[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]


 
                     CONGRESSIONAL OVERSIGHT PANEL 

                         MARCH OVERSIGHT REPORT 

                               ----------                              

                          FORECLOSURE CRISIS:
                       WORKING TOWARD A SOLUTION

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                 March 6, 2009.--Ordered to be printed

Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 
             Stabilization Act of 2008, Pub. L. No. 110-343























          CONGRESSIONAL OVERSIGHT PANEL MARCH OVERSIGHT REPORT

















                     CONGRESSIONAL OVERSIGHT PANEL

                         MARCH OVERSIGHT REPORT

                               __________

                          FORECLOSURE CRISIS:
                       WORKING TOWARD A SOLUTION

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                 March 6, 2009.--Ordered to be printed

Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 
             Stabilization Act of 2008, Pub. L. No. 110-343

                               ----------
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                            C O N T E N T S

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                                                                   Page
Executive Summary................................................     1
Section One: The Foreclosure Crisis: Working Toward a Solution...     5
    Introduction: The Need for a Comprehensive Foreclosure Plan..     5
    I. The Foreclosure Crisis....................................     6
    II. Inadequate Mortgage Market Data Limits Sound Policy 
      Decisions..................................................    10
    III. Obstacles to Loan Success and Foreclosure Mitigation: 
      Past Programs..............................................    15
    IV. Checklist for Successful Loan Modifications..............    46
    V. Policy Issues.............................................    50
    VI. The Homeowner Affordability and Stability Plan...........    61
Section Two: Additional Views....................................    69
    I. Rep. Jeb Hensarling.......................................    69
    II. Richard Neiman, Damon Silvers and Elizabeth Warren.......    81
Section Three: Correspondence with Treasury Update...............    84
Section Four: TARP Updates Since Prior Report....................    85
Section Five: Oversight Activities...............................    88
Section Six: About the Congressional Oversight Panel.............    89
Appendices:
Appendix I: Letter from Congressional Oversight Panel Chair 
  Elizabeth Warren to Treasury Secretary Mr. Timothy Geithner, 
  dated January 28, 2009.........................................    90
Appendix II: Letter from Treasury Secretary Mr. Timothy Geithner 
  to Congressional Oversight Panel Chair Elizabeth Warren, dated 
  February 23, 2009..............................................    92
Appendix III: Letter from Congressional Oversight Panel Chair 
  Elizabeth Warren to Treasury Secretary Mr. Timothy Geithner, 
  dated March 5, 2009............................................   115
Appendix IV: Mortgage Survey Letter from Congressional Oversight 
  Panel Chair Elizabeth Warren to Treasury Secretary Mr. Timothy 
  Geithner, Dated February 4, 2009...............................   117
Appendix V: Mortgage Survey from Congressional Oversight Panel to 
  numerous recipients............................................   119
Appendix VI: Mortgage Survey Data from the Office of the 
  Comptroller of the Currency and the Office of Thrift 
  Supervision....................................................   127
Appendix VII: Mortgage Survey Data from the Federal Deposit 
  Insurance Corporation..........................................   161

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

                         MARCH OVERSIGHT REPORT

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                 March 6, 2009.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

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    * This report was adopted by a 4-1 vote on March 5, 2009. Rep. Jeb 
Hensarling voted against this report.
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    For as long as there have been mortgages, there have been 
foreclosures. The reasons are well documented. Job losses, 
medical problems, and family breakups can leave families 
strapped for cash, unable to meet their monthly payments.
    Foreclosures have now skyrocketed to three times their 
historic rates. But the causes of this foreclosure crisis are 
very different than the foreclosures of the past. Since the 
late 1990s, mortgage lending, once considered the safest of all 
investments because of the well-researched decision-making that 
carefully documented the ability of a borrower to repay, 
morphed into an assembly-line business that looked nothing like 
mortgages of the past. This new approach to mortgage lending 
included steering high-priced mortgages to people who may have 
qualified for lower-priced fixed rate mortgages and aggressive 
marketing of high-risk loans to people whose incomes made it 
clear that they could not possibly repay over the life of the 
loan. In effect, such mortgages could be repaid only if the 
housing market continued to inflate at historic rates and 
borrowers could endlessly refinance their loans. After dizzying 
price increases in many parts of the country, housing prices 
flattened, refinancing became impossible, and the bubble burst.
    Now millions of Americans find themselves unable to meet 
their monthly mortgage payments. Millions more people who can 
make their payments now recognize that they owe far more than 
their houses are likely to be worth for many years, and some 
are walking away. Over the next few years, an estimated one in 
every nine homeowners is likely to be in foreclosure, and one 
in five will likely have a mortgage that is higher than their 
house is worth, making default a financially rational 
alternative.
    Mortgage foreclosures pose a special problem. Millions of 
people could make market-rate payments on 30-year fixed 
mortgages for 100 percent of the current market value of their 
homes. But these can-pay families are driven into foreclosure 
because they cannot pay according to the terms of the higher-
priced mortgages they now hold, and refinancing options are 
limited or nonexistent. After accounting for the costs of 
foreclosure and the lower prices foreclosure auctions bring, 
the lenders will lose an average of $60,000 per foreclosure and 
recover far less than the market value of the homes. 
Foreclosure for can-pay families destroys value both for the 
family forced out of its home and for the investor who will be 
forced to take a larger loss.
    For decades, lenders in this circumstance could negotiate 
with can-pay borrowers to maximize the value of the loan for 
the lender (100 percent of the market value) and for the 
homeowner (a sustainable mortgage that lets the family stay in 
the home). Because the lender held the mortgage and bore all 
the loss if the family couldn't pay, it had every incentive to 
work something out if a repayment was possible.
    But the mortgage market has changed. A series of 
impediments now block the negotiations that would bring 
together can-pay homeowners with the investors who hold their 
mortgages. In this report we identify those impediments. These 
are structural problems, created as the mortgage business 
shifted. They include fallout from securitizing mortgages, the 
arrangements with mortgages servicers that encourage 
foreclosures over modifications, and severe understaffing of 
workout departments. Because of these impediments, foreclosures 
that injure both the investor and the homeowner continue to 
mount.
    Like the crisis in the banking system, the foreclosure 
problem has grown so large that it threatens the entire 
economy. Foreclosures depress housing and commercial real 
estate prices throughout neighborhoods, imposing serious costs 
on third parties. Each of the eighty closest neighbors of a 
foreclosed property can suffer a nearly $5,000 property value 
decline as a result of a single foreclosure. Communities with 
high foreclosure rates suffer increased urban blight and crime 
rates. When families have to relocate, community ties are cut, 
affecting friendships, religious congregations, schooling, 
transportation and medical care. Numerous foreclosures flood 
the market with excess inventory that depress other sale 
prices. Thus, foreclosures can harm other homeowners both by 
encouraging additional foreclosures and by reducing home sale 
prices, while decreased property values hurt local businesses 
and reduce state and local tax revenues.
    To help individual families and to stabilize the economy, 
Congress has pressed Treasury to devise a plan to deal with 
foreclosures.\1\ The Congressional Oversight Panel was 
explicitly instructed to review ``the effectiveness of 
foreclosure mitigation efforts'' undertaken by Treasury under 
the authorization of the Emergency Economic Stabilization 
Act.\2\
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    \1\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. 
No. 110-343, at Sec. 109.
    \2\Id. at Sec. 125(b)(1)(A)(iv).
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    To develop this report, we explored the available data and 
discovered how little is known about the current state of 
mortgage performance across the country. The ability of federal 
banking and housing regulatory agencies to gather and analyze 
this data is hampered by the lack of a nationwide loan 
performance data reporting requirement on the industry. 
Consequently, there is no comprehensive private or government 
source for accurately tracking loan delinquencies and loss 
mitigation efforts, including foreclosures and modifications, 
on a complete, national scale. No federal agency has the 
ability to track delinquencies and loss mitigation efforts for 
more than 60 percent of the market. Existing data are plagued 
by inconsistencies in collection methodologies and reporting, 
and the numbers are often simply unverifiable. Worse still, the 
data that are collected are often not the data needed for 
answering key questions, such as, what are causing mortgage 
defaults and why loan modifications have not been working. The 
United States is now two years into a foreclosure crisis that 
has brought economic collapse, and federal banking and housing 
regulators still know surprisingly little about the number of 
foreclosures, what is driving the foreclosures, and the 
efficacy of mitigation efforts. The Panel endorses a much more 
vigorous plan to collect critical foreclosure data.
    To evaluate plans to deal with foreclosures, we identified 
the main impediments to economically sensible workouts. From 
there, we developed a checklist to evaluate the likely 
effectiveness of any proposal to halt the cascade of mortgage 
foreclosures.

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Checklist for Mortgage Mitigation Program
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Will the plan result in modifications that create affordable monthly
 payments?
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Does the plan deal with negative equity?
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Does the plan address junior mortgages?
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Does the plan overcome obstacles in existing pooling and servicing
 agreements that may prevent modifications?
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Does the plan counteract mortgage servicer incentives not to engage in
 modifications?
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Does the plan provide adequate outreach to homeowners?
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Can the plan be scaled up quickly to deal with millions of mortgages?
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Will the plan have widespread participation by lenders and servicers?
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    On February 18, 2009, President Obama announced the 
Homeowner Affordability and Stability Plan intended to prevent 
unnecessary foreclosures and strengthen affected communities. 
The Plan focuses on payment affordability through an expanded 
refinancing program involving Fannie Mae and Freddie Mac and a 
modification program targeting a wide range of borrowers at 
risk. The Plan also includes financial incentives to encourage 
both lenders and borrowers to strive for sustainable outcomes. 
It also encourages servicers to modify mortgages for at risk 
homeowners before they are delinquent. There are additional 
incentives available to extinguish junior mortgages.
    The Administration estimates that the Plan's expanded 
refinancing opportunities for Fannie Mae and Freddie Mac 
mortgages could assist four to five million responsible 
homeowners, some of whom otherwise would likely have ended up 
in foreclosure.
    While these projections are encouraging, the Panel has 
additional areas of concern that are not addressed in the 
original announcement of the Plan. In particular, the Plan does 
not include a safe harbor for servicers operating under pooling 
and servicing agreements to address the potential litigation 
risk that may be an impediment to voluntary modifications. It 
is also important that the Plan more fully address the 
contributory role of second mortgages in the foreclosure 
process, both as it affects affordability and as it increases 
the amount of negative equity. And while the modification 
aspects of the Plan will be mandatory for banks receiving TARP 
funds going forward, it is unclear how the federal regulators 
will enforce these new standards industry-wide to reach the 
needed level of participation.
    The Plan also supports permitting bankruptcy judges to 
restructure underwater mortgages in certain situations. Such 
statutory changes would expand the impact of the Plan. Without 
the bankruptcy piece, however, the Plan does not deal with 
mortgages that substantially exceed the value of the home, 
which could limit the relief it provides in parts of the 
country that have experienced the greatest price declines.
    The Administration released additional guidelines for the 
Plan on March 4, as this report was prepared for publication. 
The Panel will promptly pursue any outstanding issues with the 
Treasury Department and will keep Congress and the American 
people advised of its ongoing evaluation of the 
Administration's Plan.
    The foreclosure crisis has reached critical proportions. 
The Panel hopes that by identifying the current impediments to 
sensible modifications that we can move toward effective 
mechanisms to halt wealth-destroying foreclosures and put the 
American family--and the American economy--back on a sound 
footing.
     SECTION ONE: THE FORECLOSURE CRISIS: WORKING TOWARD A SOLUTION


      Introduction: The Need for a Comprehensive Foreclosure Plan

    America is in the midst of a home foreclosure catastrophe, 
unprecedented since the Great Depression. The Congressional 
Oversight Panel (``COP'' or the ``Panel'') has been charged 
with reporting to Congress on the state of the crisis, gauging 
the adequacy of existing responses, and evaluating the promise 
of potential responses.\3\ This report is the Panel's first to 
focus on foreclosure mitigation efforts. The Panel's goal in 
this report is not to endorse or propose any particular 
foreclosure mitigation program. Rather, through an examination 
of the causes of the crisis and the impediments to its 
resolution, this report sets forth a framework to analyze the 
problem and a checklist of factors that any successful 
foreclosure mitigation program must address. These factors will 
provide a metric for the Panel's evaluation of the 
Administration's efforts, as well as any other federal, state, 
local or private efforts.
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    \3\ EESA at Sec. 125(b)(iv).
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    The Emergency Economic Stabilization Act of 2008 (the 
``EESA'') aimed to stabilize the economy both through direct 
support of financial institutions and through encouraging 
foreclosure mitigation efforts. These two endeavors are 
intertwined. Foreclosures have exerted downward pressure on 
real estate markets generally. In turn, the falling real estate 
prices have put more pressure on real estate backed assets in 
the financial system and applied pressure on the economy as a 
whole. To date, the Treasury Department's emphasis in 
implementing the EESA has been focused exclusively on 
stabilizing the economy by dealing with financial institutions 
and insurance and auto companies, at the expense of dealing 
with the crisis directly by addressing home mortgage 
foreclosures, an approach suggested by the EESA.\4\ The Panel 
asked Treasury about foreclosure relief in the context of TARP 
in its first report. Treasury responded by referring to several 
existing voluntary programs, which were not actually part of 
TARP. In this report, the Panel will examine in detail the 
reasons that these voluntary programs have proven inadequate to 
address the crisis.
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    \4\ Id. at Sec. Sec. 109-110.
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    The mortgage market, central to both consumer finance and 
the broader American economy, has reached crisis stage. An 
estimated 10 percent of residential homeowners currently face 
foreclosure or have fallen behind on their mortgage payments, a 
number nearly ten times higher than historic foreclosure 
levels.\5\ The effects of the foreclosure crisis ripple through 
the economy, affecting spending, borrowing and solvency for 
households and financial institutions alike. Stabilizing the 
housing market will not solve the economic crisis, but the 
economic crisis cannot be solved without first stabilizing the 
housing market. An effective solution to the foreclosure crisis 
is necessary not only to help homeowners, but also to help fix 
the economy as a whole.
---------------------------------------------------------------------------
    \5\ Vikas Bajaj and Michael Grynbaum, About 1 in 11 Mortgageholders 
Face Problems, New York Times (June 6, 2008). See Section I, infra, for 
a more complete discussion about the size and scale of the current 
foreclosure crisis.
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    Foreclosures generally have both direct and indirect costs 
for borrowers and lenders. Further, the cost of foreclosures 
can spill over from the parties to the transaction to the 
neighborhood, larger community, and even the economy as a whole 
as the foreclosure epidemic drives falling real estate prices. 
When compared with the costs of foreclosure, the cost of loan 
workouts can often provide a more efficient, economically 
rational outcome for both the borrower and the lender, 
generally making foreclosure a lose-lose situation. But the 
rate of loan modifications has not kept pace with the rate of 
foreclosures. In this report, the Panel explores how we arrived 
at this point and why foreclosure often seems to be the default 
option rather than successful, sustainable loan modifications.
    This report proceeds in six parts. Part I provides a 
picture of the foreclosure crisis and its impact on American 
society and the global economy. Part II addresses the need for 
reliable information on mortgage markets as a basis for making 
sound policy judgments and the inadequacies of current mortgage 
market data. Part III examines the obstacles to loan 
performance that have been driving the foreclosure crisis and 
the obstacles to foreclosure mitigation that have inhibited its 
resolution, particularly through a review of past foreclosure 
mitigation programs. Part IV outlines a checklist of specific 
factors for successful future efforts at foreclosure 
mitigation. Part V discusses key policy issues for the future, 
including the moral hazard and distributional issues that are 
raised by foreclosure mitigation efforts. The report concludes 
with a review and assessment of the foreclosure mitigation 
initiative recently announced by the Obama Administration.

                       I. THE FORECLOSURE CRISIS


                 A. A PICTURE OF THE FORECLOSURE CRISIS

    Foreclosures are about the home. The importance of the home 
to Americans can hardly be overstated. The home is the center 
of American life. It is where we live, where we raise our 
families, where we gather with friends, and, in many cases, 
where we work. It is the physical and emotional nexus of many 
households as well as the centerpiece of many Americans' 
finances. The home is the single largest asset of many 
Americans.\6\
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    \6\ Brian K. Bucks et al., Changes in U.S. Family Finances from 
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal 
Reserve Bulletin, at A1, A33 (Feb. 2009) (online at 
www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf) (reporting 
that home equity accounted for 31.8 percent of total family assets).
---------------------------------------------------------------------------
    The financing of the home is central to the American 
economy. Home mortgage debt accounts for 80.3 percent of 
consumer debt,\7\ and housing expenses, which are primarily 
mortgage and rental payments, account for approximately 22 
percent of the economy.\8\ Since the early 1980's consumer 
spending has risen from approximately 60 percent of GDP to 
approximately 70 percent of GDP,\9\ as a result of falling 
savings rates and rising consumer debt. This is not a 
sustainable economic structure, and over time the United States 
must return to an economy where consumption is wage based and 
there is adequate consumer savings. But while the economy 
cannot be revived based on more asset-based consumption, 
neither can the country afford a continuing asset price 
collapse. An orderly return to a more wage-driven economy 
requires that we have functioning credit markets. American 
homeownership is in crisis. Out of 110 million residential 
units in the United States,\10\ around 75 million are owner-
occupied, and of these, nearly 51 million are mortgaged.\11\ 
Over a million homes entered foreclosure in 2007 \12\ and 
another 1.7 million in the first three quarters of 2008.\13\ 
This means that nearly one out of every twenty residential 
borrowers entered the foreclosure process in the past two 
years.
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    \7\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release Z.1: Table L.101 (Dec. 11, 2008) (Table 
L.101).
    \8\ Hoover Institution, Facts on Policy: Consumer Spending (online 
at www.hoover.org/research/factsonpolicy/facts/4931661.html).
    \9\ Id.
    \10\ U.S. Census Bureau, Housing Vacancies & Homeownership (CPS/
HVS) (Oct. 2008) (Table 4. Estimates of the Total Housing Inventory for 
the United States: Third Quarter 2007 and 2008) (online at 
www.census.gov/hhes/www/housing/hvs/qtr308/q308tab4.html).
    \11\ U.S. Census Bureau, American Housing Survey for the United 
States: 2007 (2007) (Table 3-15. Mortgage Characteristics--Owner-
Occupied Units) (online at www.census.gov/hhes/www/housing/ahs/ahs07/
tab3-15.pdf).
    \12\ RealtyTrac, U.S. Foreclosure Activity Increases 75 Percent In 
2007 (Jan. 29, 2008) (online at www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=&ItemID= 3988&accnt=64847).
    \13\ HOPE NOW, Workout Plans (Repayment Plans + Modifications) and 
Foreclosure Sales, July 2007-November 2008 (online at www.hopenow.com/
upload/data/files/HOPE%20NOW% 
20Loss%20Mitigation%20National%20Data%20July%2007%20to%20November 
%2008.pdf). See also Chris Mayer et al., The Rise in Mortgage Defaults, 
Journal of Economic Perspectives (2009) (forthcoming) (reporting 1.2 
million foreclosure starts in first half of 2008).
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    Over half a million homes were actually sold in foreclosure 
or otherwise surrendered to lenders in 2007, and over 700,000 
were sold in foreclosure in the first three quarters of 2008 
alone.\14\ At the end of the third quarter of 2008, one in ten 
homeowners was either past due or in foreclosure, the highest 
levels on record.\15\ At the current pace nearly 2,900 families 
are losing their homes each day.
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    \14\ HOPE NOW, supra note 13; Adam J. Levitin, Resolving the 
Foreclosure Crisis: Modification of Mortgages in Bankruptcy, Wisconsin 
Law Review (2009) (online at papers.ssrn.com/sol3/ 
papers.cfm?abstract_id=1071931).
    \15\ Mortgage Bankers Association, Delinquencies Increase, 
Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 
5, 2008) (online at www.mbaa.org/NewsandMedia/PressCenter/66626.htm) 
(reporting that 2.97 percent of all one-to-four family residential 
mortgages outstanding were in the foreclosure process in the first 
quarter of 2008, and 6.99 percent were delinquent). See also Vikas 
Bajaj and Michael Grynbaum, About 1 in 11 Mortgageholders Face 
Problems, New York Times (June 6, 2008). Because of the steadily 
increasing level of homeownership in the United States, higher 
percentages of past due and foreclosed mortgages means that an even 
greater percentage of Americans are directly affected by higher 
delinquency and foreclosure rates. See U.S. Census Bureau, Housing 
Vacancies and Homeownership (CPS/HVS): Historical Tables (Table 14: 
Homeownership Rates for the U.S. and Regions) (online at 
www.census.gov/hhes/www/housing/hvs/historic/index.html) (accessed Mar. 
1, 2009).
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    A comparison to Hurricane Katrina provides some sense of 
the scope of the foreclosure crisis. A national disaster, 
Katrina created serious social disruptions as many of New 
Orleans' residents left, never to return. In the year following 
Katrina, New Orleans' population declined by approximately 
229,000, according to the Census Bureau. More Americans are 
losing their homes in foreclosure each month than left New 
Orleans after Hurricane Katrina.\16\ In 2008 alone, the 
foreclosure crisis has had the force of a dozen Hurricane 
Katrinas.
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    \16\ According to the Census Bureau, the population loss after 
Hurricane Katrina was 228,782. U.S. Census Bureau, Census Bureau 
Announces Most Populous Cities (June 28, 2007) (online at 
www.census.gov/Press-Release/www/releases/archives/population/
010315.html). Given the average household size of 2.6 individuals and 
2,900 foreclosures per day, more than 226,000 persons are losing their 
homes per month. U.S. Census Bureau, Fact Sheet: 2005-2007 (online at 
factfinder.census.gov/servlet/ACSSAFFFacts) (accessed Mar. 1, 2009).
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Chart 1: Percentage of 1-4 Family Residential Mortgages in Foreclosure 
        Process \17\

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    \17\ Mortgage Bankers Association, National Delinquency Survey: 
Seasonally Adjusted (Mar. 4, 2009).

    The foreclosure crisis shows no signs of abating, and 
without decisive intervention it is likely to continue for 
years and directly affect millions of Americans. Current 
projections suggest that by the end of 2012, around 8.1 million 
homes, or one in nine residential borrowers will go through 
foreclosure.\18\
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    \18\ Credit Suisse Fixed Income Research, Foreclosure Update: Over 
8 Million Foreclosures Expected (Dec. 4, 2008) (online at 
www.chapa.org/pdf/Foreclosure UpdateCreditSuisse.pdf).
---------------------------------------------------------------------------
    Foreclosure has enormous deadweight costs. Lenders lose a 
significant part of their loan. Foreclosed properties sell for 
highly depressed prices and lenders incur significant direct 
costs in the foreclosure process. One study estimates that 
lenders incur nearly $60,000 of direct costs on average in the 
foreclosure process.\19\
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    \19\ Craig Focardi, Servicing Default Management: An Overview of 
the Process and Underlying Technology (Nov. 15 2002) (TowerGroup 
Research Note No. 033-13C) (stating that foreclosures cost on average 
$58,759 and took 18 months to complete).
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    For homeowners, foreclosure means the loss of their home 
and possibly their home equity. It means having to find a new 
place to live and moving, a move that can place extreme stress 
on borrowers and their families.\20\ It often means losing 
connections with their old neighborhood and community. It 
usually means children being moved to a new school.
---------------------------------------------------------------------------
    \20\ See, e.g., Lorna Fox, Re-Possessing Home: A Re-analysis of 
Gender, Homeownership and Debtor Default for Feminist Legal Theory, 
William & Mary Journal of Women & Law, at 434 (2008); Eric S. Nguyen, 
Parents in Financial Crisis: Fighting to Keep the Family Home, American 
Bankruptcy Law Journal, at 229 (2008); Mindy Thompson Fullilove, Root 
Shock, at 11-20 (2005); Margaret Jane Radin, Property and Personhood, 
Stanford Law Review, at 958-59 (1982). But see Stephanie Stern, 
Residential Protectionism and the Legal Mythology of Home, University 
of Michigan Law Review (2009). See also Andrea Hopkins, Ohio Woman, 90, 
Attempts Suicide After Foreclosure, Reuters (Oct. 3, 2008); Michael 
Levenson, Facing Foreclosure, Taunton Woman Commits Suicide, Boston 
Globe (July 23, 2008).
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                   B. SPILLOVER COSTS OF FORECLOSURES

    Foreclosures also depress housing and commercial real 
estate prices throughout neighborhoods, imposing serious costs 
on third parties. When families have to relocate, community 
ties are cut. Friendships, religious congregations, schooling, 
childcare, medical care, transportation, and even employment 
often depend on geography.\21\ A single foreclosure can depress 
the eighty closest neighbors' property values by nearly 
$5,000.\22\ When multiple foreclosures happen on a block or in 
a neighborhood, the effect is exponential. The property value 
declines caused by foreclosure hurt local businesses and erode 
state and local government tax bases.\23\ Condominium and 
homeowner associations likewise find their assessment base 
reduced by foreclosures, leaving the remaining homeowners with 
higher assessments.\24\
---------------------------------------------------------------------------
    \21\ See Phillip Lovell and Julia Isaacs, The Impact of the 
Mortgage Crisis on Children, (May 2008) (online at www.firstfocus.net/
Download/HousingandChildrenFINAL.pdf) (estimating two million children 
will be impacted by foreclosures, based on a projection of two and 
quarter million foreclosures).
    \22\ Dan Immergluck and Geoff Smith, The External Costs of 
Foreclosure: The Impact of Single-Family Mortgage Foreclosures on 
Property Values, Housing Policy Debate, at 58 (2006). Immergluck and 
Smith found that in Chicago in the late 1990's, a single foreclosure 
depressed neighboring properties' values between $159,000 and $371,000, 
or between 0.9 percent and 1.136 percent of the property value of all 
the houses within an eighth of a mile. For Chicago, which has a housing 
density of 5,076 houses per square mile, or around 79 per square eighth 
of a mile, this translates into a single foreclosure costing each of 79 
neighbors between $2,012 and $4,696. City-Data.com, Chicago, IL 
(Illinois) Houses and Residents (online at www.city-data.com/ housing/
houses-Chicago-Illinois.html) (accessed Mar. 3, 2009). See also Mark 
Duda & William C. Apgar, Mortgage Foreclosures in Atlanta: Patterns and 
Policy Issues, at ii (Dec. 15, 2005) (online at www.nw.org/network/
neighborworksProgs/foreclosuresolutionsOLD/documents/
foreclosure1205.pdf).
    \23\ See, e.g., Laura Johnston, Vacant Properties Cost Cleveland 
$35 Million, Study Says, Cleveland Plain Dealer (Feb. 19, 2008); Global 
Insight, The Mortgage Crisis: Economic and Fiscal Implications for 
Metro Areas: Report Prepared for The United States Conference of Mayors 
and The Council for the New American City (2007) (online at www.vacant 
properties.org/resources/documents/USCMmortgagereport.pdf) (estimating 
a $6.6 billion decrease in aggregate tax revenue in ten states 
especially impacted by the foreclosure crisis).
    \24\ Christine Haughney, Collateral Foreclosure Damage for Condo 
Owners, New York Times (May 15, 2008).
---------------------------------------------------------------------------
    The housing price declines caused by foreclosures can also 
fuel more foreclosures, as homeowners who find themselves with 
significant negative equity may choose to abandon their houses 
and become renters. Numerous foreclosures flood the market with 
excess inventory that depress other sale prices. Thus, 
foreclosures can harm other mortgagees both by encouraging 
additional foreclosures and by reducing home sale prices.
    Foreclosed properties also impose significant direct costs 
on local governments and foster crime.\25\ A single foreclosure 
can cost a city over $34,000.\26\ Foreclosures also have a 
racially disparate impact because African-Americans invest a 
higher share of their wealth in their homes \27\ and are also 
more likely than financially similar whites to have subprime 
loans.\28\
---------------------------------------------------------------------------
    \25\ Dan Immergluck and Geoff Smith, The Impact of Single-Family 
Mortgage Foreclosures on Neighborhood Crime, Housing Studies, at 851 
(2006); William C. Apgar and Mark Duda, Collateral Damage: The 
Municipal Impact of Today's Mortgage Foreclosure Boom, at 9 (May 11, 
2005) (online at www.995hope.org/content/pdf/
Apgar_Duda_Study_Short_Version.pdf).
    \26\ William C. Apgar et al., The Municipal Cost of Foreclosures: A 
Chicago Case Study, at 2 (Feb. 27, 2005) (Homeownership Preservation 
Foundation Housing Finance Policy Research Paper Number 2005-1) (online 
at www.995hope.org/content/pdf/Apgar_ Duda_Study_Full_Version.pdf).
    \27\ Melvin L. Oliver and Thomas M. Shapiro, Black Wealth, White 
Wealth: A New Perspective on Racial Inequality, at 66 (2006) (showing 
that housing equity accounted for 62.5 percent of all black assets in 
1988 but only 43.3 percent of white assets, even though black 
homeownership rates were 43 percent and white homeownership rates were 
65 percent). See also Kai Wright, The Subprime Swindle, The Nation 
(July 14, 2008); Brian K. Bucks et al., Recent Changes in U.S. Family 
Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, 
Federal Reserve Bulletin, at A8, A12, A23 (2006) (noting that while 
there was only a $35,000 difference in median home equity between 
whites and nonwhites/Hispanics in 2004, there was a $115,900 difference 
in median net worth and a $33,700 difference in median financial 
assets, suggesting that for minority homeowners, wealth is 
disproportionately invested in the home).
    \28\ Bob Tedeschi, Subprime Loans' Wide Reach, New York Times (Aug. 
3, 2008); Mary Kane, Race and the Housing Crisis, Washington 
Independent (Jul 25, 2008).
---------------------------------------------------------------------------
    Foreclosures also hurt capital markets. Investors in 
mortgage-backed securities see their investment's market value 
decline both because of direct losses from foreclosures of 
mortgages collateralizing their investment and because of the 
general decline in housing values, fueled, in part, by 
foreclosures. To the extent that these investors are financial 
institutions or their insurers, their foreclosures reduce the 
value of their assets and, if they have large exposure to 
mortgage-backed securities, may place their solvency at risk. 
Thus, foreclosures also affect the investors in these financial 
institutions. In short, foreclosure is an inefficient outcome 
that is bad not only for lenders and borrowers, but for society 
at large.
    There are important moral questions about borrower and 
lender responsibility in the foreclosure crisis, as discussed 
in Section V, infra. While the Panel emphasizes the importance 
of crafting foreclosure mitigation efforts to reach responsible 
homeowners, the Panel also recognizes that the serious 
spillover effects of foreclosures on third parties creates a 
threat to communities and the economy that counsels for 
targeted government action to protect innocent third parties 
from the harmful effects of foreclosures.

   II. INADEQUATE MORTGAGE MARKET DATA LIMITS SOUND POLICY DECISIONS

    In every area of policy, Congress and the Administration 
need quality information in order to make informed decisions. 
This is as true for financial and housing markets as it is for 
military intelligence. The first step for understanding the 
foreclosure crisis and evaluating responses is to have an 
accurate empirical picture of the mortgage market. For example, 
how many loans are not performing, what loss mitigation efforts 
have lenders undertaken, how many foreclosures have occurred, 
how many are in the process of occurring, and how many more are 
likely to occur? How many of these foreclosures are 
preventable, meaning that another loss mitigation option would 
result in a smaller loss to the lender? What is driving 
mortgage loan defaults? Are there any salient characteristics 
of the loans that are defaulting and for which successful 
modifications are not feasible? What relationship does 
foreclosure have to loan type, to loan-to-value ratios, to 
geographic factors, and to borrower characteristics? And 
crucially, what obstacles stand in the way of loss mitigation 
efforts? These are some of the questions for which the 
Congressional Oversight Panel believes the Congress and the 
Administration need to know the answers in order to make 
informed policy decisions.
    Unfortunately, this essential information is lacking. The 
failure of federal banking and housing regulatory agencies to 
gather and analyze quality market intelligence is striking. The 
United States is now two years into a foreclosure crisis that 
has brought economic collapse, and federal banking and housing 
regulators still know surprisingly little about the number of 
foreclosures, what is driving the foreclosures, and the 
efficacy of mitigation efforts.

              A. THE PANEL'S FORECLOSURE MITIGATION SURVEY

    In an attempt to provide Congress and the public with a 
more detailed and comprehensive picture of foreclosure 
mitigation efforts, the Congressional Oversight Panel 
requested, pursuant to its power under section 125(e)(3) of the 
EESA that federal banking and housing regulatory agencies 
provide it with a variety of information about foreclosures and 
loss mitigation efforts from their regulated institutions. The 
request was sent to the Departments of Treasury and Housing and 
Urban Development (HUD), to the Office of the Comptroller of 
the Currency (OCC), the Office of Thrift Supervision (OTS), the 
National Credit Union Administration (NCUA), the Federal 
Reserve Board, Federal Deposit Insurance Corporation (FDIC), 
and the Federal Housing Finance Agency (FHFA). A copy of the 
Panel's foreclosure data survey is included as an Appendix.
    The results of the survey were distressing. The overall 
state of federal banking and housing regulatory agency 
empirical knowledge about the mortgage market and the 
foreclosure crisis is inadequate. Most agencies have little in 
the way of original data, and those that do have conducted 
little analysis. Some agencies had no data or knowledge. Most 
of those with some knowledge rely on a pair of commercial data 
sources that have well-known drawbacks, lack full market 
coverage, and are based on voluntary industry reporting, rather 
than tailored to regulatory interests.

   B. INADEQUATE DATA SOURCES ON LOAN PERFORMANCE AND LOSS MITIGATION

    There are four major private sources that track mortgage 
delinquencies, foreclosures, and loss mitigation efforts, but 
their coverage is either limited or of questionable 
reliability. Two private subscription sources, First American 
LoanPerformance and McDash, feature loan-level data and are 
considered to be reliable sources with sufficiently detailed 
data for meaningful analysis about factors driving mortgage 
defaults, but these sources have limited market coverage. 
LoanPerformance collects loan performance data, including 
foreclosures, from the trustees of securitized private label 
pools. LoanPerformance supposedly covers over 80 percent of the 
subprime market, but has more limited coverage of prime 
loans.\29\ McDash collects data from mortgage servicers for 
both securitized and portfolio loans and is supposed to cover 
between 40-50 percent of the subprime market,\30\ and a similar 
range of the prime market.\31\
---------------------------------------------------------------------------
    \29\ See Vanessa G. Perry, The Dearth and Life of Subprime Mortgage 
Data: An Overview of Data Sources for Market Modeling (Jan. 8, 2008) 
(online at www.hoyt.org/subprime/vperry.pdf).
    \30\ Id.
    \31\ Lei Ding et al., Risky Borrowers or Risky Mortgages: 
Disaggregating Effects Using Propensity Score Models (Dec. 2008) 
(online at www.ccc.unc.edu/documents/RiskyMortg_ Final_Dec11.pdf).
---------------------------------------------------------------------------
    In addition to these sources, there is the Mortgage Bankers 
Association's quarterly National Delinquency Survey, which is 
data that is estimated to cover 80-85 percent of the 
market.\32\ The MBA's NDS tracks defaults and foreclosures, but 
does not have the granularity to support meaningful analysis 
about factors fueling defaults and it does not contain any data 
on loss mitigation efforts. Additionally, RealtyTrac publishes 
a monthly U.S. Foreclosure Market Report, which tracks 
foreclosures, not delinquencies or loss mitigation efforts. 
RealtyTrac's report is based on court filings and does not 
include information about the specific characteristics of 
loans. Moreover, RealtyTrac's methodology overstates the number 
of unique properties in foreclosure because it measures 
foreclosure filings, and there can be multiple filings for an 
individual property. Moreover, many foreclosures that are 
initiated result in cure and reinstatement, a workout, a short 
sale, or a deed in lieu. RealtyTrac also tracks completed 
foreclosure sales, although it does not publish these numbers, 
but these are a more reliable indicator of foreclosure 
activity, albeit with a significant delay.
---------------------------------------------------------------------------
    \32\ The MBA survey is a voluntary survey of over 120 mortgage 
lenders, including mortgage banks, commercial banks, thrifts, 
subservicers and life insurance companies. See Mortgage Bankers 
Association, Learn More About MBA's National Delinquency Survey (online 
at www.mortgagebankers.org/files/Research/NDSFactSheet.pdf) (accessed 
Mar. 1, 2009).
---------------------------------------------------------------------------
    Several government agencies track mortgage delinquencies, 
foreclosures, and loss mitigation efforts, but only for limited 
segments of the market. No federal agency tracks foreclosures 
for the entire market.\33\ Several federal agencies subscribe 
to the McDash and LoanPerformance databases. Additionally, in 
the Treasury Department, the Office of Comptroller of the 
Currency and the Office of Thrift Supervision have recently 
begun using an expanded version of the McDash data service to 
jointly track foreclosures in the servicing portfolios of 
fourteen national banks and federal thrifts, which combine for 
around 60 percent of the total mortgage servicing market. OCC 
and OTS have begun to publish a quarterly Mortgage Metrics 
Report, detailing some of its analysis of foreclosure 
mitigation efforts. The Mortgage Metrics Report, however, is 
still a work in progress. Its first two editions lacked data 
about many crucial issues. OCC and OTS have announced that the 
March and June editions will include expanded data and 
analysis, which the Panel applauds. But the Panel notes that 
this expansion in data collection has come about only following 
the Panel's request for information in the form of the COP 
Mortgage Data Survey. While the Panel is pleased to see the 
expanded data collection, the data collection efforts that are 
beginning today are ones that should have been implemented by 
the agencies months, if not years ago.
---------------------------------------------------------------------------
    \33\ Some state agencies attempt to track foreclosure data, but the 
process is complicated because foreclosure procedures vary by state, 
foreclosures often take place outside of the court system, records are 
often maintained on a county level and are not aggregated to produce 
state-wide data, and some record-keeping is not automated.
---------------------------------------------------------------------------
    Beyond the OCC and OTS, FHFA tracks certain aspects of 
Fannie Mae and Freddie Mac's modification efforts, although not 
in much detail. In any case, the FHFA could at best oversee 
only part of the market, but its jurisdiction does not extend 
to loans in the private-label securitization market or 
financial institutions' portfolio loans. The Federal Reserve 
Board appears to rely solely on analysis of third-party data 
sources. FHA and VA track some elements of the performance of 
FHA/VA insured loans, but that is only around 10 percent of the 
market. FDIC has been monitoring the portfolio of the failed 
IndyMac Federal Savings Bank, and has performed much more 
detailed analysis than any of the other financial regulators, 
but the FDIC is only monitoring the servicing portfolio of a 
single institution. Additionally, a working group of states' 
attorneys general and the Conference of State Bank Supervisors 
has been tracking foreclosures in the servicing portfolios of 
thirteen primarily subprime servicers, which make up about 57 
percent of the subprime market.\34\ Unfortunately, the state 
attorneys general working group's efforts to reach out to the 
OCC and OTS to coordinate data collection efforts were rebuffed 
due to jurisdictional rivalries.\35\
---------------------------------------------------------------------------
    \34\ State Foreclosure Prevention Working Group, Analysis of 
Subprime Mortgage Servicing Performance (Sept. 2008) (Data Report No. 
3) (online at www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport3.pdf). Maryland has made special efforts to track 
foreclosures. The Panel also recognizes the concerted efforts of 
several other states to deal with the foreclosure crisis, including 
California, Illinois, Iowa, Maryland, Massachusetts, New Jersey, New 
York, North Carolina, and Ohio.
    \35\ Letter from State Foreclosure Prevention Working Group to John 
C. Dugan, Comptroller of the Currency, and John M. Reich, Director, 
Office of Thrift Supervision (Feb. 2, 2009) (online at 
www.banking.state.ny.us/pr090202a.pdf); State Foreclosure Prevention 
Working Group, States Urge OCC and OTS to Push for Affordable Mortgage 
Modifications (Feb. 2, 2009) (online at www.csbs.org/AM/
Template.cfm?Section=Press_Releases&CONTENTID= 20998&TEMPLATE=/CM/
ContentDisplay.cfm); State Foreclosure Prevention Working Group, 
Analysis of Subprime Mortgage Servicing Performance, at 2, 7, 20 (Feb. 
2008) (Data Report No. 1) (online at www.csbs.org/Content/
NavigationMenu/Home/StateForeclosurePreventionWork 
GroupDataReport.pdf).
---------------------------------------------------------------------------
    The result is that no comprehensive private or government 
source exists for accurately tracking loan delinquencies and 
loss mitigation efforts, including foreclosures and 
modifications, on a complete, national scale. No federal agency 
has the ability to track delinquencies accurately and loss 
mitigation efforts for anything more than 60 percent of the 
market. The existing data are plagued by inconsistencies in 
data collection methodologies and reporting, and are often 
simply unverifiable. Worse still, the data being collected are 
often not what is needed for answering key questions, namely 
what are causing mortgage defaults and why loan modifications 
have not been working.\36\
---------------------------------------------------------------------------
    \36\ For example, the Office of Comptroller of the Currency (OCC) 
and the Office of Thrift Supervision (OTS) have been jointly gathering 
data on redefault rates on modified loans in the servicing portfolios 
of fourteen national banks and federal thrifts. This data shows a high 
rate of redefaults on modified loans. From this the Director of OTS 
concluded that modification efforts cannot work. The Comptroller, 
however, noted that the data shows nothing more than the fact that 
modifications have not worked; without knowing more about the 
modifications themselves, we cannot conclude that modifications cannot 
work. Cheyenne Hopkins, When Mods Fail, What Next?: Regulators Split on 
Implications of Redefaults, American Banker, at 1 (Dec. 9, 2008).
---------------------------------------------------------------------------

           C. EXPLAINING THE REGULATORY INTELLIGENCE FAILURE

    There appear to be several reasons for the failure of 
regulatory intelligence gathering and analysis. First, in the 
past, foreclosures have been largely a matter for state courts 
and for the county clerks who record transfers of real 
property. Many states and counties have not invested in the 
infrastructure needed to compile this information because the 
level of foreclosures has not reached crisis proportions since 
the Great Depression. Bank regulators are further hampered in 
their independent data collection efforts by the lack of a 
nationwide mortgage loan performance reporting requirement.
    Without a similar requirement for performance data in a 
standard, electronic format, regulators are limited to 
information obtained voluntarily from the industry or from 
reviews of individual bank records. Indeed, many states do not 
regulate either investors in whole loans or securitized 
mortgages or the servicers who service those mortgages. 
Similarly, foreclosures and loan modifications have not been a 
traditional subject of federal regulatory focus. Yet, absent 
adequate information on foreclosures and mitigation efforts, it 
is difficult to craft effective responses to the crisis, and 
the federal banking and housing regulators have never requested 
authority to collect more information.
    Second, divided regulatory bailiwicks, an issue that the 
Panel has previously drawn attention to in its regulatory 
reform report, have contributed to the failure to gather market 
intelligence. No agency appears to have identified mortgage 
market intelligence gathering and analysis as its 
responsibility. Mere jurisdictional divisions, however, are 
insufficient to explain or excuse this failure, as federal 
banking and housing regulators have coordinated successfully on 
other issues before. Nor do divided regulatory bailiwicks 
explain why so many agencies lack knowledge of what is 
happening within their regulatory sphere. For example, FHFA, 
which supervises Fannie Mae, Freddie Mac, and the Federal Home 
Loan Banks, did not have any data on hand about such basic 
elements as loss severities in foreclosure in the GSEs' 
portfolios or about the efficacy of GSE foreclosure mitigation 
efforts. The Panel is puzzled how FHFA can be performing its 
mission of overseeing the safety and soundness of the GSEs when 
it lacks basic knowledge of GSE losses.
    Given the state of agency knowledge about the mortgage 
market, the Panel must content itself, for this report, with 
reporting some of the salient statistics from the existing 
publicly-available metrics. These statistics paint a grim 
picture of mounting foreclosures, failed private and public 
mitigation efforts, and many likely future defaults and 
foreclosures. Mortgage default rates and foreclosures are at 
historically unprecedented levels, not just for subprime loans, 
but for prime loans as well.\37\ And private and government 
foreclosure mitigation attempts have failed to make much 
headway in either preventing foreclosures or restructuring 
loans.
---------------------------------------------------------------------------
    \37\ Mortgage Bankers Association, Delinquencies Increase, 
Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 
5, 2008) (online atwww.mbaa.org/NewsandMedia/Press Center/66626.htm).
---------------------------------------------------------------------------

         D. THE NEED FOR FEDERAL DATA COLLECTION GOING FORWARD

    While there is a clear picture of rising foreclosures and 
loss mitigation efforts that fail to keep pace, they do not 
provide sufficient information to determine why so many loans 
are defaulting and why foreclosure, rather than workouts, have 
been the dominant response and why modifications have often 
been unsuccessful. These sources often conflict and none has 
complete market coverage. In order for Congress and various 
regulators to respond properly and promptly to issues in the 
residential housing market, better information is needed. 
Absent more complete and accurate information, legislators, 
regulators, and market participants are flying blind.
    The housing market has traditionally been treated as a 
state law issue. While states have an important role to play, 
housing finance is a national market, closely linked with 
capital markets and the financial system. Going forward, 
Congress and the regulators need to have much better data 
available so they can ensure the smooth and efficient 
functioning of the national housing finance market and prevent 
future crises. Thus, the Panel believes that Congress should 
create a national mortgage loan performance reporting 
requirement applicable to banking institutions and others who 
service mortgage loans, to provide a source of comprehensive 
intelligence about loan performance, loss mitigation efforts 
and foreclosure, that federal banking or housing regulators 
would be mandated to analyze and share with the public. Such a 
reporting requirement exists for new mortgage loan originations 
under the Home Mortgage Disclosure Act. Because lenders already 
report delinquency and foreclosure data to credit reporting 
bureaus, the additional cost of federal reporting should be 
small.

    III. OBSTACLES TO LOAN SUCCESS AND FORECLOSURE MITIGATION: PAST 
                                PROGRAMS


                      A. OBSTACLES TO LOAN SUCCESS

    Despite gross inadequacies in the existing data on 
foreclosures and mitigation attempts, it is nonetheless 
possible to discern the basic obstacles to loan performance and 
to successful foreclosure mitigation.

1. Affordability

    The underlying problem in the foreclosure crisis is that 
many Americans have unaffordable mortgages. There are five 
major factors behind the affordability problem. First, many 
mortgages were designed and underwritten to be refinanced, not 
to be paid off according to their terms. Second, lenders 
extended mortgage credit to less creditworthy borrowers for 
whom homeownership was a financial stretch. Third, fraud, by 
brokers, lenders and borrowers produced mortgages that 
borrowers cannot afford to pay. Fourth, borrowers who qualified 
for lower cost mortgages were steered into higher priced 
subprime mortgage products. And fifth, a deteriorating economy 
has made it more difficult for many Americans to afford to pay 
their mortgage.

a. Affordability problems

            i. Changes in mortgage product type
    Most mortgages are of relatively recent vintage; the 
majority of mortgages are less than seven years old.\38\ In the 
last seven years, the mortgage market saw a major shift in 
product type to products that had much greater risk of becoming 
unaffordable than conventional prime mortgage that historically 
dominated the market.
---------------------------------------------------------------------------
    \38\ Approximately 76 percent of outstanding mortgages originated 
after 2000, with the median year of origination being 2003. U.S. Census 
Bureau, American Housing Survey for the United States: 2007, at 164 
(2008) (online at www.census.gov/prod/2008pubs/h150-07.pdf) (providing 
the data used for the calculations).
---------------------------------------------------------------------------
    Starting in 2004, there was a significant growth in 
subprime, alt-A, and home equity loans (HEL) markets for new 
originations. (See Chart 2.)

Chart 2. Market Share by Product Type \39\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \39\ Inside Mortgage Finance, Mortgage Market Statistical Annual, 
at 4 (2008) (Vol. 1).

    Each of these products increased the risk that mortgages 
would become less affordable. Subprime loans are, by 
definition, higher-priced loans. They have been made to both 
less creditworthy borrowers and to those with good credit but 
who were steered into these loans. Because they are higher 
priced and often have sharply escalating payments, subprime 
loans have historically had much higher default rates than 
prime loans. (See Chart 3.)

Chart 3. Percentage of 1-4 Family Mortgages Seriously Delinquent by 
        Type \40\

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    \40\ Mortgage Bankers Association, supra note 17.

    Alt-A loans typically required less documentation of the 
borrower's ability to repay. Because they are not underwritten 
with the certainty of a traditional conforming prime loan, they 
are riskier products. Home equity lines of credit (HELs) also 
create affordability risk because they add a second mortgage 
payment obligation, increasing the risk that a family cannot 
maintain payments on either mortgage. In addition, because HELs 
are junior mortgages, they are protected by a smaller equity 
cushion than a typical first mortgage.
    As the type of risky products proliferated, the share of 
adjustable rate mortgages among new originations also grew 
sharply. (See Chart 4.) Adjustable rate mortgages create an 
affordability risk because the interest rate and thus the 
monthly payment can reset to a higher (and potentially 
unaffordable) amount, creating ``payment reset shock'' for the 
borrower.
    Many of the adjustable rate mortgages originated in recent 
years were so-called hybrid ARMs, such as the 2/28 and 3/27, 
which had an initial fixed teaser rate period for two or three 
years, after which the monthly payment reset according to an 
adjustable rate index for the remaining 28 or 27 years of the 
loan. Many hybrid ARMs were underwritten based on the 
borrower's ability to make the monthly payments for the initial 
fixed-rate teaser period, not after the loan went into the 
adjustable rate period. The affordability of the adjustable 
rate period was ignored because the products were sold with the 
representation that the borrower could simply refinance the 
mortgage at the end of the teaser period--with the lender 
collecting another round of fees for the refinancing.

Chart 4. Market Share of Adjustable Rate Mortgages \41\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \41\ Inside Mortgage Finance, Mortgage Market Statistical Annual, 
at 4 (2008) (Vol. 1).

    At the same time that risky products and variable rate 
mortgages were expanding, the market share of so-called 
``exotic'' mortgage products, such as interest-only, pay 
option-ARMs, 20/20s, and 40-year balloons grew dramatically 
among new originations. (See Chart 5.) Many of these were 
special niche market products designed for sophisticated 
consumers with irregular monthly incomes, but they began to be 
marketed to the general population.\42\ As with the hybrid 
ARMs, these products all have built-in monthly payment amount 
resets that can lead to payment reset shock. Like many variable 
rate mortgages, these products were sold on the representation 
that the loans would be refinanced before the payment reset 
shock.
---------------------------------------------------------------------------
    \42\ Interest-only mortgages are non-amortizing loans on which the 
borrower makes payments of interest only for a fixed period, generally 
five to seven years. At the end of the period, the principal would 
begin to amortize, with monthly payments becoming much higher. Pay 
option-ARMs permit the borrower to choose a monthly payment amount. The 
borrower can choose a payment that would lead to a 30-year 
amortization, a 15-year amortization, interest only (no amortization), 
or negative amortization. If there is too much negative amortization, 
the pay-option goes away and the loan resets to a fully amortizing loan 
(with higher monthly payments). Like 2/28s and 3/27s, the expectation 
was that interest-only mortgages would be refinanced before they began 
to amortize. The 40-year balloons are a variation on the 2/28 or 3/27. 
These are 30-year loans with a 40-year amortization and a balloon 
payment due at the end of the 30th year. The 40-year amortization was 
designed to make the monthly payments during the teaser rate periods on 
these loans even more affordable to more borrowers (who would be less 
likely, therefore, to be able to afford the payments after the teaser 
period). The 20/20 is a variation of the 40-year balloon, with a fixed-
rate for 20 years and then an interest rate reset in the 21st year.
---------------------------------------------------------------------------

Chart 5. Market Share of Exotic Mortgage Products \43\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \43\ Inside Mortgage Finance, Mortgage Market Statistical Annual, 
at 6 (2008) (Vol. 1).

    Finally, the rise of so-called ``no-doc'' and ``low-doc'' 
loans meant that in many cases underwriting was not based on 
actual income and affordability, but rather on an inflated 
income that misstated affordability. (See Chart 6.)

Chart 6. Percentage of Full Documentation Loans \44\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \44\ Jesse M. Abraham et al., Explaining the United States' 
Uniquely Bad Housing Market, at 11-12 (Sept. 2008) (University of 
Pennsylvania Law School Institute for Law and Economics Research Paper 
No. 08-34) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1320197).

    In the past few years, the mortgage market shifted 
dramatically from mortgages issued under conditions that 
assured a high likelihood of affordability to a much greater 
proportion of mortgages that were higher risk instruments that 
either were, or were likely to become, unaffordable.
            ii. Fraud
    In other cases, poor underwriting, either by brokers or 
lenders eager to originate more and larger mortgages or by the 
homeowner, created the lack of affordability. Both law 
enforcement and industry groups have reported dramatic 
increases in the incidence of mortgage fraud over the last 
decade.\45\ There is considerable anecdotal evidence of 
homeowners overstating incomes, appraisers offering inflated 
appraisals, and purchasers of investor properties fraudulently 
representing that the properties would be owner-occupied.\46\ 
There is also a sizeable body of anecdotal evidence of fraud 
being committed by intermediaries between borrowers and 
lenders, such as mortgage brokers, who inflated information on 
borrowers' capacity to pay in order to close deals on more and 
larger loans.\47\ And finally, there is also significant 
anecdotal evidence of lenders that were happy to look the other 
way and forgo rigorous underwriting diligence because they 
could quickly sell the loans they made and pass along the 
credit risk on those loans to distant investors through 
securitization.\48\ The increase in low-doc and no-doc loans, 
for example, facilitated fraud, as borrowers had to provide 
little information to lenders and lenders made little effort to 
verify the information.\49\
---------------------------------------------------------------------------
    \45\ See, e.g., Financial Crimes Enforcement Network, Filing Trends 
in Mortgage Loan Fraud: A Review of Suspicious Activity Reports Filed 
July 1, 2007 through June 30, 2008, at 10 (Feb. 2009) (reporting a 
tenfold increase in suspicious activity reports relating to mortgage 
fraud between 2002-2003 and 2007-2008); Mortgage Asset Research 
Institute, Eighth Periodic Mortgage Fraud Case Report to Mortgage 
Bankers' Association, at 2 (Apr. 2006).
    \46\ Mortgage Asset Research Institute, Quarterly Fraud Report, at 
3 (Dec. 2, 2008).
    \47\ Id.
    \48\ Federal Bureau of Investigation, 2006 Mortgage Fraud Report 
(May 2007) (online at www.fbi.gov/publications/fraud/
mortgage_fraud06.htm); Gretchen Morgenson, Was There a Loan It Didn't 
Like?, New York Times (Nov. 2, 2008); David Stout and Eric Lichtblau, 
Pardon Lasts One Day for Man in Fraud Case, New York Times (Dec. 24, 
2008); Gregg Farrel, Las Vegas Called Ground Zero for Mortgage Fraud, 
USA Today (June 3, 2008).
    \49\ Mortgage Asset Research Institute, Tenth Periodic Mortgage 
Fraud Case Report to Mortgage Bankers Association, at 2, 10 (Mar. 
2008).
---------------------------------------------------------------------------
    Measuring the role of fraud and speculation in the mortgage 
crisis is difficult, but fraud by borrowers, lenders, and 
intermediaries undoubtedly played a role in placing many 
homeowners in mortgages that they could not ultimately afford.
            iii. Steering
    Subprime and exotic mortgage products were also frequently 
targeted at prime borrowers, as well. Many borrowers with 
excellent credit histories, especially minority borrowers with 
good credit, were steered to higher-rate loans than those for 
which they qualified.\50\ The Wall Street Journal reported that 
61 percent of subprime loans originated in 2006 ``went to 
people with credit scores high enough to often qualify for 
conventional [i.e., prime] loans with far better terms.'' The 
impact on minorities is also stark. A study by the Center for 
Responsible Lending found that Latino borrowers purchasing 
homes were as much as ``142 percent more likely to receive a 
higher-rate loan than if they had been non-Latino and white,'' 
and that ``African-American borrowers were as much as 34 
percent more likely to receive certain types of higher-rate 
loans than if they had been white borrowers with similar 
qualifications.'' \51\ The growth of subprime and exotic loan 
markets cannot be cast solely as a result of a democratization 
of credit.
---------------------------------------------------------------------------
    \50\ See, e.g., Kenneth R. Harney, Study Finds Bias In Mortgage 
Process, Washington Post (June 17, 2006).
    \51\ Center for Responsible Lending, Unfair Lending: The Effect of 
Race and Ethnicity on the Price of Subprime Mortgages (May, 2006) 
(online at www.responsiblelending.org/pdfs/rr011-Unfair_Lending-
0506.pdf). See also Christopher Mayer and Karen Pence, Subprime 
Mortgages: What, Where, and to Whom? (June 2008) (National Bureau of 
Economic Research Working Paper No. W14083); Consumer Federation of 
America, Subprime Locations: Patterns of Geographic Disparity in 
Subprime Lending (Sept. 2006); Robert Avery et al., New Information 
Reported Under HMDA and Its Application in Fair Lending Enforcement, 
Federal Reserve Bulletin, at 344-94 (2005); Paul K. Calem et al., The 
Neighborhood Distribution of Subprime Mortgage Lending, Journal of Real 
Estate Finance and Economics, at 393-410 (2004).
---------------------------------------------------------------------------
    An important driver of the steering of prime borrowers to 
higher-rate loans were yield-spread premiums (YSPs), a bonus 
which lenders pay independent brokers if they place the 
customer into a higher cost loan than the loan for which the 
customer qualifies.\52\ Even higher bonuses were awarded for 
brokers who could sell a mortgage with a prepayment penalty 
that would lock in the higher rate. For example, at Countrywide 
Financial, broker commissions were up to 1.48 percent for 
standard fixed rate mortgages, but they rose to 1.88 percent 
for subprime loans, and jumped to 2.5 percent for pay-option 
ARMs.\53\ Similar incentive structures existed for lender sales 
representatives making non-brokered loans.\54\ The difference 
could mean thousands of dollars more for the broker for each 
placement of a non-standard mortgage. This created a strong 
incentive for brokers and lenders to steer creditworthy 
consumers into high-cost, loans with risky features. The result 
is that more homeowners are now in unaffordable and 
unsustainable loans.
---------------------------------------------------------------------------
    \52\ Howell E. Jackson and Laurie Burlingame, Kickbacks or 
Compensation: The Case of Yield Spread Premiums, Stanford Journal of 
Law, Business, and Finance (2007).
    \53\ Ruth Simon and James R. Hagerty, Countrywide's New Scare--
Option ARM Delinquencies Bleed Into Profitable Prime Mortgages, Wall 
Street Journal (Oct. 24, 2007).
    \54\ See Gretchen Morgenson and Geraldine Fabrikant, Countrywide's 
Chief Salesman and Defender, New York Times (Nov. 11, 2007) (noting 
former employee who said commission structure rewarded sales 
representatives for making risky, high-cost loans, including, for 
example, a commission increase of 1 percent of loan value for attaching 
a three-year prepayment penalty; noting that the higher the interest at 
reset, the higher the broker's commission).
---------------------------------------------------------------------------
    On February 27, 2009, in Prince George's County, Maryland, 
the Panel held a field hearing and heard testimony regarding 
the disproportionate impact of subprime lending on minority 
communities. According to Maryland Secretary of Labor, 
Licensing, and Regulation Thomas E. Perez, ``We know that 
Maryland homeowners were disproportionately impacted by the 
subprime lending spree that led to this crisis. While 18 
percent of white homeowners were given subprime loans, 54 
percent of African American homeowners and 47 percent of 
Hispanic homeowners received subprime loans.'' He went on to 
note, ``We had problems of discrimination at the origination 
end. It is not a stretch to suggest that there are going to be 
potential fair housing issues at the modification level.''
            iv. General economic conditions
    The result of these trends in the mortgage origination 
market over the past few years is that millions of Americans 
now find themselves faced with mortgage payments they cannot 
afford. The problem has been further exacerbated by the 
economic recession. It is important to recall that the 
foreclosure crisis began before the general problems of the 
economy. Even in normal times, some mortgages, no matter how 
well underwritten originally, become unaffordable when the 
borrowers are struck by unemployment, illness, divorce, or 
death in the family. As the economy worsens and layoffs 
increase, traditional factors contributing to mortgage defaults 
compound the affordability problems caused by reckless 
underwriting.

b. Negative equity and the inability to refinance

    Lack of affordability is a serious and complex problem. 
However, it would be much easier to resolve if the broad, steep 
decline in housing prices had not left so many homeowners with 
negative equity. Creditworthy borrowers with equity in their 
homes would refinance into more affordable long-term fixed-rate 
mortgages, and homeowners who could not qualify for an 
affordable mortgage would sell their properties and either 
purchase more affordable homes or become renters.
    The affordability problem today, however, is compounded by 
a negative equity problem. Homeowners with negative equity are 
usually unable to refinance because lenders will not lend more 
than the value of their home, especially if a market is 
declining or projected to experience only slight appreciation 
in the near term. Modification of their existing loans may be 
the more appropriate option for the many homeowners with 
negative equity.
    Today, perhaps a fifth of American homeowners owe more in 
mortgage debt than their home is worth.\55\ Negative equity is 
a function of loans that were initially issued at ever higher 
cumulative loan to value (CLTV) ratios and compounded by 
declining housing prices. (See Charts 7, 8, and 9.)
---------------------------------------------------------------------------
    \55\ First American CoreLogic, Negative Equity Data Report (Sept. 
30, 2008) (online at www.facorelogic.com/newsroom/marketstudies/
negative-equity-report.jsp) (stating that over 7.5 million mortgages, 
or 18 percent, were in a negative equity position as of Sept. 30, 
2008).
---------------------------------------------------------------------------

Chart 7. Average Combined Loan to Value (CLTV) Ratio by Loan Type \56\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \56\ Abraham et al., supra note 44, at 11-12.
---------------------------------------------------------------------------

Chart 8. Percentage of Loans with CLTV>80 Percent by Loan Type \57\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \57\ Abraham et al., supra note 44, at 11-12.
---------------------------------------------------------------------------

Chart 9. S&P/Case-Shiller Composite 10 Home Price Index (Year 2000=100) 
        \58\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    \58\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (online 
at www2.standardand poors.com/spf/pdf/index/CS 
HomePrice_History_022445.xls) (accessed Mar. 4, 2009).

    Traditionally, negative equity alone does not usually lead 
to foreclosures. In past regional housing busts, as long as the 
mortgage payments remained affordable, homeowners with negative 
equity typically remained in their homes.\59\ This is not 
surprising, because although American families are increasingly 
mobile,\60\ many still have strong emotional ties to their 
homes \61\ and the costs of relocation are significant.
---------------------------------------------------------------------------
    \59\ Christopher L. Foote et al., Negative Equity and Foreclosure: 
Theory and Evidence (June 5, 2008) (Federal Reserve Bank of Boston, 
Public Policy Discussion Papers Paper No. 08-3) (online at 
www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf).
    \60\ U.S. Census Bureau, Geographical Mobility: 2002 to 2003, at 2 
(Mar. 2004) (online at www.census.gov/prod/2004pubs/p20-549.pdf) 
(noting increasing occurrence of long-distance moves).
    \61\ Radin, supra note 20; Stern, supra note 20.
---------------------------------------------------------------------------
    On the other hand, past regional housing busts may not 
provide good guides to homeowner behavior in the current 
crisis. In some parts of the country, negative equity is far 
deeper than it has ever been in past regional housing busts, 
and the overall condition of the economy is worse.
    Data from the Panel's survey of federal banking and housing 
regulators indicates that negative equity is a central problem 
in the current housing crisis. However, this result is based on 
multiple data sets that have significant limitations. It is 
likely that income data in these sets does not reflect current 
income at the time of default and, furthermore, because of the 
high proportion of Alt-A and subprime loans in the sample, 
income at origination may not have been verified and may have 
been overstated. Data submissions also were incomplete with 
respect to a number of fields. For all these reasons, the 
results may--or may not--under-estimate the importance of 
affordability, negative equity, or other factors in predicting 
default.\62\ Nevertheless, this data set represents the most 
complete information available and the Panel therefore used it 
in the following analyses. The limitations the Panel observed 
in the survey data supports the Panel's recommendation for a 
national mortgage loan performance reporting requirement.
---------------------------------------------------------------------------
    \62\ See Merrill Lynch, Loan Modifications: What Investors Need to 
Know, MBS/ABS Special Report, Nov. 21, 2008, at 7-8 (finding that 
``Clearly both DTI and current LTV influence [defaults]. However, DTI 
seems less important than LTV,'' and cautioning about problems with DTI 
data).
---------------------------------------------------------------------------
    Chart 10 displays data from the response from the Office of 
Comptroller of the Currency and Office of Thrift Supervision to 
the Panel's foreclosure mitigation survey. The data relate to 
fourteen major financial institutions that cover approximately 
60 percent of the mortgage servicing market shown. Chart 10 
displays the percentage of loans with particular 
characteristics that are 60-89 days delinquent.
    As Chart 10 shows, negative equity is the single best 
indicator that a property is likely to enter foreclosure for 
this data set. Over 20 percent of loans with negative equity 
are 60-89 days delinquent, a far higher percentage than for any 
of the other characteristics about which the Panel inquired. 
Notably, back-end DTI, an affordability measure, does not have 
a clear correlation with default, although this may be a 
function of data inadequacies. A similar picture emerges in 
Chart 11, which shows the percentage of loans with particular 
characteristics that are 60-89 days delinquent in the IndyMac 
Federal Bank portfolio serviced by the FDIC. The IndyMac 
portfolio is mainly low-doc or no-doc Alt-A loans, so robust 
DTI information is not available. Again, though, negative 
equity is among the leading factors, surpassed only by negative 
amortization loans, many of which are likely negative equity.

Chart 10. Percentage of Loans 60-89 Days Delinquent, OCC-OTS Data \63\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    \63\ Congressional Oversight Panel, Mortgage Survey Data from the 
Offfice of the Comptroller of the Currency and the Office of Thrift 
Supervision, Appendix VI, infra.
---------------------------------------------------------------------------

Chart 11. Percentage of Loans 60-89 Days Delinquent, IndyMac Portfolio 
        \64\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    \64\ Congressional Oversight Panel, Mortgage Survey Data from the 
Federal Deposit Insurance Corporation, Appendix VII, infra.

    The strong correlation between negative equity and default 
is also borne out in analysis of private loan performance data 
sources. Based on the performance between November 2008 and 
January 2009 for all deals issued in 2006 that are covered in 
the Loan Performance data set--excluding those that have 
already been modified--Chart 12 shows the likelihood that a 
loan will become 60+ days delinquent in the next year given its 
combined current loan to value (CCLTV) ratios. Thus, at 125 
percent CCLTV there is a 7.5 percent chance that a prime fixed-
rate loan will become 60+ days delinquent in the next year, 
compared with an 11.7 percent chance for a prime ARM, 23 
percent for Alt-A fixed-rate loan, 29.2 percent for Alt-A ARM, 
34.1 percent for a pay-option ARM, 32.3 percent for a subprime 
fixed-rate loan, and 54.8 percent for a subprime adjustable 
rate mortgage. As Chart 11 shows, there is a very strong linear 
correlation between delinquency rates and CCLTV. Negative 
equity provides the best single indicator of likely default in 
this data set.

Chart 12. Annualized Net Flow (Excluding Modifications) from <60 to >60 
        Days Delinquent by Combined Current Loan to Value Ratios \65\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

    Given the depth of negative equity and the strained state 
of many consumers' finances generally, it is not surprising 
that negative equity is a leading indicator of the likelihood 
of default. When there is only a small level of negative equity 
and prospects for a recovery of the housing market in the 
short-term, a homeowner might reasonably be willing to continue 
to pay through the negative equity period. Given the slim 
prospects of the housing market recovering to 2005-2007 price 
levels in the near future, some homeowners might begin to 
question whether they will ever have positive equity in their 
homes.
---------------------------------------------------------------------------
    \65\ Ellington Management Group, LLC. Bold circles indicate median 
CCLTV by product.
---------------------------------------------------------------------------
    For these homeowners, depending on other factors including 
household income in relation to debts, there may be a point at 
which they begin to consider abandoning the house and finding 
an equivalent (but cheaper) rental property, resulting in a 
foreclosure on the house.\66\ A borrower who is further 
underwater may be more willing to absorb the impact of a credit 
default, which will be carried on a credit report for seven 
years, depending on how long it could take her to see positive 
equity on the home. If even a small percentage of those with 
negative equity but generally affordable mortgages abandon 
their homes, foreclosure rates will remain greatly 
elevated.\67\ Incentives may be needed to encourage borrowers 
with negative equity to adopt a long-term view and to remain in 
their homes whenever possible.
---------------------------------------------------------------------------
    \66\ Foote et al., supra note 59, at 2.
    \67\ David Leonhardt, A Bailout Aimed at the Most Affllicted 
Owners, New York Times (Feb. 18, 2009) (citing former Federal Reserve 
Governor Frederic Mishkin).
---------------------------------------------------------------------------
    When exigent circumstances exist, however, and the borrower 
must immediately sell the home, serious negative equity poses 
greater challenges. Widespread negative equity can create 
disruptions in labor markets, in elderly care, and in the 
private home sale market. A homeowner with negative equity 
often cannot move to take a new job. In order to move, the 
homeowner must sell his house. The house will not sell for the 
amount of the loan, only for its fair market value. In order to 
discharge the mortgage, the homeowner must make up the 
difference, and if the homeowner lacks sufficient cash to do 
so, the sale cannot be completed. As a result, homeowners may 
be stuck in their homes. This hurts employers' ability to get 
the best employees and workers' ability to get the best jobs.
    Similarly, negative equity creates problems for elderly 
care. Elderly Americans with negative equity in their homes 
often cannot relocate to an assisted living facility because 
they cannot sell their homes except by paying the difference 
between the mortgage amount and the home value itself, and many 
elderly Americans lack the ability to do so.
    Negative equity also affects the private home sale market. 
Homeowners move for numerous other reasons, such as families 
outgrowing their homes or empty-nesters wishing to move to 
smaller houses. To the extent that negative equity traps 
homeowners in their home by requiring an unaffordable balloon 
payment upon sale, it decreases the number of private home 
sales. The current downward spiral of declining housing prices 
creates more negative equity, which leads to more foreclosures, 
which increases housing market inventory, further depressing 
prices. To break out of this cycle and ensure sustainable 
affordability of home mortgages, it is necessary to address 
both the affordability and negative equity problems.

           B. OBSTACLES TO SUCCESSFUL FORECLOSURE MITIGATION

1. Previous Programs

    The ideal solution to the foreclosure crisis would be 
voluntary loan modifications and refinancings. In all cases in 
which the net present value of a restructured loan would 
outweigh the net present value of pursuing foreclosure, lenders 
would restructure unsustainable, unaffordable loans into 
sustainable, affordable ones. Lenders would thereby minimize 
their losses, homeowners would not be forced to relocate, third 
parties would not suffer the externalities of depressed housing 
prices, urban blight, crime, reduced tax revenue, and disrupted 
social relationships as a result of vacant, foreclosed 
properties. The housing market would stabilize based on supply 
and demand, not on the distortions created by exotic mortgages 
or high foreclosures. This is the solution that would attain in 
a perfectly functioning market.
    Unfortunately, many factors can disrupt a perfectly 
functioning market. Accounting issues within financial 
institutions with exposures to the residential mortgage market 
may pose a significant disincentive for otherwise mutually 
beneficial loan restructurings. If mortgages or mortgage backed 
securities are being carried at par or close to par, even 
though there may be a likelihood of future default, the holders 
of those mortgages or mortgage backed securities may be 
reluctant to renegotiate those loans because such a 
renegotiation would require that assets supported by those 
mortgages be written down to the value of the renegotiated 
loan.
    In evaluating the efficacy of foreclosure mitigation 
programs, it is important to recognize that there are some 
foreclosures that cannot be avoided. In some cases, foreclosure 
will result in a smaller loss than any viable modification. In 
other cases, however, loans could perform more profitably than 
foreclosure if they were sufficiently modified to be affordable 
on an on-going basis. The data are inadequate to say with any 
certainty how many loans are in either category.
    Loan modification efforts to date have been insufficient to 
halt the downward spiral in housing. Three major loan 
modification efforts have been announced, in addition to 
whatever private arrangements lenders make with borrowers, yet 
the pace of foreclosures continues to rise. These efforts are 
the HOPE NOW Alliance, FDIC IndyMac modification program, and 
the GSE Streamlined Loan Modification Program.

           The Major Previous Foreclosure Mitigation Programs

    HOPE NOW Alliance is a private, voluntary mortgage industry 
association created in October 2007 to provide a centralized 
outreach conduit for loan modifications. While HOPE NOW 
consulted with the Treasury Department and the Department of 
Housing and Urban Development, it is not a government-sponsored 
program. HOPE NOW lacks any authority to mandate particular 
actions by its members; participation is purely voluntary and 
self-regulated. HOPE NOW Alliance members report having engaged 
in 2,911,609 workouts between July 2007 and November 2008.\68\
---------------------------------------------------------------------------
    \68\ HOPE NOW, supra note 13.
---------------------------------------------------------------------------
    This number may substantially overstate the effectiveness 
of the HOPE NOW program. The majority (63 percent) of these 
workouts have been repayment plans that merely permit repayment 
of arrearages over time, rather than affecting the terms of the 
loan going forward. If a loan is in default because it is 
unaffordable due to anything other than a temporary decline in 
borrower income, a repayment plan is unlikely to be a 
sustainable solution. Today's foreclosure crisis is not 
primarily due to temporary declines in income due to illness or 
accidents, but to the underlying cost of mortgages relative to 
income. Repayment plans are the wrong solution in many cases.
    Even for the 37 percent of HOPE NOW workouts that resulted 
in a modification of a loan, it is impossible to say what that 
actually means. A major study by Professor Alan White of 
Valparaiso University School of Law has found that only 49 
percent of loan modifications resulted in lower monthly 
payments; 17 percent had no effect and 34 percent resulted in 
higher monthly payments, raising very serious concerns about 
the effectiveness of the program.\69\ Likewise, the Center for 
Responsible Lending estimates that less than 20 percent of HOPE 
NOW loan modifications result in lower monthly payments.\70\ 
Not surprisingly, there is a high redefault rate on modified 
loans.\71\ As the State Foreclosure Prevention Working Group 
has noted:
---------------------------------------------------------------------------
    \69\ Alan M. White, Deleveraging American Homeowners: December 18, 
2008 Update to August 2008 Report, Valparaiso University School of Law 
(Dec. 18, 2008) (online at www.hastingsgroup.com/Whiteupdate.pdf) 
(hereinafter White, Update to August 2008 Report); Alan M. White, 
Rewriting Contracts, Wholesale: Data on Voluntary Mortgage 
Modifications from 2007 and 2008 Remittance Reports, Fordham Urban Law 
Journal (2009) (online at ssrn.com/abstract=1259538) (hereinafter 
White, Rewriting Contracts).
    \70\ Sonia Garrison et al., Continued Decay and Shaky Repairs: The 
State of Subprime Loans Today, Center for Responsible Lending (Jan. 
2009) (online at www.responsiblelending.org/pdfs/
continued_decay_and_shaky_repairs.pdf). See also House Committee on 
Financial Services, Testimony of Martha Coakley, The Implementation of 
the Hope for Homeowners Program and A Review of Foreclosure Mitigation 
Efforts, 110th Cong. (Sept. 17, 2008) (noting that ``virtually none'' 
of the loan modifications reviewed by her office reduced monthly 
payments).
    \71\ Office of the Comptroller of the Currency, OCC & OTS Mortgage 
Metrics: Overall Redefault Rates, at 1 (2008) (online at 
www.occ.treas.gov/ftp/release/2008-142b.pdf) (finding that over 50 
percent of the mortgages that were modified in the first quarter of 
2008 were delinquent within six months); Mortgage Bankers Association, 
MBA Study: Industry Initiated More Than 235,000 Loan Modifications and 
Repayment Plans in 3rd Quarter (Jan. 17, 2008) (online at 
www.mortgagebankers.org/NewsandMedia/PressCenter/59454.htm) (finding 
that 40 percent of subprime ARM borrowers in foreclosures had had 
repayment or loan modification plans in place).

          [O]ne out of five loan modifications made in the past 
        year are currently delinquent. The high number of 
        previously-modified loans currently delinquent 
        indicates that significant numbers of modifications 
        offered to homeowners have not been sustainable . . . 
        [M]any loan modifications are not providing any monthly 
        payment relief to struggling homeowners . . . 
        [U]nrealistic or ``band-aid'' modifications have only 
        exacerbated and prolonged the current foreclosure 
        crisis.\72\
---------------------------------------------------------------------------
    \72\ State Foreclosure Prevention Working Group, Analysis of 
Subprime Mortgage Servicing Performance, at 3 (Sept. 2008) (Data Report 
No. 3) (online at www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport3.pdf).
---------------------------------------------------------------------------

Chart 13: Workouts to Foreclosures by Type, HOPE NOW Alliance Members 
        \73\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

    It is too early to offer a definitive evaluation of the 
other two major previous loan modification programs, the FDIC's 
IndyMac program and the GSE Streamlined Modification Program 
(SMP), but some observations are in order.
---------------------------------------------------------------------------
    \73\ HOPE NOW, supra note 13.
---------------------------------------------------------------------------
    When the FDIC took over the failed IndyMac Federal Savings 
Bank, it began to offer loan modifications to borrowers in 
IndyMac's non-securitized portfolio. As of mid-December, only 
7,200 of 65,000 eligible IndyMac borrowers had benefited from 
the FDIC's program.\74\ The FDIC modified these loans by 
temporarily reducing payments to a 38 percent front-end debt 
(i.e. principal, interest, taxes and insurance)-to-income 
target. The FDIC did this through a combination of temporary 
interest rate reduction and principal forbearance. The long-
term sustainability of these modifications is unknown, and the 
pace at which these modifications were accomplished has been 
quite slow.
---------------------------------------------------------------------------
    \74\ Charles Duhigg, Fighting Foreclosures, F.D.I.C. Chief Draws 
Fire, New York Times (Dec. 11, 2008).
---------------------------------------------------------------------------
    The SMP adopted by the GSEs (in conservatorship) began 
November 2008. The SMP does not require any modifications. 
Instead, it merely sets a target for modified loan payments 
(principal, interest, taxes, insurance) to be no more than 38 
percent of gross monthly income (front-end DTI) for the 
homeowner.\75\
---------------------------------------------------------------------------
    \75\ The SMP standard has also been adopted by the HOPE NOW 
Alliance of servicers and is an entirely voluntary program.
---------------------------------------------------------------------------
    The Panel has serious concerns about the potential efficacy 
of programs based solely on a 38 percent front-end DTI, a 
number which has not been justified as effective or even 
appropriate. About 85-90 percent of prime and Alt-A loans and 
70-75 percent of subprime loans are already below this 
threshold.\76\ SMP thus has a standard so low that most 
troubled loans already officially complied with it at 
origination, and yet foreclosures are soaring. Moreover, it is 
not clear whether modifications should be based only on front-
end DTI, as back-end DTI (total monthly debt payments to gross 
monthly income) is a better measure of overall affordability. 
On the other hand, back-end DTI is harder to verify and can 
rapidly change after closing of a modification. A borrower can 
load up on credit card debt the day after closing of a 
modification, making the back-end ratio much higher than at the 
time of the modification. In choosing between front-end and 
back-end ratios, there are important trade-offs between 
precision and the ability to administer any program involving 
DTI ratios. The proper DTI measure will likely depend on other 
factors in a loan modification program.
---------------------------------------------------------------------------
    \76\ Merrill Lynch, supra note 62, at 7. Reliance on DTI is itself 
questionable; loan performance seems to correlate better to loan-to-
value ratio than front-end DTI. Id.
---------------------------------------------------------------------------
    The trade-offs between front-end and back-end ratios raise 
the question of whether it is unaffordable mortgages that are 
causing distress in household finance or whether other debt, 
such as credit cards, auto loans, and student loans are also 
contributing to borrower distress. Consumer over-indebtedness 
has become remarkably acute in recent years. Consumers with 
unaffordable mortgages frequently face other financial 
problems, and there is a competition among creditors for 
limited consumer repayment capacity. To the extent that 
foreclosure mitigation programs encourage or require more 
generous reductions in mortgage payments, this is a boon to 
other consumer creditors and raises the question of why 
mortgage creditors, rather than say creditor card lenders, 
should forgive or forbear on debt, particularly when the 
opposite result would occur if the homeowner filed for 
bankruptcy. While this issue goes beyond the scope of the 
current report, the question of how the pain of a borrower's 
inability to repay should be shared among creditors is a topic 
for further consideration.
    A 38 percent front-end DTI target has already been rejected 
as resulting in unsustainable loan modifications by leading 
elements of the mortgage servicing industry. Litton Loan 
Servicing, a Goldman Sachs affiliate, uses 31 percent front-end 
DTI as its initial target,\77\ FDIC has proposed a general 
modification program using a 31 percent front-end DTI 
target,\78\ and Bank of America/Countrywide's settlement with 
the state Attorneys General requires use of a 25-34 percent 
front-end DTI standard.\79\ Moreover, the GSEs' own initial 
underwriting guidelines suggest a maximum 25-28 percent front-
end DTI.\80\ If the GSEs do not believe that 38 percent DTI is 
prudent underwriting for a loan to begin with, it is not clear 
why they would use 38 percent DTI as a modification target. 
Moreover, it seems that many loans already had a front-end DTI 
of less than 38 percent at time of origination.\81\ Whether 
they currently have front-end DTIs of less than 38 percent is 
unclear, not least because of the declining incomes due to the 
general problems in the economy, layoffs, illness, death, and 
divorce. While it appears that past loan modification efforts 
are slowly improving, policy-makers need to determine whether 
these efforts are accomplishing enough in an acceptable 
timeframe.
---------------------------------------------------------------------------
    \77\ Senate Committee on Banking, Housing, and Urban Affairs, 
Testimony of Gregory Palm, Oversight of the Emergency Economic 
Stabilization Act: Examining Financial Institution Use of Funding Under 
the Capital Purchase Program, 110th Cong. (Nov. 13 2008) (online at 
banking. senate.gov/public/index.cfm?FuseAction= 
Hearings.LiveStream&Hearing_id=1d38de7d-67db-4614-965b-edf5749f1fa3, at 
minutes 142-144).
    \78\ Federal Deposit Insurance Corporation, FDIC Loss Sharing 
Proposal to Promote Affordable Loan Modifications (Nov. 14, 2008) 
(online at www.fdic.gov/consumers/loans/loanmod/index.html).
    \79\ People v. Countrywide Financial Corp., Case No. LC083076, 
Stipulated Judgment and Injunction, 14 (Cal. Sup. L.A. County, NW 
District, Oct. 20, 2008) (online atag.ca.gov/cms_attachments/press/
pdfs/n1618_cw_judgment.pdf).
    \80\ Freddie Mac Single-Family Seller/Servicer Guide, at 37.15 
(online at www.freddiemac.com/sell/guide/#).
    \81\ Admittedly, DTI reporting is of questionable accuracy. See 
Merrill Lynch, supra note 62.
---------------------------------------------------------------------------
    An alternative to loan modification is refinancing. The 
difference between a modification and a refinancing is that in 
a refinancing a new lender picks up the credit risk on the 
loan, whereas in a modification the existing lender continues 
to hold the credit risk. Refinancing programs have been 
ineffective to date either because of restrictive eligibility 
requirements or because of negative equity.
    Private refinancing is not possible, however, without 
dealing with the negative equity problem. Private lenders will 
not refinance a loan at more than 100 percent LTV. In a 
declining or uncertain housing market, private lenders are 
unlikely to refinance absent a larger equity cushion. 
Therefore, voluntary refinancing is not possible unless current 
lenders are willing to write-down loans to market value or are 
otherwise incentivized to refinance at above 100 percent LTV. 
Although it leaves the homeowner with a more affordable monthly 
payment, the difficulty with refinancing at much over 100 
percent LTV is that because of the long-term risk, repayment 
incentives are diminished and the homeowner may abandon the 
property due to the negative equity overhang. A homeowner who 
faces any financial setback, such as a job loss or unexpected 
medical bills, may be less inclined to stretch to continue the 
home mortgage payments if the house is worth far less than the 
mortgage. Similarly, a homeowner who is offered a job in a 
distant location or who wants to downsize to a smaller place 
may decide it is easier to walk away from a home in which 
resale is impossible and the homeowner faces substantial 
negative equity.
    The existence of junior mortgages also significantly 
complicates the refinancing process. Unless a junior mortgagee 
consents to subordination, the junior mortgage moves up in 
seniority upon refinancing. Out of the money junior mortgagees 
will consent to subordination only if they are paid. Thus, 
junior mortgages pose a serious holdup for refinancings, 
demanding a ransom in order to permit a refinancing to proceed.
    The federal government has sponsored a pair of refinancing 
programs, FHASecure and HOPE for Homeowners. The 2007 Federal 
Housing Administration's FHASecure program allowed refinancing 
of adjustable rate mortgages into fixed-rate, FHA-insured 
mortgages. Unlike any private program, FHASecure permitted 
refinancing for delinquent and underwater borrowers. Thus, 
negative equity did not present a refinancing obstacle for 
FHASecure. However, delinquencies had to be attributable to the 
loan resetting, as borrowers could not generally show any 
delinquencies in the six month period prior to the rate reset.
    FHASecure was closed down at the end of 2008. The program 
was predicted to help 240,000 homeowners.\82\ The program 
processed 487,818 loans, but this number appears to be inflated 
because it includes a substantial number of loans that would 
normally have been placed in other FHA programs.\83\ Only 4,128 
of these FHASecure refinanced loans were delinquent at the time 
of refinancing.\84\ FHASecure was quite restrictive in its 
eligibility requirements, however, which limited its potential 
effectiveness.\85\ Had FHASecure been less restrictive, it 
would likely have refinanced many more loans, but at the cost 
of taxpayers insuring a large number of negative equity 
mortgages. FHA noted that maintaining the program past the 
original termination date would have had a negative impact on 
the MMI fund that would have required offsets by either 
substantial across-the-board single family premium increases or 
the suspension of FHA's single family insurance programs 
altogether.\86\ In any case, the FHA's decision to shut down 
FHASecure testifies to the program's ultimate shortcomings in 
providing substantial foreclosure relief.\87\
---------------------------------------------------------------------------
    \82\ See, e.g., U.S. Department of Housing and Urban Development, 
Bush Administration to Help Nearly One-Quarter of a Million Homeowners 
Refinance, Keep Their Homes; FHA to Implement New "FHASecure" 
Refinancing Product (Aug. 31, 2007) (online at www.hud.gov/news/
release.cfm? content= pr07-123.cfm); U.S. Department of Housing and 
Urban Development, FHA Helps 400,000 Families Find Mortgage Relief; 
Refinancing on Pace to Help Half-million Homeowners by Year's End (Oct. 
24, 2008) (online at www.hud.gov/news/release.cfm?content=pr08-
167.cfm).
    \83\ Kate Berry, HUD Mulling How to Widen FHA Refi Net, American 
Banker (Feb. 15, 2008).
    \84\ Michael Corkery, Mortgage 'Cram-Downs' Loom as Foreclosures 
Mount, Wall Street Journal (Dec. 31, 2008).
    \85\ Berry, supra note 83.
    \86\ Letter from Brian D. Montgomery, Assistant Secretary for 
Housing--Federal Housing Commissioner, to All Approved Mortgagees (Dec. 
19, 2008) (Mortgagee Letter 2008-41) (online at www.hud.gov/offices/
adm/hudclips/letters/mortgagee/files/08-41ml.doc).
    \87\ The Panel understands that fraud concerns might have also 
driven HUD to shut down FHASecure. The program reportedly had a high 
level of defaults and there were indications, like the high rate of 
manual underwriting, that lenders and loan correspondents were 
massaging borrower information to fall within program guidelines.
---------------------------------------------------------------------------
    The HOPE for Homeowners program was established by Congress 
in July 2008 to permit FHA insurance of refinanced distressed 
mortgages. While more loans were theoretically eligible for 
HOPE for Homeowners, the program does not guarantee negative 
equity loans. Instead, the program requires the refinancing to 
be at 96.5 percent LTV based on a new, independent 
appraisal.\88\ This requires the current mortgagee to write 
down the principal outstanding on the loan.
---------------------------------------------------------------------------
    \88\ Housing and Economic Recovery Act of 2008, Pub. L. No. 100-
298, at Sec. 1402(e)(2)(B) (requiring a maximum 90 percent LTV ratio 
for FHA refinancing). This means that if the lender is perfectly 
secured, the lender will have to write down the principal by 10 
percent. If the lender is undersecured, the lender will have the write 
down the principal by a greater amount. Additionally, all lenders are 
required to pay insurance premiums on the mortgage of 3 percent of the 
principal initially and 1.5 percent of the principal remaining on an 
annual basis. Id. at Sec. 1402(i)(2).
---------------------------------------------------------------------------
    HOPE for Homeowners was predicted to help 400,000 
homeowners. As of January 3, 2009, it had attracted only 373 
applications, and only closed 13 refinancings, none of which 
had yet been FHA-insured.\89\ Many factors have contributed to 
the shortcomings of HOPE for Homeowners, including limitations 
on the program's flexibility and its reliance on private market 
cooperation to do the voluntary principal write-downs required 
for the refinancing.\90\ Lenders have been unwilling to take 
the principal write-down necessary to participate in the 
program.
---------------------------------------------------------------------------
    \89\ Letter from Brian D. Montgomery, Assistant Secretary for 
Housing-Federal Housing Commissioner, to Elizabeth Warren, Chairperson, 
Congressional Oversight Panel (Jan. 9, 2009). See also Dina ElBoghdady, 
HUD Chief Calls Aid on Mortgages a Failure, Washington Post (Dec. 17, 
2008) (online at www.washingtonpost.com/wp-dyn/content/article/2008/12/
16/AR2008121603177.html); Tamara Keith, Despite Program, No Hope for 
Homeowners, National Public Radio (Dec. 17, 2008) (online at 
www.npr.org/templates/story/story.php? storyId=98409330).
    \90\ Dina ElBoghdady, HUD Chief Calls Aid on Mortgages A Failure, 
Washington Post (Dec. 17, 2008).
---------------------------------------------------------------------------
    With a few exceptions, lenders have been very reluctant to 
take principal write-downs in their modifications.\91\ Both 
principal write-down or interest rate reductions can accomplish 
the same level of affordability in many cases. For a lender or 
investor, however, a principal write-down has a much greater 
impact. The loss from a principal write-down must be 
immediately recognized on the institution's books. Moreover, 
the lender or investor incurs the full loss from a principal 
write-down; if the loan is refinanced in ten years, the lender 
has already lost the principal it has forgiven.
---------------------------------------------------------------------------
    \91\ See White, Rewriting Contracts, supra note 699.
---------------------------------------------------------------------------
    If the lender reduces the interest rate, however, the 
monthly payment might be reduced in an amount that is 
equivalent to a principal reduction, but the lender is not 
required by accounting rules to recognize an immediate loss. An 
interest rate reduction's impact on the loan's net yield is 
spread out over the full term of the loan. If the loan is 
refinanced before term, as most loans are, then the lender will 
not incur the full cost of the interest rate reduction. 
Accordingly, lenders have been reluctant to write-down 
principal, despite calls to do so, including from the Chairman 
of the Federal Reserve Board of Governors.\92\
---------------------------------------------------------------------------
    \92\ Board of Governors of the Federal Reserve System, Address by 
Ben S. Bernanke, Chairman, at the Independent Community Bankers of 
America Annual Convention in Orlando, Florida: Reducing Preventable 
Mortgage Foreclosures (Mar. 4, 2008) (online at www.federalreserve.gov/
newsevents/speech/bernanke 20080304a.htm).
---------------------------------------------------------------------------
    Moreover, so long as lenders believe that there will be a 
bailout from the taxpayers, they are reluctant to reduce 
interest, much less principal. Lenders who anticipate that a 
bailout might be coming down the road will not impair loans 
voluntarily themselves. So long as banks think TARP will cover 
their losses in full on loans no one will pay back, they have 
no incentive to make concessions to homeowners. For financial 
institutions that are at or near insolvency, the problem is 
particularly acute: recognizing losses in the loan portfolio, 
even if they produce greater prospects of long-term repayment, 
may produce immediate consequences that the banks wish to avoid 
at all costs. The consequences of this behavior are especially 
negative for taxpayers, as the losses that then have to be 
addressed through bank bailouts are larger than they would have 
been had the mortgage portfolios been managed in an 
economically rational way. To the extent that the mortgage 
situation continues to deteriorate, it may exacerbate funding 
requirements within the TARP programs.
    Dealing with negative equity raises important questions 
about what happens if there is future appreciation of the 
home's value after principal reduction. To this end, proposals 
to deal with negative equity sometimes consider the possibility 
of shared appreciation plans in which borrowers, lenders, or 
even the government, agree on a manner in which they will share 
future increases in a home's value. Shared incentive plans 
might incentivize lenders to engage in voluntary principal 
reductions, although they would also require changes in 
accounting practices. It is also unclear how these programs 
would be administered over time.
    Although affordability of monthly payments is critical to 
reductions in foreclosures, the sustainability of foreclosure 
mitigation efforts will require attention to be paid to the 
problem of negative equity.

2. Why Previous Programs Have Limited Success

    The reasons for the limited success of past loan 
modification programs are many and complex. As an initial 
matter, however, it must be recognized that some foreclosures 
are not avoidable and some workouts may not be economical. This 
should temper expectations about the scope of any modification 
program. Nonetheless, there are many foreclosures that destroy 
value and that can and should be avoided. There are numerous 
obstacles--economic, legal, and logistical--that stand in the 
way of voluntary workouts. Removing these obstacles could 
greatly improve the circumstances of both homeowners and 
investors, help stabilize the housing market, and provide a 
sound foundation for rebuilding the economy.

a. Outreach problems

    First, there are serious outreach problems. Many troubled 
borrowers are unaware that there may be options to save their 
home or prevent a foreclosure. But because lenders do not want 
to take losses unless they have no other choice, homeowners are 
rarely presented with modification offers before they default. 
When a financially distressed homeowner defaults on her 
mortgage, she does not typically receive a modification offer 
immediately. Instead, the homeowner receives dunning calls and 
dunning letters demanding payment. Often other creditors are 
also clamoring for repayment. The result is that financially 
distressed homeowners frequently avoid opening their mail or 
answering the phone because they wish to avoid the pain 
associated with aggressive debt collection. By the time a 
mortgagee recognizes that modification may be needed and 
invites the homeowner to workout the loan, the homeowner is 
unlikely to read the mortgagee's communications.\93\ Even if 
the homeowner reads the offer, the homeowner is often 
suspicious of the mortgagee and fails to respond.
---------------------------------------------------------------------------
    \93\ Some servicers have responded to this problem with impressive 
creativity, such as sending out fake wedding invitations or canisters 
of dice labeled ``don't gamble with your home.''
---------------------------------------------------------------------------
    The result is that very few financially distressed 
homeowners are actually receiving loan modification offers that 
are sent. As the State Foreclosure Prevention Working Group has 
noted, ``[n]early eight out of ten seriously delinquent 
homeowners are not on track for any loss mitigation outcome.'' 
\94\ Whatever problems stand in the way of the actual 
modifications and in ensuring that they are meaningful, unless 
outreach to financially distressed homeowners improves, 
voluntary loan modification problems will only be able to 
prevent a very limited number of foreclosures.
---------------------------------------------------------------------------
    \94\ State Foreclosure Prevention Working Group, Analysis of 
Subprime Mortgage Servicing Performance, at 2 (Sept. 2008) (Data Report 
No. 3) (online at www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport3.pdf).
---------------------------------------------------------------------------
    Outreach problems are further compounded by unscrupulous 
vendors masquerading as government agencies or businesses 
preying on vulnerable homeowners by convincing them that their 
services are necessary to obtain a loan modification. Borrowers 
can be left wondering which entities can be trusted to assist 
them in obtaining foreclosure relief.
    During the field hearing in Prince George's County, MD, the 
Panel explored the issue of mortgage fraud, a significant 
problem in that community. Witnesses at the hearing described a 
number of foreclosure rescue scams employed by con artists to 
deceive distressed homeowners. Mortgage swindlers in Prince 
George's County are known to misrepresent themselves as 
government housing officials and prey on the elderly and poorly 
educated. A typical scheme is reconveyance, a ploy in which a 
fraudulent mortgage broker promises to help a struggling 
homeowner avoid foreclosure and repair their damaged credit. 
The broker arranges conveyance of the property to a third party 
with the expectation that at a certain point in the future the 
property will be reconveyed to the homeowner. The homeowner is 
led to believe that the transfer is necessary in order to 
improve his or her credit rating and allow for more favorable 
mortgage terms when the title is returned. In reality, the 
homeowner has unwittingly relinquished the title, the property 
has been refinanced to strip out the existing equity and the 
third party, or ``straw'', purchaser ultimately defaults on the 
refinanced note and the original homeowner is evicted upon 
foreclosure. John Mitchell of Forestville, MD, testified at the 
Prince George's County field hearing and was the victim of such 
a scam. Mr. Mitchell was unaware that he had been defrauded 
until the local sheriff arrived at his home to evict his 
family.
    The reconveyance scheme was the scam of choice for the 
Metropolitan Money Store, reputedly the most notorious 
perpetrator of mortgage fraud in Maryland history. The 
proprietor of the Metropolitan Money Store, Joy Jackson, a 
former exotic dancer with no prior experience in the credit 
industry, is currently facing Federal mail fraud and money 
laundering charges for allegedly defrauding Maryland homeowners 
out of $10 million in home equity.\95\ At the field hearing, 
Maryland Secretary of Labor, Licensing and Regulation Thomas 
Perez said the Metropolitan Money Store scam illustrated ``the 
absence of any meaningful barriers to entry'' to the mortgage 
industry.\96\
---------------------------------------------------------------------------
    \95\ Ovetta Wiggins, Md. Couple Indicted in Fraud Probe, Washington 
Post (June 13, 2008).
    \96\ Congressional Oversight Panel, Testimony of Thomas Perez, 
Maryland Secretary of Labor, Licensing & Regulation, Coping with the 
Foreclosure Crisis: State and Local Efforts to Combat Foreclosures in 
Prince George's County, MD (Feb. 27, 2009) (online at cop.senate.gov/
documents/testimony-022709-perez.pdf).
---------------------------------------------------------------------------

b. Servicer capacity problems

    Second, when homeowners try to contact their servicers to 
request a modification, they are often unable to reach them. 
Homeowners often have to wait on the phone for hours to get 
through to a servicer representative at a call center.\97\ For 
working families in particular, the time involved in trying to 
contact the servicer can be prohibitive. Homeowners who are 
trying to deal with their mortgage during their lunch breaks or 
between two jobs often give up because they cannot get through 
to their servicers.
---------------------------------------------------------------------------
    \97\ Brian Ross and Avni Patel, On Hold: Even Congresswoman Gets 
the Runaround on Bank Help Lines, ABC News (Jan. 22, 2009) (online at 
abcnews.go.com/Blotter/Story?id= 6702731&page=1).
---------------------------------------------------------------------------
    At the Prince George's County field hearing, Lisa McDougal, 
Co-Chair of the Coalition for Homeownership Preservation in 
Prince George's County, stated that several servicers have 
openly acknowledged that they simply were not prepared for the 
volume of loss mitigation requests that this crisis has 
generated.\98\ Phillip Robinson of Civil Justice, Inc. noted 
that many borrowers are stymied by the inability to even get 
someone on the phone. ``The number one thing that homeowners 
say to us when they get to any one of the different vehicles in 
the Maryland system is [that] they don't know what their 
roadmap is .  .  . they don't know what their options are,'' 
Mr. Robinson testified. ``They're calling their servicers and 
can't get an answer. No one is answering the phones. No one is 
responding to them.'' \99\ Ms. McDougal stressed that 
aggressive follow-up is necessary to get any response from most 
servicers. Many borrowers are ignored until they retain the 
assistance of a legal advocate or local public official.
---------------------------------------------------------------------------
    \98\ Congressional Oversight Panel, Testimony of Lisa McDougal, Co-
Chair of the Coalition for Homeownership Preservation in Prince 
George's County, Coping with the Foreclosure Crisis: State and Local 
Efforts to Combat Foreclosures in Prince George's County, MD (Feb. 27, 
2009) (online at cop.senate.gov/documents/testimony-022709-
mcdougal.pdf).
    \99\ Congressional Oversight Panel, Testimony of Phillip Robinson, 
Executive Director, Civil Justice, Inc., Coping with the Foreclosure 
Crisis: State and Local Efforts to Combat Foreclosures in Prince 
George's County, MD (Feb. 27, 2009) (online at cop.senate.gov/
documents/testimony-022709-robinson.pdf).
---------------------------------------------------------------------------
    Anne Balcer Norton of the St. Ambrose Housing Aid Center 
noted that poor staffing and a lack of accountability and 
oversight are to blame for the unresponsiveness of most 
servicers. ``Servicers either lack the staffing to effectively 
respond to loss mitigation requests or have artificially ramped 
up capacity at a level that precludes training and oversight of 
staff,'' Ms. Norton told the Panel.\100\ As a result, borrowers 
must often wait up to three to five months for a decision.
---------------------------------------------------------------------------
    \100\ Congressional Oversight Panel, Testimony of Anne Balcer 
Norton, Director of Foreclosure Prevention, St. Ambrose Housing Aid 
Center, Coping with the Foreclosure Crisis: State and Local Efforts to 
Combat Foreclosures in Prince George's County, MD (Feb. 27, 2009) 
(online at cop.senate.gov/documents/testimony-022709-norton.pdf).
---------------------------------------------------------------------------
    It is difficult for homeowners to initiate productive 
discussions with lenders because many servicers lack the 
capacity to deal with a large volume of modifications. Part of 
this is a staffing issue. Servicers are hired by the loan 
holders to manage the routine tasks associated with the 
mortgages. Previously, the majority of servicers' work centered 
on routine tasks, such as collecting mortgage payments, which 
are highly automated. As delinquencies have mounted, however, 
the business focus has shifted to loan mitigation, which is 
slower, more complex, and much less automated. Servicers are 
generally understaffed for handling a large volume of consumer 
loan workouts. Staffing is not simply a matter of manpower, but 
also of sufficiently trained personnel and adequate 
technological support. Servicer understaffing is a function of 
both servicers' cost-benefit analysis of hiring additional 
employees to handle loan workouts, the time it takes to train 
the employees, and the high turnover rates among consumer 
workout specialists.

c. Junior mortgages

    There are multiple mortgages on many properties, 
particularly recent vintage mortgage originations. (See Chart 
14, below.) Some second lien loans are ``piggybacks'' or 80/
20s, structured to avoid private mortgage insurance. By 2006, 
more than half of Alt-A mortgages included a second mortgage at 
the time of original funding. Across a range of products, many 
second mortgages were originated entirely separately from the 
first mortgage and often without the knowledge of the first 
mortgagee. In addition, millions of homeowners took on second 
mortgages, often as home equity lines of credit. As Chart 14 
shows, in recent years second mortgages have become far more 
common. Those debts also encumber the home and must be dealt 
with in any refinancing effort.
    The prevalence of multiple mortgage homes creates a 
coordination problem for the homeowner and the mortgagees. It 
also means that senior mortgagees are reluctant to offer 
concessions because the benefits of better loan performance 
accrue first to the junior mortgagees. Junior mortgagees may 
recognize that they have no ability to collect in an immediate 
foreclosure, but they have the power to hold up any 
refinancing. These second mortgage lenders are reluctant to 
give up their leverage and agree to any concessions absent a 
payoff. Multiple mortgages on the same home present a serious 
obstacle for loan workouts.

Chart 14. Percentage of Mortgage Originations on Properties with a 
        Junior Mortgage by Year \101\ 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    \101\ Abraham et al., supra note 44, at 11-12.
---------------------------------------------------------------------------

d. Special problems with securitized mortgages

    While outreach, staffing, and second mortgage problems 
present difficulties for the entire mortgage industry, there 
are special problems for securitized mortgage workouts. This is 
especially problematic because foreclosure rates are higher 
among securitized loans.\102\ Over two-thirds of residential 
mortgages originated since 2001 are securitized.\103\ For 
subprime, alt-A, and conforming loans, the securitization is 
over three-quarters in this period, and in 2007 it was over 90 
percent.\104\
---------------------------------------------------------------------------
    \102\ Tomasz Piskorski et al., Securitization and Distressed Loan 
Renegotiation: Evidence from the Subprime Mortgage Crisis, at 3 (Dec. 
2008) (University of Chicago Booth School of Business, Working Paper 
No. 09-02) (online at papers.ssrn.com/abstract=1321646) (finding a 19-
33 percent decrease in the relative mean foreclosure rate among 
portfolio loans).
    \103\ Inside Mortgage Finance, Mortgage Market Statistical Annual, 
at 3 (2008) (Vol. 2).
    \104\ Id.
---------------------------------------------------------------------------
    Residential mortgage securitization transactions are 
technical, complex deals, but the core of the transaction is 
fairly simple. A financial institution owns a pool of mortgage 
loans, which it either made itself or purchased from another 
source. Rather than hold these mortgage loans (and the credit 
risk) on its own books, the institution sells them to a 
specially created entity, typically a trust (SPV). The trust 
pays for the mortgage loans by issuing bonds. The bonds are 
collateralized (backed) by the loans now owned by the trust. 
These bonds are called residential mortgage-backed securities 
(RMBS). Typically the bonds are issued in tranches with a 
senior/subordinate structure.
    Because the SPV trust is only a shell to hold the loans, a 
third-party, called a servicer, must be brought in to manage 
the loans. The servicer is required by contract to manage the 
loans for the benefit of the RMBS holders. The servicer 
performs the day-to-day tasks related to the mortgages owned by 
the SPV, such as collecting mortgage loan payments from the 
homeowners and remitting them to the trust, and handling loss 
mitigation efforts (including foreclosure) on defaulted loans. 
The servicer is often, but not always, a corporate affiliate of 
the originator of the mortgage loans. Once the trust receives 
the payments, a corporate trustee with limited duties is 
responsible for making distributions to the bondholders.
            i. Contractual limitations on modification of securitized 
                    loans
    Securitization creates contractual limitations on private 
mortgage modification. Servicers carry out their duties 
according to what is specified in their contracts with the SPV. 
This contract is known as a ``pooling and servicing agreement'' 
or PSA. As noted by the American Securitization Forum, most 
securitizations provide servicers with significant flexibility 
to engage in loan modifications and other loss mitigation 
techniques where the loan is in default or where default is 
imminent or reasonably foreseeable.\105\ The decision to modify 
mortgages held by an SPV rests with the servicer, and servicers 
are instructed to manage loans as if for their own account and 
maximize the net present value of the loan.\106\
---------------------------------------------------------------------------
    \105\ House Committee on Financial Services, Testimony of Thomas 
Deutsch, Private Sector Cooperation with Mortgage Modifications: 
Ensuring That Investors, Servicers and Lenders Provide Real Help for 
Troubled Homeowners, at 5, 110th Cong. (Nov. 12, 2008).
    \106\ See 26 U.S.C. Sec. 1860A et seq. (Real Estate Mortgage 
Investment Conduit (REMIC) treatment); SFAS No. 140 (off-balance sheet 
accounting treatment).
---------------------------------------------------------------------------
    Nevertheless, some PSAs contain additional restrictions 
that can hamper servicers' ability to modify mortgages. 
Sometimes the modification is forbidden outright, sometimes 
only interest rates can be adjusted, not principal, and 
sometimes there are limitations on the amount by which interest 
rates can be adjusted. Other times the total number of loans 
that can be modified is capped (typically at 5 percent of the 
pool), the number of times a loan may be modified will be 
capped, or the number of modifications in a year will be 
capped. Generally, the term of a loan cannot typically be 
extended beyond the last maturity date of any loan in the 
securitized pool. Additionally, servicers are sometimes 
required to purchase any loans they modify at the face value 
outstanding (or even with a premium).\107\ This functions as an 
anti-modification provision.
---------------------------------------------------------------------------
    \107\ Greenwich Financial Services Distressed Mortgage Fund 3, LLC 
v. Countrywide Financial Corp., Index No. 650474-2008, Complaint (N.Y. 
Supr. Ct., N.Y. Co., Dec. 1, 2008) (online at iapps.courts.state.ny.us/
iscroll/SQLData.jsp?IndexNo=650474-2008) .
---------------------------------------------------------------------------
    The PSA is usually part of the indenture under which the 
MBS are issued. Under the Trust Indenture Act of 1939,\108\ the 
consent of 100 percent of the MBS holders is needed in order to 
alter the PSA in a manner that would affect the MBS's cash 
flow, as any change to the PSA's modification rules would. 
Changes that do not affect cash flow require either a 51 
percent or a 67 percent majority approval. It is arguable 
whether a change that allows more modifications affects cash 
flow; if so, the structure of the securitization becomes 
another factor to consider.
---------------------------------------------------------------------------
    \108\ 15 U.S.C. Sec. 77ppp(b).
---------------------------------------------------------------------------
    There can be thousands of MBS certificates from a single 
pool and these certificate holders might be dispersed world-
wide. The problem is exacerbated by resecuritizations, second 
mortgages, and mortgage insurance. MBS issued by an SPV are 
typically tranched--divided into different payment priority 
tiers, each of which will have a different dividend rate and a 
different credit rating. Because the riskier tranches are not 
investment grade, they cannot be sold to entities like pension 
plans and mutual funds. Therefore, they are often resecuritized 
into what are known as CDOs. A CDO is a securitization in which 
the assets backing the securities are themselves mortgage-
backed securities rather than the underlying mortgages. CDOs 
are themselves then tranched, and the senior tranches can 
receive investment grade ratings, making it possible to sell 
them to major institutional investors. The non-investment grade 
components of CDOs can themselves be resecuritized once again 
into what are known as CDO2s. This process can be 
repeated, of course, an endless number of times. Thus it 
becomes virtually impossible for a servicer to get unanimous 
consent for any MBS issue or for a single holder to purchase 
100 percent of the MBS in the issue.
    In addition, many MBS holders would have no incentive to 
consent to a change in the PSA. The out-of-the-money junior 
tranches have no incentive to support the modification, and the 
senior most tranches have a substantial enough cushion of 
subordinated tranches that they have no incentive to support 
the modification.
    The difficulty of modifying PSAs to permit modification on 
a wide scale is further complicated by the fact that many 
homeowners have more than one mortgage. Even when the mortgages 
are from the same lender, they are often securitized 
separately. If a homeowner is in default on two or three 
mortgages it is not enough to reassemble the MBS pieces to 
permit a modification of one of the mortgages. Modification of 
the senior mortgage alone only helps the junior mortgage 
holders, not the homeowner. In order for a loan modification to 
be effective for the first mortgage, it is necessary also to 
modify the junior mortgages, which means going through the same 
process. This process is complicated by the fact that senior 
lenders frequently do not know about the existence of the 
junior lien on the property.
    A further complication comes from insurance. An SPV's 
income can exceed the coupons it must pay certificate holders. 
The residual value of the SPV after the certificate holders are 
paid is called the Net Interest Margin (NIM). The NIM is 
typically resecuritized separately into an NIM security (NIMS), 
and the NIMS is insured by a financial institution. This NIMS 
insurer holds a position similar to an equity holder for the 
SPV. The NIMS insurer's consent is thus typically required by 
contract both for modifications to PSAs and modifications to 
the underlying mortgages beyond limited thresholds. With 
nothing more to lose from foreclosure and the ability to hold 
up a refinancing as their only leverage, NIMS insurers' 
financial positions are very similar to out-of-the-money junior 
mortgagees. Like junior mortgagees, NIMS are also unlikely to 
cooperate absent a payoff.
    Thus, the contractual structure and economic incentives of 
securitization can be an obstacle to private modifications of 
distressed and defaulted mortgages, even when that would be the 
most efficient outcome for the lenders and borrowers.\109\
---------------------------------------------------------------------------
    \109\ A fourth category--legal obstacles--in the form of REMIC tax 
provisions and Financial Accounting Board standards, are no longer a 
significant obstacle to modifying securitized loans. There are 
potentially adverse tax and accounting consequences if servicers 
engaging in too many voluntary modifications. Residential MBS are 
structured to enjoy pass-thru REMIC status under the Internal Revenue 
Code, 26 U.S.C. Sec. Sec. 1860A et seq., which enables the MBS to avoid 
double taxation of income. REMIC rules generally preclude wide-scale 
modification of securitized loans or their sale out of securitized 
pools, and these REMIC rules are further reflected in the contract with 
the servicer. The IRS has relaxed application of REMIC rules to 
mortgage loan modification programs. See Rev. Proc. 2008-28, 2008-23 
I.R.B. 1054.
    Likewise, accounting standards under SFAS 140 indicate that too 
many modifications would result in the servicer/originator having to 
take the securitized loans back onto its balance sheet. SEC Staff, 
however, have indicated that they do not believe that modifications of 
imminently defaulting loans would require on-balance sheet accounting. 
Letter from Christopher Cox, SEC Chairman to Rep. Barney Frank, 
Chairman of Committee on Financial Services, United States House of 
Representatives (July 24, 2008) (online at www.house.gov/apps/list/
press/financial svcs_dem/sec_response072507.pdf); Letter from Conrad 
Hewitt, Chief of Accounting, SEC to Mr. Arnold Hanish, Chairman of the 
Committee on Corporate Reporting, Financial Executives International 
and Mr. Sam Ranzilla, Chairman of the Professional Practice Executive 
Committee, The Center for Audit Quality, American Institute of 
Certified Public Accountants (Jan.8, 2008) (online at www.sec.gov/info/
accountants/staffletters/hanish010808.pdf).
---------------------------------------------------------------------------
    While restrictive PSAs present an obstacle to foreclosure 
mitigation efforts, it is important not to overstate their 
significance. The Panel's examination of modifications in 
several securitized pools with a 5 percent cap on the 
percentage of loans that may be modified reveals that 
modifications have not approached the cap. This indicates that 
the cap is not the major obstacle to successful 
modifications.\110\ Further, to date the Panel knows of no 
litigation against mortgage servicers for engaging in 
modifications that violate the terms of PSAs.\111\
---------------------------------------------------------------------------
    \110\ See White, Rewriting Contracts, supra note 69.
    \111\ Litigation brought against Bank of America and Countrywide is 
for a declaratory judgment that Bank of America and Countrywide must 
repurchase modified mortgages at face, not for doing unauthorized 
modifications.
---------------------------------------------------------------------------
    Previous legislative remedies have been of indeterminate 
success. In order to provide servicers with an incentive to 
participate in the Hope for Homeowners program, Congress 
created a safe harbor from legal liability for refinancing 
owners into the Hope for Homeowners program as part of the 
Housing and Economic Recovery Act of 2008. Despite the safe 
harbor provision, the program has had very limited 
participation. Restrictive PSAs do not appear to be the main 
immediate obstacle to loan modifications, but they present a 
significant limitation on expanded modification efforts.
            ii. Incentive problems created by securitization
    Securitization can also create incentive misalignment 
problems that can lead to inefficient foreclosures. Servicers 
have a duty to service loans in the best interest of the 
aggregate investor and to maximize the net present value on 
loans. Nonetheless, mortgage servicer compensation structures 
can create a situation in which foreclosure is more profitable 
to servicers than loan modification, even if it imposes bigger 
losses on both the homeowners and the investors. As a result, 
even wealth-destroying foreclosures may occur in large 
numbers.\112\
---------------------------------------------------------------------------
    \112\ Archana Sivadasan, The 800 Pound Gorrilla in the Room: 
Servicers Profit While Investors Face Losses, RGE Monitor (Nov. 4, 
2008) (online at www.rgemonitor.com/globalmacro-monitor/ 254261/
the_800_pound_gorrilla_in_the_room_servicers_profit_while_investors_ 
face_losses).
---------------------------------------------------------------------------
    Servicers receive three main types of compensation: a 
servicing fee, which is a percentage of the outstanding balance 
of the securitized mortgage pool; float income from investing 
homeowners' mortgage payments in the period between when the 
payments are received and when they are remitted to the trust; 
and ancillary fees. When a loan performs, the servicer has 
largely fixed-rate compensation. This is true also when a loan 
performs following a modification.
    Thus, if a servicer modifies a loan in a way that reduces 
monthly payments, the servicer will also have a reduced income 
stream. This reduced income stream will last only so long as 
the loan is in the servicing portfolio. If the loan is 
refinanced or if it redefaults, the loan will leave the 
portfolio. Generally servicers do not expect loans to remain in 
their portfolios for long. For example, a 2/28 ARM is likely to 
be refinanced by year three, when the teaser rate expires, and 
move to another servicer's portfolio. Moreover, for non-GSE 
RMBS, servicers are not compensated for the sizeable costs of 
loan modification. Thus, when a servicer modifies a loan, the 
servicer loses servicing and float income (which it will not 
have long into the future anyhow) and incurs expenses.
    By contrast, when a servicer forecloses, servicer 
compensation shifts to a cost-plus basis. The servicer does not 
receive any additional servicing fee or float revenue from the 
loan, but it does receive all expenses of the foreclosure, 
including any fees it tacks on, such as collateral inspection 
fees, process serving fees, etc., although it is unclear to 
what extent these fees produce profits. These fees are paid off 
the top from foreclosure recoveries, so it is the MBS holders 
that incur the losses in foreclosure, not the servicers.\113\ 
This arrangement can also create an incentive for servicers to 
sell foreclosed properties at low prices.\114\
---------------------------------------------------------------------------
    \113\ Servicer income in foreclosure is offset in part by the time-
value of advancing payments owed on defaulted loans to the trust until 
foreclosure. These payments are recoverable by the servicer, but 
without interest.
    \114\ Carrick Mollenkamp, Foreclosure `Tsunami' Hits Mortgage-
Servicing Firms, Wall Street Journal (Feb. 11, 2009).
---------------------------------------------------------------------------
    The fees servicers can add in foreclosure can be 
considerable, and there is effectively no oversight of their 
reasonableness or even whether the agreements authorize such 
fees.\115\ MBS holders lack the ability to monitor servicer 
decisions, and securitization trustees do not have the 
responsibility to do so. Servicers essentially receive cost-
plus-percentage-of-cost compensation when they foreclose. The 
incentive misalignments from this form of compensation are so 
severe that it is flatly prohibited for federal government 
contracts.\116\
---------------------------------------------------------------------------
    \115\ Katherine M. Porter, Misbehavior and Mistakes in Bankruptcy 
Mortgage Claims, Texas Law Review (2008).
    \116\ See 41 U.S.C. Sec. 254(b); 10 U.S.C. Sec. 2306(a).
---------------------------------------------------------------------------
    Servicer incentives are further complicated by the 
requirement that servicers advance payments of principal, 
interest, taxes, and insurance on non-performing loans to the 
MBS holders typically through foreclosure and until the 
property is disposed of. This too can also create an incentive 
for servicers to sell foreclosed properties at low prices in 
order to sell the property quickly and stop making 
advances.\117\ While servicers are able to recover all of their 
advances off the top of sale proceeds, they lose the time value 
of these advances, which can be considerable.\118\ While the 
requirement of making advances creates an incentive to modify 
defaulted loans, if the loan redefaults, the servicer will find 
itself making the advances anyway after incurring the expenses 
of the modification.
---------------------------------------------------------------------------
    \117\ Mollenkamp, supra note 114.
    \118\ Taxes and insurance are sometimes recoverable from other 
loans in the pool.
---------------------------------------------------------------------------
    The choice between modification and foreclosure is a choice 
between limited fixed-price income and a cost-plus contract 
arrangement with no oversight of either the costs or the plus 
components. For mortgage servicers, this can create an 
incentive to foreclose on defaulted loans rather than to modify 
them, even if modification is in the best interest of the MBS 
holders.\119\ The contractual requirement to make advances may 
mitigate this incentive alignment somewhat. The specific 
dynamics of servicer incentives are not well understood, but 
they appear to be a factor inhibiting loan modifications.
---------------------------------------------------------------------------
    \119\ Alternatively, if a servicer modifies a loan in a way that 
guarantees a quick redefault, it might be even more profitable. This 
might explain why so many modifications have resulted in higher monthly 
payments and why a large percentage of foreclosures have been after 
failed modification plans. See Jay Brinkmann, Mortgage Bankers 
Association, An Examination of Mortgage Foreclosures, Modifications, 
Repayment Plans, and Other Loss Mitigation Activities in the Third 
Quarter of 2007, at 10 (Jan. 2008) (online at www.mortgagebankers.org/
files/News/InternalResource/59454_LoanModificationsSurvey.pdf) (noting 
that nearly 30 percent of foreclosure sales in the third quarter of 
2007 involved failed repayment plans).
---------------------------------------------------------------------------
            iii. Servicer litigation risk aversion
    Servicers may also be reluctant to engage in more active 
loan modification efforts because of litigation risk. Servicers 
face litigation risk both for the number of modifications they 
do as well as for the type of modifications. Servicers are 
contractually obligated to maximize the net present value of 
the loans they manage. Net present value calculations are 
heavily dependent upon the assumptions made in the calculation, 
such as what a foreclosure sale return will be, the likelihood 
and likely timing of redefault on a loan modification, and 
future trends in housing prices. Net present value calculations 
are usually done through computer software platforms, and there 
is no standardized system or set of inputs. Changes to the 
assumptions in net present value calculations can shift whether 
a servicer will pursue foreclosure or a loan modification.
    Servicers face potential scrutiny and litigation from 
investors based on their net present value calculations and 
whether they have adhered to those calculations. Investors in 
MBS are typically tranched in a senior/subordinate structure. 
This means that senior tranches will want the more certain and 
immediate recovery on a defaulted loan because they will be 
shielded from losses by the subordinated tranches. Therefore, 
the senior tranches are likely to push for quick foreclosure. 
By contrast, the subordinated tranches stand to lose 
significantly in foreclosure, and may push for the possibility 
of a larger recovery in a modification. The type of a 
modification a servicer engages in can also have a disparate 
impact on different tranches of MBS investors, as principal and 
interest payments are often allocated separately among 
investors. Thus, a reduction in interest rates affects 
different investors than a reduction in principal. The result 
is what is known as ``tranche warfare,'' with the servicer 
caught in between competing groups of investors.\120\
---------------------------------------------------------------------------
    \120\ Kurt Eggert, Comment on Michael A. Stegman et al.'s 
`Preventive Servicing Is Good for Business and Affordable Homeownership 
Policy': What Prevents Loan Modifications, Housing Policy Debate, at 
290-91 (2007).
---------------------------------------------------------------------------
    A lawsuit was filed on December 1, 2008, by Greenwich 
Financial Services Distressed Mortgage Fund 3 LLC and QED LLC, 
against Bank of America.\121\ While the lawsuit did not dispute 
that Bank of America and Countrywide Financial had the 
authority to modify mortgages, the plaintiff hedge fund claimed 
that modifications meant that Bank of America was required to 
repurchase mortgages originated by Countrywide Financial once 
those mortgages had been modified in settlement of a predatory 
lending lawsuit. House Financial Services Committee Chairman 
Barney Frank said of this lawsuit, ``[O]f all the outrageous 
acts of social irresponsibility I have ever seen, it is the 
lead plaintiff in that lawsuit, who bought the paper solely for 
the purpose of doing it (filing the lawsuit).'' \122\
---------------------------------------------------------------------------
    \121\ Greenwich Financial Services Distressed Mortgage Fund 3, LLC 
v. Countrywide Financial Corp., Index No. 650474-2008, Complaint (N.Y. 
Supr. Ct., N.Y. Co., Dec. 1, 2008) (online at iapps.courts.state.ny.us/
iscroll/SQLData.jsp?IndexNo=650474-2008).
    \122\ House Committee on Financial Services, Statement of Chairman 
Barney Frank, Oversight Concerns Regarding Treasury Department Conduct 
of the Troubled Assets Relief Program, 110th Cong. (Dec 10, 2008) 
(online at financialservices.house.gov/hearing110/hr121008.shtml).
---------------------------------------------------------------------------
    Servicer conduct is evaluated under a deferential business 
judgment standard that shields servicers from a great deal of 
litigation risk. To date no litigation has been filed alleging 
that servicers have engaged in too many or too few 
modifications or the wrong type of modifications. Nonetheless, 
fear of litigation risk may be chilling some loan modification 
efforts. Clear industry standards and procedures for 
modifications would provide comfort to servicers in this 
regard, and the efforts of HOPE NOW, Treasury, HUD, FHFA, and 
the GSEs in creating the Streamlined Loan Modification Program 
represents important progress in this regard, although it does 
not technically affect the legal standard by which servicers 
are judged.
            iv. Servicer business models
    Finally, it is unlikely that mortgage servicers will be 
able to conduct mass loan modifications. Mortgage servicers 
perform two services that require very different skills and 
recourses. Servicers process transactions and engage in loss 
mitigation on defaulted loans. Transaction processing consists 
of sending out billing statements and receiving payments. It is 
a highly scalable and automatable business that involves little 
discretion, expertise, or manpower. Loss mitigation, in 
contrast, involves tremendous discretion, expertise, and 
manpower. It does not benefit from economies of scale and needs 
significant human labor to staff call centers, which have very 
high employee turnover rates.
    When housing markets perform well and there are few 
defaults, servicers' business is largely transaction 
processing. When default rates rise, however, servicers' 
business is increasingly a loss mitigation enterprise. Mortgage 
servicers have not staffed or built their operations around 
handling defaults at current levels. They lack the trained 
personnel to handle mass modifications. They lack sufficient 
personnel to handle a large volume of customer contacts and the 
trained loan officers necessary to handle the volume of 
requested modifications, which are essentially the underwriting 
of a new loan. Servicers are simply in the wrong line of 
business for doing modifications en masse.
    Given the special obstacles to loan modification caused by 
securitization, it is not surprising that non-securitized 
portfolio loans perform better in the first place,\123\ are 
more likely to be modified, and are less likely to redefault 
after modification.\124\ Portfolio loans superior performance 
might be in part because portfolio loans are of better quality 
initially.\125\ Even when ``hard'' underwriting 
characteristics, like LTV, FICO scores, and DTI ratios are held 
constant, lenders who hold their own mortgages are able to 
engage in more customized underwriting for their portfolio 
loans than is practical for credit rating agencies and MBS 
investors.\126\
---------------------------------------------------------------------------
    \123\ Benjamin Keys, et al., Did Securitization Lead to Lax 
Screening? Evidence From Subprime Loans (2008) (University of Chicago 
Working Paper) (online at papers.ssrn.com/sol3/papers. 
cfm?abstract_id=1093137).
    \124\ Piskorski et al., supra note 102, at 3.
    \125\ Piskorski et al., supra note 1022, at 3.
    \126\ Yingjin H Gan and Christopher Mayer, Agency Conflicts, Asset 
Substitution, and Securitization (2006) (National Bureau of Economic 
Research, Working Paper No. 12359) (online at www.nber.org/papers/
w12359).
---------------------------------------------------------------------------
    There are many practical, economic, and legal obstacles 
standing in the way of successful and sustainable large-scale 
loan modifications.

            IV. CHECKLIST FOR SUCCESSFUL LOAN MODIFICATIONS

    While Congress needs better information about foreclosure 
mitigation efforts, the urgency of the matter precludes delay. 
For a solution to be timely it is important that it be 
implemented promptly. Neither American homeowners nor the 
economy can afford another failed attempt at foreclosure 
mitigation.

                           A. DATA COLLECTION

    Congress and the Administration cannot craft optimal policy 
responses to the mortgage crisis without sufficient 
information. The current state of federal government knowledge 
about mortgage loan performance and loss mitigation efforts is 
inadequate. The Panel recommends that Congress initiate a 
national mortgage loan performance reporting requirement, 
similar to the reporting required under the Home Mortgage 
Disclosure Act, to provide a complete source of data. In 
addition, federal banking and housing regulators should be 
mandated to analyze these data and to make them publicly 
available, providing comprehensive information about mortgage 
loan performance and loss mitigation efforts.

                               B. METRICS

    In order to evaluate the likely success of any foreclosure 
prevention effort, it is necessary to establish meaningful 
metrics. Based on the Panel's review of the evidence available, 
its consultation with experts, and its field hearing, the panel 
has developed a list of standards that will aid in the 
evaluation of any foreclosure mitigation plan. Some of these 
standards apply solely to voluntary or incentive-based 
modification or refinancing programs; others apply to all 
methods. The Panel recognizes that there are significant 
obstacles to voluntary mortgage loan restructuring, and 
believes involuntary restructuring programs are an essential 
option.
    The Panel plans to evaluate any proposal's performance on 
these criteria using the following checklist.

               Checklist for Mortgage Mitigation Program

    Will the plan result in modifications that create 
affordable monthly payments?
    Does the plan deal with negative equity?
    Does the plan address junior mortgages?
    Does the plan overcome obstacles in existing pooling and 
servicing agreements that may prevent modifications?
    Does the plan counteract mortgage servicer incentives not 
to engage in modifications?
    Does the plan provide adequate outreach to homeowners?
    Can the plan be scaled up quickly to deal with millions of 
mortgages?
    Will the plan have widespread participation by lenders and 
servicers?

1. Affordable Monthly Payments

    Ensuring affordable monthly mortgage payments is the key to 
mitigating foreclosures. Any foreclosure mitigation plan must 
be based on a method of modifying or refinancing distressed 
mortgages into affordable ones. Clear and sustainable 
affordability targets achieved through interest rate 
reductions, principal write-downs, and/or term extensions 
should be a central component of foreclosure mitigation.
    Affordability targets must be set low enough that consumers 
are not at risk for redefault shortly after the modification. 
The Panel is concerned that the DTI target of 38 percent in the 
Streamlined Modification Program is too high. The Panel also 
recognizes that affordability is part of a broader picture of 
consumer finances, and that efforts to make mortgages 
affordable must consider other sources of consumer debt 
burdens, such as credit cards, student loans, auto loans, and 
medical debt, along with declining household incomes.

2. Sustainable Mortgages

    It may not be enough simply to make mortgages affordable. 
Mortgages must also be sustainable. Serious negative equity may 
undermine the sustainability of any restructured mortgage. 
While mortgage payments can generally be restructured to 
affordable levels through reduction of interest rates and 
increases in loan term, the long-term sustainability of loan 
workouts, be they through modification or refinancing, may 
depend upon the degree of negative equity.\127\
---------------------------------------------------------------------------
    \127\ See Leonhardt, supra note 67.
---------------------------------------------------------------------------
    Homeowners with negative equity cannot sell their homes 
unless they can make the balloon payment that lurks in the 
background. Many homeowners will eventually need to move for 
jobs, for assisted living, for larger or smaller living spaces, 
or to be near family. If they can find rental housing at an 
equivalent monthly payment price, they will abandon homes 
burdened by negative equity. Significant negative equity raises 
the serious risk that foreclosures have merely been postponed, 
not prevented.
    Negative equity will create significant distortions in the 
labor, elderly care, and housing markets. Moreover, negative 
equity will keep foreclosures above their historically low 
levels. These delayed foreclosures will continue to plague the 
US housing market and financial institutions' books for 
decades.
    Attempts to deal with negative equity must also address the 
question of who bears the loss from any write-down of the 
mortgage to reduce negative equity and who should benefit from 
any future appreciation on written-down mortgage.\128\ Although 
affordability is key for short-term success in foreclosure 
mitigation, sustainability is equally important in ensuring 
future economic stability.
---------------------------------------------------------------------------
    \128\ The experience of past housing bubbles suggests that it will 
be a decade or more before we see much housing price appreciation.
---------------------------------------------------------------------------

3. Junior Mortgages

    Junior mortgages pose a significant obstacle to 
restructurings of first mortgages because of junior mortgagees' 
ability to free ride on modifications and hold up refinancings. 
Any modification that reduces payments on the first mortgage 
benefits the junior mortgagee because the modification frees up 
income that is available to service the junior mortgage. 
Because of this free-riding problem, first mortgagees may be 
reluctant to engage in modifications.
    Junior mortgagees are also able to stymie refinancings of 
first mortgages. Unless the junior mortgagee's consent is 
gained, the junior mortgagee gains priority over the 
refinancer. As a result, refinancing is extremely difficult 
unless the junior mortgagee agrees to remain subordinated, and 
junior mortgagees often seek a payment for this. The problem is 
particularly acute with totally underwater junior mortgagees, 
who only have hold-up value in their mortgage.
    Attempts to restructure mortgages for affordability and 
sustainability must also have a clear method for dealing with 
junior mortgages.

4. Restrictive Pooling and Servicing Agreements (PSAs)

    Restrictions on mortgage servicers' ability to modify loans 
are an obstacle that has contributed to foreclosures that 
destroy value for homeowners and investors alike. For private 
voluntary solutions to work on a large scale, mortgage 
servicers must be able to modify loans when doing so is value-
enhancing. There are only a limited number of ways to deal with 
restrictive PSAs: either abandoning voluntary, servicer-
initiated foreclosure mitigation for some form of involuntary 
loan modification or refinancing, including judicial 
modification in bankruptcy or narrowly tailored legislation 
that voids restrictions on modifying residential mortgage loans 
if the modified loan would have a net present value greater 
than the foreclosure recovery. Creation of a safe harbor from 
legal liability in addition to creating a market standard could 
provide an incentive for more workouts by servicers.\129\ 
Restrictive PSAs must eventually be addressed to ensure 
prevention of uneconomic foreclosures.
---------------------------------------------------------------------------
    \129\ See Anna Gelpern and Adam J. Levitin, Rewriting Frankenstein 
Contracts: Workout Prohibitions in Residential Mortgage-Backed 
Securities (Feb. 2009) (Georgetown Public Law Research Paper No. 
1323546) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1323546).
---------------------------------------------------------------------------

5. Servicer Incentives

    For private solutions to work on a large scale, mortgage 
servicers must have appropriate incentives to restructure 
loans. Incentives might come via sticks (e.g., loss of future 
GSE business, bankruptcy modification of mortgages, and eased 
investor and homeowner litigation) or carrots (e.g., per/
modification bounties and litigation safe harbors) or a 
combination of both. Proper alignment of servicer incentives 
will be necessary to ensure that any foreclosure mitigation 
plan is smoothly implemented.

6. Borrower Outreach

    The success of any foreclosure mitigation program depends 
not only on the quality of loan restructuring, but also on the 
number of preventable foreclosures it can help avoid. Key to 
maximizing the impact of any foreclosure mitigation program is 
putting financially distressed homeowners in contact with 
someone who can modify their mortgages. This contact is 
essential for any negotiated workout attempt. Servicer outreach 
efforts have been hobbled by financially distressed homeowners' 
suspicion of servicers and simple unresponsiveness to attempts 
to contact them due to repeated dunning. Moreover, many 
servicers are not skilled or experienced with outreach. The 
Panel believes that TARP funds could be used effectively to 
fund outreach efforts through community organizations or 
through direct federal efforts.
    In addition, the government should consider devoting some 
portion of borrower outreach funds to prevention of ``predatory 
modifications'' in which businesses charge exorbitant fees to 
obtain loan modifications the borrowers could have obtained for 
free. Funding could be directed towards a public education 
campaign. Credible outreach directly from the government could 
tell homeowners what sorts of mortgage help is available, and 
could be effectively targeted to high foreclosure zip codes. 
Specific security features in the communication could provide 
even further reassurance that the communication is not from one 
of the fraudsters impersonating the government. Further, the 
government should consider whether it has the necessary 
personnel, resources, and enforcement authority to crack down 
on the predators who misrepresent themselves as being a part of 
or acting on behalf of the federal government in negotiating or 
providing loan modifications, as well as those who use loan 
modifications as another opportunity to rip off vulnerable 
consumers.

7. Servicer Capacity

    Servicers lack capacity to handle current demand for loan 
workouts, and they have no apparent ability to handle a greater 
volume of modifications. Foreclosure mitigation plans should 
consider methods that would assist servicers to move distressed 
homeowners through the system more quickly. For example, a 
federal pre-qualification conduit that could be combined with a 
temporary stay of foreclosure on pre-qualified loans to speed 
the process. While a pre-qualification conduit could take many 
forms, utilizing technology, such as a web portal, could 
provide even further efficiency and capacity enhancements. 
Technology could provide even greater expansion through use of 
an automated mitigation process, similar to the automated 
underwriting processes employed in making the initial loans.
    Following prequalification by the conduit, a borrower could 
be put in touch with the servicer who would assign a date and 
time for meeting as well as tell the borrower what 
documentation is necessary. This orderly process could provide 
a temporary stay of foreclosure to people who meet basic 
qualifications. Mitigation efforts should also consider methods 
for encouraging efficient use of servicing resources, such as 
servicers with capacity constraints to enter into subservicing 
by servicers with excess capacity.

8. Industry Participation

    Any foreclosure plan will ultimately succeed or fail based 
on whether millions of troubled loans are diverted from 
foreclosure to modification. Whether incentives, mandates, or 
some combination are used to drive enrollment, designers of the 
plan must always be conscious of the level of industry 
participation. Eligibility for borrowers must depend on the 
criteria set forth in the plan, rather than the willingness of 
the servicer or lender to participate in the foreclosure 
mitigation. Only broad servicer and lender participation can 
ensure that the plan reaches all or most of the borrowers who 
would need the relief offered by the mitigation initiative.

                            V. POLICY ISSUES


                        A. ALLOCATION OF LOSSES

    Any attempt to address the policy issues involved with the 
housing crisis must start with recognition of losses. The 
housing crisis has already caused trillions of dollars in 
losses, spread among homeowners, financial institutions, and 
investors--with trillions more in losses imposed on third 
parties, such as neighbors, taxing authorities, and those whose 
livelihood are in housing or related industries. Worse, the 
losses will continue. Whether these losses are recognized 
immediately or loss recognition is delayed, the losses are 
real. It may be possible to mitigate some of the losses, but 
not all can be avoided. The central question is how to allocate 
those losses among various parties. There is no escaping the 
distributional question: Any solution to the housing crisis--
including doing nothing--is a distributional decision. 
Ultimately, there are two basic distributional choices: letting 
the losses lie where they may, or bailing out investors.

1. Let Losses Lie Where They May

    Investors and lenders who willingly assumed credit risk 
will be stuck with their losses. This is what they bargained 
for, no more and no less. Letting losses lie where they may 
means that some financial institutions may find themselves 
insolvent and need to either be liquidated or recapitalized, 
but the United States has well-established methods for doing 
so: business bankruptcy, FDIC proceedings, and state insurance 
insolvency proceedings. Homeowners, too, will suffer, as 
foreclosures will likely proceed apace. Because of other 
impediments to mortgage modification, some of these 
foreclosures may destroy value for both the investor and the 
homeowner. There will be the serious third-party spillover 
effects on neighbors, on communities, on local government, and 
on other lenders as foreclosures beget more foreclosures and 
result in lower foreclosure sale prices.
    A second way to allocate losses among private parties would 
be to amend the bankruptcy laws to permit judicial modification 
of mortgages. This would give lenders and investors at least as 
much as the current market value of the property, an amount 
that typically exceeds by tens of thousands of dollars the 
value released in a foreclosure sale. Such an approach would 
also reduce the number of foreclosures, reducing the losses 
faced by homeowners and avoiding the deadweight economic loss 
and spillover effects imposed on third parties. Bankruptcy 
relief would not involve the use of any taxpayer funds to bail 
out investors, but it could allow for better outcomes than the 
foreclosure process.
    Third, the government could seize mortgages and pay 
investors just compensation for them, halting the cycle of 
foreclosures and declining prices. This would allow the 
government to modify the mortgages at will, while providing 
investors and lenders with the value of their loans and nothing 
more.

a. Bankruptcy modification

    It is also possible for mortgages to be modified without 
the consent of the mortgage investors. The principal mechanism 
to accomplish this would be through bankruptcy proceedings. 
Bankruptcy freezes all collection efforts temporarily, 
including foreclosures.\130\ Businesses and consumers are able 
to restructure all types of loans in bankruptcy, rewriting 
mortgages on business properties, rental property and vacation 
homes. The sole exception is that mortgages secured by a 
person's principal residence cannot be modified.\131\ There is 
presently legislation pending in Congress that would amend the 
Bankruptcy Code to permit judicially-supervised modification of 
all mortgage types in bankruptcy.\132\
---------------------------------------------------------------------------
    \130\ 11 U.S.C. Sec.  362(a).
    \131\ 11 U.S.C. Sec. 1322(b)(2).
    \132\ Helping Families Save Their Homes in Bankruptcy Act of 2009, 
S. 61, 111th Cong. (2009); Helping Families Save Their Homes in 
Bankruptcy Act of 2009, H.R. 200, 111th Cong. (2009); Emergency 
Homeownership and Equity Protection Act, H.R. 225, 111th Cong. (2009).
---------------------------------------------------------------------------
    The type of bankruptcy modifications proposed for mortgages 
on principal residences differs from the debt restructurings 
that are currently permitted for vacation homes or rental 
property, if they are modified in Chapter 13. In Chapter 13, 
all debts, including the reduced principal amount, must be 
repaid within the three-to-five years duration of the 
bankruptcy plan. In Chapter 11, by comparison, vacation homes, 
rental property and mortgages on all business property can be 
stretched over decades. The proposed bankruptcy modification 
would permit the modified loan on the principal residence to be 
held to maturity and repaid over as much as thirty years. The 
length of the anticipated repayment period in the proposed 
bankruptcy modification would be more like the treatment of 
mortgages on vacation homes, rental property and all business 
property in Chapter 11.
    Bankruptcy modification would permit homeowners to bypass 
all of the obstacles to voluntary loan modification--practical 
outreach and staffing problems, restrictive pooling and 
servicing agreements, and improperly motivated mortgage 
servicers. It could be administered immediately through the 
existing bankruptcy court system. Mortgage modification in 
bankruptcy would not impose any direct costs to taxpayers.
    Bankruptcy modification has some significant limitations. 
Because of strict income and property limitations, not all 
homeowners would qualify. Even among those who qualified, many 
homeowners might be unwilling to file for bankruptcy, either 
because of moral reservations or because they are unwilling to 
make extensive public declaration of their financial 
circumstances, commit all their disposable income for three to 
five years to repaying creditors, and commit to living on a 
court-supervised, IRS budget for those three-to-five years.
    Several concerns have been raised about the adverse 
economic impact of permitting judicially-supervised 
modification of mortgages in bankruptcy: that it would result 
in higher costs of credit and/or less mortgage credit 
availability going forward; that it would trigger a flood of 
bankruptcy filings that the courts cannot handle; that the 
increase in filings would have adverse effects on other 
creditors such as credit card lenders; that it would create 
additional losses for mortgagees; and that it would force 
losses on AAA-rated mortgage-backed securities because of an 
unusual loss allocation feature in mortgage-securitization 
contracts.\133\ Additionally, concerns have been expressed that 
judicial modification of mortgages would reward some homeowners 
who undertook cash-out refinances and purchased luxury goods or 
services.\134\
---------------------------------------------------------------------------
    \133\ See, e.g., Todd J. Zywicki, Don't Let Judges Tear Up Mortgage 
Contracts, Wall Street Journal (Feb. 13, 2009).
    \134\ See, e.g., id.
---------------------------------------------------------------------------
    Although there has been significant discussion of the 
potential impact of judicial modifications on mortgage credit 
price and availability, unfortunately there is not a sizeable 
body of academic work that speaks to this point. Mortgage 
industry participants such as the Mortgage Bankers Association 
have said that permitting judicial modification would result in 
a 2 percent across the board increase in mortgage interest 
rates and a possible reduction in credit availability.\135\ 
While they do not have empirical data, they cite the market-
based need for lenders to price to increased risk, including 
new legal risk.
---------------------------------------------------------------------------
    \135\ House Committee on the Judiciary, Subcommittee on Commercial 
and Administrative Law, Statement of David G. Kittle, Mortgage Bankers 
Association, Straightening Out the Mortgage Mess: How Can We Protect 
Home Ownership and Provide Relief to Consumers in Financial Distress?--
Part II: Hearing on H.R. 3609, 110th Cong., at 3 (Oct. 30, 2007) 
(online at judiciary.house.gov/hearings/pdf/Kittle071030.pdf) (2 
percent rate increase claim); Letter from Stephen A. O'Connor, Senior 
Vice President of Government Affairs, Mortgage Bankers Association, to 
Representative Brad Miller (Apr. 18, 2008) (providing alternative 
calculation and 1.5 percent rate increase claim).
---------------------------------------------------------------------------
    The only independent, empirical research on the effect of 
permitting judicial modification of home mortgages indicates 
the opposite: that it is unlikely to result in more than a de 
minimis increase in the cost of mortgage credit or reduction in 
mortgage credit availability.\136\ The data show that when they 
price mortgages or mortgage insurance for non-homestead 
property where judicial modifications are allowed, lenders have 
not raised prices to deal with possible write downs in 
bankruptcy. This finding is consistent with basic economic 
theory: so long as lenders' losses from loan modification in 
bankruptcy would be smaller than those in foreclosure, lenders 
will not price against bankruptcy modification.
---------------------------------------------------------------------------
    \136\ Levitin, supra note 14.
---------------------------------------------------------------------------
    Making meaningful bankruptcy relief available to 
financially-distressed homeowners would, in the absence of 
another foreclosure mitigation option, likely result in an 
increase in bankruptcy filings. There is no reason, however, to 
believe that the bankruptcy courts would be overwhelmed by the 
rise of filings.\137\ As Professor Michelle J. White, President 
of the American Law and Economics Association, has observed, 
there was a dramatic spike in filings in the fall of 2005, 
before the effective date of the Bankruptcy Abuse Prevention 
and Creditor Protection Act of 2005, and the bankruptcy court 
system successfully handled the filing volume with more limited 
staffing than currently exists.\138\ Moreover, much of the 
workload in bankruptcy cases is not handled by judges, but 
rather by debtors' attorneys and Chapter 13 trustees; judges 
would not decide on the terms of a mortgage modification, but 
would merely approve or deny the requested modification 
depending on whether it conformed to statutory requirements. 
The valuations that are necessary in any proposal to modify 
home mortgages are similar to the work that bankruptcy courts 
do every day in valuing business real estate, equipment, cars, 
partnerships, and all other kinds of property.
---------------------------------------------------------------------------
    \137\ See Alan Schwartz, Don't Let Judges Fix Loans, New York Times 
(Feb. 27, 2009). Likewise, Professor Schwartz's concerns about 
interminable valuation litigation are unfounded; after a handful of 
initial valuation decisions in each bankruptcy court, settlement 
parameters will become clear, so parties will settle on valuation 
rather than engage in expensive litigation.
    \138\ Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, 
and the Mortgage Crisis, at 18 (Dec. 2008) (National Bureau of Economic 
Research Working Paper 14549) (online at www.nber.org/papers/w14549).
---------------------------------------------------------------------------
    An increase in bankruptcy filings could create additional 
losses for credit card lenders. On the other hand, it is 
possible that families who can get some mortgage relief will be 
more stable economically and more able to pay off their credit 
cards and other loans.
    Bankruptcy losses might not fall within the normal senior/
subordinate tranching of MBS. But modification of mortgages in 
bankruptcy would not create mortgage losses where they 
otherwise do not exist. Instead, bankruptcy merely forces 
recognition of existing losses. Bankruptcy requires that a 
secured lender must receive at least the fair market value of 
the collateral.\139\ In the case of a homeowner facing 
foreclosure, this amount is often far in excess of the amount 
the lender would receive through foreclosure. If bankruptcy is 
viewed as an alternative to foreclosure, it should not create 
new losses on mortgages and may, in fact, save mortgage lenders 
money.
---------------------------------------------------------------------------
    \139\ 11 U.S.C. Sec. 1325(a)(5).
---------------------------------------------------------------------------
    As discussed in the section on moral hazard, infra, any 
foreclosure mitigation effort will inevitably create concerns 
about both spendthrift homeowners and irresponsible lenders 
abusing the system by socializing losses; there is nothing 
specific to bankruptcy in these important concerns. Unlike 
other bailout proposals, however, bankruptcy already has 
important safeguards against abuse by debtors.\140\ As a 
further safeguard, some have suggested crafting bankruptcy 
modification to focus on situations in which borrowers have 
made a good faith effort to obtain a mortgage modification 
prior to filing for bankruptcy, and there is no evidence of 
borrower fraud.
---------------------------------------------------------------------------
    \140\ See 11 U.S.C. Sec. Sec. 1325(a)(3) (good faith filing of 
bankruptcy petition required), 1325(a)(7) (requiring good faith plan 
filing); 1325(b) (requiring all of a debtor's disposable income be paid 
to unsecured creditors); 1328(a) (exceptions to discharge).
---------------------------------------------------------------------------
    Regardless of how these concerns about bankruptcy 
modification are resolved, bankruptcy modification by itself is 
unlikely to solve the foreclosure crisis. Credit Suisse 
estimates that permitting modification of mortgages in 
bankruptcy would prevent 20 percent of foreclosures.\141\ The 
ability to declare bankruptcy to deal with a mortgage in 
default would, however, likely change the non-bankruptcy 
negotiations. Currently, homeowners who are unable to make 
their mortgage payments have few options other than to force 
the lender to go through foreclosure proceedings or to plead 
for the lender to modify the mortgage. A homeowner who could 
credibly threaten to file for bankruptcy might find that 
servicers were more responsive and that lenders were more 
willing to make modifications available.
---------------------------------------------------------------------------
    \141\ Credit Suisse Fixed Income Research, Bankruptcy Law Reform: A 
New Tool for Foreclosure Avoidance (Jan. 26, 2009) (online at 
www.affil.org/uploads/3r/NH/3rNHuGFNnZ2Of5BEwiAeqw/Credit-Suisse-
1.29.09-Bankruptcy-Reform.pdf).
---------------------------------------------------------------------------
    In the absence of a convincing voluntary modification or 
refinancing program, bankruptcy modification presents one 
option for immediate foreclosure mitigation.

b. Takings

    Another way of letting losses lie where they may while 
mitigating the impact of uneconomic foreclosures would be for 
the federal (or state) government to seize mortgages under 
eminent domain power.\142\ These takings are essentially 
government conversion of property, for which just compensation 
(not necessarily full face value) must be paid. If the 
government took mortgages, it could modify them at will. 
Although the costs of a large-scale takings of mortgages are 
unknown, it would at the very least implicate significant 
taxpayer funds and might raise Constitutional issues. Takings 
would not result in an investor bailout, however. Investors and 
lenders would get the value of their loans and nothing more. 
Thus, takings provides a way to mitigate the impact of wealth-
destroying foreclosures while not changing contractual loss 
allocation rules.
---------------------------------------------------------------------------
    \142\ Howell E. Jackson, Build a Better Bailout, Christian Science 
Monitor (Sept. 25, 2008) (online at www.csmonitor.com/2008/0925/p09s02-
coop.html); Lauren E. Willis, Stabilize Home Mortgage Borrowers, and 
the Financial System Will Follow (Sept. 24, 2008) (Loyola-Los Angeles 
Legal Studies Paper No. 2008-28) (online at papers.ssrn.com/sol3/
papers.cfm? abstract_id=1273268).
---------------------------------------------------------------------------

2. A Bailout for Investors

    Rather than leaving the losses among private parties, the 
government can bail out investors, as it has already done in 
the automotive, insurance, and banking sectors. A bailout of 
investors could be direct, such as through government purchases 
of troubled assets, guarantees of bank obligations, loans, or 
direct government investments. A bailout could be indirect, 
through foreclosure mitigation programs that facilitate 
restructuring troubled mortgages so as to maximize their value. 
There are many potential variations for how to construct a 
direct or indirect bailout, but they all aim toward socializing 
losses to some degree by shifting them from investors to the 
taxpayers.
    Indirect bailouts of investors might involve helping 
homeowners and minimizing the third-party spillover effects of 
foreclosures as well, but whether money goes directly to 
homeowners to pay their mortgages or directly to investors 
holding the mortgages, the effect is to bail out the investors. 
A bailout of investors need not make them whole, of course. If 
investors are expecting 25 cents on the dollar (the price at 
which many RMBS are trading currently), then a program that 
gives them a return of 50 cents on the dollar gives them a 
significant bailout without making them whole. It is also 
possible for responses to the foreclosure crisis to split the 
difference between the options of letting losses lie where they 
may and bailing out investors. Unfortunately, it seems that 
many investors are dissatisfied with receiving only a partial 
bailout that would result in substantially higher returns than 
offered on the market currently because they are hoping that 
the taxpayers will give them a full bailout and not require 
them to recognize their losses.

3. Bailout for Homeowners

    There has been a great deal of popular concern about 
bailouts of irresponsible homeowners. These are the people who 
purchased too much house and lived too large, those who cashed 
out home equity and squandered it on frivolous items, or those 
who used home equity to pay off credit card debts or medical 
bills. The culture of conspicuous consumption is an 
appropriately troubling issue for many Americans, and it goes 
far beyond home mortgages into every area of the consumer 
economy. The Panel understands and sympathizes with the 
frustration and resentment of hard-working Americans who played 
by the rules and lived within their means. It is affirmatively 
unfair to ask these citizens to shoulder the expense of their 
neighbors' profligacy, just as it is unfair to ask taxpayers to 
shoulder the hundreds of billions of dollars of costs to bail 
out banks and insurance companies that reaped huge profits and 
took enormous risks and are now in shambles.
    In the mortgage market, it is difficult to know where the 
just and the unjust sit. For every homeowner who used a second 
mortgage to finance a vacation, how many homeowners were 
tricked into signing documents they did not understand? How 
many were steered into more expensive mortgages so that a 
mortgage broker could pick up a few thousand dollars more? How 
many were told that they were refinancing so that their 
payments would fall, only to discover that they had signed on 
only for a teaser rate whose expiration would cost them their 
homes? As mortgage products got more dangerous and the housing 
market inflated, profligacy and scams traveled the same paths.
    While it is tempting to see foreclosure mitigation programs 
as saving deserving homeowners while potentially rewarding 
irresponsible homeowners, the alternative is either a direct 
bailout of investors or letting losses lie where they may. The 
former may be even less palatable to many Americans, while the 
latter risks tremendous deadweight economic losses and powerful 
spillover costs. The enormous losses from the housing bubble 
can be allocated only one way or the other.
    It is also important to acknowledge that neither of the two 
basic loss allocation options offers homeowners a bailout. 
Homeowners would not receive a windfall under any of the plans 
proposed. Under every proposal, if homeowners cannot pay at 
least the current market value of their homes, they will lose 
them. There is no proposal to assist homeowners without a 
source of income or those who bought a house that is simply 
more expensive than they can afford. They will lose their 
homes. Instead, the most generous proposals permit families to 
stay in place and pay the current market value for the home--
the same way a new purchaser would. This is the result that 
would occur in a perfectly functioning market; lenders would 
restructure loans that could perform to market. Government 
programs that merely correct market failures are not bailouts. 
Insisting that homeowners make payments that were part of a 
bargain struck in a different financial universe would bind 
homeowners in a way that businesses are not bound. It would 
also turn the sanctity of contract into a social suicide pact 
with enormous spillover effects on neighbors, on communities, 
on local governments, and on the entire economy.

4. Moral Hazard and Externalities

a. Moral hazard

    Moral hazard is an important issue for any foreclosure 
mitigation plan to address. Moral hazard arises when persons or 
institutions do not bear the full consequences of their 
actions, as they may act less carefully than otherwise. To the 
extent that homeowners or lenders are shielded from the 
consequences of ill-advised mortgages, it rewards past 
mistakes, while it sets a precedent that may encourage 
excessive risk-taking in the future.
    Moral hazard concerns exist for both homeowners and lenders 
(including MBS investors). To the extent that government 
foreclosure mitigation efforts relieve homeowners who entered 
into poorly-considered mortgages, either out of failure to 
undertake proper diligence, unwarranted financial optimism, or 
outright borrower fraud, a moral hazard concern is created. 
Similarly, a moral hazard concern would exist with any 
reduction in negative equity for homeowners who engaged in cash 
out refinancings that tapped out their home equity, leaving 
them vulnerable to ending up in a negative equity position.
    Moral hazard concerns also exist for lenders and investors. 
To the extent that government foreclosure mitigation efforts 
spare lenders and investors from losses that they would have 
otherwise incurred because of poorly underwritten loans, it 
rewards reckless past lending and encourages future 
irresponsibility. The originate-to-distribute lending system 
allowed lenders to ``cash out'' too, by selling securitized 
loans to capital market investors, taking the profits and 
running before the losses became apparent. Many of these 
lenders purchased the securitized loans themselves without due 
diligence or, worse, knowing that the assets were built on an 
unsustainable model. Relieving these lenders from losses on the 
MBS they purchased would shield them from the consequences of 
their actions.
    Yet it is important to remember that moral hazard concerns 
exist only when homeowners or lenders do not bear the 
consequences of their actions. When a mortgage ends up in 
distress due to factors over which the homeowner or lender had 
no control, there is no moral hazard issue. The risks of 
complex, exotic mortgage products were not always properly 
explained to homeowners. Brokers and lenders encouraged 
homeowners to take out loans that they knew would become 
unaffordable by pushing low teaser rates and the promise of 
refinancing at the end of the teaser period. Other homeowners 
were fraudulently placed into mortgages that they could not 
afford. Likewise, many homeowners have found themselves deeply 
underwater because of the fall in housing prices, fueled in 
part by foreclosures. And no fault can be found with homeowners 
who find their income impaired because of unemployment due to a 
general economic turndown, illness, divorce, or death.
    Similarly, lenders and investors who conducted proper 
diligence and sold safe mortgage products, such as traditional 
fixed-rate, fully-amortizing conventional loans, cannot be 
faulted for mortgage defaults which were not predictable and 
over which they had no control. These lenders and investors 
have been hurt by the downward spiral of housing prices fueled 
in part by other lenders' and investors' irresponsible lending 
and by other mortgagors' irresponsible borrowing, as well as 
general economic factors.

b. Contagion fires

    There is an important exception to moral hazard, one for 
so-called ``contagion fires.'' \143\ The contagion fire 
exception holds that when third parties bear the costs of ill-
advised decisions, moral hazard concerns should give way to 
action. For example, when the fire department rescues people 
who cause fires by smoking in bed, it creates a moral hazard, 
because the smokers do not have to face the full consequences 
of their actions. But if there were no government intervention, 
the fires could easily spread and injure innocent neighbors.
---------------------------------------------------------------------------
    \143\ Lawrence Summers, Beware Moral Hazard Fundamentalists, 
Financial Times (Sept. 23, 2007).
---------------------------------------------------------------------------
    While the actions of some homeowners and lenders and 
investors have proven irresponsible and troubling, the current 
foreclosure crisis bears many of the marks of a ``contagion 
fire'' that counsels for intervention. Foreclosures have 
tremendous third-party costs, as discussed, supra, in Part I. 
Like a contagion fire, a foreclosure can damage neighboring 
properties by depressing neighbors' property values.\144\ In so 
doing, they depress property tax revenues that must be made up 
with higher tax rates or decreased services.\145\ Foreclosures 
spur crime, fires and neighborhood blight.\146\
---------------------------------------------------------------------------
    \144\ See Immergluck and Smith, supra note 22.
    \145\ See, e.g., Johnston, supra note 23; Global Insight, supra 
note 23.
    \146\ See Immergluck and Smith, supra note 25; Apgar and Duda, 
supra note 25; Apgar et al. supra note 26.
---------------------------------------------------------------------------
    Foreclosures are also contributing to continued financial 
market instability. So long as they continue at unpredictably 
high levels, mortgage-backed securities and derivatives 
products will remain toxic, difficult to value and unattractive 
in any portfolio. These impaired assets, in turn, make the 
solvency of many financial institutions suspect. These third-
party costs of foreclosures are not always apparent because 
they are not directly imposed, but they are real and very 
costly nonetheless, and they offset much of the moral hazard 
concerns associated with foreclosure mitigation efforts.
    Ideally, a foreclosure mitigation program would be able to 
sort through borrowers and lenders, to help those honest but 
unfortunate ones who acted responsibly and to deny assistance 
to those who behaved strategically. Sorting between responsible 
and irresponsible borrowers and lenders is an inherently 
difficult process that is complicated by the inevitable trade-
off between speed and precision. Foreclosure mitigation can be 
done slowly and precisely on an individualized basis or quickly 
through wholesale measures. While precision is desirable, time 
is also of the essence. The longer the foreclosure crisis drags 
on, the more injury is imposed on responsible homeowners and 
lenders and the longer and deeper the financial crisis will be.
    Finally, there is no escaping the fact that there are 
serious losses in the mortgage market. Currently, those losses 
are allocated to homeowners, who lose their homes and any 
equity they have in them, and to mortgage lenders and their 
investors. There will be a good number of mortgages that cannot 
successfully be restructured on any reasonable economic terms. 
These include many investor-owned properties. For these 
mortgages, foreclosure is the only likely outcome.
    But for foreclosures that can be averted on reasonable 
economic terms, loan restructuring inevitably involves some 
level of losses and an allocation of those losses. The 
distributional issues involved in the loss allocation are 
ultimately political questions. To be convincing, however, the 
answer must be clearly articulated and must relate to the risks 
that parties willingly and knowingly assumed and what the 
parties could expect to receive absent a foreclosure mitigation 
program. Some have suggested that attempts to deal with 
negative equity by mandating principal write down could be 
paired with plans for equity sharing plans, so that the 
distributional consequences are mirrored both as to losses and 
as to future gains. When businesses restructure loans, they are 
not required to share any future appreciation, which means this 
restriction would be imposed only on homeowners.
    As Chart 10 shows, negative equity is the single best 
indicator that a property is likely to enter foreclosure, and 
the downward pressure on home prices from foreclosures begets 
more negative equity, which in turn begets more foreclosures. 
As Chart 12 shows, likelihood of default corresponds very 
strongly with loan-to-value ratios--the more deeply underwater 
a property is, the more likely a default and a foreclosure are. 
The problem of contagion fires is real--our neighbors' houses 
are on fire with foreclosures, and the fire is spreading to 
ours. In these circumstances, we should be concerned with 
putting out the fire, not questioning our neighbor's past 
financial judgments.

                       B. FORECLOSURE MORATORIUM

    While the Panel does not make a specific recommendation, 
another policy option for consideration is a foreclosure 
moratorium. During the foreclosure crisis of the Great 
Depression, many states implemented foreclosure moratoria or 
took other steps to add delay to the foreclosure process.\147\ 
These moratoria were upheld by the Supreme Court of the United 
States.\148\ In the current crisis, a few states have changed 
their foreclosure laws to delay the process.\149\ There have 
also been proposals for a federal foreclosure moratorium or 
other measures to slow down foreclosures.\150\ The Washington 
Post praised Maryland for passing ``some of the nation's most 
ambitious legislation'' in the wake of the foreclosure crisis, 
including foreclosure timetable extensions and a variety of 
other reforms.\151\ Additionally, some local law enforcement 
officials charged with overseeing the foreclosure process, such 
as the Sheriffs of Cook County, Illinois and Philadelphia 
County, Pennsylvania, have refused to conduct foreclosure 
auctions or evictions.\152\ By and large, however, states have 
not elected to change their laws to slow the foreclosure 
process.
---------------------------------------------------------------------------
    \147\ D.P.K., Comment, Constitutional Law--Mortgage Foreclosure 
Moratorium Statutes, 32 University of Michigan Law Review, at 71 (1933) 
(noting that, in 1933, twenty-one states enacted legislation that 
functioned as foreclosure moratoria). Depression-era foreclosure-
moratorium statutes seem to have either extended the period of 
redemption post-foreclosure, prohibited foreclosures unless the sale 
price was at some minimum percentage of property appraisal, or granted 
state courts the power to stay foreclosures. Id.
    \148\ Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 
437 (1934) (upholding Depression-era Minnesota foreclosure moratorium 
in face of contracts-clause challenge, and noting that economic 
conditions of the Depression ``may justify the exercise of its 
continuing and dominant protective power notwithstanding interference 
with contracts'').
    \149\ Cal. Civ. Code, at Sec. Sec. 2923.5-6 (West 2008) (imposing 
delay and a net present value maximization requirement); Mass. Gen. 
Laws, at ch. 244, Sec. 35A(a) (2008) (imposing ninety day pre-
foreclosure cure period); Md. Code Ann., Real Prop., at Sec. Sec. 3-
104.1, 7-105.1 (LexisNexis 2008) (requiring post-default delay and 
specific form of service for foreclosure actions).
    \150\ See, e.g., Home Retention and Economic Stabilization Act of 
2008, H.R. 6076, 110th Cong., at Sec. 128A(a)(2) (2008) (providing for 
deferral of foreclosure up to 270 days if, inter alia, minimum payments 
were made); Minnesota Subprime Foreclosure Deferment Act of 2008, H.F. 
3612, 2008 Leg., 85th Sess. (Minn. 2008) (providing for foreclosure 
deferral up to one year if, inter alia, minimum payments were made) 
(online at www.revisor.leg.state.mn.us/bin/getbill.php?number 
=HF3612&session=ls85&version=list&session_number= 08session_year0); 
Senator Hillary Clinton, Details on Senator Clinton's Plan to Protect 
American Homeowners (Mar. 24, 2008) (online at 2008central.net/2008/03/
24/clinton-press-release-clinton-calls-for-bold-action-to-halt-housing-
crisis).
    \151\ National Governors Association, Center for Best Practices, 
State-by-State Listing of Actions to Tackle Foreclosures (Feb. 22, 
2009); Philip Rucker, Sweeping Bills Passed to Help Homeowners, 
Washington Post (Apr. 3, 2008).
    \152\ Ofelia Casillas and Azam Ahmed, Sheriff: I Will Stop 
Enforcing Evictions, Chicago Tribune (Oct. 9, 2008); Jeff Blumenthal, 
Moratorium on Sheriff's Foreclosure Sales Draws Debate, Philadelphia 
Business Journal (Apr. 4, 2008) (online at 
philadelphia.bizjournals.com/philadelphia/ stories/2008/04/07/
story10.html).
---------------------------------------------------------------------------
    There are three reasons to consider implementing steps to 
slow down the foreclosure process. First, delay could 
facilitate loan workouts by making the foreclosure process more 
costly for servicers and lenders. Delay means that lenders must 
carry non-performing loans on their books longer. Unless the 
property sells for more than the principal balance due, the 
lender will have, at best, a hard-to-collect, unsecured 
deficiency claim for the interest that accrued between the time 
the foreclosure was commenced and completed, and if the loan is 
non-recourse, then the lender will not even have a deficiency 
judgment. For servicers, delay imposes costs too because 
servicers must advance delinquent payments to MBS investors out 
of pocket. These advances are reimbursed off the top of 
foreclosure sale or REO sale proceeds, which reduces servicers' 
incentive to sell foreclosed and REO properties for top dollar, 
but the reimbursement does not include the time value of the 
money, which can be considerable if a foreclosure takes 18-24 
months.
    Second, to the extent that new foreclosure mitigation 
programs take time to implement, delay would allow the programs 
to help more homeowners. Thus, a foreclosure moratorium or 
other delay in the foreclosure process could be used to smooth 
the transition to a new foreclosure mitigation program.
    Third, delay could also help ease some of the servicer 
capacity concerns, discussed infra section III. It is important 
to recognize that foreclosure moratoria or other delays in the 
foreclosure process need not be across-the-board solutions that 
apply to all homeowners. A foreclosure moratorium could be 
targeted to specific classes or loans or borrowers. For 
example, a targeted foreclosure moratorium could be used to 
facilitate servicer triage and ease capacity problems. To 
utilize servicer capacity with maximum efficiency, it is 
necessary to have a streamlined process for sorting and 
triaging modification requests. Many servicers have their own 
triaging methods, but a centralized triage system that would 
sort or pre-qualify homeowners for modifications might help 
ease servicer capacity issues, and could possibly be combined 
with a government outreach program. A prequalification program 
could be combined with a moratorium on foreclosures on 
prequalified loans until a good faith effort has been made to 
modify the loan. Government outreach would also allow servicers 
to focus resources on modification programs.
    To the extent that delay from a de facto or de jure 
foreclosure moratorium is positive, it would function much like 
the current bankruptcy system: the automatic stay stops 
foreclosure proceedings, but unless the homeowner can cure and 
reinstate the mortgage, the stay will be lifted.\153\ In other 
words, a foreclosure moratorium is only a temporary solution. 
The real problem of modifying the mortgage has been pushed down 
the line to be solved elsewhere--or not at all.
---------------------------------------------------------------------------
    \153\ 11 U.S.C. Sec. Sec. 362(d), 1322(b)(5), 1322(c).
---------------------------------------------------------------------------
    Any consideration of a foreclosure moratorium should be 
mindful, however, of the potential costs. It is possible that 
delay might merely create a greater backlog of modification 
requests and place greater strains on servicer capacity. Delay 
could also affect future mortgage-credit availability and 
cost.\154\ Delay could prevent some economically efficient 
foreclosures.
---------------------------------------------------------------------------
    \154\ Karen M. Pence, Foreclosing on Opportunity: State Laws and 
Mortgage Credit, Review of Economics and Statistics, at 180 (2006) 
(online at works.bepress.com/cgi/
viewcontent.cgi?article=1001&context=karen_pence).
---------------------------------------------------------------------------
    Again, this raises the question of whether the economic 
efficiency of foreclosures should be viewed in the context of 
individual foreclosures or in the context of the macroeconomic 
impact of widespread foreclosures. If the former, then caution 
should be exercised about foreclosure moratoria and other forms 
of delay to the extent it prevents efficient foreclosures. But 
if the latter is the proper view, then it may well be that some 
individually efficient foreclosures should nonetheless be 
prevented in order to mitigate the macroeconomic impact of mass 
foreclosures.

           VI. THE HOMEOWNER AFFORDABILITY AND STABILITY PLAN


                             A. DESCRIPTION

    On February 18, 2009, President Obama announced the 
Homeowner Affordability and Stability Plan (the ``Plan''), a 
proposal to prevent unnecessary foreclosures and to strengthen 
affected communities. The Panel is encouraged with the renewed 
emphasis on foreclosure mitigation. The financial crisis facing 
the nation cannot be resolved without effectively addressing 
the underlying problem of foreclosures.
    The Administration released additional guidelines for the 
Plan on March 4, as this report was prepared for publication. 
Because some of the issues raised by the Plan may be addressed 
in these guidelines, the Panel will defer our follow-up 
questions until a review of the Plan guidelines has been 
completed. The Panel will promptly pursue any outstanding 
issues with the Treasury Department and will keep Congress and 
the American people advised of its ongoing evaluation of the 
Administration's Plan.
    The Plan as initially described involves three main parts.

1. Refinancings

    In the first part, borrowers with mortgages owned or 
guaranteed by Fannie Mae and Freddie Mac, estimated to be 
between one-third and half of all mortgages, will be able to 
refinance their mortgages to current low interest rates with 
Fannie Mae or Freddie Mac. Refinancing will be authorized even 
if the ratio of the loan to the current market value of the 
home would be more than 80 percent, up to 105 percent. The 
Administration estimates that this will provide expanded access 
to refinancing and affordable payments for four to five million 
responsible homeowners. These refinancings will not be 
available to speculators, and will target support to working 
homeowners who have made every effort to remain current on 
their mortgages.

2. Modifications

    The second part of the Plan is targeted at borrowers with 
high mortgage debt to current income, or whose mortgage is 
greater than the current value of the home, particularly 
subprime borrowers whose loans are held in private portfolios. 
The scope of the modification program is comprehensive, and 
includes early intervention for borrowers who are still current 
but are at risk of imminent default. This program will 
encourage lenders, investors and servicers to modify the 
mortgage to a more affordable rate.
    The Administration projects that three to four million 
homeowners at risk of default would be helped by this aspect of 
the Plan, which involves the commitment of $75 billion in 
government funds. All institutions receiving Financial 
Stability Plan financial assistance going forward will be 
required to engage in loan modification efforts that are 
consistent with the Treasury guidelines released on March 4. 
The guidelines will also set new standards for all federally-
supervised institutions. Based on the initial announcement of 
the Plan, the modification aspect will contain the following 
elements, to be expanded upon in the new guidelines:

     Debt Ratios. The lender would be expected to 
reduce the mortgage interest rate to an affordable level where 
front end DTI would be 38 percent. Thereafter, the Treasury 
Department will match further interest rate reductions on a 
dollar-for-dollar basis to a DTI of 31 percent. The Treasury 
would not subsidize interest rates below 2 percent. Lenders and 
servicers could reduce principal rather than interest and would 
receive the same matching funds that would have been available 
for an interest rate reduction.

     Counseling. If the borrower had a back-end debt 
ratio of 55 percent or more, he or she must enter a debt 
counseling program.

     Incentives. There are a number of incentives to 
encourage program participation and a focus on successful 
outcomes. First, servicers will receive an up-front fee of 
$1,000 for each modification. Second, servicers will receive 
``pay for success'' fees as long as the borrower stays current 
on the loan. This fee will be paid monthly, up to $1,000 per 
year for three years. Borrowers will receive a monthly balance 
reduction up to $1,000 per year for five years, as long as they 
stay current on their payments. There will be an incentive 
payment of $1,500 to the mortgage holder and $500 to the 
servicer for modifications made while the loan is still 
current. Finally, incentive payments will be available to 
extinguish second liens.

     Guarantees. The Treasury Department will also 
provide $10 billion for the creation of a home price decline 
reserve fund. In this partial guarantee initiative, holders of 
modified mortgages under the Plan would be provided with 
insurance payments that could be used as reserves in the event 
that home prices fall and associated losses increase. The 
payments would be linked to declines in the home price index. 
The goal is to discourage lenders and servicers from pursuing 
foreclosure at the present due to weakening home prices.

     Bankruptcy. The Plan contains a narrow amendment 
to the bankruptcy laws to provide in terrorem encouragement for 
modifications. Under such an amendment, bankruptcy judges would 
have the authority to modify to a limited extent mortgages 
written in the past few years where the size of the loan is 
within the Fannie Mae/Freddie Mac conforming loan limits. The 
judge would be allowed to treat the amount of the mortgage loan 
in excess of the current value of the home as unsecured, and to 
develop an affordable repayment plan for the homeowner with 
respect to the balance. As a condition to receiving this 
reduction, the homeowner must first have asked the mortgage 
lender or servicer for a modification and certify to the judge 
that he or she has complied with reasonable requests from the 
lender or servicer to provide information about current income 
and expenses.

     FHA and Housing Support. The Plan includes 
enhancements to Hope for Homeowners, the existing FHA refinance 
program for troubled borrowers. Fees for participation will be 
reduced, and other program parameters such as debt ratios for 
qualification, will be expanded. Additionally, to address the 
community impact of foreclosures, HUD will provide $2 billion 
in competitive Neighborhood Stabilization Program grants and 
$1.5 billion in assistance to displaced renters.

The lender or servicer would have to keep the modified payment 
in place for five years. Thereafter, the rate could be 
increased gradually to the GSE conforming rate in place at the 
time of the modification. Loan modification would only be 
expected if the net cost of the reduction would be less than 
the net cost of a foreclosure.

3. Supporting Low Mortgage Interest Rates

    A third part of the Plan focuses on supporting low mortgage 
interest rates by strengthening confidence in Fannie Mae and 
Freddie Mac. Using funds that Congress already authorized apart 
from the TARP, the Treasury Department will increase its 
purchase of preferred stock in these government-sponsored 
entities from $100 billion to $200 billion each. Additionally, 
the size of the GSEs' retained mortgage portfolios will be 
increased by $50 billion to $900 billion. The Treasury 
Department will also continue to purchase Fannie Mae and 
Freddie Mac mortgage-backed securities to provide liquidity and 
further instill market confidence. Collectively, this package 
of support to the GSEs is intended to support low mortgage 
interest rates and thereby provide more affordable payments to 
homeowners.

         B. HOW DOES THE PLAN MEASURE UP AGAINST THE CHECKLIST?

    Many of the details of the Homeowner Affordability and 
Stability Plan are scheduled to be announced on March 4, just 
two days before the Panel's March report. Consequently, the 
Panel will not be able to perform an assessment of the plan 
before the publication of the March report. Based on the Plan's 
initial term sheet to date, however, many of the Plan's 
elements address the major impediments to successful 
foreclosure mitigation and other recommendations that are 
highlighted in this report and specifically included in the 
checklist.

1. Affordability

    The centerpiece of the Plan is encouraging more affordable 
mortgages where doing so would result in greater net present 
value to the mortgage lender or owner than a foreclosure. The 
GSE Plan would significantly reduce interest rates, which 
should result in significantly lower mortgage payments for 
certain eligible homeowners. The Loan Mod Plan will result in a 
borrower's front-end DTI ratio being reduced to 31 percent for 
eligible homeowners. Although the Loan Mod Plan measures 
affordability using front-end DTI, it would collect information 
on back-end DTI and a borrower with a back-end DTI of 55 
percent or higher would have to agree to credit counseling.

2. Negative Equity

    The Plan does not deal with mortgages that substantially 
exceed the value of the home. It allows homeowners with 
mortgages guaranteed by Fannie Mae or Freddie Mac to refinance 
to a lower rate only if the amount of the mortgage does not 
exceed 105 percent of the current appraised value.\155\ In 
areas in which property values have dropped significantly, this 
limitation may prove highly constraining. In an area that has 
seen a 40 percent drop in home values, for example, a home that 
had been purchased three years ago for $200,000, might easily 
have a mortgage of $160,000 or more. But if current property 
values place the home at $120,000, the homeowner is not 
eligible for modification. In effect, the homeowners most at 
risk for foreclosure because of negative equity will be shut 
out of the program.
---------------------------------------------------------------------------
    \155\ The Panel is concerned whether the GSEs have the statutory 
authority to carry out the refinancings called for by the Plan. The GSE 
cannot generally own or guarantee mortgages originated at above 80 
percent LTV absent mortgage insurance. It is unclear whether existing 
insurance coverage would continue on refinanced loans or whether new 
insurance could be placed on the refinanced loans. The Panel inquired 
with FHFA on the matter and was sent a copy of an FHFA letter to the 
Executive Vice President of Mortgage Insurance Companies of America 
that did not resolve the matter or respond to all of the Panel's 
inquiries. The Panel intends to address this issue in future reports.
---------------------------------------------------------------------------
    Additionally, in order to provide an incentive to lenders 
who are reluctant to modify mortgages because they fear further 
real estate price declines, the Administration and the FDIC 
have developed an insurance fund of up to $10 billion that will 
provide partial guarantees against further drops in real estate 
values by making payments to the lender based on declines in a 
home price index. The partial guarantee may mitigate the 
incentive for lenders to foreclose when prices are falling, 
creating negative equity.
    To the extent that the Plan also includes bankruptcy 
modification, the problem of negative equity could be 
addressed. Because the proposed amendment would give bankruptcy 
judges the power to write mortgages down to 100 percent of the 
value of the home, negative equity would disappear. As noted 
earlier, not all homeowners would be eligible for bankruptcy, 
and not all of those who are eligible would be willing to file. 
Nonetheless, the combination of the bankruptcy amendment and 
the Plan's mortgage modification options would help address 
negative equity.

3. Junior Mortgages

    While the efforts to help homeowners are encouraging, it is 
important to note that the plan does not fully deal with second 
mortgages. While incentive payments will be available to 
extinguish junior mortgages when primary loans are modified, it 
is not clear whether the payments will be a sufficient 
enticement for the lien holder to agree. The high rate of 
second mortgages at the time of loan origination, combined with 
the unknown number of second mortgages added after the loans 
were completed, particularly by families under financial 
stress, suggest that the number of homes in foreclosure that 
are encumbered by two mortgages may be substantial. Those 
second mortgages must be paid, in full and on time, or the home 
will remain subject to foreclosure, this time by the holder of 
the second mortgage. These second mortgages can substantially 
impair affordability, undermining the effects of modifying 
first mortgages.
    Further, even if the first mortgage can be refinanced 
because it fits within the Plan's 105 percent limitation, the 
failure to deal with the second mortgage may mean that the home 
continues to carry substantial negative equity. If the 
refinancing does not address the negative equity, then its 
benefits in preventing foreclosure may be sharply limited.

4. Dealing with Pooling and Servicing Agreements

    The Plan does not deal with pooling and servicing 
agreements. There is no safe harbor for servicers of 
securitization pools who modify mortgages despite restrictive 
pool and servicing agreements. By providing uniform guidelines 
for loan modifications, the plan helps to establish a standard 
of reasonable conduct. Moreover, by paying mortgage holders 
$1,500 for each modification completed before a loan becomes 
delinquent, the servicer is better able to demonstrate that the 
net present value of a modification exceeds the value of 
foreclosure. Whether these modest adjustments will be adequate 
to deal with the impact of restrictive PSA agreements, and 
whether they will be adequate to offset the fear of mortgage 
servicers that they may incur legal liability if they modify 
securitized mortgages, is an open question.

5. Servicers Incentives

    Under the Plan, servicers would receive a number of 
inducements to participate in the program. They will receive an 
up-front fee of $1,000 for each modification, with an 
additional $500 for each modification made on current loans. In 
addition, they will be eligible for ``pay for success'' fees so 
long as the borrower remains current on the loan. This fee will 
be paid monthly, up to $1,000 per year for three years. To 
address servicer or investor fears about the high re-default 
rates on previous modification, the Administration Plan adds 
incentives for borrowers to stay current. Borrowers will 
receive a monthly balance reduction up to $1,000 per year for 
five years, as long as they stay current on their payments. 
Again, whether these incentives are adequate to offset the 
current financial advantages to pursuing foreclosures remains 
an open question.

6. Borrower Outreach

    The Plan also addresses the serious outreach problems 
facing any loan modification program. First, HUD will make 
unspecified funding available for non-profit counseling 
agencies to improve outreach and communications, although there 
is an absence of direct federal communication to homeowners. 
Second, it would avoid some of the difficulties in 
communication between servicers and borrowers by paying 
incentive fees of $1,500 to the mortgage holder and $500 to the 
servicer for modifications made while the loan is still 
current.

7. Capacity

    To the extent that the Plan promotes more outreach and is 
effective, there will be a surge of borrowers seeking 
modifications and further straining capacity. The incentive 
fees might be used to help address some of this need, 
offsetting some of the capacity strain. On the other hand, to 
the extent that the incentive fees are consumed in greater 
operational costs, the power of the incentive declines, leaving 
servicers to continue their current practices of pursuing 
foreclosures.

8. Industry Participation

    The Plan encourages industry participation through a 
combination of carrots and sticks. The various incentive and 
success fees should encourage lender participation. However, it 
remains to be seen whether the levels are sufficient to compel 
widespread servicer and lender participation, especially given 
the investments they will need to make to handle the expected 
business surge. The bankruptcy provisions could provide an 
incentive for lenders to engage in stronger foreclosure 
mitigation efforts. Treasury also announced that going forward, 
all financial institutions receiving assistance under TARP will 
be required to engage in loan modification efforts consistent 
with new Treasury guidelines. It is likely that this provision 
will provide the strongest incentive for lender participation 
in the near future.

-------------------------------------------------------------------------------------------------------------------------------------------------
Checklist for Mortgage Mitigation Program
------------------------------------------------------------------------
Will the plan result in modifications that create affordable monthly
 payments?
------------------------------------------------------------------------
Does the plan deal with negative equity?
------------------------------------------------------------------------
Does the plan address junior mortgages?
------------------------------------------------------------------------


-------------------------------------------------------------------------------------------------------------------------------------------------
Does the plan overcome obstacles in existing pooling and servicing
 agreements that may prevent modifications?
------------------------------------------------------------------------
Does the plan counteract mortgage servicer incentives not to engage in
 modifications?
------------------------------------------------------------------------
Does the plan provide adequate outreach to homeowners?
------------------------------------------------------------------------
Can the plan be scaled up quickly to deal with millions of mortgages?
------------------------------------------------------------------------
Will the plan have widespread participation by lenders and servicers?
------------------------------------------------------------------------


    In summary, the Plan focuses on payment affordability 
through an expanded refinancing program involving Fannie Mae 
and Freddie Mac and a modification program targeting a wide 
range of borrowers at risk. The Plan also includes financial 
incentives to encourage both lenders and borrowers to strive 
for sustainable outcomes. It also encourages servicers to 
modify mortgages for at risk homeowners before they are 
delinquent. There are additional incentives available to 
extinguish junior mortgages. The Administration estimates that 
the Plan's expanded refinancing opportunities for Fannie Mae 
and Freddie Mac mortgages could assist four to five million 
responsible homeowners, some of whom otherwise would likely 
have ended up in foreclosure.
    While these projections are encouraging, the Panel has 
additional areas of concern that are not addressed in the 
original announcement of the Plan. In particular, the Plan does 
not include a safe harbor for servicers operating under pooling 
and servicing agreements to address the potential litigation 
risk that may be an impediment to voluntary modifications. It 
is also important that the Plan more fully address the 
contributory role of second mortgages in the foreclosure 
process, both as it affects affordability and as it increases 
the amount of negative equity. And while the modification 
aspects of the Plan will be mandatory for banks receiving TARP 
funds going forward, it is unclear how the federal regulators 
will enforce these new standards industry-wide to reach the 
needed level of participation. The Plan also supports 
permitting bankruptcy judges to restructure underwater 
mortgages in certain situations. Such statutory changes would 
expand the impact of the Plan. Without the bankruptcy piece, 
however, the Plan does not deal with mortgages that 
substantially exceed the value of the home, which could limit 
the relief it provides in parts of the country that have 
experienced the greatest price declines.
    The Panel will continue to review the guidance issued by 
Treasury as this report went to publication and will pursue any 
outstanding issues with the Treasury Department and will keep 
Congress and the American people advised of its ongoing 
evaluation of the Administration's Plan.

                           C. DATA COLLECTION

    The Plan addresses collection of data about modifications 
undertaken as part of the Plan. Every servicer participating in 
the program will be required to report standardized loan-level 
data on modifications, borrower and property characteristics, 
and outcomes. The data will be pooled so the government and 
private sector can measure success and make changes where 
needed. This is an important first step in the type of national 
mortgage loan performance data reporting requirement envisioned 
by the Panel.

                             D. CONCLUSION

    The financial crisis we battle today has its origins in the 
collapse of the housing market. Since its establishment under 
the EESA and appointment by the Congress, the Congressional 
Oversight Panel has been among the many voices urging Treasury 
to offer a serious plan to address the foreclosure crisis. 
Treasury's initial focus on financial institutions and credit 
markets were essential steps towards recovery, but these 
programs did not address the problems facing homeowners 
directly. Taking on the foreclosure crisis addresses the root 
causes of the financial market downturn. With the release of 
the Obama Administration's foreclosure reduction plan, the 
Panel will continue to examine the federal government's efforts 
to revive the housing market.
    This report, and the factors it identifies as essential to 
any sustainable foreclosure reduction, will serve as the 
Panel's framework for evaluating the success of the 
Administration's efforts. The challenges of crafting an 
effective and fair foreclosure prevention plan are daunting. 
But this is a task from which the Administration and Congress 
cannot shirk.
                     SECTION TWO: ADDITIONAL VIEWS


                         I. REP. JEB HENSARLING


                            A. INTRODUCTION

    The topic of the March report of the Congressional 
Oversight Panel (COP) is an investigation of foreclosure 
mitigation efforts. This topic is not only timely given the 
recent TARP initiatives announced by the Obama Administration, 
but it is also one of the several areas explicitly mentioned in 
the Emergency Economic Stabilization Act of 2008, Pub. L. No. 
110-343, which states that the regular reports of the COP shall 
include the ``effectiveness of foreclosure mitigation 
efforts.'' To that end, I believe that this month's report is 
an appropriate exercise and I welcome this opportunity to 
review what is being done to help address the large number of 
foreclosures that far too many borrowers are currently facing.
    There is no question that we are witnessing an explosion in 
the number of foreclosures in our economy. According to a 
January report by RealtyTrac, an online foreclosure listing 
firm, more than 2.3 million properties were subject to 
foreclosure filings in 2008, an increase of more than 80 
percent from 2007 levels.\156\ Separately, the Mortgage Bankers 
Association's (MBA) National Delinquency Survey for the third 
quarter of 2008 found that the percentage of loans in the 
process of foreclosure--2.97 percent--set a new record, and the 
seasonally-adjusted total delinquency rate--6.99 percent--was 
the highest recorded in the history of the MBA survey.\157\ For 
the millions of people facing foreclosure and the untold number 
of others who might be on the brink of housing trouble, the 
economic hardship and worry associated with potentially losing 
one's home are real, tangible, and pressing problems worthy of 
attention.
---------------------------------------------------------------------------
    \156\ RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008 
(Jan. 15, 2009) (online at www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt =64847).
    \157\ Mortgage Bankers Association, Delinquencies Increase, 
Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 
5, 2008).
---------------------------------------------------------------------------
    Any investigation into the effectiveness of foreclosure 
mitigation efforts should start by identifying all the factors 
that contributed to its cause, the borrowers who are directly 
affected, the relative costs and benefits of government-
subsidized foreclosure mitigation efforts, and the possible 
policy alternatives that could help provide relief to borrowers 
in a fair, responsible, and taxpayer-friendly way. The answers 
to these questions will, I believe, help steer policymakers in 
the correct direction and provide help to those deserving of 
it, while preventing less deserving actors from benefitting 
from their own mistakes and ultimately preventing more taxpayer 
dollars from going to waste.

                         B. CONTRIBUTING CAUSES

    Before we can address the foreclosure problem, we must 
first understand its cause. In his remarks to a joint session 
of Congress on February 24, President Obama stated, ``it is 
only by understanding how we arrived at this moment that we'll 
be able to lift ourselves out of this predicament.'' \158\ To 
that end, I could not agree with the President more.
---------------------------------------------------------------------------
    \158\ The White House, Remarks of President Barack Obama--Address 
to Joint Session of Congress (Feb. 24, 2009) (online at http://
www.whitehouse.gov/the_press_office/Remarks-of-President-Barack-Obama-
Address-to-Joint-Session-of-Congress).
---------------------------------------------------------------------------
    One of the primary causes of the difficulties that some 
borrowers are facing has been the general federal objective of 
enabling and encouraging people to buy homes that were too 
expensive for them to otherwise afford. In a perfect world, the 
laws of supply and demand would be the fundamental driver of 
our mortgage markets, with qualified borrowers having reliable 
access to suitable mortgage products that best fit their needs. 
Yet, in reality, the cost of homeownership has in many places 
so thoroughly outpaced the ability of borrowers to afford a 
home that the government has chosen to intervene with various 
initiatives to defray parts of the cost of a mortgage. That 
intervention has taken many forms--affordable housing programs, 
federal FHA mortgage insurance, tax credits and deductions, 
interest rate policies, etc.--as part of a concerted effort to 
increase homeownership. For almost a decade, those efforts 
succeeded, pushing homeownership rates steadily up from 1994 
through their all-time high in 2004. That increase in demand, 
in turn, contributed to a corresponding increase in home 
prices, which rose from the mid-1990s until hitting their peak 
in 2006. Yet those price increases created a cycle of 
government intervention--home price appreciation made homes 
less affordable, which in turn spurred further government 
efforts to defray more of their cost--and the involvement of 
the federal government in our housing markets only grew deeper.
    Increased government involvement in our housing markets 
created significant distortions and disruptions. This increased 
involvement is contrary to the oft-repeated, now disproven 
claims of proponents of expanded government control of our 
economy that a ``wave'' of market deregulation over the last 20 
years caused the current crisis. To the contrary, facts 
indicate that there were at least five key factors which 
contributed to our situation, at least four of which were a 
direct result of government involvement. Those four factors--
highly accommodative monetary policy by the Federal Reserve, 
continual federal policies designed to expand home ownership, 
the congressionally-granted duopoly status of housing GSEs 
Fannie Mae and Freddie Mac, and an anti-competitive government-
sanctioned credit rating oligopoly--are thoroughly discussed in 
the Joint Dissenting Views to the COP's ``Special Report On 
Regulatory Reform'' that I offered along with Senator John 
Sununu, along with a fifth factor (failures throughout the 
mortgage securitization process that resulted in the 
abandonment of sound underwriting practices).\159\ As such, a 
thorough recitation of those points here would be redundant. 
However, a brief review of what I believe to be the two most 
relevant factors to the foreclosure debate--federal policies 
designed to expand home ownership and the market manipulations 
of Fannie and Freddie--may be instructive.
---------------------------------------------------------------------------
    \159\ Congressional Oversight Panel, Special Report on Regulatory 
Reform: Modernizing the American Financial Regulatory System: 
Recommendations for Improving Oversight, Protecting Consumers, and 
Ensuring Stability, at 54-89 (Jan. 29, 2009).
---------------------------------------------------------------------------
    For well over twenty years, federal policy has promoted 
lending and borrowing to expand homeownership, through 
incentives such as the home mortgage interest tax exclusion, 
the Federal Housing Administration (FHA), discretionary HUD 
spending programs, and the infamous Community Reinvestment Act 
(CRA). CRA is a federal program created to encourage banks to 
extend credit to ``underserved'' populations by requiring that 
banks insured by the federal government ``help meet the credit 
needs of its entire community.'' As noted in the Joint 
Dissenting Views, CRA has led to an increase in bank lending to 
low- and moderate-income families by 80 percent. However, to 
make these loans, banks were encouraged to relax their 
traditional underwriting practices to achieve and maintain 
compliance. Those reduced standards led to a surge in non-
traditional loan products, particularly adjustable rate 
subprime and Alt-A loans, which are now largely seen to be 
risky products. Thus, mandates like CRA ended up becoming a 
significant contributor to the number of foreclosures that are 
occurring because they required lending institutions to abandon 
their traditional underwriting standards in favor of more 
subjective models to meet their government-mandated CRA 
obligations.
    Perhaps even more important than the impact of federal 
policy mandates were the unparalleled market distortions of 
Fannie Mae and Freddie Mac, the two now-failed, trillion-dollar 
housing GSEs. Fannie and Freddie exploited their 
congressionally-granted charters to borrow money at discounted 
rates. They dominated the entire secondary mortgage market, 
wildly inflated their balance sheets and personally enriched 
their executives. Because market participants long understood 
that this government created duopoly was implicitly (and, now, 
explicitly) backed by the federal government, investors and 
underwriters chose to believe that if Fannie or Freddie touched 
something, it was safe, sound, secure, and most importantly 
``sanctioned'' by the government. The results of those 
misperceptions have had a devastating impact on our entire 
economy.
    Given Fannie and Freddie's market dominance, it should come 
as little surprise that once they dipped into the subprime and 
Alt-A markets, lenders quickly followed suit. In 1995, HUD 
authorized Fannie and Freddie to purchase subprime securities 
that included loans to low-income borrowers and allowed the 
GSEs to receive credit for those loans toward their mandatory 
affordable housing goals. Fannie and Freddie readily complied, 
and as a result, subprime and near-prime loans jumped from 9 
percent of securitized mortgages in 2001 to 40 percent in 2006. 
In 2004 alone, Fannie and Freddie purchased $175 billion in 
subprime mortgage securities, which accounted for 44 percent of 
the market that year. Then, from 2005 through 2007, the two 
GSEs purchased approximately $1 trillion in subprime and Alt-A 
loans, and Fannie's acquisitions of mortgages with less than 
10-percent down payments almost tripled. As a result, the 
market share of conventional mortgages dropped from 78.8 
percent in 2003 to 50.1 percent by 2007 with a corresponding 
increase in subprime and Alt-A loans from 10.1 percent to 32.7 
percent over the same period. These non-traditional loan 
products, on which Fannie and Freddie so heavily gambled as 
their congressional supporters encouraged them to ``roll the 
dice a little bit more,'' now constitute many of the same non-
performing loans which have contributed to our current 
foreclosure troubles.

 C. NECESSARY CONSIDERATIONS IN EVALUATING FORECLOSURE MITIGATION PLANS

    In evaluating the effectiveness of a government-subsidized 
foreclosure mitigation plan, there are several fundamental 
questions that must be asked. Perhaps the most salient 
questions are determining who you want to help, why you want to 
limit help to them, and who you might hurt by doing so. Those 
considerations are closely linked to questions of the inherent 
fairness and moral hazard of any government-subsidized 
foreclosure mitigation plan. For example, it is a fact even 
admitted by the majority report that some loan modifications 
are simply not economical and thus some foreclosures are 
inevitable. Even in the best of times, the MBA's National 
Delinquency Survey shows that between 4-5 percent of loans 
become delinquent and 1 percent go into foreclosure.\160\ Those 
unpaid loans likely stem from many reasons including the 
uncomfortable truth that some people, try as the might, are 
simply not ready for the responsibility of homeownership. It 
follows that efforts to keep such individuals in their homes 
will be a costly losing battle, diverting time, attention, and 
critical resources away from those who might otherwise be 
worthy candidates for help. On the other end of the spectrum, 
policymakers need to determine where to draw the line to stop 
offering assistance to those who do not actually need it 
because they have other means at their disposal or the option 
to resolve their own difficulties without the expenditure of 
taxpayer funds.
---------------------------------------------------------------------------
    \160\ Mortgage Bankers Association, Delinquencies Increase, 
Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 
5, 2008).
---------------------------------------------------------------------------
    In between the extremes of those who cannot be saved and 
those who should not be recipients of government-subsidized 
foreclosure mitigation assistance is a considerably diverse 
group of borrowers who might be technically eligible for a 
program but might have made decisions or behaved in ways that 
would call into question the desirability of expending taxpayer 
dollars to assist them. While a more thorough discussion of 
which specific undesirable decisions might merit exclusion is 
included below, one general characteristic worth considering 
involves the ability to pay. Without a doubt, in any loan 
mitigation program there will be some otherwise eligible 
borrowers who can pay their mortgages but who choose not to pay 
them or not to make the difficult decisions to sacrifice on 
other things because they want to get relief. Sorting this 
group of unwilling payers out from those who are unable to pay 
is a fundamental concern that must be addressed in every 
foreclosure mitigation plan. Unfortunately, this concern has 
been nearly universally omitted from previous government 
proposals on the subject. Until that concern is resolved, it is 
my great fear that we will continue to provide a tremendous 
incentive for borrowers on the bubble to opt not to fix (or, 
even worse, purposefully exacerbate) their own problems in 
hopes of gaining government assistance at a time when we ought 
to enact incentives to encourage the opposite behavior.
    A closely related concern to who will receive assistance is 
the question of how much will that assistance cost. This 
fundamental concern is excluded from the majority's report. So 
far, over the last 16 months, the federal government has 
pledged more than $9 trillion to address our economy's credit 
crisis between new initiatives undertaken by the Federal 
Reserve, the Treasury Department, the FDIC, and HUD.\161\ Those 
commitments come on top of our existing $10.9 trillion national 
debt \162\ and an estimated 2009 budget deficit of $1.8 
trillion.\163\ Given the unprecedented economic challenges we 
are now facing, the American people have an absolute right to 
be suspicious of the cost of developing new government-
subsidized foreclosure mitigation programs. Those that dismiss 
such concerns as narrow-minded display how disconnected they 
are from the undeniable hypocrisy of asking hardworking 
Americans to do more with less while their government continues 
to run up massive debts that it will not be able to repay 
without substantial tax increases.
---------------------------------------------------------------------------
    \161\ Mark Pittman and Bob Ivry, U.S. Taxpayers Risk $9.7 Trillion 
on Bailout Programs, Bloomberg (Feb. 9, 2009) (online at 
news.yahoo.com/s/bloomberg/20090209/p_bloomberg/agq2b3xegkok).
    \162\ TreasuryDirect, The Debt to the Penny and Who Holds It 
(online at www.treasurydirect.gov/NP/BPDLogin?application=np) (accessed 
Mar. 5, 2009).
    \163\ Republican Caucus, House Committee on the Budget, The 
President's Budget for Fiscal Year 2010: the Good, the Bad, and the 
Ugly (Feb. 27, 2009) (online at http://www.house.gov/
budget_republicans/press/2007/pr20090227potus.pdf).
---------------------------------------------------------------------------
    The question of cost is also significant because it helps 
further define the universe of deserving people to whom 
assistance could be directed. It should be clear that with an 
unlimited supply of money, you could prevent any foreclosure 
for every borrower if you did not care about their worthiness. 
But, given a limited amount of resources, it becomes critical 
that you focus your attention on those who are actual 
priorities and limit those who are less deserving. Budget 
concerns also raise another question: how much assistance is 
appropriate to commit to any one borrower? Clearly, with finite 
resources, the more money you use to help those with large 
financial needs, the fewer total number of people you can help. 
For example, the original Hope for Homeowners law limited the 
size of eligible single-family loans to no more than 132 
percent of the 2007 conforming loan limits for Freddie Mac, or 
roughly $550,000 for most places. According to the U.S. Census 
Bureau, that amount was well more than double the median 
national purchase price of $234,991 for a newly constructed 
home built in the last four years.\164\ Accordingly, all things 
being equal, you would be able to provide the same proportional 
amount of assistance to more than two borrowers at the median 
price for every one borrower at the upper limit. Thus, if the 
goal of a program is to help the maximum number of people 
possible, then it makes sense to target assistance towards 
people on the lower end of the income/loan scale; if the goal 
of a program is to provide the most robust assistance to 
borrowers, then the reverse would be true.
---------------------------------------------------------------------------
    \164\ U.S. Census Bureau, American Housing Survey National Tables: 
2007 (2007) (Table 3-14: Value, Purchase Price, and Source of Down 
Payment--Owner-Occupied Units) (online at http:// www.census.gov/hhes/
www/housing/ahs/ahs07/tab3-14.pdf).
---------------------------------------------------------------------------
    A further necessary consideration of the effectiveness of 
government-subsidized foreclosure mitigation plans is how 
successful they will be in keeping assisted borrowers out of 
future foreclosure difficulty. Unfortunately, there is strong 
evidence to suggest that despite recent loan modification 
efforts at various levels, a significant number of modified 
borrowers end up back in default anyway, often very quickly. A 
December 2008 joint report by the Office of the Comptroller of 
the Currency (OCC) and the Office of Thrift Supervision (OTS) 
on the state of first lien residential mortgages serviced by 
national banks and federally regulated thrifts found that loan 
modifications were ``associated with high levels of re-
default.'' The report found that for ``loans modified in the 
first quarter of 2008, more than 37 percent of modified loans 
were 30 or more days delinquent or in the process of 
foreclosure after three months [and a]fter six months, that re-
default rate was more than 55 percent.'' \165\ For loans 
modified in second quarter of 2008, the number of 30 or more 
days delinquent modified loans was even higher, coming in at 
40.52 percent.\166\ Such results seem to indicate that many of 
the current recipients of loan modification assistance might 
either fall into the category of those who have loans that are 
not economical to modify or those who are simply not ready for 
the responsibility of homeownership.
---------------------------------------------------------------------------
    \165\ Comptroller of the Currency and Office of Thrift Supervision, 
OCC and OTS Mortgage Metrics Report: Disclosure of National Bank and 
Federal Thrift Mortgage Loan Data (Dec. 2008) (online at 
files.ots.treas.gov/482028.pdf).
    \166\ Id.
---------------------------------------------------------------------------

                         D. UNIVERSE OF PEOPLE

    As mentioned earlier, there is little doubt that the sheer 
number of foreclosures we are experiencing is unprecedented in 
modern times. Caught up in this wave of foreclosures are 
certainly people who, through little fault of their own 
actions, now find themselves in distress. These are the 
borrowers who have suffered what industry professionals refer 
to as ``life events,'' such as the involuntary loss of a job, 
the onset of an illness or disability, a divorce, or had some 
other unexpected hardship that has materially changed their 
living/earning circumstance. For those individuals, the 
commitment required for homeownership has shifted from a 
manageable responsibility to a crushing burden from which they 
may be powerless to resolve without third-party assistance.
    These ``life event'' affected borrowers are noteworthy 
because relatively few object to efforts to find achievable 
solutions for trying to help keep these distressed borrowers in 
their current residences whenever possible. Similarly, another 
sympathetic group of distressed borrowers involves people who 
were legitimate victims of blatant manipulation or outright 
fraud by unscrupulous lenders who pressured them into homes 
they could not afford. To many, those legitimate victims are 
certainly equally deserving of assistance. Of course, such 
borrowers do have the added burden proving that they were 
indeed victims of actual wrongdoing. However, they also have a 
potential remedy of pursuing legal action against fraudulent 
lenders, an option which is not available to others.
    If the universe of individuals in mortgage distress 
included only borrowers from ``life event'' and fraud victims 
groups, the task of crafting an acceptable government-
subsidized foreclosure mitigation plan would be much easier. 
However, the number of individuals in mortgage distress 
stretches far beyond those groups to include a much larger 
section of people who, for a wide variety of reasons, are no 
longer paying their mortgage on time. While certainly not an 
exhaustive list, that larger group includes:

           people who took out large loans to purchase 
        more house than they could have reasonably expected to 
        afford;
           borrowers who lied about their income, 
        occupancy, or committed other instances of mortgage 
        fraud;
           speculators who purchased multiple houses 
        for their expected value appreciation rather than a 
        place to live;
           individuals who decided to select an exotic 
        mortgage loan with fewer upfront costs, lower monthly 
        payments, or reduced documentation requirements;
           borrowers who took advantage of refinance 
        loans to strip much or all of the equity out of their 
        house to finance other purchases;
           those who simply made bad choices by 
        incorrectly gambling on the market or overestimating 
        their readiness for homeownership; and
           borrowers who have made a rational economic 
        decision and, given their particular circumstance, it 
        no longer makes sense to them to continue paying their 
        mortgage.

    Borrowers who fall into those categories are much less 
sympathetic in the eyes of many, and attempting to develop a 
government-subsidized foreclosure mitigation plan to assist 
them will inevitably raise significant moral hazard questions 
for policymakers.
    A fundamental measure of the effectiveness of a foreclosure 
mitigation program is what steps the program has taken to sort 
those risky borrowers out from their more deserving 
counterparts to avoid the moral hazard of rewarding people for 
their bad behavior. Although that risky group might be 
difficult to quantify, there has been ample anecdotal evidence 
in the media highlighting the types of risky borrowers who 
should not be treated in the same way as other, responsible 
borrowers. For example, a 2006 USA Today story reported on a 
24-year-old former website designer in California who bought 
eight homes in four states with no money down in seven of the 
eight deals, and then quickly went broke.\167\ The Wall Street 
Journal, in 2007, published an article telling the story of a 
Detroit woman who refinanced her mortgage with an adjustable 
rate subprime loan but soon fell into delinquency after she 
used the proceeds of the new loan to settle old department-
store bills, subsidize out-of-work relatives, and pay off some 
of her back property taxes.\168\ A 2008 Bloomberg article 
featured a 28-year-old self-employed Californian cabinetmaker 
who took out a mortgage loan with monthly payments of $6,900, 
and then almost instantly fell behind when his business revenue 
declined.\169\
---------------------------------------------------------------------------
    \167\ Noelle Knox, 10 Mistakes That Made Flipping a Flop, USA Today 
(Oct. 22, 2006) (online at www.usatoday.com/money/economy/housing/2006-
10-22-young-flipper-usat_x.htm).
    \168\ Mark Whitehouse, `Subprime' Aftermath: Losing the Family 
Home, Wall Street Journal (May 30, 2007) (online at online.wsj.com/
article/SB118047548069017647.html).
    \169\ Kambiz Foroohar, Vulture Fund Deals With Delinquent 
Homeowners Lost by Subprime, Bloomberg (Feb. 28, 2009) (online at 
www.bloomberg.com/apps/news?pid= 20601109&sid=aaKT9Z_X9okg&refer=home).
---------------------------------------------------------------------------
    There have also been several stories of the rich and famous 
falling behind on their mortgages, including former Major 
League Baseball player Jose Canseco,\170\ former NBA player 
Latrell Sprewell,\171\ pop singers Whitney Houston \172\ and 
Michael Jackson,\173\ and even an elected Member of 
Congress.\174\ Although the financial details of each situation 
may be unique, the fact remains that all of those borrowers 
probably earned far more than the $50,000 that the Census 
Bureau has determined was the median annual income for 
households in 2007.\175\ Additionally, according to a 2008 
report by the MBA, at least 18 percent of loans in foreclosure 
in 2007 were for non-owner occupied homes.\176\ Separately, the 
National Association of Realtors in 2008 found that known 
second home sales accounted for 33 percent of all existing- and 
new-home sales in the previous year, a figure which was close 
to historic norms.\177\ While the individual needs of the rich 
and famous and those who own multiple homes might be great, 
surely this collection of borrowers is not the universe of 
people on whom we ought to spend limited taxpayer dollars to 
extend government-subsidized foreclosure mitigation efforts.
---------------------------------------------------------------------------
    \170\ Jose Canseco: Former Slugger's Home Foreclosed, Associated 
Press (May 5, 2008) (online at archives.chicagotribune.com/2008/may/05/
sports/chi-jose-canseco-080505-ht).
    \171\ Federal Marshal Seizes Sprewell's Yacht, Associated Press 
(Aug. 22, 2007) (online at http:// www.usatoday.com/sports/basketball/
2007-08-22-sprewell-yacht_N.htm).
    \172\ Houston, We Have A Problem: Whitney's Foreclosure, Associated 
Press (Nov. 15, 2006) (online at cbs2.com/local/
Whitney.Houston.Mortgage.2.524392.html).
    \173\ Alex Veiga, Records: Michael Jackson Late on Payments for 
Family Home, Associated Press (Feb. 28, 2008) (online at 
www.usatoday.com/life/people/2008-02-28-jackson-home_ N.htm?csp=34).
    \174\ Report: Congresswoman's Homes Defaulted 6 Times, Associated 
Press (May 31, 2008) (online at cbs2.com/politics/
Laura.Richardson.Default.2.737694.html).
    \175\  U.S. Census Bureau, Household Income Rises, Poverty Rate 
Unchanged, Number of Uninsured Down (Aug. 26, 2008) (online at 
www.census.gov/Press-Release/www/releases/archives/income_wealth/
012528.html).
    \176\ Jay Brinkmann, Mortgage Bankers Association, An Examination 
Of Mortgage Foreclosures, Modifications, Repayment Plans and Other Loss 
Mitigation Activities in the Third Quarter of 2007 (Jan. 2008) (online 
at www.mortgagebankers.org/files/News/InternalResource/
59454_LoanModificationsSurvey.pdf)
    \177\ National Association of Realtors, Second-Home Sales Accounted 
for One-Third of Transactions in 2007 (Mar. 28, 2008) (online at 
www.realtor.org/press_room/news_releases/2008/03/
second_home_sales_one_third_of_2007_transactions).
---------------------------------------------------------------------------
    Beyond those who made unwise borrowing decisions, attention 
must be paid to excluding individual borrowers who committed 
outright fraud in obtaining their mortgages. Many of these 
loans likely fall into the no-doc/low-doc category of Alt-A 
loans where borrowers were not required to provide real 
verification of their income to lenders. According to a 
February 2009 by the Department of the Treasury's Financial 
Crimes Enforcement Network (FinCEN), reports of mortgage fraud 
have increased more than 1,600 percent from 2000 to 2008, and 
almost doubled since June 2006.\178\ Despite heightened 
concerns and a depressed real estate market, the report found 
that the total number of suspected mortgage fraud reports filed 
in 2008 was 62,084, a 44 percent increase over 2007. FinCEN 
also reports that mortgage loan fraud remained the third most 
prevalent type of suspicious activity reported in 2008. Given 
the tremendous potential for fraud, it should be readily 
apparent to all that preventing taxpayer money from being used 
to aid these criminal borrowers must be a priority for any 
government-subsidized foreclosure mitigation plan.
---------------------------------------------------------------------------
    \178\ Financial Crimes Enforcement Network, supra note 45; 
Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Update of 
Trends Based Upon an Analysis of Suspicious Activity Reports (Apr. 
2008) (online at www.fincen.gov/news_room/rp/files/
MortgageLoanFraudSARAssessment.pdf)
---------------------------------------------------------------------------
    Distinct from a moral hazard question, in any consideration 
of the effectiveness of a taxpayer-funded foreclosure 
mitigation program, there is an inherent question of fairness 
as those who are not facing mortgage trouble are asked to 
subsidize those who are facing trouble. After all, why should a 
person be forced to pay for their neighbor's mortgages when he 
or she is struggling to pay his or her own mortgages and other 
bills? To many people, this question is the most important 
aspect of the public policy debate. On this point, despite the 
persistent externality admonitions of some economists, it is 
difficult to dismiss the concerns of those members of the 
ultimate ``no fault of their own'' demographic.
    The evidence supporting the potential unfairness of current 
government-subsidized efforts is compelling. According to 
recent Census Bureau statistics, in 2007 there were roughly 
110,692,000 occupied housing units in the United States.\179\ 
Of those units, approximately 35,045,000 were occupied by 
people who were renters.\180\ The remaining 75,647,000 housing 
units were occupied by people who were to some degree 
homeowners, both those with active mortgages and those who 
owned their homes outright with no mortgage. The latter group, 
those with no mortgage, totaled approximately 24,885,000.\181\ 
Thus, the aggregate total of those who either rent their 
housing or own their homes outright is roughly 59,930,000 
people, or more than 54 percent of the entire occupied housing 
unit market. That majority group, by definition, cannot be late 
on a mortgage payment, yet as taxpayers they are being asked to 
subsidize, at least in part, the mortgages of some of the 
minority 46 percent of the population that has an active 
mortgage.
---------------------------------------------------------------------------
    \179\ U.S. Census Bureau, American Housing Survey National Tables: 
2007 (2007) (Table 2-1: Introductory Characteristics--Occupied Units) 
(online at www.census.gov/hhes/www/housing/ahs/ahs07/tab2-1.pdf).
    \180\ Id.
    \181\ U.S. Census Bureau, American Housing Survey National Tables: 
2007 (2007) (Table 3-15: Mortgage Characteristics--Owner-Occupied 
Units) (online at www.census.gov/hhes/www/housing/ahs/ahs07/tab3-
15.pdf).
---------------------------------------------------------------------------
    The numbers become even more pronounced when you factor in 
which people from the active mortgage group are actually 
currently in delinquency. According to the MBA's National 
Delinquency Survey for the third quarter of 2008, which 
includes data on more than 85 percent of the active mortgages 
on the market, the non-seasonally adjusted total of loans 
beyond 30-days past due was percent 7.29, and the percent of 
loans in foreclosure was 2.97, for a combined total of 10.26 
percent of loans not being paid on time.\182\ Assuming that 
rate was consistent for all of the 50,762,000 active mortgages 
projected by the Census Bureau's statistics, that would mean 
that there were some 5,208,000 loans which were currently not 
being paid on-time versus 45,554,000 loans which are being paid 
on-time. Adding together the number of mortgages being paid on-
time with the total of those who rent or own their homes 
outright, you get a total of 105,484,000 housing units that are 
not delinquent on a mortgage, or 95.3 percent of the 
110,692,000 occupied housing units in the United States.
---------------------------------------------------------------------------
    \182\ Mortgage Bankers Association, Delinquencies Increase, 
Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 
5, 2008).
---------------------------------------------------------------------------
    In light of these statistics, an essential public policy 
question that must be asked regarding the effectiveness of any 
taxpayer-subsidized foreclosure mitigation program is ``Is it 
fair to expect 19 out of every 20 people to pay more in taxes 
to help the 20th person maintain their current residence?'' 
Although that question is subject to individual interpretation, 
there is an ever-increasing body of popular sentiment that such 
a trade-off is indeed not fair. Given the massive direct 
taxpayer costs that have already been incurred through TARP and 
the potential costs that could be incurred through the assorted 
credit facilities and monetary policy actions of the Federal 
Reserve, I believe that it is difficult to justify asking those 
19 out of 20 Americans to shoulder an even greater financial 
burden on yet another government foreclosure mitigation program 
that might not work.
    Moreover, while the effect of the underlying credit crisis 
has been nationwide, statistics show that the bulk of the 
foreclosure wave has been concentrated in a few places where, 
admittedly, the problem is robust. According to the 
aforementioned January RealtyTrac report, nearly half (47.4 
percent) of the 2.3 million properties with foreclosure filings 
in 2008 were concentrated in exactly four states: Nevada, 
Florida, Arizona, and California.\183\ In fact, 15 of the top 
16 and 18 of the top 22 metropolitan areas with the highest 
foreclosure rates were located in those four states. If you add 
to those four states the states with the five next highest 
foreclosure rates--Colorado, Michigan, Ohio, Georgia, and 
Illinois--the top nine foreclosure rate states contain more 
than two-thirds (66.9 percent) of all the properties with 
foreclosure filings in the country. Additionally, in its third 
quarter 2008 National Delinquency Survey, the MBA found that 
there were only nine total states which had rates of 
foreclosure starts above the national average (Nevada, Florida, 
Arizona, California, Michigan, Rhode Island, Illinois, Indiana 
and Ohio), while the remaining 41 states were all below the 
national average.\184\ Clearly, these data show that the 
foreclosure problem is very real, but it is also very 
concentrated in select areas, so much so that a few states are 
skewing the statistical average for the preponderance of the 
other states. This fact must be taken into consideration when 
considering the effectiveness of any government-subsidized 
foreclosure mitigation effort.
---------------------------------------------------------------------------
    \183\ RealtyTrac, supra note 156.
    \184\ Mortgage Bankers Association, Delinquencies Increase, 
Foreclosure Starts Flat in Latest MBA National Delinquencies Survey 
(Dec. 5, 2008).
---------------------------------------------------------------------------

                  E. VOLUNTARY MITIGATION ALTERNATIVES

    In reviewing the effectiveness of government-subsidized 
foreclosure mitigation efforts, it is important to keep in mind 
that there is no single reason why borrowers decide to buy a 
home and there is no single reason why some borrowers go into 
foreclosure. Home buying and home owning, like any other 
activity, are the culminations of a wide variety of individual 
factors including cost, location, availability, and station in 
life. Different people can approach the decision in distinct 
ways, weigh competing factors differently and perhaps even make 
unwise, foolhardy, or bad choices despite every reason to the 
contrary. Nevertheless, because the factors that go into the 
decision to buy and keep a home can vary greatly, it stands to 
reason you cannot devise a single foreclosure mitigation 
program that will appeal to or benefit everyone who might be at 
risk. Thus, a more sensible approach would be to encourage a 
series of different mitigation programs and approaches instead 
of attempting to force all distressed borrowers into one 
massive government-subsidized foreclosure mitigation effort.
    To that end, since the onset of the mortgage crisis the 
federal government has worked with banks and other private 
parties to develop a number of voluntary initiatives to assist 
borrowers in danger of foreclosure. While by no means perfect, 
these efforts have been helping borrowers to varying degrees 
without having to resort to government mandates or increased 
taxpayer risk. Some of these initiatives have included:

     HOPE NOW: In response to the downturn in the U.S. 
mortgage market in 2007, the Bush Administration helped broker 
an alliance of mortgage lenders, servicers, counselors, and 
investors called the HOPE NOW Alliance. The goals of HOPE NOW 
are to ``maximize outreach efforts to homeowners in distress to 
help them stay in their homes'' and to ``create a unified, 
coordinated plan to reach and help as many homeowners as 
possible.'' HOPE NOW estimates that it has helped nearly 3.2 
million homeowners avoid foreclosure since July 2007.\185\
---------------------------------------------------------------------------
    \185\ HOPE Now, Mortgage Lending Industry Prevented Almost 240,000 
Foreclosures in December (Jan. 29, 2009) (Online at www.hopenow.com/
upload/press_release/files/HOPE%20 
NOW%20December%202008%20Data%20Release%20.pdf).

     JP Morgan Chase: On October 31, 2008, JP Morgan 
Chase announced it would expand its mortgage modification 
program by undertaking multiple initiatives designed to keep 
more families in their homes, including extending its 
modification programs to customers of Washington Mutual, which 
Chase acquired in September, and EMC Mortgage, the lending arm 
of Bear Stearns, which Chase acquired in March 2008.\186\ Chase 
will open regional counseling centers, hire additional loan 
counselors, introduce new financing alternatives, proactively 
reach out to borrowers to offer pre-qualified modifications, 
and commence a new process to independently review each loan 
before moving it into the foreclosure process. Chase has 
selected sites for 24 Chase Homeownership Centers in areas with 
high mortgage delinquencies where counselors can work face-to-
face with struggling borrowers. Chase anticipated 13 of these 
centers--in California and Florida--open and serving borrowers 
by the end of February 2009. The other 11 around the country 
will be open by the end of March 2009. Chase expects these 
changes will help an additional 400,000 borrowers. While 
implementing these enhancements, Chase will not put any 
additional loans into the foreclosure process.
---------------------------------------------------------------------------
    \186\ JPMorgan Case, Chase Further Strengthens Robust Programs to 
Keep Families in Homes (Oct. 31, 2008) (online at 
files.shareholder.com/ downloads/ONE/514430481 x0x245621/b879b4eb -
40c0-43f8- 8614-6F2113759d0c /344473.pdf).

     Wells Fargo Home Mortgage Servicing: Over the past 
year and a half, through the Leading the Way Home program, 
Wells has provided more than 700,000 foreclosure prevention 
solutions.\187\ Wells' program is designed to work with all its 
customers--including those not yet in default--to determine if 
they qualify for a modification. For example, since Wells 
acquired Wachovia and its unique Wachovia Pick-a-Payment option 
ARM loans, Wells will use more aggressive solutions through a 
combination of means including permanent principal reductions 
in geographies with substantial property declines. In total, 
Wells predicts 478,000 customers will have access to this 
program if they need it.\188\ Wells has also extended a 
foreclosure moratorium on loans it owns through March 13, 2009.
---------------------------------------------------------------------------
    \187\ Wells Fargo and National Urban League Publish New Foreclosure 
Prevention Workbook: Advice from Foreclosure Experts Given to 
Homeowners Across the Country, Business Wire (Feb. 28, 2009) (online at 
www.businesswire.com/portal/site/home/permalink/?ndmViewId= news 
_view&newsId=20090228005030&newsLang=en).
    \188\ Wells Fargo, Wells Fargo Merger Gives 478,000 Wachovia 
Customers Access to New Wells Fargo Solutions if Their Mortgage 
Payments Become At-Risk (Jan. 26, 2009) (online at www.wellsfargo.com/ 
press/2009/20090126 _Wachovia_HMS).

     Bank of America: In early October, Bank of America 
announced the creation of a proactive home retention program 
that will systematically modify troubled mortgages with up to 
$8.4 billion in interest rate and principal reductions for 
nearly 400,000 Countrywide Financial Corporation customers 
nationwide.\189\ (Bank of America acquired Countrywide July 1, 
2008). The program was developed together with state attorneys 
general and is designed to achieve affordable and sustainable 
mortgage payments for borrowers who financed their homes with 
subprime loans or pay option adjustable rate mortgages serviced 
by Countrywide and originated prior to December 31, 2007. Bank 
of America has also implemented a foreclosure sale moratorium 
on mortgages it holds as well as mortgages owned by investors 
that have agreed to the moratorium for mortgages it services 
until final guidelines are issued by the Obama Administration 
on its foreclosure plan.
---------------------------------------------------------------------------
    \189\ Bank of America, Bank of America Announces Nationwide 
Homeownership Retention Program for Countrywide Customers: Nearly 
400,000 Countrywide Borrowers Could Benefit After Program Launches 
December 1 (Oct. 6, 2008) (online at newsroom.bankofamerica.com/ 
index.php?s= press_releases&item=8272).

     Citigroup: In November 2008, Citigroup announced 
the Citi Homeowner Assistance Program for families particularly 
in areas of economic distress and sharply declining home values 
whose mortgages Citigroup holds.\190\ In February, Citigroup 
also initiated a foreclosure moratorium effective through March 
12 while awaiting implementation of the Obama Administration's 
foreclosure plan.
---------------------------------------------------------------------------
    \190\ Citigroup, Citi Announces New Preemptive Initiatives to Help 
Homeowners Remain in Their Homes (Nov. 11, 2008) (online at 
www.citigroup.com/citi/press/2008/081111a.htm).
---------------------------------------------------------------------------
    These initiatives, coupled with other efforts like the 
federal Hope for Homeowners law and the FDIC's IndyMac loan 
modification program, are providing options to distressed 
borrowers. However, some have complained that these programs 
are not doing enough to help more borrowers and are advocating 
for a larger government program to fill that void. Such calls 
seem to ignore the reality that loan modifications can be 
complicated, time consuming exercises and are of course 
dependent upon the borrower being willing and qualified to 
participate. As noted in the majority's report, foreclosures 
can cost lenders up to $70,000 in costs and fees, providing 
ample economic motivation for lenders to avoid such an outcome 
wherever possible.
    Ultimately, instead of creating new government-subsidized 
programs, the best foreclosure mitigation program is having a 
strong economy, a job, and the freedom to keep more of what you 
earn. That's why I have supported legislation to encourage an 
economic turnaround, help preserve jobs, and spur widespread 
economic growth by lowering the tax burden that job-creators 
face, such as the Economic Growth Act of 2008. That 
legislation, introduced last year by Rep. Scott Garrett, would 
have provided for full, immediate business expensing, a 
significant reduction in the top corporate tax rate, an end the 
capital gains tax on inflation, and simplification of the 
capital gains rate structure. Any one of those components would 
have increased our economic growth, and helped hardworking 
Americans keep their jobs and earn more money. For example, 
while reviewing the impact of just one component of the bill, 
Dr. Mihir Desai of the Harvard Business School has estimated 
cutting the corporate capital gains rate from 35 percent to 15 
percent could unlock $1 trillion worth of wealth for the 
economy.\191\ Even though such proposals might not contain a 
specific foreclosure mitigation program, the vast economic 
growth and prosperity that bills like the Economic Growth Act 
could unleash would help countless numbers of Americans pay 
their mortgages and other bills without government-subsidized 
foreclosure mitigation plans.
---------------------------------------------------------------------------
    \191\Americans for Tax Reform, America's Growth Agenda Part Four: 
Cut the Corporate Capital Gains Rate to 15%, Unlocking Wealth for Job 
Creation (Jan. 21, 2008) (online at 74.6.239.67/search/cache?ei=UTF-
8&p=%22Mihir +Desai%22+capital+gains &fr=my-myy&u=atr.org/content/html/
2008/jan/012108pr-
growthcorpcapgains.html&w=%22mihir+desai%22+capital+gains&d 
=AwxrU52uSUbL&icp= 1&.intl=us).
---------------------------------------------------------------------------
    Additionally, providing tax relief to Americans instead of 
creating new government programs would help address some of the 
fairness concerns behind such programs because tax relief is 
unbiased towards home owners, borrowers, and renters. 
Additionally, tax relief proposals have the added benefit of 
being able to provide more relief to more people at a lower 
cost. For example, the tax reduction alternative offered by 
Reps. Dave Camp and Eric Cantor to the recently enacted $1.1 
trillion stimulus bill contained several provisions that would 
help America's small businesses and employers.\192\ Those 
provisions combined--creating a 20 percent deduction for small 
business income (which would affect 99.9 percent of the 27.2 
million businesses in America), extending the favorable bonus 
depreciation rules for small businesses, extending the Net 
Operating Losses carryback rules for previously profitable 
companies to seek immediate cash refunds of past taxes paid, 
and repealing of 3 percent withholding requirement for 
government contractors--would have cost less than $83.1 billion 
over 11 years. That amount is slightly more than the one year 
cost of the $75 billion Homeowner Affordability and Stability 
Plan proposed by President Obama last month, which would affect 
fewer people.\193\
---------------------------------------------------------------------------
    \192\ House Committee on Ways and Means Republicans, Summary of 
Camp-Cantor Substitute to H.R. 1 (Jan. 28, 2009) (online at 
republicans.waysandmeans.house.gov/showarticle.asp?ID=462).
    \193\ Federal Deposit Insurance Corporation, Homeowner 
Affordability and Stability Plan (online at www.fdic.gov/consumers/
loans/hasp/index.html) (accessed Mar. 5, 2009).
---------------------------------------------------------------------------

         II. RICHARD NEIMAN, DAMON SILVERS AND ELIZABETH WARREN

    The dissenting views offered by Congressman Jeb Hensarling 
raise a number of issues that the Panel intends to pursue in 
the course of its oversight. We all share the goals of ensuring 
that the government-sponsored entities (GSE) function in an 
optimal manner and targeting limited public foreclosure 
prevention resources to responsible borrowers. Part of the 
Panel's mission is to consider these and other important topics 
with the benefit of our diverse experiences and viewpoints.
    One point mentioned in the dissent, however, is strikingly 
inaccurate and necessitates an immediate clarification to 
Congress and the American people. And that is the Congressman's 
statement concerning the Community Reinvestment Act (CRA):

          ``Thus, mandates like CRA ended up becoming a 
        significant contributor to the number of foreclosures 
        that are occurring because they required lending 
        institutions to abandon their traditional underwriting 
        standards in favor of more subjective models to meet 
        their government mandated CRA objectives.''

This statement misinterprets both the nature of the CRA 
requirement and the positive impact that the CRA has had on the 
mortgage market over the past thirty years. But most disturbing 
is the suggestion that CRA has been a factor in the current 
financial meltdown, when the facts demonstrate just the 
opposite.
    The CRA was passed in 1977 and requires banks to be 
responsive to the needs of the communities in which they accept 
deposits, especially low and moderate-income (LMI) 
neighborhoods. Banks are evaluated in terms of their lending 
and investment activities, as well as the innovative services 
they provide. The CRA was one response to the common practice 
of ``red lining'' or refusing to offer credit and other 
services in neighborhoods that were often communities of color.
    While the CRA encourages banks to recognize emerging 
business opportunities in LMI areas, there is no ``requirement 
to abandon traditional underwriting.'' Banks were never 
encouraged to provide loans that violated safety and soundness; 
they were encouraged to be creative in marketing and developing 
products that were tailored and appropriate for a group of 
consumers with unique needs.
    The success of the CRA speaks for itself. Banks' CRA 
activities have leveraged infusions of public capital into LMI 
communities, perhaps by as much as 10 to 25 times, attracting 
additional private capital in the process.\194\ And in the last 
ten years alone, CRA has contributed to bank lending to small 
businesses and farms in excess of $2.6 trillion, exactly the 
type of stimulus we need to preserve in these challenging 
economic times.\195\
---------------------------------------------------------------------------
    \194\ Office of the Comptroller of the Currency, Remarks by John C. 
Dugan Comptroller of the Currency Before the Enterprise Annual Network 
Conference, at 6 (Nov. 19, 2008) (online at www.occ.treas.gov/ftp/
release/2008-136a.pdf).
    \195\ Id. at 4.
---------------------------------------------------------------------------
    But what about CRA's influence in the area of home mortgage 
lending- were CRA loans the culprit in the mortgage meltdown? 
The notion that CRA loans were somehow to blame in triggering 
the cascade of foreclosure is a false one that the facts 
quickly put to rest. Only six percent of higher-priced loans 
were originated by banks subject to the CRA.\196\ Of course, 
originating loans is not the only way in which banks could be 
involved in higher-priced or subprime lending. In certain 
circumstances, banks may also receive consideration under the 
CRA for loans that they have purchased. However, less than two 
percent of the higher-priced, CRA-eligible loans originated by 
independent mortgage bankers were purchased by banks for CRA 
credit.\197\
---------------------------------------------------------------------------
    \196\ Board of Governors of the Federal Reserve System, Speech by 
Governor Randall S. Kroszner at the Confronting Concentrated Poverty 
Policy Forum (Dec. 3, 2008) (online at www.federalreserve.gov/
newsevents/speech/kroszner20081203a.htm).
    \197\ Id. at 10.
---------------------------------------------------------------------------
    We agree with Congressman Hensarling that the market 
excesses of the past decade led to lax underwriting standards 
and the origination of many dubious mortgages. But the CRA has 
been one of the few examples of what has worked, and provides a 
model for preserving responsible lending and homeownership as 
we work together to strengthen and reform the mortgage market.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    As Treasury reworks its efforts to combat the financial 
crisis and restore confidence in the economy, the Panel 
continues to review government actions, to study and 
investigate different aspects of the financial crisis and EESA 
programs, and to pose questions to Treasury on behalf of 
Congress and the American people. On January 28, 2009, the day 
after Treasury Secretary Timothy Geithner's confirmation by the 
U.S. Senate, the Panel sent a letter to the Treasury Department 
welcoming the Secretary and renewing its request for answers to 
the many unanswered questions from its December report with an 
emphasis on four categories: bank accountability, increased 
transparency, foreclosure reduction, and overall strategy. The 
Panel received a reply from Treasury on February 23rd. Both 
letters are attached in the appendices.
    While this reply did not offer any direct answers to the 
Panel's questions as posed, some of Treasury's actions as 
described in the letter represent progress toward increased 
bank accountability, improved transparency and a plan to 
address the foreclosure crisis. The Panel recognizes this 
progress, but it also observes that Treasury left many 
questions unanswered. The Panel must insist that Treasury 
address outstanding questions from previous oversight reports.
    While many questions remain open, the Panel is particularly 
interested in probing the strategy behind Treasury's new 
programs for the second tranche of EESA funds. Treasury has not 
yet offered Congress and the public its diagnosis of the causes 
of the current crisis nor explained how its program address the 
root causes of the crisis. Once Treasury articulates a clear 
and consistent strategy behind its actions, banks, businesses 
and consumers will be better-equipped to anticipate and plan 
for future government intervention.
    On March 5, 2009, Chairwoman Elizabeth Warren replied to 
the Treasury Secretary's letter with a request for a direct 
response to the Panel's outstanding questions about Treasury's 
overall strategy for combating the financial crisis.\198\ 
Future correspondence with Treasury will be discussed in 
subsequent oversight reports.
---------------------------------------------------------------------------
    \198\ See Appendix III, infra.
             SECTION FOUR: TARP UPDATES SINCE PRIOR REPORT

    The Obama Administration presented an outline of its 
Financial Stability Plan (the ``FSP'') on February 10. The FSP 
has five parts. More detailed outlines of the terms of the 
three of the five parts, the Homeowner Affordability and 
Stability Plan, the Capital Assistance Plan, and the Term 
Asset-Backed Loan Facility were published on February 18, 
February 25, and March 3, respectively.
    On February 27, the Treasury Department announced a 
restructuring of its interests in Citigroup in order to 
increase Citigroup's tangible common equity. Three days later, 
on March 2, the Treasury Department and the Federal Reserve 
Board announced a restructuring of their interests in American 
International Group to increase their capital support for that 
company to provide more time for an orderly reorganization--
including generation of cash through sale of substantial 
portions of that company.
    On February 26, the President released his FY-2010 budget 
outline. The outline included a $250 billion contingent reserve 
for further efforts to stabilize the financial system and 
suggested that a reserve of that size'' would support $750 
billion in asset purchases.''
    The Administration's stimulus package included several 
amendments to the Emergency Economic Stabilization Act, 
including a tightening of limits on the compensation of the 
most senior officers of financial institutions that receive 
federal assistance and easing the way for repayment to the 
Treasury of capital infusions made under the Capital Purchase 
Program.

                    The Financial Stability Program

    The Financial Stability Program has five parts:

     Financial Stability Trust. This part of the plan 
alters the Treasury's program of direct bank assistance. It was 
fleshed out in a set of documents issued on February 25 
regarding the new Capital Assistance Program (the ``CAP''). It 
described the CAP as having two related objectives, namely ``to 
help banking institutions absorb larger than expected future 
losses, should they occur, and to support lending to 
creditworthy borrowers during the economic downturn.'' It also 
outlined a two-pronged strategy to accomplish these objectives. 
The first is the so-called ``bank stress test,'' what Treasury 
refers to as ``forward looking capital assessment of major 
institutions.'' The second is the provision of ``contingent 
common capital'' to institutions whose economic situations 
justify assistance.
    Full implementation of the CAP would alter the economic 
relationship between Treasury and the institutions that receive 
financial assistance. Although the complete terms are complex, 
the key element would allow those institutions to convert 
Treasury's investment in them to common stock--bolstering their 
capital but also bolstering the risk for taxpayer dollars--if 
the institutions' financial condition makes additional capital 
necessary.
    The CAP appears to be aimed primarily at institutions whose 
financial condition is not yet critical but could become so as 
economic conditions worsen. Institutions that are already 
experiencing critical capital deterioration may receive greater 
assistance with ``individually-negotiated'' terms and timing. 
For either set of institutions, the Treasury strategy candidly 
anticipates a substantial--at least temporary--increase in the 
public ownership of major financial institutions.

     Affordable Housing Support and Foreclosure 
Prevention Plan. The Obama Administration announced its 
Homeowner Affordability and Stability Plan on February 18. This 
plan has three components.\199\ First, the plan targets between 
four and five million homeowners with conforming loans owned or 
guaranteed by Fannie Mae and Freddie Mac who are currently 
ineligible to refinance at today's low interest rates to 
refinance their loans. Second, it will devote $75 billion to a 
system of incentives and payments to help an estimated three 
and four million homeowners and their servicers modify their 
mortgages. Third, it will increase Treasury's purchase of 
preferred stock in Fannie Mae and Freddie Mac to $200 billion 
each (from $100 billion) and increase the size of their 
retained mortgage portfolios (and allowable debt outstanding) 
to up to $900 billion. The housing plan will take effect March 
4, when the Administration will publish detailed rules 
governing the programs.
---------------------------------------------------------------------------
    \199\ U.S. Department of the Treasury, Homeowner Affordability and 
Stability Plan Executive Summary (Feb. 18, 2009) (online at 
www.financialstability.gov/initiatives/eesa/homeowner- affordability-
plan/ExecutiveSummary.pdf).

     Public-Private Investment Fund (PPIF). The PPIF is 
intended to deal with the politically sensitive issue of 
valuing the ``legacy'' toxic assets that have plummeted in 
value since the beginning of the crisis. The federal government 
will provide public financing to the Fund in order to leverage 
$500 billion to $1 trillion in private capital to make ``large-
scale'' purchases of the previously illiquid assets.\200\
---------------------------------------------------------------------------
    \200\ U.S. Department of the Treasury, Fact Sheet (Feb. 10, 2009) 
(online at www.financialstability.gov/docs/fact-sheet.pdf).

     Consumer and Business Lending Initiative. This 
initiative expanded the size and scope of the joint Treasury-
Federal Reserve Term Asset-Backed Securities Loan Facility 
(TALF). Treasury will now provide $100 billion of credit 
protection to leverage $1 trillion in Federal Reserve 
financing. This facility will provide non-recourse loans 
collateralized by asset-backed securities of auto loans, 
student loans, credit cards, SBA loans and commercial real 
estate mortgages. The inclusion of commercial mortgage-backed 
securities represents an expansion of the program.\201\ 
Treasury has indicated that the program may be expanded further 
to include non-agency residential mortgage-backed securities.
---------------------------------------------------------------------------
    \201\ Id.

     New Equity Injections into Citigroup and AIG. On 
February 27, Treasury announced that it would convert up to $25 
billion of its preferred Citigroup shares into common stock, 
giving the company a large new injection of tangible common 
equity. Other holders of preferred stock were expected to make 
similar conversions, diluting the existing shareholders by as 
much as 74 percent. Although this move did not require an 
additional infusion of TARP funding, it substantially increased 
the risk that taxpayers will not be paid back. On March 2, 
Treasury announced a similar effort to shore up AIG's balance 
sheet. Treasury converted the $40 billion in AIG preferred 
stock that it owns into securities that have more of the 
characteristics of common stock, giving Treasury 77.9 percent 
of AIG's equity. In addition, Treasury made available to AIG an 
additional $30 billion in TARP funding as needed, in exchange 
for non-cumulative preferred stock. The AIG move was prompted 
by an impending credit rating downgrade on AIG debt, in 
response to AIG's record $62 billion quarterly loss.
                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of EESA and formed on November 26, 2008. Since then the Panel 
has issued three oversight reports, as well as a special report 
on regulatory reform which came out on January 29, 2009.
    Since the release of the Panel's February oversight report, 
the following developments pertaining to the Panel's oversight 
of the TARP took place:

     On February 4, 2009, the Panel sent a survey 
requesting mortgage performance data to Fannie Mae, Freddie 
Mac, FDIC, the Federal Reserve, FHFA, HUD, OCC, OTS, and 
Treasury.\202\ The Panel received responses from FHFA (on 
behalf of Fannie Mae and Freddie Mac), NCUA, OCC/OTS and the 
Federal Reserve during the week of February 16, 2009, and HUD, 
FDIC, and Treasury during the week of February 23, 2009.
---------------------------------------------------------------------------
    \202\ See Appendix IV, infra.
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     Treasury Secretary Timothy Geithner sent a 
response letter on February 23, 2009 \203\ to the Panel in 
response to a letter from Elizabeth Warren sent January 28, 
2009.\204\ Both letters are attached as appendices.
---------------------------------------------------------------------------
    \203\ See Appendix II, infra.
    \204\ See Appendix I, infra.
---------------------------------------------------------------------------
     On behalf of the Panel, Elizabeth Warren sent a 
reply to Secretary Geithner on March 5, 2009.\205\ This letter 
acknowledged positive steps taken by Treasury under the 
Secretary's tenure but pressed for answers to the questions 
posed by the Panel in previous reports and letters. In 
particular, the Chair posed a set of strategic questions for 
Secretary Geithner to answer in advance of the Panel's April 
report on overall TARP strategy.
---------------------------------------------------------------------------
    \205\ See Appendix III, infra.
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     The Panel held a field hearing in Largo, MD on 
February 27, 2009 entitled, ``Coping with the Foreclosure 
Crisis: State and Local Efforts to Combat Foreclosures in 
Prince George's County, Maryland.'' Following opening remarks 
from Congressman Chris Van Hollen and Congresswoman Donna 
Edwards, the Panel heard from two panels of witnesses. The 
first panel consisted of homeowners affected by the foreclosure 
crisis while the second panel featured community leaders and 
policymakers.

                     Upcoming Reports and Hearings

    In April 2009, the Panel will release its fifth oversight 
report. The April report will focus on assessing TARP strategy, 
and the Panel will hold a hearing during the month of March to 
explore this topic in greater detail. That report will also 
update the public on the status of its TARP oversight 
activities. The Panel will continue to release oversight 
reports every 30 days.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided the U.S. Department of the Treasury with the 
authority to spend $700 billion to stabilize the U.S. economy, 
preserve home ownership, and promote economic growth. Congress 
created the Office of Financial Stabilization (OFS) within 
Treasury to implement a Troubled Asset Relief Program. At the 
same time, Congress created the Congressional Oversight Panel 
to ``review the current state of financial markets and the 
regulatory system.'' The Panel is empowered to hold hearings, 
review official data, and write reports on actions taken by 
Treasury and financial institutions and their effect on the 
economy. Through regular reports, the Panel must oversee 
Treasury's actions, assess the impact of spending to stabilize 
the economy, evaluate market transparency, ensure effective 
foreclosure mitigation efforts, and guarantee that Treasury's 
actions are in the best interests of the American people. In 
addition, Congress has instructed the Panel to produce a 
special report on regulatory reform that will analyze ``the 
current state of the regulatory system and its effectiveness at 
overseeing the participants in the financial system and 
protecting consumers.''
    On November 14, 2008, Senate Majority Leader Harry Reid and 
the Speaker of the House Nancy Pelosi appointed Richard H. 
Neiman, Superintendent of Banks for the State of New York, 
Damon Silvers, Associate General Counsel of the American 
Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law 
at Harvard Law School to the Panel. With the appointment on 
November 19 of Congressman Jeb Hensarling to the Panel by House 
Minority Leader John Boehner, the Panel had a quorum and met 
for the first time on November 26, 2008, electing Professor 
Warren as its chair. On December 16, 2008, Senate Minority 
Leader Mitch McConnell named Senator John E. Sununu to the 
Panel, completing the Panel's membership.

                            Acknowledgements

    The Panel thanks Adam J. Levitin, Associate Professor of 
Law at the Georgetown University Law Center, for the 
significant contribution he made to this report. Special thanks 
also go to Tai C. Nguyen for research assistance, Professor 
John Genakopolos, Professor Susan Koniak, and Ellington 
Management Group, LLC for generously sharing data, and Jesse 
Abraham, Professor William Bratton, Thomas Deutsch, Rod 
Dubitsky, Professor Anna Gelpern, Dr. Benjamin Lebwohl, Mark 
Kaufman, Professor Patricia McCoy, Mark Pearce, Eric Stein, 
Professor Susan Wachter, Professor Michael Walfish, and 
Professor Alan White for their thoughts and suggestions.
 APPENDIX I: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
 WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED JANUARY 28, 
                                 2009 

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  APPENDIX II: LETTER FROM TREASURY SECRETARY MR. TIMOTHY GEITHNER TO 
 CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN, DATED FEBRUARY 
                               23, 2009 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 5, 2009 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

APPENDIX IV: MORTGAGE SURVEY LETTER FROM CONGRESSIONAL OVERSIGHT PANEL 
  CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 
                        DATED FEBRUARY 4, 2009 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

   APPENDIX V: MORTGAGE SURVEY FROM CONGRESSIONAL OVERSIGHT PANEL TO 
                          NUMEROUS RECIPIENTS

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APPENDIX VI: MORTGAGE SURVEY DATA FROM THE OFFICE OF THE COMPTROLLER OF 
           THE CURRENCY AND THE OFFICE OF THRIFT SUPERVISION

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 APPENDIX VII: MORTGAGE SURVEY DATA FROM THE FEDERAL DEPOSIT INSURANCE 
                              CORPORATION

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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