[Senate Hearing 111-317]
[From the U.S. Government Publishing Office]
S. Hrg. 111-317
PRESERVING HOME OWNERSHIP: PROGRESS NEEDED TO PREVENT FORECLOSURES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE STATE OF THE HOUSING MARKET AND THE FEDERAL GOVERNMENT'S
EFFORTS TO PREVENT FORECLOSURES
__________
JULY 16, 2009
__________
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Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Jonathan Miller, Professional Staff Member
Deborah Katz, Legislative Fellow
Mark Oesterle, Republican Chief Counsel
Jim Johnson, Republican Counsel
Michael Passante, Professional Staff Member
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, JULY 16, 2009
Page
Opening statement of Chairman Dodd............................... 1
Prepared statement........................................... 59
Opening statements, comments, or prepared statement of:
Senator Shelby............................................... 3
Prepared statement....................................... 60
Senator Johnson.............................................. 60
WITNESSES
Herbert M. Allison, Jr., Assistant Secretary for Financial
Stability, Department of the Treasury.......................... 5
Prepared statement........................................... 61
Responses to written questions of:
Chaiman Dodd............................................. 250
Senator Johnson.......................................... 250
Senator Corker........................................... 252
William Apgar, Senior Advisor to the Secretary for Mortgage
Finance, Department of Housing and Urban Development........... 8
Prepared statement........................................... 65
Responses to written questions of:
Senator Johnson.......................................... 252
Thomas Perretta, Consumer, State of Connecticut.................. 41
Prepared statement........................................... 69
Joan Carty, President and CEO, The Housing Development Fund,
Bridgeport, Connecticut........................................ 43
Prepared statement........................................... 70
Response to written question of:
Senator Shelby........................................... 255
Paul S. Willen, Senior Economist and Policy Advisor, Federal
Reserve Bank of Boston......................................... 44
Prepared statement........................................... 73
Responses to written questions of:
Senator Shelby........................................... 255
Mary Coffin, Head of Mortgage Servicing, Wells Fargo............. 46
Prepared statement........................................... 192
Responses to written questions of:
Senator Shelby........................................... 260
Senators Corker and Vitter............................... 261
Curtis Glovier, Managing Director, Fortress Investment Group, on
behalf of the Mortgage Investors Group Coalition............... 48
Prepared statement........................................... 195
Responses to written questions of:
Senator Shelby........................................... 262
Allen H. Jones, Default Management Policy Executive, Bank of
America........................................................ 50
Prepared statement........................................... 198
Responses to written questions of:
Senator Shelby........................................... 263
Senators Corker and Vitter............................... 264
Diane E. Thompson, of Counsel, National Consumer Law Center, also
on behalf of National Association of Consumer Advocates........ 51
Prepared statement........................................... 202
(iii)
PRESERVING HOME OWNERSHIP: PROGRESS NEEDED TO PREVENT FORECLOSURES
----------
THURSDAY, JULY 16, 2009
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee convened, pursuant to notice, at 9:34 a.m.,
in room 538, Dirksen Senate Office Building, Senator
Christopher J. Dodd, Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. We gather
here this morning to have a hearing on ``Preserving Home
Ownership: Progress Needed to Prevent Foreclosures.''
It is almost like Groundhog Day. One of the very first
hearings I held 2 years ago with my friend Richard Shelby was
on this very subject matter, back in February of 2007----
Senator Shelby. Two-and-a-half years.
Chairman Dodd.----two-and-a-half years ago now, and we had,
I don't know the exact number, something like 30 hearings and
so forth, a whole series of meetings we conducted over that
period of time to try and convince people how serious the
foreclosure issue would be. And here we are, two-and-a-half
years later, back at the subject matter.
So I am glad all of us could be here today. I am
particularly thankful for our witnesses. But I have to be
honest with everyone who is here this morning. I am
frustrated--that is a mild word to use--that we even have to
hold this hearing at all. This is disgraceful, where we are
two-and-a-half years later.
For over 2 years, this Committee has worked to stem the
tide of foreclosures in America, Democrats and Republicans,
both in the Committee, other committees have obviously been
involved in it, as well. We have heard plans and proposals from
the administration. We have passed legislation. Many changes
have been asked of us and we have passed even more legislation.
We have received assurance after assurance from the industry.
Everyone agrees that the crisis in our mortgage market was the
catalyst for the broader economic crisis. There were other
factors, obviously, but it was the major catalyst, and everyone
understands that getting out of this broader crisis requires
that we stabilize our housing market and stem the tide of
foreclosures in our country.
So I am hoping that with the stakes this high, somebody can
begin to explain to us why nothing has changed over the last
two-and-a-half years.
Today, the Associated Press is reporting, I quote, ``The
number of U.S. households on the verge of losing their homes
soared by nearly 15 percent in the first half of the year as
more people lost their jobs and were unable to pay their
monthly mortgage bills. Over 336,000 households received at
least one foreclosure notice in June.''
Why am I still reading about lost files, understaffed and
undertrained services and hours spent on hold on the telephone?
Why does the National Foreclosure Mitigation Program tell us
that homeowners are waiting an average of 6 to 8 weeks--6 to 8
weeks--for a response? Why are we still reading stories about
homeowners, community advocates, even our own staffs acting on
behalf of constituents, shuffled from voice mail to voice mail
to voice mail to voice mail as they attempt to help people stay
in their homes? Why are servicers and lenders refusing to
accept principal reduction so that homeowners can start
building equity and get the housing market moving again?
Two years ago, I brought together in this very room banks,
lenders, mortgage firms, regulators, consumer groups for a home
owner or home ownership preservation gathering summit. We all
agreed upon a statement of principles, which were the
following.
First--and these were everyone agreeing to this. This
wasn't something being opposed. There were a number of days
meeting to determine what these principles ought to be. First,
that services should attempt to contact subprime borrowers
before loans reset in order to identify likely defaults early
enough for the loan to be modified. Second, modifications
should be made affordable for the long term. And third,
servicers should have dedicated teams of professionals to
implement these modifications. And finally, we agreed that we
needed real accountability, a system for measuring the
progress.
We were able to come to this agreement because all of us
understood that nobody wins, obviously, when a home is
foreclosed. Nobody wins, obviously, when a bank has to sell a
house at auction for less than it would get it if simply were
refinanced. And, of course, no one wins when a home loses at
least $5,000 in value for every foreclosure on that city block
or street block. And, of course, no one wins when foreclosure
rates are the single biggest threat to economic recovery.
So what has happened over this period of time and what are
we doing differently? Today, I want some answers. Foreclosure
is not an abstract concept. It is a very real pain for American
families. It is not just the loss of a house, it is the loss of
a home. It is the anguish of having to uproot your family. It
is the sadness of feeling that you have let them down, that you
no longer have that place that they can live in. And it is the
terrible heartache caused by the violation of the sacred
promise that has long defined the American middle class in our
country, that if you work hard and play by the rules, that
together we can build something better for you and your family.
Most people in foreclosures work hard and play by the
rules. They budgeted, they saved, they relied on brokers and
lenders, professionals who are supposed to be experts, to help
them achieve their dream of home ownership. But then someone
lost a job. Someone got sick. Fifty percent of the foreclosures
are caused by health care crisis in that family--50 percent of
them. So in far too many cases, they discover they simply have
been cheated, unfortunately.
Last year, I met a woman named Donna Pierce, a grandmother
from Bridgeport, Connecticut. By the way, in Bridgeport,
Connecticut, there are 5,000 families in that city with
subprime mortgages in danger of foreclosure. Donna was assured
by her lender that she could refinance in 6 months. But he
didn't mention the thousands of dollars in penalties that
refinancing would cost, penalties she could not afford.
People like Donna Pierce didn't deserve to lose their
homes. Neither did the 10,000 families that before today ends
will receive a foreclosure notice in our nation, or the 60,000
families in my home State of Connecticut who find themselves in
foreclosure over the next 4 years.
So I know I speak for all of us here in this Committee, our
colleagues, not just those on the Committee but others in the
Senate and the House, people all across the country, when I say
that I am glad to have the support of the administration and
the industry in our effort to stem this dangerous tide, but a
lot more needs to be done. What we don't have is results. So
today, we sit here again and the American people are demanding
to know why. So this morning, I hope we are going to get some
answers.
I happen to be one that believes that the idea of principal
reduction makes a lot more sense than interest rate reduction.
It is all about equity--all about equity. If people can
increase their equity in a home or have an equity and a chance
to regain their footing in equity, then it seems to me we can
do a lot better in this than just sitting here monkeying around
with interest rates. But that is my point of view. I know
others have a different point of view on that. But nonetheless,
that is where I believe we should be going with this, rather
than the course we are on.
With that, let me turn to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
Today, the Committee will examine the state of our housing
market and the Federal Government's efforts to prevent
foreclosures in the midst of what is now the most severe
recession in a generation.
Problems in our housing market have been center stage since
the start of this crisis, as Senator Dodd just reminded us.
Rising default rates on subprime mortgages appear to have
triggered the financial crisis nearly 2 years ago. Since then,
default rates on all classes of mortgages have risen sharply
and the precipitous declines in the value of mortgage-backed
securities have crippled banks and led to the insolvency of
Fannie and Freddie. As the economy has continued to worsen,
millions of Americans have seen the value of their homes fall
and many have lost or may lose their homes to foreclosure.
In an effort to forestall unnecessary foreclosures,
Congress and the Obama administration initially devised several
programs. Nearly 1 year ago, Congress enacted the Hope for
Homeowners program. This program aimed to keep homeowners in
their homes by encouraging lenders and servicers to modify
mortgages. Unfortunately, this program has only modified a
handful of mortgages. While recently enacted changes to the
program may help improve Hope for Homeowners, it is clear that
the program needs a thorough reexamination.
In many ways, I believe that this hearing could begin to
put the horse back in front of the cart by undertaking some of
the investigative work necessary to properly address the issues
surrounding the housing market in this country. We have heard
many theories about the causes of our difficulties. However, my
hope is that with this hearing, we can bring together
verifiable facts which will allow us to do our own analysis
here. Homeowners in need will be better served if we actually
identify the root causes of foreclosures and craft effective
solutions rather than simply implementing policies to
counteract what we think is the problem.
As the Committee considers how to prevent foreclosures, I
think we should begin by determining the following. First, and
probably most important, is the degree to which escalating
default rates can be attributed to unscrupulous lenders. If
true predatory lending was as pervasive as some have argued, we
should be able to easily document that fact. I must say,
however, aside from anecdotal evidence, I don't think we have
yet to see such data. I look forward to hearing what the
administration believes is the reason for the rising default
rates and what evidence they cite in support of their position.
The second question we need to ask, I believe, is what is
working? Unfortunately, existing modification programs have not
been very effective. It is important to understand why they
have not been working as expected and if there is anything we
can or should do in response here.
Finally, we should determine whether our policies are
building the foundations for a stable and sustainable housing
market or if they are merely delaying the inevitable. I have
long criticized our housing policy for willfully ignoring long-
term financial consequences, especially with respect to the
GSEs. Sustainable policies must be based on economic realities
and facts, not wishful thinking.
I hope today, as the Chairman has indicated, that we can
begin to establish some of those facts by examining the
research and experiences of our panelists. To the extent that
we can clearly determine what caused this crisis, we will then
be able to address it more effectively and also implement
policies to avoid future crises.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
We have got a rather large second panel, so with my
colleagues' indulgence, all of your opening statements will be
included in the record and the like, and if you want to use
your time to engage in that, that will be available to you, but
let me get right to our witnesses, the two first witnesses.
We are joined here first by two witnesses. Herb Allison is
the Assistant Secretary for Financial Stability at the U.S.
Treasury. Assistant Secretary Allison has been a leader in the
U.S. financial markets, both in the public and private sectors,
having served in top positions at Freddie Mac, TIAA-CREF, and
Merrill Lynch.
William Apgar is the Senior Advisor to the Secretary for
Mortgage Finance of the Department of Housing and Urban
Development. Previously, he was the Assistant Secretary for
Housing. He has served in various positions as a lecturer and
scholar at the Harvard Kennedy School of Government.
We appreciate both of you being here this morning and we
will accept your testimony here. Try and keep it down to five
or 8 minutes if you can so we can get to the questions.
Mr. Allison, you are up first.
STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT SECRETARY FOR
FINANCIAL STABILITY, DEPARTMENT OF THE TREASURY
Mr. Allison. Thank you very much, Mr. Chairman. Chairman
Dodd, Ranking Member Shelby, and members of the Committee,
thank you for this opportunity to testify about the Treasury
Department's comprehensive initiatives to stabilize the U.S.
housing market and to support homeowners. I will keep my
remarks brief, as I have provided a more detailed review of the
program's progress and challenges in my written testimony.
A strong housing market is crucial to our economic
recovery. The recent crisis in the housing sector has
devastated families and communities across the country and is
at the center of our financial crisis and economic downturn.
Today, I want to outline the steps that Treasury and the
administration have taken to address this crisis, help millions
of homeowners, and lay the foundations for economic recovery
and financial stability.
This crisis was years in the making, and as a result,
millions of homeowners have mortgage payments that they are
unable to afford. Rising unemployment and recessionary
pressures have impaired the ability of many otherwise
responsible families to stay current on their mortgage
payments. The result is that responsible homeowners across
America are grappling with the possibility of foreclosure and
displacement. Many analysts project that more than six million
families could face foreclosure in the next 3 years if
effective actions are not taken.
This administration has moved with great speed to
aggressively confront the economic challenges facing our
economy and housing market by announcing and implementing an
unprecedented mortgage modification program.
Chairman Dodd. Mr. Allison, would you mind moving your
microphone a little closer to you so we can hear you better?
Thank you.
Mr. Allison. Thank you. An initiative of this scale has
never been previously attempted. On March 4, just 2 weeks after
the President announced the program, the administration,
working with the banking regulators, Fannie Mae and Freddie
Mac, HUD, and the Federal Housing Finance Agency, published
detailed program guidelines for MHA's Home Affordable
Modification Program, or HAMP.
On April 6, we issued detailed servicer guidance. Today, we
have 27 servicers lined up to participate in MHA. Between loans
covered by those servicers, as well as Fannie Mae and Freddie
Mac, more than 85 percent of all mortgage loans in the country
are now covered by the program.
The initiatives include three key components. First,
support for the Government Sponsored Enterprises, or GSEs. We
have committed an additional $200 billion of capital to Fannie
Mae and Freddie Mac to encourage low mortgage rates and help
maintain mortgage affordability.
Second, the Home Affordable Refinance Program, or HARP,
expands access to refinancing for families whose homes have
lost value and whose mortgage payments can be reduced at
today's low interest rates. It helps homeowners who are unable
to benefit from the low interest rates available today because
price declines have left them with insufficient equity in their
homes. We have recently expanded the program to help homeowners
with mortgages up to 125 percent of current home value.
Third, the Home Affordable Modification Program, or HAMP,
which will provide up to $75 billion to encourage loan
modifications that will provide sustainable, affordable
mortgage payments for borrowers. Importantly, HAMP offers
incentives to investors, lenders, servicers, and homeowners to
encourage mortgage modifications.
We have recently announced details of additional HAMP
program features, including a second lien program, that can
provide a more affordable solution for borrowers by addressing
their total mortgage debt; measures to strengthen the Hope for
Homeowners Program, which provides additional relief for
borrowers with mortgage balances greater than the current value
of their homes; a foreclosure alternatives program that will
provide incentives for short sales and deeds in lieu of
foreclosure, where borrowers are unable to complete the
modification process; home price decline protection incentives
that will encourage more modifications where home price
declines have been severe.
Today, I want to highlight some key points of success.
Three-hundred-twenty-five thousand trial modifications have
been offered under HAMP. Approximately 160 trial modifications
are now underway, and that number is growing every week. While
this number is not yet audited, we believe it is reasonably
accurate, based on our discussions with the GSEs who administer
the program. As servicers adjust their systems and new
reporting capabilities become operational, we will continue to
improve the accuracy and robustness of the data that we provide
to you.
At this early data, MHA has already been more successful
than any previous similar program in modifying mortgages for
at-risk borrowers to sustainably affordable levels and helping
to avoid preventable foreclosures. Nonetheless, we recognize
that challenges remain in implementing and scaling up the
program. We are committed to overcoming those challenges and
reaching as many borrowers as possible.
In particular, we are focused on addressing challenges in
three key areas: Capacity, transparency, and borrower outreach.
We are taking a number of steps and working with servicers to
expand nationwide capacity to accommodate the number of
eligible borrowers who can receive assistance through MHA.
Just last week as part of the Administration's efforts to
expedite implementation of HAMP, Secretaries Geithner and
Donovan wrote to the CEOs of all the servicers currently
participating in the program. In this joint letter, they call
on the servicers to devote substantially more resources to the
program in order for it to fully succeed. They ask that all
servicers move rapidly to expand servicing capacity and improve
the quality of loan modifications.
Specifically, this will require that servicers add more
staff than previously planned, expand call center capacities,
bolster training of representatives, enhance online offerings,
send additional mailings to potentially eligible borrowers, and
provide a process for borrowers to escalate their concerns
about services' performance. The joint letter also requested
that each CEO designate a senior liaison to attend a program
implementation meeting with senior HUD and Treasury officials
on July 28 to work directly with us in all aspects of MHA.
As Secretary Geithner has noted, we are committed to
transparency and better communications in all of Treasury's
programs. Accordingly, we are planning to take three additional
concrete steps in conjunction with the servicer liaison meeting
to enhance transparency in the program.
First, by August 4, we will begin publicly reporting
servicers' specific results on a monthly basis. These reports
will provide a transparent and public accounting of individual
servicer performance by detailing the number of trial
modification offers extended, the number of trial modifications
underway, the number of official modifications offered, and the
long-term success of modifications.
Second, we will work to establish specific operational
metrics to measure the performance of each servicer.
Third, in order to minimize the likelihood that borrower
applications are overlooked or that applications are
inadvertently denied a modification, Treasury has also asked
Freddie Mac in its role as compliant agent to develop a second
look process for auditing a sample of MHA modification
applications that have been denied.
These additional measures will complement the steps we have
already taken to increase transparency, such as expanding the
efforts of the Federal Government to combat mortgage rescue
fraud and put scammers on notice that we will not stand by if
they prey on homeowners seeking help under the program.
The third challenge we are tackling aggressively is
borrower outreach. We are committing significant resources, in
partnership with the servicers, to reach and inform as many
borrowers as possible. We have already launched a consumer-
focused website, www.makinghomeaffordable.gov, with self-
assessment tools for borrowers to determine their potential
eligibility for the MHA program. This website is in both
English and Spanish and has already received over 22 million
page views.
We have established a call center where borrowers can reach
HUD for approved housing counselors who can provide information
and assistance in applying for the MHA program.
And working closely with Fannie Mae, we have also launched
foreclosure prevention workshops and borrower education events
in areas of the country facing high foreclosure rates. The
first outreach event was held in Miami and another is taking
place today in Sacramento.
Much more must be done. We will continue to work with other
agencies and the private sector to reach as many families as
possible.
Finally, we recognize that any program seeking to avoid
preventable foreclosures has limits, HAMP included. As
President Obama noted when he launched the program in February,
this program will not save every home. Even before the current
crisis, when home prices were declining, there were hundreds of
thousands of foreclosures a year. Therefore, even if HAMP meets
our ambitious goals, we should still expect millions of
foreclosures over the next several years. Some of those
foreclosures will affect borrowers who, as investors, do not
qualify for the program. Others will be borrowers who did not
respond to our outreach, and others will be borrowers who
bought homes well beyond what they could afford and would be
unable to make their monthly payment even on a modified loan.
Nevertheless, for millions of homeowners, HAMP will provide
a crucial opportunity to stay in their homes. It will bring
relief to the communities hardest hit by foreclosures. It will
provide peace of mind to families who have barely managed to
stay current in their mortgages, who have recently fallen
behind in their payments. It will help stabilize home prices
for all American homeowners, and in doing so aid the recovery
of the U.S. economy.
In less than 5 months, including the initial start-up
phase, the Making Home Affordable Plan has accomplished a great
deal and helped homeowners across the country. But we know that
more is required to help American families during this crisis,
so we will work tirelessly to build on these efforts.
Sustained recovery of our housing market is vital to
achieving financial stability and promoting a broad economic
recovery. We look forward to working with you to help Americans
stay in their homes, to restore stability in the U.S. housing
market and grow the U.S. economy.
Thank you very much, and I look forward to your questions.
Chairman Dodd. Thank you.
Mr. Apgar, go ahead.
STATEMENT OF WILLIAM APGAR, SENIOR ADVISOR TO THE SECRETARY FOR
MORTGAGE FINANCE, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Apgar. Chairman Dodd, Ranking Member Shelby, members of
the Committee, thank you for the opportunity to testify.
Secretary Allison has already provided you with a summary
of the Making Home Affordable Program. I will focus my comments
on the implementation of the Hope for Homeowners Program and
others administration efforts to provide relief to homeowners
and neighborhoods suffering from the effects of the foreclosure
crisis.
First of all, I want to commend Chairman Dodd and the other
members of the Committee for your leadership in passing the
Helping Families Save their Homes Act of 2009, signed into law
by President Obama on May 20 of this year. This legislation
makes important and much needed improvements to the Hope for
Homeowners Program that we are now implementing.
Due to several obstacles to participation, including steep
borrower fees, costs, complex program requirements, and lack of
operational flexibility in program design, the original Hope
for Homeowners Program only served a handful of distressed
owners. These legislative improvements that were enacted this
year, combined with the integration of Hope for Homeowners into
the Administration's Making Home Affordable Program, will help
the program, Hope for Homeowners, become a less burdensome
option for underwater borrowers who are seeking to refinance
their home and regain equity in their home.
Services participating in the Making Home Affordable
Program will be required to offer the option for Hope for
Homeowners refinancing in tandem with a Making Home Affordable
modification. To ensure proper alignment of incentives,
servicers and lenders will receive payments in the Hope for
Homeowners refinancing option similar to those offered to the
modification option. Though the Hope for Homeowners Program
offers substantial benefits to underwater borrowers best served
by an increase in equity position in their homes, treatment of
second liens poses significant challenges to the implementation
of the program.
First, the presence of a second lien complicates the
execution of a mortgage refinance program even under the best
of circumstances. Since second liens tend to be held in the
portfolio by several of the Nation's largest banking
institutions while first liens are owned by a wider range of
investors, coordinated communication and decisionmaking between
these two separate financial interests can be logistically
complex.
Equally challenging is the determination of a fair
allocation of payments to each of these two distinct investment
interests. As you know, the basic program requires first lien
investors to take a significant write-down in order to restore
the borrower to an affordable mortgage with a meaningful level
of equity in their home. Though initially resistant to the
program, many first lien investors under the concept of one
loss, one time, appear increasingly willing to accept the
required haircut and execute a clean exit from the transaction.
Unfortunately, the calculation of second lien-holders is
more complex. Even in situations where the combined LTVs of the
first and second liens exceed the market value of the home,
second liens may have some value. In particular,
representatives of banking institutions that hold sizable
numbers of second liens on their portfolios report that in some
situations, borrowers who are delinquent on their first lien
continue to make payments on their second lien, providing some
measure of benefit to second lien holders. Of course, where the
first lien is underwater, once the property moves to
foreclosure, the second lien is worthless.
In light of these complex and often conflicting interests,
determining the fair compensation system for holders of second
liens is difficult. In this regard, the July 10 letter to the
heads of five bank regulators jointly signed by you, Chairman
Dodd, and House Financial Services Committee Chairman Frank, is
illustrative. In assessing methods used to estimate the value
of second liens held on the balance sheet of the Nation's
largest bank, the letter expressed concern that loss allowance
associated with these subordinated liens may be insufficient to
realistically and accurately reflect their value, especially in
light of the historically poor performance of first lien
mortgages and the seriously diminished value of the underlying
collateral. The letter goes on to observe that in situations
where banks are allowed to carry these loans at potentially
inflated value, they may be reluctant to negotiate the
disposition of these liens and thus stand in the way of an
increasing participation in Hope for Homeowners.
To better understand these issues, HUD and Treasury are now
working with the OCC and other regulators that supervise the
activities of large national banking institutions that hold in
portfolio the largest share of second liens. We hope these
conversations will draw on the considerable expertise of the
OCC and other regulators to help HUD craft an extinguishment
schedule that will provide fair compensation to the holders of
these second liens.
Finally, HUD and the Administration are also working to
implement several other initiatives to expand the reach of
foreclosures throughout the country. These efforts are
described in my written testimony and I would be happy to
discuss them more at length during the question and answer
period.
In conclusion, once again, I would like to thank you for
the opportunity to participate in the hearing and I am happy to
answer any questions that you may have. Thank you.
Chairman Dodd. Thank you very much, both of you. I
appreciate your being here.
Obviously, there is a lot of frustration in these numbers
we hear this morning. We add to it, despite all of the efforts
we have all made up here trying to put together something that
works for people, and obviously we understand that not everyone
you are going to be able to keep in their homes. I want to
raise the issue with you about the principal reduction versus
the payment reduction approach.
But I think it is also important to point out that at some
point, we need to come to conclusions about these. There are
people we can help. There are people we cannot help. And when
those issues arise, when you can't solve that problem, it seems
to me then it is better to get that property up, get it
auctioned off, and get it moving.
I was listening to some people in my State not long ago who
are in the real estate business who when they have had--they
are not selling a lot of new homes, and in fact, some of the
sales are foreclosure sales. And when there is a foreclosure
sale, people show up to acquire the property. So striking that
balance between trying to help out people we can, and as you
point out in your testimony, Mr. Allison, there are some
situations where we just cannot work it out despite the
efforts, but you ought to make the effort, it seems to me, and
then make that conclusion, and if that conclusion is the one
that something can't be done, then to move the property along,
as well.
But let me get to the first issue, because----
[Telephone ringing.]
Chairman Dodd. I suspect that is my 7-year-old daughter. I
will put that down. Hold on. I apologize for that.
Let me ask you the question about the principal reduction
versus the payment affordability approach which the
Administration is taking. Others, including the Federal Reserve
and others, have argued for the principal reduction approach.
Now, you point out, Mr. Apgar, that the second mortgage issue
raises issues, and I want to get to that in a minute. But which
of those two approaches do you believe, Mr. Allison, is a
better approach in terms of achieving the kind of outcomes we
are looking for here and why are we not then moving on the
principal reduction idea if, in fact, there is a better outcome
there?
Mr. Allison. Well, we actually are now offering----
Chairman Dodd. You have got to get your microphone on and
speak right into it.
Mr. Allison. We actually, Senator, now are offering the
Hope for Homeowners, which is a principal reduction program----
Chairman Dodd. Right.
Mr. Allison.----alongside the modifications, and it is
important, first of all, to make home ownership affordable. And
in solving for affordability, we are looking at each homeowner,
that is the servicers are, and what they can afford to pay.
There are incentives for both the servicer to modify a loan to
an affordable level and for the homeowner then to make the
payments on that modified mortgage loan.
Chairman Dodd. So you agree that the principal reduction is
the better way to go now?
Mr. Allison. I believe that both ought to be looked at and
both can be important. What is most important is to make the
home affordable now. So the servicer is going to be looking at
whatever method seems to work best for each individual
homeowner.
Chairman Dodd. How do you feel about this, Mr. Apgar? What
do you think is the better approach?
Mr. Apgar. I think that the evidence suggests that
affordability is the key problem that homeowners face, that if
you are able to get their mortgage payments down to some
appropriate share of their income--31 percent of DTI is what we
use in the program--that is the best way to help them
maintain----
Chairman Dodd. Well, I want them to get a better equity
position in that home. If their equity position isn't going to
improve, how are you going to convince that person to sort of
stay, in effect?
Mr. Apgar. I also understand that folks are deeply
underwater, or underwater at all and need some additional help,
and that is where the Hope for Homeowners feature comes in. So
again, getting affordability, I think that is the lesson that
the FDIC experience demonstrated, that by achieving that 31
percent DTI, they could stabilize the family, avoid re-default,
and help a large number of people, while at the same time we
work on working to extinguish the overhang for people that are
underwater. That is the Hope for Homeowners promise.
Chairman Dodd. Do you also believe that if there is nothing
that can be done for people, that we ought to then try to move
that property? I mean, that is what I mentioned earlier,
reaching a decision--some system in place where you arrive at a
conclusion here. It seems to me we are sort of drifting.
Mr. Apgar. Well----
Chairman Dodd. Weeks go by and there is no resolution.
There is no conclusion as to whether or not that situation can
be resolved and the other one cannot, and then deciding on a
course of action.
Mr. Allison. Senator, we are going to be beginning to
disclose on a servicer-by-servicer basis their performance,
both how rapidly they are resolving issues on behalf of
homeowners and how many modifications they are making. And we
think that that type of disclosure, servicer by servicer, will
be important to spurring greater activity on their part.
Chairman Dodd. Let me get to the second mortgage issue. A
witness on the second panel, an economist from the Federal
Reserve in Boston, acknowledges that lenders have not been
doing modifications over the past months and the modifications
they have done have more often resulted in increased monthly
payments. No surprise, then, that the re-default rates in those
cases are very high. That is not a terribly enlightening
statement, for obvious reasons.
The homeowner can't afford the original payment. It is hard
to see how they would be able to afford an even higher payment.
This is consistent with findings by many other researchers, by
the way, not just the Federal Reserve in Boston, including
those at the Federal regulatory agencies.
Mr. Willen, the witness I am talking about, goes on to
argue that the reason that lenders aren't doing more
modifications is because it is--his quote, ``it is simply
unprofitable for them to do so.'' What is your view of this
conclusion? Do you agree with Mr. Willen? Mr. Allison?
Mr. Allison. Chairman Dodd, that information--I believe
that study was based on past modification efforts. This one is
substantially different. This one is geared to major reductions
in the payments that homeowners are making. As you correctly
pointed out, many of those prior modifications actually
resulted in higher payments because the foregone previous
payments were built into the future mortgage payments.
This approach is the first large-scale modification effort
where homeowners will see their monthly payments in many cases
dramatically reduced So I would submit that the past data,
while accurate for those past efforts, does not really apply to
the program that we are undertaking today.
Chairman Dodd. Well, I hope so. That just doesn't make any
sense at all.
Mr. Allison. Right.
Chairman Dodd. My staff has been briefed regarding the
errors in the Home Affordability Mortgage Program, the so-
called HAMP program, situations where people have been turned
away, where upon a second look it turns out that they have been
offered a modification. These errors are not uncommon, I am
told. Why don't you make the elements that go into the
modification decision, all the software, the net present value
test, and the like public so that the foreclosure counselors
can make sure people are treated fairly across the spectrum?
That would make people like Joan Carty, by the way, who we
are going to hear from on the second panel, who I would hope--
by the way, she is here in town for the day. She is a
professional. She does an incredible job in Bridgeport,
Connecticut, for us, really knows these issues. And I asked
Joan. She says, ``I need a system. I need a reliable,
predictable system.'' This is someone on the ground dealing
with a massive amount of problems, and the sense is there is no
system. There is nothing predictable and reliable about it.
And when you have got people like Joan Carty out there who
are feeling frustrated, who are dealing with these issues every
day, not feeling confident about a system in place where you
get answers, and so why don't we make this stuff public so we
have more transparency?
Mr. Allison. Mr. Chairman, let me address that in several
ways. First of all, we will be working with the servicers to
develop escalation procedures so that when homeowners believe
that there is an unnecessary delay or they have a complaint
about the way that their mortgage is being addressed, they can
escalate that complaint to higher levels within the servicer.
We also have the Hope Now website which has escalation
procedures. Or they can go on the Fannie Mae or Freddie Mac
websites.
Also, as part of this program, Freddie Mac will audit the
mortgage modifications to make sure, first of all, that people
who are qualified for a modification are able to get one, and
second, to make sure that we aren't producing modifications for
those who are not qualified and also looking at people who have
been foreclosed on to see whether they would have qualified for
this and some redress should be made.
Chairman Dodd. I would hope, Mr. Allison, it might even
today at some point--I haven't asked her to do this, or you,
but people like Joan and others, that you might spend a little
time and hear what they are going through on the ground. It
isn't just this woman in my State, there are people like her
all across the country--and listen to them as to what they
need, because they are the ones literally struggling every day
to try and come to conclusions on some of these issues. So I
think it would be really worthwhile to listen to people every
day who are struggling with these systems and have to make them
work.
Last and very quickly, because I want to turn to my
colleagues, is the issue on the second mortgage. Many of the
big servicers agree to take some reasonable payouts for the
second mortgage. They hold as the primary obstacle the use of
the Hope for Homeowners program. You point out, as has been
mentioned here already, the value of the home isn't even
sufficient to cover the first mortgage, much less the second.
Mr. Glovier in his testimony later this morning will point out
that only 3 percent of second mortgages are current where the
first mortgage is in a delinquency.
Shouldn't such loans be sold for pennies on the dollar, in
many ways it seems to me? What has been your experience with
this? Are the lenders being reasonable? And if so, what can we
do to extinguish these loans? That is the major blocking point
in a lot of these areas, as you point out, Mr. Apgar. What, if
anything, can be done? Can we do anything? Is there anything
that Congress needs to do to try and deal with this problem of
the second mortgage issue, if that is the major obstacle? Can
you give me a quick answer on this?
Mr. Apgar. Well, the key is offering fair loans and sorting
out--fair offers and sorting out the instance where there is
some value to the second liens and recognizing that and paying
fair compensation, while not overpaying by not recognizing as a
fact that many of these loans are deeply in distress and have
limited economic value. As I mentioned, we are working with OCC
and others with the Treasury team to come up with a fair
compensation system. We have received maybe the initial Hope
for Homeowners Program maybe didn't offer enough, especially in
those cases where there was economic value, and got in the way
of us moving forward on a wide range, recognizing the fact that
in many instances it is pennies on the dollar is the right
answer of what to pay for these second liens.
Mr. Allison. Mr. Chairman, to add to Mr. Apgar's answer, as
part of the new second lien program that we are rolling out, we
have already signed up the five banks that together account for
over 80 percent of the second liens. So they are pledging to
work to solve for affordability of the second lien alongside
the modification of the first lien, and we think this will go a
long way to assure greater affordability for many more
homeowners.
Chairman Dodd. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Steps to combat fraud--it is my understanding that the
Special Inspector General for the Troubled Asset Relief Program
made a number of recommendations to Treasury to address
concerns about vulnerabilities in the Home Affordable
Modification Program Senator Dodd was talking about, the HAMP.
Among these recommendations were requiring third-party verified
evidence that the applicant is residing in the subject
property, requiring notarized signatures and a thumbprint of
each participant, and mandatory collection, copying, and
retention of copies of identification documents of all
participants in the transaction at closing.
Secretary Allison, what actions has the Department taken to
address these specific recommendations? Additionally, describe
broader efforts that Treasury is taking to prevent fraud in
this program.
Mr. Allison. Yes, sir. Senator, thank you for your
question. It is a very important issue, making sure that in
this program, where we are going to be spending a sizable
amount of taxpayers' dollars, we are protecting the taxpayer,
as well.
That is one reason why we have been taking quite a bit of
time and effort to make sure that we have fraud prevention
built into this program by requiring appropriate verification
and also why we have appointed Freddie Mac to audit this
program, to look for signs of mortgage fraud. We have also been
working with agencies across the government to assure
enforcement. Where we find fraud, we are going to enforce the
laws and the rules of the mortgages to the greatest extent
possible.
Senator Shelby. Mr. Apgar, since Hope for Homeowners was
created last year by the Congress, the program, it is my
understanding, has only refinanced one mortgage--one. Clearly,
this is a regrettable policy failure. While recently enacted
changes to the program will hopefully improve its success rate,
it appears that the Hope for Homeowners will help far fewer
borrowers than the hundreds of thousands that the program
sought to help. Why has Hope for Homeowners not been more
effective? In other words, why the failure?
Mr. Apgar. Well, as I mentioned, the original formulation
had complex servicer requirements that weren't standard to the
industry and many servicers did not feel it was appropriate
to----
Senator Shelby. Explain what you mean.
Mr. Apgar. Requiring additional borrower certifications. A
particular instance was the servicer was required to verify
that the borrower had not committed mortgage fraud for the last
10 years. Many servicers said that they didn't have the
capacity to verify that, and so in reform of the program, that
particular feature was removed.
In addition, I also believe that at the time, the industry
was not ready to begin to recognize the depth of the crisis
that we are encountering and many first lien investors were not
prepared at that stage to take the necessary haircuts in order
to make the program a go. As you know from the discussions of
the revitalized Hope for Homeowners, that many of the first
lien investors are now saying we prefer to take a haircut on
the mortgage in the context of Hope for Homeowners refinancing
in order to get a clean exit. What that does is give them cash
now, minimizes any re-default risk they might encounter if they
continue to work with that borrower, and avoid any further loss
in property value should property values continue to decline.
So we think that the Hope for Homeowners now is a program
that will be embraced by first lien owners and will be more
widely utilized.
Senator Shelby. Without a huge haircut--Senator Dodd was
talking about reducing it down to something people can pay,
realistically afford--aren't we wasting our time here? In other
words, as we continue to lose more jobs, the expectations of
people making higher mortgage payments, that is an illusion,
isn't it?
Mr. Apgar. I think that any holder of these mortgages that
believes that hanging on is a better strategy is a false
promise. The program isn't demanding the haircut, the market is
demanding the haircut. The values of these homes are
discounted. The question is, what is the best that the investor
can realize in terms of, as I said, getting a clean exit. Hope
for Homeowners for many is the preferred exit strategy because
it gets the borrower in a good situation and it gets them out
of the loan at hopefully a fair approximation of the current
market value and reduces the foreclosure cost of getting to it.
Senator Shelby. But whatever we say or do policywise, or
you implement the policy, if the market doesn't respond to it
favorably, it is not going to work, is it?
Mr. Apgar. You have to pay attention to the market
interest. There is no doubt that we have seen a significant
decline in housing prices. The housing prices then have made it
difficult for the owners of these securities, and that is the
reality that any program has to address.
Senator Shelby. Secretary Allison, Treasury earlier this
year released information stating that the Home Affordability
Mortgage Program--I will just call it HAMP--will use $50
billion in TARP funds to modify mortgages. It is also my
understanding that Fannie and Freddie will provide additional
money to assist homeowners with loans on their portfolios.
My question is this. How did Treasury determine the amount
of funding it would allocate through TARP to drive HAMP
initiatives and incentives, and to what extent do you think
more money may be needed than was originally allocated? Second,
will you provide this Committee with the data and analysis that
was used to determine the appropriate levels of funding that
might help us understand what road we are going down?
Mr. Allison. Senator, in answer to your last point, we will
be glad to provide you with the underlying information. I think
it is important to point out at the outset that this is a pay-
for-performance approach. We will pay servicers--most of their
payments depend on their performance over time. Also, the
incentives for individuals depend on their continuing to pay
their new reduced mortgage rates going forward.
We currently have set aside about $18.6 billion for the
first loan modifications. We will be setting aside some
additional amounts for the other programs that we are rolling
out toward the end of this summer. We have based this on
projections about what success might mean over time and the
goals that have been set for this overall 3-year program. But
again, I want to point out, this is a pay-as-you-go program.
Senator Shelby. Mr. Apgar, will you share your data with
this Committee?
Mr. Apgar. For sure.
Senator Shelby. OK. Last question. Mr. Chairman, thanks for
your indulgence here. Mr. Apgar, given your role at HUD, you
must spend a considerable amount of time analyzing what
happened in our housing market over the last few years. Could
you please discuss what you view as the primary reasons for the
dramatic uptick in foreclosures as well as the broader cause
for the escalation then subsequent deflation of home values?
What is your view? You are into the depth of this.
Mr. Apgar. Thank you. Prior to coming to HUD, of course, I
worked for the Joint Center for Housing Studies and did
extensive research on the housing foreclosure crisis and so I
do have a view, both educated by that work and also from my
experience now at HUD. My sense is that at the core of the
problem was aggressive mortgage lending fueled by a strong
demand for mortgage-backed securities on the part of Wall
Street investors and others, and that in the rush to do these
mortgage loans, some of the cautionary tales that are common in
the mortgage lending business were put aside.
People were placed into mortgages they neither understood
nor could afford to pay. Prime mortgages, if they didn't reach
the goal, were topped off with very risky second liens that
took a prime loan that looked like it could be secured and
turned it into a loan combination with a hundred or plus LTV at
the beginning.
Once those loans began to go bad, of course, the problem
just radiated out, and it was the downward pressure on prices
that came from the foreclosure and delinquencies of these
difficult mortgages that was the seed that set off the
financial crisis.
Senator Shelby. It is going to be difficult to deal with,
isn't it?
Mr. Apgar. Putting Humpty Dumpty back together is a very
difficult situation, there is no doubt about that.
Chairman Dodd. Thank you, Senator Shelby.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Mr. Apgar, your testimony suggests that the Administration
is exploring a series of programmatic options that can help
unemployed workers get the mortgage assistance they need, which
suggests perhaps direct assistance to homeowners. There have
been a couple of proposals. One is simply to avoid going
through the servicer route and just subsidize individuals so
they can pay their mortgages----
Mr. Apgar. Mm-hmm.
Senator Reed.----or some folks have proposed creating a
mechanism where title might pass formally but the individual
can stay indefinitely as a renter, paying a suitable rental
fee.
Two questions. One, what types of assistance are you
thinking about, and second, given the record of the difficulty
of getting these programs going, can we jump start any of these
types of programs that you are contemplating?
Mr. Apgar. Well, thank you for your question. We are, in
fact, exploring other options relative to both unemployment and
other elements to help keep folks in their home, as you
suggest. Of course, one of the primary focuses on the
unemployment thing is to make sure the economy returns to
growth and that people don't experience unemployment because we
have a growing job sector. Extending unemployment benefits can
be a direct way of helping people tide over and not force the
difficulties faced when folks have loss of income and therefore
can't pay their mortgages and can't in some instances even
qualify for a modification program because they don't have even
sufficient income to support a drastically written-down
mortgage.
We are also exploring other options related to how to
provide assistance to unemployed folks. Those are in the
formative stage. I have nothing to report on that. But it is
safe to say that unemployment is making the job of doing
modifications more difficult and we recognize the importance of
exploring those issues.
On keeping people in their homes, there have been a lot of
proposals of these so-called fast foreclosures, where the
foreclosure happens but the homeowner stays in, and we know
there are some proposals like that, that are being circulated.
I get them on a regular basis. And so I just say on that that
all proposals that will help provide relief to borrowers in
their home and deal with the negative effects of foreclosures
on communities are being explored. I wouldn't say that that set
is particularly at the top of the list, but that all options
are under review because we have to get a program that works.
Senator Reed. Well, thank you very much. I think, as a
comment, what is most frustrating, and indeed infuriating to
people is that we did unprecedented things to help support the
largest financial institutions in the country in order to sort
of stem what we, I think reasonably believed could be a global
financial meltdown. My perception today is this mortgage crisis
is of the same scale in terms of threatening our economy and
perhaps world recovery, and if we don't take such aggressive
action, if we don't urge all the participants to take such
aggressive action, we are not going to be able to stabilize the
economy and foreclosures and unemployment back home are
interrelated. We have got to move aggressively on both fronts.
Mr. Allison, again, you indicated that these new programs,
revised programs, have resulted in about 325,000 modifications.
But unfortunately, it seems that the number of foreclosures are
accelerating and that even with this improved performance, we
are not catching up. What is your sense of that?
Mr. Allison. Senator, first of all, let me correct the
numbers. I was reporting that about 325,000 offers of
modifications have been issued. The actual number of
modifications now in a trial phase is about 160,000. It is
growing very rapidly. And so as you point out, it seems likely
that the foreclosure rate will increase, the numbers of
foreclosures will increase. This program is also ramping up
very quickly. It is actually only about 10 weeks since the
servicers began offering this program and we already have
160,000 mortgage modifications in the trial phase and we expect
this number to continue growing rapidly for some time.
We are not even stopping there. A number of these servicers
are just starting to ramp up. We are meeting with them, as I
mentioned, late next week, bringing them into Washington to
talk about how they can further accelerate their programs and
how we might help them. We are urging them to hire more people,
to expand their call centers, to improve their systems. We are
also creating--we are working with an outside systems firm that
services most of the servicers, provides service platforms, so
we can get streamlined input and keep closer track on the
progress that the banks are making.
So even though we are making rapid progress, we think we
can do even more to accelerate and try to get out in front of
this foreclosure problem, to the extent possible.
Senator Reed. Thank you. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Reed.
Senator Bunning.
Senator Bunning. Thank you. Gentlemen, your reports are
stunning, to say the least. Most of us who sit at this desk up
here have watched this crisis from the very beginning. I don't
know how long you have been in your jobs, but if you expect me
to believe that Fannie and Freddie are watching the store when
they are 100 percent kind of owned by the Federal Government,
you are asking the impossible.
Most of the problems with the economy stem from a law that
was passed in 1994 when we, the Congress, gave the power to
watch over mortgages, both banks and mortgage brokers, to the
Federal Reserve, and for 14 years, not one regulation was
written--14 years. Now, that is a pretty good time. They didn't
do anything, zero. And you are sitting here and telling me all
these wonderful things that you are doing, and I am like Jack
Reed. The mortgage crisis is escalating, not rescinding. It is
escalating.
We had some numbers today, and Senator Dodd brought them
out, about foreclosures, but they have projected an additional
1.5 million foreclosures for just this year, in addition to the
ones that we already have. So we are not even making a dent.
So what does that mean? That means for our economy to
recover, we have got to stop the spiral down and we have got to
get credit. You can't get credit if you don't have a job. I
mean, give me a break. You are telling me about the programs
that you are having for people that don't have jobs. They can't
pay anything unless they have saved a lot of money, and then
they wouldn't have a problem with their mortgage if they saved
a lot of money. We are talking about people who live from
paycheck to paycheck, and when they don't have a paycheck, they
can't pay a mortgage. So they are going to do the best they can
to get in and out of a house with the least pain to that
family. Now, there is going to be pain for everybody concerned,
including the kids.
So all those wonderful programs that you are talking about
mean absolutely nothing to the American people that are still
losing their houses. You may be stopping, as Mr. Allison said,
you have 150,000 people that you are trying to service out of
300,000-and-some, but that doesn't mean anything because we are
losing 350,000 more foreclosures this month.
So give me a break and tell me when you think you can stop
the bleeding. When? When are these programs that this whole
Committee put together and handed you and said, with your help,
with your input, that these could help the people that were in
stress, when are you going to stop the bleeding?
Mr. Allison. Senator, we share your sense of urgency. This
entire Administration is working very hard to deal with this
crisis. And as you know, President Obama and the Administration
announced and the Congress approved an $800 billion package
aimed at economic recovery. That money will be expended over
the next----
Senator Bunning. So you used TARP money instead of the
stimulus money?
Mr. Allison. Sir, we are actually using the economic
recovery package that the government has enacted, and also on
top of that there is the----
Senator Bunning. Will you please answer my question?
Mr. Allison.----mortgage and homeowner affordability.
Senator Bunning. When are you going to stop the bleeding?
Mr. Allison. We are working very hard to accelerate this
program. This program has actually been----
Senator Bunning. When do you see the bleeding stop?
Mr. Allison. We are moving as fast as we can to get out in
front of the problem. We are well aware that there are about
360,000 foreclosures a month and we expect this program to
reduce that number----
Senator Bunning. My last question. We just had a meeting
with Sheila Bair, who is the head of the FDIC. She is a pretty
honest lady and tells us like it is. She told us that unless
something dramatic happens, that we could lose up to 500 more
banks--up to. She didn't say that that was the exact number.
But that means that those people that make mortgages in local
places, local community bankers, bankers who are closest to the
people that really could help in a foreclosure, will not be
there.
So 500 additional, besides this morning we learned that CIT
is going to go financially bankrupt and that Citicorp is not
far behind. Well, Citicorp is part of the solution, according
to some of the documents that I have. If they are not there to
help, where do we go? Where do we go for help?
Mr. Allison. Senator, if I may, we recently, several months
ago, reopened the capital purchase program for smaller banks in
local communities. We are also concerned about making sure that
lending is available to small companies throughout America.
Senator Bunning. Well, it has been a failure.
Mr. Allison. Well, it has actually--we have helped over 600
banks that were viable banks----
Senator Bunning. But there are 8,000-plus banks, so what
about the rest of them?
Mr. Allison. We have offered this program to all banks who
are viable, and so far--and many are already well capitalized.
I think that one of the issues you are talking about----
Senator Bunning. Thank you for your patience, Mr. Chairman.
Mr. Allison. Yes, sir.
Chairman Dodd. Thank you, Senator.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman.
I want to express my appreciation for both of you being
here today. I thank you for that.
I want to start out by going back to what Senator Shelby
had talked about in his opening statement and that is about
policies that result in a stable and sustainable marketplace. I
think that is ultimately what we all want in the end. I know
you could spend my entire 5 minutes talking about it, Mr.
Allison, but I hope you could be as succinct as possible. Do
the policies that we have in place right now, from your
perspective, are they enough? Are they adequate to result in a
stable and sustainable marketplace in the housing industry?
Mr. Allison. Senator, we believe that the actions that we
are taking can make a material difference, especially for
working Americans. We are going to be reducing one of their
largest monthly expenditures, those who are qualified, by
reducing their mortgage payments. We are also offering
refinancing approaches to many Americans, as well.
Senator Tester. I understand that. The question is, have we
done enough or are we kind of like a mole on an elephant at
this point?
Mr. Allison. Well, this, as I mentioned in my testimony,
Senator, was a problem years in the making.
Senator Tester. Yes.
Mr. Allison. It is a huge crisis.
Senator Tester. There is no doubt about it.
Mr. Allison. We all appreciate that. We are taking what we
think are well thought through, deliberate, and aggressive
actions. This is already--we should point out again--the most
successful modification program ever run and it is just
beginning and we are intent on expanding this program
dramatically, as fast as we can. This Administration inherited
a huge problem----
Senator Tester. You are right.
Mr. Allison.----and it is doing its best to deal with it as
rapidly as possible.
Senator Tester. And I appreciate it, and it is not an easy
task. I guess the question that I need to know from a policy
standpoint, do you have enough tools in your toolbox at this
point in time to adequately address the problem?
Mr. Allison. Senator, I think we have enough tools. The
challenge is to roll them out. We have got to reach as many
Americans as possible, educate them about this program so that
they understand what help is available, and we have to have the
capacity to handle the demand. And we have been building
capacity, working with the services as rapidly as possible. We
are not satisfied.
Do we have adequate tools? We think if we can roll this
program out at the pace we expect, we will make this program
available to all qualified homeowners who wish to avail
themselves of it.
Senator Tester. And the program you speak of is all three
of them, or is there one in particular?
Mr. Allison. Yes, sir.
Senator Tester. All three of them?
Mr. Allison. Yes, sir.
Senator Tester. OK, which brings me to my next question.
Can you give me a timeline for when they will be fully
operational?
Mr. Allison. Well, again, I want to be very careful about
this, because one reason why we are bringing the servicers in
at the end of this month is to ask those very same questions of
them. How fast can they ramp up to serve the American public,
and what can we do to help them further? We want to work with
them as closely as possible. We are monitoring them every day.
We are in continuous contact with the servicers. And I know
that we are going to have much greater capacity every month for
the next several months.
Senator Tester. OK. In your opening statement, you talked
about a myriad of outreach things that you were doing. I assume
it is not only to homeowners, but also to servicers and maybe
others.
Mr. Allison. Yes, sir.
Senator Tester. Are those outreach--number one, is it
adequate? Do people that need help know that there is help
available and know how to get through the myriad of, as with
anything, the myriad of forms and people to get hold of and all
that? And what is the best way, in your opinion, to reach out
to the homeowners that have problems so that they know that
there is help out there?
Mr. Allison. Senator, I think that is a very important
question and we have to reach homeowners in multiple ways. We
are going out and holding events. At the event in Miami, we had
several thousand people come and we were helping them to fill
out the forms on the spot. We are doing the same, as I
mentioned, in Sacramento today. We are going to other
communities around the country. But that is just one measure.
We have to work with local counseling agencies. We are using
the Internet to get the word out, as well. We have to be on
television. We have got to be doing as much as we can, many
different approaches, and we have to reach people many times.
Senator Tester. Can you tell me at this point in time what
the rate of turn-down is in participation?
Mr. Allison. I can't give you yet a really good estimate of
that, and the reason is, as I mentioned, for instance, right
now, we have, as I said, 325,000 offers right there. The number
of trial modifications will lag the number of offers, as you
can understand. So right now, we have about 160,000 trial
modifications. We haven't yet completed any significant
modifications because that takes 3 months in the trial period.
So in August, we are going to start to see actual
modifications. So this is still early and I think it is
premature for me to give you a definitive answer to your very
good question.
Senator Tester. We would love to have it at some point in
time.
I am sorry, Mr. Apgar, I didn't fire more questions at you.
I appreciate--these are difficult times and there is a
level of frustration here that is high. We appreciate your work
and we look forward to working with you to try to get this
problem solved into the future. Thank you.
Mr. Allison. Thank you.
Chairman Dodd. That question that Senator Tester has raised
with you about the tools in the toolbox, we need to know from
you. There is no lack of willingness up here to step up if you
give us some idea of what additional tools are needed. Our
frustration is, we see these numbers continue to go up. We
think we are trying to address the issue. We turn around and we
watch the numbers get worse. And, of course, we are being asked
every single day by our constituents and others, what is going
on? You have got money you put into this. You crafted designs
and programs to get things done and the numbers continue to
rise.
So you are getting a sense of the frustration we are
feeling, and you feel it at the local level. As I say, you are
going to hear from some people later today if you hang around
who are out there at the street level that are as frustrated as
we are, and they reflect those frustrations to us.
So we need to know. You are not going to find unwilling
members here to want to respond, and quickly, if there are
things that we can do to assist you to get this done. But you
need some clarity in the system. It needs clarity so that
people know what the rules are and how to apply them and make
it work, and that is going to be critical.
Senator Corker.
Senator Corker. Mr. Chairman, thank you, and I thank both
of you for your service and for being here and for being
involved in this really complex issue.
I am going to take a little different tack. No doubt, I
wouldn't be in this body, I don't think, if I had not been
involved in trying to make sure that people had affordable
housing as a young man, and that civic and nonprofit activity
led me to this place, no question. So I want you to know I have
tremendous empathy for people who especially have children and
living in a home that have to vacate it because of foreclosure
and loss of jobs, and I understand that is a tragedy for many
people across the country.
But I am going to take, again, a little different tack,
because I am not under any illusion that you will ever really
catch up with this. I know that you are trying hard. I talked
to a lender yesterday who said one of the biggest problems is
the program continues to change. So every time they get set up
and ready to execute, there is a whole new set of rules, and
that is because we are chasing this thing from behind, and I
know this. It is very unlikely we are going to catch up, and I
am under no illusion you are going to solve it. I think your
efforts will improve. But I think the only thing that is going
to resolve it is a turn-around in the economy and things
stabilizing. But I thank you for your efforts, OK.
The tack I want to take is this. I know that $50 billion is
coming out of TARP for this. I know that most of us thought
that the TARP money all was going to be repaid because we were
going to invest in things that had value. And I realize there
were clauses in here that allowed this to occur and I am not
debating that. And I realize both Administrations have invested
money out of TARP that is not going to come back, so I am not--
but the fact is, this $50 billion is gone once it is spent. I
mean, it is not invested in something the taxpayers will get
back.
It seems to me that there are numbers of different
classifications of borrowers. I mean, Mr. Apgar, you alluded to
the fact, I think--I was daydreaming, I apologize, for a
second--but you alluded to the fact that I think one of the
biggest problems was 100 percent loan-to-value, and that is why
we are having this problem. And so we had so many people in
this country that put down 3 percent, and some of that was
loaned to them or given to them by the seller. And so we had
people that, in essence, were really renting houses. I mean,
they didn't really own a home. They did in document, but they
put no equity down. I think the staff have shown us, those
people who put equity down, candidly, have not been foreclosed
on in large.
I am wondering if we should treat homeowners that were in
essence renting their houses--they basically got somebody to
give them a nonrecourse loan and nothing down--if we should
focus on them the same way that we focus on those people who
actually--and I know there are far less of these--actually had
equity in their homes.
And then I love--actually, just answer that briefly, if you
would. I have one more question. I will stop.
Mr. Apgar. Well, I will take it, Senator. I will take a
shot at that. It is true that folks who have limited equity in
their home or no equity, as you suggest, are more likely to
quickly get in trouble in economic instability times and more
likely to lose their home to foreclosure. We can't pick and
choose which side of the line we work on because when a house
goes to foreclosure, it provides such blighting influence on a
neighborhood that the neighbors are harmed, as well. And as
house prices go down, it is indiscriminate in terms of folks
that once had good equity in their home are now underwater just
along with the folks who had limited equity are underwater. So
we have to work with both groups.
I do believe that we need to think real hard about the role
of low downpayment lending in whether or not that is a helpful
path to home ownership.
Senator Corker. And I hope that, at some point--I realize
in the middle of a crisis, maybe that is not the time, but I
think we should look at that, and I think that most of us
realize that in a push to create affordable housing for
everybody in America, we actually have created a big part of
this problem because there was no equity. And then we have done
away with the recourse side of loans, which has made it even
worse, and I would like for us to focus on that at some point.
I think that is a huge issue.
But I want to ask my one last question. The reason I
brought up the $50 billion and the reason I brought up the fact
that so many of these people are basically renting a home,
because they put no equity in it, OK, we are expending huge
amounts of taxpayer monies in other ways, too. It is not just
this $50 billion. And I wondered, Herb, if you might talk to us
a little bit about the liabilities that you believe we are
creating at the GSEs, Fannie and Freddie, because there
potentially, the way I see it, is going to be a large trailing
liability that we may be creating at those organizations by
continuing to sort of chase this mortgage problem the way we
are. If you would give us some insights into that. And I hope
at some point--I think we will--we will look into that as a
Committee, but if you could share that with us today, I would
appreciate it.
Mr. Allison. Thank you very much, Senator Corker. First of
all, you have mentioned correctly that we may spend $50 billion
on the homeowner affordability programs. These expenditures can
be also viewed as investments that will have returns in the
form of housing prices higher than they would have been had we
had more foreclosures. So that is a type of return to the
American public. And also, we are making payments to individual
homeowners for successfully continuing to pay on their modified
mortgage, which is also money they can be spending and putting
back into the economy. So I think there is a kind of multiplier
effect.
Senator Corker. What I meant for the taxpayers, I am
talking about like a return on investment----
Mr. Allison. Yes, sir.
Senator Corker.----which you are very familiar with in your
previous life, so----
Mr. Allison. Yes, and you are absolutely correct, Senator.
Those are, from that standpoint, expenditures. We are not going
to get a direct return back on those, but I think we will get
an indirect return.
As to the liabilities of the GSEs, I would answer it the
same way. I want to point out, I think that the GSEs are
performing an extremely vital role in this program and I think
they are off to a very good start. They have--they account for
about half the mortgages in the United States. They have great
professionals there with great knowledge and a lot of
capability.
We are, as you know, the government has provided an
additional $200 billion to the GSEs to assure that they can
play an active role in the mortgage modification programs going
forward. Again, I think that their ability to be actively
involved in the modification program is going to provide
returns to the American public.
Senator Corker. I know my time is up, but it is further
digging a hole for the GSEs to play the role they are playing
in these mortgage modifications, isn't that correct?
Mr. Allison. That is correct, sir, that there are
additional expenses that they will be incurring as a result of
this, but we have also provided about $25 billion available to
the GSEs for their expenses in this program.
Senator Corker. But that is, again, taxpayer money.
Mr. Chairman, I do hope at some point we will look at the
collateral damage that we are creating, just to sort of be able
to tally up the true cost so that we ourselves will know, and I
apologize for going beyond my time.
Chairman Dodd. No, that is all right, and it goes to the
point, I think, to speak for myself, I am prepared to make some
of these investments provided we get some results. My
frustration here is not so much that you are making these
investments, that in fact we are getting the indirect return on
the investment because we are keeping people in homes, the
economy is stabilizing, the institutions are, I think that is a
tradeoff I can make a case for. What is frustrating is that we
make the investments and we see the problems continue to
escalate. That is the frustration I feel in all of this to some
degree. But obviously, it is an important question, and we need
to look at it, and I have told Senator Corker that we will, in
fact, have a public hearing on that issue, as well.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chairman, and
thank you for your testimony.
I wanted to get an overview here. Under Hope for
Homeowners, I believe the testimony is that only a handful of
new mortgages have been written. A handful is one, or is a
handful a dozen, or is a handful a thousand?
Mr. Apgar. I think it is safe to say that a handful is very
few. The technical answer is that there were over 50 mortgages
actually closed, but because of the processing delays and
problems with the way in which the program was done, only one
actually moved to actual insurance. So 50 homeowners got the
benefit of the refinancing, but FHA only insured one mortgage.
Senator Merkley. OK, so 1 to 50?
Mr. Apgar. Yes. Not enough to talk about.
Senator Merkley. All right. And under the HAMP program, the
Home Affordability Mortgage Program, I believe the testimony
was 160,000 modifications?
Mr. Apgar. One hundred and sixty thousand completed trial
modifications, yes.
Senator Merkley. Why do you say trial modifications? What
is that meant to signify?
Mr. Apgar. Well, I will take a shot and I will turn it back
to my colleague, but----
Senator Merkley. Very brief, because I have lots of
questions.
Mr. Apgar. It takes 3 months to prove that the borrower can
handle the new modification program, and then they go to a
permanent modification.
Senator Merkley. I see. OK, great. Then under the HARP
program, the Home Affordable Refinance Program, how many
refinancings have taken place under that?
Mr. Allison. The total number of refinancings, this year,
number at least two million. However, if you look at the
modifications of loans with a loan-to-value ratio above 80
percent, the program, that is about 43,000 so far. And the pace
of refinancings depends heavily on interest rates. Recently,
interest rates have risen somewhat on mortgages, which tends to
slow the number of refinancings.
Senator Merkley. So refinancing is about 43,000?
Mr. Allison. With loan-to-value ratios above 80 percent,
yes.
Senator Merkley. OK. Let me lay out my frustration. If you
take the roughly 200,000 families that have been assisted
through this--and another question I have, and you may not know
the answer but if you do I would like to know it--is kind of
the cost that goes into each one of those, on average. Is it
$10,000 per family? Is it $20,000 per family? But let us say it
was $10,000 per mortgage in terms of costs to the citizen. We
would be looking at roughly $2 billion that have been spent to
assist homeowners.
Now, $2 billion is a significant number, but the contrast
is stark between an extraordinary, enthusiastic, eager,
generous effort to assist our major financial institutions,
which was extremely important in order to stabilize our
economy, and what has just been a dragging through the mud,
slow, difficult, we will try this, we will try this, and here
we are at one mortgage under Hope for Homeowners and only about
200,000 with the other two programs. There must--we need the
same attitude with which we approached assisting our banks to
assist our working families.
I know that as you lay out the details it is complicated,
it is difficult, but somehow, it is just hard to explain to the
working families in America how it is we could move so fast
with extraordinarily complicated deals with the huge financial
institutions and we are moving so incredibly slowly, mired in
paperwork, in rules. In talking to the banks back home, they
are complaining that every couple of weeks, they get a
different version of the rules and the citizens can't get
through to folks who can make the modifications, and we just
don't seem to be applying the same levers of government to move
quickly for our families that we have moved on with our major
financial institutions.
Just kind of your thought about that contrast and how we
can possibly get the same level of energy and effort to help
our working families.
Mr. Allison. Senator Merkley, thank you, because that is a
question on everybody's minds, and we are as frustrated as
anybody. This is a crisis that began about 2 years ago. This
Administration has been in office now for 5 months or so. This
program was announced early in the Administration. This is an
all new, very aggressive, dramatic program. It was really
launched in terms of actually beginning to work with homeowners
about 10 weeks ago.
Already, we have 160,000 modifications underway. I know
that in comparison to the damage that has already resulted from
this crisis, this seems like a small number. It is growing
rapidly. We are doing all we can to grow it as fast as
possible.
You correctly point out that this is a complicated
business. It has taken some weeks just to set up the program.
Mortgages are very complicated. We have to work with many
different servicers. We have to make sure that they are totally
involved in this program, they are totally committed to it.
I think as my colleague, Mr. Apgar, said, they are past the
stage where they were wondering how much they needed to be
involved. I think more and more, they are fully committed to
this program and that should result in even faster roll-out.
We want this to happen as rapidly as possible. I think even
though this crisis is several years in the making already, we
have to keep in mind that this program started just weeks ago.
We all wish it had started a lot earlier. But here we are and
we are trying to make it work as rapidly as we possibly can.
Senator Merkley. Do you wish to add anything?
Mr. Apgar. Well, with respect to the Hope for Homeowners
Program, there is no doubt that 51 mortgages is not going to
help the economy stabilize. That is why immediately in
February, we proposed bold new reforms for the Hope for
Homeowners Program, including taking this, what once was a
stand-alone program and nesting it in the harder Making Home
Affordable Program, so that people have the option to both get
a modification or, where it made sense, a mortgage write-down
under a Hope for Homeowners Program. We worked with the
Congress to make sure we got that perfecting legislation. It
has now been enacted, and we are busy rolling--putting that in
place. We think that the new Hope for Homeowners will perform
substantially better than the flawed program that we inherited
at the beginning of the year.
Senator Merkley. Well, I certainly wish you Godspeed in
pursuing this and appreciate your effort to expedite it in
every possible way.
I would like to follow up, because my time is out, but
follow up with my staff and get details on the 160,000
modifications. One of the things I have been concerned about is
that some modifications are better than others, and
modifications that we saw early on, where simply a family was
told, well, you don't have to pay for 3 months, but then you
have got to make it up over the next 12 months, the payments
actually went up, really didn't help the situation at all. I
want to get a better understanding of what share of those
160,000 modifications actually represent paths to avoid
foreclosure and will be a solution.
Mr. Apgar. Well, just a quick answer on that. One hundred
percent of the modifications that are being done brings the
homeowner to a 31 percent DTI. They are deep, true
modifications, not the things that were passing off as
modification which actually increased the borrower's payment in
some of the earlier reports on modifications.
Senator Merkley. That is excellent. Thank you.
Senator Menendez.
[Presiding.] Thank you.
Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
Secretary Allison, how many homes would be in foreclosure
today? What would the total number be?
Mr. Allison. I am not sure of the exact number, but it
numbers--the numbers are far too high.
Senator Johanns. And how many go into foreclosure every
month?
Mr. Allison. I think we are seeing several hundred thousand
a month.
Senator Johanns. Is that accelerating or is that declining,
that monthly number?
Mr. Allison. I think we are seeing that as unemployment has
been rising, the rate of foreclosures has risen to an extent.
Senator Johanns. I have an impression that as we have gone
through this subprime mess, that part of what we are dealing
with now, and I wouldn't know how to quantify it, I haven't
even read any statistics about it, but that we are now moving
into another phase of foreclosure-related problems related to
unemployment rising and people, if they don't have a paycheck,
even with unemployment, they are probably in a crisis very
quickly. Would that impression be accurate?
Mr. Allison. Well, we certainly are seeing that while early
on, excessive speculation accounted for a lot of the
foreclosures, now certainly unemployment is a major factor. And
that is why the Administration has also introduced and the
Congress has approved the Economic Recovery Program. That is
the $800 billion of expenditures between now and the end of
2010.
Senator Johanns. Here is what I would suggest to you. I
didn't vote for that because as a former mayor and a Governor,
I couldn't figure out how there was any possibility that that
would be a job creator. I just didn't see it. At least
initially, we aren't seeing it. Some have even gone so far as
to call it a flop. Whether it is or not, time will tell. But if
that doesn't work, if, in fact, the three to four million jobs
that were promised by the President don't occur, how much worse
does this get?
Mr. Allison. Well, I think all of us have to be intent on
doing the best we can to ameliorate the problem, and I think
that the Administration, with the support of the Congress, has
enacted very, very bold programs to deal with this extremely
serious crisis.
Mr. Allison. Let me come at this from another angle. I look
at these huge foreclosure numbers. I look at the really paltry
amount of impact that you are having at this point, and it is.
It is very, very small. And I understand the situation with the
new Administration. But here is my struggle. I see these
extravagant promises in just about everything that happens
here--and I am new to this, too, myself--and then I see this
terrible execution. You know, the stimulus money isn't getting
out. You are not getting on top of the foreclosure numbers. And
that has nothing to do with what you inherited. Execution is
what you do every day.
Tell me when you break through here. Tell me when you are
up and running and going and the next hearing--when can we
invite you back for a hearing where you say, boy, I know when
we were here in July, it was pretty ugly, but now we are
hitting on all cylinders and we are doing exactly what you want
us to do. Is that a week away? Is that a month away? Is that a
year away? When will you be able to assure us that the program
is firing?
Mr. Allison. Senator, my expectation is that sometime in
the fall, we will probably be at the near capacity on this
program in terms of scaling. We are working very hard to do
that. But we will not rest even then. There will still be more
we can probably do. We are constantly reevaluating the program,
even at this very early stage, to see how we can do it better.
We have got to be in touch with the American public, the
community groups, the banking system, with the Congress,
obviously. We have to be reporting to you, and beginning next
month----
Senator Johanns. So----
Mr. Allison.----you are going to see more complete
reporting on how well this program is working so we can all
assess its effectiveness together.
Senator Johanns. So if we say fall is October 15 and you
are at capacity at that point, what is capacity? What can I
write down on a sheet of paper here, and when you are invited
back I can remind you that you told me by fall, and I picked
the date October 15, that you are at capacity? Tell me what
that number is.
Mr. Allison. Well, what I mean is we have signed up now
servicers representing about 85 percent of the total mortgages
in the country. We can still reach more servicers to get at the
rest of that 15 percent and we are going to try hard to do
that. But with the 85 percent now covered, we want to make sure
that these servicers are scaling as rapidly as possible so they
can reach all of the eligible homeowners, and that is going to
take some time.
I want to point out again, this was intended to be a multi-
year program, as is the overall Economic Stimulus Program, and
it is going to take time to implement, unfortunately, all of
these programs.
Senator Johanns. Here is what I would tell you, though.
Those weren't the promises made. You know, the promises made
were very vastly different on the economic stimulus package
than what you are trying to sell me on today. And I am just
saying to you that if you can't tell me how many homes will be
impacted monthly by the time you are fully ramped up, I don't
know what you are heading toward and I don't know how $50
billion is therefore going to be effectively spent, and that is
my point.
I have started new administrations as a mayor and a
Governor. Sir, you always inherit something, and you know what?
You are going to leave something behind for the next people. It
is just the reality of life. But it is the execution that I
think is just desperately worrisome here. And if you can't
articulate what the goal is, how do you even rally the troops
back in your office to get to whatever?
I walk away from this hearing not better informed about
what that is going to be and I think that is a serious flaw in
what you are doing.
I am sorry I am out of time, but those are my thoughts. I
just think if you can't tell us what you are headed to, what
your goal is in terms of number of properties you are going to
deal with each month, we will be flailing around with this 2
years from now and it will be regarded as a failed program, a
costly failed program. Thank you.
Senator Menendez. Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman.
I wanted to, now that we have gotten around the horseshoe
here, share a really typical story that I get in my office or
when I am traveling the State and I think it is typical of what
people on this Committee hear about every day, and this comes
from David Croach of Aurora, Colorado, who is a former Air
Force Security Police Officer.
Last year, David was laid off. He found another job, but
was laid off again and has been looking for full-time
employment since March. From a part-time job, David makes about
$20,000 a year, down from his former salary of $61,000 per
year. In a letter to my office, he wrote:
I have a 14-year-old son and am doing the best to make ends
meet. Unfortunately, ends aren't meeting anymore. I have
exhausted my savings, had to disburse my 401(k) to pay bills
and attempt to save my house.
After calling the Colorado Foreclosure Prevention Hotline,
David was referred to a HUD-certified counselor who recommended
that he apply for a loan modification. Unfortunately, David was
told by his mortgage lender that he made too much money to
qualify for a loan modification. Instead, the bank offered to
take his overdue balance and put the balance back into the
loan, which would have increased his payments. The bank
wouldn't consider any other options.
In discussing his situation with my staff, he noted that
every time he turned around, the answer from his lender was no.
He filed for bankruptcy on May 28 and foreclosure remains a
serious threat.
We hear about these stories on a daily basis, and I
appreciate your efforts, by the way. Thank you for your
service. I am wondering, as this gets ramped up, as people need
to hear the information that you are providing, the trips to
Florida and to the Northwest you talked about, whether there is
some way we can work with lenders to forestall some of these
foreclosures as the program gets ramped up, to be able to,
where possible, have some sort of moratorium that says we are
not going to foreclose paying loans during this period of time.
And I realize there are all kinds of unintended
consequences of what I am talking about, but the shame here
would be if the inability to be able to get the money out, the
inability to be able to have people understand the procedures
and processes leaves us in a situation where foreclosures that
could have been avoided aren't. And as you were saying earlier,
the effect of a foreclosure or a fire sale on an entire
neighborhood, on the home equity value of tens and hundreds and
thousands of other homeowners in the country are affected,
potentially by foreclosures that never should have happened to
begin with.
And I wonder if you have any thoughts on that as a
potential strategy that we could employ to make sure that we
are beginning to get ahead of this massive problem rather than
continuing to trail behind.
Mr. Apgar. Well, thank you for that question. We just heard
that one of the central issues is execution, and we hear
hundreds of stories of the type you told us brought to you by
your staff and by our community connections around the country
and from our own personal visits in communities. In my sense, a
lot of people are feeling and saying things that are true.
When I hear that story, I think that whoever was on the
other end of the phone from that individual was not executing
the program as directed by our guidelines. That person sounds
to me--without more details, I couldn't be sure--that they
should be eligible. Certainly, they don't need more income to
qualify--they don't have incomes that are too high to qualify.
And so what is the question?
That is the central focus of this effort, to bring the
major--inform the major leaders, the CEOs of these companies to
sort of say, tell us how that story could be happening in your
company. What was the disconnect? Was it a lack of training?
Was it a lack of resources on their part? Was it our problem,
that the rules are too complex to implement? What is going on
here? Because our sense is that many of these stories, in fact,
reflect situations that could and should be corrected, that
every time we miss one of those, somebody then goes into
foreclosure and adds to the problem.
And so it is execution, execution, execution, and that is
the major focus of the next set of initiatives that Secretary
Allison indicated. Let us figure out how to get the program
working as it was designed.
Mr. Allison. Senator Bennet, if I may add to Mr. Apgar's
answer----
Senator Bennet. Please.
Mr. Allison.----under the rules of the program, a servicer
in the program should not foreclose unless the servicer has
first checked on whether the person is eligible. We are also
going to be auditing this program, and that is Freddie Mac's
role, to make sure that people who were eligible were offered a
modification. And so we are aware of the problem and we hear
these same complaints.
That is one reason why we are calling in the servicers at
the end of this month, to discuss this with them. We want to
see better adherence to the program. We want to see the
metrics. And we have--we are developing metrics for that very
reason. We have got to surveil this program to make sure that
the intention is being implemented by every servicer.
Senator Bennet. I just would underscore what you have heard
today, which is that the visibility and the urgency with which
the issues in New York and Wall Street were addressed needs to
not come in first in this race of urgency, because our
homeowners are suffering tremendously, and whatever you can do
to put in big block letters in the front offices of the
providers that you are talking about, something that says,
check twice and make sure you are doing whatever you can do to
keep people in their homes, because it is in everybody's--it
works to the benefit of everybody.
This is one of those cases where no one wins if a
foreclosure that could have been avoided isn't avoided. No one
wins. The banks don't win. The other homeowners in the
neighborhood don't win. The community doesn't win. And it just
would be a shame if we are not doing everything we can possibly
do to expedite this or to make sure that bad decisions are
forestalled so that you have the opportunity to do the work you
are trying to do.
I, for one, and I am sure the rest of the Committee feels
this way, would love to hear after your meeting next week or
next month what the targets are and what the agreed upon steps
are going forward so that we have some assurance that things
are moving forward and that we have done everything that we can
do. I would like to join the Chairman in saying, if there are
things that we haven't done, let us know what those things are
because this housing issue is a fundamental issue for our
families and also our economic recovery depends on our getting
this right.
I appreciate your testimony. Thanks for being here. Thank
you, Mr. Chairman.
Senator Menendez. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I guess as you
will conclude, that as the next-to-last, I have got to at least
make a couple of quick comments about some of the comments made
by my colleagues.
One, I would echo Senator Corker's comments about I hope
this Committee will have a chance to examine some of our past
policies where we encouraged folks to get into homes with no
documentation, no money down, no equity involved, no skin in
the game, and clearly one of the things that generated this
crisis.
I do have to comment on Senator Johanns' comments about the
stimulus. It was not perfect and I share concerns about some of
the dollars getting out. But I have got to tell you, for a bill
that has got north of $200 billion of tax breaks in it that is
helping at least folks in my State and businesses, small
businesses on 5-year look-backs, we have had testimony here of
the one little brief upstart we had in housing purchases
oftentimes generated by funds in terms of that $8,000 new
purchasing tax credit, and I was a former Governor and I can
assure you, at least in the Commonwealth of Virginia, and I
would strongly believe that in every State around the country,
there are thousands of teachers that have not been laid off
because of Federal funds that are going into States to help
ameliorate the budget crisis, thousands of construction workers
working on roads right now that otherwise would not have been
worked on, and literally millions of Americans, those who
receive Medicaid payments still getting the health care they
need because of that Federal assistance to States in crises
where they still do have to balance their budgets, and I think
that for many of those States, they have got the worst days to
come in front of them.
I want to follow up on Senator Bennet's comments, as well.
I candidly believe that we have a potential flood of
foreclosures waiting in the wings. At least in my State, many
banks have kind of slowed the process on foreclosure, waiting
to see the effects of these programs that are being rolled out,
and I have the same sense of urgency of colleagues on both
sides of the aisle that we appreciate the challenge you have
got, but we have got to get this out sooner, quicker, faster,
more expeditiously.
We have the same kind of stories that Senator Bennet
indicated and you are hearing, as well, that consumers are
feeling like there is opaqueness in the program. A neighbor
gets accepted. They get turned down. There seems to be no
remedy.
The question I have--my first question, and I will try to
get both of them in--the first question is, we put in place a
number of incentives and sweeteners to servicers to participate
in the program. I hope as you bring these servicers in and you
will look at which servicers are actually acting in good faith
and which are not, we have used the carrots. Do we need some
sticks? And what kind of actions are we going to be taking if
we can find evidence of a pattern of those servicers who are
not acting in good faith in terms of enacting this program.
Have you thought about the sticks end?
Mr. Allison. Senator, we first of all are going to be
publishing on a servicer-by-servicer basis their performance,
beginning next month. And since we made that known, we have
seen the additional activity on the part of a number of
servicers, which is welcome.
Let me point out that we do have ambitious goals for this
program. We want to achieve loan modifications numbering
between three and four million over the next several years. We
know we still have a long way to go, but this program is just
getting started.
We need to have the servicers working very hard with us. We
are going to be meeting with them continuously. They are also
not going to receive those payments unless they are performing.
So they have a strong incentive to get out and try to modify as
many eligible loans as possible.
So I think a combination of public disclosure, having them
come testify before your Committee, another powerful incentive
to perform. We want to be working closely with you, getting
more ideas about how we can do better. And we want to be out
talking to the public, as well, to see how well the----
Senator Warner. Well, I would only add that I think
disclosure is important. Public embarrassment might be another
step up.
Mr. Allison. That is right.
Senator Warner. But when people's lives are at stake, I
hope you will think, as you thought creatively in creation of
this program in terms of the carrots, that you think equally
creatively in terms of potential sticks or penalties.
And that would be my last question. It seems we are seeing
some evidence that those servicers who still retain the loan,
the whole loans, are acting in better faith--they obviously
have more of a financial interest in some level of resolution--
and that those baskets of investor-backed loans where the
servicer has no skin in the game, that there is still a much
greater pattern of dumping of those properties and not as great
of participation in terms of the modification program. Are you
seeing that pattern, as well?
Mr. Allison. I cannot tell you for certain that that is the
case. I think that with the greater disclosure we are going to
be making, that will become very abundantly clear over the next
several months, whether that is the case or not. But I can't
give you a specific answer to your question, Senator. We will
be glad to look at that and come back to your office.
Senator Warner. And again, I cannot urge you enough that
whether there are additional incentives or potential penalties
or sticks out there, you have got to come forward. I just am
concerned with these kinds of stories that we are all hearing,
and Lord knows you are hearing them directly, as well. The
immediate hardship this provides upon a family or upon an
overall neighborhood, maybe public embarrassment is not enough
for some of the folks who are not acting in good faith in this
program.
Mr. Allison. Thanks for your suggestion, Senator.
Senator Warner. Thank you, Mr. Chairman.
Senator Menendez. Thank you, Senator.
The Chair would be next, but I want to----
Senator Schumer. No, please.
Senator Menendez. I want to recognize----
Senator Schumer. I need a few minutes to get--I would
prefer a few minutes.
Senator Menendez. OK, great. All right.
Let me thank you for your testimony today. Look, I want to
start off putting something in context here. I appreciate
Senator Johanns' comments, but in March of 2007, we had a
hearing here and there was a previous Administration, and at
that hearing I said we are going to have a tsunami of
foreclosures and the Administration looked at me and said,
well, Senator, that is an exaggeration. Unfortunately, I wish
they had been right and I had been wrong.
If, in fact, we started working in March of 2007 to
mitigate the tsunami of foreclosures that we had not fully seen
the crest of, we would be in a much better position today. I
think that is important to understand the total spectrum of
what we are facing today. This Administration has had
approximately 6 months since it took office, so, you know, I
just want to put that in context.
Having said that, however, let me say that as the Chair of
the Subcommittee on Housing, I share Chairman Dodd's concerns
that he expressed in my opening statement and I am not happy. I
am not happy with where we are at. I think there is a lot more
to be done.
So let me start off by asking some questions here. What
number of modifications do you--per month will you consider a
success?
Mr. Allison. Senator, we certainly aren't satisfied with
the level that we have today. I think that the number will vary
over time, but I think we need to be on a pace to achieve three
to four million modifications by the end of 2012, and that is a
major undertaking. No program has ever come close to that. And
that will have a major impact on many families across the
country and also help to preserve homeowners.
Senator Menendez. If you did three to four million by 2012,
that means roughly a little over a million a year, is that fair
to say?
Mr. Allison. Yes, sir.
Senator Menendez. So if it is a million a year and you
divide it by 12, you are talking about what a month, 100,000,
roughly?
Mr. Allison. Yes. It would be around 20,000 a week, and I
can tell you that in the past few weeks, we have actually
exceeded that number. But we are not satisfied even with that.
We would like to achieve the home modifications as rapidly as
possible.
Senator Menendez. Well, we are looking at 2.4 million
foreclosures just this year alone, and this is the problem. You
know, time is not on our side. More importantly, it is not on
the side for families of this country and the consequences in
the economy. So this has to move much more significantly.
If we are not at that level in this period of time that we
are talking about ramping up, what is your Plan B?
Mr. Allison. Well, we believe, first of all, that this
program, because it has just gotten started, has not nearly
reached its potential. We are encouraged by the rate of
improvement week to week that we have been able to achieve over
the last 10 weeks and we expect further improvement down the
road. We are not just satisfied with doing the three or four
million over 3 years. We would like to achieve that faster. And
we need to, week by week, get a better sense of how the
servicers are doing against the number of loans that each one
of them has outstanding, and we are going to be comparing the
rates at which they manage to contact as many of those eligible
homeowners as possible.
Senator Menendez. But let me ask you, I am not happy of
where we are at with the servicers. I sent a letter to them in
anticipation of this hearing. Let me ask you this. You know,
one of the reasons I am asking you what is your rate of success
is because we can't determine whether the servicers are doing
the right thing unless we know what the rate of success is. I
mean, we need a little transparency and we need some
information here in order to establish what are the right
benchmarks. I am all for having those who are not performing be
publicly known, but that--I want to echo Senator Warner's
remarks. That is not enough. There have to be consequences
here. We have created incentives. There have to also be
consequences here at the end of the day.
And so I want to know what you are going to do with
servicers if, in fact, they have signed a contract, we have
created incentives, and they are not living up to it.
Let me ask you this. When are those--will those with VA,
FHA, and home equity loans be eligible for the program?
Mr. Apgar. On the FHA front, yes. With the new authority in
the recently enacted legislation, we are going to do an FHA
modification program that is closely aligned with the overall
Administration's plan. That program is ready to roll out and
should be available very shortly. It will provide deep, true
modifications of the type that FHA has not been able to do in
the past and that will not only help those borrowers in
distress, but also, because FHA already owns the mortgage risk,
will probably turn a small profit back to----
Senator Menendez. What is the timeframe for that?
Mr. Apgar. The next couple weeks.
Senator Menendez. The next couple of weeks. What about the
VA and home equity loans?
Mr. Apgar. The VA, I believe, is on the same pace. I am not
sure about the question on the home equity loans. That is the
second lien program, which also is close to rolling out in the
next couple of weeks.
Senator Menendez. Let me ask you, to what extent does the
current foreclosure program depend on the borrowers being
delinquent? You know, back at home in New Jersey, we have an
enormous number of homeowners who tell us that their lenders
tell them, perhaps incorrectly, that they first need to be
delinquent on their mortgages to be eligible for the Federal
programs. Having delinquency as a program requirement obviously
gives borrowers bad incentives to default on their loans. What
is the nature of that?
Mr. Allison. Senator, people do not have to be delinquent
to qualify----
Senator Menendez. But we hear this all the time----
Mr. Allison. Yes, sir----
Senator Menendez. All the time, we hear people who tell
us--and then they purposely--look, I have a woman who is here
who serves the Senators in the Capitol. She is not my
constituent per se, she doesn't live in New Jersey, but she
told me her story. She was told that she had to be delinquent
in order to qualify. Then she purposely becomes delinquent in
order to qualify, and now she is having a hell of a time trying
to get a modification. There is something fundamentally wrong
with this. I mean, I understood the law to be very clear that
you don't have to be delinquent.
Mr. Allison. Right.
Senator Menendez. How can any servicer or any lender say
you have to be delinquent? There should be a consequence for
that. It is false.
Mr. Allison. Senator, we totally agree with you, and that
is another reason why we are bringing the servicers in next
week to talk to them about this. We want to make sure the
information they are giving out is correct. Now, they have to
do additional training of their representatives. We have to
make sure that we are monitoring their actual performance and
auditing to make sure that people who are eligible in their
population of mortgage holders----
Senator Menendez. Secretary, let me just say, and I will
stop here.
Mr. Allison. Yes, sir.
Senator Menendez. Let me just say this. It is very simple.
All the training in the world--there is one simple statement to
anyone who works for you. You do not have to be delinquent in
order to be eligible for the program. That is it. Now, how much
training does that take? How much training does that take?
Mr. Allison. Senator, we very much agree with you, but----
Senator Menendez. This is why there have to be consequences
if, at the end of the day, people are not doing the right thing
under the law.
Mr. Allison. Yes.
Senator Menendez. Senator Schumer.
Senator Schumer. Thank you, Senator Menendez, and thank you
for chairing the hearing. I thank Senator Shelby. It is an
important hearing, although a good part of me can't believe
that two full years after the first signs of this crisis were
becoming plain for all to see, we are still sitting here
talking about how to prevent foreclosures.
More to the point, 5 months after the Administration
announced the Making Home Affordable Program, which was
supposed to help between seven and nine million homeowners
modify their mortgages, we are hearing only a few hundred
thousand modifications have been offered and only a fraction of
those loans have actually been modified.
You know, when it was explained to me, I thought it was
great, you know, focusing on the servicers, giving them
incentives. Obviously, it would have been better to have the
stick of bankruptcy involved, but that is not in the cards. And
it is sort of befuddling as to why it is not working, but it
clearly isn't working the way it should be and so you need to
change things.
Now, I have one proposal that might help here. I hear that
one of the things that you are thinking about--one of the
things that I am thinking about, anyway, I don't know if you
are thinking about it--but one of the things I am thinking
about is giving homeowners facing foreclosure the option as a
last resort of renting their home for a period of time at a
fair market rate. This wouldn't cost taxpayers any money,
wouldn't bail out the lenders.
Homeowners would be able to stay in their home even after
defaulting on the mortgage, but they no longer own the home so
there is little temptation to take advantage of this program
unless all efforts at reworking the mortgage have failed.
For banks, in many cases, it would be better and cheaper
than foreclosure, particularly given how depressed our housing
markets are now, and maybe in a year or two they would be
better.
Neighborhoods can ill afford more foreclosures. I have seen
this throughout my State, downstate and upstate alike. It puts
more pressure on vacant properties. The more foreclosures you
have, the harder it is for housing markets to recover, which is
an overall goal of this economy. And, of course, it helps
preserve neighborhoods, because someone living in a home is a
lot better than a vacant foreclosed home, and these foreclosed
homes don't get sold too quickly given the housing market.
So would Treasury consider this kind of program? If so, can
you describe how it would work, what you think the pros and
cons are, and what is the likelihood it could happen?
Mr. Allison. Senator, we are going to be looking at that
thought. That is a very thoughtful suggestion. I think we have
to look at this, too, on a case by case basis. There are
various programs we are rolling out right now for those who
cannot afford to stay in their homes and those will include
deeds-in-lieu as well as short sales of the property so they
can extinguish the mortgage and we provide an allowance for
them to seek housing that they can afford.
The question you are raising is whether they ought to be
able to stay in that house and rent----
Senator Schumer. Yes. It would make sense.
Mr. Allison. Yes, and it is certainly an idea that we are
thinking about and perhaps Mr. Apgar can talk about that from
the standpoint of HUD, as well.
Senator Schumer. Go ahead, Mr. Apgar.
Mr. Apgar. Yes. HUD is looking at a range of options. I
mean, what we have is a lot of households that are losing their
home and a lot of homes that have been lost, and figuring how
to put those back together either by not letting the household
depart the home through some continuing rental option, or if
they do leave the home, get another renter or another reuse of
that property. And so we are exploring a wide range of options,
both through the Neighborhood Stabilization Program----
Senator Schumer. So what would stand in the way of getting
this done? I know you can always rent a home once it is
foreclosed on. Banks do that----
Mr. Apgar. Right.
Senator Schumer.----if they can't sell it. But that, again,
is going to involve finding a new tenant, vacancy, and all
that. It is a lot easier to let the tenant stay in their home
and then the value, a year or two later, maybe the market comes
back up and you don't even need to foreclose on it.
Mr. Apgar. Well, we are investigating and looking at other
programs that have been like that around the country. Freddie
Mac had an option like that.
Senator Schumer. Well, give me off the top of your head----
Mr. Apgar. One of the obstacles was, quite surprisingly,
that the homeowner, having gone through the anguish of
delinquency, foreclosure, and what, many of them said they
didn't want to stay on as renters, which was surprising to us.
So the question is, what is blocking that program----
Senator Schumer. Yes, but what about----
Mr. Apgar.----from working where it has been tried? We will
figure that out and we will see if we can make it work.
Senator Schumer. OK, but let us say--give me an objection,
either Mr. Allison or Mr. Apgar, to a homeowner who said, I do
want to stay in my home. I have lived here. I have all my stuff
here. I don't know where I would move. I have my patterns. My
kids go to school here. Whatever.
Mr. Apgar. If you could figure out a fair rent, it seems
like it would be a fair deal.
Senator Schumer. OK. It doesn't seem to me to be too hard
to figure out a fair rent. And I will bet, I don't know, that
in many, many cases, the fair rent is less expensive to the
bank--obviously, they are not going to get as much money as the
mortgage was or we wouldn't be in that boat to begin with--than
foreclosing.
Mr. Allison. Well, we are----
Senator Schumer. And then I have found in lots of
foreclosed homes, the home gets in bad shape pretty quickly.
Mr. Allison. Yes. Again, we agree that you have a very
thoughtful suggestion. I think we owe you a response----
Senator Schumer. Good.
Mr. Allison.----as we complete our analysis.
Senator Schumer. That would be great.
Mr. Allison. Thank you.
Senator Schumer. OK. Next question. I don't know what my
time is here, since I am still on your time, Mr. Chairman, but
I will take advantage.
[Laughter.]
Senator Menendez. I am surprised.
Senator Schumer. Very funny, Bob.
[Laughter.]
Senator Schumer. The banks and servicers--ever since I
persuaded him to take the DSCC, he has been less friendly to
me. No, that is a joke.
The banks and servicers complain that the Administration
rolled out its plan too quickly without consulting them. They
haven't had time to put the necessary resources in place to
handle the volume of modification requests they are facing. But
at least one bank, J.P. Morgan, has, according to our
information, performed much better than the others, completing
approximately half of all loan modifications completed so far.
If it is just a matter of getting people and technology in
place and preparing paperwork, why is one bank able to do a lot
more than the others? Have you looked at seeing what their
success is compared to the not very great success of a lot of
the other major servicers?
Mr. Allison. Senator, we have looked at their success and
they should be commended for their rapid action and we are
pressing others to act more rapidly----
Senator Schumer. But what are they doing differently? That
is my question. I am not asking to give them a gold star. I am
rather trying to learn from their success and how we apply it
to other institutions that are not getting as many
modifications done.
Mr. Allison. Yes, sir. Well, not speaking for J.P. Morgan,
they can tell you directly, but I believe that they----
Senator Schumer. Well, they don't know what is happening in
the other banks. They know what is happening in theirs.
Mr. Allison. They must have concluded that this crisis was
going to be here for some time and it made much more sense to
address it forthrightly and rapidly than allow it to continue
to build.
Senator Schumer. And you say the other banks, the other
servicers, most of whom are major banks--as I understand it,
two-thirds of the servicers of mortgages are major TARP
recipients or something to that effect. I may have the number
off, but a large percentage. Are the other banks sort of
ignoring reality here?
Mr. Allison. I think it is fair to say that some banks were
slower to recognize the enormity of this problem and its
potential longevity than others. And I think more and more, as
Mr. Apgar testified earlier, have concluded that they must take
action and we have created incentives for them to do so. And I
think, again, publicizing their activities is going to have a
major impact on the willingness of these companies to act
rapidly.
Senator Schumer. Finally--go ahead, Mr. Apgar.
Mr. Apgar. Secretary Donovan invited the senior leadership
of the J.P. Morgan Chase company in to explore what they were
doing right in order to learn from that, and essentially they
have a system of home ownership centers, calls, outreach, a
more integrated system that clearly has ramped up----
Senator Schumer. Well, are they willing and are you willing
to share that with the other banks so that----
Mr. Apgar. That will be part of the dialog at the end of
the month, as we not only talk about what are the obstacles but
what have been best practices other----
Senator Schumer. Do you think many of the other banks would
be willing to accept that kind of methodology?
Mr. Apgar. We certainly hope so, because we believe that
everyone shares the commitment to get this crisis under
control.
Senator Menendez. We have a second panel, so if you could
wrap up----
Senator Schumer. OK. Could I do one final question?
Senator Menendez. Fine.
Senator Schumer. Thank you. I apologize.
I have been concerned for some time with the effect of
predatory equity in the residential real estate market. That is
when investors buy residential properties, often in affordable
communities. They pay very high prices--that is happening less
now, but still happening--with the help of massive amounts of
leverage. And so in order to make a profit, they stop doing
maintenance and upkeep. They make every effort to kick out low-
income tenants so they can renovate the apartments and raise
rents. I find this a despicable practice and I have gone after
the people who do it. But the people who enable them, who lend
them the money, should equally be blamed, and I know that
Secretary Donovan cares about this, because when he was HUD
Commissioner, we worked on it together.
Is Treasury or HUD currently working on programs that would
address the problem that I have labeled predatory equity?
Mr. Apgar. Yes, we have been working on this issue. I just
would point out, of course, that not only is this an issue in
New York, but nationwide, we are seeing over-leveraged
buildings or buildings where, just like single-family homes,
there is more--the value of the property is less than the value
of the outstanding mortgages. What is troubling about this is
many of these mortgages are on the balance sheets of some of
the smaller community banks that we were talking about earlier
and makes them specifically at risk, and so we are working on
options to try to address this crisis, both talking with our
colleagues in Treasury as well as throughout the
Administration.
Senator Schumer. Yes, and I will conclude now, but I think
you need to talk to some of the bank examiners. The standards
by which these loans were allowed to go forward were lax and
unrealistic in terms of what kind of rents could pay back that
kind of price that they paid for these buildings.
Mr. Apgar. Mm-hmm.
Senator Schumer. Thanks.
Senator Menendez. Thank you, Senator Schumer.
Thank you both for your testimony. I look forward to
hearing back from you on some of the issues that the Committee
has raised.
With that, let me call up our second panel, invite them to
come up to the table. As they come up, let me, to advance the
time, introduce them.
Let me welcome our second panel. Let me start off by
welcoming Thomas Perretta. He is from Chairman Dodd's State of
Connecticut. And if we could ask people to please, if you are
finished with listening to the hearing, leave the room quietly.
Thank you. Please, have a seat.
Mr. Perretta is from Chairman Dodd's State of Connecticut.
He has worked for the Connecticut Board of Education for 11
years and he is going to share with us his story of how he
tried to modify his mortgage. Mr. Perretta, I just want to say
what you are doing here today, coming before the Committee to
discuss a very personal life story is not only meaningful but
courageous. I know I speak for all of our colleagues in saying
that we are very grateful for your willingness to come and
share your personal story.
Let me welcome Joan Carty. She is the President and CEO of
the Housing Development Fund in Bridgeport, Connecticut. Ms.
Carty is a longtime community leader, having served as Director
of the Bridgeport Neighborhood Fund and Stamford's Neighborhood
Preservation Program. We are grateful to her for her hard work
and years of experience that she brings before the Committee
today.
Next, I would like to welcome Paul Willen, who is the
Senior Economist and Policy Advisor at the Federal Reserve of
Boston. Mr. Willen is well published in the areas of financial
management and mortgage markets. He recently finished some very
interesting publications on the current foreclosure crisis.
Next, I would like to welcome Mary Coffin, who is the head
of Mortgage Servicing and Post-Closing at Wells Fargo Home
Mortgage. In her capacity, she oversees an operation that
reaches 7.9 million customers. She is a member of the Wells
Fargo Executive Management Committee, where she helps to craft
the company's overall strategic direction, and she has worked
in the mortgage industry for more than 25 years. It doesn't
appear so, but it looks like it according to the statement. It
says 25 years.
Let me welcome Mr. Curtis Glovier, Managing Director at
Fortress Investment Group,. Mr. Glovier is a partner in
Fortress's hybrid funds area, managing both government
relations and private equity efforts. He brings with him many
valuable years of experience working in the financial markets.
Let me also welcome Allen Jones, who is the Default
Management Executive at Bank of America. Mr. Jones manages Bank
of America's strategy and interaction for default management
and loss mitigation with public policy groups and with
Congress. Before working with Bank of America, he worked with
HUD and with KPMG.
And last, let me welcome Diane Thompson, who serves as
Counsel at the National Consumer Law Center. Prior to her
current position, she served in the Land of Lincoln Assistance
Foundation as a home ownership specialist and a supervising
attorney. She belongs to many important boards, including the
National Community Reinvestment Coalition's Board and the
Consumer Advisor Council of the Federal Reserve.
Welcome, all. We are going to have your full statements
included in the record. Because this is a large panel and we
want to get all of your testimony in before any votes, we are
going to ask you to stick to the 5-minute timeframe that I
think the Committee advised you that you would have so we can
get everybody's testimony, hopefully some questions in, and go
from there.
With that, Mr. Perretta.
STATEMENT OF THOMAS PERRETTA, CONSUMER,
STATE OF CONNECTICUT
Mr. Perretta. Good morning, Mr. Chairman and Ranking Member
Shelby and everyone.
My mortgage problems became evident when my wife, Susan,
passed away June 1, 2008. We worked hard doing the best we
could for our son, living within our means. We had vacations.
We enjoyed ourselves. We stayed--I am going off the top of my
head with this.
We stayed at my in-laws for a year and a half, saving money
for the downpayment for the townhouse. Tommy did well in high
school. She was creative in getting him through college. He
graduated from Quinnipiac last year and he was going to do
physical therapy. He wanted to take a year off to be with Mom.
Mom didn't make it.
We worked all our lives. I am lucky. I have been working
with the Stamford Board of Education for 11 years. I am in my
twelfth year right now. I am very fortunate for that.
After going through, getting Tommy through college, all the
bills--she had taken care of the bills for the last 24 years--
Tommy, you have got to take the $2,000. Here is a check. Go pay
the mortgage. We have got to do this. She was in a nursing home
at Longridge, still writing out the checks. She was still
paying the bills.
When she passed away, I had to borrow money. I had no money
to bury her. I borrowed--I just go done paying $16,000 from
last year to bury her. A lot of friends, my in-laws, the
funeral director was very understanding. I am on a--we had a
large electric bill. I am on a yearly electric plan with CL&P.
I have negotiated payments with my common charges. I took the
cable box out for TV. I am on cell phone only. We don't have a
regular phone. We have a computer on AT&T for my son. I am
taking the car back. I can't afford the car payment.
I started realizing the problems after the holidays this
past year, that I was going to have to--I contacted Chase. I
wanted to know what to do. I talked to a lady--they were always
in touch with me--with the statement that we owed--my mortgage
was $2,031. It went up a little bit with the taxes and
everything. I kept getting a bill. My late charges had piled
up. I tried to keep up. At one point, I paid the first payment
I was late and then another $2,000 in 2 weeks. Income tax time
came. I had money. I got some money back. I straightened out a
little bit. I wanted to know if I could do something. I have to
get this payment down. I can't afford it.
I had gone over a formula two different times on the
telephone with two separate people from Chase, 10 minutes. I
had my little briefcase. I have everything I owe right next to
me. I can do it on the telephone just like that. And their
reply was, I don't qualify. I don't make enough to qualify. The
common sense--it didn't make sense to me. If I could make
enough, I wouldn't be in this jam I am in.
Finally, Air Post Housing Development Fund. I was falling
behind. They got the paperwork in to Chase on May 4. I didn't
receive a reply. I lost my--God bless my wife.
Now that my son has graduated college, he is going to start
chipping in. He is on a business trip right now. He is going to
come in. He is going to help me by paying off the big electric
bill, which is $500 a month on top of what I regularly pay. We
are halfway done with that. That was, like--she was 98 pounds.
I had the heat on for the last two winters all the time. He is
going to straighten out with me with the common charges. I am
going to use his car a couple times when he takes the train to
work. I can walk to work. I am close enough for that. And if I
have to go somewhere, I get my father-in-law's truck on the
weekend if I have to cut a lawn or something like that.
All I was looking for was to get the mortgage payment down.
I would have figured--another common sense--and I am sorry for
going off like this--another common sense thing should have
kicked in. I didn't want the sympathy for the fact that I lost
my wife. I was looking for the understanding that we had gotten
our mortgage with two incomes, mine and hers. Now once I
notified them that I am missing her income, that we have to do
something--I am behind five, 6 months with my mortgage and I
sent paperwork in to them and everything. If not for Housing
Development Fund, I don't know where I--I didn't know where
else to go.
And that is it. I am beside myself right now. I am just
waiting for a response from them. I don't have the other
income. I don't understand.
Thank you very much for your time. I am sorry.
Senator Menendez. No, thank you very much for sharing your
story, and I am sorry for your wife's loss.
Mr. Perretta. Thank you.
Senator Menendez. Ms. Carty.
STATEMENT OF JOAN CARTY, PRESIDENT AND CEO, THE HOUSING
DEVELOPMENT FUND, BRIDGEPORT, CONNECTICUT
Ms. Carty. Good morning, Mr. Chairman. Thank you for
inviting me to testify today. My name is Joan Carty. I am the
President and CEO of the Housing Development Fund in
Connecticut.
Last year, because of the widespread and increasing
problems with subprime lending, mortgage delinquencies, and
rising foreclosures, HDF started an additional counseling
program to assist families in our communities who are stressed
with these problems. In the course of developing our program,
we have reached out to many other partners: The Bar Association
for Pro Bono Attorneys, the courts to establish working
relationships with mediators, volunteers with financial and
social services backgrounds to help us with the ever increasing
volume of people who need guidance, and the banks, who in many
cases control the outcomes of the situations facing people in
foreclosure or mortgage delinquency.
We are a HUD-certified counseling agency. We have
personally experienced the kind of shadow boxing that occurs
when a homeowner in distress calls their lender or servicer for
help. Too often, their call is bounced to a call center across
the globe or the call is bounced from department to department
within the bank. On many occasions, after multiple periods of
time on hold, they finally reach a live person, but it is a
representative who is merely following a script. Often, the
lender or servicer representative has no record of prior
contact with the homeowner. It is a process that often feels
futile.
We have found that in too many cases, when we send clients'
modification requests to banks or servicers, including the
largest ones, that the modification package enters a black hole
for months on end. These homeowners are in distress. Even a 30-
day timeframe can radically affect their credit profile. Once
they slip behind on timely payments on their mortgage or any
consumer debt, their credit score goes down and their monthly
interest charges can go up. In many cases, cross-default
provisions mean that default on one obligation will trigger
higher monthly charges on all other debt, even if they are
current on it.
If we were to look for common themes as to why families are
in distress, we often find that death, divorce, illness, or
injury, in addition to predatory terms on many mortgages, have
pushed families to the edge of the cliff. Imagine the
multipliers and harm rendered when this limbo extends for
months.
I understand that the lenders and servicers need
modification requests that are well documented and that contain
a budget that has been carefully worked out so that the
homeowner will succeed over the long term. That is the kind of
service that we as a counseling agency provide to our clients.
What our clients in turn need from the lenders and servicers is
rapid response, responses before their lives continue to spiral
downward.
It is difficult to believe that the sophisticated automated
platforms that have been in use by lenders and servicers for
loan origination over the past decade cannot be retooled to
generate effective loan modifications with greater frequency
and within tighter timeframes.
I would also suggest that rapid response will help in other
ways. With delay comes added expenses, which often get added to
the mortgage balance. Extensive delays in the mediation process
often result in the lenders charging the homeowner multiple
times for late fees, attorneys' fees, and updated appraisals.
Denial of homeowners' requests lead to expensive
foreclosure processes which hurt the families involved and the
communities in which the homes are located. In many instances,
these foreclosures do not ameliorate losses or generate profits
for the banks, given the current declines in property values
throughout the country.
Additionally, it is critically important to create a system
that rapidly responds to requests from homeowners who are still
current on their mortgages but who know they will not be able
to sustain their payments going forward.
What we are building at our agency is a system that can
carry homeowners from that initial request for assistance
through assessment of their situation and development of a
modification request that will have viability over the long
term. What we need from the lenders and servicers is their
commitment to building a system that will react promptly and
predictably to these reasonable requests. Thank you.
Senator Menendez. Thank you.
Mr. Willen.
STATEMENT OF PAUL S. WILLEN, SENIOR ECONOMIST AND POLICY
ADVISOR, FEDERAL RESERVE BANK OF BOSTON
Mr. Willen. Senator Menendez, Chairman Dodd, Ranking Member
Shelby, and members of the Committee, thank you for your
invitation to testify. My name is Paul Willen and I am a Senior
Economist and Policy Advisor at the Federal Reserve Bank of
Boston, but I come to you today as a researcher and as a
concerned citizen and not a representative of the Boston Fed or
any other Reserve Bank or of the Board of Governors.
My recent research has focused largely on understanding how
we got here, why we had more foreclosures in one quarter in
2008 in Massachusetts than in the 6 years from 2000 to 2005
combined, and why millions of Americans have seen what is
supposed to be one of the most positive experiences of their
adult life, home ownership, turned into a nightmare.
Let me talk first about some misconceptions about how we
got here. These are important because most of the ineffective
policy efforts over the last 2 years failed because they were
based on incorrect theories of the crisis. One example is the
idea that large changes in payments associated with the resets
of adjustable rate mortgages caused the crisis. Every serious
researcher, including us, who has looked at loan-level data has
failed to find support for this. Most borrowers who default on
adjustable rate mortgages do so long before the first change in
their monthly payment.
Another example is the claim that many borrowers who got
subprime loans were steered into them and could have qualified
for prime loans. We found in a large sample of subprime loans
that only 10 percent met the combination of borrower credit
history, downpayment, monthly income, and documentation
necessary to qualify for a prime mortgage.
In our most recent paper, we focused on the question of
renegotiation of troubled mortgages. We followed borrowers in
the year after their first 60-day delinquency and found that
lenders gave payment reducing modifications to about 3 percent
of the borrowers. The leading explanation for this is that
securitization generates contractual complexity and fragmented
ownership, which makes it impossible for borrowers and lenders
to come together for mutual benefit. Our evidence refutes this
claim. Servicers are just as reluctant to modify loans when
they own them as when they service them on behalf of
securitization trusts.
The most plausible explanation for why lenders don't
renegotiate is that it simply isn't profitable. I am using
lenders loosely here to mean the bearers of the loss, the
investors or their appointed representatives, the servicers.
The reason is that lenders face two risks that can make
modification a losing proposition. The first, which has been
recognized as an issue by many observers and researchers, is
re-default risk, the possibility that the borrower who receives
a modification will default again and thus the modification
will have only served to postpone foreclosure and increase the
loss to the investor as house prices fall and the home itself
deteriorates.
The second risk, which has been largely ignored, is self-
cure risk, the possibility that the borrower would have repaid
the loan without any assistance from the lender. About a third
of the borrowers in our large sample are current on their
mortgages or prepay 1 year after they become 60 days
delinquent. An investor would view assistance given to such a
borrower as wasted money.
Some have suggested that our estimates overstate self-cure
risk, but we would argue the opposite. The borrowers most
likely to benefit from, for example, a 20 percent cut in
payments are borrowers without substantial income loss or deep
negative equity and are thus the ones most likely to cure
without assistance from the lender.
Let me say that my observations that servicers and
investors may find modification unprofitable has no bearing on
whether it is desirable for society at large and the economy.
The private net present value to investors and the social net
present value to society of a modified loan may well be very
different.
Let me conclude by talking about what we have always argued
is the central problem in the foreclosure crisis but that
policymakers have only recently recognized, borrower life
events like job loss, illness, and divorce. People argue that
life events could not explain the surge in defaults in 2007
because there was no underlying surge in unemployment or
illness that year. But that view reflects a misunderstanding of
the interaction of house prices, depreciation, and life events
in causing default.
Foreclosures rarely occur when borrowers have positive
equity for the simple reason that a borrower is almost always
better off selling if they have to leave the house anyway.
Thus, detrimental life events have no effect on foreclosures
when prices are rising. But when home prices fall, some
borrowers can no longer profitably sell and then the income-
disrupting life events take a toll. Thus, we did not need to
see a surge in life events to get a surge in foreclosures, but
rather a fall in house prices, which is exactly and
unfortunately what we saw.
Let me finally say that a key policy concern going forward
is that economic recovery alone will not eliminate the
foreclosure problem. Even in a healthy economy, 300,000 people
file new claims for unemployment insurance every week. Without
a substantial rise in home prices, many of these people will
face the combination of negative equity and job loss that leads
to foreclosure. The Massachusetts foreclosure crisis of the
early 1990's did not end when the economy recovered in 1993 but
when vigorous house price growth eliminated negative equity in
1998.
We hope that these findings add perhaps unexpected insights
into your work as policymakers, and thank you again for the
opportunity to appear before you today.
Senator Menendez. Thank you.
Ms. Coffin.
STATEMENT OF MARY COFFIN, HEAD OF MORTGAGE SERVICING, WELLS
FARGO
Ms. Coffin. Chairman Dodd, Ranking Member Shelby, Senator
Menendez, and members of the Committee, I am Mary Coffin,
Executive Vice President of Wells Fargo Home Mortgage
Servicing, and thank you for inviting me to speak today.
Throughout this historic public and private sector
collaboration, Wells Fargo has considered it our leadership
responsibility to champion solutions. We have played a key role
in creating streamlined, unified modification programs to help
customers in need. A prime example of our work with the
Administration is the new Homeowner Affordability and Stability
Plan, which we fully support. Early indications are that HARP
and HAMP are of great value and will benefit a significant
number of families. In fact, we believe the Administration's
goal to help as many as seven to nine million homeowners over
the next few years is well within reach.
In the first half of 2009, through lower rates, refinances,
and modification, Wells Fargo alone has helped close to one
million American homeowners. We refinanced three-quarters of a
million customers through HARP and standard programs. And since
our company represents approximately 20 percent of the market,
we could estimate that close to four million Americans
nationwide have already refinanced into lower mortgage
payments.
In these turbulent times, it is important to note that more
than 90 percent of the borrowers remain current on their
mortgage payments. To help those in need of assistance in the
first half of this year, we have provided more than 200,000
trial and completed modifications, an increase of over 100
percent from the same period 1 year ago. And notably, last
month, 83 percent of Wells Fargo's modifications resulted in a
payment reduction.
Acutely aware of the importance of speed, Wells Fargo
worked with the government aggressively to develop and deliver
HARP and HAMP. We did this in a way that was mindful of our
responsibility to American taxpayers to execute solutions for
those truly in need. Speed of execution was complicated by the
multiple versions of the program, each with unique contractual
requirements.
On March 4, the Administration first announced the
components of the Homeowner Affordability and Stability Plan.
On April 6, we received the final HAMP guidelines from Fannie
and Freddie and began implementing the program for these
customers. On April 13, we were the first to sign a HAMP
contract for loans we service for private investors, as well as
the loans in our own portfolio. Further details for this
program finalized by May 14, and we began offering it 9 days
later.
Since January, we have been providing loan workouts to
Wachovia Option ARM customers who are struggling with their
payments, and at the end of this month, we will add HAMP as yet
another potential solution for those borrowers. With this
addition, we will have fully executed HAMP for almost all of
our at-risk borrowers. Since we, Wells Fargo, service one-third
of the Nation's FHA loans, we are hopeful the government will
soon provide this program, as well as the second lien program
as it was initially described, since these borrowers are
currently ineligible for a HAMP.
As of June 30, Wells Fargo was in the process of finalizing
52,000 home affordable modifications. When working with all of
our seriously delinquent borrowers, 30 percent are not eligible
for HAMP because they have an FHA or a VA loan, and another 15
percent do not meet the basic program requirements. Of the
remaining 55 percent, whom we have all contacted, we are
actively working with half, and the other half have not yet
chosen to work with us.
For those borrowers who don't qualify for HAMP, we
immediately seek to find another modification or alternate
solution to avoid foreclosure. Before any home moves to
foreclosure sale, we conduct a final quality review to ensure
all options have been exhausted.
We understand this time has been frustrating for at-risk
customers and that they are anxious and in need of answers.
With the President's February 18 announcement that refinance
and modification programs would be forthcoming, we began to
experience a large increase in customer inquiries. Knowing this
would occur, we anticipated the influx and increased and
trained team members to handle it. Yet it has been challenging
to meet customer expectations as the various program details
were provided to us over a period of 90 days.
While we forecasted an increase in inquiries, including
from customers current on their mortgage payments, our forecast
turned out to be low. Historically, on a monthly basis, five to
10 percent of inquiries for loan work-outs come from borrowers
who are current. Since the announcement and the related
increased focus on imminent default, this statistic has risen
to nearly 40 percent. And, of course, not everyone who calls
qualifies for imminent default.
To manage this demand, we have implemented mandatory
overtime. We have streamlined document processing. We are
upgrading systems to handle escrow requirements for our home
equity lines and loans. And most importantly, we have increased
our trained staff by 54 percent over the first half of this
year to 11,500 default team members, all whom are U.S.-based.
In conclusion, we can certainly tell you we have been
working very hard to responsibly execute these programs, and
again, we fully support them.
I will be glad to answer any questions.
Senator Menendez. Thank you.
Mr. Glovier.
STATEMENT OF CURTIS GLOVIER, MANAGING DIRECTOR, FORTRESS
INVESTMENT GROUP, ON BEHALF OF THE MORTGAGE INVESTORS GROUP
COALITION
Mr. Glovier. Thank you for inviting me to testify today. My
name is Curtis Glovier and I am a Managing Director at Fortress
Investment Group. I am also a member of the Mortgage Investors
Coalition, organized to provide policymakers with the mortgage
investors' point of view. I am testifying today in my capacity
as a member of the coalition.
Allow me to start by commending the Committee for your
leadership in pursuing every possible action to help keep
Americans in their homes. We share your frustration with the
slow pace of efforts to help homeowners. I also want to thank
the Chairman for coauthoring with Chairman Frank a letter last
week highlighting the Hope for Homeowners Program, or H4H, and
to offer our support to facilitate American families'
participation in this program so that they may be able to keep
their homes and build equity. The discounted refinance program
offered by H4H provides the best long-term solution for the
homeowner and for the recovery of the U.S. housing market.
The Mortgage Investors Coalition currently has 11 member
firms with about $200 billion in total assets under management
and over $100 billion in mortgage-backed securities. Investors
in private label, that is non-Federal agency, mortgage-backed
securities include asset managers, charitable institutions,
hedge funds, insurance companies, municipalities, mutual funds,
pension funds, universities, and others.
Investors in securitizations and mortgages generally have
no interaction with the homeowners--that is the job of the
servicer--and also have extremely limited decisionmaking
authority with respect to modifications, foreclosures, and
other servicing actions. Very often, the original lender or its
affiliate acts as servicer once the loans are securitized. Loan
servicing is relatively concentrated. Fifty-five percent of all
mortgages are serviced by the four largest banks. It is also
important to note that there are $1.1 trillion of second liens,
like home equity loans, in the residential mortgage market, and
the vast majority of these are held on bank balance sheets as
opposed to in securitizations.
While the Federal Government's actions to bolster Fannie
Mae and Freddie Mac and broaden the FHA's mandate have proven
to be a critical stopgap measure during the housing and
economic crisis, a revival of the non-agency market and return
of private investors to the market is seen by many as the
prerequisite to the recovery of the U.S. housing market and a
return to normalcy in the capital markets.
Returning homeowners to a positive equity position provides
significant opportunity and motivation for at-risk homeowners
to remain in their homes and communities. A short refinancing
under H4H solves both the affordability and the negative equity
problems plaguing homeowners at risk of foreclosure today. The
program was created to reduce principal on the existing senior
lien mortgage and to eliminate the existing subordinate, second
lien, which can thereby prevent unnecessary foreclosures.
The Coalition believes that a properly implemented Hope for
Homeowners Program will not only provide stability for
homeowners, but will also stem the declines in the housing
markets and provide certainty for the fixed-income capital
markets, which will bolster financial markets in general and
promote increased lending and reinvestment in mortgages. We
believe the program will prevent additional foreclosure
inventory from adding to the overhang of bank-owned properties
in the residential real estate market, thereby helping to
establish a floor for housing prices. The best solution to our
Nation's mortgage crisis is to significantly forgive principal
on first and second lien mortgage debt in connection with the
refinancing of the over-extended homeowner into a new low
interest rate mortgage through the Hope for Homeowners Program.
Investors seek sustainable mortgage restructurings that
address the interests of all parties and the multiple factors
that have contributed to homeowner re-defaults. Compared to a
short refinance program, such as H4H, a modification approach,
such as the Making Home Affordable Program, has a notable
shortcoming: by not addressing negative equity, homeowners are
trapped in a mortgage that cannot be refinanced and a house
that cannot be sold. When the program ends in 5 years, the
interest rate on both the first and second mortgage will reset
higher. The outstanding balance of the combined mortgage debt
is likely to still exceed the value of the home, and there
could be a meaningful risk of a re-default. The low prices of
securities in the mortgage market today in part reflect the
great uncertainty of future cash-flows and values associated
with such modified loans.
While there are still operational hurdles to overcome in
implementing a more effective H4H Program, the major impediment
to the viability of the program is the volume of second
mortgages or second liens outstanding. As indicated earlier,
while a small percentage of second mortgages are sold to
investors, the vast majority remain on the balance sheets of
our Nation's largest banks. In fact, the four banks that
service approximately 55 percent of mortgages held roughly $441
billion of second liens on their balance sheets as of last
year.
Banks have favored loan modification programs, such as
Making Home Affordable, that not only defer the recognition of
losses on the second lien portfolios, but also better their
second lien position at the expense of the first lien investors
and to the detriment of the homeowner.
How can Hope for Homeowners become a reality? It is an
effort that will require participation and sacrifice by all
interested parties to succeed. The government, financial
institutions, and investors all share an important stake in the
recovery of the American homeowner and must contribute actively
to forge healthier housing and financial markets. Investors
stand ready to make the sacrifice necessary to re-equitize
homeowners at risk of foreclosure.
Thank you for the opportunity to testify today.
Senator Menendez. Mr. Jones.
STATEMENT OF ALLEN H. JONES, DEFAULT MANAGEMENT POLICY
EXECUTIVE, BANK OF AMERICA
Mr. Jones. Good afternoon, Senator Menendez. I am Allen
Jones, Bank of America's Default Management Policy Executive.
Bank of America strongly supports the Administration's
Making Home Affordable Program, and we stand ready to support
our borrowers with a sense of urgency. Since the start of
housing crisis, Bank of America has been at the forefront of
Government and industry efforts to develop loan modification
programs that work and help financially distressed customers
remain in their homes.
We know that more needs to be done. That said, we strongly
support Administration's focus on affordability and loan
modification and refinance processes in order to achieve long-
term sustainability for homeowners, and we are eager to
constructively participate in the upcoming meeting at Treasury.
Before getting into specifics, I want to highlight a couple
of items.
First, Bank of America exited subprime lending nearly 9
years ago. Upon acquiring Countrywide, we have taken the steps
to ensure our combined company is a leader in traditional
mortgage products. Our April launch of the Clarity Commitment,
a clear and simple one-page disclosure that accompanies every
new and refinanced loan, is one demonstration of our focus on
ensuring customers understand what loan they are getting and
the associated costs.
Second, Bank of America has been at the forefront to
develop loan modification programs as a way of avoiding
foreclosures and helping financially distressed customers
remain in their homes. We modified 230,000 mortgages in 2008,
and we report that year-to-date we have modified 150,000 loans.
In recent weeks, the Administration's Making Home
Affordable modification guidelines and supplemental guidelines
have been rolled out. With the MHA program, our systems have
been converted, and MHA has become the centerpiece of Bank of
America's overall home retention efforts. Already approximately
80,000 Bank of America customers are in the trial modification
period or are responding to efforts we have made under Making
Home Affordable. We have achieved this level of accomplishment
by devoting substantial resources to this effort. Our servicing
team has more than 7,400 associates dedicated to home
retention, double what it was a year ago.
Bank of America has also devoted significant resources to
community outreach. Since the beginning of this year, we have
participated in more than 120 outreach events in over 26
States.
Earlier this year, we announced our financial support and
commitment to the Alliance for Stabilizing Communities, which
is led by the National Urban League, the National Council of La
Raza, and the National Coalition for Asian Pacific American
Community Development.
We understand the importance of being there for our
customers when they call and are providing a timely response to
their inquiries. My teammates respond to an average of 80,000
customer calls a day and up to 1.8 million calls a month.
Our customers have multiple entry points into our home
retention team. Whether on an outbound call, inbound call,
outreach event, or by mail, once we have made contact with the
borrower, we diagnosed the financial challenge. We isolate
short-term issues such as inability to pay because of a medical
bill versus long-term challenges like a loss of job or
underemployment. Short-term issues may be solved through a
repayment plan. Longer-term financial challenges may be solved
through a loan modification.
In the event we cannot find a solution, we consider a short
sale or deed in lieu of foreclosure. In the event neither of
these offers work, we will work with the borrower to find a
graceful exit and provide relocation assistance.
Bank of America customers will not lose their homes to
foreclosure while their homes are being considered for
modification. The bank places foreclosure sales on hold while
it determines a customer's eligibility for its home retention
programs.
With MHA, we believe there are additional opportunities for
servicers to partner with the Administration and Congress to
refine the program to help reach our mutual beneficial goal of
helping as many borrowers as possible. We need to get this
right to preserve the flow of mortgage credit to support
sustainable homeownership, and at the same time protect
communities and neighborhoods from avoidable foreclosures.
We look forward to working with the Congress and the
Administration to accomplish these goals. Thank you.
Senator Menendez. Thank you.
Well, Ms. Thompson, you get the final word here, at least
at this point.
STATEMENT OF DIANE E. THOMPSON, OF COUNSEL, NATIONAL CONSUMER
LAW CENTER, ALSO ON BEHALF OF NATIONAL ASSOCIATION OF CONSUMER
ADVOCATES
Ms. Thompson. Thank you. Good afternoon, Senator Menendez.
Thank you for providing me with the opportunity to testify
today. My name is Diane Thompson. I am an attorney, current Of
Counsel with the National Consumer Law Center. In my work at
NCLC, I provide training and support to attorneys and housing
counselors representing homeowners from all across the country.
For nearly 13 years prior to joining NCLC, I represented low-
income homeowners at Land of Lincoln Legal Assistance
Foundation in East St. Louis, Illinois. I testify here today on
behalf of the National Consumer Law Center's low-income clients
and on behalf of the National Association of Consumer
Advocates.
My comments today will focus on the barriers homeowners
face in accessing sustainable modifications under the
Administration's Home Affordable Modification Program, or HAMP.
In preparing for this testimony, I reviewed my notes of
conversations with hundreds of housing counselors and attorneys
regarding HAMP since its rollout in early March. I also
solicited updates from advocates as to their current experience
with HAMP.
What happened next was astonishing. For the last several
days, I have had a steady stream of phone calls and e-mails
from advocates all over the country. Their frustration is
palpable. Over and over they ask me: How can I tell if the
servicer is telling me the truth? I know that this modification
is in violation of the HAMP guidelines, but when I raise that,
the servicer stopped returning my phone calls. And,
fundamentally, what can I do to help the borrowers I am working
with to get a loan modification? They can pay. They want to
keep the house. But the servicer says no.
The housing counselors and attorneys I work with are on the
front lines of our national foreclosure disaster. Many of them
had high hopes for HAMP. Few, if any, now look to HAMP for
assistance in their daily struggle.
My written statement details the most common problems with
HAMP. Implementation has been excruciatingly slow. Months after
HAMP's rollout, servicers are still telling advocates that they
do not have a process in place to review homeowners for HAMP
modifications or that they have put such reviews on hold for
one reason or another. In the meantime, servicers have
continued to proceed with foreclosures and foreclosure sales,
even for homeowners who are undergoing a current review and
have submitted all documentation.
Beyond delays in implementing the program, servicer
noncompliance has been widespread. Participating servicers
refuse to offer HAMP loan modifications, instead steering
homeowners into more expensive, less sustainable loan
modifications. Many servicers continue to require waivers of
all legal claims and defenses. Some servicers have instructed
homeowners to waive their rights to HAMP review in order to
obtain any loan modification. There are reports of several
servicers requiring downpayments usually in the range of
thousands of dollars before they will consider homeowners for
HAMP modification.
We know that the Administration has allotted $15 billion to
servicers for their participation in HAMP and will be
disbursing those funds soon. We are very concerned that
servicers may receive this money for non-HAMP-compliant loan
modifications. HAMP is premised on servicer incentives. These
incentives are unlikely to change servicer behavior without
consequences for noncompliance.
Homeowners and their advocates have no mechanism to
challenge a servicer's denial of a loan modification or even to
determine whether or not a servicer truly performed an accurate
evaluation of the homeowner's qualifications for such a
modification. The key driver of whether or not a homeowner gets
a loan modification--the net present value test--is not public.
Nor are servicers currently required to disclose to homeowners
what numbers they put into the model or what the result of the
test was.
The net present value test measures whether or not the
investor will profit more by modification or not. Many
advocates report that servicers appear to have entered
incorrect information into the net present value analysis or
failed to follow it at all.
HAMP must be modified to provide greater transparency and
accountability. The NPV test for qualifying homeowners must be
available to the public. Servicers must be required to report
to homeowners what numbers they used in the analysis and what
the results of that analysis were. Homeowners who are denied a
loan modification or who encounter difficulties in obtaining a
loan modification need access to an independent review process.
Ultimately, we believe that, in order to be effective, HAMP
may need to mandate principal reductions. With one out of five
homeowners underwater, significant readjustment in principal
balances are necessary for the economic stability of the
country. Additionally, servicers must be required to halt all
foreclosure proceedings upon commencement of a HAMP review and
should not be able to proceed with a foreclosure without a HAMP
review. Proceeding with the foreclosure during a review
increases costs of any ultimate modifications and creates a
real risk that a home will be sold in foreclosure before the
review is completed.
Staying foreclosures pending review will provide a powerful
incentive to servicers to expedite HAMP reviews. Homes that can
be saved should not be lost to foreclosure because a servicer
failed to complete a HAMP review.
If the data coming out in August and then this fall
supports our experience that changes to HAMP in design and
implementation cannot address the foreclosure crisis, mandated
loan modifications, bankruptcy reform, and servicing
legislation should be adopted by Congress.
Thank you.
Senator Menendez. Thank you, Ms. Thompson. Thank you all
for your testimony.
Let me start. I am disturbed at elements of your testimony,
Ms. Thompson, that some servicers in violation of HAMP's rules
are being asked to waive legal rights and others are being
steered into non-HAMP modifications, despite representations to
the contrary. Have you contacted Treasury about this? Have you
shared the experiences you have had? And if so, what type of
response have you gotten?
Ms. Thompson. We did talk with Treasury. We were at a
meeting with Treasury last week, actually, discussing the net
present value test and our belief that that test must
absolutely be made public, and we discussed briefly at that
point the issue of compliance, and we were told that we would
schedule a subsequent meeting at a later date to discuss in
more detail our concerns regarding compliance.
Senator Menendez. What was their response to you on the net
present value issue?
Ms. Thompson. Treasury indicated that they would be willing
to discuss providing--requiring servicers to provide some
information as to what the inputs into the net present value
test were and what the outputs were. They were reluctant to
provide the full net present value analysis or even to require
servicers to provide the entire list of inputs.
Senator Menendez. Ms. Coffin or Mr. Jones, any observations
about some of this in terms of violation of HAMP rules being
asked to waive legal rights, steering into non-HAMP
modifications?
Ms. Coffin. I will go first. We have actually trained and
worked with all of our staff and created for our organization
that HAMP is at the very top of the waterfall. Now, in my
testimony, you will see the timeline of execution, so some
customers that we have been working with before we had it fully
executed have been moved forward, even in some more aggressive
modifications than even the HAMP, particularly on our pick-a-
payment option ARM portfolio. But HAMP is at the very top of
our waterfall, and I guess my comment to some of the statements
made is that, you know, since the beginning of this, we have
understood as servicers there is full transparency here, we
would be fully audited, and we assume that all of our files and
information have to be completely documented as to why we
either chose or did not choose to do a modification. And in a
conversation earlier, we know that we will be held accountable
for that.
So our actions are being documented. Whether the NPV model
is disclosed or not, it is going to be known by Treasury and
the audits that are done as to why we did or didn't do the
modification and did we do it accurately.
Mr. Jones. Senator Menendez, Bank of America fully supports
the Making Home Affordable program, and as far as the
challenges that we are facing, I am not aware, do not have an
example to share with you, of any instance where we are not
looking to do the best for our customer.
And I would like to share that beginning last year, when we
did 230,000 loan modifications, in the event a borrower applied
for a modification that we could not do, we sent a decline
letter, and we explained exactly why we could not do that
modification.
Going forward, while it is not a requirement, I do not
believe, under Making Home Affordable, it is our intent to
provide a similar declination letter. As Mary mentioned, we
expect the process to be fully transparent, and I am happy to
work with you and the members and walk you through our process.
Senator Menendez. Let me ask, so neither of you are going
to find in your servicers, the people who work for you, telling
people that they have to be in default in order to be
considered, right?
Ms. Coffin. I would say from a historical perspective and
the number of team members that we have, I could never
blanketly tell you we have never told a customer that.
Senator Menendez. Have you made it very clear to your
employees that that is not the answer to someone?
Ms. Coffin. Very clear. And we also record all of our phone
calls, and if we hear that, we will go back and actually pull
the calls, research them, and retrain and/or handle the
employee appropriately in that circumstance.
Senator Menendez. Mr. Jones, what is experienced by Bank of
America?
Mr. Jones. Bank of America's experience is the exact same.
Senator Menendez. Well, I am going to share some cases with
both of you.
Let me ask you, Ms. Coffin and Mr. Jones, Mr. Glovier
argues that you are holding second mortgages on your books at
inflated values. As a result, your banks are refusing to accept
reasonable payments for second mortgages and blocking
homeowners from getting principal reduction through the Hope
for Homeowners. How do you respond to that?
Ms. Coffin. Go ahead. I will let you go first this time.
Mr. Jones. Sure, thanks for the question, Senator Menendez.
I was here earlier for panel one and listened very closely to
former Commissioner Apgar's comments and Secretary Allison's,
and where we are is we look forward to the Hope for Homeowners
guidelines when they come out. Today we do not have guidelines
that I can comment on. So I think the story was told, when
Senator Merkley offered, that only one H4H loan has been
created at this point.
In addition, we await final guidance on second liens. Once
we have those, we fully commit to supporting the Making Home
Affordable second lien program.
Ms. Coffin. I would second that Wells Fargo has been very
actively engaged with the Administration on the HAMP program
for our home equity loans. As a matter of fact, we are very
anxious for it to be--and I heard today within 2 weeks--so that
we can implement that.
Knowing what we believe will be the parameters of that
program, as we have co-loss-mitigated someone who we are
working to find a solution for a borrower who has a first with
us and we own the second, we have already aggressively and
proactively gone ahead to mod that, as we believe the program
will be administrated. That is, if we lower the interest rate
on a first, we will take the second, we will lower it to the
same level. If there is a principal forgiveness or forbearance
done, we will also match that on a percentage basis.
I will make one other statement as to home equity that I do
not think most people believe, but it is a fact. In working on
our own linked portfolio--that is, where we have the first, we
are servicing the first, and we own the second--that in the
small delinquency that there is, when the first is seriously
delinquent, over more than half the time the second is current.
So in our programs that we have been working on and our
advice and expertise and our analytical research to the
Administration in helping to develop a program, one of the
reasons Hope for Homeowners that we brought to the attention is
that it does not allow for a subordination, only requires an
extinguishment of the second. And when you are sitting with a
performing loan that is current, that, one, does not provide
that to be a very good option; but, number two, and more
importantly to Hope for Homeowners, I think we have to look at
the nature of who that product is best served by.
None of these programs serve blanketly all borrowers who
are in need of assistance. Take Hope for Homeowners, for
example. When you work through that program today, if you
really have a struggling borrower who has an affordability
issue, they could not afford the ending interest rate of that
loan. It will be somewhere in the range of 8 to 10 percent.
Now, when a modification today ends up in the range that it
is being produced in a HAMP, they are not going to opt for a
Hope for Homeowners modification--or a refinance, excuse me.
Senator Menendez. Mr. Glovier or Ms. Thompson, any
observations on those?
Mr. Glovier. You know, I would just echo what Mr. Apgar
said in his testimony, that the second liens are certainly an
issue and that HUD is working on that. We do understand that
HUD and Treasury are working with the large bank and bank-
affiliated servicers to work through that. But we have yet to
see resolution on that process.
Ms. Thompson. I would say that we have certainly heard from
many homeowners that they have had trouble getting servicers
who hold the second liens to agree to modify the second liens,
even when the second liens were not performing; and that we
also look forward to the new guidance under HAMP to see what
happens.
There is an additional point about affordability of loan
modifications, and I agree with Mr. Apgar that affordability is
certainly a problem. But there is more than one way to make a
loan affordable, and you can do it by reducing the interest
rate, or you can often do it by reducing the principal balance.
If you reduce the principal balance, you have also effectively
reduced the payments.
When I was a practicing legal services attorney, all of the
loan modifications that I agreed to had principal reductions as
part of them, because I believe strongly that you need to have
homeowners building equity, that you need to align the value of
the loan with the value of the collateral. So I do not think
that there is an opposition, which we sometimes set up, between
affordability and principal reductions. I think principal
reductions are often the most effective way to achieve long-
term affordability.
Senator Menendez. You testified that servicers have
incentives that keep them from forgiving principal, even when
doing so might be better for the investor as well as the
homeowner. How do you explain that?
Ms. Thompson. Yes, I think it is true that--I think that
the complex web of incentives for servicers--I am not sure that
any servicer, that any of us fully understand it, that there
are lots of different directions in which the incentives pull.
But certainly servicers' primary income base is based on a
percentage of what the principal balance on the loan pool is.
So, by reducing principal balances, they are going to take a
hit to their monthly servicing income.
They may also take a hit in the residuals. Many servicers
hold residual interests, and once the principal balance loss is
recognized, the residual income may be cut off for them which
they would otherwise be receiving.
There are lots of other ways in which, depending on the
nature of the pooling and servicing agreement, servicers can,
in fact, lose money by doing principal reductions. Now, that
has not prevented all servicers from doing principal
reductions. Ocwen and Litton have done many loan modifications
with principal reductions. But other servicers seem
extraordinarily reluctant to do it, even when from a hard-
headed economic analysis it seems to make sense.
Senator Menendez. You just mentioned one--I did not catch
the name. Who is it that is----
Ms. Thompson. Ocwen and Litton have both done quite a large
number of principal reduction modifications.
Senator Menendez. Are there any other servicers that are
being more aggressive in offering principal reductions or
deeper loan modifications?
Ms. Thompson. My understanding is that Ocwen and Litton are
leading the pack in the principal reduction modifications. I
believe Carrington may as well be doing some principal
reductions.
Senator Menendez. Well, Mr. Willen, I appreciated your
testimony. I know you are not here on behalf of the Federal
Reserve, but there is a lot of great information in your
findings. What policy responses do you think make sense based
upon those findings?
Mr. Willen. Several of my colleagues and I at the bank have
made a proposal--which, again, is from us, not from the bank
itself--in which we argued that the most effective way to help
borrowers right now would be some sort of direct assistance to
the borrowers rather than trying to incentivize servicers to
help them.
One of the things that we are doing right now, we put
together a whole web of incentives, and I think, as Diane said,
the servicer already faces a web of incentives, and we have
just added a whole new one. And whether that will actually get
them to help the people who we think deserve the help, and
especially in light of the fact that Government money is
already going into this in terms of the payments to the
servicers, that doesn't seem like a very-- that seems like it
is--it is not clear whether that will actually help the
borrowers who we want to help.
And so what we have advocated is targeting assistance to
unemployed borrowers, either in the form of a grant or in the
form of a loan. And one of the things that I think was
appealing to us is that it is something you can do quickly, and
it does not require setting up all kinds of structures with
servicers. We already have a bureaucracy in place--the
unemployment insurance system--that is in place to help
unemployed borrowers, and this would just be one thing to add
to that rather than going through the servicers.
Senator Menendez. So in Mr. Perretta's case, you would
advocate having the Government give him a direct grant and/or
loan in order to meet his present challenge?
Mr. Willen. I think that if such a program existed, we
would have solved his problem by now.
Senator Menendez. One last question to you, Ms. Thompson.
Ms. Coffin has a pie chart which I found interesting in part of
her written testimony that shows that mortgages associated with
Government programs, such as Fannie Mae, Freddie Mac, and
Ginnie Mae, constitute nearly 70 percent of all the mortgages,
but only 32 percent of the seriously delinquent mortgages.
Meanwhile, the mortgages not affiliated with those programs
constitute about 30 percent of all of the mortgages in the
universe, but a whopping 67 percent of all the seriously
delinquent mortgages.
Doesn't this tell us that a primary cause of the financial
crisis is the unregulated mortgage brokers and lenders who did
not worry about whether the mortgages they issued met Fannie or
Freddie's guidelines and were good for borrowers? And doesn't
that make the case for a Consumer Financial Protection Agency
that spreads across the spectrum of financial entities beyond
banks simply and looks at all of the interests of consumers
among the predatory lenders that are out there?
Ms. Thompson. I think there is no question but that
complex, unregulated mortgages are what are driving the current
foreclosure crisis. Any way that you look at the data, that is
what the data shows. The adjustable rate mortgages, for
example, are--it is absolutely true, as Mr. Willen said
earlier, it is not the reset but the adjustable rate mortgages,
these complex loans that were sold to people are absolutely
driving the foreclosure crisis, and there is no question in my
mind but that if we had had effective, comprehensive regulation
of those products, we would not be where we are today.
Senator Menendez. OK. Well, thank you all for your
testimony, and we will be following up. As you heard, I think,
from several of the members when we had the first panel, there
is clearly a real concern about moving this process forward,
getting more engaged, having our servicers be more aggressive
as well as looking at what the Government's response is here.
We look forward to a continuing dialog in this.
Seeing no one else here and resisting the temptation to ask
unanimous consent for something incredible, I will keep the
record open----
[Laughter.]
Senator Menendez. For that would be the last time I would
chair--keep the record open for 1 week for questions other
members may have. If they are submitted to you, we really ask
you to get a response to us as soon as you can. And with the
thanks of the Chairman, this hearing is adjourned.
[Whereupon, at 12:35 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
follow:]
PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
I'm glad you could all join us today, but I have to be honest with
you: I am frustrated that we have to hold this hearing.
For over 2 years, this Committee has worked to stem the tide of
foreclosures in America. We've gotten plans and proposals from the
Administration. We've passed legislation, made changes asked of us, and
passed some more. We've received assurance after assurance from the
industry.
Everybody agrees that the crisis in our housing market was the
catalyst for the broader economic crisis. And everybody understands
that getting out of this broader crisis requires that we stabilize our
housing market and stem the tide of foreclosures.
So I'm hoping that, with stakes this high, somebody can explain to
me why nothing has changed.
Today the Associated Press is reporting ``The number of U.S.
households on the verge of losing their homes soared by nearly 15
percent in the first half of the year as more people lost their jobs
and were unable to pay their monthly mortgage bills.''
Why am I still reading about lost files, under-staffed and under-
trained servicers, and hours spent on hold?
Why does the National Foreclosure Mitigation Program tell us that
homeowners are waiting an average of six to 8 weeks for a response?
Why am I still reading stories about homeowners, community
advocates, even my own staff acting on behalf of constituents, shuffled
from voicemail to voicemail as they attempt to help people stay in
their homes?
Why are servicers and lenders refusing to accept principal
reduction so that homeowners can start building equity and get the
housing market moving again? Two years ago I brought together banks,
lenders, mortgage firms, regulators, and consumer groups for a
Homeownership Preservation Summit.
We all agreed, upon a statement of principles.
First, servicers should attempt to contact subprime
borrowers before loans reset, in order to identify likely
defaults early enough for the loan to be modified.
Second, modifications should be made affordable for the
long term.
Third, servicers should have dedicated teams of
professionals to implement those modifications.
And finally, we agreed that we needed real accountability,
a system for measuring the progress.
We were able to come to this agreement because we all understood
that nobody wins when a home is foreclosed upon.
Nobody wins when a bank has to sell a house at auction for less
than it would get if it simply refinanced.
Nobody wins when a home loses $5,000 in value for every foreclosure
on the block.
Nobody wins when foreclosure rates are the single biggest threat to
economic recovery.
So what happened? And what are we going to do differently? Today, I
want answers.
Foreclosure is not an abstract concept. It's very real pain for
American families. It's not just the loss of a house. It's the loss of
a home. It's the anguish of having to uproot your family. It's the
sadness of feeling like you let them down.
And it's the terrible heartache caused by the violation of the
sacred promise that has long defined the American middle class: that if
we work hard and play by the rules, we can build something better.
Most people in foreclosures worked hard and played by the rules.
They budgeted, they saved, and they relied on brokers and lenders--
professionals who were supposed to be experts--to help them achieve
their dream of homeownership.
But then someone lost a job, gets sick, or, in far too many cases,
discovered that they'd simply been cheated.
Last year, I met Donna Pearce--a grandmother from Bridgeport,
Connecticut, where there are 5,000 families with subprime mortgages in
danger of foreclosure. Donna was assured by her lender that she could
refinance in 6 months, but he didn't mention the thousands of dollars
in penalties that refinancing would cost--penalties she couldn't
afford.
People like Donna didn't deserve to lose their homes. Neither do
the 10,000 families that will receive a foreclosure notice today or the
60,000 families in my home state of Connecticut that could find
themselves in foreclosure over the next 4 years.
I know I speak for my friend Senator Shelby and our colleagues on
this Committee when I say I'm glad to have the support of the
Administration and the industry in our effort to stem this dangerous
tide.
But what we don't have is results. And so here we sit. Again. And
the American people are demanding to know why.
______
PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
Thank you Mr. Chairman.
Today, the Committee will examine the state of our housing market
and the Federal Government's efforts to prevent foreclosures in the
midst of what is now the most severe recession in a generation.
Problems in our housing market have been center-stage since the start
of this crisis.
Rising default rates on sub prime mortgages appear to have
triggered the financial crisis nearly 2 years ago.
Since then, default rates on all classes of mortgages have risen
sharply and precipitous declines in the value of mortgage-backed
securities have crippled banks and led to the insolvency of Fannie and
Freddie.
As the economy has continued to worsen, millions of Americans have
seen the value of their homes fall and many have lost or may lose their
homes to foreclosure.
In an effort to forestall unnecessary foreclosures, Congress and
the Obama Administration initially devised several programs. Nearly 1
year ago, Congress enacted the Hope for Homeowners program.
This program aimed to keep homeowners in their homes by encouraging
lenders and servicers to modify mortgages. Unfortunately, this program
has only modified a handful of mortgages. While recently enacted
changes to the program may help improve Hope for Homeowners, it is
clear that the program needs a thorough reexamination.
In many ways I believe that this hearing could begin to put the
horse back in front of the cart by undertaking some of the
investigative work necessary to properly address the issues surrounding
the housing market in this country.
We've heard many theories about the causes of our difficulties.
However, my hope is that with this hearing we can begin to gather
verifiable facts which will allow us to do our own analysis. Homeowners
in need will be better served if we actually identify the root causes
of foreclosures and craft effective solutions, rather than simply
implementing policies to counteract what we think is the problem.
As the Committee considers how to prevent foreclosures, we should
begin by determining the following:
First, and probably most important, is the degree to which
escalating default rates can be attributed to unscrupulous
lenders. If true predatory lending was as pervasive as some
have argued, we should be able to easily document that fact. I
must say, however, aside from anecdotal evidence, I have yet to
see such data.
I look forward to hearing what the Administration believes is the
reason for the rising default rates and what evidence they cite in
support of their position.
The second question we need to ask is: What is working?
Unfortunately, existing modification programs have not been very
effective. It is important to understand why they have not been working
as expected and if there is anything we can or should do in response.
Finally, we should determine whether our policies are
building the foundation for a stable and sustainable housing
market, or if they are merely delaying the inevitable.
I have long criticized our housing policy for willfully ignoring
long-term financial consequences, especially with respect to the GSEs.
Sustainable policies must be based on economic realities and facts, not
wishful thinking.
I hope today we can begin to establish some of those facts by
examining the research and experiences of our panelists.
To the extent we can clearly determine what caused this crisis, we
will then be able to address it more effectively and also implement
policies to avoid future crises.
Thank you Mr. Chairman.
______
PREPARED STATEMENT OF SENATOR TIM JOHNSON
These are difficult times for homeowners no matter where you live.
My State has been more fortunate than most in that our housing market
didn't experience the boom that other parts of the country did and
South Dakota banks didn't sell as many exotic loan products as bankers
in other regions sold. That said, with the housing market still in free
fall in parts of our country, and the unemployment rate ticking upward,
the housing situation continues to be troubling. Even in places where
home values have remained relatively stable during this period of
turbulence are now experiencing the effects.
We all know that widespread foreclosures have negative consequences
on our communities. The Administration and Congress have taken many
steps to create programs to aid financial institutions in helping keep
responsible families in their homes--an important goal for preserving
both neighborhoods and homeownership. Yet, we are still seeing rising
foreclosure numbers. We need to know if the programs need to be
improved and if the financial institutions need to do more. I look
forward to hearing more from today's witnesses about the progress being
made to modify and refinance home loans, including the successes and
the challenges.
______
PREPARED STATEMENT OF HERBERT M. ALLISON
Assistant Secretary for Financial Stability, Department of the Treasury
July 16, 2009
Introduction
A strong housing market is crucial for our economic recovery. It is
a fundamental source of wealth and well-being for individual families
and communities and plays a key role in our financial system. The
recent crisis in the housing sector has devastated families and
communities across the country and is at the center of our financial
crisis and economic downturn. Today, I want to outline the steps that
Treasury and the Administration have taken to address this crisis, help
millions of homeowners and lay the foundation for economic recovery and
financial stability.
This crisis took years in the making and as a result, millions of
homeowners have mortgage payments they are unable to afford. The rapid
decline in home prices of the past 2 years has had devastating
consequences for homeowners, communities and financial institutions
throughout the country. Moreover, rising unemployment and other
recessionary pressures have impaired the ability of many otherwise
responsible families to stay current on their mortgage payments. The
result is that responsible homeowners across America are grappling with
the possibility of foreclosure and displacement. Many analysts project
that more than 6 million families could face foreclosure in the next 3
years if effective actions are not taken.
The Administration's Efforts
This Administration has moved with great speed to aggressively
confront the economic challenges facing our economy and housing market
by announcing and implementing an unprecedented mortgage modification
program. Within a month of taking office, on February 18th, President
Obama and Secretary Geithner announced the Making Home Affordable (MHA)
Program, a critical element of Treasury's Financial Stability Plan.
This program was broadly designed to stabilize the U.S. housing market
and offer assistance to millions of homeowners by reducing mortgage
payments and preventing avoidable foreclosures.
An initiative of this scale has never been previously attempted.
Just 2 weeks after the President announced the program, the
Administration, working with the banking regulators, HUD, and the
Federal Housing Finance Agency, published detailed program guidelines
for MHA's Home Affordable Modification Program (HAMP). On April 6th, we
issued detailed servicer guidance. Today, we have 27 servicers signed
up to participate in MHA. Between loans covered by those servicers and
the GSEs, more than 85 percent of all mortgage loans in the country are
now covered by the program.
The initiative includes the following three key components:
(1) The Home Affordable Refinance Program (HARP): HARP expands
access to refinancing for families whose homes have lost value
and whose mortgage payments can be reduced at today's low
interest rates. It helps to address the problems faced by
homeowners who made what seemed like conservative financial
decisions three, four or 5 years ago, but who have found
themselves unable to benefit from the low interest rates
available today because the value of their homes has sunk below
that of their existing mortgages.
Initially, the program was able to help homeowners whose existing
mortgages were up to 105 percent of their current home value. However,
we moved to expand it to help those with mortgages up to 125 percent of
current home value.
(2) The Home Affordable Modification Program (HAMP): HAMP will
provide up to $75 billion dollars, including $50 billion of
funds from the Troubled Assets Relief Program (TARP), to
encourage loan modifications that will provide sustainably
affordable mortgage payments for borrowers. Importantly, HAMP
offers incentives to investors, lenders, servicers, and
homeowners to encourage mortgage modifications.
(3) Support to the GSEs: The Administration is encouraging low
mortgage rates more generally by increasing support for the
Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie
Mac, through an expansion of Treasury's Preferred Stock
Purchase Agreements with the GSEs. To this effect, we have
committed up to an additional $200 billion of capital to the
GSEs.
In addition, we have also announced the following additional HAMP
measures:
On April 28th, the Administration announced additional
details related to the Second Lien Program which will help to
provide a more comprehensive affordability solution for
borrowers by addressing their total mortgage debt. In addition,
this announcement included provisions to strengthen HOPE for
Homeowners Program, which provides additional relief for
borrowers with mortgage balances greater than the current value
of their homes.
On May 14th, we announced additional details related to the
Foreclosure Alternatives Program, which will provide incentives
for short sales and deeds-in lieu of foreclosure where
borrowers are unable to complete the modification process. We
also announced additional details on Home Price Decline
Protection Incentives, designed to provide incentive payments
for modifications to partially compensate lenders and investors
for home price declines.
HAMP Design--Key Principles
Now, I will discuss these programs in greater detail. Our
initiatives are built around three core concepts.
First, the program focuses on affordability. Building on
the insights of Chairwoman Bair of the FDIC, it is designed to
reduce mortgage payments to an affordable level based on
borrowers' gross monthly income.
Second, HAMP's pay-for-success structure aligns the
interests of servicers, investors and borrowers in ways that
encourage loan modifications that will be both affordable for
borrowers over the long term and cost-effective for taxpayers.
Third, the Program establishes detailed guidelines for the
industry to use in making loan modifications with the goal of
encouraging the mortgage industry to adopt a standard that
better suits borrowers and lenders, both in and out of MHA.
In the past, a lack of agreed-upon guidelines has limited the
number of loan modifications that are completed, even in instances
where modifications would have been beneficial to all involved. Driving
the industry toward standardized modifications based on HAMP should
help increase the number of modifications.
That will be good for borrowers, good for lenders, good for
mortgage lending standards and good for improved stability of our
overall financial system.
HAMP Design--Eligibility Criteria
Next, I will discuss the eligibility criteria for the modification
program, designed specifically to help responsible American homeowners
with the greatest need for assistance and to provide that assistance at
the least cost to taxpayers.
Modifications are potentially available to all borrowers regardless
of loan-to-value ratio, so borrowers can qualify no matter how much the
price of their home has fallen.
The modification plan was designed to be inclusive, with a loan
limit of $729,750 for single-unit properties, and higher limits for
multi-unit properties. At this level, over 97 percent of the mortgages
in the country have a principal balance that might be eligible.
Finally, because it is more effective to reach borrowers before
they have missed a payment, the modification program includes
incentives for the modification of loans where borrowers are current on
their payments, but can demonstrate financial hardship or imminent risk
of default.
HAMP Design--Modification Process
Next, I will discuss the modification process.
Under HAMP's loan modification guidelines, mortgage servicers are
prevented from ``cherry-picking'' which loans to modify in a manner
that might deny assistance to borrowers at greatest risk of
foreclosure.
Participating servicers are required to service all loans in their
portfolio according to HAMP guidelines, unless explicitly prohibited by
pooling and servicing agreements, and further must make reasonable
efforts to obtain waivers of any limits on participation. Participating
servicers are also required to evaluate every eligible loan using a
standard net present value (NPV) test. The NPV test compares the net
present value of cash-flows with modification and without modification.
If the test is positive, the servicer must modify the loan.
Under the program, servicers must reduce the borrower's first lien
mortgage to a 31 percent debt-to-income (DTI) ratio, meaning that the
monthly mortgage payment is no greater than 31 percent of gross monthly
income. To reach this payment, the servicer must use a specified
sequence of steps:
1. Reduce the interest rate, subject to a rate floor of 2 percent.
2. If the 31 percent DTI has not been reached, extend the term or
amortization period of the loan up to a maximum of 40 years.
3. If the 31 percent DTI still has not been reached, forbear
principal until the 31 percent ratio is achieved.
Principal forgiveness may be applied at any stage. Additionally,
each loan must be considered for a HOPE for Homeowners refinancing.
The borrowers' modified monthly payment of 31 percent DTI will
remain in place for 5 years, provided the borrower remains current, and
following the modification the interest rate will step up each year to
a specified cap that will be fixed for the life of the loan. We believe
HAMP creates new fixed-rate loans that homeowners can afford and can
understand.
HAMP Design--``Pay for Success'' Incentive Structure
HAMP offers ``pay for success'' incentives to servicers, investors
and borrowers for successful modifications. This aligns the incentives
of market participants and ensures efficient expenditure of taxpayer
dollars.
Servicers receive an up-front payment of $1,000 for each successful
modification after completion of the trial period, and ``pay for
success'' fees of up to $1,000 per year, provided the borrower remains
current. Homeowners may earn up to $1,000 toward principal reduction
each year for 5 years if they remain current and pay on time.
HAMP also matches reductions in monthly payments dollar-for-dollar
with the lender/investor from 38 percent to 31 percent DTI. This
requires the lender/investor to take the first loss in reducing the
borrower payment down to a 38 percent DTI, holding lenders/investors
accountable for unaffordable loans they may have extended.
To encourage the modification of current loans expected to default,
HAMP provides additional incentive to servicers and lender/investors
when current loans are modified.
Signs of Progress
Our progress in implementing these programs to date has been
substantial, but we recognize that much more has to be done to help
homeowners. Toady, I want to highlight some key points of success:
We have signed contracts with 27 servicers, including the
five largest. Between loans covered by these servicers and
loans owned or guaranteed by the GSEs, more than 80 percent of
all mortgage loans in the country are now covered by the
program.
325,000 trial modifications have been offered under the
program. Tens of thousands of trial modifications are underway.
At this early date, MHA has already been more successful than any
previous similar program in modifying mortgages for at risk borrowers
to sustainably affordable levels, and helping to avoid preventable
foreclosures.
Nonetheless, we recognize that challenges remain in implementing
and scaling up the program, and are committed to working to overcome
those challenges and reach as many borrowers as possible. In
particular, we are focused on addressing challenges in three key areas:
capacity, transparency and borrower outreach.
Expanding Servicer Capacity
We are taking a number of steps and working with servicers to
expand nationwide capacity to accommodate the number of eligible
borrowers who can receive assistance through MHA. I highlight some key
measures below:
One, we are also asking that all servicers move rapidly to expand
servicing capacity and improve the execution quality of loan
modifications. This will require that servicers add more staff than
previously planned, expand call center capacities, provide a process
for borrowers to escalate servicer performance and decisions, bolster
training of representatives, enhance on-line offerings, and send
additional mailings to potentially eligible borrowers.
Two, just last week, as a part of the Administration's efforts to
expedite implementation of HAMP, Secretaries Geithner and Donovan wrote
to the CEOs of all of the servicers currently participating in the
program. In this joint letter, they noted that ``there appears to be
substantial variation among servicers in performance and borrower
experience, as well as inconsistent results in converting trial
modification offers into actual trial modifications.'' They called on
the servicers ``to devote substantially more resources'' to the program
in order for it to fully succeed.
The joint letter to participating servicers also requests that the
CEOs designate a senior liaison, authorized to make decisions on behalf
of the CEO, to work directly with us on all aspects of MHA and attend a
program implementation meeting with senior HUD and Treasury officials
on July 28, 2009. Treasury also requested that each servicer detail the
specific steps that the servicer will take toward effective
implementation and compliance.
Three, we are taking additional steps to expedite implementation,
including more standardization of documentation and disclosure of the
NPV evaluation.
Transparency and Accountability
As Secretary Geithner has noted, we are committed to transparency
and better communication in all of Treasury's programs. Accordingly,
Treasury is focused on continued transparency and servicer
accountability to maximize the effectiveness of HAMP. Specifically, we
are planning to take three additional concrete steps in conjunction
with the servicer liaison meeting to enhance transparency in the
program:
One, by August 4th, we will begin publicly reporting servicer-
specific results on a monthly basis. These reports will provide a
transparent and public accounting of individual servicer performance by
detailing the number of trial modification offers extended, the number
of trial modifications underway, the number of official modifications
offered and the long terms success of modifications.
Two, we will work to establish specific operational metrics to
measure the performance of each servicer. These performance metrics are
likely to include such measures as average borrower wait time in
response to inquiries, the quality of information provided to
applicants, procedures for document processing and review, and response
time for completed applications.
We are also planning to deploy a data reporting tool that will
contain over 130 data elements and will be able to provide a
comprehensive assessment of the program at the loan, servicer, and
mortgage market levels. This will enable the program to be effectively
measured against specific performance benchmarks.
Finally, we have asked Freddie Mac, in its role as compliance
agent, to develop a ``second look'' process pursuant to which Freddie
Mac will audit a sample of MHA modification applications that have been
declined. This ``second look'' process will be designed to minimize the
likelihood that borrower applications are overlooked or that applicants
are inadvertently denied a modification.
We have also expanded the efforts of the Federal Government to
combat mortgage rescue fraud and put scammers on notice that we will
not stand by while they prey on homeowners seeking help under our
program.
Borrower Outreach
The third challenge we are tackling aggressively is borrower
outreach. We recognize the importance of borrower outreach and
education and are committing significant resources, in partnership with
servicers, to reach as many borrowers as possible. Here, we have taken
a number of steps:
We have launched a consumer focused website, www.MakingHome
Affordable.gov, with self-assessment tools for borrowers to
evaluate potential eligibility in the MHA program. This website
is in both English and Spanish and already has over 22 million
page views.
We have worked with an interagency team to establish a call
center for borrowers to reach HUD approved housing counselors,
so that they are able to receive direct information and
assistance in applying for the MHA program.
Working closely with Fannie Mae, we have also launched an
effort to hold foreclosure prevention workshops and borrower
education events in cities facing high foreclosure rates. The
first such outreach event was held in Miami in June.
Much more has to be done and we will continue to work with other
agencies and the private sector to reach as many families as possible.
Program Limitations
Finally, we recognize that any modification program seeking to
avoid preventable foreclosures has limits, HAMP included. Even before
the current crisis, when home prices were climbing, there were still
many hundreds of thousands of foreclosures. Therefore, even if HAMP is
a total success, we should still expect millions of foreclosures, as
President Obama noted when he launched the program in February.
Some of these foreclosures will result from borrowers who, as
investors, do not qualify for the program. Others will result because
borrowers do not respond to our outreach. Still others will be the
product of borrowers who bought homes well beyond what they could
afford and so would be unable to make the monthly payment even on a
modified loan.
Nevertheless, for millions of homeowners, HAMP will provide a
critical opportunity to stay in their homes. It will bring relief to
the communities hardest hit by foreclosures. It will provide peace of
mind to families who have barely managed to stay current on their
mortgages or who only recently have fallen behind on payments. It will
help stabilize home prices for all American homeowners and, in doing
so, aid the recovery of the U.S. economy.
Conclusion
In less than 5 months, including the initial startup phase, HAMP
has accomplished a great deal and helped homeowners across the country.
But we know that more is required to help American families during this
crisis and will aggressively continue to build on this progress. For
example, we are taking additional steps to implement programs
including:
1. the Second Lien Program;
2. the Foreclosure Alternatives Program;
3. Home Price Decline Protection incentives; and
4. strengthening of HOPE for Homeowners.
Each of these supplemental programs is designed to increase the
effectiveness and take-up of the basic modification plan.
Sustained recovery of our housing market is critical to lasting
financial stability and promoting a broad economic recovery.
We look forward to working with you to help keep Americans in their
homes, restore stability to the U.S. housing market and growth to the
U.S. economy.
Thank you. I look forward to your questions.
______
PREPARED STATEMENT OF WILLIAM APGAR
Senior Advisor for Mortgage Finance,
Department of Housing and Urban Development
July 16, 2009
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for the opportunity to testify on the progress that the Obama
Administration is making to stabilize the U.S. housing market through
the Making Home Affordable (MHA) program, the integration of the HOPE
for Homeowners element into the larger plan, and other Administration
efforts to provide relief to homeowners and neighborhoods suffering
from the effects of the foreclosure crisis.
My name is William Apgar and I serve as Senior Advisor for Mortgage
Finance to HUD Secretary Shaun Donovan. In this capacity, I have worked
closely on the development and implementation of the Administration's
Making Home Affordable program which was announced on February 18,
2009, the HOPE for Homeowners program, and other efforts intended to
address the housing crisis.
Making Home Affordable: Progress and Challenges
We are all aware that the U.S. is facing an unprecedented
foreclosure crisis--with millions of Americans projected to lose their
homes within the next few years. Working together, Congress and the
Administration have undertaken a number of initiatives designed to
prevent foreclosures and mitigate the impact of foreclosed and
abandoned properties on local neighborhoods and the broader economy.
At the center of the Administration's effort to address the housing
crisis is the Making Home Affordable Program, a comprehensive program
to stabilize the housing markets by providing affordable refinance and
modification opportunities for at-risk borrowers. Since the launch of
the program in March, 27 servicers--representing more than 85 percent
of the market--have signed up. So far, these servicers have
collectively extended trial modification offers to more than 325,000
borrowers.
Despite this significant progress, we recognize that more has to be
done to reach additional homeowners facing, or at risk of, foreclosure
and ensure that they are assisted in a timely manner. As with any new
program, we have encountered a few difficulties in launching the Making
Home Affordable Program. Many consumers have had trouble reaching their
servicers and receiving a timely response from servicers after they
have submitted applications for modification. Other consumers have
complained of receiving inaccurate or misleading information from
servicers. HUD is working with Treasury to quickly resolve issues
surrounding program implementation and execution.
For instance, we have had ongoing meetings and conversations with
servicers to encourage them to be more responsive. To further
underscore the importance of prompt servicer response, last week
Secretaries Donovan and Geithner sent letters to the CEOs of the
participating financial institutions urging them to add servicing
capacity and improve the quality of execution necessary to reach the
sizable number of homeowners at risk of foreclosure and to designate a
senior official to serve as a liaison with the Administration and work
with HUD and Treasury on the implementation of all aspects of MHA. By
early August, we will be able to start reporting servicer specific
results publicly.
In addition, we are exploring a variety of mechanisms to enable
servicers to leverage their relationships with nonprofits and other
entities to help expedite the processing and approval of modification
applications. HUD and Treasury are working to create a network of
trusted advisors to guide borrowers through the application process,
help them prepare complete application packages, and troubleshoot if
the borrower appears to have been improperly deemed ineligible for the
program. Moreover, HUD is also working with Treasury and the
Homeownership Preservation Foundation to further train and utilize
housing counseling to better resolve consumer complaints against
servicers.
Evolving Nature of MHA
The MHA program continues to evolve in order to respond to the
changing nature and magnitude of the foreclosure crisis. For example,
on April 28, the Administration announced the framework for a program
that would facilitate the modification of second liens when a first
lien is modified. Second mortgages can create significant challenges to
helping borrowers avoid foreclosure because they can increase
borrowers' monthly mortgage payments beyond affordable levels. Up to 50
percent of at-risk mortgages have second liens, and many properties in
foreclosure have more than one lien.
Also, on July 1, Secretary Donovan announced an expansion of the
Administration's Home Affordable Refinance Program (HARP) to include
participation by borrowers who are current on their payments but have
first mortgage loan-to-value ratios of up to 125 percent. Mortgage
rates remain at near historic lows providing many homeowners with high
rate mortgages the ability to refinance into lower rates and experience
lower monthly payments. Unfortunately, millions of responsible
homeowners have seen the value of their homes drop so dramatically that
they are unable to take advantage of these lower rates. In many hard
hit communities in California, Florida and Nevada, a large number of
homeowners have experienced significant reductions in home values and
have been unable to participate in the program. Under authorization
provided by the Federal Housing Finance Agency, borrowers whose
mortgages are currently owned or guaranteed by Fannie Mae or Freddie
Mac will now be allowed to refinance those loans even in situations
where the value of their first mortgage is as much as 125 percent of
the current value of their home. By increasing this LTV cap from the
previously authorized 105 percent, this new initiative will expand the
ability of the program to aid many hard hit borrowers, particularly
those in states suffering from the most extreme declines in home
prices.
Similarly, in recognition that the MHA program will not assist
every at-risk homeowner or prevent all foreclosures, the Administration
announced foreclosure alternatives for borrowers and HUD is working on
a number of neighborhood stabilization initiatives. Under the details
announced on May 14, MHA will provide incentives for servicers and
borrowers to pursue short sales and deeds-in-lieu (DIL) of foreclosure
in cases where the borrower is generally eligible for a MHA
modification but does not qualify or is unable to complete the process.
These options eliminate the need for potentially lengthy and expensive
foreclosure proceedings, preserve the physical condition and value of
the property by reducing the time a property is vacant, and allows the
homeowners to transition with dignity to more affordable housing. The
new details simplify the process of pursuing short sales and deeds-in-
lieu, which will facilitate the ability of more servicers and borrowers
to utilize the program. The program provides a standard process flow
and minimum performance timeframes and standard documentation. The
final details of the program are being finalized, and will be announced
as soon as completed.
New Legislative Authorities: HUD's Role
In addition to efforts to improve the execution of the program that
was first announced in February, the Obama Administration is now
working to implement new and improved program features authorized by
the ``Helping Families Save Their Homes Act of 2009'' signed into law
on May 20, 2009. The legislation eases eligibility requirements and
streamlines the application process for the HOPE for Homeowners (H4H)
program and provides the Federal Housing Administration (FHA) with
additional loss mitigation authority to assist FHA borrowers under MHA.
We want to commend Chairman Dodd and other members of the Committee
for your leadership in getting this important legislation enacted. When
fully implemented, the improved H4H program is expected to provide
relief to certain at-risk homeowners who are underwater on their
mortgages and are not covered by other programs, including Fannie Mae
and Freddie Mac programs. The new FHA loss mitigation program will
enable homeowners with mortgages insured by the FHA to obtain
assistance under terms roughly comparable to borrowers in other
segments of the market, without increasing costs to the taxpayer.
HOPE for Homeowners: As you know, H4H was initially authorized
under the Housing and Economic Recovery Act of 2008 to provide a
mechanism to help distressed homeowners refinance into FHA insured
loans. The temporary program, established within the FHA, is premised
on the view that the creation of equity for troubled homeowners is
likely to be an effective tool for helping families keep their homes
and avoid foreclosure. Unfortunately, due to several obstacles to
participation, including steep borrower fees and costs, complex program
requirements, and lack of operational flexibility in program design,
the original H4H program has only served a handful of distressed home
owners. We believe that the legislative improvements combined with the
integration of the H4H into the Administration's MHA program will make
the program a more attractive and less burdensome option for underwater
borrowers seeking to refinance their loans and regain equity in their
homes.
The improved H4H program will provide a new program option for
certain at-risk borrowers who are underwater on their mortgages and are
not eligible to participate in the GSE refinancing program. When a
borrower approaches participating servicers for assistance, the
servicer will be required to offer the option for a H4H refinancing in
tandem with a MHA Trial Modification option. The program only serves
homeowners who do not own other homes, demonstrate their ability to
meet their H4H mortgage payment obligations, have not intentionally
defaulted on any other substantial debt in the last five years, and do
not have other significant sources of wealth. To ensure proper
alignment of incentives, servicers and lenders will receive pay-for-
success payments for Hope for Homeowners refinancings similar to those
offered for Home Affordable Modifications. These additional supports
are designed to work in tandem and take effect with the improved and
expanded program
Though the program promises substantial benefits to underwater
borrowers best served by an increased equity position in their homes,
treatment of second liens poses significant challenges to the
implementation of H4H. First, the presence of a second lien complicates
the execution of a mortgage refinance even under the best of
circumstances. As the effort to offer consumers the option of modifying
both first and second liens has demonstrated, since the second liens
tend to be held in portfolio by several of the Nation's largest banking
institutions, while first liens are owned by a wider range of
investors, coordinating the communication and decision making between
these two separate financial interests can be logistically complex.
Equally challenging is the determination of a fair allocation of
payments to each of these two distinct investment interests needed to
facilitate the refinancing of an underwater mortgage. Under the
improved and integrated H4H, HUD has flexibility to pay to extinguish
second liens consistent with MHA guidelines, and the potential to
provide investors a share of the price appreciation in exchange for
taking a significant ``hair cut.'' Even in situations where there is
little prospect of realizing any future appreciation, many first lien
investors, under the concept of ``one loss--one time,'' appear
increasingly willing to accept the required ``hair cut,'' and execute a
clean exit from the transaction.
Unfortunately, the calculation of second lien holders is decidedly
more complex. Even in situations where the combined LTVs of first and
second liens exceed the current market value of the home, seconds liens
may have some value. In particular representatives of banking
institutions that hold sizeable numbers of second liens in their
portfolios report that that in some situations, borrowers who are
delinquent on their first lien are continuing to make payments on their
second lien, providing some measure of benefit to second lien holders.
Of course, where the first lien is underwater, once the property moves
to foreclosure, the second lien is worthless.
In light of these complex and often conflicting interests,
determining a fair compensation system for holders of second liens is
difficult. In this regard the recent letter to the heads of the five
bank regulators (FRB, OCC, NCUA, FDIC, OTS) dated July 10 and jointly
signed by Senate Banking Committee Chairman Dodd and House Financial
Services Committee Chairman Frank is instructive. In assessing methods
used to estimate the value of second liens held on the balance sheet of
the Nation's largest banks, the letter expressed the concern ``that
loss allowance associated with these subordinated liens may be
insufficient to realistically and accurately reflect their value,
especially in light of the historically poor performance of first lien
mortgages and seriously diminished value of the underlying
collateral.'' The letter goes on to observe that in situations where
banks are allowed to carry these loans at potentially inflated values,
they may be reluctant to ``negotiate the disposition of these liens,
and thus may stand in the way of increasing participation in the H4H.''
To better understand these issues, HUD and Treasury are now working
with the OCC and other regulators that supervise the activities of the
large national banking entities that hold in portfolio the largest
share of second liens. In addition to ensuring that current regulatory
policy does not act to encourage banks to seek to delay the realization
of portfolio losses by allowing these entities to carry assets at
inflated valuations, these conversations will also draw on the
considerable expertise of the OCC and other regulators to help HUD
craft an extinguishment schedule that will provide fair compensation to
the holders of the second lien assets.
In sum, HUD remains committed to reissuing guidance on the
operation of the reconstituted version of H4H program. The goal is a
program that works--a program that provides real benefits to a group of
homeowners best served by an increased equity position in their homes,
while at the same time providing fair treatment to the interests of the
investor/owners of first and second liens and adequate compensation for
the other parties participating in the transaction.
The FHA Modification Program: As noted above, HUD is also now
working to finalize guidance implementing the Federal Housing
Administration's (FHA) Home Affordable Modification Loss Mitigation
Option which is an important complement to the MHA and will provide
homeowners in default with greater opportunity to reduce their mortgage
payments to sustainable levels. The FHA's long-standing Loss Mitigation
Program has given lenders who provide FHA-insured mortgages the
authority and responsibility to assist homeowners who have fallen into
financial difficulties with their home mortgages. The new legislation
will increase the number of distressed homeowners receiving assistance
by expanding the authority of FHA to engage in foreclosure prevention
by allowing the use of new tools. Under new authorities, FHA can offer
a partial claim up to 30 percent of the unpaid principal balance as of
the date of default combined with a loan modification. In addition, it
permits loss mitigation tools to kick in for loans that face ``imminent
default,'' rather than just for loans in default. Moreover, FHA is
granted the authority to facilitate loan modifications through
assignment of loans in order to address servicer loss mitigation
disincentives relating to having to purchase loans from Ginnie Mae
pools.
Additional Challenges
Even as the Obama Administration is working to improve the
execution of the Making Home Affordable and to deploy new program
features authorized under the ``Helping Families Save Their Homes
Act,'' we continue to examine new approaches to expand the reach of the
foreclosure avoidance efforts and stabilize housing markets in
communities around the country. As I noted in testimony before the
House Financial Services Committee last week, the Administration stands
ready to explore with Congress additional ideas to aid at-risk
borrowers that may not qualify currently qualify for the MHA.
The current very high level of unemployment is making the
already difficult task of helping families struggling to meet
their mortgage payment even harder. Initial efforts by the
government to prevent foreclosures were not primarily designed
to assist unemployed individual in some of the hardest hit
communities. As the economy has weakened, unemployment has
become an increasing cause of mortgage default and foreclosure.
Recognizing this, the Administration is now exploring a series
of programmatic options that can help unemployed workers get
the mortgage assistance that they need.
Next, recognizing that there is an impending crisis in the
multifamily mortgage sector which could have devastating
effects for tenants, HUD Secretary Donovan has led the
Administration's review of potential means to expand access to
bond financing to assist State and Local Housing Finance
Agencies in continuing to pursue their important financing role
to increase both affordable homeownership and rental housing
opportunities. HUD has also created an internal task force to
develop a better understanding of this emerging crisis, has
reached out to Treasury and the Federal Housing Finance Agency
(FHFA) to explore new approaches to confront this situation,
and is now completing a top to bottom review of HUD's own
multi-family initiatives to identify new programmatic
alternatives. Building on these efforts, HUD looks forward to
working with the Committee to explore various options for
stabilizing the multifamily housing sector.
Finally, Secretary Donovan has challenged HUD to do all
that we can to work with Congress and the Administration to
insure that the nearly $6 billion appropriated to date for the
Neighborhood Stabilization Program (NSP) plays its intended
role in helping to stabilize housing markets and combat blight.
In many communities, NSP is starting to generate real results,
but HUD will continue to monitor program activities, identify
strategies that produce real results, and work to make program
modifications that will help ensure that this funding is
deployed quickly, wisely, and well.
Conclusion
Once again, I would like to thank you for the opportunity to
participate in today's hearing. HUD shares your concerns about the
progress of Administration's efforts to address the foreclosure crisis
and can assure you that we are working to resolve issues related to
implementation and execution of core programs and to implement new
elements to improve and refine MHA in the near future. I am happy to
answer any questions you may have.
______
PREPARED STATEMENT OF THOMAS PERRETTA
Consumer, State of Connecticut
July 16, 2009
Good morning, Chairman Dodd and Ranking Member Shelby.
My mortgage problems became evident when my wife, Susan, passed
away in 2008.
All our lives we were a hard-working couple, giving the best we
could to our son, Tom Jr., and living modestly. In addition to our
regular jobs, we each had various part-time jobs.
Before we bought the town house in 2001, we lived for 1 \1/2\ years
at my in-laws to save up money for that purchase, which would be a home
for us and our son.
I have been working with the Connecticut Board of Education for 11
years and Susan worked for Stamford Health. In 2004 she found her ideal
job at Sacred Heart School, where she was a guidance counselor in
college placement. She was earning about $40,000 annually. With our
joint incomes we were able to keep our family finances going smoothly
and send Tom Jr. to Quinnipiac University.
But in 2005, just as Sacred Heart was closing permanently, Susan
was diagnosed with leukemia. In April she had chemotherapy which was
followed by a bone marrow transplant October 21, 2005.
My medical insurance covered her medical payments, although not the
co-pays. Finally Susan began receiving Social Security disability of
$1,400 monthly. As Tom Jr. had begun college in 2004, this helped but
not enough.
Throughout the years Susan had managed our finances and in order to
keep Tom Jr. in college, we applied for a home equity loan from
Wachovia and began increasing credit card debt. Susan helped Tom Jr.
apply for student loans, and we also took out one parent-student loan.
Because we had both worked all our lives, Susan even began looking
for a job after her bone marrow transplant, even though she was still
weak. In April 2008 Susan developed an infection and became extremely
weak. While at a nursing home her health deteriorated and she never
returned home.
In order for her to have a proper funeral I borrowed $16,000 from
friends. I have just finished paying that amount off. Suddenly after 25
years in which Susan handled the bills, I was overwhelmed but I
realized I had to keep paying the mortgages on the townhouse.
We had a first with Chase and a second with Wachovia. I got a grip
on some of these and started chipping away at our debt. I was making
payments to Chase at the branch. At the beginning of 2009, as money
became tight and I was worried about making payments I went to the
Chase branch for help because I could not keep up.
The Chase customer service representative told me someone would
phone me, but no one did.
At the beginning of 2009 I spoke to a Chase representative over the
phone asking for help in a loan modification and her reply was that I
did not make enough to qualify. I was unable to convey that I had just
been through the tragic death of my wife and was trying to settle
everything in a reasonable manner.
In the past few months Chase collections has been calling me at
work, but no one has ever suggested that they might help me, or
proposed a single positive step for resolution. The last calls were
just a few weeks ago.
It seemed that Chase did not realize that people like me, who have
just had an overwhelming event in their life, may still be honest
responsible human beings who need help.
I turned to a housing counselor at the Housing Development Fund and
they are trying to help me negotiate with Chase since February. So far
they also have not received a reply, even though my mortgage is a FNMA
and should qualify for Make Your Home Affordable. A package with my
request for a modification was sent to Chase on May 4th.
I explained to the counselor that with all the bills piling on top
of each other, I was unable to pay the common charges of my condo
association and am now in a one-year agreement with them. I also have
an agreement with the electrical company. Other creditors have worked
with me, only Chase is still not doing that.
Now that Tom Jr. graduated from college and is working he will be
contributing to the household income. He will help me in paying off the
past due common charges (the agreement is for $500 a month) and I am
giving up my car which will lower my expenses by $300.
With all these steps in place, some of which the counseling agency
proposed, I can make payments of $1,400 if Chase/FNMA will work with
me.
People like me should be the ones the banks are helping. I am now 6
months past due. I hope that Chase will give me a modification soon.
______
PREPARED STATEMENT OF JOAN CARTY
President and CEO, The Housing Development Fund,
Bridgeport, Connecticut
July 16, 2009
Good afternoon, Chairman Dodd and Ranking Member Shelby. Thank you
for inviting me to testify today. My name is Joan Carty. I am the
President and CEO of the Housing Development Fund (HDF) in Stamford,
CT. HDF is a community development financial institution that has
operated in Connecticut for the last twenty years. We provide financing
to developers of affordable housing, technical assistance to local
governments, homeownership counseling and down payment assistance to
first time homebuyers. We have helped almost 5,000 people secure safe,
decent and affordable housing. Less than 2 percent of our homebuyers
are in delinquency or default. We credit that solid track record to the
fact that they were counseled, educated, and that we only allowed our
clients into 30-year, fixed rate first mortgages.
HDF partners with the banking community, local housing authorities
and municipalities in its core business. We have leveraged over $145
million in first mortgages with our SmartMove and Homebuyer Assistance
loan programs. HDF has worked with the Greenwich, Stamford and Darien
housing authorities to help residents educate themselves about
homeownership. HDF also worked with the cities of Stamford and Norwalk
to put forth innovative and inclusive inclusionary zoning systems in
these communities. We have partnered with developers to market their
below market rate units as well. Last year, because of the widespread
and increasing problems with subprime lending, mortgage delinquencies
and rising foreclosures, HDF started an additional counseling program
to assist families in our communities who were stressed with these
problems. In the course of developing our program we have reached out
to many other partners: the Bar Association for pro bono attorneys, the
courts to establish working relationships with the mediators,
volunteers with financial and social services backgrounds to help us
with the ever increasing volume of people who need guidance, and the
banks--who in many cases control the outcomes of the situations facing
people in foreclosure or mortgage delinquency.
We are a HUD certified counseling agency and down payment
assistance lender. We have personally experienced the kind of shadow
boxing that occurs when a homeowner in distress calls their lender or
servicer for help. Too often, their call is bounced to a call center
across the globe, or the call is bounced from department to department
within the bank. On many occasions, after multiple periods of time on
hold, they finally reach a live person but it is a representative who
is merely following a script. Often the lender or servicer
representative has no record of prior contact with the borrower. It is
a process that often feels futile.
We have found that in too many cases when we send clients'
modification requests to banks or servicers such as JP Morgan Chase or
Goldman Sachs-owned Litton, that the modification package enters a
black box for months on end. These borrowers are in distress; even a 30
day time frame can radically affect their credit profile. Once they
slip behind on timely payments of their mortgage or any consumer debt,
their credit score goes down, and their monthly interest charges can go
up. In many cases cross default provisions mean that default on one
obligation will trigger higher monthly charges on other debt, even if
the borrower had remained current for that obligation. If we were to
look for common themes as to why families are in distress, we often
find that death, divorce, illness or injury, in addition to predatory
terms on many mortgages, have pushed families to the edge of the cliff.
Imagine the multipliers and harm rendered when this limbo extends for
months.
I understand that the lenders and servicers need modification
requests that are well documented and that contain a budget that has
been carefully worked out so that the borrower will succeed in the
modification over the long term. That is the kind of service that we as
a counseling agency provide to our clients. What our clients in turn
need from the lenders and servicers is rapid response. Responses before
their lives continue to spiral downward. It is difficult to believe
that the sophisticated automated platforms that have been in use by
lenders and servicers for loan origination over the past decade cannot
be retooled to generate effective loan modifications with greater
frequency and within tighter timelines.
I would also suggest that rapid response will help in other ways.
With delay comes added expenses, which often get added to the mortgage
balance. Extensive delays in the mediation process often result in the
lenders or servicers charging the borrower multiple times for late
fees, attorneys' fees, and updated appraisals. Denial of
borrowers'requests lead to expensive foreclosure processes, which hurt
the families involved and the communities in which the homes are
located. In many instances, these foreclosures do not ameliorate losses
or generate profits for the banks given the current declines in
property values throughout the country. Additionally, it is critically
important to create a system that rapidly responds to requests from
homeowners who are still current on their mortgages but who know they
will not be able to sustain their payments going forward.
What we are building at our agency is a system that can carry
borrowers from that initial request for assistance through assessment
of their situation and development of a modification request that will
have viability over the long term.
What we need from the lenders and servicers is their commitment to
building a system that will react promptly and predictably to these
reasonable requests.
For two decades, HDF has proven it can deliver housing solutions
that work for Connecticut--for families, for lenders, for developers,
for neighborhoods. We believe that affordable housing is an investment
in people--employees, parents, children, neighbors--without whom the
state's whole economy would suffer. Strong markets and strong
communities need a diverse mix of households. And that calls for a
supply of housing and housing opportunities that low- and moderate-
income people can afford and remain in despite temporary setbacks.
Appendix
The Housing Development Fund Banking Partner:
Bank of America
Citibank, FSB
Commerce Bank
Fairfield County Bank
Fieldpoint Private Bank and Trust
First County Bank
Hudson City Savings Bank
Hudson United Bank
Milford Savings Bank
Naugatuck Savings Bank
Newtown Savings Bank
Patriot National Bank
People's United Bank
Savings Bank of Danbury
TD Banknorth
Union Savings Bank
U.S. Trust of Connecticut
Wachovia Bank, N.A.
Webster Bank
______
PREPARED STATEMENT OF MARY COFFIN
Executive Vice President, Servicing Division,
Wells Fargo Home Mortgage
July 16, 2009
Chairman Dodd, Ranking Member Shelby and Members of the Committee,
I'm Mary Coffin, executive vice president of Wells Fargo Home Mortgage
Servicing. Thank you for inviting me to speak today.
Throughout this historic public and private sector collaboration,
Wells Fargo has considered it our leadership responsibility to champion
solutions. We have played a key role in creating streamlined, unified
modification programs to help customers in need.
A prime example of our work with the Administration is the new
Homeowner Affordability and Stability Plan, which we fully support.
Early indications are that the Home Affordable Refinance Program (HARP)
and Home Affordable Modification Program (HAMP) are of great value, and
will benefit a significant number of families.
In fact, we believe the Administration's goal to help as many as 7-
9 million homeowners over the next few years is well within reach. In
the first half of 2009, through lower rates, refinances and
modifications, Wells Fargo alone has helped close to 1 million American
homeowners.
We refinanced three-quarters of a million customers through HARP
and standard programs. And, since our company represents approximately
20 percent of the market, we could estimate that close to 4 million
Americans industry-wide have already refinanced into lower mortgage
payments.
In these turbulent times, it is important to note that more than 90
percent of our borrowers remain current on their mortgage payments. To
help those in need of assistance in the first half of this year, we
have provided more than 200,000 trial and completed modifications, an
increase of about 100 percent for the same period one year ago.
Notably, last month, 83 percent of Wells Fargo's modifications resulted
in a payment reduction which increases the probability customers will
sustain these payments and, in turn, lowers re-default rates and
foreclosures.
Acutely aware of the importance of speed, Wells Fargo worked with
the government aggressively to develop and deliver HARP and HAMP. We
did this in a way that was mindful of our responsibility to American
taxpayers to execute solutions for those truly in need.
Speed of execution was complicated by the multiple versions of the
program--each with unique contract requirements.
On March 4, the Administration first announced the
components of the Homeowner Affordability and Stability Plan.
By April 6, we received the final HAMP guidelines from
Fannie and Freddie, and began implementing this program for
these customers.
On April 13, we were the first to sign a HAMP contract for
loans we service for private investors as well as for loans in
our owned portfolio. Further details for this program were
finalized by May 14, and we began offering it 9 days later.
Since January, we have been providing loan workouts to Wachovia
option ARM customers who are struggling with their payments and, at the
end of this month, we will add HAMP as yet another potential solution.
With this addition, we will have fully executed HAMP for almost all
of our at-risk borrowers. It should be noted that the Administration
has not yet made HAMP available for FHA, VA, and home equity borrowers.
Since we service one-third of the Nation's FHA loans, we're hopeful
that the government will soon provide this program, as well as the
second-lien program as it was initially described to us.
As of June 30, Wells Fargo was in the process of finalizing 52,000
Home Affordable Modifications. When working with all of our seriously
delinquent borrowers, 30 percent are not eligible for HAMP because they
have an FHA or VA loan and another 15 percent do not meet the basic
program requirements. Of the remaining 55 percent, we are actively
working with half, and the other half has not yet chosen to work with
us.
For those borrowers who don't qualify for HAMP, we immediately seek
to find another modification or alternate solution to avoid
foreclosure. Before any home moves to foreclosure sale, we conduct a
final quality review to ensure all options have been exhausted.
We understand this time has been frustrating for our at-risk
customers and that they are anxious and in need of answers.
With the President's February 18 announcement that refinance and
modification programs would be forthcoming, we began to experience a
large increase in customer inquiries. Knowing this would occur, we
anticipated the influx, and increased and trained team members to
handle it. Yet, it has been challenging to meet customer expectations
as the various program details were provided to us over a period of 90
days.
While we forecasted an increase in inquiries--even from customers
current on their mortgage payments--our forecast turned out to be low.
Historically, on a monthly basis, 5 to 10 percent of inquiries for loan
workouts came from borrowers who were current. Since the announcement
and the related increased focus on imminent default, that statistic has
risen to nearly 40 percent. Of course, not everyone who calls qualifies
for imminent default.
To manage this demand:
we have implemented mandatory overtime;
we have streamlined the receipt, imaging and processing of
the required documents;
we are upgrading systems to handle escrow requirements for
home equity loans and lines; and
most importantly, we have increased our trained staff by 54
percent over the first half of this year to 11,500 default team
members--all of whom are U.S. based.
In conclusion, we can sincerely tell you we have been working very
hard to responsibly execute these programs and fully support them. We
will continue to work with the government, consumer counselors, non-
profit agencies and others to reduce foreclosure, save homes, and
quickly maintain, sell and donate foreclosed properties in order to
stabilize our economy.
Our sincere thank you for all you've done to help us drive home
retention by making the Nation aware of the options available to those
in need. I'd be glad to answer any questions you may have.
______
PREPARED STATEMENT OF CURTIS GLOVIER
Managing Director, Fortress Investment Group,
on behalf of the Mortgage Investors Group Coalition
July 16, 2009
Mortgage Investors Coalition Testimony
Thank you for inviting me to testify today. My name is Curtis
Glovier and I am a Managing Director at Fortress Investment Group. I am
also a member of the Mortgage Investors Coalition, which was organized
to develop investor consensus on current public policy initiatives and
to provide policy makers with the mortgage investor's point of view. I
am testifying today in my capacity as a member of the Mortgage
Investors Coalition.
Allow me to start, Chairman Dodd, by commending you, Ranking Member
Shelby and the other members of the Committee for your leadership for
well over two years, going back to before the financial crisis, in
trying to pursue every possible action to help keep Americans in their
homes. We share your frustration with the slow pace of efforts to help
homeowners get out of bad mortgages and into mortgages that will allow
them to stay in their homes and build equity at the same time.
I also want to thank you particularly, Mr. Chairman, for co-
authoring with Chairman Frank a letter last week highlighting the need
to help families keep their homes and avoid foreclosure. We agree with
your diagnosis of the Hope for Homeowners program (``HFH'') and offer
our support to assist American families' participation in this program,
so they may be able to keep their homes and build equity. The
discounted refinance program offered by HFH provides the best long term
solution for the homeowner and for the recovery of the U.S. housing
market.
My testimony today represents the views of the Mortgage Investors
Coalition, as well those of other mortgage investors whose thoughts I
have obtained through numerous conversations I have had in the course
of my professional dealings and my participation in industry groups.
The Mortgage Investors Coalition was formed in April 2009 and currently
has 11 member firms with about $200 billion in total assets under
management and over $100 billion in current outstanding principal
balance of investments in residential mortgage backed securities. In my
testimony, I will briefly describe the composition of the mortgage
market and some of the inherent conflicts that could be contributing to
the difficulty in showing sufficient progress in stemming foreclosures.
Investors in private-label (non-Federal agency) mortgage-backed
securities include asset managers, charitable institutions, endowments,
foundations, hedge funds, insurance companies, investment banks,
municipalities, mutual funds, pension funds, trusts, sovereign wealth
funds, universities and others. Thus, many of the beneficiaries of
these investments are ordinary American citizens--people with pensions,
people with life insurance policies or mutual fund investments, and
people who benefit from services provided by charities, universities,
and state and local governments.
First, I'd like to briefly describe the residential mortgage
market. The mortgage market consists of approximately $11 trillion in
outstanding mortgages. Of that $11 trillion, $5.4 trillion are held on
the books of the GSE's as agency mortgage-backed securities (issued by
one of the agencies) or in whole loan form. Another $3.6 trillion are
on the bank balance sheets as whole loans or securities in their
portfolios, of which $1.1 trillion are second liens (home equity loans/
lines of credit or closed end second mortgages). Of the $1.1 trillion
outstanding second mortgages, only 3.7 percent of the total (or $41
billion) is held in securitized form. The remaining $1.8 trillion in
first lien mortgages reside in private label mortgage-backed
securities. The Residential Mortgage Backed Securities (RMBS) market
has efficiently provided mortgage financing for millions of American
families and has served as a means to extend credit throughout the
American economy and the world. While the Federal government's actions
to bolster Fannie Mae and Freddie Mac and to broaden the FHA's mandate
have proven to be critical stopgap measures during the housing and
economic crisis, a revival of the RMBS market and a return of private
investors to that market is seen by many as a prerequisite to the
recovery of the U.S. housing market and a return to normalcy in the
capital markets. The Federal government cannot by itself provide the
liquidity necessary to finance the national housing markets.
The process by which residential mortgage-backed securities are
created begins when a borrower obtains a mortgage loan from a lender.
After the loan is made, the loan is pooled together with other mortgage
loans and placed into a trust. The trust is administered by a trustee
and one or more servicers, who are the face of the trust to homeowners.
Investors in the trust generally have no interaction with the
homeowners, and also have extremely limited decision-making authority
with respect to modifications, foreclosures and other servicing
actions. Very often, the original lender, or its affiliate, acts as
servicer once the loans are securitized. Loan servicing is relatively
concentrated. Roughly 88 percent of subprime loans and 69 percent of
all residential mortgage loans are serviced by 18 servicers, and 55
percent of all mortgages are owned by or serviced by the 4 largest
banks.
Returning homeowners to a positive equity position provides
significant opportunity and motivation for at-risk homeowners to remain
in their homes and communities. A short refinancing under HFH solves
both the affordability and negative equity problems plaguing homeowners
at risk of foreclosure today. The program was created to reduce
principal on the existing senior lien mortgage and to eliminate the
existing subordinate second lien, which can prevent unnecessary
foreclosures. The Mortgage Investor Coalition believes that a properly
implemented Hope for Homeowners program will not only provide stability
for homeowners, but will help stem the declines in the housing markets
and provide certainty for the fixed income capital markets, which will
bolster financial markets in general and promote increased lending and
reinvestment in mortgages. We believe the program will prevent
additional foreclosure inventory from adding to the overhang of bank
owned properties in the residential real estate market, thereby helping
to establish a floor for housing prices.
I would like to reiterate what we, the Mortgage Investors
Coalition, have been stating--from Capitol Hill, to the Departments of
Treasury and Housing and Urban Development, and with Community Housing
Advocates. The best solution to our Nation's mortgage crisis is to
significantly forgive principal on first and second lien mortgage debt
in connection with the refinancing of the overextended homeowner into a
new, low interest rate mortgage through the Hope for Homeowners
program. The burden of solving the housing crisis should not fall
squarely on the shoulders of any one stakeholder, and investors are
willing to do our part by making a significant sacrifice in reducing
mortgage principal.
Investors seek a sustainable mortgage restructuring program that
works in the best interest of all parties and addresses the multiple
factors that have contributed to homeowner re-defaults. The solutions
that have been offered to date have been sub-optimal for the homeowner
in that they fail to address the entire consumer debt burden, and
overlook the pernicious effects of negative equity. Compared to a short
refinance program such as HFH, a modification approach, such as the
Making Home Affordable Program, has a notable shortcoming: by not
addressing negative equity, homeowners are trapped in a mortgage that
cannot be refinanced and a house that cannot be sold. When the program
ends in five years, the interest rate on both the first and second
mortgage will reset higher, the outstanding balance of the combined
mortgage debt is likely to still exceed the value of the home, and
there could be a meaningful risk of a re-default. The low prices of
securities in the mortgage market today in part reflect the great
uncertainty of future cash flows and values associated with such
modified loans.
It is our understanding that the Committee would like to examine
the reason more Hope for Homeowners refinancings have not occurred. The
following is our analysis of what has happened since this Committee
created and Congress passed the Helping Families Save Their Homes Act,
modifying the Hope for Homeowners program.
While there are still operational hurdles to overcome in
implementing a more effective program, the major impediment to the
viability of the program is the volume of second mortgages or second
liens outstanding. The second lien problem exists because many banks
and their affiliated servicers offered additional forms of financing to
consumers, such as home equity loans and second mortgages. As indicated
earlier, while a small percentage of second mortgages were sold to
investors, the vast majority remain on the balance sheets of our
Nation's largest financial institutions. In fact, the four banks that
service approximately 55 percent of mortgages held roughly $441 billion
of second liens on their balance sheets as of December 31, 2008. Banks
have favored loan modification programs such as Making Home Affordable
that defer the recognition of losses on the second lien portfolios.
That program improves the cash flow available to the second mortgage at
the expense of the first mortgage and defers the immediate loss that
would be recognized in a foreclosure, short sale or short refinance. In
these negative equity scenarios, the second lien would receive no
proceeds in a foreclosure action; on the other hand, the modification
program allows this uncollateralized obligation to remain outstanding
and on the books of the financial institution as a performing asset,
even though the homeowner has no equity in their home. The second lien
is subordinate to the first lien and often has a higher interest rate.
In the vast majority of cases, when a first mortgage is delinquent, so
is the second lien. Our analysis of 44.1 million first lien loans from
a primary credit bureau database indicated that of all second lien
mortgages, only 3 percent are current with a corresponding first lien
mortgage that is delinquent.
We believe the current accounting treatment of second liens on the
banks' balance sheets makes them particularly unwilling to take this
loss to complete a refinance, resulting in 1) unsuccessful
modifications that are prone to quickly re-default and 2) more
importantly, only a handful of Hope for Homeowners refinances. The
ideal scenario for a borrower who owns a home that is worth less than
its outstanding mortgage debt, referred to as being ``underwater'', is
to refinance into a Hope for Homeowners mortgage. Such a refinancing
would result in the Borrower having a new, affordable mortgage with an
equity investment in his or her home and an incentive to stay in the
home and build additional equity. In addition this homeowner could
eventually sell the home in a normal market transaction as opposed to
the selling into the current market of bank auctions and foreclosure
sales.
As I previously explained, the refinancing of mortgages through
Hope for Homeowners is the preferred solution for borrowers and
investors in mortgage loans. Given that investors want more mortgage
refinancings and an increased use of the Hope for Homeowners program,
why can't investors just tell the servicers to refinance more loans?
Unfortunately, even though the loans backing the investments are
held for the benefit of investors, the investors are limited in the
influence they can exert over those who administer the trusts. The
contracts governing the Administration of the trust that issued the
mortgage-backed securities were generally written in a manner that
creates various barriers to investor control. Thus, although investors
want servicers to be more responsive to borrowers and to significantly
increase the penetration of the Hope for Homeowners program, forcing
that behavior on the servicers is extremely difficult.
What is the solution? It is an effort that will require
participation and sacrifice by all interested parties to succeed. The
government, financial institutions and investors all share an important
stake in the recovery of the American homeowner and must contribute
equitably to forge a healthier, more stable housing market, financial
market and economy. The solution lies in providing positive equity and
affordable payments for homeowners. Investors stand ready to make the
sacrifice necessary to re-equitize the homeowners at risk of
foreclosure.
The Congress and the Administration should be diligent in their
prodding of bank-affiliated servicers to offer HFH refinancings. HUD
and Treasury are actively working to reach out to all stakeholders,
including the banks and servicers who hold second liens, to arrive at a
solution that can lead to more refinancings under the Hope for
Homeowners program. It is unclear at this point whether HUD and
Treasury have made progress on the second lien issue. If necessary,
additional capital could be allocated to this effort as TARP funds are
repaid to the government. When the Emergency Economic Stability Act of
2008 first passed, a significant portion of the TARP money was to have
been reserved for foreclosure avoidance. Government funds could be used
to more aggressively compensate second lien holders as their
investments are extinguished in the short refinance process of HFH.
Fundamentally, for this problem to be solved, everyone must share
the burden. Solutions cannot be a windfall for certain stakeholders and
terrible for others. We must get homeowners out of underwater mortgages
and into mortgages that have positive equity and are properly
underwritten, affordable, fair, and sustainable. Contributions must be
made by all participants.
Based on all the available options, it seems the best solution is
the Hope for Homeowners program. This means that investors like us will
have to be prepared to take an immediate and substantial hit on the
outstanding principal amount of the mortgage as loans are refinanced
out of the securitization trust at a discount. It is necessary for
borrowers to emerge from their underwater positions and begin to build
positive equity for the housing market to recover. Given today's
unprecedented economic conditions, mortgage investors stand ready to
contribute to the re-equitization of homeowners by reducing principal
on first lien mortgage debt to facilitate the refinance of these loans
into stable thirty-year, amortizing, fixed-rate government loans.
In creating the Hope for Homeowners program, Congress has created
the framework for a successful solution to the housing crisis, and the
funding necessary to provide sustainable mortgages for many American
families at risk of losing their home to foreclosure. Mortgage
Investors are prepared to make the appropriate contributions to
preserve homeownership and call on the Committee to provide support in
effectuating a workable program with the other stakeholders, including
financial institutions that control the servicing and origination of
residential mortgages.
Mr. Chairman, we thank you for the opportunity to testify today--
and for your and your colleagues' efforts to help families not only
achieve the American dream but also to keep their homes and avoid
foreclosure during these turbulent times. We look forward to working
with you to provide hope for homeowners and to doing our part to solve
the housing and mortgage market crisis.
______
PREPARED STATEMENT OF ALLEN H. JONES
Default Management Policy Executive, Bank of America
July 16, 2009
Good morning, Chairman Dodd, Ranking Member Shelby and Members of
the Committee. I am Allen Jones, Bank of America's Default Management
Policy Executive. Thank you for the opportunity to appear and update
you on the efforts of Bank of America to help families avoid
foreclosures wherever possible and stay in their homes.
Let me start by making two important points on which I will
elaborate later in the testimony.
First, as you will recall Bank of America exited subprime lending
nearly nine years ago. Upon acquiring Countrywide, we have taken the
steps to ensure our combined company is a leader in traditional
mortgage products. Our April launch of the Clarity Commitment--a clear
and simple one page disclosure that accompanies every new and
refinanced loan--is one demonstration of our focus on ensuring
customers understand what loan they are getting and the associated
costs.
Second, Bank of America has been at the forefront of government and
industry efforts to develop loan modification programs as a way of
avoiding foreclosures and helping financially distressed customers
remain in their homes. We modified 230,000 mortgage loans in 2008, and
we are pleased to report that in the first six months of this year,
modification offers have been accepted or rate relief has been provided
for more than 150,000 customers.
In recent weeks, as the Administration's Making Home Affordable
modification program guidelines have been completed and our systems
have been converted, Making Home Affordable has become the centerpiece
of Bank of America's overall home retention efforts. Already,
approximately 80,000 Bank of America customers are in the trial
modification period or are responding to modification offers we have
extended under Making Home Affordable.
We have achieved this level of success by devoting substantial
resources to this effort. Our Home Loans business has more than 7,400
associates dedicated to home retention. This team has nearly doubled
since this time one year ago. They respond to an average of 80,000
customer calls a day--and more than 1.8 million calls a month. In
addition to personnel, we have devoted substantial systems, training
and other resources to our loan modification efforts.
Our country is slowly emerging from the worst economic crisis since
the Great Depression, the impacts of which have been felt deeply by
consumers because at its center has been the deterioration in value of
an asset important to individual wealth and stability--the home. Home
values in some areas of the country have depreciated to less than half
their value at the market's peak, and unemployment continues to rise--
recently hitting a 26 year high.
Against this backdrop, millions of families are struggling. As one
of the country's leading mortgage lenders and servicers, Bank of
America understands and fully appreciates its role in helping borrowers
through these difficult economic times. We want to ensure that any
borrower who has sufficient income and the intent to maintain
homeownership has the ability to do so using any and all resources we
have available.
With that introduction, let me describe more specifically how we
are leveraging Making Home Affordable and other programs to help
borrowers, and provide some suggestions for improvement.
Support for Administration's Foreclosure Relief Efforts
Bank of America supports the Obama Administration's Making Home
Affordable refinance and loan modification programs for their potential
to help millions of homeowners who otherwise may have faced certain
foreclosure.
The program's focus on affordability of payment in the loan
modification and refinance processes is consistent with the approach we
have successfully developed for our customers, and we appreciate the
opportunity we have had to work with the Administration in developing
guidelines for its Making Home Affordable programs.
While our primary focus here today is loan modifications, it's
important to recognize the benefits of the Making Home Affordable
refinance program and its role in helping more Americans retain their
homes.
Bank of America was one of the first lenders to process refinance
applications through the Making Home Affordable program. We have taken
more than 90,000 Making Home Affordable refinance applications (the
majority of which have locked) and funded nearly 40,000 refinances
since launching the program.
Responsiveness to borrowers. We understand the importance of
responding promptly when our customers call, and providing clear,
timely answers to their questions. As noted earlier, our home retention
division responds to an average of 80,000 customer calls daily. We seek
to answer calls from customers in 90 seconds or less--and in the second
quarter we met that goal more than 80 percent of the time.
Making Home Affordable Modification Process. Our process for
evaluating Making Home Affordable modifications generally works as
follows: A customer is contacted through solicitation or offer letters
or they contact us, and we perform an analysis of their financial
situation, focusing primarily on their income and expenses and any
hardships they may be suffering. In many cases, particularly where we
have delegated authority from our investors to modify their loans, the
customer can be pre-qualified for the Making Home Affordable program
over the phone.
A pre-qualified customer receives a trial modification plan in the
mail to execute and return within 30 days, along with supporting
financial documentation and their first trial period payment. During
the trial period, the customer's documentation is evaluated to ensure
compliance with program guidelines. A customer who meets all program
requirements, including timely making of all payments during this three
or four month period, will receive a second agreement that must be
signed and promptly returned to receive a final modification.
We continually strive to make our processes efficient and customer-
friendly. We have established new processes for, among other things,
verifying borrower income and expenses, managing trial modification
periods, securing the payment of mortgage insurance pre-claims at the
time of modification so as to enable more borrowers to qualify for
modifications, and working with third party contractors engaged by the
GSEs.
Delays in Foreclosure Sales. Bank of America customers will not
lose their homes to foreclosure while their loans are being considered
for a modification. The Bank places foreclosure sales on hold while it
determines a customer's eligibility for its home retention programs.
Bank of America's Home Retention Operations
While the focus of today's hearing is on Making Home Affordable
modification implementation, we also want to highlight our early
leadership to address avoidable foreclosures. As the largest servicer
in the United States, servicing one in five mortgages, or a total of 14
million loans, we understand our responsibility to help our customers
sustain homeownership. Before the government's announcement of Making
Home Affordable earlier this year, Bank of America had proactively put
in place industry-leading assistance programs for distressed borrowers.
We continue to leverage those programs to ensure that we consider every
potential solution for our customers.
National Homeownership Retention Program. Shortly after acquiring
Countrywide, Bank of America announced the creation of our National
Homeownership Retention Program for nearly 400,000 borrowers with
discontinued Countrywide subprime and pay option ARM products. Outreach
under the program began in December 2008. Like Making Home Affordable,
our National Homeownership Retention Program focuses on affordability
and sustainability, while providing a streamlined loan modification
process.
Hope for Homeowners. Bank of America believes the Hope for
Homeowners program provides another useful tool for assisting
borrowers. We have not been able to implement the program as we are
still awaiting final guidance from the Department of Housing and Urban
Development. The program, as originally rolled out, had a series of
unique requirements which were very different from standard FHA
programs, and presented serious implementation challenges for lenders.
The Helping Families Save Their Homes Act signed into law by President
Obama in May of 2009 includes helpful changes to Hope for Homeowners
that are designed to make the program more consistent with standard FHA
practices. We understand the Department of Housing and Urban
Development is hard at work on developing final Hope for Homeowners
guidance that will provide lenders with the tools they need to move
forward and implement the program. It is important to note that once
final guidelines are issued, it will still take lenders several months
to implement the program.
Community Outreach and Partnerships. We have also devoted
significant resources to community outreach. Since the beginning of
this year, we have participated in more than 120 community outreach
events in 26 states. We have reached more than 5,000 borrowers through
these events, with about 50 percent of whom we had no prior contact in
the last 60 days.
We have partnered with the National Council of La Raza, National
Urban League, and the National Coalition for Asian Pacific American
Community Development in the creation of the Alliance for Stabilizing
Communities, and we provided $2.5 million in funding to support this
national coalition dedicated to assisting individuals facing
foreclosure. The Alliance will hold 40 housing rescue fairs over the
next two years in 24 communities hardest hit by the foreclosure crisis.
In addition, Bank of America partners with 440 HUD-approved non-
profit counseling agencies. Empowering the counselors with knowledge
about Bank of America Home Loans and the Making Home Affordable
modification program is significant because counselors can educate
borrowers and assist in the modification application process. This
year, we have trained over 500 counselors in sessions across the United
States.
Making Home Affordable Challenges and Improvements
Bank of America appreciates the opportunity we've had to work
closely with members of the Administration in developing the Making
Home Affordable program. We all understand there is still more work to
be done on various aspects of the program to improve its success and
the success of those homeowners that rely on it for assistance during
these difficult economic times.
We would like to take this opportunity to offer some suggestions
for improvement:
Announcement of Program Changes or Guidance. Communications by
Treasury to servicers and at-risk homeowners regarding program features
and effective dates could be improved. Advanced notification to loan
servicers once new guidelines or program changes are determined (but
before they become effective) would enable servicers to establish early
necessary systems and practices to better address customer inquiries.
The current method of publicly announcing new guidelines or changes
concurrently with their effective dates creates immediate demand with
insufficient lead time for operational readiness. This can lead to
negative customer experience and, ultimately, public backlash against
the programs.
We also would suggest that new or revised guidelines not be issued
until they have been reviewed with industry representatives and their
details have been completed. For example, while we appreciate the
spirit in which it was done, the issuance by Treasury of its brief and
limited guidelines for the second lien and short sale programs months
before their comprehensive rules have been finalized or even drafted
has led to a great deal of confusion and delay in the industry and with
the public.
Promoting uniform interpretations of program guidelines.
Consistency in the creation and interpretation of program guidelines
between Treasury and the GSEs, as well as consistent guidelines for
Fannie Mae- and Freddie Mac-owned or securitized loans, also would
reduce homeowner confusion and simplify servicers' ability to
operationalize these programs as they evolve. Similarly, it is
important to encourage states to limit modification-related legislation
which may complicate participation in federal programs such as MHA. And
there also should be consistency among the various federal regulators
and agencies as to the options servicers should utilize and the process
servicers should follow for implementing Making Home Affordable.
Requirement of complete documentation. One of the benefits of the
MHA program is the trial modification period. Servicers can approve
trial modifications almost instantly and use the trial period to
collect the necessary documentation to complete the modification. One
factor that slows down the process during the trial period is that many
borrowers initially provide incomplete information. We hope to work
with the Administration to address the challenges we are experiencing
with some of the required documentation returned by customers by
reinforcing through the media and other communications the importance
of complete and accurate documentation. Servicers also should have some
flexibility to determine the materiality of the incomplete response,
such as whether we can accept an electronically filed tax return
without a signature.
No program for the unemployed. As a general matter, we would
welcome the opportunity to work with Treasury on a program that would
offer short term relief while unemployed borrowers seek re-employment.
This is already a significant population, and a growing need.
Customer Impacts
Despite problems in the economy, most of our customers continue to
pay their mortgages on time; and less than 375,000 loans, or fewer than
3 percent of the 14 million loans in our servicing portfolio, face
foreclosure. While foreclosures are a relatively small percentage of
our portfolio, we recognize that the impact they have on our
communities, neighborhoods and customers is significant. That is why we
have exhausted and will continue to exhaust every possible avenue to
help families stay in their homes.
Despite our best efforts, there are limits to what we can do. With
unemployment at a 26-year high, even the most ambitious modification
plan will not help when there is no income. Often the largest
impediments to completing loan modifications are the changed
circumstances of the borrower, such as unemployment, divorce, illness,
or dissatisfaction with the property that may make a loan modification
unattainable. We can only modify loans where the borrower has the
ability and willingness to repay.
Our goal is to keep as many families in their homes as possible.
Often we will succeed, but regardless, we believe every customer
deserves to be treated with compassion and respect, and we work to
provide a dignified process for everyone.
Bank of America Mortgage Lending Update
We strongly believe that long-term recovery in the economy and
housing markets relies upon lenders responsibly and effectively
providing loans to creditworthy borrowers. To that end, in April we
launched Bank of America Home Loans, which is built on a brand promise
to always be a responsible lender and help create successful
homeowners.
At that time, we introduced several new tools in response to
valuable customer feedback. One such tool--the Clarity Commitment--is a
one-page summary of a borrower's loan terms in plain English. We have
it in place on 95 percent of our products, and it has been very well
received by our customers and community partners. Since we introduced
it, already 400,000 customers have received this document with their
loan papers.
We are making new mortgage loans available to eligible customers
for buying homes and refinancing their current mortgage loans. On
Friday, July 17, Bank of America will report second quarter earnings.
In the first quarter of 2009, we generated:
More than $85 billion in first mortgage production--representing
more than 382,000 customers who purchased homes or saved money on the
home theyalready own.
More than $4 billion in home equity and reverse mortgage
production, representing almost 23,000 customers.
One in four of these loans were to low- and moderate-income
customers.
Conclusion
I want to thank you for the opportunity to describe our ongoing
home retention efforts. We recognize there is still much more to be
done. The ongoing economic crisis demands expedient, affordable loan
modifications that help borrowers within the framework of our
contractual obligations to investors.
This is a critically important undertaking that must be done right
if we as a country are going to preserve the flow of mortgage credit to
support sustainable homeownership and at the same time protect
communities and neighborhoods from avoidable foreclosures. We look
forward to working with Congress and the Administration to accomplish
these goals. I would be happy to answer any questions you might have.
______
PREPARED STATEMENT OF DIANE E. THOMPSON
National Consumer Law Center, also on behalf of
National Association of Consumer Advocates
July 16, 2009
I. Introduction
Chairman Dodd, Ranking Member Shelby, and members of the Committee,
thank you for inviting me to testify today regarding the barriers
encountered by homeowners attempting to access the Making Home
Affordable program and the Hope for Homeowners program.
I am an attorney, currently of counsel to the National Consumer Law
Center (NCLC).\1\ In my work at NCLC I provide training and support to
hundreds of attorneys representing homeowners from all across the
country and consequently have heard many, many reports of the
difficulties encountered by advocates and homeowners attempting to
obtain sustainable loan modifications. For nearly 13 years prior to
joining NCLC, I represented low-income homeowners at Land of Lincoln
Legal Assistance Foundation in East St. Louis, Illinois. In that
capacity, I became intimately familiar with the difficulties in
arranging a loan modification, even when it was clearly in the
investor's best interests.
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\1\ The National Consumer Law Center, Inc. (NCLC) is a non-profit
Massachusetts Corporation, founded in 1969, specializing in low-income
consumer issues, with an emphasis on consumer credit. On a daily basis,
NCLC provides legal and technical consulting and assistance on consumer
law issues to legal services, government, and private attorneys
representing low-income consumers across the country. NCLC publishes a
series of eighteen practice treatises and annual supplements on
consumer credit laws, including Truth In Lending (6th ed. 2007) and
Cost of Credit: Regulation, Preemption, and Industry Abuses (3d ed.
2005) and Foreclosures (2d ed. 2007), as well as bimonthly newsletters
on a range of topics related to consumer credit issues and low-income
consumers. NCLC attorneys have written and advocated extensively on all
aspects of consumer law affecting low-income people, conducted training
for thousands of legal services and private attorneys on the law and
litigation strategies to deal with predatory lending and other consumer
law problems, and provided extensive oral and written testimony to
numerous Congressional committees on these topics. This testimony was
written by Alys Cohen, Staff Attorney, and Diane E. Thompson, Of
Counsel, to NCLC.
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I testify here today on behalf of the National Consumer Law
Center's low-income clients. On a daily basis, NCLC provides legal and
technical assistance on consumer law issues to legal services,
government and private attorneys representing low-income consumers
across the country. I also testify here today on behalf of the National
Association of Consumer Advocates.\2\
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\2\ The National Association of Consumer Advocates (NACA) is a non-
profit corporation whose members are private and public sector
attorneys, legal services attorneys, law professors, and law students,
whose primary focus involves the protection and representation of
consumers. NACA's mission is to promote justice for all consumers.
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We are facing in this country a foreclosure tsunami, which
threatens to destabilize our entire economy, devastate entire
communities, and destroy millions of families. Large-scale, sustainable
modifications are widely recognized as an essential component of
restoring economic health to our country and hope to our homeowners.
There are three major Federal programs designed to prevent
foreclosures and preserve homeownership: Hope for Homeowners, the
Making Home Affordable refinance program, and the Making Home
Affordable modification program, or the Home Affordable Modification
Program. My comments will focus on the modification prong of the Making
Home Affordable program. Far more of the homeowners facing foreclosure
are eligible for modification under the Home Affordable Modification
Program than for refinance under either Hope for Homeowners or the
refinance prong of Making Home Affordable. Recent changes to both
programs should increase eligibility and may increase participation.
Still, restrictions on both programs are likely to continue to limit
their reach.
Both Hope for Homeowners and the refinance prong of Making Home
Affordable are designed to offer some relief to homeowners who owe more
than their homes are worth. This is an important goal and an essential
component of any solution to the foreclosure crisis. As described in
Chairman Dodd's letter of July 10, 2009, Hope for Homeowners, in
particular, could play an important role in moving us forward by
mandating principal reductions. We remain concerned, however, that
neither program effectively eliminates negative equity. The refinance
prong of Making Home Affordable permits the refinancing of excess debt
and so may permit homeowners to lower interest rates. Absent market
appreciation, however, it does not reduce the negative equity. Although
Hope for Homeowners mandates principal reductions, many mortgage
holders and servicers continue to be unwilling to agree to this write-
down as the price for participation in the program, even with the
possibility of an increased share in future appreciation.\3\ Nor is it
clear that even the recent improvements to the Hope for Homeowners
second lien program will be sufficient to remove second liens in any
significant number.
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\3\ The requirement that future appreciation be shared with HUD
also reduces homeowners' investment in their property and may have
adverse unintended consequences if homeowners respond to that reduced
equity by defaulting.
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The recent improvements to FHA and RHS are also beyond the scope of
my testimony. We would like nonetheless to take this opportunity to
congratulate Congress and the Administration on the important steps
forward in these programs. In addition to improving Hope for
Homeowners, S. 896 also increased the ability of homeowners with FHA
and RHS loans to access partial claims, a special form of principal
forbearance. This, too, is an important step to increase the long-term
affordability of mortgages for many of our most vulnerable homeowners.
Having negotiated partial claims with FHA servicers on behalf of low-
income homeowners, I personally know how important the partial claim
option can be to preserving homeownership. We at NCLC and NACA applaud
Congress and the Administration for their efforts to expand the
modification options available under the government-insured programs:
FHA, RHS, and VA.
The Home Affordable Modification Program (HAMP) announced by
President Obama's administration on March 4, 2009, is a laudable
attempt to overcome long standing reluctance by servicers to perform
large numbers of sustainable loan modifications. HAMP seeks to change
the dynamic that leads servicers to refuse even loan modifications that
would be in the investors' best interests by providing both servicers
and investors with payments to support successful loan modifications.
Several months into the Home Affordable Modification Program (HAMP),
however, homeowners and their advocates report that the program is not
providing a sufficient number of loan modifications to homeowners, the
modifications offered often do not meet the guidelines of the program,
and the program itself still presents serious barriers to mass loan
modifications.
HAMP, despite its lofty goals, has not yet been able to contain the
foreclosure tsunami. To date, implementation of the program by
servicers has been slow and sporadic. The Administration's efforts to
hold servicers accountable \4\ are a welcome and necessary step
forward. Further steps to reform HAMP and ensure servicer compliance
are needed if the program is to reach its goal of reducing
foreclosures. Particularly problematic is the lack of any mechanism to
ensure that homeowners are, when appropriate, offered a loan
modification prior to foreclosure sale. A timeline should be set to
evaluate whether HAMP, along with other existing programs, can
sufficiently address foreclosures. If it becomes clear they can not,
more stringent measures, as discussed below, should be adopted. The
structure of the servicing industry makes it unlikely that existing
measures will be adequate; currently available information confirms
that prognosis.
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\4\ Renae Merle, White House Prods Banks: Letter Tells Chiefs To
Start Backing Mortgage Relief, Wash. Post, July 10, 2009, available at
http://www.washingtonpost.com/wpdyn/content/article/2009/07/09/
AR2009070902928.html?nav=rss_business.
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A. Problems with Servicers' Implementation of HAMP Plague Homeowners
Seeking Loan Modifications.
--Participating servicers violate the HAMP guidelines:
Servicers still require waivers.
Some participating servicers offer non-compliant loan
modifications.
Some participating servicers refuse to offer HAMP
modifications.
Servicers charge fees to homeowners for the modification.
Servicers are continuing to initiate foreclosures and sell
homes at foreclosure sales while the HAMP review is pending.
--Servicer staffing and training still lag behind what is needed.
Homeowners and counselors report waits of months to hear
back on review for a trial modification, followed by very short
timeframes to return documents.
Staff of participating servicers continue to display
alarming ignorance of HAMP.
Non-participating servicers continue to represent
themselves as participating in HAMP.
--Lack of transparency and accountability is resulting in summary
denials and other unreasonable acts by servicers.
B. Certain HAMP Policies Must Be Changed to Provide Sustainable
Modifications and Save Communities.
--Transparency must be improved.
The Net Present Value model for qualifying homeowners must
be available to the public.
The layers of documents governing HAMP, the guidelines, the
Supplemental Directives, the various FAQ's, and the servicer
contracts, should be consolidated, reconciled, and clarified.
Participating subsidiaries must be clearly identified.
--Mechanisms for enforcement and compliance should be adopted.
All foreclosure proceedings must be stopped upon the
initiation of a HAMP review, not just at the point before sale.
Homeowners should be provided with an independent review
process when denied a loan modification.
Homeowners should have access to an ombudsman to address
complaints about the process.
Denials based in part on a borrower's credit score should
be accompanied by an adverse action notice under the Fair
Credit Reporting Act.
--The HAMP guidelines should be adjusted to provide more meaningful
relief to homeowners without reducing their existing rights.
Homeowners need principal reductions, not forbearance.
Homeowners suffering an involuntary drop in income should
be eligible for a second HAMP loan modification.
Homeowners in bankruptcy should be provided clear access to
the HAMP program.
Mortgages should remain assumable as between spouses,
children, and other persons with a homestead interest in the
property.
Fair lending principles must be ensured throughout the HAMP
process.
HAMP application procedures should better recognize and
lessen the impact of exigent circumstances.
The trial modification program should be further formalized
and clarified, such that homeowners receive assurances of the
terms of the permanent modification and homeowners are not put
into default on their loans if they are current at the onset of
the trial modification.
The final modification agreement should make clear that the
homeowners do not waive any rights nor are required to reaffirm
the debt in order to enter into the modification.
The second lien program should be further developed to
promote coordination with first lien modifications; servicers
should be required to participate in both programs.
--Data collection and reporting should provide broad, detailed
information in order to support the best HAMP outcomes.
II. Foreclosures Far Outweigh Loan Modifications.
Goldman Sachs estimates that, starting at the end of the last
quarter of 2008 through 2014, 13 million foreclosures will be
started.\5\ At the end of the first quarter of 2009, more than 2
million houses were in foreclosure.\6\ Over twelve percent of all
mortgages had payments past due or were in foreclosure and over 7
percent were seriously delinquent--either in foreclosure or more than 3
months delinquent.\7\
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\5\ Goldman Sachs Global ECS Research, Home Prices and Credit
Losses: Projections and Policy Options (Jan. 13, 2009), at 16; see also
Rod Dubitsky, Larry Yang, Stevan Stevanovic & Thomas Suehr, Credit
Suisse Fixed Income Research, Foreclosure Update: Over 8 Million
Foreclosures Expected 1 (Dec. 4, 2008) (predicting 9 million
foreclosures for the period 2009-2012).
\6\ Mortgage Bankers' Ass'n, Nat'l Delinquency Survey Q109 at 4
(2009) (reporting that 3.85 percent of 44,979,733, or 1.7 million,
mortgages serviced were in foreclosure). Roughly half of these were
serviced by national banks or Federal thrifts. See Office of the
Comptroller of the Currency & Office of Thrift Supervision, OCC and OTS
Mortgage Metrics Report: Disclosure of National Bank and Federal Thrift
Mortgage Loan Data, First Quarter 2009, at 8 (June 2009), available at
http://files.ots.treas.gov/482047.pdf (reporting that 884,389
foreclosures were in process by national banks and Federal thrifts at
the end of the first quarter of 2009). The estimate of more than 2
million homes in foreclosure is achieved by extrapolating from the MBA
numbers. The MBA survey only covers approximately 80 percent of the
mortgage market. Thus, (44979733*3.85 %)/0.8=2.16 million.
\7\ Mortgage Bankers' Ass'n, Nat'l Delinquency Survey Q109 at 4
(2009).
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These spiraling foreclosures weaken the entire economy and
devastate the communities in which they are concentrated.\8\ Neighbors
lose equity; \9\ crime increases; \10\ tax revenue shrinks.\11\
Communities of color remain at the epicenter of the crisis; targeted
for subprime, abusive lending, they now suffer doubly from
extraordinarily high rates of foreclosure and the assorted ills that
come with foreclosure.\12\
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\8\ See, e.g., Ben S. Bernanke, Chairman, Bd. of Governors, Fed.
Reserve Sys., Address at the Federal Reserve System Conference on
Housing and Mortgage Markets (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm#f12; Ira
J. Goldstein, The Reinvestment Fund, Lost Values: A Study of Predatory
Lending in Philadelphia, at 62/-/63 (2007), available at
www.trfund.com/resource/downloads/policypubs/Lost_Values.pdf
(discussing disastrous community impact left behind by failed subprime
lenders).
\9\ See John P. Harding, Eric Rosenblatt, & Yao Vincent, The
Contagion Effect of Foreclosed Properties (July 15, 2008), available at
http://ssrn.com/abstract=1160354; Letter, Senator Dodd to Senator Reid
(Jan. 22, 2008) (describing cycle of disinvestment, crime, falling
property values and property tax collections resulting from
foreclosures), available at http://dodd.senate.gov/multimedia/2008/
012308_ReidLetter.pdf; Staff of the J. Economic. Comm., 110th Cong.,
1st Sess., The Subprime Lending Crisis: The Economic Impact on Wealth,
Property Values and Tax Revenues, and How We Got Here (2007), available
at http://jec.senate.gov/
index.cfm?FuseAction=Reports.Reports&ContentRecord_id=c6627bb2-7e9c-
9af9-7ac7-32b94d398
d27&Region_id=&Issue_id= (projecting foreclosed home owners will lose
$71 billion due to foreclosure crisis, neighbors will lose $32 billion,
and state and local governments will lose $917 million in property tax
revenue); Dan Immergluck & Geoff Smith, The External Costs of
Foreclosure: The Impact of Single-Family Mortgage Foreclosures on
Property Values, 17 Housing Pol'y Debate 57, 69, 75 (2006) (``for each
additional conventional foreclosure within an eighth of a mile of a
house, property value is expected to decrease by 1.136 percent'';
estimating total impact in Chicago to be between $598 million and $1.39
billion); William C. Apgar, Mark Duda, & Rochelle Nawrocki Gorey, The
Municipal Cost of Foreclosures: A Chicago Case Study (Hous. Fin. Policy
Research Paper 2005), at 1, available at www.995hope.org/content/pdf/
Apgar_Duda_Study_Full_Version.pdf; John P. Harding, Eric Rosenblatt, &
Yao Vincent, The Contagion Effect of Foreclosed Properties (July 15,
2008), available at http://ssrn.com/abstract=1160354; Letter, Senator
Dodd to Senator Reid (Jan. 22, 2008) (describing cycle of
disinvestment, crime, falling property values and property tax
collections resulting from foreclosures), available at http://
dodd.senate.gov/multimedia/2008/012308_ReidLetter.pdf.
\10\ See, e.g., J.W. Elphinstone, After Foreclosure, Crime Moves
In, Boston Globe, Nov. 18, 2007 (describing Atlanta neighborhood now
plagued by house fires, prostitution, vandalism and burglaries); Dan
Immergluck & Geoff Smith, The Impact of Single-Family Mortgage
Foreclosures on Neighborhood Crime, 21 Housing Stud. 851 (2006),
available at www.prism.gatech.edu/di17/housingstudies.doc (calculating
that for every 1 percent increase in the foreclosure rate in a census
tract there is a corresponding 2 percent increase in the violent crime
rate).
\11\ See, e.g., Staff of the J. Economic Comm., 110th Cong., 1st
Sess., The Subprime Lending Crisis: The Economic Impact on Wealth,
Property Values and Tax Revenues, and How We Got Here (2007), available
at http://jec.senate.gov/index.cfm?FuseAction=Reports.Reports&Content
Record_id=c6627bb2-7e9c-9af9-7ac7-32b94d398d27&Region_id=&Issue_id=
(projecting foreclosed home owners will lose $71 billion due to
foreclosure crisis, neighbors will lose $32 billion, and state and
local governments will lose $917 million in property tax revenue);
William C. Apgar, Mark Duda, & Rochelle Nawrocki Gorey, The Municipal
Cost of Foreclosures: A Chicago Case Study (Hous. Fin. Policy Research
Paper), 2005, at 1, www.995hope.org/content/pdf/
Apgar_Duda_Study_Full_Version.pdf.
\12\ See, e.g., Michael Powell & Janet Roberts, Minorities Affected
Most as New York Foreclosures Rise, N.Y. Times, May 15, 2009; Mortgage
Foreclosure Filings in Pennsylvania: A Study by the Reinvestment Fund
for the Pennsylvania Department of Banking 36 (Mar. 2005), available at
www.trfund.com/policy/pa_foreclosures.htm; Paul Calem, Kevin Gillen &
Susan Wachter, The Neighborhood Distribution of Subprime Mortgage
Lending, 29 J. Real Estate Fin. & Econ. 393 (2004); Ira Goldstein, The
Reinvestment Fund, Predatory Lending: An Approach to Identify and
Understand Predatory Lending (2002) (showing that areas within the city
of Philadelphia that are predominately African American or Latino also
tended to have higher concentrations of foreclosure sales and were more
vulnerable to predatory lending); cf. AARP Pub. Pol'y Inst., A First
Look at Older Americans and the Mortgage Crisis 5 (2008), http://
assets.aarp.org/rgcenter/econ/i9_mortgage.pdf (African Americans and
Hispanics are foreclosed on at roughly three times the rate of white
Americans).
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Modifications have not made a dent in the burgeoning foreclosures.
A recent paper in the Boston Federal Reserve Bank's Public Policy
series found that less than 8 percent of all the loans 60 days or more
delinquent were modified during 2007-2008\13\ Professor Alan White, in
examining pools of securitized mortgages, found that the number of
modifications varied dramatically by servicer, ranging from servicers
who modified as many as 35 percent of the loans in foreclosure to as
few as 0.28 percent of the loans in foreclosure in November 2008.\14\
Even at the high end of 35 percent of all mortgages in foreclosure, the
modification rate is not enough to reduce the foreclosure rate to pre-
crisis levels.\15\ HAMP has not yet improved the situation: although
modifications increased during the first quarter of 2009, all data
indicate that the number and rate of total modifications fell back
during the second quarter.\16\
---------------------------------------------------------------------------
\13\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and
Securitization 35 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf.
\14\ Alan M. White, Deleveraging the American Homeowner: The
Failure of 2008 Voluntary Mortgage Modification Contracts, Conn. L.
Rev. 12-13 (forthcoming 2009), available at http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1325534.
\15\ See Ben S. Bernanke, Chairman, Bd. of Governors, Fed. Reserve
Sys., Address at the Federal Reserve System Conference on Housing and
Mortgage Markets (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm#f12
(noting that the number of foreclosures has more than doubled from pre-
crisis levels).
\16\ See, e.g., Gretchen Morgenson, Fair Game--So Many
Foreclosures, So Little Logic, N.Y. Times, July 4, 2009 (reporting that
modifications peaked in February 2009 and have since declined while the
number of foreclosures and delinquencies has continued to rise);
California Reinvestment Coalition, The Ongoing Chasm Between Words and
Deeds: Abusive Practices Continue to Harm Families and Communities in
California (2009) (reporting observations by housing counselors that
loan modifications declined in the second quarter); Home Foreclosures:
Will Voluntary Mortgage Modification Help Families Save Their Homes?:
Hearing Before the Subcomm. on Commercial and Administrative Law of the
H. Comm. on the Judiciary, 111th Cong. (2009) (testimony of Alan M.
White).
---------------------------------------------------------------------------
Worse, the modifications offered pre-HAMP (and presumably still by
servicers not offering HAMP modifications) were overwhelmingly ones
that increased the borrower's payment and principal balance. Only about
3 percent of the delinquent loans studied in Boston Federal Reserve
Bank paper received modifications that reduced the payment.\1\17
Professor White's data shows that, in the aggregate, modifications
increase the principal balance.\18\ While the first quarter 2009 data
from the OCC and OTS shows that a majority of the modifications
(excluding short term payment plans or forbearance agreements)
decreased the payment, most of those modifications also increased the
principal balance by capitalizing arrears.\19\ Unsurprisingly,
redefault rates on loan modifications remain high.\20\
---------------------------------------------------------------------------
\17\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and
Securitization (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-4,
July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf.
\18\ Alan White, Rewriting Contracts, Wholesale: Data on Voluntary
Mortgage Modifications from 2007 and 2008 Remittance Reports, Fordham
Urb. L. J. 20 (forthcoming 2009), available at http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1259538#
\19\ Office of the Comptroller of the Currency & Office of Thrift
Supervision, OCC and OTS Mortgage Metrics Report: Disclosure of
National Bank and Federal Thrift Mortgage Loan Data, First Quarter
2009, at 5 (June 2009), available at http://files.ots.treas.gov/
482047.pdf.
\20\ Office of the Comptroller of the Currency & Office of Thrift
Supervision, OCC and OTS Mortgage Metrics Report: Disclosure of
National Bank and Federal Thrift Mortgage Loan Data, First Quarter
2009, at 6 (June 2009), available at http://files.ots.treas.gov/
482047.pdf.
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The official numbers available to date on the HAMP program reflect
a modest start at best.\21\ The good news is that, on paper at least,
75 percent of all the loans in the country should be covered by
HAMP.\22\ The bad news is that only 55,000 trial modifications have
been offered and only 300,000 letters with information about trial
modifications have been sent to homeowners. As the President
acknowledges, foreclosures still outnumber modifications under the
program.\23\ The 300,000 letters containing information about trial
modifications are obscured by the more than 2 million homeowners in
foreclosure and the over 770,000 new foreclosure starts in the first
quarter alone.\24\
---------------------------------------------------------------------------
\21\ United States Department of the Treasury, Making Home
Affordable Progress Report, May 14, 2009, available at http://
www.treas.gov/press/releases/docs/05142009ProgressReport.pdf.
\22\ United States Department of the Treasury, Making Home
Affordable Progress Report, May 14, 2009, available at http://
www.treas.gov/press/releases/docs/05142009ProgressReport.pdf.
\23\ Tami Luhby, Obama mortgage plan needs work: Many borrowers are
not getting help under president's modification or refinancing plan,
CNN Money.com, July 8, 2009; Press Conference by the President, The
White House, Office of the Press Secretary (June 23, 2009), available
at http://www.whitehouse.gov/the_press_office/Press-Conference-by-the-
President-6-23-09/ (``Our mortgage program has actually helped to
modify mortgages for a lot of our people, but it hasn't been keeping
pace with all the foreclosures that are taking place,'').
\24\ Mortgage Bankers' Ass'n, Nat'l Delinquency Survey Q109 at 4
(2009) (reporting that 3.85 percent of 44,979,733 mortgages surveyed
were in foreclosure in the first quarter and that 1.37 percent of
mortgages surveyed had foreclosure starts in the first quarter; the MBA
survey data covers 80 percent of the mortgage market, so the numbers
are extrapolated by dividing the MBA numbers by 80 percent).
---------------------------------------------------------------------------
Servicers are still staffing up to deal with homeowners in
distress.\25\ Administration officials have admitted that the industry
is not yet up to the task.\26\ The progress servicers have made in
hiring loan modification staff, although real, is not keeping up with
the numbers of foreclosures filed by those same servicers.
---------------------------------------------------------------------------
\25\ See, e.g., Peter S. Goodman, Promised Help Is Elusive for Some
Homeowners, N.Y. Times, June 3, 2009.
\26\ Peter S. Goodman, Paper Avalanche Buries Plan to Stem
Foreclosures, N.Y. Times, June 29, 2009) (quoting Michael Barr,
Assistant Secretary for Financial Institutions at the Treasury
Department: ``They need to do a much better job on the basic management
and operational side of their firms . . . What we've been pushing the
servicers to do is improve their infrastructure to make sure their call
centers are doing a better job. The level of training is not there
yet.'').
---------------------------------------------------------------------------
We do not yet have any data on the characteristics or performance
of the HAMP loan modifications. However, extensive reports from
advocates around the country show that the quality of loan
modifications offered too often does not comport with HAMP guidelines.
Advocates for homeowners continue to report problems with
implementation of the program.\27\ Servicers are all too often refusing
to do HAMP modifications, soliciting a waiver of homeowners' rights to
a HAMP review, and structuring offered modifications in ways that
violate HAMP. These violations may be harder to detect than the gross
failure of servicers to date to process a meaningful number of
modifications, but they will vitiate HAMP just as surely.
---------------------------------------------------------------------------
\27\ See, e.g., California Reinvestment Coalition, The Ongoing
Chasm Between Words and Deeds: Abusive Practices Continue to Harm
Families and Communities in California (2009); Peter S. Goodman, Paper
Avalanche Buries Plan to Stem Foreclosures, N.Y. Times, June 29, 2009.
---------------------------------------------------------------------------
III. Servicers' Lack of Alignment with the Interests of Investors or
Homeowners Contributes to the Failure to Do Loan Modifications.
As discussed above, despite widespread calls for more
modifications, the number of modifications remains paltry compared to
the number of foreclosures. And investors are losing mind-boggling
large sums of money on foreclosures.\28\ The available data suggests
that investors lose ten times more on foreclosures than they do on
modifications.\29\
---------------------------------------------------------------------------
\28\ Home Foreclosures: Will Voluntary Mortgage Modification Help
Families Save Their Homes? Hearing Before the Subcomm. on Commercial
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong.
(2009) (testimony of Alan M. White) (65 percent loss severity rates on
foreclosures in June 2009).
\29\ Home Foreclosures: Will Voluntary Mortgage Modification Help
Families Save Their Homes? Hearing Before the Subcomm. on Commercial
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong.
(2009) (testimony of Alan M. White).
---------------------------------------------------------------------------
A. Servicers Have Different Interests Than Investors.
In attempting to make sense of this puzzle, we should remember that
servicers are not investors. Investors hold the note, or a beneficial
interest in it, and are, in general, entitled to repayment of the
interest and principal. Servicers collect the payments from the
homeowners on behalf of the investors. The bulk of their income comes
from a percentage payment on the outstanding principal balance in the
pool; the bulk of their net worth is tied to the value of the mortgage
servicing rights they purchased. A servicer may or may not lose money--
or lose it in the same amounts or on the same scale--when an investor
loses money. And it is servicers, not investors, who are making the
day-to-day, on the ground, decisions as to whether or not to modify any
given loan.
Servicers continue to receive most of their income from acting as
largely automated pass-through accounting entities, whose mechanical
actions are performed offshore or by personified computer systems.\30\
Their entire business model is predicated on making money by skimming
profits from what they are collecting: through a fixed percentage of
the total loan pool, fees charged homeowners for default, interest
income on the payments during the time the servicer holds them before
they are turned over to the owners, and affiliated business
arrangements. Servicers make their money largely through lucky or
strategic investment decisions: purchases of the right pool of mortgage
servicing rights and the correct interest hedging decisions. Performing
large numbers of loan modifications would cost servicers upfront money
in fixed overhead costs, including staffing and physical
infrastructure.
---------------------------------------------------------------------------
\30\ See, e.g., In re Taylor, 2009 WL 1885888 (Bankr.E.D.Pa. Apr
15, 2009).
---------------------------------------------------------------------------
B. Servicers' Business Model Involves As Little Service As Possible.
As with all businesses, servicers add more to their bottom line to
the extent that they can cut costs.\31\ Servicers have cut costs by
relying more on voicemail systems and less on people to assist
homeowners, by refusing to respond to homeowners' inquires and by
failing to resolve borrower disputes. Servicers sometimes actively
discourage homeowners from attempting to resolve matters. As one
attorney in Michigan attempting to arrange a short sale with Litton
reports, the voice mail warns ``If you leave more than one message, you
will be put at the end of the list of people we call back.'' Recent
industry efforts to ``staff-up'' loss mitigation departments have been
woefully inadequate.\32\ As a result, servicers remain unable to
provide affordable and sustainable loan modifications on the scale
needed to address the current foreclosure crisis. Instead homeowners
are being pushed into short-term modifications and unaffordable
repayment plans.
---------------------------------------------------------------------------
\31\ See Joseph R. Mason, Servicer Reporting Can Do More for
Modification than Government Subsidies 17 (Mar. 16, 2009), http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1361331 (noting that
``servicers' contribution to corporate profits is often . . . tied to
their ability to keep operating costs low'').
\32\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, &
Eileen Mauskopf, The Incentives of Mortgage Servicers: Myths and
Realities 9-10 (Fed. Reserve Bd. Fin. & Econ. Discussion Series Div.
Research & Statistical Affairs Working Paper No. 2008-46); State
Foreclosure Prevention Working Group, Analysis of Subprime Mortgage
Servicing Performance, Data Report No. 3 at 8 (2008), http://
www.csbs.org/Content/NavigationMenu/Home/SFPWGReport3.pdf; Preston
DuFauchard, California Department of Corporations, Loss Mitigation
Survey Results 4 (Dec. 11, 2007); cf. Aashish Marfatia, Moody's, U.S.
Subprime Market Update November 2007 at 3 (2008) (expressing concern as
to servicers' abilities to meet staffing needs).
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Creating affordable and sustainable loan modifications for
distressed homeowners on a loan-by-loan basis is labor intensive.\33\
Under many current pooling and servicing agreements, additional labor
costs incurred by servicers engaged in this process are not compensated
by the loan owner. By contrast, servicers' costs in pursuing a
foreclosure are compensated. In a foreclosure, a servicer gets paid
before an investor; in a loan modification, the investor will usually
continue to get paid first. Under this cost and incentive structure, it
is no surprise that servicers continue to push homeowners into less
labor-intensive repayment plans, non-HAMP loan modifications, or
foreclosure.
---------------------------------------------------------------------------
\33\ Joseph R. Mason, Mortgage Loan Modification: Promises and
Pitfalls 7 (Oct. 3, 2007), available at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1027470.
---------------------------------------------------------------------------
Post hoc reimbursement for individual loan modifications is not
enough to induce servicers to change their existing business model.
This business model--of fee-collecting and fee-skimming--has been
extremely profitable. A change in the basic structure of the business
model to active engagement with homeowners is unlikely to come by
piecemeal tinkering with the incentive structure. Indeed, some of the
attempts to adjust the incentive structure of servicers have resulted
in confused and conflicting incentives, with servicers rewarded for
some kinds of modifications, but not others,\34\ or told both to
proceed with a foreclosure and with a modification. Until recently,
servicers received little if any explicit guidance on which
modifications were appropriate and were largely left to their own
devices in determining what modifications to make.\35\ In the face of
an entrenched and successful business model, fragmented oversight, and
weak, inconsistent, and post hoc incentives, servicers need powerful
motivation to perform significant numbers of loan modifications.
Servicers clearly have not yet received such powerful motivation.
---------------------------------------------------------------------------
\34\ See, e.g., Ben S. Bernanke, Chairman, Bd. of Governors of the
Federal Reserve System, Speech at the Federal Reserve System Conference
on Housing and Mortgage Markets: Housing, Mortgage Markets, and
Foreclosures (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm (``The
rules under which servicers operate do not always provide them with
clear guidance or the appropriate incentives to undertake economically
sensible modifications.'').
\35\ American Securitization Forum, Discussion Paper on the Impact
of Forborne Principal on RMBS Transactions 1 (June 18, 2009), available
at http://www.americansecuritization.com/uploadedFiles/
ASF_Principal_Forbearance_Paper.pdf.
---------------------------------------------------------------------------
Servicers may make a little money by making a loan modification,
but it will definitely cost them something. On the other hand, failing
to make a loan modification will not cost the servicer any significant
amount out-of-pocket, whether the loan ends in foreclosure or cures on
its own. Until servicers face large and significant costs for failing
to make loan modifications, until servicers are actually at risk of
losing money if they fail to make modifications, no incentive to make
modifications will work. What is lacking in the system is not a carrot;
what is lacking is a stick.\36\ Servicers must be required to make
modifications, where appropriate, and the penalties for failing to do
so must be certain and substantial.
---------------------------------------------------------------------------
\36\ See Helping Families Save Their Homes: The Role of Bankruptcy
Law: Hearing Before the S. Comm. on the Judiciary, 110th Cong., 2nd
Sess. (Nov. 19, 2008), available http://judiciary.senate.gov/hearings/
testimony.cfm?renderforprint=1&id=3598&wit_id=4083 (statement of Russ
Feingold, Member, Sen. Comm. on the Judiciary) ( ``One thing that I
think is not well understood is that because of the complex structure
of these securitized mortgages that are at the root of the financial
calamity the Nation finds itself in, voluntary programs to readjust
mortgages may simply be doomed to failure.'').
---------------------------------------------------------------------------
C. Servicers Maximize Income in Ways that Hurt Both Homeowners and
Investors.
Servicers are designed to serve investors, not borrowers. Despite
the important functions of mortgage servicers, homeowners have few
market mechanisms to employ to ensure that their needs are met. Rather,
in the interest of maximizing profits, servicers have engaged in a
laundry list of bad behaviors, which have considerably exacerbated
foreclosure rates, to the detriment of both investors and
homeowners.\37\
---------------------------------------------------------------------------
\37\ See National Consumer Law Center, Foreclosures, Ch. 6 (2d ed.
2007 & Supp.) (describing the most common mortgage servicing abuses).
---------------------------------------------------------------------------
Most servicers derive the majority of their income based on a
percentage of the outstanding loan principal balance.\38\ For most
pools, the servicer is entitled to take that compensation from the
monthly collected payments, even before the highest-rated certificate
holders are paid. The percentage is set in the PSA and can vary
somewhat from pool to pool, but is generally 25 basis points for prime
loans and 50 basis points for subprime loans.\39\ This compensation may
encourage servicers to refuse principal reductions and to seek
capitalizations of arrears and other modifications that increase the
principal balance.
---------------------------------------------------------------------------
\38\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K), at 3
(Mar. 17, 2008) (typically receive 50 basis points annually on the
total outstanding principal balance of the pool).
\39\ Anthony Pennington-Cross & Giang Ho, Loan Servicer
Heterogeneity & The Termination of Subprime Mortgages 2 (Fed. Res. Bank
of St. Louis Working Paper No. 2006-024A); 26 NCLC Reports, Follow the
Money: How Servicers get Paid May/June 2008.
---------------------------------------------------------------------------
Servicers also receive fees paid by homeowners and the ``float''--
the interest earned on funds they are holding prior to their
disbursement to the trust.\40\ For many subprime servicers, late fees
alone constitute a significant fraction of their total income and
profit.\41\ Servicers thus have an incentive to push homeowners into
late payments and keep them there: if the loan pays late, the servicer
is more likely to profit than if the loan is brought and maintained
current. Float income encourages servicers to delay turning over
payments to investors for as long as possible.
---------------------------------------------------------------------------
\40\ See generally In re Stewart, 391 B.R. 327, 336 (Bankr.E.D.La.
2008) (overviewing servicer compensation).
\41\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K), at 3
(Mar. 17, 2008); Kurt Eggert, Limiting Abuse and Opportunism by
Mortgage Servicers, 15 Housing Pol'y Debate 753, 758 (2004).
---------------------------------------------------------------------------
For servicers, their most important asset is the value of their
mortgage servicing rights. Whether or not the servicer made the correct
speculative investment decision when it bought the mortgage servicing
rights to a pool of mortgages does more to shape its profitability than
any other single factor. A servicer's performance has only a marginal
impact on the performance of the loan pool; the way a servicer
increases its net worth is not by doing a top-notch job of servicing
distressed mortgages but by gambling on market trends. Servicers with
thin margins may need to squeeze all they can out of increasing
performance from delinquent loans; servicers with stronger pools are
likely to be less invested in the performance of the loans they
manage.\42\ This dynamic leaves many servicers indifferent to the
performance of the loans they service and unmotivated to hire and train
the staff needed to improve performance.
---------------------------------------------------------------------------
\42\ Vikas Bajaj & John Leland, Modifying Mortgages Can Be Tricky,
N.Y. Times, Feb. 18, 2009 (reporting views of Credit Suisse analyst
that ``[s]maller companies . . . that are under more financial pressure
and have more experience in dealing with higher-cost loans have been
most aggressive in lowering payments'' than larger companies, who offer
weaker modifications).
---------------------------------------------------------------------------
D. The Possibility of Cure Does Not Explain Servicers' Failure to Make
Loan Modifications in the Current Market.
A recent paper co-authored by my fellow panelist this morning, Paul
Willen, confirms that extremely few loan modifications are being done
and, in an attempt to solve the puzzle, propounds an economic model to
explain the dearth of loan modifications.\43\ Under the terms of that
economic model, investors recover more if a borrower brings the loan
current or refinances than if the lender modifies the loan. This is a
commonsense and unobjectionable observation. Both the FDIC Loan Mod-in-
a-Box NPV test and the HAMP NPV test build in the likelihood of cure in
determining whether a loan modification or foreclosure is the more
profitable path for investors.
---------------------------------------------------------------------------
\43\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and
Securitization 35 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf. In addition to the overall limitations of a
theoretical economic model to explain the complex web of interacting
motivations impacting the numbers of loan modifications, there appear
to be some errors in the model, even as a theoretical exercise. For
example, the model assumes that the value of the unmodified loan is the
greater of the unpaid principal balance or the value of the home, after
adjusting for the costs of the foreclosure. But, in fact, it should be
the lesser of the two. A foreclosing lender cannot legally recover more
than the unpaid principal balance and is practically unlikely to
recover more than the net foreclosure value of the home. This error
results in an overstatement of the value of foreclosure, particularly
in a market where home prices are declining, and thus undervalues
modifications.
---------------------------------------------------------------------------
In more normal times, it is surely rational for a servicer to spare
itself the time and expense of modifying a loan in favor of the
possibility of cure. In normal times, when cure rates exceeded
foreclosure rates, an investor would have little objection to the wait-
and-see-approach.\44\ However, this model cannot explain the failure to
perform loan modifications when we observe real world conditions:
dropping cure rates, due in part to the restricted ability to
refinance, even for homeowners with high credit scores;\45\ homes so
deeply underwater that investors lose 65 percent of the mortgage debt
on average in foreclosure;\46\ and a lack of other, more attractive
places, to invest funds. If we take the 30 percent cure rate documented
for loans during 2007 and 2008 in the paper co-authored by Mr. Willen,
assume, as the FDIC did in its NPV calculations, that 40 percent of all
loan modifications will end in redefault, and assume loss severity
ratios of 60 percent if the loan is foreclosed on immediately or 70
percent if it is foreclosed on after a redefault (to reflect the
dropping home prices and potential loss of upkeep by a struggling
homeowner), investors will still save money if loan modifications
reduce the current present value of the loan by as much as 20
percent.\47\
---------------------------------------------------------------------------
\44\ Alan White, Rewriting Contracts, Wholesale: Data on Voluntary
Mortgage Modifications from 2007 and 2008 Remittance Reports, Fordham
Urb. L. J. 17-18 (forthcoming 2009), available at http://
papers.ssrn.com/sol3/papers.cfm?abstract--id=1259538#; see also Aashish
Marfatia, Moody's, U.S. Subprime Market Update November 2007 at 5
(2008) (reporting that half of all active loans facing reset in the
first three-quarters of 2007 refinanced; more than one-quarter of all
remaining loans refinanced after reset); State Foreclosure Prevention
Working Group, Analysis of Subprime Mortgage Servicing Performance,
Data Report No. 3 at 8 (2008), http://www.csbs.org/Content/
NavigationMenu/Home/SFPWGReport3.pdf (reporting that 23 percent of
closed loss mitigation efforts in May 2008 were either refinancings or
reinstatements in full by the borrower).
\45\ David Streitfeld, Tight Mortgage Rules Exclude Even Good
Risks, N.Y. Times, July 10, 2009.
\46\ Home Foreclosures: Will Voluntary Mortgage Modification Help
Families Save Their Homes? Hearing Before the Subcomm. on Commercial
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong.
(2009) (testimony of Alan M. White).
\47\ These numbers are derived from an analysis by Professor Alan
White. His comment on the study is Attachment E of this testimony.
---------------------------------------------------------------------------
Mr. Willen and his co-authors suggest that the lack of outcry by
investors against servicers demonstrates that servicers are acting in
what the investors perceive as their best interest.\48\ First, the
premise that investors have been silent is not correct. Leading groups
representing investors have urged more and deeper loan
modifications.\49\ Second, to the extent that some investors have been
silent, we cannot assume that their silence means that they are happy
with servicers' actions. Given the lack of effective control investors
exercise over servicers, it would be wrong to construe that silence as
agreement with servicers' decisions to decline modifications in favor
of a chimerical cure. The large, private-label pools that contain most
subprime loans are passive investment vehicles. Trustees, on behalf of
the trust, can in exceptional cases fire a servicer, but this right is
rarely invoked, usually only when the servicer is no longer able to pay
the advances due on the borrowers' monthly payments.\50\ Thus, although
servicers are nominally accountable to investors, investors are, in
most cases, no more powerful than borrowers to provide direction to a
servicer.\51\
---------------------------------------------------------------------------
\48\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and
Securitization 24 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf.
\49\ See, e.g., American Securitization Forum, Statement of
Principles, Recommendations, and Guidelines for the Modification of
Securitized Subprime Residential Mortgage Loans 2 (June 2007).
\50\ Indeed, PSAs usually allow a trustee to increase its
monitoring of a servicer only in the case of a narrowly circumscribed
list of triggering events, primarily financial defaults. Michael
Laidlaw, Stephanie Whited, Mary Kelsch, Fitch Ratings, U.S. Residential
Mortgage Servicer Bankruptcies, Defaults, Terminations, and Transfers 2
(2007).
\51\ See, e.g., Joseph R. Mason, Servicer Reporting Can Do More for
Modification than Government Subsidies 14 (Mar. 16, 2009), http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1361331 (``The point is,
the investor has to completely trust the servicer to act in their
behalf, often in substantially unverifiable dimensions.'').
---------------------------------------------------------------------------
The work of Mr. Willen and his co-authors is an important
contribution to understanding the nature and quantity of the loan
modifications performed. The study does not tell us why loan
modifications are not being done, however. The study does not run
actual net present value analyses on actual loans: many loans that it
would not make sense to modify in a market with rising home prices,
easy refinancing, and plentiful alternative investment channels do make
sense, purely from the standpoint of financial return to investors, to
modify in today's economic market. The paper presents no hard data on
whether or not servicers, in this climate, are serving the best
interests of investors in refusing to modify loans. Servicers,
moreover, may have different incentives than investors, and it is not
clear that servicers do always make loan modification based upon the
best interests of the trust as a whole.
What we know from this study is that servicers are not making
modifications. We believe that more modifications could be made that
would serve the interests of both investors and homeowners, as well as
the national economy. As Professor Alan White noted in his testimony
last week before a House subcommittee,\52\ and as the authors
acknowledge,\53\ there may be compelling public policy reasons to
increase the number of modifications. Foreclosures impose high costs on
families, neighbors, extended communities, and ultimately our economy
at large.\54\ It would be short-sighted indeed to fail to act.
---------------------------------------------------------------------------
\52\ Home Foreclosures: Will Voluntary Mortgage Modification Help
Families Save Their Homes? Hearing Before the Subcomm. on Commercial
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong.
(2009) (testimony of Alan M. White).
\53\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and
Securitization 8 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf.
\54\ Ben S. Bernanke, Chairman, Bd. of Governors, Fed. Reserve
Sys., Address at the Federal Reserve System Conference on Housing and
Mortgage Markets (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm#f12.
---------------------------------------------------------------------------
IV. HAMP Design and Implementation Present Substantial Barriers to High
Volume, High Quality Loan Modifications
HAMP offers real hope for increasing both the quantity and the
quality of loan modifications made. By mandating a take-one, take-all
policy, requiring servicers of GSE loans to modify loans, and
standardizing the loan modification process, HAMP should increase the
total number of modifications. By mandating affordable payments,
limiting the fees charged, and permitting principal reductions, HAMP
will increase the quality of the loan modifications offered.
HAMP is a significant step forward from previous loan modification
programs. Yet the program has significant limitations both in design
and implementation. HAMP's ability to guarantee an increase in
sustainable modifications is dependent on voluntary servicer
participation in the program. Several large servicers are still not
participating, and the patchwork coverage is confusing to homeowners
and their advocates alike.
More seriously, homeowners have no leverage to obtain a HAMP loan
modification from even a participating servicer. It is unclear if the
Administration's compliance efforts will be able to detect and remedy
servicer noncompliance. Similarly, whether or not HAMP's equalization
of the incentives between principal and interest rate reductions will
be enough to boost the number of modifications that reduce principal
remains to be seen. Since loan modifications with principal reductions
appear to have the lowest redefault rates,\55\ HAMP's long-term success
may be contingent on increasing the number of loan modifications with
principal reductions and its great weakness in ensuring sustainable
modifications may be its failure to mandate principal reductions.
---------------------------------------------------------------------------
\55\ See, e.g., Roberto G. Quercia, Lei Ding, Janneke Ratcliffe,
Loan Modifications and Redefault Risk: An Examination of Short-Term
Impact (Center for Community Capital, March 2009), available at http://
www.ccc.unc.edu/documents/LM_March3_%202009_final.pdf.
---------------------------------------------------------------------------
A. Problems with Servicers' Implementation of HAMP Plague Homeowners
Seeking Loan Modifications.
Servicers' compliance with HAMP is, at best, erratic. There is
widespread violation of the HAMP guidelines across many servicers. The
lack of compliance arises in part from obvious and persistent short
falls in staffing and training. Yet some of the violations of HAMP are
embodied in form documents, perhaps reflecting a more conscious attempt
to evade the HAMP requirements. Lack of transparency prevents
homeowners from identifying violations. Lack of accountability prevents
homeowners from obtaining any redress when violations are identified.
1. Participating servicers violate existing HAMP guidelines.
Waivers of claims and defenses are still being required by servicers.
The HAMP rollout language prohibits waivers of legal rights. Yet
servicers still are seeking waivers from homeowners or an admission of
default.\56\ We have learned of many instances in which servicers
require homeowners to waive all claims and defenses in order to obtain
a loan modification or even a loan modification review. Servicers also
have asked homeowners to waive their right to a HAMP loan modification
review in favor of a non-HAMP loan modification.\57\ Not only does this
violate HAMP rules but it demonstrates bad faith. Some servicers also
are requiring homeowners to sign a waiver that states that any HAMP
loan modification will be suspended if the homeowner subsequently files
for bankruptcy.\58\ These are form documents and thus unlikely to
represent a random mistake by a line-level employee.
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\56\ See Attachment A, Ocwen Loan Servicing Loan Modification
Agreement dated June 1, 2009 (seeking waiver of all legal rights by
homeowner) Attachment B, Aurora Loan Services ``workout agreement''
dated May 20, 2009 (seeking homeowner admission of default and stating
that the trial payments will not remove the homeowner from
delinquency).
\57\ See, e.g., Attachment C (Chase Agreement seeking to obtain
waiver of homeowner's right to a HAMP loan modification in favor of a
non-HAMP loan modification offered prior to March 4, 2009).
\58\ See, e.g., Attachment D (WaMu HAMP trial plan agreement
requiring waiver of HAMP loan modification if homeowner later enters
bankruptcy).
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Some participating servicers offer non-compliant loan modifications.
All homeowners who request a HAMP review are entitled to one.
Homeowners may elect a non-HAMP modification, but that should be the
borrower's choice, informed by disclosure of all modification options.
Nonetheless, some servicers have told homeowners that they are
providing a HAMP modification, only to provide documents that do not
comport with the HAMP guidelines. These loan modifications are usually
significantly less sustainable than a HAMP modification would be and
often have higher costs. In addition to the waiver issue discussed
above, advocates have been told that homeowners must pay large advance
fees before a modification will be considered, homeowners have been
required to complete hefty repayment plans before a review is
conducted, and homeowners have been offered, as HAMP modifications,
modifications limited to 5 years, with no limitation on interest rate
increases after that time. Aurora, for example, represented to one
advocate that it does not have the ``right documents,'' although they
have been publicly available for months, and so instead offered the
borrowers old forms that contain waivers and are otherwise not HAMP
compliant. Select Portfolio Servicing has insisted that a New York
borrower make payments at a 44 percent debt-to-income ratio instead of
the 31 percent mandated by HAMP.
Some participating servicers refuse to offer HAMP modifications.
The HAMP servicer contracts require that participating servicers
review all homeowners in default for HAMP eligibility and that any
borrower who requests a HAMP review be granted one, even if the
borrower is not yet in default. Homeowners not yet in default but who
are at imminent risk of default are eligible for a HAMP modification.
Servicers may only refuse to perform a HAMP review if the pooling and
servicing agreement (PSA) forbids modification. In that case, servicers
are still expected to use all reasonable efforts to obtain an exception
to the PSA.
Staff at some participating servicers routinely refuse to do HAMP
loan modifications.\59\ For example, in a New York case, the employee
stated that the investor did not permit loan modifications, yet refused
to produce a copy of the PSA or even identify the investor, much less
attempt to obtain a release from the restrictions as required by HAMP.
One California advocate pursuing a HAMP modification for a loan
serviced by Wells Fargo was told repeatedly that the holder did not do
modifications. After protracted discovery, the servicer identified the
holder as Wells Fargo Home Mortgage. Wells Fargo Home Mortgage, of
course, is owned by Wells Fargo Bank, a participating servicer under
HAMP. In another case, a Select Portfolio Servicing representative said
that the PSA prevented a HAMP modification, but could not provide the
PSA due to ``system errors.'' Other times servicers tell homeowners
that they are not participating or that they are only participating for
GSE loans. Bank of America has told homeowners in both Pennsylvania and
Florida that it is only modifying loans that are owned by the GSEs.\60\
Bank of America is a participating servicer under HAMP and therefore
required to evaluate all loans for modification under HAMP. Some
servicers have asserted that loans held by the GSEs require a higher
debt-to-income ratio than HAMP, despite the implementation of nearly
identical programs by both Fannie Mae and Freddie Mac. Advocates in
both Ohio and Florida have been driven to file court documents to
compel Wells Fargo to do a HAMP review and stay foreclosure
proceedings, after Wells Fargo failed to complete a HAMP review.\61\
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\59\ See, e.g., Home Foreclosures: Will Voluntary Mortgage
Modification Help Families Save Their Homes? Hearing Before the
Subcomm. on Commercial and Administrative Law of the H. Comm. on the
Judiciary, 111th Cong. (2009) (testimony of Irwin Trauss) (Saxon
Mortgage ``simply reject[s] homeowners for consideration under HAMP,
for no reason that is in any way connected with the program
requirements, with no notice of any kind to the homeowner or to her
counsel.'').
\60\ See, e.g., Home Foreclosures: Will Voluntary Mortgage
Modification Help Families Save Their Homes? Hearing Before the
Subcomm. on Commercial and Administrative Law of the H. Comm. on the
Judiciary, 111th Cong. (2009) (testimony of Irwin Trauss).
\61\ Motion to Set Aside the Judgment, Modify the Loan, and Dismiss
the Foreclosure, U.S. Bank National Ass'n as Trustee HEAT 2006-1 v.
Pitman, No. 2008-CV-337 (Greene County, Ohio, 2009); Motion to Stay/
Abate, Deutsche Bank Nat'l Trust Company, as Trustee for HIS Asset
Securitization Trust 2007-HE1 v. Hoyne, No. 42-2009-CA-002178 (Marion
County, Fla., 2009).
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HAMP may even be causing a drop off in loan modifications. Loan
modifications rose through the first quarter of the year, but fell
after HAMP's roll out in March.\62\ Bank of America informed an
advocate that future HAMP modifications are put on hold while Treasury
reviews Bank of America's version of the Net Present Value calculation.
Other advocates and homeowners have been told more generally that their
servicer is participating but that the servicer does not yet have a
program to evaluate homeowners for HAMP. Ocwen, for example, told an
advocate on July 1 that it did not know when it would be rolling out
its HAMP modifications. Ocwen signed a contract as a participating
servicer on April 16, two and a half months earlier. One Brooklyn, New
York advocate was told that the investor was not allowing any
modifications because they were waiting for the Federal Government to
act. In the meantime, of course, foreclosures continue.
---------------------------------------------------------------------------
\62\ Gretchen Morgenson, Fair Game--So Many Foreclosures, So Little
Logic, N.Y. Times, July 4, 2009.
---------------------------------------------------------------------------
Servicers charge fees to homeowners for the modification.
HAMP forbids any upfront payments as a precondition to review or
trial modification. Several homeowners have reported being told by
various servicers that they must make payments before being considered
for HAMP.\63\ Sometimes these payments take the form of a special
forbearance agreement or lump-sum payment of arrearages; other times it
is less clear what the payment is for.
---------------------------------------------------------------------------
\63\ See, e.g., Attachment A, Ocwen Loan Servicing Loan
Modification Agreement dated June 1, 2009.
---------------------------------------------------------------------------
A Bank of America loss mitigation representative informed a
Pennsylvania homeowner's counsel that if the homeowners paid $2,200.00
to Bank of America, then Bank of America would ``consider'' a loan
modification. America's Servicing Company, a division of Wells Fargo
Home Mortgage, told a New York borrower that only upon completion of a
3-month repayment plan, followed by a balloon payment of $18,000, could
the borrower be considered for HAMP. Select Portfolio Servicing
representatives demanded a payment in the amount of the original
mortgage payment in order to enter the trial period agreement in order
to demonstrate the borrower's ``good faith.''
Servicers are continuing to initiate foreclosures and sell homes at
foreclosure sales while the HAMP review is pending.
HAMP requires that no foreclosures be initiated and no foreclosure
sales be completed during a HAMP review, although existing foreclosure
actions may be pursued to the point of sale. Reports from around the
country indicate that servicers are routinely placing homeowners into
foreclosure during a HAMP review and, far worse, selling the home at
foreclosure while the homeowner is waiting on the outcome of the HAMP
review.
Servicers often negotiate loan modifications on a separate track
from the personnel pursuing foreclosure. This structure results in
homeowners being placed in foreclosure, and being subject to a
foreclosure sale, while HAMP review is occurring.
2. Servicer staffing and training still lag behind what is needed.
Homeowners encounter numerous bureaucratic barriers in attempting to
negotiate a loan modification.
Homeowners' loan files are routinely lost.\64\ Counselors report
waits of months to hear back on review for a trial modification. In one
case, Select Portfolio Services advised counsel for a New York borrower
on three separate occasions over 6 weeks that the necessary broker
price opinion had been canceled due to ``system errors'' and a new
request would have to be submitted. A Florida homeowner had his HAMP
trial modification canceled by Citimortgage for non-compliance, despite
having submitted all required documents and payments as required, only
to receive a HAMP solicitation letter the same day. His lawyer, in
describing the situation to us, wrote, ``It is driving the poor guy
bananas.''
---------------------------------------------------------------------------
\64\ Peter S. Goodman, Paper Avalanche Buries Plan to Stem
Foreclosures, N.Y. Times, June 28, 2009.
---------------------------------------------------------------------------
To add insult to injury, homeowners are expected to return the
documents within days of receipt. Homeowners in both New York and
Florida have reported receiving the trial modification agreements the
same day the servicer required their return. One Illinois homeowner
received her trial modification agreement 3 days after she was required
to return the agreement.
Staff of participating servicers continue to display alarming ignorance
of HAMP.
Staff of participating servicers have told homeowners that HAMP
does not exist. Several homeowners have reported being told to contact
HUD since HAMP is a government program. HUD, of course, does not
administer HAMP; participating servicers do. Bank of America apparently
told the homeowners in one case that they were not eligible for HAMP
because they were not in default.\65\ This misinformation was given to
the homeowner despite the fact that servicers are given an additional
$500 incentive payment for modifying a loan prior to default. In
another case, Bank of America refused to modify a first lien position
home equity line of credit, apparently under the belief that
modifications of home equity lines of credit were banned as second
liens, whether or not they actually were junior liens.
---------------------------------------------------------------------------
\65\ Freda R. Savana, Some Banks Not With the Program, Bucks County
Courier Intelligencer, July 14, 2009.
---------------------------------------------------------------------------
In one case, Select Portfolio Servicing (SPS) claimed that it could
only take 80 percent of the applicants' gross income into
consideration, regardless of HAMP guidelines and that the clients would
have to reduce their debt obligations by $300 to be considered for a
modification. The representatives appeared to be operating under SPS's
standard screening process for non-HAMP modifications and were not
familiar with the HAMP standards. In the same case, another SPS
representative claimed that the investor on the loan would only allow
for payment modifications at 44 percent debt-to-income ratio, not the
31 percent mandated by HAMP. In many cases, it is not clear if staff
are applying the net present value test or if they are applying it
correctly.\66\
---------------------------------------------------------------------------
\66\ See, e.g., Home Foreclosures: Will Voluntary Mortgage
Modification Help Families Save Their Homes? Hearing Before the
Subcomm. on Commercial and Administrative Law of the H. Comm. on the
Judiciary, 111th Cong. (2009) (testimony of Irwin Trauss) (discussing a
case involving Wells Fargo).
---------------------------------------------------------------------------
A recent blurb from Mortgage Servicing News Bulletin captures the
problem: ``Confused About the Rescue Plan?'' \67\ Apparently many
servicers are.
---------------------------------------------------------------------------
\67\ Mortgage Servicing News Bull., July 14, 2009.
---------------------------------------------------------------------------
Non-participating servicers continue to represent themselves as
participating in HAMP.
Some servicers give conflicting information on whether or not they
participate in HAMP. American Home Mortgage Servicing, for example,
conveyed on its website, automated answering service, and through its
loan modification staff that it was a participating servicer under
HAMP. Yet at least some of the loan modifications it offered were not
HAMP-compliant, nor is it, as of July 13, 2009, listed as a
participating servicer.
3. Lack of transparency is resulting in summary denials and other
unreasonable acts by servicers.
Even when servicers do a HAMP review, they sometimes use the wrong
numbers, which advocates are only able to uncover after a protracted
battle. In one case involving a New York borrower, Select Portfolio
Servicing representatives initially advised that the clients were
ineligible for a HAMP loan modification, based on their budget. When
asked for clarification about the grounds for this determination, SPS
representatives claimed that the clients' expenses exceeded their
income, making it impossible for them to afford their mortgage. Upon
further discussion, it was revealed that SPS was using the clients'
original mortgage payment as an input value for these calculations,
rather than the proposed modified payment amount that would have made
their mortgage affordable.
Some servicers are scrutinizing homeowner expenses and using back-
end ratios as a basis for denying HAMP loan modifications. Back-end
ratios, the ratio between all of the borrowers' fixed monthly
obligations and income, should not disqualify a borrower under HAMP
unless the reduced payment will cause the borrower severe financial
hardship; instead, homeowners with back-end ratios above 55 percent are
to be referred to HUD-certified housing counselors. In other cases,
homeowners are turned down for loan modifications without any
explanation.
Servicers refuse to provide the final payment amounts even when the
borrower provides all verified information before the beginning of the
trial modification period. In one case, 3 days after the servicer had
supplied the borrower with the first set of trial modification
documents and nearly 2 months after the borrower had submitted verified
income information, the servicer increased the monthly payment amount,
without any apparent justification.
The permanent modifications offered often include arrears that are
undocumented and apparently overestimated. While HAMP permits
arrearages and some fees to be capitalized, HAMP does not permit unpaid
late fees to be capitalized. Given the widespread practice by servicers
of padding fees in foreclosure or bankruptcy,\68\ homeowners and their
advocates have good reason to seek review of the legitimacy of the
fees.
---------------------------------------------------------------------------
\68\ See, e.g., In re Stewart, 391 B.R. 327 (Bankr. E.D. La.
2008); In re Sacko, 394 B.R. 90 (Bankr. E.D. Pa. 2008); In re Prevo,
394 B.R. 847 (Bankr. S.D. Tex. 2008); In re Porter, 399 B.R. 113
(Bankr. D. N.H. 2008); Katherine Porter, Misbehavior and Mistake in
Bankruptcy Mortgage Claims, 87 Tex. L. Rev 121 (2009).
---------------------------------------------------------------------------
Some servicers claim they are doing a large volume of modifications
for homeowners not eligible for HAMP, as well as many HAMP loan
modifications. Whether or not the homeowners with the non-HAMP
modifications were in fact eligible for HAMP is uncertain. As discussed
above and exemplified in Attachment C, some servicers are requiring
homeowners to waive their eligibility for a HAMP review in order to
obtain any modification. The lack of public accountability makes it
impossible to know how many of those reported as ineligible for HAMP
were, in fact, ineligible, and how many were simply steered away from
HAMP modifications.
In addition, determining whether or not any individual servicer is
or is not participating is not trivial. As discussed above, some
servicers represent themselves on their websites as participating, but
fail to provide any HAMP review. As discussed below, confusion as to
coverage of affiliated servicers is widespread.
B. Certain HAMP Policies Must Be Changed To Provide Sustainable
Modifications and Save Communities.
1. Transparency must be improved.
The NPV model for qualifying homeowners must be available to the
public.
A homeowner's qualification for a loan modification under HAMP is
determined primarily through an analysis of the Net Present Value
(``NPV'') of a loan modification as compared to a foreclosure. The test
measures whether the investor profits more from a loan modification or
a foreclosure. Most investors require that servicers perform some
variant of this test prior to foreclosure.\69\ The outcome of this
analysis depends on inputs including the homeowner's income, FICO
score, current default status, debt-to-income ratio, and property
valuation, plus factors relating to future value of the property and
likely price at resale. Participating servicers are required to apply
this analysis to all homeowners who are 60 days delinquent and those at
imminent risk of default. Homeowners and their advocates need access to
the program to determine whether servicers have actually and accurately
used the program in evaluating the homeowner's qualifications for a
HAMP modification. Without access to the NPV analysis, homeowners are
entirely reliant on the servicer's good faith.
---------------------------------------------------------------------------
\69\ American Securitization Forum, Statement of Principles,
Recommendations and Guidelines for the Modification of Securitized
Subprime Residential Mortgage Loans (June 2007), available at http://
www.americansecuritization.com/uploadedFiles/
ASF%20Subprime%20Loan%20Modifi
cation%20Principles_060107.pdf.
---------------------------------------------------------------------------
The lack of NPV transparency makes servicer turndowns hard to
counteract. NPV turndowns must be detailed and in writing, and based on
a transparent process that conforms to HAMP guidelines.
The layers of documents governing HAMP, the guidelines, the
Supplemental Directives, the various FAQ's, and the servicer
contracts, should be consolidated, reconciled, and clarified.
Homeowners, their advocates, and servicers have no one source of
guidance on HAMP. The initial guidelines differ slightly from the
Supplemental Directives, and the FAQs provide different
interpretations. All of this complicates compliance.
Participating subsidiaries must be clearly identified
Participating servicers may, but need not, require their
subsidiaries to participate, so long as the subsidiary is a distinct
legal entity. However, if the subsidiary is not a distinct legal
entity, then the subsidiary must participate. The public list of
participating servicers still does not make these distinctions clear.
One example of the confusion is Wells Fargo. On financialstability.gov,
Wells Fargo Bank is listed as a participating servicer. Wells Fargo
Bank, N.A., is, according to the National Information Center maintained
by the Federal Reserve, the parent company of Wells Fargo Home
Mortgage. The contract posted on financialstability.gov variously
represents the covered servicer as Wells Fargo Bank, N.A. (when giving
the address for notices) and Wells Fargo Home Mortgage, a division of
Wells Fargo Bank, N.A. (above the signature lines). Does this contract
mean that both Wells Fargo Bank, N.A., and Wells Fargo Home Mortgage
are covered? And is America's Servicing Company, a division of Wells
Fargo Home Mortgage also covered? The answer to both questions appears
to be yes but has not been uncontested. Asking homeowners and
counselors to wade through these legal relationships invites confusion
and frustration.\70\
---------------------------------------------------------------------------
\70\ We understand and appreciate that the Treasury Department is
working on this issue. As is apparent, providing full information to
the public on participating servicers is essential.
---------------------------------------------------------------------------
2. Mechanisms for enforcement and compliance should be adopted.
All foreclosure proceedings must be stopped upon the initiation of a
HAMP review, not just at the point before sale.
While many servicers are placing homeowners in foreclosure and
proceeding to sale in violation of HAMP guidelines (as described
above), even compliance with the current rule is pushing homeowners
into costlier loan modifications and tilting the scales toward
foreclosure. In judicial foreclosure states, servicers are aggressively
pursuing foreclosures while reviewing homeowners for loan
modifications. As a result, homeowners are incurring thousands of
dollars in foreclosure costs. Servicers either demand these payments
upfront (an apparent violation of HAMP) or capitalize the costs without
permitting any review by the homeowner. In either event, these costs
make it harder to provide an affordable loan modification and the
continuation of the foreclosure causes homeowners great stress. All
foreclosure proceedings should be stayed while HAMP reviews occur.
Staying the foreclosures during the pendency of a HAMP review would
encourage servicers to expedite their HAMP reviews, rather than
delaying them.
Homeowners should be provided with an independent review process when
denied a loan modification.
It seems unlikely that all servicers will always accurately
evaluate the qualifications of every homeowner who is eligible for
HAMP. Homeowners who are wrongly denied must be afforded an independent
review process to review and challenge the servicer's determination
that the borrower does not qualify for HAMP.
Homeowners should have access to an ombudsman to address complaints
about the process.
Homeowners currently have no resource for addressing complaints,
whether with a servicer's failure to return phone calls or offer of a
non-compliant modification. Any forum for addressing homeowners'
complaints must adhere to timelines for addressing complaints and
provide public accounting as to the nature of the disputes and their
resolution.
Denials based in part on a borrower's credit score should be
accompanied by an adverse action notice under the Fair Credit
Reporting Act.
The Fair Credit Reporting Act requires that if an adverse action in
the provision of credit is taken based in part on the borrower's credit
score that the borrower be advised of that adverse action and of the
credit score upon which the decision was based.\71\ The reason for that
requirement is that credit scores often have errors, which a borrower
may correct--but only if the borrower is aware of the error.
---------------------------------------------------------------------------
\71\ 15 U.S.C. 1681m.
---------------------------------------------------------------------------
The Net Present Value test relies on credit scores to determine
default and redefault rates. It is at least possible that those credit
scores could result in the failure of the NPV test and the denial of a
loan modification. Absent full transparency regarding the NPV
calculation, homeowners are unlikely to know of the program's reliance
on their FICO score or, if they do, whether or not their FICO score was
the cause of their denial for a HAMP modification. An adverse action
notice alerts homeowners to the possibility that an incorrect FICO
score--which could be corrected--might be the reason their servicer
denied a HAMP modification. Without an adverse action notice homeowners
have little opportunity to address any potential problems.
3. The HAMP guidelines should be adjusted to provide more meaningful
relief to homeowners without reducing their existing rights.
Homeowners need principal reductions, not forbearance.
Principal forgiveness is necessary to make loan modifications
affordable for some homeowners. A significant fraction of homeowners
owe more than their homes are worth.\72\ The need for principal
reductions is especially acute--and justified--for those whose loans
were not adequately underwritten and either 1) received Payment Option
Adjustable Rate Mortgage loans that negatively amortize until as much
as 125 percent of the original balance is owed; or 2) obtained loans
that were based on inflated appraisals. As a matter of equity and
commonsense, homeowners should not be trapped in debt peonage, unable
to refinance or sell.
---------------------------------------------------------------------------
\72\ See Renae Merle & Dina ElBoghdady, Administration Fills in
Mortgage Rescue Details, Wash. Post, Mar. 5, 2009 (reporting that one
in five homeowners with a mortgage owe more on their mortgages than
their home is worth).
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Practically, principal reductions may be key to the success of
HAMP. Being ``underwater'' increases the risk of default, particularly
when coupled with unaffordable payments.\73\ Built into the HAMP NPV
calculations is an assumption that default increases as a function of
how far underwater the homeowner is. Existing data on loan
modifications shows that loan modifications with principal reductions
tend to perform better.\74\ In order to bring down the redefault rate
and make loan modifications financially viable for investors, principal
reductions must be part of the package.
---------------------------------------------------------------------------
\73\ See, e.g., Kristopher Gerardi, Christopher L. Foote, & Paul S.
Willen, Negative Equity and Foreclosure: Theory and Evidence (Fed.
Reserve Bank of Boston Pub. Pol'y Paper No. 08-3, June 2008); Andrey
Pavlov & Susan Wachter, Aggressive Lending and Real Estate Markets
(Dec. 20, 2006), available at http://realestate.wharton.upenn.edu/
newsletter/pdf/feb07.pdf.
\74\ Roberto G. Quercia, Lei Ding, Janneke Ratcliffe, Loan
Modifications and Redefault Risk: An Examination of Short-Term Impact
(Center for Community Capital, March 2009), available at http://
www.ccc.unc.edu/documents/LM_March_%202009_final.pdf.
---------------------------------------------------------------------------
The Federal Reserve Board's loan modification program directly
requires principal reductions for those homeowners most underwater.
Under that program, principal reductions are mandated when the
outstanding loan balance exceeds 125 percent of the home's current
market value. Not incidentally, under the most recent revisions to the
Making Home Affordable refinance program, once the mark-to-market loan-
to-value ratio is 125 percent, a homeowner may refinance. Thus, once
the loan value is reduced to 125 percent of current market valuation,
there is, at least for some homeowners, the possibility of refinancing.
While a loan-to-value ratio of 125 percent still leaves homeowners
underwater and restricts their options, it gives them some hope, as it
permits the possibility of refinancing or even sale, after several
years of payments or subsequent to a market rebound. A reduction only
to 125 percent is still sufficiently harsh that it is likely to contain
any moral hazard problems, yet it puts a finite bound on the
homeowner's debt peonage.
HAMP permits principal reductions, but does not mandate them, not
even in the most extreme cases. HAMP does require forbearance, but only
as a method for reducing payments. While forbearance provides
affordable payments, it prevents a homeowner from selling or
refinancing to meet a needed expense, such as roof repair or college
tuition, and sets both the homeowner and the loan modification up for
future failure. For all of these reasons, the HAMP guidelines should be
revised so that they at least conform to the Federal Reserve Board's
loan modification program by reducing loan balances to 125 percent of
the home's current market value.
Homeowners suffering an involuntary drop in income should be eligible
for a second HAMP loan modification.
Even after a loan modification is done successfully and is
performing, homeowners may still become disabled, lose their jobs, or
suffer the death of a spouse. These subsequent, unpredictable events,
outside the control of the homeowner, should not result in foreclosure
if a further loan modification would save investors money and preserve
homeownership. Foreclosing on homes where homeowners have suffered an
involuntary drop in income without evaluating the feasibility of a
further HAMP modification is punitive to homeowners already suffering a
loss and does not serve the interests of investors.
Some servicers provide modifications upon re-default as part of
their loss mitigation program. This approach should be standard and
mandated, and should include continued eligibility for HAMP
modifications rather than only specific servicer or investor programs.
Homeowners in bankruptcy should be provided clear access to the HAMP
program.
As a result of the HAMP guidelines providing servicer discretion on
whether to provide homeowners in bankruptcy access to HAMP
modifications, homeowners generally are being denied such
modifications. In at least one instance, a servicer is reported to have
refused a modification on the basis of a former bankruptcy, a clear
violation of the HAMP guidance. The HAMP guidelines should provide
clear guidance on instances where a loan modification should be
provided to homeowners in bankruptcy. The HAMP guidelines should
explicitly provide that servicers must consider a homeowner seeking a
modification for HAMP even if the homeowner is a debtor in a pending
bankruptcy proceeding.
Some servicers have explained their reluctance to do loan
modifications in bankruptcy by citing a fear of violating the automatic
stay in bankruptcy. Neither the automatic stay nor the discharge order
should be a bar to offering an otherwise eligible homeowner a loan
modification. HUD, in recent guidance to FHA servicers, has explicitly
recognized that offering a loan modification does not violate the
automatic stay or a discharge order.\75\
---------------------------------------------------------------------------
\75\ HUD Mortgagee Letter 2008-32, October 17, 2008.
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Servicers should be required, upon receipt of notice of a
bankruptcy filing, to send information to the homeowner's counsel
indicating that a loan modification under HAMP may be available. Upon
request by the homeowner and working through homeowner's counsel,
servicers should offer appropriate loan modifications in accordance
with the HAMP guidelines prior to discharge or dismissal, or at any
time during the pendency of a chapter 13 bankruptcy, without requiring
relief from the automatic stay, and, in the case of a chapter 7
bankruptcy, without requiring reaffirmation of the debt. The bankruptcy
trustee should be copied on all such communications. All loan
modifications offered in pending chapter 13 cases should be approved by
the Bankruptcy Court prior to final execution, unless the Court
determines that such approval is not needed. If the homeowner is not
represented by counsel, information relating to the availability of a
loan modification under HAMP should be provided to the homeowner with a
copy to the bankruptcy trustee. The communication should not imply that
it is in any way an attempt to collect a debt.
Two changes to the modification rules should also be made to
facilitate access for homeowners in bankruptcy. First, the payment
rules should take into account the fact that payments may be passed
through the bankruptcy trustee, rather than directly from homeowner to
servicer. Supplemental Directive 09-03 requires that the servicer
receive a payment by the end of the first month that the trial plan is
in effect. If the servicer does not receive the payment, the trial
modification is terminated and the homeowner is disqualified from a
permanent modification under HAMP. There is often an initial lag
between passing the payments from the bankruptcy trustee to the
servicer; homeowners should not be penalized for a delay over which
they have no control and which is occasioned solely by their exercise
of their right to file bankruptcy.
Second, the modification documents should explicitly prohibit
servicers from requiring homeowners to reaffirm mortgage debts.
Although the guidance and supplemental directive appear to allow
homeowners not to reaffirm in bankruptcy, the form modification
agreement requires reaffirmation by its terms in paragraph 4E. The
modification agreement should be amended to restate explicitly that the
borrower does not waive any claims by entering into the modification
and that no reaffirmation of the debt is required. Because
reaffirmations of home mortgages have the potential to deny homewners a
fresh start, many bankruptcy judges refuse to approve them. Congress
recognized this concern with an amendment to the Bankruptcy Code in
2005 that permits mortgages to be serviced in the normal course after
bankruptcy even if the mortgage has not been reaffirmed. These
purported reaffirmation agreements made outside the mandatory notice
and review procedures of section 523(c) and (d) of the Bankrutpcy Code
have no effect, are not enforceable, and the government should not be
involved in encouraging the practice.
Mortgages should remain assumable as between spouses, children, and
other persons with a homestead interest in the property.
Federal law, the Garn-St Germain Depository Act of 1982,
specifically forbids acceleration when the property is transferred from
one spouse to another and permits a spouse or child to assume the
mortgage obligations.\76\ Such transfers are most likely to occur upon
death or divorce. They may also occur in the context of domestic
violence. Freddie Mac has long allowed mortgage assumptions by
relatives as one method of working out delinquent mortgages.
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\76\ 12 U.S.C. 1701j-3(d)(6) (2008) (transfer from borrower to
spouse or children); 12 U.S.C. 1701j-3(d)(7) (2008) (transfer to
spouse pursuant to divorce decree or legal separation agreement).
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Following these policies, the HAMP program should allow mortgages
for certain homeowners to be assumable. Homeowners who have recently
suffered the death of a loved one should not find themselves
immediately faced with foreclosure or suddenly elevated mortgage
payments.
Fair lending principles must be ensured throughout the HAMP process.
Incentive payments for pre-default homeowners are aimed at the
necessary policy of ensuring that homeowners already facing hardship
obtain sustainable loans, yet the additional funds for such reviews may
implicate fair lending issues. The home price decline protection
program may result in payments focused more on non-minority areas and
should be reviewed for fair lending concerns. Servicer incentive
payments based on reductions in the dollar amount of a payment also may
raise fair lending considerations. Moreover, hardship affidavits and
paperwork must be made available in appropriate languages to ensure
wide access to the program. Data on loan modifications and applications
are essential to ensuring equitable access to the program; these data
must all be available as of fall 2009. Any further delay will limit
transparency and delay accountability.
HAMP application procedures should better recognize and lessen the
impact of exigent circumstances.
Aspects of the loan modification procedures, or gaps in current
guidance, create hurdles for certain homeowners. For example, victims
of domestic violence are unlikely to be able to obtain and should not
be required to obtain their abuser's signature on loan modification
documents. While predatory lending and predatory servicing can create
default and an imminent risk of default, as recognized by the HAMP
plan, the hardship affidavit does not contain an explicit reference to
either category. Thus, at present, a loan modification would be
available only to a homeowner who realizes that the fraud and predatory
behavior that resulted in unreasonable levels of debt are legitimate
grounds for seeking a modification and who is able to articulate and
defend that categorization to a line-level employee of the servicer who
may be relying in a formulaic way on the categories contained in the
hardship affidavit or may be outright hostile to claims of predatory
behavior.
The trial modification program should be further formalized and
clarified, such that homeowners receive assurances of the terms
of the permanent modification and homeowners are not put into
default on their loans if they are current at the onset of the
trial modification.
The trial modification program currently complicates matters for
participating homeowners by increasing costs and failing to maximize
the chances for long-term success. Moreover, by binding homeowners but
not servicers, it may further discourage some homeowners from
participating.
Payments received during the trial modification period should be
applied to principal and interest, not held in suspense until the end
of the trial period. Trial modification payments should be applied as
if the modification, and any capitalization, occurred at the outset of
the trial period, with payments allocated accordingly between principal
and interest. The policy of capitalizing arrears at the end of the
modification period, including any difference between scheduled and
modified payments, penalizes homeowners (including those not in default
at the time of the trial modification) by raising the cost of the
modification and increasing the chances that some homeowners will not
pass the NPV test. The use of suspense accounts and capitalizing
arrears after the trial period render meaningless the term
``modification'' in ``trial modification.''
In addition, homeowners who are not delinquent at the start of the
trial period and who are making payments as agreed under the trial plan
currently are reported to credit bureaus as making payments under a
payment plan; this may register as a black mark against their credit.
Homeowners should not face decreased credit scores simply because they
are seeking to attain a responsible debt load. For homeowners in
bankruptcy, the new rules defining when trial payments are ``current''
fail to take into account the delay in initial disbursement that may
occur when payments are made through the chapter 13 trustee.
Finally, homeowners need some assurance at the time of the trial
modification that, if their income is as represented upon approval of
the trial modification, the servicer will provide a final modification
on substantially similar terms. Homeowners are bound by the trial
modification; it is not clear that servicers are.
The borrower is required to sign the trial modification documents,
but the servicer is not. This onesided contract discourages some
homeowners and advocates. Homeowners may decide that the costs of a
trial modification--the capitalized interest, the sunk payments, the
potential adverse credit reporting--are not worth the uncertain benefit
of a permanent modification. Some servicers compound this problem by
telling homeowners seeking modifications that they are under no
obligation to offer a permanent modification. Indeed, the trial
modification agreement itself, in paragraph 2F, appears to allow
servicers to choose not to complete a permanent modification. According
to paragraph 2F, homeowners are not entitled to a permanent
modification if the servicer fails to provide the borrower with ``a
fully executed copy of this Plan and the Modification Agreement.''
Should a servicer fail to provide the borrower with a fully executed
copy, the borrower is left without a permanent modification and without
any recourse, while the servicer may then retain the payments made and
proceed to a foreclosure. Faced with this uneven exchange, many
homeowners will rationally refuse to complete a trial modification,
even if they would qualify for and benefit from a permanent
modification.
The final modification agreement should make clear that the homeowners
do not waive any rights nor are required to reaffirm the debt
in order to enter into the modification.
Although the HAMP guidelines prohibit waiver of claims and
defenses,\77\ the language in paragraph 4E of the modification
agreement, ``[t]hat the Loan Documents are composed of duly valid,
binding agreements, enforceable in accordance with their terms and are
hereby reaffirmed,'' could be construed as a waiver of some claims,
particularly claims involving fraud in the origination or execution of
the documents. In addition to the problems posed by reaffirmation of
the debt in bankruptcy, reaffirmation of the debt and loan documents
outside of bankruptcy could be construed as a waiver of defenses to the
debt. Servicers, as discussed above and demonstrated by the
attachments, are seeking even stronger waivers of legal rights; the
form documents should give such unauthorized behavior no shelter. The
modification agreement should clearly state that the borrower does not
waive any claims and defenses by entering into the agreement and that
the borrower is not required to reaffirm the debt.
---------------------------------------------------------------------------
\77\ Supplemental Directive, 09-01, at 2, available at
hmpadmin.com.
---------------------------------------------------------------------------
The second lien program should be further developed to promote
coordination with first lien modifications; servicers should be
required to participate in both programs.
Servicers continue to express ignorance of the second lien program
and widely refuse to modify second liens. For example, Bank of America
told a Pennsylvania borrower that a home equity line of credit could
not be modified because it was ``written'' as a second lien, even
though it was the primary, and only, lien against the property.
Servicers will often service both the first and second liens.
Frequently, servicers themselves hold the second lien. Yet often
servicers refuse to address the second lien, despite the incentives in
HAMP to do so. Servicers who hold second liens may prefer to gamble on
a market recovery rather than accept the incentive payments under HAMP
and recognize their losses now. Many servicers will choose not to
participate in the second lien program absent a Federal mandate.
The second lien program should work in concert with the primary
lien modification program to the greatest extent possible. Only such
coordination will result in maximizing the potential of the program to
save homes and communities.
4. Data collection and reporting should support the best HAMP outcomes
possible.
The maximum amount of data should be made available to the public,
including data on a loan-by-loan basis. The data should be made
available in user-friendly formats that are easy to obtain and that
allow for additional and varied processing and analysis. The data
should be made available on a basis as close to real time as possible.
Data collected by the government and disclosed to the public, including
HAMP monitoring data and other data, should enable the government and
the public to compare the performance of HAMP against specific
benchmarks. The data should enable the government and the public to
assess the extent to which HAMP is serving equitably those most heavily
targeted for high risk loans (especially African-American, Latino and
older borrowers).
V. Benchmarks for Performance, Mandatory Loan Modification Offers, and
Other Servicing Reforms Should Be Required If the Program Does
Not Produce Sufficient Results in Short Order.
Creating affordable and sustainable loan modifications for
distressed homeowners is labor intensive. It is no surprise, then, that
servicers continue to push homeowners away from HAMP loan modifications
or delay the process substantially.
Initial data collection will make a more exact review of the HAMP
program possible within the next few months. Freddie Mac already is
engaged in substantial oversight. Our work nationwide on behalf of
homeowners facing foreclosure and unaffordable loans tells us that many
qualified homeowners are being unnecessarily turned away from HAMP,
those receiving loan modifications often obtain terms quite different
from HAMP, and even the HAMP-compliant modifications are limited in
what they can do for homeowners with high loan principals.
We anticipate that the data will reflect the experience of hundreds
of homeowners and their advocates, showing that the program is too
narrow and too hard to implement. When the data substantiates our
necessarily impressionistic description of the failures of HAMP,
Congress should enact legislation to mandate loan modifications where
they are more profitable to investors than foreclosure. Loss
mitigation, in general, should be preferred over foreclosure.
Additionally, Congress should revisit the question of bankruptcy
relief. First-lien home loans are the only loans that a bankruptcy
judge cannot modify.\78\ The failure to allow bankruptcy judges to
align the value of the debt with the value of the collateral
contributes to our ongoing foreclosure crisis.
---------------------------------------------------------------------------
\78\ Second liens can be modified if they are, as many are in the
current market, completely unsecured because the amount of the first
lien equals or exceeds the market value of the property.
---------------------------------------------------------------------------
Basic problems in the structure of the servicing industry need to
be addressed in order for the homeowner-servicer relationship to be
functional. From the homeowner's perspective, one of the biggest
obstacles to loan modification is finding a live person who can provide
reliable information about the loan account and who has authority to
make loan modification decisions. Federal law should require that
mortgage servicers provide homeowners with contact information for a
real person with the information and authority to answer questions and
fully resolve issues related to loss mitigation activities for the
loan. While the Real Estate Settlement Procedures Act currently
requires servicers to respond to homeowners' request for information
and disputes within 60 days, in practice many such inquires go
unanswered. Despite this failure to respond, servicers are still
permitted to proceed to collection activities, including foreclosure.
Essential changes to this law governing servicers should ensure that
homeowners facing foreclosure would no longer be at the mercy of their
servicer. There should be transparency in the servicing process by
allowing the homeowner to obtain key information about the loan and its
servicing history. Servicers should be prohibited from initiating or
continuing a foreclosure proceeding during the period in which an
outstanding request for information or a dispute is pending.
Further reform of the tax code to simplify the exclusion of
discharge of indebtedness income would also be of assistance to many
homeowners, particularly homeowners with significant refinancing debt
whose servicers are persuaded to do sustainable principal
reductions.\79\
---------------------------------------------------------------------------
\79\ See generally 2008 Nat'l. Taxpayer Advocate Ann. Rep. at vi--
vii (summarizing recommendations regarding changes to the treatment and
reporting of cancellation of debt income in the mortgage context).
---------------------------------------------------------------------------
VI. Conclusion
Thank you for the opportunity to testify before the Committee
today. The foreclosure crisis is continuing to swell. We are drowning
in the detritus of the lending boom of the last decade. The need to act
is great. The HAMP program must be strengthened. Homeowners who qualify
must have the right to be offered a sustainable loan modification prior
to foreclosure. Passage of legislation to allow for loan modifications
in bankruptcy, to reform the servicing industry, and to address the tax
consequences of loan modifications also would aid in protecting
homeowners from indifferent and predatory servicing practices and
reducing the foreclosure surge. Together, these measures would save
many homes and stabilize the market. We look forward to working with
you to address the economic challenges that face our Nation today.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM HERBERT M.
ALLISON, JR.
Q.1. One issue that was brought to my attention recently
concerned servicer advances, that is, scheduled principal and
interest payments and other costs that servicers must advance
to the trust when the borrower fails to make a monthly payment.
As you may know, these servicer advances play a critical role
in any successful mortgage modifications.
Independent servicers use outside financing to provide
these advances, traditionally at low costs due to the minimal
credit risk involved. However, given the current liquidity
shortages in the market, financing such advances has become
prohibitively expensive. And while the Term Asset Loan Facility
(TALF) includes servicer advances as eligible collateral under
the program, servicers tell me that the TALF is hamstrung by
stringent rating requirement, particularly incompatible to HAMP
modification process. Indeed, HAMP's prolonged modification
timeline creates inherent risk for the creditors, lowering the
credit rating on the assets backed by servicer advances
accordingly.
Has this issue been brought to the Treasury's attention?
A.1. Yes, Treasury is aware of the issue. Servicer advances
play an important role in the residential mortgage backed
securities market as well as in the HAMP program. This was a
consideration when the Federal Reserve elected to make servicer
advances TALF eligible. Subsequently, based on the state of the
residential market, rating agencies have required a greater
level of subordination by the servicer advance firms in order
to obtain an AAA-rating and make them TALF eligible. Treasury
recognizes higher levels of subordination can result in a
higher cost of funds for some servicers, but Treasury does not
have any influence on the rating agency opinions and decisions.
Q.2. How serious do you think this issue is?
A.2. Although the issue may be of concern for an affected firm,
it is not clear that the issue is widespread. Treasury has
received reports that a servicer has already obtained the
required AAA-rating and issued TALF-eligible securities.
Q.3. What plans do you have to address it?
A.3. Treasury has examined the issue, but at this time Treasury
believes the TALF program is providing a viable financing
solution to independent servicers and therefore, does not
believe the program requires significant modifications.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON FROM HERBERT
M. ALLISON, JR.
Q.1. Are a proportionate number of rural homeowners facing
foreclosure as in urban or suburban areas?
A.1. The proportion of homeowners facing foreclosure is higher
in urban and suburban areas than in rural areas. Particularly
hard hit are newer subdivisions on the outer edges of
metropolitan areas. Many of the homes in these areas were
purchased in the last three or 4 years prior to the housing
crisis, and therefore their owners suffered greater home price
declines. Proportionately, these suburban homeowners also took
out a higher number of subprime mortgages. Another difficult
segment has been urban areas where homes values are slightly
below the state average while the income level of the residents
is significantly below the state average. Regarding rural
housing, conclusive research on rural mortgage lending is
hampered by the limitations on Home Mortgage Disclosure Act
data and the difficulty of getting comprehensive local data of
all varieties in smaller communities. Still, we are well aware
that rural areas have not been immune from foreclosures. For
definitive figures on foreclosure data for rural, urban, and
suburban homeowners, we suggest that you please refer to the
Department of Housing and Urban Development (HUD).
Q.2. Are they seeking refinancing and modifications at the same
rate?
A.2. We do not have reliable data on the rate that rural
homeowners are seeking refinancings and modifications relative
to urban and suburban homeowners.
Q.3. During the hearing, both of you talked about your outreach
programs to help with modifications. What specific outreach is
being done to prevent home foreclosures and educate homeowners
about the programs that are available through Hope for
Homeowners (H4H) and Making Home Affordable in rural areas?
A.3. Reaching delinquent borrowers to encourage their
participation in the Making Home Affordable program is a key
responsibility of participating servicers, who are expected to
have written procedures for outreach attempts until
constructive borrower contact is established. These
requirements are the same, regardless of the location of the
borrowers. Often, repeated attempts using alternative contact
methods are required to reach borrowers. At a minimum the
written contact procedures should include:
a. Evaluation of Delinquent Borrowers--Within 30 days of
execution of a Servicer Participation Agreement and
monthly thereafter, identify all borrowers in the
servicing portfolio that meet the basic HAMP
eligibility criteria (owner occupant, loan originated
before January 1, 2009, loan amount within GSE loan
limits, borrower is at least 60 days delinquent) and
send solicitation letters similar in format to those
posted at www.hmpadmin.com.
b. Written Contact Attempts--Send a minimum of three letters
in varying formats such as email, courier services, and
hand delivery.
c. Telephone Contact Attempts--Initiate no less than four
telephone contact attempts per borrower.
In addition, the Making Home Affordable website and the
HOPE Hotline (1-888-995-HOPE), the two main points of entry for
inquiring about the MHA program, are available to everyone
regardless of their location.
The Hope for Homeowners program is administered by the
Department of Housing and Urban Development, which would be in
a better position to address specific outreach related to that
program.
Q.4. Are you seeing any other foreclosure trends in rural areas
that are worth noting before this Committee?
A.4. Smaller, community-based financial institutions such as
those that are more prevalent in rural areas appear to be less
likely to foreclose on their borrowers than the large money-
center institutions that predominate in urban and suburban
areas. This may be because of the more personal nature of
banking in smaller institutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER FROM HERBERT
M. ALLISON, JR.
Q.1. The Obama administration is now considering a proposal
that would allow people to rent back a property when they have
defaulted. The question is, won't this cause more damage to the
secondary market for mortgages? Investors buy MBS for a stream
of payments securitized by real property. They do not buy them
to become landlords. Negating the trust agreement by forcing
investors to rent rather than be made whole on their investment
will only further damage the value of MBS in the United States
and harm future home buyers.
A.1. While the Obama administration is considering a number of
options to address the growing number of foreclosures, the
Treasury Department is very cognizant of the need to respect
contractual rights of investors. This is evident in how
Treasury designed and operates the Making Home Affordable loan
modification program, which has been guided in its underlying
principles by the contractual relationships between servicers
and investors.
Q.2. I have heard reports that the GSEs have tightened
underwriting criteria for condominiums and townhome
communities. I know in certain areas there were significant
losses on loans where these projects were overbuilt, especially
in Florida; clearly adjustments were necessary. But I'm hearing
the guidelines are going beyond this and are making it hard for
creditworthy borrowers living in established, healthy
developments to get mortgages. What's the right balance on
this? Given the need for prudential management at these
institutions, what is this Administration's plan to make sure
we don't go so far as to actually hurt healthy homeowners while
we're trying to help them? Is there a review process that looks
at what all the regulators, the GSEs and FHA are doing to make
sure we are getting at this problem in a coordinated fashion?
We shouldn't operate at cross purposes with some trying to be
prudently flexible and others using the wrong tools.
A.2. The Treasury Department defers to the Department of
Housing and Urban Development, the Federal Housing Finance
Agency, and the Federal Housing Administration on this
question.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON FROM WILLIAM
APGAR
Q.1. Are a proportionate number of rural homeowners facing
foreclosures as in urban and suburban areas?
A.1. Although conclusive research on rural mortgage lending is
hampered by the limitations on Home Mortgage Disclosure Act
data and the difficulty of getting comprehensive local data of
all varieties in smaller communities, based on the available
data it appears that the proportion of homeowners facing
foreclosure is higher in urban and suburban areas than in rural
areas. Particularly hard hit are newer subdivisions on the
outer edges of metropolitan areas. Many of the homes in these
areas were purchased in the last three or 4 years prior to the
housing crisis, and therefore their owners suffered
proportionately higher home price declines. Proportionately,
these suburban homeowners took out a higher number of subprime
mortgages. Another particularly hard hit area has been in urban
areas where homes values are slightly below the state averages
in terms of value while the income level of the residents are
significantly below the state average income levels.
We understand from our HUD field office in South Dakota
that the mortgage default rate in South Dakota is very low.
According to data published by the Mortgage Bankers
Association, South Dakota had the second lowest rate of
foreclosure filings and the fourth lowest percentage of home
loans in foreclosure in second quarter 2009. As noted above,
the number of foreclosures and sub-prime mortgages in South
Dakota are substantially less than other areas around the
country. However, according to data located on HUD's NSP
website, there are a number of foreclosures and sub-prime
mortgages that do exist with the highest concentration in the
Sioux Falls Metropolitan Statistical Area (MSA) and Rapid City
HUD Metro FMR Area (HMFA). Minnehaha, Pennington, and Meade
counties have the highest estimated number of foreclosures.
However, like other communities around the Nation, rural
areas in South Dakota have not been immune from foreclosures.
In fact, some rural counties in South Dakota are experiencing
high percentages of foreclosure. According to HUD data, the
counties of Shannon, Buffalo, Dewey, and Ziebach have the
highest percentage rate of foreclosures in the state with rates
of 10 percent or greater at the end of 2008.
Q.2. Are they seeking refinancing and modifications at the same
rate?
A.2. We do not have reliable data on the rate that rural
homeowners are seeking refinancings and modifications relative
to urban and suburban homeowners.
Q.3. During the hearing both of you talked about your outreach
programs to help with modifications. What specific outreach is
being done to prevent home foreclosures and educate homeowners
about the programs that are currently available through Hope
for Homeowners (H4H) and Making Home Affordable in rural areas?
A.3. Although the Making Home Affordable program and Hope for
Homeowners Programs have not specifically targeted rural areas
for outreach efforts, the steps that servicers are expected to
take to reach at-risk borrowers is the same regardless of the
location of the borrower. Reaching delinquent borrowers to
encourage their participation in the MHA program is a key
responsibility of participating servicers. Often, repeated
attempts using alternative contact methods are required to
reach borrowers. Servicers that participate in the program are
expected to have written procedures for outreach attempts until
constructive borrower contact is established. In addition, the
Making Home Affordable website and the HOPE Hotline (1-888-995-
HOPE), the two main points of entry for inquiring about the MHA
program, are available to everyone regardless of their
location.
Earlier this summer in Miami, the Administration launched a
nationwide campaign to promote the Making Home Affordable
Program (and HOPE for Homeowners which has been incorporated
into the overall MHA program) in communities most in need. The
campaign involves a series of outreach events to engage local
housing counseling agencies, community organizations, elected
officials and other trusted advisors in the target markets to
build public awareness of Making Home Affordable, educate at-
risk borrowers about available options, prepare borrowers to
work more efficiently with their servicers and drive them to
take action. HUD leverages local housing partners who are on
the ground and on the front lines with at-risk borrowers to
help broaden our outreach efforts and keep more people in their
homes.
In addition, HUD, in partnership with many nonprofit
counseling agencies, provides housing counseling assistance to
the record number of homeowners at risk of foreclosure,
particularly those preparing to take advantage of the
foreclosure prevent programs made available under this
Administration. HUD-approved counseling agencies are located
across the Nation (in rural and urban communities) and provide
distressed homeowners with a wealth of information and
assistance for avoiding foreclosures. The counselors provide
assistance over the phone and in person to individuals seeking
help with understanding the Making Home Affordable program and
often work with borrowers eligible for the Administration's
refinance or modification program to compile an intake package
for servicers. These services are provided free of charge by
nonprofit housing counseling agencies working in partnership
with the Federal Government and funded in part by HUD and
NeighborWorks' America. The list of approved HUD
counselors can be found at: http://www.hud.gov/offices/hsg/sfh/
hcc/fc/.
In South Dakota, HUD field staff participate in various
events, sponsored by realtors, mortgage bankers and consumer
organizations, to provide information on FHA program, including
benefits of refinancing into FHA products.
Q.4. Are you seeing any other foreclosure trends in rural areas
that are worth noting before this Committee?
A.4. Smaller, community-based financial institutions such as
those that are more prevalent in rural areas appear to be less
likely to foreclose on their borrowers than the large money-
center institutions that predominate in urban and suburban
areas. This may be because of the more personal nature of
banking in smaller institutions.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY FROM JOAN CARTY
Q.1. In your testimony you mention many common themes as to why
families are in distress as you discuss the need for quicker
action. In addition to mortgage terms, you mention many life
events. This seems to at least partially support Dr. Willen's
studies that have shown life events to be one of the primary
causes of the financial difficulties that have lead to
foreclosure.
As you counsel these families, what steps do you encourage
them to take that will allow them to remain current on their
mortgages following a loan modification?
A.1. Thank you for your interest in our work. As we counsel
families following a loan modification, we encourage them to
take the following steps:
1. Always pay family necessities (food and current medical
bills expenses), then housing related bills, including
real estate taxes and insurance if they are not
included in your mortgage bill.
2. Also pay child support and income tax debt. Not
addressing these debts can result in very serious and
expensive problems.
3. Concentrate on paying secured debt until their finances
allow them to start paying unsecured debt.
4. Develop an action plan where the goal will be to save at
least 8 months of living expenses in case of
emergencies. Client could save money by budgeting. A
counselor could help the client identify areas where
client can save money.
5. If client has high credit card debt, client can work to
get all debt consolidated at a lower interest rate and
lower payments.
6. Work to rebuild a good credit history: It's important
that a client rebuilds his/her credit history because
the credit score will determine the future interest
rate that client will be charged on both secured and
revolving credit. Also, most insurance companies charge
a higher premium to people who have poor credit scores.
7. After saving for at least 8 months of living expenses,
client could do the same to save for a car, repairs on
the house, and for any long term and short term
expenses.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM PAUL S.
WILLEN
Q.1. In previous hearings, we heard many times that large
percentages of sub-prime borrowers would have actually
qualified for traditional mortgages. In your testimony you
said, ``most borrowers who got subprime mortgages would not
have qualified for a prime mortgage for that transaction.''
As you noted the assumption that people were steered toward
subprime mortgages has been at the center of a lot of policy
debates in this area. Could you expand a bit on why your
research finds this assumption to be inaccurate?
A.1. In our research, we showed that prime lenders would not
have underwritten the vast majority of subprime loans \1\--in
other words, that subprime borrowers weren't steered to
subprime loans but rather would have been rejected by prime
lenders. Our analysis used the following criteria for
qualifying for a prime loan--that the borrower have a FICO
score above 620 and a debt-to-income ratio less than 40 percent
and that the combined loan-to-value ratio fell below 90 percent
and that the borrower fully documented income. By our count,
less than 10 percent of the subprime loans made in 2005 and
2006 passed all these tests. Furthermore, we found that
fraction had actually declined over time.
---------------------------------------------------------------------------
\1\ Just the Facts: An initial analysis of the subprime crisis,
With Chris Foote, Kris Gerardi and Lorenz Goette. 2008. Journal of
Housing Economics, 17(4):291-305.
---------------------------------------------------------------------------
Previous claims by some that the data showed steering into
subprime loans were based on a misunderstanding of what
constitutes a subprime loan. A much-cited Wall Street Journal
article from December of 2007 purported to show that a large
and increasing number of subprime borrowers would, in fact,
have qualified for prime loans. However, the analysis focused
exclusively on FICO scores, and was based on the erroneous
assumption that anyone with a FICO score above 620
automatically qualified for a prime loan. It is true that a
FICO below 620 generally renders a borrower ineligible from a
prime loan, but the converse is not true: to get a prime loan
one needs a high FICO score and to pass the other tests noted
above. The Wall Street Journal article was correct in its claim
that the number of borrowers with FICO above 620 in subprime
pools had grown over time--in our data it grew from less than
40 percent in 2000 to more than 70 percent in 2006. What the
article failed to mention was that the fraction with, for
example, very high LTV score had increased dramatically over
the same period.
The steering claim is at least partly based on a
misunderstanding of what a subprime loan is. Most of what makes
subprime loans different from prime loans involves the
characteristics of the transaction and the borrower. There are
three ways to see this. The first involves the fact that the
small subset of subprime borrowers who would have qualified for
prime treatment got loans that were virtually indistinguishable
from the equivalent prime borrowers: two-thirds had fixed rate
mortgages with an average interest rate of 6.6 percent. The
second involves the fact that prime and subprime loans with
similar characteristics perform similarly in the data. A 90
percent LTV subprime loan to a borrower with a 620 FICO score
is not significantly more likely to default than an otherwise
identical prime loan. Finally--and contrary to common
assumption--our research shows that subprime loans were not any
more likely to have ``risky features'' like interest-only or
negative amortization payment options.
Q.2. In your testimony and your papers you discuss impact of a
downturn in housing prices on the default rates. Specifically,
while discussing the role of life-event on default rates, your
testimony states ``when home prices fall, some borrowers can no
longer profitably sell, and then income-disrupting life-events
really take a toll.'' You further state that ``foreclosures
rarely occur when borrowers have positive equity.'' I believe
that this is an important point and one must be in the center
of a discussion about what happened to cause the downturn in
our housing market and subsequently in our economy.
Given the importance of equity in a home to prevent
foreclosures, do you believe that relaxed down payment
standards, which allowed people to purchase homes with little
or no down payment, left homeowners more vulnerable to these
life-events?
A.2. Yes I do. The reason that lenders view home mortgages as
safe and the reason that borrowers pay low interest rates is
that the loan is secured by the property, and thus the lender
is not as exposed to the borrower's ability or willingness to
repay the loan. For the borrower, the whole logic of buying a
home with a mortgage depends on the ability of the borrower to
sell the property if his or her circumstances change. I think
the willingness of lenders to make zero-down loans, and the
willingness of borrowers to take them out, resulted from the
belief that house prices would continue to rise and that the
borrower would quickly build equity. Going forward, it will be
important for both borrowers and lenders to take the
possibility of substantial price declines into account, no
matter how improbable such a decline may appear at the time.
Q.3. Other testimony submitted to the Committee seemed to
indicate that the primary reasons the loan modifications have
not been occurring at a faster pace are largely logistical
reasons within the leaders. You seem to suggest that this is
not the reason, but rather, contrary to popular belief, there
simply economic factors that prevent the modifications from
moving forward.
Please respond to this, as well as the criticism that your
research was not relevant because it analyzed loan modification
programs in existence prior to the efforts of the past year.
A.3. The claim that the problems are ``logistical'' does not
make economic sense. For a profitable opportunity, firms can
and will increase capacity. In the fall of 2008, there was a
dramatic increase in refinancing activity, which initially
caused problems because lenders were understaffed. Within
weeks, lenders were able to overcome this and refinance record-
breaking numbers of loans. If loan modification were highly
profitable for lenders, they would hire lots of staff. The
foreclosure crisis started in 2007, so the idea that lenders
were still struggling to ``staff up'' in 2009 must be
erroneous, in my opinion.
Our claim in the paper is that a logical explanation for
the paucity of modifications is that they aren't profitable for
lenders. Whether loan modifications are socially useful is a
completely separate question which we do not address in the
paper. That said, we do argue essentially that making social
policy based on the assumption that it is in the interests of
lenders to modify loans--i.e., that the interests of lenders
and society are perfectly aligned--is mistaken.
Q.4. In their recently released white paper, the Administration
suggests that certain type of products should be construed as
``plain vanilla'' and therefore safe for all consumers, while
other loans should presumably carry a warning symbol, or
perhaps be banned outright.
Based on your research and experience, are there times when
a 30-year fixed mortgage could be more dangerous than an
adjustable rate mortgage? As you stated in your testimony,
doesn't the characteristics of the borrower drive the success
or failure of the loan generally?
A.4. I personally would strongly disagree with the (original)
suggestion. Fixed-rate mortgages have performed better than
adjustable rate mortgages in the crisis, but that statement is
entirely relative. According to the Mortgage Bankers
Association, between the first quarter of 2007 and today, the
fraction of subprime adjustable rate mortgages that were more
than 90 days delinquent grew from 4 percent to 17 percent,
which is, of course, dismal. Would the figures have been
dramatically different if those borrowers got fixed-rate
mortgages? The evidence does not suggest it would have. The
percentage of subprime fixed rate loans that were more than 90
days delinquent rose from 3 percent to 13 percent.
Features like adjustable rates, interest only, negative
amortization payment options, and low documentation are risk
factors--but in my view they only account for a small
percentage of the risk associated with a loan. Identifying a
fixed rate mortgage as unquestionably ``safe'' would, I believe
be a disservice to consumers. A borrower with problematic
credit buying a house with little or no money down is a risky
proposition regardless of what type of loan the borrower uses--
and to identify such a mortgage as ``inherently safe'' simply
because certain features like adjustable rates are absent would
be thus irresponsible.
Q.5. Your testimony indicates that a plausible explanation for
lenders reluctance to renegotiate loans is that it simply isn't
profitable because of ``re-default risk'' and ``self-cure
risk.''
What do you believe is the best way forward with respect to
the mortgage problems facing the country?
A.5. I think that there are two things we need to do. The first
is to focus government efforts on helping unemployed borrowers.
I have, along with several colleagues in the Federal Reserve
System, circulated a proposal to provide loans or grants to
unemployed homeowners.\2\ As I argued in my testimony, most
borrowers default because of the combination of negative equity
and a life-event like job loss. But because unemployed
borrowers, unlike speculators, may be quite committed to living
in the home they own, lenders may view them as having high
``self-cure risk'' and thus be unwilling to help them by easing
the terms of their debt. A government program to tide committed
homeowners through troubled times would prevent foreclosures.
---------------------------------------------------------------------------
\2\ A Proposal to Help Distressed Homeowners: A Government Payment-
Sharing Plan by Chris Foote (Boston Fed), Jeff Fuhrer (Boston Fed),
Eileen Mauskopf (Board of Governors) and Paul Willen (Boston Fed).
---------------------------------------------------------------------------
All that said, the number of preventable foreclosures is in
my view far lower than many have assumed. Ultimately, and
unfortunately, the best foreclosure prevention program
imaginable will not prevent more than 20 percent of the
foreclosures we can expect. Thus, I think the second key policy
initiative should be to minimize the effects of foreclosures
both on borrowers and communities. This means making sure that
adequate rental housing is available for displaced families,
and that foreclosed properties transition to committed
homeowners who are able to afford them as soon as is
practicable.
Q.6. Your testimony casts serious doubts about the
effectiveness of loan modification programs. If job-loss is
driving foreclosures, it appears that government programs to
pay servicers and borrowers to modify mortgages will not help
many homeowners. It will, however, cost the taxpayers a lot.
Is the best way to prevent foreclosures to simply make sure
we have solid economic growth and a vibrant job market?
A.6. Yes and no. There is no question that a vibrant job market
would help mitigate the foreclosure problem. The 482,000 people
filing new claims for unemployment insurance in the week ended
January 15, 2009 are all candidates for foreclosure if they
have negative equity in their homes. Reducing that number will
reduce foreclosures. The problem is that even when times are
good, the mix of jobs and firms changes continuously and so
large numbers of people lose jobs. In the last forty years, in
spite of several vigorous expansions and vibrant job markets we
have rarely seen a week with fewer than 300,000 new claims for
unemployment insurance, far fewer than today, to be sure, but
still a significant number. As I said in my testimony, we
expect foreclosures to remain elevated for a considerable
period, regardless of what happens to the labor market. In
Massachusetts in the 1990s, foreclosures persisted at high
levels long after a vigorous economic recovery started.
Q.7. During previous hearing this Committee has heard testimony
that had lenders given borrowers sustainable loans rather than
sub-prime loans, we would not be now facing a foreclosure
crisis.
LDo you agree with this conclusion?
LWhat types of borrowers typically received sub-
prime loans?
LCould most sub-prime borrowers qualified for prime
loans?
A.7. No, I do not agree with the conclusion. In a recent paper,
two co-authors and I addressed exactly this question. The
dramatic fall in house prices we observed over the last 3 years
would have caused a crisis with or without subprime lending. We
showed that falling house prices we observed for 2005 house
buyers would have caused a dramatic increase in foreclosures
even for the 2002 vintage of buyers, almost none of whom
received subprime loans. By contrast, the subprime-heavy 2005
vintage would have faced almost no foreclosures if house prices
appreciated as they did earlier in the decade.
The main risk factors in a loan are the credit score of the
borrower and the amount of equity the borrower has in the
house. Other things, like whether the loan is labeled subprime
or whether the loan was interest-only do matter, but only
marginally. In most cases, the only way a lender could have
prevented a subprime foreclosure was by refusing to do business
with the borrower. A 100 percent LTV loan to a borrower with
600 credit score will always be a risky proposition.
Some have attributed the run-up in house prices and the
subsequent fall to subprime lending, but there is little
evidence in the data to support this claim. Robert Shiller
dates the house price boom in the United States to 1998,
whereas subprime did not start to grow rapidly until 2004.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM MARY
COFFIN
Q.1. Hope for Homeowners and the Making Homes Affordable
Programs are both based on the idea that if we are able to
modify a borrowers loan and thus decrease that person's monthly
debt to income ratio, homeowners will be able to keep up with
their payments. This will in turn reduce the number of
foreclosures and stabilize our housing market.While you are
probably not yet able to speak to statistics regarding these
programs, however, historically, have you seen that reducing a
borrower's monthly debt to income ratio alone has a high
success rate in keeping that borrower current in his or her new
loan?
A.1. Every borrower faces fairly unique circumstances and the
economic environment continues to shift, so it is difficult to
make broad statements of a general nature. It has been my
experience that reducing the borrower's monthly expenses
overall, whether those are related to debt or other living
expenses, and the borrower staying within that new budget will
increase that borrower's chances of staying current with his or
her mortgage payments. As mortgage servicers, we only can
impact the mortgage payment component of a customer's overall
obligations, so when we do reduce that payment we are doing our
part to help bring their expenses in line with their income.
We will even work to reduce the mortgage payment when we
believe it will help the customer keep their home even if the
mortgage debt is not the source of the financial difficulties.
A meaningful portion of our borrowers come to us with housing
payment-to-gross income ratios less than 31 percent before
modification. We find the majority of these customers have
problems with their overall debt and expense levels, and their
mortgage delinquency is really a symptom of a larger financial
problem. Such customers do not appear to need help with their
first mortgage and they are not eligible for HAMP, but many
will lose their home through foreclosure without a
modification. As a result, first mortgage investors, such as
Freddie Mac and Fannie Mae, have been approving retention
modifications with characteristics similar to HAMP for
customers who fail to qualify for HAMP; primarily those with
pre-modification HDTI ratios below 31 percent and/or those who
need to go below 31 percent HDTI to achieve overall
affordability targets.
Q.2. We face a bit of a dilemma with how to inform the public
about these programs. If we believe that loan modifications are
truly the best way to stabilize our housing market, then we
must make sure the public is aware of the programs. However, at
the same time, we risk setting unrealistic expectations for the
public as it relates to the sacrifices necessary for the
program to be effective. What have been your experiences with
customers seeking loan modifications before and after the
government made them a priority? Are we in fact reaching more
of the most vulnerable? Are the expectations of the public
realistic?
A.2. One issue that servicers have faced is a gap between
consumer expectations regarding the availability of Home
Affordable Modification Program and our ability to actually
implement the program. The original announcement about the
program was made by the Administration on February 18, but
program guidelines weren't available for 2 to 3 months after
that and changes were being made to HAMP as late as July. In
addition, there was no HAMP available for FHA borrowers until
mid August and guidelines for the second lien HAMP have not
been released as of the beginning of September. As a result,
customers heard about the program and contacted their servicers
about their potential to benefit from HAMP before--and
sometimes months before--the program could be made available to
them.
We believe the priority should be to assist those who have
been hardest hit by the economic downturn and are not able to
afford their monthly mortgage payments. Following the
government's HAMP announcement, however, the ratio of current
customers contacting us increased dramatically compared to
those who were delinquent. While we agree that HAMP should be
available to borrowers who haven't yet missed a payment but are
at risk of imminent default, this could hamper, to some extent,
our ability to reach and assist the already delinquent
borrowers who are most at risk.
Public perception and individual expectations also vary
widely, and there are borrowers out there who don't fully
understand what HAMP is for and who should expect to benefit
from the program. Some borrowers, for example, are fully able
to afford their monthly mortgage payments, but expect that they
should be eligible for a loan modification through HAMP simply
because the current market value of their home has decreased.
These borrowers' circumstances clearly aren't addressed by HAMP
and weren't intended to be, yet this misperception of the
program creates additional call volume for servicers and
eventually results in frustration for the customer.
This misalignment of consumer expectations regarding HAMP
and the realities of the program has created some confusion and
frustration among borrowers. We continue to discuss with
Treasury ways that we can avoid similar challenges as new
elements of HAMP or other borrower assistance programs are
rolled out in the future.
------
RESPONSE TO WRITTEN QUESTION OF SENATORS CORKER AND VITTER FROM
MARY COFFIN
Q.1. The SAFE Act was designed to require licensing of loan
officers, not mortgage servicers or employees that perform
modifications and loss mitigation. However, I understand that
this Act is being interpreted to apply to servicers. HUD has
indicated it wants to include employees that do modifications
within the licensing and registration scheme. Is this
interpretation-that loss mitigators are covered by SAFE-going
to impede your ability to do modifications?
A.1. Requiring any employee performing loan workouts, loss
mitigation or loan modifications to be registered under the
SAFE Act would impose a significant burden on mortgage
servicers and definitely would impede our efforts to provide
relief to struggling borrowers at a critical time and undermine
the objectives of the Making Home Affordable initiatives. One
of the most important issues is that it would severely restrict
our ability to add employees to our home retention team or
shift employees to home retention efforts as work demands vary.
In response to significant increases in the volume of
modifications we are considering, for example, Wells Fargo
hired and trained 4,000 people in the first half of the year.
It would have been impossible to register all or a significant
number of those new staff in time to deal with the increase in
activity that we have experienced.
SAFE was not constructed to cover servicers or servicing
personnel, but to establish nationwide oversight of individual
loan originators, lenders and mortgage brokers. SAFE's
education and testing requirements, for example, are focused on
originations issues and don't address servicing-related
matters. Loan modifications present none of the risks or
concerns that the SAFE Act was intended to address, namely:
accountability and tracking of mortgage loan originators;
enhanced consumer protections; reducing fraud in the mortgage
loan origination process. In a modification scenario, the
mortgage has already been originated and the borrower is
already aware of and contractually bound by the terms of their
mortgage. Modifications do not present sales opportunities to
Agency-regulated institutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM CURTIS
GLOVIER
Q.1. In your testimony you focus on the need for additional
principle reduction.
Have you analyzed how many homes would need principle
reductions, and how much principle would need to be written
off, to stabilize our housing market?
A.1. Based on an analysis of non-performing loans in the Loan
Performance data base as of April 30, 2009, (covering the non-
agency mortgage-backed securities market), we believe that
approximately 1,622,000 homes would need principal reductions
to prevent a foreclosure.
In the aggregate, this equates to a reduction in mortgage
debt of approximately $120.25 billion, which is approximately
$74,000 per homeowner. This amount represents 6.8 percent of
the $1.765 trillion non-agency residential mortgage market and
would result in a principal reduction of approximately 30
percent per mortgage loan.
Q.2. What level of taxpayer money do you believe would be
necessary for these reductions?
A.2. No taxpayer contribution is necessarily required to
achieve this principle reduction. It is certainly conceivable
that the principal reduction could be borne entirely by the
investors in the residential mortgage-backed securities.
While some form of compensation for accepting a principal
reduction of the first mortgage could serve as an incentive for
facilitating more and quicker action, the Mortgage Investors
Coalition supports policies that drive mortgage foreclosure
avoidance policy toward principal reduction and refinancings
(like those originally intended by the Hope for Homeowners
program). We believe it is a better policy for homeowners
because it reestablishes homeowner equity.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ALLEN
JONES
Q.1. Hope for Homeowners and the Making Home Affordable
Programs are both based on the idea that if we are able to
modify a borrowers loan and thus decrease that person's monthly
debt to income ratio, homeowners will be able to keep up with
their payments. This will in turn reduce the number of
foreclosures and stabilize our housing market.
While you are probably not yet able to speak to statistics
regarding these programs. However, historically have you seen
that reducing a borrowers monthly debt to income ratio alone
has a high success rate in keeping that borrower current in his
or her new loan?
A.1. Bank of America applauds the Obama Administration's
Homeowner Affordability and Stability Plan's focus on assisting
financially distressed homeowners with their mortgage payments
through their refinancing and loan modification program. We
strongly support the Administration's focus on affordability in
the loan modification and refinance processes in order to
achieve long-term mortgage sustainability for homeowners. The
Administration's focus on affordability and sustainability is
consistent with the approach we have successfully developed
with our customers. While there are many factors that influence
whether a borrower will be able to perform on their loan,
including the borrower's continued employment and whether the
borrower has a desire to continue to remain in their home, we
believe that reducing the borrower's monthly payment to a 31
percent debt to income ratio under these programs should help
to reduce the number of foreclosures and help stabilize housing
markets. Our research suggests that reducing the borrowers 1st
lien monthly mortgage obligation provides incrementally more
benefit than other modification factors. The degree of this
reduction is what is important. Payment change alone is not the
sole factor. Other factors such a mod type, borrower profile,
equity, etc are determining factors in the probability of
success.
Q.2. We face a bit of a dilemma with how to inform the public
about these programs. If we believe that loan modifications are
truly the best way to stabilize our housing market, then we
must make sure the public is aware of the programs. However, at
the same time, we risk setting unrealistic expectations for the
public as it relates to the sacrifices necessary for the
program to be effective.
What has been your experiences with customers seeking loan
modifications before and after the government made them a
priority? Are we in fact reach more of the most vulnerable? Are
the expectations of the public realistic?
A.2. We have made important progress under our programs before
HAMP, yet HAMP represents a watershed in loan modifications.
The program applies lessons we learned in early efforts across
the industry, establishes uniform national standards and
provides appropriate incentives to borrowers, servicers and
investors. We are confident HAMP enables servicers to help more
struggling homeowners and will play a key role in stabilizing
the housing markets and promoting economic recovery.
However, the program was not designed to assist borrowers
who have vacated their home or no longer occupy the home as
their principal residence. Nor was the program structured to
assist the unemployed or those who already have a relatively
affordable housing payment of less than 31 percent of their
income. Out of our HAMP eligible population, as recently
defined by Treasury, of the customers we've talked with, a
significant number are known to fall into one of these four
categories. This demonstrates the depth of the Nation's
recessionary impacts on homeowners, not the failure of the
government program or the efforts of participating mortgage
servicers.
Bank of America believes it is necessary to provide
solutions to these customer segments that fall outside HAMP's
target reach--and we are doing so. We have non-HAMP options we
consider to avoid foreclosure including modification programs
for non-owners and borrowers with a debt-to-income ratio below
31 percent, and importantly, forbearance programs for the
unemployed.
We also are working with Treasury to expand HAMP to assist
in meeting these same challenges--specifically including a
program for the unemployed and allowance for a housing ratio
less than 31 percent for low-to-moderate income borrowers.
The benefit of having Treasury take the lead to address
these challenges is creating an industry standard that helps
all customers and provides investor incentive to help more
borrowers qualify. In any case, Bank of America will continue
to provide solutions to these customers.
------
RESPONSE TO WRITTEN QUESTION OF SENATORS CORKER AND VITTER FROM
ALLEN JONES
Q.1. The SAFE Act was designed to require licensing of loan
officers, not mortgage servicers or employees that perform
modifications and loss mitigation. However, we understand that
this Act is being interpreted to apply to servicers. Even HUD
has indicated it wants to include employees that do
modifications within the licensing and registration scheme. Is
this interpretation--that loss mitigators are covered by SAFE--
going to impede your ability to do modifications?
A.1. If this interpretation were to apply to our loss
mitigation employees, then it would impose additional burdens
that would impair our ability to do loan modifications on a
timely basis.