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




                     CONGRESSIONAL OVERSIGHT PANEL

                       OCTOBER OVERSIGHT REPORT *

                               ----------                              



    AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX MONTHS

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


               October 9, 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

                       OCTOBER OVERSIGHT REPORT *

                               __________



    AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX MONTHS

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                October 9, 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


                  U.S. GOVERNMENT PRINTING OFFICE
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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                          Rep. Jeb Hensarling
                             Paul S. Atkins
                           Richard H. Neiman
                             Damon Silvers








                            C O N T E N T S

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                                                                   Page
Executive Summary................................................     1
Section One: An Assessment of Foreclosure Mitigation Efforts 
  after Six Months...............................................     5
    A. Introduction: What Has Changed Since the Last Report......     5
    B. March Checklist...........................................    23
    C. Program Evaluation........................................    32
        HARP.....................................................    35
        HAMP.....................................................    38
        Second Lien Program......................................    62
        Price Decline Protection.................................    65
        Foreclosure Alternatives Program.........................    67
        HOPE for Homeowners......................................    69
        Other Federal Efforts Outside of TARP....................    72
        State/Local/Private Sector Initiatives...................    73
    D. Big Picture Issues........................................    78
    E. Conclusions and Recommendations...........................    96
Annexes to Section One:
    ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES ON NET 
      PRESENT VALUE CALCULATIONS.................................    99
    ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE HOME AFFORDABLE 
      MORTGAGE MODIFICATION PROGRAM..............................   102
    ANNEX C: EXAMINATION OF TREASURY'S NPV MODEL.................   112
Section Two: Additional Views....................................   114
    Richard Neiman...............................................   114
    Congressman Jeb Hensarling...................................   116
    Paul Atkins..................................................   151
Section Three: Correspondence with Treasury Update...............   154
Section Four: TARP Updates Since Last Report.....................   155
Section Five: Oversight Activities...............................   169
Section Six: About the Congressional Oversight Panel.............   170
Appendices:
    APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER RE: THE STRESS TESTS, DATED SEPTEMBER 15, 
      2009.......................................................   171
======================================================================



 
                        OCTOBER OVERSIGHT REPORT

                                _______
                                

                October 9, 2009.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

    From July 2007 through August 2009, 1.8 million homes were 
lost to foreclosure and 5.2 million more foreclosures were 
started. One in eight mortgages is currently in foreclosure or 
default. Each month, an additional 250,000 foreclosures are 
initiated, resulting in direct investor losses that average 
more than $120,000. These investors include the American 
people. The combination of federal efforts to combat the 
financial crisis coupled with mortgage assistance programs 
makes the taxpayer the ultimate guarantor of a large portion of 
home mortgages.
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    * The Panel adopted this report with a 3-2 vote on October 8, 2009. 
Rep. Jeb Hensarling and Paul Atkins voted against the report. 
Additional views are available in Section Two of this report.
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    Each foreclosure further imposes direct costs on displaced 
owners and tenants, and indirect costs on cities and towns, and 
neighboring homeowners whose property values are driven down. 
High unemployment and depressed residential real estate values 
feed a foreclosure crisis that could pose an enormous obstacle 
to recovery.
    The Panel is specifically charged with conducting oversight 
of foreclosure mitigation efforts under the Emergency Economic 
Stabilization Act (EESA). In particular, the statute directs 
the Panel to assess the effectiveness of the programs from the 
standpoint of minimizing long-term costs and maximizing 
benefits for taxpayers. To that end, the Panel asked Professor 
Alan White of Valparaiso University to conduct a cost-benefit 
analysis. Although federal foreclosure mitigation programs are 
still getting off the ground, the benefits of foreclosure 
modification are likely to outweigh the cost to taxpayers.
    Since the Panel's March report on the foreclosure crisis, 
Treasury has unveiled its Making Home Affordable (MHA) 
initiative, the federal government's central tool to combat 
foreclosures. MHA consists of two primary programs. The Home 
Affordable Refinance Program (HARP) helps homeowners who are 
current on their mortgage payments but owe more than their 
homes are worth, refinance into more stable, affordable loans. 
The larger Home Affordable Modification Program (HAMP) reduces 
monthly mortgage payments in order to help borrowers facing 
foreclosure keep their homes. As of September 1, 2009, HAMP 
facilitated 1,711 permanent mortgage modifications, with 
another 362,348 additional borrowers in a three-month trial 
stage. HARP has closed 95,729 refinancings, hopefully reducing 
the number of homeowners who may face foreclosure in the 
future.
    Treasury currently estimates it will spend $42.5 billion of 
the $50 billion in Troubled Asset Relief Program (TARP) funding 
for HAMP, which will support about 2 to 2.6 million 
modifications. If HAMP is successful in reducing investor 
losses, those savings should translate to improved recovery on 
other taxpayer investments. But if foreclosure starts continue 
their push toward 10 to 12 million, as currently estimated, the 
remaining losses will be massive.
    The Panel has three concerns with the current approach.
    First is the problem of scope. Treasury hopes to prevent as 
many as 3 to 4 million of these foreclosures through HAMP, but 
there is reason to doubt whether the program will be able to 
achieve this goal. The program is limited to certain mortgage 
configurations. Many of the coming foreclosures are likely to 
be payment option adjustable rate mortgage (ARM) and interest-
only loan resets, many of which will exceed the HAMP 
eligibility limits. HAMP was not designed to address 
foreclosures caused by unemployment, which now appears to be a 
central cause of nonpayment, further limiting the scope of the 
program. The foreclosure crisis has moved beyond subprime 
mortgages and into the prime mortgage market. It increasingly 
appears that HAMP is targeted at the housing crisis as it 
existed six months ago, rather than as it exists right now.
    The second problem is scale. The Panel recognizes that HAMP 
requires a significant infrastructure--both at Treasury and 
within participating mortgage servicers--that cannot be created 
overnight. Foreclosures continue every day as Treasury ramps up 
the program, with foreclosure starts outpacing new HAMP trial 
modifications at a rate of more than 2 to 1. Some homeowners 
who would have qualified for modifications lost their homes 
before the program could reach them. Treasury's near-term 
target for HAMP--500,000 trial modifications by November 1, 
2009--appears to be more attainable, but even if it is 
achieved, this may not be large enough to slow down the 
foreclosure crisis and its attendant impact on the economy. 
Once the program is fully operational, Treasury officials have 
stated that the goal is to modify 25,000 to 30,000 loans per 
week. Treasury's own projections would mean that, in the best 
case, fewer than half of the predicted foreclosures would be 
avoided.
    The third problem is permanence. It is unclear whether the 
modifications actually put homeowners into long-term stable 
situations. Though still early in the HAMP program, only a very 
small proportion of trial modifications that were begun three 
or more months ago have converted into longer term 
modifications. In addition, HAMP modifications are often not 
permanent; for many homeowners, payments will rise after five 
years, which means that affordability can decline over time. 
Moreover, HAMP modifications increase negative equity for many 
borrowers, which appears to be associated with increased rates 
of redefault. The result for many homeowners could be that 
foreclosure is delayed, not avoided.
    Whether current Treasury programs adequately address 
foreclosures also depends on the future condition of the 
housing market. Today, one-third of mortgages are underwater, 
and if housing prices continue to drop, some experts estimate 
that one-half of all mortgages will exceed the value of the 
homes they secure. Negative equity increases the likelihood 
that when these homeowners encounter other financial problems 
or when life events cause them to move, they may walk away from 
their homes and their over-sized mortgages. Others may be 
discouraged about paying off mortgages that greatly exceed the 
value of the property or give up their homes when they 
recognize that they would be ahead financially if they rented 
for a few years before buying again. If left unresolved, 
redefaults and future defaults related to negative equity could 
mean that the country experiences high foreclosure rates and 
housing market instability for years to come.
    While Treasury must consider programmatic changes to meet 
these challenges, so too must it adapt and improve the existing 
programs in several key ways.
    Given the issues facing MHA, Treasury must be fully 
transparent about the effectiveness of its programs, as well as 
the manner in which they operate. Although Treasury's data 
collection has improved significantly since the Panel's March 
report, it should be expanded, and the information should be 
made public. Treasury should release its Net Present Value 
(NPV) model, which is used to determine a homeowner's 
eligibility for HAMP. The new denial codes should be 
implemented to provide borrowers with a specific reason for 
denying a modification and a clear path for appeal. Denial 
information should also be aggregated and reported to the 
public.
    Treasury should also make the loan modification process 
more uniform so that borrowers, servicers, and advocates can 
more easily navigate the system. Uniform documents and more 
uniform processes would benefit both lenders and borrowers, and 
would make the program easier to administer and oversee. 
Treasury should continue its efforts to streamline the system, 
including through development of a web portal as suggested in 
the Panel's March report.
    The model for determining borrowers' eligibility for the 
programs could be adapted to accommodate borrowers with 
arrearages and by incorporating more localized information when 
determining a mortgage loan's value.
    In MHA, as in all of Treasury's programs, accountability is 
paramount. Servicers who fail to comply with the program's 
requirements should face strong consequences. Treasury must 
ensure that Freddie Mac, recently selected to oversee program 
compliance, has in place the proper processes to provide robust 
oversight. To further reinforce accountability, Treasury should 
continue to develop performance metrics and publicly report the 
results by lender or servicer.
    Rising unemployment, generally flat or even falling home 
prices, and impending mortgage rate resets threaten to cast 
millions more out of their homes, with devastating effects on 
families, local communities, and the broader economy. 
Ultimately, the American taxpayer will be forced to stand 
behind many of these mortgages. The Panel urges Treasury to 
reconsider the scope, scalability and permanence of the 
programs designed to minimize the economic impact of 
foreclosures and consider whether new programs or program 
enhancements could be adopted.
SECTION ONE: AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX 
                                 MONTHS


        A. Introduction: What Has Changed Since the Last Report

    The United States is now in the third year of a foreclosure 
crisis unprecedented since the Great Depression, with no end in 
sight. Of the 75.6 million owner-occupied residential housing 
units in the United States, approximately 68 percent (51.6 
million) of homeowners carry a mortgage to finance the purchase 
of their homes.\1\ Since 2007, 5.4 million of these homes have 
entered foreclosure, and 1.9 million have been sold in 
foreclosure.\2\ Absent a significant upturn in the broader 
economy and the housing market, another 3.5 million homes could 
enter foreclosure by the end of 2010.\3\
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    \1\ 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) (hereinafter ``Census Housing Survey''); U.S. Department 
of Housing and Urban Development, U.S. Housing Market Conditions, at 24 
(Aug. 2009) (online at www.huduser.org/periodicals/ushmc/summer09/
nat_data.pdf).
    \2\ HOPE NOW, Workout Plans (Repayment Plans + Modifications) and 
Foreclosure Sales July 2007--August 2009, at 1 (2009) (online at 
www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20Aug09.pdf). (hereinafter 
``HOPE NOW, Workout Plans and Foreclosure Sales'').
    \3\ Goldman Sachs Global ECS Research, Global Economics Paper No. 
177, Home Prices and Credit Losses: Projections and Policy Options, at 
16 (Jan. 13, 2009) (online at docs.google.com/
gview?a=v&q=cache%3AQlc0g0CzRpEJ%3Agarygreene.mediaroom.com%2Ffile.php%2
F216% 
2FGlobal%2BPaper%2BNo%2B%2B177.pdf+Goldman+Sachs+Global+ECS+Research% 
2C+Global+Economics+Paper+No.+177%2C+Home+Prices+and+Credit+Losses%3A+Pr
ojections 
+and+Policy+Options&hl=en≷=us&sig=AFQjCNGp3ZHbpbCgjpZh2_17Dv-
BpFzCCg).
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    Foreclosure rates are now nearly quadruple historic 
averages (see Figures 1 and 2). At the close of second quarter 
2009, the Mortgage Bankers Association reported that 4.3 
percent of mortgages, 15.05 percent of sub-prime loans, and 
24.40 percent of sub-prime adjustable rate mortgages (ARMs) 
were currently in foreclosure. In addition, 9.24 percent of all 
residential mortgages were delinquent, a rate nearly double 
historic norms.\4\ Homeowners avoiding foreclosure, but still 
losing their homes in preforeclosure sales (short sales) or 
deeds-in-lieu (DIL) transactions further add to this crisis.\5\
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    \4\ Mortgage Bankers Association, National Delinquency Survey, at 1 
(Aug. 2009) (hereinafter ``MBA National Delinquency Survey''). Between 
1996 and 2008, residential mortgage delinquency rates averaged an 
annual 4.8 percent surveyed. Id.
    \5\ According to a July 2009 real estate agent survey, 14 percent 
of all home purchases stemmed from ``short sales.'' Campbell Surveys, 
Real Estate Agents Report on Home Purchases and Mortgages--2009 (online 
at www.campbellsurveys.com/AgentSummaryReports/
AgentSurveyReportSummary-June2009.pdf) (accessed Sept. 28, 2009) 
(hereinafter ``Campbell Real Estate Agent Survey'').
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    Foreclosures, and in many respects the foreclosure 
alternatives mentioned above, have consequences beyond the 
families who lose their homes. They affect the neighbors who 
must live next to vacant homes and suffer decreased property 
values as a result.\6\ They alter the composition of schools 
and religious institutions, which see children and congregants 
uprooted.\7\ They harm the foreclosing bank, depressing its 
balance sheet.\8\ They drive down housing prices by flooding 
the market with bank-owned properties.\9\ They negatively 
affect the economy as a whole by decreasing stability in banks, 
communities, and municipal and state tax bases.\10\ 
Successfully addressing the foreclosure crisis is key to 
reviving banks, reversing the fall in real estate prices, and 
promoting economic growth and stability.\11\
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    \6\ The Center for Responsible Lending estimates that ``in 2009 
alone, foreclosures will cause 69.5 million nearby homes to suffer 
price declines averaging $7,200 per home and resulting in a $502 
billion total decline in property values.'' Center for Responsible 
Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors 
$502 Billion in 2009 Alone; 69.5 Million Homes Lose $7,200 on Average 
(May 7, 2009) (online at www.responsiblelending.org/mortgage-lending/
research-analysis/soaring-spillover-3-09.pdf); John P. Harding et al., 
The Contagion Effect of Foreclosed Properties (July 13, 2009) (online 
at www.business.uconn.edu/Realestate/publications/pdf%20documents/
406%20contagion_080715.pdf). The Panel held a field hearing in 
Philadelphia, Pennsylvania on September 24, to examine foreclosure 
mitigation efforts under TARP. The Panel heard testimony from 
representatives of Treasury, the GSEs, community housing organizations, 
loan servicers, an economist, and Judge Annette M. Rizzo of the 
Philadelphia Court of Common Pleas. The Panel also heard statements 
from audience members, some of whom highlight this issue. Congressional 
Oversight Panel, Statements from the Audience, Philadelphia Field 
Hearing on Mortgage Foreclosures, at 154 (Sept. 24, 2009) (online at 
cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm).
    \7\ An estimated 2 million children will lose their homes to 
foreclosure. ``[C]hildren who experience excessive mobility, such as 
those impacted by the mortgage crisis, will suffer in school.'' 
FirstFocus, The Impact of the Mortgage Crisis on Children (Apr. 30, 
2008) (online at www.firstfocus.net/Download/
HousingandChildrenFINAL.pdf) (citing Russell Rumberger, The Causes and 
Consequences of Student Mobility, Journal of Negro Education, Vol. 72, 
No. 1, at 6-21, (2003)).
    \8\ Congressional Oversight Panel, August Oversight Report: The 
Continued Risk of Troubled Assets (Aug. 11, 2009) (online at 
cop.senate.gov/documents/cop-081109-report.pdf); Laurie Kulikowski, 
Citi Execs Offer Optimism, Thin Details, TheStreet.com (Sept. 14, 2009) 
(online at www.thestreet.com/story/10598384/1/citi-execs-offer-
optimism-thin-details.html) (Citigroup CEO Vikram Pandit ``noted that 
two particularly troubling businesses for the company are the credit 
card and mortgage portfolios. `When we see those assets turn, I think 
you will start to see a change in the profitability of Citi.' '').
    \9\ Lender Processing Services, LPS Releases Study That 
Demonstrates Impact of Foreclosure Sales on Home Prices (Sept. 3, 2009) 
(online at www.lpsvcs.com/NewsRoom/Pages/20090903.aspx).
    \10\ In April 2008, the Pew Charitable Trusts estimated that ``10 
states alone will lose a total of $6.6 billion in tax revenue in 2008 
as a result of the foreclosure crisis, according to a 2007 
projection.'' Pew Charitable Trusts, Defaulting on the Dream: States 
Respond to America's Foreclosure Crisis (Apr. 2008) (online at 
www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/
Subprime_mortgages/defaulting_on_the_dream.pdf) (hereinafter ``Pew 
Default on the Dream Article'').
    \11\ Federal Reserve Board of Governors, Remarks as Prepared for 
Delivery by Governor Randall S. Kroszner at NeighborWorks America 
Symposium (May 7, 2008) (online at www.federalreserve.gov/newsevents/
speech/kroszner20080507a.htm) (``[D]iscussion of the impact of 
foreclosures on neighborhoods and what can be done to mitigate those 
impacts is not only timely, it is essential to promoting local and 
regional economic recovery and growth. . . .''). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


1. Waves of Foreclosure

    There is still significant debate about the causes of 
foreclosure and the obstacles faced by foreclosure mitigation 
programs, but it is inescapable that a large number of American 
families are losing their homes. The foreclosure crisis began 
with home flippers, speculators, reach borrowers who purchased 
or refinanced properties with little money down and non-
traditional mortgage products, and homeowners who were sold 
subprime refinancings.\14\ Increasingly, however, because of 
the severity of the recession, declines in home prices, and the 
persistence of job losses, foreclosures involve families who 
put down 10 or 20 percent and took out conventional, conforming 
fixed-rate mortgages to purchase or refinance homes that in 
normal market conditions would be within their means.\15\
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    \13\ MBA National Delinquency Survey, supra note 4.
    \14\ U.S. Department of Housing and Urban Development, Unequal 
Burden: Income and Racial Disparities in Subprime Lending in America 
(Apr. 2000) (online at www.huduser.org/Publications/pdf/
unequal_full.pdf).
    \15\ MBA National Delinquency Survey, supra note 4.
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            a. Speculators
    The foreclosure crisis has gone in waves of defaults. While 
these waves are not entirely distinct, they are useful for 
understanding the course of the crisis and where it is headed. 
The first wave was centered around real estate speculators, who 
often borrowed 100 percent or more of property values.\16\ When 
home sales slowed and then as property values began to drop, 
these speculators simply stopped paying their mortgages and 
abandoned their properties because the carrying costs of the 
mortgages were greater than the appreciation they anticipated 
realizing on sale.
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    \16\ Michael Brush, Coming: A 3rd Wave of Foreclosures, MSN Money 
(June 3, 2009) (online at articles.moneycentral.msn.com/Investing/
CompanyFocus/coming-a-3rd-wave-of-foreclosures.aspx). While speculators 
often took out loans with loan-to-value (LTV) ratios of 100 percent or 
more, other borrowers also utilized high LTV loans, such as borrowers 
in high cost areas, borrowers unable or unwilling to make a standard 20 
percent down payment, and those utilizing cash-out refinancings. Some 
speculators may have made false assertions of primary residence or 
exaggerated income.
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            b. Hybrid ARMs
    The second wave was caused by payment reset shock, 
primarily from the expiration of teaser rates on hybrid ARMs. 
Hybrid ARMs have a fixed low teaser interest rate for one to 
three years, and then an adjustable interest rate that is 
usually substantially higher. (These loans are often called 2/
28s or 3/27s. The first number refers to the length of the 
teaser period in years, and the second number to the post-
teaser term of the mortgage.) The teaser rates on hybrid ARMs 
made the mortgages for the teaser period quite affordable.
    Many hybrid ARMs were subprime loans, meaning that their 
post-teaser interest rate was substantially above-market. Most 
of these loans also carried stiff prepayment penalties, making 
refinancing expensive for the borrower.\17\ Sometimes this was 
because of the risk posed by the borrower. Sometimes the 
homeowner was willing to assume the high post-teaser rate in 
exchange for the below-market teaser, as the homeowner 
anticipated refinancing or selling the appreciated property 
before the teaser expired. To refinance a mortgage (or to sell 
the property without a loss) requires having sufficient equity 
in the property. Many hybrid ARMs were made at very high loan-
to-value ratios, as both lenders and homeowners anticipated a 
rapid accumulation of home equity in the appreciating market of 
the housing bubble. When the market fell, however, these 
homeowners lacked the equity to refinance, and often faced 
prepayment penalties if they did, further decreasing their 
ability to refinance. Additionally, there are allegations that 
some prime borrowers were misled into taking out these 
mortgages.
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    \17\ Michael LaCour-Little & Cynthia Holmes, Prepayment Penalties 
in Residential Mortgage Contracts: A Cost-Benefit Analysis, Housing 
Policy Debate (2008) (online at www.mi.vt.edu/data/files/hpd%2019.4/
little-holmes_web.pdf). The authors' literature review showed that most 
subprime loans carry a pre-payment penalty, and that ``lenders and many 
economists view prepayment penalties as a mechanism to increase the 
predictability of cash flow from mortgage loans, thereby enhancing 
their value to investors and reducing the cost of credit to 
borrowers.'' LaCour-Little and Holmes' cost-benefit analysis found that 
prepayment penalties had significant economic value to lenders and 
investors, and that the ``expected cost of prepayment penalties to 
borrowers is larger than the benefit, although this cost varies 
depending on the interest rate environment.'' Id. at 668. For example, 
they found that ``for a loan originated in 2002 with a two-year penalty 
period, . . . the average interest savings was $418, compared with an 
expected penalty cost of $3,923--an almost 10-fold difference.'' Id. at 
667.
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    The result was that many homeowners with hybrid ARMs were 
unable to refinance out of their loans when the teaser period 
expired and had to start paying at the substantially higher 
post-teaser interest rate. Most of these loans had been 
underwritten based on an ability to pay only the teaser rate, 
and not the reset post-teaser rate. In many cases, even the 
teaser rate underwriting was a stretch. When the rates reset, 
monthly payments on these mortgages often became unaffordable, 
resulting in defaults.
    The teaser rates on most of the hybrid ARMs made in 2005 
and 2006 have already expired, and low interest rates now 
mitigate some of the payment shock on the remaining resets. As 
a result, the defaults from this wave have already crested, 
although not all of the defaults have yet resulted in completed 
foreclosure sales. In addition, some homeowners who have 
managed to make the post-reset payments thus far may still 
default, elevating future foreclosure levels.
            c. Negative Equity
    A third and on-going wave of defaults has been related to 
negative equity. A homeowner with negative equity owes more in 
mortgage debt than his or her home is worth. Steep declines in 
housing prices below pre-crisis levels and the drag on 
neighborhood housing prices caused by nearby foreclosures have 
combined to force a growing number of homeowners into this 
category.\18\ In cases where homeowners have edged into 
negative equity, some may undertake home improvements to 
increase the sale price of their property or at least to offset 
further price erosion. Conversely, homeowners with substantial 
negative equity may reason that any money they invest in the 
property, including basic repairs, does not meaningfully add to 
their equity, but, rather, is value that accrues to the lender. 
Therefore, homeowners with substantial negative equity have 
diminished incentives to care for their properties, which 
further decreases property values.\19\ Until they regain 
positive equity, any money they invest in their properties, 
including basic repairs, is value that accrues to the lenders 
in terms of increased collateral value. Until that point, the 
homeowner becomes at best less underwater, although the 
homeowner will continue to get the consumption value of the 
property. Homeowners with negative equity thus have diminished 
incentives to care for their properties, which further 
decreases property values.\20\
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    \18\ First American CoreLogic, Summary of Second Quarter 2009 
Negative Equity Data (Aug. 13, 2009) (online at 
www.loanperformance.com/infocenter/library/
FACL%20Negative%20Equity_final_081309.pdf) (hereinafter ``CoreLogic 
Negative Equity Data'').
    \19\ M.P. McQueen, Are Distressed Homes Worth It, Wall Street 
Journal (Oct. 1, 2009) (online at online.wsj.com/article/
SB10001424052970203803904574430860271702396.html).
    \20\ Id.
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    Homeowners with negative equity are also constrained in 
their ability to move, absent abandoning the house to 
foreclosure. There is a wide range of inevitable life events 
that necessitate moves: the birth of children, illness, death, 
divorce, retirement, job loss, and new jobs. When one of these 
life events occurs, if a homeowner has negative equity, the 
primary choices are between forgoing the move, finding the cash 
to make up the negative equity, or losing the house in 
foreclosure. Many have chosen the foreclosure route.
    Unfortunately, as the Panel has previously observed, 
foreclosures push down the prices of nearby properties, which 
can in turn result in negative equity that begets more defaults 
and foreclosures.\21\ A negative feedback loop can develop 
between foreclosures and negative equity. To the extent that 
negative equity alone may produce foreclosures, progress in 
addressing loan affordability will have a limited impact on 
foreclosure rates over the long term.
---------------------------------------------------------------------------
    \21\ Congressional Oversight Panel, The Foreclosure Crisis: Working 
Toward a Solution, at 9 (Mar. 6, 2009) (online at cop.senate.gov/
documents/cop-030609-report.pdf) (hereinafter ``COP March Oversight 
Report.'')
---------------------------------------------------------------------------
    Negative equity may also be a factor (along with 
unemployment) contributing to historically low self-cure rates 
on defaulted mortgage loans. Historically, self-cure rates on 
mortgage defaults were fairly high; nearly half of all prime 
defaults would cure on their own. Currently, however, self-cure 
rates for all types of mortgage products are extremely low 
(Figure 3). A homeowner with negative equity may well decide 
that the financial belt-tightening necessary to cure a default 
simply is not worth it or not possible. The homeowner might 
rationally conclude that it is better for him or her to save 
the monthly payments and relocate to a less expensive rental.
---------------------------------------------------------------------------
    \22\ Fitch Ratings, Delinquency Cure Rates Worsening for U.S. Prime 
RMBS (Aug. 24, 2009) (hereinafter ``Fitch Release''). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Estimates as to the number of households with negative 
equity vary, but they are all dire. Many estimates also exclude 
homeowners with minimal positive equity, borrowers who would 
likely take a loss upon a sale after paying brokers' fees and 
taxes. Currently, around one-third of all residential mortgage 
borrowers have negative equity and another five percent have 
near negative equity.\23\ Deutsche Bank also estimated that 14 
million homeowners had negative equity as of the first quarter 
of 2009,\24\ while Moody's Economy.com placed the estimate at 
15 million for that quarter.\25\ Looking forward, Moody's 
projects that by 2011, some 18 million homeowners will have 
negative equity,\26\ while Deutsche Bank projects a figure of 
as many as 25 million, or one-half of all homeowners with a 
mortgage.\27\ The estimations vary by loan product type, but 
even for conventional, conforming prime mortgages, Deutsche 
Bank estimates that 41 percent of mortgagors will have negative 
equity by the first quarter of 2011.\28\ As a comparison, 
Deutsche Bank estimates that 16 percent of borrowers with 
conventional, conforming prime mortgages currently have 
negative equity.\29\
---------------------------------------------------------------------------
    \23\ CoreLogic Negative Equity Data, supra note 18.
    \24\ Deutsche Bank, Drowning in Debt--A Look at ``Underwater'' 
Homeowners, at 2 (Aug. 5, 2009) (available online at www.sacbee.com/
static/weblogs/real_estate/
Deutsche%20research%20on%20underwater%20mortgages%208-5-09.pdf) 
(hereinafter ``Deutsche Bank Debt Report'').
    \25\ Id.
    \26\ Henry Blodget, The Business Insider, Half of US Homeowners 
Will be Underwater by 2011 (online at www.businessinsider.com/henry-
blodget-half-of-us-homeowners-underwater-by-2011-2009-8#now-14-million-
underwater-next-year-25-million-1) (accessed Oct. 5, 2009) (hereinafter 
``Blodget Underwater Homeowners Report'').
    \27\ The US Census Bureau estimates there to be 76 million home-
owning households and approximately two-thirds of them (52 million) 
have mortgages. Census Housing Survey, supra note 1.
    \28\ Deutsche Bank Debt Report, supra note 24.
    \29\ Deutsche Bank Debt Report, supra note 24.
---------------------------------------------------------------------------
    The negative equity situation also varies significantly by 
state. (See Figure 4 below.) While some states like New York 
and Hawaii have low levels of negative equity, in others, like 
Nevada, Michigan, Arizona, Florida, California, Ohio, and 
Georgia, the situation is particularly grim, with anywhere from 
30 percent to 59 percent of homeowners currently having little 
or no equity in their homes. As punctuated by expert testimony 
at the Panel's Clark County field hearing in December 2008, 
such situations, when combined with a catalyst such as rising 
unemployment, pose ``a great risk going forward if the economy 
does not pick up.'' \30\
---------------------------------------------------------------------------
    \30\ At the time, Dr. Keith Schwer testified that 50 percent of 
Nevada homeowners had negative mortgage equity. He also stated his 
belief that unemployment was likely to reach 10 percent in 2009. 
Congressional Oversight Panel, Testimony of Director of the University 
of Nevada, Las Vegas' Center for Business and Economic Research, Dr. 
Keith Schwer, Clark County, NV: Ground Zero of the Housing and 
Financial Crises (Dec. 16, 2008) (online at cop.senate.gov/documents/
transcript-121608-firsthearing.pdf).

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            d. Interest-Only and Payment-Option Mortgages
    Two additional, and simultaneous, waves of foreclosure 
still stand ahead of us. These are expected to come from 
payment shocks due to rate resets on two classes of non-
traditional mortgage products: interest-only and payment option 
mortgages. Interest-only mortgages, whether fixed or adjustable 
rate, have an initial interest-only period, typically five, 
seven or ten years, during which the borrower's required 
minimum monthly payments cover only interest, not principal. 
After the expiration of the interest-only period, the monthly 
payment rate resets with the principal amortized over the 
remaining loan terms (typically 20 to 25 years). The result is 
that after the interest-only period expires, the monthly 
payment may be significantly higher.
    Payment-option loans (virtually all ARMs keyed to an index 
rate) are similar. Payment-option ARMs permit the borrower to 
choose the level of monthly payment during the first five years 
of the loan. Typically there are four choices--(1) as if the 
loan were amortizing over 15 years; (2) as if the loan were 
amortizing over 30 years; (3) interest-only (non-amortizing); 
and (4) negatively amortizing. Payment-option ARMs generally 
have negative amortization limits. If there is too much 
negative amortization (usually 10-15 percent), then the loan 
will be recast into a fully amortizing ARM for the remaining 
term of the mortgage. If the negative amortization trigger is 
not tripped first, the loan will recast after five years into a 
fully-amortizing ARM with rates resetting every six to 12 
months thereafter based on an index rate. In either case, the 
monthly payment will increase significantly.
    Historically, interest-only and payment-option loans were 
niche products, but they boomed during the housing bubble. 
Countrywide Financial, the nation's largest mortgage lender, 
originated primarily payment-option ARMs during the bubble.\33\ 
Twenty percent of the dollar amount of mortgages originated 
between 2004 and 2007 was either payment-option or interest-
only.\34\ First American CoreLogic calculates that there are 
presently 2.8 million active interest-only home loans with an 
outstanding principal balance of $908 billion.\35\
---------------------------------------------------------------------------
    \33\ U.S. Securities and Exchange Commission, Countrywide Financial 
Corporation, Form 10-Q (June 30, 2008) (online at www.sec.gov/Archives/
edgar/data/25191/000104746908009150/a2187147z10-q.htm).
    \34\ Inside Mortgage Finance Publications, Mortgage Market 
Statistical Annual, Volume I: The Primary Mortgage Market (2009). The 
dollar amount of these mortgages currently outstanding is unknown, but 
total originations from 2004-2007 were roughly equal to the total 
amount of mortgage debt outstanding at the end of 2007. It is therefore 
likely that even with some pay-options and interest only loans being 
refinanced in this time period, that they comprise about a fifth of the 
dollar amount of mortgages outstanding. Id.
    \35\ The problems associated with interest-only loans were the 
subject of a First American CoreLogic analysis commissioned by the New 
York Times. David Streitfeld, As an Exotic Mortgage Resets, Payments 
Skyrocket, New York Times (Sept. 8, 2009) (hereinafter ``Streitfeld 
Mortgage Resets Article'').
---------------------------------------------------------------------------
    Most interest-only and payment-option mortgages were not 
subprime loans.\36\  Instead, they were made to prime 
borrowers, but were often underwritten with reduced 
documentation, making them so-called ``Alt-A'' loans.\37\  Many 
were also jumbos, meaning that the original amount of the loan 
was greater than the Fannie Mae/Freddie Mac conforming loan 
limit.\38\  (See Figure 5.) This means, among other things, 
that many of these homeowners are not eligible for assistance 
from the Making Home Affordable Program because their mortgages 
are above the maximum eligible amount, although recent 
increases in the conforming loan limit for certain high-cost 
areas have expanded eligibility.
---------------------------------------------------------------------------
    \36\ Oren Bar-Gill, The Law, Economics and Psychology of Subprime 
Mortgage Contracts, 94 Cornell L. Rev. 1073, 1086 (Nov. 2009) (online 
at papers.ssrn.com/sol3/papers.cfm?abstract_id=1304744).
    \37\ Credit Suisse, Research Report: Mortgage Liquidity du Jour: 
Underestimated No More (Mar. 12, 2007) (online at www.scribd.com/doc/
282277/Credit-Suisse-Report-Mortgage-Liquidity-du-Jour-Underestimated-
No-More-March-2007) (hereinafter ``CS Mortgage Liquidity Report'').
    \38\ Id. The conforming loan limit in certain high-cost areas was 
raised from $417,000 to $729,750 in 2008, which means that certain 
loans that would have been have previously been jumbo loans are now 
conforming and therefore eligible to be modified under the Home 
Affordability Modification Program (HAMP). Fannie Mae, Historical 
Conventional Loan Limits (July 30, 2009) (online at www.fanniemae.com/
aboutfm/pdf/historicalloanlimits.pdf). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Payment-option and interest-only mortgages are typically 5/
1s, meaning that they have a rate reset after five years and 
additional resets once each following year. This means that 
mortgages of this type originated in 2004-2007 will be 
experiencing rate resets in 2009-2012. (See Figure 6.) Assuming 
that long-term low interest rates continue, they will mitigate 
the payment reset shock on adjustable rate payment-option and 
interest-only mortgages.\40\ But there will inevitably be a 
sizeable payment shock simply from the kick-in of the full 
amortization period, and the homeowners may not have the income 
or savings to cover the increase in payments, and if they have 
negative equity, will not be able to refinance into a more 
stable product.\41\
---------------------------------------------------------------------------
    \39\ CS Mortgage Liquidity Report, supra note 37.
    \40\ If long term interest rates rise, there could be higher 
numbers of defaults on these adjustable mortgages. One factor causing 
the low rates is the Federal Reserve's buying of GSE securities. As 
part of its monetary policy, the Federal Reserve purchases GSE 
securities, therefore putting money into the economy and keeping 
interest rates low. David A. Moss, A Concise Guide to Macroeconomics, 
at 36-37 (Harvard Business School Press 2007) (providing a general 
overview of economic policy). It is unclear whether this intervention 
on the part of the Federal Reserve can sustain low mortgage interest 
rates through the 2010-2012 period when the next round of resets will 
occur. In addition, continued low interest rates will not protect 
holders of Alt-A mortgages who have negative equity and no savings with 
which to cover the gap between home value and mortgage. Other factors 
affecting interest rates include the condition of the U.S. economy 
(interest rates rise as the demand for funds increases and fall when 
the demand for funds is low), inflationary or deflationary pressures, 
the involvement of foreign investors willing to lend money to the 
United States, and fluctuations in exchange rates. Id. at 34-39.
    \41\ Streitfeld Mortgage Resets Article, supra note 35.
---------------------------------------------------------------------------
    The impact on the number of foreclosures from recasts of 
interest-only and payment-option mortgages is likely to be at 
least as great as those from subprime hybrid ARMs, as shown by 
Figure 7, a graph from Credit Suisse showing anticipated rate 
resets for different types of mortgages. These peaks might be 
softened only because a large number of payment-option ARM 
mortgagors are already in default; the Office of the 
Comptroller of the Currency and the Office of Thrift 
Supervision (OCC/OTS) Mortgage Metrics, which cover two-thirds 
of the market, indicate that a quarter of all payment-option 
ARMs are seriously delinquent or in foreclosure,\42\ while 
Deutsche Bank indicates nearly 40 percent of outstanding 
payment-option ARMs are already 60+ days delinquent.\43\ Not 
coincidentally, more than 77 percent of payment-option ARMs 
have negative equity presently.\44\   
---------------------------------------------------------------------------
    \42\ Office of the Comptroller of the Currency and Office of Thrift 
Supervision, OCC and OTS Mortgage Metrics Report, Second Quarter 2009, 
at 17 (Sept. 21, 2009) (online at files.ots.treas.gov/482078.pdf) 
(hereinafter ``OCC and OTS Second Quarter Mortgage Report'').
    \43\ Deutsche Bank, Global Economic Perspectives: Housing Turning 
Slowly, at 8 (Sept. 9, 2009).
    \44\ Blodget Underwater Homeowners Report, supra note 26.
    \45\ Henry Blodget, Business Insider, The ``Coming Alt-A Mortgage 
Reset Bomb'' Is A Myth (Aug. 28, 2009) (online at 
www.businessinsider.com/henry-blodget-the-coming-alt-a-mortgage-reset-
bomb-is-a-myth-2009-8).

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            e. Unemployment
---------------------------------------------------------------------------
    \46\ CS Mortgage Liquidity Report, supra note 37.
---------------------------------------------------------------------------
    A fifth wave of foreclosures is now occurring, driven by 
unemployment. The current unemployment rate of 9.8 percent has 
more than doubled since the beginning of 2007, when foreclosure 
rates began to rise. (See Figure 8, below.) As Figure 9 shows, 
unemployment and foreclosure rates have generally been moving 
together since 2000. When a household loses an income, even 
temporarily, the likelihood of a mortgage default rises 
sharply. Some households are able to continue making payments 
out of a second income, from savings, or from unemployment 
insurance payments, but most mortgage lenders will not accept 
partial payments. When reduced household income is combined 
with negative equity, payment reset shock, or both, default is 
nearly inevitable. Moreover, continued unemployment makes self-
cure of defaults much less likely. (See supra section 1(c)).
    Unemployment does not discriminate by mortgage product 
type. Defaults are now affecting the conventional prime market, 
jumbo prime, second lien, and home equity line of credit 
(HELOC) markets; the defaults are being driven by unemployment 
and negative equity, rather than payment reset shock. Prime 
defaults and foreclosures began to surge at the close of 2008 
and have continued to rise into 2009.\47\ (See Figure 10, 
below.) Even as foreclosures seem to be abating at the bottom 
of the market, defaults are soaring at the top of the market. 
What began as a subprime problem is now truly a national 
mortgage problem.
---------------------------------------------------------------------------
    \47\ MBA National Delinquency Survey, supra note 4. Lender 
Processing Services, Lender Processing Services' August Mortgage 
Monitor Report Shows Increased Foreclosure Starts But Greater Loss 
Mitigation Success (Sept. 1, 2009) (online at www.lpsvcs.com/NewsRoom/
Pages/20090901.aspx); American Bankers Association, Consumer 
Delinquencies Rise Again in First Quarter 2009: Composite Ratio Inches 
Higher, Sets New Record (July 7, 2009) (online at www.aba.com/
Press+Room/070709DelinquencyBulletin.htm).
    \48\ U.S. Bureau of Labor Statistics, Household Data Historical, A-
1 Employment Status of the Civilian Non-Institutional Population 16 
Years and Over, 1970 to Date (online at ftp://ftp.bls.gov/pub/suppl/
empsit.cpseea1.txt) (accessed Oct. 7, 2009). 

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2. Mixed Signs in the Housing Market

    Recently, there have been some positive signs in the 
housing sector. First, although foreclosure inventories have 
grown, the pace of foreclosure initiations remained static from 
the fourth quarter of 2008 to the first quarter of 2009 (1.37 
percent in Q4 2008 and 1.36 percent in Q1 2009). (See Figure 
10.) It is hard, however, to read too much into a particular 
quarter's data, and foreclosure starts remain at a near record 
level. The static level of foreclosure starts does not 
represent the impact of the Making Home Affordable Program, as 
that program was not announced until late in the quarter and 
did not become operational until April 2009. To the extent that 
the slowed foreclosure starts are not simply a data fluke, one 
tenable explanation is that we have reached a limit in the 
legal system's capacity to handle foreclosure initiations. 
Other possible reasons include good-faith efforts by servicers 
to enter into modifications, foreclosure moratoria, servicer 
capacity issues, and the possibility that mortgage servicers 
are intentionally postponing foreclosure filings to delay loss 
recognition for accounting purposes.\50\
---------------------------------------------------------------------------
    \49\ MBA National Delinquency Survey, supra note 4.
    \50\ Kate Berry, American Banker, Postponing the Day of Reckoning 
(Aug. 26, 2009) (online at www.financial-planning.com/news/postponing-
reckoning-foreclosure-2663681-1.html). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    A more encouraging sign is that housing price indices are 
flattening and even moving upward, although there is 
significant regional and market sector variation.\52\ Even as 
prices rebound for the lower end of the housing market, 
defaults are increasing on the top end,\53\ and some markets, 
like Phoenix and Las Vegas, continue to see precipitous housing 
price declines.\54\
---------------------------------------------------------------------------
    \51\ MBA National Delinquency Survey, supra note 4.
    \52\ Standard & Poor's, Broad Improvement in Home Price According 
to the S&P/Case-Shiller Home Price Indices (Sept. 29, 2009) (online at 
www2.standardandpoors.com/spf/pdf/index/
CSHomePrice_Release_092955.pdf).
    \53\ By July 2009, foreclosure starts for jumbo mortgages were 
happening at more than three times the rate they were occurring in 
January 2008. Lender Processing Services (LPS), Mortgage Monitor: 
August 2009 Mortgage Performance Observations, at 21 (online at 
www.lpsvcs.com/NewsRoom/IndustryData/Documents/09-
2009%20Mortgage%20Monitor/LPS%20Mortgage%20Monitor%20Aug09%20(2).pdf). 
The jumbo market will likely continue to underperform without increased 
activity in the private-label secondary market or bank lending. This 
means that foreclosure rates for jumbo mortgages are likely to stay 
higher than normal. Because Fannie and Freddie will not buy jumbo 
loans, and with the sharp decline of the private-label securities 
market, banks have little appetite for originating jumbos. 
Consequently, jumbos have fallen from around 15 percent of the mortgage 
market to a mere 2.3 percent. The diminished availability of credit for 
the purchase of expensive homes has been one factor in the decline in 
prices at the top end of the market. PMI, The Housing & Mortgage Market 
Review (July 2009) (online at www.pmi-us.com/PDF/
jul_09_pmi_hammr.html).
    \54\ Nationally, a 10.21 percent decline in home prices in the 12 
months ending in April 2009 masked a wide range of trends in the 
states. The largest price declines were in Nevada (26.05 percent), 
Florida (23.15 percent), California (22.72 percent), and Arizona (20.51 
percent). The largest price increases were in West Virginia (5.27 
percent), New York (3.88 percent), and Louisiana (3.10 percent). Id.
---------------------------------------------------------------------------
    Several factors appear to have contributed to the price 
increases. Low interest rates and the new first-time home buyer 
tax credit have combined with declines in housing prices to 
make home purchases more affordable.\55\ Given such policies, 
the National Association of Realtors Affordability Index is at 
a historic high. Moreover, the glut in housing supply is 
slackening as the stock of new homes for sale is running off 
rapidly. Yet foreclosures and distressed sales continue to keep 
inventory levels high, which pushes down prices. In recent 
months, one-third of home sales have been foreclosures or short 
sales.\56\ Moreover, when government support for the housing 
market is withdrawn, there will also necessarily be more 
downward pressure on home prices.
---------------------------------------------------------------------------
    \55\ The new homebuyer tax credit will expire on December 1, 2009. 
Some observers are concerned about the effect of this expiration. Dina 
ElBoghdady, Clock Is Ticking for First-Home Buyers, Washington Post 
(Sept. 25, 2009) (online at www.washingtonpost.com/wp-dyn/content/
article/2009/09/24/AR2009092404936.html).
    \56\ Diana Golobay, NAR Offers Realtors Certification for Short 
Sales, Foreclosures, Housing Wire.com, (Aug. 26, 2009) (online at 
www.housingwire.com/2009/08/26/nar-offers-realtors-certification-for-
short-sales-foreclosures/).
---------------------------------------------------------------------------
    While there are encouraging signs, it is hard to read them 
as anything more than a possible bottoming out of the housing 
market, rather than a true recovery. Housing price index 
futures show that the market does not expect any significant 
gain in home prices for a few years. U.S. housing market 
futures based on the Case-Shiller Composite 10 Home Price Index 
are traded on the Chicago Mercantile Exchange. The Index is 
pegged to January 2000 as 100.
    At its peak in April 2006, the Index was at 226.23. In 
April 2009, the Index was at 150.34, and as of July 2009 the 
Index stood at 155.85, down 32 percent from peak. The futures 
market anticipates the Index falling again to a low of 145.00 
in August 2010 (down 36 percent from the peak and up 45 percent 
for the decade) and still not climbing above 160 (down 29 
percent from peak) even in November 2013, the latest date on 
which futures are presently being traded. (The Index stood at 
160 in January 2009 and October 2003.) In other words, the 
market anticipates that the national average housing price will 
rise only 4 percent from current levels over the next four or 
five years. (See Figure 11.) While this is certainly better 
than a continued plunge in housing prices, it also means that 
the market anticipates that in another four years prices will 
remain near their seriously depressed values at the beginning 
of this year. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Even if prices do not fall further, the downward pressure 
of continued mass foreclosures may also prevent housing prices 
from rising significantly during the next few years. Stagnant 
housing prices would result in continued negative equity, 
setting the stage for foreclosures if payments become 
unaffordable or households need to move. Using housing price 
futures as an approximate guide to what might be expected in 
the housing market, many of the families that took out 
mortgages between 2003 and 2008--even those that put down 20 
percent or more and took out standard conforming loans--will 
have negative equity in their homes into the foreseeable 
future. If prices remain stagnant during the next four years, 
then at least one in five of today's U.S. homeowners, if not 
many more, will have negative equity in their homes, and nearly 
one in four of them will have so little equity in their homes 
that they will not be able to cover the costs of selling their 
properties without a loss. These scenarios could potentially 
unfold for approximately 15 million and 18 million homeowners, 
respectively.\57\
---------------------------------------------------------------------------
    \57\ CoreLogic Negative Equity Data, supra note 18. U.S. Census 
Bureau, American Housing Survey--Frequently Asked Questions (online at 
www.census.gov/hhes/www/housing/ahs/ahsfaq.html) (accessed Oct. 7, 
2009). More than 15.2 million mortgages were in negative equity as of 
June 30, 2009, out of 75.6 million owner-occupied residences, or about 
20 percent. More than 17.7 million, or about 23 percent of owner-
occupied residences, were in or near negative equity. Id.
---------------------------------------------------------------------------
    Ongoing negative equity presents a problem not just for 
current foreclosures, but for years into the future. This means 
more families losing their homes in foreclosure, more losses 
for lenders and investors in mortgage securitizations 
(including entities whose debts are guaranteed by the United 
States government, such as Fannie Mae and Freddie Mac), and 
more blighted properties for communities. It also means that 
true stabilization of the U.S. housing market will be delayed, 
and investors will have difficulty pricing housing investments 
because of uncertainty about default rates.
    It is against this largely discouraging backdrop that the 
Panel now turns to consideration of foreclosure mitigation 
efforts.

3. Congressional Efforts to Stem the Tide of Foreclosures

    In response to the waves of foreclosures, Congress made 
foreclosure mitigation an explicit part of the Emergency 
Economic Stabilization Act (EESA), designed to address the 
nation's economic crisis.\58\ Two of EESA's stated goals are to 
``preserve homeownership'' and ``protect home values.'' \59\ In 
addition, EESA instructs the Treasury Secretary to take into 
consideration ``the need to help families keep their homes and 
to stabilize communities.'' \60\ It also includes express 
directions to create mortgage modification programs.\61\
---------------------------------------------------------------------------
    \58\ EESA Sec. Sec. 2(2)(B), 109, 110, 125(b)(1)(iv). The HOPE for 
Homeowners Act of 2008, part of the Housing and Economic Recovery Act, 
Pub. L. No. 110-289, was intended to address the foreclosure crisis, 
but met with little success. The 2007 FHASecure program was also not 
adequate to solve the problem. U.S. Department of Housing and Urban 
Development, Bush Administration to Help Nearly One-Quarter of a 
Million Homeowners Refinance, Keep Their Homes (Aug. 31, 2007) (online 
at www.hud.gov/news/release.cfm?content=pr07-123.cfm).
    \59\ EESA Sec. 2(2).
    \60\ EESA Sec. 103(3).
    \61\ EESA Sec. 110.
---------------------------------------------------------------------------
    Prior to passage of EESA, Senator Christopher Dodd stated 
that ``Democrats and Republicans . . . warned of a coming wave 
of foreclosures that could devastate millions of homeowners and 
have a devastating impact on our economy.'' \62\
---------------------------------------------------------------------------
    \62\ Statement of Senator Christopher Dodd, Congressional Record, 
S10223 (Oct. 1, 2008) (online at frwebgate.access.gpo.gov/cgi-bin/
getpage.cgi?dbname= 2008_record&page=S10224&position=all).
---------------------------------------------------------------------------
    Senator John Rockefeller added:

          [T]he bill provides relief to homeowners who have 
        been caught up in the current mortgage crisis and are 
        trying to save their homes. The bill starts to address 
        the root of this financial crisis--foreclosures--not by 
        giving a pass to individuals who took out loans they 
        could not afford, but by allowing the Government to 
        renegotiate mortgage terms. Two million more 
        foreclosures are projected in the next year and it is 
        in everyone's interest to bring that number down, 
        keeping more families in their homes and paying off 
        their debts.\63\
---------------------------------------------------------------------------
    \63\ Statement of Senator Jay Rockefeller, Congressional Record, 
S10433 (Oct. 2, 2008).

    Senator Judd Gregg continued, ``We focused a lot of 
attention on making sure that we could keep people in their 
homes. We don't want people foreclosed on.'' \64\ Senator Max 
Baucus explained that home ownership ``is not an ancillary 
objective; it is inherent . . . to our efforts to resolve this 
economic crisis.'' \65\ Senator Jack Reed added that ``[i]t is 
only through helping the homeowners that we will we get to the 
bottom of the crisis.'' \66\
---------------------------------------------------------------------------
    \64\ Statement of Senator Judd Gregg, Congressional Record, S10217 
(Oct. 1, 2008).
    \65\ Statement of Senator Max Baucus, Congressional Record, S10224 
(Oct. 1, 2008).
    \66\ Statement of Senator Jack Reed, Congressional Record, S10228 
(Oct. 1, 2008).
---------------------------------------------------------------------------
    In early March 2009, Treasury unveiled the Making Home 
Affordable (MHA) initiative, implementing the foreclosure 
mitigation provisions of EESA. MHA consists of two primary 
programs, the Home Affordable Refinance Program (HARP) and Home 
Affordable Modification Program (HAMP), along with several 
subprograms.\67\
---------------------------------------------------------------------------
    \67\ See Sections C1-C5 for a fuller description and discussion of 
the MHA programs.
---------------------------------------------------------------------------

                           B. March Checklist

    In its March 2009 report, the Panel set forth a checklist 
by which it would evaluate future foreclosure modification 
efforts, particularly MHA. The checklist had eight criteria:
    1. Will the plan result in modifications that create 
affordable monthly payments?
    2. Does the plan deal with negative equity?
    3. Does the plan address junior mortgages?
    4. Does the plan overcome obstacles in existing pooling and 
servicing agreements that may prevent modifications?
    5. Does the plan counteract mortgage servicer incentives 
not to engage in modifications?
    6. Does the plan provide adequate outreach to homeowners?
    7. Can the plan be scaled up quickly to deal with millions 
of mortgages?
    8. Will the plan have widespread participation by lenders 
and servicers?
    In general, what progress has MHA made in addressing each 
point?

1. Affordability

    MHA has focused primarily on achieving affordable monthly 
mortgage payments through a standard for modifications of a 31 
percent debt-to-income (DTI) ratio. Under HAMP, the program 
offering the most information on outcomes, on average, 
borrowers' DTI went from 47 percent before the modification to 
31 percent after, a drop of 34 percent. This translates to a 
drop in the average payment from $1,554.14 to $955.65, an 
average savings of $598.49 per month.
    The more affordable payments were achieved primarily 
through reductions in interest rates. On average, rates dropped 
from 7.58 percent to 2.92 percent. This is noteworthy because 
under the program, interest rates begin to rise in five years, 
raising questions about the effect on affordability down the 
road. The program does not include specific features that 
address the unemployed. At the current time, MHA has made 
significant progress in providing more affordable payments for 
many. For further discussion of affordability issues, see 
Section C.

2. Negative Equity

    While HARP and HAMP can help achieve affordable payments 
for homeowners with negative equity, neither of MHA's two 
primary components was primarily designed to address underlying 
negative equity, although they do have features that address 
the issue. For example, HAMP does not have a maximum LTV, HARP 
allows refinancings of performing loans above 100 percent LTV 
(currently up to 125 percent), and in both programs principal 
reductions are permitted although not required. HAMP appears to 
increase negative equity modestly by capitalizing arrearages. 
Accordingly, average LTV ratios under HAMP increased from 
134.13 percent to 136.61 percent. For further discussion of 
negative equity, see Section D.

3. Second Liens

    The MHA initiative contains a second lien program to help 
overcome the obstacles to modification presented by junior 
liens. Second liens can interfere with the success of loan 
modification in several ways. First, unless the second lien is 
also modified, modifying the first lien may not reduce 
homeowners' total monthly mortgage payments to an affordable 
level.\68\ Even if the homeowner can afford a modified first 
mortgage payment, a second unmodified mortgage payment can make 
the total monthly mortgage payments unaffordable, increasing 
redefault risk.\69\ Second, holders of primary mortgages are 
often hesitant to modify the mortgage if the second mortgage 
holder does not agree to re-subordinate the second mortgage to 
the first mortgage. This can present a significant procedural 
obstacle to modifying a first lien.\70\ Third, second liens 
also increase the negative equity that can contribute to 
subsequent redefaults.
---------------------------------------------------------------------------
    \68\ Payments on junior liens are not included in the calculation 
of 31 percent front-end DTI under the HAMP first lien program. Front-
end DTI is calculated by summing principal, interest, taxes, insurance, 
homeowners association fees, and condominium fees, and dividing the 
total by monthly gross income. Payments on junior liens, along with 
monthly insurance premiums, payments on credit card debt, alimony, car 
lease payments, and monthly mortgage payments on second homes, are 
included in the calculation of back-end DTI.
    \69\ U.S. Department of the Treasury, Making Home Affordable: 
Program Update, at 1 (Apr. 28, 2009) (online at 
wwwfinancialstability.gov/docs/042809SecondLienFactSheet.pdf). 
(hereinafter ``MHAP Update'').
    \70\ Id. The Panel addressed the complexities and challenges caused 
by junior liens in its March Oversight Report. The Panel noted that 
there are multiple mortgages on many properties, and that across a 
range of mortgage 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. Since 
those debts also encumber the home, they must be dealt with in any 
viable refinancing effort. As the Panel stated, ``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.'' COP 
March Oversight Report, supra note 21.
---------------------------------------------------------------------------
    According to Treasury, as many as 50 percent of at-risk 
mortgages also have second liens.\71\ Therefore, it is critical 
that second liens be addressed as part of a comprehensive 
mortgage modification initiative. Treasury announced a second 
lien program as part of HAMP. The program will offer incentive 
payments and cost sharing arrangements to incentivize 
modification or extinguishment of second liens.
---------------------------------------------------------------------------
    \71\ Id. Apgar Senate Testimony, infra note 183; House Committee on 
Financial Services, Subcommittee on Housing and Community Opportunity, 
Written Testimony of FHA Commissioner and U.S. Department of Housing 
and Urban Development Assistant Secretary for Housing, Dave Stevens, 
Progress of the Making Home Affordable Program: What Are the Outcomes 
for Homeowners and What Are the Obstacles to Success? (Sept. 9, 2009) 
(online at www.hud.gov/offices/cir/test090909.cfm) (hereinafter ``House 
Testimony of Dave Stevens'').
---------------------------------------------------------------------------
    At this time, the Second Lien Program is not yet up and 
running. While Treasury is currently in negotiations with 
lenders and servicers covering more than 80 percent of the 
second lien market, it does not yet have any signed 
participation contracts for the program. Given the prevalence 
of second liens and the significant obstacle they can present 
to successful loan modification, it is critical that Treasury 
get the program up and running expeditiously. For further 
discussion of the Second Lien Program, see Section C.

4. PSA Obstacles

    The Panel's March 2009 report identified contractual 
restrictions on loan modification in securitization pooling and 
servicing agreements (PSAs) \72\ as a factor inhibiting loan 
modification efforts. It is unclear whether Treasury has the 
authority to abrogate these private contracts, although 
Treasury could, and already has, conditioned TARP assistance to 
financial institutions on particular mortgage modification 
terms. HAMP requires servicers to undertake reasonable attempts 
to have any contractual obligations revised, but HAMP otherwise 
defers to contractual requirements imposed on mortgage 
servicers by PSAs.
---------------------------------------------------------------------------
    \72\ A PSA is a document that actually creates a residential 
mortgage-backed securitized trust and establishes the obligations and 
authority of the servicer as well as some mandatory rules and 
procedures for the sales and transfers of the mortgages and mortgage 
notes from the originators to the trust.
---------------------------------------------------------------------------
    Many PSAs are simply vague,\73\ however, virtually every 
PSA restricts the ability to stretch out a loan's term; loan 
terms may not be extended beyond the final maturity date of the 
other loans in the pool. Securitized loans are typically all 
from the same annual vintage give or take a year, which means 
that the ability to stretch out terms is usually limited to a 
year at most. Not surprisingly, HAMP modifications stretch out 
terms by about a year on average.
---------------------------------------------------------------------------
    \73\ John Patrick Hunt, What Do Subprime Securitization Contracts 
Actually Say About Loan Modification?, at 10-11 (Mar. 25, 2009) (online 
at www.law.berkeley.edu/files/bclbe/
Subprime_Securitization_Contracts_3.25.09.pdf) (hereinafter ``Hunt 
Subprime Contracts Paper'').
---------------------------------------------------------------------------
    The inability to stretch out terms for more than a year in 
most cases has a serious impact on HAMP modifications. The 
inability to do meaningful term extensions likely means that 
some homeowners who could afford mortgages if longer term 
extensions were available are unable to qualify for HAMP 
modifications. For further discussion of PSAs, see Section C.

5. Servicer Incentives

    HAMP provides financial incentives to mortgage servicers, 
borrowers and investors to modify residential mortgages. Under 
the first lien program, servicers receive an up-front fee of 
$1,000 for each completed modification. Second, servicers 
receive ``Pay-for-Success'' fees of up to $1,000 each year for 
up to three years. These fees will be paid monthly and are 
predicated on the borrower staying current on the loan. 
Borrowers are eligible for ``Pay-for-Performance Success 
Payments'' of up to $1,000 each year for up to five years, as 
long as they stay current on their mortgage. This payment is 
applied directly to the principal of their mortgage. The 
``Responsible Modification Incentive Payment'' is a one-time 
bonus payment of $1,500 to the lender/investor and $500 to 
servicers that will be awarded for modifications on loans that 
are still performing. These incentive payments are in addition 
to the shared cost of reducing the DTI from 38 to 31 percent.
    The Second Lien Program also contains a ``pay-for-success'' 
structure similar to the first lien modification program. 
Servicers of junior liens can be paid $500 up-front for a 
successful modification and then receive successive payments of 
$250 per year for three years, provided that the modified first 
loan remains current.\74\ If borrowers remain current on their 
modified first loan, they can receive payments of up to $250 
per year for as many as five years.\75\ This means that 
borrowers could receive as much as $1,250 for making payments 
on time. These borrower incentives would be directed at paying 
down the principal on the first mortgage.\76\ These incentive 
payments are in addition to the cost sharing available for 
modifying a second lien or the lump sum payment available for 
extinguishing a second lien.
---------------------------------------------------------------------------
    \74\ MHAP Update, supra note 69, at 3; Introduction of the Second 
Lien Modification Program (2MP) (Aug. 13, 2009) (online at 
www.hmpadmin.com/portal/docs/second_lien/sd0905.pdf) (hereinafter 
``SLMP Supplemental Directive'').
    \75\ MHAP Update, supra note 69, at 3; Id.
    \76\ MHAP Update, supra note 69, at 3; Id.
---------------------------------------------------------------------------
    Under the Home Price Decline Protection Program (HPDP), 
investors may be eligible for incentive payments when the value 
of mortgages that they have modified declines. The incentive 
payments are calculated based on a Treasury formula 
incorporating an estimate of the projected home price decline 
over the next year based on changes in average local market 
home prices over the two previous quarters, the unpaid 
principal balance of the mortgage loan prior to HAMP 
modification, and the mark-to-market loan-to-value ratio of the 
mortgage loan prior to HAMP modification.\77\ Incentives are to 
be paid on the first- and second-year anniversaries of the 
borrower's first trial payment due date under HAMP.\78\
---------------------------------------------------------------------------
    \77\ U.S. Department of the Treasury, Supplemental Directive 09-04, 
Home Affordable Modification Program--Home Price Decline Protection 
Incentives (July 31, 2009) (online at www.financialstability.gov/docs/
press/SupplementalDirective7-31-09.pdf) (hereinafter ``HAMP 
Supplemental Directive'').
    \78\ U.S. Department of the Treasury, Secretaries Geithner, Donovan 
Announce new Details of Making Home Affordable Program, Highlight 
Implementation Progress (May 14, 2009) (online at www.treas.gov/press/
releases/tg131.htm) (hereinafter ``Secretaries Geithner, Donovan 
Announcement'').
---------------------------------------------------------------------------
    The Foreclosure Alternatives Program facilitates both short 
sales and deeds-in-lieu by providing incentive payments to 
borrowers, junior-lien holders, and servicers, similar in 
structure and amount to HAMP incentive payments. Servicers can 
receive incentive compensation of up to $1,000 for each 
successful completion of a short sale or deed-in-lieu.\79\ 
Borrowers are eligible for a payment of $1,500 in relocation 
expenses in order to effectuate short sales and deeds-in-lieu 
of foreclosure.\80\ The Short Sale Agreement, upon the 
servicer's option, may also include a condition that the 
borrower agrees to ``deed the property to the servicer in 
exchange for a release from the debt if the property does not 
sell the time specified in the Agreement or any extension 
thereof.'' \81\ In such cases, the borrower agrees to vacate 
the property within 30 days and, upon performance, receives 
$1,500 from Treasury to assist with relocation costs.\82\ 
Treasury has also agreed to share the cost of paying junior 
lien holders to release their claims by matching $1 for every 
$2 paid by investors, for a maximum total Treasury contribution 
of $1,000.\83\ Payments are made upon the successful completion 
of a short sale or deed-in-lieu. Although the HOPE for 
Homeowners program is an FHA program rather than a Treasury 
program, The Helping Families Save Their Homes Act added 
incentive payments to servicers, funded through HAMP.\84\ These 
incentive payments closely approximate MHA incentive 
payments.\85\
---------------------------------------------------------------------------
    \79\ U.S. Department of the Treasury, Making Home Affordable: 
Update: Foreclosure Alternatives and Home Price Decline Protection 
Incentives (May 14, 2009) (online at www.treas.gov/press/releases/docs/
05142009FactSheet-MakingHomesAffordable.pdf). (hereinafter ``MHA May 
Update'').
    \80\ Id.; U.S. Department of the Treasury, Making Home Affordable: 
Updated Detailed Program Description, at 5-6 (Mar. 4, 2009) (online at 
www.treas.gov/press/releases/reports/housing_fact_sheet.pdf) 
(hereinafter ``MHA March Update'').
    \81\ Id.
    \82\ Id. This amount is in addition to any funds the servicer may 
provide to the borrower.
    \83\ Id.
    \84\ Pub. L. No. 111-22, Sec. 202(b).
    \85\ Pub. L. No. 111-22, Sec. 202(a)(11).
---------------------------------------------------------------------------
    It is not yet clear whether these incentive payments are 
sufficient to overcome the ramp-up costs for servicers to adapt 
their business models, including hiring and training new 
employees and creating new infrastructure, as well as other 
possible incentives not to modify mortgages. For further 
discussion of servicer incentives, see Section C.

6. Homeowner Outreach

    One key to maximizing the impact of a foreclosure 
mitigation program is putting financially distressed homeowners 
in contact with someone who can modify their mortgages.\86\ 
Treasury has made significant progress in this area. Treasury's 
efforts include launching a website 
(www.MakingHomeAffordable.gov), establishing a call center for 
borrowers to reach HUD-approved housing counselors, and holding 
foreclosure prevention workshops and counselor training forums 
in cities with high foreclosure rates.\87\ From early May to 
late August, web hits on Treasury's MHA website doubled from 17 
million to 34 million. Self-assessment tools to determine 
eligibility for the programs under MHA are the foundation of 
the website. Additionally, other resources on the website, such 
as the ``Look Up Your Loan'' tool, which allows a borrower to 
see if their mortgage is owned by Fannie Mae or Freddie Mac, 
serve as important resources in navigating the process. The 
website also offers numerous outlets for borrower education and 
homeowner outreach. At the Panel's foreclosure mitigation field 
hearing, Seth Wheeler, senior advisor at the Treasury 
Department also highlighted the continuing efforts to enhance 
the capabilities of the HOPE Hotline, the informational call 
center, to meet the needs of the escalating number of borrowers 
participating in MHA programs.\88\
---------------------------------------------------------------------------
    \86\ COP March Oversight Report, supra note 21.
    \87\ House Financial Services Committee, Subcommittee on Housing 
and Community Opportunity, Testimony of U.S. Department of Treasury 
Assistant Secretary for Financial Institutions Michael S. Barr, Hearing 
on Stabilizing the Housing Market (Sept. 9, 2009) (online at 
www.makinghomeaffordable.gov/pr_09092009.html) (hereinafter ``Barr 
Hearing Testimony'').
    \88\ Congressional Oversight Panel, Written Testimony of U.S. 
Department of Treasury Senior Advisor Seth Wheeler, Philadelphia Field 
Hearing on Mortgage Foreclosures, at 8 (Sept. 24, 2009) (online at 
cop.senate.gov/documents/testimony-092409-wheeler.pdf) (hereinafter 
``Wheeler Philadelphia Hearing Testimony'').
---------------------------------------------------------------------------
    Lenders and servicers have also undertaken a campaign to 
contact distressed borrowers, as well as those whose loans are 
at risk of default. To date, 1,883,108 letter requests for 
financial information have been sent to borrowers.\89\ While 
this number still falls far short of Treasury's announced 
availability to three to four million borrowers, considerable 
progress can be measured and observed in the first few months 
of MHA's operation.
---------------------------------------------------------------------------
    \89\ HAMP statistics provided by Treasury to the Panel.
---------------------------------------------------------------------------
    Outreach to homeowners must be considered not just in terms 
of quantity, but also in terms of quality. Servicers must 
provide effective outreach. Outreach should include more than 
robo-calls and form letters, and should be provided in plain 
language that is accessible to all borrowers. Borrowers in 
financial distress are likely overwhelmed and intimidated, and 
might not be eager to pay close attention to the entreaties of 
their creditors. Partnership with community groups and borrower 
counseling groups is an important element of effective 
outreach.
    Another important consideration in Treasury's outreach 
strategy involves the role that well-publicized cases of 
mortgage modification fraud have had in discouraging homeowners 
from participating in MHA.\90\ Although lenders and servicers 
have sent nearly 1.9 million request letters to distressed 
borrowers (as mentioned above), it is not clear how many leery 
recipients avoided opening these letters, or overlooked such 
responsible letters in the deluge of other fraudulent offers 
and notices. In a recent study by the Federal Trade Commission 
(FTC) of online and print advertising for mortgage foreclosure 
rescue operations, approximately 71 different companies were 
found to be running suspicious ads.\91\ To combat these scams 
and alleviate concerns for skeptical homeowners, the 
Administration has started a coordinated multi-agency and 
federal/state effort, which includes the Department of the 
Treasury, the Department of Justice, the Department of Housing 
and Urban Development, the Federal Trade Commission, and state 
Attorneys General to coordinate investigative efforts, alert 
financial institutions and consumers to emerging schemes, and 
enhance enforcement actions.\92\ Seth Wheeler said in written 
testimony to the Panel in September that the federal government 
has ``put scammers on notice that we will not stand by while 
they prey on homeowners seeking help under our program.'' \93\ 
These efforts must continue.
---------------------------------------------------------------------------
    \90\ Congressional Oversight Panel, Coping With the Foreclosure 
Crisis: State and Local Efforts to Combat Foreclosures in Prince 
George's County, Maryland (Feb. 27, 2009) (S. Hrg. 111-10).
    \91\ U.S. Department of the Treasury, Federal, State Partners 
Announce Multi-Agency Crackdown Targeting Foreclosure Rescue Scams, 
Loan Modification Fraud (Apr. 6, 2009) (online at 
makinghomeaffordable.gov/pr_040609.html).
    \92\ Participants include: Treasury, the U.S. Department of Justice 
(DOJ), HUD, FTC, and the Attorney General of Illinois. Id.
    \93\ Wheeler Philadelphia Hearing Testimony, supra note 88.
---------------------------------------------------------------------------
    Treasury could also consider taking the additional step of 
sending request letters to homeowners directly from either the 
Treasury Secretary or the President in order to bring further 
clarity and authenticity to the process.

7. Scaled Up Quickly

    MHA was announced in February 2009, but the program's 
details were not available until March 2009, and the first 
trial HAMP modifications did not begin until April 2009. As a 
result, there were no permanent HAMP modifications until July 
2009. In any event, the scale up period should now be over.
    The ability of Treasury and servicers to meet demand 
adequately for the program is likely to have an effect on the 
overall borrower perception of the program, which could in turn 
impact the program's effectiveness in future outreach to 
homeowners. Borrowers will not want to seek assistance from the 
program if they view it as ineffective or unresponsive. 
Therefore, the success of borrower outreach is closely linked 
to servicer capacity and the ability to scale up quickly. 
Treasury's efforts to press ahead with massive borrower 
outreach without first addressing servicer capacity issues 
could hurt the public perception and credibility of the 
program.
    In response to a question from the Panel on this point, 
Treasury Assistant for Financial Stability Secretary Herbert 
Allison indicated that Treasury Secretary Timothy Geithner and 
Housing and Urban Development Secretary Shaun Donovan have 
``called on servicers to take specific steps to increase 
capacity, including adding more staff than previously planned, 
expanding call centers beyond their current size, providing an 
escalation path for borrowers dissatisfied with the service 
they have received, bolstering training of representatives, 
developing extra on-line tools, and sending additional mailings 
to borrowers who may be eligible for the program.'' \94\ It is 
critical that the efforts to increase capacity keep pace with 
the efforts to reach out to borrowers.
---------------------------------------------------------------------------
    \94\ Congressional Oversight Panel, Questions for U.S. Department 
of the Treasury Assistant Secretary for Financial Stability and 
Counselor to the Secretary, Herb Allison, at 7 (June 24, 2009) 
(hereinafter ``Allison COP Testimony'').
---------------------------------------------------------------------------

8. Widespread Participation

    Widespread servicer participation is an essential part of a 
successful foreclosure mitigation program. Servicers of Fannie 
Mae and Freddie Mac mortgages are required to participate in 
HARP, covering approximately 2,300 servicers.\95\
---------------------------------------------------------------------------
    \95\ U.S. Department of the Treasury, Making Home Affordable 
Program, Servicer Performance Report through August 2009 (Oct. 8, 2009) 
(online at www.treas.gov/press/releases/docs/
MHA%20Public%20100809%20Final.pdf) (hereinafter ``Servicer Performance 
Report'').
---------------------------------------------------------------------------
    HAMP has both a voluntary and mandatory participation 
component for lenders/servicers. Any participants in TARP 
programs initiated after February 2, 2009, are required to take 
part in mortgage modification programs consistent with Treasury 
standards.\96\ Since the Capital Purchase Program (CPP), the 
primary TARP vehicle for bank assistance, was established prior 
to this date, the majority of financial institutions are not 
obliged to participate. However, servicers of Fannie Mae or 
Freddie Mac mortgages are obligated to participate in HAMP for 
their Fannie Mae and Freddie Mac mortgages.
---------------------------------------------------------------------------
    \96\ U.S. Department of the Treasury, Fact Sheet Financial 
Stability Plan (February 9, 2009) (online at 
www.financialstability.gov/docs/fact-sheet.pdf) (hereinafter 
``Financial Stability Plan Fact Sheet'').
---------------------------------------------------------------------------
    On the voluntary servicer participation side, Treasury 
estimates that 85 percent of HAMP-eligible mortgage debt is 
serviced by participating servicers.\97\ This comes close to 
Treasury's projection that HAMP will ultimately cover 90 
percent of the potential loan population.\98\ Through October 
6, 2009, 63 servicers are participating in the program.
---------------------------------------------------------------------------
    \97\ Servicer Performance Report, supra note 95.
    \98\ Government Accountability Office, Troubled Asset Relief 
Program: Treasury Actions Needed to Make the Home Affordable 
Modification Program More Transparent and Accountable, at 32 (July 
2009) (online at www.gao.gov/new.items/d09837.pdf) (hereinafter ``GAO 
HAMP Report'').
---------------------------------------------------------------------------
    The Second Lien Program is not yet operational. According 
to testimony by Assistant Secretary Allison, Treasury is 
currently negotiating participation contracts with servicers 
covering more than 80 percent of the second lien market. For 
further discussion of servicer participation issues, see 
Section C.

9. Recommendation on Data

    In its March 2009 Report, the Panel noted a distressingly 
poor state of knowledge among federal regulatory agencies about 
the mortgage market, that constituted a full-blown regulatory 
intelligence failure. In particular, the Panel was concerned 
about the federal government's limited knowledge regarding loan 
performance and loss mitigation efforts and foreclosure. These 
failures of financial intelligence collection and analysis have 
only been partially remedied; major gaps in coverage still 
exist.
    Treasury's major advance in this area has been to start 
collecting a range of data on HAMP modifications, both those in 
trial periods and those made permanent. The data permit 
examination of the characteristics of the borrowers and 
property, the terms of the modification, the servicer involved, 
and payments to the servicer. The development of a robust 
database on HAMP modifications is an important step forward in 
addressing the foreclosure crisis.
    There are important limitations to these new data. Unlike 
HAMP, other MHA programs collect much more limited data. There 
are also two notable gaps in the HAMP modification data. First, 
the data exist only on loans for which a trial modification has 
commenced. As a result, the Panel lacks data on loans for which 
trial modifications have been denied, much less the performance 
of the entire universe of loans. Further, the Panel lacks data 
for the programs not yet online, such as the Second Lien 
Program and Foreclosure Alternatives Program. This information 
is crucial for understanding the changing nature of the 
foreclosure crisis and crafting informed, targeted policy 
responses. Second, the data collected by Treasury are largely 
limited to HAMP modifications, so it does not allow easy 
integration with data on other modification programs. OCC/OTS 
have produced quarterly reports on mortgage modification 
efforts for 14 of the largest bank/thrift-servicers under their 
supervision, and this data includes HAMP and non-HAMP 
modifications, but it covers only 64 percent of the market.
    While data collection has improved, further improvement is 
necessary. Moreover, improved data collection alone is 
insufficient. While the Panel assumes that Treasury has engaged 
in its own internal analysis of HAMP data, Treasury has yet to 
produce any public detailed analysis of the HAMP data. The 
releases to date have contained only minimal information about 
the number of modifications and the level of servicer 
participation. The Panel is hopeful that more informative data 
releases will be forthcoming on a regular basis. The Panel is 
also hopeful that Treasury will enable outside parties to have 
easy access to the data; analysis of such government-produced 
data by academics and non-profits has helped improve countless 
government programs in the past, and there is no reason to 
believe HAMP is different. While the Panel recognizes that 
there are privacy concerns, the level of personally 
identifiable data could easily be limited to that found in Home 
Mortgage Disclosure Act (HMDA) data releases.
    In sum, Treasury has made progress on data collection, but 
because the data covers only loans that have been approved for 
a specific modification program, essential information about 
the foreclosure crisis remains unknown. Instead, the government 
is forced to continue to rely on imperfect private data 
sources. Better consumer finance intelligence gathering and 
analysis remains a critical gap in formulating policy 
responses.\99\
---------------------------------------------------------------------------
    \99\ Deborah Goldberg, director of the Hurricane Relief Project at 
the National Fair Housing Alliance, made a similar point in her 
testimony during the Panel's hearing on mortgage foreclosures in 
Philadelphia in September. Congressional Oversight Panel, Testimony of 
Director of the National Fair Housing Alliance's Hurricane Relief 
Project, Deborah Goldberg, Philadelphia Field Hearing on Mortgage 
Foreclosures, at 78 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm) (hereinafter 
``Goldberg Philadelphia Hearing Testimony''). Ms. Goldberg urged 
improvements in ``data that are collected and made public about how 
servicers are performing under the program'' and noted that her 
organization ``think[s] it's very critical that loan level data, 
including information on the race, gender, and national origin of the 
borrower who's applying for the HAMP modification be made available to 
the public and that [sic] be done at a geographic level that makes it 
possible for public officials, community organizations, individual 
borrowers, and the public at large to understand how the program is 
working in their communities, to be able to identify places where it 
may not be working equitably or efficiently and to be able to intervene 
to change that.'' Id.
---------------------------------------------------------------------------
    This is not the first instance in which the need for such 
data has been acknowledged. In response to the savings and loan 
crisis in the 1980s, Congress directed the Department of 
Housing and Urban Development (HUD) to produce national 
mortgage default and foreclosure reports.\100\ It appears that 
HUD never produced any such reports, and Congress eliminated 
the reporting requirement, along with many other agency 
reporting requirements in 1995.\101\ Data collection has 
improved, but is still lacking in critical respects.
---------------------------------------------------------------------------
    \100\ 12 U.S.C. 1701p-1 (1983).
    \101\ Federal Reports Elimination and Sunset Act of 1995 Sec. 3003, 
Pub. L. No. 104-66.

------------------------------------------------------------------------
                                            Progress of MHA after six
        Panel's March checklist                       months
------------------------------------------------------------------------
Will the plan result in modifications    Significant progress; some
 that create affordable monthly           areas not addressed, including
 payments?.                               unemployment-related
                                          foreclosures
Does the plan deal with negative         Not addressed in a substantial
 equity?.                                 way
Does the plan address junior mortgages?  Unclear--program announced but
                                          not yet running
Does the plan overcome obstacles in      Unclear
 existing pooling and servicing
 agreements that may prevent
 modifications?.
Does the plan counteract mortgage        Unclear--incentive structures
 servicer incentives not to engage in     included, but payments just
 modifications?.                          beginning
Does the plan provide adequate outreach  Significant progress; more
 to homeowners?.                          needed
Can the plan be scaled up quickly to     Some progress; more needed
 deal with millions of mortgages?.
Will the plan have widespread            Significant progress
 participation by lenders and
 servicers?.
Is data collection sufficient to ensure  Significant progress; more
 the smooth and efficient functioning     needed
 of the mortgage market and prevent
 future crisis?.
------------------------------------------------------------------------

                         C. Program Evaluation

    MHA represents Treasury's primary foreclosure mitigation 
effort. MHA's main programs are HARP and HAMP. HAMP includes 
the Second Lien Program, the Home Price Decline Protection 
Program (HPDP), and the Foreclosure Alternatives Program (FAP). 
Treasury estimates that assistance under HARP and HAMP will be 
offered to as many as seven to nine million homeowners.\102\ 
Treasury has designed each program and subprogram to help in 
that effort, and in announcing each initiative outlined the 
specific ways in which it would help prevent foreclosures. In 
evaluating the programs, this section considers the goals 
articulated by Treasury, the programs' design, the results 
achieved to date in light of the relatively early stages of 
most programs, and whether or not the programs are well 
designed to meet the stated objectives. Adequacy of the goals 
is considered separately in the subsequent section.
---------------------------------------------------------------------------
    \102\ U.S. Department of the Treasury, Making Home Affordable 
Summary of Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/guidelines_summary.pdf) (hereinafter ``MHA Summary 
Guidelines'').

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


1. HARP

    HARP was announced on March 4, 2009, and permits homeowners 
with current, owner-occupied, government sponsored enterprise 
(GSE)-guaranteed mortgages to refinance into a GSE-eligible 
mortgage.\103\ The program does not utilize TARP funding. At 
its core, HARP is aimed at providing low-cost refinancing to 
homeowners who have been negatively affected by the decline in 
home values. Unlike other portions of MHA, HARP is not directed 
toward homeowners who are behind on their mortgage payments. 
Instead, the program is intended for homeowners who are current 
on their mortgage payments, have not been delinquent by more 
than thirty days within the previous year and are not 
struggling to make their monthly payments.\104\ Assistant 
Secretary Allison explained that the program ``helps homeowners 
who are unable to benefit from the low interest rates available 
today because price declines have left them with insufficient 
equity in their homes.'' \105\ Treasury estimates that HARP 
could assist between four to five million homeowners who would 
otherwise be unable to refinance because their homes have lost 
value, pushing their current loan-to-value ratios above 80 
percent.\106\
---------------------------------------------------------------------------
    \103\ MHA Summary Guidelines, supra note 102.
    \104\ Fannie Mae, Home Affordable Refinance FAQs, at 4 (July 24, 
2009) (online at www.efanniemae.com/sf/mha/mharefi/pdf/
refinancefaqs.pdf) (hereinafter ``Fannie Mae FAQs'').
    \105\ Senate Banking, Housing and Urban Affairs Committee, 
Testimony of U.S. Department of Treasury Assistant Secretary Herb 
Allison, Preserving Homeownership: Progress Needed to Prevent 
Foreclosures, 111th Cong. (July 16, 2009) (hereinafter ``Allison Senate 
Testimony'').
    \106\ U.S. Department of the Treasury, Making Home Affordable 
Summary of Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/guidelines_summary.pdf). HARP is not limited to above 
80 percent LTV refinancings. It is unclear, however, what would 
distinguish a HARP refinancing from a regular GSE refinancing if the 
LTV were under 80 percent. Therefore, the Panel is only counting GSE 
refinancings with LTV over 80 percent as HARP refinancings. The Panel 
emphasizes that regular course GSE refinancings are not counted as part 
of HARP in this report.
---------------------------------------------------------------------------
    Other than the requirement that the borrower is current on 
monthly mortgage payments, the program has relatively few 
restrictive requirements. All mortgages that are owned or 
guaranteed by either Fannie Mae or Freddie Mac may participate 
in HARP.\107\ Existing jumbo-conforming and high-balance loans 
may qualify for the program, in part because of higher 
temporary loan limits. However, there is not a cash-out 
component to the HARP refinance and as such, subordinated 
financing may not be paid with the proceeds from the 
refinancing. Finally, Treasury promotes the relative ease of 
this program since participants' records are centralized with 
either Fannie Mae or Freddie Mac; as such, documentation 
requirements should be less onerous than other comparable 
programs.\108\
---------------------------------------------------------------------------
    \107\ MHA Summary Guidelines, supra note 102.
    \108\ Servicer Performance Report, supra note 95.
---------------------------------------------------------------------------
    Servicers of Fannie Mae and Freddie Mac mortgages are 
required to participate in the program, covering approximately 
2,300 servicers.\109\
---------------------------------------------------------------------------
    \109\ Servicer Performance Report, supra note 95.
---------------------------------------------------------------------------
    Initially, borrowers were eligible to refinance if they 
owed up to 105 percent of the present value of their single-
family residence. In response to the continued decline of home 
values, on July 1, 2009, Treasury announced an expansion of the 
program that included borrowers who owe up to 125 percent of 
the value of their homes. This expands the universe of 
homeowners potentially eligible for refinancing, and means that 
HARP could, in theory, assist more than the four to five 
million homeowners originally estimated. Fannie Mae and Freddie 
Mac will begin accepting deliveries of these refinanced loans 
on September 1 and October 1, respectively. Generally, the GSEs 
are prohibited from purchasing mortgages with loan-to-value 
(LTV) ratios above 80 percent unless there was private mortgage 
insurance coverage on the loan. HARP refinancings do not 
require the borrower to obtain additional private mortgage 
insurance coverage. If there was no coverage on the original 
loan, coverage is not required, and if there was coverage on 
the original loan, additional coverage is not required.
    There are two distinct borrower benefit requirements under 
HARP; the refinancing needs to satisfy only one of them to 
qualify. The first states that the requirement is met if the 
borrower's mortgage payment is decreased. In this circumstance, 
it is acceptable for the borrower to extend the term of the 
loan or change the mortgage from a fixed-rate loan to an 
adjustable-rate. The second borrower benefit standard states 
that if the homeowner's monthly payment remains flat, or 
increases, then the borrower must be moving to ``a more stable 
mortgage product.'' \110\ Under the program guidelines, a 
transition out of interest-only and adjustable-rate mortgages 
would qualify as comparatively stable. Also, a shift to a 
shorter-term loan that would accelerate the amortization of 
equity would qualify. The borrower may not extend the term of 
the loan or switch to an ARM from a fixed-rate in order to be 
compliant under the second borrower benefit requirement.
---------------------------------------------------------------------------
    \110\ Fannie Mae FAQs, supra note 104.
---------------------------------------------------------------------------
    HARP refinancings permit eligible borrowers to refinance 
their mortgages despite negative equity. HARP does not dictate 
the terms of the refinanced mortgage other than prohibiting 
prepayment penalties and balloon payments. A refinanced 
mortgage could thus be fixed or adjustable rate, and at any 
interest rate. HARP refinancings aim for both affordability and 
sustainability, but sometimes the two goals will be at 
loggerheads. For example, borrowers with non-traditional 
mortgages that had introductory periods with low monthly 
payments, such as hybrid ARMs, interest-only mortgages, and 
payment-option ARMs, might refinance into fixed-rate, fully-
amortizing mortgages. The shift from a non-traditional mortgage 
to a traditional fixed-rate mortgage may result in an increase 
in the borrower's monthly payments, but it will improve the 
long-term sustainability of the loan. The assumption underlying 
HARP is that homeowners will refinance if they believe it makes 
their mortgage more affordable.
    Treasury was unable to provide the Panel with complete data 
on HARP refinancing applications. Application data was only 
available for one GSE. The only complete data available was on 
the total number of closed approved refinancings. 95,729 
refinancings have been approved as of September 1, 2009. HARP 
has thus covered only 2 percent of the four to five million 
homeowners Treasury originally estimated would be eligible when 
the program was limited to loans with less than 105 percent LTV 
ratios. Moreover, for the one GSE for which Treasury provided 
data, HARP refinancing applications have fallen every month 
since May 2009.\111\ It is not clear why there have been 
relatively few HARP refinancings; beyond HARP's eligibility 
requirements, one concern is that liquidity-constrained 
homeowners are unable to afford points and closing costs on the 
refinancings.
---------------------------------------------------------------------------
    \111\ It is not clear why HARP refinancing application data is 
unavailable for the other GSE. In response to Panel requests, Treasury 
provided a broad range of data related to the mortgage market. Although 
not all of the data are confidential, portions are. These data are 
cited in numerous places throughout the report, and are hereinafter 
cited as ``Treasury Mortgage Market Data.''
---------------------------------------------------------------------------
    If HARP ultimately reaches Treasury's stated availability 
of four to five million borrower refinancings it will have a 
sizeable impact on the foreclosure problem. Moreover, if 
housing prices increase then more borrowers with higher levels 
of negative equity will come within HARP's expanded LTV limit 
and thereby become eligible for HARP refinancing to lower more 
affordable rates and safer products.
    The decline in applications, however, coupled with the low 
total number of refinancings raises serious doubts about 
whether HARP will ever come close to assisting a significant 
percentage of the four to five million homeowners. Moreover, if 
interest rates go up during the duration of the HARP program, 
as will likely happen should housing prices stabilize, HARP 
refinancings will become relatively less appealing to many 
eligible homeowners.
    It is important to emphasize that although HARP allows 
underwater homeowners to refinance to a more affordable and/or 
sustainable loan despite negative equity, HARP does not cure 
negative equity; instead, it is focused on removing negative 
equity as an obstacle to improving affordability, permitting a 
homeowner with negative equity to continue to make payments. 
The majority of HARP refinancings, however, are loans with less 
than 90 percent LTV ratios. (See Figure 13.) For these loans, 
LTV ratios would not normally be an obstacle to refinancing. 
Therefore, the only reason these loans should have been 
refinanced through HARP, rather than through private channels, 
would have been if refinancing were impeded by other factors, 
such as curtailed income. Thus, while HARP underwriting 
standards allow not only for higher LTV refinancings without 
additional private mortgage insurance (PMI) coverage, they 
might also permit refinancings with reduced income levels. 

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2. HAMP
---------------------------------------------------------------------------

    \112\ Treasury Mortgage Market Data, supra note 111.
---------------------------------------------------------------------------
    HAMP, also announced on March 4, 2009, is another sub-
program of MHA. HAMP is funded by a government commitment of 
$75 billion, which is comprised of $50 billion of TARP funds 
and $25 billion from the Housing and Economic Recovery Act 
(HERA). The $50 billion of TARP funds is directed toward 
modifying private-label mortgages, and the $25 billion from the 
Housing and Economic Recovery Act is dedicated to the 
modification of Fannie Mae and Freddie Mac mortgages. Treasury 
has estimated that HAMP will help three to four million 
homeowners.\113\ The goal of HAMP is to create a partnership 
between the government and private institutions in order to 
reduce borrowers' gross monthly payments to an affordable 
level. The level has been set at 31 percent of the borrower's 
gross monthly income. Lenders are expected to reduce payments 
to 38 percent of the borrower's monthly income. The government 
and the private lender then share the burden equally of 
reducing the borrower's monthly payment to 31 percent of his or 
her gross monthly income. In addition to providing monetary 
incentives for the modification of at-risk mortgages, HAMP 
standardizes loan modification guidelines in order to create an 
industry paradigm.
---------------------------------------------------------------------------
    \113\ GAO has questioned whether these estimations may be overly 
optimistic due to key assumptions, such as borrower response rate and 
participation rate. GAO HAMP Report, supra note 98.
---------------------------------------------------------------------------
            a. Lender and Servicer Participation
    HAMP has both a voluntary and mandatory participation 
component for lenders/servicers. On February 9, 2009, the 
Administration announced that as part of its Financial 
Stability Plan, any participants in TARP programs initiated 
after that date would be required to take part in mortgage 
modification programs consistent with Treasury standards.\114\ 
Since the Capital Purchase Program (CPP), the primary TARP 
vehicle for bank assistance, was established prior to the 
Financial Stability Plan, the majority of financial 
institutions are not obligated to participate. However, 
servicers of Fannie Mae or Freddie Mac mortgages are obligated 
to participate in HAMP for their Fannie Mae or Freddie Mac 
mortgages.
---------------------------------------------------------------------------
    \114\ Financial Stability Plan Fact Sheet, supra note 96.
---------------------------------------------------------------------------
    On the voluntary servicer participation side, Treasury 
estimates that 85 percent of HAMP-eligible mortgage debt is 
serviced by participating servicers.\115\ This comes close to 
Treasury's projection that HAMP will ultimately cover 90 
percent of the potential loan population.\116\ Servicer 
participation in HAMP, however, is voluntary.\117\ Through 
October 6, 2009, 63 servicers have signed servicer 
participation agreements for HAMP.\118\ Servicers begin the 
participation process by completing a registration form, and 
ultimately sign a Servicer Participation Agreement with Fannie 
Mae.\119\ Treasury, through Fannie Mae, is reaching out to 
servicers with large numbers of eligible loans that have not 
yet signed up with the program.\120\
---------------------------------------------------------------------------
    \115\ Servicer Performance Report, supra note 95.
    \116\ GAO HAMP Report, supra note 98, at 32. Citing an analysis of 
unnamed OFS documents that the Panel has been unable to recover as of 
the release of this report.
    \117\ As discussed in section B5, infra, servicers receive 
incentives to participate. Servicers have until December 31, 2009 to 
opt in to the program. U.S. Department of Treasury, Borrower Frequently 
Asked Questions (July 16, 2009) (online at makinghomeaffordable.gov/
borrower-faqs.html).
    \118\ Servicer Performance Report, supra note 95.
    \119\ Treasury has designated Fannie Mae as its financial agent in 
connection with HAMP. Making Home Affordable Administrative Website for 
Servicers, Commitment to Purchase Financial Instrument and Servicer 
Participation Agreement, at 1 (online at www.hmpadmin.com/portal/docs/
hamp_servicer/servicerparticipationagreement.pdf) (accessed Oct. 7, 
2009).
    \120\ Treasury explained that:
    Efforts include one-on-one meetings and presentations during which 
Fannie Mae personnel outline the program benefits, as well as 
requirements. Subsequent to the introductory meeting, members of the 
Fannie Mae HAMP team are assigned to serve as points of contact for 
prospective servicers, providing more detailed information, answering 
questions, and keeping in touch on a regular basis. We expect that this 
approach will result in the addition of more servicers to the program 
in the coming days and weeks. Fannie Mae also provides program training 
and tools designed to make servicer implementation as efficient as 
possible. Since the HAMP was announced, more than 300 servicers have 
downloaded packages from the Fannie Mae website. Fannie Mae will 
continue to actively solicit additional servicers for participation in 
order to maximize program impact.
    Allison COP Testimony, supra note 94.
---------------------------------------------------------------------------
    HAMP provides financial incentives to mortgage servicers, 
borrowers and investors to modify residential mortgages. First, 
servicers receive an up-front fee of $1,000 for each completed 
modification for up to three years. Second, servicers receive 
``Pay-for-Success'' fees of up to $1,000 each year for up to 
three years. These fees will be paid monthly and are predicated 
on the borrower staying current on the loan. Borrowers are 
eligible for ``Pay-for-Performance Success Payments'' of up to 
$1,000 each year for up to five years, as long as they stay 
current on their payment. This payment is applied directly to 
the principal of their mortgage. The ``Responsible Modification 
Incentive Payment'' is a one-time bonus payment of $1,500 to 
the lender/investor and $500 to servicers that will be awarded 
for modifications on loans that are still performing. Finally, 
Treasury estimates that up to 50 percent of at-risk mortgages 
have second liens.\121\ In order to address second lien debts, 
such as home equity lines of credit or second mortgages, HAMP 
encourages servicers to contact second lien holders and 
negotiate the extinguishment of the second lien. The servicers 
will receive a payment of $500 per second lien modification, as 
well as success payments of $250 per year for three years, as 
long as the modified first loan remains current. Borrowers also 
receive success payments for participating of $250 per year for 
up to five years that is used to pay down the principal on the 
first lien.
---------------------------------------------------------------------------
    \121\ MHAP Update, supra note 69.
---------------------------------------------------------------------------
            b. Borrower Eligibility
    HAMP modifications begin with a three month trial 
modification period for eligible borrowers. After three months 
of successful payments at the modified rate and provision of 
full supporting documentation, the modification becomes 
permanent.\122\ To be eligible to participate in HAMP, the loan 
must have been originated on or prior to January 1, 2009, and 
the mortgage must be a first lien on an owner-occupied property 
with an unpaid balance up to $729,750.\123\ The loan must be in 
default or in imminent danger of default.\124\ Borrowers in 
bankruptcy or in active litigation regarding their mortgage can 
participate in the program without waiving their legal rights.
---------------------------------------------------------------------------
    \122\ Treasury permits servicers to do so-called ``verbal'' or 
``no-doc'' trial modifications. In these verbal modifications, the 
servicer halts foreclosure actions and allows the borrower to make 
reduced payments based on the borrower's unverified representations 
about income and debt levels. Each servicer chooses the level of 
documentation required to commence a trial modification, but for the 
modification to become permanent and the servicer to receive 
compensation from Treasury, full documentation is required. While doing 
no-doc trial modifications brings more borrowers into HAMP more quickly 
and freezes the foreclosure process, it might have a detrimental effect 
on producing permanent HAMP modifications. Congressional Oversight 
Panel, Testimony of Freddie Mac Senior Vice President for Economics and 
Policy, Edward L. Golding, Philadelphia Field Hearing on Mortgage 
Foreclosures, at 29 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm).
    \123\ The unpaid balance ceiling increases in relation to number of 
units on the property (2 units--$934,200; 3 units--$1,129,250; 4 
units--$1,403,400). The effect of this limitation is most pronounced in 
high-cost areas, although recent changes to raise the conforming loan 
limit in certain high-cost areas have made more loans potentially 
eligible for HAMP modifications in these areas.
    \124\ At the field hearing, Larry Litton cited servicers' need for 
greater clarity around the definition of imminent default. 
Congressional Oversight Panel, Testimony of Litton Loan Servicing 
President and CEO, Larry Litton, Philadelphia Field Hearing on Mortgage 
Foreclosures, at 144-45 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm).
---------------------------------------------------------------------------
    Under the first lien program, the homeowner must certify a 
hardship causing the default. If the borrower has a back-end 
DTI ratio of 55 percent or more--meaning that the borrower's 
total monthly debt payments, including credit cards and other 
forms of debt, are at least 55 percent of monthly income--he or 
she must enter a debt counseling program.\125\
---------------------------------------------------------------------------
    \125\ However, as noted by GAO, there is no mechanism to ensure 
that housing counseling happens, and Treasury does not plan to track 
borrowers systematically who are told that they must get counseling. 
GAO HAMP Report, supra note 98.
---------------------------------------------------------------------------
    A Net Present Value (NPV) test is required for each loan 
that is in ``imminent default'' or is at least 60 days 
delinquent. First, servicers determine the NPV of the proceeds 
from the liquidation and sale of a mortgaged property. 
Variables to take into account are:
          1. The current market value of the property as 
        established by a broker's price opinion, automated 
        valuation methodology, or appraisal;
          2. The cost of foreclosure proceedings, repair and 
        maintenance of the property;
          3. The time to dispose of the property if not sold at 
        foreclosure auction;
          4. Costs associated with the marketing and sale of 
        the property as real estate owned; and
          5. The net sales proceeds.\126\
---------------------------------------------------------------------------
    \126\ Jordan D. Dorchuck, Net Present Value Analysis and Loan 
Modifications (Sept. 15, 2008) (online at www.mortgagebankers.org/
files/Conferences/2008/RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).
---------------------------------------------------------------------------
    Second, servicers determine the proceeds from a loan 
modification. Treasury has established parameters for running 
the NPV for modification test. The servicer may choose the 
discount rate for the calculation although there is a ceiling 
set by the Freddie Mac Primary Mortgage Market Survey rate 
(PMMS), plus a spread of 2.5 percentage points. The servicer 
may apply different discount rates to loans in investor pools 
versus loans in portfolio. Cure rates and redefault rates must 
be based on GSE analytics. Servicers having at least a $40 
billion servicing book have the option to substitute GSE-
established cure rates and redefault rates with the experience 
of their own aggregate portfolios.
    The NPV of the foreclosure scenario is then compared to an 
NPV for a modification scenario. If the NPV of the modification 
scenario is greater, then the servicer must offer to modify the 
loan.
    Prior to September 1, 2009, servicers were permitted to use 
either their own NPV calculation method or a standardized model 
created by Treasury. Since September 1, 2009, all servicers are 
required to use Treasury's standard NPV model for HAMP 
modification purposes. See Annex C for an examination of 
Treasury's NPV model.
    The Panel also notes that the NPV model of other government 
entities, such as the OCC, the OTS, and the FDIC for Indy Mac, 
assumes an average redefault rate of 40 percent, but Treasury 
would need to factor in significant variation depending on 
income, FICO, and LTV. Changes in assumed redefault rates 
(which may themselves be functions of the type of modification 
involved) will obviously affect the NPV calculus. The inputs 
for Treasury's NPV model are not public, in part because of 
concerns that borrowers might be able to game the calculation. 
Unfortunately, the secrecy of Treasury's NPV model means that 
it is not subject to robust scrutiny. The public unavailability 
of the NPV model also means that homeowners are unable to 
verify whether they have been appropriately denied a 
modification. Housing counselors frequently attempt to 
negotiate loan modifications based on having run an NPV 
comparison that they then present to the loan servicer. Making 
the model publicly available would facilitate negotiations and 
provide an important check against wrongful modification 
denials. A possible solution is to make the NPV calculator 
publicly available as a web application, which would limit the 
ability to engage in a systematic deconstruction of the model 
for purposes of gaming it.
            c. Lender Procedures
    The front-end DTI target is 31 percent. The lender will 
first have to reduce the borrower's mortgage payments to no 
greater than 38 percent front-end DTI ratio. Treasury will then 
match the investor/lender dollar-for-dollar in any further 
reductions, down to a 31 percent front-end DTI ratio for the 
borrower. Treasury has established a 2 percent floor below 
which it will not subsidize interest rates. Lenders and 
servicers could reduce principal rather than interest at any 
stage in the waterfall and would receive the same funds 
available for an interest rate reduction.
    Servicers follow the ``standard waterfall'' steps detailed 
below in order to achieve efficiently the 31 percent front-end 
DTI ratio:
          1a. Request monthly gross income of borrower;
          1b. Validate first lien debt and monthly payments. 
        This information is used to calculate a provisional 
        modification for the trial period. A trial modification 
        typically lasts for three months, and then becomes 
        permanent if the borrower has made the required trial 
        payments, and the borrower's debt and income 
        documentation has been submitted and determined to be 
        accurate. Servicers have discretion on whether to start 
        trial modifications only after borrowers have submitted 
        the written documentation, or based on verbal 
        information that borrowers provide over the phone;
          2. Capitalize arrearage;
          3. Target front-end DTI of 31 percent and follow 
        steps 4, 5, and 6 in order to reduce the borrower's 
        monthly payment;
          4. Reduce the interest rate to achieve target (two 
        percent floor). The guidelines specify reductions in 
        increments of 0.125 percent that should bring the 
        monthly payments as close to the target without going 
        below 31 percent. If the modified interest rate is 
        above the interest rate cap as defined by Treasury, 
        then the modified interest rate will remain in effect 
        for the remainder of the loan. If the modified interest 
        rate is below the interest rate cap, it will remain in 
        effect for five years followed by annual increases of 
        one percent until the interest rate reaches the 
        interest rate cap. The modified interest rate will then 
        be in effect for the remainder of the loan;
          5. If the front-end DTI target has not been reached, 
        the term or the amortization of the loan may be 
        extended up to 40 years; and
          6. If the front-end DTI target has still not been 
        reached, it is recommended that the servicer forbear 
        principal. If there is principal forbearance, then a 
        balloon payment of that amount is due upon the maturity 
        of the loan, the sale of the property, or the payoff of 
        the interest bearing balance.
            d. HAMP Results to Date
    Because the program collects far more data than any other 
MHA program, HAMP reveals a fuller picture of the results to 
date. Based on certified data provided by Fannie Mae, 
Treasury's agent for HAMP, the following statistical picture of 
HAMP emerges. As of September 1, 2009 there were 1,711 
permanent modifications and 362,348 additional unique borrowers 
were in trial modifications. Only 1.26 percent of HAMP 
modifications had become permanent after the anticipated three-
month trial. The Panel emphasizes that this does not mean that 
the other 98.74 percent of HAMP trial modifications have 
failed, merely that they have not yet become permanent. Many 
borrowers in trial modifications are in the process of 
submitting documentation, and Treasury has provided additional 
flexibility in the timeline through a two-month extension. It 
is also important to remember that this is still a new program 
in a ramp-up period, and this statistic is preliminary.
    The Panel has not been able to determine why there is such 
a low rate of conversion from trial to permanent modifications. 
Possibilities identified to date include failure of borrowers 
to comply with the terms of the trial, including timely 
payments; the difficulties servicers have in assembling 
completed documentation on modifications commenced on a 
``verbal'' or ``no-doc'' basis; \127\ delays in servicers 
submitting data to Treasury; and data quality issues. There is 
also significant variation by servicer in terms of the 
percentage of trial modifications that become permanent after 
three months, an issue discussed below.
---------------------------------------------------------------------------
    \127\ Treasury has authorized an additional two-month period for 
assembly for documentation beyond the 3-month trial period.
---------------------------------------------------------------------------
    As of September 1, 73 percent of the permanent 
modifications involved fixed-rate mortgages, with adjustable-
rate mortgages making up 27 percent and a negligible number of 
step-rate mortgages. (See Figure 14, below.) 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    A variety of hardship reasons were given by borrowers when 
requesting the modifications. By far the most common was 
``curtailment of income,'' which was reported by 63 percent of 
borrowers and reflects reduced employment hours, wages, 
salaries, commissions, and bonuses. This is distinct from 
unemployment, reported by eight percent of borrowers. Other 
significant categories of hardship reported were ``excessive 
obligation,'' reported by nine percent of borrowers, ``payment 
adjustment,'' reported by four percent of borrowers, and 
illness of borrower, reported by two percent of borrowers. Six 
percent of borrowers reported ``other.'' (See Figure 15, 
below.) It is notable that curtailment of income is the 
majority hardship basis, as this implies that general economic 
conditions, rather than mortgage rate resets on subprime or 
payment-option or interest-only loans are driving the mortgage 
crisis at present. Because HAMP eligibility generally requires 
employment, this raises concerns as to whether HAMP, which was 
designed in the winter of 2009, is capable of dealing with 
emerging causes of foreclosure.
---------------------------------------------------------------------------
    \128\ Treasury Mortgage Market Data, supra note 111. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    For the modifications that have become official, the median 
(mean) front-end DTI declined 31 (34) percent, from 45.1 (47.2) 
percent to 31.1 (31.1) percent, in line with the program's 
goal. The median (mean) back-end DTI ratio declined 47 (32) 
percent from 68.8 (76.4) percent to 36.4 (51.8) percent. (See 
Figure 16, below.)
---------------------------------------------------------------------------
    \129\ Treasury Mortgage Market Data, supra note 111.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The reduction in DTI in HAMP modifications was achieved 
almost exclusively through reductions in interest rate, rather 
than term extensions or principal reductions. Median (mean) 
interest rates were dropped by 4.25 (4.65) percentage points, 
from 6.85 (7.58) percent to 2.00 (2.92) percent, a 71 (61) 
percent reduction in the rate. (See Figure 17, below.)
---------------------------------------------------------------------------
    \130\ Treasury Mortgage Market Data, supra note 111. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Term extensions were de minimis; the median (mean) term 
remaining before modification was 330 (337) months, and after a 
three-month trial period, the median (mean) term remaining was 
338 (364) months, indicating a median (mean) term extension of 
five months (two years). 989 permanent modifications or 57 
percent of total featured term extensions, while 645 or 38 
percent of total involved reductions in remaining terms. A 
portion of the term reductions, however, is attributable to the 
time lapse between the start of the trial modification and the 
permanent modification date.
---------------------------------------------------------------------------
    \131\ Treasury Mortgage Market Data, supra note 111.
---------------------------------------------------------------------------
    Amortization periods changed relatively little. Before 
modification, the median (mean) amortization period was 360 
(371) months, while post-modification, the amortization period 
was 342 (369) months. (See Figure 18, below.) The amortization 
period increased in 618 modifications or 36 percent of the 
total, while it was decreased in 1013 modifications or 59 
percent of total. The Panel is puzzled by the prevalence of 
both amortization and term decreases. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Principal forbearance was rare and principal forgiveness 
rarer still. Two hundred sixty-one permanent modifications (15 
percent of total) had principal forborne, while only 5 (less 
than one percent of total) had principal forgiven. When 
calculated based on all permanent modifications, the median 
(mean) amount of principal forborne was zero ($9,434.58), and 
the median (mean) amount of principal forgiven was zero 
($170.89). When calculated only for the modifications with 
principal forbearance, however, the median (mean) amount 
forborne was $47,367.61 ($61,848.92) or 22 (25) percent of 
post-modification unpaid principal balance, implying a sizeable 
balloon payment at the maturity of the mortgage.
---------------------------------------------------------------------------
    \132\ Treasury Mortgage Market Data, supra note 111.
---------------------------------------------------------------------------
    Before modification, the median (mean) LTV was 121 (134) 
percent. 471 (27 percent) loans had LTV ratios of under 100 
percent before modification and 299 (17 percent) had LTV ratios 
of under 90 percent before modification.\133\ Modification 
increased the median and mean LTV modestly due to 
capitalization of arrearages and escrow requirements; 
borrowers' actual obligations did not increase as the result of 
modifications. Thus, post-modification, the median (mean) LTV 
was 124 (137) percent. Post-modification, 424 were calculated 
as having under 100 percent LTV and 274 with LTVs under 90 
percent. (See Figure 19.)
---------------------------------------------------------------------------
    \133\ The large number of <90 percent LTV loans in HAMP is likely a 
function of curtailment of income, as even if the LTV would not make 
the loan ineligible for refinancing, lack of sufficient income to 
support the loan would. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The net result of the modifications was that median (mean) 
monthly principal and interest payments dropped $500.25 
($598.49), from $1,419.43 ($1,554.14) to $849.31 ($955.65), a 
35 (39) percent decline. As Figure 20 shows below, HAMP 
modifications resulted in a noticeable decrease in monthly 
principal and interest payments for many borrowers, but 
generally resulted in minimal changes in principal balances.
---------------------------------------------------------------------------
    \134\ Treasury Mortgage Market Data, supra note 111. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
            e. Meeting Affordability Goal
    While the Panel previously questioned whether 31 percent 
front-end DTI was the appropriate affordability target, a 
reduction in front-end DTI to 31 percent will undoubtedly make 
mortgages much more affordable, and in this regard the HAMP 
model is successful in meeting its affordability goal. As noted 
by major mortgage loan servicers Larry Litton of Litton Loan 
Servicing and Allen Jones of Bank of America at the Panel's 
foreclosure mitigation field hearing, the requirement may need 
to be lowered, however, to assist borrowers in arrearages.\136\ 
In particular, it appears that interest rate reductions alone 
are typically sufficient to make monthly payments affordable.
---------------------------------------------------------------------------
    \135\ Treasury Mortgage Market Data, supra note 111.
    \136\ Congressional Oversight Panel, Written Testimony of Litton 
Loan Servicing President and CEO, Larry Litton, Philadelphia Field 
Hearing on Mortgages, at 2-3 (Sept. 24, 2009) (online at 
cop.senate.gov/documents/testimony-092409-litton.pdf) (hereinafter 
``Litton Philadelphia Hearing Written Testimony''); Congressional 
Oversight Panel, Testimony of Bank of America Home Loans Senior Vice 
President for Default Management, Allen H. Jones, Philadelphia Field 
Hearing on Mortgage Foreclosures, at 5 (Sept. 24, 2009) (online at 
cop.senate.gov/documents/testimony-0924090jones.pdf).
---------------------------------------------------------------------------
    Possible Restrictions on Modifications. HAMP may be more 
restricted in its ability to achieve affordability through 
other means. A debate has emerged in the academic literature 
about the importance of the obstacles posed by PSAs to mortgage 
modification. An empirical study by John Patrick Hunt found 
that direct contractual prohibitions on modification are not 
common, although they do occur, and many PSAs are simply 
vague.\137\ The notable exception is that virtually every PSA 
restricts the ability to stretch out a loan's term; loan terms 
may not be extended beyond the final maturity date of other 
loans in the pool. These provisions are designed to limit cash 
flow on securitized mortgages to the term of the securities 
issued against the mortgages. Securitized loans are typically 
all from the same annual vintage give or take a year, which 
means that the ability to stretch out terms is usually limited 
to a year at most. Not surprisingly, HAMP modifications stretch 
out terms by about a year on average.
---------------------------------------------------------------------------
    \137\ Hunt Subprime Contracts Paper, supra note 73.
---------------------------------------------------------------------------
    The inability to stretch out terms for more than a year in 
most cases has a serious impact on HAMP modifications because 
it removes one of the tools and instead encourages principal 
forbearance, which has the result of creating loans with 
amortization periods that are longer than the loan term, 
meaning that a balloon payment of principal will be due at the 
end of the loan.
            f. Securitized vs. Non-Securitized
    Non-HAMP modification data also indicate that there are 
significant differences in modifications between securitized 
and non-securitized loans. OCC/OTS' joint Mortgage Metrics 
Reports for the first and second quarters of 2009 (not covering 
HAMP modifications) indicate that while the majority of 
modifications were on securitized loans, in particular those 
held in private-label pools (see Figure 21, below), very few 
loan modifications have involved principal balance reductions 
or even principal balance deferrals, and almost all principal 
reductions and deferrals were on non-securitized loans.\138\ 
(See Figure 22, below.) Out of 327,518 loan modifications in 
the OCC/OTS data in the first two quarters of 2009, only 17,574 
(5.4 percent) involved principal balance reductions. All but 
eight of those 17,574 principal balance reductions were on 
loans held in portfolio. (See Figure 23, below.) The other 
eight are likely data recording errors.
---------------------------------------------------------------------------
    \138\ Office of the Comptroller of the Currency and Office of 
Thrift Supervision, OCC and OTS Mortgage Metrics Report, First Quarter 
2009 (online at www.occ.treas.gov/ftp/release/2009-77a.pdf) (June 2009) 
(hereinafter ``OCC and OTS First Quarter Mortgage Report''); OCC and 
OTS Second Quarter Mortgage Report, supra note 42.
    \139\ Treasury Mortgage Market Data, supra note 111.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    A similar discrepancy emerges for term extensions. Loans 
guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae/FHA can 
be bought out of a securitized pool and modified, making them 
more like portfolio loans. Thus in the OCC/OTS data for the 
first and second quarters 2009, 60 percent of portfolio loan, 
49 percent of Fannie Mae, 69 percent of Freddie Mac, and 46 
percent of Ginnie Mae modifications involved term extensions, 
but only 7 percent of private-label securitization did so. (See 
Figures 24 and 25, below.)\140\ Whether the heterogeneity 
between modifications of securitized and nonsecuritized loans 
is a function of PSAs or of incentive misalignment between 
servicers and MBS holders is unclear, but there is clearly a 
difference, and this may be responsible for some of the 
difference in redefault rates.\141\ (See Figure 26, below.)
---------------------------------------------------------------------------
    \140\ The ability to stretch out a term is separate from the 
ability to stretch out amortization periods and reduce monthly payments 
by creating a balloon payment at the end of the mortgage. A term 
extension produces a very different looking mortgage than an 
amortization extension alone.
    \141\ The data presented in the OCC/OTS Mortgage Metrics Reports 
has improved steadily from quarter to quarter and it provides one of 
the most valuable sources of information on modifications efforts. 
Currently, however, OCC/OTS data does not break down redefaults by type 
of modification beyond change in payment. Such data are critical for 
gaining an understanding of whether the type of modification affects 
redefaults. The Panel urges OCC and OTS to undertake this analysis in 
future Mortgage Metrics reports, as well as to present redefault rates 
beyond 12 months. OCC and OTS First Quarter Mortgage Report, supra note 
138; OCC and OTS Second Quarter Mortgage Report, supra note 42.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Notwithstanding the significant PSA constraint on term 
extensions that means that HAMP modifications are likely to 
look quite different from portfolio loan modifications as well 
as the evidence from the OCC/OTS Mortgage Metrics Reports, a 
recent working paper from the Federal Reserve Bank of Boston 
argues that there is no difference in the rate at which 
securitized and nonsecuritized loans are being modified; both 
have been modified at exceedingly low rates.\142\ Two recent 
papers disagree with this finding. Professors Anna Gelpern and 
Adam Levitin contend that securitization creates obstacles to 
loan workouts that go beyond the formal contractual language 
analyzed by Hunt.\143\ Professors Tomasz Piskorski, Amit Seru, 
and Vikram Vig analyzed data through the first quarter of 2008 
and concluded that securitized loans are as much as 32 percent 
more likely to go into foreclosure when delinquent than loans 
held directly by banks, and are 21 percent more likely to 
become current within a year of delinquency.\144\
---------------------------------------------------------------------------
    \142\ Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why 
Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, 
and Securitization, Federal Reserve Bank of Boston Working Paper 09-4 
(July 6, 2009) (hereinafter ``Redefaults, Self-Cures, and 
Securitization Paper'').
    \143\ Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein 
Contracts: Workout Prohibitions in Residential Mortgage-Backed 
Securities, 82 Southern California Law Review_(forthcoming 2009) 
(hereinafter ``Gelpern & Levitin Frankenstein Contracts'').
    \144\ Tomasz Piskorski, Amit Seru, & Vikrant Vig, Securitization 
and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage 
Crisis, Chicago Booth School of Business Research Paper No. 09-02 (Aug. 
2009) (online at ssrn.com/abstract=1321646) (hereinafter ``Piskorski, 
Seru, & Vig Renegotiation Paper'').
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            g. Servicer Ramp-up Period
    Treasury has made significant progress towards its goal of 
broad servicer participation; however, signed participation 
agreements do not necessarily mean that servicers are fully 
ready to participate. The Panel recognizes that HAMP in 
particular requires a significant technological infrastructure 
to monitor modifications and servicer payments, and that this 
infrastructure is not something that can be created overnight. 
The infrastructure has to allow many servicers to interface 
with Treasury and Fannie Mae, Treasury's agent for HAMP 
modifications. Servicers use a variety of software platforms, 
and the standard servicing platform, distributed by Lender 
Processing Services, Inc., does not have the ability to process 
modifications. As a result, even as of the end of August 2009, 
servicers still needed to provide hand-extracted data to 
Treasury, which slowed the process.
    While the Panel is sympathetic to the difficulties in 
creating the infrastructure for HAMP, during the ramp-up period 
some homeowners who would have qualified for modifications did 
not have the opportunity. At this point, however, HAMP is up 
and running, and its ability to increase the number of 
modifications depends primarily on servicer staffing 
constraints and homeowner participation. When borrowers contact 
their servicers, either on their own or with the assistance of 
their lenders, they are often unable to make contact with 
someone who can provide accurate, timely information and help 
them obtain a modification.
    As servicers ramp up their programs, many borrowers are 
facing long hold times and repeated transfers and 
disconnections on the telephone, lack of timely responses, lost 
paperwork, and incorrect information from servicers. Judge 
Annette Rizzo of the Court of Common Pleas, First Judicial 
District for Philadelphia County, recently expressed her 
frustration with the lack of clear information about MHA during 
her testimony at the Panel's September hearing.\145\ Judge 
Rizzo is the architect of a foreclosure prevention program in 
Philadelphia that has moved cases through the pipeline more 
quickly by requiring prompt, face-to-face mediation sessions. 
According to Judge Rizzo, there is a need at the national level 
for a hotline or another easy access point for quick resolution 
of questions regarding the interpretation of various aspects of 
the MHA program.\146\
---------------------------------------------------------------------------
    \145\ Congressional Oversight Panel, Testimony of Judge Annette M. 
Rizzo, Court of Common Pleas, First Judicial District, Philadelphia 
County; Philadelphia Mortgage Foreclosure Diversion Program, 
Philadelphia Field Hearing on Mortgage Foreclosures, at 81-83 (Sept. 
24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-
philadelphia.cfm).
    \146\ Id.
---------------------------------------------------------------------------
    There is also evidence that eligible borrowers are being 
denied incorrectly. Eileen Fitzgerald, chief operating officer 
of NeighborWorks America, provided insight into this problem 
during her testimony at the Panel's foreclosure mitigation 
field hearing. Ms. Fitzgerald noted in both her written and 
oral testimony not only reports of such incorrect 
interpretations of the program, but also of delays in 
processing due to servicers misplacing documents or requesting 
duplicate documents, lack of uniform procedures and forms, and 
a need for access to servicers' NPV models to assist borrowers 
and their counselors in understanding why an application may 
have been denied.\147\ Treasury's new requirement that 
servicers provide a reason for denials to both Treasury and to 
borrowers could help to alleviate this.\148\ Denial codes can 
also help protect against discrimination in refinancing. HMDA 
data from 2008 show that 61 percent of African-Americans were 
turned down for a refinancing, 51 percent of Hispanics were 
denied a refinancing, and 32 percent of Caucasians were 
denied.\149\ Clear, prompt denial codes with a right of appeal 
are one way to help prevent possible discrimination and 
disproportionate destabilization of minority neighborhoods.
---------------------------------------------------------------------------
    \147\ Id. Congressional Oversight Panel, Testimony of NeighborWorks 
America Chief Operating Officer, Eileen Fitzgerald, Field Hearing in 
Philadelphia on Mortgage Foreclosures (Sept. 24, 2009) (online at 
cop.senate.gov/documents/testimony-092409-fitzgerald.pdf) (hereinafter 
``Fitzgerald Philadelphia Hearing Testimony'').
    \148\ Alexandra Andrews, Frustrated Homeowners Turn to Media, 
Courts ProPublica (Oct. 1, 2009) (online at www.propublica.org/ion/
bailout/item/frustrated-homeowners-turn-to-media-courts-on-making-home-
affordable-101) (hereinafter ``Andrews Frustrated Homeowners'').
    \149\ Robert B. Avery, et al., The 2008 HDMA Data: The Mortgage 
Market during a Turbulent Year, Federal Reserve Bulletin, at 69 (online 
at www.federalreserve.gov/pubs/bulletin/2009/pdf/hmda08draft.pdf) 
(accessed Oct. 6, 2009).
---------------------------------------------------------------------------
    Externally, borrowers can face language or education 
barriers, both of which can be addressed by trustworthy and 
reliable housing counselors.\150\ Treasury also plans to create 
a web portal to provide information to borrowers and servicers, 
and is working with Freddie Mac, in the GSE's role as 
compliance agent, to develop a ``second look'' process by which 
Freddie Mac will audit a sample of MHA modification 
applications that have been denied.\151\
---------------------------------------------------------------------------
    \150\ House Financial Services Committee, Subcommittee on Financial 
Institutions and Consumer Credit, Testimony of National Council of La 
Raza Legislative Analyst, Graciela Aponte, Mortgage Lending Reform: A 
Comprehensive Review of the American Mortgage System (Mar. 11, 2009) 
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/
aponte031109.pdf).
    \151\ Wheeler Philadelphia Hearing Testimony, supra note 88.
---------------------------------------------------------------------------
    Performance Variations Among Servicers. Substantial 
variation among servicers in performance and borrower 
experience, as well as inconsistent results in converting trial 
modification offers into actual trial modifications, remain 
significant issues.\152\ Through August 2009, of the estimated 
HAMP-eligible 60+ day delinquencies, 19 percent were offered 
trial plans, and 12 percent entered trial modifications.\153\ 
The percentage of HAMP-eligible borrowers entering trial 
modifications varied widely by servicer, from 0 percent to 39 
percent.\154\ This means that more than two-thirds of eligible 
borrowers potentially missed their opportunity to avoid 
foreclosure. Treasury is taking steps to increase the number of 
eligible borrowers who may participate. On July 28, Treasury 
officials met with representatives of the 27 servicers 
participating at that time. At this meeting, servicers pledged 
to increase ``significantly'' the rate at which they were 
performing modifications.\155\ Treasury acknowledges that 
servicers have a ramp-up period: ``Servicers are still working 
to incorporate program features in their systems and 
procedures, adding new program requirements as they are 
introduced.'' \156\
---------------------------------------------------------------------------
    \152\ Campbell Real Estate Agent Survey, supra note 5.
    \153\ Servicer Performance Report, supra note 95.
    \154\ Servicer Performance Report, supra note 95.
    \155\ U.S. Department of Treasury, Administration, Servicers Commit 
to Faster Relief for Struggling Homeowners through Loan Modifications 
(July 29, 2009) (online at financialstability.gov/latest/
07282009.html).
    \156\ Allison COP Testimony, supra note 94, at 4-5.
---------------------------------------------------------------------------
    There has been considerable variation in the number of 
permanent HAMP modifications by servicer, with servicers that 
have required full documentation before commencing a 
modification having significantly higher rates of conversion 
from trial to permanent modifications. Because data on 
permanent modifications is still preliminary, and because of 
the two-month extension that Treasury has granted no/low-
documentation trial modifications to assemble full 
documentation, the Panel is refraining at this point from 
presenting an analysis of servicer-by-servicer conversion rates 
from trial to permanent loans. This is an issue that the Panel 
plans to reexamine in a future report when more robust data is 
available.
    Treasury Efforts to Improve Performance. In recognition of 
this concern, Treasury has prioritized servicer capacity to 
respond to borrowers. While Treasury recognizes that ``capacity 
is key to the success of HAMP,'' \157\ current servicer 
capacity remains an area of concern. In testimony before a 
House Financial Services subcommittee hearing, Treasury 
Assistant Secretary for Financial Institutions Michael Barr 
noted the following:
---------------------------------------------------------------------------
    \157\ Letter from Secretaries Geithner and Donovan to Servicers 
(July 9, 2009) (online at www.housingwire.com/wp-content/uploads/2009/
07/servicer-letter.pdf).

          On July 9, as a part of the Administration's efforts 
        to expedite implementation of HAMP, Secretaries 
        Geithner and Donovan wrote to the CEOs of all of the 
        servicers currently participating in the program. In 
        this joint letter, they noted that there appears to be 
        substantial variation among servicers in performance 
        and borrower experience, as well as inconsistent 
        results in converting trial modification offers into 
        actual trial modifications. They called on the 
        servicers to devote substantially more resources to the 
        program in order for it to fully succeed.\158\
---------------------------------------------------------------------------
    \158\ Barr Hearing Testimony, supra note 87.

    To combat this problem, Treasury has tasked Freddie Mac to 
conduct readiness reviews of participating servicers and report 
the results back to Treasury.\159\
---------------------------------------------------------------------------
    \159\ Barr Hearing Testimony, supra note 87.
---------------------------------------------------------------------------
    Further, Treasury tracks outcomes as an incentive for 
servicers to scale up their operations to meet demand. Treasury 
publishes monthly statistics on HAMP that track, among other 
things, how many eligible borrowers to whom each servicer has 
offered a trial modification and how many have entered trial 
modifications.\160\ Additionally, Treasury is working to 
develop more exacting metrics to measure the quality of 
borrower experience, such as average borrower wait time for 
inbound inquiries, completeness and accuracy of information 
provided to applicants, as well as response time for completed 
applications.\161\
---------------------------------------------------------------------------
    \160\ It is not yet known whether the publication of these reports 
will induce lenders to increase participation. For example, Bank of 
America and Wells Fargo's borrower participation rose sharply after 
showing weak numbers in the first monthly report. However, this could 
have been due to the banks' ramp-up period in implementing the program. 
Servicer Performance Report, supra note 95.
    \161\ U.S. Department of the Treasury, Making Home Affordable 
Program on Pace to Offer Help to Millions of Homeowners (Aug. 4, 2009) 
(online at www.financialstability.gov/latest/tg252.html).
---------------------------------------------------------------------------
            h. Servicer Concerns About the HAMP Program
    Servicers voice a number of criticisms and concerns 
regarding the HAMP program. Failure to address these concerns 
could limit the effectiveness of HAMP. In June, the Panel sent 
a questionnaire to the 14 largest servicers that were not yet 
participating in HAMP.\162\ Of the 13 servicers that responded, 
only two stated that they did not plan to participate in HAMP. 
As primary justification, both of these servicers stated that 
they believed that their own modification programs provided 
borrowers with more aggressive and flexible relief than did 
HAMP, allowing more borrowers to receive modifications. One 
explained that under its own program, it uses ``a more holistic 
review of income and expenses [as compared to] the MHA gross 
income versus primary mortgage debt model.'' Another ``performs 
a disposable income analysis rather than impos[ing] a fixed 
debt-to-income requirement.'' It ``subtract[s] mortgage 
payments, property taxes, homeowners' insurance, verifiable 
utilities, and medical and day care expenses from the 
customer's net income.''
---------------------------------------------------------------------------
    \162\ Surveys were sent to Accredited Home Lenders, American Home 
Mortgage Servicing, American General Finance Inc, Citizens Financial 
Group, Fifth Third Bancorp, HSBC, Home Eq Servicing, ING Bank, Litton 
Loan Servicing, PNC Financial Services Group, Sovereign Bancorp Inc., 
SunTrust Banks Inc., and U.S. Bancorp. Only Accredited Home Lenders 
failed to provide a response. As of August 13, nine of the servicers 
had either already signed up to participate in the program or were in 
the process of signing contracts to participate. Surveys Sent by the 
Panel to Various Loan Servicers (June 30, 2009) (hereinafter ``Survey 
of Lenders'').
---------------------------------------------------------------------------
    The questionnaire asked servicers what they believed to be 
barriers to full participation in HAMP. Among the most common 
responses was that the program required cumbersome 
documentation and trial periods. One servicer suggested 
amending documentation requirements ``to mirror current bank-
owned work-out options.''\163\ A servicer that is choosing not 
to participate in HAMP believed that gathering the required 
documentation would take between 45 to 50 days under HAMP, 
while under the servicer's own program, the average decision 
time, including collection of documents, was 10 to 12 
days.\164\
---------------------------------------------------------------------------
    \163\ Survey of Lenders, supra note 162.
    \164\ Survey of Lenders, supra note 162.
---------------------------------------------------------------------------
    Another perceived barrier to full participation is the 
concern that the program's details continue to change. One 
servicer cited ``on-going clarifications of, and additions to, 
the requirements and guidelines issued by the Treasury and its 
agents, Fannie Mae and Freddie Mac.''\165\ Another stated that 
``the ongoing evolution of program benefits and requirements 
has presented challenges (for example, [the] ability to timely 
recruit, hire, and train staff for functions that are still 
being defined).''\166\ Some servicers reported that it took 
substantial manpower to implement the required system 
changes.\167\ Among the other perceived barriers to full 
participation are questions about servicer liability, 
difficulty in obtaining investor approval to amend servicing 
agreements, different reporting standards between GSEs and 
Treasury, and a lack of flexibility in the escrow requirement.
---------------------------------------------------------------------------
    \165\ Survey of Lenders, supra note 162.
    \166\ Survey of Lenders, supra note 162.
    \167\ Survey of Lenders, supra note 162.
---------------------------------------------------------------------------
    Treasury has made substantial progress towards reaching its 
projection of having 90 percent of HAMP-eligible mortgage debt 
serviced by participating servicers, but more efforts are 
needed before significant percentages of eligible borrowers 
receive modifications.\168\ As servicers take time to implement 
their programs and fully train their staff, families are losing 
their homes. Treasury must encourage and provide support to 
enable servicers to make modifications available to as many 
borrowers as possible, as quickly as possible.
---------------------------------------------------------------------------
    \168\ It is possible that a significant number of HAMP-eligible 
borrowers are receiving modification through servicers' non-HAMP 
programs. Treasury, possibly through Freddie Mac's audit function, 
should compile and analyze this set of modifications, as it does for 
HAMP modifications.
---------------------------------------------------------------------------
            i. Prospects for Long-Term Effectiveness
    The program is completely dependent upon servicers to 
provide adequate capacity and quality in order to make HAMP a 
success. Therefore, it is important to consider the longer term 
prospects for servicers to provide that quality and capacity in 
evaluating the longer term outlook for HAMP.
    HAMP relies on mortgage servicers to perform the 
modifications. Residential mortgage servicers, however, are not 
normally in the modification business.\169\ Residential 
mortgage servicing combines a transaction processing business 
with a loss mitigation business. Transaction processing is a 
business given to automation and economies of scale. Loss 
mitigation, in contrast, involves intense discretion and human 
capital and is cyclic with the occurrence of severe recessions. 
In normal times, loss mitigation is a small part of any 
servicing operation.
---------------------------------------------------------------------------
    \169\ In contrast, the commercial mortgage servicing market is 
designed with the need for loan modifications in mind. Gelpern & 
Levitin Frankenstein Contracts, supra note 143.
---------------------------------------------------------------------------
    While there were some episodes of serious cyclic 
foreclosure, such as in New England in the early 1990s, on the 
whole, mortgage defaults were historically sparse and random, 
so it made little business sense for most servicers, other than 
subprime specialists, to invest in loss mitigation capacity. 
Investors did not want to pay for this capacity, and servicing 
fee arrangements did not budget for it, particularly in light 
of the lack of demand. Because servicers did not invest in loss 
mitigation capacity during boom times, they now lack sufficient 
loss mitigation capacity. There is a limited supply of trained, 
experienced loss mitigation personnel, although it is likely 
that there are many out-of-work underwriters and originations 
personnel available, and the standard servicing computer 
platform lacks the ability to process loan modifications.
    For HAMP to succeed, the entire servicing industry has had 
to shift into a new line of business. To incentivize this 
business model transformation, HAMP offers servicers payments 
for every modified mortgage. This incentive payment is paid on 
top of servicers' regular compensation, which is supposed to 
cover appropriate loss mitigation. At this point, the 
transition and re-tooling period should be over, and servicers' 
loss mitigation units should be expected to be operating at 
capacity.
            j. Incentive Payment Sufficiency
    Incentive payments might be insufficient to offset other 
servicer incentives that push for foreclosure even when 
modification increases the net present value of the loan.\170\ 
As noted by Deborah Goldberg at the Panel's foreclosure 
mitigation field hearing, ``there are many incentives for 
servicers to continue moving a loan toward foreclosure during 
the HAMP review process.''\171\ Servicers typically purchase 
mortgage servicing rights (MSRs) for an upfront payment based 
on the outstanding principal balance of the loans in the 
servicing portfolio. The servicer's pricing of the MSRs depends 
primarily on the servicing fee, anticipated prepayment rates 
(including defaults), and on the anticipated costs of servicing 
the loans. The servicing fee is typically in the range of 25-50 
basis points per annum of the outstanding principal balance of 
the loans in the portfolio and gets paid before investors in 
the mortgages are paid.
---------------------------------------------------------------------------
    \170\ Senate Committee on the Judiciary, Testimony of Professor 
Adam J. Levitin, Helping Families Save Their Homes: The Role of 
Bankruptcy Law, 110th Cong., at 11 (Nov. 19, 2008) (online at 
www.law.georgetown.edu/faculty/levitin/documents/
LevitinSenateJudiciaryTestimony.pdf).
    \171\ Goldberg Philadelphia Hearing Written Testimony, supra note 
99.
---------------------------------------------------------------------------
    Servicers are obligated to advance monthly payments of 
principal and interest on defaulted loans (``servicing 
advances'') to investors until the property is no longer in the 
servicing portfolio (as the result of a refinancing or sale) or 
if the servicer reasonably believes it will not be able to 
recover the servicing advances. While servicers are able to 
recover their servicing advances upon liquidation of the 
property, they are not able to recover the time value of the 
advances; given that timelines of default to foreclosure are 
now in the range of 18-24 months in most parts of the country, 
servicers have significant time-value costs in making servicing 
advances, particularly if they lack low-cost funding sources 
like a depositary base or access to the Federal Reserve's 
Discount Window.
    Because servicers prepay for their MSRs, their 
profitability depends on prepayment speeds and maintaining low 
operations costs. Most servicers hedge their prepayment risk to 
the extent it is an interest rate risk. Some also hedge against 
prepayment speeds due to default risk through buying credit 
default swap protection on either their particular portfolios 
or on indices like the ABX. Servicers, however, are unable to 
hedge against servicing costs effectively, and foreclosures 
impose significant operational costs on servicers.
    Consider a servicer that receives 37.5 basis points per 
year on a mortgage loan with an unpaid principal balance of 
$200,000. The servicer might have paid $1,000 to acquire the 
MSR for that loan. The servicer's annual servicing fee income 
is $750. The servicer will then add to this a much more modest 
amount of float income from investing the mortgage payments 
during the period between when the homeowner pays the servicer, 
and the servicer is required to remit the funds to the 
investors. This income might amount to $20-$40 per year. A 
typical performing loan might cost in the range of $500/year to 
service, which means that the servicer will turn a profit on 
the loan.
    If the loan becomes delinquent, however, it will cost the 
servicer $1,000/year to service, both because of additional 
time and effort involved as well as the cost of servicing 
advances.\172\ The sooner the servicer can foreclose on the 
loan, the sooner the servicer can cut loose a money-losing 
investment. Moreover, the foreclosure itself might present an 
opportunity to levy various ancillary fees that do not need to 
be remitted to investors, but which can instead be retained by 
servicers, such as late fees and property maintenance fees. 
Thus foreclosure can not only cut losses, but it can be an 
affirmative profit center.\173\
---------------------------------------------------------------------------
    \172\ Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
    \173\ Katherine M. Porter, Misbehavior and Mistake in Bankruptcy 
Mortgage Claims, 87 Texas Law Review 121, 127--0928 (2008). 
(hereinafter ``Porter Bankruptcy Mortgage Claims'').
---------------------------------------------------------------------------
    In contrast, if the servicer modifies the defaulted loan, 
the servicer will still lose the time-value of the servicing 
advances it made; will incur a significant administrative cost 
to performing the modification, estimated at as high as 
$1,500;\174\ will have no opportunity to levy additional fees; 
and will assume a risk that there will be a redefault, which 
will add to the servicer's time-value and operations costs. 
While the precise calculations of servicers in these 
circumstances are not known, there is a strong inference that 
servicers' incentives may not be aligned with those of 
investors in the mortgages. Indeed, private mortgage insurers, 
who bear the first loss on defaults on insured loans--making 
them like investors--have recently expressed sufficient concern 
about servicer loss mitigation practices that they have 
insisted on inserting personnel into servicing companies to 
supervise loss mitigation.\175\
---------------------------------------------------------------------------
    \174\ Joseph Mason, Mortgage Loan Modification: Promises and 
Pitfalls, SSRN Working Paper Series (Oct. 3, 2007) (online at 
papers.ssrn.com/sol3/papers.cfm?abstract_id=1027470).
    \175\ Harry Terris and Kate Berry, Pipeline, American Banker vol. 
174, no. 163 (Aug. 27, 2009).
---------------------------------------------------------------------------
    HAMP provides servicers with taxpayer-funded modification 
incentive payments in addition to their preexisting contractual 
payments from investors in order to encourage servicers to 
perform more modifications, to the extent that they would 
maximize net present value. While servicers are contractually 
obligated to maximize value for mortgage investors and are 
already compensated for their services, HAMP provides 
additional, taxpayer-funded compensation for servicers to 
perform the same services. The goal of this extra compensation 
is to make the servicers' incentives look like those of a 
portfolio lender, with the hope that this will negate any 
incentive misalignments that encourage servicers to seek 
foreclosure. If so, both investors and financially distressed 
homeowners will win, as well as the neighbors of the homeowners 
and their communities.
    By all estimates, HAMP incentive payments more than cover 
the cost of modifications, excluding overhead.\176\ The 
incentive payment amounts might still be insufficient, however, 
to counterbalance servicers' incentive to pursue foreclosure 
because servicers are reluctant to invest in a loss mitigation 
business that is unlikely to have long-term value.\177\ 
Moreover, given the limited supply of modification specialists, 
who cannot be trained overnight, the capacity problem may 
simply be impervious to incentive payments of any reasonable 
level. The economics of servicing are still not fully 
understood, and this presents a challenge for any attempt to 
craft an incentive-based modification program.
---------------------------------------------------------------------------
    \176\ Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
    \177\ Redefaults, Self-Cures, and Securitization Paper, supra note 
142.
---------------------------------------------------------------------------
    That said, successful HAMP modifications should result in 
an increase in the value of MSRs by reducing prepayment speeds, 
both due to defaults and to refinancings. Prepayments due to 
refinancings are largely a function of interest rates; as rates 
drop, prepayment speeds increase. Refinancings, however, are 
only possible when there is positive equity.
    HAMP modifications result in extremely low interest rates 
and negative equity. The combination means that HAMP-modified 
loans, to the extent they do not redefault, are unlikely to be 
refinanced. First, HAMP-modified loans have interest rates that 
are initially so low that it is unlikely that the borrower 
could find a lower interest rate.\178\ And second, even if a 
lower rate were available, negative equity precludes 
refinancing. HAMP modifications thus have drastically slow 
prepayment speeds, which boosts the value of MSRs.
---------------------------------------------------------------------------
    \178\ Under the terms of HAMP modification, interest rates are tied 
to the Freddie Mac Primary Mortgage Market Survey rate (market rate) on 
the date that the modification agreement was prepared. If the modified 
rate is below the market rate on this date, the modified rate is fixed 
for the first five years. In the sixth year, the modified rate may 
increase up to one percentage point annually until it reaches the 
market rate listed in the modification agreement. If the modified rate 
equaled or exceeded the market rate when the modification agreement was 
prepared, the modified rate is fixed for the life of the loan.
---------------------------------------------------------------------------
    For example, JPMorgan Chase has reduced interest rates in 
some modifications so they are just enough to cover its 
servicing fee, but left principal balances untouched.\179\ 
Modifications like this ensure that the value of MSRs to the 
servicer will be maximized, as servicing fee income will not be 
reduced (as would occur if principal balances were reduced) and 
refinancing is likely precluded both because of low rates and 
likely negative equity. Unfortunately, while a modification 
like this might maximize value for the servicer, it might not 
be the optimal modification for the homeowner or the investors. 
Thus, while HAMP is aimed at correcting misaligned incentive 
problems, it might actually overcorrect and result in sub-
optimally structured modifications.
---------------------------------------------------------------------------
    \179\ Mike Greggory, Chase Serves Itself First in Mortgage 
Modifications; MBS Bond Holders Up in ARMs, Financial Times (July 27, 
2009) (online at www.ft.com/cms/s/2/a6f6db88-
097aee0911de098c340900144feabdc0.html).
---------------------------------------------------------------------------
    The benefit HAMP could provide to servicers in the form of 
increased MSR values is tempered by the risk that servicers 
assume on a loan redefault. A defaulted loan is worse than a 
prepayment in terms of MSR value, because not only is the 
principal balance of the trust reduced, but the servicer must 
make servicing advances of principal and interest until the 
property is sold from the trust, either at a foreclosure sale 
to a third-party or from REO. While servicing advances are 
reimbursable, no interest is paid on them, resulting in a time-
value loss for the servicer. The time-value costs of a 
defaulted mortgage are one of the largest costs for a servicer, 
especially in a depressed market where foreclosures are taking 
longer and properties are sitting in REO for months if not 
years.
    HAMP payments may well offset the cost of redefault risk 
for servicers, in addition to the costs of modification, which 
are estimated in the $1,000 range.\180\ This raises the 
question of why servicers are not engaged in more 
modifications. The answer may simply be a capacity constraint, 
but another consideration is that it is difficult for servicers 
to determine ex-ante whether a loan will redefault post-
modification and thus figure out the net benefit of 
modification.\181\ If servicers do not believe that 
modifications as a whole are sustainable, they will be 
reluctant to engage in them beyond the likely sustainable ones 
they can cherry-pick. Again, HAMP is designed to address 
servicer reluctance to engage in modifications through 
incentive payments, but this sort of targeted incentive payment 
only makes sense when an economic structure is fully 
understood.
---------------------------------------------------------------------------
    \180\ Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
    \181\ Redefaults, Self-Cures, and Securitization Paper, supra note 
142.
---------------------------------------------------------------------------
    Servicer capacity remains a weak link in the system, and it 
is unclear whether HAMP incentive payments are sufficient to 
change the situation. Servicers may be reluctant to invest in 
modification capacity that will have a limited useful lifespan. 
In addition, there might simply be an inelastic supply of 
modification capacity, which would make modification capacity 
impervious to incentives. Ensuring that modification efforts 
are not hobbled by lack of capacity is essential if HAMP is to 
be successful, but it does not appear that Treasury has 
undertaken any concrete steps to ensure that the capacity issue 
is resolved.
    One possible solution to the problem of servicer incentives 
or capacity constraints is to provide supplemental capacity, 
such as contracting with third-party originators to modify the 
loans as if they were underwriting new loans. Loan modification 
is essentially loan underwriting, which is not where servicer 
talents and expertise lie. While there are coordination and 
privacy issues involved with utilizing third-party originators 
for modifications, third-party originators could provide an 
effective option.
            k. Possible Litigation Risk for Servicers
    HAMP may itself be creating litigation risk for servicers, 
as there is a question about how principal forbearance is to be 
treated by securitization trusts for the purposes of allocating 
cash flow among investors. Treasury has advised that principal 
forbearance should be treated as a loss to the trust, with any 
later payment as a loss recovery, but Treasury has also noted 
that the trust documents control.\182\ Many servicers and 
securitization trustees are therefore reviewing the trust 
documents to determine the appropriate interpretation. To the 
extent that principal forbearance is treated as a loss, 
however, it would reduce the outstanding principal balance in 
the trust, which would reduce the servicer's servicing fee 
compensation.
---------------------------------------------------------------------------
    \182\ U.S. Department of the Treasury, Supplemental Documentation 
FAQs (Aug. 19, 2009) (online at www.hmpadmin.com/portal/docs/
hamp_servicer/hampfaqs.pdf). These two directives can be seen as 
inconsistent.
---------------------------------------------------------------------------

3. Second Lien Program

    One component of HAMP is the Second Lien Program. 
Originally released in mid-February, the plan to assist 
homeowners included an initiative to lower monthly mortgage 
payments, but it failed to address in detail a related issue 
that threatens to undo troubled borrowers: second liens. 
Treasury states that as many as 50 percent of at-risk mortgages 
also have second liens.\183\ Second liens can interfere with 
the success of loan modification programs for three reasons. 
First, modifying the first lien may not reduce homeowners' 
total monthly mortgage payments to an affordable level if the 
second mortgage remains unmodified.\184\ While some homeowners 
might be able to afford a modified first mortgage payment, a 
second unmodified mortgage payment can make monthly mortgage 
payments unaffordable, increasing redefault risk.\185\ Second, 
when a first mortgage is refinanced, the lender doing the 
refinancing will have a junior lien to any previously existing 
mortgagees unless they agree to resubordinate their liens to 
the refinanced mortgage. Second liens, therefore, have the 
potential to hinder or prevent efforts to refinance a first 
mortgage.\186\ Third, second liens also increase the negative 
equity that can contribute to subsequent redefaults.
---------------------------------------------------------------------------
    \183\ MHAP Update, supra note 69. Senate Committee on Banking, 
Housing, and Urban Affairs, Written Testimony of U.S. Department of 
Housing and Urban Development Senior Advisor for Mortgage Finance, 
William Apgar, Preserving Homeownership: Progress Needed to Prevent 
Foreclosures (July 16, 2009) (online at www.hud.gov/offices/cir/
test090716.cfm) (hereinafter ``Apgar Senate Testimony''); House 
Testimony of Dave Stevens, supra note 71.
    \184\ Although HAMP reduces mortgage payments to 31 percent of the 
borrower's monthly income, payments on junior liens are not included in 
that calculation.
    \185\ MHAP Update, supra note 69, at 1.
    \186\ MHAP Update, supra note 69, at 1. The Panel addressed the 
complexities and challenges caused by junior liens in its March 
Oversight Report. The Panel noted that there are multiple mortgages on 
many properties, and that across a range of mortgage 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. Since those debts also encumber the home, 
they must be dealt with in any viable refinancing effort. COP March 
Oversight Report, supra note 21.
---------------------------------------------------------------------------
    Treasury established the Second Lien Program with two 
primary goals in mind: (1) to allow 1 to 1.5 million homeowners 
to benefit from reduced payments on their second mortgages--
equaling up to 50 percent of HAMP participants; and (2) to 
maximize and enhance the effectiveness of Treasury's first lien 
modification program.\187\
---------------------------------------------------------------------------
    \187\ MHAP Update, supra note 69, at 1.
---------------------------------------------------------------------------
    Under the Second Lien Program, when a HAMP modification is 
initiated on a first lien, servicers participating in the 
Second Lien Program will automatically reduce payments on the 
associated second lien by modifying or extinguishing the second 
lien.\188\ Accordingly, Treasury has emphasized that 
modification of a second lien should not delay modification of 
a first lien, but will occur as soon as the second lien 
servicer is able to formulate the terms and make contact with 
the borrower.\189\ However, since the Second Lien Program is 
voluntary, automatic modification of the second lien is not 
required if the second lien servicer chooses not to participate 
in the Second Lien Program. According to the Second Lien 
Program guidelines, the amount of funds available will be 
capped based upon each servicer's Servicer Participation 
Agreement (SPA).\190\ Treasury will formulate each servicer's 
initial program participation cap by ``estimating the number of 
modifications and extinguishments expected to be performed by 
each servicer'' during the life of HAMP.\191\ Second lien 
modification does not go into effect ``until the first lien 
modification becomes effective under HAMP'' and the borrower 
has made each second lien trial period payment ``by the end of 
the month in which it is due.''\192\
---------------------------------------------------------------------------
    \188\ U.S. Department of Housing & Urban Development, Prepared 
Remarks for Secretary of Housing and Urban Development Shaun Donovan at 
the Mortgage Bankers Association National Policy Conference (Apr. 24, 
2009) (online at www.hud.gov/news/speeches/200909040929.cfm); MHAP 
Update, supra note 69, at 4.
    \189\ MHAP Update, supra note 69, at 4.
    \190\ SLMP Supplemental Directive, supra note 74.
    \191\ Id. It should be noted that Supplemental Directive 09-05 
provides guidance to servicers for implementation of the Second Lien 
Program for second liens that are not owned or guaranteed by Fannie Mae 
or Freddie Mac--that is, so-called ``non-GSE second liens.'' The 
Directive explicitly directs servicers of second liens owned or 
guaranteed by Fannie Mae or Freddie Mac to refer to the Second Lien 
Program guidance provided by those entities.
    \192\ Id. A trial period is not required if a borrower is current 
on the existing second lien and the current payment amount is equal to 
or more then the monthly payment that will be due following the second 
lien modification.
---------------------------------------------------------------------------
    The Second Lien Program has several eligibility factors. 
First, only second liens originated on or before January 1, 
2009 are eligible for a modification or extinguishment under 
this program.\193\ Second, only second liens with an unpaid 
principal balance equal to or greater than $5,000 are eligible 
for modification or cost share payments, while there is no such 
limitation with respect to any extinguishment of second 
liens.\194\ Third, borrowers can participate in the program 
provided that they have fully executed a Second Lien Program 
modification agreement or entered into a trial period plan with 
the servicer by December 31, 2012.\195\
---------------------------------------------------------------------------
    \193\ Id.
    \194\ Id.
    \195\ Id.
---------------------------------------------------------------------------
    During his testimony before the Senate Committee on 
Banking, Housing, and Urban Affairs in July, Assistant 
Secretary Allison noted that the five banks that aggregately 
account for over 80 percent of the second liens are in 
negotiations to participate in the Second Lien Program.\196\
---------------------------------------------------------------------------
    \196\ Allison Senate Testimony, supra note 105.
---------------------------------------------------------------------------
    The Second Lien Program also contains a ``pay-for-success'' 
structure similar to the first lien modification program. 
Servicers can be paid $500 up-front for a successful 
modification and then receive successive payments of $250 per 
year for three years, provided that the modified first loan 
remains current.\197\ If borrowers remain current on their 
modified first loan, they can receive payments of up to $250 
per year for as many as five years.\198\ This means that 
borrowers could receive as much as $1,250 for making payments 
on time. These borrower incentives would be directed at paying 
down the principal on the first mortgage, helping borrowers 
build equity in their home.\199\
---------------------------------------------------------------------------
    \197\ SLMP Supplemental Directive, supra note 74.
    \198\ MHAP Update, supra note 69, at 3; SLMP Supplemental 
Directive, supra note 74.
    \199\ MHAP Update, supra note 69, at 3; SLMP Supplemental 
Directive, supra note 74.
---------------------------------------------------------------------------
    The program gives participating servicers two options: (1) 
reduce borrower payments, or (2) extinguish the lien. The 
servicer's decision as to which option to pursue is based 
solely on the financial information provided by the borrower in 
conjunction with the HAMP modification.\200\
---------------------------------------------------------------------------
    \200\ SLMP Supplemental Directive, supra note 74.
---------------------------------------------------------------------------
    Under the first option, the MHA Program will share with 
lenders the cost of reducing second mortgage payments for 
homeowners.\201\ For amortizing loans (loans with monthly 
payments of interest and principal), Treasury shares the cost 
of reducing the interest rate on the second mortgage to one 
percent.\202\ The servicer reduces the loan interest rate to 
one percent, forbears principal in the same proportion as in 
the first lien modification, and extends the repayment and 
amortization schedule to match the modified first lien.\203\ In 
turn, Treasury pays the servicer the incentive and success fees 
for making the modification, plus pays the lender half the 
difference between the interest rate on the first lien and one 
percent.\204\ For interest-only loans, MHA shares the cost of 
reducing the interest rate on the second mortgage to two 
percent.\205\ The servicer reduces the interest rate to two 
percent, forbears principal in the same proportion as in the 
first lien modification, and extends the repayment and 
amortization schedule to match the first lien.\206\ Treasury 
pays the servicer an amount equal to half of the difference 
between (a) the lower of the contract rate on the second lien 
and the interest rate on the first lien as modified and (b) two 
percent.\207\ For both amortizing and interest-only loans that 
have been modified, the interest rate rises after five years, 
just as happens under HAMP. At the five-year mark, the interest 
rate in the Second Lien Program increases to the rate that is 
being charged at that time on the modified first mortgage.\208\
---------------------------------------------------------------------------
    \201\ MHAP Update, supra note 69, at 3; SLMP Supplemental 
Directive, supra note 74.
    \202\ MHAP Update, supra note 69, at 2; SLMP Supplemental 
Directive, supra note 74.
    \203\ MHAP Update, supra note 69, at 2; SLMP Supplemental 
Directive, supra note 74.
    \204\ MHAP Update, supra note 69, at 2; SLMP Supplemental 
Directive, supra note 74.
    \205\ MHAP Update, supra note 69, at 2; SLMP Supplemental 
Directive, supra note 74.
    \206\ MHAP Update, supra note 69, at 2-3; SLMP Supplemental 
Directive, supra note 74.
    \207\ MHAP Update, supra note 69, at 2-3; SLMP Supplemental 
Directive, supra note 74.
    \208\ MHAP Update, supra note 69, at 2-3; SLMP Supplemental 
Directive, supra note 74.
---------------------------------------------------------------------------
    As an alternative to modifying the second lien, lenders/
investors have the option to extinguish second liens in 
exchange for a lump-sum payment from Treasury under a pre-set 
formula.\209\ While eligible first lien modifications will not 
require any participation by second lien holders, these 
incentives to extinguish second liens on loans modified under 
the program are intended to reduce the borrower's overall 
indebtedness and improve loan performance.\210\ This option is 
intended to allow second lien holders ``to target principal 
extinguishment to the borrowers where extinguishment is most 
appropriate.''\211\ Servicers will be eligible to receive 
compensation when they contact second lien holders and 
extinguish valid junior liens (according to a schedule 
formulated by Treasury, depending in part on combined loan-to-
value).\212\ Servicers will be reimbursed for the release 
according to the specified schedule, and will also receive an 
extra $250 for obtaining a release of a valid second lien.\213\ 
For example, for loans that are more than 180 days past due at 
the time of modification, the lender/investor will be paid 
three cents per dollar extinguished.\214\ For loans less than 
180 days past due, Treasury will pay second lien holders a 
specified amount for each dollar of unpaid principal balance 
extinguished.\215\
---------------------------------------------------------------------------
    \209\ MHAP Update, supra note 69, at 2.
    \210\ MHA March Update, supra note 80, at 5-6.
    \211\ MHAP Update, supra note 69, at 3.
    \212\ MHA March Update, supra note 80, at 5-6.
    \213\ MHA March Update, supra note 80; SLMP Supplemental Directive, 
supra note 74.
    \214\ MHAP Update, supra note 69, at 3; SLMP Supplemental 
Directive, supra note 74.
    \215\ MHAP Update, supra note 69, at 3; SLMP Supplemental 
Directive, supra note 74.
---------------------------------------------------------------------------
    The program is not yet operational, therefore no loans have 
been modified under the initiative. Without officially 
participating servicers and lenders and any preliminary data, 
the Panel is unable to determine whether or not the Second Lien 
Program will be able to eliminate the significant obstacle that 
second liens can present to loan modification.

4. Home Price Decline Protection Program

    Building on ideas from the FDIC, Treasury has also 
developed a price decline protection initiative with the 
primary purpose of increasing the number of modifications 
completed under HAMP in those markets hardest hit by falling 
home prices.\216\
---------------------------------------------------------------------------
    \216\ HAMP Supplemental Directive, supra note 77; Allison Senate 
Testimony, supra note 105.
---------------------------------------------------------------------------
    Treasury's articulated purpose for the Home Price Decline 
Protection (HPDP) is to encourage HAMP modifications in areas 
where homes have lost the most value. It does this by working 
to alleviate mortgage holder/investor concerns that recent home 
price declines may persist and ``offset any incremental 
collateral losses on modifications that do not succeed.''\217\ 
Lenders may be more willing to offer modifications if potential 
losses are partially covered.
---------------------------------------------------------------------------
    \217\ House Testimony of Dave Stevens, supra note 71.
---------------------------------------------------------------------------
    There are several factors relating to HPDP eligibility. 
First, all HAMP loan modifications begun after September 1, 
2009 are eligible for HPDP payments.\218\ As of September 1, 
HPDP payments became operational and were included in NPV 
calculations.\219\ Treasury has made clear that no incentives 
will be provided if: (1) the servicer has not entered into a 
HAMP Servicer Participation Agreement; (2) the borrower did not 
successfully complete the trial period and execute a HAMP 
modification agreement; or (3) the HAMP loan modification did 
not reduce the borrower's monthly mortgage payment by at least 
six percent.\220\ In addition, HPDP incentive compensation will 
terminate if the borrower loses good standing under HAMP (i.e., 
if he or she misses three successive payments on a HAMP 
modification) or if the borrower pays off the mortgage loan 
balance in full.\221\ Second, mortgage loans that are owned or 
guaranteed by Fannie Mae or Freddie Mac are not eligible for 
HPDP incentive compensation.\222\
---------------------------------------------------------------------------
    \218\ U.S. Department of the Treasury, Treasury Announces Home 
Price Decline Protection Incentives (July 31, 2009) (online at 
www.financialstability.gov/latest/tg_07312009.html).
    \219\ Barr Hearing Testimony, supra note 87.
    \220\ HAMP Supplemental Directive, supra note 77.
    \221\ HAMP Supplemental Directive, supra note 77.
    \222\ HAMP Supplemental Directive, supra note 77.
---------------------------------------------------------------------------
    Program incentive payments are based upon the total number 
of modified loans that successfully complete the modification 
trial period and remain in the HAMP program. The HPDP incentive 
is structured as a simple cash payment on all eligible 
loans.\223\ Each successful loan modification will be eligible 
for an HPDP incentive, up to a total cap for HPDP incentives of 
$10 billion (from the $50 billion designated for HAMP using 
TARP funding), but the actual amount spent will be dependent 
upon housing price trends.\224\ Upon the completion of a 
successful trial modification, the lender/investor accrues 1/
24th of the HPDP incentive per month for 24 months.\225\ 
Incentive payments are calculated based on a Treasury formula 
incorporating an estimate of the projected home price decline 
over the next year based on changes in average local market 
home prices over the two previous quarters, the unpaid 
principal balance of the mortgage loan prior to HAMP 
modification, and the mark-to-market loan-to-value ratio of the 
mortgage loan prior to HAMP modification.\226\ Incentives are 
to be paid on the first- and second-year anniversaries of the 
borrower's first trial payment due date under HAMP.\227\ In 
other words, the incentive payments on all modified mortgages 
will help cover the ``incremental collateral loss on those 
modifications that do not succeed.''\228\
---------------------------------------------------------------------------
    \223\ MHA March Update, supra note 80, at 5.
    \224\ MHA May Update, supra note 79. According to the HPDP 
guidelines, the amount of funds available to pay HPDP will be capped 
based upon each servicer's servicer participation agreement. Treasury 
will formulate each servicer's initial program participation cap by 
estimating the number of modifications expected to be performed by each 
servicer during the life of HAMP. HAMP Supplemental Directive, supra 
note 77.
    \225\ MHA May Update, supra note 79.
    \226\ HAMP Supplemental Directive, supra note 77.
    \227\ HAMP Supplemental Directive, supra note 77; Secretaries 
Geithner, Donovan Announcement, supra note 78.
    \228\ Secretaries Geithner, Donovan Announcement, supra note 78.
---------------------------------------------------------------------------
    Because the program became active quite recently, 
performance data are not available. Treasury has not specified 
the number of loans it estimates will be covered by HPDP. All 
loans eligible for HPDP payments are also covered by incentive 
payments under the first lien program. As the Government 
Accountability Office (GAO) has noted, loans requiring a 
mandatory modification under the first lien program would 
nonetheless be eligible for additional payments under this 
program.\229\ Treasury has not offered any estimates of the 
incremental modifications created by this program--that is to 
say, the number of lenders who agree to participate only 
because of the additional coverage against losses available 
through the HPDP program, plus the number of non-mandatory 
modifications that lenders may be willing to make because of 
the additional protection against losses. Without such 
information, it is unclear why the program should provide 
additional payments for modifications that would have been made 
anyway.
---------------------------------------------------------------------------
    \229\ GAO HAMP Report, supra note 98, at 23.
---------------------------------------------------------------------------

5. Foreclosure Alternatives Program (FAP)

    Treasury has also developed an initiative to limit the 
impact of foreclosure when loan modifications cannot be 
performed. On May 14, Treasury Secretary Geithner and HUD 
Secretary Donovan announced new details on the Foreclosure 
Alternatives Program, an additional MHA program to help 
homeowners facing foreclosure. Under the FAP, Treasury will 
provide servicers with incentives to pursue alternatives to 
foreclosures, such as short sales or the taking of deeds-in-
lieu of foreclosure.\230\ A short sale occurs when the borrower 
is unable to pay the mortgage and the servicer allows the 
borrower to sell the property at its current value, regardless 
of whether the sale covers the remaining balance on the 
mortgage. The borrower must list and actively market the home 
at its fair value,\231\ and the sales transaction must be 
conducted at arm's length, with all proceeds after selling 
costs going towards the discounted mortgage payoff.\232\ If the 
borrower lists and actively markets the home but is unable to 
sell within the agreed-upon time frame, the servicer may resort 
to a deed-in-lieu transaction, where the borrower voluntarily 
transfers ownership of the property to the servicer, so long as 
the title is unencumbered.\233\
---------------------------------------------------------------------------
    \230\ MHA March Update, supra note 80.
    \231\ The servicer will independently establish both property value 
and the minimum acceptable net return on the property, and will notify 
the borrower of an acceptable list price and any permissible price 
reductions. The price can be determined based on one of two factors: 
(1) a property appraisal, or (2) one or more broker price opinions 
dated within 120 days of the short sale agreement. MHA May Update, 
supra note 79.
    \232\ MHA May Update, supra note 79.
    \233\ MHA May Update, supra note 79.
---------------------------------------------------------------------------
    Since Treasury recognizes that the MHA program will not 
help every at-risk homeowner or prevent all foreclosures, 
Treasury's primary objective for the FAP is to assist 
homeowners who cannot afford to remain in their homes by 
developing an alternative to foreclosure that results in their 
successful relocation to an affordable home.\234\ While short 
sale and deed-in-lieu transactions may avoid depressing home 
prices in an individual neighborhood, as foreclosures do, this 
may be offset by the effect of putting more inventory on the 
broader housing market when there is already a substantial 
overhang.
---------------------------------------------------------------------------
    \234\ MHA May Update, supra note 79.
---------------------------------------------------------------------------
    Treasury designed the FAP to be used in those cases where 
the borrower is generally eligible for an MHA loan 
modification, such as having a loan originated before January 
1, 2009, on an owner-occupied property in default, but does not 
qualify or is unable to maintain payments during the trial 
period or modification.\235\ Eligible borrowers can participate 
until December 31, 2012. Prior to resorting to foreclosure, 
servicers participating in HAMP must evaluate eligible 
borrowers to determine if a short sale is appropriate.\236\ 
This determination is based on a number of factors, including 
property condition and value, average marketing time in the 
community where the property is located, the condition of title 
including the presence of any junior liens,\237\ along with the 
servicer's finding that the net sales proceeds of the property 
are anticipated to exceed its recovery through 
foreclosure.\238\ If the servicer determines that a short sale 
would be appropriate, the borrower will have at least 90 
days\239\ to market and sell the property, using a licensed 
real estate professional experienced in selling properties in 
the vicinity.\240\ No foreclosure sale can occur during the 
agreed-upon marketing period, provided that the borrower is 
making good-faith efforts to sell the property.\241\ Servicers 
are not permitted to charge borrowers any fees for 
participating in the FAP.\242\ Participating servicers must 
comply with program requirements so long as they do not 
conflict with contractual agreements with investors.
---------------------------------------------------------------------------
    \235\ Secretaries Geithner, Donovan Announcement, supra note 78; 
MHA May Update, supra note 79.
    \236\ MHA May Update, supra note 79.
    \237\ For the property to be sold as a short sale or deed-in-lieu, 
all junior liens, mortgages or other debts against the property must be 
cleared, unless the servicer has a ``reasonable belief'' that all liens 
on the property can be cleared. MHA May Update, supra note 79.
    \238\ MHA May Update, supra note 79.
    \239\ There is a maximum marketing period of one year for the 
property in order to ensure that steps are being taken as quickly as 
possible to complete the short sale and deed-in-lieu process. MHA May 
Update, supra note 79.
    \240\ MHA May Update, supra note 79.
    \241\ MHA May Update, supra note 79.
    \242\ MHA May Update, supra note 79.
---------------------------------------------------------------------------
    The FAP facilitates both short sales and deeds-in-lieu by 
providing incentive payments to borrowers, junior-lien holders, 
and servicers, similar in structure and amount to MHA incentive 
payments. Servicers can receive incentive compensation of up to 
$1,000 for each successful completion of a short sale or deed-
in-lieu.\243\ Borrowers are eligible for a payment of $1,500 in 
relocation expenses in order to effectuate short sales and 
deeds-in-lieu of foreclosure.\244\ The short sale agreement, 
upon the servicer's option, may also include a condition that 
the borrower agrees to ``deed the property to the servicer in 
exchange for a release from the debt if the property does not 
sell within the time specified in the Agreement or any 
extension thereof.''\245\ In such cases, the borrower agrees to 
vacate the property within 30 days and, upon performance, 
receives $1,500 from Treasury to assist with relocation 
costs.\246\ Treasury has also agreed to share the cost of 
paying junior lien holders to release their claims by matching 
$1 for every $2 paid by investors, for a maximum total Treasury 
contribution of $1,000.\247\ Payments are made upon the 
successful completion of a short sale or deed-in-lieu.
---------------------------------------------------------------------------
    \243\ MHA May Update, supra note 79.
    \244\ MHA March Update, supra note 80; MHA May Update, supra note 
79.
    \245\ MHA May Update, supra note 79.
    \246\ MHA May Update, supra note 79. This amount is in addition to 
any funds the servicer may provide to the borrower.
    \247\ MHA May Update, supra note 79.
---------------------------------------------------------------------------
    The Program also contains a streamlined process for 
completing short sale transactions. Treasury will provide 
standardized documentation, including a short sale agreement 
and an offer acceptance letter, which will outline marketing 
terms, the rights and responsibilities of all parties, and 
identify timeframes for performance.\248\ With the use of 
standardized documents, Treasury expects that the complexity of 
these transactions will be minimized, increasing the number of 
short sale transactions. Other program features include limits 
on commission reductions.
---------------------------------------------------------------------------
    \248\ MHA May Update, supra note 79.
---------------------------------------------------------------------------
    The remaining details of the program are still being 
finalized, and Treasury plans to announce them once they are 
completed.\249\ Treasury has also not announced the number of 
borrowers it anticipates will be assisted under FAP.
---------------------------------------------------------------------------
    \249\ House Testimony of Dave Stevens, supra note 71.
---------------------------------------------------------------------------

6. HOPE for Homeowners

    HOPE for Homeowners is part of the Housing and Economic 
Recovery Act of 2008 (HERA), signed into law in July 2008.\250\ 
It is intended to help borrowers who are having difficulty 
making payments on their mortgages but who can afford an FHA-
insured loan by refinancing the borrower into an FHA loan.\251\ 
The program also directly addresses the problem of underwater 
mortgages by requiring reduction in the principal balance of 
the loan.\252\ Like MHA, it is a federal program, but is not 
part of TARP and is run through HUD, not Treasury, although it 
has subsequently utilized some TARP funding. Unfortunately, it 
has had little impact thus far.
---------------------------------------------------------------------------
    \250\ Pub. L. No. 110-289 Sec. Sec. 1401-04.
    \251\ The purpose of the program is:
    (1) to create an FHA program, participation in which is voluntary 
on the part of homeowners and existing loan holders to insure 
refinanced loans for distressed borrowers to support long-term, 
sustainable homeownership; (2) to allow homeowners to avoid foreclosure 
by reducing the principal balance outstanding, and interest rate 
charged, on their mortgages; (3) to help stabilize and provide 
confidence in mortgage markets by bringing transparency to the value of 
assets based on mortgage assets; (4) to target mortgage assistance 
under this section to homeowners for their principal residence; (5) to 
enhance the administrative capacity of the FHA to carry out its 
expanded role under the HOPE for Homeowners Program; (6) to ensure the 
HOPE for Homeowners Program remains in effect only for as long as is 
necessary to provide stability to the housing market; and (7) to 
provide servicers of delinquent mortgages with additional methods and 
approaches to avoid foreclosure.
    12 U.S.C. Sec. 1715z-23(b). The mortgage must have been taken out 
prior to January 1, 2008, all information on the original mortgage must 
be true, and the homeowner must not have been convicted of fraud. Id.
    \252\ White House Office of Press Secretary, President Obama Signs 
the Helping Families Save Their Homes Act and the Fraud Enforcement and 
Recovery Act (May 20, 2009) (online at www.whitehouse.gov/
the_press_office/Reforms-for-American-Homeowners-and-Consumers-
President-Obama-Signs-the-Helping-Families-Save-their-Homes-Act-and-
the-Fraud-Enforcement-and-Recovery-Act/); Jessica Holzer, Dispute With 
Banks Continues To Dog U.S. Mortgage Relief Program, Wall Street 
Journal (Sept. 23, 2009) (online at online.wsj.com/article/BT-CO-
20090923-709566.html) (hereinafter ``Holzer Mortgage Relief Article'').
---------------------------------------------------------------------------
    HUD announced the original program details in October 2008. 
Voluntary for all participants, it requires lenders to write 
down the principal of the mortgage to 90 percent of the value 
of the property.\253\ Though the original program did not 
provide any monetary incentives for principal reduction, a 
lender would avoid the expenses of foreclosure and the 
possibility that the home would sell for less than 90 percent 
of its value. Also, as discussed below, under the current 
program the lender will benefit from any equity created as well 
as future appreciation in the home. EESA amended the Housing 
and Economic Recovery Act, providing HUD with greater authority 
under the program and providing borrowers with more flexibility 
under the program. Revised program details were released in 
November 2008, aiming to ``reduce the program costs for 
consumers and lenders alike while also expanding eligibility by 
driving down the borrower's monthly mortgage payments.''\254\ 
Among other things, these changes increased the LTV ratio to 
96.5 percent and allowed lenders to extend the loan's term from 
30 to 40 years.\255\
---------------------------------------------------------------------------
    \253\ U.S. Department of Housing and Urban Development, Fact Sheet: 
HOPE for Homeowners to Provide Additional Mortgage Assistance to 
Struggling Homeowners (accessed Oct. 6, 2009) (online at www.hud.gov/
hopeforhomeowners/pressfactsheet.cfm).
    \254\ U.S. Department of Housing and Urban Development, Bush 
Administration Announces Flexibility for ``HOPE for Homeowners'' 
Program (Nov. 19, 2008) (online at www.hud.gov/news/
release.cfm?content=pr08-178.cfm).
    \255\ Id.
---------------------------------------------------------------------------
    A unique feature of HOPE for Homeowners is that 
participating homeowners are required to share with FHA both 
the equity created at the beginning of the new mortgage and a 
portion of the future appreciation in the home.\256\ FHA will 
receive 100 percent of the equity if the home is sold during 
the first year, and will reduce its claim by 10 percent each 
year until after the fifth year of the agreement, when the 
level settles at a 50 percent split between the FHA and the 
homeowner.\257\ The program also requires the borrower to share 
any future home price appreciation with the FHA in a 50/50 
split that remains constant throughout the life of the 
loan.\258\ If there is no equity or appreciation in the home 
when the homeowner sells or refinances, the homeowner is not 
required to pay anything to FHA.\259\
---------------------------------------------------------------------------
    \256\ Pub. L. No. 110-289 Sec. 257(k). Equity sharing is a little 
known financing method by which a non-resident investor provides 
capital and receives a portion of any equity in the home. The bottom 
line in equity sharing is appreciation; if the home does not appreciate 
in value, then the non-resident investor will receive no benefit from 
the arrangement. Id.
    \257\ U.S. Department of Housing and Urban Development, Basic 
Consumer Facts about the HOPE for Homeowners Program (Oct. 2, 2008) 
(online at www.hud.gov/hopeforhomeowners/consumerfactsheet.cfm). HUD 
provides an example of how this will work. For a home currently worth 
$200,000, the mortgage would be written down to $180,000, providing the 
homeowner with $20,000 equity. If the homeowner sold or refinanced 
within one year, he or she would have to pay 100 percent of the equity 
received, or all $20,000, to FHA. If the home were sold or refinanced 
in the second year, then FHA would receive 90 percent of the equity, or 
$18,000. The percentages decrease by 10 percent a year, until they 
level out after year five at 50 percent shared.
    \258\ Id. In the example stated above, if the homeowner sold the 
home for $250,000 at any point in the future, FHA would receive $25,000 
of the $50,000 appreciation in the home.
    \259\ Federal Housing Administration, HOPE for Homeowners Equity 
Sharing (accessed Oct. 6, 2009) (online at www.fha.com/
hope_for_homeowners_equity.cfm).
---------------------------------------------------------------------------
    The Helping Families Save Their Homes Act of 2009 further 
amended the program in May 2009.\260\ An impetus for the 
amendments was the low participation in the program.\261\ 
Senator Dodd explained that, ``While the intentions for the 
bill were high, the reality is, the bill didn't even come close 
to achieving the goals those of us who crafted it thought it 
would.''\262\ This bill added two incentives for servicers to 
participate in the program. Prior to this, there had been no 
incentive written into the law for servicer participation. The 
Helping Families Save Their Homes Act added incentive payments 
to servicers. These incentive payments closely approximate MHA 
incentive payments.\263\ The incentive payments are funded 
through TARP.\264\
---------------------------------------------------------------------------
    \260\ Pub. L. No. 111-22 Sec. 202.
    \261\ Comments of Senator Harry Reid, Congressional Record--Senate: 
S5184 (May 6, 2009).
    \262\ Comments of Chris Dodd, Congressional Record--Senate: S5003 
(May 1, 2009).
    \263\ Pub. L. No. 111-22 Sec. 202(a)(11).
    \264\ Pub. L. No. 111-22 Sec. 202(b).
---------------------------------------------------------------------------
    Second, the appreciation-sharing structure was changed: HUD 
must now share with first or second lien holders the future 
appreciation up to the appraised value of the property when the 
existing loan was first issued. The portion of appreciation 
shared with lien holders comes out of the 50 percent FHA 
share.\265\ The lien holders do not, however, receive a portion 
of the equity sharing. The appreciation sharing could be an 
incentive to lenders otherwise wary of writing down the 
principal of the loan. This compensation to second lien holders 
could also be crucial to the success of the program. Second 
lien holders are often the sticking point in mortgage 
modifications, and providing them with a share of future 
appreciation in the home could incentivize them to agree to the 
modification. Without direct financial incentives, lenders had 
limited reasons to participate in the program, as demonstrated 
by the lack of participation. Because the loans are underwater, 
junior lien holders are out of the money and only stand to gain 
by holding out until prices increase, absent incentives; the 
direct incentive payments and appreciation sharing may draw 
more lender interest. Allowing lenders to also participate in 
equity sharing could further increase lender participation.
---------------------------------------------------------------------------
    \265\ Pub. L. No. 111-22 Sec. 202(a)(6)(C).
---------------------------------------------------------------------------
    HOPE for Homeowners was originally predicted to help 
400,000 homeowners. Though it is still in effect and running 
concurrent to MHA, it has seen little success. It is doubtful 
whether this goal will be reached. By January 24, 2009, it had 
closed 22 loans, and had 442 applications for which the lender 
intended to approve the borrower for the program.\266\ By 
September 23, 2009, only 94 loans had closed, and lenders had 
stated an intention to approve an additional 844 
applications.\267\ These numbers do not reflect the program as 
revised by the May 2009 amendments, as they have not yet been 
enacted. Though the revised program will be rolled out soon, 
HUD has still not reached agreement with large national banks 
and their regulators about how much payment will be required to 
extinguish second liens.\268\ HUD still believes that the 
program will serve a ``substantial niche'' of borrowers, 
especially those with no second mortgage.\269\ There is also a 
concern that servicers, already overwhelmed with MHA 
modification requests, will not be willing to complete the 
additional work required by HOPE for Homeowners.\270\ Although 
HUD continues to work on the program and has plans to re-launch 
the program, it appears unlikely at this time that HOPE for 
Homeowners will play more than a minor role in providing 
foreclosure relief.
---------------------------------------------------------------------------
    \266\ U.S. Department of Housing and Urban Development, HOPE for 
Homeowners Program Monthly Report to Congress (Jan. 2009) (online at 
portal.hud.gov/portal/page/portal/FHA_Home/lenders/
h4h_monthly_reports_to_congress/
H4H%20Report%20to%20Congress%20January.pdf). Although HUD is 
statutorily required to submit monthly reports to Congress on the 
progress of the program, January 2009 appears to be the latest report 
available. Id.
    \267\ Holzer Mortgage Relief Article, supra note 252.
    \268\ Holzer Mortgage Relief Article, supra note 252.
    \269\ Holzer Mortgage Relief Article, supra note 252.
    \270\ Holzer Mortgage Relief Article, supra note 252; Statistics 
provided by U.S. Department of Housing and Urban Development to the 
Panel. Interestingly, since June 2009, there are no applications which 
lenders have announced an intention to approve. This could be because 
lenders are waiting for formal implementation of the May amendments to 
the program.
---------------------------------------------------------------------------

7. Other Federal Efforts Outside of TARP

    While the federal government's primary foreclosure 
mitigation efforts are embodied in MHA or otherwise linked to 
the MHA program through TARP funding, there are other 
complementary federal efforts. The Federal Deposit Insurance 
Corporation (FDIC) has established a loan modification program 
that is a mandatory component of all FDIC residential mortgage 
loss-sharing agreements with purchasers of failed banks' 
assets.\271\ Between January 2008 and early September 2009, the 
FDIC entered into 53 such loss-sharing agreements,\272\ which 
cover potential losses on more than $50 billion in loans, 
including both residential and commercial mortgages.\273\ Many 
of the loss-sharing deals involve loans that were originated by 
small banks that have since failed; however, some of the loans 
were made by larger lenders, including IndyMac and Downey 
Savings and Loan.\274\ Under the FDIC Mortgage Loan 
Modification Program, delinquent borrowers who received 
mortgages from those failed banks may be eligible for a 
modification.
---------------------------------------------------------------------------
    \271\ Loss sharing agreements allow the FDIC to sell loans that 
otherwise would be difficult if not impossible to unload. Under these 
agreements, the FDIC agrees to cover 80 percent of the acquiring bank's 
losses on certain loans that it buys, up to a specified limit. On 
losses above the limit, the FDIC agrees to cover 95 percent of the 
acquiring bank's losses.
    \272\ Tami Luhby, FDIC Pushes Mortgage Help for Jobless, 
CNNMoney.com (Sept. 11, 2009) (online at money.cnn.com/2009/09/11/news/
economy/forbearance_unemployment/index.htm).
    \273\ Federal Deposit Insurance Corporation discussions with Panel 
staff, Sept. 10, 2009.
    \274\ Binyamin Applebaum, FDIC Seizes Three Banks, Expanding Loan-
Relief Effort, Washington Post (Nov. 22, 2008) (online at 
www.washingtonpost.com/wp-dyn/content/article/2008/11/21/
AR2008112104099.html).
---------------------------------------------------------------------------
    The FDIC's program is generally quite similar to HAMP. Both 
programs apply to residential mortgages that are more than 60 
days delinquent. Both use an NPV test to determine the 
estimated difference between the amount the lender would earn 
from a foreclosure sale versus the amount that a loan 
modification would yield. Both programs use standardized 
methods--reducing interest rates, extending the term of the 
loan, and forbearing principal--to reduce borrowers' mortgage 
payments in order to decrease their debt-to-income ratio.\275\ 
Not all of the details of the two programs are the same, 
though. For instance, HAMP allows interest rates to be reduced 
to as low as 2 percent, while the lowest interest rate that can 
be charged under the FDIC program is 3 percent.\276\ Also, 
while the FDIC has released the model that it uses to calculate 
net present value, Treasury has not publicly released its NPV 
model for HAMP, a decision that has drawn criticism from some 
homeowner advocates.\277\
---------------------------------------------------------------------------
    \275\ Federal Deposit Insurance Corporation, FDIC Loan Modification 
Program (online at www.fdic.gov/consumers/loans/loanmod/
FDICLoanMod.pdf) (accessed Oct. 6, 2009).
    \276\ Id.
    \277\ Alexandra Andrews & Emily Witt, The Secret Test That Ensures 
Lenders Win On Loan Mods, ProPublica (Sept. 15, 2009) (online at 
www.propublica.org/ion/bailout/the-secret-test-that-ensures-lenders-
win-on-loan-mods-915).
---------------------------------------------------------------------------
    In September 2009, the FDIC, as part of its loan 
modification program, made an effort to address the tide of 
foreclosures caused by rising unemployment. The agency said 
that it was encouraging banks with which it has entered loss-
sharing agreements to consider a temporary forbearance plan of 
at least six months for borrowers whose default is primarily 
due to unemployment or underemployment. ``With more Americans 
suffering through unemployment or cuts in their paychecks, we 
believe it is crucial to offer a helping hand to avoid 
unnecessary and costly foreclosures,'' FDIC Chairman Sheila 
Bair said in a statement. ``This is simply good business since 
foreclosure rarely benefits lenders and would cost the FDIC 
more money, not less.'' \278\
---------------------------------------------------------------------------
    \278\ Federal Deposit Insurance Corporation, FDIC Encourages Loss-
Share Partners to Provide Forbearance to Unemployed Borrowers (Sept. 
11, 2009) (online at www.fdic.gov/news/news/press/2009/pr09167.html).
---------------------------------------------------------------------------
    It is not clear whether the FDIC's loan modification 
program has been successful. The FDIC has yet to release data 
on the number of loans covered by its loan modification 
program; the number of modification offers that have been made 
to borrowers; or the number of loans modified. FDIC has told 
the Panel that it is compiling the data. Once the data are 
released, it should be possible to compare the modification 
rates under the FDIC program with similar programs, such as 
HAMP.

8. State/Local/Private Sector Initiatives

            a. State Law Governs the Foreclosure Process
    In addition to the federal foreclosure mitigation efforts, 
a number of state, local, and private sector initiatives are 
supplementing federal efforts. State law continues for the most 
part to determine when and how an individual can be subject to 
foreclosure. Mediation, counseling, and outreach efforts at the 
state and local levels are growing because of the mortgage 
crisis.
    State foreclosure laws vary, in many cases widely.\279\ 
Many predate the residential mortgage industry, let alone the 
enormous changes that began in the 1980s.\280\ There are both 
judicial and non-judicial (often called ``power-of-sale'') 
foreclosure states.\281\ Judicial foreclosure requires a lender 
to obtain court authority to sell a home. The lender must prove 
that the mortgage is in default, and the borrower can put 
forward any defenses he or she has; the court may also try to 
foster a settlement. If the foreclosure goes forward, the 
proceeds from sale of the property go first to satisfy the 
outstanding mortgage balance.
---------------------------------------------------------------------------
    \279\ John Rao & Geoff Walsh, Foreclosing a Dream: State Laws 
Deprive Homeowners of Basic Protections, National Consumer Law Center, 
at 3 (Feb. 2009) (online at www.consumerlaw.org/issues/foreclosure/
content/FORE-Report0209.pdf). A state's foreclosure process is usually 
laid out in its civil code. Local variations, however, may exist; for 
example, a locality might modify the state rules about the time period 
allowed for parts of the process, the manner and places for publication 
of foreclosure notices, and the location of sales of foreclosed 
property. Id.
    \280\ Id. at 8.
    \281\ Some states permit both, and in many cases non-judicial 
procedures include at least the due process rights contained in the 
judicial foreclosure process. In 18 states, mortgages are most commonly 
foreclosed by judicial action. The majority of foreclosures occur 
through judicial procedures, and in 32 states plus the District of 
Columbia, the majority of foreclosures occur through non-judicial 
procedure. Id. at 12-13. See also an appendix to the same report, 
Survey of State Foreclosure Laws, National Consumer Law Center (Feb. 
2009) (online at www.consumerlaw.org/issues/foreclosure/content/
Foreclosure-Report-Card-Survey0209.pdf).
---------------------------------------------------------------------------
    In a non-judicial foreclosure, a lender simply declares a 
homeowner in default and provides him or her with a notice of 
default and intent to sell the property. Most states treat a 
completed sale as final,\282\ so that the homeowner's only 
chance to assert any claims and defenses is to ask a court to 
stop the sale before it occurs; the financial and sometimes 
emotional condition of the borrower, and his or her potential 
unfamiliarity with the legal system, may effectively limit that 
option.
---------------------------------------------------------------------------
    \282\ In states that do not regard either judicial or non-judicial 
foreclosure sales as immediately final, borrowers may have a certain 
period to repurchase the property for the amount owed and the sale only 
becomes final when that ``redemption'' period ends.
---------------------------------------------------------------------------
    States with judicial foreclosures can adopt or enforce 
stricter burdens of proof for parties bringing foreclosure 
actions. For example, if a lender cannot prove ownership of the 
property, then it cannot foreclose on a residence. Requiring 
mortgagees to provide the original paperwork would do more than 
satisfy a legal technicality; it would often have practical 
consequences. One 2007 study of more than 1,700 bankruptcy 
cases involving home foreclosures found that the note was 
missing in 41.1 percent of the cases.\283\ And without the 
mortgage note and other key documents, it can be difficult to 
assess the accuracy of the mortgagee's calculation of the 
amount of debt owed. Disputes over these calculations are 
common. As the same 2007 study noted, ``Without documentation, 
parties cannot verify that the claim is correctly calculated 
and that it reflects only the amounts due under the terms of 
the note and mortgage and permitted by other applicable law.'' 
\284\
---------------------------------------------------------------------------
    \283\ Porter Bankruptcy Mortgage Claims, supra note 173, at 127, 
147.
    \284\ Porter Bankruptcy Mortgage Claims, supra note 173, at 146.
---------------------------------------------------------------------------
            b. Innovative Approaches by States, Localities, and the 
                    Private Sector
    Moratoria. Many states responded to the rise in 
foreclosures during the Great Depression by imposing temporary 
moratoria on both farm and nonfarm residential mortgage 
foreclosures.\285\ Such moratoria were subsequently upheld by 
the Supreme Court.\286\ With the number of foreclosures 
currently on the rise, many states are revisiting this 
concept.\287\ Proponents of moratoria argue that they provide 
an incentive to make modifications by closing off the 
possibility of a foreclosure for a long enough period of time 
that lenders and servicers will consider other options,\288\ 
while opponents counter that delaying foreclosures simply 
extends the crisis and postpones the eventual day of 
reckoning.\289\
---------------------------------------------------------------------------
    \285\ Starting in February 1933 and continuing over the subsequent 
eighteen months, twenty-seven states imposed moratoria to help address 
the number of mortgage foreclosures. These states included Arizona, 
Arkansas, California, Delaware, Idaho, Illinois, Iowa, Kansas, 
Louisiana, Michigan, Minnesota, Mississippi, Montana, Nebraska, New 
Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, 
Oregon, Pennsylvania, South Carolina, South Dakota, Texas, Vermont, and 
Wisconsin. Other states made permanent changes to state laws governing 
foreclosure by limiting the rights or incentives of lenders to 
foreclose on mortgaged property. David C. Wheelock, Changing the Rules: 
State Mortgage Foreclosure Moratoria During the Great Depression, 
Federal Reserve Bank of St. Louis Review, at 573-75 (Nov./Dec. 2008).
    \286\ The statute was upheld by the United States Supreme Court in 
a 5-4 vote in Home Building & Loan Association v. Blaisdell, 290 U.S. 
398 (1934). The Blaisdell decision has never been explicitly overruled, 
and the decision has set the stage for current and future mortgage 
moratoria.
    \287\ In April 2007, Massachusetts enacted a 30-60 day foreclosure 
moratorium. In August 2008, New York enacted similar legislation 
requiring lenders to notify borrowers in writing at least 90 days 
before commencing a foreclosure action. In North Carolina, Gov. Beverly 
E. Perdue signed a bill into law on September 6 that allows a court 
clerk to postpone a foreclosure hearing for up to 60 days in order to 
provide homeowners with additional time to work out a payment plan with 
their mortgage holder and remain in their home. This legislation goes 
into law on October 1. Additionally, on February 20, 2009, California 
Gov. Arnold Schwarzenegger signed a bill placing a 90-day moratorium on 
some, but not all, foreclosures of California homes purchased between 
January 1, 2003 and January 1, 2008. It went into effect in late May. 
Current moratoria, such as these examples, are generally short-term, 
especially as compared to the 1933 Minnesota statute's two-year 
moratorium.
    Compared with other states, Maryland's foreclosure prevention 
measures have been forceful. In April 2008 Maryland instituted a law 
that requires a 90-day period after default before lenders can file a 
foreclosure action, plus a 45-day period between notice of a 
foreclosure and a sale of the property. Maryland also requires 
servicers to report data related to their loan modifications to the 
state; to provide the state with lists of homeowners with adjustable 
rate mortgages that will soon reset (to permit targeted outreach 
efforts to those individuals); and to respond promptly to homeowners 
and pursue loss mitigation where possible.
    \288\ Jim Siegel, Ohio House Panel Passes Foreclosure Moratorium, 
Columbus Dispatch (May 13, 2009) (online at www.dispatchpolitics.com/
live/content/local_news/stories/2009/05/13/copy/
noforeclosure.ART_ART_05-13-09_B1_ITDRI8L.html?adsec=politics&sid=101).
    \289\ Jeremy Burgess, Effects of the Foreclosure Moratorium in 
Wayne County, Urban Detroit Wholesalers LLC (Feb. 9, 2009) (online at 
www.urbandetroitonline.com/detroit-real-estate/foreclosure-moratorium-
wayne-county/).
---------------------------------------------------------------------------
    Mediation. A borrower and a lender cannot modify a mortgage 
without consultation. But servicers are often not equipped to 
handle the volume of calls they receive. Borrowers complain 
that servicers ignore them and that, even when they reach 
someone, repeated requests for the same information produce 
only silence. When they cannot reach a servicer or call 
repeatedly and no one can help, borrowers may give up in 
frustration, while the servicers may list the borrower as non-
responsive. In other cases, however, borrowers do not even try 
to have their mortgages modified, often because they feel 
financially or emotionally overwhelmed.\290\
---------------------------------------------------------------------------
    \290\ Florida Supreme Court Task Force on Residential Mortgage 
Foreclosure Crisis, Final Report and Recommendations on Residential 
Mortgage Foreclosure Cases, at 27 (Aug. 17, 2009) (online at 
www.floridasupremecourt.org/pub_info/documents/Filed_08-17-
2009_Foreclosure_Final_Report.pdf).
---------------------------------------------------------------------------
    States have increasingly turned to mediation--the use of a 
neutral third party to create a dialogue between lender and 
borrower--to overcome these obstacles.\291\ Mandatory mediation 
programs require both the lender and borrower to participate; 
in voluntary programs mediation is triggered only if the 
borrower chooses. There is a growing consensus that mandatory 
programs are more effective.\292\
---------------------------------------------------------------------------
    \291\ In New York, mandatory settlement conferences have been 
instituted for high-cost, subprime and non-traditional home loans. In 
New Jersey, the courts have established mandatory mediation for all 
cases in which owner-occupants of homes contest foreclosure actions. In 
Maine, a pilot project has been established in York County, under which 
mediation is triggered in foreclosure cases where the owner-occupant 
responds to the lender's complaint. The program is expected to be 
expanded across the entire state in January. In North Carolina, a new 
law requires lenders to describe the efforts they made to resolve the 
case voluntarily prior to the foreclosure proceeding. And voluntary 
mediation programs have been established in Ohio and Nevada, one of the 
states most battered by foreclosures. State of New York Banking Dept., 
Help for Homeowners Facing Foreclosure (online at 
www.banking.state.ny.us/hetp.htm) (accessed October 8, 2009); New 
Jersey Judiciary, Judiciary Announces Foreclosure Mediation Program to 
Assist Homeowners at Risk of Losing Their Homes (Oct. 16, 2008) (online 
at www.judiciary.state.nj.us/pressrel/pr081016c.htm); Maine Judicial 
Branch, Homeowner Frequently Asked Questions (online at 
www.courts.state.me.us/court_info/services/foreclosure/home_faq.html) 
(accessed Oct. 6, 2009); Maine Judicial Branch, Foreclosure Diversion 
Project--York County Program Pilot Project (online at 
www.courts.state.me.us/court_info/services/foreclosure/index.html) 
(accessed Oct. 6, 2009); Andrew Jakabovics & Alon Cohen, It's Time We 
Talked: Mandatory Mediation in the Foreclosure Process, Center for 
American Progress, at 42 (June 2009) (online at 
www.americanprogress.org/issues/2009/06/pdf/foreclosure_mediation.pdf); 
General Assembly of North Carolina, Session Law 2009-573 (online at 
www.ncga.state.nc.us/Sessions/2009/Bills/Senate/PDF/S974v5.pdf); The 
Supreme Court of Ohio & The Ohio Judicial System, Foreclosure Mediation 
Resources (online at www.supremecourtofohio.gov/JCS/disputeResolution/
foreclosure/default.asp) (accessed Oct. 6, 2009); Supreme Court of 
Nevada, First Two Mediations Scheduled in Foreclosure Mediation Program 
(Aug. 25, 2009) (online at www.nevadajudiciary.us/index.php/
foreclosure-mediation/471-first-two-mediations-scheduled-in-
foreclosure-mediation-program.html).
    \292\ In June 2008, the Connecticut legislature established a 
statewide voluntary mediation program covering all one- to four-unit 
owner-occupied properties. The program was initially voluntary; in its 
first nine months only 34 percent of eligible borrowers chose mediation 
but they were successful almost 60 percent of the time. The results led 
the legislature to act this year to require participation by borrowers.
---------------------------------------------------------------------------
    The Philadelphia mediation program was featured at the 
Panel's foreclosure mitigation field hearing. In April 
2008,\293\ the Philadelphia courts created a Residential 
Mortgage Foreclosure Diversion Pilot Program, which required 
``conciliation conferences'' in all foreclosure cases involving 
residential properties with up to four units that were used as 
the owner's primary residence. The idea is that bringing 
borrowers into the same room with lenders' representatives will 
foster a compromise that is in both parties' best interests. As 
Judge Annette Rizzo, the program's Philadelphia architect, said 
in written testimony submitted at the Panel's foreclosure 
mitigation field hearing, ``[o]ur Program is all about the 
face-to-face between the lender and borrower.'' \294\ The 
Philadelphia program has been hailed as a potential model for 
how to deal with the foreclosure crisis in other localities. 
And while officials in Philadelphia acknowledge a need to 
collect more data,\295\ preliminary statistics indicate that 
Philadelphia is having an unusually high level of success at 
averting foreclosures. Since the program began, 25 percent of 
all homes in the program have been saved from foreclosure, 
while another 48 percent of cases are waiting for resolution as 
negotiations between the two parties continue.\296\ Officials 
in Philadelphia say the active involvement of the local 
community has been an important part of the program's success. 
This includes the efforts of mediators and lawyers who have 
donated their time, as well as community groups that have 
canvassed neighborhoods to ensure that distressed homeowners 
are aware of the services that are available to them.\297\
---------------------------------------------------------------------------
    \293\ Council of the City of Philadelphia, Resolution No. 080331 
(March 27, 2008) (online at webapps.phila.gov/council/attachments/
5009.pdf).
    \294\ Congressional Oversight Panel, Written Testimony of Judge 
Annette Rizzo, Court of Common Pleas, First Judicial District, 
Philadelphia County, Philadelphia Field Hearing on Mortgage 
Foreclosures, at 4 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-rizzo.pdf).
    \295\ Id. at 90-91.
    \296\ Id. at 8.
    \297\ Id. Congressional Oversight Panel, Written Testimony of 
Philadelphia Legal Assistance Supervising Attorney, Consumer Housing 
Unit, Irwin Trauss, Philadelphia Field Hearing on Mortgage Foreclosures 
(Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-092409-
trauss.pdf) (hereinafter ``Trauss Philadelphia Hearing Written 
Testimony'').
---------------------------------------------------------------------------
    While state foreclosure mediation programs have the 
potential to play an important role in preventing foreclosures 
and in ensuring that homeowners receive the benefits of HAMP, 
they have not been able to stem the full tide of foreclosures. 
Many of the existing programs have been found to leave too much 
discretion in the hands of the servicers and fail to impose 
meaningful obligations on servicers to modify loans.\298\
---------------------------------------------------------------------------
    \298\ National Consumer Law Center, State and Local Foreclosure 
Mediation Programs: Can They Save Homes? (Sept. 2009) (online at 
www.consumerlaw.org/issues/foreclosure_mediation/content/ReportS-
Sept09.pdf).
---------------------------------------------------------------------------
    Counseling. Borrowers are often intimidated to speak 
directly with a lender or have difficulty when they attempt 
such contact. Housing counselors offer borrowers advice and an 
understanding of their options. Forty states have adopted 
counseling programs or appropriated funds for counseling 
programs.
    Outreach. No program can succeed if homeowners do not know 
about it, so strong public outreach efforts are essential. At 
least 17 state and local governments have established toll-free 
foreclosure hotlines that refer callers to trained housing 
counselors.\299\ At least 32 states have created websites to 
inform the public about the available assistance programs.\300\
---------------------------------------------------------------------------
    \299\ For example, Colorado, which had the nation's fifth-highest 
foreclosure rate in 2008, has created one of the nation's strongest 
outreach efforts. It includes (1) a toll-free telephone line sponsored 
by state agencies, non-profit groups, lenders, and other private sector 
businesses; (2) English- and Spanish-language television, radio, and 
print public service announcements; and (3) a web campaign that makes 
use of YouTube and Twitter. Between October 2006 and March 2008, the 
Colorado hotline received 33,250 calls, which in turn produced 8,000 
counseling sessions by the end of 2007; 67 percent of those who 
received mortgage counseling were able to stay in their homes, at least 
initially, 13 percent gave up their homes voluntarily, and 20 percent 
were unable to avoid foreclosure.
    \300\ National Governors Association Center for Best Practices, 
Foreclosure Mitigation: Outreach (July 29, 2009) (online at 
www.nga.org/portal/site/nga/menuitem. 9123e83a1f6786440ddcbeeb 
501010a0/?vgnextoid= d02e19091b68f110VgnVCM1 000005e00100aRCRD).
---------------------------------------------------------------------------
    The Pew Center on the States found that, as of 2008, 11 
states and the District of Columbia did not offer housing 
counseling,\301\ and six states offered no foreclosure 
prevention services at all.\302\ The private sector HOPE NOW 
alliance among housing counselors, mortgage companies, 
investors, and other participants in the mortgage market works 
to increase outreach efforts nationwide, putting financially 
distressed individuals in touch with 22 different counseling 
agencies across the country, but its efforts are especially 
important in areas that lack other options. The volume of cases 
with which the alliance and its linked agencies have dealt rose 
from 60,000 monthly in July 2007 to roughly 150,000 in July 
2009.\303\ Subprime loan work-out plans have steadily increased 
as well, from 80,000 in July 2007 to 100,000 in July 2009.\304\
---------------------------------------------------------------------------
    \301\ The 11 states were Alabama, Arkansas, Hawaii, Kansas, New 
Hampshire, North Dakota, Texas, Utah, Washington, West Virginia, and 
Wyoming. Pew Defaulting on the Dream Article, supra note 10.
    \302\ The six states, all of which had no state-funded refinance 
program, no loan modification program, no effort to prevent rescue 
scams and mortgage fraud, and no housing counseling available, were 
Alabama, Arkansas, Kansas, North Dakota, West Virginia, and Wyoming. 
Pew Defaulting on the Dream Article, supra note 10.
    \303\ HOPE Now, Phase 1National Data: July 2007 to July 2009 
(online at www.hopenow.com/industry-data/
Summary%20Charts%20Jul%202009%20v2.pdf) (accessed Oct. 6, 2009).
    \304\ Id.
---------------------------------------------------------------------------
    Temporary Financing Programs. The current foreclosure 
prevention efforts at the federal level do not specifically 
target delinquencies caused by unemployment, despite evidence 
that many of today's foreclosures are the result of a sudden 
decline in income.\305\ However, the state of Pennsylvania does 
run a program that provides a safety valve for homeowners who 
have been laid off. Since 1983, the state has been operating an 
emergency loan program for people who have lost their jobs or 
been negatively impacted by another life event, such as illness 
or divorce, and are subsequently unable to make their mortgage 
payments. Pennsylvania's Homeowners' Emergency Mortgage 
Assistance Program (HEMAP) offers mortgage relief for as long 
as two years or for as much as $60,000.
---------------------------------------------------------------------------
    \305\ Congressional Oversight Panel, Testimony of Federal Reserve 
Bank of Boston Senior Economist and Policy Advisor, Research 
Department, Dr. Paul Willen, Philadelphia Field Hearing on Mortgage 
Foreclosures, at 109-110 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-willen.pdf) (hereinafter ``Willen 
Philadelphia Hearing Written Testimony'').
---------------------------------------------------------------------------
    The program helps not only people who are currently 
unemployed, but also those who fell behind on their mortgage 
payments during an earlier period of unemployment. Loan 
recipients who currently have jobs are required to pay up to 40 
percent of their net monthly income toward their housing 
expenses,\306\ while loans to people who are currently jobless 
do not accrue interest until their income is restored.\307\ As 
part of the loan agreement, the Pennsylvania Housing Finance 
Agency, which runs the program, takes a junior lien on the 
property.\308\ Since the program was established, HEMAP has 
actually earned money for the state of Pennsylvania, and 
witnesses at the Panel's field hearing in Philadelphia endorsed 
it as a model that should be considered at the national 
level.\309\ The fact that state governments are currently 
strapped financially means that this kind of temporary 
assistance program is likely to need federal support.
---------------------------------------------------------------------------
    \306\ Pennsylvania Housing Finance Agency, Pennsylvania Foreclosure 
Prevention Act 91 of 1983--Homeowners' Emergency Mortgage Assistance 
Program (HEMAP) (online at www.phfa.org/consumers/homeowners/
hemap.aspx) (accessed Oct. 6, 2009).
    \307\ Trauss Philadelphia Hearing Written Testimony, at 3, supra 
note 297, at 10.
    \308\ Pennsylvania Housing Finance Agency, Homeowners' Emergency 
Mortgage Assistance Program (HEMAP)--FAQ (online at www.phfa.org/
hsgresources/faq.aspx#hemap--q13) (accessed Oct. 7, 2009).
    \309\ Trauss Philadelphia Hearing Written Testimony, at 3, supra 
note 297, at 10.
---------------------------------------------------------------------------

                         D. Big Picture Issues


1. Purpose of Foreclosure Mitigation

    In the previous sections, the Panel has evaluated 
foreclosure mitigation programs on their own terms. While it is 
important to evaluate the progress of the federal foreclosure 
mitigation programs in meeting their stated goals, it is 
equally important to analyze the adequacy of those goals in 
addressing the underlying foreclosure problem. Most programs 
are designed to prevent foreclosures in specific circumstances, 
but however successful programs might be on their own terms, 
they must ultimately be judged on whether they succeed in 
implementing major policy goals. Evaluating foreclosure 
mitigation programs in this manner first necessitates a 
determination of the ultimate purpose of foreclosure mitigation 
programs.
    A central purpose of foreclosure prevention efforts is to 
protect the economy from the systemic consequences of home 
foreclosures. Congress recognized as much when it declared the 
protection of home values and the preservation of homeownership 
one of the purposes of the EESA.\310\
---------------------------------------------------------------------------
    \310\ Pub. L. No. 110-343 Sec. 2(2)(A)-(B).
---------------------------------------------------------------------------
    Foreclosure prevention efforts help preserve homeownership 
and stabilize the housing market, which protects home values. 
Stabilization of the housing market is also critical to overall 
economic recovery. Not only is the housing market a major 
component of the overall economy, but it has been at the center 
of the economic crisis, and until it is stabilized, the economy 
as a whole will remain in turmoil.
    Housing markets have achieved some degree of stability 
through massive federal support. The Federal Reserve's monetary 
policy has produced low interest rates, which have stimulated 
greater demand for mortgage-financed home purchases by lowering 
the cost of capital, and federal government support for the 
GSEs and the private-label MBS market has also contributed to 
liquidity and thus lower costs of mortgage capital. This level 
of support cannot continue indefinitely, however, and as long 
as foreclosure and real estate owned (REO) inventory flood the 
housing market and contribute to an oversupply of housing stock 
for sale, there will be strong downward pressure on home 
prices.
    In these circumstances, volume and speed of foreclosure 
prevention assistance are critical if there is to be sufficient 
systemic impact. The key metric for evaluating foreclosure 
prevention efforts overall is thus whether a sufficient number 
of foreclosures are prevented--and not merely delayed--to allow 
for a stable housing market when interest rate and secondary 
market support are withdrawn.
    Some have argued that attention and resources should be 
devoted to a type of moral sorting to determine who is 
deserving of government foreclosure prevention assistance. 
Devoting attention and resources to moral sorting is at odds 
with the goal of maximizing the macroeconomic impact of 
foreclosure prevention. Trying to sort out the deserving from 
the undeserving on any sort of moral criteria means that 
foreclosure prevention efforts will be delayed and have a 
narrower scope. Moreover, in other cases where the federal 
government extended assistance under TARP--such as to banks and 
auto manufacturers--no attempt was made to sort between 
entities deserving and not deserving assistance. No inquiry was 
made as to which investors in these entities knowingly and 
willingly assumed the risks of the entities' insolvency.
    Accordingly, the Panel must consider whether federal 
foreclosure mitigation programs have sufficient scope to deal 
with the crisis in macroeconomic terms, whether the programs 
will produce long-term mortgage stability and sustainability, 
and the costs and benefits of the programs. The Panel 
recognizes that some of the foreclosure prevention programs, 
like MHA, are relatively new, having been in place for only six 
months. Other programs, however, like HOPE for Homeowners, have 
been in place for over a year. In all cases, however, there is 
now sufficient data to evaluate progress thus far, draw 
preliminary conclusions, and make preliminary recommendations. 
The Panel intends to continue to evaluate progress and make 
recommendations as the programs evolve.

2. Scale of Programs

    Are federal foreclosure mitigation initiatives sufficient 
for responding to the scope of the foreclosure crisis? While 
recognizing the relatively early nature of many of the 
programs, the Panel has serious doubts in this regard. HOPE for 
Homeowners was predicted to help 400,000 homeowners.\311\ Four 
to five million homeowners are eligible for HARP refinancings 
to achieve more affordable payments.\312\ For HAMP, Treasury 
aims to reach three to four million loans.\313\ If these goals 
are achieved, the Federal foreclosure mitigation initiative 
might help as many as 9.5 million families reduce their 
mortgage payments to affordable levels, including preventing 3-
4 million foreclosures, a substantial share of the 8.1 million 
predicted by 2012.\314\ It is difficult to say, however, 
whether that would be enough, because the Panel does not know 
how many foreclosures must be prevented to stabilize the 
housing market. However, if these programs achieve their 
maximum potential, it would undeniably be a substantial step in 
the right direction.
---------------------------------------------------------------------------
    \311\ House Committee on Financial Services, Testimony of Director 
of Office of Single Family Program Development, Meg Burns, Promoting 
Bank Liquidity and Lending Through Deposit Insurance, HOPE for 
Homeowners, and other Enhancements, 111th Cong., at 2 (Feb. 3, 2009) 
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/
burns020309.pdf).
    \312\ MHA March Update, supra note 80.
    \313\ MHA March Update , supra note 80. GAO has questioned whether 
this projection may be overstated due to some of the assumptions made 
in its calculation. GAO HAMP Report, supra note 98.
    \314\ Rod Dubitsky, Larry Yang, Stevan Stevanovic, and Thomas 
Suehr, Foreclosure Update: Over 8 Million Foreclosures Expected, Credit 
Suisse (Dec. 8, 2008) (online at www.nhc.org/
Credit%20Suisse%20Update%2004%20Dec%2008.doc).
---------------------------------------------------------------------------
    Unfortunately, there may be reason to doubt whether these 
programs will ever achieve Treasury's numeric goals, but it is 
still premature to make that judgment. HOPE for Homeowners has 
met with minimal interest. As of September 23, 2009, only 94 
refinancings had closed, and lenders had stated they intend to 
approve an additional 844 applications.\315\ For HARP, there 
have been 95,729 refinancings as of September 1, 2009. And for 
HAMP, there have been 571,354 cumulative trial modification 
offers extended, 362,348 HAMP trial modifications in progress 
and 1,711 permanent modifications. (See Figure 27.)
---------------------------------------------------------------------------
    \315\ Holzer Mortgage Relief Article, supra note 252.
    \316\ Treasury Mortgage Marked Data, supra note 111.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    HOPE for Homeowners' performance has been so weak that the 
HUD Secretary stated that it is ``tough to use.'' \317\ 
Treasury officials have made no statements on the success of 
HARP but they are optimistic about HAMP. Based on the number of 
trial modifications started, Treasury has declared that HAMP is 
``on pace'' to meet its self-set goal of 500,000 cumulative 
trial modifications by November 1, 2009.
---------------------------------------------------------------------------
    \317\ 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).
---------------------------------------------------------------------------
    While HAMP will likely achieve this more immediate goal, 
the achievement is relatively small in relation to the 
magnitude of the foreclosure crisis.
    Trial modifications are a poor metric for evaluating the 
success of HAMP. Not all trial modifications will become 
permanent modifications. The roll rate from trial modifications 
to permanent modifications is currently 1.26 percent, meaning 
that of all trial modifications started at least three months 
ago, only 1.26 percent have converted to permanent 
modifications. As noted above, however, this is a very 
preliminary statistic that should be interpreted with caution. 
Additionally, Treasury has provided a two-month extension 
during the program ramp-up.
    Once modifications become permanent, however, they must 
still be sustained in order to have an impact on foreclosure 
prevention. There will be redefaults on HAMP-modified loans. 
Treasury has refused to make public its redefault assumptions, 
but other government entities have anticipated a redefault rate 
of approximately 40 percent in their modification programs. The 
time period for Treasury's undisclosed redefault assumption is 
important. Should it only cover the first five years of the 
loan, it would not account for the increases in interest rates 
and thus monthly payments that kick in for HAMP-modified loans 
starting in year six. Similarly, the LTV assumption for 
Treasury's undisclosed redefault assumption is important. If 
Treasury's redefault assumption was created at the beginning of 
HAMP in winter 2009, it might assume LTVs that are 
substantially lower than present, which could mean that it 
underestimates probable redefaults. The Panel underscores that 
redefault assumptions are data that should be public to ensure 
the transparency of MHA, and are critical to the Panel's 
ability to provide meaningful program evaluation and oversight.
    Redefaults mean that foreclosures have been delayed, rather 
than prevented. Therefore, the net impact of HAMP is best 
measured by the number of permanent modifications that are 
sustainable, rather than trial modifications. The Panel intends 
to monitor carefully the permanent modifications produced by 
the program over the coming months as the program begins to 
produce a longer track record.
    Using permanent modifications as the metric, HAMP's 
performance to date is weak. Six months into the program, there 
have only been 1,711 permanent modifications. This number is 
low in part because it depends on the number of trial 
modifications, and the initial volume of HAMP trial 
modifications was quite low. The Panel is concerned about the 
low rate of conversion from trial to permanent modifications, 
but is hopeful that the conversion rate will increase 
substantially; unless it does, HAMP will come nowhere close to 
keeping up with foreclosures.
    Even using trial modifications as the metric, however, 
HAMP's broader effectiveness is in doubt. The country is on 
pace to see a significant number of foreclosures this year, and 
with rising unemployment, widespread deep negative equity, and 
recasts on payment-option ARMs and interest-only mortgages 
increasing in volume, there is no sign of the foreclosure 
crisis letting up. As Figure 28 shows, there were 224,262 
foreclosures started in August 2009. The same month only 94,312 
trial modifications were begun, a shortfall of nearly 130,000. 
HAMP trial modifications failed to even keep up with the number 
of foreclosures started on prime mortgages. Cumulatively, from 
March through August, there were 5 foreclosures started and 1.5 
foreclosures completed for every trial modification. HAMP 
modifications started slowly, however, and have grown in volume 
every month. Thus in August 2009, there were 2.38 foreclosure 
starts per trial modification, and trial modifications outpaced 
completed foreclosure sales, with 1.25 trial modifications per 
completed foreclosure sale. While this is cause for some 
measured optimism, unless August trial modifications convert to 
permanent modifications at a rate of 80 percent, a far cry from 
current conversion rates, permanent modifications will not keep 
pace with completed foreclosure sales.
    A permanent modification, however, must be sustainable, if 
it is to prevent a foreclosure. If permanent modifications 
redefault at a rate of 40 percent, the rate used by the FDIC's 
very similar modification program at Indy Mac, however, then 
even if 100 percent of trial modifications successfully 
converted to permanent modifications, there would still be a 
substantial shortfall relative to completed foreclosure sales.
    There is also reason to expect the number of HAMP trial 
modifications per month to drop; servicers may initially move 
to modify the easiest surest cases, and the most motivated and 
organized homeowners are likely to be among the earlier 
applicants. Further, because unemployment usually leaves a 
borrower with insufficient income to be eligible for a HAMP 
modification, the number of financially distressed homeowners 
who will be HAMP-eligible is likely to decline.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The discussion of sufficiency of HAMP modification volume 
ultimately hinges on the question of how many foreclosures must 
be prevented to stabilize the housing market. This is a 
question to which the Panel does not have an answer, but the 
existing federal foreclosure prevention programs appear 
unlikely to have a comprehensive, or even substantial impact, 
and this makes it unlikely that they will succeed in 
macroeconomic stabilization. Clearly these programs are better 
than doing nothing, and for some families they will be a 
lifeline. These programs may well prevent the housing market 
from continuing a rapid decline, and that is an important 
accomplishment. But as the following section discusses, it is 
far from clear whether they will result in long-term housing 
market stability or whether new programs may be needed. Unless 
that is accomplished, the programs' success will be limited.
---------------------------------------------------------------------------
    \319\ Servicer Performance Report, supra note 95; HOPE NOW, Workout 
Plans and Foreclosure Sales, supra note 2.
---------------------------------------------------------------------------

3. Sustainability of Modifications and Refinancings

            a. Negative Equity
    While HAMP modifications and HARP refinancings are able to 
improve the affordability of mortgages, the programs were not 
designed to address negative equity, which raises concerns 
about the sustainability of the modifications and refinancings.
    HARP permits homeowners with negative equity to refinance 
their mortgages into more affordable and sustainable mortgage 
structures. The homeowner continues to have negative equity 
after the refinancing. Similarly, many HAMP modifications 
continue to have negative equity. While HAMP permits servicers 
to forgive principal, it does not require it, and relatively 
few modifications have involved principal forgiveness. The LTV 
of permanent HAMP modifications indicates that most are deeply 
underwater even post-modification. More modifications have 
involved principal forbearance, but forbearance does not undo 
negative equity. Instead, it tacks on a balloon payment of 
forborne principal at the end of the mortgage. If housing 
prices appreciate significantly, homeowners with forborne 
principal may be able to refinance and avoid a balloon payment, 
but that is very much dependent on an uncertain housing market 
and the ability to avoid redefault until that point.
    HAMP and HARP are premised upon a belief that if monthly 
mortgage payments are affordable, borrowers will be less likely 
to default, even if they are mired in negative equity. However, 
the impact of negative equity is not clearly understood. As the 
Panel has previously observed, and has since been confirmed by 
additional studies,\320\ negative equity has a higher 
correlation with default than any other factor that has been 
identified other than affordability, which causes default. 
While this does not prove a causal relationship, it is also 
consistent with one.
---------------------------------------------------------------------------
    \320\ Stan Liebowitz, New Evidence on the Foreclosure Crisis, Wall 
Street Journal (July 3, 2009) (online at online.wsj.com/article/
SB124657539489189043.html).
---------------------------------------------------------------------------
    Generally, negative equity has been presumed to be a 
necessary, but not sufficient condition for foreclosure; in 
addition to negative equity, there needed to be some factor 
making payments unaffordable, as homeowners would usually 
prefer to retain their home. Thus, in the New England economic 
downturn during the late 1980s and early 1990s, negative equity 
alone rarely resulted in foreclosures.\321\
---------------------------------------------------------------------------
    \321\ Christopher L. Foote, Kristopher Gerardi, & Paul S. Willen, 
Negative Equity and Foreclosure: Theory and Evidence, 64 Journal of 
Urban Economics 234 (Sept. 2008) (abstract online at ideas.repec.org/a/
eee/juecon/v64y2008i2p234-245.html) (examining foreclosures in 
Massachusetts in 1990s).
---------------------------------------------------------------------------
    Yet a more recent study has cast doubt on this conventional 
wisdom. A 2009 working paper by the staff of the Federal 
Reserve Bank of Richmond has found that negative equity alone 
does result in significantly higher default rates when 
mortgages are non-recourse.\322\ Massachusetts is a recourse 
mortgage state, which limits the ability to extrapolate 
nationally from the situation in Massachusetts in the late 
1980s and early 1990s.
---------------------------------------------------------------------------
    \322\ States with nonrecourse mortgages do not allow lenders to 
recover from other assets of the defaulted borrower, besides the home. 
Andra C. Ghent & Marianna Kudlyak, Recourse and Residential Mortgage 
Default: Theory and Evidence from the United States, Federal Reserve 
Bank of Richmond Working Paper 09-10 (online at ssrn.com/
abstract=1432437) (accessed Oct. 7, 2009).
---------------------------------------------------------------------------
    It is also not clear to what degree the current foreclosure 
crisis will follow historical patterns. The housing bust in 
Massachusetts was not nearly as severe as the current one. In 
Massachusetts, housing prices fell 22.7 percent from peak. 
Nationally, housing prices have fallen 33 percent from peak in 
the current downturn, while in some regions the price declines 
have been much sharper--54 percent from peak in Las Vegas and 
Phoenix. If homeowners are more likely to wait out milder 
negative equity, then negative equity will likely have a 
stronger impact than in Massachusetts in the early 1990s.
    There are two categories of negative equity defaults--
strategic and necessitated. Strategic defaults by homeowners 
with negative equity--moving to a cheaper equivalent rental 
property nearby rather than continuing to make more expensive 
monthly mortgage payments--have been the stereotyped focus of 
negative equity defaults, and in the short term they have 
predominated.\323\ HAMP modifications reduce the discrepancy 
between rental and mortgage payments, which means that 
strategic defaults are unlikely for HAMP modifications.
---------------------------------------------------------------------------
    \323\ Kenneth R. Harney, Homeowners Who `Strategically Default' on 
Loans a Growing Problem, Los Angeles Times (Sept. 20, 2009) (online at 
www.latimes.com/classified/realestate/news/la-fi-harney20-
2009sep20,0,2560658.story.
---------------------------------------------------------------------------
    Necessitated defaults in negative equity situations, 
however, will be unavoidable. There are essential life factors 
that necessitate moves--the ``Four Ds,'' Death, Disability, 
Divorce, and Dismissal--as well as childbirth, and improved 
employment opportunities. While negative equity alone is 
unlikely to produce redefaults for HAMP modifications, these 
additional factors combined with negative equity raise the 
likelihood of redefault.
    A homeowner who loses a job with General Motors in Detroit 
may need to relocate for work. If the homeowner has $40,000 in 
negative equity and the homeowner cannot come up with that upon 
sale of the property, then default is the only option for the 
homeowner. Previous housing downturns have lasted over a 
decade, so given that the average homeowner moves approximately 
once every seven years \324\ a great many homeowners with MHA 
modifications or refinancings will likely need to move at a 
time when they still have negative equity. This casts grave 
doubt on the sustainability of negative equity homeownership. 
To be sure, foreclosures produced by the combination of 
negative equity with life factors will not come in a rush, but 
they will produce a steady stream of foreclosures as long as 
there is negative equity.
---------------------------------------------------------------------------
    \324\ U.S. Census Bureau, Geographical Mobility/Migration: 
Calculating Migration Expectancy (online at www.census.gov/population/
www/socdemo/migrate/cal-mig-exp.html) (accessed Oct. 7, 2009).
---------------------------------------------------------------------------
            b. Factors Affecting Loan Performance
    It is difficult to predict the future performance of HAMP-
modified loans. There is no performance history for loans with 
the HAMP-modified structure. OCC/OTS Mortgage Metrics indicate 
that redefault rates are significantly lower for modifications 
that reduce monthly payments, ``with greater percentage 
decreases in payments resulting in lower subsequent redefault 
rates.'' \325\ (See Figure 30, below.) Nonetheless, redefault 
rates even on modifications reducing payments by 20 percent or 
more were still a very high 34 percent.
---------------------------------------------------------------------------
    \325\ OCC and OTS Second Quarter Mortgage Report, supra note 42, at 
34.
---------------------------------------------------------------------------
    OCC/OTS data do not break down into subcategories the 
performance of modifications with monthly payment decreases of 
more than 20 percent. Permanent HAMP modifications as of 
September 1, 2009 have decreased monthly payments by a median 
(mean) of 40 (39) percent, so this might indicate that 
redefault rates will be lower than those in the OCC/OTS data 
category for payment reductions of 20 percent or more. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The closest product for comparison is, ironically, the 
subprime mortgage loans of recent years, particularly hybrid-
ARMs. Hybrid ARMs featured below-market introductory rates that 
would last for 2-3 years, after which rates would adjust to an 
index rate plus a premium. The rate reset would often result in 
a 20 to 30 percent increase in payments.\327\ These loans were 
typically underwritten based on the borrower's ability to 
afford the initial introductory rate, rather than the rate 
after reset. Hybrid ARMs were also typically underwritten at 
near or up to 100 percent LTV. Many were also underwritten as 
30-year mortgages with 40-year amortizations, meaning that 
there would be a balloon payment due at the end.
---------------------------------------------------------------------------
    \326\ OCC and OTS Second Quarter Mortgage Report, supra note 42, at 
8.
    \327\ Structured Credit Investor, Deeper and Deeper: Expiring ARM 
Teaser Rates to Drive ABX Delinquencies (Oct. 31, 2007).
---------------------------------------------------------------------------
    HAMP-modified mortgages have an initial median interest 
rate of 2 percent, significantly below market. The rate is 
fixed for five years, and then steps up over time to the lower 
of the original contract rate or the Freddie Mac 30-year fixed 
rate at the time of modification, currently around 5 percent. 
This means monthly payments for mortgages currently being 
modified could increase by over 45 percent between year five 
and year eight. Based on current income levels, monthly 
payments would go from 31 percent DTI to 45 percent DTI, 
approximately where the loans were before modification; the 
current median pre-modification DTI of HAMP modified loans is 
45 percent.\328\ Under these conditions, assuming the 
borrower's income has not changed, the affordability of the 
loans will move back toward pre-HAMP levels eight years from 
now. As noted by Deborah Goldberg of the National Fair Housing 
Alliance at the Panel's foreclosure mitigation field hearing, 
``We don't have really permanent modifications, right, we have 
five year modifications . . .'' \329\
---------------------------------------------------------------------------
    \328\ Presumably, income will increase, if only due to inflation. 
Therefore, if income only kept pace with inflation, which it has failed 
to do in recent years, then DTI would rise, unless inflation over those 
eight years totaled 31 percent or nearly 4 percent per year. If 
inflation only averaged 3 percent per year, then the DTI burden would 
increase to 36 percent, while if inflation were 2 percent per year, 
then DTI burdens would go up to 39 percent, and DTI would rise to 42 
percent if inflation averaged 1 percent per year.
    \329\ Goldberg Philadelphia Hearing Written Testimony, supra note 
99, at 85.
---------------------------------------------------------------------------
    While HAMP rate resets are more gentle and gradual than 
those on subprime mortgages, HAMP modifications are also being 
underwritten based on the affordability of the introductory 
rate, not the affordability of the stepped-up rate. The maximum 
interest rate for a HAMP modified loan after step-up is 
currently low in absolute terms, but affordability is relative, 
not absolute. Moreover, the median LTV for HAMP-modified 
mortgages is 124 percent, significantly higher than that of a 
newly originated subprime mortgage. And because of principal 
forbearance and extensions of amortization periods beyond 
original loan terms, many HAMP-modified loans have a balloon 
payment due at the end of the mortgage. These factors could 
explain why Treasury might use a 40 percent redefault rate like 
other similar government programs in the first five years for 
HAMP modifications and higher rates with deeper levels of 
negative equity. If accurate, this sort of redefault rate calls 
into question the long-term effectiveness of HAMP.
            c. Principal Reductions
    Negative equity can only be eliminated through principal 
write-downs, but this raises a number of difficult and complex 
issues. When principal is written down, it impairs the balance 
sheets of the owners of the mortgages. In many cases, this 
means the impairment of the balance sheets of the very 
financial institutions whose stability is an essential goal of 
the EESA. To be sure, if principal write-downs actually 
increase the true value of the loans, by reducing redefault 
rates, then principal write-downs might cause more immediate 
losses, but they would produce more realistic, and therefore 
more confidence-inspiring, balance sheets.
    One concern related to the idea of principal reduction is 
the incentives it may create. Witnesses at the Panel's 
foreclosure mitigation field hearing were asked about this 
matter. Dr. Paul Willen, Senior Economist at the Federal 
Reserve Bank of Boston, testified that the ``problem with 
negative equity is basically that borrowers can't respond to 
life events.'' Borrowers with positive equity simply have 
``lots of different ways they can refinance, they can sell, 
they can get out of the transaction.'' \330\ He noted that 
although most borrowers with negative equity are likely to make 
their payments in the present or over the next couple of years, 
they still remain ``at-risk homeowners'' and may face more 
serious issues several years down the road should a life 
changing event, such as unemployment, occur.\331\ In that 
sense, Dr. Willen offered that principal reduction may have 
some virtue. He also noted, however, that most borrowers with 
negative equity make their mortgage payments, and that if 
principal reduction is provided as an option, one runs the risk 
of incentivizing borrowers, who would otherwise continue to 
make their mortgage payments, ``to look for relief'' even when 
it is not necessarily needed.\332\ In this sense, according to 
Dr. Willen, mandating a principal reduction option under HAMP 
could put additional pressures on the program, and ultimately 
reduce its overall effectiveness. However, in response to a 
question from the Panel, Dr. Willen agreed that revising 
bankruptcy laws to permit principal modification was a clear 
way to address the idea that there should be a cost for 
receiving a principal reduction.
---------------------------------------------------------------------------
    \330\ Willen Philadelphia Hearing Testimony, supra note 305, at 
110, 135.
    \331\ Id. at 135.
    \332\ Id. at 135.
---------------------------------------------------------------------------
    Other witnesses at the hearing also argued that the 
incentive ``to look for relief'' may be reduced if the costs to 
the borrower of opting for principal reduction were 
significantly greater.\333\ For example, revising Chapter 13 
bankruptcy to include a cramdown or a principal reduction 
component could be one way to impose more significant costs. 
Because of these costs, such a revision could provide borrowers 
with the option of principal reduction without creating the 
potential perverse incentives to other borrowers that may occur 
by mandating principal reduction as an option under HAMP. 
Filing for bankruptcy is not an appealing choice to any 
borrower; however, to the borrower facing certain foreclosure 
it may be the only choice. Whereas mandating principal 
reduction as an option under HAMP may attract a larger than 
desired group of borrowers, allowing principal reduction as an 
option under Chapter 13 is more likely to attract only those 
borrowers who are truly in need of such assistance. In this 
sense, Chapter 13 bankruptcy could be used as a tool to employ 
the benefits of principal reduction to borrowers in need 
without attracting other borrowers and putting any additional 
pressures on HAMP.
---------------------------------------------------------------------------
    \333\ Trauss Philadelphia Hearing Testimony, supra note 297, at 67, 
91, 106.
---------------------------------------------------------------------------
    Likewise, concerns have been raised about whether Treasury 
has the authority to mandate principal reductions if it thought 
that to be a necessary action. While EESA does not give 
Treasury the power to abrogate contracts by fiat, Treasury has 
the power to place conditions on access to future TARP funds. 
Treasury has already done so by requiring institutions to 
participate in MHA, which mandates interest rate reductions and 
principal forbearance in certain circumstances. Treasury could 
therefore make principal reduction a condition for financial 
institutions and their affiliates to receive TARP assistance. 
Legally, there would be no distinction between Treasury 
conditioning TARP assistance on principal reductions and 
conditioning it on principal forbearance and interest rate 
reductions. While there are major accounting differences--
principal reductions result in an impairment of assets, while 
interest rate reductions result in a reduction of future 
income, and principal forbearance has varied accounting 
treatment (potentially charged off and treated as a recovery 
when ultimately paid)--legally they are indistinguishable, as 
they all involve an alteration of a right to payment. Thus, if 
Treasury determined that principal reductions were essential 
for the success of foreclosure mitigation efforts, it would 
have a significant ability to achieve such reductions.
    There are numerous ways in which negative equity could be 
addressed. The Panel merely notes these options and does not 
express an opinion at this time on their preferability:
     Principal reduction could occur already through 
HAMP modifications and HOPE for Homeowners refinancing.
     HAMP incentive structure could be revised to 
encourage principal reductions.
     TARP funds could be spent to purchase principal 
reductions.
     Congressional action could encourage principal 
reductions through a variety of methods:
            Mandatory national foreclosure mediation program.
            Tax and CRA credits to incentivize principal write-
        downs.
            Chapter 13 bankruptcy revisions.
            New Deal-style repudiation of contracts as serving 
        public policy.\334\
---------------------------------------------------------------------------
    \334\ During the Great Depression, the government abandoned the 
gold standard and enacted large-scale debt relief for borrowers by 
declaring that the courts would no longer enforce gold indexation 
clauses in private contracts. Instead, borrowers were able to pay debts 
with the recently devalued dollar. The net effect was to reduce the 
debt burden of borrowers by nearly 70 percent. In enacting this policy, 
the government believed the economic ``benefits of eliminating debt 
overhang and avoiding bankruptcy for private firms more than offset the 
loss to creditors.'' Randall Kroszner, Is It Better to Forgive Than to 
Receive? Repudiation of the Gold Indexation Clause in Long-term Debt, 
University of Chicago working paper (Oct. 1998) (online at 
faculty.chicagobooth.edu/finance/papers/repudiation11.pdf).
---------------------------------------------------------------------------
            d. Unemployment
    Rising unemployment also presents a foreclosure driver to 
which MHA was not designed to respond. Absent a source of 
income, neither refinancing nor modifications are possible. 
Historically, homes have been the single biggest source of 
wealth accumulation for families.\335\ Millions of families 
count on financing their retirements by paying off their homes 
and using Social Security for daily expenses. In addition, home 
equity has provided emergency funds to families hit by medical 
problems, job losses, and divorce. An unemployed household 
could extract equity from a home to bridge that gap between 
jobs. Today, however, this is not possible because of negative 
equity; the home piggybank is empty. An extended period of 
negative home equity has grave implications for the middle 
class, because it means that an important part of their 
economic safety net is gone. This calls into question the long-
term economic stability of a sizeable portion of the middle 
class. We are facing the threat of a vicious cycle: 
unemployment-driven foreclosures could exert downward pressure 
on real estate prices, depressed real estate prices dampen 
consumer consumption demand because of the high share of 
household wealth invested in real estate, and dampened consumer 
demand feeds continued high unemployment.
---------------------------------------------------------------------------
    \335\ Tracy M. Turner & Heather M. Luea, Homeownership, Wealth 
Accumulation and Income Status, Journal of Housing Economics, at 1 
(forthcoming 2009) (online at www.k-state.edu/economics/turner/
JHE2009ABTRACT.pdf).
---------------------------------------------------------------------------
    Even in cases in which there is not negative equity, 
however, unemployment lurks as a driver of foreclosures. 
Unemployment-driven foreclosures exert downward pressure on 
real estate prices and low real estate prices dampen consumer 
demand, which feeds continued high unemployment. The MHA 
programs, however, were not designed to deal with unemployment. 
Instead, they were designed to address the foreclosure crisis 
as it was understood in early 2009. Given the data lags on 
foreclosures, that meant the program was designed using data 
from the third quarter of 2008. A great deal has changed since 
then, however. In the third quarter of 2008, foreclosures were 
primarily a subprime problem; they had not yet become primarily 
a prime problem, and defaults on payment-option and interest-
only mortgages were far off on the horizon. Moreover, 
unemployment was substantially lower.\336\ The result is that 
MHA programs may not be adequate for the present and coming 
phases of the foreclosure crisis. While the program could be 
criticized for failure of prescience, the real question is 
whether federal foreclosure prevention programs will always be 
playing catch-up. To date this has been the case, as the 
federal government has consistently pursued the least 
interventionist approach possible to foreclosures at any given 
juncture.
---------------------------------------------------------------------------
    \336\ Bureau of Labor Statistics, Data Retrieval: Labor Force 
Statistics (accessed Oct. 6, 2009) (online at www.bls.gov/webapps/
legacy/cpsatab1.htm).
---------------------------------------------------------------------------
    Crafting programs to assist unemployed homeowners retain 
their homes is a crucial next step in foreclosure mitigation. 
During the Panel's foreclosure mitigation field hearing, Dr. 
Willen noted that ``an effective plan must address the problem 
of unemployed borrowers'' because ``thirty-one percent of an 
unemployed person's income is often thirty-one percent of 
nothing and a payment of zero will never be attractive to a 
lender.'' \337\ Dr. Willen also explained that his research 
``shows that, contrary to popular belief, unemployment and 
other life events like illness and divorce, much more than 
problematic mortgages, have been at the heart of this crisis 
all along even before the collapse of the labor market in the 
fall of 2008.'' \338\ Although there was no surge in such life 
events in the months or years leading up to the crisis, he 
explained, falling real estate prices meant that foreclosure--
and not a profitable sale, as would be the result if prices 
were rising--would be the result if a person became 
unemployed.\339\ Other witnesses at the Panel's foreclosure 
mitigation field hearing, including Joe Ohayon of Wells Fargo 
Home Mortgage, agreed that the Making Home Affordable program 
should directly address unemployment-related foreclosures.\340\
---------------------------------------------------------------------------
    \337\ Congressional Oversight Panel, Testimony of Dr. Paul Willen, 
Philadelphia Field Hearing on Mortgage Foreclosures, at 135 (Sept. 24, 
2009).
    \338\ Id. at 110.
    \339\ Id. at 110.
    \340\ Congressional Oversight Panel, Testimony of Joe Ohayon, 
Philadelphia Field Hearing on Mortgage Foreclosures, at 109 (Sept. 24, 
2009) (hereinafter ``Ohayon Philadelphia Hearing Testimony'').
---------------------------------------------------------------------------
    There is precedent for such programs to assist the 
unemployed. One such effort, the Homeowners' Emergency Mortgage 
Assistance Program in Pennsylvania, was discussed above in 
Section 8B. The idea has also been authorized at the federal 
level. In 1975, Congress passed the Emergency Homeowners' 
Relief Act.\341\ The Act provided standby authority for HUD to 
implement a program that would provide emergency loans and 
grants to help unemployed homeowners avoid foreclosure, and the 
Department of Housing and Urban Development--Independent 
Agencies Appropriations Act, 1976 (P.L. 94-116) appropriated 
$35 million to the Emergency Homeowners' Relief Fund in order 
to carry out this program. HUD's final rule on the standby 
program stipulated that the HUD Secretary could implement the 
Emergency Homeowners' Relief Program if a composite index of 
mortgage delinquencies reached 1.20 percent, a threshold 
several times lower than present delinquency rates. Because the 
threshold was never reached, the program was never implemented. 
Nonetheless, it provides a model of assistance to unemployed 
homeowners to carry them through an economic downturn without 
imposing the deadweight losses of foreclosures on the economy.
---------------------------------------------------------------------------
    \341\ Pub. L. 94-50, codified at 12 U.S.C. 2701 et seq.
---------------------------------------------------------------------------
    The ultimate policy success of federal foreclosure 
prevention efforts hinges on whether they can produce 
sustainable results on a sufficient scale. In both matters of 
sustainability and scale, there are serious concerns about 
whether the existing programs are up to the task. Because 
circumstances have changed markedly since the roll-out of the 
MHA in February, the Panel suggests that Treasury consider new 
programs or make significant changes to existing programs to 
address the issue of job loss and the temporary inability to 
make mortgage loan payments.

4. Cost-benefit Analysis

    In evaluating government programs, it is helpful to 
consider the costs and benefits, therefore the Panel asked 
Professor Alan White of Valparaiso University to conduct a cost 
benefit analysis, included as Annex B. Treasury estimates it 
will spend $42.5 billion for non-GSE Home Affordable 
Modification programs (HAMP), of which $23 billion has been 
contracted for, and that will buy about 2 to 2.6 million 
modifications, i.e. an average per-modification cost between 
$16,000 and $21,000. This includes the second lien modification 
component and the home price decline protection payments. 
Professor White's estimate of the probability-adjusted, 
discounted cost per modification is somewhat lower, but found 
an estimate in the range of $16,000 to $21,000 reasonable. Some 
of these payments go to servicers, while some are used to pay 
loan principal and interest, for the benefit of both homeowners 
and investors.
    Professor White's analysis noted that the benefits of HAMP 
modifications include avoided investor losses and avoided 
external costs, which include homeowner relocation costs, 
neighboring property value effects and local government 
expenditures, probably equal to double or triple the investor 
benefits. He found that investor loss avoidance could 
potentially exceed $50,000 per modification, and homeowner, 
neighboring property and municipal foreclosure loss avoidance 
could amount to double that or more. On the other hand, 
Professor White indicated that the $16,000 to $21,000 payments 
are being made for some modifications that would have occurred 
anyway, and thus the benefits need to be discounted 
accordingly. He concluded that it is too early in the program 
to measure the magnitude of this displacement effect.
    Other authors have considered that it is possible, of 
course, that modifications are failing to keep pace with 
foreclosures because modifications fail to maximize the present 
value of mortgages, making foreclosure a rational economic 
decision, even if it is not in the public interest. This theory 
has been propounded most notably in a working paper published 
by the Federal Reserve Bank of Boston.\342\ As the paper 
explains, the net present value of modifying a defaulted loan 
depends on the rate of redefaults, the extent to which losses 
on redefaults exceed losses in foreclosure without a 
modification, and the rate at which mortgagors cure their 
defaults without modification. Likewise, the net present value 
of a non-modified but defaulted loan depends on the self-cure 
rate and the loss severities in foreclosure. The paper 
correctly argues that if self-cure rates and redefault rates 
are sufficiently high, modifications will not maximize net 
present value.
---------------------------------------------------------------------------
    \342\ Redefaults, Self-Cures, and Securitization Paper, supra note 
142.
---------------------------------------------------------------------------
    The paper, which uses a 10 percent random sample of data 
from Lender Processing Services (formerly McDash) data from 
2007-2008, which covers approximately 60 percent of the market, 
also cites what appear to be quite high self-cure and redefault 
rates of 25-30 percent and 30-50 percent respectively, 
depending on loan, borrower, and modification 
characteristics.\343\ These rates are not an accurate 
description of present realities, however. According to Fitch 
Ratings, the self-cure rate at present is between 4.3 percent 
and 6.6 percent, depending on type of loan.\344\
---------------------------------------------------------------------------
    \343\ Id. at table 8.
    \344\ Fitch Release, supra note 22.
---------------------------------------------------------------------------
    Moreover, redefault rates are highly contingent on the type 
of modification, so basing NPV calculations on redefault rates 
has a circular logic. As OCC/OTS Mortgage Metrics reports and 
the Boston Fed study shows, modifications that reduce monthly 
payment have a much lower redefault rate.\345\ It also stands 
to reason that the manner in which monthly payments are reduced 
(i.e. via interest rate reduction, term extension, principal 
forbearance, principal forgiveness) might also impact redefault 
rates. A borrower with positive equity and an affordable 
mortgage will be much more incentivized to avoid a redefault 
than a borrower with negative equity, who has already lost his 
investment in the home. Additionally, the Boston Fed study 
might underestimate losses on foreclosure and overestimate the 
additional losses caused by redefault, especially if housing 
markets have bottomed out.
---------------------------------------------------------------------------
    \345\ OCC and OTS Second Quarter Mortgage Report, supra note 42; 
Redefaults, Self-Cures, and Securitization Paper, supra note 142.
---------------------------------------------------------------------------
    In any event, the Boston Fed study never actually tests the 
rates it cites in the net present value calculation it 
presents. The Panel's staff tested the Boston Fed staff's NPV 
formula with very conservative assumptions, and found that even 
when using the Boston Fed staff's much-higher-than-current 
self-cure and redefault rates, there is still room to undertake 
a NPV maximizing modification (see Annex A). When more 
realistic assumptions about self-cure, redefault, and 
foreclosure losses are used, there is significant room to 
undertake NPV maximizing modifications for a wide range of loan 
inputs.
    Accordingly, it does not appear that foreclosure is usually 
the decision that rationally maximizes value for mortgagees. 
Foreclosure may be a rational, value-maximizing decision for 
servicers, but it is often not for lenders. While there is a 
range of cases in which foreclosure will maximize NPV for 
mortgagees, these appear to be the exception, not the rule.

5. Servicer Compliance with HAMP Guidelines

    While Treasury has broad policy issues to consider for the 
evolution of the foreclosure mitigation initiative, it still 
must administer the current programs in the most effective 
manner possible. A key element to HAMP's success is the degree 
to which servicers comply with the program's guidelines. If 
borrowers face incorrectly rejected applications, unreasonably 
long wait times for responses to questions and completed 
applications, lost paperwork, and incorrect information, HAMP 
will not reach its full potential. At the Panel's foreclosure 
mitigation field hearing, Seth Wheeler, senior advisor at the 
Treasury Department, testified, ``We are working to establish 
specific operational metrics to measure the performance of each 
servicer. These performance metrics are likely to include such 
measures as average borrower wait time in response to inquiries 
and response time for completed applications. We plan to 
include these metrics in our monthly public report.'' \346\
---------------------------------------------------------------------------
    \346\ Wheeler Philadelphia Hearing Testimony, supra note 88, at 6.
---------------------------------------------------------------------------
    This is critical, as borrowers and advocates continue to 
report numerous problems. Eileen Fitzgerald, chief operating 
officer of NeighborWorks America (which provides funding to 
housing counselors across the country) testified at the Panel's 
foreclosure mitigation field hearing that a great deal of time 
is wasted during the loan modification process because each 
participating servicer uses different forms and imposes 
different requirements. ``There is a huge process problem 
here,'' she said. Housing counselors have reported other 
problems, as well, including: (1) exceedingly long telephone 
wait times before speaking to a servicer (2) inexperienced 
personnel unfamiliar with program details; (3) misplaced 
documentation often leading to delays in processing; (4) a 
significant lag period between application and final approval 
for trial modifications; and (5) the failure of servicers to 
reach out to distressed homeowners.\347\ Preliminary 
information also suggests some participating servicers violate 
HAMP guidelines in a number of much more serious ways, 
including requiring borrowers to waive legal rights, offering 
non-compliant loan modifications, refusing to offer HAMP 
modifications, charging borrowers a fee for the modification, 
and selling homes at foreclosure while the HAMP review is 
pending.\348\ Others have found such violations as ``[d]enials 
of HAMP modifications for reasons not permitted in the 
guidelines, such as--`insufficient income' and `too much back-
end debt,' '' assertions by participating servicers that they 
are not bound by HAMP, and incorrect ``claims of investors 
denying HAMP modifications.'' \349\
---------------------------------------------------------------------------
    \347\ See Congressional Oversight Panel, Testimony of NeighborWorks 
America Chief Operating Officer Eileen Fitzgerald, Philadelphia Field 
Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online at 
cop.senate.gov/hearings/library/ hearing-092409-philadelphia.cfm); 
Goldberg Philadelphia Hearing Testimony, supra note 99; Tami Luhby, 5 
Dumb Reasons You Can't Get Mortgage Help, CNNMoney (Aug. 11, 2009) 
(online at money.cnn.com/2009/08/11/news/ economy/
dumb__.reasons__no__mortgage__modification/).
    \348\ House Committee on Financial Services, Subcommittee on 
Housing and Community Opportunity, Written Testimony of Alys Cohen, 
National Consumer Law Center, Progress of the Making Home Affordable 
Program: What Are the Outcomes for Homeowners and What are the 
Obstacles to Success, at 3 (Sept. 9, 2009) (online at www.house.gov/
apps/list/hearing/financialsvcs__dem/cohen__-__nclc.pdf); National 
Consumer Law Center, Desperate Homeowners: Loan Mod Scammers Step in 
When Loan Servicers Refuse to Provide Relief, at 8 (July 2009) (online 
at www.consumerlaw.org/issues/mortgage__servicing/content/ 
LoanModScamsReport0709.pdf) (``Stories abound of exasperated homeowners 
attempting to navigate vast voice mail systems, being bounced around 
from one department to another, and receiving contradictory information 
from different servicer representatives.'').
    \349\ NYC Anti-Predatory Lending Task Force, Letter to Assistant 
Secretary Herb Allison (July 23, 2009) (online at www.nedap.org/
documents/HAMPtaskforceletter.pdf).
---------------------------------------------------------------------------
    The Panel heard similar stories at its foreclosure 
mitigation field hearing. Advocates on behalf of homeowners 
testified that some servicers have erroneously been telling 
homeowners that only Fannie Mae and Freddie Mac loans are 
eligible for HAMP modification. Some servicers have been 
wrongly claiming that only underwater loans are eligible. Some 
servicers have been misinforming homeowners by saying that the 
investors who own their loans have not given the servicers 
permission to participate in the program. And these witnesses 
also testified that some servicers have wrongly been asking 
housing counselors to provide their own Social Security 
numbers.\350\ Until specific compliance data become available, 
news from the field provides the only picture of whether 
modifications are conforming.\351\
---------------------------------------------------------------------------
    \350\ Fitzgerald Philadelphia Hearing Testimony, supra note 147, at 
71. Goldberg Philadelphia Hearing Testimony, supra note 99.
    \351\ Chris Arnold, Major Banks Still Grappling With Foreclosures, 
NPR (Sept. 9, 2009) (online at www.npr.org/templates/story/
story.php?storyId=112660935) (While the reporter shadowed a call center 
worker, the worker incorrectly denied an application for HAMP 
modification.).
---------------------------------------------------------------------------
    HAMP has a built-in compliance structure. Treasury has 
designated Freddie Mac as the compliance agent, and tasked the 
agency with performing announced and unannounced onsite and 
remote audits and reviews of participating servicers.\352\ As 
part of its compliance duties, Freddie Mac is developing a 
``second look'' process to audit modification applications that 
have been declined by servicers.\353\ However, GAO has stated 
its concern that Freddie Mac does not yet have ``procedures in 
place to address identified instances of noncompliance among 
servicers.'' \354\ Advocates have also noted that very little 
is known about the schedule, nature, or outcome of Freddie 
Mac's compliance reviews.\355\
---------------------------------------------------------------------------
    \352\ GAO HAMP Report supra note 98, at 38, 42.
    \353\ Congressional Oversight Panel, Questions for the Record from 
the Congressional Oversight Panel at the Congressional Oversight Panel 
Hearing on June 24, 2009, at 6. GAO HAMP Report, supra note 98, at 42.
    \354\ GAO HAMP Report supra note 98, at 43. GAO was particularly 
concerned that ``while Treasury has emphasized in program announcements 
that one of HAMP's primary goals is to reach borrowers who are still 
current on mortgage payments but at risk of default, no comprehensive 
processes have yet been established to assure that all borrowers at 
risk of default in participating servicers' portfolios are reached.'' 
Id.
    \355\ Goldberg Philadelphia Hearing Testimony, supra note 99.
---------------------------------------------------------------------------
    Some servicers, to their credit, concede that they must 
improve their systems. After Treasury and HUD met with 
servicers in late July to inform them that they must increase 
the number of modifications, several servicers issued 
statements in response. Bank of America's statement announced, 
``Despite our aggressive efforts to find solutions for 
homeowners in default, we must improve our processes for 
reaching those in need.'' \356\ At a recent hearing, a 
representative of Wells Fargo stated that ``some customers have 
been challenged with getting clear, timely communication from 
us, as the guidelines and the requirements for the various 
programs have continued to change.'' \357\ Servicers must iron 
out the wrinkles in their implementation of HAMP, and Treasury 
must quickly put its compliance plan into place, in order for 
all eligible borrowers to fully benefit from HAMP.
---------------------------------------------------------------------------
    \356\ Andrea Fuller, U.S. Effort Aids Only 9% of Eligible 
Homeowners, New York Times (Aug. 4, 2009) (online at www.nytimes.com/
2009/08/05/business/05treasury.html).
    \357\ House of Representatives Committee on Financial Services, 
Subcommittee on Housing and Community Opportunity, Testimony of Mary 
Coffin, Wells Fargo, Progress of the Making Home Affordable Program: 
What Are the Outcomes for Homeowners and What are the Obstacles to 
Success, 111th Cong. (Sept. 9, 2009) (Video available online at 
www.house.gov/apps/list/hearing/ financialsvcs__dem/coffin__-__wf.pdf).
---------------------------------------------------------------------------
    As with all TARP programs, transparency is crucial. 
Borrowers should understand why a modification is being denied. 
On October 1, Treasury announced that it has met its goal of 
establishing ``denial codes that will require servicers to 
report the reason for modification denials, both to Treasury 
and to borrowers.'' \358\ This is an important step, but the 
denial codes must also contain borrower recourse should the 
reason be invalid.
---------------------------------------------------------------------------
    \358\ Wheeler Philadelphia Hearing Testimony, supra note 88; 
Andrews Frustrated Homeowners, supra note 148.
---------------------------------------------------------------------------
    While the Panel is pleased with Freddie Mac's commitment to 
``using a number of fraud detection and compliance techniques 
in their sampling and compliance reviews'' and a focus on 
``borrower, servicer, and systemic fraud, as well as quality 
control,'' \359\ this alone is insufficient. Monitoring alone 
is ineffective unless accompanied by meaningful penalties for 
failure to comply. This is particularly important to address 
patterns of willful lack of compliance with program standards 
by participants. At the Panel's foreclosure mitigation field 
hearing, Irwin Trauss, supervising attorney of the consumer 
housing unit at Philadelphia Legal Services, said there should 
be immediate negative consequences for servicers that fail to 
meet their obligations in the program. ``If you sign the 
participation agreement, then you're supposed to follow the 
rules,'' he said. ``But there's no teeth.'' \360\ Treasury has 
provided servicers, investors, and borrowers with a set of 
carrots to encourage participation in the program. It also 
needs a full range of compliance tools, or sticks, to make sure 
participants adhere to program guidelines and procedures.\361\
---------------------------------------------------------------------------
    \359\ Congressional Oversight Panel, Written Testimony of Freddie 
Mac Senior Vice President, Economics and Policy, Edward Golding, 
Philadelphia Field Hearing on Mortgage Foreclosures, at 4 (Sept. 24, 
2009) (online at cop.senate.gov/documents/testimony-092409-
golding.pdf).
    \360\ Trauss Philadelphia Hearing Testimony, supra note 333, at 91.
    \361\ Goldberg Philadelphia Hearing Testimony, supra note 99.
---------------------------------------------------------------------------

                   E. Conclusion and Recommendations

    Treasury has created programs designed to address some of 
the items on the Panel's March checklist for a successful 
foreclosure mitigation program, with a focus on affordability. 
Yet, despite the passage of six months, many of these programs 
remain in their early stages and do not yet have a demonstrated 
track record of success, especially on the points of second 
liens, servicer incentives, borrower outreach, and servicer 
participation. The Panel intends to monitor carefully all 
available data on these and other points going forward to make 
further recommendations regarding the effectiveness of MHA.

1. Areas Not Adequately Addressed by MHA

    While MHA is making progress in meeting some of its 
objectives, the current programs do not encompass the entire 
scope of the foreclosure crisis, which has significantly 
expanded in scope since MHA was announced seven months ago. To 
maximize the effectiveness of the federal foreclosure 
mitigation effort, Treasury should be forward looking and 
attempt to address new and emerging problems before they reach 
crisis proportions.
    First, the current MHA framework appears to be inadequate 
to address the coming wave of payment-option ARM and interest-
only loan rate re-sets that is looming in the near future, a 
concern very specifically raised by the National Fair Housing 
Alliance and by Litton Loan Servicing at the Panel's 
foreclosure mitigation field hearing.\362\ This challenge 
should be addressed now, before many families find that the 
federal initiative offers them no relief from foreclosure.
---------------------------------------------------------------------------
    \362\ Goldberg Philadelphia Hearing Testimony, supra note 99; 
Litton Philadelphia Hearing Written Testimony, supra note 124, at 4.
---------------------------------------------------------------------------
    Second, unemployment has continued to increase since the 
inception of MHA, and job loss is a strong driver of 
foreclosure. In particular, Treasury needs to find ways to 
provide foreclosure mitigation for unemployed or underemployed 
individuals, a point underscored by Dr. Paul Willen at the 
Panel's foreclosure mitigation field hearing, and reiterated by 
Joe Ohayon of Wells Fargo Home Mortgage Service.\363\ One 
possible way to address the needs of those who are unemployed 
would be to replicate Pennsylvania's successful Homeowner 
Emergency Mortgage Assistance Program (a type of bridge loan 
program for unemployed mortgagors) on a national scale.\364\ At 
the Panel's foreclosure mitigation field hearing, virtually all 
of the witnesses acknowledged the promise of this program.
---------------------------------------------------------------------------
    \363\ Willen Philadelphia Hearing Written Testimony, supra note 
305, at 109-110, 137-138; Ohayon Philadelphia Hearing Testimony, supra 
note 340, at 137-139.
    \364\ Trauss Philadelphia Hearing Written Testimony, supra note 
297, at 3. At the foreclosure mitigation field hearing in Philadelphia, 
the Panel received a proposal from the lawyers working at the 
Pennsylvania program for a national scale project. See Hearing Record, 
Congressional Oversight Panel, Philadelphia Field Hearing on Mortgage 
Foreclosures (Sept. 24, 2009) (online at cop.senate.gov/hearings/
library/hearing-092409-philadelphia.cfm).
---------------------------------------------------------------------------
    Third, the existing federal foreclosure mitigation effort 
has also failed to deal with negative equity in a substantial 
or programmatic way, possibly calling into question the long-
term sustainability of some modifications and refinancings. 
Principal reduction is the primary way to eliminate negative 
equity, and the Panel recognizes that there are serious legal 
and bank safety and soundness considerations that accompany 
each of the various options Treasury and Congress could employ 
to achieve principal reduction.

2. MHA Program Improvements

    As it administers MHA and any subsequent program 
evolutions, Treasury must be mindful of several key points to 
maximize success.
    Transparency. First, the programs must be transparent. 
Information on eligibility and denials should be clear, easily 
understood and promptly communicated to borrowers. The denial 
process should include appropriate appeals for those denied 
incorrectly. Denial information should then be aggregated and 
reported to the public. Treasury should also release the NPV 
models, a point stressed by NeighborWorks and the National Fair 
Housing Alliance,\365\ so that they can be used by borrowers 
and borrowers' counselors. While Treasury has made marked 
progress in its data collection, more data on HAMP borrowers 
should be made public in a timely, useful way, similar to HMDA 
data. Data collection should also be expanded to include 
information on a broader universe of borrowers facing 
foreclosure, beyond those eligible for HAMP. The Panel looks 
forward to Treasury's fulfillment of its recent commitment to 
provide greater and deeper disclosure of servicer quality, 
responsiveness, capacity, and other performance data. These 
transparency commitments should apply equally to HARP, for 
which there has been a decided lack of data, and HAMP.
---------------------------------------------------------------------------
    \365\ Goldberg Philadelphia Hearing Testimony, supra note 99, at 8-
9; Fitzgerald Philadelphia Hearing Testimony, supra note 147.
---------------------------------------------------------------------------
    Streamlining process. Next, Treasury should implement 
greater uniformity into the loan modification system. 
Certainly, MHA was a significant step forward in creating an 
industry standard for loan modification, but borrowers and 
advocates continue to cite frustration with the differing forms 
and procedures from lender to lender.\366\ Lenders have 
expressed frustration as well, including Bank of America before 
the Panel.\367\ Creating further uniformity in the process will 
make it easier to educate borrowers on how the process works, 
as well as promote greater effectiveness for housing 
counselors. Treasury should continue current efforts to 
streamline and unify the process through its planned web portal 
and other means. Streamlining and standardizing the income 
documentation that verifies a borrower's income will increase 
the likelihood that modifications are executed in a timely 
fashion. Additional efforts to improve case management and 
customer communication are also needed.
---------------------------------------------------------------------------
    \366\ Goldberg Philadelphia Hearing Testimony, supra note 99, at 8-
9; Fitzgerald Philadelphia Hearing Testimony, supra note 147.
    \367\ Congressional Oversight Panel, Testimony of Bank of America 
Home Loans Senior Vice President for Default Management, Allen Jones, 
Philadelphia Field Hearing on Mortgage Foreclosures, at 144-49 (Sept. 
24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-
philadelphia.cfm) (hereinafter ``Jones Philadelphia Hearing 
Testimony'').
---------------------------------------------------------------------------
    Program enhancement. Several witnesses at the Panel's 
foreclosure mitigation field hearing made constructive 
recommendations for program enhancement that Treasury should 
consider. First, many of the NPV model standards rely on 
statewide averages and there are instances in which these 
averages can be inappropriate (home sales, foreclosure 
timeframes, etc.). More granular local information should be 
incorporated. Second, several witnesses, including borrowers 
and servicers, expressed the need for the DTI eligibility test 
to go below 31 percent in order to accommodate borrowers for 
whom the modified capitalized arrearages would move them from 
below 31 percent (ineligible) to above 31 percent DTI 
(eligible), capturing additional borrowers at risk. Third, 
there were useful suggestions for ombudsmen and designated case 
staff to help borrowers cut through the red tape and have 
consistency in who they speak to at the servicer.
    Accountability. It is also critical for the success and 
credibility of the foreclosure mitigation programs to have 
strong accountability. Freddie Mac has been selected to oversee 
program compliance, and this is an important step. Freddie Mac 
and Treasury must outline a rigorous framework, including 
procedures to address non-compliance. It is critical that the 
program have strong, appropriate sanctions to ensure that all 
participants follow program guidelines. The performance metrics 
currently being developed by Treasury can play an important 
role in providing accountability. To maximize their 
effectiveness, the metrics should be comprehensive, and the 
results should be made public, with results available by 
lender/servicer.
 ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES ON NET PRESENT 
                           VALUE CALCULATIONS

    The net present value (NPV) calculation for a servicer is a 
comparison of the NPV of an unmodified delinquent loan to the 
NPV of a modification of that same delinquent loan. A NPV is 
the probability-weighted average of the various present values 
of different outcomes. If the NPV of the modified loan is 
greater than the NPV of the unmodified loan, then a 
modification is value maximizing for the investors in the loan. 
We can thus present a simple comparison of the NPV of the same 
defaulted loan if modified and unmodified.
    If a delinquent loan is not modified, there is a chance 
(PC) that the borrower will cure without assistance. There is 
also a possibility that there will be a foreclosure (PF). The 
NPV of the unmodified delinquent loan is thus the weighted 
average of the value of the self-cured loan and the value of 
the loan in foreclosure.
    If the delinquent loan is modified, there is a chance that 
the loan will perform as modified, but only as modified (PM). 
There is also a chance that the modification was unnecessary, 
as the defaulted would have been cured without the modification 
(PC-M). There is also a chance that the loan will redefault 
(PR), which could cause greater losses to the mortgagee in a 
falling market. Thus the NPV of the modified loan is the 
weighted average of the values of the unnecessarily modified 
loan, the redefaulted modified loan, and the performing 
modified loan.
    Thus the NPV of a modified loan is only greater than the 
NPV of the unmodified loan if: PM + PC-M + PR +  PC + PF
    This model can be tested against various market 
assumptions. A working paper published by the staff of the 
Boston Federal Reserve found that in 2007-2008 the self-cure 
rate (PC and PC-M) on a sample of loans from the LPS database, 
covering approximately 60 percent of the mortgage market, was 
30 percent.\368\ This means that the chance of foreclosure if 
the loan is unmodified (PF) is 70 percent. The study also found 
redefault rates (PR) on modified loans in the range of 40 
percent. Therefore the rate of successful, necessary 
modifications (PM) is 30 percent. Also assume that loss 
severities in foreclosure are 50 percent and that loss 
severities on redefault are 75 percent. These are, 
respectively, optimistic and pessimistic assumptions. Finally, 
assume that the mortgage in question, if it performed 
unmodified, would have a NPV of $200,000.
---------------------------------------------------------------------------
    \368\ Redefaults, Self-Cures, and Securitization Paper, supra note 
142.
---------------------------------------------------------------------------
    Using a stated NPV for an unmodified loan permits us to 
avoid having to model the NPV of a loan and discount rate and 
prepayment assumptions, etc. These factors are vitally 
important in the NPV analysis that a servicer undertakes, and 
depend on numerous factors like loan structure. To examine the 
claim put forth in the Boston Federal Reserve study, however--
namely that foreclosure is in most cases a rational, value 
maximizing response--we need nearly assume an NPV for an 
unmodified loan. Given the nature of the formula, however, the 
assumed NPV is ultimately immaterial to the outcome.
    Given these assumptions, we can then solve for M, which is 
the minimum NPV of the loan as modified that would still 
maximize NPV relative to the defaulted loan unmodified:
    PM = .3M
    PC-M = .3M
    PR = .4 * (1-.75) * $200,000 = $20,000
    PC = .3 * $200,000 = $60,000
    PF = .7 * (1-.5) * $200,000 = $70,000
    Thus PM + PC-M + PR +  PC + PF is: .3M + .3M + $20,000 > 
$60,000 + $70,000
    We can simplify this as: .6M + $20,000  $130,000 and solve 
for M:
    .6M  $110,000
    M $183,333.33
    This means that even using the Boston Federal Reserves's 
findings on self-cure and redefault rate plus very conservative 
assumptions on redefault losses, the principal and/or interest 
on the mortgage could be written down such that the NPV of the 
loan would go to $183,333.33 and the modification would still 
maximize net present value for the mortgagee. In other words, a 
modification would still be value maximizing, even with an 8.33 
percent reduction in NPV from the NPV of the loan performing 
unmodified.
    Notice that this outcome does not depend on the assumed NPV 
of the unmodified loan if it performed. If we substituted a 
variable X for the unmodified NPV of the loan if it performed, 
we would find that M 55/60 * X. As there is always a positive 
difference between X and 55/60 * X, there is some room for a 
modification using these assumptions, regardless of the size of 
the mortgage.
    If we use more current assumptions, such as a 6 percent 
self-cure rate (PC and PC-M) and a 35 percent redefault rate 
(PR), then the unmodified loan will end up in foreclosure (PF) 
94 percent of the time, and will perform as modified, but only 
as modified (PM), 59 percent of the time. Let us also assume, 
more plausibly, loss severities in foreclosure at 60 percent 
and on redefault at 65 percent. With these assumptions, we see 
a much greater modification is possible.
    PM = .59M
    PC-M = .06M
    PR = .35 * (1-.65) * $200,000 =$24,500
    PC = .06 * $200,000 = $12,000
    PF = .94 * (1-.5) * $200,000 = $94,000
    Thus PM + PC-M + PR +  PC + PF is:
    .59M + .06M + $24,500 > $12,000 + $94,000
    We can simplify this as .65M + $24,500  $106,000 and solve 
for M:
    .65M  $81,500
    M  $125,384.61
    Using more realistic assumptions, the principal and/or 
interest on the mortgage could be written down such that the 
NPV of the loan would go to $125,384.61 and the modification 
would still maximize net present value for the mortgagee. In 
other words, a modification would still be value maximizing, 
even with a 37 percent reduction in NPV from the NPV of the 
loan performing unmodified. Again, once the assumptions about 
redefault and self-cure rates are fixed, the outcome does not 
depend on the size of the mortgage. While the Boston Federal 
Reserve study is correct that self-cure and redefault rates 
play a major role in servicers' NPV calculations, even with the 
extremely high self-cure and redefault rates found in the LPS 
data from 2007-2008, there was still room for value-maximizing 
modifications for quite standard loans. With current default 
and self-cure rates and further depressed foreclosure sale 
markets, there is even greater room for modifications possible.
 ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE HOME AFFORDABLE MORTGAGE 
                          MODIFICATION PROGRAM


                            A. Alan M. White


1. Introduction

    The following discussion of the costs and benefits of 
homeowner assistance programs funded by TARP is necessarily 
qualitative, rather than quantitative, and preliminary in light 
of the very recent implementation of most of the initiatives 
under study. The focus will be on the first lien modification 
program, rather than the smaller deed-in-lieu and short sale 
program, whose per-home and total costs are much smaller. The 
GSE refinance program, which does not receive TARP funds 
directly, is not discussed.
    The continuing absence of mortgage performance data 
collection and reporting by Treasury hampers the effort to 
measure the costs and benefits of the programs and to evaluate 
any progress being made in bringing the foreclosure crisis to 
an end. The ultimate yardstick for evaluating any foreclosure-
relief program is reduction in the number of foreclosure 
filings and foreclosure sales. Related indicators, such as 
early delinquencies, as well as details about modification 
application approvals and rejections, self-cure rates, and 
redefault rates on modified loans, need to be reported on a 
timely and regular (preferably monthly) basis.\369\
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    \369\ This point was made in the Congressional Oversight Panel's 
March 2009 report as well as in a July Government Accountability Office 
report. Congressional Oversight Panel, March Oversight Report: 
Foreclosure Crisis: Working Toward a Solution (Mar. 6, 2009) (online at 
cop.senate.gov/documents/cop-030609-report.pdf); GAO HAMP Report, supra 
note 98.
---------------------------------------------------------------------------

2. Description of Taxpayer-Funded Mortgage Borrower, Servicer, and 
        Investor Assistance Programs Being Funded Through TARP

    Treasury has allocated $50 billion to make incentive 
payments and loan subsidies to servicers of non-GSE mortgages 
under the Home Affordable Mortgage Program (HAMP). An 
additional $25 billion will be spent by the GSEs for a similar 
modification incentive program, but those funds are not TARP 
funds.\370\ The incentive payments include extra compensation 
to servicers for the work required to modify mortgage loans and 
payments to reduce loan balances and interest rates. The former 
payments benefit servicers, and the latter payments benefit 
both investors and homeowners. Investors benefit by the reduced 
risk of non-payment of their remaining balances and homeowners 
benefit from reduction of their debt. Treasury has allocated 
$10 billion to Home Price Decline Protection payments made to 
reduce mortgage debt in areas where home prices are subject to 
unusually high decline, such as in the sand states of Florida, 
Nevada, Arizona, and California. These latter payments afford 
an incentive to investors to agree to modifications and benefit 
both investors and homeowners by repaying and reducing mortgage 
debt.
---------------------------------------------------------------------------
    \370\ Fannie Mae and Freddie Mac have received large capital 
infusions under TARP, and so any expenditure by the GSEs, to the extent 
it reduces profits or erodes share values, indirectly reduces repayment 
of TARP funds. Like Treasury, the GSEs should be reporting data on 
mortgage modifications, servicer payments and foreclosures.
---------------------------------------------------------------------------
    Treasury has also announced two related HAMP initiatives: 
to address second mortgages and to encourage foreclosure 
alternatives for homeowners who are giving up their home (short 
sale/deed in lieu program). The cost of these programs is 
included in the $40 billion for HAMP. Servicers may receive 
incentive compensation of up to $1,000 for successful 
completion of short sale or deed-in-lieu, and borrowers may 
receive incentive compensation of up to $1,500 for relocation 
expenses. Treasury will also contribute up to $1,000, on a $1 
to $2 basis, to assist investors in buying out second lien 
holders to make a sale or deed-in-lieu workable and allow 
recovery by the first mortgage investors.

3. The General Case for Promoting Mortgage Modifications

    One in eight mortgages, representing nearly seven million 
homes, is now delinquent or in foreclosure.\371\ Mortgage 
servicers are starting new Foreclosures at a rate of 250,000 
per month, or three million per year.\372\ foreclosures are at 
roughly quadruple their pre-crisis levels.\373\ Each additional 
foreclosure is now resulting in direct investor losses of more 
than $120,000.\374\ In addition, each foreclosure results in 
direct costs to displaced owners and tenants and indirect costs 
to cities and towns, neighboring homeowners whose property 
values are driven down, and the broader housing-related 
economy. When we speak of investors to whom mortgage payments 
are due, we are speaking in part about taxpayers, who now own a 
major share of America's mortgages. Taxpayers are mortgage 
investors directly through Treasury and Federal Reserve 
investments in mortgage-backed securities (MBS), and indirectly 
through FHA and VA insurance and through equity investments and 
guarantees in Fannie Mae, Freddie Mac, and other financial 
institutions that carry mortgages and MBS on their books. If 
HAMP is successful in reducing investor losses, those savings 
should translate to improved recovery on other taxpayer 
investments.
---------------------------------------------------------------------------
    \371\ MBA National Delinquency Survey, supra note 4 (Reporting 
8.86% of mortgages delinquent and 4.3% in foreclosure as of June 30, 
2009, out of 44,721,256 mortgages, representing 85% of all first 
mortgages).
    \372\ HOPE NOW, Workout Plans and Foreclosure Sales, supra note 2 
(reporting 254,000, 251,000, and 284,000 foreclosure starts for May, 
June, and July 2009, respectively.).
    \373\ Mortgage Bankers Association, National Delinquency Survey 
(Apr. 2006).
    \374\ The average loss recorded for foreclosure sale liquidations 
in securitized subprime and alt-A mortgages in November 2008 was 
$124,000. Alan M. White, Deleveraging the American Homeowner: The 
Failure of 2008 Voluntary Contract Modifications, 41 Connecticut Law 
Review 1107, at 1119 (2009) (hereinafter ``Deleveraging the American 
Homeowner''). Losses per foreclosure have continued to rise since then. 
Current monthly data on foreclosure losses are available at: 
www.valpo.edu/law/faculty/awhite/data/index.php.
---------------------------------------------------------------------------
    Experience in prior debt crises and in the current crisis 
has shown that well-designed mortgage restructuring programs, 
in which borrowers in default or likely to default are offered 
payment reductions or extensions rather than having their 
property foreclosed, can significantly mitigate losses that 
investors and taxpayers would otherwise suffer. The mortgage 
servicing industry ramped up its levels of voluntary mortgage 
modifications in 2007 and 2008, with mixed results. On one 
hand, nearly two million mortgages were modified, avoiding 
foreclosure at least temporarily and restoring some cash flow 
for investors. On the other hand, modifications were limited 
compared to the much larger number of mortgages in default and 
foreclosure, and redefault rates on voluntary modifications 
have been as high as 50 percent or more. Nevertheless, there is 
convincing evidence that successful modifications avoided 
substantial losses, while requiring only very modest 
curtailment of investor income. In fact, the typical voluntary 
modification in the 2007-2008 period involved no cancellation 
of principal debt or of past-due interest, but instead 
consisted of combining a capitalization of past-due interest 
with a temporary (three to five year) reduction in the current 
interest rate. Foreclosures, on the other hand, are resulting 
in losses of 50 percent or more, i.e. upwards of $124,000 on 
the mean $212,000 mortgage in default.\375\
---------------------------------------------------------------------------
    \375\ Deleveraging the American Homeowner, supra note 374.
---------------------------------------------------------------------------
    While modification can often result in a better investor 
return than foreclosure, modification requires ``high-touch'' 
individualized account work by servicers for which they are not 
normally paid under existing securitization contracts (pooling 
and servicing agreements or PSAs).\376\ Servicer payment levels 
were established by contracts that last the life of the 
mortgage pools. Servicers of subprime mortgages agreed to 
compensation of 50 basis points, or 0.5 percent from interest 
payments, plus late fees and other servicing fees collected 
from borrowers, based on conditions that existed prior to the 
crisis when defaulted mortgages constituted a small percentage 
of a typical portfolio. At present, many subprime and alt-A 
pools have delinquencies and defaults in excess of 50 percent 
of the pool. The incentive payments under HAMP can be thought 
of as a way to correct this past contracting failure.
---------------------------------------------------------------------------
    \376\ Standard & Poor's, Servicer Evaluation Spotlight Report (July 
2009) (online at www2.standardandpoors.com/spf/pdf/media/
SE_.Spotlight_.July09.pdf).
---------------------------------------------------------------------------
    Ideally, investors might have foreseen the need for 
servicers to perform expensive loss mitigation work in order to 
maximize the return on the mortgages and provided in PSAs for 
servicers to be compensated for the extra work when the extra 
work would be economically justified. However, PSAs do not make 
such provisions. They have been aptly described as Frankenstein 
contracts.\377\ Because mortgage servicers are essentially 
contractors working for investors who now include the GSEs, the 
Federal Reserve, and Treasury, we can think of the incentive 
payments under HAMP as extra-contractual compensation for 
additional work that was not anticipated by the parties to the 
PSAs at the time of the contract. The additional compensation 
is justified to the extent that the investors will receive more 
than $1 in present value of additional mortgage cash flow for 
every $1 paid to the servicer for the required loss mitigation 
effort.
---------------------------------------------------------------------------
    \377\ Gelpern & Levitin Frankenstein Contracts, supra note 143.
---------------------------------------------------------------------------
    To illustrate the benefits of modification, we can use an 
example based on actual mortgage modifications reported by 
servicers in August 2009. The average August modification 
reduced the homeowner's payment by $182 per month on a loan 
with an average balance of $222,000. A foreclosure on mortgages 
in this amount resulted in average investor losses of roughly 
$145,000.\378\ Assuming a 10 percent self-cure rate,\379\ an 
unmodified mortgage, currently in default, will result in a 
probability-weighted present value loss of roughly $130,000. In 
other words, if the servicer does NOT modify the loan, the 
likely result on average is a $130,000 loss to the investor.
---------------------------------------------------------------------------
    \378\ Data tabulated by Prof. Alan M. White from Wells Fargo 
Corporate Trust Services mortgage-backed securities investor reports 
(online at www.valpo.edu/law/faculty/awhite/data/index.php).
    \379\ The self-cure rate refers to the percentage of delinquent 
mortgages being considered for modification that can be expected to 
return to current status and eventually be paid in full without 
modification. Prior to the crisis as many as 30 percent of delinquent 
borrowers were able to catch up on payments on their own, but in recent 
months the self-cure rate has declined dramatically and is currently 
between 4 percent and 7 percent. Fitch Ratings, BusinessWire, Fitch: 
Delinquency Cure Rates Worsening for U.S. Prime RMBS (Aug. 24, 2009) 
(online at www.businesswire.com/news/home/20090824005549/en).
---------------------------------------------------------------------------
    In comparison, a modification that simply reduces interest 
from seven percent to 5.1 percent, resulting in a $225 payment 
reduction for five years (more than the typical August 2009 
modification), would reduce the investor's cash flow by a 
present value of $13,000. Even when we assume that 40 percent 
of modified loans will redefault,\380\ the weighted, present 
value loss from modifying such a loan would be around $48,000 
(blending the small losses from successful modifications with 
the large losses from the failed modifications that revert to 
foreclosure).
---------------------------------------------------------------------------
    \380\ Redefault rates are an important factor in measuring the 
costs and benefits of HAMP. OCC/OTS report that modifications made in 
2008 have redefaulted at a rate of about 40 percent after six months. 
Modifications that reduced monthly payments by 10 percent or more had 
significantly lower default rates, in the range of 25 percent to 30 
percent. HAMP modifications, by requiring reduction of the monthly 
payment, should result in lower redefault rates than prior voluntary 
modifications, which often increased payments and/or total debt.
---------------------------------------------------------------------------
    The bottom line to the investor is that any time a 
homeowner can afford the reduced payment, with a 60 percent or 
better chance of succeeding, the investor's net gain from the 
modification could average $80,000 per loan or more. Two 
million modifications with a 60 percent success rate could 
produce $160 billion in avoided losses, an amount that would go 
directly to the value of the toxic mortgage-backed securities 
that have frozen credit markets and destabilized banks.\381\
---------------------------------------------------------------------------
    \381\ These calculations are based on the publicly available FDIC 
loan modification present value model. An example calculation is set 
forth in the spreadsheet in appendix 1. The results depend, of course, 
on assumptions about loss severities, self-cure rates, and redefault 
rates, among other things. This example is based on current FDIC 
assumptions. If servicers can identify homeowners with enough income to 
have at least a 60 percent chance of successful repayment, modification 
can save investors significant amounts compared to allowing most 
unmodified delinquent loans to go to foreclosure.
---------------------------------------------------------------------------

4. Analysis of the Costs and Benefits of Homeowner Assistance Funded 
        through TARP

    Any discussion of costs and benefits of the HAMP must begin 
with a caveat. The benefits of any intervention to reduce 
foreclosures necessarily involve predictions about repayment of 
mortgages, whether they are unmodified, modified, or 
refinanced. Predictions about probabilities of mortgage 
repayments and defaults are inevitably subject to a large 
margin of error, particularly in the current, unprecedented 
market environment. On the other hand, some elements are known 
with reasonable certainty, such as the likely losses that 
result from an individual foreclosure sale.
    To construct a very rough estimate of the costs and 
benefits of the HAMP we proceed in two steps. First we estimate 
the benefits and costs of intervention for each individual 
modified mortgage. The per-modification estimate is adjusted by 
the probability of successful repayment after modification 
(HAMP payments are not made if the homeowner defaults in 
payments on the modified loan). Second, we need to determine to 
what extent HAMP has resulted or will result in additional 
successful modifications, compared with the number of 
modifications that would have occurred anyway without these 
policy interventions. In other words, the second component of 
the analysis requires an estimate of the replacement effect or 
the extent to which HAMP will compensate servicers to do what 
in some instances they might have done anyway.

5. Costs and Benefits of an Individual HAMP Subsidized Mortgage 
        Modification

    Subsidy Costs. Treasury has allocated $50 billion for 
servicer and investor payments for non-GSE loans, including the 
$10 billion set aside for Home Price Decline Protection. As of 
August, roughly $23 billion of this total had been committed 
through contracts with individual servicers.\382\ Treasury 
contemplates increasing these caps as servicers successfully 
complete modifications and draw down funds.
---------------------------------------------------------------------------
    \382\ A current list of HAMP contracts and with servicers and their 
cap amounts appears in U.S. Department of the Treasury, Troubled Asset 
Relief Program, Monthly Progress Report for August 2009, at 59 (Sep. 
10, 2009) (online at www.financialstability.gov/docs/
105CongressionalReports/105areport_082009.pdf).
---------------------------------------------------------------------------
    Thus, we know the potential cost of the program because it 
has been capped by contract and by authorization. What we do 
not know in order to make a meaningful cost-benefit comparison 
is the number of successful modifications that the $23 billion 
in contracts, or $50 billion authorized, will purchase. 
Answering that question requires estimating the cost of an 
individual modification.
    Treasury has estimated that between two and 2.6 million 
borrowers will receive loan modifications assisted by HAMP 
payments funded by TARP, i.e., mortgages not held by the 
GSEs.\383\ The total projected expenditure for these HAMP 
modifications consists of the $50 billion total minus the 
amounts spent for the non-modification foreclosure alternatives 
(deed-in-lieu and short sale program). Allocations of the $50 
billion are not fixed, and Treasury will adjust them depending 
on utilization of the programs. Simple division yields a per-
modification cost of roughly $20,000, if 2.5 million borrowers 
are helped with the maximum $50 billion in program funds.
---------------------------------------------------------------------------
    \383\ GAO HAMP Report, supra note 98, at 14.
---------------------------------------------------------------------------
    The subsidy costs can also be approximated by adding up the 
components of HAMP assistance and estimating an average per-
modification subsidy. This estimation is complex because HAMP 
payments are made over time and are not made for unsuccessful 
modifications, so that redefault probability adjustment and 
present value discounting are required.
    HAMP payments are made over a five-year period. Treasury 
has agreed to pay $1,000 or $1,500 initially, plus $1,000 per 
year for up to three years to the servicer for each successful 
modification, and also $1,000 per year for up to five years 
towards principal debt reduction for each successful 
modification (for a potential total of $9,000 or $9,500 of 
incentives per modification). In addition, Treasury will pay a 
Monthly Payment Reduction Subsidy (MPRS) to bring the 
borrower's debt-to-income ratio down from 38 percent to 31 
percent when necessary. The payment is equal to one-half the 
amount required to reduce the borrower monthly payment to 31 
percent DTI from 38 percent DTI.
    The Home Price Decline Protection payments are in addition 
to the $9,000 in incentives and the payment reduction subsidy, 
and are more difficult to estimate. As the GAO report notes, it 
is not clear why Treasury believes it will be necessary to 
provide these additional subsidies for modifications that are 
NPV positive, i.e., that the servicer should make without the 
subsidy, when the other payments fully compensate the servicer 
for the transaction costs of modifications.
    Second lien modification program: Separate funds are 
allocated to support the modification of second mortgages for 
borrowers who receive a first mortgage modification. Although 
Treasury has estimated that between one-third and one-half of 
first mortgages modified under HAMP will need assistance for a 
second mortgage, it is unlikely that all second mortgages will 
be successfully modified.
    Based on Treasury's estimates, the total amount required 
for a single HAMP modification--combining the basic HAMP 
payments with the cost estimates for payment reduction subsidy, 
HPDP and second lien payments--average subsidies for a single 
modification would be about $20,350.\384\ In order to compare 
costs and benefits meaningfully, all program costs should be 
reduced to present value. The $9,000 in basic incentive 
payments over five years for an average individual modification 
translates to roughly $7,800 in present value cost for a 
successful modification, using the current Freddie Mac rate as 
the discount rate, reducing the total to $18,150.
---------------------------------------------------------------------------
    \384\ This includes the $9,000 in basic servicer and borrower 
incentive payments, plus Treasury's discounted estimates for the 
monthly payment reduction cost share, the Home Price Decline Protection 
payments, and the average cost of second lien modification spread 
across all first lien modifications. It does not include the non-
retention foreclosure alternatives program. Estimates of these costs 
were obtained from Treasury.
---------------------------------------------------------------------------
    Some modified loans will fail, and in those cases some of 
the HAMP payments will not be made. It is therefore necessary 
to adjust the program cost by a probability of redefault 
factor. If we assume an average 30 percent redefault rate, and 
that the mean time to redefault is six months, with virtually 
all redefaults occurring within 12 months, the present value, 
probability-adjusted cost of the program per modified loan 
would be about $15,850.\385\ A lower redefault rate would mean 
higher program costs. The present value and probability 
adjustments must be made both for cost and for benefit 
estimates in order for these estimates to be comparable. 
Treasury's estimate of $16,000 to $21,000 per HAMP modification 
is presumably based on more conservative assumptions, or more 
optimistic projections about redefault rates.
---------------------------------------------------------------------------
    \385\ Assuming 70 percent of the modifications result in full 
payment of the $9,000 basic subsidies, and 30 percent result in payment 
of only the $1,000 initial payment and 6 months of interest subsidies 
with no second lien or Home Price Decline Protection payment.
---------------------------------------------------------------------------
    To summarize, the total cost of the borrower, servicer, and 
investor incentive payments for first and second mortgage HAMP 
payments is projected to be in the range of $16,000 to $21,000 
average per first mortgage modification, including both 
successful and unsuccessful modifications. In other words, the 
cost per successful modification will be higher. Treasury 
should be in a position to report on actual per-modification 
costs by November or December, when several months of permanent 
modification data have been collected and some initial 
redefault statistics can be calculated.
    Note on Moral Hazard Costs. Moral hazard in this context 
refers to the cost of losses on mortgages that would otherwise 
perform but for the borrower's decision to default in order to 
benefit from the program. Initially, it should be noted that 
mortgage servicers are already modifying tens of thousands of 
mortgages every month voluntarily, so the moral hazard cost of 
HAMP would require a determination of the additional impetus, 
if any, that HAMP might cause for voluntary defaults over and 
above the effect of present servicer loss mitigation. This 
could occur, for example, if homeowners regarded the chance of 
obtaining $5,000 in potential principal reduction payments as a 
sufficient incentive to default on their mortgage.
    It is theoretically possible that some homeowners, who 
would not become delinquent in the absence of either the 
voluntary modification program or the enhanced program 
stimulated by HAMP incentive payments, will choose to become 
delinquent to benefit from the program. In this context, moral 
hazard is nearly impossible to measure. Defaults and 
delinquencies on mortgages that do occur are thought to result 
from a combination of factors including mortgage product 
features, borrower life events like unemployment, and negative 
equity making it impossible to sell or refinance the home. If a 
borrower were certain that any delinquency would automatically 
result in a modification that saves the borrower money, he or 
she might have an incentive to default.
    There are three reasons moral hazard from HAMP 
modifications is unlikely to play a significant role in 
borrower defaults. First, the likelihood of obtaining a 
modification involving permanent concessions is understood by 
most borrowers to be low. Many modifications simply reschedule 
payments, without reducing total debt. In fact, most 
modifications to date have increased principal debt, because 
unpaid arrears are added to the loan balance.\386\ HAMP 
modifications reduce payments, but servicers may still 
capitalize unpaid interest and fees and thereby increase total 
debt. The average amount capitalized in 2008 was $10,800.\387\ 
The HAMP principal reduction payments would thus not be 
sufficient to motivate a strategic default, especially in light 
of the countervailing cost a strategic defaulter would pay in 
impaired credit scores.
---------------------------------------------------------------------------
    \386\ Deleveraging the American Homeowner, supra note 374, at 1113, 
1114. The OCC/OTS Mortgage Metrics Report for the Second Quarter of 
2009 reports that of 142,362 modifications in the second quarter, 
91,590 included capitalization of arrears.
    \387\ Deleveraging the American Homeowner, supra note 374, at 1114.
---------------------------------------------------------------------------
    Second, the probability of obtaining any modification is 
uncertain--there is a huge variation among servicers in the 
number of modification requests that are being granted or 
denied. Servicers are overwhelmed with applications, and many 
homeowners and mortgage counselors report significant 
difficulty in obtaining modifications. Thus a strategic 
defaulter would take the risk that a modification would not be 
approved or processed before foreclosure and loss of the 
property.
    Third, program eligibility rules are designed to prevent 
borrowers who do not have genuine financial difficulties from 
obtaining any loan concessions. In other words, borrowers are 
screened to minimize moral hazard. Applicants for modifications 
must document their income, in order to prove that they cannot 
afford their full contract payment without modification. 
Borrowers who can already afford their mortgage will not 
receive a modification. The documentation requirements have 
been demanded by investors precisely to prevent moral hazard 
issues from arising. They can create difficulties for 
homeowners with a genuine need, but the extra transaction cost 
is justified on the basis that it will minimize moral hazard 
for undeserving borrowers.
    Further study and analysis beyond the scope of this 
discussion would be necessary to determine whether existing 
measures are sufficient to keep moral hazard costs at a 
minimum. Thus far, there has been no reported empirical 
evidence of significant moral hazard costs resulting from 
either the voluntary mortgage modifications of 2007 and 2008 or 
the HAMP modification program. In other words, the existence of 
any mortgage defaults motivated solely or primarily by the 
availability of either voluntary modifications or HAMP 
modifications has not been demonstrated.
    Benefits. The direct and most easily measured benefit of 
HAMP modification assistance is the reduction in foreclosure 
losses borne by investors, including notably Treasury, Federal 
Reserve and GSEs. The direct investor savings from a successful 
modification program are measured by comparing the present 
value of a delinquent loan without modification to its value 
after modification, the so-called net present value or NPV 
test. Every modification must be subjected to the NPV test. It 
will be vitally important for Treasury to monitor the NPV test 
results for HAMP modifications, in order to see whether the 
program costs are justified. If average investor savings, 
discounted and probability-adjusted, are in excess of $50,000, 
as in the hypothetical model discussed above, the benefits 
would clearly outweigh the costs. On the other hand, if many 
modifications are resulting in only a marginally positive NPV, 
the wisdom of the subsidies may need to be revisited, unless 
they can be justified based on other cost savings.
    Apart from the investor savings, homeowners who 
successfully repay a modified mortgage will realize significant 
benefits in avoiding the moving costs, impaired credit, and 
other measurable impacts of a foreclosure and eviction from 
their homes. In addition, for every additional foreclosure 
prevented by a successful modification, external costs of 
foreclosures are avoided. These include the decline in home 
values of neighboring properties and the lost tax revenue, 
increased crime and other costs borne by local communities.
    The benefits to homeowners and communities from preventing 
a foreclosure are more difficult to quantify, but should not be 
ignored in any plausible cost benefit analysis. The easiest 
positive externality to measure is the impact of foreclosure 
sales on surrounding home values. Immergluck and Smith 
determined that each single foreclosure in Cook County, 
Illinois drove down neighboring home values by a total of 
$158,000.\388\ Another external cost that has been quantified 
somewhat is the cost to cities, especially of concentrated 
foreclosures. A municipality may spend as much as $30,000 per 
vacant property as a result of a foreclosure.\389\ The amounts 
lost by families who lose their homes, in moving costs, 
replacement housing, and indirect effects, has not been 
reliably estimated, but are clearly a significant cost that is 
avoided when a modification is successful. Precision is 
impossible in estimating these benefits from foreclosure 
prevention. Nevertheless these benefits are real, and should 
not be discounted. As a very rough approximation, the external 
benefits of foreclosure prevention are at least double the 
amounts of direct investor savings from a successful 
modification. To put it another way, measuring only investor 
savings will capture less than a third of the likely economic 
benefits.
---------------------------------------------------------------------------
    \388\ Daniel Immergluck and Gregory Smith, The External Costs of 
Foreclosure: The Impact of Single-Family Mortgage Foreclosure on 
Property Values, Housing Policy Debate, Vol. 17, No. 1, at 57 (Jan. 
2006) (online at www.mi.vt.edu/data/files/hpd%2017%281%29/
hpd_1701_immergluck.pdf); Vicky Been, Ingrid Gould Ellen, and Jenny 
Schuetz, Neighborhood Effects of Concentrated Mortgage Foreclosures, 17 
Journal of Housing Economics, at 306 (Dec. 2008) (online at 
furmancenter.org/files/foreclosures08-03.pdf).
    \389\ William Apgar, Mark Duda, and Rochelle Gorey, The Municipal 
Costs of Foreclosure: A Chicago Case Study, Homeownership Preservation 
Foundation (Feb. 27, 2005) (online at www.hpfonline.org/content/pdf/
Apgar_Duda_Study_Full_Version.pdf).
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6. Substitution Effect and Prior Voluntary Modifications

    The second step in a cost benefit analysis would be to 
measure the extent to which HAMP has increased modifications 
over the number that were already occurring voluntarily. Data 
for July and August suggest that HAMP has resulted in a net 
increase of about 85,000 modifications per month. In August, 
Treasury reports that there were about 120,000 temporary HAMP 
modifications. Those were offset by a decline of around 35,000 
in non-HAMP permanent modifications compared with prior 
months.\390\ Because very few HAMP three-month temporary 
modifications have become permanent, it is too early to tell 
how many additional modifications HAMP has produced. In very 
rough terms, it appears that at least in August, about 29 
percent of HAMP modifications were replacing permanent 
modifications that would have been put in place voluntarily 
without subsidy payments. Thus, the net benefit of the program 
(benefits minus costs) should realistically be discounted to 
some extent to account for the substitution effect.
---------------------------------------------------------------------------
    \390\ For August 2009 HOPE NOW reported 86,000 permanent 
modifications, which is a decline of 34,000 from the 120,000 monthly 
range seen in months prior to HAMP implementation. HOPE NOW, HOPE NOW 
Data Shows Increase in Workouts for Homeowners (Sept. 30, 2009) (online 
at www.hopenow.com/press_release/files/
August%20Data%20Release_09_30_09.pdf).
---------------------------------------------------------------------------
    On the other hand, even HAMP modifications that might be 
regarded as having substituted for prior, voluntary 
modifications will be, on average, more likely to succeed and 
more beneficial for homeowners. This is because of HAMP's 
requirement to reduce borrower debt ratios to 31 percent. This 
level of payment reduction has not been the norm prior to HAMP. 
Significant payment reduction is likely to improve the chances 
of borrower success and the resulting investor and public 
savings. HAMP will thus improve the quality and uniformity of 
mortgage modifications even to the extent it does not increase 
their total number.
    Nevertheless, Treasury will need to monitor closely the 
conversion rate of temporary modifications to permanent 
modifications, and the overall maintenance of effort by 
servicers, to determine whether HAMP payments are stimulating a 
net increase in permanent modifications.

7. Other Benefits

    In addition to the incremental foreclosure prevention that 
HAMP will buy, the program may have other long-term benefits 
for the mortgage industry. By standardizing the calculation of 
net present value, improving the likelihood of success and the 
quality of loan modifications, and gathering better data on 
modified loan performance, the Treasury intervention may 
produce improvements in industry knowledge and practices. 
Mortgage servicers may realize efficiencies from greater 
uniformity in documenting modifications, applying uniform NPV 
criteria, and may thus increase investor community confidence 
in the modification and loss mitigation process. The HAMP 
template could continue to be used after subsidy ends, and 
continue to improve practices in the servicing industry.
    If HAMP is successful in producing greater investor savings 
and reduced foreclosures, Treasury should consider how and when 
to phase out the incentive payments, or reduce them to the 
minimum level needed to maintain the necessary servicer 
incentives. The payments being made to servicers are 
substantial, and perhaps more than are absolutely necessary to 
compensate servicers for loss mitigation activity. Servicers 
could be encouraged to reveal the marginal cost of good 
modifications through a competitive bidding process, allowing 
servicers to bid for the lowest compensation level necessary to 
continue processing all feasible modifications.
    Finally we should not overlook the macroeconomic benefits 
that a successful foreclosure reduction program may achieve. If 
the steadily growing inventory of foreclosed homes can be 
reduced, home prices can begin to stabilize, and the housing 
and mortgage industries can return to being a stimulus rather 
than a drag on the economy. The true measure of whether the $50 
billion HAMP investment pays off will be whether foreclosure 
filings and the inventory of foreclosed homes begin returning 
to normal levels.
              ANNEX C: EXAMINATION OF TREASURY'S NPV MODEL

    The Panel has examined Treasury's NPV model and notes that 
it is highly sensitive to small changes in certain parameters 
as well as quite inflexible in other regards. The Panel 
conducted a sensitivity test on the HAMP NPV model by using a 
baseline model where the variables of the loan are NPV neutral 
such that the NPV of the modified loan is approximately equal 
to the NPV of an unmodified loan. Starting with this control, 
the Panel staff tested the sensitivity of six major variables:
    1. Discount Rate--According to the HAMP Base NPV working 
paper, a servicer can override the default discount rate (PMMS) 
and add a risk premium up to 250 basis points for loans in 
their portfolio or loans they manage on behalf of investors. 
They may use only two risk premiums: one they apply to all 
loans in portfolio, and another they apply to all PLS loans. 
The discount rate impacts the present value of the projected 
future cashflows of the loans--a higher discount rate increases 
the extent to which the investor values near-term cash flows 
more than the same cash flows in the future. Using the baseline 
loan to conduct the test, the Panel's staff found that only a 
one basis point change in the risk premium is necessary to 
change the outcome of the test for the baseline loan from NPV 
positive to NPV negative. As such, this risk premium is a very 
sensitive variable that can change the NPV outcome from 
positive to negative.
    2. Geographical Region--The metropolitan statistical area 
(MSA) in which a property is based affects the Housing Price 
Index and the Home Price Depreciation Payment. Other variables, 
such as foreclosure timeline, REO costs, and the REO sale 
discount due to stigma, vary at the state level. Accordingly, 
by changing the MSA of a property, the NPV value of the 
modification (the difference between the NPV of cash flows in 
the mod- and no-mod scenarios) varies by as much as $10,000 for 
the example loan.
    3. Mark-to-Market Loan-to-Value ratio (MTMLTV)--The MTMLTV 
of a loan reflects the size of a borrower's debt relative to 
the value of their house. The more the borrower owes relative 
to the value of their house, the more likely they are to 
default on the loan, the less likely they are to refinance or 
sell the home (prepay), and the less of outstanding balance of 
the loan the lender recovers in foreclosure. For these reasons, 
the NPV model is sensitive to MTMLTV. Using the baseline loan, 
which has an MTMLTV of 0.72, an increase in MTMLTV ratio by one 
basis point holding all other variables constant turns the 
example loan from NPV negative to NPV positive. This is because 
an increase in MTMLTV increases the probability of default and 
redefault and changes their relative magnitudes, and lowers the 
recovery rate of the unpaid balance in foreclosure. In the case 
of the example loan--holding all else constant--the NPV 
increases as MTMLTV approaches 125 percent (the borrower owes 
25 percent more than their house is worth) and declines 
thereafter. The point at which increasing the MTMLTV would 
change from raising to lowering the NPV depends on other 
inputs, such as the discount rate, the level of delinquency, 
foreclosure costs, FICO score, and the borrower's pre-mod debt-
to-income ratio.
    4. FICO Score--Another variable tested was the FICO score. 
The borrower's FICO score reflects their probability of default 
and also their ability to borrow, which affects their ability 
to refinance their home or to sell their existing home and buy 
another--in other words, to prepay. The test found that when 
the impact of the borrower's FICO score on the NPV value of the 
modification varies with other inputs, most notably their 
MTMLTV. For loans with relative low MTMLTV, there is an inverse 
relationship between FICO score and the NPV value. This is 
because for loans where the borrowers have significant equity 
in the home, raising the FICO score lowers the probability of 
default in the no-mod case more than it lowers the probability 
of default in the mod case. For loans with relatively high 
MTMLTVs, the NPV value of the modification increases with the 
borrower's FICO score. This is because the high FICO score 
lowers the probability of default in the mod case more than it 
lowers the probability of default in the no-mod case.
    5. Borrower's Income--The Panel staff also analyzed the 
impact of the borrower's income on the NPV of the modified and 
non-modified loan. The borrower's income affects how much their 
monthly payments must be reduced to achieve a 31 percent DTI 
ratio (ratio of monthly mortgage payments--including taxes, 
insurance, and HOA fees--to monthly income). Increasing income 
also reduces the probability of default and redefault (by 
different amounts), since the borrower's starting DTI is an 
input in the default-probability calculator. Delinquency of the 
Loan--After a loan is 90+ days delinquent, default 
probabilities, and cash flows upon default become fixed in the 
HAMP NPV model--additional months of delinquency do not change 
these values. The only variable factors for 90+ day delinquent 
loans are the cash flows on the no-mod cure scenario and--to a 
lesser extent--the cash flow on the mod-cure scenario. As a 
loan becomes more delinquent, the past-due interest and escrow 
amounts are assumed to be paid up-front in the no-mod cure 
scenario and capitalized into the UPB in the cure scenario. 
This means that in the HAMP model, the NPV of the no-mod 
scenario increases relative to the NPV of the modification 
scenario once a loan is 90+ days delinquent. Accordingly, once 
a loan becomes 90+ days delinquent, the difference between the 
no-mod scenario and the modification scenario will increasingly 
favor not modifying the loan.
                     SECTION TWO: ADDITIONAL VIEWS


                          A. Richard H. Neiman

    I voted for the Panel's October Report (the ``Report'') and 
I agree with its central themes and recommendations. As 
directed by the Congress in EESA, Treasury's foreclosure 
mitigation efforts are vitally important to protecting 
homeowners, strengthening the housing market, and aiding 
economic recovery. I believe that much more needs to be done to 
help people in need now and during the foreclosure surge that 
will continue over the next several years.
    I am providing these Additional Views to clarify some 
points in the Report and amplify others.

1. It Is Too Early To Make Conclusive Judgments About HAMP, HARP and 
        MHA

    MHA had many obstacles, problems, and operational and 
technological challenges getting started and the HAMP program 
is just now gaining momentum. Because we are in a period where 
so many trial modifications are on the books and so few have 
had time to convert to permanent modifications, I believe it is 
too early to judge the program or to imply that HAMP will not 
be successful.\391\
---------------------------------------------------------------------------
    \391\ See supra p. 98 and accompanying notes (HAMP is ``unlikely to 
have a substantial impact'' and ``is better than doing nothing.'').
---------------------------------------------------------------------------
    I think that Treasury's current run rate goal of 25,000 
trial modifications per week--or 1.3 million per year--is a 
robust goal. If achieved and sustained with a solid conversion 
rate of trial modifications to permanent modification, HAMP can 
provide a tremendous benefit for millions of American 
homeowners.
    Early trial-to-permanent modification conversion rates have 
been low, as the Report points out, but there are a range of 
reasons (e.g., the temporary 60-day extension of the trial 
modification period; early documentation and capacity issues; 
etc.) why it is still several months too early to draw any 
meaningful conclusions. I suggest that Treasury issue its own 
projections for trial-to-permanent conversion rates as soon as 
possible in order to provide guidance on this issue.
    We should give the program time to work and re-visit HAMP 
within six months when a better track record and better service 
quality and performance results are available.

2. In Fact HAMP Has Great Potential

    HAMP was designed to make loans more affordable for 
homeowners by lowering monthly payments thereby giving the most 
immediate and meaningful relief to the greatest number of 
homeowners.
    Thus far, HAMP modifications have resulted in a mean 
interest rate reduction of 4.65 percent from approximately 7.58 
percent to approximately 2.93 percent with mean monthly savings 
of $740 per loan reducing payments from on average $1890 to 
$1150, a 39-percent payment decline.\392\ These are very 
impressive affordability numbers on a still-too-small base of 
loans. As HAMP gains momentum the direct savings to homeowners 
and investors and the benefits to society should be enormous. 
In fact, the Report contains a cost benefits study of mortgage 
modifications that found preliminarily, that the potential 
direct and indirect benefits to borrowers, investors, and 
society substantially outweigh the costs of HAMP loan 
modifications.\393\
---------------------------------------------------------------------------
    \392\ See supra pp. 50, 53 and accompanying notes.
    \393\ See supra Annex B, ``Potential Costs and Benefits of the Home 
Affordable Mortgage Modification Program,'' by Professor Alan M. White.
---------------------------------------------------------------------------

3. Borrowers' Grievances Are Real

    The Panel's September 20th Philadelphia hearing, which 
featured lively testimony from servicers, borrower groups, 
Treasury, Fannie Mae and Freddie Mac, demonstrated that there 
is a lot of room for improvement in the programs. Borrowers 
have been frustrated with unresponsive servicers, lost 
documents, time delays, unclear reasons for denial, and a host 
of other problems.
    The scale up period is over. Servicers have had time to 
make improvements and should by now be organized to handle the 
case load in a highly professional and expeditious manner. 
Consequently, there should be no further systemic excuses 
regarding capacity.

4. HAMP Does Not Address Every Defaulted Loan--Other Issues Need Other 
        Policy Solutions

    It is not a design shortcoming of HAMP that it does not 
address every default-related issue. I agree with the Report 
that HAMP was not primarily designed to address the issues of 
negative equity, unemployment and option ARMs.
    I endorse the view that Treasury should review these issues 
carefully and explain whether it intends to pursue additional 
policy solutions or program enhancements that are specifically 
targeted to these problems. One recommendation to address 
unemployment is to consider the use of TARP funds to support 
existing state programs or to encourage states to develop new 
programs that provide temporary secured loan payment assistance 
to the recently unemployed.\394\ In considering possible 
programs to address the effects of negative equity, 
policymakers must address issues of moral hazard, bank safety 
and soundness, contract, and fairness, including the fairness 
issue related to sharing future equity appreciation.
---------------------------------------------------------------------------
    \394\ See discussion of Pennsylvania's successful HEMAP program 
supra pp. 90-91.
---------------------------------------------------------------------------

5. We Can Only Measure Success With a Comprehensive National Metric 
        That Tracks Defaults and Foreclosures

    The Report notes that even if HAMP modifies hundreds of 
thousands of loans a year it may not be enough to stem the 
rising tide of 2-3 million foreclosure starts a year. Yet, it 
is difficult to know how many foreclosures are preventable 
because we have poor national industry information. We need to 
know more about foreclosure starts: How many result in 
foreclosure sales? How many cure? How many go to short sale or 
other solution that results in a lost home? How many are 
modified and saved? How many cannot be prevented by any means?
    There is a tremendous need for better residential mortgage 
default and foreclosure metrics and I would like to see the 
Treasury-GSE-MHA-Servicer partnership take the lead in 
providing clear understandable and comprehensive metrics about 
the housing market, especially delinquent loans and 
foreclosures, on a national basis by state of residence.\395\
---------------------------------------------------------------------------
    \395\ Currently, for example, the OCC/OTS Mortgage Metrics Report 
reports on the subset of bank-serviced loans. However the OCC/OTS 
report (a) covers only 64% of the U.S. mortgage market, (b) is 
published three months after quarter end, and (c) does not break out 
information by state or servicer. Other databases have the same 
shortcoming of incompleteness making comparability nearly impossible 
and resulting in confusing and conflicting statistics.
---------------------------------------------------------------------------
    I previously encouraged Congress to enact a national 
mortgage loan performance reporting requirement applicable to 
all institutions who service mortgage loans, to provide a 
source of comprehensive intelligence about loan performance, 
loss mitigation efforts and foreclosure.\396\ Federal banking 
or housing regulators should be mandated to analyze the data 
and share the results with the public. A similar 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, 
it would be feasible to create a tailored performance data 
standard that could be put into operation swiftly.
---------------------------------------------------------------------------
    \396\ House Joint Economic Committee, Testimony of Richard H. 
Neiman on behalf of the Congressional Oversight Panel, TARP 
Accountability and Oversight: Achieving Transparency (Mar. 11, 2009) 
(online at jec.senate.gov/
index.cfm?FuseAction=Files.View&FileStore_id=38237b7d-74fe-4960-9fc6-
68f219a03c0f).
---------------------------------------------------------------------------
    The country and its policymakers desperately need this kind 
of information and given the projections for a protracted 
period of foreclosures, it is well worth the effort.

6. Pushing Ahead

    Mortgage reforms are critical at the state and national 
levels, reforms that I believe are necessary to aiding the 
millions of homeowners for whom unachievable mortgage payments 
and potential foreclosure are painful realities. We cannot turn 
back now. We must push ahead with the borrower-lender-
government partnership that has been launched and build it out 
and improve on it. We need more hands on the oars, we need 
better cooperation and we need much better information and 
default mitigation tools.

                     B. Congressman Jeb Hensarling

    Although I appreciate the work the Panel and staff members 
have done in preparing the October report, I do not concur with 
the conclusions and recommendations presented and, accordingly, 
dissent from the adoption of the report. Foreclosure mitigation 
is mentioned in the Emergency Economic Stabilization Act, EESA 
(P.L. 110-343), so it is an important mission for the Panel to 
assess the effectiveness of loan modification programs as they 
relate to this objective as well as to taxpayer protection.

1. Executive Summary

    While I acknowledge the extensive research that went into 
this report on foreclosure mitigation and wish to thank the 
Panel for incorporating some of my edits and ideas, I believe 
several areas are either overlooked completely or present 
challenges to conducting proper oversight. In the following, I 
hope to shine a light on key issues relating to the Panel's 
analysis of housing policy and the Administration's foreclosure 
mitigation programs.
    A fair reading of the Panel's majority report and my 
dissent leads to one conclusion--HAMP and the Administration's 
other foreclosure mitigation efforts to date have been a 
failure. The Administration's opaque foreclosure mitigation 
effort has assisted only a small number of homeowners while 
drawing billions of involuntary taxpayer dollars into a black 
hole.
    While the Congressional Budget Office estimates that 
taxpayers will lose 100 percent of the $50 billion in TARP 
funds committed to the Administration's foreclosure relief 
programs, instead of focusing its attention on taxpayer 
protection and oversight, the Panel's majority report implies 
that the Administration should commit additional taxpayer funds 
in hopes of helping distressed homeowners--both deserving and 
undeserving--with a taxpayer subsidized rescue.
    While there may be some positive signals in our economy, 
recovery remains in a precarious position. Unemployment will 
hit 10 percent in 2010, if not this year. This is unfortunate 
because the best foreclosure mitigation program is a job, and 
the best assurance of job security is economic growth and the 
adoption of public policy that encourages and rewards capital 
formation and entrepreneurial success. Without a robust 
macroeconomic recovery the housing market will continue to 
languish and any policy that forestalls such recovery will by 
necessity lead to more foreclosures.
    Regardless of whether one believes foreclosure mitigation 
can truly work, taxpayers who are struggling to pay their own 
mortgage should not be forced to bail out their neighbors 
through such an inefficient and transparency-deficient program. 
Both the Administration and the Panel's majority appear to 
prioritize good intentions and wishful thinking over taxpayer 
protection.
    To date, despite the commitment of some $27 billion,\397\ 
only about 1,800 underwater homeowners have received a 
permanent modification of their mortgage. If the 
Administration's goal of subsidizing up to 9 million home 
mortgage refinancings and modifications is met, the cost to the 
taxpayers will almost surely exceed the $75 billion already 
allocated to the MHA--Making Home Affordable--program,\398\ and 
it is likely that most (if not all) of it will not be 
recovered.
---------------------------------------------------------------------------
    \397\ U.S. Department of the Treasury, TARP Transactions Report 
(Oct. 2, 2009) (online at www.financialstability.gov/docs/transaction-
reports/transactions-report_10062009.pdf). This figure is defined by 
the current ``Total Cap'' for the Home Affordable Modification Program: 
$27,247,320,000.
    \398\ The Making Home Affordable program presently consists of the 
HAMP--Home Affordable Modification Program--and the HARP--Home 
Affordable Refinancing Program--programs.
---------------------------------------------------------------------------
    Taxpayers deserve a better return on their investment than 
what they are set to receive from AIG, Chrysler, GM and the 
Administration's flawed foreclosure mitigation efforts.
    Professor Alan M. White, an expert retained by the Panel, 
notes in a paper attached to the Panel's report: ``The bottom 
line to the investor is that any time a homeowner can afford 
the reduced payment, with a 60-percent or better chance of 
succeeding, the investor's net gain from the modification could 
average $80,000 per loan or more.''
    Taxpayers--through TARP or otherwise--should not be 
required to subsidize mortgage holders or servicers when 
foreclosure mitigation efforts appear in many cases to be in 
their own economic best interests. The Administration, by 
enticing mortgage holders and servicers with the $75 billion 
HAMP--Home Affordable Modification Program--and HARP--Home 
Affordable Refinancing Program--programs (with a reasonable 
expectation that additional funds may be forthcoming), has 
arguably caused them to abandon their market oriented response 
to the atypical rate of mortgage defaults in favor of seeking 
assistance from the government.
    Any foreclosure mitigation effort must appear fair and 
reasonable to the American taxpayers. It is important to 
remember that the number of individuals in mortgage distress 
reaches beyond individuals who have experienced an adverse 
``life event'' or been the victims of fraud. This complicates 
moral hazard issues associated with large-scale modification 
programs. Distinct from a moral hazard question there is an 
inherent question of fairness as those who are not facing 
mortgage trouble are asked to subsidize those who are facing 
trouble.
    In light of current statistics regarding the overall 
foreclosure rate, 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 
approximately 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.
    Since there is no uniform solution for the problem of 
foreclosures, a sensible approach should encourage multiple 
mitigation programs that do not amplify taxpayer risk or 
require government mandates. Subsidized loan refinancing and 
modification programs may provide relief for a select group of 
homeowners, but they work against the majority who shoulder the 
tax burden and make mortgage payments on time.
    The following are topics that I will cover in my response.
     The Congressional Budget Office estimates that 
taxpayers will lose 100 percent of the $50 billion in TARP 
funds committed to the Administration's foreclosure relief 
programs.
     Determination of costs is especially important if, 
as Treasury Secretary Geithner has stated, TARP is interpreted 
to be a ``revolving facility.'' Given the likelihood that he 
will extend TARP to October 31, 2010, it's possible that a 
substantial portion of the $700 billion TARP facility could be 
directed to foreclosure mitigation efforts.
     EESA charges the Panel with a clear duty to 
provide information on foreclosure mitigation programs, but 
with the caveat that it must be with an eye towards taxpayer 
protection. The October report places policy recommendations 
above this statutory duty.
     In order to better appreciate the total all-in 
costs of the Administration's various foreclosure mitigation 
efforts and to ensure taxpayer protection, and to compensate 
for the Panel's gaps in oversight, the Administration should 
promptly provide the taxpayers with a thorough and fully 
transparent analysis of the following matters:
          (i) the total amount of funds the Administration has 
        advanced and committed to advance under its various 
        foreclosure mitigation efforts (including, without 
        limitation, under MHA, HAMP and HARP, the second lien 
        programs, as well as the programs adopted by Fannie Mae 
        and Freddie Mac);
          (ii) the total amount of funds the Administration 
        reasonably expects to advance and commit to advance 
        over the next five years under all of its present and 
        anticipated foreclosure mitigation efforts; and
          (iii) the total anticipated costs to all financial 
        institutions and other mortgage holders and servicers 
        under all of the Administration's present and 
        anticipated foreclosure mitigation efforts.
     Treasury should be held accountable for key 
performance metrics as well. With 360,000 trial modifications 
underway, only 1,800 permanent modifications in place, and at 
least $27 out of $50 billion committed to the MHA--Making Home 
Affordable--program for loan modifications, by all appearances, 
Treasury is still a long way from its goal of assisting 3 to 4 
million homeowners.
     All of the false starts with HAMP and the other 
government programs may have exacerbated the foreclosure 
mitigation process by keeping private sector servicers and 
mortgage holders on the sidelines waiting on a better deal from 
the government. By creating a perceived safety net, the 
foreclosure mitigation efforts advocated by the Administration 
may encourage economically inefficient speculation in the 
residential real estate market with its adverse bubble 
generating consequences.
     Housing GSEs--Government Sponsored Enterprises--
Fannie Mae and Freddie Mac play key roles in the 
Administration's new housing policies. Funds from the Preferred 
Share Purchase Agreements, which allow the GSEs to draw up to 
$400 billion from Treasury, are being deployed for foreclosure 
mitigation and refinancing efforts. Since Fannie Mae and 
Freddie Mac are now under the conservatorship of the Federal 
Housing Finance Agency (FHFA), their concerns are now 
officially the taxpayer's concerns--any losses they experience 
through MHA should be a carefully considered part of a cost-
benefit analysis.
     Fannie Mae and Freddie Mac should be more 
forthcoming with respect to their foreclosure mitigation 
efforts and use of taxpayer funds by addressing the questions 
that I pose later in the report.
     Due to flaws in the incentive structure for large-
scale, loan modification programs, the Panel seems to support 
substituting federal bankruptcy judges for the traditional role 
performed by servicers and mortgage holders in loan 
modifications. Such a change in law will add to the increasing 
burden borne by the vast majority of homeowners who meet their 
mortgage obligations each month by encouraging non-recourse 
speculative investment in the residential housing market.
     Since one of Treasury's fundamental mandates is 
taxpayer protection, the incorporation of a shared appreciation 
right or equity kicker feature would appear appropriate. 
Homeowners should not receive a windfall at the expense of the 
taxpayers and mortgage lenders who suffered the economic loss 
from restructuring their distressed mortgage loans.
     Evaluation of a taxpayer-subsidized loan 
modification must consider the tremendous government 
interventions already underway. Private capital investment is 
scarce in today's housing market, replaced by recent, rapid 
growth in the government's share of the mortgage markets.
     Subsidized loan refinancing and modification 
programs may provide relief for a select group of homeowners, 
while working against the majority who shoulder the tax burden 
and make mortgage payments on time. Moral hazard is not just an 
issue of fairness--programs that give no consideration to the 
rightful, necessary link between risk and responsibility could 
potentially create additional housing ``bubbles'' and result in 
greater threats to stability.
     Overall, the Panel continues to place policy 
objectives above transparent and critical oversight. I 
recommend an oversight plan with several requirements be 
considered by the Panel.

2. Cost of the Foreclosure Mitigation Plans to Taxpayers

    In order to have an informed debate on the foreclosure 
mitigation issue it's critical that the American taxpayers 
understand the all-in costs of all foreclosure mitigation 
efforts. This is particularly significant since approximately 
95 percent of taxpayers meet their monthly rental and mortgage 
obligations and these taxpayers will be asked to subsidize the 
cost of any foreclosure mitigation efforts directed for the 
benefit of those who do not meet their obligations.

3. CBO--100 Percent Subsidy Rate for HAMP; Calculation of Total All-In 
        Cost

    A key distinction between the TARP-funded Capital Purchase 
Program and Treasury's foreclosure mitigation efforts is that 
the latter will most likely carry a subsidy rate to the 
taxpayers of 100 percent--that is, a 100 percent rate of loss 
for the taxpayers from the Home Affordable Modification Program 
(HAMP).\399\ The Congressional Budget Office (CBO) has applied 
a 100 percent subsidy rate to the $50 billion of TARP funds 
committed to HAMP. It has not performed subsidy rate analysis 
for non-TARP financing of HAMP. According to CBO:
---------------------------------------------------------------------------
    \399\ Congressional Budget Office, The Troubled Asset Relief 
Program: Report on Transactions Through June 17, 2009 ((June 2009) 
(online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).

          The Treasury has committed $50 billion in TARP 
        funding for the Administration's foreclosure mitigation 
        plan, under which the TARP will make direct payments to 
        mortgage loan servicers to help homeowners refinance 
        their loans. Because no repayments will be required 
        from the servicers, the net cost of the program will be 
---------------------------------------------------------------------------
        the full amount of the payments made by the government.

    Under these conditions, a 100 percent subsidy rate will be 
applicable throughout the entire HAMP lifecycle. A 100 percent 
subsidy rate becomes particularly problematic if--as announced 
with respect to the MHA program--the Administration plans to 
refinance and modify up to 9 million mortgages. Absent 
meaningful input from Treasury, it's difficult to calculate the 
all-in cost of the foreclosure mitigation programs to both the 
taxpayers, and the holders of residential mortgages, investors 
in securitized mortgage obligations, other investors and 
mortgage servicers (which I refer to as the ``financial 
community'').
    For example, under a HAMP modification the mortgage lender 
bears the cost of reducing each participant's monthly mortgage 
payment to 38 percent of DTI (the participant's debt-to-
income), and the lender and the government share the cost of 
reducing the participant's monthly mortgage payment from 38 
percent to 31 percent of DTI. The Panel's report notes that 
monthly principal and interest payments are reduced on average 
by $598--from $1554 to $956--following a HAMP modification. If 
you run the numbers over 12 months per year and for 4 million 
modifications, the annual cost equals approximately $29 
billion. Over a five-year period the (non-discounted) cost 
equals approximately $145 billion. By adding, say, $9,000 of 
incentive payments for 4 million modifications the total all-in 
gross cost to the taxpayers and the financial community 
increases by $36 billion to approximately $181 billion ($145 
billion, plus $36 billion-non-discounted). If, instead, the 
Administration elects to modify 9 million mortgages the total 
all-in gross cost to the taxpayers and the financial community 
jumps to approximately $407 billion (non-discounted). To these 
estimates must be added the billions of dollars already 
allocated to Fannie Mae and Freddie Mac as well as the write-
offs already taken by private sector mortgage lenders, holders 
of securitized debt and servicers. These amounts reflect back-
of-the-envelope estimates of gross costs and must be considered 
along with Professor White's cost-benefit testimony (discussed 
below) and the analysis of other experts. If the Administration 
promotes aggressive principal reduction, negative equity 
abatement and second lien programs, the estimates may, however, 
materially understate the all-in gross costs to the taxpayers 
and the financial community.
    Based upon the Panel's report, it's difficult to determine 
how much of this cost will fall to the taxpayers and how much 
will be borne by the mortgage holders under the DTI formula. It 
is troubling that the Administration has made little effort to 
disclose the all-in cost of these programs to the taxpayers and 
the financial community. Did Treasury roll-out the MHA program 
with its promise of refinancing or modifying up to 9 million 
mortgages without providing a realistic estimate of the cost of 
the program to the taxpayers and the financial community? \400\ 
Will Treasury commit to limit MHA to $50 billion of TARP funds?
---------------------------------------------------------------------------
    \400\ Any attempt to quantify the total costs and expenses that may 
be incurred in restructuring mortgage loans should consider the 
following: (i) fees paid to servicers, attorneys, appraisers, 
surveyors, title companies and accountants, (ii) principal reductions, 
(iii) interest rate reductions, (iv) second lien reductions, (v) 
negative equity reductions, and the like.
---------------------------------------------------------------------------

4. Repaid TARP Funds Available for Foreclosure Mitigation

    Although the HAMP program is presently limited to $50 
billion of TARP funds, I am not aware of any constraint on the 
Secretary from allocating additional TARP funds to MHA or any 
other existing or future foreclosure mitigation efforts. Since 
the Secretary interprets TARP as a ``revolving facility'' and 
given the likelihood that he will extend TARP to October 31, 
2010, it's possible that a substantial portion of the $700 
billion TARP facility could be directed to foreclosure 
mitigation efforts. The MHA and the HAMP--Home Affordable 
Modification Program--and HARP--Home Affordable Refinancing 
Program--programs are subject to unilateral modification 
pursuant to which Treasury may restructure the programs to the 
detriment of the taxpayers. In addition, Treasury may introduce 
new programs that are funded in whole or in part by TARP. Along 
similar lines, it was recently reported that the Administration 
is close to committing up to $35 billion to state and local 
housing authorities to provide mortgages to low- and moderate- 
income families.\401\ It's important to note again that CBO 
will most likely assign a 100 percent taxpayer subsidy rate to 
any new or expanded foreclosure mitigation programs thereby 
acknowledging the vast transfer of taxpayer funds from the 
taxpayers who meet their monthly mortgage and rental payments 
to those who do not.
---------------------------------------------------------------------------
    \401\ Deborah Solomon, $35 Billion Slated for Local Housing Wall 
Street Journal (Sept. 28, 2009) (online at online.wsj.com/article/
SB125409967771945213.html).
---------------------------------------------------------------------------

5. Treasury Should Disclose the All-In Cost of the Foreclosure 
        Mitigation Plans

    In order to better appreciate the total all-in costs of the 
Administration's various foreclosure mitigation efforts, and to 
compensate for the Panel's gaps in oversight, I request that 
the Administration promptly provide the taxpayers with a 
thorough and fully transparent analysis of the following 
matters:
         the total amount of funds the Administration 
        has advanced and committed to advance under its various 
        foreclosure mitigation efforts (including, without 
        limitation, under MHA, HAMP and HARP, the second lien 
        programs, as well as the programs adopted by Fannie Mae 
        and Freddie Mac);
         the total amount of funds the Administration 
        reasonably expects to advance and commit to advance 
        over the next five years under all of its present and 
        anticipated foreclosure mitigation efforts; and
          the total anticipated costs to all financial 
        institutions and other mortgage holders and servicers 
        under all of the Administration's present and 
        anticipated foreclosure mitigation efforts.
    Like the recently completed ``stress tests'' conducted by 
Treasury and other financial regulators with respect to bank 
capital adequacy, the Administration should calculate the 
foregoing estimates under a ``more adverse'' scenario (i.e., 
where conditions materially deteriorate) as well as under 
current conditions. It is also imperative that the valuation 
models adopted by Treasury employ reasonable input assumptions 
and methodologies and make no effort to skew the results to the 
high or low range of estimates.
    The analysis should acknowledge the extent to which the 
Administration's foreclosure mitigation efforts may create 
capital shortfalls within the financial community. It's 
somewhat ironic that at the same time the Administration is 
encouraging financial institutions and mortgage holders to 
boost their foreclosure mitigation efforts by restructuring 
home loans and writing down loan portfolios, the Administration 
is considering a new round of bailouts for the financial 
community.\402\ Since money is fungible it's not unreasonable 
to conclude that the Administration may be in effect 
reimbursing--with taxpayer sourced funds--financial 
institutions that adopt and follow the Administration's 
foreclosure mitigation policies.
---------------------------------------------------------------------------
    \402\ Daniel Wagner, Fresh Bailouts for Smaller Banks Being 
Weighed, The Observer (Sept. 25, 2009) (online at hosted.ap.org/
dynamic/stories/U/_ US_SMALL_BANKS_BAILOUT).
---------------------------------------------------------------------------
    One key function of effective oversight is to determine if 
Treasury will be able to achieve its stated goals for the 
stated price--the refinancing or modification of up to 9 
million mortgage loans for $75 billion. It's not possible to 
accomplish this task without a better understanding of the 
anticipated all-in cost of the several foreclosure mitigation 
programs.

6. Analysis by the Panel and Professor Alan M. White

    In prior reports the Panel has retained the services of 
nationally recognized academics to value, for example, warrants 
issued to Treasury under the Capital Purchase Program as well 
as toxic assets held by banks and other financial institutions. 
In preparing the October report, I recommended that the Panel 
again retain the services of top-tier academics and other 
professionals to estimate the total cost to the taxpayers and 
the financial community of the various housing foreclosure 
mitigation plans and proposals including, without limitation, 
all refinancing, modification and second lien plans and 
proposals. Although the Panel's efforts do not reflect the same 
robust analysis undertaken in prior reports, I wish to thank 
Professor Alan M. White for his paper on the ``potential costs 
and benefits'' of the HAMP program.
    In calculating the total cost of each mortgage modification 
to the taxpayers, Professor White concludes:

          To summarize, the total cost of the borrower, 
        servicer and investor incentive payments for first and 
        second mortgage HAMP payments is projected to be in the 
        range of $16,000 to $21,000 average per first mortgage 
        modification, including both successful and 
        unsuccessful modifications. In other words, the cost 
        per successful modification will be higher. Treasury 
        should be in a position to report on actual per-
        modification costs by November or December, when 
        several months of permanent modification data have been 
        collected and some initial redefault statistics can be 
        calculated.

    Since these numbers apparently include up to $9,000 of 
incentive payments it appears that the total cost to the 
taxpayers of all interest rate and principal adjustments is 
approximately $10,000 per modification, or approximately $2,000 
per year ($167 per month) for the full five-year HAMP 
modification period. Perhaps this is correct, but I question 
whether mortgage loans may be successfully modified at such a 
relatively modest cost to the taxpayers under the HAMP program. 
It appears that Professor White did not independently calculate 
these amounts, but, instead, generally relied upon estimates 
provided by Treasury. It is unclear what methodology Treasury 
employed except, perhaps, to divide the $50 billion of TARP 
funds initially allocated to HAMP by 2.5 million modifications, 
or $20,000 per mortgage modification. Such approach, although 
suggested by Professor White, hardly reflects the application 
of rigorous scientific methodology.
    Professor White also expressly notes the effectiveness of 
non-subsidized voluntary foreclosure mitigation when he states:

          Nevertheless, there is convincing evidence that 
        successful modifications avoided substantial losses, 
        while requiring only very modest curtailment of 
        investor income. In fact, the typical voluntary 
        modification in the 2007-2008 period involved no 
        cancellation of principal debt, or of past-due 
        interest, but instead consisted of combining a 
        capitalization of past-due interest with a temporary 
        (three to five year) reduction in the current interest 
        rate. Foreclosures, on the other hand, are resulting in 
        losses of 50% or more, i.e. upwards of $124,000 on the 
        mean $212,000 mortgage in default.

    Significantly, he also quantifies the overall benefit of 
voluntary foreclosure mitigation to investors by concluding:

          The bottom line to the investor is that any time a 
        homeowner can afford the reduced payment, with a 60% or 
        better chance of succeeding, the investor's net gain 
        from the modification could average $80,000 per loan or 
        more. Two million modifications with a 60% success rate 
        could produce $160 billion in avoided losses, an amount 
        that would go directly to the value of the toxic 
        mortgage-backed securities that have frozen credit 
        markets and destabilized banks.

    If this is indeed the case, then why is it not in the best 
interest of each mortgage holder to modify the mortgage loans 
in its portfolio? Why would a mortgage holder risk breaching 
its fiduciary duties to its investor group by foreclosing on 
mortgaged property instead of restructuring the underlying 
loans? Why should the taxpayers subsidize the restructuring of 
mortgage loans--whether through the HAMP program or otherwise--
if the mortgage holders may independent of such subsidy realize 
a net gain of approximately $80,000 per loan by voluntarily 
restructuring their distressed mortgage loans?
    Professor White and the Panel seem to imply that without 
taxpayer-funded subsidies the mortgage servicers would be 
economically disinclined to modify distressed mortgage loans 
because of unfavorable terms included in typical pooling and 
servicing agreements--the contracts pursuant to which servicers 
discharge their duties to mortgage holders. Professor White 
writes:

          While modification can often result in a better 
        investor return than foreclosure, modification requires 
        ``high-touch'' individualized account work by servicers 
        for which they are not normally paid under existing 
        securitization contracts (pooling and servicing 
        agreements or ``PSA''s.) \403\ Servicer payment levels 
        were established by contracts that last the life of the 
        mortgage pools. Servicers of subprime mortgages agreed 
        to compensation of 50 basis points, or 0.5% from 
        interest payments, plus late fees and other servicing 
        fees collected from borrowers, based on conditions that 
        existed prior to the crisis, when defaulted mortgages 
        constituted a small percentage of a typical portfolio. 
        At present, many subprime and alt-A pools have 
        delinquencies and defaults in excess of 50% of the 
        pool. The incentive payments under HAMP can be thought 
        of as a way to correct this past contracting failure.
---------------------------------------------------------------------------
    \403\ Standard & Poor's, Servicer Evaluation Spotlight Report (July 
2009) (online at www2.standardandpoors.com/spf/pdf/media/
SE_Spotlight_July09.pdf).
---------------------------------------------------------------------------
          Because mortgage servicers are essentially 
        contractors working for investors who now include the 
        GSE's, the Federal Reserve and the Treasury, we can 
        think of the incentive payments under HAMP as extra-
        contractual compensation for additional work that was 
        not anticipated by the parties to the PSAs at the time 
        of the contract.

    Is the purpose of HAMP to bailout servicers from their 
``contracting failure'' through the payment of ``extra-
contractual compensation''? The taxpayers should not be charged 
with such a responsibility and I am disappointed that the 
Administration, the Panel and Professor White would advocate 
such an approach. Notwithstanding the inappropriate complexity 
interjected into the foreclosure mitigation debate by the 
Administration, a solution appears relatively straightforward. 
If, as Professor White suggests, mortgage holders stand to 
realize a net gain of approximately $80,000 from restructuring 
each mortgage loan instead of foreclosing on the underlying 
property, the mortgage holders themselves should undertake to 
subsidize the ``contracting failure'' of their servicers out of 
such gains. I appreciate that mortgage holders may not wish to 
remit additional fees to their servicers, but, between mortgage 
holders and the taxpayers, why should the taxpayers--through 
TARP or otherwise--bear such burden? The Administration, by 
enticing mortgage holders and servicers with the $75 billion 
HAMP and HARP programs (with a reasonable expectation that 
additional funds may be forthcoming), has arguably caused them 
to abandon their market oriented response to the atypical rate 
of mortgage defaults in favor of seeking hand-outs from the 
government. It's difficult to fault mortgage holders and 
servicers for their rational behavior in accepting bailout 
funds that may enhance the overall return to their investors.
    In addition, Professor White dismisses the importance of 
considering future decisions homeowners and others will make 
when entering into risky contracts when there is a perceived 
safety net. It is insufficient simply to say, ``moral hazard 
from HAMP modifications is unlikely to play a significant role 
in borrower defaults,'' as viewed through the prism of ``the 
cost of losses on mortgages that would otherwise perform but 
for the borrower's decision to default in order to benefit from 
the program.'' I appreciate that Professor White provides a 
definition to support his analysis, but it is an inadequate 
premise for such a sweeping conclusion. If the objective of the 
Administration's MHA program is to correct failures in the 
housing market so as to provide economic stabilization, then 
any estimate of total cost provided by Professor White or 
Treasury would by definition fail to consider the additional 
costs that will no doubt ensue when homeowners are saved from 
mortgage contracts they would not otherwise be able to shoulder 
without a government backstop. It would also exclude future 
risk-taking behavior that may necessitate future interventions. 
The MHA program in effect incorporates the failed policy of 
``implicit guarantee''--notoriously exploited by Fannie Mae and 
Freddie Mac--into yet another aspect of federal housing policy. 
By disregarding the distinct moral hazard risk, the MHA 
encourages speculation in the residential real estate market 
with its adverse bubble generating consequences.

7. Response to March Report on Foreclosures

    In my response to the March Panel report, I commented on 
several aspects of the housing crisis that I felt were omitted 
or not thoroughly described by the Panel. These include further 
contributing causes, the universe of individuals in distress, 
the realized and unrealized costs of loan modification 
programs, and additional alternatives to government-subsidized 
foreclosure mitigation efforts.\404\
---------------------------------------------------------------------------
    \404\ Representative Jeb Hensarling, Foreclosure Crisis: Working 
Toward a Solution, Additional View by Representative Jeb Hensarling, 
(Mar. 9, 2009) (online at cop-senate.gov/documents/cop-030609-report-
view-hensarling.pdf).
---------------------------------------------------------------------------
    Below is a summary of some of the key points I discussed in 
response that are relevant to the current discussion on 
foreclosure mitigation:
     Foreclosure relief should be centered around 
borrowers in a fair, responsible, and taxpayer-friendly way.
     Policymakers should take care to avoid the trap of 
creating further market distortions that disrupt the law of 
supply and demand, which is designed to ensure that qualified 
borrowers have reliable access to mortgage products suitable to 
their needs.
     Government involvement in housing markets has 
already created significant disruptions, chiefly through highly 
accommodative monetary policy; federal policies designed to 
expand home ownership; the congressionally-granted duopoly 
status of housing GSEs, Fannie Mae and Freddie Mac; an anti-
competitive government-sanctioned credit rating oligopoly; and 
mandates of certain policies and underwriting standards based 
on factors other than risk.\405\
---------------------------------------------------------------------------
    \405\ One 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 home ownership 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.
---------------------------------------------------------------------------
     As the 2009 deficit reaches an estimated $1.6 
trillion, evaluation of foreclosure plans must consider the 
all-in costs as well as the extraordinary federal assistance 
that has been provided in response to the financial crisis.
     The Panel should practice caution in estimating 
the redefault rates that will occur three months to a year 
after participation in the MHA--Making Home Affordable--
program. Historical, yearly data show that redefault rates have 
been over 50 percent on modified loans.\406\
---------------------------------------------------------------------------
    \406\ Office of the Comptroller of the Currency and Office of 
Thrift Supervision Mortgage Metric Report, First Quarter 2009 (online 
at www.occ.treas.gov/ftp/release/2009-77a.pdf) . See chart on page 7, 
which conveys a re-default rate of over 50 percent based on the most 
recent data available.
---------------------------------------------------------------------------
     Foreclosure rates are concentrated in specific 
states and areas, making one-size-fits all programs even more 
difficult to execute.
     It is important to remember that the number of 
individuals in mortgage distress reaches beyond individuals who 
have experienced an adverse ``life event'' or been the victims 
of fraud. This complicates moral hazard issues associated with 
large-scale modification programs.\407\
---------------------------------------------------------------------------
    \407\ 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 or their bad behavior.
---------------------------------------------------------------------------
     Distinct from a moral hazard question there is an 
inherent question of fairness as those who are not facing 
mortgage trouble are asked to subsidize those who are facing 
trouble. In light of current statistics regarding the overall 
foreclosure rate, 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 
approximately 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.\408\
---------------------------------------------------------------------------
    \408\ 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. 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 the taxpayers to 
shoulder an even greater financial burden from yet another government 
foreclosure mitigation program that might not work.
---------------------------------------------------------------------------
     Since there is no uniform solution for the problem 
of foreclosures, a sensible approach should encourage multiple 
mitigation programs that do not amplify taxpayer risk or 
require government mandates.
     See the following link for my full response to the 
Panel's March report: http://cop.senate.gov/documents/cop-
030609-report-view-hensarling.pdf.

8. Foreclosures and Macroeconomic Recovery

    Indeed, the housing market is still on shaky ground and 
homeowners face the turmoil of potential waves of foreclosures. 
Although there are signs of life in the market--such as upward 
movement in housing starts and nationwide home values--
unpredictable existing home sales figures \409\ and continued 
increases in delinquencies and foreclosures mean underlying 
indicators are still problematic. Mortgage interest rates 
remain at low levels by historical standards, although much of 
this may be intertwined with the Federal Reserve's program to 
purchase up to $1.25 trillion in agency mortgage-backed 
securities. The future may be even more ominous for housing 
prices and recovery if concerns are realized about ``shadow 
inventory,'' a term for the millions of homes that are waiting 
to hit the market either because they are in foreclosure or for 
other reasons.\410\
---------------------------------------------------------------------------
    \409\ Sara Murray, Existing Home Sales Dropped In August, Wall 
Street Journal (September 24, 2009) (online at online.wsj.com/article/
SB125379520447237461.html#mod= WSJ_hps_LEFTWhatsNews).
    \410\ Jody Shenn, ``Housing Crash to Resume on 7 Million 
Foreclosures, Amherst Says, Bloomberg News (September 23, 2009) (online 
at www.bloomberg.com/apps/news?pid=20601087&sid=aw6_gqc0EKKg).
---------------------------------------------------------------------------
    Even still, housing indicators cannot be studied in 
isolation. The best insurance policy to protect homeowners from 
foreclosure is having a job, and the best assurance of job 
security is the engine of economic growth and the adoption of 
public policy that encourages and rewards capital formation and 
entrepreneurial success. The Blue Chip Consensus and other 
forecasters predict that unemployment will hit 10 percent in 
2010. Although a less-than-expected GDP drop for the second 
quarter is a positive signal, the path to economic recovery is 
expected to be sluggish, and further dragged down by record 
debt and deficit levels.\411\
---------------------------------------------------------------------------
    \411\ U.S. Office of Management and Budget, Mid-Session Review, 
Economic Assumptions (August 2009) (online at www.gpoaccess.gov/
USbudget/fy09/pdf/09msr.pdf).
---------------------------------------------------------------------------
    Whether or not MHA will lead to economic stabilization or 
prevent further disruptions, two integral mandates of EESA, is 
open for debate. The Panel's report suggests that the housing 
market ``has been at the center of the economic crisis, and 
until it is stabilized, the economy as a whole will remain in 
turmoil.'' It is undisputed that the collapse of housing prices 
ignited the financial crisis, which was linked to the risky 
undertakings of multiple players: government, lenders, 
borrowers and investors. Yet even if macroeconomic recovery 
were irrevocably dependent on the revival of the housing 
market--likely, the reverse is true--can this revival be 
spurred by a large-scale loan modification program that has 
committed $75 billion in taxpayer funding?

9. The Panel's Mandate With Respect to Taxpayer Protection

    Taxpayer protection is a guiding principle of EESA 
interwoven throughout the legislation, including for 
foreclosure mitigation efforts. I recommend that Treasury and 
the Panel define in measurable terms what is at stake--the 
costs and the benefits--for taxpayers in implementing the MHA 
plan.
    EESA gives the Panel a clear duty to provide information on 
foreclosure mitigation programs, but with the following caveat. 
Reports must include:

          The effectiveness of foreclosure mitigation efforts 
        and the effectiveness of the program from the 
        standpoint of minimizing long-term costs to the 
        taxpayers and maximizing the benefits for 
        taxpayers.\412\ [Emphasis added.]
---------------------------------------------------------------------------
    \412\ Emergency Economic Stabilization Act of 2008, Pub. L. No. 
110-343 Sec. 125.

    While the Executive Summary of the Panel's report discusses 
this mandate as if it were a major theme of the paper, the 
analysis that follows does not give due credence to taxpayer 
considerations. Professor White's analysis does not assuage 
concerns about taxpayer protection--in fact, it aggravates them 
by suggesting there is actually a $50 billion ceiling on HAMP 
costs and that investors stand to gain at the taxpayers' 
expense.
    The Panel's March report applies eight criteria in its 
evaluation of loan modification programs, which is also 
included in the most recent report:
      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?
    While these are valid criteria, the list, which serves as 
the lynchpin for both the March and October reports, does not 
include taxpayer considerations. The Congressional Budget 
Office estimates that taxpayers will lose 100 percent of the 
$50 billion in TARP funds committed to the Administration's 
foreclosure relief programs.\413\ (It is reasonable to assume 
that the entire $75 billion program carries a 100 percent 
subsidy rate.) It also shows that the five-year MHA is not 
surprisingly a major driving force behind the extension of TARP 
costs well into 2013.\414\ MHA is not an investment with a 
realizable return in the same sense as other TARP programs, 
such as the Capital Purchase Program, where at least a portion 
of the outlays are expected to be recouped, and many with 
interest. The $75 billion program funds the array of incentive 
payments to servicers and lenders/investors who participate in 
the MHA program. It will not be returned to the Treasury 
general fund as the program winds down, so in a sense, it is 
equivalent to a $50 billion increase in deficits as the debt 
level reaches $12.3 trillion by 2013.\415\
---------------------------------------------------------------------------
    \413\ U.S. Congressional Budget Office, The Troubled Asset Relief 
Program: Report on Transactions Through June 17, 2009 (June 2009) 
(online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
    \414\ U.S. Congressional Budget Office, The Budget and Economic 
Outlook: An Update (August 2009) (online at www.cbo.gov/ftpdocs/85xx/
doc8565/08-23-Update07.pdf ).
    \415\ U.S. Office of Management and Budget, Mid-Session Review, 
(August 2009) (online at www.gpoaccess.gov/usbudget/fy10/pdf/
10msr.pdf).
---------------------------------------------------------------------------
    According to Treasury's program description for MHA, the 
payments to servicers, lenders and homeowners are as follows: 
\416\
---------------------------------------------------------------------------
    \416\ U.S. Department of Treasury, Making Home Affordable: Summary 
of Guidelines, (March 4, 2009) (online at www.treas.gov/press/releases/
reports/guidelines_summary.pdf).
---------------------------------------------------------------------------
     Treasury will share with the lender/investor the 
cost of reductions in monthly payments from 38 percent DTI to 
31 percent DTI.
     Servicers that modify loans according to the 
guidelines will receive an up-front fee of $1,000 for each 
modification, plus ``pay for success'' fees on still-performing 
loans of $1,000 per year.
     Homeowners who make their payments on time are 
eligible for up to $1,000 of principal reduction payments each 
year for up to five years.
     The program will provide one-time bonus incentive 
payments of $1,500 to lender/investors and $500 to servicers 
for modifications made while a borrower is still current on 
mortgage payments.
     The program will include incentives for 
extinguishing second liens on loans modified under this 
program.\417\
---------------------------------------------------------------------------
    \417\ Announced in April, MHA's second lien program offers the 
following:
    Pay-for-Success Incentives for Servicers and Borrowers:
    The Second Lien Program will have a pay-for-success structure 
similar to the first lien modification program, aligning incentives to 
reduce homeowner payments in a way most cost effective for taxpayers.
    Servicers can be paid $500 up-front for a successful modification 
and then success payments of $250 per year for three years, as long as 
the modified first loan remains current.
    Borrowers can receive success payments of up to $250 per year for 
as many as five years. These payments will be applied to pay down 
principal on the first mortgage, helping to build the borrower's equity 
in the home. U.S. Department of Treasury, Making Home Affordable: 
Program Update (April 28, 2009) (online at www.financialstability.gov/
docs/042809SecondLienFactSheet.pdf).
---------------------------------------------------------------------------
     No payments will be made under the program to the 
lender/investor, servicer, or borrower unless and until the 
servicer has first entered into the program agreements with 
Treasury's financial agent.
     Similar incentives will be paid for Hope for 
Homeowner refinances.
    Taxpayers and the Panel should demand no less than complete 
transparency and accountability of funds. If no financing will 
be repaid from the MHA program, Treasury must provide its own 
assessment of how it measures benefits and risks for all 
taxpayers, not just for participants of the program. For 
example, even were the program to work for a select group of 
homeowners, it may be working against the majority who shoulder 
the tax burden and make mortgage payments on time. If evidence 
can be provided to the contrary, it must be plausible enough to 
diminish the risks of entering into a $50 billion investment 
where direct funding will not be recovered.

10. Making Home Affordable Program--Making Sense of the Data

    On March 4, 2009, the Department of the Treasury released a 
program description of ``Making Home Affordable,'' or MHA, the 
Administration's multi-tiered plan to prevent foreclosure for 
``at-risk'' homeowners. When it was announced, the advertised 
goal was to ``offer assistance to as many as 7 to 9 million 
homeowners.'' \418\ Based on the information provided so far by 
Treasury, only murky conclusions can be reached about the 
program's progress, especially when taxpayer funds spent or 
committed are considered.\419\
---------------------------------------------------------------------------
    \418\ U.S. Department of Treasury, Making Home Affordable: Updated 
Detailed Program Description (March 4, 2009) (online at 
www.ustreas.gov/press/releases/reports/housing_fact_sheet.pdf).
    \419\ On October 8, GAO released its latest report on TARP, which 
included a table of Treasury's actions in response to major GAO 
recommendations. As an example, one recommendation is to ``Institute a 
system to routinely review and update key assumptions and projections 
about the housing market and the behavior of mortgage holders, 
borrowers, and servicers that underlie Treasury's projection of the 
number of borrowers whose loans are likely to be modified under HAMP 
and revise the projection as necessary in order to assess the program's 
effectiveness and structure.''
    It is worth nothing that the status of all of the GAO 
recommendations for HAMP is either ``not implemented'' or ``partially 
implemented.''
    Government Accountability Office, Troubled Asset Relief Program: 
One Year Later, Actions Are Needed to Address Remaining Transparency 
and Accountability Challenges (October 2009) (GAO-10-16) (online at 
www.gao.gov/new.items/d1016.pdf).
---------------------------------------------------------------------------

11. Home Affordable Modification Program

    The Administration committed $75 billion--$50 billion of 
TARP financing and $25 billion of ``Housing and Economic 
Recovery Act of 2008'' (HERA) \420\ financing--to the HAMP 
program, a loan modification program aimed at reducing monthly 
interest payments for 3 to 4 million homeowners who are either 
close to defaulting on payments or are already delinquent. The 
TARP funds used for HAMP are solely for private-label loans, 
although Fannie Mae and Freddie Mac both have major roles in 
the program, with Fannie Mae serving as the ``administrator'' 
and Freddie Mac serving as the ``compliance agent.'' HAMP uses 
HERA funding for loans owned or guaranteed by Fannie Mae or 
Freddie Mac.
---------------------------------------------------------------------------
    \420\ Pub. L. No. 110-289.
---------------------------------------------------------------------------
    Treasury has released some metrics on HAMP in its August 
Monthly Progress Report.\421\ According to these data, just 
over 360,000, 3-month trial modifications have begun. Assistant 
Secretary Allison testified at a Senate Banking Committee 
hearing on September 24, 2009, that only about 1,800 of the 
total modifications have become permanent.\422\ Treasury 
believes, however, that the HAMP program will exceed the newly-
set target of 500,000 trial modifications by November.\423\
---------------------------------------------------------------------------
    \421\ U.S. Department of Treasury, Troubled Assets Relief Program: 
Monthly Progress Report--August 2009 (September 10, 2009) (online at 
www.financialstability.gov/docs/105CongressionalReports/
105areport_082009.pdf).
    \422\ Senate Committee on Banking, Housing and Urban Affairs, 
Testimony of U.S. Treasury Department Assistant Treasury Secretary, 
Herb Allison, EESA: One Year Later (September 24, 2009) (online at 
banking.senate.gov/public/index.cfm?FuseAction= 
Hearings.Hearing&Hearing_ID=ff78e881-372e-41e3-915d-e4d5a93da22d).
    \423\ This target has only recently been announced and was not part 
of the MHA program's launch in March 2009.
---------------------------------------------------------------------------
    The jury is still out on whether the program will 
ultimately accomplish its goals, how long this may take and 
what it will cost. There are many factors at work, including 
the ability of servicers to perform the necessary 
``counseling'' role, the willingness of homeowners to 
participate, and much larger external forces such as the labor 
market. Borrowers may enter into the trial modification process 
only to be denied based on criteria like debt-to-income levels. 
Even those whose modifications become permanent for several 
months may redefault because of job loss, ``back-end'' debt 
such as credit card obligations (which is not factored into 
debt-to-income calculations) or other reasons that make 
mortgage payments unsustainable.
    Were all 360,000 trial modifications to succeed in not only 
lowering payments but also in staving off foreclosure, Treasury 
is still a long way from its goal of assisting 3 to 4 million 
homeowners. Treasury's latest transaction report on TARP 
indicates that a maximum of $27 billion out of $50 billion in 
authority has been used for incentive payments, although it is 
unclear how this corresponds to metrics on completed 
modifications.\424\ Assistant Secretary Allison has said that 
``very little'' of the funds have been spent, but unless the 
proper data are provided to link funds spent or committed to 
loan modifications that have become permanent, much is open to 
interpretation.
---------------------------------------------------------------------------
    \424\ U.S. Department of the Treasury, Troubled Assets Relief 
Program: Transactions Report for Period Ending September 18, 2009 
(Sept. 22, 2009) (online at www.financialstability.gov/docs/
transaction-reports/transactions-report_09222009.pdf).
---------------------------------------------------------------------------
    Are we to assume that the outcome of committing $27 billion 
in taxpayer funding has only yielded at most 360,000 loan 
modifications? If not, what are we to assume? Will Treasury 
commit additional TARP funds beyond the $50 billion in order to 
make the program work as advertised? Will it use the 
essentially boundless \425\ HERA authority as a back-door 
approach to financing expansions in HAMP? What other measures 
may be taken to deliver on the promise to reach millions of 
homeowners? Will Treasury adjust the criteria?
---------------------------------------------------------------------------
    \425\ See following section.
---------------------------------------------------------------------------

12. Home Affordable Refinance Program for Agency Mortgages

    A separate platform of the Administration's MHA plan, the 
``Home Affordable Refinance Program,'' or (HARP), targets up to 
4 to 5 million homeowners with loans owned or guaranteed by 
Fannie Mae and Freddie Mac. Homeowners can qualify who are up 
to 125 percent ``underwater'' on their mortgages--a situation 
where the borrower owes more on the loan than the value of the 
home--but must have a track record of making payments on time. 
Although Treasury has given assurances that no TARP funds will 
be intermingled with HARP,\426\ the program's ability to 
prevent millions of foreclosures and stabilize the housing 
market is nevertheless intertwined with the TARP-funded 
program, HAMP, and must be considered by the Panel.
---------------------------------------------------------------------------
    \426\ Letter from Assistant Treasury Secretary for Financial 
Stability Herb Allison, to the Honorable Jeb Hensarling, United States 
Congressman (Sept. 14, 2009).
---------------------------------------------------------------------------
    The HERA statute established the authority for Treasury to 
purchase preferred stock in Fannie Mae and Freddie Mac in 
amounts it or the GSEs deem necessary, providing the two 
housing companies with equity injections. Although this 
authority technically expires on December 31, 2009, Treasury 
may increase the limit to any level through the expiration 
date. Part of the Administration's housing plan involves 
doubling the size of the purchase agreements from a maximum of 
$200 billion to a maximum of $400 billion,\427\ which did not 
require Congressional approval or budgetary review. So far, 
Fannie and Freddie have drawn $95.6 billion in capital from the 
agreements.\428\
---------------------------------------------------------------------------
    \427\ U.S. Department of the Treasury, Making Home Affordable: 
Updated Detailed Program Description, (Mar. 4, 2009) (online at 
www.ustreas.gov/press/releases/reports/housing_fact_sheet.pdf).
    \428\ Fannie Mae, Second Quarter 2009 Form 10-Q (Aug. 6, 2009) 
(online at phx.corporate-ir.net/phoenix.zhtml?c=108360&p=irol-
secQuarterly&control_SelectGroup=Quarterly%20Filings); Freddie Mac, 
Second Quarter 2009 Form 10-Q (Aug. 7, 2009) (ir.10kwizard.com/
files.php?source=1372&welc_next=1&XCOMP=0&fg=23).
---------------------------------------------------------------------------
    The powers granted by the HERA statute have been used to 
fund the Administration's loan modification efforts through 
HAMP and HARP, but there is no clear way to segregate the costs 
of new housing policies from other expenditures as well as from 
losses on Fannie's or Freddie's books of business (discussed 
further in later section). Very few metrics on the success of 
HARP have been released to date. Fannie Mae and Freddie Mac 
executives testified before this Panel on September 24, 2009, 
and although they did speak to the number of total refinances 
performed by the agencies this year, they did not discuss HARP 
specifically. Treasury and the GSEs should be held accountable 
for making any loan modification program or refinancing program 
as transparent as possible, since it involves a minimum of $25 
billion of taxpayer dollars and there is no clear way to 
understand whether or not programs supporting Fannie- or 
Freddie-guaranteed mortgages will require additional funds.

13. Issues Enlisting Servicer Support of MHA

    The Panel's October report spotlights several obstacles to 
launching a massive loan modification program. One is whether 
HAMP servicers will have the capacity or expertise to 
successfully carry it out. Another involves whether they can 
handle the volume of modifications MHA creates in a profitable 
manner.
    What the report does not emphasize is simply whether or not 
the program can provide appropriate incentives that will 
outweigh both the risk of borrower redefault as well as what 
may be the enhanced return from foreclosure and sale to a 
solvent buyer. Along these lines the report seems to accept 
without comment the need for government sponsored-foreclosure 
mitigation programs and generally disregards private sector 
efforts without sufficient analysis. It's quite often in the 
best interest of private sector servicers and mortgage holders 
to restructure distressed loans but I am concerned that the 
confusing array of government sponsored programs may have 
chilled many creative private sector initiatives. Instead of 
being proactive, private sector servicers and mortgage holders 
may have been enticed to sit on their hands and wait for higher 
fees, servicing payments, and interest and principal subsidies 
courtesy of HAMP or some other government-sponsored foreclosure 
mitigation program. Without these programs and the expectation 
of future subsidies, servicers and mortgage holders would have 
had little choice but to implement independent private sector 
programs. It's ironic, but all the false starts with HAMP and 
the other government programs may have exacerbated the 
foreclosure mitigation process by keeping private sector 
servicers and mortgage holders on the sidelines waiting on a 
better deal from the government.\429\
---------------------------------------------------------------------------
    \429\ HOPE Now, a public-private foreclosure mitigation alliance in 
existence since 2007, for example, has performed as many as 140,000 
loan modifications per month. Since HARP is a first stop for at-risk 
homeowners, programs like HOPE Now may be put on the back burner.
---------------------------------------------------------------------------
    Such behavior is entirely rational if the servicers and 
mortgage holders have a reasonable expectation that Treasury 
will dedicate more TARP or other funds to foreclosure 
mitigation efforts. Since Treasury asserts that repaid TARP 
funds may be recycled to new programs it's not unrealistic to 
expect that Treasury will offer more favorable programs to 
servicers and mortgage holders in the relatively near future. 
Since servicers perform their duties pursuant to complex 
contractual arrangements that mandate they maximize the return 
to the mortgage holders, it's quite possible that servicers 
risk default under their contracts if they fail to capture the 
greatest subsidy rate offered by the government. In addition, 
servicers themselves may of course benefit by waiting for 
enhanced payments. The only way to convince servicers and 
mortgage holders that they will not forego additional 
governmental largess is for Treasury to state clearly that the 
MHA program will not be expanded and that no additional TARP or 
government funds will be allocated to foreclosure mitigation 
efforts.
    In addition, there is simply no way of knowing whether or 
not larger institutions receiving TARP funds were pressured 
into participating in government-supported loan modification 
programs against the best interest of other performance goals 
(which would have the potential to restrict credit extension 
elsewhere). Bank of America and Wells Fargo, receiving a 
combined $70 billion in TARP aid, stepped up the rate of loan 
modifications as part of MHA by 60 percent in August after 
receiving criticism from lawmakers for ``not doing enough.'' 
\430\
---------------------------------------------------------------------------
    \430\ Bloomberg, Banks Step Up Loan Modifications Under Obama 
Program (Sept. 9, 2009) (online at www.bloomberg.com/apps/
news?pid=20601087&sid=aDFdlC9CYQEQ).
---------------------------------------------------------------------------

14. Bankruptcy Cram Down

    The report makes several supportive references to 
substituting federal bankruptcy judges for the traditional role 
performed by servicers and mortgage holders in loan 
modifications. Under these plans bankruptcy judges would be 
granted the unilateral right to change--that is, cram down--the 
terms of mortgage loans over the express objections of mortgage 
holders as part of a bankruptcy proceeding. Although Congress 
rejected a bankruptcy cram down proposal a few months ago, I am 
troubled that the Panel continues to ignore the unintended 
consequences of such approach, especially the fee potential 
homeowners will be asked to pay due to enhanced risks to 
lenders of entering into mortgage contracts that could 
unilaterally be unwound. The Mortgage Bankers Association 
estimates that if bankruptcy cram down were to become law, 
mortgage rates would increase by approximately 1.50 percent 
resulting in annual additional mortgage payments of 
approximately $3,970, $3,346 and $2,989 for typical homeowners 
in California, Washington, D.C. and New York, 
respectively.\431\ These phantom taxes will add to the 
increasing burden borne by the vast majority of homeowners who 
meet their mortgage obligations each month. It seems profoundly 
unfair to ask these homeowners to subsidize the costs of any 
bankruptcy cram down plan. The bankruptcy cram down proposal 
would also adversely skew the typical rent v. buy analysis 
undertaken by individuals and families.
---------------------------------------------------------------------------
    \431\ Mortgage Bankers Association, Stop the Bankruptcy Cram Down 
Resource Center (online at www.mortgagebankers.org/stopthecramdown) 
(accessed Oct. 8, 2009).
---------------------------------------------------------------------------

15. State Anti-Deficiency Laws and Bankruptcy Cram Down May Encourage 
        Counterproductive Real Estate Speculation by Home Purchasers

    An individual's or family's decision to rent or purchase a 
residence requires a thoughtful balancing of an array of 
economic factors. Renting provides flexibility with annual or 
even month-to-month rental obligations while purchasing 
requires a longer-term financial commitment. Rental payments 
are not tax deductible but mortgage interest expense and 
property taxes arising from an owned residence are deductible 
subject to limitations. Renting offers scant investment 
opportunity (absent long-term below market leases), yet home 
ownership often yields favorable inflation adjusted returns. In 
addition, beginning in the mid-1990s with the gradual 
relaxation of underwriting standards and due diligence analysis 
historically conducted by Fannie Mae, Freddie Mac, private 
mortgage lenders and securitizers, many renters were encouraged 
to opt in favor home ownership.
    The seeming advantages of home ownership are nevertheless 
tempered by the nature of the contractual agreements most home 
purchasers undertake with their mortgage lender. While home 
purchasers may consider themselves ``owners'' of their homes 
they explicitly understand that if they fail to make their 
monthly principal and interest payments on a timely basis they 
run the distinct risk of losing the right to continue their 
ownership. Such an appreciation of economic reality requires 
little if any financial sophistication and few Americans would 
challenge the overall fairness or necessity of such 
consequences. From an historical perspective a substantial 
majority of individuals and families have made the rent v. buy 
decision with these factors in mind and, as such, have acted in 
a rational manner by not overextending their financial 
commitments.
    Over the past several years, however, the rent v. buy 
decision process has been arguably altered as homeowners have 
become aware of the economic implications arising from 
applicable ``anti-deficiency'' and ``single-action'' laws and 
other rules adopted in many states that permit, if not 
indirectly encourage, homeowners to avoid their contractual 
mortgage obligations. In their basic form, anti-deficiency and 
single-action statutes limit the debt collection efforts that 
mortgage lenders may employ so as to render mortgage loans 
effectively non-recourse obligations to the borrowers. Absent 
these laws, mortgage lenders may sue their borrowers and 
receive enforceable judgments for any deficiency arising from 
the spread between the foreclosure sales price of the pledged 
collateral and the outstanding balance of the mortgage loan. As 
such, in jurisdictions where these laws do not apply, borrowers 
understand that by signing mortgage loans they are 
contractually responsible for the entire indebtedness even if 
the fair market value of their home materially drops in value. 
If anti-deficiency and single-action statutes are applicable, 
it is not implausible to argue that the laws convert mortgage 
contracts into put option agreements pursuant to which 
borrowers may elect to satisfy their monthly mortgage 
obligations so long as they hold equity in their homes, but 
walk away from--or put--their mortgage obligations to their 
mortgage holders with relative impunity if negative equity 
develops.

16. Homeowners React in a Rational Manner to Economic Incentives

    These laws create significant moral hazard risks that will 
be exacerbated if Congress passes a cram down amendment to the 
bankruptcy code. With these laws in effect, the risk-reward mix 
underlying each mortgage and home equity loan will be 
bifurcated with lenders assuming substantially all of the risks 
regarding the underlying value of the mortgaged property and 
homeowners receiving substantially all of the rewards. These 
laws may have the unintended consequence of encouraging 
homeowners to reject their contractual responsibilities and 
service their mortgage obligations only when it's in their 
economic self-interest. Since option contracts are inherently 
more risky to lenders than traditional mortgage contracts, 
lenders may have little choice but to incorporate such risks 
into the interest rates and fees charged on mortgage loans. The 
Panel should refrain from suggesting that Congress enact 
legislation that encourages individuals and families to invest 
in the housing market for speculative purposes while permitting 
them to avoid their contractual obligations upon the occurrence 
of adverse market conditions.
    It is worth noting that the decision of individuals and 
families to speculate in the housing market, while perhaps 
unwise, is not entirely irrational. While some may contend that 
the average consumer is too unskilled to comprehend seemingly 
sophisticated financial products, I would argue to the 
contrary. With anti-deficiency, single-action and, perhaps, 
bankruptcy cram down laws in effect it does not take a Ph.D. in 
corporate finance or an expert in bankruptcy law to appreciate 
that borrowers will receive the bulk of any equity appreciation 
while lenders will bear substantially all of the risk of loss 
arising from home mortgage loans. Most consumers are rational 
and react favorably to incentives that reward particular 
behavior. Providing economic and legal incentives that 
encourage inappropriate speculation in the housing market is 
unwise and fraught with adverse unintended consequences. That a 
bankruptcy cram down law could help re-inflate a housing bubble 
by encouraging reckless speculation and cause lenders to raise 
mortgage interest rates and fees justifies its rejection.

17. Shared Appreciation Rights and Equity Kickers Missing in 
        Administration's Foreclosure Mitigation Programs at the Expense 
        of Taxpayer Protection

    It is my understanding that the foreclosure mitigation 
programs announced by Treasury do not provide Treasury or the 
mortgage lenders with the ability to participate in any 
subsequent appreciation in the fair market value of the 
properties that serve as collateral for the modified or 
refinanced mortgage loans. For example, a $100,000, 6 percent 
home mortgage loan may be modified by reducing the principal to 
$90,000 and the interest rate to 5 percent. If the house 
securing the mortgage loan subsequently appreciates by, say, 
$25,000, the taxpayers and the mortgage lender who shared the 
cost of the mortgage modification will not benefit from any 
such increase in value. Such result seems inappropriate and 
particularly unfair to the taxpayers. By modifying the mortgage 
loan and avoiding foreclosure the taxpayers and the mortgage 
lender have provided a distinct and valuable financial benefit 
to the distressed homeowner which should be recouped to the 
extent of any subsequent appreciation in the value of the house 
securing the modified mortgage.
    Homeowners should not receive a windfall at the expense of 
the taxpayers and the mortgage lenders and should graciously 
share any subsequent appreciation with those who suffered the 
economic loss from restructuring their distressed mortgage 
loans. Since one of Treasury's fundamental mandates is taxpayer 
protection, the incorporation of a shared appreciation right or 
equity kicker feature would appear appropriate.

18. Tremendous Federal Support of the Housing Market

    Evaluation of a government-subsidized loan modification 
plan cannot occur in a vacuum as if in the context of a case 
study. Private capital has fled the housing market scene and we 
have seen recent, rapid growth in the government's share of the 
mortgage markets. This has yet to fully play out but is sure to 
have adverse consequences if continued crowding out private-
sector participation. In addition, there are already 
extraordinary measures being taken not only by Treasury, but 
also by the Federal Reserve and others to provide stability in 
the housing sector. While there are short-term gains to such 
interventions, the longer-term hurdle of unwinding government 
support creates many challenges for returning to sustainable 
activity in the absence of such support.

19. Fannie, Freddie and FHA

    In the market for new origination, Fannie, Freddie and the 
Federal Housing Authority (FHA) are the dominant forces, 
supporting 94 percent of mortgages.\432\ Loans backed by Fannie 
and Freddie have grown from about 39 percent in 2006 to 72 
percent in the first quarter of 2009.\433\ FHA loans, requiring 
as little as 3.5 percent down, now account for 22 percent of 
market share, up from just 3 percent in 2006.\434\ While Fannie 
and Freddie currently have an automatic line of credit to 
Treasury, there are reports that FHA may soon require a bailout 
(which the agency denies), as its reserve fund dwindles below 
the legal requirement.\435\
---------------------------------------------------------------------------
    \432\ Source: Inside Mortgage Finance. Data on mortgage origination 
by product as percentage of total Ex-HELOC, first quarter 2009.
    \433\ Source: Inside Mortgage Finance.
    \434\ Source: Inside Mortgage Finance.
    \435\ Alan Zibel, Government Home Loan Agency Faces Cash Squeeze, 
Associated Press (Sept. 18, 2009).
---------------------------------------------------------------------------

20. The Federal Reserve

    The Federal Reserve has made an exceptional commitment to 
purchase up to $1.25 trillion in agency mortgage-backed 
securities, of which it has bought about $680 billion. 
Currently, the Fed buys around 80 percent of all new issuance, 
which is believed to play a significant role in keeping 
interest rates low. The Wall Street Journal estimates that the 
Fed MBS program has lowered spreads over Treasuries by about 70 
basis points (so if the current mortgage interest rate is 5.2 
percent, it estimates that without Fed purchases it would be 
around 5.7 percent).\436\ Although Fed Chairman Ben Bernanke 
has indicated the central bank will be slowing its purchases, 
there are concerns about the effect slowing or stopping will 
have on rates.
---------------------------------------------------------------------------
    \436\ Mark Gongloff, Decision on Ending Housing Prop Can Wait, The 
Wall Street Journal (Sept. 22, 2009) (online at online.wsj.com/article/
SB125357555750029391.html).
---------------------------------------------------------------------------

21. Summary of Government Programs

    In addition to crisis-oriented programs, there are multiple 
government initiatives that already facilitate mortgage credit 
and provide other types assistance to homeowners. Below is a 
table of major government actions and programs.

------------------------------------------------------------------------
  Interventions in the  Mortgage Markets
                   \437\                             Description
------------------------------------------------------------------------
The Federal Reserve.......................  Commitment to purchase a
                                             total of $1.45 trillion of
                                             agency MBS and housing-
                                             agency bonds
                                            Use of Section 13(3) of
                                             Federal Reserve Act
                                             authority to provide FRBNY
                                             financing for Maiden Lane
                                             LLC, consisting of mortgage-
                                             related securities,
                                             commercial mortgage loans
                                             and associated hedges Bear
                                             Stearns
                                            Use of Section 13(3) to
                                             provide FRBNY financing for
                                             Maiden Lane II LLC,
                                             consisting of residential
                                             mortgage-backed securities
                                             from AIG
                                            Smaller-scale loan
                                             modification program for
                                             Maiden Lane LLC run by
                                             Blackrock and Wells Fargo
Fannie Mae and Freddie Mac [GSEs].........  Guarantee mortgages in the
                                             secondary market so that
                                             investors will receive
                                             their expected principal
                                             and interest payments
                                            Put into conservatorship
                                             under the Federal Housing
                                             Finance Agency [FHFA] in
                                             September 2008
                                            Total combined portfolios of
                                             $5.46 trillion,\438\ which
                                             includes mortgage-backed
                                             securities and other
                                             guarantees, as well as
                                             gross mortgage portfolios
                                            CBO brought Fannie and
                                             Freddie onto the budget and
                                             estimates they will cost
                                             taxpayers $390 billion over
                                             10 years, with a $248
                                             billion cost occurring at
                                             the time of conservatorship
                                             \439\
                                            Now represent 72 percent of
                                             the loan origination market
                                             \440\
Federal Housing Agency [FHA]..............  Provides mortgage insurance
                                             on loans made by private
                                             lenders
                                            Located in HUD; loans were
                                             typically for low-income,
                                             first-time homebuyers and
                                             minorities
                                            FHA now insures 5.3 million
                                             mortgages, and represents
                                             22 percent of the loan
                                             origination market \441\
FDIC's IndyMac Program....................  The FDIC conducts a
                                             comprehensive program to
                                             provide loan modifications
                                             and other assistance to
                                             borrowers who have a first
                                             mortgage owned or
                                             securitized and serviced by
                                             IndyMac
                                            This program has served as
                                             one model for the
                                             Administration's MHA
                                             program
                                            The FDIC became the
                                             conservator of failed
                                             IndyMac bank and still
                                             holds roughly $11 billion
                                             in assets, many mortgage-
                                             related
Federal Home Loan [FHL] Bank System.......  12 FHL Banks borrow funds in
                                             debt markets and provide
                                             loans to members
                                            Loans are typically
                                             collateralized by
                                             residential mortgage loans
                                             and government and agency
                                             securities
Veterans Affairs [VA].....................  VA guarantees housing loans
                                             for veterans and their
                                             families
United States Department of Agriculture     USDA/RD guarantees loans for
 [USDA] / Rural Development [RD].            moderate-income individuals
                                             or households to purchase
                                             homes in rural areas.
Ginnie Mae................................  Corporation within HUD that
                                             guarantees MBS with the
                                             full faith of the
                                             government
                                            Guarantees 90% of FHA loans;
                                             80% of Ginnie Mae's
                                             portfolio is made up of FHA
                                             loans
Additional HUD/FHA Programs, such as HOPE   HOPE for Homeowners is an
 for Homeowners.                             example of a HUD-run
                                             program that allows
                                             homeowners to refinance
                                             into an FHA mortgage, with
                                             certain restrictions on
                                             debt-to-income ratios and
                                             loan limits
                                            Borrowers pay a premium of
                                             3% of the original mortgage
                                             amount and an annual
                                             premium of 1.5% of the
                                             outstanding mortgage amount
                                            Fannie and Freddie reimburse
                                             costs to FHA not covered by
                                             premiums
                                            HOPE has fallen
                                             significantly short of the
                                             goal of renegotiating
                                             mortgage terms for 400,000
                                             homeowners (100 served)
Community Reinvestment Act................  Passed in 1977 to prevent
                                             ``redlining,'' a term that
                                             refers to the practice of
                                             denying loans to
                                             neighborhoods considered to
                                             be higher economic risks,
                                             by mandating that banks to
                                             lend to the communities
                                             where they take deposits
                                            The current CRA law requires
                                             the OCC, OTS, Federal
                                             Reserve and FDIC as
                                             regulators to assess each
                                             bank and thrift's lending
                                             records pursuant to CRA and
                                             to apply this in evaluating
                                             applications for charters,
                                             mergers, acquisitions and
                                             expansions
Mortgage Interest Tax Deduction...........  Allows all homeowners to
                                             deduct interest paid on
                                             mortgages on income tax
                                             returns
$8,000 First-time Homebuyer Credit........  Refundable tax credit equal
                                             to 10 percent of the
                                             purchase price up to a
                                             maximum of $8,000
                                            Only eligible for single
                                             taxpayers with incomes up
                                             to $75,000 and married
                                             couples with combined
                                             incomes up to $150,000
                                            Passed as part of the
                                             ``American Recovery and
                                             Reinvestment Act of 2009,''
                                             but extension currently
                                             being considered in
                                             Congress
Treatment of Capital Gains................  Exemption from paying
                                             capital gains tax on the
                                             first $250,000 for
                                             individual filers ($500,000
                                             for joint filers) of
                                             capital gains from the sale
                                             of a primary residence
Mortgage Revenue Bonds....................  State or local agencies
                                             issue tax-exempt bonds and
                                             use the proceeds to offer
                                             mortgages below the market
                                             interest rate for first-
                                             time homebuyers of certain
                                             income levels
------------------------------------------------------------------------
\437\ Some background provided by GAO, ``Analysis of Options for
  Revising the Housing Enterprises' Long-term Structures,'' September
  2009.
\438\ Fannie Mae, Monthly Summary (July 2009) (online at
  www.fanniemae.com/ir/pdf/monthly/2009/
  073109.pdf;jsessionid=B4Q4GWTY555N3J2FECISFGA);, Freddie Mac, Monthly
  Summary (July 2009) (online at www.freddiemac.com/investors/volsum/pdf/
  0709mvs.pdf).
\439\ Congressional Budget Office, The Budget and Economic Outlook: An
  Update (August 2009) (online at www.cbo.gov/ftpdocs/85xx/doc8565/08-23-
  Update07.pdf ).
\440\ Source: Inside Mortgage Finance
\441\ Source: Inside Mortgage Finance.

22. Role of Fannie Mae and Freddie Mac in Administration's Housing Plan

    The Administration's MHA plan aims to lower mortgage rates 
by ``strengthening confidence in Fannie Mae and Freddie Mac.'' 
\442\ ``Strengthening confidence'' seems to mean increasing the 
size of the taxpayer's commitment in Fannie and Freddie 
significantly by $200 billion to $400 billion (not to mention 
their portfolio limits), as well as making the GSEs a 
centerpiece of housing policy. As mentioned, Fannie and Freddie 
have already received $95.6 billion in capital injections from 
Treasury to fill ``holes'' in their balance sheets where 
liabilities exceed assets.\443\ The companies are required to 
pay annual interest of 10 percent on the injections, although 
this amounts to a sum that is larger than the historical 
profits made by the GSEs (during years where they made 
profits).
---------------------------------------------------------------------------
    \442\ U.S. Department of Treasury, Making Home Affordable: Updated 
Detailed Program Description (March 4, 2009) (online at www.treas.gov/
press/releases/reports/housing_fact_sheet.pdf).
    \443\ Through September 30, 2009.
---------------------------------------------------------------------------
    Just as a history of bad management decisions did not 
preclude GM and Chrysler from receiving TARP funds, the same is 
true of Fannie Mae and Freddie Mac. It should be noted that 
their financial insolvency materialized after years of 
mismanagement--and after years of enjoying the gold seal of the 
government's implicit guarantee. As I wrote in the March 
addendum to the Panel's report:

          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.\444\
---------------------------------------------------------------------------
    \444\ See Congressional Oversight Panel, March Oversight Report: 
Foreclosure Crisis: Working Toward a Solution, ``Additional View by 
Representative Jeb Hensarling,'' (online at cop.senate.gov/documents/
cop-030609-report-view-hensarling.pdf).

---------------------------------------------------------------------------
    In addition, GAO also noted in a September 2009 report:

          While housing finance may have derived some benefits 
        from the enterprises' activities over the years, GAO, 
        federal regulators, researchers, and others long have 
        argued that the enterprises had financial incentives to 
        engage in risky business practices to strengthen their 
        profitability partly because of the financial benefits 
        derived from the implied federal guarantee on their 
        financial obligations.\445\

    \445\ Government Accountability Office, Analysis of Options for 
Revising the Housing Enterprises' Long-term Structures, September 10, 
2009 (online at www.gao.gov/new.items/d09782.pdf).

    In September 2008, Treasury put Fannie Mae and Freddie Mac 
into conservatorship under the Federal Housing Finance Agency 
[FHFA], effectively making taxpayers liable for their 
portfolios which now total about $5.46 trillion (including 
mortgage-backed securities and other guarantees, as well as 
gross mortgage portfolios.\446\ According to CBO, the current 
estimate of the cost of bringing Fannie's and Freddie's books 
of business onto the federal budget is $390 billion.\447\
---------------------------------------------------------------------------
    \446\ Fannie Mae, Monthly Summary, July 2009 (online at 
www.fanniemae.com/ir/pdf/monthly/2009/
073109.pdf;jsessionid=GZALNHE45QP0LJ2FECISFGI); Freddie Mac, Monthly 
Summary, July 2009 (online at www.freddiemac.com/investors/volsum/pdf/
0709mvs.pdf).
    \447\ Congressional Budget Office, The Budget and Economic Outlook: 
An Update, August 2009 (online at www.cbo.gov/doc.cfm?index=10521). The 
Administration still considers Fannie Mae and Freddie Mac to be off-
budget entities.
---------------------------------------------------------------------------
    In addition, the GSEs' support of Treasury's MHA loan 
modification program is expected to amplify the risk of an 
already-leveraged taxpayer investment. The following excerpt 
from Freddie's second quarter 2009 filing to the SEC mentions 
the dire financial situation, the probable need for additional 
Treasury capital, and the possible negative effect on 
financials caused by the MHA program:

          We expect a variety of factors will place downward 
        pressure on our financial results in future periods, 
        and could cause us to incur GAAP net losses. Key 
        factors include the potential for continued 
        deterioration in the housing market, which could 
        increase credit-related expenses and security 
        impairments, adverse changes in interest rates and 
        spreads, which could result in mark-to-market losses, 
        and our efforts under the MHA Program and other 
        government initiatives, some of which are expected to 
        have an adverse impact on our financial results. We 
        believe that the recent modest home price improvements 
        were largely seasonal, and expect home price declines 
        in future periods. Consequently, our provisions for 
        credit losses will likely remain high during the 
        remainder of 2009 and increase above the level 
        recognized in the second quarter. To the extent we 
        incur GAAP net losses in future periods, we will likely 
        need to take additional draws under the Purchase 
        Agreement. In addition, due to the substantial dividend 
        obligation on the senior preferred stock, we expect to 
        continue to record net losses attributable to common 
        stockholders in future periods.'' \448\
---------------------------------------------------------------------------
    \448\ Federal Home Loan Mortgage Corporation, Form 10-Q to the 
Securities and Exchange Commission, quarterly period ending June 30, 
2009 (online at www.freddiemac.com/investors/er/pdf/10q_2q09.pdf).

    GAO has also discussed specifically the impact to the GSEs 
---------------------------------------------------------------------------
of participation in HAMP and HARP:

          While these federal initiatives were designed to 
        benefit homebuyers, in recent financial filings, both 
        Freddie Mac and Fannie Mae have stated that the 
        initiative to offer refinancing and loan modifications 
        to at-risk borrowers could have substantial and adverse 
        financial consequences for them. For example, Freddie 
        Mac stated that the costs associated with large numbers 
        of its servicers and borrowers participating in loan-
        modification programs may be substantial and could 
        conflict with the objective of minimizing the costs 
        associated with the conservatorships. Freddie Mac 
        further stated that loss-mitigation programs, such as 
        loan modifications, can increase expenses due to the 
        costs associated with contacting eligible borrowers and 
        processing loan modifications. Additionally, Freddie 
        Mac stated that loan modifications involve significant 
        concessions to borrowers who are behind in their 
        mortgage payment, and that modified loans may return to 
        delinquent status due to the severity of economic 
        conditions affecting such borrowers. Fannie Mae also 
        has stated that, while the impact of recent initiatives 
        to assist homeowners is difficult to predict, the 
        participation of large numbers of its servicers and 
        borrowers could increase the enterprise's costs 
        substantially. According to Fannie Mae, the programs 
        could have a materially adverse effect on its business, 
        financial condition, and net worth.\449\
---------------------------------------------------------------------------
    \449\ Government Accountability Office, Analysis of Options for 
Revising the Housing Enterprises' Long-term Structures, September 2009 
(online at www.gao.gov/new.items/d09782.pdf).

    Since the GSEs are now under the conservatorship of the 
Federal Housing Finance Agency [FHFA], their concerns are now 
officially the taxpayers' concerns. Any losses the GSEs 
experience through MHA programs should be a carefully 
considered part of a cost-benefit analysis.
    In addition, as noted in the March report additional views, 
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 FHA, 
discretionary HUD spending programs, and the Community 
Reinvestment Act [CRA]. CRA is an example of a program with the 
best of intentions having adverse, unintended consequences on 
exactly the population it hopes to serve. It was initially 
authorized to prevent ``redlining,'' a term that refers to the 
practice of denying loans to neighborhoods considered to be 
higher economic risks, by mandating banks lend to the 
communities where they take deposits. Since its passage into 
law in 1977, however, CRA has advanced at least two undesirable 
outcomes: (1) some financial institutions completely avoided 
doing business in neighborhoods and restricted even low-risk 
forms of credit, and (2) many institutions went the other way 
and relaxed underwriting standards to meet CRA guidelines, thus 
opening the door to certain risky products that have 
contributed to the problem of foreclosures. These lax 
underwriting standards spread to Fannie and Freddie and 
ultimately to the private sector as the role of the GSEs 
morphed from that of a liquidity provider to a promoter of home 
ownership.

23. Questions for Fannie Mae and Freddie Mac

    Representatives of Fannie Mae and Freddie Mac testified 
before the Panel at a hearing on foreclosure mitigation held in 
Philadelphia on September 24, 2009. I asked the following 
questions for the record to Fannie Mae and Freddie Mac and 
await their response.

Fannie Mae

    1. Fannie Mae has so far received approximately $44.9 
billion in equity injections from Treasury through the 
Preferred Share Purchase Agreements authorized by the Housing 
and Economic Recovery Act of 2008 [HERA].
    Will Fannie Mae request additional funds from Treasury 
through this program?
    Will Treasury's commitment to purchase preferred shares in 
Fannie Mae increase beyond the $200 billion limit announced in 
March 2009?
    2. How much of the funding that Fannie Mae has received 
through HERA-authorized injections has been spent on the 
Administration's ``Making Home Affordable'' plan?
    How much has Fannie Mae committed from HERA-authorized 
funds for ``Making Home Affordable'' efforts?
    Specifically, how much of this funding has been and will be 
used by Fannie Mae for the Administration's ``Home Affordable 
Modification Program?''
    How much of this funding has been and will be used by 
Fannie Mae for the Administration's ``Home Affordable Refinance 
Program?''
    3. What is the average cost of modifying a home loan under 
``Home Affordable Modification Program,'' according to Fannie 
Mae's most recent data?
    Out of this amount, how much has been financed through 
Treasury capital and ultimately the taxpayers?
    If you do not have these data, please explain why not.
    4. What is the average cost of refinancing a home loan 
under ``Home Affordable Refinance Program,'' according to 
Fannie Mae's most recent data?
    Out of this amount, how much has been financed through 
Treasury capital and ultimately the taxpayers?
    If you do not have these data, please explain why not.
    5. In general, how do you expect Fannie Mae's participation 
in the ``Making Home Affordable'' plan to affect financials for 
the next quarter?
    What about for the next year?
    6. The Federal Reserve has already purchased about $860 
billion of its $1.25 trillion commitment to buy Fannie Mae and 
Freddie Mac-guaranteed mortgage-backed securities.\450\ To put 
it in context, right now, the Federal Reserve buys the lion's 
share of all new issuance, which is somewhere around 80 
percent.
---------------------------------------------------------------------------
    \450\ Federal Reserve, Press Release (Sept. 23, 2009) (online 
atwww.federalreserve.gov/newsevents/press/monetary/20090923a.htm).
---------------------------------------------------------------------------
    If the Federal Reserve stops purchasing Fannie Mae's 
mortgage-backed securities then who will purchase the 
securities and at what price?
    Has the Federal Reserve or Fannie Mae attempted to sell 
these securities to private sector participants and, if so, 
what has been the response?
    Have any significant purchasers of U.S. Treasuries asked 
the Federal Reserve to cap its purchases of these securities?

Freddie Mac

    1. Freddie Mac has so far received approximately $50.7 
billion in equity injections from Treasury through the 
Preferred Share Purchase Agreements authorized by the Housing 
and Economic Recovery Act of 2008 [HERA].
    Will Freddie Mac request additional funds from Treasury 
through this program?
    Will Treasury's commitment to purchase preferred shares in 
Freddie Mac increase beyond the $200 billion limit announced in 
March 2009?
    2. How much of the funding that Freddie Mac has received 
through HERA-authorized injections has been spent on the 
Administration's ``Making Home Affordable'' plan?
    How much has Freddie Mac committed from HERA-authorized 
funds for ``Making Home Affordable'' efforts?
    Specifically, how much of this funding has been and will be 
used by Freddie Mac for the Administration's ``Home Affordable 
Modification Program?''
    How much of this funding has been and will be used by 
Freddie Mac for the Administration's ``Home Affordable 
Refinance Program?''
    3. What is the average cost of modifying a home loan under 
``Home Affordable Modification Program,'' according to Freddie 
Mac's most recent data?
    Out of this amount, how much has been financed through 
Treasury capital and ultimately the taxpayers?
    If you do not have these data, please explain why not.
    4. What is the average cost of refinancing a home loan 
under ``Home Affordable Refinance Program,'' according to 
Freddie Mac's most recent data?
    Out of this amount, how much has been financed through 
Treasury capital and ultimately the taxpayers?
    If you do not have these data, please explain why not.
    5. In general, how do you expect Freddie Mac's 
participation in the ``Making Home Affordable'' plan to affect 
financials for the next quarter?
    What about for the next year?
    6. The Federal Reserve has already purchased about 860 
billion of its 1.25 trillion-dollar commitment to buy Fannie 
Mae and Freddie Mac-guaranteed mortgage-backed securities.\451\ 
To put it in context, right now, the Federal Reserve buys the 
lion's share of all new issuance, which is somewhere around 80 
percent.
---------------------------------------------------------------------------
    \451\ Board of Governors of the Federal Reserve System, Press 
Release (Sept. 23, 2009) (online at www.federalreserve.gov/newsevents/
press/monetary/20090923a.htm).
---------------------------------------------------------------------------
    If the Federal Reserve stops purchasing Freddie Mac's 
mortgage-backed securities then, who will purchase the 
securities and at what price?
    Has the Federal Reserve or Freddie Mac attempted to sell 
these securities to private sector participants and, if so, 
what has been the response?
    Have any significant purchasers of U.S. Treasuries asked 
the Federal Reserve to cap its purchases of these securities?

24. Net Present Value Analysis and the Risk of Redefault

    The redefault rate is a key input cited by the Panel and 
used by servicers to calculate the all-in net present value of 
electing to pursue a loan modification versus a foreclosure. It 
goes without saying that the chance of waves of redefaults 
occurring enhances significantly the risk of the 
Administration's $75 billion MHA program. The self-cure rate, 
which refers to the ability for borrowers to catch up on loan 
payments without assistance, is also an important factor in NPV 
calculations. Understandably, under the current economic 
conditions where unemployment is supposed to reach at least 10 
percent, self-cure rates will be likely be lower than under 
conventional circumstances. The Panel's report disputes the 
findings of a paper released by the Federal Reserve Bank of 
Boston, which cites self-cure rates of 25 to 30 percent, and 
supports a recent study showing self-cure rates of closer to 
between 4.3 percent and 6.6 percent. The reality is that 
homeowners' ability to heal themselves is largely a function of 
economic growth and the opportunities it affords. Another 
reality not mentioned is the fact that homeowners may choose 
not to self-cure because of the attractiveness of a government-
sponsored loan modification plan.
    The Panel also calls into question the average redefault 
rate of up to 50 percent cited by the Federal Reserve Bank of 
Boston, which, is also approximately the level of redefaults 
computed by the OCC and OTS one year after a loan modification 
has been performed.\452\ It should be stressed that we simply 
do not have enough evidence to show that the longer-term risk 
of redefault on a loan modified by MHA is still not very high. 
This is true by virtue of Assistant Secretary Allison's 
statement that only 1,800 permanent modifications--that is, 
those that have survived the minimum three-month threshold to 
become permanent--have been put in place. Only time will tell 
if this very costly investment will serve the number of 
homeowners the Administration has assured without requiring 
additional taxpayer funds. Since the data are ambiguous at 
best, it should not be affirmed by the Panel that redefault and 
self-cure rates are conclusively within one narrow range or 
another in order to make the case that government-sponsored 
loan modification is a more attractive option.
---------------------------------------------------------------------------
    \452\ Office of the Comptroller of the Currency and Office of 
Thrift Supervision, OCC and OTS Mortgage Metrics Report, First Quarter 
2009 (online at www.occ.treas.gov/ftp/release/2009-77a.pdf) (June 
2009). MHA has not been in operation for a year and it is not possible 
to obtain yearly re-default data.
---------------------------------------------------------------------------

25. The Issue of Fairness

    The Panel's report states, ``Devoting attention and 
resources to moral sorting is at odds with the goal of 
maximizing the macroeconomic impact of foreclosure prevention. 
Trying to sort out the deserving from the undeserving on any 
sort of moral criteria means that foreclosure prevention 
efforts will be delayed and have a narrower scope. Moreover, in 
other cases where the federal government extended assistance 
under TARP--such as to banks and auto manufacturers--no attempt 
was made to sort between entities deserving and not deserving 
assistance. No inquiry was made as to which investors in these 
entities knowingly and willingly assumed the risks of the 
entities'`Insolvency.' ''
    In fact, this distinction could be crucial to long-term 
stabilization. Programs that create moral hazard by giving no 
consideration to the rightful, necessary link between risk and 
responsibility could potentially create additional housing 
``bubbles'' and result in greater threats to stability.
    It goes without saying that moral hazard has already played 
out for some financial institutions that received billions in 
TARP funds, even if capital was initially deployed with an eye 
to prevent a global economic meltdown. The federal safety net 
was spread wide as many who exhibited irresponsible behavior 
were deemed ``too big to fail'' for systemic risk reasons, 
qualifying them for protected status. This is a legacy the 
banking system and the government will have to deal with for a 
long time, even if taxpayers are receiving repayments in full 
with interest from Capital Purchase Plan recipients. The 
Panel's report implies that two moral hazards make a right, and 
encourages an even wider number of homeowners to be bailed out 
from what could be their own bad decisions simply because it is 
the fair treatment. I question if the approximately 95 percent 
of taxpayers who satisfy their rental and mortgage obligation 
each month would consider such bailouts fair particularly if 
they result in higher tax rates and mortgage interests costs. 
The irony is that although the report concludes a moral 
judgment should be immaterial when doling out taxpayer money, a 
comparison of homeowners to Wall Street companies is in itself 
a moral comparison used to justify subsidization of mortgage 
payments.
    By advocating a policy of additional bailouts the Panel has 
chosen to burden a substantial majority of the taxpayers with 
yet another subsidy-based program. It is difficult for me to 
appreciate the inherent fairness or appropriateness of such an 
approach.

26. Mortgage Fraud and Abuse

    I am concerned that the Panel mentions fraud in its report 
only to assert how broad publication of mortgage schemes may 
deter homeowners from participating in MHA. SIGTARP, which has 
been actively monitoring fraud, waste and abuse, is currently 
in the process of conducting an audit on the ``Making Home 
Affordable'' program which will focus on reviewing its current 
status and the challenges it faces. This oversight body is sure 
to take cases of fraud very seriously. Widespread scams are a 
serious issue--the FBI estimates annual losses from mortgage 
fraud to be between $4 and $6 billion--and one whose 
significance should not be undermined in exchange for more 
aggressive outreach to borrowers. Homeowners must be presented 
with all of the facts on the serious risk of fraud as well as 
given the encouragement to perform due diligence on all of the 
options at their disposal if they cannot meet mortgage 
payments.

27. Conclusions and Recommendations for an Oversight Plan and the 
        Adoption of a COP Budget

    A fair reading of the Panel's majority report and my 
dissent leads to one conclusion--HAMP and the Administration's 
other foreclosure mitigation efforts to date have been a 
failure. The Administration's opaque foreclosure mitigation 
effort has assisted only a small number of homeowners while 
drawing billions of involuntary taxpayer dollars into a black 
hole.
    While the Congressional Budget Office estimates that 
taxpayers will lose 100 percent of the $50 billion in TARP 
funds committed to the Administration's foreclosure relief 
programs, instead of focusing its attention on taxpayer 
protection and oversight, the Panel's majority report implies 
that the Administration should commit additional taxpayer funds 
in hopes of helping distressed homeowners--both deserving and 
undeserving--with a taxpayer subsidized rescue.
    While there may be some positive signals in our economy, 
recovery remains in a precarious position. Unemployment will 
hit 10 percent in 2010, if not this year. This is unfortunate 
because the best foreclosure mitigation program is a job, and 
the best assurance of job security is economic growth and the 
adoption of public policy that encourages and rewards capital 
formation and entrepreneurial success. Without a robust 
macroeconomic recovery the housing market will continue to 
languish and any policy that forestalls such recovery will by 
necessity lead to more foreclosures.
    Regardless of whether one believes foreclosure mitigation 
can truly work, taxpayers who are struggling to pay their own 
mortgage should not be forced to bail out their neighbors 
through such an inefficient and transparency-deficient program. 
Both the Administration and the Panel's majority appear to 
prioritize good intentions and wishful thinking over taxpayer 
protection.
    To date, despite the commitment of some $27 billion,\453\ 
only about 1,800 underwater homeowners have received a 
permanent modification of their mortgage. If the 
Administration's goal of subsidizing up to 9 million home 
mortgage refinancings and modifications is met, the cost to the 
taxpayers will almost surely exceed by a material amount the 
$75 billion already allocated to the Making Home Affordable 
program, none of it recoverable.
---------------------------------------------------------------------------
    \453\ U.S. Department of the Treasury, Troubled Assets Relief 
Program Transactions Report (Oct. 6, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/transactions-
report_10062009.pdf). The commitment cited is as defined by the current 
``Total Cap'' for the Home Affordable Modification Program, 
$27,247,320,000.
---------------------------------------------------------------------------
    Taxpayers deserve a better return on their investment than 
what they are set to receive from AIG, Chrysler, GM and the 
Administration's flawed foreclosure mitigation efforts.
    Professor Alan M. White, an expert retained by the Panel, 
notes in a paper attached to the Panel's report: ``The bottom 
line to the investor is that any time a homeowner can afford 
the reduced payment, with a 60 percent or better chance of 
succeeding, the investor's net gain from the modification could 
average $80,000 per loan or more.''
    Taxpayers--through TARP or otherwise--should not be 
required to subsidize mortgage holders or servicers when 
foreclosure mitigation efforts appear in many cases to be in 
their own economic best interests. The Administration, by 
enticing mortgage holders and servicers with the $75 billion 
HAMP and HARP programs (with a reasonable expectation that 
additional funds may be forthcoming), has arguably caused them 
to abandon their market oriented response to the atypical rate 
of mortgage defaults in favor of seeking assistance from the 
government.
    Any foreclosure mitigation effort must appear fair and 
reasonable to the American taxpayers. It is important to 
remember that the number of individuals in mortgage distress 
reaches beyond individuals who have experienced an adverse 
``life event'' or been the victims of fraud. This complicates 
moral hazard issues associated with large-scale modification 
programs.\454\ Distinct from a moral hazard question, there is 
an inherent question of fairness as those who are not facing 
mortgage trouble are asked to subsidize those who are facing 
trouble.
---------------------------------------------------------------------------
    \454\ 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.
---------------------------------------------------------------------------
    In light of current statistics regarding the overall 
foreclosure rate, 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 
approximately 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.\455\
---------------------------------------------------------------------------
    \455\ 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. 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 the taxpayers to 
shoulder an even greater financial burden from yet another government 
foreclosure mitigation program that might not work.
---------------------------------------------------------------------------
    Since there is no uniform solution for the problem of 
foreclosures, a sensible approach should encourage multiple 
mitigation programs that do not amplify taxpayer risk or 
require government mandates. Subsidized loan refinancing and 
modification programs may provide relief for a select group of 
homeowners, but they work against the majority who shoulder the 
tax burden and make mortgage payments on time.

28. Oversight Plan

    As I have stressed before, I believe the Panel continues to 
make the mistake of putting policy objectives above transparent 
and critical oversight. The October report on foreclosure 
issues is a strong example of this. I am again dismayed that 
the Panel's current release is driven by an approach that 
appears to favor an expansion of government-subsidized 
foreclosure mitigation plans over consideration of taxpayer 
protections and prudent supervision.
    The Panel has yet to present and adopt an oversight plan. 
Until one is made official, reports and actions taken will not 
adhere to standard guidelines. I recommend the following be 
considered by the Panel.
    The EESA statute requires COP to accomplish the following, 
through regular reports:
           Oversee Treasury's TARP-related actions and 
        use of authority
           Assess the impact to stabilization of 
        financial markets and institutions of TARP spending
           Evaluate the extent to which TARP 
        information released adds to transparency
           Ensure effective foreclosure mitigation 
        efforts in light of minimizing long-term taxpayer costs 
        and maximizing taxpayer benefits.
    In adherence to this mandate, the Panel should consider 
adopting the following standards of oversight:
           Analyzing programs proposed by Treasury to 
        determine if they are properly designed for their 
        intended purpose
           Determining if the investment of TARP funds 
        in each program is permitted under EESA
           Determining if the programs are being 
        properly implemented in a reasonable, transparent, 
        accountable and objective manner
           Determining if taxpayers are being protected
           Determining the success or failure of the 
        programs based upon reasonable, transparent, 
        accountable and objective metrics
           Analyzing Treasury's exit strategy with 
        respect to each investment of TARP funds
           Analyzing the corporate governance policies 
        and procedures implemented by Treasury with respect to 
        each investment of TARP funds
           Holding regular public hearings with the 
        Secretary and other senior Treasury officials
           Holding regular public hearings with TARP 
        recipients with special care taken to invite major 
        recipients to testify
           Keeping a record of all invitations to 
        testify and responses
           Determining how TARP recipients invest and 
        deploy their TARP funds
           Reporting the results to the taxpayers in a 
        clear and concise manner
           Avoiding public policy recommendations in 
        the reports released by the Panel
           Conducting the Panel's oversight activities 
        in the most reasonable, transparent, accountable and 
        objective manner with measurable standards that hold 
        Treasury accountable, without limitation, for the 
        statutory mandate of EESA that taxpayer protection is 
        an upmost priority
           Conducting the internal operations of the 
        Panel in the most reasonable, transparent, accountable 
        and objective manner.

29. Adoption of a Budget and Disclosure of Other Matters by COP

    The Panel has a taxpayer protection based statutory 
obligation to oversee the funds committed and spent by Treasury 
on all TARP programs, as well as to ensure that there is 
complete transparency and accountability in Treasury's 
reporting practices. Taxpayers should demand no less than full 
disclosure of how the Panel's own operations are financed. It 
has been one year since the Panel's inception and a budget has 
yet to be produced. The Panel should release a budget on 
continuing operations by November 1, and should make available 
detailed information on past uses of all funds received for 
Panel activities by such date. These reports should disclose in 
sufficient detail all operating expenses and other amounts 
incurred or paid by the Panel for, without limitation, rent, 
IT, travel, services, utilities, equipment as well as the 
salary and other compensation paid to all Panel employees, 
interns, consultants, advisors, experts and independent 
contractors. In order to ensure the absence of any conflict of 
interest, the Panel should disclose the names and affiliations 
of all such consultants, advisors, experts and independent 
contractors and the terms of the written or oral agreements 
through which they render advice or counsel to the Panel (even 
if they are not compensated for their services). The Panel 
should update these matters each month and disclose the results 
on its website.
    In quarterly reports to Congress, not only does SIGTARP 
publish its statutory mandate and how well the organization 
follows EESA requirements, it also provides a detailed budget 
and information on hired personnel. SIGTARP must formally 
request funds from Treasury for any amounts beyond the initial 
EESA grant. In the July report to Congress, its budget includes 
a specific breakdown of financing requested for staff, rent, 
services, transportation, advisory, etc.\456\
---------------------------------------------------------------------------
    \456\ SIGTARP, Quarterly Report to Congress, at 26 (July 21, 2009) 
(online at www.sigtarp.gov/reports/congress/2009/
July2009_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
    SIGTARP also discloses on its website the contracts that it 
enters into with outside vendors and other Governmental 
agencies to obtain goods and services,\457\ a description of 
its senior staff,\458\ and its organizational chart.\459\ 
Although the Panel's website contains a blog,\460\ it does not 
disclose any of the other items.
---------------------------------------------------------------------------
    \457\ See Special Inspector General for the Troubled Asset Relief 
Program (SIGTARP) website (online at sigtarp.gov/about_procure.shtml).
    \458\ See Special Inspector General for the Troubled Asset Relief 
Program (SIGTARP) website (online at sigtarp.gov/about_staff.shtml).
    \459\ See Special Inspector General for the Troubled Asset Relief 
Program (SIGTARP) website (online at sigtarp.gov/about_org.shtml).
    \460\ See the Congressional Oversight Panel's website (online at 
cop.senate.gov/blog/).
---------------------------------------------------------------------------
    The EESA statute calls on the Panel's Chair to present a 
statement of expenses to the Treasury Secretary. Treasury then 
transfers funding for reimbursement of the Panel into separate, 
equal accounts in both the House of Representatives and the 
Senate.\461\ Since the Panel runs on the fuel of taxpayer 
dollars, it should be held to task for creating budgets and 
statements of operations that are fully transparent to the 
public, especially as Treasury makes the decision of whether or 
not to extend TARP--and thus the Panel's oversight and costs--
beyond December 31, 2009.
---------------------------------------------------------------------------
    \461\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. 
No. 110-343, Sec. 125:
    FUNDING FOR EXPENSES.--
    (1) AUTHORIZATION OF APPROPRIATIONS.--There is authorized to be 
appropriated to the Oversight Panel such sums as may be necessary for 
any fiscal year, half of which shall be derived from the applicable 
account of the House of Representatives, and half of which shall be 
derived from the contingent fund of the Senate.
    (2) REIMBURSEMENT OF AMOUNTS.--An amount equal to the expenses of 
the Oversight Panel shall be promptly transferred by the Secretary, 
from time to time upon the presentment of a statement of such expenses 
by the Chairperson of the Oversight Panel, from funds made available to 
the Secretary under this Act to the applicable fund of the House of 
Representatives and the contingent fund of the Senate, as appropriate, 
as reimbursement for amounts.
---------------------------------------------------------------------------

                             C. Paul Atkins

    The October Report of the Panel regarding mortgage 
foreclosure mitigation marks yet another commendable effort by 
the staff and the Panel to treat a complex area of the economy 
in a short amount of time. The October Report analyzes great 
deal of information and helpfully cites a wealth of resources 
and studies. I salute the staff and my colleagues for the hard 
work represented by the report. Unfortunately, I cannot join in 
supporting the October Report because of its extraneous 
discussions and opinions unrelated to TARP.
    Congress has charged this Panel with overseeing a $700 
billion program that was enacted in a hurry with much 
discretion placed in the Executive. Congress understandably was 
sensitive to the opportunity of departure from legislative 
intent and potential for improper activity that this situation 
presents. Thus, Congress formed not only this Panel but also an 
office of a special inspector general, independent of Treasury, 
to oversee the program, provide transparency, and ensure 
accountability to Congress and to the taxpayers. That unusual 
level of oversight reflects the concern of Members of Congress 
regarding the unusual nature of the program itself and its 
political sensitivity.
    The October Report contains some commentary and 
recommendations that depart from the oversight role of this 
Panel and, I believe, detract from the overall effectiveness of 
the report's message. Congress empowered this Panel to watch 
over the Treasury Department's use of the authority granted 
under the Emergency Economic Stabilization Act. If the 
Treasury's efforts at implementing TARP in general or in 
particular areas are inchoate, unavailing, wasteful, illegal, 
or corrupt, it is our job to report on those problems and seek 
their correction.
    On the other hand, it is not our role gratuitously to offer 
advice or comment on additional legislation, matters of 
behavioral economics, or academic studies. Consequently, it is 
entirely appropriate for our report to analyze the HAMP and 
HARP programs and judge them against the Administration's 
rhetoric regarding them. I applaud the staff's seeking input 
regarding costs and benefits. I view this research as a good 
basis for further public debate. From our observations and 
research, we are well positioned to offer advice as to needed 
adjustments to increase efficiency and responsiveness from what 
we have learned in the field or from public comment. We do not 
need to deal extensively with speculation as to the effects of 
negative equity, the desirability of a program of principal 
reduction, or legislative empowerment of bankruptcy judges to 
``cramdown'' changes to mortgages. We might point out areas for 
additional academic research that we or policymakers might find 
helpful in the future, but we should not use the report as a 
means to challenge legitimate studies, such as a Federal 
Reserve Bank of Boston Working Paper discussed in the report, 
where we do not have sufficient time or expertise to do so.
    Moreover, sweeping conclusions regarding the proper 
allocation of taxpayer resources are not within our purview. We 
are not policymakers and do not have the benefit of budget 
studies, knowledge of budgeting history, or advantage of debate 
regarding budgetary alternatives and priorities to make value 
judgments as between programs. Since government resources 
ultimately come from the taxpayers, government must be 
sensitive to prudent and moral use of taxpayer funds. In our 
role, we see only the matter and program before us. Thus, the 
report's venturing into speculation regarding the purpose of 
foreclosure mitigation and making value judgments regarding 
spending taxpayer money, including the statement that 
``[d]evoting attention and resources to moral sorting [as 
between ``deserving'' mortgagors and deadbeats or speculators] 
is at odds with the goal of maximizing the macroeconomic impact 
of foreclosure prevention,'' is inappropriate. Moral sorting is 
inherent in a legislator's consideration of support or 
opposition to legislation. To ignore it invites citizen 
cynicism and taxpayer outrage, which inevitably will be 
registered at the ballot box. Despite the report's casual 
treatment of this subject, I have confidence that Members of 
Congress will be extremely wary of adopting this report's view 
thereof.
    My concern with the ``market stability'' argument to 
``prevent'' foreclosures is that the policies are aimed at 
essentially seeking to support prices at an artificially high 
level. We have had a very large economic bubble in the housing 
sector, and a bubble's consequences are the misallocation of 
resources. The market--meaning people--needs to find the true 
level of prices according to supply and demand. This is easily 
seen in the residential housing market, where deals are closed 
or fall apart, often on the basis of relatively small amounts 
of money. Government intervention only prolongs the uncertainty 
and the eventual day of reckoning. But, there is also the 
forgotten person in the attempt to support prices. When the 
government uses taxpayer resources, with various 
justifications, to try to influence supply, the selling 
homeowner gets the artificially high price. However, what 
happens to the buyer who unwittingly pays a higher price than 
he otherwise might have paid in a more transparent marketplace? 
When the prices ultimately find equilibrium, and they settle 
lower despite the government's efforts, has the government 
helped to perpetrate a deception on the unwitting buyer who 
paid the artificially high price?
    The report makes the assertion that there was no moral 
sorting as between good and bad financial institutions in the 
Treasury's use of TARP funds under the Capital Purchase Program 
and other programs and, thus, that there should be no need to 
judge between homeowners in providing direct assistance. The 
difference, however, is that the taxpayer has lent money to the 
various financial institutions with an expectation that the 
money will be returned. The propriety of that can be debated, 
but Congress at least had the expectation that TARP funds would 
be repaid with dividends, interest, and proceeds from sale of 
warrants and stock. As Congressman Hensarling points out in his 
accompanying statement, the Congressional Budget Office views 
funds spent for foreclosure mitigation as a subsidy, with no 
expectation of being repaid. For these efforts that entail 
millions of individual cases, it is best left to private 
parties and judges to sort out the issues to ensure some sort 
of accountability, not another grand entitlement program funded 
by the taxpayer that discounts legitimate concerns of propriety 
of subsidies and moral hazard.
    In this vein, Judge Annette M. Rizzo of the Pennsylvania 
Court of Common Pleas, featured in our hearing on September 
24th in Philadelphia, seems to have forged a positive 
atmosphere of mediation and dialogue that enhances 
communication between mortgagors and mortgagees. In many cases, 
the process has helped to forestall foreclosures, for the 
benefit of both parties. Sometimes, as Judge Rizzo forthrightly 
stated, foreclosure is unavoidable and contracts must be 
enforced. In this sense, the report also disappoints in its 
seeming approbation of ``innovative'' measures taken by various 
states that in some cases are arbitrary interference with 
contracts in the name of foreclosure ``prevention'' rather than 
``mitigation.'' The government should not be in the business of 
preventing parties to a contract from enforcing that contract, 
barring cases of fraud or other illegitimate factors.
    With respect to mortgage foreclosure mitigation, it is 
relatively easy to focus on only one side of the relationship 
as between mortgagor and mortgagee, because the former is 
currently the party in the weaker position and seeks 
assistance. However, ours is a legal system of transparency, 
due process, respect of private property rights, and 
enforceability of contract. This rule of law separates the 
United States from banana republics and has created a favorable 
investment climate that has attracted capital from around the 
world to be invested here. That has created jobs and built our 
economy.
    The best policy to minimize foreclosures is for the U.S. 
government to create an environment conducive to saving and 
investment, including tax and regulatory policy, that 
encourages entrepreneurs to start businesses (the sector of 
business activity that creates the most jobs) and existing 
businesses to expand. The best mitigation of mortgage 
foreclosures is a job. Subsidies are inherently unfair, 
inefficient, expensive, and complicated. With soaring 
unemployment in the United States, focusing on creating a good 
environment for saving and investment becomes the most 
important action that the Administration can take.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    On behalf of the Panel, Chair Elizabeth Warren sent a 
letter on September 15, 2009,\462\ to Secretary of the Treasury 
Timothy Geithner requesting Treasury's inputs and formulae for 
the stress tests. The letter further requests answers to 
questions regarding how actual quarterly bank loss rates have 
differed from Treasury stress test estimates. The Panel has not 
received a response from Secretary Geithner.
---------------------------------------------------------------------------
    \462\ See Appendix I of this report, infra.
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                           A. TARP Repayment

    Since the Panel's prior report, additional banks have 
repaid their TARP investment under the Capital Purchase Program 
(CPP). A total of 39 banks have repaid their preferred stock 
TARP investment provided under the CPP to date. Of these banks, 
24 have repurchased the warrants as well. Additionally, during 
the month of August, CPP participating banks paid $1.83 billion 
in dividends and $8.4 million in interest on Treasury 
investments.

                     B. CPP Monthly Lending Report

    Treasury releases a monthly lending report showing loans 
outstanding at the top 22 CPP-recipient banks. The most recent 
report, issued on September 16, 2009, includes data up through 
the end of July 2009 and shows that CPP recipients had $4.24 
trillion in loans outstanding as of July 2009. This represents 
a one percent decline in loans outstanding between the end of 
June and the end of July.

                  C. Public-Private Investment Program

    On September 30, 2009, Treasury announced the initial 
closings of Public-Private Investment Funds (PPIFs) established 
under the Legacy Securities Public-Private Investment Program 
(PPIP). Two of the nine pre-qualified funds, Invesco Legacy 
Securities Master Fund, L.P. and UST/TCW Senior Mortgage 
Securities Fund, L.P. closed with a total of $1.13 billion of 
committed equity capital. Treasury has ten days from September 
30, to provide matching equity funding. Each fund is eligible 
for additional debt financing of $2.26 billion, bringing the 
total resources of the fund to $4.52 billion.
    Additionally, on October 5, 2009, Treasury announced the 
initial closings of three more pre-qualified funds managed by 
AllianceBernstein, LP, BlackRock, Inc., and Wellington 
Management Company, LLP, bringing the total number of closed 
funds to five, and the cumulative total committed equity and 
debt capital under the Legacy Securities program to $12.27 
billion ($3.07 billion from the private sector and $9.2 billion 
from Treasury).
    Treasury expects the four remaining funds to close by the 
end of October. Following an initial closing, each PPIF will 
have the opportunity for two more closings over the following 
six months to receive matching Treasury equity and debt 
financing, with a total Treasury equity and debt investment in 
all PPIFs equal to $30 billion ($40 billion including private 
sector capital).
    Although the legacy loan program has been shelved by the 
FDIC for the time being, a pilot program to test the funding 
mechanism for the loan program was launched in mid-September. 
In a competitive bidding process, Residential Credit Solutions 
(RCS) won the right to participate in the pilot program. Under 
the pilot program, the FDIC will sell RCS half of the ownership 
interests in an LLC created to hold a portfolio of legacy 
``toxic'' securities from Franklin Bank, SSB, a failed bank 
held in receivership by the FDIC. These legacy securities are 
comprised of a pool of residential mortgage loans with an 
unpaid principal balance of approximately $1.3 billion. At 
closing, RCS will pay the FDIC $64.2 million in cash for its 50 
percent ownership interest in the LLC, and will issue a $727.7 
million dollar FDIC-guaranteed note to the FDIC in exchange for 
the securities. The FDIC anticipates selling this note at a 
later date. The FDIC will analyze the results of this test sale 
to determine whether or not the legacy loans program is a 
feasible approach to removing troubled assets from bank balance 
sheets.

 D. Making Home Affordable Program Monthly Servicer Performance Report

    On October 8, 2009, Treasury released its third monthly 
Servicer Performance Report detailing the progress to date of 
the Making Home Affordable (MHA) loan modification program. The 
report discloses that as of September 30, 2009, 85 percent of 
mortgages are covered by a Home Affordable Modification Program 
(HAMP) participating servicer. The report also indicates that 
as of September 30, 2009, 487,081 trial loan modifications have 
occurred out of 757,955 trial plan offers extended.

          E. Term Asset-Backed Securities Loan Facility (TALF)

    As previously reported, the Federal Reserve Board and 
Treasury announced their approval of an extension to the Term 
Asset-Backed Securities Loan Facility (TALF). With the 
extension, the deadline for TALF lending against newly issued 
asset-backed securities (ABS) and legacy commercial mortgage-
backed securities (CMBS) was extended from December 31, 2009 to 
March 31, 2010. Additionally, the deadline for TALF lending 
against newly issued CMBS was extended to June 30, 2010.
    At the September 3, 2009 facility, $6.53 billion in loans 
to support the issuance of ABS collateralized by loans in the 
auto, credit card, equipment, property and casualty, small 
business, and student loan sectors were settled (though $6.54 
billion in loans were requested). There were no requests 
supported by floorplan or residential mortgage loans. At the 
September 17, 2009 legacy CMBS facility, $1.35 billion in loans 
were settled (though $1.4 billion in loans were requested). 
Additionally, at the October 2, 2009 facility, $2.47 billion in 
loans to support the issuance of ABS collateralized by loans in 
the auto, credit card, equipment, floorplan, small business, 
and student loan sectors were requested. There were no requests 
supported by residential mortgage loans.

            F. Bank of America Guarantee Termination Payment

    On January 15, 2009, Treasury, the Federal Reserve, and the 
FDIC entered into a provisional agreement with Bank of America 
to guarantee a pool of assets valued at about $118 billion, 
which was predominately in the form of loans and securities 
backed by residential and commercial real estate loans acquired 
when Bank of America merged with Merrill Lynch. In exchange for 
this guarantee, the federal government was to receive $4 
billion of preferred stock paying dividends at eight percent, 
warrants to purchase approximately $400 million of Bank of 
America stock, and a commitment fee. The provisional agreement 
was never finalized. On May 6, 2009, Bank of America notified 
the federal government that it wished to terminate the 
guarantee, and the parties negotiated a termination fee. On 
September 21, 2009, Bank of America agreed to pay $425 million 
to terminate the guarantee. Treasury received $276 million of 
the total fee, while the FDIC and the Federal Reserve received 
$92 million and $57 million, respectively. See infra note 505 
(describing components of the termination fee). The government 
agreed to adjust the fee to reflect: (1) the downsizing of the 
guaranteed asset pool from $118 billion to $83 billion; and (2) 
the abbreviated time period (about four months) during which 
the guarantee was in effect.

                   G. Money Market Guarantee Program

    On September 18, 2009, Treasury announced the end of its 
Guarantee Program for Money Market Funds. Treasury designed the 
program to stabilize markets after a large money market fund's 
announcement that its net asset value had fallen below $1 per 
share (``broke the buck'') in the wake of the failure of Lehman 
Brothers in September of 2008. The program was initially 
established for a three-month period that could be extended 
through September 18, 2009. Since inception, Treasury has had 
no losses under the program and earned approximately $1.2 
billion in participation fees.

                               H. Metrics

    The Panel continues to monitor a number of metrics that the 
Panel and others, including Treasury, the Government 
Accountability Office (GAO), Special Inspector General for the 
Troubled Asset Relief Program (SIGTARP), and the Financial 
Stability Oversight Board, consider useful in assessing the 
effectiveness of the Administration's efforts to restore 
financial stability and accomplish the goals of the EESA. This 
section discusses changes that have occurred since the release 
of the September report.
     Interest Rate Spreads. Key interest rate spreads, 
a measure of the cost of capital, have continued to decline. 
Measures such as the LIBOR-OIS spread have largely returned to 
pre-crisis levels. Other important metrics such as the 
conventional mortgage rate spreads' 37 percent decrease since 
October 2008 also represents a positive indicator for the 
housing market and refinancing.\463\
---------------------------------------------------------------------------
    \463\ White House Press Release, Executive Office of the 
President's Council of Economic Advisors CEA Notes on Refinancing 
Activity and Mortgage Rates (Apr. 9, 2009) (online at 
www.whitehouse.gov/assets/documents/CEAHousingBackground.pdf) (``For 
the week ended April 2, the conforming mortgage rate (the rate for 
mortgages that meet the GSEs' standards) was 4.78%, the lowest weekly 
rate since 1971 (when the data series begins), and likely the lowest 
widely-available mortgage rate since the 1950s.'').

                    FIGURE 31: INTEREST RATE SPREADS
------------------------------------------------------------------------
                                      Current Spread     Percent Change
             Indicator              \464\  (as of 10/  Since Last Report
                                          1/09)             (9/1//09)
------------------------------------------------------------------------
3 Month LIBOR-OIS Spread \465\....               0.13              -23.5
1 Month LIBOR-OIS Spread \466\....                0.1               11.1
TED Spread \467\ (in basis points)               19.9               -3.7
Conventional Mortgage Rate Spread                1.51              -9.04
 \468\............................
Corporate AAA Bond Spread \469\...               1.71              -2.48
Corporate BAA Bond Spread \470\...               2.84              -7.79
Overnight AA Asset-backed                        0.26               8.33
 Commercial Paper Interest Rate
 Spread \471\.....................
Overnight A2/P2 Nonfinancial                      .14             -12.5
 Commercial Paper Interest Rate
 Spread \472\.....................
------------------------------------------------------------------------
\464\ Percentage points, unless otherwise indicated.
\465\ Bloomberg, 3 Mo LIBOR-OIS Spread (online at www.bloomberg.com/apps/
  quote?ticker=.LOIS3:IND) (accessed Oct. 1, 2009).
\466\ Bloomberg, 1 Mo LIBOR-OIS Spread (online at www.bloomberg.com/apps/
  quote?ticker=.LOIS1:IND) (accessed Oct. 1, 2009).
\467\ Bloomberg, TED Spread (online at www.bloomberg.com/apps/
  quote?ticker=.TEDSP:IND) (accessed Oct. 1, 2009).
\468\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
  www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
  H15_MORTG_NA.txt) (accessed Oct. 1, 2009); Board of Governors of the
  Federal Reserve System, Federal Reserve Statistical Release H.15:
  Selected Interest Rates: Historical Data (Instrument: U.S. Government
  Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency:
  Weekly) (online at www.federalreserve.gov/releases/h15/data/
  Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Oct. 1, 2009)
  (hereinafter ``Fed H.15 10-Year Treasuries'').
\469\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: Weekly)
  (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
  H15_AAA_NA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries,
  supra note 468.
\470\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly)
  (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
  H15_BAA_NA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries,
  supra note 468.
\471\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: AA Asset-Backed Discount Rate,
  Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed July 9, 2009); Board of Governors of the
  Federal Reserve System, Federal Reserve Statistical Release:
  Commercial Paper Rates and Outstandings: Data Download Program
  (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
  at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
  Oct. 1, 2009) (hereinafter ``Fed CP AA Nonfinancial Rate'').
\472\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: A2/P2 Nonfinancial Discount Rate,
  Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed Oct. 1, 2009); Fed CP AA Nonfinancial
  Rate, supra note 471.

     Commercial Paper Outstanding. Commercial paper 
outstanding, a rough measure of short-term business debt, is an 
indicator of the availability of credit for enterprises. Two of 
the three measured commercial paper values increased since the 
Panel's September report, and one decreased. Asset-backed, 
financial and nonfinancial commercial paper have all decreased 
with nonfinancial commercial paper outstanding declining by 
over 46 percent, and asset-backed commercial paper outstanding 
declining over 27 percent since October 2008.

                 FIGURE 32: COMMERCIAL PAPER OUTSTANDING
------------------------------------------------------------------------
                                           Current Level  Percent Change
                                           (as of 9/30/      Since Last
                Indicator                  09)  (Dollars   Report (8/26/
                                           in billions)         09)
------------------------------------------------------------------------
Asset-Backed Commercial Paper                     $522.3           14.09
 Outstanding (seasonally adjusted) \473\
Financial Commercial Paper Outstanding             602.5            3.93
 (seasonally adjusted) \474\............
Nonfinancial Commercial Paper                      106.2             -9
 Outstanding (seasonally adjusted) \475\
------------------------------------------------------------------------
\473\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: Asset-Backed Commercial Paper
  Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
  DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009).
\474\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: Financial Commercial Paper Outstanding,
  Frequency: Weekly) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed Oct. 1, 2009).
\475\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: Nonfinancial Commercial Paper
  Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
  DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009).

    Lending by the Largest TARP-recipient Banks. Treasury's 
Monthly Lending and Intermediation Snapshot tracks loan 
originations and average loan balances for the 22 largest 
recipients of CPP funds across a variety of categories, ranging 
from mortgage loans to commercial and industrial loans to 
credit card lines. Commercial lending, including new commercial 
real estate loans, continues to decline dramatically.

                          FIGURE 33: LENDING BY THE LARGEST TARP-RECIPIENT BANKS \476\
----------------------------------------------------------------------------------------------------------------
                                                              Most Recent
                                                              Data  (July                        Percent Change
                         Indicator                               2009)        Percent Change     Since October
                                                              (Dollars in    Since June 2009          2008
                                                               millions)
----------------------------------------------------------------------------------------------------------------
Total Loan Originations...................................        $204,847           -9.7               -6.11
C&I New Commitments.......................................          32,169          -21.5              -45.4
CRE New Commitments.......................................           3,444           -6.96             -67.3
----------------------------------------------------------------------------------------------------------------
\476\ U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary
  Analysis for July 2009 (Oct. 2, 2009) (online at www.financialstability.gov/docs/surveys/
  July%202009%20Tables.pdf). While the Treasury report is based upon the 22 largest CPP recipient banks, these
  data exclude two institutions--PNC and Wells Fargo--because they have made significant acquisitions since
  October 2008.

     Loans and Leases Outstanding of Domestically-
Chartered Banks. Weekly data from the Federal Reserve Board 
track fluctuations among different categories of bank assets 
and liabilities. Loans and leases outstanding for large and 
small domestic banks both fell last month.\477\ Total loans and 
leases outstanding at large banks have dropped by nearly 9 
percent since last October.\478\ Also, commercial and 
industrial loans and leases outstanding at large banks have 
continued to decline, having decreased over 15 percent since 
the enactment of EESA.
---------------------------------------------------------------------------
    \477\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.8: Assets and Liabilities of Commercial 
Banks in the United States: Historical Data (Instrument: Assets and 
Liabilities of Large Domestically Chartered Commercial Banks in the 
United States, seasonally adjusted, adjusted for mergers, billions of 
dollars) (online at www.federalreserve.gov/releases/h8/data.htm) 
(accessed Oct. 1, 2009).
    \478\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.8: Assets and Liabilities of Commercial 
Banks in the United States: Historical Data (Instrument: Assets and 
Liabilities of Small Domestically Chartered Commercial Banks in the 
United States, seasonally adjusted, adjusted for mergers, billions of 
dollars) (online at www.federalreserve.gov/releases/h8/data.htm) 
(accessed Oct. 1, 2009).

                                     FIGURE 34: LOANS AND LEASES OUTSTANDING
----------------------------------------------------------------------------------------------------------------
                                                                                  Percent Change  Percent Change
                                                                       Current       Since Last      Since EESA
                  Indicator (dollars in billions)                     Level  (as   Report (8/26/   Signed  into
                                                                     of 9/23/09)        09)        Law (10/3/08)
----------------------------------------------------------------------------------------------------------------
Large Domestic Banks--Total Loans and Leases.......................       $3,692           -2.34           -8.92
Small Domestic Banks--Total Loans and Leases.......................       $2,474           -0.87           -1.73
Large Domestic Banks--Commercial and Industrial Loans..............         $683           -4.11          -15.14
Small Domestic Banks--Revolving Consumer Credit....................          $89           -3.71            9.01
----------------------------------------------------------------------------------------------------------------

     Housing Indicators. Foreclosure filings fell 
slightly from July to August; however, foreclosures are still 
up by over 28 percent from October 2008 levels. Housing prices, 
as illustrated by the S&P/Case-Shiller Composite 20 Index, 
improved slightly in August, increasing by over 1.2 percent. 
The index remains down nearly nine percent since October 2008.

                                          FIGURE 35: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
                                                              Most      Percent Change  From
                                                             Recent   Data Available  at Time   Percent  Change
                        Indicator                           Monthly    of Last  Report (9/1/     Since  October
                                                              Data              09)                   2008
----------------------------------------------------------------------------------------------------------------
Monthly Foreclosure Filings \479\........................    358,471                     -.47               28.2
Housing Prices--S&P/Case-Shiller Composite 20 Index \480\     143.05                     1.23              -8.9
----------------------------------------------------------------------------------------------------------------
\479\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
  PressRelease.aspx) (accessed Oct. 1, 2009). The most recent data available is for August 2009.
\480\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: seasonally Adjusted Composite 20
  Index) (online at www2.standardandpoors.com/spf/pdf/index/SA_CSHomePrice_History_092955.xls) (accessed Oct. 1,
  2009). The most recent data available is for July 2009.

     Asset-Backed Security Issuance. The ABS market 
slowed slightly in the third quarter with total issuance 
dropping by 1.25 percent. However, certain segments of the 
securitization market continued to improve in the third 
quarter. Auto ABS and home equity ABS have increased by over 
700 and 180 percent respectively since October 2008. Through 
the first three quarters of 2009 there have been over $118 
billion in ABS issued compared with just under $140 billion 
issued for the whole of 2008.\481\
---------------------------------------------------------------------------
    \481\ Securities Industry and Financial Markets Association, US ABS 
Issuance (accessed Oct. 1, 2009) (online at www.sifma.org/uploaded 
Files/Research/Statistics/SIFMA_USABSIssuance.pdf).

                                 FIGURE 36: ASSET-BACKED SECURITY ISSUANCE \482\
                                              (Dollars in millions)
----------------------------------------------------------------------------------------------------------------
                                                                                                 Percent change
                                                              Most recent   Data available at      from data
                         Indicator                             quarterly       time of last      available  at
                                                               data (3Q     report  (2Q 2009)     time of last
                                                                 2009)                          report (9/1/09)
----------------------------------------------------------------------------------------------------------------
Auto ABS Issuance.........................................         $19,056          $12,026.8              58.5
Credit Cards ABS Issuance.................................       $16,229.7          $19,158.5             -15.3
Equipment ABS Issuance....................................          $578.8           $2,629.1             -78
Home Equity ABS Issuance..................................          $486.6             $707.4             -31.2
Other ABS Issuance........................................        $6,356.9           $6,444                -1.35
Student Loans ABS Issuance................................        $5,292.7           $7,643.8             -30.8
    Total ABS Issuance....................................  \483\ $48,000.          $48,609.6              -1.25 
                                                                         7
----------------------------------------------------------------------------------------------------------------
\482\ Securities Industry and Financial Markets Association, US ABS Issuance (accessed Oct. 1, 2009) (online at
  www.sifma.org/uploadedFiles/ Research/Statistics/SIFMA_USABSIssuance.pdf).
\483\ $18.8 billion was requested under the Term Asset-Backed Securities Loan Facility during the third quarter
  of 2009. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Announcements (accessed
  August 5, 2008) (online at www.newyorkfed.org/markets/talf_announcements.html).

                          I. Financial Update

    Each month since its April oversight report, the Panel has 
summarized the resources that the federal government has 
committed to economic stabilization. The following financial 
update provides: (1) an updated accounting of the TARP, 
including a tally of dividend income and repayments the program 
has received as of August 31, 2009; and (2) an update of the 
full federal resource commitment as of September 30, 2009.

1. TARP

            a. Costs: Expenditures and Commitments \484\
---------------------------------------------------------------------------
    \484\ Treasury will release its next tranche report when 
transactions under the TARP reach $450 billion.
---------------------------------------------------------------------------
    Treasury is currently committed to spend $531.3 billion of 
TARP funds through an array of programs used to purchase 
preferred shares in financial institutions, offer loans to 
small businesses and automotive companies, and leverage Federal 
Reserve loans for facilities designed to restart secondary 
securitization markets.\485\ Of this total, $375.5 billion is 
currently outstanding under the $698.7 billion limit for TARP 
expenditures set by EESA, leaving $323.2 billion available for 
fulfillment of anticipated funding levels of existing programs 
and for funding new programs and initiatives. The $375.5 
billion includes purchases of preferred and common shares, 
warrants and/or debt obligations under the CPP, TIP, SSFI 
Program, and AIFP; a $20 billion loan to TALF LLC, the special 
purpose vehicle (SPV) used to guarantee Federal Reserve TALF 
loans; and the $5 billion Citigroup asset guarantee, which was 
exchanged for a guarantee fee composed of additional preferred 
shares and warrants and has subsequently been exchanged for 
Trust Preferred shares.\486\ Additionally, Treasury has 
allocated $23.4 billion to the Home Affordable Modification 
Program, out of a projected total program level of $50 billion.
---------------------------------------------------------------------------
    \485\ EESA, as amended by the Helping Families Save Their Homes Act 
of 2009, limits Treasury to $698.7 billion in purchasing authority 
outstanding at any one time as calculated by the sum of the purchases 
prices of all troubled assets held by Treasury. Pub. L. No. 110-343, 
Sec. 115(a)-(b), supra note 2; Helping Families Save Their Homes Act of 
2009, Pub. L. No. 111-22, Sec. 402(f) (reducing by $1.26 billion the 
authority for the TARP originally set under EESA at $700 billion).
    \486\ U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for Period Ending September 30, 2009 (Oct. 
4, 2009) (online at financialstability.gov/docs/transaction-reports/
Transactions_Report_09-30-09.pdf) (hereinafter ``September 30 TARP 
Transactions Report'').
---------------------------------------------------------------------------
            b. Income: Dividends, Interest Payments, and CPP Repayments
    A total of 39 institutions have completely repaid their CPP 
preferred shares, 24 of which have also repurchased warrants 
for common shares that Treasury received in conjunction with 
its preferred stock investments. There were over $375 million 
in repayments made under the CPP during September.\487\ The 
seven banks that repaid were comparatively small with the 
largest repayment being for $125 million.\488\ In addition, 
Treasury is entitled to dividend payments on preferred shares 
that it has purchased, usually five percent per annum for the 
first five years and nine percent per annum thereafter.\489\ In 
total, Treasury has received approximately $86 billion in 
income from repayments, warrant repurchases, dividends, and 
interest payments deriving from TARP investments \490\ and 
another $1.2 billion in participation fees from its Guarantee 
Program for Money Market Funds.\491\
---------------------------------------------------------------------------
    \487\ Id.
    \488\ Id.
    \489\ See, for example, U.S. Department of the Treasury, Securities 
Purchase Agreement: Standard Terms (online at 
www.financialstability.gov/docs/CPP/spa.pdf).
    \490\ U.S. Department of the Treasury, Cumulative Dividends Report 
as of August 31, 2009 (Oct. 1, 2009) (online at 
www.financialstability.gov/docs/dividends-interest-reports/
August2009_DividendsInterestReport.pdf); September 30 TARP Transactions 
Report, supra note 486.
    \491\ U.S. Department of the Treasury, Treasury Announces 
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009) 
(online at www.financialstability.gov/latest/tg_09182009.html).
---------------------------------------------------------------------------
            c. Citigroup Exchange
    Treasury has invested a total of $49 billion in Citigroup 
through three separate programs: the CPP, TIP, and AGP. On June 
9, 2009, Treasury agreed to terms to exchange its CPP preferred 
stock holdings for 7.7 billion shares of common stock priced at 
$3.25/share (for a total value of $25 billion) and also agreed 
to convert the form of its TIP and AGP holdings. On July 23, 
2009, Treasury, along with both public and private Citigroup 
debt holders, participated in a $58 billion exchange. The 
company received shareholder approval for the exchange on 
September 3, 2009.\492\ As of September 30, 2009, Treasury's 
common stock investment in Citigroup had a market value of 
$37.23 billion.\493\
---------------------------------------------------------------------------
    \492\ Citigroup, Citi Announces Shareholder Approval of Increase in 
Authorized Common Shares, Paving Way to Complete Share Exchange (Sept. 
3, 2009) (online at www.citibank.com/citi/press/2009/090903a.htm).
    \493\ The Panel continues to account for Treasury's original $25 
billion CPP investment in Citigroup under the CPP until formal approval 
of the exchange by Citigroup's shareholders and until Treasury 
specifies under which TARP program the common equity investment will be 
classified.
---------------------------------------------------------------------------
            d. TARP Accounting

                              FIGURE 37: TARP ACCOUNTING (AS OF SEPTEMBER 30, 2009)
----------------------------------------------------------------------------------------------------------------
                                               Anticipated    Purchase                 Net current       Net
       TARP Initiative  (in billions)            funding       price     Repayments    investments    available
----------------------------------------------------------------------------------------------------------------
Total......................................          $531.3     $455.5        $72.8          $380.2   494 $318.5
CPP........................................            $218     $204.6        $70.7          $134.2    495 $13.7
TIP........................................             $40        $40           $0             $40           $0
SSFI Program...............................           $69.8      $69.8           $0           $69.8           $0
AIFP.......................................             $80        $80         $2.1     \496\ $75.4     \497\ $0
AGP........................................              $5         $5           $0              $5           $0
CAP........................................             TBD         $0          N/A              $0          N/A
TALF.......................................             $20        $20           $0             $20           $0
PPIP.......................................             $30       $9.2          N/A            $9.2        $20.8
Supplier Support Program...................      \498\ $3.5       $3.5           $0            $3.5           $0
Unlocking SBA Lending......................             $15         $0          N/A              $0          $15
HAMP.......................................             $50  \499\ $23           $0           $23.4        $26.6
                                                                    .4
(Uncommitted)..............................          $167.4        N/A          N/A             N/A  \500\ $242.
                                                                                                              7
----------------------------------------------------------------------------------------------------------------
\494\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion)
  and the difference between the total anticipated funding and the net current investment ($155.8 billion).
\495\ This figure excludes the repayment of $70.7 billion in CPP funds. Secretary Geithner has suggested that
  funds from CPP repurchases will be treated as uncommitted funds of the TARP overall upon return to the
  Treasury.
\496\ This figure reflects the amount invested in the AIFP as of August 18, 2009. This number consists of the
  original assistance amount of $80 billion less de-obligations ($2.4 billion) and repayments ($2.14 billion);
  $2.4 billion in apportioned funding has been de-obligated by Treasury ($1.91 billion of the available $3.8
  billion of DIP financing to Chrysler and a $500 million loan facility dedicated to Chrysler that was unused).
  September 30 TARP Transactions Report, supra note 486.
\497\ Treasury has indicated that it will not provide additional assistance to GM and Chrysler through the AIFP.
  Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in Support and Reorganization
  of the Domestic Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-report.pdf.
  The Panel therefore considers the repaid and de-obligated AIFP funds to be uncommitted TARP funds.
\498\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
  billion, this reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion
  to $1 billion. September 30 Transactions Report, supra note 486.
\499\ This figure reflects the total of all the caps set on payments to each mortgage servicer. September 30
  Transactions Report, supra note 486.
\500\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion),
  the repayments ($72.8 billion), and the de-obligated portion of the AIFP ($2.4 billion). Treasury provided de-
  obligation information on August 18, 2009, in response to specific inquiries relating to the Panel's oversight
  of the AIFP. Specifically, this information denoted allocated funds that had since been de-obligated.


                                                          FIGURE 38: TARP REPAYMENTS AND INCOME
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                               Warrant
                TARP initiatives  (in billions)                   Repayments  (as    Dividends \501\     Interest \502\   repurchases \503\     Total
                                                                    of 9/30/09)      (as of 8/31/09)    (as of 8/31/09)     (as of 9/30/09)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total..........................................................              $72.8              $9.74               $0.2               $2.9        $85.9
CPP............................................................               70.7                7.3                N/A                2.9         80.9
TIP............................................................                  0                1.8                N/A                  0          1.8
AIFP...........................................................                2.1               0.47                 .2                N/A         2.77
ASSP...........................................................                N/A                N/A               .004                N/A         .004
AGP \504\......................................................                  0               0.17                N/A                  0         0.17
Bank of America Guarantee......................................                  -                  -                  -                  -  \505\ .276
--------------------------------------------------------------------------------------------------------------------------------------------------------
\501\ U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online at www.financialstability.gov/docs/
  dividends-interest-reports/August2009_DividendsInterestReport.pdf).
\502\ U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online at www.financialstability.gov/docs/
  dividends-interest-reports/August2009_DividendsInterestReport.pdf).
\503\ This number includes $1.6 million in proceeds from the repurchase of preferred shares by privately-held financial institutions. For privately-held
  financial institutions that elect to participate in the CPP, Treasury receives and immediately exercises warrants to purchase additional shares of
  preferred stock. September 30 Transactions Report, supra note 486.
\504\ Citigroup is the lone participant in the AGP.
\505\ On September 21, 2009 Bank of America announced the termination of its Asset Guarantee term sheet with the Treasury Department. Bank of America
  agreed to pay a total of $425 million to Treasury ($276 million), the Federal Reserve ($57 million), and the FDIC ($92 million) to terminate a
  provisional agreement to guarantee about $118 billion (later downsized to $83 billion) of Bank of America assets. Bank of America, Termination
  Agreement (Sep. 21, 2009) (online at online.wsj.com/public/resources/documents/bofa092109.pdf). Because Treasury's share of the termination fee
  derives from the never formally consummated provisional agreement and the components of the termination fee do not match this figure's repayment and
  income categories, we do not apportion the components here. Pursuant to the termination agreement, the government made retrospective valuations for
  Treasury's portion of the fee covering the four months when the provisional agreement was in place of: (1) ``foregone dividends'' ($52 million) on the
  preferred stock that would have been paid by Bank of America to Treasury had the federal government actually made the preferred stock investment
  contemplated by the provisional agreement; (2) a ``pro-rated premium,'' ($119 million) representing the economic value to Bank of America of
  Treasury's never consummated preferred stock investment; and (3) a ``warrants valuations,'' ($105 million) representing the economic value of the
  warrants purchase contemplated by the provisional agreement. Id. The FDIC's portion of the termination fee was determined by the same retrospective
  valuation methodology, but was proportionally smaller than Treasury's portion given the FDIC's more limited investment under the provisional
  agreement. Id. (calculating FDIC to receive $17 million for foregone dividends, $40 million for pro-rated premium for preferred stock, and $35 million
  for warrants investment). The Federal Reserve's $57 million portion of the termination fee is entirely composed on a pro-rated portion of the
  commitment fee contemplated by the provisional agreement ($34 million) plus expenses ($23 million). Id.

Rate of Return

    As of September 30, 2009, the average internal rate of 
return for all financial institutions that participated in the 
CPP and fully repaid the U.S. government (including preferred 
shares, dividends, and warrants) is 17.2 percent. The internal 
rate of return is the annualized effective compounded return 
rate that can be earned on invested capital. In the case of the 
CAP program under TARP the return on investment includes 
dividends and warrants.

2. Other Financial Stability Efforts

Federal Reserve, FDIC, and Other Programs

    In addition to the direct expenditures Treasury has 
undertaken through TARP, the federal government has engaged in 
a much broader program directed at stabilizing the U.S. 
financial system. Many of these initiatives explicitly augment 
funds allocated by Treasury under specific TARP initiatives, 
such as FDIC and Federal Reserve asset guarantees for 
Citigroup, or operate in tandem with Treasury programs, such as 
the interaction between PPIP and TALF. Other programs, like the 
Federal Reserve's extension of credit through its section 13(3) 
facilities and SPVs and the FDIC's Temporary Liquidity 
Guarantee Program, operate independent of TARP. As shown in the 
following table, the Federal Reserve has begun publishing its 
interest earnings on its financial stability initiatives.

  FIGURE 39: FEDERAL RESERVE CREDIT EXPANSION PROGRAMS (AS OF SEPTEMBER
                               2009) \506\
                          (Dollars in millions)
------------------------------------------------------------------------
                                                             Interest
                                                          Earned  Jan. 1-
        Federal Reserve Credit Expansion Programs          July 30, 2009

------------------------------------------------------------------------
Federal agency debt securities..........................            $614
Mortgage-backed securities..............................           4,968
Term auction credit.....................................             570
Primary credit..........................................       \507\ 134
Primary dealer and other broker-dealer credit...........              37
Mutual Fund Liquidity Facility..........................              70
Central bank liquidity swaps............................           1,880
Outstanding principal amount of loan extended to Maiden              102
 Lane LLC...............................................
Commercial Paper Funding Facility.......................             546
    Total...............................................          8,524
------------------------------------------------------------------------
\506\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.4.1: Factors Affecting Reserve Balances (Oct. 1,
  2009) (accessed Oct. 1, 2009) (online at www.federalreserve.gov/
  releases/h41/20091001/ (hereinafter ``October 1 Fed Balance Sheet'').
\507\ This figure includes interest earned on primary, secondary and
  seasonal credit facilities.

3. Total Financial Stability Resources (as of September 30, 2009)

    Beginning in its April report, the Panel broadly classified 
the resources that the federal government has devoted to 
stabilizing the economy through a myriad of new programs and 
initiatives as outlays, loans, or guarantees. Although the 
Panel calculates the total value of these resources at over 
$3.2 trillion, this would translate into the ultimate ``cost'' 
of the stabilization effort only if: (1) assets do not 
appreciate; (2) no dividends are received, no warrants are 
exercised, and no TARP funds are repaid; (3) all loans default 
and are written off; and (4) all guarantees are exercised and 
subsequently written off.
    With respect to the FDIC and Federal Reserve programs, the 
risk of loss varies significantly across the programs 
considered here, as do the mechanisms providing protection for 
the taxpayer against such risk. The FDIC, for example, assesses 
a premium of up to 100 basis points on Temporary Liquidity 
Guarantee Program (TLGP) debt guarantees. The premiums are 
pooled and reserved to offset losses incurred by the exercise 
of the guarantees and are calibrated to be sufficient to cover 
anticipated losses and thus remove any downside risk to the 
taxpayer. In contrast, the Federal Reserve's liquidity programs 
are generally available only to borrowers with good credit, and 
the loans are over-collateralized and with recourse to other 
assets of the borrower. If the assets securing a Federal 
Reserve loan realize a decline in value greater than the 
``haircut,'' the Federal Reserve is able to demand more 
collateral from the borrower. Similarly, should a borrower 
default on a recourse loan, the Federal Reserve can turn to the 
borrower's other assets to make the Federal Reserve whole. In 
this way, the risk to the taxpayer on recourse loans only 
materializes if the borrower enters bankruptcy. The only loans 
currently ``underwater''--where the outstanding principal 
amount exceeds the current market value of the collateral--are 
two of the three non-recourse loans to the Maiden Lane SPVs 
(used to purchase Bear Stearns and AIG assets).

               FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 30, 2009)
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                                                Treasury     Federal
                           Program                               (TARP)      reserve        FDIC        Total
----------------------------------------------------------------------------------------------------------------
Total.......................................................       $698.7       $1,658       $846.7  iii$3,203.4
    Outlays i...............................................        387.3            0         47.7          435
    Loans...................................................         43.7      1,428.2            0      1,471.9
    Guarantees ii...........................................           25        229.8          799      1,053.8
    Uncommitted TARP Funds..................................        242.7            0            0        242.7
AIG.........................................................      iv 69.8         96.2            0          166
    Outlays.................................................         69.8            0            0         69.8
    Loans...................................................            0       v 96.2            0         96.2
    Guarantees..............................................            0            0            0            0
Bank of America.............................................           45            0            0           45
    Outlays.................................................       vii 45            0            0           45
    Loans...................................................            0            0            0            0
    Guaranteesvi............................................            0            0            0            0
Citigroup...................................................           50        229.8           10        289.8
    Outlays.................................................      viii 45            0            0           45
    Loans...................................................            0            0            0            0
    Guarantees..............................................         ix 5      x 229.8        xi 10        244.8
Capital Purchase Program (Other)............................         97.3            0            0         97.3
    Outlays.................................................     xii 97.3            0            0         97.3
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Capital Assistance Program..................................          TBD            0            0       xv TBD
    TALF....................................................           20          180            0          200
    Outlays.................................................            0            0            0            0
    Loans...................................................            0       xiv180            0          180
    Guarantees..............................................      xiii 20            0            0           20
PPIP (Loans)xvi.............................................            0            0            0            0
    Outlays.................................................            0            0            0            0
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
PPIP (Securities)...........................................      xvii 30            0            0           30
    Outlays.................................................           10            0            0           10
    Loans...................................................           20            0            0           20
    Guarantees..............................................            0            0            0            0
Home Affordable Modification Program........................           50            0            0       xix 50
    Outlays.................................................     xviii 50            0            0           50
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Automotive Industry Financing Program.......................         75.4            0            0         75.4
    Outlays.................................................      xx 55.2            0            0         55.2
    Loans...................................................         20.2            0            0         20.2
    Guarantees..............................................            0            0            0            0
Auto Supplier Support Program...............................          3.5            0            0          3.5
    Outlays.................................................            0            0            0            0
    Loans...................................................      xxi 3.5            0            0          3.5
    Guarantees..............................................            0            0            0            0
Unlocking SBA Lending.......................................           15            0            0           15
    Outlays.................................................      xxii 15            0            0           15
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Temporary Liquidity Guarantee Program.......................            0            0          789          789
    Outlays.................................................            0            0            0            0
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0    xxiii 789          789
Deposit Insurance Fund......................................            0            0         47.7         47.7
    Outlays.................................................            0            0    xxiv 47.7         47.7
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Other Federal Reserve Credit Expansion......................            0        1,152          G19        1,152
    Outlays.................................................            0            0            0            0
    Loans...................................................            0    xxv 1,152            0        1,152
    Guarantees..............................................            0            0            0            0
Uncommitted TARP Funds......................................        242.7            0            0       242.7
----------------------------------------------------------------------------------------------------------------
i The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
  classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
  etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
  anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
  estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
  announcements, and are subject to further change. Outlays as used here represent investments and assets
  purchases and commitments to make investments and asset purchases and are not the same as budget outlays,
  which under section 123 of EESA are recorded on a ``credit reform'' basis.
ii While many of the guarantees may never be exercised or exercised only partially, the guarantee figures
  included here represent the federal government's greatest possible financial exposure.
iii This figure is roughly comparable to the $3.0 trillion current balance of financial system support reported
  by SIGTARP in its July report. SIGTARP, Quarterly Report to Congress, at 138 (July 21, 2009) (online at
  www.sigtarp.gov/reports/congress/2009/July2009_Quarterly_Report_to_Congress.pdf). However, the Panel has
  sought to capture additional anticipated exposure and thus employs a different methodology than SIGTARP.
iv This number includes investments under the SSFI Program: a $40 billion investment made on November 25, 2008,
  and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
  bonuses paid to AIG Financial Products employees). September 30 TARP Transactions Report, supra note 486.
v This number represents the full $60 billion that is available to AIG through its revolving credit facility
  with the Federal Reserve ($39.1 billion had been drawn down as of September 2, 2009) and the outstanding
  principle of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of September 24,
  2009, $16.6 billion and $19.6 billion respectively). October 1 Fed Balance Sheet, supra note 441. Income from
  the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers' exposure to losses
  over time. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit
  and Liquidity Programs and the Balance Sheet, at 16 (Aug. 2009) (online at www.federalreserve.gov/
  monetarypolicy/files/monthlyclbsreport200909.pdf ) (hereinafter ``Fed September 2009 Credit and Liquidity
  Report'').
vi Beginning in our July report, the Panel excluded from its accounting the $118 billion asset guarantee
  agreement among Bank of America, the Federal Reserve, Treasury, and the FDIC based on testimony from Federal
  Reserve Chairman that the agreement was never signed and was never signed or consummated and the absence of
  the guarantee from Treasury's TARP accounting. House Committee on Oversight and Government Reform, Testimony
  of Federal Reserve Chairman Ben S. Bernanke, Acquisition of Merrill Lynch by Bank of America, at 3 (June 25,
  2009) (online at oversight.house.gov/documents/20090624185603.pdf) (``The ring-fence arrangement has not been
  consummated, and Bank of America now believes that, in light of the general improvement in the markets, this
  protection is no longer needed.''); Congressional Oversight Panel, July Oversight Report: TARP Repayments,
  Including the Repurchase of Stock Warrants, at 85 (July 7, 2009) (online at cop.senate.gov/documents/cop-
  071009-report.pdf). On September 21, 2009 Bank of America announced that it had reached an agreement with
  Treasury to resolve the matter of the implied guarantee by paying $425 million to terminate the term sheet.
  Bank of America, Bank of America Terminates Asset Guarantee Term Sheet (Sept. 21, 2009) (online at
  newsroom.bankofamerica.com/index.php?s=43&item=8536). For further discussion of the Panel's approach to
  classifying this agreement, see Congressional Oversight Panel, September Oversight Report: The Use of TARP
  Funds in the Support and Reorganization of the Domestic Automotive Industry, at 209 (Sept. 9, 2009) (online at
  cop.senate.gov/documents/cop-090909-report.pdf).
vii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $15 billion investment
  made by Treasury on October 28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January
  9, 2009 also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16,
  2009.
viii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $25 billion investment
  made by Treasury under the CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under
  TIP on December 31, 2008.
ix U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
  www.treasury.gov/press/releases/reports/cititermsheet--112308.pdf) (hereinafter ``Citigroup Asset Guarantee'')
  (granting a 90 percent federal guarantee on all losses over $29 billion after existing reserves, of a $306
  billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury,
  the next $10 billion by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the
  Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at
  www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301
  billion).
x Citigroup Asset Guarantee, supra note ix..
xi Citigroup Asset Guarantee, supra note ix.
xii This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50
  billion investment in Citigroup ($25 billion) and Bank of America ($25 billion) identified above, and the
  $70.7 billion in repayments that are reflected as uncommitted TARP funds. This figure does not account for
  future repayments of CPP investments, nor does it account for dividend payments from CPP investments.
xiii This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. September 30 TARP
  Transactions Report, supra note 486. Consistent with the analysis in our August report, only $43 billion
  dollars has been lent through TALF as of September 23 2009, the Panel continues to predict that TALF
  subscriptions are unlikely to surpass the $200 billion currently available by year's end. Congressional
  Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 10-22 (August 11, 2009)
  (discussion of what constitutes a ``troubled asset'') (online at cop.senate.gov/documents/cop-081109-
  report.pdf).
xiv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
  of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
  (Feb.10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
  Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
  $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
  responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
  the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
xv The CAP was announced on February 25, 2009 and as of yet has not been utilized. The Panel will continue to
  classify the CAP as dormant until a transaction is completed and reported as part of the program.
xvi It now appears unlikely that resources will be expended under the PPIP Legacy Loans Program in its original
  design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal
  Deposit Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online
  at www.fdic.gov/news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation, Legacy Loans
  Program--Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html).
  The sales described in these statements do not involve any Treasury participation, and FDIC activity is
  accounted for here as a component of the FDIC's Deposit Insurance Fund outlays.
xvii U.S. Department of the Treasury, Joint Statement By Secretary of the Treasury Timothy F. Geithner, Chairman
  of the Board Of Governors Of The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit
  Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at www.financialstability.gov/
  latest/tg_07082009.html) (``Treasury will invest up to $30 billion of equity and debt in PPIFs established
  with private sector fund managers and private investors for the purpose of purchasing legacy securities.'');
  U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4-5 (Mar. 23, 2009) (online
  at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (hereinafter ``Treasury PPIP Fact Sheet'')
  (outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program,
  Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at
  Treasury's discretion, an additional loan up to $1). In the absence of Treasury guidance, the Panel had
  previously adopted a 1:1.5 ratio between Treasury equity co-investments and loans at a 1:2 ratio under the
  program, reflecting an assumption that Treasury would frequently but not always exercise its discretion to
  provide additional financing. However, Treasury's announcement of the initial round of completed PPIP legacy
  securities agreements totaling $1.13 billion suggests that Treasury may routinely exercise its discretion to
  provide $2 of financing for every $1 of equity. See U.S. Department of the Treasury, Treasury Department
  Announces Initial Closings of Legacy Securities Public-Private Investment Funds (Sept. 30, 2009) (online at
  www.ustreas.gov/press/releases/tg304.htm) (indicating that investors would be eligible for $2.26 billion of
  financing on their investments and that total Treasury financing would be $20 billion on $10 billion on
  investors' equity investments).
xviii U.S. Government Accountability Office, Troubled Asset Relief Program: June 2009 Status of Efforts to
  Address Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/
  new.items/d09658.pdf) (hereinafter ``GAO June 29 Status Report''). Of the $50 billion in announced TARP
  funding for this program, $23.4 billion has been allocated as of August 28, 2009, and no funds have yet been
  disbursed. September 30 TARP Transactions Report, supra note 486.
xix Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the
  Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
  Making Home Affordable Program, of which the HAMP is a key component. MHAP Update, supra note 69. U.S.
  Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009)
  (online at www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).
xx September 30 TARP Transactions Report, supra note 486. A substantial portion of the total $80 billion in
  loans extended under the AIFP have since been converted to common equity and preferred shares in restructured
  companies. $20.2 billion has been retained as first lien debt (with $7.7 billion committed to GM and $12.5
  billion to Chrysler). This figure represents Treasury's current obligation under the AIFP. There have been
  $2.1 billion in repayments and $2.4 billion in de-obligated funds under the AIFP. Treasury De-obligation
  Document. See also GAO June 29 Status Report, supra note xviii at 43.
xxi September 30 TARP Transactions Report, supra note 486.
xxii Treasury PPIP Fact Sheet, supra note xvii.
xxiii This figure represents the current maximum aggregate debt guarantees that could be made under the program,
  which, in turn, is a function of the number and size of individual financial institutions participating. $ 307
  billion of debt subject to the guarantee has been issued to date, which represents about 40 percent of the
  current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
  Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Aug. 31, 2009) (online at www.fdic.gov/
  regulations/resources/TLGP/total_issuance8-09.html) (updated Sep. 24, 2009). The FDIC has collected $9.35
  billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal
  Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee
  Program (Aug. 31, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Sept. 24,
  2009).
xxiv This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
  failures in the third and fourth quarters of 2008 and the first and second quarters of 2009. Federal Deposit
  Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (Fourth
  Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html); Federal
  Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement
  (Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html);
  Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income
  Statement (First Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/
  income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
  Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/
  income.html). This figure includes the FDIC's estimates of its future losses under loss share agreements that
  it has entered into with banks acquiring assets of insolvent banks during these three quarters. Under a loss
  sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
  bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
  of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit
  Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas,
  FDIC and Compass Bank at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-
  tx_p_and_a_w_addendum.pdf).In information provided to Panel staff, the FDIC disclosed that there were
  approximately $82 billion in assets covered under loss-share agreements as of September 4, 2009. Furthermore,
  the FDIC estimates the total cost of a payout under these agreements to be $36.2 billion. Since there is a
  published loss estimate for these agreements, the Panel continues to reflect them as outlays rather than as
  guarantees. By comparison, the TLGP does not have published loss-estimates and therefore remains classified as
  guarantee program.
xxv This figure is derived from adding the total credit the Federal Reserve Board has extended as of August 27,
  2009 through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer
  Credit Facility (Primary Dealer and Other Broker-Dealer Credit), Central Bank Liquidity Swaps, loans
  outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt Securities (Federal Agency Debt Securities),
  Mortgage Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
  Facility, and Commercial Paper Funding Facility LLC. Fed Balance Sheet October 1, supra note 506. The level of
  Federal Reserve lending under these facilities will fluctuate in response to market conditions. Fed Report on
  Credit and Liquidity, supra note v.

                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of the Emergency Economic Stabilization Act (EESA) and formed 
on November 26, 2008. Since then, the Panel has produced ten 
oversight reports, as well as a special report on regulatory 
reform, issued on January 29, 2009, and a special report on 
farm credit, issued on July 21, 2009. Since the release of the 
Panel's September oversight report on the use of TARP funds in 
support and reorganization of the domestic automotive industry, 
the following developments pertaining to the Panel's oversight 
of the Troubled Asset Relief Program (TARP) took place:
     The Panel held a hearing in Washington, D.C. with 
Secretary Geithner on September 10. This was Secretary 
Geithner's second appearance before the Panel. Secretary 
Geithner answered questions regarding the current state of the 
economy and the progress TARP has made during the last year in 
stabilizing the financial markets. During the hearing, 
Secretary Geithner promised Panel Members that he would provide 
additional information regarding several TARP programs and 
would continue to appear before the Panel in an open public 
hearing format at regular intervals.
     The Panel held a field hearing in Philadelphia, 
Pennsylvania on September 24, to examine foreclosure mitigation 
efforts under TARP. The Panel heard testimony from 
representatives of Treasury, the GSEs, community housing 
organizations, loan servicers, an economist, and Judge Annette 
M. Rizzo of the Philadelphia Court of Common Pleas. The 
testimony revealed the successes and challenges of various 
foreclosure mitigation programs. The hearing played an 
important role in the Panel's evaluation of TARP foreclosure 
mitigation efforts, as reflected in the October oversight 
report.
     On September 24, 2009, Treasury Assistant for 
Financial Stability Secretary Herbert Allison testified before 
the Senate Banking Committee regarding TARP's impact during its 
first year. Assistant Secretary Allison discussed briefly the 
status and impact of each of the major TARP initiatives and 
indicated Treasury's intention to wind-down each program on a 
case-by-case basis. During questions from the committee, 
Assistant Secretary Allison declined to indicate whether 
Treasury would extend TARP beyond December 31, 2009.
     Chair Elizabeth Warren, on behalf of the Panel, 
appeared before the Senate Banking Committee on September 24, 
2009. Chair Warren testified regarding the positive effects and 
shortcomings of TARP during its first year of existence.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in 
November. The report will provide an updated review of TARP 
activities and continue to assess the program's overall 
effectiveness. The report will also examine the Treasury 
guarantees of bank assets.
    The Panel will hold a hearing with Assistant Secretary 
Allison on October 22, 2009. The Assistant Secretary last 
testified before the Panel on June 24, 2009.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided 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 instructed the 
Panel to produce a special report on regulatory reform that 
analyzes ``the current state of the regulatory system and its 
effectiveness at overseeing the participants in the financial 
system and protecting consumers.'' The Panel issued this report 
in January 2009. Congress subsequently expanded the Panel's 
mandate by directing it to produce a special report on the 
availability of credit in the agricultural sector. The report 
was issued on July 21, 2009.
    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, 2008 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. Effective August 10, 2009, Senator Sununu resigned from 
the Panel and on August 20, Senator McConnell announced the 
appointment of Paul Atkins, former Commissioner of the U.S. 
Securities and Exchange Commission, to fill the vacant seat.

                            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. The Panel also 
expresses its appreciation to Alan M. White, Assistant 
Professor of Law, Valparaiso University School of Law, for his 
cost benefit analysis of the federal foreclosure mitigation 
initiative.
  APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
        GEITHNER RE: THE STRESS TESTS, DATED SEPTEMBER 15, 2009

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