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

                         CONGRESSIONAL OVERSIGHT PANEL

                          NOVEMBER OVERSIGHT REPORT *

                                   ----------

      EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARITIES FOR FINANCIAL
                      STABILITY AND FORECLOSURE MITIGATION

                   November 16, 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

                          NOVEMBER OVERSIGHT REPORT *

                                   __________

      EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARITIES FOR FINANCIAL
                      STABILITY AND FORECLOSURE MITIGATION

                   November 16, 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

                                      ______

                          U.S. GOVERNMENT PRINTING OFFICE
      61-835 PDF               WASHINGTON : 2010
    ___________________________________________________________________________
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                         CONGRESSIONAL OVERSIGHT PANEL
                                 Panel Members
                           Sen. Ted Kaufman, Chairman
                               Richard H. Neiman
                                 Damon Silvers
                               J. Mark McWatters
                                 Kenneth Troske

                                C O N T E N T S

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                                                                       Page
    Executive Summary................................................     1
    Section One:
        A. Overview..................................................     4
        B. Background................................................     5
        C. Timeline..................................................     6
        D. Legal Consequences of Document Irregularities.............    10
            1. Potential Flaws in the Recording and Transfer of
              Mortgages and Violations of Pooling and Servicing
              Agreements.............................................    12
            2. Possible Legal Consequences of the Document
              Irregularities to Various Parties......................    19
            3. Additional Considerations.............................    27
        E. Court Cases and Litigation................................    28
            1. Fraud Claims..........................................    29
            2. Existing and Pending Claims under Various Fraud
              Theories...............................................    33
            3. Other Potential Claims................................    35
            4. Other State Legal Steps...............................    36
            5. Other Possible Implications: Potential ``Front-end''
              Fraud and Documentation Irregularities.................    38
        F. Assessing the Potential Impact on Bank Balance Sheets.....    42
            1. Introduction..........................................    42
            2. Foreclosure Irregularities: Estimating the Cost to
              Banks..................................................    48
            3. Securitization Issues and Mortgage Put-backs..........    52
        G. Effect of Irregularities and Foreclosure Freezes on
          Housing Market.............................................    59
            1. Foreclosure Freezes and their Effect on Housing.......    59
            2. Foreclosure Irregularities and the Crisis of
              Confidence.............................................    64
        H. Impact on HAMP............................................    65
        I. Conclusion................................................    68
    Section Two: Correspondence with Treasury........................    71
    Section Three: TARP Updates Since Last Report....................    72
    Section Four: Oversight Activities...............................    96
    Section Five: About the Congressional Oversight Panel............    97
    Appendices:
        APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN TO SPECIAL
          MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO EXECUTIVE
          COMPENSATION HEARING, DATED NOVEMBER 1, 2010...............    98
    ======================================================================

                           NOVEMBER OVERSIGHT REPORT

                                    _______

                   November 16, 2010.--Ordered to be printed

                                    _______

                              EXECUTIVE SUMMARY *

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        * The Panel adopted this report with a 5-0 vote on November 15,
    2010.
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        In the fall of 2010, reports began to surface alleging that
    companies servicing $6.4 trillion in American mortgages may
    have bypassed legally required steps to foreclose on a home.
    Employees or contractors of Bank of America, GMAC Mortgage, and
    other major loan servicers testified that they signed, and in
    some cases backdated, thousands of documents claiming personal
    knowledge of facts about mortgages that they did not actually
    know to be true.
        Allegations of ``robo-signing'' are deeply disturbing and
    have given rise to ongoing federal and state investigations. At
    this point the ultimate implications remain unclear. It is
    possible, however, that ``robo-signing'' may have concealed
    much deeper problems in the mortgage market that could
    potentially threaten financial stability and undermine the
    government's efforts to mitigate the foreclosure crisis.
    Although it is not yet possible to determine whether such
    threats will materialize, the Panel urges Treasury and bank
    regulators to take immediate steps to understand and prepare
    for the potential risks.
        In the best-case scenario, concerns about mortgage
    documentation irregularities may prove overblown. In this view,
    which has been embraced by the financial industry, a handful of
    employees failed to follow procedures in signing foreclosure-
    related affidavits, but the facts underlying the affidavits are
    demonstrably accurate. Foreclosures could proceed as soon as
    the invalid affidavits are replaced with properly executed
    paperwork.
        The worst-case scenario is considerably grimmer. In this
    view, which has been articulated by academics and homeowner
    advocates, the ``robo-signing'' of affidavits served to cover
    up the fact that loan servicers cannot demonstrate the facts
    required to conduct a lawful foreclosure. In essence, banks may
    be unable to prove that they own the mortgage loans they claim
    to own.
        The risk stems from the possibility that the rapid growth
    of mortgage securitization outpaced the ability of the legal
    and financial system to track mortgage loan ownership. In
    earlier years, under the traditional mortgage model, a
    homeowner borrowed money from a single bank and then paid back
    the same bank. In the rare instances when a bank transferred
    its rights, the sale was recorded by hand in the borrower's
    county property office. Thus, the ownership of any individual
    mortgage could be easily demonstrated.
        Nowadays, a single mortgage loan may be sold dozens of
    times between various banks across the country. In the view of
    some market participants, the sheer speed of the modern
    mortgage market has rendered obsolete the traditional ink-and-
    paper recordation process, so the financial industry developed
    an electronic transfer process that bypasses county property
    offices. This electronic process has, however, faced legal
    challenges that could, in an extreme scenario, call into
    question the validity of 33 million mortgage loans.
        Further, the financial industry now commonly bundles the
    rights to thousands of individual loans into a mortgage-backed
    security (MBS). The securitization process is complicated and
    requires several properly executed transfers. If at any point
    the required legal steps are not followed to the letter, then
    the ownership of the mortgage loan could fall into question.
    Homeowner advocates have alleged that frequent ``robo-signing''
    of ownership affidavits may have concealed extensive industry
    failures to document mortgage loan transfers properly.
        If documentation problems prove to be pervasive and, more
    importantly, throw into doubt the ownership of not only
    foreclosed properties but also pooled mortgages, the
    consequences could be severe. Clear and uncontested property
    rights are the foundation of the housing market. If these
    rights fall into question, that foundation could collapse.
    Borrowers may be unable to determine whether they are sending
    their monthly payments to the right people. Judges may block
    any effort to foreclose, even in cases where borrowers have
    failed to make regular payments. Multiple banks may attempt to
    foreclose upon the same property. Borrowers who have already
    suffered foreclosure may seek to regain title to their homes
    and force any new owners to move out. Would-be buyers and
    sellers could find themselves in limbo, unable to know with any
    certainty whether they can safely buy or sell a home. If such
    problems were to arise on a large scale, the housing market
    could experience even greater disruptions than have already
    occurred, resulting in significant harm to major financial
    institutions. For example, if a Wall Street bank were to
    discover that, due to shoddily executed paperwork, it still
    owns millions of defaulted mortgages that it thought it sold
    off years ago, it could face billions of dollars in unexpected
    losses.
        Documentation irregularities could also have major effects
    on Treasury's main foreclosure prevention effort, the Home
    Affordable Modification Program (HAMP). Some servicers dealing
    with Treasury may have no legal right to initiate foreclosures,
    which may call into question their ability to grant
    modifications or to demand payments from homeowners. The
    servicers' use of ``robo-signing'' may also have affected
    determinations about individual loans; servicers may have been
    more willing to foreclose if they were not bearing the full
    costs of a properly executed foreclosure. Treasury has so far
    not provided reports of any investigation as to whether
    documentation problems could undermine HAMP. It should engage
    in active efforts to monitor the impact of foreclosure
    irregularities, and it should report its findings to Congress
    and the public.
        In addition to documentation concerns, another problem has
    arisen with securitized mortgage loans that could also threaten
    financial stability. Investors in mortgage-backed securities
    typically demanded certain assurances about the quality of the
    loans they purchased: for instance, that the borrowers had
    certain minimum credit ratings and income, or that their homes
    had appraised for at least a minimum value. Allegations have
    surfaced that banks may have misrepresented the quality of many
    loans sold for securitization. Banks found to have provided
    misrepresentations could be required to repurchase any affected
    mortgages. Because millions of these mortgages are in default
    or foreclosure, the result could be extensive capital losses if
    such repurchase risk is not adequately reserved.
        To put in perspective the potential problem, one investor
    action alone could seek to force Bank of America to repurchase
    and absorb partial losses on up to $47 billion in troubled
    loans due to alleged misrepresentations of loan quality. Bank
    of America currently has $230 billion in shareholders' equity,
    so if several similar-sized actions--whether motivated by
    concerns about underwriting or loan ownership--were to succeed,
    the company could suffer disabling damage to its regulatory
    capital. It is possible that widespread challenges along these
    lines could pose risks to the very financial stability that the
    Troubled Asset Relief Program was designed to protect. Treasury
    has claimed that based on evidence to date, mortgage-related
    problems currently pose no danger to the financial system, but
    in light of the extensive uncertainties in the market today,
    Treasury's assertions appear premature. Treasury should explain
    why it sees no danger. Bank regulators should also conduct new
    stress tests on Wall Street banks to measure their ability to
    deal with a potential crisis.
        The Panel emphasizes that mortgage lenders and
    securitization servicers should not undertake to foreclose on
    any homeowner unless they are able to do so in full compliance
    with applicable laws and their contractual agreements with the
    homeowner.
        The American financial system is in a precarious place.
    Treasury's authority to support the financial system through
    the Troubled Asset Relief Program has expired, and the
    resolution authority created by the Dodd-Frank Wall Street
    Reform and Consumer Protection Act of 2010 remains untested.
    The 2009 stress tests that evaluated the health of the
    financial system looked only to the end of 2010, providing
    little assurance that banks could withstand sharp losses in the
    years to come. The housing market and the broader economy
    remain troubled and thus vulnerable to future shocks. In short,
    even as the government's response to the financial crisis is
    drawing to a close, severe threats remain that have the
    potential to damage financial stability.
                                  SECTION ONE:

                                  A. Overview

        In the fall of 2010, with the Troubled Asset Relief
    Program's (TARP) authority expiring, reports began to surface
    of problems with foreclosure documentation, particularly in
    states where foreclosures happen through the courts. GMAC
    Mortgage, a subsidiary of current TARP recipient Ally
    Financial, announced on September 24, 2010 that it had
    identified irregularities in its foreclosure document
    procedures that raised questions about the validity of
    foreclosures on mortgages that it serviced. Similar revelations
    soon followed from Bank of America, a former TARP recipient,
    and others. Employees of these companies or their contractors
    have testified that they signed, and in some cases backdated,
    thousands of documents attesting to personal knowledge of facts
    about the mortgage and the property that they did not actually
    know to be true. Mortgage servicers also appeared to be cutting
    corners in other ways. According to these banks, their
    employees were having trouble keeping up with the crush of
    foreclosures, but additional training and employees would
    generally suffice to get the process in order again.
        At present, the reach of these irregularities is unknown.
    The irregularities may be limited to paperwork errors among
    certain servicers in certain states; alternatively, they may
    call into question aspects of the securitization process that
    pooled and sold interests in innumerable mortgages during the
    housing boom. Depending on their extent, the irregularities may
    affect both Treasury's ongoing foreclosure programs and the
    financial stability that Treasury, under the Emergency Economic
    Stabilization Act of 2008 (EESA), was tasked with restoring.
    Further, the mortgage market faces ongoing risks related to the
    right of mortgage-backed securities to force banks to
    repurchase any loans. Losses stemming from these repurchases
    would compound any risks associated with documentation
    irregularities.
        Under EESA, the Congressional Oversight Panel is charged
    with reviewing the current state of the financial markets and
    the regulatory system. The Panel's oversight interest in
    foreclosure documentation irregularities stems from several
    distinct concerns:

    If Severe Disruptions in the Housing Market Materialize,
    Financial Stability and Taxpayer Funds Could Be Imperiled. If
    document irregularities prove to be pervasive and, more
    importantly, throw into question ownership of not only
    foreclosed properties but also pooled mortgages, the result
    could be significant harm to financial stability--the very
    stability that the TARP was designed to protect. In the worst
    case scenario, a clear chain of title--an essential element of
    a functioning housing market--may be difficult to establish for
    properties subject to mortgage loans that were pooled and
    securitized. Rating agencies are already cautious in their
    outlook for the banking sector, and further blows could have a
    significant effect. The implications could also be dire for
    taxpayers' recovery of their TARP investments. Treasury still
    has $66.8 billion invested in the banking sector generally, and
    as the Panel discussed in its July report, ``Small Banks in the
    Capital Purchase Program,'' the prospects for repayment from
    smaller banks are still uncertain and dependent, in great part,
    on a sector healthy enough to attract private investment.\1\
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        \1\ Taxpayers may also be at risk for losses related to Treasury's
    investment in AIG. The Maiden Lane II and Maiden Lane III vehicles,
    which the Federal Reserve Bank of New York (FRBNY) created to hold
    assets purchased from AIG, hold substantial amounts of residential
    mortgage-backed securities (RMBSs), most of which are either sub-prime
    or Alt-A mortgages originated during the housing boom. Treasury's
    ability to recover the funds it has put into AIG depends in significant
    part on FRBNY's ability to collect on these investments, and
    uncertainty associated with the investments could hinder that process.
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    HAMP May Rely on Uncertain Legal Authority and Inaccurate
    Foreclosure Cost Estimates, Potentially Posing a Risk to
    Foreclosure Mitigation Efforts. If irregularities in the
    foreclosure process reflect deeper failures to document
    properly changes of ownership as mortgage loans were
    securitized, then it is possible that Treasury is dealing with
    the wrong parties in the course of the Home Affordable
    Modification Program (HAMP). This could mean that borrowers
    either received or were denied modifications improperly. Some
    servicers dealing with Treasury may have no legal right to
    initiate foreclosures, which may call into question their
    ability to grant modifications or to demand payments from
    homeowners, whether they are part of a foreclosure mitigation
    program or otherwise. The servicers' tendency to cut corners
    may also have affected the determination to modify or foreclose
    upon individual loans. Because the net present value (NPV)
    model compares the net present value of the modification to a
    foreclosure, improper procedures that cut corners might have
    affected the foreclosure cost calculation and thus might have
    affected the outcome of the NPV test.
    TARP-Recipient Banks May Have Failed to Meet Legal Obligations.
    Many of the entities implicated in the recent document
    irregularities, including Ally Financial, Bank of America, and
    JPMorgan Chase, are current or former TARP recipients. Ally
    Financial, notably, remains in TARP and is in possession of
    $17.2 billion in taxpayer funds. Bank of America received funds
    not only from TARP's Capital Purchase Program (CPP) but also
    what Treasury deemed ``exceptional assistance'' from TARP's
    Targeted Investment Program (TIP). Some of the banks involved
    were also subject to the Supervisory Capital Assessment Program
    (SCAP), also known as the stress tests: Treasury's and the
    Board of Governors of the Federal Reserve's (Federal Reserve)
    efforts to determine the health of the largest banks under a
    variety of stressed scenarios.

        The Congressional Oversight Panel will continue to monitor
    Treasury's engagement with these ongoing events, not only to
    protect the taxpayers' existing TARP investments and to oversee
    its foreclosure mitigation programs, but also to meet the
    Panel's statutory mandate to ``review the current state of the
    financial markets and the regulatory system.''

                                 B. Background

        In the fall of 2010, a series of revelations about
    foreclosure documentation irregularities hit the housing
    markets. The transfer of a property's title from the mortgagor
    (the homeowner) to the mortgagee (typically a bank or a trust)
    necessary for a successful foreclosure requires a series of
    steps established by state law.\2\ As further described below,
    depositions taken in a variety of cases in which homeowners
    were fighting foreclosure actions indicated that mortgage
    servicer employees--who were required to have personal
    knowledge of the matters to which they were attesting in their
    affidavits--were signing hundreds of these documents a day.
    Other documents appeared to have been backdated improperly and
    ineffectively or incorrectly notarized. While these
    documentation irregularities may sound minor, they have the
    potential to throw the foreclosure system--and possibly the
    mortgage loan system and housing market itself--into turmoil.
    At a minimum, in certain cases, signers of affidavits appear to
    have signed documents attesting to information that they did
    not verify and without a notary present. If this is the extent
    of the irregularities, then the issue may be limited to these
    signers and the foreclosure proceedings they were involved in,
    and in many cases, the irregularities may potentially be
    remedied by reviewing the documents more thoroughly and then
    resubmitting them. If, however, the problem is related not
    simply to a limited number of foreclosure documents but also to
    irregularities in the mortgage origination and pooling process,
    then the impact of the irregularities could be far broader,
    affecting a vast number of investors in the mortgage-backed
    securities (MBS) market, already completed foreclosures, and
    current homeowners. This latter scenario could result in
    extensive litigation, an extended freeze in the foreclosure
    market, and significant stress on bank balance sheets arising
    from the substantial repurchase liability that can arise from
    mistakes or misrepresentations in mortgage documents.\3\
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        \2\ These steps depend on whether a state is a judicial foreclosure
    state or a non-judicial foreclosure state, as further described below,
    in footnote 17.
        \3\ If mortgage documentation has errors or misrepresentations,
    buyers of the mortgage paper can ``put-back'' the mortgage to its
    originator and require them to repurchase the mortgage. For a more
    complete discussion of this possibility, see Sections D.1.b and D.2.
        Several analysts and experts have speculated on the potential for
    widespread impact. Morgan Stanley, Housing Market Insights: Washington,
    We Have a Problem (Oct. 12, 2010); Amherst Mortgage Insight, The
    Affidavit Fiasco--Implications for Investors in Private Label
    Securities (Oct. 12, 2010); FBR Capital Markets, Conference Call:
    Foreclosure Mania: Big Deal or Not? (Oct. 15, 2010) (hereinafter ``FBR
    Foreclosure Mania Conference Call''). In a conference call with
    investors, Jamie Dimon, CEO of JPMorgan Chase, speculated that the
    issue could either be a ``blip'' or a more extended problem with ``a
    lot of consequences, most of which will be adverse on everybody.''
    Cardiff Garcia, JPM on Foreclosures, MERS, Financial Times Alphaville
    Blog (Oct. 13, 2010) (online at ftalphaville.ft.com/blog/2010/10/13/
    369406/jpm-on-foreclosures-mers/) (hereinafter ``JPM on Foreclosures,
    MERS'') (``If you talk about three or four weeks it will be a blip in
    the housing market. If it went on for a long period of time, it will
    have a lot of consequences, most of which will be adverse on
    everybody.'').
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                                  C. Timeline

        After the housing market started to collapse in 2006, the
    effects rippled through the financial sector and led to
    disruptions in the credit markets in 2008 and 2009. In an
    economy that had been hit hard by the financial crisis and soon
    settled into a deep recession, the housing market declined,
    dragging down housing prices and increasing the likelihood of
    default. This put pressure on a variety of parties involved in
    the mortgage market. During the boom, there were many players
    involved in the process of lending, securitizing, and servicing
    mortgages, and many of these players took on multiple roles.\4\
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        \4\ For example, it was not uncommon for a commercial bank to
    perform both lending and servicing functions, and to have established
    separate lending and servicing arms of its organization. As discussed
    later in this report, the securitization process begins with a lender/
    originator, often but not always a commercial bank. Next, the mortgage
    is securitized by an investment bank. Finally, the mortgage is
    serviced, often also by a commercial bank or its subsidiary. Even where
    the same banks are listed as doing both lending and servicing, they did
    not necessarily service only the mortgages they originated. Source:
    Inside Mortgage Finance.
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        The initial role of servicers was largely
    administrative.\5\ They were hired by the MBS investors to
    handle all back-office functions for existing loans, and
    generally acted as intermediaries between borrowers and MBS
    investors.\6\ However, when the housing bubble burst, and the
    number of delinquencies began to rise, the role of servicers
    evolved correspondingly.\7\ Servicer focus shifted from
    performing purely administrative tasks to engaging in active
    loss mitigation efforts.\8\ Servicers found themselves
    responsible for processing all defaults, modifications, short
    sales, and foreclosures.\9\ The servicers themselves have
    admitted that they were simply not prepared for the volume of
    work that the crisis generated.\10\ Thus, many servicers began
    subcontracting out much of their duties to so-called
    ``foreclosure mills,'' contractors that had significant
    incentives to move foreclosures along quickly.
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        \5\ See Office of the Special Inspector General for the Troubled
    Asset Relief Program, Quarterly Report to Congress, at 157 (Oct. 26,
    2010) (online at www.sigtarp.gov/reports/congress/2010/
    October2010_Quarterly_Report_to_Congress.pdf) (hereinafter ``October
    2010 SIGTARP Report'').
        \6\ Servicer duties included fielding borrower inquiries,
    collecting mortgage payments from the borrowers, and remitting mortgage
    payments to the trust. See Id. at 157, 164. See also Congressional
    Oversight Panel, March Oversight Report: Foreclosure Crisis: Working
    Toward a Solution, at 40-42 (Mar. 6, 2009) (online at cop.senate.gov/
    documents/cop-030609-report.pdf) (hereinafter ``March 2009 Oversight
    Report'').
        \7\ See March 2009 Oversight Report, supra note 6, at 40.
        \8\ See March 2009 Oversight Report, supra note 6, at 40-42. See
    also October 2010 SIGTARP Report, supra note 5, at 158.
        \9\ See October 2010 SIGTARP Report, supra note 5, at 157-158. In
    the spring of 2009, when Treasury announced its Making Home Affordable
    program, the centerpiece of which was HAMP, servicers took on the
    additional responsibility of processing all HAMP modifications.
        \10\ See March 2009 Oversight Report, supra note 6, at 39.
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        Thus, as the boom in the housing market mutated into a boom
    in foreclosures,\11\ banks rushed to move delinquent borrowers
    out of their homes as quickly as possible, leading, apparently,
    to procedures of which the best that can be said is that they
    were sloppy and cursory. Concerns with foreclosure
    irregularities first arose when depositions of so-called
    ``robo-signers'' came to light.\12\ In a June 7, 2010,
    deposition, Jeffrey Stephan, who worked for GMAC Mortgage \13\
    as a ``limited signing officer,'' testified that he signed 400
    documents each day. In at least some cases, he signed
    affidavits without reading them and without a notary
    present.\14\ He also testified that in doing so, he acted
    consistently with GMAC Mortgage's policies.\15\ Similarly,
    faced with revelations that robo-signers had signed tens of
    thousands of foreclosure documents without actually verifying
    the information in them, Bank of America announced on October
    8, 2010, that it would freeze foreclosure sales in all 50
    states until it could investigate and address the
    irregularities.\16\ GMAC Mortgage took similar action,
    announcing that while it would not suspend foreclosures, it had
    ``temporarily suspended evictions and post-foreclosure
    closings'' in 23 states.\17\ In a statement, it referred to the
    issue as a ``procedural error . . . in certain affidavits'' and
    stated that ``we are confident that the processing errors did
    not result in any inappropriate foreclosures.'' GMAC also
    announced that the company had taken three remedial steps to
    address the problem: additional education and training for
    employees, the release of a ``more robust policy'' to govern
    the process, and the hiring of additional staff to assist with
    foreclosure processing.\18\
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        \11\ Mortgages that are more than 90 days past due are concentrated
    in certain regions and states of the country, including California,
    Nevada, Arizona, Florida, and Georgia. See Federal Reserve Bank of New
    York, Q3 Credit Conditions (Nov. 8, 2010) (online at
    www.newyorkfed.org/creditconditions/). Similarly, foreclosures are
    concentrated in certain states, including the so-called ``sand
    states'': Arizona, California, Nevada, and Florida. U.S. Department of
    Housing and Urban Development, Report to Congress on the Root Causes of
    the Foreclosure Crisis, at vi (Jan. 2010) (online at www.huduser.org/
    Publications/PDF/Foreclosure_09.pdf). The Panel's field hearings in
    Clark County, Nevada, Prince George's County, Maryland, and
    Philadelphia, Pennsylvania, also touched on the subject of high
    concentrations of foreclosures in those regions. See Congressional
    Oversight Panel, Clark County, NV: Ground Zero of the Housing and
    Financial Crises (Dec. 16, 2008) (online at cop.senate.gov/hearings/
    library/hearing-121608-firsthearing.cfm); Congressional Oversight
    Panel, COP Hearing: Coping with the Foreclosure Crisis in Prince
    George's County, Maryland (Feb. 27, 2009) (online at cop.senate.gov/
    hearings/library/hearing-022709-housing.cfm); Congressional Oversight
    Panel, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24,
    2009) (online at cop.senate.gov/hearings/library/hearing-092409-
    philadelphia.cfm).
        \12\ The details of ``robo-signers'' actions surfaced on the
    Internet in September 2010, including video and transcriptions of
    depositions filed by robo-signers. See, e.g., The Florida Foreclosure
    Fraud Weblog, Jeffrey Stephan Affidavits `Withdrawn' by Florida Default
    Law Group (Sept. 15, 2010) (online at floridaforeclosurefraud.com/2010/
    09/jeffrey-stephan-affidavits-withdrawn-by-florida-default-law-group/).
    Some of this information was made public in court documents. For
    instance, in an order issued by a state court in Maine on September 24,
    2010, the judge noted that it was undisputed that Jeffrey Stephan had
    signed an affidavit without reading it and that he had not been in the
    presence of a notary when he signed it. Order on Four Pending Motions
    at 3, Federal National Mortgage Assoc. v. Nicolle Bradbury, No. BRI-RE-
    09-65 (Me. Bridgton D. Ct. Sept. 24, 2010) (online at
    www.molleurlaw.com/themed/molleurlaw/files/uploads/
    9_24_10%20Four%20Motions%20Order.pdf) (hereinafter ``Federal National
    Mortgage Assoc. v. Nicolle Bradbury'').
        \13\ GMAC Mortgage is a subsidiary of Ally Financial. The Panel
    examined Ally Financial, then named GMAC, in detail in its March 2010
    report. See Congressional Oversight Panel, March Oversight Report: The
    Unique Treatment of GMAC Under TARP (Mar. 11, 2010) (online at
    cop.senate.gov/documents/cop-031110-report.pdf).
        \14\ Federal National Mortgage Assoc. v. Nicolle Bradbury, supra
    note 12. There are two primary concerns with affidavits. First: are the
    affidavits accurate? For example, even if the homeowner is indebted,
    the amount of the indebtedness is a part of the attestation. The amount
    of the indebtedness must be accurate because there might be a
    subsequent deficiency judgment against the homeowner, which would
    require the homeowner to cover the remaining amount owed to the lender.
    And even if there was no deficiency judgment, an inflated claim would
    increase the recovery of the mortgage servicer from the foreclosure
    sale proceeds to the detriment of other parties in the process. Second,
    even if the information in the affidavit is correct, it must be sworn
    out by someone with personal knowledge of the indebtedness; otherwise
    it is hearsay and generally not admissible as evidence. See, e.g.,
    Transcript of Court Proceedings, GMAC Mortgage, LLC v. Debbie Viscaro,
    et al., No. 07013084CI (Fla. Cir. Ct. Apr. 7, 2010) (online at
    floridaforeclosurefraud.com/wp-content/uploads/2010/04/040710.pdf)
    (discussing whether affected affidavits were admissible). See generally
    Congressional Oversight Panel, Written Testimony of Katherine Porter,
    professor of law, University of Iowa College of Law, COP Hearing on
    TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (online at
    cop.senate.gov/documents/testimony-102710-porter.pdf) (hereinafter
    ``Written Testimony of Katherine Porter'').
        \15\ Federal National Mortgage Assoc. v. Nicolle Bradbury, supra
    note 12. In addition, a Florida court admonished GMAC for similar
    problems in 2006. Plaintiff's Notice of Compliance with this Court's
    Order Dated May 1, 2006, TCIF RE02 v. Leibowitz, No.
    162004CA004835XXXXMA (June 14, 2006) (detailing GMAC's policies on
    affidavits filed in foreclosure cases). These actions, if true, would
    be inconsistent with the usual documentation requirements necessary for
    proper processing of a foreclosure, giving rise to concerns that the
    foreclosure was not legally sufficient. See generally Written Testimony
    of Katherine Porter, supra note 14.
        \16\ Bank of America Corporation, Statement from Bank of America
    Home Loans (Oct. 8, 2010) (online at mediaroom.bankofamerica.com/
    phoenix.zhtml?c=234503&p=irol-newsArticle&ID=1480657&highlight=)
    (hereinafter ``Statement from Bank of America Home Loans''). At the
    same time, Bank of America agreed to indemnify Fidelity National
    Financial, a title insurer, for losses directly incurred by ``failure
    to comply with state law or local practice on both transactions in
    which foreclosure has already occurred or been initiated and those to
    be initiated in the future.'' See Fidelity National Financial, Fidelity
    National Financial, Inc., Reports EPS of $0.36 (Oct. 20, 2010) (online
    at files.shareholder.com/downloads/FNT/1051799117x0x411089/209d61a9-
    8a05-454c-90d1-4a78e0a7c4ae/FNF_News_2010_10_20_Earnings.pdf). As
    further described below in Section D.2, title insurance is a critical
    piece of the mortgage market. Generally, title insurance insures
    against the possibility that title is encumbered or unclear, and
    thereby provides crucial certainty in transactions involving real
    estate. The insurance is retrospective--covering the history of the
    property until, but not after the sale, and is issued after a review of
    the land title records. For a buyer, title insurance therefore insures
    against the possibility that a defect in the title that is not apparent
    from the public records will affect their ownership. Industry sources
    conversations with Panel staff (Nov. 9, 2010). A title insurer's
    refusal to issue insurance can significantly hamper the orderly
    transfer of real estate and interests collateralized by real estate.
    Bank of America's indemnity agreement with Fidelity National Financial
    shifts the risk of covered losses arising from the foreclosure
    irregularities from Fidelity National to Bank of America.
        \17\ Twenty-two states require judicial oversight of foreclosure
    proceedings. In these judicial foreclosure states the mortgagee must
    establish its claim--show that a borrower is in default--before a
    judge. In non-judicial states a foreclosure can proceed upon adequate
    and timely notice to the borrower, as defined by statute. In non-
    judicial states, a power of sale clause included in a deed of trust
    allows a trustee to conduct a non-judicial foreclosure. Non-judicial
    foreclosures can proceed more quickly since they do not require
    adjudication. Mortgage Bankers Association, Judicial Versus Non-
    Judicial Foreclosure (Oct. 26, 2010) (online at www.mbaa.org/files/
    ResourceCenter/ForeclosureProcess/JudicialVersusNon-
    JudicialForeclosure.pdf). Typically, states that rely on mortgages are
    judicial foreclosure states, while states that rely on deeds of trust
    are non-judicial foreclosure states. Standard & Poor's, Structured
    Finance Research Week: How Will the Foreclosure Crisis Affect U.S. Home
    Prices? (Oct. 21, 2010) (hereinafter ``S&P on Foreclosure Crisis'').
        \18\ Ally Financial, Inc., GMAC Mortgage Provides Update on
    Mortgage Servicing Process (Sept. 24, 2010) (online at media.ally.com/
    index.php?s=43&item=417).
    ---------------------------------------------------------------------------
        These voluntary, privately determined suspensions were
    brief.\19\ On October 12, 2010, GMAC Mortgage released a
    statement indicating that in cases in which it had initiated a
    review process for its foreclosure procedures, it would resume
    foreclosure proceedings once any problems had been identified
    and, where necessary, addressed. It also noted that it ``found
    no evidence to date of any inappropriate foreclosures.'' \20\
    On October 18, Bank of America announced that it had completed
    its review of irregularities in the 23 states that require
    judicial review of foreclosure proceedings and that it would
    begin processing foreclosure affidavits for 102,000 foreclosure
    proceedings in those states. It stated that it would review
    proceedings in the remaining 27 states on a case-by-case basis
    and that foreclosure sales in those states would be delayed
    until those reviews are complete. It further stated that in all
    states, it appeared that the ``basis of our foreclosure
    decisions is accurate.'' \21\ Various commentators, however,
    have questioned Bank of America's ability to make such
    determinations in such a short timeframe.\22\ Then, on October
    27, another large bank entered the fray when Wells Fargo
    announced that it had uncovered irregularities in its
    foreclosure processes and stated that it would submit
    supplemental affidavits in 55,000 foreclosure actions.\23\
    ---------------------------------------------------------------------------
        \19\ To date, GMAC Mortgage and Bank of America have only resumed
    foreclosures in judicial foreclosure states and are still reviewing
    their procedures in non-judicial foreclosure states.
        \20\ Ally Financial, Inc., GMAC Mortgage Statement on Independent
    Review and Foreclosure Sales (Oct. 12, 2010) (online at media.ally.com/
    index.php?s=43&item=421) (hereinafter ``GMAC Mortgage Statement on
    Independent Review and Foreclosure Sales'').
        \21\ Bank of America Corporation, Statement from Bank of America
    Home Loans (Oct. 18, 2010) (online at mediaroom.bankofamerica.com/
    phoenix.zhtml?c=234503&p=irol-newsArticle&ID=1483909&highlight=)
    (hereinafter ``Statement from Bank of America Home Loans'').
        \22\ See Written Testimony of Katherine Porter, supra note 14, at
    10 (``In the wake of these parties' longstanding allegations and
    findings of inappropriate and illegal practices, I am unable to give
    weight to recent statements by banks such as Bank of America that only
    10 to 25 of the first several hundred loans that it has reviewed have
    problems.'').
        \23\ Wells Fargo & Company, Wells Fargo Provides Update on
    Foreclosure Affidavits and Mortgage Securitizations (Oct. 27, 2010)
    (online at www.wellsfargo.com/press/2010/20101027_Mortgage)
    (hereinafter ``Wells Fargo Update on Affidavits and Mortgage
    Securitizations'').
    ---------------------------------------------------------------------------
        Meanwhile, as the revelations of irregularities quickly
    multiplied, some argued that over and above the banks' and
    servicers' voluntary actions, the federal government should
    impose a nationwide moratorium on foreclosures.\24\ Housing and
    Urban Development Secretary Shaun Donovan rejected the idea,
    arguing that ``a national, blanket moratorium on all
    foreclosure sales would do far more harm than good.'' \25\ At
    the same time, on October 13, attorneys general from all 50
    states \26\ announced a bipartisan effort to look into the
    possibility that documents or affidavits were improperly
    submitted in their jurisdictions.
    ---------------------------------------------------------------------------
        \24\ See, e.g., Office of Senator Harry Reid, Reid Welcomes Bank of
    America Decision, Calls On Others To Follow Suit (Oct. 8, 2010) (online
    at reid.senate.gov/newsroom/pr_101008_bankofamerica.cfm) (hereinafter
    ``Reid Welcomes Bank of America Decision''); Dean Baker, Foreclosure
    Moratorium: Cracking Down on Liar Liens, Center for Economic and Policy
    Research (Oct. 18, 2010) (online at www.cepr.net/index.php/op-eds-&-
    columns/op-eds-&-columns/foreclosure-moratorium-cracking-down-on-liar-
    liens) (hereinafter ``Foreclosure Moratorium: Cracking Down on Liar
    Liens'').
        \25\ Shaun Donovan, secretary, U.S. Department of Housing and Urban
    Development, How We Can Really Help Families (Oct. 18, 2010) (online at
    portal.hud.gov/portal/page/portal/HUD/press/blog/2010/blog2010-10-18).
        \26\ National Association of Attorneys General, 50 States Sign
    Mortgage Foreclosure Joint Statement (Oct. 13, 2010) (online at
    www.naag.org/joint-statement-of-the-mortgage-foreclosure-multistate-
    group.php) (hereinafter ``50 States Sign Mortgage Foreclosure Joint
    Statement'').
    ---------------------------------------------------------------------------
        Although the public focus today lies generally on
    foreclosures, the possibility of document irregularities in
    mortgage transactions has expanded beyond their significance to
    foreclosure proceedings. Recently, investors have begun to
    claim that similar irregularities in origination and pooling of
    loans should trigger actions against entities in the mortgage
    origination, securitization, and servicing industries.\27\
    ---------------------------------------------------------------------------
        \27\ Cases involved suits against Bank of America (as the parent of
    loan originator Countrywide) claiming violations of representations and
    warranties and sought to enforce put-back provisions. Greenwich
    Financial Services Distressed Fund 3 L.L.C. vs. Countrywide Financial
    Corp, et al., 1:08-cv-11343-RJH (S.D.N.Y. Oct. 15, 2010); Footbridge
    Limited Trust and OHP Opportunity Trust vs. Bank of America, CV00367
    (S.D.N.Y. Oct 1, 2010).
    ---------------------------------------------------------------------------

                D. Legal Consequences of Document Irregularities

        The possible legal consequences of the documentation
    irregularities described above range from minor, curable title
    defects for certain foreclosed homes in certain states to more
    serious consequences such as the unenforceability of
    foreclosure claims and other ownership rights that rely on the
    ability to establish clear title to real property, forced put-
    backs of defective mortgages to originators, and market
    upheaval. The severity and likelihood of these various possible
    consequences depend on whether the irregularities are pervasive
    and when in the process they occurred.
        Effective transfers of real estate depend on parties' being
    able to answer seemingly straightforward questions: who owns
    the property? how did they come to own it? can anyone make a
    competing claim to it? The irregularities have the potential to
    make these seemingly simple questions complex. As a threshold
    matter, a party seeking to enforce the rights associated with
    the mortgage must have standing in court, meaning that a party
    must have an interest in the property sufficient that a court
    will hear their claim and can provide them with relief.\28\ For
    a mortgage, ``[a] mortgage may be enforced only by, or in
    behalf of, a person who is entitled to enforce the obligation
    the mortgage secures.'' \29\ Thus, the only party that may
    enforce the rights associated with the mortgage, with standing
    to take action on a mortgage in a court, must be legally able
    to act on the mortgage.\30\ Accordingly, standing is critical
    for a successful foreclosure, because if the party bringing the
    foreclosure does not have standing to enforce the rights
    attached to the mortgage and the note, that party may not be
    able to take the property with clear title that can be passed
    on to another buyer.\31\ Thus, if prior transfers of the
    mortgage were unsuccessful or improper, subsequent transfers of
    the property, such as a foreclosure or even an ordinary sale,
    could be affected. Further, failure to foreclose properly--
    whether because the foreclosing party did not actually hold the
    mortgage and the note, or because robo-signing affected the
    homeowner's due process rights--means that the prior homeowner
    may be able to assert claims against a subsequent owner of the
    property.\32\ In this way, documentation irregularities can
    affect title to a property at a number of stages, as further
    described below.
    ---------------------------------------------------------------------------
        \28\ See Stephen R. Buchenroth and Gretchen D. Jeffries, Recent
    Foreclosure Cases: Lenders Beware (June 2007) (online at
    www.abanet.org/rppt/publications/ereport/2007/6/
    OhioForeclosureCases.pdf); Wells Fargo v. Jordan, 914 N.E.2d 204 (Ohio
    2009) (``If plaintiff has offered no evidence that it owned the note
    and mortgage when the complaint was filed, it would not be entitled to
    judgment as a matter of law.''); Christopher Lewis Peterson,
    Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic
    Registration System, University of Cincinnati Law Review, Vol. 78, No.
    4, at 1368-1371 (Summer 2010) (online at papers.ssrn.com/sol3/
    papers.cfm?abstract_id=1469749) (hereinafter ``Cincinnati Law Review
    Paper on Foreclosure''); MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81
    (N.Y. 2006). Accordingly, a second set of problems relates to the chain
    of title on mortgages and the ability of the foreclosing party to prove
    that it has legal standing to foreclose. While these problems are not
    limited to the securitization market, they are especially acute for
    securitized loans because there are more complex chain of title issues
    involved.
        \29\ Restatement (Third) of Prop. (Mortgages) Sec. 5.4(c) (1997).
    Only the proven mortgagee may maintain a foreclosure action. The
    requirement that a foreclosure action be brought only by the actual
    mortgagee is at the heart of the issues with foreclosure
    irregularities. If the homeowner or the court challenges the claim of
    the party bringing a foreclosure action that it is the mortgagee (and
    was when the foreclosure was filed), then evidentiary issues arise as
    to whether the party bringing the foreclosure can in fact prove that it
    is the mortgagee. The issues involved are highly complex areas of law,
    but despite the complexity of these issues, they should not be
    dismissed as mere technicalities. Rather, they are legal requirements
    that must be observed both as part of due process and as part of the
    contractual bargain made between borrowers and lenders.
        \30\ That party must either own the mortgage and the note or be
    legally empowered to act on the owner's behalf. Servicers acting on
    behalf of a trust or an originator do not own the mortgage, but by
    contract are granted the ability to act on behalf of the trust or the
    originator. See Federal Trade Commission, Facts for Consumers (online
    at www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm) (accessed Nov.
    12, 2010) (``In today's market, loans and the rights to service them
    often are bought and sold. In many cases, the company that you send
    your payment to is not the company that owns your loan.''). See also
    October 2010 SIGTARP Report, supra note 5, at 160 (describing clients
    of servicers).
        \31\ Laws governing the remedies available to a lender foreclosing
    on a property vary considerably. States also differ markedly in how
    long it takes the lender to foreclose depending on the available
    procedures. In general, claimants can seek to recover loan amounts by
    foreclosing on the property securing the debt. If the loan is ``non-
    recourse,'' the lender only may foreclose upon the property, but if the
    loan is ``recourse,'' the lender may foreclose upon the property and
    other borrower assets. Most states are recourse states. A loan in a
    recourse state allows a mortgagee to foreclose upon property securing a
    promissory note and, if that property is insufficient to discharge the
    debt, move against the borrower's other assets. In non-recourse states,
    recovery of the loan amount is limited to the loan collateral. Put
    another way, the lender cannot go after the borrower's other assets in
    a non-recourse state if the property is insufficient to discharge the
    debt. It is worth noting that even in recourse states, given the
    current economic climate, the mortgagees' recourse to the borrower's
    personal assets may be somewhat illusory since they may be minimal
    relative to the costs and delay in pursuing and collecting on a
    deficiency judgments. See Andra C. Ghent and Marianna Kudlyak, Recourse
    and Residential Mortgage Default: Theory and Evidence from U.S. States,
    Federal Reserve Bank of Richmond Working Paper, No. 09-10, at 1-2 (July
    7, 2009) (online at www.fhfa.gov/webfiles/15051/website_ghent.pdf).
        \32\ Christopher Lewis Peterson, associate dean for academic
    affairs and professor of law, S.J. Quinney College of Law, University
    of Utah, conversations with Panel staff (Nov. 8, 2010).
    ---------------------------------------------------------------------------

    1. Potential Flaws in the Recording and Transfer of Mortgages and
            Violations of Pooling and Servicing Agreements

                a. Mortgage Recordation, Perfecting Title, and Transferring
                        Title
                i. Title
        The U.S. real property market depends on a seller's ability
    to convey ``clear title'': an assurance that the purchaser owns
    the property free of encumbrances or competing claims.\33\ Laws
    governing the transfer of real property in the United States
    were designed to create a public, transparent recordation
    system that supplies reliable information on ownership
    interests in property. Each of the 50 states has laws governing
    title to land within its legal boundaries. Every county in the
    country maintains records of who owns land there, of transfers
    of ownership, and of related mortgages or deeds of trust. While
    each state's laws have unique features, their basic
    requirements are the same, consistent with the notion that the
    purpose of the recording system is to establish certainty
    regarding property ownership. In order to protect ownership
    interests, fully executed, original (commonly referred to as
    ``wet ink'') documents must be recorded in a grantor/grantee
    index at a county recording office.\34\ In the case of a
    purchaser or transferee, a properly recorded deed describing
    both the property and the parties to the transfer establishes
    property ownership.
    ---------------------------------------------------------------------------
        \33\ Black's Law Dictionary, at 1522 (2004).
        \34\ See Cincinnati Law Review Paper on Foreclosure, supra note 28.
    ---------------------------------------------------------------------------
                ii. Transfer
        In a purchase of a home using a mortgage loan, required
    documents include (a) a promissory note establishing the
    mortgagor's personal liability, (b) a mortgage evidencing the
    security interest in the underlying collateral, and (c) if the
    mortgage is transferred, proper assignments of the mortgage and
    the note.\35\ There are a number of ways for a mortgage
    originator to proceed upon entering into a loan secured by real
    property. They may keep the loan on their own books; these are
    so-called ``whole loans.'' However, if the loan is sold in a
    secondary market--either as a whole loan or in a securitization
    process--the loan must be properly transferred to the
    purchaser. To be transferred properly, both the loan and
    accompanying documentation must be transferred to the
    purchaser, and the transfer must be recorded.
    ---------------------------------------------------------------------------
        \35\ There are two documents that need to be transferred as part of
    the securitization process--a promissory note and the security
    instrument (the mortgage or deed of trust). The promissory note
    embodies the debt obligation, while the security instrument provides
    that if the debt is not repaid, the creditor may sell the designated
    collateral (the house). Both the note and the mortgage need to be
    properly transferred. Without the note, a mortgage is unenforceable,
    while without the mortgage, a note is simply an unsecured debt
    obligation, no different from credit card debt. See FBR Foreclosure
    Mania Conference Call, supra note 3. The rules for these transfers are
    generally governed by the Uniform Commercial Code (UCC), although one
    author states that the application of the UCC to the transfer of the
    note is not certain. See Dale A. Whitman, How Negotiability Has Fouled
    Up the Secondary Mortgage Market, and What to Do About It, Pepperdine
    Law Review, Vol. 37, at 758-759 (2010).
        States adopt articles of and revisions to the UCC individually, and
    so there can be variation among states in the application of the UCC.
    This report does not attempt to identify all of the possible
    iterations. Rather, it describes general and common applications of the
    UCC to such transactions.
        There are two methods by which a promissory note may be
    transferred. First, it may be transferred by ``negotiation,'' the
    signing over of individual promissory notes through indorsement, in the
    same way that a check can be transferred via indorsement. See UCC
    Sec. Sec. 3-201, 3-203. The pooling and servicing agreements (PSAs) for
    securitized loans generally contemplate transfer through negotiation.
    Typical language in PSAs requires the delivery to the securitization
    trust of the notes and the mortgages, indorsed in blank. Alternatively,
    a promissory note may be transferred by a sale contract, also governed
    by whether a state has adopted particular revisions to the UCC. In many
    states, in order for a transfer to take place under the relevant
    portion of the UCC, there are only three requirements: the buyer of the
    promissory note must give value, there must be an authenticated
    document of sale that describes the promissory note, and the seller
    must have rights in the promissory note being sold. UCC Sec. 9-203(a)-
    (b).
        The first two requirements should be easily met in most
    securitizations; the transfer of the mortgage loans at each stage of
    the securitization involves the buyer giving the seller value and a
    document of sale (a mortgage purchase and sale agreement or a PSA) that
    should include a schedule identifying the promissory notes involved.
    The third requirement, however, that the seller must have rights in the
    promissory note being sold, is more complicated, as it requires an
    unbroken chain of title back to the loan's originator. While the loan
    sale documents plus their schedules are evidence of such a chain of
    title, they cannot establish that the loan was not previously sold to
    another party.
        Further, this discussion only addresses the validity of transfers
    between sellers and buyers of mortgage loans. It does not address the
    enforceability of those loans against homeowners, which requires
    physical possession of the original note. Thus, for both securitized
    and non-securitized loans, it is necessary for a party to show that it
    is entitled to enforce the promissory note (and therefore generally
    that it is a holder of the physical original note) in order to complete
    a foreclosure successfully.
        Perhaps more critically, parties are free to contract around the
    UCC. UCC Sec. 1-302. This raises the question of whether PSAs for MBS
    provide for a variance from the UCC by agreement of the parties. The
    PSA is the document that provides for the transfer of the mortgage and
    notes from the securitization sponsor to the depositor and thence to
    the trust. The PSA is also the document that creates the trust. The
    transfer from the originator to the sponsor is typically governed by a
    separate document, although sections of it may be incorporated by
    reference in the PSA.
        If a PSA is considered a variation by agreement from the UCC, then
    there is a question of what the PSA itself requires to transfer the
    mortgage loans and whether those requirements have been met. In some
    cases, PSAs appear to require a complete chain of indorsements on the
    notes from originator up to the depositor, with a final indorsement in
    blank to the trust. A complete chain of indorsements, rather than a
    single indorsement in blank with the notes transferred thereafter as
    bearer paper, is important for establishing the ``bankruptcy
    remoteness'' of the trust assets. A critical part of securitization is
    to establish that the trust's assets are bankruptcy remote, meaning
    that they could not be claimed by the bankruptcy estate of an upstream
    transferor of the assets. Without a complete chain of indorsements, it
    is difficult, if not impossible, to establish that the loans were in
    fact transferred from originator to sponsor to depositor to trust,
    rather than directly from originator or sponsor to the trust. If the
    transfer were directly from the originator or sponsor to the trust, the
    loans could possibly be claimed as part of the originator's or
    sponsor's bankruptcy estate. The questions about what the transfers
    required, therefore, involve both the question as to whether the
    required transfers actually happened, as well as whether, if they
    happened, they were legally sufficient.
    ---------------------------------------------------------------------------
                iii. Mortgage Securitization Process

    FIGURE 1: TRANSFER OF RELEVANT PAPERWORK IN SECURITIZATION PROCESS \36\

    ---------------------------------------------------------------------------
        \36\ FBR Foreclosure Mania Conference Call, supra note 3.

        Securitizations of mortgages require multiple transfers,
    and, accordingly, multiple assignments. Mortgages that were
    securitized were originated through banks and mortgage
    brokers--mortgage originators. Next they were securitized by
    investment banks--the sponsors--through the use of special
    purpose vehicles, trusts that qualify for Real Estate Mortgage
    Investment Conduit (REMIC) status. These trusts are bankruptcy-
    remote, tax-exempt vehicles that pooled the mortgages
    transferred to them and sold interests in the income from those
    mortgages to investors in the form of shares. The pools were
    collateralized by the underlying real property, because a
    mortgage represents a first-lien security interest on an asset
    in the pool--a house.\37\ A governing document for
    securitizations called a pooling and servicing agreement (PSA)
    includes various representations and warranties for the
    underlying mortgages. It also describes the responsibilities of
    the trustee, who is responsible for holding the recorded
    mortgage documents, and of the servicer, who plays an
    administrative role, collecting and disbursing mortgage and
    related payments on behalf of the investors in the MBS.
    ---------------------------------------------------------------------------
        \37\ For an overview of REMICs, see Federal National Mortgage
    Association, Basics of REMICs (June 16, 2009) (online at
    www.fanniemae.com/mbs/mbsbasics/remic/index.jhtml). See also Internal
    Revenue Service, Final Regulations Relating to Real Estate Mortgage
    Investment Conduits, 26 CFR Sec. 1 (Aug. 17, 1995) (online at
    www.irs.gov/pub/irs-regs/td8614.txt). Only the MBS investors are taxed
    on their income from the trusts' payments on the MBS. REMICs are
    supposed to be passive entities. Accordingly, with few exceptions, a
    REMIC may not receive new assets after 90 days have passed since its
    creation, or there will be adverse tax consequences. Thus, if a
    transfer of a loan was not done correctly in the first place, proper
    transfer now could endanger the REMIC status. For an overview of
    residential mortgage-backed securities in general, see American
    Securitization Forum, ASF Securitization Institute: Residential
    Mortgage-Backed Securities (2006) (online at
    www.americansecuritization.com/uploadedFiles/RMBS%20Outline.pdf).
    ---------------------------------------------------------------------------
        As described above, in order to convey good title into the
    trust and provide the trust with both good title to the
    collateral and the income from the mortgages, each transfer in
    this process required particular steps.\38\ Most PSAs are
    governed by New York law and create trusts governed by New York
    law.\39\ New York trust law requires strict compliance with the
    trust documents; any transaction by the trust that is in
    contravention of the trust documents is void, meaning that the
    transfer cannot actually take place as a matter of law.\40\
    Therefore, if the transfer for the notes and mortgages did not
    comply with the PSA, the transfer would be void, and the assets
    would not have been transferred to the trust. Moreover, in many
    cases the assets could not now be transferred to the trust.\41\
    PSAs generally require that the loans transferred to the trust
    not be in default, which would prevent the transfer of any non-
    performing loans to the trust now.\42\ Furthermore, PSAs
    frequently have timeliness requirements regarding the transfer
    in order to ensure that the trusts qualify for favored tax
    treatment.\43\
    ---------------------------------------------------------------------------
        \38\ See Section D.1.a.ii, supra.
        \39\ FBR Foreclosure Mania Conference Call, supra note 3.
        \40\ N.Y. Est. Powers & Trusts Law Sec. 7-2.4; FBR Foreclosure
    Mania Conference Call, supra note 3.
        \41\ FBR Foreclosure Mania Conference Call, supra note 3.
        \42\ Amended Complaint at Exhibit 5, page 13, Deutsche Bank
    National Trust Company v. Federal Deposit Insurance Corporation, No.
    09-CV-1656 (D.D.C. Sept. 8, 2010) (hereinafter ``Deutsche Bank v.
    Federal Deposit Insurance Corporation'').
        \43\ See FBR Foreclosure Mania Conference Call, supra note 3.
    ---------------------------------------------------------------------------
        Various commentators have begun to ask whether the poor
    recordkeeping and error-filled work exhibited in foreclosure
    proceedings, described above, is likely to have marked earlier
    stages of the process as well. If so, the effect could be that
    rights were not properly transferred during the securitization
    process such that title to the mortgage and the note might rest
    with another party in the process other than the trust.\44\
    ---------------------------------------------------------------------------
        \44\ See, e.g., FBR Foreclosure Mania Conference Call, supra note
    3.
    ---------------------------------------------------------------------------
                iv. MERS
        In addition to the concerns with the securitization process
    described above, a method adopted by the mortgage
    securitization industry to track transfers of mortgage
    servicing rights has come under question. A mortgage does not
    need to be recorded to be enforceable as between the mortgagor
    and the mortgagee or subsequent transferee, but unless a
    mortgage is recorded, it does not provide the mortgagee or its
    subsequent transferee with priority over subsequent mortgagees
    or lien holders.\45\
    ---------------------------------------------------------------------------
        \45\ Restatement (Third) of Prop. (Mortgages) Sec. 5.4 cmt. B
    (1997).
    ---------------------------------------------------------------------------
        During the housing boom, multiple rapid transfers of
    mortgages to facilitate securitization made recordation of
    mortgages a more time-consuming, and expensive process than in
    the past.\46\ To alleviate the burden of recording every
    mortgage assignment, the mortgage securitization industry
    created the Mortgage Electronic Registration Systems, Inc.
    (MERS), a company that serves as the mortgagee of record in the
    county land records and runs a database that tracks ownership
    and servicing rights of mortgage loans.\47\ MERS created a
    proxy or online registry that would serve as the mortgagee of
    record, eliminating the need to prepare and record subsequent
    transfers of servicing interests when they were transferred
    from one MERS member to another.\48\ In essence, it attempted
    to create a paperless mortgage recording process overlying the
    traditional, paper-intense mortgage tracking system, in which
    MERS would have standing to initiate foreclosures.\49\
    ---------------------------------------------------------------------------
        \46\ Christopher Lewis Peterson, associate dean for academic
    affairs and professor of law, S.J. Quinney College of Law, University
    of Utah, conversations with Panel staff (Nov. 8, 2010).
        \47\ MERS conversations with Panel staff (Nov. 10, 2010). See
    Christopher Lewis Peterson, Two Faces: Demystifying the Mortgage
    Electronic Registration System's Land Title Theory, Real Property,
    Probate, and Trust Law Journal (forthcoming) (online at
    papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729).
        \48\ MERS conversations with Panel staff (Nov. 10, 2010); John R.
    Hodge and Laurie Williams, Mortgage Electronic Registration Systems,
    Inc.: A Survey of Cases Discussing MERS' Authority to Act, Norton
    Bankruptcy Law Adviser, at 2 (Aug 2010) (hereinafter ``A Survey of
    Cases Discussing MERS' Authority to Act'').
        \49\ Members pay an annual membership fee and $6.95 for every loan
    registered, versus approximately $30 in fees for filing a mortgage
    assignment at a local county land office. MERSCORP, Inc., Membership
    Kit (Oct. 2009) (online at www.mersinc.org/membership/ WinZip/
    MERSeRegistryMembershipKit.pdf); Cincinnati Law Review Paper on
    Foreclosure, supra note 28, at 1368-1371. See also MERSCORP, Inc. v.
    Romaine, 861 N.E. 2d 81 (N.Y. 2006).
    ---------------------------------------------------------------------------
        MERS experienced rapid growth during the housing boom.
    Since its inception in 1995, 66 million mortgages have been
    registered in the MERS system and 33 million MERS-registered
    loans remain outstanding.\50\ During the summer of 2010, one
    expert estimated that MERS was involved in 60 percent of
    mortgage loans originated in the United States.\51\
    ---------------------------------------------------------------------------
        \50\ MERS conversations with Panel staff (Nov. 10, 2010).
        \51\ Cincinnati Law Review Paper on Foreclosure, supra note 28, at
    1362.
    ---------------------------------------------------------------------------
        Widespread questions about the efficacy of the MERS model
    did not arise during the boom, when home prices were escalating
    and the incidence of foreclosures was minimal.\52\ But as
    foreclosures began to increase, and documentation
    irregularities surfaced in some cases and raised questions
    about a wide range of legal issues, including the legality of
    foreclosure proceedings in general,\53\ some litigants raised
    questions about the validity of MERS.\54\ There is limited case
    law to provide direction, but some state courts have rendered
    verdicts on the issue. In Florida, for example, appellate
    courts have determined that MERS had standing to bring a
    foreclosure proceeding.\55\ On the other hand, in Vermont, a
    court determined that MERS did not have standing.\56\
    ---------------------------------------------------------------------------
        \52\ See A Survey of Cases Discussing MERS' Authority to Act, supra
    note 48, at 3.
        \53\ For instance, in a question-and-answer session during a recent
    earnings call with investors, Jamie Dimon, CEO and chairman of JPMorgan
    Chase, said that the firm had stopped using MERS ``a while back.''
    JPMorgan Chase & Co., Q3 2010 Earnings Call Transcript (Oct. 13, 2010)
    (online at www.morningstar.com/earn-0/ earnings_18244835-jp-morgan-
    chase-co-q3-2010.aspx.shtml) (hereinafter ``Q3 2010 Earnings Call
    Transcript''). See also JPM on Foreclosures, MERS, supra note 3. This,
    however, related only to the use of MERS to foreclose. MERS
    conversations with Panel staff (Nov. 10, 2010).
        \54\ See generally Cincinnati Law Review Paper on Foreclosure,
    supra note 28. Cases addressed questions as to standing and as to
    whether, by separating the mortgage and the note, the mortgage had been
    rendered invalid (thus invalidating the security interest in the
    property). See A Survey of Cases Discussing MERS' Authority to Act,
    supra note 48, at 20-21 (``These interpretive problems and
    inconsistencies have provoked some courts to determine the worst
    possible fate for secured loan buyers--that their mortgages were not
    effectively transferred or even that the mortgages have been separated
    from the note and are no longer enforceable. . . . Whether the MERS
    construct holds water is being robustly tested in a variety of
    contexts. Given the pervasiveness of MERS, if the construct is not
    viable, if MERS cannot file foreclosures, and, perhaps most
    importantly, cannot even record or execute an assignment of a mortgage,
    what then?'').
        \55\ See, e.g., Mortg. Elec. Registry Sys. v. Azize, 965 So. 2d 151
    (Fla. Dist. Ct. App. 2007). See also A Survey of Cases Discussing MERS'
    Authority to Act, supra note 48, at 9.
        \56\ Mortg. Elec. Registry Sys. v. Johnston, No. 420-6-09 Rdcv
    (Rutland Superior Ct., Vt., Oct. 28, 2009) (determining that MERS did
    not have standing to initiate the foreclosure because the note and
    mortgage had been separated).
    ---------------------------------------------------------------------------
        In the absence of more guidance from state courts, it is
    difficult to ascertain the impact of the use of MERS on the
    foreclosure process. The uncertainty is compounded by the fact
    that the issue is rooted in state law and lies in the hands of
    50 states' judges and legislatures. If states adopt the Florida
    model, then the issue is likely to have a limited effect.
    However, if more states adopt the Vermont model, then the issue
    may complicate the ability of various players in the
    securitization process to enforce foreclosure liens.\57\ If
    sufficiently widespread, these complications could have a
    substantial effect on the mortgage market, inasmuch as it would
    destabilize or delegitimize a system that has been embedded in
    the mortgage market and used by multiple participants, both
    government and private. Although it is impossible to say at
    present what the ultimate result of litigation on MERS will be,
    holdings adverse to MERS could have significant consequences to
    the market.
    ---------------------------------------------------------------------------
        \57\ MERS was used by the most active participants in the
    securitization market including the largest banks (for example, Bank of
    America, JPMorgan Chase, Wells Fargo, Citigroup, and Fannie Mae and
    Freddie Mac), and processed 60 percent of all MBS. See MERSCORP, Inc.,
    SunTrust Becomes Third Major Mortgage Provider in Recent Months to
    Require MERS System (Mar. 18, 2010) (online at www.mersinc.org/
    newsroom/press_details.aspx?id=235). According to MERS, it has acted as
    the party foreclosing for one in five of the delinquent mortgages on
    its system. MERS conversations with Panel staff (Nov. 10, 2010).
    ---------------------------------------------------------------------------
        If courts do adopt the Vermont view, it is possible that
    the impact may be mitigated if market participants devise a
    viable workaround. For example, according to a report released
    by Standard & Poor's, ``most'' market participants believe that
    it may be possible to solve any MERS-related problems by taking
    the mortgage out of MERS and putting it in the mortgage owner's
    name prior to initiating a foreclosure proceeding.\58\
    According to one expert, the odds that the status of MERS will
    be settled quickly are low.\59\
    ---------------------------------------------------------------------------
        \58\ See S&P on Foreclosure Crisis, supra note 17.
        \59\ Christopher Lewis Peterson, associate dean for academic
    affairs and professor of law at the S.J. Quinney College of Law at the
    University of Utah, conversations with Panel staff (Nov. 8, 2010).
    ---------------------------------------------------------------------------
                b. Violations of Representations and Warranties in the PSA
                        \60\
    ---------------------------------------------------------------------------
        \60\ This section attempts to provide a general description of put-
    backs. Put-backs have been an issue throughout the financial crisis,
    typically in the context of questions about underwriting standards.
    See, e.g., Federal National Mortgage Association, Form 10-K for the
    Fiscal Year Ended December 31, 2009, at 9 (Feb. 26, 2010) (online at
    www.sec.gov/Archives/edgar/data/310522/000095012310018235/
    w77413e10vk.htm) (``As delinquencies have increased, we have
    accordingly increased our reviews of delinquent loans to uncover loans
    that do not meet our underwriting and eligibility requirements. As a
    result, we have increased the number of demands we make for lenders to
    repurchase these loans or compensate us for losses sustained on the
    loans, as well as requests for repurchase or compensation for loans for
    which the mortgage insurer rescinds coverage.''). Documentation
    irregularities may provide an additional basis for put-backs, although
    the viability of these put-back claims will depend on a variety of
    deal-specific issues, such as the particular representations and
    warranties that were incorporated into the PSA, which in turn often are
    related to whether the MBSs are agency or private-label securities.
    Although private-label MBS PSAs typically included weaker
    representations regarding the quality of the loans and underwriting,
    they still contain representations regarding proper transfer of the
    documents to the trust.
    ---------------------------------------------------------------------------
        Residential mortgage-backed securities' PSAs typically
    contain or incorporate a variety of representations and
    warranties. These representations and warranties cover such
    topics as the organization of the sponsor and depositor, the
    quality and status of the mortgage loans, and the validity of
    their transfers.
        More particularly, PSAs, whose terms are unique to each
    MBS, include representations and warranties by the originator
    or seller relating to the conveyance of good title,\61\
    documentation for the loan,\62\ underwriting standards,\63\
    compliance with applicable law,\64\ and delivery of mortgage
    files,\65\ among other things.\66\ In addition, the mortgage
    files must contain specific loan and mortgage documents and
    notification of material breaches of any representations and
    warranties.
    ---------------------------------------------------------------------------
        \61\ Failure to transfer the loans properly would create two
    sources of liability: one would be in rendering the owner of the
    mortgage and the note uncertain, and the other would be a breach of
    contract claim under the PSA. For an example of typical language in
    representations and warranties contained in PSAs or incorporated by
    reference from mortgage loan purchase agreements executed by the
    mortgage originator, see Deutsche Bank v. Federal Deposit Insurance
    Corporation, supra note 42 (``. . . and that immediately prior to the
    transfer and assignment of the Mortgage Loans to the Trustee, the
    Depositor was the sole owner and had good title to each Mortgage Loan,
    and had full right to transfer and sell each Mortgage Loan to the
    Trustee free and clear.'').
        \62\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
    supra note 42 (``Each Mortgage Note, each Mortgage, each Assignment and
    any other document required to be delivered by or on behalf of the
    Seller under this Agreement or the Pooling and Servicing Agreement to
    the Purchaser or any assignee, transferee or designee of the Purchaser
    for each Mortgage Loan has been or will be . . . delivered to the
    Purchaser or any such assignee, transferee or designee. With respect to
    each Mortgage Loan, the Seller is in possession of a complete Mortgage
    File in compliance with the Pooling and Servicing Agreement . . . The
    Mortgage Note and the related Mortgage are genuine, and each is the
    legal, valid and binding obligation of the Mortgagor enforceable
    against the Mortgagor by the mortgagee or its representative in
    accordance with its terms, except only as such enforcement may be
    limited by bankruptcy, insolvency . . . .''). These representations and
    warranties generally state that the documents submitted for loan
    underwriting were not falsified and contain no untrue statement of
    material fact or omit to state a material fact required to be stated
    therein and are not misleading and that no error, omission,
    misrepresentation, negligence, or fraud occurred in the loan's
    origination or insurance.
        \63\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
    supra note 42 (``Each Mortgage Loan was underwritten in accordance with
    the Seller's underwriting guidelines as described in the Prospectus
    Supplement as applicable to its credit grade in all material
    respects.''). Many concerns over underwriting standards have surfaced
    in the wake of the housing boom, such as lack of adequate
    documentation, lack of income verification, misrepresentation of income
    and job status, and haphazard appraisals. Even before the more recent
    emergence of the issue of document irregularities, institutions were
    pursuing put-back actions to address concerns over underwriting
    quality. See Federal National Mortgage Association, Form 10-Q for the
    Quarterly Period Ended June 30, 2010, at 95 (Aug. 5, 2010) (online at
    www.sec.gov/Archives/edgar/data/310522/000095012310073427/
    w79360e10vq.htm) (``Our mortgage seller/servicers are obligated to
    repurchase loans or foreclosed properties, or reimburse us for losses
    if the foreclosed property has been sold, if it is determined that the
    mortgage loan did not meet our underwriting or eligibility requirements
    or if mortgage insurers rescind coverage.'').
        \64\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
    supra note 42 (``Each Mortgage Loan at origination complied in all
    material respects with applicable local, state and federal laws,
    including, without limitation, predatory and abusive lending, usury,
    equal credit opportunity, real estate settlement procedures, truth-in-
    lending and disclosure laws, and consummation of the transactions
    contemplated hereby, including without limitation the receipt of
    interest does not involve the violation of any such laws.'').
        \65\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
    supra note 42.
        \66\ For examples of representations and warranties, see New
    Century Home Equity Loan Trust, Form 8-K for the Period Ending February
    16, 2005, at Ex. 99.2 (Mar. 11, 2005) (online at www.secinfo.com/
    dqTm6.zEy.a.htm#hm88).
    ---------------------------------------------------------------------------
        If any of the representations or warranties are breached,
    and the breach materially and adversely affects the value of a
    loan, which can be as simple as reducing its market value, the
    offending loan is to be ``put-back'' to the sponsor, meaning
    that the sponsor is required to repurchase the loan for the
    outstanding principal balance plus any accrued interest.\67\
    ---------------------------------------------------------------------------
        \67\ See, e.g., Citigroup, Inc., Form 10-K for the Fiscal Year
    Ended December 31, 2009, at 131 (Feb. 26, 2010) (online at www.sec.gov/
    Archives/edgar/data/831001/000120677410000406/citi_10k.htm)
    (hereinafter ``Citigroup Form 10-K''). However, since every deal is
    different, there are a number of different methods for extinguishing a
    repurchase claim that may not necessarily require the actual
    repurchasing of the loan. Industry experts conversations with Panel
    staff (Nov. 9, 2010).
    ---------------------------------------------------------------------------
        If successfully exercised, these put-back clauses have
    enormous value for investors, because they permit the holder of
    a security with (at present) little value to attempt to recoup
    some of the lost value from the originator (or, if the
    originator is out of business, the sponsor or a successor).
    Put-backs shift credit risk from MBS investors to MBS sponsors
    (typically, as noted above, investment banks): the sponsor now
    has the defective loan on its balance sheet, and the trust has
    cash for the full unpaid principal balance of the loan plus
    accrued interest on its balance sheet.\68\ This means that the
    sponsor may have to increase its risk-based capital and will
    bear the risk of future losses on the loan, while the trust
    receives 100 cents on the dollar for the loan.\69\ Not
    surprisingly, put-back actions are very fact-specific and can
    be hotly contested.\70\
    ---------------------------------------------------------------------------
        \68\ See Citigroup Form 10-K, supra note 67, at 131.
        \69\ Wells Fargo & Company, Together We'll Go Far: Wells Fargo &
    Company Annual Report 2008, at 127 (2009) (online at
    www.wellsfargo.com/downloads/pdf/invest_relations/
    wf2008annualreport.pdf) (``In certain loan sales or securitizations, we
    provide recourse to the buyer whereby we are required to repurchase
    loans at par value plus accrued interest on the occurrence of certain
    credit-related events within a certain period of time.'').
        \70\ Compass Point Research & Trading, LLC, Mortgage Repurchases
    Part II: Private Label RMBS Investors Take Aim--Quantifying the Risks
    (Aug. 17, 2010) (online at api.ning.com/files/
    fiCVZyzNTkoAzUdzhSWYNuHv33*Ur5ZYBh3S08zo*phy T79SFi0TOpPG7klHe3h8
    RXKKyphNZqqyt ZrXQKbMxv4R3F6fN5dI/ 36431113MortgageFinance
    RepurchasesPrivateLabel08172010.pdf).
    ---------------------------------------------------------------------------
        Servicers do not often pursue representation and warranties
    violations. A 2010 study by Amherst Mortgage Securities showed
    that while private mortgage insurers were rescinding coverage
    on a substantial percentage of the loans they insured because
    of violations of very similar representation and warranties,
    there was very little put-back activity by servicers, even
    though one would expect relatively similar rates.\71\ One
    explanation for the apparent lack of servicer put-back activity
    may be the possibility of servicer conflicts of interest.
    Servicers are often affiliated with securitization sponsors and
    therefore have disincentives to pursue representation and
    warranty violations. Trustees have disincentives to remove
    servicers because they act as backup servicers and bear the
    costs of servicing if the servicer is terminated from the deal.
    Finally, investors are poorly situated to monitor servicers.
    Whereas a securitization trustee could gain access to
    individual loan files--but typically do not \72\--investors
    cannot review loan files without substantial collective
    costs.\73\ On the other hand, investor lawsuits have the
    potential to be lucrative for lawyers, so it is possible that
    some investor groups may take action despite their limited
    access to information.\74\
    ---------------------------------------------------------------------------
        \71\ Amherst Mortgage Insight, PMI in Non-Agency Securitizations,
    at 4 (July 16, 2010) (``PMI companies have become more assertive in
    rescinding insurance . . . In fact, since early 2009, option ARM
    recoveries have averaged 40%, Alt-A recoveries averaged 45%, prime
    recoveries averaged 58%, and subprime recoveries 67%.'').
        \72\ Securitization trustees do not examine and monitor loan files
    for representation and warranty violations and generally exercise very
    little oversight of servicers. Securitization trustees are not general
    fiduciaries; so long as there has not been an event of default for the
    securitization trust, the trustee has narrowly defined contractual
    duties, and no others. Securitization trustees are also paid far too
    little to fund active monitoring; trustees generally receive 1 basis
    point or less on the outstanding principal balance in the trust. In
    addition, securitization trustees often receive substantial amounts of
    business from particular sponsors, which may provide a disincentive for
    them to pursue representation and warranty violations vigorously
    against those parties. See Nixon Peabody LLP, Caught in the Cross-fire:
    Securitization Trustees and Litigation During the Subprime Crisis (Jan.
    29, 2010) (online at www.nixonpeabody.com/
    publications_detail3.asp?ID=3131) (discussing the perceived role of the
    trustee in mortgage securities litigation).
        \73\ See Section D.2, infra.
        \74\ See Section D.2, infra.
    ---------------------------------------------------------------------------

    2. Possible Legal Consequences of the Document Irregularities to
            Various Parties

        In addition to fraud claims, discussed further below, and
    claims arising from whether the loans in the pool met the
    underwriting standards required (which is primarily relevant to
    investors' rights of put-back and bank liability), the other
    primary concern arising out of document irregularities is the
    potential failure to convey clear title to the property and
    ownership of the mortgage and the note.
        There are two separate but interrelated forms of conveyance
    that may be implicated by documentation irregularities:
    conveyance of the mortgage and the note, and conveyance of the
    property securing the mortgage. The foreclosure documentation
    irregularities affect conveyance of the property: if the
    foreclosure was not done correctly, the bank or a subsequent
    buyer may not have clear title to the property. But these
    foreclosure irregularities may also be further compromised by a
    failure to convey the mortgage and the note properly earlier in
    the process. If, during the securitization process, required
    documentation was incomplete or improper, then ownership of the
    mortgage may not have been conveyed to the trust. This could
    have implications for the PSA--inasmuch as it would violate any
    requirement that the trust own the mortgages and the notes--as
    well as call into question the holdings of the trust and the
    collateral underlying the pools under common law, the UCC, and
    trust law.\75\ The trust in this situation may be unable to
    enforce the lien through foreclosure because only the owner of
    the mortgage and the note has the right to foreclose. If the
    owner of the mortgage is in dispute, no one may be able to
    foreclose until ownership is clearly established.
    ---------------------------------------------------------------------------
        \75\ Most PSAs are governed by New York trust law and contain
    provisions that override UCC Article 9 provisions on secured
    transactions. This report does not attempt to describe every possible
    legal defect that may arise out of the irregularities, particularly
    given the rapidly developing nature of the problem, but addresses
    arguments common to the current discussions. In addition, the Panel
    takes no position on whether any of these arguments are valid or likely
    to succeed.
    ---------------------------------------------------------------------------
        If it is unclear who owns the mortgage, clear title to the
    property itself cannot be conveyed. If, for example, the trust
    were to enforce the lien and foreclose on the property, a buyer
    could not be sure that the purchase of the foreclosed house was
    proper if the trust did not have the right to foreclose on the
    house in the first place. Similarly, if the house is sold, but
    it is unclear who owns the mortgage and the note and, thus, the
    debt is not properly discharged and the lien released, a
    subsequent buyer may find that there are other claimants to the
    property. In this way, the consequences of foreclosure
    documentation irregularities converge with the consequences of
    securitization documentation irregularities: in either
    situation, a subsequent buyer or lender may have unclear rights
    in the property.
        These irregularities may have significant bearing on many
    of the participants in the mortgage securitization process:
          Parties to Whom a Mortgage and Note Is
    Transferred--If a lien was not ``perfected''--filed according
    to appropriate procedures--participants in the transfer process
    may no longer have a first-lien interest in the property and
    may be unable to enforce that against third-parties (and, where
    the property has little value, particularly in non-recourse
    jurisdictions, may not be able to recover any money).
    Similarly, if the notes and mortgages were not properly
    transferred, then the party that can enforce the rights
    attached to the note and the mortgage--right to receive payment
    and right to foreclose, among others--may not be readily
    identifiable. If a trust does not have proper ownership to the
    notes and the mortgage, it is unclear what assets are actually
    in the trust, if any.\76\
    ---------------------------------------------------------------------------
        \76\ The competing claims about MERS can also factor into these
    issues. If MERS is held not to be a valid recording system, then
    mortgages recorded in the name of MERS may not have first priority.
    Similarly, if MERS does not have standing to foreclose, it could cast
    into question foreclosures done by MERS.
    ---------------------------------------------------------------------------
          Sponsors, Servicers, and Trustees--Failure to
    follow representations and warranties found in PSAs can lead to
    the removal of servicers or trustees and trigger
    indemnification rights between the parties.\77\ Failure to
    record mortgages can result in the trust losing its first-lien
    priority on the property. Failure to transfer mortgages and
    notes properly to the trust can affect the holdings of the
    trust. If transfers were not done correctly in the first place
    and cannot be corrected, there is a profound implication for
    mortgage securitizations: it would mean that the improperly
    transferred loans are not trust assets and MBS are in fact not
    backed by some or all of the mortgages that are supposed to be
    backing them. This would mean that the trusts would have
    litigation claims against the securitization sponsors for
    refunds of the value given by the trusts to the sponsors (or
    depositors) as part of the securitization transaction.\78\ If
    successful, in the most extreme scenario this would mean that
    MBS trusts (and thus MBS investors) could receive complete
    recoveries on all improperly transferred mortgages, thereby
    shifting the losses to the securitization sponsors.\79\
    Successful put-backs to these entities would require them to
    hold those loans on their books. Even if the mortgage loans are
    still valid, enforceable obligations, the sponsors would (if
    regulated for capital adequacy) be required to hold capital
    against the mortgage loans, and might have to raise capital. If
    these banks were unable to raise capital, it might, again,
    subject them to risks of insolvency and threaten the system.
    ---------------------------------------------------------------------------
        \77\ It should be noted that while no claims have been made yet
    based on an alleged breach of representations and warranties related to
    the transfer of title, claims have been made based on allegations of
    poor underwriting and loan pool quality. See Buckingham Research Group,
    Conference Takeaways on Mortgage Repurchase Risk, at 2 (Nov. 4, 2010)
    (hereinafter ``Buckingham Research Group Conference Takeaways'').
    However, there is a possibility that there will be put-back demands for
    breaches of representations and warranties relating to mortgage
    transfers.
        \78\ Because the REMIC status and avoidance of double taxation
    (trust level and investor level) is so critical to the economics of
    securitization deals, the PSAs that govern the securitization trusts
    are replete with instructions to servicers and trustees to protect the
    REMIC status, including provisions requiring that the transfers of the
    mortgage loans occur within a limited time after the trust's creation.
    See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor,
    Wells Fargo Bank, National Association, Master Servicer and Securities
    Administrator, and HSBC Bank USA, National Association, Trustee,
    Pooling and Servicing Agreement (Sept. 1, 2006) (online at
    www.secinfo.com/d13f21.v1B7.d.htm#1stPage).
        \79\ If a significant number of loan transfers failed to comply
    with governing PSAs, it would mean that sizeable losses on mortgages
    would rest on a handful of large banks, rather than being spread among
    MBS investors. Sometimes the securitization sponsor is indemnified by
    the originator for any losses the sponsor incurs as a result of the
    breach of representations and warranties. See Id. at section 10.03.
    This indemnification is only valuable, however, to the extent that the
    originator has sufficient assets to cover the indemnification. Many
    originators are thinly capitalized and others have ceased operating or
    filed for bankruptcy. Therefore, in many cases, any put-back liability
    is likely to rest on the securitization sponsors. Although these put-
    back rights sometimes entitle the trust only to the value of the loan
    less any payments already received, plus interest, the value the trust
    would receive is still greater than the current value of many of these
    loans. As a number of originators and sponsors were acquired by other
    major financial institutions during 2008-2009, put-back liability has
    become even more focused on a relatively small number of systemically
    important financial institutions. Financial Crisis Inquiry Commission,
    Preliminary Staff Report: Securitization and the Mortgage Crisis, at 13
    (Apr. 7, 2010) (online at www.fcic.gov/reports/pdfs/2010-0407-
    Preliminary_Staff_Report_-_Securitization_and_the_Mortgage_Crisis.pdf)
    (table showing that five of the top 25 sponsors in 2007 have since been
    acquired). Overall, recovery is likely to be determined on a deal-by-
    deal basis.
    ---------------------------------------------------------------------------
          Borrowers/homeowners--Borrowers may have several
    available causes of action. They may seek to reclaim foreclosed
    properties that have been resold. They may also refuse to pay
    the trustee or servicer on the grounds that these parties do
    not own or legitimately act on behalf of the owner of the
    mortgage or the note.\80\ In addition, they may defend
    themselves against foreclosure proceedings on the claim that
    robo-signing irregularities deprived them of due process.
    ---------------------------------------------------------------------------
        \80\ As noted above, the servicer does not own the mortgage and the
    note, but has a contractual ability to enforce the legal rights
    associated with the mortgage and the note.
    ---------------------------------------------------------------------------
          Later Purchasers--Potential home-buyers may be
    concerned that they are unable to determine definitively
    whether the home they wish to purchase was actually conveyed
    with clear title, and may be unwilling to rely on title
    insurance to protect them.\81\ Financial institutions that may
    have been interested in buying mortgages or mortgage securities
    may worry that the current holder of the mortgage did not
    actually receive the loan through a proper transfer.
    ---------------------------------------------------------------------------
        \81\ The concept of ``bona-fide purchaser for value,'' which exists
    in both common and statutory law, may protect the later buyer. If the
    later buyer records an interest in the property and had no notice of
    the competing claim, that interest in the property will be protected.
    Industry sources conversations with Panel staff (Nov. 9, 2010).
    ---------------------------------------------------------------------------
          Investors--Originators of mortgages destined for
    mortgage securities execute mortgage loan purchase agreements,
    incorporated into PSAs, that, as mentioned earlier, make
    representations and warranties the breach of which can result
    in put-back rights requiring that the mortgage originator
    repurchase defective mortgages. MBS investors may assert claims
    regarding issues that arose during the origination and
    securitization process. For instance, they may assert that
    violations of underwriting standards or faulty appraisals were
    misrepresentations and material omissions that violate
    representations and warranties and may, in some cases where the
    necessary elements are established, raise fraud claims.\82\
    They may also raise issues about the validity of the REMIC, the
    bankruptcy-remote, tax-exempt conduit that is central to the
    mortgage securitization process. A potential investor claim is
    that mortgage origination violations and title defects
    prevented a ``true sale'' of the mortgages, consistent with
    Internal Revenue Service (IRS) regulations and as required by
    the New York State trust law, invalidating the REMIC. Some
    commentators believe that inquiries by investors could uncover
    untimely attempts to cure the problem by substituting complying
    property more than 90 days after formation of the REMIC, a
    prohibited transaction that could cause loss of REMIC status,
    resulting in the loss of pass-through taxation status and
    taxation of income to the trust and to the investor.\83\ Loss
    of REMIC status would provide substantial grounds for
    widespread put-backs. Moreover, this type of litigation could
    be extremely lucrative for the lawyers representing the
    investors. It may be expected that, for this type of action,
    the investors' counsel would have strong incentives to litigate
    forcefully.
    ---------------------------------------------------------------------------
        \82\ See Section E.1, infra.
        \83\ The majority of PSAs were created under the laws of New York
    state. Under New York law, there are four requirements for creating a
    trust: (1) a designated beneficiary; (2) a designated trustee; (3)
    property sufficiently identified; and (4) and the delivery of the
    property to the trustee. Joshua Rosner of Graham Fisher, an investment
    research firm, has noted that there may not have always been proper
    delivery of the property to the trustee. ``In New York it is not enough
    to have an intention to deliver the property to the trust, the property
    must actually be delivered. So, what defines acceptable delivery? The
    answer appears to lie with the `governing instrument,' the Pooling and
    Servicing Agreement (PSA). Thus, in order to have proper delivery the
    parties to the PSA must do that which the PSA demands to achieve
    delivery.'' Joshua Rosner, note to Panel staff (Nov. 8, 2010). To the
    extent that a PSA requires that property be conveyed to the trust
    within a certain timeframe, such conveyance would be void. N.Y.
    Estates, Powers, and Trusts Law Sec. 7-2.4 (McKinney's 2006).
    ---------------------------------------------------------------------------
          Title Insurance Companies--In the United States,
    purchasers of real property (i.e., land and/or buildings)
    typically purchase title insurance, which provides a payment to
    the purchaser if a defect in the title or undisclosed lien is
    discovered after the sale of the property is complete. Given
    the potential legal issues discussed in this section, title
    insurance companies could face an increase in claims in the
    near future. The threat of such issues may also lead insurers
    to require additional documentation before issuing a policy,
    increasing the costs associated with buying property.\84\
    ---------------------------------------------------------------------------
        \84\ Although title insurers appear to be poised for potential
    risk, one observer has noted that title insurance lobbyists and trade
    groups have instead played down the possible effects of these legal
    issues. Christopher Lewis Peterson, professor of law, S.J. Quinney
    School of Law, University of Utah, conversations with Panel staff (Nov.
    8, 2010). Title insurers state that they do not presently believe that
    these legal issues will have much effect. Industry sources
    conversations with Panel staff (Nov. 10, 2010). Professor Peterson
    suggested that the insurers may earn sufficient remuneration from
    various fees to offset any potential risk. On the other hand, title
    insurers could stand to suffer significant losses if some of the
    matters presently discussed in the market, such as widespread
    invalidation of MERS, come to pass. It is too soon to say if such
    events are likely, but title insurers would be one of the primary
    parties damaged by such an action.
    ---------------------------------------------------------------------------
          Junior Lien Holders--Second and third liens are
    not as commonly securitized as first liens; therefore, their
    holders may not face the same direct risk as first lien
    holders. Junior lien holders may, however, face an indirect
    risk if the rights of the first lien holder cannot be properly
    established. If the property securing the lien is sold, all
    senior liens must be paid first. If the senior liens cannot be
    paid off because it is impossible to determine who holds those
    liens, the junior lien holder may not be able to claim any of
    the proceeds of the sale until the identity of the senior lien
    holder is settled. On the other hand, document irregularities
    may offer a windfall for some junior liens. If the first
    mortgage has not been perfected, the first lien holder loses
    its priority over any other, perfected liens. Therefore, if a
    second lien was properly recorded, it could take priority over
    a first lien that was not properly recorded. The majority of
    second liens, however, were completed using the same system as
    first liens and therefore face the same potential issues.
    Moreover, many mortgages that were created during the housing
    boom were created with an 80 percent/20 percent ``piggy-back''
    structure in which a first and second lien were created
    simultaneously and using the same system. If neither lien was
    perfected, there may be a question as to which would take
    priority over the other.\85\
    ---------------------------------------------------------------------------
        \85\ Christopher Lewis Peterson, professor of law, S.J. Quinney
    School of Law, University of Utah, conversations with Panel staff (Nov.
    8, 2010). If the mortgages were created at different times, the
    mortgage created first would take precedence.
    ---------------------------------------------------------------------------
          Local Actions--Despite the state attorneys'
    general national approach to investigating document
    irregularities, there may be separate state initiatives. Under
    traditional mortgage recording practices, each time a mortgage
    is transferred from a seller to a buyer, the transfer must be
    recorded and a fee paid to the local government. Although each
    fee is not large--typically around $30--the fees for the rapid
    transfers inherent in the mortgage securitization process could
    easily add up to hundreds of dollars per securitization. The
    MERS system was intended in part to bypass these fees.\86\
    Local jurisdictions, deprived of mortgage recording tax
    revenue, may file lawsuits against originators, servicers, and
    MERS.
    ---------------------------------------------------------------------------
        \86\ Cincinnati Law Review Paper on Foreclosure, supra note 28, at
    1386-1371.
    ---------------------------------------------------------------------------
        The primary private litigation in this area is likely to
    come from investors in MBS. These investors are often
    institutional investors, a group that has the resources and
    expertise to pursue such claims.\87\ A major obstacle to
    investor lawsuits seeking put-backs has been a provision in
    PSAs that limits private investor action in the case of
    breaches of representations and warranties to certificate
    holders with some minimum percentage of voting rights, often 25
    percent.\88\ Investors also suffer from a collective-action
    problem in trying to achieve these thresholds, not least
    because they do not know who the other investors are in a
    particular deal, and many investors are reluctant to share
    information about their holdings. Furthermore, the interests of
    junior and senior tranche holders may not be aligned.\89\
    ---------------------------------------------------------------------------
        \87\ Institutional holders of RMBS include pension funds, hedge
    funds and other asset managers, mutual funds, life insurance companies,
    and foreign investors. Data provided by Inside Mortgage Finance (Nov.
    12, 2010).
        \88\ See Buckingham Research Group Conference Takeaways, supra note
    77, at 2.
        \89\ Also, to the extent that these MBSs have been turned into
    collateralized debt obligations (CDOs), the collateral manager
    overseeing the CDOs may need to weigh actions that pose conflicts among
    the tranche holders because of obligations to act in the best interests
    of all the securities classes. Panel staff conversations with industry
    sources (Nov. 8, 2010).
    ---------------------------------------------------------------------------
        When investors do achieve the collective-action threshold,
    it is only the first step in a complicated process. For
    example, if the trustee declines to declare the servicer in
    default, then investors can either bring suit against the
    trustee to force it to remove the servicer, attempt to remove
    the trustee (which often requires a 51 percent voting
    threshold), or remove the servicer directly (with a two-thirds
    voting threshold). It bears emphasis that the collective-action
    thresholds required vary from deal to deal. Two recent investor
    lawsuits started with a view to enforce put-back provisions
    resulted in dismissals based on the plaintiffs' failure to
    adhere to 25-percent threshold requirements.\90\ The practical
    effect of such decisions is that the hurdle of meeting this
    relatively high threshold of certificate holders can limit
    investors' ability to examine the documents that would support
    their claims.
    ---------------------------------------------------------------------------
        \90\ Greenwich Fin. Serv. v. Countrywide Fin. Corp., No. 650474/08
    (N.Y. Supp. Oct. 7, 2010); Footbridge Ltd. Trust and OHP Opportunity
    Ltd. Trust v. Countrywide Home Loans, Inc., No. 09 CIV 4050 (S.D.N.Y.
    Sep. 28, 2010).
    ---------------------------------------------------------------------------
        Recently, however, investors are beginning to take
    collective action, suggesting that the 25-percent threshold may
    not be an enormous burden for organized investors. A registry
    created by RMBS Clearing House is providing a confidential data
    bank whose purpose is to identify and organize certificate
    holders into groups that can meet threshold requirements.\91\
    Using the registry data, a lawsuit has been initiated against
    JPMorgan Chase and the Federal Deposit Insurance Corporation
    (FDIC),\92\ both of which have assumed liabilities of failed
    bank Washington Mutual, seeking to enforce put-backs and
    document disclosure. Recently, an investor group composed of
    eight institutional investors, including the Federal Reserve
    Bank of New York (FRBNY), representing more than 25 percent of
    the voting rights in certain Countrywide MBSs,\93\ made a
    request of securitization trustee Bank of New York to initiate
    an investigation of the offerings originated by Countrywide
    prior to its acquisition by Bank of America. After Bank of New
    York refused to act,\94\ the group petitioned Bank of America
    directly in an effort to review the loan files in the pool.\95\
    Some believe that the difficulty faced by investors in gaining
    access to the loan files that support their claims of
    contractual breaches and the cost of auditing them will make
    widespread litigation economically unrealistic.\96\ Even as
    put-back demands from investors are appearing, unless the
    investors can review loan documents, they lack the information
    to know what level of put-backs should be occurring. Moreover,
    at least one bank CEO has stated that his bank will challenge
    any determination that underwriting standards were not met on a
    loan-by-loan basis, creating further hurdles.\97\ At present,
    it is unclear what litigation risk these proceedings are likely
    to pose for the banks.\98\ There is good reason to assume,
    however, that the litigation will attract sophisticated parties
    interested in the deep pockets of the sponsors.
    ---------------------------------------------------------------------------
        \91\ Based on conversations between Panel staff and the company,
    RMBS Clearing House claims to represent more than 72 percent of the
    certificate holders of 2,300 mortgage-backed securities, more than 50
    percent of holders of 900 mortgage-backed securities, and more than 66
    percent of the holders of 450 mortgage-backed securities representing,
    in the aggregate, a face amount of $500 billion, or approximately one-
    third of the private label mortgage-backed securities market. One
    industry participant likened them to a dating site for investors. RMBS
    Clearing House conversations with Panel staff (Oct. 24, 2010).
        \92\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
    supra note 42.
        \93\ Gibbs & Bruns represents eight institutional investors who
    collectively hold more than 25 percent of the voting rights in more
    than $47 billion in Countrywide mortgage-backed securities issued in
    115 offerings in 2006 and 2007. On Oct 20, 2010, FRBNY became a
    signatory to the letter.
        \94\ Under the PSA, the trustee is entitled to a satisfactory
    indemnity prior to allowing such a process to continue. The trustee for
    the securities, Bank of New York, did not find the indemnity offered
    acceptable and refused to allow the parties to proceed. The various
    trustees for these securities may therefore form an additional barrier
    between investors and review of the loan files. For example, Fannie Mae
    explains in a prospectus for mortgage-backed securities (REMIC
    certificates) that, ``We are not required, in our capacity as trustee,
    to risk our funds or incur any liability if we do not believe those
    funds are recoverable or if we do not believe adequate indemnity exists
    against a particular risk.'' See Federal National Mortgage Association,
    Single-Family REMIC Prospectus, at 44 (May 1, 2010) (online at
    www.efanniemae.com/syndicated/documents/mbs/remicpros/
    SF_FM_May_1_2010.pdf).
        \95\ Letter from Gibbs & Bruns LLP on behalf of BlackRock Financial
    Management, Inc. et al. to Countrywide Home Loans Servicing LP, The
    Bank of New York, and counsel, Re: Holders' Notice to Trustee and
    Master Servicer (Oct. 18, 2010) (hereinafter ``Letter from Gibbs &
    Bruns LLP to Countrywide''). The group including FRBNY alleges
    generally that the loans in the pools did not meet the quality required
    by the PSA and have not been prudently serviced.
        \96\ Jamie Dimon, CEO of JPMorgan Chase, commented during a recent
    quarterly earnings call that litigation costs in foreclosure cases will
    be so large as to become a cost of doing business and that, in
    anticipation of such suits JPMorgan Chase has raised its reserves by
    $1.3 billion. Transcript provided by SNL Financial (Nov. 3, 2010). See
    also JPM on Foreclosures, MERS, supra note 3.
        \97\ Chuck Noski, chief financial officer for Bank of America,
    stated during an earnings call for the third quarter of 2010: ``This
    really gets down to a loan-by-loan determination and we have, we
    believe, the resources to deploy against that kind of a review.'' Bank
    of America Corporation, Q3 2010 Earnings Call Transcript (Oct. 19,
    2010) (online at www.morningstar.com/earnings/18372176-bank-of-america-
    corporation-q3-2010.aspx?pindex=1) (hereinafter ``Bank of America Q3
    2010 Earnings Call Transcript'').
        \98\ For a discussion of litigation risk, see Section F.2, infra.
    ---------------------------------------------------------------------------
        Given the complexity of the legal issues, the numerous
    parties involved, and the relationships between many of them,
    it is likely that any litigation will be robust, costly, and
    lengthy. Nonetheless, it is possible that banks may see a
    financial advantage to delaying put-backs through litigation
    and other procedural hurdles, if only to slow the pace at which
    they must be completed and to keep the loans off of their books
    a little longer. In addition, as discussed above, conflicts of
    interest in the industry may further complicate an assessment
    of litigation risk: Servicers, trustees, sponsors, and
    originators are often affiliated with each other, meaning that
    each has a disincentive to proceed with an action against
    another lest it harm its own bottom line.\99\ Moreover, there
    is the possibility that those who foresee favorable results
    from such litigation, and who have the resources and stamina
    for complex litigation (such as hedge funds), will purchase
    affected assets with the intent to participate as plaintiffs,
    intensifying the legal battle further. TARP recipients, of
    course, were and are at the center of many of these
    transactions, and predicting all of the possible litigation to
    which they might be subject as a result of the irregularities
    (known and suspected) is virtually impossible. It is not
    unlikely that, on the heels of highly publicized actions
    initiated by major financial institutions and the increasing
    likelihood that investors can meet the 25 percent threshold
    requirements for filing lawsuits, sophisticated institutional
    investors may become more interested in pursuing litigation or
    even in investing in MBS in order to position themselves for
    lawsuits.\100\ Some security holders, such as large endowments
    and pension plans, have fiduciary duties to their own investors
    that may lead them to try and enforce repurchase rights. In
    addition, if investors such as hedge funds that have the
    resources to support protracted litigation initiate lawsuits,
    that could intensify the legal battles that banks will
    face.\101\ If litigation based on significant document
    irregularities is successful, it may throw the large banks back
    into turmoil.
    ---------------------------------------------------------------------------
        \99\ See Section D.1.b, supra.
        \100\ See discussion of collective action thresholds in this
    section, supra.
        \101\ In its latest filing with the Securities and Exchange
    Commission (SEC), Citigroup acknowledged that hedge fund Cambridge
    Place Investment Management, The Charles Schwab Corporation, the
    Federal Home Loan Bank of Chicago, and the Federal Home Loan Bank of
    Indianapolis have filed actions related to underwriting irregularities
    in RMBS. See Citigroup, Inc., Form 10-Q for the Quarterly Period Ended
    September 30, 2010, at 204 (Nov. 5, 2010) (online at www.sec.gov/
    Archives/edgar/data/831001/000104746910009274/a2200785z10-q.htm)
    (hereinafter ``Citigroup 10-Q for Q2 2010''). In addition, the hedge
    fund community has begun coalescing around their investments in RMBS,
    forming a lobbying group called the Mortgage Investors Coalition. See
    Senate Committee on Banking, Housing, and Urban Affairs, Written
    Testimony of Curtis Glovier, managing director, Fortress Investment
    Group, Preserving Homeownership: Progress Needed To Prevent
    Foreclosures (July 16, 2009) (online at banking.senate.gov/public/
    index.cfm?FuseAction=Files.View&FileStore_id=18f542f2-1b61-4486-98d0-
    c02fc74ea2c5).
    ---------------------------------------------------------------------------
        Similarly, Fannie Mae and Freddie Mac may become embroiled
    in the controversies. Fannie and Freddie have already been
    actively engaged in efforts to put-back nonconforming loans to
    the originators/sponsors of the loans they guarantee. But they
    may also find themselves on the other side, as targets of
    litigation. In addition to being embedded in the entire
    securitization process, they are part owners of MERS,\102\
    which is becoming a litigation target. Both Fannie and Freddie
    have recently ceased allowing MERS to bring foreclosure
    actions.\103\ Further, Fannie and Freddie used at least one of
    the law firms implicated in the irregularities to handle
    foreclosures.\104\ Given that these two government-supported
    firms are perceived as the ultimate ``deep pocket,'' it is
    likely that interested litigants will attempt to find a way to
    attach liability to them, which, if successful, could further
    affect the taxpayers.\105\
    ---------------------------------------------------------------------------
        \102\ See MERSCORP, Inc., MERS Shareholders (online at
    www.mersinc.org/about/
    shareholders.aspx) (accessed Nov. 12, 2010) (``Shareholders played a
    critical role in the development of MERS. Through their capital
    support, MERS was able to fund expenses related to development and
    initial start-up.''). See also Letter from R.K. Arnold, president and
    chief executive officer, MERSCORP, Inc., to Elizabeth M. Murphy,
    secretary, Securities and Exchange Commission, Comments on the
    Commission's Proposed Rule for Asset-Backed Securities, at Appendix B
    (July 30, 2010) (online at www.sec.gov/comments/s7-08-10/s70810-58.pdf)
    (attaching as an Appendix letters from both Fannie Mae and Freddie Mac,
    which include the Fannie Mae statement that ``As you are aware, Fannie
    Mae has been an advocate and strong supporter of the efforts of MERS
    since its formation in 1996. The mission of MERS to streamline the
    mortgage process through paperless initiatives and data standards is
    clearly in the best interests of the mortgage industry, and Fannie Mae
    supports this mission.'').
        \103\ See Federal National Mortgage Association, Miscellaneous
    Servicing Policy Changes, at 3 (Mar. 30, 2010) (Announcement SVC-2010-
    05) (online at www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/
    svc1005.pdf) (``Effective with foreclosures referred on or after May 1,
    2010, MERS must not be named as a plaintiff in any foreclosure action,
    whether judicial or non-judicial, on a mortgage loan owned or
    securitized by Fannie Mae.'').
        \104\ On November 2, 2010, Fannie Mae and Freddie Mac terminated
    their relationships with a Florida foreclosure attorney David J. Stern,
    who had processed thousands of evictions on their behalf and faces
    allegations by the Florida Attorney General's office of improper
    foreclosure practices including false and misleading documents. See
    Office of Florida Attorney General Bill McCollum, Florida Law Firms
    Subpoenaed Over Foreclosure Filing Practices (Aug. 10, 2010) (online at
    www.myfloridalegal.com/newsrel.nsf/newsreleases/
    2BAC1AF2A61BBA398525777B0051BB30); Office of Florida Attorney General
    Bill McCollum, Active Public Consumer-Related Investigation, No. L10-3-
    1145 (online at www.myfloridalegal.com/__85256309005085AB.nsf/0/
    AD0F010A43782D96852577770067B68D?Open&Highlight=0,david,stern)
    (accessed Nov. 10, 2010); Nick Timiraos, Fannie, Freddie Cut Ties to
    Law Firm, Wall Street Journal (Nov. 3, 2010) (online at online.wsj.com/
    article/SB10001424052748704462704575590342587988742.html) (``A
    spokeswoman for Freddie Mac, Sharon McHale, said it took the rare step
    on Monday of beginning to remove loan files after an internal review
    raised `concerns about some of the practices at the Stern firm. She
    added that Freddie Mac took possession of its files `to protect our
    interest in those loans as well as those of borrowers.' '').
        \105\ The Federal Housing Finance Agency (FHFA) placed Fannie Mae
    and Freddie Mac into conservatorship on September 7, 2008, in order to
    preserve each company's assets and to restore them to sound and solvent
    condition. Treasury has guaranteed their debts, and FHFA has all the
    powers of the management, board, and shareholders of the GSEs. House
    Financial Services, Subcommittee on Capital Markets, Insurance, and
    Government-Sponsored Enterprises, Written Testimony of Edward J.
    DeMarco, acting director, Federal Housing Finance Agency, The Future of
    Housing Finance: A Progress Update on the GSEs, at 2 (Sept. 15, 2010)
    (online at financialservices.house.gov/Media/file/hearings/111/
    DeMarco091510.pdf). One of the questions that has arisen is whether
    there are likely to be differences in the quality of securitization
    processing for government-sponsored entity (GSE) MBS compared to
    private-label MBS. Some industry sources believe that the process
    underlying GSE securitizations is likely to have been more rigorous,
    but it is presently impossible to determine if this is correct, and,
    accordingly, this report does not attempt to distinguish between GSE
    and private-label deals. However, if GSE securitizations prove to have
    been done improperly, it might result in additional litigation for the
    GSEs--either as targets, or as the GSEs try to pursue indemnification
    rights.
    ---------------------------------------------------------------------------

    3. Additional Considerations

        The participants described above are by no means the only
    parties affected by these issues. Lenders may be reluctant to
    make new loans on homes that could have title issues. Investors
    may likewise be reluctant to invest in mortgages and MBS that
    may be affected. Uncertainty about the actions that federal and
    state governments may take to address the documentation issues,
    how these actions will affect investment returns, and concerns
    that these problems may be widespread in the mortgage industry
    may also discourage investors. Until there is more clarity on
    the legal issues surrounding title to affected properties, as
    well as on the extent of any title transfer issues, it may also
    become more difficult or expensive to get title insurance, an
    essential part of any real estate transaction. In addition,
    put-backs of mortgages, damages from lawsuits, and claims
    against title companies, mortgage servicers, and MBS pooling
    and securitization firms have the potential to drive these
    firms out of business. Should these and other companies that
    provide services to the mortgage market either decide to exit
    the market or go bankrupt, and no other companies opt to take
    their place in the current environment, the housing market
    would likely suffer. Even the mere possibility of such losses
    in the future could have a chilling effect on the risk
    tolerance of these firms, and could dim the housing market
    expectations of prospective home buyers and mortgage investors,
    further reducing housing demand and raising the cost of
    mortgages.\106\
    ---------------------------------------------------------------------------
        \106\ See Standard & Poor's Global Credit Portal, Ratings Direct,
    Mortgage Troubles Continue To Weigh On U.S. Banks (Nov. 4, 2010)
    (online at www2.standardandpoors.com/spf/pdf/events/
    FITcon11410Article5.pdf) (hereinafter ``Standard & Poor's on the Impact
    of Mortgage Troubles on U.S. Banks'') (discussion of best and worst
    case scenarios).
    ---------------------------------------------------------------------------
        More generally, however, and as noted below, the efficient
    functioning of the housing market is highly dependent on the
    existence of clear property rights and a level of trust that
    various market participants have in each other and in the
    integrity of the market system.\107\ If the current foreclosure
    irregularities prove to be widespread, they have the potential
    to undermine trust in the legitimacy of many foreclosures and
    hence in the legality of title on many foreclosed
    properties.\108\ In that case, it is possible that buyers will
    avoid purchasing properties in foreclosure proceedings because
    they cannot be sure that they are purchasing a clean title.
    Protections in the law, such as those for a bona-fide purchaser
    for value, may not ease their anxiety if they are concerned
    that they will become embroiled in litigation when prior owners
    appeal foreclosure rulings. These concerns would be likely to
    continue until the situation is resolved, or at least until the
    legal issues surrounding title to foreclosed properties have
    been clarified. Those buyers who remain will likely face less
    competition and will offer very low bids. Even foreclosed homes
    that have already been sold are at risk, since homes sold
    before these documentation issues came to light cannot be
    assumed to have a legally provable chain of title. These homes
    will therefore likely be difficult to resell, except at low
    prices that attract risk-tolerant buyers.
    ---------------------------------------------------------------------------
        \107\ Hernando de Soto, The Mystery of Capital: Why Capitalism
    Triumphs in the West and Fails Everywhere Else, at 5-6, 174 (2000)
    (``Formal property titles allowed people to move the fruits of their
    labor from a small range of validation into that of an expanded
    market.'').
        \108\ The few foreclosed homes where a single bank originated the
    mortgage, serviced it, held it as a whole loan, and processed the
    foreclosure documents themselves are very unlikely to be affected. The
    effect of the irregularities on other types of loans and homes are, as
    discussed in this report, presently very difficult to predict.
    ---------------------------------------------------------------------------

                         E. Court Cases and Litigation

        The foreclosure documentation irregularities unquestionably
    show a system riddled with errors. But the question arises:
    Were they merely sloppy mistakes, or were they fraudulent?
    Differing answers to this question may not affect certain
    remedies available to aggrieved parties--put-backs, for
    example, are available for both mistakes and for fraud--but
    would affect potential damages in a lawsuit.\109\ It is
    important to note that the various parties who may be able to
    bring lawsuits may choose different causes of action for very
    similar sets of facts depending on standing and a host of other
    factors. For example, on the same facts, an investor may try to
    pursue a civil suit alleging violations of representations and
    warranties relating to underwriting standards in a PSA instead
    of pursuing a securities fraud case where the burden of proof
    would be higher. Put another way, plaintiffs will pursue as
    many or as few causes of action as they believe serves their
    purpose, and one case does not necessarily preclude another.
    ---------------------------------------------------------------------------
        \109\ See, e.g., Agreement Among Deutsche Alt-A Securities, Inc.,
    Depositor, Wells Fargo Bank, National Association, Master Servicer and
    Securities Administrator, and HSBC Bank USA, National Association,
    Trustee, Pooling and Servicing Agreement (Sept. 1, 2006) (online at
    www.secinfo.com/d13f21.v1B7.d.htm) (``Section 2.03: Repurchase or
    Substitution of Loans. (a) Upon discovery or receipt of notice . . . of
    a breach by the Seller of any representation, warranty or covenant
    under the Mortgage Loan Purchase Agreement . . . the Trustee shall
    enforce the obligations of the Seller under the Mortgage Loan Purchase
    Agreement to repurchase such Loan''); Trust Agreement Between GS
    Mortgage Securities Corp., Depositor, and Deutsche Bank National Trust
    Company, Trustee, Mortgage Pass-Through Certificates Series 2006-FM1
    (Apr. 1, 2006) (online at www.secinfo.com/dRSm6.v1Py.c.htm#1stPage)
    (``Upon discovery or notice of any breach by the Assignor of any
    representation, warranty, or covenant under this Assignment Agreement .
    . . the Assignee may enforce the Assignor's obligation hereunder to
    purchase such Mortgage Loan from the Assignee.'').
    ---------------------------------------------------------------------------

    1. Fraud Claims

                a. Common Law Fraud
        Property law is principally a state issue, and the
    foreclosure irregularities first surfaced in depositions filed
    in state courts. Accordingly, one option for plaintiffs may be
    to pursue a common law fraud claim. The bar for proving common
    law fraud, however, is fairly high. In order to prove common
    law fraud, the plaintiff must establish five elements: (1) That
    the respondent made a material statement; (2) that the
    statement was false; (3) that the respondent made the statement
    with the intent to deceive the plaintiff; (4) that the
    plaintiff relied on the statement; and (5) that the plaintiff
    suffered injury as a result of that reliance.\110\
    ---------------------------------------------------------------------------
        \110\ See Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d
    1059, 1069 (Fed. Cir. 1998) (citing W. Prosser, Law of Torts,
    Sec. Sec. 100-05 (3d ed. 1964) and 37 C.J.S. Fraud Sec. 3 (1943)).
    ---------------------------------------------------------------------------
        Traditionally, in order to prove common law fraud under
    state laws, each element detailed above has to be satisfied to
    the highest degree of rigor. Each state's jurisprudence has
    somewhat different relevant interpretive provisions, and common
    law fraud is generally perceived as a fairly difficult claim to
    make.\111\ In particular, the requirement of intent has been
    very difficult to show, since it requires more than simple
    negligence.\112\
    ---------------------------------------------------------------------------
        \111\ See, e.g., Lynn Y. McKernan, Strict Liability Against
    Homebuilders for Material Latent Defects: It's Time, Arizona, Arizona
    Law Review, Vol. 38, at 373, 382 (Spring 1996) (``Although its recovery
    options are attractive, common law fraud is generally difficult to
    prove.''); Teal E. Luthy, Assigning Common Law Claims for Fraud,
    University of Chicago Law Review, Vol. 65, at 1001, 1002 (Summer 1998)
    (``Fraud is a difficult claim to prove''); Jonathan M. Sobel, A Rose
    May Not Always Be a Rose: Some General Partnership Interests Should Be
    Deemed Securities Under the Federal Securities Acts, Cardozo Law
    Review, Vol. 15, at 1313, 1318 (Jan. 1994) (``Common law fraud is
    inadequate as a remedy because it is often extremely difficult to
    prove.'').
        \112\ See Seth Lipner & Lisa A. Catalano, The Tort of Giving
    Negligent Investment Advice, University of Memphis Law Review, Vol. 39,
    at 697 n.181 (2009); Jack E. Karns & Jerry G. Hunt, Can Portfolio
    Damages Be Established in a Churning Case Where the Plaintiff's Account
    Garners a Profit Rather Than a Loss, Oklahoma City University Law
    Review, Vol. 24, at 214 (1999).
    ---------------------------------------------------------------------------
                b. Securities Fraud
                i. Foreclosure Irregularities
        In the wake of the revelations about foreclosure
    irregularities, a number of government agencies have gotten
    involved. The Securities and Exchange Commission (SEC) is
    reviewing the mortgage securitization process and market
    participants for possible securities law violations. It has
    also provided specific disclosure guidance to public companies
    for their quarterly reports.\113\ Since many of the mortgages
    potentially affected by faulty documentation practices were put
    into securitization pools, there is an increased potential for
    lawsuits by investors, including securities law claims.
    ---------------------------------------------------------------------------
        \113\ SEC conversations with Panel staff (Nov. 15, 2010). In
    addition, the SEC's Division of Corporation Finance has provided
    disclosure guidance for the upcoming quarterly reports by affected
    companies. U.S. Securities and Exchange Commission, Sample Letter Sent
    to Public Companies on Accounting and Disclosure Issues Related to
    Potential Risks and Costs Associated With Mortgage and Foreclosure-
    Related Activities or Exposures (Oct. 2010) (online at www.sec.gov/
    divisions/corpfin/guidance/cfoforeclosure1010.htm) (hereinafter
    ``Sample SEC Letter on Disclosure Guidelines''). If the disclosure
    proves misleading, it could provide the basis for another cause of
    action.
    ---------------------------------------------------------------------------
        In order for MBS investors to state a securities fraud
    claim against investment or commercial bank sponsors under the
    Securities Exchange Act of 1934's Rule 10b-5,\114\ the most
    common private litigant cause of action, the investors must
    prove: (1) A material misrepresentation or omission; (2)
    wrongful intent; (3) connection to the purchase or sale of the
    security; (4) reliance by the purchaser on the information; (5)
    economic loss to the plaintiff; and (6) causation.\115\
    ---------------------------------------------------------------------------
        \114\ 17 CFR 240.10b-5. It is important to note that other causes
    of action are available under the Securities Act of 1933 for registered
    offerings: Under Section 11, a claim may be made for a false or
    misleading statement in the registration statement, and the issuer of
    the security, the special purpose vehicle, underwriters, and auditors
    will all be subject to potential Section 11 liability (with the latter
    two groups having due diligence defenses). With respect to other
    communications made during the registered offering process, misleading
    statements can give rise to Section 12(a)(2) liability. See 15 U.S.C.
    Sec. Sec. 77k, 77m.
        \115\ See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42
    (2005). The SEC can bring enforcement claims under a variety of
    theories, but private litigants typically litigate under Rule 10b-5.
    See Scott J. Davis, Symposium: The Going-Private Phenomenon: Would
    Changes in the Rules for Director Selection and Liability Help Public
    Companies Gain Some of Private Equity's Advantages, University of
    Chicago Law Review, Vol. 76, at 104 (Winter 2009); Palmer T. Heenan, et
    al., Securities Fraud, American Criminal Law Review, Vol. 47, at 1018
    (Spring 2010).
    ---------------------------------------------------------------------------
        To be sure, private investor lawsuits have been ongoing
    since the end of 2006 without much success.\116\ Some argue
    that securities fraud was not at the heart of the financial
    crisis, and securities fraud claims are bound to fail because
    of the typically extensive disclosure on risks associated with
    these transactions.\117\ A number of judges seem to agree: some
    important cases ``suggest judicial skepticism to claims arising
    from the mortgage and financial crises.'' \118\ The main hurdle
    in these securities claims--beyond establishing that the
    misrepresentations were so material that without them the
    investment would not have been made--is to establish ``loss
    causation,'' i.e., that the misrepresentations caused the
    investor's losses directly. Any losses caused by unforeseeable
    external factors such as ``changed economic circumstances'' or
    ``new industry-specific conditions'' will not be
    recoverable.\119\ Defendants in subprime litigation cases are
    likely to argue that the crash of the housing market, for
    example, was just such an unexpected new industry-specific
    condition.\120\ Losses occurring as a result of the market's
    crash would be non-recoverable even if there was a material
    misrepresentation. It remains to be seen how securities fraud
    cases would play out in the context of the current
    documentation irregularities.
    ---------------------------------------------------------------------------
        \116\ For an extensive analysis of subprime mortgage-related
    litigation up to 2008 and potential legal issues surrounding such
    litigation, see Jennifer E. Bethel, Allen Ferrel, and Gang Hu, Law and
    Economics Issues in Subprime Litigation, Harvard Law School John M.
    Olin Center For Law, Economics, and Business Discussion Paper (Mar. 21,
    2008) (online at lsr.nellco.org/harvard_olin/612) (hereinafter
    ``Harvard Law School Discussion Paper on Subprime Litigation''). A list
    of class action lawsuits filed up to February 28, 2008 is included in
    Table 1 of the article, at 67-69.
        \117\ See, e.g., Peter H. Hamner, The Credit Crisis and Subprime
    Mortgage Litigation: How Fraud Without Motive `Makes Little Economic
    Sense', UPR Business Law Journal, Vol. 1 (2010) (online at
    www.uprblj.com/wp/wp-content/uploads/2010/08/1-UPRBLJ-103-Hamner-
    PH.pdf).
        \118\ A recent update on subprime and credit crisis-related
    litigation summarizes a number of cases and analyzes why many of them
    failed (for example, lack of standing and lack of wrongful intent).
    Gibson, Dunn & Crutcher LLP, 2010 Mid-Year Securities Litigation Update
    (Aug. 9, 2010) (online at gibsondunn.com/Publications/Pages/
    SecuritiesLitigation2010Mid-YearUpdate.aspx#_toc268774214). The update
    also references a report by NERA Economic Consulting on a decrease in
    securities law filings since 2009. See National Economic Research
    Associates, Inc. Trends 2010 Mid-Year Study: Filings Decline as the
    Wave of Credit Crisis Cases Subsides, Median Settlement at Record High
    (July 27, 2010) (online at www.nera.com/67_6813.htm).
        \119\ See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342-43
    (2005).
        \120\ For a more complete discussion of this theory, see Harvard
    Law School Discussion Paper on Subprime Litigation, supra note 116, at
    42-44.
    ---------------------------------------------------------------------------
        Of course, the SEC has other tools at its disposal should
    it choose to pursue action against any of the financial
    institutions involved in potential documentation
    irregularities. For example, if a formal SEC investigation
    finds evidence of wrongdoing, the SEC may order an
    administrative hearing to determine responsibility for the
    violation and impose sanctions. Administrative proceedings can
    only be brought against a person or firm registered with the
    SEC, or with respect to a security registered with the SEC.
    Many times these actions end with a settlement, but the SEC
    often seeks to publish the settlement terms.
                ii. Due Diligence Firms
        There is also the possibility of distinct claims against
    the institutions that acted as securitization sponsors for
    their use of third-party due diligence firms. Specifically,
    before purchasing a pool of loans to securitize, the
    securitization sponsors, usually banks or investment firms,
    hired a third-party due diligence firm to check if the loans in
    the pool adhered to the seller's underwriting guidelines and
    complied with federal, state, and local regulatory laws.\121\
    The sponsor would select a sample of the total loan pool,
    typically around 10 percent,\122\ for the due diligence firm to
    review. The due diligence firm reviewed the sample on a loan-
    by-loan basis and categorized each as not meeting the
    guidelines, not meeting the guidelines but having compensating
    factors, or meeting the guidelines. Those specific loans that
    did not meet the guidelines, called exceptions, were returned
    to the sellers unless the securitization sponsors waived their
    objections.\123\ One due diligence firm found that, from the
    first quarter 2006 to second quarter 2007, only 54 percent of
    the loans they sampled met all underwriting guidelines.\124\
    ---------------------------------------------------------------------------
        \121\ Financial Crisis Inquiry Commission, Written Testimony of
    Vicki Beal, senior vice president, Clayton Holdings, Impact of the
    Financial Crisis--Sacramento, at 2 (Sept. 23, 2010) (online at
    www.fcic.gov/hearings/pdfs/2010-0923-Beal.pdf) (hereinafter ``Written
    Testimony of Vicki Beal before the FCIC'').
        \122\ Id. at 2. A sample size of only around 10 percent of the
    total loans in the pool was low by historical standards. In the past,
    sample sizes were between 50 percent and 100 percent. Financial Crisis
    Inquiry Commission, Testimony of Keith Johnson, former president,
    Clayton Holdings, Transcript: Impact of the Financial Crisis--
    Sacramento, at 183 (Sept. 23, 2010) (online at fcic.gov/hearings/pdfs/
    2010-0923-transcript.pdf) (hereinafter ``Testimony of Keith Johnson
    before the FCIC''). In his letter to the FCIC after Mr. Johnson's
    testimony, the current president of Clayton Holdings, Paul T. Bossidy,
    contested some of Mr. Johnson's testimony. Calling the testimony
    ``inaccurate,'' he corrected Mr. Johnson on three points. First, Mr.
    Johnson testified during the hearing about meetings he had had with the
    rating agencies in which he showed them Clayton's Exception Tracking
    reports. Mr. Bossidy stated that Clayton had never disclosed client
    data during these meetings and that Clayton had never expressed
    concerns about the securitization process or the ratings being issued.
    Second, Mr. Bossidy cautioned that the exception tracking data provided
    to the FCIC was from ``beta'' reports. These reports contain valid
    client-level data, but are not standardized across clients. Different
    clients have different standards and guidelines, leading to different
    exception rates. Thus, the aggregated results do not form a meaningful
    basis for comparison between clients and the data cannot be used to
    draw conclusions. Finally, Mr. Johnson had stated that Clayton examined
    a number of prospectuses to determine if the information from Clayton's
    due diligence reports had been included. Mr. Bossidy clarified that
    Clayton was not actively reviewing prospectuses but had begun only in
    2007 in response to specific questions from regulators. Letter from
    Paul T. Bossidy, president and chief executive officer, Clayton
    Holdings, LLC, to Phil Angelides, chairman, Financial Crisis Inquiry
    Commission, Re: September 23, 2010 Sacramento Hearing (Sept. 30, 2010)
    (online at fcic.gov/news/pdfs/2010-1014-Clayton-Letter-to-FCIC.pdf)
    (hereinafter ``Letter from Paul Bossidy to Phil Angelides'').
        \123\ This description is just a summary. For a more complete
    description of one due diligence firm's process, see Financial Crisis
    Inquiry Commission, Testimony of Vicki Beal, senior vice president,
    Clayton Holdings, Transcript: Impact of the Financial Crisis--
    Sacramento, at 156-158 (Sept. 23, 2010) (online at fcic.gov/hearings/
    pdfs/2010-0923-transcript.pdf) (hereinafter ``Testimony of Vicki Beal
    before the FCIC'').
        \124\ Financial Crisis Inquiry Commission, All Clayton Trending
    Reports: 1st Quarter 2006--2nd Quarter 2007, Impact of the Financial
    Crisis--Sacramento (Sept. 23, 2010) (online at www.fcic.gov/hearings/
    pdfs/2010-0923-Clayton-All-Trending-Report.pdf). Eighteen percent of
    sampled loans did not meet guidelines but had compensating factors.
    Eleven percent of loans were non-compliant loans, but objections were
    waived. Seventeen percent of the loans in the sample were rejected. In
    his letter to the FCIC noted above, Mr. Bossidy cautioned the FCIC from
    relying on aggregated exception information. The exception tracking
    data provided to the FCIC was from ``beta'' reports which contain valid
    client-level data, but are not standardized across clients. Different
    clients use different standards and guidelines, leading to different
    exception rates. Letter from Paul Bossidy to Phil Angelides, supra note
    122.
    ---------------------------------------------------------------------------
        Rejected loans from the sample were returned to the seller.
    The sample, though, was only approximately 10 percent of the
    loans in the pool, and the low rate of compliance indicated
    that there were likely other non-compliant loans in the pool.
    The securitization sponsors did not then require due diligence
    on a larger sample to identify non-compliant loans.\125\
    Instead, some assert that the sponsors used the rate of non-
    compliant loans to negotiate a lower price for the pool of
    loans.\126\ These loan pools were subsequently sold to
    investors but, reports claim, the results of the due diligence
    were not disclosed in the prospectuses except for standard
    language that there might be underwriting exceptions.\127\
    ---------------------------------------------------------------------------
        \125\ Testimony of Keith Johnson before the FCIC, supra note 122,
    at 177-78; Testimony of Vicki Beal before the FCIC, supra note 123, at
    177.
        \126\ Testimony of Keith Johnson before the FCIC, supra note 122,
    at 183, 210-211.
        \127\ Written Testimony of Vicki Beal before the FCIC, supra note
    121, at 3.
    ---------------------------------------------------------------------------
        This behavior raises at least two potential securities
    fraud claims. The first is a Rule 10b-5 violation.\128\ Rule
    10b-5 prohibits ``omit[ting] to state any material fact
    necessary to make the statements made, in the light of the
    circumstances under which they were made, not misleading.''
    \129\ If the sponsors used the due diligence reports to
    negotiate a lower price, the information may have been
    material. In addition, the reports were not publicly
    available.\130\ On the other hand, the courts may find the
    standard disclosures, that there might be underwriting
    exceptions, to be sufficient disclosure. As yet, the 10b-5
    claim is untested in the courts, and the facts are still
    unproven.
    ---------------------------------------------------------------------------
        \128\ 17 CFR 240.10b5.
        \129\ 17 CFR 240.10b5.
        \130\ Written Testimony of Vicki Beal before the FCIC, supra note
    121, at 3 (``The work product produced by Clayton is comprised of
    reports that include loan-level data reports and loan exception
    reports. Such reports are `works for hire,' the property of our clients
    and provided exclusively to our clients.'').
    ---------------------------------------------------------------------------
        Another potential claim is based on Section 17 of the
    Securities Act of 1933, which makes it unlawful in the ``offer
    or sale of any securities . . . to obtain money or property by
    means of any untrue statement of a material fact or any
    omission to state a material fact necessary in order to make
    the statements made, in light of the circumstances under which
    they were made, not misleading.'' \131\ This claim also depends
    on unproved facts, but if the securitization sponsors used the
    due diligence reports to negotiate a lower price for the loan
    pools, the information is arguably material. As such, the
    sponsors may have violated Section 17 when they omitted the
    results of the due diligence reports from the prospectuses,
    though the proposition has not yet been ruled on by a court.
    Section 17, however, can only be enforced by the SEC, and not
    by private litigants.
    ---------------------------------------------------------------------------
        \131\ 15 U.S.C. Sec. 77q(a).
    ---------------------------------------------------------------------------
        There are suggestions in the press that authorities are
    examining the issue, with several news reports referencing
    discussions with investigators or prosecutors.\132\
    ---------------------------------------------------------------------------
        \132\ Gretchen Morgenson, Raters Ignored Proof of Unsafe Loans,
    Panel is Told, The New York Times (Sept. 26, 2010) (online at
    www.nytimes.com/2010/09/27/business/27ratings.html?pagewanted=all);
    Gretchen Morgenson, Seeing vs. Doing, The New York Times (July 24,
    2010) (online at www.nytimes.com/2010/07/25/business/
    25gret.html?ref=fair_game).
    ---------------------------------------------------------------------------

    2. Existing and Pending Claims under Various Fraud Theories

        Currently, these issues are being explored at the state
    level and, as discussed above, the private investor level. The
    recent disclosures about robo-signing may provide additional
    causes of action and additional arguments for private lawsuits
    asking for put-backs of deficient loans. In response to a
    question at the Panel's most recent hearing on housing issues,
    however, one of the witnesses indicated that he was not aware
    of any successful put-backs for foreclosure procedure problems
    alone.\133\ According to some consumer lawyers who are
    significantly involved in these proceedings, while it is very
    unlikely that a national class action lawsuit based on wrongful
    foreclosure claims could be successfully filed, it may be
    possible on a state-by-state basis.\134\ The outcome in these
    cases is uncertain, and consumer lawyers said that at this
    point it would be difficult to quantify potential losses
    arising out of these actions or any similar challenges in
    individual foreclosure procedures.\135\
    ---------------------------------------------------------------------------
        \133\ Congressional Oversight Panel, Testimony of Guy Cecala, chief
    executive officer and publisher, Inside Mortgage Finance Publications,
    Inc., Transcript: COP Hearing on TARP Foreclosure Mitigation Programs
    (Oct. 27, 2010) (publication forthcoming) (online at cop.senate.gov/
    hearings/library/hearing-102710-foreclosure.cfm) (hereinafter
    ``Testimony of Guy Cecala'').
        \134\ Consumer lawyers conversations with Panel staff (Nov. 9,
    2010). Several state class actions have been filed alleging wrongful
    foreclosures and fraud on the court, see, e.g., Defendant William
    Timothy Stacy's Answer, Affirmative Defenses and Individual and Class
    Action Counterclaims, Wells Fargo Bank NA, as Trustee for National City
    Mortgage Loan Trust 2005-1, Mortgage-Backed Certificates, Series 2005-1
    vs. William Timothy Stacy, et al., No. 08-CI-120 (Commonwealth of
    Kentucky Bourbon Circuit Court Division 1 Oct. 4, 2010) See also Class
    Action Complaint, Geoffrey Huber, Beatriz D'Amico-Souza, and Michael
    and Tina Unsworth, for themselves and all persons similarly situated v.
    GMAC, LLC, n/k/a Ally Financial, Inc., No. 8:10-cv-02458-SCB-EAJ
    (United States District Court Middle District of Florida Tampa Division
    Nov. 4, 2010).
        \135\ Consumer lawyers conversations with Panel staff (Nov. 9,
    2010).
    ---------------------------------------------------------------------------
        Various states are proceeding under a variety of theories.
    As noted above, on October 13, 2010, all 50 state attorneys
    general, as well as state bank and mortgage regulators,
    announced that they would pursue a ``bi-partisan multistate
    group'' to investigate foreclosure irregularities.\136\ They
    are working together to investigate allegations of questionable
    and potentially fraudulent foreclosure documentation practices,
    and may design rules to improve foreclosure practices. They
    also may begin individual actions against some of the
    implicated institutions. On October 6, 2010, Ohio Attorney
    General Richard Cordray filed a suit against GMAC Mortgage and
    its parent Ally Financial, alleging that the companies
    committed common law fraud and violated the Ohio Consumer Sales
    Practices Act.\137\ In response, GMAC referred to the
    irregularities as ``procedural mistakes'' and maintained that
    it would defend itself ``vigorously.'' \138\ The Ohio state
    attorney general alleges that ``GMAC and its employees
    committed fraud on Ohio consumers and Ohio courts by signing
    and filing hundreds of false affidavits in foreclosure cases.''
    He argues that the defendants' actions were both against the
    Ohio Consumer Sales Practices Act and constituted common law
    fraud.\139\ The attorney general has asked the court to halt
    affected foreclosures until defendants remedy their faulty
    practices and to require them to submit written procedures to
    the attorney general and the court to ensure that no employee
    signs documentation without personal knowledge.
    ---------------------------------------------------------------------------
        \136\ 50 States Sign Mortgage Foreclosure Joint Statement, supra
    note 26.
        \137\ Complaint, State of Ohio ex rel. Richard Cordray v. GMAC
    Mortgage, CI0201006984 (Lucas Cnty Ohio Ct. Common Pleas Oct. 6, 2010)
    (online at www.ohioattorneygeneral.gov/GMACLawsuit). The complaint also
    named Jeffrey Stephan as a defendant. It was Jeffrey Stephan's
    testimony in a Maine foreclosure case that he signed thousands of
    affidavits without verifying their content that ignited the foreclosure
    documentation scandal.
        \138\ Ally Financial, Inc., GMAC Mortgage Statement on Ohio Lawsuit
    (Oct. 6, 2010) (online at media.ally.com/index.php?s=43&item=420).
        \139\ The Ohio attorney general argues that the statements in the
    foreclosure affidavits were material and false, and the employees
    making them were aware that they were false and were making them anyway
    to induce Ohio courts and opposing parties to rely upon them, which, in
    turn, justifiably did so. He further argues that Ally and GMAC
    financially benefitted from these fraudulent practices by completing
    foreclosures that should not have been allowed to proceed, and the
    ``system of justice in Ohio and Ohio borrowers have suffered and are
    suffering irreparable injury.'' The Ohio attorney general also argues
    that Ally and GMAC ``engaged in a pattern and practice of unfair,
    deceptive and unconscionable acts'' in violation of the Ohio Consumer
    Sales Practices Act when their employees signed false affidavits and
    when they attempted to assign mortgage notes on behalf of MERS.
    Complaint, State of Ohio ex rel. Richard Cordray v. GMAC Mortgage,
    CI0201006984 (Lucas Cnty Ohio Ct. Common Pleas Oct. 6, 2010) (online at
    www.ohioattorneygeneral.gov/GMACLawsuit).
    ---------------------------------------------------------------------------
        Although Ohio is the first state to take action, it would
    not be surprising if others follow.\140\ Depositions have been
    taken in various foreclosure cases around the country that
    point to questionable practices by employees at a number of
    banks.\141\ Most of the large financial institutions that
    service mortgages maintain that documentation issues can be
    fixed relatively easily by re-submitting affidavits where
    appropriate and that based on their internal reviews there is
    no indication that the mortgage market is severely flawed. Many
    of the banks that temporarily suspended foreclosures have now
    resumed them. However, in their most recent earnings
    statements, many of these institutions have indicated that they
    set aside additional funds for repurchase reserves and
    potential litigation costs resulting from the foreclosure
    documentation irregularities.
    ---------------------------------------------------------------------------
        \140\ See Section E.3.
        \141\ See, e.g., Deposition of Xee Moua, Wells Fargo Bank v. John
    P. Stipek, No. 50 2009 CA 012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9,
    2010).
    ---------------------------------------------------------------------------
        In addition to these potential lawsuits, the
    Administration's Financial Fraud Enforcement Task Force (FFETF)
    is in the early stages of an investigation into whether banks
    and other companies that submitted flawed paperwork in state
    foreclosure proceedings may also have violated federal laws.
    Treasury's representative informed the Panel that through
    Treasury's Financial Crimes Enforcement Network (FinCEN) they
    are actively participating in the work of the FFETF led by the
    Department of Justice.\142\ Treasury has otherwise indicated
    that they are not presently engaged in any independent
    investigative efforts.\143\ To date, little has been disclosed
    about the investigation.
    ---------------------------------------------------------------------------
        \142\ Congressional Oversight Panel, Written Testimony of Phyllis
    Caldwell, chief of the Homeownership Preservation Office, U.S.
    Department of the Treasury, COP Hearing on TARP Foreclosure Mitigation
    Programs, at 13 (Oct. 27, 2010) (online at cop.senate.gov/documents/
    testimony-102710-caldwell.pdf) (hereinafter ``Written Testimony of
    Phyllis Caldwell''). In addition to their participation in FFETF,
    Treasury is coordinating efforts with other federal agencies and
    regulators, including the Department of Housing and Urban Development
    (HUD), the Federal Housing Administration (FHA), the Federal Housing
    Finance Agency (FHFA), the Federal Reserve System, the Office of Thrift
    Supervision (OTS), the Office of the Comptroller of the Currency (OCC),
    the FDIC, the Federal Trade Commission (FTC), and the SEC.
        \143\ Congressional Oversight Panel, Testimony of Phyllis Caldwell,
    chief of the Homeownership Preservation Office, U.S. Department of the
    Treasury, Transcript: COP Hearing on TARP Foreclosure Mitigation
    Programs (Oct. 27, 2010) (publication forthcoming) (online at
    cop.senate.gov/hearings/library/hearing-102710-foreclosure.cfm)
    (hereinafter ``Testimony of Phyllis Caldwell'').
    ---------------------------------------------------------------------------

    3. Other Potential Claims

        Beyond the various fraud claims, there are also several
    other potential claims. For example, those who signed false
    affidavits may be guilty of perjury. Perjury is the crime of
    intentionally stating any fact the witness knows to be false
    while under oath, either in oral testimony or in a written
    declaration.\144\ Though the exact definition varies from state
    to state, perjury is universally prohibited. Affidavits such as
    the ones involved in the foreclosure irregularities are
    statements made under oath and thus clearly fall within the
    scope of the perjury statutes.\145\ Moreover, there are reports
    of robo-signers admitting in depositions that they knew they
    were lying when they signed the affidavits.\146\ As a result,
    it is possible that these individuals at least are guilty of
    perjury. Even without such an explicit admission, it is
    possible that a court could find that a robo-signer was
    intentionally and knowingly lying by signing hundreds of
    affidavits a day that attested to personal knowledge of loan
    documents.\147\ It is important to note, however, that perjury
    prosecutions are rare. For example, of the 91,835 federal cases
    commenced in fiscal year 2008, at most, only 342 charged
    perjury as the most serious offense.\148\ It is thus possible
    that robo-signers, though potentially guilty, will not be
    charged.
    ---------------------------------------------------------------------------
        \144\ For example, the federal perjury statute states ``Whoever--
    (1) having taken an oath before a competent tribunal, officer, or
    person, in any case in which a law of the United States authorizes an
    oath to be administered, that he will testify, declare, depose, or
    certify truly, or that any written testimony, declaration, deposition,
    or certificate by him subscribed, is true, willfully and contrary to
    such oath states or subscribes any material matter which he does not
    believe to be true; or (2) in any declaration, certificate,
    verification, or statement under penalty of perjury as permitted under
    section 1746 of title 28, United States Code, willfully subscribes as
    true any material matter which he does not believe to be true; is
    guilty of perjury and shall, except as otherwise expressly provided by
    law, be fined under this title or imprisoned not more than five years,
    or both.'' 18 U.S.C. Sec. 1621.
        \145\ Black's Law Dictionary, at 62 (8th ed. 2004).
        \146\ A Florida Law Firm, The Ticktin Law Group, P.A. has taken
    hundreds of depositions in which employees or contractors of various
    banks admitted to not knowing what they were signing or lying regarding
    their personal knowledge of information in affidavits. See, e.g.,
    Deposition of Ismeta Dumanjic, La Salle Bank NA as Trustee for
    Washington Mutual Asset-Backed Certificates WMABS Series 2007-HE2 Trust
    v. Jeanette Attelus, et al., No. CACE 08060378 (Fla. 17th Cir. Ct. Dec.
    8, 2009).
        \147\ For testimony attesting to signing hundreds of affidavits a
    day, see Deposition of Xee Moua, at 28-29, Wells Fargo Bank v. John P.
    Stipek, No. 50 2009 CA 012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9,
    2010); Deposition of Renee Hertzler, at 25, In re: Patricia L. Starr,
    No. 09-41903-JBR (D. Mass. Feb. 19, 2010).
        \148\ Bureau of Justice Statistics, Federal Justice Statistics,
    2008--Statistical Tables, at Table 4.1 (Nov. 2008) (online at
    bjs.ojp.usdoj.gov/content/pub/html/fjsst/2008/tables/fjs08st401.pdf).
    ---------------------------------------------------------------------------
        By contrast, the state attorneys general are already
    investigating whether foreclosure irregularities such as the
    use of robo-signers violated state unfair or deceptive acts or
    practices (UDAP) laws. Each state has some form of UDAP law,
    and most generally, they prohibit practices in consumer
    transactions that are deemed to be unfair or deceptive.\149\
    Individual state laws, however, can be as broad as generally
    prohibiting deceptive or unfair conduct or as narrow as
    prohibiting only a discrete list of practices or exempting all
    acts by banks.\150\ As a result, whether there has been a UDAP
    violation will depend heavily on the particularities of each
    state's law. The state attorneys general, though, are already
    examining the matter. In announcing their bipartisan multistate
    group, the attorneys general explicitly stated that they
    ``believe such a process [robo-signing] may constitute a
    deceptive act and/or an unfair practice.'' \151\
    ---------------------------------------------------------------------------
        \149\ Shaun K. Ramey and Jennifer M. Miller, State Attorneys
    General Strong-Arm Mortgage Lenders, 17 Business Torts Journal 1, at 1
    (Fall 2009) (online at www.sirote.com/tyfoon/site/members/D/6/E/D/0/7/
    0/4/3/C/file/S%20Ramey/Ramey-Miller_REPRINT.pdf).
        \150\ Carolyn L. Carter, Consumer Protection in the United States:
    A 50-State Report on Unfair and Deceptive Acts and Practices Statutes
    (Feb. 2009) (online at www.nclc.org/images/pdf/udap/
    report_50_states.pdf).
        \151\ 50 States Sign Mortgage Foreclosure Joint Statement, supra
    note 26.
    ---------------------------------------------------------------------------

    4. Other State Legal Steps

        In addition to the Ohio lawsuit described above and the
    ongoing joint investigation, some other state officials have
    taken concrete steps to address the foreclosure irregularities,
    including but not limited to: \152\
    ---------------------------------------------------------------------------
        \152\ This list is not a comprehensive list of state actions.
    States are becoming involved at a rapid pace, in a variety of ways, and
    from a variety of levels.
    ---------------------------------------------------------------------------
         In New York, the court system now requires that
    those initiating residential foreclosure actions must file a
    new affirmation to certify that an appropriate employee has
    personally reviewed their documents and papers filed in the
    case and confirmed both the factual accuracy of these court
    filings and the accuracy of the notarizations contained
    therein.\153\
    ---------------------------------------------------------------------------
        \153\ New York State Unified Court System, Attorney Affirmation-
    Required in Residential Foreclosure Actions (Oct. 20, 2010) (online at
    www.courts.state.ny.us/attorneys/foreclosures/affirmation.shtml); New
    York State Unified Court System, Sample Affirmation Document (online at
    www.courts.state.ny.us/attorneys/foreclosures/Affirmation-
    Foreclosure.pdf) (accessed Nov. 12, 2010).
    ---------------------------------------------------------------------------
         In California, a non-judicial foreclosure state,
    the attorney general sent a letter to JPMorgan Chase demanding
    that the firm stop all foreclosures unless it could demonstrate
    that all foreclosures had been conducted in accordance with
    California law.\154\ The attorney general also called on all
    other lenders to halt foreclosures unless they can demonstrate
    compliance with California law.\155\
    ---------------------------------------------------------------------------
        \154\ Letter from Edmund G. Brown, Jr., attorney general, State of
    California, to Steve Stein, SVP channel director, Homeownership
    Preservation and Partnerships, JPMorgan Chase (Sept. 30, 2010) (online
    at ag.ca.gov/cms_attachments/press/pdfs/n1996_
    jp_morganchase_letter_.pdf).
        \155\ Office of California Attorney General Edmund G. Brown, Jr.,
    Brown Calls on Banks to Halt Foreclosures In California (Oct. 8, 2010)
    (online at ag.ca.gov/newsalerts/release.php?id=2000&).
    ---------------------------------------------------------------------------
         In Arizona, which is also a non-judicial
    foreclosure state, the attorney general sent letters on October
    7, 2010 to several servicers implicated in the robo-signing
    scandals to demand a description of their practices and any
    remedial actions taken to address potential paperwork
    irregularities. The attorney general wrote that if any
    employees or agents used any of the questionable practices in
    connection with conducting a trustee's sale or a foreclosure in
    Arizona, such use would likely constitute a violation of the
    Arizona Consumer Fraud Act, and the attorney general would have
    to take appropriate action.\156\
    ---------------------------------------------------------------------------
        \156\ Letter from Terry Goddard, attorney general, State of
    Arizona, to mortgage servicers, Re: ``Robo-Signing'' of Foreclosure
    Documents in Arizona (Oct. 7, 2010) (online at www.azag.gov/
    press_releases/oct/2010/Mortgage%20Loan%20Servicer%20Letter.pdf).
    ---------------------------------------------------------------------------
         In Ohio, in addition to his lawsuit against GMAC,
    the attorney general filed an amicus curiae brief in an
    individual foreclosure case asking the court to consider
    evidence that GMAC committed fraud that tainted the entire
    judicial process and to consider sanctioning GMAC.\157\ The
    attorney general also sent a letter to 133 Ohio judges asking
    them for information on any cases involving the robo-signer Xee
    Moua.\158\ In addition, he asked Wells Fargo Bank to vacate any
    foreclosure judgments in Ohio based on documents that were
    signed by robo-signers and to stop the sales of repossessed
    properties.\159\
    ---------------------------------------------------------------------------
        \157\ Brief for Richard Cordray, Ohio attorney general, as Amici
    Curiae, US Bank, National Association v. James W. Renfro, No. CV-10-
    716322 (Cuyahoga Cty Ohio Ct. Common Pleas Oct. 27, 2010); Office of
    Ohio Attorney General Richard Cordray, Cordray Outlines Fraud in
    Cleveland Foreclosure Case (Oct. 27, 2010) (online at
    www.ohioattorneygeneral.gov/Briefing-Room/News-Releases/October-2010/
    Cordray-Outlines-Fraud-in-Cleveland-Foreclosure-Ca).
        \158\ Letter from Richard Cordray, attorney general, State of Ohio,
    to Judges, State of Ohio (Oct. 29, 2010).
        \159\ Letter from Richard Cordray, attorney general, State of Ohio,
    to David Moskowitz, deputy general counsel, Wells Fargo (Oct. 29,
    2010).
    ---------------------------------------------------------------------------
         In The District of Columbia, Attorney General
    Peter Nickles announced on October 27, 2010 that foreclosures
    cannot proceed in the District of Columbia unless a mortgage
    deed and all assignments of the deed are recorded in public
    land records, and that foreclosures relying on MERS would not
    satisfy the requirement.\160\ MERS responded the next day by
    issuing a statement that their procedures conform to the laws
    of the District of Columbia and encouraged their members to
    contact them if they experience problems with their
    foreclosures.\161\
    ---------------------------------------------------------------------------
        \160\ Office of District of Columbia Attorney General Peter J.
    Nickles, Statement of Enforcement Intent Regarding Deceptive
    Foreclosure Sale Notices (Oct. 27, 2010) (online at newsroom.dc.gov/
    show.aspx?agency=occ§ion=2&release=
    20673&year=2010&file=file.aspx%2frelease%2f20673%2fforeclosure%2520state
    ment.pdf).
        \161\ MERSCORP, Inc., MERS Response to D.C. Attorney General's Oct.
    28, 2010 Statement of Enforcement (Oct. 28, 2010) (online at
    www.mersinc.org/news/details.aspx?id=250). The statement emphasizes
    that ``[w]e will take steps to protect the lawful right to foreclose
    that the borrower contractually agreed to if the borrower defaults on
    their mortgage loan.'' The law firm K&L Gates has also published a
    legal analysis critical of the attorney general's actions. See K&L
    Gates LLP, DC AG Seeks to Stop Home Loan Foreclosures Based on
    Incomplete Legal Analysis, Mortgage Banking & Consumer Financial
    Products Alert (Nov. 1, 2010) (online at www.klgates.com/newsstand/
    detail.aspx?publication=6737).
    ---------------------------------------------------------------------------
         In Connecticut, the attorney general started
    investigating GMAC/Ally and demanded that the company halt all
    foreclosures. He also asked the company to provide specific
    information relating to its foreclosure practices.\162\ In
    addition, the attorney general asked the state Judicial
    Department on October 1, 2010 to freeze all home foreclosures
    for 60 days to allow time to institute measures to assure the
    integrity of document filings.\163\ The Judicial Department
    refused this request.\164\
    ---------------------------------------------------------------------------
        \162\ Office of Connecticut Attorney General Richard Blumenthal,
    Attorney General Investigating Defective GMAC/Ally Foreclosure Docs,
    Demands Halt To Its CT Foreclosures (Sept. 27, 2010) (online at
    www.ct.gov/ag/cwp/view.asp?A=2341&Q=466312).
        \163\ Office of Connecticut Attorney General Richard Blumenthal,
    Attorney General Asks CT Courts To Freeze Home Foreclosures 60 Days
    Because of Defective Docs (Oct. 1, 2010) (www.ct.gov/ag/cwp/
    view.asp?A=2341&Q=466548).
        \164\ Letter from Judge Barbara M. Quinn, chief court
    administrator, State of Connecticut Judicial Branch, to Richard
    Blumenthal, attorney general, State of Connecticut (Oct. 14, 2010).
    ---------------------------------------------------------------------------

    5. Other Possible Implications: Potential ``Front-End'' Fraud and
            Documentation Irregularities

        Until the full scope of the problem is determined, it will
    be difficult to assess whether banks, servicers, or borrowers
    knew of the irregularities in the market. However, there are
    several signs that the problem was at least partially
    foreseeable. For example, numerous systems had been developed
    to circumvent the slow, paper-based property system in the
    United States. MERS, discussed in more detail above,
    represented an attempt to add speed and simplification to the
    property registration process, which in turn would allow
    property to be transferred more quickly and easily. MERS arose
    in reaction to a clash: during the boom, originations and
    securitizations moved extremely quickly. But the property law
    system that governed the underlying collateral moves slowly,
    and is heavily dependent on a variety of steps memorialized on
    paper and thus inefficient at processing enormous lending
    volume. While systems like MERS appeared to allow the housing
    market to accelerate, the legal standards underpinning the
    market did not change substantially.\165\ In some respects, the
    irregularities and the mounting legal problems in the mortgage
    system seem to be the consequence of the banks asking the
    property law system to do something that it may be largely
    unequipped to do: process millions of foreclosures within a
    relatively short period of time.\166\ The Panel emphasizes that
    mortgage lenders and securitization servicers should not
    undertake to foreclose on any homeowner unless they are able to
    do so in full compliance with applicable laws and their
    contractual agreements with the homeowner. If legal uncertainty
    remains, foreclosure should cease with respect to that
    homeowner until all matters are objectively resolved and vetted
    through competent counsel in each applicable jurisdiction.
    Satisfaction of applicable legal standards and legal certainty
    is in the best interests of homeowners as well as creditors and
    will enable all concerned parties to exercise properly their
    legal and contractual rights and remedies.
    ---------------------------------------------------------------------------
        \165\ See, e.g., Federal National Mortgage Assoc. v. Nicolle
    Bradbury, supra note 12 (requiring that the plaintiff provide, among
    other things, the book and page number of the mortgage, as well as the
    street address and stating that failure to provide a street address is
    sufficient to preclude summary judgment in a foreclosure proceeding).
        \166\ See Section C, supra, discussing strains on servicers.
    ---------------------------------------------------------------------------
        This combination of factors--a demand for speed, the use of
    systems designed to streamline a legal regime that was viewed
    as out-of-date, and a slow, localized legal system--may have
    substantially increased the likelihood that documentation would
    be insufficient. As discussed above, some authorities are
    taking direct aim at MERS and the validity of its processes.
    Coupled with business pressure exerted on law firms \167\ and
    contractors \168\ to process rapidly foreclosure documents, the
    system had clear risks of encouraging corner-cutting and
    creating substantial legal difficulties. Furthermore, even if
    these problems were not foreseeable from the vantage point of
    the housing boom, the downturn in the housing market and the
    foreclosure crisis made them much more likely. In 2008 and
    2009, a vast amount of attention was given to the difficulty of
    determining liability in the securitization market because of
    problems with documentation and transparency.\169\ At this
    time, servicers could have had notice of the types of
    documentation problems that could affect the transfer of
    mortgage ownership. In some cases, even when servicers were
    explicitly made aware of the shoddy documentation, they did
    little to correct the problem. One judge determined that
    ``[r]ather than being an isolated or inadvertent instance of
    misconduct . . . GMAC has persisted in its unlawful document
    signing practices'' even after it was ordered to correct its
    practices.\170\
    ---------------------------------------------------------------------------
        \167\ Deposition of Tammie Lou Kapusta, In re: Investigation of Law
    Offices of David J. Stern, P.A. (Sept. 22, 2010).
        \168\ Federal National Mortgage Association, Foreclosure Time
    Frames and Compensatory Fees for Breach of Servicing Obligations, at 3
    (Aug. 31, 2010) (Announcement SVC-2010-12) (online at
    www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1012.pdf) (stating
    that Fannie Mae might pursue compensatory fees based on ``the length of
    the delay, and any additional costs that are directly attributable to
    the delay.'').
        \169\ See, e.g., Hernando de Soto, Toxic Assets Were Hidden Assets,
    Wall Street Journal (Mar. 25, 2009) (online at online.wsj.com/article/
    SB123793811398132049.html) (``The real villain is the lack of trust in
    the paper on which [subprime mortgages]--and all other assets--are
    printed. If we don't restore trust in paper, the next default--on
    credit cards or student loans--will trigger another collapse in paper
    and bring the world economy to its knees.'').
        \170\ Federal National Mortgage Assoc. v. Nicolle Bradbury, supra
    note 12 (``The Court is particularly troubled by the fact that
    Stephan's deposition in this case is not the first time that GMAC's
    high-volume and careless approach to affidavit signing has been
    exposed. . . . The experience of this case reveals that, despite the
    Florida Court's order, GMAC's flagrant disregard apparently persists.
    It is well past time for such practices to end.''). See also Section C,
    supra. It is worth noting that the rights of a bona-fide purchaser for
    value are affected by whether the purchaser had notice of a competing
    claim at the time of purchase. One possible source of conflict will be
    what, under these circumstances, constitutes adequate notice. Panel
    staff conversations with industry sources (Nov. 9, 2010).
    ---------------------------------------------------------------------------
        Some observers argue that current irregularities were not
    only foreseeable, but that they mask a range of potential
    irregularities at the stage in which the mortgages were
    originated and pooled. According to that view, current
    practices simply added to and magnified problems with the prior
    practices. The legal consequences of foreclosure irregularities
    will be magnified if the problems also plagued originations:
    after all, foreclosures are still a relatively limited portion
    of the market. If all securitizations or performing whole loans
    were to be affected, the consequences could be significantly
    greater. At this point, answers as to what exactly is the
    source of the problems at the front end and how severe the
    consequences may be going forward depend to a large degree on
    who is evaluating the problem. The Panel describes below the
    perspectives of various stakeholders in the residential
    mortgage market.
                a. Academics and Advocates for Homeowners
        Many lawyers and stakeholders who have worked with
    borrowers and servicers on a regular basis over the past few
    years, primarily in bankruptcy and foreclosure cases, maintain
    that documentation problems, including potentially fraudulent
    practices, have been pervasive and apparent.\171\ These actors,
    including academics who study the topic, argue that bankruptcy
    and foreclosure procedures have been revealing major
    deficiencies in mortgage servicing and documentation for quite
    some time. Professor Katherine M. Porter, a professor of law
    who testified at the Panel's most recent hearing, wrote: ``The
    robo-signing scandal should not have been a surprise to anyone;
    these problems were being raised in litigation for years now.
    Similarly, I released a study in 2007--three years ago--that
    showed that mortgage companies who filed claims to be paid in
    bankruptcy cases of homeowners did not attach a copy of the
    note to 40% of their claims.'' \172\ According to this view,
    the servicing process was severely flawed, and ``servicers
    falsify court documents not just to save time and money, but
    because they simply have not kept the accurate records of
    ownership, payments, and escrow accounts that would enable them
    to proceed legally.'' \173\ In 2008-2009 over 1,700 lost note
    affidavits were filed in Broward County, Florida alone.\174\
    These affidavits claim that the original note has been lost or
    destroyed and cannot be produced in court. It is important to
    recognize, however, that a lost note affidavit may not actually
    mean that the note has been lost. In her written testimony to
    the Panel, Professor Katherine Porter points out that her study
    of lost notes in bankruptcies ``does not prove . . . whether
    the mortgage companies have a copy of the note and refused to
    produce it to stymie the consumers' rights or to cut costs,
    whether the mortgage companies or their predecessors in a
    securitization lost the note, or whether someone other than the
    mortgage company is the holder/bearer of the note.'' \175\
    ---------------------------------------------------------------------------
        \171\ For example, in her testimony submitted to the Congressional
    Oversight Panel, Julia Gordon of the Center for Responsible Lending
    writes: ``The recent media revelations about ``robo-signing'' highlight
    just one of the many ways in which servicers or their contractors
    elevate profits over customer service or duties to their clients, the
    investors. Other abuses include misapplying payments, force-placing
    insurance improperly, disregarding requirements to evaluate homeowners
    for nonforeclosure options, and fabricating documents related to the
    mortgage's ownership or account status.'' See Congressional Oversight
    Panel, Written Testimony of Julia Gordon, senior policy counsel, Center
    for Responsible Lending, COP Hearing on TARP Foreclosure Mitigation
    Programs, at 3 (Oct. 27, 2010) (online at cop.senate.gov/documents/
    testimony-102710-gordon.pdf) (hereinafter ``Written Testimony of Julia
    Gordon'').
        \172\ Written Testimony of Katherine Porter, supra note 14, at 9
    (referencing her paper: Katherine M. Porter, Misbehavior and Mistake in
    Bankruptcy Mortgage Claims, Texas Law Review, Vol. 87 (2008) (Nov.
    2008) (online at www.mortgagestudy.org/files/Misbehavior.pdf)). The
    paper gives an in-depth analysis of how mortgage servicers frequently
    do not comply with bankruptcy law.
        \173\ Written Testimony of Julia Gordon, supra note 171, at 11.
        \174\ Legalprise Inc., Report on Lost Note Affidavits in Broward
    County, Florida (Oct. 2010). Legalprise is a Florida legal research
    firm that uses and analyzes public foreclosure court records.
        \175\ Written Testimony of Katherine Porter, supra note 14, at 9.
    ---------------------------------------------------------------------------
        If the lawyers' and advocates' assertions of widespread
    irregularities are correct, it could mean that potentially
    millions of shoddily documented mortgages have been pooled
    improperly into securitization trusts. Lawyers are using a lack
    of standing by the servicers due to ineffective conveyance of
    ownership of the mortgage as a defense in foreclosure cases.
    Some of these lawyers argue that the disconnect between what
    was happening on the ``street level,'' i.e., with the
    origination and documentation of mortgages, and the transfer
    requirements in the PSAs, is so huge that no credence can be
    given to the banks' argument that the issues are merely
    technical.\176\ However, commentators who believe that the
    problem is widespread also believe that investors in these
    securitization pools, rather than homeowners, may be the best
    placed to pursue the cases on a larger scale successfully.\177\
    ---------------------------------------------------------------------------
        \176\ Consumer lawyers conversations with Panel staff (Oct. 28,
    2010).
        \177\ Consumer lawyers conversations with Panel staff (Nov. 9,
    2010).
    ---------------------------------------------------------------------------
                b. Servicers and Banks
        Since the foreclosure irregularities have surfaced, the
    banks involved have maintained that the problems are largely
    procedural and technical in nature. Banks have temporarily
    suspended foreclosures in judicial foreclosure states in
    particular and looked into their practices, but they state that
    they do not view these problems as fundamental either in the
    foreclosure area or in the origination and pooling of
    mortgages. The CEO of Bank of America, Brian Moynihan, noted in
    the company's most recent earnings call that Bank of America
    has resumed foreclosures, but ``it's going to take us three or
    five weeks to get through and actually get all the judicial
    states taken care of. The teams reviewing data have not found
    information which was inaccurate, would affect the frame
    factors of the foreclosure; i.e., the customer's delinquency,
    etcetera.'' \178\ He focused on the faulty affidavits and
    argued that ``[they] fixed the affidavit signing problem or
    will be fixed in very short order.'' \179\ Many of the other
    large banks have issued statements in the same vein.\180\ Most
    of these banks have either not commented on the issues around
    the transfer of ownership of the mortgage or maintain that
    alleged ownership transfer problems are without merit or
    exaggerated.\181\
    ---------------------------------------------------------------------------
        \178\ Bank of America Q3 2010 Earnings Call Transcript, supra note
    97, at 6.
        \179\ Bank of America Q3 2010 Earnings Call Transcript, supra note
    97, at 6.
        \180\ JPMorgan Chase & Co., Financial Results 3Q10, at 15 (Oct. 13,
    2010) (online at files.shareholder.com/downloads/ONE/
    1051047839x0x409164/e27f1d82-ef74-429e-8ff1-7d6706634621/
    3Q10_Earnings_Presentation.pdf) (hereinafter ``JPMorgan Q3 2010
    Financial Results'') (``Based on our processes and reviews to date, we
    believe underlying foreclosure decisions were justified by the facts
    and circumstances.''); Wells Fargo Update on Affidavits and Mortgage
    Securitizations, supra note 23 (``The issues the company has identified
    do not relate in any way to the quality of the customer and loan data;
    nor does the company believe that any of these instances led to
    foreclosures which should not have otherwise occurred.'').
        \181\ For example, the American Securitization Forum issued a
    statement questioning the legitimacy of concerns raised about
    securitization practices: ``In the last few days, concerns have been
    raised as to whether the standard industry methods of transferring
    ownership of residential mortgage loans to securitization trusts are
    sufficient and appropriate. These concerns are without merit and our
    membership is confident that these methods of transfer are sound and
    based on a well-established body of law governing a multi-trillion
    dollar secondary mortgage market.'' See American Securitization Forum,
    ASF Says Mortgage Securitization Legal Structures & Loan Transfers Are
    Sound (Oct. 15, 2010) (online at www.americansecuritization.com/
    story.aspx?id=4457) (hereinafter ``ASF Statement on Mortgage
    Securitization Legal Structures and Loan Transfers''). ASF will issue a
    white paper in the coming weeks to elaborate further on this statement.
    ---------------------------------------------------------------------------
                c. Investors
        As discussed above, securitization investors have been
    involved in lawsuits regarding underwriting representations and
    warranties for some time. Investors in MBS or collateralized
    debt obligation (CDO) transactions have a variety of options to
    pursue a claim. Claims alleging violations of representations
    and warranties have typically focused on violations of
    underwriting standards regarding the underlying loans pooled
    into the securities. Another option may be to pursue similar
    claims relating to violations of representations and warranties
    with respect to the transfer of mortgage ownership. In the wake
    of the current documentation controversies, it appears that
    private investors may become more emboldened to pursue put-back
    requests and potentially file lawsuits. For example, and as
    discussed above, a group of investors--including FRBNY in its
    capacity as owner of RMBS it obtained from American
    International Group, Inc. (AIG)--sent a letter to Bank of
    America as an initial step to be able to demand access to
    certain loan files.\182\ Direct contact with the bank was
    initiated because the securitization trustee (Bank of New York)
    had refused to comply with the initial request in accordance
    with the PSA. FRBNY, as an investor, is on equal footing with
    all the other investors, and according to FRBNY's
    representatives, they view this action and any potential
    participation in a future lawsuit as one way to attempt to
    recover funds for the taxpayers.\183\
    ---------------------------------------------------------------------------
        \182\ See Letter from Gibbs & Bruns LLP to Countrywide, supra note
    95. As noted above, the letter predominantly alleges problems with loan
    quality and violation of prudent servicing obligations. See also Gibbs
    & Bruns LLP, Institutional Holders of Countrywide-Issued RMBS Issue
    Notice of Non-Performance Identifying Alleged Failures by Master
    Servicer to Perform Covenants and Agreements in More Than $47 Billion
    of Countrywide-Issued RMBS (Oct. 18, 2010) (online at
    www.gibbsbruns.com/files/Uploads/Documents/
    Press_Release_Gibbs%20&%20Bruns%20
    _10_18_10.pdf); Gibbs & Bruns LLP, Countrywide RMBS Initiative (Oct.
    20, 2010) (online at www.gibbsbruns.com/countrywide-rmbs-initiative-10-
    20-2010/).
        \183\ FRBNY staff conversations with Panel staff (Oct. 26, 2010).
    ---------------------------------------------------------------------------
        While there may be a growing appetite for pursuing such
    lawsuits, these lawsuits still have to overcome a fair number
    of obstacles built in to the PSAs,\184\ as well as problems
    inherent in any legal action that requires joint action by many
    actors.\185\ As a general matter, what appears to be a
    significant problem is that the operating documents for these
    transactions generally give significant discretion to trustees
    in exercising their powers,\186\ and these third parties may
    not be truly independent and willing to look out for the
    investors.\187\
    ---------------------------------------------------------------------------
        \184\ For further discussion of these obstacles, see Section D.2.
    In addition, see description of PSAs in Section D.1, supra.
        \185\ For example, the investors taking action have to consider
    costs associated with their litigation such as indemnifications to be
    given to trustees when those are directed to initiate a lawsuit on the
    bondholders' behalf. Another consideration is that non-participating
    investors may also ultimately benefit from legal actions without
    contributing to the costs.
        \186\ For example, in some PSAs, trustees are not required to
    investigate any report or, in many agreements, request put-backs,
    unless it is requested by 25 percent of investors. See Pooling and
    Servicing Agreement by and among J.P. Morgan Acceptance Corporation I,
    Depositor, et al., at 122 (Apr. 1, 2006) (online at www.scribd.com/doc/
    31453301/Pooling-Servicing-Agreement-JPMAC2006-NC1-PSA). Absent that
    threshold being met, the trustee has discretion to act. For further
    discussion, see Section D.2.
        \187\ Amherst Securities Group LP, Conference Call: ``Robosigners,
    MERS, And The Issues With Reps and Warrants'' (Oct. 28, 2010). If the
    investors wished to act against trustees they believe are not
    independent, there are some legal avenues they could pursue. For
    example, the investors could remove the trustee using provisions that
    are typically in PSAs that allow for such a removal. Such provisions,
    however, often require 51 percent of investors to act. In addition, to
    the extent that the trustees are found to be fiduciaries, if the
    trustee takes a specific action that the investors believe not to be in
    their best interest, they may be able to sue the trustee. If
    successful, investors could be awarded a number of possible remedies,
    including damages or removal of the trustee. Greenfield, Stein, &
    Senior, Fiduciary Removal Proceedings (online at www.gss-law.com/
    PracticeAreas/Fiduciary-Removal-Proceedings.asp) (accessed Nov. 12,
    2010); Gary B. Freidman, Relief Against a Fiduciary: SCPA Sec. 2102
    Proceedings, NYSBA Trusts and Estates Law Section Newsletter, at 1-2, 4
    (Oct. 13, 2003) (online at www.gss-law.com/CM/Articles/
    SCPA%202102%20Proceedings%20-%20Revised.pdf) (``The failure of the
    fiduciary to comply with a court order directing that the information
    be supplied can be a basis for contempt under SCPA Sec. 606, 607-1 and/
    or suspension or removal of the fiduciary under SCPA Sec. 711.'').
    ---------------------------------------------------------------------------

            F. Assessing the Potential Impact on Bank Balance Sheets

    1. Introduction

        A bank's exposure to the current turmoil in the residential
    real estate market stems from its role as the originator of the
    initial mortgage, its role as the issuer of the packaged
    securities, its role as the underwriter of the subsequent
    mortgage trusts to investors, and/or its role as the servicer
    of the troubled loan.\188\ Through these various roles in the
    mortgage market, the banking sector's vulnerability to the
    current turmoil in the market generally encompasses improper
    foreclosures, related concerns regarding title documentation,
    and mortgage repurchase risk owing to breaches in
    representations and warranties provided to investors.
    ---------------------------------------------------------------------------
        \188\ There are also risks for holders of second lien loans, but
    these loans are not as directly impacted by foreclosure irregularities
    as first-lien mortgages, since most second liens were not securitized,
    and are held on the balance sheets of banks and other market
    participants. As discussed above, if second liens were perfected and
    first liens were not, they may actually take priority. See Section D.2
    for further discussion of effects on second lien holders.
        An analyst report from January 2010, values securitized second
    liens only at $32.5 billion of the $1.053 trillion of the total second
    liens outstanding. Amherst Securities Group LP, Amherst Mortgage
    Insight, 2nd Liens--How Important, at 12 (Jan. 29, 2010).
        At the end of the second quarter of 2010, the four largest U.S.
    commercial banks--Bank of America, Citigroup, JPMorgan Chase, and Wells
    Fargo--reported $433.7 billion in second lien mortgages while having
    total equity capital of $548.8 billion. Amherst Securities Group LP
    data provided to Panel staff (Sept. 2, 2010); Federal Deposit Insurance
    Corporation, Statistics of Depository Institutions (online at
    www2.fdic.gov/sdi/) (accessed Nov. 12, 2010). This figure is based on
    reporting by the banks, not their holding companies, and therefore may
    not include all second liens held by affiliates.
    ---------------------------------------------------------------------------
        Many investment analysts believe that potential costs
    associated with bank foreclosure irregularities are manageable,
    with potential liabilities representing a limited threat to
    earnings, rather than bank capital.\189\ Market estimates
    stemming from foreclosure irregularities to a potential
    prolonged foreclosure moratorium range from $1.5 to $10.0
    billion for the entire industry.\190\ However, while the
    situation remains fluid, the emerging consensus in the market
    is that the risk from mortgage put-backs is a potentially
    bigger source of instability for the banks.\191\ Using
    calculations based on current market estimates of investment
    analysts, the Panel calculates a consensus exposure for the
    industry of $52 billion. Aside from the potential for costs to
    far exceed these market estimates (or be materially lower), the
    wild card here is the impact of broader title documentation
    concerns across the broader mortgage market. In any case, the
    fallout from the foreclosure crisis and ongoing put-backs to
    the banks from mortgage investors are likely to continue to
    weigh on bank earnings, but are, according to industry
    analysts, unlikely to pose a grave threat to bank capital
    levels.\192\
    ---------------------------------------------------------------------------
        \189\ FBR Foreclosure Mania Conference Call, supra note 3.
        \190\ See Section F.2 for further discussion on costs stemming from
    a foreclosure moratorium.
        \191\ However, to the extent that banks hold MBSs originated/issued
    by non-affiliates, they may themselves benefit from put-backs.
        \192\ Credit Suisse, U.S. Banks: Mortgage Put-back Losses Appear
    Manageable for the Large Banks, at 4 (Oct. 26, 2010) (hereinafter
    ``Credit Suisse on Mortgage Put-back Losses''); Deutsche Bank,
    Revisiting Putbacks and Securitizations, at 7 (Nov. 1, 2010)
    (hereinafter ``Deutsche Bank Revisits Putbacks and Securitizations'');
    FBR Capital Markets, Repurchase-Related Losses Roughly $44B for
    Industry--Sensationalism Not Warranted (Sept. 20, 2010) (hereinafter
    ``FBR on Repurchase-Related Losses''); Standard & Poor's on the Impact
    of Mortgage Troubles on U.S. Banks, supra note 106.
    ---------------------------------------------------------------------------
        However, there are scenarios whereby wholesale title and
    legal documentation problems for the bulk of outstanding
    mortgages could create significant instability in the
    marketplace, leading to potentially significantly larger
    effects on the balance sheets of banks. Under significantly
    more severe scenarios that would engulf the broader mortgage
    market--encompassing widespread legal uncertainty regarding
    mortgage loan documentation as well as the prospect of
    extensive put-backs impacting agency and private label
    mortgages--bank capital levels could conceivably come under
    renewed stress, particularly for the most exposed
    institutions.\193\ It is unclear whether severe mortgage
    scenarios were modeled in the Federal Reserve's 2009 stress
    tests, which, in any event, did not examine potential adverse
    scenarios beyond 2010.\194\
    ---------------------------------------------------------------------------
        \193\ There are other mortgage risks that are difficult to
    quantify, such as the potential effect mortgage put-backs may have on
    holders of interests in CDOs and the banks that serve as counterparties
    for synthetic CDOs. A synthetic CDO is a privately negotiated financial
    instrument that is generally made up of credit default swaps on a
    referenced pool of fixed-income assets, in these cases often including
    the mezzanine tranches of RMBSs. Large banks served as intermediaries
    for clients wishing to shift risk and therefore structure a synthetic
    CDO. These banks packaged and underwrote synthetic CDOs and may have
    retained a certain amount of liquidity risk. It is nearly impossible,
    however, to measure the possible effect of this issue due to the fact
    that there is no reliable data that estimates the size of the CDO
    market, and the fact that counterparty risk in synthetic CDOs is agreed
    to under a private contract and therefore no data is publicly
    available. Panel staff conversations with industry sources (Nov. 4,
    2010).
        For general information on the counterparty risk involved in
    synthetic CDOs, see Michael Gibson, Understanding the Risk of Synthetic
    CDOs (July 2004) (online at www.curacao-law.com/
    wp-content/uploads/2008/10/federal-reserve-cdo-analysis-2004.pdf).
        \194\ Board of Governors of the Federal Reserve System, The
    Supervisory Capital Assessment Program: Design and Implementation (Apr.
    24, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
    bcreg20090424a1.pdf).
    ---------------------------------------------------------------------------
        While the situation is still uncertain, the worst-case
    scenarios would have to presuppose at a minimum a systemic
    breakdown in documentation standards, the consequences of which
    would likely grind the mortgage market to a halt. However, it
    is important to note that, so far, many of the experts who have
    spoken to the question (and the banks themselves) believe that
    securities documentation concerns are unlikely to trigger
    meaningful broad-based losses. These experts state that
    although put-backs owing to breaches of representations and
    warranties will continue to exert a toll on the banks, it will
    largely be manageable, with costs covered from ongoing reserves
    and earnings. Furthermore, as noted in Section D, there are a
    considerable number of legal considerations that will likely
    lead to losses being spread out over time.\195\
    ---------------------------------------------------------------------------
        \195\ See Section D for a discussion on legal considerations of
    foreclosure document irregularities.
    ---------------------------------------------------------------------------
        Residential U.S. mortgage debt outstanding was $10.6
    trillion as of June 2010.\196\ Of this amount, $5.7 trillion is
    government-sponsored enterprise (GSE) or agency-backed paper,
    $1.4 trillion is private label (or non-GSE issued) securities,
    and $3.5 trillion is non-securitized debt held on financial
    institution balance sheets.\197\
    ---------------------------------------------------------------------------
        \196\ Board of Governors of the Federal Reserve System, Statistics
    & Historical Data: Mortgage Debt Outstanding (Sept. 2010) (online at
    www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm).
        \197\ Id.
    ---------------------------------------------------------------------------

    FIGURE 2: RESIDENTIAL (1-4 FAMILY) MORTGAGE DEBT OUTSTANDING, 1985-2009
                                     \198\

                             [Dollars in millions]

    ---------------------------------------------------------------------------
        \198\ Board of Governors of the Federal Reserve System, Federal
    Reserve Statistical Release: Flow of Funds Accounts of the United
    States: Data Download Program (Instrument: Home Mortgages, Frequency:
    Annually, L.218) (online at www.federalreserve.gov/datadownload/
    Choose.aspx?rel=Z.1) (accessed Nov. 12, 2010).

        Industry-wide, 4.6 percent of mortgages are classified as
    in the foreclosure process. In addition, 9.4 percent of
    mortgages are at least 30 days past due, approximately half of
    which are more than 90 days past due.\199\
    ---------------------------------------------------------------------------
        \199\ Mortgage Bankers Association, National Delinquency Survey, Q2
    2010 (Aug. 26, 2010) (hereinafter ``MBA National Delinquency Survey, Q2
    2010''). See also Mortgage Bankers Association, Delinquencies and
    Foreclosure Starts Decrease in Latest MBA National Delinquency Survey
    (Aug. 26, 2010) (online at www.mbaa.org/NewsandMedia/PressCenter/
    73799.htm) (hereinafter ``MBA Press Release on Delinquencies and
    Foreclosure Starts'').
    ---------------------------------------------------------------------------

         FIGURE 3: DELINQUENCY AND FORECLOSURE RATES (2006-2010) \200\

    ---------------------------------------------------------------------------
        \200\ Delinquency rates include loans that are 30 days, 60 days,
    and 90 days or more past due. Foreclosure rates include loans in the
    foreclosure process at the end of each quarter. See Id.

                a. Leading Market Participants
        Troubled mortgages were largely originated in 2005-2007,
    when underwriting standards were most suspect, particularly for
    subprime, Alt-A and other loans to low-credit or poorly
    documented borrowers. Figure 4 below outlines the largest
    mortgage originators during this period, ranked by volume and
    market share.

          FIGURE 4: LARGEST U.S. MORTGAGE ORIGINATORS, 2005-2007 \201\
                              [Dollars in billions]
    ------------------------------------------------------------------------
                                                                    Market
                        Company                        Volume       Share
                                                                  (Percent)
    ------------------------------------------------------------------------
    Bank of America...............................        1,880         22.1
        Countrywide Financial.....................        1,362         16.0
        Bank of America Mortgage & Affiliates.....          518          6.1
    Wells Fargo...................................       1,324          15.5
        Wells Fargo Home Mortgage.................        1,062         12.4
        Wachovia Corporation......................          262          3.1
    JPMorgan Chase................................       1,151          13.5
        Chase Home Finance........................          566          6.6
        Washington Mutual.........................          584          6.9
    Citigroup.....................................         506           5.9
    Top Four Aggregate............................       4,861          57.0
                                                   -------------------------
    Total Mortgage Originations (2005-2007).......        8,530
    ------------------------------------------------------------------------
    \201\ Inside Mortgage Finance.

        The four largest banks accounted for approximately 60
    percent of all loan originations between 2005 and 2007. Totals
    for Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup
    include volumes originated by companies that these firms
    subsequently acquired. As Figure 4 indicates, a significant
    portion of Bank of America's mortgage loan portfolio is
    comprised of loans assumed upon its acquisition of Countrywide
    Financial. Similarly, JPMorgan Chase more than doubled its
    mortgage loan portfolio with its acquisition of Washington
    Mutual.
        Figure 5, below, details the largest originators of both
    Alt-A and subprime loans between 2005 and 2007. The five
    leading originators of Alt-A and subprime loans represented
    approximately 56 percent and 34 percent, respectively, of
    aggregate issuance volume for these loan types. Alt-A and
    subprime loans represented approximately 30 percent of all
    mortgages originated from 2005 to 2007.

      FIGURE 5: LEADING ORIGINATORS OF SUBPRIME AND ALT-A LOANS, 2005-2007
                                      \202\
                              [Dollars in billions]
    ------------------------------------------------------------------------
                                                                    Market
                        Company                        Volume       Share
                                                                  (Percent)
    ------------------------------------------------------------------------
                               ALT-A ORIGINATIONS
    ------------------------------------------------------------------------
    Countrywide Financial (Bank of America).......          172         16.2
    IndyMac.......................................          145         13.6
    JPMorgan Chase................................          102          9.6
        Washington Mutual.........................           40          3.8
        EMC Mortgage..............................           38          3.5
        Chase Home Financial......................           25          2.3
    GMAC..........................................           98          9.2
        GMAC-RFC..................................           77          7.3
        GMAC Residential Holding..................           21          1.9
    Lehman Brothers \203\.........................           79          7.4
    Top Five Aggregate............................          596         56.0
                                                   -------------------------
    Total Alt-A Originations (2005-2007)..........        1,065
    ========================================================================
                              SUBPRIME ORIGINATIONS
    ------------------------------------------------------------------------
    Ameriquest Mortgage...........................          112          7.7
    New Century...................................          109          7.5
    Countrywide Financial (Bank of America).......          102          7.0
    JPMorgan Chase................................           99          6.8
        Washington Mutual.........................           66          4.5
        Chase Home Finance........................           33          2.3
    Option One Mortgage...........................           80          5.5
    Top Five Aggregate............................          502         34.4
                                                   -------------------------
    Total Subprime Origination (2005-2007)........        1,458
    ------------------------------------------------------------------------
    \202\ Inside Mortgage Finance.
    \203\ Includes Alt-A originations from Lehman Brothers subsidiary,
      Aurora Loan Services, LLC.

        As shown in Figure 6, below, the five leading underwriters
    (pro forma for acquisitions) of non-agency MBS between 2005 and
    2007 accounted for 58 percent of the total underwriting volume
    for the period. It is of note that the three firms with the
    largest underwriting volumes during this period, Lehman
    Brothers, Bear Stearns, and Countrywide Securities, have either
    failed or been acquired by another company.

    FIGURE 6: LEADING UNDERWRITERS OF NON-AGENCY MORTGAGE-BACKED SECURITIES,
                                 2005-2007 \204\
                              [Dollars in billions]
    ------------------------------------------------------------------------
                                                                    Market
                        Company                        Volume       Share
                                                                  (Percent)
    ------------------------------------------------------------------------
    JPMorgan Chase................................          593         19.5
        JPMorgan Chase............................          143          4.7
        Bear Stearns..............................          298          9.8
        Washington Mutual.........................          152          5.0
    Bank of America...............................          371         12.2
        Merrill Lynch.............................           94          3.1
        Countrywide Securities....................          277          9.1
    Lehman Brothers...............................          322         10.6
    RBS Greenwich Capital.........................          273          9.0
    Credit Suisse.................................          203          6.7
    Top Five Aggregate............................        1,762         58.0
                                                   -------------------------
    Total Underwriting Volume (2005-2007).........        3,044
    ------------------------------------------------------------------------
    \204\ Inside Mortgage Finance.

        As noted above, banks either retain or securitize--market
    conditions permitting--the mortgage loans they originate. In
    terms of mortgages retained on bank balance sheets, Figure 7
    below lists banks with the largest mortgage loan books, as well
    as the concentration of foreclosed mortgage loans, ranked by
    volume and as a percentage of overall residential mortgage
    balance sheet assets.

           FIGURE 7: BANK HOLDING COMPANIES WITH 1-4 FAMILY LOANS IN FORECLOSURE PROCEEDINGS, JUNE 2010 \205\
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                     Percent of 1-4
                                                                    Total 1-4   1-4 Family  Loans   Family Loans  in
                               Company                                Family     in  Foreclosure      Foreclosure
                                                                      Loans                            (Percent)
    ----------------------------------------------------------------------------------------------------------------
    Bank of America..............................................        427.1               18.8                4.4
    Wells Fargo..................................................        370.7               17.6                4.7
    JPMorgan Chase...............................................        259.9               19.5                7.5
    Citigroup....................................................        178.4                6.0                3.3
    HSBC North America...........................................         72.9                6.6                9.0
    U.S. Bancorp.................................................         58.1                2.5                4.4
    PNC Financial Services Group.................................         54.9                2.7                5.0
    SunTrust Banks...............................................         47.9                2.4                5.0
    Ally Financial (GMAC)........................................         21.5                2.2               10.2
    Fifth Third Bancorp..........................................         21.4                0.7                3.2
                                                                  --------------------------------------------------
    Total for All Bank Holding Companies.........................      2,152.2               87.7                4.1
    ----------------------------------------------------------------------------------------------------------------
    \205\ SNL Financial. These data include revolving or permanent loans secured by real estate as evidenced by
      mortgages (FHA, FMHA, VA, or conventional) or other liens (first or junior) secured by 1-4 family residential
      property.

        The leading mortgage servicers are ranked below by loan
    volume serviced and market share, including the percentage of
    the overall portfolio in foreclosure. During the second quarter
    of 2010, the 10 largest servicers in the United States were
    responsible for servicing 67.2 percent of all outstanding
    residential mortgages.

                               FIGURE 8: LARGEST U.S. MORTGAGE SERVICERS, JUNE 2010 \206\
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                                         Servicing      Percent of      Percent of
                                 Company                                 Portfolio      Total Loans    Portfolio in
                                                                          Amount         Serviced       Foreclosure
    ----------------------------------------------------------------------------------------------------------------
    Bank of America.................................................           2,135            20.1             3.3
    Wells Fargo.....................................................           1,812            17.0             2.0
    JPMorgan........................................................           1,354            12.7             3.6
    Citigroup.......................................................             678             6.4             2.3
    Ally Financial (GMAC)...........................................             349             3.3             n/a
    U.S. Bancorp....................................................             190             1.8             n/a
    SunTrust Banks..................................................             176             1.7             4.9
    PHH Mortgage....................................................             156             1.5             1.8
    OneWest Bank, CA (IndyMac)......................................             155             1.5             n/a
    PNC Financial Services Group....................................             150             1.4             n/a
    10 Largest Mortgage Servicers Aggregate.........................           7,155            67.2
                                                                     -----------------------------------------------
    Total Residential Mortgages Outstanding.........................          10,640
    ----------------------------------------------------------------------------------------------------------------
    \206\ As a point of reference, as of June 2010, 63 percent of foreclosures occurred on homes where the loan was
      either owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while the remaining 37
      percent of foreclosures were on homes owned by private investors. Data on percentage of portfolio in
      foreclosure unavailable for Ally Financial, U.S. Bancorp, OneWest Bank, and PNC Financial Services Group.
      Inside Mortgage Finance.

    2. Foreclosure Irregularities: Estimating the Cost to Banks

        Assessing the potential financial impact of foreclosure
    irregularities, including a prolonged foreclosure moratorium,
    on bank stability is complicated by the extremely fluid nature
    of current developments. For example, after unilaterally
    halting foreclosure proceedings, both Bank of America \207\ and
    Ally Financial (GMAC) announced their intention to resume
    foreclosure proceedings in the wake of internal reviews that
    did not uncover systemic irregularities, according to both
    firms.\208\ Looking ahead, the chief variables are the extent
    and duration of potential foreclosure disruptions or an
    outright moratorium, which would impact servicing and
    foreclosure costs and housing market prices (and recovery
    values). Such scenarios would also likely increase litigation
    and legal risks, including potential fines from state attorneys
    general, as well as raising questions regarding the extent to
    which title irregularities may permeate the system.\209\
    ---------------------------------------------------------------------------
        \207\ Bank of America is frequently mentioned by analysts as having
    potentially high exposure, in part because of its purchase of
    Countrywide Financial and Merrill Lynch, which was heavily involved in
    CDOs, and its assumption of successor liability. During the Panel's
    October 27, 2010 hearing, Guy Cecala of Inside Mortgage Finance noted
    that Bank of America was one of the few major mortgage lenders to steer
    away from the subprime market. Upon the bank's acquisition of
    Countrywide in 2008, however, Bank of America became the holder of the
    largest subprime mortgage portfolio (in the industry). See Testimony of
    Guy Cecala, supra note 133.
        \208\ Bank of America Q3 2010 Earnings Call Transcript, supra note
    97, at 6 (``On the foreclosure area . . . we changed and started to
    reinitiate the foreclosures . . . ''); GMAC Mortgage Statement on
    Independent Review and Foreclosure Sales, supra note 20 (``In addition
    to the nationwide measures, the review and remediation activities
    related to cases involving judicial affidavits in the 23 states
    continues and has been underway for approximately two months. As each
    of those files is reviewed, and remediated when needed, the foreclosure
    process resumes. GMAC Mortgage has found no evidence to date of any
    inappropriate foreclosures.'').
        \209\ See Section F.3 for further discussion on potential bank
    liabilities from securitization title irregularities and mortgage
    repurchases or put-backs.
    ---------------------------------------------------------------------------
        During recent conference calls for third quarter 2010
    earnings and subsequent investor presentations, the five
    largest mortgage servicers addressed questions regarding
    foreclosure irregularities and potential liabilities stemming
    from these issues.\210\
    ---------------------------------------------------------------------------
        \210\ In October 2010, the SEC sent a letter to Chief Financial
    Officers of certain public companies to remind them of their disclosure
    obligations relating to the foreclosure documentation irregularities.
    See Sample SEC Letter on Disclosure Guidelines, supra note 113. The
    letter noted that affected public companies should carefully consider a
    variety of issues relating to foreclosure documentation irregularities,
    including trends, known demands, commitments and other similar elements
    that might ``reasonably expect to have a material favorable or
    unfavorable impact on your results of operations, liquidity, and
    capital resources.'' Although the letter notes a variety of areas that
    would require disclosure, the quality of disclosure will depend on what
    the companies in question are able to determine about the effect of the
    irregularities on their operations. Genuine uncertainty will result in
    less useful disclosure. Once the information is provided in a report,
    however, companies have a duty to update it if it becomes inaccurate or
    misleading.
    ---------------------------------------------------------------------------
         Bank of America \211\--Bank of America initially
    suspended foreclosure sales on October 8, 2010 across all 50
    states after reviewing its internal foreclosure procedures. On
    October 18, 2010, the bank began amending and re-filing 102,000
    foreclosure affidavits in 23 judicial foreclosure states, a
    process expected to take three to five weeks to complete. While
    asserting that it is addressing issues surrounding affidavit
    signatures, the company claims that it has not been able to
    identify any improper foreclosure decisions.\212\
    ---------------------------------------------------------------------------
        \211\ Bank of America Corporation, 3Q10 Earnings Results, at 10-11
    (Oct. 19, 2010) (online at phx.corporate-ir.net/
    External.File?item=UGFyZW50SUQ9NjY0MDd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1);
    Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
        \212\ It was recently reported that Bank of America found errors in
    10 to 25 foreclosure cases out of the first several hundred the bank
    has examined. Written Testimony of Katherine Porter, supra note 14, at
    10); Jessica Hall & Anand Basu, Bank of America Corp Acknowledged Some
    Mistakes in Foreclosure Files as it Begins to Resubmit Documents in
    102,000 Cases, the Wall Street Journal Said, Reuters (Oct. 25, 2010)
    (online at www.reuters.com/article/idUSTRE69O04220101025). Bank of
    America expects increased costs related to irregularities in its
    foreclosure affidavit procedures during the fourth quarter of 2010 and
    into 2011. Costs associated with reviewing its foreclosure procedures,
    revising affidavit filings, and making other operational changes will
    likely result in higher noninterest expense, including higher servicing
    costs and legal expenses. Furthermore, Bank of America anticipates
    higher servicing costs over the long term if it must make changes to
    its foreclosure process. Finally, the time to complete foreclosure
    sales may increase temporarily, which may increase nonperforming loans
    and servicing advances and may impact the collectability of such
    advances, as well as the value of the bank's mortgage servicing rights.
    Bank of America Corporation, Form 10-Q for the Quarterly Period Ended
    September 30, 2010, at 95 (Nov. 5, 2010) (online at sec.gov/Archives/
    edgar/data/70858/000095012310101545/g24513e10vq.htm).
    ---------------------------------------------------------------------------
         Citigroup \213\--Citigroup has not announced plans
    to halt its foreclosure proceedings. The bank has nonetheless
    initiated an internal review of its foreclosure process due to
    increased industry-wide focus on foreclosure processes. It has
    not identified any issues regarding its preparation and
    transfer of foreclosure documents thus far. However, Citigroup
    noted in a recent filing that its current foreclosure processes
    and financial condition could be affected depending on the
    results of its review or if any industry-wide adverse
    regulatory or judicial actions are taken on foreclosures.\214\
    ---------------------------------------------------------------------------
        \213\ Citigroup, Inc., Transcript: Citi Third Quarter 2010 Earnings
    Review, at 6-7 (Oct. 18, 2010) (online at www.citigroup.com/citi/fin/
    data/qer103tr.pdf?ieNocache=128).
        \214\ Citigroup 10-Q for Q2 2010, supra note 101, at 52.
    ---------------------------------------------------------------------------
         JPMorgan Chase \215\--Beginning in late September
    to mid-October 2010, JPMorgan Chase delayed foreclosure sales
    across 40 states, suspending approximately 127,000 loan files
    currently in the foreclosure process.\216\ While the company,
    similar to Bank of America, has identified issues relating to
    foreclosure affidavits, it does not believe that any
    foreclosure decisions were improper. On November 4, 2010,
    JPMorgan Chase stated that it will begin refiling foreclosures
    within a few weeks.\217\ The firm also stated in a recent
    filing that it is developing new processes to ensure it
    satisfies all procedural requirements related to
    foreclosures.\218\
    ---------------------------------------------------------------------------
        \215\ JPMorgan Q3 2010 Financial Results, supra note 180, at 14-15;
    Q3 2010 Earnings Call Transcript, supra note 53.
        JPMorgan Chase anticipates additional costs from implementation of
    these new procedures, as well as expenses associated with maintaining
    foreclosed properties, re-filing documents and foreclosure cases, or
    possible declining home prices during foreclosure suspensions. These
    costs are dependent on the length of the foreclosure suspension.
    JPMorgan Chase & Co., Form 10-Q for the Quarterly Period Ended
    September 30, 2010, at 93 (Nov. 9, 2010) (online at www.sec.gov/
    Archives/edgar/data/19617/000095012310102689/y86142e10vq.htm)
    (hereinafter ``JPMorgan Chase Form 10-Q'').
        \216\ JPMorgan Chase Form 10-Q, supra note 215, at 93, 200.
        \217\ JPMorgan Chase & Co., BancAnalysts Association of Boston
    Conference, Charlie Scharf, CEO, Retail Financial Services, at 33 (Nov.
    4, 2010) (online at files.shareholder.com/downloads/ONE/
    967802442x0x415409/c88f9007-6b75-4d7c-abf6-846b90dbc9e3/
    BAAB_Presentation_Draft_11-03-10_FINAL_PRINT.pdf) (hereinafter ``JPM
    Presentation at BancAnalysts Association of Boston Conference'').
        \218\ JPMorgan Chase Form 10-Q, supra note 215, at 93.
    ---------------------------------------------------------------------------
          Wells Fargo \219\--Wells Fargo expressed
    confidence in its foreclosure documentation practices and
    reiterated that the firm has no plans to suspend foreclosures.
    The bank added that an internal review identified instances
    where the final affidavit review and some aspects of the
    notarization process were not properly executed. Accordingly,
    Wells Fargo is submitting supplemental affidavits for
    approximately 55,000 foreclosures in 23 judicial foreclosure
    states.\220\
    ---------------------------------------------------------------------------
        \219\ Wells Fargo & Company, 3Q10 Quarterly Supplement, at 26 (Oct.
    20, 2010) (online at www.wellsfargo.com/downloads/pdf/press/
    3Q10_Quarterly_Supplement.pdf); Wells Fargo & Company, Q3 2010 Earnings
    Call Transcript (Oct. 20, 2010) (online at www.morningstar.com/earn-
    023/earnings--earnings-call-transcript.aspx/WFC/en-US.shtml).
        \220\ Wells Fargo Update on Affidavits and Mortgage
    Securitizations, supra note 23.
        The company has stated that it could incur significant legal costs
    if its internal review of its foreclosure procedures causes the bank to
    re-execute foreclosure documents, or if foreclosure actions are
    challenged by a borrower or overturned by a court. Wells Fargo &
    Company, Form 10-Q for the Quarterly Period Ended September 30, 2010,
    at 42-43 (Nov. 5, 2010) (online at sec.gov/Archives/edgar/data/72971/
    000095012310101484/f56682e10vq.htm).
    ---------------------------------------------------------------------------
          Ally Financial (GMAC) \221\ -- As of November 3,
    2010, GMAC Mortgage reviewed 9,523 foreclosure affidavits, with
    review pending on an additional 15,500 files. The company noted
    that its review to date has not identified any instances of
    improper foreclosures. Where appropriate, GMAC re-executed and
    refiled affidavits with the courts. GMAC stated that it has
    modified its foreclosure process, increased the size of its
    staff involved in foreclosures, provided more training, and
    enlisted a ``specialized quality control team'' to review each
    case. The company expects to complete all remaining foreclosure
    file reviews by the end of the year. Furthermore, GMAC recently
    implemented supplemental procedures for all new foreclosure
    cases in order to ensure that affidavits are properly
    prepared.\222\
    ---------------------------------------------------------------------------
        \221\ Ally Financial Inc., 3Q10 Earnings Review, at 10 (Nov. 3,
    2010) (online at phx.corporate-ir.net/
    External.File?item=UGFyZW50SUQ9MzQ2Nzg3NnxDaGlsZElEPTQwMjMzOHxUeXBlPTI=&
    t=1).
        \222\ Ally Financial Inc., Form 10-Q for the Quarterly Period Ended
    September 30, 2010, at 75-76 (Nov. 9, 2010) (online at www.sec.gov/
    Archives/edgar/data/40729/000119312510252419/d10q.htm).
    ---------------------------------------------------------------------------
        While a market-wide foreclosure moratorium appears less
    likely following comments from the Administration and internal
    reviews by the affected banks, state attorneys general have yet
    to weigh in on the issue. Market estimates of possible bank
    losses related to a foreclosure moratorium have varied
    considerably, from $1.5 billion to $10 billion.\223\ Industry
    analysts have noted that a three-month foreclosure delay could
    increase servicing costs and losses on foreclosed properties.
    In addition, banks could also face added litigation costs
    associated with resolving flawed foreclosure procedures.\224\
    However, these estimates can of course become quickly outdated
    in the current environment. As noted, firms that previously
    suspended foreclosures are now beginning to re-file and re-
    execute foreclosure affidavits, and market estimates accounting
    for shorter foreclosure moratoriums are currently unavailable.
    ---------------------------------------------------------------------------
        \223\ A Credit Suisse research note estimated that Bank of America,
    JPMorgan Chase, and Wells Fargo could each face $500 million-$600
    million in increased servicing costs and write-downs on foreclosed
    homes, assuming a three-month foreclosure delay and associated costs
    and write-downs approximating 1 percent per month. An FBR Capital
    Markets research note estimated $6 billion-$10 billion in potential
    losses from a three-month foreclosure moratorium across the entire
    banking industry. This estimate assumes that there are approximately 2
    million homes currently in the foreclosure process, and that the costs
    of a delay on each foreclosed property is $1,000 per month. Credit
    Suisse, Mortgage Issues Mount, at 10 (Oct. 15, 2010) (hereinafter
    ``Credit Suisse on Mounting Mortgage Issues''); FBR Foreclosure Mania
    Conference Call, supra note 3.
        \224\ FBR Foreclosure Mania Conference Call, supra note 3.
    ---------------------------------------------------------------------------
        Although they have not been implicated in the recent news
    of foreclosure moratoriums, thousands of small to mid-level
    banks also face some risk from foreclosure suspensions if they
    act as servicers for larger banks.\225\ Generally, small
    community banks, as well as credit unions, are more likely to
    keep mortgage loans on their books as opposed to selling them
    in the secondary market. They primarily use securitization to
    hedge risk and increase lending power.\226\ Accordingly,
    foreclosure moratoriums would prevent small banks and credit
    unions from working through nonperforming loans on their
    balance sheets, limiting their capacity to originate new
    loans.\227\ As of June 2010, residential mortgages made up 31
    percent of small banks' loan portfolios and 55 percent of
    credit union portfolios.\228\
    ---------------------------------------------------------------------------
        \225\ Treasury conversations with Panel staff (Oct. 21, 2010).
        \226\ Third Way staff conversations with Panel staff (Oct. 29,
    2010).
        \227\ Jason Gold and Anne Kim, The Case Against a Foreclosure
    Moratorium, Third Way Domestic Policy Memo, at 3-4 (Oct. 20, 2010)
    (online at content.thirdway.org/publications/342/Third_Way_Memo_-
    _The_Case_Against_a_Foreclosure_Moratorium.pdf) (hereinafter ``Third
    Way Domestic Policy Memo on the Case Against a Foreclosure
    Moratorium'').
        \228\ Small banks are those with under $1 billion in total assets.
    Congressional Oversight Panel, July Oversight Report: Small Banks in
    the Capital Purchase Program, at 74 (July 14, 2010) (online at
    cop.senate.gov/documents/cop-071410-report.pdf); SNL Financial. Credit
    union residential mortgage loan portfolios include first and second
    lien mortgages and home equity loans. Credit Union National
    Association, U.S. Credit Union Profile: Mid-Year 2010 Summary of Credit
    Union Operating Results, at 6 (Sept. 7, 2010) (online at www.cuna.org/
    research/download/uscu_profile_2q10.pdf).
    ---------------------------------------------------------------------------

    3. Securitization Issues and Mortgage Put-backs

        Foreclosure documentation issues highlight other
    potential--and to some degree, related--mortgage market risks
    to the banking sector. Questions regarding document standards
    in the foreclosure process are tangential to broader concerns
    impacting bank's representations and warranties to mortgage
    investors, as well as concerns regarding proper legal
    documentation for securitized loans.
        Given the lack of transparency into documentation
    procedures and questions as to the capacity of disparate
    investor groups to centralize claims against the industry,
    market estimates of potential bank liabilities stemming from
    securitization documentation issues vary widely.
                a. Securitization Title
        As discussed above, documentation standards in the
    foreclosure process have helped shine a light on potential
    questions regarding the ownership of loans sold into
    securitization without the proper assignment of title to the
    trust that sponsors the mortgage securities. There are at least
    three points at which the mortgage and the note must be
    transferred during the securitization process in order for the
    trust to have proper ownership of the mortgage and the note and
    thereby the authority to foreclose if necessary. Concerns that
    the proper paperwork was not placed in the securitization trust
    within the 90-day window stipulated by law have created
    uncertainty in MBS markets.
        Any lack of clarity regarding the securitization trust's
    clear ownership of the underlying mortgages creates an
    atmosphere of uncertainty in the market and a bevy of possible
    problems. A securitization trust is not legally capable of
    taking action on mortgages unless it has clear ownership of the
    mortgages and the notes. Therefore, possible remedies for loans
    that are seriously delinquent--such as foreclosure, deed-in-
    lieu, or short sale--would not be available to the trust.\229\
    Litigation appears likely from purchasers of MBS who have
    possible standing against the trusts that issued the MBS.
    Claimants will contend that the securitization trusts created
    securities that were based on mortgages which they did not own.
    Since the nation's largest banks often created these
    securitization trusts or originated the mortgages in the pool,
    in a worst-case scenario it is possible that these institutions
    would be forced to repurchase the MBS the trusts issued, often
    at a significant loss.
    ---------------------------------------------------------------------------
        \229\ A deed-in-lieu permits a borrower to transfer their interest
    in real property to a lender in order to settle all indebtedness
    associated with that property. A short sale occurs when a servicer
    allows a homeowner to sell the home with the understanding that the
    proceeds from the sale may be less than is owed on the mortgage. U.S.
    Department of the Treasury, Home Affordable Foreclosure Alternatives
    (HAFA) Program (online at makinghomeaffordable.gov/hafa.html) (accessed
    Nov. 12, 2010).
    ---------------------------------------------------------------------------
        On October 15, 2010, the American Securitization Forum
    (ASF) asserted that concerns regarding the legality of loan
    transfers for securitization were without merit. The statement
    asserted that the ASF's member law firms found that the
    ``conventional process for loan transfers embodied in standard
    legal documentation for mortgage securitizations is adequate
    and appropriate to transfer ownership of mortgage loans to the
    securitization trusts in accordance with applicable law.''
    \230\
    ---------------------------------------------------------------------------
        \230\ ASF Statement on Mortgage Securitization Legal Structures and
    Loan Transfers, supra note 181. Some observers question whether, even
    if the procedures in the PSA were legally sound, they were actually
    accomplished. Consumer lawyers conversations with Panel staff (Nov. 9,
    2010).
    ---------------------------------------------------------------------------
                b. Forced Mortgage Repurchases/Put-backs
        In the context of the overall $7.6 trillion mortgage
    securitization market, approximately $5.5 trillion in MBS were
    issued by the GSEs and $2.1 trillion by non-agency
    issuers.\231\ As discussed above, and distinct from the
    foreclosure irregularities and securitization documentation
    concerns, banks make representations and warranties regarding
    the mortgage loans pooled and sold into GSE and private-label
    securities. A breach of these representations or warranties
    allows the purchaser to require the seller to repurchase the
    specific loan.
    ---------------------------------------------------------------------------
        \231\ The non-agency figure includes both residential and
    commercial mortgage-backed securities. Securities Industry and
    Financial Markets Association, US Mortgage-Related Outstanding (online
    at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/SF-
    US-Mortgage-Related-Outstanding-SIFMA.xls) (accessed Nov. 12, 2010).
    ---------------------------------------------------------------------------
        While these representations and warranties vary based on
    the type of security and customer, triggers that may force put-
    backs include undisclosed liabilities, income or employment
    misrepresentation, property value falsification, and the
    mishandling of escrow funds.\232\ Thus far, loans originated in
    2005-2008 have the highest concentration of repurchase demands.
    Repurchase volumes stemming from older vintages have not had a
    material effect on the nation's largest banks, and due to
    tightened underwriting standards implemented at the end of
    2008, it appears unlikely that loans originated after 2008 will
    have a high repurchase rate, although the enormous uncertainty
    in the market makes it difficult to predict repurchases with
    any degree of precision.\233\
    ---------------------------------------------------------------------------
        \232\ Federal National Mortgage Association, Selling Guide: Fannie
    Mae Single Family, at Chapters A2-2, A2-3 (Mar. 2, 2010) (online at
    www.efanniemae.com/sf/guides/ssg/sg/pdf/sg030210.pdf).
        \233\ It is unlikely that earlier vintages will pose a repurchase
    risk given the relatively more seasoned nature of these securities.
    ---------------------------------------------------------------------------
        There are meaningful distinctions between the capacity of
    GSEs and private-label investors to put-back loans to the
    banks. This helps explain why the vast majority of put-back
    requests and successful put-backs relate to loans sold to the
    GSEs. This also helps estimate the size of the potential risks
    to the banks from non-agency put-backs. GSEs benefit from
    direct access to the banks' loan files and lower hurdles for
    breaches of representations and warranties due to the
    relatively higher standard of loan underwriting. Private label
    investors, on the other hand, do not have access to loan files,
    and instead must aggregate claims to request a review of loan
    files.\234\ Moreover, and perhaps more importantly, private
    label securities often lack some of the representations and
    warranties common to agency securities. For example, Wells
    Fargo indicated that approximately half of its private label
    securities do not contain all of the representations and
    warranties typical of agency securities.\235\ Also, given that
    private label securities are often composed of loans to
    borrowers with minimal to non-existent supporting loan
    documentation, many do not contain warranties to protect
    investors from borrower fraud.\236\
    ---------------------------------------------------------------------------
        \234\ For further discussion, please see Section D, supra.
        \235\ Wells Fargo & Company, BancAnalysts Association of Boston
    Conference, at 13 (Nov. 4, 2010) (online at www.wellsfargo.com/
    downloads/pdf/invest_relations/presents/nov2010/baab_110410.pdf)
    (``Repurchase risk is mitigated because approximately half of the
    securitizations do not contain typical reps and warranties regarding
    borrower or other third party misrepresentations related to the loan,
    general compliance with underwriting guidelines, or property
    valuations'').
        \236\ JPM Presentation at BancAnalysts Association of Boston
    Conference, supra note 217, at 24 (``70% of loans underlying deals
    were low doc/no doc loans''); Bank of America Corporation, BancAnalysts
    Association of Boston, at 13 (Nov. 4, 2010) (online at phx.corporate-
    ir.net/
    External.File?item=UGFyZW50SUQ9Njg5MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1)
    (hereinafter ``Bank of America Presentation at BancAnalysts Association
    of Boston Conference'') (``Contractual representations and warranties
    on these deals are less rigorous than those given to GSEs. These deals
    had generally higher LTV ratios, lower FICOs and less loan
    documentation by program design and Disclosure'').
    ---------------------------------------------------------------------------
        Since the beginning of 2009, the four largest banks
    incurred $11.4 billion in repurchase expenses, with the group's
    aggregate repurchase reserve increasing to $9.9 billion as of
    the third quarter 2010.\237\ Bank of America incurred a total
    of $4.5 billion in expenses relating to representations and
    warranties during this period--nearly 40 percent of the $11.4
    billion total that the top four banks have reported.\238\
    ---------------------------------------------------------------------------
        \237\ Credit Suisse, Mortgage Put-back Losses Appear Manageable for
    the Large Banks, at 10 (Oct. 26, 2010).
        \238\ Id. at 10.

        FIGURE 9: ESTIMATED REPRESENTATION AND WARRANTIES EXPENSE AND REPURCHASE RESERVES AT LARGEST BANKS \239\
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                      Estimated Representation and  Warranty   Estimated Ending Repurchase  Reserves
                                                      Expense                ---------------------------------------
                                     ----------------------------------------
                                       FY 2009   Q1 2010   Q2 2010   Q3 2010   FY 2009   Q1 2010   Q2 2010   Q3 2010
    ----------------------------------------------------------------------------------------------------------------
    Bank of America.................    $1,900      $526    $1,248      $872    $3,507    $3,325    $3,939    $4,339
    Citigroup.......................       526         5       351       358       482       450       727       952
    JP Morgan.......................       940       432       667     1,464     1,705     1,982     2,332     3,332
    Wells Fargo.....................       927       402       382       370     1,033     1,263     1,375     1,331
                                     -------------------------------------------------------------------------------
    Total...........................    $4,293    $1,365    $2,648    $3,064    $6,727    $7,020    $8,373    $9,954
    ----------------------------------------------------------------------------------------------------------------
    \239\ Id. at 10.

    GSE Put-backs

        As of June 2010, 63 percent of foreclosures occurred on
    homes where the loan was either owned or guaranteed by
    government investors such as Fannie Mae and Freddie Mac, while
    the remaining 37 percent of foreclosures were on homes owned by
    private investors.\240\ A large portion of these loans were
    originated and sold by the nation's largest banks. As Figure 10
    illustrates, the nation's four largest banks sold a total of
    $3.1 trillion in loans to Fannie Mae and Freddie Mac from 2005-
    2008.
    ---------------------------------------------------------------------------
        \240\ Loans either owned or guaranteed by the GSEs have performed
    materially better than loans owned or securitized by other investors.
    For example, loans owned or guaranteed by the GSEs that are classified
    as seriously delinquent have increased from 3.8 percent in June 2009 to
    4.5 percent in June 2010. In comparison, the percentage of loans owned
    by private investors that are classified as seriously delinquent has
    increased from 10.5 percent in June 2009 to 13.1 percent in June 2010.
    The same dichotomy is seen in the number of loans in the process of
    foreclosure. As of June 2010, 2.3 percent of loans owned or guaranteed
    by the GSEs were in the foreclosure process, whereas 8.0 percent of
    loans owned by private investors were classified as such. Staff
    calculations derived from Office of the Comptroller of the Currency and
    Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report:
    Second Quarter 2010, at Tables 9, 10, 11 (Sept. 2010) (online at
    www.ots.treas.gov/_files/490019.pdf) (hereinafter ``OCC and OTS
    Mortgage Metrics Report''); Foreclosure completion information provided
    by OCC/OTS in response to Panel request.
    ---------------------------------------------------------------------------

      FIGURE 10: LOANS SOLD TO FANNIE MAE AND FREDDIE MAC, 2005-2008 \241\

    ---------------------------------------------------------------------------
        \241\ Credit Suisse on Mounting Mortgage Issues, supra note 223.

        GSEs have already forced banks to repurchase $12.4 billion
    in mortgages.\242\ Bank of America, which has the largest loan
    portfolio in comparison to its peers, has received a total of
    $18.0 billion in representation and warranty claims from the
    GSEs on 2004-2008 vintages. Of this total, Bank of America has
    resolved $11.4 billion, incurring $2.5 billion in associated
    losses.\243\ However, the bank believes that it has turned the
    corner in terms of new repurchase requests from the GSEs.\244\
    Further, the passage of time is apparently on the banks' side
    here, as JPMorgan Chase noted that breaches of representations
    and warranties generally occur within 24 months of the loan
    being originated.\245\ JPMorgan Chase noted that delinquencies
    or foreclosures on loans aged more than two years generally
    reflect economic hardship of the borrower.\246\
    ---------------------------------------------------------------------------
        \242\ Standard & Poor's on the Impact of Mortgage Troubles on U.S.
    Banks, supra note 106, at 2.
        \243\ Bank of America Presentation at BancAnalysts Association of
    Boston Conference, supra note 236, at 12.
        \244\ Bank of America Presentation at BancAnalysts Association of
    Boston Conference, supra note 236, at 12 (``We estimate we are roughly
    two-thirds through with GSE claims on 2004-2008 vintages.'').
        \245\ JPM Presentation at BancAnalysts Association of Boston
    Conference, supra note 217, at 22 (``More recent additions to 90 DPD
    [days past due] have longer histories of payment; we believe loans
    going delinquent after 24 months of origination are at lower risk of
    repurchase.'').
        \246\ JPM Presentation at BancAnalysts Association of Boston
    Conference, supra note 217, at 24 (``45% of losses-to-date from loans
    that paid for 25+ months before delinquency''); Bank of America Merrill
    Lynch, R&W: Investor hurdles mitigate impact; GSE losses peaking (Nov.
    8, 2010) (``Delinquency after 2 years of timely payment materially
    reduces the likelihood of repurchase from GSEs (or others, for that
    matter), since the likelihood of default being caused by origination
    problems is much lower; instead, default was likely triggered by loss
    of employment, decline in home value, and the like.'').
    ---------------------------------------------------------------------------

    Private-Label Put-backs

        In comparison with the GSEs, private-label investors do not
    benefit from the same degree of protection through the
    representations and warranties common in the agency PSAs.\247\
    There were, however, representations and warranties in private-
    label securities that, if violated, could provide an outlet for
    mortgage put-backs. In theory, systemic breaches in these
    securities could prove a bigger and potentially more
    problematic exposure, although market observers have cited
    logistical impediments to centralizing claims, in addition to
    the higher hurdles necessary to put-back securities
    successfully to the banks.\248\ Since the majority of subprime
    and Alt-A originators folded during the crisis, the bulk of the
    litigation is directed at the underwriters and any large,
    surviving originators. Thus far, however, subprime and Alt-A
    repurchase requests have been slow to materialize. Relative to
    subprime and Alt-A loans, jumbo loans to higher-net borrowers--
    which were in turn sold to private label investors--have
    performed substantially better.\249\
    ---------------------------------------------------------------------------
        \247\ Standard & Poor's on the Impact of Mortgage Troubles on U.S.
    Banks, supra note 106, at 4.
        \248\ Standard & Poor's on the Impact of Mortgage Troubles on U.S.
    Banks, supra note 106, at 4. (``[W]e believe that the representation
    and warranties were not standard across all private-label securities
    and may have provided differing levels of protection to investors. They
    do not appear to have the same basis on which to ask the banks to buy
    back the loans because the banks did not, in our view, make similar
    promises in the representation and warranties.'').
        \249\ As of June 2010, the OCC/OTS reports that 11.4 percent of the
    Alt-A and 19.4 percent of the subprime loans it services are classified
    as seriously delinquent as compared to an overall rate of 6.2 percent.
    OCC and OTS Mortgage Metrics Report, supra note 240. Also, for example,
    JPMorgan Chase noted that 41 percent and 32 percent of its private-
    label subprime and Alt-A securities, respectively, issued between 2005
    and 2008 had been 90 days or more past due at one point as compared to
    only 13 percent of its prime mortgages. JPM Presentation at
    BancAnalysts Association of Boston Conference, supra note 217, at 24 .
    ---------------------------------------------------------------------------
        Bank of America offers a window into the comparatively slow
    rate at which private-label securities have been put-back to
    banks. Between 2004 and 2008, Bank of America sold
    approximately $750 billion of loans to parties other than the
    GSEs.\250\ As of October 2010, Bank of America received $3.9
    billion in repurchase requests from private-label and whole-
    loan investors. To date, Bank of America has rescinded $1.9
    billion in private-label and whole-loan put-back claims and
    approved $1.0 billion for repurchase, with an estimated loss of
    $600 million.
    ---------------------------------------------------------------------------
        \250\ Bank of America Presentation at BancAnalysts Association of
    Boston Conference, supra note 236.
    ---------------------------------------------------------------------------
        This level of actual put-back requests highlights the
    difficulty in maneuvering the steps necessary to put-back a
    loan, which begins with a group of investors in the same
    security or tranche of a security banding together to request
    access to the underlying loan documents. For example, the group
    of investors petitioning for paperwork relating to $47 billion
    in Bank of America loans remain a number of steps away from
    being in a position to request formally a put-back.\251\ Figure
    11, below, illustrates the dollar amount of non-agency loans
    originated by the nation's four largest banks between 2005 and
    2008.
    ---------------------------------------------------------------------------
        \251\ As part of its MBS purchase program, the Federal Reserve
    currently owns approximately $1.1 trillion of agency MBS. Due to the
    nature of the government guarantee attached to agency MBS, loans that
    are over 120 days past due are automatically bought back at par by the
    government agencies such as Fannie Mae and Freddie Mac that guaranteed
    them. Therefore the Federal Reserve's $1.1 trillion in MBS holdings do
    not pose a direct put-back risk to the banking industry, however, if
    the loans are bought back by the agency guarantors, these agencies have
    the right to take action against the entities that originally sold the
    loans if there were breaches or violations. The Federal Reserve Bank of
    New York also owns private-label RMBS in its Maiden Lane vehicles
    created under its 13(3) authority.
        FRBNY's holdings of private-label RMBS are concentrated in the
    Maiden Lane II vehicle created as part of the government's intervention
    in American International Group (AIG). As of June 30, 2010, the fair
    value of private-label RMBS in Maiden Lane II was $14.8 billion. The
    sector distribution of Maiden Lane II was 54.6 percent subprime, 30.8
    percent Alt-A adjustable rate mortgage (ARM), 6.8 percent option ARM,
    and the remainder was classified as ``other.'' The $47 billion action
    that FRBNY joined involves only the private-label RMBS it holds in the
    Maiden Lane vehicles, and is primarily localized within Maiden Lane II.
    FRBNY staff conversations with Panel staff (Oct. 26, 2010); Board of
    Governors of the Federal Reserve System staff conversations with Panel
    staff (Nov. 10, 2010); Board of Governors of the Federal Reserve
    System, Federal Reserve System Monthly Report on Credit and Liquidity
    Programs and the Balance Sheet, at 19 (Oct. 2010) (online at
    www.federalreserve.gov/monetarypolicy/ files/
    monthlyclbsreport201010.pdf) (hereinafter ``Federal Reserve Report on
    Credit and Liquidity Programs and the Balance Sheet''); Board of
    Governors of the Federal Reserve System, Factors Affecting Reserve
    Balances (H.4.1) (Nov. 12, 2010) (online at www.federalreserve.gov/
    releases/h41/) (hereinafter ``Federal Reserve Statistical Release
    H.4.1''). For more information on the Federal Reserve's section 13(3)
    authority, please see 12 U.S.C. Sec. 343 (providing that the Federal
    Reserve Board ``may authorize any Federal reserve bank . . . to
    discount . . . notes, drafts, and bills of exchange'' for ``any
    individual, partnership, or corporation'' if three conditions are met).
    See also Congressional Oversight Panel, June Oversight Report: The AIG
    Rescue, Its Impact on Markets, and the Government's Exit Strategy, at
    79-83 (June 10, 2010) (online at cop.senate.gov/documents/cop-061010-
    report.pdf).
    ---------------------------------------------------------------------------

              FIGURE 11: NON-AGENCY ORIGINATIONS, 2005-2008 \252\

    ---------------------------------------------------------------------------
        \252\ There were no sales in 2009. Credit Suisse on Mounting
    Mortgage Issues, supra note 223.
    ---------------------------------------------------------------------------

    Put-back Loss Estimates

        Losses stemming from mortgage put-backs are viewed as the
    biggest potential liability of the banking sector from the
    foreclosure crisis. While it is difficult to quantify the
    impact this issue may have on bank balance sheets, a number of
    analysts have compiled estimates on potential risks to the
    sector.
        The first step in estimating the industry's exposure is
    identifying the appropriate universe of loans, within the $10.6
    trillion mortgage debt market. The 2005-2008 period is the
    starting point for this analysis. Of the loans originated
    during this period, $3.7 trillion were sold by banks to the
    GSEs and $1.5 trillion were sold to private label
    investors.\253\ Accordingly, this $5.2 trillion in agency and
    non-agency loans and securities sold by the banks during the
    2005-2008 period is the starting point for a series of
    assumptions--loan delinquencies, put-back requests, successful
    put-backs, and loss severity--that ultimately drive estimates
    of potential bank losses.
    ---------------------------------------------------------------------------
        \253\ Nomura Equity Research, Private Label Put-Back Concerns are
    Overdone, Private Investors Face Hurdles (Nov. 1, 2010) (hereinafter
    ``Nomura Equity Research on Private Label Put-Back Concerns''); Goldman
    Sachs, Assessing the Mortgage Morass (Oct. 15, 2010) (hereinafter
    ``Goldman Sachs on Assessing the Mortgage Morass'').
    ---------------------------------------------------------------------------
        The Panel has averaged published loss estimates from bank
    analysts in order to provide a top-level illustration of the
    cost mortgage put-backs could inflict on bank balance sheets.
    The estimate below represents a baseline sample of five analyst
    estimates for the GSE portion and six analyst estimates for the
    private-label approximation. Accordingly, realized losses could
    be significantly higher or meaningfully lower.
        As outlined below, there are numerous assumptions involved
    in estimating potential losses from put-backs.\254\
    ---------------------------------------------------------------------------
        \254\ Subsequent estimates--loan delinquencies, put-back requests,
    successful put-backs, and loss severity--are surveyed from the
    following research reports: Bernstein Research, Bank Stock Weekly:
    Return to Lender? Sizing Rep and Warranty Exposure (Sept. 24, 2010)
    (hereinafter ``Bernstein Research Report on Sizing Rep and Warranty
    Exposure''); Barclays Capital, Focus on Mortgage Repurchase Risk (Sept.
    2, 2010); J.P. Morgan, Putbacks and Foreclosures: Fact vs. Fiction
    (Oct. 15, 2010) (hereinafter ``Barclays Capital Research Report on
    Putbacks and Foreclosures''); Goldman Sachs on Assessing the Mortgage
    Morass, supra note 253; Nomura Equity Research on Private Label Put-
    Back Concerns, supra note 253; Citigroup Global Markets, R&W Losses
    Manageable, but Non-Agency May be Costly Wildcard (Sept. 26, 2010)
    (hereinafter ``Citigroup Research Report on Non-Agency Losses'');
    Compass Point Research & Trading, LLC, GSE Mortgage Repurchase Risk
    Poses Future Headwinds: Quantifying Losses (Mar. 15, 2010); Deutsche
    Bank Revisits Putbacks and Securitizations, supra note 192; JPM
    Presentation at BancAnalysts Association of Boston Conference, supra
    note 217, at 26.
    ---------------------------------------------------------------------------
          Projected Loan Losses--Delinquent or non-
    performing mortgage loans provide the initial pipeline for
    potential mortgage put-backs. Accordingly, estimates of
    cumulative losses on loans issued between 2005 and 2008 govern
    the aggregate put-back risk of the banks. The blended estimate
    for GSE loans is 13 percent, and the blended private label
    estimate is 30 percent.\255\
    ---------------------------------------------------------------------------
        \255\ Four analyst estimates were used for the blended private-
    label loan losses percentage of 30%: Goldman Sachs--28%, Bernstein
    Research--25%, Nomura Equity Research--25%, and Credit Suisse--40%.
    Goldman Sachs on Assessing the Mortgage Morass, supra note 253; Nomura
    Equity Research on Private Label Put-Back Concerns, supra note 253;
    Bernstein Research Report on Sizing Rep and Warranty Exposure, supra
    note 254; Credit Suisse on Mortgage Put-back Losses, supra note 192.
    ---------------------------------------------------------------------------
          Gross Put-backs--The next step is projecting what
    percentage of these delinquent or nonperforming loans holders
    will choose to put-back to the banks. The average estimate for
    gross put-backs for the GSEs is 30 percent, and private label
    loans is 24 percent.
          Successful Put-backs--Of these put-back requests,
    analysts estimate that 50 percent of GSE loans and 33 percent
    of private label loans are put-back successfully to the banks.
          Severity--The calculation involves the loss
    severity on loans that are successfully put-back to the banks
    (i.e., how much the banks have to pay to make the aggrieved
    investors whole). The blended average severity rate used by
    analysts for both GSE and the private label loans is 50
    percent.
        Using the assumptions outlined above, the estimated loss to
    the industry from mortgage put-backs is $52 billion (see Figure
    12 below). This compares to industry-wide estimates of base-
    case losses from mortgage put-backs of $43 billion to $65
    billion.\256\
    ---------------------------------------------------------------------------
        \256\ This range is comprised of a number of base-case or mid-point
    estimates for potential losses across the industry from put-backs:
    Standard & Poor's--$43 billion, Deutsche Bank--$43 billion, FBR Capital
    Markets--$44 billion in potential losses, Citigroup--$50.1 billion, J.P
    Morgan--$55 billion, Goldman Sachs--$71 billion, Credit Suisse--$65
    billion, The Deutsche Bank estimate is for $31 billion in remaining
    losses, the $12 billion in realized losses thus far was added to create
    a consistent metric. FBR on Repurchase-Related Losses, supra note 192;
    Credit Suisse on Mortgage Put-back Losses, supra note 192; Deutsche
    Bank Revisits Putbacks and Securitizations, supra note 192; Standard &
    Poor's on the Impact of Mortgage Troubles on U.S. Banks, supra note
    106, at 4; Citigroup Research Report on Non-Agency Losses, supra note
    254; Barclays Capital Research Report on Putbacks and Foreclosures,
    supra note 254; Goldman Sachs on Assessing the Mortgage Morass, supra
    note 253.

                                        FIGURE 12: PUT-BACK LOSS ESTIMATES \257\
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                                    Agency MBS         Private Label MBS
                                                              --------------------------------------------   Total
                                                                  (%)        ($)        (%)        ($)
    ----------------------------------------------------------------------------------------------------------------
    2005-2008 MBS Sold \258\.................................                $3,651                $1,358     $5,009
    Projected Loan Losses....................................         13        475         30        407        882
    Gross Put-backs (Requests)...............................         30        142         24         98        240
    Successful Put-backs.....................................         50         71         33         32        103
    Put-back Severity........................................         50                    50
    ----------------------------------------------------------------------------------------------------------------
    Total Put-back Losses....................................                   $36                   $16        $52
    ----------------------------------------------------------------------------------------------------------------
    \257\ JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 26.
    \258\ These figures represent the value of the MBS sold either to the GSEs or private-label investors during
      this period that are still currently outstanding. Nomura Equity Research on Private Label Put-Back Concerns,
      supra note 253; Goldman Sachs on Assessing the Mortgage Morass, supra note 253.

        The estimated $52 billion would be borne predominantly by
    four firms (Bank of America, JPMorgan Chase, Wells Fargo, and
    Citigroup), accounting for the majority of the industry's total
    exposure and projected losses.\259\ In the aggregate these four
    banks have already reserved $9.9 billion for future
    representations and warranties expenses, which is in addition
    to the $11.4 billion in expenses already incurred.\260\ Thus,
    of this potential liability, $21.3 billion has either been
    previously expensed or reserved for by the major banks.\261\
    Given the timing associated with put-back requests and
    associated accounting recognition, it is not inconceivable that
    the major banks could recognize future losses over a 2-3 year
    period.
    ---------------------------------------------------------------------------
        \259\ It is worth noting, however, that Bank of America and
    JPMorgan Chase are the more meaningful contributors, accounting for
    approximately 50 percent of the industry's total projected losses by
    analysts. The mid-point of each of these estimates was used to compute
    the range. Deutsche Bank Revisits Putbacks and Securitizations, supra
    note 192, at 7; Credit Suisse on Mounting Mortgage Issues, supra note
    223; FBR on Repurchase-Related Losses, supra note 192.
        \260\ The $11.4 billion in estimated expenses at the top four banks
    has been since the first quarter of 2009. Credit Suisse on Mortgage
    Put-back Losses, supra note 192, at 10.
        \261\ Deutsche Bank Revisits Putbacks and Securitizations, supra
    note 192.
    ---------------------------------------------------------------------------

     G. Effect of Irregularities and Foreclosure Freezes on Housing Market

    1. Foreclosure Freezes and their Effect on Housing

        In previous reports, the Panel has noted the many
    undesirable consequences that foreclosures, especially mass
    foreclosures, have on individuals, families, neighborhoods,
    local governments, and the economy as a whole.\262\
    Additionally, housing experts testifying at Panel hearings have
    emphasized that mass foreclosures cause damage to the economy
    and social fabric of the country.\263\ Certainly, the injection
    over the past several years of millions of foreclosed-upon
    homes into an already weak housing market has had a deleterious
    effect on home prices. These effects are especially relevant in
    examining what repercussions foreclosure freezes would have on
    the housing market, and the advisability of such freezes.
    ---------------------------------------------------------------------------
        \262\ March 2009 Oversight Report, supra note 6, at 9-11.
        \263\ See, e.g., Written Testimony of Julia Gordon, supra note 171,
    at 1-2.
    ---------------------------------------------------------------------------
        Questions remain as to how broadly the current foreclosure
    irregularities will affect the housing market, and the scale of
    the losses involved. The immediate effect of the foreclosure
    document irregularities has been to cause many servicers to
    freeze all foreclosure processings, although some freezes have
    been temporary.\264\ Some states have encouraged these
    foreclosure freezes,\265\ and government-imposed, blanket
    freezes on all foreclosures have been under discussion.\266\
    The housing market may not be seriously affected by the current
    freezes on pending foreclosures, which may actually cause home
    prices of unaffected homes to rise. Any foreclosure moratorium
    that is not accompanied by action to address the underlying
    issues associated with mass foreclosures and the
    irregularities, however, will add delays but will not provide
    solutions. Beyond the effects of the current freezes, mortgage
    documentation irregularities may increase home buyers' and
    mortgage investors' perceptions of risk and damage confidence
    and trust in the housing market, all of which may drive down
    home prices.
    ---------------------------------------------------------------------------
        \264\ See, e.g., Statement from Bank of America Home Loans, supra
    note 21.
        \265\ See, e.g., Office of Maryland Governor Martin O'Malley,
    Governor Martin O'Malley, Maryland Congressional Delegation Request
    Court Intervention in Halting Foreclosures (Oct. 8, 2010) (online at
    www.governor.maryland.gov/pressreleases/101009b.asp).
        \266\ See, e.g., Reid Welcomes Bank of America Decision, supra note
    24; Foreclosure Moratorium: Cracking Down on Liar Liens, supra note 24.
    ---------------------------------------------------------------------------
        In considering the possible effects foreclosure freezes may
    have on the housing market, it is important to distinguish, as
    the Panel has in previous reports, between the effects these
    foreclosures and foreclosure freezes may have on individuals
    versus effects that are more systemic or macroeconomic, as
    these interests may come into conflict at times.\267\ The Panel
    has also repeatedly acknowledged that the circumstances
    surrounding some mortgages make foreclosure simply
    unavoidable.\268\ Additionally, the current housing market has,
    among other difficult problems, a severe oversupply of housing
    in relation to current demand, which has fallen substantially
    since the peak bubble years due to higher unemployment and
    other economic hardships. This fundamental supply/demand
    imbalance has driven down home prices nationwide, but
    especially in areas such as Nevada or Florida, where a great
    many new homes were constructed.\269\
    ---------------------------------------------------------------------------
        \267\ March 2009 Oversight Report, supra note 6, at 62-63
    (Discussing foreclosure freezes: ``Again, this raises the question of
    whether the economic efficiency of foreclosures should be viewed in the
    context of individual foreclosures or in the context of the
    macroeconomic impact of widespread foreclosures. If the former, then
    caution should be exercised about foreclosure moratoria and other forms
    of delay to the extent it prevents efficient foreclosures. But if the
    latter is the proper view, then it may well be that some individually
    efficient foreclosures should nonetheless be prevented in order to
    mitigate the macroeconomic impact of mass foreclosures.'').
        \268\ March 2009 Oversight Report, supra note 6, at 37 (Discussing
    loan modification programs: ``As an initial matter, however, it must be
    recognized that some foreclosures are not avoidable and some workouts
    may not be economical. This should temper expectations about the scope
    of any modification program.'').
        \269\ The oversupply of homes can be clearly seen from ``for sale''
    inventory statistics, which the Panel has discussed in previous
    reports. See, e.g., March 2009 Oversight Report, supra note 6, at 107-
    108. September 2010 for-sale housing inventory stands at 4.04 million
    homes, a 10.7 month supply at current sales rates, up from the 3.59
    million homes representing an 8.6 month supply cited in the Panel's
    April report on foreclosures. National Association of Realtors,
    September Existing-Home Sales Show Another Strong Gain (Oct. 25, 2010)
    (online at www.realtor.org/press_room/news_releases/2010/10/
    sept_strong).
    ---------------------------------------------------------------------------
        There are numerous arguments both for and against
    foreclosure freezes at this time.\270\ Freezing foreclosures
    may allow time for servicers, state governments, and courts to
    sort out the irregularity situation and may avoid illegal or
    erroneous foreclosures in some cases. Voluntary, limited
    freezes may be sensible for particular servicers. The costs
    associated with a mandatory foreclosure freeze may also
    pressure servicers to resolve frozen foreclosures through
    modifications.\271\ Further, foreclosure freezes can
    temporarily reduce the number of real estate owned by banks and
    pre-foreclosure homes coming to market, reducing excess supply,
    which can be beneficial for home prices in the short term. The
    longer-term consequences of freezes depend on the ultimate
    solution to the issues giving rise to the freezes.
    ---------------------------------------------------------------------------
        \270\ The Panel has discussed some of the pros and cons of
    foreclosure freezes in prior reports, but not in the context of the
    irregularities. March 2009 Oversight Report, supra note 6, at 61-63.
        \271\ March 2009 Oversight Report, supra note 6, at 61.
    ---------------------------------------------------------------------------
        In addition, foreclosures have many well-documented
    negative financial and social consequences on families and
    neighborhoods that might be mitigated by a foreclosure
    freeze.\272\ Vacant homes can attract thieves and vandals. If
    not maintained by the lender, properties foreclosed upon and
    repossessed by the lender--properties also known as real-estate
    owned (REOs), often become eyesores, detracting from the
    appearance of the neighborhood and reducing local home values.
    The drop in the value of neighboring homes has been
    corroborated by a recent study. Although the authors found that
    the impact of foreclosed homes on each individual neighboring
    home is relatively small, these losses can amount to a
    considerable total loss in value to the neighborhood. Not
    surprisingly, the researchers found a more dramatic decline in
    value for the foreclosed home itself. The study indicated that
    foreclosure lowers a home's value by an average of 27 percent,
    much more than other events, such as personal bankruptcy, that
    also lead to forced home sales. The researchers attribute these
    losses primarily to the urgency with which lenders dispose of
    REOs and to damage inflicted on vacant, lender-owned
    homes.\273\
    ---------------------------------------------------------------------------
        \272\ See, e.g., March 2009 Oversight Report, supra note 6, at 9-
    11.
        \273\ John Campbell, Stefano Giglio, and Parag Pathak, Forced Sales
    and House Prices, at 10, 18, 21, Unpublished manuscript (July 2010)
    (online at econ-www.mit.edu/files/5694) (``. . . the typical
    foreclosure during this period lowered the price of the foreclosed
    house by $44,000 and the prices of neighboring houses by a total of
    $477,000, for a total loss in housing value of $520,000.'' and ``Our
    preferred estimate of the spillover effect suggests that each
    foreclosure that takes place 0.05 miles away lowers the price of a
    house by about 1%.'').
    ---------------------------------------------------------------------------
        In addition to lowering the value of the home itself, a
    foreclosure affects the surrounding neighborhood, especially if
    the home is clearly marked with a sale sign that says
    ``foreclosure.'' A reduction in price from a foreclosed
    property can affect the values of surrounding homes if the low
    price is used as a comparable sale for valuation purposes. Even
    if foreclosure sales are excluded as comparable sales from
    appraisals, as is often the case, these sale prices are readily
    accessible public information. For example, considering the
    popularity of real estate sites such as Zillow and Trulia that
    show home sale prices, buyers can easily see these low
    foreclosure sale prices and are likely to reduce their offers
    accordingly.\274\ Furthermore, as Julia Gordon of the Center
    for Responsible Lending and several academic studies
    observe,\275\ minority communities are disproportionately
    affected by foreclosures and their consequences.\276\ These
    negative externalities from foreclosures are borne not by any
    of the parties to the mortgage, but by the neighbors and the
    community, who are innocent bystanders.
    ---------------------------------------------------------------------------
        \274\ Zillow does not include foreclosure data in its home price
    estimates; however, a person can click on a home, including foreclosed
    homes, and see its sales price.
        \275\ See, e.g., Vicki Bean, Ingrid Gould Ellen, et al., Kids and
    Foreclosures: New York City (Sept. 2010) (online at steinhardt.nyu.edu/
    scmsAdmin/media/users/lah431/
    Foreclosures_and_Kids_Policy_Brief_Sept_2010.pdf); Vanesa Estrada
    Correa, The Housing Downturn and Racial Inequality, Policy Matters,
    Vol. 3, No. 2 (Fall 2009) (online at www.policymatters.ucr.edu/
    pmatters-vol3-2-housing.pdf).
        \276\ Congressional Oversight Panel, Testimony of Julia Gordon,
    senior policy council, Center for Responsible Lending, Transcript: COP
    Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010)
    (publication forthcoming) (online at cop.senate.gov/hearings/library/
    hearing-102710-foreclosure.cfm) (``African American and Latino families
    are much more likely than whites to lose their homes, and we estimate
    that communities of color will lose over $360 billion worth of
    wealth.'').
    ---------------------------------------------------------------------------
        One of the most common arguments against foreclosure
    freezes concerns the effect that freezes could have on shadow
    inventory--properties likely to be sold in the near future that
    are not currently on the market, and are therefore not counted
    in supply inventory statistics. A prolonged freeze on
    foreclosures without a diminution in the number of homes in
    foreclosure would add to the already substantial problem of
    shadow inventory. Of course, increased shadow inventory can be
    addressed either by foreclosing and selling the homes, or by
    creating circumstances that allow current homeowners to stay in
    their homes. Although there are no reliable measures (or
    definitions) of shadow inventory, estimates range from 1.7
    million to 7 million homes.\277\ These homes represent
    additional supply that the market will eventually have to
    accommodate, so long as the homes are not removed from the
    shadow inventory due to circumstances such as loan
    modifications or an improvement in the financial condition of
    borrowers.\278\
    ---------------------------------------------------------------------------
        \277\ 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); Laurie Goodman, Robert Hunter, et
    al., Amherst Securities Group LP, Amherst Mortgage Insight: Housing
    Overhang/Shadow Inventory = Enormous Problem, at 1 (Sept. 23, 2009)
    (online at matrix.millersamuel.com/wp-content/3q09/
    Amherst%20Mortgage%20Insight%2009232009.pdf).
        \278\ James J. Saccacio, chief executive officer of the online
    foreclosure marketplace RealtyTrac, expects that ``if the lenders can
    resolve the documentation issue quickly, then we would expect the
    temporary lull in foreclosure activity to be followed by a parallel
    spike in activity as many of the delayed foreclosures move forward in
    the foreclosure process. However, if the documentation issue cannot be
    quickly resolved and expands to more lenders we could see a chilling
    effect on the overall housing market as sales of pre-foreclosure and
    foreclosed properties, which account for nearly one-third of all sales,
    dry up and the shadow inventory of distressed properties grows--causing
    more uncertainty about home prices.'' RealtyTrac, Foreclosure Activity
    Increases 4 Percent in Third Quarter (Oct. 14, 2010) (online at
    www.realtytrac.com/content/press-releases/q3-2010-and-september-2010-
    foreclosure-reports-6108) (hereinafter ``RealtyTrac Press Release on
    Foreclosure Activity'').
    ---------------------------------------------------------------------------
        Beyond shadow inventory, foreclosure sales consist of sales
    of homes immediately prior to foreclosure and sales of REOs. In
    the 12 months between September 2009 and August 2010, 4.13
    million existing homes were sold in the United States,
    approximately 30 percent of which were foreclosure sales.\279\
    Further, lenders are estimated to own 290,000 properties as
    REOs.\280\ Currently, approximately 2 million homes, or 4.6
    percent of all mortgaged properties, are classified as in the
    foreclosure process. Another 2 million, or 4.5 percent of
    mortgaged properties, are more than 90 days past due.\281\ The
    level of foreclosures is, further, expected to rise: more than
    $1 trillion in adjustable-rate mortgages are expected to
    experience interest rate resets between 2010 and 2012, an event
    that is positively correlated with delinquency and
    foreclosure.\282\ Foreclosure sales therefore represent a very
    substantial portion of housing market activity, with many more
    foreclosures either in the pipeline or likely to enter the
    pipeline in the coming years.
    ---------------------------------------------------------------------------
        \279\ National Association of Realtors, Existing-Home Sales Move Up
    in August (Sept. 23, 2010) (online at www.realtor.org/press_room/
    news_releases/2010/09/ehs_move); HOPE Now Alliance, Appendix--Mortgage
    Loss Mitigation Statistics: Industry Extrapolations (Monthly for Dec
    2008 to Nov 2009) (online at www.hopenow.com/industry-data/
    HOPE%20NOW%20National%20Data%20July07%20to%20Nov09%20v2%20(2).pdf);
    HOPE Now Alliance, Industry Extrapolations and Metrics (May 2010)
    (online at www.hopenow.com/industry-data/
    HOPE%20NOW%20Data%20Report%20(May)%2006-21-2010.pdf); HOPE Now
    Alliance, Industry Extrapolations and Metrics (Aug. 2010) (online at
    hopenow.com/industry-data/HOPE%20NOW%20Data%20Report%20(August)%2010-
    05-2010%20v2b.pdf).
        \280\ RealtyTrac Press Release on Foreclosure Activity, supra note
    278.
        \281\ MBA National Delinquency Survey, Q2 2010, supra note 199. See
    also MBA Press Release on Delinquencies and Foreclosure Starts, supra
    note 199.
        \282\ Zach Fox, Credit Suisse: $1 Trillion worth of ARMs still face
    resets, SNL Financial (Feb. 25, 2010). The Panel addressed the impact
    of interest rate resets in its April 2010 Report on foreclosures.
    Congressional Oversight Panel, April Oversight Report: Evaluating
    Progress of TARP Foreclosure Mitigation Programs, at 111-115, 123 (Apr.
    14, 2010) (online at cop.senate.gov/documents/cop-041410-report.pdf)
    (hereinafter ``April 2010 Ovesright Report'').
    ---------------------------------------------------------------------------
        Opponents of mandatory foreclosure freezes have also argued
    that a widespread freeze would encourage defaults by
    eliminating the negative consequences of default; that
    foreclosure freezes are bad for mortgage investors (including
    taxpayers, as owners of the GSEs) \283\ because they reduce
    investment returns by delaying the payment of foreclosure sale
    proceeds; and that they would disproportionately harm smaller
    banks and credit unions, which are heavily invested in home
    mortgages.\284\ Further, when smaller banks and credit unions
    service loans, payments to investors on non-performing loans
    must come from significantly smaller cash cushions than they do
    for the largest banks and servicers.\285\ James Lockhart,
    former regulator of Fannie Mae and Freddie Mac, has stated that
    freezes will also extend the time that homes in foreclosure
    proceedings will be left vacant, with attendant negative
    effects on the surrounding neighborhood.\286\ Such cases would
    presumably involve already vacant, foreclosed-upon homes, and
    homes with impending or ongoing foreclosure proceedings where
    the borrower has chosen to vacate early, as occasionally
    happens.\287\
    ---------------------------------------------------------------------------
        \283\ Fannie Mae and Freddie Mac would be impacted directly by a
    freeze because they would have to continue advancing coupon payments to
    bondholders while not receiving any revenue from disposal of foreclosed
    properties, upon which they are already not receiving mortgage
    payments. These costs would almost certainly be borne by taxpayers, and
    depending on the duration of the freeze and how the housing market
    responds to it, they could be substantial.
        Press reports and Panel staff discussions with industry sources
    have indicated that, as part of an effort to restart foreclosures,
    Fannie Mae and Freddie Mac were until recently negotiating an
    indemnification agreement with servicers and title insurers. This would
    have been along the lines of the recent agreement between Bank of
    America and Fidelity National Financial, mentioned above in Section C,
    in which Bank of America agreed to indemnify Fidelity National (a title
    insurer) for losses incurred due to servicer errors. However, industry
    sources stated that the GSEs had recently cooled to this effort.
    Industry sources conversations with Panel staff (Nov. 9, 2010); Nick
    Timiraos, Fannie, Freddie Seek End to Freeze, Wall Street Journal (Oct.
    23, 2010) (online at online.wsj.com/article/
    SB10001424052702304354104575568621229952944.html); see also Statement
    from Bank of America Home Loans, supra note 16.
        \284\ Third Way Domestic Policy Memo on the Case Against a
    Foreclosure Moratorium, supra note 227.
        \285\ See Section F.2, supra.
        \286\ Bloomberg News, Interview with WL Ross & Co.'s James Lockhart
    (Oct. 27, 2010) (online at www.bloomberg.com/video/64040362/).
        \287\ JPMorgan Chase estimates that approximately one-third of the
    homes upon which it forecloses are already vacant by the time the
    foreclosure process commences. Stephen Meister, Foreclosuregate is
    Quickly Spinning Out of Control, RealClearMarkets (Oct. 22, 2010)
    (online at www.realclearmarkets.com/articles/2010/10/22/foreclosure-
    gate_is_quickly_spinning_out_of_control.html). Similarly, there are
    reports about a type of strategic default, commonly known as ``jingle
    mail,'' where the delinquent borrower vacates the home and mails the
    servicer the keys in the hope that the servicer will accept the act as
    a deed-in-lieu-of-foreclosure, or simply to get the foreclosure process
    over with.
    ---------------------------------------------------------------------------

    2. Foreclosure Irregularities and the Crisis of Confidence

        The apparently widespread nature of the foreclosure
    irregularities that have come to light has the potential to
    reduce public trust substantially in the entire real estate
    industry, especially in the legitimacy of important legal
    documents and the good faith of other market participants.
    Under these circumstances, either buying or lending on a home
    will appear to be substantially more risky than before. If
    buyers suspect that homes, especially foreclosed homes, may
    have unknown title and legal problems, they may be less likely
    to buy, or at least they may lower their offers to account for
    the increased risks. Since foreclosure sales currently account
    for such a large portion of market activity, in the absence of
    solutions that reduce foreclosures, a reduction in demand for
    previously foreclosed-upon properties would have negative
    effects on the overall housing market. David Stevens,
    commissioner of the Federal Housing Administration, recently
    noted that the mortgage industry now faces an ``enormous trust
    deficit'' that risks ``scaring'' off an entire generation of
    young people from homeownership.\288\
    ---------------------------------------------------------------------------
        \288\ David H. Stevens, commissioner, Federal Housing
    Administration, Remarks at the Mortgage Bankers Association Annual
    Convention, at 7, 20 (Oct. 26, 2010).
    ---------------------------------------------------------------------------
        Similar dynamics may impact the availability and cost of
    mortgages as well, as mortgage investors, who provide the
    capital that ultimately supports home prices, reassess their
    perceptions of risk. The exposure of foreclosure irregularities
    has raised a host of potential risks for investors, such as the
    possibility that MBS trusts may not actually own the underlying
    loans they claim to own, that servicers may not be able to
    foreclose upon delinquent borrowers and thus recover invested
    capital, that borrowers who have already been foreclosed upon
    may sue, or that other currently unknown liability issues
    exist. These new risks could cause some mortgage investors to
    look for safer alternative investments or to increase their
    investment return requirements to compensate for the increased
    risks. With wary investors making less capital available for
    mortgages, and reevaluating the risk of residential lending,
    mortgage interest rates could rise, in turn decreasing the
    affordability of homes and depressing home prices, as the same
    monthly payment now supports a smaller mortgage.
        Additionally, both the foreclosure freezes and the legal
    wrangling between homeowners, servicers, title companies, and
    investors that appears inevitable at this point, and in the
    absence of a solution to the problem of mass foreclosures could
    extend the time it will take for the inventory of homes for
    sale to be cleared from the system, and thus could potentially
    delay the recovery of the housing market.\289\ Further, general
    uncertainty about the scope of these problems and how they will
    be addressed by market participants and governments could have
    a chilling effect on both home sales and mortgage investment,
    as people adopt a ``wait and see'' attitude. On the other hand,
    some delay could be beneficial in that it would provide the
    time necessary to arrive at a more comprehensive solution to
    the many complex issues involved in, or underlying, this
    situation.\290\
    ---------------------------------------------------------------------------
        \289\ Cf. The White House, Press Briefing (Oct. 12, 2010) (online
    at www.whitehouse.gov/the-press-office/2010/10/12/press-briefing-press-
    secretary-robert-gibbs-10122010) (``We also have pointed out, though,
    that the idea of a national moratorium would impact the recovery in the
    housing sector, as anybody that wished to enter into a contract or
    execute a contract to purchase a home that had previously been
    foreclosed on, that process stops. That means houses and neighborhoods
    remain empty even if there are buyers ready, willing and able to do
    so.'').
        \290\ In prior reports, the Panel has acknowledged that the delays
    caused by foreclosure freezes create additional costs for servicers,
    but also have possibly beneficial effects for borrowers. March 2009
    Oversight Report, supra note 6, at 61-63.
    ---------------------------------------------------------------------------
        The recent and developing nature of the foreclosure
    irregularities means that predicting their effects, as well as
    those of any resulting foreclosure freezes, on the housing
    market necessarily involves a high degree of speculation.
    Actual housing market movements will depend on, among other
    things, the scope and severity of the foreclosure
    irregularities, the resolution of various legal issues,
    government actions, and on the reactions of homeowners, home
    buyers, servicers, and mortgage investors. It seems clear,
    however, that the many unknowns, uncertain solutions, and
    potential liability for fraud greatly add to the risk inherent
    in owning or lending on affected homes.\291\
    ---------------------------------------------------------------------------
        \291\ Mortgage lenders who make loans on formerly foreclosed homes
    where the legal ownership of the property is uncertain due to
    foreclosure irregularities risk the possibility that other creditors
    could come forward with competing claims to the collateral.
    ---------------------------------------------------------------------------

                               H. Impact on HAMP

        HAMP is a nationwide mortgage modification program
    established in 2009, using TARP funds, as an answer to the
    growing foreclosure problem. HAMP is designed to provide a
    mortgage modification to homeowners in those cases in which
    modification, from the perspective of the mortgage holder, is
    an economically preferable outcome to foreclosure. The program
    provides financial incentives to servicers to modify mortgages
    for homeowners at risk of default, and incentives for the
    beneficiaries of these modifications to stay current on their
    mortgage payments going forward.\292\ Participation in the
    program by servicers is on a voluntary basis. Once a servicer
    is in HAMP, though, if a borrower meets certain eligibility
    criteria, participating servicers must run a test, known as a
    net present value (NPV) test, to evaluate whether a foreclosure
    or a loan modification would yield a higher value. If the value
    of the modified mortgage is greater than the potential
    foreclosure value, then the servicer must offer the borrower a
    modification.
    ---------------------------------------------------------------------------
        \292\ Servicers of GSE mortgages are required to participate in
    HAMP for their GSE portfolios. Servicers of non-GSE mortgages may elect
    to sign a Servicer Participation Agreement in order to participate in
    the program. Once an agreement has been signed, the participating
    servicer must evaluate all mortgages under HAMP unless the
    participation contract is terminated. See Congressional Oversight
    Panel, October Oversight Report: An Assessment of Foreclosure
    Mitigation Efforts After Six Months, at 44-45 (Oct. 9, 2009) (online at
    cop.senate.gov/documents/cop-100909-report.pdf).
    ---------------------------------------------------------------------------
        Treasury asserts that the foreclosure irregularities have
    no direct impact on HAMP. With regard to false affidavits,
    Phyllis Caldwell, chief of Treasury's Homeownership
    Preservation Office, noted that HAMP is a foreclosure-
    prevention program and therefore is separate from the actual
    foreclosure sale process. As a result, HAMP ``is not directly
    affected by `robo-signers' or false affidavits filed with state
    courts.'' \293\
    ---------------------------------------------------------------------------
        \293\ Written Testimony of Phyllis Caldwell, supra note 142, at 1.
    ---------------------------------------------------------------------------
        With regard to the issues around the transfer of ownership
    of the mortgage, Ms. Caldwell testified that ``to modify a
    mortgage, there is not a need to have clear title.'' \294\ In
    addition, Treasury stated that it has not reviewed mortgage
    ownership transfer issues because the modifications are private
    contracts between the servicer and the borrower.\295\ Perhaps
    as a result, Treasury is not doing anything independently to
    determine if the mortgages the servicers in HAMP are modifying
    have been properly transferred into the trusts the servicers
    represent. It is supporting other agencies in their efforts,
    but is taking no action on its own.\296\ According to Ms.
    Caldwell, there is an ``assumption that the servicer is
    following the laws. [ . . .] If we learn something after the
    fact that contradicts that, we do have the ability to go in and
    claw back the incentive.'' \297\ Treasury echoed this opinion
    in conversations with Panel staff.\298\
    ---------------------------------------------------------------------------
        \294\ Testimony of Phyllis Caldwell, supra note 143.
        \295\ Treasury conversations with Panel staff (Oct. 21, 2010).
        \296\ Testimony of Phyllis Caldwell, supra note 143 (``KAUFMAN: So
    you're not sending anyone out to actually find out whether they hold
    the mortgages? . . . [O]r any kind of physical (ph) follow-up on the
    fact that there are mortgages out there--do they actually have the
    mortgages and they actually have title to the land that they are trying
    to foreclose on? CALDWELL: At this point, we are supporting all of the
    agencies that are doing investigations of those servicers, including
    the GSEs, and are monitoring closely, and will take follow-up action
    when there are facts that we get from those reviews. KAUFMAN: So . . .
    Treasury's not doing anything independently to determine that mortgages
    modified under HAMP have all necessary loan documentation and a clear
    chain of title? You're just taking the word of the people--of the folks
    at the banks and financial institutions you're dealing with that they
    do have a--they have loan documentation and a clear chain of title? . .
    . CALDWELL: . . . I think that . . . it's an important issue and
    something that . . . at least at this point in time . . . we're looking
    at the foreclosure prevention process separate from the actual
    foreclosure sale process. And to modify a mortgage, there is not a need
    to have clear title. . . . you need information from the note, but you
    don't need a physical note to modify a mortgage.''). See also Treasury
    conversations with Panel staff (Oct. 21, 2010).
        \297\ Testimony of Phyllis Caldwell, supra note 143.
        \298\ Treasury conversations with Panel staff (Oct. 21, 2010).
    ---------------------------------------------------------------------------
        The Panel questions Treasury's position that HAMP is
    unaffected by the foreclosure irregularities. Although it is
    difficult to assess the exact consequences of the foreclosure
    documentation crisis on HAMP at this point, there are several
    strong potential links which Treasury should carefully
    consider. For example, if trusts have not properly received
    ownership of the mortgage, they may not be the legal owner of
    the mortgage. If the trust does not own the mortgage, the
    servicer cannot foreclose on it, and HAMP, a foreclosure
    prevention program, is paying incentives to parties with no
    legal right to foreclose. At present, Treasury has no way to
    determine if such payments are being made.\299\ Treasury may
    well be paying incentives to servicers that have no right to
    receive them.
    ---------------------------------------------------------------------------
        \299\ Testimony of Phyllis Caldwell, supra note 143.
    ---------------------------------------------------------------------------
        Treasury has justified its relative inaction by noting that
    if ownership of the mortgage has not been properly transferred,
    the legal owner will eventually appear, and at that time,
    Treasury can claw back any incentive payments made to the wrong
    party.\300\ Such a solution, however, may not be feasible. It
    optimistically assumes that legal owners will be able to
    identify clearly the mortgages they own, despite all of the
    potential litigation and complex transactions many mortgages
    have been part of, and then navigate the bureaucracy to bring
    the matter before Treasury. Inevitably, not all legal owners
    will manage this, in which case Treasury will be giving money
    to parties that are not entitled to it. Moreover, if this is
    occurring, even in cases where the legal owners do come
    forward, Treasury is essentially providing interest-free loans
    to the wrong parties in the meantime. In addition, Treasury's
    inactivity may give rise to a double standard in which
    borrowers must provide extensive documentation before
    benefiting from HAMP, while servicers are allowed public money
    without having to prove their right to foreclose.
    ---------------------------------------------------------------------------
        \300\ Treasury conversations with Panel staff (Oct. 21, 2010).
    ---------------------------------------------------------------------------
        In addition, although Treasury maintains that HAMP is
    unaffected by transfer of mortgage ownership issues because
    modifications are private contracts between servicers and
    borrowers,\301\ a servicer cannot modify a loan unless it is
    authorized to do so by the mortgage's actual owner.\302\ If
    legal owners then begin to come forward, as Treasury is relying
    on them to do in order to clarify incentive payments, the legal
    owners will not be bound by the modifications.\303\ Abruptly,
    borrowers would no longer benefit from the reduced interest
    rates of a HAMP modification. As a result, the length of time
    that a modification provides a borrower to recover and become
    current on payment, which Treasury cites as one of HAMP's
    principal successes,\304\ would be cut short. Indeed, borrowers
    may even suffer penalties for not having been paying the
    monthly payments required prior to the modification.
    ---------------------------------------------------------------------------
        \301\ Treasury conversations with Panel staff (Oct. 21, 2010).
        \302\ Written Testimony of Katherine Porter, supra note 14, at 8.
        \303\ It is unclear what would happen if the true owner were also
    in HAMP. Under the HAMP standards, the individual servicer should not
    matter, and a loan that qualified for a modification with one servicer
    should qualify with another. The borrower, however, might have to
    reapply for a modification and enter a new trial modification. It is
    also possible that Treasury could facilitate the transfer and not
    require a borrower to reapply.
        \304\ Testimony of Phyllis Caldwell, supra note 143.
    ---------------------------------------------------------------------------
        Another concern involves how HAMP servicers have been
    calculating the costs of foreclosure under the program's NPV
    test. Foreclosures carry significant costs leading up to the
    acquisition of a property's title. If, by cutting corners in
    the foreclosure process, servicers were able to lower the cost
    of foreclosure artificially, their own internal cost comparison
    analysis might have differed from the official NPV analysis. In
    such instances, servicers would have an incentive to lose
    paperwork or otherwise deny modifications that they would be
    compelled to make under the program standards.
        Conversely, foreclosure irregularities could have the
    perverse effect of encouraging servicers to modify more loans
    through HAMP. If foreclosure irregularities lead to additional
    litigation and delays in foreclosure proceedings, they will
    increase the costs of foreclosure.\305\ Treasury may then
    update the HAMP NPV model to reflect these new realities. With
    the costs of foreclosure higher, the NPV model will find more
    modifications to be NPV-positive, resulting in more HAMP
    modifications.
    ---------------------------------------------------------------------------
        \305\ See Sections D and F, supra.
    ---------------------------------------------------------------------------

                                 I. Conclusion

        Allegations of documentation irregularities remain in flux,
    and their consequences remain uncertain. The best-case
    scenario, a possibility embraced by the financial services
    industry, is that current concerns over foreclosure
    irregularities are overblown, reflecting mere clerical errors
    that can and will be resolved quickly. If this view proves
    correct, then the irregularities might be fixed with little to
    no impact on HAMP or financial stability.
        The worst-case scenario, a possibility predominantly
    articulated by homeowners and plaintiffs' lawyers, is
    considerably grimmer. In this view, the irregularities reflect
    extensive misbehavior on the part of banks and loan servicers
    that extends throughout the entire securitization process. Such
    problems could throw into question the enforceability of legal
    rights related to ownership of many loans that have been pooled
    and securitized. Given that 4.2 million homeowners are
    currently in default and facing potential foreclosure,
    including 729,000 who have been rejected from HAMP, the
    implications for the foreclosure market alone would be immense.
    Much larger, of course, would be the implications of such
    irregularities for the broader market in MBS, which totals $7.6
    trillion in value. Losses related to documentation issues could
    be compounded by losses related to MBS investors exercising
    put-back rights due to poor underwriting of securitized loans.
        Several investigations of irregularities are now underway,
    including a review by the 50 states' attorneys general; an
    investigation by the Federal Fraud Enforcement Task Force; an
    effort to review documentation for certain Countrywide loans
    led by PIMCO, BlackRock, and FRBNY; and numerous other
    inquiries by private investors. These and similar efforts may
    ultimately uncover the full extent of irregularities in
    mortgage loan originations, transfers, and foreclosures, but
    the final picture may not emerge for some time if these actions
    founder in protracted litigation.
        In the meantime, the Panel raises several concerns that
    policymakers should carefully consider as these issues evolve.
        Treasury Should Monitor Closely the Impact of Foreclosure
    Irregularities. Treasury so far has expressed relatively little
    concern that foreclosure irregularities could reflect deeper
    problems that would pose a threat to financial stability.
    According to Phyllis Caldwell, Chief of the Homeownership
    Preservation Office for Treasury, ``We're very closely
    monitoring any litigation risk to see if there is any systemic
    threat, but at this point, there's no indication that there is
    [any threat].'' This statement appears premature. Potential
    threats are by definition those that have not yet fully
    materialized, but their risks remain real. Despite assurances
    by banks and Treasury to the contrary, great uncertainty
    remains as to whether the stability of banks and the housing
    market might be at risk if the legal underpinnings of the real
    estate market should come into question. Treasury should
    closely monitor these issues as they develop, both for the sake
    of its foreclosure mitigation programs and for the overall
    health of the banking system, and Treasury should report its
    findings to the public and to Congress. Further, Treasury
    should develop contingency plans to prepare for the potential
    worst-case scenario.
        Treasury and the Federal Reserve Should Stress Test Banks
    to Evaluate Their Ability to Weather a Crisis Related to
    Mortgage Irregularities. The potential for further instability
    among the largest banks raises the specter of another acute
    crisis like the one that hit the markets in the autumn of 2008.
    If investors come to doubt the entire process underlying
    securitizations, they may grow unwilling to lend money to even
    the largest banks without implicit or explicit assurances that
    taxpayers will bear any losses. Further, banks could, in the
    worst-case scenario, suffer severe direct capital losses due to
    put-backs. Bank of America holds $230.5 billion in equity, yet
    the PIMCO and FRBNY action alone could ultimately seek up to
    $47 billion in put-backs. If several similar-sized actions were
    to succeed, Bank of America could suffer a major dent in its
    regulatory capital. In effect, a bank forced to accept put-
    backs would be required to buy back troubled mortgage loans
    that in many cases had already defaulted or had been poorly
    underwritten. As the Panel has noted in the past, some major
    banks have had extensive exposure to troubled mortgage-related
    assets. Widespread put-backs could destabilize financial
    institutions that remain exposed and could lead to a precarious
    situation for those that were emerging from the crisis.
    Further, banks and loan servicers could be vulnerable to state-
    based class-action lawsuits initiated by homeowners who claim
    to have suffered improper foreclosures. Even the prospect of
    such losses could damage a bank's stock price or its ability to
    raise capital.
        The Panel has recommended in the past that, when
    policymakers are faced with uncertain economic or financial
    conditions, they should employ ``stress tests'' as part of the
    regular bank supervisory process to identify possible outcomes
    and to measure the robustness of the financial system. Treasury
    and the Federal Reserve last conducted comprehensive stress
    tests in 2009, but because those tests predated the current
    concerns about documentation irregularities and projected
    banks' capitalization only through the end of 2010, they offer
    limited reassurance that major banks could survive further
    shocks in the months and years to come. Federal banking
    regulators should re-run stress tests on the largest banks and
    on at least a sampling of smaller institutions, using realistic
    macroeconomic and housing price projections and stringent
    assumptions about realistic worst-case scenario bank losses.
    Any assumptions about the ultimate costs of documentation
    irregularities would be necessarily speculative and the
    contours of the problem are still murky. Stress tests may
    therefore need to account for a wide range of possibilities and
    acknowledge their own limitations. Such testing, however, would
    nonetheless illuminate the robustness of the financial system
    and help prepare for a worst-case scenario.
        Policymakers Should Evaluate System-Wide Consequences of
    Documentation Irregularities. As disturbing as the potential
    implications of documentation irregularities may be for ``too
    big to fail'' banks, the consequences would not be limited to
    the largest banks in the market. Among other concerns:
          Fannie Mae and Freddie Mac Present Significant
    Risks. Already Fannie Mae and Freddie Mac play an enormous role
    in the market for MBS. If investors develop new concerns about
    the safety of the MBS market, then Fannie and Freddie--backed
    by their government guarantee--could be forced to maintain or
    even expand their dominant role for years to come. Because the
    American people ultimately stand behind every guarantee made by
    these companies, the result could be greater and prolonged
    financial risk to taxpayers.
          Homeowners May Lose Confidence in the Housing
    Market. Buyers and sellers, in foreclosure or otherwise, may
    find themselves unable to know with any certainty whether they
    can safely buy or safely sell a home. Widespread loss of
    confidence in clear ownership of mortgage loans would throw
    further sand in the gears of the already troubled housing
    market--especially since 31 percent of the homes currently on
    the market are foreclosure sales, which may already have
    undergone an improper legal process.
          Public Faith in Due Process Could Suffer. If the
    public gains the impression that the government is providing
    concessions to large banks in order to ensure the smooth
    processing of foreclosures, the people's fundamental faith in
    due process could suffer.
        In short, actions by some of the largest financial
    institutions may have the potential to threaten the still-
    fragile economy. The risk is uncertain, but the danger is
    significant enough that Treasury and all other government
    agencies with a role to play in the mortgage market must focus
    on preventing another such shock.
                   SECTION TWO: CORRESPONDENCE WITH TREASURY

        The Panel's Chairman, Senator Ted Kaufman, sent a letter on
    behalf of the Panel on November 1, 2010 to Patricia Geoghegan,
    the Special Master for TARP Executive Compensation under
    EESA.\306\ The letter presents a series of questions to the
    Special Master, requesting additional information and data
    following the Panel's October 21, 2010 hearing on TARP and
    executive compensation.
    ---------------------------------------------------------------------------
        \306\ See Appendix I of this report, infra.
                 SECTION THREE: TARP UPDATES SINCE LAST REPORT

                    A. GM To Repurchase AIFP Preferred Stock

        On October 27, 2010, Treasury accepted an offer by General
    Motors Company (New GM) to repurchase 83.9 million shares of
    New GM's Series A preferred stock at $25.50 per share provided
    that the company's proposed initial public offering (IPO) is
    completed. These preferred shares were issued, along with 60.8
    percent of the company's common stock, in July 2009 in exchange
    for extinguishing the debtor-in-possession loan extended to
    General Motors Corporation (Old GM). The repurchase price
    represents 102 percent of the liquidation preference. After the
    IPO is completed, New GM will repurchase the Series A preferred
    shares on the first dividend payment date of the preferred
    stock. Following this transaction, Treasury's total return from
    New GM through debt repayments, the preferred stock repurchase,
    and interest and dividends will total $9.5 billion.

               B. AIG: AIA Initial Public Offering and ALICO Sale

        As part of its plan to repay the federal government's
    outstanding investments, AIG completed an IPO for AIA Group
    Limited (AIA) and sold American Life Insurance Company (ALICO)
    to MetLife, Inc. The AIA IPO raised $20.5 billion in cash
    proceeds and the ALICO sale generated $16.2 billion in total
    proceeds. Of this amount, $7.2 billion represents cash
    proceeds. The $36.7 billion in aggregate proceeds will be used
    to pay down the outstanding balance on the revolving credit
    facility from FRBNY.

                       C. Sales of Citigroup Common Stock

        On October 19, 2010, Treasury began a fourth period of
    sales for 1.5 billion shares of Citigroup common stock.
    Treasury received 7.7 billion common shares in July 2009 in
    exchange for its initial $25 billion investment in the company
    under the CPP. As of October 29, 2010, Treasury has sold 4.1
    billion shares (approximately fifty percent of its stake) for
    $16.4 billion in gross proceeds. Of this amount, approximately
    $13.4 billion represents a repayment for Citigroup's CPP
    funding, while the remaining $3 billion represents a net profit
    for taxpayers. Morgan Stanley will act as Treasury's sales
    agent for the fourth selling period, which will end on December
    31, 2010 or upon the sale of the full allotment of 1.5 billion
    shares.

       D. Legacy Securities Public-Private Investments Program Quarterly
                                     Report

        On October 20, 2010, Treasury released its fourth quarterly
    report on the Legacy Securities Public-Private Investments
    Program (PPIP). This program is intended to support market
    functioning and facilitate price discovery in MBS markets
    through equity and debt capital commitments in eight public-
    private investment funds (PPIFs). As of September 30, 2010, the
    purchasing power of these funds totaled $29.4 billion.\307\ Of
    this amount, $7.4 billion represents equity commitments from
    private-sector fund managers and investors and $22.1 billion
    represents both debt and equity commitments from Treasury. The
    total market value of securities held by participating PPIFs
    was approximately $19.3 billion, with 82 percent of investments
    concentrated in non-agency RMBS and 18 percent in commercial
    mortgage-backed securities (CMBS).
    ---------------------------------------------------------------------------
        \307\ The total purchasing power published in the PPIP quarterly
    report does not include the purchasing power within UST/TCW Senior
    Mortgage Services Fund, L.P., which was wound up and liquidated on
    January 4, 2010. See endnote xlvi, infra, for details on the
    liquidation of this fund. U.S. Department of the Treasury, Legacy
    Securities Public-Private Investment Program, at 3 (Oct. 20, 2010)
    (online at financialstability.gov/docs/External%20Report%20-%2009-
    10%20vFinal.pdf).
    ---------------------------------------------------------------------------
        To date, cumulative gross unrealized equity gains for both
    Treasury and private investors total $1.5 billion. The net
    internal rate of return for each PPIF is currently between 19.3
    percent and 52.0 percent.

                                   E. Metrics

        Each month, the Panel's report highlights a number of
    metrics that the Panel and others, including Treasury, the
    Government Accountability Office (GAO), Special Inspector
    General for the Troubled Asset Relief Program (SIGTARP), and
    the Financial Stability Oversight Board, consider useful in
    assessing the effectiveness of the Administration's efforts to
    restore financial stability and accomplish the goals of EESA.
    This section discusses changes that have occurred in several
    indicators since the release of the Panel's October 2010
    report.

    1. Macroeconomic Indices

        The post-crisis rate of real GDP growth quarter-over-
    quarter peaked at an annual rate of 5 percent in the fourth
    quarter of 2009, but the rate has decreased during 2010. Real
    GDP increased at an annualized rate of 2.0 percent in the third
    quarter of 2010, increasing from 1.7 percent in the second
    quarter of 2010.\308\ The third quarter growth rate was
    unaffected by the spike in employment resulting from the 2010
    U.S. Census.\309\ The year-over-year increase from third
    quarter 2009 to third quarter 2010 was 3.1 percent, from 12.9
    billion to 13.3 billion dollars.
    ---------------------------------------------------------------------------
        \308\ Bureau of Economic Analysis, Table 1.1.6.: Real Gross
    Domestic Product, Chained Dollars (online at www.bea.gov/national/
    nipaweb/TableView.asp?SelectedTable=6&Freq=Qtr&FirstYear=
    2008&LastYear=2010) (hereinafter ``Bureau of Economic Analysis Table
    1.1.6'') (accessed Nov. 3, 2010). Until the year-over-year decrease
    from 2007 to 2008, nominal GDP had not decreased on an annual basis
    since 1949. Bureau of Economic Analysis, Table 1.1.5.: Gross Domestic
    Product (online at www.bea.gov/national/nipaweb/
    TableView.asp?SelectedTable=5&Freq=Qtr&First Year=2008&LastYear=2010)
    (accessed Nov. 3, 2010).
        \309\ The Economics and Statistics Administration within the U.S.
    Department of Commerce estimated that the spending associated with the
    2010 Census would peak in the second quarter of 2010 and could boost
    annualized nominal and real GDP growth by 0.1 percent in the first
    quarter of 2010 and 0.2 percent in the second quarter of 2010. As the
    boost from the Census is a one-time occurrence, continuing increases in
    private investment and personal consumption expenditures as well as in
    exports will be needed to sustain the resumption of growth that has
    occurred in the U.S. economy over the past year. It was expected that
    the drop in 2010 Census spending would then reduce GDP growth by
    similar amounts in Q3 and Q4 2010. Economics and Statistics
    Administration, U.S. Department of Commerce, The Impact of the 2010
    Census Operations on Jobs and Economic Growth, at 8 (online at
    www.esa.doc.gov/02182010.pdf).
    ---------------------------------------------------------------------------

                           FIGURE 13: REAL GDP \310\

    ---------------------------------------------------------------------------
        \310\ Bureau of Economic Analysis Table 1.1.6, supra note 308
    (accessed Nov. 3, 2010).

        Since the Panel's October report, underemployment has
    increased from 16.7 percent to 17.1 percent, while unemployment
    has remained constant. Median duration of unemployment has
    increased by half a week.

       FIGURE 14: UNEMPLOYMENT, UNDEREMPLOYMENT, AND MEDIAN DURATION OF
                               UNEMPLOYMENT \311\

    ---------------------------------------------------------------------------
        \311\ It is important to note that the measures of unemployment and
    underemployment do not include people who have stopped actively looking
    for work altogether. While the Bureau of Labor Statistics (BLS) does
    not have a distinct metric for ``underemployment,'' the U-6 category of
    Table A-15 ``Alternative Measures of Labor Underutilization'' is used
    here as a proxy. BLS defines this measure as: ``Total 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.'' U.S.
    Department of Labor, International Comparisons of Annual Labor Force
    Statistics (online at www.bls.gov/webapps/legacy/cpsatab15.htm)
    (accessed Nov. 3, 2010).

    2. Financial Indices

                a. Overview
        Since the Panel's October report, the St. Louis Financial
    Stress Index, a proxy for financial stress in the U.S. economy,
    has continued its downward trend, decreasing by a quarter.\312\
    The index has fallen by over half since the post-crisis peak in
    June 2010. The recent trend in the index suggests that
    financial stress continues moving toward its long-run norm. The
    index has decreased by more than three standard deviations
    since October 2008, the month when the TARP was initiated.
    ---------------------------------------------------------------------------
        \312\ Federal Reserve Bank of St. Louis, Series STLFSI: Business/
    Fiscal: Other Economic Indicators (Instrument: St. Louis Financial
    Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/
    fred2/series/STLFSI) (accessed Nov. 3, 2010). The index includes 18
    weekly data series, beginning in December 1993 to the present. The
    series are: effective federal funds rate, 2-year Treasury, 10-year
    Treasury, 30-year Treasury, Baa-rated corporate, Merrill Lynch High
    Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-
    rated, 10-year Treasury minus 3-month Treasury, Corporate Baa-rated
    bond minus 10-year Treasury, Merrill Lynch High Yield Corporate Master
    II Index minus 10-year Treasury, 3-month LIBOR-OIS spread, 3-month TED
    spread, 3-month commercial paper minus 3-month Treasury, the J.P.
    Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange
    Market Volatility Index, Merrill Lynch Bond Market Volatility Index (1-
    month), 10-year nominal Treasury yield minus 10-year Treasury Inflation
    Protected Security yield, and Vanguard Financials Exchange-Traded Fund
    (equities). The index is constructed using principal components
    analysis after the data series are de-meaned and divided by their
    respective standard deviations to make them comparable units. The
    standard deviation of the index is set to 1. For more details on the
    construction of this index, see Federal Reserve Bank of St. Louis,
    National Economic Trends Appendix: The St. Louis Fed's Financial Stress
    Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/
    NETJan2010Appendix.pdf).
    ---------------------------------------------------------------------------

          FIGURE 15: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX

        Stock market volatility has decreased recently. The Chicago
    Board Options Exchange Volatility Index (VIX) has fallen by
    more than half since the post-crisis peak in May 2010 and has
    fallen 7 percent since the Panel's October report. However,
    volatility is still 40 percent higher than its post-crisis low
    on April 12, 2010.

        FIGURE 16: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX \313\

    ---------------------------------------------------------------------------
        \313\ Data accessed through Bloomberg data service on November 3,
    2010. The CBOE VIX is a key measure of market expectations of near-term
    volatility. Chicago Board Options Exchange, The CBOE Volatility Index--
    VIX, 2009 (online at www.cboe.com/micro/vix/vixwhite.pdf) (accessed
    Nov. 3, 2010).

                b. Interest Rates, Spreads, and Issuance
        As of November 3, 2010, the 3-month and 1-month London
    Interbank Offer Rates (LIBOR), the prices at which banks lend
    and borrow from each other, were 0.29 and 0.25,
    respectively.\314\ Rates have fallen by nearly half since post-
    crisis highs in June 2010 and have remained nearly constant
    since the Panel's October report. Over the longer term,
    however, interest rates remain extremely low relative to pre-
    crisis levels, indicating both efforts of central banks and
    institutions' perceptions of reduced risk in lending to other
    banks.
    ---------------------------------------------------------------------------
        \314\ Data accessed through Bloomberg data service on November 3,
    2010.

                           FIGURE 17: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF NOVEMBER 3, 2010)
    ----------------------------------------------------------------------------------------------------------------
                                                         Current Rates (as of 11/ Percent Change from Data Available
                         Indicator                               3/2010)          at Time of Last Report (10/4/2010)
    ----------------------------------------------------------------------------------------------------------------
    3-Month LIBOR \315\................................                     0.29                               (1.6)
    1-Month LIBOR \316\................................                     0.25                               (1.2)
    ----------------------------------------------------------------------------------------------------------------
    \315\ Data accessed through Bloomberg data service on November 3, 2010.
    \316\ Data accessed through Bloomberg data service on November 3, 2010.

        Since the Panel's October report, interest rate spreads
    have decreased slightly. Thirty-year mortgage interest rates
    have decreased very slightly and 10-year Treasury bond yields
    have increased very slightly. The conventional mortgage spread,
    which measures the 30-year mortgage rate over 10-year Treasury
    bond yields, has decreased slightly since late September.\317\
    ---------------------------------------------------------------------------
        \317\ Board of Governors of the Federal Reserve System, Federal
    Reserve Statistical Release H.15: Selected Interest Rates: Historical
    Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
    www.federalreserve.gov/releases/h15/data/Weekly_Thursday/
    H15_MORTG_NA.txt) (hereinafter ``Federal Reserve Statistical Release
    H.15'') (accessed Nov. 3, 2010).
    ---------------------------------------------------------------------------
        The TED spread serves as an indicator for perceived risk in
    the financial markets. While it has increased by about three
    basis points since the Panel's October report, the spread is
    still currently lower than pre-crisis levels.\318\ The LIBOR-
    OIS spread reflects the health of the banking system. While it
    increased over threefold from early April to July, it has been
    falling since mid-July and is now averaging pre-crisis
    levels.\319\ LIBOR-OIS remained fairly constant since the
    Panel's October report. Decreases in the LIBOR-OIS spread and
    the TED spread suggest that hesitation among banks to lend to
    counterparties has receded.
    ---------------------------------------------------------------------------
        \318\ Federal Reserve Bank of Minneapolis, Measuring Perceived
    Risk--The TED Spread (Dec. 2008) (online at www.minneapolisfed.org/
    publications_papers/pub_display.cfm?id=4120).
        \319\ Data accessed through Bloomberg data service on November 3,
    2010.
    ---------------------------------------------------------------------------

                          FIGURE 18: TED SPREAD \320\

    ---------------------------------------------------------------------------
        \320\ Data accessed through Bloomberg data service on November 3,
    2010.

                       FIGURE 19: LIBOR-OIS SPREAD \321\

    ---------------------------------------------------------------------------
        \321\ Data accessed through Bloomberg data service on November 3,
    2010.

        The interest rate spread for AA asset-backed commercial
    paper, which is considered mid-investment grade, has fallen by
    more than a tenth since the Panel's October report. The
    interest rate spread on A2/P2 commercial paper, a lower grade
    investment than AA asset-backed commercial paper, has fallen by
    nearly 11 percent since the Panel's October report. This
    indicates healthier fundraising conditions for corporations.

                                            FIGURE 20: INTEREST RATE SPREADS
    ----------------------------------------------------------------------------------------------------------------
                                                                                              Percent Change  Since
                               Indicator                             Current Spread  (as of    Last Report  (9/30/
                                                                           11/1/2010)                 2010)
    ----------------------------------------------------------------------------------------------------------------
    Conventional mortgage rate spread \322\.......................                     1.56                   (13.3)
    TED Spread (basis points).....................................                    15.59                     20.0
    Overnight AA asset-backed commercial paper interest rate                           0.07                   (11.2)
     spread \323\.................................................
    Overnight A2/P2 nonfinancial commercial paper interest rate                        0.14                   (11.0)
     spread \324\.................................................
    ----------------------------------------------------------------------------------------------------------------
    \322\ Federal Reserve Statistical Release H.15, supra note 317 (accessed Nov. 3, 2010); Board of Governors of
      the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data
      (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency: Weekly)
      (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Nov. 3,
      2010).
    \323\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
      Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily)
      (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 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 Nov. 3, 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.
    \324\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
      Rates and Outstandings: Data Download Program (Instrument: A2/P2 Nonfinancial Discount Rate, Frequency: Daily)
      (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 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.

        The spread between Moody's Baa Corporate Bond Yield Index
    and 30-year constant maturity U.S. Treasury Bond yields doubled
    from late April to mid-June 2010. Spreads have trended down
    since mid-June highs and have fallen over 6 percent since the
    Panel's October report. This spread indicates the difference in
    perceived risk between corporate and government bonds, and a
    declining spread could indicate waning concerns about the
    riskiness of corporate bonds.

     FIGURE 21: MOODY'S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY
                                  YIELD \325\

    ---------------------------------------------------------------------------
        \325\ Federal Reserve Bank of St. Louis, Series DGS30: Selected
    Interest Rates (Instrument: 30-Year Treasury Constant Maturity Rate,
    Frequency: Daily) (online at research.stlouisfed.org/fred2/)
    (hereinafter ``Federal Reserve Bank of St. Louis Series DGS30'')
    (accessed Nov. 3, 2010). Corporate Baa rate data accessed through
    Bloomberg data service on November 3, 2010.

        Corporate bond market issuance data corroborate this
    analysis, with investment grade issuance increasing over 50
    percent between August and September 2010.\326\
    ---------------------------------------------------------------------------
        \326\ Securities Industry and Financial Markets Association, U.S.
    Corporate Bond Issuance (online at www.sifma.org/uploadedFiles/
    Research/Statistics/StatisticsFiles/Corporate-US-Corporate-Issuance-
    SIFMA.xls) (accessed Nov. 3, 2010).
    ---------------------------------------------------------------------------
                c. Condition of the Banks
        Since the Panel's last report, 10 additional banks have
    failed, with an approximate total asset value of $4.2 billion.
    With 139 failures from January through October 2010, the year-
    to-date rate has nearly reached 140, the level for all of
    calendar year 2009. In general, banks failing in 2009 and 2010
    have been small- and medium-sized institutions; \327\ while
    they are failing in high numbers, their aggregate asset size
    has been relatively small.
    ---------------------------------------------------------------------------
        \327\ For the purposes of its analysis, the Panel uses four
    categories based on bank asset sizes: Large banks (those with over $100
    billion in assets), medium banks (those with between $10 billion and
    $100 billion in assets), smaller banks (those with between $1 billion
    and $10 billion in assets), and smallest banks (those with less than $1
    billion in assets).
    ---------------------------------------------------------------------------

       FIGURE 22: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK
                   FAILURES BY TOTAL ASSETS (1990-2010) \328\

    ---------------------------------------------------------------------------
        \328\ The disparity between the number of and total assets of
    failed banks in 2008 is driven primarily by the failure of Washington
    Mutual Bank, which held $307 billion in assets. The 2010 year-to-date
    percentage of bank failures includes failures through August. The total
    number of FDIC-insured institutions as of March 31, 2010 is 7,932
    commercial banks and savings institutions. As of November 12, 2010,
    there have been 143 institutions that failed. Federal Deposit Insurance
    Corporation, Failures and Assistance Transactions (online at
    www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (accessed Nov. 12, 2010).
    Asset totals have been adjusted for deflation into 2005 dollars using
    the GDP implicit price deflator. The quarterly values were averaged
    into a yearly value. Federal Reserve Bank of St. Louis Series DGS30,
    supra note 325 (accessed Nov. 3, 2010).
    ---------------------------------------------------------------------------

    3. Housing Indices

        Foreclosure actions, which consist of default notices,
    scheduled auctions, and bank repossessions, increased 2.5
    percent in September to 347,420. This metric is over 24 percent
    above the foreclosure action level at the time of the EESA
    enactment.\329\ While the hardest hit states still account for
    19 out of 20 of the highest metro foreclosure rates,
    foreclosure activity grew less in the hardest-hit cities than
    in other states.\330\ Sales of new homes increased to 307,000,
    but remain low.\331\ The Case-Shiller Composite 20-City
    Composite decreased very slightly, while the FHFA Housing Price
    Index increased very slightly in August 2010. The Case-Shiller
    and FHFA indices are 6 percent and 5 percent, respectively,
    below their levels of October 2008.\332\
    ---------------------------------------------------------------------------
        \329\ RealtyTrac Press Release on Foreclosure Activity, supra note
    278.
        \330\ Hardest-hit cities are defined as those in California,
    Florida, Nevada, and Arizona. Chicago, Houston, and Seattle posted the
    largest increases in foreclosure activity. RealtyTrac, Third Quarter
    Foreclosure Activity Up in 65 Percent of U.S. Metro Areas But Down in
    Hardest-Hit Cities (Oct. 28, 2010) (online at www.realtytrac.com/
    content/press-releases/third-quarter-foreclosure-activity-up-in-65-
    percent-of-us-metro-areas-but-down-in-hardest-hit-cities-6127).
        \331\ Sales of new homes in May 2010 were 276,000, the lowest rate
    since 1963. It should be noted that this number likely reflects a
    shifting of sales from May to April prompted by the April expiration of
    tax credits designed to boost home sales. U.S. Census Bureau and U.S.
    Department of Housing and Urban Development, New Residential Sales in
    June 2010 (July 26, 2010) (online at www.census.gov/const/
    newressales.pdf); U.S. Census Bureau, New Residential Sales--New One-
    Family Houses Sold (online at www.census.gov/ftp/pub/const/
    sold_cust.xls) (accessed Nov. 3, 2010).
        \332\ The most recent data available is for July 2010. See Standard
    and Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Case-
    Shiller 20-City Composite Seasonally Adjusted, Frequency: Monthly)
    (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 Nov. 3, 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 Nov. 3, 2010). S&P
    has cautioned that the seasonal adjustment is probably being distorted
    by irregular factors. These factors could include distressed sales and
    the various government programs. See Standard and Poor's, S&P/Case-
    Shiller Home Price Indices and Seasonal Adjustment, S&P Indices: Index
    Analysis (Apr. 2010). For a discussion of the differences between the
    Case-Shiller Index and the FHFA Index, see April 2010 Ovesright Report,
    supra note 282, at 98.
    ---------------------------------------------------------------------------
        Additionally, Case-Shiller futures prices indicate a market
    expectation that home-price values for the major Metropolitan
    Statistical Areas \333\ (MSAs) will hold constant through
    2011.\334\ These futures are cash-settled to a weighted
    composite index of U.S. housing prices in the top ten MSAs, as
    well as to those specific markets. They are used to hedge by
    businesses whose profits and losses are related to any area of
    the housing industry, and to balance portfolios by businesses
    seeking exposure to an uncorrelated asset class. As such,
    futures prices are a composite indicator of market information
    known to date and can be used to indicate market expectations
    for home prices.
    ---------------------------------------------------------------------------
        \333\ A Metropolitan Statistical Area is defined as a core area
    containing a substantial population nucleus, together with adjacent
    communities having a high degree of economic and social integration
    with the core. U.S. Census Bureau, About Metropolitan and Micropolitan
    Statistical Areas (online at www.census.gov/population/www/metroareas/
    aboutmetro.html) (accessed Nov. 3, 2010).
        \334\ Data accessed through Bloomberg data service on November 3,
    2010. The Case-Shiller Futures contract is traded on the CME and is
    settled to the Case-Shiller Index two months after the previous
    calendar quarter. For example, the February contract will be settled
    against the spot value of the S&P Case-Shiller Home Price Index values
    representing the fourth calendar quarter of the previous year, which is
    released in February one day after the settlement of the contract. Note
    that most close observers believe that the accuracy of these futures
    contracts as forecasts diminishes the farther out one looks.

                                              FIGURE 23: HOUSING INDICATORS
    ----------------------------------------------------------------------------------------------------------------
                                                                         Percent Change  from Data   Percent Change
                        Indicator                         Most Recent    Available at Time of Last   Since  October
                                                         Monthly Data              Report                 2008
    ----------------------------------------------------------------------------------------------------------------
    Monthly foreclosure actions \335\................        347,420                          2.5              24.3
    S&P/Case-Shiller Composite 20 Index \336\........            146.99                      (0.3)             (5.9)
    FHFA Housing Price Index \337\...................            192.83                       0.4              (4.5)
    ----------------------------------------------------------------------------------------------------------------
    \335\ RealtyTrac, Foreclosures (online at www.realtytrac.com/home/) (accessed Nov. 3, 2010). The most recent
      data available is for September 2010.
    \336\ S&P/Case-Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010). The most recent data
      available is for August 2010.
    \337\ U.S. and Census Division Monthly Purchase Only Index, supra note 332 (accessed Nov. 3, 2010). The most
      recent data available is for August 2010.

       FIGURE 24: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES \338\

    ---------------------------------------------------------------------------
        \338\ All data normalized to 100 at January 2000. Futures data
    accessed through Bloomberg data service on November 3, 2010. S&P/Case-
    Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010).

                              F. Financial Update

        Each month, the Panel summarizes the resources that the
    federal government has committed to the rescue and recovery of
    the financial system. 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 September 30, 2010; and (2) an
    updated accounting of the full federal resource commitment as
    of October 27, 2010.

    1. The TARP

                a. Program Updates \339\

    ---------------------------------------------------------------------------
        \339\ U.S. Department of the Treasury, Cumulative Dividends,
    Interest and Distributions Report as of September 30, 2010 (Oct. 11,
    2010) (online at financialstability.gov/docs/dividends-interest-
    reports/September%202010%20Dividends%20&%20Interest%20Report.pdf)
    (hereinafter ``Treasury Cumulative Dividends, Interest and
    Distributions Report); U.S. Department of the Treasury, Troubled Asset
    Relief Program Transactions Report for the Period Ending October 29,
    2010 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
    reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf)
    (hereinafter ``Treasury Transactions Report'').
    ---------------------------------------------------------------------------
        Treasury's spending authority under the TARP officially
    expired on October 3, 2010. Though it can no longer make new
    funding commitments, Treasury can continue to provide funding
    for programs for which it has existing contracts and previous
    commitments. To date, $395.1 billion has been spent under the
    TARP's $475 billion ceiling.\340\ Of the total amount
    disbursed, $209.5 billion has been repaid. Treasury has also
    incurred $6.1 billion in losses associated with its CPP and
    Automotive Industry Financing Program (AIFP) investments. A
    significant portion of the $179.7 billion in TARP funds
    currently outstanding includes Treasury's investments in AIG
    and assistance provided to the automotive industry.
    ---------------------------------------------------------------------------
        \340\ The original $700 billion TARP ceiling was reduced by $1.26
    billion as part of the Helping Families Save Their Homes Act of 2009.
    12 U.S.C. Sec. 5225(a)-(b); Helping Families Save Their Homes Act of
    2009, Pub. L. No. 111-22 Sec. 40. On June 30, 2010, the House-Senate
    Conference Committee agreed to reduce the amount authorized under the
    TARP from $700 billion to $475 billion as part of the Dodd-Frank Wall
    Street Reform and Consumer Protection Act that was signed into law on
    July 21, 2010. See Dodd-Frank Wall Street Reform and Consumer
    Protection Act, Pub. L. No. 111-203 (2010); The White House, Remarks by
    the President at Signing of Dodd-Frank Wall Street Reform and Consumer
    Protection Act (July 21, 2010) (online at www.whitehouse.gov/the-press-
    office/remarks-president-signing-dodd-frank-wall-street-reform-and-
    consumer-protection-act).
    ---------------------------------------------------------------------------

    CPP Repayments

        As of October 29, 2010, 112 of the 707 banks that
    participated in the CPP have fully redeemed their preferred
    shares either through capital repayment or exchanges for
    investments under the Community Development Capital Initiative
    (CDCI). During the month of October, Treasury received a $12
    million full repayment from 1st Constitution Bancorp, and a
    $100 million partial repayment from Webster Financial
    Corporation. A total of $152.9 billion has been repaid under
    the program, leaving $49.5 billion in funds currently
    outstanding.
                b. Income: Dividends, Interest, and Warrant Sales
        In conjunction with its preferred stock investments under
    the CPP and TIP, Treasury generally received warrants to
    purchase common equity.\341\ As of October 29, 2010, 45
    institutions have repurchased their warrants from Treasury at
    an agreed upon price. Treasury has also sold warrants for 15
    other institutions at auction. To date, income from warrant
    dispositions have totaled $8.1 billion.
    ---------------------------------------------------------------------------
        \341\ For its CPP investments in privately held financial
    institutions, Treasury also received warrants to purchase additional
    shares of preferred stock, which it exercised immediately. Similarly,
    Treasury also received warrants to purchase additional subordinated
    debt that were also immediately exercised along with its CPP
    investments in subchapter S corporations. Treasury Transactions Report,
    supra note 339, at 14.
    ---------------------------------------------------------------------------
        In addition to warrant proceeds, Treasury also receives
    dividend payments on the preferred shares that it holds under
    the CPP, 5 percent per annum for the first five years and 9
    percent per annum thereafter.\342\ For preferred shares issued
    under the TIP, Treasury received a dividend of 8 percent per
    annum.\343\ In total, Treasury has received approximately $25.7
    billion in net income from warrant repurchases, dividends,
    interest payments, and other proceeds deriving from TARP
    investments (after deducting losses).\344\ For further
    information on TARP profit and loss, see Figure 26.
    ---------------------------------------------------------------------------
        \342\ U.S. Department of the Treasury, Capital Purchase Program
    (Oct. 3, 2010) (online at www.financialstability.gov/roadtostability/
    capitalpurchaseprogram.html).
        \343\ U.S. Department of the Treasury, Targeted Investment Program
    (Oct. 3, 2010) (online at www.financialstability.gov/roadtostability/
    targetedinvestmentprogram.html).
        \344\ Treasury Cumulative Dividends, Interest and Distributions
    Report, supra note 339; Treasury Transactions Report, supra note 339.
    Treasury also received an additional $1.2 billion in participation fees
    from its Guarantee Program for Money Market Funds. U.S. Department of
    the Treasury, Treasury Announces Expiration of Guarantee Program for
    Money Market Funds (Sept. 18, 2009) (online at www.ustreas.gov/press/
    releases/tg293.htm).
    ---------------------------------------------------------------------------
                c. TARP Accounting

                                   FIGURE 25: TARP ACCOUNTING (AS OF OCTOBER 29, 2010)
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                              Total
                                   Maximum     Actual      Repayments/       Total         Funding         Funding
               Program              Amount    Funding        Reduced         Losses       Currently       Available
                                   Allotted                 Exposure                     Outstanding
    ----------------------------------------------------------------------------------------------------------------
    Capital Purchase Program         $204.9     $204.9       ii $(152.9)   iii $(2.6)            $49.5          $0
     (CPP)......................
    Targeted Investment Program        40.0       40.0            (40.0)         0                 0             0
     (TIP)......................
    Asset Guarantee Program             5.0     iv 5.0           v (5.0)         0                 0             0
     (AGP)......................
    AIG Investment Program             69.8    vi 47.5              0            0                47.5          22.3
     (AIGIP)....................
    Auto Industry Financing            81.3       81.3            (10.8)    vii (3.5)        viii 67.1           0
     Program (AIFP).............
    Auto Supplier Support               0.4        0.4             (0.4)         0                 0             0
     Program (ASSP) ix..........
    Term Asset-Backed Securities      x 4.3     xi 0.1              0            0                 0.1           4.2
     Loan Facility (TALF).......
    Public-Private Investment          22.4  xiii 14.2         xiv (0.4)         0                13.8           8.2
     Program (PPIP) xii.........
    SBA 7(a) Securities Purchase        0.4     xv 0.4              0            0                 0.4       xvi 0
    Home Affordable Modification       29.9        0.6              0            0                 0.6          29.3
     Program (HAMP).............
    Hardest Hit Fund (HHF)......   xvii 7.6  xviii 0.1              0            0                 0.1           7.5
    FHA Refinance Program.......        8.1    xix 0.1              0            0                 0.1           8.0
    Community Development               0.8     xx 0.6              0            0                 0.6           0
     Capital Initiative (CDCI)..
                                 -----------------------------------------------------------------------------------
    Total.......................     $475.0     $395.1          $(209.5)       $(6.1)           $179.7         $79.5
    ----------------------------------------------------------------------------------------------------------------
    i Figures affected by rounding. Unless otherwise noted, data in this table are from the following source: U.S.
      Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October
      29, 2010 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    ii Total amount repaid under CPP includes $13.4 billion Treasury received as part of its sales of Citigroup
      common stock. As of October 29, 2010, Treasury had sold 4.1 billion Citigroup common shares for $16.4 billion
      in gross proceeds. Treasury has received $3 billion in net profit from the sale of Citigroup common stock. In
      June 2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of the company's
      common stock at $3.25 per share. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
      Report for the Period Ending October 29, 2010, at 13-15 (Nov. 2, 2010) (online at financialstability.gov/docs/
      transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the
      Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at
      www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
    Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments for
      investments under the CDCI, as well as proceeds earned from the sale of preferred stock and warrants issued by
      South Financial Group, Inc. and TIB Financial Corp.
    iii On the TARP Transactions Report, 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. In addition, Treasury sold
      its preferred ownership interests, along with warrants, in South Financial Group, Inc. and TIB Financial Corp.
      to non-TARP participating institutions. These shares were sold at prices below the value of the original CPP
      investment. Therefore, Treasury's net current CPP investment is $49.5 billion due to the $2.6 billion in
      losses thus far. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
      Period Ending October 29, 2010, at 13-14 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
      reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    iv The $5 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any guarantee
      payments during the life of the program. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-
      Year Retrospective, at 31 (Oct. 2010) (online at www.financialstability.gov/docs/
      TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
    v Although this $5 billion is no longer exposed as part of the AGP, 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 26.
    vi AIG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange for the
      company's preferred stock. It has also drawn down $7.5 billion of the $29.8 billion made available on April
      17, 2009. This figure does not include $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. AIG expects to draw down up to $22 billion in outstanding funds from the TARP as part of its plan to
      repay the revolving credit facility provided by the Federal Reserve Bank of New York. American International
      Group, Inc., Form 10-Q for the Fiscal Year Ended September 30, 2010, at 119 (Nov. 5, 2010) (online at sec.gov/
      Archives/edgar/data/5272/000104746910009269/a2200724z10-q.htm); American International Group, Inc., AIG
      Announces Plan To Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/newsroom/
      2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf); U.S. Department of the Treasury, Troubled Asset Relief
      Program Transactions Report for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at
      financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    vii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to Chrysler
      Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. U.S.
      Department of the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion in Settlement of Original
      Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr_05172010c.html). Also, following
      the bankruptcy proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP)
      loan provided to Old Chrysler, Treasury retained the right to recover the proceeds from the liquidation of
      specified collateral. To date, Treasury has collected $40.2 million in proceeds from the sale of collateral,
      and it does not expect a significant recovery from the liquidation proceeds. Treasury includes these proceeds
      as part of the $10.8 billion repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief
      Program Monthly 105(a) Report--September 2010 (Oct. 12, 2010) (online at financialstability.gov/docs/
      105CongressionalReports/September 105(a) report_FINAL.pdf); Treasury conversations with Panel staff (Aug. 19,
      2010); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
      Ending October 29, 2010, at 18 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    viii On the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was
      extinguished April 30, 2010, was deducted from Treasury's AIFP investment amount. U.S. Department of the
      Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18
      (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf). See note vii, supra, for details on losses from
      Treasury's investment in Chrysler.
    ix On April 5, 2010, Treasury terminated its commitment to lend to the GM SPV under the ASSP. On April 7, 2010,
      it terminated its commitment to lend to the Chrysler SPV. In total, Treasury received $413 million in
      repayments from loans provided by this program ($290 million from the GM SPV and $123 million from the
      Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this
      program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
      Ending October 29, 2010, at 19 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    x For the TALF program, one dollar of TARP funds was committed for every $10 of funds obligated by the Federal
      Reserve. The program was intended to be a $200 billion initiative, and the TARP was responsible for the first
      $20 billion in loan-losses, if any were incurred. The loan was incrementally funded. When the program closed
      in June 2010, a total of $43 billion in loans was outstanding under the TALF program, and the TARP's
      commitments constituted $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate
      for Treasury to reduce TALF credit protection from TARP to $4.3 billion. Board of Governors of the Federal
      Reserve System, Federal Reserve Announces Agreement With the Treasury Department Regarding a Reduction of
      Credit Protection Provided for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online
      at www.federalreserve.gov/newsevents/press/monetary/20100720a.htm).
    xi As of October 27, 2010, Treasury had provided $105 million to TALF LLC. This total includes accrued payable
      interest. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online
      at www.federalreserve.gov/releases/h41/20101028/).
    xii As of September 30, 2010, the total value of securities held by the PPIP managers was $19.3 billion. Non-
      agency Residential Mortgage-Backed Securities represented 82 percent of the total; CMBS represented the
      balance. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, Program Update--
      Quarter Ended September 30, 2010, at 4 (Oct. 20, 2010) (online at financialstability.gov/docs/
      External%20Report%20-%2009-10%20vFinal.pdf).
    xiii U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report--September 2010, at 6
      (Oct. 12, 2010) (online at financialstability.gov/docs/105CongressionalReports/September 105(a)
      report_FINAL.pdf).
    xiv As of October 29, 2010, Treasury has received $428 million in capital repayments from two PPIP fund
      managers. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
      Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xv As of October 29, 2010, Treasury's purchases under the SBA 7(a) Securities Purchase Program totaled $324.9
      million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
      Ending October 29, 2010, at 22 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xvi Treasury will not make additional purchases pursuant to the expiration of its purchasing authority under
      EESA. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 43 (Oct.
      2010) (online at www.financialstability.gov/docs/
      TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
    xvii As part of its revisions to TARP allocations upon enactment of the Dodd-Frank Wall Street Reform and
      Consumer Protection Act, Treasury allocated an additional $2 billion in TARP funds to mortgage assistance for
      unemployed borrowers through the Hardest Hit Fund (HHF). U.S. Department of the Treasury, Obama Administration
      Announces Additional Support for Targeted Foreclosure-Prevention Programs to Help Homeowners Struggling With
      Unemployment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm). Another $3.5 billion was
      allocated among the 18 states and the District of Columbia currently participating in HHF. The amount each
      state received during this round of funding is proportional to its population. U.S. Department of the
      Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct. 2010) (online at
      www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
    xviii As of November 10, 2010, a total of $63.6 million has been disbursed to seven state Housing Finance
      Agencies (HFAs). Data provided by Treasury staff (Nov. 10, 2010).
    xix This figure represents the amount Treasury disbursed to fund the advance purchase account of the letter of
      credit issued under the FHA Short Refinance Program. Data provided by Treasury staff (Nov. 10, 2010).
    xx Seventy-three Community Development Financial Institutions (CDFIs) entered the CDCI in September. Among these
      institutions, 17 banks exchanged their CPP investments for an equivalent investment amount under the CDCI.
      U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
      October 29, 2010, at 1-13, 16-17 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-
      2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Treasury closed the program on September 30, 2010,
      after investing $570 million in 84 CDFIs. U.S. Department of the Treasury, Treasury Announces Special
      Financial Stabilization Initiative Investments of $570 Million in 84 Community Development Financial
      Institutions in Underserved Areas (Sept. 30, 2010) (online at financialstability.gov/latest/
      pr_09302010b.html).

                                                                 FIGURE 26: TARP PROFIT AND LOSS
                                                                      [Dollars in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Warrant
                                                                 Dividends xxii  Interest xxiii    Disposition        Other        Losses xxv
                        TARP  Initiative xxi                      (as of  9/30/   (as of  9/30/   Proceeds xxiv   Proceeds  (as  (as of  10/29/     Total
                                                                      2010)           2010)       (as of 10/29/  of  9/30/2010)       2010)
                                                                                                      2010)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total......................................................         $16,721          $1,052          $8,160          $5,833        ($6,034)      $25,732
    CPP........................................................           9,859              49           6,904      xxvi 3,015         (2,576)       17,250
    TIP........................................................           3,004               -           1,256               -               -        4,260
    AIFP.......................................................     xxvii 3,418             931               -       xxviii 15         (3,458)          906
    ASSP.......................................................               -              15               -        xxix 101               -          116
    AGP........................................................             440               -               -       xxx 2,246               -        2,686
    PPIP.......................................................               -              56               -        xxxi 180               -          236
    SBA 7(a)...................................................               -               1               -               -               -            1
    Bank of America Guarantee..................................               -               -               -       xxxii 276               -          276
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    xxi AIG is not listed on this table because no profit or loss has been recorded to date for AIG. Its missed dividends were capitalized as part of the
      issuance of Series E preferred shares and are not considered to be outstanding. Treasury currently holds non-cumulative preferred shares, meaning AIG
      is not penalized for non-payment. Therefore, no profit or loss has been realized on Treasury's AIG investment to date.
    xxii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of September 30, 2010 (Oct. 12, 2010) (online at
      financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf).
    xxiii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of September 30, 2010 (Oct. 12, 2010) (online at
      financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf).
    xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 2, 2010) (online at
      financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xxv In the TARP Transactions Report, Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast
      National Bancorp ($4.1 million), as losses. Treasury has also sold its preferred ownership interests and warrants from South Financial Group, Inc. and
      TIB Financial Corp. This represents a $241.7 million loss on its CPP investments in these two banks. Two TARP recipients, UCBH Holdings, Inc. ($298.7
      million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently in bankruptcy proceedings. U.S. Department of the
      Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 2, 2010) (online at financialstability.gov/
      docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Finally, Sonoma Valley Bancorp, which received $8.7 million in CPP
      funding, was placed into receivership on August 20, 2010. Federal Deposit Insurance Corporation, Westamerica Bank, San Rafael, California, Assumes All
      of the Deposits of Sonoma Valley Bank, Sonoma, California (Aug. 20, 2010) (online at www.fdic.gov/news/news/press/2010/pr10196.html).
    xxvi This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. For details on Treasury's sales of Citigroup
      common stock, see note ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29,
      2010, at 15 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S.
      Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at www.financialstability.gov/docs/
      TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
    xxvii This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and mandatory convertible preferred shares.
      The dividend total also includes a $748.6 million senior unsecured note from Treasury's investment in General Motors. Data provided by Treasury.
    xxviii Treasury received proceeds from an additional note connected with the loan made to Chrysler Financial on January 16, 2009. U.S. Department of the
      Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 2010) (online at
      financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xxix This represents the total proceeds from additional notes connected with Treasury's investments in GM Supplier Receivables LLC and Chrysler
      Receivables SPV LLC. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 19
      (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xxx As a fee for taking a second-loss position of 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 in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities, leaving
      Treasury with $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, Treasury sold these securities for $2.25 billion in total
      proceeds. 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 Treasury. U.S. Department of the Treasury, Troubled Asset Relief Program
      Transactions Report for the Period Ending October 29, 2010, at 20 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal
      Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1 (Dec. 23, 2009) (online at www.financialstability.gov/docs/
      Citi%20AGP%20Termination%20Agreement%20-%20Fully%20Executed%20Version.pdf); U.S. Department of the Treasury, Treasury Announces Further Sales of
      Citigroup Securities and Cumulative Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at financialstability.gov/latest/pr_09302010c.html);
      Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30, 2010) (online at www.fdic.gov/about/strategic/report/2009annualreport/
      AR09final.pdf).
    xxxi As of September 30, 2010, Treasury has earned $159.1 million in membership interest distributions from the PPIP. Additionally, Treasury has earned
      $20.6 million in total proceeds following the termination of the TCW fund. See U.S. Department of the Treasury, Cumulative Dividends, Interest and
      Distributions Report as of September 30, 2010, at 14 (Oct. 12, 2010) (online at financialstability.gov/docs/dividends-interest-reports/
      September%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
      Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xxxii 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 period. 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. CPP Unpaid Dividend and Interest Payments \345\
    ---------------------------------------------------------------------------
        \345\ Treasury Cumulative Dividends, Interest and Distributions
    Report, supra note 339, at 20.
    ---------------------------------------------------------------------------
        As of September 30, 2010, 120 institutions have at least
    one dividend payment on preferred stock issued under CPP
    outstanding.\346\ Among these institutions, 95 are not current
    on cumulative dividends, amounting to $114.8 million in missed
    payments. Another 25 banks have not paid $8 million in non-
    cumulative dividends. Of the $49.5 billion currently
    outstanding in CPP funding, Treasury's investments in banks
    with non-current dividend payments total $3.5 billion. A
    majority of the banks that remain delinquent on dividend
    payments have under $1 billion in total assets on their balance
    sheets. Also, there are 21 institutions that no longer have
    outstanding unpaid dividends, after previously deferring their
    quarterly payments.\347\
    ---------------------------------------------------------------------------
        \346\ Does not include banks with missed dividend payments that
    have either repaid all delinquent dividends, exited TARP, gone into
    receivership, or filed for bankruptcy.
        \347\ Includes institutions that have either (a) fully repaid their
    CPP investment and exited the program or (b) entered bankruptcy or its
    subsidiary was placed into receivership. Treasury Cumulative Dividends,
    Interest and Distributions Report, supra note 339, at 20.
    ---------------------------------------------------------------------------
        Six banks have failed to make six dividend payments, while
    one bank has missed all seven quarterly payments. These
    institutions have received a total of $207.1 million in CPP
    funding. Under the terms of the CPP, after a bank fails to pay
    dividends for six periods, Treasury has the right to elect two
    individuals to the company's board of directors.\348\ Figure 27
    below provides further details on the distribution and the
    number of institutions that have missed dividend payments.
    ---------------------------------------------------------------------------
        \348\ U.S. Department of the Treasury, Frequently Asked Questions
    Capital Purchase Program (CPP): Related to Missed Dividend (or
    Interest) Payments and Director Nomination (online at
    www.financialstability.gov/docs/CPP/CPP%20Directors%20FAQs.pdf)
    (accessed Nov. 12, 2010).
    ---------------------------------------------------------------------------
        In addition, eight CPP participants have missed at least
    one interest payment, representing $3.6 million in cumulative
    unpaid interest payments. Treasury's total investments in these
    non-public institutions represent less than $1 billion in CPP
    funding.

                        FIGURE 27: CPP MISSED DIVIDEND PAYMENTS (AS OF SEPTEMBER 30, 2010) \349\
    ----------------------------------------------------------------------------------------------------------------
        Number of Missed Payments         1         2         3         4         5         6         7       Total
    ----------------------------------------------------------------------------------------------------------------
    Cumulative Dividends
    Number of Banks, by asset size..        29        19        17        17        10         3         0        95
        Under $1B...................        20        15        12        11         5         1         0        64
        $1B-$10B....................         8         4         4         6         5         2         0        29
        Over $10B...................         1         0         1         0         0         0         0         2
    Non-Cumulative Dividends
    Number of Banks, by asset size..         2         5         6         3         5         3         1        25
        Under $1B...................         1         5         5         3         5         3         1        23
        $1B-$10B....................         1         0         1         0         0         0         0         2
        Over $10B...................         0         0         0         0         0         0         0         0
                                     -------------------------------------------------------------------------------
    Total Missed Payments...........  ........  ........  ........  ........  ........  ........  ........       120
    ----------------------------------------------------------------------------------------------------------------
    \349\ Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 17-20. Data on total
      bank assets compiled using SNL Financial data service. (accessed Nov. 3, 2010).

                e. Rate of Return
        As of November 4, 2010, the average internal rate of return
    for all public financial institutions that participated in the
    CPP and fully repaid the U.S. government (including preferred
    shares, dividends, and warrants) remained at 8.4 percent, as no
    institutions exited the program in October.\350\ The internal
    rate of return is the annualized effective compounded return
    rate that can be earned on invested capital.
    ---------------------------------------------------------------------------
        \350\ Calculation of the internal rate of return (IRR) also
    includes CPP investments in public institutions not repaid in full (for
    reasons such as acquisition by another institution) in the Transaction
    Report, e.g., The South Financial Group and TIB Financial Corporation.
    The Panel's total IRR calculation now includes CPP investments in
    public institutions recorded as a loss on the TARP Transaction Report
    due to bankruptcy, e.g., CIT Group Inc. Going forward, the Panel will
    continue to include losses due to bankruptcy when Treasury determines
    any associated contingent value rights have expired without value. When
    excluding CIT Group from the calculation, the resulting IRR is 10.4
    percent. Treasury Transactions Report, supra note 339.
    ---------------------------------------------------------------------------
                f. Warrant Disposition

                   FIGURE 28: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS (AS OF NOVEMBER 4, 2010)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Panel's Best
                                                                          Investment      Warrant         Warrant          Valuation      Price/      IRR
                                Institution                                  Date        Repurchase  Repurchase/ Sale     Estimate at    Estimate  (Percent)
                                                                                            Date          Amount       Disposition 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 Corporation....................................      12/19/2008    6/17/2009           900,000         1,580,000    0.570      13.8
    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 Inc..................................      11/21/2008   10/28/2009           212,000           220,000    0.964       5.9
    Manhattan Bancorp.................................................       12/5/2008   10/14/2009            63,364           140,000    0.453       9.8
    CVB Financial Corp................................................       12/5/2008   10/28/2009         1,307,000         3,522,198    0.371       6.4
    Bank of the 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
    JPMorgan Chase & Co...............................................      10/28/2008   12/10/2009       950,318,243     1,006,587,697    0.944      10.9
    CIT Group Inc.....................................................      12/31/2008            -                 -           562,541    -         (97.2)
    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 Company...................................      12/19/2008   12/16/2009           568,700         1,071,494    0.531       7.8
    Wesbanco Bank, Inc................................................       12/5/2008   12/23/2009           950,000         2,387,617    0.398       6.7
    Union First Market Bankshares Corporation (Union Bankshares             12/19/2008   12/23/2009           450,000         1,130,418    0.398       5.8
     Corporation).....................................................
    Trustmark Corporation.............................................      11/21/2008   12/30/2009        10,000,000        11,573,699    0.864       9.4
    Flushing Financial Corporation....................................      12/19/2008   12/30/2009           900,000         2,861,919    0.314       6.5
    OceanFirst Financial Corporation..................................       1/16/2009     2/3/2010           430,797           279,359    1.542       6.2
    Monarch Financial Holdings, Inc...................................      12/19/2008    2/10/2010           260,000           623,434    0.417       6.7
    Bank of America...................................................      10/28/2008     3/3/2010     1,566,210,714     1,006,416,684    1.533       6.5
                                                                        \351\ 1/9/2009
                                                                           \352\ 1/14/
                                                                            2009 \353\
    Washington Federal Inc./Washington Federal Savings & Loan               11/14/2008     3/9/2010        15,623,222        10,166,404    1.537      18.6
     Association......................................................
    Signature Bank....................................................      12/12/2008    3/10/2010        11,320,751        11,458,577    0.988      32.4
    Texas Capital Bancshares, Inc.....................................       1/16/2009    3/11/2010         6,709,061         8,316,604    0.807      30.1
    Umpqua Holdings Corp..............................................      11/14/2008    3/31/2010         4,500,000         5,162,400    0.872       6.6
    City National Corporation.........................................      11/21/2008     4/7/2010        18,500,000        24,376,448    0.759       8.5
    First Litchfield Financial Corporation............................      12/12/2008     4/7/2010         1,488,046         1,863,158    0.799      15.9
    PNC Financial Services Group Inc..................................      12/31/2008    4/29/2010       324,195,686       346,800,388    0.935       8.7
    Comerica Inc......................................................      11/14/2008     5/4/2010       183,673,472       276,426,071    0.664      10.8
    Valley National Bancorp...........................................      11/14/2008    5/18/2010         5,571,592         5,955,884    0.935       8.3
    Wells Fargo Bank..................................................      10/28/2008    5/20/2010       849,014,998     1,064,247,725    0.798       7.8
    First Financial Bancorp...........................................      12/23/2008     6/2/2010         3,116,284         3,051,431    1.021       8.2
    Sterling Bancshares, Inc./Sterling Bank...........................      12/12/2008     6/9/2010         3,007,891         5,287,665    0.569      10.8
    SVB Financial Group...............................................      12/12/2008    6/16/2010         6,820,000         7,884,633    0.865       7.7
    Discover Financial Services.......................................       3/13/2009     7/7/2010       172,000,000       166,182,652    1.035      17.1
    Bar Harbor Bancshares.............................................       1/16/2009    7/28/2010           250,000           518,511    0.482       6.2
    Citizens & Northern Corporation...................................       1/16/2009     8/4/2010           400,000           468,164    0.854       5.9
    Columbia Banking System, Inc......................................      11/21/2008    8/11/2010         3,301,647         3,291,329    1.003       7.3
    Hartford Financial Services Group, Inc............................       6/26/2009    9/21/2010       713,687,430       472,221,996    1.511      30.3
    Lincoln National Corporation......................................       7/10/2009    9/16/2010       216,620,887       181,431,183    1.194      27.1
    Fulton Financial Corporation......................................      12/23/2008     9/8/2010        10,800,000        15,616,013    0.692       6.7
    The Bancorp, Inc./The Bancorp Bank................................      12/12/2008     9/8/2010         4,753,985         9,947,683    0.478      12.8
    South Financial Group, Inc./Carolina First Bank...................       12/5/2008    9/30/2010           400,000         1,164,486    0.343     (34.2)
    TIB Financial Corp/TIB Bank.......................................       12/5/2008    9/30/2010            40,000           235,757    0.170     (38.0)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total.............................................................                                 $8,148,332,166    $7,999,843,254    1.019       8.4
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \351\ Investment date for Bank of America in CPP.
    \352\ Investment date for Merrill Lynch in CPP.
    \353\ Investment date for Bank of America in TIP.

                      FIGURE 29: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF NOVEMBER 4, 2010)
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                    Warrant Valuation
            Financial Institutions with  Warrants Outstanding        -----------------------------------------------
                                                                       Low Estimate    High Estimate   Best Estimate
    ----------------------------------------------------------------------------------------------------------------
    Citigroup, Inc.\354\............................................          $71.57       $1,479.30         $206.88
    SunTrust Banks, Inc.............................................           17.34          356.98          123.78
    Regions Financial Corporation...................................            5.94          172.60           63.27
    Fifth Third Bancorp.............................................           96.96          390.18          170.52
    KeyCorp.........................................................           20.90          158.08           64.62
    AIG.............................................................          419.89        2,062.45          909.42
    All Other Banks.................................................          379.97        1,210.32          812.63
    Total...........................................................       $1,012.57       $5,829.91       $2,351.12
    ----------------------------------------------------------------------------------------------------------------
    \354\ Includes warrants issued under CPP, AGP, and TIP.

    2. Federal Financial Stability Efforts

                a. Federal Reserve and FDIC Programs
        In addition to the direct expenditures Treasury has
    undertaken through the 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 special purpose vehicles (SPVs) and the FDIC's
    Temporary Liquidity Guarantee Program (TLGP), operate
    independently of the TARP.
                b. Total Financial Stability Resources
        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. With the
    reductions in funding for certain TARP programs, the Panel
    calculates the total value of these resources to be over $2.5
    trillion. However, 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 2009 report, the FDIC assesses a premium of up to 100
    basis points on TLGP debt guarantees.\355\ 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.
    ---------------------------------------------------------------------------
        \355\ Congressional Oversight Panel, November Oversight Report:
    Guarantees and Contingent Payments in TARP and Related Programs, at 36
    (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-
    report.pdf).
    ---------------------------------------------------------------------------
                c. Credit Union Assistance
        Apart from the assistance credit unions have received
    through the CDCI, the National Credit Union Administration
    (NCUA), the federal agency charged with regulating federal
    credit unions (FCUs), has also made efforts to stabilize the
    corporate credit union (CCU) system. Corporate credit unions
    provide correspondent services, as well as liquidity and
    investment services to retail (or consumer) credit unions.\356\
    Since March 2009, the NCUA has placed five CCUs into
    conservatorship due to their exposure to underperforming
    private-label MBS. The NCUA estimates that these five
    institutions, which have $72 billion in assets and provide
    services for 4,600 retail credit unions, hold more than 90
    percent of the MBS in the corporate credit union system.\357\
    ---------------------------------------------------------------------------
        \356\ National Credit Union Administration, Corporate System
    Resolution: Corporate Credit Unions Frequently Asked Questions (FAQs),
    at 1 (online at www.ncua.gov/Resources/CorporateCU/CSR/CSR-6.pdf).
        \357\ National Credit Union Administration, Corporate System
    Resolution: National Credit Union Administration Virtual Town Hall, at
    14 (Sept. 27, 2010) (online at www.ncua.gov/Resources/CorporateCU/CSR/
    10-0927WebinarSlides.pdf); National Credit Union Administration, Fact
    Sheet: Corporate Credit Union Conservatorships (Sept. 14, 2010) (online
    at www.ncua.gov/Resources/CorporateCU/CSR/CSR-14.pdf).
    ---------------------------------------------------------------------------
        To assist in the NCUA's stabilization efforts, the
    Temporary Corporate Credit Union Stabilization Fund
    (``Stabilization Fund'') was created to help cover costs
    associated with CCU conservatorships and liquidations. The
    Stabilization Fund was established on May 20, 2009, as part of
    the Helping Families Save Their Homes Act of 2009, and allows
    the NCUA to borrow up to $6 billion from Treasury on a
    revolving basis.\358\ The NCUA had drawn a total of $1.5
    billion from the Stabilization Fund, and repaid the balance at
    the end of September.\359\
    ---------------------------------------------------------------------------
        \358\ National Credit Union Administration, Board Action Memorandum
    (June 15, 2010) (online at www.ncua.gov/GenInfo/BoardandAction/
    DraftBoardActions/2010/Jun/
    Item6aBAMSFAssessmentJune2010(1%20billion)FINAL.pdf).
        \359\ National Credit Union Administration, Remarks as Prepared for
    Delivery by Board Member Gigi Hyland at Grand Hyatt Washington (Sept.
    20, 2010) (online at www.ncua.gov/GenInfo/Members/Hyland/Speeches/10-
    0920HylandNAFCUCongrCaucus.pdf).
    ---------------------------------------------------------------------------
                d. Mortgage Purchase Programs
        On September 7, 2008, Treasury announced the GSE Mortgage
    Backed Securities Purchase Program. The Housing and Economic
    Recovery Act of 2008 provided Treasury with the authority to
    purchase MBS guaranteed by GSEs through December 31, 2009.
    Treasury purchased approximately $225 billion in GSE MBS by the
    time its authority expired.\360\ As of October 2010, there was
    approximately $154.6 billion in MBS still outstanding under
    this program.\361\
    ---------------------------------------------------------------------------
        \360\ U.S. Department of the Treasury, FY2011 Budget in Brief, at
    138 (Feb. 2010) (online at www.treas.gov/offices/management/budget/
    budgetinbrief/fy2011/FY%202011%20BIB%20(2).pdf).
        \361\ U.S. Department of the Treasury, MBS Purchase Program:
    Portfolio by Month (online at www.financialstability.gov/docs/
    October%202010%20Portfolio%20by%20month.pdf) (accessed Nov. 12, 2010).
    Treasury has received $65.7 billion in principal repayments and $14.3
    billion in interest payments from these securities. See U.S. Department
    of the Treasury, MBS Purchase Program Principal and Interest Received
    (online at www.financialstability.gov/docs/
    October%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.p
    df) (accessed Nov. 12, 2010).
    ---------------------------------------------------------------------------
        In March 2009, the Federal Reserve authorized purchases of
    $1.25 trillion MBS guaranteed by Fannie Mae, Freddie Mac, and
    Ginnie Mae, and $200 billion of agency debt securities from
    Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.\362\
    The intended purchase amount for agency debt securities was
    subsequently decreased to $175 billion.\363\ All purchasing
    activity was completed on March 31, 2010. As of November 10,
    the Federal Reserve held $1.05 trillion of agency MBS and $150
    billion of agency debt.\364\
    ---------------------------------------------------------------------------
        \362\ Federal Reserve Report on Credit and Liquidity Programs and
    the Balance Sheet, supra note 251, at 5.
        \363\ Federal Reserve Report on Credit and Liquidity Programs and
    the Balance Sheet, supra note 251, at 5.
        \364\ Federal Reserve Statistical Release H.4.1, supra note 251.
    ---------------------------------------------------------------------------
                e. Federal Reserve Treasury Securities Purchases \365\
    ---------------------------------------------------------------------------
        \365\ Board of Governors of the Federal Reserve System, Press
    Release--FOMC Statement (Nov. 3, 2010) (online at
    www.federalreserve.gov/newsevents/press/monetary/20101103a.htm);
    Federal Reserve Bank of New York, Statement Regarding Purchases of
    Treasury Securities (Nov. 3, 2010) (online at www.federalreserve.gov/
    newsevents/press/monetary/monetary20101103a1.pdf).
    ---------------------------------------------------------------------------
        On November 3, 2010, the Federal Open Market Committee
    (FOMC) announced that it has directed FRBNY to begin purchasing
    an additional $600 billion in longer-term Treasury securities.
    In addition, FRBNY will reinvest $250 billion to $350 billion
    in principal payments from agency debt and agency MBS in
    Treasury securities.\366\ The additional purchases and
    reinvestments will be conducted through the end of the second
    quarter 2011, meaning the pace of purchases will be
    approximately $110 billion per month. In order to facilitate
    these purchases, FRBNY will temporarily lift its System Open
    Market Account per-issue limit, which prohibits the Federal
    Reserve's holdings of an individual security from surpassing 35
    percent of the outstanding amount.\367\ As of November 10,
    2010, the Federal Reserve held $853 billion in Treasury
    securities.\368\
    ---------------------------------------------------------------------------
        \366\ On August 10, 2010, the Federal Reserve began reinvesting
    principal payments on agency debt and agency MBS holdings in longer-
    term Treasury securities in order to keep the amount of their
    securities holdings in their System Open Market Account portfolio at
    their then-current level. Board of Governors of the Federal Reserve
    System, FOMC Statement (Aug. 10, 2010) (online at
    www.federalreserve.gov/newsevents/press/monetary/20100810a.htm).
        \367\ Federal Reserve Bank of New York, FAQs: Purchases of Longer-
    term Treasury Securities (Nov. 3, 2010) (online at www.newyorkfed.org/
    markets/lttreas_faq.html).
        \368\ Federal Reserve Statistical Release H.4.1, supra note 251.

                FIGURE 30: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 27, 2010) xxxiii
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                         Treasury         Federal
                         Program                          (TARP)          Reserve          FDIC            Total
    ----------------------------------------------------------------------------------------------------------------
    Total...........................................            $475        $1,378.0          $690.9        $2,544.0
        Outlays xxxiv...............................           232.2         1,226.8           188.9         1,648.0
        Loans.......................................            23.4           151.2               0           174.6
        Guarantees xxxv.............................             4.3               0             502           506.3
        Repaid and Unavailable TARP Funds...........           215.1               0               0           215.1
    AIG xxxvi.......................................            69.8            83.1               0           152.9
        Outlays.....................................     xxxvii 69.8    xxxviii 26.1               0            95.9
        Loans.......................................               0      xxxix 57.1               0            57.1
        Guarantees..................................               0               0               0               0
    Citigroup.......................................            11.6               0               0            11.6
        Outlays.....................................         xl 11.6               0               0            11.6
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Capital Purchase Program (Other)................            37.8               0               0            37.8
        Outlays.....................................        xli 37.8               0               0            37.8
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Capital Assistance Program......................             N/A               0               0        xlii N/A
    TALF............................................             4.3            38.7               0            43.0
        Outlays.....................................               0               0               0               0
        Loans.......................................               0       xliv 38.7               0            38.7
        Guarantees..................................       xliii 4.3               0               0             4.3
    PPIP (Loans) xlv................................               0               0               0               0
        Outlays.....................................               0               0               0               0
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    PPIP (Securities)...............................       xlvi 22.4               0               0            22.4
        Outlays.....................................             7.5               0               0             7.5
        Loans.......................................            14.9               0               0            14.9
        Guarantees..................................               0               0               0               0
    Making Home Affordable Program/Foreclosure                  45.6               0               0            45.6
     Mitigation.....................................
        Outlays.....................................      xlvii 45.6               0               0            45.6
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Automotive Industry Financing Program...........     xlviii 67.1               0               0            67.1
        Outlays.....................................            59.0               0               0            59.0
        Loans.......................................             8.1               0               0             8.1
        Guarantees..................................               0               0               0               0
    Automotive Supplier Support Program.............             0.4               0               0             0.4
        Outlays.....................................               0               0               0               0
        Loans.......................................        xlix 0.4               0               0             0.4
        Guarantees..................................               0               0               0               0
    SBA 7(a) Securities Purchase....................            0.36               0               0            0.36
        Outlays.....................................            0.36               0               0            0.36
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Community Development Capital Initiative........         li 0.57               0               0            0.57
        Outlays.....................................               0               0               0               0
        Loans.......................................            0.57               0               0            0.57
        Guarantees..................................               0               0               0               0
    Temporary Liquidity Guarantee Program...........               0               0           502.0           502.0
        Outlays.....................................               0               0               0               0
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0       lii 502.0           502.0
    Deposit Insurance Fund..........................               0               0           188.9           188.9
        Outlays.....................................               0               0      liii 188.9           188.9
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Other Federal Reserve Credit Expansion..........               0         1,256.1               0         1,256.1
        Outlays.....................................               0     liv 1,200.7               0         1,200.7
        Loans.......................................               0         lv 55.4               0            55.4
        Guarantees..................................               0               0               0               0
    ----------------------------------------------------------------------------------------------------------------
    xxxiii Unless otherwise noted, all data in this figure are as of October 27, 2010.
    xxxiv 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.). These values were calculated using (1) Treasury's actual reported expenditures, and (2) Treasury's
      anticipated funding levels as estimated by a variety of sources, including Treasury statements 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--
      as well as 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.
    xxxv Although many of the guarantees may never be exercised or will be exercised only partially, the guarantee
      figures included here represent the federal government's greatest possible financial exposure.
    xxxvi U.S. Department of the Treasury, Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online at
      financialstability.gov/latest/pr_11012010.html). AIG values exclude accrued dividends on preferred interests
      in the AIA and ALICO SPVs and accrued interest payable to FRBNY on the Maiden Lane LLCs.
    xxxvii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November
      25, 2008, and a $30 billion investment made on April 17, 2009 (less a reduction of $165 million representing
      bonuses paid to AIG Financial Products employees). As of November 1, 2010, AIG had utilized $47.5 billion of
      the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, Treasury Update on AIG
      Investment Valuation (Nov. 1, 2010) (online at www.financialstability.gov/latest/pr_11012010.html); U.S.
      Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October
      29, 2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xxxviii 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 October 27, 2010, the book value of the Federal
      Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $26.1 billion in preferred
      equity ($16.7 billion in AIA and $9.4 billion in ALICO). Federal Reserve Bank of New York, Factors Affecting
      Reserve Balances (H.4.1) (Oct. 28, 2010) (online at www.federalreserve.gov/releases/h41/20101028/).
    xxxix This number represents the full $29.3 billion made available to AIG through its Revolving Credit Facility
      (RCF) with FRBNY ($18.9 billion had been drawn down as of October 27, 2010) and the outstanding principal of
      the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of October 27, 2010, $13.5 billion
      and $14.3 billion, respectively). The amounts outstanding under the Maiden Lane II and III facilities do not
      reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the loans
      to the SPVs, reducing the taxpayers' exposure to losses over time. Federal Reserve Bank of New York, Factors
      Affecting Reserve Balances (H.4.1) (Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20101028/).
    The maximum amount available through the RCF decreased from $34.4 billion to $29.3 billion between March and
      September 2010, as a result of the sale of two AIG subsidiaries, as well as the company's sale of CME Group,
      Inc. common stock. The reduced ceiling also reflects a $3.95 billion repayment to the RCF from proceeds earned
      from a debt offering by the International Lease Finance Corporation (ILFC), an AIG subsidiary. Board of
      Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
      Programs and the Balance Sheet, at 18 (Oct. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
      monthlyclbsreport201010.pdf).
    xl This figure represents Treasury's $25 billion investment in Citigroup, minus $13.4 billion applied as a
      repayment for CPP funding. The amount repaid comes from the $16.4 billion in gross proceeds Treasury received
      from the sale of 4.1 billion Citigroup common shares. See note ii, supra for further details of the sales of
      Citigroup common stock to date. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
      Report for the Period Ending October 29, 2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docs/
      transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xli This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion investment
      in Citigroup identified above, $139.5 billion in repayments (excluding the amount repaid for the Citigroup
      investment) that are in ``repaid and unavailable'' TARP funds, and losses under the program. This figure does
      not account for future repayments of CPP investments and dividend payments from CPP investments. U.S.
      Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October
      29, 2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xlii 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. 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).
    xliii This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of October 27,
      2010, TALF LLC had drawn only $105 million of the available $4.3 billion. Board of Governors of the Federal
      Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 30, 2010) (online at www.federalreserve.gov/
      releases/h41/20100930/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
      for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at financialstability.gov/docs/
      transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). On June 30, 2010, the Federal
      Reserve ceased issuing loans collateralized by newly issued CMBS. As of this date, 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). Earlier, it ended its issues of
      loans collateralized by other TALF-eligible newly issued and legacy ABS (non-CMBS) on March 31, 2010. Federal
      Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and Conditions (online at
      www.newyorkfed.org/markets/talf_terms.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term
      Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/cmbs_operations.html)
      (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: CMBS
      (online at www.newyorkfed.org/markets/CMBS_recent_operations.html) (accessed Nov. 12, 2010); Federal Reserve
      Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/
      talf_operations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities
      Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/TALF_recent_operations.html) (accessed Nov. 12,
      2010).
    xliv 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, at 4 (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). Since only
      $43 billion in TALF loans remained outstanding when the program closed, Treasury is currently responsible for
      reimbursing the Federal Reserve Board only up to $4.3 billion in losses from these loans. Thus, the Federal
      Reserve's maximum potential exposure under the TALF is $38.7 billion. See Board of Governors of the Federal
      Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at www.federalreserve.gov/
      releases/h41/20101028/).
    xlv 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. In several sales described in
      FDIC press releases, it appears that there is no Treasury participation, and FDIC activity is accounted for
      here as a component of the FDIC's Deposit Insurance Fund outlays. See, e.g., 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).
    xlvi This figure represents Treasury's final adjusted investment amount in the Legacy Securities Public-Private
      Investment Program (PPIP). As of October 29, 2010, Treasury reported commitments of $14.9 billion in loans and
      $7.5 billion in membership interest associated with PPIP. On January 4, 2010, Treasury and one of the nine
      fund managers, UST/TCW Senior Mortgage Securities Fund, L.P. (TCW), entered into a ``Winding-Up and
      Liquidation Agreement.'' Treasury's final investment amount in TCW totaled $356 million. Following the
      liquidation of the fund, Treasury's initial $3.3 billion obligation to TCW was reallocated among the eight
      remaining funds on March 22, 2010. See U.S. Department of the Treasury, Troubled Asset Relief Program
      Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at
      financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    On October 20, 2010, Treasury released its fourth quarterly report on PPIP. The report indicates that as of
      September 30, 2010, all eight investment funds have realized an internal rate of return since inception (net
      of any management fees or expenses owed to Treasury) above 19 percent. The highest performing fund, thus far,
      is AG GECC PPIF Master Fund, L.P., which has a net internal rate of return of 52 percent. U.S. Department of
      the Treasury, Legacy Securities Public-Private Investment Program, at 7 (Oct. 20, 2010) (online at
      financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf).
    xlvii As of October 29, 2010, the total cap for HAMP was $29.9 billion. The total amount of TARP funds committed
      to HAMP is $29.9 billion. However, as of October 30, 2010, only $597.2 million in non-GSE payments has been
      disbursed under HAMP. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
      the Period Ending October 29, 2010, at 43 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
      reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Troubled
      Assets Relief Program Monthly 105(a) Report--September 2010, at 6 (Oct. 1, 2010) (online at
      financialstability.gov/docs/105CongressionalReports/September%20105(a)%20report_FINAL.pdf). Data provided by
      Treasury staff (Nov. 10, 2010).
    xlviii A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been
      converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained as
      first lien debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1
      billion) represents Treasury's current obligation under the AIFP after repayments and losses. U.S. Department
      of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at
      18 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    xlix This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
      Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 19
      (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    l U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 43 (Oct. 2010)
      (online at www.financialstability.gov/docs/
      TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
    li U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
      October 29, 2010, at 17 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
      10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
    lii 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. $286.8 billion
      of debt subject to the guarantee is currently outstanding, which represents approximately 57.1 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 (Sept. 30, 2010) (online at www.fdic.gov/
      regulations/resources/tlgp/total_issuance09-10.html). 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 Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary
      Liquidity Guarantee Debt Program (Sept. 30, 2010) (online at www.fdic.gov/regulations/resources/tlgp/
      fees.html).
    liii 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, the first, second, third, and fourth quarters of 2009, and
      the first and second quarters of 2010. Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO)
      Report to the Board: DIF Income Statement--Second Quarter 2010 (online at www.fdic.gov/about/strategic/
      corporate/cfo_report_2ndqtr_10/income.html). For earlier reports, see Federal Deposit Insurance Corporation,
      Chief Financial Officer's (CFO) Report to the Board (online at www.fdic.gov/about/strategic/corporate/
      index.html) (accessed Nov. 12, 2010). 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
      eight 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 on another portion of assets. See, e.g.,
      Federal Deposit Insurance Corporation, Purchase and Assumption Agreement--Whole Bank, All Deposits--Among
      FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation 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).
    liv Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
      accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
      Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
      (Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20100930/). 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, e.g., Board of Governors of the Federal Reserve
      System, Factors Affecting Reserve Balances (H.4.1), at 2 (Oct. 28, 2010) (online at www.federalreserve.gov/
      releases/h41/20101028) (accessed Nov. 3, 2010).
    lv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
      credit, central bank liquidity swaps, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
      Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction credit,
      the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane LLC). Board
      of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online
      at www.federalreserve.gov/releases/h41/20101028/) (accessed Nov. 3, 2010).

                       SECTION FOUR: 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 24
    oversight reports, as well as a special report on regulatory
    reform, issued on January 29, 2009, and a special report on
    farm credit, issued on July 21, 2009. Since the release of the
    Panel's October oversight report, the following developments
    pertaining to the Panel's oversight of the TARP took place:
          The Panel held a hearing in Washington on October
    21, 2010, discussing restrictions on executive compensation for
    companies that received TARP funds. The Panel heard testimony
    from Kenneth R. Feinberg, the former Special Master for TARP
    Executive Compensation, as well as from industry and academic
    experts.
          The Panel held a hearing in Washington on October
    27, 2010. The Panel heard testimony from Phyllis Caldwell,
    chief of Treasury's Homeownership Preservation Office, as well
    as from industry and academic experts about Treasury's HAMP
    program and the effects of recent foreclosure documentation
    irregularities on Treasury's ability to maintain systemic
    financial stability and effective foreclosure mitigation
    efforts under the TARP.

    Upcoming Reports and Hearings

        The Panel will release its next oversight report in
    December. The report will discuss HAMP, the most expansive of
    Treasury's foreclosure mitigation initiatives under the TARP,
    assessing its effectiveness in meeting the TARP's legislative
    mandate to ``protect home values'' and ``preserve
    homeownership.'' This will be the Panel's fourth report
    addressing Treasury's foreclosure mitigation efforts under the
    TARP.

    Acknowledgements

        The Panel would like to thank the following individuals for
    sharing their thoughts and suggestions: Roger Ashworth, MBS
    Analyst, Amherst Securities; Guy Cecala, CEO and Publisher,
    Inside Mortgage Finance; Chris Gamaitoni, Vice President,
    Compass Point Research & Trading; Jason Gold, Senior Fellow for
    Housing and Financial Services Policy, Third Way; Laurie
    Goodman, Senior Managing Director, Amherst Securities; Anne
    Kim, Domestic Policy Program Director, Third Way; Paul Miller,
    Managing Director and Group Head of Financial Services
    Research, FBR Capital Markets; Matthew O'Connor, Research
    Analyst, Deutsche Bank Securities; Christopher Peterson,
    Associate Dean for Academic Affairs and Professor of Law,
    University of Utah; Robert Placet, Associate Analyst, Deutsche
    Bank Securities; Joshua Rosner, Managing Director, Graham
    Fisher & Co.; and, Jason Stewart, Managing Director, Compass
    Point Research & Trading.
        The Panel also wishes to acknowledge and thank the many
    individuals from the academic, legal, consumer, analyst, and
    other communities who provided useful information and views for
    this report.
             SECTION FIVE: 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 TARP. 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. Senate Minority Leader Mitch
    McConnell appointed Kenneth Troske, Sturgill Professor of
    Economics at the University of Kentucky, to fill the vacancy
    created by the resignation of Paul Atkins on May 21, 2010.
    Effective September 17, 2010, Elizabeth Warren resigned from
    the Panel, and on September 30, 2010, Senate Majority Leader
    Harry Reid announced the appointment of Senator Ted Kaufman to
    fill the vacant seat. On October 4, 2010, the Panel elected
    Senator Kaufman as its chair.
    APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN TO SPECIAL MASTER PATRICIA
       GEOGHEGAN, RE: FOLLOW UP TO EXECUTIVE COMPENSATION HEARING, DATED
                                NOVEMBER 1, 2010