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



 
                     CONGRESSIONAL OVERSIGHT PANEL

                      DECEMBER OVERSIGHT REPORT *

                               ----------                              

         A REVIEW OF TREASURY'S FORECLOSURE PREVENTION PROGRAMS

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


               December 14, 2010.--Ordered to be printed

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




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                     CONGRESSIONAL OVERSIGHT PANEL

                      DECEMBER OVERSIGHT REPORT *

                               __________

         A REVIEW OF TREASURY'S FORECLOSURE PREVENTION PROGRAMS

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


               December 14, 2010.--Ordered to be printed

    * Submitted under Section 125(b)(1) of Title 1 of the Emergency 
        Economic Stabilization Act of 2008, Pub. L. No. 110-343
                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                       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: Introduction........................................     4
Part One: Where HAMP Stands Today................................     5
    A. Background................................................     5
    B. Pre-HAMP Foreclosure Mitigation Efforts...................     6
    C. HAMP's Structure..........................................     9
    D. HAMP's Performance........................................    12
        1. Trial Modifications...................................    13
        2. Conversion to Permanent Modification..................    15
        3. Permanent Modifications...............................    17
        4. Borrowers Dropped from the Program....................    21
        5. Redefault.............................................    25
    E. Performance of Non-HAMP Modifications.....................    26
    F. Treasury's Other Foreclosure Mitigation Programs..........    28
    G. Barriers to Success.......................................    33
        1. What are HAMP's Goals?................................    33
        2. Factors Affecting HAMP Success........................    39
Part Two: The Future of HAMP.....................................    59
    H. Treasury's Implementation of HAMP and Possible 
      Improvements...............................................    60
        1. Role of Fannie Mae and Freddie Mac....................    61
        2. Current Oversight Mechanisms..........................    69
        3. Implementation Failures and Ways to Improve...........    70
    I. Redefaults of Modified Mortgages..........................    73
        1. The Great Depression-Era Home Owners' Loan Corporation    75
        2. Redefaults in Other Loan Modification Efforts.........    77
        3. Current Trends in Loan Modifications and Redefaults...    78
        4. HAMP Redefaults.......................................    80
Conclusions and Recommendations..................................    90
Annex I: Lessons from the Home Owners' Loan Corporation of the 
  1930s and 1940s................................................    95
    A. Background................................................    95
    B. The HOLC's Operations.....................................    96
    C. How the HOLC Compares to HAMP.............................   102
    D. Lessons from the HOLC.....................................   104
Section Two: Additional Views....................................   106
    A. J. Mark McWatters and Professor Kenneth R. Troske.........   106
Section Three: Correspondence with Treasury Update...............   110
Section Four: TARP Updates Since Last Report.....................   111
Section Five: Oversight Activities...............................   138
Section Six: About the Congressional Oversight Panel.............   139
Appendices:
    APPENDIX I: LETTER FROM SPECIAL MASTER PATRICIA GEOGHEGAN TO 
      CHAIRMAN TED KAUFMAN RE: FOLLOW UP TO EXECUTIVE 
      COMPENSATION HEARING, DATED NOVEMBER 18, 2010..............   140
======================================================================




                       DECEMBER OVERSIGHT REPORT

                                _______
                                

               December 14, 2010.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

    In April 2010, in its most recent report on Treasury's 
foreclosure prevention programs, the Panel raised serious 
concerns about the timeliness, accountability, and 
sustainability of Treasury's efforts. As the Panel noted at the 
time, ``It now seems clear that Treasury's programs, even when 
they are fully operational, will not reach the overwhelming 
majority of homeowners in trouble . . . . Treasury is still 
struggling to get its foreclosure programs off the ground as 
the crisis continues unabated.''
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    * The Panel adopted this report with a 5-0 vote on December 13, 
2010.
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    In the intervening eight months, Treasury has tweaked its 
main foreclosure prevention effort, the Home Affordable 
Modification Program (HAMP), but the changes have not resolved 
the Panel's core concerns. The Panel now estimates that, if 
current trends hold, HAMP will prevent only 700,000 to 800,000 
foreclosures--far fewer than the 3 to 4 million foreclosures 
that Treasury initially aimed to stop, and vastly fewer than 
the 8 to 13 million foreclosures expected by 2012. Because 
Treasury's authority to restructure HAMP ended on October 3, 
2010, the program's prospects are unlikely to improve 
substantially in the future.
    In some regards, the program's failure to make a dent in 
the foreclosure crisis may seem surprising. HAMP's premise was 
straightforward: Because the foreclosure process allows lenders 
to recover only a small fraction of the value of a mortgage 
loan, lenders should generally prefer to avoid foreclosure by 
voluntarily reducing a borrower's monthly payments to 
affordable levels. Through HAMP, Treasury attempted to sweeten 
this deal by offering incentive payments to all parties to a 
mortgage loan modification. Yet despite the apparent strength 
of HAMP's economic logic, the program has failed to help the 
vast majority of homeowners facing foreclosure.
    A major reason is that mortgages are, in practice, far more 
complicated than a one-to-one relationship between borrower and 
lender. In particular, banks typically hire loan servicers to 
handle the day-to-day management of a mortgage loan, and the 
servicer's interests may at times sharply conflict with those 
of lenders and borrowers. For example, although lenders suffer 
significant losses in foreclosures, servicers can turn a 
substantial profit from foreclosure-related fees. As such, it 
may be in the servicer's interest to move a delinquent loan to 
foreclosure as soon as possible. HAMP attempted to correct this 
market distortion by offering incentive payments to loan 
servicers, but the effort appears to have fallen short, in part 
because servicers were not required to participate. Another 
major obstacle is that many borrowers have second mortgages 
from lenders who may stand to profit by blocking the 
modification of a first mortgage. For these reasons among many 
others, HAMP's straightforward plan to encourage modifications 
has proven ineffective in practice.
    While HAMP's most dramatic shortcoming has been its poor 
results in preventing foreclosures, the program has other 
significant flaws. For example, despite repeated urgings from 
the Panel, Treasury has failed to collect and analyze data that 
would explain HAMP's shortcomings, and it does not even have a 
way to collect data for many of HAMP's add-on programs. 
Further, Treasury has refused to specify meaningful goals by 
which to measure HAMP's progress, while the program's sole 
initial goal--to prevent 3 to 4 million foreclosures--has been 
repeatedly redefined and watered down. Treasury has also failed 
to hold loan servicers accountable when they have repeatedly 
lost borrower paperwork or refused to perform loan 
modifications. Treasury has essentially outsourced the 
responsibility for overseeing servicers to Fannie Mae and 
Freddie Mac, but both companies have critical business 
relationships with the very same servicers, calling into 
question their willingness to conduct stringent oversight. 
Freddie Mac in particular has hesitated to enforce some of its 
contractual rights related to the foreclosure process, arguing 
that doing so ``may negatively impact our relationships with 
these seller/servicers, some of which are among our largest 
sources of mortgage loans.'' Treasury bears the ultimate 
responsibility for preventing such conflicts of interest, and 
it should ensure that loan servicers are penalized when they 
fail to complete loan modifications appropriately.
    Many of the problems now plaguing HAMP are inherent in its 
design and cannot be resolved at this late date. Other 
problems, however, can still be mitigated. For instance, 
Treasury should enable borrowers to apply for loan 
modifications more easily--for example, by allowing online 
applications. Treasury should also carefully examine HAMP's 
track record to pin down the factors that define successful 
loan modifications so that similar modifications can be 
encouraged in the future.
    Perhaps most critically, Treasury should carefully monitor 
and, where appropriate, intervene in cases in which borrowers 
are falling behind on their HAMP-modified mortgages. Preventing 
redefaults is an extremely powerful way of magnifying HAMP's 
impact, as each redefault prevented translates directly into a 
borrower keeping his home. Delinquencies that are flagged in 
their early stages can potentially be brought current through a 
repayment plan, but delinquencies that are left unchecked have 
the potential to undermine even the modest progress made by 
HAMP. Worse still, each redefault represents thousands of 
taxpayer dollars that have been spent merely to delay rather 
than prevent a foreclosure.
    Finally, Treasury should accept that HAMP will not reach 
its original goals and provide a meaningful framework for 
evaluating the program in the future. Treasury continues to 
state that HAMP will expend $30 billion in Troubled Asset 
Relief Program funding, yet the Congressional Budget Office 
recently estimated that all of Treasury's foreclosure programs 
combined will spend only $12 billion. Given the Panel's cost 
estimates for Treasury's other foreclosure-related efforts, 
HAMP thus appears likely to spend only around $4 billion. Had 
Treasury acknowledged this reality before its crisis authority 
expired, it could have made material changes to HAMP or 
reallocated the money to a more effective program. Now, that 
option is gone.
    For this reason, Treasury's reluctance to acknowledge 
HAMP's shortcomings has had real consequences. Absent a 
dramatic and unexpected increase in HAMP enrollment, many 
billions of dollars set aside for foreclosure mitigation may 
well be left unused. As a result, an untold number of borrowers 
may go without help all because Treasury failed to acknowledge 
HAMP's shortcomings in time.
                              SECTION ONE


                              Introduction

    The Emergency Economic Stabilization Act (EESA), the 
October 2008 legislation that granted Treasury the authority to 
create the Troubled Asset Relief Program (TARP), included a 
mandate that TARP funds be used in a manner that ``protects 
home values'' and ``preserves homeownership.'' \1\ To fulfill 
that mandate, Treasury in 2009 allocated $50 billion in TARP 
funds for a new mortgage modification program called the Home 
Affordable Modification Program (HAMP).
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    \1\ 12 U.S.C. Sec. 5201(2)(A), (B). For a discussion of the 
authority of the Secretary of the Treasury to use TARP funds to create 
a program such as HAMP, see Congressional Oversight Panel, April 
Oversight Report: Evaluating Progress on TARP Foreclosure Mitigation 
Programs, at 147-171 (Apr. 14, 2010) (online at cop.senate.gov/
documents/cop-041410-report.pdf) (hereinafter ``April 2010 Oversight 
Report'').
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    The same legislation established the Congressional 
Oversight Panel, along with a specific charge to issue periodic 
reports on TARP foreclosure mitigation efforts. The Panel's 
first foreclosure mitigation oversight report was issued in 
March 2009, concurrent with the announcement of HAMP. The 
report established numerous standards for evaluating the 
Administration's foreclosure mitigation program, including: (1) 
whether it resulted in affordable monthly payments; (2) whether 
it dealt with negative equity; (3) whether it addressed second 
liens; and (4) whether it counteracted incentives for mortgage 
servicers not to modify troubled loans. Seven months later, in 
October 2009, the Panel examined the Administration's 
implementation of HAMP. This report identified three main 
concerns with the program: (1) that it lacked sufficient scope 
to prevent many foreclosures, including those caused by 
unemployment and negative equity; (2) that it was not achieving 
scale quickly enough; and (3) that it was not providing a 
permanent solution to homeowners who needed help.
    The Panel again assessed HAMP in April 2010. Foreclosures 
were continuing at a rapid pace, and the report found that 
Treasury's response continued to lag the crisis. The Panel 
articulated three major concerns with HAMP: (1) the failure of 
the program to deal with the foreclosure crisis in a timely 
way; (2) the unsustainable nature of many HAMP modifications, 
given the large debt load and negative equity that many 
participating homeowners continued to carry; and (3) the need 
for greater accountability in HAMP, particularly with regard to 
the activities of participating servicers.
    Treasury's foreclosure mitigation programs have grown and 
evolved since the initial announcement in March 2009. More 
TARP-funded foreclosure prevention initiatives were announced 
shortly before the release of the Panel's most recent 
foreclosure report; those programs are discussed in Section B.4 
of this report.\2\ However, this month's report focuses 
primarily on HAMP, since it is Treasury's marquee foreclosure 
prevention initiative, and because many of the other 
initiatives remain in early stages, with no record of results 
on which to be assessed.\3\
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    \2\ Treasury has since created two additional foreclosure 
prevention programs under the TARP: the Hardest Hit Fund (HHF), which 
provides foreclosure prevention funding to 19 states and the District 
of Columbia, and the Federal Housing Administration (FHA) Short 
Refinance Program, which will allow for the refinancing of certain 
mortgages by the FHA.
    \3\ For an analysis of the programs' structures, see April 2010 
Oversight Report, supra note 1, at 8-29.
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                   Part One: Where HAMP Stands Today


                             A. Background

    Despite government and private sector efforts to modify 
troubled loans and thus stop ``preventable'' foreclosures, the 
number of foreclosures remains extremely high, with 
approximately 250,000 foreclosure starts and over 100,000 
foreclosure completions per month.
    Figure 1 below shows the number of foreclosure starts and 
completions each month.

   FIGURE 1: FORECLOSURE STARTS AND COMPLETIONS BY MONTH (JULY 2007-
                          SEPTEMBER 2010) \4\

[GRAPHIC] [TIFF OMITTED] 62622A.001

      
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    \4\ 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 (Sept. 2010) (online at 
www.hopenow.com/industry-data/HOPE%20NOW%20Data%20 
Report%20(September)%20101010%20v2.pdf) (hereinafter ``HOPE NOW 
Alliance Industry Extrapolations and Metrics'').

    Figure 2 below shows the percentage of all mortgages that 
are in delinquency and the percentage of all mortgages that are 
counted as foreclosure inventory, meaning they are somewhere in 
the foreclosure process. Please note that the foreclosure 
inventory is stacked on top of delinquency, that is, 
delinquency is currently around 10 percent, and foreclosure 
inventory is roughly 4 percent, not 14 percent. Although both 
factors are at historically high levels, they have been 
relatively steady for the past two years.

   FIGURE 2: DELINQUENCY AND FORECLOSURE RATES (Q1 2006-Q3 2010) \5\

[GRAPHIC] [TIFF OMITTED] 62622A.002

      
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    \5\ Mortgage Bankers Association, National Delinquency Survey Q3 
2010 (Nov. 18, 2010).

    The Federal Reserve has recently estimated foreclosures 
over the next two years: ``All told, we expect about two and 
one-quarter million foreclosure filings [in 2010] and again 
next year, and about two million more in 2012.'' \6\ The Center 
for Responsible Lending has also released a foreclosure 
forecast of 9 million foreclosures between 2009 and 2012.\7\ 
Since approximately 5 million foreclosures have been completed 
since the beginning of 2009, this seems to be generally in line 
with the Federal Reserve's prediction.
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    \6\ Sarah Bloom Raskin, member, Board of Governors of the Federal 
Reserve System, Remarks at the National Consumer Law Center's Consumer 
Rights Litigation Conference, Boston, Massachusetts, Problems in the 
Mortgage Servicing Industry, at 2 (Nov. 12, 2010) (online at 
www.federalreserve.gov/newsevents/speech/bloomraskin20101112a.pdf). See 
also House Committee on Financial Services, Written Testimony of 
Elizabeth A. Duke, member, Board of Governors of the Federal Reserve 
System, Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues 
in Mortgage Servicing, at 5 (Nov. 18, 2010) (online at 
financialservices.house.gov/Media/file/hearings/111/Duke111810.pdf) 
(``Over the first half of this year, we have seen a further 1.2 million 
foreclosure filings, and an additional 2.4 million homes were somewhere 
in the foreclosure pipeline at the end of June. All told, we expect 
about 2.25 million foreclosure filings this year and again next year, 
and about 2 million more in 2012.'').
    \7\ Center for Responsible Lending, Soaring Spillover (May 2009) 
(online at www.responsiblelending.org/mortgage-lending/research-
analysis/soaring-spillover-3
9.pdf).
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               B. Pre-HAMP Foreclosure Mitigation Efforts

    In the wake of the financial crisis of late 2008, Treasury 
developed HAMP as the latest in a series of federal government 
initiatives to stem the growing foreclosure problem. At the 
time, foreclosures had been rising for several years already, 
leading to an increase in the number of empty homes owned by 
banks and weakening the banking system at a time when 
policymakers felt that restoring economic and bank stability 
was crucial. The history of prior efforts, which met with 
limited success, provides a useful context for examining HAMP 
and its performance to date.
    As the housing boom peaked and began its long downward 
slide in 2006, policymakers appeared to take for granted that 
foreclosures would not require government intervention. In 
previous housing recessions of the post-WWII era, foreclosures 
and mortgage modifications had been left to the discretion of 
private lenders and loan servicers.\8\ After all, modifications 
generally maximize value for the lender or investor as compared 
to foreclosure, so it was logical to assume that such 
modifications would occur. Yet, by mid-2007, it appeared that 
many foreclosures were proceeding even in instances where loan 
modifications would appear to be economically preferable to the 
lender or mortgage investors.
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    \8\ The Home Owners' Loan Corporation, a depression-era federal 
government mortgage modification program, is discussed in Annex I.
---------------------------------------------------------------------------
    Policymakers continued to look to the private sector for a 
more aggressive response to the situation, but began to nudge 
them toward a more organized response in hopes of achieving 
greater results. As a result, in October 2007, the HOPE NOW 
Alliance was formed as a voluntary coalition of mortgage 
companies and industry organizations designed to centralize and 
coordinate foreclosure mitigation efforts. Although both 
Treasury and the Department of Housing and Urban Development 
(HUD) were consulted and strongly promoted the effort, the 
federal government is not an official sponsor.\9\ Initially, 
HOPE NOW met with limited success. For instance, a 2009 study 
found that only 49 percent of HOPE NOW workouts had reduced the 
borrower's monthly payment, and 34 percent had actually 
resulted in a higher monthly payment.\10\ However, HOPE NOW 
recently reported that 91 percent of the nearly 150,000 
modifications completed in August 2010 involved payment 
reductions.\11\ As of August 2010, HOPE NOW participants report 
a total of 10.7 million mortgage ``solutions'' since the 
inception of the alliance, including 3.2 million proprietary 
modifications. However, the Mortgage Metrics Report compiled by 
the Office of Comptroller of the Currency and the Office of 
Thrift Supervision reports only 1.3 million such 
modifications.\12\ Proprietary modifications are discussed 
further in Section E below.
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    \9\ See U.S. Department of the Treasury, Statement by Secretary 
Henry M. Paulson, Jr. on Announcement of New Private Sector Alliance--
HOPE NOW (Oct. 10, 2007) (online at 205.168.45.71/press/releases/
hp599.htm).
    \10\ Congressional Oversight Panel, March Oversight Report: 
Foreclosure Crisis: Working Toward a Solution, at 31 (Mar. 6, 2009) 
(online at cop.senate.gov/documents/cop-030609-report.pdf) (hereinafter 
``March 2009 Oversight Report''). See also Sonia Garrison et al., 
Continued Decay and Shaky Repairs: The State of Subprime Loans Today, 
Center for Responsible Lending Study, at 7 (Jan. 2009) (online at 
www.responsiblelending.org/mortgage-lending/research-analysis/
continued_decay_and_shaky_repairs.pdf). This study reported only 20 
percent of modifications resulted in lower payments.
    \11\ HOPE NOW Alliance, HOPE NOW: Nine out of Ten Proprietary Loan 
Mods in August Included Principal ` Interest Payment Reduction (Oct. 7, 
2010) (online at www.hopenow.com/press_release/files/
August%202010%20Data%20Release_FINAL.pdf).
    \12\ See Congressional Oversight Panel, Written Testimony of Joseph 
H. Evers, deputy comptroller for large bank supervision, Office of the 
Comptroller of the Currency, COP Hearing on TARP Foreclosure Mitigation 
Programs, at 4, 7-8 (Oct. 27, 2010) (online at cop.senate.gov/
documents/testimony-102710-evers.pdf) (stating that loan servicers 
modified 1,239,896 loans between the start of 2008 and the end of the 
first quarter of 2010, including 121,731 HAMP modifications, and that 
an additional 164,473 non-HAMP modifications were done in the second 
quarter of 2010).
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    The first official federal government foreclosure 
mitigation program was FHA Secure, announced in August 2007, 
which refinanced adjustable-rate mortgages into fixed-rate 
mortgages insured by the Federal Housing Administration (FHA). 
FHA Secure permitted the refinancing of delinquent and 
underwater borrowers, which was rare in the private sector. 
However, delinquencies had to be attributable to the loan 
resetting, and borrowers could not generally show any 
delinquencies in the six-month period prior to the rate reset. 
Borrowers participating in this program were therefore able to 
refinance their existing underwater mortgages into safer loans 
at a time when lenders were tightening underwriting standards 
and underwater borrowers were unable to refinance in the 
private market. As the Panel has noted previously, however, 
this was accomplished at the cost of having the taxpayer insure 
a large number of negative equity mortgages. FHA Secure was 
closed down at the end of 2008. Although the program refinanced 
nearly half a million loans, only 4,128 of these were 
delinquent at the time of refinancing. The Panel has previously 
attributed FHA Secures failure to its restrictive borrower 
criteria.\13\
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    \13\ March 2009 Oversight Report, supra note 10, at 35. See also 
Kate Berry, HUD Mulling How to Widen FHA Refi Net, American Banker 
(Feb. 15, 2008) (online at www.americanbanker.com/issues/173_33/-
344173-1.html); Michael Corkery, Mortgage `Cram-Downs' Loom as 
Foreclosures Mount, Wall Street Journal (Dec. 31, 2008) (online at 
online.wsj.com/article/SB123068005350543971.html).
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    Following the lackluster results stemming from the private 
sector initiatives, policymakers determined that a new 
government program was the next appropriate step. Accordingly, 
HOPE for Homeowners was established by Congress in July 2008 to 
permit FHA insurance of refinanced distressed mortgages. While 
less restrictive in some areas than FHA Secure, the program did 
not guarantee negative equity loans. Since the goal of the 
program was specifically to encourage principal reduction 
modifications of negative equity loans, guaranteeing them as is 
would have defeated the purpose, as well as likely been 
impossible under FHA`s 97 percent LTV statutory limit. 
Nonetheless, although HOPE for Homeowners was predicted to help 
400,000 homeowners, it managed to refinance only a handful of 
loans. This was likely due to the program`s poor initial 
design, lack of flexibility, and its reliance on voluntary 
principal write-downs, which lenders were very reluctant to do, 
a pattern also seen in HAMP.\14\
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    \14\ See March 2009 Oversight Report, supra note 10, at 36. See 
also Dina ElBoghdady, HUD Chief Calls Aid on Mortgages A Failure, 
Washington Post (Dec. 17, 2008) (online at www.washingtonpost.com/wp-
dyn/content/article/2008/12/16/AR2008121603177.html).
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    In the same month HOPE for Homeowners was created, the 
Federal Deposit Insurance Corporation (FDIC) took over IndyMac, 
one of the largest subprime lenders. Soon afterwards, the FDIC 
announced a loan modification program to assist the 65,000 
delinquent borrowers with loans in IndyMac`s non-securitized 
portfolio. Although no FDIC funds were allocated specifically 
for these modifications, loss-sharing agreements were signed 
with the purchasers of IndyMac`s assets. A number of other, 
similar efforts were instituted with smaller failed lenders 
taken over by the FDIC. The IndyMac program and other FDIC 
foreclosure mitigation efforts had limited reach, but may have 
influenced the structure of HAMP.\15\ This and other aspects of 
the FDIC IndyMac program are discussed in more detail in 
Section I.2.
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    \15\ See March 2009 Oversight Report, supra note 10, at 32-33; 
Congressional Oversight Panel, October Oversight Report: An Assessment 
of Foreclosure Mitigation Efforts After Six Months, at 83-84 (Oct. 9, 
2009) (online at cop.senate.gov/documents/cop-100909-report.pdf) 
(hereinafter ``October 2009 Oversight Report''). See also Charles 
Duhigg, Fighting Foreclosures, F.D.I.C. Chief Draws Fire, New York 
Times (Dec. 11, 2008) (online at www.nytimes.com/2008/12/11/business/
11bair.html).
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    Even with increasing government intervention throughout 
this timeframe, foreclosures continued to surge. It became 
clear that the private sector was either unable or unwilling to 
conduct mortgage modifications on its own of a scope and scale 
necessary to stem the tide. Most likely, this was due to 
rational behavior on the part of servicers. As discussed below, 
there are incentives built into the mortgage servicing system 
that encourage servicers to prefer foreclosure in many cases, 
and discourage certain types of modifications. HAMP, and 
specifically its servicer incentive payments, were created to 
overcome the additional costs that servicers incur in modifying 
loans, and to compensate them in part for the income they may 
forgo by choosing modification over foreclosure.

                          C. HAMP's Structure

    HAMP is designed to provide a path to modification in those 
cases in which modification is the economically preferable 
outcome, from the perspective of the lender or investor who 
owns the loan, to foreclosure. Because such modifications are 
in the interest of both the borrower and the lender, it would 
seem to follow that mortgage servicers should be providing 
modifications in those cases without any payments from the 
government. As observed by David Stevens, commissioner of the 
Federal Housing Administration, ``To be frank, too often during 
this crisis, that private sector engagement hasn't happened. In 
some instances, we've seen market actors refuse to participate. 
In others, we've seen them participate half-heartedly.'' \16\ 
The failure of the private sector to reduce debt service 
payments on a substantial number of mortgages in part led to 
Treasury's decision to create HAMP.
---------------------------------------------------------------------------
    \16\ David H. Stevens, commissioner, Federal Housing 
Administration, Remarks at the Mortgage Bankers Association Annual 
Convention, at 7 (Oct. 26, 2010).
---------------------------------------------------------------------------
    HAMP provides financial incentives to mortgage 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.\17\ 
Participation in the program by servicers is voluntary, but 
once a servicer elects to participate, adherence to the program 
standards is mandatory for all the servicer's loans. If a 
participating servicer has a borrower who qualifies for HAMP, 
the lender must first reduce monthly payments until they are no 
more than 38 percent of the borrower's gross monthly income. 
Treasury will then match, dollar for dollar, further reductions 
required to bring the monthly payments down to 31 percent of 
the borrower's income.
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    \17\ Servicers of government-sponsored enterprise (GSE) mortgages 
are required to participate in HAMP for their GSE portfolio. Servicers 
of non-GSE mortgages may elect to sign a servicer participation 
agreement (SPA) 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.
---------------------------------------------------------------------------
    Only borrowers whose mortgage servicers have opted into the 
program may apply for assistance. Pooling and servicing 
agreements (PSAs) for securitized mortgages may also limit the 
latitude that servicers have to modify loans.\18\ Furthermore, 
borrowers must meet the following criteria to be eligible:
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    \18\ The decision to modify securitized mortgages rests with the 
servicer, and servicers are instructed to manage loans as if for their 
own account and maximize the net present value of the loan. 
Nevertheless, some PSAs contain additional restrictions that can hamper 
servicers' ability to modify mortgages. Sometimes the modification is 
forbidden outright, sometimes only interest rates can be adjusted, not 
principal, and sometimes there are limitations on the amount by which 
interest rates can be adjusted. Other times the total number of loans 
that can be modified is capped (typically at 5 percent of the pool), 
the number of times a loan may be modified will be capped, or the 
number of modifications in a year will be capped. Generally, the term 
of a loan cannot typically be extended beyond the last maturity date of 
any loan in the securitized pool. Additionally, servicers are sometimes 
required to purchase any loans they modify at the face value 
outstanding (or even with a premium). This functions as an 
antimodification provision. See March 2009 Oversight Report, supra note 
10, at 42-44.
---------------------------------------------------------------------------
          The home must be owner-occupied, not vacant, 
        and not condemned;
          The remaining balance on a single unit home 
        must be no more than $729,750, with higher limits for 
        properties containing up to four units;
          The borrower must be delinquent, or default 
        must be reasonably foreseeable, and the borrower must 
        demonstrate financial hardship, including the fact that 
        he or she has insufficient liquid assets to make the 
        required monthly payments; and
          The borrower must have a monthly ``front-
        end'' debt-to-income (DTI) ratio of more than 31 
        percent, meaning that the monthly mortgage payment must 
        be greater than 31 percent of the borrower's gross 
        monthly income.\19\
---------------------------------------------------------------------------
    \19\ U.S. Department of the Treasury, Introduction of the Home 
Affordable Modification Program, Supplemental Directive 09-01, at 6 
(Apr. 6, 2009) (online at www.hmpadmin.com/portal/programs/docs/
hamp_servicer/sd0901.pdf) (hereinafter ``Introduction of the Home 
Affordable Modification Program,''). ``Monthly payment'' means monthly 
mortgage payment before modification, including both principal and 
interest, plus applicable taxes, hazard insurance, flood insurance, 
condominium association fees and homeowners' association fees, as 
applicable. ``Front-end'' DTI refers to a ratio of the borrower's 
monthly mortgage payment to their monthly income, as opposed to a 
``back-end'' DTI which compares all of a borrowers debt service 
payments (including credit cards, car payments, etc.) to their income.
---------------------------------------------------------------------------
    If a borrower meets these criteria, the servicer must then 
use Treasury's Net Present Value (NPV) model to determine 
whether or not a HAMP modification makes economic sense from 
the lender's perspective. The NPV model calculates net present 
values for the expected income from the mortgage under a HAMP 
modification, and the expected income with no modification 
(generally a foreclosure and home sale scenario). The two 
figures are then compared. If the mortgage has a greater value 
under the HAMP modification, it is said to be ``NPV positive,'' 
in which case a participating servicer must offer the borrower 
a HAMP modification.
    HAMP prescribes a ``waterfall'' to determine what type of 
modification should be offered. First, the servicer should 
consider whether lowering the loan's interest rate, to as low 
as 2 percent, would result in a monthly front-end DTI ratio of 
less than 31 percent. If the ratio would still be too high, the 
next step should be extending the loan period out to as long as 
40 years. If the DTI ratio would still be greater than 31 
percent, the final step is principal forbearance.\20\
---------------------------------------------------------------------------
    \20\ As described in Section F, an alternate waterfall moves the 
principal reduction option to earlier in the process.
---------------------------------------------------------------------------
    Once approved for assistance through HAMP, a borrower must 
successfully complete a trial period, typically three months, 
during which the borrower makes payments on the modified 
mortgage. A borrower who remains current through the trial 
period becomes eligible for a permanent modification, under 
which the terms of the trial modification remain in effect for 
a period of five years.\21\ For each year that the borrower 
remains current under the modified mortgage, he or she receives 
a $1,000 incentive payment from HAMP, for up to five years. 
After the five year term is up, the interest rate on the loan 
can increase by a maximum of 1 percent per year until it 
reaches the prevailing Freddie Mac average interest rate at the 
time the HAMP modification was made. As of December 2, 2010, 
Freddie Mac's average interest rate on a 30-year fixed rate 
conforming mortgage is 4.46 percent. Incentive payments also 
flow to the mortgage servicer and investor.\22\ For mortgages 
that are not backed by government-sponsored entities Fannie Mae 
or Freddie Mac (the GSEs), the funding comes from $29.9 billion 
currently set aside from the TARP for foreclosure 
mitigation.\23\ For GSE mortgage modifications, $25 billion has 
been set aside from the Housing and Economic Relief Act of 
2008.
---------------------------------------------------------------------------
    \21\ ``Current'' means that no payment is more than 30 days 
overdue. See Introduction of the Home Affordable Modification Program, 
supra note 19, at 17-18.
    \22\ The incentive payments for investors and borrowers are 
included when calculating the net present value of a loan modification 
under Treasury's NPV analysis. See Introduction of the Home Affordable 
Modification Program, supra note 19, at 22-25.
    \23\ The original funding amount allotted for HAMP was $50 billion. 
In May 2009, the $1.2 billion reduction in TARP due to the passage of 
the Helping Families Save Their Homes Act was officially allocated to 
HAMP. See Helping Families Save Their Homes Act of 2009, Pub. L. No. 
111-22 Sec. 402(f) (2009) (online at financialservices.house.gov/
FinancialSvcsDemMedia/file/public%20laws/111-22.pdf). The $50 billion 
HAMP funding was later reduced to a ceiling of $30.6 billion by the 
Dodd-Frank Wall Street Reform and Consumer Protection Act. To date 
Treasury has expended less than $800 million on HAMP.
---------------------------------------------------------------------------
    Under HAMP's Principal Reduction Alternative (PRA) 
initiative, which became effective on October 1, 2010, 
servicers must conduct an additional evaluation of borrowers 
who meet the HAMP criteria and whose mortgages are 
significantly underwater, resulting in a loan-to-value (LTV) 
ratio, at current market prices, of more than 115 percent. If 
the mortgage meets these criteria, the servicer must evaluate 
it to determine, as with the original HAMP NPV test, whether 
the NPV of a principal reduction under the program is greater 
than the NPV under no modification. If so, the servicer has the 
option to offer a principal reduction under the PRA. These 
principal reductions are voluntary for servicers, unlike 
interest payment reductions which are a mandatory part of HAMP. 
A servicer who elects to offer a principal reduction first 
reduces the principal until the LTV is 115 percent or the DTI 
is no more than 31 percent, whichever happens first. Then the 
servicer follows the HAMP guidelines for completing the 
modification. The amount of principal reduced is treated 
initially only as forbearance. Each year for three years, 
however, a third of that amount is forgiven if the borrower 
remains current on the modified loan.\24\
---------------------------------------------------------------------------
    \24\ Principal forbearance is not the same as principal reduction. 
In the first case, the borrower's unpaid principal balance remains 
unchanged but is restructured to reduce monthly payments. In the latter 
case, a certain amount of the principal is forgiven by the lender. 
Principal forbearance means that the loan's unpaid principal balance is 
not fully amortized over the remaining life of the loan. The balance, 
less the amount subject to forbearance, is then amortized or ``spread 
out'' over the remaining period of the loan, lowering the amount due 
each month. The amount by which the principal was reduced is then due 
as a balloon payment at the end of the loan, or when the property is 
sold. In the case of principal reduction, a certain amount of the 
principal is forgiven and is no longer owed by the borrower. See U.S. 
Department of the Treasury, Making Home Affordable: Borrower Frequently 
Asked Questions (Oct. 12, 2010) (online at makinghomeaffordable.gov/
borrower-faqs.html).
---------------------------------------------------------------------------
    The NPV test is key to HAMP's strategy. The program is not 
intended to prevent all foreclosures, but rather to encourage 
modification in those cases in which the value of a 
modification is greater than the value of a foreclosure. One 
might very reasonably ask why a government program involving 
servicer payments is necessary when servicers should already be 
modifying these loans out of self-interest. However, there are 
other factors at work that may affect a servicer's decision, 
particularly the many incentives in securitized mortgages for 
servicers to prefer foreclosure.\25\
---------------------------------------------------------------------------
    \25\ For a detailed explanation of these factors, see March 2009 
Oversight Report, supra note 10. See also Office of the Special 
Inspector General for the Troubled Asset Relief Program, Quarterly 
Report to Congress, at 163-176 (Oct. 26, 2010) (online at sigtarp.gov/
reports/congress/2010/October2010_Quarterly_Report_to_Congress.pdf) 
(hereinafter ``SIGTARP Quarterly Report to Congress'').
---------------------------------------------------------------------------
    During the period that the mortgage is in default, the 
servicer typically must continue to make payments to the 
investor out of its own pocket. It may also incur other 
expenses related to holding the troubled mortgage in its 
portfolio. If the mortgage goes into foreclosure, the servicer 
is reimbursed for these expenses before any of the money passes 
to the investors. Moreover, if a mortgage goes into 
foreclosure, the servicer holding the loan at that time 
typically handles the foreclosure, earning various fees for 
this service. Additionally, servicers earn income from float on 
the payments they collect--interest earned from the short-term 
investment of mortgage payments made between the time the 
servicer receives it from the borrower and the time it must be 
remitted to the investors.\26\
---------------------------------------------------------------------------
    \26\ Privately modified loans generally follow a similar pattern of 
reimbursement of the servicer for costs incurred, such as advancing 
coupon payments to investors while loans in the pool are in default. 
Individual PSAs can differ in their terms, however.
---------------------------------------------------------------------------
    Therefore, it is in the servicer's interest to keep a 
mortgage for as long as it is producing an income stream and, 
once it goes into default, to ensure that the mortgage goes 
through foreclosure. HAMP's servicer incentive payments are 
designed, at least in part, to overcome these incentives that 
distort servicer decision making and lead to unnecessary 
foreclosures.
    HAMP also offers incentive payments to borrowers over the 
course of the modification. These payments are designed to 
encourage borrowers to remain in the program and continue to 
pay their mortgages as well as to encourage participation in 
the first place. While it would seem unnecessary to pay 
borrowers to do what should already be in their interest, 
Treasury obviously felt otherwise, probably due to the poor 
track record of prior programs at obtaining and keeping 
borrower participation. Additionally, the added income from 
these borrower incentives is considered in the NPV model and 
may help some marginal HAMP applicants to achieve an NPV 
positive result, thus obtaining a HAMP modification.\27\
---------------------------------------------------------------------------
    \27\ U.S. Department of the Treasury, Home Affordable Modification 
Program: Base Net Present Value (NPV) Model v4.0: Model Documentation, 
at 33 (Oct. 1, 2010) (online at www.hmpadmin.com//portal/programs/docs/
hamp_servicer/npvmodeldocumentationv4.pdf) (hereinafter ``HAMP Base NPV 
Model v4.0: Model Documentation'').
---------------------------------------------------------------------------

                         D. HAMP's Performance

    After an influx of new trial modifications in 2009 and 
early 2010, the pace of entry into the program has fallen off 
considerably, according to the most recent data on the 
program's performance. Moreover, although some headway has been 
made in reducing the enormous number of borrowers in trial 
modifications awaiting conversion to permanent status, a 
sizeable backlog remains. Finally, while nearly 1.4 million 
trial modifications have been initiated since the start of the 
program, the number of borrowers who have dropped out of the 
program remains high. To date, HAMP has processed 519,648 
permanent modifications.\28\
---------------------------------------------------------------------------
    \28\ Data provided by Treasury.
---------------------------------------------------------------------------

1. Trial Modifications

    As of October 31, 2010, approximately 1.4 million trial 
modifications had been initiated under HAMP. Of these, 20,998 
were initiated in October 2010. Between May and October 2010, 
each month posted, on average, approximately 23,000 new trial 
modifications, down from a high of almost 160,000 in October 
2009.\29\
---------------------------------------------------------------------------
    \29\ Data provided by Treasury. These figures represent new trial 
modification first payments reported in October 2010.
---------------------------------------------------------------------------
    Figure 3 below shows the total number of trial 
modifications granted by month (e.g. October 2010: 
approximately 21,000 modifications) as well as the disposition 
of loans in each monthly cohort of HAMP modifications. Note 
that some trial modifications from the earliest months of the 
program remain active as trials.

  FIGURE 3: DISPOSITION OF HAMP TRIAL MODIFICATIONS BY VINTAGE (MARCH 
                       2009-SEPTEMBER 2010) \30\

[GRAPHIC] [TIFF OMITTED] 62622A.003

      
---------------------------------------------------------------------------
    \30\ Data provided by Treasury.

    Home mortgages have been traditionally divided into three 
categories of borrower credit quality, although these 
categories are not clearly defined. In the traditional usage, 
prime mortgages are loans to borrowers with good credit 
(typically above FICO 620) and adequate income. Alt-A mortgages 
are also loans to borrowers with prime (A) credit. However, 
Alt-As usually do not require income documentation (they are 
``stated income'' loans), which is useful for small business 
owners and independent contractors who have variable income, 
but making the loans susceptible to fraud. Subprime mortgages 
refer to loans to borrowers with poor credit (below 620). 
Although in the past the Prime, Alt-A, and Subprime categories 
formerly did not indicate anything about mortgage type (e.g., 
fixed or floating rate, interest only or fully amortizing), the 
terms have come to be associated with specific loan types 
without regard to credit score in recent usage. For example, 
``subprime'' is often used to refer to more exotic and risky 
mortgage types such as option ARMs.
    Despite the fact that much of the analysis of the housing 
crisis has focused on subprime loans, the majority of loans 
past due as of June 2010 were prime mortgages.\31\ Prime 
mortgages received more than half of all HAMP modifications in 
the second quarter of 2010, while subprime and alt-A mortgages 
each received less than a quarter.\32\
---------------------------------------------------------------------------
    \31\ Office of the Comptroller of the Currency and Office of Thrift 
Supervision, Mortgage Metrics Report, Second Quarter 2010, at 22 (Sept. 
2010) (online at www.ots.treas.gov/_files/490019.pdf) (hereinafter 
``OCC/OTS Mortgage Metrics Report, Second Quarter 2010'').
    \32\ Id. at 22.
---------------------------------------------------------------------------
    Treasury has attributed the dramatic decrease in new trial 
modifications to several factors. According to officials, most 
of the decline is likely due to the institution of a verified 
income requirement in June 2010. Information provided by 
borrowers (including income), now must be documented before a 
trial modification can be initiated. ``Stated income'' (i.e. 
non-verified) was previously allowed for trial modifications. 
Additionally, Treasury has said that servicers increasingly 
shifted their attention from initiating new trial modifications 
to converting the existing backlog to permanent modifications. 
Finally, Treasury has indicated that the declining overall 
mortgage delinquency rate may play a role as well. There is 
reason to doubt that this latter factor has been a major cause 
of the decline, however. Figure 4 below shows new trial 
modifications and mortgage delinquency from the third quarter 
of 2009 to the third quarter of 2010. Clearly, the decline in 
delinquency has been relatively slight, while the decline in 
new trials has been much more severe.

  FIGURE 4: TRIAL MODIFICATIONS VS. MORTGAGE DELINQUENCY (Q3 2009-Q3 
                               2010) \33\

[GRAPHIC] [TIFF OMITTED] 62622A.004

      
---------------------------------------------------------------------------
    \33\ Mortgage Bankers Association, National Delinquency Survey Q3 
2010 (Nov. 18, 2010); Data provided by Treasury.

    The change to verified income cannot completely explain the 
decrease either, since the number of new trial modifications 
began dropping off long before the up-front verified 
documentation standard was implemented in July 2010. It is 
possible that the program has already reached the majority of 
borrowers who can be helped. In the early months of the 
program, there was a large pool of borrowers awaiting help. 
Once many of these homeowners entered HAMP or other programs, 
there were simply fewer potential applicants who met HAMP 
criteria.\34\
---------------------------------------------------------------------------
    \34\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 22. See also Fitch Ratings, U.S. RMBS: Still Under a 
Shadow, at 5 (Nov. 1, 2010) (noting that ``the number of remaining 
borrowers eligible for a loan modification appears to be declining, as 
new loan modification activity has declined from its peak in 2009.'').
---------------------------------------------------------------------------
    Among borrowers starting trial modifications, ``curtailment 
of income'' remains the most common reason provided to explain 
the borrowers' economic hardship: around 47 percent of 
borrowers gave this reason for their hardship, reflecting in 
part the effect of underemployment. Unemployment accounts for 
only around 6 percent.\35\ This is not surprising since the 
program originally was structured in such a way that made it 
almost impossible for an unemployed borrower to receive help 
under HAMP without another source of income. Furthermore, an 
applicant from a household in which one spouse has lost a job, 
while the other remains employed may select ``curtailment of 
income'' instead of ``unemployment.'' In July 2010, Treasury 
rolled out an add-on program, the HAMP Unemployment Program, 
which offers forbearance for those who are unemployed and are 
receiving unemployment benefits. Additionally, several states, 
through the Hardest Hit Fund (HHF), have taken steps to address 
the effects of unemployment on homeowners' ability to keep 
their homes. For further discussion of these programs, see 
Section F. Figure 5 below details the top economic hardship 
reasons for trial modification starts.
---------------------------------------------------------------------------
    \35\ Data provided by Treasury.
---------------------------------------------------------------------------

 FIGURE 5: ECONOMIC HARDSHIP REASONS FOR TRIAL MODIFICATION STARTS \36\

      
---------------------------------------------------------------------------
    \36\ Data provided by Treasury.

    [GRAPHIC] [TIFF OMITTED] 62622A.005
    
2. Conversion to Permanent Modification

    In its previous reports, the Panel expressed concern 
regarding the rate at which trial modifications were converting 
to permanent modifications. As noted in the October 2009 
report, only 1.26 percent of modifications had converted to 
permanent modifications, or approximately 2,000 borrowers. The 
April 2010 report found that the conversion rate had improved 
to 23.1 percent, or around 4,000 borrowers, although only 9.7 
percent converted within the standard three months. Through 
September 2010, 38.4 percent of HAMP conversions happened 
within three months.\37\ While, as noted in the Panel's prior 
reports, the earlier conversion rates were based on a fairly 
small loan pool, HAMP is demonstrating improvement in 
conversion of modifications from trial to permanent. As 
mentioned above, however, the number of new trial modifications 
has declined substantially in recent months.
---------------------------------------------------------------------------
    \37\ Data provided by Treasury.
---------------------------------------------------------------------------
    In this area, some servicers have performed markedly better 
than others. Among the top servicers, for example, Wachovia 
Mortgage and HomeEq Servicing have conversion rates of 89 
percent and 95 percent respectively. In contrast, Bank of 
America's rate is closer to 30 percent.\38\ Conversations with 
Treasury officials indicate that much of the difference in 
conversion rates between servicers is due to the recent switch 
from stated income trials to verified income, and because 
stated income was used primarily by larger servicers, such as 
Bank of America. As a result, these servicers still have large 
pools of difficult to convert, stated income modifications.
---------------------------------------------------------------------------
    \38\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through October 2010, at 4 (Nov. 
19, 2010) (online at www.financialstability.gov/docs/
Oct%202010%20MHA%20Public%20Final.pdf) (hereinafter ``MHA Servicer 
Performance Report'').
---------------------------------------------------------------------------
    During the early days of HAMP, Treasury focused on 
providing payment relief to as many borrowers as possible. 
Servicers were able to grant trial modifications to borrowers 
with no documentation required. However, the documentation 
required to convert the trial to a permanent modification 
proved to be a challenge as demonstrated by the earlier anemic 
conversion rate. Accordingly, mortgage servicers utilizing 
stated income began to develop a backlog of trial modifications 
awaiting a decision. In its last report on foreclosure 
mitigation, the Panel noted steps that Treasury had taken to 
ensure that servicers would clear these cases in a timely 
manner. As of October 31, 2010, the backlog of modifications 
that had been in a trial period for six months or longer had 
fallen to 69,400. Three servicers--Bank of America, JPMorgan 
Chase, and CitiMortgage--comprise more than two-thirds of the 
backlog, and not surprisingly, all three utilized stated income 
trials prior to the new standard. Bank of America alone 
services approximately half of the backlog of aged trials.\39\
---------------------------------------------------------------------------
    \39\ Id. at 4.
---------------------------------------------------------------------------
    While it is good that the servicers appear to be clearing 
out the backlog of trial modifications eligible for conversion, 
much of the increase in the conversion rate is linked to the 
decline in number of people entering new trial modifications, 
and therefore a decline in the total number of borrowers in 
trial modifications, and not from an actual increase in the 
number of borrowers moving to permanent modifications. That is, 
while the conversion rate is improving, it is primarily a 
result of the smaller pool of borrowers eligible for 
conversion. Treasury expects the HAMP conversion rate to 
increase significantly going forward as trial modifications are 
now started only after the borrower has provided all 
documentation, previously a major stumbling block, and 
servicers shift their focus more to processing the existing 
backlog of trial modifications.\40\ As the Panel has noted 
before, different pieces of the HAMP modification process, such 
as initiating trial modifications and converting trials to 
permanent modifications are linked, and a narrow focus by 
servicers on one aspect to the exclusion of others may lead to 
tradeoffs that diminish overall modification success.\41\ 
Currently, as Treasury has acknowledged, a focus by servicers 
on converting the backlog has caused the number of new trials 
to decline.\42\
---------------------------------------------------------------------------
    \40\ Treasury conversations with Panel staff (Nov. 16, 2010).
    \41\ April 2010 Oversight Report, supra note 1, at 69-70.
    \42\ Treasury conversations with Panel staff (Nov. 16, 2010).
---------------------------------------------------------------------------

3. Permanent Modifications

    Through October 2010, 519,648 homeowners have been able to 
obtain a conversion to a permanent modification through HAMP. 
Of these, 483,342 are currently active modifications. The 
remaining 36,306 represent 491 loans that have been paid off 
and 35,815 that have been cancelled due to redefault.\43\
---------------------------------------------------------------------------
    \43\ Data provided by Treasury; MHA Servicer Performance Report, 
supra note 38, at 4.
---------------------------------------------------------------------------
    There were a total of 23,750 new permanent modifications in 
October 2010. The number of new permanent modifications peaked 
in April 2010 at 68,291 and has declined steadily since then. 
The number of new permanent conversions is now averaging less 
than half the number of new monthly permanent modifications at 
the peak.\44\ This trend is closely tied to the significant 
decrease in trial modifications coming into the pipeline rather 
than a failure to convert modifications once they enter the 
pipeline. This development raises the question of whether HAMP 
has already surpassed its maximum effectiveness and will 
continue the trend of diminishing results.
---------------------------------------------------------------------------
    \44\ Data provided by Treasury; MHA Servicer Performance Report, 
supra note 38, at 2.
---------------------------------------------------------------------------
    All HAMP permanent modifications have used interest rate 
reductions in order to reach the program's affordability 
target. In addition, more than 57 percent of the modifications 
include a term extension, and 30 percent feature principal 
forbearance.\45\ Principal reduction remains relatively rare, 
with only around 3 percent of the permanent modifications 
offering a principal write-down as of early October 2010.\46\ 
Prior to modification, the median interest rate of HAMP 
participants is 6.63 percent. This drops to 2 percent after the 
permanent modification. Similarly, monthly payments decline 
from a median value of $1,434 before modification to $838 after 
modification, a difference of $596.\47\
---------------------------------------------------------------------------
    \45\ MHA Servicer Performance Report, supra note 38, at 3.
    \46\ Data provided by Treasury; MHA Servicer Performance Report, 
supra note 38, at 3.
    \47\ Data provided by Treasury.
---------------------------------------------------------------------------
    Figure 6 below shows the number of all active permanent 
modifications and redefaults by month.

FIGURE 6: MONTHLY HAMP PERMANENT MODIFICATIONS AND REDEFAULTS (FEBRUARY 
                       2010-SEPTEMBER 2010) \48\

     
---------------------------------------------------------------------------
    \48\ ``Monthly Active Permanent Modifications'' and ``Monthly 
Permanent Modification Redefaults'' are derived from cumulative 
``Active Permanent Modifications'' and ``Permanent Modifications 
Canceled'' (excluding loans paid off) levels from March 2010 to October 
2010 recorded in the Making Home Affordable Program's monthly Servicer 
Performance Reports. For these monthly reports, see U.S. Department of 
the Treasury, Reports and Documents (online at financialstability.gov/
latest/reportsanddocs.html) (accessed Dec. 10, 2010) (hereinafter 
``Treasury Reports and Documents'').
[GRAPHIC] [TIFF OMITTED] 62622A.006


    Figure 7 below summarizes the characteristics of all 
permanent modifications granted under HAMP. Forgiveness and 
forebearance are explained in footnote 24 above. UPB refers to 
the unpaid principal balance. PI refers to debt service 
payments--principal and interest.

       FIGURE 7: SUMMARY DATA ABOUT PERMANENT MODIFICATIONS \49\

     
---------------------------------------------------------------------------
    \49\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.007
    

            a. Borrower Debt
    Permanent HAMP modifications offer much more affordable 
mortgage payments over unmodified mortgages, but they 
nonetheless leave borrowers with very high overall debt levels. 
Prior to modification, the median borrower receiving a HAMP 
modification was paying 45 percent of his or her pre-tax income 
towards the mortgage (front-end DTI), and nearly 80 percent of 
pre-tax income toward all debts (back-end DTI). After receiving 
a HAMP permanent modification, the median borrower's front-end 
DTI had been reduced to 31 percent, and their back-end DTI fell 
to 63 percent.\50\
---------------------------------------------------------------------------
    \50\ Since the purpose of HAMP is to lower high-DTI borrowers to 31 
percent or below, and since servicers have no incentive to lower 
payments below this, the average borrower DTI is the same as the 31 
percent limit. Data provided by Treasury.
---------------------------------------------------------------------------
    However, even these post-modification DTIs are higher than 
those allowed by most mortgage underwriting standards. To 
qualify for a new FHA loan, for example, a borrower typically 
needs to show a back-end DTI ratio of no more than 41 percent 
of gross income, while a borrower receiving a mortgage through 
Freddie Mac must not have a back-end DTI ratio of more than 45 
percent.\51\ The situation worsens once state and federal taxes 
are subtracted from income. Pre-modification borrowers appear 
to be spending nearly all of their after-tax income on debt 
service, with other expenses presumably paid for with credit. 
Even at the improved 63 percent back-end DTI of borrowers 
following a HAMP modification, debt service payments will still 
consume approximately 80 percent of after-tax income, which is 
of course the income borrowers actually have to spend.\52\ 
Furthermore, the Panel is particularly concerned that the post-
modification back-end DTI ratio appears to be rising--up 4 
percent since the Panel's April 2010 foreclosure report, where 
post-modification back-end median DTI was 59 percent.\53\ These 
high and rising DTIs do not bode well for the long term success 
of the program.
---------------------------------------------------------------------------
    \51\ Federal Housing Administration, FHA Requirements: Debt Ratios 
(online at www.fha.com/fha_requirements_debt.cfm) (accessed Dec. 10, 
2010); Federal Home Loan Mortgage Corporation, Underwriting Reminders 
for Loan Prospector Caution Risk Class Mortgages, at 4 (Oct. 2010) 
(online at www.freddiemac.com/learn/pdfs/uw/caution_remind.pdf).
    \52\ A rough calculation of after-tax income can give a more 
realistic picture of the financial situation of HAMP participants. The 
median HAMP participant earning $32,000 a year, filing as the head of 
household, and taking the standard deduction, would pay approximately 
$2,954 in federal income taxes, $2,448 in Social Security and Medicare 
taxes and, in this example, $1,000 in state taxes, although this latter 
figure will vary greatly depending on the state. The borrower in this 
case would then have an after-tax income of $25,598.
    The median HAMP participant's pre-tax, pre-mod, back-end DTI of 80 
percent equates to $25,555 in total debt service owed annually, divided 
into $14,422 in mortgage payments and $11,133 of service on other 
debts. If accurate, total debt service is nearly as much as the after-
tax income above (a 100 percent after-tax back-end DTI). After a HAMP 
permanent modification, the borrower would still be paying $20,272 
annually on all debts, including $9,930 in mortgage payments (a savings 
of $4,493 annually). Interestingly, service on other debts apparently 
falls as well after modification, down $790 to $10,342. After taxes and 
debt service, the median HAMP participant has just $5,326 per year, or 
$444 per month, for all other expenses, including food, clothing, 
health care, education, etc.
    \53\ See April 2010 Oversight Report, supra note 1, at 43; Data 
provided by Treasury. Sustainability of HAMP modifications is discussed 
further in Section G.2.g, infra.
---------------------------------------------------------------------------
    Figure 8 below shows the distribution of (pre-tax) back-end 
DTIs for borrowers receiving permanent modifications from HAMP. 
Since these borrowers have already been in trials for at least 
three months, these DTIs are post-modification. The bulk of 
borrowers receiving permanent modifications are clearly either 
in the more moderate 31 percent-40 percent DTI category or the 
very high over 80 percent DTI. In fact, nearly one-third of 
post-modification borrowers have back-end DTI in excess of 80 
percent. This is troubling, as it indicates that the overall 63 
percent post-modification DTI statistic contains a very large 
sub-segment of heavily indebted borrowers.

  FIGURE 8: NUMBER OF PERMANENT MODIFICATIONS BY BACK-END DTI (AS OF 
                        SEPTEMBER 30, 2010) \54\

      
---------------------------------------------------------------------------
    \54\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.008
    

    The question of what DTI level is sustainable remains open, 
and complicated by HAMP's focus on front-end DTIs. Other debts 
such as second liens, credit card debt, and car debt are not 
factored into the front-end DTI used to determine HAMP 
eligibility, despite the fact that most HAMP applicants have 
substantial amounts of such debt. It would appear that back-end 
DTI may be the more important metric for gauging a homeowner's 
overall financial picture and their ultimate ability to remain 
current on a mortgage. Indeed some borrowers, although heavily 
indebted overall, do not meet HAMP's front-end DTI eligibility 
threshold. Faith Schwartz, senior adviser for the HOPE NOW 
Alliance, testified that HAMP's 31 percent minimum front-end 
DTI for eligibility was considered ``aggressive'' when HAMP was 
first rolled out, but that even this level is too high for many 
homeowners who wind up in foreclosure because their front-end 
DTI is too low to make them HAMP-eligible.\55\ Any additional 
assistance necessary to bring down the back-end DTI ratio could 
theoretically come from a number of sources, including federal, 
state, or local agencies, or from private sources.\56\ 
Obviously, however, in any effort of this sort to reduce back-
end DTIs, policymakers will have to weigh the costs and 
benefits of any additional assistance, as well as how the 
burden of these costs would be distributed between servicers, 
investors, and taxpayers.\57\
---------------------------------------------------------------------------
    \55\ Congressional Oversight Panel, Written Testimony of Faith 
Schwartz, senior advisor, HOPE NOW Alliance, COP Hearing on TARP 
Foreclosure Mitigation Programs, at 7 (Oct. 27, 2010) (online at 
cop.senate.gov/documents/testimony-102710-schwartz.pdf).
    \56\ For instance, Treasury's 2MP program is designed to decrease 
second lien payments which would reduce back-end DTI. See Section F, 
infra.
    \57\ Continuing with the median HAMP participant example discussed 
in footnote 52, supra, an additional subsidy sufficient to put the 
borrower at a 50 percent pre-tax back-end DTI would raise the 
borrower's after-tax, after debt service, disposable income by $4,272 
($356 per month) from $5,326 ($444 per month) to $9,598 ($800 per 
month). Although an extra $356 a month could greatly help many 
distressed borrowers living at the edge of their means, it is difficult 
to determine how much such a policy would actually reduce foreclosures 
in the long run. The cost of such a program is also difficult to 
estimate, as it would depend on how the subsidy was structured (direct 
payment of debt service vs. principal reduction) and which debts are 
affected (the low-interest first mortgage or higher interest debts such 
as credit cards).
---------------------------------------------------------------------------
            b. Negative Equity
    Permanent modifications have not, however, made much of an 
impact on the depth of borrowers' negative equity. Of all 
active permanent modifications, nearly 95 percent have an 
unpaid principal balance that is higher than it was before 
modification.\58\ Negative equity remains high, with more than 
76 percent of mortgages in permanent modification still 
carrying a negative LTV ratio. In fact, LTV ratios have 
increased, on average, after modifications. The median LTV 
ratio is approximately 120 percent before a modification and 
about 125 percent after the modification.\59\ Although HAMP may 
provide a more affordable monthly payment for homeowners, it 
does not address the problems caused by mortgages that are 
deeply underwater. Negative equity can restrict the ability of 
homeowners to move, whether for family reasons or to pursue 
greater job opportunities, since home sale proceeds will not be 
sufficient to repay their loan. It also provides an incentive 
for borrowers who can afford to pay their mortgages to stop 
paying intentionally and walk away from their homes if they 
believe that they will remain deeply underwater for a long 
time, a decision known as a ``strategic default.''
---------------------------------------------------------------------------
    \58\ The increase does not represent a true increase in the 
obligations of the borrower because it represents mostly capitalization 
of arrearages and escrow requirements. Data provided by Treasury.
    \59\ Data provided by Treasury. Much of this increase in LTV is due 
to adding missed mortgage payments to the principal balance.
---------------------------------------------------------------------------
    The value of futures contracts based on the Case-Shiller 
Housing Price Index can be a useful indicator of market 
expectations for future home prices. A chart showing the 
current prices for these contracts for the 10 largest 
Metropolitan Statistical Areas (MSAs) and the composite of 
these MSAs is shown as Figure 45 in the Metrics section. The 
futures market expects that over the next five years housing 
prices will remain relatively flat in all MSAs as well as the 
10-MSA composite. Although the predictive accuracy of these 
prices is limited, especially for the more illiquid contracts, 
and as they go further out in time, the prices seem to indicate 
that few of the educated observers of the housing market who 
trade these contracts expect a rapid rise in home prices. It 
would therefore appear that borrowers at 120 percent LTV or 
higher, such as the average HAMP participant, have a slim 
chance of returning to positive equity in the foreseeable 
future.\60\
---------------------------------------------------------------------------
    \60\ Further discussion of Case-Shiller futures can be found below 
in Section Three: TARP Updates Since Last Report (see Section D.3 on 
housing prices).
---------------------------------------------------------------------------

4. Borrowers Dropped from the Program

    As servicers began to work through the significant backlog 
in the program, many borrowers in trial modifications were 
denied permanent modifications and dropped from the program. In 
total, servicers have cancelled 541,907 trial modifications 
through October 2010.\61\ According to Treasury, the most 
common reasons for trial modification cancellations are 
insufficient documentation, trial plan payment default, and 
ineligibility because the first mortgage payment is already at 
or below the program DTI standard of 31 percent. Specifically, 
among the HAMP servicers, just under 30 percent of trial 
modifications have been cancelled because of incomplete 
requests. Surprisingly, the percentage did not change 
significantly between the period preceding June 1, 2010--the 
date the verified income requirement was implemented--and the 
period following that date. Trial plan defaults, however, have 
crept up slightly. Prior to June 1, 2010, approximately 21 
percent of cancellations were due to a default during the trial 
period, and 24 percent for the period following June 1. Among 
those with the first payment due on or before June 1, 2010, 
nearly 8 percent did not go forward because of a negative NPV 
test result, meaning that foreclosure was found to be more cost 
effective than modification. Among those with a first payment 
due after June 1, 2010, only 4 percent were cancelled for this 
reason. Figure 9 below shows reasons for permanent conversion 
denials for the period prior to June 1, 2010, and post June 1, 
2010, respectively.\62\
---------------------------------------------------------------------------
    \61\ In addition to these canceled modifications that failed to 
convert from trial to permanent status, an additional 177,580 trial 
modifications were disqualified through October 2010. Data provided by 
Treasury.
    \62\ Data provided by Treasury.
---------------------------------------------------------------------------

                FIGURE 9: CONVERSION DENIAL REASONS \63\

     
---------------------------------------------------------------------------
    \63\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.009
    

    Figure 10 below shows the status of cancelled trial 
modifications for the eight largest servicers. Only 3.9 percent 
experienced a foreclosure sale, while 13 percent are in the 
foreclosure process. Another 41.3 percent of the borrowers 
received an alternative modification, although the alternative 
modification terms are not necessarily comparable to a HAMP 
modification.\64\ See Section E for a discussion of alternative 
modifications.
---------------------------------------------------------------------------
    \64\ MHA Servicer Performance Report, supra note 38, at 5. These 
eight are the servicers with the largest allocated HAMP cap amounts.
---------------------------------------------------------------------------

  FIGURE 10: STATUS OF CANCELLED TRIAL MODIFICATIONS (AS OF SEPTEMBER 
                               2010) \65\

     
---------------------------------------------------------------------------
    \65\ MHA Servicer Performance Report, supra note 38, at 5.
    [GRAPHIC] [TIFF OMITTED] 62622A.010
    

    There is a tremendous variation in the reasons given by 
different servicers for trial plan failures. Some notable 
outliers are identified with circles in Figure 11 below. For 
example, a significantly greater percentage of Wells Fargo's 
trial modifications failed because of low front-end DTI (<31 
percent) than was the case for other servicers. Of the trial 
modifications terminated by Citibank, nearly half were due to 
``ineligible mortgages.'' JPMorgan Chase's borrowers had NPV 
negative modifications at a much higher rate than other 
servicers. This might be a function of other servicers ruling 
out more modifications before even getting to NPV, or it could 
be a function of the particular inputs JPMorgan Chase uses for 
its NPV test.\66\ Of the trial modifications terminated by GMAC 
and Litton Loan Servicing, over half were caused by a failure 
to receive complete paperwork. Nearly 60 percent of failed 
trials at Saxon Mortgage Services, Inc., were due to trial plan 
default. At present, the Panel is unsure why these wide 
discrepancies exist. It might be explained by heterogeneity in 
the loan pools or by servicer choices in coding denials, but it 
could also be explained by particular servicer behavior or 
decisions. Treasury should be closely monitoring this issue and 
provide an explanation for these wide discrepancies.
---------------------------------------------------------------------------
    \66\ Treasury permits larger servicers such as JPMorgan Chase to 
adjust certain inputs to the NPV model to suit their particular 
circumstances. This is discussed further in Section G.2.f, infra.
---------------------------------------------------------------------------

  FIGURE 11: REASONS FOR TRIAL PLAN FAILURE FOR LARGE HAMP SERVICERS 
        (>20,000 TRIAL MODIFICATIONS), MARCH 2009-JUNE 2010 \67\

      
---------------------------------------------------------------------------
    \67\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.011
    
5. Redefault

    There are also a number of borrowers who are unable to 
remain current even after receiving a permanent modification 
through HAMP and ultimately redefault on their mortgages. As of 
October 2010, 35,815 borrowers with permanent modifications had 
redefaulted. Although the trend has been toward lower rates of 
redefault, October posted an increase. Actual redefaults to 
date have been lower than the redefault rate assumed in the NPV 
model. However, the NPV model considers the likelihood of 
redefault over the entire 5-year term of a modification, while 
the current redefault rate only looks at the experience of the 
program since its inception. Many of these loans are only a few 
months into their modifications, so it is too soon to tell if 
the current redefault rates will continue.
    It is important to note that Treasury does not have 
complete data on HAMP permanent modification performance. 
Treasury lacks complete or valid performance information for 
63,169 permanent HAMP modifications or 13 percent of all 
permanent modifications. The inclusion of full information for 
these permanent modifications could potentially raise or lower 
redefault rates. The Panel urges Treasury to ensure that going 
forward it has complete, valid performance data on all HAMP 
permanent modifications. For further discussion of HAMP 
redefaults, see Section D.5.

                E. Performance of Non-HAMP Modifications

    Taken as a whole, 54 percent of the nearly 1.4 million 
temporary modifications that have been initiated under HAMP 
have ultimately failed.\68\ What became of the borrowers who 
are no longer in the program? According to Treasury, the 
majority of the borrowers go on to receive modifications 
through the servicers' own proprietary modification programs. 
Under program guidelines, participating servicers must consider 
borrowers who were unable to receive a HAMP modification for a 
proprietary modification, but there are no specific eligibility 
or modifications standards, only the requirement that borrowers 
not receiving a HAMP modification must be considered for a 
proprietary modification according to the servicers' own 
standards. Thus, whereas HAMP modifications are standardized 
and the terms are publicly transparent, non-HAMP modifications 
are not, creating concern about their sustainability.
---------------------------------------------------------------------------
    \68\ Data provided by Treasury. These failed modifications include 
disqualified and cancelled trials as well as disqualified permanent 
modifications.
---------------------------------------------------------------------------
    In addition, proprietary modifications serve borrowers who 
are not eligible for HAMP. Of the 5.1 million first lien 
mortgages that were more than 60 days delinquent as of October 
31, 2010, Treasury estimates that only around 1.5 million are 
HAMP-eligible. The most common reasons for ineligibility, are: 
(1) having a servicer that is not participating in HAMP; (2) 
having an ineligible loan, such as a loan backed by FHA or 
Department of Veterans Affairs (VA); (3) having a front-end DTI 
ratio of less than 31 percent, and (4) having a loan for a home 
reported as non-owner occupied at the time of origination.\69\
---------------------------------------------------------------------------
    \69\ Data provided by Treasury. Having a non-participating servicer 
excludes 600,000 borrowers, while the other most common reasons for 
ineligibility affect approximately 700,000 borrowers each. HAMP 
applicants are evaluated via a waterfall method. Therefore, a borrower 
who is disqualified because his or her servicer is not participating 
may also be ineligible for other reasons, but is only counted among 
those disqualified at the top of waterfall.
---------------------------------------------------------------------------
    Banks report that they are increasing their number of non-
HAMP modifications to help those who are not eligible or do not 
qualify for a HAMP modification. Statistics gathered by HOPE 
NOW, an alliance of mortgage servicers, show that the number of 
loan modifications implemented through private channels is 
outpacing the number of HAMP modifications.\70\ Year-to-date, 
there have been more than twice as many modifications performed 
outside of Treasury programs as HAMP modifications,\71\ and in 
October 2010 alone, 81 percent of all completed modifications 
were done outside of HAMP.\72\ In addition to various types of 
modifications, HAMP and proprietary, some homeowners have 
sought assistance through other payment plans. More than 18 
percent of the home retention actions initiated in the second 
quarter of 2010 were payment plans.\73\
---------------------------------------------------------------------------
    \70\ HOPE NOW Alliance, Industry Extrapolations and Metrics 
(October 2010), at 3-4 (Dec. 6, 2010) (online at www.hopenow.com/
industry-data/HOPE%20NOW%20Data%20Report%20(October)%2012-05-
2010%20v2.pdf) (hereinafter ``HOPE NOW Industry Extrapolations and 
Metrics'').
    \71\ HOPE NOW Industry Extrapolations and Metrics, supra note 70, 
at 3.
    \72\ Year-to-date, nearly 87 percent of all completed modifications 
have been performed outside of HAMP. HOPE NOW Industry Extrapolations 
and Metrics, supra note 70, at 4.
    \73\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 21.
---------------------------------------------------------------------------
    While the number of proprietary modifications currently 
outpaces HAMP modifications, HAMP still produces, on average, a 
modification offering more relief to the borrower and having a 
lower likelihood of redefault. For those modifications made 
during the second quarter of 2010, non-HAMP modifications 
reduced monthly payments, on average, half as much as HAMP 
payment reductions, and of the nearly 10 percent of loan 
modifications that result in unchanged or increased monthly 
payments, nearly all are non-HAMP modifications.\74\ The lower 
average payment reductions for non-HAMP modifications seems to 
impact directly their potential to redefault, as non-HAMP 
modifications have a redefault rate six months after 
modification of 22.4 percent, compared to only 10.8 percent for 
HAMP modifications.\75\ While the redefault rate six months 
after modification is a more preliminary data point that does 
not encompass the full scope of likely redefaults, it is the 
longest time span currently available for rates that break out 
HAMP and non-HAMP modifications. HAMP modifications have a 
redefault rate of 21 percent twelve months after modification 
for loans 90 or more days past due,\76\ while the same rates 
for all modifications (HAMP and non-HAMP combined) are 48.6 
percent and 36.6 percent for loans modified in the first 
quarter and second quarter of 2009, respectively.\77\
---------------------------------------------------------------------------
    \74\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 30-32.
    \75\ The redefault rate is for fourth quarter 2009 loan 
modifications that have aged six months and are 60 or more days 
delinquent. OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 35.
    \76\ Data provided by Treasury.
    \77\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 37.
---------------------------------------------------------------------------
    Beyond these data points, HAMP continues to provide a 
roadmap (i.e., the ``waterfall'') for servicers to use when 
considering various tools to use in mortgage modifications. As 
Ms. Schwartz noted at the Panel's October foreclosure 
mitigation hearing, ``The first most important contribution of 
HAMP is that all servicers who signed up for HAMP must review 
all homeowners for eligibility. The HAMP process offers 
homeowners a first line of defense to avoid foreclosure. Second 
is the importance of the HAMP waterfall. Investors, servicers, 
lenders, and nonprofits, and homeowners have a uniform map of 
activity that is necessary to ensure delinquent homeowners who 
seek help are being considered for a solution prior to 
foreclosure.'' \78\ HAMP has created a uniform approach to 
mortgage modifications: participating servicers must evaluate 
borrowers for and (assuming criteria are met) provide them with 
a HAMP modification first, ensuring a set affordability 
standard, and only consider a proprietary modification, the 
terms of which are determined completely by the servicer, after 
it has been determined that HAMP is not an option.
---------------------------------------------------------------------------
    \78\ Congressional Oversight Panel, Testimony of Faith Schwartz, 
senior advisor, HOPE NOW Alliance, 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 Faith Schwartz'').
---------------------------------------------------------------------------
    Unfortunately, while some limited data do exist on non-HAMP 
programs, the data collection efforts have not been 
sufficiently robust. The lack of comprehensive, reliable data 
makes it difficult to make an apples-to-apples comparison of 
HAMP and non-HAMP programs. While the average monthly payment 
reduction and redefault rates are available, the specifics of 
the structure of the modifications are unknown. Since its 
initial report on foreclosure in March 2009, the Panel has 
stressed the importance of collecting data on loan performance, 
loss mitigation efforts, and foreclosure. While data collection 
has improved, including the data collected through HAMP, non-
HAMP modifications do not have the same level of transparency. 
The Panel questions why a system of record was not established 
to track non-HAMP modifications at the outset and why one still 
does not exist. The HOPE NOW Alliance has increased its 
collection of data on this type of modification but, as of 
publication, the data are not available. Mortgage servicers 
representing the bulk of the mortgage servicing industry are 
owned or controlled by federally regulated entities.\79\ 
Regulators of those entities, typically the Federal Reserve 
System and the Office of the Comptroller of the Currency, could 
and should be collecting and reporting this information from 
the mortgage servicers under their jurisdiction. Given the need 
for specific and robust data on non-HAMP modifications to 
analyze properly their effectiveness and viability and further 
inform the continued analysis of HAMP, the Panel reiterates its 
call for Treasury to increase or aid in data collection.
---------------------------------------------------------------------------
    \79\ For instance the top four servicers, Bank of America, Wells 
Fargo, JPMorgan and Citigroup, who service over 50 percent of all 
mortgages (by outstanding principal balance), are all bank holding 
companies. Congressional Oversight Panel, November Oversight Report: 
Examining the Consequences of Mortgage Irregularities for Financial 
Stability and Foreclosure Mitigation, at 59 (Nov. 16, 2010) (online at 
cop.senate.gov/documents/cop-111610-report.pdf) (hereinafter ``November 
2010 Oversight Report''); Federal Financial Institutions Examination 
Council, Top 50 BHCs (Sept. 30, 2010) (online at www.ffiec.gov/
nicpubweb/nicweb/top50form.aspx); House Financial Services, 
Subcommittee on Housing and Community Opportunity, Written Testimony of 
John Walsh, acting comptroller of the currency, Office of the 
Comptroller of the Currency, Robo-Signing, Chain of Title, Loss 
Mitigation, and Other Issues in Mortgage Servicing, at 2 (Nov. 18, 
2010) (online at financialservices.house.gov/Media/file/hearings/111/
Walsh111810.pdf) (``The OCC supervises all national banks and their 
operating subsidiaries, including their mortgage servicing operations. 
The servicing portfolios of the eight largest national bank mortgage 
servicers account for approximately 63 percent of all mortgages 
outstanding in the United States--nearly $33.3 million loans totaling 
almost $5.8 trillion in principal balances as of June 30, 2010.'').
---------------------------------------------------------------------------

          F. Treasury's Other Foreclosure Mitigation Programs

    Establishing HAMP was part of Treasury's initial response 
to the housing crisis, and it has remained Treasury's largest 
foreclosure mitigation program, both in terms of funding and 
borrowers. However, as the crisis evolved and HAMP's reach 
began to prove too limited, Treasury announced and rolled out 
the following additional programs: Home Price Decline 
Protection (HPDP), PRA, Home Affordable Unemployment Program 
(UP), Home Affordable Foreclosure Alternatives (HAFA), Second 
Lien Modification Program (2MP), HHF, FHA Refinance Program, 
and various agency-specific programs to encourage 
modifications. Although many of these programs have been in 
existence for many months to over a year, at this time there 
are either no data available or such a limited data pool that 
meaningful analysis of these programs is not possible. 
Therefore, this report will confine its primary analysis to 
HAMP. However, it is important to understand that HAMP 
currently operates in conjunction with these other programs.

Home Price Decline Protection (HPDP)

    The HPDP, announced on July 31, 2009, and effective the 
following day,\80\ was designed to address the issue of 
investor objections to modifications due to fear of a potential 
future decline in home values. For an investor who anticipates 
a future decline in home values, it is preferable to foreclose 
today rather than consent to a modification that might fail and 
end in a future foreclosure. Under this program, investors 
receive incentive payments that accrue over a 24-month period 
to mitigate potential losses and encourage their consent to 
proposed modifications.
---------------------------------------------------------------------------
    \80\ U.S. Department of the Treasury, Treasury Announces Home Price 
Decline Protection Incentives (July 31, 2009) (online at 
www.financialstability.gov/latest/tg_07312009.html).
---------------------------------------------------------------------------

Principal Reduction Alternative (PRA)

    Treasury's PRA program was announced on June 3, 2010, and 
went into effect on October 1, 2010. This program was a 
response to the large number of underwater mortgages, as 
principal reductions can be a significant means of preventing 
foreclosures and redefaults. It operates much like HAMP, except 
that instead of postponing payments on a portion of the 
mortgage, the PRA program forgives that portion altogether.\81\ 
Servicers are required to evaluate a loan that is HAMP eligible 
and has a mark-to-market loan-to-value ratio greater than 115 
percent with both the standard HAMP waterfall and an 
alternative waterfall that includes principal reduction as the 
required second step, and then must use the NPV model to 
evaluate the modifications proposed by both waterfalls. If the 
NPV result generated by the standard waterfall is positive, 
servicers must modify the loan; if the NPV result generated by 
the alternative waterfall is positive, servicers are encouraged 
but not required to perform a HAMP modification including 
principal forgiveness; if the NPV result for both waterfalls is 
negative, loan modification is not required.\82\ Thus, the 
final decision on whether to grant a principal reduction is 
ultimately up to the servicer. Investors receive standard 
incentive payments as well as a percentage of each dollar 
forgiven.
---------------------------------------------------------------------------
    \81\ U.S. Department of the Treasury, Modification of Loans with 
Principal Reduction Alternative, Supplemental Directive 10-05 (June 3, 
2010) (online at www.hmpadmin.com/portal/programs/docs/hamp_servicer/
sd1005.pdf).
    \82\ Id. The alternative waterfall inserts principal reduction in 
between the standard waterfall's step one (capitalization) and step two 
(interest rate reduction).
---------------------------------------------------------------------------

Home Affordable Unemployment Program (UP)

    Treasury's unemployment program, announced on March 26, 
2010,\83\ and effective July 1, 2010,\84\ was designed to 
assist unemployed homeowners by granting a temporary 
forbearance of a portion of their monthly mortgage payment for, 
at a minimum, the lesser of three months or until employment is 
regained.\85\ During the forbearance period, payments are 
reduced to no more than 31 percent of the borrower's gross 
monthly income, including unemployment benefits.\86\ In order 
to be eligible, a borrower must hold a mortgage that: is 
secured by the borrower's principal residence, is first-lien 
and originated on or before January 1, 2009, has an unpaid 
principal amount equal to or less than $729,750, is delinquent 
or default is reasonably foreseeable, has not yet been modified 
under the HAMP, and has not yet received UP forbearance. 
Additionally, the borrower must: be eligible for HAMP, make the 
request before becoming seriously delinquent (three months 
overdue on monthly payments), and be unemployed. An unemployed 
borrower who requests HAMP assistance must be evaluated for and 
receive UP forbearance before being considered for a HAMP 
modification, if all criteria are met. Servicers may require as 
a pre-condition to approval that borrowers be in receipt of 
unemployment benefits for up to three months before the 
forbearance period begins. Once in the program, if a borrower 
regains employment, the forbearance ends. If the borrower still 
meets HAMP eligibility, the servicer must consider him for a 
permanent HAMP modification, and any arrearages are capitalized 
as part of the standard HAMP process. If the borrower is still 
unemployed at the end of the forbearance period, the borrower 
will be considered for a HAMP foreclosure alternative, like 
HAFA or PRA.\87\ A unique feature of this program is that no 
TARP funds are obligated to it.
---------------------------------------------------------------------------
    \83\ U.S. Department of the Treasury, Housing Program Enhancements 
Offer Additional Options for Struggling Homeowners (Mar. 26, 2010) 
(online at www.financialstability.gov/latest/pr_03262010.html).
    \84\ U.S. Department of the Treasury, Home Affordable Unemployment 
Program, Supplemental Directive 10-04 (May 11, 2010) (online at 
www.hmpadmin.com//portal/programs/docs/hamp_servicer/sd1004.pdf) 
(hereinafter ``Supplemental Directive 10-04'').
    \85\ Servicers have the discretion to extend the minimum 
forbearance period in increments in accordance with investor and 
regulatory guidelines.
    \86\ See Supplemental Directive 10-04, supra note 84.
    \87\ See Supplemental Directive 10-04, supra note 84.
---------------------------------------------------------------------------
    Recent research has suggested that the loss of a job is a 
significant factor in a homeowner's determination of whether or 
not to default on a loan and that foreclosure prevention policy 
that addresses this finding would be more effective than 
traditional modifications. Researchers at the Federal Reserve 
Banks of Boston and Atlanta conclude that unaffordable loans, 
defined as those with high monthly payments relative to income 
at the time of origination, are unlikely to be the main reason 
borrowers default. Their analysis concludes a better served 
policy would be one that cushions the immediate effects of job 
loss or other adverse life events instead of conducting 
mortgage modifications aimed at long-term affordability.\88\ As 
nearly 60 percent of borrowers report loss of income through 
reduction in hours or lost jobs as the primary reason for 
permanent modification, Treasury's unemployment program has the 
potential to reduce significantly foreclosures prompted by job 
loss.\89\
---------------------------------------------------------------------------
    \88\ Christopher Foote et al., Reducing Foreclosures: No Easy 
Answers, Federal Reserve Bank of Atlanta Working Paper No. 2009-15 (May 
2009) (online at www.frbatlanta.org/filelegacydocs/wp0915.pdf) 
(hereinafter ``Federal Reserve Bank of Atlanta Working Paper'').
    \89\ Data provided by Treasury.
---------------------------------------------------------------------------

Home Affordable Foreclosure Alternatives (HAFA)

    Announced on November 30, 2009,\90\ but not effective until 
April 5, 2010,\91\ Treasury's HAFA program was created to 
encourage the use of short sales and deeds-in-lieu of 
foreclosure for HAMP-eligible borrowers unable to qualify for 
modifications of currently underwater mortgages. Servicers 
agree to forfeit the ability to seek a deficiency judgment in 
exchange for borrowers engaging in short sales or issuing a 
deed-in-lieu of foreclosure. Essentially, a servicer agrees to 
accept the property itself in satisfaction of a borrower's 
mortgage obligation. All parties receive financial incentives 
in the form of relocation assistance, one-time completion, and 
reimbursement to release subordinate liens.
---------------------------------------------------------------------------
    \90\ U.S. Department of the Treasury, Making Home Affordable: HAMP 
Update--New Program Offers Borrowers Foreclosure Alternatives (Nov. 30, 
2009) (online at www.hmpadmin.com/portal/news/docs/2009/
hampupdate113009.pdf).
    \91\ U.S. Department of the Treasury, Making Home Affordable: HAMP 
Updates--New Supplemental Directives Issued (Mar. 26, 2010) (online at 
www.hmpadmin.com/portal/news/docs/2010/hampupdate032610.pdf).
---------------------------------------------------------------------------

Second Lien Modification Program (2MP)

    The 2MP was announced on April 28, 2009, and went into 
effect on August 14, 2009.\92\ This program was created to 
address the issue of homeowners remaining distressed even after 
their first liens were modified because there was also a second 
lien on the property. Borrowers are eligible to apply for the 
2MP after their corresponding first liens have been modified 
under HAMP. Although servicer participation is voluntary, once 
on board, servicers must modify or extinguish the second liens 
of all eligible borrowers.\93\ All 2MP modifications must 
consist of: an interest rate reduction, an extension of term 
years matching that of the first lien modification, and 
principal forbearance or principal reduction matching the 
percentage of any principal forbearance or reduction of the 
first lien.\94\ All parties receive incentive payments for 
their participation.
---------------------------------------------------------------------------
    \92\ U.S. Department of the Treasury, Making Home Affordable: 
Second Lien Modification Program Details Announced (Aug. 14, 2009) 
(online at www.hmpadmin.com/portal/news/docs/2009/
hampupdate081409.pdf).
    \93\ U.S. Department of the Treasury, Making Home Affordable 
Program, Policy Update, Supplemental Directive 10-16 (Nov. 23, 2010) 
(online at www.hmpadmin.com/portal/programs/docs/hamp_servicer/
sd1016.pdf).
    \94\ Id.
---------------------------------------------------------------------------

Hardest Hit Fund (HHF)

    The HHF provides TARP money to state-run foreclosure 
mitigation programs in specific states hit hardest by home 
value decreases and high unemployment rates. In a series of 
announcements, Treasury has stated that 18 states and the 
District of Columbia are eligible for HHF funding. Before 
receiving the funds, eligible states must submit and receive 
approval for their plans to use the money. To date, there have 
been four rounds of funds approved and expended under the HHF. 
The first round of HHF funding was announced on February 19, 
2010, and the plan to distribute the first round of funds was 
approved on June 23, 2010. The first-round money went to 
qualifying states where the average home price declined by more 
than 20 percent from its peak: Arizona, California, Florida, 
Michigan, and Nevada.\95\ The second-round funding went to the 
top five states (excluding those included in the first round) 
with the highest shares of their state populations living in 
counties in which the unemployment rate exceeded 12 percent, on 
average, over the twelve calendar months in 2009. The states 
receiving the second round of funding are North Carolina, Ohio, 
Oregon, Rhode Island, and South Carolina.\96\ The third-round 
funding went to qualifying states, including those that 
received funding in prior rounds, with an unemployment rate at 
or above the national average during the previous 12 months: 
Alabama, California, Florida, Georgia, Illinois, Indiana, 
Kentucky, Michigan, Mississippi, Nevada, New Jersey, North 
Carolina, Ohio, Oregon, Rhode Island, South Carolina, 
Tennessee, and the District of Columbia.\97\ The fourth-round 
dollars were provided to existing HHF participants to be used 
in approved programs.\98\ A total of $7.6 billion in TARP funds 
has been allocated for the HHF.
---------------------------------------------------------------------------
    \95\ U.S. Department of the Treasury, Update on HFA Hardest-Hit 
Fund (Mar. 5, 2010) (online at www.makinghomeaffordable.gov/
pr_03052010.html).
    \96\ U.S. Department of the Treasury, Update to the HFA Hardest Hit 
Fund Frequently Asked Questions, at 4 (Mar. 29, 2010) (online at 
financialstability.gov/docs/
Hardest%20Hit%20public%20QA%200%2029%2010.pdf).
    \97\ U.S. Department of the Treasury, Troubled Asset Relief Program 
Section 105(a) Report--August 2010 (Sept. 10, 2010) (online at 
www.financialstability.gov/docs/105CongressionalReports/
August%202010%20105(a)%20Report_final_9%2010%2010.pdf).
    \98\ U.S. Department of the Treasury, Troubled Asset Relief 
Program--Two Year Retrospective (Oct. 2010) (online at 
www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf)
 (hereinafter ``TARP Two Year Retrospective'').
---------------------------------------------------------------------------
    All state recipients of HHF funds are using at least a 
portion of those funds to aid unemployed homeowners. 
California, for example, has developed a program targeting 
unemployed homeowners. Under that program, homeowners could 
receive a mortgage subsidy for up to 6 months, with monthly 
benefit of up to $1,500 or 50 percent of existing total monthly 
mortgage payment. Other states, such as Arizona, have developed 
programs intended to help any struggling homeowner with a 
demonstrated hardship and who meets certain qualifications. 
Among the recognized hardships are unemployment as well as 
medical condition, divorce, and death. Many of the proposed HHF 
programs are aimed at low- to moderate-income families, 
requiring those eligible to have a household income of no more 
than 120 or 140 percent of median household income. These 
programs are all in the early stages of implementation, and 
there are not yet data available on the programs' results.
    In August 2010, HUD announced the $1 billion Emergency 
Homeowners Loan Program (EHLP) to complement Treasury's Hardest 
Hit Fund and continue to target unemployed borrowers at risk of 
foreclosure. The program will provide assistance to homeowners 
in Puerto Rico and 32 states not funded by Treasury's 
Innovation Fund for Hardest Hit Housing Markets program through 
a declining balance, deferred payment bridge loan for up to 
$50,000 to assist borrowers with arrearages and mortgage 
payments for up to 24 months. HUD intends to start taking 
applications by the end of this year.\99\
---------------------------------------------------------------------------
    \99\ The HUD EHLP loans will be non-recourse, zero-interest, 
subordinate loans. U.S. Department of Housing and Urban Development, 
Emergency Homeowner Loan Program--Summary (Oct. 8, 2010) (online at 
www.hud.gov/offices/hsg/sfh/hcc/msgs/EHLP100810.pdf). The Pennsylvania 
Housing Finance Agency implemented a similar program, the Homeowners' 
Emergency Mortgage Assistance Loan Program (HEMAP), which targets 
borrowers facing foreclosure who are dealing with financial hardship 
due to circumstances beyond their control (i.e., unemployment, wage 
loss, illness). HEMAP provides a loan of up to $60,000 that cannot 
exceed a period of 24 months (or 36 months in the case of unemployment) 
to cover mortgage payments. The loan is considered a mortgage lien 
against the homeowner's property. Non-continuing loan recipients must 
begin repayment immediately following loan closing at a monthly amount 
based on income but not less than $25 per month. Payment increases are 
based on 40 percent of a homeowner's net monthly income less total 
monthly housing expense. Continuing loan recipients begin repayment 
immediately following termination of continuing loan disbursements. 
Pennsylvania Housing Finance Agency, Frequently Asked Questions (FAQ) 
(online at www.phfa.org/hsgresources/faq.aspx) (accessed Dec. 1, 2010).
---------------------------------------------------------------------------

FHA Short Refinance Program

    The FHA Short Refinance Program was announced on March 26, 
2010,\100\ and went into effect on September 7, 2010.\101\ This 
program was created to refinance non-FHA-insured underwater 
mortgages into above-water, FHA-insured mortgages. Eligible 
borrowers are not guaranteed a refinance, and program 
participation is voluntary for servicers on a case-by-case 
basis. Under the terms of the refinance, the existing lien 
holder is given a cash payment equal to 97.75 percent of the 
current home value and issued a subordinate second lien for up 
to 17.25 percent of the current home value, if applicable. 
Thus, the existing lien holder can retain an interest in up to 
115 percent of the current home value, but any interest above 
115 percent of the current home value is deemed forgiven. The 
new FHA-insured mortgage payments can be no more than 31 
percent of the borrower's gross monthly income.
---------------------------------------------------------------------------
    \100\ U.S. Department of Housing and Urban Development, Housing 
Program Enhancements Offer Additional Options for Struggling Homeowners 
(Mar. 26, 2010) (online at portal.hud.gov/portal/page/portal/HUD/press/
press_releases_media_advisories/2010/HUDNo.10-058).
    \101\ U.S. Department of Housing and Urban Development, FHA 
Launches Short Refi Opportunity for Underwater Homeowners (Aug. 6, 
2010) (online at portal.hud.gov/portal/page/portal/HUD/press/
press_releases_media_advisories/2010/HUDNo.10-173).
---------------------------------------------------------------------------

Other Agency Programs

    Lastly, Treasury has coordinated with the FHA, the United 
States Department of Agriculture, and the VA to encourage 
modification of the mortgages they insure. These agencies have 
each developed their own versions of HAMP, in support of which 
Treasury provides incentive payments to servicers and 
borrowers. No incentive payments are made to investors, because 
they already have the benefit and protection of a government 
loan guarantee.
    As stated earlier, there is not yet sufficient data 
available to analyze whether these programs are achieving their 
goals or operating effectively. While the Panel appreciates the 
length of time involved in moving a program from inception to 
data validation, the timely availability of data is a key 
component of transparency and oversight, and the Panel urges 
Treasury to continue working towards this goal. For an analysis 
of the structural aspects of these programs, and the Panel's 
recommendations as to addressing new issues surrounding 
foreclosure mitigation programs overall, see the Panel's April 
2010 report.

                         G. Barriers to Success


1. What Are HAMP's Goals?

    In considering whether a program has been a success, the 
goals and metrics outlined for that program offer an important 
yardstick. When the stated objectives are limited or not 
meaningful, the scope of oversight and analysis is narrowed. 
Treasury's only explicitly stated goal for HAMP is to offer 
three to four million homeowners lower mortgage payments 
through a modification.\102\ As noted in the Panel's April 
report, the meaning of even that one goal has shifted over 
time. Treasury and the administration initially stated a goal 
of ensuring that three to four million homeowners avoid 
foreclosure and remain in their homes.\103\ This nebulous 
target gave rise to uncertainty about Treasury's goal: did 
Treasury intend HAMP's three to four million target to refer to 
permanent modifications, as was widely assumed? Or did the goal 
refer to trial modifications started, or merely trial 
modifications offered?
---------------------------------------------------------------------------
    \102\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through January 2010, at 2 (Feb. 
18, 2010) (online at www.financialstability.gov/docs/press/
January%20Report%20FINAL%2002%2016%2010.pdf).
    \103\ April 2010 Oversight Report, supra note 1, at 63; Office of 
the Special Inspector General for the Troubled Asset Relief Program, 
Factors Affecting Implementation of the Home Affordable Modification 
Program (Mar. 25, 2010) (online at sigtarp.gov/reports/audit/2010/
Factors_Affecting_Implementation_of_the_Home_Affordable_Modification_Pro
gram.pdf) (hereinafter ``SIGTARP Report--Factors Affecting 
Implementation of HAMP'').
---------------------------------------------------------------------------
    A year into the program's life, Treasury clarified its goal 
by stating its intended objective is to offer three to four 
million modifications, with one Treasury official estimating 
that the number of permanent modifications would be only 
between 1.5 and 2 million.\104\ This not only cut what was 
assumed to be the initial modification goal in half but also 
established a relatively meaningless measurement, trial 
modification offers, as the touchstone for program success.
---------------------------------------------------------------------------
    \104\ SIGTARP Report--Factors Affecting Implementation of HAMP, 
supra note 103, at 10.
---------------------------------------------------------------------------
    Recently, Treasury has claimed that the existence of a 
government foreclosure program--HAMP--accelerated the number of 
proprietary modifications.\105\ While counting these non-HAMP 
modifications as successful ``HAMP'' modifications would allow 
Treasury to come closer to its three to four million target, 
the lack of public data by servicers on the terms of 
proprietary modifications hinders the ability to assess 
properly whether these modifications are actually helping 
homeowners. While Treasury believes that HAMP accelerated the 
pace of proprietary modifications, when pressed, Treasury 
acknowledges that there is no clear causal link between HAMP 
and proprietary modifications.\106\
---------------------------------------------------------------------------
    \105\ Treasury conversations with Panel staff (Oct. 21, 2010). See 
TARP Two Year Retrospective, supra note 98, at 67 (``A cancelled trial 
modification does not mean that the program has completely failed a 
homeowner or that the borrower will inevitably face foreclosure: HAMP 
explicitly requires servicers to consider these borrowers for other 
foreclosure prevention options including proprietary modifications or 
other options like a short sale or deed-in-lieu of foreclosure that 
also prevent a foreclosure sale. The broader HAMP program provides 
borrowers with a range of assistance; success can only be measured on 
an aggregate basis, taking account of homeowners' individual situations 
and outcomes.'').
    \106\ Treasury conversations with Panel staff (Oct. 21, 2010).
---------------------------------------------------------------------------
    Treasury has not explicitly stated its own definition of 
program success, noting only that it plans to evaluate success 
in the context of the state of the economy over time,\107\ and 
remains elusive on this issue when questioned by the Panel and 
others.\108\ Using its singular goal, however, one can 
reasonably infer that success, from Treasury's point of view, 
is measured by reaching three to four million trial 
modification offers. Under this definition, the program has not 
been ``successful'' to date, as nearly 1.65 million trial plan 
offers have been extended through October 2010. As noted in 
Section D above, trial modification offers have significantly 
declined since September 2009 and seem to have leveled off 
recently. Although Treasury is halfway to its goal with two 
years remaining in the program's life, and the long-term trend 
is uncertain, at the current rate of trial offers, HAMP is not 
on target to meet its one goal.\109\ Assuming a continued pace 
of 20,000 to 30,000 offers per month going forward,\110\ HAMP 
will provide a cumulative total of only 2.17 to 2.43 million 
trial modification offers.\111\ And if the current pace of new 
permanent modifications continues, the program will result in 
only about 1.26 million permanent modifications, many of which 
will likely end in redefaults.\112\
---------------------------------------------------------------------------
    \107\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \108\ See 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 ``Transcript Testimony of Phyllis Caldwell''). See also 
Congressional Oversight Panel, Written Responses of Timothy F. 
Geithner, secretary, U.S. Department of the Treasury, COP Hearing with 
Treasury Secretary Timothy Geithner (June 22, 2010) (online at 
cop.senate.gov/documents/testimony-062210-geithner-qfr.pdf); This Week 
with Jake Tapper, Interview with Treasury Secretary Timothy Geithner, 
ABC News Television Broadcast (Feb. 7, 2010) (online at abcnews.go.com/
ThisWeek/week-transcript-treasury-secretary-timothy-geithner/
story?id=9758951).
    \109\ MHA Servicer Performance Report, supra note 38, at 2.
    \110\ The Panel previously noted in its October 2009 report that 
Treasury officials stated a goal of modifying 25,000 to 30,000 loans 
per week; however, the actual pace is currently only 20,000 to 30,000 
trial modifications per month. October 2009 Oversight Report, supra 
note 15, at 4; Data provided by Treasury.
    \111\ Panel staff calculation using assumed range of 20,000 to 
30,000 trial modification offers per month over the remaining 26 months 
of the program's life, added to the actual cumulative total of 1.65 
million offers through October 2010.
    \112\ Panel staff calculation that assumes 28,311 new permanent 
modification each month through December 2012, based on the average 
number of new permanent modifications between August-October 2010.
---------------------------------------------------------------------------
    The Congressional Budget Office (CBO) last month projected 
that Treasury will spend only $12 billion on all TARP housing 
programs, including HAMP and the Hardest Hit Fund, out of the 
$45.6 billion in TARP funds allocated for those programs.\113\ 
While the CBO did not publish a breakdown of how it expects the 
projected $12 billion to be divided between the various TARP 
housing programs, if one assumes that the Hardest Hit Fund-
recipient states will spend the $7.6 billion allocated to them 
in grants, that would leave only $4.4 billion to be spent on 
HAMP and the other TARP housing programs.\114\
---------------------------------------------------------------------------
    \113\ Congressional Budget Office, Report on the Troubled Asset 
Relief Program--November 2010, at 7 (Nov. 29, 2010) (online at 
www.cbo.gov/ftpdocs/119xx/doc11980/11-29-TARP.pdf) (hereinafter ``CBO 
Report on the TARP--November 2010'').
    \114\ Through November 2010, Treasury has spent $652.4 million on 
the first-lien portion of HAMP, $71.3 million on HPDP, $4.3 million on 
HAFA, $959,1335 on 2MP, and $8,990 on FHA-HAMP. Data provided by 
Treasury.
---------------------------------------------------------------------------
    Treasury has declined to state publicly any metrics or 
benchmarks by which HAMP should be judged, a fact that has 
frustrated Congress and TARP oversight bodies, and has made 
clear to the Panel that it has no other unarticulated goals for 
HAMP.\115\ As stated earlier, the absence of additional, more 
meaningful goals hinders the Panel's ability to perform 
oversight and adequately assess HAMP's level of success or 
failure. The Panel has expressed concerns about Treasury's lack 
of transparency and accountability in regards to its goals for 
HAMP, noting in its April report that ``. . . Treasury needs to 
take care to communicate its goals, its strategies, and its 
measures of success for its programs. Its stated goal of 
modifying three to four million mortgages has proven too vague. 
. . .'' \116\ Further, the Panel has continued to urge Treasury 
to develop specific objectives for other program measures.\117\ 
In its most recent Quarterly Report to Congress, the Special 
Inspector General for the Troubled Asset Relief Program 
(SIGTARP) clearly pointed out Treasury's lack of meaningful 
program benchmarks or measures of success:
---------------------------------------------------------------------------
    \115\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \116\ April 2010 Oversight Report, supra note 1, at 95.
    \117\ Congressional Oversight Panel, Transcript: COP Hearing on 
TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (publication 
forthcoming) (online at cop.senate.gov/hearings/library/hearing-102710-
foreclosure.cfm).

          SIGTARP, along with the other TARP oversight bodies 
        (GAO and the Congressional Oversight Panel), has long 
        argued that Treasury should adopt meaningful benchmarks 
        and goals for HAMP, including setting forth its 
        expectations and goals for the most meaningful aspect 
        of HAMP--permanent modifications that offer secure, 
        sustainable relief to the program's intended 
        beneficiaries. Remarkably, Treasury has steadfastly 
        rejected these recommendations, and now finds itself 
        defending a program that is failing to meet TARP's goal 
        of ``preserv[ing] homeownership.'' . . . and it has 
        steadfastly and explicitly declined to articulate well-
        considered, consistent, and meaningful success 
        standards for HAMP. . . . Instead it continues to cite 
        the number of HAMP trial modifications, as opposed to 
        permanent modifications, as an indication of success. . 
        . . While it may be true that many homeowners may 
        benefit from temporarily reduced payments even though 
        the modification ultimately fails, Treasury's claim 
        that ``every single person'' who participates in HAMP 
        gets ``a significant benefit'' is either hopelessly out 
        of touch with the real harm that has been inflicted on 
        many families or a cynical attempt to define failure as 
        success. Worse, Treasury's apparent belief that all 
        failed trial modifications are successes may preclude 
        it from seeking to make the meaningful changes 
        necessary to provide the ``sustainable'' mortgage 
        relief for struggling families it first promised.\118\
---------------------------------------------------------------------------
    \118\ Senate Committee on Finance, Written Testimony of Neil 
Barofsky, Special Inspector General for the Troubled Asset Relief 
Program, An Update on the TARP Program, at 3 (July 21, 2010) (online at 
finance.senate.gov/imo/media/doc/072110nbtest.pdf).

    During a July Senate Finance Committee hearing with TARP 
oversight bodies, Senator Charles Grassley (R-Iowa) similarly 
noted, ``Moreover, Treasury still has not established 
performance goals or benchmarks for HAMP, meaning that there is 
no effective way for us to know whether this 50 billion dollar 
program is accomplishing its intended purpose. That's not 
accountability, that's not transparency--that's just more 
taxpayer money flying out the window.'' \119\ Richard Hillman, 
managing director of financial markets and community investment 
team at the Government Accountability Office (GAO), emphasized 
that even as Treasury created new programs and modified 
existing programs under the MHA initiative, it failed to 
redefine the program's reach and goals, undercutting program 
transparency.\120\ Despite Treasury's frequent changes to the 
program, despite HAMP's inadequate performance compared to 
Treasury's initially stated goal, and despite the urgings of 
Congress and oversight bodies to articulate a meaningful 
benchmark for success beyond the initial, opaque goal of 
``reaching'' three to four million homeowners, Treasury has 
failed to do so.
---------------------------------------------------------------------------
    \119\ Senate Committee on Finance, Opening Statement of Senator 
Chuck Grassley, An Update on the TARP Program, at 2 (July 21, 2010) 
(online at finance.senate.gov/imo/media/doc/072110CG.pdf).
    \120\ Senate Committee on Finance, Written Testimony of Richard 
Hillman, managing director, Financial Markets and Community Investment 
Team, U.S. Government Accountability Office, An Update on the TARP 
Program, at 11 (July 21, 2010) (online at finance.senate.gov/imo/media/
doc/072110rhtest.pdf) (``Treasury announced several potentially 
substantial new HAMP-funded efforts in March 2010, but did not say how 
many borrowers these programs were intended to reach. . . .We noted 
that Treasury needed to ensure that future public reporting on this 
program [principal reduction initiative] provided program transparency 
and address the potential question of whether borrowers were being 
treated fairly.'').
---------------------------------------------------------------------------
    As SIGTARP noted in its March 2010 report on HAMP, ``the 
anticipated benefits of a program . . . and how a program's 
success or failure is defined are important to provide a 
reference point for discussions about whether a program is 
worth the resources devoted to it and whether the program is 
functioning as it should.'' \121\ While Treasury has clarified 
its target goal of trial modification offers, it has not 
provided a clear definition of program success. Meeting a goal 
that has no basis in whether borrowers have actually received 
help does not make a program successful, and, as noted in 
Section D.2, intense focus on one goal over another can limit 
broader success. In order to demonstrate the legitimacy and 
effectiveness of its chief foreclosure mitigation program, the 
Panel believes Treasury should clearly articulate its 
definition of success for HAMP, allowing the defined benchmarks 
to be the true measure of HAMP's worth.
---------------------------------------------------------------------------
    \121\ SIGTARP Report--Factors Affecting Implementation of HAMP, 
supra note 103, at 8.
---------------------------------------------------------------------------
    The Panel stated in its April 2010 report that Treasury's 
success with HAMP will be measured by the number of homeowners 
who avoid foreclosure, not the number of mortgages 
modified.\122\ It is difficult to track precisely the number of 
homeowners who have avoided foreclosure because of HAMP, as 
there are no public data for foreclosure avoidance due to trial 
modification only, so the most recent modification results are 
the closest proxy. As of October 31, 2010, HAMP has 156,408 
active trial modifications and 483,342 active permanent 
modifications.\123\ Thus, 639,750 homeowners are currently 
avoiding foreclosure, on either a temporary basis or for five 
years, through HAMP.\124\ Foreclosure starts since HAMP's 
inception, on the other hand, reached a total of approximately 
4.4 million in October 2010.\125\ These results mean that since 
HAMP was unveiled, there have been just over nine foreclosure 
starts for every one permanent, or five-year, HAMP 
modification.\126\
---------------------------------------------------------------------------
    \122\ April 2010 Oversight Report, supra note 1, at 95.
    \123\ Data provided by Treasury.
    \124\ Data provided by Treasury. (The trial period typically lasts 
for three months to provide immediate relief and ensure that the new 
payment plan will work for the borrower.)
    \125\ The total of 4.4 million starts includes foreclosure starts 
from March 2009, the time of HAMP's inception, through October 2010. 
The number of foreclosure starts is an imperfect data point, as it is 
incomplete, potentially redundant, and is extrapolated out to determine 
national totals; however, it is helpful in providing the ability to 
track trends in foreclosures. These flaws emphasize the need for the 
government to collect data on foreclosure starts and completions on a 
nationwide basis. Over this same time period, the number of foreclosure 
completions, or actual foreclosure sales, reached nearly 1.8 million. 
HOPE NOW Alliance Foreclosure Data.
    \126\ Panel staff calculation using total foreclosure starts 
through October 2010 of 4.4 million and total permanent HAMP 
modifications that are active or paid off (excluding those that were 
disqualified or cancelled) of 483,833 as of October 31, 2010. Data 
provided by Treasury.
---------------------------------------------------------------------------
    While the number of foreclosure starts that were HAMP 
eligible is unknown, as of October 31, 2010, only 29 percent of 
loans 60 or more days delinquent were estimated to be eligible 
for HAMP modification, as noted in Section D.\127\ As the Panel 
noted in its April 2010 report, certain HAMP exclusions prevent 
aid from flowing to speculators, wealthy borrowers, those 
covered by other modification programs, or those unlikely to 
benefit from HAMP. Other HAMP exclusions, however, such as 
borrowers with nonparticipating servicers and those with DTI 
less than 31 percent, may be preventing a significant number of 
modifications and more positive program results. Foreclosure 
rates remain at historically very elevated levels, and housing 
prices have not recovered significantly compared to the highs 
reached in the middle of the decade, as indicated in Figure 12 
below. Therefore, it is unclear whether HAMP has made 
appreciable improvement in the unstated but implicit goals of 
reducing foreclosures and stabilizing the housing markets.
---------------------------------------------------------------------------
    \127\ Data provided by Treasury.
---------------------------------------------------------------------------

           FIGURE 12: FORECLOSURE RATE AND HOME VALUES \128\

      
---------------------------------------------------------------------------
    \128\ Bloomberg data (graph created from FORLTOTL and SPCSUSS 
indices) (accessed Dec. 9, 2010). Data for the Case-Shiller Price Index 
are normalized to 100 at March 2000.
[GRAPHIC] [TIFF OMITTED] 62622A.012


    Despite HAMP's lack of clearly articulated goals and 
metrics, the program has had a positive impact in another way, 
even if inadvertently so. It has provided standardization of 
the mortgage modification process, an issue noted as a 
significant industry problem in the past,\129\ by encouraging 
the use of a common model, reporting platform, and 
affordability measurement.\130\ Phyllis Caldwell, chief of 
Treasury's Homeownership Preservation Office, noted at the 
Panel's most recent hearing on foreclosure mitigation, ``. . . 
it [HAMP] has helped transform the way the entire mortgage 
servicing industry operates. HAMP established a universal 
affordability standard, a 31 percent debt to income ratio.'' 
\131\ Ms. Schwartz reiterated these sentiments, stating, ``. . 
. it's very integral and important that the government stepped 
forward to put a protocol in place for modifications and that 
this protocol would have been very difficult to get into place 
otherwise . . . . And HAMP offers uniformity of approach, which 
is fair and systematic in its approach for all homeowners at 
risk.'' \132\ While Treasury was not the first entity to 
propose or employ a 31 percent standard, through the parameters 
of HAMP and substantial servicer participation, Treasury 
solidified the wide acceptance of 31 percent as an industry 
affordability standard.\133\
---------------------------------------------------------------------------
    \129\ See Joseph R. Mason, Mortgage Loan Modification: Promises and 
Pitfalls, at 17 (Oct. 3, 2007) (online at www.lebow.drexel.edu/PDF/
Docs/20071003LoanModificationPaper.pdf).
    \130\ Transcript Testimony of Phyllis Caldwell, supra note 108.
    \131\ Transcript Testimony of Phyllis Caldwell, supra note 108.
    \132\ Testimony of Faith Schwartz, supra note 78.
    \133\ In testimony before the Senate Banking, Housing, and Urban 
Affairs Committee in November 2008, Martin D. Eakes, CEO of Self-Help 
and Center for Responsible Lending, noted the industry standard of 38 
percent DTI but urged Congress to push Treasury to utilize TARP to 
create a modification program that required 31 percent DTI, referencing 
the FDIC proposal at the time to use TARP funds for a modification 
program with a 31 percent HTI (housing-to-income). Eakes noted that the 
standard had moved over time from a lending standard of 25 percent DTI 
to the current 38 percent. See Senate Committee on Banking, Housing, 
and Urban Affairs, Written Testimony of Martin D. Eakes, chief 
executive officer, Self-Help Credit Union and the Center for 
Responsible Lending, Oversight of the Emergency Economic Stabilization 
Act: Examining Financial Institution Use of Funding Under the Capital 
Purchase Program, at 8 (Nov. 13, 2008) (online at banking.senate.gov/ 
public/ index.cfm? FuseAction=Files. View&FileStore_id=26c73c7a-bafc-
4ff1-88f9-e984d672c9f6). Gregory Palm, Executive Vice President and 
General Counsel of The Goldman Sachs Group, also testified at the 
hearing that Litton Loan Servicing, Goldman Sachs' affiliate, was 
already employing a 31 percent DTI standard. See Senate Committee on 
Banking, Housing, and Urban Affairs, Testimony of Gregory K. Palm, 
executive vice president and general counsel, The Goldman Sachs Group, 
Inc., Transcript: Oversight of the Emergency Economic Stabilization 
Act: Examining Financial Institution Use of Funding Under the Capital 
Purchase Program, at 8 (Nov. 13, 2008) (publication forthcoming) 
(online at banking.senate.gov/public/ index.cfm? FuseAction= Hearings. 
Hearing& Hearing_ ID=1d38de7d- 67db- 4614-965b-edf5749f1fa3). The 
IndyMac Federal program implemented by the FDIC utilized a DTI standard 
of 38 percent. Federal Deposit Insurance Corporation, FDIC Implements 
Loan Modification for Distressed IndyMac Mortgage Loans (Aug. 20, 2008) 
(online at www.fdic.gov/news/news/press/2008/pr08067.html).
---------------------------------------------------------------------------
    Nonetheless, when viewed in light of the millions of 
foreclosure completions since 2007 and the large number waiting 
in the pipeline due to continued hardships from high 
unemployment rates and lower home values, HAMP has failed to 
make a significant dent in the number of foreclosures and does 
not appear likely to do so in the future.

2. Factors Affecting HAMP Success

    In many cases, mortgage modifications are economically 
rational; the investor loses less money on a modification than 
the losses that it would incur under a foreclosure. In a well-
functioning market, modifications, principal forgiveness, and 
refinancings will occur as long as they are in the best 
interests of all parties. If a mortgage modification allows a 
lender or investor to sustain a smaller loss than a foreclosure 
and allows a borrower to remain in his home at a sustainably 
affordable monthly payment, then incentives to modify the loan 
should be unnecessary. However, as discussed in Section B, the 
housing market has been in a state of disequilibrium, and the 
private sector failed to conduct modifications on its own, 
which triggered government intervention in the form of HAMP and 
the use of incentives to enhance the likelihood that the 
decision scale tipped in favor of modification.
    HAMP is premised upon the idea of economically rational 
mortgage modifications--beneficial to both borrower and 
investor--as embodied in its NPV model. The model is explicitly 
designed to determine whether a modification or a foreclosure 
makes more sense economically for the mortgage holder. If the 
NPV model shows that it is economically better to modify the 
mortgage, participating servicers are compelled to make the 
modification. HAMP also added financial incentive payments for 
investors, servicers, and borrowers, some of which are included 
in the NPV model calculations, to promote participation 
further. These incentives were designed to encourage mortgage 
modifications by lessening the financial burden on all parties, 
especially given the dearth of private-sector modifications at 
the outset of HAMP and to offset any disincentives.\134\
---------------------------------------------------------------------------
    \134\ Transcript Testimony of Phyllis Caldwell, supra note 108 
(``No, I think it's that when you look back at the beginning of the 
program--again, HAMP was a--is a voluntary program--getting the 
servicers, the investors and the homeowners to the table and to change 
their business model to--to do that required some incentives.'').
---------------------------------------------------------------------------
    As of the October 3, 2010 deadline for enrolling in HAMP, 
105 servicers,\135\ covering nearly 90 percent of all non-GSE 
mortgage loans, had signed Servicer Participation 
Agreements.\136\ Servicers of GSE mortgages are required to 
evaluate mortgages for HAMP. Thus, the program clearly has 
broad coverage of the mortgage market.
---------------------------------------------------------------------------
    \135\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \136\ TARP Two Year Retrospective, supra note 98, at 65.
---------------------------------------------------------------------------
    Yet, despite this broad commitment by servicers to 
participate in a program that offers additional payments on top 
of an often economically rational decision, HAMP's results 
remain underwhelming. Why has HAMP failed to deliver? It is 
unclear what the additional cost would be to provide sufficient 
incentives to induce greater numbers of modifications, and 
there does not appear to be one single answer as to why HAMP 
has not resulted in more modifications. Rather, it appears that 
multiple factors have inhibited otherwise sensible mortgage 
modifications.
            a. Voluntary Nature of the Program
    A key characteristic that has limited Treasury's influence 
over servicers is the voluntary nature of the program for 
servicers of non-GSE loans.
    Although Treasury has been able to pressure servicers to 
sign participation agreements, Treasury has little ability to 
pressure servicers when it comes to actually making 
modifications. This structure has created an imbalance of power 
between Treasury and the servicers, and has hindered Treasury's 
ability to influence, oversee, and compel servicers into more 
aggressive action. According to Treasury officials, ``Because 
it is a voluntary program, our abilities to enforce specific 
performance are extremely limited,'' \137\ and it ``makes 
aggressive enforcement difficult.'' \138\ The California 
Reinvestment Coalition has noted that the voluntary nature of 
the program is a hindrance to success. Its recent survey of 
mortgage counselors indicated a growing frustration with 
servicers not following HAMP requirements and Treasury not 
enforcing servicer compliance.\139\ Treasury has focused on 
establishing a tone of program compliance, directing servicers 
to fix issues instead of doling out penalties.\140\ Although 
Treasury oversees servicers and encourages compliance, there is 
little real accountability for servicers that fail to adhere to 
program standards, lose borrower submitted paperwork, 
unnecessarily delay the process, or otherwise don't make 
modifications. In describing this system of incentives with no 
real sticks, Professor Katherine Porter, a professor of law who 
testified at the Panel's October hearing, said, ``. . . 
[servicers] have gorged themselves at a buffet of carrots, and 
they're still not doing what we want them to do.'' \141\
---------------------------------------------------------------------------
    \137\ Treasury conversations with Panel staff (Sept. 10, 2010).
    \138\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \139\ California Reinvestment Coalition, Chasm Between Words and 
Deeds IV: HAMP Is Not Working, at 2, 9-11 (July 2010) (online at 
www.calreinvest.org/system/assets/234.pdf) (hereinafter ``Chasm Between 
Words and Deeds IV: HAMP Is Not Working'').
    \140\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \141\ Congressional Oversight Panel, Testimony of Katherine Porter, 
professor of law, University of Iowa College of Law, Transcript: COP 
Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010) 
(publication forthcoming) (online at cop.senate.gov/ hearings/ library/ 
hearing-102710-foreclosure.cfm).
---------------------------------------------------------------------------
    The Panel has previously noted that servicers need to face 
``meaningful monetary penalties'' for noncompliance with SPAs 
and denial of modification for an unexplained reason, a breach 
of their contractual obligations under HAMP SPAs.\142\ However, 
Treasury has seemed reluctant to do more than vaguely threaten 
the potential for clawbacks of HAMP payments.\143\ Despite 
rampant anecdotal stories of servicer errors, to date, no 
servicer has experienced a clawback or other financial 
repercussion. The steepest penalty Treasury has levied to date 
has been withholding payments to servicers due to data issues. 
But after remedying the problem, these servicers will receive 
any missed incentive payments, despite a prolonged remediation 
process.\144\ By signing HAMP participation agreements, 
servicers indicated that they agreed with the NPV model and 
would provide modifications based on the model's results. They 
knew they were legally obligated to do so when they signed.
---------------------------------------------------------------------------
    \142\ April 2010 Oversight Report, supra note 1, at 55.
    \143\ See House Committee on Financial Services, Written Testimony 
of Herbert M. Allison, Jr., assistant secretary for financial 
stability, U.S. Department of the Treasury, The Private Sector and 
Government Response to the Mortgage Foreclosure Crisis, at 3 (Dec. 8, 
2009) (online at financial services. house. gov/ media/ file/ hearings/ 
111/ herb_allison.pdf); Rob Chrisman, Cinco de Mayo: HAMP Incentives 
Denied to NonCompliant Servicers? High Balance Loans; PennyMac 
Earnings; Flood Zone Alert, Mortgage News Alert (May 5, 2010) (online 
at www.mortgagenewsdaily.com/ channels/ pipelinepress/ 05052010-hamp-
greece.aspx).
    \144\ Treasury noted that it is currently considering no longer 
accruing missed incentive payments to the five servicers that have 
failed to remedy their data issues. Treasury conversations with Panel 
staff (Oct. 21, 2010).
---------------------------------------------------------------------------
    An additional challenge of voluntary participation is the 
issue of potential servicer withdrawal. Despite a formal 
contract for those who voluntarily participate, the contract 
does not explicitly address servicer withdrawal. It is unclear 
whether or not servicers can withdraw without Treasury's 
consent, creating uncertainty regarding the ramifications 
should a servicer decide unilaterally to exit the program. The 
Servicer Participation Agreements (SPAs) require participating 
servicers to offer HAMP modifications to all eligible 
borrowers, but the contracts do not explicitly compel servicers 
to remain in the program. Some servicers have exited HAMP for 
various reasons,\145\ and Treasury has indicated that in those 
instances it worked with the servicer to ensure that the HAMP-
modified loans remained in the program or were transferred to 
another HAMP servicer. Further, Treasury noted that its concern 
with servicer exit is most applicable to the larger servicers. 
Should a servicer choose to exit the program without Treasury's 
consent, Treasury has indicated to the Panel that it could 
potentially sue the servicer for specific performance.\146\ 
Treasury encouraged servicer participation by adding incentives 
to the program and by sharing some of the financial burden of 
modifying a loan.\147\ Servicers that do not participate also 
face the public stigma of being seen as unwilling to help 
homeowners avoid foreclosure.
---------------------------------------------------------------------------
    \145\ Treasury conversations with Panel staff (Oct. 21, 2010). 
Treasury noted that servicers might exit due to having better 
proprietary modification options or because of the costs of 
participating in HAMP (e.g., labor and time needed to complete 
additional paperwork). Treasury indicated that the latter has occurred.
    \146\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \147\ Servicers that make modifications to get a homeowner down to 
a 38 percent mortgage DTI ratio receive aid from Treasury in the form 
of half of the remaining cost of getting the borrower down to a final 
31 percent DTI ratio. This amount is not paid by Treasury, though, 
until the modification moves to permanent status. Servicers also 
receive an up-front payment for each eligible modification meeting 
program guidelines and yearly Pay for Success payments for up to three 
years as long as the borrower remains in the program. Initially, these 
payments were $1,000, but Treasury increased them to $1,500 to 
encourage servicers to increase their use of foreclosure alternatives 
and engage in additional outreach to homeowners unable to complete a 
modification. U.S. Department of the Treasury, Making Home Affordable 
Program Enhancements to Offer More Help for Homeowners (Mar. 25, 2010) 
(online at making home affordable.gov/ docs/ HAMP%20 
Improvements_Fact_% 20Sheet_ 032510%20FINAL2.pdf) (hereinafter ``MHA 
Program Enhancements to Offer More Help for Homeowners'').
---------------------------------------------------------------------------
    A program structure in which participation is voluntary and 
the repercussions of exit are uncertain has presented a key 
problem within HAMP: namely a lack of accountability for 
performance. Without more useful, publicly available 
performance data, transparency is compromised, and without 
stringent enforcement of contractual obligations, servicer 
underperformance is unpunished. Of course, such an inability to 
enforce standards would be an Achilles heel in virtually any 
voluntary foreclosure mitigation program design.
            b. Accounting Issues
    Because of the latitude participating servicers have in 
ultimately granting a modification with little accountability 
for performance, many external incentives or disincentives will 
remain crucial in shaping the decision to modify a loan. As 
discussed in the Panel's April 2010 Report, the current 
accounting rules provide investors a disincentive to modify 
loans under HAMP.\148\ Since HAMP loans are contractually 
modified, under the current accounting rules there is immediate 
loss recognition for financial institutions.\149\ For other 
loans that are not modified, the current accounting rules 
provide a financial institution more discretion to determine 
when a loss should be recognized.\150\ In addition, write-downs 
on loans would require financial institutions to boost their 
regulatory capital ratios. As a result, financial institutions 
are reluctant to write down mortgages since their capital 
structures have already been weakened by a variety of factors, 
including write-downs already taken on residential and 
commercial real estate loans, losses taken on other loans due 
to the recession, and recent actions by Fannie Mae and Freddie 
Mac to require banks to buy back mortgages that the banks had 
previously sold to them.\151\
---------------------------------------------------------------------------
    \148\ See April 2010 Oversight Report, supra note 1, at 74. Under 
generally accepted accounting principles (GAAP), once the terms of a 
loan are contractually modified, the modified loan is accounted for as 
a ``troubled debt restructuring.'' A troubled debt restructuring occurs 
when the terms of a loan have been modified due to the borrower's 
financial difficulties, and a long-term concession has been granted to 
the borrower. Examples of such concessions include interest rate 
reductions, principal forbearance, principal forgiveness, and term 
extensions, all of which may be used to modify loans in HAMP.
    \149\ For all restructured loans, GAAP requires that a loss be 
recognized if the difference in cash flows to be received under the 
modified loan is less than the cash flows of the original loan. By 
nature of the modified terms of the loan under HAMP (i.e., reduction of 
interest to be received and/or principal forbearance or forgiveness) 
the entity's future cash flows to be received will be less than the 
current loan payoff amount. See April 2010 Oversight Report, supra note 
1, at 74 n. 243.
    \150\ Current accounting rules require that a loss contingency is 
required to be recognized only if it is probable that an asset has been 
impaired and the amount of the loss can be reasonably estimated. See 
April 2010 Oversight Report, supra note 1, at 74 n. 244.
    \151\ Financial institutions are faced with write-downs on both 
first and second lien mortgages. See April 2010 Oversight Report, supra 
note 1, at 75.
---------------------------------------------------------------------------
    There continues to be tension between Treasury's goal of 
mitigating foreclosures and its goal of maintaining adequate 
capital levels at large banks. A new proposed accounting rule 
that would eliminate the disincentives to modify loans under 
HAMP is currently under consideration. This rule, which is to 
be adopted at the earliest in 2013, would require a financial 
institution to account for all loans similar to the accounting 
for HAMP loans.\152\ Unfortunately, the rule will come too late 
to make a difference for HAMP, which will stop offering 
modifications in 2012.
---------------------------------------------------------------------------
    \152\ On May 26, 2010, the Financial Accounting Standards Board 
(FASB) issued proposed Accounting Standard Update (ASU), Accounting for 
Financial Instruments and Revisions to the Accounting for Derivative 
Instruments and Hedging Activities--Financial Instruments (Topic 825) 
and Derivatives and Hedging (Topic 815). The rule applies to all 
entities and there is a phase in period for non-public entities that 
have less than $1 billion in total assets. The rule would eliminate an 
entity's discretion to determine when a loan impairment loss should be 
recognized and would also require that loans and other financial 
instruments be classified on the balance sheet at fair value. Changes 
in fair value would be reported at each reporting period and would 
either flow through an entity's equity or net income. An adjustment to 
equity (other comprehensive income) would be made if the entity does 
not plan to sell the loan. Otherwise, the fair value adjustment would 
be required to flow through the income statement. See Financial 
Accounting Standards Board, Accounting for Financial Instruments and 
Revisions to the Accounting for Derivative Instruments and Hedging 
Activities--Financial Instruments (Topic 825) and Derivatives and 
Hedging (Topic 815), Financial Accounting Series FASB Exposure Draft, 
at paragraph 38 at 40 (May 26, 2010) (online at www. fasb. org/cs/ 
BlobServer? blobcol=urldata&blob table= Mungo Blobs&blobkey= 
id&blobwhere= 1175820761372&blobheader= application%2Fpdf).
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            c. Second Liens
    Since the Panel's March 2009 oversight report, the Panel 
has been highlighting the significant financial and legal 
barriers that second liens impose on the successful 
implementation of HAMP.\153\ Because more than 40 percent of 
homes and approximately 50 percent of HAMP participants have 
second liens,\154\ it is important to reemphasize the 
importance of several of those impediments.\155\ Though 
Treasury has recently implemented several initiatives designed 
to address the problems caused by second liens, these programs 
have not yet produced data sufficient to evaluate their 
success.\156\
---------------------------------------------------------------------------
    \153\ April 2010 Oversight Report, supra note 1, at 15.
    \154\ Amherst Securities Group LP, Amherst Mortgage Insight: 2nd 
Liens--How Important, at 3 (Jan. 29, 2010) (hereinafter ``Amherst 
Mortgage Insight: Second Liens''); House Committee on Financial 
Services, Testimony of Phyllis Caldwell, chief of the Homeownership 
Preservation Office, U.S. Department of the Treasury, Transcript: Robo-
Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage 
Servicing (Nov. 18, 2010) (publication forthcoming) (online at 
financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1376.)
    \155\ Based on data representing approximately a third of all 
second liens outstanding and over 75 percent of all first liens 
outstanding, as of September 2010, the average second lien is 
approximately $55,000, while the average first lien is roughly 
$170,000. In general, second liens that are home equity loans tend to 
be larger in dollar value than close-end second liens, with approximate 
average sizes of $57,000 and $46,000, respectively. Data provided to 
Panel staff by CoreLogic (Dec. 8, 2010).
    \156\ The second lien program was announced in April 2009, four 
months later, in August 2009, Treasury released the first guidance 
regarding the program. SIGTARP Report--Factors Affecting Implementation 
of HAMP, supra note 103, at 20. During the summer, banks commented on 
the interim rule and requested that second liens modified in tandem 
with first liens be given the same favorable treatment as the first 
liens, meaning that as long as certain criteria are met, loans modified 
under the program will retain the risk weight assigned to that loan 
prior to the modification. Letter from Gregory A. Baer, deputy general 
counsel for corporate law, Bank of America, to Jennifer J. Johnson, 
secretary, Board of Governors of the Federal Reserve System, et al. 
(July 30, 2009) (online at www.federalreserve.gov/SECRS/2009/August/
20090810/R-1361/R-1361_073009_21279_428725101156_1.pdf); Letter from 
David Pommerehn, counsel, Legislative and Regulatory Affairs, Consumer 
Bankers Association, to Office of the Comptroller of the Currency, et 
al. (July 30, 2009) (online at 192.147.69.84/regulations/laws/federal/
2009/09c04AD42.PDF). In December 2009, the rule on risk based capital 
guidelines for liens modified under the program became effective not 
reflecting the banks' request on the treatment of second liens. U.S. 
Department of the Treasury, Risk-Based Capital Guidelines; Capital 
Adequacy Guidelines; Capital Maintenance; Capital--Residential Mortgage 
Loans Modified Pursuant to the Home Affordable Mortgage Program, 74 
Fed. Reg. 60138-60140 (Nov. 20, 2009) (online at www.occ.gov/news-
issuances/federal-register/74fr60137.pdf) (``the agencies have 
determined that allowing a banking organization to risk weight junior-
lien mortgage loans at less than 100 percent is not appropriate other 
than in those circumstances already permitted by the agencies general 
risk-based capital rules''). The first servicer signed up for the 
program in January 2010. April 2010 Oversight Report, supra note 1, at 
14-15. In March 2010, Treasury issued new guidelines for the second 
lien program. U.S. Department of the Treasury, Making Home Affordable 
Program--Update to the Second Lien Modification Program (2MP), 
Supplemental Directive 09-05 Revised (Mar. 26, 2010) (online at 
www.hmpadmin.com/portal/programs/docs/second_lien/sd0905r.pdf). To 
date, there is limited data to report for the second lien programs as 
Ms. Caldwell indicated, ``we don't have data to report yet, as the 
program really got started at the beginning of October [2010].'' 
Transcript Testimony of Phyllis Caldwell, supra note 108. Treasury 
expects to have more complete data and the programs in early March 
2011. Treasury conversations with Panel staff (Nov. 23, 2010). As of 
September 30, 2010, 19 first lien servicers representing 60 percent of 
the second liens are participating in the program, and information 
supplied to SIGTARP on October 15, 2010 indicates that only 21 
permanent modifications have been performed under the program. SIGTARP 
Quarterly Report to Congress, supra note 25, at 67, 69.
---------------------------------------------------------------------------
    Second liens are loans where the collateral interest for 
that loan is second in ranking to the primary or first 
lien.\157\ In general terms this means that in the foreclosure 
process, the first lien would need to be compensated in full 
before the second lien would be paid from the proceeds of the 
sale. In other words, the first liens have lien priority. 
Therefore, in cases where the first lien is underwater and the 
home is in foreclosure, the second lien holder is generally not 
entitled to any of the proceeds from the sale.
---------------------------------------------------------------------------
    \157\ It is possible that a home could have more than two liens; 
however, as most homes only have two liens, in this section second 
liens are often used as a proxy for all subordinated liens and the 
analysis with respect to second liens holders can often by extrapolated 
to apply to other subsequent lien holders.
---------------------------------------------------------------------------
    Loan modifications, including some of those performed under 
HAMP, could affect lien priority.\158\ The law in this area, 
however, is not always clear.\159\ In general, in the absence 
of a clause in the first lien reserving the right to modify, a 
modification performed between the first lien holder and the 
borrower could jeopardize the lien priority of the first lien 
holder.\160\ The usual standard to determine whether lien 
priority remains intact is if a modification materially 
prejudices the second lien holder.\161\ For instance, 
modifications that lower the interest rate or reduce principal 
are generally considered favorable to the second lien holder 
and should not affect lien priority, while modifications that 
increase principal can prejudice the second lien holder and 
might affect lien priority.\162\ Furthermore, it is possible 
that a court would only subordinate (rank lower in lien 
priority) the additional amounts due to the modification.\163\ 
However, though a more drastic remedy, courts have on occasion 
elevated the second lien before the entire first lien in 
priority.\164\
---------------------------------------------------------------------------
    \158\ ``HAMP does not require extinguishment of subordinate lien 
instruments as a condition of modification. However, servicers must 
follow investor guidance to ensure first lien priority.'' U.S. 
Department of the Treasury, Making Home Affordable Program: Handbook 
for Servicers of Non-GSE Mortgages-Version 3.0, at 42 (Dec. 2, 2010) 
(online at www.hmpadmin.com/portal/programs/docs/hamp_servicer/
mhahandbook_30.pdf) (hereinafter ``MHA Handbook for Servicers of Non-
GSE Mortgages''); House Oversight and Government Reform, Subcommittee 
on Domestic Policy, Written Testimony of David Berenbaum, chief program 
officer, National Community Reinvestment Coalition, Foreclosures 
Continue: What Needs to Change in the Administration's Response?, at 21 
(Feb. 25, 2010) (online at oversight.house.gov/images/stories/Hearings/
Domestic_Policy/2010/022510_Foreclosure/
022310_DP_David_Berenbaum_022510.pdf).
    \159\ Furthermore, real estate law is state specific and states 
differ in their approaches to determinations of lien priority.
    \160\ In general, the first lien holder retains the priority to any 
subsequent modification if the modification is not materially 
prejudicial to the second lien holder or there is a clause in the 
contract that allows for a modification. However, there is a limited 
case law and scholarship is mixed on the enforceability of this clause. 
An example of such a provision would read, ``This mortgage shall also 
secure all extensions, amendments, modifications, or alterations of the 
secured obligation including amendments, modifications, or alterations 
that increase the amount of the secured obligation or the interest rate 
on the secured obligation.'' Restatement (Third) of Prop. (Mortgages) 
Sec. 7.3 (1997).
    \161\ The determination of what is considered materially 
prejudicial is generally a question of fact to be determined by the 
court and court decisions in this area vary. Restatement (Third) of 
Prop. (Mortgages) Sec. 7.3 (1997).
    \162\ There is mixed case law on modifications that extend the 
length of the first lien. In general, this type of modification aids in 
affordability and can be considered favorable to the second lien 
holder; however, there is legal precedent where loan priority is 
shifted due to this type of modification. Restatement (Third) of Prop. 
(Mortgages) Sec. 7.3 (1997) (``Absent an increase in the interest rate 
or principal amount of the mortgage obligation, courts routinely hold 
that such modifications do not defeat the mortgagee's priority as 
against intervening lienors. The assumption is that such transactions 
reduce the likelihood of foreclosure of the senior mortgage and that 
they are therefore beneficial to the interests of junior lienors. See, 
e.g., Crutchfield v. Johnson & Latimer, 8 So.2d 412 (Ala. 1942); Lennar 
Northeast Partners v. Buice, 57 Cal.Rptr.2d 435 (Cal.Ct. App.1996); 
Eurovest Ltd. v. 13290 Biscayne Island Terrace Corp., 559 So.2d 1198 
(Fla.Dist.Ct.App.1990); State Life Insurance Co. v. Freeman, 31 N.E.2d 
375 (Ill.Ct.App.1941); Guleserian v. Fields, 218 N.E.2d 397 
(Mass.1966); Shultis v. Woodstock Land Dev. Assoc., 594 N.Y.S.2d 890 
(N.Y.App.Div.1993); Skaneateles Savings Bank v. Herold, 376 N.Y.S.2d 
286 (N.Y.App.Div.1975), aff'd, 359 N.E.2d 701 (N.Y. 1976); Resolution 
Trust Corp. v. BVS Development, Inc., 42 F.3d 1206 (9th Cir.1994); In 
re Fowler, 83 B.R. 39 (Bankr.Mont. 1987); In re Earl, 147 B.R. 60 
(Bankr. N.D.N.Y.1992); Kratovil & Werner, Mortgage Extensions and 
Modification, 8 Creighton L. Rev. 595, 607 (1975); 1 G. Nelson & D. 
Whitman, Real Estate Finance Law, Sec. 9.4 (3d ed. 1993). Contra 
Citizens and Southern National Bank v. Smith, 284 S.E.2d 770 (S.C.1981) 
(extension of senior mortgage results in loss of its priority as 
against intervening lienor).
    \163\ For instance, a homeowner borrows $100,000 from Lender A to 
buy a property, Blackacre, and uses Blackacre as collateral against the 
note. Then the homeowner borrows $20,000 from Lender B, again using 
Blackacre as collateral. Both liens are properly recorded in a timely 
fashion and in accordance with local laws and there is no clause 
reserving the right to modify in the agreement with Lender A. 
Subsequently, the homeowner and Lender A modify their agreement in a 
way which has the effect of increasing the total principal outstanding 
to $110,000. If a court decides on an equitable solution, it might 
decide that from the proceeds of a foreclosure sale the ranking would 
be such that Lender A is entitled to $100,000, then Lender B $20,000 
and thirdly, Lender A would be entitled to the additional amount due to 
the modification, $10,000. Restatement (Third) of Prop. (Mortgages) 
Sec. 7.3 (1997).
    \164\ Using the example describe above in footnote 163, if a court 
decides to elevate the second lien over the first lien, then Lender B 
would be entitled to his entire $20,000 before Lender A would get paid 
back any of the $110,000 that homeowner still owes him. Restatement 
(Third) of Prop. (Mortgages) Sec. 7.3 (1997).
---------------------------------------------------------------------------
    While the HAMP modifications are geared to making the first 
liens more affordable and do utilize tools such as interest and 
principal reductions (which can be viewed as favorable to the 
second lien holder), the vast majority of active HAMP 
modifications have a higher principal balance after the 
modification than before the modification.\165\ Though this 
increase in principal balance is mostly due to capitalization 
of arrearages and escrow requirements, it is unclear how courts 
would treat this principal increase.\166\ Even if courts were 
to decide that HAMP modifications do not change or even 
partially affect the lien priority, this legal murkiness could 
complicate or at least extend the foreclosure process. 
Therefore, in order to assure the first lien holder their 
position of seniority, it is more prudent to have that lien 
holder reach an agreement with the subsequent lien 
holders.\167\
---------------------------------------------------------------------------
    \165\ See Section D.3.b, supra, for a discussion on the increase of 
principal balance.
    \166\ Restatement (Third) of Prop. (Mortgages) Sec. 7.3 (1997).
    \167\ April 2010 Oversight Report, supra note 1, at 13-16; 
Restatement (Third) of Prop. (Mortgages) Sec. 7.3 (1997).
---------------------------------------------------------------------------
    In addition, there are reasons of equity why having an 
agreement with the second lien holder, especially an agreement 
that also modifies or extinguishes the second lien, is 
important to the modification process. Unless the second lien 
is modified or extinguished, many of the concessions the first 
lien holder makes to help the borrower could disproportionately 
accrue to the benefit of the second lien holder.\168\ 
Therefore, for these legal and financial reasons, second lien 
holders can act as a hold out and make modification more 
difficult.
---------------------------------------------------------------------------
    \168\ April 2010 Oversight Report, supra note 1, at 13-14.
---------------------------------------------------------------------------
    Similar to first liens, losses on modified second liens 
generally need to be recognized sooner than losses on loans 
that have not been modified. In general, if a second lien is 
modified, the loss requires immediate recognition.\169\ 
However, despite the fact that many such liens may not have any 
recoverable value at current home prices, many second lien 
holders currently carry these liens at improbably high 
accounting values for various reasons, including that they are 
optimistic that home prices will recover shortly, they believe 
they can extract some value from the first lien holder, many of 
the second liens are actually current, or because not doing so 
would damage their capital position.\170\ Therefore, 
recognizing these losses could have significant economic costs, 
including that it might require the second lien holder to raise 
additional capital or increase other reserves.\171\ Treasury 
has indicated that it does not require second lien write-downs 
and is ``indifferent to it in the [. . .] first lien program.'' 
\172\
---------------------------------------------------------------------------
    \169\ See Section G.2.b, supra, for a more in-depth discussion of 
accounting issues.
    \170\ Second liens are current in many cases where first liens are 
in default. This could be for a variety of reasons, including that 
second liens tend to have lower payments, and that since many of them 
are home equity lines of credit, the borrowers want to keep those lines 
of credit open for future needs. In addition, second liens tend not to 
be securitized. Therefore, the servicing bank is also the investor and 
might be more aggressive in collecting payments. Furthermore, many of 
the second liens are home equity lines of credit and could be 
technically current even if the lien holder is not being paid, as the 
unpaid interest can simply be rolled into the balance due. April 2010 
Oversight Report, supra note 1, at 119-120; Amherst Mortgage Insight: 
Second Liens, supra note 154, at 11-12. See also Section G.2.b, supra.
    \171\ April 2010 Oversight Report, supra note 1, at 15-16.
    \172\ Transcript Testimony of Phyllis Caldwell, supra note 108. 
According to Treasury, borrower qualification for HAMP is based on 
first lien affordability. Treasury conversations with Panel staff (Oct. 
21, 2010).
---------------------------------------------------------------------------
    As the vast majority of second liens are not securitized 
and are held directly by banks and other financial 
institutions, a write-down of second lien portfolios under a 
modification program could cause substantial accounting losses 
and thereby impact the solvency of some banks. In fact, the 
largest four banks--JPMorgan Chase, Bank of America, Citigroup, 
and Wells Fargo--hold 43 percent or $420.0 billion of all U.S. 
revolving and second liens ($975.3 billion).\173\ To give a 
sense of the magnitude, the value of the second liens held by 
these banks is roughly comparable to just under 80 percent of 
the amount of their Tier 1 capital, the principal measure used 
by regulators to determine the adequate capitalization of a 
bank. Specifically, at the end of the third quarter 2010, the 
four largest banks reported $420.0 billion in second lien 
mortgages while having total Tier 1 capital of $535.2 
billion.\174\ In the case of Wells Fargo, their second lien 
exposure actually exceeds the amount of their Tier 1 capital.
---------------------------------------------------------------------------
    \173\ In terms of market size, the first lien market is roughly 10 
times the size of the second lien market. However, since almost all 
second liens are not securitized, the exposure that banks have with 
respect to second liens tends to be disproportionately larger than 
their exposure from first liens. For instance, at the end of the third 
quarter, the largest four banks hold $420.0 billion in second liens, 
while holding $793.1 billion in first liens. Board of Governors of the 
Federal Reserve System, Flow of Funds Accounts of the United States, at 
96 (Sept. 30, 2010) (online at www.federalreserve.gov/RELEASES/z1/
Current/z1.pdf) (hereinafter ``Federal Reserve--Flow of Funds Accounts 
of the United States''); Data provided by Federal Reserve staff (Dec. 
1, 2010); Data on first and second lien holdings of the four largest 
banks accessed through SNL Financial data service (Dec. 9, 2010).
    \174\ The Tier 1 Capital amount is based on reporting by the banks, 
not their holding companies, and therefore may not include all second 
liens held by affiliates. Data accessed through SNL Financial data 
service (Dec. 9, 2010).
---------------------------------------------------------------------------
    Figure 13 shows that these banks are some of the largest 
investors in second lien mortgages, and Figure 14 details their 
second lien exposure as compared to their Tier 1 capital.

 FIGURE 13: OWNERSHIP OF SECOND-LIEN MORTGAGES BY INSTITUTION TYPE, AS 
                            OF Q3 2010 \175\


                         [Dollars in billions]

     
---------------------------------------------------------------------------
    \175\ Federal Reserve--Flow of Funds Accounts of the United States, 
supra note 173 at 96; Data on second lien holdings of the four largest 
banks accessed through SNL Financial data service (Dec. 9, 2010).
[GRAPHIC] [TIFF OMITTED] 62622A.013


            FIGURE 14: SECOND LIENS COMPARED TO TIER 1 CAPITAL AS OF THE THIRD QUARTER OF 2010 \176\
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                                                                                Second Liens  as
                        Company                             Second Liens      Tier 1 Capital      a Percent of
                                                                                                 Tier 1 Capital
----------------------------------------------------------------------------------------------------------------
Bank of America Corporation............................             $137.4             $164.8                 83
JPMorgan Chase  Co.....................................              108.6              139.4                 78
Citigroup Inc..........................................               52.0              125.4                 41
Wells Fargo  Company...................................              122.0              105.6                116
    Total Top 4........................................             $420.0             $535.2                 78
----------------------------------------------------------------------------------------------------------------
\176\ Data accessed through SNL Financial data service (Dec. 9, 2010).

    In addition, the four largest commercial banks, Bank of 
America, Citigroup, JPMorgan Chase, and Wells Fargo, are both 
servicers of first and second liens as well as owners of large 
second lien portfolios. Therefore, this potential for a 
significant write-down of second lien mortgages creates a 
profound conflict of interest for these entities, putting their 
financial well-being at odds with their duties as first lien 
servicers.\177\
---------------------------------------------------------------------------
    \177\ For instance, Bank of America and Chase have indicated that 
for first liens that they service, they own 15 percent and 10 percent, 
respectively, of the related second liens. House Committee on Financial 
Services, Written Testimony of Barbara Desoer, president, Bank of 
America Home Loans, Second Liens and Other Barriers to Principal 
Reduction as an Effective Foreclosure Mitigation Program, at 6 (Apr. 
13, 2010) (online at financialservices.house.gov/media/file/hearings/
111/desoer.pdf); House Committee on Financial Services, Written 
Testimony of David Lowman, chief executive officer, JPMorgan Chase Home 
Lending, Second Liens and Other Barriers to Principal Reduction as an 
Effective Foreclosure Mitigation Program, at 5 (Apr. 13, 2010) (online 
at financialservices.house.gov/media/file/hearings/111/
jpmc_lowman_4.13.10.pdf).
---------------------------------------------------------------------------
    Finally, the salient objective of HAMP is to make homes 
more affordable. Statistically, having a second lien decreases 
the likelihood that the property is affordable.\178\ If a 
homeowner has two liens, even if that homeowner is granted a 
modification on the first lien, the homeowner might still not 
have the funds to make his or her mortgage payments, as the 
modified first lien payment combined with the cost of the 
second lien might still be beyond the homeowner's reach.\179\ 
The existence of multiple liens also increases the likelihood 
that there is negative equity in the home and makes it more 
likely that the homeowner will default.\180\
---------------------------------------------------------------------------
    \178\ The likelihood that properties financed through multiple 
liens have aggregate mortgage payments greater than 30 percent of 
income is nearly 22 percent, as compared to an only 2.2 percent 
likelihood for properties with only one lien against the property. 
David Bernstein, A Presentation: Seconds First: The Role of Second 
Liens in the Mortgage Crisis and Rescue, at 7 (Nov. 10, 2008) (online 
at ssrn.com/abstract=1299144).
    \179\ Second liens, as additional borrower debt, contribute to 
back-end DTI. See Section D.3.a., discussing how borrower debt affects 
the affordability and sustainability of a modification.
    \180\ Amherst Mortgage Insight: Second Liens, supra note 154, at 5.
---------------------------------------------------------------------------
    Though the administration's two announced second lien 
programs--2MP and the second-lien portion of the FHA Short 
Refinance Program--are structured to better align the interests 
of the first and second lien holders in order to increase the 
likelihood that a borrower's modification will be successful, 
it is unclear that all of the impediments caused by second 
liens have been adequately addressed.
            d. Misaligned Incentives
    Mortgage servicers, often divisions of large banks, are 
responsible for collecting payments from borrowers on behalf of 
the investors who own the loans. These servicers play a key 
decision-making role on HAMP modifications--they are the firms 
that have entered into contracts with Treasury to make 
modifications under HAMP--but they have different financial 
incentives than the investors who own the loans. Hence, as the 
Panel described in its April 2010 report, HAMP may be faltering 
because of a principal-agent problem. The servicers are 
interested in maximizing their revenue from each loan while 
minimizing their expenses.\181\ Servicers typically incur most 
of their costs on the front-end when ``boarding'' the loans 
into their systems. Since they make money from servicing on an 
on-going basis it is in their interest to keep servicing loans 
that are current. However, once a loan is on the verge of 
becoming delinquent or defaults, servicers' incentives change: 
because the costs associated with servicing a delinquent loan 
often exceed the revenues that a servicer can generate from the 
same loan, it may be in the servicer's interest to move to 
foreclosure as soon as possible.\182\ Consequently, the 
servicer's financial interests may be at odds with the 
interests of the loan investors, who will generally receive far 
less from a foreclosure than they will from a modification. The 
picture is even more complicated when the mortgages have been 
securitized, because the holders of the senior tranches of 
mortgage-backed securities tend to benefit from more rapid 
foreclosures, while the holders of the junior tranches benefit 
from a more drawn-out foreclosure process.\183\ This 
misalignment of incentives and the disputes that can result 
from it are sometimes called ``tranche warfare.'' \184\ The 
complexity and opacity of the situation combined with the lack 
of accountability--where it is not clear whose interests the 
servicers are serving--appear to be undermining HAMP's 
effectiveness.
---------------------------------------------------------------------------
    \181\ April 2010 Oversight Report, supra note 1, at 71-74.
    \182\ See October 2009 Oversight Report, supra note 15, at 71-74. 
See also SIGTARP Quarterly Report to Congress, supra note 25, at 162 
(``Typically, if a borrower's payments are not made promptly and in 
full, servicers must advance to the investor the required amount of the 
monthly payment owed by the borrower, although in some circumstances 
servicers are required to advance only the unpaid interest. . . . As 
more loans in a servicer's portfolio become delinquent, these advance 
payments can strain servicers' cash supplies or their lines of credit. 
Servicers thus have incentives to pursue aggressive collection 
techniques to ``cure'' a loan and return it to a performing status or 
to place the property into foreclosure, which may enable them to 
recover their advances more quickly. . . . Servicers often borrow to 
fund these advances, and they incur interest expenses on that 
borrowing.'').
    \183\ See Amherst Securities Group LP, Amherst Mortgage Insight: 
The Affidavit Fiasco--Implications for Investors in Private Label 
Securities (Oct. 12, 2010) (``In general, when liquidations are 
postponed, servicers generally continue to advance (``as long as it is 
deemed recoverable''). These advances are repaid to a servicer at 
liquidation, which increases the loss severity at liquidation. That 
helps the more junior bonds, which continue to receive interest 
payments for a longer period (they never expected to receive principal, 
anyway). But postponement hurts the more senior bonds, as (1) they 
experience higher losses due to the higher severities and (2) the 
average life lengthens for their bonds, a negative for bonds purchased/
carried at a discount.'').
    \184\ Larry Cordell et al., The Incentives of Mortgage Servicers 
and Designing Loan Modifications to Address the Mortgage Crisis, at 
233-234, in Lessons from the Financial Crisis: Causes, Consequences, 
and Our Economic Future (Robert W. Kolb ed., 2010).
---------------------------------------------------------------------------
            e. Pooling and Servicing Agreements
    The contracts between the investors in a mortgage and the 
mortgage's servicers are known as PSAs. In some cases, as the 
Panel has noted in its previous reports, these agreements may 
be serving as contractual barriers to HAMP modifications.\185\ 
While PSAs generally do not bar loan modifications, they 
typically restrict the ability of servicers to extend the term 
of the loan by more than one year, and they often make it 
difficult for servicers to reduce the loan principal as part of 
a modification.\186\ These contractual restrictions may be 
hindering the ability of servicers to qualify borrowers for 
HAMP, since term extensions are a key tool for reducing monthly 
payments to the level that the program requires.
---------------------------------------------------------------------------
    \185\ March 2009 Oversight Report, supra note 10, at 42-44; October 
2009 Oversight Report, supra note 15, at 28-29; April 2010 Oversight 
Report, supra note 1, at 72. But see John P. Hunt, What Do Subprime 
Securitization Contracts Actually Say About Loan Modification? 
Preliminary Results and Implications, at 8 (Mar. 25, 2009) (online at 
www.law.berkeley.edu/files/
Subprime_Securitization_Contracts_3.25.09.pdf) (``The most common rules 
are that the servicer must follow generally applicable servicing 
standards, service the loans in the interest of the certificateholders 
and/or the trust, and service the loans as it would service loans held 
for its own portfolio. Notably, these conditions taken together can be 
read as attempting to cause the loan to be serviced as they would have 
been if they had not been securitized.'').
    \186\ April 2010 Oversight Report, supra note 1, at 72.
---------------------------------------------------------------------------
            f. Treasury's Base NPV Model
    Treasury's base NPV model is in many ways the linchpin for 
HAMP. Treasury requires that participating servicers use the 
NPV test for all HAMP eligible loans that are in imminent 
default or are at least 60 days delinquent.\187\ The NPV test 
is run before a homeowner is offered a trial modification.\188\ 
The base NPV model computes the difference between the expected 
values of those loans under unmodified and modified scenarios. 
This is the gateway into HAMP. As long as agreed to by the 
investor,\189\ a servicer must offer a HAMP modification when 
an NPV evaluation yields a positive value, meaning the total 
discounted value of expected cash flows is greater for the 
modified loan than the non-modified loan.\190\ A loan 
modification is not required when the NPV is negative.\191\
---------------------------------------------------------------------------
    \187\ The determination of delinquency is based on the Mortgage 
Bankers Association delinquency calculation; however, the determination 
for imminent default for non-GSE mortgages is left to the servicer with 
very little guidance from Treasury. MHA Handbook for Servicers of Non-
GSE Mortgages, supra note 158, at 58, 73 (``All loans that meet HAMP 
eligibility criteria and are either deemed to be in imminent default or 
delinquent as to two or more payments must be evaluated using a 
standardized NPV test.''); U.S. Department of the Treasury, Home 
Affordable Modification Program: Base Net Present Value (NPV) Model 
Specifications, at 3 (June 11, 2009) (online at www.hmpadmin.com/
portal/programs/docs/hamp_servicer/npvoverview.pdf) (hereinafter ``HAMP 
Base NPV Model Specifications''). Large servicers with at least $40 
billion on their servicing books have the option of using the base NPV 
model or creating their own proprietary model. To date, no servicer has 
elected to customize the model and Treasury indicated that it would 
remove the new model as an option, if no servicer makes such an 
election by December. HAMP Base NPV Model v4.0: Model Documentation, 
supra note 27, at 41; Treasury conversations with Panel staff (Oct. 20, 
2010).
    \188\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27, 
at 3; MHA Handbook for Servicers of Non-GSE Mortgages, supra note 158, 
at 73.
    \189\ See Section G.2.e, supra.
    \190\ MHA Handbook for Servicers of Non-GSE Mortgages, supra note 
158, at 73-74; HAMP Base NPV Model Specifications, supra note 187.
    \191\ MHA Handbook for Servicers of Non-GSE Mortgages, supra note 
158, at 73-74.
---------------------------------------------------------------------------
    To best conceptualize the NPV model, Treasury describes it 
as three discrete calculations, which are combined in the final 
stage.\192\ The inputs of the program are used to generate (1) 
default rates (for both the modified and unmodified scenarios), 
(2) cure rates (for both the modified and unmodified 
scenarios), as well as (3) a cash flow equation.\193\ All three 
results are then combined in the cash flow equation where the 
default and cure rates are used to predict the likelihood for 
various cash streams.\194\ The following figure represents a 
simplified form of that equation.
---------------------------------------------------------------------------
    \192\ Treasury conversations with Panel staff (Oct. 20, 2010).
    \193\ The cure rate represents the likelihood that a borrower who 
was previously behind in his payments, makes up those missing payments.
    \194\ A more complete description of the base NPV model equations 
can be found online on the administrative web site for servicers for 
HAMP. HAMP Base NPV Model v4.0: Model Documentation, supra note 27, at 
31-40 .
---------------------------------------------------------------------------

                   FIGURE 15: NPV MODEL DIAGRAM \195\

     
---------------------------------------------------------------------------
    \195\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27, 
at 6.
[GRAPHIC] [TIFF OMITTED] 62622A.014


    In order to calculate the NPV, the model has several inputs 
and variables, including the government incentives.\196\ 
Therefore, both borrowers with a positive NPV in the absence of 
the government incentives, as well as those who only have a 
positive NPV due to the addition of government incentives, can 
participate in HAMP.\197\ Other variables in the NPV model are 
as follows:\198\
---------------------------------------------------------------------------
    \196\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27.
    \197\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27, 
at 7-8.
    \198\ Some of these variables are fixed and others are updated in 
regular intervals depending on the availability of data. For instance, 
Treasury indicated that it updates some parameters such as home price 
projections and real estate owned (REO) discount rate on a quarterly 
basis. However, the redefault rates and cure rates are based on GSE 
analytics, and program portfolio data are updated on an as needed 
basis. Treasury conversations with Panel staff (Oct. 20, 2010).
---------------------------------------------------------------------------
            Modification costs and incentives, 
        including lower monthly mortgage payments, likelihood 
        of a redefault, and likelihood that a loan will be paid 
        off before its term expires;
            Property value relative to mortgage value;
            Likelihood of foreclosure; and
            Foreclosure costs, including legal 
        expenses, property maintenance costs, and expenses 
        involved in reselling property, and lost interest.\199\
---------------------------------------------------------------------------
    \199\ HAMP Base NPV Model Specifications, supra note 187, at 3; 
HAMP Base NPV Model v4.0: Model Documentation, supra note 27, at 36-37; 
Treasury conversations with Panel staff (Oct. 20, 2010). See Section 
G.2.c, supra, for a discussion of second liens, which are not captured 
in Treasury's base NPV model.
---------------------------------------------------------------------------
    The NPV model also has a significant amount of inputs. 
Post-modification principal and interest payments, loan terms, 
and principal amounts are included among the many inputs. Since 
many of the PSAs with investors limit the type of modification 
that can be offered on a loan, the NPV model needed to be 
flexible enough to account for the investor restrictions.\200\ 
Furthermore, not all the inputs are used in the calculation as 
some are strictly for data collection purposes.\201\
---------------------------------------------------------------------------
    \200\ See Section G.2.e, supra, for a further discussion on the 
limits on modifications placed by these agreements.
    \201\ This includes the Borrower's Total Monthly Obligation, an NPV 
input closely correlated to back-end debt. Treasury conversations with 
Panel staff (Oct. 20, 2010).
---------------------------------------------------------------------------
    Servicers are limited in their flexibility to tweak these 
inputs and variables; however, they can adjust the discount 
rate, the rate at which future cash flows are brought back to 
the present time, by adding a risk premium. For non-GSE loans, 
all servicers may add a risk premium of up to 250 basis points 
to the minimum discount rate set at Freddie Mac's Primary 
Mortgage Market Survey rate for 30-year fixed rate conforming 
loans.\202\ The number of loans that will qualify for a HAMP 
modification will vary depending on the risk premium a servicer 
uses in its NPV calculations.\203\ Higher risk premiums 
decrease the likelihood of a loan modification.\204\ In the 
October 2009 Report, the Panel noted that for a baseline 
scenario ``only a one basis point change in the risk premium is 
necessary to change the outcome of the test for the baseline 
loan from NPV positive to NPV negative.'' \205\ This 
demonstrates how sensitive the NPV model is to changes in the 
risk premium.
---------------------------------------------------------------------------
    \202\ For GSE loans, servicers are not permitted to add a premium. 
Servicers only have the flexibility to choose two risk premium rates, 
one which they must use for all loans in portfolio (loans owned by the 
servicers) and one that they need to apply to all private label loans 
(generally, loans that are owned by private label securitization trusts 
and not sponsored by any GSE). In addition, the specific risk premiums 
are considered to be proprietary and confidential by servicers and are 
not publicly disclosed. October 2009 Oversight Report, supra note 15, 
at 130; Treasury conversations with Panel staff (Oct. 20, 2010); 
Treasury conversations with Panel staff (Dec. 9, 2010).
    \203\ U.S. Government Accountability Office, Troubled Asset Relief 
Program: Further Actions Needed to Fully and Equitably Implement 
Foreclosure Mitigation Programs, at 19 (June 2010) (GAO-10-634) (online 
at www.gao.gov/new.items/d10634.pdf) (hereinafter ``GAO Report on 
Foreclosure Mitigation Programs'').
    \204\ Since the loan modifications push the cash stream further 
into the future, discount rates decrease the expected value of the 
modified loans more than the unmodified loans, thereby decreasing the 
possibility that the NPV will be a positive number. Treasury 
conversations with Panel staff (Oct. 20, 2010).
    \205\ October 2009 Oversight Report, supra note 15, at 130.
---------------------------------------------------------------------------
    Since the NPV model is complex, there are several factors 
that could affect the success of the model, including the 
design of the model, the implementation of the model, and the 
accuracy of the data input by the servicers into the 
model.\206\
---------------------------------------------------------------------------
    \206\ SIGTARP is in the process of auditing the NPV model, 
including the implementation by servicers of the NPV model, Treasury 
efforts to ensure quality control, and the procedures that servicers 
follow to communicate the reasons for NPV test failure to the 
borrowers. SIGTARP Quarterly Report to Congress, supra note 25, at 31.
---------------------------------------------------------------------------
    The correct design of the model is critical. If the NPV 
model is calibrated correctly, it will get the correct 
homeowners into HAMP to prevent avoidable foreclosures. 
However, an incorrect calibration could either act as a means 
to delay inevitable foreclosures or grant subsidies to those 
who would otherwise cure and therefore do not need the extra 
help.\207\ In response to servicer feedback as well as changes 
to HAMP, Treasury has recently released a new version of the 
NPV model. This new model, which is effective as of October 1, 
2010, reflects the PRA initiative as well as updates to the 
default and prepayment models.\208\
---------------------------------------------------------------------------
    \207\ These risks, the risk of delaying inevitable foreclosure (or 
redefault risk) and the cure risk, can significantly increase costs 
during renegotiation. In evaluating a modification, ``[o]ne must take 
into account both the redefault and the self-cure risks.'' Manuel 
Adeline, Kristopher Gerardo, and Paul S. Willen, Why Don't Lenders 
Renegotiate More Home Mortgages? Redefaults, Self-Cures, and 
Securitization, Federal Reserve Bank of Boston Working Paper 09-4, at 7 
(July 6, 2009) (online at www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf).
    \208\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27, 
at 4-5.
---------------------------------------------------------------------------
    The NPV model, similar to any financial model, can only be 
as accurate as its assumptions and inputs.\209\ In creating the 
model, Treasury had to make decisions about what to 
incorporate, balancing better results with limitations on data. 
In the NPV model, among the items that Treasury did not 
incorporate were the impact of accounting rules and back-end 
debt (including second liens).\210\ Furthermore, the economics 
captured in the NPV model are primarily those of the borrower 
and the investor, therefore the NPV model does not directly 
take into account servicer costs and incentives.\211\ 
Therefore, it is likely that one reason for these incentives is 
to compensate the servicers for some of their costs in 
implementing the program.
---------------------------------------------------------------------------
    \209\ Many assumptions in the model, including the default, 
prepayment and cure rates, are based off of historic data. Treasury 
updates these assumptions when it is warranted with the data and when 
there is sufficient new information to create reliable models. Treasury 
conversations with Panel staff (Oct. 20, 2010); Treasury conversations 
with Panel staff (Nov. 15, 2010).
    \210\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27, 
at 13-20; Treasury conversations with Panel staff (Oct. 20, 2010); 
Treasury conversations with Panel staff (Nov. 15, 2010).
    \211\ Treasury conversations with Panel staff (Dec. 3, 2010).
---------------------------------------------------------------------------
    The Panel previously examined Treasury's base NPV model in 
its October 2009 report. Among its recommendations was the need 
to increase transparency regarding the methodology of the 
model. Treasury has since released documents detailing model 
inputs, assumptions, and underlying equations for the expected 
cash flows and default probabilities. These documents have been 
updated to reflect the new version of the NPV model.\212\
---------------------------------------------------------------------------
    \212\ HAMP Base NPV Model v4.0: Model Documentation, supra note 27.
---------------------------------------------------------------------------
    A further issue concerning the performance of the model is 
the granularity of its inputs. The Panel's October 2009 report 
called for ``incorporating more localized information when 
determining a mortgage loan's value.'' For example, home price 
projections used in the base model are constructed from state 
averages rather than values within specific communities or 
neighborhoods. Limited granularity within the model is a 
possible source of inaccurate NPV calculations, and by 
extension, wrongful denials for loan modifications.\213\
---------------------------------------------------------------------------
    \213\ Congressional Oversight Panel, Written Testimony of Larry 
Litton, president and chief executive officer, Litton Loan Servicing, 
Philadelphia Field Hearing on Mortgage Foreclosures, at 3-4 (Sept. 24, 
2009) (online at cop.senate.gov/documents/testimony-092409-litton.pdf).
---------------------------------------------------------------------------
    The implementation of the model is also a source of 
concern. A June 2010 GAO report noted that audits conducted by 
MHA Compliance (MHA-C) revealed that 15 of the largest 20 HAMP 
servicers were not in compliance with certain guidelines for 
implementation of the NPV model. Further, the report discussed 
inconsistencies with seven servicers that coded the NPV model 
on their internal systems rather than running the model through 
the Fannie Mae web portal. Those servicers were required to fix 
the coding on their in-house models and until that coding was 
fixed, ``MHA-C required the servicers to refrain from denying 
permanent modifications because of negative NPV results unless 
these results were validated by the Treasury version of the NPV 
model housed on the Fannie Mae Web portal.'' \214\ Failing to 
code the NPV model properly has likely led to inconsistent 
evaluations of similarly situated borrowers.\215\
---------------------------------------------------------------------------
    \214\ GAO Report on Foreclosure Mitigation Programs, supra note 
203, at 20; Congressional Oversight Panel, Written Testimony of Paul 
Heran, program executive, Making Home Affordable--Compliance, Freddie 
Mac, COP Hearing on Treasury's Use of Private Contractors, at 5 (Sept. 
22, 2010) (online at cop.senate.gov/documents/testimony-092210-
heran.pdf) (hereinafter ``Written Testimony of Paul Heran'') (``[I]f a 
recoded NPV model is determined to provide unreliable results, a 
servicer may be required to validate results in the Treasury approved 
model until the recoded model's reliability can be substantiated.'').
    \215\ GAO Report on Foreclosure Mitigation Programs, supra note 
203, at 20.
---------------------------------------------------------------------------
    Finally, the accuracy of the inputs is vital. Servicers are 
responsible for collecting the financial information from the 
borrower and inputting the data for the NPV tests. Treasury has 
taken steps to improve accuracy, including changing the 
guidelines to require that borrowers denied based on a negative 
NPV receive letters containing the 33 inputs used in the NPV 
model.\216\ Beginning February 1, 2011, these denial letters 
will be required and borrowers will then have 30 days from the 
notice to correct the NPV inputs.\217\ Moreover, as required by 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Treasury is in the process of establishing a web portal so that 
borrowers can perform their own NPV analysis.\218\ Treasury 
indicated that it intends to launch this portal in the spring 
of 2011.\219\ Though, Treasury is still ultimately responsible 
for ensuring servicer compliance, as the Panel noted in October 
2009, ``[m]aking the model publicly available [will] facilitate 
negotiations and provide an important check against wrongful 
modification denials.'' \220\
---------------------------------------------------------------------------
    \216\ The new directive would be effective as of February 1, 2011. 
U.S. Department of the Treasury, Making Home Affordable Program--Case 
Escalation Process/Dodd-Frank Act NPV Notices, Supplemental Directive 
10-15, at 2, 21-24 (Nov. 3, 2010) (online at www.hmpadmin.com/portal/
programs/docs/hamp_servicer/sd1015.pdf) (hereinafter ``Supplemental 
Directive 10-15'').
    \217\ Id. at 2.
    \218\ Though the NPV model will be available to borrowers through a 
portal, it will only provide an ``estimated outcome.'' There are many 
factors that a borrower may not have access to that will affect the 
outcome of the NPV model including information about mortgage insurance 
on the loan and restrictions on a loan modification due to PSAs with 
investors. 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 11 (Oct. 27, 2010) (online at cop.senate.gov/documents/
testimony-102710-caldwell.pdf) (hereinafter ``Written Testimony of 
Phyllis Caldwell'') (``As required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Treasury is preparing to establish a web 
portal that borrowers can access to run a NPV analysis using input data 
regarding their own mortgages, and to provide to borrowers who are 
turned down for a HAMP modification the input data used in evaluating 
the application.''); Supplemental Directive 10-15, supra note 216, at 1 
(``However, because a borrower using the Borrower NPV Calculator may 
not use exactly the same data used by the servicer, the Borrower NPV 
Calculator will only provide an estimated outcome.''); Treasury 
conversations with Panel staff (Nov. 15, 2010).
    \219\ Supplemental Directive 10-15, supra note 216, at 1; Treasury 
conversations with Panel staff (Nov. 15, 2010).
    \220\ October 2009 Oversight Report, supra note 15, at 47.
---------------------------------------------------------------------------
            g. Sustainability of HAMP Modifications
    HAMP modifications make homeownership relatively more 
affordable by reducing borrowers' monthly debt burdens. The 
Panel has raised concerns, however, as to whether these 
modifications make homeownership sufficiently affordable to 
avoid foreclosure.\221\
---------------------------------------------------------------------------
    \221\ See April 2010 Oversight Report, supra note 1, at 4-5.
---------------------------------------------------------------------------
    Treasury has stated that its estimated redefault rate for 
HAMP permanent modifications is 40 percent over the five-year 
span for a permanent modification.\222\ For the first year of a 
modification, the redefault rate has been significantly lower, 
although the Panel has previously expressed concerns that the 
redefault rate could be higher over the long term. For a full 
discussion of redefault rates, see Section I.\223\ Although 
HAMP improves affordability, many borrowers' resources are 
severely constrained by debt other than monthly mortgage 
payments. The program does not consider the homeowner's back-
end DTI ratio--the ratio of total monthly debt payments to 
monthly income--and as a result many borrowers with permanent 
modifications are still spending a large percentage of their 
income on housing and other debt.\224\ After a HAMP 
modification, the median borrower is left paying 63 percent of 
pre-tax income towards debt.\225\ This in turn implies after-
tax DTI levels that could make modifications 
unsustainable.\226\ With high levels of total debt, even a 
small disruption of income or increase in expenses could make 
repayment impossible for these borrowers. HAMP adopted DTI 
targets that may be inappropriately high for long-term 
sustainability of loans. The 31 percent DTI target is higher 
than the GSEs' own affordability guidelines, and arguably more 
important, the program does not have a back-end affordability 
target and results in back-end DTIs that are also widely 
regarded as too high. By comparison, as discussed above in more 
detail, to qualify for an FHA loan, a borrower typically needs 
to show a back-end DTI ratio of no more than 41 percent.\227\ 
The inclusion of a specific and more demanding back-end DTI 
target in the NPV model would likely have meant either larger 
modification of the first lien loan or concessions from junior 
lienholders, raising the question of the treatment of second 
lien mortgages. As explained above, the inputs into the NPV 
model were designed to exclude back-end DTI as a factor because 
of difficulties involved in data collection.\228\
---------------------------------------------------------------------------
    \222\ Congressional Oversight Panel, Written Responses of Herbert 
M. Allison, Jr., assistant secretary for financial stability, U.S. 
Department of the Treasury, COP Hearing with Assistant Treasury 
Secretary Herbert M. Allison, Jr., at 3 (Oct. 22, 2009) (online at 
cop.senate.gov/documents/testimony-102209-allison-qfr.pdf).
    \223\ April 2010 Oversight Report, supra note 1, at 60-62.
    \224\ U.S. Department of the Treasury, Making Home Affordable 
Program: Handbook for Servicers of Non-GSE Mortgages--Version 3.0, at 
19 (Sept. 22, 2010) (online at www.hmpadmin.com/portal/programs/docs/
hamp_servicer/mhahandbook_20.pdf) (hereinafter ``MHA Handbook for 
Servicers of Non-GSE Mortgages'').
    \225\ Data provided by Treasury.
    \226\ See Section D.3.a, supra, for after-tax DTI calculations.
    \227\ See Section B.3.a, supra.
    \228\ See Section D.3.a, supra, for further discussion.
---------------------------------------------------------------------------
    Moreover, interest rates and payments for borrowers who 
successfully complete a permanent modification can increase 
after the five-year modification period.\229\ This calls into 
question whether these mortgages will be sustainable after the 
modification period expires. Even among borrowers who complete 
a five-year permanent modification, absent a dramatic recovery 
in housing prices, some will redefault when their payments 
increase at the end of the modification period. The phase-out 
of modification terms will be particularly problematic for 
those families still underwater on their properties. Unless 
housing prices recover to a significant degree or the economy 
rebounds notably, redefault rates may be higher than Treasury 
currently estimates.
---------------------------------------------------------------------------
    \229\ Explaining the rationale underlying HAMP, Ms. Caldwell 
testified before the Panel ``[t]he borrower's modified monthly payment 
would remain in place for five years, which Treasury expected would 
provide sufficient time for the housing market and the financial system 
to recover.'' Written Testimony of Phyllis Caldwell, supra note 218, at 
4.
---------------------------------------------------------------------------
    The state of the broader economy will also have a 
significant influence on the redefault rate. Curtailment of 
income is the most common reason listed for hardship by 
borrowers requesting HAMP modifications, and borrowers who are 
unable to find sufficient work will inevitably redefault. 
Unemployment and underemployment are particularly problematic 
because loan modifications under HAMP require borrowers to stay 
in their homes for several years, which may prevent borrowers 
from moving to take advantage of better job opportunities.
    The deep level of negative equity for many HAMP permanent 
modification recipients also makes the sustainability of these 
mortgages questionable in the absence of principal reductions. 
The median borrower in a HAMP permanent modification has a 125 
percent LTV ratio, meaning the family is deeply 
underwater.\230\ Even with affordable payments, deeply 
underwater borrowers may choose to strategically default or may 
be compelled to default in response to core life events, such 
as illness, changes in family circumstances, job loss or job 
opportunities.
---------------------------------------------------------------------------
    \230\ Data provided by Treasury.
---------------------------------------------------------------------------
            h. Foreclosure Processing Problems
    Charges of servicers' negligence, ranging from lost 
paperwork to improper claims of ownership, have plagued the 
government's housing rescue programs from nearly the 
beginning.\231\ As the Panel discussed in its November 2010 
report, some servicers' employees have admitted to approving 
foreclosures without properly verifying the accompanying 
documents or otherwise following proper procedure.\232\
---------------------------------------------------------------------------
    \231\ See April 2010 Oversight Report, supra note 1, at 71.
    \232\ See November 2010 Oversight Report, supra note 79, at 10-12.
---------------------------------------------------------------------------
    For servicers, foreclosures carry significant costs leading 
up to the acquisition of a property's title. Many of the 
delinquency costs, including lost principal and interest 
payments and lost servicing fee income, are time-dependent 
costs that the servicer continues to accrue throughout the 
foreclosure.\233\ Servicers are required to pay many of these 
funds in advance and often have to borrow money to cover these 
costs. In shortening the foreclosure processing period, the 
servicer not only pays less in delinquency costs out-of-pocket 
compared to a longer, and more thorough, processing period, but 
is also able to recoup its costs quicker and repay any amounts 
it has borrowed. Foreclosure processing irregularities may tilt 
servicers to initiate more foreclosures because pursuing this 
option becomes artificially cheaper, although the servicer 
should weigh all the relevant costs, including the cost to 
replace its guaranteed income from a mortgage under its 
management.\234\ Servicers may also be lowering their overhead 
costs by forgoing the administrative costs of hiring additional 
resources to conduct more robust scrutiny on mortgage 
documents.
---------------------------------------------------------------------------
    \233\ The national average time between the first missed payment 
and the foreclosure sale is approximately one year. See Mortgage 
Bankers Association, Lenders' Cost of Foreclosure, at 3 (May 28, 2008) 
(online at www.nga.org/Files/pdf/0805FORECLOSUREMORTGAGE.PDF). See also 
Congressional Budget Office, Policy Options for the Housing and 
Financial Markets, at Chapter 3 (Apr. 2008) (online at www.cbo.gov/
ftpdocs/90xx/doc9078/toc.htm).
    \234\ For a more detailed discussion on how servicer incentives 
could skew the process toward foreclosures, see Section G.2.d, supra.
---------------------------------------------------------------------------
    This difference in cost could also skew HAMP's NPV model. 
In determining whether to grant a modification to a borrower, a 
servicer uses HAMP's NPV model to compare the net present value 
of a modification versus that of a foreclosure.\235\ In valuing 
the cost of a foreclosure, the NPV model requires inputs based 
on observed costs, i.e. costs calculated based on actual 
historical data. By cutting corners in the foreclosure process, 
servicers may have been able to lower artificially the cost of 
a foreclosure, in particular by reducing the time it would take 
to complete a foreclosure. A shorter foreclosure process would 
mean decreased costs and that in turn would tilt the model in 
favor of foreclosures. 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. According to Treasury, it is not yet clear whether 
the foreclosure irregularities may have altered costs and thus 
NPV inputs to the point that it skewed the model toward 
foreclosure, however, it is carefully examining the data for 
such evidence and will take appropriate steps should it observe 
a data break point.\236\
---------------------------------------------------------------------------
    \235\ For a discussion of the NPV model, see Section G.2.f, supra.
    \236\ Treasury conversations with Panel staff (Oct. 17, 2010).
---------------------------------------------------------------------------
            i. Failure To Focus on Root Causes of Foreclosures
    The Panel first expressed concerns that HAMP was not 
designed to address the root causes of the housing crisis in 
March 2009.\237\ In subsequent reports the Panel has raised 
serious concerns about Treasury's efforts to address these 
problems, noting that HAMP has failed to address foreclosures 
caused by factors such as unemployment and negative 
equity.\238\ Unemployment can undermine many loan modifications 
designed to prevent foreclosure, since these modifications 
generally are based on the assumption that the borrower will 
stay in place and make payments for several years, and it is 
very difficult for unemployed borrowers to pass HAMP's NPV 
test. Negative equity similarly leaves borrowers unable to 
respond to life events such as changes in family circumstances, 
job loss or job opportunities. Homeowners responding to life 
events often face the choice of either walking away from their 
mortgages or turning down a job opportunity. Those who choose 
to leave their homes depress nearby property values, while 
those who turn down job opportunities disrupt the labor market. 
In either case, the economic impact is negative.
---------------------------------------------------------------------------
    \237\ March 2009 Oversight Report, supra note 10.
    \238\ April 2010 Oversight Report, supra note 1.
---------------------------------------------------------------------------
    As detailed in Section F, in response to the problem of 
foreclosures caused by unemployment, Treasury announced changes 
to HAMP that will provide temporary assistance to unemployed 
homeowners. Treasury also announced an FHA refinance option to 
address negative equity, which provides incentive payments and 
loss-sharing to encourage voluntary refinancing of underwater 
mortgages into FHA mortgages. Additionally, the HHF may offer 
assistance to unemployed or underwater borrowers in 
participating states.
    While the Panel applauds Treasury's efforts to address 
unemployment and negative equity, it is unclear that these 
initiatives will make significant headway against the scope and 
scale of the problem. Julia Gordon, senior policy advisor for 
the Center for Responsible Lending, testified before the Panel 
that ``over the next several years, the toxic combination of 
high unemployment and underwater loans could mean a stunning 
total of more than 13 million foreclosures.'' \239\ As 
discussed above, these estimates are in line with those of the 
Federal Reserve.\240\ The Panel also remains concerned about 
the timeliness of Treasury's response. Even if Treasury's 
programs succeed, their impact will not be felt until almost 
two years after the foreclosure mitigation initiative was first 
launched, perhaps proving to be too little, too late.
---------------------------------------------------------------------------
    \239\ Congressional Oversight Panel, Testimony of Julia Gordon, 
senior policy counsel, 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).
    \240\ See Section A, supra.
---------------------------------------------------------------------------
            j. Manner in Which HAMP Rollout Happened
    Since HAMP was announced in February 2009, Treasury has 
initiated half a dozen foreclosure mitigation programs and 
announced numerous changes to existing programs. The initial 
announcement was referenced but included little specificity 
about plans to modify second liens, to modify loans in 
geographic areas where home prices have fallen precipitously, 
and to encourage alternatives to foreclosure in cases where 
modifications are not possible.\241\ In the months that 
followed, Treasury announced five additional MHA programs and 
released numerous supplemental directives or additional MHA 
program guidelines.\242\ Among the changes introduced was an 
increase in incentive payments to lenders, servicers, and 
borrowers.\243\
---------------------------------------------------------------------------
    \241\ U.S. Department of the Treasury, Making Home Affordable 
Updated Detailed Program Description (Mar. 4, 2009) (online at 
treasury.tpaq.treasury.gov/press/releases/reports/
housing_fact_sheet.pdf).
    \242\ MHA Handbook for Servicers of Non-GSE Mortgages, supra note 
224.
    \243\ MHA Program Enhancements to Offer More Help for Homeowners, 
supra note 147, at 2.
---------------------------------------------------------------------------
    Although Treasury should be commended for trying new 
approaches aimed at preventing foreclosures, loan servicers and 
borrower advocates continue to express confusion about the 
constant flux of new programs, new standards, new requirements, 
and continued changes to HAMP, that make implementation more 
complex.\244\ The Panel has also expressed concern with 
Treasury's pattern of providing ever-greater incentives to 
servicers and lenders. This pattern may create an incentive for 
servicers and lenders to delay modifications in hopes that the 
government will offer a better deal in the future. The Panel 
raised many of these problems in its April 2010 report, and 
SIGTARP identified many of these issues in a March 2010 report 
examining root causes for HAMP's disappointing results.\245\
---------------------------------------------------------------------------
    \244\ Senate Committee on Banking, Housing, and Urban Affairs, 
Written Testimony of Barbara Desoer, president, Bank of America Home 
Loans, Problems in Mortgage Servicing from Modification to Foreclosure, 
at 3 (Nov. 16, 2010) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=0a4db4b3-b131-4764-8247-
c665b9978e44) (``For example, Treasury, investors, and other 
constituencies often change the requirements of their modification 
programs. HAMP alone has had nearly 100 major program changes in the 
past 20 months. Fannie and Freddie, as investors, have layered on 
additional requirements, conditions and restrictions for HAMP 
processing. When these changes occur, we and other servicers have to 
change our process, train our staff, and update technology.''); 
Congressional Oversight Panel, Written Testimony of Julia Gordon, 
senior policy counsel, Center for Responsible Lending, COP Hearing on 
TARP Foreclosure Mitigation Programs, at 19-20 (Oct. 27, 2010) (online 
at cop.senate.gov/documents/testimony-102710-gordon.pdf) (``However, 
given the way HAMP was created and implemented, many of these problems 
are no surprise. First, the program repeatedly raised public 
expectations that were then dashed when programs were not already 
operational. This pattern began at the inception of the program, when 
HAMP was announced to the public well before its infrastructure was in 
place. Servicers were quickly overwhelmed by requests when they were 
not yet prepared to qualify people for the program, thereby causing 
many homeowners to be very disappointed early on. Despite this initial 
bad experience with a lag between public announcement and rollout, 
Treasury continued to make every subsequent program change the same 
way. Rather than inform the servicers and wait for them to be ready 
before informing the public, Treasury's routine was to release the 
broad outline of a new initiative or guideline change and then have an 
implementation date months away.'').
    \245\ SIGTARP linked HAMP's disappointing results to undeveloped 
program rules at the time of the initiation, confusion resulting from 
continued guideline changes, the decision to permit servicers to start 
trial modifications without supporting documentation from borrowers, 
and limited marketing efforts by Treasury. SIGTARP Report--Factors 
Affecting Implementation of HAMP, supra note 103.
---------------------------------------------------------------------------
    Additionally, HAMP could have done a much better job with 
borrower outreach. Servicer outreach is inherently problematic, 
as servicers generally first contact borrowers in a debt 
collector role. A government-run outreach campaign might have 
been more effective at ensuring the maximum reach for HAMP. In 
its March 2010 report, SIGTARP criticized Treasury for failing 
to engage in an effective educational and promotional campaign 
on HAMP. They note that a ``lack of basic understanding about 
the program has sown confusion'' and servicers have reported 
that many borrowers did not even understand that not everyone 
is eligible for a HAMP modification.\246\ In addition, SIGTARP 
noted that a Treasury-run outreach effort would have provided 
the opportunity to educate the public about foreclosure rescue 
scams and the dangers of other types of fraud.
---------------------------------------------------------------------------
    \246\ SIGTARP Report--Factors Affecting Implementation of HAMP, 
supra note 103, at 28.
---------------------------------------------------------------------------
            k. Flawed Program Structure
    In designing HAMP, Treasury made key choices regarding the 
program structure leading to fundamental problems. First, the 
basic decision to run HAMP through Treasury was an initial 
misstep in the program. Treasury's expertise is in managing the 
U.S. government's debt and ensuring financial institution 
safety-and-soundness. Treasury had no prior experience running 
a program like HAMP, nor did it have experience with housing 
issues, with consumer programs, or with mortgage servicers. 
Treasury is also the government agency with the closest ties to 
financial institutions. It would have been appropriate to 
consider the costs and benefits of other agencies, including 
HUD, which may have greater experience in the relevant areas 
and are less focused on financial institutions. More directly 
applicable experience and distance from an interested set of 
program participants might have ensured better program design.
    A second design flaw arises because HAMP relies on mortgage 
servicers as the program's interface with borrowers. As 
detailed above, there are a variety of conflicts of interest 
and misaligned incentives with mortgage servicers. These make 
the decision to permit servicers to be the point of borrower 
contact for HAMP modifications questionable. Alternatives would 
have been either creating a central borrower interface that 
would have intermediated between borrowers and servicers or 
putting HAMP modifications up for competitive bidding. The 
Panel notes that while it may have been difficult to put in 
place an entirely new system in a short amount of time and a 
central, government-operated interface would have greatly 
increased theprogram's administrative burden, such a system 
likely would have given Treasury or another agency much greater control 
and information about servicer and borrower behavior.
    In addition, Treasury's decision to use Fannie Mae as its 
agent for HAMP program administration and Freddie Mac as its 
agent for program compliance set up barriers to success. 
Because of its own lack of housing policy expertise, Treasury 
contracted with the GSEs to serve as its agents for HAMP under 
no-bid contracts. Yet, the GSEs are highly conflicted because 
they hold the credit risk on most mortgages in the United 
States, and have their own operational concerns, raising the 
question of why Treasury decided to saddle the GSEs with 
oversight of HAMP.
    Finally, HAMP tries to be both streamlined and 
individualized in its treatment of loans. The result is that it 
is neither sufficiently streamlined nor sufficiently 
individualized, and gains the virtues of neither.

                      Part Two: The Future of HAMP

    Although HAMP will continue to make trial modifications 
until the end of 2012, the October 3, 2010 expiration of the 
TARP had important consequences for the program. Throughout 
much of 2009 and 2010, Treasury made changes to the program's 
structure in an effort to address different aspects of the 
foreclosure crisis. Because the TARP has now expired, 
programmatic changes to HAMP are no longer possible, and no 
additional TARP dollars can be allocated to HAMP, although the 
program can continue to spend previously obligated money. This 
does not mean, however, that the program will now run on auto-
pilot, or that Treasury is helpless to affect its eventual 
impact on the foreclosure crisis.
    In late 2010 and beyond, there are two main ways that 
Treasury can affect the program's ultimate success. In order to 
ensure that HAMP is as successful as possible over the long 
term, Treasury should pursue both avenues energetically. First, 
it should aggressively monitor Fannie Mae, which Treasury hired 
to administer HAMP, and Freddie Mac, which it hired to enforce 
compliance with the program's rules, and require these two 
contractors to ensure that HAMP servicers are living up to the 
obligations of their contracts with Treasury in order to 
provide the appropriate outcomes for borrowers. Servicers must 
be held accountable, for example, for failing to implement the 
HAMP NPV model properly. By ensuring efficient administration 
of the program and by requiring HAMP servicers to comply with 
the program's rules, Treasury can maximize the number of 
borrowers who will eventually benefit from a HAMP modification, 
given the existing program structure and constraints.
    Second, Treasury should focus more strongly on minimizing 
redefaults within HAMP. Ultimately, a HAMP modification is only 
a positive outcome if it allows its beneficiary to keep his or 
her home, rather than simply delaying a foreclosure. 
Preliminary redefault rates for HAMP offer some reason for 
hope, but it is still too early to say whether redefault rates 
will be lower than expectations over the five-year term of the 
program. Data being collected by HAMP servicers can shed light 
on what borrower and loan characteristics are correlated with 
redefaults. Treasury should make aggressive use of these data 
to encourage modifications that are sustainable. For example, 
should Treasury find that redefaults are correlated with 
unemployment, it can focus on the existing initiative to assist 
unemployed borrowers. Similarly, a correlation with negative 
equity could be addressed through more focused use of the 
existing FHA Short Refinance program.

     H. Treasury's Implementation of HAMP and Possible Improvements

    To implement HAMP, Treasury has chosen to work primarily 
through two financial agents, the GSEs Fannie Mae and Freddie 
Mac. To date, there have been a number of problems, both 
between the GSEs and the servicers, and between the GSEs and 
Treasury. Despite working through agents, however, Treasury 
remains ultimately responsible for HAMP's execution. This 
section examines the structure that Treasury has constructed to 
implement HAMP and what steps Treasury should take to improve 
implementation of the program.

1. Role of Fannie Mae and Freddie Mac

            a. Selection of Fannie Mae and Freddie Mac as Financial 
                    Agents
    Fannie Mae and Freddie Mac are GSEs chartered by Congress 
with the mission of providing liquidity, stability, and 
affordability to the U.S. housing and mortgage markets. In 
2008, Fannie Mae and Freddie Mac combined lost more than $108 
billion. In response, 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. Since then, 
the GSEs' legal status has been unclear. The GSEs remain 
responsible for normal business operations and day-to-day 
management.\247\ They are, however, effectively owned by the 
government; Treasury has guaranteed their debts and FHFA has 
all the powers of the management, board, and shareholders of 
the GSEs.\248\ Thus, for example, FHFA installed new boards of 
directors and CEOs, but could not hire or fire regular 
employees. Congress has not yet determined what Fannie Mae and 
Freddie Mac's ultimate status will be and is considering a 
number of potential options.\249\
---------------------------------------------------------------------------
    \247\ House Committee on Financial Services, Written Testimony of 
Edward J. DeMarco, acting director, Federal Housing Finance Agency, 
Compensation in the Financial Industry--Government Perspectives, at 6 
(Feb. 25, 2010) (online at financialservices.house.gov/media/file/
hearings/111/fhfa_acting_director_demarco_testimony_for_2-25-10.pdf).
    \248\ 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).
    \249\ The Dodd-Frank Wall Street Reform and Consumer Protection Act 
requires Treasury to conduct a study and submit recommendations on 
ending the conservatorship of Fannie Mae and Freddie Mac no later than 
January 31, 2011. Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. No. 111-203, Sec. 1074 (2010).
---------------------------------------------------------------------------
    Treasury has explained its decision to select Fannie Mae 
and Freddie Mac as the financial agents responsible for HAMP by 
claiming that the GSEs were the only entities with the 
experience, resources, and mortgage industry contacts necessary 
to implement and administer the program quickly.\250\ The FHFA 
also supported the GSEs' selection.\251\ According to Deputy 
Assistant Secretary of Treasury Gary Grippo in testimony before 
the Panel, ``[s]imply put, we made a determination that there 
were no other parties with the capabilities and infrastructure 
to operate a national mortgage modification program.'' \252\ 
The Panel's October 2010 report questions Treasury's selection 
of the GSEs.\253\ The GSEs both had to rely heavily on 
subcontractors to fulfill their responsibilities, and testimony 
from a Panel hearing suggested that Fannie Mae and Freddie 
Mac's roles as financial agents were not simply extensions of 
their prior work.\254\
---------------------------------------------------------------------------
    \250\ Treasury conversations with Panel staff (Sept. 27, 2010). See 
also Congressional Oversight Panel, October Oversight Report: Examining 
Treasury's Use of Financial Crisis Contracting Authority, at 78-82 
(Oct. 14, 2010) (online at cop.senate.gov/documents/cop-101410-
report.pdf) (hereinafter ``October 2010 Oversight Report'').
    \251\ Treasury conversations with Panel staff (Oct. 7, 2010) 
(during which Mr. Grippo indicated that FHFA ``was involved from the 
very beginning,'' provided its explicit authorization for Treasury's 
selection, and ``always had firsthand knowledge of everything.''); FHFA 
conversations with Panel staff (Oct. 8, 2010).
    \252\ Congressional Oversight Panel, Testimony of Gary Grippo, 
deputy assistant secretary for fiscal operations and policy, U.S. 
Department of the Treasury, Transcript: COP Hearing on Treasury's Use 
of Private Contractors (Sept. 22, 2010) (publication forthcoming) 
(online at cop.senate.gov/hearings/library/hearing-092210-
contracting.cfm) (hereinafter ``Transcript Testimony of Gary Grippo'').
    \253\ October 2010 Oversight Report, supra note 250, at 78-82.
    \254\ See Treasury conversations with Panel staff (Sept. 23, 2010); 
Written Testimony of Paul Heran, supra note 214, at 2.
---------------------------------------------------------------------------
            b. Role of Fannie Mae
    Fannie Mae's principal responsibilities under its $127 
million agreement include implementing HAMP guidelines and 
policies, serving as a point of contact for participating 
mortgage servicers and instructing them on how to modify loans, 
serving as paying agent to calculate subsidies and compensation 
consistent with program guidelines, and coordinating with 
Treasury and other parties toward achievement of the program's 
goals.\255\
---------------------------------------------------------------------------
    \255\ U.S. Department of the Treasury, Financial Agency Agreement 
Between U.S. Department of the Treasury and Fannie Mae, at Exhibit A 
(Feb. 18, 2009) (Contract No. TOFA-09-FAA-0002) (online at 
www.financialstability.gov/docs/ContractsAgreements/
Fannie%20Mae%20FAA%20021809%20.pdf) (hereinafter ``Financial Agency 
Agreement Between Treasury and Fannie Mae'').
---------------------------------------------------------------------------
    In addition, Fannie Mae serves as the sole data collector 
and record keeper for executed loan modifications and program 
administration. Fannie Mae collects its data and records in its 
``IR2'' database, and Treasury's Homeownership Preservation 
Office (HPO) periodically validates the accuracy of IR2's 
incentive payment data with the involvement of 
PricewaterhouseCoopers. The review tests three elements: (1) 
that all incentive payments were paid correctly; (2) that all 
the loans for which incentive payments were made meet HAMP 
eligibility requirements; and (3) that all of the IR2 data used 
is internally consistent. If the validation process reveals 
discrepancies, Treasury works with Fannie Mae to resolve them. 
In light of recent issues regarding misleading actions by 
servicers in potentially tens of thousands of foreclosure 
cases,\256\ it is reasonable to raise concerns as to how 
accurate Fannie Mae's reporting and recordkeeping is in the 
context of HAMP, particularly as Fannie Mae officials have 
indicated that primary responsibility for data accuracy lies 
with the servicers and that the embedded data checks in IR2 
check for completeness but not accuracy.\257\
---------------------------------------------------------------------------
    \256\ For example, servicers using ``robo-signers'' filed false 
affidavits in foreclosure cases across the country. For a more complete 
discussion of foreclosure and mortgage irregularities, see November 
2010 Oversight Report, supra note 79.
    \257\ Treasury conversations with Panel staff (Oct. 4, 2010).
---------------------------------------------------------------------------
    In addition to these recent concerns about servicer data, 
servicers have long had problems with losing borrower 
documentation.\258\ This persistent failing is of particular 
importance to Fannie Mae's administration of HAMP because 
incomplete documentation is a leading cause of canceled trial 
modifications.\259\ To resolve this issue, the Panel has 
repeatedly recommended that Treasury and Fannie Mae develop a 
web portal to allow borrowers to submit and track modification 
applications, to deliver application documents to servicers, 
and to centralize information.\260\ In September 2009, Treasury 
testified that it was working to build one,\261\ but in March 
2010, Treasury stated that it was still considering whether it 
should release a web portal at all.\262\ Treasury has since 
decided not to develop its own web portal for three 
reasons:\263\ (1) to the extent the portal would facilitate 
moving documents between the borrower and the servicers, 
Treasury could not guarantee that the documents would be 
complete; (2) the security concerns arising from storing so 
much personally identifiable information; and 
(3) the advent of an industry solution, discussed below, led 
Treasury to conclude that developing a Treasury web portal was 
not the best use of public money.
---------------------------------------------------------------------------
    \258\ See, e.g., SIGTARP Report--Factors Affecting Implementation 
of HAMP, supra note 103, at 27; October 2009 Oversight Report, supra 
note 15, at 107; Congressional Oversight Panel, Written Testimony of 
Irwin Trauss, supervising attorney, Consumer Housing Unit, Philadelphia 
Legal Assistance, Philadelphia Field Hearing on Mortgage Foreclosures 
(Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-092409-
trauss.pdf) (hereinafter ``Philadelphia Field Hearing on Mortgage 
Foreclosures''); Congressional Oversight Panel, Written Testimony of 
Deborah Goldberg, director, Hurricane Relief Project, National Fair 
Housing Alliance, Philadelphia Field Hearing on Mortgage Foreclosures 
(Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-092409-
goldberg.pdf) (hereinafter ``Written Testimony of Deborah Goldberg''); 
Floyd Norris, Are Banks Losing Lots of Documents?, New York Times (Dec. 
4, 2009) (online at norris.blogs.nytimes.com/2009/12/04/are-banks-
losing-lots-of-documents/); Mary Kane, White House, Loan Servicers 
Point Fingers as Foreclosure Plan Fails, The Minnesota Independent 
(Jan. 4, 2010) (online at minnesotaindependent.com/52967/white-house-
loan-servicers-point-fingers-as-foreclosure-plan-fails); Bendix 
Anderson, Second Chance for Loan Modifications, Housing Watch (Mar. 23, 
2010) (online at www.housingwatch.com/2010/03/23/second-chance-for-
loan-modifications/); Bendix Anderson, HAMP Offers New Home for 
Borrowers, Housing Watch (May 28, 2010) (online at 
www.housingwatch.com/2010/05/28/hamp-offers-new-hope-for-borrowers/); 
Stephanie Armour, More Homeowners Get Help Outside of Federal Program, 
USAToday (July 23, 2010) (online at www.usatoday.com/money/economy/
housing/2010-07-23-mortgages23_CV_N.htm).
    \259\ See, e.g., MHA Servicer Performance Report, supra note 38, at 
5. There were 196,835 trial modifications that did not convert to 
permanent modifications because of lack of documentation. Data provided 
by Treasury. Given the extensive anecdotal evidence noted above, in 
footnote 258, it is reasonable to believe that at least some of these 
conversions would not have been denied absent servicers losing borrower 
documentation.
    \260\ March 2009 Oversight Report, supra note 10, at 52; October 
2009 Oversight Report, supra note 15, at 111; April 2010 Oversight 
Report, supra note 1, at 83.
    \261\ Congressional Oversight Panel, Written Testimony of Seth 
Wheeler, senior advisor, U.S. Department of the Treasury, Philadelphia 
Field Hearing on Mortgage Foreclosures, at 6 (Sept. 24, 2009) (online 
at cop.senate.gov/documents/testimony-092409-wheeler.pdf) (hereinafter 
``Written Testimony of Seth Wheeler'').
    \262\ Treasury conversations with Panel staff (Mar. 24, 2010).
    \263\ The web portal referred to here should not be confused with 
the NPV web portal Treasury is required to develop by the Dodd-Frank 
Wall Street Reform and Consumer Protection Act. The web portal being 
discussed is not for NPV calculations, but to centralize borrower 
documentation and submit it to servicers.
---------------------------------------------------------------------------
    The Panel is pleased to note, however, that in November 
2009, HOPE NOW, a coalition of mortgage companies, investors, 
counselors, and other mortgage market participants,\264\ 
piloted the HOPE LoanPort web portal.\265\ At present, the 
LoanPort is primarily a ``counselor's portal.'' In order to use 
the LoanPort, borrowers first approach a participating housing 
counselor to modify a loan with a participating servicer. The 
counselor works with the borrower to build a loan modification 
application package, and then the counselor goes on the 
LoanPort. The LoanPort has certain required fields and 
mandatory documents that must be provided in order to submit 
the application. Once the counselor has entered all the 
required information,\266\ the application package is delivered 
to the servicer. The servicer is then required to provide the 
counselor with updates on the status of the application every 
10 days. The process from borrower approaching a housing 
counselor to the servicer reaching a decision on the 
application takes an average of 44 days (10 days for the 
housing counselor to complete the application package with the 
borrower and 34 days for the servicer to reach a 
decision).\267\ There are currently 12 servicers,\268\ and over 
1,800 housing counselors from more than 420 organizations 
participating in the LoanPort.\269\ As of November 19, 2010, 
counselors had started a total of 8,585 applications on the 
LoanPort. Of those, 3,320 were still being completed, and 4,784 
had been finished and submitted to the servicers.\270\ Though 
an important start, this annual volume of applications is a 
tiny fraction of the 672,439 HAMP trial modifications and the 
929,148 proprietary modifications started last year.\271\ Nor, 
unfortunately, is it significant in comparison to the 1,344,337 
foreclosures initiated last year.\272\
---------------------------------------------------------------------------
    \264\ HOPE NOW Alliance, About Us (online at www.hopenow.com/
hopenow-aboutus.php) (accessed Dec. 10, 2010).
    \265\ The HOPE LoanPort is now operated by its own non-profit 
group. The LoanPort completed its pilot phase in June 2010. Testimony 
of Faith Schwartz, supra note 78.
    \266\ Documents are date stamped as they are submitted, providing a 
record to minimize later documentation problems.
    \267\ HOPE LoanPort conversations with Panel staff (Nov. 15, 2010).
    \268\ HOPE LoanPort conversations with Panel staff (Nov. 15, 2010). 
The servicers are: American Home Mortgage Servicing, Bank of America, 
Bayview Loan Servicing, Chase, Citi, GMAC, Ocwen Loan Servicing, 
OneWest Bank, PNC, Saxon, Sun Trust Mortgage, and Wells Fargo. HOPE NOW 
Alliance, Partners (online at www.hopenow.com/partners.php) (accessed 
Dec. 10, 2010). An additional three servicers, Nation Star, Met Life, 
and SPS Servicing, will be live on the LoanPort by the end of the year. 
HOPE LoanPort conversations with Panel staff (Nov. 19, 2010).
    \269\ HOPE LoanPort conversations with Panel staff (Nov. 15, 2010). 
An additional three servicers will be live on the LoanPort by the end 
of the year. The 1,800 housing counselors are located in 47 states. 
Before allowing a housing counselor access, HOPE LoanPort provides 
webinar trainings. HOPE LoanPort conversations with Panel staff (Nov. 
15, 2010).
    \270\ The remaining 481 had a variety of dispositions. E-mail from 
Larry Gilmore, president and CEO, HOPE LoanPort to Panel staff (Nov. 
19, 2010).
    \271\ Data provided by Treasury; MHA Servicer Performance Report, 
supra note 38, at 2 (year measured from November 2009 through October 
2010); OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra note 
31, at 2.
    \272\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 2.
---------------------------------------------------------------------------
    HOPE LoanPort has also developed but not deployed a 
``borrower portal.'' \273\ The borrower portal allows borrowers 
to interact directly with the LoanPort, uploading documents and 
information without working through housing counselors. The 
LoanPort would then ensure the applications were complete and 
verify the borrower's information. After this was finished, 
LoanPort would deliver the application package to the servicer. 
This borrower portal has not been deployed nationwide because 
of lack of funding. HOPE LoanPort estimates it would cost under 
$30 million.\274\
---------------------------------------------------------------------------
    \273\ A variant of the borrower portal has been deployed in 
Arizona. In Arizona, a borrower submits information through the 
LoanPort. That information is then transferred to a housing counselor 
in the borrower's area, who will contact the borrower and work with 
them to complete and verify the application package. From then on, the 
counselor will use the standard counselor's portal. HOPE LoanPort 
conversations with Panel staff (Nov. 15, 2010).
    \274\ HOPE LoanPort conversations with Panel staff (Nov. 15, 2010).
---------------------------------------------------------------------------
    Going forward, HOPE LoanPort is trying to increase the 
number of borrowers using the system and to expand the number 
of participating housing counselor organizations to over 1,000 
by June 2011. It is also working with state housing agencies to 
develop partnerships. In addition, it is seeking to attract 
funding to deploy the borrower portal nationwide. Further, the 
LoanPort is in conversations with the GSEs to engage the 
investor community and move them to push servicers to use the 
LoanPort. Though 12 servicers currently participate, they do 
not use the LoanPort as their primary point of entry for 
modification applications. Freddie Mac has expressed interest 
but Fannie Mae has been reluctant. Fannie Mae has also refused 
to allowHOPE LoanPort to adapt Fannie Mae's counselor software, 
Home Counselor Online, to the LoanPort system in order to avoid the 
need to enter application information on both systems.\275\
---------------------------------------------------------------------------
    \275\ HOPE LoanPort conversations with Panel staff (Nov. 15, 2010).
---------------------------------------------------------------------------
    Treasury is supportive of the new portal,\276\ and was 
consulted during its development, but was not responsible for 
its creation.\277\ It stays abreast of new developments with 
the LoanPort but has no input in how it is run.\278\
---------------------------------------------------------------------------
    \276\ Transcript Testimony of Phyllis Caldwell, supra note 108.
    \277\ HOPE LoanPort, About Hope LoanPort (online at 
www.hopeloanportal.org/aboutloanport.php#) (accessed Dec. 10, 2010).
    \278\ Treasury conversations with Panel staff (Nov. 9, 2010).
---------------------------------------------------------------------------
    Though the LoanPort as it currently stands is an important 
step forward, only a few borrowers are currently using the 
system. Deploying the borrower portal is essential and should 
be completed as soon as possible. Allowing direct borrower 
access to the system will both increase the LoanPort's 
utilization and most effectively solve documentation problems. 
The Panel recommends that Treasury examine ways to facilitate 
the LoanPort's development in this direction, including 
exploring funding the LoanPort's borrower portal. Treasury 
should also work with HAMP servicers to encourage them to push 
the LoanPort as their primary point of entry for applications. 
In addition, Treasury should work with FHFA to determine why 
Fannie Mae has been reluctant to use the LoanPort and to 
overcome their resistance.
    Fannie Mae has additional functions relating to servicer 
support and operates the HOPE Hotline. The hotline provides 
free housing assistance to borrowers and is the primary means 
for borrowers to escalate concerns about how a servicer handled 
their claim.\279\ Treasury, however, has not explicitly 
informed borrowers that the hotline can be used to escalate 
complaints.\280\ If borrowers assert that their modifications 
were wrongly denied, complaints are escalated to HUD-approved 
housing counselors at MHA Help. That counselor will set up a 
three-way call with the servicer and borrower to attempt to 
resolve the issue. If the counselor is unable to broker a 
solution, and further intervention is needed, the complaint can 
then be sent to the counseling agencies' management, which will 
consult with higher-level officials at the servicer level.\281\ 
If the issue still cannot be resolved, the complaint will be 
escalated to the HAMP Solution Center at Fannie Mae.\282\ 
Throughout this process, the housing counselors and Fannie Mae 
do not have independent authority to resolve a borrower's 
complaint. They rely on the servicer to make the ultimate 
decision as to whether the initial modification decision was 
wrong.\283\ If a complaint has been escalated through to the 
HAMP Solution Center and alleges that the servicer did not 
follow HAMP guidelines, the complaint can be escalated one more 
time, to the MHA Compliance Committee at Treasury, which does 
have authority to require the servicer to change a modification 
decision.\284\ Since Fannie Mae began to report the information 
in June 2010, the number of complaints to the hotline, though 
small, has increased every month.\285\
---------------------------------------------------------------------------
    \279\ GAO Report on Foreclosure Mitigation Programs, supra note 
203, at 23-26.
    \280\ GAO Report on Foreclosure Mitigation Programs, supra note 
203, at 25-26. Treasury does inform borrowers through a number of 
channels that the hotline can be used for problems related to HAMP, but 
not that it can be used to escalate complaints. Treasury has explained 
this decision by stating that it wanted a single number for everything 
and that Treasury did not wish to confuse the market by identifying 
that number as a place to escalate complaints. Treasury conversations 
with Panel staff (Nov. 16, 2010).
    \281\ Treasury conversations with Panel staff (Nov. 16, 2010).
    \282\ GAO Report on Foreclosure Mitigation Programs, supra note 
203.
    \283\ Treasury conversations with Panel staff (Nov. 16, 2010). On 
November 3, 2010, Treasury issued HAMP Supplemental Directive 10-15. 
The Directive requires servicers to have written procedures and 
sufficient personnel in place to provide timely responses to escalated 
complaints. The Directive further requires that, for large servicers, 
the personnel who review escalated cases must be independent from the 
servicer personnel who made the initial modification decision. It also 
compels improved communications between the borrower and servicer 
during the escalation process. The Directive will take effect on 
February 1, 2011. Supplemental Directive 10-15, supra note 216.
    \284\ Treasury conversations with Panel staff (Nov. 16, 2010).
    \285\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through June 2010, at 8 (Aug. 6, 
2010) (online at www.financialstability.gov/docs/
June%20MHA%20Public%20Revised%20080610.pdf); U.S. Department of the 
Treasury, Making Home Affordable Program: Servicer Performance Report 
Through July 2010, at 8 (Aug. 20, 2010) (online at 
www.financialstability.gov/docs/JulyMHAPublic2010.pdf); U.S. Department 
of the Treasury, Making Home Affordable Program: Servicer Performance 
Report Through August 2010, at 8 (Sept. 22, 2010) (online at 
www.financialstability.gov/docs/AugustMHAPublic2010.pdf) (hereinafter 
``Making Home Affordable Program: Servicer Performance Report Through 
August 2010''); U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through September 2010, at 9 (Oct. 
25, 2010) (online at www.financialstability.gov/docs/
Sept%20MHA%20Public%202010.pdf) (hereinafter ``MHA Servicer Performance 
Report Through September 2010''); MHA Servicer Performance Report, 
supra note 38, at 8. In the most recent report, for October 2010, the 
complaint rate was at 5.7 percent.
---------------------------------------------------------------------------
            c. Role of Freddie Mac
    Treasury obligated $92 million to retain Freddie Mac to act 
as the HAMP compliance agent, responsible for ensuring that 
participating servicers satisfy their obligations under the 
HAMP SPAs.\286\ Freddie Mac is required, among other tasks, to 
``conduct examinations and review servicer compliance with the 
published rules for the program and report results to the 
Treasury.'' \287\
---------------------------------------------------------------------------
    \286\ U.S. Department of the Treasury, Financial Agency Agreement 
Between the U.S. Department of the Treasury and Freddie Mac, at Exhibit 
A (Feb. 18, 2009) (Contract No. TOFA-09-FAA-0003) (online at 
www.financialstability.gov/docs/ContractsAgreements/
Freddie%20Mac%20Financial%20Agency%20Agreement.pdf) (hereinafter 
``Financial Agency Agreement Between Treasury and Freddie Mac'').
    \287\ Id. at Exhibit A.
---------------------------------------------------------------------------
    Freddie Mac conducts periodic on-site examinations of 
servicers to evaluate readiness, governance, and implementation 
of HAMP requirements. In addition, Freddie Mac reviews the 
disbursements of incentive payments to servicers. Freddie Mac 
also performs periodic assessments of the use of the NPV model 
and an ongoing review of all servicers with recoded NPV models. 
Where issues are identified in these recoded models, servicers 
are asked to validate their results in the Treasury model.\288\ 
If servicers' models do not meet Treasury's NPV specifications, 
Freddie Mac will require the servicers to discontinue use of 
their models and revert back to the NPV application available 
from Treasury through the MHA Servicer Portal.\289\
---------------------------------------------------------------------------
    \288\ Id. at Exhibit A.
    \289\ TARP Two Year Retrospective, supra note 98, at 75.
---------------------------------------------------------------------------
    Freddie Mac is also authorized to conduct both unannounced 
and announced audits of servicers. It has chosen not to do any 
unannounced audits, stating that they are not practical because 
of the considerable coordination required to arrange a 
productive audit.\290\ Freddie Mac, however, does conduct 
regularly scheduled announced audits of servicers. The 
frequency of these audits is determined by the size, risk, and 
volume of the servicer.\291\ The ten largest servicers are 
subject to nearly continuous review and there are 42 servicers 
who have not yet been examined on any aspect of their 
performance. These 42 servicers are the smallest servicers and 
represent a tiny fraction of the total volume of loans.\292\ 
Freddie Mac stated that they will review these servicers at 
some point, but not necessarily within the first year. The 
schedule of reviews has been approved by Treasury.\293\
---------------------------------------------------------------------------
    \290\ Treasury and Freddie Mac conversations with Panel staff 
(Sept. 27, 2010).
    \291\ The larger, riskier, and higher volume servicers are audited 
more frequently. Treasury and Freddie Mac conversations with Panel 
staff (Sept. 27, 2010).
    \292\ Congressional Oversight Panel, Written Responses of Phyllis 
Caldwell, chief of the Homeownership Preservation Office, U.S. 
Department of the Treasury, COP Hearing on TARP Foreclosure Mitigation 
Programs, at 1 (Oct. 27, 2010) (online at cop.senate.gov/documents/
testimony-102710-caldwell-qfr.pdf).
    \293\ Treasury and Freddie Mac conversations with Panel staff 
(Sept. 27, 2010).
---------------------------------------------------------------------------
    In cases of noncompliance, Freddie Mac may direct servicers 
to perform remediation activities in consultation with 
Treasury. For example, Freddie Mac may direct a servicer who 
failed to comply with its solicitation obligations to restrict 
foreclosure activities. It is Treasury's MHA Compliance 
Committee that can make decisions to impose financial remedies, 
which may include withholding or reducing incentive payments to 
servicers, requiring repayments of prior incentive payments 
made to servicers with respect to affected loans, or requiring 
additional servicer oversight.\294\ Treasury, though, has 
eschewed levying penalties in favor of directing servicers to 
change their processes.\295\ In some instances, though, this 
committee has ordered additional oversight, for example, 
requiring servicers to assess their solicitations' impact on 
borrowers.\296\ Treasury also temporarily withheld incentive 
payments on approximately 1,400 loans until servicers resolved 
several data issues. After servicers complied, the payments 
that had been withheld were paid out, though there are still 
132 loans with outstanding problems. For these 132 loans, 
Treasury is considering permanently withholding the incentive 
payments.\297\
---------------------------------------------------------------------------
    \294\ TARP Two Year Retrospective, supra note 98, at 76.
    \295\ House Committee on Financial Services, Transcript: Robo-
Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage 
Servicing (Nov. 18, 2010) (publication forthcoming) (online at 
financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1376). 
Treasury has stated that it may begin to use financial penalties more 
frequently as the programs mature. House Committee on Financial 
Services, Written Testimony of Phyllis Caldwell, chief of the 
Homeownership Preservation Office, U.S. Department of the Treasury, 
Robo-signing, Chain of Title, Loss Mitigation, and Other Issues in 
Mortgage Servicing, at 8-9 (Oct. 27, 2010) 
(financialservices.house.gov/Media/file/hearings/111/
Caldwell111810.pdf).
    \296\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \297\ Treasury conversations with Panel staff (Oct. 21, 2010).
---------------------------------------------------------------------------
    In addition, Treasury asked Freddie Mac to develop a 
``second look'' process to audit a sample of HAMP modification 
files in order to double-check the servicer's determination on 
the request.\298\ Freddie Mac retrieves servicer source 
documents and loan files on a sample of their non-performing 
loans, as well as data from Fannie Mae's IR2 database of HAMP 
records. According to Treasury, individual borrowers whose 
files are being reviewed are not contacted in order to avoid 
added stress to borrowers. Freddie Mac then independently 
reviews the documents to ensure that it agrees with the 
decision the servicer reached on the modification.\299\ If 
Freddie Mac disagrees with a decision, it can require further 
action, including requiring servicers to reevaluate loans that 
were not offered HAMP modifications,\300\ to submit further 
documentation, to clarify a loan status, or to engage in 
process remediation, training, or policy clarification.\301\
---------------------------------------------------------------------------
    \298\ U.S. Department of the Treasury, Making Home Affordable 
Program On Pace To Offer Help to Millions of Homeowners (Aug. 4, 2009) 
(online at www.financialstability.gov/latest/tg252.html).
    \299\ Treasury conversations with Panel staff (Sept. 27, 2010). 
Second look reviews are frequently done on-site.
    \300\ If the home is in foreclosure when Freddie Mac requires the 
servicer to reevaluate the modification decision, the servicer must 
forestall the foreclosure sale. MHA Servicer Performance Report Through 
September 2010, supra note 285, at 1.
    \301\ MHA Servicer Performance Report Through September 2010, supra 
note 285, at 1.
---------------------------------------------------------------------------
    Freddie Mac publicly releases some results from these 
second look reviews, including specific results for several 
servicers.\302\ This disclosure, however, is limited. Freddie 
Mac only notes whether it disagreed with, could not yet 
determine, or agreed with a servicer's determination. This is 
not enough information for the public to evaluate the servicers 
effectively. For example, the public is unable to tell if 
Freddie Mac's determination that it disagrees with the servicer 
is the result of a technical difference or a gross violation. 
Furthermore, Freddie Mac has not focused follow-up reviews on 
the servicers with the worst records. Some servicers were 
reviewed twice, others once, but the servicers with the most 
questionable decisions in their first review were not those who 
were reviewed again.
---------------------------------------------------------------------------
    \302\ See U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through May 2010, at 6 (June 21, 
2010) (online at www.financialstability.gov/docs/
May%20MHA%20Public%20062110.pdf); MHA Servicer Performance Report 
Through September 2010, supra note 285, at 11.
---------------------------------------------------------------------------
    More troublingly, recent statements raise questions about 
Freddie Mac's willingness to pursue servicers who violate 
program guidelines. In response to revelations that servicers 
have been using ``robo-signers'' to submit false affidavits in 
thousands of foreclosure cases, Freddie Mac noted that ``we 
believe that our seller/servicers would be in violation of 
their servicing contracts with us to the extent that they 
improperly executed documents in foreclosure or bankruptcy 
proceedings.'' \303\ Trying to enforce Freddie Mac contractual 
rights, however, ``may negatively impact our relationships with 
these seller/servicers, some of which are among our largest 
sources of mortgage loans.'' \304\ The Panel condemns this 
sentiment. If Freddie Mac is hesitant to jeopardize their 
relationships with servicers to enforce their rights in their 
own book of business, it is reasonable to worry that they may 
be similarly unwilling to risk these relationships on 
Treasury's behalf by aggressively overseeing HAMP servicers. It 
is important to note, though, that both Freddie Mac and Fannie 
Mae have threatened to penalize financially thousands of 
servicers if they did not fix their foreclosure practices,\305\ 
and that FHFA is having the GSEs pursue repurchase requests 
from many of these same institutions.\306\ Nevertheless, the 
potential conflict of interest raises concerns.
---------------------------------------------------------------------------
    \303\ Federal Home Loan Mortgage Corporation, Form 10-Q for the 
Quarterly Period Ended September 30, 2010, at 190 (Nov. 3, 2010) 
(online at www.sec.gov/Archives/edgar/data/1026214/000102621410000053/
f71398e10vq.htm) (hereinafter ``Federal Home Loan Mortgage Corporation 
Form 10-Q'').
    \304\ Federal Home Loan Mortgage Corporation Form 10-Q, supra note 
303, at 190 (``While we believe that our seller/servicers would be in 
violation of their servicing contracts with us to the extent that they 
improperly executed documents in foreclosure or bankruptcy proceedings, 
as such contracts require that foreclosure proceedings be conducted in 
accordance with applicable law, it may be difficult, expensive, and 
time consuming for us to enforce our contractual rights. Our efforts to 
enforce our contractual rights may negatively impact our relationships 
with these seller/servicers, some of which are among our largest 
sources of mortgage loans.'').
    \305\ American Bankers Association, Fannie, Freddie Place Lenders 
on Notice in Foreclosure Debacle, 2 Mortgage Lending Bulletin 15, at 5-
6 (Oct. 21, 2010) (online at www.aba.com/NR/rdonlyres/A73585B8-6541-
4A77-8184-1BEFB4AB2E60/69412/10222010MortgageLendingBulletin.pdf).
    \306\ Senate Committee on Banking, Housing, and Urban Affairs, 
Testimony of Edward DeMarco, acting director, Federal Housing Finance 
Agency, Transcript: Problems in Mortgage Servicing From Modification to 
Foreclosure, Part II (Dec. 1, 2010) (publication forthcoming) 
(online at banking.senate.gov/public/
index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=ea6d7672-f492-4b1f-
be71-b0b658b48bef).
---------------------------------------------------------------------------

2. Current Oversight Mechanisms

    Treasury has a comprehensive oversight structure in place 
to monitor Fannie Mae and Freddie Mac. Primary responsibility 
inside Treasury for overseeing the GSEs rests with the Office 
of Financial Agents (OFA), which monitors the GSEs in their 
role as financial agents. However, OFA has a collaborative 
relationship with three other offices inside Treasury's Office 
of Financial Stability (OFS): HPO, the Office of the Chief 
Financial Officer, and OFS-Compliance. HPO is particularly 
important in this collaboration as it is the program office and 
therefore makes the policy decisions on how HAMP is structured 
and implemented. In addition, Treasury has a Making Home 
Affordable program committee that meets weekly as well as 
several working committees (centered on compliance, budgeting, 
and governance issues) to oversee the GSEs. These committees 
meet on a regular basis and include interlocking membership 
from each of the different Treasury offices (referenced above) 
that are tasked with monitoring and oversight responsibilities 
for Fannie Mae and Freddie Mac.\307\ Treasury's monitoring and 
supervision of the GSEs are also closely coordinated with 
general oversight and risk assessment by FHFA as part of the 
conservatorship process. Members of the FHFA conservatorship 
team continuously oversee Fannie Mae's and Freddie Mac's 
financial agency agreements, monitor the tasks that Treasury 
asks the GSEs to perform as a risk assessment measure, and help 
ensure that they are compensated appropriately for their 
work.\308\
---------------------------------------------------------------------------
    \307\ Treasury and Fannie Mae conversations with Panel staff (Oct. 
4, 2010).
    \308\ FHFA conversations with Panel staff (Oct. 4, 2010).
---------------------------------------------------------------------------
    Treasury uses several methods to evaluate and manage Fannie 
Mae's and Freddie Mac's performance and compliance with their 
financial agency agreements and the performance of their 
fiduciary obligation to Treasury. On the performance side, 
these include qualitative measures (such as assessments of cost 
containment, responsiveness, and nature of their business 
relationship with Treasury), and quantitative measures (such as 
how they process transactions, the timeliness and accuracy of 
their reports, and the number of servicer reviews 
conducted).\309\ Treasury staff are also in frequent informal 
contact with GSE staff at many levels within each 
organization.\310\
---------------------------------------------------------------------------
    \309\ Transcript Testimony of Gary Grippo, supra note 252.
    \310\ Treasury and Freddie Mac conversations with Panel staff 
(Sept. 27, 2010); Treasury and Fannie Mae conversations with Panel 
staff (Oct. 4, 2010).
---------------------------------------------------------------------------
    On the compliance side, the GSEs are required to report to 
Treasury on internal controls, risk assessments, information 
technology security, employee training, and how they have 
revisited their conflicts of interest mitigation plans.\311\ 
The financial agency agreements also require that Fannie Mae 
and Freddie Mac self-certify annually that they are complying 
with 11 selected terms of the agreements and review the 
effectiveness of their internal controls on an annual 
basis.\312\ Also on an annual basis, Treasury staff conduct on-
site visits to review the processes and controls of each agent 
at their offices.\313\ Treasury also requires agents to submit 
information regarding conflicts of interest, which it reviews 
on an ongoing basis.\314\
---------------------------------------------------------------------------
    \311\ Financial Agency Agreement Between Treasury and Fannie Mae, 
supra note 255; Financial Agency Agreement Between Treasury and Freddie 
Mac, supra note 286.
    \312\ Financial Agency Agreement Between Treasury and Fannie Mae, 
supra note 255, at Sec. 16, Exhibit D; Financial Agency Agreement 
Between Treasury and Freddie Mac, supra note 286, at Sec. 16, Exhibit 
D.
    \313\ Congressional Oversight Panel, Joint Written Testimony of 
Gary Grippo, deputy assistant secretary for fiscal operations and 
policy, and Ronald W. Backes, director of procurement services, U.S. 
Department of the Treasury, COP Hearing on Treasury's Use of Private 
Contractors, at 6 (Sept. 22, 2010) (online at cop.senate.gov/documents/
testimony-092210-treasury.pdf).
    \314\ Treasury conversations with Panel staff (Sept. 16, 2010). For 
a more complete discussion of Treasury's monitoring of contractor and 
agent conflicts of interest, see October 2010 Oversight Report, supra 
note 250, at Sections B.3 & H.
---------------------------------------------------------------------------

3. Implementation Failures and Ways To Improve

    Despite the intricate oversight mechanisms Treasury has 
developed to ensure the GSEs' performance, HAMP has suffered a 
number of implementation problems. First, there have been 
problems with the GSEs' oversight of the servicers. Secretary 
Geithner himself noted that ``servicers have done a terrible 
job of making sure that they are doing everything they can to 
meet the needs of their customers . . . And they still have 
some distance to go to try to make up for that series of basic, 
how should I say it, mistakes, inadequacies, in performance.'' 
\315\ Since this statement on June 22, 2010, servicers have 
made little progress. Of particular note are long-standing 
public complaints that servicers lose borrower 
documentation.\316\ For example, the California Reinvestment 
Coalition surveyed more than 50 housing counselors from 40 
different housing counseling agencies and found that 100 
percent of the counselors said it was very common for servicers 
to request documents the counselors had already submitted.\317\ 
A similar study by the National Counsel of La Raza found that 
60 percent of counselors reported that servicers usually or 
always lost borrower documents.\318\ Additionally, GAO reported 
in March 2010 that different servicers were applying different 
criteria in determining whether particular borrowers are at 
risk of imminent default, and therefore if they were eligible 
for HAMP, introducing inconsistencies into a standardized 
national program.\319\ In June 2010, GAO found further servicer 
errors that created inconsistencies, including that 15 of the 
largest 20 participating servicers did not comply with all 
program guidelines when implementing the NPV model.\320\ And 
there is mounting evidence of widespread irregularities by 
servicers in foreclosure proceedings, including the use of 
``robo-signers.'' The failure of Fannie Mae and Freddie Mac to 
detect foreclosure irregularities by the servicers they hire as 
part of their own business raises questions as to their 
credibility in overseeing the servicers' adherence to HAMP 
standards.
---------------------------------------------------------------------------
    \315\ Congressional Oversight Panel, Testimony of Timothy Geithner, 
secretary, U.S. Department of the Treasury, Transcript: COP Hearing 
With Treasury Secretary Timothy Geithner (June 22, 2010) (publication 
forthcoming) (online at cop.senate.gov/hearings/library/hearing-062210-
geithner.cfm).
    \316\ See, e.g., October 2009 Oversight Report, supra note 15, at 
107; Written Testimony of Deborah Goldberg, supra note 258; Written 
Testimony of Deborah Goldberg, supra note 258.
    \317\ Chasm Between Words and Deeds IV: HAMP Is Not Working, supra 
note 139, at 4.
    \318\ National Council of La Raza, Saving Homes and Homeownership: 
Perspectives From Housing Counselors, at 3 (Apr. 14, 2010) (online at 
www.nclr.org/index.php/publications/
saving_homes_and_homeownership_perspectives_From_housing_counselors). 
Another survey, a random sample of 42 active cases conducted by a 
housing counselor organization, found that servicers had lost 
documentation in 28 percent of cases. E-mail from Cheyenne Martinez-
Boyette, homeownership program lead, Mission Economic Development 
Agency, to Panel staff (Dec. 8, 2010).
    \319\ U.S. Government Accountability Office, Troubled Asset Relief 
Program: Home Affordable Modification Program Continues To Face 
Implementation Challenges, at 13-14 (Mar. 25, 2010) (GAO-10-556T) 
(online at www.gao.gov/new.items/d10556t.pdf).
    \320\ GAO Report on Foreclosure Mitigation Programs, supra note 
203, at 20-21.
---------------------------------------------------------------------------
    There have also been several implementation failures on the 
part of the GSEs themselves. OFS initially had a number of 
concerns about Freddie Mac, including the use of unqualified 
staff to perform audits.\321\ Treasury and Freddie Mac 
developed a detailed remediation plan, and Treasury has not 
reported any problems since.\322\ In addition, in its October 
2010 report, the Panel noted an instance when Fannie Mae 
publicly released a table with incorrect information. The error 
led Treasury to acknowledge that they lacked adequate controls 
with respect to the communication of program requirements and 
the validation of data.\323\ Since then, Treasury has taken 
steps to improve its oversight, hiring MITRE Corporation to 
correct the table in question as well as to validate and 
improve Treasury's data production process for all HAMP 
reports. Though both GSEs have resolved these issues as they 
are identified, the fact that such significant errors were able 
to occur raises questions about how closely Treasury is 
overseeing the GSEs.
---------------------------------------------------------------------------
    \321\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, Quarterly Report to Congress, at 102 (Oct. 21, 
2009) (online at www.sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
    \322\ Id. at 102.
    \323\ Treasury conversations with Panel staff (Sept. 23, 2010).
---------------------------------------------------------------------------
    Notably, these problems are faults in implementation, not 
program design. Treasury must work to ensure that these sorts 
of errors do not continue to occur. These situations underscore 
the need to improve oversight of the GSEs, which will help 
prevent future problems and maximize HAMP's impact.
    For example, OFA evaluates the GSEs on both qualitative 
measures (such as assessments of cost containment, 
responsiveness, and nature of their business relationship with 
Treasury), and quantitative measures (such as how they process 
transactions, the timeliness and accuracy of their reports, and 
the number of servicer reviews conducted).\324\ These metrics 
are focused completely on the interaction between Treasury and 
the GSEs, not on how the servicers deal with borrowers. This 
incentivizes the GSEs to focus on developing intricate 
processes and not necessarily on ensuring that borrowers' needs 
are met. Treasury should instead adopt measures that track the 
end results Treasury wishes to see, such as the number of 
modifications a servicer is making as compared to its peers or 
the number of complaints a servicer receives. Treasury itself 
initially proposed several metrics, including ``average 
borrower wait time in response to inquiries and response time 
for completed applications,'' but never adopted them.\325\ 
Evaluating the GSEs on the end results rather than on the 
processes they follow will encourage them to push servicers to 
do the same.
---------------------------------------------------------------------------
    \324\ Transcript Testimony of Gary Grippo, supra note 252.
    \325\ Written Testimony of Seth Wheeler, supra note 261, at 6.
---------------------------------------------------------------------------
    Another simple change Treasury could make is requiring 
Freddie Mac to call borrowers or their housing counselors 
during its Second Look reviews. At present, Freddie Mac looks 
at a servicer's source data and loan file, but does not call 
the borrowers to avoid adding to their stress. Calling 
borrowers or their counselors, however, is critical to 
assessing the accuracy of a servicer's determination. For 
example, without direct contact there is no way to validate 
that the servicer has all of the documentation the borrower 
sent. Establishing this fact is particularly important in light 
of the fact that servicers' losing documentation has been a 
consistent problem and that one of the most common causes of 
modifications being denied is missing documentation.
    Similarly, Treasury should reform its process for 
escalating complaints. Despite having three different layers of 
review for complaints, it is the servicers themselves who 
ultimately choose whether to alter the borrower's modification 
decision.\326\ The escalation process thus preserves servicers' 
discretion to decide on a modification, relying on them to 
determine if they made a mistake initially. Though the 
requirement in Supplemental Directive 10-15 that personnel who 
review escalated complaints in large servicers be independent 
from the staff that made the initial modification decision is a 
step in the right direction, it is not sufficient.\327\ 
Treasury should remove the decision from the servicers' hands 
in favor of an independent and enforceable review. To maximize 
the HOPE Hotline's impact, moreover, Treasury should clearly 
inform borrowers that the hotline can be used to escalate 
complaints. For example, Treasury could easily post a 
notification to that effect on its Making Home Affordable Web 
site. In addition, Treasury should include the information in 
other communications with borrowers. The combination of these 
two changes would improve servicer accountability to borrowers, 
as it would provide borrowers a clear and independent pathway 
to challenge incorrect determinations. If Fannie Mae or 
Treasury were to track successful complaints, these changes 
would also allow Fannie Mae and Treasury to identify those 
servicers with the best, and the worst, decision-making 
records. By then rewarding or punishing them accordingly, 
servicers could be appropriately incentivized to focus on 
borrower outcomes.
---------------------------------------------------------------------------
    \326\ GAO Report on Foreclosure Mitigation Programs, supra note 
203, at 25-26; Treasury conversations with Panel staff (Nov. 16, 2010).
    \327\ Supplemental Directive 10-15, supra note 216, at 3.
---------------------------------------------------------------------------
    Treasury should also make more prominent use of its 
available enforcement mechanisms against servicers. Treasury 
has emphasized the effectiveness of temporarily withholding 
incentive payments in resolving data issues with approximately 
1,400 loans, but has only ever withheld incentive payments in 
that one instance.\328\ It has not yet permanently stopped any 
incentive payments. As the Panel noted as early as October 
2009, ``[m]onitoring alone is ineffective unless accompanied by 
meaningful penalties for failure to comply.'' \329\ Treasury 
should be more willing to use penalties to resolve long-
standing problems, such as servicers losing borrower 
documentation.\330\
---------------------------------------------------------------------------
    \328\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \329\ October 2009 Oversight Report, supra note 15, at 109.
    \330\ As noted in Section G.2.a, supra, the voluntary nature of the 
program generates the understandable concern that if servicers are 
penalized too much, they will simply leave the program. Treasury, 
however, raised the possibility that it may not be so easy for 
servicers to exit from HAMP. The SPAs do not contain any provision that 
allows servicer withdrawal. Treasury has not fully explored the 
ramifications of this absence, but did state that Treasury had 
discussed suing a servicer for specific performance if they attempted 
to withdraw unilaterally from the program. While Treasury may decide 
not to sue, or such a suit may not be successful, this possibility 
would complicate a servicer's exit. It may, therefore, create more 
space for Treasury to penalize servicers. Treasury conversations with 
Panel staff (Oct. 21, 2010).
---------------------------------------------------------------------------
    The Panel is pleased to note that Treasury has indicated 
that it will increase its public disclosure of particular 
servicers with problems.\331\ Such ``naming and shaming'' can 
be an effective enforcement mechanism. Moreover, as the Panel 
noted in its October 2010 report, ``[i]n order for compliance 
and enforcement to function as a deterrence mechanism and be 
exercised effectively, they must be sufficiently robust and 
transparent.'' Publicly noting problem servicers and their 
sanctions will help build a credible deterrent. Public exposure 
may also be the most effective enforcement mechanism for 
policing the GSEs. Monetary inducements are ineffective because 
Fannie Mae and Freddie Mac are performing their work at 
cost,\332\ and even if Treasury were to fine one of the GSEs 
for failing to perform, this sanction would ultimately be paid 
by the taxpayers, not by the now almost non-existent GSE 
equity-holders.\333\ Congress, however, is in the process of 
deciding on the GSEs' ultimate fate, so Fannie Mae and Freddie 
Mac may be sensitive to disclosures that would cast a negative 
light on their abilities. Treasury should regularly publish a 
detailed scorecard of the GSEs' performance, as well as 
disclose any particular problems or failures.
---------------------------------------------------------------------------
    \331\ Treasury conversations with Panel staff (Oct. 21, 2010).
    \332\ See October 2010 Oversight Report, supra note 250, at 66.
    \333\ The original agreements with the GSEs included the 
possibility of incentive payments, but no incentive payments have been 
made, and Treasury has indicated that it has taken the incentive 
payment clause off the table indefinitely. Treasury conversations with 
Panel staff (Sept. 23, 2010). See also Congressional Oversight Panel, 
Testimony of Joy Cianci, senior vice president, Making Home Affordable 
Program, Fannie Mae, Transcript: COP Hearing on Treasury's Use of 
Private Contractors (Sept. 22, 2010) (publication forthcoming) (online 
at cop.senate.gov/hearings/library/hearing-092210-contracting.cfm) 
(stating that ``[t]here was a provision in the original contract that 
provided for the potential for incentives. We have not received 
incentives to date. And we're in the process of working through a 
revision to that contract. My understanding is that there will not be 
an incentive framework forward.'').
---------------------------------------------------------------------------
    Alternatively, Treasury could work with FHFA to intervene 
more directly with Fannie Mae and Freddie Mac. FHFA can 
exercise the powers of the management and board of both the 
GSEs. These powers could be used to generate internal pressure 
to improve performance, even to the extent of holding senior 
officials individually responsible for poor outcomes.

I. Redefaults of Modified Mortgages

    To ensure HAMP's success, Treasury should focus attention 
on trying to minimize redefaults of HAMP-modified loans. 
Redefaults, which occur when borrowers who have entered 
permanent modifications become delinquent on their loans, 
present a large potential pitfall for HAMP. This is in large 
part because every borrower who stops making monthly mortgage 
payments likely will not be able to keep his or her home in the 
long run. (There may be some benefit from the delay in 
foreclosures that results from failed modifications, since 
delays ease the downward pressure that foreclosures put on 
housing prices. But delays that do not address the underlying 
issues associated with mass foreclosures will not provide 
solutions.) On top of that, every redefault under HAMP 
represents a loss to taxpayers. This is a result of HAMP's 
structure: the program begins making incentive payments to 
borrowers, servicers, and investors after a loan is permanently 
modified. These payments continue for up to five years, so if a 
borrower redefaults after three years, the government will have 
paid thousands of dollars for an ultimately unsuccessful 
modification. In this sense, redefaults are more costly than 
HAMP trial modifications that fail to convert to permanent 
modifications, since no tax dollars are spent on trial 
modifications.
    Treasury's initial estimated redefault rate over the five-
year span of HAMP permanent modifications was 40 percent, but 
some private analysts estimate that the program's redefault 
rate will be higher. Barclays Capital has projected a 60 
percent redefault rate for HAMP.\334\ In addition, Standard & 
Poor's estimates that only 20 percent of HAMP trial 
modifications will ultimately succeed, an estimate that 
includes both the program's rate of conversion from trial 
modifications to permanent modifications and its redefault 
rate.\335\
---------------------------------------------------------------------------
    \334\ Barclays Capital e-mail to Panel staff (Nov. 1, 2010).
    \335\ Standard & Poor's, U.S. Government Cost To Resolve and 
Relaunch Fannie Mae and Freddie Mac Could Approach $700 Billion (Nov. 
4, 2010).
---------------------------------------------------------------------------
    Because HAMP permanent modifications have only been in 
effect for a maximum of about a year, it is difficult to 
evaluate the program's redefault rate in the context of 
Treasury's five-year estimate of a 40 percent redefault rate. 
So far, the 60+ day delinquency rate after three months in the 
program is 4.6 percent. After six months, the redefault rate is 
9.8 percent. After nine months, the rate is 15.6 percent. And 
after 12 months, the rate is 25.4 percent.\336\ (For a fuller 
discussion of HAMP redefaults, see Section I.4, below.)
---------------------------------------------------------------------------
    \336\ Data provided by Treasury.
---------------------------------------------------------------------------
    In the context of the falling number of new HAMP permanent 
modifications, redefaults are an even greater concern. If 
present trends continue, the monthly number of new permanent 
modifications could actually fall below the monthly number of 
redefaults, as Figure 16 shows. If this happens, the overall 
number of homeowners being helped by HAMP would begin to fall.

   FIGURE 16: MONTHLY REDEFAULTS AND NEW PERMANENT MODIFICATIONS IF 
                     CURRENT TRENDS CONTINUE \337\

     
---------------------------------------------------------------------------
    \337\ ``Monthly New Permanent Modifications'' and ``Monthly New 
Redefaults'' are derived from cumulative ``All Permanent Modifications 
Started'' and ``Permanent Modifications Canceled'' (excluding loans 
paid off) levels from March 2010 to October 2010 recorded in the Making 
Home Affordable Program's monthly Servicer Performance Reports. For 
these monthly reports, see Treasury Reports and Documents, supra note 
48.
[GRAPHIC] [TIFF OMITTED] 62622A.015


    To understand better how Treasury might seek to minimize 
redefaults, the Panel examined (1) the incidence of redefaults 
during the Great Depression, the only previous era in which the 
U.S. government instituted a nationwide foreclosure-prevention 
program, in order to draw lessons to apply in today's 
environment; (2) redefault rates for non-HAMP modifications 
during the current crisis; and (3) HAMP redefaults, analyzing 
the data by amount of equity held by the borrower and 
affordability, among other factors.

1. The Great Depression-Era Home Owners' Loan Corporation

    The 1920s and 1930s represent one the largest boom-and-bust 
real-estate cycles in U.S. history. From 1920 until 1930, 
prices of owner-occupied homes rose by an average of 45 
percent. Then between 1930 and 1940, nominal prices in those 
same cities fell by an average of 48.6 percent.\338\ The market 
shocks were particularly severe in the early 1930s. Housing 
prices fell by 30 to 40 percent nationwide between 1929 and 
1932.\339\ The non-farm foreclosure rate reached 13 percent in 
1933.\340\
---------------------------------------------------------------------------
    \338\ Price V. Fishback et al., The Influence of the Home Owner's 
Loan Corporation on Housing Markets During the 1930s, National Bureau 
of Economic Research Working Paper No. 15824, at 5-6 (Mar. 2010) 
(online at www.nber.org/papers/w15824) (hereinafter ``NBER Working 
Paper No. 15824''). These figures were derived from a sample of 278 of 
the largest cities across the country. In real terms, the price 
declines were lower because the U.S. economy was experiencing 
deflation. The Consumer Price Index fell by 16 percent between 1930 and 
1940.
    \339\ Id. at 5-6. The shocks were even more severe in certain 
regions; in Manhattan, home prices fell by a staggering 66 percent 
during the same four-year period. See also Tom Nicholas and Anna 
Scherbina, Real Estate Prices During the Roaring Twenties and the Great 
Depression, U.C. Davis Graduate School of Management Research Paper No. 
18-09, at 16 (Jan. 29, 2010) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1470448).
    \340\ David Wheelock, The Federal Response to Home Mortgage 
Distress: Lessons from the Great Depression, Federal Reserve Bank of 
St. Louis Review, at 139 (May/June 2008) (online at 
research.stlouisfed.org/publications/review/08/05/Wheelock.pdf) 
(hereinafter ``Federal Reserve Bank of St. Louis Review Paper'').
---------------------------------------------------------------------------
    In June 1933, in response to the housing crisis and an 
unemployment rate of 25 percent, Congress established the Home 
Owners' Loan Corporation (HOLC).\341\ The HOLC was intended to 
assist homeowners who were in trouble largely through no fault 
of their own. It did so by purchasing mortgages from private 
lenders and offering homeowners refinanced mortgages that were 
intended to be more sustainable.\342\ Initially, HOLC loans had 
5 percent interest rates and amortizing, 15-year terms, which 
was a substantial improvement for borrowers.\343\ HOLC loans 
also represented better terms than the private mortgage market 
was offering at the time. (Annex I provides an extended 
discussion of the HOLC.)
---------------------------------------------------------------------------
    \341\ Robert Van Giezen and Albert E. Schwenk, Compensation From 
Before World War I Through the Great Depression, Bureau of Labor 
Statistics Paper (Jan. 30, 2003) (online at www.bls.gov/opub/cwc/
cm20030124ar03p1.htm).
    \342\ NBER Working Paper No. 15824, supra note 338, at 6-7.
    \343\ Residential mortgages in the 1920s typically required very 
large down payments and had relatively high interest rates and short 
loan terms, so borrowers were required to make balloon payments at the 
end of the term. By lowering the required down payment, extending the 
loan term, and lowering the interest rate, the HOLC was able to 
refinance many loans even in an environment of much lower property 
values. As Annex I discusses, the interest-only and negatively 
amortizing loans of the 2000s arguably offer a similar opportunity 
today.
---------------------------------------------------------------------------
    How did the HOLC's refinanced mortgages perform? In the 
HOLC's early years, the performance was relatively poor. In 
June 1936, 62.6 percent of HOLC borrowers were at least one 
month delinquent, and 39.5 percent of them were at least three 
months delinquent. But over time the delinquency statistics 
showed improvement. By June 1939, the one-month delinquency 
rate was 46.8 percent, and the three-month delinquency rate was 
24.3 percent. By June 1942, the one-month delinquency rate was 
down to 28.2 percent, and the three-month delinquency rate was 
just 5.1 percent.\344\
---------------------------------------------------------------------------
    \344\ C. Lowell Harriss, History and Policies of the Home Owners' 
Loan Corporation, at 201-202, National Bureau of Economic Research 
(1951) (online at www.nber.org/books/harr51-1) (hereinafter ``NBER 
Research Paper''). See Annex I for more detailed data.
---------------------------------------------------------------------------
    This improvement was likely in part the result of improving 
economic conditions in the 1940s. It was also partly the result 
of the HOLC foreclosing on delinquent borrowers; once the loans 
were foreclosed, the HOLC no longer counted them as part of its 
loan inventory. Altogether, throughout the 18-year life of the 
HOLC, about 200,000 loans, or roughly 20 percent of the HOLC's 
portfolio, went into foreclosure or were voluntarily 
transferred by the borrower to the HOLC.
    Another potential reason why the percentage of defaulted 
loans fell between 1936 and 1950 is that the HOLC went to great 
lengths to keep homeowners in their houses. At its peak, the 
HOLC had about 20,000 employees and offices in 48 states. In 
servicing loans, the HOLC relied heavily on personal contact 
aimed at helping distressed homeowners. Servicing practices 
varied by state and over time, but there were some common 
themes. In the second and third months of delinquency, the HOLC 
would insert special notices with the homeowner's monthly bill. 
If the homeowner was unresponsive, a form letter followed. Next 
came a personal letter. If there was no response, a HOLC 
staffer would make an in-person visit to the home. In some 
cases, HOLC employees helped homeowners or their relatives find 
jobs, and to collect insurance claims, unpaid debts, and 
pensions. HOLC employees even suggested ways of finding tenants 
or foster children to defray the homeowner's monthly mortgage 
payment.\345\ C. Lowell Harriss, the author of a 1951 book 
about the HOLC, wrote: ``The assistance given by the HOLC's 
service representatives is difficult to summarize adequately. 
The closest parallel, perhaps, is found in the social worker's 
helping individuals and families adjust to their own problems 
and to the community around them.'' \346\ All of this stands in 
marked contrast, of course, to the highly automated, impersonal 
mortgage servicing practices of today. These differences are an 
important consideration in a comparison of redefault rates 
under the HOLC and HAMP.
---------------------------------------------------------------------------
    \345\ Id. at 66-67.
    \346\ Id. at 67.
---------------------------------------------------------------------------
    It is difficult to analyze systematically the factors that 
drove HOLC delinquencies and foreclosures, since there is a 
relative lack of useful data. For example, the HOLC collected 
borrower income data only at the time it made the loan, not on 
an ongoing basis,\347\ which makes it impossible to study the 
connection between mortgage affordability and delinquency. 
There has been research, though, on the connection between 
foreclosures and HOLC borrowers' equity stake in their homes. A 
study of a sample of HOLC loans in the New York region found 
that when the borrower's equity was equal to or greater than 
the amount of the HOLC loan, the foreclosure rate was 12 
percent. That number rose as the borrower's equity got smaller, 
though. For borrowers whose equity was less than 25 percent of 
the loan value, the foreclosure rate topped 40 percent.\348\
---------------------------------------------------------------------------
    \347\ Id. at 87-88.
    \348\ Id. at 98.
---------------------------------------------------------------------------
    The finding that HOLC loans were more likely to end in 
foreclosure if the borrower had little or no equity has 
important implications for HAMP. It suggests that borrowers 
with less equity or negative equity will be more likely to 
redefault on their modified loans, and thereby underscores the 
importance of principal reductions to the program's long-term 
success.

2. Redefaults in Other Loan Modification Efforts

    Shortly after the FDIC took IndyMac Bank into receivership 
in July 2008, it instituted a mortgage modification program for 
delinquent borrowers. The program, also discussed in Section B, 
was applied to more than 60,000 residential mortgages that were 
60 days or more past due.\349\ The FDIC's program is similar to 
HAMP in several ways. Like HAMP, it uses an NPV test to 
determine whether a mortgage should be modified. And it uses 
interest rate reductions, term extensions and principal 
forbearance to make mortgages more affordable. The FDIC program 
is somewhat less aggressive than HAMP in seeking affordability; 
it reduces interest rates as low as 3 percent, rather than 2 
percent under HAMP, and it requires that first-lien mortgage 
payments exceed no more than 38 percent of income, rather than 
31 percent under HAMP.\350\
---------------------------------------------------------------------------
    \349\ Federal Deposit Insurance Corporation, The FDIC Loan 
Modification Program at IndyMac Federal Savings Bank, presented by 
Richard A. Brown, Chief Economist, at the Mortgages and the Future of 
Housing Finance conference (Oct. 25, 2010).
    \350\ Federal Deposit Insurance Corporation, FDIC Loan Modification 
Program, at 3 (online at www.fdic.gov/consumers/loans/loanmod/
FDICLoanMod.pdf) (accessed Dec. 10, 2010).
---------------------------------------------------------------------------
    The FDIC estimated that 33 percent of the IndyMac loans 
that it modified would eventually redefault.\351\ So far, in 
the context of the IndyMac modifications, that projection has 
proven to be too optimistic. The FDIC recently published 
certain redefault data, and they show that the program's 
redefault rate rises steadily as modifications age. After 
modifications have been in the program for six months, the 
redefault rate is 18.5 percent. At one year, the redefault rate 
has risen to 42.1 percent. And at 18 months, the redefault rate 
is 59.0 percent.
---------------------------------------------------------------------------
    \351\ FDIC conversations with Panel staff (Oct. 28, 2010).
---------------------------------------------------------------------------
    The FDIC's data also show that depending on various 
characteristics of the loan and the borrower, the 18-month 
redefault rate may be as low as 40 percent or as high as 70 
percent. For example, 18-month redefault rates on IndyMac loans 
modified when they were more than 180 days delinquent were 66.5 
percent, while the redefault rate on loans modified when they 
were 60 days delinquent was 43.9 percent. Similarly, there was 
a divergence of redefault rates based on the borrower's 
original credit score. Homeowners with credit scores in the 
highest range had a redefault rate of 45.7 percent, while 
borrowers with credit scores in the lowest range had a 
redefault rate of 63.2 percent. There was also a large gap in 
redefault rates based on monthly payment reductions. For 
homeowners whose monthly payments dropped by 40 to 50 percent, 
the 18-month redefault rate was 42.8 percent. But for those 
whose payments fell by less than 20 percent, the redefault rate 
was around 70 percent. Perhaps the best news from the FDIC data 
is that redefault rates have been lower for more recent loan 
modifications than they were for earlier ones. For loans 
modified between September 2008 and April 2009, the 10-month 
redefault rate was 38.6 percent. But for loans modified during 
the following six months, the 10-month redefault rate fell to 
27.1 percent.\352\
---------------------------------------------------------------------------
    \352\ FDIC data provided to Panel staff (Dec. 8, 2010).
---------------------------------------------------------------------------

3. Current Trends in Loan Modifications and Redefaults

    Two federal financial regulatory agencies, the Office of 
the Comptroller of the Currency (OCC) and the Office of Thrift 
Supervision (OTS), publish a quarterly statistical report on 
the U.S. mortgage market. This report, the OCC/OTS Mortgage 
Metrics Report, provides data on the performance of first-lien 
residential mortgages serviced by federally regulated banks and 
thrifts, which comprise 65 percent of all U.S. mortgages. So 
while the Mortgage Metrics Report is the most reliable source 
of nationwide data on mortgage delinquencies, loan 
modifications, and foreclosures, it does not include data from 
35 percent of the mortgage market. The most recent Mortgage 
Metrics Report includes data through June 30, 2010. It shows 
that the number of loan modifications that are happening 
outside of HAMP, and therefore without incentive payments from 
the government, has exceeded the number of HAMP modifications 
each quarter since HAMP began in 2009. In the second quarter of 
2010, there were 164,473 permanent non-HAMP modifications and 
108,946 permanent HAMP modifications.\353\ It is still too 
early to draw any conclusions about the sustainability of 
modification programs that began in the last two years, since 
the ultimate success of those programs will hinge on whether 
the borrowers are able to stay in their homes over the long 
term. Still, it is instructive to review redefault data on 
modifications from non-government programs, since they shed 
light on how to make HAMP as effective as possible.
---------------------------------------------------------------------------
    \353\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 21.
---------------------------------------------------------------------------
    One must be cautious when comparing non-HAMP modifications 
with HAMP modifications because they do not necessarily have 
the same characteristics. For example, HAMP modifications 
generally result in larger decreases in monthly payments, and 
consequently result in better affordability, than non-HAMP 
modifications do. The Mortgage Metrics Report shows that in the 
second quarter of 2010, HAMP modifications resulted in an 
average monthly payment reduction of $608, compared to $307 for 
non-HAMP modifications.\354\ Furthermore, homeowners in non-
HAMP modifications, as a group, may be more likely to redefault 
than those in HAMP modifications, since certain factors that 
kept them from being approved for HAMP may also indicate that 
their personal finances are more precarious.
---------------------------------------------------------------------------
    \354\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 30-32.
---------------------------------------------------------------------------
    The data from the Mortgage Metrics Report show that 
redefault rates for all permanent loan modifications--a 
category that includes both HAMP and non-HAMP modifications--
have been dropping each quarter since the start of 2009. For 
example, in the first quarter of 2009, 30.8 percent of modified 
loans were at least 60 days delinquent within just three months 
of the modification; by the fourth quarter of 2009, this figure 
had fallen to 11.4 percent. Similarly, in the first quarter of 
2009, 42.8 percent of modified loans were at least 60 days 
delinquent within six months of the modification; by the fourth 
quarter, that figure had dropped to 20.7 percent.\355\ Figure 
17 shows the improvements in redefault rates since the start of 
2009.
---------------------------------------------------------------------------
    \355\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 33.

                FIGURE 17: PERMANENT MODIFICATIONS AT LEAST 60 DAYS DELINQUENT, BY QUARTER \356\
----------------------------------------------------------------------------------------------------------------
                                      3-month Redefault  6-month Redefault       29-month           12-month
                                             Rate               Rate          Redefault Rate     Redefault Rate
----------------------------------------------------------------------------------------------------------------
First Quarter 2009..................               30.8               42.8               51.5               55.0
Second Quarter 2009.................               18.7               33.5               40.9               43.2
Third Quarter 2009..................               14.7               27.7               32.7                 --
Fourth Quarter 2009.................               11.4               20.7                 --                 --
First Quarter 2010..................               11.1                 --                 --                 --
----------------------------------------------------------------------------------------------------------------
\356\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra note 31, at 33.

    Data from nine mortgage servicers collected by the State 
Foreclosure Prevention Working Group confirm the notion that 
redefault rates on loan modifications have been improving. 
Rates of serious delinquency after six months fell from 30.8 
percent for loans modified in August and September of 2008 to 
15.3 percent for loans modified in August and September of 
2009.\357\ The State Foreclosure Prevention Working Group also 
found that in the same time period redefault rates have fallen 
by more than 60 percent for both modifications that result in 
significant payment reductions and for those that result in 
significant principal reductions.\358\
---------------------------------------------------------------------------
    \357\ State Foreclosure Prevention Working Group, Redefault Rates 
Improve for Recent Loan Modifications, at 5 (Aug. 2010) (online at 
www.csbs.org/regulatory/Documents/SFPWG/DataReportAug2010.pdf).
    \358\ Id. at 6 (``A comparison of five reporting servicers 
demonstrates how the improvement in redefault rate is evident even when 
controlling for the type of loan modification. For instance, the 
redefault rate at six months for loans with significant payment 
reductions fell from almost 31.4% for loans modified in August to 
September of 2008 to just 11.8% for loans modified in August to 
September of 2009, a more than 62% reduction. Similarly, the redefault 
rate for loans with significant principal reductions fell from 35.4% to 
12.9%, over a 63% reduction.'').
---------------------------------------------------------------------------
    The Mortgage Metrics Report also shows that modifications 
resulting in large reductions in monthly payments have lower 
redefault rates than other modifications. This correlation is 
not surprising, given that HAMP, which produces greater 
reductions in monthly payments than other loan modification 
programs, has lower redefault rates than those programs, as 
shown below in Section I.4. The 2009 data show that 19.6 
percent of modifications that resulted in payment reductions of 
at least 20 percent were at least 60 days delinquent within six 
months. The 60-day delinquency rates are higher for 
modifications that result in less relief--or in some cases, a 
greater payment burden--for borrowers.\359\ Figure 18 shows 60+ 
day delinquency rates by change in monthly payment.
---------------------------------------------------------------------------
    \359\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 39.
---------------------------------------------------------------------------

   FIGURE 18: 60+ DAY DELINQUENCY RATES OF LOANS MODIFIED IN 2009 BY 
                        CHANGE IN PAYMENT \360\

     
---------------------------------------------------------------------------
    \360\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 40.
[GRAPHIC] [TIFF OMITTED] 62622A.016

4. HAMP Redefaults

            a. Redefault Rates
    Overall, through October 2010, 35,815 of 519,648 HAMP 
permanent modifications have redefaulted. This yields an 
overall redefault rate of 6.9 percent.\361\ This statistic is 
misleading, however, in terms of predicting the ultimate 
redefault rate on HAMP permanent modifications. More than half 
of all HAMP permanent modifications were made between April and 
October 2010. Thus, the denominator in the overall redefault 
rate is tilted toward more recent modifications. As most 
redefaults do not happen immediately, the numerator is tilted 
toward older modifications, which are fewer.
---------------------------------------------------------------------------
    \361\ Data provided by Treasury.
---------------------------------------------------------------------------
    A more complete picture of HAMP redefault rates emerges 
from the redefault rate for HAMP modifications at set numbers 
of months post-modification, as shown in Figure 19. Figure 19 
shows that although only around 1 percent of permanent 
modifications are 90+ days delinquent within their first three 
months, the number jumps to 5.5 percent by month six and 11 
percent by month nine; within a year, 21 percent of HAMP 
permanent modifications are 90 or more days delinquent, at 
which point they are disqualified from the program. This 
compares to a 40 percent redefault projection over five years. 
HAMP does not yet have redefault rates past one year, and it is 
not likely that the redefault rate will plateau at one year. 
Certain characteristics common to HAMP permanent modifications, 
such as balloon payments, deep negative equity, borrowers with 
severely damaged credit scores (which increase the borrowers' 
cost of credit for other obligations), and interest rates and 
payments that can rise after five years, may leave HAMP 
borrowers vulnerable to redefaults that peak over a somewhat 
longer time period. Doubtless, the state of the economy and 
unemployment will have a bearing on the performance of the 
modifications over the coming years. The 12-month redefault 
rate is well below Treasury's 40-percent assumption, but it is 
important to remember that the 40-percent number reflects the 
redefault rate over the five-year span of the modification. 
Only time will tell whether the assumption is too high, 
accurate, or too low.

   FIGURE 19: HAMP REDEFAULT RATES BY MONTHS POST-MODIFICATION \362\

     
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    \362\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.017
    

    HAMP's trial period serves as an effective tool in reducing 
the investment of HAMP dollars towards borrowers who are more 
likely to redefault, as HAMP redefault rates do not include 
borrowers who default during the trial period. Without such a 
screening mechanism, many additional loans would likely have 
redefaulted. In addition to the modifications experiencing 
traditional payment default during the permanent modification 
period (redefault), 146,031 HAMP trials were disqualified 
because of payment default. Had Treasury not utilized a trial 
period, these payment defaults would likely have combined with 
the traditional redefaults to yield a 44 percent redefault rate 
at 12 months and a 50 percent redefault rate at 15 months, as 
shown in Figure 20. The policy decision by Treasury to include 
a trial period helped screen out these borrowers who could not 
support a modified payment and contributed to more sustainable 
outcomes within HAMP. Recent changes made in June within HAMP 
requiring up-front verification to receive a trial modification 
further prevent less prepared borrowers from entering the trial 
period.

      FIGURE 20: 90+ DAY DELINQUENCY RATE FOR ALL QUALIFIED HAMP 
                MODIFICATIONS, TRIAL AND PERMANENT \363\

     
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    \363\ Data provided by Treasury. This figure assumes that there was 
only a three month trial period, which is what was called for by the 
original terms of HAMP. In fact some trial periods were extended 
considerably longer.
[GRAPHIC] [TIFF OMITTED] 62622A.018


    Data available in the OCC/OTS Mortgage Metrics report allow 
a comparison of HAMP modifications and non-HAMP modifications 
over the same time period. It is important to note, however, 
that the OCC/OTS data only cover approximately two-thirds of 
the mortgage market. According to that data, HAMP modifications 
are redefaulting at lower rates than other loan modifications, 
which likely stems from the more substantial relief generally 
received under the program as compared to non-HAMP 
modifications, as well as differences in borrower 
characteristics between borrowers in HAMP and borrowers 
receiving proprietary modifications. Among HAMP modifications 
initiated in the fourth quarter of 2009, 10.8 percent were at 
least 60 days delinquent within six months. This compares to 
22.4 percent for non-HAMP modifications started during the same 
period.\364\ Figure 21 compares the redefault rates for 
permanent HAMP modifications with those for permanent non-HAMP 
modifications.
---------------------------------------------------------------------------
    \364\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra 
note 31, at 37.

                          FIGURE 21: HAMP VS. NON-HAMP 60+ DAY DELINQUENCY RATES \365\
----------------------------------------------------------------------------------------------------------------
                                                                             3 Months  after    6 Months  after
                                                             Number of         Modification       Modification
                                                           Modifications        (Percent)          (Percent)
----------------------------------------------------------------------------------------------------------------
HAMP Fourth Quarter 2009...............................             20,679                7.9               10.8
Other Fourth Quarter 2009..............................            103,617               12.1               22.4
HAMP First Quarter 2010................................            100,269               10.5                 --
Other First Quarter 2010...............................            131,207               11.6                 --
----------------------------------------------------------------------------------------------------------------
\365\ OCC/OTS Mortgage Metrics Report, Second Quarter 2010, supra note 31, at 37.


            b. Relationship Between Modification Characteristics and 
                    Redefault Rates
    A full exploration of the relationship between modification 
characteristics and redefault rates would necessitate careful 
statistical analysis of loan-level data and is beyond the scope 
of this report. The Panel is surprised that Treasury has not 
undertaken such a statistical analysis itself, as it is 
fundamental to understanding what is and what is not working 
with HAMP. At this point there is already over a year's worth 
of performance history on many modifications. A better 
understanding of the relationship between modification 
characteristics and redefaults is critical for optimizing 
modifications and making the best use of TARP funds. The Panel 
strongly urges Treasury to undertake such analysis as soon as 
possible, with due attention to LTV ratios, back-end DTI 
ratios, the presence of second liens, hardship reasons, and 
state and ZIP code of the property's location, as well as these 
variables' interactions, and to make its findings public.
    The Panel also urges Treasury to make loan-level data on 
HAMP modifications publicly available in a form that is readily 
accessible for data analysis. Enabling public analysis of the 
data (including analysis by researchers at other government 
agencies) will help provide feedback to Treasury that can be 
used to improve HAMP as well as to optimize the design of non-
HAMP foreclosure mitigation programs. The Panel recognizes that 
there are legitimate concerns about protecting borrower 
privacy, but simply removing borrower names, Social Security 
numbers, and street addresses from the data would provide 
borrowers with the same level of privacy as is provided for 
data released under the Home Mortgage Disclosure Act.
    Although this report does not undertake a loan-level 
statistical analysis, in this section it does explore the 
relationship between HAMP redefault rates and certain 
modification characteristics.

Vintage

    HAMP's original vintage--permanent modifications from the 
third quarter of 2009--have performed consistently worse than 
more recent vintages. (See Figure 22.) The reason for this is 
not clear.

 FIGURE 22: REDEFAULT RATES (90+ DAYS DELINQUENT) BY QUARTERLY VINTAGE 
                                 \366\

      
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    \366\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.019
    
Mark-to-Market Loan-to-Value Ratio

    Mark-to-market loan-to-value ratio at the time of the 
modification has a strong impact on redefault rates. More 
deeply underwater loans redefault at higher rates. This 
suggests that if the goal is to lower redefaults, HAMP 
modifications should place greater emphasis on principal 
reduction instead of principal forbearance; however, that goal 
must be weighed against the possibility that fewer borrowers 
would receive modifications, unless the NPV model were changed. 
PRA attempts to consider these points, as it requires servicers 
to run two NPV analyses--one general analysis and one featuring 
principal reduction. Thus, the success of PRA could positively 
influence the success of HAMP.
    Figure 25 shows that the distribution of loan-to-value 
ratios for permanent modifications is heavily tilted toward 
deeply underwater loans. For all of the categories shown in 
Figure 23, redefaults trend upward with time. However, at each 
point in time, the loans with higher LTVs had higher redefault 
rates as compared to the loans with lower LTVs. The trend 
becomes even more pronounced for 90+ day delinquencies, as 
depicted in Figure 24. This conclusion is worrisome, given that 
most HAMP modifications retain a high LTV post-modification. 
Also notable in Figures 23 and 24 is that there is little 
difference in performance once LTVs exceed 120 percent. 
Permanent modifications with LTVs of 120-150 percent performed 
similarly to those with LTVs of above 150 percent. These 
figures do not necessarily represent a break point for 
performance based on LTV, but they do indicate that if LTV is 
low enough, there is a noticeable improvement in long-term 
performance. Figure 25 reveals that the number of HAMP 
modifications with LTVs of over 100 percent, meaning that the 
homeowner is underwater, far exceed the number of modifications 
in which the homeowner is above-water. Unless housing prices 
increase, or unless negative equity is addressed in some other 
manner, LTV represents a risk for HAMP going forward.\367\
---------------------------------------------------------------------------
    \367\ Data provided by Treasury.
---------------------------------------------------------------------------

  FIGURE 23: 60+ DAY REDEFAULT RATES BY MARK-TO-MARKET LOAN-TO-VALUE 
                              RATIO \368\

     
---------------------------------------------------------------------------
    \368\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.020
    
  FIGURE 24: 90+ DAY REDEFAULT RATES BY MARK-TO-MARKET LOAN-TO-VALUE 
                              RATIO \369\

     
---------------------------------------------------------------------------
    \369\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.021
    
FIGURE 25: NUMBER OF PERMANENT MODIFICATIONS BY MARK-TO-MARKET LOAN-TO-
                           VALUE RATIO \370\

     
---------------------------------------------------------------------------
    \370\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.022
    

Back-End DTI Ratio

    Surprisingly, back-end DTI ratios, which provide a measure 
of homeowners' total indebtedness, seem to have no correlation 
with redefault rates. (See Figures 26 and 27.) \371\ Redefaults 
are actually more frequent on modifications for borrowers who 
have lower back-end DTI ratios than they are for those with 
higher ratios.\372\ It is not clear what implications to draw 
from this. It is possible that borrowers given a second chance 
through HAMP but still saddled with high total debt have 
managed to stay current for the term of the modification to 
date, generally less than a year. After all, many borrowers 
will prioritize a mortgage payment, especially a reduced 
payment, lest the family lose its home. It is unclear whether 
homeowners will be able to stay afloat under such a debt load 
over a longer term, particularly if the economy and 
unemployment do not improve. While DTI has not proven to be 
correlated with redefault to date, this is an important point 
to monitor over the coming years, as the situation could change 
dramatically. A counter intuitive result is often the result of 
a hidden correlation, which is why it is so important for 
Treasury to engage in sophisticated analysis of redefault data. 
It is striking, as Figure 28 shows, that nearly one-third of 
HAMP permanent modifications have back-end DTI ratios of more 
than 80 percent.\373\
---------------------------------------------------------------------------
    \371\ Data provided by Treasury.
    \372\ See also Federal Reserve Bank of Atlanta Working Paper, supra 
note 88 (finding that borrowers' DTI ratios at their loans' 
originations are not strong predictors of the likelihood that they will 
default on their mortgages).
    \373\ Data provided by Treasury.
---------------------------------------------------------------------------

  FIGURE 26: 60+ DAY REDEFAULT RATES BY BACK-END DEBT-TO-INCOME RATIO 
                                 \374\

     
---------------------------------------------------------------------------
    \374\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.023
    
  FIGURE 27: 90+ DAY REDEFAULT RATES BY BACK-END DEBT-TO-INCOME RATIO 
                                 \375\

     
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    \375\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.024
    
FIGURE 28: NUMBER OF PERMANENT MODIFICATIONS BY BACK-END DEBT-TO-INCOME 
                              RATIO \376\

     
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    \376\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.025
    
Payment Reduction

    The magnitude of the borrower's payment reduction under 
HAMP also clearly affects redefault rates. As Figures 29 and 30 
show, redefault rates are much lower on loans with a larger 
percentage decrease in payments. It is not clear why the 
percentage of payment reduction would matter, whereas the 
absolute debt burden level would not, as discussed above. As 
Figure 31 shows, the majority of permanent modifications at 
least three months old in September 2010 had payment reductions 
of more than 30 percent.\377\
---------------------------------------------------------------------------
    \377\ Data provided by Treasury.
---------------------------------------------------------------------------

  FIGURE 29: 60+ DAY REDEFAULT RATES BY REDUCTION IN MONTHLY PAYMENT 
                                 \378\


---------------------------------------------------------------------------
    \378\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.026
    

  FIGURE 30: 90+ DAY REDEFAULT RATES BY REDUCTION IN MONTHLY PAYMENT 
                                 \379\

     
---------------------------------------------------------------------------
    \379\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.027
    
   FIGURE 31: NUMBER OF PERMANENT MODIFICATIONS BY PAYMENT REDUCTION 
                            PERCENTAGE \380\

     
---------------------------------------------------------------------------
    \380\ Data provided by Treasury.
    [GRAPHIC] [TIFF OMITTED] 62622A.028
    
                    Conclusions and Recommendations

    In completing its fourth report on foreclosure mitigation 
efforts, the Panel remains concerned that the choices made by 
Treasury concerning issues such as program structure, 
transparency, and data collection have not left borrowers well 
served. Nearly two years after the announcement of MHA and 
HAMP, foreclosures remain largely unabated, and while the 
foreclosure level may be leveling off in some regions, it 
remains extremely high in others.
    Under EESA, Treasury still has an obligation to use TARP 
funds in a manner that ``protects home values'' and ``preserves 
homeownership.'' \381\ The expiration of its ability to 
allocate additional money or create new programs does not mean 
that it cannot make strides toward meeting that mandate.
---------------------------------------------------------------------------
    \381\ 12 U.S.C. Sec. 5201(2)(A)-(B). For a discussion of the 
authority of the Secretary of the Treasury to use TARP funds to create 
a program such as HAMP, please see Appendix III of the Panel's April 
2010 Oversight Report, supra note 1, at 147.
---------------------------------------------------------------------------

1. Treasury Should Announce Clear, Measurable Goals for HAMP

    Nearly two years after HAMP was announced, it remains 
virtually impossible for oversight bodies and the public to 
determine whether the program is a success because Treasury has 
failed to offer a definition of success. This has been 
especially frustrating, given the clear shortcomings of the 
program. Yet, because tradeoffs are inevitable, any foreclosure 
mitigation program will be imperfect. However the fact that 
tradeoffs are inevitable does not mean that all of HAMP's flaws 
are acceptable. Unfortunately, the Panel is hamstrung in its 
attempts to distinguish between these types of problems--the 
unavoidable and the avoidable--because Treasury has provided so 
few goals and metrics for foreclosure prevention.
    Most fundamentally, how many foreclosures was HAMP intended 
to prevent? What percentage of temporary modifications did 
Treasury intend to convert to permanent status? What redefault 
rate did Treasury consider acceptable for permanent 
modifications? How frequently were servicers expected to 
misplace paperwork? In short, how many of HAMP's shortcomings 
were expected and inevitable, and how many were unexpected and 
potentially resolvable? Despite repeated urgings from the Panel 
and others, Treasury still has not answered these questions.
    Treasury continues to have the ability to resolve this 
problem. It should announce clear, measurable goals for HAMP. 
Specifically, Treasury should announce a clear metric regarding 
how many foreclosures will be prevented, the only real measure 
of success. Up to 13 million foreclosures are expected over the 
coming years, and the American people should know how many will 
be averted with the $30 billion Treasury says it intends to 
spend on HAMP.
    Announcing clear, measurable goals will help create much 
needed transparency for the program. Because the program lacks 
any metrics, Treasury has continued to focus on unrealistic 
expectations. For example, Treasury continues to state that 
HAMP will expend approximately $30 billion in TARP funds, yet 
CBO recently estimated that Treasury will spend only $12 
billion out of the $45.6 billion allocated for all TARP 
foreclosure mitigation programs, including both HAMP and the 
Hardest Hit Fund. While CBO did not publish any detail on how 
it expects the projected $12 billion to be spent, if one 
assumes that states that are recipients of Hardest Hit Fund 
grants will spend the $7.6 billion allocated to them, that 
would leave only $4.4 billion to be spent on HAMP and the other 
TARP housing programs. Had Treasury faced up to HAMP's problems 
before the TARP expired, it could have taken more concrete 
steps, such as making material program changes or reallocating 
money. Absent a dramatic and unexpected increase in HAMP 
enrollment, many billions of dollars set aside for foreclosure 
mitigation will be left unused because Treasury failed to 
recognize HAMP's shortcomings.

2. Treasury Should Collect More Data on HAMP's Progress and on Loan 
        Modifications

    Treasury is to be commended for its improvement in HAMP 
data collection, yet additional data would provide valuable new 
information. In outlining the need for federal data collection, 
the Panel's March 2009 report noted, ``While there is a clear 
picture of rising foreclosures and loss mitigation efforts that 
fail to keep pace, they do not provide sufficient information 
to determine why so many loans are defaulting and why 
foreclosure, rather than workouts, have been the dominant 
response and why modifications have often been unsuccessful. . 
. . Absent more complete and accurate information, legislators, 
regulators, and market participants are flying blind.'' \382\ 
In particular, Treasury still does not collect sufficient 
information about why loans are moving to foreclosure rather 
than workouts, nor does it monitor closely enough any loan 
modifications performed outside of HAMP. Treasury should also 
explore further public reporting of compliance matters, 
findings, and remediation activities by servicers.
---------------------------------------------------------------------------
    \382\ March 2009 Oversight Report, supra note 10, at 15.
---------------------------------------------------------------------------
    While Treasury should collect and report more data 
generally, the Panel is particularly frustrated that data 
sufficient for analysis is lacking for any of Treasury's 
foreclosure mitigation programs, save HAMP. This is the Panel's 
fourth foreclosure mitigation report, and the paucity of 
available data has been a theme in each. Nearly two years after 
the general foreclosure mitigation initiative was announced, 
Treasury indicated that it does not have data available on its 
second lien programs.\383\ More than six months after some of 
its add-on programs were announced, Treasury still does not 
even have a system of record to accept data.\384\ For other 
areas, such as redefaults, Treasury is still considering what 
data it wishes to collect.\385\ From the perspective of being 
able to demonstrate results and fix shortcomings, most Treasury 
programs are still at the very beginning stages. Because the 
add-on programs represent efforts to supplement HAMP's narrow 
focus, it is critical that they demonstrate results. Additional 
delays in data collection and reporting could mean that many 
programs do not even begin reporting data until the foreclosure 
mitigation programs are scheduled to stop making additional 
modifications at the end of 2012.
---------------------------------------------------------------------------
    \383\ Transcript Testimony of Phyllis Caldwell, supra note 108.
    \384\ SIGTARP Quarterly Report to Congress, supra note 25, at 202.
    \385\ Treasury conversations with Panel staff (Oct. 28, 2010).
---------------------------------------------------------------------------
    Further, because redefaults of permanent modifications pose 
a particular risk to HAMP's ultimate success, Treasury should 
focus its data analysis on identifying borrower characteristics 
that correlate to a higher risk of redefault. Treasury must 
also ensure that servicers are complying with data reporting 
requirements related to redefaults. At this point, some 
servicers are taking six months or longer to report new 
modifications to the system of record. Should redefaults be 
reported in a similarly tardy fashion, Treasury could end up 
improperly paying incentives to servicers for loans that have 
already redefaulted. Finally, Treasury should expand the range 
and frequency of its data reporting on redefaults.

3. Treasury Should Use HAMP's Existing Authorities as Effectively as 
        Possible To Prevent Foreclosures

    The TARP's expiration has ended Treasury's ability to 
change HAMP's structure or to dedicate additional money to the 
program. Even so, Treasury can focus on preventing as many 
foreclosures as possible under the existing program structure.
    Treasury Should Enable Borrowers To Apply for HAMP as 
Easily as Possible. Treasury should ensure that the web portal 
is expanded to provide direct access for borrowers, allowing 
them to apply for modifications and to track the status of 
their applications online. A one-stop website for HAMP would 
end one of the biggest obstacles that borrowers have identified 
to their participation in the program. In addition, Treasury 
should work with HAMP servicers to encourage them to push the 
LoanPort as their primary point of entry for applications.
    Treasury Must Hold Servicers Accountable for Failing To 
Complete Loan Modifications Appropriately. For example, to 
determine how frequently loan servicers are losing paperwork, 
Freddie Mac should expand its Second Look loan reviews to 
include contacting borrowers or their representatives to verify 
whether documents were submitted properly. Further, although 
Fannie Mae and Freddie Mac serve as Treasury's agents in 
administering HAMP, Treasury bears ultimate responsibility for 
the program's success or failure. As such, it should take 
greater steps to hold Fannie Mae and Freddie Mac accountable. 
This is especially critical in light of statements from the 
GSEs indicating a potential conflict of interest between their 
own business interests and their role as financial agents. 
Performance reviews of Fannie Mae and Freddie Mac should be 
expanded to include borrower oriented qualitative and 
quantitative measures. Compliance activities must focus on 
borrowers and outcomes, not merely process. Treasury should 
also be more willing to use its power to withhold or clawback 
incentive payments. It should then publicly detail its 
sanctions for non-compliance by both its financial agents and 
HAMP servicers.
    Treasury Should Provide a Meaningful, Independent Appeals 
Process from Servicer Decisions. Currently, the primary 
mechanism for escalating complaints, the HOPE Hotline, 
preserves servicers' discretion to decide on a modification, 
relying on them to determine if they make a mistake initially. 
Treasury should remove the decision from the servicers' hands 
in favor of an independent and enforceable review. As 
previously suggested by the Panel, this would be an appropriate 
role for the Office of Homeowner Advocate or an ombudsman. In 
addition, to maximize the impact of the appeals process, 
Treasury should clearly inform borrowers that the hotline can 
be used to escalate complaints.
    Treasury Must Address the Obstacles Presented by Second 
Liens. Since its initial report on foreclosure mitigation in 
March 2009, the Panel has consistently highlighted the 
modification obstacles created by second liens. Treasury is to 
be commended for creating programs to address second liens, 
such as 2MP and 2LP; however, it is extremely disappointing 
that nearly two years later the programs have no track record 
of success. It is critical that Treasury get the programs fully 
operational and produce data on which they can be evaluated. 
Further, given the important role second liens play in 
affecting a loan modification, Treasury should explore the 
implications of adding borrower-specific junior lien 
information directly into the NPV model. In particular, 
Treasury should consider the effect on the number of borrowers 
served and the impact on modification sustainability.
    Treasury Should Consider Ways To Increase Participation. 
Although Treasury no longer has the ability to make material 
changes to the foreclosure mitigation programs, it can make 
more modest changes designed to incentivize participation 
further. In rolling out PRA, Treasury held discussions with the 
industry to find ways to increase participation in the new 
initiative. Based on that feedback, Treasury included 
authorization, but not a requirement, for equity sharing 
arrangements subject to borrower protection provisions. 
Treasury should monitor PRA to determine whether authorization 
for equity sharing does indeed appear to increase 
participation. If so, Treasury should consider authorizing 
equity sharing arrangements in other programs.
    Treasury Should Encourage Loan Servicers To Offer More 
Effective, Sustainable Modifications. The Panel remains 
concerned regarding the long-term sustainability of HAMP 
modifications. High, persistent unemployment continues to 
present problems for many borrowers. HAMP modifications leave 
borrowers with continuing high levels of negative equity, and 
even after receiving a modification, half of HAMP borrowers are 
still paying 63 percent of pre-tax income towards debt. 
Treasury must continue to adapt its programs to address more 
effectively these root causes of foreclosure. Treasury can 
determine, based on data collected to date, which types of 
modifications have a lower correlation of redefault. Treasury 
should encourage servicers to make more of these types of 
modifications and fewer of the types of modifications that tend 
to end in redefault. Redefaults, after all, represent the worst 
failure of HAMP, as each redefault represents thousands of 
taxpayer dollars that have been spent merely to delay rather 
than prevent a foreclosure.
    Treasury Should Identify and Consider Intervening in Cases 
of Potential Redefault. Once borrowers make it into the 
modification program, Treasury must focus on keeping them 
there, as unchecked redefaults have the potential to undermine 
even the modest progress made by HAMP. One lesson to be taken 
from the HOLC program during the Great Depression was the 
importance of ongoing intervention to hold down redefault 
rates. The HOLC experienced success with early intervention 
upon delinquency, such as targeted borrower outreach, and 
Treasury should encourage the same approach. Delinquencies that 
are flagged in their early stages can potentially be brought 
current through a repayment plan. Such early intervention could 
be done at minimal cost. In more serious situations or when 
early intervention is ineffective, Treasury should assess the 
cost of any additional intervention and the likelihood that 
such intervention would keep borrowers in their homes before 
spending additional resources. As part of this evaluation 
Treasury must consider whether resources are best directed to 
providing additional assistance to those already in the program 
or helping borrowers who have not yet entered the program.
    Although HAMP has managed to prevent some number of 
foreclosures, the program as currently structured will never 
have the reach necessary to put an appreciable dent into the 
foreclosure crisis. Nonetheless, HAMP continues to have the 
authority to spend $30 billion in taxpayer funds. Treasury must 
ensure that every dollar spent is used as effectively as 
possible to prevent foreclosures.
 ANNEX I: LESSONS FROM THE HOME OWNERS' LOAN CORPORATION OF THE 1930s 
                               AND 1940s

    Prior to the current foreclosure crisis, the 1930s is the 
most recent era when U.S. housing prices have fallen on a 
sustained nationwide basis. The Depression-era decline in home 
prices led to a flood of foreclosures, which caused tremendous 
harm to families and communities. The federal government 
responded by enacting numerous policies aimed at helping 
affected homeowners and supporting the faltering mortgage 
market. One of the most significant steps was the establishment 
in June 1933 of the Home Owners' Loan Corporation (HOLC). The 
HOLC's goal was to provide relief to borrowers who were in 
trouble largely through no fault of their own. It did so by 
purchasing mortgages from private lenders and offering 
refinancing to homeowners on more favorable terms. This section 
examines the HOLC in the context of the U.S. mortgage market 
when it was established, compares the HOLC with HAMP, and draws 
lessons from the HOLC that provide perspective on challenges 
facing HAMP today.

                             A. Background

    The mortgage market of the 1920s was substantially 
different than the modern system to which Americans have become 
accustomed. There was no national mortgage market, as there is 
today, meaning that interest rates could vary substantially in 
different parts of the country. In some geographic areas, even 
as home prices soared during the 1920s, banks did not offer 
real estate loans, so local residents turned to insurance 
companies for mortgages.\386\ In addition, borrowers typically 
had to make down payments equal to 40 to 60 percent of the 
property's value. Loans typically lasted 10 years or less and 
required payment of interest only; after the loan term, a 
balloon payment equal to the loan's principal was due. Because 
most borrowers did not have the cash to pay off the principal, 
they typically refinanced into a new loan.\387\ The booming 
real-estate market of the 1920s also had some features that 
would be familiar to modern-day Americans. Lending standards 
became looser during the 1920s, with many homeowners taking out 
amortizing second liens that allowed them to borrow an 
additional 30 percent of their home's value.\388\
---------------------------------------------------------------------------
    \386\ Senate Committee on Banking and Currency, Subcommittee on 
Home Mortgages, Etc., Testimony of Horace Russell, general counsel, 
Federal Home Loan Bank Board of Atlanta, Home Owners Loan Act, 73rd 
Congress, at 7-8 (Apr. 20 and 22, 1933) (hereinafter ``Testimony of 
Horace Russell'') (estimating that in 1933, one-third of U.S. counties 
did not have banks that made real estate loans, and noting that in many 
of these communities there had never been banks that made such loans).
    \387\ While some lenders did offer amortizing loans, even those had 
relatively short terms. NBER Working Paper No. 15824, supra note 338, 
at 6-7.
    \388\ Kenneth A. Snowden, The Anatomy of a Residential Mortgage 
Crisis: A Look Back to the 1930s, National Bureau of Economic Research 
Working Paper No. 16244, at 9-10 (July 2010) (online at www.nber.org/
papers/w16244.pdf).
---------------------------------------------------------------------------
    When property values contracted sharply in the early 1930s, 
obtaining a refinanced mortgage became much more difficult. As 
in the current crisis, relatively few homeowners received the 
kinds of private mortgage modifications that made it easier for 
them to keep their homes.\389\ One study of mortgage 
modifications in the New York metropolitan area found that 5 
percent of loans originated from 1920-1939 received a 
modification that might be considered a concession by the 
lender, while almost 14 percent of those loans ended in a 
foreclosure or an agreement by the borrower to provide a deed 
in lieu of foreclosure.\390\ Lenders may have been cautious 
about offering concessions to homeowners because they had 
trouble distinguishing between the mortgages that needed a 
modification in order to avert a foreclosure and those that did 
not. Modern credit scores were not available in the 1930s,\391\ 
and DTI ratios, which today's lenders use to determine whether 
a borrower can afford a mortgage, were apparently not widely 
used.\392\
---------------------------------------------------------------------------
    \389\ See, e.g., Jonathan D. Rose, The Incredible HOLC? Mortgage 
Relief During the Great Depression, at 25 (Nov. 9, 2009) (online at 
www.uncg.edu/bae/econ/seminars/2010/Rose.pdf) (hereinafter ``The 
Incredible HOLC? Mortgage Relief During the Great Depression'') 
(``Mortgage lenders were reluctant during the Depression to engage in 
much serious refinancing, especially debt reductions, and they appear 
similarly reluctant today.'')
    \390\ Andra C. Ghent, Residential Mortgage Renegotiation During the 
Great Depression, at 20 (June 15, 2010) (online at papers.ssrn.com/
sol3/papers.cfm?abstract_id=1604664) (hereinafter ``Residential 
Mortgage Renegotiation During the Great Depression'').
    \391\ There were credit reports at the time, and the HOLC used them 
to obtain information on applicants. NBER Research Paper, supra note 
344, at 2, National Bureau of Economic Research.
    \392\ Residential Mortgage Renegotiation During the Great 
Depression, supra note 390.
---------------------------------------------------------------------------
    By 1933, the government estimated that 20 to 25 percent of 
the nation's $20 billion in home mortgage debt ($336 billion in 
today's dollars) was in default.\393\
---------------------------------------------------------------------------
    \393\ Testimony of Horace Russell, supra note 386, at 6, 9.
---------------------------------------------------------------------------

                        B. The HOLC's Operations

    The HOLC was established by the Home Owners Loan Act of 
1933 as a government corporation to be administered by the 
recently established Federal Home Loan Bank Board. The 
legislation, which had broad support in Congress,\394\ was 
proposed by President Roosevelt. Roosevelt argued at the time 
that the ``broad interests of the Nation require that specific 
safeguards should be thrown around home ownership as a 
guarantee of social and economic stability, and that to protect 
home owners from inequitable enforced liquidation in a time of 
general distress is a proper concern of the Government.'' \395\ 
The HOLC was capitalized with $200 million ($3.4 billion in 
today's dollars). It was also given the authority to issue up 
to $2 billion in government bonds ($33 billion today).
---------------------------------------------------------------------------
    \394\ The vote in the House of Representatives was 383-4. No record 
vote was taken in the Senate.
    \395\ Franklin D. Roosevelt, Message to Congress on Small Home 
Mortgage Foreclosures (Apr. 13, 1933) (online at 
www.presidency.ucsb.edu/ws/?pid=14618).
---------------------------------------------------------------------------
    HOLC refinance loans were restricted to borrowers in 
default.\396\ Homeowners whose homes were worth $20,000 or 
less--this figure is equivalent to $336,000 today, and the vast 
majority of U.S. homeowners qualified under the standard--were 
eligible to apply for a refinancing. The government provided 
refinancings of up to 80 percent of the property's value, or 
$14,000, whichever was higher. Initially, under the terms of 
the refinanced loans, the homeowner paid 5 percent interest, 
which was 1-2 percent below prevailing market rates,\397\ and 
the loans fully amortized over 15 years. Second liens could 
also be refinanced, although total obligations on the property 
could not exceed 100 percent of the appraisal value.\398\ 
Delinquent property tax payments could be financed, including 
for people who owned their homes outright, which helped boost 
revenue for local governments.\399\ The HOLC addressed the 
problem of unemployment by allowing three-year term extensions 
for borrowers who were unable to pay. The program did not offer 
loans for new home purchases,\400\ but it did lend money for 
the reconditioning of homes.\401\
---------------------------------------------------------------------------
    \396\ NBER Research Paper, supra note 344, at 1, National Bureau of 
Economic Research.
    \397\ Testimony of Horace Russell, supra note 386, at 15, 17.
    \398\ NBER Research Paper, supra note 344, at 35-39, National 
Bureau of Economic Research.
    \399\ Rosalind Tough, The Life Cycle of the Home Owners' Loan 
Corporation, Land Economics (1951) (hereinafter ``The Life Cycle of the 
Home Owners' Loan Corporation'').
    \400\ Home Owner's Loan Corporation, Statement by Chairman William 
F. Stevenson Relative to the Method and Procedure of Procuring Loans 
from the Federal Home Owners' Loan Corporation (June 6, 1933) 
(hereinafter ``Statement by Chairman William F. Stevenson'').
    \401\ NBER Research Paper, supra note 344, at 4, National Bureau of 
Economic Research.
---------------------------------------------------------------------------
    Lenders who agreed to sell their mortgages to the 
government received the appraised value of the property. 
Appraisals were also used to determine whether a homeowner had 
the 20 percent equity needed to qualify for a HOLC mortgage. 
Because housing markets were not functioning properly at the 
time, determining appraised values was difficult. The HOLC's 
chairman, William Stevenson, acknowledged this problem when the 
program was established, saying, ``The matter of appraisal is 
the most difficult problem to be dealt with by the Corporation 
on account of the chaotic condition of the country with 
reference to values.'' \402\ HOLC appraisals were supposed to 
weigh three factors equally: the property's estimated current 
market price; the cost of a similar lot, plus the cost of 
reproducing the building, minus depreciation; and the 
capitalization of the reasonable monthly rental value for the 
last 10 years.\403\ Despite the establishment of this standard, 
research has shown that ensuring accurate appraisals was a 
problem for the HOLC, and appraisal standards varied 
significantly across the country.\404\
---------------------------------------------------------------------------
    \402\ Statement by Chairman William F. Stevenson, supra note 400.
    \403\ NBER Research Paper, supra note 344, at 2, National Bureau of 
Economic Research.
    \404\ The Incredible HOLC? Mortgage Relief During the Great 
Depression, supra note 389, at 23.
---------------------------------------------------------------------------
    Jonathan Rose, an economist with the Federal Reserve Board, 
concludes in a recent paper that the HOLC set appraisals at 
high levels,\405\ which benefitted private lenders, since they 
received more than they expected to earn from their delinquent 
mortgages, and resulted in fewer principal reductions for 
homeowners than would have occurred at lower appraisal values. 
Mr. Rose concludes that the inflated appraisals seem to have 
been deliberate, with the likely goals having been to encourage 
lenders to participate and to support prices in the housing 
market. ``The conclusion is that in many ways the HOLC was a 
lenders' program,'' Mr. Rose writes. ``Fundamentally, with a 
median decline in housing prices of 33 percent, large 
adjustments were needed to debts undertaken during the 1920s. 
Under the HOLC, the bulk of this adjustment was left to the 
borrowers, while many lenders were absolved completely. 
Borrowers certainly benefitted from the HOLC's lenient mortgage 
structure, but lenders also benefitted greatly from the removal 
of poorly performing assets off of their balance sheets.'' 
\406\
---------------------------------------------------------------------------
    \405\ Mr. Rose adds: ``The fact that generous appraisals were made 
was not a secret, although it is not widely known today. A 1933 
pamphlet published by the HOLC to give information to potential 
borrowers described the appraisal as being an estimate of `fair worth' 
rather than `technical market value.' The Federal Home Loan Bank Review 
. . . stated that HOLC loans `were permitted to be equal to 80 per cent 
of liberal appraisals. They were intended to be generous and may have 
frequently approached or sometimes exceeded market values at that 
time.''' The Incredible HOLC? Mortgage Relief During the Great 
Depression, supra note 389, at 1-2.
    \406\ The Incredible HOLC? Mortgage Relief During the Great 
Depression, supra note 389, at 1-2. See also The Life Cycle of the Home 
Owners' Loan Corporation, supra note 399 (``What actually happened 
between 1933 and 1936--the emergency period during which the H.O.L.C. 
extended loans--was that the new organization bailed out not only the 
home owners of the United States but also the banking institutions.'').
---------------------------------------------------------------------------
    Private lenders who sold mortgages to the HOLC usually were 
not paid in cash. Instead, they generally received government 
bonds. Initially, these were 18-year bonds that paid 4 percent 
interest. Although these bonds were often worth less than the 
face value of the original mortgages, the private lenders 
benefited from the government's guarantee of the bonds, as well 
as their favorable tax treatment.\407\ If a lender refused to 
sell the loan except for cash, and the loan was worth 40 
percent or less of the property's value, the government would 
pay cash, and then refinance the borrower into a 6-percent 
interest loan.\408\
---------------------------------------------------------------------------
    \407\ The bonds were exempt from all federal, state, and local 
taxes except for estate taxes, surtaxes, inheritance taxes, and gift 
taxes. NBER Research Paper, supra note 344, at 11, National Bureau of 
Economic Research.
    \408\ Statement by Chairman William F. Stevenson, supra note 400.
---------------------------------------------------------------------------
    When Congress established the HOLC, it was aware that the 
program's thin spread--the HOLC was collecting 5 percent 
interest, and its bonds paid 4 percent--combined with the 
likelihood of defaults, meant that the program might prove to 
be unprofitable. Given the harsh economic circumstances, 
Congress was willing to accept losses from the program.\409\ As 
it turned out, the HOLC benefitted greatly from the low 
interest rates of the era. Although the HOLC initially paid 4 
percent interest on its bonds, its average borrowing cost 
between 1933 and 1949 was 2.24 percent.\410\ Over the life of 
the program, even though the interest rate charged to HOLC 
borrowers fell to 4.5 percent in 1939, the HOLC's spread was 
about 2.5 percentage points.\411\
---------------------------------------------------------------------------
    \409\ Senate Committee on Banking and Currency, Subcommittee on 
Home Mortgages, Etc., Statement of Senator James Couzens, Home Owners 
Loan Act, 73rd Cong., at 15 (Apr. 20 and 22, 1933).
    \410\ NBER Research Paper, supra note 344, at 5.
    \411\ NBER Research Paper, supra note 344, at 162-163.
---------------------------------------------------------------------------
    The HOLC established offices in every state, and its 
employees worked with homeowners to keep them in their homes. 
The window of time to obtain a HOLC loan was relatively short--
from August 1933 until June 1936. By the end, the HOLC received 
1.886 million applications. The applicants sought a total of 
$6.2 billion in loans, or an average of $3,272 per application. 
According to one estimate, these applications accounted for 
about 20 percent of the non-farm, owner-occupied homes in the 
United States, and about 40 percent of mortgaged properties 
that qualified for the HOLC. Close to half of the applications 
were withdrawn or rejected, either because the homeowner was 
deemed not to be in sufficient trouble or because the loan was 
deemed too risky.\412\ The HOLC ultimately issued 1.02 million 
refinance loans. The loans averaged $3,039, for a total of $3.1 
billion.\413\ According to one historian who studied the HOLC, 
applications from people who were unemployed would probably 
have been rejected, but most of the people who qualified had 
relatively modest incomes, and most had suffered financially 
during the Depression.\414\ The HOLC reported in 1938 that, 
``Almost without exception, the cost to the home owner under 
the HOLC amortized mortgage is less than rent for a home of 
corresponding value. In addition, it permits the borrower 
actually to acquire final ownership free of debt.'' \415\
---------------------------------------------------------------------------
    \412\ NBER Working Paper No. 15824, supra note 338, at 6-8.
    \413\ NBER Research Paper, supra note 344, at 1.
    \414\ NBER Research Paper, supra note 344, at 50.
    \415\ Federal Home Loan Bank Board, Sixth Annual Report for the 
Period Covering July 1, 1937-June 30, 1938, at 95 (Oct. 1, 1938) 
(online at fraser.stlouisfed.org/publications/holc/issue/3013/download/
40596/1937_38annualrpt.pdf).
---------------------------------------------------------------------------
    In 1933, the HOLC accounted for 12 percent of all new 
mortgages on one-to-four-family homes. That figure rose to 71 
percent in 1934 before falling to 26 percent in 1935, and to 6 
percent in 1936. The HOLC's share of the nation's outstanding 
mortgage debt peaked at 19 percent in 1935.\416\ The HOLC 
purchased $770 million in mortgages from building & loans, many 
of which became savings & loans around this time; $525 million 
from commercial banks; $410 million from mutual savings banks; 
$165 million from insurance companies; and $880 million from 
other mortgage holders, including individuals.\417\
---------------------------------------------------------------------------
    \416\ Federal Reserve Bank of St. Louis Review Paper, supra note 
340, at 142.
    \417\ Charles Courtemanche and Kenneth Snowden, Repairing a 
Mortgage Crisis: HOLC Lending and Its Impact on Local Housing Markets, 
National Bureau of Economic Research Working Paper No. 16245, at 30 
(July 2010) (online at www.nber.org/papers/w16245) (hereinafter ``NBER 
Working Paper No. 16245'').
---------------------------------------------------------------------------
    Over time, some of the HOLC's initial parameters changed. 
In 1934, Congress extended the government guarantee of the 
HOLC's bonds, which originally only covered interest, to 
include principal.\418\ In 1935, Congress increased the HOLC's 
bonding authority to $4.75 billion. In 1939, the interest rate 
on HOLC loans was reduced from 5 percent to 4.5 percent, and 
Congress authorized an extension of HOLC loan terms from 15 
years to 25 years.\419\
---------------------------------------------------------------------------
    \418\ Federal Home Loan Bank Board, Second Annual Report of the 
Home Owners' Loan Corporation Covering the Year 1934, at 81 (Feb. 11, 
1935) (online at fraser.stlouisfed.org/publications/holc/issue/3008/
download/40940/1934_annualrpt_pt2.pdf). This decision was seen as an 
important way to encourage participation by lenders; after the 
government's guarantee was extended, the HOLC's bonds were considered 
as credit-worthy as U.S. Treasury bonds.
    \419\ Federal Home Loan Bank Board, Eighth Annual Report for the 
Period July 1, 1939, through June 30, 1940, at 126 (Oct. 1, 1940) 
(online at fraser.stlouisfed.org/publications/holc/issue/3016/download/
40989/1939_40annualrpt_pt7.pdf). By the end of 1942, 30 percent of 
outstanding loans had received these extensions. NBER Research Paper, 
supra note 344, at 136.
---------------------------------------------------------------------------
    As discussed in Section I.1, above, the delinquency rate on 
HOLC mortgages was initially high, but it fell sharply over the 
life of the program. Figure 32 shows the fall in three-month 
delinquency rates until 1950, shortly before the HOLC finished 
liquidating its portfolio. Likely contributors to the falling 
delinquency rate include the improving economy of the 1940s and 
the fact that HOLC foreclosures pushed down the program's 
default rate by eliminating those loans from the overall pool 
of HOLC mortgages. In addition, the HOLC had a reputation as a 
lenient loan servicer, and often went to great lengths in an 
effort to keep families in their homes.\420\ Starting in 1937, 
for example, the HOLC extended many defaulted loans by adding 
arrearages to the loan and, in many cases, giving the borrower 
several years to become current, with the goal of giving the 
borrower a fresh start psychologically.\421\
---------------------------------------------------------------------------
    \420\ For more detail about the HOLC's loan servicing practices, 
see Section I.1, supra.
    \421\ NBER Research Paper, supra note 344, at 69.

             FIGURE 32: PERCENTAGE OF HOLC MORTGAGES AT LEAST THREE MONTHS DELINQUENT, BY YEAR \422\
----------------------------------------------------------------------------------------------------------------
                                                                                                 Percentage of
                          Year                              Loans 3-plus       Total Loans        Loans 3-plus
                                                            Months Late                           Months Late
----------------------------------------------------------------------------------------------------------------
1936...................................................            397,533          1,005,988               39.5
1937...................................................            331,664            930,049               35.7
1938...................................................            270,144            878,017               30.8
1939...................................................            205,582            845,630               24.3
1940...................................................            100,027            854,233               11.7
1941...................................................             57,348            843,175                6.8
1942...................................................             41,607            808,219                5.1
1943...................................................             25,942            741,390                3.5
1944...................................................             16,009            641,446                2.5
1945...................................................             11,405            532,495                2.1
1946...................................................              9,349            430,307                2.2
1947...................................................              8,672            351,127                2.5
1948...................................................              9,407            278,189                3.4
1949...................................................              7,017            200,782                3.5
1950...................................................              2,420             73,965                3.3
----------------------------------------------------------------------------------------------------------------
\422\ All data were reported in June of the specified year.

    Despite its efforts to avoid foreclosure, the HOLC 
eventually acquired nearly 200,000 homes from borrowers who 
failed to make payments. These property acquisitions were 
mostly through foreclosure proceedings, though some involved a 
voluntary transfer of the property by the borrower. More than 
half of HOLC foreclosures involved borrowers who were a year 
and a half or more delinquent.\423\ The HOLC often rented the 
foreclosed homes it owned, spending an average of $51 on 
reconditioning and $135 on maintenance before selling the 
homes.\424\ The HOLC sold the foreclosed homes for an average 
of 93 percent of the original HOLC loan amount. Its average 
loss per foreclosed property was $1,568, for a total net loss 
of $310 million on properties acquired.\425\
---------------------------------------------------------------------------
    \423\ NBER Research Paper, supra note 344, at 3, 101 (``There was 
no precedent for a real estate management situation of this size and 
complexity. Most of the foreclosed properties presented difficult 
problems of repair, reconditioning, rental, insurance, tax payment, and 
eventual sale. They were widely distributed geographically, many were 
twenty years old when acquired, and virtually all had been neglected by 
their defaulting owners.'').
    \424\ NBER Research Paper, supra note 344, at 3. The HOLC also 
offered loans in connection with the sale of foreclosed properties.
    \425\ NBER Research Paper, supra note 344, at 4.
---------------------------------------------------------------------------
    As discussed in Section I.1, research indicates that when 
HOLC borrowers had less equity, they were more likely to lose 
their homes in foreclosures. Figure 33 shows this pattern in a 
sample of HOLC loans from the New York region.

 FIGURE 33: FORECLOSURE RATES BY BORROWER'S EQUITY FOR A SAMPLE OF HOLC
                      LOANS IN THE NEW YORK REGION
------------------------------------------------------------------------
 Borrower's Equity as Percentage of Loan                    Foreclosure
                 Amount                     Loans Made    Rate (Percent)
------------------------------------------------------------------------
Less than 0%............................             561              46
0-24%...................................             968              40
25-49%..................................             920              37
50-74%..................................             498              22
75-99%..................................             258              22
100% or more............................             405              12
------------------------------------------------------------------------

    Mr. Rose recently reached a related conclusion. Mr. Rose's 
2009 study looked at loan-level HOLC data from New York, New 
Jersey, and Connecticut. There was wide variation between HOLC 
foreclosure rates in different states, ranging from just 4.4 
percent in Nevada to 42.9 percent in New York and 38.4 percent 
in New Jersey. One reason why foreclosures on HOLC loans may 
have been so common in New York and New Jersey, the paper 
concludes, is that those states used appraisal practices that 
overvalued the properties being refinanced, even in comparison 
to other states.\426\ The paper notes that HOLC offices in New 
York and New Jersey paid more generous prices than elsewhere 
and concludes that these practices ``likely contributed to the 
weak performance'' of HOLC loans in those states.\427\ HOLC 
borrowers in New York and New Jersey had less equity on average 
than HOLC borrowers elsewhere, and their loans foreclosed at 
higher rates.
---------------------------------------------------------------------------
    \426\ Other factors likely contributed to the wide variations in 
foreclosure rates. The HOLC attributed the differences, at least in 
part, to regional variations in real-estate price levels, in the 
duration and severity of the economic downturn, in real-estate tax 
rates, and in levels of mortgage indebtedness prior to 1933. The Life 
Cycle of the Home Owners' Loan Corporation, supra note 399, at 327.
    \427\ The Incredible HOLC? Mortgage Relief During the Great 
Depression, supra note 389, at 1-3, 8, 13. For the 3,032 loans that Mr. 
Rose reviewed from New York, New Jersey, and Connecticut, the average 
mark-up from the estimated market price to the final appraisal was 4.2 
percent. Using the estimated market price rather than the appraised 
value, Mr. Rose calculated that 50.1 percent of the homeowners in this 
sample had less than 20 percent equity in their properties, and 19 
percent had negative equity.
---------------------------------------------------------------------------
    There had been fears that the HOLC would lose up to $500 
million, and these concerns occasionally led to the 
introduction of bills in Congress to force the early 
liquidation of the HOLC's loans.\428\ Such calls went unheeded, 
though, and when the HOLC was liquidated in 1951, it reported a 
net profit of $14.2 million, based on net income of $352.2 
million and losses of $338 million.\429\ This accounting, 
however, did not include certain costs. The HOLC had borrowed 
from Treasury, and the costs of that borrowing, which were 
later pegged at $91.9 million, were not included in the HOLC's 
calculations. One recent estimate pegged the HOLC's losses in 
the general vicinity of $100 million.\430\ In addition to the 
higher than expected spread between the HOLC's borrowing costs 
and its earnings, the HOLC also benefited from the nation's 
rising prosperity during World War II. Incomes rose, which led 
to falling delinquencies and lower servicing costs.\431\
---------------------------------------------------------------------------
    \428\ The Life Cycle of the Home Owners' Loan Corporation, supra 
note 399, at 329-300.
    \429\ NBER Research Paper, supra note 344, at 160.
    \430\ NBER Working Paper No. 15824, supra note 338, at 9. Also 
omitted were the HOLC's free use of the U.S. Postal Service, which 
saved it $6 million and cost the government $3 million. Furthermore, 
the HOLC benefitted by virtue of its exemption from state and local 
business taxes, as well as from Social Security taxes. NBER Research 
Paper, supra note 344, at 160-162, National Bureau of Economic 
Research.
    \431\ NBER Research Paper, supra note 344, at 163-165.
---------------------------------------------------------------------------
    Recent research by Kenneth Snowden and Charles Courtemanche 
of the University of North Carolina Greensboro found that the 
HOLC increased home values and home ownership rates--by 
repairing credit channels and by shutting off the destructive 
cycle by which foreclosures hurt nearby home values, which 
leads to more foreclosures. The researchers also found that the 
HOLC did not lead to an increase in home building.\432\ The 
HOLC played a key role in the gradual reshaping of the U.S. 
mortgage market. Over time, the five-year interest-only loans 
of the 1920s were replaced by 15-year, and later, 25-year, 
government-backed amortizing loans. And 20 percent down 
payments became a new standard in the mortgage industry.
---------------------------------------------------------------------------
    \432\ NBER Working Paper No. 16245, supra note 417, at 6, 26.
---------------------------------------------------------------------------

                    C. How the HOLC Compares to HAMP

    The differences between the HOLC and HAMP are considerable. 
This section distills some of the most important differences.

1. Scale of Programs

    The HOLC operated on a significantly larger scale in 
relation to the U.S. housing market than HAMP has operated to 
date. The HOLC provided refinancing for about 10 percent of all 
non-farm, owner-occupied homes in the country, and for about 20 
percent of all mortgaged homes.\433\ For HAMP to achieve a 
comparable scale, it would have to yield between 7.6 million-
10.1 million permanent modifications.\434\ Through September 
2010, less than 500,000 homeowners have received permanent HAMP 
modifications.\435\ Of course, the scale of the 1930s mortgage 
crisis and the larger economic crisis of the Great Depression 
were comparatively larger than those of today. The number of 
non-farm foreclosures between 1929 and 1938 was 1.89 
million,\436\ at a time when the United States had 
approximately 10 million non-farm, owner-occupied homes.\437\ 
Since July 2007, there have been approximately 8 million 
foreclosure starts in the United States,\438\ while the number 
of U.S. owner-occupied homes is around 76 million.\439\
---------------------------------------------------------------------------
    \433\ NBER Research Paper, supra note 344, at 1-2.
    \434\ In 2009, there were 76.4 million owner-occupied homes in the 
United States. Ten percent of those homes equals 7.6 million. There 
were 50.5 million mortgaged homes in the United States. Twenty percent 
of those homes equals 10.1 million. U.S. Census Bureau, American 
Housing Survey National Tables: 2009, Table 2-1 and Table 3-15 (online 
at www.census.gov/hhes/www/housing/ahs/ahs09/ahs09.html) (accessed Dec. 
10, 2010) (hereinafter ``American Housing Survey National Tables: 
2009'').
    \435\ MHA Servicer Performance Report Through September 2010, supra 
note 285, at 2.
    \436\ U.S. Department of Commerce, Bureau of the Census, Historical 
Statistics of the United States: Colonial Times to 1970, Part 2, at 651 
(online at www2.census.gov/prod2/statcomp/documents/CT1970p2-02.pdf).
    \437\ See NBER Research Paper, supra note 344, at 1-2, National 
Bureau of Economic Research (stating that the HOLC made roughly one 
million loans, which provided aid to the owners of approximately one 
out of 10 non-farm, owner-occupied homes).
    \438\ See HOPE NOW Alliance, National Data July 2007 to November 
2009, Appendix--Mortgage Loss Mitigation Statistics, at 7 (online at 
www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20Nov09%20v2%20%282%29.pdf) 
(showing 5.91 million foreclosure starts between July 2007 and November 
2009); HOPE NOW Alliance, Data Report May 2010, at 8 (online at 
www.hopenow.com/industry-data/HOPE NOW Data Report (May) 06-21-2010 
DRAF62.pdf) (showing approximately 890,000 foreclosure starts between 
December 2009 and March 2010); HOPE NOW Alliance Industry 
Extrapolations and Metrics, supra note 4 (showing approximately 1.04 
million foreclosure starts between April 2010 and September 2010).
    \439\ American Housing Survey National Tables: 2009, supra note 
434.
---------------------------------------------------------------------------

2. Nature of Government's Role

    The HOLC, by purchasing mortgages from private lenders in 
an effort to prevent foreclosures, directly intervened in the 
mortgage market. HAMP, by contrast, intervenes in the market in 
an indirect way: by providing incentive payments to private 
lenders that agree to modify their loans within certain 
parameters. As a result of the fact that HAMP's market 
intervention is indirect, the government is not in a good 
position to use loan servicing policies as a tool for 
preventing foreclosures, as the HOLC did during the Depression. 
(It is important to note that two other government programs 
during the current foreclosure crisis, HOPE for Homeowners and 
the FHA Short Refinance Program, aim to purchase mortgages from 
private lenders and thus represent direct interventions in the 
mortgage market. Neither program, though, has made a 
significant impact thus far.)

3. Enrollment Rate

    The HOLC received 1.89 million applications, of which 1.02 
million resulted in refinanced loans, for an enrollment rate of 
54 percent. Because HAMP is structured differently than the 
HOLC, it does not have a directly comparable enrollment rate. 
The most comparable measures involve HAMP's permanent 
modifications started as a percentage of its trial modification 
offers, and HAMP's permanent modifications started as a 
percentage of its trial modifications started. The former rate 
is 32 percent; the latter rate is 37 percent.\440\
---------------------------------------------------------------------------
    \440\ Through October 2010, 1,647,474 trial modifications had been 
offered; 1,395,543 trial modifications had started; and 519,648 
permanent modifications had started. MHA Servicer Performance Report, 
supra note 38, at 2; Data provided by Treasury.
---------------------------------------------------------------------------

4. Homeowner Equity

    Homeowners who participated in the HOLC had an average LTV 
ratio of 68.6 percent,\441\ which suggests that their equity at 
the time of the refinancing was equal to nearly one-third of 
their homes' value. This figure is dependent, though, on the 
accuracy of HOLC appraisals, and those appraisals were often 
higher than what the housing market actually would bear at the 
time.\442\ But even after accounting for inflated appraisals, 
it seems reasonable to assume that in most cases the homeowner 
had at least some equity at the time of the HOLC refinancing. 
This is in sharp contrast to HAMP, where most homeowners have 
substantial negative equity after their mortgage is modified. 
As of October 2010, half of all homeowners entering HAMP had an 
LTV ratio of greater than 120 percent. Their homes would have 
to appreciate by 20 percent before they would have any equity 
at all. This disparity between the HOLC and HAMP is critical 
because, as the data in Section I.4.b. illustrate, homeowners 
with little or no equity have less incentive to try to keep 
their homes, and are more likely to redefault on modified loans 
than homeowners who have more equity.
---------------------------------------------------------------------------
    \441\ NBER Research Paper, supra note 344, at 25.
    \442\ NBER Research Paper, supra note 344, at 25 (``In most areas 
appraisals were sufficiently generous to permit loans nearly as large--
possibly larger--than current market price.'').
---------------------------------------------------------------------------

5. Duration of Relief

    Because the HOLC refinanced loans, participating homeowners 
got new loans that generally offered permanently lower interest 
rates than in their previous mortgages. By contrast, despite 
the fact that Treasury refers to HAMP modifications as 
permanent, HAMP-modified loans can reset after five years to a 
higher interest rate.

6. Risk/Reward for Government

    HOLC loans represented a substantial risk to the 
government, but one with the possibility of a profit. If a HOLC 
borrower defaulted, the government stood to lose a considerable 
amount of money in a foreclosure. If the borrower paid off the 
loan, the government not only got its money back, it made a 
small profit. HAMP's structure is quite different, with both 
less potential downside and less potential upside. The 
government's potential liability for each loan is limited to a 
series of incentive payments over a five-year period, but it 
has no opportunity to earn any of that money back.

7. Data Availability

    The HOLC closed its doors in 1951, prior to the 
popularization of computers. The HOLC therefore relied on 
employees using paper to collect data about borrowers and 
loans, a process that was inefficient, time-consuming, and 
inaccurate by today's standards. One important advantage that 
HAMP has over the HOLC is the availability of tools to collect 
and analyze vast quantities of data. These tools should allow 
Treasury and outside observers to gain a better understanding 
of what is working and what is not working in HAMP, in a way 
that was not possible during the 1930s and 1940s.

                        D. Lessons From the HOLC

    In the context of today's foreclosure crisis, the size and 
breadth of the HOLC's work is striking. The HOLC bought up 10 
percent of the residential mortgages in the United States; it 
hired 20,000 employees at a time when the U.S. population was 
only about 40 percent of today's population; and by amortizing 
and extending mortgages, it reshaped the mortgage contract in a 
fundamental way. This is not to say that a comparably large 
government intervention would be appropriate in the present-day 
situation. Indeed, the need for relief was substantially 
greater during the 1930s than it is today. And the scale of the 
present-day U.S. foreclosure problem will depend in large part 
on the future trajectory of home prices.
    It is at least arguable that the residential mortgage 
market of the 1920s--which in some ways resembles the market 
for construction loans today--offered a better opportunity for 
government intervention than today's residential mortgage 
market. Because many homeowners with mortgages from the 1920s 
were not building equity, they had little incentive to continue 
making payments when the price of their homes plummeted. By 
adjusting home values to more realistic levels, and by giving 
homeowners a chance to build equity, the HOLC gave homeowners 
much more reason to try to stay in their homes. On the other 
hand, certain reckless mortgage products in the 2000s, such as 
interest-only loans and negatively amortizing loans with rate 
resets, do offer low-hanging fruit for the government. Indeed, 
these are the kinds of loans that HAMP was designed to address.
    Lastly, the HOLC's servicing practices, which involved 
extraordinary efforts by the government to avoid foreclosures, 
shed light on some of the problems that HAMP has encountered. 
Whereas the HOLC was a purely governmental effort, HAMP, by its 
design, relies on private servicers to carry out public-policy 
aims. This creates a principal-agent problem--there may be a 
divergence of interests between Treasury and the servicers it 
is paying--which could be problematic even if HAMP were a 
mandatory program. Unfortunately, the voluntary nature of HAMP 
exacerbates the problem, because Treasury has few tools 
available to ensure that servicers fulfill their obligations 
under the program. As was described earlier in the report, if 
Treasury enforces the servicers' contractual obligations more 
stringently, the servicers may have the option of simply 
dropping out of the program.
                     SECTION TWO: ADDITIONAL VIEWS


           A.  J. Mark McWatters and Professor Kenneth Troske

    We concur with the issuance of the December report and 
offer the additional observations below. We appreciate the 
efforts the Panel staff made incorporating our suggestions 
offered during the drafting of the report.
    The issue discussed in this month's report--foreclosures 
and the government's efforts to help keep families in their 
homes--remain quite contentious and fraught with strong 
feelings among people debating this issue. However, when 
considering the effectiveness of programs designed to mitigate 
foreclosures, it is important to keep in mind that one of our 
primary goals should be returning the economy to a place where 
it can begin to grow at a pace that helps everyone currently in 
distress.
    Certainly all of us would like to return to a world where 
we have steadily rising housing prices, low unemployment rates, 
and an economy that is growing at 4 percent to 5 percent per 
year. However, this is not the world in which we currently 
live. Instead, we are in an economy where housing prices 
nationwide have fallen by 14 percent from their peak,\443\ 
where prices in the largest metropolitan areas have fallen by 
almost one-third,\444\ and annual existing home sales have 
plunged by over 40 percent.\445\ Without a doubt, the housing 
market has been in disequilibrium for several years, even 
before the recent discoveries of problems with foreclosures. 
The important question is what are the best policies for 
helping the housing market return to stability? Because until 
we achieve stability in the housing market, the economy will 
continue to limp along at 1 percent to 2 percent growth per 
year and unemployment will remain unacceptably high.
---------------------------------------------------------------------------
    \443\ 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) (accessed Dec. 10, 2010) 
(hereinafter ``U.S. and Census Division Monthly Purchase Only Index'').
    \444\ 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_) 
(accessed Dec. 10, 2010) (hereinafter ``S&P/Case-Shiller Home Price 
Indices'').
    \445\ Data accessed through Bloomberg Data Service (Dec. 10, 2010).
---------------------------------------------------------------------------
    One of the main problems with the housing market is that in 
2005 and 2006 many people borrowed money to purchase houses, or 
took out home-equity loans, predicated on the belief that 
housing prices would continue rising. It is important to note 
that few of these borrowers were first-time home buyers. 
Instead these were people who had a mortgage and decided to 
refinance in order to extract some of the equity they had built 
up in their house to purchase other goods. As long as home 
values kept rising, homeowners and other investors could 
refinance these loans at lower rates based on the accumulation 
of equity. When housing prices started to decline in 2006, many 
of these people were left with mortgages where the amount they 
owed was less than the value of the home. The question is, what 
if anything should the government do to fix this problem?
    As we point out in the report, the Administration's 
foreclosure mitigation programs--primarily HAMP--have failed to 
provide meaningful relief to distressed homeowners and, 
disappointingly, the Administration has inadvertently created a 
sense of false expectations among millions of homeowners who 
reasonably anticipated that they would have the opportunity to 
modify or refinance their troubled mortgage loans under HAMP. 
In our view, the primary reason for HAMP's lack of success lies 
in the confusing and illogical basis for the program. Under 
HAMP, the government pays lenders and borrowers to modify a 
mortgage only when the estimated value of the modified mortgage 
(estimated using a procedure specified by the government) 
exceeds the estimated value of the foreclosed loan (again 
estimated using government rules). In short, under HAMP, 
Treasury is planning on paying $30 billion to lenders and 
borrowers to do something that they should be willing to do 
without receiving any money from the government. The fact that 
a program which should be an unmitigated success--paying people 
money for nothing--has had such limited success should be a 
clue that the situation is far more complicated then it 
appears.
    To begin with, the structure of HAMP indicates that it is 
likely to have only limited success. HAMP works by reducing the 
monthly mortgage payments of borrowers through a capitalization 
of arrearages, a term extension, forbearance, and/or a 
reduction of interest rates or principal for up to five years. 
Then the program ends and the interest rate will gradually rise 
to the prevailing rate in place at the time the modification 
was made. Given the structure of the program, it seems unlikely 
that borrowers, especially those with negative equity, will be 
able to keep their homes unless we see dramatic improvements in 
the housing market, which also seems unlikely. The median 
borrower in the program had monthly debt payments equal to 80 
percent of their pre-tax income.\446\ On an after-tax basis, 
even after all the modifications have been done, after making 
their new monthly mortgage payment and all the other payments 
to lenders, the typical HAMP participant has $444 per month 
left over for expenses such as food, clothing, and health care, 
so it is hard to imagine how any modification is going to be 
successful.\447\ Additionally, instead of being directed at 
borrowers who are in trouble because of some sudden, unexpected 
occurrence, such as losing a job or having the value of their 
home fall below the balance of their mortgage, this program is 
primarily focused on borrowers who can't make their monthly 
payments even though they are currently employed and not under 
water. This despite evidence from researchers at the Federal 
Reserve Banks of Atlanta and Boston showing that helping 
workers who have experienced temporary shocks is much more 
likely to result in those owners keeping their homes.\448\
---------------------------------------------------------------------------
    \446\ Data provided by Treasury.
    \447\ See footnote 52 supra, for further discussion of after-tax 
debt-to-income ratios.
    \448\ Federal Reserve Bank of Atlanta Working Paper, supra note 88.
---------------------------------------------------------------------------
    There are also a myriad of details and rules that limit the 
ability and/or willingness of lenders to modify loans. For 
example, for loans in which there are multiple liens, if the 
first lien holder modifies the loan without reaching an 
agreement with the other lien holders, then the first lien 
holder might have to take a subordinated position to the other 
lien holders. Given that over 40 percent of current mortgages 
have two or more liens; this significantly increases the cost 
of modifying a mortgage.\449\ In addition, since a lender must 
recognize losses once a loan is modified, for banks holding a 
large number of underwater mortgages, this has the potential to 
impose a significant financial strain on the institution, a 
strain they will try to avoid.
---------------------------------------------------------------------------
    \449\ Amherst Securities Group LP, Amherst Mortgage Insight, 2nd 
Liens--How Important, at 3 (Jan. 29, 2010).
---------------------------------------------------------------------------
    We are also troubled that HAMP itself may have exacerbated 
the mortgage loan delinquency and foreclosure problem by 
encouraging homeowners to refrain from remitting their monthly 
mortgage installments based upon the expectation that they 
would ultimately receive a favorable restructure or principal 
reduction subsidized by the taxpayers. The curious incentives 
offered by HAMP arguably converts the concept of home ownership 
into the economic equivalent of a ``put option''--as long as a 
homeowner's residence continues to appreciate in value, the 
homeowner will not exercise the put option, but as soon as the 
residence falls in value, the homeowner will elect to exercise 
the put option and walk away--or threaten to walk away--if a 
favorable bailout is not offered.
    We remain unconvinced that government-sponsored foreclosure 
mitigation programs are necessarily capable of lifting millions 
of American families out of their underwater home mortgage 
loans. From our perspective, the best foreclosure mitigation 
tool is a steady job at a fair wage and not a hodgepodge of 
government-subsidized programs that create and perpetuate moral 
hazard risks and all but establish the government as the 
implicit guarantor of distressed homeowners. In the end it 
appears that, for most participants, HAMP will only postpone 
the inevitable.
    So, what would be the downside if all HAMP does is postpone 
foreclosures for a few years? Well, as one of us has pointed 
out in an earlier Panel report,\450\ despite all the attention 
they have received, homeowners with unaffordable mortgages were 
not the only group hurt by the financial crisis. Millions of 
homeowners who didn't have mortgages or who had affordable 
mortgages saw the value of their home plummet, and this was 
devastating for those who were going to use the equity in their 
home to finance their retirement. Millions of others saw the 
value of their retirement savings decline significantly, and 
families lost substantial amounts in their children's college 
savings accounts. For all of these people, relief will only 
come once the economy starts growing again. That growth will 
only occur once the housing market has stabilized, and that 
stability will not develop until people move out of homes with 
mortgages they cannot afford and into housing they can afford. 
So to the extent that HAMP simply kicks the foreclosure can 
down the road, it ends up hurting all of the people who are 
desperate for the economy to start growing again so that their 
lives can return to normal.
---------------------------------------------------------------------------
    \450\ April 2010 Oversight Report, supra note 1, at 179-180 (from 
the additional views of J. Mark McWatters).
---------------------------------------------------------------------------
    HAMP carries a 100 percent subsidy rate according to the 
Congressional Budget Office (CBO).\451\ This means that the 
U.S. government expects to recover none of the $30 billion of 
taxpayer-sourced TARP funds invested in HAMP. Since Treasury is 
charged with protecting the interests of the taxpayers who fund 
HAMP and the other TARP programs, we recommend that Treasury's 
foreclosure mitigation efforts be structured so as to 
incorporate an effective exit strategy by allowing Treasury to 
participate in any subsequent appreciation in the home equity 
of any mortgagor whose loan is modified under HAMP or any other 
taxpayer-subsidized program. An equity appreciation right--the 
functional equivalent of a warrant in a non-commercial 
transaction--will also mitigate the moral hazard risk of 
homeowners who may undertake risky loans in the future based on 
the assumption that the government will act as a backstop with 
no strings attached.
---------------------------------------------------------------------------
    \451\ CBO Report on the TARP--November 2010, supra note 113, at 7.
---------------------------------------------------------------------------
    This analysis is in no way intended to diminish the 
financial hardship that many Americans are suffering as they 
attempt to modify or refinance their underwater home mortgage 
loans, and we fully acknowledge and empathize with the stress 
and economic uncertainty created from the bursting of the 
housing bubble. It is particularly frustrating--although not 
surprising--that many of the hardest hit housing markets are 
also suffering from seemingly intractable rates of unemployment 
and underemployment. We also recognize that there have been 
serious mistakes, and perhaps fraud, committed by servicers and 
lenders in the lending and foreclosure process, and any illegal 
activity on the part of banks needs to be fully prosecuted. In 
addition, we know that many homeowners are rightfully 
frustrated and angry over the treatment they have received by 
lenders and servicers once they begin to experience financial 
distress. As such, we encourage each mortgage loan and 
securitized debt investor and servicer to work with each of 
their borrowers in a good faith, transparent, and accountable 
manner to reach an economically reasonable resolution prior to 
pursuing foreclosure. In our view, foreclosure should serve as 
the exception to the rule that only follows from the 
transparent and objective failure of the parties to modify or 
refinance a troubled mortgage loan pursuant to market-based 
terms. It is regrettable that HAMP creates disincentives for 
investors and servicers as well as homeowners by rewarding 
their dilatory and inefficient behavior with the expectation of 
enhanced taxpayer-funded subsidies. Since any intermediate to 
long-term resolution of the housing crisis must reside 
substantially with the private sector lenders and investors who 
hold the mortgage notes and liens, instead of spending an 
additional $30 billion on a government-sponsored foreclosure 
mitigation effort, we believe Treasury would be best served by 
strongly encouraging these participants to engage in good 
faith, market-based negotiations with their distressed 
borrowers. In our opinion, this is the best way to bring 
stability to the housing market so that the economy can start 
growing again.
              SECTION THREE: CORRESPONDENCE WITH TREASURY

    Patricia Geoghegan, the Special Master for TARP Executive 
Compensation, sent a letter to Senator Ted Kaufman, the Panel's 
Chairman, on November 18, 2010.\452\ The letter responds to a 
series of questions presented by the Panel seeking additional 
information about TARP executive compensation restrictions 
following the Panel's October 21, 2010 hearing on the 
topic.\453\
---------------------------------------------------------------------------
    \452\ See Appendix I, infra.
    \453\ See Appendix I of the Panel's November 2010 Oversight Report, 
supra note 79, at 125.
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                               A. GM IPO

    General Motors held an initial public offering on November 
18, 2010, after three quarters of posting profit. Treasury 
received $11.7 billion in net proceeds on November 23 for the 
sale of 358,546,795 shares of common stock. As widely expected, 
underwriters exercised their over-allotment option, and on 
December 2, Treasury received $1.8 billion in net proceeds from 
the sale of 53,782,019 additional shares of common stock. In 
total, these sales reduced Treasury's share of GM's outstanding 
common stock from 60.8 percent to 33.3 percent. Treasury's 
remaining stock in General Motors consists of 500,065,254 
shares of common stock. Treasury's total receipt from the IPO 
was $13.5 billion.

                         B. Stress-Tested Banks

    The Federal Reserve has requested that bank holding 
companies that participated in the Supervisory Capital 
Assessment Program (SCAP) consult with Federal Reserve staff 
before taking actions that could result in a diminished capital 
base, such as increasing dividends, repurchasing common stock, 
and other planned capital actions. Stress-tested BHCs have been 
requested to file a Comprehensive Capital Plan by January 7, 
2011. This plan should incorporate a stress-testing framework 
that will estimate potential capital needs under a range of 
circumstances from normal to very severe. The Federal Reserve 
will use this and supervisory actions, in addition to firms' 
risk profiles, in order to assess the BHC's capital adequacy. 
Stress-tested BHCs are expected to complete reimbursement of 
U.S. government investment before undertaking any other capital 
actions. Five SCAP institutions--Fifth Third Bancorp, SunTrust, 
Regions Financial, KeyCorp, and GMAC/Ally Financial--have yet 
to repay their TARP assistance.

                        C. Citigroup Stock Sale

    Treasury announced on December 6, 2010 that it was 
commencing an underwritten public offering of approximately 2.4 
billion shares of Citigroup Inc. common stock. Treasury 
converted its common shares at $3.25 per share in July 2009 and 
the stock was sold to investors at $4.35 on December 6, 2010, 
which will result in an estimated profit of $2.64 billion. This 
offering will dispose of Treasury's remaining shares of 
Citigroup common stock, although Treasury will still hold 
warrants and be entitled to receive up to $800 million of 
CitigroupTrust Preferred securities from the FDIC. As of the 
time of the writing of this report, the sale has not officially 
closed, and thus the Panel has not incorporated the results of 
this sale in this month's financial update section.

                               D. 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 November 2010 
report.

1. Financial Indices

            a. Overview
    The St. Louis Financial Stress Index, a proxy for financial 
stress in the U.S. economy, has remained relatively stable 
since the Panel's November report.\454\ The index has decreased 
more than 60 percent since its 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 EESA was 
enacted in October 2008.
---------------------------------------------------------------------------
    \454\ 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 Dec. 1, 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 34: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX


[GRAPHIC] [TIFF OMITTED] 62622A.029


    Stock market volatility, as measured by the Chicago Board 
Options Exchange Volatility Index (VIX), continues to decrease. 
The VIX has fallen by more than half since the post-crisis peak 
in May 2010 and has decreased 4 percent since the Panel's 
November report. However, as of December 1, 2010, volatility 
was 35 percent higher than its post-crisis low on April 12, 
2010.

    FIGURE 35: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX \455\

      
---------------------------------------------------------------------------
    \455\ Data accessed through Bloomberg data service (Dec. 1, 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 
Dec. 1, 2010).
[GRAPHIC] [TIFF OMITTED] 62622A.030


            b. Interest Rates, Spreads, and Issuance
    As of December 1, 2010, the 3-month and 1-month London 
Interbank Offer Rates (LIBOR), the prices at which banks lend 
and borrow from each other, were 0.30 and 0.27, 
respectively.\456\ Rates have increased slightly since the 
Panel's November report. However, the 3-month and 1-month LIBOR 
remain below their post-crisis highs in June 2010. Over the 
longer term, however, interest rates remain extremely low 
relative to pre-crisis levels, reflecting the impact of the 
actions of central banks and institutions' perceptions of 
reduced risk in lending to other banks.
---------------------------------------------------------------------------
    \456\ Data accessed through Bloomberg data service (Dec. 1, 2010).

                       FIGURE 36: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF DECEMBER 1, 2010)
----------------------------------------------------------------------------------------------------------------
                                                                                      Percent Change From Data
                           Indicator                               Current Rates      Available at Time of Last
                                                                                         Report (11/3/2010)
----------------------------------------------------------------------------------------------------------------
3-Month LIBOR \457\............................................               0.30                           3.4
1-Month LIBOR \458\............................................               0.27                           8.0
----------------------------------------------------------------------------------------------------------------
\457\ Data accessed through Bloomberg data service (Dec. 1, 2010).
\458\ Data accessed through Bloomberg data service (Dec. 1, 2010).

    As of December 1, 2010, the conventional mortgage rate 
spread, which measures the difference between 30-year mortgage 
rates and 10-year Treasury bond yields, remained unchanged 
since the Panel's November report.\459\ The TED spread, which 
captures the difference between the 3-month LIBOR and the 3-
month Treasury bill rates, serves as an indicator for perceived 
risk in the financial markets.\460\ As of December 1, 2010, the 
spread was 14.3 basis points, declining approximately two basis 
points in November. As shown in Figure 37 below, the spread 
remains below pre-crisis levels.
---------------------------------------------------------------------------
    \459\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.15: Selected Interest Rates: Historical 
Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at 
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (accessed Dec. 1, 2010) (hereinafter ``Federal 
Reserve Statistical Release H.15'').
    \460\ 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).
---------------------------------------------------------------------------
    The LIBOR-OIS (Overnight Index Swap) spread serves as an 
indicator of the health of the banking system, as it reflects 
what banks believe to be the risk of default associated with 
interbank lending.\461\ The spread increased over threefold 
from early April to July, before falling in mid-July.\462\ 
Decreases in the LIBOR-OIS spread and the TED spread suggest 
that hesitation among banks to lend to counterparties has 
receded. The LIBOR-OIS spread remained fairly constant since 
the Panel's November report, averaging approximately 11 basis 
points during the month.
---------------------------------------------------------------------------
    \461\ Federal Reserve Bank of St. Louis, What the LIBOR-OIS Spread 
Says (May 11, 2009) (online at research.stlouisfed.org/publications/es/
09/ES0924.pdf).
    \462\ Data accessed through Bloomberg data service (Dec. 1, 2010).
---------------------------------------------------------------------------

                      FIGURE 37: TED SPREAD \463\

      
---------------------------------------------------------------------------
    \463\ Data accessed through Bloomberg data service (Dec. 1, 2010).
    [GRAPHIC] [TIFF OMITTED] 62622A.031
    
                   FIGURE 38: LIBOR-OIS SPREAD \464\

      
---------------------------------------------------------------------------
    \464\ Data accessed through Bloomberg data service on (Dec. 1, 
2010).
[GRAPHIC] [TIFF OMITTED] 62622A.032


    The interest rate spread for AA asset-backed commercial 
paper, which is considered mid-investment grade, decreased by 
more than five percent since the Panel's November report. The 
interest rate spread on A2/P2 commercial paper, a lower grade 
investment than AA asset-backed commercial paper, fell by 
approximately 10 percent. These declining spreads indicate 
healthier fundraising conditions for corporations.

        FIGURE 39: INTEREST RATE SPREADS (AS OF DECEMBER 1, 2010)
------------------------------------------------------------------------
                                                  Percent Change  Since
             Indicator                Current      Last Report  (11/1/
                                       Spread             2010)
------------------------------------------------------------------------
Conventional mortgage rate spread          1.56                      0.0
 \465\............................
TED Spread (basis points).........        14.34                    (8.0)
Overnight AA asset-backed                  0.07                    (5.4)
 commercial paper interest rate
 spread \466\.....................
Overnight A2/P2 nonfinancial               0.12                   (10.1)
 commercial paper interest rate
 spread \467\.....................
------------------------------------------------------------------------
\465\ Federal Reserve Statistical Release H.15, supra note 459; 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.federal reserve.gov/releases/
  h15/data/Weekly_Friday_/H15_ TCMNOM_Y10.txt) (accessed Dec. 1, 2010).
\466\ The overnight AA asset-backed commercial paper interest rate
  spread reflects the difference between AA asset-backed commercial
  paper discount rate and the AA nonfinancial commercial paper discount
  rate. 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 Dec. 1, 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
  Dec. 1, 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.
\467\ The overnight A2/P2 nonfinancial commercial paper interest rate
  spread reflects the difference between A2/P2 nonfinancial commercial
  paper discount rate and the AA nonfinancial commercial paper discount
  rate. 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 Dec. 1, 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
  Dec. 1, 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, which 
indicates the difference in perceived risk between corporate 
and government bonds, doubled from late April to mid-June 2010. 
During November, the spread declined over 5 percent, and has 
decreased 22 percent since its post-crisis peak in mid-June. 
The declining spread could indicate waning concerns about the 
riskiness of corporate bonds.

 FIGURE 40: MOODY'S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY 
                              YIELD \468\

     
---------------------------------------------------------------------------
    \468\ 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/) (accessed 
Dec. 1, 2010) (hereinafter ``Series DGS30: Selected Interest Rates''). 
Corporate Baa rate data accessed through Bloomberg data service (Dec. 
1, 2010).
[GRAPHIC] [TIFF OMITTED] 62622A.033


            c. Condition of the Banks
    During November, year-to-date bank failures surpassed the 
2009 level of 140 failures. As of November 25, 2010, 149 banks 
have been placed into receivership. Despite exceeding the total 
number of bank failures in 2009, banks that have failed in 2010 
thus far had $90.5 billion in total assets, which represents 
only half of the total assets of failed institutions in 
2009.\469\ Most failures in 2010 involved institutions with 
less than $10 billion in assets. Of the 10 banks that failed in 
November, two were CPP recipients.
---------------------------------------------------------------------------
    \469\ Federal Deposit Insurance Corporation, Failures & Assistance 
Transactions (online at www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) 
(accessed Dec. 1, 2010) (hereinafter ``Failures & Assistance 
Transactions'').
---------------------------------------------------------------------------

   FIGURE 41: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK 
               FAILURES BY TOTAL ASSETS (1990-2010) \470\

     
---------------------------------------------------------------------------
    \470\ 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 November. The 
total number of FDIC-insured institutions as of September 30, 2010 is 
7,760 commercial banks and savings institutions, which represents a 
decline of 70 institutions since June 30, 2010. Failures & Assistance 
Transactions, supra note 469; Federal Deposit Insurance Corporation, 
Quarterly Banking Profile, Third Quarter 2010: Statistics At A Glance 
(online at www.fdic.gov/bank/statistical/stats/2010sep/industry.pdf) 
(accessed Dec. 10, 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. Series DGS30: Selected 
Interest Rates, supra note 468.
[GRAPHIC] [TIFF OMITTED] 62622A.034

2. Unemployment and Underemployment

    The unemployment rate increased in November to 9.8 percent 
after three consecutive months at 9.6 percent, while the 
underemployment rate remained unchanged at 17.0 percent. The 
median duration of unemployment increased by approximately half 
a week, to 21.6 weeks, in November.

   FIGURE 42: UNEMPLOYMENT, UNDEREMPLOYMENT, AND MEDIAN DURATION OF 
                           UNEMPLOYMENT \471\

     
---------------------------------------------------------------------------
    \471\ 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 Dec. 3, 2010); Series DGS30: Selected Interest Rates, supra 
note 468.
[GRAPHIC] [TIFF OMITTED] 62622A.035


3. Housing Indices

    New home sales saw a month-over-month decrease in October, 
declining 8 percent during the month. New home sales as 
measured by the U.S. Census Bureau totaled 283,000 units. With 
respect to existing home sales, National Association of 
Realtors estimates a 2 percent month-over-month decline in 
October, to 4.4 million homes sold. Although existing home 
sales in October remained below the 10-year historical average, 
current levels are above the July 2010 level, when existing 
home sales reached their lowest point in more than a decade.

        FIGURE 43: NEW AND EXISTING HOME SALES (2000-2010) \472\

     
---------------------------------------------------------------------------
    \472\ Data accessed through Bloomberg Data Service (Dec. 1, 2010). 
Spikes in both new and existing home sales in January 2009 and November 
2009 correlate with the tax credits extended to first-time and repeat 
home buyers during these periods. After both tax credits were 
extinguished on April 30, 2010, existing home sales dropped to 3.8 
million homes in July, their lowest level in a decade. National 
Association of Realtors, July Existing-Home Sales Fall as Expected but 
Prices Rise (Aug. 24, 2010) (online at www.realtor.org/press_room/
news_releases/2010/08/ehs_fall).
[GRAPHIC] [TIFF OMITTED] 62622A.036


    Foreclosure actions, which consist of default notices, 
scheduled auctions, and bank repossessions, increased 4.4 
percent in October to 332,172.\473\ Since the enactment of 
EESA, there have been approximately 8.1 million foreclosure 
filings.\474\ Both the Case-Shiller Composite 20-City Composite 
Home Price Index and the FHFA Housing Price Index decreased 
approximately 1 percent in September 2010. The Case-Shiller and 
FHFA indices are 7 percent and 6 percent, respectively, below 
their October 2008 levels.\475\
---------------------------------------------------------------------------
    \473\ RealtyTrac, Foreclosure Activity Decreases 4 Percent in 
October (Nov. 11, 2010) (online at www.realtytrac.com/content/press-
releases/foreclosure-activity-decreases-4-percent-in-october-6182) 
(hereinafter ``Foreclosure Activity Decreases 4 Percent in October'').
    \474\ Data accessed through Bloomberg data service (Dec. 1, 2010).
    \475\ The most recent data available are for September 2010. See 
S&P/Case-Shiller Home Price Indices, supra note 444; U.S. and Census 
Division Monthly Purchase Only Index, supra note 443. 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 (Apr. 2010) (online at 
www.standardandpoors. com/ servlet/ BlobServer?blobheadername3= MDT- 
Type&blobcol=urldata&blobtable= MungoBlobs&blobheadervalue2= 
inline;+filename%3DCase 
Shiller_SeasonalAdjustment2,0.pdf&blobheadername2=Content- 
Disposition&blobheadervalue1= application/
pdf&blobkey=id&blobheadername1=content- 
type&blobwhere=1243679046081&blobheadervalue3=UTF-8). For a discussion 
of the differences between the Case-Shiller Index and the FHFA Index, 
see April 2010 Oversight Report, supra note 1, at 98.
---------------------------------------------------------------------------
    Case-Shiller futures prices indicate a market expectation 
that home-price values for the major Metropolitan Statistical 
Areas (MSAs) will decrease through 2011.\476\ These futures are 
cash-settled to a weighted composite index of U.S. housing 
prices in the top 10 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.
---------------------------------------------------------------------------
    \476\ Data accessed through Bloomberg data service on December 1, 
2010. The Case-Shiller Futures contract is traded on the Chicago 
Mercantile Exchange (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.
    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 Dec. 10, 2010).

                                          FIGURE 44: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
                                                                        Percent Change from      Percent Change
                      Indicator                         Most Recent    Data Available at Time    Since October
                                                       Monthly Data        of Last Report             2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \477\...................         332,172                    (4.4)               18.8
S&P/Case-Shiller Composite 20 Index \478\...........          145.47                    (1.0)              (6.9)
FHFA Housing Price Index \479\......................          190.47                    (1.2)              (5.7)
----------------------------------------------------------------------------------------------------------------
\477\ Foreclosure Activity Decreases 4 Percent in October, supra note 473. The most recent data available are
  for October 2010.
\478\ S&P/Case-Shiller Home Price Indices, supra note 444. The most recent data available are for September
  2010.
\479\ U.S. and Census Division Monthly Purchase Only Index, supra note 443. The most recent data available are
  for September 2010.

   FIGURE 45: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES \480\

     
---------------------------------------------------------------------------
    \480\ All data normalized to 100 at January 2000. Futures data 
accessed through Bloomberg data service on December 1, 2010. S&P/Case-
Shiller Home Price Indices, supra note 444.
[GRAPHIC] [TIFF OMITTED] 62622A.037


                          E. 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 October 31, 2010; and (2) an updated 
accounting of the full federal resource commitment as of 
November 26, 2010.

1. The TARP

            a. Program Updates \481\
---------------------------------------------------------------------------
    \481\ 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%20 Report.pdf) 
(hereinafter ``Cumulative Dividends, Interest and Distributions 
Report''); U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for the Period Ending November 26, 2010 
(Nov. 30, 2010) (online at financialstability.gov/docs/transaction-
reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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.\482\ Of the total amount 
disbursed, $223.0 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 $166.7 billion in TARP funds 
currently outstanding relates to Treasury's investments in AIG 
and assistance provided to the automotive industry.
---------------------------------------------------------------------------
    \482\ 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. 202(b) (2009) (online at 
financialservices.house.gov/FinancialSvcsDemMedia/file/public%20laws/
111-22.pdf). 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 November 26, 2010, 114 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 November, Treasury received an 
$11.3 million full repayment from Central Jersey Bancorp, a 
$5.83 million full repayment from Leader Bancorp, Inc. and a 
$6.25 million partial repayment from Horizon Bancorp. A total 
of $152.9 billion has been repaid under the program, leaving 
$49.4 billion in funds currently outstanding.
            b. Income: Dividends, Interest, and Warrant Sales
    In conjunction with its preferred stock investments under 
the CPP and the TIP, Treasury generally received warrants to 
purchase common equity.\483\ As of November 26, 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 totals $8.1 billion.
---------------------------------------------------------------------------
    \483\ 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 481, 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.\484\ For preferred shares issued 
under the TIP, Treasury received a dividend of 8 percent per 
annum.\485\ In total, Treasury has received approximately $25.8 
billion in net income from warrant repurchases, dividends, 
interest payments, and other proceeds deriving from TARP 
investments (after deducting losses).\486\ For further 
information on TARP profit and loss, see Figure 46.
---------------------------------------------------------------------------
    \484\ U.S. Department of the Treasury, Capital Purchase Program 
(Oct. 3, 2010) (online at www. financial stability.gov/ 
roadtostability/capitalpurchaseprogram.html).
    \485\ U.S. Department of the Treasury, Targeted Investment Program 
(Oct. 3, 2010) (online at www. financial stability.gov/roadtostability/ 
targetedinvestmentprogram.html).
    \486\ Cumulative Dividends, Interest and Distributions Report, 
supra note 481; Treasury Transactions Report, supra note 481. 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 46: TARP ACCOUNTING (AS OF NOVEMBER 26, 2010)
                                             [Dollars in billions] i
----------------------------------------------------------------------------------------------------------------
                               Maximum              Total Repayments/                  Funding
           Program              Amount     Actual        Reduced         Total        Currently        Funding
                               Allotted   Funding       Exposure         Losses      Outstanding      Available
----------------------------------------------------------------------------------------------------------------
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            (24.3)    vii (3.5)        viii 53.6           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 14.9         xiv (0.4)         0                14.4           7.5
 Program (PPIP) xii.........
SBA 7(a) Securities Purchase        0.4     xv 0.4              0            0                 0.4       xvi 0
Home Affordable Modification       29.9        0.7              0            0                 0.7          29.2
 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     $395.9          $(223.0)       $(6.0)           $167.0         $78.8
----------------------------------------------------------------------------------------------------------------
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 November
  26, 2010 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
ii As of October 29, 2010, Treasury had sold 4.1 billion Citigroup common shares for $16.4 billion in gross
  proceeds. Amount repaid under CPP includes $13.4 billion Treasury received as part of its sales of Citigroup
  common stock. The difference between these two numbers represents the $3.0 billion in net profit Treasury has
  received 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.
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 issued by South
  Financial Group, Inc. and TIB Financial Corp and warrants. See U.S. Department of the Treasury, Troubled Asset
  Relief Program Transactions Report for the Period Ending November 26, 2010, at 2, 13-15 (Nov. 30, 2010)
  (online at financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-
  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); U.S. Department of the Treasury,
  Treasury Commences Plan to Sell Citigroup Common Stock (Apr. 26, 2010) (online at ustreas.tpaq.treasury.gov/
  press/releases/tg660.htm).
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, at respective losses of $217 million and $25 million. Therefore, Treasury's net current CPP
  investment is $49.5 billion due to the $2.6 billion in losses thus far. See U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending November 26, 2010, at 13-14 (Nov. 30,
  2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
iv The $5.0 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); U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending November 26, 2010, at 20 (Nov. 30,
  2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
v Although this $5.0 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 46. See U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending November 26, 2010, at 20 (Nov. 30,
  2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
vi AIG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange for the
  company's preferred stock. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
  Report for the Period Ending November 26, 2010, at 21 (Nov. 30, 2010) (online at financialstability.gov/docs/
  transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.pdf). It has also drawn down $7.5
  billion of the $29.8 billion made available on April 17, 2009. 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). 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. See U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for the Period Ending November 26, 2010, at 21 (Nov. 30, 2010) (online at
  financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
  AIG expects to draw down up to $22.3 billion in unutilized 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., AIG Announces Plan to Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/newsroom/
  2010_September/AIGAnnouncesPlantoRepay30Sept2010.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. See 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); U.S. Department
  of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending November 26, 2010, at
  18-19 (Nov. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf). 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. Although
  Treasury does not expect a significant recovery from the liquidation proceeds, Treasury is not yet reporting
  this loan as a loss in the Transaction Report. To date, Treasury has collected $40.2 million in proceeds from
  the sale of collateral. 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 and Nov. 29, 2010); U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending November 26, 2010, at 18 (Nov. 30,
  2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.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 November 26, 2010, at 18
  (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf). See endnote 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 November 26, 2010, at 19 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-
  30-10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
x For the TALF program, $1 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 December 1, 2010, Treasury had provided $106 million to TALF LLC. This total is net of accrued interest
  payable to Treasury. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances
  (H.4.1) (Dec. 2, 2010) (online at www.federalreserve.gov/releases/h41/20101202/).
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; Commercial Mortgage-Backed
  Securities 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--October 2010, at 4
  (Nov. 10, 2010) (online at www.financialstability.gov/docs/October 105(a) Report.pdf).
xiv As of November 26, 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 November 26, 2010, at 23 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-
  30-10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
xv As of November 26, 2010, Treasury's purchases under the SBA 7(a) Securities Purchase Program totaled $364.2
  million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
  Ending November 26, 2010, at 22 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-
  30-10%20Transactions%20Report%20as%20of%2011-26-10.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 On June 23, 2010, $1.5 billion was allocated to mortgage assistance through the Hardest Hit Fund (HHF).
  Another $600 million was approved on August 3, 2010. U.S. Department of the Treasury, Obama Administration
  Approves State Plans for $600 million of `Hardest Hit Fund' Foreclosure Prevention Assistance (Aug. 3, 2010)
  (online at www.financialstability.gov/latest/pr_08042010.html). 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 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.financialstability.gov/latest/pr_08112010.html). 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 December 1, 2010, a total of $103.6 million has been disbursed to 12 state Housing Finance Agencies
  (HFAs). Data provided by Treasury (Dec. 2, 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. The $53.3 million in the FHA Short Refinance program is
  broken down as follows: $50 million for a deposit into an advance purchase account as collateral to the
  initial $50 million Letter of Credit, $2.9 million for the closing and funding of the Letter of Credit,
  $115,000 in trustee fees, $175,000 in claims processor fees, and $156,000 for an unused commitment fee for the
  Letter of Credit. Data provided by Treasury (Dec. 2, 2010).
xx U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
  November 26, 2010, at 1-13, 16-17 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/
  11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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 47: TARP PROFIT AND LOSS
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Warrant
                                                             Dividends xxii  Interest xxiii    Disposition   Other Proceeds
                    TARP Initiative xxi                       (as of 10/31/   (as of 10/31/   Proceeds xxiv   (as of 10/31/  Losses xxv (as     Total
                                                                  2010)           2010)       (as of 11/26/       2010)      of 11/26/2010)
                                                                                                  2010)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total......................................................         $16,725          $1,061          $8,160          $5,852        ($6,034)      $25,764
CPP........................................................           9,860              49           6,905      xxvi 3,015         (2,576)       17,252
TIP........................................................           3,004              --           1,256              --              --        4,260
AIFP.......................................................     xxvii 3,418             931              --       xxviii 15         (3,458)          906
ASSP.......................................................              --              15              --        xxix 101              --          116
AGP........................................................             443              --              --       xxx 2,246              --        2,689
PPIP.......................................................              --              66              --        xxxi 199              --          264
SBA 7(a)...................................................              --               1              --              --              --            1
Bank of America Guarantee..................................              --              --              --       xxxii 276              --          276
--------------------------------------------------------------------------------------------------------------------------------------------------------
xxi AIG is not listed in 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.
HAMP is not listed in this table because HAMP is a 100% subsidy program and there is no profit expected.
xxii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of October 31, 2010 (Nov. 11, 2010) (online at
  financialstability.gov/docs/dividends-interest-reports/October%202010%20Dividends%20&%20Interest%20Report.pdf).
xxiii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of October 31, 2010 (Nov. 11, 2010) (online at
  financialstability.gov/docs/dividends-interest-reports/October%202010%20Dividends%20&%20Interest%20Report.pdf).
xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending November 26, 2010 (Nov. 30, 2010) (online
  at financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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. As of November 26, three
  TARP recipients, Pierce County Bancorp, Sonoma Valley Bancorp, and Tifton Banking Company, had entered receivership. Cumulatively, they had received
  $19.3 million in TARP funding. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending November 26,
  2010 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
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 endnote ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending November
  26, 2010, at 15 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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 Ally 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. U.S. Department of the Treasury,
  Cumulative Dividends, Interest and Distributions Report as of October 31, 2010 (Nov. 11, 2010) (online at financialstability.gov/docs/dividends-
  interest-reports/October%202010%20Dividends%20&%20Interest%20Report.pdf); Data provided by Treasury (May 7, 2010).
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 November 26, 2010, at 18 (Nov. 30, 2010) (online at
  financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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 November 26, 2010, at 19
  (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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 November 26, 2010, at 20 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.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 October 31, 2010, Treasury has earned $264.2 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 October 31, 2010, at 14 (Nov. 11, 2010) (online at financialstability.gov/docs/dividends-interest-reports/
  October%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
  Period Ending November 26, 2010, at 23 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
xxxii lthough 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 \487\
---------------------------------------------------------------------------
    \487\ U.S. Department of the Treasury, Cumulative Dividends, 
Interest, and Distributions Report as of October 31, 2010, at 20 (Nov. 
10, 2010) (online at www.financialstability.gov/docs/dividends-
interest-reports/
October%202010%20Dividends%20&%20Interest%20Report.pdf) (hereinafter 
``Cumulative Dividends, Interest, and Distributions Report as of 
October 31, 2010'').
---------------------------------------------------------------------------
    As of October 31, 2010, 123 institutions have missed at 
least one dividend payment on preferred stock issued under CPP 
outstanding.\488\ Among these institutions, 97 are not current 
on cumulative dividends, amounting to $110.8 million in missed 
payments. Another 26 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 $3.8 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 22 institutions that no longer have 
outstanding unpaid dividends, after previously deferring their 
quarterly payments.\489\
---------------------------------------------------------------------------
    \488\ Does not include banks with missed dividend payments that 
have either repaid all delinquent dividends, exited TARP, gone into 
receivership, or filed for bankruptcy.
    \489\ 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. Cumulative Dividends, 
Interest, and Distributions Report as of October 31, 2010, supra note 
487, 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.\490\ Figure 48 
below provides further details on the distribution and the 
number of institutions that have missed dividend payments.
---------------------------------------------------------------------------
    \490\ 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 Dec. 10, 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 48: CPP MISSED DIVIDEND PAYMENTS (AS OF OCTOBER 31, 2010) \491\
----------------------------------------------------------------------------------------------------------------
    Number of Missed Payments         1         2         3         4         5         6         7       Total
----------------------------------------------------------------------------------------------------------------
Cumulative Dividends
Number of Banks, by asset size..        30        20        18        16        10         3         0        97
    Under $1B...................        22        17        14        11         7         1         0        72
    $1B-$10B....................         6         3         3         5         3         2         0        22
    Over $10B...................         2         0         1         0         0         0         0         3
Non-Cumulative Dividends
Number of Banks, by asset size..         2         5         7         3         5         3         1        26
    Under $1B...................         1         5         6         3         5         3         1        24
    $1B-$10B....................         1         0         1         0         0         0         0         2
    Over $10B...................         0         0         0         0         0         0         0         0
                                 -------------------------------------------------------------------------------
Total Missed Payments...........  ........  ........  ........  ........  ........  ........  ........       123
----------------------------------------------------------------------------------------------------------------
\491\ Cumulative Dividends, Interest, and Distributions Report as of October 31, 2010, supra note 487, at 17-20.
  Data on total bank assets compiled using SNL Financial data service (accessed Nov. 3, 2010).

            e. CPP Losses
    As of November 26, 2010, Treasury has realized a total of 
$2.6 billion in losses from investments in four CPP 
participants. CIT Group Inc. and Pacific Coast National Bancorp 
have both completed bankruptcy proceedings, and the preferred 
stock and warrants issued by the South Financial Group and TIB 
Financial Corp. were sold to third-party institutions at a 
discount. Excluded from Treasury's total losses are investments 
in institutions that have pending receivership or bankruptcy 
proceedings, as well as an institution that is currently the 
target of an acquisition.\492\ Settlement of these transactions 
and proceedings would increase total losses in the CPP to $3.0 
billion. Figure 49 below details settled and unsettled 
investment losses from CPP participants that have declared 
bankruptcy, been placed into receivership, or renegotiated the 
terms of their CPP contracts.
---------------------------------------------------------------------------
    \492\ Treasury Transactions Report, supra note 481, at 13.

                                                                        FIGURE 49: CPP SETTLED AND UNSETTLED LOSSES \493\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Investment  Disposition    Warrant  Disposition                                Possible Losses/
             Institution                  Investment  Amount             Amount                   Amount           Dividends  & Interest      Reduced  Exposure                Action
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cadence Financial Corporation........              $44,000,000              $38,000,000                        -               $2,970,000             $(6,000,000)  10/29/2010: Treasury agreed
                                                                                                                                                                     to sell preferred stock and
                                                                                                                                                                     warrants issued by Cadence
                                                                                                                                                                     Financial to Community
                                                                                                                                                                     Bancorp LLC for $38 million
                                                                                                                                                                     plus accrued and unpaid
                                                                                                                                                                     dividends. Completion of
                                                                                                                                                                     the sale subject to
                                                                                                                                                                     fulfillment of certain
                                                                                                                                                                     closing conditions.
Capital Bank Corporation \494\                      41,279,000                        -                        -                3,457,117             (20,639,500)  11/9/2010: Capital Bank
                                                                                                                                                                     Corp. is seeking to enter
                                                                                                                                                                     an agreement with Treasury
                                                                                                                                                                     pursuant to which the
                                                                                                                                                                     company will repurchase
                                                                                                                                                                     outstanding TARP preferred
                                                                                                                                                                     shares at 50 percent of
                                                                                                                                                                     liquidation value, plus
                                                                                                                                                                     accrued unpaid dividends.
                                                                                                                                                                     The company will use cash
                                                                                                                                                                     proceeds from its
                                                                                                                                                                     acquisition by North
                                                                                                                                                                     American Financial Holdings
                                                                                                                                                                     Inc. As of Nov. 30, 2010,
                                                                                                                                                                     no agreement has been
                                                                                                                                                                     reached between Capital
                                                                                                                                                                     Bank Corp. and Treasury.
CIT Group Inc.*......................            2,330,000,000                        -                        -               43,687,500          (2,330,000,000)  12/10/2009: Bankruptcy
                                                                                                                                                                     reorganization plan for CIT
                                                                                                                                                                     Group Inc. became
                                                                                                                                                                     effective. CPP preferred
                                                                                                                                                                     shares and warrants were
                                                                                                                                                                     extinguished and replaced
                                                                                                                                                                     with contingent value
                                                                                                                                                                     rights (CVR). On Feb. 8,
                                                                                                                                                                     2010, the CVRs expired
                                                                                                                                                                     without value.
Midwest Banc Holdings, Inc...........               89,388,000                        -                        -                  824,289             (89,388,000)  5/14/2010: Midwest Banc
                                                                                                                                                                     Holdings, Inc. subsidiary,
                                                                                                                                                                     Midwest Bank and Trust,
                                                                                                                                                                     Co., placed into
                                                                                                                                                                     receivership. Midwest Banc
                                                                                                                                                                     Holdings is currently in
                                                                                                                                                                     bankruptcy proceedings.
Pacific Coast National Bancorp.*                     4,120,000                        -                        -                   18,088              (4,120,000)  2/11/2010: Pacific Coast
                                                                                                                                                                     National Bancorp dismissed
                                                                                                                                                                     its bankruptcy proceedings
                                                                                                                                                                     without recovery to
                                                                                                                                                                     creditors or investors.
                                                                                                                                                                     Investments, including
                                                                                                                                                                     Treasury's CPP investments,
                                                                                                                                                                     were extinguished.
Pierce County Bancorp................                6,800,000                        -                        -                  207,948              (6,800,000)  11/5/2010: Pierce County
                                                                                                                                                                     Bancorp subsidiary, Pierce
                                                                                                                                                                     Commercial Bank, placed
                                                                                                                                                                     into receivership.
Sonoma Valley Bancorp................                8,653,000                        -                        -                  347,164              (8,653,000)  8/20/2010: Sonoma Valley
                                                                                                                                                                     Bancorp subsidiary, Sonoma
                                                                                                                                                                     Valley Bank, placed into
                                                                                                                                                                     receivership.
South Financial Group*...............              347,000,000              130,179,219                 $400,000               16,386,111            (216,820,781)  9/30/2010: Preferred stock
                                                                                                                                                                     and warrants sold to
                                                                                                                                                                     Toronto-Dominion Bank.
The Bank of Currituck................                4,021,000                1,752,850                        -                  169,834              (2,268,150)  11/5/2010: Treasury agreed
                                                                                                                                                                     to sell all preferred stock
                                                                                                                                                                     (including preferred stock
                                                                                                                                                                     received upon exercise of
                                                                                                                                                                     warrants) to the Bank of
                                                                                                                                                                     Currituck.
TIB Financial Corp.*.................               37,000,000               12,119,637                   40,000                1,284,722             (24,880,363)  9/30/2010: Preferred stock
                                                                                                                                                                     and warrants sold to North
                                                                                                                                                                     American Financial
                                                                                                                                                                     Holdings.
Tifton Banking Company...............                3,800,000                        -                        -                  223,208              (3,800,000)  11/12/2010: Tifton Banking
                                                                                                                                                                     Company placed into
                                                                                                                                                                     receivership.
UCBH Holdings, Inc...................              298,737,000                        -                        -                7,509,920            (298,737,000)  11/6/2009: United Commercial
                                                                                                                                                                     Bank, a wholly-owned
                                                                                                                                                                     subsidiary of UCBH
                                                                                                                                                                     Holdings, Inc., was placed
                                                                                                                                                                     into receivership. UCBH
                                                                                                                                                                     Holdings is currently in
                                                                                                                                                                     bankruptcy proceedings.
    Total............................           $3,214,798,000             $182,051,706                  440,000               77,085,901         $(3,012,106,794)  ............................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\493\ Treasury Transactions Report, supra note 481, at 14. The asterisk (``*'') denotes recognized losses on Treasury's Transactions Report.

\494\ Capital Bank Corporation, Schedule 14A, at 5 (Nov. 19, 2010) (online at www.sec.gov/Archives/edgar/data/1071992/000095012310107474/g25191ddef14a.htm).

            f. Rate of Return
    As of December 2, 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 November.\495\ The internal 
rate of return is the annualized effective compounded return 
rate that can be earned on invested capital.
---------------------------------------------------------------------------
    \495\ 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 
that 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 481.
---------------------------------------------------------------------------
            g. Warrant Disposition

               FIGURE 50: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS (AS OF DECEMBER 2, 2010)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Panel's Best
                                                                                      Warrant         Warrant          Valuation      Price/
                            Institution                               Investment     Repurchase  Repurchase/ Sale     Estimate at    Estimate     IRR
                                                                         Date           Date          Amount          Disposition      Ratio   (Percent)
                                                                                                                         Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
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           --                --                --   --         (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
                                                                      \496\ 10/28/
                                                                              2008
                                                                     \497\1/9/2009
Bank of America...................................................     \498\ 1/14/     3/3/2010     1,566,210,714     1,006,416,684    1.533       6.5
                                                                              2009
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    $7,999,280,713    1.019       8.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
\496\ Investment date for Bank of America in CPP.
\497\ Investment date for Merrill Lynch in CPP.
\498\ Investment date for Bank of America in TIP.


                  FIGURE 51: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF DECEMBER 2, 2010)
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                 Warrant Valuation
        Financial Institutions with  Warrants Outstanding        -----------------------------------------------
                                                                   Low  Estimate  High  Estimate  Best  Estimate
----------------------------------------------------------------------------------------------------------------
Citigroup, Inc.\499\............................................          $74.68       $1,383.79         $229.25
SunTrust Banks, Inc.............................................           13.52          322.84          103.76
Regions Financial Corporation...................................            4.61          157.75           87.58
Fifth Third Bancorp.............................................           92.59          373.07          177.87
KeyCorp.........................................................           20.60          152.96           68.87
AIG.............................................................          401.00        1,977.51          744.11
All Other Banks.................................................          555.16        1,868.68        1,102.97
Total...........................................................       $1,162.16       $6,236.60       $2,514.41
----------------------------------------------------------------------------------------------------------------
\499\ 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. 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 such 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.\500\ 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.
---------------------------------------------------------------------------
    \500\ 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. 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.\501\ As of November 2010, there was 
approximately $149.7 billion in MBS still outstanding under 
this program.\502\
---------------------------------------------------------------------------
    \501\ U.S. Department of the Treasury, FY2011 Budget in Brief, at 
138 (Feb. 2010) (online at www.treasury.gov/about/budget-performance/
budget-in-brief/Documents/FY%202011%20BIB% 20(2).pdf).
    \502\ U.S. Department of the Treasury, MBS Purchase Program: 
Portfolio by Month (online at www.financialstability.gov/docs/
November%202010%20Portfolio%20by%20month.pdf) (accessed Dec. 3, 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/
November%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.
pdf) (accessed Dec. 3, 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.\503\ 
The intended purchase amount for agency debt securities was 
subsequently decreased to $175 billion.\504\ All purchasing 
activity was completed on March 31, 2010. As of December 1, 
2010, the Federal Reserve held $1.02 trillion of agency MBS and 
$148 billion of agency debt.\505\
---------------------------------------------------------------------------
    \503\ Board of Governors of the Federal Reserve System, Federal 
Reserve System Monthly Report on Credit and Liquidity Programs and the 
Balance Sheet, at 5 (Nov. 2010) (online at federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201011.pdf).
    \504\ Id. at 5.
    \505\ Board of Governors of the Federal Reserve System, Factors 
Affecting Reserve Balances (H.4.1) (Dec. 2, 2010) (online at 
www.federalreserve.gov/releases/h41/20101202/) (hereinafter ``Factors 
Affecting Reserve Balances (H.4.1)'').
---------------------------------------------------------------------------
            d. Federal Reserve Treasury Securities Purchases \506\
---------------------------------------------------------------------------
    \506\ 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 $300 billion 
in principal payments from agency debt and agency MBS in 
Treasury securities.\507\ The additional purchases and 
reinvestments will be conducted through the end of the second 
quarter of 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.\508\ As of December 1, 2010, 
the Federal Reserve held $917 billion in Treasury 
securities.\509\
---------------------------------------------------------------------------
    \507\ 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).
    \508\ 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).
    \509\ Factors Affecting Reserve Balances (H.4.1), supra note 505.

            FIGURE 52: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF DECEMBER 1, 2010) xxxiii
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
               Program                 Treasury  (TARP)   Federal  Reserve         FDIC              Total
----------------------------------------------------------------------------------------------------------------
Total...............................               $475           $1,345.3             $690.9           $2,511.2
    Outlays xxxiv...................              218.7            1,196.9              188.9            1,604.6
    Loans...........................               23.4              148.4                  0              171.8
    Guarantees xxxv.................                4.3                  0                502              506.3
    Repaid and Unavailable TARP                   228.6                  0                  0              228.6
     Funds..........................
AIG xxxvi...........................               69.8               82.6                  0              152.4
    Outlays.........................        xxxvii 69.8       xxxviii 26.1                  0               95.9
    Loans...........................                  0         xxxix 56.5                  0               56.5
    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/                    45.6                  0                  0               45.6
 Foreclosure Mitigation.............
    Outlays.........................         xlvii 45.6                  0                  0               45.6
    Loans...........................                  0                  0                  0                  0
    Guarantees......................                  0                  0                  0                  0
Automotive Industry Financing                xlvii 53.6                  0                  0               53.6
 Program............................
    Outlays.........................               45.5                  0                  0               45.5
    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........             l 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                   li 0.57                  0                  0               0.57
 Initiative.........................
    Outlays.........................                  0                  0                  0                  0
    Loans...........................               0.57                  0                  0               0.57
    Guarantees......................                  0                  0                  0                  0
Temporary Liquidity Guarantee                         0                  0              502.0              502.0
 Program............................
    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                          0            1,224.0                  0            1,224.0
 Expansion..........................
    Outlays.........................                  0        liv 1,170.8                  0            1,170.8
    Loans...........................                  0            lv 53.2                  0               53.2
    Guarantees......................                  0                  0                  0                  0
----------------------------------------------------------------------------------------------------------------
xxxiii Unless otherwise noted, all data in this figure are as of November 26, 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 November
  26, 2010, at 13 (Nov. 30, 2010) (online at financialstability.gov/docs/ transactionreports/11-30-
  10%20Transactions %20Report%20as%20of%2011-26-10.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. Board of
  Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
  Programs and the Balance Sheet, at 18 (Nov. 2010) (online at www.federalreserve.gov/monetarypolicy/ files/
  monthlyclbsreport201011.pdf). 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
  December 1, 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) (Dec. 2, 2010) (online at
  www.federalreserve.gov/releases/h41/20101202/).
xxxix This number represents the full $29.2 billion made available to AIG through its Revolving Credit Facility
  (RCF) with FRBNY ($21.3 billion had been drawn down as of December 1, 2010) and the outstanding principal of
  the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of December 1, 2010, $13.3 billion
  and $13.9 billion, respectively). Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1)
  (Dec. 2, 2010) (online at www.federalreserve.gov/releases/ h41/20101202/); Board of Governors of the Federal
  Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet
  (Nov. 2010) (online at www.federalreserve.gov/monetarypolicy/ files/monthlyclbsreport201011.pdf). 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. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report
  on Credit and Liquidity Programs and the Balance Sheet, at 15 (Nov. 2010) (online at www.federalreserve.gov/
  monetarypolicy/ files/monthlyclbsreport201011.pdf).
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 several subsidiaries. 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. The balance on the AIG Revolving Credit Facility increased $0.3 billion
  between September 29 and October 27, 2010, primarily due to recapitalized interest and fees as principal
  repayments. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit
  and Liquidity Programs and the Balance Sheet, at 17, 19-20 (Nov. 2010) (online at www.federalreserve.gov/
  monetarypolicy/files/monthlyclbsreport201011.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 endnote 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 November 26, 2010, at 1, 13 (Nov. 30, 2010) (online at financialstability.gov/
  docs/ transaction-reports/11-30-10%20 Transactions%20Report%20as%20of%2011-26-10.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 November
  26, 2010, at 13 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.pdf).
xlii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC (now
  Ally Financial), 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) (Oct. 28, 2010) (online at www.federalreserve.gov/
  releases/h41/20101028/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
  for the Period Ending November 26, 2010, at 21 (Nov. 30, 2010) (online at financialstability.gov/docs/
  transaction- reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.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 Dec. 10, 2010); Federal Reserve Bank of New York, Term
  Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/cmbs_operations.html)
  (accessed Dec. 10, 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 Dec. 10, 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 Dec. 10, 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 Dec. 10,
  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 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, Federal Reserve Announces Agreement with Treasury Regarding 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); 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 No TARP resources were expended under the PPIP Legacy Loans Program, a TARP program that was announced in
  March 2009 but never launched. Since no TARP funds were allocated for the program by the time the TARP expired
  in October 2010, this or a similar program cannot be implemented unless another source of funding is
  available.
xlvi This figure represents Treasury's final adjusted investment amount in the Legacy Securities Public-Private
  Investment Program (PPIP). As of November 26, 2010, Treasury reported commitments of $14.9 billion in loans
  and $7.5 billion in membership interest associated with PPIP. See U.S. Department of the Treasury, Troubled
  Asset Relief Program Transactions Report for the Period Ending November 26, 2010, at 23 (Nov. 30, 2010)
  (online at financialstability.gov/docs/transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-
  10.pdf). 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.'' U.S. Department of the Treasury,
  Winding Up and Liquidation Agreement Between the United States Department of the Treasury and UST/TCW Senior
  Mortgage Securities Fund, L.P. (Jan. 4, 2010) (online at financialstability.gov/docs/
  TCW%20Winding%20Up%20Agmt%20(Execution%20Copy)%20Redacted.pdf). 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 November 26, 2010, at 23 (Nov. 30,
  2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.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 November 26, 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 December 2, 2010, only $728.9 million in non-GSE payments
  have been disbursed under HAMP. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
  Report for the Period Ending November 26, 2010, at 45 (Nov. 30, 2010) (online at financialstability.gov/docs/
  transaction-reports/11-30-10%20Transactions%20Report%20as%20of%2011-26-10.pdf); U.S. Department of the
  Treasury, Troubled Assets Relief Program Monthly 105(a) Report--October 2010, at 4 (Nov. 10, 2010) (online at
  financialstability.gov/docs/October%20105(a)%20Report.pdf); Data provided by Treasury (Dec. 3, 2010).
xlviii A substantial portion of the total $81.3 billion in debt instruments 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 ($53.6
  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 November 26, 2010, at
  18 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.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 November 26, 2010, at 19
  (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.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
  November 26, 2010, at 17 (Nov. 30, 2010) (online at financialstability.gov/docs/transaction-reports/11-30-
  10%20Transactions%20Report%20as%20of%2011-26-10.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 Related to the Temporary Liquidity
  Guarantee Program: Debt Issuance Under Guarantee Program (Oct. 31, 2010) (online at www.fdic.gov/regulations/
  resources/tlgp/total_issuance10-10.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 (Oct. 31, 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 (Sept. 23, 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 (Sept. 23, 2010) (online at www.fdic.gov/
  about/strategic/corporate/index.html). This figure includes the FDIC's estimates of its future losses under
  loss-sharing agreements that it has entered into with banks acquiring assets of insolvent banks during these
  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)
  (Dec. 2, 2010) (online at www.federalreserve.gov/releases/h41/20101202/) (accessed Dec. 3, 2010). Although the
  Federal Reserve does not employ the outlays, loans, and guarantees classification, its accounting clearly
  separates its mortgage-related purchasing programs from its liquidity programs. See, e.g., Board of Governors
  of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1), at 2 (Dec. 2, 2010) (online at
  www.federalreserve.gov/releases/h41/20101202) (accessed Dec. 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) (Dec. 2, 2010) (online
  at www.federalreserve.gov/releases/h41/20101202/) (accessed Dec. 3, 2010). For further information, please see
  the data that the Federal Reserve recently disclosed on these programs pursuant to its obligations under the
  Dodd-Frank Wall Street Reform and Consumer Protection Act. Board of Governors of the Federal Reserve System,
  Credit and Liquidity Programs and the Balance Sheet: Overview (May 11, 2010) (online at www.federalreserve.gov/
  monetarypolicy/bst.htm); Board of Governors of the Federal Reserve System, Credit and Liquidity Programs and
  the Balance Sheet: Reports and Disclosures (Aug. 24, 2010) (online at www.federalreserve.gov/monetarypolicy/
  bst_reports.htm); Board of Governors of the Federal Reserve System, Usage of Federal Reserve Credit and
  Liquidity Facilities (Dec. 3, 2010) (online at www.federalreserve.gov/newsevents/reform_transaction.htm).

                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of the Emergency Economic Stabilization Act (EESA) and formed 
on November 26, 2008. Since then, the Panel has produced 25 
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.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in 
January. The report will provide an update on government 
support for the domestic automotive industry via the TARP's 
Automotive Industry Financing Program. This will be the Panel's 
third report focusing on the AIFP, following its September 2009 
and March 2010 oversight reports.\510\
---------------------------------------------------------------------------
    \510\ See Congressional Oversight Panel, September Oversight 
Report: The Use of TARP Funds in Support and Reorganization of the 
Domestic Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/
documents/cop-090909-report.pdf); 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).
---------------------------------------------------------------------------
    The Panel will hold a hearing with Secretary Geithner in 
Washington on December 16, 2010. The Panel will ask the 
Secretary for a general update on the TARP, for information 
regarding the future plans for TARP investments following 
expiration of the program's authority on October 3, 2010, and 
for specific information pertaining to the topics of the 
Panel's recently published and forthcoming oversight reports. 
This will be the Secretary's fifth appearance before the Panel; 
his most recent appearance was on June 22, 2010.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating financial crisis, on October 
3, 2008, Congress provided Treasury with the authority to spend 
$700 billion to stabilize the U.S. economy, preserve home 
ownership, and promote economic growth. Congress created the 
Office of Financial Stability (OFS) within Treasury to 
implement the 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 SPECIAL MASTER PATRICIA GEOGHEGAN TO CHAIRMAN 
  TED KAUFMAN RE: FOLLOW UP TO EXECUTIVE COMPENSATION HEARING, DATED 
                           NOVEMBER 18, 2010

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