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




                                     

 
                     CONGRESSIONAL OVERSIGHT PANEL
                        APRIL OVERSIGHT REPORT *

                               ----------                              

      EVALUATING PROGRESS ON TARP FORECLOSURE MITIGATION PROGRAMS

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                 April 14, 2010.--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 APRIL OVERSIGHT REPORT

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                     CONGRESSIONAL OVERSIGHT PANEL

                        APRIL OVERSIGHT REPORT *

                               __________

      EVALUATING PROGRESS ON TARP FORECLOSURE MITIGATION PROGRAMS

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                 April 14, 2010.--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
                             Panel Members
                        Elizabeth Warren, Chair
                             Paul S. Atkins
                           Richard H. Neiman
                             Damon Silvers
                           J. Mark McWatters


                            C O N T E N T S

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                                                                   Page
Executive Summary................................................     1
Section One: Foreclosure Mitigation..............................     4
    A. Introduction..............................................     4
    B. State of the Housing Markets and General Economy..........     4
    C. Discussion and Evaluation of Program Changes Since October     5
        1. Changes to Previously Announced Programs..............     6
        2. New Program Announcements.............................    23
    D. Data Updates Since October Report.........................    25
        1. General Program Statistics............................    25
        2. HAMP Data Analysis....................................    32
    E. Foreclosure Mitigation Program Success....................    51
        1. Treasury's Definition of ``Success'' and Program Goals    51
        2. Ineligible Borrowers..................................    54
        3. Best Estimates for Program Reach......................    56
        4. Short-term vs. Long-term Success......................    57
    F. How Disincentives for Servicers and Investors Undermine 
      HAMP.......................................................    58
        1. Why Servicers may be Ambivalent about HAMP............    59
        2. Accounting Rules Provide Investors a Disincentive to 
          Modify Loans...........................................    61
        3. Servicers and Investors may be Waiting for a Better 
          Offer from the Government..............................    63
    G. Treasury Progress on Key Recommendations from the October 
      Report.....................................................    64
        1. Transparency..........................................    64
        2. Streamlining the Process..............................    67
        3. Program Enhancements..................................    69
        4. Accountability........................................    72
        5. General Data Availability.............................    76
    H. Conclusions and Recommendations...........................    79
Annex I: State of the Housing Markets and General Economy........    82
    1. Housing Market Indicators.................................    82
    2. Economic Indicators.......................................   112
Annex II: What Is Going on in Arizona, California, Florida, 
  Nevada, and Michigan?..........................................   121
Annex III: Legal Authority.......................................   124
Annex IV: Update on Philadelphia Residential Mortgage Foreclosure 
  Diversion Pilot Program........................................   147
Annex V: Private Foreclosure Mitigation Efforts..................   148
Section Two: Additional Views....................................   149
    A. Richard H. Neiman.........................................   149
    B. J. Mark McWatters.........................................   152
Section Three: Correspondence with Treasury Update...............   170
Section Four: TARP Updates Since Last Report.....................   171
Section Five: Oversight Activities...............................   187
Section Six: About the Congressional Oversight Panel.............   188
Appendices:
    APPENDIX I: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIR 
      ELIZABETH WARREN RE: FOLLOWUP QUESTIONS ON TARP-RECIPIENT 
      BANKS, DATED APRIL 13, 2010................................   189
======================================================================




                         APRIL OVERSIGHT REPORT

                                _______
                                

                 April 14, 2010.--Ordered to be printed

                                _______
                                

                           EXECUTIVE SUMMARY*

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    * The Panel adopted this report with a 3-1 vote on April 13, 2010.
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    When the Panel last examined the foreclosure crisis in 
October of 2009, the picture was grim. About one in eight 
mortgages was already in foreclosure or default, and an 
additional 250,000 foreclosures were beginning every month. The 
Panel's report raised serious concerns about Treasury's efforts 
to address the problem, noting that six months after the 
programs had been announced and two years into the foreclosure 
crisis, the Home Affordable Modification Program (HAMP) had 
permanently modified the mortgages of only 1,711 homeowners, 
that it had failed to address foreclosures caused by such 
factors as unemployment and negative equity, and that it 
appeared unlikely to help any significant fraction of the 
homeowners facing foreclosure.
    Since then, Treasury has taken steps to address these 
concerns and to stem the tide of foreclosures. HAMP began 
requiring loan servicers to explain to homeowners why their 
applications for loan modifications had been declined, and 
Treasury launched a drive to convert temporary modifications 
into long-term, five-year modifications. In keeping with Panel 
recommendations, Treasury also announced new programs to 
support unemployed borrowers and to help ``underwater'' 
homeowners--those who owe more on their mortgages than their 
homes are worth--regain equity through principal write-downs.
    Despite Treasury's efforts, foreclosures have continued at 
a rapid pace. In total, 2.8 million homeowners received a 
foreclosure notice in 2009. Each foreclosure has imposed costs 
not only on borrowers and lenders but also indirectly on 
neighboring homeowners, cities and towns, and the broader 
economy. These foreclosures have driven down home prices, 
trapping even more borrowers in a home that is worth less than 
what they owe. In fact, nearly one in four homeowners with a 
mortgage is presently underwater. Although housing prices have 
begun to stabilize in many regions, home values in several 
metropolitan areas, such as Las Vegas and Miami, continue to 
fall sharply.
    Treasury's response continues to lag well behind the pace 
of the crisis. As of February 2010, only 168,708 homeowners 
have received final, five-year loan modifications--a small 
fraction of the 6 million borrowers who are presently 60+ days 
delinquent on their loans. For every borrower who avoided 
foreclosure through HAMP last year, another 10 families lost 
their homes. It now seems clear that Treasury's programs, even 
when they are fully operational, will not reach the 
overwhelming majority of homeowners in trouble. Treasury's 
stated goal is for HAMP to offer loan modifications to 3 to 4 
million borrowers, but only some of these offers will result in 
temporary modifications, and only some of those modifications 
will convert to final, five-year status. Even among borrowers 
who receive five-year modifications, some will eventually fall 
behind on their payments and once again face foreclosure. In 
the final reckoning, the goal itself seems small in comparison 
to the magnitude of the problem.
    After evaluating Treasury's foreclosure programs, the Panel 
raises specific concerns about the timeliness of Treasury's 
response to the foreclosure crisis, the sustainability of 
mortgage modifications, and the accountability of Treasury's 
foreclosure programs.
          Timeliness. Since early 2009, Treasury has initiated 
        half a dozen foreclosure mitigation programs, gradually 
        ramping up the incentives for participation by 
        borrowers, lenders, and servicers. Although Treasury 
        should be commended for trying new approaches, its 
        pattern of providing ever more generous incentives 
        might backfire, as lenders and servicers might opt to 
        delay modifications in hopes of eventually receiving a 
        better deal. In addition, loan servicers have expressed 
        confusion about the constant flux of new programs, new 
        standards, and new requirements that make 
        implementation more complex.
          The long delay in dealing effectively with 
        foreclosures underscores the need for Treasury to get 
        its new initiatives up and running quickly, but it also 
        underscores the need for Treasury to get these programs 
        right. Even if Treasury's recently announced programs 
        succeed, their impact will not be felt until early 
        2011--almost two years after the foreclosure mitigation 
        program was first launched--and more than three years 
        after the first foreclosure mitigation program was 
        undertaken.
          Sustainability. Although HAMP modifications reduce a 
        homeowner's mortgage payments, many borrowers continue 
        to experience severe financial strain. The typical 
        post-modification borrower still pays about 59 percent 
        of his total income on debt service, including payments 
        on first and second mortgages, credit cards, car loans, 
        student loans, and other obligations. Furthermore, HAMP 
        typically does not reduce the total principal balance 
        of a mortgage, meaning that a borrower who was 
        underwater before receiving a HAMP modification will 
        likely remain underwater afterward. The typical HAMP-
        modified mortgage has a balance 25 percent greater than 
        the value of the underlying home.
          Most borrowers who proceed through HAMP will face a 
        precarious future, but their resources will be severely 
        constrained. With a majority of their income still tied 
        up in debt payments, a small disruption in income or 
        increase in expenses could make repayment almost 
        impossible. Many will have no equity in their homes and 
        are likely to question whether it makes sense to 
        struggle so hard and for so long to make payments on 
        homes that could remain below water for years. Many 
        borrowers will eventually redefault and face 
        foreclosure. Others may make payments for five years 
        under a so-called ``permanent modification,'' only to 
        see their payments rise again when the modification 
        period ends. The redefaults signal the worst form of 
        failure of the HAMP program: billions of taxpayer 
        dollars will have been spent to delay rather than 
        prevent foreclosures.
          Accountability. As always, Treasury must take care to 
        communicate clearly its goals, its strategies, and its 
        specific metrics for success for its programs. The 
        Panel is concerned that the sum total of announced 
        funding for Treasury's individual foreclosure programs 
        exceeds the total amount set aside for foreclosure 
        prevention. It is unclear whether this indicates that 
        Treasury will scale back particular programs or will 
        scale up its financial commitment to the foreclosure 
        prevention effort. Treasury must be clearer about how 
        much taxpayer money it intends to spend. Additionally, 
        Treasury must thoroughly monitor the activities of 
        participating lenders and servicers, audit them, and 
        enforce program rules with strong penalties for failure 
        to follow the requirements.
    Treasury has made progress since the Panel's last 
foreclosure report, and the Panel applauds those efforts. But 
the Panel also notes that even now Treasury's programs are not 
keeping pace with the foreclosure crisis. Treasury is still 
struggling to get its foreclosure programs off the ground as 
the crisis continues unabated.

                  SECTION ONE: FORECLOSURE MITIGATION


                            A. Introduction

    The Emergency Economic Stabilization Act (EESA), which 
established the Panel, charged it with providing periodic 
reports on foreclosure mitigation efforts. In March 2009, the 
Panel issued its first report on foreclosure mitigation, in 
which it offered a checklist of key items that are necessary 
for a successful foreclosure mitigation effort. Coinciding with 
the release of the report, Treasury announced a foreclosure 
mitigation initiative known broadly as Making Home Affordable 
(MHA). MHA includes various programs and subprograms, including 
the Administration's signature Home Affordable Modification 
Program (HAMP).
    Seven months later, the Panel revisited the foreclosure 
mitigation programs in its October 2009 report. The MHA 
programs were measured against the March checklist, but further 
assessment was limited because many of the programs were still 
in their early stages and did not have a demonstrated track 
record. The Panel noted its intention to monitor carefully all 
available data going forward and to make further 
recommendations.
    Now, more than one year after the announcement of the 
foreclosure mitigation programs, the Panel turns once again to 
the programs. What have the programs accomplished in the last 
year? Have they demonstrated a track record of success since 
the October report? Has Treasury implemented the findings and 
recommendations identified by the Panel in the last six months?

          B. State of the Housing Markets and General Economy

    In order to evaluate Treasury's efforts at foreclosure 
mitigation, it is necessary to understand the broader context 
of the housing market and the economy as a whole.
    In Annex I, the Panel reviews recent trends in the major 
housing market statistical indicators. The current market 
prices and the level of activity in the housing sector provide 
context for understanding the nature and scale of the 
foreclosure issue, and metrics for evaluating the progress of 
Treasury's foreclosure mitigation initiatives. As the 
information in the annex shows, on the whole, the U.S. housing 
market remains extremely weak, although there are some signs of 
stabilization. While several indicators of housing market 
health have shown improvement in recent months, others are 
trending in the opposite direction. Housing price levels are 
crucial for foreclosure prevention, as default rates have a 
strong negative correlation with changes in housing prices from 
the time of financing. Depressed housing prices contribute to 
negative equity, which impedes refinancings and encourages 
strategic defaults. A slow recovery of housing prices means 
that default and foreclosure rates are likely to remain 
elevated for some time into the future, and also threatens the 
sustainability of HAMP permanent modifications.
    Some observers view recent improvements as grounds for 
optimism. Jay Brinkmann, the Mortgage Bankers Association's 
chief economist, recently said that ``[w]e are likely seeing 
the beginning of the end of the unprecedented wave of mortgage 
delinquencies and foreclosures that started with the subprime 
defaults in early 2007 . . .'' \1\ Others, however, are more 
skeptical. Peter Flint, CEO of the online home listing database 
Trulia, expects that ``government interventions will start to 
disappear, shadow inventory will hit the market and mortgage 
rates will start to rise . . . We're in a false state of 
stability.'' \2\
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    \1\ Mortgage Bankers Association, National Delinquency Survey 
(Fourth Quarter 2009) (online at www.mbaa.org/ResearchandForecasts/
ProductsandSurveys/NationalDelinquencySurvey.htm) (hereinafter ``MBA 
National Delinquency Survey'') (subscription required). See also 
Mortgage Bankers Association, Delinquencies, Foreclosure Starts Fall in 
Latest MBA National Delinquency Survey (Feb. 19, 2010) (online at 
www.mortgagebankers.org/NewsandMedia/PressCenter/71891.htm) 
(hereinafter ``February MBA Survey Results'').
    \2\ Lynn Adler, Foreclosure Buyer Demand Dips as Supply Mounts, 
Reuters (Dec. 15, 2009) (online at www.reuters.com/article/
idUSTRE5B90JZ20091215).
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    The second portion of the annex discusses general economic 
indicators. The state of the broader economy has a great 
influence on the housing market, and therefore on foreclosure 
mitigation efforts. After all, the best foreclosure mitigation 
initiative is a sound economy with low unemployment. Certain 
economic indicators, such as unemployment, have a direct effect 
on the housing market; people without jobs are rarely able to 
pay their mortgages for long, even if they receive favorable 
concessions from their lender. The unemployed are also often 
forced to move to take advantage of better job opportunities. 
This can undermine many loan modifications designed to prevent 
foreclosure, since these modifications are generally based on 
an assumption that the borrower will stay in place for several 
years.
    Opinions are mixed on the outlook for the economy. Some, 
such as Richard Bernstein, chief investment strategist at 
Merrill Lynch, are encouraged by recent economic growth, and 
believe that the economy is charging ahead as if ``on steroids 
. . . because of the huge amount of credit and leverage.'' \3\ 
Others are less sanguine, and see structural problems with the 
recovery. Former Federal Reserve Chairman Alan Greenspan calls 
the current recovery ``extremely unbalanced . . . because we're 
dealing with small businesses who are doing badly, small banks 
in trouble, and of course there is an extraordinarily large 
proportion of the unemployed in this country who have been out 
of work for more than six months and many more than a year.'' 
Instead, he believes the recovery is being driven by high-
income consumers and corporations benefitting from rising stock 
prices.\4\
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    \3\ Michelle Lodge, U.S. Recovery ``On Steroids'': Bernstein, CNBC 
(Mar. 25, 2010) (online at www.cnbc.com/id/36036362).
    \4\ David Lawder, Greenspan: U.S. Recovery Extremely Unbalanced, 
Reuters (Feb. 23, 2010) (online at www.reuters.com/article/
idUSTRE61M4B120100223).
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     C. Discussion and Evaluation of Program Changes Since October

    The Panel, in its October report, described and evaluated 
the MHA program, with a focus on HAMP, the largest segment that 
uses Troubled Asset Relief Program (TARP) funds. Treasury, 
through HAMP, provides servicers, borrowers and investors/
lenders with a series of financial incentives and cost-sharing 
measures to modify loans, bringing the borrowers' first-lien 
mortgage debt-to-income (DTI) ratio down to 31 percent.
    In describing and evaluating MHA, the Panel also made a 
number of recommendations as to how Treasury could improve the 
program and how success could be defined. The Panel revisits 
those recommendations in Section G. This section of the report 
discusses and evaluates the changes that Treasury and the 
Administration have made to MHA since the Panel's October 
report.

1. Changes to Previously Announced Programs

            a. Denial Letters
    In early November Treasury released guidance that took a 
step toward transparency in the process of determining whether 
a borrower is eligible for HAMP. The guidance requires 
servicers to provide borrowers with a reason for any denial 
from the program. Treasury now requires servicers, within 10 
days of their determination of a denial, to send the borrower a 
Borrower Notice that sets out the reason for the denial and 
describes other foreclosure alternatives for which the borrower 
might be eligible.\5\ Treasury requires that the servicers 
write the letters in ``clear, non-technical language, with 
acronyms and industry terms such as `NPV' explained in a manner 
that is easily understandable.'' \6\ If the borrower is denied 
because the transaction has a negative net present value (NPV), 
meaning that the lender could earn more from a foreclosure than 
from a HAMP modification, the Borrower Notice must also include 
a list of certain input fields that went into the NPV 
calculation. Upon the borrower's request, the servicer must 
also provide the values for these fields, so that the borrower 
might correct any inaccuracies. If the borrower requests the 
input data, and the home is scheduled for foreclosure sale, the 
servicer may not conduct the sale until 30 days after it 
provides the borrower with the input data. This provides the 
borrower with an opportunity to correct the data. If the 
borrower corrects the data by a material amount, the servicer 
must re-run the NPV calculation. Announced in early November, 
this directive was effective January 1, 2010.\7\
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    \5\ U.S. Department of the Treasury, Home Affordable Modification 
Program--Borrower Notices, Supplemental Directive 09-08, at 1-2 (Nov. 
3, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/
sd0908.pdf) (hereinafter ``HAMP Borrower Notices'').
    \6\ Treasury included in the supplemental directive model clauses 
for the letter. HAMP Borrower Notices, supra note 5, at 2.
    \7\ HAMP Borrower Notices, supra note 5, at 3.
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    Treasury has stated that servicer reporting of the denial 
codes was only starting to happen in February 2010, but that 
Treasury expects this reporting to improve in the next several 
months.\8\ When asked why Treasury is not requiring servicers 
to include the values of certain input fields (rather than just 
a list of input fields considered) due to an NPV-negative 
denial, Treasury stated that requiring servicers to set out the 
data from the input fields in the initial denial letter would 
have been too burdensome on servicers, as it would have 
required customized letters for each borrower.\9\
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    \8\ Treasury conference call with Panel staff (Mar. 24, 2010). The 
data supports that servicers have not been reporting denial codes 
consistently. For additional discussion on the extent of reported data, 
see Section D(2)c.
    \9\ Treasury conference call with Panel staff (Mar. 24, 2010).
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    The Panel appreciates that Treasury has tried to reduce the 
implementation burden on servicers, but it is unclear how 
burdensome such a requirement would have been. The Panel notes 
that many of the model clauses for denial letters allow 
servicers to simply check the box of the reason for denial 
(e.g., ``You did not obtain your loan on or before January 1, 
2009'' or your property was ineligible because it is 
``Vacant''). However, many of the model clauses require 
servicers to fill in the blanks or customize the letter for the 
borrower (e.g., you are ineligible because your income ``which 
[you told us is $___] OR [we verified as $___]'' does not meet 
debt-to-income ratio (DTI) eligibility requirements, ``Your 
loan was paid in full on ___,'' or ``you notified us on ___ 
that you did not wish to accept the offer''). Even the list of 
certain NPV inputs requires some customization because the 
servicer must provide the data collection date for unpaid loan 
balance, pre-modification interest rate, and number of months 
delinquent.\10\
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    \10\ See HAMP Borrower Notices, supra note 5, at A-1.
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    The Panel is concerned that some of the reported denial 
codes are incorrect or erroneous. For example, the data show 
that HAMP applications were denied because of a trial plan 
default. However, a trial plan default can only occur if a 
borrower is already participating in a trial modification; 
these borrowers received such denials before they were in a 
trial modification.\11\ Treasury needs an appropriate 
monitoring mechanism in place to ensure that servicers are 
accurately reporting the reasons for denial or cancellation and 
those who are not receive meaningful sanctions for 
noncompliance.
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    \11\ See Section G(1) for additional information on reported denial 
codes.
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            b. Conversion Campaign
     Under HAMP, eligible borrowers are given trial 
modifications in which first-lien mortgage payments are reduced 
to 31 percent of income. Generally, after three months of 
successful payments and provision of certain documentation, the 
modification is converted to a permanent modification. Although 
Treasury uses the term ``permanent modification,'' the Panel 
believes it is important to be clear that these are only five-
year modifications; after five years the interest rate and 
payments on the modified loan can rise,\12\ therefore the 
modification is not truly ``permanent.'' However for clarity 
and consistency with Treasury's terms, this report will use the 
term permanent modification.
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    \12\ If the modified rate is below the market rate as determined 
from the Freddie Mac Primary Mortgage Market Survey rate on the date 
the modification agreement is prepared, the modified rate will be fixed 
for a minimum of five years as specified in the modification agreement. 
Beginning in year six, the rate may increase no more than one 
percentage point per year until it reaches the market rate at the time 
the modification agreement is prepared. The rate can never be higher 
than the market rate as indicated in the modification agreement. If the 
modified rate is at or above the market rate at the time the 
modification agreement is prepared, however, the modified rate is fixed 
for the life of the loan.
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    At the end of 2009, Treasury began a conversion campaign 
focused on homeowners still in trial status who were eligible 
for permanent modifications.\13\ Treasury took this step in 
order to move along a backlog of approximately 375,000 eligible 
borrowers who were still in trial modifications. As part of 
this campaign, Treasury required the seven largest HAMP 
servicers to submit plans showing their ability to make and 
communicate decisions on the eligibility of each borrower 
before the end of January 2010. Treasury also required 
servicers to provide a strategy for borrowers who were current 
on their payments but had not submitted certain documentation. 
Treasury evaluated servicers' plans with on-site servicer 
reviews by Treasury and Fannie Mae, enhanced borrower 
communication tools, and the engagement of all levels of 
government to assist in outreach.\14\
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    \13\ U.S. Department of the Treasury, Obama Administration Kicks 
Off Mortgage Modification Conversion Drive (Nov. 30, 2009) (online at 
www.financialstability.gov/latest/tg_11302009b.html) (hereinafter 
``Administration Kicks Off Modification Drive'').
    \14\  House Oversight and Government Reform, Subcommittee on 
Domestic Policy, Written Testimony of Phyllis R. Caldwell, chief, 
Homeownership Preservation Office, U.S. Department of the Treasury, 
Foreclosures Continue: What Needs to Change in the Administration's 
Response?, at 11 (Feb. 25, 2010) (online at oversight.house.gov/images/
stories/Hearings/Domestic_Policy/2010/022510_Foreclosure/
022410_Caldwell_Treasury_OGR_DP_022510.pdf) (hereinafter ``Testimony of 
Phyllis Caldwell'').
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    During this review period, servicers were to convert 
eligible borrowers as quickly as possible. In doing so, 
servicers had to confirm the status of all borrowers in active 
trial modifications that were set to expire by January 31, 
2010. If appropriate, servicers had to send borrowers written 
notice that the borrowers had failed to make all scheduled 
trial plan payments, had failed to submit required paperwork, 
or both. Borrowers had 30 days (or until January 31, 2010, 
whichever was later) to submit the required documentation and/
or payments.\15\ Servicers that did not meet performance 
expectations detailed in the Servicer Participation Agreements 
could be subject to withholding or clawbacks of incentives or 
additional oversight from Treasury.\16\
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    \15\ U.S. Department of the Treasury, Home Affordable Modification 
Program--Temporary Review Period for Active Trial Modifications 
Scheduled to Expire on or before January 31, 2010, Supplemental 
Directive 09-10 (Dec. 23, 2009) (online at www.hmpadmin.com/portal/
docs/hamp_servicer/sd0910.pdf).
    \16\ Administration Kicks Off Modification Drive, supra note 13.
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    The conversion campaign appears to have had some success. 
As of the Panel's October report, modifications were converting 
at a mere 1.26 percent,\17\ but the percentage of trial 
modifications converted within three months peaked at a rate of 
11.84 percent in the most recent data received from Treasury. 
The percentage converted within six months reached 23.72 
percent.\18\ These figures are encouraging but still relatively 
low considering the enormity of the foreclosure problem. 
Treasury must remain focused on continuing to increase the 
conversion rate.
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    \17\ Congressional Oversight Panel, October Oversight Report: An 
Assessment of Foreclosure Mitigation Efforts After Six Months, at 74 
(Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909-
report.pdf) (hereinafter ``October Oversight Report'').
    \18\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
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    Unfortunately, Treasury has been unable to provide data to 
the Panel regarding the status of the 375,000 borrowers who 
were the prime focus of the conversion campaign, and indicated 
that such data would not be available for several months. 
Treasury should clarify the outcomes for these borrowers and 
continuously work to improve its systems, as a lack of relevant 
program data in a timely manner prevents adequate analysis and 
evaluation.
            c. Verified Documentation
    In late January 2010, Treasury released a directive that 
altered borrower documentation requirements ``to simplify and 
speed up the modification process for both borrowers and 
servicers.'' \19\ This new directive requires servicers to 
obtain written, or ``verified,'' income before offering trial 
period plans with effective dates on or after June 1, 2010.\20\ 
Currently, servicers can offer trial period plans based on 
stated or verified income.\21\ This new directive was intended 
to make the HAMP modification process more efficient as well as 
to streamline documentation requirements. Under the new 
directive, borrowers must submit an ``Initial Package'' that 
includes a Request for Modification and Affidavit (RMA) Form 
(which includes the reason the borrower needs a modification, 
such as ``curtailment of income'' or ``loss of job''), an 
authorization for the servicer to obtain borrower tax records 
from the IRS, and written evidence of income.\22\
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    \19\ Testimony of Phyllis Caldwell, supra note 14.
    \20\ U.S. Department of the Treasury, Home Affordable Modification 
Program--Program Update and Resolution of Active Trial Modifications, 
Supplemental Directive 10-01, at 1 (Jan. 28, 2010) (online at 
www.hmpadmin.com/portal/docs/hamp_servicer/sd1001.pdf) (hereinafter 
``HAMP--Update and Resolution of Active Trial Modifications'').
    \21\ See U.S. Department of the Treasury, Introduction of the Home 
Affordable Modification Program, Supplemental Directive 09-01, at 5-7 
(Apr. 6, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/
sd0901.pdf) (hereinafter ``Introduction of HAMP'').
    \22\ HAMP--Update and Resolution of Active Trial Modifications, 
supra note 20, at 1-2.
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    With this directive, Treasury has taken a significant step 
to improve the documentation process. The directive followed 
Treasury's initial decision to allow servicers to offer trial 
period plans based on stated or verified income so that the 
program could reach a larger number of borrowers in the 
shortest amount of time in order to stem the flood of 
foreclosures that many saw coming. This was part of a general 
decision to roll out HAMP very quickly. Treasury has since 
modified the program several times to address problems 
encountered by servicers, borrowers, and housing counselors and 
in response to recommendations of its TARP oversight bodies-
COP, the Special Inspector General for TARP (SIGTARP), and the 
Government Accountability Office (GAO). For example, Treasury 
found that allowing servicers to base HAMP eligibility 
determinations on verbal financial information provided trial 
modifications to many borrowers who would not ultimately 
qualify for permanent modifications.\23\ (Treasury has always 
required servicers to review written documentation to evaluate 
borrowers' conversion to permanent modifications.)\24\ Although 
attempts to streamline and standardize the mortgage 
modification process can result in uniformity and efficiency, 
SIGTARP and GAO have found that Treasury's repeated changes to 
program guidelines (including changing documentation 
requirements and repeated changes and clarifications in net 
present value models) were some of the main problems with HAMP 
or some of the primary reasons that Treasury's progress has 
been slow and disappointing.\25\ Treasury is to be commended 
for efforts to improve the programs, but when attempting to do 
so, Treasury should be aware that the slow drip of additional 
program requirements has been a major challenge in program 
implementation for servicers that may lack nimbleness to 
respond to programmatic changes.\26\ There have been 13 new 
supplemental directives and two revisions of existing 
supplemental directives in the last 12 months.
---------------------------------------------------------------------------
    \23\ When providing stated incomes, a number of borrowers 
inadvertently or intentionally under- or over-stated their incomes, or 
misrepresented that the property was owner occupied. Treasury 
conversations with Panel staff (Mar. 24, 2010).
    \24\ Introduction of HAMP, supra note 21, at 6-7.
    \25\ Government Accountability Office, Home Affordable Modification 
Program Continues to Face Implementation Challenges, GAO-10-556T (Mar. 
25, 2010) (online at www.gao.gov/new.items/d10556t.pdf); Office of the 
Special Inspector General for the Troubled Asset Relief Program, 
Factors Affecting Implementation of the Home Affordable Modification 
Program (Mar. 25, 2010) (online at sigtarp.gov/reports/audit/2010/
Factors_Affecting_Implementation--
of_the_Home_Affordable_Modification_Program.pdf) (hereinafter ``Factors 
Affecting Implementation of HAMP'').
    \26\ Factors Affecting Implementation of HAMP, supra note 25.
---------------------------------------------------------------------------
    It is yet to be seen how the transition to verified income 
will impact program results. However, a few conclusions can be 
drawn. The change to verified income is unlikely to result in a 
net increase in the number of permanent modifications. It 
should increase the conversion rate from trial to permanent 
modification, as servicers will have already evaluated the 
borrower's documentation for modification at the time of trial 
offer, thus the only reason for failure to convert would be the 
borrower's failure to make the required payments. But, it also 
should result in fewer HAMP trial modifications being offered, 
as the documentation requirements are more stringent and 
similar to the previous requirements for conversion.\27\ It is 
important to note that this documentation change will give 
borrowers a stronger, more realistic expectation that they will 
be able to convert to a permanent modification.
---------------------------------------------------------------------------
    \27\ Treasury conversation with Panel. As discussed in Section 
D(2)e, the data supports this conclusion. The data shows that stated-
income servicers have enrolled more borrowers in trial modifications 
but have converted a smaller number into permanent modifications. The 
data also shows that verified-income servicers have been offering fewer 
trial period plans but have converted a larger percentage of those 
trial modifications to permanent modifications.
---------------------------------------------------------------------------
            d. Second-Lien Program
    Second liens often present legal and financial obstacles to 
the successful, sustainable modification of first mortgages. 
Whether they are originated at the same time as the first 
mortgage, or, in the case of home equity loans, at a later 
date, second liens often contribute to affordability problems 
for borrowers. Even with a modified first-lien mortgage, the 
borrower's total mortgage payments may remain unaffordable 
after accounting for the borrower's second-lien payment 
obligations. Second liens also contribute to negative equity, 
which increases the likelihood that the borrower will default.
    In addition, second liens complicate the process of getting 
an agreement among the various interested parties on a mortgage 
modification. As part of a modification, holders of first-lien 
mortgages give up their position as having the first claim on 
the property, unless the second-lien holder agrees otherwise, 
and securing this agreement can be difficult.\28\ The second-
lien holder may be reluctant to remain in the second position 
because of a concern that its claim on payments from the 
borrowers will be wiped out by the first-lien modification.\29\ 
So, in exchange for agreeing to keep the junior claim on the 
property, the second-lien holder may demand money from the 
first-lien holder.\30\ Furthermore, the holder of the first-
lien mortgage will be reluctant to make concessions to the 
borrower unless the second-lien holder does so too. Otherwise, 
the second-lien holder would effectively free-ride off the 
first-lien holder's concessions; to the extent that the 
borrower's cash flow is freed up by the first-lien holder's 
concessions, it would accrue to the benefit of the second-lien 
holder.
---------------------------------------------------------------------------
    \28\ October Oversight Report, supra note 17, at 24-25.
    \29\ House Oversight and Government Reform, Subcommittee on 
Domestic Policy, Written Testimony of David Berenbaum, chief program 
officer, National Community Reinvestment Coalition, Foreclosures 
Continue: What Needs to Change in the Administration's Response?, at 23 
(Feb. 25, 2010) (online at oversight.house.gov/images/stories/Hearings/
Domestic_Policy/2010/022510_Foreclosure/
022310_DP_David_Berenbaum_022510.pdf) (hereinafter ``Testimony of David 
Berenbaum'').
    \30\ October Oversight Report, supra note 17, at 25 fn 70.
---------------------------------------------------------------------------
    To address these issues, last year Treasury announced the 
Second Lien Program (2MP) as part of HAMP. Under this program, 
Treasury uses incentive payments to encourage second-lien 
servicers to voluntarily reduce the cost of these loans to 
borrowers who participate in first-lien modifications under 
HAMP.\31\ As announced, the program gave participating 
servicers two options: reduce borrower payments or extinguish 
the lien.\32\ Under the first option, Treasury would pay 
servicers incentive payments of up to $1,250 to modify second-
lien loans to a lower interest rate--one percent on amortizing 
loans and two percent on interest-only loans. Borrowers also 
would receive up to $1,250 in incentive payments to stay 
current on the second lien. Investors also would receive an 
incentive payment from Treasury equal to half of the difference 
between (i) the interest rate on the first lien as modified and 
(ii) either one or two percent, depending on the loan type.\33\ 
The maturity date of the second lien was to be extended to 
match the modified first lien.\34\ Under the second option, 
investors would receive a lump sum incentive payment to 
extinguish the loan.
---------------------------------------------------------------------------
    \31\ U.S. Department of the Treasury, Update to the Second Lien 
Modification Program, Supplemental Directive 09-05 Revised (Mar. 26, 
2010) (online at www.hmpadmin.com/portal/docs/second_lien/sd0905r.pdf) 
(hereinafter ``Update to the Second Lien Modification Program'').
    \32\ For a complete discussion of the Second Lien Program, see the 
Panel's October report. October Oversight Report, supra note 17, at 74.
    \33\ U.S. Department of the Treasury, Making Home Affordable 
Program Update (Apr. 28, 2009) (online at www.financialstability.gov/
docs/042809SecondLienFactSheet.pdf) (hereinafter ``Apr. 2009 MHA 
Update'').
    \34\ Update to the Second Lien Modification Program, supra note 31.
---------------------------------------------------------------------------
    The Second Lien Program was announced more than a year ago, 
but in its initial form it did not attract much participation 
from second-lien holders, and consequently failed to get off 
the ground. More recently, Treasury announced a number of 
changes to the program, and the four largest second-lien 
servicers (Bank of America, Citigroup, JPMorgan Chase, and 
Wells Fargo) have now enrolled.\35\ Together, Bank of America, 
Citigroup, JPMorgan Chase, and Wells Fargo hold approximately 
58 percent of the $1.03 trillion in outstanding second 
liens.\36\
---------------------------------------------------------------------------
    \35\ Bank of America had enrolled before the new changes were 
announced, but had not yet implemented the program. After the changes 
were announced, Wells Fargo, J.P. Morgan Chase, and Citigroup signed 
up. Bank of America, Bank of America Becomes First Mortgage Servicer to 
Sign Contract for Home Affordable Second-Lien Modification Program 
(Jan. 26, 2010) (online at newsroom.bankofamerica.com/
index.php?s=43&item=8624); Wells Fargo, Wells Fargo Signs Home 
Affordable Second-Lien Modification Program Agreement With U.S. 
Treasury (Mar. 17, 2010) (online at www.wellsfargo.com/press/2010/
20100317_2MP); Chase, Chase Joins Second-Lien Program to Keep More 
Families in Homes (Mar. 22, 2010) (online at investor.shareholder.com/
jpmorganchase/releasedetail.cfm?ReleaseID=453682); Citigroup, Citi 
Expands Efforts to Keep Families in Their Homes With Commitment to 
Second-Lien Program (Mar. 25, 2010) (online at www.citigroup.com/citi/
press/2010/100325a.htm).
    \36\ Amherst Securities Group LP, Amherst Mortgage Insight, Second 
Liens--How Important?, at 10 (Jan. 29, 2010) (hereinafter ``Second 
Liens--How Important?''). For further discussion of the banks' second-
lien holds see Annex I, Section 1.g, infra.
---------------------------------------------------------------------------
    Previously, for interest-only loans, servicers were to 
reduce the interest rate to two percent, and retain the 
interest-only feature.\37\ Under the revisions, servicers have 
the option of reducing the rate to two percent and converting 
the loan to a fully amortizing loan. Servicers are also now 
permitted to extend the amortization term to 40 years. In 
addition, second liens for borrowers in bankruptcy must be 
modified.\38\ Treasury increased the lump sum incentive 
payments to between 10 percent and 21 percent of the unpaid 
principal balance of the second lien to investors that agree to 
extinguish loans.\39\ None of these revisions alter the basic 
structure of the Second Lien Program; the program still uses 
TARP funds as an incentive for second-lien modifications or 
extinguishments.
---------------------------------------------------------------------------
    \37\ Update to the Second Lien Modification Program, supra note 31, 
at 5.
    \38\ This is only a sampling of the revisions to the Second Lien 
Program.
    \39\ Update to the Second Lien Modification Program, supra note 31.
---------------------------------------------------------------------------
    The Panel has been highlighting the need for the 
modification and removal of second liens since March 2009, and 
Treasury has acknowledged the issue's importance for just as 
long, so it is a positive sign that the Second Lien Program now 
appears to be gaining traction. The Panel will monitor the 
program closely to evaluate its progress.
    Specifically, the Panel plans to monitor the effect of 
second-lien write-downs on the capital levels of the banks 
holding second liens. As discussed previously, Bank of America, 
Citigroup, JPMorgan Chase, and Wells Fargo have large second-
lien portfolios. The stress tests conducted last year by 
federal banking regulators found that under adverse economic 
conditions, those four banks could lose a total of $68.4 
billion in 2009 and 2010 on their second-lien portfolios; \40\ 
those losses were based on estimated loss rates of 13.2 percent 
to 19.5 percent, rates that could go higher because so many 
first liens are underwater.\41\ There is a tension between 
Treasury's goal of removing second liens as an obstacle to 
mortgage restructurings and Treasury's stated interest in 
maintaining bank capital levels.\42\
---------------------------------------------------------------------------
    \40\ Under the stress tests' more adverse scenario, estimated 
losses on second liens were $21.4 billion for Bank of America, $20.1 
billion for JPMorgan Chase, $14.7 billion for Wells Fargo, and $12.2 
billion for Citigroup. Board of Governors of the Federal Reserve 
System, The Supervisory Capital Assessment Program: Overview of 
Results, at 9 (May 7, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/bcreg20090507a1.pdf).
    \41\ See Letter from Rep. Barney Frank, chairman, Committee on 
Financial Services, U.S. House of Representatives, to Brian Moynihan, 
Vikram Pandit, James Dimon, and John Stumpf, Mar. 4, 2010 (online at 
online.wsj.com/public/resources/documents/BFranksLttr100307.pdf) 
(hereinafter ``Letter from Rep. Barney Frank'') (``Large numbers of 
these second liens have no real economic value--the first liens are 
well underwater, and the prospect for any real return on the seconds is 
negligible'').
    \42\ See e.g., 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, Chairman of 
the Federal Deposit Insurance Corporation Sheila Bair, and Comptroller 
of the Currency John C. Dugan: The Treasury Capital Assistance Program 
and the Supervisory Capital Assessment Program (May 6, 2009) (online at 
financialstability.gov/latest/tg91.html).
---------------------------------------------------------------------------
    The Panel also believes that Treasury should consider 
incorporating borrowers' second-lien payments into the formula 
used to calculate mortgage affordability under HAMP. Currently, 
only the first-lien payment is used in the calculation,\43\ 
which may provide a skewed picture of whether the borrower can 
afford to pay the modified mortgage. Second liens have a high 
correlation with poorer loan performance; delinquencies are 
higher on properties with multiple liens.\44\ Treasury must 
account for this reality if HAMP is going to produce 
modifications that are sustainable over the long run.
---------------------------------------------------------------------------
    \43\ The debt-to-income ratio (DTI) used in HAMP establishes that 
the borrower's first-lien mortgage payments each month must not exceed 
31 percent of the household income.
    \44\ See, e.g., Second Liens--How Important?, supra note 36, at 1.
---------------------------------------------------------------------------
            e. Extension of HARP
    Part of MHA, but not funded by TARP dollars, the Home 
Affordable Refinance Program (HARP) allows borrowers who hold 
mortgages guaranteed by government-sponsored entities (GSEs) 
Fannie Mae and Freddie Mac to refinance into new GSE-eligible 
mortgages. This program allows borrowers whose loan-to-value 
(LTV) ratios have risen above 80 percent, and therefore would 
generally have insufficient equity for a traditional 
refinancing, to take advantage of the current lower mortgage 
interest rates.\45\ The program extends to borrowers with LTV 
ratios of up to 125 percent. HARP is administered by the 
Federal Housing Finance Agency (FHFA), the government agency 
that regulates Fannie Mae and Freddie Mac, which recently 
announced plans to extend it by one year, to June 30, 2011. 
FHFA acting director Ed DeMarco explained that it had 
``determined that the market conditions that necessitated the 
actions taken last year have not materially changed.'' \46\
---------------------------------------------------------------------------
    \45\ U.S. Department of the Treasury, Making Home Affordable: 
Summary of Guidelines, at 1 (Mar. 4, 2009) (online at www.treas.gov/
press/releases/reports/guidelines_summary.pdf).
    \46\ Federal Housing Finance Agency, FHFA Extends Refinance Program 
By One Year (Mar. 1, 2010) (online at www.fhfa.gov/webfiles/15466/
HARPEXTENDED3110[1].pdf).
---------------------------------------------------------------------------
    When announced, Treasury expected HARP to reach four to 
five million homeowners eligible to refinance.\47\ More than a 
year later, only 221,792 borrowers have refinanced their 
mortgages under the program. Despite the lower than projected 
participation, HARP remains a good refinancing opportunity for 
borrowers of underwater GSE-guaranteed mortgages who are 
current in their payments. The program can help borrowers 
refinance into a more stable 30-year fixed rate product. The 
30-year fixed rate mortgage, created during the Great 
Depression as the standard to protect the housing market and 
economy, provides households with a predictable housing cost. 
In addition, HARP refinancings do not involve any direct 
taxpayer expenditures.
---------------------------------------------------------------------------
    \47\ 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) 
(hereinafter ``MHA Detailed Program Description'').
---------------------------------------------------------------------------
            f. Borrower Outreach and Communication
    On March 24, 2010, Treasury announced additional guidance 
for HAMP servicers related to borrower outreach and 
communication. Most significantly, servicers must now 
proactively solicit borrowers who have missed two mortgage 
payments and meet the basic HAMP eligibility conditions.\48\ If 
a borrower meets these criteria, the servicer must reach out to 
the borrower to determine whether he or she is eligible for 
HAMP. The new guidance sets out a series of steps and 
timeframes that the servicer must follow before initiating 
foreclosure proceedings.\49\ The servicer may not refer the 
borrower to foreclosure until the borrower has been evaluated 
and determined not to be eligible for HAMP, unless the borrower 
did not respond to the servicer's solicitations.
---------------------------------------------------------------------------
    \48\ U.S. Department of the Treasury, Supplemental Directive 10-02: 
Home Affordable Modification Program--Borrower Outreach and 
Communication at 2 (Mar. 24, 2010) (online at www.hmpadmin.com/portal/
docs/hamp_servicer/sd1002.pdf) (hereinafter ``Supplemental Directive 
10-02''). See Section E.2 for a description of HAMP eligibility 
criteria.
    \49\ Supplemental Directive 10-02, supra note 48, at 2-4.
---------------------------------------------------------------------------
    This guidance also sets out a defined regime that 
establishes timely performance for each party to a 
modification, which is intended to establish clear steps that 
the servicer and borrower must take to proceed with the 
modification or move into foreclosure. In addition, the 
guidance requires servicers to consider the HAMP eligibility of 
borrowers who have filed for bankruptcy. Prior to this 
guidance, consideration of those who had filed for bankruptcy 
was optional.\50\ All of these changes will be effective June 
1, 2010.
---------------------------------------------------------------------------
    \50\ Id., at 7-8.
---------------------------------------------------------------------------
    The Panel applauds Treasury's new guidance promoting 
borrower outreach, with three aspects standing out as a 
positive evolution of Treasury assistance to distressed 
homeowners: (1) the enunciation of clear expectations and 
timelines for both borrower and servicer obligations; (2) the 
clarification with regard to the eligibility of homeowners who 
are facing bankruptcy; and (3) the required evaluation of 
borrowers for HAMP before foreclosure can commence. In 
particular, the Panel is pleased that Treasury is prioritizing 
early intervention in the new guidance. As discussed in Section 
D.2.d, statistics show that early intervention modifications 
are more successful than modifications on loans in default.
    The clarification of good faith efforts to contact a 
borrower is an important point. The Panel is aware that many 
servicers currently conduct efforts beyond the newly 
articulated standard and hopes that they will continue with 
such efforts. The standard should be viewed as a floor rather 
than a measure of maximum servicer effort.
            g. Help for Unemployed Homeowners
    When HAMP was announced in March 2009,\51\ the U.S. 
unemployment rate was 8.6 percent; it is currently 9.7 percent. 
Just as important, the median length of a period of 
unemployment has risen in that same time from under 12 weeks to 
nearly 20 weeks.\52\ So, unemployment today generally means a 
sharp curtailment of income for 4-5 months, with a mortgage 
becoming delinquent after just 60 days without full payment. A 
recent Freddie Mac survey notes that 58 percent of conforming 
borrowers who have made contact with their servicers cite 
``unemployment or curtailment of income'' as the principal 
cause of hardship.\53\ In a survey of distressed homeowners by 
the National Community Reinvestment Coalition, 39 percent of 
respondents cited the loss of a job as the reason for their 
inability to make their mortgage payments. Another 44 percent 
of respondents cited a reduction in work hours.\54\ The 
curtailment of income caused by unemployment may lead to a rise 
in household debt and, consequently, an increase in redefaults 
on modified mortgages.\55\
---------------------------------------------------------------------------
    \51\ U.S. Department of the Treasury, Relief for Responsible 
Homeowners One Step Closer Under New Treasury Guidelines (Mar. 4, 2009) 
(online at financialstability.gov/latest/tg48.html).
    \52\ See Figure 50, infra.
    \53\ Freddie Mac, Featured Perspectives with Chief Economist Frank 
Nothaft: What's Driving Mortgage Delinquencies? (Mar. 22, 2010) (online 
at www.freddiemac.com/news/featured_perspectives/
20100322_nothaft.html?intcmp=1004FPFN).
    \54\ National Community Reinvestment Coalition, HAMP Mortgage 
Modification Survey 2010, at 7 (online at www.ncrc.org/images/stories/
mediaCenter_reports/hamp_report_2010.pdf).
    \55\ Factors Affecting Implementation of HAMP, supra note 25, at 
15-16.
---------------------------------------------------------------------------
    It has generally been quite difficult for unemployed 
borrowers to qualify for HAMP because affordable monthly 
mortgage payments for people without a paycheck are usually too 
low to make economic sense for the investor. Originally under 
HAMP, unemployment insurance payments were counted in the 
calculation of the borrower's income,\56\ but only if the 
servicer determined that the assistance would last for nine 
months.\57\ Nonetheless, unemployment benefits were often 
insufficient to make a modified mortgage affordable.
---------------------------------------------------------------------------
    \56\ U.S. Department of Treasury, Home Affordable Modification 
Program Guidelines (Mar. 4, 2009) (online at www.ustreas.gov/press/
releases/reports/modification_program_guidelines.pdf).
    \57\ Introduction of HAMP, supra note 21, at 7-8.
---------------------------------------------------------------------------
    In response to the problem of foreclosures caused by 
unemployment, Treasury in March 2010 announced changes to HAMP 
that will provide temporary assistance to unemployed 
homeowners. This feature aims to assist unemployed homeowners 
as they search for new employment. It is available to any 
eligible borrower whose servicer participates in HAMP; 
borrowers do not need to be evaluated for a trial modification 
to participate. To be eligible, the borrower must (1) have a 
mortgage that meets HAMP's eligibility requirements; \58\ (2) 
submit evidence that he or she is receiving unemployment 
benefits; and (3) request the temporary assistance within the 
first 90 days of delinquency. Servicers that participate in 
HAMP are required to provide these temporary modifications to 
eligible borrowers.
---------------------------------------------------------------------------
    \58\ Introduction of HAMP, supra note 21. See Section E.2 for a 
further description of HAMP eligibility criteria.
---------------------------------------------------------------------------
    The new unemployment assistance sets the borrower's monthly 
payment at up to 31 percent of monthly income (which in most 
cases will be unemployment insurance). The 31 percent payment 
is reached via forbearance; no taxpayer dollars will be spent 
on the forbearance plans. The borrower's payment will stay at 
the unemployment forbearance amount for at least three months 
and can be extended up to six months, subject to investor and 
regulatory guidelines. If the borrower becomes re-employed 
during this period, his or her temporary assistance will stop. 
If, when the borrower finds a new job, the mortgage payment is 
more than 31 percent of gross monthly income, the servicer must 
evaluate the borrower for HAMP. If at the end of the six-month 
period the borrower has not yet found a new job, the servicer 
must evaluate the borrower for a HAMP short sale or deed-in-
lieu.\59\
---------------------------------------------------------------------------
    \59\ U.S. Department of the Treasury, Making Home Affordable 
Program Enhancements to Offer More Help for Homeowners, at 2 (Mar. 26, 
2010) (online at makinghomeaffordable.gov/docs/
HAMP%20Improvements_Fact_%20Sheet_032510%20FINAL2.pdf) (hereinafter 
``MHA Enhancements to Offer More'').
---------------------------------------------------------------------------
    Considering the high and persistent level of unemployment, 
the Panel believes that Treasury is right to focus on assisting 
unemployed borrowers. Treasury must create a plan that can meet 
the needs as presented, such as giving people enough time. As 
with all foreclosure mitigation programs, it is important to 
create sustainable situations rather than simply delaying a 
foreclosure. The implementation of the program raises a number 
of issues. Because it only applies to unemployed new entrants 
into HAMP, borrowers already in HAMP modifications at the time 
they lose their jobs are omitted from participation. Treasury's 
rationale for this is not clear. Averting a HAMP redefault 
prevents not only a foreclosure but also the waste of taxpayer 
dollars that accompanies a HAMP redefault. Also not clear is 
how Treasury will reliably determine when participants have 
found new work and are no longer eligible. Self-reporting, 
which seems to be the current mechanism, carries the potential 
for abuse.
    As with all forms of foreclosure mitigation, federal 
efforts to assist unemployed borrowers can be supplemented by 
innovative state and local government initiatives as well as 
private sector initiatives. There are a number of proposals 
that hold promise in combating the problem of foreclosures 
caused by unemployment. One idea that the Panel discussed in 
October involves establishing a fund to provide emergency loans 
to unemployed homeowners. Since 1983, the state of Pennsylvania 
has operated such a fund, known as the Homeowners' Emergency 
Mortgage Assistance Program (HEMAP). It offers loans for as 
long as two years or for as much as $60,000. Unemployed 
borrowers do not have to pay interest on the loans until they 
start working again.\60\ This program actually earned money for 
the state of Pennsylvania between 1983 and 2009.\61\ A second 
idea, proposed by University of Wisconsin School of Business 
Professor Morris Davis, is to provide housing vouchers to 
unemployed homeowners. These vouchers would supplement 
traditional unemployment benefits. Under Davis' proposal, the 
size of the housing voucher would vary depending on the 
mortgage payment owed each month and the amount of traditional 
unemployment benefits being collected by the homeowner. The 
housing voucher and 30 percent of the homeowner's traditional 
unemployment benefits together would be large enough to cover 
the monthly mortgage payment.\62\ A third idea comes from the 
Federal Reserve Bank of Boston. Under this proposal, unemployed 
borrowers would receive a limited-duration monthly grant or 
loan based on their loss of household income and the size of 
their monthly mortgage payments.\63\ While the Panel does not 
endorse any particular proposal, it does believe there is a 
clear need for assistance targeted at unemployed borrowers, and 
innovative proposals can play a role in supplementing federal 
efforts; the Panel urges Treasury in its new Hardest Hit Fund 
programs (discussed below in Section C.2) to help develop 
promising ideas in this area.
---------------------------------------------------------------------------
    \60\ Pennsylvania Housing Finance Agency, Pennsylvania Foreclosure 
Prevention Act 91 of 1983 (online at www.phfa.org/consumers/homeowners/
hemap.aspx) (accessed Apr. 12, 2010).
    \61\ See Congressional Oversight Panel, Written Testimony of the 
Honorable Annette M. Rizzo, Court of Common Pleas, First Judicial 
District, Philadelphia County, Philadelphia Field Hearing on Mortgage 
Foreclosures, at 10 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-rizzo.pdf).
    \62\ Morris A. Davis, The Foreclosure Problem and the WI-FUR Plan 
Solution, Wisconsin School of Business, James A. Graaskamp Center for 
Real Estate (Nov. 19, 2009) (online at morris.marginalq.com/WIFUR/
2009_11_17 WI-FUR Overview.ppt).
    \63\ Morris A. Davis, Jeff Fuhrer, Chris Foote & Eileen Mauskopf, 
Staff Briefing on Reducing Foreclosures (Dec. 4, 2009) (online at 
morris.marginalq.com/WIFUR/2009_12_04%20House%20Briefing.ppt); Federal 
Reserve Bank of Boston, A Proposal to Help Distressed Homeowners 
(Winter 2010) (online at www.bos.frb.org/commdev/c&b/2010/winter/
Foote_Fuhrer_Mauskopf_Willen_foreclosure.pdf).
---------------------------------------------------------------------------
            h. FHA Refinancings
    On March 26, 2010, the Administration announced a number of 
changes to its foreclosure mitigation efforts. One of these 
changes was the announcement of a Federal Housing 
Administration (FHA) refinance option, which offers HAMP 
incentive payments to encourage the extinguishment of existing 
second-lien loans in order to encourage the voluntary 
refinancing of underwater mortgages into FHA mortgages.\64\ 
This refinancing option is available for all mortgages meeting 
FHA underwriting standards and is not restricted to refinancing 
existing FHA loans.
---------------------------------------------------------------------------
    \64\ MHA Enhancements to Offer More, supra note 59, at 1.
---------------------------------------------------------------------------
    The new initiative, which should be available by the fall, 
alters the required loan-to-value ratios of the refinanced 
mortgage, provides incentives for principal write-downs on 
second liens, and provides TARP-funded protection for the new 
FHA loan. Under the changes, participating original first-lien 
holders must write down the principal of the existing first-
lien loan by at least 10 percent; but the existing first-lien 
loan holder may subordinate a portion of the remaining original 
first-lien loan up to a combined LTV ratio of 115 percent 
combined LTV (in other words, the new second-lien loan may be 
between 97.75 percent and 115 percent combined LTV). The first 
lien LTV ratio of the new loan must be no higher than 97.75 
percent after modification. If there was an original second 
lien, it must be written down to ensure a maximum of 115 
percent combined LTV in new mortgage debt. Treasury will pay 
from TARP funds the original second-lien servicer between 10 
and 21 percent of the extinguished amount, the same level of 
payments mentioned above under the Second Lien Program. For the 
newly refinanced first-lien loans, FHA insurance will only 
cover approximately 90.00 percent of the value of the home, and 
TARP funds will cover an approximate additional 7.75 percent of 
the value of the home (resulting in a combined insurance of 
97.75 percent of the value of the home, equivalent to standard 
FHA-insured loans). To be eligible, borrowers must (1) be 
current on their mortgage, (2) occupy the home as a primary 
residence, (3) qualify under FHA underwriting guidelines, (4) 
have a FICO credit score of at least 500, and (5) document 
their income.\65\
---------------------------------------------------------------------------
    \65\ U.S. Department of the Treasury, FHA Program Adjustments to 
Support Refinancings for Underwater Homeowners (Mar. 26, 2010) (online 
at makinghomeaffordable.gov/docs/
FHA_Refinance_Fact_Sheet_032510%20FINAL2.pdf) (hereinafter ``FHA 
Program Adjustments'').
---------------------------------------------------------------------------
    Up to $14 billion in TARP funds will support these changes 
through incentives to second-lien holders, incentive to 
servicers and the provision of a letter of credit to cover a 
share of any losses FHA might experience.\66\ It is unclear how 
the $14 billion will be divided between incentives and the 
letter of credit. This is especially important, as second liens 
are concentrated in four banks, and thus the majority of 
incentive payments will go to those same four banks. Treasury 
and FHA need to be transparent regarding how the funds will 
ultimately flow.
---------------------------------------------------------------------------
    \66\ The use of TARP funds for the program is authorized by the 
Helping Families Save their Homes Act. Pub. L. No. 111-22 Sec. 202(b).
---------------------------------------------------------------------------
    While the Panel has expressed concern over the growing 
scope and scale of negative equity for the past year, it is 
unclear whether this program will be able to make significant 
headway against the problem. First, like HARP and Hope For 
Homeowners, the FHA refinance option targets underwater 
borrowers who are current on their mortgages. It is unclear how 
this program would entice sizable additional participation from 
the same general group of borrowers. Unlike HAMP, though, 
lenders and servicers would not sign broad commitments to 
participate in the program, but rather would be able to decide 
on a case-by-case basis whether to participate. Because 
refinancings move loans out of servicers' portfolios, and thus 
eliminate a source of servicing income, servicers would not 
have strong incentive to participate. Further, first-lien 
holders, unlike second-lien holders, do not receive incentive 
payments; therefore, their motivation to participate is 
questionable. The similar Hope For Homeowners program did not 
attract widespread participation, despite the added lender 
incentive of equity sharing. Thus, especially in light of 
uncertainty about key parties' desire to participate, the 
coordination between borrower, servicer, first-lien holder, and 
second-lien holder poses a significant challenge to the 
program's effectiveness and is a potential program weakness 
that Treasury and FHA need to address.\67\
---------------------------------------------------------------------------
    \67\ FHA acknowledged the current lack of a clear plan to address 
the coordination challenge in conversation with Panel staff (Apr. 1, 
2010).
---------------------------------------------------------------------------
    Unlike modification programs, the FHA refinance option will 
refinance the mortgage into an FHA mortgage, providing explicit 
taxpayer backing for the loan. Treasury and FHA have yet to 
specify fully the loss sharing arrangements between the two 
entities. It will be extremely important to have transparent 
accounting for the joint program; FHA has faced serious 
mounting losses recently and is currently below its statutorily 
mandated reserve levels.
    Treasury has indicated that some portion of the $14 billion 
will be used to purchase a letter of credit to cover losses. 
Where does Treasury plan to obtain such a letter of credit, and 
how will the pricing be effective? If Treasury has to obtain 
the letter of credit from the very banks it so recently bailed 
out, it is unclear how the risk has been shifted, since 
Treasury has been acting as a backstop for the financial 
sector.
    As noted above, the FHA refinance option provides a 
foreclosure alternative for underwater borrowers current on 
their loans, yet many key elements remain unclear, including 
the allocation of the $14 billion, the loss-sharing arrangement 
between the TARP and FHA, the degree of risk the taxpayers may 
bear, and the coordination challenge. Treasury and FHA need to 
continue to provide clearer details and a more developed 
program.
            i. Principal Write-Down Incentives
    Negative equity, which occurs when the current market value 
of a home is less than the amount owed on the mortgage, 
continues to be an important factor driving foreclosure rates. 
In fact, it is more highly correlated with foreclosure than any 
other factor besides a lack of affordability. The primary way 
to eliminate negative equity is a principal write-down. The 
importance of negative equity will persist, especially given 
the large number of option ARMs and interest-only loans 
scheduled to reset to higher interest rates in the next few 
years.\68\ While negative equity alone will not create an 
imminent default, when combined with other financial factors 
and life events of the borrower, the possibility of default and 
foreclosure increases.
---------------------------------------------------------------------------
    \68\ See Annex I(1)a, infra.
---------------------------------------------------------------------------
    When homeowners owe more than their homes are worth, they 
are ill-equipped to respond to major life events, such as the 
loss of a job or divorce. In addition, they may struggle to 
deal with an unaffordable mortgage payment or other constraint 
on their incomes. Under normal circumstances, a homeowner would 
be able to sell his or her home and buy another near the 
location of his or her next job; but moving because of a job 
opportunity becomes more difficult when the homeowner is 
underwater. Homeowners with negative equity have the choice of 
either walking away from their loans, thereby depressing nearby 
property values, or honoring the loans' terms and turning down 
the job, thus disrupting the labor market. In either case, the 
economic impact is negative. In addition, underwater homeowners 
are more inclined to postpone decisions that might improve the 
labor force, such as enrolling in continuous learning programs, 
job training programs, or graduate school.
    Principal reductions are the primary method of addressing 
the problem of negative equity, because they incentivize a 
borrower to stay in his or her home. Up until the most recent 
HAMP program changes, servicers lacked any incentive to make 
modifications through principal reductions, as servicers' 
primary compensation is a percentage of the outstanding 
principal balance on a mortgage.\69\ Thus, principal reductions 
reduce servicers' income, whereas interest reductions do not, 
and forbearance and term extensions actually increase 
servicers' income because there is greater principal balance 
outstanding for a longer period of time. Servicers that 
participate in HAMP have been allowed but not required to 
reduce principal as part of the effort to reduce the borrower's 
monthly mortgage payment to 31 percent of their monthly income. 
Because servicers so far have lacked incentives to write down 
principal, principal reductions under HAMP to date have been 
rare.\70\
---------------------------------------------------------------------------
    \69\ See Section C(2)b, infra.
    \70\ See Section D(2)a, infra.
---------------------------------------------------------------------------
    In late March 2010, Treasury announced new conditions and 
incentive payments for HAMP servicers to write down principal. 
This change requires servicers to consider a modification that 
utilizes a principal write-down if the borrower has an LTV 
ratio that exceeds 115 percent. The servicer must run the 
standard NPV test and an alternative NPV test that includes the 
incentive payments for principal write-down. If the alternative 
NPV is higher, the servicer then has the option to use it, but 
is not required to do so.\71\ If a principal write-down proves 
to be the optimal modification option based on the two NPV 
analyses, and the servicer chooses to use the principal write-
down option, the servicer forbears principal that exceeds 115 
percent of the home's value to bring the borrower's monthly 
payment to 31 percent of his or her monthly income. The entire 
amount is initially treated as forbearance, and it is forgiven 
in three equal installments over three years as long as the 
borrower remains current on mortgage payments.
---------------------------------------------------------------------------
    \71\ MHA Enhancements to Offer More, supra note 59, at 2 (``Under 
alternative approach, servicers assess the NPV of a modification that 
starts by forbearing principal balance as needed over 115 percent loan-
to-value (LTV) to bring borrower payments to 31 percent of income; if a 
31 percent monthly payment is not reached by forbearing principal to 
115 percent LTV, the servicer will then use standard steps of lowering 
rate, extending term, and forbearing additional principal'').
---------------------------------------------------------------------------
    Servicers must retroactively consider for the program 
borrowers who are already in trial or permanent modifications 
and are current on payments at the time of the change's 
implementation. Treasury has stated that additional guidance 
for second liens is forthcoming but that second-lien holders 
must agree to extinguish principal if principal is written down 
on the first lien. Treasury will provide second-lien holders 
with incentives equal to between 10 percent and 21 percent of 
the principal written down.\72\ Treasury will also provide 
these same incentives for the write down of principal on the 
first lien.
---------------------------------------------------------------------------
    \72\ The level of incentive varies depending on the LTV of the 
initial loan, from 10 percent incentive for a 140 or greater LTV, 15 
percent for between 115 and 140, and 21 percent for less than 115.
---------------------------------------------------------------------------
    The Panel is encouraged by Treasury's increased incentives 
for servicers to employ principal write-downs in mortgage 
modifications. It provides a potential for underwater borrowers 
to avoid foreclosure and also, in its retroactive application, 
has the potential to lower redefault rates in underwater loans 
currently in HAMP trials. As with other aspects of HAMP, 
however, uncertainty remains as to whether the incentives will 
be enticing enough to encourage servicers to forgo income and 
actually write down principal.
    Finally, Treasury must continue to be mindful of the matter 
of moral hazard. When Treasury Secretary Timothy Geithner was 
asked at a Panel hearing in December 2009 about the problem of 
underwater borrowers, he cited moral hazard for borrowers as 
one reason why Treasury had not prioritized principal 
reduction. ``And the problem in doing that, apart from its 
expense,'' Secretary Geithner said, ``is the basic sense of 
fairness and what it does to incentives in the future.'' \73\
---------------------------------------------------------------------------
    \73\ Congressional Oversight Panel, Transcript: Testimony of 
Secretary Timothy F. Geithner (Dec. 10, 2009) (publication forthcoming) 
(online at cop.senate.gov/hearings/library/hearing-121009-
geithner.cfm).
---------------------------------------------------------------------------
    Treasury's recently announced principal reduction program 
has two important features that may help minimize the moral 
hazard problem. First, because lenders are not required to 
write down principal, even if a borrower could qualify for the 
modification program, he or she would have absolutely no 
assurance that the lender would be willing to employ principal 
reduction. Second, the program does not provide the principal 
reduction upfront; rather, it must be earned over three years 
with timely payments. Treasury must monitor data carefully 
going forward to watch for early signs of abuse and take 
necessary steps to prevent it from recurring. The Panel will 
also monitor the program's performance in this area.
            j. Increased Incentive Payments
    Treasury in late March 2010 increased incentive payments to 
lenders, servicers, and borrowers in a variety of situations. 
HAMP and its various subprograms are structured to provide 
incentive payments to borrowers, lenders, and servicers in 
order to encourage modifications or other foreclosure 
prevention activities.
    For example, under the Home Affordable Foreclosure 
Alternative Program (HAFA), subordinate lien holders that agree 
to release borrowers from debt will receive up to six percent 
or $6,000 of the outstanding loan balance, with the amount 
reimbursed by TARP increased to a maximum of 2 percent or 
$2,000. Servicer incentive payments under the program will 
increase from $1,000 to $1,500 to encourage additional outreach 
to homeowners who are unable to complete a modification and to 
increase the use of short sales and deeds-in-lieu. Borrowers 
who successfully complete a deed-in-lieu or short sale will 
receive $3,000, up from $1,500, for relocation assistance.\74\
---------------------------------------------------------------------------
    \74\ MHA Enhancements to Offer More, supra note 59, at 3.
---------------------------------------------------------------------------
    It is unclear whether these and other increased incentive 
payments--discussed in Sections C(1)d and C(1)i, supra--will be 
enough to offset the additional costs that servicers incur 
under HAMP. Servicers have a variety of additional costs, 
including hiring and training new employees and overhauling 
their processing systems. Prior to the recent sharp decline in 
housing prices, servicers were primarily in the business of 
processing transactions. They have had to shift resources from 
that business, which relies heavily on automation, to the loss-
mitigation business, which depends much more on employees with 
underwriting expertise.\75\ More than a year has passed since 
HAMP's inception, so participating servicers that have failed 
to retool their businesses lack a good excuse, but the costs to 
servicers of implementing these changes may nonetheless be 
impeding HAMP modifications.\76\
---------------------------------------------------------------------------
    \75\ See, e.g., Paul A. Koches, Ocwen Financial Corporation, Mods 
Make Sense, DSNews (Feb. 25, 2010) (online at www.dsnews.com/articles/
mods-make-sense-2010-02-25) (hereinafter ``Mods Make Sense'').
    \76\ See October Oversight Report, supra note 17, at 66-67.
---------------------------------------------------------------------------
    Further complicating the calculus on modifications are a 
variety of payments that servicers receive and outlays they 
must make while a loan is delinquent. When a loan defaults, the 
servicer is able to collect significant ancillary fees from the 
borrower, such as late fees and fees for various in-sourced 
activities like collateral inspection; a monthly late fee is 
typically five percent of the payment due. In addition, the 
servicer continues to accrue its monthly servicing fee--25-50 
basis points annually of the outstanding principal balance of 
the loans serviced. These fees are recovered off the top from 
foreclosure or real estate owned (REO) sale proceeds, before 
any payments are made to investors. Offsetting this income, 
however, is the requirement that the servicer advance all 
delinquent payments to investors from its own funds. While the 
servicer is able to recover the advances from foreclosure or 
REO sale proceeds, it does not receive any interest on the 
advances. Thus, to a servicer without a low-cost funding 
channel like deposits, advances can be quite costly.\77\ After 
several months, the cost of advances will outweigh the 
servicer's income from the defaulted loan.\78\ Thus, while 
servicers can often initially profit from a defaulted loan, if 
the loan is delinquent for too long, the servicer will start to 
lose money on it. Accordingly, servicers are under particular 
financial pressure as foreclosure timetables have lengthened 
due to court backlogs caused by the rise in foreclosures.
---------------------------------------------------------------------------
    \77\ Servicers that are also banks (e.g., Bank of America or Wells 
Fargo) have access to low-cost funding channels while other servicers 
that are just servicers (e.g., Ocwen Financial Corporation) do not have 
access to this low-cost funding source.
    \78\ Adam J. Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. 
on Reg. (forthcoming 2011) (hereinafter ``Levitin & Twomey'').
---------------------------------------------------------------------------
    Servicer compensation structures may also make servicers 
reluctant to attempt loan modifications.\79\ Servicers incur 
significant costs when undertaking a loan modification--
estimated at between $1,000 and $1,500 per modification. These 
are sunk costs for the servicer. If the modified loan continues 
to perform, the servicer will recoup the costs of the 
modification and earn more than if it had proceeded directly to 
foreclosure. But if the modified loan redefaults before the 
servicer recoups the costs of the modification, then the 
servicer will incur a larger loss than if it had proceeded 
directly to foreclosure.
---------------------------------------------------------------------------
    \79\ Id.
---------------------------------------------------------------------------
    Thus, as a recent article by Paul A. Koches, general 
counsel for Ocwen Financial, a leading subprime servicer, 
notes, ``servicers make money when delinquent loans become 
reperforming. Servicers collect the most servicing fees and 
incur the lowest costs when this is the case.'' \80\ Koches 
also notes, however, that sustainability is key and that 
``picking the right people pays off.'' While a reperforming 
loan is the optimal outcome for a servicer, a servicer must 
weigh the chance that a loan will reperform against the chance 
that it will redefault. The critical question for the servicer 
is not whether the loan will redefault, but when. If the 
servicer anticipates early redefaults, the servicer will be 
disinclined to attempt modifications, lest it incur greater 
losses.
---------------------------------------------------------------------------
    \80\ Mods Make Sense, supra note 75, at 104.
---------------------------------------------------------------------------
    For most mortgage modifications, not just those within 
HAMP, it takes a servicer between 12 and 24 months to recoup 
the cost of a modification.\81\ Given that redefault rates on 
all loans modified by OCC/OTS institutions have been in the 60-
percent range for a single year, and at 30 percent just in the 
first three months post-modification,\82\ servicers have a 
strong incentive not to attempt modifications, especially of 
loans they think are likely to redefault quickly. Most 
servicers, however, lack predictive capabilities regarding 
redefault, and therefore, if they are risk-averse, are likely 
to assume that all loans are likely to be early redefaulters.
---------------------------------------------------------------------------
    \81\ Levitin & Twomey, supra note 78.
    \82\ Office of the Comptroller of the Currency and Office of Thrift 
Supervision, OCC and OTS Mortgage Metrics Report (Fourth Quarter 2009), 
at 7 (Mar. 2010) (online at www.occ.treas.gov/ftp/release/2009-
163a.pdf) (hereinafter ``OCC and OTS Mortgage Metrics Report--Q4 
2009'').
---------------------------------------------------------------------------
    In light of the redefault timing problem, HAMP incentive 
payments so far may have been too low to have a significant 
effect.\83\ HAMP servicer incentive payments of $1,000 barely 
cover the cost of a modification. HAMP incentive payments are 
only made when a loan modification converts to a permanent 
modification. If a trial modification's costs are similar to a 
permanent modification's costs, then a payment of $1,000 per 
permanent modification will fail to come anywhere close to 
offsetting servicers' costs when only one in four trial 
modifications becomes a permanent modification. With trial to 
permanent roll rates at around 23 percent, servicers are on 
average receiving incentive payments of $1,000 for every 
$4,000-$5,000 of modification costs they incur. If so, then 
HAMP incentive payments may have simply been too small to 
correct misaligned servicer incentives. It remains to be seen 
whether the recently announced payment increases will change 
servicers' decision-making.
---------------------------------------------------------------------------
    \83\ Levitin & Twomey, supra note 78; House Judiciary, Subcommittee 
on Commercial and Administrative Law, Written Testimony of Adam J. 
Levitin, associate professor of law, Georgetown University Law Center, 
Home Foreclosures: Will Voluntary Mortgage Modifications Help Families 
Save Their Homes? Part II (Dec. 11, 2009) (online at 
judiciary.house.gov/hearings/pdf/Levitin091211.pdf) (hereinafter 
``Testimony of Adam Levitin'').
---------------------------------------------------------------------------
    To the extent that the new payment schedules increase 
modifications, Treasury should be careful that monetary 
incentives encourage but do not overpay for increased servicer 
participation.

2. New Program Announcements

    On February 19, 2010, the White House announced a new 
initiative, the Help for the Hardest Hit Housing Markets 
(Hardest Hit Fund) program.\84\ To date, Treasury has committed 
to the Hardest Hit Fund $2.1 billion of the $50 billion in TARP 
funds allocated for foreclosure mitigation.
---------------------------------------------------------------------------
    \84\ White House, Help for the Hardest Hit Housing Markets (Feb. 
19, 2010) (online at www.whitehouse.gov/the-press-office/help-hardest-
hit-housing-markets).
---------------------------------------------------------------------------
    Originally five states--Arizona, California, Florida, 
Michigan, and Nevada--qualified for Hardest Hit Fund 
assistance.\85\ State and local housing finance agencies (HFAs) 
in these states have been allocated caps totaling $1.5 billion. 
The states must submit proposals using these allocations, which 
will be evaluated by Treasury, before funds are disbursed. 
States were eligible if home prices had fallen by at least 20 
percent from their peaks; in each of the five recipient states, 
borrowers who made traditional downpayments of 20 percent 
during the boom years are now at or near negative equity. The 
$1.5 billion is to be allocated among the five states based on 
a two-part formula that takes into account both home price 
declines and unemployment.\86\ For each state, two ratios are 
summed: (1) the ratio of the state's unemployment rate to the 
highest unemployment rate in any state and (2) the ratio of the 
state's price decline to the largest price decline in any 
state. The sum of these two ratios is then multiplied by the 
number of delinquent loans in the state, and the funds are then 
distributed based on each state's resulting weighted share of 
delinquent borrowers.\87\
---------------------------------------------------------------------------
    \85\ U.S. Department of the Treasury and U.S. Department of Housing 
and Urban Development, Housing Finance Agency Innovation Fund for the 
Hardest Hit Housing Markets (``HFA Hardest-Hit Fund''): Frequently 
Asked Questions, at 3 (online at www.makinghomeaffordable.gov/docs/
HFA%20FAQ%20--%20030510%20FINAL%20(Clean).pdf) (hereinafter ``Hardest-
Hit Fund: FAQs'').
    \86\ Hardest-Hit Fund: FAQs, supra note 85, at 1, 3.
    \87\ The allocation is: Nevada $102.8 million, California $699.6 
million, Florida $418 million, Arizona $125.1 million, and Michigan 
$154.5 million. Hardest-Hit Fund: FAQs, supra note 85, at 3. Data for 
these calculations is derived from the Bureau of Labor Statistics 
unemployment data, the FHFA Purchase Only Seasonally Adjusted Index, 
and the MBA National Delinquency Survey; Treasury conversation with 
Panel staff (Mar. 5, 2010).
---------------------------------------------------------------------------
    On March 29, 2010, Treasury announced a second allocation 
to provide assistance to HFAs in Rhode Island, South Carolina, 
Oregon, North Carolina, and Ohio. This second set of states was 
chosen because they had large percentages of their populations 
living in high-unemployment counties, which were defined as 
those counties having an unemployment rate over 12 percent. For 
example, 60 percent of Rhode Island residents live in such 
distressed counties, as opposed to 15 percent of the population 
nationwide. This second allocation will make available $600 
million, which on a per-capita basis is the same amount 
provided under the first allocation.\88\ The $600 million will 
be split among Rhode Island, North Carolina, South Carolina, 
Ohio, and Oregon based on a formula that uses the product of 
the state's total population and the percentage of that 
population that is located in high-unemployment counties.\89\
---------------------------------------------------------------------------
    \88\ U.S. Department of the Treasury, Update to the HFA Hardest Hit 
Fund Frequently Asked Questions (Mar. 29, 2010) (online at 
financialstability.gov/docs/
Hardest%20Hit%20public%20QA%200%2029%2010.pdf) (hereinafter ``Hardest 
Hit Fund: Updated FAQs'').
    \89\ Ohio's allocation cap is $172 million, followed by $159 
million for North Carolina, $138 million for South Carolina, $88 
million for Oregon, and $43 million for Rhode Island. Hardest Hit Fund: 
Updated FAQs, supra note 88.
---------------------------------------------------------------------------
    According to Treasury, the Hardest Hit Fund's purpose is 
``to support new and innovative foreclosure prevention efforts 
in the areas hardest hit by housing price declines and high 
unemployment rates.'' \90\ The Hardest Hit Fund is expected to 
be used to modify mortgages that HFAs hold, to provide 
incentives for financial institutions, servicers, or investors 
to modify mortgages, to refinance mortgages in whole or part, 
to facilitate short-sales and deeds-in-lieu of foreclosure, to 
pay down principal for borrowers with severe negative equity, 
to provide assistance to unemployed borrowers, and to provide 
incentives for the reduction or modification of second-lien 
loans.\91\
---------------------------------------------------------------------------
    \90\ Hardest-Hit Fund: FAQs, supra note 85, at 3.
    \91\ Hardest-Hit Fund: FAQs, supra note 85, at 4-5.
---------------------------------------------------------------------------
    Because of EESA's requirement that TARP funds be used to 
purchase troubled assets from financial institutions,\92\ 
Hardest Hit Fund money will be available to qualifying entities 
(the entities must be financial institutions) that will 
implement state HFA programs. HFAs in the eligible states are 
expected to submit proposals for how they will use their 
Hardest Hit Fund allocations. To be eligible, the funding 
recipient ``must be a regulated entity that is incorporated 
separately from the state government itself, which has the 
corporate power to receive [Hardest Hit Fund money] from 
Treasury and to work with the related state HFA in implementing 
that state's HFA Proposal(s). Agencies of state governments are 
not considered Eligible Entities for purposes of the HFA 
Hardest-Hit Fund.'' \93\ Proposals for the first round of 
Hardest Hit Fund grants are due April 16, 2010; \94\ proposals 
for the second round are due June 1, 2010.
---------------------------------------------------------------------------
    \92\ 12 U.S.C. Sec. 5211(a)(1).
    \93\ U.S. Department of the Treasury, Housing Finance Agency 
Innovation Fund for the Hardest Hit Housing Markets (``HFA Hardest-Hit 
Fund''): Guidelines for HFA Proposal Submission, at 6 (online at 
www.makinghomeaffordable.gov/docs/HFA%20Proposal%20Guidelines%20-
%20030510%20FINAL%20(Clean).pdf) (hereinafter ``Hardest-Hit Fund: 
Proposal Guidelines'').
    \94\ Hardest-Hit Fund: Proposal Guidelines, supra note 93, at 3.
---------------------------------------------------------------------------
    Treasury has developed guidelines for approval of Hardest 
Hit Fund grants and is requiring all funded program designs and 
program effectiveness metrics to be posted online. All programs 
funded by the Hardest Hit Fund are subject to Treasury's direct 
oversight as well as the full range of EESA oversight. Because 
the Hardest Hit Fund is a grant program, Treasury does not 
expect HFAs or their program partners to repay to Treasury any 
of the $2.1 billion that is to be distributed.\95\
---------------------------------------------------------------------------
    \95\ Id., at 5.
---------------------------------------------------------------------------
    The Hardest Hit Fund is not, in and of itself, a solution 
to the foreclosure crisis, a point acknowledged by Treasury. 
Instead, Treasury bills it as a targeted use of TARP funds for 
particularly hard-hit markets that is meant to encourage local 
experimentation and innovation. While the Panel applauds 
Treasury for seeking to encourage local initiatives, it is 
unsure how much local expertise can bring to bear on a 
foreclosure problem that is national in scope and nature.

                  D. Data Updates Since October Report


1. General Program Statistics

    MHA is the umbrella program under which HARP, HAMP, and a 
number of other foreclosure mitigation efforts are housed. HAMP 
is a $75 billion program that provides lenders, servicers, and 
investors with incentive payments in order to entice them to 
modify mortgages, thereby creating affordable monthly payments 
for the borrower. In tandem with other initiatives such as the 
HPDP, the HAFA, Hope for Homeowners (H4H), and the newly 
announced Hardest Hit Fund, the Administration has announced 
that MHA will provide assistance to as many as 7 to 9 million 
borrowers.
    Figure 1, below, compares the number of loans in the 
foreclosure process, by month, with the number of permanent 
HAMP modifications and HARP refinances. For several reasons, 
these statistics are not directly comparable and do not provide 
an accurate measure of Treasury's progress in preventing 
foreclosures. They do, however, offer a sense of the scale of 
the foreclosure problem and the scale of Treasury's efforts.

   FIGURE 1: MHA FORECLOSURE PREVENTION ACTIONS VS. FORECLOSURES \96\

      
---------------------------------------------------------------------------
    \96\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010); HOPE NOW Alliance; RealtyTrac, Foreclosure Activity Press 
Releases (online at www.realtytrac.com//ContentManagement/
PressRelease.aspx) (hereinafter ``RealtyTrac Foreclosure Press 
Releases'') (accessed Apr. 12, 2010). ``HARP + HAMP'' is comprised of 
permanent HAMP modifications began as well as all HARP refinancings.
[GRAPHIC] [TIFF OMITTED] T5737A.001

    Of the $75 billion allocated to HAMP, $50 billion comes 
from the TARP and the remaining $25 billion comes from the 
Housing and Economic Recovery Act of 2008 (HERA).\97\ Of the 
$50 billion of TARP funds allocated to HAMP, the Office of 
Management and Budget (OMB) has approved $45.5 billion in 
apportionments. The following table provides a breakdown of 
these apportionments by program.
---------------------------------------------------------------------------
    \97\ Congressional Oversight Panel, Questions for the Record from 
the Congressional Oversight Panel Philadelphia Field Hearing on 
September 24, 2009: Questions for Seth Wheeler, Senior Advisor U.S. 
Department of the Treasury (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-wheeler-qfr.pdf) (hereinafter ``Seth Wheeler 
QFRs'').

  FIGURE 2: MHA PROGRAM APPORTIONMENTS BY OMB AS OF MARCH 29, 2010 \98\
                          [Dollars in billions]
------------------------------------------------------------------------
                            Program                              Amount
------------------------------------------------------------------------
HAMP First-Lien Modifications.................................     $31.7
Second Lien Modification Program (2MP)........................       5.7
Home Affordable Foreclosure Alternatives Program (HAFA).......       4.6
Home Price Depreciation Program (HPDP)........................       3.4
                                                               ---------
    Total.....................................................     $45.5
------------------------------------------------------------------------
98Treasury mortgage market data provided to Panel staff (Mar. 23, 2010).

    Adding the combined stated value of newly announced 
programs--$1.5 billion and $0.6 billion for the first and 
second Hardest Hit Fund installments \99\ and $14 billion for 
the FHA principal reduction program\100\--to the total 
apportionments above, the budgeted amount would exceed the $50 
billion in TARP funds allocated to foreclosure mitigation 
efforts by around $11.6 billion. However, Treasury has 
explained that the numbers announced for future programs are in 
the process of being developed into finalized program models 
that will be sent to the OMB for the apportionment process and 
that Treasury will ensure that total apportionments will not 
exceed $50 billion.\101\ This raises the question of whether 
Treasury intends to scale back the spending announced for 
individual programs or scale up the total spending announced 
for foreclosure mitigation.
---------------------------------------------------------------------------
    \99\ Hardest Hit Fund: Updated FAQs, supra note 88, at 1.
    \100\ FHA Program Adjustments, supra note 65, at 1.
    \101\ Treasury conversation with Panel staff (Mar. 31, 2010).
---------------------------------------------------------------------------
    Of the total amount apportioned to HAMP, $36.9 billion had 
been obligated to servicers by Servicer Participation 
Agreements through February.\102\ This represents the maximum 
amount each servicer could receive, not the amount that has 
actually been paid. The following table shows the HAMP cap for 
the top 16 servicers, a total for remaining servicers, and the 
overall total.
---------------------------------------------------------------------------
    \102\ Treasury provided that $39.89 billion had been obligated to 
servicers by Servicer Participation Agreements as of March 29, 2010. 
This adjusted HAMP cap amount was included in Treasury's April 6, 2010 
TARP Transactions Report. U.S. Department of the Treasury, Troubled 
Asset Relief Program: Transactions Report For Period Ending April 2, 
2010, at 20-28 (Apr. 6, 2010) (online at www.financialstability.gov/
docs/transaction-reports/4-6-10%20Transactions%20Report%20as%20of%204-
2-10.pdf) (hereinafter ``Treasury Transactions Report'').

        FIGURE 3: HAMP CAP BY SERVICER AS OF FEBRUARY 2010 \103\
------------------------------------------------------------------------
                    Servicer                        Current Cap Amount
------------------------------------------------------------------------
Countrywide Home Loans Servicing LP............        $7,206,300,000.00
Wells Fargo Bank, N.A..........................         5,738,626,343.90
JPMorgan Chase Bank, N.A.......................         3,863,050,000.00
Bank of America, N.A...........................         2,433,020,000.00
OneWest Bank...................................         2,170,170,000.00
CitiMortgage, Inc..............................         1,984,190,000.00
GMAC Mortgage, Inc.............................         1,875,370,000.00
American Home Mortgage Servicing, Inc..........         1,469,270,000.00
Litton Loan Servicing..........................         1,363,320,000.00
Saxon Mortgage Services, Inc...................         1,242,130,000.00
EMC Mortgage Corporation.......................         1,209,800,000.00
Ocwen Financial Corporation, Inc...............           933,600,000.00
Select Portfolio Servicing.....................           913,840,000.00
National City Bank.............................           700,430,000.00
Home Loan Services, Inc........................           639,850,000.00
HomEq Servicing................................           516,520,000.00
Other Servicers................................         2,612,893,656.10
                                                ------------------------
    Total......................................       $36,872,380,000.00
------------------------------------------------------------------------
\103\ Treasury mortgage market data provided to Panel staff (Mar. 23,
  2010). Some of the listed servicers have been acquired by, or are
  related to, other institutions on the list. For example, Bank of
  America includes Countrywide and Home Loan Services and JPMorgan Chase
  includes EMC Mortgage in Treasury's Monthly Servicer Performance
  Reports. See Levitin & Twomey, supra note 78, at 4. In addition,
  Litton Loan Servicing is a subsidiary of Goldman Sachs; Saxon Mortgage
  Services is a subsidiary of Morgan Stanley; Select Portfolio Servicing
  is a subsidiary of Credit Suisse; and HomeEq Servicing is a subsidiary
  of Barclays. Bloomberg Data.

    Of the amount obligated to servicers, very little was 
actually spent through February 2010. Payments occur only once 
a trial has converted to permanent modification status, and 
further, the payments occur over a five-year schedule rather 
than all at once. Treasury explained that all payments made 
through February relate to the first-lien modification program 
only; no money had been paid out for the other programs (2MP, 
HAFA, HPDP). The following table shows the breakdown of the 
money spent for the top 16 servicers, the total for remaining 
servicers, and the overall total.

     FIGURE 4: HAMP INCENTIVES BY SERVICER AS OF FEBRUARY 2010 \104\
------------------------------------------------------------------------
                    Servicer                          Servicer Total
------------------------------------------------------------------------
Ocwen..........................................           $10,070,232.00
Select Portfolio Servicing, Inc................             8,232,946.57
Saxon Mortgage Services, Inc...................             6,243,121.40
GMAC Mortgage, LLC.............................             5,665,573.60
JPMorgan Chase Bank, N.A.......................             4,845,384.27
CitiMortgage Inc...............................             4,525,867.83
Bank of America Home Loans.....................             3,292,936.74
Litton Loan Servicing, LP......................             3,284,724.01
EMC Mortgage Corporation.......................             1,728,646.74
Nationstar Mortgage, LLC.......................             1,678,104.03
Wells Fargo Bank, N.A..........................             1,614,533.04
Carrington Mortgage Services, LLC..............             1,378,869.20
Aurora Loan Services, LLC......................             1,270,372.18
Wilshire Credit Corporation....................               885,064.02
HomEq Servicing................................               693,276.95
OneWest Bank...................................               665,207.25
Other Servicers................................             1,676,249.93
                                                ------------------------
    Total......................................           $57,751,109.76
------------------------------------------------------------------------
\104\ Treasury mortgage market data provided to Panel staff (Mar. 23,
  2010). Some of the listed servicers have been acquired by, or are
  related to, other institutions on the list. In addition to the
  relationships noted in footnote 103 above, Bank of America includes
  Wilshire Credit Corporation. See Levitin & Twomey, supra note 78, at
  4.

            a. Home Affordable Refinance Program
    HARP was established to provide borrowers current on their 
mortgage payments, with loans owned or guaranteed by Fannie Mae 
and Freddie Mac, an outlet to reduce their monthly payments 
through refinancing, as well as an opportunity to refinance 
into a more stable fixed-rate mortgage product. Borrowers 
receive assistance through refinancing--not modifications. The 
program does not employ incentive payments, and there are no 
TARP expenditures for HARP. Unlike other components of MHA, 
HARP is not intended for borrowers who are behind in their 
mortgage payments. Instead, HARP is aimed at eligible borrowers 
suffering from little equity or negative equity due to the 
decline in home price values.
    All mortgages that are either owned or guaranteed by Fannie 
Mae or Freddie Mac are eligible for this program. 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 declining 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. Treasury 
estimated that 4 to 5 million borrowers would be eligible for 
the program. Since the program began on April 1, 2009, there 
have been 221,792 HARP refinancings. This total is comprised of 
over 218,000 homeowners with LTVs between 80 percent and 105 
percent that received refinancing through HARP and more than 
3,000 borrowers with LTVs between 105 percent and 125 
percent.\105\
---------------------------------------------------------------------------
    \105\ Federal Housing Finance Agency, HAMP Modifications Up in 
January; HARP Growing, at 4 (Mar. 24, 2010) (online at fhfa.gov/
webfiles/15570/FPR32410F.pdf).
---------------------------------------------------------------------------
            b. Home Affordable Modification Program
    HAMP utilizes TARP funds as a match to lender funds to 
reduce borrowers' monthly payments and as servicer and borrower 
incentives. Once a lender reduces a HAMP-eligible borrower's 
front-end DTI ratio to 38 percent, Treasury will match further 
reductions in monthly payments dollar-for-dollar with the 
lender/investor to achieve a 31 percent DTI ratio.\106\ 
Treasury also utilizes HAMP funds to provide incentives for 
servicer participation and borrower performance. Servicers 
receive a one-time payment of $1,000 for each eligible 
modification meeting program guidelines, as well as $1,000 per 
year (for up to three years) as long as the borrower stays in 
the program. Borrowers receive up to $1,000 per year (for up to 
five years) as long as he or she remains current on monthly 
payments within the program; the borrower funds go directly to 
the servicer/lender as principal balance reduction. A one-time 
bonus of $1,500 to lenders/investors and $500 to servicers is 
paid for modifications made while a borrower is still current 
on monthly payments, again, with the borrower bonus going 
towards principal balance reduction.\107\
---------------------------------------------------------------------------
    \106\ U.S. Department of the Treasury, Home Affordable Modification 
Program Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/modification_program_guidelines.pdf) (hereinafter 
``HAMP Guidelines'').
    \107\ HAMP Guidelines, supra note 106.
---------------------------------------------------------------------------
    A total of $50 billion in funding has been allocated from 
TARP funds to finance the non-GSE segment of HAMP. As of 
February 2010, there were 835,194 active trial modifications 
under HAMP.\108\ During the same period, there were 168,708 
active permanent modifications, or modifications that have 
passed beyond the trial modification phase into the permanent 
modification phase under HAMP.\109\ In total, over 1.35 million 
trial period plan offers have been extended to borrowers. The 
non-GSE segment of HAMP is based upon voluntary servicer 
participation. Currently, there are 106 servicer participants 
in HAMP.\110\ A detailed analysis of HAMP program data follows 
in Section D.2, after the general program overviews.
---------------------------------------------------------------------------
    \108\ Active trial modifications include all modifications 
currently in place but exclude modifications that were cancelled or 
converted to permanent status. Active permanent modifications include 
all permanent modifications currently in place but exclude redefaults 
and loans that have been paid off.
    \109\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
    \110\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through February 2010 (Mar. 12, 
2010) (online at www.makinghomeaffordable.gov/docs/
Feb%20Report%20031210.pdf) (hereinafter ``MHA Servicer Performance 
Through February 2010'').
---------------------------------------------------------------------------

FIGURE 5: HAMP ACTIVE TRIAL MODIFICATIONS STARTED VS. ACTIVE PERMANENT 
                  MODIFICATIONS STARTED BY MONTH \111\

---------------------------------------------------------------------------
    \111\These figures include trials converted to permanent and 
pending permanent modifications. Treasury mortgage market data provided 
to Panel staff (Mar. 23, 2010).
[GRAPHIC] [TIFF OMITTED] T5737A.002

            c. GSE-HAMP
    In total, $25 billion in funding was apportioned under HERA 
to fund the GSE portion of HAMP.\112\ The $25 billion portion 
of funds derived from HERA is dedicated to Fannie Mae and 
Freddie Mac for providing incentive payments in HAMP loan 
modifications. As of December 2009, Fannie Mae and Freddie Mac 
completed 23,500 and 19,500 permanent modifications, 
respectively.\113\ These agencies account for approximately 38 
percent of the active permanent modifications under HAMP.
---------------------------------------------------------------------------
    \112\ Seth Wheeler QFRs, supra note 97, at 1.
    \113\ Federal Housing Finance Agency, Foreclosure Prevention & 
Refinance Report, at 2 (Jan. 29, 2010) (online at fhfa.gov/webfiles/
15389/Foreclosure_Prev_release_1_29_10.pdf) (hereinafter ``FHFA 
Foreclosure Report'').
---------------------------------------------------------------------------

     FIGURE 6: FANNIE MAE AND FREDDIE MAC HAMP TRIAL AND PERMANENT 
  MODIFICATIONS STARTED BY MONTH THAT WERE ACTIVE AS OF FEBRUARY 2010 
                                 \114\

      
---------------------------------------------------------------------------
    \114\ FHFA Foreclosure Report, supra note 113, at 2.
    [GRAPHIC] [TIFF OMITTED] T5737A.003
    
            d. Home Price Decline Protection Program
    HPDP was established in order to facilitate additional 
mortgage modifications in those areas hardest hit by home price 
declines. HPDP provides the mortgage investor with further 
incentives to modify mortgages on properties in areas that have 
suffered from price declines. The HPDP incentive payment is a 
cash payment on all eligible loans and is linked to the rate of 
recent home price declines in the particular area, the unpaid 
principal balance, and the mark-to-market LTV of the 
mortgage.\115\ Following a successful HAMP trial modification, 
the lender/investor accrues 1/24th of the HPDP incentive per 
month for 24 months. Treasury has allocated $10 billion of the 
$50 billion in TARP funds dedicated to HAMP for this 
subprogram; however, the actual amount expended will depend 
upon participation and housing price trends.\116\ Although some 
servicers may be offering this program to borrowers, Treasury 
does not yet have a system of record to which the servicers can 
submit records. Therefore, no borrowers are yet officially 
considered to have been assisted by HPDP, and no money has been 
paid out under the program.
---------------------------------------------------------------------------
    \115\ U.S. Department of the Treasury, Home Affordable Modification 
Program--Home Price Decline Protection Incentives, Supplemental 
Directive 09-04, at 1 (July 31, 2009) (online at 
www.financialstability.gov/docs/press/SupplementalDirective7-31-
09.pdf).
    \116\ See U.S. Department of the Treasury, Making Home Affordable: 
Update: Foreclosure Alternatives and Home Price Decline Protection 
Incentives, at 4 (May 14, 2009) (online at www.treas.gov/press/
releases/docs/05142009FactSheet-MakingHomesAffordable.pdf) (hereinafter 
``Foreclosure Alternatives and Home Price Decline Protection 
Incentives'').
---------------------------------------------------------------------------
            e. Home Affordable Foreclosure Alternatives Program
    In some circumstances a modification that keeps the 
borrower in the home is not possible or preferable. HAFA is 
intended to widen the scope of mitigation options by providing 
incentives to servicers that pursue short sales or deeds-in-
lieu of foreclosure. While this may not keep the borrower in 
the home, it avoids foreclosure and provides a more orderly 
transition for both the borrower and lender. A short sale takes 
place when a borrower is unable to make the mortgage payment, 
and the servicer allows the borrower to sell the property at 
the current value, regardless of whether the proceeds from the 
sale would cover the remaining balance of the mortgage. It is 
necessary for the borrower to list and market the property; 
however, if the borrower is unable to sell the property, the 
servicer may choose to pursue a deed-in-lieu transaction, where 
the borrower willingly transfers ownership of the property to 
the servicer.\117\
---------------------------------------------------------------------------
    \117\ See Foreclosure Alternatives and Home Price Decline 
Protection Incentives, supra note 116.
---------------------------------------------------------------------------
    HAFA facilitates short sales as well as deed-in-lieu 
transactions by offering incentive payments to borrowers, 
junior lien holders, and servicers that are similar to the 
structure and amounts of MHA incentive payments.\118\ While 
servicers are required to evaluate borrowers for the program, 
they are not required to offer foreclosure alternatives. 
Although some servicers may be offering this program to 
borrowers, Treasury does not yet have a system of record to 
which the servicers can submit records. Therefore, no borrowers 
are yet officially considered to have been assisted by HAFA, 
and no money has been paid out under the program.
---------------------------------------------------------------------------
    \118\ U.S. Department of the Treasury, Introduction of Home 
Affordable Foreclosure Alternatives--Short Sale and Deed-in-Lieu of 
Foreclosure, Supplemental Directive 09-09 (Nov. 30, 2009) (online at 
www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf) (hereinafter 
``Introduction of Home Affordable Foreclosure Alternatives'').
---------------------------------------------------------------------------
            f. Hope for Homeowners
    H4H was created by HERA and is voluntary for lenders.\119\ 
Although the program is not a TARP program and is run by the 
Department of Housing and Urban Development (HUD), it is still 
considered part of the Administration's umbrella MHA 
foreclosure mitigation initiative. The program is now more 
closely linked to the TARP because subsequent legislation 
apportioned TARP funds to the H4H program. Due to low servicer 
participation, the Helping Families Save Their Homes Act of 
2009 added TARP-funded servicer incentive payments similar to 
those under HAMP to the structure of the H4H program.\120\ H4H 
is intended to provide borrowers who are having trouble making 
their monthly payments the opportunity to refinance into an 
FHA-insured loan. H4H requires the participant's lender to 
decrease the principal of the loan to 90 percent of the newly 
appraised value, thereby addressing the issue of underwater 
mortgages.\121\ As of February 2010, 35 loans had closed.\122\ 
No TARP dollars have been used for the recently added servicer 
incentive payments under H4H.\123\
---------------------------------------------------------------------------
    \119\ Housing and Economic Recovery Act, Pub. L. No. 110-289 
Sec. Sec. 1401-04 (2008).
    \120\ Preventing Mortgage Foreclosure and Enhancing Mortgage 
Credit, Pub. L. No. 111-22 Sec. 202(b) (2009).
    \121\ U.S. Department of Housing and Urban Development, Fact Sheet: 
HOPE for Homeowners to Provide Additional Mortgage Assistance to 
Struggling Homeowners (online at www.hud.gov/hopeforhomeowners/
pressfactsheet.cfm) (accessed Apr. 13, 2010).
    \122\ U.S. Department of Housing and Urban Development, Letter from 
Assistant Secretary for Housing David H. Stevens to The Honorable 
Richard C. Shelby, Ranking Member, Committee on Banking, Housing, and 
Urban Affairs, United States Senate enclosing the February HOPE for 
Homeowners Program monthly report (Mar. 29, 2010).
    \123\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------

2. HAMP Data Analysis

    Based on certified data provided by Fannie Mae, Treasury's 
agent for HAMP, the following statistical picture of HAMP 
emerges. As of March 8, 2010, there were 170,207 permanent 
modifications, of which 168,708 were active. This represents a 
conversion rate of 23.1 percent of eligible trials to permanent 
modifications. Only 9.7 percent of eligible trials (71,397 
trials) converted to permanent modifications within the typical 
anticipated three-month trial period; many more converted after 
extended trial forbearance. Of the 1,499 permanent 
modifications that ceased to be active, 1,473 had redefaulted, 
and 26 were paid off. An additional 835,194 unique borrowers 
were actively in trial modifications.\124\
---------------------------------------------------------------------------
    \124\ Id.
---------------------------------------------------------------------------
            a. HAMP Modified Loan Characteristics
    Most active HAMP modifications (trial and permanent) have 
been on loans in GSE pools. There are 572,650 active 
modifications on GSE loans, 340,877 on loans in private-label 
securitization pools, and 90,375 on whole loans held in 
portfolio. Unfortunately, this data has little analytical use 
because there is no baseline for comparison, such as the number 
of each type of loan that is HAMP-eligible, or controls for 
loan characteristics.\125\
---------------------------------------------------------------------------
    \125\ Id.
---------------------------------------------------------------------------
    As of March 1, 2010, 67 percent of trials and 70 percent of 
permanent modifications involved fixed-rate mortgages, with 
adjustable-rate mortgages making up 32 percent of trials and 28 
percent of permanent modifications. There were also a 
negligible number of step-rate mortgages. (See Figure 7, 
below.)

 FIGURE 7: PRE-MODIFICATION LOAN TYPE OF COMPLETED HAMP MODIFICATIONS 
                                 \126\

      
---------------------------------------------------------------------------
    \126\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.004
    
    Borrowers listed a variety of hardship reasons when 
requesting HAMP modifications. By far the most common was 
``curtailment of income,'' which was reported by 41 percent of 
borrowers in trial modifications and 52 percent of borrowers 
with permanent modifications. This category reflects reduced 
employment hours, wages, salaries, commissions, and bonuses and 
is distinct from unemployment, which was reported by six 
percent of trial modification borrowers and five percent of 
permanent modification borrowers. Other significant categories 
of hardship reported were ``excessive obligation,'' reported by 
eight percent of trial modification borrowers and 11 percent of 
permanent modification borrowers. Additionally, 35 percent of 
trial modifications and 21 percent of permanent modifications 
reported ``other'' for the hardship reason.\127\ (See Figures 8 
and 9, below.)
---------------------------------------------------------------------------
    \127\ Id.
---------------------------------------------------------------------------
    It is notable that curtailment of income is the predominant 
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. Until recent program changes, HAMP 
eligibility generally required employment. This raised concerns 
as to whether HAMP, which was designed in the winter of 2009 
when unemployment rates were lower, was capable of dealing with 
emerging causes of foreclosure.\128\
---------------------------------------------------------------------------
    \128\ For further discussion of the impact of the newly announced 
changes designed to assist unemployed borrowers, see Section C(1)g.
---------------------------------------------------------------------------

   FIGURE 8: TOP FIVE HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT 
                          MODIFICATIONS \129\

      
---------------------------------------------------------------------------
    \129\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
[GRAPHIC] [TIFF OMITTED] T5737A.005


       FIGURE 9: ALL HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT
                           MODIFICATIONS \130\
------------------------------------------------------------------------
                                                   Trial      Permanent
------------------------------------------------------------------------
Abandonment of property.......................           54           29
Business failure..............................        6,091        1,199
Casualty loss.................................          961           97
Curtailment of income.........................      339,751       88,014
Death of borrower.............................        2,361          987
Death of borrower family member...............        2,024          922
Distant employment transfer...................          323           55
Energy environment costs......................          949          199
Excessive obligation..........................       72,216       18,295
Fraud.........................................          841        1,200
Illness of borrower family member.............        3,494        1,521
Illness of principal borrower.................       20,031        4,498
Inability to rent property....................          911          212
Inability to sell property....................          287           42
Incarceration.................................          230           31
Marital difficulties..........................       12,569        2,431
Military service..............................          207          135
Other.........................................      291,427       35,826
Payment adjustment............................        6,203        1,455
Payment dispute...............................        1,569          518
Property problem..............................          552          104
Servicing problems............................        1,095          205
Transfer of ownership pending.................          273           25
Unable to contact borrower....................       20,118        1,810
Unemployment..................................       50,657        8,898
------------------------------------------------------------------------
\130\ Id.

   FIGURE 10: TOP FIVE HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT 
 MODIFICATIONS AS PERCENTAGE OF TRIAL AND PERMANENT MODIFICATIONS \131\

      
---------------------------------------------------------------------------
    \131\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.006
    

      FIGURE 11: ALL HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT
 MODIFICATIONS AS PERCENTAGE OF TRIAL AND PERMANENT MODIFICATIONS \132\
------------------------------------------------------------------------
                                         Trial             Permanent
                                     Modification        Modification
------------------------------------------------------------------------
Abandonment of property.........                0.01                0.02
Business failure................                0.73                0.71
Casualty loss...................                0.12                0.06
Curtailment of income...........               40.68               52.17
Death of borrower...............                0.28                0.59
Death of borrower family member.                0.24                0.55
Distant employment transfer.....                0.04                0.03
Energy environment costs........                0.11                0.12
Excessive obligation............                8.65               10.84
Fraud...........................                0.1                 0.71
Illness of borrower family                      0.42                0.9
 member.........................
Illness of principal borrower...                2.4                 2.67
Inability to rent property......                0.11                0.13
Inability to sell property......                0.03                0.02
Incarceration...................                0.03                0.02
Marital difficulties............                1.5                 1.44
Military service................                0.02                0.08
Other...........................               34.89               21.24
Payment adjustment..............                0.74                0.86
Payment dispute.................                0.19                0.31
Property problem................                0.07                0.06
Servicing problems..............                0.13                0.12
Transfer of ownership pending...                0.03                0.01
Unable to contact borrower......                2.41                1.07
Unemployment....................                6.07                5.27
------------------------------------------------------------------------
\132\ Id.

    For the modifications that have converted to permanent 
modifications, the median (mean) front-end DTI--the ratio of 
monthly housing debt payments to monthly income--declined by 14 
(17.11) percent, from 45.02 (47.97) percent to 31.02 (30.86) 
percent, in line with the program's goal. Under HAMP, the 
front-end DTI is calculated based on the first-lien payment 
only and does not include housing costs resulting from second 
liens. The median (mean) back-end DTI ratio--the ratio of total 
monthly debt payments to monthly income--declined by 16.6 
(16.6) percent from 76.44 (86.52) percent to 59.84 (69.92) 
percent.\133\ Back-end DTI calculations include all payments to 
creditors, which in addition to first-lien payments could 
include payments on debts such as home equity lines of credit, 
credit cards, auto loans, and student loans. (See Figures 12 
and 13, below.) These changes indicate that HAMP modifications 
are substantially reducing borrowers' monthly debt service 
burdens and making homeownership relatively more affordable, 
yet even with reduced mortgage payments, the typical HAMP 
modification recipient still has an extremely high debt burden 
overall and a relatively high housing debt burden. A 31 percent 
front-end DTI is a fairly high percentage of monthly income to 
spend on housing, particularly if a homeowner carries a second 
lien, as junior liens are not considered in the 31 percent 
front-end DTI calculation. More notably, the program can still 
leave borrowers saddled with very high levels of total debt, as 
back-end debt is not even considered in the HAMP modification. 
HAMP is improving affordability, but it leaves many borrowers 
with permanent modifications still paying a large percentage of 
income for housing and other debts. This calls into question 
the sustainability of many permanent modifications, 
particularly as the loan payments rise after the five-year 
modification period expires.
---------------------------------------------------------------------------
    \133\ Id.
---------------------------------------------------------------------------

     FIGURE 12: FRONT-END DEBT-TO-INCOME RATIOS PRE- AND POST-HAMP 
                          MODIFICATIONS \134\

      
---------------------------------------------------------------------------
    \134\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.007
    
     FIGURE 13: BACK-END DEBT-TO-INCOME RATIOS PRE- AND POST-HAMP 
                          MODIFICATIONS \135\

      
---------------------------------------------------------------------------
    \135\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.008
    
    The reduction in DTI in HAMP modifications was achieved 
almost exclusively through reductions in interest rate, rather 
than term extensions or principal reductions. In fact, 100 
percent of HAMP modifications involved interest rate 
reductions. Median (mean) interest rates were dropped by 4 
(3.54) percentage points, from 6.625 (6.52) percent to 2 (2.98) 
percent, a 70 (54) percent reduction in the rate.\136\ (See 
Figure 14, below.) Interest rates may rise after five years, 
however, calling into question the long-term sustainability of 
HAMP permanent modifications.
---------------------------------------------------------------------------
    \136\ Id.
---------------------------------------------------------------------------

    FIGURE 14: INTEREST RATES PRE- AND POST-HAMP MODIFICATIONS \137\

      
---------------------------------------------------------------------------
    \137\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.009
    
    Term extensions were de minimis; the median (mean) term 
remaining before modification was 332 (334.48) months, and 
after the trial period, the median (mean) term remaining was 
334 (367.15) months, indicating a median (mean) term extension 
of 2 (32.67) months. There were 78,906 permanent modifications 
or 47 percent of total featured term extensions, while 8,674 or 
5 percent of total modifications involved reductions in 
remaining terms.\138\ For loans with term extensions the median 
extension was 92 months, while the median term reduction was 
only one month.\139\ Terms remained unchanged for 81,128 
permanent modifications or 48 percent of all permanent 
modifications.\140\ 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, so the 
actual number and percentage of modifications with term 
extensions excluding the trial period might be lower.
---------------------------------------------------------------------------
    \138\ Id.
    \139\ Id.
    \140\ Id.
---------------------------------------------------------------------------
    Amortization periods changed relatively little. Before 
modification, the median (mean) amortization period was 360 
(361.44) months, and post-modification, the median amortization 
period dropped to 341 months while the mean rose to 376.49 
months, indicating that amortization periods on a small number 
of permanent modifications were significantly increased.\141\ 
(See Figure 15, below.) The amortization period increased in 
78,906 modifications or 47 percent of the total and decreased 
in 8,674 modifications or 5 percent of the total, and remained 
unchanged for 81,128 modifications or 48 percent of the 
total.\142\
---------------------------------------------------------------------------
    \141\ Id.
    \142\ Id.
---------------------------------------------------------------------------

      FIGURE 15: TERM AND AMORTIZATION PERIODS FOR PERMANENT HAMP 
                          MODIFICATIONS \143\

      
---------------------------------------------------------------------------
    \143\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.010
    
    Principal forbearance was rare and principal forgiveness 
rarer still. Principal was forborne on 46,959 permanent 
modifications (27.8 percent of total) while only 10,521 (6.2 
percent of total) had principal forgiven. Additionally, 10,381 
or 6.15 percent of modifications had both principal forgiven 
and forborne. When calculated based on all permanent 
modifications, the median (mean) amount of principal forborne 
was $0 ($18,836.48), and the median (mean) amount of principal 
forgiven was $0 ($3,572.06). When calculated only for the 
modifications with principal forbearance, however, the median 
(mean) amount forborne was $49,003.10 ($67,673.19) of post-
modification unpaid principal balance, implying a sizable 
balloon payment at the maturity of the mortgage.\144\ When 
calculated only for the permanent modifications with principal 
forgiveness, the median (mean) amount forgiven was $42,020.06 
($57,279.32) of the post-modification unpaid principal balance.
---------------------------------------------------------------------------
    \144\ Id.
---------------------------------------------------------------------------

FIGURE 16: UNPAID PRINCIPAL BALANCE FORGIVEN AND FORBORNE IN PERMANENT 
                          MODIFICATIONS \145\

      
---------------------------------------------------------------------------
    \145\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.011
    
    Before modification, the median (mean) LTV was 119.31 
(134.83) percent. 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 125.88 (143.19) percent.\146\ (See Figure 
17.) Post-modification, 127,890 or 75.8 percent of permanent 
modifications were calculated as having an LTV of greater than 
100, meaning the vast majority of borrowers receiving a HAMP 
permanent modification still have negative equity. Indeed, most 
HAMP permanent modification recipients remain deeply 
underwater. Fifty-one percent of HAMP permanent modifications 
have a first lien LTV of greater than 125 percent.\147\ If 
junior liens were to be included, the percentage would be 
significantly higher. The continuing deep level of negative 
equity for many HAMP permanent modification recipients makes 
the modifications' sustainability questionable; even with more 
affordable payments, deeply underwater borrowers may remain 
tempted to strategically default or may be compelled to because 
core life events, such as death, divorce, disability, marriage, 
child birth, job loss, or job opportunities necessitate a move.
---------------------------------------------------------------------------
    \146\ Id.
    \147\ Id.
---------------------------------------------------------------------------

     FIGURE 17: LOAN-TO-VALUE RATIOS PRE- AND POST-HAMP FIRST-LIEN 
                          MODIFICATIONS \148\

      
---------------------------------------------------------------------------
    \148\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.012
    
    The net result of the modifications was that median (mean) 
monthly principal and interest payments for the first lien 
dropped $518.88 ($627.74), from $1,430.96 ($1,560.06) to 
$837.86 ($932.32), a 41 (40) percent decline. As Figure 18 
below shows, HAMP modifications resulted in a noticeable 
decrease in monthly principal and interest payments on first-
lien mortgages for many borrowers, but as shown earlier, they 
generally resulted in minimal changes in principal 
balances.\149\
---------------------------------------------------------------------------
    \149\ Id.
---------------------------------------------------------------------------

  FIGURE 18: MONTHLY PRINCIPAL & INTEREST PAYMENT PRE- AND POST-HAMP 
                          MODIFICATIONS \150\

      
---------------------------------------------------------------------------
    \150\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.013
    
    Overall, HAMP modifications succeed at making homeownership 
more affordable by reducing payments. But the Panel has 
concerns as to whether the modifications make homeownership 
sufficiently affordable to avoid foreclosure, given borrowers' 
broader circumstances. As noted previously, the program payment 
target of 31 percent DTI, without considering the existence of 
junior liens, leaves borrowers still paying a significant 
percentage of their income for housing. This is particularly 
problematic because most HAMP modification recipients are 
underwater. They are thus paying for the consumption value of 
housing and what amounts to a currently out-of-the-money put 
option on the house.\151\
---------------------------------------------------------------------------
    \151\ Id.
---------------------------------------------------------------------------
    This points to the problem with the lack of principal 
forgiveness in HAMP up to this point. Lack of principal 
forgiveness means that homeowners will continue to be 
underwater. It also means that more of each payment will be 
going to interest, rather than paying down principal, and it 
may mean that some borrowers have to pay for a longer period of 
time. All of these factors increase the redefault risk on 
modified mortgages, and to the extent that a permanent 
modification is not sustainable, it merely delays a foreclosure 
and the stabilization of the housing market.
    HAMP's original emphasis on interest rate reduction, rather 
than principal reduction, benefits lenders and servicers at the 
expense of homeowners. Lenders benefit from avoiding having to 
write down assets on their balance sheets and from special 
regulatory capital adequacy treatment for HAMP modifications. 
Mortgage servicers benefit because a reduction in monthly 
payments due to an interest rate reduction reduces the 
servicers' income far less than an equivalent reduction in 
monthly payment due to a principal reduction. Servicers are 
thus far keener to reduce interest rates than principal. The 
structure of HAMP modifications favors lenders and servicers, 
but it comes at the expense of a higher redefault risk for the 
modifications, a risk that is borne first and foremost by the 
homeowner but is also felt by taxpayers funding HAMP.
            b. Impact of Loan Ownership on Modifications
    Data from the OCC/OTS Mortgage Metrics Report indicate that 
ownership of loans affects the features of modifications done 
outside of HAMP. There are important variations in pre-
modification characteristics depending on loan ownership--
Fannie Mae securitized pools, Freddie Mac securitized pools, 
private-label securitized pools, and loans held directly by 
financial institutions. Portfolio loans accounted for 43 
percent of the modifications despite being a smaller share of 
all loans. Private-label securitized loans accounted for 
another 31 percent of all modifications, again a percentage 
disproportionately large to market share. Yet on the OCC/OTS 
data from the first three quarters of 2009, 90 percent of 
principal forgiveness modifications were on loans held directly 
in financial institutions' portfolios, rather than securitized, 
while 70 percent of principal forbearance modifications were 
done on private-label securitized loans, with the rest being 
almost entirely portfolio loans.\152\ (See Figure 19, below.)
---------------------------------------------------------------------------
    \152\ See, e.g., Office of the Comptroller of the Currency and 
Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report 
(First Quarter 2009), at 23 (June 2009) (online at files.ots.treas.gov/
4820471.pdf) (hereinafter ``OCC and OTS Mortgage Metrics Report--Q1 
2009''); Office of the Comptroller of the Currency and Office of Thrift 
Supervision, OCC and OTS Mortgage Metrics Report (Second Quarter 2009), 
at 25 (Sept. 2009) (online at files.ots.treas.gov/482078.pdf) 
(hereinafter ``OCC and OTS Mortgage Metrics Report--Q2 2009''); Office 
of the Comptroller of the Currency and Office of Thrift Supervision, 
OCC and OTS Mortgage Metrics Report (Third Quarter 2009), at 25 (Dec. 
2009) (online at files.ots.treas.gov/482114.pdf) (hereinafter ``OCC and 
OTS Mortgage Metrics Report--Q3 2009''). The OCC/OTS data do not 
generally include HAMP modifications because very few were permanent in 
the first three quarters of 2009.
---------------------------------------------------------------------------

          FIGURE 19: MODIFICATION TYPE BY LOAN OWNERSHIP \153\

      
---------------------------------------------------------------------------
    \153\ OCC and OTS Mortgage Metrics Report--Q3 2009, supra note 152, 
at 23-25. The OCC/OTS data do not generally include HAMP modifications 
because very few were permanent in the first three quarters of 2009.
[GRAPHIC] [TIFF OMITTED] T5737A.014

    The OCC/OTS data indicate that securitization status 
affects the type of modification: securitized loans are more 
likely to have principal forborne rather than forgiven relative 
to portfolio loans. This is likely a function of servicer 
incentives. A servicer of a securitized loan is compensated 
primarily based on the principal balance outstanding. 
Therefore, the servicer has an incentive to forbear rather than 
forgive principal. Forbearing actually increases the servicer's 
income, while forgiveness decreases it. For loans held in 
portfolio, the concern is simply maximizing the value of the 
loan itself.
    By and large, among modifications that have been approved, 
ownership of loans does not appear to affect HAMP 
modifications. There are notable variations in pre-modification 
characteristics depending on loan ownership. Yet, with two 
exceptions, these variations in pre-modification 
characteristics do not seem to have a noticeable effect on the 
modification process or on loans' post-modification 
characteristics.
    The first exception is that the median time for conversion 
from trial to permanent modification is about a month shorter 
for loans held in portfolio than for any type of securitized 
loans.\154\ Mean conversion times, however, are roughly 
comparable.\155\ This would indicate that while some portfolio 
loans are taking a significant time to convert, most of them 
are converting much more quickly than securitized loans. The 
quicker conversion of portfolio loans presents an opportunity 
to learn about factors affecting conversion speed and thus for 
improving HAMP.\156\ The Panel, therefore, urges Treasury to 
investigate this variation in conversion speed in more depth.
---------------------------------------------------------------------------
    \154\ The median Fannie Mae and Freddie Mac loan takes 122 days to 
convert to permanent status, while the median private-label securitized 
loan takes 120 days. Treasury mortgage market data provided to Panel 
staff (Mar. 23, 2010). The median portfolio loan takes only 92 days to 
convert. Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
    \155\ Mean conversion times are 132 days for Fannie Mae, 128 days 
for Freddie Mac, 133 days for private-label securitized loans, and 132 
days for portfolio loans. Treasury mortgage market data provided to 
Panel staff (Mar. 23, 2010).
    \156\ This may be a function of financial institutions simply being 
able to manage processes and make decisions with loans in their 
portfolios more quickly.
---------------------------------------------------------------------------
    The other noticeable difference is that servicers are 
constrained in their ability to extend the term of private-
label securitized loans. The mean term extension on private-
label securitized permanent modifications is five months, 
whereas the mean term extension for Fannie Mae, Freddie Mac, 
and portfolio loan modifications is between 44 and 48 
months.\157\ This is likely a function of contractual 
restrictions on private-label servicers in the pooling and 
servicing agreements (PSAs) governing the servicing of the 
securitized mortgages. Virtually all PSAs restrict servicers' 
ability to extend the term of a mortgage beyond the final 
maturity date of any other loan in the pool.\158\ As most 
mortgages in a pool are originated within a year of each other, 
this means that private-label securitized loans have little 
flexibility in terms of term extension. Thus, as Figure 20 
shows, private-label securitized loans represented a 
substantially smaller percentage of permanent modifications 
with term extensions than they do of total permanent 
modifications.
---------------------------------------------------------------------------
    \157\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
    \158\ Levitin & Twomey, supra note 78.
---------------------------------------------------------------------------

   FIGURE 20: TERM EXTENSION BY LOAN OWNERSHIP COMPARED WITH OVERALL 
                    DISTRIBUTION OF LOAN OWNERSHIP 

[GRAPHIC] [TIFF OMITTED] T5737A.015

    Limitations on the ability to extend maturity dates do not 
appear to affect the ability of servicers to reduce DTI to 31 
percent; even when maturity dates cannot be extended, 
amortization periods often can be. Curiously, however, mean and 
median amortization terms on private-label securitized loans 
dropped for permanent modifications, whereas medians were 
largely flat and means increased substantially for other types 
of loans. This movement, however, likely reflects variations in 
pre-modification loan characteristics as private-label 
securitized loans had, on average, substantially longer 
amortization periods pre-modification, likely reflecting the 
inclusion of so-called 30/40 loans, with 30-year terms and 40-
year amortization periods.\159\
---------------------------------------------------------------------------
    \159\ See OCC and OTS Mortgage Metrics Report--Q3 2009, supra note 
152, at 24.
---------------------------------------------------------------------------
    If amortization extensions are compensating for lack of 
term extensions in private-label securitized loans, it raises 
the concern that these loans are being restructured to have 
balloon payments at the end. An important lesson of the housing 
market crash of the Depression, recognized by the 1931 
President's Conference on Home Building and Home Ownership, was 
that balloon loans pose inherent default risks because of the 
sizable backloaded payment.\160\ To the extent that HAMP 
encourages forbearance or amortizations longer than terms, it 
increases the default risk on the modified loans.
---------------------------------------------------------------------------
    \160\ Home Finance and Taxation, President's Conference on Home 
Building and Home Ownership, at 7 (James M. Gries & James Ford eds., 
1932).
---------------------------------------------------------------------------
            c. HAMP Modification Application Denials and Trial 
                    Modification Cancellations
    Starting in February 2010, servicers began to report the 
reason why HAMP trial modifications were denied or cancelled; 
however, the data have not been reported consistently. Treasury 
indicates that fallout reasons are reported only for 31 percent 
of disqualified or cancelled modifications, and some reported 
data appear to be erroneous, such as ``trial plan default'' 
being reported as a reason for a modification application being 
denied, when a default can only occur once a trial modification 
has commenced. There is also particularly thin data on 
modification denials. Denial reasons were reported for only 
4,900 modification applications as opposed to 83,763 cancelled 
trial modifications.\161\
---------------------------------------------------------------------------
    \161\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------
    The leading denial reason, accounting for 61 percent of 
denials, is ``trial plan default,'' a clearly erroneous 
designation for a denial code, because a borrower can only 
default once a trial has started; these borrowers were not in a 
trial modification. Another 19 percent of applications were 
denied because the property was not owner occupied at the time 
of origination, and 9 percent because the loan was already paid 
off or the default cured. No reason for denial was submitted 
for 10 percent of denials. This means that for 71 percent of 
denials, no valid reason was provided.\162\ (See Figure 21, 
below.)
---------------------------------------------------------------------------
    \162\ Id.
---------------------------------------------------------------------------
    Similarly, for modification cancellations, no reason was 
provided in 72 percent of the cases. In 11 percent of the 
cases, the borrower turned out to have a current DTI ratio of 
under 31 percent; in 7 percent of cancellations, the borrower 
failed to submit complete paperwork; in 4 percent of 
cancellations the borrower defaulted on the trial modification; 
in less than 3 percent of cancellations, the NPV calculation 
was negative.\163\ (See Figure 21, below.) The cancellations 
due to ineligible DTI or NPV outcomes are a function of some 
servicers doing stated-income trial modifications. For those 
servicers doing verified income trial modifications, the 
modifications would be denied, rather than initially approved 
and then subsequently cancelled.
---------------------------------------------------------------------------
    \163\ Id.
---------------------------------------------------------------------------
    Notably, the reported data do not indicate that borrowers 
were responsible for most trial modification failures. Payment 
defaults, failure to submit paperwork, and borrower refusal of 
modification offers accounted for 12 percent of trial 
modification cancellations. HAMP program parameters--mortgage 
type eligibility, property type requirements, occupancy 
requirements, DTI requirements, NPV requirements, and excessive 
forbearance--accounted for 16 percent of trial modification 
cancellations.\164\  (See Figure 22, below.)
---------------------------------------------------------------------------
    \164\ Id.
---------------------------------------------------------------------------
    The Panel is deeply concerned about the unacceptable 
quality of the denial and cancellation reasons and strongly 
urges Treasury to take swift action to ensure that homeowners 
are not denied the opportunity for a modification and shuffled 
off to foreclosure without a servicer at least accounting for 
why the modification was denied or cancelled. If a HAMP 
participating servicer operating under a contract with the 
federal government cannot provide a valid reason for a trial 
modification denial, the servicer should be subject to 
meaningful monetary penalties for noncompliance and the 
foreclosure stayed until an independent analysis of the 
application or trial can be performed, with the servicer paying 
the cost of that independent evaluation necessitated by its 
noncompliance. It is not enough that a servicer is not paid 
when a modification fails to convert to permanent modification 
status. If a servicer fails to comply with program 
requirements, it should be subject to meaningful penalties. 
Collection and analysis of HAMP denial and cancellation data is 
critical for both ensuring the program's fairness and improving 
the program.

  FIGURE 21: TOP FIVE HAMP CANCELLATION AND DISQUALIFICATION REASONS 
                                 \165\

      
---------------------------------------------------------------------------
    \165\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.016
    

   FIGURE 22: ALL HAMP CANCELLATION AND DISQUALIFICATION REASONS \166\
------------------------------------------------------------------------
                                        Cancelled         Disqualified
------------------------------------------------------------------------
Default not imminent..............                  5                  0
Excessive forbearance.............                885                  0
Ineligible borrower, current DTI                9,590                  1
 less than 31%....................
Ineligible mortgage...............                554                  0
Investor guarantor not                             18                  0
 participating....................
Loan paid off or reinstated.......                 14                422
Negative NPV......................              2,228                  4
Offer not accepted by borrower,                   707                  2
 request withdrawn................
Other ineligible property (i.e.,                   16                 34
 property condemned, property
 greater than 4 units)............
Previous permanent HAMP                             2                  0
 modification.....................
Property not owner occupied.......                 91                952
Request incomplete................              5,983                  1
Trial plan default................              3,338              2,986
Unknown (no ADE submitted)........             60,332                498
------------------------------------------------------------------------
\166\ Id.

            d. Conversion Rates
    In its previous foreclosure report in October 2009, the 
Panel underscored serious concern about the low rate at which 
trial modifications were converting to permanent modification 
status. The Panel emphasized that the volume of sustainable, 
permanent modifications was the metric by which HAMP should be 
evaluated, not the volume of temporary trial modifications or 
permanent, but unsustainable modifications.\167\
---------------------------------------------------------------------------
    \167\ October Oversight Report, supra note 17, at 93.
---------------------------------------------------------------------------
    HAMP trial-to-permanent modification conversion rates have 
improved drastically since the October 2009 report and have 
been higher for more recent vintages of trial modifications 
(see Figure 23 below), but they are still far too low for the 
program to help a significant number of homeowners, much less 
stabilize the housing market. In October 2009, the conversion 
rate was 1.26 percent.\168\ As of the beginning of April, the 
rate stood at 23.13 percent. Although the improvement is 
dramatic, less than one in four trial modifications has 
converted to permanent modification status after the requisite 
three-month trial period. Moreover, it has taken substantially 
longer than three months for most of the conversions to occur. 
Conversions, when they have occurred, have taken 4.36 months on 
average. Only 9.7 percent of eligible trial modifications 
converted to permanent modifications after three months. The 
reasons for delayed conversion are unclear to the Panel.\169\ 
(See Figure 23, below.)
---------------------------------------------------------------------------
    \168\ Id., at 48.
    \169\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------

 FIGURE 23: CUMULATIVE CONVERSION RATE BY VINTAGE BY MONTHS FROM TRIAL 
             COMMENCEMENT (HMP 1 AND HMP 2 COMBINED) \170\

      
---------------------------------------------------------------------------
    \170\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.017
    
     FIGURE 24: CUMULATIVE PERCENTAGE OF CONVERSION-ELIGIBLE TRIAL 
  MODIFICATIONS CONVERTED TO PERMANENT MODIFICATION STATUS BY MONTHS 
                     POST-TRIAL COMMENCEMENT \171\

      
---------------------------------------------------------------------------
    \171\ Id. 
    [GRAPHIC] [TIFF OMITTED] T5737A.018
    
    There is a notable difference in conversion rates between 
the HMP 2 program for loans that are current, but where default 
is imminent, and the HMP 1 program for loans that are 60+ days 
delinquent.\172\ HMP 2 modifications have had substantially 
better conversion rates than HMP 1 modifications. (See Figure 
24, above.) HMP 2 modifications also converted more quickly 
than HMP 1 modifications. The average HMP 2 modification took 
3.86 months to convert, whereas the average HMP 1 modification 
took 4.49 months to convert.\173\ This suggests that early 
intervention, before a borrower is seriously delinquent, is 
more likely to be successful in terms of conversion.
---------------------------------------------------------------------------
    \172\ To date, there have been 842,022 HMP 1 modifications 
commenced, of which 611,862 are eligible for conversion to permanent 
status. For HMP 2, there have been 252,042 modifications commenced, of 
which 124,128 have become eligible for conversion to permanent status.
    \173\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------
    The Panel is hopeful that Treasury will continue to improve 
HAMP conversion rates but emphasizes that unless conversion 
rates continue to rise dramatically, the total number of 
borrowers assisted by HAMP will be low--in the hundreds of 
thousands, not millions. At the current conversion rate, the 
835,194 active trial modifications as of the end of February 
2010 will yield only 193,431 permanent modifications.\174\ This 
would mean that in the course of its first year, HAMP would 
have commenced trial modifications that would yield a total of 
363,638 permanent modifications. If conversion rates were at 
100 percent, HAMP would only have commenced trial modifications 
yielding around 1 million permanent modifications.
---------------------------------------------------------------------------
    \174\ Id.
---------------------------------------------------------------------------
            e. Use of Stated vs. Verified Income
    The 22 largest servicers participating in HAMP can be 
divided into two groups. Twelve servicers currently ask 
borrowers to state their incomes at the start of a trial 
modification. This group includes the nation's four largest 
mortgage servicers--Bank of America, JPMorgan Chase, Wells 
Fargo, and CitiMortgage. The other servicers in the stated-
income group are Aurora Loan Services, Bayview Loan Servicing, 
Green Tree Servicing, Nationstar Mortgage, OneWest Bank, Saxon 
Mortgage Services, Select Portfolio Servicing, and Wachovia 
Mortgage, which is owned by Wells Fargo. The 10 remaining large 
servicers that participate in HAMP verify borrowers' income 
prior to the start of a trial modification. The servicers in 
this group are: American Home Mortgage Servicing, Bank United, 
Carrington Mortgage Servicing, CCO Mortgage, GMAC Mortgage, 
HomEq Servicing, Litton Loan Servicing, Ocwen Financial Corp., 
PNC Bank, and U.S. Bank.\175\
---------------------------------------------------------------------------
    \175\ Id.
---------------------------------------------------------------------------
    Using data through February 2010, the Panel compared the 
performance of servicers that use stated income with that of 
servicers that use verified income. Unsurprisingly, the data 
show that stated-income servicers have been enrolling a larger 
percentage of eligible borrowers in trial modifications, but 
they have also been converting a smaller percentage of those 
trial modifications into permanent modifications. In aggregate, 
the stated-income servicers have enrolled 35 percent of 
eligible borrowers in trial modifications, compared with 24.3 
percent for the verified-income servicers. But, the stated-
income servicers have only converted 12.6 percent of those 
trial modifications into permanent modifications, while the 
verified-income servicers have converted 28.0 percent.\176\ 
These data suggest that Treasury's decision to begin requiring 
all participating servicers to verify borrowers' income upfront 
will result in fewer trial modifications but a higher 
conversion rate.
---------------------------------------------------------------------------
    \176\ These conversion rates were calculated using total active 
modifications, rather than active modifications that are currently 
eligible for conversion because the Panel did not receive the latter 
data for each servicer. Conversion rates that are calculated using only 
active modifications that are eligible for conversion will be higher 
than the rates shown here. MHA Servicer Performance Through February 
2010, supra note 110, at 7; Treasury mortgage market data provided to 
Panel staff (Mar. 23, 2010).
---------------------------------------------------------------------------
    Looking at the data on a servicer-by-servicer basis, 
however, reveals a picture that is significantly more 
complicated than the aggregate data might indicate. Servicers 
that are lagging behind the rest of their respective groups 
include Bank of America, which collects stated income, and 
American Home Mortgage Servicing, which verifies income. 
Servicers that are significantly outpacing their respective 
groups include Select Mortgage Servicing, a stated-income 
servicer, and GMAC Mortgage, a verified-income servicer.\177\ 
So while in aggregate there appears to be a correlation between 
how servicers collect income and their performance results, 
other factors that vary by servicer also appear to be having a 
large effect, a matter Treasury should investigate.
---------------------------------------------------------------------------
    \177\ MHA Servicer Performance Through February 2010, supra note 
110, at 7; Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------
            f. Redefaults
    Treasury has stated that its estimate for HAMP permanent 
modification redefaults is 40 percent within the five 
years,\178\ and the Panel has previously expressed concern that 
the redefault rate could be significantly higher, if 
adjustments for actual market conditions are made to Treasury's 
models.\179\
---------------------------------------------------------------------------
    \178\ Congressional Oversight Panel, Questions for the Record for 
U.S. Department of the Treasury Assistant Secretary Herbert M. Allison, 
Jr., at 3 (Oct. 22, 2009) (online at cop.senate.gov/documents/
testimony-102209-allison-qfr.pdf) (hereinafter ``Assistant Secretary 
Herbert Allison QFRs'').
    \179\ See October Oversight Report, supra note 17, at 93.
---------------------------------------------------------------------------
    It is generally too early to draw firm conclusions about 
the performance of HAMP permanent modifications. The initial 
signs are not encouraging, however. Overall, for permanent 
modifications for which there is full information,\180\ 16.85 
percent of HAMP modifications were 30-59 days delinquent, 5.94 
percent were 60-89 days delinquent, and 1.3 percent were 90+ 
days delinquent. (See Figure 25, below.) Additionally 1,473 
permanent modified mortgages, or 0.8 percent of permanent 
modifications were foreclosed. These rates reflect only a few 
months of loan performance; they are not annual rates.\181\
---------------------------------------------------------------------------
    \180\ Treasury provided the Panel with data as of March 1, 2010. 
Because some permanent modifications are commenced mid-month, there is 
only full data on delinquency rates starting a month beyond the 
delinquency period. Thus, 30-day delinquency rates are for 
modifications commenced through January 2010, 60-day rates are through 
December 2009, and 90+ day rates are through November 2009.
    \181\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------

 FIGURE 25: REDEFAULT RATES BY VINTAGE OF PERMANENT MODIFICATIONS \182\

      
---------------------------------------------------------------------------
    \182\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.019
    
    Because servicers do not follow uniform foreclosure 
timelines in handling defaulted loans, the foreclosure rate is 
not the best measure of HAMP permanent modifications' 
performance at present. Instead, 90+ days delinquency combined 
with foreclosure is the most uniform metric available.\183\ 
This measure covers all seriously delinquent loans. There are 
only data available on this level of delinquency for 
modifications commenced before December 2009; modifications 
commenced in December 2009 or later have not yet had three 
payments come due.
---------------------------------------------------------------------------
    \183\ Id.
---------------------------------------------------------------------------
    There were 31,164 modifications commenced before December 
2009. All but 20 were commenced in the four months between 
August and November 2009. Of these, 1,715 were 90+ days 
delinquent or foreclosed as of March 1, 2010.\184\ This means 
the combined serious delinquency and foreclosure rate is 5.5 
percent for a third of a year. Annualized on a straight-line 
basis, this translates to a 16.5-percent serious delinquency 
and foreclosure rate.
---------------------------------------------------------------------------
    \184\ Id.
---------------------------------------------------------------------------
    If the trend is projected over five years, this translates 
to a high cumulative serious delinquency and foreclosure rate. 
This projection, however, assumes that redefault rates will 
remain constant over time. There is no experience yet to show 
whether that assumption is too pessimistic or optimistic. There 
are factors that could potentially weigh in either direction. 
For example, if unemployment lessens or the real estate market 
recovers or there is significant inflation, redefault rates 
will likely decline. Moreover, it is possible that the 
redefaults will be front-loaded and taper off as the weakest 
cases redefault quickly, leaving sounder borrowers remaining.
    On the other hand, there are factors that suggest the 
straight-line projection is reasonable or even overly 
optimistic. The recovery in employment rates and rise in real 
estate values are likely to be measured in years, not months, 
which means that help may not come until after the home is 
lost. Indeed, unemployment may continue to rise and real estate 
values may continue to fall, either of which would increase the 
odds of redefault. As strategic defaults increase, social 
inhibitions against walking away from underwater properties may 
lessen, thereby increasing the rate of redefaults. While weaker 
borrowers might be more likely to redefault quickly, a 
redefault rate of one in 20 within just the first three months 
of modifications converting to permanent modification status is 
particularly worrisome because these families have just passed 
a financial screening and have not had time for other things to 
go wrong. Moreover, beyond a five-year horizon, the very 
structure of HAMP modifications might lead to increased 
redefaults, as the fixed low-interest rate will start to 
increase, whereas borrowers' income and other expenses will not 
necessarily keep step.\185\
---------------------------------------------------------------------------
    \185\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------
    There is still too little data to draw firm conclusions 
about redefault rates on HAMP permanent modifications, but the 
existing data are worrisome. When the total picture of HAMP is 
taken into account, low conversion rates plus potentially high 
redefault rates mean that the total number of sustainable, 
permanent modifications generated by HAMP will be quite 
limited. Even if Treasury's estimates for conversion and 
redefault rates--75 percent and 40 percent, respectively--are 
accurate, and HAMP met Treasury's goal of making trial offers 
to 4 million borrowers, the program would only result in 1.2 
million sustainable permanent modifications.

               E. Foreclosure Mitigation Program Success


1. Treasury's Definition of ``Success'' and Program Goals

    The MHA program's chief objective is to ``help borrowers 
avoid foreclosure by modifying troubled loans to achieve a 
payment the borrower can afford.'' \186\ Treasury estimates 
that HARP may reach up to four to five million eligible 
homeowners for loan refinancing.\187\ Its goal for HAMP is to 
offer three to four million home owners lower mortgage payments 
through modifications through 2012.\188\
---------------------------------------------------------------------------
    \186\ U.S. Department of the Treasury, Borrower Frequently Asked 
Questions_What is ``Making Home Affordable'' all about? (July 16, 2009) 
(online at www.financialstability.gov/docs/borrower_qa.pdf).
    \187\ MHA Detailed Program Description, supra note 47.
    \188\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through January 2010, at 2 (Feb. 
18, 2010) (online at www.financialstability.gov/docs/press/
January%20Report%20FINAL%2002%2016%2010.pdf) (hereinafter ``MHA 
Servicer Performance Through January 2010'').
---------------------------------------------------------------------------
    While the targeted number is clear, the meaning of the 
target itself has shifted over time. Treasury was initially 
elusive in stating whether the goal was three to four million 
permanent modifications (a substantial impact), three to four 
million trial modifications (a short-term solution), or three 
to four million trial modification offers (a relatively 
meaningless measure of program effectiveness, as a modification 
offer alone does nothing to prevent a foreclosure or promote 
affordability unless a trial commences). As noted earlier in 
Section C, the modification is for only a five-year period and 
not effectively a permanent modification over the entire life 
of the loan.
    In his speech announcing the Making Home Affordable 
program, President Obama noted that the plan ``will help 
between seven and nine million families restructure or 
refinance their mortgages so they can . . . avoid 
foreclosure,'' and of this amount ``as many as three to four 
million homeowners [will be able] to modify the terms of their 
mortgages to avoid foreclosure.'' \189\ On the same day as 
President Obama's speech, HUD Secretary Shaun Donovan also 
stated that ``this modification plan does a number of things to 
make sure that up to 3 to 4 million families can stay in their 
homes and have affordable mortgages.'' \190\ Thus, it can 
reasonably be inferred from these initial statements of the 
program's scope that the goal was to not just offer the 
potential for a mortgage modification but actually ensure that 
three to four million families remained in their homes through 
permanent modifications. In the latter half of the program's 
first year, however, Treasury finally clarified (or changed) 
the definition of its target as ``allow[ing] 3 to 4 million 
families the chance to stay in their homes'' \191\ and began 
including the more defined target in its MHA Monthly Program 
Reports. Indeed, Treasury acknowledged the confusion around its 
target and the lack of precision in its own statements in a 
response to the most recent SIGTARP report.\192\
---------------------------------------------------------------------------
    \189\ The remaining four to five million were estimated to be 
helped through HARP. White House, Remarks by the President on the Home 
Mortgage Crisis (Feb. 18, 2009) (online at www.whitehouse.gov/the-
press-office/remarks-president-mortgage-crisis).
    \190\ White House, Press Briefing (Feb. 18, 2009) (online at 
www.whitehouse.gov/the-press-office/press-briefing-with-treasury-
secretary-geithner-hud-secretary-donovan-and-fdic-chai) (hereinafter 
``White House Press Briefing'').
    \191\ Congressional Oversight Panel, Testimony of Timothy F. 
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP 
Hearing with Treasury Secretary Timothy Geithner, at 47-48 (Sept. 10, 
2009) (hereinafter ``September COP Hearing Transcript'') (publication 
forthcoming).
    \192\ Factors Affecting Implementation of HAMP, supra note 25.
---------------------------------------------------------------------------
    Seth Wheeler, Treasury senior advisor, testified before the 
Panel that the trial modification goal would mean a run rate of 
20,000 to 25,000 trial modification starts per week.\193\ 
Treasury's use of trial modification starts per week as a 
benchmark goal discounts the importance of a trial 
modification's conversion to a permanent modification. Treasury 
and HUD recognize the importance of permanent mortgage 
modifications in ensuring long-term foreclosure prevention, as 
they announced a joint Mortgage Modification Conversion Drive 
in November 2009 to provide further assistance to homeowners 
navigating the paperwork required for conversion. At the time, 
Treasury noted that 375,000 of the borrowers in trial 
modification were scheduled to convert by year-end, but 
permanent modifications remained at a mere 66,465 through 
December 2009.\194\
---------------------------------------------------------------------------
    \193\ Congressional Oversight Panel, Written Testimony of Seth 
Wheeler, senior advisor, U.S. Department of the Treasury, Philadelphia 
Field Hearing on Mortgage Foreclosures, at 3 (Sept. 24, 2009) (online 
at cop.senate.gov/documents/testimony-092409-wheeler.pdf) (hereinafter 
``Testimony of Seth Wheeler'').
    \194\ Administration Kicks Off Modification Drive, supra note 13; 
U.S. Department of the Treasury, Making Home Affordable Program: 
Servicer Performance Report Through December 2009, at 3 (Jan. 19, 2010) 
(online at financialstability.gov/docs/report.pdf) (hereinafter ``MHA 
Servicer Performance Through December 2009'').
---------------------------------------------------------------------------
    As of the MHA Program update through February 2010, the 
number of active HAMP modifications is 835,194, with 168,708 of 
these being permanent modifications, more than double the 
December 2009 number but still below the conversion drive 
target.\195\ In a recent interview, Secretary Geithner was 
asked explicitly if he considered the number of permanent 
modifications as of December 2009 to be a mark of program 
success, to which he avoided a clear answer and merely 
indicated the importance of noting the ``substantial cash flow 
relief [being provided to] . . . more than three quarters of a 
million Americans.'' \196\ Three quarters of a million 
Americans on a primarily trial basis, that is.
---------------------------------------------------------------------------
    \195\ Treasury mortgage market data provided to Panel staff (Mar. 
23, 2010).
    \196\ This Week with Jake Tapper (ABC News television broadcast 
Feb. 7, 2010) (online at abcnews.go.com/ThisWeek/week-transcript-
treasury-secretary-timothy-geithner/story?id=9758951).
---------------------------------------------------------------------------
    HAMP is providing many homeowners with cash flow relief, 
but if that relief is only temporary, then the potential for 
continued foreclosures remains high. Also, temporary 
modifications that fail to convert prevent homeowners from 
using the time to prepare themselves legally and financially 
for foreclosure, and they then owe the difference between the 
original payment amount and the reduced trial payment amount 
for their time in a trial modification.\197\ The low conversion 
rates have been driven by misstated owner-occupied status and 
income, as borrowers may have overstated or understated income 
depending on their motives, and servicers were not required to 
obtain documentation until the permanent modification stage. 
Further, some borrowers may be deciding that foreclosure or 
other alternatives are better options than the permanent 
modification.
---------------------------------------------------------------------------
    \197\ Factors Affecting Implementation of HAMP, supra note 25, at 
15 fn 13.
---------------------------------------------------------------------------
    The Panel is also concerned with Treasury's presentation of 
MHA performance data. Previously, the performance data listed 
``permanent modifications;'' however, Treasury's recent reports 
have combined ``permanent modifications'' with ``pending 
permanent modifications'' in the calculation or presentation of 
some data. Pending modifications should not be counted as if 
they are already permanent. If, as Treasury suggests, virtually 
all of the pending modifications will convert, then they should 
be reflected as ``permanent modifications'' only when the 
expected conversion occurs. If Treasury wishes to note the 
number of ``pending permanent modifications,'' it should do so 
in a separate entry and not combine them with fully converted 
modifications, including in the calculation of related numbers, 
such as conversion rates. Similarly, Treasury should be more 
explicit in its presentation of ``permanent modifications 
cancelled.'' The reports should explicitly state the number of 
modifications that have redefaulted and the number that have 
been paid off, rather than combining the two.

2. Ineligible Borrowers--What about the remaining delinquent loans?

    In its most recent HAMP update report, Treasury noted that 
not all 60+ days delinquent loans qualify for modification 
under HAMP.\198\ This raises the question of how a borrower 
becomes HAMP-eligible. To apply for a HAMP mortgage 
modification, a borrower must meet the following 
characteristics: be the owner-occupant of a one- to four-unit 
house, have an unpaid principal balance that is equal to or 
less than $729,750,\199\ have a first-lien mortgage originated 
on or before January 1, 2009, have a monthly mortgage payment 
greater than 31 percent of monthly gross (pre-tax) income, and 
be able to document that the monthly mortgage payment lacks 
affordability due to financial hardship.\200\ The loan also has 
to be delinquent, or default must be reasonably 
foreseeable.\201\
---------------------------------------------------------------------------
    \198\ MHA Servicer Performance Through February 2010, supra note 
110, at 5.
    \199\ This unpaid principal balance relates to a one unit house. 
The balance limit increases with each additional unit. A two unit, 
three unit, and four unit house must have unpaid principal balances no 
more than $934,200; $1,129,250; and $1,403,400, respectively. 
Introduction of HAMP, supra note 21, at 3.
    \200\ U.S. Department of the Treasury, Making Home Affordable 
Program, Borrower Frequently Asked Questions (Mar. 9, 2010) (online at 
www.makinghomeaffordable.gov/borrower-faqs.html#19).
    \201\ Introduction of HAMP, supra note 21, at 2.
---------------------------------------------------------------------------
    In recent testimony before the House Committee on Oversight 
and Government Reform's Domestic Policy Subcommittee, Phyllis 
R. Caldwell, chief of Treasury's Homeownership Preservation 
Office, noted that HAMP provides homeowners with the 
opportunity to stay in their homes and aids in community 
stability. In addressing those who do not meet HAMP 
eligibility, she stated:

          However, it will not reach the many borrowers who do 
        not meet the eligibility criteria and was not designed 
        to help every struggling homeowner. We unfortunately 
        should expect millions of foreclosures that HAMP cannot 
        prevent due to long-term unemployment, jumbo mortgages, 
        and other factors, as President Obama made clear when 
        he announced the program last February.\202\
---------------------------------------------------------------------------
    \202\ Testimony of Phyllis Caldwell, supra note 14, at 6.

    As noted in Figure 26, below, Treasury's internal estimates 
reveal that of the 6.0 million borrowers who are currently 60+ 
days delinquent, only 1.8 million, or 30 percent of those in 
delinquency, are even eligible for HAMP.\203\ The exclusions 
from HAMP participation are also noted in Figure 26. FHA and 
Veterans Affairs (VA) loans are excluded, as they have separate 
programs aimed at providing modification options to 
borrowers.\204\ The non-owner occupied home loan and vacant 
properties exclusions ensure that speculators or house flippers 
do not benefit from poor investing decisions.\205\ Jumbo loans 
are excluded to prevent benefits going to wealthy homeowners, 
those who have enough home equity to refinance, or those who 
irresponsibly purchased more house than they could afford.\206\ 
The exclusion of loans originated after January 1, 2009 is 
likely due to tighter underwriting standards in place at that 
time, and loans with negative NPV are excluded since servicers 
are not required to modify such loans.
---------------------------------------------------------------------------
    \203\ MHA Servicer Performance Through February 2010, supra note 
110.
    \204\ U.S. Department of the Treasury and U.S. Department of 
Housing and Urban Development, Press Release: HUD Secretary Donovan 
Announces New FHA-Making Home Affordable Loan Modification Guidelines 
(July 28, 2009) (online at www.makinghomeaffordable.gov/
pr_07302009.html); U.S. Department of Veterans Affairs, VA HAMP 
Frequently Asked Questions (Jan. 27, 2010) (online at 
www.homeloans.va.gov/docs/VA_HAMP_FAQ_for_Servicers.pdf).
    \205\ MHA Detailed Program Description, supra note 47, at 3.
    \206\ White House Press Briefing, supra note 190.

FIGURE 26: HAMP INELIGIBLE 60+ DAYS DELINQUENT LOANS AS OF FEBRUARY 2010
                                  \207\
------------------------------------------------------------------------

------------------------------------------------------------------------
First lien, 60+ days delinquent loans..................       6,000,000
    Less: Non-participating HAMP servicer loans........        (800,000)
    Less: FHA or VA loans..............................        (800,000)
    Less: Non-owner occupied at loan origination.......        (800,000)
                                                        ----------------
Total HAMP eligible 60+ days delinquent loans..........       3,600,000
    Less: Jumbo non-conforming loans and loans                 (200,000)
     originated after 1/1/2009.........................
    Less: DTI less than 31 percent.....................        (800,000)
    Less: Negative NPV.................................        (400,000)
    Less: Vacant properties and other exclusions.......        (400,000)
                                                        ----------------
Total estimated HAMP eligible 60+ days delinquent loans       1,800,000
------------------------------------------------------------------------

    The exclusions for non-participating HAMP servicers and 
homeowners with DTI less than 31 percent are more questionable. 
Currently, there are 800,000 homeowners with delinquent loans 
unable to modify their loans through HAMP because their 
servicers are not participating in the program.\208\ This 
number is nearly four times larger than the number of HAMP 
permanent modifications achieved to date. The voluntary nature 
of HAMP means that a large number of homeowners are unable to 
receive assistance because of the identity of their servicer. 
The identity of a borrower's servicer is completely out of the 
borrower's control; borrowers cannot select their servicer or 
bargain for the terms under which their loan is serviced. 
Treasury should encourage participation by all servicers or 
offer alternatives to borrowers with non-participating 
servicers.\209\ HAMP excludes borrowers whose pre-modification 
front-end DTI is below 31 percent as well as borrowers who 
cannot lower their DTI to 31 percent without decreasing their 
NPV to less than what it would be in foreclosure. From the pre-
modification perspective, DTI is assessed on a per loan basis; 
thus, if a borrower has multiple loans with DTI less than 31 
percent, the borrower is ineligible for HAMP, even though the 
total mortgage debt burden is greater than the 31 percent 
threshold.\210\ These two ``disqualifiers'' would allow for an 
additional 1.6 million eligible HAMP loans. If Treasury 
estimates that in its present state HAMP can assist a maximum 
of 1.8 million borrowers, then the basis for its current goal 
of three to four million trial modification offers becomes 
questionable.\211\ Doubt then emerges as to the attainability 
of Treasury's goal, as the scope of borrowers even eligible is 
roughly half of the target.
---------------------------------------------------------------------------
    \207\ MHA Servicer Performance Through February 2010, supra note 
110.
    \208\ MHA Servicer Performance Through February 2010, supra note 
110.
    \209\ For data on three mortgage modification programs established 
by servicers that chose not to participate in HAMP, see Annex V, infra.
    \210\ Testimony of Adam Levitin, supra note 83.
    \211\ MHA Detailed Program Description, supra note 47.
---------------------------------------------------------------------------

3. Best Estimates for Program Reach

    Treasury's stated target of offering 3 to 4 million trial 
modifications has spurred government agencies to formulate 
their own estimates for the number of homeowners who will 
actually receive permanent modifications and lasting assistance 
based on Treasury's estimates and their own assumptions. The 
Congressional Budget Office (CBO) and OMB have estimated that 
$22 billion and $49 billion, respectively, will be disbursed 
through HAMP to servicers for permanent modifications. CBO also 
estimates that each permanent modification will cost between 
$20,000 to $40,000. Thus, using CBO's estimate per permanent 
modification and both CBO's and OMB's total HAMP outlay 
estimates, the number of permanent modifications through HAMP 
will be approximately 550,000-1.1 million (CBO) and 1.22-2.45 
million (OMB).\212\ These estimates are less than the number of 
foreclosures in 2009 alone. With nearly two million foreclosure 
filings in 2008, 2.8 million in 2009, and the expectation for 
even more in 2010, the comparatively much smaller estimates for 
foreclosures prevented by HAMP becomes a central part of the 
discussion of HAMP's effectiveness.\213\
---------------------------------------------------------------------------
    \212\ Congressional Budget Office, Report on the Troubled Asset 
Relief Program--March 2010 (Mar. 2010) (online at www.cbo.gov/ftpdocs/
112xx/doc11227/03-17-TARP.pdf). Panel Staff calculation of $49 billion 
and $22 billion divided by 20,000 and 40,000.
    \213\ Factors Affecting Implementation of HAMP, supra note 25.
---------------------------------------------------------------------------
    SIGTARP reported that a Treasury official has estimated a 
total of 3 million trial modifications will be initiated and 
between 1.5 and 2 million will become permanent modifications. 
If there are 3 million trial modification starts, of which 50 
to 75 percent convert and 40 percent (trial and permanent) 
redefault, then potentially HAMP will produce only 900,000 to 
1.2 million permanent modifications, which is not even half of 
the number of foreclosures in 2009 alone. SIGTARP noted the 
importance of using Treasury's current 1.5 to 2 million 
permanent modification estimate as a basis for program 
effectiveness.\214\
---------------------------------------------------------------------------
    \214\ Id.
---------------------------------------------------------------------------
    The Panel has also made estimates. Treasury's own internal 
assumptions are that 50 to 66 percent of trial modifications 
will convert to permanent status and 40 percent of all 
modifications will redefault within five years.\215\ As stated 
above, using Treasury's own assumptions, as of February 2010 
the Panel's best estimate for foreclosures prevented by HAMP is 
approximately 900,000 to 1.2 million, or 15 to 20 percent of 
the total population of 60+ day delinquencies. Assuming the 
current roll rate of 23 percent holds and redefaults of 60 
percent--comparable to the levels seen in OCC/OTS statistics 
over five-year periods\216\--Treasury will prevent only 276,000 
foreclosures, or less than four percent of the total 60+ day 
delinquencies. The Panel is hopeful that the recently announced 
program expansions and initiatives will help expand MHA's 
reach. But as the array of estimates noted above on the number 
of permanent modifications likely to stem from HAMP shows, 
foreclosures prevented by HAMP will still likely be eclipsed by 
the number of actual foreclosures filed in any given year of 
the program's existence.
---------------------------------------------------------------------------
    \215\ Assistant Secretary Herbert Allison QFRs, supra note 178, at 
26.
    \216\ Sixty percent represents the redefault rate for all 
modifications by OCC/OTS institutions. Although the most robust 
historical data are available for this combined metric, the eventual 
redefault rate within HAMP could prove to be lower or higher than this 
general number. Many of the modifications in the OCC/OTS calculation 
did not reduce payments. Data included in the Q4 2009 OCC/OTS report 
indicate that payment decreases are correlated with lower redefault 
rates. For loans with payment reductions, the redefault rate was 38.6 
percent, with a redefault rate of 26 percent for loans with a payment 
decrease of ten percent or more. It should be noted, however, that 
these redefault rates only cover the first nine months of the loan 
modification. On the other hand, the OCC/OTS number may underestimate 
HAMP's eventual redefault rate, as the OCC/OTS calculation does not 
take into consideration sustained high unemployment and negative 
equity.
---------------------------------------------------------------------------

4. Short-term vs. Long-term Success 

    As mentioned above, Treasury's numerical targets focus on 
short-term results, which they are largely on track to achieve. 
However, short-term results do not necessarily guarantee long-
term mortgage foreclosure mitigation success. Just as the 
target for trial modifications initiated per week and trial 
modifications offered reflect short-term successes, redefaults 
and low rates of conversion to permanent modification reveal 
short-term failures. To gauge accurately the long-term success 
of its foreclosure mitigation programs, Treasury must assess 
all available metrics, both short- and long-term, ultimately 
ensuring that taxpayer dollars spent produce sustainable 
changes.
    As discussed in Section D, HAMP utilizes various cost 
sharing and incentive payments. The key factor in these payment 
streams and incentives is that the loan must convert from trial 
to permanent modification before funds are disbursed. Thus, 
trial modification offers that never reach active status and 
trial modifications that fail to convert to permanent status 
involve costs to only the borrower and lender--time and forgone 
original loan amounts in favor of preventing foreclosure. 
Redefaults, on the other hand, also involve direct costs to 
taxpayers, as TARP funds have already been expended once the 
modification has become permanent.
    Redefault risk is the possibility that a borrower will 
still default despite initial mortgage modification.\217\ 
Treasury has estimated the average initial redefault rate for 
HAMP-modified loans to be 40 percent and defines redefault as a 
loan being 90+ days past due at any point during the five-year 
life of the HAMP modification. Treasury utilized the 40 percent 
redefault estimate in its cost estimates for both trial and 
permanent modifications and for all five years of potential 
HAMP participation.\218\
---------------------------------------------------------------------------
    \217\ Federal Reserve Bank of Boston, Why Don't Lenders Renegotiate 
More Home Mortgages? Redefaults, Self-Cures, and Securitization, Public 
Policy Discussion Papers, No. 09-4, at 18 (July 6, 2009) (online at 
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf).
    \218\ Assistant Secretary Herbert Allison QFRs, supra note 178, at 
26.
---------------------------------------------------------------------------
    For non-HAMP mortgages serviced by national banks and 
federally regulated thrifts, the average redefault rates were 
36 percent, 45 percent, and 53 percent for redefault 
occurrences six months, nine months, and twelve months after 
modification, respectively.\219\ Treasury utilized a lower 
overall rate of 40 percent based on its belief that other 
modification programs did not result in payment reductions, 
whereas HAMP does.\220\ While Treasury has pushed servicers to 
increase the number of trial modifications offered in order to 
meet the stated targets of the program, these efforts do little 
good if few reach permanent modification status, and for those 
that do, the projected redefault rate is such that nearly half 
could end up exactly where they started--facing foreclosure. As 
a result of redefaults, the final cost-per-permanent 
modification will be much higher than actual dollars spent on 
those modifications, as the funds spent on redefaulted loans 
will need to be included in total cash outlay.
---------------------------------------------------------------------------
    \219\ The OCC and OTS report covers approximately 65 percent of all 
mortgages outstanding in the United States at the time of publication. 
HAMP modification data will be included in future OCC and OTS Mortgage 
Metric Reports. OCC and OTS Mortgage Metrics Report--Q4 2009, supra 
note 82, at 32.
    \220\ Assistant Secretary Herbert Allison QFRs, supra note 178, at 
26.
---------------------------------------------------------------------------
    As the HAMP results to date have shown, a sole focus on 
producing positive numbers for one metric hurts other data 
indicators of success. In the program's early stages, Treasury 
pushed for large numbers of trial modifications offered. While 
the trial offers and loans in trial modification jumped, the 
conversion rate suffered, as the bulk of time and energy was 
being spent on getting borrowers in the door but not on moving 
them to permanent status. Thus, in November 2009, Treasury and 
HUD kicked off a Mortgage Modification Conversion Drive aimed 
at improving the numbers for conversion from trial to permanent 
modification.\221\ As noted above, conversion rates have 
improved in recent months. The push for conversions, though, 
will likely impact redefault rates in the future. If servicers 
and lenders have focused on conversion of all trials instead of 
conversion of those best prepared for long-term modification, 
it is possible and likely that some borrowers in permanent 
modification still do not have loan terms that can allow them 
to remain current on their monthly payments.
---------------------------------------------------------------------------
    \221\ Administration Kicks Off Modification Drive, supra note 13.
---------------------------------------------------------------------------
    Treasury must ensure that its analysis of HAMP's 
effectiveness is not limited to one data point over another but 
incorporates an extensive analysis of all data--trial 
modifications, conversions, and redefaults. Short-term 
successes are only good when coupled with long-term sustainable 
results. Even if Treasury reaches its newly restated target of 
three to four million trial modifications offered, it will be 
for naught if conversion rates are not significant and 
redefault rates are too high, ultimately creating a foreclosure 
mitigation program that does not effectively mitigate 
foreclosures. Long-term success requires long-term changes to 
the mortgage burdens that homeowners in or near default 
currently face.

    F. How Disincentives for Servicers and Investors Undermine HAMP

    When borrowers lose their homes to foreclosure, they are 
not the only people who suffer. Neighbors see the values of 
their own homes decline. Local governments lose property tax 
revenue. And the investors who own these mortgages also take a 
large loss, in many cases equal to about half of their 
investment,\222\ because homes in foreclosure tend to sell for 
less money than would be generated either by a performing 
mortgage or from a pre-foreclosure sale.
---------------------------------------------------------------------------
    \222\ Board of Governors of the Federal Reserve System, Speech by 
Chairman Ben S. Bernanke at the Federal Reserve System Conference on 
Housing and Mortgage Markets: Housing, Mortgage Markets, and 
Foreclosures, Washington, D.C. (Dec. 4, 2008) (online at 
www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm).
---------------------------------------------------------------------------
    HAMP was explicitly designed to ensure that modified loans 
provide a larger return to investors than a foreclosure sale 
would. Servicers participating in the program run a test, known 
as the NPV test, that determines whether the modification is 
economically advantageous to the investors. If it is not, the 
servicer is not required to modify the loan.\223\ In addition 
to that test, HAMP provides various additional financial 
incentives to servicers and investors to provide loan 
modifications.\224\ In short, HAMP offers incentives to do what 
should already be in the investors' financial interests. So the 
following question arises: why is HAMP not resulting in more 
loan modifications? It appears that in many cases the program's 
incentive structure is not sufficient to overcome other 
disincentives that are affecting the decisions made by 
servicers and investors. This section of the report discusses 
how those disincentives may be undermining HAMP's 
effectiveness.
---------------------------------------------------------------------------
    \223\ HAMP Guidelines, supra note 106, at 5.
    \224\ Id., at 11-12.
---------------------------------------------------------------------------

1. Why Servicers may be Ambivalent about HAMP

    Since HAMP began, housing counselors and borrowers have 
recounted stories of servicers losing their paperwork, lacking 
adequate staff, failing to tell borrowers why they are being 
denied, and in some cases failing to follow the program's 
rules.\225\ Although this information is anecdotal, it has come 
with enough frequency and consistency to raise questions about 
whether servicers are fully committed to HAMP's success. As 
David Berenbaum, chief program officer of the National 
Community Reinvestment Corporation (NCRC), which provides 
housing counseling to at-risk borrowers, testified at a recent 
congressional hearing: ``NCRC counselors observe that the 
haphazard quality of loan modifications reflects financial 
institution ambivalence about the HAMP program.'' \226\
---------------------------------------------------------------------------
    \225\ See, e.g., 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); Congressional Oversight Panel, Written Testimony Deborah 
Goldberg, director, Hurricane Relief Project, National Fair Housing 
Alliance, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 
24, 2009) (online at cop.senate.gov/documents/testimony-092409-
goldberg.pdf) (hereinafter ``Testimony of Deborah Goldberg''); 
Testimony of David Berenbaum, supra note 29, at 23.
    \226\ Testimony of David Berenbaum, supra note 29, at 23.
---------------------------------------------------------------------------
    There are several potential reasons why this may be. First, 
a servicer's financial interest in a defaulted loan is based on 
very different criteria than an investor's. The servicer is 
indifferent to the net present value of the loan; instead, the 
servicer is concerned with maximizing its revenue stream from 
the loan and minimizing its expenses on the loan. This means 
that residential mortgage servicing suffers from a severe 
principal-agent problem, particularly in the case of private-
label securitization.\227\ Residential mortgage servicer 
compensation structures fail to align servicers' incentives 
with investors'.\228\ The incentive payments to servicers under 
HAMP are themselves an acknowledgment that servicers are not 
properly incentivized to perform modifications even when 
modifications would yield a positive net present value for 
investors.
---------------------------------------------------------------------------
    \227\ Levitin & Twomey, supra note 78. See also National Consumer 
Law Center, Why Servicers Foreclose When They Should Modify and Other 
Puzzles of Servicer Behavior: Servicer Compensation and Its 
Consequences (Oct. 2009) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1502744) (hereinafter ``Puzzles of Servicer 
Behavior''). It should be noted that securitization can be done without 
this sort of principal-agent problem. For example, in commercial 
mortgage securitization (or CMBS structures), loans are transferred to 
a special servicer if they go 60 days delinquent, and the default 
servicer's compensation is based on the ultimate recovery of the 
defaulted loan. Thus, if the default servicer can get the loan to 
reperform, it will be worth more than if it redefaults. See Anna 
Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout 
Prohibitions in Residential Mortgage-Backed Securities, 82 S. Cal. L. 
Rev. (2010).
    \228\ Servicers usually have some ``skin in the game'' through 
their relationship as an affiliate of the securitization sponsor. In 
these cases, the servicers have liability for early payment defaults 
and the residual tranche. The residual, however, is often 
resecuritized, and when the defaults surpass a minimum level, the 
residual will be out of the money and will not align servicer and 
investor incentives.
---------------------------------------------------------------------------
    In addition, as the Panel discussed in its October 2009 
report, servicers may face impediments to loan modifications in 
the form of contractual barriers. Servicers of securitized 
loans operate under the terms of PSAs, which are contracts 
between the servicers and the investors.\229\ These contracts 
contain provisions that may encourage servicers, working with 
the securitization trustee, to disqualify certain homeowners 
who would otherwise qualify for a HAMP modification. For 
example, although PSAs rarely prohibit loan modifications,\230\ 
they typically restrict the servicer's ability to extend the 
term of a loan, usually to a maximum of one year.\231\ Such a 
restriction might preclude HAMP modifications that would 
otherwise allow the borrowers to stay in their homes. In 
addition, PSAs often restrict the servicer's ability to grant 
principal reductions.\232\ Under HAMP, servicers must make 
reasonable efforts to have such contractual restrictions 
revised, but the program otherwise defers to the PSAs' 
terms.\233\ Treasury should make public information regarding 
servicers' efforts to have contractual restrictions revised.
---------------------------------------------------------------------------
    \229\ See October Oversight Report, supra note 17.
    \230\ Testimony of Adam Levitin, supra note 83, at 10.
    \231\ October Oversight Report, supra note 17.
    \232\ Testimony of Adam Levitin, supra note 83, at 10.
    \233\ HAMP Guidelines, supra note 106.
---------------------------------------------------------------------------
    Furthermore, second-lien mortgages are sometimes held by 
the same institution that is acting as servicer for the first-
lien loan. It is unknown how frequently this is the case; many 
second-lien loans might be held by a bank other than the 
servicer of the first-lien loan. But when a servicer both 
services the first lien and holds the second lien, and the 
first lien defaults, there is an inexorable conflict of 
interest, as the same financial institution is representing two 
adverse interests, one of which is its own. In such a 
situation, however, the conflict of interest is actually more 
likely to result in a modification of the first-lien loan, as 
it benefits the bank at the expense of the mortgage-backed 
security investors.\234\
---------------------------------------------------------------------------
    \234\ Levitin & Twomey, supra note 78.
---------------------------------------------------------------------------
    To the extent that servicer conflicts of interest are 
inhibiting mortgage modifications, it is important to note that 
there is little supervisory structure for servicers. Servicers 
are nominally supervised by securitization trustees, but 
securitization trustees have little ability or incentive to 
intervene. The securitization trustee has no way of knowing 
whether a servicer also holds a second lien on a property it is 
servicing. Accordingly, there is no way a securitization 
trustee can monitor servicers for conflicts of interest, and 
even if the trustee could, the trustee has little ability to 
fire a servicer over a conflict of interest; at most, the 
trustee could bring litigation against the servicer, but would 
have to front the expenses of the litigation for the trust and 
would receive no benefit from doing so.\235\
---------------------------------------------------------------------------
    \235\ Id.
---------------------------------------------------------------------------
    Securitization trustees are large corporate trust 
departments at a handful of financial institutions. They have 
very limited duties prescribed by contract, and they do not 
have general fiduciary duties to mortgage-backed securities 
(MBS) investors. Moreover, securitization trustees often have 
close, long-standing business relationships with particular 
servicers and securitization sponsors. Securitization trustees 
might, therefore, be reluctant to jeopardize these 
relationships by aggressively monitoring servicer behavior. 
There is only downside to a securitization trustee for bringing 
action against a servicer, not upside. Thus, servicers are 
largely left to their own devices in dealing with conflicts of 
interest.\236\
---------------------------------------------------------------------------
    \236\ Id.
---------------------------------------------------------------------------
    Finally, outside parties such as credit rating agencies and 
bond insurers may provide servicers with additional 
disincentives to modify mortgages. Credit rating agencies rate 
mortgage servicers, as they do other financial institutions, 
based on a variety of factors, including their financial 
condition and their management.\237\ These ratings can impact a 
servicer's profitability. If the servicer's ratings fall, it 
will have to pay a higher price for mortgage servicing rights. 
As a result, servicers have a strong incentive to follow the 
performance criteria established by the credit rating agencies. 
The National Consumer Law Center has concluded that while the 
credit rating agencies have generally been supportive of more 
loan modifications, they also encourage servicers to move loans 
quickly through the foreclosure process.\238\ This may explain 
why borrowers have frequently reported receiving foreclosure 
notices in the midst of the modification process,\239\ even 
though HAMP prohibits foreclosure sales while borrowers are 
being evaluated for modifications.\240\ Bond insurers, which 
stand to lose money when securitized mortgages stop paying, may 
also have influence over servicers. Their interventions can 
lead servicers to make decisions regarding modifications that 
might not otherwise be in their own financial interests.\241\
---------------------------------------------------------------------------
    \237\ See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 
Servicers, at 764, 15 Housing Policy Debate (2004) (online at 
www.msfraud.org/Articles/abuseopportunism.pdf).
    \238\ Puzzles of Servicer Behavior, supra note 227, at 2.
    \239\ Testimony of David Berenbaum, supra note 29, at 19.
    \240\ Testimony of Phyllis Caldwell, supra note 14, at 11.
    \241\ For a more detailed discussion of the role played by bond 
insurers, see Puzzles of Servicer Behavior, supra note 227, at 15-16.
---------------------------------------------------------------------------

2. Accounting Rules Provide Investors a Disincentive to Modify Loans

    Because of the accounting treatment of loan modifications, 
investors may also have cause to be ambivalent about HAMP. 
Under generally accepted accounting principles (GAAP), once the 
terms of a loan are contractually modified, the modified loan 
is accounted for as a ``troubled debt restructuring.'' A 
troubled debt restructuring occurs when the terms of a loan 
have been modified due to the borrower's financial 
difficulties, and a long-term concession has been granted to 
the borrower. Examples of such concessions include interest 
rate reductions, principal forbearance, principal forgiveness, 
and term extensions, all of which may be used to modify loans 
in HAMP.\242\ Under GAAP, a loss is to be recognized if the 
difference in cash flows to be received under the modified loan 
is less than the cash flows of the original loan.\243\ In 
addition, the loss is required to be recognized at the time the 
loan is contractually modified as opposed to being recognized 
over the term of the loan. The accounting for loans that are 
not accounted for as troubled debt restructurings is generally 
less severe, since under those circumstances GAAP provides an 
entity more discretion to determine when a loan should be 
written off.\244\
---------------------------------------------------------------------------
    \242\ See Accounting Standard Codification (ASC) 310-40-15, 
Troubled Debt Restructurings by Creditors (formerly Statement of 
Financial Standards (SFAS) 15) (online at asc.fasb.org/
section&trid=2196900%26analyticsAssetName=subtopic_page_section%26nav_ty
pe=subtopic page). ASC 310-40-15-5 states that a loan the terms of 
which have been modified is a troubled debt restructuring ``if the 
creditor for economic or legal reasons related to the debtor's 
financial difficulties grants a concession to the debtor that it would 
not otherwise consider.''
    \243\ By nature of the modified terms of the loan under HAMP, 
(i.e., reduction of interest to be received and/or principal 
forbearance or forgiveness) the entity's future cash flows to be 
received will be less than the current loan payoff amount. See ASC 310-
10-35, Receivables--Measurement of Impairment (formerly SFAS 114). ASC 
310-10-35-24 states that ``[i]f the present value of expected future 
cash flows (or, alternatively, the observable market price of the loan 
or the fair value of the collateral) is less than the recorded 
investment in the loan (including accrued interest, net deferred loan 
fees or costs, and unamortized premium or discount), a creditor shall 
recognize an impairment by creating a valuation allowance with a 
corresponding charge to bad-debt expense or by adjusting an existing 
valuation allowance for the impaired loan with a corresponding charge 
or credit to bad-debt expense.'' (online at asc.fasb.org/
section&trid=2196791%26analyticsAssetName=subtopic_page_section%26nav_ty
pe=subtopic_page).
    \244\ Except if the loan is classified as troubled debt 
restructuring, the accounting for loan losses for residential mortgage 
loans is provided by ASC 450-20-25, Contingencies-Loss Contingencies 
(formerly SFAS 5). An estimated loss from a loss contingency shall be 
accrued by a charge to income if both of the following conditions are 
met (emphasis added):
     Information available before the financial statements are 
issued or are available to be issued indicates that it is probable that 
an asset had been impaired or a liability had been incurred at the date 
of the financial statements. Date of the financial statements means the 
end of the most recent accounting period for which financial statements 
are being presented. It is implicit in this condition that it must be 
probable that one or more future events will occur confirming the fact 
of the loss.
     The amount of loss can be reasonably estimated. In 
addition, banking regulatory guidelines have instituted an initial loan 
review whereby loans are classified as either special mention, 
substandard, doubtful or loss. If the loan is 180 cumulative days past 
due, the loan should be classified as a loss and the loan balance is 
either charged off or a reserve is established equal to 100% of the 
loan balance (with a corresponding charge to bad debt expense). See, 
e.g., Federal Deposit Insurance Corporation, Uniform Retail Credit 
Classification and Account Management Policy (Dec. 3, 2009) (online at 
www.fdic.gov/regulations/laws/rules/5000-1000.html).
---------------------------------------------------------------------------
    Depository institutions that own mortgages are generally 
reluctant to take write-downs because doing so requires them to 
boost their regulatory capital ratios, which hurts both their 
ability to make new loans and their profitability. That is 
particularly true today, since banks' capital structures have 
already been weakened by a variety of factors, including write-
downs already taken on residential and commercial real estate 
loans, losses taken on other loans due to the recession, and 
recent actions by Fannie Mae and Freddie Mac to require banks 
to buy back mortgages that the banks had previously sold to 
them.\245\
---------------------------------------------------------------------------
    \245\ Agreements between banks and government-sponsored enterprises 
such as Fannie Mae and Freddie Mac include provisions that require the 
banks to buy back mortgages that do not meet Fannie Mae's and Freddie 
Mac's underwriting standards.
---------------------------------------------------------------------------
    Accounting issues are not exclusive to first liens. There 
have been calls for the holders of second-lien loans to write 
off those loans, at least to the extent they are 
underwater.\246\ Such calls may mistakenly presume that the 
entire value of an underwater second-lien loan is its hold-up 
value--the value that could be extracted from homeowners or 
first-lien holders by being able to block a refinancing of the 
first-lien mortgage. There is additional value, however, beyond 
hold-up value, to the extent that the loan is still 
performing--a realistic possibility, especially for Home Equity 
Lines of Credit (HELOCs), where balances are simply allowed to 
accrue. If the lien were to be discharged in a foreclosure 
sale, and the debt charged off for regulatory accounting 
purposes, the bank would still hold an enforceable unsecured 
debt. The market value of such debt is far less than face 
value, but to the extent the debt were sold or recovered, it 
would represent a recovery on charged-off debt.
---------------------------------------------------------------------------
    \246\ See Letter from Rep. Barney Frank, supra note 41.
---------------------------------------------------------------------------
    There is tension between Treasury's goals of mitigating 
foreclosures and Treasury's goal of maintaining adequate 
capital levels at large banks. Bank of America, Citigroup, 
JPMorgan Chase, and Wells Fargo have all signed up for the 
Second Lien Modification Program. Combined, as of the third 
quarter in 2009, these four banks held $442.1 billion in 
second-lien mortgages. At the end of that same quarter, these 
four banks' total equity capital was $459.1 billion.\247\
---------------------------------------------------------------------------
    \247\ Federal Deposit Insurance Corporation, Statistics of 
Depository Institutions (online at www2.fdic.gov/sdi/). This figure is 
based on reporting by the banks, not their holding companies, and 
therefore may not include all second liens held by affiliates.
---------------------------------------------------------------------------

3. Servicers and Investors may be Waiting for a Better Offer from the 
        Government

    One additional disincentive, which may affect the actions 
of both servicers and investors, involves the possibility that 
the government will offer them a better deal at some point in 
the future. When HAMP was first announced in February and March 
2009, it referenced but included little specificity about plans 
to modify second liens, to modify loans in geographic areas 
where home prices have fallen precipitously, and to encourage 
alternatives to foreclosure in cases where modifications are 
infeasible.\248\ Additional incentive payments were announced 
later.\249\
---------------------------------------------------------------------------
    \248\ MHA Detailed Program Description, supra note 47.
    \249\ Apr. 2009 MHA Update, supra note 33; Foreclosure Alternatives 
and Home Price Decline Protection Incentives, supra note 116.
---------------------------------------------------------------------------
    Given this history, it was not unreasonable for the 
mortgage industry to wonder whether Treasury would again offer 
a better deal at some point in the future. As Mr. Berenbaum of 
the National Community Reinvestment Coalition testified at a 
recent congressional hearing, ``Some institutions may be going 
through the motions and not seeking permanent modifications in 
which they have to make significant financial sacrifices 
because they may be waiting for additional government subsidies 
or even outright purchases of their distressed loans.'' \250\ 
About a month after those comments, Treasury announced in late 
March that participating servicers and investors will be 
eligible to receive numerous additional incentive 
payments,\251\ and they will be paid retroactively.\252\ Such 
changes could inadvertently bolster the perception that a 
better offer may again be forthcoming, although to be fair it 
is probably impossible for Treasury to avoid this perception as 
long as it is taking actions aimed at preventing more 
foreclosures. Treasury must be mindful of this tension as it 
moves forward in implementing the recently announced changes.
---------------------------------------------------------------------------
    \250\ Testimony of David Berenbaum, supra note 29, at 23.
    \251\ MHA Enhancements to Offer More, supra note 59.
    \252\ Treasury conversation with Panel staff (Mar. 26, 2010).
---------------------------------------------------------------------------

  G. Treasury Progress on Key Recommendations from the October Report

    The Panel has been examining various issues of the 
foreclosure crisis and the adequacy of Treasury's responses to 
these issues for the last year. Foreclosures started rising in 
July 2007, and by the end of 2008, 1.24 million homes had been 
lost to foreclosure, and 3.28 million more foreclosures had 
started.\253\ Treasury announced its first major foreclosure 
mitigation initiative--the Homeowner Affordability and 
Stability Plan--in February 2009. Since then, the foreclosure 
problem has continued to grow. In response, Treasury has 
introduced or expanded six major MHA programs (HAMP, 2MP, HPDP, 
HAFA, Hardest Hit Fund, and the FHA refinance option) and 
released 13 new supplemental directives or additional MHA 
program guidelines as well as two revised supplemental 
directives. These additional programs and guidelines have 
helped moderate certain aspects of the foreclosure crisis, but 
Treasurys response to the overall problem has not kept pace 
with the growing number of foreclosures, and more importantly, 
significant issues remain.
---------------------------------------------------------------------------
    \253\ See HOPE NOW, 1.77 Million Homeowners Receive Mortgage Loan 
Workout Solutions According to the HOPE NOW Alliance, at 4 (Sept. 1, 
2009) (online at www.hopenow.com/press_release/files/
July%20Data%20Release_Final.pdf) (providing numbers of foreclosure 
starts and foreclosure sales that include Q3 2007 through Q4 2008).
---------------------------------------------------------------------------
    The Panel explained in its October report that the key 
problems of the MHA programs related to scope, scale, and 
permanence. The Panel then provided a list of specific 
recommendations for addressing these problems: transparency, 
streamlining the process, program enhancements, and 
accountability.\254\ This section will review the Panel's key 
recommendations from the October report, new programs and 
changes to existing programs that Treasury has implemented in 
the last six months related to these key recommendations, and 
the extent to which these changes address the Panel's key 
findings and recommendations. Overall, although Treasury has 
made some progress in addressing the Panel's concerns, 
additional changes are needed in order to address the 
foreclosure crisis in a sufficient, comprehensive way. However, 
the Panel notes that many of Treasury's new programs and 
program changes are still in the process of being implemented 
or are in their early stages. The Panel will continue to 
monitor these programs as data become available in order to 
evaluate the effectiveness of the MHA.
---------------------------------------------------------------------------
    \254\ October Oversight Report, supra note 17, at 111-12.
---------------------------------------------------------------------------

1. Transparency

    Panel Recommended. In October, the Panel reported evidence 
of eligible borrowers being denied HAMP modifications 
incorrectly, misinterpretations of program guidelines, and 
difficulties encountered by borrowers and their counselors in 
understanding the NPV models as well as the reasons that HAMP 
applications were being denied. As a result, the Panel made 
several recommendations related to the transparency of the MHA 
programs in order to promote fairness and clarity. The details 
of the programs should be completely above board both 
internally and externally so that servicers, borrowers, and 
housing counselors understand their roles or responsibilities 
within the program and so that the public, Congress, and 
oversight bodies can meaningfully evaluate the structure, 
effectiveness, and success of the MHA programs.
    The Panel recommended that Treasury should be more 
transparent by disclosing denial codes, providing additional 
information on the appeals process for loan modification 
denials, and releasing its NPV model so that borrowers and 
their housing counselors can easily determine if the borrowers 
were eligible for HAMP modifications and can appeal if they 
believe the borrowers were denied incorrectly. Information on 
program eligibility, denials, and the appeals process should be 
clear, meaningful, easily understood, and communicated in a 
timely manner.\255\
---------------------------------------------------------------------------
    \255\ October Oversight Report, supra note 17, at 47, 62-63, 111. 
The Panel noted that this recommendation applied equally to HARP.
---------------------------------------------------------------------------
    Treasury Action Since October. In September, Treasury 
released denial codes or ``Not Approved/Not Accepted Reason 
Codes,'' which servicers must provide to Fannie Mae, as 
Treasury's program administrator, for each mortgage loan 
evaluated for HAMP that did not enter a trial period, fell out 
of a HAMP trial, or did not result in a permanent HAMP 
modification on or after December 1, 2009.\256\ In November, 
Treasury further clarified that whenever servicers are required 
to provide denial codes to Fannie Mae, servicers must also 
provide written notification to borrowers of the reasoning for 
their program eligibility determinations (sending the notice 
within 10 business days of making their decision), effective 
January 1, 2010.\257\ Treasury noted that explanations should 
relate to one or more of the denial codes and must be written 
in clear, non-technical language, and it included model clauses 
for various denial codes as examples.\258\ When a borrower is 
denied because the NPV calculation is negative, the servicer 
must include a list of certain input fields that were 
considered in the NPV decision and must explain that the 
borrower can request the values used to populate these NPV 
fields. However, Treasury did not provide additional guidance 
on the appeals process available to borrowers that were 
ultimately denied HAMP modifications. And, although Treasury 
has planned to release an augmented version of its NPV 
calculator for housing counselor use only--the Counselor HAMP 
Screen or CHAMPS--it is unclear when or whether such release 
will occur. Treasury explained that the current version of 
CHAMPS had a high rate of false positives and false negatives 
because of the sensitivity of the model to certain inputs such 
as LTV (a value which will likely be different for the borrower 
and the servicer and that can lead to dramatically different 
results) so that it has trepidation around providing the model 
and has not reached a firm conclusion on whether it will 
ultimately release CHAMPS.\259\
---------------------------------------------------------------------------
    \256\ U.S. Department of the Treasury, Home Affordable Modification 
Program--Data Collection and Reporting Requirements Guidance, 
Supplemental Directive 09-06, at 2, 14-15 (Sept. 11, 2009) (online at 
www.hmpadmin.com/portal/docs/hamp_servicer/sd0906.pdf).
    \257\ HAMP Borrower Notices, supra note 5, at 2. See also 
Introduction of Home Affordable Foreclosure Alternatives, supra note 
118, at 5 (requiring servicers to provide written communication of its 
decision not to offer a HAFA short sale or deed-in-lieu of foreclosure 
in accordance with the guidelines in Supplemental Directive 09-08); 
HAMP--Update and Resolution of Active Trial Modifications, supra note 
20, at 5 (requiring servicers to provide written communication of its 
ineligibility decision in accordance with the guidelines in 
Supplemental Directive 09-08 and to provide Incomplete Information 
Notices with a specific date by which the information must be received 
from the borrower that is not less than 30 days from the date of the 
notice).
    \258\ HAMP Borrower Notices, supra note 5, at 2-4.
    \259\ Treasury conference call with Panel staff (Mar. 24, 2010).
---------------------------------------------------------------------------
    Evaluation. Treasury has made significant progress in 
establishing guidelines for written communications from 
servicers to borrowers of the reasons for ineligibility 
determinations including denials of HAMP trial periods, HAMP 
permanent modifications, and HAFA short sales or deeds-in-lieu 
of foreclosure. Servicers are directed to send these borrower 
notices within 10 business days of the date of their 
determinations, making these notices timely. Treasury also 
explained that these notices must be written in clear, non-
technical language and provide examples or model clauses that 
are straightforward and easy to understand. These guidelines 
should bring greater clarity to the reasons for servicer 
denials of HAMP trial periods or permanent modifications or 
HAFA short sales or deeds-in-lieu of foreclosure. However, the 
denial code and borrower notice guidelines are still in the 
process of being implemented. Although the denial codes were 
released in September 2009 and the borrower notice guidelines 
were released in November 2009 and were effective January 1, 
2010, Treasury told the Panel that servicer reporting of denial 
codes was only beginning to happen. In February 2010, Treasury 
reiterated to servicers the need to report denial codes, and it 
expects to have the numbers in the next few months.\260\ In 
addition, it is unclear whether borrowers have actually been 
receiving borrower notices in a timely manner or whether the 
denial codes have been useful or sufficient in addressing 
fairness concerns; have provided greater understanding to 
borrowers; or have resulted in a simpler, more straightforward, 
or more efficient appeals process. It is important for 
Treasury, either directly or through its program contractors 
(Fannie Mae as program agent and Freddie Mac as compliance 
agent), to monitor the activities of the program participants, 
audit them, and enforce program rules, guidelines, and 
requirements.\261\ Only when the rules are enforced in a 
thorough and even-handed manner will the transparency that the 
structure of the MHA programs attempts to achieve come to 
fruition. The Panel will continue to monitor these program 
updates as additional information becomes available.
---------------------------------------------------------------------------
    \260\ Id.
    \261\ For additional discussion of accountability and program 
compliance, see Section G.4.
---------------------------------------------------------------------------
    Regarding the net present value model, the Panel applauds 
Treasury's efforts to rigorously test the augmented version of 
its NPV calculator and agrees with Treasury's assessment that 
it should not release a model that results in misleading false 
positives and false negatives. However, the Panel continues to 
believe that borrowers and counselors should have access to an 
accurate version of the NPV model and is hopeful that Treasury 
redoubles its efforts to make such access possible in the near 
future. Also, although Treasury has released a white paper 
related to its base net present value model,\262\ borrowers and 
housing counselors still only have limited access to the inputs 
used by servicers (who only have to release certain inputs) and 
have very little insight into how material these inputs are or 
whether corrections to any inaccurate values are likely to 
change the outcome of the NPV calculation (servicers only have 
to re-run NPV calculations if the correction is material).\263\ 
Thus, Treasury has not made meaningful progress in addressing 
the Panel's concern about the secrecy around the NPV model.
---------------------------------------------------------------------------
    \262\ See U.S. Department of the Treasury, Home Affordable 
Modification Program: Base Net Present Value (NPV) Model v3.0 Model 
Documentation (Dec. 8, 2009) (online at www.hmpadmin.com/portal/docs/
hamp_servicer/npvmodeldocumentationv3.pdf).
    \263\ HAMP Borrower Notices, supra note 5, at 3; see also Testimony 
of David Berenbaum, supra note 29, at 24, 29 (voicing continued 
frustration with the opacity of the NPV analysis and stating that the 
Administration should establish rules for a fair appeals process); 
House Oversight and Government Reform, Subcommittee on Domestic Policy, 
Written Testimony of Julia Gordon, senior policy counsel, Center for 
Responsible Lending, Foreclosures Continue: What Needs to Change in the 
Government Response?, at 12, 15 (Feb. 25, 2010) (online at 
oversight.house.gov/images/stories/Hearings/Domestic_Policy/2010/
022510_Foreclosure/022410_Gordon_COGR_testimony_022510_final.pdf) 
(hereinafter ``Testimony of Julia Gordon'') (stating that Treasury 
needs to provide homeowners and their advocates access to the NPV 
analysis and an independent, formal appeals process for those that 
believe their HAMP applications were not handled correctly); State 
Foreclosure Prevention Working Group, Analysis of Mortgage Servicing 
Performance: Data Report No. 4, at 4 (Jan. 2010) (online at 
www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport4Jan202010FINAL.pdf) (hereinafter ``State Foreclosure 
Prevention Working Group: Data Report No. 4'').
---------------------------------------------------------------------------

2. Streamlining the Process

    Panel Recommended. In October, the Panel found significant 
variation among servicers in terms of program implementation, 
performance, borrower experience, and the numbers of successful 
trial and permanent modifications. As a result, the Panel 
recommended that Treasury should standardize and streamline the 
loan modification process to ensure uniformity as well as to 
enhance the effectiveness of its programs. Greater uniformity 
will help ease frustration for borrowers, housing counselors, 
and lenders/servicers. In addition, standardization will remedy 
different forms and procedures from lender to lender, 
facilitate borrower education, enhance the effectiveness of 
housing counselors, and promote program efficiency (e.g., by 
increasing the likelihood or timeliness of mortgage 
modifications).\264\
---------------------------------------------------------------------------
    \264\ See October Oversight Report, supra note 17, at 63-64, 111.
---------------------------------------------------------------------------
    Treasury Action Since October. Treasury has issued several 
supplemental directives related to streamlining and 
standardizing income documentation that make it easier for 
borrowers to compile documentation packages, for borrowers to 
understand the HAMP modification process, and for servicers to 
process HAMP applications. In October, Treasury updated 
borrower underwriting requirements and introduced revised model 
documentation (e.g., a standard MHA Request for Modification 
and Affidavit form), effective March 1, 2010.\265\ In November, 
Treasury standardized the amount of information that must be 
communicated in writing to borrowers whenever servicers made 
HAMP eligibility decisions, effective January 1, 2010.\266\ In 
January 2010, Treasury made a significant program change 
requiring full verification of borrower eligibility prior to 
the offer of any HAMP Trial Period Plan with an effective date 
on or after June 1, 2010 (servicers can currently offer HAMP 
Trial Periods to borrowers based on stated or verified 
income).\267\ And, in March 2010, Treasury provided additional 
guidance on borrower outreach and communication (e.g., 
clarifying the requirement for servicers to proactively solicit 
all borrowers that are potentially eligible for HAMP prior to 
initiating foreclosure actions, defining reasonable 
solicitation efforts for servicers, providing a timeframe for 
borrowers to return the necessary HAMP documentation, 
explaining servicers' responsibilities for borrowers already in 
foreclosure, and requiring servicers to consider borrowers in 
bankruptcy for HAMP if the borrower requests such 
consideration) with an effective date of June 1, 2010.\268\
---------------------------------------------------------------------------
    \265\ See U.S. Department of the Treasury, Home Affordable 
Modification Program--Streamlined Borrower Evaluation Process, 
Supplemental Directive 09-07 (Oct. 8, 2009) (online at 
www.hmpadmin.com/portal/docs/hamp_servicer/sd0907.pdf).
    \266\ See HAMP Borrower Notices, supra note 5.
    \267\ See HAMP--Update and Resolution of Active Trial 
Modifications, supra note 20; see also Testimony of Phyllis Caldwell, 
supra note 14, at 3 (providing that greater upfront documentation will 
ensure that HAMP does not experience a backlog of trial modifications 
going forward).
    \268\ Supplemental Directive 10-02, supra note 48.
---------------------------------------------------------------------------
    Evaluation. Treasury has taken several steps to streamline 
the HAMP modification process and bring greater uniformity and 
standardization to the MHA programs. Treasury has standardized 
several HAMP requirements by providing model documentation and 
model clauses for borrowers and servicers, clarifying 
underwriting requirements for servicers including several clear 
examples of acceptable forms of income verification, clarifying 
responsibilities and timelines for borrowers and servicers, and 
defining ambiguous terms such as ``reasonable solicitation 
efforts.'' In addition, Treasury's recent announcement 
requiring servicers to verify income before offering borrowers 
trial plans with effective dates on or after June 1, 2010 
should improve the process by reducing the backlog of HAMP 
trial periods awaiting permanent modification, increasing the 
conversion rate, and reducing false expectations for 
borrowers.\269\ However, it is unclear whether borrowers are 
benefiting from these program changes at this time.
---------------------------------------------------------------------------
    \269\ HAMP--Update and Resolution of Active Trial Modifications, 
supra note 20.
---------------------------------------------------------------------------
    In attempting to streamline its process and increase the 
number of borrowers being assisted, Treasury should be 
cognizant that the potential exists for the program to end up 
propping up bad loans to unqualified borrowers, who will 
ultimately redefault. Although the Panel does not believe this 
is currently the case, it does believe that the problems that 
created the current housing problems should not be repeated in 
the name of foreclosure prevention. However, Treasury must also 
balance this caution with the need to design foreclosure 
prevention programs that will actually be used by servicers, 
lenders, and borrowers, and that reflect the circumstances 
these groups face. Whether or not Treasury is able to strike 
this balance of effectiveness and fiscal prudence will greatly 
determine the success or failure of HAMP.
    Some housing counselors note continued frustration and 
problems regarding the HAMP program: Foreclosure proceedings do 
not always stop during the modification process, communication 
is difficult, servicers continue to lose information, 
transitions from trial periods to permanent modifications have 
been slow, the quality of loan modifications have been 
haphazard, the NPV analysis is still not transparent, and 
denials appear to be arbitrary and hamper appeals.\270\ Many of 
these programs are still in the process of being implemented or 
are in their early stages and should address some of the 
continued borrower concerns or complaints in the next several 
months. It should be noted that repeated changes to program 
guidelines can place implementation burdens on servicers.\271\ 
Treasury must monitor and audit the activity of program 
participants, and it must ensure compliance with new programs, 
rules, and requirements.\272\ The issues that these program 
changes were designed to target will not be addressed, 
adequately or at all, if the new rules are not followed. The 
Panel will continue to monitor these program changes as 
additional results become available.
---------------------------------------------------------------------------
    \270\ Testimony of David Berenbaum, supra note 29, at 19, 21-24, 
28-29 ; see also State Foreclosure Prevention Working Group: Data 
Report No. 4, supra note 263, at 4 (noting that Treasury's new HAMP 
requirements were added to an already overloaded system; the secrecy of 
the NPV model makes it difficult for homeowners, counselors, and states 
to evaluate the likelihood of HAMP eligibility and to monitor 
implementation; and homeowners still need access to a real-time 
escalation and appeals process).
    \271\ See, e.g., Factors Affecting Implementation of HAMP, supra 
note 25, at 21-24.
    \272\ For additional discussion of accountability and program 
compliance, see Section G.4.
---------------------------------------------------------------------------

3. Program Enhancements

    Panel Recommended. The Panel noted several specific areas 
of concern in its October report related to meeting 
affordability goals and reaching a larger number of at-risk 
borrowers. The Panel suggested that Treasury should consider 
specific program improvements or modifications such as 
incorporating more local information into its NPV models (where 
reliance on statewide average would be inappropriate), 
modifying DTI eligibility requirements to accommodate more 
borrowers (i.e., borrowers that would be above the 31 percent 
DTI eligibility threshold when including modified capitalized 
arrearages), and appointing ombudsmen or designating case staff 
to help borrowers communicate more effectively with 
servicers.\273\ The Panel also suggested the development of a 
web portal to improve borrower-servicer communication in both 
its March and October reports.\274\
---------------------------------------------------------------------------
    \273\ October Oversight Report, supra note 17, at 6, 55, 111-12.
    \274\ See October Oversight Report, supra note 17, at 6, 111. Such 
a web portal would also help streamline and unify the loan modification 
process.
---------------------------------------------------------------------------
    Treasury Action Since October. Treasury does not appear to 
have made any program changes related to incorporating more 
local information into NPV calculations or allowing DTI 
flexibility with arrearages.\275\ The current NPV calculation 
remains unchanged. And, Treasury has decided to peg the DTI at 
31 percent over the next five years, without flexibility for 
modified capitalized arrearages. However, Treasury has made a 
program change to accommodate more at-risk borrowers by 
modifying DTI flexibility in order to assist more unemployed 
homeowners that will be implemented ``in the coming months.'' 
\276\
---------------------------------------------------------------------------
    \275\ Testimony of Phyllis Caldwell, supra note 14, at 1 (``HAMP 
defines a standard for an affordable and sustainable modification 
across the industry, set at 31% of gross monthly income'').
    \276\ MHA Enhancements to Offer More, supra note 59, at 1.
---------------------------------------------------------------------------
    In addition, Treasury has made some progress in 
facilitating communications between borrowers and servicers. In 
November 2009, Treasury released guidelines requiring servicers 
to provide a written notification to every borrower explaining 
its determinations regarding HAMP program eligibility (e.g., 
its decision not to offer a Trial Period Plan, its decision not 
to offer a permanent HAMP modification, or the risk to the 
borrower of losing eligibility), effective January 1, 
2010.\277\ These notices must include both ``a toll-free number 
through which the borrower can reach a servicer representative 
capable of providing specific details about the . . . reasons 
for a non-approval determination'' and the HOPE Hotline Number 
so that the borrower knows how to reach a HUD-approved housing 
counselor for assistance at no charge.\278\ The Making Home 
Affordable website also clearly says that borrowers can speak 
with HUD-approved housing counselors at no cost when they need 
help with the Making Home Affordable program.\279\
---------------------------------------------------------------------------
    \277\ HAMP Borrower Notices, supra note 5, at 1.
    \278\ Id., at 4.
    \279\ U.S. Department of the Treasury, MakingHomeAffordable.gov: 
Help for American's Homeowners (online at makinghomeaffordable.gov) 
(accessed April 13, 2010) (hereinafter ``MHA Website'').
---------------------------------------------------------------------------
    At the Panel's Philadelphia Field Hearing in September 
2009, Mr. Wheeler testified that Treasury planned to work with 
servicers and Fannie Mae to develop a web portal that would 
``serve as a centralized point for modification and 
applications'' and allow ``borrowers to check the status of 
their applications.'' \280\ In March 2010, Treasury stated that 
it had not released and was still considering whether it should 
release such a web portal. Treasury cited the availability of 
other solutions to the lost document problems such as increased 
servicer capacity or private market programs as reasons that a 
web portal might not be necessary.\281\ For example, Phyllis 
Caldwell, chief of Treasury's Homeowner Preservation Office, 
testified before the House Committee on Oversight and 
Government Reform that HUD-approved housing counselors would be 
able to take advantage of HOPE NOW's new web portal--the HOPE 
LoanPort--``to help borrowers collect the necessary HAMP 
documents, upload the completed package directly to servicers 
and track the status of a borrower's application.'' \282\
---------------------------------------------------------------------------
    \280\ Testimony of Seth Wheeler, supra note 193, at 6.
    \281\ Treasury conference call with Panel staff (Mar. 24, 2010).
    \282\ Testimony of Phyllis Caldwell, supra note 14, at 12. HOPE NOW 
launched its web portal--HOPE LoanPort--in December 2010 and announced 
the expansion of the web portal to over 100 key markets in February 
2010. See HOPE NOW, HOPE NOW Expanding HOPE LoanPort Housing Counselor 
Web Portal To Over 100 Key Markets (Feb. 24, 2010) (online at 
www.hopenow.com/press_release/files/
HOPE%20LoanPort%20Release_02_24_10.pdf); HOPE NOW, HOPE NOW Launches 
the HOPE LoanPort To Assist At-Risk Homeowners (Dec. 10, 2010) (online 
at www.hopenow.com/press_release/files/
HOPE%20%20LoanPort%20National%20Release%20_12_10_09.pdf). HOPE NOW is 
an industry-created alliance between housing counselors, mortgage 
companies, investors, and other mortgage market participants.
---------------------------------------------------------------------------
    Evaluation. Treasury still needs to address the Panel's 
recommendation to include more appropriate information in NPV 
calculations (and thus, more proper determinations of HAMP 
eligibility). Treasury has made some progress in reaching more 
at-risk borrowers through its assistance to unemployed 
homeowners, but Treasury could accommodate even more at-risk 
borrowers by allowing more flexibility in its DTI requirements 
(i.e., by considering modified capitalized arrearages).\283\ In 
addition, Treasury has made some progress in facilitating 
communications between borrowers and servicers and in helping 
borrowers understand the reasons their HAMP applications have 
been denied. However, it is unclear whether borrowers are 
receiving Borrower Notices or how many people are following up 
on the additional information in the Borrower Notices by 
contacting either the servicers directly through the toll-free 
number provided or HUD-approved housing counselors through the 
HOPE Hotline for explanations or assistance in communicating 
with servicers. It is also unclear whether the HUD-approved 
housing counselors have sufficient capacity or adequate 
training to properly handle borrower requests for assistance.
---------------------------------------------------------------------------
    \283\ For additional discussion of the problems of unemployment and 
the temporary assistance to unemployed homeowners, see Section C(1)g.
---------------------------------------------------------------------------
    Some housing counselors say that the special counselor 
hotline and institutional reforms such as the HAMP escalation 
process ``have not been effective.'' \284\ These housing 
counselors claim that communication with servicers is 
difficult. For example, counselors are only able to talk with 
servicers' customer service representatives that often have 
erroneous information regarding the loan or are unable to 
properly convey the details of the conversation or the 
complexities of the loan modifications to the negotiators who 
have underwriting discretion and can modify the loan. In 
addition, many financial institutions are selling distressed 
loans after modifications have started, further complicating 
counselors' efforts.\285\
---------------------------------------------------------------------------
    \284\ Testimony of David Berenbaum, supra note 29, at 22.
    \285\ Testimony of David Berenbaum, supra note 29, at 21-22.
---------------------------------------------------------------------------
    In addition, as noted above, Treasury has not yet released 
and is still considering whether it should release a web portal 
to enhance borrower-servicer communication because of the 
availability of private market programs as well as increased 
servicer capacity. It is unclear, however, whether solutions 
such as the HOPE LoanPort are sufficient to address the 
numerous complaints from borrowers and servicers about 
documents not being submitted or documents being lost, 
misplaced, or mishandled. It is also unclear how servicers have 
sufficient capacity to prevent problems with lost 
documentation, slow conversions, or slow response times 
considering the backlog of HAMP trial period plans awaiting 
conversion to permanent modifications and continued complaints 
with servicer competence and capacity.\286\ Treasury has 
acknowledged these problems and the need for a solution, and 
Treasury's plan to develop a web portal provided a viable 
solution.\287\ Treasury has been working toward this goal since 
at least September 2009, and the Panel hopes that Treasury 
continues its efforts to develop and release a web portal to 
enhance the modification process.
---------------------------------------------------------------------------
    \286\ House Oversight and Government Reform, Subcommittee on 
Domestic Policy, Written Testimony of Ronald M. Faris, president, Ocwen 
Financial Corporation, Foreclosures Continue: What Needs to Change in 
the Administration's Response?, at 2 (Feb. 25, 2010) (online at 
oversight.house.gov/ images/stories/Hearings/Domestic_Policy/2010/
022510_Foreclosure/022210_DP__Ronald_M._Faris_OCWEN_022510.pdf) 
(reasoning that many homeowners are having problems obtaining HAMP 
modifications because of ``a lack of sufficient capacity and expertise 
in the industry to effectively handle the unprecedented numbers of 
distressed homeowners in need of assistance''); State Foreclosure 
Prevention Working Group: Data Report No. 4, supra note 263, at 2, 12-
13 (discussing the apparent backlog of loss mitigation efforts and 
resolutions, even after servicers increased the number of employees 
dedicated to loss mitigation efforts).
    \287\ Treasury conference call with Panel staff (Mar. 24, 2010).
---------------------------------------------------------------------------
    Overall, despite making some progress in facilitating 
borrower-servicer communication, even Treasury officials admit 
that they ``need to do more'' and that they ``continue to work 
with servicers to improve their capacity to both evaluate 
eligible borrowers and provide conversion decisions in a timely 
manner.'' \288\ As part of its continued efforts to improve 
borrower-servicer communications, Treasury should monitor and 
audit participating servicers to ensure that they are complying 
with the Borrower Notice rules that became effective on January 
1, 2010. The structure that Treasury has implemented will not 
be able to facilitate borrower-servicer communications or 
address the concerns, or improve the experiences of, borrowers 
or servicers in the absence of compliance by program 
participants.
---------------------------------------------------------------------------
    \288\ Testimony of Phyllis Caldwell, supra note 14, at 3.
---------------------------------------------------------------------------

4. Accountability

    Panel Recommended. The Panel recommended that strong 
accountability was necessary for the success and credibility of 
the foreclosure mitigation programs.\289\ Treasury must clearly 
define and communicate its goals and requirements as well as 
its measurements for success. Without clear goals and 
measurements, Treasury and its agents and third parties (e.g., 
oversight bodies, Congress, and the public) will not be able to 
evaluate the adequacy or success of its programs overall or of 
individual participants. Treasury must also effectively monitor 
or oversee program participants and ensure compliance through 
established enforcement mechanisms that provide a clear message 
of the consequences (both positive and negative) for servicer 
actions. Only then will servicers be able to understand the 
link between cause and effect. Toward this goal of enhanced 
credibility, Treasury has chosen to use Fannie Mae as financial 
agent and HAMP program administrator and Freddie Mac as 
compliance agent.\290\ These agents provide structural 
accountability to its MHA programs.
---------------------------------------------------------------------------
    \289\ October Oversight Report, supra note 17, at 112.
    \290\ See Introduction of HAMP, supra note 21, at 1, 25; see also 
U.S. Department of the Treasury, Making Home Affordable Program, 
Housing Counselor: Frequently Asked Questions, at 1-2 (Dec. 29, 2009) 
(online at www.hmpadmin.com/portal/docs/counselor/counselorfaqs.pdf) 
(hereinafter ``MHA Housing Counselor: FAQs''); Government 
Accountability Office, Treasury Actions Needed to Make the Home 
Affordable Modification Program More Transparent and Accountable, GAO-
09-837, at 38 (Jul. 2009) (online at www.gao.gov/new.items/d09837.pdf) 
(hereinafter ``GAO Report on HAMP'').
---------------------------------------------------------------------------
    In its capacity as financial agent and HAMP program 
administrator, Fannie Mae must register and execute servicer 
participation agreements with servicers.\291\ Fannie Mae must 
collect a variety of loan-level data from servicers related to 
HAMP trial periods (to establish loans for processing and 
report activity during the trial period), loan setup for 
approved HAMP modifications, monthly activity for all HAMP 
loans, and additional data elements such as borrower 
information (e.g., full name, race, ethnicity, sex, and credit 
score), NPV model inputs, loan data, property characteristics, 
reasons for any denial of HAMP eligibility for trial periods or 
permanent modifications, and the status of loans that did not 
receive HAMP modifications.\292\ Servicers and investors must 
seek approval from Fannie Mae if they want to deviate from the 
standard payment reduction guidance when offering HAMP loan 
modifications.\293\ Finally, following the modification of an 
eligible mortgage, Fannie Mae is responsible for making 
incentive compensation payments and reimbursements upon the 
request of the servicers and in accordance with HAMP guidelines 
and directives.\294\
---------------------------------------------------------------------------
    \291\ See Introduction of HAMP, supra note 21, at 1, 19.
    \292\ Id., at 19-21, 27-38.
    \293\ MHA Housing Counselor: FAQs, supra note 290, at 9.
    \294\ Id., at 1-2.
---------------------------------------------------------------------------
    In its capacity as HAMP compliance agent, Freddie Mac must 
conduct independent compliance assessments (both on-site and 
remote) to evaluate loan-level data and confirm adherence to 
HAMP requirements including evaluation of borrower and property 
eligibility, compliance with underwriting guidelines, execution 
of the NPV model/modification processes, completion of borrower 
incentive payments, investor subsidy calculations, and data 
integrity.\295\ Freddie Mac must provide its servicer 
assessment to Treasury after the completion of the review. 
Freddie Mac also provides its assessment to the servicer, who 
will be able to submit concerns or disputes through an issue/
resolution appeal process.\296\ Finally, Freddie Mac must 
penalize those servicers that fail to comply with HAMP 
requirements (or manage any corrective action) and report 
compliance violations to Treasury and other regulatory 
agencies.\297\
---------------------------------------------------------------------------
    \295\ See Introduction of HAMP, supra note 21, at 25-26; see also 
Testimony of Phyllis Caldwell, supra note 14, at 6-7.
    \296\ See Introduction of HAMP, supra note 21, at 26.
    \297\ See GAO Report on HAMP, supra note 290, at 38.
---------------------------------------------------------------------------
    As the Panel noted in the October report, Treasury should 
release comprehensive performance metrics, the results of these 
performance metrics by lender/servicer, and a rigorous 
framework including appropriate, meaningful sanctions or 
procedures to address non-compliance.\298\ The public release 
of information by lender/servicer--and the impact of that 
release on their motivation in modifying mortgages--provides an 
element of procedural accountability. At the time of the 
October report, such data were unavailable. Treasury chose not 
to release information collected by Fannie Mae as the HAMP 
program administrator that would give the public a sense of 
individual servicer performance, such as average conversion 
time, the types of modifications being offered, redefault 
rates, and call response time. In October, Treasury was still 
in the process of implementing the compliance programs with 
Freddie Mac so compliance data were not available. The Panel 
requested the data so that it could evaluate lender/servicer 
performance as well as the details or effectiveness of the 
compliance review process, its enforcement mechanisms or 
sanctions, and the results of compliance audits or findings. 
The Panel also noted that the public release of such 
information was important so that third parties could conduct 
independent analyses and, as a result, contribute to the 
improvement of HAMP.
---------------------------------------------------------------------------
    \298\ October Oversight Report, supra note 17, at 112.
---------------------------------------------------------------------------
    Treasury Action Since October. Related to structural 
accountability, Treasury has still not publicly released 
information related to its selection and use of Fannie Mae as 
financial agent and HAMP program administrator or Freddie Mac 
as compliance agent. For example, Treasury has still not 
disclosed the framework of procedures or performance metrics, 
specific compliance data, or the results of performance metrics 
by lenders/servicers. According to GAO, ``Treasury has not yet 
finalized remedies, or penalties, for servicers who are not in 
compliance with HAMP guidelines,'' but plans to do so in April 
2010, and has a HAMP compliance committee in place to review 
compliance issues and enforce appropriate remedies.\299\
---------------------------------------------------------------------------
    \299\ House Committee on Oversight and Government Reform, Written 
Testimony of Gene L. Dodaro, acting comptroller general of the United 
States, Government Accountability Office, Foreclosure Prevention: Is 
the Home Affordable Modification Program Preserving Homeownership? 
(Mar. 25, 2010) (online at oversight.house.gov/images/stories/Hearings/
Committee_on_Oversight/2010/032510_HAMP/TESTIMONY-Dodaro.pdf).
---------------------------------------------------------------------------
    Related to procedural accountability, Treasury has released 
additional information by lender/servicer: aggregate numbers of 
HAMP modification activity including estimated number of 
eligible loans, trial plan offers extended, HAMP trials 
started, active trial modifications, permanent modifications, 
permanent modifications pending borrower acceptance, and 
modifications (including active trials and permanent 
modifications) by investor type (GSE, private, and 
portfolio).\300\
---------------------------------------------------------------------------
    \300\ See MHA Servicer Performance Through January 2010, supra note 
188. For additional discussion of the data provided by Treasury in its 
monthly reports, see Section G.5.
---------------------------------------------------------------------------
    Evaluation. Treasury still needs to provide detailed public 
information related to its selection and use of Fannie Mae as 
financial agent and HAMP program administrator and Freddie Mac 
as compliance agent. The effectiveness of the financial agent/
program administrator and compliance agent is instrumental to 
the success and accountability of HAMP, making the selection 
process for these agents especially important.
    When considering the selection process, it should be noted 
that apart from their administrative responsibilities, Fannie 
Mae and Freddie Mac initiated more than 485,000 loan mortgage 
modifications as of December 2009.\301\ These dual roles--as 
``doers'' of mortgage modifications for loans that they own or 
guarantee and ``overseers'' of Treasury's mortgage modification 
program--may present competing interests or diminish the 
overall effectiveness of Fannie Mae's and Freddie Mac's ability 
to modify mortgages, engage in HAMP administration or 
oversight, or both.
---------------------------------------------------------------------------
    \301\ FHFA Foreclosure Report, supra note 113, at 1.
---------------------------------------------------------------------------
    In addition, Treasury must effectively monitor its HAMP 
contractors to ensure that its programs or guidelines are being 
properly followed or enforced.
    Treasury should publicly release more data collected by 
Fannie Mae and Freddie Mac so that Congress, the TARP oversight 
bodies, and the public can better evaluate the effectiveness of 
HAMP. Review and analysis of the substantial amount of data 
being collected by Fannie Mae as program administrator and 
Freddie Mac as compliance agent are important in understanding 
the strengths and weaknesses of HAMP as well as particular 
areas in need of improvement.
    The Panel cannot evaluate the effectiveness of Treasury's 
use of Fannie Mae as financial agent and HAMP program 
administrator or Freddie Mac as compliance agent without a 
better understanding of Treasury's selection and use of Fannie 
Mae and Freddie Mac. Unfortunately, it appears that compliance 
issues remain. For example, some housing counselors are still 
having difficulty with servicers that continue with foreclosure 
proceedings while modifications are in progress, ``continue to 
exhibit widespread incompetence in receiving forms and storing 
information,'' are not equipped to deal with the foreclosure 
crisis, and delay the transition from trial modifications to 
permanent modifications.\302\ Because of Fannie Mae's and 
Freddie Mac's crucial roles in administering and enforcing HAMP 
requirements, it is especially important that Treasury release 
data on the compliance audits done by Freddie Mac to show 
whether servicers are properly following HAMP guidelines or 
whether Treasury and Freddie Mac are ensuring that HAMP 
requirements are enforced. Taxpayers should be able to see the 
consequences that result both from HAMP compliance and non-
compliance.
---------------------------------------------------------------------------
    \302\ Testimony of David Berenbaum, supra note 29, at 19, 21-24, 
28-29. See also Testimony of Julia Gordon, supra note 263, at 9-10 
(providing that HAMP's ``effectiveness has been hampered by lack of 
servicer capacity, a piece-by-piece rollout of complementary programs 
addressing second liens and short sales, inadequate compliance review, 
minimal public data available, and--perhaps most disturbingly--
widespread violation of HAMP guidelines by participating servicers''); 
State Foreclosure Prevention Working Group: Data Report No. 4, supra 
note 263, at 3.
---------------------------------------------------------------------------
    Although Treasury has made some progress in increasing 
accountability through the amount of information that is 
publicly available by lender/servicer, the available data are 
cursory and need to be further refined. The Panel applauds 
Treasury for releasing information on the percentage of 
portfolios converting and the aggregate number of trial and 
permanent modifications by lender/servicer, but Treasury should 
release the results of performance metrics by lender/servicer 
so that the oversight bodies, Congress, and the public can 
measure how rigorously each participant is engaged in the 
program.\303\
---------------------------------------------------------------------------
    \303\ See additional discussion of general data availability in 
Section G.5.
---------------------------------------------------------------------------
    When Secretary Geithner testified before the Panel in 
September 2009, in response to a question about the wide 
disparities among modification rates by servicers, he 
emphasized the importance of publicly releasing data on the 
number of modifications by servicer and the impact of such 
disclosure on the occurrence and timeliness of modifications:

          It is very helpful . . . to put into the public 
        domain every month detailed numbers that allow the 
        American people to see how many people these banks are 
        reaching. And I am quite confident that will produce 
        much, much faster modifications much more quickly 
        because institutions do not want to live with the 
        consequences of being so far behind the curve in what 
        is possible in helping families get through this 
        exceptional set of problems.\304\
---------------------------------------------------------------------------
    \304\ September COP Hearing Transcript, supra note 191, at 47-48.

According to the tables in the monthly servicer reports, 
identifying aggregate information by lender/servicer may have 
had an impact on increasing the number of trial modifications 
and the conversion of trial modifications to permanent 
modifications over the last six months. For example, in the 
October report on servicer performance, only eight servicers 
had active modifications that represented 20 percent or more of 
estimated HAMP-eligible loans, and only three servicers had 
active modifications that represented 33 percent or more of 
estimated HAMP-eligible loans.\305\ By the March report on 
servicer performance, 18 servicers had active modifications 
that represented 20 percent or more of estimated HAMP-eligible 
loans, and 9 servicers had active modifications that 
represented 33 percent or more of estimated HAMP-eligible 
loans.\306\ Further, the data show that the number of permanent 
modifications is growing for almost every servicer.\307\ The 
absolute numbers in the monthly snapshot provide a sense of 
program success, but they do not provide particularly good data 
for measuring a servicer's progress from the previous month or 
a servicer's performance in terms of the speed or timeliness of 
conversions.
---------------------------------------------------------------------------
    \305\ See U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through September 2009 (Oct. 8, 
2009) (online at www.treas.gov/press/releases/docs/
MHA%20Public%20100809%20Final.pdf) (hereinafter ``MHA Servicer 
Performance Through September 2009'').
    \306\ See MHA Website, supra note 279.
    \307\ See Id.
---------------------------------------------------------------------------
    The data in the monthly servicer reports do not show the 
increase in the number of active trial modifications from the 
previous month or the increase in the permanent modifications 
from the previous month by servicer, although these numbers can 
be ascertained by comparing the monthly reports. The data also 
do not show the number of new or cancelled trial or permanent 
modifications from the current month by servicer; these numbers 
are embedded in the total active trial modifications and 
permanent modifications and in the difference in the active 
modifications and the HAMP trials started. The pending 
permanent modification number is not particularly helpful, 
especially when the data do not show whether and to what extent 
the number of pending permanent modifications from the previous 
month successfully converted into permanent modifications in 
the current month. Finally, the data do not reveal how quickly 
servicers are converting loans from trial to permanent 
modifications. Thus, the data are of questionable value in 
motivating servicers to produce faster modifications.\308\ 
Providing aggregate information is not responsive to the 
Panel's recommendation that Treasury should make available the 
results of performance metrics by lender/servicer.
---------------------------------------------------------------------------
    \308\ For example, the increase in the numbers of active trial and 
permanent modifications could have resulted simply from servicer 
compliance with HAMP guidelines or requirements (either voluntarily or 
as a result of audits of servicer performance). Or, servicers motivated 
to enhance their public image through their commitment to the HAMP 
program or the number of successful modifications (HAMP or otherwise)--
such as Citigroup or GMAC--can do so through their own press releases, 
public statements, or favorable press, rather than relying on 
Treasury's monthly snapshots. See, e.g., Congressional Oversight Panel, 
Written Testimony of Vikram Pandit, chief executive officer, Citigroup, 
COP Hearing on Assistance Provided to Citigroup under TARP, at 11 (Mar. 
4, 2010) (online at cop.senate.gov/documents/testimony-030410-
pandit.pdf).
---------------------------------------------------------------------------

5. General Data Availability 

    Panel Recommended. The Panel stressed in both its March and 
October reports that Treasury should make additional 
information available to the public to make the mortgage 
modification programs more credible, transparent, 
understandable, and effective. The Panel noted that Treasury 
should continue to enhance disclosures related to servicer 
participation and the number of loans that have been modified 
or denied modifications through HAMP or that have benefited 
from other Treasury programs such as the 2MP and the HAFA. In 
addition, Treasury should release more specific loan-level 
data, comparable to Home Mortgage Disclosure Act (HMDA) data 
releases, in a manner that is widely available and useful (or 
easily accessible) to the general public.\309\
---------------------------------------------------------------------------
    \309\ See October Oversight Report, supra note 17, at 34-36, 109-
12.
---------------------------------------------------------------------------
    Treasury Action Since October. Treasury has made additional 
information available in its monthly reports for the MHA loan 
modification program.
     As of October, Treasury was including basic 
information on the number of trial modifications, the number of 
trial period plan offers, and HAMP modification activity by 
servicer (e.g., estimated number of eligible loans, trial plan 
offers extended, and trial modifications started).\310\
---------------------------------------------------------------------------
    \310\ See MHA Servicer Performance Through September 2009, supra 
note 305.
---------------------------------------------------------------------------
     In November, Treasury included state-specific 
trial modification and delinquency rate numbers; the number of 
active trial modifications; an overview of Administration 
Housing Stability Initiatives; and basic housing trends in 
mortgage rates, housing inventory, home prices, and sales since 
1999.\311\
---------------------------------------------------------------------------
    \311\ Levitin & Twomey, supra note 78.
---------------------------------------------------------------------------
     In December, Treasury added the number of 
permanent HAMP modifications (cumulative and by servicer); HAMP 
modifications by investor type for the 20 largest servicers 
(GSE, private, portfolio); and the number of active trial and 
permanent HAMP modifications in the 15 metropolitan statistical 
areas (MSAs) with the highest program activity (with a citation 
to a website listing HAMP activity in all MSAs).\312\
---------------------------------------------------------------------------
    \312\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through November 2009 (Dec. 10, 
2009) (online at www.financialstability.gov/docs/
MHA%20Public%20121009%20Final.pdf).
---------------------------------------------------------------------------
     In January, Treasury included the number of 
permanent modifications pending borrower acceptance (cumulative 
and by servicer) and the number of total permanent 
modifications approved by servicers; information on permanent 
modifications by waterfall step (i.e., the percent of 
modifications involving interest rate reductions, term 
extensions, and principal forbearance), the predominant 
hardship reasons for permanent modifications (including 
curtailment of income, excessive obligation, unemployment, and 
illness of principal borrower), select median characteristics 
of permanent modifications (i.e., median percentage decrease in 
front-end DTI, median percentage decrease in back-end DTI, and 
dollar decrease in median monthly payments), and a breakdown of 
modification numbers for states and the 15 MSAs with highest 
HAMP activity (showing active trials, permanent modifications, 
and totals).\313\
---------------------------------------------------------------------------
    \313\ MHA Servicer Performance Through December 2009, supra note 
194.
---------------------------------------------------------------------------
     In February, Treasury added a report highlights 
section to describe overall progress, a graph showing the 
waterfall of HAMP-eligible borrowers, and an appendix of all 
non-GSE participants in HAMP.\314\
---------------------------------------------------------------------------
    \314\ MHA Servicer Performance Through January 2010, supra note 
188.
---------------------------------------------------------------------------
     In March, Treasury added the total number of HAMP 
trials that converted to permanent modifications, the number of 
permanent modifications pending, and the percentage to goal of 
3-4 million modification offers to the HAMP snapshot; a comment 
that 32 percent of trials that started at least three months 
ago have been converted to permanent modifications by the 
servicer to the bar graph of cumulative HAMP trial started by 
month; and a graph of selected outreach measures (servicer 
solicitation of borrowers by servicers (cumulative) and page 
views on MHA.gov (in February 2010 and cumulative)).\315\
---------------------------------------------------------------------------
    \315\ MHA Website, supra note 279.
---------------------------------------------------------------------------
    Treasury intends to provide additional information on 
servicer performance later in the year, including the results 
of performance metrics such as average time to answer borrower 
calls and the percentage of borrowers personally contacted, as 
such information becomes available.\316\
---------------------------------------------------------------------------
    \316\ Treasury conference call with Panel staff (Mar. 24, 2010); 
see also House Committee on Oversight and Government Reform, Written 
Testimony of Herbert M. Allison, assistant secretary, Office of 
Financial Stability, U.S. Department of the Treasury, Foreclosure 
Prevention: Is The Home Affordable Modification Program Preserving 
Homeownership?, at 8-9 (Mar. 25, 2010) (online at oversight.house.gov/
images/stories/Hearings/Committee_on_Oversight/2010/032510_HAMP/
TESTIMONY-Allison.pdf).
---------------------------------------------------------------------------
    Evaluation. Treasury's release of additional aggregate data 
by lender/servicer, aggregate data on the percentage of trials 
that started at least three months ago that have been converted 
to permanent modifications, aggregate data on the predominant 
reasons for HAMP modification, and aggregate data on 
modification characteristics is a positive step in providing 
greater transparency regarding the scope and effectiveness of 
the MHA programs. Treasury still needs to provide the public 
with significantly more information to ensure MHA transparency, 
accountability, and effectiveness.
    As discussed above, Treasury should continue to enhance the 
amount of information available by lenders and servicers. 
Treasury could commit to release publicly the following:
           cumulative rate of conversion for eligible 
        trials;
           monthly rate of conversion for eligible 
        trials: percentage of trials eligible to convert in 
        month X that converted;
           conversion rate by vintage of trial 
        modifications and the percentage of modifications 
        commenced in any given month that have converted;
           cumulative default rate and the number of 
        defaults on permanent modifications;
           monthly rate of default and the number of 
        defaults on permanent modifications;
           breakdown of reason for defaults on 
        permanent modifications (if known);
           mean and median LTV of all permanent 
        modifications;
           mean and median LTV of permanent 
        modifications that have defaulted;
           percentage of permanent modifications with 
        first-lien LTV that is (a) <100 percent, (b) 100-125 
        percent, and (c) >125 percent;
           percentage of permanent modifications where 
        there is a junior lien on the property;
           number of second liens eliminated under 2MP;
           ownership breakdown of (a) trials, (b) 
        permanent modifications, and (c) defaulted 
        modifications (Fannie/Freddie/private label/portfolio);
           mean and median pre-modification front- and 
        back-end DTI on permanent modifications;
           mean and median post-modification front- and 
        back-end DTI on permanent modifications;
           mean and median post-modification front- and 
        back-end DTI on defaulted permanent modifications;
           breakdown of trial modification denial and 
        cancellation reasons by number and percentage on a 
        cumulative and monthly basis; and
           information on any HAMP compliance actions 
        taken, including the identity of the servicer, the 
        reason for the action, and the sanctions imposed.
    In addition, Treasury should disclose loan-level data, 
comparable to that provided in HMDA data releases, in a manner 
that allows easy access for outside parties. Treasury must 
ensure that modification application denial and cancellation 
data are fully and accurately reported by servicers. Congress 
and oversight bodies must have full access to program data to 
evaluate properly the success of HAMP. It is also critical that 
Treasury commit to providing regular publicly available data 
reports on the performance of all HAMP permanent modifications 
through the end of their five-year permanent modification 
period--that is, extending through 2017. The Panel looks 
forward to Treasury's release of more detailed public reports.

                  H. Conclusions and Recommendations 

    The Panel applauds Treasury for beginning to address the 
problems that the Panel has highlighted over the last year and 
in particular for taking steps to support borrowers dealing 
with unemployment, second liens, or negative equity. However, 
the Panel remains concerned about the timeliness of Treasury's 
response, the sustainability of mortgage modifications, and the 
accountability of Treasury's foreclosure programs.

Timeliness

    The foreclosure crisis has thus far outpaced Treasury's 
efforts to deal with it. Since early 2009, Treasury has 
initiated half a dozen foreclosure mitigation programs, 
gradually ramping up the incentives for participation by 
borrowers, lenders, and servicers. Although Treasury should be 
commended for trying new approaches, its pattern of providing 
ever more generous incentives might backfire, as lenders and 
servicers might opt to delay modifications in hopes of 
eventually receiving a better deal. Further, loan servicers 
have expressed confusion about the constant flux of new 
programs, new standards, and new requirements.
    The long delay in dealing effectively with foreclosures 
underscores the need for Treasury to get its new initiatives up 
and running quickly, but it also underscores the need for 
Treasury to get these programs right. Even if Treasury's 
recently announced programs succeed, their impact will not be 
felt until early 2011--almost two years after the foreclosure 
mitigation program was first launched.

Sustainability

    Treasury's success will ultimately be measured not by the 
number of mortgages modified but by the number of homeowners 
who avoid foreclosure. The programs have made progress in 
helping some whose loans can be prudently modified. It appears, 
however, that Treasury's programs are vulnerable to several 
weaknesses that could undermine the long-term sustainability of 
mortgage modifications.
    Treasury needs to support all three elements of successful 
modifications: commencing modifications, converting 
modifications to permanent status, and sustaining 
modifications. Of these three elements, the last has received 
the least attention, even though it is in many ways the most 
important. A modification that eventually redefaults represents 
only a stay, not a reprieve--a stay purchased at significant 
taxpayer expense.
    Yet, even those families who are able to qualify for a 
modification and manage to make every payment on time may face 
difficulty after five years; although the modifications are 
called permanent, in fact, the interest rates and therefore the 
payments can rise after five years. The phase-out of 
modification terms could create significant sustainability 
challenges for families who have otherwise been successful 
under the terms of the modification, especially for those 
families still underwater on their properties. Unless housing 
prices recover to a sufficient degree--which appears unlikely--
or the economy rebounds notably, these families may find 
themselves back in an all too familiar situation of 
desperation.
    Although the federal government has played and will 
continue to play a key role in foreclosure prevention, it 
cannot solve the problem alone, and it should embrace a broad 
sense of partnership with state, local, and private programs.
    At the same time, Treasury must consider whether its 
definition of ``affordability'' adequately captures the many 
financial pressures facing families today. It should examine 
the appropriateness of the present 31 percent DTI requirement 
and should consider whether DTI standards should account for 
local conditions, arrearages, second liens, and other borrower 
debt.

Accountability

    As always, Treasury needs to take care to communicate its 
goals, its strategies, and its measures of success for its 
programs. Its stated goal of modifying three to four million 
mortgages has proven too vague, since a modification offer does 
not always translate into a foreclosure prevented. Treasury's 
goals should include specific metrics to measure the success of 
each of its foreclosure prevention programs.
    The Panel is concerned that the sum total of announced 
funding for Treasury's individual foreclosure programs exceeds 
the total amount set aside for foreclosure prevention. It is 
unclear whether this indicates that Treasury will scale back 
particular programs or will scale up its entire foreclosure 
prevention effort. Treasury must be clearer about how much 
taxpayer money it intends to spend and where.
    Treasury should also clarify the answers to important 
questions about the FHA refinancing program. If the program 
allows private lenders to offload their poorly performing 
mortgages onto taxpayers, then this would represent an 
inappropriate backdoor bailout. Treasury should ensure that the 
program does not simply shift risk from private lenders to the 
federal government.
    The Panel also offers the following operational 
recommendations to Treasury:
     Focus on launching the long overdue CHAMPS system 
and the foreclosure web portal as soon as possible.
     Release more information to borrowers about how 
their eligibility for HAMP is calculated, including the inputs 
used when borrowers are denied due to having an NPV-negative 
loan.
     Prohibit HAMP-participating servicers from 
proceeding with a foreclosure unless a valid denial or 
cancellation reason is reported, and impose meaningful monetary 
sanctions for failure to properly report denial and 
cancellation reasons.
     Exercise greater oversight of Fannie Mae and 
Freddie Mac on compliance and oversight issues. In particular, 
the inconsistent use of denial codes has made it difficult to 
gather reliable data on the programs' effectiveness. Servicers 
should be subject to strong penalties for failure to follow 
denial code reporting guidelines.
     Thoroughly monitor the activities of participating 
lenders and servicers, audit them, and enforce program rules, 
guidelines, and requirements.
     Release greater information on compliance results 
and sanctions.
     Enforce new borrower outreach and communication 
standards and timelines.
     Continue to expand and improve data collected and 
publicly reported, specifically the list of items included in 
Section G.5. Treasury should also release information on the 
status of borrowers who received the January 31 notice of the 
expiration of the trial modification period; a new category for 
those who are appealing their status under the January 31 
notice; a new category for borrowers offered contingent 
permanent modifications, pending receipt of their hardship 
affidavit or tax verification form per the January 28 
supplemental directive; the number of trial modifications that 
have been in place for three months or more, broken down by 
month; the reasons why trial and permanent modifications were 
canceled; the reasons why homeowners were denied permanent 
modifications after initiating trial modifications; and a 
separate category on escalation reviews and the results of 
Fannie Mae audits.
    Treasury has made progress since the Panel's last 
foreclosure report, but its programs still are not keeping pace 
with the foreclosure crisis. Even as Treasury struggles to get 
its foreclosure programs off the ground, the crisis continues 
unabated. In 2009, 2.8 million homeowners received a 
foreclosure notice. The long delay in successfully addressing 
the foreclosure crisis has served no one well, and further 
delays would cause even more pain.
       ANNEX I: STATE OF THE HOUSING MARKETS AND GENERAL ECONOMY


1. Housing Market Indicators

    An analysis of Treasury's foreclosure mitigation efforts 
must consider broader questions: Is the housing market 
recovering? What is the supply and demand situation? What are 
the trends in delinquencies and foreclosures? How many more 
foreclosures can we expect in coming years? What other factors 
could change the foreclosure situation? Without the answers to 
these questions, it is hard to say whether or not Treasury is 
conducting an effective foreclosure mitigation effort that will 
make a significant difference. Unfortunately, the data 
described here paint a fairly bleak picture of the future of 
the housing market and call into question whether Treasury's 
efforts are likely to have a large impact, considering the vast 
scale of the housing market's problems.
            a. Home Prices
    The present level and trends in home prices greatly affect 
the success of any foreclosure mitigation effort.
    The following section looks at three home value indices--
the highly regarded S&P/Case-Shiller and FHFA indices, and a 
more recent and controversial but still useful index from the 
online real estate database Zillow. It then considers home 
price trends in historical context by comparison to other 
housing booms and busts. Although the results differ because of 
different data sets, methodology, and assumptions, it is 
possible to see some broad trends in home prices. Nationally, 
home prices have fallen from a peak in 2006. Nationally, price 
declines continued in 2009, although the rate of decline has 
slowed and in recent months become essentially flat. There is 
significant local variation in housing price trends. Some 
metropolitan areas continue to see home prices fall, but other 
areas have seen upticks in prices. In all areas, however, 
housing prices are still significantly down from their peaks.
    The S&P/Case-Shiller Home Price Index estimates price 
trends using repeat sales of the same homes (including sales of 
foreclosed properties) in order to control for differences in 
the tested sample. For this reason, it is often referred to as 
a ``constant quality'' index. However, because the index is 
based on repeat sales, it excludes new construction. S&P/Case-
Shiller's national home price index rose 0.3 percent in January 
2010 on a seasonally adjusted basis. While the index has now 
risen for four months in a row, it has declined 0.7 percent 
over the past year.\317\
---------------------------------------------------------------------------
    \317\ Standard & Poor's, Home Prices in the New Year Continue the 
Trend Set in Late 2009 According to the S&P/Case-Shiller Home Price 
Indices (Mar. 30, 2010) (online at www.standardandpoors.com/spf/
CSHomePrice_Release_033056.pdf).
---------------------------------------------------------------------------
    The FHFA Purchase Only House Price Index is also a constant 
quality index with a similar methodology, although its sample 
is based only on properties with mortgages that were acquired 
by government-sponsored entities (GSEs) Fannie Mae and Freddie 
Mac. FHFA data are therefore based only on homes conforming to 
GSE standards, excluding properties that are either too 
expensive or those with less stringent standards, as well as 
excluding new construction. As the name implies, the Purchase 
Only House Price Index includes only data from actual 
purchases, not appraisals conducted in advance of refinancings. 
This index declined by 0.6 percent between December 2009 and 
January 2010 on a seasonally adjusted basis.\318\ However, the 
index fell only 0.1 percent in the fourth quarter of 2009 
overall and was down 1.2 percent for the entire year, somewhat 
less than the annual decline for the Case-Shiller index. The 
FHFA's All Transactions House Price Index, which includes 
property values from refinancing appraisals as well, declined 
0.7 percent in the fourth quarter and 4.7 percent during all of 
2009.\319\
---------------------------------------------------------------------------
    \318\ Federal Housing Finance Agency, U.S. Monthly House Price 
Index Declines 0.6 Percent From December to January (Mar. 23, 2010) 
(online at www.fhfa.gov/webfiles/15565/MonthlyHPI32310.pdf).
    \319\ Federal Housing Finance Agency, House Prices Fall Modestly in 
the Fourth Quarter (Feb. 25, 2010) (online at www.fhfa.gov/webfiles/
15454/finalHPI22510.pdf). For a discussion of the differences between 
the Case-Shiller and FHFA indices, see Charles A. Calhoun, OFHEO House 
Price Indexes: HPI Technical Description (Mar. 1996) (online at 
www.fhfa.gov/webfiles/896/hpi_tech.pdf).
---------------------------------------------------------------------------
    The online real estate database Zillow.com compiles an 
index based on their home value estimates that covers 
approximately 75 percent of all homes in the United States, 
more than 80 million properties in all.\320\ Unlike the other 
indices mentioned here, Zillow's index is based not on actual 
sales but on an appraisal-like methodology that uses comparable 
sale prices, characteristics of the individual home, past sales 
history, and tax-assessment data. Although Zillow's estimates 
have been criticized as being inaccurate for valuing individual 
homes,\321\ the extremely large sample covered (including new 
construction) makes the index useful for comparison to the 
often widely divergent Case-Shiller and FHFA indices. The 
Zillow Home Value Index showed declines of 0.5 percent from 
January to February 2010, 1.5 percent from November 2009 to 
February 2010, and 5.4 percent from February 2009 to February 
2010.\322\
---------------------------------------------------------------------------
    \320\ Stan Humphries, Home Value Index vs FHFA and Case-Shiller, 
Zillow (Feb. 19, 2010) (online at www.zillow.com/wikipages/Zillow-Home-
Value-Index-vs-FHFA-and-Case-Shiller/) (accessed Apr. 12, 2010). Zillow 
provides estimates only for homes in areas where there is available and 
timely transaction data. Since there is no apparent common factor among 
the uncovered areas besides a lack of data, there is no reason to 
believe that the housing situation in these areas is significantly 
different from the situation in the covered areas.
    \321\ James Hagerty, How Good are Zillow's Estimates?, Wall Street 
Journal (Feb. 14, 2007) (online at online.wsj.com/public/article/
SB117142055516708035-O6WPplch_duU0zq_
zhjQaI19vIg_20080214.html).
    \322\ Zillow, Real Estate Market Reports (Feb. 1, 2010) (online at 
www.zillow.com/local-info/).
---------------------------------------------------------------------------
    Figure 27, below, shows the trends in national home prices 
over the past 10 years for the three indices.

           FIGURE 27: CHANGES IN HOME PRICE INDICES, 2000-2009
------------------------------------------------------------------------
                     S&P/Case-
                   Shiller \323\   FHFA \324\  Zillow \325\    Average
------------------------------------------------------------------------
2000                     11.14%         5.89%         8.22%        8.42%
2001                      6.74%         6.12%         6.53%        6.46%
2002                     11.58%         7.07%         9.34%        9.33%
2003                     10.48%         7.13%        10.62%        9.41%
2004                     14.72%         8.72%        14.37%       12.60%
2005                     13.88%         8.57%        11.70%       11.38%
2006                    (0.15)%         2.37%         0.13%        0.78%
2007                    (9.17)%       (2.13)%       (5.41)%      (5.57)%
2008                   (17.27)%       (7.56)%      (11.63)%     (12.15)%
2009                    (1.02)%       (2.78)%       (4.53)%      (2.78)%
------------------------------------------------------------------------
\323\ Data calculated from Standard & Poor's, S&P Case-Shiller Homeprice
  Indices (Seasonally Adjusted Values for January 2010) (Mar. 30, 2010)
  (online at homeprice.standardandpoors.com) (free registration
  required). See also Standard & Poor's, Home Prices Continue to Send
  Mixed Messages as 2009 Comes to a Close According to the S&P/Case-
  Shiller Home Price Indices (Feb. 23, 2010) (online at
  www.standardandpoors.com/servlet/BlobServer?blobheadername3= MDT-
  Type&blobcol=urldocumentfile&blobtable=
  SPComSecureDocument&blobheadervalue2=
  inline%3B+filename%3Ddownload.pdf&blobheadername2= Content-
  Disposition&blobheadervalue1= application%2Fpdf&blobkey=
  id&blobheadername1=content-
  type&blobwhere=1245206345483&blobheadervalue3=
  abinary%3B+charset%3DUTF-8 &blobnocache=true) (hereinafter ``Home
  Prices Continue to Send Mixed Messages'').
\324\ Data compiled by Panel staff from Federal Housing Finance Agency,
  HPI Historical Reports (2000-2009) (online at www.fhfa.gov/
  Default.aspx?Page=195) (hereinafter ``HPI Historical Reports (2000-
  2009)'') (accessed Apr. 13, 2010).
\325\ Data provided by Zillow staff.

    Real estate is highly local, and individual areas can have 
home price trends that differ greatly from each other and the 
national average. Figure 28 shows the December 2009 changes in 
home prices for the top 20 metropolitan areas as measured by 
each of the three indices. It is apparent from these tables 
that certain metropolitan areas, such as Las Vegas and Miami, 
have suffered far greater drops in value than others, such as 
Dallas and Denver.

                         FIGURE 28: YEAR-OVER-YEAR CHANGE IN HOME PRICES, DECEMBER 2009
----------------------------------------------------------------------------------------------------------------
                                                                S&P/Case-                                 City
                                                              Shiller \326\  FHFA \327\  Zillow \328\   Average
----------------------------------------------------------------------------------------------------------------
Atlanta.....................................................      (4.00)%       (6.69)%      (1.11)%     (3.93)%
Boston......................................................        0.50%       (3.62)%        2.05%     (0.36)%
Charlotte...................................................      (3.80)%       (5.97)%      (3.51)%     (4.43)%
Chicago.....................................................      (7.20)%       (8.38)%      (7.90)%     (7.83)%
Cleveland...................................................      (1.20)%       (2.71)%      (2.97)%     (2.29)%
Dallas \329\................................................        3.00%       (1.27)%            -       0.87%
Denver......................................................        1.20%       (1.37)%        0.72%       0.18%
Detroit.....................................................     (10.30)%       (9.13)%     (19.70)%    (13.04)%
Las Vegas...................................................     (20.60)%      (19.30)%     (21.22)%    (20.37)%
Los Angeles.................................................        0.00%       (4.59)%        0.64%     (1.32)%
Miami.......................................................      (9.90)%      (14.02)%     (10.33)%    (11.42)%
Minneapolis.................................................      (2.30)%       (7.85)%      (4.78)%     (4.98)%
New York....................................................      (6.30)%       (5.84)%      (2.45)%     (4.86)%
Phoenix.....................................................      (9.20)%      (16.01)%     (14.85)%    (13.35)%
Portland....................................................      (5.40)%       (4.93)%      (5.77)%     (5.37)%
San Diego...................................................        2.70%       (3.64)%        0.14%     (0.27)%
San Francisco...............................................        4.80%       (5.72)%        0.59%     (0.11)%
Seattle.....................................................      (7.90)%       (9.60)%      (5.40)%     (7.63)%
Tampa.......................................................     (11.00)%      (10.75)%     (11.04)%    (10.93)%
Washington..................................................        1.90%       (4.61)%      (1.41)%     (1.37)%
Index Average...............................................      (4.25)%       (7.30)%      (5.70)%
----------------------------------------------------------------------------------------------------------------
\326\ Home Prices Continue to Send Mixed Messages, supra note 323.
\327\ Federal Housing Finance Agency, Changes in FHFA Metropolitan Area House Price Indexes (Feb. 25, 2010)
  (online at www.fhfa.gov/Default.aspx?Page=216&Type=summary).
\328\ Data provided by Zillow staff.
\329\ Zillow does not report data for Dallas because the transactions reported in that area are insufficient to
  ensure accuracy.

    Figure 29, below, shows the FHFA Purchase Only Home Price 
Index, compared with the number of foreclosure completions over 
time. As might be expected, foreclosure completions and home 
prices tend to have an inverse relationship. It is not clear to 
what extent foreclosures drive housing price declines or vice 
versa, although it seems likely that the causation works in 
both directions, creating a negative feedback loop of 
foreclosures and housing price declines.

 FIGURE 29: FORECLOSURE COMPLETIONS COMPARED TO CASE-SHILLER AND FHFA 
                                 \330\

      
---------------------------------------------------------------------------
    \330\ Foreclosure completion data provided by the HOPE NOW 
Alliance. Standard & Poor's, S&P/Case-Shiller Home Price Indices 
(Instrument: Seasonally Adjusted Composite 20 Index) (online at 
www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/
us/?indexId=spusa-cashpidff_p-us_) (hereinafter ``S&P/Case-Shiller Home 
Price Indices'') (accessed Apr. 12, 2010); Federal Housing Finance 
Agency, U.S. and Census Division Monthly Purchase Only Index 
(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (hereinafter ``U.S. and Census Division Monthly 
Purchase Only Index'') (accessed Apr. 12, 2010). The most recent data 
available for the housing indices are as of January 2010. 
[GRAPHIC] [TIFF OMITTED] T5737A.020

    It is interesting to note, though, that despite the high 
and rising level of foreclosure completions last year, home 
prices declined relatively little during 2009, implying that 
there is significant demand counteracting the downward pressure 
on prices caused by foreclosures. It is likely that government 
interventions in the housing market, such as the homebuyer tax 
credits, support for Fannie Mae and Freddie Mac, a large 
increase in FHA insurance underwriting, and Treasury and 
Federal Reserve purchases of mortgage-backed securities, as 
well as the Federal Reserve monetary policy aimed at keeping 
interest rates low, have fostered increased demand for home 
purchases by making them more affordable and by reducing the 
cost of mortgage finance. Some of these government 
interventions in the housing market are being scaled back or 
eliminated. The FHA has tightened its underwriting standards in 
response to reduced capitalization of its insurance fund,\331\ 
and the Federal Reserve has ended its direct support of 
mortgage finance markets by winding down its purchases of 
agency mortgage-backed securities. By supporting the secondary 
mortgage market through its purchases of agency mortgage-backed 
securities, the Federal Reserve facilitated lower mortgage 
rates for both home purchasers and refinancers. The Federal 
Reserve purchased approximately $1.25 trillion of agency 
mortgage-backed securities since early 2009, but its program to 
buy such securities came to an end on March 31, 2010. The 
Federal Reserve's support for the MBS market has been described 
by Susan M. Watcher, Richard B. Worley Professor of Financial 
Management and Professor of Real Estate, Finance and City and 
Regional Planning at the University of Pennsylvania's Wharton 
School, as ``the single most important move to stabilize the 
economy.''\332\ This support as well as Federal Reserve 
monetary policy contributed to the interest rate on 30-year 
mortgages declining from over six percent in late 2008 to below 
five percent in March 2009.\333\ Lower rates have helped stave 
off some foreclosures both by enabling refinancings and by 
making interest rate resets on adjustable rate mortgages less 
severe. As government support for the housing market is 
withdrawn, the sustainability of home purchase demand is 
questionable.
---------------------------------------------------------------------------
    \331\ See U.S. Department of Housing and Urban Development, FHA 
Announces Policy Changes to Address Risk and Strengthen Finances, HUD 
No. 10-016 (Jan. 20, 2010) (online at portal.hud.gov/portal/page/
portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-016). 
See also Bob Tedeschi, Mortgages--F.H.A. Lending Standards Tightened, 
New York Times (Jan. 28, 2010) (online at www.nytimes.com/2010/01/31/
realestate/31mort.html); Steve Kerch, Shoring Up the FHA: Housing 
Agency Tightens Underwriting Policies, Raises Mortgage Premiums, 
MarketWatch (Jan. 20, 2010) (online at www.marketwatch.com/story/fha-
raises-fees-tightens-mortgage-underwriting-2010-01-20).
    \332\ Sewell Chan, Fed Ends Its Purchasing of Mortgage Securities, 
New York Times (Apr. 1, 2010) (online at www.nytimes.com/2010/04/01/
business/01fed.html) (hereinafter ``Fed Ends Its Purchasing of Mortgage 
Securities'').
    \333\ See Federal Home Loan Mortgage Corporation, Primary Mortgage 
Market Survey: Convention, Conforming 30-Year Fixed Rate Mortgage 
Series Since 1971 (online at www.freddiemac.com/pmms/
pmms_archives.html) (weekly and monthly 30-year fixed-rate data).
---------------------------------------------------------------------------
    Many mortgage bankers feared that the ending of the Federal 
Reserve MBS purchase program would cause the prices of the 
securities to decrease and their yields relative to Treasury 
securities to soar, causing mortgage interest rates to rise and 
the demand for home loans in an already weak market to 
fall.\334\ After the program ended, 30-year fixed mortgage 
interest rates rose to 5.08 percent, the highest rate since the 
first week of January 2010.\335\ However, analysts no longer 
expect the close of the Federal Reserve MBS purchase program to 
cause a major disruption in the housing market or a setback to 
its recovery. The Federal Reserve was clear on its intention to 
exit the market, and the market appears to have been able to 
absorb this news. Fannie Mae and Freddie Mac have forecasted 
that 30-year fixed mortgage interest rates should increase less 
than a quarter of a percentage point in the next three 
months.\336\ Lawrence Yun, chief economist at the National 
Association of Realtors, has said that the private market for 
mortgage-backed securities has sufficiently recovered for the 
Federal Reserve program to end without much impact. He reasoned 
that consumers should not see much of a change as long as there 
are enough buyers on Wall Street, and it appears that private 
investors are stepping in as the Federal Reserve exits.\337\ 
Several market participants, including Christian Cooper of 
Royal Bank of Canada's RBC Capital Markets and Scott Colbert of 
Commerce Trust Co., agree that there are a number of people on 
the sidelines waiting to buy MBS securities.\338\ In addition, 
Michael Fratantoni, vice president for single-family research 
at the Mortgage Bankers Association, has said that sharp 
increases in mortgage interest rates are not expected because 
the supply of mortgage-backed securities has not increased 
substantially. Messrs. Fratantoni and Yun have further stated, 
however, that mortgage interest rates may rise late in the year 
due to economic forces unrelated to the Federal Reserve 
purchase program, such as recovery in the job market.\339\
---------------------------------------------------------------------------
    \334\ See Sara Lepro, Why Fed's Exit Plan Isn't Roiling Mortgage 
Bonds, American Banker (Mar. 22, 2010) (online at 
www.americanbanker.com/issues/175_54/mortgage-bonds-1016184-1.html) 
(hereinafter ``Why Fed's Exit Plan Isn't Roiling Mortgage Bonds'').
    \335\ See Federal Home Loan Mortgage Corporation, 2010 Weekly 
Mortgage Rates Data (online at www.freddiemac.com/dlink/html/PMMS/
display/PMMSOutputYr.jsp) (accessed Apr. 12, 2010).
    \336\ See Federal Home Loan Mortgage Corporation, March 2010 
Economic and Housing Market Outlook (Mar. 12, 2010) (online at 
www.freddiemac.com/news/finance/docs/Mar_2010_public_outlook.pdf); 
Federal National Mortgage Association, Economics and Mortgage Market 
Analysis: Economic Forecast: March 2010 (Mar. 10, 2010) (online at 
www.fanniemae.com/media/pdf/economics/2010/
Economic_Forecast_031710.pdf).
    \337\ Fed Ends Its Purchasing of Mortgage Securities, supra note 
332.
    \338\ Why Fed's Exit Plan Isn't Roiling Mortgage Bonds, supra note 
334.
    \339\ Fed Ends Its Purchasing of Mortgage Securities, supra note 
332.
---------------------------------------------------------------------------
    Figure 30 highlights the behavior of real estate prices in 
recent recessions, shown by the shaded bars. As mentioned 
earlier, both the lag with the general economy and the slower 
movement up and down can be seen.

           FIGURE 30: FHFA HOME PRICE INDEX, 1975-2009 \340\


                       [Not seasonally adjusted]

      
---------------------------------------------------------------------------
    \340\ Federal Housing Finance Agency, U.S. and Census Divisions 
through 2009Q4 (All-Transactions Indexes: Not Seasonally Adjusted) 
(accessed Apr. 4, 2010) (online at www.fhfa.gov/webfiles/15436/
4q09hpi_reg.txt) National Bureau of Economic Research, Business Cycle 
Expansions and Contractions (accessed Apr. 5, 2010) (online at 
www.nber.org/cycles/). The shaded areas represent periods of recession 
as defined by the National Bureau of Economic Research (NBER). The NBER 
has not yet determined whether the recession that began in December 
2007 has ended nor established the date of its ending. The Panel's own 
estimate is that this recession ended at the end of Q2 2009, the last 
quarter of net decline in the U.S. Gross Domestic Product (GDP), and 
that is the date that is assumed here. National Bureau of Economic 
Research, Business Cycle Expansions and Contractions (accessed Apr. 5, 
2010) (online at www.nber.org/cycles/); Bureau of Economic Analysis, 
Gross Domestic Product (accessed Apr. 5, 2010) (online at www.bea.gov/
national/txt/dpga.txt). 
[GRAPHIC] [TIFF OMITTED] T5737A.021

    The United States has experienced several regional housing 
price collapses over the past three decades. These past housing 
busts provide some sense as to the length of time it will take 
for housing prices to recover to their pre-collapse peaks. 
Historically, it has often taken over a decade for regional 
housing prices to recover from collapses, and on a time-value 
and inflation adjusted basis, these recoveries have taken even 
longer. Thus, it took over 13 years for housing prices in New 
England to recover after their 1988 collapse, 12 years for 
housing prices in California to rebound after falling from 
their 1989 peak, 17 years for Michigan housing prices to return 
to 1979 peak, and Texas housing prices have yet to recover from 
a 15-year decline that began in 1982. According to an FHFA 
study, the ``median time required to return to prior peak 
prices was 10\1/2\ to 20 years.'' \341\
---------------------------------------------------------------------------
    \341\ Federal Housing Finance Agency, A Brief Examination of 
Previous Housing Price Declines, at 4 (June 2009) (online at 
www.fhfa.gov/webfiles/2918/PreviousDownturns61609.pdf).
---------------------------------------------------------------------------
    These historical precedents suggest that the housing price 
recovery time frame on a national basis may take a decade or 
more, and that in some particularly hard-hit areas, it may take 
as long as two decades for housing prices to recover to their 
pre-bust peaks. Moreover, if there is another collapse in 
housing prices, a ``double-dip'' that some economists fear, the 
housing price recovery could take even longer.
    Historically, housing price recoveries have largely 
paralleled overall regional economic recoveries; as regional 
economies recovered, housing prices rebounded. But past 
regional housing busts were also often closely connected with 
regional employment conditions--the decline of defense 
contracting in New England and California in the late 1980s, 
the drop in oil prices in Texas in the mid-1980s, and the 
decline of the U.S. auto industry in 1980s Michigan. While 
unemployment is now a major factor contributing to mortgage 
defaults and depressed housing values, the decline in housing 
prices began in 2006, well before a national economic slowdown. 
That is to say, only part of the current housing bust is 
related to general economic conditions; part relates to housing 
prices that were elevated because lax underwriting expanded the 
pool of mortgage borrowers, thereby driving up demand and thus 
prices. Economic recovery will help buoy housing prices, but it 
is critical to recall that peak housing prices in 2006 were not 
driven by fundamentals, so they are unlikely to be restored 
solely by improvements in the overall economy.
            b. Home Sales
    The National Association of Realtors (NAR) reports that 
existing home sales dropped 0.6 percent between January 2010 
and February 2010, after suffering 0.5 percent and 16.5 percent 
declines in January 2010 and December 2009, respectively. The 
February seasonally adjusted annual sales rate of 5.02 million 
units was down one percent from 5.05 million units in January, 
though still 7 percent above the level of February 2009.\342\ 
In 2009 there were 5.2 million existing home sales, a 4.9 
percent gain over the 4.9 million transactions recorded in 
2008. This was the first annual sales gain recorded since 
2005.\343\
---------------------------------------------------------------------------
    \342\ National Association of Realtors, February Existing-Home 
Sales Ease with Mixed Conditions Around the Country (Mar. 23, 2010) 
(online at www.realtor.org/press_room/news_releases/2010/03/ehs_ease) 
(hereinafter ``February Existing-Home Sales Ease'').
    \343\ National Association of Realtors, December Existing-Home 
Sales Down but Prices Rise; 2009 Sales Up (Jan. 25. 2010) (online at 
www.realtor.org/press_room/news_releases/2010/01/december_down) 
(hereinafter ``December Existing-Home Sales Down'').
---------------------------------------------------------------------------
    The government's homebuyer tax credit programs, which will 
end on April 30, 2010, appear to have attracted significant 
interest from the home-buying public. Sales, however, did not 
grow in the early months of 2010 as many had expected. The last 
three months have seen declining existing home sales, 
indicating a weakening demand for homes and possibly a lack of 
qualified buyers. Bad weather in much of the country may have 
also deterred buyers. Some observers have suggested that the 
tax credits are not bringing new buyers into the market, but 
are simply moving up the timing of sales that would have 
happened anyway at a later date. If this is true, it is likely 
that sales will remain low for several months after the 
programs end.

                  FIGURE 31: EXISTING HOME SALES \344\

      
---------------------------------------------------------------------------
    \344\ The shaded areas represent periods of recession as defined by 
the National Bureau of Economic Research (NBER). National Bureau of 
Economic Research, Business Cycle Expansions and Contractions (online 
at www.nber.org/cycles/) (accessed Apr. 5, 2010) (hereinafter 
``Business Cycle Expansions and Contractions''); U.S. Department of 
Commerce, Bureau of Economic Analysis, Gross Domestic Product (accessed 
Apr. 5, 2010) (online at www.bea.gov/national/txt/dpga.txt) 
(hereinafter ``Bureau of Economic Analysis Data--Gross Domestic 
Product''). The data is seasonally adjusted annual rate. 
[GRAPHIC] [TIFF OMITTED] T5737A.022

    The inventory of homes for sale improved in February, 
increasing 9.5 percent after a 0.5 percent decline in January. 
February's unsold inventory totaled 3.59 million units, up from 
3.27 million units in January. Whereas January marked the 
lowest unsold inventory level since March 2006, the February 
inventory level has returned to levels seen in September 2009. 
Inventory is now 5.5 percent below the February 2009 level, and 
22 percent below the record high of 4.58 million units for sale 
in July 2008.\345\ Due to the substantial amount of ``shadow 
inventory'' that is not currently being offered for sale but 
could be brought to market quickly, the potential exists for a 
rapid increase in inventory levels. This issue is discussed 
further in Annex I(1)i.
---------------------------------------------------------------------------
    \345\ December Existing-Home Sales Down, supra note 343; National 
Association of Realtors, Existing-Home Sales Down in January but Higher 
than a Year Ago; Prices Steady (Feb. 26. 2010) (online at 
www.realtor.org/press_room/news_releases/2010/02/ehs_january2010) 
(hereinafter ``Existing-Home Sales Down in January''); February 
Existing-Home Sales Ease, supra note 342.
---------------------------------------------------------------------------

                     FIGURE 32: HOME SALE INVENTORY

[GRAPHIC] [TIFF OMITTED] T5737A.023

    Despite the lower raw inventory numbers, the slow pace of 
sales in February means that unsold inventory represented an 
8.6-month supply of unsold homes, up from 7.8 months in January 
and 7.2 months in December. NAR reports that 35 percent of 
existing home sales in February were ``distressed'' properties, 
either short sales or foreclosure liquidations.\346\ Such a 
large number of distressed sellers inevitably puts additional 
downward pressure on home prices.
---------------------------------------------------------------------------
    \346\ December Existing-Home Sales Down, supra note 343; Existing-
Home Sales Down in January, supra note 345; February Existing-Home 
Sales Ease, supra note 342.
---------------------------------------------------------------------------
            c. Construction
    New home construction data are an indicator of the overall 
state of the housing market, as well as a forecast of new 
housing supply that will come to market in future months. 
Indicators of new housing construction for February 2010 were 
mixed. Building permits and housing starts were significantly 
higher than similar figures for February of last year, 
signaling a modest revival of new housing construction during 
2009. Housing completions, on the other hand, were considerably 
lower than in February 2009. This may be attributable to 
housing developments started toward the end of the bubble 
market. Figure 33, below, shows seasonally adjusted annual 
rates of various construction statistics.

                             FIGURE 33: NEW HOUSING CONSTRUCTION DATA (ANNUALIZED) 347
----------------------------------------------------------------------------------------------------------------
                                                   February     January    Change from    February   Change from
                   Indicator                         2010         2010      1/10-2/10       2009      2/09-2/10
----------------------------------------------------------------------------------------------------------------
Building Permits...............................      612,000      621,000       (1.6)%      550,000        11.3%
Housing Starts.................................      575,000      591,000       (5.9)%      574,000         0.2%
Housing Completions............................      700,000      659,000         2.2%      828,000      (34.8)%
New Home Sales348..............................      308,000      309,000       (2.2)%      354,000      (13.0)%
----------------------------------------------------------------------------------------------------------------
347 U.S. Department of Commerce, Bureau of the Census, New Residential Construction in January 2010 (Feb. 17,
  2010) (online at www.census.gov/const/newresconst_201001.pdf); U.S. Department of Commerce, Bureau of the
  Census, New Residential Construction in February 2010 (Mar. 17, 2010) (online at www.census.gov/const/
  newresconst_201002.pdf).
348 U.S. Department of Commerce, Bureau of the Census, New Residential Sales in January 2010 (Feb. 24, 2010)
  (online at www.census.gov/const/newressales_201001.pdf); U.S. Department of Commerce, Bureau of the Census,
  New Residential Sales in February 2010 (Mar. 24, 2010) (online at www.census.gov/const/
  newressales_201002.pdf).

    Given the current housing market conditions, the rise in 
new home construction is somewhat unexpected. While many view 
this as an optimistic sign of a housing recovery, some would 
argue that this new supply will only add to the worsening 
inventory absorption situation described in the section above 
and further depress home prices.
    The discrepancy between the number of building permits 
issued and housing starts (both roughly 600,000) and the number 
of new homes sold (approximately 300,000) can be explained, in 
part, by the metrics through which the data is measured. 
Building permits and housing starts are measured by the total 
number of permits issued or units constructed, but the number 
of new home sales is only measured when a new home is sold to a 
third party.\349\ Therefore, anyone who commissions a new home 
to be built for themselves on land they already own will be 
counted as having a building permit and a housing start, but 
not as having a new home sale.
---------------------------------------------------------------------------
    \349\ U.S. Department of Commerce, Bureau of the Census 
conversations with Panel staff (Mar. 30, 2010).
---------------------------------------------------------------------------
            d. Mortgage Rates
    Prevailing mortgage interest rates are of interest to the 
Panel's evaluation of foreclosure mitigation efforts because 
these rates directly affect home affordability and indirectly 
drive property values. Current housing recovery efforts are 
being facilitated by historically low mortgage interest rates. 
However, an increase in mortgage interest rates is inevitable. 
Consequently, a housing recovery built on ultra-low long-term 
interest rates is unlikely to be sustainable. Since the amount 
that borrowers can afford to pay each month is relatively 
fixed, property values may fall when interest rates rise, 
because increasing interest rates put downward pressure on home 
prices. An increase in rates will in most cases lead to a 
decline in values and is likely to result in more delinquencies 
and foreclosures, because declines in borrowers' equity are 
correlated with defaults.\350\ While mortgage interest rates 
are market-driven and influenced by many supply and demand 
factors, Federal Reserve interest rate policy has considerable 
influence. The yields on Treasury securities also influence 
these rates, since Treasuries provide a competitive investment 
for the bond buyers who provide funds for the mortgage market. 
Both of these issues are discussed in Annex I(1)i.
---------------------------------------------------------------------------
    \350\ See, e.g., Stan Liebowitz, New Evidence on the Foreclosure 
Crisis, Wall Street Journal (July 3, 2009) (online at online.wsj.com/
article/SB124657539489189043.html).
---------------------------------------------------------------------------
    As of April 8, 2010, the interest rate on a 30-year fixed 
rate mortgage averaged 4.83 percent. This is similar to the 
rate of just over 5 percent in early January 2010 and up from 
the 4.65 percent average rate in late November 2009. Current 
mortgage interest rates vary by state from a low of 4.88 
percent in Maine to a high of 5.33 percent in Oklahoma.\351\ 
Nationwide, mortgage rates remain near historically low levels. 
This can be seen in Figure 34, which shows the average interest 
rates on 30-year fixed-rate mortgages since 1971. The shaded 
areas indicate officially designated recessions.
---------------------------------------------------------------------------
    \351\ Zillow, Mortgage Rates (online at www.zillow.com/
Mortgage_Rates) (accessed Apr. 8, 2010).
---------------------------------------------------------------------------

                FIGURE 34: MORTGAGE INTEREST RATES \352\

      
---------------------------------------------------------------------------
    \352\ Board of Governors of the Federal Reserve System, 
Conventional Mortgages (Monthly) (online at www.federalreserve.gov/
releases/h15/data/monthly/h15_mortg_na.txt) (accessed Apr. 12, 2010). 
The shaded areas represent periods of recession as defined by the 
National Bureau of Economic Research (NBER). Business Cycle Expansions 
and Contractions, supra note 344; Bureau of Economic Analysis Data--
Gross Domestic Product, supra note 344.
[GRAPHIC] [TIFF OMITTED] T5737A.024

    Figure 35, below, illustrates the mortgage interest rate 
spread over the yield of Treasury securities, an indicator of 
the market's perception of risk. In times of great uncertainty, 
such as late 2008, a classic financial panic, lenders demand 
larger spreads over low-risk Treasury securities in order to 
compensate for the increased risk of lending. Although the 
housing market has not appreciably improved since that time, 
the level of fear and confusion in the markets has subsided, 
leading to a decrease in spreads.

    FIGURE 35: RECENT 30-YEAR FIXED RATE MORTGAGE RATE SPREADS \353\

      
---------------------------------------------------------------------------
    \353\ This spread is the difference between the 30-year fixed-rate 
conventional mortgage rate and the yield on 10-year Treasury 
securities. Board of Governors of the Federal Reserve System, 
Conventional Mortgages (Weekly) (online at www.federalreserve.gov/
releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (hereinafter 
``Conventional Mortgages (Weekly)'') (accessed Apr. 12, 2010); Board of 
Governors of the Federal Reserve System, U.S. Government Securities/
Treasury Constant Maturities/Nominal (online at www.federalreserve.gov/
releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (hereinafter 
``U.S. Government Securities/Treasury Constant Maturities/Nominal'') 
(accessed Apr. 12, 2010).
[GRAPHIC] [TIFF OMITTED] T5737A.025

            e. Introductory Rate Resets
    The resetting of the introductory rates on mortgages 
continues to be a major problem for the long-term prospects of 
the housing market, as the Panel has noted in previous reports. 
This concern was also raised by the National Fair Housing 
Alliance and by Litton Loan Servicing at the Panel's September 
24, 2009 foreclosure mitigation field hearing.\354\ Many loans 
in recent years were originated with extremely low introductory 
rates. After a period of several years, the rate would reset to 
a significantly higher above-market rate for the remainder of 
the term, either as a fixed-rate loan or more commonly as an 
adjustable-rate loan. By making housing appear to be more 
affordable, these low rates were a valuable marketing tool for 
lenders.
---------------------------------------------------------------------------
    \354\ Testimony of Deborah Goldberg, supra note 225, at 11; 
Congressional Oversight Panel, Written Testimony of Larry Litton, chief 
executive officer, Litton Loan Servicing, Philadelphia Field Hearing on 
Mortgage Foreclosures, at 4 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-litton.pdf).
---------------------------------------------------------------------------
    Many borrowers assumed that at the end of the introductory 
term, they would be able to refinance into another mortgage. 
While this may have seemed like a reasonable assumption in a 
rising market, refinancing is a difficult proposition when a 
property has fallen in value. In such an environment, in order 
to qualify for refinancing a borrower may have to contribute 
additional equity in order to meet loan-to-value standards. The 
recent decline in mortgage availability and the tightening of 
underwriting standards means many borrowers cannot find lenders 
to refinance their homes. Even if a lender is willing to 
refinance a property, prepayment penalties can make refinancing 
extremely expensive for the borrower.\355\
---------------------------------------------------------------------------
    \355\ Prepayment penalties may be attached to loans, most often 
subprime, as a means of reducing the lender's prepayment risk, or loss 
of loan profitability and return predictability for investors; the 
borrower generally receives a lower interest rate in exchange for the 
penalty. Gregory Elliehausen, Michael E. Staten, and Jevgenijs 
Steinbuks, The Effect of Prepayment Penalties on the Pricing of 
Subprime Mortgages, 60 Journal of Economics and Business, Issues 1-2 
(Jan.-Feb. 2008) (online at business.gwu.edu/research/centers/fsrp/
2009/EffectPrepayment.pdf).
---------------------------------------------------------------------------
    Over $1 trillion in mortgages will reset during the next 
three years, and resets will not peak until November 2011.\356\ 
Option Adjustable Rate Mortgages (Option ARMs), in which the 
borrower chooses between different payment options, usually 
including a negative amortization option that adds unpaid 
interest to the loan balance, will make up a large percentage 
of the resetting loans going forward. In the Panel's 
Philadelphia Field Hearing on Foreclosures, Deborah Goldberg of 
the National Fair Housing Alliance pointed out that many Option 
ARM borrowers are severely underwater.\357\
---------------------------------------------------------------------------
    \356\ Zach Fox, Credit Suisse: $1 Trillion Worth of ARMs Still Face 
Resets, SNL Financial (Feb. 25, 2010) (online at www.snl.com/
interactivex/article.aspx?CDID=A-10770380-12086).
    \357\ Testimony of Deborah Goldberg, supra note 225, at 11.
---------------------------------------------------------------------------
    Option ARMs were not generally subprime loans, since they 
were made to prime credit borrowers.\358\ Many, however, were 
part of the larger ``Alt-A'' category of loans underwritten 
with reduced documentation, including ``stated,'' i.e. 
unverified, income.\359\ The terms subprime, prime, and Alt-A 
are used to describe the creditworthiness of a borrower. 
Creditworthiness of the borrower is, aside from mortgage type, 
the most common method of categorizing mortgages. Prime 
mortgages are loans to borrowers with good credit (typically 
above FICO 620) and adequate income. Alt-A mortgages are also 
loans to borrowers with prime (A) credit. However, Alt-As 
usually do not require income documentation, which is useful 
for small business owners and independent contractors who have 
variable income, but makes the loans susceptible to fraud. 
Subprime mortgages refer to loans to borrowers with poor credit 
(below 620). The Prime, Alt-A, and Subprime categories do not 
indicate the mortgage type (e.g., fixed or floating rate, 
interest only or fully amortizing). Another system of 
categorizing loans is by conformance with Fannie Mae/Freddie 
Mac (GSE) standards. Conforming mortgages are, of course, loans 
that meet these standards and are eligible for inclusion in GSE 
securitization pools. Non-conforming loans can be excluded from 
GSE pools for a variety of reasons, including loan size, loan 
type, borrower credit, income, loan-to-value, and fees. One 
common type of non-conforming loan is the Jumbo, a loan that 
exceeds the conforming limit, which ranged from $417,000 to 
$938,250 depending on location. Exotic products are typically 
nonconforming, even if made to prime borrowers. Because there 
are so many reasons a loan can be non-conforming, one cannot 
judge a loan's riskiness on this factor alone, nor can one 
equate the terms ``conforming'' with ``prime,'' or 
``nonconforming'' with ``subprime.'' \360\
---------------------------------------------------------------------------
    \358\ Oren Bar-Gill, The Law, Economics and Psychology of Subprime 
Mortgage Contracts, 94 Cornell L. Rev. 1073, 1086 (Nov. 2009) (online 
at www.law.virginia.edu/pdf/olin/conf08/bargill.pdf).
    \359\ Credit Suisse, Research Report: Mortgage Liquidity du Jour: 
Underestimated No More, at 16 (Mar. 12, 2007) (online at 
www.scribd.com/doc/282277/Credit-Suisse-Report-Mortgage-Liquidity-du-
Jour-Underestimated-No-More-March-2007).
    \360\ Kristie Lorette, What is a Non Conforming Mortgage Loan 
(online at www.ehow.com/about_6062372_non_conforming-mortgage-
loan_.html) (accessed Apr. 12, 2010).
---------------------------------------------------------------------------
    Interest-only loans comprise another category that will be 
resetting in large numbers. These loans, like Option ARMs, were 
a result of easy credit during the housing boom. Some of them 
will recast into fixed-rate mortgages at the end of the 
interest-only period, while others will become adjustable-rate 
mortgages. Currently, prevailing mortgage rates are low, so 
interest-only adjustable-rate borrowers facing resets this year 
might experience only a slight rise or even a decline in 
payments. However, the potential for rising interest rates as 
more of these mortgages reset could cause further stress on 
homeowners. A January 2010 report by Fitch Ratings estimated 
that $80 billion in prime and Alt-A interest-only loans would 
reset by the end of 2011. The report estimated that as a result 
of these resets, the average monthly payment would rise by 15 
percent, and more if interest rates rise.\361\ Data from First 
American CoreLogic prepared for the Wall Street Journal show 
that 500,000 interest-only loans are expected to reset in the 
next two years.\362\
---------------------------------------------------------------------------
    \361\ Levitin & Twomey, supra note 78.
    \362\ Nick Timiraos, Mortgage Increases Blunted, Wall Street 
Journal (Mar. 29, 2010) (online at online.wsj.com/article/
SB10001424052702303429804575150161178252530.html) (hereinafter 
``Mortgage Increases Blunted'').
---------------------------------------------------------------------------
    Figure 36, below, is an updated version of the Credit 
Suisse interest rate reset chart that has appeared in earlier 
Panel housing reports.\363\ Nearly all subprime mortgages have 
already reset, meaning that the foreclosure problem has moved 
from a subprime to a prime problem. It is worth noting the 
mortgage market for prime borrowers is much larger than the one 
for subprime, with prime loans comprising 68 percent of first-
lien residential mortgages serviced by most of the largest 
mortgage servicers.\364\
---------------------------------------------------------------------------
    \363\ See October Oversight Report, supra note 17, at 19.
    \364\ OCC and OTS Mortgage Metrics Report--Q4 2009, supra note 82, 
at 13.
---------------------------------------------------------------------------

                 FIGURE 36: MORTGAGE RATE RESETS \365\


                         [Dollars in billions]

      
---------------------------------------------------------------------------
    \365\ Data provided by Credit Suisse Securities.
    [GRAPHIC] [TIFF OMITTED] T5737A.026
    
    Considering the large number of defaults caused by rate 
resets so far in this recession, and that the average loan-to-
value ratio on option ARMs is 126 percent, meaning that these 
borrowers often have significant negative equity, it is 
reasonable to expect resets to be a major driver of 
delinquencies and foreclosures through the end of 2012 at 
least.\366\ Mutual fund manager John Hussman has observed that:
---------------------------------------------------------------------------
    \366\ Fitch Ratings, Fitch: $47B Prime/Alt-A 2010 IO Loan Resets to 
Place Added Stress on U.S. ARM Borrowers (Jan. 11, 2010) (online at 
www.businesswire.com/portal/site/home/permalink/
?ndmViewId=news_view&newsId=20100111006615&newsLang=en).

          . . . the 2010 peak doesn't really get going until 
        July-Sep (with delinquencies likely to peak about 3 
        months later, and foreclosures about 3 months after 
        that). A larger peak will occur the second half of 
        2011. I remain concerned that we could quickly 
        accumulate hundreds of billions of dollars of loan 
        resets in the coming months, and in that case, would 
        expect to see about 40% of those go delinquent based on 
        the sub-prime curve and the delinquency rate on earlier 
        Alt-A loans.\367\
---------------------------------------------------------------------------
    \367\ John P. Hussman, Ordinary Outcomes of Extraordinary 
Recklessness, Hussman Funds Weekly Market Comment (March 15, 2010) 
(online at hussmanfunds.com/wmc/wmc100315.htm).

On the other hand, some observers believe that the problem of 
defaults caused by interest rate resets will not be as severe 
as had been anticipated, at least as long as mortgage rates 
remain low, since many problematic loans have already 
defaulted, while others have been modified.\368\
---------------------------------------------------------------------------
    \368\ Mortgage Increases Blunted, supra note 362.
---------------------------------------------------------------------------
            f. Negative Equity
    The high percentage of borrowers with negative equity in 
their homes (``underwater'' or ``upside down'') is a great 
concern for the future of the housing market and for 
foreclosure mitigation efforts. A recent study by First 
American CoreLogic found that negative equity was closely 
correlated with an increase in ``pre-foreclosure activity,'' 
that is, delinquency.\369\ The impact of negative equity, 
including its ability to ``trap'' borrowers in their current 
homes (discussed further in Section C.1(h)(i) and Annex I(1)k) 
was highlighted in the Panel's foreclosure mitigation field 
hearing by Dr. Paul Willen, senior economist at the Federal 
Reserve Bank of Boston. He 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.'' Dr. Willen also noted 
that even underwater borrowers who are current on their 
payments must be viewed as ``at risk'' borrowers.\370\
---------------------------------------------------------------------------
    \369\ First American CoreLogic, Underwater Mortgages On the Rise 
According to First American CoreLogic Q4 2009 Negative Equity Data 
(Feb. 23, 2010) (hereinafter ``Underwater Mortgages On the Rise'').
    \370\ Congressional Oversight Panel, Testimony of Dr. Paul Willen, 
senior economist, Federal Reserve Bank of Boston, Transcript: 
Philadelphia Field Hearing on Mortgage Foreclosures, at 109-110 (Sept. 
24, 2009) (publication forthcoming).
---------------------------------------------------------------------------
    Although estimates vary, nearly one in four homeowners with 
mortgages are likely to be underwater. First American CoreLogic 
reported that more than 11.3 million, or 24 percent, of 
borrowers had negative equity at the end of the fourth quarter 
of 2009, up from 10.7 million, or 23 percent, at the end of the 
third quarter of 2009. An additional 2.3 million mortgages had 
less than five percent equity, or near negative equity. 
Together, negative equity and near negative equity mortgages 
accounted for nearly 29 percent of all residential properties 
with a mortgage nationwide. The aggregate value of negative 
equity in the fourth quarter of 2009 was $801 billion, up from 
$746 billion in the third quarter. The average negative equity 
of underwater borrowers in the fourth quarter was $70,700, up 
from $69,700 in the third quarter.\371\ Thus, the problem of 
negative equity continues to spread to additional borrowers, 
and to intensify for those already facing negative equity.
---------------------------------------------------------------------------
    \371\ Underwater Mortgages On the Rise, supra note 369.
---------------------------------------------------------------------------
    Negative equity problems are worst in the Sunbelt bubble 
markets, as discussed in Annex II--Arizona, California, 
Florida, and Nevada. Recession-plagued Michigan, also discussed 
in Annex II, is high on the list as well. Figure 37, below, 
shows negative equity and near negative equity by state.

       FIGURE 37: PERCENTAGE OF HOMES WITH NEGATIVE EQUITY \372\

      
---------------------------------------------------------------------------
    \372\ There is no negative equity data available for Louisiana, 
Maine, Mississippi, South Dakota, Vermont, West Virginia or Wyoming. 
[GRAPHIC] [TIFF OMITTED] T5737A.027

    In terms of individual metropolitan areas, cities in 
Florida and California \373\ have the highest rates of negative 
equity. The areas with lowest rates are not geographically 
concentrated, but include many smaller cities in the Northeast, 
Midwest, and Northwest that did not undergo a great deal of 
housing appreciation during the bubble.\374\
---------------------------------------------------------------------------
    \373\ Rates of negative equity are especially high in interior 
areas of California, such as the Central Valley.
    \374\ Negative equity data provided to the Panel by Stan Humphries, 
chief economist, Zillow (Feb. 23, 2010).
---------------------------------------------------------------------------
            g. Second Liens
    Loans secured by second or subordinate liens on a property 
can greatly complicate foreclosure mitigation. The loan balance 
on the first-lien mortgage generally cannot be written down 
unless the second lien is first extinguished.\375\ Because of 
this, resolution of the second lien is a threshold issue in 
many foreclosure mitigation situations. Even after foreclosure, 
the borrower is often still liable for the second-lien debt. 
Not surprisingly, second-lien holders are not eager to 
extinguish these loans when there may be some residual value, 
even if the loan is apparently worthless because the amount 
owed on the first lien exceeds the current value of the 
home.\376\
---------------------------------------------------------------------------
    \375\ Second Liens--How Important?, supra note 36, at 1.
    \376\ James R. Hagerty, Home-Saving Loans Afoot, Wall Street 
Journal (Mar. 8, 2010) (online at online.wsj.com/article/
SB10001424052748704706304575107770265900644.html).
---------------------------------------------------------------------------
    Currently, 43 percent of borrowers have second liens on 
their homes. There is a strong correlation between the 
existence of second liens and delinquency. Treasury estimated 
in April 2009 that up to half of all at-risk borrowers had 
second liens. Although there is great variation in the rate of 
delinquency depending on the type of second lien, the year of 
origination, and the credit category or type of the loan, 
second-lien holders are consistently more likely to be 
delinquent than borrowers with only a first lien. For example, 
subprime loans made in 2006 with a simultaneous second lien 
\377\ have a 62 percent rate of non-performance, while the same 
sort of subprime first mortgage borrowers without a second lien 
have a 52 percent rate of non-performance. In contrast, prime 
loans made in 2004, when the market was lower, with a 
subsequent second lien, have only a 5.6 percent rate of non-
performance. However, this is still higher than the rate for 
the same sort of borrowers with only a single first mortgage, 
who have a 2.1 percent rate of non-performance.\378\
---------------------------------------------------------------------------
    \377\ Simultaneous second liens are second lien debt originated at 
the same time as the first lien debt, as opposed to subsequent second 
liens, which are originated later.
    \378\ Second Liens--How Important?, supra note 36, at 6.
---------------------------------------------------------------------------
    As of the end of 2009, the value of second-lien loans 
outstanding, including HELOCs, was $1.03 trillion. That was a 
decline of $100 billion from the peak outstanding balance of 
$1.13 trillion in 2007.\379\ Due to accounting issues discussed 
in Section F.2, these figures may not reflect the true market 
value of the loans.
---------------------------------------------------------------------------
    \379\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release Z.1, at 96 (Mar. 11, 2010) (online at 
www.federalreserve.gov/releases/z1/Current/z1.pdf) (hereinafter 
``Federal Reserve Statistical Release Z.1'').
---------------------------------------------------------------------------
    Of the approximately $1.03 trillion of second liens 
outstanding, 73.8 percent are held in banks' portfolios,\380\ 
rather than being securitized or held by other institutions. Of 
those loans, approximately 58 percent are held by just four 
large banks--Bank of America, Citibank, JPMorgan Chase, and 
Wells Fargo.\381\ Figures 38 and 39 illustrate that these four 
institutions all have significant exposure to second-lien 
loans, though that exposure has fluctuated significantly in 
recent years.
---------------------------------------------------------------------------
    \380\ Federal Reserve Statistical Release Z.1, supra note 379, at 
11 ($667.5 billion of $700 billion in second-lien loans held in bank 
portfolio).
    \381\ Second Liens--How Important?, supra note 36, at 10.

                         FIGURE 38: SECOND LIENS AS A PERCENTAGE OF TIER 1 CAPITAL \382\
----------------------------------------------------------------------------------------------------------------
                                                              2005       2006       2007       2008       2009
----------------------------------------------------------------------------------------------------------------
Citigroup................................................      23.8%      42.6%      46.7%      28.9%      21.0%
JPMorgan Chase...........................................      10.6%      17.4%      19.6%      14.6%       9.7%
Wells Fargo..............................................      58.3%      43.6%      50.0%      30.2%      22.4%
Bank of America..........................................      11.9%      12.0%      26.1%      29.2%      18.1%
----------------------------------------------------------------------------------------------------------------
\382\ Data from SNL Financial. Second-lien data are limited to loans that do not revolve, such as home equity
  lines of credit. These loans are excluded because the some of the bank's exposure to revolving loans may never
  be tapped by the borrower.


                      FIGURE 39: SECOND LIENS AS A PERCENTAGE OF TIER 1 COMMON EQUITY\383\
----------------------------------------------------------------------------------------------------------------
                                                              2005       2006       2007       2008       2009
----------------------------------------------------------------------------------------------------------------
Citigroup................................................      26.5%      48.9%      66.3%     149.6%      25.5%
JPMorgan Chase...........................................      12.9%      20.7%      23.6%      22.9%      12.2%
Wells Fargo..............................................      68.5%      50.0%      58.7%      75.8%      32.1%
Bank of America..........................................      14.5%      15.2%      36.4%      55.8%      24.1%
----------------------------------------------------------------------------------------------------------------
\383\ Data from SNL Financial. See note 381 for information regarding data limitations.

    An interesting phenomenon that has come to light recently 
is that borrowers are often choosing to pay debt service on 
their second liens in preference to their first liens. This may 
seem counterintuitive, since first mortgages are traditionally 
thought to be much safer investments for lenders than second 
mortgages. Several explanations have been proposed. The 
recourse nature of many second mortgages makes it sensible for 
borrowers to continue paying those loans. Some have theorized 
that borrowers try to pay as many of their bills as possible, 
and therefore are neglecting the large first mortgage bill in 
order to pay other smaller expenses, such as a second mortgage. 
Another possible explanation is that HELOC borrowers are trying 
to maintain their access to credit by staying current on that 
loan.\384\
---------------------------------------------------------------------------
    \384\ Kate Berry, The Shoe That Refuses to Drop: Home Equity 
Losses, American Banker (Mar. 10, 2010) (online at 
www.americanbanker.com/issues/175_46/home-equity-losses-1015702-
1.html).
---------------------------------------------------------------------------
            h. Delinquencies
    Although not all delinquent borrowers end up in 
foreclosure, delinquencies are an important indicator of future 
foreclosures. They are also a useful indicator of the general 
economic well being of homeowners. The seasonally adjusted 
mortgage delinquency rate fell slightly during the fourth 
quarter of 2009 from 9.64 percent to 9.47 percent, according to 
the Mortgage Bankers Association.\385\ Delinquency rates for 
the fourth quarter in 2006, 2007, and 2008 were 4.95 percent, 
5.82 percent, and 7.88 percent, respectively. The modest 
decline in the fourth quarter of 2009 is thought to be 
significant because the rate usually increases in the fourth 
quarter due to the financial stress of holiday expenses.\386\ 
However, the 2009 fourth quarter delinquency rate was still 
1.59 percent higher on a year-over-year basis.\387\
---------------------------------------------------------------------------
    \385\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
    \386\ Jann Swanson, MBA Delinquency Survey Shows Signs of 
Stabilization. Progress Depends on Labor Market, Mortgage News Daily 
(Feb. 19, 2010) (online at www.mortgagenewsdaily.com/
02192010_mba_delinquency_survey_shows_signs_of_stabilization 
_progress_depends_on_labor_market.asp).
    \387\ 387 MBA National Delinquency Survey, supra note 1 
(subscription required). See also February MBA Survey Results, supra 
note 1.
---------------------------------------------------------------------------
    The type of loans that are delinquent is also of 
considerable interest to foreclosure mitigation efforts. The 
90-day delinquency rate on prime loans, at 3.34 percent, is not 
surprisingly much lower than the rate for subprime loans. 
However, both rates rose in the fourth quarter of 2009. Figure 
40 shows the 90-day delinquency rate over the last five years 
for prime, subprime, FHA, and VA loans, as well as the rate for 
all loans.\388\ Although the subprime delinquency rate is very 
high, the rising delinquency rate on prime loans is more 
troubling, since there are far more prime loans outstanding, 
especially if Alt-A loans are included in the prime category, 
and they were supposedly made to much more creditworthy 
borrowers. ``Prime'' and ``subprime'' do not indicate loan 
structure or overall risk, only the creditworthiness of the 
borrower.\389\
---------------------------------------------------------------------------
    \388\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
    \389\ See further discussion in Annex I.1(e).
---------------------------------------------------------------------------

          FIGURE 40: SERIOUS DELINQUENCY RATE, 2005-2009 \390\

      
---------------------------------------------------------------------------
    \390\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.028

    Figure 41, below, shows delinquency rates ranked by state. 
Figure 42, also below, is a map of 90-day delinquencies by 
county, with darker colors indicating higher delinquencies. It 
is clear from these two charts that the areas that boomed the 
most during the housing bubble, including most of Nevada, 
Arizona, Florida, and California, have the worst problems with 
delinquencies. Michigan also has a particularly high level of 
delinquencies. (See Annex II for additional discussion of the 
situation in these states.) It is also apparent that the areas 
that did not experience an extreme housing boom, such as the 
Plains states and portions of the Midwest and Northwest, are 
better off in terms of delinquencies.

            FIGURE 41: STATES RANKED BY DELINQUENCIES \391\

      
---------------------------------------------------------------------------
    \391\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.029

  FIGURE 42: MORTGAGE DELINQUENCY RATE 90+ DAYS (AS OF Q4 2009) \392\

      
---------------------------------------------------------------------------
    \392\ Federal Reserve Bank of New York, U.S. Credit Conditions 
(online at data.newyorkfed.org/creditconditions/) (accessed Apr. 13, 
2010).
[GRAPHIC] [TIFF OMITTED] T5737A.030

            i. Foreclosures
    The foreclosure rate is the ultimate determinant of the 
success or failure of foreclosure mitigation efforts. It is 
also relevant because the REO by lenders as a result of 
foreclosures will eventually be sold, often at low prices, 
driving down comparable sale prices and overall property 
values. Outside influences, such as the date of mortgage rate 
resets, workloads at lenders, servicers, and foreclosure 
courts, and the timing of job losses, can cause the foreclosure 
rate to fluctuate.
    The latest data indicate that February had the lowest year-
over-year increase in foreclosure starts in four years.\393\ 
While this may indicate an apparent improvement in market 
conditions, it remains to be seen whether the lower level of 
foreclosures can be sustained in the face of other trends, such 
as increasing negative equity and continuing high unemployment. 
It may also indicate that banks, courts, and others have 
reached their capacity to process foreclosures.\394\
---------------------------------------------------------------------------
    \393\ RealtyTrac, U.S. Foreclosure Activity Decreases 2 Percent in 
February (Mar. 11, 2010) (online at www.realtytrac.com/
contentmanagement/pressrelease.aspx?channelid=9&itemid=8695).
    \394\ See, e.g. Kimberly Miller, Florida's Foreclosure Backlog 
among Nation's Worst, Palm Beach Post (Mar. 17, 2010) (online at 
www.palmbeachpost.com/money/real-estate/floridas-foreclosure-backlog-
among-nations-worst-380990.html).
---------------------------------------------------------------------------
    More complete data are available as of the end of 2009. 
According to these data, the foreclosure process began on an 
additional 1.2 percent of all loans in the fourth quarter. 
While this was a significant drop from 1.42 percent in the 
third quarter, and the lowest rate for the year, it was still a 
considerably higher rate than any time during 2005-2008. Figure 
43, below, shows foreclosure starts for various categories of 
loans. The subprime category was the worst performer at 3.66 
percent, and the VA loan category was the best performer at 
0.81 percent. All categories showed a similar downward trend in 
foreclosure starts in the fourth quarter.

    FIGURE 43: FORECLOSURE STARTS BY LOAN CATEGORY, 2005-2009 \395\

      
---------------------------------------------------------------------------
    \395\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.031

    While starts have decreased across the board, the last 
quarter also saw the total inventory of loans in foreclosure 
rise from 4.47 percent to 4.58 percent of all loans. 
Foreclosure inventory increased by 1.28 percent during 2009, 
which indicates that foreclosure starts are adding to the stock 
of inventory faster than lenders are selling their real estate 
owned property. As Figure 44 below shows, subprime loans were 
most likely to be in foreclosure (15.58 percent). VA loans were 
least likely to be in foreclosure (2.46 percent), which 
reflects the low level of VA foreclosure starts in prior 
quarters.

   FIGURE 44: FORECLOSURE INVENTORY BY LOAN CATEGORY, 2005-2009 \396\

      
---------------------------------------------------------------------------
    \396\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.032

    Figure 45 shows foreclosure inventory by state. Once again, 
Florida (13.34 percent), Nevada (9.76 percent), and Arizona 
(6.07 percent) topped the list, although New Jersey (5.82 
percent) and Illinois (5.62 percent) edged out California (5.56 
percent).\397\ Ohio (4.72 percent) was next, followed by 
Michigan (4.56 percent).
---------------------------------------------------------------------------
    \397\ Variations in local foreclosure procedures can significantly 
affect foreclosure timetables and therefore foreclosure inventory. For 
a given level of defaults, foreclosure inventory is likely to be higher 
in states with slower foreclosure procedures because foreclosure 
inventory accumulates rather than being converted into REO or sold to 
third-party buyers. Accordingly, foreclosure inventory levels do not 
necessarily correlate with default indicators, such as negative equity.
---------------------------------------------------------------------------

            FIGURE 45: FORECLOSURE INVENTORY BY STATE \398\

      
---------------------------------------------------------------------------
    \398\ MBA National Delinquency Survey, supra note 1 (subscription 
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.033

    Should lenders suddenly change their policies in a way that 
results in more REOs on their books (such as foreclosing more 
aggressively) or permit more short sales, the housing market 
may be hit by a glut of distressed home sales. This will almost 
certainly drive prices down further, and consequently, worsen 
negative equity and lead to more defaults. This also raises 
concerns about the capacity of lenders and servicers to work 
through this backlog without overwhelming their staffs and 
causing additional foreclosures and losses to investors that 
could have been prevented had these delinquencies been dealt 
with more promptly.
    Some, such as Mr. Fratantoni, lay the blame at the feet of 
Treasury. ``I think that it's been pretty clear that these 
efforts to delay the foreclosure process--that's precisely what 
they're doing: They're delaying; they're not resolving in many 
cases. And at some point there is going to be an effort to 
resolve these longer-run delinquencies,'' Mr. Fratantoni said. 
``We're starting to see that now with Treasury's program to 
streamline and encourage short sales. And I expect that's where 
more of these resolutions are headed in the months and years 
ahead.'' \399\
---------------------------------------------------------------------------
    \399\ Zach Fox, With Foreclosures, Python Refuses to Digest Pig, 
SNL Financial (Mar. 24, 2010).
---------------------------------------------------------------------------
            j. Short Sales/Deed-in-Lieu
    One of the alternatives to foreclosure available to lenders 
is to allow an underwater borrower to complete a ``short 
sale,'' or to sell the property for less than the loan 
balance.\400\ Although the lender takes an immediate loss, a 
short sale allows the lender to avoid the expense and 
difficulty of a foreclosure. The lender also avoids the risks 
of a loan modification plan, such as the possibility of 
redefault, and the chance that the future state of the market 
will not meet expectations. Short sales can be a satisfactory 
solution for the borrower. The borrower is able to get out of 
the underwater mortgage with less damage to his or her credit 
rating, without putting up additional equity, and without being 
burdened by a workout plan that does not reduce indebtedness.
---------------------------------------------------------------------------
    \400\ A short sale applies only to borrowers with negative equity, 
or near negative equity. Only when the sale proceeds (the value of the 
property less sale costs) are less than the loan balance (i.e., 
negative equity) is the sale considered ``short.'' A borrower with 
significant positive equity would have sale proceeds that are greater 
than the loan balance; the sale would not be considered ``short.''
---------------------------------------------------------------------------
    Short sales can be particularly beneficial to borrowers who 
have reason to move anyway, perhaps to start a new job or go 
back to school. In order to move, as discussed earlier in 
Section B and below in Annex I(1), these borrowers would 
otherwise have to either default or make up the negative equity 
with cash. If homeowners are not able to move, they may have 
difficulty finding work. Similarly, employers may have more 
difficulty hiring qualified candidates if the labor market 
lacks normal flexibility. Consequently, negative equity can 
have a significant negative macroeconomic effect beyond its 
effect on the housing market.
    The National Association of Realtors reports that 14 
percent of all January home sales were short sales.\401\ Figure 
46 shows short sales as a percentage of total sales over the 
past 16 months.
---------------------------------------------------------------------------
    \401\ Data provided by National Association of Realtors.
---------------------------------------------------------------------------

     FIGURE 46: SHORT SALES AS A PERCENTAGE OF ALL HOME SALES \402\

      
---------------------------------------------------------------------------
    \402\ Data provided by National Association of Realtors.
    [GRAPHIC] [TIFF OMITTED] T5737A.034
    
    Another alternative to foreclosure is a deed-in-lieu of 
foreclosure, in which the borrower voluntarily gives the house 
to the lender in exchange for elimination of the mortgage. This 
strategy also avoids the difficulties of foreclosure for both 
lender and borrower. While data on deeds-in-lieu for the entire 
market are not readily available, FHFA does release deed-in-
lieu data for approximately 30 million GSE-serviced loans, 
which are a significant portion of the overall market. As of 
October 2009, the GSEs had completed 382,848 foreclosure 
prevention actions in the prior 12 months. Only 2,872, or 0.7 
percent, of these actions were deed-in-lieu of foreclosure 
transactions.\403\ It is unclear whether this minimal level of 
activity is indicative of the use of deeds-in-lieu in the 
broader housing market.
---------------------------------------------------------------------------
    \403\ Federal Housing Finance Agency, Refinance Volumes and HAMP 
Modifications Increased in December (Jan. 29, 2010) (online at 
ofheo.gov/Default.aspx/cgi/t/text/webfiles/15389/
Foreclosure_Prev_release_1_29_10.pdf).
---------------------------------------------------------------------------
            k. Strategic Defaults
    Recently, there has been a surge of interest in the subject 
of strategic defaults, in which borrowers choose to default on 
their mortgages, despite the fact that they have the ability to 
continue making payments.\404\ The term ``strategic default'' 
encompasses a number of different situations.
---------------------------------------------------------------------------
    \404\ See, e.g., James R. Hagerty and Nick Timiraos, Debtor's 
Dilemma, Wall Street Journal (Dec. 17, 2009) (online at online.wsj.com/
article/SB126100260600594531.html); Linda Lowell, Who, in the End, Will 
Strategically Default?, Housing Wire (Mar. 1, 2010) (online at 
www.housingwire.com/2010/03/01/who-in-the-end-will-strategically-
default/).
---------------------------------------------------------------------------
    Some borrowers who are deep in negative equity may decide 
that the consequences of default--having to move, damage to 
their credit ratings, and, for some, feelings of guilt or 
embarrassment--are less than the burden of negative equity that 
they would remain responsible for paying. Owners of investment 
properties and second homes may make more detached, 
businesslike decisions in this regard than borrowers 
contemplating default on their primary residences. Other 
borrowers may strategically default out of what they believe to 
be financial necessity. For example, if they believe they will 
never be able to repay the debt, default may be the only 
reasonable option left. The comparatively low cost of renting 
as opposed to owning may also be an incentive to a strategic 
default for some borrowers.
    A borrower may also strategically default if he or she 
needs to move, but does not have sufficient cash to pay off the 
mortgage's negative equity. If the lender does not agree to a 
principal write-down, short sale, or other form of debt 
forgiveness, borrowers remain ``trapped'' in their homes and 
have little choice but to default if they wish to move. There 
is a wide range of inevitable life events that necessitate 
moves: the birth of children, illness, death, divorce, 
retirement, job loss, education, and new jobs. Without a way to 
deal with the negative equity, many borrowers facing these 
events will be forced to default.
    The decision for a strategic default is often influenced by 
the borrower's expectation of when property values will 
recover, erasing the negative equity. Since some predictions do 
not expect a full recovery in the hardest hit markets until 
2030 or later,\405\ many borrowers have significant incentives 
to default.
---------------------------------------------------------------------------
    \405\ Fiserv, FHFA, and Moody's Economy.com, Hardest Hit Metros 
Will Take Longer to Recover (2010). See also John Spence, Moody's 
Bearish on Housing Recovery, MarketWatch (Sept. 18, 2009) (online at 
www.marketwatch.com/story/home-prices-wont-regain-peak-this-decade-
moodys-2009-09-18). A map based on these predictions is shown at the 
end of Annex I.
---------------------------------------------------------------------------
    Because borrowers who strategically default do not usually 
reveal that they have done so, it is hard to determine exactly 
how many strategic defaults are occurring. Although estimates 
of strategic defaults vary considerably, it is apparent that 
these defaults are common and are, not surprisingly, 
increasingly likely as borrowers sink deeper underwater.
    Researchers at Northwestern University's Kellogg School of 
Management have estimated that 26 percent of all defaults are 
strategic. They also found a strong correlation between 
negative equity and strategic default, and that ``below 10 
percent negative equity people do not walk away, as it is too 
costly and there is a moral consideration--a shame factor.'' 
Another interesting finding was that ``social pressure not to 
default is weakened when homeowners live in areas with high 
frequency of foreclosures or know other people who defaulted 
strategically.'' \406\
---------------------------------------------------------------------------
    \406\ Kellogg Insight, Walking Away: Moral, Social, and Financial 
Factors Influence Mortgage Default Decisions (Jul. 2009) (online at 
insight.kellogg.northwestern.edu/index.php/Kellogg/article/
walking_away).
---------------------------------------------------------------------------
    A September 2009 study by credit bureau Experian and 
consulting firm Oliver Wyman estimated that 18 percent of 
delinquent borrowers strategically defaulted in 2008. That 
study also found that borrowers with higher credit ratings were 
50 percent more likely to strategically default, and that these 
defaults were most common in markets with many borrowers who 
are deeply underwater. The principal researcher of the study, 
Piyush Tantia, has said that borrowers who strategically 
default ``are clearly sophisticated'' and view the default as a 
business decision.\407\
---------------------------------------------------------------------------
    \407\ Experian-Oliver Wyman, Market Intelligence Report: 
Understanding Strategic Default in Mortgages, Part I (Sept. 2009) 
(online at www.marketintelligencereports.com) (subscription required); 
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).
---------------------------------------------------------------------------

1. Shadow Inventory

    ``Shadow inventory'' in the housing market most commonly 
refers to REOs held by banks but not yet put up for sale, homes 
that are in the foreclosure process, and seriously delinquent 
homes that are expected to enter foreclosure.
    First American CoreLogic, a subsidiary of First American 
Corp., has estimated a shadow inventory of 1.7 million homes as 
of September 2009, an increase of 55 percent in one year.\408\ 
Bank Foreclosures Sale, an online foreclosure listing site, 
estimates an additional 2.4 million foreclosures will occur in 
2010.\409\ For comparison, as mentioned earlier, there are 3.3 
million homes currently on the market.\410\
---------------------------------------------------------------------------
    \408\ First American CoreLogic, ``Shadow Housing Inventory'' Put at 
1.7 Million in 3Q According to First American CoreLogic (Dec. 17, 2009) 
(online at www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/
FACL_Shadow_Inventory_121809.pdf).
    \409\ PR Newswire, Shadow Inventory Properties May Contribute to 
Next Wave of Foreclosures in 2010, MarketWatch (Jan. 11, 2010) (online 
at www.marketwatch.com/story/shadow-inventory-properties-may-
contribute-to-next-wave-of-foreclosures-in-2010-2010-01-
11?siteid=nbkh).
    \410\ Existing-Home Sales Down in January, supra note 345.
---------------------------------------------------------------------------
    A recent study by Standard & Poor's, while not quantifying 
the number of homes in shadow inventory, found that at the 
current rate of disposal (``closing'') of REOs and delinquent 
loans, there are currently 29 months of shadow inventory. When 
recently cured delinquent loans that are expected to redefault 
are added (using current redefault rates),\411\ the total 
increases to 33 months of shadow inventory. Currently 
performing loans that default in the future would only add to 
this inventory.\412\
---------------------------------------------------------------------------
    \411\ Currently modified loans may not redefault in the future at 
the rate assumed here. However, some of these modified and performing 
loans will certainly redefault, and should be considered as shadow 
inventory.
    \412\ Standard & Poor's, The Shadow Inventory of Troubled Mortgages 
Could Undo U.S. Housing Price Gains (Feb. 16, 2010) (online at 
www.standardandpoors.com/ratings/articles/en/us/
?assetID=1245206147429).
---------------------------------------------------------------------------
    Some definitions of shadow inventory include homes that 
homeowners want to sell, but are waiting to put on the market 
until conditions improve. This is potentially a significant 
number of homes. A survey conducted by Zillow found that almost 
a third of homeowners have considered putting their homes up 
for sale, but are waiting for market conditions to 
improve.\413\ There is little reason to believe that this 
number has shrunk substantially in the year since the survey 
was conducted. Since there are 75 million privately owned homes 
in the United States, this potential inventory could be as much 
as 24 million homes.\414\
---------------------------------------------------------------------------
    \413\ Stan Humphries, When the Bottom Arrives, A Flood of ``Shadow 
Inventory''?, Zillow (May 19, 2009) (online at www.zillow.com/blog/
when-the-bottom-arrives-a-flood-of-shadow-inventory/2009/05/19/) 
(hereinafter ``Stan Humphries, When the Bottom Arrives''). Zillow has 
indicated to Panel staff that many of these homeowners who responded 
that they were likely to sell may have wanted to sell during 2006-2010, 
but decided to ``wait it out'' because of the low level of home prices. 
Zillow also indicated that many of these may be homeowners ``trapped'' 
by negative equity, and therefore unable to move until prices recover 
(or they default, as discussed in Annex I(1)(k).
    \414\ U.S. Department of Commerce, Bureau of the Census, Census 
Bureau Reports on Residential Vacancies and Homeownership, at 3 (Feb. 
2, 2010) (online at www.census.gov/hhes/www/housing/hvs/qtr409/files/
q409press.pdf).
---------------------------------------------------------------------------
    It would not be appropriate to count all these homes as 
shadow inventory since many owners may not carry through with 
their intention to sell, and those that do will not sell all at 
once. Nevertheless, the number is so large that even a fraction 
of this additional supply coming to market could easily tamp 
down any recovery in property values. Figure 47 shows the 
responses to Zillow's survey. Figure 48 shows what homeowners 
who are considering selling would consider to be a 
``turnaround'' in the housing market.

       FIGURE 47: ZILLOW SURVEY SHADOW INVENTORY RESPONSES \415\

      
---------------------------------------------------------------------------
    \415\ Stan Humphries, When the Bottom Arrives, supra note 413.
    [GRAPHIC] [TIFF OMITTED] T5737A.035
    
       FIGURE 48: ZILLOW SURVEY MARKET TURNAROUND RESPONSES \416\

      
---------------------------------------------------------------------------
    \416\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.036
    
2. Economic Indicators

    The state of the housing market and the state of the 
overall economy are closely intertwined. While the growth of 
the housing bubble and its subsequent collapse were key causes 
of the recent recession, the linkage works in the other 
direction as well--a weak economy can drag down the housing 
market. Several economic indicators, especially unemployment 
and interest rates, are of critical importance to housing 
values and consequently to foreclosure mitigation. This section 
explores recent trends in major economic indicators.
            a. Unemployment
    As mentioned at the beginning of Section I(B), unemployment 
is a major driver of delinquencies, foreclosures, and 
consequently, home values. Unemployed borrowers without 
significant savings are unlikely to be able to pay their debt 
service regardless of what loan modifications they receive.
    According to the most recent data from the Bureau of Labor 
Statistics (BLS), the unemployment rate held steady at 9.7 
percent in March 2010 for the second month in a row. This 
equates to 14.9 million unemployed workers. Although the 
unemployment rate has fallen from its late 2009 highs, which 
topped 10 percent, it remains considerably higher than the 8.6 
percent rate a year earlier.\417\ The number of long-term 
unemployed (jobless for 27 weeks or more) increased from 6.3 
million in January to 6.5 million in March on a seasonally 
adjusted basis. Since the start of the recession in December 
2007, the number of long-term unemployed has risen by 5 
million. The average duration of unemployment was 29.3 weeks, 
slightly higher than in January, and almost 10 weeks higher 
than in February 2009.\418\ The current long-term unemployment 
rate of nearly 4 percent (41 percent of all unemployed) is 
significantly higher than in other recent recessions. In June 
1983, seven months after the official end of a recession, long-
term unemployment peaked at 3.1 percent, which until recently 
was the highest long-term rate since before World War II.\419\
---------------------------------------------------------------------------
    \417\ U.S. Department of Labor, Bureau of Labor Statistics, The 
Employment Situation--March 2010, at 4 (Apr. 2, 2010) (online at 
www.bls.gov/news.release/archives/empsit_04022010.pdf) (hereinafter 
``The Employment Situation--March 2010'') (using seasonally adjusted 
data).
    \418\ Id.
    \419\ U.S. Department of Labor, Bureau of Labor Statistics, A 
Glance at Long-Term Unemployment in Recent Recessions, Issues in Labor 
Statistics, Summary 06-01 (Jan. 2006) (online at www.bls.gov/opub/ils/
pdf/opbils53.pdf).
---------------------------------------------------------------------------
    Figure 49, below, shows the percentage of workers 
unemployed for 27 weeks or longer since 1980. The shaded areas 
indicate recessions. As the chart shows, the current rate of 
long-term unemployment is higher than at any other time during 
this period, including the severe recession of 1981-1983.

FIGURE 49: LONG TERM UNEMPLOYMENT AS A PERCENTAGE OF TOTAL UNEMPLOYMENT 
                                 \420\

      
---------------------------------------------------------------------------
    \420\ U.S. Department of Labor, Bureau of Labor Statistics, Total 
Unemployed, Percent Unemployed 27 Weeks & Over (Instrument: Percent 
Distribution, 27 Weeks and Over) (online at www.bls.gov/webapps/legacy/
cpsatab12.htm) (accessed Apr. 12, 2010). The shaded areas represent 
periods of recession as defined by the National Bureau of Economic 
Research (NBER). The NBER has not yet determined whether the recession 
that began in December 2007 has ended nor established the date of its 
ending. The Panel's own estimate is that this recession ended at the 
end of Q2 2009, the last quarter of net decline in the U.S. Gross 
Domestic Product (GDP), and that is the date assumed here. Bureau of 
Economic Analysis, Gross Domestic Product (accessed Apr. 5, 2010) 
(online at www.bea.gov/national/txt/dpga.txt). 
[GRAPHIC] [TIFF OMITTED] T5737A.037

    Unemployment is highest in Michigan (14.1 percent), Nevada 
(13.2 percent), and Rhode Island (12.7 percent), and lowest in 
North Dakota (4.1 percent), Nebraska (4.8 percent), and South 
Dakota (4.7 percent).\421\
---------------------------------------------------------------------------
    \421\ U.S. Department of Labor, Bureau of Labor Statistics, 
Regional and State Employment and Unemployment Summary, at 3 (Mar. 26, 
2010) (online at www.bls.gov/news.release/archives/laus_03262010.pdf). 
This data is for February 2010, the latest available.
---------------------------------------------------------------------------
    Unemployment increased in the past year across all 
occupations. The job categories with the highest rates of 
unemployment in March 2010 were construction and extraction 
(24.6 percent), and farming, fishing, and forestry (21.8 
percent). The occupations with the lowest rates were 
professional and related (4.3 percent) and management, 
business, and financial operations (5.4 percent).\422\
---------------------------------------------------------------------------
    \422\ The Employment Situation--March 2010, supra note 417, at 24 
(using data that is not seasonally adjusted).
---------------------------------------------------------------------------
    The unemployment rate was significantly higher for men (10 
percent) than for women (8.0 percent).\423\ Unemployment was 
also higher among African Americans (16.5) \424\ and Latinos 
(12.6 percent) \425\ than among Whites (9.3 percent) and Asians 
(7.5 percent).\426\ All of these demographic groups had higher 
rates of unemployment in March 2010 than a year earlier.
---------------------------------------------------------------------------
    \423\ The Employment Situation--March 2010, supra note 417, at 4 
(using seasonally adjusted data).
    \424\ Id., at 12.
    \425\ Id., at 14.
    \426\ Id., at 12. Unlike the other racial categories in this 
paragraph, the unemployment rate for Asians is not seasonally adjusted. 
The BLS does not publish seasonally adjusted unemployment data for 
Asians.
---------------------------------------------------------------------------
    Workers with little education have fared the worst in this 
recession. The unemployment rate is 14.5 percent for workers 
with less than a high school diploma. High school graduates 
have an unemployment rate of 10.8 percent. Workers with some 
college have an 8.2 percent rate. Workers with a bachelor's 
degree or higher are faring best, with only a 4.9 percent 
unemployment rate.\427\ By contrast, in 1980, high school 
graduates had an unemployment rate of 5.8 percent, the rate of 
workers with some college was 4.7 percent, and the rate for 
workers with a bachelor's degree was 2.1 percent, according to 
the Department of Education.\428\
---------------------------------------------------------------------------
    \427\ Id., at 15.
    \428\ In the 2001 recession the unemployment rates for workers with 
high school diplomas, some college, and bachelor degrees were 3.8, 2.6, 
and 1.7 percent, respectively. See U.S. Department of Education, 
National Center for Education Statistics, Employment Outcomes of Young 
Adults by Race/Ethnicity (online at nces.ed.gov/programs/coe/2005/
section2/table.asp?tableID=264) (accessed Apr. 12, 2010). The most 
recent economic downturn (2008-current) highlights the fact that 
college-educated individuals are experiencing increasingly difficult 
times finding work. See U.S. Department of Education, National Center 
for Education Statistics, Digest of Education Statistics 2009, at 558 
(Apr. 2010) (online at nces.ed.gov/pubs2010/2010013.pdf) (noting the 
rise in unemployment among all individuals with a bachelor's or higher 
degree from 2006-2008).
---------------------------------------------------------------------------
    The number of people working part-time for economic reasons 
grew from 8.8 million in February 2010 to 9.0 million in March 
2010.\429\ An additional 2.3 million people not included as 
``unemployed'' were considered ``marginally attached'' to the 
labor force, an increase of 149,000 from a year earlier; these 
are people who are available to work and have looked for work 
sometime in the past year. Of these marginally attached 
workers, 994,000 were considered ``discouraged,'' an increase 
of 309,000 from a year earlier.\430\ Adding these people to the 
number of people who are officially unemployed yields a 16.9 
percent rate of unemployment/underemployment, up from 16.5 
percent in January 2010.\431\
---------------------------------------------------------------------------
    \429\ The Employment Situation--March 2010, supra note 417, at 19.
    \430\ Id., at 27 (using data that is not seasonally adjusted).
    \431\ Id., at 26.
---------------------------------------------------------------------------

FIGURE 50: UNEMPLOYMENT, UNEMPLOYMENT/UNDEREMPLOYMENT, AND DURATION OF 
                           UNEMPLOYMENT \432\

      
---------------------------------------------------------------------------
    \432\ The Employment Situation--March 2010, supra note 417, at 26 
(citing to data in Table A-15. Alternative measures of labor 
underutilization); Federal Reserve Bank of St. Louis, Median Duration 
of Unemployment (online at research.stlouisfed.org/fred2/series/
UEMPMED/downloaddata) (accessed Apr. 12, 2010). The Bureau of Labor 
Statistics defines the underemployment measure as ``[t]otal unemployed, 
plus all persons marginally attached to the labor force, plus total 
employed part time for economic reasons, as a percent of the civilian 
labor force plus all persons marginally attached to the labor force.'' 
The Employment Situation--March 2010, supra note 417, at 26.
[GRAPHIC] [TIFF OMITTED] T5737A.038

    On the positive side, the informal though well-regarded 
report on layoffs compiled by the outplacement firm Challenger, 
Gray, and Christmas showed a decline in layoffs in February 
2010 to the lowest level since July 2006. In total, 42,090 
planned layoffs were reported in February, down 41 percent from 
71,482 in January, and down 71 percent from the 186,350 layoffs 
announced in February 2009. The retail and automotive sectors 
showed the biggest drops in layoffs compared to last year, down 
75 percent and 90 percent, respectively.\433\ This is perhaps 
not surprising, given the massive job losses these industries 
suffered in 2009. It should be noted that the Challenger, Gray, 
and Christmas report tracks announced layoffs only, and does 
not include all job losses. Nevertheless, it indicates that the 
rate of job losses is slowing.
---------------------------------------------------------------------------
    \433\ Challenger, Gray & Christmas, Inc., Planned Job Cuts Drop 41% 
(Mar. 3, 2010). See also Rex Nutting, Planned Layoffs Drop to Lowest 
Level Since 2006, MarketWatch (Mar. 3, 2010) (online at 
www.marketwatch.com/story/planned-layoffs-drop-to-lowest-level-since-
2006-2010-03-03).
---------------------------------------------------------------------------
    However, there is negative news regarding employment by 
state and local governments. This sector was traditionally 
thought to be ``recession-proof,'' but more recently, extensive 
layoffs have been announced. According to the Bureau of Labor 
Statistics, the number of unemployed government workers in 
March 2010 (not seasonally adjusted) is projected to be as high 
as 881,000.\434\ Because the economy has not recovered to a 
sufficient degree to boost tax revenues, more government 
employees may be laid off in 2010 and beyond, absent further 
federal support to state and local governments.
---------------------------------------------------------------------------
    \434\ The Employment Situation--March 2010, supra note 417, at 25 
(using data that is not seasonally adjusted).
---------------------------------------------------------------------------
            b. Gross Domestic Product
    The overall level of economic activity is most commonly 
measured by the Gross Domestic Product (GDP). The GDP of the 
United States continued to grow, and in fact accelerate, 
through the end of 2009. Real GDP rose at an annualized rate of 
5.9 percent in the fourth quarter of 2009, a considerable 
increase from 2.2 percent growth in the third quarter \435\ and 
a decrease of 0.7 percent in the second quarter.\436\ The 
Bureau of Economic Analysis attributes the robust fourth 
quarter growth to increases in exports, personal consumption 
expenditures, nonresidential fixed investment, and private 
inventory investment. Unfortunately, the rise in inventory 
investment was likely due in large part to businesses 
replenishing their stocks as they anticipated economic 
recovery; this often happens toward the end of a recession 
after businesses have reduced their inventories. Therefore, the 
recent boost in inventory investment is unlikely to have a long 
duration, which means it may be hard to sustain the level of 
GDP growth seen in the fourth quarter. Also, while it is likely 
that federal government stimulus spending has had some positive 
effect on GDP growth, it is not clear to what degree it has 
helped, or what impact the end of stimulus spending will have 
on the economy.
---------------------------------------------------------------------------
    \435\ U.S. Department of Commerce, Bureau of Economic Analysis, GDP 
and the Economy: Second Estimates for the Fourth Quarter of 2009, at 1 
(Mar. 2010) (online at www.bea.gov/scb/pdf/2010/03%20March/
0310_gdpecon.pdf) (hereinafter ``GDP and the Economy: Second Estimates 
for the Q4 2009'').
    \436\ Id., at 2.
---------------------------------------------------------------------------

                             FIGURE 51: GDP

[GRAPHIC] [TIFF OMITTED] T5737A.039

            c. Interest Rates
    Interest rates are, for many reasons, a matter of great 
importance to the housing market. Lenders price mortgages at a 
spread over a baseline interest rate, such as a Treasury 
security with a comparable term. In addition to affecting 
affordability and home prices, the mortgage payment on an 
adjustable rate mortgage depends on prevailing market interest 
rates. As interest rates on mortgages reset over the next three 
years, as discussed in Section C, prevailing interest rates 
could help determine whether the housing market recovers or 
crashes again.
    The section below looks at several interest rates that 
affect the residential mortgage market. Although market forces 
play a major role in determining most interest rates, the 
Federal Reserve monetary policy also has a great effect on 
rates in normal times, and is thus central to understanding the 
prospects of the housing market and foreclosure mitigation 
efforts. Short-term rates generally reflect the current supply 
and demand for credit in the economy, as well as inflation, 
government fiscal policy, monetary policy actions, market 
sentiments, foreign exchange rates, and other factors. Longer-
term rates are influenced by these factors as well, but more 
importantly, by expectations of future short-term rates. If 
lenders expect rates to rise in the future, they will require a 
higher interest rate on long-term loans. Long-term rates are 
more market driven and less sensitive to central bank policies 
than are short-term rates.
    In general, interest rates remain extremely low in both 
nominal and real terms. Rates set or targeted by the Federal 
Reserve remain near the ``zero bound,'' beyond which nominal 
rates cannot fall, constraining the ability of monetary policy 
to stimulate the economy.
            i. Discount Rate Increase
    The discount rate is the interest rate charged to financial 
institutions on the fully secured loans they receive from the 
Federal Reserve--the ``discount window.'' Short-term discount 
rate loans from the Federal Reserve are available to depository 
institutions that offer eligible collateral, such as Treasury 
securities, or more recently, certain mortgage-backed 
securities. By setting the discount rate at a certain level, 
the Federal Reserve can influence other market-set interest 
rates.\437\ On February 18, 2010, the Federal Reserve Board 
announced a 25-basis point increase in the discount rate to 
0.75 percent. This was the first increase in the discount rate 
since June 2006, near the height of the housing bubble. 
Furthermore, the Federal Reserve shortened the maturity period 
for borrowing under the primary credit window from 28 days to 
overnight.\438\
---------------------------------------------------------------------------
    \437\ Federal Reserve Bank of New York, The Discount Window (Aug. 
2007) (online at www.newyorkfed.org/aboutthefed/fedpoint/ fed18.html).
    \438\ Board of Governors of the Federal Reserve System, Federal 
Reserve Approves Modifications to the Terms of Its Discount Window 
Lending Programs (Feb. 18, 2010) (online at www.federalreserve.gov/
newsevents/press/monetary/ 20100218a.htm).
---------------------------------------------------------------------------
            ii. Fed Funds Rate
    The Fed Funds rate, the interest rate at which depository 
institutions loan funds held at the Federal Reserve to other 
depository institutions, was 0.20 percent on April 6, 2010. 
Interbank borrowing at the Fed Funds rate is a major source of 
liquidity in the banking system. Although the actual rate is 
set by the market, it is greatly influenced by the Federal 
Reserve, which uses open market operations to hold the rate at 
a predetermined target as part of its monetary policy. These 
actions to target a particular rate affect the amount of 
reserves in the banking system, and consequently influence bank 
lending policies and behavior.\439\ This rate has fluctuated 
from 0.05 to 0.20 percent from October 2009 through March 2010. 
This is down considerably from rates above 2 percent at the 
height of the credit crunch in late 2008.\440\
---------------------------------------------------------------------------
    \439\ Federal Reserve Bank of New York, Federal Funds (Aug. 2007) 
(online at www.newyorkfed.org/aboutthefed/ fedpoint/fed15.html).
    \440\ Board of Governors of the Federal Reserve System, Selected 
Interest Rates, Fed Funds Rate, Daily Series (online at 
www.federalreserve.gov/releases/h15/ data/Daily/H15_FF_O.txt) (accessed 
Apr. 8, 2010). As of March 16, 2010, the Federal Open Market 
Committee's target range for the federal funds rate was 0 to 1/4 
percent. Board of Governors of the Federal Reserve System, FOMC 
Statement (Mar. 16, 2010) (online at www.federalreserve.gov/ 
newsevents/press/monetary/ 20100316a.htm) (hereinafter ``FOMC 
Statement'').
---------------------------------------------------------------------------
    Many market observers have viewed the Federal Reserve's 
recent decisions, including raising the discount rate, 
shortening the maturity period for borrowing under the primary 
credit window, and the decision to allow four Federal Reserve 
programs established to provide liquidity at the height of the 
crisis to expire as indicators that the Federal Reserve may 
target an increase in the Fed Funds rate in the near 
future.\441\ The current extremely low interest rates, with 
short-term rates near zero, concern some members of the Federal 
Reserve, who believe that extended periods of low rates fuel 
speculative asset bubbles.\442\ A policy of continued monetary 
tightening would inevitably drive up mortgage rates. On 
February 24, 2010, however, Chairman of the Board of Governors 
of the Federal Reserve System Ben S. Bernanke stated:
---------------------------------------------------------------------------
    \441\ The four Federal Reserve facilities were the Primary Dealer 
Credit Facility (PDCF), the Term Securities Lending Facility (TSLF), 
the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity 
Facility (AMLF), and the Commercial Paper Funding Facility (CPFF).
    \442\ FOMC Statement, supra note 440 (noting the dissent of Kansas 
City Fed President Thomas M. Hoenig); see also Peter Barnes Interview 
with Kansas City Fed President Thomas Hoenig (Fox Business Network 
television broadcast Mar. 24, 2010).

          The FOMC [Federal Open Market Committee] continues to 
        anticipate that economic conditions--including low 
        rates of resource utilization, subdued inflation 
        trends, and stable inflation expectations--are likely 
        to warrant exceptionally low levels of the federal 
        funds rate for an extended period.\443\
---------------------------------------------------------------------------
    \443\ House Committee on Financial Services, Written Testimony of 
Ben S. Bernanke, chairman, Board of Governors of the Federal Reserve 
System, Semiannual Monetary Policy Report to the Congress, at 3 (Feb. 
24, 2010) (online atwww.house.gov/apps/list/hearing/financialsvcs_dem/
022410_mpr_house-financial-services.pdf).

    Although the meaning of ``an extended period'' is 
deliberately vague, Federal Reserve Bank of Chicago President 
Charles Evans (who is not an FOMC voting member) has suggested 
that this term means approximately six months, a considerably 
shorter time than many observers had assumed the term 
meant.\444\
---------------------------------------------------------------------------
    \444\ Robert Flint, Defining Fed's Extended Period, Wall Street 
Journal (Feb. 26, 2010) (online at blogs.wsj.com/marketbeat/2010/02/26/
defining-feds-extended-period/).
---------------------------------------------------------------------------
            iii. Treasury Yields
    The yields of Treasury securities trading in the secondary 
market, that is, the effective rate of return from these 
securities at market prices, are the most common benchmark 
interest rates used by banks to determine the rates on loans, 
including many mortgages (i.e., long-term market-determined 
interest rates). The yield of 30-year Treasury bonds, the most 
widely followed Treasury yield, was 4.74 percent as of April 7, 
2010. Yields of all maturities are low in historical terms. The 
yield curve, a graphical representation of the yields of 
Treasury securities of all maturities, is ``normal'' (longer 
maturities bear higher yields) and relatively steep. For 
example, the difference between 2-year and 10-year Treasury 
yields was 2.83 percent on April 7, 2010.\445\ Long-term and 
short-term interest rates tend to move together but may react 
differently to market or economic changes. Two-year notes and 
other shorter term rates are impacted primarily by monetary 
policy, responding quickly and precisely to actions taken by 
the Federal Reserve such as changes to the discount rate. Long-
term interest rates, on the other hand, behave in a more 
complicated manner, incorporating expectations for inflation 
and future interest rates as well as supply and demand 
conditions in the mortgage-backed securities market. Absent 
Federal Reserve activity in Treasury markets or mortgage-backed 
securities markets, long-term interest rates move somewhat 
independently from Federal Reserve action. A steep yield curve 
is considered a sign of economic optimism among bond investors, 
and often precedes an economic recovery. In April 1992, for 
example, the yield curve was relatively steep as the economy 
emerged from recession and the savings and loan debacle. A 
steeper yield curve indicates that investors expect higher 
short-term interest rates in the future. Higher rates are 
usually, though not always, a reaction to inflation driven by 
increased economic activity.\446\
---------------------------------------------------------------------------
    \445\ U.S. Department of the Treasury, Daily Treasury Yield Curve 
Rates (online at www.ustreas.gov/offices/domestic-finance/debt-
management/interest-rate/yield.shtml) (accessed Apr. 8, 2010).
    \446\ PIMCO, Yield Curve Basics (July, 2006) (online at 
www.pimco.com/LeftNav/Bond+Basics/2006/ Yield_Curve_Basics.htm).
---------------------------------------------------------------------------
            d. Economic Sector Surveys
    Business surveys are often useful for illuminating trends 
that are occurring in the economy or providing insight into the 
thinking of business leaders. The Institute for Supply 
Management's Report on Business (Non-Manufacturing), which 
tracks the health of the service sector of the economy, showed 
general improvement in its most recent report from March 2010. 
Business activity/production and new orders both grew at 
increasingly faster rates than in previous months. Inventories 
fell again, but at a slower rate than February. However, these 
positive signs were countered by the survey's results on 
inventory sentiment, which indicated that for the 154th 
straight month, service businesses believe that there is too 
much inventory in the system. Reported service employment also 
declined, albeit at a slowing rate.\447\ This continued lack of 
hiring may indicate that service business owners lack 
confidence in the strength of the economy.
---------------------------------------------------------------------------
    \447\ Institute for Supply Management, March 2010 Non-Manufacturing 
ISM Report on Business (Apr. 5, 2010) (online at www.ism.ws/ISMReport/
NonMfgROB.cfm).
---------------------------------------------------------------------------
    The Philadelphia Federal Reserve's widely followed 
manufacturing sector survey showed an increase in its 
``diffusion index'' in March to a level of 18.9, up from 17.6 
in February. This increase means that survey respondents 
reported an increase in business activity. The diffusion index 
has remained positive for seven consecutive months, indicating 
a steady revival of the manufacturing sector. Survey responses 
in specific business activity categories showed positive 
numbers for new orders, shipments, and employment in March. The 
report also concluded that manufacturers remain optimistic 
about future business activity.\448\
---------------------------------------------------------------------------
    \448\ Federal Reserve Bank of Philadelphia, March 2010 Business 
Outlook Survey (Mar. 2010) (online at www.phil.frb.org/research-and-
data/regional-economy/business-outlook-survey/2010/bos0310.pdf).
ANNEX II: WHAT'S GOING ON IN ARIZONA, CALIFORNIA, FLORIDA, NEVADA, AND 
                               MICHIGAN?

    Although the troubles in the housing market have affected 
all areas of the country, as shown by statistics in Annex I, 
certain markets have been particularly struck by the downturn 
in housing prices. This annex examines the dire housing market 
conditions in Arizona, California, Florida, Michigan, and 
Nevada. With the exception of Michigan, the states that boomed 
the most during the bubble years are now suffering the most 
severe bust.

a. What are their housing market and economic indicator statistics?

    Figure 52 below shows some housing related indicators for 
the five hardest hit states.

                                                              FIGURE 52: STATE INFORMATION
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       FHFA
                                                    FHFA Housing     Housing        FHFA      Percent of                                    Unemployment
                                                   Price Index %   Price Index    Housing    Borrowers in   Delinquency    Percentage of     Rate (as of
                                                    Change 2001-     % Change   Price Index    Negative      Rate (90         Loans in        12/31/09)
                                                     2006 \449\      Since Q4     % Change   Equity \452\  days+) \453\  Foreclosure \454\      \455\
                                                                    2006 \450\   2009 \451\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Arizona.........................................            97%          (36)%      (12.7)%         51.3%         7.13%           6.07%             9.1%
California......................................           106%          (38)%       (0.4)%         35.1%         6.93%           5.56%            12.4%
Florida.........................................           107%          (37)%       (8.2)%         47.8%         6.99%          13.44%            11.8%
Nevada..........................................            99%          (48)%      (17.3)%         69.9%         9.28%           9.76%            13.0%
Michigan........................................            16%          (20)%       (2.8)%         38.5%         6.57%           4.56%            14.6%
National Average................................            55%          (10)%       (1.2)%         23.8%         5.09%           4.58%             9.7%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\449\ HPI Historical Reports (2000-2009), supra note 324.
\450\ U.S. and Census Division Monthly Purchase Only Index, supra note 330 (accessed Apr. 13, 2010); U.S. and Census Division Monthly Purchase Only
  Index, supra note 330 (accessed Apr. 13, 2010).
\451\ Federal Housing Finance Agency, Purchase Only Index: State HPI Summary (online at www.fhfa.gov/Default.aspx?Page=215&Type=summary) (accessed Apr.
  13, 2010).
\452\ Underwater Mortgages On the Rise, supra note 369.
\453\ MBA National Delinquency Survey, supra note 1 (subscription required); see also February MBA Survey Results, supra note 1.
\454\ MBA National Delinquency Survey, supra note 1 (subscription required); see also February MBA Survey Results, supra note 1.
\455\ U.S. Department of Labor, Bureau of Labor Statistics, Regional and State Employment and Unemployment Summary--December 2009 (Jan. 22, 2010)
  (online at www.bls.gov/news.release/archives/laus_01222010.pdf).

b. Why are things so bad there?

    Although all five states have been severely affected by the 
bursting of the housing bubble, Michigan's situation is 
different from the other states. The drop in Michigan property 
values has been largely due to the continued decline of the 
state's economic engine, the big three American auto companies. 
Although this downward trend has been going on for nearly 40 
years, the acute difficulties the automakers faced in 2008 and 
2009 led to massive layoffs and plant closings that crippled an 
already weak housing market. As mentioned earlier, Michigan has 
the nation's highest unemployment rate. Many homes in the 
state's largest city, Detroit, are nearly worthless due to a 
lack of employed, qualified buyers. Detroit has 33,000 vacant 
homes, and over 90,000 abandoned lots. To cope with this 
situation, the Mayor of Detroit has proposed bulldozing large 
portions of the city to reduce the area that the city 
government must serve.\456\
---------------------------------------------------------------------------
    \456\ Michael Snyder, The Mayor of Detroit's Radical Plan to 
Bulldoze One Quarter of the City, Business Insider (Mar. 10, 2010) 
(online at www.businessinsider.com/the-mayor-of-detroits-radical-plan-
to-bulldoze-one-quarter-of-the-city-2010-3).
---------------------------------------------------------------------------
    Arizona, California, Florida, and Nevada have the opposite 
problem. They are high growth ``sunbelt'' areas, which have 
attracted millions of new residents in recent decades from 
declining areas such as Michigan, for instance. An excessive 
level of optimism about the economic prospects of these states 
led to many poorly planned investments and severe 
overdevelopment of housing. These four states saw particularly 
extreme versions of the trends that affected the country as a 
whole during the housing bubble: easy credit, sloppy mortgage 
underwriting, subprime and stated income lending, general 
disregard for credit risk, the rampant use of exotic loans, 
overdevelopment of new homes, and manic, speculative home 
buying. The existence of a real estate market cycle was largely 
disregarded, conservative underwriting standards were derided 
as obsolete, and rising home prices drove a ``sky's the limit'' 
mentality.
    For example, option ARMs, perhaps the most risky type of 
mortgage generally available to the public, were particularly 
common in these four states. Nearly 75 percent of all option 
ARMs were originated in these four states.\457\ By contrast, 
these states account for only 17 percent of all mortgages 
outstanding in the United States.\458\
---------------------------------------------------------------------------
    \457\ Levitin & Twomey, supra note 78.
    \458\ MBA National Delinquency Survey, supra note 1 (subscription 
required); see also February MBA Survey Results, supra note 1.
---------------------------------------------------------------------------
    It is difficult to predict how long the decline will 
continue in the five hardest-hit states, and how far prices 
will ultimately fall, given the various external factors that 
could affect the housing market. Such predictions are outside 
the scope of this report. However, a research arm of the credit 
rating agency Moody's, Economy.com, predicts home prices in 
most parts of the five states will not return to their previous 
highs until the year 2030 or later. Figure 53, below, shows 
Economy.com's estimates of housing recovery dates by 
metropolitan statistical area.

 FIGURE 53: YEAR IN WHICH METRO AREA REGAINS PREVIOUS HOUSE PRICE PEAK 
                                 \459\

      
---------------------------------------------------------------------------
    \459\ Fiserv, FHFA, and Moody's Economy.com, Hardest Hit Metros 
Will Take Longer to Recover (2010).
[GRAPHIC] [TIFF OMITTED] T5737A.040

                       ANNEX III: LEGAL AUTHORITY

    EESA authorizes the Secretary of the Treasury to establish 
the TARP ``to purchase, and to make and fund commitments to 
purchase, troubled assets from any financial institution.'' 
\460\ Treasury has structured HAMP to involve commitments to 
purchase financial instruments from mortgage servicers, but the 
underlying economics of the program are that Treasury is paying 
not for financial instruments but for the servicing of loan 
modifications. Members of the Panel have questioned Treasury as 
to whether expenditures under HAMP are in fact authorized by 
EESA.
---------------------------------------------------------------------------
    \460\ 12 U.S.C. Sec. 5211(a)(1).
---------------------------------------------------------------------------

                         A. Treasury's Position

    Treasury's General Counsel, George Madison, has shared with 
the Panel a summary of his legal views on the authority for 
HAMP, but Treasury has asserted that the letter containing that 
summary would be subject to the attorney-client privilege as 
applied to third parties, and is subject to the Panel's 
confidentiality arrangements with Treasury.\461\ The General 
Counsel's letter is addressed to Panel member Paul Atkins and 
copied to Panel Chair Elizabeth Warren. Treasury has stated 
that the Panel may summarize or quote from the letter but may 
not reprint it in its original form.
---------------------------------------------------------------------------
    \461\ The letter explains that ``[w]hile it is not our custom to 
release internal legal analyses, [this letter] share[s] a summary of my 
legal views with you.'' Letter from George Madison, general counsel, 
U.S. Department of the Treasury, to Paul Atkins, member, Congressional 
Oversight Panel (Jan. 12, 2010).
---------------------------------------------------------------------------
    The letter states that HAMP is authorized by sections 101 
and 109 of EESA. It argues that a HAMP Servicer Participation 
Agreement involves Treasury's commitment to purchase a 
``financial instrument'' that is a ``troubled asset,'' from a 
financial institution and thus the commitment and purchase are 
authorized by section 101. It adds that the payments Treasury 
makes are ``credit enhancements'' authorized by section 109. 
Treasury's primary assertion is that it is purchasing 
``financial instruments'' from servicers. The HAMP Servicer 
Participation Agreement is titled ``Commitment to Purchase 
Financial Instrument and Servicer Participation Agreement,'' 
and includes an attachment titled ``Financial Instrument.'' 
\462\
---------------------------------------------------------------------------
    \462\ U.S. Department of the Treasury, Commitment to Purchase 
Financial Instrument and Servicer Participation Agreement (online at 
www.hmpadmin.com/ portal/docs/hamp_servicer/ 
servicerparticipationagreement.pdf) (hereinafter ``Commitment to 
Purchase Financial Instrument and Servicer Participation Agreement'') 
(accessed on Apr. 5, 2010).
---------------------------------------------------------------------------
    The General Counsel notes that EESA authorizes the 
Secretary of the Treasury to establish a program to purchase 
``troubled assets'' from financial institutions. He notes that 
``troubled assets'' are defined under EESA to include ``any 
other financial instrument that the Secretary, after 
consultation with the Chairman of the Board of Governors of the 
Federal Reserve System, determines the purchase of which is 
necessary to promote financial market stability, but only upon 
transmittal of such determination, in writing, to the 
appropriate committees of Congress.'' \463\ (Emphasis added.)
---------------------------------------------------------------------------
    \463\ Letter from George Madison, general counsel, U.S. Department 
of the Treasury, to Paul Atkins, member, Congressional Oversight Panel 
(Jan. 12, 2010) (citing 12 U.S.C. Sec. 5202(9)).
---------------------------------------------------------------------------
    EESA does not define ``financial instrument,'' but the 
letter outlines the view that:

          In the absence of such a definition, the Supreme 
        Court has directed that a statutory term be construed 
        in accordance with its ordinary or natural meaning. The 
        ordinary and natural meaning of `financial instrument' 
        includes a written legal document that defines duties 
        and grants rights and is financial in nature. This 
        meaning is supported by dictionary definitions, federal 
        case law and published financial accounting 
        standards.\464\
---------------------------------------------------------------------------
    \464\ The letter does not contain citations to dictionary 
definitions, federal case law, or published financial accounting 
standards.

---------------------------------------------------------------------------
    The letter continues:

          The instruments executed by the servicers easily fall 
        within the ordinary and natural meaning of the term 
        `financial instrument' in that each one is a written 
        legal document that defines duties and grants rights 
        and pertains to the receipt and use of money. The 
        instruments recite the servicers' respective promises 
        (i.e., duties) to Treasury to modify mortgages meeting 
        criteria set out in the instrument and to distribute 
        the funds paid by Treasury consistent with the 
        directions set out in the instruments.

    The General Counsel explains that, while Treasury has 
``generally used its authority under EESA to purchase financial 
instruments in the form of shares of preferred stock or 
promissory notes, the ordinary or natural meaning of the term 
`financial instrument' is not limited to stock certificates and 
promissory notes,'' given Treasury's authority, noted above, to 
purchase ``any financial instrument that the Secretary, after 
consultation with the Chairman of the Board of Governors of the 
Federal Reserve System, determines the purchase of which is 
necessary to promote financial market stability.'' The letter 
states that EESA section 2(1), which says that the purpose of 
EESA is ``to immediately provide authority and facilities that 
the Secretary of the Treasury can use to restore liquidity and 
stability to the financial system of the United States,'' gives 
the Secretary ``broad authority'' to determine which type of 
financial instrument can be purchased.
    The General Counsel points to the legislative history to 
support the interpretation that the Secretary has broad 
authority to determine which type of financial instrument to 
purchase \465\ and to use some of this authority to purchase 
assets ``directly for foreclosure mitigation.'' \466\ His 
letter explains that ``[t]he contract that the Secretary enters 
into with each servicer is a `commitment' to purchase the 
financial instrument executed by the servicer, and the 
Secretary `purchases' the financial instrument by making the 
payments to the servicer set out in the contract.'' It 
continues that:
---------------------------------------------------------------------------
    \465\ The letter cites to Senator Dodd's statement:

      Section 101 of the legislation gives broad authority for 
      the Treasury Secretary, in consultation with other 
      agencies, to purchase and make and fund commitments to 
      purchase troubled assets from financial institutions on 
      terms and conditions that he determines. This legislation 
      does not limit the Secretary to specific actions, such as 
      direct purchases or reverse auctions but could include 
      other actions, such as a more direct recapitalization of 
      the financial system or other alternatives that the 
      Secretary deems are in the taxpayers' best interest and 
---------------------------------------------------------------------------
      that of the Nation's economy.

154 Cong. Rec. 10283 (daily ed. Oct 1, 2008) (statement of Sen. Dodd).

    \466\ To support this, the letter points to a colloquy between 
Representatives Edwards and Frank ``in which Representative Frank 
clarified this important legislative intent that Treasury use a portion 
of the spending authority in EESA to mitigate mortgage foreclosures:''

      Ms. EDWARDS of Maryland. Madam Speaker, if I might make an 
---------------------------------------------------------------------------
      inquiry of the gentleman from Massachusetts.

      In my reading of the bill, I am trying to understand 
      whether it is your belief that the Treasury has the 
      authority under this legislation to use some portion of 
      that $700 billion to deal directly with homeowners, 
      specifically with homeowners facing foreclosure. And could 
      you clarify for me the circumstances under which the 
      Treasury has that authority when it wholly owns the 
      mortgage, and when that mortgage is being serviced by loan 
      servicing centers?

      Mr. FRANK of Massachusetts. If the gentlewoman will yield, 
      the answer is absolutely. And I can tell you that I have 
      spoken to the Treasury, to the Secretary, to tell him it is 
      very important; that many Members will be voting for this 
      bill only with the understanding that he will use that 
      authority. And I believe he accepts that fact and will act 
      on it.

154 Cong. Rec. H10770-10771 (daily ed. Oct 3, 2008) (statements of Rep. 
Edwards and Rep. Frank).

          [T]he purchase contracts . . . are enforceable 
        contracts that contain the servicers' agreement to 
        issue their financial instruments to the Secretary, and 
        the Secretary's agreement to purchase those financial 
        instruments. Treasury pays the purchase price for those 
        financial instruments, as valuable consideration, by 
        making the payments of money to the servicers set out 
        in the contracts. The contracts entered into by the 
        Secretary . . . with the servicers are plainly 
        `commitments to purchase troubled assets' authorized by 
        section 101(a)(1) of EESA and the Secretary is 
        `purchasing' financial instruments by making those 
        payments.

The letter also describes the purchase price of each contract 
as the series of payments that Treasury makes to a servicer as 
incentive payments for the servicer and for the servicer to 
pass along to the lender/investor or borrower.
    Finally, the General Counsel explains that the servicers 
are ``financial institutions'' under section 3(5) of EESA. He 
notes that the statutory definition of ``institution'' does not 
contain an exclusive list, so long as the organization is 
created and regulated under U.S. federal, state, possession or 
territorial law, has substantial U.S. operations, and is not 
operating as or owned by foreign central banks.
    In addition, the General Counsel characterizes the payments 
made to servicers as ``credit enhancements'' under EESA section 
109(a). The letter states that EESA section 109(a) says that 
``the Secretary may use loan guarantees and credit enhancements 
to facilitate loan modifications to prevent avoidable 
foreclosures.'' The letter notes that neither EESA nor Black's 
Law Dictionary defines ``credit enhancement.'' The analysis in 
this instance cites to the Encyclopedia of Banking and Finance 
(10th ed. 1994), which ``defines `credit enhancement' as being 
`[a] generic term for collateral, letters of credit, 
guarantees, and other contractual mechanisms aimed at reducing 
credit risk.' '' The letter explains how each payment is a 
credit enhancement:

          The Treasury commitment in the proposed contacts 
        [sic] to make interest-subsidy and principal-reduction 
        payments to lenders and investors plainly enhances the 
        creditworthiness of the homeowners; it therefore 
        constitutes a credit enhancement that facilitates loan 
        modifications by the servicers. The Treasury commitment 
        to make the `home price depreciation reserve' payments 
        is a contractual mechanism that operates to guarantee, 
        or at least mitigate loss to, the value of the 
        collateral for the credit transaction as a whole; it 
        therefore also constitutes a credit enhancement that 
        facilitates loan modifications. The Treasury commitment 
        to make the proposed payments to servicers to 
        extinguish junior liens reduces the homeowners' overall 
        indebtedness; it therefore plainly constitutes a credit 
        enhancement that facilitates loan modifications. The 
        Treasury commitment to make the proposed payments for 
        foreclosure alternatives minimizes the negative impact 
        that a foreclosure would have on the credit rating of a 
        borrower; it therefore constitutes a credit 
        enhancement, vis-a-vis foreclosure, that prevents 
        avoidable foreclosure. Lastly, it is highly 
        questionable that servicers would enter into thousands 
        of loan modifications under the HAMP, and therefore 
        doubtful that the HAMP could be successfully 
        implemented, if the HAMP did not include incentive and 
        `success' payments to servicers. Moreover, the 
        `success' payments increase the likelihood that 
        servicers will modify loans that are more likely than 
        other troubled loans to continue to be repaid.\467\
---------------------------------------------------------------------------
    \467\ The letter is dated the day before the announcement of the 
Hardest Hit Fund program, therefore it does not describe how the 
payments to local housing finance agencies are financial instruments or 
credit enhancements.

    Finally, the letter points out that section 109(a) of EESA 
instructs the Treasury that, ``to the extent that the Secretary 
acquires mortgages and mortgage-backed securities,'' it shall 
encourage the servicers of the underlying mortgages to take 
advantage of existing programs to minimize foreclosures. The 
letter explains that ``while Treasury has not acquired whole 
mortgages or mortgage-backed securities under EESA, Treasury 
has, in furtherance of the spirit of that provision, developed 
and implemented the voluntary HAMP to encourage servicers to 
minimize foreclosures on mortgages . . . that the Treasury does 
not even own.''

                   B. Outside Legal Experts' Opinions

    The Panel requested outside legal opinions from 
independent, nationally recognized legal scholars. Professor 
Eric Posner of the University of Chicago Law School and 
Professors John A.E. Pottow and Stephen P. Croley from the 
University of Michigan Law School provided the Panel with 
opinions. The full text of the two opinions is included in this 
Annex.
    Professor Posner concluded that under clear administrative 
law precedent, Treasury would be accorded deference in its 
determination of what constitutes a financial instrument and 
therefore a troubled asset under section 3(9)(B) of the EESA, 
so long as its determination was ``reasonable.'' Professor 
Posner noted, however, that even with such deference, 
Treasury's determination that HAMP payments to servicers were 
pursuant to the commitment to purchase a financial instrument 
was in fact not reasonable, as the contracts with servicers 
were not commitments to purchase financial instruments in any 
sense that the term ``financial instrument'' is used elsewhere 
in federal law or the Uniform Commercial Code. Professor Posner 
noted, however, that it is unlikely that any party would have 
legal standing to challenge HAMP's legality.
    Professors Pottow and Croley concluded that HAMP is 
implicitly authorized by EESA's purposes and design. They state 
that section 109 of EESA applies expressly to loans in which 
Treasury has an ownership interest, but does not preclude 
Treasury from establishing a program for loans which it does 
not own. They note that, despite Treasury's titling of the 
``Servicer Participation Agreement'' as also being a 
``Commitment to Purchase Financial Instrument,'' even under 
``the most generous legal interpretation,'' the document is a 
service contract and not a financial instrument. In doing so, 
Professors Pottow and Croley examined a number of definitions 
of ``financial instrument'' from the Uniform Commercial Code, 
case law, the tax code, and the Office of Thrift Supervision. 
Turning to EESA's statutory purpose, they explain that Congress 
gave Treasury broad powers to stabilize the financial markets, 
including the mortgage arena. They point to the purposes of 
EESA as set out in section 2, as well as the Secretary's 
``necessary and appropriate'' implementing power. Professors 
Pottow and Croley conclude that Treasury's actions with regard 
to HAMP would ``likely pass the `arbitrary and capricious' bar 
of EESA section 119(a)(1)'' and would not constitute an ``abuse 
of discretion'' under 119(a)(1).
    The Panel takes no position on the ultimate legality of 
HAMP and suggests that HAMP's legality is an issue best suited 
for Congress to take up if it is in fact concerned by 
Treasury's actions.\468\
---------------------------------------------------------------------------
    \468\ The Panel recognizes the possibility that even if Treasury's 
actions are extra-legal, Congressional inaction could be interpreted as 
ratification.
---------------------------------------------------------------------------
   To:  Professor Elizabeth Warren, Chair, Congressional Oversight 
    Panel
From: Eric A. Posner, University of Chicago Law School
 Date: April 1, 2010
  Re:  Treasury's Authority Under the Emergency Economic Stabilization 
    Act to Implement the Home Affordable Modification Program
----------------------------------------------------------------------
------------------------------

    You have asked me for my opinion as to whether Treasury has 
the authority under the Emergency Economic Stabilization Act 
(EESA) to use TARP funds to finance the Home Affordable 
Modification Program (HAMP). I conclude that Treasury has no 
such authority. However, because no one may have standing to 
challenge HAMP, it seems unlikely that it will be struck down 
by a court. I do not represent anyone, and have not received 
compensation for this opinion from the Congressional Oversight 
Panel or anyone else.

I. The Home Affordable Modification Program

    HAMP is available to certain homeowners at risk of 
foreclosure. The central feature of this program is a model 
contract entitled the Commitment to Purchase Financial 
Instrument and Servicer Participation Agreement (the 
``Commitment''). Fannie Mae, as financial agent of the United 
States, may enter this contract with any loan servicer eligible 
to participate in the program. Under the contract, Fannie Mae 
pays loan servicers to modify mortgage contracts in favor of 
homeowners, using funds made available to Treasury under EESA. 
In addition, Fannie Mae channels money through the loan 
servicer to homeowners who stay current with HAMP modified 
loans and investors whose contractual rights are modified. The 
overall goal is to reduce mortgage payments without 
compromising the rights of investors. This should both reduce 
the incidence of foreclosure and strengthen the financial 
condition of banks and other institutions that hold mortgages 
and mortgage-related securities.

II. Treasury's Authority Under EESA

    EESA grants Treasury the authority:

        to purchase, and to make and fund commitments to 
        purchase, troubled assets from any financial 
        institution, on such terms and conditions as are 
        determined by the Secretary, and in accordance with 
        this Act and the policies and procedures developed and 
        published by the Secretary.

EESA, Sec. 101(a)(1). Under the Commitment, Treasury pays the 
loan servicers to modify mortgage contracts and to transfer 
funds to investors and homeowners. Accordingly, the issue is 
whether Treasury's authority to ``purchase'' a ``troubled 
asset'' entitles it to pay for a loan modification--or, in 
short, whether a loan modification is a troubled asset.\469\
---------------------------------------------------------------------------
    \469\ A question could also be raised whether Treasury has the 
authority to make payments to homeowners and investors, using loan 
servicers as agents.
---------------------------------------------------------------------------
    ``Troubled assets'' are defined as:

          (A) residential or commercial mortgages and any 
        securities, obligations, or other instruments that are 
        based on or related to such mortgages, that in each 
        case was originated or issued on or before March 14, 
        2008, the purchase of which the Secretary determines 
        promotes financial market stability; and
          (B) any other financial instrument that the 
        Secretary, after consultation with the Chairman of the 
        Board of Governors of the Federal Reserve System, 
        determines the purchase of which is necessary to 
        promote financial market stability, but only upon 
        transmittal of such determination, in writing, to the 
        appropriate committees of Congress.

EESA, Sec. 3(9). Accordingly, a troubled asset is a mortgage, a 
mortgage-related security, a mortgage-related obligation, a 
mortgage-related instrument, or ``any other financial 
instrument'' that satisfies the criteria in subsection (B).
    This definition spells trouble for HAMP. Under HAMP, Fannie 
does not purchase an ``asset,'' troubled or otherwise, from the 
loan servicer. It purchases, in effect, a right to have loans 
modified. Loan modification is a service: it is the performance 
of a series of actions rather than a tangible or intangible 
thing. Subsection A defines a troubled asset as, among other 
things, a mortgage. A loan modification is not a mortgage--the 
loan servicer is modifying other people's mortgages; it is not 
selling mortgages that it owns or they own. Subsection A also 
defines a troubled asset as a mortgage-related security or 
obligation. A loan modification is a service, not a security or 
other obligation.
    Subsection A also defines a troubled asset as a mortgage-
related instrument and Subsection B broadens this definition to 
include ``any other financial instrument.'' The Commitment is 
clearly written with these definitions in mind. The Commitment 
refers to the loan servicer's obligation to modify loans as a 
``financial instrument'' in numerous places. Its title mentions 
a ``commitment to purchase financial instrument'' (emphasis 
added). Section 1(B) of the Commitment provides that ``Servicer 
shall perform the Services described in (i) the Financial 
Instrument attached hereto as Exhibit B (the `Financial 
Instrument').'' Section 4(A) provides that ``Fannie Mae, in its 
capacity as a financial agent of the United States, agrees to 
purchase, and Servicer agrees to sell to Fannie Mae, in such 
capacity, the Financial Instrument that is executed and 
delivered by Servicer to Fannie Mae in the form attached hereto 
as Exhibit B, in consideration for the payment by Fannie Mae, 
as agent, of the Purchase Price.'' Exhibit B supplies the form 
of the Financial Instrument. The Financial Instrument, as it 
appears in Exhibit B, restates Fannie Mae's obligation to pay 
for the Servicer's services; makes that obligation conditional 
on prior performance of those services and other actions; 
imposes various reporting requirements on the Servicer; 
requires the Servicer to implement an internal control program; 
states that the Servicer promises to comply with various laws, 
regulations, business norms, and the like; and much else in 
this vein.
    Is the Financial Instrument a mortgage-related 
``instrument'' or a ``financial instrument'' within the meaning 
of Sec. 3(9) of EESA? If so, Treasury has the authority to fund 
HAMP. If not, it does not have the authority under EESA.
    EESA does not define ``financial instrument.'' Accordingly, 
one must look outside the statute for definitions. The 
legislative history is uninformative.\470\ One lay definition 
of ``financial instrument'' is ``cash; evidence of an ownership 
interest in an entity; or a contractual right to receive, or 
deliver, cash or another financial instrument.''\471\ On this 
definition, the Financial Instrument is not a financial 
instrument because it is not cash; it is not evidence of an 
ownership interest but instead a contractual right to services; 
and it is not a contractual right to receive cash but a 
contractual right to receive services. Nor is it a contractual 
right to receive or deliver another financial instrument.
---------------------------------------------------------------------------
    \470\ For the legislative history, see www.dechert.com/emailings/
fre-fmrpu/fre-fmrpu-1.html. One senator, in passing, gives the 
following examples of ``financial instrument'': mortgage-related 
assets, securities based on credit card payments or auto loans, and 
common stock. See www.dechert.com/emailings/fre-fmrpu/docs/Senate-
Debate-1.pdf, p. S10240.
    \471\ Wikipedia, en.wikipedia.org/wiki/Financial_instrument.
---------------------------------------------------------------------------
    A legal definition of ``instrument'' can be found in the 
Uniform Commercial Code:

          ``Instrument'' means a negotiable instrument or any 
        other writing that evidences a right to the payment of 
        a monetary obligation, is not itself a security 
        agreement or lease, and is of a type that in ordinary 
        course of business is transferred by delivery with any 
        necessary endorsement or assignment. The term does not 
        include (i) investment property, (ii) letters of 
        credit, or (iii) writings that evidence a right to 
        payment arising out of the use of a credit or charge 
        card or information contained on or for use with the 
        card.

U.C.C., Sec. 9-102(1)(47). Courts distill this definition into 
two elements: (1) a writing that evidences a right to the 
payment of a monetary obligation, (2) of a type that in 
ordinary course of business is transferred by delivery with any 
necessary endorsement or assignment. See, e.g., In re Omega 
Environmental Inc., 219 F.3d 984, 986 (9th Cir., 2000) (holding 
that a certificate of deposit is an instrument). See also In re 
Commercial Money Center, Inc., 392 B.R. 814, 833-34 (Bankr. 
App. 9, 2008) (holding that surety bonds are not instruments 
because they are not transferrable by delivery in the ordinary 
course of business and do not provide for the payment of any 
sum certain); In re Matter of Newman, 993 F.2d 90 (5th Cir., 
1993) (holding that an annuity contract is not an instrument 
because it is not transferred in the regular course of 
business).
    None of these courts would regard the Financial Instrument 
as an ``instrument'' under the Uniform Commercial Code. The 
Financial Instrument is a writing but it does not evidence a 
right to the payment of a monetary obligation. Instead, it 
evidences a right to the modification of mortgages held by 
others. Someone who possess the Financial Instrument, whether 
Fannie Mae or a transferee, would have no right to obtain money 
from anyone. In addition, as far as I know, writings evidencing 
rights to loan modifications are not transferred by delivery in 
the ordinary course of business. Such rights may be assigned as 
part of a contract, but their value is not embodied in a piece 
of paper which is routinely transferred as a way of conveying 
value, as is the case for checks, securities, and other 
conventional financial instruments.
    The U.S. Code contains a number of references to financial 
instruments.

          The term ``financial instrument'' includes stocks and 
        other equity interests, evidences of indebtedness, 
        options, forward or futures contracts, notional 
        principal contracts, and derivatives.

26 U.S.C. 731(c)(2)(C). This section does not define financial 
instrument but lists a series of examples that are consistent 
with the definition of instrument in the Uniform Commercial 
Code. The term ``financial instrument'' also appears in 18 
U.S.C. 514(a)(2), which criminalizes fraudulent use of phony 
financial instruments, but does not define the term. Judicial 
interpretations of the latter statute are consistent with the 
U.C.C. definition and do not provide any support for a broader 
interpretation that would encompass transactions like the 
Financial Instrument in the Commitment. See, e.g., United 
States v. Howick, 263 F.3d 1056 (9th Cir. 2001) (phony Federal 
Reserve notes are fictitious instruments). See also United 
States v. Sargent, 504 F.3d 767 (9th Cir. 2007) (postage 
statements are not financial instruments).
    HAMP is consistent with the purposes of EESA, which include 
``protect[ing] home values'' and ``preserv[ing] 
homeownership.'' EESA, Sec. 2(2)(A) and (B). However, EESA does 
not authorize all kinds of transactions that might advance 
these goals. Treasury can advance these goals only by 
purchasing mortgages, mortgage-related obligations, and 
financial instruments. Congress may well have limited Treasury 
in this way for reasons expressed in Sec. 2(2)(C): to maximize 
overall returns to the taxpayers of the United States. 
Purchasing mortgages, securities, and other financial 
instruments is plausibly a safer way to protect the public fisc 
than paying for services and giving away money to homeowners, 
since financial instruments are generally liquid and can be 
resold or held to maturity in return for cash.\472\
---------------------------------------------------------------------------
    \472\ The U.S. Department of Treasury's definition of ``financial 
instrument''--``a written legal document that defines duties and grants 
rights and is financial in nature''--would encompass virtually any 
financial transaction. The U.S. Department of Treasury's definition 
ignores the conventional meaning of ``instrument,'' which is narrower 
than that of ``transaction.''
---------------------------------------------------------------------------
    Treasury also argues that it has authority under 
Sec. 109(a) of EESA, which provides:

          To the extent that the Secretary acquires mortgages, 
        mortgage backed securities, and other assets secured by 
        residential real estate, including multifamily housing, 
        the Secretary shall implement a plan that seeks to 
        maximize assistance for homeowners and use the 
        authority of the Secretary to encourage the servicers 
        of the underlying mortgages, considering net present 
        value to the taxpayer, to take advantage of the HOPE 
        for Homeowners Program under section 257 of the 
        National Housing Act or other available programs to 
        minimize foreclosures. In addition, the Secretary may 
        use loan guarantees and credit enhancements to 
        facilitate loan modifications to prevent avoidable 
        foreclosures.

    Treasury argues that the authority to use ``credit 
enhancements to facilitate loan modification'' enables it to 
pay loan servicers to modify mortgages and to make payments to 
investors and homeowners.
    However, Sec. 109(a) gives the Secretary this authority 
only over mortgages it has acquired, and the HAMP program 
involves privately owned mortgages, not mortgages owned by the 
government or its agencies. Accordingly, Sec. 109(a) cannot 
provide authority for HAMP. In addition, although ``credit 
enhancement'' is not defined in EESA, it is a term of art in 
the financial world. It refers to a number of conventional 
transactions that are used to provide assurances to a creditor 
that it will be repaid even if the debtor defaults.\473\ These 
transactions include third-party guarantees, where a third 
party promises to repay the creditor if the debtor defaults, 
and the provision by the debtor of excess collateral, which 
protects the creditor against default in case the market value 
of the collateral declines. The placement of the term ``credit 
enhancement'' next to ``loan guarantees'' in Sec. 109(a) 
reinforces this conventional interpretation. Given limits on my 
time, I have not been able to track down a definition of 
``credit enhancement'' in U.S. statutes or judicial opinions, 
but the term does appear (undefined) in a number of statutes 
and a survey of the judicial opinions that involve 
consideration of those statutes address standard examples of 
credit enhancements such as loan guarantees.
---------------------------------------------------------------------------
    \473\ See Wikipedia, en.wikipedia.org/wiki/Credit_enhancement.
---------------------------------------------------------------------------
    Treasury's argument boils down to a claim that, in effect, 
a third party ``uses a credit enhancement'' when it pays a 
creditor to give better terms to the debtor because the risk 
that the creditor will not be repaid will decline, just as it 
does in the case of loan guarantees and excess 
collateralization. I am not persuaded but I believe that 
reasonable people could disagree on this issue, and that 
therefore a court might be willing to defer to Treasury's 
interpretation. However, as I noted above, this issue is moot 
because Treasury does not have authority under EESA to use 
credit enhancements on mortgages that the U.S. government does 
not own.

III. Judicial Review

    You have asked me whether parties may seek judicial review 
of HAMP. This is a closer question.
    Section 119 provides for judicial review of actions by the 
Secretary pursuant to the authority of EESA under the 
``arbitrary and capricious'' standard, but limits the 
availability of injunctions. Conceivably, individuals could 
also challenge HAMP under the general judicial review 
provisions of the Administrative Procedure Act, 5 U.S.C. 
Sec. Sec. 702-06, on the ground that the Secretary is acting 
outside of EESA, with no authority at all.
    However, anyone who seeks to challenge HAMP would need to 
have standing, which requires, among other things, an injury. 
Taxpayers might argue that HAMP injures them but courts tend to 
deny standing where the injury is generalized or 
undifferentiated. With the exception of establishment clause 
challenges, taxpayers rarely if ever have standing to challenge 
spending programs. Investors who are not adequately compensated 
under HAMP for losses resulting from mortgage modifications 
would have standing. But it is not clear whether such investors 
exist.
    If a challenge to HAMP reached the merits, Treasury's 
interpretation of EESA would be subject to Chevron deference 
under Chevron U.S.A. Inc. v. National Resources Defense 
Council, 467 U.S. 837 (1984).\474\ However, this deference is 
limited. Courts apply a two-step procedure. First, they 
determine whether the statute addresses the question at issue. 
Second, if not, they determine whether the agency's 
interpretation of the statute is ``reasonable.'' For reasons 
given in Part II, I do not believe that Treasury's 
interpretation of ``financial instrument'' in Sec. 3(9) of EESA 
is reasonable. A contractual right to loan modification is not 
a financial instrument. Accordingly, if a court were to review 
HAMP, it would hold that Treasury does not have the authority 
to fund it.
---------------------------------------------------------------------------
    \474\ There is disagreement about whether Chevron deference applies 
to an agency's interpretation of the statute that confers jurisdiction 
on it; for present purposes, I assume that it does.
---------------------------------------------------------------------------
    The most serious obstacle to judicial review is standing. 
If this obstacle cannot be overcome, then judicial review will 
not take place.
   To:  Elizabeth Warren, Chair, TARP Congressional Oversight Panel
From: Steven Croley, John Pottow
  Re: Requested Analysis of HAMP Authority
 Date: April 5, 2010


    We are two law professors at the University of Michigan 
(one specializing in commercial law and the other in 
administrative law), who have been asked to analyze the 
statutory authority under which the Secretary of the Treasury 
(``Secretary'') has promulgated the Home Affordable 
Modification Program (``HAMP'') under the Emergency Economic 
Stabilization Act of 2008, (``EESA'' or ``Act''), and the 
Troubled Asset Relief Program (``TARP'') created by the 
Act.\475\ We have been asked to address especially payments to 
mortgage servicers.
---------------------------------------------------------------------------
    \475\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. 
No. 110-343 Sec. 122.
---------------------------------------------------------------------------

1. Short Answer

    (1) Encouraging mortgage servicers to participate in 
mortgage modifications through financial incentives, where the 
Secretary has taken a direct interest in the mortgages in 
question (either through acquisition in whole or in part of the 
loan or through investment in securities related to the loan), 
is unquestionably authorized by the EESA.
    (2) Encouraging servicers to modify mortgages in which the 
Secretary has taken no direct interest is not explicitly 
authorized by the EESA. Yet incentive payments to mortgage 
servicers here seem implicitly consonant with the EESA's design 
and purposes. Given the Secretary's considerable discretion 
created by the EESA, such payments would most likely survive 
any judicial challenge.

2. Scope of HAMP

    HAMP is designed to facilitate the modification of 
residential mortgage loans as a loss mitigation effort, with 
the goal of preventing foreclosure and thus keeping financially 
struggling Americans in their homes. We have reviewed the 
summary of the HAMP guidelines from online sources, as none 
have yet been promulgated in the Code of Federal 
Regulations.\476\
---------------------------------------------------------------------------
    \476\ MHA Detailed Program Description, supra note 47; HAMP 
Guidelines, supra note 106.
---------------------------------------------------------------------------
    In relevant part, HAMP sets forth a series of incentives to 
encourage mortgage modifications. These include the following, 
which we put in quotations for mnemonic ease: ``incentive'' 
payments of $1,000 for mortgage servicers who successfully 
implement a mortgage modification (as well as follow-up 
``success fees'' up to $1,000 for modifications that avoid 
default for subsequent years); ``reward'' payments for 
homeowners who stick to modified repayment schedules; 
``insurance'' coverage for depreciating home prices (to 
overcome the anxiety mortgagees have to modification in the 
face of falling collateral values); ``surrender fees'' for 
second-lien holders to give up their largely out-of-the-money 
liens; and ``loss sharing'' payments for investors and lenders 
who take principal and other reductions on modified loans.
    Importantly, the scope of HAMP is broad. Loans eligible for 
application seem to cover almost the entire universe of primary 
residential mortgages: that is, both mortgages in which the 
Secretary (1) has taken a direct interest, either through (a) 
acquisition (partial or complete) of the underlying mortgage or 
(b) investment in a mortgage-backed security related to the 
underlying mortgage, and (2) has no direct financial stake 
whatsoever. (Throughout this memo, we call the latter 
``stranger'' loans and both of the former ``non-stranger'' 
loans vis. the Secretary.)
    In addition to the summarized HAMP guidelines, we reviewed 
what appears to be the implementing document for a HAMP-
participating mortgage servicer--the ``Commitment to Purchase 
Financial Instrument and Servicer Participation Agreement'' 
(``SPA'').\477\ The SPA spells out the terms and conditions by 
which a servicer must abide in order to receive its incentive 
and other payments under HAMP (and related programs).
---------------------------------------------------------------------------
    \477\ Commitment to Purchase Financial Instrument and Servicer 
Participation Agreement, supra note 462 (accessed Apr. 5, 2010).
---------------------------------------------------------------------------
    The SPA, by its own express terms (in its introductory 
recitals) does not apply to so-called Government-sponsored 
entity (``GSE'') loans, that is, loans ``owned, securitized, or 
guaranteed by Fannie Mae or Freddie Mac.'' \478\ This is so, 
according to the same recitals, because the guidelines for 
those participating servicers are being promulgated by the 
Federal National Mortgage Association (``Fannie Mae'') and the 
Federal Home Loan Mortgage Corporation (``Freddie Mac'').\479\ 
Thus, the scope of the SPA we consider covers only mortgages 
that have no connection to Fannie Mae or Freddie Mac.
---------------------------------------------------------------------------
    \478\ Id.
    \479\ Id.
---------------------------------------------------------------------------
    Similarly, the guidelines instruct that ``FHA, VA and rural 
housing loans will be addressed through standalone modification 
programs run by those agencies.'' \480\ As such, HAMP appears 
to be a residuum program that applies to (1) loans not covered 
by, e.g., FHA, VA, USDA, Fannie Mae and Freddie Mac programs, 
but nevertheless find themselves under the purview of the 
federal government (through acquisition by TARP), as well as 
(2) loans with a more tangential (if any) connection to the 
federal government, i.e., purely private loans uninsured by 
Fannie Mae or Freddie Mac. In sum, it appears that the SPA (and 
hence HAMP) seems to cover both stranger and non-stranger 
loans.
---------------------------------------------------------------------------
    \480\ HAMP Guidelines, supra note 106, at 15.
---------------------------------------------------------------------------

3. Statutory Authority under the EESA

            a. General Authority
    The EESA contains at least three potential bases of textual 
authority for HAMP. The first is found in the explicit mortgage 
foreclosure prevention and homeowner assistance directives of 
Title I, sections 109 and 110. The second relates to the 
general authority to acquire (and insure) troubled assets under 
Title I, sections 101 and 102. The third flows from the broader 
structural objectives of the Act, expressed in its statement of 
purposes in section 2.
    These specific provisions of the Act are best interpreted, 
however, not in a vacuum but rather mindful of what we perceive 
to be distinctive characteristics of the EESA relevant to the 
question of HAMP's authority. In the first place, the statute 
delegates very broad authority to the Secretary, expressly 
using statutory language generally understood to convey that 
the Secretary will exercise discretion to achieve the purposes 
of the Act and that the Secretary will enjoy deference in the 
exercise of that discretion. Thus, section 101(c) states: 
``Necessary Actions.--The Secretary is authorized to take such 
actions as the Secretary deems necessary to carry out the 
authorities in this Act, including, without limitation, the 
following: . . . .'' (emphasis added).\481\
---------------------------------------------------------------------------
    \481\ EESA Sec. 101(c); see also EESA Sec. 101(c)(5) (``Issuing 
such regulations and other guidance as may be necessary or appropriate 
to define terms or carry out the authorities or purposes of this 
Act'').
---------------------------------------------------------------------------
    Second, related to this wide discretion, the Act is sparse 
in terms of just what the Secretary is supposed to do in 
discharging his mandate under section 2 to ``restore liquidity 
and stability to the financial system of the United States.'' 
This wide latitude may indeed be why Congress concomitantly 
created this Oversight Panel--to keep a watch over this huge 
grant of power (and money).
    Third, the EESA repeatedly instructs the Secretary to focus 
on the interests of homeowners, wholly apart from the duty to 
help stabilize the financial markets. For example, section 2(B) 
says that the purposes of the Act are to ``preserve 
homeownership.'' Similarly, section 103(3) (``Considerations'') 
says that the Secretary ``shall'' take into consideration ``the 
need to help families keep their homes and to stabilize 
communities.'' This focus on homeowners is consistent with the 
legislative history. More than a few legislators were expressly 
focused on how the bill would help American homeowners 
struggling to stay in their homes.\482\
---------------------------------------------------------------------------
    \482\ See, e.g., House Committee on Financial Services, Oversight 
of Implementation of the Emergency Economic Stabilization Act of 2008 
and of Government Lending and Insurance Facilities: Impact on the 
Economy and Credit Availability, 110th Cong. (Nov. 18, 2008) (statement 
of Rep. Waters) (online at www.house.gov/apps/list/hearing/
financialsvcs_dem/hr111808.shtml) (reminding ``we gave [the Secretary] 
the authority . . . to deal with foreclosure mitigation efforts'' and 
that ``I sold [members of my caucus and the Congressional Black Caucus] 
this program and told them about my faith in your ability to carry out 
this program'').
---------------------------------------------------------------------------
            b. Specific Provisions
                i. Section 109's Requirements
    Captioned ``Foreclosure Mitigation Efforts,'' section 109 
requires (``shall'') the Secretary to implement ``a plan that 
seeks to maximize assistance for homeowners,'' and use the 
authority of the Secretary to ``encourage'' the servicers of 
those underlying mortgages to avail themselves to the ``HOPE 
for Homeowners Program . . . or other available programs 
[presumably such as HAMP] to minimize foreclosures.'' In 
addition, the Secretary also ``may'' use loan guarantees and 
credit enhancements to ``facilitate'' loan modifications ``to 
prevent avoidable foreclosures.''
    Section 109's operative term ``encourage'' of course does 
not confine the Secretary to rhetorical encouragement. Economic 
incentives, such as use of the Tax Code, are a common way the 
federal government ``encourages'' desirable actions. And again, 
the Secretary enjoys considerable discretion concerning how 
best to implement those plans and provide that encouragement. 
Nor does the Act restrict the tools the Secretary chooses to 
deploy in the exercise of his statutory authority, assuming of 
course that he is acting within the scope of that authority. 
Therefore, the Secretary's decision to ``encourage'' servicers 
through, for example, the $1,000 incentive payments under HAMP 
seems easily authorized by section 109 of the Act.
    The sticking point with reliance on section 109 to ground 
all of HAMP is the section's introductory clause, ``To the 
extent the Secretary acquires mortgages, mortgage backed 
securities, and other assets secured by residential real estate 
. . . the Secretary shall implement a plan [etc.].'' This means 
that the section 109 powers are intended to apply only to 
``non-stranger'' loans, i.e., mortgages where the Secretary has 
purchased or otherwise come into possession of the loans 
themselves (or securities based on the loans). There is no 
basis, given this textual qualifier, for applying section 109 
to ``stranger'' loans to which the Secretary has no connection.
    That said, Congress's decision to use ``shall'' in 
commanding the Secretary to undertake foreclosure mitigation 
efforts regarding non-stranger loans should not be overlooked. 
That is, by using mandatory language here, it is possible that 
while foreclosure mitigation would be demanded for non-stranger 
loans, the Secretary has discretion whether to extend his 
foreclosure mitigation efforts to stranger loans (if he decided 
it was a desirable use of his authority to deal with those 
loans). In other words, requiring servicer encouragement for 
non-stranger loans does not preclude servicer encouragement for 
stranger loans, should the Secretary determine that the latter 
would also further congressional purposes.
    By contrast, if section 109 had, instead, said that to the 
extent the Secretary acquires non-stranger loans, he ``may'' 
implement a plan to help the underlying homeowners, it would be 
textually awkward to contend that he would also be authorized 
to establish such a program for stranger loans, as the creation 
of a servicer encouragement initiative would depend upon 
acquisition of mortgages. But since Congress chose to give the 
Secretary a specific mandate regarding non-stranger loans, we 
find its silence on stranger loans more consistent with 
ambivalence than with an implied restriction of authority.
    To be clear, section 109 plainly does not authorize 
servicer encouragement for stranger loans. The question is 
whether it precludes it. In candor, the point could be argued 
either way. But in light of section 109's hierarchically 
inferior placement to section 101 and the significance of its 
mandatory language, this provision certainly can be read not to 
foreclose the inclusion of stranger loans under HAMP.
                ii. Section 101(a)'s Authority to Purchase ``Troubled 
                    Assets''
    Apart from what the Secretary is obligated to do under 
section 109, the Secretary has very broad powers under section 
101 to establish TARP and to use TARP ``to purchase, and to 
make and fund commitments to purchase, troubled assets from any 
financial institution. . . '' \483\ ``Troubled assets'' are 
defined as ``residential or commercial mortgages and any 
securities, obligations, or other instruments that are based on 
or related to such mortgages. . . .'' \484\ Thus, any non-
stranger loans in which the Secretary has made some sort of 
purchase connection would clearly be troubled assets and have 
explicit statutory authority.
---------------------------------------------------------------------------
    \483\ EESA Sec. 101(a)(1).
    \484\ EESA Sec. 3(9)(a).
---------------------------------------------------------------------------
    But the definition of troubled asset also includes ``any 
other financial instrument that the Secretary . . . determines 
the purchase of which is necessary to promote financial market 
stability.'' \485\ This definition raises the question whether 
categorizing stranger loans as ``troubled assets'' might 
provide an explicit statutory basis for HAMP's servicer 
incentives for those loans. That is, if the stranger loans 
could somehow be found to come under the purview of section 101 
as troubled assets, then the Secretary would be given wide 
latitude under section 101(c)(5) to ``issue such regulations 
and other guidance as may be necessary or appropriate to carry 
out the authorities or purposes of this Act'' (emphasis added).
---------------------------------------------------------------------------
    \485\ EESA Sec. 3(9)(b).
---------------------------------------------------------------------------
    The extension of HAMP to stranger loans is through the SPA. 
The SPA, in turn, purports to be not just a ``Servicer 
Participation Agreement'' (which it most clearly is) but also a 
``Commitment to Purchase [a] Financial Instrument.'' Thus, the 
financial instrument supposedly being purchased presumably 
falls under the section 9(B) definition of ``troubled asset,'' 
thereby providing a basis under the EESA for incentivizing 
servicer modification of stranger loans. The problem here is 
that notwithstanding its caption, the SPA is not a ``financial 
instrument,'' at least under traditional conceptions of 
commercial law. It looks more like a services contract, or 
perhaps an offer for a unilateral contract to be accepted by 
performance, or maybe even just a term sheet of rules that a 
servicer hoping to enjoy the fruits of a HAMP incentive must 
follow. Even if it rises to the level of being a contract, 
however, it is still not a conventional instrument (financial 
or otherwise). True, an ``instrument'' can be and often is a 
``contract,'' but that does not mean that a ``contract'' is an 
``instrument.''
    Commercial lawyers usually talk about ``instruments'' as 
being ``negotiable instruments,'' such as drafts and 
notes.\486\ And ``negotiable instrument'' is defined as ``an 
unconditional promise or order to pay a fixed amount of money, 
with or without interest or other charges described in the 
promise or order . . . [listing requirements].'' (A draft is 
typified by a check and a note by a promissory note.) \487\ 
This of course implies a residuum of non-negotiable 
instruments, and that is true: an otherwise negotiable 
promissory note can be rendered non-negotiable by the simple 
inscription ``non-negotiable'' at the top, which presumably 
would relegate it to being a mere instrument.\488\
---------------------------------------------------------------------------
    \486\ See U.C.C. Sec. 3-104(b) (`` `Instrument' means a negotiable 
instrument'').
    \487\ U.C.C. Sec. 3-104(a).
    \488\ Article 9 of the Uniform Commercial Code defines 
``instrument'' more broadly: `` `Instrument' means a negotiable 
instrument (defined in Section 3-104), or a certificated security 
(defined in Section 8-102) or any other writing which evidences a right 
to the payment of money and is not itself a security agreement or lease 
and is of a type which is in ordinary course of business transferred by 
delivery with any necessary indorsement or assignment.'' See U.C.C. 
Sec. 9-105(1)(i) (emphasis added). Thus, even this broader definition 
requires some element of negotiability.
---------------------------------------------------------------------------
    A ``financial instrument'' is typically understood to have 
some bearing to a security or similar financial 
obligation.\489\ For example, equity shares of a corporation 
would be financial instruments, as would be debt issued by that 
corporation. And of course, contracts of financial exotica 
synthetically derived from those instruments are themselves 
financial instruments (puts, swaps, repos, etc.). But the 
underlying thread is that they are all related to financing. To 
illustrate, here are three definitions (taken from a court 
required to define ``financial instrument'' for terms of a 
patent dispute):\490\
---------------------------------------------------------------------------
    \489\ Under Article 8 of the Uniform Commercial Code, a 
``certificated security'' is represented by an instrument. See id. 
Sec. 8-102(1)(a). Securities can also be uncertificated. See U.C.C. 
Sec. 8-102(1)(b).
    \490\ See EBS Dealing Res., Inc. v. Intercontinental Exch., Inc., 
379 F. Supp. 2d 521, 526 (S.D.N.Y. 2005).

          A contractual claim held by one party on another, 
        such as a security, currency, or derivatives contract. 
        A financial instrument entitles the other to be paid in 
        cash or with another financial instrument.\491\
---------------------------------------------------------------------------
    \491\ Dictionary of Banking and Finance, at 159 (Standard Chartered 
Bank, 1st ed., 1998).
---------------------------------------------------------------------------
          Generic term for those securities or contracts which 
        provide the holder with a claim on an obligor. Such 
        instruments include common stock, preferred stock, 
        bonds, loans, money market instruments, and other 
        contractually binding obligations. The common feature 
        which differentiates a financial instrument from a 
        commercial or trade credit is the right to receive cash 
        or another financial instrument from the obligor and/or 
        the ability to exchange for cash the instrument with 
        another entity. The definition can also include 
        instruments where the claim is contingent, as with 
        derivatives.\492\
---------------------------------------------------------------------------
    \492\ The Handbook of International Financial Terms, at 220 (Oxford 
Univ. Press, 1st ed., 1997).
---------------------------------------------------------------------------
          [A]n enforceable contract obligating one party to pay 
        money or transfer property to another. Credit 
        documents, (e.g., drafts, bonds, etc.) are instruments, 
        as are documents of title, such as deeds or stock 
        certificates.\493\
---------------------------------------------------------------------------
    \493\ The McGraw-Hill Dictionary of International Trade and 
Finance, at 202 (McGraw-Hill, 1st ed., 1994).

    Indeed, even the Tax Code defines financial instrument as 
including ``stocks and other equity interests, evidences of 
indebtedness, options, forward or futures contracts, notional 
principal contracts, and derivatives.'' \494\ And Treasury's 
Office of Thrift Supervision shared a report at a congressional 
hearing that defined financial instrument (using the Financial 
Accounting Standards Board's definition, although cautioning 
that that definition was ``general'' and more broad than a 
regulatory definition), ultimately summarizing: ``A fundamental 
characteristic of all financial instruments is that they give 
rise to cash flows. The value of any financial instrument can 
be estimated by projecting the amount and timing of future net 
cash flows associated with the instrument, and discounting 
those cash flows with appropriate discount rates.'' \495\
---------------------------------------------------------------------------
    \494\ I.R.C. Sec. 731(c)(2)(C).
    \495\ House Committee on Banking, Finance and Urban Affairs, Safety 
and Soundness Issues Related to Bank Derivatives Activities, Part I, at 
217, 103rd Cong. (Oct. 28, 1993) (quoting Office of Thrift Supervision, 
Risk Management Division, Methodologies for Estimating Economic Values 
in the OTS Net Portfolio Value Model (May 1993)).
---------------------------------------------------------------------------
    The SPA, by contrast, is not the issuance of debt or other 
financing mechanism.\496\ Nor is it in any sense intended to be 
a demand for payment. To break it down into its component 
parts, the SPA purports to be a commitment by Fannie Mae to 
``purchase'' a ``financial instrument'' from the servicer (thus 
the servicer is apparently ``selling'' something to Fannie 
Mae). What is being ``sold,'' in turn, is the self-styled 
``financial instrument'' that appears as Exhibit B to the SPA. 
And that Exhibit B--while most assuredly captioned ``Financial 
Instrument''--at no place summarizes just exactly what the 
servicer is ``selling'' (or, more precisely, ``issuing'') to 
Fannie Mae. Surreally, the document merely recites that for 
``good and valuable consideration, the receipt and sufficiency 
of which is hereby acknowledged, [the] Servicer agrees as 
follows . . .'' \497\ and then proceeds to list a catalogue of 
undertakings the servicer agrees to abide by, involving 
auditing, data retention, and so forth.\498\
---------------------------------------------------------------------------
    \496\ In fact, the servicer is the ``issuer'' of the supposed 
instrument, and the servicer does not obligate itself to provide any 
cash flows to Fannie Mae, in the way the issuer of a real financial 
instrument would make, say, bond coupon payments.
    \497\ Commitment to Purchase Financial Instrument and Servicer 
Participation Agreement, supra note 462 (accessed April 5, 2010).
    \498\ See Commitment to Purchase Financial Instrument and Servicer 
Participation Agreement, supra note 462, at Exhibit B (accessed April 
5, 2010) (``Form of Financial Instrument'').
---------------------------------------------------------------------------
    As mentioned, the most generous legal interpretation of 
this document would be a service contract, whereby the 
participating servicer agrees to undertake specific services 
for Fannie Mae, although even that is unclear because it is 
uncertain whether a servicer who wanted to discontinue 
participation in HAMP would be subject to any damages for 
breach. This furthers the interpretation of Exhibit B as 
actually just a term sheet of rules that servicers must abide 
by in order to get paid under HAMP. Using diction that sounds 
related to financial instruments--for example, characterizing 
the servicers as ``issuing'' Exhibit B (much like debt is 
``Issued'' in a real financial instrument)--and using a caption 
the declares a service contract (or term sheet) a ``financial 
instrument'' does not make it a financial instrument. 
Accordingly, it is difficult to shoehorn HAMP incentives for 
stranger loans into ``troubled assets'' under the theory that 
the SPAs transform them into financial instruments.
              iii. Section 2's Statutory Purposes
    The third possibility for finding statutory authority in 
the EESA for HAMP's application to stranger loans is in the 
intrinsic structure, design, and indeed fundamental purpose of 
the law, given the wide implementing discretion accorded the 
Secretary in section 101(c). Section 2 spells out the purposes 
of the Act as follows:
          (1) to immediately provide authority and facilities 
        that the Secretary . . . can use to restore liquidity 
        and stability to the financial system of the United 
        States; and
          (2) to ensure that such authority and such facilities 
        are used in a manner that--
                  (A) protects home values, college funds, 
                retirement accounts, and life savings;
                  (B) preserves homeownership and promotes jobs 
                and economic growth;
                  (C) maximizes overall returns to the 
                taxpayers of the United States; and
                  (D) provides public accountability for the 
                exercise of such authority.
    Crucially, the Secretary is admonished to fix the financial 
collapse the markets experienced beginning in 2007-2008 as best 
he can by price-stabilizing market intervention. This is a 
broad and necessarily vague mandate, given the complexity of 
the problem to which the EESA responds, but obviously an urgent 
one. It is unsurprising that each individual tool the Secretary 
might deploy (e.g., rewards for timely paying mortgagors) is 
not spelled out with a specific legislative provision. Such 
legislative brevity is far from novel. Congress routinely 
leaves matters of implementation, including choice of 
regulatory tools and devices, to the discretion of expert 
administrative agencies (here, Treasury).
    To be sure, even broad grants of discretion have limits. 
Thus, the difficult question arises: if the Secretary is only 
explicitly authorized in section 101 to acquire mortgages 
(which become non-stranger loans in our taxonomy), which he in 
turn can certainly regulate under HAMP, can he then also 
regulate stranger loans under HAMP by relying upon his broader, 
structural powers delegated by the EESA?
    Arguably yes. The mortgage market the Secretary is trying 
to stabilize is huge, with countless securities and underlying 
loans. Some of the loans the Secretary will acquire, either in 
whole or in part, and either directly or indirectly through 
mortgage-backed securities based on those loans. These are the 
non-stranger loans to which the Secretary has some direct 
financial connection. One purpose of buying these loans and 
securities is to help prop up their prices and hence try to 
avoid a downward price spiral. But in trying to stabilize the 
housing market, government-backed loans are unquestionably 
affected by stranger loans too. The fate of housing prices and 
the value of mortgages and mortgage-based securities are not 
segregated according to stranger and non-stranger loans.
    Accordingly, given that the success of TARP itself will 
depend in part upon developments in the purely private mortgage 
and mortgage-backed securities market--and thus upon 
homeowners' abilities to modify their purely private 
mortgages--the Secretary has a parallel need to provide an 
incentive for private mortgage modifications. He is presumably 
animated by ``defensive'' motivations--preventing a selloff of 
foreclosed homes that would decimate real estate prices and in 
turn make the process of price stabilizing the non-stranger 
loans all the more difficult: the downward vector of prices the 
Secretary would be trying to fight would be strengthened. Under 
this analysis, then, incentivizing the modification of those 
stranger loans to stabilize prices, as a safeguard against his 
own non-stranger loans' pricing, is not only reasonable but 
arguably necessary. Such a purpose would very likely pass the 
``arbitrary and capricious'' bar; nor would modest servicer 
incentives constitute an ``abuse of discretion.'' \499\
---------------------------------------------------------------------------
    \499\ EESA Sec. 119(a)(1) (setting forth the standard of judicial 
review).
---------------------------------------------------------------------------
    Thus, the most viable basis for the valid inclusion of 
stranger loans under the EESA stems from the broad market-
rescuing mandate of section 2 and the general structure and 
goal of the statute as a whole (coupled with the expansive 
``necessary or appropriate'' implementing power explicitly 
conferred by section 101(c)).

4. Legislative History

    There is little legislative history directly on point with 
respect to servicer incentives, but there is some clear 
understanding, at least by the Chairman of the House Financial 
Services Committee, that servicer incentive payments were 
anticipated. For example, at a November 18, 2008 hearing (after 
the EESA's enactment, so perhaps ``subsequent legislative 
history'') in discussing model foreclosure mitigation 
guidelines, the Chairwoman of the FDIC (Sheila Bair) explained 
she would provide ``a financial incentive for servicers and 
investors'' and ``administrative expenses of $1,000 per 
modification for servicers.'' \500\ The Chairman then responded 
``I would note that, in the TARP, there is explicit 
authorization to provide funding for servicers in appropriate 
context.'' \501\
---------------------------------------------------------------------------
    \500\ House Committee on Financial Services, Oversight of 
Implementation of the Emergency Economic Stabilization Act of 2008 and 
of Government Lending and Insurance Facilities: Impact on the Economy 
and Credit Availability, 110th Cong. (Nov. 18, 2008) (statement of 
Sheila Bair) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:46593.pdf).
    \501\ House Committee on Financial Services, Oversight of 
Implementation of the Emergency Economic Stabilization Act of 2008 and 
of Government Lending and Insurance Facilities: Impact on the Economy 
and Credit Availability, 110th Cong. (Nov. 18, 2008) (statement of Rep. 
Frank) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:46593.pdf).
---------------------------------------------------------------------------
    In a hearing the next year, regarding legislation that 
became known as ``TARP II,'' and shortly before HAMP's 
guidelines were promulgated, Chairman Frank reiterated his 
belief that servicer incentive priorities lay in TARP:

          One proposal that has been floating around is that 
        there may be a requirement that if you want to make 
        [foreclosure mitigation programs] work, you will have 
        to pay the servicer something. Servicers were not set 
        up originally to do this. We believe there is authority 
        in the first TARP to do this. Some of the lawyers in 
        the Federal Government have told people that there 
        isn't. That is being discussed. If there were to be a 
        definitive decision that there wouldn't be, I think if 
        there is no such authority, then I think we should get 
        it.\502\
---------------------------------------------------------------------------
    \502\ House Committee on Financial Services, Promoting Bank 
Liquidity and Lending Through Deposit Insurance, HOPE for Homeowners, 
and Other Enhancements, 111th Cong., at 3 (Feb. 3, 2009) (statement of 
Rep. Frank) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=111_house_hearings&docid=f:48672.pdf).

    To be clear, Chairman Frank's comments are silent about the 
distinction between stranger and non-stranger loans, and so 
cannot be relied upon to answer the most difficult question of 
HAMP's statutory authority. It could be that he was simply 
opining on the easier question whether incentive payments are a 
specific tool the Secretary can use under TARP to ``encourage'' 
foreclosure relief. If this is what some ``Federal Government 
lawyers'' were concerned about, we respectfully disagree and 
think the broad discretion of the EESA would clearly give the 
Secretary such power for government-backed loans. (Framed 
another way, we see nothing in the EESA that would prohibit the 
Secretary in the exercise of his broad authority from using 
servicer incentive payments for non-stranger loans.)
    The legislative history does not otherwise shed light on 
the issues in question.

5. Other Statutes and Bills

            a. TARP II
    The ``TARP Reform and Accountability Act of 2009,'' H.R. 
384 (so-called ``TARP II''), has passed the House and has been 
referred to the Senate. In it, section 203(3) augments the EESA 
by providing the Secretary with authority to establish ``[a] 
program under which the Secretary may make payments to 
servicers, including servicers that are not affiliated with a 
depository institution, who implement modifications to 
mortgages. . . .'' \503\ Accompanying legislative history 
explains, ``The bill also provides several alternatives for 
foreclosure mitigation, such as a systematic mortgage 
modification program, whole loan purchasing, buy-down of second 
mortgages, . . . and incentives and assistance to servicers to 
modify loans.'' \504\
---------------------------------------------------------------------------
    \503\ H.R. 384, 111th Cong. (2009).
    \504\ Statement of Representative Maxine Waters, Congressional 
Record, H289 (Jan. 14, 2009).
---------------------------------------------------------------------------
    The timing and status of TARP II make it difficult 
legislative authority to address. For example, the statements 
made by Rep. Waters were made in January 2009, before HAMP had 
even had its guidelines promulgated. So it is unclear whether 
Congress thought these explicit conferrals of power (especially 
the extension to servicers that were not affiliated with 
depository institutions) were necessary to plug lacunae left 
open in the EESA or whether were codifications and 
clarifications of existing practice. Thus, the information to 
be gleaned from TARP II regarding the Secretary's legislative 
authority under the EESA is ambiguous at best.
            b. HOPE for Homeowners
    The Panel might be interested to know that the ``Helping 
Families Save Their Homes Act of 2009,'' \505\ which amended 
the ``HOPE for Homeowners Act of 2008,'' \506\ specifically 
added a provision on mortgage servicer payments: ``The 
Secretary may establish payment to the--(1) servicer of the 
existing senior mortgage or existing subordinate mortgage for 
every loan insured under the HOPE for Homeowners Program.'' 
\507\ According to Senators Dodd and Shelby, the bill 
``expand[s] the access to the HOPE for Homeowners Act'' and 
``allows for incentive payments to servicers . . . who 
participate in the program.'' \508\ Similarly, Rep. Holt 
remarked that the bill ``provide[s] greater incentives for 
mortgage servicers to modify mortgages under [HOPE] '' and 
``permit[s] payments to loan services.'' \509\
---------------------------------------------------------------------------
    \505\ Pub. L. No. 111-22, Div. A., 123 Stat. 1632 (2009).
    \506\ 12 U.S.C. Sec. 1715z-23.
    \507\ Pub. L. No. 111-22, Div. A, Sec. 202(a)(11), 123 Stat. 1632 
(2009).
    \508\ Statement of Senator Christopher Dodd, Congressional Record, 
S5003 (May 1, 2009).
    \509\ Id.
---------------------------------------------------------------------------
    This might at first blush imply the Secretary had no 
authority under HOPE for Homeowners for incentive payments. But 
an analysis of HOPE for Homeowners contrasting it with the EESA 
is striking. HOPE for Homeowners establishes an FHA mortgage 
modification program, but does so in extensive detail, with, 
for example, the criteria for eligible loans and principal 
reduction amounts described over several pages of legislation. 
This is a far cry from the one-sentence blanket authorization 
of the Secretary to ``encourage'' modifications under the EESA. 
Under these circumstances, it is not surprising that Congress 
felt the need to amend specifically HOPE by statute to add 
another tool (servicer incentives).
            c. VA Loans
    A more illuminating example might be the VA loan 
modification procedures prescribed by regulation. Although the 
Secretary (of Veterans Affairs) has been paying servicer 
incentives for some time, there is no explicit grant of 
statutory authority for such payments. That is, although 38 
U.S.C. 3720 spells out ``Powers of the Secretary,'' and 
subsection (2) confers the power to ``consent to the 
modification, with respect to rate of interest, time of payment 
of principal or interest or any portion thereof'' of certain 
loans acquired by the VA, there is no mention of servicer 
payments. Nevertheless, the Secretary promulgated 38 CFR 
Sec. 36.4819 (``Servicer loss-mitigation options and 
incentives''), which does exactly that. (The cited authority 
for this regulation is the general necessary-and-appropriate 
power of 38 U.S.C. Sec. 501.) This program has apparently 
proceeded without objection. Thus, the VA example shows how 
Secretaries use a wide arsenal of tools even beyond those that 
are expressly prescribed by statute. (Again, it does not speak 
to whether the VA Secretary could address non-VA loans, but 
that is where the analogy to a limited domain like VA loans 
dissolves; the market-wide sweep of the EESA is a marked 
contrast.)
    There is not too much directly apposite to glean from 
similar bills and laws. The closest is the VA servicer 
incentives regulations promulgated by the Secretary of the VA, 
which are noteworthy because they seem to emanate from the 
general structure and power of the Secretary to modify loans, 
not from any textually explicit grant of legislative power.

6. Other Considerations

    Two additional points require brief comment. First, we 
assume that the servicers are ``financial institutions.'' 
Second, we considered, and rejected, the idea that the SPAs 
might be ``credit enhancements,'' which would bring them under 
the scope of the last sentence of section 109(a). Standard 
financial usage defines credit enhancements as, for example, 
``techniques used by debt issuers to raise credit rating of 
their offering, and thereby lower their interest costs.'' \510\ 
Similarly, the IRS uses the following: ``the term `credit 
enhancement' refers to any device, including a contract, letter 
of credit, or guaranty, that expands the creditor's rights, 
directly or indirectly, beyond the identified property 
purchased, constructed, or improved with the funds advanced 
and, thus effectively provides as security for a loan the 
assets of any person other than the borrower'' \511\ (emphasis 
added). Its regulation further expands: ``The acquisition of 
bond insurance or any other contract of suretyship by an 
initial or subsequent holder of an obligation shall constitute 
credit enhancement.'' \512\ The home depreciation insurance 
payments under HAMP would most likely be credit enhancements, 
as they provide a risk-reduction function similar to the 
guarantee. The loss-sharing payments might also be similarly 
classified, as too might the interest and principal reduction 
payment subsidies. But such reliance for servicer incentives 
would be too much of a stretch--and unnecessary, we believe, in 
light of our ultimate conclusions regarding the Secretary's 
broad powers already conferred by section 101(c).
---------------------------------------------------------------------------
    \510\ Dictionary of Finance and Investment Terms, at 127 (5th ed., 
1998) (citing bond insurance or bank letters of credits as examples).
    \511\ 26 C.F.R. Sec. 1.861-10T(b)(7) (2009).
    \512\ 26 C.F.R. Sec. 1.861-10T(b)(7) (2009).
---------------------------------------------------------------------------

7. Conclusion

    While the exercise of authority under HAMP for stranger 
mortgages cannot fairly be shoehorned into the definition of 
``financial instrument'' from section 9(B), it can be justified 
as an exercise of the Secretary's wide discretion under section 
2 in light of the structure, design, and purposes of the 
statute as a whole. Moreover, the subset of HAMP incentives 
properly classified as ``credit enhancements'' can plausibly be 
justified by explicit textual reliance--not just implicit 
textual support--based on the last sentence of section 109. As 
for non-stranger loans to which the Secretary has some 
financial connection, there is no problem with the wide array 
of tools he has chosen to use to encourage mortgage 
modifications, including servicer incentive payments. That 
these powers are proposed to be spelled out with greater 
specificity in TARP II does not alter our opinion, and we are 
indirectly encouraged by the VA regulations as consistent with 
our views. Finally, we note that the legislative debates after 
the EESA and leading up to TARP II evince a clear congressional 
desire to ``do more'' regarding foreclosure mitigation. As 
such, an expansive reading of the Secretary's authority in this 
area to cover servicer incentives for non-government loans is 
consonant with the intended spirit of the statute.
   ANNEX IV: UPDATE ON PHILADELPHIA RESIDENTIAL MORTGAGE FORECLOSURE 
                        DIVERSION PILOT PROGRAM

    The Panel's October report detailed an innovative mediation 
program created by the Philadelphia courts. The Residential 
Mortgage Foreclosure Diversion Pilot Program requires `` 
`conciliation conferences' in all foreclosure cases involving 
residential properties with up to four units that were used as 
the owner's primary residence.'' \513\ The program is 
effectively a requirement that the parties talk to one another, 
face to face, and attempt to come to a solution.
---------------------------------------------------------------------------
    \513\ October Oversight Report, supra note 17, at 87.
---------------------------------------------------------------------------
    Philadelphia's Office of Housing and Community Development 
reports that, between June and December 2009, approximately 
9,079 homeowners had conciliation conferences scheduled. Of 
these, 5,707 homeowners participated in the conferences. 
Approximately 3,074, or 35 percent of the 9,079 homeowners, did 
not participate. This 35 percent breaks down into 28 percent 
who failed to appear, 2 percent who did not participate because 
the homes were vacant, and 4 percent because the homes were not 
owner-occupied.\514\
---------------------------------------------------------------------------
    \514\ Not counted in the 35 percent are the five percent of 
homeowners with scheduled conferences who filed bankruptcy.
---------------------------------------------------------------------------
    Of the 5,707 homeowners who did participate, approximately 
1,900 homes, or one third of participating homeowners, were 
able to modify or refinance their mortgages through the 
diversion program. Data are not available regarding the 
modifications, including the type of modification, 
affordability changes, and redefault rates. Over 3,600 cases, 
or 63 percent, remain in active negotiation. Through August 
2009, approximately 947 homes, or 16 percent were sold through 
sheriff sales.\515\
---------------------------------------------------------------------------
    \515\Data collected by the Philadelphia Office of Housing and 
Community Development.
---------------------------------------------------------------------------
    Although they have the same final goal, it is difficult to 
compare HAMP's results to those of the Philadelphia program. 
Other than the administrative costs of running the program, the 
Philadelphia program does not use any taxpayer dollars.
    In addition, the two programs feature very different 
participation models; lenders and servicers volunteer to 
participate in HAMP, choosing to subject themselves to a regime 
requiring them to modify loans in certain circumstances. By 
contrast, the lenders involved in the Philadelphia program 
participate by court order, but a modification under the 
Philadelphia program is entirely voluntary--the only 
requirement is that the servicer participate in the 
conciliation conference. Because the taxpayer costs of HAMP are 
higher, and lenders and servicers affirm their desire to 
participate, it should implicitly be held to more stringent 
standards.
            ANNEX V: PRIVATE FORECLOSURE MITIGATION EFFORTS

    In its October 2009 foreclosure mitigation report, the 
Panel included information from its survey of major servicers 
that had not yet signed HAMP participation agreements. Several 
servicers responded that they did not intend to sign up for 
HAMP because they believed that their own foreclosure 
mitigation programs were superior. More than one year later, 
how do the results of these private sector programs compare to 
the results of the taxpayer financed HAMP program? \516\ Fifth 
Third, Sovereign Bank, and HSBC shared with the Panel data on 
their own foreclosure mitigation programs.
---------------------------------------------------------------------------
    \516\ It is difficult to directly compare the programs with the 
data available to the Panel, as the programs might differ 
significantly, and there are also constraints as to the data collected 
by the servicers. The Panel would like to thank Fifth Third, Sovereign, 
and HSBC for sharing this information.
---------------------------------------------------------------------------
    During calendar year 2009, Fifth Third evaluated over 5,300 
borrowers for modifications; of these, over 3,600 received 
modifications, which included both term extensions and interest 
rate reductions. Their borrowers' median front end debt-to-
income ratios went from 38 percent to 17 percent. Borrowers' 
median interest rate declined from 6.72 percent to 3.54 
percent. Although over 1,700 borrower's principal amount 
increased, only 3.85 percent include a balloon payment. The 
redefault rate is approximately 30 percent.
    The Sovereign Home Loan Modification Program (SHLMP) is 
newer, having only started in July 2009. As of February 2010, 
SHLMP has evaluated almost 1,300 borrowers, and provided 
modifications to 50, with over 300 more offered or in trial 
plans. Of the final modifications, most received interest rate 
reductions and term extensions, and most had an increase in 
principal. Borrowers' median interest rate fell from 6.4 
percent to 3.9 percent. Its redfault rate in its first eight 
months is less than one percent. Although it does not currently 
offer principal forgiveness or forbearance, it will roll out 
changes in April that will include the availability of 
forbearance.
    Through its Foreclosure Avoidance Program, HSBC modified 
the terms of 105,000 mortgages during calendar year 2009. Of 
the mortgages that HSBC had modified since 2007 through this 
program, 48 percent were delinquent or in default. HSBC 
modified the mortgages of 36 percent of the borrowers who 
applied for the program in 2009. HSBC's modified mortgages 
carry an average 30 percent payment reduction. Since its 
inception in 2003, the HSBC program provides a minimum $100 
monthly payment reduction, and over a 10 percent reduction in 
over 90 percent of modifications. HSBC did not provide data on 
interest rate reductions, term extensions, principal 
forgiveness or forbearance, or balloon payments.


                     SECTION TWO: ADDITIONAL VIEWS


                         A.  Richard H. Neiman

    Foreclosure prevention is not just the right thing to do 
for suffering Americans, but it is the lynchpin around which 
all other efforts to achieve financial stability revolve.
    As the Panel notes, substantial challenges remain in terms 
of the timeliness, accountability, and sustainability of 
Treasury's foreclosure mitigation programs. Even so, 
considerable progress has been made in crafting a responsible 
and effective public response.
    Treasury should be commended for its recent efforts to 
address unemployment and negative equity as drivers of default. 
The housing crisis began with subprime foreclosures, as many 
borrowers had been given inappropriate products. However, as 
the recession progressed, the crisis evolved to impact prime 
borrowers whose loans were originally affordable. Loss 
mitigation initiatives need to keep pace with the changing 
nature of the problem, and Treasury has the difficult task of 
casting a wider net while maintaining the integrity of their 
programs.
    Tension exists between expanding the scope of program 
eligibility and issues of fairness and preventing future 
defaults. In three key areas, I believe more can be done to 
prevent foreclosures while balancing these competing concerns:
          1. Assisting homeowners who are experiencing 
        temporary unemployment or other hardship;
          2. Applying lessons learned from HAMP's low 
        conversion rates to permanent modifications to the 
        program changes that begin June 1st; and
          3. Creating a national mortgage performance database.

1. The Country Needs a National Emergency Mortgage Support Program 
        (EMS)

    Even prime borrowers with loans made on prudent terms are 
facing increasing pressure as the crisis has continued. The 
number one reason for prime defaults is unemployment and 
reduced earnings according to Freddie Mac.
    The State Foreclosure Prevention Working Group, a multi-
state effort of state attorneys general and state banking 
supervisors, has conducted additional research that brings the 
impact on prime loans into sharp focus. The number of prime 
loans in foreclosure has doubled in each of the past two years 
and now account for 71 percent of the increase in the total 
number of loans in foreclosure.
    The Administration's Help for the Hardest-Hit Housing 
Markets is a step in the right direction, both in terms of 
assisting those most in need and in leveraging states as 
partners. The recent enhancements to HAMP will also help 
unemployed borrowers through temporary payment reductions and 
expanded eligibility for permanent modifications.
    As positive as these steps are, these measures do not 
replace the need for a nationwide Emergency Mortgage Support 
system (EMS). The Help for the Hardest-Hit Housing Markets 
program by design is limited to target geographies. And, the 
recently announced three- to six-month reprieve for the 
unemployed under HAMP, although very helpful, is an 
insufficient time frame to stabilize household budgets that 
have been ravaged by sharply reduced income. The scope of 
impacted borrowers is simply too great for anything short of a 
national program, which should be administered by the states 
with the support of the nonprofit housing community.
    The five states of Pennsylvania, Delaware, North Carolina, 
New Jersey, and Connecticut currently have state programs to 
assist the unemployed facing foreclosure that can help inform a 
national model. They take different approaches to making short-
term loans accessible for those who need temporary help while 
seeking to ensure that borrowers will repay their loans once 
their hardship has passed.
    An evaluation of these differing states' approaches 
suggests that underwriting criteria should be based on bright 
lines for easy administration and program sustainability, but 
within a sufficiently flexible framework so that the program 
can truly help those it is intended to. For example, the number 
of past missed payments by a borrower should be evaluated on a 
bright line basis as most of the states do. However, the states 
differ on the number of missed payments that should be 
permitted, thus demonstrating the need for a guiding principle. 
The principal should perhaps be based on the age of the 
mortgage loan, whereby newer loans allow for fewer missed 
payments. This flexible framework, by incorporating a bright 
line, better protects the program from early payment default or 
fraud on newly originated mortgages while allowing appropriate 
discretion for aged loans to take account of servicer delays in 
payment processing or occasional borrower oversight.
    A full set of underwriting criteria is beyond the scope of 
this supplemental view, but I mention this one example of how 
expanded assistance could be achieved within a prudent program 
framework. Emergency mortgage support should also involve 
lender and investor concessions, including eventual HAMP 
modification and perhaps waiving arrearages for unemployed 
borrowers.

2. HAMP Implementation Must Learn from HAMP's Low Conversion Rates to 
        Permanent Modifications

    I strongly support the Panel's recommendations concerning 
greater data collection on the HAMP process. We need improved 
data access to identify the choke points in the process, and 
then adapt to ensure that the new standards taking effect on 
June 1st meet their objective.
    Using this data, Treasury must fully consider whether there 
are duplicative or burdensome document requests that could be 
waived, for example, in requiring profit and loss statements. 
More importantly, the data must address the most frequent 
concern I have heard from borrowers and housing counselors as 
Chair of New York State's foreclosure mitigation task force: 
borrowers do not know the status of their submissions and are 
not receiving timely updates as to whether submitted documents 
have been received or are deemed adequate. These problems do 
not go away on June 1st, but the number of people who will be 
denied access to the program will go up if they are not 
addressed.
    I am troubled that Treasury's expanded web portal, where 
borrowers could check their application status and see if 
servicers have received necessary documentation, has so far 
failed to launch. Although Treasury is seeking to improve the 
servicers' notification process, borrowers should be encouraged 
and enabled to be proactive in monitoring the processing of 
their modification request. I urge Treasury to swiftly 
implement this database.

3. A National Mortgage Performance Database Is Needed

    The gaps in data access for borrowers seeking modifications 
highlight the general lack of data about the mortgage market. 
Access to complete information on existing mortgages does not 
exist, and the reason is simple: there is no mortgage loan 
performance data reporting requirement for the industry.
    Once a new loan has been initially reported under the Home 
Mortgage Disclosure Act (HMDA), it is no longer tracked in any 
public database. HMDA has been a powerful tool for combating 
housing discrimination and predatory lending in mortgage 
origination, but a performance data reporting requirement would 
provide a similar window on servicing practices. Because 
lenders and servicers already report the payment status of open 
loans to credit bureaus, a performance data standard could be 
put into operation quickly.
    Currently, Congress, banking regulators, consumer 
advocates, and other policymakers are left with incomplete or 
unreliable data purchased from third-party vendors or with 
limited data provided voluntarily by the industry. This lack of 
a public database has hindered the response to the housing 
sector. Improved intelligence on the mortgage market is 
critical to preventing future crises.
                         B.  J. Mark McWatters

    Although I concur with much of the analysis provided in the 
April report and respect the sincere and principled views of 
the majority, I dissent from the issuance of the report and 
offer the observations noted below. I appreciate, however, the 
spirit with which the Panel and the staff approached this 
complex issue and incorporated suggestions offered during the 
drafting process.

Executive Summary

    I offer the following summary of my analysis:
     The Administration's foreclosure mitigation 
programs--including the HAMP and the HARP--have failed to 
provide meaningful relief to distressed homeowners and, 
disappointingly, the Administration has created a sense of 
false expectation among millions of homeowners who reasonably 
anticipated that they would have the opportunity to modify or 
refinance their troubled mortgage loans under the HAMP and HARP 
programs. It is exceedingly difficult not to conclude that 
these programs have served as little more than window dressing 
carefully structured so as to placate distressed homeowners.
     In fairness to the tepid efforts of the 
Administration, I remain unconvinced that government sponsored 
foreclosure mitigation programs are necessarily capable of 
lifting millions of American families out of their underwater 
home mortgage loans. In my view, the best foreclosure 
mitigation tool is a steady job at a fair wage and not a 
hodgepodge of government-subsidized programs that create and 
perpetuate moral hazard risks and all but establish the U.S. 
government as the implicit guarantor of distressed homeowners.
     If the economy is indeed improving, it would be 
preferable to let the housing market recover on its own without 
the expenditure of additional taxpayer funds and without 
investors being forced unnecessarily to recognize huge losses 
that will reduce or even deplete their capital base and 
increase mortgage loan interest rates.
     Insufficient taxpayer funds are available under 
HAMP for the government to bail out millions of homeowners in 
an equitable and transparent manner. The Administration should 
not commit the taxpayers to subsidize any such bailouts where 
there is no reasonable expectation for the timely repayment of 
such funds.
     If the taxpayers do not subsidize reductions in 
first and second lien mortgage loan principal to the extent 
required under HAMP and the Administration's other foreclosure 
mitigation programs, the investors who own the distressed 
mortgage loans and securitized debt instruments will bear the 
financial burden of such modifications, and the regulatory 
capital of many financial institutions will no doubt suffer 
from the realization of losses triggered by the write-downs of 
mortgage principal. As a result, such institutions may have 
little choice but to seek to raise mortgage loan interest rates 
and curtail their lending and other financial services 
activities to the detriment of qualified individuals and 
businesses in search of capital. It is also possible that the 
taxpayers will be required to fund additional capital infusions 
to those weakened institutions through TARP, a Resolution Trust 
Corporation-type structure or otherwise.
     In private sector foreclosure mitigation efforts, 
however, the participating investors may readily determine the 
extent to which voluntary reductions in mortgage principal will 
reduce or impair their regulatory capital. As such, each 
private sector investor will have the opportunity to develop 
its own customized foreclosure mitigation program that 
carefully balances the costs and benefits to the institution 
that may arise from the write-down of outstanding mortgage 
principal. Prudent investors and servicers recognize the 
purpose and necessity of offering their borrowers voluntary 
mortgage principal reductions in certain well-defined 
circumstances, and the government should welcome and encourage 
their active participation in and contribution to the 
foreclosure mitigation process without the imposition of an 
overarching one-size-fits-all mandate.
     In the Panel's October report on foreclosure 
mitigation, Professor Alan M. White reported to the Panel that, 
subject to certain reasonable assumptions, the mortgage loan 
investor's net gain from a non-subsidized mortgage modification 
could average $80,000 or more per loan over the foreclosure of 
the property securing the mortgage loan. If Professor White is 
correct in his assessment, why should Treasury mandate that the 
taxpayers fund payments so as to motivate investors in mortgage 
loans and securitized debt instruments to take actions that are 
in their own best interests absent the subsidies?
     While many homeowners have recently lost equity 
value in their residences, others have suffered substantial 
losses in their investment portfolios including their 401(k) 
and IRA plans. Why should the taxpayers bail out a homeowner 
who has lost $100,000 of home equity value and neglect another 
taxpayer who has suffered a $100,000 loss of 401(k) and IRA 
retirement savings? This is particularly true if the homeowner 
was able to cash out of some or all of the homeowner's equity 
appreciation. That is, what public policy goal is served by 
bailing out the homeowner who received a ski boat, trailer, and 
all wheel drive SUV as proceeds from a $100,000 home equity 
loan while neglecting the taxpayer who suffered a $100,000 
investment loss in her 401(k) and IRA accounts?
     Suppose, instead, two taxpayers purchased 
condominiums in the same building for $200,000 each with 100 
percent financing. After the condominiums appreciated to 
$300,000 each, the first homeowner secured a $100,000 home 
equity loan to pay the college tuition of the first homeowner's 
son; the second homeowner declined to accept a home equity loan 
(expressing a ``this is too good to believe'' skepticism) and 
the second homeowner's daughter financed her college tuition 
with a $100,000 student loan. If the condominiums subsequently 
drop in value to $200,000 each, why should the taxpayers 
subsidize the write-off of the first homeowner's home equity 
loan and in effect finance the college tuition of the first 
homeowner's son while the second homeowner's daughter remains 
committed on her $100,000 student loan? I do not concur with 
any public policy that would yield such an inequitable 
treatment, particularly since the second homeowner acted in a 
prudent and fiscally responsible manner by electing not to over 
leverage the residence.
     What about (i) the retired homeowner whose 
residence drops in value by $100,000 after she has diligently 
paid each installment on her $300,000 mortgage over 30 years, 
(ii) the taxpayer who rents her primary residence and with a 
$300,000 mortgage loan purchases real property for investment 
purposes that subsequently drops in value by $100,000, and 
(iii) the homeowner suffering from a protracted illness or 
disability who loses $100,000 of equity value upon the 
foreclosure of her residence for failure to pay property taxes? 
HAMP and the other programs offered by the Administration offer 
no assistance to these taxpayers.
     Since it is neither possible nor prudent for the 
government to subsidize the taxpayers for the trillions of 
dollars of economic losses that have arisen over the past two 
years, the government should not undertake to allocate its 
limited resources to one group of taxpayers while ignoring the 
equally (or more) legitimate economic losses incurred by other 
groups.
     Only a relatively modest (although certainly not 
insignificant) percentage of Americans are facing foreclosure 
after properly considering the number of taxpayers who are 
current on their mortgage obligations, who are renting their 
primary residence, and who own their home free of mortgage 
debt. Is it fair to ask the overwhelming majority of Americans 
who are struggling each month to meet their own financial 
obligations to bail out the relatively modest group of 
homeowners who are actually facing foreclosure?
     What message does the government send to the 
taxpayers by treating a discrete group of homeowners as per se 
``victims'' of predatory lending activity and undertaking to 
substantially subsidize their mortgage indebtedness at the 
direct expense of the vast majority of taxpayers who meet their 
financial obligations each month? Will the former group of 
homeowners modify their behavior and become more fiscally 
prudent, or will they continue to over-leverage their 
households with the expectation that the government will offer 
yet another taxpayer-funded bailout as needed?
     I remain troubled that HAMP itself may have 
exacerbated the mortgage loan delinquency and foreclosure 
problem by encouraging homeowners to refrain from remitting 
their monthly mortgage installments based upon the expectation 
that they would ultimately receive a favorable restructure or 
principal reduction subsidized by the taxpayers. The curious 
incentives offered by HAMP arguably convert the concept of home 
ownership into the economic reality of a ``put option''--as 
long as a homeowner's residence continues to appreciate in 
value the homeowner will not exercise the put option, but as 
soon as the residence falls in value the homeowner will elect 
to exercise the put option and walk away or threaten to walk 
away if a favorable bailout is not offered.
     The TARP-funded HAMP program carries a 100 percent 
subsidy rate according to the GAO. This means that the U.S. 
government expects to recover none of the $50 billion of 
taxpayer-sourced TARP funds invested in the HAMP foreclosure 
mitigation program. Since Treasury is charged with protecting 
the interests of the taxpayers who funded HAMP and the other 
TARP programs, I recommend that Treasury's foreclosure 
mitigation efforts be structured so as to incorporate an 
effective exit strategy by allowing Treasury to participate in 
any subsequent appreciation in the home equity of any mortgagor 
whose loan is modified under HAMP or any other taxpayer 
subsidized program. An equity appreciation right--the 
functional equivalent of a warrant in a non-commercial 
transaction--will also mitigate the moral hazard risk of 
homeowners who may undertake risky loans in the future based on 
the assumption that the government will act as a backstop with 
no strings attached.
     In many instances it is unlikely that holders of 
second lien mortgage loans are truly out-of-the-money since 
today's fire-sale valuations are not representative of the 
actual intermediate to long-term fair market value of the 
residential collateral securing the underlying loans. I am not 
unsympathetic to the argument that an 80-year historic low in 
the housing market does not reflect a true representation of 
fair market value, particularly given the tepid mortgage loan 
and refinancing markets. If holders of second lien mortgage 
loans previously advanced cash to their borrowers under home 
equity loans, they may also be reluctant to write off such 
loans since the homeowners received actual cash value from the 
home equity loans and not just additional over-inflated house 
value. It is also entirely possible that holders of second lien 
mortgages are reluctant to write down their loans past a 
certain level for fear of impairing their regulatory capital, 
which could trigger another round of TARP funded bailouts or 
worse.
     Since the actions of Fannie Mae and Freddie Mac--
the GSEs--may directly influence Treasury's foreclosure 
mitigation programs under the TARP, I recommend that the GSEs 
conduct their own foreclosure mitigation efforts in an 
equitable, fully transparent and accountable manner. The 
Federal Reserve, Treasury and the GSEs should disclose on a 
regular and periodic basis a detailed analysis of the amount 
and specific use of all taxpayer-sourced funds they have spent 
and expect to spend on their foreclosure mitigation efforts.
     This analysis is in no way intended to diminish 
the financial hardship that many Americans are suffering as 
they attempt to modify or refinance their underwater home 
mortgage loans, and I fully acknowledge and empathize with the 
stress and economic uncertainty created from the bursting of 
the housing bubble. It is particularly frustrating--although 
not surprising--that many of the hardest hit housing markets 
are also suffering from seemingly intractable rates of 
unemployment and underemployment. As such, I strongly encourage 
each mortgage loan and securitized debt investor and servicer 
to work with each of their borrowers in good faith, in a 
transparent and accountable manner, to reach an economically 
reasonable resolution prior to pursuing foreclosure. If 
Professor White is correct in his analysis, it is clearly in 
the best economic interest of the investors and servicers to 
modify the distressed mortgage loans in their portfolios rather 
than to seek foreclosure of the underlying residential 
collateral. It is regrettable that HAMP and the 
Administration's other foreclosure mitigation programs create 
disincentives for investors and servicers as well as homeowners 
by rewarding their dilatory behavior with the expectation of 
enhanced taxpayer-funded subsidies.
     EESA authorizes Treasury ``to purchase, and to 
make and fund commitments to purchase, troubled assets from any 
financial institution.'' \517\ In response to a request from 
Panelist Paul Atkins as to whether Treasury was authorized to 
fund HAMP under EESA, Treasury's General Counsel delivered a 
legal opinion to the Panel concluding that Treasury was so 
authorized. Interestingly, Treasury has requested that the 
Panel not publish the opinion in the Panel's report even though 
Treasury has permitted the Panel to quote extensively from the 
opinion in the report and deliver a copy of the opinion to 
outside experts. It is my understanding that Treasury has not 
asserted an attorney-client privilege regarding the opinion, 
but, instead, has suggested that disclosure of the opinion may 
impact its ability to assert attorney-client privilege over 
related material in other contexts. After reviewing the opinion 
and the basis upon which the opinion was rendered, I can think 
of no legal theory in support of Treasury's assertion that an 
attorney-client privilege could be waived by disclosure of the 
opinion now that Treasury has agreed that the Panel may quote 
extensively from the opinion in the Panel's report and deliver 
a copy of the opinion to outside experts. Treasury's legal 
analysis regarding the subject matter of the opinion is fully 
disclosed and discussed by the Panel and the outside experts in 
the Panel's report. I request that Treasury promptly abandon 
any position--including the assertion of an attorney-client 
privilege--that would keep the opinion confidential.
---------------------------------------------------------------------------
    \517\ 12 U.S.C. Sec. 5211.
---------------------------------------------------------------------------

HAMP and HARP Have Failed

    The Administration's foreclosure mitigation programs--HAMP 
and HARP--have failed to provide meaningful relief to 
distressed homeowners. Disappointingly, the Administration has 
only structured approximately 169,000 ``permanent 
modifications'' out of its stated goal of three to four million 
modifications and, remarkably, 40 percent or more of such 
homeowners will most likely redefault on their permanent 
modifications. Worse yet, the Administration has created a 
sense of false expectation among millions of homeowners who 
reasonably anticipated that they would have the opportunity to 
modify or refinance their troubled mortgage loans under the 
HAMP and HARP programs. It is exceedingly difficult not to 
conclude that these programs have served as little more than 
window dressing carefully structured so as to placate 
distressed homeowners.
    In fairness to the tepid efforts of the Administration, I 
remain unconvinced that government sponsored foreclosure 
mitigation programs are necessarily capable of lifting millions 
of American families out of their underwater home mortgage 
loans. In my view, the best foreclosure mitigation tool is a 
steady job at a fair wage and not a hodgepodge of government-
subsidized programs that create and perpetuate moral hazard 
risks and all but establish the U.S. government as the implicit 
guarantor of distressed homeowners. The tax and regulatory 
policies of the Administration have injected a substantial and 
relentless element of uncertainty into the private sector. 
Significant job growth will arguably not return in earnest 
until the business and investment communities have been 
afforded sufficient opportunity to assess and assimilate the 
daunting array of tax increases and enhanced regulatory burdens 
that have arisen over the past 15 months. If the Administration 
continues to introduce and actively promote new taxes and 
regulatory changes, it is not unreasonable to suggest that the 
recovery of the employment and housing markets will proceed at 
a less than optimal pace.\518\
---------------------------------------------------------------------------
    \518\ See Burton Folsom Jr. and Anita Folsom, Did FDR End the 
Depression?, The Wall Street Journal (Apr. 12, 2010) (online at 
online.wsj.com/article/
SB10001424052702304024604575173632046893848.html?KEYWORDS=burt).
---------------------------------------------------------------------------

Recovery of the Housing Market without Taxpayer-Funded Subsidies

    The Administration suggests the economy is improving, and 
there have been positive signs in the housing market. There is 
still uncertainty, however, on whether the country is ``out of 
the woods'' and can reach sustainable levels of economic growth 
and job recovery. If the economy is indeed improving, it would 
be preferable to let the housing market recover on its own 
without the expenditure of additional taxpayer funds and 
without investors being forced unnecessarily to recognize huge 
losses that will reduce or even deplete their capital base and 
increase mortgage interest rates.\519\ It is worth noting that 
the S&P/Case-Shiller Index rose 0.3 percent, seasonally 
adjusted, in January from December, its eighth consecutive 
monthly increase, and that Los Angeles, San Francisco, San 
Diego, Dallas, Washington, D.C., Boston, Denver and Minneapolis 
have experienced year-over-year increases in housing prices 
from January 2009 to January 2010.\520\ This trend indicates 
that the housing market is beginning to recover in many 
significant regions of the country on its own without 
government assistance and the attendant expenditure of 
taxpayer-sourced funds.\521\ The Administration should refrain 
from developing its foreclosure mitigation policies by fixating 
on the rear-view mirror when the road ahead shows signs of 
clearing.
---------------------------------------------------------------------------
    \519\ Under such an approach, investors and servicers would be free 
to exercise their independent business judgments regarding which 
mortgage loans to modify or refinance, which to leave unchanged, and 
which to foreclose without the influence of government-subsidized 
programs and their ability to skew rational market-based economic 
decisions. In addition, it is unlikely that the regulatory capital of 
the investors will be impaired from the voluntary write-down of 
mortgage loan principal.
    \520\ See David Streitfeld, U.S. Home Prices Inch Up, But Worries 
Remain, New York Times (Mar. 30, 2010) (online at www.nytimes.com/2010/
03/31/business/economy/31econ.html?hp); Javier C. Hernandez, Sharp Rise 
in Home Sales in February, New York Times (Apr. 5, 2010) (online at 
www.nytimes.com/2010/04/06/business/economy/06econ.html?hp); Lynn 
Adler, US Subprime Delinquencies Drop 1st Time in 4 Years, Reuters 
(Apr. 8, 2010) (online at www.reuters.com/article/
idUSN0715337220100407); Deborah Solomon, Light at the End of the 
Bailout Tunnel, Wall Street Journal (Apr. 12, 2010) (online at 
online.wsj.com/article/
SB10001424052702304846504575177950029886696.html?mod=googlenews_wsj).
    \521\ It seems unlikely that the 169,000 permanent modifications 
out of a projected three to four million HAMP modifications has 
affected the housing market for the better.
---------------------------------------------------------------------------

The Unaffordable Cost of the Administration's Foreclosure Mitigation 
        Programs

    In my view, insufficient taxpayer funds are available under 
HAMP for the government to bail out millions of homeowners in 
an equitable and transparent manner. By suggesting otherwise 
the Administration continues to propagate misguided 
expectations and fuzzy accounting. For example, if the 
taxpayers are required to fund $25,000 in payments to 
servicers, investors and homeowners per mortgage modification, 
the total cost of modifying four million mortgages will equal 
$100 billion--exactly twice the amount of TARP funds presently 
allocated to HAMP--with a projected 100 percent subsidy or loss 
rate to the taxpayers.\522\ If the taxpayers also subsidize 
first and second lien mortgage loan principal reductions of 
another $50,000 per modification (which may understate the 
issue), the total cost to the taxpayers will equal $300 
billion\523\--six times the amount of TARP funds presently 
allocated to HAMP--with a projected 100 percent subsidy or loss 
rate to the taxpayers.\524\ The Administration should not 
commit the taxpayers to subsidize any such bailouts where there 
is no reasonable expectation for the timely repayment of such 
funds.
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    \522\ 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).
    \523\ The $300 billion total cost figure is derived by multiplying 
four million mortgage modifications by $75,000 total cost per mortgage 
modification ($25,000 plus $50,000).
    \524\ If the actual goal of the Administration is to modify, for 
example, only one-million mortgage loans, the cost of the program will 
total far less than $300 billion. Such a reduced mandate, however, will 
most likely produce only modest results absent robust independent 
efforts from private sector mortgage loan and securitized debt 
investors and servicers.
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    If the taxpayers do not ultimately subsidize reductions in 
first and second lien mortgage loan principal to the extent 
required under HAMP and the Administration's other foreclosure 
mitigation programs, the investors who own the distressed 
mortgage loans and securitized debt instruments will bear the 
financial burden of such modifications, and the regulatory 
capital of many financial institutions will no doubt suffer 
from the realization of losses triggered by the write-downs of 
mortgage principal. As a result, such institutions may have 
little choice but to seek to raise mortgage loan interest rates 
and curtail their lending and other financial services 
activities to the detriment of qualified individuals and 
businesses in search of capital. It is also possible that the 
taxpayers will be required to fund additional capital infusions 
to those weakened institutions through the TARP, a Resolution 
Trust Corporation-type structure, or otherwise.
    If the policies of the Administration result in the near-
term recognition of substantial losses by the holders of 
mortgage loans and securitized debt instruments, and if the 
housing market rebounds over the near to intermediate term, the 
Administration will have accomplished little more than 
orchestrating a huge transfer of wealth from the investment 
community to that select group of homeowners who were able to 
qualify for inclusion in HAMP or one of the Administration's 
other foreclosure mitigation programs. The taxpayers will share 
the burden of this wealth transfer to the extent that the 
Administration subsidizes the write-off of mortgage principal 
by investors and, if investors who help finance these home 
loans anticipate a large risk that they will not be repaid, 
homeowners will ultimately suffer through increased mortgage 
interest rates.\525\ For example, a mortgage loan or 
securitized debt investor will suffer a $50,000 economic loss 
\526\ upon forgiving a homeowner's like amount of mortgage 
principal, but the homeowner will realize a $50,000 economic 
gain if the mortgaged residence subsequently appreciates by a 
like amount.\527\ If four million home mortgage loans are 
restructured in a similar manner and if the housing market 
steadily recovers over the near to intermediate term, the 
taxpayers and the investment community will suffer the burden 
of transferring approximately $200 billion \528\ of value to 
the homeowner participants in the Administration's foreclosure 
mitigation programs.\529\
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    \525\ It is entirely understandable that many taxpayers may have 
little sympathy for the plight of struggling financial institutions 
after the generous taxpayer-funded bailouts they received under the 
TARP. I appreciate and do not disagree with this sentiment but note 
that any action that impairs the capital of these financial 
institutions or increases mortgage loan interest rates is not in the 
best interest of the taxpayers.
    \526\ The investor most likely will also incur additional costs and 
expenses with respect to each mortgage loan modification.
    \527\ If the contract that governs the mortgage modification 
contains an equity participation feature, then some or all of the 
$50,000 of subsequent appreciation will inure to the benefit of the 
taxpayers and, perhaps, the investors.
    \528\ The $200 billion transfer is derived by multiplying four 
million mortgage modifications by a $50,000 principal reduction per 
mortgage modification.
    \529\ By comparison, TARP's Capital Purchase Program totaled $204.9 
billion of which $129.8 billion has been repaid as of February 25, 
2010. See Congressional Oversight Panel, March Oversight Report: The 
Unique Treatment of GMAC under the TARP, at 139 (Mar. 10, 2010) (online 
at cop.senate.gov/documents/cop-031110-report.pdf).
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    In voluntary private sector foreclosure mitigation efforts, 
however, the participating investors may readily determine the 
extent to which voluntary reductions in mortgage principal will 
reduce or impair their regulatory capital. As such, each 
private-sector investor will have the opportunity to develop 
its own customized foreclosure mitigation program that 
carefully balances the costs and benefits to the investor that 
may arise from the write-down of outstanding mortgage 
principal. In my view, this approach is preferable to a 
government mandated, across-the-board mortgage principal 
reduction program where investors are required (or pressured) 
to write off a certain amount of mortgage principal in 
accordance with a static matrix or a generic ability-to-pay 
formula. Prudent investors and servicers recognize the purpose 
and necessity of offering their borrowers voluntary mortgage 
principal reductions in certain well-defined circumstances, and 
the government should welcome and encourage their active 
participation in and contribution to the foreclosure mitigation 
process without the imposition of an overarching one-size-fits-
all mandate.

Cost Benefit Analysis of Voluntary Mortgage Modification vs. 
        Foreclosure

    In the Panel's October report on foreclosure mitigation, 
the Panel retained Professor Alan M. White to conduct a cost-
benefit analysis of HAMP as well as an analysis of whether it 
is more cost effective to modify a mortgage loan (without the 
payment of any government sponsored subsidy to the servicer, 
the investor or the homeowner) or foreclose the property 
securing the mortgage loan.\530\ Professor White concluded 
that, subject to certain reasonable assumptions, the investor's 
net gain from a non-subsidized mortgage modification could 
average $80,000 or more per loan versus the foreclosure of the 
property securing the mortgage loan.\531\ If Professor White is 
correct in his assessment, it is difficult to appreciate why 
the government should undertake to subsidize mortgage loan 
modifications. Why should Treasury mandate that the taxpayers 
fund payments to motivate investors in mortgage loans and 
securitized debt instruments to take actions that are in their 
own best interests absent the subsidies?
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    \530\ See Congressional Oversight Panel, October Oversight Report: 
An Assessment of Foreclosure Mitigation Efforts After Six Months: 
Additional Views of Congressman Jeb Hensarling (Oct. 9, 2009) (online 
at cop.senate.gov/documents/cop-100909-report-hensarling.pdf); 
Congressional Oversight Panel, January Oversight Report: Exiting TARP 
and Unwinding Its Impact on the Financial Markets: Additional Views of 
J. Mark McWatters and Paul S. Atkins (Jan. 13, 2010) (online at 
cop.senate.gov/documents/cop-011410-report-atkinsmcwatters.pdf).
    \531\ It is important to note that the modification versus 
foreclosure analysis does not turn upon the realization of net gains 
anywhere near $80,000 per mortgage loan modification. As long as the 
mortgage lender breaks even (after considering all costs and expenses 
including any addition fees paid to the mortgage servicer as well as 
all cost savings from not foreclosing), the lender should prefer 
modification.
---------------------------------------------------------------------------
    If the difficulty with respect to modifying mortgage loans 
on a timely basis arises from the unwillingness of mortgage 
servicers to discharge their contractual duties without the 
receipt of additional fee income, investors may respond by 
either suing the servicers for breach of their obligations 
under their pooling and servicing agreements or--perhaps more 
prudently--agreeing to share a portion of their $80,000 or so 
net gain per modification with the servicers. In either event, 
the taxpayers will not be required to subsidize the mortgage 
loan modification process, the investors will receive a 
substantial net gain from modifying their mortgage loans 
instead of foreclosing the underlying collateral, the servicers 
will receive the benefit of their contractual bargain as, 
perhaps, amended, and the homeowners will not suffer the 
foreclosure of their residences. If an investor stands to 
benefit from the modification of a mortgage loan it seems 
reasonable to ask the investor--and not the taxpayers--to share 
part of its ``gain'' \532\ from the workout with the servicer 
so as to ``motivate'' the servicer to restructure the 
loan.\533\ Treasury should not gum up the works by offering to 
subsidize the contractual commitments of mortgage servicers. 
Any such action will only motivate the investors and servicers 
to sit on their hands and wait for Treasury to turn on the TARP 
money machine. In other words, why should the government offer 
an expensive and needlessly complex taxpayer-funded subsidy 
when a cost-effective private sector solution is readily 
available?
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    \532\ The investor's ``gain'' most likely will be realized in the 
form of cash proceeds received and cash expenditures not made over an 
extended period. As such, investors will need to balance their cash 
flow against the additional cash fees paid to the mortgage servicers.
    \533\ I certainly appreciate that mortgage servicers should not 
merit the payment of additional fees in order to discharge their 
contractual undertakings. Nevertheless, in order to provide prompt 
relief to distressed homeowners, such approach is preferable to doing 
nothing.
---------------------------------------------------------------------------
    I am troubled that the otherwise objective and transparent 
mortgage loan modification process has been arguably derailed 
by the enticement of TARP-funded subsidy payments and the 
expectation that the government will increase the subsidy rate 
if the mortgage loan and securitized debt investors and 
servicers continue to drag their feet and all but refuse to 
modify their portfolio of distressed mortgage loans. With the 
passage of EESA and the expectation that Treasury would soon 
introduce a foreclosure mitigation subsidy program, it is not 
surprising that some investors and servicers apparently elected 
to adopt a wait-and-see approach. Although unfortunate, such 
action is entirely rational and presents the investors and 
servicers with the opportunity to receive additional fee income 
and net gains by deferring their foreclosure mitigation 
efforts.\534\ Without HAMP or a similar program, the investors 
and servicers would have arguably undertaken to modify many of 
their distressed mortgage loans on an expedited basis so as to 
benefit from Professor White's estimated $80,000 net gain. As 
long as the government continues to offer investors and 
servicers generous and ever-increasing subsidies to perform 
actions that are already in their best economic interests it 
should surprise no one if some of these recipients revert to 
stand-by mode and wait for the best deal. Since the TARP does 
not end until October 3, 2010, it is possible that some 
investors and servicers will wait on the sidelines for Treasury 
to again sweeten an already favorable offer.
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    \534\ Although such approach may qualify as ``rational,'' I 
strongly disagree with any mortgage lender or servicer who delays its 
foreclosure mitigation actions based upon the expectation of additional 
TARP-sourced subsidy payments.
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Principles of Equity, Moral Hazard Risks and Implicit Guarantees

    The public policy rationale underlying taxpayer-funded 
support for HAMP and the Administration's other foreclosure 
mitigation efforts appears inequitable when compared to the 
assistance offered other taxpayers who have suffered economic 
reversals during the recession. While many homeowners have 
recently lost equity value in their residences, others have 
suffered substantial losses in their investment portfolios, 
including in their 401(k) and IRA plans. Why should the 
taxpayers bail out a homeowner who has lost $100,000 of home 
equity value and neglect another taxpayer who has suffered a 
$100,000 loss of 401(k) and IRA retirement savings?
    This problem is exacerbated if the homeowner was able to 
benefit from accrued home equity appreciation prior to the 
decline in housing prices. For example, a homeowner may have 
purchased a residence for $200,000 (with 100 percent 
financing), taken out a $100,000 home equity loan as the 
residence appreciated to $300,000, and used the $100,000 of 
cash proceeds from the home equity loan to purchase a ski boat, 
trailer, and all-wheel-drive SUV. If the residence subsequently 
fell in value to $200,000 it makes little sense for the 
taxpayers to subsidize any reduction in the outstanding 
principal balance of the home equity loan since the homeowner 
actually received the proceeds of the loan in the form of a ski 
boat, trailer, and all-wheel-drive SUV and not as overinflated 
house value. That is, what public policy goal is served by 
bailing out the homeowner who received a ski boat, trailer, and 
all-wheel-drive SUV as proceeds from a $100,000 home equity 
loan while neglecting the taxpayer who suffered a $100,000 
investment loss in her 401(k) and IRA retirement savings 
accounts? \535\
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    \535\ In other words, why should the homeowner who did not suffer 
an economic loss (because she retains the ski boat, trailer, and all-
wheel-drive SUV) receive a $100,000 taxpayer-funded bailout, while the 
401(k) and IRA investor who actually suffered a $100,000 economic loss 
in her retirement savings receives nothing? More broadly stated, why 
should those homeowners who benefitted from the use of their homes as 
an ATM expect other taxpayers to offer a bailout?
    See Alyssa Katz, How Texas Escaped the Real Estate Foreclosure 
Crisis, Washington Post (Apr. 4, 2010) (online at 
www.washingtonpost.com/wp-dyn/content/article/2010/04/03/
AR2010040304983.html?sub=AR) (``But there is a broader secret to 
Texas's success, and Washington reformers ought to be paying very close 
attention. If there's one thing that Congress can do to help protect 
borrowers from the worst lending excesses that fueled the mortgage and 
financial crises, it's to follow the Lone Star State's lead and put the 
brakes on ``cash-out'' refinancing and home-equity lending. A cash-out 
refinance is a mortgage taken out for a higher balance than the one on 
an existing loan, net of fees. Across the nation, cash-outs became 
ubiquitous during the mortgage boom, as skyrocketing house prices made 
it possible for homeowners, even those with bad credit, to use their 
home equity like an ATM. But not in Texas. There, cash-outs and home-
equity loans cannot total more than 80 percent of a home's appraised 
value. There's a 12-day cooling-off period after an application, during 
which the borrower can pull out. And when a borrower refinances a 
mortgage, it's illegal to get even a dollar back. Texas really means 
it: All these protections, and more, are in the state constitution. The 
Texas restrictions on mortgage borrowing date from the first days of 
statehood in 1845, when the constitution banned home loans.''
    See also Did Consumer Protection Laws Prevent Texas Housing 
Bubble?, Wall Street Journal (Apr. 6, 2010) (online at blogs.wsj.com/
developments/2010/04/06/did-consumer-protection-laws-prevent-texas-
housing-bubble/tab/print/) (``Texas avoided a bubble to begin with, in 
part because it didn't have a rampant speculation and house flipping 
that arguably sparked the bubble markets in Florida, Nevada and 
Arizona. Indeed, real-estate investors have argued that higher property 
taxes in Texas made it less attractive to hold properties as 
investments versus states such as California, while urban planners have 
argued that less restrictive land-use laws didn't drive up prices by 
constraining supply. Texas, of course, may also have fresh memories of 
a real-estate bubble, as housing economist Thomas Lawler notes, given 
that the state had the ``absolute worst regional downturn in home 
prices in the post-World War II period'' prior to the current downturn 
during the ``oil patch'' boom and bust of the 1980s. (The bulk of 
``default asset management'' operations--how to dispose of 
foreclosures--for Fannie Mae and Freddie Mac are still headquartered in 
Dallas as a byproduct of that era.) Mr. Lawler says while any actions 
designed to discourage excessive borrowing is an ``incredibly good 
idea, I'm not sure that Texas is an all around `good' example.''
---------------------------------------------------------------------------
    Suppose, instead, two taxpayers purchased condominiums in 
the same building for $200,000 each with 100 percent financing. 
After the condominiums appreciated to $300,000 each, the first 
homeowner secured a $100,000 home equity loan to pay the 
college tuition of the first homeowner's son; the second 
homeowner declined to accept a home equity loan (expressing a 
``this is too good to believe'' skepticism) and the second 
homeowner's daughter financed her college tuition with a 
$100,000 student loan. If the condominiums subsequently drop in 
value to $200,000 each, why should the taxpayers subsidize the 
write-off of the first homeowner's home equity loan and in 
effect finance the college tuition of the first homeowner's son 
while the second homeowner's daughter remains committed on her 
$100,000 student loan? I do not concur with any public policy 
that would yield such an inequitable treatment, particularly 
since the second homeowner acted in a prudent and fiscally 
responsible manner by electing not to over leverage the 
residence.
    Other examples come to mind. What about the retired 
homeowner whose residence drops in value by $100,000 after she 
has diligently paid each installment on her $300,000 mortgage 
over 30 years? The homeowner has certainly suffered an economic 
loss, but she does not qualify for relief under HAMP or 
otherwise because she has repaid her mortgage in full. What 
about the taxpayer who rents her primary residence and 
purchases (with a $300,000 mortgage loan) real property for 
investment purposes that subsequently drops in value by 
$100,000? As in the prior example, the renter has certainly 
suffered a $100,000 economic loss, but she does not qualify for 
relief under HAMP or otherwise. What about the homeowner 
suffering from a protracted illness or disability who loses 
$100,000 of equity value upon the foreclosure of her residence 
for failure to pay property taxes? Again, the taxpayer has 
suffered a $100,000 economic loss, but HAMP and the 
Administration's other foreclosure mitigation programs offer no 
assistance.
    These examples illustrate the inequity of assisting only 
one group of Americans to the exclusion of others who have also 
suffered from the recession. Since it is neither possible nor 
prudent \536\ for the government to subsidize the taxpayers for 
the trillions of dollars of economic losses that have arisen 
over the past two years, the government should not undertake to 
allocate its limited resources to one group of taxpayers while 
ignoring the equally (or more) legitimate economic losses 
incurred by other groups.
---------------------------------------------------------------------------
    \536\ If the government undertook to cover explicitly or implicitly 
the investment losses of the taxpayers, such a policy would--in 
addition to bankrupting the government--most likely encourage many 
taxpayers to select high-risk investments for their portfolios with the 
expectation that they will retain all of the upside from such 
investments but that the government would subsidize any losses on the 
downside.
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    It is also worth noting that only a relatively modest 
(although certainly not insignificant) percentage of Americans 
are facing foreclosure after properly considering the number of 
taxpayers who are current on their mortgage obligations, who 
are renting their primary residences and who own their homes 
free of mortgage debt.\537\ Is it fair to ask the overwhelming 
majority of Americans who are struggling each month to meet 
their own financial obligations to bail out the relatively 
modest group of homeowners who are actually facing foreclosure? 
This issue becomes far more compelling when considering the 
economic difficulties facing many members of the majority 
group--as noted in the foregoing examples--that have received 
next to no attention from the Administration. I do not believe 
that it is equitable to ask these taxpayers to shoulder the 
burden of funding HAMP and the Administration's other 
foreclosure mitigation programs.
---------------------------------------------------------------------------
    \537\ See Congressional Oversight Panel, October Oversight Report: 
An Assessment of Foreclosure Mitigation Efforts After Six Months: 
Additional Views of Congressman Jeb Hensarling (Oct. 9, 2009) (online 
at cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
---------------------------------------------------------------------------
    In addition to a compelling sense of inequity, the bailout 
of distressed homeowners creates profound moral hazard risks 
and all but establishes the U.S. government as the implicit 
guarantor of homeowners who overextend their mortgage 
obligations. What message does the government send to the 
taxpayers by treating a discrete group of homeowners as per se 
``victims'' of predatory lending activity and undertaking to 
substantially subsidize their mortgage indebtedness at the 
direct expense of the vast majority of taxpayers who meet their 
financial obligations each month? Will the former group of 
homeowners modify their behavior and become more fiscally 
prudent, or will they continue to over-leverage their 
households with the expectation that the government will offer 
yet another taxpayer-funded bailout as needed? Will formerly 
prudent homeowners look at the windfall others have received 
and modify their behavior in an adverse manner? Such behavior, 
while certainly not commendable, is by no means irrational and 
only demonstrates that consumers will respond to economic 
incentives that are in their own self-interest. If the 
government offers to subsidize a homeowner's mortgage payments 
(or credit card debt), it is arguably difficult to criticize 
the homeowner for accepting the misguided offer, yet I would be 
remiss if I did not question any government-sanctioned policy 
that encourages taxpayers to act in a fiscally imprudent 
manner.
    This analysis is in no way intended to diminish the 
financial hardship that many Americans are suffering as they 
attempt to modify or refinance their underwater home mortgage 
loans, and I fully acknowledge and empathize with the stress 
and economic uncertainty created from the bursting of the 
housing bubble. It is particularly frustrating--although not 
surprising--that many of the hardest hit housing markets are 
also suffering from seemingly intractable rates of unemployment 
and underemployment. As such, I strongly encourage each 
mortgage loan and securitized debt investor and servicer to 
work with each of their borrowers in good faith, in a 
transparent and accountable manner, to reach an economically 
reasonable resolution prior to pursuing foreclosure. If 
Professor White is correct in his analysis, it is clearly in 
the best economic interest of the investors and servicers to 
modify the distressed mortgage loans in their portfolios rather 
than to seek foreclosure of the underlying residential 
collateral. It is regrettable that HAMP and the 
Administration's other foreclosure mitigation programs create 
disincentives for investors and servicers as well as homeowners 
by rewarding their dilatory behavior with the expectation of 
enhanced subsidies.

Home Ownership as a ``Put Option''

    I remain troubled that HAMP itself may have exacerbated the 
mortgage loan delinquency and foreclosure problem by 
encouraging homeowners to refrain from remitting their monthly 
mortgage installments based upon the expectation that they will 
ultimately receive a favorable restructure or principal 
reduction subsidized by the taxpayers.\538\ This ``strategic 
default'' issue is magnified by single-action and anti-
deficiency laws in effect in several states that permit 
homeowners to walk away from their mortgage obligations with 
relative impunity.\539\ These laws together with the curious 
incentives offered by HAMP arguably convert the concept of home 
ownership into the economic reality of a ``put option'' \540\--
as long as a homeowner's residence continues to appreciate in 
value the homeowner will not exercise the put option, but as 
soon as the residence falls in value the homeowner will elect 
to exercise the put option and walk away or threaten to walk 
away if a favorable bailout is not offered.\541\ I am also 
concerned that Treasury's attempt to ``streamline'' the loan 
modification process will result in materially lower 
underwriting standards that may lead to the creation of a new 
class of Treasury-sanctioned and subsidized subprime loans that 
may inflate yet another housing bubble. Any inappropriate 
loosening of prudent underwriting standards may also cause the 
re-default rate to surpass the already distressing projected 
rate of 40 percent.
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    \538\ Although such approach may qualify as ``rational,'' I 
strongly disagree with any homeowner who purposely declines to make a 
mortgage payment based upon the expectation of a TARP-sourced bailout.
    \539\ A ``bankruptcy cram down'' law pursuant to which a bankruptcy 
judge would be authorized to change (i.e., cram down) the terms of a 
mortgage loan over the objection of the mortgage loan holder could 
arguably encourage homeowners to act in a similar manner.
    \540\ A put option is a contract providing the owner with the 
right--but not the obligation--to sell a specified amount of an 
underlying security or asset at a specified price within a specified 
period of time. The right afforded the homeowner in a jurisdiction with 
an anti-deficiency or one-action law is arguably the functional 
equivalent of a put option.
    \541\ If a homeowner exercises the put option, her credit rating 
will suffer and she may not qualify for another home mortgage loan for 
several years. It may, however, be in the best long term financial 
interest of the homeowner to walk away from her house and mortgage 
obligations in favor of renting a residence until her credit rating 
recovers.
---------------------------------------------------------------------------

Taxpayer Protection--the Importance of Equity Participation Rights 
        \542\
---------------------------------------------------------------------------

    \542\ See Congressional Oversight Panel, January Oversight Report: 
Exiting TARP and Unwinding Its Impact on the Financial Markets: 
Additional Views of J. Mark McWatters and Paul S. Atkins (Jan. 13, 
2010) (online at cop.senate.gov/documents/cop-011410-report-
atkinsmcwatters.pdf). I have incorporated such Additional Views into my 
analysis of equity participation rights.
---------------------------------------------------------------------------
    The TARP-funded HAMP program carries a 100 percent subsidy 
rate according to the General Accounting Office (GAO).\543\ 
This means that the United States government expects to recover 
none of the $50 billion of taxpayer-sourced TARP funds invested 
in the HAMP foreclosure mitigation program.\544\ The projected 
shortfall will become more burdensome to the taxpayers as 
Treasury contemplates expanding HAMP or introducing additional 
programs targeted at modifying or refinancing distressed home 
mortgage loans. Since Treasury is charged with protecting the 
interests of the taxpayers who funded HAMP and the other TARP 
programs, I recommend that Treasury's foreclosure mitigation 
efforts be structured so as to incorporate an effective exit 
strategy by allowing Treasury to participate in any subsequent 
appreciation in the home equity of any mortgagor whose loan is 
modified under HAMP or any other taxpayer subsidized 
program.\545\
---------------------------------------------------------------------------
    \543\ Government Accountability Office, Financial Audit: Office of 
Financial Stability (Troubled Asset ReliefProgram) Fiscal Year 2009 
Financial Statements, at 15 (Dec. 2009) (online at www.gao.gov/
new.items/d10301.pdf).
    \544\ 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).
    \545\ Doing so will also mitigate the moral hazard risk of 
homeowners who could undertake problematic loans in the future based on 
the assumption that the government will act as a backstop with no 
strings attached. See Congressional Oversight Panel, December Oversight 
Report: Taking Stock: What has the Troubled Asset Relief Program 
Achieved?: Additional Views of Congressman Jeb Hensarling (Dec. 9, 
2009) (online at cop.senate.gov/documents/cop-120909-report-
hensarling.pdf).
---------------------------------------------------------------------------
    In order to encourage the participation of mortgage lenders 
in Treasury's foreclosure mitigation efforts, such lenders 
could also be granted the right--subordinate to the right 
granted Treasury--to participate in any subsequent equity 
appreciation. Understandably, many feel little sympathy for 
lenders on the other side of the mortgage contract. However, if 
the lenders are not allowed to partake in a slice of the equity 
appreciation after they agree to take an upfront loss in a 
principal reduction, homeowners could suffer across-the-board 
by being required to pay higher premiums for loans in the 
future.
    The mechanics of an equity participation right may be 
illustrated by the following example of a typical home mortgage 
loan modification.\546\
---------------------------------------------------------------------------
    \546\ The incorporation of an equity participation right may be 
achieved by the filing of a one-page document in the local real 
property records when the applicable home mortgage loan is modified.
---------------------------------------------------------------------------
    Assume a homeowner borrows $200,000 and purchases a 
residence of the same amount.\547\ The home subsequently 
declines in value to $175,000; the homeowner and the mortgage 
lender agree to restructure the loan under a TARP-sponsored 
foreclosure mitigation program, pursuant to which the 
outstanding principal balance of the loan is reduced to 
$175,000, and Treasury advances $10,000 \548\ in support of the 
restructure. Immediately after the modification the mortgage 
lender has suffered a $25,000 \549\ economic loss and Treasury 
has advanced $10,000 of TARP funds. If the homeowner 
subsequently sells the residence for $225,000, the $50,000 of 
realized equity proceeds \550\ would be allocated in accordance 
with the following waterfall--the first $10,000 \551\ is 
remitted to reimburse Treasury for the TARP funds advanced 
under the foreclosure mitigation program; the next $25,000 
\552\ is remitted to the mortgage lender to cover its $25,000 
economic loss; and the balance of $15,000 is paid to the 
homeowner.\553\
---------------------------------------------------------------------------
    \547\ These facts illustrate the zero ($0.00) down-payment 
financings that were more common a few years ago.
    \548\ The $10,000 of TARP-sourced funds advanced by Treasury may 
be, for example, remitted to the mortgage loan servicer and the 
homeowner under HAMP.
    \549\ The $25,000 loss equals the $200,000 outstanding principal 
balance of the original loan, less the $175,000 original principal 
balance of the modified loan. The example does not consider the 
consequences of modifying the interest rate on the loan.
    \550\ The $50,000 of realized equity proceeds equals the $225,000 
sales price of the residence, less the $175,000 outstanding principal 
balance of the modified loan. The example makes certain simplifying 
assumptions such as the absence of transaction and closing fees and 
expenses.
    \551\ In order to more appropriately protect the taxpayers, the 
$10,000 advanced under the TARP-sponsored foreclosure mitigation 
program could accrue interest at an objective and transparent rate. For 
example, if the 30-year fixed rate of interest on mortgage loans equals 
five percent when the mortgage loan is modified, the $10,000 advance 
would accrue interest at such a rate, and Treasury would be reimbursed 
the aggregate accrued amount upon realization of the equity proceeds. 
If at such time $2,500 of interest has accrued, Treasury would be 
reimbursed $12,500 ($10,000 originally advanced, plus $2,500 of accrued 
interest) instead of only the $10,000 of TARP proceeds originally 
advanced.
    \552\ The mortgage lender may also argue that its $25,000 loss 
should accrue interest in the same manner as provided Treasury. In such 
event, the mortgage lender would be entitled to recover $25,000, plus 
accrued interest upon the realization of sufficient equity proceeds.
    \553\ Treasury, the mortgage lender, and the homeowner may also 
agree to share the $50,000 net gain in a manner that is more favorable 
to the homeowner. For example, the parties could agree to allocate the 
net gain as follows--(i) 50 percent to Treasury, but not to exceed 75 
percent of Treasury's aggregate advances; (ii) 25 percent to the 
mortgage lender, but not to exceed 50 percent of the mortgage lender's 
economic loss; and (iii) the remainder to the homeowner. Under such an 
agreement the $50,000 net gain would be allocated as follows--(i) 
$7,500 to Treasury (50 percent x $50,000 net gain, but not to exceed 75 
percent x $10,000 aggregate advances by Treasury); (ii) $12,500 to the 
mortgage lender (25 percent x $50,000 net gain, but not to exceed 50 
percent x $25,000 economic loss of the mortgage lender); and (iii) 
$30,000 to the homeowner ($50,000 net gain, less $7,500, less $12,500).
    Treasury may also wish to structure its foreclosure mitigation 
efforts so as to encourage the early repayment of TARP funds by 
homeowners. Treasury, for example, could agree to a 20 percent discount 
or waive the accrual of interest on the TARP funds advanced if a 
homeowner repays such funds in full within three years following the 
restructure. Any such sharing arrangements and incentives should appear 
reasonable to the taxpayers and should not negate the intent of the 
equity participation right. Mortgage lenders may also agree to similar 
incentives.
---------------------------------------------------------------------------
    Prior to the repayment of all funds advanced by Treasury 
and the economic loss suffered by the mortgage lender, the 
homeowner should not be permitted to borrow against any 
appreciation in the net equity value of the mortgaged property 
unless the proceeds are applied in accordance with the 
waterfall noted above. That is, instead of selling the 
residence for $225,000 as assumed in the foregoing example, the 
homeowner should be permitted to borrow against any net equity 
in the residence, provided that $10,000 is remitted to Treasury 
and $25,000 is paid to the mortgage holder prior to the 
homeowner retaining any such proceeds.\554\ Such flexibility 
allows the homeowner to cash out the interests of Treasury and 
the mortgage lender without selling the residence securing the 
mortgage loan. The modified loan documents should also permit 
the homeowner to repay Treasury and the mortgage lender from 
other sources such as personal savings or the disposition of 
other assets.\555\
---------------------------------------------------------------------------
    \554\ Prudent underwriting standards should apply to all such home 
equity loans.
    \555\ As noted above, Treasury, the mortgage lender, and the 
homeowner may agree to share the $50,000 of refinancing proceeds in a 
manner that is more favorable to the homeowner.
---------------------------------------------------------------------------
    I also recommend that to the extent permitted by applicable 
law Treasury consider structuring all mortgage loan 
modifications and refinancings under HAMP and any other 
foreclosure mitigation programs as recourse obligations to the 
homeowners. If the loans are structured as non-recourse 
obligations under state law or otherwise, the homeowners may 
have a diminished incentive to repay Treasury the funds 
advanced under TARP.
    In my view, the incorporation of these specifically 
targeted modifications into each TARP funded foreclosure 
mitigation program will enhance the possibility that Treasury 
will exit the programs at a reduced cost to the taxpayers.

The Overstated Case against Second Lien Mortgage Holders

    Some advocate that holders of out-of-the-money second lien 
mortgages walk away from their loans so as to facilitate the 
timely modification of in-the-money first lien mortgage 
loans.\556\ In my view, this approach--although certainly not 
without merit--is generally unrealistic and inequitable to the 
holders of second lien mortgage loans. In many instances it is 
unlikely that holders of second lien mortgage loans are truly 
out-of-the-money since today's fire-sale valuations are not 
representative of the actual intermediate to long-term fair 
market value of the residential collateral securing the 
underlying loans.\557\ I am not unsympathetic to the argument 
that an 80-year historic low in the housing market does not 
reflect a true representation of fair market value, 
particularly given the tepid mortgage loan and refinancing 
markets.
---------------------------------------------------------------------------
    \556\ See James S. Hagerty, Banks Rebel Against Push to Redo Loans, 
Wall 
Street Journal (Apr. 13, 2010) (online at online.wsj.com/article/
SB10001424052702304506904575180320655553224.html?mod=rss_com_mostcomment
art) (``To write down loans enough to bring those debts down to no more 
than the home values would cost $700 billion to $900 billion, JPMorgan 
Chase estimated in its testimony. That would include costs of $150 
billion to the Federal Housing Administration and government-controlled 
mortgage investors Fannie Mae and Freddie Mac, the bank said. J.P. 
Morgan also said broad-based principal reductions could raise costs for 
borrowers if mortgage investors demand more interest to compensate for 
that risk. Borrowers probably would have to increase down payments, and 
credit standards would tighten further, the bank said. Wells Fargo said 
principal forgiveness ``is not an across-the-board solution'' and 
``needs to be used in a very careful manner.'' Bank of America said 
that it supports principal reductions for some customers whose debts 
are high in relation to their home values and who face financial 
hardships but that ``solutions must balance the interests of the 
customer and the (mortgage) investor'').
    \557\ For example, if a homeowner has encumbered her residence with 
a first lien mortgage of $200,000 and a second lien mortgage of 
$100,000, the holder of the second lien mortgage loan is completely 
out-of-the-money if the residence has a current--fire sale--market 
value of only $175,000. If the holder of the second lien mortgage in 
good faith anticipates that the residence will appreciate to $240,000 
within the next year or so, I can understand why the holder may not be 
inclined to write off $40,000 of its loan ($240,000 projected fair 
market value of the residence, less $200,000 outstanding principal 
balance of the first lien loan).
---------------------------------------------------------------------------
    Second lien lenders may refrain from writing down their 
mortgage loans if their internal projections reasonably reflect 
a recovery in the housing market within the next year or so. In 
addition, if the second lien lenders previously advanced cash 
to their borrowers under home equity loans, they may also be 
reluctant to write off such loans since the homeowners received 
actual cash value from the home equity loans and not just more 
over-inflated house value. In both instances second lien 
holders may argue that such analysis is based upon their 
exercise of prudent business judgment as well as the discharge 
of their fiduciary duties to their shareholders.
    While these arguments are compelling, they perhaps mask the 
real problem arising from the wholesale write-off of second 
lien mortgage loans. It is entirely possible that holders of 
second lien mortgages are reluctant to write down their loans 
past a certain level for fear of impairing their regulatory 
capital, which could trigger another round of TARP funded 
bailouts, the failure of second lien holders or worse. This 
problem may be particularly acute given the high concentration 
of second lien mortgage loans held by a relatively few 
financial institutions. Holders of first lien mortgage loans 
and homeowners may have more success in motivating holders of 
second lien mortgages to write off part or all of their loans 
if they offer the holders a contractual equity participation 
right that permits the subordinate lenders to share in any 
subsequent appreciation in the fair market value of the 
underlying residential collateral.

Government Support of Housing Programs through Fannie Mae and Freddie 
        Mac

    Since the collapse in home values, the federal government 
has undertaken extraordinary and unprecedented actions in the 
housing market. Fannie Mae and Freddie Mac together own or 
guarantee approximately $5.5 trillion of the $11.8 trillion in 
U.S. residential mortgage debt and financed as much as 75 
percent of new U.S. mortgages during 2009.\558\ On December 24, 
2009, Treasury announced that it would provide an unlimited 
amount of additional assistance to the two GSEs as required 
over the next three years.\559\ Treasury also revised upwards 
to $900 billion the cap on the retained mortgage portfolio of 
the GSEs, which means the GSEs will not be forced to sell 
mortgage-backed securities (MBS) into a distressed market just 
as the Federal Reserve ends its program to purchase up to $1.25 
trillion of MBS. Treasury apparently took these actions out of 
concern that the $400 billion of support that it previously 
committed to the GSEs could prove insufficient as well as to 
provide stability to an industry still teetering. Additional 
assistance by Treasury has allowed the GSEs to honor their MBS 
guarantee obligations and absorb further losses from the 
modification or write-down of distressed mortgage loans. It 
also has provided an advantage by allowing them to raise 
additional funds through the issuance of debt viewed by markets 
as virtually risk-free.
---------------------------------------------------------------------------
    \558\ See Congressional Oversight Panel, January Oversight Report: 
Exiting TARP and Unwinding Its Impact on the Financial Markets: 
Additional Views of J. Mark McWatters and Paul S. Atkins (Jan. 13, 
2010) (online at cop.senate.gov/documents/cop-011410-report-
atkinsmcwatters.pdf). I have incorporated such Additional Views into my 
analysis of the foreclosure mitigation programs of Fannie Mae and 
Freddie Mac.
    \559\ See U.S. Department of the Treasury, Treasury Issues Update 
on Status of Support for Housing Programs (Dec. 24, 2009) (online at 
treasury.gov/press/releases/2009122415345924543.htm).
---------------------------------------------------------------------------
    The additional commitment and revised cap increase the 
likelihood that the GSEs will undertake to make significant 
purchases of distressed MBS for which they provided a 
guarantee. Presumably, the GSEs may make such purchases from 
TARP recipients and other holders and issuers, and it will be 
interesting to note how the GSEs elect to employ the proceeds 
of the unlimited Treasury facility. It does not seem 
unreasonable to conclude that the GSEs may use the facility to 
finance the modification of the residential mortgages they own 
or guarantee. Since the actions of the GSEs may directly 
influence Treasury's foreclosure mitigation programs under 
TARP, I recommend that the GSEs conduct their own foreclosure 
mitigation efforts in an equitable, fully transparent and 
accountable manner. The Federal Reserve, Treasury and the GSEs 
should disclose on a regular and periodic basis a detailed 
analysis of the amount and specific use of all taxpayer-sourced 
funds they have spent and expect to spend on their foreclosure 
mitigation efforts.
    In addition, it must be a clear goal that all of these 
extraordinary actions taken to stabilize markets are temporary 
in nature. If not, another crisis could result from an over-
inflated, government-backed housing market, led by the too-big-
to-fail--and getting bigger--GSEs, in which a TARP-like bailout 
of equal or greater magnitude could occur. While stability is a 
priority in the short-term, in the medium- to long-term 
Treasury must make certain that its actions do not exacerbate 
the same issues that caused the last meltdown and that it 
enables the return of a viable private sector for housing.

Legal Authority for Treasury to Fund HAMP with TARP Proceeds

    EESA authorizes Treasury ``to purchase, and to make and 
fund commitments to purchase, troubled assets from any 
financial institution.'' \560\ In response to a request from 
Panelist Paul Atkins as to whether Treasury was authorized to 
fund HAMP under EESA, Treasury's General Counsel delivered a 
legal opinion to the Panel concluding that Treasury was so 
authorized. Interestingly, Treasury has requested that the 
Panel not publish the opinion in the Panel's report even though 
Treasury has permitted the Panel to quote extensively from the 
opinion in the report and deliver a copy of the opinion to 
outside experts. It is my understanding that Treasury has not 
asserted an attorney-client privilege regarding the opinion, 
but, instead, has suggested that disclosure of the opinion may 
impact its ability to assert attorney-client privilege over 
related material in other contexts. After reviewing the opinion 
and the basis upon which the opinion was rendered, I can think 
of no legal theory in support of Treasury's assertion that an 
attorney-client privilege could be waived by disclosure of the 
opinion now that Treasury has agreed that the Panel may quote 
extensively from the opinion in the Panel's report and deliver 
a copy of the opinion to outside experts. Treasury's legal 
analysis regarding the subject matter of the opinion is fully 
disclosed and discussed by the Panel and the outside experts in 
the Panel's report. I request that Treasury promptly abandon 
any position--including the assertion of an attorney-client 
privilege--that would keep the opinion confidential.
---------------------------------------------------------------------------
    \560\ 12 U.S.C. Sec. 5211.


           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    On behalf of the Panel, Chair Elizabeth Warren sent a 
letter on April 13, 2010,\561\ to Secretary of the Treasury 
Timothy Geithner, presenting a series of questions about the 
failure of financial institutions which had received funds 
under the Capital Purchase Program (CPP), and asking Treasury 
to estimate its remaining exposure to future bank failures. The 
Panel has requested a written response from Treasury by April 
27, 2010.
---------------------------------------------------------------------------
    \561\ See Appendix I of this report, infra.


              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                           A. TARP Repayments

    In March 2010, four institutions completely redeemed the 
preferred shares given to Treasury as part of their 
participation in the TARP's Capital Purchase Program (CPP). 
Treasury received $5.9 billion in CPP repayments from these 
institutions. Of this total, $3.4 billion was repaid by 
Hartford Financial Services Group, Inc., and $2.25 billion was 
repaid by Comerica Inc. A total of eight banks have fully 
repaid their preferred stock TARP investments provided under 
the CPP in 2010.

                      B. CPP Warrant Dispositions

    As part of its investment in senior preferred stock of 
certain banks under the CPP, Treasury received warrants to 
purchase shares of common stock or other securities in those 
institutions. During March, one institution repurchased its 
warrants from Treasury for $4.5 million, and Treasury sold the 
warrants of five other institutions at auction for $344 million 
in proceeds. Treasury has liquidated the warrants it held in 48 
institutions for total proceeds of $5.6 billion.

       C. Treasury Named Two Appointees to AIG Board of Directors

    On April 1, 2010, Treasury announced that it had exercised 
its right to appoint two directors to the AIG board of 
directors. Treasury was afforded this right because AIG did not 
make dividend payments for four consecutive quarters on the 
preferred stock held by Treasury. Treasury named Donald H. 
Layton, the former chairman and chief executive officer of 
E8Trade Financial Corporation, and Ronald A. Rittenmeyer, 
former president, chairman and chief executive officer of 
Electronic Data Systems, to the AIG board.

             D. Term Asset-Backed Securities Loan Facility

    At the March 19, 2010 facility, investors requested $1.25 
billion in loans for legacy commercial mortgage-backed 
securities (CMBS), of which $857 million settled. In 
comparison, at the February facility, investors requested $1.25 
billion in loans for legacy CMBS, of which $1.1 billion 
settled. Investors did not request any loans for new CMBS in 
March. The only request for new CMBS loans during TALF's 
operation was for $72.2 million at the November facility.
    The New York Federal Reserve's March 4, 2010 facility was a 
non-CMBS facility, offering loans to support the issuance of 
ABS collateralized by loans in the credit card, equipment, 
floorplan, premium financing, small business, and student loan 
sectors. In total, $4.1 billion in loans were requested at this 
facility. There were no requests at this facility for auto or 
servicing advance loans. At the February 5, 2010 facility, $974 
million of the $987 million in requested loans settled.

              E. Sale of Treasury's Interest in Citigroup

    On March 29, 2010, Treasury announced that it intended to 
fully dispose of the $7.7 billion shares of Citigroup, Inc. 
common stock it owns during 2010. Treasury has employed Morgan 
Stanley to act on its behalf in the sale of these securities.

        F. Special Master Issues Executive Compensation Rulings

    On March 24, 2010, the Special Master for TARP Executive 
Compensation, Kenneth R. Feinberg, issued rulings on the 2010 
pay packages for the ``Top 25'' executives at the five 
remaining firms that received ``exceptional assistance'' from 
the government: AIG, Chrysler, Chrysler Financial, General 
Motors, and GMAC. The Special Master decreased total 
compensation for the 119 executives who fell under this 
distinction by 15 percent as compared to the 2009 levels.

                    G. Expansion of Housing Programs

    On March 26, 2010, the Administration announced adjustments 
to its foreclosure mitigation efforts. The adjustments to the 
Home Affordable Modification Program (HAMP) allow for the 
mortgage rates of an eligible unemployed borrower to be reduced 
for a period of time while looking for work. Furthermore, the 
Administration announced on this date that it would allow 
lenders to expand the number of refinancing options for 
eligible borrowers.
    On March 29, 2010, Treasury announced a second initiative 
directing aid to states suffering the most from the economic 
downturn. As an expansion of the Hardest Hit Fund announced on 
February 19, 2010, this program will allocate $600 million to 
five additional states: North Carolina, Ohio, Oregon, Rhode 
Island, and South Carolina. For further discussion of these 
program expansions and adjustments, please see Section C.2 of 
this report.

                               H. Metrics

    Each month, the Panel's report highlights a number of 
metrics that the Panel and others, including Treasury, GAO, 
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 EESA. This section discusses changes that have occurred in 
several indicators since the release of the Panel's March 
report.
     Interest Rate Spreads. Interest rate spreads have 
continued to flatten since the Panel's March report. The 
conventional mortgage spread, which measures the 30-year 
mortgage rate over 10-year Treasury bond yields, declined by 
12.5 percent during March. The interest rate spread for AA 
asset-backed commercial paper, which is considered mid-
investment grade, has decreased by 26.3 percent since the 
Panel's March report.

                                        FIGURE 54: INTEREST RATE SPREADS
----------------------------------------------------------------------------------------------------------------
                                                                Current Spread (as of 4/  Percent Change  Since
                           Indicator                                     5/10)            Last Report (3/11/10)
----------------------------------------------------------------------------------------------------------------
Conventional mortgage rate spread \562\.......................                     1.19                   (12.5)
Overnight AA asset-backed commercial paper interest rate                           0.08                   (26.3)
 spread \563\.................................................
Overnight A2/P2 nonfinancial commercial paper interest rate                        0.13                      0.8
 spread \564\.................................................
----------------------------------------------------------------------------------------------------------------
\562\ Conventional Mortgages (Weekly), supra note 353 (accessed Apr. 12, 2010); U.S. Government Securities/
  Treasury Constant Maturities/Nominal, supra note 353 (accessed Apr. 12, 2010).
\563\ 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) (hereinafter ``Federal Reserve Statistical
  Release: Commercial Paper Rates and Outstandings'') (accessed Apr. 12, 2010); 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 Apr. 12, 2010). In order to provide a more
  complete comparison, this metric utilizes the average of the interest rate spread for the last five days of
  the month.
\564\ Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings, supra note 519 (accessed
  Apr. 12, 2010). In order to provide a more complete comparison, this metric utilizes the average of the
  interest rate spread for the last five days of the month.

     Housing Indicators. Both the Case-Shiller 
Composite 20-City Composite as well as the FHFA Housing Price 
Index remained relatively flat in January 2010. The Case-
Shiller and FHFA indices remain 6.5 percent and 4.3 percent 
below the levels at the time EESA was enacted in October 2008. 
Foreclosure filings decreased by 2.3 percent from December to 
January, and are 10.4 percent above their October 2008 level.

                                          FIGURE 55: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
                                                                  Percent Change from
              Indicator                  Most Recent Monthly     Data Available at Time    Percent Change Since
                                                 Data                of Last Report            October 2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \565\....                  308,524                    (2.3)                     10.4
S&P/Case-Shiller Composite 20-City                       146.3                     0.31                    (6.5)
 Composite \566\.....................
FHFA Housing Price Index \567\.......                      194                    (1.1)                    (4.3)
----------------------------------------------------------------------------------------------------------------
\565\ RealtyTrac Foreclosure Press Releases, supra note 96 (accessed Apr. 12, 2010). Most recent data available
  for February 2010.
\566\ S&P/Case-Shiller Home Price Indices, supra note 330 (accessed Apr. 12, 2010). Most recent data available
  for January 2010.
\567\ U.S. and Census Division Monthly Purchase Only Index, supra note 330 (accessed Apr. 12, 2010). Most recent
  data available for January 2010.

 FIGURE 56: FORECLOSURE ACTIONS AS COMPARED TO THE HOUSING INDICES (AS 
                         OF JANUARY 2010) \568\

      
---------------------------------------------------------------------------
    \568\ Realty Trac Foreclosure Press Releases, supra note 96 
(accessed Apr. 12, 2010); S&P/Case-Shiller Home Price Indices, supra 
note 330 (accessed Apr. 12, 2010); U.S. and Census Division Monthly 
Purchase Only Index, supra note 330 (accessed Apr. 12, 2010). The most 
recent data available for the housing indices are as of January 2010.
[GRAPHIC] [TIFF OMITTED] T5737A.041

     Bank Conditions. Fourth quarter data on the 
condition of domestic banks continue to reflect the decline in 
loan quality. As Figure 57 illustrates, loan loss reserves as a 
percentage of all loans continued to increase during the fourth 
quarter of 2009. This measure has increased over 43 percent 
since the enactment of EESA and is at its highest level ever. 
Figure 58 displays nonperforming loans as a percentage of total 
loans for all U.S. banks. Nonperforming loans are defined here 
as those loans 90+ days past due as well as loans in nonaccrual 
status. This metric has increased over 86 percent since the 
enactment of EESA and by nearly 580 percent since the first 
quarter of 2007.

   FIGURE 57: LOAN LOSS RESERVE/TOTAL LOANS FOR DOMESTIC BANKS \569\

      
---------------------------------------------------------------------------
    \569\ Federal Reserve Bank of St. Louis, Loan Loss Reserve/Total 
Loans for all U.S. Banks (accessed Apr. 12, 2010) (online at 
research.stlouisfed.org/fred2/series/USLLRTL). 
[GRAPHIC] [TIFF OMITTED] T5737A.042

            FIGURE 58: NONPERFORMING LOANS/TOTAL LOANS \570\

      
---------------------------------------------------------------------------
    \570\ Federal Reserve Bank of St. Louis, Nonperforming Loans (past 
due 90+ days plus nonaccrual)/Total Loans for all U.S. Banks (accessed 
Apr. 12, 2010) (online at research.stlouisfed.org/fred2/series/
USNPTL?cid=93). 
[GRAPHIC] [TIFF OMITTED] T5737A.043

     Commercial Real Estate. Conditions for commercial 
real estate have continued to decline since the most recent 
data contained in the Panels February report on the subject. As 
Figure 59 shows, the vacancy rate for office properties was 17 
percent at the end of 2009, nearly a 30 percent increase since 
the first quarter of 2007. Conversely, the Moody's/REAL 
Commercial Property Price Index for office properties declined 
by nearly 29 percent since the same period.\571\
---------------------------------------------------------------------------
    \571\ Vacancy rate data provided by Reis, Inc., a New York-based 
commercial real estate research firm. Reis, Inc. provides quarterly 
data on commercial real estate properties and trends in 169 
metropolitan areas and this data reflect aggregation of Reis primary 
markets. MIT Center for Real Estate, Moody's/REAL Commercial Property 
Price Index (CPPI) (Instrument: Index_O_Natl_CY) (accessed Apr. 12, 
2010) (online at web.mit.edu/cre/research/credl/rca.html) (hereinafter 
``Moody's/REAL Commercial Property Price Index'').
---------------------------------------------------------------------------

 FIGURE 59: OFFICE PROPERTIES VACANCY RATES AND CPPI INDEX VALUE \572\

      
---------------------------------------------------------------------------
    \572\ Vacancy rate data provided by Reis, Inc., a New York-based 
commercial real estate research firm. Reis, Inc. provides quarterly 
data on commercial real estate properties and trends in 169 
metropolitan areas and this data reflect aggregation of Reis primary 
markets. The CPPI: Office data was provided by the MIT Center for Real 
Estate. Moody's/REAL Commercial Property Price Index, supra note 527.
[GRAPHIC] [TIFF OMITTED] T5737A.044

     Total Loans and Leases at Commercial Banks. The 
total dollar amount of loans and leases outstanding at domestic 
commercial banks has continued to decline. This measure reached 
its peak of $7.3 trillion on October 22, 2008. Since that 
point, the total amount of loans and leases outstanding 
decreased by 11 percent to $6.5 trillion outstanding from 
October 22, 2008 to March 24, 2010. However, the total dollar 
amount of loans and leases outstanding increased by 6.5 percent 
to $6.95 trillion from March 24, 2010 to March 31, 2010.\573\
---------------------------------------------------------------------------
    \573\ Federal Reserve Bank of St. Louis, Total Loans and Leases of 
Commercial Banks (accessed Apr. 12, 2010) (online at 
research.stlouisfed.org/fred2/series/TOTLL?rid=22&soid=1) (hereinafter 
``Total Loans and Leases of Commercial Banks'').
---------------------------------------------------------------------------

      FIGURE 60: TOTAL LOANS AND LEASES OF COMMERCIAL BANKS \574\

      
---------------------------------------------------------------------------
    \574\ Id.
    [GRAPHIC] [TIFF OMITTED] T5737A.045
    
                          I. Financial Update

    Each month, the Panel summarizes 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, repayments, 
and warrant dispositions that the program has received as of 
April 2, 2010; and (2) an updated accounting of the full 
federal resource commitment as of March 31, 2010.

1. TARP

            a. Costs: Expenditures and Commitments
    Treasury has committed or is currently committed to spend 
$520.3 billion of TARP funds through an array of programs used 
to purchase preferred shares in financial institutions, provide 
loans to small businesses and automotive companies, and 
leverage Federal Reserve loans for facilities designed to 
restart secondary securitization markets.\575\ Of this total, 
$229 billion is currently outstanding under the $698.7 billion 
limit for TARP expenditures set by EESA, leaving $408.2 billion 
available for fulfillment of anticipated funding levels of 
existing programs and for funding new programs and initiatives. 
The $229 billion includes purchases of preferred and common 
shares, warrants and/or debt obligations under the CPP, AIGIP/
SSFI Program, PPIP, and AIFP; and a loan to TALF LLC, the 
special purpose vehicle (SPV) used to guarantee Federal Reserve 
TALF loans.\576\ Additionally, Treasury has spent $57.8 million 
under the Home Affordable Modification Program, out of a 
projected total program level of $50 billion.
---------------------------------------------------------------------------
    \575\ 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 purchase 
prices of all troubled assets held by Treasury. 12 U.S.C. Sec. 5225 
(a)-(b); 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).
    \576\ Treasury Transactions Report, supra note 102.
---------------------------------------------------------------------------
            b. Income: Dividends, Interest Payments, CPP Repayments, 
                    and Warrant Sales
    As of April 2, 2010, a total of 65 institutions have 
completely repurchased their CPP preferred shares. Of these 
institutions, 40 have repurchased their warrants for common 
shares that Treasury received in conjunction with its preferred 
stock investments; Treasury sold the warrants for common shares 
for eight other institutions at auction.\577\ In March 2010, 
one CPP participant repurchased its warrants for $4.5 million 
and the warrants of five other institutions were sold at 
auction for $344 million in proceeds. Treasury received $5.9 
billion in repayments for complete redemptions from four CPP 
participants during March. The largest repayment was the $3.4 
billion repaid by Hartford Financial Services Group, Inc.\578\ 
In addition, Treasury receives dividend payments on the 
preferred shares that it holds, usually five percent per annum 
for the first five years and nine percent per annum 
thereafter.\579\ Net of these losses under the CPP, Treasury 
has received approximately $19.5 billion in income from warrant 
repurchases, dividends, interest payments, and other 
considerations deriving from TARP investments,\580\ and another 
$1.2 billion in participation fees from its Guarantee Program 
for Money Market Funds.\581\
---------------------------------------------------------------------------
    \577\ Id.
    \578\ Id.
    \579\ U.S. Department of the Treasury, Factsheet on Capital 
Purchase Program (Mar. 17, 2009) (online at www.financialstability.gov/ 
roadtostability/ CPPfactsheet.htm).
    \580\ U.S. Department of the Treasury, Cumulative Dividends and 
Interest Report as of December 31, 2009 (Jan. 20, 2010) (online at 
www.financialstability.gov/docs/dividends-interest-reports/
December%202009%20Dividends%20and%20Interest%20Report.pdf); Treasury 
Transactions Report, supra note 102.
    \581\ U.S. Department of the Treasury, Treasury Announces 
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009) 
(online at www.treasury.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
            c. TARP Accounting

                              FIGURE 61: TARP ACCOUNTING, AS OF APRIL 2, 2010 \582\
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                                                       Total
                                    Anticipated                     Repayments/       Funding         Funding
         TARP Initiative              Funding     Actual Funding      Reduced       Outstanding      Available
                                                                     Exposure
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP)            $204.9          $204.9          $135.8     \584\ $69.1              $0
 \583\..........................
Targeted Investment Program                 40.0            40.0              40               0               0
 (TIP) \585\....................
AIG Investment Program (AIGIP)/             69.8      \586\ 49.1               0            49.1            20.7
 Systemically Significant
 Failing Institutions Program
 (SSFI).........................
Automobile Industry Financing               81.3            81.3            4.19            77.1               0
 Program (AIFP).................
Asset Guarantee Program (AGP)                5.0             5.0       \588\ 5.0               0               0
 \587\..........................
Capital Assistance Program (CAP)
 \589\..........................
Term Asset-Backed Securities                20.0      \590\ 0.10               0            0.10            19.9
 Lending Facility (TALF)........
Public-Private Investment                   30.0            30.0               0            30.0               0
 Partnership (PPIP) \591\.......
Supplier Support Program (SSP)..       \592\ 3.5             3.5               0             3.5               0
Unlocking SBA Lending...........            15.0     \593\ 0.021               0           0.021           14.98
Home Affordable Modification            \594\ 50      \595\ 0.06               0            0.06            49.9
 Program (HAMP).................
Community Development Capital         \596\ 0.78               0               0               0            0.78
 Initiative (CDCI)..............
Total Committed.................           520.3             414                             229           106.3
Total Uncommitted...............           178.4                             185                     \597\ 363.4
    Total.......................          $698.7            $414            $185            $229          $469.7
----------------------------------------------------------------------------------------------------------------
\582\ Treasury Transactions Report, supra note 102.
\583\ As of December 31, 2009, the CPP was closed. U.S. Department of the Treasury, FAQ on Capital Purchase
  Program Deadline (online at www.financialstability.gov/docs/
  FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
\584\ Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific
  Coast National Bancorp ($4.1 million), as losses on the Transactions Report. Therefore, Treasury's net current
  CPP investment is $66.8 billion due to the $2.3 billion in losses thus far. Treasury Transactions Report,
  supra note 102.
\585\ Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under
  the TIP on December 9 and December 23, 2009, respectively. Therefore, the Panel accounts for these funds as
  repaid and uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
  Wells Fargo and Citigroup (Dec. 22, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm)
  (hereinafter ``Treasury Receives $45 Billion from Wells Fargo and Citigroup'').
\586\ AIG has completely utilized the $40 billion made available on November 25, 2008 and drawn-down $7.54
  billion of the $29.8 billion made available on April 17, 2009. This figure also reflects $1.6 billion in
  accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury's investment
  from cumulative preferred shares to non-cumulative shares. American International Group, Inc., Form 10-K for
  the Fiscal Year Ending December 31, 2009 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/5272/
  000104746910001465/a2196553z10-k.htm); Treasury Transactions Report, supra note 102; Information provided by
  Treasury staff in response to Panel request.
\587\ Treasury, the Federal Reserve, and the Federal Deposit Insurance Company terminated the asset guarantee
  with Citigroup on December 23, 2009. The agreement was terminated with no losses to Treasury's $5 billion
  second-loss portion of the guarantee. Citigroup did not repay any funds directly, but instead terminated
  Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now
  counted as uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
  Wells Fargo and Citigroup (Dec. 23, 2009) (online at www.ustreas.gov/press/releases/20091229716198713.htm).
\588\ Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available,
  Treasury did not receive a repayment in the same sense as with other investments. Treasury did receive other
  income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 61.
\589\ On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC,
  was in need of further capital from Treasury. GMAC received an additional $3.8 billion in capital through the
  AIFP on December 30, 2009. U.S. Department of the Treasury, Treasury Announcement Regarding the Capital
  Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html); Treasury
  Transactions Report, supra note 102.
\590\ Treasury has committed $20 billion in TARP funds to a loan funded through TALF LLC, a special purpose
  vehicle created by the Federal Reserve Bank of New York. The loan is incrementally funded and as of March 31,
  2010, Treasury provided $103 million to TALF LLC. This total includes accrued payable interest. Treasury
  Transactions Report, supra note 102; Federal Reserve Bank of New York, Factors Affecting Reserve
  Balances(H.4.1) (Apr. 1, 2010) (online at www.federalreserve.gov/releases/h41).
\591\ On January 29, 2010, Treasury released its first quarterly report on the Legacy Securities Public-Private
  Investment Program. As of that date, the total value of assets held by the PPIP managers was $3.4 billion. Of
  this total, 87 percent was non-agency residential mortgage-backed securities and the remaining 13 percent was
  commercial mortgage-backed securities. U.S. Department of the Treasury, Legacy Securities Public-Private
  Investment Program, at 4 (Jan. 29, 2010) (online at www.financialstability.gov/docs/External%20Report%20-%2012-
  09%20FINAL.pdf).
\592\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
  billion. This action reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5
  billion to $1 billion. GM Supplier Receivables LLC, the special purpose vehicle (SPV) created to administer
  this program for GM suppliers, has made $290 million in partial repayments and Chrysler Receivables SPV LLC,
  the SPV created to administer the program for Chrysler suppliers, has made $123 million in partial repayments.
  These were partial repayments of drawn-down funds and did not lessen Treasury's $3.5 billion in total exposure
  under the ASSP. Treasury Transactions Report, supra note 102.
\593\ On March 24, 2010, Treasury settled on the purchase of three floating rate Small Business Administration
  7a securities. As of April 2, 2010 the total amount of TARP funds invested in these securities was $21.37
  million. Treasury Transactions Report, supra note 102, at 29.
\594\ On February 19, 2010, President Obama announced the Help for the Hardest-Hit Housing Markets (Hardest Hit
  Fund) program, his proposal to use $1.5 billion of the $50 billion in TARP funds allocated to HAMP to assist
  the five states with the highest home price declines stemming from the foreclosure crisis: Arizona,
  California, Florida, Nevada, and Michigan. The White House, President Obama Announces Help for Hardest Hit
  Housing Markets (Feb. 19, 2010) (online at www.whitehouse.gov/the-press-office/president-obama-announces-help-
  hardest-hit-housing-markets). On March 29, 2010, Treasury announced $600 million in funding for a second HFA
  Hardest Hit Fund which includes North Carolina, Ohio, Oregon Rhode Island, and South Carolina. U.S. Department
  of the Treasury, Administration Announces Second Round of Assistance for Hardest-Hit Housing Markets (Mar. 29,
  2010) (online at www.financialstability.gov/latest/pr_03292010.html). Until further information on these
  programs is released, the Panel will continue to account for the $50 billion commitment to HAMP as intact and
  as the newly announced programs as subsets of the larger initiative. For further discussion of the newly
  announced HAMP programs, and the effect these initiatives may have on the $50 billion in committed TARP funds,
  please see Section D.1 of this report.
\595\ In response to a Panel inquiry, Treasury disclosed that, as of February 2010, $57.8 million in funds had
  been disbursed under the HAMP. As of April 2, 2010, the total of all the caps set on payments to each mortgage
  servicer was $39.9 billion. Treasury Transactions Report, supra note 102, at 28.
\596\ On February 3, 2010, the Administration announced an initiative under TARP to provide low-cost financing
  for Community Development Financial Institutions (CDFIs). Under this program, CDFIs are eligible for capital
  investments at a 2-percent dividend rate as compared to the 5-percent dividend rate under the CPP. In response
  to Panel request, Treasury stated that it projects the CDCI program to utilize $780.2 million.
\597\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($178.4 billion)
  and the repayments ($185 billion).


                                                             FIGURE 62: TARP PROFIT AND LOSS
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Dividends \598\  Interest \599\       Warrant            Other       Losses \601\
                   TARP Initiative                      (as of  2/28/   (as of  2/28/  Repurchases \600\   Proceeds  (as   (as of  4/2/        Total
                                                            10)              10)         (as of  4/2/10)   of  2/28/10)         10)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...............................................          $13,236            $491            $5,609           $2,518        ($2,334)         $19,520
CPP.................................................            8,820              28             4,338                -         (2,334)          10,852
TIP.................................................            3,004               -             1,256                -  ..............           4,260
AIFP................................................            1,091             443                15                -  ..............           1,549
ASSP................................................              N/A              14                 -                -  ..............              14
AGP.................................................              321               -                 0      \602\ 2,234  ..............           2,555
PPIP................................................                -               6                 -          \603\ 8  ..............              14
Bank of America Guarantee...........................                -               -                 -        \604\ 276  ..............            276
--------------------------------------------------------------------------------------------------------------------------------------------------------
\598\ U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of February 28, 2010 (Mar. 17, 2010) (online at
  www.financialstability.gov/docs/dividends-interest-reports/February%202010%20Dividends%20and%20 Interest%20Report.pdf) (hereinafter ``Cumulative
  Dividends and Interest Report'').
\599\ Cumulative Dividends and Interest Report, supra note 598.
\600\ Treasury Transactions Report, supra note 102.
\601\ Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as
  losses on the Transactions Report. A third institution, UCBH Holdings, Inc. received $299 million in TARP funds and is currently in bankruptcy
  proceedings. Treasury Transactions Report, supra note 102.
\602\ As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
  received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks for trust preferred securities in June
  2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with a
  $2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. At the end of Citigroup's participation in the FDIC's
  TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP
  to the Treasury. Treasury Transactions Report, supra note 102.
\603\ As of February 28, 2010, Treasury has earned $8 million in membership interest distributions from the PPIP. Cumulative Dividends and Interest
  Report, supra note 554.
\604\ Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
  agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
  the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
  U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
  Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
  %20executed.pdf).

            d. Rate of Return
    As of March 26, 2010, 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) was 10.7 percent. The internal rate of 
return is the annualized effective compounded return rate that 
can be earned on invested capital.
            e. TARP Warrant Disposition

 FIGURE 63: WARRANT REPURCHASES FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS AS OF MARCH 26, 2010
----------------------------------------------------------------------------------------------------------------
                                                                             Panel's Best
                                Investment    Warrant         Warrant          Valuation      Price/      IRR
         Institution               Date      Repurchase  Repurchase/ Sale     Estimate at      Est.    (Percent)
                                                Date          Amount       Repurchase  Date    Ratio
----------------------------------------------------------------------------------------------------------------
Old National Bancorp.........   12/12/2008     5/8/2009        $1,200,000        $2,150,000     0.558        9.3
Iberiabank Corporation.......    12/5/2008    5/20/2009         1,200,000         2,010,000     0.597        9.4
Firstmerit Corporation.......     1/9/2009    5/27/2009         5,025,000         4,260,000     1.180       20.3
Sun Bancorp, Inc.............     1/9/2009    5/27/2009         2,100,000         5,580,000     0.376       15.3
Independent Bank Corp........     1/9/2009    5/27/2009         2,200,000         3,870,000     0.568       15.6
Alliance Financial              12/19/2008    6/17/2009           900,000         1,580,000     0.570       13.8
 Corporation.................
First Niagara Financial Group   11/21/2008    6/24/2009         2,700,000         3,050,000     0.885        8.0
Berkshire Hills Bancorp, Inc.   12/19/2008    6/24/2009         1,040,000         1,620,000     0.642       11.3
Somerset Hills Bancorp.......    1/16/2009    6/24/2009           275,000           580,000     0.474       16.6
SCBT Financial Corporation...    1/16/2009    6/24/2009         1,400,000         2,290,000     0.611       11.7
HF Financial Corp............   11/21/2008    6/30/2009           650,000         1,240,000     0.524       10.1
State Street.................   10/28/2008     7/8/2009        60,000,000        54,200,000     1.107        9.9
U.S. Bancorp.................   11/14/2008    7/15/2009       139,000,000       135,100,000     1.029        8.7
The Goldman Sachs Group, Inc.   10/28/2008    7/22/2009     1,100,000,000     1,128,400,000     0.975       22.8
BB&T Corp....................   11/14/2008    7/22/2009        67,010,402        68,200,000     0.983        8.7
American Express Company.....     1/9/2009    7/29/2009       340,000,000       391,200,000     0.869       29.5
Bank of New York Mellon Corp.   10/28/2008     8/5/2009       136,000,000       155,700,000     0.873       12.3
Morgan Stanley...............   10/28/2008    8/12/2009       950,000,000     1,039,800,000     0.914       20.2
Northern Trust Corporation...   11/14/2008    8/26/2009        87,000,000        89,800,000     0.969       14.5
Old Line Bancshares Inc......    12/5/2008     9/2/2009           225,000           500,000     0.450       10.4
Bancorp Rhode Island, Inc....   12/19/2008    9/30/2009         1,400,000         1,400,000     1.000       12.6
Centerstate Banks of Florida    11/21/2008   10/28/2009           212,000           220,000     0.964        5.9
 Inc.........................
Manhattan Bancorp............    12/5/2008   10/14/2009            63,364           140,000    40.453        9.8
Bank of Ozarks...............   12/12/2008   11/24/2009         2,650,000         3,500,000     0.757        9.0
Capital One Financial........   11/14/2008    12/3/2009       148,731,030       232,000,000     0.641       12.0
JP Morgan Chase & Co.........   10/28/2008   12/10/2009       950,318,243     1,006,587,697     0.944       10.9
TCF Financial Corp...........    1/16/2009   12/16/2009         9,599,964        11,825,830     0.812       11.0
LSB Corporation..............   12/12/2008   12/16/2009           560,000           535,202     1.046        9.0
Wainwright Bank & Trust         12/19/2008   12/16/2009           568,700         1,071,494     0.531        7.8
 Company.....................
Wesbanco Bank, Inc...........    12/5/2008   12/23/2009           950,000         2,387,617     0.398        6.7
Union Bankshares Corporation.   12/19/2008   12/23/2009           450,000         1,130,418     0.398        5.8
Trustmark Corporation........   11/21/2008   12/30/2009        10,000,000        11,573,699     0.864        9.4
Flushing Financial              12/19/2008   12/30/2009           900,000         2,861,919     0.314        6.5
 Corporation.................
OceanFirst Financial             1/16/2009     2/3/2010           430,797           279,359     1.542        6.2
 Corporation.................
Monarch Financial Holdings,     12/19/2008    2/10/2010           260,000           623,434     0.417        6.7
 Inc.........................
Bank of America..............  \605\ 10/28/    3/3/2010     1,566,210,714     1,006,416,684     1.533        6.5
                                      2008
                                \606\ 1/9/
                                      2009
                               \607\ 1/14/
                                      2009
Washington Federal Inc./        11/14/2008     3/9/2010        15,623,222        10,166,404     1.537       18.6
 Washington Federal Savings &
 Loan Association............
Signature Bank...............   12/12/2008    3/10/2010        11,320,751        11,458,577     0.988       32.4
    Total....................  ...........  ...........    $5,618,174,187    $5,395,308,333     1.041       10.7
----------------------------------------------------------------------------------------------------------------
\605\ Investment date for Bank of America in CPP.
\606\ Investment date for Merrill Lynch in CPP.
\607\ Investment date for Bank of America in TIP.


                   FIGURE 64: WARRANT VALUATION OF REMAINING STRESS TEST INSTITUTION WARRANTS
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                 Warrant Valuation
                                                                 -----------------------------------------------
                                                                   Low  Estimate  High  Estimate   Best Estimate
----------------------------------------------------------------------------------------------------------------
Stress Test Financial Institutions with Warrants Outstanding:
    Wells Fargo & Company.......................................         $501.15       $2,084.43         $813.70
    Citigroup, Inc..............................................           39.44        1,049.16          271.52
    The PNC Financial Services Group Inc........................          143.19          613.12          234.15
    SunTrust Banks, Inc.........................................           25.51          366.75          142.05
    Regions Financial Corporation...............................           19.70          233.11          102.31
    Fifth Third Bancorp.........................................          122.37          385.90          179.47
    Hartford Financial Services Group, Inc......................          681.95          875.05          681.95
    KeyCorp.....................................................           23.24          166.23           80.12
All Other Banks.................................................        1,265.00        3,565.99        2,564.68
                                                                 -----------------------------------------------
    Total.......................................................       $2,821.55       $9,339.74       $5,069.95
----------------------------------------------------------------------------------------------------------------

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 independently of TARP.
    Figure 65 below reflects the changing mix of Federal 
Reserve investments. As the liquidity facilities established to 
address the crisis have been wound down, the Federal Reserve 
has expanded its facilities for purchasing mortgage related 
securities. The Federal Reserve announced that it intended to 
purchase $175 billion of federal agency debt securities and 
$1.25 trillion of agency mortgage-backed securities.\608\ As of 
March 31, 2010, $169 billion of federal agency (government-
sponsored enterprise) debt securities and $1.1 trillion of 
agency mortgage-backed securities were purchased. The Federal 
Reserve has announced that these purchases will be completed by 
April 2010.\609\ These purchases are in addition to the $181.6 
billion in GSE MBS that remain outstanding as of March 2010 
under the GSE Mortgage-Backed Securities Purchase Program.\610\
---------------------------------------------------------------------------
    \608\ Board of Governors of the Federal Reserve System, Minutes of 
the Federal Open Market Committee, at 10 (Dec. 15-16, 2009) (online at 
www.federalreserve.gov/newsevents/press/monetary/
fomcminutes20091216.pdf) (``[T]he Federal Reserve is in the process of 
purchasing $1.25 trillion of agency mortgage-backed securities and 
about $175 billion of agency debt'').
    \609\ Board of Governors of the Federal Reserve System, FOMC 
Statement (Dec. 16, 2009) (online at www.federalreserve.gov/newsevents/
press/monetary/20091216a.htm) (``In order to promote a smooth 
transition in markets, the Committee is gradually slowing the pace of 
these purchases, and it anticipates that these transactions will be 
executed by the end of the first quarter of 2010''); Board of Governors 
of the Federal Reserve System, Factors Affecting Reserve Balances (Feb. 
4, 2010) (online at www.federalreserve.gov/Releases/H41/Current).
    \610\ U.S. Department of the Treasury, MBS Purchase Program: 
Portfolio by Month (accessed Apr. 12, 2010) (online at 
www.financialstability.gov/docs/
Mar%202010%20Portfolio%20by%20month.pdf). Treasury received $39.1 
billion in principal repayments $9.6 billion in interest payments from 
these securities. U.S. Department of the Treasury, MBS Purchase Program 
Principal and Interest (accessed Apr. 12, 2010) (online at 
www.financialstability.gov/docs/
Mar%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf).

---------------------------------------------------------------------------

 FIGURE 65: FEDERAL RESERVE AND FDIC FINANCIAL STABILITY EFFORTS AS OF 
                        FEBRUARY 28, 2010 \611\

      
---------------------------------------------------------------------------
    \611\ Federal Reserve Liquidity Facilities include: Primary credit, 
Secondary credit, Central Bank liquidity swaps, Primary dealer and 
other broker-dealer credit, Asset-backed Commercial Paper Money Market 
Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial 
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Term 
Asset-backed Securities Loan Facility. Federal Reserve Mortgage-related 
Facilities include: Federal agency debt securities and mortgage-backed 
securities held by the Federal Reserve. Institution Specific Facilities 
include: Credit extended to American International Group, Inc., the 
preferred interests in AIA Aurora LLC and ALICO Holdings LLC, and the 
net portfolio holdings of Maiden Lanes I, II, and III. Board of 
Governors of the Federal Reserve System, Factors Affecting Reserve 
Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H41) (Mar. 31, 2010). For related presentations of 
Federal Reserve data, see Board of Governors of the Federal Reserve 
System, Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov. 
2009) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200911.pdf). The TLGP figure reflects the monthly 
amount of debt outstanding under the program. Federal Deposit Insurance 
Corporation, Monthly Reports on Debt Issuance Under the Temporary 
Liquidity Guarantee Program (Dec. 2008-Jan. 2010) (online at 
www.fdic.gov/regulations/resources/TLGP/reports.html). The total for 
the Term Asset-Backed Securities Loan Facility has been reduced by $20 
billion throughout this exhibit in order to reflect Treasury's $20 
billion first-loss position under the terms of this program. 
[GRAPHIC] [TIFF OMITTED] T5737A.046

3. Total Financial Stability Resources as of February 28, 2010

    Beginning in its April 2009 report, the Panel broadly 
classified the resources that the federal government has 
devoted to stabilizing the economy through myriad new programs 
and initiatives as outlays, loans, or guarantees. Although the 
Panel calculates the total value of these resources at nearly 
$3 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. As discussed in the Panel's 
November report, the FDIC assesses a premium of up to 100 basis 
points on TLGP debt guarantees.\612\ 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 loan currently ``underwater''--
where the outstanding principal amount exceeds the current 
market value of the collateral--is the loan to Maiden Lane LLC, 
which was formed to purchase certain Bear Stearns assets.
---------------------------------------------------------------------------
    \612\ Congressional Oversight Panel, Guarantees and Contingent 
Payments in TARP and Related Programs, at 36 (Nov. 11, 2009) (online at 
cop.senate.gov/documents/cop-110609-report.pdf).

                 FIGURE 66: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT AS OF MARCH 31, 2010 i
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                                     Treasury         Federal
                     Program                          (TARP)          Reserve          FDIC            Total
----------------------------------------------------------------------------------------------------------------
Total...........................................          $698.7        $1,626.1          $670.4        $2,995.2
    Outlays ii..................................           272.8         1,288.4            69.4         1,630.6
    Loans.......................................            42.5           337.7               0           380.1
    Guarantees iii..............................              20               0             601             621
    Uncommitted TARP Funds......................           363.4               0               0           363.4
AIG.............................................            69.8            92.3               0           162.1
    Outlays.....................................         iv 69.8          v 25.4               0            95.2
    Loans.......................................               0         vi 66.9               0            66.9
    Guarantees..................................               0               0               0               0
Citigroup.......................................              25               0               0              25
    Outlays.....................................           vii25               0               0              25
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Purchase (Other)........................            50.1               0               0            50.1
    Outlays.....................................       viii 50.1               0               0            50.1
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Assistance Program......................             N/A               0               0          ix N/A
TALF............................................              20             180               0             200
    Outlays.....................................               0               0               0               0
    Loans.......................................               0          xi 180               0             180
    Guarantees..................................            x 20               0               0              20
PIP (Loans) xii.................................               0               0               0               0
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
PIP (Securities)................................         xiii 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              50
    Outlays.....................................          xiv 50               0               0              50
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Automotive Industry Financing Program...........         xv 77.1               0               0            77.1
    Outlays.....................................            58.9               0               0            58.9
    Loans.......................................            18.2               0               0            18.2
    Guarantees..................................               0               0               0               0
Auto Supplier Support Program...................             3.5               0               0             3.5
    Outlays.....................................               0               0               0               0
    Loans.......................................         xvi 3.5               0               0             3.5
    Guarantees..................................               0               0               0               0
Unlocking SBA Lending...........................         xvii 15               0               0              15
    Outlays.....................................              15               0               0              15
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Community Development Capital Initiative........      xviii 0.78               0               0            0.78
    Outlays.....................................               0               0               0               0
    Loans.......................................            0.78               0               0            0.78
    Guarantees..................................               0               0               0               0
Temporary Liquidity Guarantee Program...........               0               0             601             601
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0         xix 601             601
Deposit Insurance Fund..........................               0               0            69.4            69.4
    Outlays.....................................               0               0         xx 69.4            69.4
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Other Federal Reserve Credit Expansion..........               0         1,353.8               0         1,353.8
    Outlays.....................................               0       xxi 1,263               0           1,263
    Loans.......................................               0       xxii 90.8               0            90.8
    Guarantees..................................               0               0               0               0
Uncommitted TARP Funds..........................           363.4               0               0           363.4
----------------------------------------------------------------------------------------------------------------
i All data in this exhibit is as of March 31, 2010 except for information regarding the FDIC's Temporary
  Liquidity Guarantee Program (TLGP). This data is as of February 28, 2010.
ii 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 used here represent investment and asset 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.
iii Although 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.
iv This number includes investments under the AIGIP/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). As of January 5, 2010, AIG had utilized $45.3 billion of
  the available $69.8 billion under the AIGIP/SSFI and owed $1.6 billion in unpaid dividends. This information
  was provided by Treasury in response to a Panel inquiry.
v As part of the restructuring of the U.S. Government's investment in AIG announced on March 2, 2009, the amount
  available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for preferred
  equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These SPVs were
  established to hold the common stock of two AIG subsidiaries: American International Assurance Company Ltd.
  (AIA) and American Life Insurance Company (ALICO). As of March 31, 2010, the book value of the Federal Reserve
  Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $16.26 billion and $9.15 billion in
  preferred equity respectively. Thereby the book value of these securities is $25.416 billion, which is
  reflected in the corresponding table. Federal Reserve Bank of New York, Factors Affecting Reserve Balances
  (H.4.1) (Apr. 1, 2010) (online at www.federalreserve.gov/releases/h41/).
vi This number represents the full $35 billion that is available to AIG through its revolving credit facility
  with the Federal Reserve ($26.2 billion had been drawn down as of February 25, 2010) and the outstanding
  principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of March 31, 2010,
  $14.9 billion and $16.9 billion respectively). 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 17
  (Oct. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). On December
  1, 2009, AIG entered into an agreement with FRBNY to reduce the debt AIG owes the FRBNY by $25 billion. In
  exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also reduced the debt
  ceiling on the loan facility from $60 billion to $35 billion. American International Group, AIG Closes Two
  Transactions That Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online
  at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
vii As of April 2, 2010, the U.S. Treasury held $25 billion of Citigroup common stock under the CPP. U.S.
  Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending April 2, 2010
  (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
  10%20Transactions%20Report%20as%20of%204-2-10.pdf).
viii This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion
  investment in Citigroup identified above, and the $135.8 billion in repayments that are reflected as available
  TARP funds. This figure does not account for future repayments of CPP investments, dividend payments from CPP
  investments, or losses under the program. U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for Period Ending April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/
  transaction-reports/4-6-10%20Transactions%20Report%20as%20of%204-2-10.pdf).
ix On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
  need of further capital from Treasury. GMAC, however, received further funding through the AIFP, therefore the
  Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding the
  Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
x This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. However, as of March 31,
  2010, TALF LLC had drawn only $103 million of the available $20 billion. Board of Governors of the Federal
  Reserve System, Factors Affecting Reserve Balances (H.4.1) (Mar. 31, 2010) (online at www.federalreserve.gov/
  Releases/H41/Current/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
  Period Ending April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
  10%20Transactions%20Report%20as%20of%204-2-10.pdf). As of January 28, 2010, investors had requested a total of
  $73.3 billion in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF
  loans had been settled ($12 billion in CMBS and $59 billion in non-CMBS). Federal Reserve Bank of New York,
  Term Asset-Backed Securities Loan Facility: CMBS (accessed Apr. 4, 2010) (online at www.newyorkfed.org/markets/
  CMBS_recent_operations.html); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
  non-CMBS (accessed Apr. 4, 2010) (online at www.newyorkfed.org/markets/talf--operations.html).
xi 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.
xii It is 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.
xiii As of February 25, 2010, Treasury reported commitments of $19.9 billion in loans and $9.9 billion in
  membership interest associated with the program. On January 4, 2010, the Treasury and one of the nine fund
  managers, TCW Senior Management Securities Fund, L.P., entered into a ``Winding-Up and Liquidation
  Agreement.'' U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
  Ending April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
  10%20Transactions%20Report%20as%20of%204-2-10.pdf).
xiv Of the $50 billion in announced TARP funding for this program, $39.9 billion has been allocated as of April
  2, 2010. However, as of February 2010, only $57.8 million in non-GSE payments have been disbursed under HAMP.
  Disbursement information provided in response to Panel inquiry; U.S. Department of the Treasury, Troubled
  Asset Relief Program Transactions Report for Period Ending April 2, 2010 (Apr. 6, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/4-6-10%20Transactions%20Report%20as%20of%204-2-10.pdf).
xv A substantial portion of the total $81 billion in loans extended under the AIFP have since been converted to
  common equity and preferred shares in restructured companies. $18.2 billion has been retained as first-lien
  debt (with $5.6 billion committed to GM, $12.5 billion to Chrysler). This figure ($77.1 billion) represents
  Treasury's current obligation under the AIFP after repayments.
xvi See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
  April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
  10%20Transactions%20Report%20as%20of%204-2-10.pdf).
xvii U.S. Department of the Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online
  at www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit
  Markets For Small Businesses By Purchasing Up to $15 Billion in Securities'').
xviii This information was provided by Treasury staff in response to Panel inquiry.
xix This figure represents the current maximum aggregate debt guarantees that could be made under the program,
  which is a function of the number and size of individual financial institutions participating. $305.4 billion
  of debt subject to the guarantee is currently outstanding, which represents approximately 51 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 (Dec. 31, 2009) (online at www.fdic.gov/
  regulations/resources/tlgp/total_issuance12-09.html) (Feb. 28, 2010). The FDIC has collected $10.4 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 (Nov.
  30, 2009) (online at www.fdic.gov/regulations/resources/tlgp/total_issuance02-10.html) (updated Feb. 4, 2010).

xx 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, second and third 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); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
  Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/
  income.html). This figure includes the FDIC's estimates of its future losses under loss-sharing agreements
  that it has entered into with banks acquiring assets of insolvent banks during these five 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 $132 billion in assets covered under loss-sharing agreements as of December 18, 2009.
  Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since
  there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather
  than as guarantees.
xxi Outlays are comprised of the Federal Reserve Mortgage Related Facilities and the preferred equity holdings
  in AIA Aurora LLC and ALICO Holdings LLC. The Federal Reserve balance sheet accounts for these facilities
  under Federal agency debt securities, mortgage-backed securities held by the Federal Reserve, and the
  preferred interests in AIA Aurora LLC and ALICO Holdings LLC. Board of Governors of the Federal Reserve
  System, Factors Affecting Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
  Choose.aspx?rel=H41) (accessed Apr. 4, 2010). Although the Federal Reserve does not employ the outlays, loans
  and guarantees classification, its accounting clearly separates its mortgage-related purchasing programs from
  its liquidity programs. See Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the
  Balance Sheet November 2009, at 2 (online at www.federalreserve.gov/monetarypolicy/files/
  monthlyclbsreport200911.pdf).
On September 7, 2008, the Treasury announced the GSE Mortgage-Backed Securities Purchase Program (Treasury MBS
  Purchase Program). The Housing and Economic Recovery Act of 2008 provided Treasury the authority to purchase
  Government Sponsored Enterprise (GSE) MBS. Under this program, Treasury purchased approximately $214.4 billion
  in GSE MBS before the program ended on December 31, 2009. As of March 2010, there was $181.6 billion still
  outstanding under this program. U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month
  (accessed Apr. 5, 2010) (online at www.financialstability.gov/docs/Mar%202010%20Portfolio%20by%20month.pdf).
  Treasury received $39.1 billion in principal repayments and $9.6 billion in interest payments from these
  securities. U.S. Department of the Treasury, MBS Purchase Program Principal and Interest (accessed Apr. 5,
  2010) (online at www.financialstability.gov/docs/
  Mar%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf).
xxii Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary
  credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
  Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility
  LLC, Seasonal credit, Term auction credit, Term Asset-Backed Securities Loan Facility, and loans outstanding
  to Bear Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors Affecting
  Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Apr. 4,
  2010); see id.

                   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 16 
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. The Panel's March 
oversight report evaluated Treasury's exceptional assistance 
provided to GMAC under the TARP as well as the approach taken 
by GMAC's new management to return the company to profitability 
and, ultimately, return the taxpayers' investment.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in May. 
The report will examine the ongoing contraction in lending, 
with a focus on small business lending, and discuss Treasury's 
current initiatives and proposals to improve market liquidity 
and access to credit for small businesses.
    The Panel is planning a hearing in Phoenix, Arizona on 
April 27, 2010, to discuss the topic of the May report. The 
Panel will hear from local small business owners, community 
bankers, and relevant government officials about the status of 
small business lending and their perspectives on the current 
proposals to improve access to credit.


          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating financial 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 Stability (OFS) within Treasury to 
implement the 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, Director of Policy and Special 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, 2009, Senator 
McConnell announced the appointment of Paul Atkins, former 
Commissioner of the U.S. Securities and Exchange Commission, to 
fill the vacant seat. Effective December 9, 2009, Congressman 
Jeb Hensarling resigned from the Panel and House Minority 
Leader John Boehner announced the appointment of J. Mark 
McWatters 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. Special thanks 
also go to Professor Eric Posner of the University of Chicago 
Law School and Professors John A.E. Pottow and Stephen P. 
Croley from the University of Michigan Law School.


 APPENDIX I: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIR ELIZABETH 
WARREN RE: FOLLOW UP QUESTIONS ON TARP-RECIPIENT BANKS, DATED APRIL 13, 
                                  2010

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