[Senate Hearing 111-987]
[From the U.S. Government Publishing Office]
S. Hrg. 111-987
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO
FORECLOSURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO
FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD ON U.S. HOMEOWNERS
AND THE HOUSING MARKET DURING THE ECONOMIC DOWNTURN
----------
NOVEMBER 16 AND DECEMBER 1, 2010
----------
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
S. Hrg. 111-987
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO
FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD ON U.S. HOMEOWNERS
AND THE HOUSING MARKET DURING THE ECONOMIC DOWNTURN
__________
NOVEMBER 16 AND DECEMBER 1, 2010
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PRINTING OFFICE
65-258 WASHINGTON : 2011
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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 BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
McGinnis, Acting Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Jonathan Miller, Professional Staff Member
Marc Jarsulic, Chief Economist
Beth Cooper, Professional Staff Member
William Fields, Legislative Assistant
Drew Colbert, Legislative Assistant
Mark Oesterle, Republican Deputy Staff Director
Jim Johnson, Republican Counsel
Jeff Wrase, Republican Chief Economist
Chad Davis, Republican Professional Staff Member
Erin Barry, Legislative Assistant
Dawn Ratliff, Chief Clerk
Levon Bagramian, Legislative Assistant and Hearing Clerk
Brett Hewitt, Legislative Assistant and Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
----------
TUESDAY, NOVEMBER 16, 2010
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statement of:
Senator Shelby............................................... 5
Prepared Statement....................................... 50
Senator Akaka................................................ 51
Senator Brown................................................ 51
WITNESSES
Thomas J. Miller, Attorney General, State of Iowa................ 7
Prepared statement........................................... 53
Response to written questions of:
Senator Shelby........................................... 190
Senator Brown............................................ 194
Barbara J. Desoer, President, Bank of America Home Loans......... 8
Prepared statement........................................... 56
Response to written questions of:
Chairman Dodd............................................ 195
Senator Shelby........................................... 197
Senator Brown............................................ 204
R.K. Arnold, President and Chief Executive Officer, Merscorp,
Inc............................................................ 10
Prepared statement........................................... 60
Response to written questions of:
Chairman Dodd............................................ 208
Senator Shelby........................................... 209
Senator Brown............................................ 212
Adam J. Levitin, Associate Professor of Law, Georgetown
University Law Center.......................................... 11
Prepared statement........................................... 102
Response to written questions of:
Senator Shelby........................................... 218
Senator Brown............................................ 221
David B. Lowman, Chief Executive Officer for Home Lending,
JPMorgan Chase................................................. 13
Prepared statement........................................... 121
Response to written questions of:
Chairman Dodd............................................ 224
Senator Shelby........................................... 225
Senator Brown............................................ 230
Diane E. Thompson, Counsel, National Consumer Law Center......... 15
Prepared statement........................................... 126
Response to written questions of:
Senator Shelby........................................... 235
Senator Brown............................................ 246
Additional Material Supplied for the Record
Letter from Gibbs & Bruns LLP to Countrywide Home Loans Servicing
regarding Pooling Service Agreements........................... 255
Letter from Wachtell, Lipton, Rosen & Katz regarding Gibbs &
Bruns LLP letter............................................... 270
Denver Post article, Foreclosure paperwork miscues piling, up,
November 14, 2010.............................................. 274
----------
WEDNESDAY, DECEMBER 1, 2010
Opening statement of Chairman Dodd............................... 277
Opening statements, comments, or prepared statement of:
Senator Shelby............................................... 280
Prepared statement....................................... 340
Senator Johnson
Prepared statement....................................... 340
Senator Menendez............................................. 280
Senator Akaka
Prepared statement....................................... 340
Senator Tester............................................... 281
Senator Bailey Hutchison
Prepared statement....................................... 341
WITNESSES
Phyllis Caldwell, Chief, Homeownership Preservation Office,
Department of the Treasury..................................... 283
Prepared statement........................................... 342
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation.. 284
Prepared statement........................................... 352
Daniel K. Tarullo, Member, Board of Governors of the Federal
Reserve
System......................................................... 286
Prepared statement........................................... 358
John Walsh, Acting Comptroller of the Currency, Office of the
Comptroller of the Currency.................................... 288
Prepared statement........................................... 368
Response to written questions of:
Chairman Dodd............................................ 475
Senator Johnson.......................................... 476
Senator Brown............................................ 477
Senator Merkley.......................................... 481
Edward J. DeMarco, Acting Director, Federal Housing Finance
Agency......................................................... 289
Prepared statement........................................... 381
Response to written questions of:
Senator Johnson.......................................... 481
Terence Edwards, Executive Vice President, Credit Portfolio
Management, Fannie Mae......................................... 321
Prepared statement........................................... 386
Response to written questions of:
Senator Johnson.......................................... 483
Donald Bisenius, Executive Vice President, Single Family Credit
Guarantee Business, Freddie Mac................................ 323
Prepared statement........................................... 392
Tom Deutsch, Executive Director, American Securitization Forum... 324
Prepared statement........................................... 399
Kurt Eggert, Professor of Law, Chapman University School of Law.. 326
Prepared statement........................................... 451
Response to written questions of:
Senator Johnson.......................................... 487
Additional Material Supplied for the Record
Federal Housing Finance Agency Foreclosure Prevention & Refinance
Report, August 2010............................................ 500
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE
----------
TUESDAY, NOVEMBER 16, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 3:20 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Christopher J. Dodd, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. Let me
first of all thank my colleagues and our witnesses for their
patience and indulgence. This is a gathering today with the
various caucuses meeting, unfortunately not at the same time,
so it has made this a little awkward to try and schedule, Tim,
the hearing. But you have all come a long way, my good friend
Tom Miller, the Attorney General from Iowa as well, so I wanted
to make sure we could have the hearing and yet accommodate the
interests of all Members of the Committee. So we moved it to
this time, Bob, and I am sure Senator Shelby will be here at
some point shortly, and the idea being that I guess the
Democratic caucus is sort of wrapping up, but there is a
Republican caucus which is going to start in about an hour.
Chairman Dodd. To which you are not invited.
[Laughter.]
Chairman Dodd. And so I am going to try, and what I would
like to do--and I have already asked the witnesses to do this.
I will make some brief opening comments. Senator Shelby
obviously will do so as well. And then we will turn to our
witnesses and ask them if they can to try and abbreviate their
comments even further so I can then accommodate--and I know
this is a bit awkward, but to accommodate our Republican
colleagues who are here, who still have an obligation to get to
that caucus, in which case our own Members as they come out of
the caucus will be showing up here. So it is a little different
than we would normally proceed, but I want to make sure we give
all Members a chance to be heard, and the witnesses who have
come a long way with prepared testimony are going to get a
good, healthy discussion.
I will also, at the appropriate time when we have a quorum,
ask the Committee to fulfill its obligation of voting on the
Diamond nomination to serve on the Federal Reserve Board. As my
colleagues will recall, at the recess period the nomination
under the law had to be--was sent back to the White House and
resubmitted, therefore requiring yet another vote by the
Committee, even though we have had a hearing and voted on the
Diamond nomination once before. And so when that time comes, I
will interrupt the hearing to perform that function, knowing
that a quorum could slip from time to time.
So with that in mind, I would like to begin, and I will
make my own opening comments, and then turn to Senator Shelby
or Senator Bennett, whoever is here, for any thoughts they may
have. And then we will turn to our witnesses. So I again thank
all for participating.
Richard, how are you? Good to see you.
The hearing today, as you are all aware, is on the problems
in mortgage servicing from modification to foreclosure.
Obviously, it has received a great deal of attention over the
last number of weeks in the media, and we thought it was
appropriate that even in this lame duck session we invite those
who have been involved in it, including our Attorneys General,
represented by Tom Miller, and others including the
institutions involved, to come and share their thoughts as to
where we are with this matter and give us an opportunity to
move forward. And, obviously, as I prepare to leave, Tim
Johnson, Richard Shelby, and other Members here will pick up
this issue. Evan Bayh will be traveling out the door with me,
and then they will be moving to analyze this issue and respond
accordingly.
I want to welcome again and thank our witnesses for
appearing today and for their testimony about the problems in
mortgage servicing from modification, as I said, to
foreclosure. As many of us know, or all of you know, we have
had numerous hearings on the problems of the mortgage industry.
In fact, the second hearing that I held as Chairman of this
Committee in the first week of February 2007 was on the
residential mortgage markets and the problems. During that year
of 2007, we had almost 80 different hearings on this subject
matter at one time or another, including informal gatherings in
this very room with some of the leading servicing companies in
the Nation to talk about what plans they had to minimize the
fallout from the mortgage crisis. So it is a subject matter
over the last 4 years that this Committee has spent a great
deal of time and attention on.
In addition to today's hearing, I intend to have another
hearing--and, again, I will consult with Senator Shelby about
timing to do this. We are only here for a couple of weeks. We
have got the break for Thanksgiving. But if we can, we want to
fit that hearing in to invite the regulators to come before us
as well to share with us their thoughts on the subject matter.
First let me explain what we mean by mortgage servicing.
When a homeowner takes out a mortgage, that loan is often
bundled with a pool of similar mortgages and sold in the
secondary market as a mortgage-backed security, commonly known
as MBSs. After the origination, all processing related to the
loan is managed by a mortgage servicing company. The four
largest banks--JPMorgan Chase, Wells Fargo, Bank of America,
and Citi--are also the largest mortgage servicers. Mortgage
servicers bill and collect monthly payments, operate customer
service centers, maintain records of payments and balances, and
distribute payments according to the terms of a trust.
Principal and interest are distributed to the investors of the
mortgage-backed securities through a trustee. Taxes and
insurance are paid to local governments and insurers--servicers
retain a servicing fee. That is a brief description of how this
is supposed to work.
It is the problems that have arisen with this process that
have led me to call the hearing today. It has not generally
been my habit to quote the Wall Street Journal editorials in my
Committee statements, but I thought the following from a column
last month captured perfectly the essence of the issues we will
examine today. The column is entitled ``A Foreclosure Sitcom.''
It starts by saying, ``First we learned America's biggest banks
could not properly lend.'' It goes on to say:
Then we learned they could not keep themselves solvent without
taxpayer assistance. Then we learned they could not effectively
work with troubled borrowers in a bursting housing bubble. And
now we have learned they do not even know how to foreclose.
``This is more than just a little paperwork problem,'' it
went on.
Ohio Attorney General Richard Cordray put it best: `This is
about the private property rights of homeowners facing
foreclosure and the integrity of our court system, which cannot
enter judgments based on fraudulent evidence.'
This editorial provides a sharp description, in my view, of
the situation in which millions of Americans find themselves
today, whether we are talking about a homeowner facing possible
eviction, an investor in an MBS, or simply an average American
family watching the value of their home drop as more and more
homes go into foreclosure around them.
I want to provide a bit more context, if I can, for today's
proceedings. In April of 2007, after holding a number of
hearings on predatory lending, as my colleagues will recall,
and the foreclosure crisis to which it would lead, I hosted a
meeting of large mortgage servicers in this very room,
including regulators, civil rights and consumer groups, and
others, to discuss ways that we could better prepare for the
wave of loan defaults and foreclosures many of us expected.
That summit that we held in this very room resulted in a
statement of principles to which all participants agreed on May
2nd of 2007.
Among the items to which the servicers agreed were the
following: early contact and evaluation, modification to create
long-term affordability, and providing dedicated teams or
resources to achieve the kind of scale many knew would be
necessary to face the coming tidal wave of foreclosures.
Unfortunately, rather than living up to these commitments,
many in the industry wasted a lot of time denying culpability
for the mortgage problems or arguing that the problems would
not be as severe as they turned out to be. As a result, we see
even today, more than 2 years later, a number of points:
servicers struggling to keep up with demand; numerous and
repeated cases of lost paperwork; serious allegations by
investors, including the New York Federal Reserve, and
advocates of self-dealing at some of the largest mortgage
servicers in the country and people needlessly losing their
homes, including, according to some press reports, people who
have no mortgages on their homes at all.
More than a month ago, the robo-signing scandal, of course,
hit the press. Many in the industry were too quick, in my view,
to call the problems technical alone and to insist that nobody
is losing a home to foreclosure without cause.
However, the focus of the robo-signing problem is too
limited, in my view. Many believe that the robo-signing errors
are simply the tip of a much larger iceberg, that they are
emblematic of much deeper problems at the mortgage servicing
business, problems that have resulted in homeowners, of course,
losing their homes and unjustifiable foreclosures. In fact,
servicing practices may be putting homeowners at risk.
Even the industry now acknowledges that the current
mortgage servicing business model is broken and is simply not
equipped to deal with the current crisis. Many observers point
out that the interests of third-party mortgage servicers are
not aligned with the interests of either homeowners or
investors. So, for example, a permanent modification might
result in a homeowner keeping the family's home and the
investor being assured of a better return. But that same
modification could cause the servicer to lose money.
The upshot is that there could be extensive problems
throughout the servicing process that may have led to, in the
words of the Federal Reserve Board Governor Sarah Bloom Raskin,
and I quote her, ``a Pandora's box of predatory servicing
tactics.''
According to Governor Bloom Raskin, these tactics include
padding of fees, strategic misapplication of payments which can
sometimes cause the loan to be considered in default, what some
people call service-driven defaults, and the inappropriate
assessment of forced placed insurance, which is extremely
costly to the homeowner.
To her list let me add other issues that have arisen,
including failure to properly record transfer and ownership of
notes and/or mortgages, failure to maintain proper custody of
title, failure to properly administer the Home Affordable
Modification Program, failure to meet the requirements of the
foreclosure process, such as by the use of robo-signers, and
failure to establish or administer mortgage trusts in
accordance with applicable law or contractual agreements. This
hearing will explore these potential problems and their
implications.
In addition, the Congressional Oversight Panel has raised
concerns today that the failure of servicers and others to
correctly handle mortgages and mortgage documents could create
systemic risk for the financial system. Professor Levitin will
also discuss this in his testimony this afternoon.
This is a very important issue to explore, both here today
and with the regulators at our next hearing. In my view, we
created the Financial Stability Oversight Council to examine
exactly this kind of issue. The FSOC needs to really drill
down, in my view, and find out the scope of the problem and
determine the steps that may need to be taken to prevent
systemic problems from growing, if they conclude that there are
systemic implications, in fact.
Let me assure everyone here that I do not want this hearing
to be simply about casting blame. It is extremely important to
lay out the problems and challenges, and today's hearing is
designed to do exactly that. But I also hope we can work toward
solutions. As we do, we need to keep in mind that bad mortgage
servicing is far more than a technical issue. At the same time,
we must all acknowledge that not every delinquent borrower's
home ought to be saved or can be saved. In my view, we need to
strike a balance; we need more robust loan modifications,
including loan modifications that result in real principal
forgiveness that will finally help put an end to our housing
crisis.
At the same time, I hope we can agree that we should
expedite foreclosures that cannot be prevented. For example, a
significant portion of homes awaiting foreclosure are vacant
today in the country. There is no reason in the world to slow
down the process on these homes. We will need to work together
going forward if we hope to finally put an end to this housing
crisis, and I look forward to these witnesses' testimony and
the comments and questions raised by my colleagues.
We do have a quorum? Oh, good.
[Whereupon, at 3:33 p.m., the Committee proceed to other
business and reconvened at 3:44 p.m.]
Chairman Dodd. Richard, before you came in, what I said is
I know you have got a caucus to go to as well, so we are going
to do this a little differently. You make your opening
statement; they are going to make brief comments, our
witnesses.
Senator Shelby. OK.
Chairman Dodd. And then I am going to turn to my Republican
colleagues for questions so that you can get your questions in
before you have to go to the caucus.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you. You are charitable. We like you
as Chairman right now. We are going to miss you. Thank you.
Thank you, Mr. Chairman. I will go back to the subject
matter now. On October the sixth, I called for an investigation
into the growing controversy surrounding home foreclosures. At
this point, there appear to be a number of key issues--Senator
Dodd has raised a lot of them--that need to be examined very
thoroughly.
First, we need to determine the extent of the problem. It
appears that thousands of so-called robo-signers working on
behalf of banks to service loans signed foreclosure-related
court documents swearing that they had personal knowledge of
the facts of each foreclosure case. It now appears that few, if
any, of these people had such knowledge that they swore to.
Second, we need to determine whether the flaws in the
process led to improper results. In other words, were any
homeowners foreclosed upon when they should not have been? I
think that is a big issue.
Third, we need to examine the activities of the law firms
that work for the servicers. Many questions have been raised
regarding the conduct of these firms during their engagement in
foreclosure proceedings.
Fourth, what role did the GSEs and the larger
securitization market play in this debacle? Did their actions
contribute to the problem? Were Fannie and Freddie complicit in
any way?
Finally, we need to examine the role of the regulators
here. Where were they in this process? What were they supposed
to be doing, and what were they doing, and if not, why not? I
think these questions have got to be asked and answered.
And in order to determine the extent of the problem, we
need to speak with all of the major servicers. Unfortunately,
we only have a small subset present today. For example, Allied
Financial was the first major servicer to recognize that it had
problems with its process. That firm, among others, Mr.
Chairman, for some reason is not here today.
Mr. Chairman, it is my understanding that many, if not all,
of the law firms under investigation were selected by the
housing GSEs. In order to best understand how and why these
firms were chosen, I believe we need to hear from Fannie Mae
and Freddie Mac. Unfortunately, they also did not make the
witness list today.
Perhaps the most complex facet of this examination involves
securitization. As highlighted in the Congressional Oversight
Panel's most recent report, the most severe potential fallout
from this will be found in the securitization market. According
to that report, this could have a devastating effect on our
broader financial system.
On this critical topic, we have a professor from Georgetown
University, the Iowa Attorney General, and finally the CEO of
MERS. Each witness has an important viewpoint to share with the
Committee, but none of them represent the views or perhaps the
expertise of the securitizers. Given the complexity of this
issue, perhaps the Committee should have invited others, and
perhaps, as the Chairman said, maybe have another hearing or so
regarding the securitization community to answer our questions.
Finally, the regulators are also significant players here,
or should be. Each of the major servicers have regulators
onsite in their operations. How did those regulators miss the
widespread foreclosure problems at the firms they were supposed
to be regulating? That is the question. We could ask them, but
unfortunately, they, too, are not here today, and Senator Dodd
said he is going to have another hearing.
Mr. Chairman, I expect this hearing to be focused on the
foreclosure process. As I have already stated and you have
mentioned, too, there is a great deal to examine on this topic
alone. It appears that this hearing will also become a
foreclosure mitigation hearing. Mortgage modifications is an
important topic, to be sure, and certainly one that warrants
its own hearing. But if we are going to examine the issue of
foreclosure mitigation, I believe we should study the extent to
which borrower fraud has distorted the modification process and
inflated overall foreclosure numbers. This is a critical issue,
considering that the U.S. taxpayer has spent more than $50
billion on foreclosure mitigation programs. We need to know
where our mitigation efforts are best directed and where our
money is being wasted as a result of fraud. I understand that
there are no witnesses here today that can address the topic of
borrower fraud, but we should have that.
Mr. Chairman, I called for a full investigation on this
matter in early October because I believe that those who face
foreclosure should, at the very least, know that the process is
being handled fairly and legally according to the law. While I
believe that we will learn a great deal from this hearing, I
hope that it does not represent the Committee's complete
examination of this important issue and I commend you for
saying you will look into it some more.
Chairman Dodd. Well, thank you very much, and obviously
this is a matter that will go far beyond even the time
constraints we have over the next couple of weeks in the lame
duck session. I will be watching C-SPAN from hopefully some
comfortable spot in January as Tim Johnson and Richard Shelby
hold extensive hearings on the subject matter, and Bob Bennett
may be joining me along with Evan Bayh from Indiana and
watching you go forward.
[Laughter.]
Chairman Dodd. Let me turn, first of all, to the Attorney
General of Iowa. Tom, we thank you very much, and I know you
have done a lot of work on this issue along with others. In
fact, the new Senator from the State of Connecticut, of course,
Dick Blumenthal, the Attorney General of my State for the last
18 years, I know has worked with you on this issue, as well, so
we are anxious to hear what you have to say and we will move
right along.
I am not going to do extensive introductions of all of you.
I will put that in the record so that your children and
families can make sure you were recognized appropriately here
for your contributions to mankind. Attorney General?
STATEMENT OF THOMAS J. MILLER, ATTORNEY GENERAL, STATE OF IOWA
Mr. Miller. Thank you, Mr. Chairman, and thank you, Members
of the Committee. I think that this hearing makes a lot of
sense. These are very, very important issues that have
difficult questions and difficult resolutions but are very,
very important to Americans. The housing market, the home to
individuals, very, very important to everybody.
We have 50 Attorney Generals working together on this
issue. We have more than half of the banking regulators working
with us. We have developed over the last 10 years a remarkable
working relationship with the State banking regulators. We have
gone through three cases together, major cases, and we have
worked since 2007 on the Foreclosure Prevention Task Force. It
is a very important relationship and we work together.
What the 50 of us and the banking regulators are looking at
is a series of issues. It was triggered by the robo-signing.
First of all, let me say very clearly that we do not view that
as a technical issue. It is an issue that is an affront to
State courts. Signing an oath to produce a judgment of
foreclosure in a court is a very, very serious matter.
We are following sort of the outline of the Chairman,
Senator Dodd, in terms of looking at other aspects, as well,
that have appeared in our investigation and we think are
important. They include other servicing issues, the whole issue
of the paperwork being lost and people having to start over and
over again, not hearing from the servicers for two or 3 months.
That is an issue.
The modification, the decision concerning modification is
an important issue. I think that after 3 years, the servicers,
whoever is making the decision on modification, there should be
a rhythm. There should be a pattern. They should see patterns
developing, and very quickly, people fall within modification
or out or marginally. It is more ad hoc, we think, and that
just has not come together.
We are concerned about some of the fees that are charged,
particularly the forced insurance. We are concerned about
assignment issues. Those are something that we are looking at.
The so-called dual track issue is something that is important,
as well, and by that we mean a person who is working on
modification and all of a sudden the foreclosure process starts
at the same time. It is enormously frustrating.
Second liens create a problem when the banks hold the
second lien and also do the servicing. There is a dynamic there
that does not work as well as it should.
We are talking. We are working a lot with the Federal
people. The level of cooperation with the Federal agencies,
particularly Justice and Treasury, is like never before. I have
been around for a while, worked with a lot of Administrations,
Democrats and Republicans. We have never had a working
relationship this good and this productive as we do with this
Administration.
We have opened up a dialogue with the investors. We think
they are an important part of the solution of this whole
problem and have started productive meetings with them. We have
had sessions with Bank of America, two sessions recently. They
have been productive.
We view this as a chance to solve some or much of this
problem that has hung on for over 3 years, as Senator Dodd
outlined. It started as a mess, the robo-signing. We want to
figure out a way that it leaves the whole situation much better
than when the mess started, and there are a number of things we
are working on to try and make sure that this is never repeated
again. That is, in a way, the simplest and very basic, that
there is some redress to consumers that are harmed. But then
how do we develop a way to change the paradigm and the whole
system so that it works and works much more productively,
because, as I said before, there is so much at stake for the
homeowner, for the investor, for the community and the overall
economy.
Chairman Dodd. Thank you very much, General. I appreciate
again your work on this effort and those of your colleagues
around the country.
Barbara Desoer is the President of the Bank of America Home
Loans. She oversees the business that currently accounts for
almost one in five mortgage originations. Bank of America Home
Loans has $2 trillion in a servicing portfolio that serves 13
million customers. She also manages the Bank's home equity
business and insurance services organization. We thank you for
joining us.
STATEMENT OF BARBARA J. DESOER, PRESIDENT, BANK OF AMERICA HOME
LOANS
Ms. Desoer. Thank you, Chairman Dodd and Ranking Member
Shelby and Members of the Committee. Thank you for the
opportunity to testify.
The economic downturn and sustained high unemployment,
coupled with the housing market collapse, have led to
challenges far more profound and complex than anyone ever
anticipated. Importantly, more than 86 percent of Bank of
America's customers are current on their mortgage.
Unfortunately, others are in distress. At foreclosure sale, one
of three properties are vacant, and there are far too many
abandoned properties in our communities that drive down home
values in neighborhoods across the country.
Helping customers remain in their homes wherever possible
remains Bank of America's number one priority, as evidenced by
our over 700,000 completed loan modifications. We have reached
a crossroads between modification efforts and the reality of
foreclosure. Despite our best efforts and numerous programs,
for some customers, foreclosure is unavoidable. That has driven
an increase in the concerns that you and we are hearing from
our customers.
It is our responsibility to be fair and to treat customers
with respect as they transition to alternative housing. We have
an obligation to do our best to protect the integrity of the
proceedings of foreclosure, and when that has not happened, we
accept responsibility for it and we deeply regret it.
We were the only servicer who stopped foreclosure sales
nationwide to review our procedures. We know the concerns are
not just technical issues. We have confirmed that the basis for
our foreclosure decisions has been correct and accurate, but we
did not find a perfect process and we are already moving
forward with the needed improvements.
As a servicer, we have a responsibility to follow the
guidelines established by our investors relating to
modifications and other foreclosure alternatives. Where we can
act to improve the process alone, we have and will continue to
innovate. We also need to work with others, and we are
committed to further improvements.
First, improve the communication with our customers. A
frequent source of customer frustration is they cannot deal
with the same person two times during the process, let alone
three or four. We have redesigned our loan modification process
to offer a single point of contact to our customers, and we
have more than 140,000 customers who are experiencing this
today. We are in discussions with key stakeholders, like the
State Attorneys General, to determine how that approach can be
expanded.
Second, we know we need to provide greater clarity to our
customers who are going through the process, and Attorney
General Miller referenced the parallel foreclosure or dual
track process of modification and foreclosure. We want to
partner with you and other key stakeholders to find a way to
eliminate that dual track to significantly improve the
understanding of where a customer is in the process.
Third, we are making improvements to the foreclosure
process. We determined during our ongoing review that our
process for preparing affidavits of indebtedness in the
judicial foreclosure States did not conform to best practices
in some cases. We have introduced a new affidavit form. We have
added additional quality controls. And we are implementing new
procedures for selecting and monitoring the performance of
outside counsel. We are carefully restarting the affidavit
process with these and other new controls in place.
Again, our commitment is to ensure that no property is
taken to foreclosure sale until our customer is given a fair
opportunity to be evaluated for all of the programs that exist
under modification, or if that cannot be done, through a short
sale or a deed execution. Foreclosure is the option of last
resort. Thank you.
Chairman Dodd. Thank you very much. We appreciate your
testimony.
Mr. R.K. Arnold is the President and CEO of MERS
Corporation and its subsidiary, Mortgage Electronic
Registration, known as MERS. Most of you are familiar with it.
MERS was created by the mortgage industry participants as a
central electronic registry with the hopes of streamlining the
mortgage process by eliminating the need to prepare and record
paper assignments of mortgages. MERS now registers more than
half of the mortgage loans originated in the United States. Mr.
Arnold has been with MERS since its inception in 1996, and we
thank you for joining us.
STATEMENT OF R.K. ARNOLD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MERSCORP, INC.
Mr. Arnold. Chairman Dodd, Ranking Member Shelby, Members
of the Committee, I appreciate the opportunity to be here
today. If it is all right with you, Mr. Chairman, I would
submit my remarks for the record.
Chairman Dodd. That is true of all of you, by the way, and
any documentation that any of you want to add to your
testimony, we will just include as part of the record, so
consider that done.
Oral Statement of R.K. Arnold, President and Chief
Executive Officer, MERSCORP, Inc.
Chairman Dodd, Ranking Member Shelby and Members of the
Committee, my name is R.K. Arnold. I am President and CEO of
MERSCORP, Inc. Thank you for this opportunity to appear today.
MERS is a member-based organization made up of about 3,000
mortgage lenders. It maintains a nationwide database that
tracks changes in servicing rights and ownership interests in
mortgage loans. Today MERS is keeping track of 31 million
active loans.
The MERS database is important to the mortgage industry because
it is the only centralized registry in the industry that
uniquely identifies each mortgage loan.
The MERS database is important to individual borrowers because
it provides a free and accessible resource where borrowers can
locate their servicers, and in many cases, learn who their
note-owner is as they change over time.
The MERS database is important to communities because housing
code enforcement officers use it to identify who is responsible
for maintaining vacant properties.
The MERS database aids law enforcement in the detection of
mortgage fraud by tracking liens taken out utilizing the same
borrower name, social security number, or property.
MERS also performs another key function: It serves as the
mortgagee of record, or the holder of mortgage liens, on behalf
of its members as a common agent. MERS is designated as the
mortgagee in the mortgage document, and this designation is
approved by the borrower at loan closing and then recorded in
the appropriate local land records. Serving as the mortgagee
enables MERS to receive and maintain updated information as
loan servicers and noteholders change over time because we are
the central clearinghouse for receipt of mail as mortgagee. One
thing that is always clear in a mortgage document is that if
the borrower defaults on his obligation, the lender can
foreclose. If MERS holds the mortgage lien, foreclosures can
occur in two ways: Either the MERS mortgage interest is
reassigned in the land records to the lender holding the note
and the lender initiates the action on its own, or MERS
initiates the action as the mortgagee of record in the land
records.
To do this, MERS relies on specially designated employees of
its members, called certifying officers, to handle the
foreclosure. To be a MERS certifying officer, one must be an
officer of the member institution who is familiar with the
functions to be performed, and who has passed an examination
administered by MERS. Generally, these are the same individuals
who would handle the foreclosure if the lender was involved
without MERS. The loan file remains with the servicer as it did
before MERS. MERS is not a repository for mortgage documents or
promissory notes.
MERS derives its revenues entirely from fees charged to its
members--it makes no money from foreclosures. And MERS does not
decide when to foreclose. Foreclosure must be authorized by the
note-owner (or noteholder), and it must be done in accordance
with our strict rules and procedures, which we regularly
enforce and refine.
For example, it is a key MERS rule that the note must be
presented in a foreclosure, which some States do not require.
And we prohibited the use of lost note affidavits in
foreclosures done by MERS once we learned they were being used
as an excuse to not produce the note.
Earlier this year, when we became aware of acceleration in
foreclosure document processing, we grew concerned that some
certifying officers might have been pressured to perform their
responsibilities in a manner inconsistent with our rules. When
we did not get the assurances we thought were appropriate to
keep this from happening, we suspended our relationships with
those companies.
When we discovered that some so-called ``robo-signers'' were
MERS certifying officers, we suspended their authority until
they could be retrained and retested. We are asking our members
to provide us with specific plans outlining how they intend to
prevent such actions in the future.
Mr. Chairman, all of us at MERS keenly understand that while
owning your own home is a dream, losing that home is a
nightmare. As professionals who have dedicated ourselves to
helping people realize their dream, we are deeply dismayed by
the current foreclosure crisis. We take our role as a mortgagee
very seriously and we see our database as a key to moving
toward better access to information and transparency for
consumers.
I am hopeful that as people understand more about MERS and the
role we play, they will see that MERS adds great value to our
nation's system of housing finance in ways that benefit not
just financial institutions, the broader economy and the
Government, but--most of all--real people.
Thank you for holding these hearings and inviting MERS to
participate.
Mr. Arnold. Thank you, and I am ready for your questions.
Chairman Dodd. Well, that was good testimony there. I
appreciate it.
[Laughter.]
Chairman Dodd. Professor, do you want to do the same?
[Laughter.]
Chairman Dodd. Professor Levitin, we thank you very much
for joining us. Professor Levitin is an Associate Professor of
Law at Georgetown. He specializes in bankruptcy, commercial
law, financial regulations. He has done extensive research on
the role of financial institutions in consumer and business
transactions, including mortgage finance payment systems and
bankruptcy reorganizations. He also served as Special Counsel
to the Congressional Oversight Panel, and is currently a Fellow
at the Center of Law at George Washington University. We thank
you for joining us.
STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW,
GEORGETOWN UNIVERSITY LAW CENTER
Mr. Levitin. Well, I hope I can keep my comments as brief
as Mr. Arnold.
I want to make clear that I am here today to testify only
as an academic and not on behalf of the Congressional Oversight
Panel.
Over the last few months, the mortgage world has been
roiled by a number of seemingly unconnected issues: The
discovery that major mortgage servicers were submitting
thousands of faulty or fraudulent affidavits in foreclosure
cases, the emergence of concerns over securitization chain of
title, and mortgage-backed securities investors put-back
demands. Although seemingly disparate, these issues are, in
fact, connected by two common threads, the necessity of proving
standing in order to maintain a foreclosure action, and the
severe conflicts of interest between mortgage servicers and MBS
investors.
It is axiomatic that in order to bring a foreclosure
action, the plaintiff must have legal standing. Only the
mortgagee has such standing. Many of the issues relating to
foreclosure irregularities, ranging from procedural defects up
to outright counterfeiting, relate to the need to show
standing. Thus, problems like various types of false or faulty
affidavits as well as backdated mortgage assignments and
altered or wholly counterfeited notes, mortgages, and
assignments all relate to the evidentiary need to prove
standing.
Concerns about securitization chain of title also go to the
standing question. If the mortgages were not properly
transferred in the securitization process, then the party
bringing the foreclosure does not, in fact, own the mortgage
and therefore lacks standing to foreclose.
If the mortgage was not properly transferred, there are
profound implications, too, for investors, as the mortgage-
backed securities they believe they had purchased would, in
fact, be non-mortgage-backed securities. If so, title on most
properties in the United States would be clouded and there
would also be a put-back liability that would greatly exceed
the market capital of major U.S. banks.
Put-back claims underscore the myriad conflicts of interest
between mortgage services and investors. Servicers are
responsible for prosecuting violations of representations and
warranties made to investors in securitization deals. Servicers
are loath to bring such actions, however, not least because
they would often be bringing them against their own affiliates.
Thus, Countrywide Home Mortgage Servicing would be bringing
those claims against Countrywide itself.
I am guessing that many of you received this morning a copy
of the American Securitization Forum's White Paper on
residential mortgage-backed security chain of transfer. It is a
good document and I agree with most of the legal analysis
within it, as far as it goes, but that is the problem. The
problem is that the ASF White Paper neglects to address three
rather important points.
First, it fails to address that parties can contract around
the Uniform Commercial Code, which is what the ASF says governs
transfers in securitization. Parties are allowed to contract
around that by the terms of the Uniform Commercial Code, and
arguably, that is exactly what mortgage securitization pooling
and servicing agreements do. If that is correct, then the ASF
White Paper is simply analyzing the wrong law.
Second, the ASF White Paper neglects to address the
question of noncompliance with whatever the applicable law is,
and there are a multitude of potential noncompliance problems,
such as premature shredding of notes or the signing of
assignments by purported agents of now-defunct companies. The
scope of these problems is unclear, but noncompliance with
transfer rules could void the transfers.
Third, the ASF White Paper neglects to address the trust
law issues in securitization. Most residential mortgage
securitization trusts are governed by New York trust law, and
New York trust law imposes additional requirements on
transfers. Arguably, these requirements are not met by many
securitization deals. New York trust law provides that if a
transfer does not comport with the trust documents, that
transfer is void even if the transfer would otherwise comply
with law. And if the transfer is void, that would mean that the
trusts do not own the mortgages and therefore lack standing to
foreclose.
I want to emphasize that I am not saying that this is the
case, that there are many unresolved legal issues and there are
also evidentiary questions. I am not predicting that there is a
wholesale chain of title problem with residential mortgage-
backed securities. Instead, my point is that there are
unresolved questions and that the law is not as clear as either
the American Securitization Forum or any law firm with
outstanding securitization opinion letter liability would like
you to believe.
We do not know how these questions are going to be
resolved, but some of the potential resolutions have dire
systemic consequences and Congress should be aware of that
possibility, because we would do much better being ahead of the
ball than behind it on systemic risk. When the systemic risk
aspect is taken into consideration within the context of all
the other problems in the mortgage securitization world, I
think it makes a compelling case for early intervention and for
a global settlement of the foreclosure crisis and investor
litigation against servicers and securitizers. Only a global
settlement will help revive the mortgage market, will remove
the debt overhang from consumers and financial institutions,
and will help restart the U.S. economy.
Thank you.
Chairman Dodd. Thank you very, very much.
Mr. Lowman, we welcome you to the Committee, as well. Mr.
Lowman is the Chief Executive Officer of Chase Home Lending,
responsible for Chase's mortgage and home equity lending
business, including loan origination servicing and default, as
well as credit risk management and capital markets. Chase Home
Lending originates $200 billion in residential markets and home
equity per year. The company services some six million loan
customers, and we thank you for joining us.
STATEMENT OF DAVID B. LOWMAN, CHIEF EXECUTIVE OFFICER FOR HOME
LENDING, JPMORGAN CHASE
Mr. Lowman. Thank you, Chairman Dodd, Ranking Member
Shelby, and Members of the Committee. Thank you for inviting me
to appear before you today.
We are committed to ensuring that all borrowers are treated
fairly and with respect, that all appropriate measures short of
foreclosure are considered, and that if foreclosure is
necessary, the process complies with all applicable laws and
regulations. We take these issues seriously. We regret the
errors in our affidavit processes and we have worked hard to
correct these issues.
I want to emphasize that Chase strongly prefers to work
with borrowers to reach a solution that permits them to keep
their homes. Foreclosures cause significant hardship to
borrowers and communities. Foreclosures----
[Interruption.]
Chairman Dodd. Officers? All right.
[Interruption.]
Chairman Dodd. OK. Because of disruption subject to arrest,
I ask that you----
[Interruption.]
Chairman Dodd. We stand in recess here for a few minutes.
[Recess.]
Chairman Dodd. I would invite those who would like to hear
the rest of the hearing to join us by sitting down so we can
hear the rest of the witnesses, and I will just make a point
here that those who engage in that kind of an outburst, we will
have to ask you to clear the room. We will ask the officers to
clear the room. I hope that is not necessary. We are delighted
to have you here in the room to hear the testimony. It is an
important hearing.
With that, now we will go back to Mr. Lowman, your
testimony.
Mr. Lowman. Foreclosures cause significant hardship to
borrowers and their communities. Foreclosures also inevitably
result in severe losses for lenders and investors. Therefore,
we always consider whether there are viable alternatives to
foreclosure.
Chase adopted its own modification programs in early 2007.
Since 2009, Chase has offered almost one million modifications
to struggling borrowers and has completed over 250,000
permanent modifications.
Sustainable modifications are not always possible. There
are some borrowers who simply cannot afford to stay in the
homes or they have vacated their homes. While we make repeated
efforts to modify a delinquent loan, sometimes we must proceed
to foreclosure. A property does not go to foreclosure if a
modification is in progress. But if the foreclosure has begun
and a borrower later begins the modification process, our
investors, including the GSEs, have instructed us to allow the
two processes to run at the same time. However, we will not
allow a foreclosure sale if a modification is in progress.
I understand the focus of the Committee today is our recent
decision to temporarily suspend foreclosures in a number of
States. To be clear, we service millions of loans and we make
mistakes. But when we find them, we fix them. It is important
to note that the issues that have arisen in connection with the
foreclosure proceedings do not relate to whether the
foreclosures were warranted. We have not found issues that
would have led to foreclosures on borrowers who were current.
Our recent temporary suspension of foreclosures arose out
of concerns about affidavits prepared by local foreclosure
counsel, signed by Chase employees, and filed in certain
mortgage foreclosure proceedings. Specifically, our employees
may have signed affidavits on the basis of file reviews and
verifications performed by other Chase personnel, not by the
affiants themselves. They may not have signed affidavits in the
presence of a notary. But the facts set forth in the affidavits
with respect to the borrower's default and the amount of
indebtedness, the core facts justifying foreclosure, were
verified prior to execution of the affidavits.
We take these issues seriously. Our process did not live up
to our standards. While foreclosures have been halted, we have
thoroughly reviewed our procedures and undertaken a complete
review of our document execution policies. We have also rolled
out extensive additional training for all personnel involved.
I would be happy to answer any questions that you might
have.
Chairman Dodd. Thank you very much.
Our last witness, and certainly not the least, is Diane
Thompson, who is a familiar face to many of us here. She is
Counsel to the National Consumer Law Center. She has written
numerous publications dealing with the integrity of the lending
and foreclosure process. She worked from 1994 to 2007 at the
Land of Lincoln Legal Assistance Foundation representing low-
income homeowners in East St. Louis. She testified at our
hearing on loan modifications in July of 2009 before this
Committee, and I will be particularly interested to hear if she
believes enough progress has been made since our last hearing
in July of last year. I thank you again for joining us.
STATEMENT OF DIANE E. THOMPSON, COUNSEL, NATIONAL CONSUMER LAW
CENTER
Ms. Thompson. Thank you, Chairman Dodd, Ranking Member
Shelby, and Members of the Committee. Thank you for inviting me
to testify today, and to answer your question, Chairman Dodd,
no, enough progress has not been made. I was shocked, actually,
when I took out my testimony from last July to look at it as I
was getting ready for this, how much of that testimony was
still relevant.
I am an attorney with NCLC, and in my work at NCLC I
provide training and support to hundreds of attorneys
representing homeowners from all across the country. So I hear
what is going on in Alaska and in Mississippi on a daily basis,
as well as in New York and Illinois.
The recent robo-signing scandal reveals the contempt that
servicers have long exhibited for rules--the rules of court
procedure flouted in the robo-signing scandal, the contract
rules breached by servicers' common misapplication of payments
and imposition of illegal payments, and the rules for HAMP
modifications honored, unfortunately, more often in the breach
than in reality.
Servicers do not believe that the rules that apply to
everyone else apply to them. This lawless attitude, created in
part by financial incentives and too often tolerated by
regulators, is the root cause of the robo-signing scandal, the
failure of HAMP, and the wrongful foreclosure of countless
American families.
In my written testimony, I provided dozens of examples of
the harm caused to homeowners by servicers. Many of the
foreclosure cases that have come to national attention
involving robo-signing allegations originated due to the
unnecessary forced placement of insurance, sometimes at more
than ten times the actual cost of the homeowner's existing
insurance policy.
Often, servicers' misrepresentations lead directly to
foreclosure. In one case cited in my written testimony, a North
Carolina woman was placed in foreclosure by Chase after 15
months of timely and full trial modification payments when she
made the mistake of following the advice of a Chase
representative to make a partial payment in the 16th month.
In another case, Bank of America employees told a
California attorney that the relevant pooling and servicing
agreement prohibited all loan modifications. Bank of America
employees went so far as to provide the attorney with what
appeared to be an electronic snapshot of the relevant section
of the PSA, but that snapshot converted a comma to a period and
removed the immediately following clause which provided for
loan modifications in most circumstances after default.
These abuses occur because servicers have strong financial
incentives to deny permanent modifications and in many cases to
proceed with foreclosure. The illegal fees that push many
homeowners into foreclosure are profit centers for servicers.
Servicers usually recover their costs faster in a modification
than in a foreclosure and servicers and their affiliates also
profit from post-foreclosure REO sales. Ultimately, these
actions by servicers strip wealth from investors as well as
homeowners.
Unless and until servicers are held to account for their
behavior, we will continue to see fundamental flaws in mortgage
servicing with cascading costs throughout our society. The lack
of restraint on servicer abuses has created a moral hazard
juggernaut that at best prolongs and deepens the current
foreclosure crisis, and at worst threatens our global economic
security.
Solutions must address the affidavit and ownership issues
raised most recently, but much more is urgently needed. We must
require servicers to evaluate homeowners for loan modifications
before foreclosure, offer modifications where doing so will
provide a net benefit to the investors, and provide that the
failure to do so is a defense to foreclosure. Funding for
mediation and representation of low-income homeowners is
desperately needed. Principal reduction must be mandated. Both
Congress and Federal regulators must rein in servicer abuse and
move toward restoring rationality to our mortgage markets.
Thank you for the opportunity to testify here today. I am
happy to answer any questions you may have.
Chairman Dodd. Thank you very much, Ms. Thompson. I
appreciate your testimony.
[Applause.]
Chairman Dodd. All right, please. Audience, please. This is
not a rally here, it is a hearing.
Let me turn to Senator Shelby. As I said earlier, I know my
Republican colleagues have a caucus and so I have invited
Senator Shelby and Senator Johanns to go ahead of us here, so I
will defer any questions I have. Senator Shelby.
Senator Shelby. Mr. Chairman, I have a number of written
questions that I would like to be made part of the record for
the panel.
Chairman Dodd. Consider it done.
Senator Shelby. And I have something I want to ask. I will
start with you, Mr. Arnold, and Ms. Thompson maybe will chime
in here, I hope. As I understand--I used to do some of this
many years ago--let us say a bank anywhere in America--we will
just use my home town of Tuscaloosa, Alabama--a bank makes a
loan on a home, or a mortgage banker or whoever, and that
mortgage, that note is signed and the mortgage is recorded at
the courthouse and the bank owns the mortgage. That is the
security for the loan.
Now, it used to be, and correct me if it has changed, that
they would sell that loan and then they would do an assignment
of record, say X Bank would assign the record to Y Bank or
whoever, or pension fund, and that would be recorded and they
would own the mortgage of record. There would be a record of
that in the courthouse there. And then if somebody missed four
or five payments and they foreclosed, you would recite all of
this in the foreclosure notice, of the default made in certain
mortgage, dated so and so, to X Bank and subsequently assigned,
or three or four times, and you would have to do that.
What has changed? Electronically, what is the problem and
what has caused it? Did you get away from the basic property
laws of the State? I do not know. And has that caused some of
the problem? I realize that in the securitization you might
take a thousand of these mortgages that I have just talked
about and you pool them, you securitize them. But still, the
fundamentals of each one of those homeowners remains: They are
in debt and the record of their indebtedness. Am I wrong or
right, and what has changed? I will ask Ms. Thompson next.
Mr. Arnold. Well, Senator, there has been a great deal that
has changed.
Senator Shelby. Tell the Committee.
Mr. Arnold. Part of that is that the sheer velocity of the
transactions that you are talking about began to jam up the
recorders' offices. There would be mistakes in those
assignments. They would be filed in the wrong order.
Senator Shelby. Wait a minute. Excuse me. You are saying
there were mistakes in the courthouses?
Mr. Arnold. No, Senator.
Senator Shelby. Well, where were the mistakes?
Mr. Arnold. Mistakes in the assignments that the banks were
preparing.
Senator Shelby. OK. The banks made the mistakes.
Mr. Arnold. Yes. And that would ultimately cause title
problems, breaks in the chain of title. It was unnecessary that
those assignments would be recorded every time----
Senator Shelby. Why would it be unnecessary to show who
owned the mortgage before you foreclosed on it? Because
heretofore you always foreclosed in the name of the holder of
record, did you not? I guess. Is that right, Ms. Thompson?
Ms. Thompson. Yes, that is the general rule in most States.
Senator Shelby. Go ahead, sir.
Mr. Arnold. And that still happens today even with the
advent of MERS. What MERS is is a common agent for all of those
banks, and that way when servicing changes hands, which is
covered under the Truth In Lending Act, there is a hello/
goodbye letter. Anytime that that changes, that is reflected on
the MERS system. The MERS----
Senator Shelby. But is it reflected--excuse me. It might be
reflected on your computer, but is it reflected in the
courthouse where the mortgage is recorded.
Mr. Arnold. MERS is reflected in the courthouse at all
times, and then if----
Senator Shelby. Wait a minute. Do they record the
assignment there at the courthouse? I could go look it up and
see who owned the mortgage?
Mr. Arnold. There is no assignment if MERS is the
mortgagee.
Senator Shelby. That is what I am getting at. You just said
there were, so you are correcting yourself. So actually what
you are doing with the electronic transfer, you have taken the
place of historically the property laws of the States. Is that
wrong or right, Ms. Thompson?
Ms. Thompson. That is correct, and it is true that MERS has
the case from New York, Romaine; there have been several cases
where clerks challenged the MERS recordation because it removes
from the public record any chain of title, and it does
complicate homeowners' attempts to discover who the current
holder of their mortgage is.
Senator Shelby. Well, isn't this part of the problem in the
foreclosure process? People are saying--I am asking you, Mr.
Arnold--that you do not really own this mortgage; you have no--
there is no record of you owning it, how can you foreclose on
it? Is that part of it?
Mr. Arnold. If there is a foreclosure in the name of MERS,
which might happen as few as one in ten----
Senator Shelby. Can you do that legally? Is that the law of
the land?
Mr. Arnold. The MERS mortgage can be foreclosed.
Senator Shelby. No, I asked you a question. Was that the
law of the land--in other words, you can do this? Because you
used to could not do that. You had to have the property
assignment properly recorded in X county to show, would you
not?
Ms. Thompson. Whether or not MERS can foreclose in its own
name is a hotly contested issue.
Senator Shelby. That is what I am raising.
Ms. Thompson. It varies State by State. Some States have
passed legislation allowing MERS to do that. In other States,
there has been litigation that has allowed MERS to do that. In
other States, there has been litigation that has forbidden MERS
from foreclosing in its own name.
Senator Shelby. So MERS is part of the problem.
Ms. Thompson. MERS certainly complicates determining who
the actual ownership and what the correct standing is, and it
can have the effect of concealing from the public the role of
major lending institutions in foreclosures.
Senator Shelby. I do not know if you have answered my
question correctly or like I want you to, but I am looking for
the truth of what the problem is. I think that when you
deviated from the basic property laws of the country, you got
yourself in trouble. Maybe I am wrong.
Ms. Thompson. I think that MERS is one piece of the
problem. I think there are more serious and more complicated
pieces of the problem.
Senator Shelby. OK. Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Shelby.
I am going to turn, Bob, with your permission, to Senator
Johanns. He has to go to that caucus.
Senator Johanns. Well, thank you. I appreciate the courtesy
from both Senators.
Ms. Thompson, help me understand this, if you will. All of
the abuses that you have described, somebody altering a
document and trying to mislead someone, I do not think there is
anybody in the room, probably anybody in the country, that
would try to claim that that is right. It is not right. I mean,
fundamentally it is just not right. But I want to kind of drill
down on the mortgage foreclosure issue itself and try to get
your help in me understanding this.
I have done many mortgages through my life. My first
mortgage was probably when I was in my 20s and bought my first
house. And my understanding is, complex as those documents
are--and, you know, they give you a stack about that thick to
sign. My understanding was that somebody was giving me money
that would at least partially buy the house--these days maybe
buy most of the house--and that if I failed to repay that in a
timely way, they would take the house. I mean, as sad and
unfortunate as that is, that was kind of the bottom line.
How many instances have you run into or is it a common
practice that these foreclosure people are foreclosing on
properties where, in fact, somebody has not failed to pay? Do
you see what I am getting to?
Ms. Thompson. I do, and in my written testimony I believe I
have three examples of cases where people were not actually in
default when the foreclosure was initiated.
Senator Johanns. And let me say again, that is not right.
But I am trying to figure out if it is 3 million or 3,000 or
three, because----
Ms. Thompson. I think it is very--it is certainly more than
three. I certainly had many examples like that in the course of
my practice. It is a complicated question because sometimes the
person is absolutely not in default and they initiate
foreclosure; sometimes the wrong bank initiates foreclosure.
And sometimes there is a placement of fees that then makes the
payment double or triple, and at that point the person does go
into default. Now, I submit that in that case it is the
placement of the improper fees that causes the foreclosure,
even though the person does technically go into default.
Senator Johanns. Well, let me just say again I do not think
that is right. And, again, I do not think you are going to get
much debate from anybody about that. I just do not think that
is right, and I want to make that clear.
But, again, for the purposes of this Banking Committee, in
this area it is so important that we understand what we are
dealing with. And so at least today you can give me three cases
where a default was initiated in a situation where the person
was not in default. Three.
Ms. Thompson. There are about 26 examples in the written
testimony, and I believe three of them involve cases where
there was no default; three of them involve cases where the
homeowner submitted a partial payment in reliance on a
representation by the servicer, and the servicer then declared
a default; and at least three or four of them involve cases
where people went into default solely because of the placement
of improper fees.
It is not uncommon--I think it is very difficult for us to
assess the magnitude of it, in part because there is no
meaningful verification of the affidavits that servicers submit
in a foreclosure process.
Senator Johanns. Well, you are going to have to----
Ms. Thompson. To determine whether or not the fees are
actually correct and the default is correct requires hours,
often, analysis of the payment histories.
Senator Johanns. Ms. Thompson, I will make this request to
you. Again, I am trying to get a notion of the scope of what we
are dealing with here so we can understand what we are to fix.
But if this is truly a case where you are telling me out of all
of the work you have done in this area that you can bring to
mind three cases where somebody was default--or sued and
foreclosed upon, that is a whole different dynamic for me than
if there are 300,000 of them.
Ms. Thompson. Out of all of the cases that I took, out of
the hundreds of homeowners that I represented, in virtually
every case I believe the homeowner was not in default when you
looked at the surrounding facts.
Senator Johanns. Would you be able to provide us with some
information to back up that statement? You just made a
statement: Out of all of these cases, in virtually every one
the homeowner was not in default. That really--I find that
troubling that there would be people out there foreclosing when
the homeowner is not in default when there are--do you see how
that does not----
Ms. Thompson. Yes, and as a legal services attorney, I had
precious little time, and I only took cases where I believed
that there was a meritorious defense to the foreclosure. I
represented in court hundreds of homeowners. Every single one
of those cases, I believed there was a strong defense that
would defeat the foreclosure. You can only defeat the
foreclosure ultimately if you establish that there is not a
legal default. It is a widespread problem throughout the
country.
Senator Johanns. I am a lawyer myself, and although I did a
little bit of this work in my career, I did not do a lot, so I
start with that deficiency. But I will tell you there are legal
defenses and then there are defenses to the fact that, look, my
client is not in default. And that is what I am trying to get
to here. How many of those are in defense where you actually
filed an answer to the foreclosure petition saying you made a
mistake, my client is fully in compliance, at least in terms of
the payment of this mortgage?
Ms. Thompson. Well, again, I do not think that is a simple
yes or no, because if you have these improper fees, that can
cause a technical default under the note. But if we are looking
at the cases where somebody was absolutely not in default, that
would have been--you know, there is absolutely no question, no
controversy about their payments, maybe 10 percent of the cases
that I handled. If we are looking at cases where it was
something that the servicer did, just the servicer, that
triggered the default, maybe about 50 percent of the cases.
Senator Johanns. OK. I will wrap up with this because I am
over my time. You have even caused me more concern by your
testimony because, again, if people are doing things that are
not right, we should stop those things. We all agree to that.
But what I am trying to get to is this issue of if you have not
paid and somebody is suing you because you have not paid, then
I need to know the scope of that problem. And if it is 10
percent, then, again, that causes me a great deal of concern
about your testimony.
So hopefully you can provide more information to this
Committee to try to clarify what you are saying here, and I
would welcome that.
I thank the Chair. I have gone 3 minutes over, and I
appreciate it.
Chairman Dodd. No, no, that is fine, Senator. Thank you.
I would just note again--and then I will turn to Senator
Bennett and then turn to my colleagues on the Democratic side.
I had noted in the testimony of Ms. Desoer that 86 percent of
homeowners are in compliance. Obviously, the number that is
troubling to me is not the 86 percent, but the 14 percent who
are not. Normally, as I understand it--and we have talked about
this. Today, in fact, it is less than 1 percent or something
around 1 percent under current underwriting standards and the
like. Normally, though, in normal times, it would be around 2
percent, people in default. The fact that it is at 14 percent
speaks of another larger--coming down to the point where
whether or not someone is in default or not, that is the end of
the process. There is a lot that occurs before that particular
moment that really causes so much concern as well. But I would
just make that point generally.
Senator Bennett.
Senator Bennett. Thank you very much, Mr. Chairman.
Unlike Senator Johanns, I am not a lawyer. My experience
with mortgages, like his, started with getting one. I have
defaulted on payments at various times in my career when I
simply did not have the money. Fortunately, I got it in time to
make up the payment before any legal proceedings were made. I
was 60 days late, or whatever it might be. But I know the angst
that comes with having missed a mortgage payment, worrying
about what is going to happen if you cannot get the money to
make it up with sick children and a foster child at home and a
situation where your own economic circumstance is not good. So
I have all kinds of emotional reactions to the testimony and to
the emotional reactions to the testimony. But let me try to
follow up on Senator Johanns with some of the things he was
trying to get a hold of.
We have two people here who are in the business of home
loans: the president of the Bank of America Home Loans and the
CEO of Chase Home Lending. I would like your response to the
testimony we got from Ms. Thompson.
Ms. Thompson, either deliberately or otherwise, you gave us
the impression that it was the policy of the servicers--that
there is a built-in conflict of interest so that it is their
policy to try to pile on extra fees, to try to force people
into bankruptcy so they can make more money. And I would like
those who were on the receiving end of that implication to have
an opportunity to respond.
As a businessman--I am not a lawyer, but I am a
businessman--I would say to the business people in the room, if
that is indeed your policy, it is a really stupid policy,
because while you may make a little short-term revenue out of
such a circumstance, you build in very serious long-term
consumer resistance to dealing with you. And I do not suggest
that there are not businessmen and women who are stupid and,
therefore, that there are not businessmen and women who do
that. I think there are some who are stupid and who do do that.
But if I were an employee of any company that was involved with
this or serving on the board of any company that was involved
with this and found out that you were deliberately trying to
maximize short-term profits with these kinds of fees, I would
say that is about as dumb a thing as you could possibly be
doing from a business point of view.
So we have two business people here, and I would like to
hear your response to this. Ladies first.
Ms. Desoer. OK, thank you. Senator, we absolutely do not
sacrifice the long-term brand of Bank of America for the
opportunity to have short-term gains in fees. At the same time,
and for what Ms. Thompson referenced relative to our
inaccurately portraying a PSA that resulted in a bad consumer
experience, that is an error on our part. We take errors very
seriously. We do make them. We are not perfect. When they are
brought to our attention, we work to resolve them just as
quickly as we can. So I apologize for any error there may have
been. But, when we do make them, we work quickly to correct
them because our best financial outcome is aligned with keeping
homeowners in their homes. And so we have been as creative as
we can under the circumstances, and unfortunately there are 14
percent of customers who are delinquent on their mortgages, to
attempt to reach out, to make offers of Government programs, of
our own programs, of working with others to try to do
everything that we can to keep customers in their homes. And
where that has been possible, we have succeeded 700,000 times
with permanent modifications that have enabled customers to
stay in their homes. We continue to work to do that by
expanding programs, being one of the first in the industry to
offer a principal reduction program, as an example, under a
proprietary program to participate in the hardest-hit States of
the Government funds and to participate in the principal
reduction portion of that where it is important in States that
have experienced the most severe depression in home prices.
At the same time, there is no question that we have to
balance interests. We put the interests of the customer front
and center. That is part of the core value of Bank of America.
But we have to also consider the interests of the investors,
whether that be Government agencies or private investors, as
well as our role and responsibility of servicer. We take that
balancing very seriously. We do not always get it right, but we
certainly focus on trying to keep the customer in their home,
and that is where our financial incentives are aligned.
Senator Bennett. Mr. Lowman.
Mr. Lowman. Yes, I would echo Ms. Desoer. The fact is we do
not make money when we foreclose on customers. It is in our
best interest to figure out ways to make loans perform again.
And as a result of that we have invested significant effort and
resources to beef up our modification efforts. We have 6,000
customer-facing employees. We have 1,900 people that are the
single point of contact for troubled borrowers. We go through
an extensive analysis to determine whether or not a borrower is
eligible for a modification, and as a result, modifications are
in our best interest and in the interest of the investor.
Like Ms. Desoer mentioned, we have a balancing act to do.
We have to do what is right for the borrower, and at the same
time do what is right for the investor who we have a duty to
minimize their losses.
Senator Bennett. Yes, one last comment, Mr. Chairman.
Chairman Dodd. Yes.
Senator Bennett. Ms. Thompson, I am sure your information
is accurate when you say employees of these companies have
misled people and given them improper advice. If you call an
IRS agent for advice on your taxes, there is a very good chance
you will get wrong advice and end up in tax court. Human beings
do make mistakes, and I would just say to the two
representatives of the two banks, I hope you are checking your
training at all times to make sure those kinds of mistakes are
not made, because as I say, the IRS is a Government agency, but
it has a history of misleading taxpayers, and they act on the
basis of the advice they are getting, and then they end up in
tax court. And it is not a defense to say, ``Well, I did what
the IRS agent told me.'' That does not matter. You are still--
did you want to comment?
Mr. Levitin. Yes, Mr. Bennett, I think it is also important
to actually hear the words of another servicer, and this is a
public document, Countrywide's third quarter 2007 earnings
call. Countrywide's president, David Sambol, this is what he
said, and I quote:
Now, we are frequently asked what the impact on our servicing
costs and earnings will be from increased delinquencies and
loss mitigation efforts and what happens to costs. And what we
point out is, as I will now, that increased operating expenses
in times like this tend to be fully offset by increases in
ancillary income from our servicing operation: greater fee
income from items like late charges and, importantly, from in-
sourced vendor functions that represent part of our
diversification strategy.
In 2010, Countrywide settled with the FTC for $108 million
on charges that it overcharged delinquent homeowners for
default management services, including mark-ups on some of
these services that were in-sourced by over 100 percent. So
that is the head of Countrywide in 2007 basically admitting,
Yeah, we do sacrifice long term for short term.
Senator Bennett. As I say, there are some people who are
stupid.
Ms. Thompson. Mr. Bennett, if I may, Mortgage Daily News,
hardly a radical publication, reported in June of this year
that servicers generally, their profit per loan had increased
over the previous year despite the fact that foreclosures were
rising. Servicers' business model is not based on the long-term
profitability of the loan. It is based on the fees. The fees
make up a large chunk of their profits because they are allowed
to retain the fees under the current business models. And that
is a structural problem with the existing business model that
incents them to charge and retain the fees.
Senator Bennett. I think that is something we ought to look
at.
Chairman Dodd. Well, I was going to say, I am going to turn
to Tim Johnson, then Senator Tester, and I am going to forgo
any questions I have. But I am going to ask to include in the
record a letter from the New York Fed to, I think it was, Bank
of America, Bank of New York, and others on October 18th of
this year.
Chairman Dodd. This one paragraph goes to the very question
that Senator Bennett has asked. I will preface it by saying
that the PSAs, the pooling and service agreements, provides
that the master servicers shall be entitled to recover
servicing advances that are:
customary, reasonable, and necessary out-of-pocket costs and
expenses incurred in the performance by the master servicer of
its servicing obligation, including, but not limited to, the
cost of preservation, restoration, and protection of the
mortgaged property.
That is the section of the law.
The letter from the New York Fed goes on to say:
Despite the requirements that servicing advances were to be
incurred only for reasonable and necessary out-of-pocket costs,
the master servicer instead utilized affiliated vendors who
marked up their services to a level of 100 percent or more
above the market price to provide services related to the
preservation, restoration, and protection of the mortgaged
property in a fraudulent, unauthorized, and deceptive effort to
supplement its servicing income.
That is from the New York Fed. That is not from--you know,
with all due respect, this is--so this whole letter, by the
way--it is a lengthy letter but very worthy, and I think it
ought to be part of the record because it goes to the heart of
these issues as well.
Senator Johnson.
Senator Johnson. Mr. Levitin, we have heard criticism that
laws regarding documentation have not evolved quickly enough to
address innovations in business. Does the law need to be
changed to ensure proper documentation throughout the mortgage
process?
Mr. Levitin. No, sir, I do not believe that is the case. I
do not think the problem is the law. The law is actually pretty
good. The problem is really one of compliance with the law, and
there are, I think, two potential problems.
According to the American Securitization Forum--and I would
agree with them, there are two generic ways in which you would
transfer the notes and the mortgages in a securitization. One
is that you would negotiate the notes through the procedures
set out in Article 3 of the Uniform Commercial Code. Just the
way you would sign the back of the check to negotiate it to the
bank when you deposit it, similarly, you could sign it, endorse
it to someone else. That way is fine.
Alternatively, Article 9 of the Uniform Commercial Code
allows for promissory notes and mortgages to be transferred as
part of just a regular--under just a regular contract of sale.
That system works fine. The first question is whether that
system was actually the one that governed securitization. The
answer, I believe--but I cannot say for certain, but I
certainly believe the answer is now. Instead, I believe that
what was governing securitization was private contractual law.
The parties are allowed under Section 301 of Article 1 of the
Uniform Commercial Code to contract around Article 3 or Article
9. And I believe that is exactly what they did in the pooling
and servicing agreements. Pooling and servicing agreements are
trust documents that create a trust, have a transfer of assets
to the trust, set for the rights of the mortgage-backed
security holders, because the trust pays for those assets by
issuing mortgage-backed securities, and sets forth the rights
and duties of the servicer.
The securitization documents themselves, the pooling and
servicing agreement, call for a rather specific method of
transferring of mortgage notes. My understanding--and this is a
secondhand understanding. I want to emphasize this because I
have not seen more than a handful of loan files. My
understanding is that generally the requirements set forth in
the pooling and servicing agreements were not followed, and
they were not followed in the following way:
The pooling and servicing agreement says that there has to
be--when the notes are transferred to the trust, there needs to
be an endorsement in blank to the trust as well as a complete
chain of endorsements for all preceding transfers. That means
that the originator of the loan has to have a specific
endorsement transferring it to the securitization sponsor, the
sponsor to the depositor, and then the depositor in blank to
the trust.
What I am told is that in the majority of cases that chain
of endorsements is not there. There is simply a single
endorsement in blank. That creates a problem because it does
not comply with the trust documents. That is a severe problem
because most pooling and servicing agreements are trusts that
are governed by New York law, and New York law says if you are
not punctilious in following the trust documents for a
transfer, the transfer is void. It does not matter if you
intended it. It is void.
In addition, there is a very good business reason for
having that particular form of transfer. A critical concern in
securitization is to ensure that the assets placed in the trust
are bankruptcy remote, meaning that if any of the upstream
transfers to the trust were itself to end up in bankruptcy,
they could not claw the assets out of the trust. This is to
protect the mortgage-backed security holders.
If you do not have that specific chain of endorsements, you
just have an endorsement in blank turning the note into bearer
paper, it is going to be very difficult to prove that you have
that chain of transfers necessary for bankruptcy remoteness. So
this is the concern.
Now, I want to emphasize, this is not a problem with the
law. This is a problem with following the law. So I do not
think that there is a need to change the law to catch up with
the market. I think this is, rather, a problem with the market.
The law itself would have been fine, and historically, these
procedures were followed. But as volumes grew during the
housing bubble, securitization volumes, it just became easier
to disregard the requirements. And you know, just as the
underwriting standards fell, similarly the transfer diligence
fell.
Senator Johnson. Attorney General Miller, given that
foreclosure is a judicial crisis in many States, what were the
barriers to recognizing the documentation problems that
existed?
Mr. Miller. Well, I think what happened was that recently
in some litigation people that did the robo-signing were
deposed and admitted that. And, you know, once that happened,
then this investigation started in earnest.
I do not think there was any way for the banking regulators
just looking at the documents to know that they were robo-
signed as opposed to done properly, as the affidavit said. So I
think it was really sort of people coming forward, I think, in
some foreclosure actions that were being defended in an
aggressive, very capable way, that these disclosures became
public, and then, you know, I think the Attorneys General, the
banking regulators, the Federal authorities, class action
lawyers, and the companies have been energized.
So I think that what was sort of an unusual occurrence or
maybe even a happenstance, if we can convert that problem into
multiple solutions like the ones I talked about earlier, you
know, we can come out of this much better than we came in. I
just agree wholeheartedly with Senator Dodd saying that what we
need is a broad brush, a broadly based look at all the problems
that he described and I described and try and work with the
companies and the investors and the Federal regulators to come
up with a comprehensive resolution that gets us back on track
and corrects as many problems as we can of those that are on
the table.
Senator Johnson. One last question for Ms. Desoer and Mr.
Lowman. There have been serious questions, concerns raised that
it is in the best interest not to modify--there have been
serious concerns raised that it is in the servicer's best
interest not to modify a loan given the fee structure and
potential conflict of interest regarding second liens owned by
a servicer's parent company. Can you address that criticism?
Ms. Desoer. Certainly, I would be happy to start. We are a
large servicer of first mortgages and also we have a large
servicing portfolio, most of which we own, of second lien home
equity loans and lines of credit at Bank of America, and in
that context, we do not even take the second mortgage into
consideration when modifying the first. So it is absolutely not
an obstacle that stands in our way. We do modifications on
second liens. We have done 95,000 of them independently of the
first lien. Also, we were the first servicer to sign up for
participation in the HAMP 2MP program, which is the second lien
modification program that now others in the industry, as well,
are participating in. So the second lien is not an obstacle,
and has not been an obstacle and does not get taken into
consideration when we look at modifying a first lien. So it
does not stand in our way.
Senator Johnson. Mr. Lowman?
Mr. Lowman. I would echo Barbara Desoer's comments. The
second liens do not stand in the way of modifying the first.
We, too, are participants in Treasury's 2MP program, which has
just recently been rolled out, which will allow for an
automatic modification of the second when the first is modified
and that first is held by another servicer.
Senator Johnson. My time has expired.
Chairman Dodd. Thank you very much, Senator.
Because we have a good number of our colleagues here, if we
can try and keep it down to about 5 or 6 minutes. Senator
Tester?
Senator Tester. I will do my best, Mr. Chairman. Thank you
very much.
I want to say, first of all, thank you all for being here.
I very much appreciate your time. I am very deeply troubled
about some of the allegations that have been made about
improper fraudulent servicing and foreclosure processing, and
what compounds this is the first-hand reports that my office
has received in Montana. I have reached out to many foreclosure
counseling agencies in Montana. I have read through some of the
cases that my staff have worked on in recent months, and I will
tell you, it is not a pretty picture. There is mismanagement
that goes far beyond robo-signing and the chain of title
issues.
Since the foreclosure crisis began, we have urged
constituents in danger of foreclosure to be proactive and to
reach the servicer before they were in trouble. The foreclosure
process is daunting, to say the least. It is a maze of
paperwork, computer systems, conflict information. So it is a
big deal. And the misalignment of the servicer incentives with
homeowners and investors, I think, is a recipe for disaster.
I have got a couple of examples and then I want to get to a
couple of questions. In one example, a constituent of mine from
Whitehall seeking a modification from Bank of America was told
by a servicing associate that while the loan modification was
in review, the homeowner should not make any mortgage payments.
Let me repeat that. He was told by their servicer, Bank of
America, not to make any payments, and that if they did, they
would not qualify for modification. Ultimately, as a result of
following the directions of their servicer, they were hit with
interest and penalties and lapse in payments in addition to
badly damaged credit.
Then there is a case of a gentleman from Helena who has
been fighting with BOA for over a year to prove that he should
not be in foreclosure, despite having the paperwork to prove
that his modification was approved. He never missed a payment,
never late with his mortgage. After being told in August, this
last August, that the bank has confirmed his modification, he
received a letter 2 weeks later telling him that he was in
foreclosure along with a foreclosure notice in the paper.
Now, I do appreciate Bank of America's work to resolve the
issue. Unfortunately, not everybody calls their U.S. Senator
when they have a problem. And I am still trying to understand
how this could go on for a year, in the case of the gentleman
in Helena, to receive an erroneous foreclosure notice, and this
was received at a time when, Ms. Desoer, there was a self-
imposed pause of foreclosures in Montana. So I need to know how
this can happen.
There are far, far, far too many stories out there, and it
does not have anything to do with Ms. Thompson's testimony,
although I very much appreciate it. This is stuff that I am
getting in my office. We have a State with 950,000 people and I
have got staff members that are spending a ton of time on this
issue. I think it is more than an isolated case. If it was the
folks who were not paying their bills, I get that. I have
empathy for them and I understand it and we will do what we can
do to help them. But in this particular case, these folks never
missed a payment and they are getting hammered. Can you tell me
how a servicer could ever tell a homeowner not to pay their
mortgage?
Ms. Desoer. Thank you for bringing those to my attention,
and I think our staff has met with your staff to get those
details and to follow up. We apologize. That is not part of
what we should be telling homeowners. Of course, homeowners who
are current who are facing imminent default can be considered
for the HAMP and other programs if they can demonstrate that
their payments are at risk, and we take those into
consideration and do those modifications and we should never be
advising anyone to----
Senator Tester. Do you attribute this to an employee who
screwed up?
Ms. Desoer. An employee who somehow--yes, unfortunately,
and--after conversations with your staff, we have gone back and
reinforced that aspect of our communication to our teammates.
It is a critical part of our training.
Senator Tester. I think it is absolutely critical. If I
take myself and put myself in that position, I mean, in these
economic times, it is tough enough, and then you have something
like this happen, it is pretty wild to even think it is
possible.
The gentleman from Helena, how is it possible he did not
receive a letter indicating that he is in foreclosure before
foreclosure processing has restarted in the State of Montana?
Ms. Desoer. This goes back to what I referenced in my
written testimony and my oral testimony about the dual track of
if someone being delinquent and they go into the start of a
foreclosure process, and then subsequently we engage in a
conversation about a modification, the foreclosure sale will
not take place, but that customer continues to get notices, and
that is a requirement by certain investors that we do that on a
parallel path. That is where we think there is an opportunity
if we work together--and we are talking to the State Attorneys
General under Attorney General Miller's leadership, to try to
amend that process because we understand how confusing it is.
But a customer would not go to a foreclosure sale----
Senator Tester. OK. And I have run out of time and I am
just going to make a real quick statement, and I appreciate
everybody being here today. These particular hearings are not
particularly enjoyable for me, and I know they cannot be
enjoyable for you. The fact is that why we are here is not an
isolated incident, like the Senators before talked about. There
is no doubt in my mind this is not isolated. Montana is not a
State where people come to the U.S. Senator just willy nilly.
They end up in trouble and think they have been wronged, and I
do not know how many people out there did not come to me and
end up on the street and they never did anything wrong, and so
it is crazy.
So I just want to say in closing, I am going to remain very
concerned about the scope of this problem, the impact it can
have on our financial system and on the housing market. I know
that the Fed is very much focused on it and I hope it is
something that the Financial Stability Oversight Council will
take a closer look at. It strikes me that some of the biggest
servicers have been a little bit glib about their potential
magnitude of these risks, particularly the risks to their own
balance sheets. At a minimum, we need to understand these risks
before the Fed moves forward with guidance on banks to increase
dividends, because quite frankly, there are not going to be any
more bailouts. And so it is important that we get this squared
away simply from a fairness standpoint. I think both sides of
the aisle can agree on that.
Mr. Miller, you had a question or a comment?
Mr. Miller. Just one very quick comment. I agree with you.
We hear about it more often than it be just isolated, and one
of the things that is difficult that we hope we can do is get
to the bottom of how often it happens, why it happens, and how
it can be stopped. It is a daunting challenge but one that we
want to work with the banks and with the Feds to figure out why
this happens and how can be----
Senator Tester. I just appreciate that. I think if you go
to what Mr. Levitin said about what the Countrywide CEO said--I
think it was the CEO that said that--this could be taken care
of pretty quickly by the servicers, I mean, really quickly by
the servicers. I mean, to be honest with you, some heads have
to roll if they are giving that kind of advice. That is just
the way it is.
[Applause.]
Chairman Dodd. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair.
Mr. Lowman, you made a comment that, if I understood it
correctly, I wanted to restate it, and that is that GSEs say if
foreclosure has begun before the modification starts, the
servicer should continue foreclosure proceedings while underway
with the modification. Did I catch that correctly?
Mr. Lowman. You did.
Senator Merkley. OK. So we have so many folks coming to our
office in Oregon who over here are working with the servicer to
modify their loan, but then they are getting foreclosure
notices, phone calls, agents coming to their door, and they
keep calling up the servicer and saying, ``I thought we had a
loan modification underway.'' Is this the result of these dual
processes going forward together?
Mr. Lowman. Yes, it is a result of the dual processes, and
as I mentioned, at Chase, what we have put in place is a
process that makes sure that if there is a modification in
process and--if there is a foreclosure in process and you
initiate a modification during that period of time, that we
will not allow a foreclosure sale to happen. So we stop the
foreclosure sale.
Senator Merkley. So you do not take the final step, but you
continue kind of the steps leading up to that?
Mr. Lowman. Correct.
Senator Merkley. It is just short. This is a story from one
of my constituents:
My husband and I signed a loan modification. We were approved
September of 2009. It was a steep loan rate and every year our
interest went up. We sent in a payment of $577 in certified
funds for the modification to become effective. We began making
our new payment each time we called in, but there was
confusion.
We got a foreclosure notice in the mail. When we called to ask
about it, they would assure us everything is OK. Keep on making
your payment, is what they would tell us. We have made our new
payment for over a year and are still receiving foreclosure
notices. The bank told us our account has not been updated and
not to worry.
We went out of town in October 2010, so last month, and
received a `Notice of Foreclosure' on our door. When my husband
called the bank, they told him the lender never signed off on
our modification, so it was not valid. They were going to try
and figure out something and let us know. When I called to
check on the account in November, of course, this month, the
bank said we are now delinquent. I told them what had happened
and asked what we should do. She told me we may qualify for a
loan modification. I said, we did that. I told the woman we
were approved and had been paying our new payment for over a
year. I asked her if she had seen this happen before. The woman
said yes. I then asked what happened to the money we paid every
month. She told me that it went toward our account, but only as
a partial payment.
Now my husband and I do not know what to do. We want to make a
payment, but not if it is just a partial payment. We need help
and advice but cannot afford an attorney. It is embarrassing to
have your neighbor tell you you have a foreclosure notice on
your door. We also had a man come to our house telling us that
he was from the mortgage company and wanting to know if we were
occupying the property. I said, yes, we live here. This has
created a huge strain in our family and caused an enormous
amount of stress. Our children have been affected by this, as
well.
I have stacks of these stories of this conflict between
foreclosure--can't we just change this policy and suspend the
foreclosure proceedings when a modification is underway, not
keep it going forward and create this enormous confusion and
stress for America's families?
Mr. Lowman. So the new process prescribed by HAMP that was
instituted this summer would necessitate that we enter into the
modification process and engage with the customer to initiate a
modification prior to the commencement of foreclosure. So that
is the process that is happening today.
The other major key difference today from in the past is at
the beginning of the onset of the program, the HAMP program and
other modification programs, we did things based on the
statements from the borrower. So we entered into trial
modification plans based on what they told us over the phone.
And then we got into the game of collecting documents, not
getting the documents, I am sure in many cases misplacing the
documents. But at the end of the day, this period of time just
took way too long. So the new process is such now that we
collect the documents before we enter in the trial--set up a
trial payment. And really the only thing that has to happen in
order to make that----
Senator Merkley. Let me cut you off----
Mr. Lowman.----a permanent modification.
Senator Merkley. My time is almost out. Have you changed
your practice to suspend the foreclosure proceedings, not the
final step, but the whole stream of events?
Mr. Lowman. We have not.
Senator Merkley. I just want to put that forward.
Ms. Desoer, how about with Bank of America? Would that be
possible, to set aside the foreclosure operation while you are
in the modification process?
Ms. Desoer. That is what we are proposing to consider, but
we cannot do it independently except on our own portfolio of
loans, and that is why we are working with the State Attorneys
General on a suggestion to do that.
Senator Merkley. Well, I think that is one substantial,
simple step that would have substantial positive consequences,
because this--the homeowners are completely confused and
completely stressed by these foreclosure notices, and then
suddenly in some cases people find out the foreclosure has
actually gone through, which leads us then to talk about MERS.
In common law, if you had a stake in a house, you could put
a lien against the house because you had that stake, and that
is captured in our modern law with a contract that is a
promissory note on the contract side and a mortgage lien on the
property rights side, and the idea is that if your contract
right is violated, you have a property right to go back and
reclaim your damages, essentially. But the separation that has
occurred in MERS between the property law and the contract law
is creating a lot of court cases.
We are trying to get the details, but we think there has
been a case in Oregon that has said, in fact, MERS does not
have standing if they are not in a situation where they
actually have damage, and I have your testimony, Mr. Arnold,
from last year, your deposition where you said MERS suffers no
damages. They have no economic stake in these mortgages.
I am very concerned about the legal issues getting
resolved, in part because this poses a huge systemic risk to
our banking system as a whole. We are talking here both about
the rights of the homeowner being honored, but we are also
talking about confusion that can throw shock waves through an
already challenged system of home finance in our country that
is important to all of our homeowners.
Can any of you kind of comment on what needs to be done to
make sure both homeowner rights are honored and we do not send
shock waves through our entire economy with this question?
Mr. Arnold. Well, Senator, I would say that one thing that
MERS does is make all of that more clear. The public can look
at the MERS system and, free of charge, find out who the
servicer is and who the note holder was. That was never
available in the public records prior to MERS. So that gives a
homeowner the two key players that they would have to negotiate
with for a modification. So with MERS and the land records and
the MERS system keeping track of the servicers free of charge,
consumers can get that information and go straight to a
modification. With regard to the foreclosure, MERS, if the
foreclosure is done in the name of MERS, we have a nationwide
requirement that the promissory note be presented at the time
of foreclosure. That is more strict than most States. Likewise,
there can be no lost note affidavit in a MERS foreclosure.
Senator Merkley. So the person who represents MERS at the
foreclosure proceeding is normally someone you have designated
as a certifying officer of the company. How many folks have you
designated as certifying officers, essentially temporarily made
them members of your company in order to execute this process?
Mr. Arnold. Well, it is not temporary. It is limited. They
are limited to seven specific items that they can do for MERS.
There are 20,000 of those nationwide.
Senator Merkley. OK. I am sorry. I am out of time. But it
has created legal confusion and that is an issue and I am
sorry. Thank you all very much.
Chairman Dodd. Thank you, Senator.
Senator Bennet.
Senator Bennet. Thank you. Thank you, Mr. Chairman. Thank
you for holding this hearing, although I have to say it is so
depressing how little we have moved in the last 3 years on
these questions.
I wanted to just clear something up because I did not
understand the answers to the question. On the HAMP program, I
wrote in February to the Administration suggesting that
servicers that were part of the HAMP program ought to not be
able to pursue foreclosure while they were working on modifying
loans, and it was my understanding that last June the
Administration put forward a policy like that, and you just
spoke to that. I am confused about what the status is from the
servicers' perspective. Are you in a position now to be able to
say, we are not going to pursue foreclosures while we are doing
modifications, or it sounds to me like it is not as simple as I
may have imagined it was, or straightforward.
Ms. Desoer. We are not in a position to say that we are not
going to follow the foreclosure process in parallel to a
modification. If there is a modification in the process of
being considered, we will not proceed with the foreclosure
sale. So the work that I suggested that we consider doing,
which is eliminating that parallel process, has not yet taken
place.
Senator Bennet. What are the gating items there preventing
you from being able to do that, or what----
Ms. Desoer. Investor requirements.
Senator Bennet. OK, which brings me actually to my second
point----
Ms. Thompson. Senator Bennet?
Senator Bennet. Yes?
Ms. Thompson. May I address the question about the HAMP?
Senator Bennet. Sure.
Ms. Thompson. That would be Supplemental Directive 10-02,
which for HAMP does halt the foreclosure process, but only, in
most circumstances, only for loans that are not yet in
foreclosure at the time that the modification review is
initiated, so that if the foreclosure process has already
started proceeding for one reason or another, that process is
allowed to continue to the point of sale while the loan
modification review goes on. So while Supplemental Directive
10-02 was helpful, it did not relate back to cover loans that
were already in the foreclosure process.
Senator Bennet. You have heard the stories here today, and
I want to say that my office is facing exactly the same thing
Senator Tester's office is facing. I have had 22 months of town
hall meetings, people bringing their documents and the
transcripts of voice mails and e-mails from servicers telling
them that what they are doing is OK, that they are in
compliance with the loan, and then they find out that they have
been hit by a penalty of some kind or another.
Mr. Chairman, there was an article in Sunday's Denver Post
that I would ask to be included in the record, and I will not
go through the two stories, but one of the people that were
affected by all this sort of ``through the looking glass''
business, Wendy Diers, she said, ``We did everything we were
supposed to do. This is such a boondoggle of a mess,'' she
described.
Senator Bennet. And it is a boondoggle of a mess, and I
think there is some--and the thing that I cannot understand is
where the misalignment of interest is here, because we have
millions of people in this country that are underwater in their
mortgages. We know that. I, for one, do not believe that it is
possible to prop up the value of all of these houses. That is
impossible and it would be foolish public policy to do that.
But it seems it is clearly in the interest of people that
can pay on their loans at a reduced value and who want to stay
in their home, it is clearly in their interest to do that,
right?
For investors in these securities, it would seem to me that
it is clearly in their interest to have the homeowner be able
to do that, because the value of the modified mortgage is worth
more than the proceeds from a foreclosure sale would be, it
would seem to me, and I could be wrong. Any of this that you
want to correct, please correct.
The third piece is that it is clearly in the interest of
the adjacent homeowners that that loan be modified and that
that person remain in their house, because if they do not, the
value of their house is just going to go down, and that can be
repeated over and over and over again until the neighborhood is
actually the entire United States of America, not just one
place or a State that has been particularly hard hit, but the
entire economic recovery in many respects rests on our being
able to get this sorted out. That is a self-interest that would
seem to be present.
So the question I have is, and we have had this hearing and
other hearings and here I am at the end still completely
unclear where the misalignment is. Why can we not get all of
the self-interest aligned in a way that will allow us to
proceed expeditiously so that--not just so that my constituents
can get on with their lives, which they desperately want to do,
but so that we can get this economy moving again. Professor?
Mr. Levitin. I think there are at least two problems. One
problem is mortgage servicers, and I think you have heard a
fair amount of testimony already at this hearing about the
incentive alignment problem. Simply put, foreclosure is either
less costly or more profitable than modification in many cases.
The second problem----
Senator Bennet. Not as far as the investors are concerned,
right?
Mr. Levitin. No. This is the servicers----
Senator Bennet. Right.
Mr. Levitin.----representing their own financial interests,
which are--the servicers' financial interests do not match the
investors'.
The second problem comes with loans that are not being
serviced by a third-party servicer but with loans that are
actually on bank books. There is a strong disincentive for
banks to recognize losses on mortgages quickly.
Senator Bennet. What percentage would you say of----
Mr. Levitin. Around 40 percent of mortgages in this country
are not securitized. We do not actually know how many mortgages
there are in the United States, which is just kind of an
astounding failure, regulatory failure to gather information.
No one knows the number. Somewhere between 50 and 60 million.
But of the mortgages that are on bank books, if the bank--
if the loan defaults, the bank can stretch out the period of
time before foreclosure. That means that the bank is stretching
out the time before it has to recognize the loss. If the bank
modifies the loan now, and let us say it writes down principal
now, it is taking an immediate loss and this is particularly a
problem with second liens because almost all second lien
mortgages are on banks' books. There are around $400 billion in
second lien mortgages out there. That is roughly equal to--they
are held by the four largest banks, Bank of America, Chase,
Citi, and what am I forgetting--Wells. That is roughly equal to
the market capitalization of those four banks. So if they
started writing off their second lien mortgages, they would
have no capital left. They would be insolvent. And that creates
a strong incentive not to recognize losses and to just try and
pretend that they are not there.
Senator Bennet. Mr. Attorney General, did you want to
respond?
Mr. Miller. Just briefly. First of all, you gave my speech,
although you gave it better than I give it. I just agree with
you completely on the fundamental alignment of interests that
you describe.
And I think there is a series of factors. Some were just
mentioned, including the second lien and the recognition of
loss. In addition, I think there is a question of putting
enough resources into the servicing process. There has been an
enormous demand on what they need to do. They have added a lot
of people. I think they have to add more and add more
resources.
And then I think, additionally, the quality of
decisionmaking that--it is hard to tell, and we hope to get to
the bottom of this, as well, but I think that in the
decisionmaking they make on modifications, they are not making
some of the modifications that they should for a whole variety
of reasons. In some cases, I think competency. In some cases, I
am not sure.
Also, there is a culture here to get over that servicers
traditionally--their job was to collect money and turn it over
to investors, and now they are being asked to do something
totally different, to make these judgments, really to
underwrite loans maybe for the first time. For someone that is
used to collecting the full amount, to write off part of it,
there is a hurdle there. And I think they are getting over that
hurdle more and more all the time.
But our belief, the State Attorney Generals' belief is
that, like yours, that a lot more modifications should be made
that are not being made. We are going to try and find out why
that is happening, and as I say, we are working a lot with the
servicers to figure out what the solution is. But I just--I
could not agree more with the fundamentals of your question and
your statement.
Senator Bennet. Ms. Thompson?
Chairman Dodd. Could I, just quickly, I appreciate the
Attorney General's comment on that. But just quickly, I just
want quick yeses or noes, or very brief answers. Do you
disagree with what Senator Bennet has said, beginning with
Barbara?
Ms. Desoer. No. We are the largest U.S. consumer bank and
our financial interests are aligned with consumers being
healthy and the economy recovering. So I agree absolutely, when
you look at a community and the impact that a foreclosure has
on a community versus a household being able to stay together,
a family being able to send their kids to school----
Chairman Dodd. That is longer than a sentence, Barbara, but
I appreciate it.
Ms. Desoer. I am sorry, but we are very aligned. I agree.
Yes.
Chairman Dodd. Just quickly, yes or no. I suspect everyone
is going to agree with what Senator Bennet said. Is that true?
Mr. Arnold. Yes, sir.
Mr. Levitin. Yes.
Mr. Lowman. Yes.
Ms. Thompson. Yes.
Chairman Dodd. Again, here we are----
Ms. Thompson. If I may, we spent at the Center a lot of
time last year trying to answer that question, why it is that
servicers have failed to modify, and produced this report
looking very carefully at the legal and financial incentives
that they face, and the key charts from that are reproduced in
the testimony submitted today.
There are three key recommendations that we believe would
do a great deal to align servicer incentives with homeowners,
investors, and the American public at large, and those three
are what both Senator Merkley and Senator Bennet have talked
about, ending the two-track system and requiring in all cases
that evaluation for a loan modification be performed before the
foreclosure process is initiated and requiring that a loan
modification be offered to the homeowner if, in fact, it is
going to provide a net benefit to the investor. So if the
investor will profit from a loan modification, it should be
offered to the homeowner before fees start getting tacked on
and the foreclosure process starts down the road.
Chairman Dodd. I agree with that.
Ms. Thompson. That is one. Two is there are complicated
rules imposed by the credit rating agencies and in the pooling
and servicing agreements that make it--that reduce repayment of
servicer expenses when there is a modification. So when there
is a foreclosure, servicers get repaid off the top before the
investors get anything, all of their fees and advances, all of
those broker price opinions, their title work, their
foreclosure fees, all of that gets paid back directly to the
servicers when the home is sold in a post-foreclosure sale. The
repayment of those advances is delayed and much less clear if
there is a modification, and so that is almost certainly a
significant disincentive in many cases to perform modifications
and there ought to be guidance issued that would clarify that
you can get repaid from the pool when you do a modification for
your advances so that servicers would get their legitimate
advances repaid.
The third thing is we have talked about the role of fees in
pushing people into foreclosure and encouraging servicers to
have people in default because then there are these extra fees
that they can tack on that they can then put in their pocket to
offset the costs of foreclosure. And so we believe that you
need to regulate those default fees to reduce the incentives to
put homeowners into foreclosure.
Chairman Dodd. Thank you very much.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman.
Too many homeowners in our country, they face the threat
of----
Chairman Dodd. Is your microphone on?
Senator Akaka. Thank you very much, Mr. Chairman.
Too many homeowners in our country have faced the threat of
foreclosures, and hearing our witnesses here, I think of Hawaii
as suffering from this. At this time, the foreclosure rate in
October was the 12th highest in the nation. In September of
this year, families in Hawaii faced 67 percent more
foreclosures than in September 2009, and 172 percent more than
in September 2 years ago. This underlines how alarming the
reported problems among mortgage service providers are, and so
without question, we must do more than we are doing now, and
our business here really is legislation. Mr. Levitin did
mention it is not the law. It is not being complied to, and so
that is not the problem. Many problems have been addressed
here, and this issue is very complex.
So let me cut this down to asking three of you, and that is
Mr. Miller and Mr. Levitin and Ms. Thompson to help us in what
we are trying to do, and that is what recommendations do you
have to protect homeowners in foreclosure proceedings from
abuse of legal practices?
Chairman Dodd. Ms. Thompson, you just answered that
question, I thought, pretty well in your last three things you
said.
Ms. Thompson. Yes.
Senator Akaka. Do you have something to add to that?
Ms. Thompson. I do. We have more recommendations in our
testimony. One key point about compliance is that you can get
much better compliance if you fund quality mediation programs
and you fund legal services attorneys. The mediation programs
in New York City and Philadelphia are reducing the foreclosures
there by about 50 percent. People that participate in the
mediation programs, about 50 percent of those avoid
foreclosure. So if you can get the servicers into a program
where they are forced to focus on that particular loan and get
it out of the automated processes, you are very likely to avoid
many foreclosures and reduce the numbers dramatically. But
those programs need to be funded.
The other thing is that the Dodd-Frank Wall Street Reform
Act authorized $35 million in funding for legal services for
legal services programs to assist low-income homeowners and
tenants facing foreclosure, but that money has not been
appropriated. All of the robo-signing allegations were only
discovered, brought to light by aggressive, competent attorneys
working very diligently to represent their clients. Homeowners
cannot negotiate these kinds of issues without lawyers. Low-
income homeowners particularly need the lawyers. Funding for
legal services in foreclosure defense has taken several hits in
recent years. We urgently need that funding.
Senator Akaka. Thank you for that.
Mr. Miller.
Mr. Miller. I would underscore the funding set of issues.
We have Federal funding for our hotline in Iowa that is working
very well to try and help people modify loans and the whole
system that supports that. Legal services also is terribly
underfunded by the Congress for, I know, a variety of reasons.
I am also a former legal services attorney.
In terms of the substantive legislation, you know, it might
depend on how we come out with our investigation and our
resolution and what we find. Hopefully, we can solve these
issues, but if we can't, you might want to think about
regulation on the fees----
Chairman Dodd. Tom, can I jump in there? How long do you
anticipate you Attorneys General are going to take on this?
Mr. Miller. It is hard to tell, Mr. Chairman, but we are
thinking in terms of months rather than a year or longer. But
it depends really on how far we get, how the negotiations get,
and as we expand the scope, like you and I believe strongly we
should, that expands the time somewhat, as well.
Chairman Dodd. Excuse me, Dan. I apologize.
Senator Akaka. Sure.
Mr. Miller. But maybe something on the fees that are
allowed. I agree that the forced insurance, there has been a
huge abuse there that need to either be corrected by agreement
or by legislation. The same thing with the dual track of
foreclosure and modification at the same time. If you all could
solve the second lien problem, which I think is a daunting
problem, we would all appreciate that. You might want to take a
look at that, as well.
Senator Akaka. Thank you.
Mr. Levitin.
Mr. Levitin. All right. I would certainly support
everything that Ms. Thompson and Attorney General Miller have
suggested, but I would also suggest that you might want to
consider an alternative that would go a bit farther, namely
taking servicers out of the loan modification process
altogether. Servicers were never in the loan modification
business. They are in the transaction processing business and
we are trying to get them to enter a business line that they
are not used to doing, and to expect them to succeed in that is
really asking too much.
And the way to get them out of that would be having some
federally administered loan modification program where--you
could do this under the bankruptcy power. It would not
necessarily have to be done through bankruptcy courts, even
though that would certainly be one way, and it would not
necessarily have to be a repeat of the Chapter 13 cram-down
legislation that the Senate failed to pass a couple of years
back.
You could do this instead through something like a
mortgage-only bankruptcy chapter where you have an immediate
triage between homeowners who can pay and those who cannot, and
if they cannot, have an expedited foreclosure proceeding. So if
it is an empty house, move it back on the market as fast as you
can. But if the homeowner can pay, give them a cookie cutter
modification, including principal reduction, and if you did
something like that, that would certainly get rid of the second
lien problem altogether. I mean, you would have another problem
potentially, which is that you might have four very large
insolvent banks, but that is a problem that exists whether or
not you recognize the losses now or later.
Senator Akaka. Thank you. My time has expired.
Chairman Dodd. Thank you very much, Senator.
Senator Reed.
Senator Reed. You anticipated my question, Professor
Levitin, which is basically how do we deal with millions of
individualized cases given the general model of the HAMP
program, which applied to a specific case requires someone to
weigh the ability of a borrower to pay, the job prospects,
etc., which all comes down to some type of impartial--both
sides respecting the impartiality of the decisionmaker saying,
well, this is what we are going to do.
You might be aware that I became aware through Senator
Whitehouse's hearings in Rhode Island that the Southern
District of New York, their bankruptcy judges are participating
in a program like this under their mediation procedures. They
have taken a step forward, and apparently it is working in that
they are quickly, as you suggest, finding debtors who in no way
can pay given their job circumstances, and the pain and the
uncertainty is over. The pain might linger, but at least the
foreclosure is completed. But for others, the modifications go
into effect, they get on with their lives, etc. So I think that
suggestion is excellent.
You mentioned previously, and I will get comments from
others, too, that you were talking about some type of global
settlement, because of the suggested implications on the
balance sheets of the banks and the overall economy. What are
the components, in addition to this bankruptcy-type approach,
which you suggest should be in this global settlement?
Mr. Levitin. You need to make sure that there is quiet
title on real estate in the United States. That is also
something that bankruptcy can do. That is something that
bankruptcy courts routinely do, is award quiet title. So that
is one way of sorting through any of the chain of title
problems.
I think, ultimately, our real problem is that there are
losses in the system and we have to figure out how to allocate
them. There is not a solution where everyone walks away happy
with no losses. Right now, those losses are being put on
mortgage-backed security holders and, frankly, on average
homeowners, not just the ones in foreclosure but the ones who
live next door and have the vacant property next to them where
the lawn is not being watered and so forth.
The losses have to go somewhere. They can go on the banks.
They can go on the investors. They can go on the homeowners. Or
they can go on the Government. Those are the four choices. I
certainly do not like the losses going on the Government. We
made a move that way in 2008 and I do not think there is a lot
of appetite to see that expand. The homeowners----
Chairman Dodd. Very perceptive of you.
[Laughter.]
Mr. Levitin. That might get me tenure.
[Laughter.]
Mr. Levitin. I do not think anyone wants to see these
losses borne by the homeowners, but that is where it is falling
right now. So really, this is kind of a question between the
investors and the banks, and frankly, I think the investors
have really the--are the more innocent party in that they did
not originate. There were a lot of problems on the origination
end. That was not the investors' fault. I mean, certainly they
bought the stuff and they made a market for it, but in many
cases, the investors are saying now, we thought we were buying
better paper than you sold us. You said you were selling us B-
plus paper and it turns out this was actually C-plus paper. We
want our money back.
But we need to recognize that we have to allocate the
losses, and we can either just avoid that for a time, but
recognize that as long as we do not specifically address the
loss allocation, we are making a choice, and that choice is
stick all the losses on the homeowners and the investors and
that is really not where they should be.
Senator Reed. Let me just make one point, and I do want to
ask the Attorney General about his comments regarding the
direction his investigation is going and his recommendations
and also give the opportunity for the financial representatives
to respond. This phenomenon, and Ms. Thompson said it here, if
you look back, it is deja vu. This situation was bad a year
ago. It is worse today, and it might get worse. If the strategy
is to just try to hope for a recovery independent of anything
we do here of solving a problem, we could find ourselves coming
back here in months or years from now with even a worse
situation, and investors being more frustrated and more willing
to sue the banks, etc. So there is, I think, a problem for all
the institutions, the homeowners, the financial institutions,
and we have to start moving toward a solution, not simply
waiting, because it seems to be getting worse in my mind. I
hope I am wrong, but that is the impression.
Just quickly, General Miller, will your recommendations
touch upon some of these discussions we have had in terms of a
bankruptcy-like approach to settle these individual disputes
between individual homeowners and banks, take the servicers out
of the middle, if you will? Will it talk about some type of
distribution or sharing of the losses, which Professor Levitin
suggests could be substantial? Just give me an idea of where
you think you are headed with your recommendations, not
specifically, but what categories.
Mr. Miller. You know, there could be some recommendations,
but the core of what we are trying to do will be an agreement
with the servicers, with the banks that are servicers, and, you
know, we are trying to figure out ways to change the paradigm
with them staying in place. They are not going to agree to the
kinds of fundamental change that you have talked about.
So our goal is to change the paradigm within the current
system so that it functions, and ideally, I think, from our
point of view, so it functions the way Senator Bennet described
that it should function. That is certainly our goal, and what
we want to do is have some provisions--what we are talking
about now are some provisions, some requirements that they
would have to live up to--only one contact person, deal with
the dual track, and other issues, as well.
And then I think there would have to be some way that it
would be enforced, maybe a monitor is something we have talked
a little bit about, maybe some penalties if they do not comply.
But where we are at right now is to try and change the paradigm
within the current system of the bank servicers that you see in
front of you and the other large three.
We talk about and we struggle with sort of the dysfunction
of the system. We have not gotten to the point of the
resolutions you have talked about, but it is a system that was
designed, as I mentioned, to collect money and turn it over to
investors and now it is a much different system that has some
issues concerning reliance on fees to pay for some of the new
resources they have to bring in that we talked a little bit
about earlier. The conflict of the second liens are involved
there.
But I guess what we are still trying to do is have enough
change within the current players to resolve some of the issues
so that we have a much better system, the best system that we
can have so that when that person comes before them and asks
for a modification and the calculation is done quickly and
fairly and accurately and the modification they are requesting
produces more money for the investor than foreclosing, then
that happens. I do not think it does happen that often now. I
think there are some fundamental problems.
So we are trying to do what I am trying to say. We are
struggling with how to do that, and if the Committee and the
Committee staff have any suggestions to us, we would love to
hear from you. We are talking to the investors. Last week,
Patrick Madigan, our Assistant who is the lead of this, talked
to the consumer groups and said what we should do. This is a
very serious attempt to solve a very difficult problem. We are
going to do the best we can and let the chips fall where they
may from that. We will need, ultimately, agreement from the
banks, and so far, our discussions, as I said, have been
productive.
Senator Reed. Well, I appreciate what you and your
colleagues are doing. It is very important. But just again,
your process, because of the negotiations, because of the
complexity, we expect--you expect months from now to have
recommendations which might take even further time to
implement, and there is a real question, I think, of do we have
that time, and not just in terms of the individual homeowners
but the economy. And if the economy gets worse for reasons not
directly related to this, such as the sovereign debt crisis
overseas, etc., then the foreclosure problem we face today, you
know, the bottom keeps slipping down, down, down, down, down,
and this problem becomes really tremendous.
I want to give an opportunity to----
Mr. Miller. Yes, and we feel all that pressure, by the way.
Senator Reed. Good. So do we.
Mr. Miller. I know you do. And again, there will not be
recommendations. If there is an agreement, there will be an
agreement and we will go forward right from there.
Senator Reed. But let me ask Ms. Desoer and then also Mr.
Lowman this. Implicit in, I think, the comments, and I do not
want to put words in your mouth, of Professor Levitin is that
there could be potentially significant losses here, and the
question really is are efforts being made to minimize your
losses, which, frankly, if I was a business person, that might
be my first goal on behalf of the shareholders, or to
effectively deal with these home mortgage modifications to
follow the HAMP guidelines, etc.? And I suspect in reality
there is probably a constant tension and conflict to that. But
I just want to give you an opportunity fairly to comment on
this whole discussion with that.
Ms. Desoer. Thank you for the opportunity. There is not
conflict in our company. Any dollar, any resource, any
capability that is needed, our business has the support of
that. There is nothing more important to recovery of Bank of
America's brand than doing this right, listening to people like
Ms. Thompson, understanding the Senators' individual
situations, dedicating people, training people to do it.
We have moved people. As General Miller indicated, we have
had to build a brand new capability, people, process,
technology, to deliver it. We have moved as many resources,
experienced underwriters, others who have experience into the
servicing space to build that. We have made progress, but there
is no question there is still great inconsistency that we are
dedicated to eliminating. But it is not a constraint, or it is
not that someone is saying, no, that will mean a lack of profit
for the company. This is the most important issue in the
company and there is no constraint on dollars that we will put
against it.
Senator Reed. Mr. Lowman?
Mr. Lowman. We have sustained billions of dollars of losses
in this whole crisis as a bank, and I believe our interests
are, in fact, aligned with other investors. The fact is, the
best outcome is to keep a person in their home and to keep them
paying, and we are all advantaged by doing that. We do not have
anything to gain by having someone go into foreclosure. And so
I would just echo Barbara's comments. Our interests are aligned
and we are doing everything we can.
Senator Reed. Just a final point, and I think this echoes
one of the recommendations that Ms. Thompson has made and which
is included in the legislation I have, which is basically to
require that a full attempt to modify a loan be made prior to
pursuing foreclosure. That might require renegotiating your
agreements with the servicers and with the trusts. I do not
know. But is that something that you would consider as a policy
initiative for the bank to take immediately?
Mr. Lowman. Well, I would say that as we have described in
the HAMP program, it is a requirement today. So we have to
offer a modification to a customer before we commence with the
foreclosure process. So by definition, as time goes on, it will
have to have happened before foreclosure.
Senator Reed. Ms. Thompson, any comments?
Ms. Thompson. As I said earlier to Mr. Bennet--first of
all, Senator Reed, thank you so much for your work on
supporting servicing reform. We greatly appreciate it and your
bill, if enacted, would be a very important step forward.
As I said in response to Mr. Bennet's concerns earlier, in
our view, the HAMP program--what Mr. Lowman just said is, over
time, we will see that a modification will be offered, and the
problem is that ``over time'' means that there are going to be
tens and hundreds and perhaps millions of foreclosures that
occur until you get to that point where a loan modification is,
in fact, offered before a foreclosure, and over time, if you
are waiting for over time, you are going to see millions of
dollars of fees piled onto homeowners' accounts, which makes a
modification much more difficult.
Senator Reed. A final word. The Chairman has been very
gracious here.
Mr. Levitin. I think it is important just to remember that
HAMP--that requirement that the modification be offered only
applies to HAMP-eligible loans, and only about one in six loans
that is currently 60-plus days delinquent is HAMP-eligible. So
we have a problem of HAMP being a problem that just had too
narrow of a focus and that really does not solve the problem.
Senator Reed. Thank you, Mr. Chairman. You are most kind.
Chairman Dodd. Thank you. Let me just--because these are
important. Attorney General Miller, at the outset of my opening
comments, I talked about the importance of getting this
Financial Stability Council that we established in the
financial reform bill to anticipate systemic risk and to
collectively work as a body chaired by the Secretary of the
Treasury, along with the FDIC and the OCC. There are 10 members
of that, an independent member, and five others are part of it.
This seems to me like a classic example, one that we did not
anticipate necessarily when we drafted the legislation, but
exactly--I mean, we are in a crisis with this. Now, you could
argue that it is not yet a systemic crisis that poses the kind
of risk we saw in the fall of 2008. But no one can argue we are
not in the middle of a crisis.
Now, the idea of this, of course, was to minimize crises so
that they do not grow into the large systemic crises. Have you
had any contact with the Secretary of the Treasury or is there
any communication going on between the Attorneys General and
this Council or the Chairman of it, the Secretary of the
Treasury, or their office to begin to talk about what the role
of the Federal Government might be in formulating an answer to
all of this?
Mr. Miller. We have not had any contact with the Council.
We have repeated contact with the Department of Treasury, with
Assistant Secretary Michael Barr and his staff. We have
developed a terrific ongoing relationship with them. We talk
about these issues and try and help and support each other on
these issues. So we have had a lot of discussions with
Treasury, but not with that particular Council.
Chairman Dodd. Again, I talked privately with Senator
Warner and others. I do not know if Senator Merkley has a
similar thought. I am going to use this forum here obviously in
a very public setting to urge the Secretary of the Treasury and
others to convene that Council, to begin to work with you and
others so that there is a role here to examine this question in
seeking broad solutions to this question. So my hope is they
will hear this request to pick up that obligation that we have,
I think, laid out in that legislation.
I want to ask, if I can, also as well both you, Ms. Desoer
and Mr. Lowman, to respond, if you could, to the suggestions
that Ms. Thompson made regarding the three that were raised.
And anyone else can jump in on this, but I would like to get
your response to them.
First, she argues the elimination of the two-track system,
which we just discussed, and as Mr. Levitin pointed out, only
one in six--and, again, having been very involved in the
crafting of HAMP, you know, we were trying to put together a
bill here in this Committee, and it was very awkward and
obviously trying to get a majority, getting 60 votes and doing
the best we could to have some answer to all of this at the
time. It is not exactly what I would have written if I could
have written it alone and passed it. But it is what we were
able to get done through a very difficult mine field
politically here in the institution.
But I want to get your response to the elimination of the
two-track system. Forget whether HAMP requires it or not. What
is in your interest, what would you like to see happen here in
all of this, regarding that homeowners are fully evaluated for
loan modification before the foreclosure is initiated?
Second, she proposes that failure to offer loan
modification where such a modification is net present
positive--in other words, where the modification had a better
return for investors than foreclosure, it would be allowed to
be used as a defense against foreclosure?
And, third, the principal reduction should be mandatory
under HAMP. I have been advocating that for almost 4 years,
that principal reduction would really address this issue very
directly. But I would like to get--Mr. Lowman, why don't we
start with you? We always have Ms. Desoer going first. We will
have you go first here. Give me your answer to these three. Are
you in favor of them or not? And why?
Mr. Lowman. So, first of all, with respect to the two-track
system----
Chairman Dodd. Right.
Mr. Lowman. You know, as I mentioned, the HAMP program
already requires----
Chairman Dodd. I know, but forget that for a second. What
would you like? Would you be willing to accept what she has
argued for here?
Mr. Lowman. I think we have to be careful with that, and I
just believe that, you know, we have now a process inside of
our company where every defaulted borrower gets linked up with
a single person and there is single accountability----
Chairman Dodd. Well, how do you address the point she
raised earlier? If you are going through and you have got a
foreclosure process going and all of these costs are mounting
up, it seems to me you are working against yourself. In fact,
if you are trying to get some modification here, would it not
be wiser to go with the modification? Then if that falls apart,
then go to foreclosure.
Mr. Lowman. Right. So that is currently what we----
Chairman Dodd. But it is a dual track. You are going both
at the same time.
Mr. Lowman. We actually start the modification process much
sooner than when a borrower goes--you know, is referred to
foreclosure. We start the modification process literally with
the first talk-off.
Chairman Dodd. OK. So you reject that. Tell me about number
two.
Mr. Lowman. So to make sure I understand number two, can
you repeat it?
Chairman Dodd. Number two, she proposes--and correct me if
I misspoke here. She points out that the modification has a
better return for investors, to investors than foreclosure,
they be allowed to use that as a defense against foreclosure.
Mr. Lowman. So today, the way the process works is we, you
know, run the net present value models that we use to determine
whether or not we should foreclose or modify. And in the cases
of where it is in the best interest of the investor to modify,
we offer a modification.
Chairman Dodd. Well, if there is a net present value that
makes it more valuable than foreclosure--I mean, using a model
is one thing. But, I mean, in these individual cases, if that
turns out to be the result----
Mr. Lowman. That we should modify the loan, then it should
be modified.
Chairman Dodd. How about number three, principal reduction
mandatory?
Mr. Lowman. So principal reduction, first of all, we are
participating in the HAMP principal reduction program which was
recently rolled out. All of our analysis indicates that what is
most important is that borrowers have affordable mortgage
payments, and we have got lots of experience, having done many
mods. And we do that by reducing the interest rate, by
extending the term, and by deferring principal where necessary
with, you know, no interest attached to that. We as a servicer
have a duty to our investors to minimize losses, and obviously
principal forgiveness potentially increases losses.
And then, last, I think if we want to rebuild the U.S.
mortgage market and continue to have investors and banks have
confidence in the market, we need to ensure that the collateral
values are there.
Chairman Dodd. Now, I understand that, but going back--and
I recall 4 years ago making the case. There was a study done on
a square block in the city of Chicago. One foreclosure in that
square block immediately caused the lowering of value of every
other property on that block immediately by 5 percent. You end
up with two and three foreclosures in a city block, and you
get, obviously, a larger impact.
Why wouldn't it make more sense just to go directly at that
principal issue which makes a greater possibility that
homeowner will be able to afford that mortgage and avoid the
kind of cascading effect we see in these neighborhoods, which
obviously can work to your interests?
Mr. Lowman. We are able to achieve affordability with the
tool set that we have today, which includes the deferment of
principal. So you get to the same end state.
Chairman Dodd. I wish that were the case.
Ms. Desoer, how about responding to those three points?
Ms. Desoer. As I have discussed, we are very open to
discussing changes for the existing pipeline that is going
through the dual track to take it away. I agree with Mr. Lowman
that with everything we have done, hopefully nobody who is
eligible for a modification ever gets to the start of a
foreclosure, but we know we have got a pipeline to work
through, and so we are amenable to that.
On the second issue, I agree. And then on the third issue
of principal reduction, we do have a proprietary program that
we are now executing with 40 States on a principal reduction
program, and we are participating in the principal reduction
program of the hardest-hit States with Government funding, and
those are the places where it is the largest issue.
Thank you.
Chairman Dodd. Senator Merkley, do you have any additional
questions you would like to raise?
Senator Merkley. Yes.
Chairman Dodd. I am going to leave the record open, by the
way, for a few days--this is awkward, obviously, with caucuses
around here and everything else--for other Members to submit
questions to the panel.
Senator Merkley. Thank you very much, Mr. Chair. I just
wanted to clarify a couple of points.
One is I know that we sought to create a safe harbor for
the servicers from the investors so that they were following
the HAMP program, that they would be in that safe harbor and
not subject to suits. That is a real concern. Did the safe
harbor not provide enough protection to disconnect the
foreclosure track from the modification track? And do we need
to take action here to provide an expanded safe harbor?
Because of the constituents streaming in our doors with the
enormous stress connected with working on a modification and
yet some other group of folks somewhere within the same
servicer are pursuing aggressively every single step on
foreclosure, people are--it just seems like the two parts are
not talking to each other, and they are enormously stressed
over this. And it seems like if there is a good-faith
modification effort under way, the foreclosure process ought to
be shut down until it becomes clear that modification will not
work, and then, OK, well, it gears up again.
What do we need to do to help create the ability--and, Ms.
Desoer, since you referred to that you are working on this,
what do we need to do to--do we need to do anything? What needs
to be done to help create the legal framework that will allow
you to take a step that would be a tremendous step forward for
American families?
Ms. Desoer. Well, first, the safe harbor has enabled us to
get to some of those 700,000 permanent modifications that we
have done and certainly the 85,000 that we have done under
HAMP, because without that not all of our investors would have
agreed to those modifications as many do today. So that has
been beneficial.
On the dual track, for about 23 percent of our servicing
portfolio where Bank of America is the investor on those
mortgages, we have the ability to do something about that
because we have the authority as investor as well as servicer.
But for the rest of the investors, it would take their approval
to make a change, and that would include, you know, the
Government-sponsored enterprises and other private investors as
well.
Senator Merkley. So that is a process you are actively
pursuing? You are requesting those changes in the servicing
contract?
Ms. Desoer. That is what we are in the early discussions of
with the State Attorneys General, seeing if we can use that
forum to get investors to the table as well for consideration
in that.
Senator Merkley. So I did not hear you mention anything
that we need to do here to provide an additional legal
framework. Mr. Lowman, your sense, do you need additional legal
authority to be able to set the foreclosure track aside while
you are in good-faith modification----
Mr. Lowman. I am not certain that we have the right safe
harbor, but, frankly, I would like to follow up on that
question.
Senator Merkley. That would be great. This is the last
question I will ask, though everything we talk about is so
complex and interrelated, I have 100 questions, but I will
stick with this one. That is, Mr. Lowman, you noted that your
services, your interests are aligned, and, Ms. Desoer, that as
a community bank you have a huge stake in the success of
families and so forth. But is it different when you are
contracted to be the servicer but you do not own the loan? You
do not have a stake in the success of the loan, if you will.
You have a stake only in the fees generated by the servicing
unit. In that situation, is it really the case, as Ms. Thompson
has been laying out, that there are enormous financial
incentives as a servicer to pursue this foreclosure track? She
has all these charts and information that she has analyzed. Is
her testimony fair? Or if it is not, what is she missing?
Ms. Desoer. As I referenced, we are not perfect. We have
inconsistencies as we have built our capabilities out, and
there have been customer issues. I do not deny those, and we
work every day and we have significantly increased the staff to
support all of our customers who have those issues while we get
to the point where we can eliminate the issues that we do have.
What you have to remember is the financial cost is one
aspect of it, but the reputation cost to the Bank of America
brand is a very powerful driver of why we are working as hard
as we are to get this right and why we listen to customers,
community groups, yourselves, and certainly working with the
State Attorneys General. Our interests are aligned in working
to get this right, that is for a homeowner who has some ability
to pay and a desire to stay in their primary residence, to stay
there. It is in all of our best interests to get to a solution
that enables them to do that by taking advantage of all the
programs and capabilities and resources that are available. And
that is what we are committed to make happen.
Senator Merkley. If I can summarize what I just heard, you
are not contesting her analysis of the financial incentives
that certainly favor foreclosure, but that because the
reputation of the bank is at stake, that balances that out.
Ms. Desoer. I have not looked at all of the analysis that I
would need to so I can confirm or deny that with you.
Senator Merkley. Yes, Professor.
Mr. Levitin. I would just like to point out that many
servicers are in a very different situation than Bank of
America. Bank of America has a major lending business in its
own name and servicing in its own name. There are plenty of
servicers, though, that are a servicing unit of a major bank
but service under a completely different name, and the consumer
is unlikely to make any connection between any misdeeds brought
by the servicer and the lending unit.
Senator Merkley. So, Professor, in that case the financial
incentives to pursue foreclosure are not offset by, if you
will, defense of the reputation of the banking institution?
Mr. Levitin. There would be no--you could not even make
such a claim. That is correct.
Senator Merkley. Mr. Lowman, do you want to share your
thoughts on that?
Mr. Lowman. Yes. As a servicer, the calculation that is
used to determine whether to foreclose or to modify does not
take into account our remuneration as a servicer. And I think
it is important to note that, as I said earlier, we make money,
we earn fees on performing loans. And when we modify a loan, we
get the servicing stream because we have made it a performing
loan. And to the extent it is a HAMP loan, we get an income
stream as a result of payment from the Government for having
successfully modified the loan.
So I guess I do not agree that we are incented to
foreclose. We, in fact, I believe, are incented to modify.
Senator Merkley. Well, I just want to thank you all for
addressing these complicated issues. I do not think we really
got into the other big piece of this, which the Chair referred
to, which is kind of the systemic risk that comes from some of
the legal issues that are being raised and how we can really
get our hands around that, which is important to both
homeowners in terms of their rights and to our economy in terms
of the availability of credit. But certainly I have learned a
lot, and thank you very much.
Chairman Dodd. Let me just say that would hopefully be the
subject matter of the next hearing on the subject matter
because I think it is a critical point that we have to address.
I say this respectfully of others--and I know the Oversight
Panel made suggestions somehow this was much larger than a
technical issue. And I am not disagreeing. That may be the
conclusion. But it is just as premature to make that conclusion
as it is to suggest it is only a technical problem. So in
either case, language like that can cause its own distortions,
and I get a little uneasy without knowing the implications of
what we are doing, making predictions along those lines.
I had a chance to talk to Ms. Desoer and just share--and
correct me if I am wrong on some of these numbers, but I
thought it was interesting. Thirty percent of all foreclosures
nationwide are in the judicial States, I think it is 23 of the
judicial States. Of that 30 percent, 68 percent of the
foreclosures are in the State of Florida. Is that correct?
Ms. Desoer. Of the 23 judicial States in Bank of America's
portfolio of foreclosures, over 60--close to 60 percent are in
Florida.
Chairman Dodd. And 70 percent of the foreclosures
nationwide are in the non-judicial--the 27 States that are non-
judicial States. And, of course, in the non-judicial, the
burden is on the homeowner as opposed to--I mean, I am
simplifying this. The Attorney General is probably rolling his
eyes as I make that kind of broad, sweeping statement. But as I
read it, basically the burdens shift in a non-judicial and a
judicial State. And you correct me, Tom, if I am wrong on this,
but in the non-judicial the burden is on the homeowner to make
the case they are not able to make their payments and so forth;
whereas, in the judicial, the burden is more on the servicing
side of the equation? Am I oversimplifying that?
Mr. Miller. I think that is right, yes.
Chairman Dodd. So is there any indication to draw from
these statistics that 70 percent of the foreclosures are in the
non-judicial, that there is something about that equation that
places the burden on the homeowners, why we are seeing so much
more of the foreclosures occurring in the non-judicial States
as opposed to the judicial States? Or am I just reading too
much into these numbers?
Ms. Desoer. Senator, I think it is more related to economic
factors like unemployment or housing price declines as to the
States that are experiencing the greatest level of
foreclosures. So I do not think Florida is related to the fact
that it is a judicial or a non-judicial State, but to the
extent of the economy----
Chairman Dodd. Well, I agree with that. That would make
some sense. But, otherwise, where that is not the case, does
the judicial framework have any strong implication on the
outcome in terms of a modification versus a foreclosure?
Ms. Thompson. Senator?
Chairman Dodd. Yes.
Ms. Thompson. One point is that, of course, California and
Nevada are non-judicial foreclosure States.
Chairman Dodd. Right.
Ms. Thompson. So that makes a big difference. There are
some studies that show that being in a judicial foreclosure
State increases--delays the time to foreclosure, that is
obvious, and increases slightly the likelihood that you will
end up with a modification. There is some evidence that being
in a judicial----
Chairman Dodd. But not the 37 numbers.
Ms. Thompson. I would not think the numbers would be that
high.
Chairman Dodd. One other point--and, again, I want to thank
Ms. Desoer for her sharing this information with me. And,
again, it is a separate subject matter but one that concerns
me, and that is that when you are getting--the foreclosed homes
that are bought--it was not 40 percent. They gave me some
numbers--30 percent. But 30 percent of the foreclosed homes
that are bought are bought with cash.
Ms. Desoer. Thirty percent of all U.S. home sales are cash
purchases, not just the foreclosed.
Chairman Dodd. I thought it was just foreclosed.
Ms. Desoer. No.
Chairman Dodd. Of all.
Ms. Desoer. Of all U.S. home sales, 30 percent are
purchased with cash, and I can give you the study that is
produced monthly that shows the mix of how many new homes
purchased are purchased for cash or financed with a
conventional mortgage or financed with an FHA mortgage as an
example. But 30 percent of last month's--and it has been
running about that for several months--entire home purchases
are cash purchases.
Chairman Dodd. And further--and, again, you correct me if I
am interpreting these numbers in too broad a context. Of that
number bought with cash, these are not owner-occupied; these
are investment properties.
Ms. Desoer. The vast majority of those purchases are
investors as opposed to primary homeowners. That is correct.
Chairman Dodd. And any implications of what that means in
terms of neighborhoods and so forth, as opposed to having
owner-occupied versus rental properties?
Ms. Desoer. If it is concentrated in terms of the mix of
investors coming into a community, it could mean a shift from
primary homeownership to rental. But I think the primary
indication that I was trying to say is that there are investors
with cash who think that the price of the property is right for
them to earn a good return as a rental property. And I think in
certain communities where, as we acquire the real estate for
our own portfolio after a foreclosure sale, those properties do
sell relatively quickly.
Chairman Dodd. And, again, I am a great advocate that we
need to increase rental stock in the country. One of the
problems is we have had so much of an emphasis on homeownership
that we find a limitation of increasing rental stock, and that
has created its own set of problems. So I would state that. But
is there any correlation between having less owner-occupied
properties and the value of other properties in that
neighborhood?
Ms. Desoer. I do not know the answer to that.
Chairman Dodd. Do you have any idea on that, Mr. Levitin?
Mr. Levitin. No.
Chairman Dodd. Ms. Thompson, any idea?
Ms. Thompson. No.
Chairman Dodd. OK. Well, thank you very, very much. This
has been--it is a long time but I am glad we--sorry for
starting late, but otherwise it would have been very difficult
to hold all of you here. So let me thank all of you for your
testimony. I will leave the record open so that Members can
provide some additional questions. But it has been very, very
helpful to hear what you have had to say, and I am very
grateful to all of you for coming and sharing your thoughts
with us.
Tom Miller, the Attorney General, we thank you for what you
are doing and how hard you are working at this. And I hope you
might make that call to the Treasury Department and say you
would like to be hearing what this Systemic Council is also--
what their thoughts might be on this as well.
The Committee will stand adjourned.
[Whereupon, at 6:03 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
Thank you Mr. Chairman.
On October 6th, I called for an investigation into the growing
controversy surrounding home foreclosures. This hearing represents what
I understand will be the only examination the Committee intends to
conduct. I hope that isn't the case.
At this point, there appear to be a number of key issues that need
to be examined thoroughly.
First, we need to determine the extent of the problem. It appears
that thousands of so-called ``robo-signers'' working on behalf of banks
that service loans, signed foreclosure related court documents swearing
that they had ``personal knowledge'' of the facts of each foreclosure
case. It now appears that few, if any, of these people had such
knowledge.
Second, we need to determine whether the flaws in the process led
to improper results. In other words, were any homeowners foreclosed
upon when they shouldn't have been.
Third, we need to examine the activities of the law firms that
worked for the servicers. Many questions have been raised regarding the
conduct of these firms during their engagement in foreclosure
proceedings.
Fourth, what role did the GSEs and the larger securitization market
play in this debacle. Did their actions contribute to the problem? Were
Fannie and Freddie complicit in any way?
Finally, we need to examine the role of the regulators. Where were
they in this process? What were they supposed to be doing and were they
doing it? If not, why not?
In order to determine the extent of the problem we need to speak
with all of the major servicers. Unfortunately, we only have a small
subset present today. For example, Ally Financial was the first major
servicer to recognize that it had problems with its process. That firm,
among others, is not here today.
Mr. Chairman, it is my understanding that many, if not all, of the
law firms under investigation were selected by the housing GSEs. In
order to best understand how and why these firms were chosen, I believe
we need to hear from Fannie and Freddie.
Unfortunately, they also didn't make the witness list.
Perhaps the most complex facet of this examination involves
securitization. As highlighted in the Congressional Oversight Panel's
most recent report, the most severe potential fallout from this will be
found in the securitization market. According to that report, this
could have a devastating affect on our broader financial system.
On this critical topic we have a professor from Georgetown
University, the Iowa Attorney General, and finally the CEO of MERS.
Each witness has an important view point to share with the
Committee, but none of them represent the views or expertise of the
securitizers. Given the complexity of this issue, perhaps the Committee
should have invited someone from the broader securitization community
to answer our questions.
Finally, the regulators are also significant players in this
examination. Each of the major servicers have regulators onsite in
their operations.
How did those regulators miss the wide-spread foreclosure problems
at the firms they were regulating? We could ask them, but,
unfortunately they are not here today.
Mr. Chairman, I expected this hearing to be focused on the
foreclosure process. As I have already stated, there is a great deal to
examine on this topic alone.
It appears, however, that this hearing has also become a
foreclosure mitigation hearing. Mortgage modification is an important
topic to be sure, and certainly one that warrants its own hearing.
Nonetheless, if we are also going to examine the issue of
foreclosure mitigation, we should study the extent to which borrower
fraud has distorted the modification process and inflated overall
foreclosure numbers.
This is a critical issue considering that the U.S. taxpayer has
spent more than $50 billion on foreclosure mitigation programs. We need
to know where our mitigation efforts are best directed and where our
money is being wasted as a result of fraud. I understand that there are
no witnesses here today that can address the topic of borrower fraud.
Mr. Chairman, I called for a full investigation on this matter in
early October because I believed that those who face foreclosure
should, at the very least, know that the process is being handled
fairly and according to the law. While I believe that we will learn a
great deal from this hearing, I hope that it does not represent the
Committee's complete examination of this important issue.
Thank you.
______
PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA
Thank you, Mr. Chairman, for holding this timely hearing. Too many
homeowners continue to lose their homes to foreclosure. For
approximately one in five borrowers, the value of their home is less
than what they owe on it. And, high unemployment rates suggest that
even more families face difficult financial situations and even more
borrowers may be at risk of foreclosure now or in the future. These
challenges are not just isolated to the largest housing markets.
Hawaii's foreclosure rate in October was the 12th highest in the
nation.
Homeowners are under a tremendous amount of financial stress right
now, which is what makes the recent reports of problems within the
mortgage servicing industry all the more troubling. The ``robo-
signing'' issue has shed light on other questionable mortgage servicing
practices that my colleagues on this Committee and I have been hearing
about from homeowners in our States for quite some time. They have
reported that servicers are unresponsive, uncooperative, and
disingenuous throughout the loan modification and foreclosure
processes.
Borrowers should expect mortgage lenders and servicers to put forth
a good faith effort to help them keep their homes. Foreclosure should
be servicer's last resort, not its preferred outcome. However,
servicers' decisions to flaunt their protocols and contractual
agreements indicate that this is not the case.
We must do more to help distressed borrowers and preserve
homeownership. This begins with ensuring that servicers are properly
adhering to modification, refinance, and foreclosure procedures.
Borrowers should expect servicers to be accessible and to refrain from
obstructing homeowner assistance efforts. Mortgage modifications and
refinances must be significant and meaningful so that homeowners do not
find themselves in the same situation several months later. We also
have a responsibility to those who have lost their homes--to ensure
that they have access to alternative housing opportunities, that they
have the knowledge and resources to meet their other debt obligations,
and that they are able to rebuild their credit.
Finally, these failures among mortgage service providers once again
highlight the need for greater financial literacy. Homeowners are
borrowers and consumers--they should be able to understand the terms of
their mortgage agreements and the consumer protection resources
available to them. They should also have the knowledge and skills to
overcome foreclosure and other unforeseen financial obstacles.
Mr. Chairman, I thank you for this opportunity for the Committee to
examine the prevalence of foreclosures and the actions of mortgage
service providers. I also thank the witnesses for appearing today, and
I look forward to your testimonies. Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman.
The predatory practices of the mortgage servicing industry are
remarkably similar to the predatory practices that led to the subprime
crisis.
The biggest mortgage servicers have poorly maintained, lost, or
forged documentation. They ignored the interests of homeowners in
exchange for outsized profits.
Each day Ohioans are failed by the modification process. Last
month, my State had the eighth most foreclosures in the nation--and the
most of any States represented on this Committee.
Ohioans interested in merely attempting to modify mortgages often
end up owing more principal on their loans or having their credit
scores lowered.
Instead of trying to stay in their homes, they are saddled with
back payments, penalties, and late fees.
And it's happening across Ohio--in large cities and small towns,
and urban and rural counties that are hit hard by the housing crisis.
In Perry County, a homeowner was outraged to learn that her
temporary modification was accompanied by late fees and negative marks
on her credit report.
It's the tragic truth that she was luckier than other Ohioans
because her servicer stopped collection efforts.
In Cuyahoga County--which had the most foreclosures of any county
in the State last month--a senior living on Social Security disability
received collection notices while she was in her trial period.
When my office contacted the bank about these notices, we were told
that the mortgage department could not make the collection department
stop until she got a permanent modification.
We were told that she should just ignore their collection notices.
But this same constituent also had her first trial payment double-
billed, causing the bank to tack on $136 in overdraft fees.
In Geauga County one family asked about her servicer, ``How is it
possible for a bank, its computers, departments and representatives to
be so out of touch with one another?''
Another constituent from Geauga County told my office, ``In 1999, I
was diagnosed with cancer . I endured two surgeries and a brutal year
of chemotherapy . . . My experiences with [my servicer] have been worse
than having cancer.''
Indifference, foreclosed homes, and broken neighborhoods shouldn't
be a formula for record profits.
By far the most complaints that I receive from frustrated Ohioans
relate to the four largest servicers, who account for more than 55
percent of all servicing contracts.
After acquiring big subprime player like Countrywide, Wachovia, and
Washington Mutual, the four biggest banks are now so large that their
executives apparently don't know what's happening deep in their own
securitization and servicing departments.
In July, I sent these four largest servicers a letter describing
Ohioans' frustrations with their failed attempts at mortgage
modifications.
I received a response letter from one of the banks on September 29,
affirming its commitment to keeping homeowners in their homes and out
of foreclosure.
But that very same day, that bank announced a moratorium on 56,000
foreclosures in 23 States--including Ohio--because of deficiencies with
their foreclosure affidavits.
These big banks tell us that mistakes are isolated and harmless.
But these problems are not new. They are well documented and are part
of a longstanding, ugly pattern of homeowner abuse.
It's a cycle of mistrust and misinformation that deprives families
of their homes and neighborhoods of their vitality.
According to a survey of foreclosure counselors released last month
by the Cleveland Federal Reserve, most modifications take between 120-
240 days to work out.
In that period paperwork errors like multiple requests, incorrect
evaluations, and poor internal communications are common.
It's common enough that last year, a bankruptcy judge in Ohio wrote
in a decision that mortgage servicers are ``unconcerned with the
accuracy of records and information.''
The Department of Treasury's report on the Home Assistance
Modification Program (HAMP) found compliance problems at three of the
four biggest servicers.
Yesterday, the GAO released a report that I had requested on bank
walkaways.
The report found that as a result of poor communication from
servicers, between 14,000 and 34,000 families in cities like Cleveland,
Akron, and Columbus have been unnecessarily forced out of their homes.
Vacant and abandoned homes not only diminish surrounding properties
values, they drain city resources and present a series of public safety
concerns and risks.
Why are so many homeowners being kicked out of their houses--even
when it is not economically beneficial to anyone?
That's why today's hearing is so important--and why reform to the
mortgaging servicing industry is long overdue.
We've seen how ``robo-signings'' are a serious abuse of court
processes--the Cuyahoga County courts are now asking lawyers to confirm
that the information in their filings is true.
Courts are considering whether banks have standing to foreclose or
whether promissory notes were properly transferred and conveyed.
There are strong possibilities that banks have wrongfully taken
homes to which they had no secured claim.
These are all symptoms of a mortgage servicing industry that is
broken.
Servicers claim that homeowners didn't meet their legal
obligations, so they don't deserve to stay in their homes--that
homeowners lack ``personal responsibility.''
But what about institutional responsibility? Should we not hold the
banks to the same standards they impose on homeowners?
A Federal judge in Cleveland pointed out 3 years ago, ``Neither the
fluidity of the secondary mortgage market, nor monetary or economic
considerations of the parties, nor the convenience of the [banks,]''
overrides the banks' duty to follow the law.
Money and profits should not trump the law.
And while the courts are playing a role in checking abuse, it is
Congress's responsibility to empower regulators to oversee the mortgage
servicing industry.
As the newly confirmed Fed Governor Sarah Bloom Raskin said last
week, ``Until a better business model is developed that eliminates the
business incentives that can potentially harm consumers, there will be
a need for close regulatory scrutiny of these issues and for
appropriate enforcement action that addresses them.''
The new Bureau of Consumer Financial Protection (CFPB) is a perfect
illustration of how to empower regulatory scrutiny and appropriate
enforcement.
Instead of helping homeowners, regulators' responses appear crafted
to protect the balance sheets of the ``too big to fail'' servicers.
The CFPB is designed to ensure someone serves American families and
confronts abusive mortgage servicing practices.
And stronger oversight means streamlined modification procedures
and meaningful penalties when servicers fail to comply.
We should be trying to find ways to keep people in their homes, not
forcing more houses onto an already depressed housing market.
This foreclosure crisis affects all of us--homeowners, families,
neighbors, and State and local governments.
It is clear that the current system isn't working.
And it's clear that we won't have economic recovery if our
neighborhoods are full of foreclosed or vacant homes.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF THOMAS J. MILLER
Attorney General, State of Iowa
November 16, 2010
Chairman Dodd, Ranking Member Shelby and the other Members of the
Committee, thank you for the opportunity to address you today on this
important subject.
I. Background and History of the States' Efforts
While the issues of foreclosures, mortgage loan servicing, and loss
mitigation efforts are currently receiving substantial attention in the
press, they are not new to the Attorneys General. Starting over a
decade ago, the Attorneys General and our partners in the State banking
departments began numerous enforcement efforts regarding fraudulent
behavior by lenders in the origination of subprime mortgages. Beginning
with First Alliance Mortgage Company (better known as FAMCO), then
followed by the $484 million settlement with Household Finance, and
finally the $325 million settlement with Ameriquest Mortgage Company,
at that time the largest subprime lender, the States have had a front
row seat to the fraud and misconduct in subprime originations.
This fraud, however, was concealed for years by the unprecedented
home price appreciation that many areas of the country were
experiencing. Due to the race to the bottom in underwriting standards,
as soon as borrowers got into trouble they would simply refinance,
masking their inability to perform. Accordingly, we knew that as soon
as the rapid and unprecedented home price appreciation began to stall,
the fraudulent and fragile underpinnings of the market would be exposed
and more loans than we could imagine would begin to fail.
Knowing this, my staff began to explore servicing and foreclosure
issues in the Spring of 2007. The more we learned, the more concerned
we grew as it became apparent that servicers were not in any way
prepared to deal with even a moderate volume of foreclosures.
Accordingly, in July 2007 my office put out an invitation to every
Attorney General in the country to attend a summit on foreclosures. The
purpose was to warn our colleagues that a tidal wave was coming and
they needed to begin to prepare.
Out of this meeting, a working group of Attorneys General and State
bank regulators was formed. This group was later named the State
Foreclosure Prevention Working Group (``State Working Group''). At the
beginning, a policy decision was made that this would not be a
litigation based group, but rather the group would attempt to work
collaboratively with the mortgage servicing industry in order to find
solutions to the myriad problems standing in the way of effective loss
mitigation. Because the problem was mostly contained to subprime loans
at that point in time, we set up a meeting with the top 10 largest
subprime servicers in September 2007 and another meeting with the next
10 largest in November 2007. At these meetings, we were assured by many
of the servicers that they were adequately staffed and prepared for
what was coming. Obviously, this did not turn out to be the case.
In addition, it became clear to the States that we wanted to base
our decisions on empirical data, not anecdotal stories. Thus, in
October 2007, the State Working Group became the first governmental
entity--state or Federal--to collect data on the servicers' loss
mitigation efforts and results. We used this data to publish five
reports which provide analysis and commentary on a variety of issues.
Reports were published in February 2008, April 2008, September 2008,
January 2010, and August 2010. Unfortunately, our data collection was
not as robust as it could have been due to the extremely short-sighted
direction of the Office of the Comptroller of the Currency which forbad
national banks from providing loss mitigation data to the States.
II. The Impact of Securitization on Servicing
Many people still talk about ``banks'' generically when discussing
foreclosure issues. Of course, the old model of a local bank making a
loan and then keeping that loan on its books has largely disappeared.
Instead, mass securitization of mortgage loans has become the norm.
This has produced a radical change in the structure of loan servicing
and a misalignment of incentives. Many pages can and have been written
on this subject, and I will not attempt to repeat that discussion hear.
Described in its simplest form, in most cases ownership of the mortgage
loan is no longer aligned with the servicing of that loan. This change
has introduced enormous complexity and has made the task of modifying
loans and avoiding preventable foreclosures much more difficult.
III. Common Loan Servicing Problems
In order to understand what has been happening with mortgage loan
servicing over the last 3 years, it is essential to understand one
basic truth: the current mortgage servicing system was not designed for
any of the tasks it is being asked to perform, and it certainly is not
equipped to perform such tasks at anywhere near the scope and scale of
the foreclosure crisis. Modern loan servicing was designed to be a no-
touch or low-touch money collection system. Instead, servicers have
been asked to re-underwrite, or in many cases underwrite for the first
time, a massive number of loans. Asking servicers to solve the
foreclosure crisis is akin to putting a square peg in a round hole. The
servicers, no matter how good their intentions, were simply not
designed for this problem. Put on top of that the unprecedented scope
and scale of the foreclosure crisis, and the servicers have become
completely overwhelmed.
From this premise flow all of the problems which our office and
other Attorneys General hear about on a regular basis. For example, we
are constantly hearing about borrowers who are asked to resubmit their
paperwork because it was lost multiple times. Because servicers are
overwhelmed, loss mitigation requests are often delayed and stretched
out over long periods of time. As a result, the financial documents
originally submitted by the borrower become stale, triggering multiple
requests for resubmission. While the servicer is free to lose documents
as many times as they want or to take as long as they want, the
servicer often demands strict compliance from the borrower. Thus, no
matter how many times the borrower has previously submitted his or her
paperwork, if the borrower fails one time, the loan modification is
denied. Similarly, many borrowers report that after not hearing from
their servicer for several months, they will receive a proposed loan
modification but will be given a very short timeframe (several days) to
sign and return the document (along with any required financial
contribution). Again, strict compliance is enforced.
Perhaps the biggest problem is that loss mitigation and foreclosure
exist simultaneously on parallel tracks. This leads to problems when
the left hand does not know what the right hand is doing. Thus, we all
hear stories of borrowers who thought they were approved for a loan
modification receiving a notice of a foreclosure sale. In short, the
fundamental fact that servicing systems are being asked to perform a
task for which they were not designed has predictably led to a wide
range of problems in implementing loss mitigation solutions.
IV. The Mortgage Foreclosure Multistate Group
In a classic example of why it is wise to continue to support our
constitutional framework of federalism, the States were able to react
very quickly to the recent robo-signing reports. In very short order,
all 50 Attorneys General and a committee of State banking regulators
representing all 50 States formed a multistate group to address this
problem. We were able to do this for several reasons. First, State
officials are much closer to the problems in loan origination and
servicing than our Federal counterparts. Quite simply, citizens know
who their State Attorney General or banking department is and are much
more likely to contact us than a 1-800 number in some far away
location, particularly when it comes to real estate and foreclosures,
both of which are inherently local issues. Second, the long standing
relationships formed over the past decade in our mortgage origination
enforcement actions and more recently, the work of the State
Foreclosure Prevention Working Group, allowed us to mobilize quickly.
As in our previous efforts, we are continuing our valuable partnership
with our State bank regulator counterparts.
Because we are in the midst of our investigation, I am necessarily
constrained as to how much I can comment on the specifics. However, I
can make some general comments.
First, some have attempted to describe the issue of ``robo-
signing'' as being a mere technicality. This argument shows a certain
type of arrogance. The home is not only the centerpiece of family life,
but it is by far the biggest purchase that many people will make in
their life, and for many their biggest asset. The State foreclosure
laws are the official method by which the family home can be taken
away. Given such high stakes, strict compliance is expected. Others
have suggested that the only relevant facts are that the borrower owes
the money and has to pay it back. Such statements miss the point
entirely. We do not say in a criminal prosecution that it is ok for the
prosecutor to fabricate evidence, so long as the defendant is in fact
guilty. The outrage over robo-signing is about due process, protection
of private property rights, and the rule of law. In judicial
foreclosure States, robo-signing is a fraud on the court. Such issues
are of the highest importance.
That being said, I would like to make it clear that the multistate
investigation is about more than robo-signing. After all, robo-signing
is only a symptom of the much larger problems with the mortgage
servicing system. Thus, the multistate group intends to look at issues
regarding the accuracy of the information used by servicers in the
foreclosure process, as well as issues such as the imposition of
various servicing related fees and force placed insurance. The
multistate group is also interested in some of the issues that are
being raised regarding the ability or inability of servicers and
investors to show proper chain of title.
However, the biggest issue is fixing the loan modification system.
In many ways, there is not currently a coherent loss mitigation system.
Instead, there exists a system of ``Russian roulette'' where whether or
not a borrower receives a modification that will save the family home
depends in large part on who picks up the phone on the other end. In
essence, those who are lucky enough or persistent enough to get to the
right person are the ones who receive quality modifications, regardless
of the facts of their case. This has to change.
To be clear, the States do not believe that every foreclosure is a
tragedy that must be avoided. To the contrary, we have consistently
stated over the last 3 years that we are only interested in
modifications where the cash-flow from the modification exceeds the
expected proceeds from a foreclosure sale. In industry parlance, this
is a net present value positive modification. Such a modification is a
win for the servicer, the investors who own the loan, the borrower, and
the community at large. We strongly believe, however, that many
borrowers, who under a strict economic analysis should receive a
modification, are falling through the cracks. We must find a way to
make sure that all borrowers who have the desire to keep the home and
qualify for a modification, receive that modification.
V. Conclusion
In recent weeks, many have opined that the temporary halt on
foreclosures and foreclosure sales by several servicers was greatly
damaging the economy. With all due respect, it is the foreclosures in
the first instance that pose the greatest threat to the economy. While
certainly it does not make sense to allow vacant properties to linger,
and such properties should be sold if possible, the looming shadow
inventory of homes that will become real estate owned and the millions
of foreclosures yet to come is the true threat that must be avoided.
Foreclosures at the scale we are currently experiencing, and
unfortunately will continue to experience for some time, are a public
policy issue. It is well past time to once and for all tackle the issue
of foreclosures and loan modifications with the resources and urgency
it deserves.
As set forth above, the Attorneys General and the State banking
regulators have been discussing various issues and quite frankly
warning the servicing industry for over 3 years. Unfortunately, the
mortgage servicing industry has been slow to recognize the problems and
instead responded with a series of half-steps, based on the hope that a
recovery in the market was just around the corner. Instead, the
situation has become worse and worse, forcing servicers and secondary
market investors to take steps that a relatively short time earlier
were off the table. We believe that there have been many missed
opportunities over the past few years and are deeply disappointed that
our many previous attempts at working with the servicers have not been
as successful as we had hoped. However, the States are determined that
this time, we will find lasting solutions to the foreclosure crisis.
______
PREPARED STATEMENT OF BARBARA J. DESOER
President, Bank of America Home Loans
November 16, 2010
Introduction
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for the opportunity to discuss Bank of America's loan
modification performance and foreclosure process.
The prolonged economic downturn and sustained high unemployment,
coupled with the collapse of the U.S. housing market, have led to
challenges that are more profound and complex than anyone anticipated.
For a borrower, the prospect of falling behind on mortgage payments due
to loss of income would be a wrenching personal situation in normal
times. But these are not normal times, and the traditional solutions of
the refinance of debt or the sale of a home at sufficient value to
repay the debt, do not exist for many, which causes great anxiety and
frustration for borrowers under economic stress. We know you are
hearing from your constituents, because in many cases your constituents
are also our customers.
These customers depend on us--Treasury, GSE's, lenders, and
servicers to have a solution for their unprecedented needs. The good
news: we have worked together at extraordinary speed to create
solutions--like HAMP--and to retool mortgage servicing; adding new
people, new processes, and new technology capabilities to meet the ever
increasing needs. Unfortunately, those solutions have not met all of
the needs nor have they been executed well in some cases.
It's important to note that despite the hardships most Americans
are facing, more than 86 percent of Bank of America customers remain
current and are making their mortgage payment each month. Others are
unfortunately in distress. Helping these customers remain in their
homes where possible is a top priority for Bank of America--as
evidenced by our 700,000 completed loan modifications since 2008.
Whether one of our customers has just missed his or her first
mortgage payment or is many months delinquent and at the point of
foreclosure--Bank of America believes the customer's experience with
us, from start to finish, must be consistent, accurate, and
understandable. Our customers are entitled to an experience that gives
them confidence they are being treated fairly.
We have, however, reached a crossroads between loan modification
efforts and the reality of foreclosure. Fortunately, early stage
delinquencies are stabilizing. The majority of initial volume and
backlog of customers seeking solutions have been evaluated for
available programs. We're reaching a peak where some customers will be
dealing with the reality that despite the myriad of programs and our
best efforts, foreclosure is unavoidable. That has driven an increase
in the concerns you and we hear from distressed homeowners, and our
increases in staffing and foreclosure alternative programs are directed
at moving through this difficult period. We believe that these efforts
are working, as every day we reduce the backlog in both modification
decisions and customer complaints.
It is our responsibility to be fair, to be responsive and, where a
foreclosure is unavoidable, to treat customers with respect as they
transition to alternative housing. We, and those who work with us in
connection with foreclosure proceedings, also have an obligation to do
our best to protect the integrity of those proceedings. When and where
that has not happened, we accept responsibility for it, and we deeply
regret it. We take seriously our obligation to the customer, the
investor, the legal process and the economy.
We also fully understand our obligation to evaluate customers for
every way to make their payment more affordable, and we are continually
improving our processes for working with customers.
When industry concerns arose with the foreclosure affidavit
process, we took the step to stop foreclosure sales nationwide and
launch a voluntary review of our foreclosure procedures. Thus far, we
have confirmed the basis for our foreclosure decisions has been
accurate. At the same time, however, we have not found a perfect
process. There are areas where we clearly must improve, and we are
committed to making needed changes.
We've also used this opportunity to further evaluate our
modification program and identify additional enhancements we can make.
We have done this based on feedback from you, our customers, community
groups, investors, and from our regulators. We also are committed to a
constructive dialogue with State Attorneys General, who have taken a
leadership role on these issues.
Role of the Servicer
Before I describe the changes we have made in the foreclosure and
modification processes, I would like to provide some context regarding
the role of mortgage servicers, the complexity of our portfolio and
loan modification performance. This context relates directly to the
changes we are making.
Traditionally, a mortgage servicer's primary function is to collect
loan payments from customers and to distribute payments to the
investors who own the loan. Until recent years, foreclosures were
ancillary and loan modifications were essentially non-existent.
Economic conditions--including the loss of income, inability of many
consumers to pay their mortgages or, when in distress, to sell their
property--have dramatically increased the volume of modifications and
foreclosures, severely straining industry systems and resources
designed around much lower volumes of activity.
Moreover, Bank of America is constrained by our duties to
investors; of the nearly 14 million loans in our servicing portfolio:
23 percent of the portfolio is owned by Bank of America;
77 percent of the portfolio we service for the investors
who own the loans--Fannie Mae and Freddie Mac are the investors
on 60 percent of these loans, for example.
Many investors limit Bank of America's discretion to take certain
actions. When working with delinquent customers, we aim to achieve an
outcome that meets customer and investor interests, consistent with
whatever contractual obligations we have to the investor.
Duties to investors add complexities to the execution of
modification programs and can result in confusion for customers. For
example, Treasury, investors, and other constituencies often change the
requirements of their modification programs. HAMP alone has had nearly
100 major program changes in the past 20 months. Fannie and Freddie, as
investors, have layered on additional requirements, conditions and
restrictions for HAMP processing. When these changes occur, we and
other servicers have to change our process, train our staff, and update
technology. These changes can also affect what is required of the
customer, for example the need for new or different documentation.
Basic Facts of the Bank of America Portfolio
With the Countrywide acquisition, Bank of America became the
nation's largest mortgage servicer--with a servicing portfolio that
more than tripled post-acquisition to nearly 14 million customer
loans--1 in 5 of all U.S. mortgages.
The majority--86 percent--of our customers are current and making
their mortgage payments on time every month. Fortunately, that number
is stabilizing. But the segments of the portfolio that are distressed
include large numbers of customers who are seriously delinquent. Nearly
600,000 customers have not made a mortgage payment in more than a year;
of these 195,000 have not made a mortgage payment in 2 years.
Servicer Implementation of Loan Modification Solutions
To address these drastic economic and industry changes, Bank of
America has had to undertake a massive retooling since our acquisition
of Countrywide in 2008 to shift our servicing organization from one
that simply services loans, to one that also manages customer requests
for aid as the housing downturn and high unemployment persist. We also
have built new processes, tools and partnerships with community
organizations to reach customers who do not respond to loan
modification offers.
We've hired and trained more than 10,000 new employees--and now
have a team of more than 26,000 helping customers who are delinquent.
To reach customers we've opened bricks and mortar customer assistance
centers; gone door to door with modification solicitations, and
participated in more than 500 housing rescue fairs across the country.
We have completed more than 614,000 proprietary modifications and
85,000 HAMP modifications. Given the majority of our delinquent
borrowers are not eligible for HAMP today, proprietary solutions have
been critical to provide meaningful options for those who fall outside
the requirements of HAMP. We have completed over 95,000 second lien
modifications and were the first servicer to implement the Treasury's
second lien program--2MP.
We have provided innovative solutions to meet evolving customer
needs, including the launch of an industry-leading principal reduction
program earlier this year. Bank of America is also a leader in the
Hardest Hit Fund program development and is working with Treasury, the
State Housing Finance Authorities, and others as we attempt to find
solutions and design programs including principal reduction in the most
severely impacted States.
If all home retention options are exhausted, and there is not a
viable alternative to create an affordable payment, we offer short sale
and deed-in-lieu solutions that allow customers to avoid foreclosure
and ease the transition to alternative housing. Earlier this year, we
launched a proprietary cooperative short sale program that proactively
solicits customers in late stage delinquency to provide assistance. We
are also fully operational with Treasury's Home Affordable Foreclosure
Alternatives (HAFA) program, which streamlines the short sale process
for borrowers who have been considered for HAMP and offers customers
relocation assistance of $3,000. We've completed nearly 70,000 short
sales through the first three quarters of this year.
We also provide deed in lieu programs that do provide an increased
cash allotment for expenses such as moving and rental security deposits
in exchange for the deed to the property in which the customer
currently resides.
Our intent is to exhaust all modification, short sale and other
disposition options before foreclosure. Despite those efforts, far too
many customers have been impacted by an economy that has left them
unemployed or severely underemployed to a point that leaves even a
modified mortgage payment out of reach.
With that background in mind, I would like to inform you of some
key decisions and commitments we have made to address concerns we have
heard from our customers, your constituents and other stakeholders:
Single Point of Contact
A frequent source of frustration for customers is when they feel
they are being passed around the system, seemingly never talking to the
same person twice. We are addressing this by redesigning our
modification process to offer a single point of contact for every
eligible borrower. We are in the midst of implementation and more than
140,000 customers have already been assigned a single case manager to
whom they can always turn with questions or concerns that arise
throughout the process. We are also in discussions with key
stakeholders, like the State Attorneys General, about how this approach
can be expanded, and refined, to improve the customer experience and
reduce borrower anxiety during the time they are being considered for
modifications. We know this goes to the heart of many customer
complaints that you have heard.
Reform of Dual Track System
Parallel foreclosure and modification processes are required by
many investors, and reflect an industry-wide servicing practice. This
so-called ``dual track'' process has been a source of confusion for
customers. We want to be a partner with you, State Attorneys General,
other servicers, and investors in looking for ways to change industry
practice with respect to evaluation of borrowers for modifications
after they have been referred to foreclosure to mitigate the very real
concerns we have heard about that practice.
Customer Status Checklist
Customers are understandably frustrated when they are unsure where
they are in the process of modification or foreclosure. To address this
and provide greater clarity, we are working to create a Customer Status
Checklist, so that customers will have a document in hand to understand
their status, the steps they have completed, reasons decisions have
been made and what additional steps remain.
Housing Rescue Fairs and Outreach
By establishing a presence in the community, we've had greater
success reaching customers who have not been responsive to more
traditional contact methods. We've deployed Customer Assistance Centers
in areas most impacted by the housing downturn. We've also launched
mobile home retention teams who travel around the country meeting with
customers.
We've had considerable success in working with non-profit partners
such as Neighborhood Assistance Corporation of America (NACA), National
Urban League, National Council of La Raza and the National Association
of Asian Pacific Americans for Community Development. We established
the Alliance for Stabilizing our Communities--the first national
multicultural outreach and home retention effort to address foreclosure
prevention in diverse communities. Through the Alliance, 34 home rescue
fairs have been completed serving more than 9,800 families. We find
that the opportunity for customers to work with a trusted non-profit
and get the chance to meet with their servicer face-to-face can enhance
the response rates of borrowers and the chance for a successful
modification, and we are committed to increasing the resources
committed to face to face contact in 2011--including doubling our
outreach staff.
Enhanced Transition Services:
When we cannot change the foreclosure outcome, we can ensure the
process is respectful. We have been in extensive conversations with the
Neighborhood Preservation Foundation, the United Way, other non-profit
agencies, and with HUD to determine how we can most effectively engage
them to help customers in the transition of households to alternative,
more affordable housing. We are working with these and other community
partners to expand support services--relocation assistance, credit
counseling, and other aid to help customers and rejuvenate
neighborhoods.
Other Reforms
Additional reforms and process enhancements may be identified
through our constructive and continuing conversations with State
Attorney General Miller and the Executive Committee of the National
Association of Attorneys General.
Foreclosure Process
Our commitment at Bank of America and its subsidiaries is to ensure
that no property is taken to foreclosure sale until our customer is
given a fair opportunity to be evaluated for a modification to an
affordable payment or, if that cannot be done, a short sale or deed in
lieu solution. Foreclosure is the option of last resort.
We voluntarily launched a foreclosure hold in October 2008 and have
participated in several others--as new programs were developed and
launched, in order to ensure no customer goes to foreclosure who has a
reasonable option to stay in their home.
We re-evaluate borrowers for home retention options throughout the
foreclosure process and check to determine whether a borrower is being
evaluated for a modification all the way up until the day before the
foreclosure sale. Subject to investor guidelines and the rules of the
applicable court, we defer the sale dates of borrowers who are being
evaluated for modifications.
When a customer is referred to foreclosure sale, the process and
requirements vary significantly among States. Courts have jurisdiction
over foreclosures in 23 States (called judicial States). In both
judicial and non-judicial cases, it is our policy to refer a loan to
foreclosure only after we have completed a review for modification
eligibility, assessment of foreclosure alternatives and compliance with
applicable State law requirements. Also included are several checks to
ensure the data supporting the foreclosure is both accurate and
accurately recorded.
On average, it takes nearly a year from the time a customer
receives a foreclosure notice until the actual foreclosure sale is
completed; and for customers in judicial States like Florida that
timeline can be closer to 2 years. This is not a process that is rushed
and there are multiple checkpoints and controls along the way to
prevent wrongful foreclosure--controls that have now been further
strengthened.
Foreclosure Review and Improvements
After concerns emerged at other lenders regarding the foreclosure
affidavit in judicial foreclosure States, Bank of America and its
servicing subsidiary initiated a review of our foreclosure procedures.
On October 1, we voluntarily suspended foreclosure judgments in the 23
judicial foreclosure States while we completed this review.
One week later, we paused foreclosure sales nationwide as we
launched a voluntary review of our foreclosure process in all 50
States. We believe this step was appropriate and responsible in order
to give our customers confidence they are being treated fairly in the
process. I would like to share some conclusions we've reached following
our review, as well as some of our plans to improve our process going
forward. Let me first offer a quick overview of the typical foreclosure
process in a judicial foreclosure State. If the internal foreclosure
review process concludes all other options are exhausted and that
foreclosure is necessary, the loan is referred to our foreclosure
operation and to outside foreclosure counsel, who prepare affidavits of
indebtedness where required and ultimately handle the local foreclosure
process.
The decision to refer a loan to foreclosure is made by Bank of
America after a foreclosure review process that is based on an
evaluation of our servicing records. This evaluation precedes and is
independent from the process used to create and execute affidavits of
indebtedness. The foreclosure affidavit is a summary of the basic facts
in the foreclosure case (for example, the borrower's name, address and
delinquent amount). For all GSE loans, we select the outside counsel
from pre-approved lists created by each of Fannie Mae and Freddie Mac.
Once Bank of America receives the affidavit from outside counsel,
we conduct a multi-step quality assessment process to verify the key
facts underlying the affidavit. After this quality check, the verified
affidavits are sent to a bank officer for a notarized signature and
then returned to foreclosure counsel for filing.
Even though our review has indicated the basis for our foreclosure
decisions has been accurate, we have identified areas for improvement
as a result of our intensive review. We are taking the need for
improvement very seriously and are implementing changes accordingly.
These changes in the foreclosure process include, among other things, a
new affidavit form and additional quality control checks.
Every affidavit will be individually reviewed by the signer,
properly executed, and promptly notarized. We are carefully restarting
the affidavit process with these controls in place. We are working to
replace previously filed affidavits in as many as 102,000 pending
foreclosure cases that have not yet gone to judgment. Further, with
regard to both judicial and non-judicial States, we are implementing
new procedures for selecting and monitoring outside counsel.
Conclusion
If a Bank of America customer is eligible for a modification, we'll
help him or her stay in their home. That is in our interest as a
mortgage servicer and as an owner of loans. And, when foreclosure is
the necessary outcome, we will pursue it through a respectful process.
As the loan servicer, the decision is not always in our hands, but
ensuring a process that is fair, accurate and consistent is our
accountability. We have worked for 2 years since our acquisition of
Countrywide to aggressively respond to more than a million customers in
distress. We don't claim perfection, but we believe we have led with
innovative ideas and continue to put forward solutions that respond to
customer needs. That's a responsibility that comes with being America's
leading consumer bank--and a responsibility every associate at Bank of
America is working diligently to uphold.
Thank you and I look forward to your questions.
______
PREPARED STATEMENT OF R.K. ARNOLD
President and Chief Executive Officer of MERSCORP, Inc.
November 16, 2010
Chairman Dodd, Ranking Member Shelby and Members of the Committee,
my name is R.K. Arnold. I am President and CEO of MERSCORP, Inc. and
its subsidiary, Mortgage Electronic Registration Systems, Inc. I
appreciate the opportunity to appear before the Committee today to
explain what MERS is and isn't, its critical role in our nation's
housing finance system, and how MERS has been affected by the current
foreclosure crisis.
I have written testimony and an oral statement that has already
been delivered to the Committee that I would request be made part of
the record.
BACKGROUND
MERS is owned by the mortgage industry\1\ and operated as a
membership organization. Almost all mortgage lenders (about 3,000) are
members of MERS, though not all members register all the loans they
originate on the MERS System.\2\ MERS derives its revenue solely from
its members.\3\ MERS charges no fees and makes no money from mortgages,
from the securitization or transfer of mortgages, or from foreclosures
done in its name.
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\1\ MERSCORP, Inc. is structured as a privately held stock company.
Its principal owners are the Mortgage Bankers Association, Fannie Mae,
Freddie Mac, Bank of America, Chase, HSBC, CitiMortgage, GMAC, American
Land Title Association, and Wells Fargo. MERS is headquartered in
Reston, VA.
\2\ Members tend to register only loans they plan to sell. Wells
Fargo and JPMorgan Chase are the principal members in this regard. They
service most of the loans they originate themselves, so registering
their retail business on the MERS System is of less practical value to
them. However, when these institutions purchase loans from others,
known as their correspondent business, they do require that those loans
be registered on the MERS System.
\3\ MERS makes its money through an annual membership fee (ranging
from $264 to $7,500) based on organizational size, and through loan
registration and servicing transfer fees. MERS charges a one-time $6.95
fee to register a loan and have Mortgage Electronic Registration
Systems, Inc. serve as the common agent (mortgagee) in the land
records. For loans where Mortgage Electronic Registration Systems, Inc.
will not act as the mortgagee, there is only a small one-time
registration fee ($0.97). This is known as an iRegistration.
Transactional fees (ranging from $1.00 to $7.95) are charged to update
the database when servicing rights on the loan are sold from one member
to another.
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MERS serves two important functions. First, it maintains a database
or registry of mortgage loans, keeping track of changes in servicing
rights and beneficial ownership interests over the life of the loan.
Second, it can be designated by its members to serve as the mortgagee,
or the holder of the mortgage lien, in the public land records. This
designation is what enables MERS to maintain its accurate database.
MERS AND YOUR MORTGAGE
The mortgage loan process can be confusing and complex to
consumers. There is a lot of paperwork generated and many documents to
be signed. However, two pieces of paper stand out from the rest as the
most important pieces needed so that the consumer can get a mortgage
loan. They are: (1) the promissory note, which is a promise by the
borrower to repay the loan amount to the lender or noteholder; and (2)
the mortgage (also referred to as the ``deed of trust'' in some
States), which establishes a lien against the property as collateral
for the loan and allows the lender (or noteholder) to foreclose on the
property if the borrower does not repay the loan according to the terms
of the promissory note. The person who borrows the money is called the
``mortgagor'' and the holder of the mortgage is called the
``mortgagee.'' Once the borrower signs both pieces of paper, the
borrower receives the money to buy the house. To obtain a mortgage
loan, the borrower must agree that the mortgagee has the right to
foreclose in the event of a default.
Another important party in the life of a mortgage loan is the loan
servicer. The servicer is a company named (by the note-owner) to be the
interface between the note-owner and the borrower to collect payments
and remit them to the note-owner. It may become the noteholder for
purposes of enforcing the terms of the note on behalf of the note-
owner.\4\
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\4\ The originating lender may be the servicer in some cases.
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MERS acts as the designated ``common agent'' for the MERS member
institutions in the land records, which means that MERS holds the
mortgage lien on behalf of its members and acts on their behalf as
mortgagee. To accomplish this, at the time of the closing, the borrower
and lender appoint MERS to be the mortgagee. The designation of MERS is
prominently displayed on the mortgage document and is affirmatively
approved by the borrower at closing.\5\ After the borrower executes the
mortgage document, it is recorded in the public land records with
Mortgage Electronic Registration Systems, Inc. noted in the index
prepared by the recorder (or clerk) as the mortgagee. Mortgage loan
information is then registered on the MERS database.
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\5\ A copy of a sample mortgage document can be found in Attachment
One. A short summary of MERS prepared by the Mortgage Bankers
Association can be found in Attachment Two.
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These two key pieces of paper in a mortgage transaction follow very
different paths after they are signed. The mortgage (or deed of trust)
is recorded in the county land records where an imaged copy is
stored.\6\ The original mortgage document, with recording data added by
the county recorder, is returned to the servicer and goes into the
servicer's master loan file. The note is sent to a custodian (usually a
regulated depository institution) and is typically bought and sold (and
thus trades hands) in the normal course of financial activity.\7\ The
servicer undertakes the obligations to service the loan, but servicing
rights also may move from one servicing business to another because
servicing rights are contract rights, which are bought and sold
independent of any sale of the promissory note. MERS does not receive
or maintain either the mortgage or the promissory note.
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\6\ This action tells the world that there is a lien against the
property. This is done to protect the lender's interest. The recording
of the mortgage puts future purchasers on notice of any outstanding
claims against the property.
\7\ The promissory note is not (and never has been) recorded or
stored with the county land records office. The note is a negotiable
instrument that can be bought and sold by endorsement and delivery from
the seller to the note purchaser. This activity is governed in all
fifty States by the Uniform Commercial Code (UCC) Article 3.
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Every time a note or servicer changes hands, a notation of that
change is made (electronically) on the MERS System by the members
involved in the sale. In this way, changes in servicing rights and
beneficial ownership interest in the promissory note are tracked over
the life of the loan.\8\
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\8\ The MERS System is the database; MERSCORP, Inc is the
operating company that owns the database; and Mortgage Electronic
Registration Systems, Inc (``MERS'') a subsidiary of MERSCORP, Inc.,
which serves as mortgagee in the land records for loans registered on
the MERS System. For discussion purposes, ``MERS'' may be used in this
testimony to refer to all three entities unless specifically stated
otherwise.
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A fundamental legal principle is that the mortgage follows the
note, which means that as the note changes hands, the mortgage remains
connected to it legally even though it is not physically attached. In
other words, the promissory note is enforceable against the property
because of the mortgage, but the mortgage instrument itself is not
independently enforceable as a debt. This principle is not changed when
MERS is the mortgagee because of the agency relationship between MERS
and the lender. An agency relationship arises where one party is
specifically authorized to act on behalf of another in dealings with
third persons, and the legal definition of a ``nominee'' is a ``party
who holds bare legal title for the benefit of others.'' Here, the
language of the mortgage appoints MERS as nominee, or agent, for the
lender and its successors and assigns for the purposes set forth
therein. The mortgage also grants MERS broad rights, again as nominee
for the lender and the lender's successors and assigns, ``to exercise
any or all'' of the interests granted by the borrower under the
mortgage, ``including but not limited to, the right to foreclose and
sell the property; and to take any action required of the lender.''
Thus, the language of the recorded mortgage authorizes MERS to act on
behalf of the lender in serving as the legal titleholder under the
mortgage and exercising any of the rights granted to the lender there
under.
MERS members affirm this agency relationship with MERS in their
membership agreements, which provide that MERS ``shall serve as
mortgagee of record'' with respect to each mortgage loan that the MERS
member registers on the MERS System and provide that ``MERS shall at
all times comply with the instructions of the holder of mortgage loan
promissory notes.''
THE MECHANICS OF MERS
MERS tracks mortgage loans through an 18-digit identification
number called the Mortgage Identification Number (MIN). With one
notable exception, the MIN is to a specific home loan what the VIN
(Vehicle Identification Number) is to an individual automobile. Like
the VIN, the MIN can be assigned at the earliest stage of the product's
creation and stays with it for its entire life. However, unlike cars
which all get a VIN, not all loans get MINs and are registered on the
MERS System. This is because some loan originators do not use MERS
when they do not intend to sell the servicing rights. About half of all
loans active in the United States are registered on the MERS System.
As the mortgagee of record, MERS receives all notices including
legal pleadings on actions pertaining to the property such as
foreclosure notices and complaints, tax sales and eminent domain
actions, among the many other types of mail. MERS forwards those
documents electronically to the relevant servicer who will then take
the appropriate action to respond on behalf of the note-owner and MERS.
MERS plays an important role for borrowers as the permanent link
between borrowers and their servicers. If servicers change or if they
declare bankruptcy, the borrower always has a knowledgeable point of
contact in MERS. A toll free number, the unique Mortgage Identification
Number (MIN) and mailing address are prominently included on the first
page of the mortgage document. MERS also maintains a Web site, which
serves as another resource for borrowers. MERS is also a means by which
the borrower can easily identify the note-owner.\9\
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\9\ The design of the MERS System always anticipated and required
that borrowers would be able to access the system to determine the
servicer of their loans. Providing such information to MERS is a
requirement of membership and loan registration. When Congress acted
last year to require that borrowers be told when their note is sold and
the identity of the new note-owner, MERS established, within a matter
of weeks, a new service called Investor ID. Of the 3,000 members of
MERS, 97 percent agreed to disclose the identity of the note-owner
through the MERS System. Fannie Mae opted to be disclosed. Freddie Mac
chose not to be disclosed.
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MERS is not part of the decisionmaking process as to which mortgage
loans the lenders make to borrowers, nor is MERS part of how mortgage
loans get securitized. It is the note-owner who decides whether a note
should be sold, or transferred to a trust, or ultimately securitized
with a pool of other loans.\10\ Loans were securitized long before MERS
became operational, and in fact, there are loans in securities today
that do not name Mortgage Electronic Registration Systems, Inc. as the
mortgagee. What MERS does is eliminate the expense of repeated
assignments, resulting in lower cost for lenders when they sell the
loans (represented by the promissory note) to investors. When the note
is sold, MERS continues to act as the mortgagee for the new noteholder
because the mortgage interest follows the note when it changes hands.
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\10\ The issue of whether transfers of residential mortgage loans
made in connection with securitizations are sufficient to transfer
title and foreclosure rights is the subject of a ``View Point'' article
entitled ``Title Transfer Law 101'' by Karen Gelernt that appeared in
the October 19, 2010 edition of the American Banker. A copy can be
found in Attachment Three.
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OTHER FACTS ABOUT MERS
The number of loans registered on the MERS System is substantial.
Since its establishment in 1997, about 66 million loans have been
registered and tracked on the MERS System. About half of those loans
(about 31 million) are active mortgage loans.
Measured by direct employment, MERS is a relatively small
organization. About 50 people work for MERSCORP, Inc. in our Reston,
VA, office. Hewlett-Packard is the MERS technology partner and runs the
database with an additional 150 people.
In significant ways, MERS is analogous to the Depository Trust and
Clearing Corporation (DTCC) that electronically records the assignment
of stock and bond certificates, thus eliminating the need to create a
new certificate each time a security is bought or sold. The benefit of
MERS is similar to that of the DTCC: It reduces the errors associated
with paper processes and increases system efficiency.\11\ Also like the
DTCC, MERS is adjacent to the systems that create the data it tracks;
it is integrated with, but independent of, its member organizations.
The two primary differences between the organizations are that the DTCC
holds title to the financial instrument and that it clears trades
between its participants (including the exchange of funds between the
counter-parties).
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\11\ A 1993, 36-page white paper entitled ``Whole Loan Book Entry
Concept for the Mortgage Finance Industry'' addresses the concepts
underlying MERS and the problems it was designed to address. It is
available upon request.
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MERS CERTIFYING OFFICERS
Mortgage Electronic Registration Systems, Inc. takes the majority
of its actions as the mortgagee through the use of officers commonly
referred to as ``certifying officers.'' From inception, the concept of
certifying officers has always been fundamental to the operations of
MERS. In the white paper calling for the creation of MERS (referenced
in footnote 11), it was recognized that members would need to have a
form of authority to act on behalf of MERS when MERS is the mortgagee
on their behalf. That authority took the form of electing persons
(designated by the member) as officers with limited authority to take
certain actions. The offices to which each of these individuals are
officially appointed are vice president and assistant secretary. The
authority granted to these officers is limited to: (1) executing lien
releases, (2) executing mortgage assignments, (3) initiating
foreclosures, (4) executing proofs of claims and other bankruptcy
related documents (e.g., motions for relief of the automatic stay), (5)
executing modification and subordination agreements needed for
refinancing activities, (6) endorsing over mortgage payment checks made
payable to MERS (in error) by borrowers, and (7) taking such other
actions and executing documents necessary to fulfill the member's
servicing duties.
It is important to note that the certifying officers are the same
officers whom the lenders and servicers use to carry out these
functions even when MERS is not the mortgagee. MERS has specific
controls over who can be identified by its members as a certifying
officer. To be a MERS certifying officer, one must be a company officer
of the member institution, have basic knowledge of MERS, and pass a
certifying examination administered by MERS.
Under the corporate law in Delaware (where MERS is incorporated),
there is no requirement that an officer of a corporation also be an
employee of that corporation. A corporation is allowed to appoint
individuals to be officers without having to employ those individuals
or even pay them. This concept is not limited to MERS. Corporations
cannot operate without officers; they can and often do operate without
employees. It is not uncommon for large organizations to have all its
employees employed by an operating company and for those employees to
be elected as officers of affiliated companies that are created for
other purposes (all corporations are required by law to have officers
to act for it). Even for loans where MERS is not the mortgagee,
employees of the servicer are generally delegated the power to take
actions (e.g., initiate foreclosures) and execute documents (e.g., lien
releases and assignments) on behalf of the owner of the loan (and the
servicer, in turn, may further delegate such authority to a third-party
vendor).
MERS AND FORECLOSURE
When Mortgage Electronic Registration Systems, Inc. is the
mortgagee of record, and the borrower is in default on the mortgage,
and the note-owner decides to foreclose, foreclosure can be undertaken
in one of two ways: Either in the name of MERS, or in the name of the
noteholder (which is usually the servicer).
If the noteholder chooses to foreclose in its own name, under the
MERS rules, it must be named as mortgagee in the land records. MERS,
through the MERS member's designated certifying officer, will execute
an assignment to the foreclosing company and the assignment will be
recorded in the land records. At this point, MERS no longer holds any
legal interest in the mortgage, and it plays no further role in the
foreclosure process. Most loans are assigned out of MERS in this way
and not foreclosed in the name of MERS.
If the note-owner chooses to have Mortgage Electronic Registration
Systems, Inc. foreclose, then the note-owner endorses the note in blank
(if it has not already done so), making it bearer paper, and grants
possession of the note to a MERS certifying officer. This makes MERS
the noteholder. Since MERS is already the mortgagee in the land
records, MERS is now able to legally begin the foreclosure process on
behalf of the note-owner. The foreclosure is managed entirely by the
member institution's MERS certifying officer. This person typically
works in the default department within the MERS member institution so
they are familiar with the various State foreclosure requirements. The
member manages the relationship with the law firm that is handling the
foreclosure. The member retains the law firm on behalf of MERS and the
member provides the necessary documents and information to the law
firm. The member obtains these documents and information from the
servicing files and system, which are maintained by the member.
As noted earlier, the MERS certifying officers are the same
employee officers who handle foreclosure functions for the MERS member
institutions. Whether a foreclosure is initiated in the name of MERS
and handled by the certifying officers, or by the lender in its own
name, the same people would be doing the work. Likewise, the loan file
remains with the servicer as it did before MERS existed. MERS is not a
repository for mortgage documents or promissory notes.
It is important to note that Mortgage Electronic Registration
Systems, Inc. only initiates foreclosure when it has been instructed to
do so by the servicer (acting on behalf of the note-owner) or directly
by the note-owner. MERS has strict rules and procedures governing
foreclosure, most notably a requirement that the certifying officer be
in possession of the mortgage note when foreclosing in the name of
MERS. In addition, pursuant to a 2006 MERS membership rule, no
foreclosures in the name of MERS are allowed in the State of Florida.
In the event a MERS member contracts out foreclosure operations to a
vendor or a law firm, a separate contract is entered into by MERS, the
MERS member and the contracted firm for the purpose of establishing our
understanding of the obligations of the parties and for the purposes of
designating certifying officers. The specific, authorized functions of
MERS certifying officers are enumerated in a corporate resolution by
which MERS makes the appointment.
Because there is a choice whether a foreclosure is done in the name
of the servicer, note-owner or MERS, one might wonder if there is an
advantage in choosing one way or the other. The advantage to
institutions by foreclosing in the name of MERS is that they do not
need to record an assignment from MERS to themselves, saving them time
and money. The advantage that some lenders see in not foreclosing in
the name of MERS is that the MERS rules are strict and require that the
note be produced. If the lender does not want to do this, the MERS
member cannot commence a foreclosure action in the name of MERS, but
must assign the mortgage out of MERS. This is a major reason why most
loans are not foreclosed in the name of MERS.
In 2005, when it became apparent to us that foreclosures undertaken
in Florida were relying excessively on lost note affidavits, MERS
adopted a rule forbidding the use of lost note affidavits when
foreclosures were done in the name of MERS in Florida. That rule was
extended nationally in 2006 and is still in effect today. MERS believes
that borrowers are entitled to know that the company foreclosing has
all of the necessary paperwork and rights to do so. Showing up with the
original note provides the borrower and the court with proof that the
foreclosing company is the proper party to foreclose.
COMMON QUESTIONS ABOUT MERS STRUCTURE AND ROLE IN MORTGAGE MARKETS
When servicing rights or promissory notes are sold for loans where
MERS is not the mortgagee, the usual practice is for the seller to
execute and record an instrument assigning the mortgage lien to the
purchaser (commonly referred to as an ``assignment''). Assignments are
not required by law to be recorded in the land records. The primary
reason assignments are recorded (in cases where MERS is not the
mortgagee), stems from the appointment of servicers to administer the
loan on behalf of the mortgage loan owner. In which case, the servicer
will be assigned the mortgage lien (thus becoming the mortgagee) in
order to receive the service of process related to that mortgage loan.
When Mortgage Electronic Registration Systems, Inc. is the mortgagee
(i.e., holds the legal title to the mortgage lien), there is no need
for an assignment between its members because MERS is the common agent
for them. It is not the case that the assignments are now being done
electronically through the MERS System instead of being recorded in
the land records. The need for an assignment is eliminated because
title to the mortgage lien has been grounded in MERS. Moreover,
transfers of mortgage notes and servicing rights are not recordable
transactions (and have never been reflected in the land records)
because they are not a conveyance of an interest in real property that
is entitled to be recorded; only the transfer of the lien is a
conveyance. A promissory note is sold by endorsing the note, and
delivering it to the purchasers. Servicing rights are non-recordable
contracts rights. Mortgage Electronic Registration Systems, Inc.
remains the mortgagee regardless of the number of these non-recordable
transfers that may occur during the life of the loan. Upon such sales,
the seller and purchaser update the MERS System of the transfer with
an ``electronic handshake.'' If the purchaser does not confirm the
transaction, it is flagged by the MERS System for follow-up. MERS also
audits its members for the accuracy of the information they provide to
the MERS System.
The only reason servicers needed to appear in the county land
records before MERS was so they could receive legal notices pertaining
to the property. That role is now played by MERS as their common agent.
MERS runs a massive mailroom and help desk operation to handle millions
of legal notices for its members, which makes it far more efficient and
certain that mail will go to the correct place. Today, if a servicer
``boxes up'' in the middle of the night and disappears, the homeowner
can have confidence that legal notices will be delivered to the correct
successor company without delay.
The chain of title starts and stops with Mortgage Electronic
Registration Systems, Inc. as the mortgagee. MERS, as the agent for the
note-owner, can hold legal title for the note-owner in the land
records.\12\ The basic concept of a recording statute is that a person
or company claiming an interest in land protects its interest by
recording that interest at the county recorder of deeds office. The
recorded document provides constructive notice to the world of the
claim. In many States, there is no requirement that a conveyance of
real estate must be recorded in the land records. The concept of
nominees appearing in the land records on behalf of the true owner has
long been recognized. It has never been the case that the true owners
of interests in real estate could be determined using the land records.
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\12\ The essential elements of the legal principles underlying MERS
can be found in ``MERS Under Attack: Perspective on Recent Decisions
from Kansas and Minnesota,'' an article by Barkley and Barbara Clark in
the February 2010 edition of Clark's Secured Transactions Monthly. A
copy of this article can be found in Attachment Four.
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The use of MERS is in compliance with the statutory intent of the
State recording acts. When MERS is the mortgagee, the mortgage is
recorded at the county land records, thereby putting the public on
notice that there is a lien on the property. As the 1993 white paper
describing MERS makes clear, at certain time periods, the flow of
assignments were overwhelming the county recorder system, resulting in
long backlogs, and in some cases, taking the county recorder over a
year to record an assignment. Now that assignments are eliminated
because a common agent like MERS is holding the mortgage lien, the land
records can operate more efficiently. Multiple assignments can lead to
errors and uncertainty in the chain of title because assignments were
often missing, incomplete, inaccurate, or misfiled. In situations where
the recorded assignment identified the wrong property, the lender had
not perfected its lien on the right property but had clouded the title
for some unrelated third party.
The MERS System also complements the county land records by
providing additional information that was never intended to be recorded
at the county level, namely the information about the mortgage loan
servicer, and now, with the addition of MERS InvestorID, the name of
the investor.
Some have raised questions about the reduction of recording fees
that has accompanied the elimination of the need to record assignments,
and there have been suggestions that these fees are somehow owed or
outstanding. Fees are paid for a service performed, and if a document
is eliminated because it is no longer legally necessary, no fee is due
and owing because there is nothing to record. Another way to look at it
is that, because MERS greatly reduces the workload of county recorders,
the lower operating expenses of the county recorder's office offsets
the loss in fee income. Moreover, it would be the borrower, and not the
lender, who ultimately pays the costs of recording assignments, either
directly or indirectly.\13\
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\13\ On loans originated by correspondent lenders or brokers (where
MERS is not the mortgagee), the costs of preparing assignments and the
associated filing fees are listed on the HUD-1 and paid directly by the
borrower.
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The use of MERS is based on sound legal principles. Its legal
validity has been upheld as it was in the Cervantes, Jackson and In re
Tucker cases, to just name a few. While there is much support by courts
for the MERS role as a common agent, there have been cases where there
have been evidentiary issues, which have resulted in outcomes that do
not always let MERS, or its members, foreclose without going back and
proving up the right to take action. States have laws that govern
foreclosures \14\ and when the process is not followed, it can, and
should result in a court not allowing it to go forward. In some of
these cases, judges wanting more evidence or information about MERS
have made comments about MERS. In light of the recent foreclosure
crisis, it is probable that MERS will continue to be challenged. But we
are confident that when courts are provided with all of the facts, MERS
will continue to prevail.\15\ A MERS case law outline (current through
October 20, 2010) is available upon request.\16\
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\14\ Individual States handle real estate foreclosures differently.
In some States the foreclosure process is judicial, and in some States
it is non-judicial. Under both systems, timeframes and terms vary
widely from State to State. A brief, general, description of both
processes prepared by the Mortgage Bankers Association can be found in
Attachment Five.
\15\ Some important recent cases upholding the rights of MERS
include:
In re Mortgage Electronic Registration Systems (MERS) Litigation, a
multi-district litigation case in Federal court in Arizona where the
court issued a favorable opinion, stating that ``The MERS System is not
fraudulent, and MERS has not committed any fraud.''
In re Tucker (9/20/2010), where a Missouri bankruptcy judge found
that the language of the deed of trust clearly authorizes MERS to act
on behalf of the lender in serving as the legal title holder.
Mortgage Electronic Registration Systems, Inc. v. Bellistri, 2010
WL 2720802 (E.D. Mo. 2010), where the court held that Bellistri's
failure to provide notice to MERS violated MERS' constitutional due
process rights.
Taylor v. Deutsche Bank Nat'l Trust Co., So. 3d, 2010 WL 3056612
(Fla. 5th DCA 2010), where the court held the MERS mortgage to be valid
under Florida law, and held that MERS may assign its rights in the
mortgage to the foreclosing company who holds the note. The Florida
court also held that where MERS is described as the ``mortgagee under
the Security Instrument'' the document grants to MERS legal status
under the UCC, which MERS can assign to the foreclosing bank.
Deutsche Bank Natl. Trust Co. v. Traxler, 2010-Ohio-3940, where the
Ohio Court of Appeals recognizes MERS' authority to assign a mortgage
when designated as both a nominee and mortgagee.
King v. American Mortgage Network, et al., United States District
Court, District of Utah, Northern Division (Case No. 1:09-CV-125 TS),
where the court, interpreting the language of the deed of trust, held
that MERS had the authority to initiate foreclosure proceedings,
appoint a trustee, and to foreclose and sell the property.
\16\ A review of the use of MERS in all 50 States was done by
Covington and Burling in 1996 and 1997 as part of the due diligence
associated with the creation of MERS. It is available upon request.
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MERS CONTINUES TO IMPROVE ITS PROCESSES
In 2009, when it came to our attention that some employees
designated by member institutions to serve as MERS certifying officers
were not entrusted by their own institutions with signing authority,
MERS enhanced its procedures to require that each MERS certifying
officer be a company officer of the member institution. In addition,
MERS has developed a primer containing information to be reviewed by
each prospective MERS certifying officer. To test this knowledge, MERS
instituted an online examination to make sure prospective certifying
officers had a basic knowledge of MERS and of their roles and
responsibilities as MERS certifying officers. MERS requires that these
certifications be renewed annually, and we also instituted a
recertification process for current certifying officers who had been
designated prior to establishment of the online examination. MERS will
continue to enforce these policies and refine its testing and
certification program in recognition of the responsibility involved in
initiating a foreclosure on someone's home.
When we saw actions were being undertaken to accelerate foreclosure
document processing, we became concerned that certifying officers might
be pressured to perform their responsibilities in a manner inconsistent
with the MERS rules. When we did not receive the assurances we thought
appropriate that this would not happen, we suspended relationships with
some prominent players involved in the foreclosure process.
When we discovered that some ``robo-signers'' were MERS certifying
officers, we contacted those certifying officers and suspended their
authority. They will not be recertified until they retrain and submit
to reexamination, and the members who employed them provide MERS with a
plan on what will be changed within their companies to prevent this
from happening again.
The MERS management team is committed to the highest standards; we
believe that MERS adds great value to our nation's system of housing
finance in a way that benefits financial institutions, borrowers and
the Government. There are many benefits derived from the MERS database:
The MERS database is available to borrowers to locate their
servicers, and in many cases, to identify note-owners.
For local communities, MERS has become a much-needed link
between code enforcement officers and the servicing community
to help combat the blight that vacant properties bring to
neighborhoods. Over 600 government institutions (cities,
municipalities and States) utilize the MERS System for free to
look up the property preservation contacts for loans registered
on the system. This helps save the code enforcement officers
much needed time in searching for the company directly
responsible for the upkeep of that vacant property.
For law enforcement agencies, MERS aids in combating
mortgage fraud through the detection of undisclosed multiple
liens taken out by fraudsters for the same social security
number or property.
Also, with MERS, lien releases occur quickly at the time of payoff
for borrowers because there can be no break in the chain of title with
MERS. And finally, foreclosures in the name of MERS are not allowed
without the note.
IDEAS FOR THE FUTURE
The MERS database, coupled with the Mortgage Identification Number,
is a powerful tool that can be harnessed by the Congress and the
industry to improve the mortgage finance system. There are a number of
ideas that are worth considering so that when we emerge from this
current crisis we have a housing finance system that meets our needs.
1. All residential home loans should be uniquely identified and
tracked on a national database, which should include:
a. Who is the borrower?
b. What/Where is the property?
c. Who is the owner of the loan's promissory note (the originator/
investor)?
d. Who is the servicer of the loan (the mortgage company)?
2. The cost of registration for the loan should be included with
the other origination fees and disclosed on the HUD-1 at closing.
3. The national database should also track who has physical custody
of the original promissory note (the mortgages are always available in
the county land records).
4. The database should reflect both current and historical
information regarding the home loan.
5. The national unique identifier should be a full life-of-loan
identifier, from origination through final satisfaction (payoff) and
lien release.
6. All Federal data systems that deal with home loans should be
required to integrate the unique national identification number, so
that information regarding loans can be linked across multiple data
sources, e.g., the FHA should be able to look at HUD data, and FDIC
should be able to look at SEC information, always knowing that they are
comparing apples to apples. State and local government agencies should
also be encouraged to adopt the number.
Mr. Chairman, all of us at MERS keenly understand that while owning
your own home is a dream, losing that home is a nightmare. As
professionals who have dedicated ourselves to helping people realize
their dream, we are deeply dismayed by the current foreclosure crisis.
We take our role as a mortgagee very seriously and we see our database
as a key to moving toward better access to information and transparency
for consumers.
I am hopeful that as people understand more about MERS and the role
we play, they will see that MERS adds great value to our nation's
system of housing finance in ways that benefit not just financial
institutions, the broader economy and the Government, but--most of
all--real people. Thank you for holding these hearings and inviting
MERS to participate.
ATTACHMENTS:
1) Sample mortgage document
2) MBA Fact Sheet on MERS
3) ``Title Transfer Law 101,'' by Karen Gelernt, American Banker,
October 19, 2010
4) ``MERS Under Attack: Perspective on Recent Decisions from Kansas
and Minnesota,'' by Barkley and Barbara Clark, Clark's Secured
Transactions Monthly, February 2010
5) ``Judicial Versus Non-Judicial Foreclosure,'' Mortgage Bankers
Association, October 2010
______
PREPARED STATEMENT OF ADAM J. LEVITIN *
Associate Professor of Law, Georgetown University Law Center
November 16, 2010
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*Adam J. Levitin in an Associate Professor of Law at the Georgetown
University Law Center, in Washington, D.C., and Robert Zinman Scholar
in Residence at the American Bankruptcy Institute. He also serves as
Special Counsel to the Congressional Oversight Panel, and has been the
Robert Zinman Scholar in Residence at the American Bankruptcy
Institute.
Before joining the Georgetown faculty, Professor Levitin practiced
in the Business Finance & Restructuring Department of Weil, Gotshal &
Manges, LLP in New York, and served as law clerk to the Honorable Jane
R. Roth on the United States Court of Appeals for the Third Circuit.
Professor Levitin holds a J.D. from Harvard Law School, an M.Phil
and an A.M. from Columbia University, and an A.B. from Harvard College.
Professor Levitin has not received any Federal grants nor has he
received any compensation in connection with his testimony. The views
expressed in Professor Levitin's testimony are his own and do not
represent the positions of the Congressional Oversight Panel.
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Executive Summary
The mortgage foreclosure process is beset by a variety of problems.
These range from procedural defects (including, but not limited to
robosigning) to outright counterfeiting of documents to questions about
the validity of private-label mortgage securitizations that could mean
that these mortgage-backed securities are not actually backed by any
mortgages whatsoever. While the extent of these problems is unknown at
present, the evidence is mounting that it is not limited to one-off
cases, but that there may be pervasive defects throughout the
foreclosure and securitization processes.
The problems in the mortgage market are highly technical, but they
are extremely serious. At best they present problems of fraud on the
court, clouded title to property, and delay in foreclosures that will
increase the shadow housing inventory and drive down home prices. At
worst, they represent a systemic risk of liabilities in the trillions
of dollars, greatly exceeding the capital of the United State's major
financial institutions.
Congress would do well to ensure that Federal regulators are
undertaking a thorough investigation of foreclosure problems and to
consider the possibilities for a global settlement of foreclosure
problems, loan modifications, and the housing debt overhang that
stagnate the economy and pose potential systemic risk.
Mr. Chairman, Members of the Committee:
Good morning. My name is Adam Levitin. I am an Associate Professor
of Law at the Georgetown University Law Center in Washington, D.C.,
where I teach courses in bankruptcy, commercial law, contracts, and
structured finance. I also serve as Special Counsel to the
Congressional Oversight Panel for the Troubled Asset Relief Program.
The views I express today are my own, however.
We are now well into the fourth year of the foreclosure crisis, and
there is no end in sight. Since mid-2007 around 8 million homes entered
foreclosure,\1\ and over three million borrowers lost their homes in
foreclosure.\2\ As of June 30, 2010, the Mortgage Bankers Association
reported that 4.57 percent of 1-4 family residential mortgage loans
(roughly 2.5 million loans) were currently in the foreclosure, process
a rate more than quadruple historical averages. (See Figure 1.)
Additionally, 9.85 percent of mortgages (roughly 5 million loans) were
at least a month delinquent.\3\
---------------------------------------------------------------------------
\1\ HOPE Now Data Reports.
\2\ Id.
\3\ Mortgage Bankers Association, National Delinquency Survey.
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Chart 1: Percentage of 1-4 Family Residential Mortgages in
Foreclosure\4\
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\4\ Mortgage Bankers Association, National Delinquency Surveys.
Private lenders, industry associations, and two successive
Administrations have made a variety of efforts to mitigate the crisis
and encourage loan modifications and refinancings. A series of much
hyped initiatives, such as the FHASecure refinancing program and the
Hope4Homeowners have all met what can charitably be described as
limited success. FHASecure, predicted to help 240,000 homeowners,\5\
assisted only a few thousand borrowers before it wound down,\6\ while
Hope4Homeowners, originally predicted to help 400,000 homeowners,\7\
had closed only 130 refinancings as of September 30, 2010.\8\ The Home
Affordable Modification (HAMP) has also failed, producing 495,898
permanent modifications through September 2010. This number is likely
to be a high water mark for HAMP, as new permanent modifications are
decreasing rapidly while defaults on permanent modifications rise; if
current trends continue, by year's end the number of active permanent
HAMP modifications will actually decline.
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\5\ See, e.g., Press Release, U.S. Dept. of Housing and Urban
Development, Bush Administration to Help Nearly One-Quarter of a
Million Homeowners Refinance, Keep Their Homes; FHA to implement new
``FHASecure'' refinancing product (Aug. 31, 2007), available at http://
www.hud.gov/news/release.cfm?content=pr07-123.cfm; Press Release, U.S.
Dept. of Housing and Urban Development, FHA Helps 400,000 Families Find
Mortgage Relief; Refinancing on pace to help half-million homeowners by
year's end (Oct. 24, 2008), available at http://www.hud.gov/news/
release.cfm?content=pr08-167.cfm.
\6\ Michael Corkery, Mortgage `Cram-Downs' Loom as Foreclosures
Mount, Wall St. J., Dec. 31, 2008.
\7\ Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure,
Wash. Post. Dec. 17, 2008, at A1.
\8\ See FHA Single Family Outlook, Sept. 2010, at http://
www.hud.gov/offices/hsg/rmra/oe/rpts/ooe/olcurr.xls-2010-11-02, Row 263
(note that FHA fiscal years begin in October, so that Fiscal Year 2009
began in October 2008).
---------------------------------------------------------------------------
A number of events over the past several months have roiled the
mortgage world, raising questions about:
(1) Whether there is widespread fraud in the foreclosure process;
(2) Securitization chain of title, namely whether the transfer of
mortgages in the securitization process was defective,
rendering mortgage-backed securities into non-mortgage backed
securities;
(3) Whether the use of the Mortgage Electronic Registration System
(MERS) creates legal defects in either the secured status of a
mortgage loan or in mortgage assignments;
(4) Whether mortgage servicers' have defaulted on their servicing
contracts by charging predatory fees to borrowers that are
ultimately paid by investors;
(5) Whether investors will be able to ``putback'' to banks
securitized mortgages on the basis of breaches of
representations and warranties about the quality of the
mortgages.
These issues are seemingly disparate and unconnected, other than
that they all involve mortgages. They are, however, connected by two
common threads: the necessity of proving standing in order to maintain
a foreclosure action and the severe conflicts of interests between
mortgage servicers and MBS investors.
It is axiomatic that in order to bring a suit, like a foreclosure
action, the plaintiff must have legal standing, meaning it must have a
direct interest in the outcome of the legislation. In the case of a
mortgage foreclosure, only the mortgagee has such an interest and thus
standing. Many of the issues relating to foreclosure fraud by mortgage
servicers, ranging from more minor procedural defects up to outright
counterfeiting relate to the need to show standing. Thus problems like
false affidavits of indebtedness, false lost note affidavits, and false
lost summons affidavits, as well as backdated mortgage assignments, and
wholly counterfeited notes, mortgages, and assignments all relate to
the evidentiary need to show that the entity bringing the foreclosure
action has standing to foreclose.
Concerns about securitization chain of title also go to the
standing question; if the mortgages were not properly transferred in
the securitization process (including through the use of MERS to record
the mortgages), then the party bringing the foreclosure does not in
fact own the mortgage and therefore lacks standing to foreclose. If the
mortgage was not properly transferred, there are profound implications
too for investors, as the mortgage-backed securities they believed they
had purchased would, in fact be non-mortgage-backed securities, which
would almost assuredly lead investors to demand that their investment
contracts be rescinded, thereby exacerbating the scale of mortgage
putback claims.
Putback claims underscore the myriad conflicts of interest between
mortgage servicers and investors. Mortgage servicers are responsible
for prosecuting on behalf of MBS investors, violations of
representations and warranties in securitization deals. Mortgage
servicers are loathe to bring such actions, however, not least because
they would often be bringing them against their own affiliates.
Servicers' failure to honor their contractual duty to protect
investors' interest is but one of numerous problems with servicer
conflicts of interest, including the levying of junk fees in
foreclosures that are ultimately paid by investors and servicing first
lien loans while directly owning junior liens.
Many of the problems in the mortgage securitization market (and
thus this testimony) are highly technical, but they are extremely
serious.\9\ At best they present problems of fraud on the court and
questionable title to property. At worst, they represent a systemic
risk of liabilities in the trillions of dollars, greatly exceeding the
capital of the United State's major financial institutions. While
understanding the securitization market's problems involves following a
good deal of technical issues, it is critical to understand from the
get-go that securitization is all about technicalities.
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\9\ I emphasize, however, that this testimony does not purport to
be a complete and exhaustive treatment of the issues involved and that
many of the legal issues discussed are not settled law, which is itself
part of the problem; trillions of dollars of mortgage securitization
transactions have been done without a certain legal basis.
---------------------------------------------------------------------------
Securitization is the legal apotheosis of form over substance, and
if securitization is to work it must adhere to its proper, prescribed
form punctiliously. The rules of the game with securitization, as with
real property law and secured credit are, and always have been, that
dotting ``i's'' and crossing ``t's'' matter, in part to ensure the
fairness of the system and avoid confusions about conflicting claims to
property. Close enough doesn't do it in securitization; if you don't do
it right, you cannot ensure that securitized assets are bankruptcy
remote and thus you cannot get the ratings and opinion letters
necessary for securitization to work. Thus, it is important not to
dismiss securitization problems as merely ``technical;'' these issues
are no more technicalities than the borrower's signature on a mortgage.
Cutting corners may improve securitization's economic efficiency, but
it undermines its legal viability.
Finally, as an initial matter, let me also emphasize that the
problems in the securitization world do not affect the whether
homeowners owe valid debts or have defaulted on those debts. Those are
separate issues about which there is no general controversy, even if
debts are disputed in individual cases.\10\
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\10\ A notable exception, however, is for cases where the default
is caused by a servicer improperly force-placing insurance or
misapplying a payment, resulting in an inflated loan balance that
triggers a homeowner default.
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This written testimony proceeds as follows: Part I presents an
overview of the structure of the mortgage market, the role of mortgage
servicers, the mortgage contract and foreclosure process. Part II
presents the procedural problems and fraud issues that have emerged in
the mortgage market relating to foreclosures. Part III addresses chain
of title concerns. Part IV considers the argument that the problems in
foreclosures are mere technicalities being used by deadbeats to delay
foreclosure. Part V concludes.
I. BACKGROUND ON SECURITIZATION, SERVICING, AND THE FORECLOSURE PROCESS
A. MORTGAGE SECURITIZATION
Most residential mortgages in the United States are financed
through securitization. Securitization is a financing method involving
the issuance of securities against a dedicated cash flow stream, such
as mortgage payments, that are isolated from other creditors' claims.
Securitization links consumer borrowers with capital market financing,
potentially lowering the cost of mortgage capital. It also allows
financing institutions to avoid the credit risk, interest rate risk,
and liquidity risk associated with holding the mortgages on their own
books.
Currently, about 60 percent of all outstanding residential
mortgages by dollar amount are securitized.\11\ The share of
securitized mortgages by number of mortgages outstanding is much higher
because the securitization rate is lower for larger ``jumbo''
mortgages.\12\ Credit Suisse estimates that 75 percent of outstanding
first-lien residential mortgages are securitized.\13\ In recent years,
over 90 percent of mortgages originated have been securitized.\14\ Most
second-lien loans, however, are not securitized.\15\
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\11\ Inside Mortgage Finance, 2010 Mortgage Market Statistical
Annual.
\12\ Id.
\13\ Ivy L. Zelman et al., Mortgage Liquidity du Jour:
Underestimated No More, 28 exhibit 21 (Credit Suisse, Equity Research
Report, Mar. 12, 2007).
\14\ Inside Mortgage Finance, 2010 Mortgage Market Statistical
Annual.
\15\ Inside Mortgage Finance, 2010 Mortgage Market Statistical
Annual. From 2001-2007, only 14 percent of second lien mortgages
originated were securitized. Id. Second lien mortgages create a
conflict of interest beyond the scope of this paper. In many cases,
second lien loans are owned by financial institutions that are
servicing (but do not own) the first lien loan. See Hearing Before the
House Financial Services Committee, Apr. 13, 2009, ``Second Liens and
Other Barriers to Principal Reduction as an Effective Foreclosure
Mitigation Program'' (testimony of Barbara DeSoer, President, Bank of
America Home Loans) at 6 (noting that Bank of America owns the second
lien mortgage on 15 percent of the first lien mortgages it services);
Hearing Before the House Financial Services Committee, Apr. 13, 2009,
``Second Liens and Other Barriers to Principal Reduction as an
Effective Foreclosure Mitigation Program'' (testimony of David Lowman,
CEO for Home Lending, JPMorgan Chase) at 5 (noting that Chase owns the
second lien mortgage on around 10 percent of the first lien mortgages
it services). The ownership of the second while servicing the first
creates a direct financial conflict between the servicer qua servicer
and the servicer qua owner of the second lien mortgage, as the servicer
has an incentive to modify the first lien mortgage in order to free up
borrower cash flow for payments on the second lien mortgage.
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Although mortgage securitization transactions are extremely complex
and vary somewhat depending on the type of entity undertaking the
securitization, the core of the transaction is relatively simple.\16\
---------------------------------------------------------------------------
\16\ The structure illustrated is for private-label mortgage-backed
securities. Ginnie Mae and GSE securitizations are structured somewhat
differently. The private-label structure can, of course, be used to
securitize any asset, from oil tankers to credit card debt to song
catalogues, not just mortgages.
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First, a financial institution (the ``sponsor'' or ``seller'')
assembles a pool of mortgage loans. The loans were either made
(``originated'') by an affiliate of the financial institution or
purchased from unaffiliated third-party originators. Second, the pool
of loans is sold by the sponsor to a special-purpose subsidiary (the
``depositor'') that has no other assets or liabilities. This is done to
segregate the loans from the sponsor's assets and liabilities.\17\
Third, the depositor sells the loans to a passive, specially created,
single-purpose vehicle (SPV), typically a trust in the case of
residential mortgages.\18\ The SPV issues certificated securities to
raise the funds to pay the depositor for the loans. Most of the
securities are debt securities--bonds--but there will also be a
security representing the rights to the residual value of the trust or
the ``equity.''
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\17\ This intermediate entity is not essential to securitization,
but since 2002, Statement of Financial Accountings Standards 140 has
required this additional step for off-balance-sheet treatment because
of the remote possibility that if the originator went bankrupt or into
receivership, the securitization would be treated as a secured loan,
rather than a sale, and the originator would exercise its equitable
right of redemption and reclaim the securitized assets. Deloitte &
Touche, Learning the Norwalk Two-Step, Heads Up, Apr. 25, 2001, at 1.
\18\ The trustee will then typically convey the mortgage notes and
security instruments to a ``master document custodian,'' who manages
the loan documentation, while the servicer handles the collection of
the loans.
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The securities can be sold directly to investors by the SPV or, as
is more common, they are issued directly to the depositor as payment
for the loans. The depositor then resells the securities, usually
through an underwriting affiliate that then places them on the market.
(See Figure 2, below.) The depositor uses the proceeds of the
securities sale (to the underwriter or the market) to pay the sponsor
for the loans. Because the certificated securities are collateralized
by the residential mortgage loans owned by the trust, they are called
residential mortgage-backed securities (RMBS).
A variety of reasons--credit risk (bankruptcy remoteness), off-
balance sheet accounting treatment, and pass-through tax status
(typically as a REMIC \19\ or grantor trust)--mandate that the SPV be
passive; it is little more than a shell to hold the loans and put them
beyond the reach of the creditors of the financial institution.\20\
Loans, however, need to be managed. Bills must be sent out and payments
collected. Thus, a third-party must be brought in to manage the
loans.\21\ This third-party is the servicer. The servicer is supposed
to manage the loans for the benefit of the RMBS holders.
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\19\ A REMIC is a real estate mortgage investment conduit, as
defined under I.R.C. 860A-860G.
\20\ See Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein
Contracts: Workout Prohibitions in Residential Mortgage Backed
Securities, 82 S. Cal. L. Rev. 1075, 1093-98. (2009).
\21\ See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage
Servicers, 15 Housing Pol'y Debate 753, 754 (2004).
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Every loan, irrespective of whether it is securitized, has a
servicer. Sometimes that servicer is a first-party servicer, such as
when a portfolio lender services its own loans. Other times it is a
third-party servicer that services loans it does not own. All
securitizations involve third-party servicers, but many portfolio loans
also have third-party servicers, particularly if they go into default.
Third-party servicing contracts for portfolio loans are not publicly
available, making it hard to say much about them, including the precise
nature of servicing compensation arrangements in these cases or the
degree of oversight portfolio lenders exercise over their third-party
servicers. Thus, it cannot always be assumed that if a loan is not
securitized it is being serviced by the financial institution that owns
the loan, but if the loan is securitized, it has third-party servicing.
Securitization divides the beneficial ownership of the mortgage
loan from legal title to the loan and from the management of the loans.
The SPV (or more precisely its trustee) holds legal title to the loans,
and the trust is the nominal beneficial owner of the loans. The RMBS
investors are formally creditors of the trust, not owners of the loans
held by the trust.
The economic reality, however, is that the investors are the true
beneficial owners. The trust is just a pass-through holding entity,
rather than an operating company. Moreover, while the trustee has
nominal title to the loans for the trust, it is the third-party
servicer that typically exercises legal title in the name of the
trustee. The economic realities of securitization do not track with its
legal formalities; securitization is the apotheosis of legal form over
substance, but punctilious respect for formalities is critical for
securitization to work.
Mortgage servicers provide the critical link between mortgage
borrowers and the SPV and RMBS investors, and servicing arrangements
are an indispensable part of securitization.\22\ Mortgage servicing has
become particularly important with the growth of the securitization
market.
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\22\ The servicing of nonsecuritized loans may also be outsourced.
There is little information about this market because it does not
involve publicly available contracts and does not show up in standard
data.
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Figure 2. Private-Label Mortgage Securitization Structure \23\
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\23\ See ACE Sec. Corp. Home Equity Loan Trust, Series 2006-NC3,
Prospectus Supplement (Form 424B5) S-11 (Nov. 21, 2006), available at
http://www.sec.gov/Archives/edgar/data/1380884/000114420406049985/
v058926_424b5.htm.
B. THE MORTGAGE SERVICING BUSINESS \24\
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\24\ This section of my testimony comes from Adam J. Levitin &
Larry Cordell, What RMBS Servicing Can Learn from CMBS Servicing,
working paper, November 2010.
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The nature of the servicing business in general militates toward
economies of scale and automation. Servicing combines three distinct
lines of business: transaction processing, default management, and loss
mitigation. Transaction processing is a highly automatable business,
characterized by large economies of scale. Default management involves
collections and activities related to taking defaulted loans through
foreclosure. Like transaction processing, default management can be
automated,\25\ as it does not require any negotiation with the
homeowner, insurers, or junior lienholders.\26\
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\25\ See In re Taylor, 407 B.R. 618 (Bankr. E.D. Pa. 2009), rev'd
2010 WL 624909 (E.D. Pa. 2010).
\26\ Arguably servicers have a fourth line of business--the
management of real estate owned (REO). REO are foreclosed properties
that were not purchased by third-parties at the foreclosure sale. REO
management involves caring for and marketing the REO. It does not
require negotiations with the homeowner (who is evicted) or junior
lienholders (whose liens are generally extinguished by the
foreclosure).
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Loss mitigation is considered an alternative to foreclosure, and
includes activities such as repayment plans, loan modifications, short
sales and deeds in lieu of foreclosure. Loss mitigation is always a
negotiated process and is therefore labor-intensive and expensive. Not
only must the homeowner be agreeable to any loss mitigation solution,
but so too must mortgage insurers and junior lienholders if they are
parties on the loan. Because each negotiation is separate and requires
a trained employee, there are very few opportunities for automation or
economies of scale. Labor expenses are also considered overhead, which
are all non-reimbursable expenses to servicers. And, to the extent that
loss mitigation is in the form of a loan modification, redefault and
self-cure risk always lurk in the background. Moreover, loss mitigation
must generally be conducted in addition to default management; the
servicer must proceed with foreclosure even if attempting to find an
alternative, so the cost of loss mitigation is additive. Yet, while
taking a loan through foreclosure is likely to involve lower costs than
pursuing loss mitigation, it may not ultimately maximize value for RMBS
investors because loss severities in foreclosure can easily surpass
those on a re-performing restructured loan.
The balance between these different parts of a servicer's business
changes over the course of the housing cycle. When the housing market
is strong, the transaction processing dominates the servicing business,
but when the housing market is weak, default management and loss
mitigation become more important.
The very short weighted average life (WAL) of RMBS trusts combined
with very low defaults in most economic environments encouraged
servicers to place disproportionate weight on performing loan
servicing, which historically has been characterized by small servicing
fees and enormous economies of scale. Thus, on a typical loan balance
of $200,000 today, a servicer might earn between $500 and $1,000 per
year.\27\ Given the low-level of annual income per loan, the short WAL
of each loan, and low default rates in most economic environments
before 2006, servicers had few incentives to devote resources to loss
mitigation, but large incentives to invest in performing loan
automation to capture the large economies of scale. This left servicers
wholly unprepared for the elevated level of defaults that began in
2007.
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\27\ Servicing fees are generally 25-50 bps, which translates into
$500-$1,000 per year in servicing fees.
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C. RMBS SERVICER COMPENSATION
RMBS servicers' duties and compensation are set forth in a document
called a ``Pooling and Servicing'' agreement (PSA) also governs the
rights of the RMBS certificate holders. RMBS servicers are compensated
in four ways. First, they receive a ``servicing fee,'' which is a flat
fee of 25-50 basis points (bps) and is a first priority payment in the
RMBS trust.\28\ This is by far the greatest portion of servicer income.
This fee is paid out proportionately across all loans regardless of
servicer costs through the economic cycle.
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\28\ Generally the servicing fee is 25 bps for conventional fixed-
rate mortgages, 37.5 bps for conventional ARM loans, 44 bps for
Government loans and 50 bps for subprime.
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Second, servicers earn ``float'' income. Servicers generally
collect mortgage payments at the beginning of the month, but are not
required to remit the payments to the trust until the 25th of the
month. In the interim, servicers invest the funds they have collected
from the mortgagors, and they retain all investment income. Servicers
can also obtain float income from escrow balances collected monthly
from borrowers to pay taxes and insurance during the course of the
year.
Third, servicers are generally permitted to retain all ancillary
fees they can collect from mortgagors. This includes things like late
fees and fees for balance checks or telephone payments. It also
includes fees for expenses involved in handling defaulted mortgages,
such as inspecting the property. Finally, servicers can hold securities
themselves directly as investors, and often hold the junior-most,
residual tranche in the securitization.
Servicers face several costs. In addition to the operational
expenses of sending out billing statements, processing payments,
maintaining account balances and histories, and restructuring or
liquidating defaulted loans, private label RMBS servicers face the
expense of ``servicing advances.''\29\ When a loan defaults, the
servicer is responsible for advancing the missed payments of principal
and interest to the trust as well as paying taxes and insurance on the
property. They continue to pay clear through liquidation of the
property, unless these advances are not deemed recoverable.
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\29\ In Agency securities, servicers generally stop advancing after
borrowers owe their fifth payment, at 120 days past due. For GSE loans,
they are then removed from the securities and taken on balance sheet.
Servicer advances for the four payments are typically not reimbursed
until termination.
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The servicer is able to recover advances it has made either from
liquidation proceeds or from collections on other loans in the pool,
but the RMBS servicer does not receive interest on its advances.
Therefore, advances can be quite costly to servicers in terms of the
time value of money and can also place major strains on servicers'
liquidity, as the obligation to make advances continues until the loan
is liquidated or the servicer believes that it is unlikely to be able
to recover the advances. In some cases, servicers have to advance
years' worth of mortgage payments to the trust.
While RMBS servicers do not receive interest on servicing advances,
they are compensated for their ``out-of-pocket'' expenses. This
includes any expenses spent on preserving the collateral property,
including force-placed insurance, legal fees, and other foreclosure-
related expenses. Large servicers frequently ``in-source'' default
management expenses to their affiliates.
D. MONITORING OF RMBS SERVICERS
RMBS servicing arrangements present a classic principal-agent
problem wherein the agent's incentives are not aligned with the
principal and the principal has limited ability to monitor or
discipline the agent.
1. Investors
Investors are poorly situated to monitor servicer behavior because
they do not have direct dealings with the servicer. RMBS investors lack
information about servicer loss mitigation activity. Investors do not
have access to detailed servicer expense reports or the ability to
examine loss mitigation decisions. Investors are able to see only the
ultimate outcome. This means that investors are limited in their
ability to evaluate servicers' performance on an ongoing basis. And
even if investors were able to detect unfaithful agents, they have
little ability to discipline them short of litigation.\30\
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\30\ Investors also arguably lack a strong incentive to care about
servicer performance. See Levitin & Twomey, supra note __. (Noting that
resecuritization and investor optimism bias means that investors are
likely to either be invested only derivatively in subordinated tranches
or believe that they have selected a tranche that will be ``in-the-
money'' and therefore unaffected by marginal changes in servicer
behavior).
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2. Trustees
RMBS feature a trustee, but the name is deceptive. The trustee is
not a common law trustee with general fiduciary duties. Instead, it is
a limited purpose corporate trustee whose duties depend on whether
there has been a default as defined U.N. the PSA. A failure to pay all
tranches their regularly scheduled principal and interest payments is
not an event of default. Instead, default relates to the financial
condition of the servicer, whether the servicer has made required
advances to the trust, whether the servicer has submitted its monthly
report, and whether the servicer has failed to meet any of its
covenants under the PSA.
Generally, before there is an event of default, the trustee has a
few specifically assigned ministerial duties and no others.\31\ These
duties are typically transmitting funds from the trust to the RMBS
investors and providing investors performance statements based on
figures provided by the servicer. The trustee's pre-default duties do
not include active monitoring of the servicer.
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\31\ See, e.g., Wells Fargo Mortgage Backed Securities 2006-AR10
Trust 8.01 (``Prior to the occurrence of an Event of Default of which
a Responsible Officer of the Trustee shall have actual knowledge and
after the curing of all such Events of Default which may have occurred,
the duties and obligations of the Trustee shall be determined solely by
the express provisions of this Agreement, the Trustee shall not be
liable except for the performance of such duties and obligations as are
specifically set forth in this Agreement, no implied covenants or
obligations shall be read into this Agreement against the Trustee and,
in the absence of bad faith on the part of the Trustee, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or
opinions furnished to the Trustee, and conforming to the requirements
of this Agreement.''). See also Moody's Investor Service, Structured
Finance Ratings Methodology: Moody's Re-examines Trustees' Role in ABS
and RMBS, Feb. 4, 2003, at 4. (noting ``Some trustees have argued that
their responsibilities are limited to strictly administrative functions
as detailed in the transaction documents and that they have no
``fiduciary'' duty prior to an event of default.'').
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Trustees are generally entitled to rely on servicers' data
reporting, and have little obligation to analyze it.\32\ Indeed, as
Moody's has noted, trustees lack the ability to verify most data
reported by servicers; at best they can ensure that the reported data
complies with any applicable covenant ratios:
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\32\ MBIA Ins. Corp. v. Royal Indem. Co., 519 F. Supp. 2d 455
(2007), aff'd 321 Fed. Appx. 146 (3d Cir. 2009) (``Royal argues that
Wells Fargo [the trustee] had the contractual obligation to analyze
data using certain financial accounting principles and to detect any
anomalies that analysis might have uncovered. As Royal suggests, this
analysis may not have been very labor-intensive. Yet, the contract did
not call for any analysis at all. It simply required Wells Fargo to
perform rote comparisons between that data and data contained in
various other sources, and to report any numerical inconsistencies.
Wells Fargo did just that.'').
The trustee is not in a position to verify certain of the
numbers reported by the servicer. For example, the amount of
delinquent receivables and the amount of receivables charged
off in a given month are figures that are taken from the
servicer's own computer systems. While these numbers could be
verified by an auditor, they are not verifiable by the
trustee.\33\
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\33\ Moody's Investor Service, supra note 31, at 4.
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Likewise, as attorney Susan Macaulay has observed:
In most cases, even if the servicer reports are incorrect, or
even fraudulent, absent manifest error, the trustee simply has
no way of knowing that there is a problem, and must allocate
the funds into the appropriate accounts, and make the mandated
distributions, in accordance with the servicer reports.''\34\
\34\ Susan J. Macaulay, U.S.: The Role of the Securitisation
Trustee, Global Securitisation and Structured Finance 2004. Macaulay
further notes that:
It is almost always an event of default under the indenture if the
trustee does not receive a servicer report within a specified period of
time, and the trustee must typically report such a failure to the
investors, any credit enhancement provider, the rating agencies and
others. However, the trustee generally has no duties beyond that with
respect to the contents of the report, although under the TIA, the
trustee must review any reports furnished to it to determine whether
there is any violation of the terms of the indenture. Presumably this
would include verifying that any ratios represented in any reports
conform to financial covenants contained in the indenture, etc. It
would not however, require the trustee to go beyond the face of the
report, i.e., to conduct further investigation to determine whether the
data underlying the information on the reports presented to it were, in
fact, true. Virtually all indentures, whether or not governed by the
TIA, explicitly permit the trustee to rely on statements made to the
trustee in officers' certificates, opinions of counsel and documents
delivered to the trustee in the manner specified within the indenture.
Id.
Similarly, trustees usually wait for servicers to notify them of
defaults,\35\ and Moody's has noted that trustees are often
unresponsive to information from third parties indicating that an
unreported default might have occurred.\36\ Thus, trustees enforce
servicer representations and warranties largely on the honor system of
servicer self-reporting.
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\35\ Moody's Investor Service, supra note 31, at 4.
\36\ Id.
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For private-label securities, trustees also lack the incentive to
engage in more vigorous monitoring of servicer loss mitigation
decisions. The trustee does not get paid more for more vigorous
monitoring. The trustee generally has little ability to discipline the
servicer except for litigation. Private-label RMBS trustees have almost
no ability to fire or discipline a servicer. Servicers can only be
dismissed for specified acts, and these acts are typically limited to
the servicer's insolvency or failure to remit funds to the trust.
Occasionally servicers may be dismissed if default levels exceed
particular thresholds.
Trustees also have no interest in seeing a servicer dismissed
because they often are required to step in as back-up servicer.\37\ In
the event of a servicer default, the trustee takes over as servicer
(which includes the option of subcontracting the duties), and assumes
the duty of making servicing advances to the trust. The back-up
servicer role is essentially an insurance policy for investors, and
activation of that role is equivalent to payment on a claim; a trustee
that has to act as a back-up servicer is likely to lose money in the
process, especially when some of the trustees do not themselves own
servicing operations.
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\37\ Eric Gross, Portfolio Management: The Evolution of Backup
Servicing, Portfolio Financial Servicing Company (PFSC) (July 11, 2002)
at http://www.securitization.net/knowledge/article.asp?id=147&aid=2047.
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Trustees also often have close relationships with particular
servicers. For example, Professor Tara Twomey and I have shown that
Bank of America/Countrywide accounts for nearly two-thirds of Deutsche
Bank's RMBS trustee business.\38\ In such circumstances, trustees are
unlikely to engage in meaningful monitoring and disciplining of
servicers.\39\ Amherst Securities points out that early payment default
provisions are not effectively enforced by trustees, to the point where
in cases where borrowers did not make a single payment on the mortgage,
only 37 percent were purchased out of the trust, much smaller amounts
for loans making only one to six payments.\40\ Thus, for private-label
RMBS, there is virtually no supervision of servicers.\41\
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\38\ Levitin & Twomey, supra note __.
\39\ See Ellington Credit Fund, Ltd. v. Select Portfolio, Inc., No.
1:07-cv-00421-LY, W.D. Tex., Plaintiffs' First Amended Complaint, July
10, 2007 (RMBS residual tranche holder alleging that trustee was aware
that servicer was in violation of PSA and failed to act).
\40\ See Amherst Mortgage Insight, supra note __, at 15.
\41\ For MBS with separate master and primary servicers, the master
servicer may monitor the primary servicer(s), but often the master and
primary servicers are the same entity.
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GSE and Ginnie Mae securitization have greater oversight of
servicers. The GSEs serve as master servicers on most of their RMBS;
they therefore have a greater ability to monitor servicer compliance.
The GSEs require servicers to foreclose according to detailed
timelines, and servicers that fail to comply face monetary penalties.
Recognizing the benefits inherent in effective loss mitigation, Fannie
Mae places staff directly in all of the largest servicer shops to work
alongside loss mitigation staff at their servicers.\42\ Freddie Mac
constructed servicer performance profiles to directly monitor
servicers, sharing results directly with servicers and rating agencies.
Since each GSE insures against credit losses on the loans, their
ongoing monitoring provides consistent rules and a single point of
contact to approve workout packages and grant exceptions, something
absent in private label RMBS.
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\42\ PMI insurers have recently started to embed staff in servicer
shops to monitor loss mitigation efforts. Harry Terris & Kate Berry, In
the Trenches, Am. Banker, Aug. 27, 2009.
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3. Ratings and Reputation
Like any repeat transaction business, servicers are concerned about
their reputations. But reputational sanctions have only very weak
discipline on servicer behavior.
While Regulation AB requires servicers to disclose information
about their experience and practices,\43\ they are not required to
disclose information about performance of past pools they have
serviced. In any event, reputational sanctions are ineffective because
loss severities are more likely to be attributed to underwriting
quality than to servicing decisions. Rating agencies also produce
servicer ratings, but these ratings are a compilation of the evaluation
of servicers on a multitude of characteristics. Rating agencies have
been known to incorporate features of Freddie Mac's servicer
performance profiles in their servicer assessments and to incorporate
loss mitigation performance into their ratings. But details of their
methodology used to measure these assessments are not disclosed. They
give no indication of whether a servicer is likely to make loss
mitigation decisions based solely on the interests of the
securitization trust. Ratings are also combined with other criteria,
such as the servicer's own financial strength and operational capacity.
In other words, servicer ratings go to the question of whether a
servicer will have to be replaced because it is insolvent or lacks the
ability to service the loans, with much less weight given to whether
the servicer acts in the investors' interests.
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\43\ 17 C.F.R. Sec. 229.1108.
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C. THE MORTGAGE CONTRACT AND FORECLOSURE PROCESS
The mortgage contract consists of two documents, a promissory note
(the ``note'' or the ``mortgage loan'') and a security instrument (the
``mortgage'' or the ``deed of trust'').\44\ The note is the IOU that
contains the borrower's promise to repay the money loaned. If the note
is a negotiable instrument, meaning that it complies with the
requirements for negotiability in Article 3 of the Uniform Commercial
Code,\45\ then the original physical note is itself the right to
payment.\46\
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\44\ The note and the mortgage can be combined in a single
document, but that is not common practice, both because the mortgage
can be granted subsequent to the creation of the debt and because of
borrower privacy concerns about the terms of the note, which would
become public if the note and mortgage were combined and recorded in
local property records.
\45\ See UCC 3-104.
\46\ UCC 3-203, Cmt. 1 (``An instrument is a reified right to
payment. The right is represented by the instrument itself.'').
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The mortgage is the document that connects the IOU with the house.
The mortgage gives the lender a contingent right to the house; it
provides that if the borrower does not pay according to the terms of
the note, then the lender can foreclose and have the property sold
according to the terms of the mortgage and applicable State and Federal
law. The applicable law governing foreclosures is State law.\47\
---------------------------------------------------------------------------
\47\ There is a Federal foreclosure statute that can be utilized by
FHA.
---------------------------------------------------------------------------
State real estate law, including foreclosure law, is non-uniform,
making it difficult to State what the law is as a generic matter; there
is always the possibility that some jurisdictions may deviate from the
majority rule. That said, no State requires a borrower's note to be
recorded in local land records for the note to be valid, and, as a
general matter, State law does not require the mortgage to be recorded
either in order for the mortgage to be enforceable against the
borrower. Recording of the mortgage is necessary, however, to establish
the mortgage's priority relative to the claims of other parties,
including other mortgagees, judgment lien creditors and tax and
workmen's liens against the property. The basic rule of priority is
first in time, first in right; the first mortgage to be recorded has
senior priority. An unrecorded mortgage will thus, generally have
junior priority to a subsequently issued, but recorded mortgage. The
difference between enforceability and priority is an important one,
discussed in more detail below, in the section of this testimony
dealing with MERS.
State law on foreclosures is also non-uniform. Roughly, however,
States can be divided into two groups: those where foreclosure actions
are conducted through the courts (``judicial foreclosure'') and those
where foreclosure actions are conducted by private sales (``non-
judicial foreclosure''). This division maps, imperfectly, with whether
the preferred security instrument is a mortgage or a deed of trust.\48\
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\48\ Mortgages sometimes also include a power of sale, permitting
non-judicial foreclosure. In a deed of trust, the deed to the property
is transferred in trust for the noteholder to a deed of trust trustee,
often a local attorney. The note remains the property of the lender
(the deed of trust beneficiary). When there is a default on the note,
the lender notifies the deed of trust trustee and the lender or its
agent is typically appointed as substitute deed of trust trustee to run
the foreclosure sale.
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Mortgage loans cost more in States that have judicial foreclosure;
what this means is that borrowers in judicial foreclosure States are
paying more for additional procedural rights and legal protections;
those procedural rights are part of the mortgage contract; failure to
honor them is a breach of the mortgage contract. Note, that a default
on the mortgage note is not a breach of the contract per se; instead it
merely triggers the lender's right to foreclose per the applicable
procedure.
In a typical judicial foreclosure proceeding, the homeowner
receives a notice of default and if that default is not cured within
the required period, the mortgagee then files a foreclosure action in
court. The action is commenced by the filing of a written complaint
that sets forth the mortgagee's allegations that the homeowner owes a
debt that is secured by a mortgage and that the homeowner has defaulted
on the debt. Rules of civil procedure generally require that legal
actions based upon a writing include a copy of the writing as an
attachment to the complaint, although there is sometimes an exception
for writings that are available in the public records. While the
mortgage is generally filed in the public records, assignments of the
mortgage are often not (an issue complicated by MERS, discussed below),
and the note is almost never a matter of public record.
It is important to understand that most judicial foreclosures do
not function like the sort of judicial proceeding that is dramatized on
television, in which all parties to the case appear in court,
represented by attorneys and judgment only follows a lengthy trial.
Instead, the norm in foreclosure cases is a default judgment. Most
borrowers do not appear in court or contest their foreclosures, and not
all of those who do are represented by competent counsel, not least
because of the difficulties in paying for counsel. Most borrowers that
the borrower does not contest the foreclosure or appear in court. In
most cases, only the lender's attorney appears, and judges routinely
dispatch dozens or hundreds of foreclosure cases in a sitting.
Homeowners in foreclosure actions are among the most vulnerable of
defendants, the least able to insist up on and vindicate their rights,
and accordingly the ones most susceptible to abuse of legal process.
II. PROCEDURAL PROBLEMS AND FRAUD
The first type of problems in the mortgage market are what might
generously be termed ``procedural defects'' or ``procedural
irregularities.'' There are numerous such problems that have come to
light in foreclosure cases. The extent and distribution of these
irregularities is not yet known. No one has compiled a complete
typology of procedural defects in foreclosures; there are, to use
Donald Rumsfeld's phrase, certainly ``known unknowns'' and well as
``unknown unknowns.''
A. AFFIDAVITS FILED WITHOUT PERSONAL KNOWLEDGE (ROBOSIGNING)
Affidavits need to be based on personal knowledge to have any
evidentiary effect; absent personal knowledge an affidavit is hearsay
and therefore generally inadmissible as evidence. Accordingly,
affidavits attest to personal knowledge of the facts alleged therein.
The most common type of affidavit is an attestation about the
existence and status of the loan, namely that the homeowner owes a
debt, how much is currently owed, and that the homeowner has defaulted
on the loan. (Other types of affidavits are discussed in sections II.B.
and II.C., infra). Such an affidavit is typically sworn out by an
employee of a servicer (or sometimes by a law firm working for a
servicer). Personal knowledge for such an affidavit would involve, at
the very least, examining the payment history for a loan in the
servicer's computer system and checking it against the facts alleged in
a complaint.
The problem with affidavits filed in many foreclosure cases is that
the affiant lacks any personal knowledge of the facts alleged
whatsoever. Many servicers, including Bank of America, Citibank,
JPMorgan Chase, Wells Fargo, and GMAC, employ professional affiants,
some of whom appear to have no other duties than to sign affidavits.
These employees cannot possibly have personal knowledge of the facts in
their affidavits. One GMAC employee, Jeffrey Stephan, stated in a
deposition that he signed perhaps 10,000 affidavits in a month, or
approximately one a minute for a 40-hour work week.\49\ For a
servicer's employee to ascertain payment histories in a high volume of
individual cases is simply impossible.
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\49\ See Deposition of Jeffrey Stephan, GMAC Mortgage LLC v. Ann M.
Neu a/k/a Ann Michelle Perez, No. 50 2008 CA 040805XXXX MB, (15th
Judicial Circuit, Florida, Dec. 10, 2009) at 7, available at http://
api.ning.com/files/s4SMwlZXvPu4A7kq7XQUsGW9xEcYtqNMPCm0a2hISJ
u88PoY6ZNqanX7XK41Fyf9gV8JIHDme7KcFO2cvHqSEMcplJ8vwnDT/
091210gmacmortgagevs-
annmneu1.pdf (stating that Jeffrey Stephan, a GMAC employee, signed
approximately 10,000 affidavits a month for foreclosure cases).
---------------------------------------------------------------------------
When a servicer files an affidavit that claims to be based on
personal knowledge, but is not in fact based on personal knowledge, the
servicer is committing a fraud on the court, and quite possibly
perjury. The existence of foreclosures based on fraudulent pleadings
raises the question of the validity of foreclosure judgments and
therefore title on properties, particularly if they are still in real
estate owned (REO).
B. LOST NOTE AFFIDAVITS FOR NOTES THAT ARE NOT LOST
The plaintiff in a foreclosure action is generally required to
produce the note as evidence that it has standing to foreclose.
Moreover, under the Uniform Commercial Code, if the note is a
negotiable instrument, only a holder of the note (or a subrogee)--that
is a party in possession of the note--may enforce the note, as the note
is the reified right to payment.\50\
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\50\ UCC 3-301; 1-201(b)(21) (defining ``holder'').
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There is an exception, however, for lost, destroyed, or stolen
notes, which permits a party that has lost possession of a note to
enforce it.\51\ If a plaintiff seeks to enforce a lost note, it is
necessary ``to prove the terms of the instrument'' as well as the
``right to enforce the instrument.''\52\ This proof is typically
offered in the form of a lost note affidavit that attests to the prior
existence of the note, the terms of the note, and that the note has
been lost.
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\51\ UCC 3-309. Note that UCC 3-309 was amended in the 2001
revision of Article 3. The revision made it easier to enforce a lost
note. Not every State has adopted the 2001 revisions. Therefore, UCC 3-
309 is non-uniform law.
\52\ UCC 3-309(b).
---------------------------------------------------------------------------
It appears that a surprisingly large number of lost note affidavits
are filed in foreclosure cases. In Broward County, Florida alone, over
2000 such affidavits were filed in 2008-2009.\53\ Relative to the
national population, that translates to roughly 116,000 lost note
affidavits nationally over the same period.\54\
---------------------------------------------------------------------------
\53\ Cite NY Times.
\54\ According to the U.S. Census Bureau, Broward County's
population is approximately 1.76 million, making it .57 percent of the
total U.S. population of 307 million. Broward does have a significantly
higher than average foreclosure rate, roughly 12 percent over the past
2 years, according to Core Logic Loan Performance data, making it
approximately 3 times the national average.
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There are two problems with the filing of many lost note
affidavits. First, is a lack of personal knowledge. Mortgage servicers
are rarely in possession of the original note. Instead, the original
note is maintained in the fireproof vault of the securitization
trustee's document custodian. This means that the servicer lacks
personal knowledge about whether a note has or has not been lost.\55\
Merely reporting a communication from the document custodian would be
hearsay and likely inadmissible as evidence.
---------------------------------------------------------------------------
\55\ The 2001 version of UCC 3-309 permits not only a party that
has lost a note but a buyer from such a party to enforce a lost note.
---------------------------------------------------------------------------
The second problem is that the original note is frequently not in
fact lost. Instead, it is in the document custodian's vault. Servicers
do not want to pay the document custodian a fee (of perhaps $30) to
release the original mortgage, and servicers are also wary of
entrusting the original note to the law firms they hire. Substitution
of counsel is not infrequent on defaulted mortgages, and servicers are
worried that the original note will get lost in the paperwork shuffle
if there is a change in counsel. When pressed, however, servicers will
often produce the original note, months after filing lost note
affidavits. The Uniform Commercial Code (UCC) requires that a party
seeking to enforce a note be a holder (or subrogee to a holder) or
produce evidence that a note has been lost, destroyed, or stolen; the
UCC never contemplates an ``inconvenience affidavit'' that states that
it is too much trouble for a servicer to bother obtaining the original
note. But that is precisely what many lost note affidavits are
effectively claiming.
Thus, many lost note affidavits are doubly defective: they are
sworn out by a party that does not and cannot have personal knowledge
of the alleged facts and the facts being alleged are often false as the
note is not in fact lost, but the servicer simply does not want to
bother obtaining it.
C. JUNK FEES
The costs of foreclosure actions are initially incurred by
servicers, but servicers recover these fees off the top from
foreclosure sale proceeds before MBS investors are paid. This
reimbursement structure limits servicers' incentive to rein in costs
and actually incentives them to pad the costs of foreclosure. This is
done in two ways. First, servicers charge so-called ``junk fees''
either for unnecessary work or for work that was simply never done.
Thus, Professor Kurt Eggert has noted a variety of abusive servicing
practices, including ``improper foreclosures or attempted foreclosures;
imposition of improper fees, especially late fees; forced-placed
insurance that is not required or called for; and misuse of escrow
funds.''\56\ Servicers' ability to retain foreclosure-related fees has
even led them to attempt to foreclose on properties when the homeowners
are current on the mortgage or without attempting any sort of repayment
plan.\57\ Consistently, Professor Katherine Porter has documented that
when mortgage creditors file claims in bankruptcy, they generally list
amounts owed that are much higher than those scheduled by debtors.\58\
---------------------------------------------------------------------------
\56\ Kurt Eggert, Comment on Michael A. Stegman et al.'s
``Preventive Servicing Is Good for Business and Affordable
Homeownership Policy'': What Prevents Loan Modifications?, 18 Housing
Policy Debate 279 (2007).
\57\ Eggert, Limiting Abuse, supra note 21, at 757.
\58\ Katherine M. Porter, Mortgage Misbehavior, 87 Tex. L. Rev.
121, 162 (2008).
---------------------------------------------------------------------------
There is also growing evidence of servicers requesting payment for
services not performed or for which there was no contractual right to
payment. For example, in one particularly egregious case from 2008,
Wells Fargo filed a claim in the borrower's bankruptcy case that
included the costs of two brokers' price opinions allegedly obtained in
September 2005, on a property in Jefferson Parish, Louisiana when the
entire Parish was under an evacuation order due to Hurricane
Katrina.\59\
---------------------------------------------------------------------------
\59\ In re Stewart, 391 B.R. 327, 355 (Bankr. E.D. La. 2008).
---------------------------------------------------------------------------
Similarly, there is a frequent problem of so-called ``sewer
summons'' issued (or actually not issued) to homeowners in
foreclosures. Among the costs of foreclosure actions is serving notice
of the foreclosure (a court summons) on the homeowner. There is
disturbing evidence that homeowners are being charged for summons that
were never issued. These non-delivered summons are known as ``sewer
summons'' after their actual delivery destination.
One way in which these non-existent summons are documented is
through the filing of ``affidavits of lost summons'' by process servers
working for the foreclosure attorneys hired by mortgage servicers. A
recent article reports that in Duval County, Florida (Jacksonville) the
number of affidavits of lost summons has ballooned from 1,031 from
2000-2006 to over 4,000 in the last 2 years, a suspiciously large
increase that corresponds with a sharp uptick in foreclosures.\60\
---------------------------------------------------------------------------
\60\ Matt Taibi, Courts Helping Banks Screw Over Homeowners,
Rolling Stone, Nov. 25, 2010, at http://www.rollingstone.com/politics/
news/17390/232611?RS_show_page=7.
---------------------------------------------------------------------------
Because of concerns about illegal fees, the United States Trustee's
Office has undertaken several investigations of servicers' false claims
in bankruptcy \61\ and brought suit against Countrywide,\62\ while the
Texas Attorney General has sued American Home Mortgage Servicing for
illegal debt collection practices.\63\
---------------------------------------------------------------------------
\61\ Ashby Jones, U.S. Trustee Program Playing Tough With
Countrywide, Others, Law Blog (Dec. 3, 2007, 10:01 AM), http://
blogs.wsj.com/law/2007/12/03/us-trustee-program-playing-tough-with-
countrywide-others.
\62\ Complaint, Walton v. Countrywide Home Loans, Inc. (In re
Atchely), No. 05-79232 (Bankr. N.D. Ga. filed Feb. 28, 2008).
\63\ Complaint, State v. Am. Home Mtg. Servicing, Inc., No. 2010-
3307 (Tex. Dist. Ct. 448th Jud. Dist. filed Aug. 30, 2010).
---------------------------------------------------------------------------
The other way in which servicers pad the costs of foreclosure is by
in-sourcing their expenses to affiliates at above-market rates. For
example, Countrywide, the largest RMBS servicer, force places insurance
on defaulted properties with its captive insurance affiliate
Balboa.\64\ Countrywide has been accused of deliberately extending the
time to foreclosure in order to increase the insurance premiums paid to
its affiliate, all of which are reimbursable by the trust, before the
RMBS investors' claims are paid.\65\ Similarly, Countrywide in-sources
trustee services in deed of trust foreclosures to its subsidiary Recon
Trust.\66\
---------------------------------------------------------------------------
\64\ Amherst Mortgage Securities, supra note__, at 23.
\65\ Id.
\66\ Center for Responsible Lending, Unfair and Unsafe: How
Countrywide's irresponsible practices have harmed borrowers and
shareholders, CRL Issue Paper, Feb. 7, 2008, at 6-7.
---------------------------------------------------------------------------
Thus, in Countrywide's 2007 third quarter earnings call,
Countrywide's President David Sambol emphasized that increased revenue
from in-sourced default management functions could offset losses from
mortgage defaults.
Now, we are frequently asked what the impact on our servicing
costs and earnings will be from increased delinquencies and
loss mitigation efforts, and what happens to costs. And what we
point out is, as I will now, is that increased operating
expenses in times like this tend to be fully offset by
increases in ancillary income in our servicing operation,
greater fee income from items like late charges, and
importantly from in-sourced vendor functions that represent
part of our diversification strategy, a counter-cyclical
diversification strategy such as our businesses involved in
foreclosure trustee and default title services and property
inspection services.\67\
---------------------------------------------------------------------------
\67\ Transcript, ``Countrywide Financial Corporation Q3 2007
Earnings Call,'' Oct. 26, 2007 (emphasis added) (also mentioning ``Our
vertical diversification businesses, some of which I mentioned, are
counter-cyclical to credit cycles, like the lender-placed property
business in Balboa and like the in-source vendor businesses in our loan
administration unit.'').
In June, 2010, Countrywide settled with the FTC for $108 million on
charges that it overcharged delinquent homeowners for default
---------------------------------------------------------------------------
management services. According to the FTC:
Countrywide ordered property inspections, lawn mowing, and
other services meant to protect the lender's interest in the
property. But rather than simply hire third-party vendors to
perform the services, Countrywide created subsidiaries to hire
the vendors. The subsidiaries marked up the price of the
services charged by the vendors--often by 100 percent or more--
and Countrywide then charged the homeowners the marked-up
fees.\68\
---------------------------------------------------------------------------
\68\ FTC, Press Release, June 7, 2010, Countrywide Will Pay $108
Million for Overcharging Struggling Homeowners; Loan Servicer Inflated
Fees, Mishandled Loans of Borrowers in Bankruptcy.
Among the accusations brought against Countrywide in a recent
investor notice of default filed by the Federal Reserve Bank of New
York along with BlackRock and PIMCO, is that Countrywide has been
padding expenses via in-sourcing on the 115 trusts covered by the
letter.\69\
---------------------------------------------------------------------------
\69\ Kathy D. Patrick, Letter to Countrywide Home Loan Servicing LP
and the Bank of New York, dated Oct. 18, 2010, available at http://
www.scribd.com/Bondholders-Letter-to-BofA-Over-Countrywide-Loans-inc-
NY-fed/d/39686107.
---------------------------------------------------------------------------
Countrywide is hardly the only servicer accused of acting in its
interests at the expense of investors. Carrington, another major
servicer, also owns the residual tranche on many of the deals it
services. Amherst Mortgage Securities has shown that Carrington has
been much slower than other servicers to liquidate defaulted loans.\70\
Delay benefits Carrington both as a servicer and as the residual
tranche investor. As a servicer, delay helps Carrington by increasing
the number of monthly late fees that it can levy on the loans. These
late fees are paid from liquidation proceeds before any of the MBS
investors.
---------------------------------------------------------------------------
\70\ Amherst Mortgage Insight, 2010, ``The Elephant in the Room-
Conflicts of Interest in Residential Mortgage Securitizations'', pp.
22-24, May 20, 2010.
---------------------------------------------------------------------------
As an investor in the residual tranche, Carrington has also been
accused of engaging in excessive modifications to both capture late
fees and to keep up the excess spread in the deals, as it is paid
directly to the residual holders.\71\ When loans were mass modified,
Carrington benefited as the servicer by capitalizing late fees and
advances into the principal balance of the modified loans, which
increased the balance on which the servicing fee was calculated.
Carrington also benefited as the residual holder by keeping up excess
spread in the deals and delaying delinquency deal triggers that
restrict payments to residual holders when delinquencies exceed
specified levels. Assuming that the residual tranche would be out of
the money upon a timely foreclosure, delay means that Carrington, as
the residual holder, receives many more months of additional payments
on the MBS it holds than it otherwise would.\72\
---------------------------------------------------------------------------
\71\ See Amherst Mortgage Insight, ``Why Investors Should Oppose
Servicer Safe Harbors'', April 28, 2009. Excess spread is the
difference between the income of the SPV in a given period and its
payment obligations on the MBS in that period, essentially the SPV's
periodic profit. Excess spread is accumulated to supplement future
shortfalls in the SPV's cash flow, but is either periodically released
to the residual tranche holder. Generally, as a further protection for
senior MBS holders, excess spread cannot be released if certain
triggers occur, like a decline in the amount of excess spread trapped
in a period beneath a particular threshold.
\72\ Carrington would still have to make servicing advances on any
delinquent loans if it stretched out the time before foreclosure, but
these advances would be reimbursable, and the reimbursement would come
from senior MBS holders, rather than from Carrington, if it were out of
the money in the residual.
---------------------------------------------------------------------------
It is important to emphasize that junk fees on homeowners
ultimately come out of the pocket of MBS investors. If the homeowner
lacks sufficient equity in the property to cover the amount owed on the
loan, including junk fees, then there is a deficiency from the
foreclosure sale. As many mortgages are legally or functionally non-
recourse, this means that the deficiency cannot be collected from the
homeowner's other assets. Mortgage servicers recover their expenses off
the top in foreclosure sales, before MBS investors are paid. Therefore,
when a servicer lards on illegal fees in a foreclosure, it is stealing
from investors such as pension plans and the U.S. Government.
D. COMPLAINTS THAT FAIL TO INCLUDE THE NOTE
Rule of civil procedure generally require that a compliant based on
a writing include, as an attachment, a copy of a writing. In a
foreclosure action, this means that both the note and the mortgage and
any assignments of either must be attached. Beyond the rules of civil
procedure requirement, these documents are also necessary as an
evidentiary matter to establish that the plaintiff has standing to
bring the foreclosure. Some States have exceptions for public records,
which may be incorporated by reference, but it is not always clear
whether this exception applies in foreclosure actions. If it does, then
only the note, which is not a public record, would need to be attached.
Many foreclosure complaints are facially defective and should be
dismissed because they fail to attach the note. I have recently
examined a small sample of foreclosure cases filed in Allegheny County,
Pennsylvania (Pittsburgh and environs) in May 2010. In over 60 percent
of those foreclosure filings, the complaint failed to include a copy of
the note. Failure to attach the note appears to be routine practice for
some of the foreclosure mill law firms, including two that handle all
of Bank of America's foreclosures.
I would urge the Committee to ask Bank of America whether this was
an issue it examined in its internal review of its foreclosure
practices.
E. COUNTERFEIT AND ALTERED DOCUMENTS AND NOTARY FRAUD
Perhaps the most disturbing problem that has appeared in
foreclosure cases is evidence of counterfeit or altered documents and
false notarizations. To give some examples, there are cases in which
multiple copies of the ``true original note'' are filed in the same
case, with variations in the ``true original note;''\73\ signatures on
note allonges that have clearly been affixed to documents via
Photoshop;\74\ ``blue ink'' notarizations that appear in blank ink;
counterfeit notary seals;\75\ backdated notarizations of documents
issued before the notary had his or her commission;\76\ and assignments
that include the words ``bogus assignee for intervening asmts, whose
address is XXXXXXXXXXXXXXXXX.''\77\
---------------------------------------------------------------------------
\73\ Brief of Antonio Ibanez, Defendant-Appellee, U.S. Bank Nat'l
Assn, as Trustee for the Structured Asset Securities Corporation
Mortgage Pass-Through Certificates, Series 2006-Z v. Ibanez; Wells
Fargo Bank, N.A. as Trustee for ABFC 2005-Opt 1 Trust, ABFC Asset
Backed Certificates Series 2005-OPT 1, No 10694, (Mass. Sept. 20,
2010), at 10 (detailing 3 different ``certified true copies'' of a note
allonge and of an assignment of a mortgage); http://4closurefraud.org/
2010/04/27/foreclosure-fraud-of-the-week-two-original-wet-ink-notes-
submitted-in-the-same-case-by-the-florida-default-law-group-and-
jpmorgan-chase/ (detailing a foreclosure file with two different
``original'' wet ink notes for the same loan).
\74\ http://4closurefraud.org/2010/04/08/foreclosure-fraud-of-the-
week-poor-photoshop-skills/.
\75\ See WSTB.com, at http://www.wsbtv.com/video/25764145/
index.html.
\76\ Deposition of Cheryl Samons, Deutsche Bank Nat'l Trust Co., as
Trustee for Morgan Stanley ABS Capital 1 Inc. Trust 2006-HE4 v. Pierre,
No. 50-2008-CA-028558-XXXX-MB (15th Judicial Circuit, Florida, May 20,
2009, available at http://mattweidnerlaw.com/blog/wpcontent/ uploads/
2010/03/depositionsammons.pdf.
\77\ http://www.nassauclerk.com/clerk/publicrecords/oncoreweb/
showdetails.aspx?id=809395&
rn=0&pi=0&ref=search.
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Most worrisome is evidence that these frauds might not be one-off
problems, but an integral part of the foreclosure business. A price
sheet from a company called DocEx that was affiliated with LPS, one of
the largest servicer support firms, lists prices for various services
including the ``creation'' of notes and mortgages. While I cannot
confirm the authenticity of this price sheet or date it, it suggests
that document counterfeiting is hardly exceptional in foreclosure
cases.
While the fraud in these cases is not always by servicers
themselves, but sometimes by servicer support firms or attorneys, its
existence should raise serious concerns about the integrity of the
foreclosure process. I would urge the Committee to ask the servicer
witnesses what steps they have taken to ascertain that they do not have
such problems with loans in their servicing portfolios.
G. THE EXTENT OF THE PROBLEM
The critical question for gauging the risk presented by procedural
defects is the extent of the defects. While Federal Reserve Chairman
Bernanke has announced that Federal bank regulators are looking into
the issue and will issue a report this month, I do not believe that it
is within the ability of Federal bank regulators to gauge the extent of
procedural defects in foreclosure cases. To do so would require, at the
very least, an extensive sampling of actual foreclosure filings and
their examination by appropriately trained personnel. I am unaware of
Federal bank regulators undertaking an examination of actual
foreclosure filings, much less having a sufficient cadre of
appropriately trained personnel. Bank examiners lack the experience or
training to evaluate legal documents like foreclosure filings.
Therefore, any statement put forth by Federal regulators on the scope
of procedural defects is at best a guess and at worse a parroting of
the ``nothing to see here folks'' line that has come from mortgage
servicers.
I would urge the Committee to inquire with Federal regulators as to
exactly what steps they are taking to examine foreclosure
irregularities and how they can be sure that those steps will uncover
the extent of the problem. Similarly, I would urge the Committee to ask
the servicer witnesses what specific irregularities they examined
during their self-imposed moratoria and by what process. It defies
credulity that a thorough investigation of all the potential problems
in foreclosure paperwork could be completed in a month or two, much
less by servicers that have taken so long to do a small number of loan
modifications.
III. CHAIN OF TITLE PROBLEMS
A second problem and potentially more serious problem relating to
standing to foreclose is the issue of chain of title in mortgage
securitizations.\78\ As explained above, securitization involves a
series of transfers of both the note and the mortgage from originator
to sponsor to depositor to trust. This particular chain of transfers is
necessary to ensure that the loans are ``bankruptcy remote'' once they
have been placed in the trust, meaning that if any of the upstream
transferors were to file for bankruptcy, the bankruptcy estate could
not lay claim to the loans in the trust by arguing that the transaction
was not a true sale, but actually a secured loan.\79\ Bankruptcy
remoteness is an essential component of private-label mortgage
securitization deals, as investors want to assume the credit risk
solely of the mortgages, not of the mortgages' originators or
securitization sponsors. Absent bankruptcy remoteness, the economics of
mortgage securitization do not work in most cases.
---------------------------------------------------------------------------
\78\ Chain of title problems appear to be primarily a problem for
private-label securitization, not for agency securitization because
even if title were not properly transferred for Agency securities, it
would have little consequence. Investors would not have incurred a loss
as the result of an ineffective transfer, as their MBS are guaranteed
by the GSEs or Ginnie Mae, and when a loan in an Agency pool defaults,
it is removed from the pool and the owned by the GSE or Ginnie Mae,
which is then has standing to foreclose.
\79\ Bankruptcy remote has a second meaning, namely that the trust
cannot or will not file of bankruptcy. This testimony uses bankruptcy
remote solely in the sense of whether the trust's assets could be
clawed back into a bankruptcy estate via an equity of redemption. The
Uniform Commercial Code permits a debtor to redeem collateral at face
value of the debt owed. If a pool of loans bore a now-above-market
interest rate, the pool's value could be above the face value of the
debt owed, making redemption economically attractive.
It can be very difficult to distinguish true sales from secured
loans. For example, a sale and repurchase agreement (a repo) is
economically identical to a secured loan from the repo buyer to the
repo seller, secured by the assets being sold.
---------------------------------------------------------------------------
Recently, arguments have been raised in foreclosure litigation
about whether the notes and mortgages were in fact properly transferred
to the securitization trusts. This is a critical issue because the
trust has standing to foreclose if, and only if it is the mortgagee. If
the notes and mortgages were not transferred to the trust, then the
trust lacks standing to foreclose. There are several different theories
about the defects in the transfer process; I do not attempt to do
justice to any of them in this testimony.
While the chain of title issue has arisen first in foreclosure
defense cases, it also has profound implications for MBS investors. If
the notes and mortgages were not properly transferred to the trusts,
then the mortgage-backed securities that the investors' purchased were
in fact non-mortgage-backed securities. In such a case, investors would
have a claim for the rescission of the MBS,\80\ meaning that the
securitization would be unwound, with investors receiving back their
original payments at par (possibly with interest at the judgment rate).
Rescission would mean that the securitization sponsor would have the
notes and mortgages on its books, meaning that the losses on the loans
would be the securitization sponsor's, not the MBS investors, and that
the securitization sponsor would have to have risk-weighted capital for
the mortgages. If this problem exists on a wide-scale, there is not the
capital in the financial system to pay for the rescission claims; the
rescission claims would be in the trillions of dollars, making the
major banking institutions in the United States would be insolvent.
---------------------------------------------------------------------------
\80\ This claim would not be a putback claim necessarily, but could
be brought as a general contract claim. It could not be brought as a
securities law claim under section 11 of the Securities Act of 1933
because the statute of limitations for rescission has expired on all
PLS.
---------------------------------------------------------------------------
The key questions for evaluating chain of title are what method of
transferring notes and mortgages is actually supposed to be used in
securitization and whether that method is legally sufficient both as a
generic matter and as applied. There is a surprising degree of legal
uncertainty over these issues, even among banks' attorneys; different
arguments appear in different litigation. The following section
outlines the potential methods of transfer and some of the issues that
arise regarding specific methods. It is critical to emphasize that the
law is not settled on most of the issues regarding securitization
transfers; instead, these issues are just starting to be litigated.
A. TRANSFERS OF NOTES AND MORTGAGES
As a generic matter, a note can be transferred in one of four
methods:
(1) the note can be sold via a contract of sale, which would be
governed by the common law of contracts.
(2) if the note is a negotiable instrument, it could be negotiated,
meaning that it would be transferred via endorsement and
delivery, with the process governed by Article 3 of the Uniform
Commercial Code (UCC). The endorsement.
(3) the note could be converted into an electronic note and
transferred according to the provisions of the Federal E-SIGN
Act.\81\
---------------------------------------------------------------------------
\81\ 15 U.S.C. Sec. 7021.
(4) The note could be sold pursuant to UCC Article 9. In 49 States
(South Carolina being the exception), Article 9 provides a
method for selling a promissory note, which requires that there
be an authenticated (signed) agreement, value given, and that
the seller have rights in the property being transferred.\82\
This process is very similar to a common law sale.
---------------------------------------------------------------------------
\82\ UCC 9-203. The language of Article 9 is abstruse, but UCC
Revised Article 1 defines ``security interest'' to include the interest
of a buyer of a promissory note. UCC 1-201(b)(35). Article 9's
definition of ``debtor'' includes a seller of a promissory note, UCC 9-
102(a)(28)(B ), and ``secured party'' includes a buyer of a promissory
note, UCC 9-102(a)(72)(D). Therefore UCC 9-203, which would initially
appear to address the attachment (enforceability) of a security
interest also covers the sale of a promissory note. South Carolina has
not adopted the revised Article 1 definition of security interest
necessary to make Article 9 apply to sales of promissory notes.
There is general agreement that as a generic method, any of these
methods of transfer would work to effectuate a transfer of the note. No
method is mandatory. Whether or not the chosen process was observed in
practice, is another matter, however.\83\
---------------------------------------------------------------------------
\83\ Note that common law sales and Article 9 sales do not affect
the enforceability of the note against the obligor on the note. UCC 9-
308, Cmt.6, Ex. 3 (``Under this Article, attachment and perfection of a
security interest in a secured right to payment do not of themselves
affect the obligation to pay. For example, if the obligation is
evidenced by a negotiable note, then Article 3 dictates the person to
whom the maker must pay to discharge the note and any lien security
it.''). UCC Article 3 negotiation and E-SIGN do affect enforceability
as they enable a buyer for value in good faith to be a holder in due
course and thereby cutoff some of the obligor's defenses that could be
raised against the seller. UCC 3-305, 3-306; 15 U.S.C. Sec. 7021(d).
---------------------------------------------------------------------------
There are also several conceivable ways to transfer mortgages, but
there are serious doubts about the validity of some of the methods:
(1) the mortgage could be assigned through the traditional common
law process, which would require a document of assignment.
a. There is general consensus that this process works.
(2) the mortgage could be negotiated.
a. This method of transfer is of questionable effectiveness. A
mortgage is not a negotiable instrument, and concepts of
negotiability do not fit well with mortgages. For example, if a
mortgage were negotiated in blank, it should become a ``bearer
mortgage,'' but this concept is utterly foreign to the law, not
least as the thief of a bearer mortgage would have the ability
to enforce the mortgage (absent equitable considerations).
Similarly, with a bearer mortgage, a homeowner could never
figure out who would be required to grant a release of the
mortgage upon payoff. And, in many States (so-called title
theory states), a mortgage is considered actual ownership of
real property, and real property must have a definite owner
(not least for taxation purposes).
(3) the mortgage could ``follow the note'' per common law.
a. Common law is not settled on this point. There are several
instances where the mortgage clearly does not follow the note.
For example, the basic concept of a deed of trust is that the
security instrument and the note are separated; the deed of
trust trustee holds the security, while the beneficiary holds
the note. Likewise, the mortgage follows the note concept would
imply that the theft of a note also constitutes theft of a
mortgage, thereby giving to a thief more than the thief was
able to actually steal. Another situation would be where a
mortgage is given to a guarantor of a debt. The mortgage would
not follow the debt, but would (at best) follow the guarantee.
And finally, the use of MERS, a recording utility, as original
mortgage (a/k/a MOM) splits the note and the mortgage. MERS has
no claim to the note, but MERS is the mortgagee. If taken
seriously, MOM means that the mortgage does not follow the
note. While MERS might claim that MOM just means that the
beneficial interest in the mortgage follows the note, a
transfer of the legal title would violate a bankruptcy stay and
would constitute a voidable preference if done before
bankruptcy.
(4) the mortgage could ``follow the note'' if it is an Article 9
transfer.\84\
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\84\ UCC 9-203(g). If the transfer is not an Article 9 transfer,
then the Article 9 provision providing that the mortgage follows the
note would not apply.
a. There is consensus that this process would work if Article 9
governs the transfer of the note.
Ultimately, there is lack of consensus as to the method of transfer
that is actually employed in securitization transactions. In theory,
the proper method should be UCC Article 9 transfer process was adopted
as part of the 2001 revision of Article 9 with the apparent goal of
facilitating securitization transactions. Parties are free, however, to
contract around the UCC.\85\ That is precisely what pooling and
servicing agreements (PSAs) appear to do. PSAs provide a recital of a
transfer of the notes and loans to the trust and then they further
require that the as they set forth specific requirements regarding the
transfer of the notes and mortgages, namely that there be a complete
chain of endorsements followed by either a specific endorsement to the
trustee or an endorsement in blank.\86\ The reason for this additional
requirement is to provide a clear evidentiary basis for all of the
transfers in the chain of title in order to remove any doubts about the
bankruptcy remoteness of the assets transferred to the trust. Absent a
complete chain of endorsements, it could be argued that the trust
assets were transferred directly from the originator to the trust,
raising the concern that if the originator filed for bankruptcy, the
trust assets could be pulled back into the originator's bankruptcy
estate.
---------------------------------------------------------------------------
\85\ UCC 1-203.
\86\ This provision is general found in section 2.01 of PSAs.
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As PSAs are trust documents, they must be followed punctiliously.
Moreover, most RMBS are issued by New York common law trusts, and well-
established New York law provides that a transaction that does not
accord with the trust documents is void.\87\ Therefore, the key
question is whether transfers to the trusts complied with PSAs. It
appears that in recent years mortgage securitizers started to cut
corners in order to deal with the increased deal volume they faced
during the housing bubble, and they ceased to comply with the PSA
requirements in many cases. Thus, in many cases, the notes contain
either a single endorsement in blank or no endorsement whatsoever,
rather than the chain of endorsements required by the PSA and critical
for ensuring the trust's assets' bankruptcy remoteness.
---------------------------------------------------------------------------
\87\ NY E.P.T.L. Sec. 7-2.4.
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It bears emphasis that the validity of transfers to the trusts is
an unsettled legal issue. But if the transfers were invalid, they
cannot likely be corrected because of various timeliness requirements
in the PSAs.
IV. YES, BUT WHO CARES? THESE ARE ALL DEADBEATS
A common response from banks about the problems in the
securitization and foreclosure process is that it doesn't matter as the
borrower still owes on the loan and has defaulted. This ``No Harm, No
Foul'' argument is that homeowners being foreclosed on are all a bunch
of deadbeats, so who really cares about due process? As JPMorganChase's
CEO Jamie Dimon put it ``for the most part by the time you get to the
end of the process we're not evicting people who deserve to stay in
their house.''\88\
---------------------------------------------------------------------------
\88\ Tamara Keith & Renee Montaigne, Sorting Out the Banks'
Foreclosure Mess, NPR, Oct. 15, 2010.
---------------------------------------------------------------------------
Mr. Dimon's logic condones vigilante foreclosures: so long as the
debtor is delinquent, it does not matter who evicts him or how. But
that is not how the legal system works. A homeowner who defaults on a
mortgage doesn't have a right to stay in the home if the proper
mortgagee forecloses, but any old stranger cannot take the law into his
own hands and kick a family out of its home. That right is reserved
solely for the proven mortgagee.
Irrespective of whether a debt is owed, there are rules about who
can collect that debt and how. The rules of real estate transfers and
foreclosures have some of the oldest pedigrees of any laws. They are
the product of centuries of common law wisdom, balancing equities
between borrowers and lenders, ensuring procedural fairness and
protecting against fraud.
The most basic rule of real estate law is that only the mortgagee
may foreclosure. Evidence and process in foreclosures are not mere
technicalities nor are they just symbols of rule of law. They are a
paid-for part of the bargain between banks and homeowners. Mortgages in
States with judicial foreclosures cost more than mortgages in States
without judicial oversight of the foreclosure process.\89\ This means
that homeowners in judicial foreclosure States are buying procedural
protection along with their homes, and the banks are being compensated
for it with higher interest rates. Banks and homeowners bargained for
legal process, and rule of law, which is the bedrock upon which markets
are built function, demands that the deal be honored.
---------------------------------------------------------------------------
\89\ See Karen Pence, Foreclosing on Opportunity: State Laws and
Mortgage Credit, 88 Rev. Econ. & Stat. 177 (2006) (noting that the
availability--and hence the cost--of mortgages in States with judicial
foreclosure proceedings is greater than in States with non-judicial
foreclosures).
---------------------------------------------------------------------------
Ultimately the ``No Harm, No Foul,'' argument is a claim that rule
of law should yield to banks' convenience. To argue that problems in
the foreclosure process are irrelevant because the homeowner owes
someone a debt is to declare that the banks are above the law.
V. CONCLUSION
The foreclosure process is beset with problems ranging from
procedural defects that can be readily cured to outright fraud to the
potential failure of the entire private label mortgage securitization
system.
In the best case scenario, the problems in the mortgage market are
procedural defects and they will be remedied within reasonably quickly
(perhaps taking around a year). Remedying them will extend the time
that properties are in foreclosure and increase the shadow housing
inventory, thereby driving down home prices. The costs of remedying
these procedural defects will also likely be passed along to future
mortgage borrowers, thereby frustrating attempts to revive the housing
market and the economy through easy monetary policy.
In the worst case scenario, there is systemic risk, as there could
be a complete failure of loan transfers in private-label securitization
deals in recent years, resulting in trillions of dollars of rescission
claims against major financial institutions. This would trigger a
wholesale financial crisis.
Perhaps the most important lesson from 2008 is the need to be ahead
of the ball of systemic risk. This means (1) ensuring that Federal
regulators do a serious investigation as discussed in this testimony
above and (2) considering the possible legislative response to a
crisis. The sensible course of action here is to avoid gambling on
unsettled legal issues that could have systemic consequences. Instead,
we should recognize that stabilizing the housing market is the key
toward economic recovery, and that it is impossible to fix the housing
market unless the number of foreclosures is drastically reduced,
thereby reducing the excess inventory that drives down housing prices
and begets more foreclosures. Unless we fix the housing market,
consumer spending will remain depressed, and as long as consumer
spending remains depressed, high unemployment will remain and the U.S.
economy will continue in a doldrums that it can ill-afford given the
impending demographics of retirement.
This suggests that the best course of action is a global settlement
on mortgage issues, the key elements of which must be (1) a triage
between homeowners who can and cannot pay with principal reduction and
meaningful modifications for homeowners with an ability to pay and
speedier foreclosures for those who cannot, (2) a quieting of title on
securitized properties, and (3) a restructuring of bank balance sheets
in accordance with loss recognition.
I recognize that for many, the preferred course of action is not to
deal with a problem until it materializes. But if we pursue that route,
we may be confronted with an unmanageable crisis. We cannot rebuild the
U.S. housing finance system until we deal with the legacy problems from
our old system, and these are problems that are best addressed sooner,
before an acute crisis, then when it is too late.
______
PREPARED STATEMENT OF DAVID B. LOWMAN
Chief Executive Officer for Home Lending, JPMorgan Chase
November 16, 2010
Introduction
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for inviting me to appear before you today. My name is David
Lowman, and I am the Chief Executive Officer for Home Lending at
JPMorgan Chase. I am grateful for the opportunity to discuss Chase's
loan servicing business, our wide-ranging efforts to enable borrowers
to keep their homes and avoid foreclosure where possible, and the
recent issues that have arisen relating to affidavits filed in
connection with certain foreclosure proceedings.
JPMorgan Chase is committed to ensuring that all borrowers are
treated fairly; that all appropriate measures short of foreclosure are
considered; and that, if foreclosure is necessary, the foreclosure
process complies with all applicable laws and regulations. As I will
discuss in detail later in my testimony, we regret the errors that we
have discovered in our processes, and we have worked hard to correct
these processes so that we get them right. We take these issues very
seriously.
Chase services about 9 million mortgages across every State,
representing over $1.2 trillion in loans to borrowers. In our role as
servicer, we are responsible for administering loans on behalf of the
owner of the loan, which sometimes is Chase itself, but more often is
someone else--a Government-sponsored enterprise (GSE), a Government
agency (such as the Federal Housing Administration or the Department of
Veterans Affairs), a securitization trust, or another private investor.
I will first discuss Chase's extensive efforts to help borrowers
avoid foreclosure and then discuss the issues that led to our temporary
halt to some foreclosures, as well as Chase's enhanced procedures for
the foreclosure process.
The past several years have been very difficult ones for many
Americans. We have made extensive efforts during these difficult
economic times to help borrowers who have fallen behind on their
payments understand all of their options and, where feasible, to work
with them in an effort to modify their loans and bring their accounts
current so that they can keep their homes.
At the outset, I want to emphasize that Chase strongly prefers to
work with borrowers to reach a solution that permits them to keep their
homes rather than foreclose on their properties. As we discuss below,
solutions may include modification, temporary forbearance, short sales
or deeds-in-lieu of foreclosure. Foreclosures cause significant
hardship to borrowers, harm their credit profiles, and depress property
values in the communities where they occur. Foreclosures also
inevitably result in severe losses for lenders and investors.
Therefore, we always consider whether there are viable alternatives to
foreclosure before proceeding with a foreclosure.
It is critical to note that the analysis we use in deciding whether
to proceed with a modification or foreclosure does not take into
account servicer compensation. Furthermore, if it were considered,
servicer compensation would tend to favor modification over
foreclosure. Indeed, the cost for servicers to take a loan to
foreclosure generally is significantly greater than the cost of a
modification. With a successful modification, Chase is able to continue
to service the loan and earn servicer fees; but when a property is sold
as a result of foreclosure, Chase's role as servicer ends and Chase
receives no further fees.
Chase has established modification programs that collectively have
allowed us to avoid many more foreclosures than we have completed. We
established these programs starting in early 2007 in recognition of the
difficult economic conditions that resulted in a growing number of our
borrowers being unable to make their monthly payments. While we keep
striving to do even better, our efforts to date have yielded
significant results. Since January 2009, Chase has offered almost one
million modifications to struggling borrowers and has completed over
250,000 permanent modifications under the Home Affordable Modification
Program (HAMP), Chase's own proprietary modification programs, and
modification programs offered by the GSEs and FHA/VA. Combined with
other programs designed to avoid foreclosure, we have prevented over
429,000 foreclosures since January 2009. Over that same period, we have
completed over 241,000 foreclosures. In other words: during the last 2
years, Chase has successfully prevented about two foreclosures for each
one we have completed.
Sustainable modifications are not always possible; there are some
borrowers who simply cannot afford to stay in their homes,
notwithstanding the modification programs and other foreclosure
prevention alternatives available. There are other borrowers who are
not seeking modifications; in the majority of cases that went to
foreclosure sale in the last quarter, the properties were vacant or not
owner-occupied.
Our Investment in Foreclosure Prevention
Our progress in foreclosure prevention derives in part from early
and significant investments since late 2008. Currently, Chase employs
over 6,000 customer-facing staff whose focus is working with distressed
borrowers, and we have more than doubled the number of employees in
this area in the last 2 years. For more than 6 months, we have assigned
each borrower a single point of contact who serves as a consistent
touchpoint for the borrower as he/she seeks a loan modification. More
than 1,900 dedicated relationship managers serve in this role for our
borrowers.
In addition, Chase has made major efforts to reach out personally
to borrowers and offer assistance with modifications. Since early 2009,
our employees have met with 115,000 struggling borrowers at the 51
Homeownership Centers we have created in 15 States and the District of
Columbia. The Chase Homeownership Centers are a notable example of our
early efforts to reach borrowers in need. We also have a Homeownership
Preservation Office, which maintains relationships with national groups
like HOPE NOW and NeighborWorks, as well as with hundreds of local non-
profit organizations across the country. Our team works closely with
Government and community leaders on initiatives that focus on
affordable housing, foreclosure prevention and community
revitalization. The team also travels across the country and directs
national outreach events. Over 3.7 million letters have been sent to
borrowers inviting them to attend these events. More than 54,000
borrowers have attended one of the hundreds of events held to date.
We expend great efforts to reach our borrowers and inform them
about modification alternatives. In the last 2 years, Chase has made
341 million outbound calls to borrowers. Chase does not wait for
borrowers to contact us; when we believe a borrower may be at risk, we
affirmatively reach out to them early to discuss possible modification
options. While requirements vary by State, generally our outreach to
borrowers includes numerous calls from a customer service
representative and letters detailing the nature of the delinquency and
possible Government and other modification programs. Our borrowers also
receive a Chase Homeownership and Outreach letter, including any
information about local events that provide in-person help. When a loan
becomes more delinquent, a Chase representative may visit the property;
and generally at 90 days past due, the borrower receives notification
of intent to foreclose. On average, we contact a borrower over 100
times before a foreclosure is completed. In addition, our loan
counselors have fielded over 29 million inbound calls from borrowers
seeking foreclosure prevention assistance in the last 2 years and 5
million calls to our dedicated loan modification hotline.
Loan Modification Programs
Chase's modification programs are focused on helping borrowers stay
in their homes by making their monthly mortgage payments affordable.
HAMP Modifications
Chase has supported the Department of Treasury's efforts to
increase mortgage modifications industry-wide through HAMP, and Chase
was one of the first major servicers to begin implementing the program.
Chase mails a HAMP application to every borrower whose loan meets the
program's eligibility criteria at both 40 and 70 days delinquency. To
date, we have sent HAMP applications to 900,000 borrowers.
Chase makes substantial efforts to help borrowers complete the
necessary paperwork, and any decision denying a HAMP application is
subject to a rigorous review. Chase also affords borrowers an
opportunity to appeal denials of HAMP applications by supplementing the
information in their file. When an application is pending, Chase
suspends foreclosure sales; and if that application is denied, Chase
ordinarily will not proceed with the foreclosure sale for a period of
30 days, provided that an investor does not instruct us to proceed
sooner.
If a borrower is eligible for participation in HAMP and is approved
for a trial modification, we adjust the mortgage payment to 31 percent
of the borrower's total pretax income, as required by HAMP. To achieve
this level, as a first step, the loan's interest rate is reduced to as
low as 2 percent. If this is not sufficient, then the term of the loan
is extended to 40 years. Finally, if necessary, a portion of the
principal is deferred until the loan is paid off, and no interest is
charged on the deferred principal.
The response to HAMP has been substantial. To date, we have offered
HAMP trial plans to more than 270,000 borrowers and have over 60,000
borrowers in active permanent HAMP modification plans through October
2010. These modifications have benefited borrowers by reducing their
monthly mortgage payments in most cases. Our borrowers who have taken
advantage of HAMP modifications realized an average reduction of 28
percent in their monthly payment.
Modifications for Adjustable Rate Mortgages
Prior to the introduction of HAMP, Chase implemented several of its
own proprietary loan modification programs, including several programs
for adjustable rate mortgages (ARMs). Chase-owned subprime hybrid ARMs
scheduled to reset for the first time are modified to remain at the
initial interest rate for the life of the loan. Borrowers qualify for
this program if they have a clean payment history on a hybrid ARM with
an interest rate that adjusts after the first two or 3 years. Borrowers
do not need to contact Chase to benefit from this program; Chase
implements the rate lock automatically, and borrowers are so advised.
In cases of hybrid ARM loans that we service but do not own, we use the
American Securitization Forum (ASF) Fast Track program to reduce
payment shock. Under this program, qualifying borrowers will have their
initial ARM rate frozen for 5 years.
We also have taken action to help borrowers with Chase-owned Pay
Option ARMs. Chase did not originate or purchase these loans, but
assumed them through the 2008 acquisition of the mortgage assets of
Washington Mutual. Chase has developed proactive programs to assist
current Pay Option ARM borrowers who may be at higher risk of default
due to factors such as credit score, loan-to-value ratio (LTV), and
future payment shock. To eliminate any potential payment shock, we
offer to modify the loan to a fixed payment, keeping the borrower's
monthly payment at its current amount. For the majority of these
modifications, the borrower's payment is fixed for the life of the
loan. Since 2009, Chase has proactively completed about 22,000 Option
ARM modifications on current loans, worth $8 billion in unpaid
principal balance.
Chase Custom Modifications
Borrowers not eligible for HAMP are reviewed on a case-by-case
basis to determine their suitability for an alternative modification.
We evaluate these loans by developing an estimated target affordable
payment of 31 percent to 40 percent of the borrower's gross income. We
use the lowest percentage for borrowers with the lowest incomes. Once
the target payment is calculated for the borrower, we test each
modification option to see if it will get the borrower to an affordable
payment. As in the HAMP program, we apply a net present value (NPV)
analysis to each option to determine whether the value of the
modification exceeds the value expected to be recovered through a
foreclosure. Chase recommends a modification when that option produces
both an affordable payment and a positive NPV result.
Despite our best efforts, not every loan can be modified, for a
variety of reasons. Most of the mortgages we service are serviced on
behalf of others; we do not own the loans. We generally owe those third
parties, which include the GSEs, a contractual duty to maximize the
return on the investment they made. As noted above, the high costs of
foreclosure give them (and us) an incentive to consider meaningful
payment reduction when necessary to effectively modify the loan, but
modifications that do not maximize the return to investors are
inconsistent with our duties as servicer. And even aside from our
contractual duties, the U.S. mortgage market will never return to
health if investors come to believe that the value of the collateral is
unreliable.
Other Loss Mitigation Efforts
For a variety of reasons, loan modifications are not always a
workable solution. Borrowers who cannot afford their homes, even if the
payment is substantially reduced, need other solutions. So, in addition
to loan modifications, Chase also offers borrowers other options to
avoid foreclosure. These include:
Short Sales--For borrowers who do not qualify for loan
modification or would qualify, but do not wish to stay in their
homes, Chase has a program that makes available a short sale in
which Chase agrees to a sale to a third party, arranged by the
borrower, at a price below the outstanding amount of
indebtedness. Since April 2010, Chase has had a program to
proactively contact borrowers who have listed their homes for
sale and who would be good candidates for short sales. Chase
provides these borrowers with a minimum offer that Chase would
accept to approve a short sale. Since 2009, Chase has completed
more than 83,000 short sales.
Deed in Lieu--In cases where a short sale is not possible
because a sale cannot be arranged within the prescribed period
of time, Chase may offer borrowers the option of deeding the
property to Chase in full satisfaction of their debt. Since
2009, Chase has completed more than 3,400 deeds-in-lieu.
In addition to short sales and deeds-in-lieu, since 2009,
Chase has implemented over 55,000 forbearance, extension and
repayment plans to help with a hardship and avoid foreclosure.
Foreclosures
The decision to foreclose is always a difficult one, but there are
unfortunately many cases where this alternative is unavoidable. In many
cases, borrowers are unemployed or otherwise do not or cannot make any
meaningful payment on their mortgages. In the average case where we
foreclose, the borrower has not made any payment for 14 months; in
Florida, where many of our foreclosures have occurred, the average
period without payment prior to foreclosure sale is 22 months. In some
cases, the borrower may not have an incentive to pursue a modification;
of the properties on which we foreclose, a significant percentage is
vacant or not the owner's primary residence, but rather an investment
property. In cases where the property is vacant, foreclosure may not
only be the right economic decision--it also transfers the property
into a new owner's hands, improving community safety and stabilizing
neighboring property values.
We recently announced that we had temporarily suspended
foreclosures, foreclosure sales, and evictions in a number of States to
allow for a review and enhancement of our procedures. It is important
to note at the outset that the issues that have arisen in connection
with foreclosure proceedings do not relate to whether foreclosure
proceedings were appropriately commenced. We have not found errors in
our systems or processes that would have led foreclosure proceedings to
be commenced when the borrower was not in default.
Chase has substantial safeguards in place designed to ensure that
foreclosures are both a last resort and instituted only in appropriate
cases. A loan is referred to foreclosure only after Chase has made
substantial attempts to provide the borrower with alternatives to
foreclosure. Then, as part of the process that can ultimately lead to
referring a loan to foreclosure, Chase policy requires that all
delinquent loans be reviewed by its Independent Foreclosure Review
team. The Independent Foreclosure Review confirms that the loan is past
due and that Chase has complied with its pre-referral policies,
including repeated efforts to contact the borrower to discuss
alternatives. Under Chase's policies, only after the Independent
Foreclosure Review is complete can a loan be referred for foreclosure
proceedings. The Independent Foreclosure Review is repeated 2 to 3
weeks prior to any scheduled sale, and a final check also is performed
72 hours prior to the sale. If any of these subsequent reviews suggests
that a loan should not have been referred to foreclosure, we do not
proceed with the sale. Under our policies, if a loan modification
process has begun after the commencement of a foreclosure, we do not
engage in a foreclosure sale if the modification succeeds or until the
modification process fails. That is not to say we are perfect--we
service millions of loans, and we sometimes do make mistakes. But when
we find an error, we fix it.
The Nature of the Affidavit Issues
Chase's recent temporary suspension of foreclosure operations in a
number of States arose out of concerns about affidavits prepared by
local foreclosure counsel, signed by Chase employees, and filed in
certain mortgage foreclosure proceedings. Specifically, employees in
our foreclosure operations area may have signed affidavits on the basis
of file reviews and verifications performed by other Chase personnel,
not by the affiants themselves. In addition, we discovered other
related issues in connection with some of these affidavits, including
instances in which notarized affidavits may not have been signed and
affirmed in the physical presence of the notary. Nevertheless, the
facts set forth in the affidavits with respect to the borrowers'
indebtedness and the amount of the debt--the core facts justifying
foreclosure--were verified prior to the execution of the affidavits by
Chase employees consulting the company's books and records, which are
themselves subject to extensive internal and external controls.
Therefore, we believe the underlying information about default and
indebtedness was materially accurate and the issues described above did
not result in unwarranted foreclosures.
We take these issues very seriously. Our process was not what it
should have been; quite simply, it did not live up to our standards. To
begin to address these issues, we temporarily halted foreclosure and
related proceedings in certain States because our procedures may not
have complied with personal knowledge and notarization requirements. In
late September, Chase temporarily halted all foreclosure proceedings
and property sales in the 23 States where foreclosure primarily occurs
through a judicial process and where affidavits are generally filed as
part of the process. Shortly thereafter, Chase also temporarily halted
foreclosure proceedings in certain States where foreclosure primarily
occurs through a non-judicial process in order to assess whether
similar documentation issues might exist in those jurisdictions. As an
additional safeguard, Chase also temporarily halted evictions in the
States in which it suspended foreclosures, as well as in other States
where Chase-signed affidavits might be used as part of the eviction
process.
While these proceedings have been halted, Chase has thoroughly
reviewed its foreclosure procedures and enhanced them to resolve these
issues. Briefly, the remedial actions undertaken by Chase include:
A complete review of our document execution policies and
procedures;
The creation of model affidavits that will comply with all
local law requirements and be used in every case, and that will
limit factual assertions to those within the personal knowledge
of the signer and eliminate any legal conclusions that are
outside the signer's personal knowledge;
Implementation of enhanced procedures designed to ensure
that the employees who execute affidavits personally verify
their contents and that the affidavits are executed only in the
physical presence of a licensed notary;
Extensive training for all personnel who will have
responsibility for document execution going forward and
certification of those personnel by outside counsel;
Implementation of a rigorous quality control double-check
review of affidavits completed by Chase employees; and
Review and verification of our revised procedures by
outside experts.
In addition to enhancing procedures for future foreclosure filings,
Chase also is working to remedy any issues with affidavits on file in
pending proceedings. Although Chase's approach will vary based on the
procedures in individual States, in cases in which judgment has not yet
been entered, Chase plans to re-verify the material information in
filed affidavits and file replacement affidavits prepared under the new
enhanced procedures to eliminate any possible defects in these
affidavits. Chase is taking other appropriate measures in connection
with foreclosure matters in which judgment has been entered but a sale
has not yet occurred.
We have worked hard over the past month and a half to review and
strengthen our procedures to remediate the affidavit issues we found.
We are committed to addressing these issues as thoroughly and quickly
as possible.
I hope that my testimony has explained our processes for dealing
with cases of borrower default, as well as the issues surrounding the
documentation filed in Chase's foreclosure proceedings and the steps we
have taken to address them. Foreclosure is a last resort for Chase, but
when we do foreclose, we are committed to making sure that we do so in
compliance with applicable law and with respect for the borrower. I
would be happy to answer questions from the Committee.
______
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM THOMAS J.
MILLER
Q.1. Attorney General Miller, on November 3, the Wall Street
Journal reported that you and officials from other States told
Bank of America executives that ``State attorneys general would
like additional aid to be offered to borrowers, such as further
principal reductions on certain delinquent loans where people
owe much more than what their homes are worth.''
Is it correct that you have asked mortgage lenders or
servicers that you, in your role as State attorney general,
would like them to offer more aid to borrowers, such as
principal reductions?
If so, how did you balance the competing desires of
borrowers and lenders to arrive at the conclusion that
servicers should be offering modified mortgages with principal
reductions?
A.1. It is estimated that approximately 23 percent of the homes
in this country have mortgage principal balances that are
larger than the current fair market value of the property. This
status is commonly referred to as being ``underwater.'' Many
different groups, ranging from securities analysts, economists,
investors in mortgage backed securities, to advocacy groups,
have been calling for principal reductions for quite some time
now. The simple proposition is that given the extremely high
loss severities lenders and investors are suffering in certain
markets when a home is taken to foreclosure sale, in some
instances a modification with a significant principal reduction
still produces more income than the foreclosure sale while
giving the homeowner sufficient motivation to stay in the home.
In other words, in appropriate circumstances, principal
reductions produce a positive net present value for the owners
of the loan.
We have consistently stated since 2007 that we are only
interested in modifications that are net present value
positive. Principal reductions are just another tool to arrive
at a sustainable net present value positive modification in
those markets that have experienced a severe drop in home
prices over the last 3 to 4 years.
Q.2. Attorney General Miller, you testify, with respect to data
collection efforts of your ``State Working Group'' which began
in October 2007, that ``our data collection was not as robust
as it could have been due to the extremely short-sighted
direction at the Office of the Comptroller of the Currency
which forbad national banks from providing loss mitigation data
to the States.''
Has data sharing with the OCC improved since you began
trying to collect data in 2007?
A.2. No. While the OCC and OTS have provided a public service
by publishing their quarterly Mortgage Metrics Report, they
have not shared any data directly with the State Attorneys
General. We do not receive anything in addition to the public
Metrics Report.
Q.3. Attorney General Miller, you testify that ``We must find a
way to make sure that all borrowers who have the desire to keep
their home and qualify for a modification receive that
modification.''
Have you found cases in your jurisdiction in which
homeowners who qualify for mortgage modifications have been
illegally denied modifications?
If so, have you pursued legal remedies in Iowa?
If not, what analysis can you provide that leads you to
believe that ``many borrowers, who under a strict economic
analysis should receive a modification, are falling through the
cracks''?
A.3. My office helped found and helps run the ``Iowa Mortgage
Help Hotline.'' This is the premier loan modification effort in
the State of Iowa. We have had over 13,000 Iowans open
applications with Iowa Mortgage Help and many thousand more
have contacted the Hotline without formally opening a file. In
addition, my Consumer Protection Division received almost 600
complaints regarding mortgage origination and servicing in 2010
alone. In fact, mortgages are now the number one consumer
complaint category in my office, representing 14.5 percent of
all written complaints submitted to my office. The vast
majority of these complaints involve loan servicing and
requests for a loan modification.
Through this front-line experience, we have seen many
instances of borrowers who through a strict economic analysis
should have received a loan modification, but for a variety of
systemic failures by the servicers did not receive such a
modification. Through the intervention of both the Iowa
Mortgage Help mediators and my Consumer Protection Division,
many of these borrowers have received modifications when they
would have otherwise lost the family home to foreclosure. Keep
in mind that these modifications were all in the best economic
interests of the owners of the loan.
Our experience in this regard is consistently echoed every
time we talk to HUD approved housing counselors in both Iowa
and other States, and by my fellow Attorneys General. In fact,
several of the Senators during the hearing stated that their
offices have received many complaints with a similar fact
pattern. If you talk to anyone who has front-line experience
working directly with borrowers attempting to get loan
modifications, you will hear countless horror stories where the
incompetence of the servicers prevented a modification from
occurring. There is little doubt that many borrowers are indeed
falling through the cracks.
Q.4. Attorney General Miller, your testimony States that you
believe ``It is well past time to once and for all tackle the
issue of foreclosures and loan modifications with the resources
and urgency it deserves.'' Your statement leads me to conclude
that you do not believe that efforts by the Treasury Department
and the Obama administration to address a large and potentially
growing foreclosure wave have been successful.
What would you recommend that the Administration do to
achieve success in battling the issue of foreclosures, and what
is the economic and distributional analysis upon which you base
your recommendation?
A.4. I commend the Obama administration for the wide variety of
efforts it has undertaken to battle the issue of foreclosures.
While the HAMP program has not been as successful as we all
hoped, it must be given credit for creating a national standard
for modifications and bringing considerable stability to a
chaotic situation. HAMP must be placed in its proper historical
context. Prior to HAMP there was no coherent national strategy
with regard to loan modifications. The previous
Administration's response was the very tepid creation of the
industry backed HOPE NOW group, consisting of a 1-800 number
and little else. In large part, the Obama administration's
efforts have been stymied by the failures of the loan
servicers. Ultimately, all loan modification programs rely on
the servicers to fulfill their duties and until the loan
servicers put sufficient resources into loss mitigation and
work out their numerous procedural problems, any modification
program is going to have difficulties.
Q.5. Attorney General Miller, in your testimony you state: ``In
recent weeks, many have opined that the temporary halt on
foreclosures and foreclosure sales by several servicers was
greatly damaging the economy. With all due respect, it is the
foreclosures in the first instance that pose the greatest
threat to the economy.''
There is an absolute need for any servicer to proceed
legally with a foreclosure sale. However, with blanket action,
the vast majority of the delayed foreclosures likely were ones
that would have been executed properly.
Is it your position that delays in proper foreclosures or
foreclosure sales do not represent a significant cost to our
economy? What evidence have you examined to arrive at this
conclusion?
If you do believe there is an economic cost to delaying
forecloses, what do you estimate that cost to be? Has this been
a factor in your decisionmaking?
A.5. It is my understanding that there has been no Government
action in regard to any foreclosure delays. All such delays
were done voluntarily by those servicers who determined on
their own that they had possibly violated State law in their
foreclosure procedures. In addition, there has been no blanket
action. Delays were only instituted by those servicers that
felt it necessary. It is further my understanding that the
servicers who did institute delays did not do so for every
single loan they serviced, but only for those loans where they
thought violations of the law may have occurred. Finally, the
State Attorneys General are in the midst of an ongoing
investigation of multiple servicer practices and a variety of
State and Federal regulators are also conducting multiple
examinations and reviews. The early results suggest that
multiple, serious problems exist within the mortgage servicing
industry. For all of these reasons, it is hard to conclude that
``the vast majority of the delayed foreclosures likely were
ones that would have been executed properly.''
Furthermore, given the historic levels of property that is
already owned by the lenders (commonly known as ``real estate
owned'' or ``REO'') and the very large ``shadow inventory''
(homes that could be taken through the foreclosure process to
completion but have deliberately been withheld by the
servicers), it is likely that any additional REO properties
would only further depress property values. Thus, any economic
damage caused by a several month delay of some foreclosures is
likely negligible. This is particularly true given the many
loans that servicers could take all the way through a
foreclosure sale right now, but the servicers have chosen
instead to leave these properties in a legal limbo (a state of
foreclosure purgatory if you will); out of a desire to avoid
responsibility for the upkeep of these properties and to avoid
putting any more foreclosed properties onto the real estate
market. The fact that the servicers themselves are avoiding
putting more foreclosed properties onto the market severely
undercuts any argument that a temporary, voluntary delay has or
will cause significant economic damage.
Q.6. Given the varying State laws that govern foreclosure,
there must be the opportunity to observe both best and worst
practices. While foreclosures are not the preferred option for
any party at the onset of a loan, sometimes it is the path
forward that presents the least harm to borrowers, lenders and
the economy. In those instances, it is essential that our
foreclosure process be effective.
Which States do each of you feel provide the most efficient
path forward in foreclosures, while providing borrowers proper
legal channels in the event that there is a dispute? What is
the average length of time between original delinquency and
foreclosure sale in these States?
Which States do each of you feel have the most problems in
effectively executing foreclosures? What is the average length
of time between original delinquency and foreclosure sale in
these States?
A.6. The fundamental problem in today's mortgage servicing
market is the policies and practices of the servicers
themselves, not variations among State foreclosure laws. A
broad range of financial institutions successfully comply with
a broad range of differing State, not to mention international,
laws in their daily operations. The recent servicing problems
arise not from the differences among State foreclosures laws,
but from a business model that is not equipped to manage the
current volume of distressed loans.
Q.7. To better gauge the level of violations surrounding the
topic of this hearing it is necessary for us to understand who
is being affected. Admittedly, this question is probably best
suited for the regulators, and we hope to receive this
information from them at some point.
In your research and investigations, how many individuals
were discovered to have been fully current on their mortgage
payments but foreclosed upon by their servicer? Please provide
the data and evidence that you evaluated to arrive at your
conclusions.
A.7. Harm is not limited to borrowers who are fully current on
their payments but foreclosed upon. In fact, we are finding a
wide variety of servicer misconduct and practices which harm
borrowers in a variety of situations. Other areas of harm
include, but are not limited to:
1. The inability of some servicers to complete such simple
tasks as properly applying the borrower's monthly
payment or properly boarding the loan upon receiving
the servicing rights.
2. The well publicized challenges some servicers are having
with one of the mostfundamental facts: proving
ownership of the note and the mortgage and the right to
foreclose.
3. The inability of servicers to properly handle loss
mitigation requests, including such basic
responsibilities as repeatedly losing borrower
submitted financial documents and consequently
requiring borrowers to repeatedly resubmit such
documents. Other examples include foreclosing on
borrowers when a loan modification is being considered
(the so called ``dual track'' issue); loss mitigation
representatives giving borrowers conflicting or
incorrect information; failure to respond to borrowers
in a timely manner, and so on. In our conversations
with housing counselors and legal aid lawyers we have
been repeatedly told that there is no rhyme or reason
why a particular loan modification request is granted
or denied, that the system is arbitrary and capricious
and depends mostly on who answers the phone on the
other end, not on a principled basis.
4. We have heard multiple complaints of borrowers who have
the money necessary to reinstate their loan, yet cannot
find a servicing employee who can accept and apply that
money.
5. We have heard multiple complaints of borrowers who have
signed loan modifications, yet the servicer does not
recognize the modification and continues to foreclose.
My staff has personally intervened on several of these
cases and without such intervention we believe a
foreclosure would have likely occurred.
6. Many borrowers have complained that they had a buyer
willing to purchase their property for less than the
principal balance on the loan, but considerably more
than the lender would receive from a foreclosure sale
(commonly known as a ``short sale''), but that the
servicer was so disorganized that any response came
much too late and the buyer walked away, resulting in a
much more expensive foreclosure.
7. We have heard complaints about the servicing of a loan
being transferred to a new servicer and the new
servicer refuses to recognize either a pending loan
modification application or even a completed
modification with the previous servicer.
8. We have heard many, many complaints about servicers
imposing thousands of dollars of unjustified fees as
part of the foreclosure process. In some cases, these
fees have pushed the borrower over the edge and made it
impossible for the borrower to save the home.
9. Similarly, we hear complaints about servicers imposing
very expensive ``force-placed'' homeowners insurance,
when the borrowers' homeowners insurance was in place
the entire time.
In short, there are many different kinds of harm that
borrowers suffer due to servicer misconduct and incompetence.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM THOMAS J.
MILLER
Q.1. What improvements should be made to Federal regulation of
mortgage servicers?
A.1 The number one thing is to elevate the importance of
mortgage loan servicing. It is my understanding that
traditionally most effort by Federal banking regulators has
been focused on the origination of mortgage loans. What we have
learned the hard way over the last three and a half years is
that loan servicing is equally as important. Thus, the Federal
regulators should give loan servicing much more attention in
their examinations than they have previously. It is also clear
to me that there is a need for more detailed regulation of
servicing standards.
While I support increased Federal regulation of loan
servicing, it must be made clear that any such efforts should
be in addition to and not in place of regulation at the State
level. Some have attempted to blame servicers' current troubles
on the fact that foreclosure is controlled by State law.
Nothing could be further from the truth. The servicers'
troubles are not based on an inability to comply with
differences in State law, they are much more basic. The simple
fact is that the current servicing model was never designed for
the high delinquency environment we are experiencing today and
the system is fundamentally broken.
Foreclosure is an inherently local transaction, with
devastating effects on local neighborhoods and communities and
serious impacts on city, county, and State budgets.
Accordingly, State law has controlled foreclosure proceedings
since the founding of this Nation. Any attempt to use the
current crisis to preempt State law is deeply misguided.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM BARBARA J.
DESOER
Q.1. During discussion of the dual-track process, you mentioned
that your ability to halt the practice of ``dual tracking'' of
loans simultaneously through the modification and foreclosure
processes could be constrained on loans you are servicing for
outside trusts, but that you would have the ability to halt the
dual-track process on loans held in portfolio by Bank of
America.
I understand that you are in negotiations with State AGs on
a potential agreement on this and other aspects of servicing.
In the meantime, however, many families could continue to be
confused by this dual-track process.
Have you unilaterally halted the dual-track process and
suspended the foreclosure process for loans held by Bank of
America that are in the review and modification processes? If
not, do you plan to do so soon? If not, why not, and what would
need to happen before BofA would halt dual-tracking on its
loans?
A.1. As your question acknowledges, parallel foreclosure and
modification processes are required by many investors, and
reflect an industry-wide servicing practice. The majority of
the loans we service--approximately 77 percent--are for outside
investors. We want to partner with Members of Congress, State
Attorneys General, regulators, other servicers, and investors
to agree on ways to improve industry practices with respect to
the evaluation of borrowers for modifications after they have
been referred to foreclosure. At the same time, we are actively
working to reduce the borrower confusion that may result from
dual tracking.
For borrowers who are referred to foreclosure, Bank of
America's policies are designed to prevent a loan from going to
a foreclosure sale, consistent with regulatory directives and
investor requirements, if the borrower is being evaluated for a
HAMP or proprietary modification. In addition, for borrowers
who enter a trial plan after their loan has been referred to
foreclosure, to the extent consistent with its legal and
contractual obligations, Bank of America's policy is to suspend
the foreclosure process, including refraining from scheduling
sales or causing judgments to be entered, on a basis consistent
with HAMP for proprietary or traditional loan modifications
that are successfully performing under the trial plan. Bank of
America also has introduced an additional review procedure to
delay foreclosure sales if there is ongoing modification,
short-sale, or deed-in-lieu activity.
We are also addressing concerns about customer confusion by
improving our communication with distressed borrowers. In
particular, we are redesigning our modification process to
assign eligible borrowers who have submitted to us at least one
document in support of their modification application to an
associate with relevant expertise for help at each particular
stage of the modification process. We are implementing this new
approach to modifications, and so far we have paired customers
with an associate on this basis over 230,000 times. We are also
implementing a similar model for our short sale and deed-in-
lieu foreclosure alternatives.
More generally, in the past 2 years, We have committed
significant resources to helping distressed homeowners,
including by hiring and training over 11,000 people, so that we
now have a team of about 30,000 working with customers in
default. We have also reached out to our customers by opening
customer assistance centers, going door-to-door to reach
customers with modification offers, and participating in more
than 550 housing rescue fairs across the country. We are also
partnering with non-profits to address foreclosure prevention
in diverse communities.
Q.2. In response to questions from Senator Johnson, Mr. Lowman
and Ms. Desoer, you characterized the HAMP 2MP program as a
good approach to second lien modification. You also noted your
organizations' participation in 2MP, with Ms. Desoer pointing
out that Bank of America had been the first servicer to sign up
for the program. Yet, as of Sept 30, only 21 second lien
modifications worth $10,500 had been made under 2MP since its
implementation in March 2010.
Why, in your opinion, have so few modifications been made
under 2MP so far? Do you see your organization increasing its
number of 2MP modifications in the coming months?
A.2. Bank of America was the first servicer to sign up to
participate in the 2MP second lien modification program. This
program is limited to borrowers whose first liens are modified
under HAMP and who agree to a modification of the second lien
under the terms of the program. If a borrower fails a trial
HAMP modification, that borrower is not eligible for 2MP. In
addition, 2MP requires a 3-month trial period for delinquent
borrowers before the 2MP modification can become effective.
Phyllis Caldwell, Chief of Homeownership Presentation
Office of the Department of Treasury, explained to this
Committee:
The program uses a third-party database to match second lien
loans with first lien loans permanently modified under HAMP . .
. The implementation of this database began over the summer.
Five 2MP Servicers have already begun matching modified first
liens with their corresponding second liens, while the other 12
are in some phase of developing systems capacity to do so.
Bank of America is one of five servicers that have led the
way in matching modified first liens with corresponding second
liens. As of the end of December 2010, we had matched
approximately 29,000 Bank of America second lien customers to a
permanent HAMP modification of a first lien. We are currently
working through these matches and issuing modifications to 2MP-
eligible customers.
Bank of America also has proprietary modifications that it
applies to second liens independently of 2MP. Since 2008, we
have completed over 95,000 second lien modifications through
proprietary or other programs.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM BARBARA J.
DESOER
Q.1. Mr. Levitin, your testimony States that a common response
from banks--and I assume here you mean servicers--about
problems in the foreclosure process is that it doesn't matter
to them because the borrower still owes on the loan and has
defaulted. As you put it: ``This `No Harm, No Foul' argument is
that homeowners being foreclosed on are all a bunch of
deadbeats, so who really cares about due process?'' You say
that this argument, that you attribute loosely to ``banks,''
condones ``vigilante foreclosures: so long as the debtor is
delinquent, it does not matter who evicts him or how.''
Does any representative of the servicer industry on the
panel wish to comment on this?
A.1. Bank of America is committed to treating our customers
responsibly and fairly. We acknowledge our obligation to do our
best to protect the integrity of the foreclosure proceedings.
And when that has not happened, we accept responsibility for
it, and we deeply regret it.
We were the only servicer that stopped foreclosure sales
nationwide to review our procedures. We also halted evictions
and are only restarting them with 30 days advance notice to the
borrower of the restart. We know that the concerns are not just
technical issues. We are already well along in making
improvements with respect to foreclosure documentation. We take
seriously our obligation to the customer, the investor, the
legal process, and the economy.
Since suspending foreclosure sales and evictions, the Bank
has implemented new or revised policies and procedures to
strengthen controls over our foreclosure activities. We also
have added and redeployed human resources to execute on our
commitment to improve our processes. We hope that these new
measures and controls give all stakeholders added confidence
that foreclosure proceedings, when necessary, will move forward
with integrity.
Q.2. Ms. Desoer and Mr. Lowman, it is important that this
Committee has an adequate understanding of the current state of
affairs as it relates to delinquency and foreclosures. Please
briefly discuss the following statistics as they relate to your
companies:
What is the total number of mortgages that your company
services?
How many mortgages are currently in foreclosure?
What is the average number of days that a borrower is
delinquent on his or her mortgage at the time of a foreclosure
sale?
What percentage of homes are vacant at the time of a
foreclosure sale?
A.2. Bank of America services nearly 14 million mortgage loans.
The majority of our customers--86 percent--are current and
making their mortgage payments on time every month.
Fortunately, that number is stabilizing. But the segments of
the portfolio that are distressed include large numbers of
customers who are seriously delinquent. Of Bank of America's
1.3 million customers who are more than 60-days delinquent,
nearly 600,000 have not made a mortgage payment in more than a
year, and more than 190,000 have not made a mortgage payment in
2 years.
The following are delinquency statistics for completed
foreclosure sales in the third quarter of 2010:
Eighty (80) percent of borrowers had not made a
mortgage payment for more than 1 year.
The average loan had been in delinquent status for
560 days.
Thirty-three (33) percent of properties were
vacant.
Fifteen (15) percent of properties were non-owner
occupied at the time of origination.
Helping our customers remain in their homes where possible is a
top priority for Bank of America--as evidenced by our nearly
750,000 completed loan modifications since 2008. This number
includes over 250,000 mortgage modifications in 2010.
Q.3. This Committee has a responsibility to ensure that actors
on all sides of the foreclosure process, including servicers,
are acting legally and in the best interest of our society. We
must address and remedy situations where this is not the case.
However, unnecessarily delaying foreclosures is not without
cost. Representatives of the secondary mortgage market have
told us that, on average, a delay in foreclosure costs
approximately $30-40 per day, per home. This is in addition to
any changes in home values during that time.
Ms. Desoer and Mr. Lowman, could you discuss what
additional costs your institutions may incur during a
foreclosure process if that process is delayed?
A.3. As we stated in our Third Quarter Form 10-Q filing with
the SEC, Bank of America and its subsidiaries cannot predict
the ultimate impact or cost of the temporary delay in
foreclosure sales. If the time to complete foreclosure sales
increases temporarily, that may result in an increase in
nonperforming loans and the cash advances that as servicer we
are required to make to taxing authorities, insurers, and other
third parties, and may impact the collectability of such
advances and the value of our mortgage servicing rights asset.
Delays in foreclosure sales, including any delays beyond those
currently anticipated, could increase the costs associated with
our mortgage operations. Delays also may subject us to
penalties for failing to meet investor foreclosure timelines.
In addition, delays may adversely impact our held for
investment portfolio due to real estate value declines
resulting in decreased foreclosure sale prices.
Q.4. Given this Committee's oversight responsibilities, it is
vital that we examine the regulatory actions taken before and
after reports surfaced detailing the problems surrounding some
foreclosures.
Ms. Desoer and Mr. Lowman, did your regulator contact you
prior to any of these press reports to review your foreclosure
procedures?
What, if any, directives or recommendations were made by
your regulator surrounding the definition of ``personal
knowledge'' as it relates to those in your companies who must
sign foreclosure documents?
What, if any, directives or recommendations were made by
your regulator with regard to the notary process for these
documents?
A.4. Under the rules and regulations of the Office of the
Comptroller of the Currency (OCC), a national bank may not
disclose information concerning examinations or investigations
performed by the OCC. For example, pursuant to 12 CFR
4.36(d), a national bank may not disclose non-public OCC
information to third parties because it is considered the
property of the OCC.
Julie Williams, Chief Counsel and First Senior Deputy
Comptroller, stated the following at a December 2, 2010 hearing
of the House Judiciary Committee:
[N]either banks' internal quality control tests, internal
audits, nor the OCC's own consumer complaint data suggested
foreclosure document processing was an area of systemic
concern.
. . .
There were no warning signs from internal audit, quality
control or even complaints relating to the foreclosure
documentation aspect of mortgage servicing, that were
triggering red lights for us.
In addition, Ms. Williams stated:
[Wlhen problems were identified at Ally Bank, which is not a
national bank, we immediately directed the eighth largest
national bank mortgage servicers to review their operations and
take corrective actions. In concert with other regulatory
agencies, OCC examiners are now reviewing samples of individual
loan files where foreclosures have either been initiated or
completed to test the validity of bank self assessments and
corrective actions, whether foreclosed borrowers were
appropriately considered for loss-mitigation alternatives such
as loan modifications, and whether fees charged were
appropriate, documents were accurate and appropriately
reviewed, proper signatures were obtained and documents
necessary to support a legal foreclosure proceeding were
provided.
. . .
Where we find errors or deficiencies, we are directing national
banks to take immediate corrective action.
Q.5. Unfortunately, neither Fannie Mae, Freddie Mac, nor the
Federal Housing Finance Administration were present at the
hearing to discuss the ``approved lenders'' list that Fannie
and Freddie publish to guide servicers as they select in-State
counsels to act on their behalf.
Given that, Ms. Desoer and Mr. Lowman, please describe what
the GSE's require of your firms with respect to these lists,
and indicate whether there have been any changes to them since
news of problems with ``foreclosure mills'' began to surface.
A.5. The GSEs place numerous requirements on servicers for the
loans the GSEs own. Certain of those requirements relate to the
hiring of outside counsel. With some exceptions, we ordinarily
select outside counsel with respect to the foreclosure of GSE
loans from Fannie Mae and Freddie Mac lists of preapproved
counsel. The GSEs have modified those lists recently.
Q.6. Ms. Desoer, your company must try to execute modification
programs, but requirements of these programs are often changed
by Treasury, investors, or other constituencies. You have
identified in your testimony that in the HAMP program alone,
there have been nearly 100 major program changes in the past 20
months.
Do you believe that the constantly changing requirements
and restrictions on the Government-sponsored mortgage
modification programs are confusing to consumers and
counterproductive to attaining actual mortgage modifications?
A.6. When working with delinquent customers, we aim to achieve
an outcome that meets both customer and investor interests,
consistent with our obligations to the investor. Many investors
limit Bank of America's discretion to make modifications, and
even when they do not, our legal duties to investors add
complexities to the execution of modification programs. While
very few investors have an outright prohibition on
modifications, their eligibility criteria and requirements
vary.
The Treasury Department, investors, and other
constituencies have frequently changed the requirements of
their modification programs. These differences and changes
significantly contribute to the complexity of the modification
process, strain a servicer's operations and systems, and may be
a source of frustration and confusion felt by borrowers.
As I previously testified, HAMP alone has had nearly 100
program changes in the past 20 months. In testimony before the
House Judiciary Committee on December 2, 2010, Phyllis
Caldwell, Chief of the Homeownership Preservation Office of the
Department of the Treasury, testified that ``we have made so
many changes'' to HAMP and that ``some would say we've made too
many changes that the system can't absorb them.'' Fannie Mae
and Freddie Mac have layered on additional, and in many cases,
different requirements, conditions and restrictions for HAMP
processing of the loans they own. When these changes occur, we
and other servicers have to change our processes, retrain our
staff, and update our technology. These changes can also affect
what is required of the customer, including requiring new or
different documentation. In addition, States also have made
statutory and regulatory changes to the foreclosure process,
requiring various types of loss mitigation efforts, all of
which have to be coordinated with the changing Federal
directives.
Q.7. Ms. Desoer, your company and other large mortgage
servicers portray a mortgage-servicing industry that,
confronted with enormous adjustment challenges, is responding
well and with, as you say in your testimony, ``extraordinary
speed.'' From the perspective of large mortgage-servicing
firms, it sounds as though homeowners facing distress are
treated with dignity, are offered a wide array of possible
modification alternatives, and are treated fairly. In striking
contrast, however, consumer activists portray mortgage
servicers as profit-centric firms with sloppy record keeping
and little aversion to cutting corners in order to reach
foreclosure.
Ms. Desoer, with stories circulating that homeowners who
should not have been foreclosed upon are finding their locks
changed as a result of a sloppy foreclosure process, why should
I believe industry claims that borrowers are being treated
fairly and with respect?
Do you have detailed data, preferably verified by an
independent party, to show that you have not wrongfully
foreclosed on homeowners?
A.7. We do not claim perfection, and we address mistakes
quickly and responsibly when they arise. We also appreciate and
take seriously the perspective of consumer advocates. We would
note that the cases reported in the press are often more
complex than some reports suggest but financial privacy
concerns prevent us from discussing the specifics of these
cases publicly.
After concerns emerged at other lenders regarding the
foreclosure affidavit process in judicial foreclosure States,
Bank of America initiated a review of our foreclosure
procedures. On October 1, 2010, we voluntarily suspended
foreclosure judgments in the 23 judicial foreclosure States
while we completed this review. One week later, we paused
foreclosure sales nationwide as we launched a voluntary review
of our foreclosure processes in those States as well. We
believe these steps were appropriate and responsible.
We have identified areas for improvement as a result of our
review. We are taking these matters very seriously and are
implementing changes accordingly. These changes in the
foreclosure process include, among other things, a new
affidavit form and additional quality control checks.
We fully understand our responsibility to be responsive
and, when a foreclosure is unavoidable, to treat customers with
respect as they transition to alternative housing. We, and
those who work with us in connection with foreclosure
proceedings, also have an obligation to do our best to protect
the integrity of those proceedings. When and where that has not
happened, we accept responsibility for it, and we deeply regret
it.
Q.8. Attorney General Miller's testimony today states the
following:
While the servicer is free to lose documents as many times as
they want or to take as long as they want, the servicer often
demands strict compliance from the borrower. Thus, no matter
how many times the borrower has previously submitted his or her
paperwork, if the borrower fails one time, the loan
modification is denied.
Do any representatives of the servicer industry wish to
respond to Mr. Miller's claims?
A.8. Our commitment at Bank of America is to ensure that no
property is taken to foreclosure sale until our customer is
given a fair opportunity to be evaluated for a modification. If
a modification is not possible, we explore a short sale or deed
in lieu solution. Foreclosure is our last resort.
We launched a foreclosure hold in October 2008 for
borrowers potentially eligible for our National Home Ownership
Retention Program and have participated in several others, as
new programs were developed and launched, in order to ensure no
customer who has a reasonable option to stay in their home goes
to foreclosure sale.
It is not the case that borrowers are given only one
opportunity to be considered for a modification. Subject to
investor requirements, we re-evaluate borrowers for home
retention options throughout the foreclosure process.
Modifications can occur after borrowers have failed to respond
to initial requests for documentation and borrowers are given
more than one opportunity to provide documentation. We have
worked hard to improve borrower response rates by partnering
with non-profits such as the Neighborhood Assistance
Corporation of America (NACA), the National Urban League, the
National Council of La Raza and the National Association of
Asian Pacific Americans for Community Development. It is also
our policy to check to determine whether a borrower is being
evaluated for a modification all the way up until the day
before the foreclosure sale.
In addition, as noted above in response to Senator Dodd's
first question, we are redesigning our modification process to
assign eligible borrowers who have submitted to us at least one
document in support of their modification application to an
associate with relevant expertise for help at each particular
stage of the modification process. We are implementing this new
approach to modifications, and so far we have paired customers
with an associate on this basis over 230,000 times.
Q.9. Ms. Thompson testifies that, `` . . . the problems
occasioned by mortgage servicer abuse run rampant.'' That is a
strong accusation. Ms. Thompson also frequently, though without
definition, refers to ``abuses'' committed by servicers and
``excessive'' fees. She accuses servicers of failing to
negotiate in good faith and of preparing false affidavits. She
states that ``Servicers do not believe that the rules that
apply to everyone else apply to them.'' Their attitude,
according to Ms. Thompson, is ``lawless'' and they commit
``wrongful foreclosure on countless American families.'' She
also states that ``The lack of restraint on servicer abuses has
created a moral hazard juggernaut that at best prolongs and
deepens the current foreclosure crisis and at worst threatens
our global economic security.''
Do any of the servicer representatives here wish to respond
to Ms. Thompson's allegations?
A.9. We categorically reject Ms. Thompson's characterization of
our commitment to serving our customers. We have worked
aggressively to respond to more than a million customers in
distress. We don't claim perfection, but we have led with
innovative ideas and continue to put forward solutions that
respond to customer needs. That's a responsibility that comes
with being America's leading consumer bank--and a
responsibility every associate at Bank of America is working
diligently to uphold. We fully understand our responsibility to
be fair, to be responsive and, where a foreclosure is
unavoidable, to treat customers with respect as they transition
to alternative housing.
Unfortunately, we have reached a crossroads between loan
modification efforts and the reality of foreclosure. The
majority of our distressed customers have been evaluated for
available programs or afforded a fair opportunity to be
evaluated, and many customers will be dealing with the reality
that despite the range of loss mitigation solutions and our
best efforts, foreclosure is unavoidable. This will drive an
increase in the concerns you and we hear from distressed
homeowners. Our increases in staffing and foreclosure
alternative programs are directed at respectfully helping
customers move through this difficult period. We believe that
these efforts are working, as every day we reduce the backlog
in both modification decisions and customer complaints.
Q.10. Given the varying State laws that govern foreclosure,
there must be the opportunity to observe both best and worst
practices. While foreclosures are not the preferred option for
any party at the onset of a loan, sometimes it is the path
forward that presents the least harm to borrowers, lenders and
the economy. In those instances, it is essential that our
foreclosure process be effective.
Which States do each of you feel provide the most efficient
path forward in foreclosures, while providing borrowers proper
legal channels in the event that there is a dispute? What is
the average length of time between original delinquency and
foreclosure sale in these States?
Which States do each of you feel have the most problems in
effectively executing foreclosures? What is the average length
of time between original delinquency and foreclosure sale in
these States?
A.10. The processes and requirements governing foreclosure vary
significantly among States, and in some cases, from one local
jurisdiction to another. We have not undertaken a review to
compare the relative efficiency and effectiveness of
foreclosure regimes in the 50 States. We would note that States
face varying challenges, including their respective volumes of
delinquent borrowers and economic conditions.
As to the average duration of the foreclosure process, for
the loan population serviced by Bank of America, it takes
nearly a year, on average, from the time a customer receives a
foreclosure notice until the actual foreclosure sale is
completed. The timeline in judicial States is generally longer.
In Florida, for example, the timeline can be closer to 2 years.
While Bank of America does not track this data across all
servicers, we are aware of various third parties that do
endeavor to provide State-by-State averages. For example,
RealtyTrac (http://www.realtytrac.com/foreclosure-laws/
foreclosure-laws-comparison.asp) provides information on State-
by-State procedures and foreclosure timelines. The Mortgage
Bankers Association also provides information on foreclosure
timelines (see http://www.mortgagebankers.org/
IndustryResources/ResourceCenters/ForeclosureProces). While we
cannot verify the accuracy of this third party data, we share
them with you as potential sources of information.
Q.11. To better gauge the level of violations surrounding the
topic of this hearing it is necessary for us to understand who
is being affected. Admittedly, this question is probably best
suited for the regulators, and we hope to receive this
information from them at some point.
In your research and investigations, how many individuals
were discovered to have been fully current on their mortgage
payments but foreclosed upon by their servicer? Please provide
the data and evidence that you evaluated to arrive at your
conclusions.
A.11. As noted in response to question 7 above, when industry
concerns arose with the foreclosure affidavit process, we took
steps to stop foreclosure sales nationwide and launch a
voluntary review of our foreclosure procedures. While we don't
claim perfection, our review to date indicates that the issues
with the affidavit process did not affect the basis of our
foreclosure decisions.
The decision to refer a loan to foreclosure is made by Bank
of America after a foreclosure review process that is based on
a careful evaluation of our servicing records. This evaluation
precedes and is independent from the process used to create and
execute affidavits of indebtedness.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM BARBARA J.
DESOER
Q.1. Please describe in detail the reviews that your
organizations conducted pursuant to your announced moratoriums,
including: how many employees were involved; how many files
they reviewed; how much time, on average, an employee spent
reviewing a file.
How many errors did you uncover, and what was the nature of
those errors?
How did you inform homeowners that their foreclosure
filings were being reviewed?
A.1. When industry concerns arose with the foreclosure
affidavit process, we took affirmative steps to stop
foreclosure sales so that we could review our related
foreclosure procedures. On October 1, 2010, we voluntarily
suspended foreclosure judgments in the 23 judicial foreclosure
States while we completed this review. One week later, we
paused foreclosure sales nationwide in order to extend our
voluntary review of our foreclosure process to all 50 States.
We determined that, out of an abundance of caution, we would
replace every affidavit of indebtedness in every pending
foreclosure case.
The new affidavits will be prepared through an improved
process, which includes, among other things, a new affidavit
form to enhance the quality and uniformity of our process and
additional quality control checks throughout the process in
order to ensure that the accuracy of each affidavit is verified
at several key points. We are also adding measures to validate
that each affidavit is individually reviewed by the signer,
properly executed, and promptly notarized. In addition, we are
implementing new procedures for selecting and monitoring
outside counsel.
We are taking these matters very seriously and are
carefully restarting the affidavit process with these controls
in place.
Q.2. How many files that you reviewed were missing the original
note?
A 2007 study found that 40 percent of bankruptcy filings
involving mortgages were missing the original note. How many of
your foreclosure filings are missing their original note?
A.2. We believe that our investors hold notes for substantially
all of the mortgage loans we service, and we rarely prepare and
file lost note affidavits. It bears note that the fact that a
note is lost does not mean that the debt is extinguished or is
unenforceable. The law in all States permits lost notes to be
enforced and the related mortgages to be foreclosed subject to
certain conditions.
While rules and practice over the filing or submission of
originals or copies of promissory notes vary significantly from
court to court, if our local counsel is required to file or
submit the original note or a copy of the original note, we
request it from the applicable custodian or investor and send
the original or a copy of the note (or, in those rare cases
when a note has been lost, a lost note affidavit) to our local
counsel to be filed or submitted. Your reference to a 2007
study may be to an article by Katherine Porter entitled
Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas
Law Review 121 (2008). Ms. Porter did not study whether
servicers had access to notes or whether they were filed or
submitted in foreclosure actions. Her study was limited to
assessing whether proofs of claim initially filed in bankruptcy
cases included copies of notes (she did not look at any
amendments or responses to requests).
Q.3. Do all of your organization's note endorsements comply
with the requirements of your pooling and servicing agreements?
A.3. Bank of America believes that it has complied in all
material respects with the mortgage loan document delivery
requirements of pooling and servicing agreements with respect
to note endorsements. Trustees or their designated document
custodian generally have a contractual obligation to review the
loan documents provided by the seller for conformity with the
delivery requirements of the pooling and servicing agreement.
This process is called ``certification.'' If a seller did not
deliver a proper note endorsement, in the ordinary course this
error should be identified by the trustee or the document
custodian as part of the certification process.
Q.4. Have your regulators participated in or overseen your
reviews, and if so, how?
A.4. Under the rules and regulations of the Office of the
Comptroller of the Currency (OCC), a national bank may not
disclose information concerning examinations or investigations
performed by the ace. For example, pursuant to 12 CFR
4.36(d), a national bank may not disclose non-public OCC
information to third parties because it is considered the
property of the OCC.
John Walsh, Acting Comptroller of the Currency, testified
to this Committee on December 1, 2010 that ``[w]hen problems
were identified outside the national banking system at Ally
Bank, we immediately directed the eighth largest national bank
servicers to review their operations and take corrective
action'' and that the OCC ``began organizing onsite
examinations at each of those major servicers which are now
well underway, with more than 100 national bank examiners
assigned to this task.'' In addition, Mr. Walsh testified at a
November 18, 2010 hearing of the House Financial Services
Committee, Housing & Community Opportunity Subcommittee, that
``[t]he examinations that we're now undertaking on an
interagency basis are going to just grind right down to the
most granular detail to understand what has gone on in this
process; to make sure that those processes are remedied so that
they operate in a fair and legal manner.''
Q.5. There is some disagreement about whether the problems
within the loan modification and foreclosure processes were
isolated incidents, systemic failures, or were caused by rogue
individuals following mistaken guidelines. Who determines your
affidavit signing policies and procedures?
Were your employees following company policy? If so, has
any employee responsible for designing that policy been
disciplined, and how?
Were any employees disobeying company policy? If so, have
they been disciplined, and how?
A.5. As noted above in response to your first question, we are
implementing a series of steps to improve our process for
generating affidavits of indebtedness. Our new policies and
enhancements to our judicial foreclosure process are designed
to provide additional assurance that going forward, affidavits
of indebtedness will be prepared in accordance with best
practices and all applicable rules. Our efforts include an
enhanced training program for all employees involved in the
affidavit process, including affiants and notaries, on the
revised process and their specific responsibilities. We are
taking these matters very seriously.
Q.6. An article published in the Cleveland Plain Dealer on
October 17 titled ``Mortgage Foreclosure Uproar Sweeps Up
Northeast Ohioans'' told the stories of three Northeast Ohio
families that had their houses taken from them despite not
missing any mortgage payments. What is your response to this
story, and do you believe that such a report is consistent with
statements like that from Mr. Lowman's written testimony that
information in your files about ``default and indebtedness was
materially accurate'' and that foreclosure record-keeping and
affidavit issues ``did not result in unwarranted
foreclosures''?
A.6. As noted above in response to Senator Shelby's questions 7
and 11, when industry concerns arose with the foreclosure
affidavit process, we took steps to stop foreclosure sales
nationwide and launch a voluntary review of our foreclosure
procedures. While we don't claim perfection, our review to date
indicates that the issues with the affidavit process did not
affect the basis of our foreclosure decisions.
We would note that the cases reported in the press are
often more complex than some reports suggest but financial
privacy concerns prevent us from discussing the specifics of
these cases publicly.
Q.7. Mr. Lowman's written testimony says that ``servicer
compensation would tend to favor modification over
foreclosure,'' and that ``the cost for servicers to take a loan
to foreclosure generally is significantly greater than the cost
of a modification.'' Please describe the compensation structure
of your mortgage servicing business.
A.7. At Bank of America, foreclosure is the last resort. From a
business standpoint, a loan modification is the preferred
solution because foreclosures are almost always more costly
than modifications.
For context, of the loans Bank of America has taken to
foreclosure sale, the foreclosure typically takes 19 months to
complete from the time of delinquency to actual sale versus a
loan modification that typically takes 4 months to complete
from default to workout. The associated servicing-related costs
to foreclose on average are four times higher than the cost to
modify a loan.
The cost of servicing a non-performing loan for an extended
period of time exceeds any offsetting income from fees. In
addition, Bank of America suffers the full loss on loans it
holds for investment.
Q.8. How many second liens do you hold on properties that you
are also servicing?
A.8. Bank of America owns the second lien on approximately 11
percent of the portfolio of loans we service.
Q.9. Please describe any barriers to mortgage modifications
that servicers may encounter.
A.9. As we discussed above in response to Senator Shelby's
question 6, when working with delinquent customers, we aim to
achieve an outcome that meets both customer and investor
interests, consistent with our obligations to the investor.
Many investors limit Bank of America's discretion to make
modifications, and even when they do not, our legal duties to
investors add complexities to the execution of modification
programs. While very few investors have an outright prohibition
on modifications, their eligibility criteria and requirements
vary.
The Treasury Department, investors, and other
constituencies have frequently changed the requirements of
their modification programs. These differences and changes
significantly contribute to the complexity of the modification
process, strain a servicer's operations and systems, and may be
a source of frustration and confusion felt by borrowers.
As I previously testified, HAMP alone has had nearly 100
program changes in the past 20 months. In testimony before the
House Judiciary Committee on December 2, 2010, Phyllis
Caldwell, Chief of the Homeownership Preservation Office of the
Department of the Treasury, testified that ``we have made so
many changes'' to HAMP and that ``some would say we've made too
many changes that the system can't absorb them.'' Fannie Mae
and Freddie Mac have layered on additional, and in many cases,
different requirements, conditions and restrictions for HAMP
processing of the loans they own. When these changes occur, we
and other servicers have to change our processes, retrain our
staff, and update our technology. These changes can also affect
what is required of the customer, including requiring new or
different documentation. In addition, States also have imposed
statutory and regulatory changes to the foreclosure process
requiring various types of loss mitigation efforts, all of
which have to be coordinated with the changing Federal
directives.
Notwithstanding these challenges, Bank of America has
completed nearly 750,000 loan modifications since 2008.
------
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD FROM R.K. ARNOLD
Q.1. Last year we enacted the Helping Families Save Their Homes
Act. The Act added a provision to the Truth in Lending Act,
known as TILA, which requires loan owners and assignees to
disclose their identity to homeowners. Now, TILA requires the
mortgage industry to keep homeowners informed--in writing--
whenever their mortgage is sold, transferred or assigned.
How does MERS' core function--that of recording MERS as the
mortgagee of record in public documents and then tracking
future assignments in its internal, proprietary database--match
up with the disclosure provisions of the Truth in Lending Act?
How are homeowners notified about who owns or who services
their loans--and who has the right to foreclose on them--when
it is being tracked by MERS?
A.1. The functions and operations of MERS are completely
consistent with, and supportive of, the provisions of the Truth
in Lending Act, and in particular, with the original
requirement for servicers to notify homeowners when the
servicing rights are transferred, and the new requirement
implemented by the Helping Families Save Their Homes Act for
notification of the homeowner when the ownership of a mortgage
loan changes.
While the primary responsibility in notifying the borrowers
of changes in ownership and servicing of a mortgage loan fall
(respectively) upon the owner and the servicer of the mortgage
loan, MERS has always attempted to operate in conformance with
the mandates and directives of TILA. From the outset, the
MERS' System has allowed borrowers to consult the
database and determine the identity of the servicer for their
loan if their loan is registered on the MERS'
System.
Following the passage of the Helping Families Save Their
Homes Act, MERS introduced an optional new service called MERS
InvestorID that took two steps to help further the Act's
objectives. First, it added a new feature to the system that
allows its members to automatically generate an ``Investor
Transfer Notice'' that informs homeowners of the change to
their loan's ownership.
Second, MERS expanded its Web-based servicer look-up system
(www.mers-servicerid.org) so that a borrower can also determine
who owns their mortgage loan if their loan is registered on the
MERS' System. Participation in the InvestorID
program is optional for MERS members, and members may choose to
keep the investor identity confidential. However, to date 97
percent of MERS' 3,000 members have agreed to participate and
disclose the identity of the owner of the loan. MERS continues
to work with our remaining members and seeks to have 100
percent participation. In those cases where the investor
information is not available, MERS is frequently willing and
able to work with the borrower and help them secure this
information through other sources (such as the Web site of
Freddie Mac, which has opted not to participate in InvestorID
at this time but has enabled their own Web site,
www.freddiemac.com, to provide the same service).
In addition to providing investor information online and
free of charge, borrowers may also confirm the identity of
their current servicer through MERS. The same service where
borrowers can obtain the identity of their investor will also
identify their current servicer (www.mers-servicerid.org). This
is particularly useful in detecting fraud for borrowers by
letting them confirm the content of any hello-and-goodbye
letter they receive and preventing them from sending a loan to
the wrong (and possibly fraudulent) address. Regardless of the
availability of information on the MERS' System, the
borrower still retains the right under TILA to obtain the
ownership information from the servicer. The principle legal
obligation to provide borrowers with this information rests
with the servicer, and the naming of MERS as mortgagee does not
diminish or change this duty in any way. MERS' disclosure of
investor information is and always was intended to be a
supplement to, rather than a replacement of, this legal right.
MERS strives to improve the availability and reliability of
information for all participants in the mortgage finance
process--borrowers, lenders, investors, servicers, and
regulator--and we are open to any suggestions that further
those goals.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM R.K.
ARNOLD
Q.1. Mr. Levitin, your testimony states that a common response
from banks--and I assume here you mean servicers--about
problems in the foreclosure process is that it doesn't matter
to them because the borrower still owes on the loan and has
defaulted. As you put it: ``This `No Harm, No Foul' argument is
that homeowners being foreclosed on are all a bunch of
deadbeats, so who really cares about due process?'' You say
that this argument, that you attribute loosely to ``banks,''
condones ``vigilante foreclosures: so long as the debtor is
delinquent, it does not matter who evicts him or how.''
Does any representative of the servicer industry on the
panel wish to comment on this?
A.1. MERSCORP, Inc. and its subsidiary, Mortgage Electronic
Registration Systems, Inc., is not a servicer or a
representative of any servicer or the servicer industry.
Mortgage Electronic Registration Systems, Inc. serves as a
common agent for the mortgage finance industry for the limited
purpose of holding and tracking mortgages. Neither company is
involved in the servicing of loans and makes no decisions and
has no role in the any decisions regarding loan modifications
or loan foreclosures. As such, we have no comment on Mr.
Levitin's statements.
Q.2. Attorney General Miller's testimony today states the
following:
While the servicer is free to lose documents as many times as
they want or to take as long as they want, the servicer often
demands strict compliance from the borrower. Thus, no matter
how many times the borrower has previously submitted his or her
paperwork, if the borrower fails one time, the loan
modification is denied.
Do any representatives of the servicer industry wish to
respond to Mr. Miller's claims?
A.2. MERSCORP, Inc. and its subsidiary, Mortgage Electronic
Registration Systems, Inc. is not a servicer or a
representative of any servicer or the servicer industry.
Mortgage Electronic Registration Systems, Inc. serves as a
common agent for the mortgage finance industry for the limited
purpose of holding and tracking mortgages. Neither company is
not involved in the servicing of the loan and makes no
decisions and has no role in the any decisions regarding loan
modifications or loan foreclosures. As such, we have no comment
on Attorney General Miller's statement.
However, it should be noted that in 2005, when it became
apparent to us that foreclosures undertaken in Florida were
relying excessively on lost note affidavits, MERS adopted a
rule forbidding the use of lost note affidavits when
foreclosures were done in the name of MERS in Florida. That
rule was extended nationally in 2006 and is still in effect
today. MERS believes that borrowers are entitled to know that
the company foreclosing has all of the necessary paperwork and
rights to do so. Showing up with the original note provides the
borrower and the court with proof that the foreclosing company
is the proper party to foreclose.
Q.3. Mr. Arnold, your company relies on people who you refer to
as ``certifying officers.'' These are people who work in
companies that are members of your system and who your company
grants certain authorities, such as the authority to initiate
foreclosures.
Please explain what authorities are granted to certifying
officers and the mechanisms that your company has in place to
monitor the performance and behavior of those officers.
A.3. Mortgage Electronic Registration Systems, Inc. takes the
majority of its actions as the mortgagee through the use of
officers commonly referred to as ``certifying officers.'' From
inception, the concept of certifying officers has always been
fundamental to the operations of MERS. In the white paper \1\
calling for the creation of MERS, it was recognized that
members would need to have a form of authority to act on behalf
of MERS when MERS is the mortgagee on their behalf. That
authority took the form of appointing persons (designated by
the member) as officers with limited authority to take certain
actions. The offices to which each of these individuals are
officially appointed to are vice president and assistant
secretary.
---------------------------------------------------------------------------
\1\ In 1993, a 36-page white paper entitled ``Whole Loan Book Entry
Concept for the Mortgage Finance Industry'' addresses the concepts
underlying MERS and the problems it was designed to address. It is
available upon request.
---------------------------------------------------------------------------
The authority granted to these officers is limited to: (1)
executing lien releases, (2) executing mortgage assignments,
(3) initiating foreclosures, (4) executing proofs of claims and
other bankruptcy related documents (e.g., motions for relief of
the automatic stay), (5) executing modification and
subordination agreements needed for refinancing activities, (6)
endorsing over mortgage payment checks made payable to MERS (in
error) by borrowers, and (7) taking such other actions and
executing documents necessary to fulfill the member's servicing
duties. It is important to note that the certifying officers
are the same officers whom the lenders and servicers use to
carry out these same functions above for their company even
when MERS is not the mortgagee.
MERS has specific controls over who can be identified by
its members as a certifying officer. To be a MERS certifying
officer, one must be a company officer of the member
institution, have basic knowledge of MERS, and pass a
certifying examination administered by MERS, which is renewed
on an annual basis for each individual.
Concerning the monitoring and oversight of certifying
officers, as noted in our testimony (see p.19-21), MERS has
taken actions in the past to help ensure that certifying
officers were acting in a manner consistent with MERS rules.
Earlier this year, when we became aware of acceleration in
foreclosure document processing, we grew concerned that some
certifying officers might have been pressured to perform their
responsibilities in a manner inconsistent with our rules. When
we did not get the assurances we thought were appropriate to
keep this from happening, we suspended our relationships with
those companies.
When we discovered that some so-called ``robo-signers''
were MERS certifying officers, we suspended their authority
until they could be retrained and retested. We are asking our
members to provide us with specific plans outlining how they
intend to prevent such actions in the future.
Q.4. Mr. Arnold, does MERS derive any revenue from
foreclosures?
A.4. No. Neither MERSCORP, Inc. nor its subsidiary, Mortgage
Electronic Registration Systems, Inc., receive any fees or
other form of compensation from foreclosures.
MERS derives its revenue solely from its members. MERS
makes its money through an annual membership fee (ranging from
$264 to $7,500) based on organizational size, and through loan
registration and servicing transfer fees. MERS charges a one-
time $6.95 fee to register a loan and have Mortgage Electronic
Registration Systems, Inc. serve as the common agent
(mortgagee) in the land records. For loans where Mortgage
Electronic Registration Systems, Inc. will not act as the
mortgagee, there is only a small one-time registration fee
($0.97). This is known as an iRegistration. Transactional fees
(ranging from $1.00 to $7.95) are charged to update the
database when servicing rights on the loan are sold from one
member to another.
MERS charges no fees and makes no money from mortgage
origination or payments, from the securitization or transfer of
mortgages, or from foreclosures done in its name.
Q.5. Ms. Thompson testifies that, `` . . . the problems
occasioned by mortgage servicer abuse run rampant.'' That is a
strong accusation. Ms. Thompson also frequently, though without
definition, refers to ``abuses'' committed by servicers and
``excessive'' fees. She accuses servicers of failing to
negotiate in good faith and of preparing false affidavits. She
states that ``Servicers do not believe that the rules that
apply to everyone else apply to them.'' Their attitude,
according to Ms. Thompson, is ``lawless'' and they commit
``wrongful foreclosure on countless American families.'' She
also states that ``The lack of restraint on servicer abuses has
created a moral hazard juggernaut that at best prolongs and
deepens the current foreclosure crisis and at worst threatens
our global economic security.''
Do any of the servicer representatives here wish to respond
to Ms. Thompson's allegations?
A.5. MERSCORP, Inc. is not best suited to answer this question.
MERSCORP, Inc. and its subsidiary, Mortgage Electronic
Registration Systems, Inc. is not a servicer or a
representative of any servicer or the servicer industry.
Mortgage Electronic Registration Systems, Inc., serves as a
common agent for the mortgage finance industry for the limited
purpose of holding and tracking mortgages. Neither company is
involved in the servicing of the loan and makes no decisions
and has no role in the any decisions regarding loan
modifications or loan foreclosures. As such, we have no comment
on Ms. Thompson's statements.
Q.6. Given the varying State laws that govern foreclosure,
there must be the opportunity to observe both best and worst
practices. While foreclosures are not the preferred option for
any party at the onset of a loan, sometimes it is the path
forward that presents the least harm to borrowers, lenders and
the economy. In those instances, it is essential that our
foreclosure process be effective.
Which States do each of you feel provide the most efficient
path forward in foreclosures, while providing borrowers proper
legal channels in the event that there is a dispute? What is
the average length of time between original delinquency and
foreclosure sale in these States?
Which States do each of you feel have the most problems in
effectively executing foreclosures? What is the average length
of time between original delinquency and foreclosure sale in
these States?
A.6. MERSCORP, Inc. is not best suited to answer this question.
MERSCORP, Inc. and its subsidiary, Mortgage Electronic
Registration Systems, Inc. is not a servicer or a
representative of any servicer or the servicer industry.
Mortgage Electronic Registration Systems, Inc. serves as a
common agent for the mortgage finance industry for the limited
purpose of holding and tracking mortgages. Neither company has
any role in the decisions regarding loan modifications or loan
foreclosures.
Q.7. To better gauge the level of violations surrounding the
topic of this hearing it is necessary for us to understand who
is being affected. Admittedly, this question is probably best
suited for the regulators, and we hope to receive this
information from them at some point.
In your research and investigations, how many individuals
were discovered to have been fully current on their mortgage
payments but foreclosed upon by their servicer? Please provide
the data and evidence that you evaluated to arrive at your
conclusions.
A.7. MERSCORP, Inc. is not best suited to answer this question.
MERSCORP, Inc. and its subsidiary, Mortgage Electronic
Registration Systems, Inc. is not a servicer or a
representative of any servicer or the servicer industry.
Mortgage Electronic Registration Systems, Inc. serves as a
common agent for the mortgage finance industry for the limited
purpose of holding and tracking mortgages. Neither company is
involved in the servicing of the loan and makes no decisions
and has no role in the any decisions regarding loan
modifications or loan foreclosures.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM R.K. ARNOLD
Q.1. How many individuals are employed by MERS, Inc. and
MERSCORP, Inc., including vice presidents, assistant
secretaries, or other ``certifying officers'' designated
pursuant to corporate resolution?
Are these employees also employed by other organizations?
If so, which ones?
A.1. Measured by direct employment, MERSCORP, Inc. is a
relatively small organization. About 50 people work for
MERSCORP, Inc. in our Reston, VA, office. Hewlett-Packard and
Genpact are our technology partners, and they run the database,
the help desk and mailroom with an additional 150 people
dedicated to the MERS account.
MERS Certifying Officers
Mortgage Electronic Registration Systems, Inc. takes the
majority of its actions as the mortgagee through the use of
officers commonly referred to as ``certifying officers.'' From
inception, the concept of certifying officers has always been
fundamental to the operations of MERS. In the white paper
calling for the creation of MERS, it was recognized that
members would need to have a form of authority to act on behalf
of MERS when MERS is the mortgagee on their behalf. That
authority took the form of electing persons (designated by the
member) as officers with limited authority to take certain
actions. The offices to which each of these individuals are
officially appointed are vice president and assistant
secretary. The authority granted to these officers is limited
to: (1) executing lien releases, (2) executing mortgage
assignments, (3) initiating foreclosures, (4) executing proofs
of claims and other bankruptcy related documents (e.g., motions
for relief of the automatic stay), (5) executing modification
and subordination agreements needed for refinancing activities,
(6) endorsing over mortgage payment checks made payable to MERS
(in error) by borrowers, and (7) taking such other actions and
executing documents necessary to fulfill the member's servicing
duties.
It is important to note that the certifying officers are
the same officers whom the lenders and servicers use to carry
out these functions even when MERS is not the mortgagee. MERS
has specific controls over who can be identified by its members
as a certifying officer. To be a MERS certifying officer, one
must be a company officer of the member institution, have basic
knowledge of MERS, and pass a certifying examination
administered by MERS.
Under the corporate law in Delaware (where MERS is
incorporated), there is no requirement that an officer of a
corporation also be an employee of that corporation. A
corporation is allowed to appoint individuals to be officers
without having to employ those individuals or even pay them.
This concept is not limited to MERS. Corporations cannot
operate without officers; they can and often do operate without
employees. It is not uncommon for large organizations to have
all its employees employed by an operating company and for
those employees to be elected as officers of affiliated
companies that are created for other purposes (all corporations
are required by law to have officers to act for it). Even for
loans where MERS is not the mortgagee, employees of the
servicer are generally delegated the power to take actions
(e.g., initiate foreclosures) and execute documents (e.g., lien
releases and assignments) on behalf of the owner of the loan
(and the servicer, in turn, may further delegate such authority
to a third-party vendor).
As of November 15, 2010, MERS has 20,302 certifying
officers who work with the more than 31 million active loans
registered on the MERS System.
Q.2. Is Mortgage Electronic Registration Systems (MERS)
considered a nominee or mortgagee for the mortgages that it
registers?
A.2. MERS is a mortgagee who holds the mortgage lien in a
nominee capacity for the lender and the lenders successors and
assigns. When MERS is named as mortgagee in a mortgage
document, it holds the legal title to that mortgage, while the
beneficial interest in that mortgage flows to the owner of the
promissory note. A MERS mortgage makes clear that MERS is
acting as the nominee (agent) of the lender-the original owner
of the beneficial interest in the mortgage-and holds the legal
title to the mortgage in this capacity.
Mortgage law is abundantly clear that a promissory note
owner may empower an agent with the authority to hold and
enforce a mortgage lien on behalf of the note owner, and that
courts should make every effort to recognize this agency
relationship. (See Restatement (Third) Property, 5.4, comment
e)
The practice of having an agent hold legal title to the
mortgage for a note-owner long pre-dates the creation of MERS
in 1995. It became a standard practice in the mortgage finance
industry.
Q.3.-1. What is the status of a mortgage if a State court rules
that MERS has not legally obtained or transferred title?
A.3.-1. As a rule, the mortgage is said to follow the note,
i.e., that the holder of the note also holds the beneficial and
equitable (but not legal) title to the mortgage, and transfer
of the promissory note conveys the beneficial and equitable
interest in the mortgage. Therefore, the note-holder always has
the right to foreclose. If a lender has possession of the note
and seeks to foreclose, the note-holder will be viewed as
having an equitable assignment of the mortgage because the
mortgage follows the note. This general principle applies
whether or not MERS is the mortgagee.
We are not aware of any State where the law of that State
prohibits MERS from being the mortgagee, or that MERS has not
legally obtained or transferred title. There have been a few
cases that turned on the specific facts of the case and some
may mistakenly interpret these cases to hold that MERS cannot
be the mortgagee (e.g., the Maine Supreme Judicial Court
decision in Mortgage Electronic Registration Systems, Inc. v.
Saunders, 2010 ME 79, Cum-09-640 (MESC), August 12, 2010). Such
an interpretation is not correct, in Saunders or any other case
that we are aware.
For example, the Saunders court did not hold or state
anywhere in the opinion that MERS cannot hold a mortgage lien.
What the court actually concluded is that ``MERS does not
qualify as a mortgagee pursuant to [Maine's] foreclosure
statute, 14 M.R.S. 6321-6325.'' (par. 11 of the opinion,
emphasis added). The statute outlines steps that a mortgagee
must take to commence and complete a judicial foreclosure in
that State. It does not specifically define the term
``mortgagee'' or in any way determine who may be a mortgagee
under Maine's broader real property law. As for the Saunders
decision itself, it does not in any way conflict with or
otherwise repudiates the basic legal principals upon which the
MERS business model is based.
When MERS is named as mortgagee in a mortgage document, it
holds the legal title to that mortgage, while the beneficial
interest in that mortgage flows to the owner of the promissory
note. The Saunders opinion acknowledges this very same point. A
MERS mortgage makes clear that MERS is acting as the nominee
(agent) of the lender--the original owner of the beneficial
interest in the mortgage--and holds the legal title to the
mortgage in this capacity for the lender and successors-in-
interest to the lender.
A foreclosing party--be it MERS or anyone else--must both
hold the note and be the mortgagee of record. As the Saunders
court noted, Maine's adoption of the Uniform Commercial Code
(UCC) specifically allows the holder of the promissory note the
right to enforce its terms. The note is the primary evidence of
the borrower's obligation to repay the debt, and the mortgage
is subordinate to the note.
For this reason, MERS rules require that before it will
move forward with a foreclosure, MERS must be the mortgagee and
MERS must be the holder of the note. MERS has established rules
and procedures for foreclosures to ensure that the necessary
evidence is presented to the court and the claim is clearly
presented in the pleading. When these rules and procedures are
followed, MERS foreclosures are successful. It has been noted
in the press and elsewhere that some courts have held that MERS
did not have the right to foreclose, despite the fact that MERS
is named as mortgagee on the document. However, these cases are
typically the result of a MERS member and/or certifying officer
failing to follow the established rules and procedures for a
foreclosure. The MERS member fails to provide the court the
proper evidence and plead the case appropriately to establish
the standing and claim for MERS. The most common failing in
these cases is the failure to provide a copy of the note.
The court specifically acknowledged--and we agree--that
MERS holds legal title to the property. We are not aware of any
court ruling or opinion where MERS has been the mortgagee and
presented the note as the note holder where the court has found
that MERS does not have standing to foreclose. Further, we are
not aware of any court ruling or opinion holding that a
mortgage naming MERS as the mortgagee is unenforceable or void.
Q.3.-2. Who holds the mortgage? Who holds the right to
foreclose?
A.3.-2. When faced with the issue of whether MERS can hold the
mortgage, numerous courts have concluded that pursuant to the
language in the security instrument, MERS is the mortgagee and
holds legal title to the mortgage. Courts have also held that
as the mortgagee, MERS has the authority to commence
foreclosure, whether judicially or non-judicially, under State
statutes governing foreclosure. See In re Mortgage Electronic
Registration Systems (MERS) Litigation, a Multi-district
litigation case (D.Ariz., Sept. 30, 2010, MDL Docket No. 09-
2119-JAT); Pantoja v. Countrywide Home Loans, et al.--U.S.
Dist. Ct., 5:09cv016015 (N.D. Cal., 2009); Mortgage Electronic
Registration Systems, Inc. v. Azize, (965 So. 2d 151, 153-54
Fla. Dist. Ct. App. 2007); Warque v. Taylor, Bean & Whitaker,
MERS, et al, 09-1906 (D. Ga. 8/18/2010); Mortgage Electronic
Registration Systems, Inc., v. Bellistri, 2010 WL 272080 *6,
para.1A37 (E.D. Mo. July 1, 2010); Ramos v. Mortgage
Electronic Registration Systems, Inc., et al., 2:08cv01089 (D.
Nevada., 2009); Athey v. Mortgage Electronic Registration
Systems, Inc., 2010 WL 1634066 (Tex. App.--Beaumont; Burnett v.
Mortgage Electronic Registration Systems, Inc., 09-69 (D. Ut.
2009); Ruben Larota-Florez v. Goldman Sachs Mortgage Co., et
al., #09cv1181, U.S. Dist. Ct., Eastern Dist. of VA (December
8, 2009); and Moon v. GMAC Mortgage Corporation, et al, No.
C08-969Z, 2008 WL 4741492 (W.D. Wash. Oct. 24, 2008).
Likewise, numerous courts have held that when MERS is the
mortgagee identified in the security instrument, it has the
authority to assign its interest in the mortgage or deed of
trust, and that the assignee of MERS has standing to commence
foreclosure proceedings. See Lane vs. Vitek Real Estate
Industries Group, et al., 2:10cv335 (E.D. Cal., 2010); Trotter
v. Bank of New York Mellon et al, Kootenai County District
Court, Case No. CV-10-95 (July 2, 2010); Deutsche Bank National
Trust Co. v. Traxler, 2010-Ohio-3490, the Ninth Judicial
District Court of Appeal finding that MERS, as the mortgagee
had the authority to assign the mortgagee and that Deutsche
Bank, as the assignee, had standing to foreclose; US Bank
National Assoc. v. Flynn, 897 N.Y.S. 2d 855 or LexisNexis at
2010 N.Y. Misc. Lexis 511 (March 12, 2010); and Griffin v.
Wilshire Credit Corporation, et al., Case No. 4:09-CV-715-Y
(U.S. Dist. Ct., N.D. Texas, June 8, 2010).
Q.3.-3. What are the rights of the investors in the mortgage-
backed security (MBS)?
A.3.-3. With respect to the securitization process, MERS' role
is limited to assisting investors and servicers to reduce the
need for assignments to be recorded in the local land records
when MERS Members trade rights in mortgage loans. While we
understand generally that investors in mortgage-backed
securities own the underlying promissory notes which have been
pooled and securitized, MERS does not participate in the actual
process of pooling the mortgage loans and issuing the
securities and is not in a position to comment in detail on the
rights of the investors to these financial products.
Q.4. If the trustees of the MBS never secured the assets from
the originators because of their own failure to complete
diligence, who holds the mortgage?
What is the impact on the MBS?
What are the rights of the investors in the MBS?
A.4. MERS is not part of how mortgage loans get securitized.
That role belongs to the note-owner who decides whether a note
should be sold, or transferred to a trust, or ultimately
securitized with a pool of other loans.\2\ Loans were
securitized long before MERS became operational, and in fact,
there are loans in securities today that do not name Mortgage
Electronic Registration Systems, Inc. as the mortgagee. As
such, MERSCORP, Inc. is not in a position to comment on some
portions of this question.
---------------------------------------------------------------------------
\2\ The issue of whether transfers of residential mortgage loans
made in connection with securitizations are sufficient to transfer
title and foreclosure rights is the subject of a ``View Point'' article
entitled ``Title Transfer Law 101'' by Karen Gelernt that appeared in
the October 19, 2010 edition of the American Banker. A copy was
provided as attachment 3 of MERS' testimony.
---------------------------------------------------------------------------
For mortgages where Mortgage Electronic Registration
Systems, Inc. is the mortgagee, MERS holds legal title to the
mortgage as nominee and common agent on behalf of the
originator of the mortgage loan and any successors or assignees
of the mortgage loan. This does not change regardless of
whether the mortgage loan is assigned or securitized
(successfully or unsuccessfully). The beneficial and equitable
rights to the mortgage move with the promissory note, but the
legal title remains grounded with MERS.
The disposition of beneficial and equitable interests in
the mortgage following a failed sale, transfer or negotiation
of the promissory note will turn upon the facts of the case,
but it is most likely that they will ultimately rest with the
party found to hold the promissory note. However, MERS is not
in a position to comment upon the specific hypothetical posed
by this question.
Other MBS-related aspects of this question are beyond the
scope of MERS' operation and knowledge. Senator Brown may wish
to consult the American Securitization Forum's November 16,
2010 whitepaper, ``Transfer and Assignment of Residential
Mortgage Loans in the Secondary Mortgage Market.''
Q.5. If the assets are never properly secured for an MBS, who
is responsible, both legally and financially--the servicers,
trustees, or investors?
What is the liability of the law firms that failed to
conduct proper due diligence?
A.5. MERS and the MERS' System have limited
involvement in the securitization process. MERS has no role in
determining whether any loan will be securitized, into what
asset pool or trust that loan might be placed, or the creation
of any security that might be issued in reliance upon that
loan. All of this activity is controlled by the owners of the
loans and legally occurs outside of the
MERS' System. It is the obligation of the trustee
and its custodian to verify and ensure that the conveyance of
loans to the trust is done correctly. MERS is fundamentally a
database that tracks servicing rights and beneficial interests
based on information provide by its members. The rating
agencies, however, do require that the name of the trustee (or
the trust) be registered in the investor field on the
MERS' System following the sale of the loan to the
securitization trust.
As a result, this question is beyond the scope of MERS'
operation and knowledge, and MERS therefore has no comment.
Senator Brown may wish to consult the American Securitization
Forum's November 16, 2010 whitepaper, ``Transfer and Assignment
of Residential Mortgage Loans in the Secondary Mortgage
Market.''
Q.6. If States reach opposing legal conclusions regarding the
mortgage holder of record in MERS transactions, what would be
the impact on MBS that contain mortgages from multiple States?
What are the rights of the investors in the MBS?
A.6. MERS and the MERS' System have limited
involvement in the securitization process. MERS has no role in
determining whether any loan will be securitized, into what
asset pool or trust that loan might be placed, or the creation
of any security that might be issued in reliance upon that
loan. All of this activity is controlled by the owners of the
loans and legally occurs outside of the MERS'
System. It is the obligation of the trustee and its custodian
to verify and ensure that the conveyance of loans to the trust
is done correctly. MERS is fundamentally a database that tracks
servicing rights and beneficial interests based on information
provide by its members. The rating agencies, however, do
require that the name of the trustee (or the trust) be
registered in the investor field on the MERS' System
following the sale of the loan to the securitization trust.
As a result, this question is beyond the scope of MERS'
operation and knowledge, and MERS therefore has no comment.
Senator Brown may wish to consult the American Securitization
Forum's November 16, 2010 whitepaper, ``Transfer and Assignment
of Residential Mortgage Loans in the Secondary Mortgage
Market.''
Q.7. On Thursday, November 18, the Washington Post reported
that ``[t]he [financial services] industry is seeking
legislation that would effectively affirm MERS's legality and
block any bill that would call into question what MERS does.''
Is MERS or any of its members seeking Federal legislation? If
so, please describe the proposed legislation sought by the
industry.
A.7. MERS has no knowledge of the source or basis for the
Washington Post report. MERS has not proposed and is not
seeking any Federal legislation.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ADAM J.
LEVITIN
Q.1. Mr. Levitin, you state that problems in the mortgage
market potentially ``represent a systemic risk of liabilities
in the trillions of dollars, greatly exceeding the capital of
the U.S.'s major financial institutions.''
The Dodd-Frank Act sets up a Financial Stability Oversight
Council. According to Section 112 of the Act, the Council is
supposed to identify risks to the financial stability of the
United States. You argue that existing mortgage market problems
are potentially systemic.
Do you believe that the Council has been appropriately
engaged on the foreclosure issue, and, if so, what actions has
it taken to help deal with the issue? If not, what do you
believe the Council should be doing?
A.1. I am not aware of the Financial Stability Oversight
Council (FSOC) having taken any meaningful steps to engage with
potential systemic risks from chain of title problems in
mortgage securitization. Having clear title to property is
among the most fundamental components of a modern, functioning
economy, and any concerns about widespread clouds on title
necessarily raise systemic risk concerns.
There are two potential sources of chain of title problems
for mortgage securitization. The first involves unresolved
questions of law. There is little that the FSOC can do
regarding these questions other than note their existence and
try to reach its own conclusions about how courts might rule. I
would caution that the FSOC needs to be careful to ask how a
court might rule, not what it believes to be the proper (or
convenient) answer. The fact that there is little the FSOC can
do about unresolved legal questions underscores just how
troubling it is that a $1.2 trillion private label
securitization market hinges on debatable legal presumptions in
its product design. I would underscore that it was the
unregulated, private-label securitization industry, not the
GSEs or Ginnie Mae, that designed products lacking either clear
statutory or caselaw support for their legal structures.
The other source of chain of title problems for mortgage
securitization is a compliance question--did mortgage
securitizations actually get the signatures and move the paper
the way they were supposed to do in order to be legally
effective? FSOC can answer this question--if it wants to. To
determine whether there are widespread compliance problems in
mortgage securitization, financial regulators could have
properly trained examiners look at a sufficiently broad
sampling of loan files in mortgage securitizations. Currently,
Federal bank regulators lack the expertise to perform this sort
of examination; mortgage loan documentation is beyond the
traditional scope of bank examiner duties. If the FSOC were so
motivated, however, it could have examiner teams properly
trained to sent to do unannounced, random sampling of
securitized mortgage loan files.
Q.2. Mr. Levitin, your testimony states that a common response
from banks--and I assume here you mean servicers--about
problems in the foreclosure process is that it doesn't matter
to them because the borrower still owes on the loan and has
defaulted. As you put it: ``This `No Harm, No Foul' argument is
that homeowners being foreclosed on are all a bunch of
deadbeats, so who really cares about due process?'' You say
that this argument, that you attribute loosely to ``banks,''
condones ``vigilante foreclosures: so long as the debtor is
delinquent, it does not matter who evicts him or how.''
Mr. Levitin, do you really believe that mortgage servicers
do not care about due process?
Does any representative of the servicer industry on the
panel wish to comment on this?
A.2. I do not believe that mortgage servicers care about due
process, and I do not think it should be surprising to anyone
that they do not. Due process has no value to mortgage
servicers; it only adds to their costs. I believe that like any
profit maximizing business, mortgage servicers care about their
bottom line and that they evaluate compliance with the law
according to this metric: is it more profitable to comply with
the law or not?
A sad, but basic reality of consumer finance is that it is
often profitable for financial service provides to violate the
law. Consumers are unaware of their legal rights or legal
violations, and even when they are aware, they often lack the
resources to stand up for their rights. Moreover, it simply is
not worthwhile for a consumer to litigate over a violation that
costs the consumer a few hundred or even a few thousanddollars.
And when a consumer does make a determined stand for his or her
rights, it is very easy for the financial service provider to
claim that the violation of the law was a mistake, apologize,
and continue violating the law with other consumers. This makes
it quite profitable to violate the law on a wide-scale, but in
a manner than only harms individual consumers a relatively
small amount.
Seen against this background, it is hard to reach any
conclusion other than that due process is a hindrance to
servicers, not a value. It adds to the cost of foreclosures and
slows down the process, which increases the length of time for
which servicers must advance payments of principal and interest
on the defaulted mortgage to their investors for which
servicers are reimbursed, but without interest. No matter how
loudly any of the servicers testifying protest that they would
of course adhere to the law and would never knowingly violate
consumers due process rights, the plain fact is that they
routinely do so and will continue to do so as long as it is
profitable. Servicers' public protestations of morality and
legality will hardly overcome the basic forces of economics.
Q.3. Given the varying State laws that govern foreclosure,
there must be the opportunity to observe both best and worst
practices. While foreclosures are not the preferred option for
any party at the onset of a loan, sometimes it is the path
forward that presents the least harm to borrowers, lenders and
the economy. In those instances, it is essential that our
foreclosure process be effective.
Which States do each of you feel provide the most efficient
path forward in foreclosures, while providing borrowers proper
legal channels in the event that there is a dispute? What is
the average length of time between original delinquency and
foreclosure sale in these States?
Which States do each of you feel have the most problems in
effectively executing foreclosures? What is the average length
of time between original delinquency and foreclosure sale in
these States?
A.3. There is a tradeoff between efficiency and procedural due
process. The States that have non-judicial foreclosure have a
more efficient foreclosure process from the standpoint of
lenders, in that foreclosures are quicker and less expensive,
but this efficiency comes at the price of procedural
protections.
There is a study that indicates that mortgage availability
is generally greater (and hence mortgage costs are lower) in
States with non-judicial foreclosure procedures. See Karen M.
Pence, Foreclosing on Opportunity, 88 Review of Economics and
Statistics, 177-82 (2006). This would imply that part of the
savings from a more efficient foreclosure process are
transmitted back to mortgage borrowers.
The mere fact that non-judicial foreclosure results in
somewhat lower costs of mortgage credit, however, is not alone
sufficient reason to endorse non-judicial foreclosure.
Homeowners in States with judicial foreclosure pay slightly
more for their mortgages, but they gain procedural protections.
While many homeowners would likely opt for lower up-front
mortgage costs and fewer procedural protections, there is good
reason to believe that homeowners are likely to undervalue
procedural protections in foreclosures: homeowners rarely enter
into a mortgage thinking that it will end up in foreclosure.
Because homeowners are likely to think the likelihood of
foreclosure is more remote than it is, they will underestimate
the value of procedural protections, a phenomenon known as
hyperbolic discounting.
The myriad procedural problems that have become apparent in
foreclosures today make clear just how valuable due process is
in foreclosures; it is when homeowners are at their most
vulnerable that they most need procedural protections. In non-
judicial foreclosure States, a homeowner must bring a quiet
title action to challenge a foreclosure. The result is really a
burden shifting from lenders to homeowners. Given the disparity
in resources between lenders and homeowners, particularly
homeowners in foreclosure, this sort of burden shifting makes
due process simply unaffordable for many homeowners.
While judicial foreclosure adds costs, I believe they are
worthwhile one from a social standpoint, as judicial
foreclosure functions as a type of mandatory insurance designed
to bolster homeownership preservation policies and address the
adverse selection problem that would ensue if homeowners could
decide if they wanted judicial or non-judicial foreclosure.
Ultimately, we need foreclosure processes that strike the
optimal balance between efficiency and procedural due process.
I would submit that non-judicial foreclosure systems are so
lacking in procedural due processes that they are unlikely to
be the proper balance. Instead, the question is really one of
the extent of procedural protections within a judicial
foreclosure system.
Q.4. To better gauge the level of violations surrounding the
topic of this hearing it is necessary for us to understand who
is being affected. Admittedly, this question is probably best
suited for the regulators, and we hope to receive this
information from them at some point.
In your research and investigations, how many individuals
were discovered to have been fully current on their mortgage
payments but foreclosed upon by their servicer? Please provide
the data and evidence that you evaluated to arrive at your
conclusions.
A.4. My research has not examined the issue of the number of
homeowners who are current but have ended up in foreclosure,
and I do not know of anyone who has examined this issue
empirically. Anecdotally, however, there are a troublingly
large number of examples of homeowners who have ended up in
foreclosure while current on their mortgages, or who have ended
up in foreclosure as the result of servicer induced defaults
for reasons such as improper crediting of payments (such as to
late fees first, and then to principal and interest) or by the
imposition of exorbitantly priced force-placed insurance.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM ADAM J.
LEVITIN
Q.1. Please describe any barriers to mortgage modifications
that servicers may encounter.
A.1. Beyond the problem of mortgage servicer incentives, which
I address in response to Senator Brown's third question for the
record, there are two major types of barriers to mortgage
modifications for servicers.
First, servicers are often contractually limited in their
ability to perform modifications. Servicing contracts, known as
pooling and servicing agreements (PSAs), frequently contain
limitations on modifications. Most PSAs restrict modifications
to loans that are in default or where default is reasonably
foreseeable and limit servicers' ability to extent the term of
a loan more than a year or so (to the final maturity date of
any other loan in the securitized pool). PSAs sometimes have
further restrictions such as limiting the amount by which
interest rates can be reduced, limiting the number of loans in
a pool that may be modified, or limiting changes in
amortization.
The other major barrier is the presence of junior liens
(``second liens'') on a property. Servicers are reluctant to
modify a loan if there is a junior lien on the property because
any cash flow freed up by the modification benefits the junior
lien holder. While junior liens are not a per se obstacle,
their presence makes servicers hesitant to perform
modifications.
Q.2. What systems should mortgage servicers implement to
correct their mistakes and compensate the individual homeowners
who have suffered through the actions of others?
A.2. There is no simple way for servicers to correct their
mistakes and compensate individual homeowners who have been
harmed. A starting point would be a thorough review of
foreclosure procedures to identify all possible mistakes.
Unfortunately, I do not believe that servicers are capable of
performing such a review. Servicers as companies and
particularly servicer employees involved in foreclosure
operations have very strong incentives not to identify possible
mistakes. Unless servicers are given such an incentive or an
honest-broker third party with expertise in the area examines
hundreds of thousands of foreclosure filings from the past
several years, it is impossible to truly know the extent of the
problem or the harm caused. Let me underscore that I do not
believe that any of the Federal bank regulators have the
expertise to carry out such an examination, and that some of
the regulators are frankly compromised when it comes to
disciplining servicers.
Once the scope of the problem is determined, then
compensation questions can be considered. While there might be
interest from the servicer side in simply creating a
compensation fund for servicing victims, I am loathe to see
Kenneth Feinberg as the solution to all of America's problems,
and am concerned that such an approach would fail to shine much
needed sunlight on a seriously troubled industry.
Q.3. What are the financial incentives encouraging mortgage
servicers to foreclose on homeowners?
A.3. There are several financial considerations that encourage
mortgage servicers to foreclose rather than modify mortgages.
First, in foreclosure servicers are often able to lard on
various ``junk fees,'' meaning either fees for services never
performed, fees for which the homeowner is not actually liable,
or inflated fees for in-sourced services or services outsourced
to vendors that provide kickbacks. Because servicers are paid
off the top of foreclosure sale proceeds, it does not matter
whether the sale brings in enough to cover the mortgage debt;
the servicer's claim for various servicing fees and expenses
will be paid. This means, then, that in most cases--that is
cases where the debt is actually or functionally non-recourse--
servicers' junk fees are really coming out of the pocket of
mortgage backed securities investors.
While a foreclosed loan does not generate servicing fee and
float income for servicers, junk fees can easily off-set this
income. Thus, in Countrywide's 2007 third quarter earnings
call, Countrywide's President David Sambol emphasized that
increased revenue from in-sourced default management functions
could offset losses from mortgage defaults.
Now, we are frequently asked what the impact on our servicing
costs and earnings will be from increased delinquencies and
loss mitigation efforts, and what happens to costs. And what we
point out is, as I will now, is that increased operating
expenses in times like this tend to be fully offset by
increases in ancillary income in our servicing operation,
greater fee income from items like late charges, and
importantly from in-sourced vendor functions that represent
part of our diversification strategy, a counter-cyclical
diversification strategy such as our businesses involved in
foreclosure trustee and default title services and property
inspection services.
Transcript, ``Countrywide Financial Corporation Q3 2007
Earnings Call,'' Oct. 26, 2007 (emphasis added). Sambol also
mentioned that ``Our vertical diversification businesses, some
of which I mentioned, are counter-cyclical to credit cycles,
like the lender-placed property business in Balboa and like the
in-source vendor businesses in our loan administration unit.''
Countrywide is now owned by Bank of America. I have no
reason to believe that the fundamental economics of servicing
acknowledged by Mr. Sambol changed when Countrywide was
purchased by Bank of America.
Second, loan modification is expensive. To modify (or
attempt to modify) a loan is essentially to underwrite a new
loan. There are costs for doing this in terms of personnel time
and overhead, as well as pulling a credit report, etc.
Servicing agreements do not generally provide reimbursement for
modification expenses. Moreover, not all attempted
modifications result in an actual modification. Attempted
modifications still involve expenses, however, Thus, unless a
servicer believes that its income from a modified loan--
discounted for the likelihood that there will be a modification
and that the modified loan will redefault--will outweigh both
the costs of modification and the forgone junk fees that could
be collected in foreclosure, attempting a modification is a
losing economic proposition for the servicer.
HAMP attempts to change these incentives by paying a $1,000
modification bounty (and assorted other bounties) to servicers
for each permanent modification. HAMP bounties have to be
discounted, however, by the fact that only 39 percent of HAMP
trial modifications successfully converted to permanent status.
This means that 61 percent of the time servicers put in the
time and expense to doing a HAMP modification, but receive no
reimbursement. The net result is that HAMP incentives may
simply be too small to have their desired effect.
Finally, servicers are required to advance payments of
principal and interest (and sometimes taxes and insurance) on
defaulted loans to mortgage investors. These payments are
reimbursed out of foreclosure sale proceeds, but without
interest. This means that there are considerable time value and
liquidity costs to making advances. The faster a servicer can
foreclose, the less advancing it has to do. Servicers are often
concerned that if they modify a loan, the loan will redefault,
which will increase the total number of months of advances they
will have to pay.
In short, residential mortgage servicers are subject to
strong financial incentives that discourage mortgage
modification and encourage foreclosure. I do not believe that
Government foreclosure mitigation programs like the Home
Affordable Modification Program offer servicers' sufficient
compensation to overcome these incentives, and I do not believe
it is appropriate for the Government to be paying servicers to
perform their contractual duty of maximizing the value of
mortgages for RMBS investors. Residential mortgage servicing is
a failed business model, and mortgage servicers are simply
incapable of handling the current mortgage foreclosure crisis
in a manner that mitigates the harm to the economy and society
at large. In light of this, I think it is necessary to consider
solutions to the foreclosure crisis that remove mortgage
servicers from the decisionmaking process, be it through
modification of mortgages in bankruptcy or through a Federal
agency program modeled on the Home Owners Loan Corporation.
------
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD FROM DAVID B.
LOWMAN
Q.1. In response to questions from Senator Johnson, Mr. Lowman
and Ms. Desoer, you characterized the HAMP 2MP program as a
good approach to second lien modification. You also noted your
organizations' participation in 2MP, with Ms. Desoer pointing
out that Bank of America had been the first servicer to sign up
for the program. Yet, as of Sept. 30, only 21 second lien
modifications worth $10,500 had been made under 2MP since its
implementation in March 2010.
Why, in your opinion, have so few modifications been made
under 2MP so far? Do you see your organization increasing its
number of 2MP modifications in the coming months?
A.1. Response: Chase routinely modifies second liens, just as
it does first liens, when appropriate to achieve affordable
payments for borrowers. From January 2009 through November
2010, Chase offered over 65,000 second lien modifications of
which 16,015 were made permanent. Through November 2010, Chase
had offered 2,319 HAMP 2MP modifications, of which 2,070 were
completed.
Chase implemented 2MP in May 2010, making Chase one of the
first major servicers to do so, but the program did not become
fully effective under the Treasury's re-issued July
Supplemental Directive until August 1, 2010. We believe that
2MP will become more effective over time, as more HAMP
modifications are implemented on first liens--to be eligible
for a 2MP modification, a homeowner must have first received a
HAMP modification of their first mortgage--and as the process
and common database continue to operate.
Because to be eligible for 2MP modification a homeowner
must have received a HAMP modification on their first lien,
information regarding both liens is necessary to initiate the
process. Accordingly, Chase's initial efforts under the 2MP
program focused on borrowers for whom Chase serviced both the
first and second liens. Once Treasury's loan matching files--
providing information regarding loans serviced by other
servicers--became available in August 2010, Chase was able to
expand its efforts to borrowers for whom it serviced only the
second lien.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM DAVID B.
LOWMAN
Q.1. Mr. Levitin, your testimony states that a common response
from banks--and I assume here you mean servicers--about
problems in the foreclosure process is that it doesn't matter
to them because the borrower still owes on the loan and has
defaulted. As you put it: ``This `No Harm, No Foul' argument is
that homeowners being foreclosed on are all a bunch of
deadbeats, so who really cares about due process?'' You say
that this argument, that you attribute loosely to ``banks,''
condones ``vigilante foreclosures: so long as the debtor is
delinquent, it does not matter who evicts him or how.''
Does any representative of the servicer industry on the
panel wish to comment on this?
A.1. We disagree with Mr. Levitin. Chase is committed to
ensuring that all applicable laws are followed in the
foreclosure process. We regret the errors that we have
discovered in our foreclosure processes, and we are working
hard to correct these processes so we get them right. At the
same time, we do not believe that there have been unwarranted
foreclosures as a result of these issues. Of course, if we have
made any mistakes, we will fix them.
Q.2. Ms. Desoer and Mr. Lowman, it is important that this
Committee has an adequate understanding of the current state of
affairs as it relates to delinquency and foreclosures. Please
briefly discuss the following statistics as they relate to your
companies:
What is the total number of mortgages that your company
services? How many mortgages are currently in foreclosure? What
is the average number of days that a borrower is delinquent on
his or her mortgage at the time of a foreclosure sale?
What percentage of homes are vacant at the time of a
foreclosure sale?
A.2. As of November 30, 2010, Chase serviced approximately 8.6
million home loans. As of November 30, 2010, Chase serviced
349,586 loans that were in foreclosure, that is, approximately
4.07 percent of the total loans serviced were in foreclosure.
The average borrower's loan is 448 days delinquent at the time
of foreclosure sale.
In the third quarter of 2010, 11 percent of foreclosure
sales were of properties that had been owner-occupied, but were
vacant at the time of sale. In addition, 57 percent of
foreclosure sales in the third quarter of 2010 were of non-
owner-occupied properties, some of which were also vacant at
the time of sale. Our best estimate is that 35-40 percent of
properties are vacant at the time of foreclosure sale.
Q.3. This Committee has a responsibility to ensure that actors
on all sides of the foreclosure process, including servicers,
are acting legally and in the best interest of our society. We
must address and remedy situations where this is not the case.
However, unnecessarily delaying foreclosures is not without
cost. Representatives of the secondary mortgage market have
told us that, on average, a delay in foreclosure costs
approximately $30-40 per day, per home. This is in addition to
any changes in home values during that time.
Ms. Desoer and Mr. Lowman, could you discuss what
additional costs your institutions may incur during a
foreclosure process if that process is delayed?
A.3. Delays in the foreclosure process could lead to additional
fees on the property, such as taxes and insurance, maintenance
costs of the property, and potentially additional attorneys
fees, each of which is heavily dependent on the geography of
the property, the condition of the property, and the loan
amount.
Q.4. Given this Committee's oversight responsibilities, it is
vital that we examine the regulatory actions taken before and
after reports surfaced detailing the problems surrounding some
foreclosures.
Ms. Desoer and Mr. Lowman, did your regulator contact you
prior to any of these press reports to review your foreclosure
procedures? What, if any, directives or recommendations were
made by your regulator surrounding the definition of ``personal
knowledge'' as it relates to those in your companies who must
sign foreclosure documents? What, if any, directives or
recommendations were made by your regulator with regard to the
notary process for these documents?
A.4. Prior to September 30, 2010, when the referenced press
reports were published, we did not receive specific directives
from our regulators regarding the definition of ``personal
knowledge'' or the notary process.
Q.5. Unfortunately, neither Fannie Mae, Freddie Mac, nor the
Federal Housing Finance Administration were present at the
hearing to discuss the ``approved lenders'' list that Fannie
and Freddie publish to guide servicers as they select in-State
counsels to act on their behalf.
Given that, Ms. Desoer and Mr. Lowman, please describe what
the GSE's require of your firms with respect to these lists,
and indicate whether there have been any changes to them since
news of problems with ``foreclosure mills'' began to surface.
A.5. Although the question mentions an ``approved lenders''
list, we understand the Senator to be seeking information
regarding the ``approved counsel'' list, which relates to the
selection of in-State counsel. Fannie Mae and Freddie Mac
require servicers to use foreclosure counsel that are
identified on the GSE's lists of approved counsel for each
State. Although GSE-approved foreclosure counsel have contracts
directly with servicers and operate under the same agreements
as non-GSE approved foreclosure counsel, they also will take
direction directly from the GSEs on GSE-owned loans. Over the
last 90 days, we have been notified by the GSEs of changes to
their approved counsel lists.
Q.6. Attorney General Miller's testimony today states the
following:
While the servicer is free to lose documents as many times as
they want or to take as long as they want, the servicer often
demands strict compliance from the borrower. Thus, no matter
how many times the borrower has previously submitted his or her
paperwork, if the borrower fails one time, the loan
modification is denied.
Do any representatives of the servicer industry wish to
respond to Mr. Miller's claims?
A.6. Chase attempts to ensure that borrower paperwork is
received and scanned into Chase's imaging systems thoroughly
and systematically. One potential reason for multiple requests
for documents would be the submission of incomplete documents.
For example, since HAMP regulations have very specific
requirements for documentation, borrowers who make incomplete
submissions may need to resubmit a complete set of documents in
order to qualify for modification under the program.
Chase has made significant investments in people,
technology and process improvements to enhance the
effectiveness of the modification process and reduce borrower
frustration, especially with the documentation process.
Specifically:
Chase has 51 Community Home Ownership Centers
(``CHOCs'') throughout the country where borrowers can
provide documentation in person and work with a Chase
employee to ensure that their package is complete.
To improve our customer service and our
modification process effectiveness, in May 2010 we
created a new role--the Relationship Manager (``RM'')--
to be accountable for each customer through the home
retention process. As of November 2010, Chase employed
1,921 RMs, and we now assign an RM to each borrower as
soon as they contact Chase for assistance due to
financial hardship, such as loss of income or other
major life event. The RM becomes the single point of
contact with Chase for the borrower during the
modification process. The RM tells the borrower about
our foreclosure-avoidance solutions and helps the
borrower complete the needed paperwork so a
modification request can be submitted to underwriting.
The RM continues to monitor the loan to ensure the
process moves forward and will contact the borrower
with the ultimate decision on modification. If the
borrower is approved for a modification, the RM
contacts the borrower to review the approval and assist
them with the final steps in the process, which
includes reviewing and executing the modification
documents. If a modification is not approved, the RM
may suggest a short sale or other alternative,
depending on the underlying reasons for the denial, and
if the borrower agrees, will transfer the borrower to
the Chase's Liquidation teams to further discuss other
foreclosure avoidance solutions.
At the end of 2009, Chase implemented imaging
technology and created a document repository to
centralize the handling of all incoming customer
documentation. Customers now are directed to send all
communications and documents to this location, which
receives and indexes the document to the appropriate
loan file for that borrower which is available
electronically, eliminating the need to move paper
files. Quality Control assures the thousands of unique
documents received daily are uploaded in a timely
fashion, properly indexed (assigned to the correct
loan), and are legible. This new centralized system is
available to employees throughout the loss mitigation
process. Letters mailed by Chase to customers are also
uploaded to this centralized repository, enabling
customer-facing staff access to the most current and
complete information about the loan.
Chase implemented the verified model, which
requires borrowers to provide all necessary documents
prior to being evaluated for a potential solution,
across all the portfolios we service. This has slowed
the rate at which modification trials are initiated,
but it should significantly increase the percentage of
trials that lead to permanent modifications.
Chase policy requires adherence to Treasury's
guidance regarding responsiveness to borrowers'
requests for modifications. With the implementation of
verified trial plans, borrowers are to receive answers
within 30 days of submitting a complete request,
including all the necessary documents to evaluate the
application.
Q.7. Ms. Thompson testifies that, `` . . . the problems
occasioned by mortgage servicer abuse run rampant.'' That is a
strong accusation. Ms. Thompson also frequently, though without
definition, refers to ``abuses'' committed by servicers and
``excessive'' fees. She accuses servicers of failing to
negotiate in good faith and of preparing false affidavits. She
states that ``Servicers do not believe that the rules that
apply to everyone else apply to them.'' Their attitude,
according to Ms. Thompson, is ``lawless'' and they commit
``wrongful foreclosure on countless American families.'' She
also states that ``The lack of restraint on servicer abuses has
created a moral hazard juggernaut that at best prolongs and
deepens the current foreclosure crisis and at worst threatens
our global economic security.''
Do any of the servicer representatives here wish to respond
to Ms. Thompson's allegations?
A.7. Chase believes that Ms. Thompson's allegations are
entirely unfounded. Chase is committed to ensuring that all
applicable laws are followed in the foreclosure process. We
regret the errors that we have discovered in our foreclosure
processes, and we are working hard to correct these processes
so we get them right. At the same time, we do not believe that
there have been unwarranted foreclosures as a result of these
issues. Of course, if we have made any mistakes, we will fix
them.
As to Ms. Thompson's reference to fees, the fees imposed by
Chase are not excessive. Importantly, Chase does not foreclose
on borrowers if their loan payments are current but they owe
fees. Chase applies borrowers' payments to their debt prior to
applying them to any fees owed.
It is also critical to note that the analysis we use in
deciding whether to proceed with a modification or
foreclosure--which involves a net present value analysis to
determine what is in the best interest of the investor--does
not take into account servicer compensation over time.
Furthermore, if it were considered, which it is not, servicer
compensation would tend to favor modification over foreclosure.
Indeed, with a successful modification, Chase is able to
continue to service the loan and earn servicer fees; but when a
property is sold as a result of foreclosure, Chase's role as
servicer ends and Chase receives no further fees.
Q.8. Given the varying State laws that govern foreclosure,
there must be the opportunity to observe both best and worst
practices. While foreclosures are not the preferred option for
any party at the onset of a loan, sometimes it is the path
forward that presents the least harm to borrowers, lenders and
the economy. In those instances, it is essential that our
foreclosure process be effective.
Which States do each of you feel provide the most efficient
path forward in foreclosures, while providing borrowers proper
legal channels in the event that there is a dispute? What is
the average length of time between original delinquency and
foreclosure sale in these States?
Which States do each of you feel have the most problems in
effectively executing foreclosures? What is the average length
of time between original delinquency and foreclosure sale in
these States?
A.8. Each State has different procedures for foreclosures, and
all provide some mechanism for the borrower to challenge the
propriety of the foreclosure. Chase is not really in a position
to weigh the relative efficiency of one State versus another.
Nationwide, the average borrower's loan is 448 days delinquent
at the time of foreclosure sale.
Q.9. To better gauge the level of violations surrounding the
topic of this hearing it is necessary for us to understand who
is being affected. Admittedly, this question is probably best
suited for the regulators, and we hope to receive this
information from them at some point.
In your research and investigations, how many individuals
were discovered to have been fully current on their mortgage
payments but foreclosed upon by their servicer? Please provide
the data and evidence that you evaluated to arrive at your
conclusions.
A.9. Thus far, we are not aware of any individuals who were
current on their mortgage payments but were foreclosed upon by
Chase. Chase has in place numerous safeguards designed to
ensure that loans are not referred to foreclosure unless
foreclosure is appropriate. To begin with, Chase communicates
with a customer beginning at 5 days after a missed payment, and
continuing through foreclosure. Outgoing letters and phone
attempts to discuss modification options commence at 40 days
past due and continue through foreclosure referral. The average
number of contacts a borrower receives from Chase before a
foreclosure sale is 111. These communications should help
ensure that Chase becomes aware of any errors in its
calculations of outstanding indebtedness.
Further, an Independent Foreclosure Review team within
Chase reviews each loan at two specific points to make sure
that a loan has been appropriately referred for foreclosure.
The Independent Foreclosure Review confirms that the loan is
past due and that Chase has complied with its pre-referral
policies, including repeated efforts to contact the borrower to
discuss alternatives. Under Chase's policies, only after the
Independent Foreclosure Review is complete can a loan be
referred for foreclosure proceedings. The Independent
Foreclosure Review is repeated 2 to 3 weeks prior to any
scheduled sale. A final review is also conducted approximately
96 hours prior to a foreclosure sale to review the borrower's
payment history and to ensure that loss mitigation is closed
and the borrower is not in bankruptcy.
Of course, if Chase discovers that any foreclosures were
initiated improperly, it will take action to correct any error.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DAVID B.
LOWMAN
Q.1 Please describe in detail the reviews that your
organizations conducted pursuant to your announced moratoriums,
including: how many employees were involved; how many files
they reviewed; how much time, on average, an employee spent
reviewing a file.
How many errors did you uncover, and what was the nature of
those errors?
How did you inform homeowners that their foreclosure
filings were being reviewed?
A.1. Beginning in late September 2010, Chase temporarily halted
foreclosures in 43 States and territories where documents
signed by Chase may be required. Since that time, Chase has
focused on reviewing and enhancing its document execution
procedures, and training its document execution employees.
Chase also has put in place a remediation plan designed to
identify Chase-signed affidavits in each pending foreclosure
file, and file substitute affidavits based on a reverification
of the information in the affidavits by the individual
executing those affidavits. Chase is still in the process of
implementing this plan and is not able at this stage to provide
the detailed loan level information sought by this question.
Q.2. How many files that you reviewed were missing the original
note?
A 2007 study found that 40 percent of bankruptcy filings
involving mortgages were missing the original note. How many of
your foreclosure filings are missing their original note?
A.2. We are not able at this stage in our remediation plan to
provide numbers of instances in which original notes were
missing in pending foreclosure proceedings. Chase has not
historically tracked the frequency of lost note affidavits
because there has been no need for such information in the
past. Chase is generally unable to determine the total number
of lost note affidavits submitted during the timeframe
identified in the request.
Two businesses acquired by Chase in 2008--EMC (which Chase
acquired in March 2008) and Washington Mutual (certain assets
of which Chase acquired in September 2008)--did use systems
that kept track of affidavits that were submitted to Chase for
execution that local counsel characterized as Lost Note
Affidavits. However, Chase's systems did not keep track of
whether these affidavits were actually executed and filed.
Still, the 40 percent figure is extremely high based on our
general experience.
Chase is keeping track of the number of Lost Note
Affidavits submitted in connection with foreclosure actions on
a going forward basis.
Q.3. Do all of your organization's note endorsements comply
with the requirements of your pooling and servicing agreements?
A.3. As a general matter, when Chase functioned as the
depositor for a securitization, it received a certification
report from the custodian on the deal (often Chase Custody
Services) certifying its possession of the documentation for
the loans, including the note, mortgage, and any assignments.
Generally, per the pooling and servicing agreement, a final
trust receipt reflecting the certification with respect to the
loans contained in the securitization was issued to the trustee
by the custodian. We are not aware of instances in which there
were material deviations from these procedures in connection
with securitizations in which Chase was the depositor.
Q.4. Have your regulators participated in or overseen your
reviews, and if so, how?
A.4. The Office of the Comptroller of Currency is Chase's
primary regulator and has been conducting an onsite audit of
Chase (together with the Federal Reserve and the FDIC) since
early November 2010. Chase has kept the OCC apprised of
developments relating to foreclosure procedures.
Q.5. There is some disagreement about whether the problems
within the loan modification and foreclosure processes were
isolated incidents, systemic failures, or were caused by rogue
individuals following mistaken guidelines. Who determines your
affidavit signing policies and procedures?
Were your employees following company policy? If so, has
any employee responsible for designing that policy been
disciplined, and how? Were any employees disobeying company
policy? If so, have they been disciplined, and how?
A.5. With regard to the portion of your question relating to
problems within the loan modification processes, we do not
believe that there have been systemic issues in connection with
Chase's implementation of HAMP or its own proprietary programs.
Chase has invested substantially in its loss mitigation efforts
in recent years because, as I explained during my testimony,
loan modifications are preferable to foreclosure from the
servicer's perspective.
Specifically, with respect to loan modification, Chase has:
Added more than 9,000 new employees to the Default
and Loss Mitigation organization since 2008, more than
doubling our staff;
Chase assigns each new modification applicant to
one of approximately 1,900 dedicated Relationship
Managers, who are responsible for supporting borrowers
who have asked for help throughout the entire mortgage
modification process;
Opened 51 regional CHOCs and a Home Ownership
Preservation Office to assist borrowers face-to-face
with modification efforts. CHOCs were opened in
geographic areas with the highest rates of payment
delinquencies and have assisted more than 118,480
borrowers through since their launch in early 2009.
Handled over 32.3 million inbound calls to our call
centers from homeowners seeking foreclosure prevention
assistance since 2009, including 5.3 million calls to
our dedicated customer hotline for modification
inquiries;
Offered over 1 million modifications to struggling
homeowners since the beginning of 2009, through HAMP,
the GSEs and Chase modification solutions; converting
275,152 into permanent modifications;
Provided a graceful exit through a short sale for
over 92,000 borrowers where a homeownership retention
solution was not an option;
Prevented over 467,000 foreclosures through various
foreclosure avoidance programs since January 2009;
Sent more than 3.7 million letters inviting
borrowers to attend outreach events;
Hosted or participated with community groups in
more than 1,284 local events since 2009, including
multi-day events reaching over 60,000 homeowners to
educate and inform homeowners about foreclosure
prevention solutions and assist in the completion of
required documents;
Helped the Hope Now Alliance establish a new Web-
based portal to facilitate the loan modification
process for homeowners working with Hope Now counseling
agencies and the Hope Now Hotline.
With respect to the issues that have arisen in connection
with affidavits filed in foreclosure cases, at all times, Chase
policy required that its employees verify the accuracy of the
affidavits prior to their execution, and our understanding is
that our employees followed this policy. Therefore, we do not
believe that the affidavits contained material inaccuracies in
terms of the amount of indebtedness.
However, prior to approximately June 2010, our policies--
which evolved over time and in the past, differed between Chase
platforms--did not always require that the same employee who
reviewed the business records to verify the information in the
affidavit actually sign it. Rather, during certain periods,
Chase's policies instructed employees who verified the
affidavits to bring them to an officer for signature. This
policy developed in part because it was believed to be
preferable for an officer of the company to sign the affidavit
rather than an analyst. In cases where an officer signed the
affidavit, he or she did so in reliance on the research that
had been performed by the analyst who reviewed the document
instead of their own review of the business records.
Chase's review is ongoing, but thus far we have not
determined that discipline of our employees is warranted. Our
review to date indicates that all of our employees believed in
good faith that they were complying with legal requirements and
complying with firm policy.
Q.6. An article published in the Cleveland Plain Dealer on
October 17 titled ``Mortgage foreclosure Uproar Sweeps Up
Northeast Ohioans'' told the stories of three Northeast Ohio
families that had their houses taken from them despite not
missing any mortgage payments. What is your response to this
story, and do you believe that such a report is consistent with
statements like that from Mr. Lowman's written testimony that
information in your files about ``default and indebtedness was
materially accurate'' and that foreclosure recordkeeping and
affidavit issues ``did not result in unwarranted
foreclosures''?
A.6. Chase did not service any of the loans discussed in the
Cleveland Plain Dealer article.
We believe that the information in the affidavits we have
filed regarding the fact of default and the amount of
indebtedness was materially accurate. This information was in
fact verified by Chase personnel before the affidavits were
filed. We are not aware of any individuals who were current on
their mortgage payments but were foreclosed upon by Chase.
Chase has in place numerous safeguards designed to ensure
that loans are not referred to foreclosure unless foreclosure
is appropriate. To begin with, Chase communicates with a
customer beginning at 5 days after a missed payment, and
continuing through foreclosure. Outgoing letters and phone
attempts to discuss modification options commence at 40 days
past due and continue through foreclosure referral. The average
number of contact attempts a borrower receives from Chase
before a foreclosure sale is 111. These communications should
help ensure that Chase becomes aware of any errors in its
calculations of outstanding indebtedness.
Further, an Independent Foreclosure Review team within
Chase reviews each loan at two specific points to make sure
that a loan has been appropriately referred for foreclosure.
The Independent Foreclosure Review confirms that the loan is
past due and that Chase has complied with its pre-referral
policies, including repeated efforts to contact the borrower to
discuss alternatives. Under Chase's policies, only after the
Independent Foreclosure Review is complete can a loan be
referred for foreclosure proceedings. The Independent
Foreclosure Review is repeated 2 to 3 weeks prior to the
scheduled foreclosure sale. A final review is also conducted
approximately 96 hours prior to a foreclosure sale to review
the borrower's payment history and to ensure that loss
mitigation is closed and the borrower is not in bankruptcy.
Of course, if Chase discovers that any foreclosures were
initiated improperly, it will take action to correct any error.
Q.7. Mr. Lowman's written testimony says that ``servicer
compensation would tend to favor modification over
foreclosure,'' and that ``the cost for servicers to take a loan
to foreclosure generally is significantly greater than the cost
of a modification.'' Please describe the compensation structure
of your mortgage servicing business.
A.7. From both a revenue and cost perspective, servicers
clearly have a greater incentive to enter into an appropriate
modification rather than to foreclose.
First, a servicer derives the lion's share of its servicing
revenue from monthly servicer fees. For GSE loans, payment of
servicer fees ceases upon borrower default. For other investor-
owned loans, these monthly servicer fees cease upon
foreclosure. By contrast, if a loan is modified and continues
to perform, the servicer will receive servicer fees going
forward. Even if the servicer fees are reduced--for example, as
may be the case as a result of principal reduction--the
continued revenue stream is greater than would be received in
the case of foreclosure, after which there is obviously no
servicer fee.
Second, in the event of a HAMP or GSE modification, a
servicer also receives an incentive fee in the event of a
successful modification. A servicer receives no additional
revenue or fees in the event of foreclosure.
Third, the existence of certain fees charged or expenses
incurred by the servicer in the event of delinquency--such as
late payment fees or advances--are typically not incentives to
favor foreclosure over modification because the servicer,
provided it does not own the loan, typically receives repayment
of these fees either way.
Fourth, the cost of processing a modification is not
materially different from the cost of foreclosing. Further, a
modification typically will occur significantly more quickly
than a foreclosure. Nationally, foreclosures take an average of
14 months to complete, and in some jurisdictions, much longer.
Chase has incentive plans for employees involved in the
modification process, and these plans are aligned with
borrower-centric outcomes. The incentive plans strike a balance
between the quality and productivity of these employees.
Employees involved in foreclosure operations (e.g., affiants,
notaries, attorney management) are not compensated through
incentive plans.
Q.8. How many second liens do you hold on properties that you
are also servicing?
A.8. Chase services 6.83 million first-lien mortgages; of
those, 1.15 million have a second lien, which also is serviced
by Chase.
Q.9. Please describe any barriers to mortgage modifications
that servicers may encounter.
A.9. The number one reason for foreclosure continues to be
financial problems caused by illness, a job loss,
underemployment, or other life-changing events. Foreclosures
cut across all types of people, regardless of factors like
income level, education or type of house. Simply put,
foreclosure can affect anyone.
Borrowers overwhelmed by their circumstances don't know
where to turn, and they often think that Chase can't (or won't)
help them. Two of Chase's bigger challenges in helping
borrowers avoid foreclosure are getting them to call or meet
with Chase to explain their situation as well as provide a
complete set of documents to allow for an evaluation of their
modification application. The majority of people rejected for
modifications are rejected because they have failed to submit
the complete set of documents required to evaluate their
application.
Chase recognized early in the current crisis that customers
facing financial stress managing their mortgage payments
require special attention and dedication to their needs. We
acknowledged the importance of enhancing customer access and
service levels to help customers understand their foreclosure
prevention options, either directly through Chase or through
our partnerships with community leaders and non-profit credit
counselors. Regardless of how the customer chooses to engage
with Chase for homeownership assistance our commitment is to do
everything in our power to assist in a respectful and timely
fashion as described in response to question 5 from Senator
Brown.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY OF DIANE E.
FROM THOMPSON
Q.1. Ms. Thompson, you conclude your testimony by calling for
legislation or regulations to ``reform the servicing industry,
to allow for loan modifications in bankruptcy, and to address
the tax consequences of loan modifications . . . '' These
actions would, according to you, ``aid in protecting homeowners
from indifferent and predatory servicing practices and reducing
the foreclosure surge.'' When analyzing effects of alternative
possible actions that would affect the mortgage and housing
markets, you focus on protecting homeowners. Indeed, such a
focus is welcome and warranted. There is also, of course, a
need to consider effects of any action on securities holders,
including retirement funds that help provide interest and other
income to retirees who continue to struggle in the current
zero-interest rate environment to live off of the assets they
accumulated during their working years.
Ms. Thompson, could you discuss the economic, financial,
and distributional analysis you have performed to arrive at the
policy recommendations that you provide in your conclusion?
A.1. You correctly note that my analysis focuses on the
homeowners. The interests of homeowners have been, in my view,
almost entirely overlooked during the foreclosure crisis. This
is particularly unfortunate since it is the failure to pay
attention to those interests and reduce the foreclosure rate
that has caused the economic recession.\1\ Preserving
homeownership, where economically appropriate, has a net
positive benefit for the society at large and the unnecessary
destruction of homeownership hurts the rest of us from an
economic and financial perspective.
---------------------------------------------------------------------------
\1\ See, e.g., Ben S. Bernanke, Chairman, Board 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) [hereinafter Bernanke, Speech at Federal
Reserve], available at http://www.federalreserve.gov/newsevents/speech/
bernanke20081204a.htm (``Despite goodfaith efforts by both the private
and public sectors, the foreclosure rate remains too high, with adverse
consequences for both those directly involved and for the broader
economy.'').
---------------------------------------------------------------------------
The impact of the foreclosure crisis has damaged the
financial interests of many constituencies in this country,
including securities holders. Aside from the indirect financial
harm caused by the scale of the financial crisis--the weak
economy, the slumping interest rates, the outright collapse of
many securities--foreclosures hurt all homeowners in the
communities in which they occur. Violent crime increases in
neighborhoods with increased foreclosures--at twice the rate of
the increase in the foreclosure rate.\2\ Surrounding neighbors
watch their housing values plummet and their insurance costs
increase.\3\ The losses to communities in taxes are
staggeringly high, amounting to millions to billions of dollars
in lost taxes.\4\ For securities holders who own homes, or pay
taxes, or live in neighborhoods with increasing crime, their
interests are not distinct from those of homeowners subject to
foreclosure.
---------------------------------------------------------------------------
\2\ Dan Immergluck & Geoff Smith, The Impact of Single-Family
Mortgage Foreclosures on Neighborhood Crime, 21 Housing Studies 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).
\3\ See, e.g., Ctr. for Responsible Lending, Soaring Spillover:
Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone;
69.5 Million Homes Lose $7,200 on Average (2009), available at
www.responsiblelending.org/mortgage-lending/research-analysis/
soaringspillover-acceleratingforeclosures-to-cost-neighbors-436-
billion-in-2009-alone-73-4-millionhomes-lose-5-900-onaverage.html
(estimating losses to neighboring property values due to the
foreclosure crisis at $1.86 trillion dollars); John P. Harding, Eric
Rosenblatt, Vincent W. Yao, The Contagion Effect of Foreclosed
Properties, J. of Urban Econ. (forthcoming), available at http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1160354 (finding a 1.2
percent drop in market value for each additional neighboring home in
foreclosure; effect drops to 0.6 percent if property in foreclosure is
one-eighth of a mile away); 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).
\4\ See, e.g., Staff of the Joint 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)2b94d398d27&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 Apgar & Mark Duda, Collateral Damage: The Municipal Impact of
Today's Mortgage Foreclosure Boom, at 4 (May 11, 2005), available at
www.hpfonline.org/PDF/Apgar-Duda_Study_Final.pdf (estimating costs to
the city of Chicago per foreclosure upwards of $30,000 for some vacant
properties).
---------------------------------------------------------------------------
Retirees are themselves often homeowners,\5\ and all too
often subject to abusive lending and foreclosure.\6\ For many
retirees, their home is their largest asset--of far more
importance to their financial (not to mention psychological and
social) well-being than their pension funds invested in
derivatives. The interests of retirees, as a class, are not
substantially different from the interests of homeowners, as a
class.
---------------------------------------------------------------------------
\5\ U.S. Census Bureau, Housing Vacancies and Homeownership T 17
(2009), available at http://www.census.gov/hhes/www/housing/hvs/
annual09/ann09ind.html (reporting that the 2009 homeownership rates for
Americans 65 and over was 80.5 percent).
\6\ AARP Public Pol'y Inst., A First Look at Older Americans and
the Mortgage Crisis 5 (2008), http://assets.aarp.org/rgcenter/econ/
i9_mortgage.pdf. Cf. Ellen E. Schulz & Theo Francis, High-Interest
Lenders Tap Elderly, Disabled, Wall St. J., Feb. 12, 2008 (reporting
that payday lenders concentrate their outlets around subsidized elder
housing).
---------------------------------------------------------------------------
Retirees, like all securities holders, have watched
servicers strip wealth from them by piling on unnecessary and
excessive fees in foreclosure.\7\ The servicer can either
collect these fees from the homeowner--reducing the likelihood
of a successful modification--or collect them from monies
otherwise payable to the trust upon the conclusion of a
foreclosure. Either path leaves securities holders poorer.
Servicing reform benefits all stakeholders in the system-
except, of course, to the extent that servicing reform prevents
servicers themselves from profiting at the expense of both
homeowners and securities holders. Our specific proposals focus
on providing a net benefit to investors as well as homeowners.
You cite three proposals: reform of the servicing industry,
allowing loan modifications in bankruptcy, and addressing tax
consequences for homeowners. Our recommendations include
requiring servicers to modify loans where doing so would
provide a net benefit to the investor. There is considerable
evidence that servicers fail to modify loans, even when the
investor would benefit from a modification. Investors,
including pension funds, lose dramatically when servicers fail
to modify loans and foreclose instead. The foreclosure will in
many cases cutoff the flow of payments to the ultimate
beneficiaries of the trust, who are often, as you note,
retirees, dependent on that income to maintain a comfortable
standard of living. Available data suggests that those retirees
and other investors are losing, on average, over $145,000 per
foreclosure.\8\ They would do much better if more loan
modifications were made.
---------------------------------------------------------------------------
\7\ See, e.g., Jody Shenn, Mortgage Investors with $500 Billion
Urge End of Practices, Lawyer Says, Bloomberg News, July 23, 2010,
http://www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-
billion-urge-end-of-practices-lawyer-says.html (reporting on letters
sent to trustees of mortgage pools on behalf of a majority of the
investors in the pool); Complaint, Carrington Asset Holding Co., L.L.C.
v. American Home Mortgage Servicing, Inc., No. FST-CV 09-5012095-S
(Conn. Super. Ct., Stamford Feb. 9, 2009) (complaint alleges that
servicer's practices regarding fees and post-foreclosure sales were
costly to investors); Ass'n of Mortg. Investors Press Release, AMI
Supports Long Term, Effective, Sustainable Solutions to Avert
Foreclosure; Invites Bank Servicers to Join, Nov. 16, 2010 (citing
servicers' profit from fees and payments from affiliates as an
impediment to loan modifications that would be in the interests of
investors); Letter from Kathy D. Patrick to Countrywide Home Loans
Servicing, Oct. 18, 2010 (notifying a trust and master servicer of
breaches in the master servicer's performance).
\8\ See Alan M. White, Sept. 26, 2010 Columbia Collateral File
Summary Statistics, http://www.valpo.edu/law/faculty/awhite/data/
sep10_summary.pdf.
---------------------------------------------------------------------------
Servicers' fee-gouging hurts securities holders. Fees come
off the top in a foreclosure: servicers get paid before the
investors do.\9\ When times are good, and equity in homes is
increasing, securities holders can afford to ignore fees.
Indeed, until recently, the impact of servicers' fee-skimming
was largely invisible to investors.\10\ But with one in four
homes underwater,\11\ and foreclosures at an all time high, the
cost of those fees is reducing investors' profits.\12\
---------------------------------------------------------------------------
\9\ See, e.g., Prospectus Supplement, Chase Funding Loan
Acquisition Trust, Mortgage Loan Asset-Backed Certificates, Series
2004-AQ1, at 34, (June 24, 2004), available at http://www.sec.gov/
Archives/edgar/data/825309/000095011604003012/four24b5.txt (``[T]he
servicer will be entitled to deduct from related liquidation proceeds
all expenses reasonably incurred in attempting to recover amounts due
on defaulted loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes
and maintenance and preservation expenses.''); Prospectus, CWALT, INC.,
Depositor, Countrywide Home Loans, Seller, Countrywide Home Loans
Servicing L.P., Master Servicer, Alternative Loan Trust 2005-J12,
Issuer 56 (Oct. 25, 2005) (``In addition, generally the master servicer
or a subservicer will retain all prepayment charges, assumption fees
and late payment charges, to the extent collected from mortgagors);
Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage
Loan Trust 2007-FLX5, at S-73 (June 27, 2007):
Default Management Services
In connection with the servicing of defaulted Mortgage Loans, the
Servicer may perform certain default management and other similar
services (including, but not limited to, appraisal services) and may
act as a broker in the sale of mortgaged properties related to those
Mortgage Loans. The Servicer will be entitled to reasonable
compensation for providing those services, in addition to the servicing
compensation described in this prospectus supplement.
Letter from Kathy D. Patrick to Countrywide Home Loans Servicing,
Oct. 18, 2010 (notifying a trust and master servicer of breaches in the
master servicer's performance).
\10\ E.g., Peter S. Goodman, Lucrative Fees May Deter Efforts to
Alter Troubled Loans, N.Y. Times, July 30, 2009.
\11\ First American Core Logic Negative Equity Report Q22010,
available at http://www.corelogic.com/uploadedFiles/Pages/About_Us/
ResearchTrends/CL_Q2_2010_Negative
_Equity_FINAL.pdf.
\12\ See, e.g., Jody Shenn, Mortgage Investors with $500 Billion
Urge End of Practices, Lawyer Says, Bloomberg News, July 23, 2010,
http://www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-
billion-urge-end-of-practices-lawyer-says.html (reporting on letters
sent to trustees of mortgage pools on behalf of a majority of the
investors in the pool); Complaint, Carrington Asset Holding Co., L.L.C.
v. American Home Mortgage Servicing, Inc., No. FST-CV 09-5012095-S
(Conn. Super. Ct., Stamford Feb. 9, 2009) (complaint alleges that
servicer's practices regarding fees and post-foreclosure sales were
costly to investors); Ass'n of Mortg. Investors Press Release, AMI
Supports Long Term, Effective, Sustainable Solutions to Avert
Foreclosure; Invites Bank Servicers to Join, Nov. 16, 2010 (citing
servicers' profit from fees and payments from affiliates as an
impediment to loan modifications that would be in the interests of
investors); Letter from Kathy D. Patrick to Countrywide Home Loans
Servicing, Oct. 18, 2010 (notifying a trust and master servicer of
breaches in the master servicer's performance).
---------------------------------------------------------------------------
The reforms we propose are either directly beneficial or
neutral for securities holders, in addition to the important
positive impacts these reforms would have in stabilizing the
housing market and the larger economy.
Comprehensive servicing reform has two primary components:
requiring servicers to offer homeowners a modification where
the modification would provide a net benefit to the securities
holders and limiting fees to those both reasonable and
necessary. Securities holders, as much as homeowners, stand to
benefit from both those reforms.
Currently, there is only one type of lien that bankruptcy
judges can never modify in any way: first liens on single-
family principal residences. Loans on vacation homes, boats,
cars, and corporate collateral can be modified. Even junior
liens on single-family principal residences can be modified if
they are wholly underwater, as many are today. By contrast,
first liens on principal residences cannot be reduced to the
value of the security interest and the interest rate cannot be
changed. Securities holders, however, have not suffered larger
losses from the modification of these other secured loans than
they have from the foreclosure of home loans: it is the large
losses on home loans that have driven the current economic
crisis.
Judicial modification of secured liens often provides
creditors (and any ultimate securities holders) with a better
return than foreclosure. Creditors do not have to absorb the
same losses in bankruptcy as they do with a forced foreclosure
sale, with its below market price and out-of-pocket expenses.
If bankruptcy courts were permitted to modify first-lien loans
on primary residences by reducing the secured balance to the
value of the property, securities holders would not be saddled
with losses as a result of below market prices and mortgage
servicers' foreclosure costs. Instead, securities holders, who
are suffering catastrophic losses now, would receive a stable
flow of income from borrowers able to make ongoing payments on
the reduced principal balance. Significantly, judicial
modification in bankruptcy is limited to reducing the loan to
the actual current value of the home; moreover, bankruptcy
judges also have long experience balancing the claims of
competing creditors to maximize returns to creditors. Losses to
security holders, borrowers, and communities would likely be
lower if bankruptcy judges had the power to modify residential
home loans.
Addressing the tax consequences of loan modifications is
unlikely to have any significant impact on securities holders
or on the fisc. Few lay people believe that a reduction in the
value of a loan to its fair market value is taxable income;
indeed, existing exceptions to the general rule that any
reduction in the value of a loan is taxable income mean that
homeowners who have access to a competent tax attorney or CPA
are likely to be able to exclude that imputed value from
income, but these exceptions, and the reporting forms are
sufficiently complicated that unrepresented homeowners are
unlikely to be able to avail themselves of the exception. The
National Taxpayer Advocate has repeatedly identified the
treatment of cancellation of debt income as a serious
problem.\13\
---------------------------------------------------------------------------
\13\ See, e.g., 2007 Nat'l Taxpayer Advocate Report to Congress 13-
33, available at http://www.irs.gov/pub/irs-utl/
arc_2007_vol_1_cover_msps.pdf.
---------------------------------------------------------------------------
The proposals outlined in my November testimony are
designed to align the interests of the servicers with those of
investors and society at large, so that modifications will be
made when doing so provides a net benefit. In this
distributional analysis, it is only the servicers who lose.
Servicers have made more money per loan in the recent times,
precisely while securities holders are suffering steep losses
from foreclosures.\14\ The servicers, when loan modifications
that produce a net benefit to the investor are required before
foreclosure, when servicing reform limits their ability to
strip equity by piling on fees, and when bankruptcy judges have
the power to force modifications that leave securities holders
better off, will have to find a different business model.
Instead of using default fees to cushion the cost of default,
they will have to learn to make modifications and save money
for both investors and homeowners. This is not an impossible
goal: indeed, specialty servicers have long proclaimed their
ability to make money by doing modifications.\15\ Servicers
should not be allowed to strip wealth from both securities
holders and homeowners but should be required to provide
service to both groups in exchange for their substantial fees.
---------------------------------------------------------------------------
\14\ Servicers Earn More Per Loan, MortgageDailyNews.com, June 29,
2010.
\15\ See, e.g., Press Release, Paul A. Koches, Ocwen Fin. Corp. 2
(Feb. 25, 2010).
Q.2. Given the varying State laws that govern foreclosure,
there must be the opportunity to observe both best and worst
practices. While foreclosures are not the preferred option for
any party at the onset of a loan, sometimes it is the path
forward that presents the least harm to borrowers, lenders and
the economy. In those instances, it is essential that our
foreclosure process be effective.
Which States do each of you feel provide the most efficient
path forward in foreclosures, while providing borrowers proper
legal channels in the event that there is a dispute? What is
the average length of time between original delinquency and
foreclosure sale in these States?
Which States do each of you feel have the most problems in
effectively executing foreclosures? What is the average length
of time between original delinquency and foreclosure sale in
these States?
A.2. The answer to this question depends a great deal on how
one defines the appropriate goal for an effective foreclosure
law. Speed is one goal; reducing losses to investors is
another. A third is providing a fair and transparent process,
to ensure that homeowners are not wrongfully deprived of their
home. Speed by itself, as you suggest in the question, cannot
be the ultimate measure of the effectiveness and efficiency of
the foreclosure process in any State. Rather, the focus in most
cases should be on providing a fair process for homeowners and
reducing losses to investors.
We should remember that it is not so much the State laws
that make the foreclosure process efficient or effective as
servicers' compliance with those laws. Frequently, servicers
are guilty of failing to process a foreclosure efficiently.
When servicers fail to comply with long standing requirements
for affidavit execution or notice to borrowers, their
procedures are neither effective nor efficient, as they call
into jeopardy the successful completion of a foreclosure and
often result in unnecessary and costly litigation. As discussed
in my testimony, and in response to Senator Brown's questions,
servicers have significant incentives to process foreclosures
inefficiently and often do so. That is not the fault of the
laws (although it may reflect weak enforcement); it is the
fault of the servicers. The effectiveness or lack thereof
cannot be judged by the complications created by servicers'
willful noncompliance.
NCLC is generally supportive of strengthening weak and
ineffective State foreclosure laws; we do not believe that a
Federal foreclosure process would be appropriate. The
foreclosure process has historically been part of State real
property law and should remain so. Necessary servicing reform
can be conducted at the Federal level without undermining
States' rights in this area traditionally regulated by the
States. Greater detail on these questions can be found in a
recent study co-authored by my NCLC colleagues John Rao and
Geoff Walsh.\16\
---------------------------------------------------------------------------
\16\ John Rao & Geoff Walsh, Nat'l Consumer L. Ctr., Foreclosing a
Dream: State Laws Deprive Homeowners of Basic Protections (2009),
http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/
foreclosing-dreamreport.pdf.
---------------------------------------------------------------------------
Protections for Homeowners: The foreclosure process in the
United States falls into roughly two categories: the
traditional, judicial foreclosure process, which has required
courts since colonial times to supervise foreclosure
proceedings and prevent unjust results and a comparatively
recent ``non-judicial'' process, which allows lenders to
foreclose without court involvement. Slightly less than one-
half of the States mandate court supervision over residential
mortgage foreclosures.\17\ In the remaining States, foreclosure
sales may proceed without any oversight by a court or neutral
third party. In non-judicial foreclosures, homeowners with
valid complaints about their treatment by a lender or mortgage
servicer must hire an attorney to prepare a cumbersome and
expensive lawsuit in order to stop an imminent foreclosure. In
some States, they may even be required to post bond in the
amount of the mortgage loan before the homeowner's challenge to
the foreclosure can be heard in court. The direct and
inexpensive access to the courts, as occurs now in the many
States requiring judicial foreclosure, is essential to an
effective foreclosure system--one that protects the rights and
interests of all parties.
---------------------------------------------------------------------------
\17\ See National Consumer Law Center, Foreclosing a Dream: State
Laws Deprive Homeowners of Basic protections February 2009, available
at http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/
foreclosing-dream-report.pdf. This report contains State-by-State
summaries of the States' foreclosure laws, highlighting features
related to court access and oversight of loss mitigation actions.
---------------------------------------------------------------------------
State laws work best to prevent avoidable foreclosures when
they include concrete options for the homeowner to terminate a
foreclosure proceeding prior to a sale. For example, several
State laws provide for a borrower's right to ``cure'' a
mortgage default before the mortgage holder may accelerate the
loan and begin foreclosure proceedings. Before taking any
action to foreclose, the mortgage holder must give the borrower
a clear notice of the amount due and time within which to pay.
This legal requirement promotes resolution of potential
foreclosures before either party incurs any costs.
Approximately 15 States now provide for this type of pre-
acceleration notice of right to cure, with Massachusetts, New
Jersey, New York, and Maryland having recently added clear
statutory notice of right to cure provisions to their
foreclosure laws.\18\
---------------------------------------------------------------------------
\18\ National Consumer Law Center, Foreclosing a Dream: State Laws
Deprive Homeowners of Basic protections February 2009, supra __.
---------------------------------------------------------------------------
Twenty-two States provide for a right to cure an arrearage,
pay costs and fees incurred, and reinstate the loan after
commencement of foreclosure proceedings and up until the time
of a foreclosure sale.\19\ When borrowers have clear notice of
a right to reinstate, it is more likely that they will avail
themselves of this opportunity. They will avoid foreclosure by
restoring the loan to its original contract terms. In these
post-acceleration reinstatements the mortgage holder ultimately
suffers no loss because the borrower must reimburse foreclosure
costs.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
In approximately half the States borrowers have some form
of post-sale redemption right that allows them to pay the sale
price plus costs and set the foreclosure sale aside.\20\ The
post-sale redemption periods range from 60 days (North Dakota)
to 1 year (Iowa, Kansas, Kentucky, Alabama, and Montana). In
some States redemption rights and timeframes vary according to
factors such as extent of the borrower's equity in the property
or whether a third party purchased at the sale.
---------------------------------------------------------------------------
\20\ Id.
---------------------------------------------------------------------------
Reducing Losses to Investors: Investors lose enormous sums
of money in foreclosure, $2.7 billion from foreclosure sales in
the month of September 2010 alone.\21\ For that month the
average loss per foreclosed property was $145,636, representing
a loss of over 58 percent of the original principal per
loan.\22\ Loan modifications substantially reduce these losses.
For example, when mortgages were modified to forgive a portion
of loan principal during September 2010, the recognized loss
per loan averaged about 20 percent of the typical loan
balance.\23\ Loans modified under the HAMP program, for
example, show low redefault rates, less than half those of
other loan modifications made at the same time, even though the
HAMP modifications typically do not provide for principal
reductions and only a temporary below-market interest rate
reduction.\24\ These and similar modifications targeting
borrower affordability provide investors with a steady stream
of payments on the original loan principal. A foreclosure law
that best facilitates sustainable loan modifications instead of
foreclosures should be considered most ``effective'' in
minimizing investor losses.
---------------------------------------------------------------------------
\21\ Alan M. White, September 26, 2010 Columbia Collateral File
Summary Statistics, Valparaiso University School of Law, available at
http://www.valpo.edu/law/faculty/awhite/data/sep10_summary.pdf.
\22\ Id.
\23\ Id.
\24\ Congressional Oversight Panel December 2010 Oversight Report,
A Review of Treasury's Foreclosure Prevention Programs 34.; OCC/OTS
Mortgage Metrics Report, Third Quarter 2010 at 37 (reporting a
redefault rate on HAMP modifications after 6 months of 10.6 percent).
---------------------------------------------------------------------------
State laws can set a requirement that mortgage holders
consider loss mitigation options, including a loan
modification, before a foreclosure sale will be allowed. For
example, the South Carolina Supreme Court issued an
administrative order in May 2009 requiring that all foreclosure
complaints filed in the State describe how a servicer complied
with any obligation it had to modify a loan under the HAMP
program.\25\ The Connecticut courts approved a similar order
that went into effect in September 2010.\26\ In several
judicial foreclosure States, including New York, Maine,
Vermont, and Connecticut, legislatures have recently enacted
statutes requiring mediation or supervised conferences in
foreclosure cases.\27\ The goal of these sessions is to bring
representatives of mortgage servicers and the borrowers
together to consider loss mitigation options that mutually
benefit all parties. Court-initiated programs in Ohio, Florida,
Pennsylvania, Kentucky, New Mexico, New Jersey, Indiana, and
Delaware are now offering similar mediation and conference
programs.\28\ Particularly where these programs involve use of
net present value tests to examine the relative benefit to
investors of an affordable loan modification as opposed to
foreclosure, the sessions can provide a quick and effective
means to determine whether foreclosures make economic sense for
investors under accepted industry standards.\29\
---------------------------------------------------------------------------
\25\ South Carolina Supreme Court Administrative Order 2009-05-22-
01 (May 22, 2009) at http://www.judicial.state.sc.us/courtOrders/
displayOrder.cfm?orderNo=2009-05-22-01.
\26\ State of Connecticut Superior Court Mortgage Foreclosure
Standing Order Federal Loss Mitigation Programs, JD-CV-117 Rev 8/10
(August 18, 2010) available at http://www.jud2.ct.gov/webforms/forms/
CV117.pdf.
\27\ Links to the texts of these statutes can be found at the
National Consumer Law Center Web site: http://www.nclc.org/issues/
foreclosure-mediation-programs-by-state.html.
\28\ Links to the court Web sites describing these programs are
available on the same NCLC Web page, http://www.nclc.org/issues/
foreclosure-mediation-programs-by-state.html.
\29\ The foreclosure mediation programs in effect in Maine and
Vermont require use of these net present value tests.
---------------------------------------------------------------------------
Recently, several State legislatures have incorporated
mediation and conference requirements into non-judicial
foreclosure procedures. For example, in Nevada, a traditionally
non-judicial foreclosure State, the courts now supervise a
statewide mediation program. In Maryland, homeowners may
request hearings before a State agency to review the servicer's
loss mitigation activities. Parties to a foreclosure in
Maryland may also appeal conference decisions to the courts.
The District of Columbia, another non-judicial foreclosure
jurisdiction, recently enacted a foreclosure mediation law that
will go into effect in early 2011.
Time Frames: Both Fannie Mae and HUD (on behalf of FHA)
publish guidelines for what they consider to be the reasonable
timeframes from the initiation of a foreclosure to a sale in
each of the 50 States.\30\ The expected time to foreclosure
varies depending on State law and court procedures. Fannie Mae
and HUD use these guidelines to assess performance of attorneys
who are paid to conduct foreclosures of FHA insured and Fannie
Mae owned and guaranteed loans. The guidelines show wide
variations in foreclosure timeframes from State to State. For
example, HUD lists three non-judicial foreclosure States
(Missouri, Rhode Island, and Texas) with timeframes of 3 months
from the commencement of foreclosure to sale. Nine non-judicial
States have 4-month timeframes.\31\ On the other hand, HUD's
permissible timeframes in judicial foreclosures States
typically run 10 months and longer.\32\ Actual times to
foreclosure can vary wildly, depending on how aggressive and
competently a servicer handles a foreclosure, ranging in the
same State from 30 days to years to complete a foreclosure.
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\30\ Fannie Mae Servicing Guide (2010 version) Part VIII, sec.
104.05, Allowable Time Frames for Completing Foreclosure, https://
www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1012.pdf and HUD
Mortgagee Letter 2005-30 (July 12, 2005) with attachments, http://
www.hud.gov/offices/adm/hudclips/letters/mortgagee/2005ml.cfm.
\31\ Alabama, Arizona, Georgia, Mississippi, New Hampshire,
Tennessee, and Virginia.
\32\ E.g. 17 months (Iowa), 14 months (New Jersey, Vermont), 13
months (New York), 12 months (Illinois, Maine, Ohio, Wisconsin), 10
months (Indiana, Pennsylvania, South Dakota).
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Vagaries in the reporting of these timeframes exaggerates
the discrepancy between non-judicial and judicial foreclosure
States. The clock starts to run at a different point in time
for judicial and non-judicial foreclosures. In non-judicial
foreclosures the initial action is typically the publication of
a notice of sale or the recording of a notice of default. In
judicial foreclosures it is usually the filing of a foreclosure
complaint in a court. But neither point in time measures how
long it has been from default to the initiation of foreclosure.
In many cases, the servicers will wait at least 3 months after
the initial default before commencing a foreclosure, either
because of contract limitations in the mortgage, or because of
loss mitigation requirements imposed on Government-insured
loans and some loans insured with private mortgage insurance,
or because of custom.\33\ Post-sale redemption periods in some
non-judicial foreclosure States (Michigan, Alabama, Minnesota
Missouri and Wyoming) can extend the process beyond the Fannie
Mae numbers in periods lasting from 3 months to 1 year. The
time to completed foreclosures in these non-judicial
foreclosure States is actually more in line with those of
judicial foreclosure States.
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\33\ 24 C.F.R. 203.355(a).
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Debates over changes to State foreclosure laws often focus
on the relative speed of different foreclosure procedures. Some
industry representatives suggest that longer foreclosure
timeframes harm consumers because lenders must raise the cost
of credit on a State-by-State basis in response to lengthening
of foreclosure timeframes. There is little empirical evidence
indicating that this actually happens.\34\
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\34\ One study by a Federal Reserve Board economist offered some
limited data on this subject. Karen M. Pence, Foreclosing on
Opportunity: State Laws and Mortgage Credit, 88 Review of Economics and
Statistics 177 (February 2006). The author looked for variances in home
mortgage credit terms in States with judicial and non-judicial
foreclosure laws. The study concluded that borrowers in judicial
foreclosure States tended to receive marginally smaller loan amounts
than those in non-judicial foreclosure States, but found no significant
disparities in loan terms such as interest rates. The report could not
conclude that borrowers in judicial States were necessarily worse off
than borrowers in non-judicial States. According to the report,
``homeownership might even increase if the judicial protections help
borrowers remain in their homes.'' The Report noted that further study
was needed to assess the balance between any minor negative effects on
credit terms and the benefits that heightened homeowner protections
create for a housing market.
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On the other hand, we now have analytical tools that allow
us to see how the costs of foreclosure compare to the costs of
various alternatives to foreclosure. We can easily quantify the
cost to investors in interest lost during the 5 months
additional time that a judicial foreclosure may take in
comparison to a non-judicial foreclosure. However this short
term incremental cost pales in relation to the overall loss of
$145,000 that investors incur in the typical foreclosure today.
Foreclosure laws that allow for full consideration of loss
mitigation can drastically reduce that loss. In today's housing
crisis, an analysis of State foreclosure laws that focuses on
length of foreclosure time is dangerously outdated. An
effective foreclosure system must provide a framework within
which an evaluation of the true costs of foreclosure takes
place in a timely and transparent manner.
States with Relatively Effective and Efficient Foreclosure
Laws: The foreclosure laws in New York and Maine include: (1)
judicial supervision over entry of judgments and sales; (2)
clear pre-foreclosure notices to borrowers advising them of
their rights in a potential foreclosure, including a right to
cure before commencement of proceedings and during proceedings;
(3) timely referrals to counseling resources; and (4) an
opportunity for conferences or mediations supervised by neutral
third parties who can enforce good faith participation by the
borrower, mortgage holder, and servicer. The laws in
Connecticut and Vermont similarly encourage efficient review of
loss mitigation options.
Because the State laws in New York, Maine, Connecticut, and
Vermont require court orders to schedule and approve sales, and
allow time periods to negotiate and cure defaults, the
foreclosure timelines from initiation of foreclosure to sale in
these States are longer than in most other States and run from
9 months to slightly over a year.\35\
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\35\ FHA's ``reasonable diligence'' timelines for these States are:
Vermont (14 months); New York (13 months); Maine (12 months);
Connecticut (9 months). Vermont, Maine, and Connecticut provide for a
redemption period between entry of judgment and sale. These redemption
periods are included in the timelines.
---------------------------------------------------------------------------
States with Relatively Ineffective and Inefficient
Foreclosure Laws: Several non-judicial foreclosure States,
including Georgia, Tennessee, Rhode Island, Virginia, and
Missouri combine ineffective notice and cure rights, no
judicial oversight, and a timeframe that gives few homeowners a
practical opportunity to participate actively in the
foreclosure process.
The timelines in Georgia, Tennessee, Rhode Island,
Virginia, and Missouri are shorter, running about 4 months.\36\
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\36\ FHA's ``reasonable diligence'' timelines for these States are:
Georgia (4 months); Tennessee (4 months); Rhode island (3 months);
Virginia (4 months); Missouri (3 months). In cases in which the
mortgage holder purchases the property at the sale, Missouri permits a
1-year redemption period for a borrower who makes an appropriate
request within 10 days of sale and posts a bond.
Q.3. To better gauge the level of violations surrounding the
topic of this hearing it is necessary for us to understand who
is being affected. Admittedly, this question is probably best
suited for the regulators, and we hope to receive this
information from them at some point.
In your research and investigations, how many individuals
were discovered to have been fully current on their mortgage
payments but foreclosed upon by their servicer? Please provide
the data and evidence that you evaluated to arrive at your
conclusions.
A.3. Of course, I am not primarily a researcher, nor do I have
access to the servicers' proprietary databases or an ability to
conduct a comprehensive review of their loan files. While I did
provide examples where the servicer wrongfully initiated
foreclosure in my written testimony, including five homeowners
who were foreclosed upon while negotiating a loan modification
and making payments as instructed by the servicer, two
homeowners who were placed into foreclosure solely because of
the servicers' improper imposition of fees, three homeowners
who were foreclosed upon although they were current in their
required payments, and three cases where the servicer initiated
foreclosure proceedings in the name of the wrong owner of the
loan, these examples were illustrative and not exhaustive. As
you note, regulators with supervisory authority are better
positioned to review the millions of foreclosure filings than
I. As we recommend in our testimony, it is essential that the
regulators begin random sampling of servicers' files to
determine the extent of the problem we are facing.
In an attempt to quantify the extent of the problem, absent
the hard data only careful supervisory exams are likely to
provide, the National Association of Consumer Advocates, in
conjunction with NCLC, conducted a survey of attorneys
representing homeowners in foreclosure. The 96 attorneys from
34 States reported representing over 1,200 homeowners who had
been placed into foreclosure by a servicer when they were
current on their payments. Those attorneys reported
representing an additional 1,800 homeowners who had been placed
into foreclosure by the servicer despite making payments as
agreed under a plan.
More importantly, this is not a question easily answered.
By the time homeowners seek legal counsel, they have usually
spent several months attempting to resolve their dispute with
the servicer on their own, and sorting out the payment history
is cumbersome and often uncertain. There are frequently
divergences between the servicer's records and the homeowner's,
and reconciling those records can take months, in my
experience. Several courts have noted that the gross
inaccuracies pervading servicers' records often make it
impossible to determine whether a homeowner is in default and
the extent of any default.\37\
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\37\ See, e.g., Schlosser v. Fairbanks Capital Corp., 323 F.3d 534
(7th Cir. 2003); Maxwell v. Fairbanks Capital Corp. (In re Maxwell),
281 B.R. 101 (Bankr. D. Mass. 2002); Chu v. Green Point Sav. Bank, 628
N.Y.S. 2d 527 (2nd App. Dist. 1995) (finding servicers' conduct in
foreclosing ``frivolous'' and imposing sanctions).
---------------------------------------------------------------------------
There is also the difference between the homeowner's status
at the time the servicer declares default and the time a
foreclosure is formally filed. There is usually a lag of
several months between the servicer's declaring default and the
filing of a foreclosure in a judicial foreclosure State; a
homeowner who was current at the time of the declaration of
default is unlikely to be current when the foreclosure is filed
(the servicer will ordinarily refuse payments in that
circumstance, or homeowners may give up making payments,
assuming that they will lose the home).
Moreover, whether homeowners are current on their payments
or not may depend on whether the servicer accepted the
homeowner's payments, whether the servicer instructed the
homeowner to stop making payments, whether the servicer
properly applied the homeowner's payments, whether the servicer
charged improper fees or forceplaced insurance. An analysis
that only looks to the servicers' records as to the homeowners'
status at the time of foreclosure is likely to miss most if not
all of these cases where the homeowner was, by any sensible
measure, current in the payments at the time the servicer
initiated foreclosure. In my experience representing
homeowners, it is not uncommon for servicers to initiate
foreclosure where the homeowner has a good faith basis to
dispute the servicer's accounting. Furthermore, problems in
servicing cannot easily be disentangled from problems in
origination: borrowers may fail to make payments because they
were told not to, told that the amount owed was a different
amount, or borrowers may make payments to the wrong entity.\38\
Fundamentally, if a loan modification would save the investors
money, and the borrower qualifies for a loan modification, a
servicer who initiates a foreclosure is acting wrongfully, in
violation of their fiduciary obligations to the securities
holders, in breach of the mortgage contract with the borrower,
which requires good faith and fair dealing, and, often, in
blatant disregard of regulatory guidance and HAMP Servicer
Participation Agreements.
---------------------------------------------------------------------------
\38\ See, e.g., Karen Weise, ProPublica, One ``Nightmare''
Mortgage: Problems from Origination through Foreclosure Nov. 22, 2010,
http://www.propublica.org/article/one-nightmare-mortgage-problems-from-
origination-through-foreclosure (homeowner sent her payments to
mortgage broker who failed to forward payments on).
---------------------------------------------------------------------------
There continue to be press accounts--unrelated to either my
testimony or the survey--documenting baseless foreclosures.
Press reports from around the country have documented cases
where servicers have initiated foreclosure, even though the
homeowner was current in payments.\39\ In some instances,
servicers have foreclosed on mortgages that the homeowner had
already paid off in full.\40\ In other cases, servicers have
foreclosed on the wrong home.\41\ A recent story in The New
York Times reports on four separate cases where the servicer
completed a foreclosure illegally.\42\ In one of those cases,
the mortgage was paid off; in two of those cases, the homeowner
was attempting to sort out the confusion following a loved
one's death. Servicers will frequently refuse to accept
payments from a spouse, partner, or child following a
mortgagor's death, despite the fact that Federal law forbids
servicers from exercising their due-on-sale clauses in this
context \43\ and despite the fact that ordinary human feeling--
or good business judgment--would suggest allowing the grieving
survivor to continue making payments without hassle.
---------------------------------------------------------------------------
\39\ See, e.g., George Gombossy, Bank of America's Christmas
Present: Foreclose Even Though Not a Missed Payment, ctwatchdog.com,
Dec. 24, 2010, http://ctwatchdog.com/2010/12/24/bank-of-americas-
christmas-present-foreclose-even-though-not-a-payment-missed; Jon
Yates, Processing Mistake Leads to Erroneous Foreclosure, Chi. Trib.
Nov. 23, 2010.
\40\ See, e.g., Andrew Martin, In Sign of Foreclosure Flaws, Suits
Claim Break-Ins by Banks, N.Y. Times, Dec. 22, 2010, at A1; Aldo
Svaldi, Foreclosure Paperwork Miscues Piling Up, Denver Post, Nov. 14,
2010.
\41\ See, e.g., Harriet Johnson Brackey, Lauderdale Man's Home Sold
Out From Under Him in Foreclosure Mistake, Sun Sentinel, Sept. 23,
2010; Tony Marrero, Bank of America Forecloses on House that Couple Had
Paid Cash For, St. Petersburg Times, Feb. 12, 2010.
\42\ Andrew Martin, In Sign of Foreclosure Flaws, Suits Claim
Break-Ins by Banks, N.Y. Times, Dec. 22, 2010, at A1.
\43\ 12 U.S.C. 1701j-3.
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Servicer abuses are widespread and unquestionably result in
wrongful foreclosure. Determining the true extent of the
problem will require careful, independent scrutiny of both
servicers' and homeowners' records.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DIANE E.
THOMPSON
Q.1. Please describe any barriers to mortgage modifications
that servicers may encounter.
A.1. In general, the barriers servicers face to mortgage
modifications have been overstated. The barriers servicers face
are usually surmountable or of their own making.
Servicers often complain about staffing shortages. Staffing
is certainly expensive for servicers, particularly default
staffing, although servicers continue to have enviable margins
in their servicing of the majority of loans that are
performing.\1\ By any reasonable measure though, servicers have
sufficient staff to perform modifications.\2\ Training and
supervision of staff may be an issue, as may the implementation
of procedures to perform loan modifications correctly, but
those are questions about servicers' will to implement
modifications, not their ability to do so.
---------------------------------------------------------------------------
\1\ See, e.g., Mortg. Servicing News, Servicers' Collection Profits
May Outweigh Cost of Defaults, Dec. 28, 2010 (noting that while default
servicing is expensive, servicing of performing loans is highly
lucrative for large servicers, with the direct costs running perhaps
$60 a year and the principal based mortgage servicing income paid by
the trust running $450 a year on a midsized prime loan of $180,000).
\2\ For example, in April of this year, Bank of America reported
that it had over 15,000 people working in customer outreach. Jennifer
Harmon, Am Banker, B of A Deploys More Resources from Origination to
Servicing, Apr. 12, 2010. By October, Bank of America had fewer than
80,000 HAMP permanent modifications in place. Making Home Affordable
Program, Servicer Performance Report Through Oct. 2010. That suggests
that it is taking Bank of America more than two full work days to
process a homeowner for a HAMP modification-a highly standardized
application that requires little individual underwriting. Jack
Guttentag, New Plan to Jump-Start Loan Mods: Web Portal Would
Centralize Communication, Break Logjam, Inman News, July 20, 2009,
available at http://www.inman.com/buyerssellers/columnists/
jackguttentag/new-plan-jump-start-loan-mods (noting that it should take
no more than an hour for a servicer to process a loan modification
request; at that rate, Chase's 3500 loan modification counselors should
be able to process at least 70,000 loan modifications a week-
approximately the number of Making Home Affordable modifications that
Chase has processed in the first 5 months of the HAMP program).
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Servicers often assert that investors prohibit
modifications. As detailed in my written testimony, often those
representations are entirely false. Most PSAs permit
modifications of loans in default freely.\3\ Where
securitizations contain absolute bars to modifications,
sponsors of those securitizations have successfully petitioned
the trustee to amend the contract to allow modifications
generally, so long as the loan is in default or at imminent
risk of default.\4\ Increasingly, groups representing investors
call on servicers to perform more loan modifications, including
principal reductions, and assert that servicers are failing to
perform modifications, contrary to servicers' wishes.\5\
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\3\ John P. Hunt, Berkeley Ctr. for Law, Business, and the Economy,
Loan Modification Restrictions in Subprime Securitization Pooling and
Servicing Agreements from 2006: Final Results 2 (July 2010), available
at http://www.law.berkeley.edu/files/bclbe/Subprime_
Securitization_Paper_John_Hunt_7.2010.pdf (only 8 percent of subprime
contracts reviewed barred modifications); John P. Hunt, Berkeley Ctr.
for Law, Business, and the Economy, What Do Subprime Securitization
Contracts Actually Say About Loan Modification: Preliminary Results and
Implications 7 (Mar. 25, 2009), available at http://
www.law.berkeley.edu/files/bclbe/
Subprime_Securitization_Contracts_3.25.09.pdf (discussing various
limitations and quantifying the frequency of limitations); See Manuel
Adelino, Kristopher Gerardi, and Paul S. Willen, Fed. Reserve Bank of
Boston, Why Don't Lenders Renegotiate More Home Mortgages? Redefaults,
Self-Cures, and Securitizations 28 (Publicy Pol'y Paper No. 09-4, July
6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf. (summarizing several different studies finding no
meaningful PSA restrictions in a majority of securitizations reviewed);
Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen
Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. Research
& Statistical Affairs, The Incentives of Mortgage Servicers: Myths and
Realities 22 (Working Paper No. 2008-46) (reporting that of 500
different PSAs under which a large servicer operated, 48 percent had no
limitations on modifications other than that they maximize investor
return; only 7.5 percent of the PSAs had meaningful limits on then
types of modifications a servicer could authorize); Credit Suisse, The
Day After Tomorrow: Payment Shock and Loan Modifications (2007),
available at http://www.creditsuisee.com/researchandanalytics (finding
that 65 percent of survey PSAs contain no meaningful restrictions on
ability to modify loans); American Securitization Forum, Statement of
Principles, Recommendations, and Guidelines for the Modification of
Securitized Subprime Residential Mortgage Loans 2 (June 2007) (``Most
subprime transactions authorize the servicer to modify loans that are
either in default or for which default is either imminent or reasonably
foreseeable.'').
\4\ See, e.g., Morgan Stanley Omnibus Amendment (Aug. 23, 2007) (on
file with author).
\5\ Jody Shenn, Mortgage Investors with $500 Billion Urge End of
Practices, Lawyer Says, Bloomberg News, July 23, 2010, http://
www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-billion-
urge-end-of-practices-lawyer-says.html (reporting on letters sent to
trustees of mortgage pools on behalf of a majority of the investors in
the pool); Ass'n of Mortg. Investors Press Release, AMI Supports Long
Term, Effective, Sustainable Solutions to Avert Foreclosure; Invites
Bank Servicers to Join, Nov. 16, 2010 (citing servicers' profit from
fees and payments from affiliates as an impediment to loan
modifications that would be in the interests of investors); Letter from
Kathy D. Patrick to Countrywide Home Loans Servicing, Oct. 18, 2010
(notifying a trust and master servicer of breaches in the master
servicer's performance).
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Servicers' delayed recovery of expenses in modifications
may create a barrier to performing modifications. Servicers
have two main expenses when a loan is in default: advances of
principal and interest to the trust and payments to third
parties for default services, such as property inspections. The
requirement for advances usually continues until a foreclosure
is completed, a loan modification is reached, or the servicer
determines that there is no realistic prospect of recovering
the advances from either the borrower or the collateral.\6\
Financing these costs is one of servicers' biggest expenses.\7\
---------------------------------------------------------------------------
\6\ Brendan J. Keane, Moody's Investor Services, Structural Nuances
in Residential MBS Transactions: Advances 3 (June 10, 1994).
\7\ Ocwen Fin. Corp., Annual Report (Form 10-K) 5 (Mar. 12, 2009).;
Mary Kelsch, Stephanie Whited, Karen Eissner, Vincent Arscott, Fitch
Ratings, Impact of Financial Condition on U.S. Residential Mortgage
Servicer Ratings 2 (2007).
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Modifications in general do not allow servicers to recover
their costs as quickly as foreclosures do.\8\ Servicers'
advances are taken off the top, in full, at the post-
foreclosure sale, before investors receive anything.\9\ If
advances of principal and interest payments remain beyond the
sale value, servicers can usually collect them directly from
the trust's bank account (or withhold them from payments to the
trust).\10\ In contrast, when there is a modification,
servicers are usually limited to recovering their advances from
the modified loan alone, after required payments to the trust,
or, if the advances are deemed nonrecoverable, from only the
principal payments on the other loans in the pool, not the
interest payments.\11\ As a result, servicers can face a delay
of months to years in recouping their advances on a
modification. Modifications involving principal reductions
compound the problem: they lengthen the time to recover
advances on any individual modified loan as well as on other
modified loans, by reducing the amount of principal payments
available for application to recovery of advances.\12\ Limiting
recovery of servicer expenses when a modification is performed
to the proceeds on that loan rather than allowing the servicer
to recover more generally from the income on the pool as a
whole, as is done in foreclosure, clearly biases servicers
against meaningful modifications, particularly modifications
with principal reduction or forbearance.
---------------------------------------------------------------------------
\8\ Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, U.S.
Residential Mortgage Servicer Advance Receivables Securitization Rating
Criteria 4 (Sept. 10, 2009) (finding that modifications do not appear
to accelerate the rate of recovery of advances, in part because of high
rates of redefault).
\9\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, &
Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div.
Research & Statistical Affairs, The Incentives of Mortgage Servicers:
Myths and Realities 11 (Working Paper No. 2008-46); Ocwen Fin. Corp.,
Annual Report (Form 10-K) 4 (Mar. 17, 2008) (advances are ``top of the
waterfall'' and get paid first); Wen Hsu, Christine Yan, Roelof Slump,
FitchRatings, U.S. Residential Mortgage Servicer Advance Receivables
Securitization Rating Criteria 1 (Sept. 10, 2009) (same); Prospectus
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust
2007-FLX5, at S-71 (June 27, 2007) (servicers repaid all advances when
foreclosure is concluded).
\10\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 11
(Mar. 12, 2009) (``[I]n the majority of cases, advances in excess of
loan proceeds may be recovered from pool level proceeds.''); Prospectus
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust
2007-FLX5, at S-71 (June 27, 2007) (permitting principal and interest
advances to be recovered from the trust's bank account); Prospectus,
CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide
Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust
2005-J12, Issuer 47 (Oct. 25, 2005) (limiting right of reimbursement
from trust account ``to amounts received representing late recoveries
of the payments for which the advances were made).
\11\ Monica Perelmuter & Waqas Shaikh, Standard & Poor's, Criteria:
Revised Guidelines for U.S. RMBS Loan Modification and Capitalization
Reimbursement Amounts 3 (Oct. 11, 2007).
\12\ But see Rod Dubitsky, Larry Yang, Stevan Stevanovic, Thomas
Suer, Credit Suisse, Subprime Loan Modifications Update (2008)
(discussing how some servicers exploited then existing imprecision in
the accounting treatment of principal reduction modifications to use
principal reduction modifications to halt interest advances).
---------------------------------------------------------------------------
Moreover, since the significant financing costs associated
with making advances cannot be recovered,\13\ servicers are
likely to push through a foreclosure quickly when the cost of
financing advances is climbing, even at the expense of
investors who might prefer a modification.\14\
---------------------------------------------------------------------------
\13\ Joseph R. Mason, Mortgage Loan Modification: Promises and
Pitfalls 4 (Oct. 2007). A large subprime servicer noted in its 2007
annual report that although ``the collectability of advances generally
is not an issue, we do incur significant costs to finance those
advances. We utilize both securitization, (i.e., match funded
liabilities) and revolving credit facilities to finance our advances.
As a result, increased delinquencies result in increased interest
expense.'' Ocwen Fin. Corp., Annual Report (Form 10-K) 18 (Mar. 17,
2008); see also Wen Hsu, Christine Yan, Roelof Slump, FitchRatings,
U.S. Residential Mortgage Servicer Advance Receivables Securitization
Rating Criteria 1 (Sept. 10, 2009) (``Servicer advance receivables are
typically paid at the top of the cash-flow waterfall, and therefore,
recovery is fairly certain. However, . . . there is risk in these
transactions relating to the timing of the ultimate collection of
recoveries.'').
\14\ See Complaint at 11-15, ); Carrington Asset Holding Co.,
L.L.C. v. American Home Mortgage Servicing, Inc., No. FST-CV 09-
5012095-S (Conn. Super. Ct., Stamford Feb. 9, 2009) (alleging that
servicer conducted ``fire sales'' of foreclosed properties in order to
avoid future advances and recover previously made advances); Kurt
Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15
Housing Pol'y Debate 753, 757 (2004) (reporting that servicers
sometimes rush through a foreclosure without pursuing a modification or
improperly foreclose in order to collect advances); Peter S. Goodman,
Lucrative Fees May Deter Efforts to Alter Troubled Loans, N.Y. Times,
July 30, 2009.
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The two-track system also impedes servicers' ability to
perform modifications. Proceeding with a foreclosure before
considering a loan modification results in high costs for both
investors and homeowners. These costs--which accrue primarily
to the benefit of the servicer--can make an affordable loan
modification impossible. Moreover, the two track system, of
proceeding simultaneously with foreclosures and loan
modification negotiations, results in many ``accidental''
foreclosures, due to bureaucratic bungling by servicers,\15\ as
one department of the servicer fails to communicate with
another, or papers are lost, or instructions are not conveyed
to the foreclosure attorney. To some extent, the two-track
system is still mandated by large investors and the FHFA.
Ending the two-track system would facilitate servicers' ability
to complete loan modifications.
---------------------------------------------------------------------------
\15\ For some descriptions of all too typical bureaucratic bungling
by servicers, see Peter S. Goodman, Paper Avalanche Buries Plan to Stem
Foreclosures, N.Y. Times, June 29, 2009, and Jack Guttentag, New Plan
to Jump-Start Loan Mods: Web Portal Would Centralize Communication,
Break Logjam, Inman News, July 20, 2009, available at http://
www.inman.com/buyers-sellers/columnists/jackguttentag/new-plan-jump-
start-loan-mods.
Q.2. What systems should mortgage servicers implement to
correct their mistakes and compensate the individual homeowners
---------------------------------------------------------------------------
who have suffered through the actions of others?
A.2. We believe that servicers must take steps to redress harm
caused consumers, ensure fair and effective processing going
forward, and begin complying with existing standards.
Compliance. Compliance with existing rules and policies
must come first. Any redress to harmed borrowers is undercut if
servicers do not stop violating existing standards. We continue
to hear examples of outright misrepresentations by all of the
major servicers. Bank of America, for example, has continued to
require homeowners to sign waivers for its proprietary loan
modification program, despite representations to the contrary.
Chase has been sending out letters that implicitly discourage
homeowners from applying for Pennsylvania's HEMAP program.
Servicers must comply with both the letter and the spirit of
the law.
Improved Processing. In addition to taking steps to comply
with existing standards, servicers could implement the
following systems to ease the process for homeowners going
forward.
End dual track. Stop the foreclosure process during
modification applications (and modifications), even for
people already in foreclosure at the time of
application.
Create a single point of contact for each
homeowner, one with real decisionmaking authority and
ability to follow through.
Process modification applications in hours instead
of months or years. Expedited review.
Clear in-house escalations for homeowners who have
been denied a modification or encountered difficulties
in obtaining a modification.
Redress. Providing redress for homeowners harmed will not
be easy and would require a significant commitment on the part
of servicers. There are two basic categories of homeowners who
have been harmed by servicers' malfeasance: 1) those who have
lost their homes and 2) those who are still in their homes, but
have been denied a loan modification, pushed into default, or
merely had improper fees tacked onto their account. Addressing
the former category, homeowners who lost their homes, is more
complex than providing relief to those who have not yet lost
their homes at a foreclosure sale.
For homeowners who have not yet lost their home in a
foreclosure sale, servicers should institute a supervised, full
review of every file marked in default. This review must
include a review of the payment history, including the timing
and application of payments and the validity of fees charged.
Homeowners found not to be in default should be
removed from foreclosure, corrections of credit
reporting status must be provided to the credit
bureaus, and accounts should be fully corrected.
All pending foreclosures should be halted while
this review takes place, and dual track processing must
be stopped on all loans so that the modification review
can be completed.
Fees should be rolled back and limited to
reasonable and necessary ones.
Recalculation of principal balances should be done
to account for improperly assessed fees or overcharged
interest.
The servicers should also be required to undertake a review
of all completed foreclosures. There are two large categories
of cases for which servicers should attempt to make redress:
first, cases where the foreclosure was executed on the wrong
home or where the homeowner was not in default; and second,
cases where the foreclosure was completed without completing
the loan modification review process, providing a written
denial to the homeowner, or failing to offer a qualifying
homeowner an appropriate modification.
If the home has not yet been sold to a bona fide
third party, the servicer should offer to restore the
mortgage, with a reduction of the principal balance to
account for all assessed foreclosure fees, as well as
any improper fees. If the borrower is in default, the
servicer also should provide a reduction of the
interest rate to the Freddie Mac Prime Weekly Rate, if
that is lower. Such homeowners further should be
evaluated for a deeper modification where the monthly
payment would be greater than 31 percent of the
homeowner's income. As part of those NPV positive
modifications, servicers should be required to reduce
the principal balance on the loan to the assessed value
of the property that the servicer relied on in
evaluating the loan for foreclosure originally.
Servicers must further provide corrected credit
reporting to the credit bureaus to mitigate the
negative credit reporting.
If the home has already been sold to a third party
or if the homeowner no longer wishes to retain the
home, the servicer should be required to refund to the
homeowner all foreclosure fees assessed against the
homeowner's account, plus the amount by which the
valuation the servicer relied on exceeds the
foreclosure sale price. Servicers must also take steps
to repair the homeowner's credit in these situations.
No waiver of the homeowner's rights should be required.
If the homeowner who was subject to a wrongful foreclosure
cannot be located, the servicer should be required to deposit
the money that would otherwise be paid to the homeowner into a
fund for legal services and housing counselors. Funding must be
available to legal services lawyers to support foreclosure
litigation, as well as counseling.
Q.3. What are the financial incentives encouraging mortgage
servicers to foreclose on homeowners?
A.3. As detailed in my report, ``Why Servicers Foreclose When
They Should Modify,''\16\ the balance of servicer incentives
leans toward foreclosure over modification.
---------------------------------------------------------------------------
\16\ Diane E. Thompson, Why Servicers Foreclose When They Should
Modify and Other Puzzles of Servicer Behavior: Servicer Compensation
and its Consequences (Oct. 2009), available at www.consumerlaw.org.
---------------------------------------------------------------------------
Staffing costs: Servicers encounter increased staffing
costs that are not reimbursed when they modify. In contrast,
the staffing costs of foreclosures, which are often lower than
those for modifications, may be outsourced and charged back to
the trust. Many of those foreclosure staffing needs are
provided by affiliates or other organizations that provide
financial compensation to the servicers in exchange for repeat
business.\17\
---------------------------------------------------------------------------
\17\ See Complaint para. 15, Fed'l Trade Comm'n v.
Countrywide Home Loans, Inc., No. CV-10-4193 (C.D. Cal. Jun. 7, 2010),
available at http://www.ftc.gov/os/caselist/0823205/
100607countrywidecmpt.pdf; (alleging that Countrywide's
``countercyclical diversification strategy'' was built on its
subsidiaries funneling the profits from marked-up default fees back to
Countrywide); Peter S. Goodman, Homeowners and Investors May Lose, But
the Bank Wins, N.Y. Times, July 30, 2009 (describing Bank of America's
refusal to entertain three separate short sale offers during 2 years of
non-payment while its affiliate continues to assess property inspection
fees); Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter
Troubled Loans, N.Y. Times, July 30, 2009.
---------------------------------------------------------------------------
Fees: Servicers get paid off the top in a foreclosure for
any costs and expenses, before the investors get paid. But when
a loan is modified, servicers can only collect their fees and
expenses from the payments on that loan.
Servicers can charge homeowners and investors more fees in
a foreclosure than in a modification. There are property
preservation fees, REO sale costs, attorney fees, and title
work, to name a few. For example, one servicer recently charged
the account of a Maine homeowner $600 for cutting the grass,
once. The servicer charged this ``property preservation fee''
multiple times over the course of a few months. The servicer
tacked these fees onto a petition for deficiency judgment
against the homeowner; had the homeowner not been able to force
those fees to be waived, the servicer would likely have
collected any unpaid amount from the trust, before the
investors got paid. Additionally, HAMP and other loan
modification programs may require waiver of late fees, which
servicers are otherwise entitled to retain.\18\
---------------------------------------------------------------------------
\18\ See Home Affordable Modification Program, Supplemental
Directive 09-01 (Apr. 6, 2009).
---------------------------------------------------------------------------
Pressure from credit rating agencies to expedite
foreclosures: Credit rating agencies rate servicers'
performance on the speed to conduct a foreclosure.\19\ Since
servicers are dependent on the credit rating agencies for
approval to enter into new mortgage servicing contracts and
affordable financing, servicers have a strong financial
incentive to push forward a foreclosure rather than allowing
for the possibility of a loan modification.
---------------------------------------------------------------------------
\19\ Diane Pendley & Thomas Crowe, FitchRatings, U.S. RMBS
Servicers' Loss Mitigation and Modification Efforts 11, 15 (May 26,
2009); see also Michael Guttierez, Michael S. Merriam, Richard Koch,
Mark I. Goldberg, Standard & Poors, Structured Finance: Servicer
Evaluations 15-16 (2004). The rating agencies do not set benchmarks for
any of these, but expect servicers to develop timelines and
standardized loss mitigation options for each loan product, with
reference to the industry standards as developed by Fannie Mae and
Freddie Mac.
---------------------------------------------------------------------------
Troubled debt restructuring rules: The troubled debt
restructuring rules discourage servicers from performing
permanent modifications, as well as more generally discouraging
those modifications most likely to be successful-modifications
that provide deep payment reductions and modifications before
default. While the TDR accounting rules only apply to loans
held in portfolio,\20\ preserving the assets of the trust from
the originators' creditors has required that servicers
generally categorize modifications using the TDR rules.\21\
---------------------------------------------------------------------------
\20\ Fin. Accounting Standards Bd., Accounting by Creditors for
Impairment of Loans, An Amendment of FASB Statement No. 5 and 15,
Statement of Fin. Accounting Standards No. 114 (1993).
\21\ FASB has recently altered the rules protecting the bankruptcy-
remote status of the trust. Instead of qualifying as a Special Purpose
Entity, all ``variable interest entities'' now must be reviewed to
determine the extent to which the transferring entity maintains control
and appropriate disclosures provided. This is unlikely to impact the
weight of the TDR rules directly, but it does change the formal
mechanism by which bankruptcy-remote status is achieved and evaluated.
See Transfers of Financial Assets, An Amendment to FASB Statement No.
140, Statement of Fin. Accounting Standards No. 166 (2009).
---------------------------------------------------------------------------
FAS 15 generally requires all permanent modifications
occasioned by the ``borrower's financial difficulties'' to be
treated as ``troubled debt restructurings.''\22\ A TDR usually
results in immediate loss recognition and, for loans held in
portfolio, a cessation of interest payments.\23\ The FAS 15
rules apply whether the loan is current or delinquent when
modified. A servicer who modifies a loan pre-default-say an
adjustable rate mortgage in advance of a rate reset-will have
to report that loan as a TDR. Many servicers prefer to postpone
that paper loss, thus converting the paper loss into a real
loss, at least for the homeowner and investors.\24\
---------------------------------------------------------------------------
\22\ Fin. Accounting Standards Bd., Accounting by Debtors and
Creditors for Troubled Debt Restructurings, Statement of Fin.
Accounting Standards No. 15 at Sec. 2 (1977).
\23\ Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Fed.
Reserve Bank of Boston, Why Don't Lenders Renegotiate More Home
Mortgages? Redefaults, Self-Cures, and Securitizations 23-24 (Publicy
Pol'y Paper No. 09-4, July 6, 2009), available at http://
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf.
\24\ Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Fed.
Reserve Bank of Boston, Why Don't Lenders Renegotiate More Home
Mortgages? Redefaults, Self-Cures, and Securitizations 23-24 (Publicy
Pol'y Paper No. 09-4, July 6, 2009), available at http://
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf.
---------------------------------------------------------------------------
Junior liens: Servicers who own junior liens will be
reluctant to modify those loans. Homeowners often continue to
pay on junior liens after they have defaulted on first
mortgages, because the smaller payment associated with the
junior lien feels more manageable. As long as that mortgage is
performing, servicers will be reluctant to recognize a loss,
even if doing so would enable a greater return on the first
mortgage.
Advances: Servicers' requirement to advance the principal
and interest payments on loans that are in default favors
foreclosures. Servicers have two main expenses when a loan is
in default: advances of principal and interest to the trust and
payments to third parties for default services, such as
property inspections. Servicers, under their agreements with
investors, typically are required to continue to advance
interest on loans that are delinquent until a foreclosure is
completed.\25\ Financing these costs is one of servicers'
biggest expenses.\26\ Recovery of these fees (but not the
financing costs) is more certain and often swifter via a
foreclosure than a modification.
---------------------------------------------------------------------------
\25\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, &
Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div.
Research & Statistical Affairs, The Incentives of Mortgage Servicers:
Myths and Realities 16 (Working Paper No. 2008-46).
\26\ Ocwen Fin. Corp., Annual Report (Form 10-K) 5 (Mar. 12,
2009).; Mary Kelsch, Stephanie Whited, Karen Eissner, Vincent Arscott,
Fitch Ratings, Impact of Financial Condition on U.S. Residential
Mortgage Servicer Ratings 2 (2007).
---------------------------------------------------------------------------
Servicers' advances are taken off the top, in full, at the
post-foreclosure sale, before investors receive anything.\27\
If advances of principal and interest payments remain beyond
the sale value, servicers can usually collect them directly
from the trust's bank account (or withhold them from payments
to the trust).\28\ In contrast, when there is a modification,
servicers are usually limited to recovering their advances from
the modified loan alone, after required payments to the trust,
or, if the advances are deemed nonrecoverable, from only the
principal payments on the other loans in the pool, not the
interest payments.\29\ As a result, servicers can face a delay
of months to years in recouping their advances on a
modification. Modifications involving principal reductions
compound the problem: they lengthen the time to recover
advances on any individual modified loan as well as on other
modified loans, by reducing the amount of principal payments
available for application to recovery of advances.\30\
---------------------------------------------------------------------------
\27\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, &
Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div.
Research & Statistical Affairs, The Incentives of Mortgage Servicers:
Myths and Realities 11 (Working Paper No. 2008-46); Ocwen Fin. Corp.,
Annual Report (Form 10-K) 4 (Mar. 17, 2008) (advances are ``top of the
waterfall'' and get paid first); Wen Hsu, Christine Yan, Roelof Slump,
FitchRatings, U.S. Residential Mortgage Servicer Advance Receivables
Securitization Rating Criteria 1 (Sept. 10, 2009) (same); Prospectus
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust
2007-FLX5, at 71 (June 27, 2007) (servicers repaid all advances when
foreclosure is concluded).
\28\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K) 11
(Mar. 12, 2009) (``[I]n the majority of cases, advances in excess of
loan proceeds may be recovered from pool level proceeds.''); Prospectus
Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust
2007-FLX5, at 71 (June 27, 2007) (permitting principal and interest
advances to be recovered from the trust's bank account); Prospectus,
CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide
Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust
2005-J12, Issuer 47 (Oct. 25, 2005) (limiting right of reimbursement
from trust account `` to amounts received representing late recoveries
of the payments for which the advances were made).
\29\ Monica Perelmuter & Waqas Shaikh, Standard & Poor's, Criteria:
Revised Guidelines for U.S. RMBS Loan Modification and Capitalization
Reimbursement Amounts 3 (Oct. 11, 2007).
\30\ But see Rod Dubitsky, Larry Yang, Stevan Stevanovic, Thomas
Suer, Credit Suisse, Subprime Loan Modifications Update 8 (2008)
(discussing how some servicers exploited then existing imprecision in
the accounting treatment of principal reduction modifications to use
principal reduction modifications to halt interest advances).
---------------------------------------------------------------------------
Although the cost of the advances themselves may be
recovered, the significant financing costs associated with
making advances cannot be.\31\ Thus, servicers are encouraged
to reach a resolution of default as quickly and completely as
possible, even at the expense of investors who might prefer a
modification.\32\
---------------------------------------------------------------------------
\31\ Joseph R. Mason, Mortgage Loan Modification: Promises and
Pitfalls 4 (Oct. 2007). A large subprime servicer noted in its 2007
annual report that although ``the collectability of advances generally
is not an issue, we do incur significant costs to finance those
advances. We utilize both securitization, (i.e., match funded
liabilities) and revolving credit facilities to finance our advances.
As a result, increased delinquencies result in increased interest
expense.'' Ocwen Fin. Corp., Annual Report (Form 10-K) 18 (Mar. 17,
2008); see also Wen Hsu, Christine Yan, Roelof Slump, FitchRatings,
U.S. Residential Mortgage Servicer Advance Receivables Securitization
Rating Criteria 1 (Sept. 10, 2009) (same) (``Servicer advance
receivables are typically paid at the top of the cash-flow waterfall,
and therefore, recovery is fairly certain. However, . . . there is risk
in these transactions relating to the timing of the ultimate collection
of recoveries.'').
\32\ See Complaint at 11-15, Carrington Asset Holding Co., L.L.C.
v. American Home Mortgage Servicing, Inc., No. FST-CV 09-5012095-S
(Conn. Super. Ct., Stamford Feb. 9, 2009) (alleging that servicer
conducted ``fire sales'' of foreclosed properties in order to avoid
future advances and recover previously made advances); Kurt Eggert,
Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing Pol'y
Debate 753, 757 (2004) (reporting that servicers sometimes rush through
a foreclosure without pursuing a modification or improperly foreclose
in order to collect advances); Peter S. Goodman, Lucrative Fees May
Deter Efforts to Alter Troubled Loans, N.Y. Times, July 30, 2009.
---------------------------------------------------------------------------
Additional Material Supplied for the Record
Foreclosure paperwork miscues piling up
The Denver Post, Sunday, November 14, 2010
By Aldo Svaldi
Brent and Wendy Diers of Fruita thought their foreclosure
nightmare would end in April when they sent a check to pay off
their mortgage.
But more than 6 months later, CitiMortgage hasn't followed
through on repeated assurances it would release the lien and
give them title.
And despite a judge's ruling that they are not in default,
the lender's law firm, Castle Meinhold & Stawiarski, continues
to pursue a foreclosure sale.
``We are not in default and they do not have authorization
to sell our house,'' a frustrated Wendy Diers said.
Although the Diers case is extreme, it is just one of
several stories of borrowers in Colorado and elsewhere who find
themselves trapped in a frustrating state of limbo.
A surge in foreclosures has strained the system across the
country, creating problems of lost paperwork, uncertain
ownership on mortgages, and sloppy processing that has forced
some lenders in recent weeks to pull back.
And those individuals who fall through the cracks like the
Dierses find it hard to get out.
In a phone conversation, the Dierses recorded a
CitiMortgage employee in May telling them ``rest assured, we do
have the check. Everything is fine.''
In July, the couple were told the title was being
contested. Another CitiMortgage representative, named Jennifer,
in late July tells them, ``We have the title clear. The
mortgage has been paid.''
A Mesa County judge cited the recordings in rejecting
Castle Meinhold's request to sell the home at foreclosure
auction.
``Under Colorado law, we cannot and will not take further
action until we have authorization from the court,'' Mesa
County Public Trustee Paul Brown said.
Still, the auction date has been postponed, not dismissed.
The Dierses said they can't figure out what is going on. Public
trustees don't have the authority to throw out foreclosure
filings a judge has rejected or to sanction law firms pursuing
illegitimate claims, Brown said.
The inability of Castle Meinhold and CitiMortgage to
straighten out the situation is bordering on harassment, the
Dierses said.
Neither firm responded to interview requests.
The couple don't deny missing payments after Brent suffered
a work injury and lost his job in 2008.
But unlike most people in that predicament, they had a
relative willing to lend them enough to pay off the mortgage,
more than $212,000 in their case. ``We did everything we were
supposed to do,'' Wendy said. ``This is such a boondoggle of a
mess.''
Fees of $1,000 added
On a smaller scale, the Compo family of Colorado Springs
also found out how difficult it can be to escape foreclosure.
The family wanted to modify their mortgage payments after
their business income dropped. A worker with GMAC Mortgage told
them they couldn't do so unless they had missed two payments,
Susan Compo said.
The Compos started missing payments, but set aside the
mortgage money into savings. After three different rejections
for a modification, the family, whose financial situation
eventually improved, requested a reinstatement statement.
That statement tells borrowers what they owe to get caught
up and escape foreclosure. Compo said she sent a check for the
amount law firm Castle Meinhold requested, about $17,200, due
Sept. 30.
But after the check was sent off, the law firm added about
another $1,000 in charges. The payment didn't arrive at GMAC
Mortgage until Oct. 12.
The Compo family didn't find out about the added fees until
GMAC rejected the check as insufficient.
``We don't have the money for the fees,'' Compo said.
Castle Meinhold didn't return a phone call from The Denver
Post. But the firm did call the Compos offering to waive the
additional fees, she said.
``I am giving them an opportunity to make this right,''
Compo said. ``Let's see what they do.''
Confusion over true creditor
Even when borrowers simply ask a lender to clear up
confusion regarding who really owns their mortgage, they can
face a major headache.
Most mortgages are sold and resold and eventually land in
investment pools owned by thousands of investors. Several
lenders and investment banks also collapsed in 2007 and 2008,
complicating ownership.
A Longmont couple, William Hough and Jacqueline Resaul,
faced that problem when they got behind on mortgages they took
out with Washington Mutual for their home and two rental
properties.
They received letters from Washington Mutual, JPMorgan
Chase and LaSalle Bank all claiming to be the creditor on their
loans, said Michael Wussow, an attorney with Stigler Wussow &
Braverman in Boulder.
Hough, a developer, got into financial trouble after
suffering a heart attack that put him into a coma.
LaSalle Bank, trustee of the investment pools that claimed
to be holding the mortgages in question, initiated the original
foreclosures.
Hough, who once worked as a mortgage broker, asked what he
thought was a simple request--produce the original notes to
clear up any confusion.
LaSalle's law firm in the case, Robert J. Hopp & Associates
of Denver, failed to produce the notes, although it obtained an
affidavit from JPMorgan Chase claiming LaSalle was the holder,
Wussow said.
A Boulder County judge had enough doubts to throw out two
of the foreclosures filed in that county. After months of legal
wrangling, the foreclosures were refiled under JPMorgan Chase,
which had inherited the note from the failed WaMu.
While Hopp was conceding in Boulder County court that
JPMorgan Chase was the actual owner, Wussow alleges they didn't
tell a Larimer County judge, who approved a foreclosure under
LaSalle.
Wussow said he was so ticked off that he filed a motion for
sanctions against the Hopp law firm and the lenders involved.
He wants them to pay the $52,000 in attorney fees his
clients incurred because the paperwork wasn't straight.
``That is what I said all along--come with the notes and we
are done. They made us go through a year of litigation,'' he
said.
In a response to the motion, Denver law firm Kutak Rock,
now representing the lenders, claims Wussow's motion can't be
brought up under the limited scope of a Rule 120 hearing, where
judges determine the merits of a foreclosure action. A call to
the Hopp law firm was not returned.
After losing their home, Hough and his wife moved to South
America, where the cost of living was lower, Wussow said.
But they fought because they felt it important to ensure
the proper parties foreclose and to not let the big banks run
roughshod over the system.
``I think there should be some sort of requirement that you
show up with the original note or with a detailed document
showing the transfers,'' Wussow said. ``They should have the
right parties foreclosing. They should have been recording
documents.''
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE
----------
WEDNESDAY, DECEMBER 1, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:34 a.m. in room SD-538, Dirksen
Senate Office Building, Hon. Christopher J. Dodd, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. Let me
thank all of you for your presence here this morning,
colleagues and guests and our witnesses who are being a part of
this hearing this morning entitled ``The Problems in Mortgage
Servicing From Modification to Foreclosure.'' And this is the
second of two hearings we have had. I thought it was a good
idea to do this, and Senator Shelby also advocated it. You can
make a case that maybe we should have had you first and had the
people we had first second, but either way I think it is going
to be helpful to get the perspective of those of you at the
table here today.
Some of you have nothing to do with this other than your
observations. I know particularly Sheila Bair, of the FDIC,
this is not your particular responsibility, but you have been
terrific on these issues, and so we wanted you to be a part of
the discussion today as to how we ought to proceed, and I am
grateful to you for that.
I am going to make a brief couple of opening comments, and
then I will turn to Senator Shelby and any of our colleagues
who would like to be heard on some opening thoughts on this. We
have two panels, so it will take a little time this morning to
get through this, but I am very grateful to all of you.
Before I begin, this is likely my--I hesitate to say likely
my last hearing as Chairman of the Banking Committee, having
taken over in January of 2007 for Paul Sarbanes, who did a
wonderful job. As I have told many of you the story, I was
sitting in the chair where Tim Johnson sits at a hearing in the
fall of 2006 after Paul had announced the fact that he was no
longer running--I guess in the spring of 2006--and he put his
right arm around me at this chair here, and there was chaos
going on in the Committee room. People were screaming and
yelling over something that had been said. The police were
coming in to remove people. And as the screaming was going on
and the bellowing was occurring, he put his arm around you
shoulder and said, ``Just think, in 6 months all of this is
yours.''
[Laughter.]
Chairman Dodd. I had no idea what he was predicting for me
over the next 4 years on the subject matter. So to my
colleagues and staff and all, I thank you immensely for the
wonderful support and how enjoyable it has been to work with
all of you over these past 4 years. In a sense, we are almost
ending--I am ending here, at least, where we began. As Richard
will recall in another Committee--I think our second hearing in
February, the first week in February of 2007, was on the
foreclosure issues, and we had a series of them, of course, all
that year, and 2008. For those 2 years, we could not get anyone
really to pay attention within the administration or others at
the time. I do not know how many times I heard Bob Menendez
say, coin the phrase ``the tsunami'' coming. I think that was
in February or March of 2007, almost 4 years ago talking about
this as well. And between the two of us up here, that is 54
years between Shelby and me. That is a long time here, Richard,
going back to the days of----
Senator Shelby. I am going to miss you.
Chairman Dodd. Well, I will miss you as well. I want you to
know that. So I want to thank all of you, and I particularly
want to say to all of you here, but particularly Dick Shelby, I
know the assumption is that obviously people do not report
about planes that fly, as we say in this business. You only
hear about the planes that do not make it. But every single day
people up here work together and get things done. Paul Sarbanes
had the relationship with Dick Shelby, and I have had it as
well. We are good friends, and we spend a lot of time together
far beyond the confines of this Committee room. And for that, I
will be eternally grateful to this great friend from Alabama
who has been a good partner. We have not always agreed on every
issue, but he has been a gentleman and always kept me informed
as to where things were and how things were progressing, and I
thank you immensely.
Senator Shelby. Thank you.
Chairman Dodd. Anyway, I want to welcome all of the
witnesses who are here today for their testimony about the
problem of mortgage servicing. This is a continuation, as I
mentioned at the outset, of a hearing we held last month at
which we heard from witnesses within the servicing industry and
others. Today we will hear from some of the regulators
responsible for overseeing the industry.
First let me explain what we mean by mortgage servicing. I
know all of our witnesses know this, but sometimes I think the
audience and those who are following this might not understand
what we are talking about by servicing. Individual mortgages
are often bundled into pools of similar mortgages and sold in
the secondary market as a mortgage-backed security. We have
heard a lot about that over the last 4 years.
After the origination, all processing--and this is where
the servicing comes in. All processing related to the loan is
managed by a mortgage servicing company. Now, the Nation's four
largest banks--JPMorgan Chase, Wells Fargo, Bank of America,
and Citi are also the largest mortgage servicers. Mortgage
servicers have a long list of administrative responsibilities
from collecting monthly payments, maintaining detailed
accounting records, paying taxes and insurance premiums, and
distributing payments to the holders of the mortgage security.
And for this work, they receive a servicing fee. That is a
rather abbreviated description, but basically that is the
purpose and that is what servicing companies do.
At the last hearing, we learned that many of the servicers
have not been doing their jobs, and these servicers, including
many of the Nation's biggest banks, failed to maintain proper
records, failed to properly administer the Home Affordable
Modification Program, the HAMP program; hired so-called robo-
signers, submitted thousands of false and possibly fraudulent
affidavits and in some cases even foreclosed unfairly on people
who should not have lost their homes.
Since our last hearing, news reports have suggested that
the problem may be actually a lot larger than we previously
thought. I do not wish that to be the case, but evidence seems
to be mounting that it may, in fact, be the case. An employee
of the Bank of America testified in court that the bank's
standard mortgage servicing practices failed to meet basic loan
documentation requirements--a failure that could call a huge
number of loans into question. If there are more revelations of
that nature, this situation could ultimately have ramifications
for the safety and soundness of the financial system. Investors
in the mortgage securities market, including the New York Fed
Reserve Bank and Freddie Mac, are pushing banks to repurchase
loans that may not have been originated as represented.
Last month, the Congressional Oversight Panel estimated
that these lawsuits and repurchasers would ultimately cost
banks about $52 billion. Subsequent to that report, Barron's
Magazine used data from a research firm called CompassPoint and
estimated that the losses to banks could be as high as $164
billion. Other estimates are even higher still. Now, even for
Wall Street, that is a lot of money to be talking about.
It is important also to remember that while it was
servicers who caused this problem, it is borrowers who are, of
course, paying the price. Confusion over sloppy and incomplete
documentation has slowed the mortgage modification process for
countless borrowers. Conflicts of interest in the industry may
be incentivizing third-party servicers to actively seek to
block modifications that would prevent foreclosures but cut
into their profits. These problems may have resulted in
problems for borrowers who otherwise may have been able to pay
their mortgages or in pushing troubled borrowers to foreclosure
who otherwise may have been able to save their homes with
reasonable modification efforts.
At any rate, this is a problem that the servicers should
have seen coming, in my view. They had plenty of warnings from
Congress. Sheila Bair, who is with us today, of the FDIC, also
provided those warnings. Many Members up here--I mentioned Bob
Menendez, among others in this Committee, going back a long
time who talked about this literally--in fact, Jim Bunning and
Jack Reed were talking about it in 2006 in hearings that they
held in those days. So we are getting near 5 years that we have
been talking about this issue, and yet here we are still
watching a problem associated with all of that getting worse is
possibly the case.
Whether it was out of greed or ignorance or the failure to
recognize the disaster on the horizon, we now are left, of
course, to pick up the pieces of this problem and to try and
help homeowners caught up in the forces beyond their control
and to do everything in our power to fix the system and prevent
these problems again in the future.
Today we are going to hear from regulators about what they
did or did not do, what ideas you have as well, and I
appreciate all of you being here, not only regulators but also
from the academic world who have followed these questions. What
do you recommend we do, the Congress do, done by Treasury, done
by regulators? I do not want to argue and I do not want a lot
of finger pointing going on as to how we are here. We all know
where we are. The question now is, What do we do about it? And,
obviously, this is my last hearing on all of this, but,
obviously, this Committee will have to pick up this subject
matter and work on it, and we would like to know what we can do
to be a part of that solution. I suspect that all of us would
agree with that conclusion. So today I appreciate, again, your
participation, and let me turn to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Mr. Chairman, I ask that my written
statement be made part of the record, and other than that, I
look forward to the testimony of the witnesses.
Chairman Dodd. Thanks very much.
Anyone else want to be heard in the opening? Yes, Bob.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Mr. Chairman, first of all, I do not know
if this is or is not your last hearing, but in the eventuality
that it is, I want to just say that I think history will record
that you presided over some of the most tumultuous times in our
financial system and that the response to that day when
Chairman Bernanke came before Members of this Committee and
members of leadership and described in 2008 the challenges and
the consequences of the potential collapse of a series of
financial institutions and what they would have meant to this
country in terms of systemic risk to the entire Nation's
economy. And I will never forget asking the question: Well, we
must have enough tools at the Federal Reserve? And his answer:
If you do not act in the next 2 to 3 weeks, we will have a
global financial meltdown.
Chairman Dodd. Yes.
Senator Menendez. That is what you chaired over, and I
think history will record that the way in which you led in that
period of time really helped save our Nation from what would
have been a new depression, and I appreciate your service very
deeply.
Chairman Dodd. Thanks, Bob.
Senator Menendez. Just a moment on an issue that I have
been pursuing for some time. You are right, it was in March of
2007, I think it was Secretary Paulson who was sitting here,
and I said, you know, I think we are going to have a tsunami of
foreclosures. And I remember the response as ``I think that is
an exaggeration.'' I wish he had been right and I had been
wrong. The reality is that we ended up with we have not even
seen fully the crest of that tsunami even yet.
And what I am concerned about is not just for all of those
families who clearly are under a life-changing set of
circumstances where their home will be taken away from them,
but it is even for the greater risk to everyone in a community
that faces the consequences of multiple foreclosures in their
neighborhood, the loss of property values, the loss of
ratables, and all of the consequences that flow from that.
And so I appreciate that 18 of my colleagues signed with me
a letter to the Treasury Secretary. One, about the whole issue
you have discussed, is about the robo-signings, the rubber
stamping of foreclosures by banks that exercise lax oversight.
It is not certainly only shocking, but it is one example of how
banks have mishandled both foreclosures and mortgage
modification requests. And if the robo-signing is directly
attributable to banks not doing proper due diligence, which is
inexcusable when dealing with a matter as monumental as taking
someone's home away, I think the more important point might
very well be that banks and servicers are not handling even
basic foreclosure procedures correctly; it is that they are
also not correctly evaluating homeowners for mortgage
modifications. And I have serious concerns about that process.
I have listened to constituents time and time again who
talked to me about the horrors still today, even after this
Committee has raised these issues time and time again, of the
process that they have gone through. I am concerned that,
despite the best efforts of the HAMP program, which estimated
that 79 million families could restructure or refinance their
homes, we have only had since January of 2010 about 495,000.
That does not seem to be working in a way that we want it to.
And, finally, you know, countless constituents have told us
stories of being stonewalled by banks for very long periods of
time, of not being told the reasons for their rejection of
their modification request, of significant delays caused by
banks losing their paperwork, and trial modifications canceled
with no rationale. And that just cannot continue to happen, Mr.
Chairman. So I appreciate that you are having this hearing
today and the work the Committee will continue to do.
Chairman Dodd. Thanks very much, Senator.
Anyone else want to make any opening comments on this? If
not, we will turn----
Senator Tester. Just very quickly, if I might, Mr.
Chairman.
Chairman Dodd. Yes.
STATEMENT OF SENATOR JON TESTER
Senator Tester. First of all, I want to express my
appreciation for your comments on the floor yesterday. I
thought they were spot on, and I thank you for your leadership
on this Committee. You will be missed.
Chairman Dodd. Thank you.
Senator Tester. Thank you all for being here today, the
folks on the panel. I appreciate you taking the time. I think
these are an important set of hearings. It has been
established, well established I think, that these are
significant issues, that they are not isolated cases. My office
has experienced a number of complaints, a significant number of
complaints, by constituents who have had their places
foreclosed on and have not been treated fairly. So I think it
is important that we pay attention to this issue because I do
not think there has been adequate attention paid to this issue.
Mortgage servicers have a trust placed in them, but there
is not a lot of verification that what they are doing is--well,
there is not a lot of requirements for verification. So
hopefully these investigations will result in some changes that
will ensure that homeowners are treated with honesty and
respect and we can really get down to the root of what the
magnitude of these problems really are.
I know that last week many of you, as part of the Financial
Stability Oversight Council, echoed the concerns and recognized
the potential risks to our system by this processing problem.
My hope is that through your investigations we will finally be
able to understand the full size and scope and its potential
impact to the financial markets. And then we can move forward
in a sensible way from there. So thank you all for being here.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Tester, very, very much.
Anyone else? Are we all set to go with the witnesses? Good.
Very good.
Let me introduce them, if I can, very briefly to you. First
of all, Phyllis Caldwell is the Chief of the Homeownership
Preservation Office at Treasury, leads the Administration's
efforts to assist with the home loan conversion process. She
joined the Treasury in November of 2009, and we thank you very
much for being with us today.
Sheila Bair, you could almost sit up on this side of the
dais, you have been here so often, but obviously with the FDIC,
and I think all of us acknowledge, Sheila, your tremendous
participation and efforts over the last 4 years that I have
been grappling with this, as the Committee has. Again, we
appreciate you being here today in a sense for your thoughts
and observations on this as well.
Dan Tarullo is well known. He used to sit on this side of
the dais up here, not on this Committee but with Senator
Kennedy going back years ago, and has been a good friend over
the years. He is obviously one of the six current Governors of
the Board of Governors of the Federal Reserve, served in that
capacity since January of 2009, and was a professor of law at
Georgetown University, among other things. We thank you, Dan,
for your observations.
John Walsh, again a frequent participant in our
discussions, is the Comptroller of the Currency, oversees that
office, supervises some 1,500 federally chartered commercial
banks and about 500 Federal branches of the agencies of foreign
banks in the United States. He has been with the OCC since 2005
and previously served as chief of staff, and we thank you for
your service as well.
Ed DeMarco, the last witness in our first panel, is the
Acting Director of the Federal Housing Finance Agency and has
been doing a very good job, in my view, regulating Fannie and
Freddie and the 12 home loan banks within the United States.
Prior to this capacity, he was the Chief Operating Officer of
FHFA.
Let me just say, by the way, that with a lot of the
criticism going on, there is a lot of good news coming out of
the management as well under this process that was put in place
a number of years ago, so we thank you for your work as well.
With that, I would ask--by the way, I want to ask consent
that all of the opening statements and comments of our
colleagues will be included in the record, as will all of your
statements and any supporting documents or information you
think would be valuable for the Committee.
With that, Ms. Caldwell, we will begin with you. If you
could try and keep your statements down to about 5 minutes or
less, then we can get to the questions and get to our second
panel as well.
STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP
PRESERVATION OFFICE, DEPARTMENT OF THE
TREASURY
Ms. Caldwell. Chairman Dodd, Ranking Member Shelby, and
Members of the Committee, thank you for the opportunity to
testify before you today on issues surrounding mortgage
servicing and servicer performance in the Making Home
Affordable program.
The foreclosure problems that have recently come to light
underscored the continued critical importance of the Making
Home Affordable program launched by Treasury, of which HAMP is
a part. Preventing avoidable foreclosures through modifications
and other home retention opportunities continues to be critical
priority. Foreclosures dislocate families, disrupt the
communities, and destabilize local housing markets.
Over the last 20 months, we have developed rules and
procedures to facilitate meaningful modifications. We have
urged servicers to increase staffing and improve customer
service. We have developed specific guidelines and
certifications on how and when homeowners must be evaluated for
HAMP and other home retention options. HAMP has strong
compliance mechanisms in place to ensure that servicers follow
program guidelines.
Treasury has built procedural safeguards and appropriate
communication standards in HAMP to minimize those instances
where borrowers are dual-tracked, where they are being
evaluated for HAMP at the same time they are being put through
the foreclosure process. Specifically, HAMP program guidelines
require participating servicers of non-agency loans to:
evaluate homeowners for HAMP modifications before referring
those homeowners to foreclosure; suspend any foreclosure
proceedings against homeowners who have applied for HAMP
modifications while their applications are pending; evaluate
whether homeowners who do not qualify for HAMP (or who have
fallen out of HAMP) qualify for private modification programs;
evaluate whether homeowners may qualify for a short sale or
deed-in-lieu of foreclosure; and provide a written explanation
to any homeowner not eligible for HAMP and to delay any
foreclosure sale for at least 30 days afterwards to give the
homeowner time to appeal.
Servicers may not proceed to foreclosure sale unless they
have tried these alternatives. Servicers must first issue a
written certification to their foreclosure attorney or trustee
stating that ``all available loss mitigation alternatives have
been exhausted and a non-foreclosure option could not be
reached.'' On October 6, Treasury clearly reminded servicers of
this existing HAMP rule.
We have instructed our compliance team to review the ten
largest servicers' processes and procedures for complying with
that guideline. If we find incidents of non-compliance,
Treasury will direct those servicers to take corrective action,
which may include suspending those foreclosure proceedings and
re-evaluating the affected homeowners for HAMP.
In terms of compliance, it is important to remember that
although Treasury administers the Making Home Affordable
program and HAMP, it does so through voluntary contracts with
the servicer versus regulatory or enforcement agency authority.
Thus, our compliance efforts are focused on ensuring that
servicers are following the contractual requirements of their
servicer participation agreements.
We are looking to ensure that borrowers are being properly
evaluated for HAMP. Compliance remedies have included: re-
evaluating loans for HAMP eligibility; re-soliciting borrowers;
enhancing servicer processes; and providing additional training
to servicer staff.
To date, almost 1.4 million homeowners have started trial
modifications, and over 520,000 have started permanent
modifications. These homeowners have experienced a 36-percent
median reduction in their mortgage payments, or more than $500
a month.
Consider that in the first quarter of 2009, nearly half of
mortgage modifications increased borrowers' monthly payments or
left them unchanged. By the second quarter of 2010, 90 percent
of mortgage modifications lowered payments for the borrower.
Homeowners today have access to more sustainable foreclosure
prevention solutions.
HAMP uses taxpayer resources efficiently. Its pay-for-
success design supports borrowers who are committed to staying
in their homes by paying out servicer, borrower, and investor
incentives over 5 years, and the investor, not the taxpayer,
retains the risk of borrower payment.
In conclusion, we believe that these foreclosure problems
underscore the continued need for servicers to focus on
evaluating borrowers for all home retention options, starting
with HAMP. We appreciate the efforts of both the Members of
this Committee and our partners in the housing community in
holding servicers accountable and improving HAMP's design and
performance.
I look forward to taking your questions. Thank you.
Senator Johnson. [Presiding.] Ms. Bair.
STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Ms. Bair. Thank you. Senators Johnson and Shelby, and thank
you, Members of the Committee, for requesting the views of the
Federal Deposit Insurance Corporation on deficiencies in
mortgage servicing and the impact on the financial system. It
is unfortunate that problems in mortgage servicing and
foreclosure prevention continue to require the scrutiny of this
Committee. The robo-signing issue is symptomatic of persistent
shortcomings in the foreclosure prevention efforts of our
Nation's largest mortgage servicers.
While the FDIC is not the primary supervisor for these
companies, we do have a significant interest as the insurer of
many of these institutions. Through our back-up examination
authority, our examiners have been working on-site as part of
an interagency review team at 12 of the 14 major mortgage
servicers. The weaknesses that have been identified in mortgage
servicing practices during the mortgage crisis are a by-product
of both rapid growth in the number of problem loans and a
compensation structure that is not well designed to support
loss mitigation measures such as loan modifications.
The traditional structure of third-party mortgage servicing
fees, put in place well before the crisis, is based on a flat
fee that is tied to the outstanding mortgage balance and does
not provide additional compensation for the proper management
of distressed loans. The flaws in the structure were not
evident when the number of problem loans was low. Large
servicers aggressively automated systems and consolidated
servicing to maximize short-term returns. However, the historic
rise in mortgage defaults in recent years has driven up
servicing cost structures, creating incentives to cut corners
just at a time that servicers needed to be devoting more
careful individualized attention to their management of problem
loans.
The problems we are seeing go beyond robo-signing and other
technical documentation issues to include questions regarding
chain of title and the proper establishment of private sector
securitization trusts. Their implications are potentially
serious and damaging to the Nation's housing recovery and to
some of our largest institutions.
One implication is the risk of a wider disruption to the
foreclosure process. A transparent, functioning foreclosure
process, while painful, is necessary to the recovery of our
housing market and our economy.
Another implication is that mortgage documentation problems
cast a cloud of uncertainty over the ownership rights and
obligations of mortgage borrowers and investors. Moreover,
there are numerous private parties and Government entities that
may have significant claims against firms central to the
mortgage markets.
While we do not see immediate systemic risk, the clear
potential is there. The Financial Stability Oversight Council,
or FSOC, was established under the Dodd-Frank Act to deal with
just this type of emerging risk. It is in a unique position to
provide needed clarity to the market by coordinating consistent
interpretations of what standards should be applied to
establishing the chain of title for mortgage loans and
recognizing the true sale of mortgage loans in establishing
private securitization trusts.
While my written statement goes into more detail, there are
principles, I believe, that should be part of any broad
agreement among the stakeholders to this issue.
One, establish a single point of contact for struggling
homeowners. This will go a long way toward eliminating the
conflicts and miscommunications between loan modifications and
foreclosures in today's dual-track system and will provide
borrowers assurance that their application for modification is
being considered in good faith.
Two, simplify loan modification efforts to reduce the
number of foreclosures. The modification process has become far
too complicated given the volume of troubled loans and the
shortage of mortgage servicing resources. The modification
process needs to be dramatically streamlined. Modifications
need to be put in place at an early stage of delinquency and
should provide for a significant reduction in the borrower's
monthly payment. Our experience at IndyMac shows that these are
the key factors that determine the long-term success of
modifications. In exchange, mortgage servicers should have a
safe harbor that will assure them that their claims will be
recognized if foreclosure becomes unavoidable.
Three, invest appropriate resources to maintain adequate
numbers of well-trained staff and strengthen quality control
processes. Inadequate staffing, lax standards of care, and
failure to follow legal requirements cannot be tolerated.
Servicers need to strengthen their practices, and regulators
must ensure that servicers adhere to the highest standards.
Four, tackle the second lien issue head-on. Servicers
should be required to take a meaningful write-down of any
second lien if a first mortgage loan is modified or approved
for short sale. All stakeholders must be willing to compromise
if we are to find solutions to the foreclosure problem and lay
the foundation for recovery in our housing markets.
Thank you for the opportunity to testify, and I look
forward to your questions.
Senator Johnson. Thank you.
Mr. Tarullo.
STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Tarullo. Thank you, Senator, and Senator Shelby and
Members of the Committee. Let me build on some of what Sheila
has said to add a few introductory comments.
First, on the extent of the problem, which is the question
Senator Shelby started with at your last hearing, I want to
first caution that the three--or four, actually--agencies
represented here are all still in the middle of investigating
the firms themselves, whether the GSEs or the banking
institutions. So we need to be provisional in any observations
that we make.
But I think with respect to the documentation issue, it is
already pretty apparent that there are significant weaknesses
in risk management, in quality control, in audit and compliance
practices, in staff training, and in oversight of third-party
providers, such as law firms. The extent of the problem appears
to vary across firms, but my suspicion is that when all is said
and done, we are going to find some problems in all servicers,
large, medium, and small. The problem will be particularly
acute in some servicers where the difficulties and the
shortcomings have been the greatest.
When we look at those problems in the context of all the
difficulties associated with loan modifications that Senator
Menendez referred to earlier, it seems to me that we do need to
have some structural changes in how servicers are organized,
monitored, and regulated.
I also want to say a word about put-back exposure. This is
something which is not directly related to the foreclosure
documentation problem, but documentation problems have both
drawn attention to the issue and maybe motivated some investors
to pursue some additional arguments for why sponsors should
take mortgages back.
The exposure here results from the interplay of default
rates on the underlying mortgages which motivate the put-back
efforts by the investors who hold the securities and the legal
liability of a securitizer or originator. This liability could
be quite significant for some firms, although particularly with
respect to private-label securitizations, the losses may well
be spread over a considerable period of time as litigation
ensues.
With respect to put-back liability, we had already started
a process of requiring each of the major holding companies to
produce to us their comprehensive capital plans, which we are
supposed to get in early January. That is an exercise apart
from mortgage foreclosure problems. But as part of that
exercise, we have asked for an assessment by the firms of the
put-back liability that they may be facing.
Turning now to supervisory responses, I noted in my written
testimony the range of supervisory and enforcement tools that
are available to the three banking agencies here. I expect that
many or all of these tools will be used as appropriate with
respect to specific institutions. So I just note from the
particular supervisory position of the Federal Reserve that our
rating of management at the holding company level will be
influenced by the extent of these problems even if the problems
occurred in a banking subsidiary.
As to how these problems have shaped our thinking about
supervision more generally, I would say, again from our
perspective, two points are already apparent. First, we need to
use to its fullest the additional authority given the Federal
Reserve in Dodd-Frank to send our examiners into non-bank
affiliates of large holding companies. And second, I think we
all need to find ways to leverage control process audits of
some functions in firms into improvements in control processes
across the firm, because we are never going to be able to audit
every single control process in all of these institutions.
Before closing, I want to say a few more words on the loan
modification issue, but from more of a macroeconomic
perspective, because I think there is a close relationship, as
many of you have suggested already, between the foreclosure
difficulties and the relatively sluggish pace of modifications.
The race that frequently occurs between a modification of a
particular mortgage and foreclosure proceedings has more often
than not been won by the foreclosure process. And, of course,
we now know that the race was often not being fairly run in the
first place. But even if it is, there is a larger macroeconomic
point to be made here. Foreclosures are costly not only for the
parties involved, but for the housing market and the economy as
a whole. And while there is no single simple method for gaining
more of a balance between foreclosures and modifications, I
wholeheartedly agree with Sheila's perspective that it is
incumbent on people in industry and at all levels of Government
to renew attention to measures that can facilitate sensible
modifications across the country and thereby to help create the
conditions for a housing recovery which will be, in turn,
important for supporting renewed stronger growth in our own
economy.
Thank you very much.
Senator Johnson. Mr. Walsh.
STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE CURRENCY,
OFFICE OF THE COMPTROLLER OF THE
CURRENCY
Mr. Walsh. Thank you, Senator, Ranking Member Shelby, and
Members of the Committee. I appreciate the opportunity to
discuss improprieties in the foreclosure process and the steps
being taken by the Office of the Comptroller of the Currency to
address them.
When I appeared before the Committee in September, I
described early steps to address the foreclosure problem at
eight of the largest mortgage services the OCC supervises. I
can report today that we have greatly expanded those efforts to
address this critical problem, working with other Government
agencies.
Let me state clearly that the shoddy practices that have
come to light, including improperly executed documents and
attestations, are absolutely unacceptable. They raise questions
about the integrity of the foreclosure process and concerns
about whether some homes may have been improperly taken from
their owners. The OCC is moving aggressively to hold banks
accountable and fix the problem.
In recent years, as problem loans surged, the OCC's primary
focus was on efforts to prevent avoidable foreclosures by
increasing the volume and sustainability of loan modifications.
When we saw, using loan-level data from our mortgage metrics
project, that an inordinate number of modifications initiated
in 2008 were re-defaulting, we directed national bank servicers
to take corrective action. Since then, we have seen a sharp
increase in modifications that lowered monthly payments and
fewer re-defaults. While these efforts are preventing some
foreclosures, many families are still struggling and face the
prospect of losing their home. We owe these homeowners our best
efforts to assure that they receive every protection provided
under the law.
Questions have arisen about the practice of continuing
foreclosure proceedings even when a modification has been
negotiated and is in force. We agree that the dual track is
unnecessary confusing for distressed homeowners and the OCC is
directing national bank servicers to suspend foreclosure
proceedings for successfully performing modifications where
they have the legal ability and are not already doing so. It is
important to remember, however, that the GSEs and private
investors dictate the terms for non-HAMP modifications, so this
option may not always be available to servicers.
It is also the case that foreclosures are governed by State
law and requirements vary considerably across jurisdictions. As
a result, most nationwide servicers hire local firms familiar
with those requirements. Both Fannie Mae and Freddie Mac
require servicers to use law firms they pre-approve for a given
locality.
The OCC reviews a bank's foreclosure governance process to
determine if it has appropriate policies, procedures, and
internal controls necessary to ensure the accuracy of
information relied upon in the foreclosure process and
compliance with Federal and State law. We expect banks to test
these processes through periodic internal audits and their
ongoing quality control function. Examiners generally do not
directly test standard business processes or practices, such as
the validity of signed contracts or the processes used to
notarize documents absent red flags that indicate systemic
flaws in those business practices.
Unfortunately, neither internal quality control tests,
internal audits, nor data from our consumer call center
suggested foreclosure document processing was an area of
systemic concern. When problems were identified outside the
national banks at Ally Bank, we immediately directed the eight
largest national bank servicers to review their operations and
take corrective action. We began organizing onsite examinations
at each of those major servicers, which are now well underway,
with more than 100 national bank examiners assigned to the
task.
In concert with other regulatory agencies, these examiners
are reviewing whether foreclosed borrowers were appropriately
considered for loan modifications, whether fees charged were
appropriate, documents were accurate and appropriately
reviewed, and that proper signatures were obtained. We are
reviewing whether servicers complied with State laws and
whether they had possession and control over documents
necessary to support a legal foreclosure proceeding.
The OCC is also heading an onsite interagency examination
of the Mortgage Electronic Registration System, or MERS, in
coordination with the Federal Reserve, the FDIC, and the
Federal Housing Finance Agency, and we are participating in an
examination led by the Federal Reserve of lender processing
services which provides third-party foreclosure services to
banks.
Where we find errors or deficiencies, we are directing
banks to take immediate corrective action and we will not
hesitate to take an enforcement action or impose civil money
penalties, removals from banking, and criminal referrals if
warranted. We expect to complete our examinations by mid- to
late-December and to determine by the end of January whether
additional supervisory or enforcement actions are needed.
Thank you again for the opportunity to appear. I will be
happy to answer questions.
Chairman Dodd. [Presiding.] Thank you very much, Mr. Walsh.
Mr. DeMarco, welcome.
STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY
Mr. DeMarco. Thank you. Good morning, Chairman Dodd,
Ranking Member Shelby, Members of the Committee.
The recently identified deficiencies in the preparation and
handling of legal documents to carry out foreclosures are
unacceptable. Those deficiencies undoubtedly reflect strains on
a system that is operating beyond capacity, but they also
represent a breakdown in corporate internal controls and
management oversight.
FHFA's goals in this matter are twofold: To ensure that
foreclosure processing is done in accordance with the servicer
contract and applicable laws, and to protect taxpayers from
further losses on defaulted mortgages. Of course, before any
foreclosure is completed, we expect servicers to exhaust all
alternatives.
My prepared statement reviews the actions that FHFA has
taken to date as well as those underway. It also provides
context for understanding the problems that have arisen,
including consideration of the role of servicers and a
description of the diverse range of foreclosure processing
requirements.
As I reported previously to the Committee, the Enterprises,
Fannie Mae and Freddie Mac, minimize losses on delinquent
mortgages by offering distressed borrowers loan modifications,
repayment plans, or forbearance. These loss mitigation tools
reduce the Enterprises' losses on delinquent mortgages and help
homeowners retain their homes. Servicers of Enterprise
mortgages know that these tools are the first response to a
homeowner who falls behind on their mortgage payments.
Yet for some delinquent borrowers, their mortgage payments
are simply not affordable due to unemployment or other hardship
and a loan modification is not a workable solution. For these
cases, the Enterprises offer foreclosure alternatives in the
form of short sales and deeds in lieu of foreclosure. Despite
these options for a graceful exit from a home, foreclosure
remains the final and necessary option in many cases.
As we know, foreclosure process deficiencies have emerged
at several major servicers. Recently, FHFA provided the
Enterprises and services a four-point policy framework for
handling these deficiencies. The four points are rather simply
stated. First, verify that the foreclosure process is working
properly. Second, remediate any deficiencies identified in
foreclosure processing. Third, refer suspicions of fraudulent
activity. And fourth, avoid delay in processing foreclosures in
the absence of identified problems.
Pursuant to that guidance, the Enterprises continue to
gather information on the full nature and extent of servicer
problems. Only a small number of servicers have reported back
to the Enterprises as having some problem with their
foreclosure processing that needs to be addressed. Still, these
firms represent a sizable portion of the Enterprises' combined
books of business. The Enterprises are currently working
directly with their servicers to ensure that all loans are
handled properly and corrections and refiling of paperwork are
completed where necessary and appropriate. To be clear, FHFA
does not regulate mortgage servicers and the Enterprises'
relationship with them is a contractual one.
As conservator of the Enterprises, FHFA expects all
companies servicing Enterprise mortgages to fulfill their
contractual responsibilities, which include compliance with
both the Enterprises' seller servicer guides and applicable
law. Also, FHFA remains committed to ensuring borrowers are
presented with foreclosure alternatives. Still, it is important
to remember that FHFA has a legal obligation as conservator to
preserve and conserve the Enterprises' assets. This means
minimizing losses on delinquent mortgages. Clearly, foreclosure
alternatives, including loan modifications, can reduce losses
relative to foreclosure. But when these alternatives do not
work, timely and accurate foreclosure processing is critical
for minimizing taxpayer losses.
To conclude, regulatory agencies, including FHFA, are
carrying out important examination activities that will better
inform the issue. Thus, identification of further actions or
regulatory responses should await the results of these
examinations and evaluation of the information being developed.
Thank you.
Chairman Dodd. Thank you very much, Mr. DeMarco.
Again, I will ask the Clerk to time us on, say, 6 minutes,
and we will try and stick with that a little bit. Again, we
have got a large panel here and a second panel to get through,
so we will try and keep to that time.
Senator Shelby. Mr. Chairman, is that 6 minutes of
questions?
Chairman Dodd. That is 6 minutes of questions for you and
me, and then for everyone else, it is 6 minutes of time.
[Laughter.]
Chairman Dodd. Well, let me begin, Dan, with you, if I can.
I thought your testimony was--I am sorry, I had to go down to a
markup downstairs, but I actually read your testimony last
evening so I am familiar with your point here. You described
the banking agencies' review of the mortgage crisis and state
that preliminary findings suggest weaknesses in risk
management, quality control, audit, compliance practices,
shortcomings in staff, training, coordination among loan
modification and foreclosure staff, and management and
oversight and third-party providers, including legal servicers.
Aside from that, there were not too many problems, I guess you
said.
Anyway, according to experts, including Professor Eggert,
who will be testifying in the next panel, these problems have
been documented for years, I think he claims since 2003, by
actions taken by the FTC, for example. So there was some real
background to all of this.
First, I would like to ask you whether or not the other
agencies that are at the table with you agree with Governor
Tarullo's conclusions in his testimony, whether or not you feel
as though what he has said is an accurate description of the
situation, and then given the apparent severity of these
problems, I want to ask you, as well, why the various agencies
that do have regulatory authority have not been taking action
earlier, the obvious question for us here. Again, there has
been a lot of evidence. This is not some new information we are
getting. Why have the agencies not been more aggressive about
this earlier on? We will start with that.
Ms. Caldwell. Thank you for the question. I will talk from
the perspective of the HAMP program, and I think it is
important, again, just to say that HAMP is a voluntary program
and we have contractual relationships with the larger servicers
to participate in the mortgage modification program. We are in
those largest servicers every month. Certainly, our
observations have been that they were ineffective in soliciting
homeowners for HAMP. There was delayed processing of HAMP.
There was improper use of the Treasury net present value model.
And as a result of that, actions that we have taken have
included sending the servicers back to re-solicit certain pools
of borrowers where we identified they were not solicited. We
have had them rerun the net present value model. And in January
of this year, we instituted a temporary review period where we
said servicers could not decline a homeowner from HAMP until
they had reviewed and verified the status of their
documentation, their payment, notified the homeowner of what
their records showed, and gave the homeowner an opportunity to
review.
So again, we agree that there has not been sufficient
capacity in the servicing shops relative to the magnitude of
this problem.
Chairman Dodd. Let me jump to the OCC. John, this is,
again, not new information. Why have we not been more
aggressive as regulators here in dealing with this?
Mr. Walsh. Certainly, it is not new information that there
have been capacity constraints going back to 2008. As I
mentioned in my testimony, we had been both gathering more
information but also conducting horizontal exams in the major
servicers focused on the modification problems that were
occurring, and clearly, we had seen a rise in the number of
complaints through our own system that had indicated problems
with mortgage modifications. We were in the exam process seeing
that there were clear deficiencies that were otherwise being
reported. We were consistently pushing the servicers to hire,
to train, to adopt the succession of procedures that were
coming forward from HAMP, to develop their own proprietary
modification programs, but the push that was being made was
always trying to get them to ramp up.
As has been described, a very large surge of problem loans
was coming into the system. They were clearly not ready for it.
They have made substantial efforts to improve processing and
deal with the problems that are there, but they clearly have
not caught up with the modification piece of it.
We have now seen the surge of cases move through to
foreclosure. There was somewhat of a pause going back 6 to 9
months as HAMP and other programs, in fact, did ramp up and we
saw increased modification activity. But the foreclosures that
were coming were an inevitable piece of this. As I mentioned in
my testimony, we relied upon internal audit quality assurance
and the other things that are often relied upon to look at
these large volume activities. But, the institutions failed in
their oversight of, for example, third-party agents, law firms
and others. They did not ensure quality assurance both in their
own activities and in their use of third parties. Clearly, in
hindsight, we should have seen that that problem was going to
appear successfully in each link in the chain, but--and so now
that is where we are focused.
Chairman Dodd. Dan, do you want to comment on this?
Mr. Tarullo. So I asked the same question of our people
that you just asked of us.
Chairman Dodd. Yes.
Mr. Tarullo. Everybody has their own supervisees and so
everybody has a specific story for the specific supervisee. But
I came away with a few observations.
One, as John has already said, I think there were a lot of
supervisory resources focused on servicing and servicers, but
they were dominantly focused on modification, or the slow pace
of modifications. I actually asked our folks to pull the
records of consumer complaints that we collect through the
Community and Consumer Affairs Division of the Board, and
dominantly, the complaints about foreclosure are complaints
from people being foreclosed when they think they are eligible
for, or should be in, a modification. And so that is where a
lot of the attention was directed.
The second thing is that the control process audit that I
mentioned a moment ago is one that I have now concluded needs
to be rethought, because what you essentially do is pick out a
particular function of an institution where you say, OK, there
may be some problems here. We have heard of some problems here.
Let us dig in, and you dig in and once you have finished
digging in, you find difficulties--or do not, but usually do--
and then you take some sort of supervisory action.
You cannot audit all control process functions. You just do
not have anywhere near the number of examiners you need. So in
the absence of specific complaints about specific processes,
the question is how do you use those audits that you do to try
to identify or rectify problems elsewhere.
And although I do not want to push this point too far,
because I think it is pretty provisional in our own thinking,
we do have some sense that in institutions where, for example,
on the modification problems we had been doing a control
process audit and asking for some changes, that we still see an
incidence of problems on the strict documentation foreclosure
side, but they do not seem to be quite as pervasive.
And so what we are trying to figure out going forward is
whether there is some sort of causal relationship between
having done one kind of control audit on the one hand, and on
the other getting the firm to pay more attention to what it
does. Or, frankly, Senator, it may be that it was a
coincidence. But that is my observation at this point.
Chairman Dodd. Well, thank you for that. Obviously, I have
a lot more questions, but my time has expired.
Senator Shelby?
Senator Shelby. Governor, I would like to follow up on
something you talked about earlier, and that is risk
management----
Mr. Tarullo. Yes.
Senator Shelby.----and quality control. You alluded to the
fact that there are obviously weaknesses here. When did you or
the Fed, or did the Fed realize that there were problems in
this documentation process dealing with mortgages?
Mr. Tarullo. For me personally, it was really not very long
at all, maybe a day or so before the public, because, one
institution that we are the primary supervisor for, Ally, did
come in and tell the supervisors of the holding company that
they had self-identified these problems.
Senator Shelby. What do you believe is the fundamental
problem here that needs to be resolved? For example, for years
and years, you know, we have got State property laws, we have
got laws that if you buy a home, you execute a note and a
mortgage. The mortgage is sold, say, to Fannie Mae or somebody
and they historically used to record the assignment, you know,
every time a mortgage was sold. Has this electronic system that
we talk about, is that part of the problem? Or where are we,
because we are trying to solve this problem.
For example, if somebody is not paying their mortgage, my
gosh, you know, I believe that you have got to foreclosure
unless you agree to modify it or something like that. Now, to
foreclose, you have got to own that mortgage, in a sense. That
is the law, is it not?
Mr. Tarullo. Right.
Senator Shelby. So where are we, and what do you think
needs to be done?
Mr. Tarullo. So I can only give a provisional answer to
that, Senator.
Senator Shelby. Sure.
Mr. Tarullo. But I have to say, getting briefed on the
extent of the problem, the complexities of national servicers
doing not just foreclosures but servicing in every State, in
many counties within particular States, the differences in
requirements and the continued requirement for physical
recording obviously is for them a substantially costly
undertaking.
Senator Shelby. But those are State property laws, are they
not?
Mr. Tarullo. That is right, and, certainly we the
regulators cannot do anything about them. I suppose you could
if you decided that it was important to have a national system
of----
Senator Shelby. In other words, preempt the State in
property and recording? That is a strong----
Mr. Tarullo. Exactly. So that is why I did not propose that
in my testimony. What I proposed was thinking about national
standards for servicers----
Senator Shelby. Let us go back a few years, let us say
seven, eight, or 10 years ago, 2001, or it will be. Did we have
those problems then? I mean, for years, we did not have those
problems. People executed the mortgage, they sold the mortgage,
they recorded the assignment, they did the documentation, risk
management, quality control. Did they get too risky, too
sloppy, too shoddy in what they were doing although they were
dealing in hundreds of thousands of dollars worth of
mortgages--billions of dollars worth--and does that taint the
securities, in a sense, that you sell?
Mr. Tarullo. Well, so I----
Senator Shelby. You securitize the mortgage----
Mr. Tarullo. Right. I would say a couple of things. One, in
all honesty, we do not know what the situation actually was in
2001, or at least I certainly do not. We do not know whether,
if an examination had been done of servicers in 2001, some of
these issues might have been found. But because housing prices
were rising and foreclosures were pretty contained, you did not
have the opportunity for a potential problem in documentation
to show up at the courthouse door, as it were.
I do not think there is any doubt but that the enormous
increase in the servicing operations----
Senator Shelby. So the volume of the mortgages?
Mr. Tarullo. A huge volume of the mortgages, absolutely,
and more concentration in the servicing----
Senator Shelby. Well, where do we go from here, today? This
is December 1, 2010.
Mr. Tarullo. Right.
Senator Shelby. We have still got this problem. Senator
Dodd has had a number of hearings. We had other people. Are we
close to solving this problem, or where are we?
Mr. Tarullo. From my perspective, Senator, I would not say
we are close to solving the problem for several reasons. One,
as I said earlier, I think it is related to the relative
balance between foreclosures and modifications. Two, I think
that until you get a more or less integrated approach to----
Senator Shelby. What do you mean by an integrated approach?
Mr. Tarullo. I think you need a set of standards that apply
to servicers whether they are in a national bank----
Senator Shelby. OK.
Mr. Tarullo.----an affiliate of a bank, or, and this may be
increasingly the case in the future, or a non-bank institution.
Senator Shelby. And what kind of standards are you talking
about? Are you talking about recording and showing ownership or
stuff? But we have had that, have we not, for years?
Mr. Tarullo. Yes. I do not know that we have had clearly
articulated standards as opposed to requiring firms to have
their own processes which assure that they abide by the law,
and so I think what this has shown us is we do need more
standards and particularly during a period in which there is,
as I say, sometimes literally a race between foreclosure and
modification within particular servicers. I think some sense of
how that race is supposed to be conducted needs to be set forth
on a standardized basis.
Senator Shelby. OK. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Shelby.
Senator Reed?
Senator Reed. Thank you, Mr. Chairman.
Chairman Bair, the HAMP program, as mentioned, is
voluntary. It covers roughly, my guess is about 25 percent of
the modifications. And as a result, for the vast majority of
the loans, there is no requirement for banks or servicers to
offer modifications or do most anything. Should we mandate that
100 percent of loans should at least be evaluated and offered a
modification?
Ms. Bair. Well, I think that is a very important
observation. What we have suggested is to try to have some type
of global settlement where we could actually leverage all the
deficiencies we are finding and procedural hurdles that are
appearing to foreclosure because of lack of documentation and
not following fully the State and local laws pertaining to
foreclosure; that if they provide some type of streamlined mod
and give it some period of time--say 3 months--to see if you
can rehabilitate the loan, they need to do that first. If the
loan cannot be rehabilitated, then they could proceed to
foreclosure, and perhaps law enforcement officials and
borrowers would agree to waive procedural objections. So I
think actually trying to take a lemon and make lemonade, this
might actually provide some additional leverage to get a more
streamlined modification process for the nongovernment
modifications.
Legislation would be an option. I do not know if this is
possible, though. I guess I am looking for more things that we
could perhaps implement immediately.
Senator Reed. Well, again, the legislative process, as we
prove every day, unfortunately is slow. So----
Ms. Bair. You are talking about bank regulators.
Senator Reed. So you are envisioning a regulatory solution
initially which would use what authorities you have, which are
substantial, to deal with a host of issues. One is making sure
everyone is offered or at least evaluated for modification, not
a small fraction, under half, not voluntary but everybody;
dealing with issues of quieting title and standing, etc., which
may require legislation, but at least you could pursue it at a
regulatory level. The other sets of issues would be the
capacity of the institutions to do their jobs, which you would
have to increase. But there is another issue here which is the
individualized evaluation in the foreclosure process of the
status of the person. And you are probably aware, I am sure,
that at least in some districts, the bankruptcy trustees have
become very active about requiring the paperwork be correct. Is
that something that you would like to see broadened? Because it
appears to be within the power, the existing power of
bankruptcy trustees.
Ms. Bair. Well, it is not just bankruptcy trustees. In
judicial States, it is the courts as well. Local courts, as
well, increasingly are becoming much, much more stringent and
exacting in terms of requiring proof of good chain of title,
challenging the MERS process. So I think this is a real issue.
And, again, as Dan said, we are still collecting the facts,
but it is not clear to me, depending on how the case law goes,
that all of these procedural problems can actually be cured.
And if that is the case, it seems to me we need to think about
some type of safe harbor provision, again, using that as
leverage to try to get loan modifications early in the process,
give the borrower a fighting chance, let them see if it can
work; if not, then waive the procedural objections and permit
proceeding to foreclosure.
But I think this is--getting back to Senator Shelby's
question, you know, ``how did we use to do it?'' I think
community banks are still doing it the way they used to do it,
and, you know, when you are keeping your loans in portfolio,
servicing them yourselves, you have every economic incentive to
work out the loan to mitigate your losses. When you separate
ownership from the loan through the securitization process, the
same economic incentives are not there. You have this very high
volume of troubled mortgages that these servicers are trying to
deal with, with a compensation system that was based on benign
times when there were very few troubled loans.
So I think going forward, you know, the compensation
structure----
Senator Reed. My time is limited, but essentially what you
are saying, the model that worked before does not work any
longer.
Ms. Bair. It does not. It does not.
Senator Reed. And we are pursuing this model in the same
old fashion, just do a little bit more and do a little of this
and that.
Ms. Bair. It is not going to work.
Senator Reed. It is not going to work. Time is of the
essence. There are huge sets of issues here with respect to the
legal liabilities of large financial institutions, securities
law violations, tax law violations, etc. And the sooner there
is, I think, a coming together of the financial community and
the regulator, with a coherent program that addresses these
issues, the better off we will all be. But what I am concerned
about is that the people who will be left out are the mortgage
holders who are struggling to stay in their homes--not the
flippers, not those folks, but people who have seen one spouse
lose a job, tuition increases, etc., struggling. And until they
are part of this solution, we are not going to get a total
solution. That goes to the bankruptcy issue, empowering
bankruptcy trustees to be much more proactive.
Let me just turn quickly to Mr. Walsh and Mr. Tarullo. What
you have pointed out I think can be characterized as severe
managerial failures in many of these companies. Would that be
your conclusion, Governor Tarullo, in terms of the way they are
operating, in terms of how they accumulated these mortgages?
Mr. Tarullo. As I said earlier, I would want to withhold a
final characterization, but as I also said, we have already
seen a lot of problems. And when you see a lot of problems,
there is some degree of management failure, and I would suspect
in some institutions a rather substantial degree of management
failure.
Senator Reed. Mr. Walsh, your conclusion from your banks?
Mr. Walsh. I would have to second that. Clearly, when banks
are self-reporting that they have had major problems, they have
major problems.
Senator Reed. And let me ask you what steps you have taken
in terms of ensuring that the resources are available, that the
managerial skills are available, that the emphasis from the
very top of the institution all the way down, and maybe in
terms of the compensation arrangements which are doled out fit
this critical national goal of stabilizing the mortgage
markets, of fixing this issue of the securitization model and a
servicing model that no longer works. What have you done?
Mr. Walsh. As I had mentioned earlier, we have certainly
leaned in hard on the modification part of this and done a
series of exams and have been focused since 2008 on
shortcomings in staffing and process and the rest. And the
banks have improved. They have not improved enough. They have
not improved fast enough. Now the problem has migrated on to
the foreclosure process where they have again been caught
short.
Clearly there are deficiencies there, but the deficiencies
that were laid bare by this surge of problems are ones that,
should these problems pass through and the system returns to
normal, it may look like its old self. But these problems will
now have been exposed and the question is how do we deal with
them over time.
Senator Reed. Thank you. My time has expired.
Thank you, Mr. Chairman. Thank you, gentlemen. Thank you,
Madam Chairman.
Chairman Dodd. Thank you very much.
Senator Corker.
Senator Corker. Thank you, Mr. Chairman. In keeping with
the normal principle, I did not make any opening comments, but
I want to thank you for your leadership on this Committee. I
have been on the Committee 3 of your 4 years as Chairman. I
asked about ten Senators, when I had the option of coming on
this Committee, and 9 out of 10 said, ``Whatever you do, do not
go on the Banking Committee. It is the most boring Committee in
the Senate.''
[Laughter.]
Senator Corker. It has been anything but that. I thank you
very much for the way that you have handled this Committee. I
thought your comments yesterday on the floor were just
outstanding, and for a person who sometimes scratches his head
and asks is this really worth a grown man's time because of
some of the issues we get involved in, I want to say that I
thought it was inspiring; and I hope that we live up to those
aspirational comments that were made yesterday. So I thank you
for that, and I hope you will give me another minute in my
questioning.
Chairman Dodd. You take as long as you would like.
[Laughter.]
Chairman Dodd. The prerogative of the Chair.
Senator Corker. But, seriously, we have had, as Senator
Menendez said, numbers of very difficult issues, and I think
the way Committee Members have interacted with each other has
been a reflection of your outstanding leadership, and I thank
you for that.
Chairman Dodd. As I said, I said this about Senator Shelby
as well, and my colleagues here know the tremendous job they
have done on this side. But I would be remiss if I did not
point out--and I have said this in so many venues and so many
places, particularly on the financial reform package, the work
of Senator Bob Corker, working with Mark Warner, working with
so many people on this side over here made a major, major
contribution to the effort. And while we all did not come to an
agreement on it, the effort, I think, made a far better product
than would otherwise have been the case. And so I will be
eternally grateful to a guy from Tennessee named Bob Corker for
your efforts.
Senator Corker. Thank you. And I plan to attend the Latin
America hearing later today, having traveled with you to
Central America and seeing that you could run for president of
any of those countries. I plan on attending that as well.
But with that, I will move on to our wonderful witnesses. I
thank you all for being here. I know Senator Bunning is about
to get nauseous over here with all of these comments.
[Laughter.]
Senator Corker. But, in any event, I thank all of you for
coming today. I wonder, as it relates to just the
macroprudential issue of the institutions, the servicers that
are involved, we have not really talked much about that. We
have talked about some of the issues. All of us have offices
that are being flooded with phone calls over problems with
this. Candidly, you have all been very helpful to us as we have
tried to navigate that.
But as it relates to just the macroprudential issue, the
strength of these organizations, what may happen over time to
them financially, I would love for Chairman Bair and Mr.
Tarullo and Mr. Walsh to just respond as to how they see this
impacting our financial system in general.
Ms. Bair. Well, as I say in my testimony, we do not see a
systemic impact at this point, but I think the potential is
there. We need concerted, proactive action to get ahead of this
to make sure it does not spin into something that we do not
want to see.
I think that there are two key issues. One is what this
does to the housing market, which could more broadly impact a
lot of institutions and others. We do need a functioning
foreclosure process. That is just the unfortunate fact of it.
And so I think getting this situation cleared up so that
borrowers on the front-end are given a fair chance at a
rehabilitated loan. But, if that does not work out, if
foreclosure is unavoidable, that there is a process to proceed
that has certainty in terms of ownership and legal rights I
think is important.
There are also a lot of potential litigation exposures
here, and potential for law enforcement actions. And, I do not
think we have a good handle on that yet. I think we have asked
the institutions to do their own risk assessment of the
financial risks that are involved in this, but I think we are
continuing to collect information and just do not have a good
handle on it yet.
Senator Corker. I am aware of a number of those issues, but
do you have any sense of the order of magnitude, though, of--I
know you do not know exactly, but is this something that we
should be concerned about as it relates to especially the large
servicers and their organizations? Is the magnitude large? Or
is this something that really does not matter and we ought to
move on?
Ms. Bair. I think as Dan said, it could be very
significant. It could occur over a period of years, but it
could be quite significant. A lot of it relates to open legal
issues and how they are resolved. And I think the put-back risk
is something in particular that the Fed is taking the lead in
analyzing. So I am sorry, we do not have all the facts yet. A
lot of it would be determined by how courts might resolve
various open legal issues, which is why I think that the FSOC
can provide some leadership and coordinate interpretations now,
at least where we have appropriate authorities. I think that
would be helpful.
Senator Corker. And as you are answering, Mr. Tarullo, in
these contracts, these servicing contracts, is there typically
recourse back to servicers? Is there significant recourse back
to them?
Mr. Tarullo. Let me echo what Sheila said on the issue of
the housing market and just add to that something I noted in my
written testimony, which is until we get a handle on and
reduction in the overhang of the foreclosed inventory in the
housing markets, and until we have a process that is moving
smoothly, I hope both with modifications and with foreclosures,
there are going to continue to be problems in the housing
market, and obviously thus for the rest of the economy.
With respect to put-back risk, that is a function of
several things. One is the default rate that one anticipates,
because security holders only want to put back securities when
there are enough defaults that they are not paying well. That
we can at least model based on certain macro assumptions.
Second is the legal set of issues. Those are harder to pull
apart right now at least. I think Mr. DeMarco can probably give
you a pretty straightforward answer about put-back liabilities
with respect to the GSEs. But when you get to private label
securities, those agreements vary enormously, and the
representations and warranties in those agreements vary. So
even if there is litigation over one, that may not tell you
what the liabilities in others may be.
The third factor is the particular configuration of the
defaults and the legal exposure at a particular institution. So
you could have an institution that securitized a bunch of
mortgages that are not doing very well but had a set of
representations and warranties which were either very weak or
which they met. So it is just going to take time to disentangle
that. As I said, we are going to take a first stab at getting
the firms themselves to do it in the capital plan, but that may
not be final.
In terms of order of magnitude, Senator, I do not want to
give you a number. Senator Dodd noted that the order of
magnitude in public or nongovernmental assessments differs by a
factor of three or four. We do not have a better number than
that, but I do think, as I said in my testimony, that with
respect to some institutions, this could be a significant
exposure.
Senator Corker. And before Mr. Walsh--my time is going to
expire, so if you could maybe, all of you, even respond to
whether pricing--you know, the servicing pricing seems to be--
obviously, it was priced for no problems, and there are lots.
What length of time is an appropriate length of time for
foreclosure? I know in judicial States it is one length of
time, in non-judicial another, both of which are incredibly
long. But how long should a foreclosure process take? Is it 90
days, 100 days? It is probably not 492. And then, last, just
the issue of conflicts, I know that we have been talking more
about the mechanisms of servicers, but I know we had an
amendment on the floor we were unsuccessful in passing over the
last year and a half, but to me there is a built-in conflict
with servicers who end up having home equity loans and others.
That to me is a huge issue that we do need to deal with because
the fact is I think in many cases they are putting their
interests ahead of the first mortgage holder, which really
inverts and greatly changes property rights.
So with that, I will stop, Mr. Chairman. Thank you for the
latitude, and hopefully there will be a little bit of a
response.
Chairman Dodd. Absolutely. Thank you.
Do you want to quickly respond to that at all, to Senator
Corker's point? Does anybody want to jump in on that just
quickly?
Mr. Walsh. I mean, I would just say on the systemic piece,
there is a systemic risk here, but it is unlike the sort of
market crisis in 2008 or 2009. It is something that appears to
be something that will be drawn out as we sort through the
problems that are there, as Governor Tarullo mentioned.
On the length of the foreclosure process, it tended to
average 8 or 9 months. Now it is averaging 15 to 18 months. I
mean, it takes a long time, but it takes a long time by design.
I mean, it is not supposed to be easy to take somebody's house
away from them. But it has now become quite drawn out, and the
question is, you know, do we need to streamline that in some
way.
Mr. Tarullo. If I could, Mr. Chairman.
Chairman Dodd. Certainly.
Mr. Tarullo. Senator, I completely agree with your
observation on the first and second liens, and I think that is
one of the many reasons why we do need to have a more
consolidated set of standards applicable to servicers, because
there is an inherent conflict there, and when you observe a
second lien doing quite well and a first lien moving toward
default, you do raise your eyebrow a bit.
Chairman Dodd. Sheila?
Ms. Bair. Also, I just want to note when we have done our
own securitization as part of mortgages that we have acquired
from failed banks, we have tried to implement servicing reform
so the compensation structure does go up if a loan needs to be
worked out. There is third-party servicer oversight. We have
also included servicing reforms as part of our securitization
safe harbor. And we have also engaged in discussions with our
fellow regulators about defining qualified residential
mortgages as part of the Dodd-Frank Act implementation, and
whether servicing should also be addressed. And I think at the
top of our list there is a second lien problem so that if a
servicer is going to service a first lien and own the second
lien, the securitization documents have to spell out in advance
what is going to happen if that first lien gets into trouble so
we do not get into this in the future.
Chairman Dodd. That is a good suggestion.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
You know, Ms. Caldwell, I mentioned in my opening statement
that 17 of my colleagues joined with me in a letter to the
Secretary, and it is our concern about HAMP. We are concerned
about the servicers and the banks, and I will get to that in a
minute. But we are also concerned about HAMP, which was
originally projected to take care of 7 to 9 million homeowners.
It has fallen far short with about 495,000 permanent
modifications since January of 2009. At the same time, in 2010
we are estimating that there is going to be about 3.5 million
homeowners who will receive foreclosure notices, and less than
2 percent of the funds allocated for HAMP have been expended.
Now, something is wrong with that.
We sent a letter that outlines a series of actions that can
be done not with congressional approval, simply
administratively by the Secretary, including a process of
holding servicers accountable. Treasury offers incentives for
their participation, but no disincentive or no consequence for
mistakes. You know, the issue of a Office of Homeowner
Advocate, the issue of automatic conversions if you have a
successful trial modification, the issue of revised eligibility
requirements, the documenting of investor base modification
denials, the release of net present value analysis. Why can't
we get that done by Treasury?
Ms. Caldwell. Well, I heard a lot of suggestions there. Let
me just first talk in general about the program.
You know, I think it is important to remember that when we
started the program, you know, 18 months ago, folks said,
``Servicers will never sign up for a voluntary program.'' It
went from zero to over 100 servicers signed up. Then it was,
``We will never get homeowners in the program,'' and we set a
goal of getting 500,000 homeowners to trial modifications by
November. We hit that.
Then we reached the conversion challenge, and at the
beginning of 2010, we had about 31,000 permanent modifications
and a backlog of close to 700,000 trials, and folks said,
``They will not convert.'' We have gone in the first three
quarters of this year from 31,000 modifications to over
500,000. And what we do know about those modifications is that
they are affordable to the homeowner and based on the OCC OTS
metrics, they perform better than historical modifications. So
while we certainly have not hit the numbers we want and
continue to focus on outreach efforts to homeowners through our
call centers, through our events, what we do know is that those
homeowners that are in HAMP have affordable and sustainable
modifications that have used taxpayer resources wisely. But we
continue to focus our efforts on outreach, absolutely.
Senator Menendez. Well, I appreciate your defense of the
program. I do not quite see it the way you see it. I do not
think many Members see it the way you see it in terms of what
our goals are and what the accomplishments are. And so I hope
that we will get a response from Treasury toward these six,
seven items that can be done internally administratively, and
many of us, including many of us on this Committee, think that,
in fact, would transform that into a much better, more
successful program. So we would like to get a response from
Treasury on it.
Mr. Tarullo, a couple of weeks ago, your colleague on the
Federal Reserve Board, Sarah Bloom Raskin, said that the
numerous procedural flaws that have been unearthed are ``part
of a deeper systemic problem,'' and that as long as the
business incentives for bank and loan servicers run counter to
the interest of homeowners, there is a need--and this is her
word--``a need for close regulatory scrutiny of these issues
and for appropriate enforcement action that addresses them.''
Now, to me that makes a lot of sense, and as long as the
servicers are incentivized to quickly push foreclosures
through, they will ignore, I think, very often the ordinary
homeowner's needs and the accompanying dead weight cost of
foreclosures. How do we get those incentives somehow realigned?
What steps should banks and regulators such as the Fed take, if
any?
Mr. Tarullo. This gets back, Senator, to my point about the
need for a combined or generally applicable set of standards
which are going to apply to servicers whether or not they are
an insured depository institution, an affiliate of an insured
depository institution, or completely independent.
I do think that with respect to fair treatment of
homeowners, with respect to the way in which a servicer deals
with conflicts it may have as between one lien holder and
another, with respect to the relationship between the servicer
and the investors in a securitized mortgage, that the system as
it is now was simply not developed with the prospect of a large
number of foreclosures and troubled loans in mind.
So I think that while you will see problems across the
board, you are going to need more of an across-the-board
approach, and that is why I said in my testimony and will
repeat here, I think we do need more of a national effort to
impose standards on everybody. We can do things as we are--I
mean, with respect to one of our institutions where even
partway through the examination we just see a lot of problems,
we are pushing them to change now. We do not need to wait for
the end of the examination. But that kind of step-by-step
process, one institution by one institution, specific issues
here, I do not think gets to the larger points that you and
Senator Corker and others have been raising.
Senator Menendez. Mr. Chairman, I have one final one. Mr.
DeMarco, both Freddie and Fannie are participants in the second
loan modification program which helps a lot of homeowners who
are struggling with multiple mortgages, and servicers are
supposed to implement this program by January of this coming
year. But given the stories we have heard from homeowners and
consumer advocates about servicers' reluctance to engage in
second loan modifications, let alone the first loan
modifications, I am concerned about how the implementation of
this program is going.
What rules are in place for ensuring that servicers are
knowledgeable about the second lien modification program, that
they actually participate? And how does your agency plan to
oversee this program to ensure that servicers are in
compliance?
Mr. DeMarco. So, Senator, first, the second lien program
you are talking about is part of the HAMP program, so that is
administered by the Treasury Department. It is a Treasury
program.
But to the general point--and this goes back to some
comments that were made just a few minutes ago in response to a
question by Senator Corker--the existence of second liens has
been very problematic for us in overseeing the Enterprises and
their loss mitigation activities with respect to first liens.
And it is really quite turning things upside down to find
situations--and this is rather common--where borrowers are
continuing to pay on their second mortgage, and they are not
paying on their first mortgage. But the property rights here
actually run first to the first lien holder, and this has been
a true conundrum in this whole loan modification and loss
mitigation effort that we have all been engaged in, is to
figure out that the way this ought to work is that the second
lien holder ought to be taking the first credit loss here, and
yet we are continuing to do loan modifications on first liens
that basically provide protection to second liens.
So I would share the comments of my colleagues that as we
think about our housing finance system going forward, I think
that this is an area that clearly needs addressing. But as we
go along right now, with second lien--with loan modifications,
yes, it is very much our expectation as a conservator of Fannie
and Freddie that the second lien holders be participants in
providing relief to a troubled homeowner. If the first mortgage
holder is going to provide relief through a reduced payment, an
affordable payment, we certainly think that the second lien
holder ought to be sharing in that.
Senator Menendez. Thank you.
Chairman Dodd. Thank you, Senator, very much.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
I am going to say something that you all will not like, but
in 2006, we had a huge housing crisis in this country. And even
before that, the mortgage crisis showed its face in 2001 and
2002 and everything. All you people here have not come up with
a solution to solve it. All your brains, and you have got a lot
of them, have not come up with a solution. And I have sat on
this Committee for 12 years and listened to the same absolute
gobbledygook from everyone who has come up here. You have not
had an answer to any of the questions. All you do is deal in
hyperbole. You do not deal in fact.
How do you solve the problem? How do you get out the first
mortgage holder and the second mortgage holder, how do you get
them out? I cannot believe that with all the brains that are
sitting at that table that there is not one of you that can
come up with the answer to solve this crisis--which is about to
go the wrong way again. If you saw the numbers in 2010 for
October, you saw them minus 2 percent in housing.
Now, I am telling you, if it goes badly in November and
December--because all the programs that we had in place are no
longer in place, I mean, that supplemented the mortgage market
and the housing market. And until we get the housing market
straightened out and the loan market straightened out, we are
not going to get the economy straightened out.
Chairman Bair, I know you have heard this before, but it is
too important not to repeat to you again today. I continue to
hear from well over 40 Kentucky community banks about the heavy
hand of your examiners and their supervisors. I have talked to
you about this before. These banks are not the ones that caused
the housing mess. But your examiners are blocking them from
making good loans and forcing them to treat good loans like bad
ones. Your regional supervisors are even adding more
requirements on banks beyond what the examiners think are
necessary. And the biggest complaint is your agency is being
inconsistent in applying the regulations day to day and bank to
bank.
When are you going to do something about this and get off
the backs of our community bankers?
Ms. Bair. Well, Senator, whenever this issue comes up, and
we were discussing it before, if you can give me specific names
of banks that have had problems, we can review that and make
sure that whatever our examiners are doing in the field is
consistent with the policies we have issued in Washington. We
have issued a lot of policies on this. We want a balanced
examination approach. We want bankers making good loans.
The community banks have been doing a better job lending
than any other sector, certainly much better than the larger
institutions. So the facts are the community banks have been
lending. Their loan balances have been maintaining steady
throughout this crisis. There are some community banks that
have a lot of troubled commercial real estate loans, and if
that is the case, they are going to be capital constrained
because they are going to maintain their capital to absorb
losses from their troubled commercial real estate loans.
Senator Bunning. But I am talking about people that have 30
percent down on a home----
Ms. Bair. Mm-hmm.
Senator Bunning.----and can go out--30 percent down used to
be----
Ms. Bair. If they have a 30 percent downpayment and have
income to support the mortgage, they should be approved for the
mortgage if----
Senator Bunning. They are not being.
Ms. Bair. Well, please, give me specific examples. We will
correct that very quickly.
Senator Bunning. I will be more than happy to give you 40
names of 40 banks.
Ms. Bair. OK, good. We will take a look at all of them.
Senator Bunning. OK. Mr. Tarullo, Mr. DeMarco, what kinds
of losses--and Sheila, you can also get in this--what kind of
losses do you expect the Fed and the GSEs to take on their
holdings of mortgage and mortgage-backed securities as a result
of mortgage servicing problems?
Mr. Tarullo. I can say from our point of view, Senator, the
mortgage-backed securities which we purchased as part of the
large-scale asset purchase program last year are only those
that are guaranteed by Fannie and Freddie. So we do not have an
independent issue there. We have the guarantee of Fannie and
Freddie.
Senator Bunning. OK. Then he will pick it up at Freddie and
Fannie.
Mr. DeMarco. Right. So it is something that we are--both
Enterprises are totaling up and it is a servicer-specific issue
and it goes to the losses that result from delays in
foreclosure processing because the individual servicer has a
problem.
Senator Bunning. Four trillion, or where are we?
Mr. DeMarco. No, sir. It is nowhere near that amount. I
mean, the fact that there is a loss already coming on the
mortgage because it is seriously delinquent and it is in
foreclosure has already been reserved for. What we are looking
at in the foreclosure processing problem is the incremental
cost of delay and possible litigation that results from this.
So no, I do not think we are looking at any----
Senator Bunning. Well, how many foreclosures, then, are we
still engaged in?
Mr. DeMarco. I can get that number for you, Senator. We
report it up here on a monthly basis to the Committee. But I
would say that----
Senator Bunning. Well, does somebody on the Committee staff
have that number?
Chairman Dodd. We will get it for you.
Senator Bunning. OK.
Mr. DeMarco. We will certainly provide it again, Senator.
We report--just so you understand, we report monthly to the
Committee----
Senator Bunning. Well, since you report it, I thought maybe
they had it.
Mr. DeMarco. I understand. We report monthly what is called
the Federal Property Managers' Report in which we report for
each Enterprise updated data on mortgage delinquencies as well
as the whole range of loss mitigation activities that are
taking place, loan modification----
Senator Bunning. Well, I have got another question and you
are talking me through it. Are the Fed and the GSEs going to
aggressively pursue pull-back of mortgages to the originators
and investment banks to reduce taxpayer losses?
Mr. DeMarco. I am very much in the process of doing that,
Senator. At FHFA, we have been quite clear and public about
that for months. The instruction to the Enterprises, and the
mortgage servicers know this, is that we will--where there are
representation and warranty violations by a servicer or loan
originator, we are having the Enterprises put those loans back.
In my prepared written statement, I provided data on how much
was done last year and this year.
And I would say further, Senator, your question about
private label mortgage-backed securities, in July, the FHFA
issued 64 subpoenas to a range of institutions to gather data
on mortgages in private label mortgage-backed securities that
the Enterprises hold. This is to gather information to be able
to assess whether there have been representation warranty
violations in those securities. This is going to be a long
process. But FHFA has been committed to it as a necessary part
of being the conservator and having a responsibility to protect
the taxpayer.
Senator Bunning. Sheila, let me explain why you have not
heard from those bankers. They are afraid to put their names
forward to figure that the FDIC will jump down their throats
because they are in total and complete control of who and how
they can lend money. So that is their reluctancy to come
forward.
Ms. Bair. You have my personal assurance that would not
happen. I have----
Senator Bunning. I love that.
Ms. Bair.----to make sure that is not--no, you have my
personal assurance that will not. I cannot respond, though, to
generalized issues----
Senator Bunning. Well, it is no big deal. I will get the
names----
Ms. Bair. OK.
Senator Bunning.----from the head of the Kentucky Bankers
Association.
Ms. Bair. That would be fine.
Senator Bunning. Thank you.
Chairman Dodd. Thank you, Senator, very much.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you for your leadership on this Committee over the last 2 years
that I have been on it. It has been an extraordinary
exploration of the process by which we aggregate capital,
disburse capital, and the many, many challenges that have
arisen in the course of mortgage practices, both at the retail
level and then at the securitization level, and these issues
are going to continue to reverberate for a long time. We are
addressing one little slice of it today. But thank you for your
leadership on Dodd-Frank, a huge effort to try to stabilize our
financial sector and have it serve our nation well in the
decades ahead. It has been a pleasure to be a part of your
team.
Chairman Dodd. Well, thank you, Senator, and you have made
a wonderful contribution, as well, to the efforts and I want to
publicly thank you. As a new Member of the Committee, you
became very active and played a very important role in the
process and I thank you for that effort.
Senator Merkley. Thank you, Mr. Chair.
I wanted to start, Mr. Tarullo, by asking you a little bit
about the put-back risk. The numbers that you lay out in your
testimony are that Freddie and Fannie between them have $13.3
billion in outstanding repurchase requests. The four largest
banks have reserves of less than $10 billion. So the reserves
are not expected to grow, and yet the repurchase requests are
probably going to grow substantially over the $13.3 billion,
and that is just Fannie and Freddie, not other investors that
are----
This situation, in terms of its systemic risk down the
road, I believe that the Federal Reserve is conducting a
detailed examination of this risk. When do you anticipate that
there will be a point that you will have a report, and is the
Systemic Risk Council also undertaking this issue?
Mr. Tarullo. Senator, we have requested the comprehensive
capital plans from the largest bank holding companies, whether
or not they are mortgage servicers, I should say. This is an
independent exercise. But for those which are big servicers,
obviously, put-back is a significant risk. We have requested
those plans by the first part of January, which will be the
occasion, for us digging into each of them for each of the
institutions with respect to specific issues, and where there
are issues that may call for supervisory guidance or action, we
would take those.
I would not anticipate that we would release firm-specific
information about that, but obviously we would be happy to
communicate on our general evaluation of the level of put-back
risk with respect to the institutions as a whole.
Senator Merkley. On a scale of one to ten, how big of an
issue do you anticipate this is going to be?
Mr. Tarullo. Instead of being evasive, let me just say I am
going to be evasive and that I will not----
[Laughter.]
Mr. Tarullo. I do not want to give you a number on that
because we really are in the middle of the process right now.
But I will tell you, if I had to guess, that for a few
institutions, that number would be reasonably high, and for
many, it will actually be reasonably low, even if the dollar
amount is significant, just because these are such big
institutions.
Senator Merkley. OK. Thank you very much. I think it is
important that you flagged it in your testimony and that we
continue to pay attention to it in a Congressional oversight
fashion.
Ms. Caldwell, I wanted to turn to your comments about the
dual track. I am not sure if I have this word for word, but I
think you said that you have done procedural safeguards to
minimize dual track, that is, to make sure that the foreclosure
process does not move ahead simultaneously with the loan
modification process. Did I roughly capture your comment?
Ms. Caldwell. Yes, you did, and I just also want to
acknowledge the work, Senator, of your staff in providing input
into the HAMP program and some of those borrower protections
that were announced in January that did put clarification
around minimizing the dual-track program, so----
Senator Merkley. So thank you. We will continue to work
with you all. But I must say, we are much more worried about
this than I think perhaps Treasury is, based on your testimony.
We had recently two major banks here, Chase and Bank of
America, which said very clearly that it is their policy to
pursue both tracks simultaneously, that the only factor that is
kind of a caveat to that is that they do not go through with
the sale if the modification process is still underway.
But that process, the foreclosure process going forward
simultaneously in which the homeowner is receiving notice after
notice, phone calls, notices posted on their door--I read a
letter, actually, about one of the homeowners in Oregon--is
enormously confusing and enormously stressful to our families.
I wish there was, in fact, a rule in place that said the
foreclosure track will not be pursued until the modification is
completed because that would change the dynamic of the
modification process enormously for the families involved. Is
that a potential point that Treasury can back, completely
suspend the foreclosure track until the modification track is
completed?
Ms. Caldwell. Again, with respect to the HAMP program,
servicers may not start the foreclosure process until loans
have been evaluated for HAMP or until a certain measure of
outreach efforts to the homeowner has been tried and exhausted.
Senator Merkley. So----
Ms. Caldwell. In the hearing----
Senator Merkley. I am going to interrupt you for just a
second----
Ms. Caldwell. OK. Sure.
Senator Merkley.----because my time is out. Can I pursue
this for just a second?
Chairman Dodd. Yes.
Senator Merkley. Thank you, Mr. Chair.
The situation is that often when folks seek a modification,
they are told by the servicer, you need to be delinquent before
you start this. You need to be one or two or 3 months
delinquent. At 3 months delinquent or 90 days, then that is
kind of the official start of a foreclosure process. So now
that the foreclosure process is underway and the modification
is being initiated, the banks do not suspend the foreclosure
process.
And so essentially--I guess what I am saying is that
technically, you are making a correct point, is that if no
foreclosure process has begun, it cannot begin if they are in a
modification. But so often, the interaction results in the
family being 90 days behind and therefore triggering the
foreclosure process before the bank will proceed with the
modification, and then the foreclosure process is not
suspended. That is the reality on the ground that all of us are
seeing with our constituents. And so we need a much stronger
position in regard to that situation.
Ms. Caldwell. You know, we completely agree with you that
the dual-track process is confusing for homeowners, but I just
want to make sure to clarify that within the HAMP program, we
issued guidance that effective in June of this year, servicers
had to stop the process in place and evaluate that homeowner
for HAMP.
In the last hearing that this Committee had, the two large
servicers did testify that for those loans in their HAMP book,
they do, in fact, stop that process, but that for those loans
that are subject to other investor guidelines where they are
not permitted to do so, they cannot. So HAMP does not have the
authority to override existing investor contracts, but that is
a specific HAMP guidance that was issued in January of 2010,
effective in June, and it was done in response to the
overwhelming complaints we heard during 2009 about confusion
among homeowners with the process.
Senator Merkley. I will just conclude with this, then.
Because of those existing agreements, what you are describing
has little practical effect because Fannie and Freddie are
telling those servicers to continue with the foreclosure
process, not the final sale but the foreclosure process, the
intermediate steps to get there, and so we have a real problem
on the ground that needs to be addressed.
Mr. DeMarco. Senator, if I may, to the extent that concerns
are about GSE loans, Fannie Mae and Freddie Mac loans, I would
like to say that it is under our authority. It is not--while it
is run in tandem with and is meant to be in alignment with the
HAMP program, those are not HAMP loans per se, and I will be
glad to speak to the concern you have about dual-tracking with
respect to what is said about the Enterprises because I think
that this is a matter of confusion not just for homebuyers, or
homeowners, but it is confusion in a lot of other places, as
well.
I think that the responsibility here and the way this is
run for Enterprise loans, which is in harmony with what is done
in the HAMP program, is that as soon as a borrower starts
missing payments or reaches out and contacts their mortgage
servicer that they have a difficulty with their mortgage, there
is a single track, and that is to work on a loss mitigation
option that is tailored to the particular circumstances of that
borrower. Foreclosure does not begin, and that is what we
should be working on.
But at some point, foreclosure does need to begin, and that
typically is at 4 months, and as has been reported in the
testimonies of several of us and has been discussed at this
hearing, the foreclosure process is extraordinarily long, and
so I think that we have got to be a little bit careful about
terms here--to have a dual-track. If you have got a foreclosure
process that is going to take a year or more, it means that
while you are going through that foreclosure process, there
remains an opportunity for the homeowner to cure that loan or
to qualify for some other kind of loss mitigation activity.
I fully understand the concern about the confusion for the
borrowers, and I think we all have a responsibility to be
working on greater clarity for the borrowers. But at some
point, once the foreclosure process starts, I am looking at
having to conserve the assets of these Enterprises on behalf of
the taxpayer and I do think that I have got a responsibility as
conservator for the lengthy foreclosure process to be moving
along if we are not making or hitting a meaningful milestone
with respect to loss mitigation alternatives that are offered,
and these offers are numerous.
So I would just like to sort of leave it at we absolutely
want the servicers of Fannie Mae and Freddie Mac loans to be
doing everything possible to come up with an appropriate
foreclosure alternative starting with a loan modification. That
must start months before any foreclosure processing would
start. And if there is meaningful progress and milestones met
on those loan modification activities, foreclosure will not
start. But once the foreclosure process does start, I do think
that there is a responsibility to be moving that along, and
when a successful trial modification is initiated, consistent
with the terms of the HAMP program, then we will cease the
foreclosure proceedings.
I hope that that helped clarify. This is a very difficult
issue and it is one we all share, the concern for both the
homeowner and for the taxpayer.
Senator Merkley. I am completely dissatisfied. We will
continue the conversation. And I apologize to my colleagues. I
am deep into their time----
Chairman Dodd. No, it is an important question. I thank
you.
Senator Merkley. Thank you.
Chairman Dodd. Senator Bunning asked Mr. DeMarco for
numbers, and just to put these in the record, between January
and the end of August, there were 278,409 completed
foreclosures, and since January to date, the ones that are now
in process of foreclosure are 761,611. So those are the two
numbers, and I will put this whole graph in the record, Jim, as
well.
Senator Bunning. Thank you.
Chairman Dodd. I just note, as well, by the way, in this
chart, and maybe I ought to inquire here, the top five reasons
for delinquency, and interestingly, the overwhelming number,
almost 50 percent of delinquencies are curtailment of income,
and so----
Senator Bunning. Loss of job?
Chairman Dodd. Well, you know, it is confusing, because one
says curtailment of income. There is an unemployment statistic,
and that only accounts for about 8 percent. I do not know what
the difference between curtailment of income and unemployment
is. I started to ask staff the question, what the distinction
is. I do not want to take up the time of Senator Bennet, but
someone else may answer that question for me, what the
distinction is. How do you----
Mr. DeMarco. Well, curtailment of income could be that
there is a dual-income household and one person has lost----
Chairman Dodd. All right.
Mr. DeMarco. It could also mean reduction in hours and so
forth.
Chairman Dodd. But more than likely, it is loss of
employment? OK.
Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman, and thank you for
your leadership of this Committee, for allowing me to
participate and for your excellent, excellent speech yesterday.
Chairman Dodd. Thank you very much.
Senator Bennet. I hope we hear a lot more like that one
going forward.
I wanted to go back to an observation Mr. Tarullo made at
the very outset of this hearing, which were the macroeconomic
implications of what we are talking about here, because I think
they are potentially devastating. We had this housing bubble.
We had this crash. We had a lot of people try to figure out,
well, how do you preserve these home values, which you know is
like holding back the ocean.
But now I am very concerned that we are moving in exactly
the opposite direction, that because of all of the issues that
have been raised here, we find ourselves in a place where,
though it is in the investors' economic interest for a lot of
these loans to be modified rather than houses foreclosed upon,
because it is in the homeowners' interest to get modifications
done, not to be foreclosed upon, and because it is in the
broader economic interest of this entire country that we do not
drive housing prices down because we are foreclosing in
neighborhoods unnecessarily, somehow, we still find ourselves
incapable of streamlining this process. And I think the dual
track has a lot to do with it. I think that the observations
that the servicers made when they were here was that because of
Fannie and Freddie, they said, they cannot get out of this dual
track. They cannot find a way to modify the loans in the way
they want to.
And I guess the question that I have--sorry for the long
wind-up--is, is this really an issue about standards, which is
what you said, national standards, or is it a broken system of
incentives, and we do not understand the incentives in the
marketplace here, or is it some combination of those two
things, because, you know, for us--at least from my point of
view, this entire conversation has been like watching a slow-
moving train wreck for 22 months. And for the homeowners in my
State, there have been devastating consequences as a result of
this. And I am the first to say you cannot hold values up when
the market drops. It is impossible. What I am worried about is
that we are engaged in a process of value destruction and
therefore creating a horrible potential economic consequence to
the country.
So I do not know if you want to respond to that, or if
Sheila or anybody else----
Mr. Tarullo. I can start, Senator. I am sure others have
something to say on that.
Senator Bennet. OK.
Mr. Tarullo. First of all, obviously, I agree with your
point about the macroeconomic consequences here.
Second, in response to your specific question, I think it
is about standards, but the standards themselves can be about
incentives. The first lien, second lien issue is a very good
example of that.
Senator Bennet. Right.
Mr. Tarullo. But also, the standards are going to need to
be about resources, because you have heard a number of us
mention the inadequacy of resources to deal with foreclosure,
with modifications, and perhaps even with the ongoing servicing
of non-foreclosed mortgages.
So the reason why I come at the standards is not because
rules are going to be the end-all and be-all, but I think it
will be an occasion for a consolidated group, whether it is in
the FSOC or somewhere else, to think about how all these things
interact and to try to get a more or less uniform set of
standards and expectations for how this needs to proceed.
But I do not want to take up more time, because I am sure
others have more to say.
Ms. Bair. Well, I guess, as I have indicated before, I
think we will not fix the securitization market going forward
unless we deal with the huge economic incentives that have
really been the key driver of this mess we have, with not
having servicing done appropriately on these loans. I guess
that is number one.
Number two, I think the GSEs really do have a big role to
play in setting standards in the short term and I think we can,
as members of the FSOC, the FSOC can play a broader role in
this process.
On the question of dual track specifically, one of the
reasons we have suggested that all servicers be required to
designate a single point of contact for the borrower is, to
just acknowledge the reality that in some circumstances, it may
be a legal requirement that they do dual track. If there is a
huge backlog, there might be a valid reason to start the
process. It may be legally required in some jurisdictions.
But there needs to be somebody talking to the borrower,
saying if we can get this modification to go through, you will
not be foreclosed upon. We have a legal requirement to do this,
but we are explaining it to you. Do not be scared by it. Give
them a phone number and a real person who is going to answer
the phone to call if they get confused because of this process.
And I think this would be operationally challenging for the
servicers, but I think they should do it, because borrowers are
confused and scared. The thing that is happening now is that
people in good faith who want to keep paying on their mortgage
but cannot make the current payment, need to reduce their
payment. They are getting caught in this confusing trap, and
the people who want to game the system and just play it out for
as long as they can without paying anything are benefiting.
Senator Bennet. Right.
Ms. Bair. It is completely upside down. In the short term,
that would be our solution, with the single point of contact.
Mr. Walsh. Just to add to that, I think the two actually go
together. A number of institutions have talked about
instituting a single point of contact to eliminate confusion in
that form. But we do agree, and in the conversations we are now
all too frequently having with servicers, they share the
concern that the dual track is confusing. If you have entered
into a modification and are performing under it, you should not
be getting things in your mailbox and things stuck on the door
of your house and finding an ad in the paper about the home
that you live in.
So where we are--where the servicers have the flexibility
to do so, we are directing them to halt the foreclosure process
when there is a mortgage modification in place. But the fact is
that it is a space that is dominated by contractual obligations
because of the servicing arrangements, and so in many cases,
what happens is either through private-label arrangements or
the GSEs, there are particular rules that apply and I think we
need to give some attention to sorting that out and trying to
produce some uniformity.
Senator Bennet. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
You know, let me ask you something. I am sitting here, and
Senator Bunning in his usual, very forthright manner expressed
his frustration that others of us have tried to express in less
direct terms, and I thank my colleague sometimes for his
directness--he gets to the point very quickly--every person
represented on this table here today is a member of the
Financial Services Oversight Commission, the one that we
established in the Dodd-Frank legislation as one of the major
points of this bill, to try and anticipate systemic problems,
chaired by the Treasury. And I realize you are not the
Secretary of the Treasury, Ms. Caldwell, but nonetheless, you
are here.
I have raised it several times here, but the question of
why we have not been able to come up with some answers, given
your regulatory authority you have, and again, there may be
contractual issues that limit even regulators' capacity to be
able to implement some of these very ideas that you seem to
agree on would make some sense--a single point of contact,
various other suggestions have been made--what is the FSOC
doing? I mean, it is the law of the land now. Are you people
meeting?
It seems to me this was a classic case--we did not
anticipate this one, but here we have, by all of your
admitting, we have potentially a systemically risky problem
that can put our economy once again in a tailspin. And the
issue is, why are you not meeting on this thing? Why am I not
reading about this Commission that we formed specifically for a
purpose like this getting together and doing anything about it?
What is going on?
Mr. Walsh. In our last FSOC meeting, we had a discussion in
the private session of the foreclosure issue and then there was
a presentation by Assistant Secretary Barr in the public
session on the state of play, and we have a number of efforts
underway. It is certainly something that has been taken up by
the Council, but I think with the thought that we need to
complete the work that is underway, which is due to be
completed within the next month in the institutions and then
brought back to the Council at its January meeting. So it is
certainly something that has been taken on by----
Chairman Dodd. Well, John, did you talk about--for
instance, Sheila Bair made some recommendations. Dan has made
some suggestions. Were those talked about in that meeting,
these ideas, or are we hearing them for the first time here
today?
Mr. Walsh. I do not think that we are hearing ideas for the
first time, but I would characterize the discussions as being
at a more general kind of systemic level, at least in that
first discussion that we held. Once we have details of the
nature of the problems, we will move on to solutions.
Chairman Dodd. I apologize. I have two of my colleagues who
have not asked questions. But also, I realize that five of the
Members of the ten Members are sitting at this table, and
again, I have raised this at the past in other hearings. If I
could have conjured up a fact situation--I did not think we
would see one this quickly, quite candidly, when the law was
signed a few weeks ago, that I would be sitting here with a
bunch of witnesses talking about a systemic problem, and yet I
do not hear much out of this very entity we created in that
bill to exactly provide the kind of answers that Jim Bunning
has raised.
And I do not expect miracles out of it. Merely the fact
that you all meet does not necessarily mean you are going to
have an answer to a very complex problem. But, good Lord, I
would expect something coming out of this operation other than
what presently is the case. What better case could you have
than this one to demonstrate the value of having a Commission
like this?
Senator Kohl.
Senator Kohl. Thank you very much, Mr. Chairman. Like every
other member----
Chairman Dodd. Sorry, I apologize. Herb, Evan was here
before you.
Senator Bayh. I will be mercifully brief, Herb. Thank you.
You are very kind.
First, Chairman, let me thank you, as the others have, for
your service. I could not help but note that with your changing
circumstances, mine, and Senator Bennet's, the caucus of those
of us who have followed our fathers into the Senate is going to
be somewhat diminished, so we are going to have to count on
Senator Pryor and----
Chairman Dodd. Mark Pryor has got it all on his shoulders
now.
Senator Bayh. I had no idea until I was talking to Senator
Bennet yesterday about his father's long commitment to public
service, so although not in the Senate, he will carry on in
like spirit. But it has been a pleasure serving with you, and
although our time here will come to a conclusion, our
friendship will not. So thank you.
And thanks to all of you for your service to the public. I
know that you sacrifice in many ways personally, and I just
want to--and particularly during the last couple of years and
all we have been through, I am sure you have been putting in
yeoman's hours, and I want to thank you and your families for
your devotion to our country and to meeting the challenges that
face America.
I just have two or three quick questions. Mr. Tarullo, I
would like to start with you, and let me just give you some
introductory comments. We avoided the worst possible outcome
with the downturn. The Fed, though, is now engaged in some
rather extraordinary efforts, which I support, to prevent a
lapse back into a more sluggish economy. I am referring to the
quantitative easing. And yet we have other drags on the
economy. We have lack of consumer confidence. They are
retrenching. Businesses are sitting on a couple trillion
dollars because of their lack of clarity about future final
demand. We have some of the problems of--the sovereign debt
problems in Europe may have caused more sluggish growth there.
China may be worried about increased inflation, so they may be
raising their interest rate. There are a variety of things that
may serve as a drag upon the economy.
Where I am going with all this is obviously real estate has
been a huge drag on the economy. We have been hoping that this
clearing process would take place, that we would get footing
under the real estate sector and that that could then not be a
drag but perhaps contribute to economic growth going forward.
And yet the dragging out of this whole process runs the risk of
retarding that.
From a macroeconomic standpoint, do you have an opinion
about what kind of risk this presents to the overall economy,
the fact that this will be a slower process and the clearing
will take more time and, therefore, be less certainty in the
real estate market?
Mr. Tarullo. So, Senator, at this juncture our internal
forecasts are for housing prices being stable to maybe slightly
declining, depending on which forecaster you talk to over the
course of the next year. That obviously is not providing an
impetus to growth, and as Senator Bennet was suggesting
earlier--he did not use this term, but I will--there are
multiple ways in which the housing market can clear, some with
greater costs, more neighborhood problems, more lost value and
foreclosures, lower-valued homes because of deterioration and
the like; some with fewer costs. There are going to be costs in
any case, and as Sheila said, we are not going to avoid all
foreclosures by a long shot. But I do think that if we are to
get housing to be a net addition to GDP growth, we are going to
need to deal with the overhang of foreclosed homes which are
undoubtedly having----
Senator Bayh. The sooner we clear, the better?
Mr. Tarullo. Absolutely.
Senator Bayh. More certainty.
Mr. Tarullo. Depressing effect on the market, as----
Senator Bayh. Home prices can start rising again, people
can be confident in purchasing----
Mr. Tarullo. Right now, Senator, if you just look
objectively, based on past experience, conditions--finance and
other conditions for home buying such as pricing and credit--
are actually quite good. But home buying is obviously not
nearly what people hope it will be. Well, why is that? It is
for a couple of reasons. One, people may be uncertain about
their own economic situations. Two, they may think housing
prices are going to decline some more. And so until we
strengthen the economy to help deal with number one and clear
the market to deal with number two, we are going to have--we
are not going to get----
Senator Bayh. And the more protracted this foreclosure
problem, the more that delays----
Mr. Tarullo. It is an additional----
Senator Bayh.----recovery.
Mr. Tarullo.----source of uncertainty.
Senator Bayh. Right. And with regard to the put-back
problem, you mentioned that for a couple of institutions this
may be a material issue. You said that there was a variation in
the estimates of a factor of three or four, which is a huge
swing.
Mr. Tarullo. Right.
Senator Bayh. But for a couple of them, which I assume must
be, you know, among the bigger ones, this may be a problem for
them. If they become significantly affected by this, does that
present a systemic risk of some kind?
Mr. Tarullo. First, I want to again underscore the
tentativeness of everything that I am saying about examinations
or put-back analysis. But, second, I would say this is why we
are trying to get ahead of the issue and do it in the context
of an overall capital plan. So to the degree that any
institution needs to be reserving more, needs to be doing
capital preservation, that we are able to give that kind of
guidance in a timely fashion.
Senator Bayh. Well, and if they have to be focused on
capital preservation, then obviously they are not lending, and
that is yet another drag upon the recovery, isn't it?
Mr. Tarullo. Well, sure. At this juncture I wish that
capital requirements were the principal drag upon lending. They
do not seem to be. The demand factors that you mentioned
earlier seem to be playing a greater role. But at some point
they could be, sure.
Senator Bayh. Right. My last question has to do with I
think what many people are asking themselves, Chairman. When
they pick up the paper and they see--there is an understandable
sense of outrage if someone who has been undeservedly
foreclosed upon, if the underlying merits did not justify that
person's home being taken away from him, people say, ``This is
outrageous. How can this possibly happen?''
At the same time you read these articles, and it would
appear that a fair amount of this are just technical paper
problems that ultimately will be resolved. And so my question
is: Do any of you have any sense about the percentage of these
cases that are miscarriages of justice, for lack of a better
term, and how many of them are purely technical in nature and
simply postponing the day of reckoning that will inevitably
come?
Mr. Walsh. Well, again, we keep mentioning the fact that we
are still in the middle of these exams, but the indication----
Senator Bayh. Based upon what you have seen to date.
Mr. Walsh. Right, but the indications that are coming in
are that there are not--we are not seeing many cases where the
wrong person has been identified, they were current on a
mortgage or kind of working under a modification under which
they were performing and that sort of thing. These are kind of
long-dated foreclosure processes taking place where the
problems are more technical. But, I mean, the fact of the
matter is there are laws that require certain things to be
done, and if there is a violation of law, then that is
unacceptable and you have to cure that problem and remedy that
situation.
So even if the problems are more kind of technical in that
sense, they are legal deficiencies, they have to be fixed. They
are not legal foreclosures unless those problems----
Senator Bayh. Well, and those requirements are there for a
reason. The reason for my two questions--and then I want to
turn it over to Senator Kohl, who has been very patient--is
that we are paying a macroeconomic price for the delay in
resolving this issue. As much as those of us on this side of
the aisle look for a pain-free resolution--on this side of the
dais look for a pain-free resolution--that is what politicians
usually do. Economists remind us that is not possible at the
end of the day. So the more efficiently we can resolve this,
while still--you know, even if only one person has been
unjustly foreclosed on, that is one person too many. So we have
got to focus on how do you keep that from happening but do that
in the most efficient way possible so we can allow the process
to take place and avoid the overall drag to the economy that
causes every American to suffer. I guess that is the underlying
purpose of my two questions.
And the final comment--and then, Chairman, thank you
again--I really encourage you to look at the misalignment of
incentives. If we are going to avoid a repetition--there is a
wonderful saying in law school from many years ago. It is a
problem susceptible of repetition and yet evading review. We do
not want that here. This is susceptible of repetition if we do
not appropriately align the incentives. That is the best way to
avoid getting back into this morass again. So I would encourage
your focus on that.
Again, thank you for your service. Herb, thank you for your
patience. And, Chairman, it has been a pleasure.
Chairman Dodd. Thank you very much. I want to thank you for
your patience and your work on the Committee as well. You have
been a great asset to this effort over the last few years, and
I am very grateful to you for that.
Let me just say, by the way, in my last monologue there
about the Financial Services Oversight Commission, this is a
question for the Secretary of the Treasury. He is the Chairman
of this Commission, and so while I have asked--sort of raised
the issue to all of you at the table, the question goes back to
the Secretary, and I would appreciate if you would carry it
back to him. I would like to know what is going on right here.
Again, I do not expect miracle answers because you merely
convene meetings. But it seems to me, again, the idea of
getting the collective wisdom of people around this table, this
table that is in front of us as well as others, could really
help, in my view. So please convey that message.
Ms. Caldwell. OK.
Chairman Dodd. Senator Kohl.
Senator Kohl. Thank you very much, Mr. Chairman. Like
everybody else on this Committee, I would like to offer my
praise to you. It has been a pleasure and an honor to serve
with you, and in my judgment, you are one of the very best
Senators that the United States has ever had. So thank you for
everything you have done.
Chairman Dodd. Thank you.
Senator Kohl. Chairman Bair, I would like to talk to you.
In addition to the current home foreclosure crisis, I am also
concerned about two other crises potentially: farm lending and
commercial real estate lending. According to the FDIC, farmers
are falling behind on their loans at a 17-year high. Oftentimes
collateral for farm operating loans is the farm itself. And so
if a farmer defaults on an operating loan, not only are they at
risk of losing their livelihood but also their home. Because of
the economy and because some farm loans are indeed in trouble,
several banks are telling us that regulators are seeing farm
loans as suspect and discouraging community banks from carrying
farm loans. This attitude is hurting rural America without
making the banking system any safer.
What is the FDIC doing to work with banks to make sure
farmers have adequate access to credit? Would FDIC consider
issuing guidance on farm loans similar to the commercial real
estate guidance that was issued last year?
Ms. Bair. Well, Senator, thank you for that question. I
think parts of the AG sector are obviously quite strong, but
other parts, particularly the dairy industry, have been having
some trouble, and we appreciate that. We do have guidance
encouraging prudent lending and loan restructuring activities
applying to small businesses generally and commercial loans
generally. But I would be very open to doing something specific
to lending. I think that is a point well taken, and there are
parts of it that are troubled, and I think providing some
clarification about our expectations would be something we
would be very open to.
Senator Kohl. So I heard you to say that you are willing to
discuss----
Ms. Bair. We will be happy to do this, yes. Yes.
Senator Kohl.----specific guidance on farm loans.
Ms. Bair. Absolutely. Absolutely.
Senator Kohl. Well, that is great to hear. Thank you.
Ms. Bair, because of the decrease in real estate prices,
many commercial borrowers will not be able to refinance,
possibly causing mass foreclosures and hurting banks
nationwide. Community banks are known to have large real estate
portfolios and will likely be hit hardest by this downturn.
Community bankers are not certain how regulators will treat
commercial loans that they have on their books, and this makes
it very hard for them to lend to small businesses.
Last year, FDIC and other regulators came up with
guidelines for when a bank can modify a commercial real estate
loan. These guidelines said that the lenders would not be
penalized by examiners for pursuing prudent workout efforts
with their borrowers. I have heard from bankers that the
regulatory examiners are not always following these guidelines.
What can be done to bridge the gulf between what is written
here in Washington and what is actually happening at the local
level? Is FDIC serious about giving banks and borrowers a
chance to work out these loans without freezing a bank's
ability to make other loans?
Ms. Bair. Well, yes, for commercial real estate loans, we
have very specific guidance that we issued with the other
regulators, encouraging prudent loan workouts. We encourage
that strongly, just as we have encouraged workouts of
residential loans as well.
If the collateral has gone down, that does not immediately
mean that the loan needs to be criticized. If it is current, if
the borrower has the capacity to keep making payments, we
specifically told our examiners that they should not criticize
the loan. If the borrower runs into trouble, we want it
restructured. Obviously that needs to be disclosed, and if
there is some loss taken on the restructuring, that needs to be
recognized. That is an accounting rule. Even if we wanted that
to not be the case, it would still be the case under the
accounting rules. But we have tried to exercise a lot of
flexibility and provide a lot of guidance in this area, but it
is just very difficult right now. Parts of the country,
particularly in several parts of the country, commercial real
estate still has some troubles.
The good news is that balance sheets are getting cleaned
up, the construction development loans in particular, those
balances have been coming down, and the credit quality of the
delinquencies and charge-offs are improving. So we are emerging
from this. But for some banks in particular that have heavy
concentrations of troubled loans, they need to maintain and
conserve capital and reserve heavily against expected losses.
That can constrain their balance sheet capacity to lend. That
is driven by the fact that they have troubled loans, not by the
fact that there is an overly harsh supervisory process. But we
have tried to be very flexible and prudent and continue to
convey to community banks we want them to lend. As I indicated
earlier, community banks' loan balances have remained constant.
Actually for the banks with $1 billion in assets and smaller,
the loan balances have actually increased during this crisis.
So community banks as a group have been lending. They are the
strongest group in terms of size that have been lending through
this crisis, and I think that should be acknowledged and
appreciated for what they have been doing.
So, again, I will make the same offer I gave Senator
Bunning. If there are specific institutions that feel that our
policies in Washington have not been consistently applied, we
would be happy to take a look at those. We welcome that. We
have an ombudsman that is equipped to do just that. It is not a
bad thing. We encourage that. We want to make sure our policies
are appropriately applied.
But, again, I do not want to raise expectations. There is
just a lot of troubled commercial real estate loans out there,
and it is going to take a while to work through them.
Senator Kohl. Thank you very much.
Ms. Bair. You are welcome.
Senator Kohl. Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator, very, very much, and
good questions. I am going to leave the record open for
additional questions, but we do have a second panel, and I want
to give them a chance to be heard.
I was going to just quickly ask Dan Tarullo--Governor
Tarullo raised the issue of standards, which I think is a
terrific idea, personally. I obviously will not be around to
try to move that along for you, but I like the idea. But I
wanted to get just a quick acknowledgment or recognition
whether or not just at first blush--and I would expect
obviously you want some more details. To the rest of you, is
that an idea--from Treasury down to FHFA, do you like that
idea? Is that something you would agree with, you think you
might agree with or not? I am just curious.
Ms. Caldwell. Servicing standards?
Chairman Dodd. Yes.
Ms. Caldwell. Yes----
Chairman Dodd. Recommendations to Governor Tarullo.
Ms. Caldwell. It is something we support, and we have
tried--as you know, when HAMP was set up, it was set up in part
to set some servicing standards for the industry.
Chairman Dodd. Sheila, any thoughts about that?
Ms. Bair. Yes, very much so. We have tried to address this
through our safe harbor for banks and would like it to be more
broadly applied, perhaps through the rulemaking process that is
going on right now.
Chairman Dodd. John?
Mr. Walsh. Certainly given all that we have seen, we need
to give serious thought to the model here and whether we can
improve. There is this question of incentives. Are there
perverse incentives that are operating? Can they be better
aligned? It certainly is a good time to give that look.
Chairman Dodd. Mr. DeMarco?
Mr. DeMarco. Mr. Chairman, as this Committee takes up
housing finance reform next month, I hope that part of that is
absolutely standards, and go beyond servicing standards, and
suggest that there are a range of things in the mortgage
industry for which assuring where and how standards are
established, overseen, and enforced should be part of that
discussion.
Chairman Dodd. Tim Johnson will be chairing the Committee
come January. He had to leave to go to a conference call, but I
have checked with his staff on this. Let me make a request of
all of you here to submit some very--more than just kind of the
suggestions and ideas in testimony. And, Dan, obviously, with
this--we would like to get maybe some very specific ideas.
Maybe this is something that the Financial Services Oversight
Commission as a commission might submit to us, some legislative
ideas and language that could be a part of this Committee's
consideration over the next month or so. It would be very, very
helpful. So I will make that request of all of you and, again,
through the Treasury suggest that maybe that Oversight
Commission might not be a bad place to come up with these ideas
to make a single presentation of a number of ideas that will
allow us to make this more efficient and a single point of
contact. But, Sheila, you have raised a number of ideas that I
think have been terrific as well.
So I thank all of you, and let me echo Senator Bayh's
comments as well since this will be my last opportunity for
this particular panel to say thank you. I am very grateful to
all of you. I have enjoyed immensely working with Treasury and
FDIC and obviously the Board of Governors and OCC, and I want
to commend again FHFA. You have done a wonderful job. People do
not realize the conservatorship that you have taken on, and
really without you there and without the housing financing
system, we would be in a lot deeper problem. I think most
people with knowledge of the issues recognize that. So I want
to take this opportunity to thank you for the work that you and
your staff are doing there as well. And, obviously, the
Committee will look forward to working with you on this as they
bring up the whole issue of housing finance reforms. So I thank
all of you very, very much.
Mr. DeMarco. Thank you, Mr. Chairman, and congratulations.
Chairman Dodd. Thank you very much.
Let me invite our second panel to come on up as the first
panel departs. I will introduce you as chairs are being moved
around so we get right to it.
Terry Edwards is the Executive Vice President of Credit
Portfolio Management for Fannie Mae. In this capacity, he is
directly responsible for Fannie Mae's foreclosure prevention,
loss mitigation activities for the single family book business.
His duties also include executing the Making Home Affordable
for Fannie Mae, and we thank him.
Donald Bisenius is the Executive Vice President of Single
Family Credit Guarantee Business for Freddie Mac. In this
position, he oversees the sourcing, pricing, and securitization
of new business, as well as the strategic business process and
technology redesign for single family credit guarantees. He has
been with Freddie Mac since 1992 and is a member of Freddie
Mac's Management Committee.
Tom Deutsch is the Executive Director of the American
Securitization Forum. ASF is an organization that works to
develop a consensus, a frame of thought, of legal, regulatory,
accounting, and legislative activities for the securitization
industry. It represents both servicers and investors. That is
an interesting juggling act, I might point out. I am rather
interested to hear his comments.
And, last, Professor Kurt Eggert is professor of law at
Chapman University School of Law. His expertise is in mortgage
and lending issues, predatory lending, consumer protection, and
securitization. And before becoming a law professor, Mr. Eggert
was a member of the Federal Reserve Board's Consumer Advisory
Council where for 2 years he chaired the Subcommittee on
Consumer Credit.
So, again, I really am grateful to all of you for sitting
through the last couple of hours. I hope it was somewhat
helpful. And I will say to you what I said to the last panel.
Your prepared statements will all be part of the record. I
would urge you if you could to try and at least paraphrase your
testimony for us here today, and then we will get to some
questions for you. But I am very grateful to all of you for
your willingness to participate in this second hearing on this
very important and complicated subject matter, as we, I think,
are all acknowledging here. We all like things to be efficient
and move quickly, get resolution for people, clarity for
people--either we can work something out for you or we cannot--
so that we deal with all the issues that Senator Merkley and
Senator Evan Bayh and others have raised as a result of this
ongoing and growing problem, it seems, at least temporarily.
So we will begin in the order that I have introduced you.
Mr. Edwards, thank you for being with us.
STATEMENT OF TERENCE EDWARDS, EXECUTIVE VICE PRESIDENT, CREDIT
PORTFOLIO MANAGEMENT, FANNIE MAE
Mr. Edwards. Thank you, Chairman Dodd, Members of the
Committee. Thank you for the opportunity to testify today. My
name is Terry Edwards, and I am Executive Vice President for
Credit Portfolio Management at Fannie Mae. This includes
foreclosure prevention and servicing oversight, which we have
spent a lot of time on today.
Fannie Mae is focused on resolving the mortgage crisis
facing our country. Every day our people come to work with
clear objectives: to keep mortgage funds flowing, to do
everything possible to help families avoid foreclosure, while
being responsible stewards of taxpayer money.
The good news is these goals are aligned. Keeping people in
their homes saves taxpayers' money, as does working with people
to exit the home without the pain of foreclosure of either a
short sale or a deed in lieu of foreclosure.
Since the start of 2009, we have helped more than 600,000
struggling Fannie Mae families avoid foreclosure. This number
includes 160,000 HAMP mods and 250,000 proprietary Fannie Mae
mods.
But the current foreclosure crisis has been difficult and
unprecedented, and we are far from done. The U.S. housing
finance system was not set up to handle this tidal wave of
mortgage defaults, and loan servicers, who have the front-line
responsibility to work with borrowers who need help have
acknowledged they are struggling to keep up. So Fannie Mae has
been taking aggressive actions to ensure borrowers get the help
they need.
Although servicers are the primary contact with borrowers,
we have worked to expand our borrower outreach and education
efforts so that homeowners who are in trouble know how to seek
help, understand their options, work with their servicers, and
avoid scammers. These efforts including launching our
KnowYourOptions.com Web site and mortgage help centers and
partnerships with housing counselors in hard-hit communities
across the country. We have developed a series of workout
options for servicers to help struggling families keep their
homes. All of these workout options now dovetail with HAMP,
meaning if the servicer has collected the documentation
required for HAMP and the borrower is not eligible for HAMP,
more than likely they are eligible for a Fannie Mae mod. And if
home retention is not possible, we offer servicers incentives
to help homeowners exist through short sales and deed in lieu,
reducing the burden on borrowers and taxpayers. Our servicers
do not get any incentives for foreclosures.
We are working every day with servicers to help them
improve their performance, and we enforce our contract with
them when they fall short. Our teams meet with senior servicing
leadership on a regular and frequent basis to discuss the
strengths and weaknesses of their operations, best practices
that we are aware of that we think can help, challenges they
are facing, plus give us ideas--plus we ask them for ideas
where Fannie Mae can make their jobs easier so they can serve
homeowners.
I have submitted written testimony for the record that
provides a fuller description of our foreclosure prevention
efforts to date, but I would like to touch on two recent issues
here.
The first involves servicer completion of foreclosure
affidavits. Fannie Mae's guidelines require that servicers
comply with all applicable laws and regulations in the
foreclosure process. In the wake of reports that some servicers
did not follow procedures, we have instructed our servicers to
review their policies and procedures regarding affidavits,
verifications, and other legal documents in connection with the
foreclosure process. We are also coordinating with our
regulator, FHFA, to seek appropriate corrective actions. As
servicers said in recent hearings, they are working hard to fix
the issue.
The second issue has been called dual tracking, where a
borrower receives a foreclosure notice during the loan
modification process. To clarify, during the critical early
stages of delinquency, Fannie Mae has a one-track process.
Servicers have 3 months, and sometimes longer, to process a
loan modification before starting the foreclosure process. In
addition, our research shows that borrowers are more likely to
succeed if a modification process begins early. So we expect
our servicers to put forth the maximum level of effort to
communicate with the borrower during the first 90 days of
delinquency. This means staffing up and implementing the single
point of contact you have heard servicers talk about. We are
encouraged because in our meetings with servicers, they say
that they are on board and committed to adding staff to put the
single point of contact in place.
In closing, this housing crisis cannot be solved overnight,
and we are all frustrated with the time it has taken to get a
smooth operating process in place for families facing very
difficult circumstances. Fannie Mae is committed to doing
everything we can to support the market and to ensure that
servicers do their job in helping struggling borrowers. I look
forward to discussing our work with the Committee.
Thank you.
Chairman Dodd. Thank you very much.
Mr. Bisenius.
STATEMENT OF DONALD BISENIUS, EXECUTIVE VICE PRESIDENT, SINGLE
FAMILY CREDIT GUARANTEE BUSINESS, FREDDIE MAC
Mr. Bisenius. Chairman Dodd, Members of the Committee,
thank you for inviting me to speak here today. I am Don
Bisenius, head of Freddie Mac's Single Family Credit Guarantee
Business. I oversee the sourcing, pricing, securitization, and
performance of single-family mortgages we purchase.
Today's hearing raises important issues about the integrity
of the mortgage origination, securitization, and servicing
practices. As detailed in my written testimony, I would like to
highlight the following points:
First, let me start by saying Freddie Mac expects servicers
of our loans to treat borrowers fairly, with respect, and in
full compliance with all applicable laws, regulations, and
Freddie Mac policies. No homeowner with a mortgage owned or
guaranteed by Freddie Mac should ever worry about losing his or
her home to an unnecessary or wrongful foreclosure.
Freddie Mac currently owns or guarantees approximately 12.4
million single-family mortgages. In both the acquisition and
ongoing servicing of these loans, Freddie Mac relies on sellers
and servicers. We do not directly originate loans, and we do
not directly service loans. Rather, Freddie Mac provides
guidelines for the origination and servicing of our loans and
contracts with sellers and servicers to carry out these
operations. Companies conducting these activities represent and
warrant to us that they are following our contractual
requirements. Freddie Mac has ongoing monitoring programs in
place to test compliance with these requirements. Failure to
fulfill these obligations creates a liability for either the
originator or the servicer, including the possibility that they
will be required to repurchase the loan.
Second, Freddie Mac has long had policies and initiatives
in place to help financially troubled borrowers avoid
foreclosures. In response to the unprecedented mortgage default
crisis, we have created additional servicer incentives and home
retention options. In addition to the $5 billion that Freddie
Mac pays servicers each year for managing the servicing
process, we offer additional financial incentives for servicers
to help borrowers keep their homes.
Third, while Freddie Mac currently owns almost 25 percent
of all single-family mortgages outstanding in this country, we
own fewer than 500,000 seriously delinquent mortgages compared
to the approximately 5 million seriously delinquent mortgages
nationwide. Our ability to assist troubled borrowers is limited
to this 10-percent share of the delinquent borrower population.
Having said that, I want to be very clear. We have
redoubled our efforts to keep borrowers in their homes. Since
the beginning of 2009, we have helped nearly 370,000 families
avoid foreclosure. Through the first 9 months of 2010 alone,
nearly 211,000 delinquent borrowers with Freddie Mac mortgages
avoided foreclosure. That is nearly twice the 114,000 who were
foreclosed upon.
Finally, the length of time for the average foreclosure of
a Freddie Mac loan indicates that borrowers are not being
rushed through the foreclosure process. We require our
servicers to seek to resolve borrower delinquencies through a
variety of foreclosure alternatives, including forbearance,
repayment plans, loan modifications, and short sales. If the
borrower's delinquency cannot be cured by these methods,
servicers must move forward with the foreclosure to minimize
further financial loss and risk to the taxpayer. Currently, the
nationwide average for completion of foreclosures on a
delinquent mortgage owned or guaranteed by Freddie Mac is 449
days, and borrowers whose properties are foreclosed upon are
behind on their mortgage payments well over a year.
Our guide does give servicers the authority to stop or
suspend a foreclosure action whenever there is an opportunity
for a viable workout. We are aware that the existing processes
are confusing to some borrowers. We are working with the
industry to find ways to improve communications and minimize
any borrower confusion.
As my testimony makes clear, Freddie Mac has put in place
policies, procedures, and financial incentives to help
borrowers avoid foreclosures. We continue to work with our
conservator and servicers to enhance these efforts and improve
their execution.
I will be happy to answer any questions.
Chairman Dodd. Thank you very much, Mr. Bisenius.
Mr. Deutsch, how are you? Thank you for being here.
STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, AMERICAN
SECURITIZATION FORUM
Mr. Deutsch. Thank you. Chairman Dodd, Ranking Member
Shelby, Members of the Committee, my name is Tom Deutsch, and
as the Executive Director of the American Securitization Forum,
I appreciate the opportunity to participate here today on
behalf of the 330 ASF member institutions, including those who
originate the collateral, structure the transactions, serve as
trustees, trade the bonds, service the loans, and invest the
capital in the preponderance of mortgage and asset-backed
securities in the United States.
In my prepared statement, I highlight some of the key
aspects of securitization as well as its critical importance to
the U.S. and global economy. Importantly for this hearing,
there are nearly 55 million first-lien mortgages in America
today that total approximately $9.75 trillion of outstanding
mortgage debt. Approximately three-quarters of that debt, or
about $7 trillion, resides in mortgage securitization trusts
and are beneficially owned by institutional investors in the
United States and around the world, such as pension funds,
mutual funds, and insurance companies.
But in my remarks today, I seek to address the concerns
raised by a few commentators that securitization trusts may not
actually own the $7 trillion of mortgages that are contained
within those trusts. For example, a recent Congressional
Oversight Panel report has even suggested that these issues
could create systemic risk to the banking sector if loans were
not validly assigned to securitization trusts.
But the concerns that have been raised have not been
supported by substantiation that there are, in fact, signs of
systemic fails in the process of assignments. Indeed, the
origins of these concerns is not clear. They are not the result
of a series of new court cases supporting the legal arguments
advanced, but instead appear to be largely the result of
academic theories. In fact, even the Congressional Oversight
Panel report suggests that, quote, ``the panel takes no
position on whether any of these arguments are valid or likely
to succeed.''
So all of the consequences that flow directly and solely
from a single mistaken core premise, that is that the trust and
ultimately investors do not generally own the $7 trillion of
loans in the trusts, is discussed in great detail in my
prepared remarks. This core premise is incorrect, and therefore
the dire consequences of this faulty premise will not follow.
Just 2 weeks ago, the ASF issued a White Paper on the
subject that is part of our written testimony that puts to rest
many of the questions that have previously been raised about
the ownership of the mortgage loans. In that White Paper, the
ASF exhaustively studied traditional legal principles and
processes, including the Uniform Commercial Code and
substantial case history throughout every one of the 50 United
States and the District of Columbia and found that traditional
legal principles and processes are fully consistent with
today's complex holding, assignment, and transfer methods for
mortgage loans. In fact, 13 major U.S. law firms listed in
Exhibit A to that ASF White Paper reviewed it and believe that
the Executive Summary contained therein represents a fair
summary of the legal principles presented.
Although the ASF White Paper assured many of the concerns
that had previously been presented, some new concerns have been
raised since that White Paper was published. For example, one
commentator has proposed that securitizers have not met the
contractual requirements for a complete or unbroken chain of
endorsement. In our written testimony, we rebut this academic
theory in great detail with analysis of the key contractual
provisions, the intent of the contracting parties, industry
custom, independent third-party trustee acceptance, as well as
the relevant case law and UCC applicability. In particular,
this argument overlooks the key fact that each separate step in
the chain of transfers of ownership by each party, from the
originator to the securitization trust, is fully documented by
a separate contract.
The proposition itself, though, that the securitization
legal professionals have uniformly opted out of the use of
applicable laws, such as the UCC, to set up an even higher bar
for transfers, but then subsequently and systematically ignore
that higher bar, appear on the face to be illogical assertions
and, in fact, as a legal analysis in our written testimony
demonstrates, are patently false.
From time to time, though, mistakes in process are certain
to occur, particularly in a market where 55 million mortgages
are transferred and/or serviced in the worst housing market
since the Great Depression, and that is one reason why, in
particular, typical language in the governing contracts
provides the opportunity to cure these mistakes to prove
ownership.
In conclusion, the ASF greatly appreciates the invitation
to appear before this Committee to share our views related to
these current issues. I look forward to answering any questions
that Committee Members may have. Thank you.
Chairman Dodd. Thank you very much.
Professor, welcome.
STATEMENT OF KURT EGGERT, PROFESSOR OF LAW, CHAPMAN UNIVERSITY
SCHOOL OF LAW
Mr. Eggert. Thank you, Chairman Dodd. I appreciate the
opportunity to testify today. As a professor, I feel a little
overwhelmed by the luminaries around me, but I will try to do
my best to shed some light on what I think is a serious
problem.
In the first panel, I kept waiting to hear one of the
regulators say, here is what we have done to sanction servicer
misbehavior. We saw it and we acted and we did this. And I did
not hear that. I hoped if I did not hear that, at least I would
hear them say, well, here are the kinds of sanctions that we
can do if servicers misbehave. I did not hear that, either.
What I heard was, we are investigating it. We are on it. We
hope to know more in a month or so and then we are going to do
something.
My concern is, this is not a new problem. I wrote an
article on servicer abuse in 2004, and if I wanted to update it
at this point, what I would need to do is change the name of
the servicers and add a zero to most of the statistics. And
otherwise, everything I talked about in 2004 is still
happening. We have had this problem for a long time. It is not
just the result of the foreclosure crisis. It is not just the
result of the added number of defaults. It is a systemic
problem in the way that servicers are organized and regulated
and we have to fix it. We did not fix it in 2002. We did not
fix it in 2003. We have not fixed it yet and it is time to do
it.
I say it is a systemic problem. I know that in the last
version of this panel, there were questions about whether these
were just anecdotal evidence of issues or whether there was
proof that it was a larger problem. I would like to note that
economists have been looking at this, have been looking to see,
do servicers foreclose more if they are third-party servicers
rather than if they are servicing stuff that they own. In other
words, are borrowers more likely to get foreclosed if servicers
are servicing on behalf of investors or themselves.
And what the economists have concluded--I mean, there is
some disagreement on it, but it seems like the trend of the
investigation is that there is a foreclosure bias by third-
party servicers, that they are more likely to foreclose for
investors than they are for themselves. That is an important
fact. Christopher Mayer, an important economist, said that the
empirical evidence is compelling on this point.
The next thing I would like to note is that things are
getting worse. The servicing regulation industry has long been
kind of unregulated. I think the Federal regulators at a
certain point looked around and said, who has got the ball on
this one? How much of this is mine? How much can I regulate?
And they have not come up with a good answer for that.
HAMP is a, I think, is a very well intentioned program, but
as we have heard, it is a voluntary program and it is a program
that is based on all carrots and no stick, and in fact, baby
carrots at that. So it addresses only a small part of loans
that are being serviced and I have not heard of a single
servicer who has been sanctioned by the HAMP program for
misbehaving. I mean, maybe that has happened, but that has not
been broadly broadcast.
So if HAMP is not doing it and the regulators are not doing
it, then you have to say, well, maybe the market is doing it.
Maybe investors are saying, we are going to make the servicers
do the right thing. But if you look at it, investors have very
little control over servicers. Servicers I read a recent quote
from an investor who said, servicers treat us like the
Thanksgiving turkey. They just decide where to carve.
And investors, I think, are getting tired of it, are now
trying to figure out, how can we get together to force
servicers to do the right thing, because it is important to
note that this is not just a problem for borrowers. It is a
problem for investors. Every time a servicer imposes bad junk
fees on a borrower, every time a servicer forecloses when they
should modify, there are two victims. There is the borrower and
there is the investor who does not get the return that they
should get.
So we need to--we have to address this if we want to have a
robust mortgage market, which many people are saying we cannot
just have the mortgage market run by the Government. We have to
have a robust private market, and the only way to have that
happen is to fix the servicer problem and now is the time.
Thank you.
Chairman Dodd. Well, thank you very, very much, and let
me--Senator Merkley and I are here together. In fact, Jeff, do
you want to move up here? We are going to sit and be
comfortable, so you are not going to be back in the corner
there. You are going to be moving up anywhere here come
January, so get used to those seats.
You framed my first question, for our two first witnesses
in this panel, first Freddie and Fannie. During the debate on
the issue of whether or not we should have had GSE reform as
part of the financial reform package--I am not going to invite
that kind of debate again, but nonetheless, there were reasons
why we did at the time, but pointed out during those debates,
and you can both correct me if I am wrong, but somewhere
between 95 and 96, maybe an even higher percent of all
mortgages are financed and backed by Fannie and Freddie. That
number is pretty much right, am I correct?
Mr. Bisenius. Well, that would include FHA, as well.
Chairman Dodd. That is what I mean. But, roughly, those
numbers are correct. Well, Professor Eggert has raised an
interesting question and one that I would have in a sense that
because of the power you have, and again, we talked about
regulators doing this or finding out whether or not they do not
have the authority, what Congress needs to give them to do it,
but it would seem to me that just FHA and yourselves would have
a tremendous ability on servicers, given how critically
important you are to them, that were they to be stripped of GSE
business, I suspect that might get their attention.
And so the question becomes, why not? Why have you not done
more to insist upon servicer reform in dealing with these
matters since you are directly affected by it, as well? Why
have you not done this? Why would you not do that?
Mr. Edwards. So our approach has been to understand the
problem, get behind the problem, and try to solve the problem.
Chairman Dodd. Well, we know what the problem is.
Mr. Edwards. Well----
Chairman Dodd. The question is, you have got power to do
this, market power, I mean, to do this.
Mr. Edwards. We have been trying to do it with influence.
We have been trying to define the problem for the servicers. As
I said in my testimony, we----
Chairman Dodd. If you told them you were going to strip
those--you no longer are going to get GSE protection, do you
not think they would jump back through hoops to respond to your
concerns?
Mr. Edwards. In some instances, sir, Senator, we have moved
servicing away from servicers who are not performing. We have
moved hundreds of thousands of loans where servicers were not
getting it done. They were at the bottom of the barrel, if you
will, in terms of servicer performance and we moved servicers
to where there was capacity in the industry. At the end of the
day, this problem is a capacity problem. The servicers have not
staffed up where they need to staff up and they have not fixed
their process. The process that we have been suggesting since
the beginning of the year is this approach that you have heard
a lot about today, the single point of contact.
And the point is, servicers/originators, large financial
institutions, have plenty of resources when you need a loan.
When it comes time to--a difficult time, your most difficult
time in your financial situation, when you potentially have to
leave your house, the resources are not there to take care of
the problem. And what we have suggested is the single point of
contact where a counselor, in effect, puts their arms around
the person who is in a jam and explains to them what is going
on, what do you have to do to stay in your house. If we cannot
keep you in your house, this is what needs to happen for a
graceful exit. What is the best thing to do to manage your
credit report. Literally counsel people on what they need to
know and understand.
And the good news is we see our servicers starting to move
there. It has taken far too long, but the large servicers are
now using words that we have been using, single point of
contact. We are hearing them say it. In meetings with us, they
are saying that they are going there and we are--we know there
is a solution. Time is our enemy and now it is a function of
getting the resources in place so the solution can be fixed.
Chairman Dodd. Well, I appreciate you saying that. I will
give you a chance to respond, as well. Lost paperwork,
misapplied payments, and conflicts of self-dealing, I mean,
there are just a myriad of problems there. And again, we talk
about market power, but, boy, there is no better market power
than the two of you have, in my view, with FHA, in being able
to influence this process, short of a regulatory and
Congressional mandates.
What is the answer to this?
Mr. Bisenius. I would offer just two additional
observations in addition to what Terry said. One would be I
think the market power you suggested has clearly come through
on the front end of the business. Origination quality and
performance has improved dramatically because of that dominance
of the GSEs and FHA in the origination market.
Chairman Dodd. Right.
Mr. Bisenius. I think in the servicing market it has
improved some, but as I noted in my testimony and as noted in
the public facts, the amount of delinquent loans that are
serviced by servicers for Freddie Mac or Fannie Mae is actually
a small fraction of the total amount of delinquent loans.
On our particular book, we have seen significant
improvement. The number of modifications, the number of HAMP
modifications on the Freddie Mac portfolio is actually a pretty
large percentage. I think if you combine it with the ones on
the Fannie Mae portfolio, it is a large share of the HAMP
modifications have occurred on the GSE portfolios themselves.
So I think on our loans, we are beginning to see improvement in
the performance. I do not know if we are seeing the same
improvements on loans outside of----
Chairman Dodd. Well, let me urge you to keep at that. I
mean, again, I have made the point and it just seemed to me
that Professor Eggert raised a good question. Short of the
regulators doing their job, it seems to me that market power
here, which a lot of people agree with, and I do, as well,
where it exists, utilization of it can make a big difference.
Let me ask you, as well, something I wanted to ask the
regulators, but we took a lot of time with as many Members who
participated here and did not get to it, but in briefing with
Fannie and Freddie earlier this week, it became apparent that
the two of you have somewhat differing modification programs.
Given the fact there is already too much confusion in the
process, should you not adopt the same policies? Why are there
not the same policies?
Mr. Edwards. We each have different books. We, Fannie and
Freddie, do not talk. We are in the field with our servicers
trying to----
Chairman Dodd. That is not a great answer here.
Mr. Edwards. There are rules on----
Chairman Dodd. Why are you not talking?
Mr. Edwards. We talk through our regulator, but we are not
able to talk directly because of antitrust issues.
Chairman Dodd. Well, do you talk to the regulator about
this?
Mr. Edwards. Yes, absolutely.
Chairman Dodd. And FHFA says, no, we are not going to let
you have the same process?
Mr. Edwards. We each have our own different books and our
books perform a little bit differently. We take great pride in
what we have now done at Fannie Mae, meaning once you have all
of the HAMP documentation in hand, you do not have to ask the
borrower for a single other document in order to complete a
Fannie Mae modification. We think that is a best practice and
perhaps one that should be adopted. But
Mr. Bisenius. I only had----
Chairman Dodd. Well, I do not want to violate the law here,
but let us say you are sitting next to each other.
[Laughter.]
Chairman Dodd. You talk to me, but talk to him, OK? I will
let you pretend here we are having a conversation together.
Tell me why we are not doing this. I mean, the confusion, this
seems like a fairly simple one we might resolve.
Mr. Bisenius. So you raise an excellent point, and
actually, we do work closely with FHFA, and in all those areas
where we can align as closely as possible, we actually do. I
think HAMP is a good example of that. I think the majority of
our requirements under HAMP are identical.
Chairman Dodd. All right. But outside of HAMP, why not in
the other areas?
Mr. Bisenius. I think they are relatively close. They are
not identical. I think it is, in part, as Terry indicates, that
there are some differences with individual services, individual
loan types. But I think they are amazingly close in most
aspects.
Chairman Dodd. Well, all right. Let me jump to Senator
Merkley. I did not mean to dominate here. But let me get Mr.
Deutsch, and I say this respectfully, but I could not help but
resist that you seem to be a bit conflicted yourself, and I do
not mean that personally but as a representative of both
mortgage servicers and investors. Just wearing your hat as a
representative of investors, let me put that hat on your head
right now if I can here. How serious a problem do you think the
servicer conflicts of interest are with regards to, example,
charging excess fees or force-placing insurance, and do you
have any suggested solutions? You heard Professor Eggert, or
you may have read his testimony, that servicers, and I am
quoting him, ``are loathe to seek put-backs of loans where the
put-backs would come from their parent companies.'' I wonder if
you agree with his comment in his testimony.
Mr. Deutsch. Again, with the hat of investor on----
Chairman Dodd. Yes.
Mr. Deutsch. Again, with the hat of an investor on, I think
our first lien investors are very concerned about servicer
conflicts internally. They are very concerned about how loans
are modified, and in particular how they are modified in
relation to the second lien program. They have had significant
concerns about how the 2MP program has performed. My
understanding, the latest data I have seen is that 382 loans
have gone through that program since its beginning. That number
may have increased in the last month or two since the last data
that I have seen. But investors are concerned about that
conflict. That conflict obviously is seen much more prevalently
now in a very down economy, particularly in the housing market,
than we see in a normal time. So it certainly is strained by
the existing housing market today.
Chairman Dodd. Do you agree with the comment of Professor
Eggert I quoted to you, that the servicers are loathe to see
put-backs at the parent company?
Mr. Deutsch. Well, I do not think any originator would like
to buy a put-back back. I mean, ultimately, they are buying
something at par that is now either delinquent or defaulted, so
it is worth less than par. So no economic institution----
Chairman Dodd. But the alternative is worse, is it not?
Mr. Deutsch. Pardon?
Chairman Dodd. The alternative of not getting anything back
from it, it seems to me----
Mr. Deutsch. Oh, correct, but I think the banks who have
sold the loans would prefer not to buy them back, and certainly
investors would prefer them to be bought back if they are
delinquent in default. I think it is one of the core issues in
the market right now, is how do we appropriately sell off
credit risk from the banks' balance sheets to effectively
isolate that credit risk from the bank and at the same time
make sure that the representations and warranties that are made
to the investors, that those loans are actually the way they
were originated in the manner that they were.
Chairman Dodd. Well, who is standing up? I think Professor
Eggert said it. You have got the investor and the homeowner
that are here, and the two entities here that are being taken
to the cleaners in the process. Professor Eggert, do you want
to comment on this?
Mr. Eggert. Well, I would like to first--Mr. Edwards said
something very interesting which I have not heard many people
say, which is we had some servicers who were not performing, so
in essence, we fired them. They had servicers that they worked
with that were not going up to snuff, so they fired the
servicer. How different servicer behavior would be if more
people could say that.
Have you ever heard an investor saying, we fired our
servicer?
Mr. Deutsch. Yes.
Mr. Eggert. No. How often?
Chairman Dodd. Do they, Mr. Deutsch? Have you fired some?
Mr. Deutsch. Investors do have the ability to fire
servicers. It is challenging under the pooling and servicing
agreements. You need a certain mass of investors, whether it is
25 percent or more, to be able to fire a servicer, but that can
occur if----
Chairman Dodd. But it has not yet occurred?
Mr. Deutsch. It has occurred.
Chairman Dodd. Oh, it has?
Mr. Deutsch. It has occurred in instances, and
particularly--but it has not happened widespread because the
question is who is a better servicer out there.
Chairman Dodd. Yes. And the pooling and services agreements
are--are they too rigid in that sense?
Mr. Deutsch. Well, the challenge of a pooling and servicing
agreement is you have a mass, a diffuse set of investors in the
marketplace----
Chairman Dodd. Yes.
Mr. Deutsch.----that have bought into the securitization
trust. How do you effectively have a captain of that group of
investors who can charge and lead for that group of investors
but at the same time not be conflicted and serve their own best
interest as opposed to the other group of investors.
Chairman Dodd. Let me turn to Senator Merkley. I have got a
couple more, but let me turn to my colleague.
Senator Merkley. Thank you very much, Mr. Chair, and I will
follow up on your questions related to the put-back with our
folks, Mr. Edwards and Mr. Bisenius from Fannie and Freddie.
In the testimony we had earlier, Freddie and Fannie
together have $13.3 billion of outstanding requests, put-back
requests, if you will, repurchase requests. At what rate is
that growing? If none of those were paid off, if that $13.3
billion sat there, what would the total be a year from now?
Would we be looking at $20 billion? I want to get a sense of
kind of a monthly or annual amount of put-back requests that
are potentially--what is the flow rate, if you will?
Mr. Bisenius. I do not know if I have the specific flow
rate associated with that. What I would suggest is actually if
we have looked over the last few quarters, the share of
outstanding repurchases or put-backs from Freddie Mac has
actually been declining. So we may well be kind of past the
peak of mortgage put-backs and now on the downside of that. So
for us, it has been declining at a fairly significant rate.
Senator Merkley. And that would not be because the number
of folks falling into foreclosure action is declining, so to
what do you attribute that?
Mr. Bisenius. Well, I do think it is associated with the
number of folks who are going seriously delinquent has begun to
stabilize, and therefore the number of loans being reviewed and
subsequent repurchase requests are going down. We have worked
through a huge kind of pipeline of mortgage reviews and
mortgage repurchases over the last 2 years. So I am simply
suggesting that we are at the peak today, and I think it is
declining over the--it has been declining over the last few
quarters.
Senator Merkley. OK. So, ballpark, can you tell me between
the two institutions or for your institution how many more
repurchase--are we talking a billion dollars a month or are we
talking about a billion dollars every 6 months?
Mr. Bisenius. I think it would be hard for me to speculate
at this point. We can do some analysis and provide those facts
to you separately.
Senator Merkley. OK. And Mr. Edwards, can you clarify it
from your perspective?
Mr. Edwards. Yes, Senator. So for the third quarter, we
collected about $1.6 billion. We do not see that pace slowing
down, and what we have said to--because we get asked this
question all the time by our customers, our banks, where are we
in this process, and our answer is we are about 40 percent of
the way through the process. So we have got another 60 percent
to go.
Senator Merkley. OK. So let me lay it out this way, then.
If the four largest banks have reserves for repurchase of about
$10 billion, and if we are at $13.3 billion and crudely between
the two, perhaps $3 billion a quarter additional, and 40
percent of the way through the process, that means we might
have the equivalent of a couple of more years at $3 billion a
quarter. Just back-of-the-envelope math, an additional $24
billion plus the $13 billion we have now. Are we looking at
something akin to, over the next 2 years, a total of $30
billion in requests against $10 billion in reserves?
Mr. Edwards. First and foremost, the way those reserves--
when we talk about repurchases, we are talking about an unpaid
principal balance. So original principal balance. So when a
servicer buys one of those loans back, they do not need dollar-
for-dollar reserves. That loan might be worth 60 or 70 cents on
the dollar when they take it back, or if it has gone through
foreclosure, it is more like 50 or 60 cents on the dollar. So
you have to--we are talking apples and oranges here.
Mr. Bisenius. Yes. I think in addition to that, one of the
things I want to highlight about that outstanding number is
that is the level of repurchase requests. It is not uncommon
for an originator, once they get the repurchase request, to be
able to provide information that leads us to rescind that
repurchase request. So the original loan file gets sent in. We
review it. We believe there is a defect. We request a
repurchase. They see what the defect was and are able to cure
that defect which means the loan is no longer subject to
repurchase. So that really is a gross number from an exposure
standpoint in addition to what Terry said.
Senator Merkley. So I would appreciate some follow-up from
both of you in giving us some analysis of this issue, because
essentially the questions I am raising are should this put-back
situation be considered a serious problem that we should pay
attention to now because it could be a very sizable systemic
risk issue for Fannie and Freddie, a risk for specific
financial institutions, a risk that may not have reserves to
cover it, but is there a systemic risk on top of that, kind of
the three components. So often, we are coming into the story
down the road when it has exploded. If we are at the front end
of this and we are trying to understand the problem, we need a
little more analysis to be able to get our hands around it.
That would be very helpful.
Mr. Bisenius. I would be happy to provide that.
Senator Merkley. That would be----
Mr. Edwards. Senator, if I may, I want to put one other
thing in context. There is a lot of talk about the number of
put-backs from the GSEs. When you add up our put-backs in terms
of percentage of loans sold to us, for each of the years 2005,
2006, 2007, 2008--those are the big years--we have not gone
beyond 2 percent of the originations in any one particular
year.
Senator Merkley. Thank you for noting that. And these
numbers that I have been citing are just Fannie and Freddie, so
there is a lot of other pressure on the financial institutions
coming from put-backs coming from other quarters that would
have to be part of a comprehensive understanding of this issue.
But let me turn to the dual-track issue. When my
constituents were talking to the case workers on my team about
the challenges of getting foreclosure notices, foreclosure
phone calls, even foreclosure postings on their door in the
process that they were in the middle of loan modifications, the
explanations for a very long period of time were
miscommunication within the bank, this unit, this unit. Not so
long ago, a few weeks ago, we had testimony that essentially
was along the lines of actually this is the consequence of a
deliberate dual-track strategy and a couple of the major banks,
B of A and Chase, testified that while they have the power to
change that dual-track strategy and they recognize some of the
shortfalls of it, they can only do so on loans that they have
control over, but that a tremendous number of the loans they
service are Fannie and Freddie loans, and that in that case,
Fannie and Freddie are pushing very hard to pursue both tracks
aggressively so that the foreclosure can take place as quickly
as possible if the modification fails.
I guess that general perspective seems to be supported in
the testimony that both of you have put forward just from your
written testimony on where you both address the dual track, and
here is the dilemma. Everyone benefits, in general, from a
modification being successful. The investors benefit. Certainly
the community benefits by having a family in that home.
Certainly the children benefit from the stability of the family
staying in that home. Everyone who has a stake in the
surrounding community--it is not just those who live there, but
the fact that the dropping home values are driving a national
cycle that we have not seen the end of yet. That is all tied in
together.
So all these incentives, and yet Daniel Tarullo testifying
earlier noted that despite the preference of modifications over
foreclosure as a national strategy, that the deck is stacked
the other direction, and he says that several possible
explanations for the prominence of foreclosures: Lack of
service or capacity to execute modifications, financial
incentives for servicers to foreclose, what appears to be
easier execution of foreclosures relative to modifications,
limits on authority of securitization trustees, and conflicts
between primary and secondary lien holders. So kind of big
picture, modifications make a lot of sense from a lot of
perspectives, but the complexity of the mortgage marketplace
results in a lot of foreclosures in lieu of aggressive pursuit
of modifications.
And then we find Fannie and Freddie saying the same. Hey,
folks, if you are servicing our loans, you have got to
aggressively pursue foreclosure. And so families are completely
stressed out and a substantial number--I do not really know the
percent--but families start to get these foreclosure notices.
Some of them are walking away from their homes because they
cannot deal with the pressure of--they think they are trying to
get a modification, but they have been on the phone four times.
They have talked to four different people in the pursuit of
that modification. They have submitted the paperwork three
times. It has been lost repeatedly. They can never get the same
story. They are told, make your payments, and they are told, we
cannot pursue your modification unless you are a month late.
Then somebody else says, no, we cannot pursue it unless you are
3 months late. And so in the middle of all that, then the
foreclosure side starts pounding on their door and families,
like we are not answering the phone anymore and we are not
going to open the mail anymore and until the sheriff comes and
moves us out, or we are just getting out of the house now.
There is something counterproductive from every quarter
about this aggressive pursuit of foreclosures at the same time
that a modification is in process. Is it not possible, because
since folks are saying that it is really Fannie and Freddie
that are really helping to drive this dual track, is it not
possible to find a way to recognize the importance that
foreclosure may be the ultimate path, but to suspend some of
the features of your tracking down that path during a period
where there is legitimate good faith effort by the servicer and
by the family to get a modification in place, and could that
not help overall with this picture?
So I guess I am asking each of you, Mr. Edwards and Mr.
Bisenius.
Mr. Bisenius. Let me offer a couple of thoughts around
that, if I could, Senator. First off, the challenge that you
highlight, I believe is very real and one that can lead to, as
you suggest, kind of counterproductive results. It is in our
interest to have our servicers work with borrowers to try to
seek a non-foreclosure alternative, to seek a modification, to
seek a repayment plan, to seek something other than a
foreclosure. As I mentioned in my testimony, we actually
provide financial incentives for them to do that and encourage
them to do that.
The balancing act we feel, though, is if a non-foreclosure
alternative cannot be found, every day, every month I wait to
start that foreclosure process costs. It costs a lot. If you do
back-of-envelope math, as I suggested in my written statement,
it is $30 to $40 a day. If we have 300,000 loans sitting in
foreclosure, that can start to run into the hundreds of
millions of dollars a month from those delays.
We have to find a way to remove the confusion, because I
understand it is a painful process and a confusing process.
Simultaneously, though, I need to find a way to ensure that I
am not adding more losses to the taxpayers as a result of our
actions.
Senator Merkley. So before I turn to Mr. Edwards, let me
just pursue that for a moment. And, by the way, I think I am
way over my time, Mr. Chair----
Chairman Dodd. That is OK.
Senator Merkley. Thank you. So essentially, you say when
there is recognition that a modification cannot be completed,
then we need to push through to foreclosure. I understand that.
But what about a policy where you said, if this standard is
met, a family has applied in good faith for a modification,
they are in negotiation of that modification, there is perhaps
a 120-day limit or a 90-day window or something, can you not
just say, listen, suspend the foreclosure notifications and
that track. Tell the customer that for the next 90 days or the
next 120 days while this gets worked out, we are setting that
aside. Recognize, Mr. and Mrs. Customer, that if it does not
get worked out, that we will have to restart the foreclosure
track. But create a window in which the whole emphasis of the
institution, of the servicer institution, is upon getting that
modification in place and done. Is something like that workable
that could be done as a policy?
Mr. Bisenius. So let me suggest one thing. It is our policy
that if we have begun some type of a modification, some type of
a work-out strategy, then we will not initiate the foreclosure
proceedings until we can work through that. So that is our
policy. The difference that we have, though, is as the servicer
has tried to contact the borrower and made good faith effort to
contact the borrower and yet the delinquency has extended, at a
point, we begin that foreclosure process. Oftentimes, that is
the initiator that now gets the borrower to be able to make
contact with the servicer and some type of work-out option gets
started. At this point, we have not delayed that. It is
something we can look at, but if we have begun the foreclosure
process, we think it is important to continue that.
Senator Merkley. Right. Well, I would love to continue this
conversation because I think in some degrees we are passing
each other, because we are really talking here--I think all the
Members of this Committee have constituents who are in the
modification process. We hear from them every single day, and
yet they are getting those foreclosure notices. They are not
folks who are ignoring your calls and not responding.
Mr. Edwards?
Mr. Edwards. Senator, you made a very key point in that the
borrower/family is making a legitimate effort, but more
importantly that the servicer is making a legitimate effort to
effect the modification. And as I have said in my testimony,
servicers are not staffed adequately. The issue is inadequate
staffing, the reason for multiple phone calls, the reason that
we all read and hear about. Why did I have to tell my story to
different people over and over and over again?
And you made another key point, the stress on the family.
Our work, our focus groups have said that once you get past
three or 4 months of delinquency, borrowers start to--families
emotionally start to detach from the home and they are not
coming back and they are not seeking a modification.
We need to do everything we can to make sure the servicers
follow up with their commitment to provide a single point of
contact. Fannie's and Freddie's process is there is no
foreclosure track during the first 90 days. There needs to be a
legitimate effort by both the borrower and the servicer within
those first 90 days. The servicers need to put forth a
legitimate effort. They need more staffing. That will allow the
system to run appropriately.
Senator Merkley. Thank you very much for your testimony,
and I encourage every possible effort to try to make this
modification track work better because it is an abysmal failure
in terms of national policy right now and our economy and our
families are going to--are suffering and will continue to
suffer if we do not figure out how to do it better. Thank you.
Chairman Dodd. Let me pick up on Senator Merkley's line of
questioning. I am just thinking out loud here with you, and I
wanted to ask you about--I presume you have seen or heard some
of the suggestions that were made by Sheila Bair and Dan
Tarullo regarding standards and, well, you have obviously
embraced the notion of a single point of contact and others.
But let me state the conclusion, and you disagree with me. Do
you agree--I presume you agree with these suggestions being
made, or do you disagree with any of the suggestions being
made?
Mr. Edwards. Absolutely agree.
Mr. Bisenius. I have not looked at as much detail to them.
The point I would add to that one, Mr. Chairman, is Freddie Mac
has very clear written standards on servicing. So it is not as
though they are nebulous. They are very clear about----
Chairman Dodd. Well, we are talking about national
standards, in a sense. Mr. Deutsch?
Mr. Deutsch. I would have to look at----
Chairman Dodd. Well, let me know what you think. I would
like to hear back because you represent an organization.
Mr. Edwards. I think it is important to have two things.
One is it is important to have national standards, but it is
also important to have one regulatory agency that takes this on
as its job with an eye to protecting consumers. And I think the
new Bureau of Consumer Financial Protection, this should be its
baby. It should say, we are taking over. We are going to write
the regulations. We are going to make sure that there are
standards, that standards are enforced, and that servicers who
do not comply with the standards, who do not live up to the
standards, will be sanctioned and might even lose their license
to service. I mean, we have to get serious about that and that
is the only way to do it.
Chairman Dodd. It will be good for the investor and the
borrower.
Let me ask something, because Jeff Merkley has raised an
interesting set of questions regarding the dual tracking. It
seemed to me that one of the major problems we saw underlying
the mortgage crisis that led to the near financial collapse in
the country was a lack of underwriting standards that went on
through the subprime lending. And maybe--I hope I am not naive
about this. I presume at some point, and obviously facts and
circumstances can change, that person has lost a job. The
income is not there. It could also be they did not get a job in
the middle of all of this. But in addition to hoping something
can turn around or there is maybe a work-out at a level that
would allow that family to meet that obligation and stay in
that home. It is obviously important.
Is there some capacity in all of this--because obviously, I
think all of us agree, as well, look, if someone just is not
going to be able to do this no matter how hard you try in all
of this, it is better probably to move along because the other
values of properties in that neighborhood suffer. All the other
tangential problems that emerge get exacerbated by delaying,
obviously, a situation. So striking that balance is not easy.
None of us are suggesting you are going to find a perfect way
to do this.
But I wonder if there is any consideration of making a
determination as to whether or not there is, in a number of
these cases, just no likelihood, given the economic
circumstances, beyond the capacity of that family to meet an
obligation. Do you consider that?
Mr. Edwards. First and foremost, for people who are
unemployed----
Chairman Dodd. Yes?
Mr. Edwards.----our first offering is 6 months of
forbearance. So we do not require any payments for that 6-month
period and hope that the individual will get employed. To the
extent they get employed, and in all likelihood it is going to
be at less of an income that they had earlier, we will first
run them through HAMP, evaluate the documentation, and then
determine whether or not a HAMP modification or a Fannie Mae
modification is feasible.
Chairman Dodd. Yes. I presume you consider other sources of
income that may be coming in--family support, others that could
be supporting that conclusion, as well. So it is not just a
question of a job, necessarily. Is that true, or am I--can a
homebuyer provide evidence that they have other sources of
support economically that will allow them to meet a modified--
--
Mr. Edwards. Absolutely. Other sources of income would need
to be documented----
Chairman Dodd. Yes.
Mr. Edwards.----and then we would set the modification
appropriately. Let me leave it at that.
Mr. Bisenius. All I would add to that is we encourage our
servicers to actually reach out to the borrower just a few days
after that first missed payment in order to begin to evaluate
the financial circumstances that the borrower has.
Chairman Dodd. So you encourage them to do it. But again, I
come back to the first question I asked you. Why do you not
demand it of them? They need you. They do not survive without
you.
Mr. Bisenius. It is in our servicer guidelines. It is in
our servicing contract that they reach out to borrowers in
those first few days after it. So it is demanded as part of our
contract.
Chairman Dodd. I would like to see it be tougher than that.
Professor Eggert, I will give you the last word on this.
Anything else you want to add to this conversation?
Mr. Eggert. Well, I wanted to add something about the put-
back issue, if I could.
Chairman Dodd. Yes.
Mr. Eggert. And I worry that during the course of the day,
the discussion of the put-backs has all been in terms of safety
and soundness of the financial institutions that would have to
repurchase it. I think it is important to recognize that put-
backs where there has been a breach of representations and
warranties is an important market discipline for originators of
loans. Lenders should not be selling loans and breaching their
representations and warranties.
Chairman Dodd. Yes.
Mr. Eggert. And right now, what we are seeing is lenders
fighting off put-backs, saying, oh, it is--you are just putting
this back because the loan is in default, but we should not
have to buy it back. You were a sophisticated investor. You
knew what you were buying.
But if you do not enforce representations and warranties,
the market breaks down. I mean, that is an important part of
market discipline. I think it is important that Fannie and
Freddie enforce representations and warranties and put back all
loans that are appropriate.
Chairman Dodd. Yes.
Mr. Eggert. As a taxpayer, I think that is important, and
also for market discipline, it is a crucial thing.
Chairman Dodd. Well, thank you. There are other questions I
was going to----
Mr. Edwards. Excuse me, Senator.
Chairman Dodd. Yes?
Mr. Edwards. Can I make one final point?
Chairman Dodd. Certainly, you may. Yes.
Mr. Edwards. I do not want to make any headlines here
today, so earlier Professor Eggert indicated that Fannie Mae
had fired servicers. When we moved this servicing, we actually
got together and worked out an arrangement where the servicer
agreed to move some of these loans to a place where we had
better capacity. We did it in such a way that it was a win-win
for Fannie Mae and the servicer and ultimately for the
families.
Chairman Dodd. Well, good. That is encouraging. More of
that evidence would help us.
And I am going to submit--there are a couple of other
questions that I have, but we have kept everyone a long time
here.
Jeff, any additional comments you want to make at all, or--
--
Senator Merkley. I will just close with this comment, and
that is that the perspective presented by major banks before
this Committee was that they are suspending the dual track for
loans that they carry, but they are being forced by Fannie and
Freddie not to suspend the dual track. You all have come and
testified, oh, no, we create this window, this 90 days. There
is either a serious misunderstanding or a serious discrepancy,
but I would just urge you to try to find a path that is as
supportive of the modification process as the major banks are
for their own portfolio loans. Despite your attestations that
you are doing it, something seems amiss and could be improved.
Chairman Dodd. It might be, and Jeff, again, we tried this
4 years ago, or 3 \1/2\ years ago, where we talked about it in
this room, where we gathered together a lot of the mortgage
lenders to talk about this very issue, and we had a set of
principles that we adopted in this room that went nowhere,
unfortunately, despite the commitments to the contrary. And it
might not be a bad idea to gather, and you could raise this
with Tim or others, as a way of gathering both these lending
institutions, the servicers in a room like this and sit down
and have that kind of conversation, what is going on, because
that gap that we are getting--in these hearings, we have one
panel and then another panel. Getting people together and find
out where the gaps are here that we are hearing in the
testimony might be very valuable. That is just a suggestion.
I thank all of you. Thank you for being here. It is very
gracious of you to participate in this. Obviously, this is a
problem that is not going to be resolved in the short term, but
one that we have got to get behind us for all the reasons that
have been articulated today. So the Committee thanks you for
your presence.
The Committee will stand adjourned.
[Whereupon, at 12:50 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
Thank you, Mr. Chairman, for holding a second hearing on this very
important topic.
As I stated in my opening remarks at our last meeting, it is
important to hear from our regulators.
They are responsible for overseeing financial institutions,
detecting these types of problems and formulating credible solutions.
With that in mind, I look forward to hearing from them on when they
first discovered these problems, how serious they believe they are, and
how quickly they can be resolved.
Additionally, I am interested in hearing from the members of the
Financial Stability Oversight Council. I would like to know how they
believe that body has performed and whether it has a role to play in
addressing these issues.
Thank you Mr. Chairman.
______
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Thank you for calling this hearing, Mr. Chairman. There have been
many disturbing media reports about careless foreclosure practices.
During our last hearing on this topic, the Attorney General from Iowa,
Mr. Miller, stated that the regulators' review of documents couldn't
have caught the robo-signing problems.
However, I am interested in learning about the steps that have been
taken to ensure that taxpayers and homeowners get a fair shake in this
process. I was particularly disturbed by reports of homeowners who were
in the process of a modification being foreclosed upon. The perception
that the system is stacked against the individual will further erode
confidence in our housing markets and delay stability not just for
housing but potentially for the economy as a whole.
I look forward to hearing from our witnesses about the steps they
are taking to ensure that servicing, modification and foreclosure
guidelines are being followed.
______
PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA
Thank you, Mr. Chairman. During our first hearing to examine
shortcomings in the mortgage servicing industry, we heard directly from
the servicers about the steps that they were taking to address recent
servicing issues. It was helpful to hear our panel's recommendations to
remedy the situation and provide long overdue relief to homeowners. I
left concerned with the extent of the problem, but hopeful that the
servicers would continue to work with Federal and State regulators
toward a swift resolution.
Unfortunately, in the short time between our last hearing and
today, I continue to hear from homeowners in Hawaii that are facing
foreclosure and having difficulty working with servicers. Borrowers are
still faced with unresponsive and obstructive mortgage servicers, and
they continue to receive conflicting and inaccurate information when
they contact their lenders and servicers for information about loan
modifications and other loss mitigation options.
Borrowers rightly expect their mortgage lenders and servicers to
work in good faith to help them keep their homes. Instead, servicers
have flaunted their protocols and ignored contractual agreements in
favor of foreclosures. It is our responsibility and that of our
witnesses today to correct these problems in order to preserve
homeownership and provide much needed relief to distressed borrowers.
This begins with ensuring that servicers are properly adhering to
modification, refinance, and foreclosure procedures. Borrowers should
expect servicers to be accessible, cooperative, and helpful through
loss mitigation and foreclosure. Mortgage modifications and refinances
must be significant and meaningful so that homeowners do not re-default
or find themselves delinquent again several months later. When
foreclosure is unavoidable, it should proceed in accordance with the
law in order to avoid documentation defects and proof of title
uncertainties that have become too common.
These failures among mortgage service providers also highlight the
need for greater financial literacy in our country. A lack of financial
literacy is problematic even before foreclosure. Many borrowers fell
behind on their mortgage payments because they did not understand the
terms and features of their loans and they failed to anticipate
increases in their monthly payments. Others are facing foreclosure
because they did not plan for unforeseen financial hardships and were
unable to make their monthly payments when they lost their jobs.
Homeowners that are delinquent on their mortgages are often unaware of
the counseling and education resources that are available to assist
them throughout the loss mitigation and foreclosure processes. Even
after foreclosure, individuals need a better understanding of how to
manage their other debt obligations, rebuild their credit once it has
been damaged, and access alternative housing opportunities.
Mortgage lenders and servicers must be held accountable for their
poor business practices, but we should also provide individuals with
the skills and tools they need to protect themselves. I worked to
establish and secure funding for a pilot program that provides access
to pre-homeownership counseling services for prospective homebuyers.
The program is one example of what must be done to prepare individuals
for the financial responsibilities that come with homeownership. We
must continue to invest in financial education and counseling services
that can develop individuals into more empowered and responsible
consumers, borrowers, and homeowners.
It is clear that more must be done to improve mortgage servicing
practices and the effectiveness of Federal homeowner assistance
initiatives. I thank the witnesses for joining us today and look
forward to continuing to work together to improve homeowner protection
and financial literacy. Thank, Mr. Chairman.
______
PREPARED STATEMENT OF SENATOR KAY BAILEY HUTCHISON
Thank you Chairman Dodd.
As we continue to investigate allegations of fraud in the
foreclosure process, we must remember that these issues are only a part
of even greater problems with our nation's broader mortgage finance
system. While today we consider mortgage servicing and compliance with
foreclosures laws, we must not neglect the need to address and
restructure our mortgage finance system that to date has cost taxpayers
more than $150 billion.
In October, Greg Abbott, the Attorney General of Texas, called on
30 mortgage loan servicing companies in our State to halt new home
foreclosures, sales of foreclosed homes, and evictions of people living
in foreclosed homes. The purpose of this plea was to determine whether
or not any mortgage loan company employees had participated in unlawful
practices.
The Attorney General's request was not made lightly. In fact, it
was made after several national lenders, including Bank of America, JP
Morgan Chase, and Ally Financial, halted foreclosures outside of Texas
to determine whether their practices were sound. And Attorney General
Abbott was not alone. Attorneys general and regulators in all 50 states
have joined together to investigate home foreclosures procedures on
allegations of fraudulent practices.
As we have all come to learn, the issue at hand is "robosigning," a
practice used by mortgage loan servicers to expedite foreclosure
proceedings. Through this practice, employees signed and swore to
thousands of loan documents and affidavits without so much as verifying
the information in the document, or, in some cases, without reading the
information.
In any economic climate, allegations of foreclosure fraud should
never be taken lightly. However, these allegations are magnified in our
nation's ongoing economic downturn. From July 2007 to August 2009, 5.3
million homeowners saw foreclosure proceeds begin, and 2.5 million of
these homeowners ended up losing their homes. Over the past year, the
rate of foreclosure has only accelerated, and we have seen predictions
that the number of foreclosures across the country may reach 12 million
before the economy recovers.
In Texas, one in every 738 housing units is a foreclosure property,
compared with 1 in every 389 nationally. While Texas has fared better
than many other states, and the foreclosure and delinquency rates have
respectively slowed across our State in recent months, there is nothing
to celebrate. Many of our neighbors in Texas and across the country
have already endured a foreclosure, and the threat of delinquency and
foreclosure looms for many others.
Addressing allegations of fraud in mortgage servicing is very
important. It is my hope that this hearing will be enlightening and I
welcome the testimony of these distinguished witnesses.
However, Mr. Chairman, in addressing mortgage servicing, we must
not lose sight of the larger elephant in the room: the need to reform
our broader residential mortgage finance system. While we need to
ensure that mortgage loan servicing companies are adhering to the law
in the foreclosure process, we must address what led to the crisis in
the first place.
In the wake of this crisis, American taxpayers have poured more
than $150 billion into Fannie Mae and Freddie Mac, the secondary
mortgage giants who have traded their Government charter for Government
control through Federal conservatorship. It is estimated that the total
cost to taxpayers of this bailout for Fannie Mae and Freddie Mac may
reach as high as $259 billion. When the bailout of Fannie Mae and
Freddie Mac is combined with the $700 billion Troubled Asset Relief
Program ultimately used to inject capital into banks weighed down by
bad mortgages, and Federal stimulus and spending packages aimed at
lifting the tattered economy brought down by the mortgage crisis,
taxpayers have fronted trillions of dollars. Taxpayers have paid an
even greater amount in lost jobs, lost homes, and lost savings.
Despite the significant effects of the mortgage crisis, Congress
has done nothing to address the mortgage finance system, except to
throw Fannie Mae and Freddie Mac the lifeline of their bailout which we
have seen grow to more than $150 billion and counting. Mr. Chairman, we
must not wait any longer to investigate issues that have arisen as a
result of the mortgage crisis. We must address the root causes of this
crisis: Fannie Mae, Freddie Mac, and the rest of nation's flawed
mortgage finance system.
______
PREPARED STATEMENT OF PHYLLIS CALDWELL
Chief of Homeownership Preservation Office
Department of the Treasury
December 1, 2010
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for the opportunity to testify today regarding issues
surrounding mortgage servicing. This testimony will cover two key
areas: first, the steps we are taking to ensure that servicers
participating in the Making Home Affordable (MHA) program are adhering
to program guidelines in light of the recent foreclosure issues, and
second, the accomplishments of MHA to date and its impact on mortgage
servicing.
The reports of ``robo-signing'', faulty documentation and other
improper foreclosure practices by mortgage servicers are unacceptable.
If servicers have failed to comply with the law, they should be held
accountable. The Administration is leading a coordinated interagency
effort to investigate misconduct, protect homeowners and mitigate any
long-term effects on the housing market. While Treasury does not have
the authority to regulate the foreclosure practices of financial
institutions, nor to ensure that those practices conform to the law, it
is working closely with agencies that do have such authority.
The Financial Fraud Enforcement Task Force, a broad coalition of
law enforcement, investigatory, and regulatory agencies that brings
together more than 20 Federal agencies, 94 U.S. Attorneys Offices, and
dozens of State and local partners, is working to ensure that
foreclosure practices are thoroughly investigated and any criminal
behavior is prosecuted. The Federal Housing Administration (FHA) has
been reviewing servicers of loans it insures for compliance with loss
mitigation requirements. Additionally, the Office of the Comptroller of
the Currency has directed all large national bank servicers to review
their foreclosure management processes--including file reviews,
affidavit processing, and signatures--to ensure that the processes are
fully compliant with all applicable State laws. The other independent
banking regulatory agencies are doing similar reviews of institutions
under their jurisdiction. Attached to my testimony is a fact sheet
providing more detail concerning the activities of the coordinated
interagency effort.
Because MHA and its first lien program, the Home Affordable
Modification Program (HAMP), are pre-foreclosure programs, the recent
reports of robo-signing of affidavits and improper foreclosure
documentation do not directly affect the implementation of HAMP. But
these documentation failures reflect the fact that servicers did not
have the proper resources in place, nor did they have procedures and
controls in place to prevent this crisis. As we have learned in
implementing HAMP, servicers were historically structured and staffed
to perform a limited role-primarily collecting payments. They did not
have the systems, staffing, operational capacity or incentives to
engage with homeowners on a large scale and offer meaningful relief
from unaffordable mortgages.
The foreclosure problems underscore the continued critical
importance of the Making Home Affordable Program launched by the Obama
administration. Preventing avoidable foreclosures through modifications
and other alternatives to foreclosure continues to be a critical
national priority. Foreclosure is painful for homeowners; it is also
costly to servicers and investors. Foreclosures dislocate families,
disrupt the communities, and destabilize local housing markets. For
this reason, the Obama administration launched the Making Home
Affordable program in the spring of 2009, of which HAMP is a key
component. HAMP is intended to prevent avoidable foreclosures by
providing financial incentives to servicers, investors and borrowers to
voluntarily undertake modifications of mortgages for responsible
homeowners in a way that is affordable and sustainable over time. In
cases where a modification is not possible, the participating servicers
must consider other alternatives to foreclosure. As a result,
throughout the last 20 months, we have worked to develop systems and
procedures to ensure that responsible homeowners are offered meaningful
modifications and other foreclosure alternatives. To remedy servicer
shortcomings, we have urged servicers to rapidly increase staffing and
improve customer service. We have developed specific guidelines and
certifications on how and when borrowers must be evaluated for HAMP and
other loss mitigation options prior to foreclosure initiation. We have
also continued our compliance efforts to ensure borrowers are fairly
evaluated and that servicers conduct their operations in accordance
with Treasury guidelines. MHA has strong compliance mechanisms in place
to ensure that servicers follow our program's guidelines.
HAMP Procedural Safeguards and Compliance Efforts
Treasury has built numerous procedural safeguards in HAMP to avoid
foreclosure sales. Specifically, program guidelines require
participating mortgage servicers of non-GSE loans to:
Evaluate homeowners for HAMP modifications before referring
them for foreclosure. The focus here is on early intervention.
Servicers must reach out to all potentially eligible borrowers
when they are only 2 months delinquent and there is a still a
viable opportunity to save the loan;
Suspend any foreclosure proceedings against homeowners who
have applied for HAMP modifications, while their applications
are pending;
Evaluate whether homeowners who do not qualify for HAMP (or
who have fallen out of HAMP) qualify for alternative loss
mitigation programs or private modification programs;
Evaluate whether homeowners who cannot obtain alternative
modifications may qualify for a short sale or deed-in-lieu of
foreclosure; and
Provide a written explanation to any borrower who is not
eligible for modification and delay foreclosure for at least 30
days to give the homeowner time to appeal.
Servicers may not proceed to foreclosure sale unless and until they
have tried these alternatives. They must also first issue a written
certification to their foreclosure attorney or trustee stating that
``all available loss mitigation alternatives have been exhausted and a
non-foreclosure option could not be reached.'' On October 6, Treasury
clearly reminded servicers of non-GSE loans of this existing
requirement that they are prohibited from conducting foreclosure sales
until these pre-foreclosure certifications are executed. It should be
noted that the GSEs have similar guidelines for their HAMP
modifications.
The MHA compliance program is designed to ensure that servicers are
meeting their obligations under the MHA servicer contracts for loans
where Fannie Mae or Freddie Mac is not the investor, and uses a variety
of compliance activities to assess servicers from different
perspectives. Treasury has engaged a separate division of Freddie Mac,
Making Home Affordable--Compliance (MHA-C), to perform these compliance
activities. Employing a risk-based approach, compliance activities are
performed ranging generally monthly for servicers with the largest
percentages of potentially eligible borrowers, to at least twice
annually for the smaller-sized servicers.
Our compliance activities focus on ensuring that homeowners are
appropriately treated in accordance with MHA guidelines. As the program
has evolved, servicers have adapted their processes to incorporate MHA
programs. Treasury has implemented non-financial remedies that have
shaped servicer behavior in order to address the most vital issue: the
ultimate impact on the homeowner.
As information regarding irregularities in servicer foreclosure
practices arose, Treasury acted swiftly and instructed MHA-C to review
the ten largest servicers' internal policies and procedures for
completing these pre-foreclosure certifications before initiating the
foreclosure proceedings, and to assess a limited sample of foreclosure
sales that have occurred since the effective date of the guidance. The
results of the review are not yet available. However, if MHA-C
identifies any incidents of non-compliance with HAMP guidelines,
Treasury will direct servicers to take appropriate corrective action,
which may include suspending foreclosure proceedings and re-evaluating
the affected homeowners for HAMP, as well as undertaking changes to
servicing processes to help ensure that HAMP guidelines are followed
prior to initiating the foreclosure process.
HAMP's Accomplishments and Its Impact on the Mortgage Industry
To date, HAMP has achieved three critical goals: it has provided
immediate relief to many struggling homeowners; it has used taxpayer
resources efficiently; and it has helped transform the way the entire
mortgage servicing industry operates. Twenty months into the program,
close to 1.4 million homeowners have entered into HAMP trials and
experienced temporary reductions in their mortgage payments. Of these,
almost 520,000 homeowners converted to permanent modifications. These
homeowners are experiencing a 36 percent median reduction in their
mortgage payments-averaging more than $500 per month-amounting to a
total, program-wide savings of nearly $3.7 billion annually for
homeowners.
Early indications suggest that the re-default rate for permanent
HAMP modifications is significantly lower than for historical private-
sector modifications--a result of the program's focus on properly
aligning incentives and achieving greater affordability. For HAMP
modifications made in the fourth quarter of 2009, at 6 months, fewer
than 10 percent of permanent modifications are 60+ days delinquent.
According to the OCC's Mortgage Metrics Report, the comparable
delinquency rates for non-HAMP modifications made in the same quarter
were 22.4 percent. Regarding HAMP re-defaults, the OCC states, ``These
lower early post-modification delinquency rates may reflect HAMP's
emphasis on the affordability of monthly payments and the requirements
to verify income and complete a successful trial period.''
Borrowers who do not ultimately qualify for HAMP modifications
often receive alternative forms of assistance. Based on survey data
from the eight largest servicers, approximately one-half of homeowners
who apply for HAMP modifications but do not qualify have received some
form of private-sector modification. Less than 10 percent have lost
their homes through foreclosure sales.
HAMP uses taxpayer resources efficiently. HAMP's ``pay-for-
success'' design utilizes a trial period to ensure that taxpayer-funded
incentives are used only to support borrowers who are committed to
staying in their homes and making monthly payments, and the investor
retains the risk of the borrower re-defaulting into foreclosure. No
taxpayer funds are paid to a servicer or an investor until a borrower
has made three modified mortgage payments on time and in full. The
majority of payments are made over a 3- to 5-year period only if the
borrower continues to fulfill this responsibility. These safeguards
ensure that spending is limited to high-quality modifications.
MHA Has Been a Catalyst_Setting the Benchmark for Sustainable
Modifications
MHA has transformed the way the mortgage servicing industry deals
with alternatives to foreclosure. Because of MHA, servicers have
developed constructive private-sector options. Where there was once no
consensus plan among loan servicers about how to respond to borrowers
in need of assistance, HAMP established a universal affordability
standard: a 31 percent debt-to-income ratio, which dramatically
enhanced servicers' ability to reduce mortgage payments to sustainable
levels while simultaneously providing the necessary justification to
investors for the size and type of modification.
In the year following initiation of HAMP, home retention strategies
changed dramatically. According to the OCC/ OTS Mortgage Metrics
Report, in the first quarter of 2009, nearly half of mortgage
modifications increased borrowers' monthly payments or left their
payments unchanged. By the second quarter of 2010, 90 percent of
mortgage modifications lowered payments for the borrower. This change
means borrowers are receiving better solutions. Modifications with
payment reductions perform materially better than modifications that
increase payments or leave them unchanged.
Moreover, even holding the percentage payment reduction constant,
the quality of modifications made by servicers appears to have improved
since 2008. For modifications made in 2008, 15.8 percent of
modifications that received a 20 percent payment reduction were 60 days
or more delinquent 3 months into the modification. For modifications
made in 2010, that delinquency rate has fallen almost in half, to 8.2
percent. The OCC's Mortgage Metrics Report from 2010:Q2 attributes the
improvement in mortgage performance to ``servicer emphasis on repayment
sustainability and the borrower's ability to repay the debt.''
Spurred by the catalyst of the HAMP program, the number of
modification arrangements was nearly three times greater than the
number of foreclosure completions between April 2009 and August 2010.
More than 3.7 million modification arrangements were started, including
the close to 1.4 million trial HAMP modification starts, more than
568,000 FHA loss mitigation and early delinquency interventions, and
more than 1.6 million proprietary modifications by servicing members of
the HOPE NOW Alliance.
Further, it is important to keep in mind that MHA is only one of
many Administration housing efforts targeting these challenges: the
Administration has also provided substantial support for the housing
markets through support for Fannie Mae and Freddie Mac to help keep
mortgage rates affordable; purchase of agency mortgage-backed
securities; and an initiative to provide support and financing to State
and local Housing Finance Agencies (HFAs). These HFAs provide, in turn,
tens of thousands of affordable mortgages to first time homebuyers and
help develop tens of thousands of affordable rental units for working
families.
Responding to a Changing Housing Crisis
MHA was designed to be a versatile program. MHA includes a second
lien modification program, a foreclosure alternatives program that
promotes short sales and deeds-in-lieu of foreclosures, and an
unemployment forbearance program. Treasury expanded HAMP to include FHA
and Rural Development mortgage loans through the FHA-HAMP and RD-HAMP
program, and also introduced a principal reduction option. Finally,
Treasury introduced a program to allow the hardest-hit states to tailor
housing assistance to their areas, and worked with FHA to introduce an
option for homeowners with high negative equity to refinance into a new
FHA loan if their lender agrees to reduce principal on the original
loan by at least 10 percent.
Second Lien Modification Program
The Second Lien Modification Program (referred to as 2MP) requires
that when a borrower's first lien is modified under HAMP and the
servicer of the second lien is a 2MP participant, that servicer must
offer to modify the borrower's second lien according to a defined
protocol. 2MP provides for a lump sum payment from Treasury in exchange
for full extinguishment of the second lien, or a reduced lump sum
payment from Treasury in exchange for a partial extinguishment and
modification of the borrower's remaining second lien. Although 2MP was
initially met with reluctance from servicers and investors who did not
want to recognize losses on their second lien portfolios, as of October
3, 2010, Treasury has signed up seventeen 2MP servicers, which includes
the four largest mortgage servicers, who in aggregate service
approximately 60 percent of outstanding second liens. The program uses
a third-party data base to match second lien loans with first lien
loans permanently modified under HAMP. Servicers are required to modify
second lien loans within 120 days from the date the servicer receives
the first lien and second lien matching information. The implementation
of this data base began over the summer. Five 2MP Servicers have
already begun matching modified first liens with their corresponding
second liens, while the other twelve are in some phase of developing
systems capacity to do so. Information on the second lien program will
be included in upcoming Monthly Servicer Performance Reports as data
becomes available.
Home Affordable Foreclosure Alternatives Program
Any modification program seeking to avoid preventable foreclosures
has limits, HAMP included. HAMP does not, nor was it ever intended to,
address every delinquent loan. Borrowers who do not qualify for HAMP
may benefit from an alternative program that helps the borrower
transition to more affordable housing and avoid the substantial costs
of a foreclosure. Under HAFA, Treasury provides incentives for short
sales and deeds-in-lieu of foreclosure for circumstances in which
borrowers are unable to complete the HAMP modification process or
decline a HAMP modification. Borrowers are eligible for a relocation
assistance payment, and servicers receive an incentive for completing a
short sale or deed-in-lieu of foreclosure. In addition, investors are
paid additional incentives for allowing some short sale proceeds to be
distributed to subordinate lien holders. The Home Affordable
Foreclosure Alternatives (HAFA) Program became effective on April 5,
2010.
Unemployment Program
In March 2010, the Obama administration announced enhancements to
HAMP aimed at unemployment problems by requiring servicers to provide
temporary mortgage assistance to many unemployed homeowners. The
Unemployment Program (UP) requires servicers to grant qualified
unemployed borrowers a forbearance period during which their mortgage
payments are temporarily reduced for a minimum of 3 months, and up to 6
months for some borrowers, while they look for a new job. Servicers are
prohibited from initiating a foreclosure action or conducting a
foreclosure sale (a) while the borrower is being evaluated for UP, (b)
after a foreclosure plan notice is mailed, (c) during the UP
forbearance or extension, or (d) while the borrower is being evaluated
for or participating in HAMP or HAFA following the UP forbearance
period. UP went in to effect August 1, 2010. Because no incentives are
paid under UP, data reports will be based on servicer surveys.
Principal Reduction Alternative
The Administration announced further enhancements to HAMP in March
2010 by encouraging servicers to write down mortgage debt as part of a
HAMP modification (the Principal Reduction Alternative, or PRA). Under
PRA, servicers are required to evaluate the benefit of principal
reduction and are encouraged to offer principal reduction whenever the
net present value (NPV) result of a HAMP modification using PRA is
greater than the NPV result without considering principal reduction.
The principal reduction and the incentives based on the dollar value of
the principal reduced will be earned by the borrower and investor based
on a pay-for-success structure. Under the contract with each servicer,
Treasury cannot compel a servicer to select PRA over the standard HAMP
modification even if the NPV of PRA is greater than the NPV of regular
HAMP. However, Treasury has required servicers to have written policies
for PRA to help ensure that similarly situated borrowers are treated
consistently. The program became operational October 1, 2010 and the
four largest servicers have indicated an intention to offer PRA to
homeowners.
FHA Refinance
Also in March 2010, the Administration announced adjustments to
existing FHA refinance programs that permit lenders to provide
additional refinancing options to homeowners who owe more than their
homes are worth because of large declines in home prices in their local
markets. This program, known as the FHA Short Refinance option, will
provide more opportunities for qualifying mortgage loans to be
restructured and refinanced into FHA-insured loans.
In order to qualify for this program, a homeowner must be current
on their existing first lien mortgage; the homeowner must occupy the
home as a primary residence and have a qualifying credit score; the
mortgage owner must reduce the amount owed on the original loan by at
least 10 percent; the new FHA loan must have a balance of no more than
97.75 percent of the current value of the home; and total mortgage debt
for the borrower after the refinancing, including both the first lien
mortgage and any other junior liens, cannot be greater than 115 percent
of the current value of the home--giving homeowners a path to regain
equity in their homes and affordable monthly payments. Program guidance
was issued to participating FHA servicers in September 2010.
HFA Hardest-Hit Fund
On February 19, 2010, the Administration announced the Housing
Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA
Hardest-Hit Fund) for State HFAs in the nation's hardest-hit housing
markets to design innovative, locally targeted foreclosure prevention
programs. In total, $7.6 billion has been allocated to 18 states
(Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana,
Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina,
Ohio, Oregon, Rhode Island, South Carolina, and Tennessee) and the
District of Columbia under the HFA Hardest-Hit Fund. As of November 1,
2010, four states were either accepting applications or providing
assistance (Arizona, Michigan, Ohio and Rhode Island). By the end of
2010 another three states are expected to begin providing assistance.
The remaining states are expected to begin providing assistance in the
first half of 2011.
Allocations under the HFA Hardest-Hit Fund were made using several
different metrics. Some of the funds were allocated to states that have
suffered average home price drops of more than 20 percent from their
peak, while other funds were allocated to states with the highest
concentration of their populations living in counties with unemployment
rates greater than 12 percent or unemployment rates that were at or
above the national average. In addition, some funds were allocated to
all the states and jurisdictions already participating in the HFA
Hardest-Hit Fund to expand the reach of their programs to help more
struggling homeowners. The applicable HFAs designed the State programs
themselves, tailoring the housing assistance to their local needs. A
minimum of $2 billion of the funding is required to be used by states
for targeted unemployment or under-employment programs that provide
temporary assistance to eligible homeowners to help them pay their
mortgages while they seek re-employment or additional employment or
undertake job training. Treasury also required that all of the programs
comply with the requirements of EESA, which include that they must be
designed to prevent avoidable foreclosures. All of the funded program
designs are posted online at http://www.FinancialStability.gov/
roadtostability/hardesthitfund.html.
Transparency, Accountability, and Compliance
I would like to provide you with further detail regarding the
compliance efforts regarding HAMP. To protect taxpayers and ensure that
TARP dollars are directed toward promoting financial stability,
Treasury established rigorous transparency and accountability measures
for all of its programs, including all housing programs. In addition,
every borrower is entitled to a clear explanation if he or she is
determined to be ineligible for a HAMP modification. Treasury requires
servicers to report the reason for modification denials in the HAMP
system of record. MHA-C's compliance activities, through Second Look
loan file reviews and other onsite assessments, evaluate the
appropriateness of the denials as well as the timeliness and accuracy
of the denial notification to the affected borrowers.
In order to improve transparency of the HAMP NPV model, which is a
key component of the eligibility test for HAMP, Treasury increased
public access to the NPV white paper, which explains the methodology
used in the NPV model. To ensure accuracy and reliability, MHA-C
conducts periodic audits of servicers' NPV practices. MHA-C conducts
two types of reviews related to NPV. For those servicers that have re-
coded the requirements of the NPV model in their processing systems,
MHA-C conducts onsite and offsite reviews of model accuracy, model
management, and data integrity and inputs. For those servicers using
the MHA Servicer Portal, MHA-C conducts reviews of data integrity and
inputs. Where non-compliance is found, Treasury requires servicers to
take remedial actions, which can include re-evaluating borrowers with
appropriate inputs, process changes, corrections to recoded NPV
implementations, and, for servicers who have re-coded the NPV model,
reverting back to the MHA Servicer Portal for loans with negative NPV
results from the servicers' re-coded NPV model until necessary
corrections have been re-evaluated by MHA-C. In addition, as required
by the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Treasury is preparing to establish a Web portal that borrowers can
access to run a NPV analysis using input data regarding their own
mortgages, and to provide to borrowers who are turned down for a HAMP
modification the input data used in evaluating the application.
As stated above, servicers are subject to various other compliance
activities, including periodic, onsite compliance reviews as well as
onsite and offsite loan file reviews. These various compliance
activities performed by MHA-C assess servicers' compliance with HAMP
requirements. Treasury works closely with MHA-C to adapt and execute
our risk based compliance activities quickly based on changes in the
program as well as observed trends. The current assessment of the top
ten servicers' adherence to our pre-foreclosure certifications and
requirements is one example of how we adapt our compliance activities.
MHA-C provides Treasury with the results from each of the various
compliance activities conducted. Treasury performs quality reviews of
these activities and evaluates the nature and scope of any instances of
non-compliance, and assesses appropriate responses, including remedies,
in a consistent manner. As stated earlier, during the beginning of the
program, and as additional features (e.g., the Second Lien Program) are
introduced, Treasury's compliance activities and associated remedies
focus on shaping servicers' behavior and improving processes as
servicers ramp up or modify their implementation of HAMP. As the
program and servicers' processes mature, financial remedies may become
more appropriate and effective in reinforcing Treasury's compliance and
performance expectations.
Looking Ahead for Housing
Servicers need to increase efforts in helping borrowers avoid
foreclosure through modification, as well as other alternatives to
foreclosure, such as short sales. Furthermore, as we have learned
through HAMP, servicers must be held accountable for ensuring that
their foreclosure processes have integrity and are used after all loss
mitigation options have been exhausted. Treasury's main priority is to
ensure that first, participating servicers are doing everything that
they can to reach, evaluate, and start borrowers into HAMP
modifications, second, if a HAMP modification is not possible, every
servicer is properly evaluating each homeowner for all other potential
options to prevent a foreclosure, including HAFA or one of their own
modification programs, and third, servicers are utilizing programs such
as UP or the HFA Hardest-Hit Fund to their fullest ability in order to
prevent avoidable foreclosures.
Over the past 20 months, we have been actively engaged with
stakeholders from across the housing sector to find ways to increase
the pace of new HAMP modifications, improve the characteristics of
those modifications, and improve the borrower experience. We sincerely
appreciate the assistance that we have gotten from Members of Congress
and the advocacy community in strengthening borrower protections,
incentivizing principal reduction, and assisting the unemployed. And
most importantly, we value the efforts that Members of Congress,
counselors and advocates have made in holding servicers accountable.
Yet, as we deploy a comprehensive suite of loss mitigation options,
we must remember, as the President noted, not every foreclosure can be
prevented. Any broad-based solution must aim at achieving both an
efficient and equitable allocation of resources. This means a balance
must be struck between affording homeowners opportunities to avoid
foreclosure while expeditiously easing the transition in those cases
where homeownership is not an economically sustainable alternative.
This is especially important in order to lay the foundation for future
appreciation which will provide a meaningful path to sustainable
homeownership.
In the coming months, we will begin to see the impacts of the newly
launched MHA programs. These programs will reach more distressed
homeowners and provide additional stability to the housing market going
forward. In much the same way that HAMP's first lien modification
program has provided a national blueprint for mortgage modifications,
these new programs will continue to shape the mortgage servicing
industry and act as a catalyst for industry standardization of short
sale, refinance and principal reduction programs. The interplay of all
these programs will provide a much more flexible response to changes in
the housing market over the next 2 years.
______
PREPARED STATEMENT OF SHEILA C. BAIR.
Chairman, Federal Deposit Insurance Corporation
December 1, 2010
Chairman Dodd, Ranking Member Shelby and Members of the Committee,
thank you for requesting the views of the Federal Deposit Insurance
Corporation on deficiencies in mortgage servicing and their broader
potential impact on the financial system. It is unfortunate that
problems in mortgage servicing and foreclosure prevention continue to
require the scrutiny of this Committee. While ``robo-signing'' is the
latest issue, this problem is symptomatic of persistent shortcomings in
the foreclosure prevention efforts of our nation's largest mortgage
servicers. As such, I believe that major changes are required to
stabilize our housing markets and prevent unnecessary foreclosures.
The FDIC continues to review the mortgage servicing operations at
banks we supervise and also those institutions that have purchased
failed-bank loans under loss share agreements with the FDIC. To date,
our review has revealed no evidence that FDIC-supervised State-
chartered banks directly engage in robo-signing, and it also appears
that they have limited indirect exposure through third-party
relationships with servicers that have engaged in this practice.
However, we remain concerned about the ramifications of deficiencies in
foreclosure documentation among the largest servicers, most of which we
insure. We will continue to work with the primary supervisors of these
servicers through our backup examination authority. In addition, we are
coordinating our work with the State Attorneys General (AG) and the
Financial Fraud Enforcement Task Force--a broad coalition of Federal,
State, and local law enforcement, regulatory, and investigatory
agencies led by the Department of Justice--to support efforts for broad
based and consistent resolution of servicing issues.
The robo-signing and foreclosure documentation issues are the
natural result of the misaligned incentives that pervade the entire
mortgage process. For instance, the traditional, fixed level of
compensation for loan servicing has been wholly inadequate to cover the
expenses required to implement high-touch and specialized servicing on
the scale needed in recent years. Misaligned incentives have led to
significant underinvestment in the systems, processes, training, and
staffing necessary to effectively implement foreclosure prevention
programs. Similarly, many servicers have failed to update their
foreclosure process to reflect the increased demand and need for loan
modifications. As a result, some homeowners have received conflicting
messages from their servicers and have missed opportunities to avoid
foreclosure. The failure to effectively implement loan modification
programs can not only harm individual homeowners, but the resulting
unnecessary foreclosures put downward pressure on home prices.
As serious as these issues are, a complete foreclosure moratorium
is ill-advised, as it would unduly prolong those foreclosures that are
necessary and justified, and would slow the recovery of housing
markets. The regrettable truth is that many of the properties currently
in the foreclosure process are either vacant or occupied by borrowers
who simply cannot make even a significantly reduced payment and have
been in arrears for an extended time.
My hope is that the newly established Financial Stability Oversight
Council (FSOC) will take the lead in addressing the latest issues of
foreclosure documentation deficiencies and proposing a sensible and
broad-based approach to reforming mortgage servicer processes,
promoting sustainable loan modifications and restoring legal certainty
to the foreclosure process where it is appropriate and necessary.
In my testimony, I will begin with some background on the robo-
signing and related foreclosure documentation problems and connect
theses issues to other deficiencies in the mortgage servicing process.
Second, I will discuss the FDIC's efforts to address identified
servicing problems within our limited jurisdiction. Finally, I will
discuss the central role that I believe the FSOC can play in
facilitating broad agreements among major stakeholder groups that can
help resolve some of these issues.
I. Robo-Signing and Foreclosure Documentation Problems and Shortfalls
in Mortgage Servicing
The FDIC is concerned about two related, but separate, problems
relating to foreclosure documentation. The first is referred to as
``robo-signing,'' or the use of highly automated processes by some
large servicers to generate affidavits in the foreclosure process
without the affiant having reviewed facts contained in the affidavit or
having the affiant's signature witnessed in accordance with State laws.
Recent depositions of individuals involved in robo-signing have led to
allegations of fraud based on contentions that these individuals signed
thousands of documents without knowledge or verification of the
information contained in the filed affidavits.
The second problem involves demonstrating the chain of title
required to foreclose. Some servicers have not been able to establish
their legal standing to foreclose because, under current industry
practices, they may not be in possession of the necessary documentation
required under State law. In many cases, a servicer is acting on behalf
of a trustee of a pool of mortgages that have been securitized and sold
to investors in a mortgage-backed securities (MBS) transaction. In MBS
transactions, the promissory note and mortgage signed by the borrowers
are held by a custodian on behalf of the securitization investors.
In many cases today, however, the mortgage held by the custodian
indicates that legal title to the mortgage has been assigned from the
original lender to the Mortgage Electronic Registration System (MERS),
a system encompassing some 31 million active mortgage loans that was
designed to facilitate the transfer of mortgage claims in the
securitization process. Securitization often led to multiple transfers
of the mortgage through MERS. Many of the issues raised about the
authority of servicers to foreclose are a product of potential defects
in these transfers and the requirements for proof of the servicer's
authority. Where MERS is involved, foreclosures have been initiated
either by MERS, as the legal holder of the lien, or by the servicer. In
both cases, the foreclosing party must show that it has possession of
the note and that its right to foreclose on the mortgage complies with
State law.
Robo-signing and chain of title issues may create contingent
liabilities for mortgage servicers. Investors who contend that
servicers have not fulfilled their servicing responsibilities under the
pooling and servicing agreements (PSAs) argue that they have grounds to
reassign servicing rights. In addition, concerns have been raised by
investors as to whether the transfer of loan documentation in some
private MBS securitization trusts fully conform to the requirements
established under applicable trust law and the PSAs governing these
transactions. While the legal challenges under the representations and
warranties trust requirements remain in their early stages, they could,
if successful, result in the ``putback'' of large volumes of defaulted
mortgages from securitization trusts to the originating institutions.
The FDIC has been working with the FRB and the Comptroller of the
Currency (OCC), in our backup capacity, to gather information from the
large servicers to evaluate the potential financial impact of these
adverse outcomes.
Long-Standing Weaknesses in Third-Party Mortgage Servicing
The weaknesses that have been identified in mortgage servicing
practices during the mortgage crisis are a byproduct of both rapid
growth in the number of problem loans and a compensation structure that
is not well designed to deal with these loans. As recently as 2005,
when average U.S. homes prices were still rising rapidly, fewer than
800,000 mortgage loans entered foreclosure on an annual basis.\1\ By
2009, the annual total had more than tripled to over 2.8 million, and
foreclosures through the first three quarters of 2010 are running at an
annualized pace of more than 2.5 million. Moreover, the proportion of
foreclosure proceedings actually resulting in the repossession and sale
of collateral appears to have increased even more rapidly over this
period in some of the hardest-hit markets. Data published by the
Federal Housing Finance Agency show that the percent of total homes
sales in California resulting from foreclosure-related distressed sales
increased more than eight-fold, to over 40 percent of all sales,
between 2006 and 2008.\2\
---------------------------------------------------------------------------
\1\ FDIC estimate based on data from the Mortgage Bankers
Association data and the American Housing Survey.
\2\ ``The Impact of Distressed Sales on Repeat-Transactions House
Price Indexes,'' FHFA, May 27, 2009, http://www.fhfa.gov/webfiles/2916/
researchpaper_distress%5B1%5D.pdf.
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The share of U.S. mortgage loans held or securitized by the
Government-sponsored enterprises (GSEs) and private issuers of asset-
backed securities has doubled over the past 25 years to represent fully
two-thirds of the value of all mortgages currently outstanding.\3\ One
effect of this growth in securitization has been parallel growth in
third-party mortgage servicing under PSA agreements. By definition, a
large proportion of the mortgages sold or securitized end up serviced
under PSAs.
---------------------------------------------------------------------------
\3\ Source: Federal Reserve Board, Flow of Funds, Table L.218.
---------------------------------------------------------------------------
The traditional structure of third-party mortgage servicing fees,
put in place well before this crisis, has created perverse incentives
to automate critical servicing activities and cut costs at the expense
of the accuracy, reliability and currency of loan documents and
information. Prior to the 1980s, the typical GSE mortgage pool paid a
servicing fee of 37.5 basis points annually, or .375 percent of the
outstanding principal balance of the mortgage pool. Since the 1980s,
the typical servicing fee for prime loans has been 25 basis points.
When Alt-A and subprime mortgages began to be securitized by private
issuers in the late 1990s, the standard servicing fees for those loans
were set higher, typically at 37.5 basis points for Alt-A loans and 50
basis points for subprime loans. While this fee structure provided a
steady profit stream for servicers when the number of defaulted loans
remained low, costs rose dramatically with the rise in mortgage
defaults in the latter half of the last decade. As a result, some
mortgage servicers began running operating losses on their servicing
portfolios. One result of a compensation structure that did not account
for the rise in problem loans was a built-in financial incentive to
minimize the investment in back office processes necessary to support
both foreclosure and modification. The other result was consolidation
in the servicing industry. The market share of the top 5 mortgage
servicers has nearly doubled since 2000, from 32 percent to almost 60
percent.\4\ The purpose and effect of consolidation is to cut costs and
achieve economies of scale, but also to increase automation.
---------------------------------------------------------------------------
\4\ Source: Inside Mortgage Finance.
---------------------------------------------------------------------------
Most PSAs allow for both foreclosure and modification as a remedy
to default. But servicers have continuously been behind the curve in
pursuing modification as an alternative to foreclosure. A survey of 13
mortgage servicers conducted by the State Foreclosure Prevention
Working Group shows that the annual percent of all past due mortgages
that are being modified has risen from just over 2 percent in late 2007
to a level just under 10 percent as of late 2009.\5\ At the same time,
the percentage of past due loans entering foreclosure each year has
also steadily risen over this same time period, from 21 percent to 32
percent.
---------------------------------------------------------------------------
\5\ Analysis of Mortgage Servicing Performance,'' Data Report No.
4, January 2010, State Foreclosure Prevention Working Group, http://
www.ohioattorneygeneral.gov/ForeclosureReport
Jan2010.
---------------------------------------------------------------------------
One example of the lack of focus on loss mitigation strategies is
the uncoordinated manner in which many servicers have pursued
modification and foreclosure at the same time. Under such a ``dual-
track'' process, borrowers may be attempting to file the documentation
needed to establish their qualifications for modification and waiting
for a favorable response from the servicer, even while that servicer is
at the same time executing the paperwork necessary to foreclose on the
property. While in some cases it may be reasonable to begin conducting
preliminary filings for seriously past due loans in states with long
foreclosure timelines, it is vitally important that the modification
process be brought to conclusion before a foreclosure sale is
scheduled. Failure to coordinate the foreclosure process with the
modification process risks confusing and frustrating homeowners and
could result in unnecessary foreclosures.
As described in the concluding section, we recommend that servicers
establish a single point of contact that can work with every distressed
borrower and coordinate all activities taken by the servicer with
regard to that particular case.
II. FDIC Efforts to Address Problems in Mortgage Servicing and
Foreclosure Prevention
Since the early stages of the mortgage crisis, the FDIC has made a
concerted effort to promote the early modification of problem mortgages
as a first alternative that can spare investors the high losses
associated with foreclosure, assist families experiencing acute
financial distress, and help to stabilize housing markets where
distressed sales have resulted in a lowering of home prices in a self-
reinforcing cycle.
In 2007, when the dimensions of the subprime mortgage problem were
just becoming widely known, I advocated in speeches, testimony and
opinion articles that servicers not only had the right to carry out
modifications that would protect subprime borrowers from unaffordable
interest-rate resets, but that doing so would often benefit investors
by enabling them to avoid foreclosure costs that could run as high as
40 percent or more of the value of the collateral. In addition, the
FDIC, along with other Federal regulators jointly hosted a series of
roundtables on the issues surrounding subprime mortgage securitizations
to facilitate a better understanding of problems and identify workable
solutions for rising delinquencies and defaults, including alternatives
to foreclosure.
More recently, the FDIC has been actively involved both in
investigating and addressing robo-signing and documentation issues at
insured depository institutions and their affiliates, ensuring that its
own loss-share partners are employing best practices in their servicing
operations, and implementing reforms that will better align the
financial incentives of servicers in future securitization deals.
Supervisory Actions
The FDIC is exercising both its primary and backup authorities to
actively address the issues that have emerged regarding banks'
foreclosure and ``robo-signing'' practices. The FDIC is the primary
Federal supervisor for nearly 5,000 State-chartered insured
institutions, where we monitor compliance with safety and soundness and
consumer protection requirements and pursue enforcement actions to
address violations of law. While the FDIC is not the primary Federal
regulator for the major loan servicers, our examiners are working
onsite under our backup authority as part of an interagency horizontal
review team at 12 of the 14 major mortgage servicers along with their
primary Federal regulators. This interagency review is also evaluating
the roles played by MERS and Lender Processing Services, a large data
processor used by many mortgage servicers.
The FDIC is committed to active participation in horizontal reviews
and other interagency efforts so we are able to have a comprehensive
picture of the underlying causes of these problems and the lessons to
be learned. The onsite reviews are finding that mortgage servicers
display varying degrees of performance and quality controls. Program
and operational deficiencies may be correctable in the normal course of
business for some, while others may need more rigorous system changes.
The level and adequacy of documentation also varies widely among
servicers. Where chain of title is not sufficiently documented,
servicers are being required to make changes to their processes and
procedures. In addition, some servicers need to strengthen audit,
third-party arrangements, and loss mitigation programs to cure lapses
in operations. However, we do not believe that servicers should wait
for the conclusion of the interagency effort to begin addressing known
weaknesses in internal controls and risk management. Corrective actions
on problems identified during a servicer's own review or the examiners'
review should be addressed as soon as possible. We expect each servicer
to properly review loan documents prior to initiating or conducting any
foreclosure proceedings, to adhere to applicable laws and regulations,
and to maintain appropriate policies, procedures and documentation. If
necessary, the FDIC will encourage the use of formal or informal
corrective programs to ensure timely action is taken.
Actions Taken as Receiver for Failed Institutions
In addition to our supervisory efforts, the FDIC is looking at the
servicing practices of institutions acquiring failed institutions under
loss-share agreements. To date there are $159.8 billion in loans and
securities involved in FDIC loss share agreements, of which $56.7
billion (36 percent) are single family loans. However, the proportion
of mortgage loans held by acquiring institutions that are covered by
loss share agreements is in some cases very small. For example, at One
West Bank, the successor to Indy Mac, only 8 percent of mortgages
serviced fall under the FDIC loss share agreement.
An institution that acquires a single-family loss-share portfolio
is required to implement a loan modification program, and also is
required to consider borrowers for a loan modification and other loss
mitigation alternatives prior to foreclosure. These requirements
minimize the FDIC's loss share costs. The FDIC monitors the loss-share
agreements through monthly and quarterly reporting by the acquiring
bank and semiannual reviews of the acquiring bank. The FDIC has the
right to deny or recover any loss share claim where the acquiring
institution is unable to verify that a qualifying borrower was
considered for loan modification and that the least costly loss
mitigation alternative was pursued.
In connection with the recent foreclosure robo-signing revelations,
the FDIC contacted all of its loss-share partners. All partners
certified that they currently comply with all State and Federal
foreclosure requirements. We are in the process of conducting a Loan
Servicing Oversight audit of all loss-share partners with high volumes
of single-family residential mortgage loans and foreclosures. The FDIC
will deny any loss-share payments or seek reimbursement for any
foreclosures not compliant with State laws or not fully remediated,
including noncompliance with the loss-share agreements and loan
modification requirements.
Regulatory Actions to Reform Mortgage Securitization
We also are taking steps to restore market discipline to our
mortgage finance system by doing what we can to reform the
securitization process. In July of this year, the FDIC sponsored its
own securitization of $471 million of single-family mortgages. In our
transaction, we addressed many of the deficiencies in existing
securitizations. First, we ensured that the servicer will make every
effort to work with borrowers in default, or where default is
reasonably foreseeable. Second, the servicing arrangements in these
structured loan transactions have been designed to address shortcomings
in the traditional flat-rate structures for mortgage servicing fees.
Our securitization pays a base dollar amount per loan per year,
regardless of changes in the outstanding balance of that loan. In
addition, the servicing fee is increased in the event the loan becomes
more complex to service by falling past due or entering modification or
foreclosure. This fee structure is much less likely to create
incentives to slash costs and rely excessively on automated or
substandard processes to wring a profit out of a troubled servicing
portfolio. Third, we provided for independent, third party oversight by
a Master Servicer. The Master Servicer monitors the Servicer's overall
performance and evaluates the effectiveness of the Servicer's
modification and loss mitigation strategies. And, fourth, we provided
for the ability of the FDIC, as transaction sponsor, the Servicer and
the Master Servicer to agree on adapting the servicing guidelines and
protocols to unanticipated and significant changes in future market
conditions.
The FDIC has also recently taken the initiative to establish
standards for risk retention and other securitization practices by
updating its rules for safe harbor protection with regard to the sale
treatment of securitized assets in failed bank receiverships. Our final
rule, approved in September, establishes standards for disclosure, loan
quality, loan documentation, and the oversight of servicers. It will
create a comprehensive set of incentives to assure that loans are made
and managed in a way that achieves sustainable lending and maximizes
value for all investors. In addition, the rule is fully consistent with
the mandate under the Dodd-Frank Act to apply a 5 percent risk-
retention requirement on all but the most conservatively underwritten
loans when they are securitized.
We are currently working on an interagency basis to develop the
Dodd-Frank Act standards for risk retention across several asset
classes, including requirements for low risk ``Qualifying Residential
Mortgages,'' or QRMs, that will be exempt from risk retention. These
rules allow us to establish a gold standard for securitization to
encourage high-quality mortgages that are sustainable for the long
term. This rulemaking process also provides a unique opportunity to
better align the incentives of servicers with those of mortgage pool
investors.
We believe that the QRM rules should authorize servicers to use
best practices in mitigating losses through modification, require
compensation structures that promote modifications, and direct
servicers to act for the benefit of all investors. We also believe that
the QRM rules should require servicers to disclose any ownership
interest in other whole loans secured by the same real property, and to
have in place processes to deal with any potential conflicts. Some
conflicts arise from so-called ``tranche warfare'' that reflects the
differing financial interests among the holders of various mortgage
bond tranches. For example, an investor holding the residual tranche
typically stands to benefit from a loan modification that prevents
default. Conversely, the higher rated tranches might be better off if a
servicer foreclosed on the property forcing losses to be realized at
the expense of the residual tranche. A second type of conflict
potentially arises when a single company services a first mortgage for
an investor pool and the second mortgage for a different party, or for
itself. Serious conflicts such as this must be addressed if we are to
achieve meaningful long-term reform of the securitization process.
Therefore, the FDIC believes it would be extremely helpful if the
definition of a QRM include servicing requirements that, among other
things:
grant servicers the authority and provide servicers
compensation incentives to mitigate losses on residential
mortgages by taking appropriate action to maximize the net
present value of the mortgages for the benefit of all investors
rather than the benefit of any particular class of investors;
establish a pre-defined process to address any subordinate
lien owned by the servicer or any affiliate of the servicers;
and
require disclosure by the servicer of any ownership
interest of the servicer or any affiliate of the servicer in
other whole loans secured by the same real property that
secures a loan included in the pool.
Risk retention rules under the Dodd-Frank Act should also create
financial incentives that promote effective loan servicing. The best
way to accomplish this is to require issuers--particularly those who
also are servicers--to retain an interest in the mortgage pool that is
directly proportional to the value of the pool as a whole. Frequently
referred to as a ``vertical slice,'' this form of risk retention would
take the form of a small, proportional share of every senior and
subordinate tranche in the securitization, creating a combined
financial interest that is not unduly tilted toward either senior or
subordinate bondholders.
III. The FSOC Should Play a Central Role in Developing Solutions
What started a few months ago as technical documentation issues in
the foreclosure process has grown into something more serious and
potentially damaging to the nation's housing recovery and to some of
our largest institutions. First, a transparent, functioning foreclosure
process is unfortunately necessary to the recovery of our housing
market and our economy. Second, the mortgage documentation problems
cast a cloud of uncertainty over the ownership rights and obligations
of mortgage borrowers and investors. Further, there are numerous
private parties and government entities that may have significant
claims against firms central to the mortgage markets.
While we do not see immediate systemic risk, the clear potential is
there. The FSOC was established under the Dodd-Frank Act to deal with
just this type of emerging risk. Its mandate includes identifying risks
to financial stability and potential gaps in regulation and making
recommendations for primary regulators and other policymakers to take
action to mitigate those risks. As such, these issues represent just
the type of problem the FSOC was designed to address. In addition, the
difficulties that have been experienced to date in coordinating a
Government policy response speak to the need for central role by the
FSOC in negotiating workable solutions with the major parties that have
a stake in the outcome.
The FSOC is in a unique position to provide needed clarity to the
market by coordinating consistent interpretations of what standards
should be applied to establishing the chain of title for mortgage loans
and recognizing the true sale of mortgage loans in establishing private
securitization trusts. The constituent agencies that make up the FSOC
also have their own authorities that can be used to provide clarity of
this type. Examples include rulings on standards that determine the
tax-exempt status of mortgage trusts and standards for the recognition
of true sale in a failed bank receivership, which the FDIC recently
updated in its safe harbor regulation.
We need broad agreements between representatives of the major
stakeholders affected by this issue so that the uncertainties
associated with this issue can be resolved as quickly as possible.
Outlined below are some of the principles I believe should be part of
any broad agreement among the stakeholders to this issue.
1. Establish a single point of contact for struggling homeowners.
Servicers should identify a single person to work with
homeowners once it becomes evident the homeowner is in
distress. This single point of contact must be appropriately
authorized to provide current, accurate information about the
status of the borrower's loan or loan modification application,
as well as provide a sign-off that all loan modification
efforts have failed before a foreclosure sale. This will go a
long way toward eliminating the conflicts and miscommunications
between loan modifications and foreclosures in today's dual-
track system and will provide borrowers assurance that their
application for modification is being considered in good faith.
2. Expand and streamline private loan modification efforts to
increase the number of successful modifications. To accomplish
this end, servicers should be required to intervene with
troubled borrowers from the earliest stages of delinquency to
increase the likelihood of success in foreclosure mitigation.
Modifications under such programs should significantly reduce
the monthly payment through reductions in the interest rate and
principal balance, as needed, to make the mortgage affordable
over the long term. Analysis of modifications undertaken in the
FDIC program at Indy Mac Federal Bank has shown that modifying
loans when they are in the early stages of delinquency and
significantly reducing the monthly payment are both factors
that promote sustainable modifications that perform well over
time. In exchange for the creation of highly simplified
modification programs, mortgage servicers should have a ``safe
harbor'' that would give them assurance that their claims will
be recognized if foreclosure becomes unavoidable. In addition,
streamlined modification programs should be recognized as a
best practice in adjudicating disputes with mortgage investors.
3. Invest appropriate resources to maintain adequate numbers of
well-trained staff. Broad agreements should require servicers
to hire and train sufficient numbers of staff to professionally
process applications for loan modifications. Further, servicers
should be required to improve information systems to help
manage and support the workload associated with loan
modifications.
4. Strengthen quality control processes related to foreclosure and
loan servicing activities. Some servicers need to make
fundamental changes to their practices and programs to fulfill
their responsibilities and satisfy their legal obligations. Lax
standards of care and failure to follow longstanding legal
requirements cannot be tolerated. Regulators must vigorously
exercise their supervisory tools to ensure that mortgage
servicers operate to high standards. Servicers need to
institute strong controls to address defective practices and
enhance programs to regain integrity of their operations. Where
severe deficiencies are found, the servicers should be required
to have independent third-party monitors evaluate their
activities to ensure that process changes are fully implemented
and effective. Servicers must also fully evaluate and account
for their risks relating to their servicing activities,
including any costs stemming from weaknesses in their
operations.
5. Resolve the challenges created by second liens. Since the early
stages of the mortgage crisis, second liens have been an
obstacle to effective alternatives to foreclosure, including
loan modification and short sales. We must tackle the second
lien issue head on. One option is to require servicers to take
a meaningful write-down of any second lien if a first mortgage
loan is modified or approved for a short sale. All of the
stakeholders must be willing to compromise if we are to find
solutions to the foreclosure problem and lay the foundation for
a recovery in our housing markets.
Conclusion
We must restore integrity to the mortgage servicing system. We need
a mandate for dramatically simplified loan modifications so that
unnecessary foreclosures can be avoided. Servicers need to establish a
single point of contact to coordinate their communication with
distressed borrowers. They also need to invest appropriate resources
and strengthen quality control processes related to loan modification
and foreclosure. We must finally tackle the second liens head on, by
requiring servicers to impose meaningful write-downs on second lien
holders when a first mortgage is modified or approved for a short sale.
This is the time for all parties to come together and arrive at
broad agreements that will reduce uncertainty and lay the foundation
for long-term stability in our mortgage and housing markets. The FSOC
has a unique role to play in addressing the situation and can provide
needed clarity on issues such as standards for recognizing true sale in
securitization trusts.
Again, thank you for the opportunity to testify on this important
issue. I look forward to your questions.
______
PREPARED STATEMENT OF DANIEL K. TARULLO
Member, Board of Governors of the Federal Reserve System
December 1, 2010
Mr. Chairman, Ranking Member Shelby, and other Members of the
Committee, thank you for your invitation to this morning's hearing on
problems in mortgage servicing.
In the first portion of my testimony, I will explain our current
understanding of the nature and extent of the deficiencies in mortgage
documentation that have been so apparent in the robo-signing
misconduct, as well as what the banking agencies are doing in support
of a broader interagency effort to develop a full picture of these
problems. I also want to address the issue of so-called put backs of
mortgage-backed securities (MBS) to mortgage originators or
securitization sponsors. Though only indirectly related to robo-signing
and associated servicing flaws, financial exposure resulting from put
backs could be more significant for some institutions than that from
documentation flaws.
In the second portion of my testimony, I will turn to the question
of appropriate policy responses--with respect to specific regulated
financial institutions, to supervisory practices more generally, and to
the structural problems we have observed in the mortgage servicing
industry, including the discouragingly sluggish pace of mortgage
modifications. This last point is a matter of concern not only because
of its significance for the millions of American families who are
unable to maintain their mortgage payments on homes that have lost
considerable value in recent years, but also because of the importance
from a macroeconomic perspective of realizing as quickly and
efficiently as possible a clearing of housing prices, which would help
create the conditions for a market recovery.
Mortgage Documentation and other Servicing Issues
Foreclosure is a legal process initiated to terminate a borrower's
interest in a property and is permitted only when the borrower has
defaulted on the debt obligation for a specified period. The process
allows the lender to sell the property and use the proceeds to satisfy
the borrower's unpaid debt to the extent it is secured by the property.
Foreclosure requirements are generally established by State laws and
each State has its own statutes, rules, and court decisions pertaining
to foreclosures.
Some 23 states, known as judicial foreclosure states, require
foreclosures to be reviewed and approved by a court. Nonjudicial
foreclosure states have different processes for foreclosures that do
not require the creditor to obtain court approval for a foreclosure,
but instead impose varying waiting periods and documentation, filing,
and notice requirements after a default occurs and before a foreclosure
sale may take place. In nonjudicial foreclosure states, the homeowner
typically has access to the court in a foreclosure matter only if the
homeowner initiates a suit to stop the foreclosure process or seeks
protection in a bankruptcy court.
Because mortgage servicers maintain the official accounting of all
amounts paid and owed by borrowers, they serve as the critical link
between borrowers and mortgage holders. In addition, servicers manage
loan defaults, including the negotiation of loan modification and
repayment plans with borrowers. Should the servicer decide to initiate
foreclosure, it would often do so as the agent for third parties, such
as securitization trusts. In this regard, servicers have
responsibilities to investors holding residential MBS. Servicers also
have responsibilities to borrowers to maintain accurate and complete
records of payments received, amounts advanced, notifications made to
borrowers, and changes of payment terms with respect to any mortgage
modification discussions.
Foreclosure documentation typically requires an assertion that the
agent bringing forth the action has the legal right to foreclose and
that the loan is in default. The document filings contain details of
the transactions and the amounts owed. These documents typically
include attestations signed by individuals who have personal knowledge
of the facts and who are properly authorized to make such assertions.
In most jurisdictions, the documents must be signed by these
individuals in the presence of a notary, following proper notarization
procedures. Lenders and servicers are responsible for ensuring that the
individuals who sign these documents are duly authorized and have
appropriate knowledge of the facts and circumstances. In addition,
lenders and servicers are responsible for ensuring the accuracy of
records and the facts recited in the foreclosure documents.
State and local laws govern the recordation process for real estate
transfers and mortgage filings and assignments. Given the multiple
sales and assignments of mortgage loans that often occur, concerns have
been raised regarding investors' or servicers' rights to initiate
foreclosure actions. Although State-by-State practices vary
considerably, generally the noteholder has the right to initiate
foreclosure, once default has occurred, if an original note can be
produced and the current holder's ownership is verified. If there is no
controversy concerning ownership of the note, but rather an inability
to locate original documents, processes usually allow for foreclosure
to proceed, albeit at some cost and delay. If there is some question of
ownership, the investor or servicer may be required to produce evidence
of ownership before a foreclosure can proceed.
Since matters regarding real estate titles and foreclosures are
generally governed by State law, State attorneys general are
undertaking a joint review of lenders and servicers focusing on the
reported problems in foreclosures. In addition, numerous Federal
agencies have launched investigations, including the examinations in
process by the Federal financial regulators.
The Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, and the Federal
Reserve are conducting an in-depth review of practices at the largest
mortgage servicing operations. The interagency examinations and reviews
focus on foreclosure practices generally, but with an emphasis on the
internal control breakdowns that led to inaccurate affidavits and other
questionable legal documents being used in the foreclosure process. The
agencies are reviewing firms' policies, procedures, and internal
controls, including sampling loan files. We have also solicited the
views of consumer organizations to help detect problems at specific
servicers. The agencies expect the initial onsite portion of our work
to be completed by the end of the year. The agencies plan to publish a
summary overview in early 2011 that will describe the range of industry
practices found in the examinations and identify weaknesses requiring
remediation.
The Federal Reserve has supervisory and regulatory authority for
bank holding companies and their nonbank subsidiaries, as well as for
approximately 800 State-chartered banks that are members of the Federal
Reserve System (State member banks), and certain other financial
institutions and activities. We work with other Federal and State
supervisory authorities to ensure the safety and soundness of the
banking industry, foster the stability of the financial system, and
provide for fair and equitable treatment of consumers in their
financial transactions. The Federal Reserve is engaged in both
regulation, which involves establishing the rules within which banking
organizations must operate, and supervision, which involves reviewing
the efforts of banking organizations to abide by those rules and
remain, overall, in safe and sound condition.
The Federal Reserve serves as the primary Federal regulator for two
of the 10 largest servicers affiliated with banking organizations, one
a holding company affiliate and the other a State member bank. The
Federal Reserve is participating with the other Federal banking
agencies in examining the foreclosure policies and practices of the
other large institutions. For additional information on foreclosure
processes, we have sent a self-assessment questionnaire to other
Federal Reserve-regulated institutions that engage in mortgage
servicing but are not part of the interagency examination effort.
While quite preliminary, the banking agencies' findings from the
supervisory review suggest significant weaknesses in risk-management,
quality control, audit, and compliance practices as underlying factors
contributing to the problems associated with mortgage servicing and
foreclosure documentation. We have also found shortcomings in staff
training, coordination among loan modification and foreclosure staff,
and management and oversight of third-party service providers,
including legal services. It is for this reason that we expanded the
review to include an examination of pre-foreclosure loans, or those
past due but not yet in the foreclosure process, and certain third-
party service providers. As examiners identify weaknesses, they will
require firms to take remedial action and, when necessary, require
servicers to address resource shortfalls, training and coordination
problems, and control failures.
It is important to recognize that the extent of these problems is
not the same across all firms. Nonetheless, the problems are
sufficiently widespread that they suggest structural problems in the
mortgage servicing industry. The servicing industry overall has not
been up to the challenge of handling the large volumes of distressed
mortgages. The banking agencies have been focused for some time on the
problems related to modifying mortgage loans and the large number of
consumer complaints by homeowners seeking loan modifications. It has
now become evident that significant parts of the servicing industry
also failed to handle foreclosures properly.
While we are still in the process of determining the extent of
these problems and the required supervisory response, it is clear that
the industry will need to make substantial investments to improve its
functioning in these areas and supervisors must ensure that these
improvements occur. Moreover, fixing the problems in the mortgage
servicing industry may also require thinking about some fundamental
structural changes to the current mortgage system. I will discuss the
issue of structural solutions to these issues in more detail later in
my testimony.
Investor Repurchase Requests
The cost associated with foreclosure documentation problems,
including robo-signing, are not the only potential liabilities facing
financial institutions in the wake of the mortgage and housing crisis.
As losses in MBS have been escalating, investors in MBS and purchasers
of unsecuritized whole loans are more frequently exploring, and in some
cases asserting, contractual and securities law claims against the
parties that originated the loans, sold the loans, underwrote
securities offerings, or had other roles in the process. The essence of
these claims is that mortgages in the securitization pools, or sold as
unsecuritized whole loans, did not conform to representations and
warranties made about their quality--specifically that the loan
applications contained misrepresentations or the underwriting was not
in conformance with stated standards.
The potential liability associated with contract claims in
securitizations is usually called put back risk because many of the
relevant agreements permit the buyer of the mortgages to put them back
to the seller at par. Buyers can demand that the seller or another
party that makes representations repurchase the mortgages if defects
are found in the underlying loan documentation or in the underwriting
that conflict with the sale agreements. Although the representations
and warranties in the various agreements vary considerably, they
frequently require that the defect materially and adversely affect the
value of the loan before put back rights can be exercised. At the time
of the put back, the mortgage loan may have become seriously delinquent
or entered into default. Because underperforming mortgages are
typically valued substantially less than par, the put back transfers
any potential loss from the buyer back to the original seller or
mortgage securitizer.
Given the poor performance of the mortgage assets, investors,
including the Government Sponsored Enterprises (GSEs), have sought to
pursue put back claims through various legal avenues, including
requesting that mortgage servicers provide underlying mortgage files
and the requisite documents. A GSE will generally buy a loan out of an
MBS pool when the loan becomes 120 days delinquent. The GSE will then
conduct a review of the delinquent loan file, and if it finds that the
loan did not comply with its underwriting standards, it will request
that the loan be repurchased by the originator/seller or that the GSE
be made whole on any credit losses incurred.
During the third quarter of 2010, Fannie Mae collected $1.6 billion
in unpaid principal balance (UPB) from originators, and currently has
$7.7 billion UPB in outstanding repurchase requests, $2.8 billion of
which has been outstanding for more than 120 days. Freddie Mac has $5.6
billion UPB in outstanding repurchase requests, $1.8 billion of which
has been outstanding for more than 120 days. As of the third quarter of
2010, the four largest banks held $9.7 billion in repurchase reserves,
most of which is intended for GSE put backs.
There are also pending claims by some investors alleging that
underwriters and sponsors of securitizations failed to comply with the
Federal securities laws covering the offering documents and
registration statements. These suits specifically reference
descriptions of the risks to investors, the quality of assets in the
securitization, the order in which investors would be paid, or other
factors. Most of these lawsuits are in the early stages, and it is
difficult to ascertain the probability that investors will be able to
shift a substantial portion of the losses on defaulted mortgages back
to the parties that sold the loans or underwrote the offerings.
While the full extent of put back exposure is for this reason hard
to specify with precision, the risk has been known for some time and
has been an ongoing focus of supervisory oversight at some
institutions. However, in light of recent increased investor activity,
the Federal Reserve has been conducting a detailed evaluation of put
back risk to financial institutions. We are asking institutions that
originated large numbers of mortgages or sponsored significant MBS to
assess and provide for these risks as part of their overall capital
planning process.
Supervisory Responses
The revelation of documentation flaws in foreclosure processes
raise two kinds of questions for supervisors: First, what actions are
appropriate and sufficient to respond to problems identified at
specific regulated banking organizations? Second, what does the failure
of supervisory examinations to uncover these flaws counsel for future
supervisory practice?
With respect to the question of actions aimed at specific
institutions, the Federal Reserve and the other Federal banking
agencies have significant supervisory and enforcement tools that can be
used to address certain types of deficiencies in the foreclosure and
mortgage transfer process. For example, numerous enforcement tools are
available to address safety and soundness issues such as inadequate
controls and processes, weaknesses in risk-management and quality
control, and certain types of compliance weaknesses in foreclosure
operations. These tools include supervisory enforcement actions that
require an institution to correct deficient operations in a prescribed
period of time and Civil Money Penalties (CMPs) for egregious actions.
The agencies may also lower examination ratings, which can result in
limiting the permissible activities and affiliations of financial firms
and trigger other supervisory reviews and limitations, and restrict the
ability of institutions to expand. The agencies also have the authority
to assess CMPs on individuals who are responsible for violations, to
issue cease and desist orders on responsible individuals, or, if the
statutory criteria are met, to remove them from banking. In addition,
we may make referrals to law enforcement agencies, or require
institutions to file Suspicious Activity Reports, as appropriate.
Although the examinations are not yet fully completed, based on
what we have already learned, the Federal Reserve expects to use many
or all of these tools through the course of our review of foreclosure
and other mortgage matters. In particular, the Federal Reserve has
already emphasized to the industry and to institutions we supervise the
importance of addressing identified weaknesses in risk-management,
quality control, audit, and compliance practices. The problems that are
evident to date raise significant reputation and legal risk for the
major mortgage servicers. These weaknesses require immediate remedial
action. They will also affect the rating assigned by Federal Reserve
supervisors to management of bank holding companies, even where the
servicing activity was in a banking subsidiary of a holding company. In
addition, the Federal banking agencies expect that employees are
adequately trained and have sufficient resources to appropriately
review the facts and circumstances of files when preparing documents,
and that legal processes are fully and properly followed. Banking
organizations also must ensure quality control for third-party service
providers, including legal services.
With respect to future supervisory practice more generally, two
points for increased emphasis are already apparent. First, this episode
has underscored the importance of our using the new authority given the
Federal Reserve in the Dodd-Frank Wall Street Reform and Consumer
Protection Act to send our examiners into non-bank affiliates of large
bank holding companies, including those in large institutions that have
become bank holding companies only in the last couple of years.
Second, our experience suggests that the utility of examining and
validating internal control processes within firms may extend beyond
improvements to the specific processes subject to the exam. We have
found that problems in foreclosure practices do not seem as pervasive
in institutions in which we had previously examined other internal
control processes, found shortcomings, and insisted on corrective
action. While we would not draw strong conclusions from such a limited
experience, it seems possible that a firm may improve its general
approach to control processes once it has been required to remedy
problems in discrete areas. If this relationship is borne out, it could
be a significant advance in supervisory practice, insofar as resource
constraints will always limit the number of supervisory examinations.
Possible Need for Structural Solutions
Beyond remedial or punitive measures directed at specific firms and
future-oriented changes in supervisory practice, structural solutions
may be needed to address the range of problems associated with mortgage
servicing. Similarly, the foreclosure documentation problems are
another reminder of the degree to which foreclosure has been preferred
to mortgage modification, notwithstanding various efforts to change
this imbalance. Here again, a more structural solution may be needed.
The explosive growth of securitization as a vehicle for financing
mortgages was accompanied by the emergence of a sizable mortgage
servicing industry--that is, a group of firms servicing mortgages that
they did not own or, in many cases, that they had not originated. While
there have surely been economies associated with this industry, there
have also been chronic problems. It has been increasingly apparent that
the inadequacy of servicer resources to deal with mortgage
modifications--an area that was a point of supervisory emphasis--was
actually a reflection of a larger inability to deal with the challenges
entailed in servicing mortgages in many jurisdictions and dealing with
a complicated investor base. For example, foreclosure procedures are
specifically the province of real property law governed by the states,
and can vary not only by State, but also within states and sometimes
even within counties. With or without regulatory changes, it is quite
probable that servicer fees to securitization trusts will increase to
reflect the costs associated with the complexities of the contemporary
mortgage model.
The impetus for change in the mortgage servicing industry is likely
only to increase as the advantages of servicing rights for regulatory
capital purposes become limited after the new Basel III requirements
are implemented.\1\ It is possible that servicing issues can be
satisfactorily addressed through the actions of the various primary
regulators. However, in light of the range of problems already
encountered, and the prospect of further changes in the industry--
including the possible migration of more servicing activity to non-
banking organizations--it seems reasonable at least to consider whether
a national set of standards for mortgage servicers may be warranted.
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\1\ The proposed Basel III capital rules would simultaneously
introduce a specific minimum common equity ratio and define ``common
equity'' so as to limit or exclude consideration of items that may not
provide the loss absorbing capacity that common equity is supposed to
represent.
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The case for concerted, coordinated action is much clearer with
respect to the slow-moving pace of mortgage modifications. Regardless
of the findings that emerge from the examinations underway, and
remedial actions required to correct past mistakes, this episode has
again drawn attention to what can only be described as a perverse set
of incentives for homeowners with underwater mortgages. Homeowners who
try to obtain a modification of the terms of their mortgages are all
too frequently subject to delay and disappointment, while those who
simply stop paying their mortgages have found that they can often stay
in their homes rent free for a time before the foreclosure process
moves ahead. Moreover, many homeowners believe, reportedly on the basis
of communications from servicers, that the only way they can qualify
for modifications is by stopping their mortgage payments and thus
becoming delinquent.
Quite apart from the impact upon families who lose their homes, the
dominance of foreclosures over modifications raises macroeconomic
concerns. The number of foreclosures initiated on residential
properties has soared from about 1 million in 2006, the year that house
prices peaked, to 2.8 million last year. Over the first three quarters
of this year, we have seen a further 2 million foreclosure filings, and
an additional 2.3 million homes were in foreclosure at the end of
September. All told, we expect about 2.5 million foreclosure filings
this year and next year and about 2.4 million more in 2012. While our
outlook is for filings to decline in coming years, they will remain
high by historical standards. Currently, more than 4.5 million mortgage
loans are 90 days or more past due or in foreclosure. These numbers
compare to just 520,000 permanent loan modifications executed under the
Treasury Department's Home Affordable Modification Program (HAMP) and
an additional 1.6 million proprietary loan modifications by servicers
participating in the HOPE NOW Alliance program.\2\
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\2\ Written testimony of Phyllis Caldwell, Chief of Homeownership
Preservation Office, U.S. Department of the Treasury, before the House
Financial Services Subcommittee on Housing and Community Opportunity
hearing on ``Robo-Signing, Chain of Title, Loss Mitigation and Other
Issues in Mortgage Servicing,'' November 18, 2010.
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The Federal Reserve believes that in most cases the best way to
assist struggling borrowers is a mortgage modification allowing them to
retain their home with an affordable mortgage payment. In a housing
market where values have declined so much, following a period in which
all actors relied upon rising house prices to sustain mortgage
practices, foreclosures simply do not make sense as a preferred
response. Foreclosures are costly to all parties and more broadly to
our economy. Lenders and investors incur financial losses arising from
the litigation expenses associated with the foreclosure process and the
loss on the defaulted mortgage when the foreclosed property sells at a
liquidation price that is substantially less than the loan balance.
Local governments must contend with lower property tax revenue and the
ramifications of neglected properties that may threaten public safety.
Additionally, neighbors and neighborhoods suffer potential spillover
effects from foreclosure sales because foreclosures may reduce the
attractiveness of the neighborhood or may signal to potential buyers a
forthcoming decline in neighborhood quality. In the end, an overhang of
homes awaiting foreclosure is unhealthy for the housing market and can
delay a recovery in housing markets and the broader economy.
Several possible explanations have been suggested for the
prominence of foreclosures: the lack of servicer capacity to execute
modifications, purported financial incentives for servicers to
foreclose rather than modify, what until recently appeared to be easier
execution of foreclosures relative to modifications, limits on the
authority of securitization trustees, and conflicts between primary and
secondary lien holders. Whatever the merits and relative weights of
these various explanations, the social costs of this situation are
huge. It just cannot be the case that foreclosure is preferable to
modification for a significant proportion of mortgages where the
deadweight costs of foreclosure, including a distressed sale discount,
are so high. While some banks and other industry participants have
stepped forward to increase the rate of modifications relative to
foreclosures, many have not done enough. We need renewed attention in
many quarters of government and the financial industry, and among
investors in mortgage-backed securities, to the lagging incidence of
modifications.
Conclusion
In conclusion, I regret to say that the hangover from the housing
bubble of this past decade is still very much with us, as revealed both
in the inadequate capacity of mortgage servicers and the continued
impact of foreclosed homes on the housing market. While bank regulatory
agencies can and should respond to specific failings that are being
identified in our interagency examination, there is a strong case to be
made that broader solutions are needed both to address structural
problems in the mortgage servicing industry and to accelerate the pace
of mortgage modifications or other loss mitigation efforts. Thank you
very much for your attention. I would be happy to answer any questions
you might have.
______
PREPARED STATEMENT OF JOHN WALSH *
Acting Comptroller of the Currency
Comptroller of the Currency
December 1, 2010
Introduction
---------------------------------------------------------------------------
*Statement Required by 12 U.S.C. 250:
The views expressed herein are those of the Office of the
Comptroller of the Currency and do not necessarily represent the views
of the President.
---------------------------------------------------------------------------
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
I appreciate this opportunity to discuss recently reported
improprieties in the foreclosure processes used by several large
mortgage servicers and actions that the Office of the Comptroller of
the Currency (OCC) is taking to address these issues where they involve
national banks. The occurrences of improperly executed documents and
attestations raise concerns about the overall integrity of the
foreclosure process. The loss of one's home is personally and
financially traumatic for a borrower. Laws in each State establish the
requirements and process by which that action may be taken. When that
due process is not followed, it is not a technicality; it goes to the
propriety of the foreclosure itself. The unacceptable practices that
have been identified in the past several months warrant the thorough
investigation that is now underway by the OCC, other Federal bank
regulators, and other agencies, and demand an appropriate and vigorous
response.
The OCC supervises all national banks and their operating
subsidiaries, including their mortgage servicing operations. The
servicing portfolios of the eight largest national bank mortgage
servicers\1\ account for approximately 63 percent of all mortgages
outstanding in the United States--nearly 33.3 million loans totaling
almost $5.8 trillion in principal balances as of June 30, 2010.
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\1\ Bank of America, Citibank, JPMorgan Chase, HSBC, MetLife, PNC,
Wells Fargo, and U.S. Bank.
---------------------------------------------------------------------------
To date, six large national bank servicers have publicly
acknowledged procedural deficiencies in their foreclosure processes.
The lapses that have been reported represent a serious operational
breakdown in foreclosure governance and controls that national banks
should maintain. These lapses are unacceptable, and we are taking
aggressive actions to hold national banks accountable, and to get these
problems fixed. As soon as the problems at Ally Bank came to light, we
directed the largest national bank mortgage servicers under our
supervision to review their operations, to take corrective action to
remedy identified problems, and to strengthen their foreclosure
governance to prevent reoccurrences. At the same time, we initiated
plans for intensive, onsite examinations of the eight largest national
bank mortgage servicers. Through these examinations we are
independently testing the adequacy of governance over their foreclosure
processes to ensure foreclosures are completed in accordance with
applicable legal requirements and that delinquency affidavits and
claims that are the basis for the foreclosure are accurate.
As part of our examinations we also are reviewing samples of
individual loan files where foreclosures have either been initiated or
completed to test the validity of bank self assessments and corrective
actions, and to determine whether troubled borrowers were considered
for loss mitigation alternatives such as loan modifications prior to
foreclosure. We have likewise instructed examiners to be alert to, and
document, any practices such as misapplied payments, padded fees, and
inappropriate application of forced placed insurance as part of these
file reviews. Should we find evidence of such occurrences, we will take
appropriate action. Our examinations are still on-going.
My testimony provides a brief discussion of how the OCC regulates
national bank mortgage servicing operations, the recently publicized
foreclosure problems, and our most recent findings on trends in
modifications, alternatives to modifications, and foreclosures from the
OCC and OTS Mortgage Metrics Report. I then describe the OCC's actions
with respect to loan modifications and problems that have arisen in the
foreclosure process.
OCC Supervision of Mortgage Servicers
The Committee's invitation letter requested that my testimony
include an explanation of how the OCC regulates national bank mortgage
servicing operations. Mortgage banking at the largest national banks is
a high-volume, operationally intensive business that requires
specialized supervision. The majority of the mortgage banking assets in
the national banking system fall under our Large Bank Supervision
program, characterized by a continuous onsite examiner presence that
includes specialists in the mortgage banking, retail credit, consumer
compliance, and operational risk areas. Our resident examiner teams are
supplemented by subject matter specialists in our Policy, Legal, and
Economics divisions, each of whom brings specialized expertise to
supervision of our mortgage companies.
Direct supervision is largely based upon supervisory strategies
developed for each institution that are risk-based and focused on the
more complex issues. The first step is to identify the most significant
risks and determine whether a bank has systems and controls to identify
and manage exposures. Next, we assess the integrity and effectiveness
of the bank's internal risk management systems and audit, with
appropriate validation through transaction testing. This is
accomplished through a combination of ongoing monitoring and targeted
examinations. The targeted examinations validate that risk management
systems and processes are functioning as expected and do not present
significant supervisory concerns. Supervisory strategies will be
revised, as necessary, to expediently address newly identified or
emerging risks or concerns, whether at an individual bank or
systemically across the banking system.
Examiners generally do not directly test standard business
processes or practices, such as the validity of signed contracts, or
the processes used to notarize documents or the actual physical
presence of notes with document custodians, unless there is evidence of
a material weakness or breakdown in governance and internal controls
over these activities. In making such a determination, examiners will
review on-going quality control activities, internal or third-party
audits, consumer complaints and relevant publicly available
information. As warranted, our supervisory activities at individual
banks will often be supplemented with horizontal reviews of targeted
areas of heightened risk across a group of banks, as with the
horizontal review of foreclosure processes currently underway.
Our supervisory conclusions, including any risk management
deficiencies, are communicated directly to bank senior management.
Thus, not only is there ongoing evaluation, but also a process for
timely and effective corrective action when needed. If warranted, these
concerns are communicated to management and the Board as ``Matters
Requiring Attention'' (``MRAs'') in supervisory communications. If
these concerns are not appropriately addressed within a reasonable
period, we have a variety of tools with which to respond, ranging from
informal supervisory actions directing corrective measures to formal
enforcement actions.
Current Foreclosure Problems
The current foreclosure problems represent another painful chapter
of the recent financial crisis, stemming from a record number of
borrower defaults which has strained servicer capacity to provide loss
mitigation activities to troubled borrowers and ensure a large and
growing number of foreclosures are properly processed.
The concerns about improper foreclosure practices initially
centered on two issues that deal with the documentation required to
effect foreclosure actions. The first issue involves requirements under
some State laws for individuals to sign affidavits attesting personal
knowledge of the accuracy and completion of required documentation
essential to a valid foreclosure proceeding. The second issue is
whether, in similar situations where required by State law, individual
notaries may have violated procedures in notarizing documentation by,
for example, notarizing the documents after they had been signed,
rather than in the presence of the individual signing the affidavit. As
the situation has evolved, concerns have broadened to include the
accuracy of all information underlying the foreclosure process, and the
physical possession and control over documents necessary to foreclose
on a home. Our examinations are investigating all of these issues.
The signing and attestation of foreclosure documents are steps
required by various State laws that govern the legal completion of a
foreclosure proceeding-and as such, typically represent the final steps
in what is a very lengthy and resource intensive process that banks
undertake to deal with seriously delinquent borrowers. The time to
complete a foreclosure process in most states can take 15 months or
more and in many cases can be as long as 2 years. Foreclosure
completion timelines are generally set by investors such as Fannie Mae
and Freddie Mac, and there are penalties that they may impose on
servicers that do not meet the timelines mandated by these investors.
The specific requirements and the legal standards applied for
determining personal knowledge vary across judicial foreclosure states,
and thus require servicers to ensure that their processes conform to
individual State, or in some cases, local law. To assist with meeting
these requirements, mortgage servicers often outsource some of the
requisite legal work to law firms familiar with local standards and
other third parties for input and review. Fannie Mae and Freddie Mac in
fact require servicers to use law firms approved for particular
geographies when preparing foreclosure filings. For large mortgage
servicers that operate nationwide, this often has resulted in use of a
significant number of third parties--lawyers and other service
providers--and a panoply of documents used in their mortgage
foreclosure processes: one large mortgage servicer has indicated that
they use over 250 different affidavit forms. These operational
challenges, however, do not absolve the banks from their
responsibilities to have the appropriate staff, quality controls, and
an effective audit process in place to ensure that documents are
accurate and the foreclosure process is conducted in compliance with
applicable State and local laws.
Servicers typically move forward with foreclosure proceedings only
after thoroughly evaluating a borrower's eligibility for loan
modifications and other alternatives, such as short sales or deed-in-
lieu-of-foreclosures.\2\ As a practical matter, many investors for whom
loans are serviced, including Fannie Mae and Freddie Mac, require
servicers to attempt loss mitigation actions, including modifications,
prior to foreclosing on a home. The largest national bank mortgage
servicers are participants in Treasury's Home Affordable Modification
Program (HAMP) and are required to evaluate troubled borrowers to
determine their eligibility for a HAMP modification. For borrowers that
fail to qualify for a HAMP loan modification, servicers also typically
consider whether the borrowers would qualify for a modification under
their proprietary programs, which generally have more flexible
criteria. In the vast majority of cases, it is only after these loan
modification efforts have been exhausted that final foreclosure actions
are taken.
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\2\ Short sales refer to sales of mortgaged properties at prices
that net less than the total amount due on the loans. Servicers and
borrowers negotiate repayment programs, forbearance, or forgiveness for
any remaining deficiency on the debt. Short sales typically have less
adverse impact than foreclosures on borrowers' credit records. Deed-in-
lieu-of-foreclosure actions refer to actions in which borrowers
transfer ownership of the properties (deeds) to servicers in full
satisfaction of the outstanding mortgage debt to lessen the adverse
impact of the debt on borrowers' credit records.
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Recent Trends in Mortgage Modifications and Foreclosure Activity
Since 2008, the OCC has collected loan level data from the large
national banks we supervise and published this information in quarterly
mortgage metrics reports. We have since expanded our data collection
and reporting efforts and joined with the Office of Thrift Supervision
(OTS) to publish data on the performance of loans and loan
modifications, and to highlight trends in loss mitigation activities,
foreclosures, and re-defaults occurring on mortgages serviced by large
national banks and federally regulated thrifts. Our most recent report,
released in September, provides data through second quarter 2010 for
nearly 34 million first-lien mortgages, totaling nearly $6 trillion in
outstanding balances--representing approximately 65 percent of all
first-lien residential mortgages in the country.\3\ Key trends from
that report are summarized below.
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\3\ A full copy of the OCC and OTS Mortgage Metrics Report, Second
Quarter 2010 is available at: http://www.occ.gov/publications/
publications-by-type/other-publications/mortgage-metrics-q2092010/
mortgagemetrics-q2092010-pdf.pdf.
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Overall Mortgage Performance
As shown in Table 1, the percentage of current and performing
mortgages remained unchanged from the previous quarter at 87.3 percent.
The percentage of mortgages 30 to 59 days delinquent increased to 3.1
percent at the end of the second quarter of 2010, compared with 2.8
percent at the end of the previous quarter and 3.2 percent a year ago.
The percentage of seriously delinquent mortgages \4\ was 6.2 percent, a
decrease of 5.3 percent from the previous quarter but up 16.1 percent
from a year ago. Foreclosures in process were 3.4 percent of the total
portfolio, a 1.4 percent decrease from the previous quarter but a 16.1
percent increase from a year ago.
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\4\ Seriously delinquent loans are those mortgages that are 60 or
more days past due and all mortgages held by bankrupt borrowers whose
payments are 30 or more days past due.
Home Retention Actions
As shown in Table 2, servicers implemented 902,800 permanent loan
modifications (shown as ``Other Modifications'' and ``HAMP
Modifications'') over the past five quarters with HAMP modifications
accounting for approximately 26 percent of this total. During the
second quarter 2010, servicers initiated or implemented 504,292 home
retention actions. This included 273,419 HAMP and other permanent loan
modifications, an increase of 18.1 percent from the first quarter of
2010. Loan modifications implemented in second quarter 2010 represent
13.1 percent of seriously delinquent borrowers, up from 7.9 percent in
the second quarter 2009. While the number of permanent modifications
increased, the number of trial modifications and other payment plans
declined as servicers worked through their portfolio of seriously
delinquent mortgages to determine borrower eligibility under HAMP and
each servicer's own proprietary loan modification programs.
Changes to Borrowers' Monthly Payments Resulting From Modifications
Early in the mortgage crisis, servicers' informal payment plans and
loan modifications were done in low volume and often resulted in
mortgage payments that increased or did not change. This traditional
approach to loss mitigation gave delinquent borrowers experiencing
temporary financial problems a chance to catch-up on making their loan
payments. However, as the mortgage crisis deepened, unemployment
climbed, and the number of delinquent borrowers increased to
unprecedented levels, it became clear that more formal and permanent
modifications were needed. The OCC's mortgage metrics data provided
factual evidence that loan modifications completed in 2008 were
experiencing high re-default rates. As a result of those high re-
default rates, in March 2009, the OCC directed the largest national
banks to take corrective action to implement loan modification programs
designed to achieve more sustainable modifications.
As a result, servicers have focused efforts on improving the
quality of their loan modifications and the performance of those
modifications over time. This is evidenced by the increase in
modifications that are reducing borrowers' monthly mortgage payments
and the corresponding decline in re-defaults (as measured by serious
delinquencies) subsequent to modification since the OCC's direction to
servicers in 2009. As shown in Table 3, mortgage modifications that
lowered monthly principal and interest payments increased to more than
90 percent of all modifications during the second quarter 2010. The
emphasis on payment affordability and sustainability has resulted in a
62 percent increase in the average monthly savings in mortgage payments
from mortgage modifications from a year ago. As shown in Table 4,
modifications made during the second quarter of 2010 reduced monthly
payments by an average of $427. Further, 56 percent of the
modifications made during the second quarter reduced the borrower's
monthly payment by 20 percent or more, representing an average savings
to the consumer of $698 a month. These actions for more sustainable
payments are also reflected in lower re-default rates for more recently
modified loans. Modifications made after the end of the first quarter
of 2009 have experienced about half the re-default rates of
modifications made prior to that time.\5\
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\5\ See OCC and OTS Mortgage Metrics, Second Quarter, page 7.
Home Forfeiture Actions--Short Sales, Deed-in-Lieu-of-Foreclosures, and
Foreclosures
As previously noted, mortgage servicers generally do not proceed
with home forfeiture actions until they have evaluated the borrower's
eligibility for a loan modification that would allow the borrower to
stay in his or her home. Unfortunately, loan modification programs
cannot help borrowers who simply cannot make even reduced mortgage
payments. In these cases, servicers turn to home forfeiture actions to
protect the interests of lenders and investors.
Completed home forfeiture actions--foreclosure sales, short sales,
and deed-in-lieu-of-foreclosure actions--totaled 221,474 during the
second quarter, an increase of 14.2 percent from the previous quarter
(see Table 5). Short sales and deed-in-lieu-of-foreclosure actions
increased significantly during the quarter, but they remain only 26
percent of home forfeiture actions overall. While home forfeiture
actions increased in the second quarter, servicers implemented about
2.3 times more home retention actions--loan modifications, trial period
plans, and payment plans--than total home forfeiture actions.
The number of newly initiated foreclosures decreased by 21.2
percent, to 292,072, during the second quarter of 2010, the lowest
level in more than a year. The lower number is partly attributable to
the increase in permanent modifications made during the quarter. In
addition, HAMP guidelines now preclude the servicer from initiating a
foreclosure action until the borrower has been determined to be
ineligible for a HAMP modification. Similarly, the number of loans in
process of foreclosure decreased by 1.8 percent from the previous
quarter to 1,149,770, reflecting the increases in permanent
modifications and completed foreclosures during the quarter as well as
the drop in newly initiated foreclosure actions. Notwithstanding these
positive trends, we expect the number of foreclosure actions will
remain elevated as the large inventory of seriously delinquent loans
and loans in process of foreclosure works through the system.
OCC Supervisory Efforts
Emphasis on Sustainable Loan Modifications and Accurate Financial
Reporting
As the volume of problem loans surged to record levels and has
worked its way through the financial system, servicers have struggled
to maintain the needed capacity and resources to effectively deal with
the number of consumers who require assistance. We have used our
examination process and our Customer Assistance Group (CAG) to address
issues as they have arisen.
Our primary supervisory focus in assessing how servicers work with
borrowers experiencing payment problems over the past 2 years has
centered on their efforts to offer sustainable loan modifications that
avoid foreclosure and allow troubled borrowers to remain in their
homes. As previously noted, when our mortgage metrics data showed that
an inordinately high percentage of loan modifications made in 2008 were
re-defaulting, we directed large national bank mortgage servicers to
take corrective action and revise their loan modification programs to
produce loan modifications that resulted in more sustainable loan
payments. In most cases, this requires concessions on the terms of the
loan, rather than simply granting a borrower a payment deferral that
capitalizes arrearages, which was typical in many traditional
modifications. In addition, in our supervision of national bank
mortgage servicers we have issued numerous ``Matters Requiring
Attention,'' requiring improvements in servicers' loan modification
operations and staffing.
Some observers have stated that mortgage servicers have an inherent
conflict of interest in working with borrowers to modify a first lien
where the servicer holds the second lien on the property. In general,
all other creditors benefit from a modification of the first lien since
the modification puts the borrower in a stronger cash-flow position,
and makes the borrower more likely to be able to make payments on other
debts. A conflict of interest could arise if the second lien holder
were trying to overstate the second lien's carrying value (and under-
allocate loan loss reserves) for a troubled borrower. The OCC has
addressed this potential conflict by directing that second lien holders
must take steps necessary to understand any potential issues with the
first lien and ensure that carrying values and loan loss reserve levels
reflect all risk in the transaction--including any problems the
borrower might be having on the first lien, even if the second lien is
performing as agreed.
The volume of current and performing second liens held by national
banks behind delinquent or modified first liens remains relatively
small. The OCC analyzed second liens held by national banks and matched
more than 60 percent of them ($293 billion) to first-lien mortgages. Of
these 5,000,000 matched second mortgages, about 6 percent, or 235,000,
were current and performing but behind delinquent or modified first
liens. The balance of those current and performing second liens behind
delinquent or modified first mortgages totaled less than $18 billion.
The OCC has directed national banks that hold such performing second
liens to properly reflect the associated credit impairment for those
second liens through an increase in the allowance for loan losses, or
in many cases, a charge-off of the loan where appropriate.
Oversight of and Responses to Foreclosure Documentation Issues
When reviewing a bank's foreclosure governance process, such as
practices involved with the preparation and filing of affidavits for
foreclosure proceedings, examiners determine if the bank has
appropriate policies, procedures, and internal controls in place to
ensure the accuracy of information relied upon in the foreclosure
process and compliance with Federal and State laws. An appropriate
governance process would include the testing of those policies and
procedures through periodic internal audits and the bank's on-going
quality control function. In this instance, neither internal quality
control, internal or third party audits at the largest servicers, nor
our CAG data revealed that foreclosure document processing was an area
of concern.
When the problems at Ally Bank--an institution that is not
supervised by the OCC--became public, the OCC took immediate action to
determine if procedural breakdowns at national bank servicers could be
resulting in similar foreclosure affidavit problems. On September 29,
2010, we ordered the eight largest national bank servicers to conduct a
comprehensive self-assessment of their foreclosure management
processes, including file review and affidavit processing and
signature. We also made clear that where deficiencies were identified,
the servicers needed to take prompt action to remedy any improper
documentation, including as applicable, making appropriate re-filings
with local courts. Equally important, we also directed banks to
strengthen foreclosure governance to ensure the accuracy of the
information relied upon in the foreclosure process and prevent re-
occurrences of documentation problems.
Concurrent with this directive, we began planning onsite
examinations at each of these large servicers and their mortgage
servicing operational centers. Our objectives are to independently test
and verify the adequacy and integrity of bank self-assessments and
corrective actions; the adequacy and effectiveness of governance over
servicer foreclosure processes to ensure foreclosures are completed in
accordance with applicable legal requirements and that affidavits and
claims are accurate; and to determine whether troubled borrowers were
considered for loss mitigation alternatives such as loan modifications
prior to foreclosure.
These examinations are now underway at each of the eight servicers.
The Federal Reserve Board (FRB) and Federal Deposit Insurance
Corporation (FDIC) are participating in these examinations. The
examination teams include examiners from the OCC, FRB, and FDIC. The
OCC has approximately 100 examiners working on this effort. Legal
support is provided by staff attorneys from both the OCC and FRB. We
have established an interagency foreclosure review team to provide
oversight and direction to onsite examination teams to ensure
consistency in our examination work.
As noted above, a key objective of our examinations is to determine
the adequacy and effectiveness of governance over the foreclosure
process. The scope of work to assess governance is extensive and
includes an assessment of each servicer's foreclosure policies and
procedures, organizational structure and staffing, vendor management,
quality control and audit, loan documentation including custodial
document management, and foreclosure work flow processes. As part of
these reviews, examiners are conducting interviews with personnel
involved in the preparation, review, and signing of foreclosure
documents. Our objective in conducting these interviews is to
understand current and past practices with respect to preparation of
foreclosure documents, whether the staff conducting these functions had
sufficient knowledge and training, including training in relevant
requirements, to effectively complete and sign-off on foreclosure
affidavits, and to help assess the underlying cause of any identified
deficiencies.
Examiners will also be reviewing samples of individual borrower
foreclosure files from judicial and non-judicial states that include
both in-process and completed foreclosures. In reviewing these files,
examiners will determine whether foreclosed borrowers were
appropriately considered for alternative loss mitigation actions such
as a loan modification. Examiners will also check for the following:
A documented audit trail that demonstrates that data and
information (e.g., amount of indebtedness and fees) in
foreclosure affidavits and claims are accurate and comply with
State laws;
Possession and control over the underlying, critical loan
documents such as original note, mortgage, and deed of trust to
support legal foreclosure proceedings; and
Evidence that the affidavit and documents were
independently and appropriately reviewed, and that proper
signatures were obtained.
In addition to these loan file reviews, examiners will review the
nature, volume, and resolution of foreclosure-related complaints. These
will include complaints received by the OCC's Customer Assistance Group
as well as complaints received by the banks.
Finally, examiners will assess the adequacy of each bank's analysis
and financial reporting for the potential adverse impact on the bank's
balance sheet and capital that may arise from the increased time and
costs needed to correct any procedural errors; losses (if any)
resulting from inability to access collateral; and expected litigation
costs. We are directing banks to maintain adequate reserves for
potential losses and other contingencies and to make appropriate
disclosures, consistent with applicable Securities and Exchange
Commission disclosure rules.
Using our authority under the Bank Service Company Act, we also are
conducting interagency examinations of two major non-bank mortgage
service providers. The OCC, in coordination with the FRB, FDIC, and
Federal Housing Finance Agency, is leading an onsite examination of the
Mortgage Electronic Registration System (MERS). A key objective of the
MERS examination is to assess MERS corporate governance, control
systems, and accuracy and timeliness of information maintained in the
MERS system. Examiners assigned to MERS will also visit onsite
foreclosure examinations in process at the largest mortgage servicers
to determine how servicers are fulfilling their roles and
responsibilities relative to MERS.
We are also participating in an examination being led by the FRB of
Lender Processing Services, Inc., which provides third-party
foreclosure services to banks. We expect to have most of our onsite
examination work completed by mid to late December. We then plan to
aggregate and analyze the data and information from each of these
examinations to determine whether or what additional supervisory and
regulatory actions may be needed. We are targeting to have our analysis
completed by the end of January.
We recognize that the problems associated with foreclosure
processes and documentation have raised broader questions about the
potential effect on the mortgage market in general and the financial
impact on individual institutions that may result from litigation or
other actions by borrowers and investors. Obviously, for a host of
reasons--from fair treatment of borrowers to the fundamentals of the
mortgage marketplace--mortgage servicers must get this right. We are
directing banks to take corrective action where we find errors or
deficiencies, and we have an array of informal and formal enforcement
actions and penalties that we will impose if warranted. These range
from informal memoranda of understanding to civil money penalties,
removals from banking, and criminal referrals.
Conclusion
The OCC is focused on identifying and rectifying problems so that
the basic function and integrity of the foreclosure process is
restored; the rights of all homeowners subject to the foreclosure
process are protected; and the basic functioning of the U.S. mortgage
market is stabilized. As we move forward we will continue to cooperate
with the many inquiries and investigations that are taking place and
provide updates to the Congress.
OFFICE OF THE COMPTROLLER OF THE CURRENCY OUTLINE FOR UNIFORM SERVICING
STANDARDS
General Standards
Servicers should act responsibly and adhere to the highest
standards of professionalism in their dealings with borrowers. These
include:
Safeguarding and accounting for borrower's funds;
Acting in accordance with the underlying contractual
documents in servicing the loan;
Striving to act in the best interest of the owner of the
loan and the borrower in servicing the loan, including by
pursuing loss mitigation options as appropriate;
Maintaining trained personnel appropriate to servicing
workload;
Maintaining compensation schedules for staff and third
party vendors that promote adherence to these standards;
Maintaining compensation schedules that provide effective
incentives to work with troubled borrowers, including early
outreach and counseling; to pursue loss mitigation and
foreclosure avoidance strategies, to maximize the net present
value of the loan; and to maintain adequate levels of
appropriately trained staff to respond to current and
anticipated demand, including to respond to increases in loan
delinquencies.
Maintaining fee schedules that are reasonable and
appropriate to the type, level and cost of the service that is
provided, or purpose of the fee;
Providing timely information to the borrower about the
account, including periodic statements of the account;
Providing timely and comprehensive information to borrowers
on matters related to the account, including in response to
borrower requests for information or complaints and, as
appropriate, about loan counseling and loss mitigation options
and services;
Force-placing hazard, homeowners, or flood insurance on a
mortgaged property only when required, to the extent required,
and in the amount required after reasonable advance notice to
the borrower;
Adopting internal controls appropriate to the nature and
complexity of the servicing operations and conducting periodic
assessments to ensure adherence to these standards; and
Avoiding conflicts of interest.
Payments
Servicers should adopt and adhere to reasonable procedures for
handling borrower payments, including:
Clearly describing the payment amount, and the date, time,
and location for payments to be received under the terms of the
loan agreement;
Imposing reasonable cutoff times;
Crediting payments in a prompt and timely manner,
ordinarily on the date of receipt;
Applying payments, including partial payments, to scheduled
principal and interest, before they are applied to fees;
Avoiding payment allocation processes designed primarily to
increase fee income;
Not imposing late or delinquency fees when the delinquency
is attributable solely to nonpayment of late or delinquency
fees on an earlier payment;
Notifying a borrower of the fact that, and reasons why, any
payment may not have been credited to the account and how the
borrower may make the loan current;
Correcting any misapplication of borrower funds in a prompt
and timely manner;
Not commingling borrowers' payments with the servicer's own
funds except for the time needed to process and clear borrower
payments;
Adopting reasonable policies and procedures for handling
payment overages and shortages; and
Conducting periodic audits of payment processing functions.
Borrower Notices
Servicers should provide borrowers with full and accurate
information about their accounts and payment records, including by
providing the following notices:
Periodic and annual statements--Servicers should provide
borrowers with monthly and annual statements of the borrower's
account activity for the preceding period, including
information about total amount due; payments of principal and
interest; remaining principal balance; itemization of any late
or other fees imposed; escrow payments, balances, and
deficiencies; any advances made, such as for force-placed
insurance; and remaining term of the loan.
Payment history--Upon request, servicers should provide
borrowers within a reasonable time of the request, a statement
of the recent payment history of the loan.
Mortgage servicing transfer--Servicers should provide
borrowers with appropriate account and contact information upon
transfer of servicing.
Payoff statement--Upon request, servicers should provide
borrowers within a reasonable time of the request, a statement
of the total amount required to pay off the loan as of a
specified date.
Late payment notice--Servicers should send borrowers a
payment reminder notice after a payment is past due, unpaid,
and a late fee has been imposed. Servicers need not send
separate notices for each consecutive month in which the loan
remains unpaid.
Schedule of fees--Servicers should provide reasonable
disclosure of a current schedule of standard or common fees it
may impose. Service fees should be imposed only as authorized
in the loan instruments and applicable law or where the
consumer expressly requests a specific service at that fee;
Delinquencies, loss mitigation, and foreclosure notices--
Servicers should provide borrowers with timely information in
the event of a delinquency or default about loss mitigation
options offered by the servicers, as well as clear and
understandable notices about the pendency of loan modification
and foreclosure proceedings. Such information includes the
following:
The nature and extent of any delinquency;
A list of documentation or other information and any third
party approvals the borrower must provide;
The anticipated or average length of time it may take to
process any loss mitigation option or loan modification; and
The actions the servicer, lender, or owner of the loan may
take during the applicable process, such as the circumstances
in which the borrower may receive collection and/or foreclosure
notices and in which any foreclosure action may be stayed.
Borrower Complaints and Inquiries
Servicers should act promptly and reasonably in responding to
borrower inquiries, requests, and complaints, including by taking the
following actions:
Maintaining adequate levels of trained customer service
personnel to handle complaints and inquiries;
Providing an address and toll-free number for such
complaints and inquiries;
Providing contact information for the owner of the loan;
Providing a single and easily accessible point of contact
for special inquiries, information and services, such as loss
mitigation and loan modifications services, and for delinquent
and at risk borrowers; and
Responding and resolving borrower inquiries and complaints
in a prompt and appropriate manner;
Providing an avenue for escalation or appeal of any
disputes;
Correcting customer accounts, correcting credit report
information, and making refunds, as applicable; and
Maintaining adequate tracking information for such
inquiries and complaints.
Delinquencies, Loss Mitigation, Loan Modifications, and Foreclosure
Abeyance
Delinquent loans--Servicers should follow an appropriate set of
special protocols for servicing delinquent loans that include:
Promptly alerting the appropriate functional unit(s) that a
loan is delinquent;
Working with borrowers at risk of foreclosure, including
early outreach and counseling;
Employing specially trained staff to work with delinquent
loans and borrowers;
Implementing appropriate procedures regarding notices of
delinquencies, assessing late charges, handling partial
payments, maintaining collection records, and reporting to
credit bureaus;
Pursuing loss mitigation and foreclosure prevention
measures;
Ensuring compliance with legal requirements;
Providing for quality assurance review of decisions
concerning loss mitigation options or commencement of
foreclosure actions.
Loss mitigation--Servicers should make reasonable and good faith
efforts, consistent with customary business standards and in accordance
with applicable laws and contracts, to engage in loss mitigation
activities and foreclosure prevention for delinquent loans, where
appropriate. Such activities include considering a deed-in-lieu of
foreclosure; forbearance; and short sale.
Loan modification procedures--Servicers also should make reasonable
and good faith efforts, in accordance with specific protocols
established by contract and with applicable laws, to modify loans to
provide affordable and sustainable payments when:
The borrower is in default or at imminent risk of default
on a loan due to financial hardship and is unable to maintain
the payments or is unable to make up any delinquent payments,
and
The net present value of cash-flows from the modified loan
will exceed that expected from foreclosure.
Servicers should implement appropriate procedures to ensure that
documents provided by borrowers and third parties are appropriately
maintained and tracked and that borrowers generally will not be
required to resubmit the same documented information that has already
been provided; that such requests are acknowledged, processed, and
evaluated in a timely manner; and that borrowers are notified promptly
of the approval or denial of their modification requests or of the need
for additional information. Such procedures include:
Acknowledging receipt of requests for loan modifications
and providing information about the designated point of contact
for further communications about the request or for appeals;
Reviewing such requests for documentary sufficiency and
notifying a borrower if an application or request is incomplete
and describing any additional information that is necessary to
complete any application or otherwise enable an evaluation of
the borrower's loan modification request;
Implementing procedures and systems to ensure that
reasonable steps are taken, without undue delay, to procure and
safeguard all information needed to evaluate and act on a
consumer's request for a mortgage modification;
Completing the evaluation of the borrower's eligibility for
a loan modification or other loss mitigation option;
Notifying the borrower of approval of any modified loan
terms being offered or, if applicable, the reasons for denial,
such as information on the NPV calculation, and where to obtain
additional information or information about housing counseling
assistance;
Implementing and maintaining reasonable procedures and
sufficient staffing to ensure full compliance with policies,
procedures, and timelines affecting loan modification requests;
Ensuring that borrowers are not required to waive any
claims or defenses as a condition of a loan modification; and
Implementing policies and procedures to notify foreclosure
attorneys and trustees regarding a borrower's status for
consideration of a loss mitigation option, including whether
the borrower has requested and is being considered for loss
mitigation and whether the borrower is in a trial or permanent
loan modification and is not in default under the agreement.
Foreclosure abeyance--Servicers should avoid taking steps to
foreclose on a property, including referring a mortgage to foreclosure,
continuing the foreclosure process--whether judicial or non-judicial,
conducting a scheduled mortgage foreclosure sale, or incurring costs
for foreclosure-related services that will be imposed on the borrower,
if the borrower is in a trial or permanent modification and is not in
default under the modification agreement. A servicer may initiate or
proceed with the foreclosure process when:
The borrower has declined to pursue loss mitigation or loan
modification actions;
The borrower is not responding to reasonable requests for
information or outreach related to loss mitigation or loan
modification efforts;
The borrower has not submitted information necessary to
evaluate the borrower for a loan modification;
The borrower has been determined to be ineligible for a
loan modification; or
The borrower is in default under the terms of a trial or
permanent modification period plan.
Acting in accordance with guidelines, directives, and notice
requirements developed by the U.S. Department of Treasury and in effect
for the Home Affordable Mortgage Program (HAMP) will be deemed to meet
these standards for loss mitigation, loan modification and foreclosure
prevention.
Foreclosure Governance
Servicers should adhere to reasonable procedures in managing the
foreclosure process including with respect to compliance with legal
standards and documentation requirements, oversight of third parties,
staffing and training, and audits. In general, servicers should
institute controls and procedures that will ensure that foreclosures
occur only when appropriate and taking into account the status of any
foreclosure abeyance actions, the facts are documented to support the
action, and in compliance with applicable laws and investor
requirements.
Compliance with legal requirements--Servicers should ensure
compliance with State law requirements when preparing foreclosure
affidavits and claims.
Documentation procedures--Servicers should ensure maintenance of
sufficient documentation and servicing systems to support foreclosure
decisions and actions. For example, servicers should adopt internal
controls and procedures to ensure:
The accuracy and completeness of the borrower's loan
history;
The accuracy and completeness of representations to courts
and other parties in connection with foreclosure or bankruptcy
proceedings;
Compliance with legal requirements;