here.
So let me start off with, I know some of you talk about
single point of contact and dual track, but if you had to name
a few specific national mortgaging service standards that you
believe would be helpful, what would those be and how would
they be helpful? This is for anyone on the panel.
Ms. Schwartz. I am happy to offer a few. Clearly, the
single point of contact has become a dominant discussion in the
regulatory environment, the legislative environment, the
advocacy environment, because customers are unhappy. And to
turn that into something where they understand what is
happening around them and to them and through the options that
are made available, a single point of contact is something that
makes them get through the process in an easier way. I
testified earlier to say it does not mean the outcome will
differ if they are not able to make an affordable payment or if
they are unemployed and there are very tools that will help
them get through a loan process. So single point of contact.
Dual track processing is the other very significant issue
out there. It is confusing to homeowners to get help on the
left side of the house to get a modification, of which I have
spent 4 years working with the industry and nonprofits to do.
At the same time, the laws create process and standards for
foreclosure to occur, and so to explain that very complicated
process has to be done in a much better way for the consumer.
Senator Menendez. Now, Mr. Hopkins, in your testimony, you
suggest that community banks should not be subject to national
servicing standards, and I realize your arguments about
consolidation in the industry are a concern. But to what extent
does that depend on what servicing standards are we talking
about?
Mr. Hopkins. Well, we are already subject to some
standards, and I think we have been able to follow those
standards very carefully. You know, if we are dealing with
Fannie Mae, Freddie Mac, or South Dakota Housing, in our case,
they all have their standards of when they expect us to make
contact with customers, et cetera. What we are concerned about
is the cost that they are looking at to document that we are
doing what we are doing, that we are having the contact with
the customer. But I think, again, our results show that we are
there. So what we are looking for is that anything you are
doing does not add cost and burden to us and that we have a
carve-out if we are meeting certain standards. I mean, our
delinquency rate----
Senator Menendez. So if your--go ahead. Finish that.
Mr. Hopkins. I said, our delinquency rate would prove, at
1.7 percent, where we are one-third the national average, that
we are doing the job that we are supposed to be doing. We have
only had a handful of foreclosures over the last few years. And
by handful, I am talking 23 last year. I mean, that is not--out
of 5,000 loans, that is not an excessive number of
foreclosures. Those are typically life-event type things, a
divorce, loss of job, et cetera, that are causing those issues.
Senator Menendez. All right. Let me ask for anyone, maybe
some of the counsel here, does the panel acknowledge that it is
a conflict of interest for mortgage servicers to have an
ownership interest in a company that performs services
associated with that owned mortgage services foreclosures--
property maintenance, inspection, force placed insurance? Does
that not give the servicers an incentive to force homeowners to
use expensive add-on services for their own property, even when
that is more likely to drive the homeowner into foreclosure?
Mr. Swire. Senator, that--OK.
Mr. Couch. Senator, I think that certainly you raise a good
point, that there are all sorts of interests in place that have
to be balanced. I would maintain that there is not necessarily
a conflict of interest for--in fact, it may make it easier for
the consumer to have services that are provided in-house versus
going outside the house.
Now, I think that most of the standards that are proposed
would require those services to be offered at fair market rates
and not be marked up, and we have had extensive debate
throughout about RESPA and what is required under RESPA in that
regard. So, I mean, you raise a very good point, but I think it
is a case-by-case----
Senator Menendez. How about force placed insurance?
Mr. Couch. And----
Senator Menendez. The effect on borrowers----
Mr. Couch. Well, keep in mind what force placed insurance
is designed to do. If you lend me money and I give you a
security interest in my house to secure that money, part of the
deal is that I keep insurance in place so that your security
interest in my house is protected. And if I do not go out and
get property and casualty insurance to keep your security
interest secured, I think you as an investor would like there
to be a provision, a contractual provision, that allows that
coverage to be put in place so that your security interest is
secured.
Senator Menendez. But we have found many cases in which
that force placed insurance has been well overpriced. And so,
again, how do you maintain these bounds? The same issue, and I
see, Professor, you are trying to get in here, so I will, after
I ask this next question, have you maybe answer both of them.
The second thing was--and, Mr. Chairman, thank you for your
patience--second lien conflict of interest at mortgage
insurers. You know, so suppose it is a conflict of interest for
the company servicing the primary lien to also own the second
lien, and that industry alone is not willing to do anything to
stop the conflict since it might be in the financial self-
interest of at least some private sector parties for that
conflict to continue. Is that not the kind of situation where
there is a legitimate role for the Government to step in?
Mr. Couch. Are you directing that to me, Senator?
Senator Menendez. Yes.
Mr. Couch. Well, again, keep in mind that in most of the
cases that we are talking about, I mean, we can go back and
talk about where the piggyback loan, which is where many times
this has come about, is through the piggyback loans, why those
evolved the way they did. But keep in mind that the
relationship between the first and the second is established by
State law. Well, it is established by, I think, investors that
bought the first, or the lender that has the first and the
lender who has the second, and any competing interests there
are governed by State law and also by the contracts that govern
the servicing----
Senator Menendez. Oh, I understand the right, the privilege
rights of whatever the first lender is and whatever the second
lender is in terms of their status and how they will be
compensated if there is foreclosure. My concern is the second,
you know, the second lien being also the servicing entity, and
in that context are they working in a way to satisfy their
interests as a second lien holder or are they working in the
interest of the homeowner and a resolution of the process in a
way that best ensures that they can keep the person in their
home.
Mr. Couch. Well, the primary party affected by that is the
owner of the first lien, and the first lien holder, if he has
concern about the way the second lien is going to be serviced,
would have to raise that concern at the point that he purchased
the loan, because those are the rights that are most directly
affected.
Now, I recognize that there have been suggestions that that
second that the servicer of the second lien may put the
interests of the second lien in front of the first,
particularly if there is a loan modification that has been
proposed, and I can easily envision the conflict that could
arise. But the beef, if you will, is with the investor in that
first mortgage.
Senator Menendez. Professor, Swire, and then I will stop
there.
Mr. Swire. Yes. Thank you, Senator. Just a couple of quick
points. First is on force placed insurance, the logic of having
the insurance to protect the investor is strong. What my
experience found out was a national servicer had a practice of
ignoring proof of insurance that came in from my State Farm
agent or other agents like that and buying insurance anyway. So
the fact that there is a reason for something does not mean it
is being implemented correctly.
On the conflicts of interest, often, a first step is
disclosure of the conflict so that people can see it, and I
think with force placed insurance, with fees of various sorts,
disclosures about that are one way to start to address the
problem.
And the last point is on second liens, I know from my time
in the Administration, there was very great concern that the
decisions about seconds by major banks were driving how firsts
got handled, and that a lot of times, seconds seemed to come
first, that we had a lot of conflicts of interest. It made it
much harder to make modifications that worked for the
homeowners and for the first lien holders, and that was a big
problem.
Senator Menendez. Thank you. I appreciate it.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman, and I thank all of
you for being here today and on Skype.
When I am in North Carolina, I travel across the State, and
I hold ``Conversations with Kay,'' and it is an opportunity for
constituents throughout North Carolina to come to these events
and actually bring their--we talk about the issues of the day,
but also to bring their concerns to me, and we have constituent
staffers there that can help immediately start working on
issues. And without a doubt, there are always concerns about
foreclosures, always concerns about mortgages that have
questions. And in just about every situation, they discuss how
documents have been requested, they send them in, they get
lost; they send them in again, they get lost; they send them in
again. It is a repetitive comment that I hear each and every
time.
So my question is--and, Ms. Schwartz, I think you mentioned
this in your opening talk about how a single point of contact
might help solve problems like this, and any of you if would
care to comment.
Ms. Schwartz. Yes, Senator, good morning. You know,
earlier, I also referenced, we created a Web portal called HOPE
LoanPort for just that reason, so that consumers, counselors,
and servicers would no longer have that anecdotal back-and-
forth but a rigorous way to track documentation and process and
time and date stamp every communication so that there no longer
would be an issue, and that exists today through HOPE LoanPort,
and we created a neutral nonprofit entity for just that reason.
Second, that is a fair concern. There is nothing more
frustrating than losing documents and having 20 phone calls
with someone who says--and then someone on the receiving end
does not have it because of a fax or a FedEx.
So at the end of the day, this is not complex. There are
ways to address it through documenting and making sure there is
a safe and secure system of communicating among all the
stakeholders so that does not happen anymore. It already exists
today. We need to as an industry and Government keep working
toward those solutions.
Senator Hagan. Thank you.
Mr. Swire. Senator, from my experience this problem--first
of all, the portal that Faith Schwartz just described is
something that I have supported, and I think it is getting
better. But what I saw in my own experience because I kept date
and time stamps with a lot of documents was that at that point
they would receive the documents, and then it did not fit their
system, it did not have their loan number on it, and so they
ignored the document even though they had my insurance agent's
phone number and fax, my phone number and fax. They had a proof
of insurance. They ignored it because it did not sort of check
a box that they had in their system, and then they went ahead
and bought the industry in a force placed way. And so that is
in the file that I provided to staff, and it was a practice by
one of the major servicers in this country in 2007.
Senator Hagan. Thank you.
Some have suggested that one way to improve servicing is to
create performance thresholds that servicers must meet at the
MBS level, and if servicers failed to achieve delinquency rate
targets, time lines, or modification success rates, the
servicing rights would be sold and the servicer replaced.
Mr. Couch and Ms. Schwartz, can you discuss whether you
believe such an approach would be effective? And then, Mr.
Hopkins, could performance thresholds get servicers to perform
better on behalf of investors and borrowers and at the same
time avoid placing undue loan-by-loan regulatory burden on
community banks that service loans?
Ms. Schwartz. Sure. So there are already in a sense
performance thresholds. Fannie Mae and Freddie Mac today have
time lines required of foreclosure processes. They measure them
against State law and other efforts, how long it takes to
foreclose on a loan, and there are incentives in place for
servicers to perform under their guidelines.
Certainly there are really great things being done by the
small and special servicers out there, many who are members of
HOPE NOW, who all they do is high-touch and feel and help the
borrower who is in distress, and that is their main business.
The larger shops have both performing and nonperforming aspects
to their departments and have a lot of performing loans they
deal with versus just a focused efforts.
Thresholds and ability to move servicing you investors is
probably something to be considered because we have been locked
up in the system with the inability to move loans in and out of
pools and buckets, and it has caused some stress in the system.
Senator Hagan. Mr. Couch.
Mr. Couch. She did a good job.
Mr. Hopkins. I guess from our standpoint, you know,
particularly when we are talking about performance standards,
we in the South Dakota housing market do have some penalties if
we do not hit certain delinquency rates. Our fees are actually
reduced as the delinquency rate goes up. So we are incented to
have early and often contact with our customer, and it works.
You know, under some of the new proposals they are looking
at, it is taking and cutting the servicing fees for your
performing loans because they say you do not need to deal with
them. Well, that will drive me out of the business because it
is a break-even at best business as it is. And they are looking
at, in my opinion, rewarding the bad players by paying them
more to service and to modify those loans. Well, I think that
is kind of a perverse relationship, and it will drive bad
behavior. In my opinion, you should not be rewarded for making
bad loans and paying people more to service bad loans. So we
would be in favor of some servicing standards that would drive
that.
Senator Hagan. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Mr. Hopkins and Ms. Schwartz, as we have
heard from Professor Swire's testimony, resolving a servicer's
mistakes takes time and diligence. To help correct mistakes
sooner, can borrowers access their servicing records and
mortgage files to ensure that payments and fees are being
applied appropriately? Mr. Hopkins.
Mr. Hopkins. Yes, if they call into our servicing
department, we will happily supply them with their payment
record and any other record that they would like on their
mortgage. We will email it, fax it to them, whatever they would
like, or if they come in and talk to us. If they find a
discrepancy, we are happy to work with them to try to resolve
the discrepancy because obviously we are what we call a high-
touch, high-feel type bank, and we rely on our servicing and
our expertise in servicing and our reputation as a high-touch
supervisor.
Chairman Johnson. Ms. Schwartz.
Ms. Schwartz. Yes, sir. Well, what I have seen from some of
the largest shops is that they have very impressive Web-based
access systems where they indeed can go in and look and have a
read-only review in a private, secure setting to see where they
are. And I think the industry has made great strides in that
area.
I am not familiar enough to know across the industry the
consistency of that opportunity.
Chairman Johnson. Professor Swire, what do you have to say
to that?
Mr. Swire. Two observations. One is that Washington Mutual
did, in fact, provide me detailed records eventually on that
issue. They showed a lot of fees that I did not think I owed,
but they showed them accurately.
A second thing is this issue of access to records was an
issue in the Gramm-Leach-Bliley area, an area I used to work
in, where there is no right of access in general like you have
a right of access now to your medical records, and that is
something that I think in practice usually the banks comply
with, but there is not the same legal right that we have to our
financial records that we have to our medical records.
Chairman Johnson. Yes. Thanks again to all our witnesses
for being here with us today. As more developments within the
servicing industry continue to surface, the Committee will
continue to exercise oversight of this important issue.
The hearing record will remain open for 7 days for
additional statements and questions.
This hearing is adjourned.
[Whereupon, at 11:06 a.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
Good morning. I call this hearing to order.
Thanks to all of our witnesses for joining us this morning. I would
also like to recognize that, for the first time, we have a witness
joining us by Skype. Professor Peter Swire is in Oregon, but was kind
enough to start his day early for our hearing.
Today, we will continue the Committee's oversight of problems in
the mortgage servicing industry and explore the need for a national
mortgage servicing standard.
The housing recovery appears to have stalled--in part because of
widespread uncertainty in mortgage servicing. Borrowers aren't certain
that servicers are accurately evaluating them for modifications.
Servicers aren't confident that borrowers' documents were submitted
properly. And investors are concerned about how all these factors
increase litigation risk for servicers. Homes that should move through
the foreclosure process are held up because courts and servicers are
concerned that paperwork has not been completed properly.
We need rules of the road so that borrowers, investors and
servicers have a clear understanding of the process to follow both when
a borrower is current on payments and also in the unfortunate event
that a borrower becomes delinquent.
Since our first servicing hearing in November of last year, the
Federal banking regulators have found significant problems and issued
consent orders to 14 large servicers; the Federal Housing Finance
Agency amended its seller-servicer guidance to align Fannie Mae and
Freddie Mac's standards for servicing and improve borrower contact; and
the Treasury Department's HAMP program began issuing servicer report
cards--which did not show promising improvements.
Even more recently, Reuters and AP released investigative reports
detailing ongoing problems in mortgage servicing. I would like to place
those reports into the record.
Given the variety of standards and the continuing problems that
I've mentioned, it is important that we explore a national mortgage
servicing standard.
Several Members of this Committee have already introduced
legislation to create such a standard and mitigate the foreclosure
crisis. Senator Reed is a consistent leader on this issue introducing
legislation last Congress and again this Congress. I would also like to
recognize Senator Merkley and Senator Brown for their legislative
efforts.
Senator Menendez has also helped in the Committee's oversight of
this issue with a productive hearing in the Housing Subcommittee.
This is an important issue, and the Committee will continue to
exercise its oversight responsibility.
Before I turn to Senator Shelby, I would like to thank him and his
staff for working with me and my staff on these housing finance reform
hearings. Housing finance reform is a large topic that requires our
attention in all aspects and these hearings will help us better
understand the areas that need reform.
ADDENDUM I
AP Exclusive: Mortgage ``Robo-Signing'' Goes On
By Michelle Conlin and Pallavi Gogoi, AP Business Writers
Tuesday, July 19, 2011
(07-19) 06:05 PDT (AP)----
Mortgage industry employees are still signing documents they
haven't read and using fake signatures more than 8 months after big
banks and mortgage companies promised to stop the illegal practices
that led to a nationwide halt of home foreclosures.
County officials in at least three States say they have received
thousands of mortgage documents with questionable signatures since last
fall, suggesting that the practices, known collectively as ``robo-
signing,'' remain widespread in the industry.
The documents have come from several companies that process
mortgage paperwork, and have been filed on behalf of several major
banks. One name, ``Linda Green,'' was signed almost two dozen different
ways.
Lenders say they are working with regulators to fix the problem but
cannot explain why it has persisted.
Last fall, the Nation's largest banks and mortgage lenders,
including JPMorgan Chase, Wells Fargo, Bank of America, and an arm of
Goldman Sachs, suspended foreclosures while they investigated how
corners were cut to keep pace with the crush of foreclosure paperwork.
Since then, suspect paperwork has been filed not only with
foreclosures, but also with new purchases and refinancings. Critics say
the new findings point to a systemic problem with the paperwork
involved in home mortgages and titles. And they say it shows that banks
and mortgage processors haven't acted aggressively enough to put an end
to widespread document fraud in the mortgage industry.
``Robo-signing is not even close to over,'' says Curtis Hertel, the
recorder of deeds in Ingham County, Mich., which includes Lansing.
``It's still an epidemic.''
In Essex County, Mass., the office that handles property deeds has
received almost 1,300 documents since October with the signature of
``Linda Green,'' but in 22 different handwriting styles and with many
different titles.
Linda Green worked for a company called DocX that processed
mortgage paperwork and was shut down in the spring of 2010. County
officials say they believe Green hasn't worked in the industry since.
Why her signature remains in use is not clear.
``My office is a crime scene,'' says John O'Brien, the registrar of
deeds in Essex County, which is north of Boston and includes the city
of Salem.
In Guilford County, NC, the office that records deeds says it
received 456 documents with suspect signatures from Oct. 1, 2010,
through June 30. The documents, mortgage assignments and certificates
of satisfaction, transfer loans from one bank to another or certify a
loan has been paid off.
Suspect signatures on the paperwork include 290 signed by Bryan Bly
and 155 by Crystal Moore. In the mortgage investigations last fall,
both admitted signing their names to mortgage documents without having
read them. Neither was charged with a crime.
And in Michigan, a fraud investigator who works on behalf of
homeowners says he has uncovered documents filed this year bearing the
purported signature of Marshall Isaacs, an attorney with foreclosure
law firm Orlans Associates. Isaacs' name did not come up in last year's
investigations, but county officials across Michigan believe his name
is being robo-signed.
O'Brien caused a stir in June at a national convention of county
clerks by presenting his findings and encouraging his counterparts to
investigate continued robo-signing.
The Nation's foreclosure machine almost came to a standstill when
the Nation's largest banks suspended foreclosures last fall. Part of
the problem, banks contended, was that foreclosures became so rampant
in 2009 and 2010 that they were overwhelmed with paperwork.
The banks reviewed thousands of foreclosure filings, and where they
found problems, they submitted new paperwork to courts handling the
cases, with signatures they said were valid. The banks slowly started
to resume foreclosures this winter and spring.
The 14 biggest U.S. banks reached a settlement with Federal
regulators in April in which they promised to clean up their mistakes
and pay restitution to homeowners who had been wrongly foreclosed upon.
The full amount of the settlement has not been determined. But it will
not involve independent mortgage processing firms, the companies that
some banks use to handle and file paperwork for mortgages.
So far, no individuals, lenders or paperwork processors have been
charged with a crime over the robo-signed signatures found on documents
last year. Critics such as April Charney, a Florida homeowner and
defense lawyer, called the settlement a farce because no real
punishment was meted out, making it easy for lenders and mortgage
processors to continue the practice of robo-signing.
Robo-signing refers to a variety of practices. It can mean a
qualified executive in the mortgage industry signs a mortgage affidavit
document without verifying the information. It can mean someone forges
an executive's signature, or a lower-level employee signs his or her
own name with a fake title. It can mean failing to comply with notary
procedures. In all of these cases, robo-signing involves people signing
documents and swearing to their accuracy without verifying any of the
information.
Most of the tainted mortgage documents in question last fall were
related to homes in foreclosure. But much of the suspect paperwork that
has been filed since then is for refinancing or for new purchases by
people who are in good standing in the eyes of the bank. In addition,
foreclosures are down 30 percent this year from last. Home sales have
also fallen. So the new suspect documents come at a time when much less
paperwork is streaming through the Nation's mortgage machinery.
None of the almost 1,300 suspect Linda Green-signed documents from
O'Brien's office, for example, involve foreclosures. And Jeff Thigpen,
the register of deeds in North Carolina's Guilford County, says fewer
than 40 of the 456 suspect documents filed to his office since October
involved foreclosures.
Banks and their partner firms file mortgage documents with county
deeds offices to prove that there are no liens on a property, that the
bank owns a mortgage or that a bank filing for foreclosure has the
authority to do so.
The signature of a qualified bank or mortgage official on these
legal documents is supposed to guarantee that this information is
accurate. The paper trail ensures a legal chain of title on a property
and has been the backbone of U.S. property ownership for more than 300
years.
The county officials say the problem could be even worse than what
they're reporting. That's because they are working off lists of known
robo-signed names, such as Linda Green and Crystal Moore, that were
identified during the investigation that began last fall. Officials
suspect that other names on documents they have received since then are
also robo-signed.
It is a Federal crime to sign someone else's name to a legal
document. It is also illegal to sign your name to an affidavit if you
have not verified the information you're swearing to. Both are
punishable by prison.
In Michigan, the attorney general took the rare step in June of
filing criminal subpoenas to out-of-State mortgage processing companies
after 23 county registers of deeds filed a criminal complaint with his
office over robo-signed documents they say they have received. New York
Attorney General Eric Schneiderman's office has said it is conducting a
banking probe that could lead to criminal charges against financial
executives. The attorneys general of Delaware, California, and Illinois
are conducting their own probes.
The legal issues are grave, deeds officials across the country say.
At worst, legal experts say, the document debacle has opened the
property system to legal liability well beyond the Nation's foreclosure
crisis. So someone buying a home and trying to obtain title insurance
might be delayed or denied if robo-signed documents turn up in the
property's history. That's because forged signatures call into question
who owns mortgages and the properties they are attached to.
``The banks have completely screwed up property records,'' says L.
Randall Wray, an economics professor and senior scholar at the
University of Missouri-Kansas City.
In the Massachusetts case, The Associated Press tried to reach
Linda Green, whose name was purportedly signed 1,300 times since
October. The AP, using a phone number provided by lawyers who have been
investigating the documents since last year, reached a person who said
she was Linda Green, but not the Linda Green involved in the mortgage
investigation.
In the Michigan case, a lawyer for the Orlans Associates law firm,
where Isaacs works, denies that Isaacs or the firm has done anything
wrong. ``People have signatures that change,'' says Terry Cramer,
general counsel for the firm. ``We do not engage in `robo-signing' at
Orlans.''
To combat the stream of suspect filings, O'Brien and Jeff Thigpen,
the register of deeds in North Carolina's Guilford County, stopped
accepting questionable paperwork June 7. They say they had no choice
after complaining to Federal and State authorities for months without
getting anywhere.
Since then, O'Brien has received nine documents from Bank of
America purportedly signed by Linda Burton, another name on
authorities' list of known robo-signers. For years, his office has
regularly received documents signed with Burton's name but written in
such vastly different handwriting that two forensic investigators say
it's highly unlikely it all came from the same person.
O'Brien returned the nine Burton documents to Bank of America in
mid-June. He told the bank he would not file them unless the bank
signed an affidavit certifying the signature and accepting
responsibility if the title was called into question down the road.
Instead, Bank of America sent new documents with new signatures and new
notaries.
A Bank of America spokesman says Burton is an assistant vice
president with a subsidiary, ReconTrust. That company handles mortgage
paperwork processing for Bank of America.
``She signed the documents on behalf of the bank,'' spokesman
Richard Simon says. The bank says providing the affidavit O'Brien asked
for would have been costly and time-consuming. Instead, Simon says Bank
of America sent a new set of documents ``signed by an authorized
associate who Mr. O'Brien wasn't challenging.''
The bank didn't respond to questions about why Burton's name has
been signed in different ways or why her signature appeared on
documents that investigators in at least two States have deemed
invalid.
Several attempts by the AP to reach Burton at ReconTrust were
unsuccessful.
O'Brien says the bank's actions show ``consciousness of guilt.''
Earlier this year, he hired Marie McDonnell, a mortgage fraud
investigator and forensic document analyst, to verify his suspicions
about Burton's and other names on suspect paperwork.
She compared valid copies of Burton's signature with the documents
O'Brien had received in 2008, 2009, and 2010 and found that Burton's
name was fraudulently signed on hundreds of documents.
Most of the documents reviewed by McDonnell were mortgage
discharges, which are issued when a home changes hands or is refinanced
by a new lender and are supposed to confirm that the previous mortgage
has been paid off. Bank of America declined comment on McDonnell's
findings.
In Michigan, recorder of deeds Hertel and his counterparts in 23
other counties found numerous suspect signatures on documents filed
since the beginning of the year.
In June, their findings led the Michigan attorney general to issue
criminal subpoenas to several firms that process mortgages for banks,
including Lender Processing Services, the parent company of DocX, where
Linda Green worked. On July 6, the CEO of that company, which is also
under investigation by the Florida Attorney General's office, resigned,
citing health reasons.
http://sfgate.com/cgi-bin/article.cgi?f=/n/a/2011/07/18/national/
a135435D60.DTL
ADDENDUM II
PREPARED STATEMENT OF SENATOR ROBERT MENENDEZ
Thank you all for being here today. This hearing of the Banking
Committee is on a very important topic to our Nation's homeowners. I
explored a similar topic in a hearing that I chaired in the
Subcommittee on Housing, Transportation, and Community Development in
May. It is of particular concern to the countless New Jersey homeowners
who have contacted my office, almost all with terrible stories about
their experiences 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, 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. 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 national mortgage servicing standards as a way to provide
consistency, accountability, and better homeowner and mortgage investor
protections. There seems to be increasing consensus that at least some
kind of national mortgage servicing standards are warranted, and I
believe if they are done in the right way, they can actually make
mortgage servicers' jobs easier too.
This is also a timely topic because Federal banking regulators
including the OCC, 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're also too little and too late to help many
homeowners. Fortunately the State Attorneys General settlement
framework is providing some basis for discussion of these important
issues as well. I look forward to hearing the testimony on this.
______
PREPARED STATEMENT OF JACK HOPKINS
President and Chief Executive Officer, CorTrust Bank, Sioux Falls,
South Dakota, on behalf of the Independent Community Bankers of America
August 2, 2011
Chairman Johnson, Ranking Member Shelby, Members of the Committee,
I am Jack Hopkins, President and CEO of CorTrust Bank, a $660 million
asset, nationally chartered bank headquartered in Mitchell, South
Dakota. As a third generation community banker, I am pleased to
represent ICBA's nearly 5,000 members at this important hearing on
``National Mortgage Servicing Standards.''
As this Committee considers the development of national mortgage
servicing standards, I urge you to ensure that they do not add to the
regulatory burden of community banks, which are servicing their
portfolios successfully and have not contributed to widely reported
problems. We must preserve the role of community banks in mortgage
servicing because the alternative is further consolidation in the
servicing industry, which will only harm borrowers, especially those in
rural and underserved housing markets.
CorTrust Bank was founded in 1930, at the outset of the Great
Depression, and was built, tested, and proven under historically
challenging economic conditions. We survived the Great Depression and
numerous recessions since that time, including the most recent
financial crisis, by practicing conservative, commonsense lending. We
have emerged from the crisis well-capitalized and ready to lend to
support the recovery. CorTrust Bank serves 16 communities in South
Dakota, from Sioux Falls to rural communities with populations of less
than 150, such as Artesian, where we were first chartered under the
name Live Stock State Bank. We recently expanded into Minnesota.
Many ICBA member banks with similar stories--some have been in
business for more than 100 years--have also emerged from the crisis
well-capitalized. Despite the recent wave of bank failures and
consolidations, I fully expect the community bank business model will
thrive in the future, to the benefit of consumers, communities, and the
economy.
Servicing Is Key to Relationship Banking and Helps Community Banks
Remain Competitive
Residential mortgage lending has been an important component of
CorTrust's business since its founding and has grown more important
over the years. In 1988, we first began to sell mortgages into the
secondary market in order to access additional funding. Today, we have
a $552 million servicing portfolio consisting of approximately 5,000
loans.
About two thirds are held by Fannie Mae, and a smaller number are
held by Freddie Mac and by the South Dakota Housing Authority.
Over the years, we have discovered that mortgage lending is a great
way to cement long-term relations with customers and win the
opportunity to serve their additional banking needs. But in order to
sustain customer relations we need to service these loans, whether they
are subsequently sold or held in portfolio. We also discovered that
customers do care about who services their loans. They value, and even
seek out, local servicing. If they have a question, they want to be
able to pick up the phone or visit a branch and sit down with a banker
in their community. We built a successful ad campaign--print, TV,
online--around the advantage of local servicing. The campaign has
resonated with consumers and boosted our mortgage sales. Notably, much
of our recent business has come in the form of refinancing mortgages
away from large lenders whose borrowers are frustrated with remote,
faceless servicing performed outside the community.
Servicing is key to the marketing of mortgage originations, and
together, origination and servicing are integral to our relationship-
banking business model. Mortgage lending represents approximately 20
percent of our business, but its significance is greater than its
percentage would suggest. Viewed narrowly, loan-for-loan, it would be
more profitable for us to release servicing when we sell a loan. But we
chose to keep servicing in-house, even though it's at best a break-even
business, because it is central to our community bank business model.
CorTrust Bank's experience is typical of community banks. Servicing
helps community banks remain competitive in the mortgage origination
business. Today, community banks represent approximately 20 percent of
the mortgage market, but more importantly, community bank mortgage
lending is often concentrated in the rural areas and small towns of
this country, which are not effectively served by large banks. For many
rural and small town borrowers, a community bank loan is the only
mortgage option. Any broad based recovery of the housing market must
involve community bank mortgage lending.
Community bank servicing is based on close ties to customers and
communities. Because CorTrust Bank's servicing team consists of only
four people, customers always know who is on the other end of a
telephone or across the desk. A customer who dials our 1-800 number
will generally get one of two people on the line. Alternatively, a
customer can walk into one of our 24 locations and deal with a staff
person face-to-face.
Most importantly, we intervene early to keep mortgages out of
default. We know, for example, when an employer closes in our community
and how that closure impacts the income of our borrowers. A servicer
based 1,000 miles away won't have such knowledge. Smaller servicing
portfolios and better control of mortgage documents also provide an
advantage over the large servicers. For these reasons, community banks
have generally been able to identify repayment problems at the first
signs of distress. Our staff will contact a late customer on the 16th
day--the first day of delinquency--to find out what their circumstances
are and discuss solutions.
Community Bank Servicing Improves Loan Performance
This personalized approach to servicing is a natural complement to
conservative, commonsense underwriting. We make sure loans are
affordable for our customers and they have the ability to repay. Loans
are underwritten based on personal knowledge of the borrower and their
circumstances--not based on statistical modeling done in another part
of the country. We don't underwrite option adjustable rate mortgage
(ARM) loans or other exotic credit products. This combination of
quality, personalized underwriting and servicing yields results.
CorTrust Bank's delinquency rate on loans transferred to Fannie Mae is
0.83 percent. Our delinquency rate on loans transferred to other
programs is a bit higher, yielding an average delinquency rate of 1.7,
which is consistent with the general pool of community bank originated
loans and about one-third of the national average. In the most
frenzied, exuberant years of mortgage lending, 2005 through 2007, the
general pool of GSE loans was seriously delinquent at a rate four or
five times higher than loans originated by community banks and sold to
GSEs. In the history of CorTrust Bank mortgage lending, we've had very
few mortgage loans go into foreclosure. Community bank originated and
serviced mortgages perform better in all market conditions.
National Servicing Standards Should Exempt Community Banks
As a result of widely reported, abusive servicing at some large
banks, ``robo-signing,'' wrongful foreclosures, and other high profile
scandals, Congress, the regulators, State officials, and the media have
focused on servicing. In June, Fannie Mae published Announcement SVC-
2011-08, ``Delinquency Management and Default Prevention.'' These new
servicing standards are very prescriptive with regard to the method and
frequency of delinquent borrower contacts. They are a challenge to
implement and have reduced our flexibility to use methods that have
proved successful in holding down delinquency rates.
As Congress and the agencies consider how to address the deficient
servicing standards of some large lenders, they must recognize
community banks have fundamentally different standards, practices, and
risks. Overly prescriptive servicing requirements should not be applied
across the board. Examples of difficult and unnecessary requirements
include rigid time lines for making contacts that leave no discretion
to the servicer; mandatory property inspections; establishing a single
point of contact for the borrower; the creation of a special servicing
group for delinquent loans; requiring significant oversight of third-
party providers; developing burdensome compliance programs; and annual
independent audits of controls and processes. Many of the proposals
I've seen would require us to establish a call center to comply, a
prohibitive and unnecessary expense for a community bank such as mine.
Our small size and our local presence in the communities we serve make
many of these requirements unnecessary. For example, borrowers are able
to quickly find the right person in the bank to address their issues.
In practice, community bank servicing is consistent with the goals
and the spirit of national standards proposals I have seen, which
promote more personalized service, improved accountability and control
of documents. But, in the proposals I've seen, the means of achieving
those goals are overly prescriptive. CorTrust Bank services loans with
care, diligence, and accountability because quality servicing
contributes to the reputation we enjoy in our communities. We don't
need threat of enforcement to incentivize quality servicing.
The most significant risk in applying standards that are too rigid
and prescriptive to all banks, regardless of size, is that the
additional expense would cause many community banks to exit the
mortgage servicing business and accelerate consolidation of the
servicing industry, leaving it to the largest lenders. Loss of
servicing would make it harder for community banks to compete for
origination business and would thereby accelerate consolidation in that
business as well. Were this to happen, rural and small town customers
in particular would be left with fewer mortgage choices, interest rates
and fees would be less competitive, and customer service and product
choice would suffer. The secondary markets, without well-performing,
community bank-originated loans to shore them, would be less stable. We
all witnessed the danger and devastating fallout that resulted from the
concentration of mortgage lending in a few major market players. We
must promote beneficial competition and avoid further consolidation and
concentration of the mortgage lending industry.
Any national standards developed by Congress or the regulators must
exempt community bank lenders. There are a number of ways of
accomplishing this. One possibility is to exempt lenders that are both
below a threshold number of loans (or aggregate dollar value of loans)
and whose delinquency rate is below its regional average. As a lender
exceeds its regional average, servicing standards could be applied on
an incremental basis, so that one delinquent loan does not bring on the
full array of standards that apply to a large bank. However you choose
to structure the exemption, I urge you not to tamper with our success
in a service that is so important to our business and that of other
community banks.
Servicing Compensation Must Cover Costs and Incentivize Diligent
Servicing
A separate but related issue is compensation for servicing. Because
the income provided by servicing is only enough to cover costs, ICBA is
very concerned about a recent Federal Housing Finance Agency (FHFA)
proposal to change both the method and the amount of compensation paid
for servicing mortgage loans for Fannie Mae or Freddie Mac. The
proposal would significantly reduce or eliminate all together the
minimum servicing fee of 25 basis points earned for performing
mortgages and would implement a specific fee paid for nonperforming
loans. This proposal would result in a sharp reduction in mortgage
servicing fee income for community banks, who predominantly service
performing loans, and does nothing to improve the financial condition
of Fannie Mae or Freddie Mac. Further, changing the servicing fee
structure could cause significant change to the value of existing
mortgage servicing rights held by community banks which may impact
their capital position and likely increase consolidation of the
servicing business. Moreover, by rewarding the servicers of
nonperforming loans--and the originators who typically retain servicing
rights--the proposal would create a perverse incentive. Loan servicing
fees should be structured to incentivize diligent servicing, which can
make the difference between keeping a loan current and a lapse into
nonperformance.
Closing
Thank you for holding this hearing and for the opportunity to
testify and present the good story of community bank mortgage
servicing. For many community banks, servicing is integral to
competitive mortgage origination and is a crucial aspect of
relationship business lending. While I appreciate your concern with
servicing practices that have harmed consumers and impeded the housing
market recovery, I urge you not to tamper with the success of community
banks in serving their customers and keeping loans out of delinquency.
______
PREPARED STATEMENT OF FAITH SCHWARTZ
Executive Director, HOPE NOW Alliance
August 2, 2011
Introduction
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, thank you for the opportunity to testify today. My name is
Faith Schwartz. I am the Executive Director of the HOPE NOW Alliance
and a cofounder of HOPE LoanPort'. \1\ I have served in a
leadership capacity at HOPE NOW since 2007, during which time I worked
closely with members and partners of the Alliance, including mortgage
servicers, investors, nonprofit housing counseling partners, Government
agencies and regulators to help homeowners avoid foreclosure. Before my
time with HOPE NOW, I served in various capacities in the housing
finance industry for 28 years.
---------------------------------------------------------------------------
\1\ HOPE NOW is an alliance of counselors, mortgage lenders/
servicers, investors, and other mortgage market participants to prevent
foreclosures through outreach to delinquent borrowers, counseling, and
loan workouts based on the borrower's ability to repay. The goal is to
prevent foreclosures by connecting troubled borrowers with counselors
and/or their mortgage servicer. HOPE LoanPort' is a Web-
based tool that streamlines home retention applications on behalf of
homeowners at-risk of foreclosure, allowing housing counselors to
efficiently transmit completed applications to mortgage companies.
---------------------------------------------------------------------------
The comments I make today are my own and reflect my experience in
the mortgage business and in particular, in working with servicers and
counselors attempting to help at-risk homeowners. These comments do not
necessarily represent the views of all HOPE NOW members. Attached to my
testimony is an addendum on HOPE NOW data and supplemental facts from
the HOPE NOW Alliance.
The Goal of National Servicing Standards
I am here today to speak to you about the goal of achieving strong
National Servicing Standards which will require extraordinary
cooperation and communication between the industry, the Government, and
other concerned parties to evaluate the servicing standard initiatives
now underway. We all want to improve the customer experience and the
establishment of uniform, clear standards would be a strong step in
that direction.
The members of HOPE NOW have been focused on assisting homeowners
in need for the past 4 years. The joint efforts of servicers,
nonprofits and other partners have helped millions avoid foreclosure,
but unfortunately there are millions of homeowners who still remain at
risk of losing their home. In addition to the estimated 4 plus million
homeowners 60 days past due or in foreclosure, there are many customers
current with their mortgage, but who struggle to make that payment
every month letting other bills slip.
We are all aware that the current economic conditions--unemployment
and underemployment in particular--are challenging for customers who
are trying to maintain their home. Additionally, homeowners are
frustrated by mixed messages from some loan servicers when they ask for
help. Improvements have been made, but more needs to be done. These
issues are part of the motivation for more uniform servicing standards.
At the same time, it is important to recognize that national servicing
standards may not change the final outcome for many homeowners at risk
of foreclosure because of their economic situation, but customers need
a servicing process that gives them timely responses and consistent
answers regarding their loans.
Improving the Customer Experience in Mortgage Servicing
Our alliance members recognize the importance of improving the
customer experience in mortgage servicing and they have been working
hard to achieve that goal. An ongoing demonstration of the effort on
reaching customers directly is the large number of outreach events that
HOPE NOW has helped organize around the country since the crisis hit.
Loan servicers and nonprofit counselors have worked with HOPE NOW staff
to set up events in different cities and around the country, spending
2, sometimes 3 days on the ground in distressed markets providing in
person help to at-risk homeowners. HOPE NOW initiated the events in
2008 and when the Making Home Affordable program began, we partnered
with Treasury to combine industry and Government efforts in joint
events to reach more borrowers at risk and offer solutions in a timely
manner.
Part of the focus at these events is to make sure that the customer
walks away feeling that they have been helped or at the very least put
on the right path to get help. Providing access to HUD approved housing
counselors at the events has been a very important component of the
free services offered to a borrower. If a borrower comes prepared with
all the necessary documents and information, they may have the option
to be underwritten on site and approved for a loan modification or
other workout by their loan servicer, subject to various validations.
Together, we have held 112 outreach events. Just 3 weeks ago, HOPE
NOW members and Making Home Affordable partners were in two cities in
Florida and met with more than 2,000 homeowners. The latest totals for
all outreach events reached 89,207 borrowers. Our follow up from those
events indicates that 43.5 percent have been assisted by resolving
their delinquencies without foreclosure sales. As an addendum to this
testimony, there is a list of the communities in which HOPE NOW,
partnering with our industry members, the Government Sponsored
Enterprises (GSE), the United States Treasury, and nonprofit counselors
have been to since we started holding outreach events in early 2008. It
is also important to note that several of the larger servicers are
holding their own company-sponsored events all over the country which
directly reach their borrowers at risk in key markets.
Without question, the outreach events have improved the experience
of many customers trying to resolve their mortgage difficulties through
a face to face meeting with their loan servicer or counseling through a
nonprofit agency. Our exit surveys reflect over 88 percent strong
borrower satisfaction after they have a chance to meet face to face
with their loan servicers. As many as 30-40 percent of those attending
had never had contact with their servicer before the meeting. These
numbers will vary slightly from market to market, but in every case the
majority of homeowners who come to the events are delinquent on their
loans and more than satisfied with the service they receive at the
outreach event. We truly believe that nothing gives a distressed
homeowner more peace of mind and satisfaction than sitting down face to
face with someone and being able to discuss the options that are
available to them. I have included as part of my addendum exit surveys
from recent outreach events to give you a taste of how borrowers feel
after coming to an event.
Another ongoing effort that was begun in 2006 is the Homeowner's
HOPE hotline, the national 1-888-995-HOPE number that servicers and
investors support financially, for homeowners to call to speak to a HUD
certified counselor. The Homeowner's HOPE Hotline, operated by the
Homeownership Preservation Foundation, has become the leading national
hotline and has received over 5.2 million calls from borrowers seeking
help with their mortgage.
Servicing Has Changed Dramatically
It is important to understand some of the history of mortgage
servicing and how the tremendous challenges of the current crisis have
impacted the mortgage servicing system.
In the decades before the current crisis, mortgage servicing
developed some uniformity in part because of the requirements of GSEs
and the Federal Housing Agency (FHA) for servicers on loans purchased
by the GSEs or insured by FHA. In both cases these entities established
requirements for mortgage servicing as well as requirements for other
features of mortgage finance. In particular, the GSEs became the
dominant force in setting standards in the industry and could dictate
servicing rules and standards because they were the primary investor
for the majority of the residential mortgage loans originated and
serviced.
When the private label mortgage securities market grew in size in
the late 1990s those private label securitization agreements dictated
specific servicing terms that had to be followed by the servicers, and
when details were missing, the practice was to default to the GSE rules
as the industry standards. While the market functioned smoothly and
delinquencies were generally low, these differences in servicing
requirements were not meaningful.
However, once the dramatic downturn in the market occurred in the
mid 2000s, the challenges facing servicers grew tremendously and
differences in servicing requirements became more important. Prior to
the crisis, servicing had been a fairly simple process of processing
payments from current borrowers and forwarding those payments to
investors. Servicers were paid a set fee for processing performing
loans. Delinquent loans and troubled borrowers were a small segment
generally handled by relatively small loss mitigation staffs and
solutions often involved repayment plans to get borrowers back on
track. The housing crisis completely changed the demands on major
mortgage servicers. Servicers are now managing millions of delinquent
loans and have had to hire thousands of new employees to work with
borrowers to find solutions such as loan modifications which require a
re-underwriting and contractual change in the terms of the original
loan. This is a much more complicated servicing process that requires
many more staff and additional training.
HOPE NOW was formed in great part to assist the industry in its
attempts to deal with the new demands on servicing resulting from the
housing crisis. It was also created to reach a growing number of
borrowers who were going into default and were not contacting their
servicer. The Alliance helped industry members to work together to find
a process for offering loan modifications and other assistance to
borrowers that were consistent with the requirements of investors. The
alliance helped build a good working relationship with the nonprofit
community and Government agencies to work together to stem the tide of
foreclosures.
Today's Servicing Issues
The industry strongly supports a uniform approach to servicing
standards. Progress is being made in providing better service to
troubled homeowners, but there are a variety of initiatives and
requirements from Federal regulators, the GSEs and others to set
standards. These initiatives need to be evaluated and coordinated to
determine the best overall standards. For example, let me address two
of the main issues that are regularly discussed by industry,
Government, and nonprofit groups: single point of contact and dual
track processing. \2\
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\2\ Single point of contact has many definitions, but for this
discussion it describes an individual or small team of individuals in a
servicer that can communicate directly with a customer and have real
time access to all the data in the customer's file in order to discuss
the issues with the customer, direct the customer to the specialist in
the organization for specific loss mitigation practices (i.e., short
sales, modifications, forbearance, etc.). Dual track processing is the
practice of both proceeding to move a delinquent borrower toward
foreclosure while at the same time trying to resolve with that borrower
an alternative to foreclosure.
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Single Point of Contact
In order to best help a homeowner in difficulty, a homeowner needs
to be able to talk with a servicer representative who has the
information on the customer's mortgage and the options that are
available to assist them. A clear, consistent communication channel
with someone in the servicing department will help the homeowner
understand their options which may range from a loan modification, a
short sale, to the need for unemployment forbearance. It is equally
important that customers not be required to repeat the same request to
various customer service representatives and that the information they
provide about their income and payment situation be consistently
available to all decision makers across the company. Finally, the
customer needs to know that they have been informed of all options
available and that their single point of contact or relationship
manager at the company is able to confirm needed information and the
status of their case.
All of our members are working to develop a single point of contact
or relationship manager program that will meet those goals. Most of
them have established or committed to establishing such a program.
While different companies may have slightly different definitions of
what a single point of contact is and what programs should be used to
implement it, most programs include these key features:
1. The creation and training of servicing specialists who can serve
as a relationship manager.
2. The designation of a group of employees to serve in that
capacity, and in some cases the establishment of small teams
that work together;
3. The ability to respond promptly to inquiries from borrowers and
to immediately record the discussions with the borrower in the
company's data files for that customer;
4. A knowledge of all of the mitigation programs that are available
to the borrower and the ability to know when to refer that
borrower to a specialist with in-depth knowledge of one or more
of those programs that might be suitable for that borrower;
5. The ability to connect that borrower with the specialist and then
to follow that process through to the time that all alternative
options have been considered and the borrower is either
provided an alternative or the foreclosure sale occurs;
6. The ability for the contact person to reach out personally, as
needed, to fully explain why an option might have been denied;
and
7. In all instances to utilize a single point of contact to ensure
consistent and appropriate feedback to the homeowner about
their status in foreclosure.
Last month I visited a major servicer's shop to get a first-hand
view of their effort to develop a single point of contact system. It
was an excellent opportunity to actually see how a company is dealing
with the growing number of servicing standard requirements. This
company was hiring hundreds of people to become single point of contact
managers. (Other servicers have reported they may hire up to thousands
of additional staff for the single point of contact role.) The
company's training programs lasted up to 6 weeks for these new hires.
The long training was for two reasons--they want to make sure they get
it right, but they also need time to educate this relationship manager
of all the options that are available to at risk homeowners and the
program requirements by the Government and GSEs. For a servicer
representative to talk to a homeowner whose loan may be eligible for a
Home Affordable Modification Program (HAMP), they had to refer to an
eight inch thick black binder filled to the brim with the HAMP
requirements for each loan evaluation. There was a large binder for
each program and for each investor, to show what would be allowable for
a specific loan.
Obviously, the ability to understand and explain the numerous
Government, GSE, and other loss mitigation programs is daunting. In the
Web-based world we live in, it is hard to believe that these binders
were not online. The answer was that the consistent training, access to
internal systems, and an additional system to navigate the numerous
programs not housed in any one system remained a challenge.
That said, an impressive manager was charged with training for the
new hires. The training emphasized consistent and empathetic ways to
work closely with the borrower, and training on how to work with the
several departments across the large organization. With this drive to
make the system work more effectively for customers, I am confident
they will establish a process that improves service to all their
customers needing mortgage assistance. Seeing an organization at work
in person was a good experience to understand the many factors in play
for strengthening servicing performance in assisting borrowers.
Dual Track Processing
The dual track process is a confusing concept to many customers,
and also confusing for our members to attempt to explain what it means
and why it is happening to the homeowner. But the dual track process is
driven in large part by investor requirements and State laws on
foreclosures. For example, in many States once a servicer commences the
foreclosure process by sending notice to the borrower, the steps that
must be taken and the time frames in which they must be taken are
directed in great part through State laws and regulations. Similarly,
investors such as Fannie Mae and Freddie Mac have certain guidelines
and time lines that require processing foreclosures while the efforts
to modify loans continue simultaneously. There are rules that cover and
protect homeowners from going to foreclosure if they are eligible for a
modification and adhere to time lines for submitting documentation,
validating income, and finalizing the modification or alternative
solution prior to the foreclosure sale. In any event, the foreclosure
process (which now exceeds 600 days in some areas of the country)
continues with the exception of a 30 day process for review of
eligibility for modifications. If a loan is in the midst of a
modification review, the foreclosure sale process will not commence.
Once referred to foreclosure, there are various pauses that will occur,
and in no case should a foreclosure sale occur while under a review for
a modification that falls within the HAMP or investor guidelines. Rules
differ among investors as to what time lines are required. The GSEs are
the most important investors setting requirements in the dual track
process.
It is important to keep in mind that the investors' contracts
continue to govern much of the latitude for servicers around
foreclosures versus short sales and modifications. The investors and
rules include HAMP, Fannie Mae, Freddie Mac, FHA, Veterans
Administration (VA) and private securitization trusts. Often the most
flexibility exists when a bank/servicer owns the loan in full on their
balance sheet. These differences help explain the confusion in
understanding the dual track issue.
Our servicer members generally follow a few clear practices on the
dual track process:
1. They notify the borrower that a dual track process exists and how
it works with the continuation of the foreclosure proceedings,
including the continued delivery of statutorily required
notices, but that no foreclosure sale will occur if the
borrower is still being considered for a modification or is
making payments under a trial modification;
2. The servicer attempts to come to an agreement with the borrower
on a loan modification or other alternative to foreclosure for
which the borrower might be eligible while the processes
necessary to continue to the foreclosure sale continue;
3. If a modification is agreed upon and payments have been made to
convert the trial modification to a permanent modification no
further foreclosure notices will be sent; and
4. If no agreement for a modification can be reached, and trigger
dates arise after which time the foreclosure sale must proceed,
the servicer pauses and ensures by a separate review of the
loan file that all viable options to foreclosure have been
explored before notifying the foreclosure attorney to continue
with the sale.
Multiple Efforts on Servicing Standards
In evaluating the need for uniform national servicing standards, it
is important to understand the wide variety of rules and initiatives
already in progress that servicers are attempting to understand and
implement as they develop and utilize a single point of contact and
address dual track processing issues. These are some of the current
initiatives by Federal and State governments and the GSEs to set
servicing standards, many of which have or will set single point of
contact and dual track processing rules:
The OCC consent orders of April, 2011, differ from
institution to institution but all require specific practices
relative to establishing and maintaining a single point of
contact and safeguards and disclosure requirements when
engaging in a dual track process with a delinquent homeowner.
The Fannie Mae Servicer Guidelines describe a single point
of contact as a Quality Right Party Contact (QRPC). The
guidelines say that Fannie Mae will establish benchmarks to
measure and monitor effective QRPC, and that it promotes single
point of contact which supports those servicers who have or
will implement single point of contact processes for the
purpose of achieving contact continuity throughout the
delinquency process.
The Fannie Mae Guidelines also cover elements of dual track
processing in a number of ways but do not specifically use that
term. The guidelines establish uniform disclosure requirements
for borrowers, including notices about the evaluation process
and time line, explanation of the foreclosure process, and
instances where foreclosure shall not be halted, as well as
uniform content and timing requirements for solicitation during
the foreclosure process.
The Freddie Mac Servicer Guidelines also use the term QRPC,
and is defined by a contact that occurs when a servicer
identifies and discusses with a borrower, coborrower, or
trusted advisor such as a housing counselor, the most
appropriate options for delinquency resolution, and makes every
attempt to achieve quality right party contact by establishing
rapport with the borrower, expressing empathy with the borrower
and a desire to help, determining the reason for the
delinquency and whether it is temporary or permanent,
determining whether the borrower has vacated the property or
plans to do so, setting payment expectations and educating the
borrower on the availability of foreclosure alternative
solutions, and obtaining a commitment from the borrower to
either resolve the delinquency through traditional methods
(paying the total delinquent amount) or engage in a foreclosure
alternative solution. It has similar, but not the same,
guidance to that of Fannie Mae with respect to benchmarks for
measuring effective QRPC and contact continuity.
Freddie Mac language with respect to dual track is again
similar but not identical to that of Fannie Mae.
Treasury's Home Affordable Modification Program (HAMP)
requires that each servicer must develop and implement a policy
that identifies experience and training requirements for the
relationship manager position and the appropriate caseload
levels to ensure that relationship managers can successfully
fulfill all specified requirements.
Various States have servicing requirements which vary
considerably from State to State. In the area of mediation, for
example, some States may include opt in for mediation, and
others may require opt out for mediation and the variations may
not be clear on how many meetings are required for servicers
send borrowers to meet face to face. Some States are silent on
mediation.
States' Attorneys Generals are in discussions with the top
five servicers and while the content of their discussions
remains confidential, it is very possible that they will have a
broad list of required servicing requirements, including those
relating to single point of contact and parallel tracks.
Individual private investors require different servicing
rules for various pools of securities. For servicers signed up
with Making Home Affordable, some of that is mitigated but not
all.
The Board of Governors of the Federal Reserve System and
other Federal banking regulators have called for uniform
national servicing standards and many of those regulators are
now in discussions to create new standards.
The Consumer Financial Protection Agency (CFPB) has
indicated they will work on servicing standards early on as
they begin to stand up the agency.
The proposed risk retention rule under Dodd Frank Act--
specifically the Qualified Residential Mortgage (QRM)
definition--includes servicing requirements. While these do not
specifically refer to single point of contact, they do require
rules in place in the contracts themselves which mandate
default mitigation policies without regard to whether
foreclosure proceedings are underway, therefore raising
questions about dual track processing.
The Federal Housing Finance Agency (FHFA), Fannie Mae and
HUD unveiled an initiative on compensation of servicers, which
will address a wide variety of servicing requirements,
including different payments for noncurrent borrowers than the
payments for current borrowers, and could conceivably address
both dual track processing and single point of contact. This
effort is in progress and adds to the changing landscape.
There are other servicing features that also differ from program to
program. For example, as recently as July 25th, 2011, Treasury issued a
Supplemental Directive 11-07 that expanded the minimum period of
forbearance for unemployed borrowers under HAMP to 12 months from 3
months. That is consistent with the new policy issued by FHA, but is
inconsistent with the policy followed by Fannie Mae and Freddie Mac and
the VA.
Servicers faced with this daunting list find that they must
frequently change the way they do business. That includes, not only
changes in systems, but changes in training and educating staff
throughout the organization. One solution, to which many servicers are
attracted, is the establishment of a single uniform set of servicing
standards which all State and Federal entities must accept, and which
would establish the parameters for the GSEs, FHA and private investors.
We believe that the efforts by various entities currently underway
are already moving in the direction of national standards for
servicing. We recommend that there be coordination to ensure the
definitions and policies set by different regulators, enforcement
agencies and investors align with one another. If these efforts are
given a certain amount of time to be put in place and reviewed, then
major progress toward national standards will be achieved. To ensure
that all these initiatives on servicing standards achieve their
intended goal, we would suggest that the Administration convene a
summit with all necessary partners from the industry, the Government,
nonprofit agencies, and other concerned entities to review the new
standards underway, evaluate them, and determine what should be
included in a uniform national standard.
Uniform national servicing standards can help improve the customer
experience as well as give servicers clarity on a single definition of
the standards expected. We appreciate the difficulties in reaching
agreement on servicing standards because the servicing process for
delinquent loans is complex; there are multiple initiatives at the
Federal and State levels on standards, and servicers are have programs
already underway to improve assistance to customers.
Now is the time to coordinate and align the servicing standard
initiative and make them work for all parties. This will help rebuild
confidence in our housing finance system and assist in the recovery of
the market. The home mortgage is the most important investment in the
lives of most consumers, and it is essential that we ``get right'' the
process for communicating to the customer whenever there is a change
affecting their ability to meet their loan payment.
What Has Changed From 2007 to 2011?
Since the housing crisis began in 2007, there have been tremendous
changes in the challenges facing homeowners; programs created to
address the crisis; and the process for servicing loans. It is
important to keep all of these events and factors in mind as we
evaluate how to implement uniform servicing standards.
Subprime Crisis: When the crisis began in 2007, most of the early
foreclosure prevention efforts focused on repayment plans, and some
modifications, which entailed capitalizing missed payments (arrearages)
and re-setting the mortgage. The HOPE NOW data indicates that in July
2007, there were 17,000 modifications completed. The primary focus was
in the subprime products; the hybrid ARMs and option ARMs which were
defaulting in record numbers, many prior to the ARM reset. In 2007, The
Treasury Department and the Department of Housing (HUD) reached out to
industry and asked them to increase and expand collaboration with
nonprofits to reach more borrowers and help them avoid foreclosures
wherever possible.
Through HOPE NOW, more servicers set up toll-free numbers for
housing counselors. HOPE NOW servicers produced servicing guidelines to
improve the loss mitigation process, and worked with third parties to
reach homeowners who were not responding to contact from servicers. The
housing crisis deepened with the recession and we saw more widespread
defaults happening across loan portfolios--economic problems spread
defaults to borrowers with prime, fixed-rate loans. Servicers continued
to be proactive working with housing counselors and third parties,
while hiring and expanding activity around foreclosure prevention
efforts.
In 2007, there was few Government resources focused directly on
foreclosure prevention. Mortgage servicers and others worked
individually and then pulled together through HOPE NOW to meet the
challenge, progress was made but the growth of the housing crisis
outweighed the response.
Additionally, since 2008, the Government has taken on a broader
role to address the crisis. The Government created programs to deal
with several problem areas: refinances, unemployment assistance,
modification, short sale and deed in lieu, and mediation (at the State
level). Some of these programs are more successful than others and it
is difficult to measure the full impact of the programs. However, a
combination of factors has led to record longer foreclosure time lines
as measured in 2010. The average loan in delinquency that went to
foreclosure in 2010 exceeded 500 plus days, up from 300 days in 2008,
according to a Lender Processing Services (LPS) report in early 2011.
The following programs have been implemented by the Government to deal
with the housing crisis:
1. FHA HOPE for Homeowners was an attempt to assist homeowners who
might qualify to refinance to an FHA-insured loan with the
participation of servicers and investors willing to write-down the
existing loan. It also required the homeowner to share possible future
appreciation of the property with the Government. There were few loans
produced through the program in part because of its complexity.
Originators and servicers have not been easy to match up with regard to
refinancing higher risk loans and expanding short payoffs.
2. Home Affordable Refinance Program (HARP) is the refinance portion of
the MHA program offered by the Fannie Mae and Freddie Mac. It is a
first lien refinance program targeted to loans at 80 percent LTV up to
125 percent LTV. Essentially, it targeted borrowers who were current on
their loan, but at-risk to become delinquent. From April 2009 through
November 2010, FHFA reports 623,000 homeowners refinanced into this
program. This is creative and an opportunity to continue reaching
borrowers who could not otherwise refinance and may become future
foreclosure candidates.
3. Making Home Affordable: HAFA--A short sale and deed in lieu program
that focuses on a detailed process for the complicated nature of a
``short sale'' and deed in lieu product. The effort has key time lines,
document and process requirements that need to be followed and extends
the time line for loans for up to 120 days. It includes forgiveness of
the deficiency when a borrower sells a property short of value and it
offers clarity, accountability and clear expectations of what is
required for realtors, servicers, and other stakeholders. Junior lien
holders often require more dollars than HAFA supports. Recent
adjustments to the program offered by Treasury suggest that this
program may be used more in the future because of adjustments made to
the requirements to prove hardship or stick to 31 percent DTI
thresholds.
4. Making Home Affordable: HAMP--This is the loan modification program
that was rolled out in response to the growing stress in the housing
market. The crisis was deepening. By intervening with a loan
modification that was subsidized by the Government, it was a change
from the previous attempts to modify loans, and was an important step
toward creating market standards.
Standards: Despite criticism for falling short of projected
numbers for permanent modifications, HAMP helped create
standards that improved methods and transparency on how to
achieve affordable and sustainable loan modifications.
Increasing Homeowner Awareness: When the United States
Government offers a potential solution to the loan modification
process, the public listens. The awareness created by the HAMP
program helped engage millions of at-risk homeowners in efforts
to preserve their home and avoid foreclosure. The existence of
the HAMP program helps attract borrowers to seek help. It is
still a very valuable way for borrowers to get in the system,
even if they do not qualify for a HAMP modification.
First line of defense for homeowners: The HAMP program
structure requires participating servicers to first review the
borrower for HAMP eligibility prior to placing them into
alternative modifications. Even if they do not ultimately
qualify, borrowers are first assessed for eligibility for HAMP
and then must be considered for other loan modifications or
other workouts.
Safe Harbor: HAMP created an industry ``safe harbor'' for
modifying loans. Due to conflicting investor contracts, prior
to HAMP it was difficult to identify a consistent ``industry
standard.'' HAMP helped create these standards and common
practices The creation of tools to use in an evaluation
''waterfall'' and use of a Net Present Value test has
transcended HAMP and is a model for servicers to use for
proprietary modifications. This may transcend HAMP for other
modifications as the process and a net present value test
provide an ``industry standard.''
Structure created: Through Making Home Affordable,
Government HAMP modifications introduced clear guidance for the
HAMP waterfall, including guidance for working with unemployed
or underemployed borrowers--one of the most difficult
situations. The protocols on structuring an affordable payment
for borrowers include:
Forbearance (3-6 months, recently updated for HAMP and
FHA loans to 12 months) for unemployed borrowers;
31 percent housing DTI split by investors and Government
dollars from 38 percent;
Use of lower interest rate to 2 percent, extended terms
to 40 years, and principal deferral and/or principal write-
down;
If ineligible, servicers must review for proprietary
solutions (GSE, other), and if ineligible for that option;
Servicers must consider HAFA (Home Affordable Foreclosure
Alternatives short sale and deed in lieu) or proprietary
programs;
In many instances, foreclosure prevention will then state
mediation requirement to review all solutions outside of
foreclosure; and
Foreclosure sale as the final option.
Confusion and expanded time lines were the result of this
early execution: Average foreclosure time lines since in 2008,
2009, and 2010 are as follows (according to data from LPS):
January 2008--300 days
January 2009--350 days
January 2010--450 days
September 2010--500 days
May 2011--590 days
5. Treasury: Hardest Hit Funds: Treasury has also expanded foreclosure
prevention programs by creating a Hardest Hit Fund. The Hardest Hit
Fund distributed $7.5 billion dollars to 18 States and the District of
Columbia and directed them to set up their own programs to assist
unemployed and other at-risk homeowners in the hardest-hit housing
markets. When a borrower is unemployed, it is difficult to qualify for
a loan modification due to lack of income. State housing finance
agencies develop the waterfall for approving borrowers for various
means of assistance, including unemployment assistance, principle write
down, and combined funds that may compliment a HAMP modification.
This deployment of dollars should be helpful to assist some homeowners
in particularly distressed States where there are few other solutions.
However, the States, Treasury, counselors, and State housing finance
agencies must continue to work with industry to achieve some uniformity
to ensure servicers can implement the many variations of programs in
the different States. To help share information and increase the
ability to execute on these programs, HOPE NOW has played a role in
convening the stakeholders to discuss implementation issues. As a
reminder, loan servicers need uniform standards and guidelines wherever
possible for efficient execution. Each time a program is introduced,
the more aligned it is with similar programs in various States with
uniform automation, the more successful that new program will be.
6. State Mediation Programs: HOPE NOW has focused on the mediation
issue as a high priority issue and convened States and the Federal
Government to find common ground on what constitutes success. Mediation
is a powerful tool that may be even more effective with a common
definition of success with rules to get there (including early
engagement with the borrower). There are now approximately 26 States
that offer some kind of opt-in or opt-out mediation for homeowners. The
physical presence of a third party is valuable for this final attempt
to bring parties together to prevent a foreclosure. When appropriate
mediation is a viable option, however, there is not enough data on
mediation programs to make a clear judgment around the best mediation
process. For instance, an author for the Sun Sentinel newspaper
recently reported that Broward County, Florida examined 326 cases via
mediation in December 2010 and 17 percent resulted in written
settlements that avoided foreclosure. It is important we study
mediation efforts going forward and wisely use our limited funds and
human capital to make these most effective nationwide, and maximize
assistance to qualified homeowners.
There is a movement among the other 24 States to incorporate mediation
as another means to prevent foreclosures. In doing so, we believe
certain risk parameters must first be addressed. By nature, mediation
hearings delay the foreclosure process. And the intent is to ensure the
borrower understands the options available to prevent foreclosure. We
know from experience, sometimes borrowers in financial distress do not
answer phones, open mail, and respond to more formal meeting requests
such as State mandated mediation. Our goal over the coming months is to
work with the stakeholders on mediation to come up with a set of
recommendations that make sense for all parties, most importantly the
homeowner at risk of foreclosure.
HOPE NOW stands ready to support all efforts to bring homeowners into
the system to review options to avoid foreclosure. However, we believe
that mediation can be streamlined with more effective processes so that
all parties participating have aligned expectations.
Conclusion
HOPE NOW member companies and organizations support the improvement
of the customer experience in mortgage servicing, and have been
actively attempting to make the system work better for customers as
they wrestle with an unprecedented number of delinquent loans. To
evaluate the multiple servicing initiatives and rules now under way,
the Administration should consider gathering all interested parties
together to review the current servicing standard initiatives to ensure
the definitions and policies agreed to by regulators, enforcement
agencies and investors are consistent and to determine if a single
uniform set of standards can be identified and established.
Improving customer communication; reducing confusion and
conflicting directives for servicers will improve the mortgage
servicing system. The home mortgage is the most important investment in
the lives of most consumers, and it is essential that we have a sound
servicing system in place to get through the current crisis and set the
appropriate course for the future. The industry nonprofit partners and
servicer members are committed to working to improve mortgage servicing
for consumers.
PREPARED STATEMENT OF ROBERT M. COUCH
Counsel, Bradley Arant Boult Cummings, LLP
August 2, 2011
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee: My name is Rob Couch, and I am attorney with Bradley Arant
Boult Cummings, a law firm based in Birmingham, Alabama. Prior to
joining the firm, I served as General Counsel of the United States
Department of Housing and Urban Development from June 2007 to November
2008 and Acting General Counsel from December 2006 to June 2007. Before
joining HUD, I served as president of the Government National Mortgage
Association (Ginnie Mae). Prior to my Government service, I was the CEO
of New South Federal Savings Bank, then the largest thrift in Alabama
and one of the most active residential mortgage lenders in the South. I
have also served as Chairman of the Mortgage Bankers Association of
America and as President of the Alabama Mortgage Bankers Association.
Thank you for inviting me to testify today about the ongoing debate
regarding national mortgage servicing standards.
Despite my years of involvement within the mortgage and financial
services industries, perhaps the most profound lesson about mortgage
banking that I ever learned occurred when I signed a mortgage of my own
several years ago. It was about 15 pages long. Right before I signed
it, the closing agent looked at me and said, ``Do you know what this
document means, Rob?'' ``I think so,'' I replied. His response will
remain with me forever: ``If you pay, you stay. If you don't, you
won't.'' While this summation may seem unduly harsh to some, it
provides the essence of the subject of this hearing.
We are all painfully aware of the deficiencies in the mortgage
process that came to light in the throes of the recent financial
crisis. I believe that we are all in agreement about the need to go
forward addressing these issues and focusing on the actual harm that
they caused. We, of course, must also balance everything against the
long-term impact that the unintended consequences of our actions will
have on homeowners and the housing market. It is my hope that my
testimony will illuminate the important issues of market certainty and
fundamental fairness in a way that will encourage this Committee and
the Congress to consider these principles and take a balanced approach
as it proceeds with its important efforts.
Although there are multiple proposals to make changes to mortgage
servicing standards, I think that it is important to recognize that
historically, the process has worked just as it was supposed to. In the
debate over how to prevent mistakes in the future, there is a tendency
to overlook the basics. At the risk of oversimplifying, it is worth a
couple of minutes to review how the system is supposed to work.
When an individual decides to borrow money to buy or refinance a
home, she provides information to the bank that has the money and the
bank makes the decision to lend based on the likelihood that the
borrower will repay the money along with a fair market interest rate.
At closing, the borrower receives the money and signs a note promising
to pay the money back along with interest. She also signs a mortgage
stating that, as collateral for the loan, the home itself is subject to
being foreclosed upon if the borrower goes into default. This process
provides certainty to both the borrower and the lender, which is vital
to the markets. The borrower's promise to pay and the document that
lays out the security is then saleable to investors. These investments
have historically been attractive to pension plan managers and other
long-term investors because pension plan participants and other
beneficiaries of investments in mortgages have long-term horizons and
30-year mortgages provide just that.
While the intention behind setting national mortgage servicing
standards is certainly laudable, such standards create unintended
consequences that Congress should consider through the lens of
certainty and fairness.
I. Certainity
Much of the recent criticism of the mortgage industry is warranted.
Recently, we have witnessed sloppiness and abuse of process by some
lenders and servicers. Borrowers who have actually been harmed by any
malfeasance should unquestionably be fully compensated as required by
law. While national mortgage servicing standards may well address these
mistakes, they can also potentially cause uncertainty to creep into the
markets and devastate investment, which will ultimately be felt by
homeowners. Efforts to slow down foreclosures have created a huge
backlog that has become known as the ``foreclosure overhang.'' This
backlog has further depressed real estate markets that are still
reeling from the recent recession.
Today, over 90 percent of all new mortgages have direct guarantees
from the Federal Government. Such direct involvement is necessary to
overcome the markets' uncertainty of investment in mortgages. Ongoing,
heavy Government involvement, however, is not sustainable over the long
run. For private capital to return, certainty must exist.
To illustrate my point, over the past 3 years, only two private
label securities, backed by mortgages, have come to market. They were
worth approximately $500 million. \1\ In 2006, by comparison, multiple
private label securities worth over $700 billion were issued backed by
mortgages. \2\ The lack of private money in the marketplace is in a
large part due to uncertainty and any national mortgage servicing
standards must take that uncertainty into consideration and
sufficiently address it.
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\1\ Mark Fogarty, ``Trouble Ahead'', National Mortgage News, Mar.
10, 2011.
\2\ The Board of Governors of the Federal Reserve System, Report
to Congress on Risk Retention, Oct. 2010.
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Much of this uncertainty in the market is attributable to
uncertainty in the foreclosure arena, the execution of the second half
of my closing agent's simple principle: ``if you don't, you won't.''
Investors, many of whom are retirees, watch the value of their
mortgage-backed investments fall as well-intended efforts to be
compassionate to struggling borrowers proliferate. These efforts take
many forms, including loan modifications extending or reducing interest
rates on loans, reduction of the principal amount owed, or indefinite
postponement of foreclosure rights. All of these proposals may change
the terms of the contract the investor purchased and contribute to the
uncertainty surrounding the mortgage marketplace.
II. Fairness
The national average of the amount of time between delinquency and
foreclosure is 400 days. \3\ Put another way, on average, a person who
cannot or will not pay their home mortgage stays in his or her home
rent-free for an average of 400 days before possession of the home is
transferred to the owner of the debt. In some States, this figure is
much higher. In New York and New Jersey, it is taking an average of 900
days--almost two-and-a-half years--to move a loan from default to
foreclosure. In Florida, the average foreclosure time line is about 680
days. \4\ Many of the provisions under debate in negotiations on
nationwide standards, such as principal write-downs, are well-intended
efforts to provide relief to borrowers who do not pay. Any national
mortgage servicing standards, however, must also address the
marketplace and equally important, the people who do pay.
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\3\ Jon Prior, ``Delays Push Foreclosures to 40-Month Low in
April'', Housing Wire, May 11, 2011.
\4\ Id.
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The vast majority of people being foreclosed upon are not legally
damaged or suffering demonstrated harm. As an aside, this fact
demonstrates one of the major flaws with the proposed settlement by
State attorneys general as reported in the press because they propose
to collect money from servicers without basing the collection on
demonstrated harm. \5\ Individuals who have been harmed during the
foreclosure process already have avenues to pursue their legal rights
and obtain damages due to them. Fact-based determinations in a court of
law, however, are far better and ultimately provide more protection
than simply requiring servicers to contribute money to a fund.
---------------------------------------------------------------------------
\5\ Kerri Panchuk, ``Congress Wants CFPB To Come Clean on Mortgage
Servicing Settlement'', Housing Wire, Jul. 14, 2011.
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Most of the servicing standard proposals, however, do not consider
the majority of hardworking Americans who do pay their mortgages every
month. National servicing standards that do not address the marketplace
or the people who are not in default subject those people to the
``foreclosure overhang.'' Requiring lenders to reduce mortgage balances
increases costs that will ultimately be borne by all borrowers.
Mortgage write-downs also remove incentives for banks to lend money and
for investors to purchase mortgages, denying people access to credit
needed to purchase or refinance homes and negatively impacting an
already devastated housing market. In sum, an efficient foreclosure
process is necessary to clear local markets, facilitate economic
recovery, and protect the borrowers who are not in default.
III. Adequacy of State Law
Finally, Congress should be mindful that policies and procedures
relating to the foreclosure process historically have resided within
the province of State laws dealing with foreclosure processes and
consumer protection. Each State has adopted procedures spelling out how
the foreclosure process should be conducted and what protections should
be afforded to borrowers. These procedures have worked very well for
many years. Federal and State regulators should be slow to override
State law sovereignty by effectively making mortgage servicers subject
to new rules without a legislative mandate. Moreover, in most cases,
remedies under State laws, regulations and requirements already exist
for a majority of the perceived problems within the mortgage industry
and any national servicing standard should consider the existence and
adequacy of existing rules so that borrowers who suffer actual harm may
avail themselves of compensation already afforded by State law.
Thank you again for holding this important hearing and for sharing
everyone's commitment to certainty and fairness as we continue to pave
the road to our Nation's economic recovery together. I urge you to be
deliberate and balanced in your approach to these important issues and
be mindful of the unintended consequences of your actions. I look
forward to answering your questions.
______
PREPARED STATEMENT OF PETER P. SWIRE
C. William O'Neill Professor of Law, Moritz College of Law of the Ohio
State University
August 2, 2011
Chairman Johnson, Ranking Member Shelby, and other distinguished
Members of the Committee, thank you for inviting me to participate in
this hearing on national mortgage servicing standards. As staff is
aware, I had previously committed to speak at an event in Oregon today,
and I thank the Committee and its staff for the extraordinary
flexibility of having me testify online today, over Skype. In addition
to my work on housing and finance issues, my other main area of
research is in technology and the Internet. I believe that using online
technologies in this way can help open up Congress and our political
process to effective participation by an ever-greater portion of the
American people.
My testimony today will draw on two previously published items,
which are attached to the testimony. The first is a report called
``What the Fair Credit Reporting Act Should Teach Us About Mortgage
Servicing,'' which was published by the Center for American Progress in
January, 2011. \1\ The second is an article in the Los Angeles Times
from March 6, 2011, which described some of my personal experiences as
a homeowner with the mortgage servicing industry. \2\ In 2006 and 2007
my servicer, Washington Mutual, repeatedly purchased duplicate flood
insurance for my house in Bethesda. After dozens of calls, and the
erroneous imposition of numerous late fees, I was eventually able to
resolve this problem with WaMu without paying such fees. I have also
attached a time line of the dispute that I sent to WaMu in 2007.
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\1\ http://www.americanprogress.org/issues/2011/01/
fcra_mortgage_servicing.html
\2\ Lew Sichelman, ``Mortgage Servicing Errors Highlight Need for
Change'', L.A. Times, March 6, 2011, available at http://
articles.latimes.com/2011/mar/06/business/la-fi-lew-20110306.
---------------------------------------------------------------------------
Background of the Witness
I am now C. William O'Neill Professor of Law at the Moritz College
of Law of the Ohio State University, and Senior Fellow at the Center
for American Progress. From July, 2009 through August, 2010 I served as
Special Assistant to the President for Economic Policy, serving under
Lawrence Summers in the National Economic Council. At the NEC, my
biggest task was to coordinate the interagency process for housing and
housing finance issues. In this role, I worked extensively on mortgage
servicing issues, including the Home Affordable Mortgage Program
(HAMP), and servicing and other issues affecting the Federal Housing
Administration, Government sponsored enterprises (GSEs), and possible
reform of the GSEs. In this role, I met on a number of occasions with
mortgage servicing executives, as well as a wide variety of other
stakeholders concerned about the mortgage servicing process.
Before and after my NEC service, I have worked on a range of other
policy issues. My work is likely best known in the privacy area. I
served as Chief Counselor for Privacy in the Office of Management and
Budget under President Clinton, and I testified on the Fair Credit
Reporting Act before the Housing Financial Services Committee in 2003.
What the Fair Credit Reporting Act Should Teach Us About Mortgage
Servicing
My report on the Fair Credit Reporting Act (FCRA) makes a simple
point. The sorts of market failures that led to the creation of the
FCRA in 1970 also exist for mortgage servicers. The single most
important fact is that the consumers--the homeowners--are not the
clients. The clients for the credit reporting agencies are the
companies that pay for the credit reports, such as lenders or
employers. The clients for the mortgage servicers are the companies
that invest in mortgages. Mortgage servicers owe their legal duties and
market loyalties to the investors, not the homeowners.
This testimony will not repeat the report's discussion of the
history of mortgage servicing and all of the policy analysis. Instead,
it is important to understand that consumers have no market or legal
checks on the servicers. The homeowner doesn't choose the servicer--
that choice is made by the company originating the loan or by a
subsequent owner of the mortgage. If the homeowner has a bad experience
with the servicer--as so many consumers have--the homeowner can't even
quit. Even if the homeowner refinances the loan, concentration in the
servicing market means the homeowner quite possibly will get the same
servicer the next time.
Homeowners not only lack any market choice, but they currently lack
legal remedies if the servicer performs badly. That is the reason that
national standards for mortgage servicing are so important. Where there
are no market forces to protect consumers, then something else must
fill the gap. An effective set of consumer rights could be embodied in
national mortgage servicing standards. I hope that that will happen.
Dispute on My Mortgage With Washington Mutual's Servicing Arm in 2006-
2007
To prepare for this testimony, I have reviewed the files from my
dispute with Washington Mutual in 2006 and 2007 about flood insurance
on my family's home on a hill in Bethesda. This dispute was the subject
of the Los Angeles Times article by Mr. Sichelman in March.
I am sorry to report that I stated some details incorrectly to Mr.
Sichelman when I did the interview with him for the story. The
interview began as a discussion about the FCRA and mortgage servicing
policy, and so I did not review the file before speaking with him.
Specifically, my family did have flood insurance on the house from the
time we bought it in 2002. The house is within a couple of hundred
yards of the top of a large hill in Bethesda, it has never flooded to
my knowledge since it was built in the 1960s, and I personally did not
believe it needed flood insurance. Upon review of the file, however, I
learned that we had prudently kept flood insurance in effect from the
time we bought the house and throughout the dispute with WaMu.
I provide that detail because the file vividly shows the cascade of
mistakes that the servicing company made, despite several dozen calls
by me to the company and detailed documentation. The basic problem,
beginning in early 2006, was that WaMu bought ``force placed
insurance''--duplicate flood insurance on my house despite the fact
that State Farm repeatedly sent them proof of coverage. In numerous
instances, WaMu would impose a ``late fee'' on my family. We had
automatic payment each month for our mortgage payment, and so we were
never late on any payment. The WaMu practice, however, was to charge us
for flood insurance without telling us, and then declare us ``late''
for the entire monthly mortgage payment. The next month would also be
``late,'' and subject to additional fees, because of the second month's
duplicate flood insurance fee.
In May, 2007, I informed WaMu that I would contact regulators and
the Congress if they did not resolve the problem. My letter to WaMu
said:
The amount of time it is taking for me to resolve this matter
resembles a major piece of litigation. I feel very sorry for
the other customers who get caught in this cycle of uninformed
debt collectors, automatic threatening letters of no insurance,
lost faxes by WaMu, an apparent policy of ignoring many proofs
of insurance coverage, systems that suppress notes saying a
customer will not be subject to collection calls and late fees,
large late fees due to no fault of the customer, and so on.
This letter led to a phone response that made me believe that the
problem was resolved. Soon, however, the problems began again, and it
was not until October, 2007, that the matter was finally resolved.
In conclusion, I have taught both banking law and consumer
protection, and I feel fortunate that I could advocate for myself and
avoid the thousands of dollars of fees that the servicer erroneously
sought to impose on my family. Most homeowners, however, are not
banking law professors. Before the financial crisis of 2008, my
experience with WaMu sensitized me to the flaws in our current mortgage
servicing system. My experience in Government and since has taught me
there are numerous hard-working and talented individuals in the
mortgage servicing industry. The incentives, however, do not work for
consumers. In the absence of market discipline on servicers, an
effective national set of mortgage standards is essential.
I thank the Committee for its attention to these important matters,
and I welcome any questions you may have.