[House Hearing, 111 Congress] [From the U.S. Government Publishing Office] SECOND LIENS AND OTHER BARRIERS TO PRINCIPAL REDUCTION AS AN EFFECTIVE FORECLOSURE MITIGATION PROGRAM ======================================================================= HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION __________ APRIL 13, 2010 __________ Printed for the use of the Committee on Financial Services Serial No. 111-120 U.S. GOVERNMENT PRINTING OFFICE 57-738 WASHINGTON : 2010 ----------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001 HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama MAXINE WATERS, California MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York PETER T. KING, New York LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina RON PAUL, Texas GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois BRAD SHERMAN, California WALTER B. JONES, Jr., North GREGORY W. MEEKS, New York Carolina DENNIS MOORE, Kansas JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West WM. LACY CLAY, Missouri Virginia CAROLYN McCARTHY, New York JEB HENSARLING, Texas JOE BACA, California SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas AL GREEN, Texas TOM PRICE, Georgia EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina MELISSA L. BEAN, Illinois JOHN CAMPBELL, California GWEN MOORE, Wisconsin ADAM PUTNAM, Florida PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota KEITH ELLISON, Minnesota KENNY MARCHANT, Texas RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan CHARLES A. WILSON, Ohio KEVIN McCARTHY, California ED PERLMUTTER, Colorado BILL POSEY, Florida JOE DONNELLY, Indiana LYNN JENKINS, Kansas BILL FOSTER, Illinois CHRISTOPHER LEE, New York ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota JACKIE SPEIER, California LEONARD LANCE, New Jersey TRAVIS CHILDERS, Mississippi WALT MINNICK, Idaho JOHN ADLER, New Jersey MARY JO KILROY, Ohio STEVE DRIEHAUS, Ohio SUZANNE KOSMAS, Florida ALAN GRAYSON, Florida JIM HIMES, Connecticut GARY PETERS, Michigan DAN MAFFEI, New York Jeanne M. Roslanowick, Staff Director and Chief Counsel C O N T E N T S ---------- Page Hearing held on: April 13, 2010............................................... 1 Appendix: April 13, 2010............................................... 33 WITNESSES Tuesday, April 13, 2010 Das, Sanjiv, President and Chief Executive Officer, CitiMortgage, Inc., accompanied by Steve Hemperly, Executive Vice President.. 7 Desoer, Barbara, President, Bank of America Home Loans, accompanied by Jack Schakett, Credit Loss Mitigation Strategies Executive...................................................... 5 Heid, Michael J., Co-President, Wells Fargo Home Mortgage, accompanied by Kevin Moss, Executive Vice President, Wells Fargo Home Equity Group........................................ 10 Lowman, David, Chief Executive Officer, JPMorgan Chase Home Lending, accompanied by Molly Sheehan, Senior Vice President, Housing Policy................................................. 8 APPENDIX Prepared statements: Das, Sanjiv.................................................. 34 Desoer, Barbara.............................................. 39 Heid, Michael J.............................................. 47 Lowman, David................................................ 52 Additional Material Submitted for the Record Moss, Kevin: Additional information provided for the record in response to a question asked by Chairman Frank during the hearing...... 64 SECOND LIENS AND OTHER BARRIERS TO PRINCIPAL REDUCTION AS AN EFFECTIVE FORECLOSURE MITIGATION PROGRAM ---------- Tuesday, April 13, 2010 U.S. House of Representatives, Committee on Financial Services, Washington, D.C. The committee met, pursuant to notice, at 12 p.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Members present: Representatives Frank, Kanjorski, Moore of Kansas, Hinojosa, Miller of North Carolina, Green, Cleaver, Bean, Perlmutter, Carson, Adler; Bachus, Biggert, Hensarling, and Neugebauer. The Chairman. The hearing will come to order. I apologize for the slight delay. The ongoing question of how do we deal with the foreclosure crisis is before us. And I should be clear: Our major motivation here is the extent to which the ongoing problem of mortgage foreclosure damages the national economy. This is a fundamental problem that we have, and it is a consensus that one of the obstacles through the fullest recovery that is possible is the overhanging in the housing area. We have no magic wands to wave or buttons to push. There are a series of efforts. One of the things that became clear to us as we talked about it is the question of the interrelationship of first mortgages and second mortgages. And we have been talking to investors who hold first mortgages to servicers. The institutions here have a significant number of second mortgages that they own. And we would like to find out what can be done to help resolve this crisis with regard to second mortgages, and in particular, we are interested to know what people plan to do about them, and if there are obstacles to doing something, how can we be either helpful or maybe persuade people to do more? I will now reserve the balance of my time, and recognize the gentleman from Alabama. Mr. Bachus. Thank you, Mr. Chairman. I thank you for holding this important hearing on the issue of modifying mortgages on properties having multiple debt obligations or second liens. I would also like to thank our witnesses for being here today. We look forward to hearing your testimony. Preventing avoidable foreclosures is a serious issue for homeowners that has a great impact on our economy and on the communities in which those homes are located. A leading credit research provider estimates that the 4 institutions testifying before the committee today hold $423 billion in home equity loans, including $151 billion in loans to borrowers, who are either underwater or close to it. Further research shows that at least 51 percent of first liens also have a second or subsequent liens. This presents real problems for homeowners with multiple liens on their property, as well as for bank balance sheets and securitization markets. It also impacts our prospects for housing market recovery, as the chairman mentioned. Mr. Chairman, many of the well intentioned foreclosure mitigation programs have already failed to accomplish their mission. And many believe that this latest attempt by the Administration to ``fix'' the HAMP program will do little to stem foreclosures and help troubled homeowners. Constant shifts in policy directions have created uncertainty in the market and encouraged homeowners and servicers to wait for the next best offer rather than take action to address problems related to distressed mortgages. Additionally, many Americans continue to be concerned about the inherent moral hazards of these foreclosure mitigation programs. Is it fair to provide taxpayer funds to overextended homeowners who have fallen behind on their mortgages while homeowners who have been struggling to stay current and meet their commitments receive no help? I think not. Also, I think that ignores the problem that many homeowners do not even have a mortgage or second liens. Most do not have second liens. And it is inherently unfair to ask them to guarantee or participate in programs to help others. Critics of the HAMP program argue that mocks the hard work and foresight of those who have made larger downpayments or took out smaller mortgages to buy more affordable homes and now struggle to make their monthly payments. Now these responsible homeowners are forced as taxpayers to foot the bill for rescuing their less prudent neighbors. And once again, the Administration intends to use TARP funds to pay for these newly announced initiatives designed to pressure banks to modify troubling loans. Unending government interference, intervention, and bailouts must end. It is particularly troubling to me that banks are being told to forgive principal when many of them have said they would rather reduce the interest rates. And when the government gets into that detail of trying to force banks or coerce them into forgiving principal, I think that is a slippery slope. Instead of new programs and new bailouts, Congress should focus on job creation policies as the best way to help homeowners make their payments, prevent more foreclosures, and get our economy back on track. That includes reducing our debt, which will keep interest rates low. The market needs to find its own footing, free of government intervention and manipulation, so we can revive our economy and get on with a full housing market recovery. And I know it won't be easy. I thank, again, the witness for being here, and I yield back the balance of my time. The Chairman. The gentleman from North Carolina is recognized for 3 minutes. Mr. Miller of North Carolina. Thank you, Mr. Chairman. The 4 banks represented today service about two-thirds of all distressed home mortgage loans. The same 4 banks own between $400 billion and $500 billion in second mortgages secured by the same distressed assets, the value of which will be directly affected by decisions to modify the first mortgage or to foreclose or to extend and pretend. It is hard to understand why servicing a first mortgage on behalf of investors while holding a second lien on the same property is not an irreconcilable conflict of interest between servicers and investors. Why is this not a breach of fiduciary duty, which is fraud under the common law? It makes no sense, as the testimony today will tell us, that second mortgages are performing better than first mortgages. That makes no sense for the homeowner. Are servicers telling homeowners to pay the second mortgage before they pay the first if they can only pay one? Congress and the industry investors should begin by asking whether there is any plausible reason to continue to permit servicers to own debts secured by a home that secures a mortgage that they also service. Hearing none so far, I have introduced with Mr. Ellison legislation to prohibit one bank, one entity, from doing both. Thank you, Mr. Chairman. The Chairman. The gentleman from Texas. Mr. Hensarling. Thank you, Mr. Chairman. Today, we will examine the 5th or 6th iteration of the same failed foreclosure mitigation plan offered by the Obama Administration and Congress. It is a policy that still throws mud on the wall to see what sticks. It is very expensive mud. It belongs to someone else. And by the way, none of it is sticking. We still have one of the highest default rates in our Nation's history. By the Administration's own admission, the HAMP and HARP program have now restructured 169,000 permanent modifications out of their stated goal of 3 to 4 million. Most studies and empirical evidence show that at least 50 percent of those who have their mortgages modified will again redefault. Besides being a highly ineffective program, it is an unfair program. It is yet another chapter in ``America the Bailout Nation,'' as co-authored by the President and by Speaker Pelosi. It takes $50 billion from the taxpayer or borrows the money from the Chinese to bail out banks that made bad loans and to bail out many who bought more home than they could afford, speculated in residential real estate, or used their home equity as an ATM machine. We must remember that 94 percent of Americans own their home outright; they rent or they are current on their mortgage; and they are being asked to bail out the other 6 percent. It is a policy that says to the citizens who work hard, who live within their means, who save for a rainy day, ``You are a sucker.'' When you are struggling to pay your own mortgage, you shouldn't be forced to pay your neighbor's as well. The program is unfair to taxpayers. According to the Congressional Budget Office and the Government Accountability Office, they say that HAMP and the TARP $50 billion program will lose 100 percent of the taxpayer investment. Although I curiously note under the Majority memo for this hearing, under the subchapter entitled, ``Who Will Absorb Losses,'' curiously the word ``taxpayer'' is never mentioned. Finally, the program hurts our economy. It fails to recognize that the only effective foreclosure mitigation plan is a good job with a steady paycheck and a bright future. Unfortunately, under the policies of this Administration and of this Congress, over 7 million of these jobs have now been lost. By creating an unpredictable artificial market, investment capital remains on the sidelines; thus, HAMP is hampering economic recovery. Finally, as our Nation drowns in a sea of debt, I think we can better use the $50 billion to put forth a plan to pay down the debt and put the Nation on the road to fiscal sanity. That would create jobs and thus have effective foreclosure mitigation for the Nation. I yield back the balance of my time. The Chairman. I will yield myself 30 seconds, and then yield for his final statement the gentleman from Texas. I would just say that when the gentleman from Texas talked about the bailout partnership between the President and Nancy Pelosi, I gather he was chronicling a George Bush/Nancy Pelosi cooperative arrangement since every single bailout as it is described now began, of course, at the request of President Bush; although they are being continued by President Obama. Mr. Hensarling. Will the gentleman yield? The Chairman. Yes. Mr. Hensarling. Has not the President continued these policies? The Chairman. Excuse me, I just said continued by President Obama. I apologize. The gentleman was apparently preparing his response without listening to what he was going to respond to, so I will repeat it, and give myself another 15 seconds. Every single bailout in America that is undergoing now was begun at the request of and, in some cases, the unilateral decision of President Bush. What we then have is President Obama continuing those bailouts, that is what I was saying. Mr. Bachus. Mr. Chairman, could I have 30 seconds? The Chairman. I will yield to the gentleman. Mr. Bachus. Mr. Chairman, I think the American people, at this time, are really not interested in whether it was President Bush, whether it was President Obama, whether it was Democrats, whether it was Republicans, whether it was the Congress, whether it was the Administration, or even whether it was Wall Street. I think their main concern is, where do we go from here? And so I think we ought to focus-- The Chairman. I will yield myself some time to say, I would have been more impressed with that if the gentleman had said it after the gentleman from Texas blamed the President, meaning President Obama and Speaker Pelosi. Yes, I agree. I did not get into it until the gentleman from Texas said, this is the President, I assumed meaning President Obama and Speaker Pelosi. So I appreciate the gentleman's comments. It came just a little bit too late. Mr. Bachus. I believe the reason he did that-- The Chairman. I am sorry, the gentleman's time has expired. The gentleman from Texas. Mr. Green. Having been here, Mr. Chairman, when the request was made for a toxic assets program to be implemented and having seen the Capital Purchase Program implemented, I do have some degree of institutional knowledge in terms of what actually occurred. And my hope is that we can get beyond the finger pointing, but my sincerest thought is that we will not, hence the truth has to be told. And it is only by telling the truth that we will make it clear to future generations what exactly occurred. Two points: One, we do have to concern ourselves with what we call moral hazard, but we also have to concern ourselves with the immoral hazard. The moral hazard has to do with the possibility of persons taking advantage of a program specifically designed to help persons in times of need. The immoral hazard has to do with doing nothing after having seen millions, more than six, go into foreclosure, do nothing and watch millions more go into foreclosure. That is an immoral hazard. We have a great challenge before us. If we do nothing, the impact on the economy can be devastating. If we do nothing, the moral hazard will be secondary to the immoral hazard of having done nothing at a time when we are called upon to do much. I think we have to simply understand that we are here for a purpose. We are here to make sure that moral hazards are avoided and to make sure that we don't engage in the immoral hazard of doing nothing. I will yield back the balance of my time. The Chairman. All time has expired. We will begin with the statements. And we begin here with Barbara Desoer, who is president of Bank of America Home Loans. STATEMENT OF BARBARA DESOER, PRESIDENT, BANK OF AMERICA HOME LOANS, ACCOMPANIED BY JACK SCHAKETT, CREDIT LOSS MITIGATION STRATEGIES EXECUTIVE Ms. Desoer. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to discuss Bank of America's loan modification performance. Providing solutions to distressed borrowers remains a critical focus, and in the past 2 years, we have helped more than 560,000 customers with a permanent modification, including 33,000 under the Home Affordable Modification Program. Modification efforts have been successful in helping many customers stay in their homes, but there is a limit to what the current programs can accomplish. Today, I would like to discuss the number of customers that we believe we can still assist with HAMP, as well as focus on the role of principal reduction and second liens. In our total portfolio of 14 million loans, Bank of America has 1.4 million first mortgage customers who are more than 60 days delinquent. Of that number, 621,000 customers are eligible for mortgage modification through HAMP. We arrive at that number by subtracting customers for whom HAMP was not intended. This includes non-owner-occupied or vacant homes, the unemployed, and customers with a debt-to-income ratio less than 31 percent. For those customers who fall outside the scope of HAMP, Bank of America continues to offer proprietary modification solutions. To date, we have made HAMP trial offers to 391,000 customers. However, despite aggressive outreach, including face-to-face visits to customers' homes, we have not experienced the kind of response rate we anticipated. In addition, a significant number of customers in the trial modification period are not completing the requirements to obtain permanent modifications. We continue to look at ways to evolve the programs to achieve higher customer acceptance rates. Recent efforts on principal reduction and second liens are examples of those. Bank of America is supportive of principal reduction for customers who are experiencing hardship and have extremely high loan-to-value ratios. We recently announced enhancements to our own proprietary national homeownership retention program that includes an innovative earned principal forgiveness approach which strikes, we believe, the necessary balance between customer and investor interests. We understand that there are questions about the impact of second liens on loan modifications and the use of principal reduction. Second liens need to be a part of the modification process. However, we believe broad-scale extinguishment is not the solution because the majority of seconds do in fact have value. Out of 2.2 million second loans in Bank of America's held-for-investment portfolio, only 91,000 are delinquent, and also behind a delinquent first and not supported by any equity. It is important to note that in our first mortgage held for investment portfolio, we have already been modifying firsts including principal reduction, regardless of whether or not there is a second lien behind it. We have also modified many second lien loans and written down a significant number of second lien loans as well. We recognize that more needs to be done, particularly when the first lien is held by a different investor. And we believe a solution is contained within the Treasury's second lien program, known as 2MP. With 2MP, the holder of the second lien is required to forebear a similar percentage as the first lienholder. We would advocate working on a similar industry- wide process that would require the second lienholder to take a principal balance reduction proportionate to the first lienholder. Bank of America is a proud participant in 2MP and, on April 1st, became the first major loan servicer to begin mailing trial modification offers to home equity customers under the program. Despite these considerable efforts, not everyone will be able to afford to stay in their homes. Given the depth of the Nation's recession, a considerable number of customers will need to move from homeownership to rental and other housing solutions. Bank of America is committed to passionately and responsibly helping our customers make this transition. We recently launched the Treasury's Home Affordable Foreclosure Alternatives program on April 5th and have implemented our own expanded short-sale program to help customers avoid the stigma of foreclosure and reduce the damage done to their credit. For those not interested in the short-sale process as an alternative, we are stepping up efforts to provide incremental funding for our Cash for Keys program and Deed in Lieu program. We will continue to partner with public policy officials, community groups, and, most importantly, our customers to provide a dignified transition where required. At Bank of America, we are working to balance the needs of customers, investors, shareholders, and the communities we serve. We take very seriously our role in helping customers, as well as restoring confidence in the U.S. housing market. We appreciate the leadership of this committee and will continue to work with you to develop solutions on these critical issues. Thank you. [The prepared statement of Ms. Desoer can be found on page 39 of the appendix.] The Chairman. Thank you. I should explain that we have asked the four large banks here to send a high-ranking official and, if they wish, to bring with them someone who can do technical back-up. We in this committee are well aware of the importance of--I was just explaining that we are going to be calling on every other witness because we have high-ranking executives, and they are accompanied by other executives who have the kind of knowledge that will be helpful together in answering the questions. So our next witness is Mr. Sanjiv Das, who is president and chief executive officer of CitiMortgage. STATEMENT OF SANJIV DAS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CITIMORTGAGE, INC., ACCOMPANIED BY STEVE HEMPERLY, EXECUTIVE VICE PRESIDENT Mr. Das. Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for the opportunity to discuss Citi's efforts to help families stay in their homes. I am Sanjiv Das, CEO of CitiMortgage. Joining me is Steve Hemperly, head of Citi's default servicing operations, and I am honored to be given the chance today to describe our efforts. As Citi CEO Vikram Pandit has said, we owe a debt of gratitude to the American taxpayer, and we believe it is our responsibility to help American families in financial distress and, in particular, to help families stay in their homes. We are committed to modifying loans to borrowers facing hardship, while providing new loans to help Americans in this difficult time. I joined Citi in July of 2008, and in my role as head of CitiMortgage, I manage Citi's efforts to help families pursue their dreams of buying a home, making their homes more affordable, or assisting those families who may be facing financial hardship. CitiMortgage has a long history of helping homeowners. Just last year, we originated mortgages to approximately 336,000 homeowners, totalling $80.5 billion. Also, last year, we helped approximately 270,000 borrowers refinance their primary mortgages. And in the midst of this housing crisis, we have put considerable resources towards helping our customers who are facing financial challenges remain in their homes. We describe our lending and foreclosure prevention efforts in detail in a quarterly report that we release publicly and post on our Web site. Citi has worked closely with the U.S. Treasury in developing and executing their Making Home Affordable programs. Since 2007, we have helped more than 825,000 families in their efforts to avoid foreclosure. We now have over 1,400 new employees dedicated to supporting our foreclosure prevention efforts and have trained more than 4,000 employees to assist borrowers. Our focus has paid off. We are pleased to be ranked consistently among the top, if not at the top, of Treasury's rankings for HAMP, and in the fourth quarter of 2009, we were able to help families in their efforts to avoid foreclosure by a ratio of 15 to 1. Our goal is to work with our customers to find the most affordable solution and to assist those who are in need. At Citi, we have addressed affordability with programs which go beyond HAMP. We believe these programs are responsible, timely and, most importantly, effective. Our programs address core issues which borrowers face, such as unemployment, imminent risk of default, and the need for alternatives to foreclosure for those not able to afford owning a home. We have used and continue to use principal reduction as a solution. To date, we have been able to address the needs of our borrowers on a case-by-case basis, tailoring solutions for a family's unique needs and to deliver an outcome that is affordable and lasting. We do not believe there is a one-size- fits-all approach to affordability. The proof of this is in our low default rates, which continue to rank significantly lower than industry averages. We caution that applying principal reductions on a broad scale could raise issues of fairness among consumers. We have also signed for the Treasury's second lien program and support recent changes to HAMP's first lien program. We expect these changes to result in more principal reductions going forward, and we will continue to be thoughtful in how we implement these programs. Just as HAMP is not the only solution for all consumers, we believe principal reduction is not the only solution for those who are experiencing financial hardship. While we have made progress, I fully appreciate there is more work to be done. We are staunch supporters of the Treasury's programs to help consumers because we believe that action among all banks will prove to be more powerful and ultimately more effective than individual bank actions in addressing consumer financial hardship. Let me conclude by restating our unwavering commitment to helping American families during these challenging times. All of us at Citi remain focused on achieving affordability in a responsible manner while helping families stay in their homes. Thank you, Mr. Chairman and Ranking Member Bachus, for the opportunity to speak before you and the members of the committee. I would be happy to answer any questions you might have. [The prepared statement of Mr. Das can be found on page 34 of the appendix.] The Chairman. Next, we have Mr. David Lowman, who is the chief executive officer of JPMorgan Chase Home Lending. STATEMENT OF DAVID LOWMAN, CHIEF EXECUTIVE OFFICER, JPMORGAN CHASE HOME LENDING, ACCOMPANIED BY MOLLY SHEEHAN, SENIOR VICE PRESIDENT, HOUSING POLICY Mr. Lowman. Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for the opportunity to appear before you today. My name is Dave Lowman, and I am the chief executive officer of the home lending businesses of JPMorgan Chase. I am joined today by my colleague, Molly Sheehan. JPMorgan Chase shares your commitment to helping homeowners and stabilizing our Nation's housing market. At Chase, we are working hard to help families meet their mortgage obligations and keep them in their homes by making their home payments affordable. To date, we have helped to prevent over 965,000 foreclosures through HAMP, our own proprietary modification programs, and other programs. In addition, we have refinanced nearly $16 billion of loans under HARP. HAMP modification performance has been strong, helping hundreds of thousands of homeowners achieve affordable mortgage payments. At Chase, we are now completing more than 10,000 permanent modifications per month, and on average, homeowners are receiving a monthly payment reduction of $548 through their HAMP modification. That represents, on average, a payment reduction of 29 percent. In addition, we are adopting and implementing the Home Affordable Foreclosure Alternative Program and a second lien modification program to help more borrowers. We actively use temporary forbearance agreements for unemployed borrowers, similar to the program being contemplated by the Administration. You have asked us to focus our testimony on second liens and principal forgiveness, and I would like to make a few points on these topics. We have given these issues a great deal of thought, and my written testimony contains the results of our extensive analysis. There have been many questions about the role of second liens in the process of helping borrowers. We estimate that 70 percent of the first liens in our servicing portfolio are unencumbered by a junior lien; 95 percent of our second lien borrowers continue to pay as agreed. Even among loans that are underwater, 95 percent continue to pay as agreed. More than 90 percent of customers with loan to values greater than 125 percent continue to pay as agreed. In our experience, second liens are not an impediment to first lien modifications. Our HAMP first lien modification completion rate is virtually the same, whether or not we are aware of the existence of a second lien. It is important to distinguish between payment priority and lien priority. In almost all scenarios, second lienholders have rights equal to a first lienholder with respect to a borrower's cash flow. The same is true with respect to other secured or unsecured debt, such as credit cards or car loans. Generally, consumers can decide how they want to manage their monthly payments. It is only at liquidation or property disposition that the first lien investors have priority. We routinely modify our second liens, whether or not we own the first mortgage. We have offered almost 54,000 second lien modifications over the last 14 months, 12,000 of which have been made permanent. Approximately 45 percent of these were on loans where we did not service the first lien. On the topic of principal reduction, there are certainly individual cases or even segments of borrowers where principal reduction may be appropriate. Last year, we began testing targeted principal reduction programs for certain high-risk borrowers to see if a principal reduction program could be effective. Once we see the results of these tests, we will be able to better evaluate the effectiveness of a broader principal reduction program. But we are concerned about large-scale, broadbased principal reduction programs for both first and second lien mortgage loans and particularly for current borrowers with an ability to repay their obligations. Our first concern is that such programs could be harmful to consumers, investors, and future mortgage market conditions, and should not be undertaken without first attempting other solutions, including more targeted modification efforts. Broadbased principal reduction could result in decreased access to credit and higher cost for consumers because lenders will price for principal forgiveness risk. Less affluent borrowers will likely be harmed disproportionately. There is also an important issue of cost. A broadbased principal reduction program could have an industry-wide cost of $700 billion to $900 billion, by our estimates. The cost of Fannie Mae, Freddie Mac, and FHA alone would be in the neighborhood of $150 billion. In addition, let me emphasize that we have contractual obligations to investors, including Fannie Mae and Freddie Mac, that generally do not permit principal reductions. Responsible lenders and major servicers are offering programs that incorporate principal reduction features for borrowers who most need that type of assistance, based on the characteristics of the particular portfolio of loans. We believe these types of targeted solutions are more appropriate. Thank you for your attention, and I would be happy to answer any questions you may have. [The prepared statement of Mr. Lowman can be found on page 52 of the appendix.] The Chairman. Next, we will hear from Mr. Mike Heid, who is co-president of Wells Fargo Home Mortgage. STATEMENT OF MICHAEL J. HEID, CO-PRESIDENT, WELLS FARGO HOME MORTGAGE, ACCOMPANIED BY KEVIN MOSS, EXECUTIVE VICE PRESIDENT, WELLS FARGO HOME EQUITY GROUP Mr. Heid. Chairman Frank, Ranking Member Bachus, and members of the committee, I am Mike Heid, co-president of Wells Fargo Home Mortgage,and I am here today with Kevin Moss, executive vice president of the Wells Fargo Home Equity Group. I would like to begin by stating what we, Wells Fargo, believe is an overarching issue that requires constant consideration. While very difficult to achieve, the needs and interests of homeowners in financial distress must be balanced with those who have remained current in their mortgage payments. While much focus deservedly is directed to consumers behind on payments, we cannot lose sight of the 91 percent of our mortgage customers current on their loans and the fact that just 3 percent of our home equity customers were 2 or more payments past due as of the end of 2009. With that perspective in mind, let me address the assistance programs already under way and the program announced in concept on March 26th. First, for years, we have offered a short-term relief option that, since January of 2009, has helped more than 100,000 customers who have experienced unemployment or underemployment. It appears that Treasury's new temporary assistance program is consistent with our own. If that proves to be true when the details are released, we could put this enhancement into practice in a matter of weeks. Second, more than a year ago, we began using principal forgiveness as an element of our Wells Fargo loan modification program for certain portfolio assets. In 2009, we completed more than 50,000 such modifications, with a total reduction of principal of more than $2.6 billion granting immediate and permanent principal forgiveness, not an earnout over time. On average, customers received a 15 percent principal reduction amounting to more than $50,000 and, when combined with rate reductions and term extensions, dropped their monthly payments by 25 percent. Principal forgiveness is not an across-the-board solution. Not every homeowner with a loan balance that exceeds the value of their home falls behind on their payments. Most homeowners are doing what is necessary to stay current on their payment obligations and, in so doing, protecting their credit standing. For this reason, principal forgiveness needs to be used in a very careful and focused manner. Through experience, we have found that it is best to use to assist customers in areas with severe price declines where there is little prospect for full recovery of home values. Further, they have suffered financial hardships, but continue to have sufficient incomes to afford a lower modified home payment and want to remain in the home. In 2009, the redefault rates on these loans were less than half the rate for similar loans in our industry. In 2010, we expect to use principal forgiveness on the same basic tenants. In addition, when available, we will review the new HAMP program details to confirm our conceptual understanding. Absent any unexpected legal, regulatory, or accounting issues, we plan to implement the HAMP enhancements for first and second lien modifications as rapidly as possible. With respect to HAMP in general, from the very beginning, we have said it is only part of the story when it comes to helping homeowners. Since the beginning of 2009, we have initiated or completed more than half a million mortgage modifications, three-quarters of which were done outside of the HAMP program. Wells Fargo is now doing three modifications for every completed foreclosure. As a standing practice, before we move a home to foreclosure sale, we ensure all other options are exhausted. With respect to HUD's new FHA refinance program, also announced in concept on March 26th, implementation will require significant work. As one of the two largest FHA lenders, we intend to offer these refinance opportunities and plan to closely follow the guidelines set by first lien investors, including Fannie Mae and Freddie Mac. In our home equity portfolio, we stand committed to ensuring second liens do not prevent such refinances from occurring. In closing, our efforts to assist customers today are very different than they were a year ago. For instance, we have assigned one person to manage a loan modification, so by June, a customer will know who he or she is dealing with from start to finish. We have hired 10,000 home preservation staff for a total of 17,400. We have expanded 2,700 preservation centers to provide face-to-face help, and we have instituted a 5-day credit decision turnaround for customers who provide all of the required documents. Wells Fargo remains committed to working with this committee and others on balanced initiatives that consider the needs of all customers, our investors, and our country. Thank you and I look forward to your questions. [The prepared statement of Mr. Heid can be found on page 47 of the appendix.] The Chairman. Thank you. Mr. Bachus. Mr. Chairman? The Chairman. Yes. Mr. Bachus. Prior to the 5 minutes each, I want to say this, and I want to compliment you. I am not sure it was an intentional thing, but we had this hearing at 12:00 instead of 10:00. The testimony usually comes in at night or late afternoon, as it did yesterday. We were able, many of us, to read the testimony this morning prior to the hearing, which was a great help, and I think it makes for a better hearing. The Chairman. Well, I appreciate that. And I don't know if we want to set the precedent of members having to read the testimony. But I was able to--that clearly was something intentional. We were able to do it, in part, and look, we have a lot of requests for hearings. We have a hard time accommodating them all, and they put a lot of strain on the people who work for us. What I did today was, we are not voting until 6:30, so that is one reason we were able to do this at noon; we are not going to be interrupted. As members know, I feel terribly guilty when very busy people, private sector or public sector, nonprofit, profit, volunteers, when they sit for an hour while we commemorate the winning of some baseball game over on the Floor of the House. And so I was able to move it to that time, which I agree is a better time. And we will work together, as we have done, maybe to pick some other days when members are coming, and we start a little early. But that was made possible on the fact that we wouldn't have any votes. Let me just begin with an agreement that, yes, not everybody who is in default is going to get help or should be helped. There are people who made mistakes and misjudgments. And I have long felt that we were pushing too many people into homeownership and not doing enough for rental housing, so that was no favor to anybody. I also believe, yes, when you are talking about people who had a loan and then took out a home equity loan and enjoyed the fruits of that, those are not great objects of sympathy in every case where people cashed out the ability. On the other hand, there are some categories of people whom I very much want to help. Let me talk in particular, do any of you differentiate based on the unemployed? That is one of the things I think that we should do, which is, yes, you can talk about people who were, either because they were persuaded to or they made misjudgments or some combination of fault, that is one thing, but there are people who are unemployed, and you can't pay your mortgage out of unemployment. Those are the people who seem to me no one should be arguing would be, I don't think it is moral hazard. I don't think anybody is going to get unemployed just so he can get a mortgage reduction. Let me go down the list, starting with Ms. Desoer. Do you differentiate at all based on whether or not people have been unemployed through no fault of their own? Ms. Desoer. Yes, we do. And, as you know, under the new Treasury guidelines as well, there is a standard of 3 to 6 months of forbearance of payments. The Chairman. Three months does not--I wish I could say that unemployment was so transitory that 3 months made a difference. I am disappointed in the Obama Administration here. I think that is insufficient. Do you go beyond that? In your own judgments, do you take that into account? Ms. Desoer. Each one is really a very customized solution, so it depends on the state of delinquency when the request was initiated and that sort of thing. So occasionally, we do. But usually, it is within that timeframe. The Chairman. I understand some of what you said, but I don't see any reason for not being very sympathetic to people who are unemployed. Mr. Das? Mr. Das. Chairman Frank, I think you raise a very important point. The unemployed group of people are essentially the ones who are getting hit by a double whammy here, not only with house prices coming down but also losing their jobs. Citi had the perspective of a year's advantage, because we launched an unemployment assist last March. So we learned a few more things prior to the Administration's new program. What we learned, sir, was that 3 months, between 3 months and 6 months, to the point that you made earlier, we didn't want a program to be so long that it would change people's employment-seeking behaviors and so what we learned is it actually doesn't change their employment behavior. The Chairman. It is very hard to find that someone is going to just not try and get back to work. Mr. Das. Correct. And that was our experience as well. We found that people looked for work, and many of them found work. But more importantly, many of them found an alternative solution in terms of HAMP with us. And so I would strongly recommend that we look at that. The Chairman. Mr. Lowman? Mr. Lowman. Chairman Frank, as I mentioned in my testimony, we have had a program that provided forbearance to unemployed borrowers. It has been a part of our practices for a while. And we, obviously, embrace new changes in the HAMP program that provide the same. The Chairman. Mr. Heid? Mr. Heid. Yes, we have done this for years. And I think in addition to what has been said, the key is to make sure the customer has the desire to remain in the home. The Chairman. I agree. And I would think the question of fairness to people paying their mortgages and the question of moral hazard, it would seem to me, substantially to recede when you are talking about people who are unemployed. And I also agree, with regard to public money, we do give money to people who are unemployed, called unemployment insurance. We do other things. I would hope we would be forthcoming about that. Let me ask quickly. As in a lot of circumstances, if the holder of the first mortgage is ready to do some principal reduction and you hold the second mortgage separately from that, are you prepared to do a proportional reduction? Let me start with Mr. Heid. Mr. Heid. Yes, especially under the 2MP program, which has been mentioned earlier. The Chairman. You would do proportional reductions? Mr. Heid. That would be required. The other thing I would say is, in the 50,000 principal forgiveness modifications that we did as a first lienholder, we did not condition that based upon what any second lienholder might-- The Chairman. But as second lien, not everybody is as nice as you, maybe. So you would accept a proportional on the second if there was going to be a reduction on the first? Mr. Heid. Yes. The Chairman. Mr. Lowman? Mr. Lowman. Yes, as a part of the 2MP program, we would consider the same. The Chairman. Mr. Das? Mr. Das. Actually, we were using the FDIC program prior to the 2MP program, so, obviously, with the 2MP program, we will. But in the FDIC program, when we modified a first that was on our books, we automatically modified a second. The Chairman. Sir, I know Bank of America is doing that, you have informed me, but my time is expiring. I would ask you all in writing to let me know of any circumstances in which there was a reduction that was going to be made on the first but you would not accept a proportional reduction on the second because that becomes an obstacle. I would like to know if there is any category of cases where-- obviously, if you are the owner of both, it is not as much of an issue--but where there is separate ownership of the first and the second, where you own the second and don't own the first, are there cases or categories where you would resist a proportional reduction? Because I will be honest, if there were, that would trouble me. The gentleman from Alabama. Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, and I will say this to the panelists, what we are talking about is forgiveness, or what we are talking about is a benefit or really a modification of the contract. And I think it is important for all of us to know that any time you create a benefit or an entitlement, whatever you call it, you create a need. Mr. Hensarling, Congressman Hensarling, often says, if you build it, they will come. And that is one of my concerns here. Mr. Lowman said 95 percent of borrowers are current. So my first concern is the social cost. Are people going to say, it is not fair to me, somewhere down the line I have to pay for this? So that would be one of my concerns, equal treatment, or is it going to create more really late payments and things of that nature? The second is, the cost of mortgages going forward are going to be greater. It is impossible to start modifying contracts without that showing up in subsequent contracts because people are going to protect themselves from the risk that wasn't there before. And a lot of this, actually, JPMorgan Chase's testimony, Ms. Sheehan and Mr. Lowman, was very good, and I think it was a thoughtful analysis. There is going to be a cost to everyone else in this. The third one, and this is something that we ought to all be concerned about, I think the greatest cost is going to fall on those with less than perfect credit in the future because it is going to raise their downpayment. Some of that may be good, but some of it may make it very hard for them. It is going to increase cost to those with less than perfect credit going forward because, sooner or later, they are going to have to shoulder the benefit. And these are people who probably would not have defaulted. So my questions are going to kind of concern those things. First, Mr. Lowman, you talked about an industry-wide cost of $700 billion to $900 billion, and that is a large cost. How will the industry work through its underwater borrowers in the near term? Or really maybe a better question, will this cost necessarily be incurred or passed down to other borrowers in the future? How will it be made up? Mr. Lowman. Well, I think the cost obviously is great for everybody that holds loans, right, every type of investor, whether banks or private investors or what have you. To the extent we were required to forgive those loans, it certainly would be a hazard and a risk that we would have to bear in the future, and as a result, we would either do one of two things. We would increase the downpayment requirements to protect ourselves from that in the future or raise the prices or both. So I think the cost of homeownership in the future would be greatly increased as a result. Mr. Bachus. Do the other three institutions agree with that analysis? Ms. Desoer. Yes, I would agree if there were wholesale reductions, but I think that is the total amount, and I view that as hypothetical because of constraints that exist that I believe would stand in the way of ever reaching the number of making 100 percent of the borrowers whole. Mr. Das. I would agree with that. I would say that the only other issue, I agree with Barbara, that it is in fact hypothetical, but I would expect it to increase. I think in trying to solve low redefaults, it might actually increase the number of defaults if we do things like this. The costs could actually be higher. Mr. Heid. All the risks described are very real and need to be taken into account. Mr. Bachus. Thank you. I also would like to hear from the regulators. I don't know that bank regulators would want lenders to take such risks, some of the risks that may be associated with this type of program. It certainly will have an impact on the finances of the company. Let me ask all of you this in conclusion. The rollout of this 2MP program will not be effective until September of this year. But under this program, a servicer cannot execute a foreclosure until all available modification options have been tried. And I know the chairman has asked you all to write a letter basically saying that you will agree to that. Does this cause, particularly with the September intent rollout, does this basically really operate almost like a 6-month mortgage foreclosure moratorium? Ms. Desoer. I will take that one. The 2MP operates as a modification of the second deed of trust after the first mortgage has been modified to a permanent modification. So the foreclosure event is passed as long as that first mortgage modification continues to perform. And then it is just a difference in timing between the modification of the first and the second, but there-- Mr. Bachus. As a practical matter, do you think that this will be sort of viewed as a mortgage foreclosure moratorium? Ms. Desoer. I don't believe so, no. Mr. Bachus. How about the other institutions? Mr. Heid. I think the one piece that is getting lost in some of these broad sweeping delays on foreclosures is that there are a number of vacant properties that are also getting swept up in that. So communities are being harmed by the fact that there is a vacant property sitting there, can't move the process forward. And I don't believe that was the intent, but that is one of the casualties of the process that is now unfolding. Mr. Bachus. So it does have a tendency to slow the foreclosures? Mr. Heid. Yes. The Chairman. Will the gentleman yield to me because I just want to make clear. I wasn't calling for any over--mine was contingent. I want to know, in cases where the first is modified, if they were also modifying the second. That doesn't impose a requirement to modify the first where someone is in-- they can do that in or out of the 2MP program. There is nothing stopping it. Mr. Bachus. So it would still be voluntary on everyone's part, is that correct? The Chairman. Well, as I understand it, unless we change the law, yes, it is voluntary. I voted for bankruptcy, but it didn't win. Mr. Bachus. We have a tendency to all of a sudden say, you have made a commitment to do something, and I didn't know whether these letters would--when you say assurances, I don't know what that means going forward. The Chairman. The gentleman from Pennsylvania. Mr. Kanjorski. Thank you, Mr. Chairman. I am sitting here asking myself the question of, why are we here today? It seems you all are very happy with what is happening in 64 percent of the market that you control, and I have not heard anybody make a suggestion that you have a plan or you are able to put a plan together better than what is presently being implemented. Is that a correct hearing of what your testimony is? Ms. Desoer. Sir, I would disagree with that. And the kinds of recommendations are to embrace the programs that have just recently been announced and launch 2MP. We started mailing our first trial modifications under that program April 1st. The home affordable foreclosure alternative short sale program just went into effect April 5th, so there is new performance that will indicate whether in fact there is further impact that can have. And then, finally, the principal reduction and things like the FHA refinance that has been recommended won't go into effect in the fall. So I think there is certainly more that needs to be done. I think in our testimony what we-- Mr. Kanjorski. Well, that is the question. If I may, I am limited on my time, do we have to do the extra work here in the Congress, or is the private sector able to come up with the solutions to this? It seems to me that if just the four institutions at that table cannot get together and conspire, but you came up with good ideas and implemented them, it would not require the Congress to take any action. Mr. Heid. I would say much of that is already occurring. Each of us have stated the number of loan modifications that are happening outside of the various government programs. So I would say the private sector is already stepping forward. Mr. Kanjorski. Very good. In listening to the testimony, it does not seem that the numbers are very high with what is being done as of this present time. There are a lot more potential foreclosures out there that may be caused or may come about because we have not quite arranged things. Is that a correct impression on my part, or do you think you are at the absolute optimum level, and we have nothing more to do? Is what you are doing going to satisfy the market? I want to make the observation--you know that we have talked about the fact that certainly, we want to help homeowners stay in their homes if they want to and are disposed to do so. However, let us not miss the fact that we are trying to get the economy stimulated. If we can get homes being sold again and financed again, we can change the recession to a recovery, and we can be on our way to some good times. However, I am getting the impression from the testimony of the witnesses thus far that everything is hunky dory, and we do not have to really do anything; therefore, I am wondering why the chairman got me back so early today for this hearing. The Chairman. If the gentleman would yield. It is because I sometimes find that having called a hearing, things get hunkier and dorier between the time that the hearing is called and the time that we hear the testimony. Mr. Kanjorski. Good observation, Mr. Chairman. I heard one part that does disturb me. Mr. Miller, in his introduction, talked about the internal conflict between a servicer and an owner of a lien position. Quite frankly, maybe you are marvelous in your approach in the private sector that that conflict never arises, but I have a hard time believing that, and I am wondering, do you see a need for us to address the issue of separating and taking away that conflict of interest that either you can be an owner of a lien or you can be a servicer of a mortgage, but you cannot be both? Can I just have your expressions on that? Ms. Desoer. I do not believe that is required. When you look at our portfolio of first mortgages, about 30 percent of them have a second lien behind them. About half of those are on us; half of that is other investors. And I think I heard another competitor saying a similar statistic. But as I mentioned in my oral testimony and our written testimony, we are doing modifications. But the issue is that a holder of a first, an investor, would not want to make a principal reduction that could benefit the cash flow of the borrower if that borrower turned around and used that cash flow to pay a second. And that is why our recommendation in the testimony is to further advance 2MP from principal forbearance on a shared percentage basis across the first and the second to principal forgiveness across the first and the second, and a similar percentage would help resolve that. Mr. Heid. I would add that we all have requirements on us to service the first mortgage appropriately, so that I think that topic and that issue is getting lost in the mix. I would not--I do not believe it is appropriate to legislate this matter. And I think the customer choice is really the missing piece in terms of where the cash is being sent. It is not because there is a shifting of cash between first and second lien portfolios or anything of the sort. Mr. Kanjorski. Mr. Heid, do you really think the customer has anything to do with who is servicing his mortgage? Mr. Heid. No. What I am saying is the customer is choosing which bills to pay. Mr. Kanjorski. Oh, on paying the bill, but that is not under the advice from the servicer or not with any coercion or any thought process? Mr. Heid. That is my belief. Mr. Das. Congressman, I would attest to that. I would say that the modification on the first mortgage, which happens to be the single biggest debt for most consumers, has been the one that we have led with, as opposed to what the investors might want in this case. But I think that what we have really tried to solve for here is solving the greatest source of distress for people and so help keep them in their own homes. The issue in separating the two is that, as we know, there is about $440-odd billion that is there in second mortgages and there just wouldn't be enough liquidity if we didn't have the same servicers service both the first and the second. So I think there is a certain amount of liquidity and capacity that really also needs to be looked at. But there is no conflict. The Chairman. The gentleman from Texas, Mr. Neugebauer. Mr. Neugebauer. So when I listened to your testimony, as you went down the line there, I heard you talk about how some of you participated in the HAMP program, and then others have done things in-house, and I think you used the word proprietary. What I also heard was, the HAMP program has not been overwhelmingly received or effective up to this point. So I guess the question, just to kind of go down the road there is, why isn't the HAMP program working, and are your proprietary solutions better than the HAMP program? Ms. Desoer. It very much depends on the circumstances of the borrowers. I think the advantages of the HAMP program and what it has done for the industry in establishing standards that enable us to apply programs across the portfolio has been a real advantage. But there is no question that there are certain borrowers, a jumbo mortgage as an example for that, a non-owner-occupied property, an FHA loan, where HAMP was not built to modify those loans, and that determines the need for special FHA programs or special proprietary programs. So the two work in complement. And I think as an industry, we are just trying to get the message across that both are effective for whom they are targeted. We agree that we are disappointed in the pull through rates for permanent modifications under HAMP for our performance so far, and that is what we have been working on fixing. But both are required because the portfolio is broad. Mr. Neugebauer. Mr. Das? Mr. Das. Congressman, I have a different view on HAMP. If you recall, at this time last year, there were a lot of proprietary programs that all of us banks had, and consumers were very confused. This is a large-scale problem, and consumers needed to know what options were available to them, and so I think HAMP provided the standard view of what a consumer could expect when they called their bank. And so we took it very seriously and so when we walked out of the Treasury offices after designing the program, we decided that we would adopt it in spirit and ended up with 52 percent of our eligible portfolio on an active HAMP trial. And what we are finding is that we now compare to 20 percent for the rest of the industry so it really depends on how you adopt it. I will give you an example. Thirty-three percent of all the portfolio loans have been HAMP'd by Citi compared to a 4\1/2\ percent share of portfolio loans that we have and our experience on booking mods are actually pretty good. We have been constantly contacting our customers to make sure that they understood what they were signing up for and the documents needed to come in. And I will say that with respect to unoccupied is that is our number one priority; we need to keep people in their homes, and I think that HAMP's focus was good. So I think it gets an unfair share of negative publicity, but I think I actually applaud the Treasury for having come up with it. Mr. Neugebauer. Mr. Lowman? Mr. Lowman. We believe HAMP is a good program. I think one thing that we just need to remind ourselves of, we put a program in, in lightning speed from the time it was announced to the time we implemented, it took a lot of systems, processes, new sites for people to sit in, and thousands of people. We learned a lot along the way, and I think we continue to be able to shape the future of HAMP. I think the new requirements that were just announced that require the documentation of the borrower's situation prior to the commencement of the trial will prove to be really effective. Mr. Neugebauer. Mr. Heid? Mr. Heid. I think what the discussion around HAMP has also done is encouraged consumers to reach out, make contact with their servicer for assistance. I think that has been a very positive development in addition to the standardization. If anything is getting lost in the discussion, I think the piece that is getting lost is the fact that the industry is doing a substantially greater number of loan modifications and outreach efforts and providing assistance in ways that go well beyond the HAMP program itself. Mr. Neugebauer. I think that was part of my point. My final point is, my time is going to run out, here is the whole scenario, I don't know that the government needs to be sending the signal out there when politicians get up and say, no one should lose their home and so that raises an expectation level that, gosh, all I have to do is call my lender because I heard the President say last night no one should lose their home. Here is the thing I want you to think about. When that customer calls you, and he and his neighbor bought the house at the same time, paid the same amount, and that neighbor started saving money, put some money behind and now their neighbor has leveraged up their house, bought a boat, charged up a bunch of stuff, put a second loan on their home, and now they are going to get a participation from at a reduction in equity, created equity by either a Federal program or your lending and the guy next door is out of a job as well, but he is using his savings to make his payment. And again, we are going down this road where we keep having the government pick winners and losers, and unfortunately in this case, the people who are making their mortgage payment are going to be the losers and there is something wrong with the system that supports that. The Chairman. The gentleman from Kansas. Mr. Moore of Kansas. Thank you, Mr. Chairman. I understand some are concerned about the ``moral hazard'' of reducing principal on a mortgage, but it also seems unfair to blame millions of homeowners for a housing bubble they didn't create that artificially inflated home values. Many recent foreclosures are due to unemployment, but we wouldn't have millions of unemployed Americans in the first place if it weren't for the subprime lending crisis that was at the center of the financial crisis. I offered an amendment to H.R. 1728, which was later incorporated into the House-passed regulatory reform bill to strengthen our mortgage underwriting practices. My amendment requires a borrower's income to be verified so we can put an end to the dangerous products like no-doc loans that created so much damage in our housing market. For each of the four banks represented here, do you support income verification requirements, and instead of depending on housing prices to go up forever, how have your firms changed your underwriting practices to focus more on a borrower's ability to repay? Ms. Desoer? Ms. Desoer. Yes, we do believe in income verification as part of the full documentation process, and as you know, most of the production being done in the market today is with the GSEs or FHA which have those requirements as well but we also do it for our own portfolio. Mr. Moore of Kansas. Mr. Das? Mr. Das. We do the same, verify income, and we continue to do that for all new originations. Mr. Lowman. We began requiring full documentation in late 2008, so we have no programs that don't require it. We fully support it. Mr. Heid. We published our responsible lending principles on our Web site back in 2004. We believe very strongly in ability to repay and fully support documented cases. Mr. Moore of Kansas. Thank you. In an article in American Banker last week, Bank of America's spokesman said, ``We support the idea of a consumer protection entity, consistent with the principles of Federal preemption, and believe that any new regulations should focus on activities that would apply evenly to all, rather than be focused on particular entities.'' I share that view, which is why I support an independent CFPA and worked with Representative Mel Watt and others in our committee to return us to a pre-2004 preemption standard, balancing the need for State support in enforcing consumer protection laws and a fair, uniform standard that provides some clarity across the country. Representative Melissa Bean further clarified that standard before the full House approved the bill. To confirm your spokesman's statement, Ms. Desoer, does Bank of America support the House-passed and Senate Banking- approved consumer protection provisions coupled with a pre-2004 Federal preemption standard? And will stronger consumer protections help mitigate against a future wave of foreclosures and tamp down housing bubbles? Ms. Desoer. I agree with the statement that our spokesperson made from Bank of America about the support, and I do believe that a level playing field of regulation in the consumer space would help avoid problems in the future, yes. Mr. Moore of Kansas. Any other comments? Mr. Das. Congressman, we feel the same way at Citi. We believe the concept of a central authority with national standards is very important, however, we also feel it is very important for us as an institution as every institution should do, to take our responsibilities very carefully, which has been laid out by our CEO, Mr. Pandit, as in the context of responsible finance theme within the company. Mr. Moore of Kansas. Thank you, sir. Mr. Lowman. Our chairman has also spoken extensively on the need for regulatory reform. And so we would support comprehensive reform. Obviously, he has also reiterated the details or what are key. Mr. Heid. We believe that national access to financial products is critical. We think the best way to achieve that is through national standards and relative to the regulation, I think the key needs to be to make sure that the regulation applies to what is today unregulated entities. Mr. Moore of Kansas. Finally, one of my ongoing concerns is some homeowners may not be aware of foreclosure mitigation opportunities either offered voluntarily by financial institutions or through government programs like HAMP. And I think maybe some of you have spoken to this before, but to the four banks represented here, what steps has your bank taken, anything you can add to what you have already said to make people aware of this opportunity? Please? Ms. Desoer. Extensive contact and creative ways to go to establish that contact, using local community nonprofit organizations where someone might be more familiar and feel more comfortable in responding to someone, participating in housing events across the country, we have participated in over 250 last year as ways to attract consumers and borrowers to a place where we have representation to support those. Telephone contact, e-mail contact, texting contact. We are trying to be as creative as we possibly can. Mr. Moore of Kansas. Thank you, Mr. Chairman, I see my time has expired. The Chairman. The gentlewoman from Illinois. Mrs. Biggert. Thank you, Mr. Chairman. I have two questions. First of all, I would like to know what, we are hearing about the regulators coming in and saying to the banks that you have to write down certain loans because they will not be good in a year or two. And I wondered how this affects the-- or if you are hearing from regulators, about the potential write-downs associated with the second lien program? Is there concern to your bank about how this will affect your balance sheet in the near term? Would anybody like to answer that? Mr. Das. I can take that, Congresswoman. I think the concept of writing down or extinguishing second mortgages needs to be re-examined. And I believe it has been. I would say that when we do a modification, we should look at the potential loss of income, and that is the piece that we should really be accounting for. I think that we may be going too far to the extreme in saying that the second mortgages are worth nothing but, in fact, all of us across this table have said that by and large, the second mortgages are performing really well and the reason they are performing really well is because borrowers tend to look at them as an important source of cash flow and tend not to think about them as in terms of how much collateral they have or the equity in their home. They are almost behaving like an unsecured line of credit, and I think that needs to be taken into account. Mrs. Biggert. Do you think that will affect your availability of credit for consumers then? Will this have any effect? Mr. Das. No. I think the way it is structured right now is we are lending prudently to prudent customers. But I think that taking it too far to the extreme could have the potential of limiting the number of second mortgages that are available to consumers. Mrs. Biggert. Anybody else? Mr. Heid? Mr. Heid. I would simply add that I think the totality of all the programs and all the changes that are happening and yet to happen, I think all of that will certainly be factored into credit decisions in the future. Mrs. Biggert. Then just another question, with the FHA refinance program, tends to write down the total debt obligation, the primary mortgages and the second liens to 115 percent of the current value, do you have any concerns about the appraisal of these properties, how are they going to determine what the current value, it seems like this is kind of an unknown right now, particularly if they use comps. Will this require an up-to-date appraisal? And what is going to happen with that? Ms. Desoer. This would be under standards of FHA financing that exists today which requires an FHA appraisal to do an updated appraisal and the industry is, we did $378 billion of new originations on mortgages last year, all of which had an appraisal associated with them. So we are finding our way through what is a difficult period of time to establish comps and that sort of thing, but it is happening day in and day out and that would be required under FHA refinances as well. Mrs. Biggert. Is there kind of a percentage of lowering the, what was originally the appraisal on a house? Ms. Desoer. No, it would be whatever the independent appraisal thought the appraised value of that home is today. Mrs. Biggert. Does anybody else have anything to add? Mr. Heid. The details of that refinance program haven't been provided. The concepts have. But to the extent the ultimate program details follow the standard FHA program as it now exists, there is an established mechanism for getting property values using designated appraisers and that type of thing, so I wouldn't anticipate that being a problem as long as the ultimate rollout of the new FHA refinanced program follows as closely as it can the standard requirements of FHA today. Mrs. Biggert. Thank you. I yield back. The Chairman. The gentleman from North Carolina. Mr. Miller of North Carolina. Thank you, Mr. Chairman. I know that the idea of taking a pro rata reduction in principal in the second to any reduction principal in the second was supposed to sound generous, but first lien holders and second lien holders don't have a equal claim to the home as collateral. The way the law is supposed to work is that first mortgage holders get paid everything before second mortgage holders get paid anything. Second mortgage holders lose everything before first mortgage holders lose anything. So suggesting that a servicer agree to a pro rata reduction in principal in the second that they hold, that they own, to go with a reduction in principal that they agree to on behalf of investors strikes me as evidence of a conflict of interest not an absence of a conflict of interest. In Mr. Lowman's testimony, he said that pooling and servicing agreements for private label securitization of mortgages as well as Fannies and Freddies to a large extent would require a change in the agreement to make it legal to modify to reduce principal. And it is very difficult to agree to get to that kind of amendment. It took agreement basically by everybody and everybody's interest, the different tranches or different, there have been a lot of proposals of how to cut through that kind of legal problem, and I have thought that there had to be something involuntary to do it, whether it was purchasing, having the government purchase mortgage interest through eminent domain and then modifying ourselves which is similar to what the homeowners loan corporation did in the Great Depression or modification in bankruptcy. Citigroup supported that 2 years ago, which I appreciated; Bank of America went to the brink but never quite got there. What is your current position, Ms. Desoer? Ms. Desoer. Thank you. Our current position is, as we have gone through the lessons that we have learned with modifications and other programs, there probably is some segment of borrowers for whom that would be an appropriate alternative. So that is our position at this point in time. Mr. Miller of North Carolina. So you would support that in some circumstances? Ms. Desoer. In some circumstances, yes. Thank you. The Chairman. If the gentleman would yield, obviously the law would have to be modified to allow that circumstance. We should make clear we can't change the bankruptcy law obviously case-by-case, so it would have to be adjusted. Mr. Miller of North Carolina. You would support a change in the bankruptcy law to allow the modification of home mortgages in bankruptcy? Mr. Das. Yes. And I believe that there is a segment of borrowers for whom that is the appropriate alternative and subject to them having gone through qualification for HAMP or something like that and failed that there is a segment of borrowers for whom that might be an appropriate alternative. Yes. Mr. Heid. There is also, though, a much easier and less costly way that customers are already getting assistance in terms of this program, so ask yourself whether a change in bankruptcy law is really the best way and the fastest way to achieve assistance for homeowners. I think there are other alternatives. Mr. Miller of North Carolina. We are trying to go to other alternatives now, and have been for 3 years without much to show for it. The stress test of a year ago assumed that second mortgages held by the 19 banks were worth 85 cents on the dollar. Other analysts have said that a 40 to 60 percent loss is a more realistic number. How are you valuing your second mortgage portfolios now? And was the stress test an accurate estimation at the time and should there be a second stress test? Mr. Das. I can take that. The evaluation or the value of a particular asset is based on the expected losses in that book, and it stressed under economic situations to see what the expected losses might be in that stressful situation and revaluate based on what our models tell us the expected losses would be. The market is valid and there is a disconnect in the sense that the market is valuing it not on the basis of the performance of the seconds but on the basis of the equity that is in people's homes. We believe that there is a disconnect between the market and what value is in our books. And if these things happen from time to time, the markets disconnect with what is on the books, as we saw in the case of nonperforming loans last year. Nonperforming loans were at one end and we had valued them at another end and they converged at the end of the year to a point where it was very similar to what it was on the books. Mr. Miller of North Carolina. A 15 percent loss off par for second mortgages you think was an accurate valuation? Mr. Das. Yes. Mr. Miller of North Carolina. My time has expired, Mr. Chairman. The Chairman. The gentleman from Texas. Mr. Hensarling. Thank you, Mr. Chairman. I have no doubt that in this economy, there is a lot of pain and misery that has taken place throughout. I am sort of curious why we are examining a program that seemingly will bail out banks who made bad loans, people who may have purchased more home than they could afford, yet someone who invested $100,000, saw their 401(k) decrease by $100,000, there is no plan for them, somebody who decided to rent their primary residence, invest money perhaps in a Real Estate Investment Trust saw a $100,000 loss there, there is no program for them. So I question the fairness of this particular approach, again noting that 94 percent of Americans either own their home outright, rent, or are current on their mortgage. Be that as it may, I believe I have heard the chairman say and others have said that they want to persuade you to modify more mortgages, I know in that regard, there are a number of carrots and sticks floating around here, particularly one carrot is having FHA insure these mortgages so that the taxpayer takes the risk instead of you. Surely we are all aware that assuming it makes conference, a capital markets reform bill that could have a lot to do with your bottom line, so I suppose there are sticks floating around there as well, but I want to talk a little bit about the continue on with this particular metaphor about the organic carrots that are already out there. I previously served on a Congressional Oversight Panel for the TARP program, and in testimony that we received before that panel in November, I believe it was, a number of different academics and people from familiar with market said, typically, the average foreclosure could cost you anywhere in the neighborhood of $60,000 to $80,000. Is there anybody on the panel who wishes to disagree with that assessment? Are those good numbers? Is that a ballpark range? I see at least some heads shaking in the affirmative. Does anybody care to shake their head? The Chairman. We have very good recorders, but head shakes don't make their way into the transcript. Mr. Hensarling. Mr. Chairman, I will note that this particular member at least observed some affirmative head shakes. I guess that begs the question again, so you have a built-in incentive to modify a number of these, I am not sure how much more taxpayer incentive you ought to have, much less need. Clearly, there is a large concentration, I suppose, in your banks, of second liens, I assume there is a fear of impairment of your regulatory capital. But I also question why, is there a legal impairment or a practical impairment from the homeowner, the first lien holder contracting with the second lien holder, in order for writing down some principal for them to receive some contractual equity participation in any potential upside appreciation of the fair market value of the residential collateral? I think the gentleman from Pennsylvania noted, aren't there a number of market solutions? Is that not a market solution? Is there a legal and practical impairment there that this member ought to be aware of? Anybody care to handle the question? Mr. Heid. I think your point is a very good one, in that there are significant incentives already that exist for all of us to do what is right for our customers. Mr. Hensarling. Thank you. Recently, there was a article in The Wall Street Journal that I will quote from; it speaks to the moral hazard question, ``Treasury Department officials have warned that if some borrowers get their principal reduced, even borrowers who aren't behind will stop paying unless they get the same break.'' For argument's sake, let's assume The Wall Street Journal got it right. We have kind of touched on the moral hazard question. And I don't think I have heard you address it specifically. Does anybody care to comment on this particular article? Mr. Das. Congressman, the only thing I would say there is while it is quite likely, a lot depends on how a principal reduction or a particular form of modification is affected. I will give you an example. You could have a principal reduction where the principal is taken straight off or you could have a principal reduction where it is taken off over 3 decades. Mr. Hensarling. The point is, if not done properly, you could provide incentives for people to default who have-- Mr. Das. If it is not done properly, it can absolutely lead to that. But if there is some form of shared appreciation, then perhaps that could be mitigated to some extent, but there is no doubt it will lead to some issues. Mr. Hensarling. My time has expired. The Chairman. We may have a second round. I have a couple, actually, institution-specific questions I was going to ask, so we may take a little more time. The gentleman from Texas. Mr. Green. Mr. Chairman, I would like to ask all the witnesses a question and the question is, was it appropriate and necessary for the government to intercede with the $700 billion bailout? If you don't think so or you think we should have done nothing, would you just simply raise your hand. I am going to take it from the absence of hands that there is a belief among the witnesses that there was a need for a bailout. That is the terminology we are using nowadays, so I will be consistent so we communicate. Mr. Heid, I believe it is, sir, you indicated that there is enough incentive to I believe you said to do the right thing for your customers. Mr. Heid is there enough incentive for you to do the right thing for the economy? Mr. Heid. The way I think of it is, if we do right with our customers, we are doing what is right for the economy. Mr. Green. And if you find that it is not necessary to make modifications, and you have customers who go into foreclosure and that impacts the economy in an adverse way, have you done the right thing? Mr. Heid. I think the fact that we have done a substantial number of loan modifications, the fact that we have done a substantial number of principal forgiveness loan modifications says we are doing everything we possibly can to stabilize. Mr. Green. What percentage would you consider is substantial? Mr. Heid. About 2 percent of the overall portfolio on an annual basis is what ultimately works it through foreclosure. Mr. Green. Have you reached the 2 percent plateau? Mr. Heid. It has been pretty consistent somewhere on an annual basis. Mr. Green. Two percent of those in foreclosure? Mr. Heid. Two percent of the entire portfolio of Americans who have homes tend to go through the foreclosure process. Mr. Green. I understand, but what percentage of your homes that are in foreclosure have you modified? Mr. Heid. There are a couple of ways to answer that. If you look at the HAMP-- Mr. Green. I would like, no disrespect, and time is of the essence, I would like you to give a percentage, if you would, of the many ways. Mr. Heid. I don't have a specific answer to your specific question. I don't have an answer to that right now. Mr. Green. I think most who examine these numbers have concluded that we have not significantly impacted the number of homes in foreclosure. Do you agree with this contention? Mr. Heid. No. Mr. Green. You think you have significantly impacted? Well, if you had, it would seem to me you would be prepared to talk to us about how you have performed this significant feat. Mr. Heid. Let me answer it this way: Certainly there is no question more needs to be done. When I look-- Mr. Green. Sir, more needs to be done? You say it as though if we do something else, we will make a great difference. A lot more appears to me should be done because we are facing a lot more foreclosures. What are we going to do about them? Let me just excuse myself from you just for just a moment if I may, please. No disrespect. But I do have to go to Bank of America. Let me compliment you on this principal reduction program. I think that when businesses do well, we have that knowledge it and you should be complimented. Ms. Desoer. Thank you. The Chairman. There shall be no demonstrations. Mr. Green. Tell us briefly why you see principal reduction as personally as you can as a significant means by which we can impact foreclosure? Ms. Desoer. Because there are some borrowers for whom the offers that we have extended so far have not been generous enough, and in order to enable owners who truly want to stay in their home-- Mr. Green. Let me move one step further, because I am about to lose my time, would this also impact the overall economy, what you are doing? Ms. Desoer. We believe that bringing stability to neighborhoods by ensuring that homeowners who want to stay in their homes can get to an affordable payment and have sort of a vision for the future of that homeownership as important. At the same time, we do believe that there are some borrowers for whom being able to afford staying in that home is not a viable alternative, and so we need to work with them to transition them out of that home in as dignified a way as possible, ideally without having to go through foreclosure but a short sale or some other alternative into an alternative housing arrangement. Mr. Green. Thank you, Mr. Chairman. The Chairman. The gentlewoman from Illinois. Ms. Bean. Thank you Mr. Chairman. Thank you to our witnesses for your testimony today. It was almost 2 years ago that we had a hearing about what was then the looming foreclosure crisis in this committee. We were concerned about debt to income ratios, loan to value ratios which were unsustainable, and at that time, what we produced at the committee level was the HOPE for Homeowners Program, which I thought provided a proper balance between providing release to those who found themselves upside down, while also protecting taxpayers against moral hazard by requiring those who received relief to pay back taxpayers by sharing any upside in equity appreciation back with the government. Clearly, the HOPE for Homeowners Program has had little to zero participation from organizations like yourselves. So my question is why, recognizing that there were some compliance issues that we later addressed about a year into the program, does that include the second lien treatment in how it is different than in the HAMP program? And my other question would be, would you agree that a shared equity approach does tackle moral hazard by discouraging homeowners from intentionally defaulting because they think they are going to get a deal if they are going to have to share equity later that would discourage them but also encourages those who are in a troubled situation to stay in their home because they have a more realistic potential at some equity appreciation in some realistic future than just adding all their debt down at the end of the day. Is there anything precluding you as servicers from already working out their own shared equity arrangements with borrowers, and is there something we should do in the HAMP program relative to that? Can we start with Ms. Desoer? Ms. Desoer. I am going to ask Jack Schakett to answer that. Mr. Schakett. Yes. The HOPE for Homeowners Program definitely had some appealing pieces to it. The Chairman. Would you please identify yourself for the record. Mr. Schakett. Yes, I am Jack Schakett with Bank of America home loans. The HOPE for Homeowners Program, the shared appreciation piece on a theoretical point of view looks very nice because the idea of sharing appreciation feature, giving both the homeowner a chance for appreciation and the investor a chance to share in that is appealing, but every program kind of has operational concerns. And what probably hurt HOPE for Homeowners the most was because it was a significant deviation from the standard FHA program requiring pieces like shared appreciation, the operational hurdles to put in place have been very difficult. So we have been working on rolling out for HOPE for Homeowners for quite some time. We are still not quite there yet. If you look at the new program put out at FHA which actually on some points is much simpler, like eliminating shared appreciation will be much more operationally easier to roll out and more effective from that point of view. Ms. Bean. Thank you. Mr. Das? Mr. Das. Congresswoman, I would say that while HOPE for Homeowners was a complicated program in terms of being executed, I generally tend to be a little bit more in favor of shared appreciation because I believe that there is some sharing of the upside that the whole notion of sharing on the downside doesn't seem fair. I will defer to my colleague, Steve Hemperly, if he has any additional comments. Mr. Hemperly. I am Steve Hemperly, CitiMortgage, for the record. I would tend to agree with Mr. Schakett's comments. We look forward to introducing the new FHA program as well as HOPE for Homeowners. Mr. Lowman. Congresswoman, this is a very complex program and one that we have wrestled with. We are in the process of doing the necessary changes to our system to be able to allow it, and we plan to launch it some time this summer. Mr. Heid. The new FHA refinance program has some real advantages over the HOPE for Homeowners. It is a simpler program. What we know of it so far it appears to be using standard FHA requirements. The approach between first liens and second liens is a more equitable sharing under the new program, so it has some real advantages to it. And as I said in my testimony, we intend to make sure that our second liens do not prevent this from happening. Ms. Bean. Can I also ask, by maybe a nod, is there anything precluding servicers from working out shared equity arrangements with borrowers now? On your own? So you can? Are you doing those in some situations? The Chairman. We really do need oral responses. Ms. Bean. If you could say whether you are doing them or whether you are allowed to? The Chairman. Marcel Marceau never served here. Ms. Desoer. We are not doing that, but we have introduced the concept of earned principle forgiveness into our principal reduction program. Mr. Hermperly. We currently don't have any programs operational that include shared equity, but we are in the process of constructing some pilots. Mr. Lowman. We currently don't have a program. Mr. Heid. We have been using the principal forgiveness as part of the program starting in January 2009 as a way to get customers help. Ms. Bean. Thank you. I see my time has expired. The Chairman. The gentleman from Indiana. Mr. Carson. Thank you, Mr. Chairman. In yesterday's Wall Street Journal, a Bank of America spokesperson is quoted as saying, ``If efforts to avoid a foreclosure fail, then we do reserve the right to recover the unpaid balance of the second lien if permissible by State law. However, our practice has been to only pursue recovery in situations where we believe the customer has sufficient nonretirement assets to satisfy their debt obligation.'' Ms. Desoer, could you expand upon the process your bank goes through in determining which customers they deem appropriate to collect on the second lien? Ms. Desoer. Yes, it is part of the evaluation of underwriting to determine the hardship where we look at the verification of income and other assets that the borrower might have, and in order to mitigate the risk of moral hazard, we try to draw that line to determine who is eligible for certain programs based on the hardship, and if they are not eligible for that hardship, then we might reserve the right to pursue other assets or income and their ability to afford the payment. Mr. Carson. I yield back. The Chairman. I am going to have a question, and also Mr. Hensarling and Ms. Bean. Let me ask Mr. Lowman. I was approached yesterday, I believe, in my office in Newton by an attorney who reported to me that he has people who are in modification programs with Chase who are still getting collection letters. I am wondering if you or Ms. Sheehan would know about that, and how do we solve that, I assume that is not appropriate. Mr. Lowman. We do make mistakes. We are dealing with a lot of customers and a lot of transactions. And I would be happy to address them. The Chairman. Let me also, along the same lines, I have also been told by a national organization that does a lot of work here, NACA, that they have had some difficulty in getting some answers on some pending requests for modifications. Is there a channel? What do people do when they don't get the answers that they thought they were going to get? Who do they talk to? Mr. Lowman. We have a special group that deals specifically with community groups including NACA and through those channels is how you would-- The Chairman. Apparently some of those channels aren't working. Is there an appeal? What do they do if they are feeling frustrated? Mr. Lowman. Come to me. The Chairman. Or you, Ms. Sheehan. Ms. Sheehan, your first name is-- Ms. Sheehan. Molly. Molly Sheehan from Chase. The Chairman. --indicated that she could be the one who could be talked to on this. And the gentleman from Texas. Mr. Hensarling. Thank you, Mr. Chairman. There have been a number of editorials written about the approach of the Administration on foreclosure mitigation. USA Today wrote on the first of this month, ``helps irresponsible lenders, borrowers.'' The Wall Street Journal, they wrote, ``Instead we are heading toward year 5 of the housing recession with Washington proposing even more ideas to prolong the agony. One senior banking regulator we talked to calls it `extending and pretending.''' The question I have, I spent part of the congressional recess over Easter speaking to a number of private equity funds, banks, within the Dallas metropolitan area, which I have the opportunity to represent a section of the City of Dallas in Congress. And there is a great concern that the government is artificially propping up values in the marketplace that create uncertainty and leave private pools of capital on the sideline. I admit most of my evidence is anecdotal, but I hear it over and over and over, that people are afraid to invest in pools of residential mortgages because: first, they don't know that the market has reached its true value; and second, they don't know what the next public policy shoe to drop may be. And so, at least in my mind, I am not sure that Washington is being helpful. At the moment, they may be more hurtful. I would like any comment on the validity of the observations made by a number of people in the investment and banking community in Dallas, Texas. Does anybody care to comment? Mr. Heid? Mr. Heid. I would say as a general statement, uncertainty is certainly not a good thing for the investor community. Mr. Das. Congressman, I would like to weigh in on that a little bit with your permission. I would say that is somewhat of a sanguine view of the world. We are actually seeing that in certain markets, there is, in fact, improvement in markets, genuine improvements in market, for example, markets in California are seeing some stabilization. I think we are at a point of inflection right now in the marketplace and that the government's role is welcome in terms of getting us all together, and I think don't believe it is interventionist in forcing us to create artificial pools of opportunity for capital. I believe it is important to, for example, in first and second mortgages, to get us all working together. That is an important set of actions that will make the market more efficient. Mr. Hensarling. This will be my last question. I guess I am looking to be persuaded as a Member of Congress that this is a good investment of the taxpayers' money. I know there is a $50 billion pool of money here and I know the chairman and I had this exchange earlier, I think at least is a matter of fact, the HAMP program was a creation of the Obama Administration, be that as it may, so there is a $50 billion pool of money here. We know that we are a Nation that today is on an unsustainable fiscal path, not my language, I believe that comes from Dr. Elmendorf of the Congressional Budget Office. Chairman Bernanke has echoed that. I think economist Paul Samuelson has said we have a fiscal cancer that could threaten our Nation, that is a paraphrase, I don't have the quote in front of me, but already we are looking at levels of debt to GDP going from 40 percent of the economy to 90 percent, we are looking at a budget that is going to triple the national debt over the next 10 years. We are looking at almost $1 trillion of interest payments alone at the end of the decade. So the question I have, when everybody from the CBO to OMB, the President's own Director of OMB says we are on an unsustainable fiscal path, why do I want to use $50 billion to pay you guys to do something that you probably are already incented to do, as opposed to pay off the national debt? If I see no enthusiastic takers of the question, I will yield back my time. The Chairman. Thank you. The gentleman asked if he could be persuaded, on my whip list, you were leaning against. The gentlewoman from Illinois will have the final question. Ms. Bean. Thank you, Mr. Chairman. My last question was one of the things I hear from my constituent services folks in my district is that people who have been trying to get remods, a number of them have been approved for the temporary modifications while unemployed and on unemployment insurance, but then they are disapproved for permanent modification because they don't have employment. Can someone explain to me why you would be able to get into a temporary and not a full modification? And shouldn't we be using the same criteria? Ms. Desoer. Yes, and there is a change in the program, so the only way I believe that could potentially happen is if in establishing that customer into a trial modification, we ask what their income was, but maybe not the source of their income and we verbally verify that they could meet the requirements, put them in a trial modification and then once we got documentation of income and understood the length of time that it was going to be in place, because the intent of the program is to make a long term affordable payment, that that is when that disconnect would potentially happen. Ms. Bean. So does unemployment income qualify in either case, or neither case? Ms. Desoer. It is qualifying income, but it is only for 9 months, so you have to see the path to either another member of the household having income that could be part of the equation. So I would have to understand the specific circumstance to give you something more specific but that is potentially it, and Jack, I don't know if you have anything to add? Mr. Schakett. The program allows for unemployment insurance to be considered but they have to have at least 9 months of unemployment insurance left so as Barbara said if potentially if they did a stated income in the first place because now we are required to do full documentation but we didn't before and we didn't know exactly the period, they may have thought they qualified, but when we determined they only had 6 months remaining at the time of the permanent mod, then they wouldn't have qualified under HAMP. Mr. Das. It would be the same issue, unless Steve, you want to add any more color to it, it will pretty much be the same issue and I think that issue is significantly mitigated with the new program, as Barbara mentioned. The Chairman. The hearing is adjourned. 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