[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'').
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    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).
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            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.
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    \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.
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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.
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      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.
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      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.
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    \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&section=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





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