[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
OCTOBER OVERSIGHT REPORT *
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AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX MONTHS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
October 9, 2009.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL
OCTOBER OVERSIGHT REPORT *
__________
AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX MONTHS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
October 9, 2009.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
U.S. GOVERNMENT PRINTING OFFICE
52-671 WASHINGTON : 2009
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20402-0001
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Rep. Jeb Hensarling
Paul S. Atkins
Richard H. Neiman
Damon Silvers
C O N T E N T S
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Page
Executive Summary................................................ 1
Section One: An Assessment of Foreclosure Mitigation Efforts
after Six Months............................................... 5
A. Introduction: What Has Changed Since the Last Report...... 5
B. March Checklist........................................... 23
C. Program Evaluation........................................ 32
HARP..................................................... 35
HAMP..................................................... 38
Second Lien Program...................................... 62
Price Decline Protection................................. 65
Foreclosure Alternatives Program......................... 67
HOPE for Homeowners...................................... 69
Other Federal Efforts Outside of TARP.................... 72
State/Local/Private Sector Initiatives................... 73
D. Big Picture Issues........................................ 78
E. Conclusions and Recommendations........................... 96
Annexes to Section One:
ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES ON NET
PRESENT VALUE CALCULATIONS................................. 99
ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE HOME AFFORDABLE
MORTGAGE MODIFICATION PROGRAM.............................. 102
ANNEX C: EXAMINATION OF TREASURY'S NPV MODEL................. 112
Section Two: Additional Views.................................... 114
Richard Neiman............................................... 114
Congressman Jeb Hensarling................................... 116
Paul Atkins.................................................. 151
Section Three: Correspondence with Treasury Update............... 154
Section Four: TARP Updates Since Last Report..................... 155
Section Five: Oversight Activities............................... 169
Section Six: About the Congressional Oversight Panel............. 170
Appendices:
APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY
TIMOTHY GEITHNER RE: THE STRESS TESTS, DATED SEPTEMBER 15,
2009....................................................... 171
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OCTOBER OVERSIGHT REPORT
_______
October 9, 2009.--Ordered to be printed
_______
EXECUTIVE SUMMARY *
From July 2007 through August 2009, 1.8 million homes were
lost to foreclosure and 5.2 million more foreclosures were
started. One in eight mortgages is currently in foreclosure or
default. Each month, an additional 250,000 foreclosures are
initiated, resulting in direct investor losses that average
more than $120,000. These investors include the American
people. The combination of federal efforts to combat the
financial crisis coupled with mortgage assistance programs
makes the taxpayer the ultimate guarantor of a large portion of
home mortgages.
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* The Panel adopted this report with a 3-2 vote on October 8, 2009.
Rep. Jeb Hensarling and Paul Atkins voted against the report.
Additional views are available in Section Two of this report.
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Each foreclosure further imposes direct costs on displaced
owners and tenants, and indirect costs on cities and towns, and
neighboring homeowners whose property values are driven down.
High unemployment and depressed residential real estate values
feed a foreclosure crisis that could pose an enormous obstacle
to recovery.
The Panel is specifically charged with conducting oversight
of foreclosure mitigation efforts under the Emergency Economic
Stabilization Act (EESA). In particular, the statute directs
the Panel to assess the effectiveness of the programs from the
standpoint of minimizing long-term costs and maximizing
benefits for taxpayers. To that end, the Panel asked Professor
Alan White of Valparaiso University to conduct a cost-benefit
analysis. Although federal foreclosure mitigation programs are
still getting off the ground, the benefits of foreclosure
modification are likely to outweigh the cost to taxpayers.
Since the Panel's March report on the foreclosure crisis,
Treasury has unveiled its Making Home Affordable (MHA)
initiative, the federal government's central tool to combat
foreclosures. MHA consists of two primary programs. The Home
Affordable Refinance Program (HARP) helps homeowners who are
current on their mortgage payments but owe more than their
homes are worth, refinance into more stable, affordable loans.
The larger Home Affordable Modification Program (HAMP) reduces
monthly mortgage payments in order to help borrowers facing
foreclosure keep their homes. As of September 1, 2009, HAMP
facilitated 1,711 permanent mortgage modifications, with
another 362,348 additional borrowers in a three-month trial
stage. HARP has closed 95,729 refinancings, hopefully reducing
the number of homeowners who may face foreclosure in the
future.
Treasury currently estimates it will spend $42.5 billion of
the $50 billion in Troubled Asset Relief Program (TARP) funding
for HAMP, which will support about 2 to 2.6 million
modifications. If HAMP is successful in reducing investor
losses, those savings should translate to improved recovery on
other taxpayer investments. But if foreclosure starts continue
their push toward 10 to 12 million, as currently estimated, the
remaining losses will be massive.
The Panel has three concerns with the current approach.
First is the problem of scope. Treasury hopes to prevent as
many as 3 to 4 million of these foreclosures through HAMP, but
there is reason to doubt whether the program will be able to
achieve this goal. The program is limited to certain mortgage
configurations. Many of the coming foreclosures are likely to
be payment option adjustable rate mortgage (ARM) and interest-
only loan resets, many of which will exceed the HAMP
eligibility limits. HAMP was not designed to address
foreclosures caused by unemployment, which now appears to be a
central cause of nonpayment, further limiting the scope of the
program. The foreclosure crisis has moved beyond subprime
mortgages and into the prime mortgage market. It increasingly
appears that HAMP is targeted at the housing crisis as it
existed six months ago, rather than as it exists right now.
The second problem is scale. The Panel recognizes that HAMP
requires a significant infrastructure--both at Treasury and
within participating mortgage servicers--that cannot be created
overnight. Foreclosures continue every day as Treasury ramps up
the program, with foreclosure starts outpacing new HAMP trial
modifications at a rate of more than 2 to 1. Some homeowners
who would have qualified for modifications lost their homes
before the program could reach them. Treasury's near-term
target for HAMP--500,000 trial modifications by November 1,
2009--appears to be more attainable, but even if it is
achieved, this may not be large enough to slow down the
foreclosure crisis and its attendant impact on the economy.
Once the program is fully operational, Treasury officials have
stated that the goal is to modify 25,000 to 30,000 loans per
week. Treasury's own projections would mean that, in the best
case, fewer than half of the predicted foreclosures would be
avoided.
The third problem is permanence. It is unclear whether the
modifications actually put homeowners into long-term stable
situations. Though still early in the HAMP program, only a very
small proportion of trial modifications that were begun three
or more months ago have converted into longer term
modifications. In addition, HAMP modifications are often not
permanent; for many homeowners, payments will rise after five
years, which means that affordability can decline over time.
Moreover, HAMP modifications increase negative equity for many
borrowers, which appears to be associated with increased rates
of redefault. The result for many homeowners could be that
foreclosure is delayed, not avoided.
Whether current Treasury programs adequately address
foreclosures also depends on the future condition of the
housing market. Today, one-third of mortgages are underwater,
and if housing prices continue to drop, some experts estimate
that one-half of all mortgages will exceed the value of the
homes they secure. Negative equity increases the likelihood
that when these homeowners encounter other financial problems
or when life events cause them to move, they may walk away from
their homes and their over-sized mortgages. Others may be
discouraged about paying off mortgages that greatly exceed the
value of the property or give up their homes when they
recognize that they would be ahead financially if they rented
for a few years before buying again. If left unresolved,
redefaults and future defaults related to negative equity could
mean that the country experiences high foreclosure rates and
housing market instability for years to come.
While Treasury must consider programmatic changes to meet
these challenges, so too must it adapt and improve the existing
programs in several key ways.
Given the issues facing MHA, Treasury must be fully
transparent about the effectiveness of its programs, as well as
the manner in which they operate. Although Treasury's data
collection has improved significantly since the Panel's March
report, it should be expanded, and the information should be
made public. Treasury should release its Net Present Value
(NPV) model, which is used to determine a homeowner's
eligibility for HAMP. The new denial codes should be
implemented to provide borrowers with a specific reason for
denying a modification and a clear path for appeal. Denial
information should also be aggregated and reported to the
public.
Treasury should also make the loan modification process
more uniform so that borrowers, servicers, and advocates can
more easily navigate the system. Uniform documents and more
uniform processes would benefit both lenders and borrowers, and
would make the program easier to administer and oversee.
Treasury should continue its efforts to streamline the system,
including through development of a web portal as suggested in
the Panel's March report.
The model for determining borrowers' eligibility for the
programs could be adapted to accommodate borrowers with
arrearages and by incorporating more localized information when
determining a mortgage loan's value.
In MHA, as in all of Treasury's programs, accountability is
paramount. Servicers who fail to comply with the program's
requirements should face strong consequences. Treasury must
ensure that Freddie Mac, recently selected to oversee program
compliance, has in place the proper processes to provide robust
oversight. To further reinforce accountability, Treasury should
continue to develop performance metrics and publicly report the
results by lender or servicer.
Rising unemployment, generally flat or even falling home
prices, and impending mortgage rate resets threaten to cast
millions more out of their homes, with devastating effects on
families, local communities, and the broader economy.
Ultimately, the American taxpayer will be forced to stand
behind many of these mortgages. The Panel urges Treasury to
reconsider the scope, scalability and permanence of the
programs designed to minimize the economic impact of
foreclosures and consider whether new programs or program
enhancements could be adopted.
SECTION ONE: AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX
MONTHS
A. Introduction: What Has Changed Since the Last Report
The United States is now in the third year of a foreclosure
crisis unprecedented since the Great Depression, with no end in
sight. Of the 75.6 million owner-occupied residential housing
units in the United States, approximately 68 percent (51.6
million) of homeowners carry a mortgage to finance the purchase
of their homes.\1\ Since 2007, 5.4 million of these homes have
entered foreclosure, and 1.9 million have been sold in
foreclosure.\2\ Absent a significant upturn in the broader
economy and the housing market, another 3.5 million homes could
enter foreclosure by the end of 2010.\3\
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\1\ U.S. Census Bureau, American Housing Survey for the United
States: 2007 (2007) (Table 3-15. Mortgage Characteristics--Owner-
Occupied Units) (online at www.census.gov/hhes/www/housing/ahs/ahs07/
tab3-15.pdf) (hereinafter ``Census Housing Survey''); U.S. Department
of Housing and Urban Development, U.S. Housing Market Conditions, at 24
(Aug. 2009) (online at www.huduser.org/periodicals/ushmc/summer09/
nat_data.pdf).
\2\ HOPE NOW, Workout Plans (Repayment Plans + Modifications) and
Foreclosure Sales July 2007--August 2009, at 1 (2009) (online at
www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20Aug09.pdf). (hereinafter
``HOPE NOW, Workout Plans and Foreclosure Sales'').
\3\ Goldman Sachs Global ECS Research, Global Economics Paper No.
177, Home Prices and Credit Losses: Projections and Policy Options, at
16 (Jan. 13, 2009) (online at docs.google.com/
gview?a=v&q=cache%3AQlc0g0CzRpEJ%3Agarygreene.mediaroom.com%2Ffile.php%2
F216%
2FGlobal%2BPaper%2BNo%2B%2B177.pdf+Goldman+Sachs+Global+ECS+Research%
2C+Global+Economics+Paper+No.+177%2C+Home+Prices+and+Credit+Losses%3A+Pr
ojections
+and+Policy+Options&hl=en&gl=us&sig=AFQjCNGp3ZHbpbCgjpZh2_17Dv-
BpFzCCg).
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Foreclosure rates are now nearly quadruple historic
averages (see Figures 1 and 2). At the close of second quarter
2009, the Mortgage Bankers Association reported that 4.3
percent of mortgages, 15.05 percent of sub-prime loans, and
24.40 percent of sub-prime adjustable rate mortgages (ARMs)
were currently in foreclosure. In addition, 9.24 percent of all
residential mortgages were delinquent, a rate nearly double
historic norms.\4\ Homeowners avoiding foreclosure, but still
losing their homes in preforeclosure sales (short sales) or
deeds-in-lieu (DIL) transactions further add to this crisis.\5\
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\4\ Mortgage Bankers Association, National Delinquency Survey, at 1
(Aug. 2009) (hereinafter ``MBA National Delinquency Survey''). Between
1996 and 2008, residential mortgage delinquency rates averaged an
annual 4.8 percent surveyed. Id.
\5\ According to a July 2009 real estate agent survey, 14 percent
of all home purchases stemmed from ``short sales.'' Campbell Surveys,
Real Estate Agents Report on Home Purchases and Mortgages--2009 (online
at www.campbellsurveys.com/AgentSummaryReports/
AgentSurveyReportSummary-June2009.pdf) (accessed Sept. 28, 2009)
(hereinafter ``Campbell Real Estate Agent Survey'').
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Foreclosures, and in many respects the foreclosure
alternatives mentioned above, have consequences beyond the
families who lose their homes. They affect the neighbors who
must live next to vacant homes and suffer decreased property
values as a result.\6\ They alter the composition of schools
and religious institutions, which see children and congregants
uprooted.\7\ They harm the foreclosing bank, depressing its
balance sheet.\8\ They drive down housing prices by flooding
the market with bank-owned properties.\9\ They negatively
affect the economy as a whole by decreasing stability in banks,
communities, and municipal and state tax bases.\10\
Successfully addressing the foreclosure crisis is key to
reviving banks, reversing the fall in real estate prices, and
promoting economic growth and stability.\11\
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\6\ The Center for Responsible Lending estimates that ``in 2009
alone, foreclosures will cause 69.5 million nearby homes to suffer
price declines averaging $7,200 per home and resulting in a $502
billion total decline in property values.'' Center for Responsible
Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors
$502 Billion in 2009 Alone; 69.5 Million Homes Lose $7,200 on Average
(May 7, 2009) (online at www.responsiblelending.org/mortgage-lending/
research-analysis/soaring-spillover-3-09.pdf); John P. Harding et al.,
The Contagion Effect of Foreclosed Properties (July 13, 2009) (online
at www.business.uconn.edu/Realestate/publications/pdf%20documents/
406%20contagion_080715.pdf). The Panel held a field hearing in
Philadelphia, Pennsylvania on September 24, to examine foreclosure
mitigation efforts under TARP. The Panel heard testimony from
representatives of Treasury, the GSEs, community housing organizations,
loan servicers, an economist, and Judge Annette M. Rizzo of the
Philadelphia Court of Common Pleas. The Panel also heard statements
from audience members, some of whom highlight this issue. Congressional
Oversight Panel, Statements from the Audience, Philadelphia Field
Hearing on Mortgage Foreclosures, at 154 (Sept. 24, 2009) (online at
cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm).
\7\ An estimated 2 million children will lose their homes to
foreclosure. ``[C]hildren who experience excessive mobility, such as
those impacted by the mortgage crisis, will suffer in school.''
FirstFocus, The Impact of the Mortgage Crisis on Children (Apr. 30,
2008) (online at www.firstfocus.net/Download/
HousingandChildrenFINAL.pdf) (citing Russell Rumberger, The Causes and
Consequences of Student Mobility, Journal of Negro Education, Vol. 72,
No. 1, at 6-21, (2003)).
\8\ Congressional Oversight Panel, August Oversight Report: The
Continued Risk of Troubled Assets (Aug. 11, 2009) (online at
cop.senate.gov/documents/cop-081109-report.pdf); Laurie Kulikowski,
Citi Execs Offer Optimism, Thin Details, TheStreet.com (Sept. 14, 2009)
(online at www.thestreet.com/story/10598384/1/citi-execs-offer-
optimism-thin-details.html) (Citigroup CEO Vikram Pandit ``noted that
two particularly troubling businesses for the company are the credit
card and mortgage portfolios. `When we see those assets turn, I think
you will start to see a change in the profitability of Citi.' '').
\9\ Lender Processing Services, LPS Releases Study That
Demonstrates Impact of Foreclosure Sales on Home Prices (Sept. 3, 2009)
(online at www.lpsvcs.com/NewsRoom/Pages/20090903.aspx).
\10\ In April 2008, the Pew Charitable Trusts estimated that ``10
states alone will lose a total of $6.6 billion in tax revenue in 2008
as a result of the foreclosure crisis, according to a 2007
projection.'' Pew Charitable Trusts, Defaulting on the Dream: States
Respond to America's Foreclosure Crisis (Apr. 2008) (online at
www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/
Subprime_mortgages/defaulting_on_the_dream.pdf) (hereinafter ``Pew
Default on the Dream Article'').
\11\ Federal Reserve Board of Governors, Remarks as Prepared for
Delivery by Governor Randall S. Kroszner at NeighborWorks America
Symposium (May 7, 2008) (online at www.federalreserve.gov/newsevents/
speech/kroszner20080507a.htm) (``[D]iscussion of the impact of
foreclosures on neighborhoods and what can be done to mitigate those
impacts is not only timely, it is essential to promoting local and
regional economic recovery and growth. . . .'').
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
1. Waves of Foreclosure
There is still significant debate about the causes of
foreclosure and the obstacles faced by foreclosure mitigation
programs, but it is inescapable that a large number of American
families are losing their homes. The foreclosure crisis began
with home flippers, speculators, reach borrowers who purchased
or refinanced properties with little money down and non-
traditional mortgage products, and homeowners who were sold
subprime refinancings.\14\ Increasingly, however, because of
the severity of the recession, declines in home prices, and the
persistence of job losses, foreclosures involve families who
put down 10 or 20 percent and took out conventional, conforming
fixed-rate mortgages to purchase or refinance homes that in
normal market conditions would be within their means.\15\
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\13\ MBA National Delinquency Survey, supra note 4.
\14\ U.S. Department of Housing and Urban Development, Unequal
Burden: Income and Racial Disparities in Subprime Lending in America
(Apr. 2000) (online at www.huduser.org/Publications/pdf/
unequal_full.pdf).
\15\ MBA National Delinquency Survey, supra note 4.
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a. Speculators
The foreclosure crisis has gone in waves of defaults. While
these waves are not entirely distinct, they are useful for
understanding the course of the crisis and where it is headed.
The first wave was centered around real estate speculators, who
often borrowed 100 percent or more of property values.\16\ When
home sales slowed and then as property values began to drop,
these speculators simply stopped paying their mortgages and
abandoned their properties because the carrying costs of the
mortgages were greater than the appreciation they anticipated
realizing on sale.
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\16\ Michael Brush, Coming: A 3rd Wave of Foreclosures, MSN Money
(June 3, 2009) (online at articles.moneycentral.msn.com/Investing/
CompanyFocus/coming-a-3rd-wave-of-foreclosures.aspx). While speculators
often took out loans with loan-to-value (LTV) ratios of 100 percent or
more, other borrowers also utilized high LTV loans, such as borrowers
in high cost areas, borrowers unable or unwilling to make a standard 20
percent down payment, and those utilizing cash-out refinancings. Some
speculators may have made false assertions of primary residence or
exaggerated income.
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b. Hybrid ARMs
The second wave was caused by payment reset shock,
primarily from the expiration of teaser rates on hybrid ARMs.
Hybrid ARMs have a fixed low teaser interest rate for one to
three years, and then an adjustable interest rate that is
usually substantially higher. (These loans are often called 2/
28s or 3/27s. The first number refers to the length of the
teaser period in years, and the second number to the post-
teaser term of the mortgage.) The teaser rates on hybrid ARMs
made the mortgages for the teaser period quite affordable.
Many hybrid ARMs were subprime loans, meaning that their
post-teaser interest rate was substantially above-market. Most
of these loans also carried stiff prepayment penalties, making
refinancing expensive for the borrower.\17\ Sometimes this was
because of the risk posed by the borrower. Sometimes the
homeowner was willing to assume the high post-teaser rate in
exchange for the below-market teaser, as the homeowner
anticipated refinancing or selling the appreciated property
before the teaser expired. To refinance a mortgage (or to sell
the property without a loss) requires having sufficient equity
in the property. Many hybrid ARMs were made at very high loan-
to-value ratios, as both lenders and homeowners anticipated a
rapid accumulation of home equity in the appreciating market of
the housing bubble. When the market fell, however, these
homeowners lacked the equity to refinance, and often faced
prepayment penalties if they did, further decreasing their
ability to refinance. Additionally, there are allegations that
some prime borrowers were misled into taking out these
mortgages.
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\17\ Michael LaCour-Little & Cynthia Holmes, Prepayment Penalties
in Residential Mortgage Contracts: A Cost-Benefit Analysis, Housing
Policy Debate (2008) (online at www.mi.vt.edu/data/files/hpd%2019.4/
little-holmes_web.pdf). The authors' literature review showed that most
subprime loans carry a pre-payment penalty, and that ``lenders and many
economists view prepayment penalties as a mechanism to increase the
predictability of cash flow from mortgage loans, thereby enhancing
their value to investors and reducing the cost of credit to
borrowers.'' LaCour-Little and Holmes' cost-benefit analysis found that
prepayment penalties had significant economic value to lenders and
investors, and that the ``expected cost of prepayment penalties to
borrowers is larger than the benefit, although this cost varies
depending on the interest rate environment.'' Id. at 668. For example,
they found that ``for a loan originated in 2002 with a two-year penalty
period, . . . the average interest savings was $418, compared with an
expected penalty cost of $3,923--an almost 10-fold difference.'' Id. at
667.
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The result was that many homeowners with hybrid ARMs were
unable to refinance out of their loans when the teaser period
expired and had to start paying at the substantially higher
post-teaser interest rate. Most of these loans had been
underwritten based on an ability to pay only the teaser rate,
and not the reset post-teaser rate. In many cases, even the
teaser rate underwriting was a stretch. When the rates reset,
monthly payments on these mortgages often became unaffordable,
resulting in defaults.
The teaser rates on most of the hybrid ARMs made in 2005
and 2006 have already expired, and low interest rates now
mitigate some of the payment shock on the remaining resets. As
a result, the defaults from this wave have already crested,
although not all of the defaults have yet resulted in completed
foreclosure sales. In addition, some homeowners who have
managed to make the post-reset payments thus far may still
default, elevating future foreclosure levels.
c. Negative Equity
A third and on-going wave of defaults has been related to
negative equity. A homeowner with negative equity owes more in
mortgage debt than his or her home is worth. Steep declines in
housing prices below pre-crisis levels and the drag on
neighborhood housing prices caused by nearby foreclosures have
combined to force a growing number of homeowners into this
category.\18\ In cases where homeowners have edged into
negative equity, some may undertake home improvements to
increase the sale price of their property or at least to offset
further price erosion. Conversely, homeowners with substantial
negative equity may reason that any money they invest in the
property, including basic repairs, does not meaningfully add to
their equity, but, rather, is value that accrues to the lender.
Therefore, homeowners with substantial negative equity have
diminished incentives to care for their properties, which
further decreases property values.\19\ Until they regain
positive equity, any money they invest in their properties,
including basic repairs, is value that accrues to the lenders
in terms of increased collateral value. Until that point, the
homeowner becomes at best less underwater, although the
homeowner will continue to get the consumption value of the
property. Homeowners with negative equity thus have diminished
incentives to care for their properties, which further
decreases property values.\20\
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\18\ First American CoreLogic, Summary of Second Quarter 2009
Negative Equity Data (Aug. 13, 2009) (online at
www.loanperformance.com/infocenter/library/
FACL%20Negative%20Equity_final_081309.pdf) (hereinafter ``CoreLogic
Negative Equity Data'').
\19\ M.P. McQueen, Are Distressed Homes Worth It, Wall Street
Journal (Oct. 1, 2009) (online at online.wsj.com/article/
SB10001424052970203803904574430860271702396.html).
\20\ Id.
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Homeowners with negative equity are also constrained in
their ability to move, absent abandoning the house to
foreclosure. There is a wide range of inevitable life events
that necessitate moves: the birth of children, illness, death,
divorce, retirement, job loss, and new jobs. When one of these
life events occurs, if a homeowner has negative equity, the
primary choices are between forgoing the move, finding the cash
to make up the negative equity, or losing the house in
foreclosure. Many have chosen the foreclosure route.
Unfortunately, as the Panel has previously observed,
foreclosures push down the prices of nearby properties, which
can in turn result in negative equity that begets more defaults
and foreclosures.\21\ A negative feedback loop can develop
between foreclosures and negative equity. To the extent that
negative equity alone may produce foreclosures, progress in
addressing loan affordability will have a limited impact on
foreclosure rates over the long term.
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\21\ Congressional Oversight Panel, The Foreclosure Crisis: Working
Toward a Solution, at 9 (Mar. 6, 2009) (online at cop.senate.gov/
documents/cop-030609-report.pdf) (hereinafter ``COP March Oversight
Report.'')
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Negative equity may also be a factor (along with
unemployment) contributing to historically low self-cure rates
on defaulted mortgage loans. Historically, self-cure rates on
mortgage defaults were fairly high; nearly half of all prime
defaults would cure on their own. Currently, however, self-cure
rates for all types of mortgage products are extremely low
(Figure 3). A homeowner with negative equity may well decide
that the financial belt-tightening necessary to cure a default
simply is not worth it or not possible. The homeowner might
rationally conclude that it is better for him or her to save
the monthly payments and relocate to a less expensive rental.
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\22\ Fitch Ratings, Delinquency Cure Rates Worsening for U.S. Prime
RMBS (Aug. 24, 2009) (hereinafter ``Fitch Release'').
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Estimates as to the number of households with negative
equity vary, but they are all dire. Many estimates also exclude
homeowners with minimal positive equity, borrowers who would
likely take a loss upon a sale after paying brokers' fees and
taxes. Currently, around one-third of all residential mortgage
borrowers have negative equity and another five percent have
near negative equity.\23\ Deutsche Bank also estimated that 14
million homeowners had negative equity as of the first quarter
of 2009,\24\ while Moody's Economy.com placed the estimate at
15 million for that quarter.\25\ Looking forward, Moody's
projects that by 2011, some 18 million homeowners will have
negative equity,\26\ while Deutsche Bank projects a figure of
as many as 25 million, or one-half of all homeowners with a
mortgage.\27\ The estimations vary by loan product type, but
even for conventional, conforming prime mortgages, Deutsche
Bank estimates that 41 percent of mortgagors will have negative
equity by the first quarter of 2011.\28\ As a comparison,
Deutsche Bank estimates that 16 percent of borrowers with
conventional, conforming prime mortgages currently have
negative equity.\29\
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\23\ CoreLogic Negative Equity Data, supra note 18.
\24\ Deutsche Bank, Drowning in Debt--A Look at ``Underwater''
Homeowners, at 2 (Aug. 5, 2009) (available online at www.sacbee.com/
static/weblogs/real_estate/
Deutsche%20research%20on%20underwater%20mortgages%208-5-09.pdf)
(hereinafter ``Deutsche Bank Debt Report'').
\25\ Id.
\26\ Henry Blodget, The Business Insider, Half of US Homeowners
Will be Underwater by 2011 (online at www.businessinsider.com/henry-
blodget-half-of-us-homeowners-underwater-by-2011-2009-8#now-14-million-
underwater-next-year-25-million-1) (accessed Oct. 5, 2009) (hereinafter
``Blodget Underwater Homeowners Report'').
\27\ The US Census Bureau estimates there to be 76 million home-
owning households and approximately two-thirds of them (52 million)
have mortgages. Census Housing Survey, supra note 1.
\28\ Deutsche Bank Debt Report, supra note 24.
\29\ Deutsche Bank Debt Report, supra note 24.
---------------------------------------------------------------------------
The negative equity situation also varies significantly by
state. (See Figure 4 below.) While some states like New York
and Hawaii have low levels of negative equity, in others, like
Nevada, Michigan, Arizona, Florida, California, Ohio, and
Georgia, the situation is particularly grim, with anywhere from
30 percent to 59 percent of homeowners currently having little
or no equity in their homes. As punctuated by expert testimony
at the Panel's Clark County field hearing in December 2008,
such situations, when combined with a catalyst such as rising
unemployment, pose ``a great risk going forward if the economy
does not pick up.'' \30\
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\30\ At the time, Dr. Keith Schwer testified that 50 percent of
Nevada homeowners had negative mortgage equity. He also stated his
belief that unemployment was likely to reach 10 percent in 2009.
Congressional Oversight Panel, Testimony of Director of the University
of Nevada, Las Vegas' Center for Business and Economic Research, Dr.
Keith Schwer, Clark County, NV: Ground Zero of the Housing and
Financial Crises (Dec. 16, 2008) (online at cop.senate.gov/documents/
transcript-121608-firsthearing.pdf).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
d. Interest-Only and Payment-Option Mortgages
Two additional, and simultaneous, waves of foreclosure
still stand ahead of us. These are expected to come from
payment shocks due to rate resets on two classes of non-
traditional mortgage products: interest-only and payment option
mortgages. Interest-only mortgages, whether fixed or adjustable
rate, have an initial interest-only period, typically five,
seven or ten years, during which the borrower's required
minimum monthly payments cover only interest, not principal.
After the expiration of the interest-only period, the monthly
payment rate resets with the principal amortized over the
remaining loan terms (typically 20 to 25 years). The result is
that after the interest-only period expires, the monthly
payment may be significantly higher.
Payment-option loans (virtually all ARMs keyed to an index
rate) are similar. Payment-option ARMs permit the borrower to
choose the level of monthly payment during the first five years
of the loan. Typically there are four choices--(1) as if the
loan were amortizing over 15 years; (2) as if the loan were
amortizing over 30 years; (3) interest-only (non-amortizing);
and (4) negatively amortizing. Payment-option ARMs generally
have negative amortization limits. If there is too much
negative amortization (usually 10-15 percent), then the loan
will be recast into a fully amortizing ARM for the remaining
term of the mortgage. If the negative amortization trigger is
not tripped first, the loan will recast after five years into a
fully-amortizing ARM with rates resetting every six to 12
months thereafter based on an index rate. In either case, the
monthly payment will increase significantly.
Historically, interest-only and payment-option loans were
niche products, but they boomed during the housing bubble.
Countrywide Financial, the nation's largest mortgage lender,
originated primarily payment-option ARMs during the bubble.\33\
Twenty percent of the dollar amount of mortgages originated
between 2004 and 2007 was either payment-option or interest-
only.\34\ First American CoreLogic calculates that there are
presently 2.8 million active interest-only home loans with an
outstanding principal balance of $908 billion.\35\
---------------------------------------------------------------------------
\33\ U.S. Securities and Exchange Commission, Countrywide Financial
Corporation, Form 10-Q (June 30, 2008) (online at www.sec.gov/Archives/
edgar/data/25191/000104746908009150/a2187147z10-q.htm).
\34\ Inside Mortgage Finance Publications, Mortgage Market
Statistical Annual, Volume I: The Primary Mortgage Market (2009). The
dollar amount of these mortgages currently outstanding is unknown, but
total originations from 2004-2007 were roughly equal to the total
amount of mortgage debt outstanding at the end of 2007. It is therefore
likely that even with some pay-options and interest only loans being
refinanced in this time period, that they comprise about a fifth of the
dollar amount of mortgages outstanding. Id.
\35\ The problems associated with interest-only loans were the
subject of a First American CoreLogic analysis commissioned by the New
York Times. David Streitfeld, As an Exotic Mortgage Resets, Payments
Skyrocket, New York Times (Sept. 8, 2009) (hereinafter ``Streitfeld
Mortgage Resets Article'').
---------------------------------------------------------------------------
Most interest-only and payment-option mortgages were not
subprime loans.\36\ Instead, they were made to prime
borrowers, but were often underwritten with reduced
documentation, making them so-called ``Alt-A'' loans.\37\ Many
were also jumbos, meaning that the original amount of the loan
was greater than the Fannie Mae/Freddie Mac conforming loan
limit.\38\ (See Figure 5.) This means, among other things,
that many of these homeowners are not eligible for assistance
from the Making Home Affordable Program because their mortgages
are above the maximum eligible amount, although recent
increases in the conforming loan limit for certain high-cost
areas have expanded eligibility.
---------------------------------------------------------------------------
\36\ Oren Bar-Gill, The Law, Economics and Psychology of Subprime
Mortgage Contracts, 94 Cornell L. Rev. 1073, 1086 (Nov. 2009) (online
at papers.ssrn.com/sol3/papers.cfm?abstract_id=1304744).
\37\ Credit Suisse, Research Report: Mortgage Liquidity du Jour:
Underestimated No More (Mar. 12, 2007) (online at www.scribd.com/doc/
282277/Credit-Suisse-Report-Mortgage-Liquidity-du-Jour-Underestimated-
No-More-March-2007) (hereinafter ``CS Mortgage Liquidity Report'').
\38\ Id. The conforming loan limit in certain high-cost areas was
raised from $417,000 to $729,750 in 2008, which means that certain
loans that would have been have previously been jumbo loans are now
conforming and therefore eligible to be modified under the Home
Affordability Modification Program (HAMP). Fannie Mae, Historical
Conventional Loan Limits (July 30, 2009) (online at www.fanniemae.com/
aboutfm/pdf/historicalloanlimits.pdf).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Payment-option and interest-only mortgages are typically 5/
1s, meaning that they have a rate reset after five years and
additional resets once each following year. This means that
mortgages of this type originated in 2004-2007 will be
experiencing rate resets in 2009-2012. (See Figure 6.) Assuming
that long-term low interest rates continue, they will mitigate
the payment reset shock on adjustable rate payment-option and
interest-only mortgages.\40\ But there will inevitably be a
sizeable payment shock simply from the kick-in of the full
amortization period, and the homeowners may not have the income
or savings to cover the increase in payments, and if they have
negative equity, will not be able to refinance into a more
stable product.\41\
---------------------------------------------------------------------------
\39\ CS Mortgage Liquidity Report, supra note 37.
\40\ If long term interest rates rise, there could be higher
numbers of defaults on these adjustable mortgages. One factor causing
the low rates is the Federal Reserve's buying of GSE securities. As
part of its monetary policy, the Federal Reserve purchases GSE
securities, therefore putting money into the economy and keeping
interest rates low. David A. Moss, A Concise Guide to Macroeconomics,
at 36-37 (Harvard Business School Press 2007) (providing a general
overview of economic policy). It is unclear whether this intervention
on the part of the Federal Reserve can sustain low mortgage interest
rates through the 2010-2012 period when the next round of resets will
occur. In addition, continued low interest rates will not protect
holders of Alt-A mortgages who have negative equity and no savings with
which to cover the gap between home value and mortgage. Other factors
affecting interest rates include the condition of the U.S. economy
(interest rates rise as the demand for funds increases and fall when
the demand for funds is low), inflationary or deflationary pressures,
the involvement of foreign investors willing to lend money to the
United States, and fluctuations in exchange rates. Id. at 34-39.
\41\ Streitfeld Mortgage Resets Article, supra note 35.
---------------------------------------------------------------------------
The impact on the number of foreclosures from recasts of
interest-only and payment-option mortgages is likely to be at
least as great as those from subprime hybrid ARMs, as shown by
Figure 7, a graph from Credit Suisse showing anticipated rate
resets for different types of mortgages. These peaks might be
softened only because a large number of payment-option ARM
mortgagors are already in default; the Office of the
Comptroller of the Currency and the Office of Thrift
Supervision (OCC/OTS) Mortgage Metrics, which cover two-thirds
of the market, indicate that a quarter of all payment-option
ARMs are seriously delinquent or in foreclosure,\42\ while
Deutsche Bank indicates nearly 40 percent of outstanding
payment-option ARMs are already 60+ days delinquent.\43\ Not
coincidentally, more than 77 percent of payment-option ARMs
have negative equity presently.\44\
---------------------------------------------------------------------------
\42\ Office of the Comptroller of the Currency and Office of Thrift
Supervision, OCC and OTS Mortgage Metrics Report, Second Quarter 2009,
at 17 (Sept. 21, 2009) (online at files.ots.treas.gov/482078.pdf)
(hereinafter ``OCC and OTS Second Quarter Mortgage Report'').
\43\ Deutsche Bank, Global Economic Perspectives: Housing Turning
Slowly, at 8 (Sept. 9, 2009).
\44\ Blodget Underwater Homeowners Report, supra note 26.
\45\ Henry Blodget, Business Insider, The ``Coming Alt-A Mortgage
Reset Bomb'' Is A Myth (Aug. 28, 2009) (online at
www.businessinsider.com/henry-blodget-the-coming-alt-a-mortgage-reset-
bomb-is-a-myth-2009-8).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
e. Unemployment
---------------------------------------------------------------------------
\46\ CS Mortgage Liquidity Report, supra note 37.
---------------------------------------------------------------------------
A fifth wave of foreclosures is now occurring, driven by
unemployment. The current unemployment rate of 9.8 percent has
more than doubled since the beginning of 2007, when foreclosure
rates began to rise. (See Figure 8, below.) As Figure 9 shows,
unemployment and foreclosure rates have generally been moving
together since 2000. When a household loses an income, even
temporarily, the likelihood of a mortgage default rises
sharply. Some households are able to continue making payments
out of a second income, from savings, or from unemployment
insurance payments, but most mortgage lenders will not accept
partial payments. When reduced household income is combined
with negative equity, payment reset shock, or both, default is
nearly inevitable. Moreover, continued unemployment makes self-
cure of defaults much less likely. (See supra section 1(c)).
Unemployment does not discriminate by mortgage product
type. Defaults are now affecting the conventional prime market,
jumbo prime, second lien, and home equity line of credit
(HELOC) markets; the defaults are being driven by unemployment
and negative equity, rather than payment reset shock. Prime
defaults and foreclosures began to surge at the close of 2008
and have continued to rise into 2009.\47\ (See Figure 10,
below.) Even as foreclosures seem to be abating at the bottom
of the market, defaults are soaring at the top of the market.
What began as a subprime problem is now truly a national
mortgage problem.
---------------------------------------------------------------------------
\47\ MBA National Delinquency Survey, supra note 4. Lender
Processing Services, Lender Processing Services' August Mortgage
Monitor Report Shows Increased Foreclosure Starts But Greater Loss
Mitigation Success (Sept. 1, 2009) (online at www.lpsvcs.com/NewsRoom/
Pages/20090901.aspx); American Bankers Association, Consumer
Delinquencies Rise Again in First Quarter 2009: Composite Ratio Inches
Higher, Sets New Record (July 7, 2009) (online at www.aba.com/
Press+Room/070709DelinquencyBulletin.htm).
\48\ U.S. Bureau of Labor Statistics, Household Data Historical, A-
1 Employment Status of the Civilian Non-Institutional Population 16
Years and Over, 1970 to Date (online at ftp://ftp.bls.gov/pub/suppl/
empsit.cpseea1.txt) (accessed Oct. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2. Mixed Signs in the Housing Market
Recently, there have been some positive signs in the
housing sector. First, although foreclosure inventories have
grown, the pace of foreclosure initiations remained static from
the fourth quarter of 2008 to the first quarter of 2009 (1.37
percent in Q4 2008 and 1.36 percent in Q1 2009). (See Figure
10.) It is hard, however, to read too much into a particular
quarter's data, and foreclosure starts remain at a near record
level. The static level of foreclosure starts does not
represent the impact of the Making Home Affordable Program, as
that program was not announced until late in the quarter and
did not become operational until April 2009. To the extent that
the slowed foreclosure starts are not simply a data fluke, one
tenable explanation is that we have reached a limit in the
legal system's capacity to handle foreclosure initiations.
Other possible reasons include good-faith efforts by servicers
to enter into modifications, foreclosure moratoria, servicer
capacity issues, and the possibility that mortgage servicers
are intentionally postponing foreclosure filings to delay loss
recognition for accounting purposes.\50\
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\49\ MBA National Delinquency Survey, supra note 4.
\50\ Kate Berry, American Banker, Postponing the Day of Reckoning
(Aug. 26, 2009) (online at www.financial-planning.com/news/postponing-
reckoning-foreclosure-2663681-1.html).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A more encouraging sign is that housing price indices are
flattening and even moving upward, although there is
significant regional and market sector variation.\52\ Even as
prices rebound for the lower end of the housing market,
defaults are increasing on the top end,\53\ and some markets,
like Phoenix and Las Vegas, continue to see precipitous housing
price declines.\54\
---------------------------------------------------------------------------
\51\ MBA National Delinquency Survey, supra note 4.
\52\ Standard & Poor's, Broad Improvement in Home Price According
to the S&P/Case-Shiller Home Price Indices (Sept. 29, 2009) (online at
www2.standardandpoors.com/spf/pdf/index/
CSHomePrice_Release_092955.pdf).
\53\ By July 2009, foreclosure starts for jumbo mortgages were
happening at more than three times the rate they were occurring in
January 2008. Lender Processing Services (LPS), Mortgage Monitor:
August 2009 Mortgage Performance Observations, at 21 (online at
www.lpsvcs.com/NewsRoom/IndustryData/Documents/09-
2009%20Mortgage%20Monitor/LPS%20Mortgage%20Monitor%20Aug09%20(2).pdf).
The jumbo market will likely continue to underperform without increased
activity in the private-label secondary market or bank lending. This
means that foreclosure rates for jumbo mortgages are likely to stay
higher than normal. Because Fannie and Freddie will not buy jumbo
loans, and with the sharp decline of the private-label securities
market, banks have little appetite for originating jumbos.
Consequently, jumbos have fallen from around 15 percent of the mortgage
market to a mere 2.3 percent. The diminished availability of credit for
the purchase of expensive homes has been one factor in the decline in
prices at the top end of the market. PMI, The Housing & Mortgage Market
Review (July 2009) (online at www.pmi-us.com/PDF/
jul_09_pmi_hammr.html).
\54\ Nationally, a 10.21 percent decline in home prices in the 12
months ending in April 2009 masked a wide range of trends in the
states. The largest price declines were in Nevada (26.05 percent),
Florida (23.15 percent), California (22.72 percent), and Arizona (20.51
percent). The largest price increases were in West Virginia (5.27
percent), New York (3.88 percent), and Louisiana (3.10 percent). Id.
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Several factors appear to have contributed to the price
increases. Low interest rates and the new first-time home buyer
tax credit have combined with declines in housing prices to
make home purchases more affordable.\55\ Given such policies,
the National Association of Realtors Affordability Index is at
a historic high. Moreover, the glut in housing supply is
slackening as the stock of new homes for sale is running off
rapidly. Yet foreclosures and distressed sales continue to keep
inventory levels high, which pushes down prices. In recent
months, one-third of home sales have been foreclosures or short
sales.\56\ Moreover, when government support for the housing
market is withdrawn, there will also necessarily be more
downward pressure on home prices.
---------------------------------------------------------------------------
\55\ The new homebuyer tax credit will expire on December 1, 2009.
Some observers are concerned about the effect of this expiration. Dina
ElBoghdady, Clock Is Ticking for First-Home Buyers, Washington Post
(Sept. 25, 2009) (online at www.washingtonpost.com/wp-dyn/content/
article/2009/09/24/AR2009092404936.html).
\56\ Diana Golobay, NAR Offers Realtors Certification for Short
Sales, Foreclosures, Housing Wire.com, (Aug. 26, 2009) (online at
www.housingwire.com/2009/08/26/nar-offers-realtors-certification-for-
short-sales-foreclosures/).
---------------------------------------------------------------------------
While there are encouraging signs, it is hard to read them
as anything more than a possible bottoming out of the housing
market, rather than a true recovery. Housing price index
futures show that the market does not expect any significant
gain in home prices for a few years. U.S. housing market
futures based on the Case-Shiller Composite 10 Home Price Index
are traded on the Chicago Mercantile Exchange. The Index is
pegged to January 2000 as 100.
At its peak in April 2006, the Index was at 226.23. In
April 2009, the Index was at 150.34, and as of July 2009 the
Index stood at 155.85, down 32 percent from peak. The futures
market anticipates the Index falling again to a low of 145.00
in August 2010 (down 36 percent from the peak and up 45 percent
for the decade) and still not climbing above 160 (down 29
percent from peak) even in November 2013, the latest date on
which futures are presently being traded. (The Index stood at
160 in January 2009 and October 2003.) In other words, the
market anticipates that the national average housing price will
rise only 4 percent from current levels over the next four or
five years. (See Figure 11.) While this is certainly better
than a continued plunge in housing prices, it also means that
the market anticipates that in another four years prices will
remain near their seriously depressed values at the beginning
of this year.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Even if prices do not fall further, the downward pressure
of continued mass foreclosures may also prevent housing prices
from rising significantly during the next few years. Stagnant
housing prices would result in continued negative equity,
setting the stage for foreclosures if payments become
unaffordable or households need to move. Using housing price
futures as an approximate guide to what might be expected in
the housing market, many of the families that took out
mortgages between 2003 and 2008--even those that put down 20
percent or more and took out standard conforming loans--will
have negative equity in their homes into the foreseeable
future. If prices remain stagnant during the next four years,
then at least one in five of today's U.S. homeowners, if not
many more, will have negative equity in their homes, and nearly
one in four of them will have so little equity in their homes
that they will not be able to cover the costs of selling their
properties without a loss. These scenarios could potentially
unfold for approximately 15 million and 18 million homeowners,
respectively.\57\
---------------------------------------------------------------------------
\57\ CoreLogic Negative Equity Data, supra note 18. U.S. Census
Bureau, American Housing Survey--Frequently Asked Questions (online at
www.census.gov/hhes/www/housing/ahs/ahsfaq.html) (accessed Oct. 7,
2009). More than 15.2 million mortgages were in negative equity as of
June 30, 2009, out of 75.6 million owner-occupied residences, or about
20 percent. More than 17.7 million, or about 23 percent of owner-
occupied residences, were in or near negative equity. Id.
---------------------------------------------------------------------------
Ongoing negative equity presents a problem not just for
current foreclosures, but for years into the future. This means
more families losing their homes in foreclosure, more losses
for lenders and investors in mortgage securitizations
(including entities whose debts are guaranteed by the United
States government, such as Fannie Mae and Freddie Mac), and
more blighted properties for communities. It also means that
true stabilization of the U.S. housing market will be delayed,
and investors will have difficulty pricing housing investments
because of uncertainty about default rates.
It is against this largely discouraging backdrop that the
Panel now turns to consideration of foreclosure mitigation
efforts.
3. Congressional Efforts to Stem the Tide of Foreclosures
In response to the waves of foreclosures, Congress made
foreclosure mitigation an explicit part of the Emergency
Economic Stabilization Act (EESA), designed to address the
nation's economic crisis.\58\ Two of EESA's stated goals are to
``preserve homeownership'' and ``protect home values.'' \59\ In
addition, EESA instructs the Treasury Secretary to take into
consideration ``the need to help families keep their homes and
to stabilize communities.'' \60\ It also includes express
directions to create mortgage modification programs.\61\
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\58\ EESA Sec. Sec. 2(2)(B), 109, 110, 125(b)(1)(iv). The HOPE for
Homeowners Act of 2008, part of the Housing and Economic Recovery Act,
Pub. L. No. 110-289, was intended to address the foreclosure crisis,
but met with little success. The 2007 FHASecure program was also not
adequate to solve the problem. U.S. Department of Housing and Urban
Development, Bush Administration to Help Nearly One-Quarter of a
Million Homeowners Refinance, Keep Their Homes (Aug. 31, 2007) (online
at www.hud.gov/news/release.cfm?content=pr07-123.cfm).
\59\ EESA Sec. 2(2).
\60\ EESA Sec. 103(3).
\61\ EESA Sec. 110.
---------------------------------------------------------------------------
Prior to passage of EESA, Senator Christopher Dodd stated
that ``Democrats and Republicans . . . warned of a coming wave
of foreclosures that could devastate millions of homeowners and
have a devastating impact on our economy.'' \62\
---------------------------------------------------------------------------
\62\ Statement of Senator Christopher Dodd, Congressional Record,
S10223 (Oct. 1, 2008) (online at frwebgate.access.gpo.gov/cgi-bin/
getpage.cgi?dbname= 2008_record&page=S10224&position=all).
---------------------------------------------------------------------------
Senator John Rockefeller added:
[T]he bill provides relief to homeowners who have
been caught up in the current mortgage crisis and are
trying to save their homes. The bill starts to address
the root of this financial crisis--foreclosures--not by
giving a pass to individuals who took out loans they
could not afford, but by allowing the Government to
renegotiate mortgage terms. Two million more
foreclosures are projected in the next year and it is
in everyone's interest to bring that number down,
keeping more families in their homes and paying off
their debts.\63\
---------------------------------------------------------------------------
\63\ Statement of Senator Jay Rockefeller, Congressional Record,
S10433 (Oct. 2, 2008).
Senator Judd Gregg continued, ``We focused a lot of
attention on making sure that we could keep people in their
homes. We don't want people foreclosed on.'' \64\ Senator Max
Baucus explained that home ownership ``is not an ancillary
objective; it is inherent . . . to our efforts to resolve this
economic crisis.'' \65\ Senator Jack Reed added that ``[i]t is
only through helping the homeowners that we will we get to the
bottom of the crisis.'' \66\
---------------------------------------------------------------------------
\64\ Statement of Senator Judd Gregg, Congressional Record, S10217
(Oct. 1, 2008).
\65\ Statement of Senator Max Baucus, Congressional Record, S10224
(Oct. 1, 2008).
\66\ Statement of Senator Jack Reed, Congressional Record, S10228
(Oct. 1, 2008).
---------------------------------------------------------------------------
In early March 2009, Treasury unveiled the Making Home
Affordable (MHA) initiative, implementing the foreclosure
mitigation provisions of EESA. MHA consists of two primary
programs, the Home Affordable Refinance Program (HARP) and Home
Affordable Modification Program (HAMP), along with several
subprograms.\67\
---------------------------------------------------------------------------
\67\ See Sections C1-C5 for a fuller description and discussion of
the MHA programs.
---------------------------------------------------------------------------
B. March Checklist
In its March 2009 report, the Panel set forth a checklist
by which it would evaluate future foreclosure modification
efforts, particularly MHA. The checklist had eight criteria:
1. Will the plan result in modifications that create
affordable monthly payments?
2. Does the plan deal with negative equity?
3. Does the plan address junior mortgages?
4. Does the plan overcome obstacles in existing pooling and
servicing agreements that may prevent modifications?
5. Does the plan counteract mortgage servicer incentives
not to engage in modifications?
6. Does the plan provide adequate outreach to homeowners?
7. Can the plan be scaled up quickly to deal with millions
of mortgages?
8. Will the plan have widespread participation by lenders
and servicers?
In general, what progress has MHA made in addressing each
point?
1. Affordability
MHA has focused primarily on achieving affordable monthly
mortgage payments through a standard for modifications of a 31
percent debt-to-income (DTI) ratio. Under HAMP, the program
offering the most information on outcomes, on average,
borrowers' DTI went from 47 percent before the modification to
31 percent after, a drop of 34 percent. This translates to a
drop in the average payment from $1,554.14 to $955.65, an
average savings of $598.49 per month.
The more affordable payments were achieved primarily
through reductions in interest rates. On average, rates dropped
from 7.58 percent to 2.92 percent. This is noteworthy because
under the program, interest rates begin to rise in five years,
raising questions about the effect on affordability down the
road. The program does not include specific features that
address the unemployed. At the current time, MHA has made
significant progress in providing more affordable payments for
many. For further discussion of affordability issues, see
Section C.
2. Negative Equity
While HARP and HAMP can help achieve affordable payments
for homeowners with negative equity, neither of MHA's two
primary components was primarily designed to address underlying
negative equity, although they do have features that address
the issue. For example, HAMP does not have a maximum LTV, HARP
allows refinancings of performing loans above 100 percent LTV
(currently up to 125 percent), and in both programs principal
reductions are permitted although not required. HAMP appears to
increase negative equity modestly by capitalizing arrearages.
Accordingly, average LTV ratios under HAMP increased from
134.13 percent to 136.61 percent. For further discussion of
negative equity, see Section D.
3. Second Liens
The MHA initiative contains a second lien program to help
overcome the obstacles to modification presented by junior
liens. Second liens can interfere with the success of loan
modification in several ways. First, unless the second lien is
also modified, modifying the first lien may not reduce
homeowners' total monthly mortgage payments to an affordable
level.\68\ Even if the homeowner can afford a modified first
mortgage payment, a second unmodified mortgage payment can make
the total monthly mortgage payments unaffordable, increasing
redefault risk.\69\ Second, holders of primary mortgages are
often hesitant to modify the mortgage if the second mortgage
holder does not agree to re-subordinate the second mortgage to
the first mortgage. This can present a significant procedural
obstacle to modifying a first lien.\70\ Third, second liens
also increase the negative equity that can contribute to
subsequent redefaults.
---------------------------------------------------------------------------
\68\ Payments on junior liens are not included in the calculation
of 31 percent front-end DTI under the HAMP first lien program. Front-
end DTI is calculated by summing principal, interest, taxes, insurance,
homeowners association fees, and condominium fees, and dividing the
total by monthly gross income. Payments on junior liens, along with
monthly insurance premiums, payments on credit card debt, alimony, car
lease payments, and monthly mortgage payments on second homes, are
included in the calculation of back-end DTI.
\69\ U.S. Department of the Treasury, Making Home Affordable:
Program Update, at 1 (Apr. 28, 2009) (online at
wwwfinancialstability.gov/docs/042809SecondLienFactSheet.pdf).
(hereinafter ``MHAP Update'').
\70\ Id. The Panel addressed the complexities and challenges caused
by junior liens in its March Oversight Report. The Panel noted that
there are multiple mortgages on many properties, and that across a
range of mortgage products, many second mortgages were originated
entirely separately from the first mortgage and often without the
knowledge of the first mortgagee. In addition, millions of homeowners
took on second mortgages, often as home equity lines of credit. Since
those debts also encumber the home, they must be dealt with in any
viable refinancing effort. As the Panel stated, ``The existence of
junior mortgages also significantly complicates the refinancing
process. Unless a junior mortgagee consents to subordination, the
junior mortgage moves up in seniority upon refinancing. Out of the
money junior mortgagees will consent to subordination only if they are
paid. Thus, junior mortgages pose a serious holdup for refinancings,
demanding a ransom in order to permit a refinancing to proceed.'' COP
March Oversight Report, supra note 21.
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According to Treasury, as many as 50 percent of at-risk
mortgages also have second liens.\71\ Therefore, it is critical
that second liens be addressed as part of a comprehensive
mortgage modification initiative. Treasury announced a second
lien program as part of HAMP. The program will offer incentive
payments and cost sharing arrangements to incentivize
modification or extinguishment of second liens.
---------------------------------------------------------------------------
\71\ Id. Apgar Senate Testimony, infra note 183; House Committee on
Financial Services, Subcommittee on Housing and Community Opportunity,
Written Testimony of FHA Commissioner and U.S. Department of Housing
and Urban Development Assistant Secretary for Housing, Dave Stevens,
Progress of the Making Home Affordable Program: What Are the Outcomes
for Homeowners and What Are the Obstacles to Success? (Sept. 9, 2009)
(online at www.hud.gov/offices/cir/test090909.cfm) (hereinafter ``House
Testimony of Dave Stevens'').
---------------------------------------------------------------------------
At this time, the Second Lien Program is not yet up and
running. While Treasury is currently in negotiations with
lenders and servicers covering more than 80 percent of the
second lien market, it does not yet have any signed
participation contracts for the program. Given the prevalence
of second liens and the significant obstacle they can present
to successful loan modification, it is critical that Treasury
get the program up and running expeditiously. For further
discussion of the Second Lien Program, see Section C.
4. PSA Obstacles
The Panel's March 2009 report identified contractual
restrictions on loan modification in securitization pooling and
servicing agreements (PSAs) \72\ as a factor inhibiting loan
modification efforts. It is unclear whether Treasury has the
authority to abrogate these private contracts, although
Treasury could, and already has, conditioned TARP assistance to
financial institutions on particular mortgage modification
terms. HAMP requires servicers to undertake reasonable attempts
to have any contractual obligations revised, but HAMP otherwise
defers to contractual requirements imposed on mortgage
servicers by PSAs.
---------------------------------------------------------------------------
\72\ A PSA is a document that actually creates a residential
mortgage-backed securitized trust and establishes the obligations and
authority of the servicer as well as some mandatory rules and
procedures for the sales and transfers of the mortgages and mortgage
notes from the originators to the trust.
---------------------------------------------------------------------------
Many PSAs are simply vague,\73\ however, virtually every
PSA restricts the ability to stretch out a loan's term; loan
terms may not be extended beyond the final maturity date of the
other loans in the pool. Securitized loans are typically all
from the same annual vintage give or take a year, which means
that the ability to stretch out terms is usually limited to a
year at most. Not surprisingly, HAMP modifications stretch out
terms by about a year on average.
---------------------------------------------------------------------------
\73\ John Patrick Hunt, What Do Subprime Securitization Contracts
Actually Say About Loan Modification?, at 10-11 (Mar. 25, 2009) (online
at www.law.berkeley.edu/files/bclbe/
Subprime_Securitization_Contracts_3.25.09.pdf) (hereinafter ``Hunt
Subprime Contracts Paper'').
---------------------------------------------------------------------------
The inability to stretch out terms for more than a year in
most cases has a serious impact on HAMP modifications. The
inability to do meaningful term extensions likely means that
some homeowners who could afford mortgages if longer term
extensions were available are unable to qualify for HAMP
modifications. For further discussion of PSAs, see Section C.
5. Servicer Incentives
HAMP provides financial incentives to mortgage servicers,
borrowers and investors to modify residential mortgages. Under
the first lien program, servicers receive an up-front fee of
$1,000 for each completed modification. Second, servicers
receive ``Pay-for-Success'' fees of up to $1,000 each year for
up to three years. These fees will be paid monthly and are
predicated on the borrower staying current on the loan.
Borrowers are eligible for ``Pay-for-Performance Success
Payments'' of up to $1,000 each year for up to five years, as
long as they stay current on their mortgage. This payment is
applied directly to the principal of their mortgage. The
``Responsible Modification Incentive Payment'' is a one-time
bonus payment of $1,500 to the lender/investor and $500 to
servicers that will be awarded for modifications on loans that
are still performing. These incentive payments are in addition
to the shared cost of reducing the DTI from 38 to 31 percent.
The Second Lien Program also contains a ``pay-for-success''
structure similar to the first lien modification program.
Servicers of junior liens can be paid $500 up-front for a
successful modification and then receive successive payments of
$250 per year for three years, provided that the modified first
loan remains current.\74\ If borrowers remain current on their
modified first loan, they can receive payments of up to $250
per year for as many as five years.\75\ This means that
borrowers could receive as much as $1,250 for making payments
on time. These borrower incentives would be directed at paying
down the principal on the first mortgage.\76\ These incentive
payments are in addition to the cost sharing available for
modifying a second lien or the lump sum payment available for
extinguishing a second lien.
---------------------------------------------------------------------------
\74\ MHAP Update, supra note 69, at 3; Introduction of the Second
Lien Modification Program (2MP) (Aug. 13, 2009) (online at
www.hmpadmin.com/portal/docs/second_lien/sd0905.pdf) (hereinafter
``SLMP Supplemental Directive'').
\75\ MHAP Update, supra note 69, at 3; Id.
\76\ MHAP Update, supra note 69, at 3; Id.
---------------------------------------------------------------------------
Under the Home Price Decline Protection Program (HPDP),
investors may be eligible for incentive payments when the value
of mortgages that they have modified declines. The incentive
payments are calculated based on a Treasury formula
incorporating an estimate of the projected home price decline
over the next year based on changes in average local market
home prices over the two previous quarters, the unpaid
principal balance of the mortgage loan prior to HAMP
modification, and the mark-to-market loan-to-value ratio of the
mortgage loan prior to HAMP modification.\77\ Incentives are to
be paid on the first- and second-year anniversaries of the
borrower's first trial payment due date under HAMP.\78\
---------------------------------------------------------------------------
\77\ U.S. Department of the Treasury, Supplemental Directive 09-04,
Home Affordable Modification Program--Home Price Decline Protection
Incentives (July 31, 2009) (online at www.financialstability.gov/docs/
press/SupplementalDirective7-31-09.pdf) (hereinafter ``HAMP
Supplemental Directive'').
\78\ U.S. Department of the Treasury, Secretaries Geithner, Donovan
Announce new Details of Making Home Affordable Program, Highlight
Implementation Progress (May 14, 2009) (online at www.treas.gov/press/
releases/tg131.htm) (hereinafter ``Secretaries Geithner, Donovan
Announcement'').
---------------------------------------------------------------------------
The Foreclosure Alternatives Program facilitates both short
sales and deeds-in-lieu by providing incentive payments to
borrowers, junior-lien holders, and servicers, similar in
structure and amount to HAMP incentive payments. Servicers can
receive incentive compensation of up to $1,000 for each
successful completion of a short sale or deed-in-lieu.\79\
Borrowers are eligible for a payment of $1,500 in relocation
expenses in order to effectuate short sales and deeds-in-lieu
of foreclosure.\80\ The Short Sale Agreement, upon the
servicer's option, may also include a condition that the
borrower agrees to ``deed the property to the servicer in
exchange for a release from the debt if the property does not
sell the time specified in the Agreement or any extension
thereof.'' \81\ In such cases, the borrower agrees to vacate
the property within 30 days and, upon performance, receives
$1,500 from Treasury to assist with relocation costs.\82\
Treasury has also agreed to share the cost of paying junior
lien holders to release their claims by matching $1 for every
$2 paid by investors, for a maximum total Treasury contribution
of $1,000.\83\ Payments are made upon the successful completion
of a short sale or deed-in-lieu. Although the HOPE for
Homeowners program is an FHA program rather than a Treasury
program, The Helping Families Save Their Homes Act added
incentive payments to servicers, funded through HAMP.\84\ These
incentive payments closely approximate MHA incentive
payments.\85\
---------------------------------------------------------------------------
\79\ U.S. Department of the Treasury, Making Home Affordable:
Update: Foreclosure Alternatives and Home Price Decline Protection
Incentives (May 14, 2009) (online at www.treas.gov/press/releases/docs/
05142009FactSheet-MakingHomesAffordable.pdf). (hereinafter ``MHA May
Update'').
\80\ Id.; U.S. Department of the Treasury, Making Home Affordable:
Updated Detailed Program Description, at 5-6 (Mar. 4, 2009) (online at
www.treas.gov/press/releases/reports/housing_fact_sheet.pdf)
(hereinafter ``MHA March Update'').
\81\ Id.
\82\ Id. This amount is in addition to any funds the servicer may
provide to the borrower.
\83\ Id.
\84\ Pub. L. No. 111-22, Sec. 202(b).
\85\ Pub. L. No. 111-22, Sec. 202(a)(11).
---------------------------------------------------------------------------
It is not yet clear whether these incentive payments are
sufficient to overcome the ramp-up costs for servicers to adapt
their business models, including hiring and training new
employees and creating new infrastructure, as well as other
possible incentives not to modify mortgages. For further
discussion of servicer incentives, see Section C.
6. Homeowner Outreach
One key to maximizing the impact of a foreclosure
mitigation program is putting financially distressed homeowners
in contact with someone who can modify their mortgages.\86\
Treasury has made significant progress in this area. Treasury's
efforts include launching a website
(www.MakingHomeAffordable.gov), establishing a call center for
borrowers to reach HUD-approved housing counselors, and holding
foreclosure prevention workshops and counselor training forums
in cities with high foreclosure rates.\87\ From early May to
late August, web hits on Treasury's MHA website doubled from 17
million to 34 million. Self-assessment tools to determine
eligibility for the programs under MHA are the foundation of
the website. Additionally, other resources on the website, such
as the ``Look Up Your Loan'' tool, which allows a borrower to
see if their mortgage is owned by Fannie Mae or Freddie Mac,
serve as important resources in navigating the process. The
website also offers numerous outlets for borrower education and
homeowner outreach. At the Panel's foreclosure mitigation field
hearing, Seth Wheeler, senior advisor at the Treasury
Department also highlighted the continuing efforts to enhance
the capabilities of the HOPE Hotline, the informational call
center, to meet the needs of the escalating number of borrowers
participating in MHA programs.\88\
---------------------------------------------------------------------------
\86\ COP March Oversight Report, supra note 21.
\87\ House Financial Services Committee, Subcommittee on Housing
and Community Opportunity, Testimony of U.S. Department of Treasury
Assistant Secretary for Financial Institutions Michael S. Barr, Hearing
on Stabilizing the Housing Market (Sept. 9, 2009) (online at
www.makinghomeaffordable.gov/pr_09092009.html) (hereinafter ``Barr
Hearing Testimony'').
\88\ Congressional Oversight Panel, Written Testimony of U.S.
Department of Treasury Senior Advisor Seth Wheeler, Philadelphia Field
Hearing on Mortgage Foreclosures, at 8 (Sept. 24, 2009) (online at
cop.senate.gov/documents/testimony-092409-wheeler.pdf) (hereinafter
``Wheeler Philadelphia Hearing Testimony'').
---------------------------------------------------------------------------
Lenders and servicers have also undertaken a campaign to
contact distressed borrowers, as well as those whose loans are
at risk of default. To date, 1,883,108 letter requests for
financial information have been sent to borrowers.\89\ While
this number still falls far short of Treasury's announced
availability to three to four million borrowers, considerable
progress can be measured and observed in the first few months
of MHA's operation.
---------------------------------------------------------------------------
\89\ HAMP statistics provided by Treasury to the Panel.
---------------------------------------------------------------------------
Outreach to homeowners must be considered not just in terms
of quantity, but also in terms of quality. Servicers must
provide effective outreach. Outreach should include more than
robo-calls and form letters, and should be provided in plain
language that is accessible to all borrowers. Borrowers in
financial distress are likely overwhelmed and intimidated, and
might not be eager to pay close attention to the entreaties of
their creditors. Partnership with community groups and borrower
counseling groups is an important element of effective
outreach.
Another important consideration in Treasury's outreach
strategy involves the role that well-publicized cases of
mortgage modification fraud have had in discouraging homeowners
from participating in MHA.\90\ Although lenders and servicers
have sent nearly 1.9 million request letters to distressed
borrowers (as mentioned above), it is not clear how many leery
recipients avoided opening these letters, or overlooked such
responsible letters in the deluge of other fraudulent offers
and notices. In a recent study by the Federal Trade Commission
(FTC) of online and print advertising for mortgage foreclosure
rescue operations, approximately 71 different companies were
found to be running suspicious ads.\91\ To combat these scams
and alleviate concerns for skeptical homeowners, the
Administration has started a coordinated multi-agency and
federal/state effort, which includes the Department of the
Treasury, the Department of Justice, the Department of Housing
and Urban Development, the Federal Trade Commission, and state
Attorneys General to coordinate investigative efforts, alert
financial institutions and consumers to emerging schemes, and
enhance enforcement actions.\92\ Seth Wheeler said in written
testimony to the Panel in September that the federal government
has ``put scammers on notice that we will not stand by while
they prey on homeowners seeking help under our program.'' \93\
These efforts must continue.
---------------------------------------------------------------------------
\90\ Congressional Oversight Panel, Coping With the Foreclosure
Crisis: State and Local Efforts to Combat Foreclosures in Prince
George's County, Maryland (Feb. 27, 2009) (S. Hrg. 111-10).
\91\ U.S. Department of the Treasury, Federal, State Partners
Announce Multi-Agency Crackdown Targeting Foreclosure Rescue Scams,
Loan Modification Fraud (Apr. 6, 2009) (online at
makinghomeaffordable.gov/pr_040609.html).
\92\ Participants include: Treasury, the U.S. Department of Justice
(DOJ), HUD, FTC, and the Attorney General of Illinois. Id.
\93\ Wheeler Philadelphia Hearing Testimony, supra note 88.
---------------------------------------------------------------------------
Treasury could also consider taking the additional step of
sending request letters to homeowners directly from either the
Treasury Secretary or the President in order to bring further
clarity and authenticity to the process.
7. Scaled Up Quickly
MHA was announced in February 2009, but the program's
details were not available until March 2009, and the first
trial HAMP modifications did not begin until April 2009. As a
result, there were no permanent HAMP modifications until July
2009. In any event, the scale up period should now be over.
The ability of Treasury and servicers to meet demand
adequately for the program is likely to have an effect on the
overall borrower perception of the program, which could in turn
impact the program's effectiveness in future outreach to
homeowners. Borrowers will not want to seek assistance from the
program if they view it as ineffective or unresponsive.
Therefore, the success of borrower outreach is closely linked
to servicer capacity and the ability to scale up quickly.
Treasury's efforts to press ahead with massive borrower
outreach without first addressing servicer capacity issues
could hurt the public perception and credibility of the
program.
In response to a question from the Panel on this point,
Treasury Assistant for Financial Stability Secretary Herbert
Allison indicated that Treasury Secretary Timothy Geithner and
Housing and Urban Development Secretary Shaun Donovan have
``called on servicers to take specific steps to increase
capacity, including adding more staff than previously planned,
expanding call centers beyond their current size, providing an
escalation path for borrowers dissatisfied with the service
they have received, bolstering training of representatives,
developing extra on-line tools, and sending additional mailings
to borrowers who may be eligible for the program.'' \94\ It is
critical that the efforts to increase capacity keep pace with
the efforts to reach out to borrowers.
---------------------------------------------------------------------------
\94\ Congressional Oversight Panel, Questions for U.S. Department
of the Treasury Assistant Secretary for Financial Stability and
Counselor to the Secretary, Herb Allison, at 7 (June 24, 2009)
(hereinafter ``Allison COP Testimony'').
---------------------------------------------------------------------------
8. Widespread Participation
Widespread servicer participation is an essential part of a
successful foreclosure mitigation program. Servicers of Fannie
Mae and Freddie Mac mortgages are required to participate in
HARP, covering approximately 2,300 servicers.\95\
---------------------------------------------------------------------------
\95\ U.S. Department of the Treasury, Making Home Affordable
Program, Servicer Performance Report through August 2009 (Oct. 8, 2009)
(online at www.treas.gov/press/releases/docs/
MHA%20Public%20100809%20Final.pdf) (hereinafter ``Servicer Performance
Report'').
---------------------------------------------------------------------------
HAMP has both a voluntary and mandatory participation
component for lenders/servicers. Any participants in TARP
programs initiated after February 2, 2009, are required to take
part in mortgage modification programs consistent with Treasury
standards.\96\ Since the Capital Purchase Program (CPP), the
primary TARP vehicle for bank assistance, was established prior
to this date, the majority of financial institutions are not
obliged to participate. However, servicers of Fannie Mae or
Freddie Mac mortgages are obligated to participate in HAMP for
their Fannie Mae and Freddie Mac mortgages.
---------------------------------------------------------------------------
\96\ U.S. Department of the Treasury, Fact Sheet Financial
Stability Plan (February 9, 2009) (online at
www.financialstability.gov/docs/fact-sheet.pdf) (hereinafter
``Financial Stability Plan Fact Sheet'').
---------------------------------------------------------------------------
On the voluntary servicer participation side, Treasury
estimates that 85 percent of HAMP-eligible mortgage debt is
serviced by participating servicers.\97\ This comes close to
Treasury's projection that HAMP will ultimately cover 90
percent of the potential loan population.\98\ Through October
6, 2009, 63 servicers are participating in the program.
---------------------------------------------------------------------------
\97\ Servicer Performance Report, supra note 95.
\98\ Government Accountability Office, Troubled Asset Relief
Program: Treasury Actions Needed to Make the Home Affordable
Modification Program More Transparent and Accountable, at 32 (July
2009) (online at www.gao.gov/new.items/d09837.pdf) (hereinafter ``GAO
HAMP Report'').
---------------------------------------------------------------------------
The Second Lien Program is not yet operational. According
to testimony by Assistant Secretary Allison, Treasury is
currently negotiating participation contracts with servicers
covering more than 80 percent of the second lien market. For
further discussion of servicer participation issues, see
Section C.
9. Recommendation on Data
In its March 2009 Report, the Panel noted a distressingly
poor state of knowledge among federal regulatory agencies about
the mortgage market, that constituted a full-blown regulatory
intelligence failure. In particular, the Panel was concerned
about the federal government's limited knowledge regarding loan
performance and loss mitigation efforts and foreclosure. These
failures of financial intelligence collection and analysis have
only been partially remedied; major gaps in coverage still
exist.
Treasury's major advance in this area has been to start
collecting a range of data on HAMP modifications, both those in
trial periods and those made permanent. The data permit
examination of the characteristics of the borrowers and
property, the terms of the modification, the servicer involved,
and payments to the servicer. The development of a robust
database on HAMP modifications is an important step forward in
addressing the foreclosure crisis.
There are important limitations to these new data. Unlike
HAMP, other MHA programs collect much more limited data. There
are also two notable gaps in the HAMP modification data. First,
the data exist only on loans for which a trial modification has
commenced. As a result, the Panel lacks data on loans for which
trial modifications have been denied, much less the performance
of the entire universe of loans. Further, the Panel lacks data
for the programs not yet online, such as the Second Lien
Program and Foreclosure Alternatives Program. This information
is crucial for understanding the changing nature of the
foreclosure crisis and crafting informed, targeted policy
responses. Second, the data collected by Treasury are largely
limited to HAMP modifications, so it does not allow easy
integration with data on other modification programs. OCC/OTS
have produced quarterly reports on mortgage modification
efforts for 14 of the largest bank/thrift-servicers under their
supervision, and this data includes HAMP and non-HAMP
modifications, but it covers only 64 percent of the market.
While data collection has improved, further improvement is
necessary. Moreover, improved data collection alone is
insufficient. While the Panel assumes that Treasury has engaged
in its own internal analysis of HAMP data, Treasury has yet to
produce any public detailed analysis of the HAMP data. The
releases to date have contained only minimal information about
the number of modifications and the level of servicer
participation. The Panel is hopeful that more informative data
releases will be forthcoming on a regular basis. The Panel is
also hopeful that Treasury will enable outside parties to have
easy access to the data; analysis of such government-produced
data by academics and non-profits has helped improve countless
government programs in the past, and there is no reason to
believe HAMP is different. While the Panel recognizes that
there are privacy concerns, the level of personally
identifiable data could easily be limited to that found in Home
Mortgage Disclosure Act (HMDA) data releases.
In sum, Treasury has made progress on data collection, but
because the data covers only loans that have been approved for
a specific modification program, essential information about
the foreclosure crisis remains unknown. Instead, the government
is forced to continue to rely on imperfect private data
sources. Better consumer finance intelligence gathering and
analysis remains a critical gap in formulating policy
responses.\99\
---------------------------------------------------------------------------
\99\ Deborah Goldberg, director of the Hurricane Relief Project at
the National Fair Housing Alliance, made a similar point in her
testimony during the Panel's hearing on mortgage foreclosures in
Philadelphia in September. Congressional Oversight Panel, Testimony of
Director of the National Fair Housing Alliance's Hurricane Relief
Project, Deborah Goldberg, Philadelphia Field Hearing on Mortgage
Foreclosures, at 78 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm) (hereinafter
``Goldberg Philadelphia Hearing Testimony''). Ms. Goldberg urged
improvements in ``data that are collected and made public about how
servicers are performing under the program'' and noted that her
organization ``think[s] it's very critical that loan level data,
including information on the race, gender, and national origin of the
borrower who's applying for the HAMP modification be made available to
the public and that [sic] be done at a geographic level that makes it
possible for public officials, community organizations, individual
borrowers, and the public at large to understand how the program is
working in their communities, to be able to identify places where it
may not be working equitably or efficiently and to be able to intervene
to change that.'' Id.
---------------------------------------------------------------------------
This is not the first instance in which the need for such
data has been acknowledged. In response to the savings and loan
crisis in the 1980s, Congress directed the Department of
Housing and Urban Development (HUD) to produce national
mortgage default and foreclosure reports.\100\ It appears that
HUD never produced any such reports, and Congress eliminated
the reporting requirement, along with many other agency
reporting requirements in 1995.\101\ Data collection has
improved, but is still lacking in critical respects.
---------------------------------------------------------------------------
\100\ 12 U.S.C. 1701p-1 (1983).
\101\ Federal Reports Elimination and Sunset Act of 1995 Sec. 3003,
Pub. L. No. 104-66.
------------------------------------------------------------------------
Progress of MHA after six
Panel's March checklist months
------------------------------------------------------------------------
Will the plan result in modifications Significant progress; some
that create affordable monthly areas not addressed, including
payments?. unemployment-related
foreclosures
Does the plan deal with negative Not addressed in a substantial
equity?. way
Does the plan address junior mortgages? Unclear--program announced but
not yet running
Does the plan overcome obstacles in Unclear
existing pooling and servicing
agreements that may prevent
modifications?.
Does the plan counteract mortgage Unclear--incentive structures
servicer incentives not to engage in included, but payments just
modifications?. beginning
Does the plan provide adequate outreach Significant progress; more
to homeowners?. needed
Can the plan be scaled up quickly to Some progress; more needed
deal with millions of mortgages?.
Will the plan have widespread Significant progress
participation by lenders and
servicers?.
Is data collection sufficient to ensure Significant progress; more
the smooth and efficient functioning needed
of the mortgage market and prevent
future crisis?.
------------------------------------------------------------------------
C. Program Evaluation
MHA represents Treasury's primary foreclosure mitigation
effort. MHA's main programs are HARP and HAMP. HAMP includes
the Second Lien Program, the Home Price Decline Protection
Program (HPDP), and the Foreclosure Alternatives Program (FAP).
Treasury estimates that assistance under HARP and HAMP will be
offered to as many as seven to nine million homeowners.\102\
Treasury has designed each program and subprogram to help in
that effort, and in announcing each initiative outlined the
specific ways in which it would help prevent foreclosures. In
evaluating the programs, this section considers the goals
articulated by Treasury, the programs' design, the results
achieved to date in light of the relatively early stages of
most programs, and whether or not the programs are well
designed to meet the stated objectives. Adequacy of the goals
is considered separately in the subsequent section.
---------------------------------------------------------------------------
\102\ U.S. Department of the Treasury, Making Home Affordable
Summary of Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/guidelines_summary.pdf) (hereinafter ``MHA Summary
Guidelines'').
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
1. HARP
HARP was announced on March 4, 2009, and permits homeowners
with current, owner-occupied, government sponsored enterprise
(GSE)-guaranteed mortgages to refinance into a GSE-eligible
mortgage.\103\ The program does not utilize TARP funding. At
its core, HARP is aimed at providing low-cost refinancing to
homeowners who have been negatively affected by the decline in
home values. Unlike other portions of MHA, HARP is not directed
toward homeowners who are behind on their mortgage payments.
Instead, the program is intended for homeowners who are current
on their mortgage payments, have not been delinquent by more
than thirty days within the previous year and are not
struggling to make their monthly payments.\104\ Assistant
Secretary Allison explained that the program ``helps homeowners
who are unable to benefit from the low interest rates available
today because price declines have left them with insufficient
equity in their homes.'' \105\ Treasury estimates that HARP
could assist between four to five million homeowners who would
otherwise be unable to refinance because their homes have lost
value, pushing their current loan-to-value ratios above 80
percent.\106\
---------------------------------------------------------------------------
\103\ MHA Summary Guidelines, supra note 102.
\104\ Fannie Mae, Home Affordable Refinance FAQs, at 4 (July 24,
2009) (online at www.efanniemae.com/sf/mha/mharefi/pdf/
refinancefaqs.pdf) (hereinafter ``Fannie Mae FAQs'').
\105\ Senate Banking, Housing and Urban Affairs Committee,
Testimony of U.S. Department of Treasury Assistant Secretary Herb
Allison, Preserving Homeownership: Progress Needed to Prevent
Foreclosures, 111th Cong. (July 16, 2009) (hereinafter ``Allison Senate
Testimony'').
\106\ U.S. Department of the Treasury, Making Home Affordable
Summary of Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/guidelines_summary.pdf). HARP is not limited to above
80 percent LTV refinancings. It is unclear, however, what would
distinguish a HARP refinancing from a regular GSE refinancing if the
LTV were under 80 percent. Therefore, the Panel is only counting GSE
refinancings with LTV over 80 percent as HARP refinancings. The Panel
emphasizes that regular course GSE refinancings are not counted as part
of HARP in this report.
---------------------------------------------------------------------------
Other than the requirement that the borrower is current on
monthly mortgage payments, the program has relatively few
restrictive requirements. All mortgages that are owned or
guaranteed by either Fannie Mae or Freddie Mac may participate
in HARP.\107\ Existing jumbo-conforming and high-balance loans
may qualify for the program, in part because of higher
temporary loan limits. However, there is not a cash-out
component to the HARP refinance and as such, subordinated
financing may not be paid with the proceeds from the
refinancing. Finally, Treasury promotes the relative ease of
this program since participants' records are centralized with
either Fannie Mae or Freddie Mac; as such, documentation
requirements should be less onerous than other comparable
programs.\108\
---------------------------------------------------------------------------
\107\ MHA Summary Guidelines, supra note 102.
\108\ Servicer Performance Report, supra note 95.
---------------------------------------------------------------------------
Servicers of Fannie Mae and Freddie Mac mortgages are
required to participate in the program, covering approximately
2,300 servicers.\109\
---------------------------------------------------------------------------
\109\ Servicer Performance Report, supra note 95.
---------------------------------------------------------------------------
Initially, borrowers were eligible to refinance if they
owed up to 105 percent of the present value of their single-
family residence. In response to the continued decline of home
values, on July 1, 2009, Treasury announced an expansion of the
program that included borrowers who owe up to 125 percent of
the value of their homes. This expands the universe of
homeowners potentially eligible for refinancing, and means that
HARP could, in theory, assist more than the four to five
million homeowners originally estimated. Fannie Mae and Freddie
Mac will begin accepting deliveries of these refinanced loans
on September 1 and October 1, respectively. Generally, the GSEs
are prohibited from purchasing mortgages with loan-to-value
(LTV) ratios above 80 percent unless there was private mortgage
insurance coverage on the loan. HARP refinancings do not
require the borrower to obtain additional private mortgage
insurance coverage. If there was no coverage on the original
loan, coverage is not required, and if there was coverage on
the original loan, additional coverage is not required.
There are two distinct borrower benefit requirements under
HARP; the refinancing needs to satisfy only one of them to
qualify. The first states that the requirement is met if the
borrower's mortgage payment is decreased. In this circumstance,
it is acceptable for the borrower to extend the term of the
loan or change the mortgage from a fixed-rate loan to an
adjustable-rate. The second borrower benefit standard states
that if the homeowner's monthly payment remains flat, or
increases, then the borrower must be moving to ``a more stable
mortgage product.'' \110\ Under the program guidelines, a
transition out of interest-only and adjustable-rate mortgages
would qualify as comparatively stable. Also, a shift to a
shorter-term loan that would accelerate the amortization of
equity would qualify. The borrower may not extend the term of
the loan or switch to an ARM from a fixed-rate in order to be
compliant under the second borrower benefit requirement.
---------------------------------------------------------------------------
\110\ Fannie Mae FAQs, supra note 104.
---------------------------------------------------------------------------
HARP refinancings permit eligible borrowers to refinance
their mortgages despite negative equity. HARP does not dictate
the terms of the refinanced mortgage other than prohibiting
prepayment penalties and balloon payments. A refinanced
mortgage could thus be fixed or adjustable rate, and at any
interest rate. HARP refinancings aim for both affordability and
sustainability, but sometimes the two goals will be at
loggerheads. For example, borrowers with non-traditional
mortgages that had introductory periods with low monthly
payments, such as hybrid ARMs, interest-only mortgages, and
payment-option ARMs, might refinance into fixed-rate, fully-
amortizing mortgages. The shift from a non-traditional mortgage
to a traditional fixed-rate mortgage may result in an increase
in the borrower's monthly payments, but it will improve the
long-term sustainability of the loan. The assumption underlying
HARP is that homeowners will refinance if they believe it makes
their mortgage more affordable.
Treasury was unable to provide the Panel with complete data
on HARP refinancing applications. Application data was only
available for one GSE. The only complete data available was on
the total number of closed approved refinancings. 95,729
refinancings have been approved as of September 1, 2009. HARP
has thus covered only 2 percent of the four to five million
homeowners Treasury originally estimated would be eligible when
the program was limited to loans with less than 105 percent LTV
ratios. Moreover, for the one GSE for which Treasury provided
data, HARP refinancing applications have fallen every month
since May 2009.\111\ It is not clear why there have been
relatively few HARP refinancings; beyond HARP's eligibility
requirements, one concern is that liquidity-constrained
homeowners are unable to afford points and closing costs on the
refinancings.
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\111\ It is not clear why HARP refinancing application data is
unavailable for the other GSE. In response to Panel requests, Treasury
provided a broad range of data related to the mortgage market. Although
not all of the data are confidential, portions are. These data are
cited in numerous places throughout the report, and are hereinafter
cited as ``Treasury Mortgage Market Data.''
---------------------------------------------------------------------------
If HARP ultimately reaches Treasury's stated availability
of four to five million borrower refinancings it will have a
sizeable impact on the foreclosure problem. Moreover, if
housing prices increase then more borrowers with higher levels
of negative equity will come within HARP's expanded LTV limit
and thereby become eligible for HARP refinancing to lower more
affordable rates and safer products.
The decline in applications, however, coupled with the low
total number of refinancings raises serious doubts about
whether HARP will ever come close to assisting a significant
percentage of the four to five million homeowners. Moreover, if
interest rates go up during the duration of the HARP program,
as will likely happen should housing prices stabilize, HARP
refinancings will become relatively less appealing to many
eligible homeowners.
It is important to emphasize that although HARP allows
underwater homeowners to refinance to a more affordable and/or
sustainable loan despite negative equity, HARP does not cure
negative equity; instead, it is focused on removing negative
equity as an obstacle to improving affordability, permitting a
homeowner with negative equity to continue to make payments.
The majority of HARP refinancings, however, are loans with less
than 90 percent LTV ratios. (See Figure 13.) For these loans,
LTV ratios would not normally be an obstacle to refinancing.
Therefore, the only reason these loans should have been
refinanced through HARP, rather than through private channels,
would have been if refinancing were impeded by other factors,
such as curtailed income. Thus, while HARP underwriting
standards allow not only for higher LTV refinancings without
additional private mortgage insurance (PMI) coverage, they
might also permit refinancings with reduced income levels.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2. HAMP
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\112\ Treasury Mortgage Market Data, supra note 111.
---------------------------------------------------------------------------
HAMP, also announced on March 4, 2009, is another sub-
program of MHA. HAMP is funded by a government commitment of
$75 billion, which is comprised of $50 billion of TARP funds
and $25 billion from the Housing and Economic Recovery Act
(HERA). The $50 billion of TARP funds is directed toward
modifying private-label mortgages, and the $25 billion from the
Housing and Economic Recovery Act is dedicated to the
modification of Fannie Mae and Freddie Mac mortgages. Treasury
has estimated that HAMP will help three to four million
homeowners.\113\ The goal of HAMP is to create a partnership
between the government and private institutions in order to
reduce borrowers' gross monthly payments to an affordable
level. The level has been set at 31 percent of the borrower's
gross monthly income. Lenders are expected to reduce payments
to 38 percent of the borrower's monthly income. The government
and the private lender then share the burden equally of
reducing the borrower's monthly payment to 31 percent of his or
her gross monthly income. In addition to providing monetary
incentives for the modification of at-risk mortgages, HAMP
standardizes loan modification guidelines in order to create an
industry paradigm.
---------------------------------------------------------------------------
\113\ GAO has questioned whether these estimations may be overly
optimistic due to key assumptions, such as borrower response rate and
participation rate. GAO HAMP Report, supra note 98.
---------------------------------------------------------------------------
a. Lender and Servicer Participation
HAMP has both a voluntary and mandatory participation
component for lenders/servicers. On February 9, 2009, the
Administration announced that as part of its Financial
Stability Plan, any participants in TARP programs initiated
after that date would be required to take part in mortgage
modification programs consistent with Treasury standards.\114\
Since the Capital Purchase Program (CPP), the primary TARP
vehicle for bank assistance, was established prior to the
Financial Stability Plan, the majority of financial
institutions are not obligated to participate. However,
servicers of Fannie Mae or Freddie Mac mortgages are obligated
to participate in HAMP for their Fannie Mae or Freddie Mac
mortgages.
---------------------------------------------------------------------------
\114\ Financial Stability Plan Fact Sheet, supra note 96.
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On the voluntary servicer participation side, Treasury
estimates that 85 percent of HAMP-eligible mortgage debt is
serviced by participating servicers.\115\ This comes close to
Treasury's projection that HAMP will ultimately cover 90
percent of the potential loan population.\116\ Servicer
participation in HAMP, however, is voluntary.\117\ Through
October 6, 2009, 63 servicers have signed servicer
participation agreements for HAMP.\118\ Servicers begin the
participation process by completing a registration form, and
ultimately sign a Servicer Participation Agreement with Fannie
Mae.\119\ Treasury, through Fannie Mae, is reaching out to
servicers with large numbers of eligible loans that have not
yet signed up with the program.\120\
---------------------------------------------------------------------------
\115\ Servicer Performance Report, supra note 95.
\116\ GAO HAMP Report, supra note 98, at 32. Citing an analysis of
unnamed OFS documents that the Panel has been unable to recover as of
the release of this report.
\117\ As discussed in section B5, infra, servicers receive
incentives to participate. Servicers have until December 31, 2009 to
opt in to the program. U.S. Department of Treasury, Borrower Frequently
Asked Questions (July 16, 2009) (online at makinghomeaffordable.gov/
borrower-faqs.html).
\118\ Servicer Performance Report, supra note 95.
\119\ Treasury has designated Fannie Mae as its financial agent in
connection with HAMP. Making Home Affordable Administrative Website for
Servicers, Commitment to Purchase Financial Instrument and Servicer
Participation Agreement, at 1 (online at www.hmpadmin.com/portal/docs/
hamp_servicer/servicerparticipationagreement.pdf) (accessed Oct. 7,
2009).
\120\ Treasury explained that:
Efforts include one-on-one meetings and presentations during which
Fannie Mae personnel outline the program benefits, as well as
requirements. Subsequent to the introductory meeting, members of the
Fannie Mae HAMP team are assigned to serve as points of contact for
prospective servicers, providing more detailed information, answering
questions, and keeping in touch on a regular basis. We expect that this
approach will result in the addition of more servicers to the program
in the coming days and weeks. Fannie Mae also provides program training
and tools designed to make servicer implementation as efficient as
possible. Since the HAMP was announced, more than 300 servicers have
downloaded packages from the Fannie Mae website. Fannie Mae will
continue to actively solicit additional servicers for participation in
order to maximize program impact.
Allison COP Testimony, supra note 94.
---------------------------------------------------------------------------
HAMP provides financial incentives to mortgage servicers,
borrowers and investors to modify residential mortgages. First,
servicers receive an up-front fee of $1,000 for each completed
modification for up to three years. Second, servicers receive
``Pay-for-Success'' fees of up to $1,000 each year for up to
three years. These fees will be paid monthly and are predicated
on the borrower staying current on the loan. Borrowers are
eligible for ``Pay-for-Performance Success Payments'' of up to
$1,000 each year for up to five years, as long as they stay
current on their payment. This payment is applied directly to
the principal of their mortgage. The ``Responsible Modification
Incentive Payment'' is a one-time bonus payment of $1,500 to
the lender/investor and $500 to servicers that will be awarded
for modifications on loans that are still performing. Finally,
Treasury estimates that up to 50 percent of at-risk mortgages
have second liens.\121\ In order to address second lien debts,
such as home equity lines of credit or second mortgages, HAMP
encourages servicers to contact second lien holders and
negotiate the extinguishment of the second lien. The servicers
will receive a payment of $500 per second lien modification, as
well as success payments of $250 per year for three years, as
long as the modified first loan remains current. Borrowers also
receive success payments for participating of $250 per year for
up to five years that is used to pay down the principal on the
first lien.
---------------------------------------------------------------------------
\121\ MHAP Update, supra note 69.
---------------------------------------------------------------------------
b. Borrower Eligibility
HAMP modifications begin with a three month trial
modification period for eligible borrowers. After three months
of successful payments at the modified rate and provision of
full supporting documentation, the modification becomes
permanent.\122\ To be eligible to participate in HAMP, the loan
must have been originated on or prior to January 1, 2009, and
the mortgage must be a first lien on an owner-occupied property
with an unpaid balance up to $729,750.\123\ The loan must be in
default or in imminent danger of default.\124\ Borrowers in
bankruptcy or in active litigation regarding their mortgage can
participate in the program without waiving their legal rights.
---------------------------------------------------------------------------
\122\ Treasury permits servicers to do so-called ``verbal'' or
``no-doc'' trial modifications. In these verbal modifications, the
servicer halts foreclosure actions and allows the borrower to make
reduced payments based on the borrower's unverified representations
about income and debt levels. Each servicer chooses the level of
documentation required to commence a trial modification, but for the
modification to become permanent and the servicer to receive
compensation from Treasury, full documentation is required. While doing
no-doc trial modifications brings more borrowers into HAMP more quickly
and freezes the foreclosure process, it might have a detrimental effect
on producing permanent HAMP modifications. Congressional Oversight
Panel, Testimony of Freddie Mac Senior Vice President for Economics and
Policy, Edward L. Golding, Philadelphia Field Hearing on Mortgage
Foreclosures, at 29 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm).
\123\ The unpaid balance ceiling increases in relation to number of
units on the property (2 units--$934,200; 3 units--$1,129,250; 4
units--$1,403,400). The effect of this limitation is most pronounced in
high-cost areas, although recent changes to raise the conforming loan
limit in certain high-cost areas have made more loans potentially
eligible for HAMP modifications in these areas.
\124\ At the field hearing, Larry Litton cited servicers' need for
greater clarity around the definition of imminent default.
Congressional Oversight Panel, Testimony of Litton Loan Servicing
President and CEO, Larry Litton, Philadelphia Field Hearing on Mortgage
Foreclosures, at 144-45 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm).
---------------------------------------------------------------------------
Under the first lien program, the homeowner must certify a
hardship causing the default. If the borrower has a back-end
DTI ratio of 55 percent or more--meaning that the borrower's
total monthly debt payments, including credit cards and other
forms of debt, are at least 55 percent of monthly income--he or
she must enter a debt counseling program.\125\
---------------------------------------------------------------------------
\125\ However, as noted by GAO, there is no mechanism to ensure
that housing counseling happens, and Treasury does not plan to track
borrowers systematically who are told that they must get counseling.
GAO HAMP Report, supra note 98.
---------------------------------------------------------------------------
A Net Present Value (NPV) test is required for each loan
that is in ``imminent default'' or is at least 60 days
delinquent. First, servicers determine the NPV of the proceeds
from the liquidation and sale of a mortgaged property.
Variables to take into account are:
1. The current market value of the property as
established by a broker's price opinion, automated
valuation methodology, or appraisal;
2. The cost of foreclosure proceedings, repair and
maintenance of the property;
3. The time to dispose of the property if not sold at
foreclosure auction;
4. Costs associated with the marketing and sale of
the property as real estate owned; and
5. The net sales proceeds.\126\
---------------------------------------------------------------------------
\126\ Jordan D. Dorchuck, Net Present Value Analysis and Loan
Modifications (Sept. 15, 2008) (online at www.mortgagebankers.org/
files/Conferences/2008/RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).
---------------------------------------------------------------------------
Second, servicers determine the proceeds from a loan
modification. Treasury has established parameters for running
the NPV for modification test. The servicer may choose the
discount rate for the calculation although there is a ceiling
set by the Freddie Mac Primary Mortgage Market Survey rate
(PMMS), plus a spread of 2.5 percentage points. The servicer
may apply different discount rates to loans in investor pools
versus loans in portfolio. Cure rates and redefault rates must
be based on GSE analytics. Servicers having at least a $40
billion servicing book have the option to substitute GSE-
established cure rates and redefault rates with the experience
of their own aggregate portfolios.
The NPV of the foreclosure scenario is then compared to an
NPV for a modification scenario. If the NPV of the modification
scenario is greater, then the servicer must offer to modify the
loan.
Prior to September 1, 2009, servicers were permitted to use
either their own NPV calculation method or a standardized model
created by Treasury. Since September 1, 2009, all servicers are
required to use Treasury's standard NPV model for HAMP
modification purposes. See Annex C for an examination of
Treasury's NPV model.
The Panel also notes that the NPV model of other government
entities, such as the OCC, the OTS, and the FDIC for Indy Mac,
assumes an average redefault rate of 40 percent, but Treasury
would need to factor in significant variation depending on
income, FICO, and LTV. Changes in assumed redefault rates
(which may themselves be functions of the type of modification
involved) will obviously affect the NPV calculus. The inputs
for Treasury's NPV model are not public, in part because of
concerns that borrowers might be able to game the calculation.
Unfortunately, the secrecy of Treasury's NPV model means that
it is not subject to robust scrutiny. The public unavailability
of the NPV model also means that homeowners are unable to
verify whether they have been appropriately denied a
modification. Housing counselors frequently attempt to
negotiate loan modifications based on having run an NPV
comparison that they then present to the loan servicer. Making
the model publicly available would facilitate negotiations and
provide an important check against wrongful modification
denials. A possible solution is to make the NPV calculator
publicly available as a web application, which would limit the
ability to engage in a systematic deconstruction of the model
for purposes of gaming it.
c. Lender Procedures
The front-end DTI target is 31 percent. The lender will
first have to reduce the borrower's mortgage payments to no
greater than 38 percent front-end DTI ratio. Treasury will then
match the investor/lender dollar-for-dollar in any further
reductions, down to a 31 percent front-end DTI ratio for the
borrower. Treasury has established a 2 percent floor below
which it will not subsidize interest rates. Lenders and
servicers could reduce principal rather than interest at any
stage in the waterfall and would receive the same funds
available for an interest rate reduction.
Servicers follow the ``standard waterfall'' steps detailed
below in order to achieve efficiently the 31 percent front-end
DTI ratio:
1a. Request monthly gross income of borrower;
1b. Validate first lien debt and monthly payments.
This information is used to calculate a provisional
modification for the trial period. A trial modification
typically lasts for three months, and then becomes
permanent if the borrower has made the required trial
payments, and the borrower's debt and income
documentation has been submitted and determined to be
accurate. Servicers have discretion on whether to start
trial modifications only after borrowers have submitted
the written documentation, or based on verbal
information that borrowers provide over the phone;
2. Capitalize arrearage;
3. Target front-end DTI of 31 percent and follow
steps 4, 5, and 6 in order to reduce the borrower's
monthly payment;
4. Reduce the interest rate to achieve target (two
percent floor). The guidelines specify reductions in
increments of 0.125 percent that should bring the
monthly payments as close to the target without going
below 31 percent. If the modified interest rate is
above the interest rate cap as defined by Treasury,
then the modified interest rate will remain in effect
for the remainder of the loan. If the modified interest
rate is below the interest rate cap, it will remain in
effect for five years followed by annual increases of
one percent until the interest rate reaches the
interest rate cap. The modified interest rate will then
be in effect for the remainder of the loan;
5. If the front-end DTI target has not been reached,
the term or the amortization of the loan may be
extended up to 40 years; and
6. If the front-end DTI target has still not been
reached, it is recommended that the servicer forbear
principal. If there is principal forbearance, then a
balloon payment of that amount is due upon the maturity
of the loan, the sale of the property, or the payoff of
the interest bearing balance.
d. HAMP Results to Date
Because the program collects far more data than any other
MHA program, HAMP reveals a fuller picture of the results to
date. Based on certified data provided by Fannie Mae,
Treasury's agent for HAMP, the following statistical picture of
HAMP emerges. As of September 1, 2009 there were 1,711
permanent modifications and 362,348 additional unique borrowers
were in trial modifications. Only 1.26 percent of HAMP
modifications had become permanent after the anticipated three-
month trial. The Panel emphasizes that this does not mean that
the other 98.74 percent of HAMP trial modifications have
failed, merely that they have not yet become permanent. Many
borrowers in trial modifications are in the process of
submitting documentation, and Treasury has provided additional
flexibility in the timeline through a two-month extension. It
is also important to remember that this is still a new program
in a ramp-up period, and this statistic is preliminary.
The Panel has not been able to determine why there is such
a low rate of conversion from trial to permanent modifications.
Possibilities identified to date include failure of borrowers
to comply with the terms of the trial, including timely
payments; the difficulties servicers have in assembling
completed documentation on modifications commenced on a
``verbal'' or ``no-doc'' basis; \127\ delays in servicers
submitting data to Treasury; and data quality issues. There is
also significant variation by servicer in terms of the
percentage of trial modifications that become permanent after
three months, an issue discussed below.
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\127\ Treasury has authorized an additional two-month period for
assembly for documentation beyond the 3-month trial period.
---------------------------------------------------------------------------
As of September 1, 73 percent of the permanent
modifications involved fixed-rate mortgages, with adjustable-
rate mortgages making up 27 percent and a negligible number of
step-rate mortgages. (See Figure 14, below.)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A variety of hardship reasons were given by borrowers when
requesting the modifications. By far the most common was
``curtailment of income,'' which was reported by 63 percent of
borrowers and reflects reduced employment hours, wages,
salaries, commissions, and bonuses. This is distinct from
unemployment, reported by eight percent of borrowers. Other
significant categories of hardship reported were ``excessive
obligation,'' reported by nine percent of borrowers, ``payment
adjustment,'' reported by four percent of borrowers, and
illness of borrower, reported by two percent of borrowers. Six
percent of borrowers reported ``other.'' (See Figure 15,
below.) It is notable that curtailment of income is the
majority hardship basis, as this implies that general economic
conditions, rather than mortgage rate resets on subprime or
payment-option or interest-only loans are driving the mortgage
crisis at present. Because HAMP eligibility generally requires
employment, this raises concerns as to whether HAMP, which was
designed in the winter of 2009, is capable of dealing with
emerging causes of foreclosure.
---------------------------------------------------------------------------
\128\ Treasury Mortgage Market Data, supra note 111.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
For the modifications that have become official, the median
(mean) front-end DTI declined 31 (34) percent, from 45.1 (47.2)
percent to 31.1 (31.1) percent, in line with the program's
goal. The median (mean) back-end DTI ratio declined 47 (32)
percent from 68.8 (76.4) percent to 36.4 (51.8) percent. (See
Figure 16, below.)
---------------------------------------------------------------------------
\129\ Treasury Mortgage Market Data, supra note 111.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The reduction in DTI in HAMP modifications was achieved
almost exclusively through reductions in interest rate, rather
than term extensions or principal reductions. Median (mean)
interest rates were dropped by 4.25 (4.65) percentage points,
from 6.85 (7.58) percent to 2.00 (2.92) percent, a 71 (61)
percent reduction in the rate. (See Figure 17, below.)
---------------------------------------------------------------------------
\130\ Treasury Mortgage Market Data, supra note 111.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Term extensions were de minimis; the median (mean) term
remaining before modification was 330 (337) months, and after a
three-month trial period, the median (mean) term remaining was
338 (364) months, indicating a median (mean) term extension of
five months (two years). 989 permanent modifications or 57
percent of total featured term extensions, while 645 or 38
percent of total involved reductions in remaining terms. A
portion of the term reductions, however, is attributable to the
time lapse between the start of the trial modification and the
permanent modification date.
---------------------------------------------------------------------------
\131\ Treasury Mortgage Market Data, supra note 111.
---------------------------------------------------------------------------
Amortization periods changed relatively little. Before
modification, the median (mean) amortization period was 360
(371) months, while post-modification, the amortization period
was 342 (369) months. (See Figure 18, below.) The amortization
period increased in 618 modifications or 36 percent of the
total, while it was decreased in 1013 modifications or 59
percent of total. The Panel is puzzled by the prevalence of
both amortization and term decreases.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Principal forbearance was rare and principal forgiveness
rarer still. Two hundred sixty-one permanent modifications (15
percent of total) had principal forborne, while only 5 (less
than one percent of total) had principal forgiven. When
calculated based on all permanent modifications, the median
(mean) amount of principal forborne was zero ($9,434.58), and
the median (mean) amount of principal forgiven was zero
($170.89). When calculated only for the modifications with
principal forbearance, however, the median (mean) amount
forborne was $47,367.61 ($61,848.92) or 22 (25) percent of
post-modification unpaid principal balance, implying a sizeable
balloon payment at the maturity of the mortgage.
---------------------------------------------------------------------------
\132\ Treasury Mortgage Market Data, supra note 111.
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Before modification, the median (mean) LTV was 121 (134)
percent. 471 (27 percent) loans had LTV ratios of under 100
percent before modification and 299 (17 percent) had LTV ratios
of under 90 percent before modification.\133\ Modification
increased the median and mean LTV modestly due to
capitalization of arrearages and escrow requirements;
borrowers' actual obligations did not increase as the result of
modifications. Thus, post-modification, the median (mean) LTV
was 124 (137) percent. Post-modification, 424 were calculated
as having under 100 percent LTV and 274 with LTVs under 90
percent. (See Figure 19.)
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\133\ The large number of <90 percent LTV loans in HAMP is likely a
function of curtailment of income, as even if the LTV would not make
the loan ineligible for refinancing, lack of sufficient income to
support the loan would.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The net result of the modifications was that median (mean)
monthly principal and interest payments dropped $500.25
($598.49), from $1,419.43 ($1,554.14) to $849.31 ($955.65), a
35 (39) percent decline. As Figure 20 shows below, HAMP
modifications resulted in a noticeable decrease in monthly
principal and interest payments for many borrowers, but
generally resulted in minimal changes in principal balances.
---------------------------------------------------------------------------
\134\ Treasury Mortgage Market Data, supra note 111.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
e. Meeting Affordability Goal
While the Panel previously questioned whether 31 percent
front-end DTI was the appropriate affordability target, a
reduction in front-end DTI to 31 percent will undoubtedly make
mortgages much more affordable, and in this regard the HAMP
model is successful in meeting its affordability goal. As noted
by major mortgage loan servicers Larry Litton of Litton Loan
Servicing and Allen Jones of Bank of America at the Panel's
foreclosure mitigation field hearing, the requirement may need
to be lowered, however, to assist borrowers in arrearages.\136\
In particular, it appears that interest rate reductions alone
are typically sufficient to make monthly payments affordable.
---------------------------------------------------------------------------
\135\ Treasury Mortgage Market Data, supra note 111.
\136\ Congressional Oversight Panel, Written Testimony of Litton
Loan Servicing President and CEO, Larry Litton, Philadelphia Field
Hearing on Mortgages, at 2-3 (Sept. 24, 2009) (online at
cop.senate.gov/documents/testimony-092409-litton.pdf) (hereinafter
``Litton Philadelphia Hearing Written Testimony''); Congressional
Oversight Panel, Testimony of Bank of America Home Loans Senior Vice
President for Default Management, Allen H. Jones, Philadelphia Field
Hearing on Mortgage Foreclosures, at 5 (Sept. 24, 2009) (online at
cop.senate.gov/documents/testimony-0924090jones.pdf).
---------------------------------------------------------------------------
Possible Restrictions on Modifications. HAMP may be more
restricted in its ability to achieve affordability through
other means. A debate has emerged in the academic literature
about the importance of the obstacles posed by PSAs to mortgage
modification. An empirical study by John Patrick Hunt found
that direct contractual prohibitions on modification are not
common, although they do occur, and many PSAs are simply
vague.\137\ The notable exception is that virtually every PSA
restricts the ability to stretch out a loan's term; loan terms
may not be extended beyond the final maturity date of other
loans in the pool. These provisions are designed to limit cash
flow on securitized mortgages to the term of the securities
issued against the mortgages. Securitized loans are typically
all from the same annual vintage give or take a year, which
means that the ability to stretch out terms is usually limited
to a year at most. Not surprisingly, HAMP modifications stretch
out terms by about a year on average.
---------------------------------------------------------------------------
\137\ Hunt Subprime Contracts Paper, supra note 73.
---------------------------------------------------------------------------
The inability to stretch out terms for more than a year in
most cases has a serious impact on HAMP modifications because
it removes one of the tools and instead encourages principal
forbearance, which has the result of creating loans with
amortization periods that are longer than the loan term,
meaning that a balloon payment of principal will be due at the
end of the loan.
f. Securitized vs. Non-Securitized
Non-HAMP modification data also indicate that there are
significant differences in modifications between securitized
and non-securitized loans. OCC/OTS' joint Mortgage Metrics
Reports for the first and second quarters of 2009 (not covering
HAMP modifications) indicate that while the majority of
modifications were on securitized loans, in particular those
held in private-label pools (see Figure 21, below), very few
loan modifications have involved principal balance reductions
or even principal balance deferrals, and almost all principal
reductions and deferrals were on non-securitized loans.\138\
(See Figure 22, below.) Out of 327,518 loan modifications in
the OCC/OTS data in the first two quarters of 2009, only 17,574
(5.4 percent) involved principal balance reductions. All but
eight of those 17,574 principal balance reductions were on
loans held in portfolio. (See Figure 23, below.) The other
eight are likely data recording errors.
---------------------------------------------------------------------------
\138\ Office of the Comptroller of the Currency and Office of
Thrift Supervision, OCC and OTS Mortgage Metrics Report, First Quarter
2009 (online at www.occ.treas.gov/ftp/release/2009-77a.pdf) (June 2009)
(hereinafter ``OCC and OTS First Quarter Mortgage Report''); OCC and
OTS Second Quarter Mortgage Report, supra note 42.
\139\ Treasury Mortgage Market Data, supra note 111.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A similar discrepancy emerges for term extensions. Loans
guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae/FHA can
be bought out of a securitized pool and modified, making them
more like portfolio loans. Thus in the OCC/OTS data for the
first and second quarters 2009, 60 percent of portfolio loan,
49 percent of Fannie Mae, 69 percent of Freddie Mac, and 46
percent of Ginnie Mae modifications involved term extensions,
but only 7 percent of private-label securitization did so. (See
Figures 24 and 25, below.)\140\ Whether the heterogeneity
between modifications of securitized and nonsecuritized loans
is a function of PSAs or of incentive misalignment between
servicers and MBS holders is unclear, but there is clearly a
difference, and this may be responsible for some of the
difference in redefault rates.\141\ (See Figure 26, below.)
---------------------------------------------------------------------------
\140\ The ability to stretch out a term is separate from the
ability to stretch out amortization periods and reduce monthly payments
by creating a balloon payment at the end of the mortgage. A term
extension produces a very different looking mortgage than an
amortization extension alone.
\141\ The data presented in the OCC/OTS Mortgage Metrics Reports
has improved steadily from quarter to quarter and it provides one of
the most valuable sources of information on modifications efforts.
Currently, however, OCC/OTS data does not break down redefaults by type
of modification beyond change in payment. Such data are critical for
gaining an understanding of whether the type of modification affects
redefaults. The Panel urges OCC and OTS to undertake this analysis in
future Mortgage Metrics reports, as well as to present redefault rates
beyond 12 months. OCC and OTS First Quarter Mortgage Report, supra note
138; OCC and OTS Second Quarter Mortgage Report, supra note 42.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Notwithstanding the significant PSA constraint on term
extensions that means that HAMP modifications are likely to
look quite different from portfolio loan modifications as well
as the evidence from the OCC/OTS Mortgage Metrics Reports, a
recent working paper from the Federal Reserve Bank of Boston
argues that there is no difference in the rate at which
securitized and nonsecuritized loans are being modified; both
have been modified at exceedingly low rates.\142\ Two recent
papers disagree with this finding. Professors Anna Gelpern and
Adam Levitin contend that securitization creates obstacles to
loan workouts that go beyond the formal contractual language
analyzed by Hunt.\143\ Professors Tomasz Piskorski, Amit Seru,
and Vikram Vig analyzed data through the first quarter of 2008
and concluded that securitized loans are as much as 32 percent
more likely to go into foreclosure when delinquent than loans
held directly by banks, and are 21 percent more likely to
become current within a year of delinquency.\144\
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\142\ Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why
Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures,
and Securitization, Federal Reserve Bank of Boston Working Paper 09-4
(July 6, 2009) (hereinafter ``Redefaults, Self-Cures, and
Securitization Paper'').
\143\ Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein
Contracts: Workout Prohibitions in Residential Mortgage-Backed
Securities, 82 Southern California Law Review_(forthcoming 2009)
(hereinafter ``Gelpern & Levitin Frankenstein Contracts'').
\144\ Tomasz Piskorski, Amit Seru, & Vikrant Vig, Securitization
and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage
Crisis, Chicago Booth School of Business Research Paper No. 09-02 (Aug.
2009) (online at ssrn.com/abstract=1321646) (hereinafter ``Piskorski,
Seru, & Vig Renegotiation Paper'').
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g. Servicer Ramp-up Period
Treasury has made significant progress towards its goal of
broad servicer participation; however, signed participation
agreements do not necessarily mean that servicers are fully
ready to participate. The Panel recognizes that HAMP in
particular requires a significant technological infrastructure
to monitor modifications and servicer payments, and that this
infrastructure is not something that can be created overnight.
The infrastructure has to allow many servicers to interface
with Treasury and Fannie Mae, Treasury's agent for HAMP
modifications. Servicers use a variety of software platforms,
and the standard servicing platform, distributed by Lender
Processing Services, Inc., does not have the ability to process
modifications. As a result, even as of the end of August 2009,
servicers still needed to provide hand-extracted data to
Treasury, which slowed the process.
While the Panel is sympathetic to the difficulties in
creating the infrastructure for HAMP, during the ramp-up period
some homeowners who would have qualified for modifications did
not have the opportunity. At this point, however, HAMP is up
and running, and its ability to increase the number of
modifications depends primarily on servicer staffing
constraints and homeowner participation. When borrowers contact
their servicers, either on their own or with the assistance of
their lenders, they are often unable to make contact with
someone who can provide accurate, timely information and help
them obtain a modification.
As servicers ramp up their programs, many borrowers are
facing long hold times and repeated transfers and
disconnections on the telephone, lack of timely responses, lost
paperwork, and incorrect information from servicers. Judge
Annette Rizzo of the Court of Common Pleas, First Judicial
District for Philadelphia County, recently expressed her
frustration with the lack of clear information about MHA during
her testimony at the Panel's September hearing.\145\ Judge
Rizzo is the architect of a foreclosure prevention program in
Philadelphia that has moved cases through the pipeline more
quickly by requiring prompt, face-to-face mediation sessions.
According to Judge Rizzo, there is a need at the national level
for a hotline or another easy access point for quick resolution
of questions regarding the interpretation of various aspects of
the MHA program.\146\
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\145\ Congressional Oversight Panel, Testimony of Judge Annette M.
Rizzo, Court of Common Pleas, First Judicial District, Philadelphia
County; Philadelphia Mortgage Foreclosure Diversion Program,
Philadelphia Field Hearing on Mortgage Foreclosures, at 81-83 (Sept.
24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-
philadelphia.cfm).
\146\ Id.
---------------------------------------------------------------------------
There is also evidence that eligible borrowers are being
denied incorrectly. Eileen Fitzgerald, chief operating officer
of NeighborWorks America, provided insight into this problem
during her testimony at the Panel's foreclosure mitigation
field hearing. Ms. Fitzgerald noted in both her written and
oral testimony not only reports of such incorrect
interpretations of the program, but also of delays in
processing due to servicers misplacing documents or requesting
duplicate documents, lack of uniform procedures and forms, and
a need for access to servicers' NPV models to assist borrowers
and their counselors in understanding why an application may
have been denied.\147\ Treasury's new requirement that
servicers provide a reason for denials to both Treasury and to
borrowers could help to alleviate this.\148\ Denial codes can
also help protect against discrimination in refinancing. HMDA
data from 2008 show that 61 percent of African-Americans were
turned down for a refinancing, 51 percent of Hispanics were
denied a refinancing, and 32 percent of Caucasians were
denied.\149\ Clear, prompt denial codes with a right of appeal
are one way to help prevent possible discrimination and
disproportionate destabilization of minority neighborhoods.
---------------------------------------------------------------------------
\147\ Id. Congressional Oversight Panel, Testimony of NeighborWorks
America Chief Operating Officer, Eileen Fitzgerald, Field Hearing in
Philadelphia on Mortgage Foreclosures (Sept. 24, 2009) (online at
cop.senate.gov/documents/testimony-092409-fitzgerald.pdf) (hereinafter
``Fitzgerald Philadelphia Hearing Testimony'').
\148\ Alexandra Andrews, Frustrated Homeowners Turn to Media,
Courts ProPublica (Oct. 1, 2009) (online at www.propublica.org/ion/
bailout/item/frustrated-homeowners-turn-to-media-courts-on-making-home-
affordable-101) (hereinafter ``Andrews Frustrated Homeowners'').
\149\ Robert B. Avery, et al., The 2008 HDMA Data: The Mortgage
Market during a Turbulent Year, Federal Reserve Bulletin, at 69 (online
at www.federalreserve.gov/pubs/bulletin/2009/pdf/hmda08draft.pdf)
(accessed Oct. 6, 2009).
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Externally, borrowers can face language or education
barriers, both of which can be addressed by trustworthy and
reliable housing counselors.\150\ Treasury also plans to create
a web portal to provide information to borrowers and servicers,
and is working with Freddie Mac, in the GSE's role as
compliance agent, to develop a ``second look'' process by which
Freddie Mac will audit a sample of MHA modification
applications that have been denied.\151\
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\150\ House Financial Services Committee, Subcommittee on Financial
Institutions and Consumer Credit, Testimony of National Council of La
Raza Legislative Analyst, Graciela Aponte, Mortgage Lending Reform: A
Comprehensive Review of the American Mortgage System (Mar. 11, 2009)
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/
aponte031109.pdf).
\151\ Wheeler Philadelphia Hearing Testimony, supra note 88.
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Performance Variations Among Servicers. Substantial
variation among servicers in performance and borrower
experience, as well as inconsistent results in converting trial
modification offers into actual trial modifications, remain
significant issues.\152\ Through August 2009, of the estimated
HAMP-eligible 60+ day delinquencies, 19 percent were offered
trial plans, and 12 percent entered trial modifications.\153\
The percentage of HAMP-eligible borrowers entering trial
modifications varied widely by servicer, from 0 percent to 39
percent.\154\ This means that more than two-thirds of eligible
borrowers potentially missed their opportunity to avoid
foreclosure. Treasury is taking steps to increase the number of
eligible borrowers who may participate. On July 28, Treasury
officials met with representatives of the 27 servicers
participating at that time. At this meeting, servicers pledged
to increase ``significantly'' the rate at which they were
performing modifications.\155\ Treasury acknowledges that
servicers have a ramp-up period: ``Servicers are still working
to incorporate program features in their systems and
procedures, adding new program requirements as they are
introduced.'' \156\
---------------------------------------------------------------------------
\152\ Campbell Real Estate Agent Survey, supra note 5.
\153\ Servicer Performance Report, supra note 95.
\154\ Servicer Performance Report, supra note 95.
\155\ U.S. Department of Treasury, Administration, Servicers Commit
to Faster Relief for Struggling Homeowners through Loan Modifications
(July 29, 2009) (online at financialstability.gov/latest/
07282009.html).
\156\ Allison COP Testimony, supra note 94, at 4-5.
---------------------------------------------------------------------------
There has been considerable variation in the number of
permanent HAMP modifications by servicer, with servicers that
have required full documentation before commencing a
modification having significantly higher rates of conversion
from trial to permanent modifications. Because data on
permanent modifications is still preliminary, and because of
the two-month extension that Treasury has granted no/low-
documentation trial modifications to assemble full
documentation, the Panel is refraining at this point from
presenting an analysis of servicer-by-servicer conversion rates
from trial to permanent loans. This is an issue that the Panel
plans to reexamine in a future report when more robust data is
available.
Treasury Efforts to Improve Performance. In recognition of
this concern, Treasury has prioritized servicer capacity to
respond to borrowers. While Treasury recognizes that ``capacity
is key to the success of HAMP,'' \157\ current servicer
capacity remains an area of concern. In testimony before a
House Financial Services subcommittee hearing, Treasury
Assistant Secretary for Financial Institutions Michael Barr
noted the following:
---------------------------------------------------------------------------
\157\ Letter from Secretaries Geithner and Donovan to Servicers
(July 9, 2009) (online at www.housingwire.com/wp-content/uploads/2009/
07/servicer-letter.pdf).
On July 9, as a part of the Administration's efforts
to expedite implementation of HAMP, Secretaries
Geithner and Donovan wrote to the CEOs of all of the
servicers currently participating in the program. In
this joint letter, they noted that there appears to be
substantial variation among servicers in performance
and borrower experience, as well as inconsistent
results in converting trial modification offers into
actual trial modifications. They called on the
servicers to devote substantially more resources to the
program in order for it to fully succeed.\158\
---------------------------------------------------------------------------
\158\ Barr Hearing Testimony, supra note 87.
To combat this problem, Treasury has tasked Freddie Mac to
conduct readiness reviews of participating servicers and report
the results back to Treasury.\159\
---------------------------------------------------------------------------
\159\ Barr Hearing Testimony, supra note 87.
---------------------------------------------------------------------------
Further, Treasury tracks outcomes as an incentive for
servicers to scale up their operations to meet demand. Treasury
publishes monthly statistics on HAMP that track, among other
things, how many eligible borrowers to whom each servicer has
offered a trial modification and how many have entered trial
modifications.\160\ Additionally, Treasury is working to
develop more exacting metrics to measure the quality of
borrower experience, such as average borrower wait time for
inbound inquiries, completeness and accuracy of information
provided to applicants, as well as response time for completed
applications.\161\
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\160\ It is not yet known whether the publication of these reports
will induce lenders to increase participation. For example, Bank of
America and Wells Fargo's borrower participation rose sharply after
showing weak numbers in the first monthly report. However, this could
have been due to the banks' ramp-up period in implementing the program.
Servicer Performance Report, supra note 95.
\161\ U.S. Department of the Treasury, Making Home Affordable
Program on Pace to Offer Help to Millions of Homeowners (Aug. 4, 2009)
(online at www.financialstability.gov/latest/tg252.html).
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h. Servicer Concerns About the HAMP Program
Servicers voice a number of criticisms and concerns
regarding the HAMP program. Failure to address these concerns
could limit the effectiveness of HAMP. In June, the Panel sent
a questionnaire to the 14 largest servicers that were not yet
participating in HAMP.\162\ Of the 13 servicers that responded,
only two stated that they did not plan to participate in HAMP.
As primary justification, both of these servicers stated that
they believed that their own modification programs provided
borrowers with more aggressive and flexible relief than did
HAMP, allowing more borrowers to receive modifications. One
explained that under its own program, it uses ``a more holistic
review of income and expenses [as compared to] the MHA gross
income versus primary mortgage debt model.'' Another ``performs
a disposable income analysis rather than impos[ing] a fixed
debt-to-income requirement.'' It ``subtract[s] mortgage
payments, property taxes, homeowners' insurance, verifiable
utilities, and medical and day care expenses from the
customer's net income.''
---------------------------------------------------------------------------
\162\ Surveys were sent to Accredited Home Lenders, American Home
Mortgage Servicing, American General Finance Inc, Citizens Financial
Group, Fifth Third Bancorp, HSBC, Home Eq Servicing, ING Bank, Litton
Loan Servicing, PNC Financial Services Group, Sovereign Bancorp Inc.,
SunTrust Banks Inc., and U.S. Bancorp. Only Accredited Home Lenders
failed to provide a response. As of August 13, nine of the servicers
had either already signed up to participate in the program or were in
the process of signing contracts to participate. Surveys Sent by the
Panel to Various Loan Servicers (June 30, 2009) (hereinafter ``Survey
of Lenders'').
---------------------------------------------------------------------------
The questionnaire asked servicers what they believed to be
barriers to full participation in HAMP. Among the most common
responses was that the program required cumbersome
documentation and trial periods. One servicer suggested
amending documentation requirements ``to mirror current bank-
owned work-out options.''\163\ A servicer that is choosing not
to participate in HAMP believed that gathering the required
documentation would take between 45 to 50 days under HAMP,
while under the servicer's own program, the average decision
time, including collection of documents, was 10 to 12
days.\164\
---------------------------------------------------------------------------
\163\ Survey of Lenders, supra note 162.
\164\ Survey of Lenders, supra note 162.
---------------------------------------------------------------------------
Another perceived barrier to full participation is the
concern that the program's details continue to change. One
servicer cited ``on-going clarifications of, and additions to,
the requirements and guidelines issued by the Treasury and its
agents, Fannie Mae and Freddie Mac.''\165\ Another stated that
``the ongoing evolution of program benefits and requirements
has presented challenges (for example, [the] ability to timely
recruit, hire, and train staff for functions that are still
being defined).''\166\ Some servicers reported that it took
substantial manpower to implement the required system
changes.\167\ Among the other perceived barriers to full
participation are questions about servicer liability,
difficulty in obtaining investor approval to amend servicing
agreements, different reporting standards between GSEs and
Treasury, and a lack of flexibility in the escrow requirement.
---------------------------------------------------------------------------
\165\ Survey of Lenders, supra note 162.
\166\ Survey of Lenders, supra note 162.
\167\ Survey of Lenders, supra note 162.
---------------------------------------------------------------------------
Treasury has made substantial progress towards reaching its
projection of having 90 percent of HAMP-eligible mortgage debt
serviced by participating servicers, but more efforts are
needed before significant percentages of eligible borrowers
receive modifications.\168\ As servicers take time to implement
their programs and fully train their staff, families are losing
their homes. Treasury must encourage and provide support to
enable servicers to make modifications available to as many
borrowers as possible, as quickly as possible.
---------------------------------------------------------------------------
\168\ It is possible that a significant number of HAMP-eligible
borrowers are receiving modification through servicers' non-HAMP
programs. Treasury, possibly through Freddie Mac's audit function,
should compile and analyze this set of modifications, as it does for
HAMP modifications.
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i. Prospects for Long-Term Effectiveness
The program is completely dependent upon servicers to
provide adequate capacity and quality in order to make HAMP a
success. Therefore, it is important to consider the longer term
prospects for servicers to provide that quality and capacity in
evaluating the longer term outlook for HAMP.
HAMP relies on mortgage servicers to perform the
modifications. Residential mortgage servicers, however, are not
normally in the modification business.\169\ Residential
mortgage servicing combines a transaction processing business
with a loss mitigation business. Transaction processing is a
business given to automation and economies of scale. Loss
mitigation, in contrast, involves intense discretion and human
capital and is cyclic with the occurrence of severe recessions.
In normal times, loss mitigation is a small part of any
servicing operation.
---------------------------------------------------------------------------
\169\ In contrast, the commercial mortgage servicing market is
designed with the need for loan modifications in mind. Gelpern &
Levitin Frankenstein Contracts, supra note 143.
---------------------------------------------------------------------------
While there were some episodes of serious cyclic
foreclosure, such as in New England in the early 1990s, on the
whole, mortgage defaults were historically sparse and random,
so it made little business sense for most servicers, other than
subprime specialists, to invest in loss mitigation capacity.
Investors did not want to pay for this capacity, and servicing
fee arrangements did not budget for it, particularly in light
of the lack of demand. Because servicers did not invest in loss
mitigation capacity during boom times, they now lack sufficient
loss mitigation capacity. There is a limited supply of trained,
experienced loss mitigation personnel, although it is likely
that there are many out-of-work underwriters and originations
personnel available, and the standard servicing computer
platform lacks the ability to process loan modifications.
For HAMP to succeed, the entire servicing industry has had
to shift into a new line of business. To incentivize this
business model transformation, HAMP offers servicers payments
for every modified mortgage. This incentive payment is paid on
top of servicers' regular compensation, which is supposed to
cover appropriate loss mitigation. At this point, the
transition and re-tooling period should be over, and servicers'
loss mitigation units should be expected to be operating at
capacity.
j. Incentive Payment Sufficiency
Incentive payments might be insufficient to offset other
servicer incentives that push for foreclosure even when
modification increases the net present value of the loan.\170\
As noted by Deborah Goldberg at the Panel's foreclosure
mitigation field hearing, ``there are many incentives for
servicers to continue moving a loan toward foreclosure during
the HAMP review process.''\171\ Servicers typically purchase
mortgage servicing rights (MSRs) for an upfront payment based
on the outstanding principal balance of the loans in the
servicing portfolio. The servicer's pricing of the MSRs depends
primarily on the servicing fee, anticipated prepayment rates
(including defaults), and on the anticipated costs of servicing
the loans. The servicing fee is typically in the range of 25-50
basis points per annum of the outstanding principal balance of
the loans in the portfolio and gets paid before investors in
the mortgages are paid.
---------------------------------------------------------------------------
\170\ Senate Committee on the Judiciary, Testimony of Professor
Adam J. Levitin, Helping Families Save Their Homes: The Role of
Bankruptcy Law, 110th Cong., at 11 (Nov. 19, 2008) (online at
www.law.georgetown.edu/faculty/levitin/documents/
LevitinSenateJudiciaryTestimony.pdf).
\171\ Goldberg Philadelphia Hearing Written Testimony, supra note
99.
---------------------------------------------------------------------------
Servicers are obligated to advance monthly payments of
principal and interest on defaulted loans (``servicing
advances'') to investors until the property is no longer in the
servicing portfolio (as the result of a refinancing or sale) or
if the servicer reasonably believes it will not be able to
recover the servicing advances. While servicers are able to
recover their servicing advances upon liquidation of the
property, they are not able to recover the time value of the
advances; given that timelines of default to foreclosure are
now in the range of 18-24 months in most parts of the country,
servicers have significant time-value costs in making servicing
advances, particularly if they lack low-cost funding sources
like a depositary base or access to the Federal Reserve's
Discount Window.
Because servicers prepay for their MSRs, their
profitability depends on prepayment speeds and maintaining low
operations costs. Most servicers hedge their prepayment risk to
the extent it is an interest rate risk. Some also hedge against
prepayment speeds due to default risk through buying credit
default swap protection on either their particular portfolios
or on indices like the ABX. Servicers, however, are unable to
hedge against servicing costs effectively, and foreclosures
impose significant operational costs on servicers.
Consider a servicer that receives 37.5 basis points per
year on a mortgage loan with an unpaid principal balance of
$200,000. The servicer might have paid $1,000 to acquire the
MSR for that loan. The servicer's annual servicing fee income
is $750. The servicer will then add to this a much more modest
amount of float income from investing the mortgage payments
during the period between when the homeowner pays the servicer,
and the servicer is required to remit the funds to the
investors. This income might amount to $20-$40 per year. A
typical performing loan might cost in the range of $500/year to
service, which means that the servicer will turn a profit on
the loan.
If the loan becomes delinquent, however, it will cost the
servicer $1,000/year to service, both because of additional
time and effort involved as well as the cost of servicing
advances.\172\ The sooner the servicer can foreclose on the
loan, the sooner the servicer can cut loose a money-losing
investment. Moreover, the foreclosure itself might present an
opportunity to levy various ancillary fees that do not need to
be remitted to investors, but which can instead be retained by
servicers, such as late fees and property maintenance fees.
Thus foreclosure can not only cut losses, but it can be an
affirmative profit center.\173\
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\172\ Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
\173\ Katherine M. Porter, Misbehavior and Mistake in Bankruptcy
Mortgage Claims, 87 Texas Law Review 121, 127--0928 (2008).
(hereinafter ``Porter Bankruptcy Mortgage Claims'').
---------------------------------------------------------------------------
In contrast, if the servicer modifies the defaulted loan,
the servicer will still lose the time-value of the servicing
advances it made; will incur a significant administrative cost
to performing the modification, estimated at as high as
$1,500;\174\ will have no opportunity to levy additional fees;
and will assume a risk that there will be a redefault, which
will add to the servicer's time-value and operations costs.
While the precise calculations of servicers in these
circumstances are not known, there is a strong inference that
servicers' incentives may not be aligned with those of
investors in the mortgages. Indeed, private mortgage insurers,
who bear the first loss on defaults on insured loans--making
them like investors--have recently expressed sufficient concern
about servicer loss mitigation practices that they have
insisted on inserting personnel into servicing companies to
supervise loss mitigation.\175\
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\174\ Joseph Mason, Mortgage Loan Modification: Promises and
Pitfalls, SSRN Working Paper Series (Oct. 3, 2007) (online at
papers.ssrn.com/sol3/papers.cfm?abstract_id=1027470).
\175\ Harry Terris and Kate Berry, Pipeline, American Banker vol.
174, no. 163 (Aug. 27, 2009).
---------------------------------------------------------------------------
HAMP provides servicers with taxpayer-funded modification
incentive payments in addition to their preexisting contractual
payments from investors in order to encourage servicers to
perform more modifications, to the extent that they would
maximize net present value. While servicers are contractually
obligated to maximize value for mortgage investors and are
already compensated for their services, HAMP provides
additional, taxpayer-funded compensation for servicers to
perform the same services. The goal of this extra compensation
is to make the servicers' incentives look like those of a
portfolio lender, with the hope that this will negate any
incentive misalignments that encourage servicers to seek
foreclosure. If so, both investors and financially distressed
homeowners will win, as well as the neighbors of the homeowners
and their communities.
By all estimates, HAMP incentive payments more than cover
the cost of modifications, excluding overhead.\176\ The
incentive payment amounts might still be insufficient, however,
to counterbalance servicers' incentive to pursue foreclosure
because servicers are reluctant to invest in a loss mitigation
business that is unlikely to have long-term value.\177\
Moreover, given the limited supply of modification specialists,
who cannot be trained overnight, the capacity problem may
simply be impervious to incentive payments of any reasonable
level. The economics of servicing are still not fully
understood, and this presents a challenge for any attempt to
craft an incentive-based modification program.
---------------------------------------------------------------------------
\176\ Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
\177\ Redefaults, Self-Cures, and Securitization Paper, supra note
142.
---------------------------------------------------------------------------
That said, successful HAMP modifications should result in
an increase in the value of MSRs by reducing prepayment speeds,
both due to defaults and to refinancings. Prepayments due to
refinancings are largely a function of interest rates; as rates
drop, prepayment speeds increase. Refinancings, however, are
only possible when there is positive equity.
HAMP modifications result in extremely low interest rates
and negative equity. The combination means that HAMP-modified
loans, to the extent they do not redefault, are unlikely to be
refinanced. First, HAMP-modified loans have interest rates that
are initially so low that it is unlikely that the borrower
could find a lower interest rate.\178\ And second, even if a
lower rate were available, negative equity precludes
refinancing. HAMP modifications thus have drastically slow
prepayment speeds, which boosts the value of MSRs.
---------------------------------------------------------------------------
\178\ Under the terms of HAMP modification, interest rates are tied
to the Freddie Mac Primary Mortgage Market Survey rate (market rate) on
the date that the modification agreement was prepared. If the modified
rate is below the market rate on this date, the modified rate is fixed
for the first five years. In the sixth year, the modified rate may
increase up to one percentage point annually until it reaches the
market rate listed in the modification agreement. If the modified rate
equaled or exceeded the market rate when the modification agreement was
prepared, the modified rate is fixed for the life of the loan.
---------------------------------------------------------------------------
For example, JPMorgan Chase has reduced interest rates in
some modifications so they are just enough to cover its
servicing fee, but left principal balances untouched.\179\
Modifications like this ensure that the value of MSRs to the
servicer will be maximized, as servicing fee income will not be
reduced (as would occur if principal balances were reduced) and
refinancing is likely precluded both because of low rates and
likely negative equity. Unfortunately, while a modification
like this might maximize value for the servicer, it might not
be the optimal modification for the homeowner or the investors.
Thus, while HAMP is aimed at correcting misaligned incentive
problems, it might actually overcorrect and result in sub-
optimally structured modifications.
---------------------------------------------------------------------------
\179\ Mike Greggory, Chase Serves Itself First in Mortgage
Modifications; MBS Bond Holders Up in ARMs, Financial Times (July 27,
2009) (online at www.ft.com/cms/s/2/a6f6db88-
097aee0911de098c340900144feabdc0.html).
---------------------------------------------------------------------------
The benefit HAMP could provide to servicers in the form of
increased MSR values is tempered by the risk that servicers
assume on a loan redefault. A defaulted loan is worse than a
prepayment in terms of MSR value, because not only is the
principal balance of the trust reduced, but the servicer must
make servicing advances of principal and interest until the
property is sold from the trust, either at a foreclosure sale
to a third-party or from REO. While servicing advances are
reimbursable, no interest is paid on them, resulting in a time-
value loss for the servicer. The time-value costs of a
defaulted mortgage are one of the largest costs for a servicer,
especially in a depressed market where foreclosures are taking
longer and properties are sitting in REO for months if not
years.
HAMP payments may well offset the cost of redefault risk
for servicers, in addition to the costs of modification, which
are estimated in the $1,000 range.\180\ This raises the
question of why servicers are not engaged in more
modifications. The answer may simply be a capacity constraint,
but another consideration is that it is difficult for servicers
to determine ex-ante whether a loan will redefault post-
modification and thus figure out the net benefit of
modification.\181\ If servicers do not believe that
modifications as a whole are sustainable, they will be
reluctant to engage in them beyond the likely sustainable ones
they can cherry-pick. Again, HAMP is designed to address
servicer reluctance to engage in modifications through
incentive payments, but this sort of targeted incentive payment
only makes sense when an economic structure is fully
understood.
---------------------------------------------------------------------------
\180\ Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
\181\ Redefaults, Self-Cures, and Securitization Paper, supra note
142.
---------------------------------------------------------------------------
Servicer capacity remains a weak link in the system, and it
is unclear whether HAMP incentive payments are sufficient to
change the situation. Servicers may be reluctant to invest in
modification capacity that will have a limited useful lifespan.
In addition, there might simply be an inelastic supply of
modification capacity, which would make modification capacity
impervious to incentives. Ensuring that modification efforts
are not hobbled by lack of capacity is essential if HAMP is to
be successful, but it does not appear that Treasury has
undertaken any concrete steps to ensure that the capacity issue
is resolved.
One possible solution to the problem of servicer incentives
or capacity constraints is to provide supplemental capacity,
such as contracting with third-party originators to modify the
loans as if they were underwriting new loans. Loan modification
is essentially loan underwriting, which is not where servicer
talents and expertise lie. While there are coordination and
privacy issues involved with utilizing third-party originators
for modifications, third-party originators could provide an
effective option.
k. Possible Litigation Risk for Servicers
HAMP may itself be creating litigation risk for servicers,
as there is a question about how principal forbearance is to be
treated by securitization trusts for the purposes of allocating
cash flow among investors. Treasury has advised that principal
forbearance should be treated as a loss to the trust, with any
later payment as a loss recovery, but Treasury has also noted
that the trust documents control.\182\ Many servicers and
securitization trustees are therefore reviewing the trust
documents to determine the appropriate interpretation. To the
extent that principal forbearance is treated as a loss,
however, it would reduce the outstanding principal balance in
the trust, which would reduce the servicer's servicing fee
compensation.
---------------------------------------------------------------------------
\182\ U.S. Department of the Treasury, Supplemental Documentation
FAQs (Aug. 19, 2009) (online at www.hmpadmin.com/portal/docs/
hamp_servicer/hampfaqs.pdf). These two directives can be seen as
inconsistent.
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3. Second Lien Program
One component of HAMP is the Second Lien Program.
Originally released in mid-February, the plan to assist
homeowners included an initiative to lower monthly mortgage
payments, but it failed to address in detail a related issue
that threatens to undo troubled borrowers: second liens.
Treasury states that as many as 50 percent of at-risk mortgages
also have second liens.\183\ Second liens can interfere with
the success of loan modification programs for three reasons.
First, modifying the first lien may not reduce homeowners'
total monthly mortgage payments to an affordable level if the
second mortgage remains unmodified.\184\ While some homeowners
might be able to afford a modified first mortgage payment, a
second unmodified mortgage payment can make monthly mortgage
payments unaffordable, increasing redefault risk.\185\ Second,
when a first mortgage is refinanced, the lender doing the
refinancing will have a junior lien to any previously existing
mortgagees unless they agree to resubordinate their liens to
the refinanced mortgage. Second liens, therefore, have the
potential to hinder or prevent efforts to refinance a first
mortgage.\186\ Third, second liens also increase the negative
equity that can contribute to subsequent redefaults.
---------------------------------------------------------------------------
\183\ MHAP Update, supra note 69. Senate Committee on Banking,
Housing, and Urban Affairs, Written Testimony of U.S. Department of
Housing and Urban Development Senior Advisor for Mortgage Finance,
William Apgar, Preserving Homeownership: Progress Needed to Prevent
Foreclosures (July 16, 2009) (online at www.hud.gov/offices/cir/
test090716.cfm) (hereinafter ``Apgar Senate Testimony''); House
Testimony of Dave Stevens, supra note 71.
\184\ Although HAMP reduces mortgage payments to 31 percent of the
borrower's monthly income, payments on junior liens are not included in
that calculation.
\185\ MHAP Update, supra note 69, at 1.
\186\ MHAP Update, supra note 69, at 1. The Panel addressed the
complexities and challenges caused by junior liens in its March
Oversight Report. The Panel noted that there are multiple mortgages on
many properties, and that across a range of mortgage products, many
second mortgages were originated entirely separately from the first
mortgage and often without the knowledge of the first mortgagee. In
addition, millions of homeowners took on second mortgages, often as
home equity lines of credit. Since those debts also encumber the home,
they must be dealt with in any viable refinancing effort. COP March
Oversight Report, supra note 21.
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Treasury established the Second Lien Program with two
primary goals in mind: (1) to allow 1 to 1.5 million homeowners
to benefit from reduced payments on their second mortgages--
equaling up to 50 percent of HAMP participants; and (2) to
maximize and enhance the effectiveness of Treasury's first lien
modification program.\187\
---------------------------------------------------------------------------
\187\ MHAP Update, supra note 69, at 1.
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Under the Second Lien Program, when a HAMP modification is
initiated on a first lien, servicers participating in the
Second Lien Program will automatically reduce payments on the
associated second lien by modifying or extinguishing the second
lien.\188\ Accordingly, Treasury has emphasized that
modification of a second lien should not delay modification of
a first lien, but will occur as soon as the second lien
servicer is able to formulate the terms and make contact with
the borrower.\189\ However, since the Second Lien Program is
voluntary, automatic modification of the second lien is not
required if the second lien servicer chooses not to participate
in the Second Lien Program. According to the Second Lien
Program guidelines, the amount of funds available will be
capped based upon each servicer's Servicer Participation
Agreement (SPA).\190\ Treasury will formulate each servicer's
initial program participation cap by ``estimating the number of
modifications and extinguishments expected to be performed by
each servicer'' during the life of HAMP.\191\ Second lien
modification does not go into effect ``until the first lien
modification becomes effective under HAMP'' and the borrower
has made each second lien trial period payment ``by the end of
the month in which it is due.''\192\
---------------------------------------------------------------------------
\188\ U.S. Department of Housing & Urban Development, Prepared
Remarks for Secretary of Housing and Urban Development Shaun Donovan at
the Mortgage Bankers Association National Policy Conference (Apr. 24,
2009) (online at www.hud.gov/news/speeches/200909040929.cfm); MHAP
Update, supra note 69, at 4.
\189\ MHAP Update, supra note 69, at 4.
\190\ SLMP Supplemental Directive, supra note 74.
\191\ Id. It should be noted that Supplemental Directive 09-05
provides guidance to servicers for implementation of the Second Lien
Program for second liens that are not owned or guaranteed by Fannie Mae
or Freddie Mac--that is, so-called ``non-GSE second liens.'' The
Directive explicitly directs servicers of second liens owned or
guaranteed by Fannie Mae or Freddie Mac to refer to the Second Lien
Program guidance provided by those entities.
\192\ Id. A trial period is not required if a borrower is current
on the existing second lien and the current payment amount is equal to
or more then the monthly payment that will be due following the second
lien modification.
---------------------------------------------------------------------------
The Second Lien Program has several eligibility factors.
First, only second liens originated on or before January 1,
2009 are eligible for a modification or extinguishment under
this program.\193\ Second, only second liens with an unpaid
principal balance equal to or greater than $5,000 are eligible
for modification or cost share payments, while there is no such
limitation with respect to any extinguishment of second
liens.\194\ Third, borrowers can participate in the program
provided that they have fully executed a Second Lien Program
modification agreement or entered into a trial period plan with
the servicer by December 31, 2012.\195\
---------------------------------------------------------------------------
\193\ Id.
\194\ Id.
\195\ Id.
---------------------------------------------------------------------------
During his testimony before the Senate Committee on
Banking, Housing, and Urban Affairs in July, Assistant
Secretary Allison noted that the five banks that aggregately
account for over 80 percent of the second liens are in
negotiations to participate in the Second Lien Program.\196\
---------------------------------------------------------------------------
\196\ Allison Senate Testimony, supra note 105.
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The Second Lien Program also contains a ``pay-for-success''
structure similar to the first lien modification program.
Servicers can be paid $500 up-front for a successful
modification and then receive successive payments of $250 per
year for three years, provided that the modified first loan
remains current.\197\ If borrowers remain current on their
modified first loan, they can receive payments of up to $250
per year for as many as five years.\198\ This means that
borrowers could receive as much as $1,250 for making payments
on time. These borrower incentives would be directed at paying
down the principal on the first mortgage, helping borrowers
build equity in their home.\199\
---------------------------------------------------------------------------
\197\ SLMP Supplemental Directive, supra note 74.
\198\ MHAP Update, supra note 69, at 3; SLMP Supplemental
Directive, supra note 74.
\199\ MHAP Update, supra note 69, at 3; SLMP Supplemental
Directive, supra note 74.
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The program gives participating servicers two options: (1)
reduce borrower payments, or (2) extinguish the lien. The
servicer's decision as to which option to pursue is based
solely on the financial information provided by the borrower in
conjunction with the HAMP modification.\200\
---------------------------------------------------------------------------
\200\ SLMP Supplemental Directive, supra note 74.
---------------------------------------------------------------------------
Under the first option, the MHA Program will share with
lenders the cost of reducing second mortgage payments for
homeowners.\201\ For amortizing loans (loans with monthly
payments of interest and principal), Treasury shares the cost
of reducing the interest rate on the second mortgage to one
percent.\202\ The servicer reduces the loan interest rate to
one percent, forbears principal in the same proportion as in
the first lien modification, and extends the repayment and
amortization schedule to match the modified first lien.\203\ In
turn, Treasury pays the servicer the incentive and success fees
for making the modification, plus pays the lender half the
difference between the interest rate on the first lien and one
percent.\204\ For interest-only loans, MHA shares the cost of
reducing the interest rate on the second mortgage to two
percent.\205\ The servicer reduces the interest rate to two
percent, forbears principal in the same proportion as in the
first lien modification, and extends the repayment and
amortization schedule to match the first lien.\206\ Treasury
pays the servicer an amount equal to half of the difference
between (a) the lower of the contract rate on the second lien
and the interest rate on the first lien as modified and (b) two
percent.\207\ For both amortizing and interest-only loans that
have been modified, the interest rate rises after five years,
just as happens under HAMP. At the five-year mark, the interest
rate in the Second Lien Program increases to the rate that is
being charged at that time on the modified first mortgage.\208\
---------------------------------------------------------------------------
\201\ MHAP Update, supra note 69, at 3; SLMP Supplemental
Directive, supra note 74.
\202\ MHAP Update, supra note 69, at 2; SLMP Supplemental
Directive, supra note 74.
\203\ MHAP Update, supra note 69, at 2; SLMP Supplemental
Directive, supra note 74.
\204\ MHAP Update, supra note 69, at 2; SLMP Supplemental
Directive, supra note 74.
\205\ MHAP Update, supra note 69, at 2; SLMP Supplemental
Directive, supra note 74.
\206\ MHAP Update, supra note 69, at 2-3; SLMP Supplemental
Directive, supra note 74.
\207\ MHAP Update, supra note 69, at 2-3; SLMP Supplemental
Directive, supra note 74.
\208\ MHAP Update, supra note 69, at 2-3; SLMP Supplemental
Directive, supra note 74.
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As an alternative to modifying the second lien, lenders/
investors have the option to extinguish second liens in
exchange for a lump-sum payment from Treasury under a pre-set
formula.\209\ While eligible first lien modifications will not
require any participation by second lien holders, these
incentives to extinguish second liens on loans modified under
the program are intended to reduce the borrower's overall
indebtedness and improve loan performance.\210\ This option is
intended to allow second lien holders ``to target principal
extinguishment to the borrowers where extinguishment is most
appropriate.''\211\ Servicers will be eligible to receive
compensation when they contact second lien holders and
extinguish valid junior liens (according to a schedule
formulated by Treasury, depending in part on combined loan-to-
value).\212\ Servicers will be reimbursed for the release
according to the specified schedule, and will also receive an
extra $250 for obtaining a release of a valid second lien.\213\
For example, for loans that are more than 180 days past due at
the time of modification, the lender/investor will be paid
three cents per dollar extinguished.\214\ For loans less than
180 days past due, Treasury will pay second lien holders a
specified amount for each dollar of unpaid principal balance
extinguished.\215\
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\209\ MHAP Update, supra note 69, at 2.
\210\ MHA March Update, supra note 80, at 5-6.
\211\ MHAP Update, supra note 69, at 3.
\212\ MHA March Update, supra note 80, at 5-6.
\213\ MHA March Update, supra note 80; SLMP Supplemental Directive,
supra note 74.
\214\ MHAP Update, supra note 69, at 3; SLMP Supplemental
Directive, supra note 74.
\215\ MHAP Update, supra note 69, at 3; SLMP Supplemental
Directive, supra note 74.
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The program is not yet operational, therefore no loans have
been modified under the initiative. Without officially
participating servicers and lenders and any preliminary data,
the Panel is unable to determine whether or not the Second Lien
Program will be able to eliminate the significant obstacle that
second liens can present to loan modification.
4. Home Price Decline Protection Program
Building on ideas from the FDIC, Treasury has also
developed a price decline protection initiative with the
primary purpose of increasing the number of modifications
completed under HAMP in those markets hardest hit by falling
home prices.\216\
---------------------------------------------------------------------------
\216\ HAMP Supplemental Directive, supra note 77; Allison Senate
Testimony, supra note 105.
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Treasury's articulated purpose for the Home Price Decline
Protection (HPDP) is to encourage HAMP modifications in areas
where homes have lost the most value. It does this by working
to alleviate mortgage holder/investor concerns that recent home
price declines may persist and ``offset any incremental
collateral losses on modifications that do not succeed.''\217\
Lenders may be more willing to offer modifications if potential
losses are partially covered.
---------------------------------------------------------------------------
\217\ House Testimony of Dave Stevens, supra note 71.
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There are several factors relating to HPDP eligibility.
First, all HAMP loan modifications begun after September 1,
2009 are eligible for HPDP payments.\218\ As of September 1,
HPDP payments became operational and were included in NPV
calculations.\219\ Treasury has made clear that no incentives
will be provided if: (1) the servicer has not entered into a
HAMP Servicer Participation Agreement; (2) the borrower did not
successfully complete the trial period and execute a HAMP
modification agreement; or (3) the HAMP loan modification did
not reduce the borrower's monthly mortgage payment by at least
six percent.\220\ In addition, HPDP incentive compensation will
terminate if the borrower loses good standing under HAMP (i.e.,
if he or she misses three successive payments on a HAMP
modification) or if the borrower pays off the mortgage loan
balance in full.\221\ Second, mortgage loans that are owned or
guaranteed by Fannie Mae or Freddie Mac are not eligible for
HPDP incentive compensation.\222\
---------------------------------------------------------------------------
\218\ U.S. Department of the Treasury, Treasury Announces Home
Price Decline Protection Incentives (July 31, 2009) (online at
www.financialstability.gov/latest/tg_07312009.html).
\219\ Barr Hearing Testimony, supra note 87.
\220\ HAMP Supplemental Directive, supra note 77.
\221\ HAMP Supplemental Directive, supra note 77.
\222\ HAMP Supplemental Directive, supra note 77.
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Program incentive payments are based upon the total number
of modified loans that successfully complete the modification
trial period and remain in the HAMP program. The HPDP incentive
is structured as a simple cash payment on all eligible
loans.\223\ Each successful loan modification will be eligible
for an HPDP incentive, up to a total cap for HPDP incentives of
$10 billion (from the $50 billion designated for HAMP using
TARP funding), but the actual amount spent will be dependent
upon housing price trends.\224\ Upon the completion of a
successful trial modification, the lender/investor accrues 1/
24th of the HPDP incentive per month for 24 months.\225\
Incentive payments are calculated based on a Treasury formula
incorporating an estimate of the projected home price decline
over the next year based on changes in average local market
home prices over the two previous quarters, the unpaid
principal balance of the mortgage loan prior to HAMP
modification, and the mark-to-market loan-to-value ratio of the
mortgage loan prior to HAMP modification.\226\ Incentives are
to be paid on the first- and second-year anniversaries of the
borrower's first trial payment due date under HAMP.\227\ In
other words, the incentive payments on all modified mortgages
will help cover the ``incremental collateral loss on those
modifications that do not succeed.''\228\
---------------------------------------------------------------------------
\223\ MHA March Update, supra note 80, at 5.
\224\ MHA May Update, supra note 79. According to the HPDP
guidelines, the amount of funds available to pay HPDP will be capped
based upon each servicer's servicer participation agreement. Treasury
will formulate each servicer's initial program participation cap by
estimating the number of modifications expected to be performed by each
servicer during the life of HAMP. HAMP Supplemental Directive, supra
note 77.
\225\ MHA May Update, supra note 79.
\226\ HAMP Supplemental Directive, supra note 77.
\227\ HAMP Supplemental Directive, supra note 77; Secretaries
Geithner, Donovan Announcement, supra note 78.
\228\ Secretaries Geithner, Donovan Announcement, supra note 78.
---------------------------------------------------------------------------
Because the program became active quite recently,
performance data are not available. Treasury has not specified
the number of loans it estimates will be covered by HPDP. All
loans eligible for HPDP payments are also covered by incentive
payments under the first lien program. As the Government
Accountability Office (GAO) has noted, loans requiring a
mandatory modification under the first lien program would
nonetheless be eligible for additional payments under this
program.\229\ Treasury has not offered any estimates of the
incremental modifications created by this program--that is to
say, the number of lenders who agree to participate only
because of the additional coverage against losses available
through the HPDP program, plus the number of non-mandatory
modifications that lenders may be willing to make because of
the additional protection against losses. Without such
information, it is unclear why the program should provide
additional payments for modifications that would have been made
anyway.
---------------------------------------------------------------------------
\229\ GAO HAMP Report, supra note 98, at 23.
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5. Foreclosure Alternatives Program (FAP)
Treasury has also developed an initiative to limit the
impact of foreclosure when loan modifications cannot be
performed. On May 14, Treasury Secretary Geithner and HUD
Secretary Donovan announced new details on the Foreclosure
Alternatives Program, an additional MHA program to help
homeowners facing foreclosure. Under the FAP, Treasury will
provide servicers with incentives to pursue alternatives to
foreclosures, such as short sales or the taking of deeds-in-
lieu of foreclosure.\230\ A short sale occurs when the borrower
is unable to pay the mortgage and the servicer allows the
borrower to sell the property at its current value, regardless
of whether the sale covers the remaining balance on the
mortgage. The borrower must list and actively market the home
at its fair value,\231\ and the sales transaction must be
conducted at arm's length, with all proceeds after selling
costs going towards the discounted mortgage payoff.\232\ If the
borrower lists and actively markets the home but is unable to
sell within the agreed-upon time frame, the servicer may resort
to a deed-in-lieu transaction, where the borrower voluntarily
transfers ownership of the property to the servicer, so long as
the title is unencumbered.\233\
---------------------------------------------------------------------------
\230\ MHA March Update, supra note 80.
\231\ The servicer will independently establish both property value
and the minimum acceptable net return on the property, and will notify
the borrower of an acceptable list price and any permissible price
reductions. The price can be determined based on one of two factors:
(1) a property appraisal, or (2) one or more broker price opinions
dated within 120 days of the short sale agreement. MHA May Update,
supra note 79.
\232\ MHA May Update, supra note 79.
\233\ MHA May Update, supra note 79.
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Since Treasury recognizes that the MHA program will not
help every at-risk homeowner or prevent all foreclosures,
Treasury's primary objective for the FAP is to assist
homeowners who cannot afford to remain in their homes by
developing an alternative to foreclosure that results in their
successful relocation to an affordable home.\234\ While short
sale and deed-in-lieu transactions may avoid depressing home
prices in an individual neighborhood, as foreclosures do, this
may be offset by the effect of putting more inventory on the
broader housing market when there is already a substantial
overhang.
---------------------------------------------------------------------------
\234\ MHA May Update, supra note 79.
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Treasury designed the FAP to be used in those cases where
the borrower is generally eligible for an MHA loan
modification, such as having a loan originated before January
1, 2009, on an owner-occupied property in default, but does not
qualify or is unable to maintain payments during the trial
period or modification.\235\ Eligible borrowers can participate
until December 31, 2012. Prior to resorting to foreclosure,
servicers participating in HAMP must evaluate eligible
borrowers to determine if a short sale is appropriate.\236\
This determination is based on a number of factors, including
property condition and value, average marketing time in the
community where the property is located, the condition of title
including the presence of any junior liens,\237\ along with the
servicer's finding that the net sales proceeds of the property
are anticipated to exceed its recovery through
foreclosure.\238\ If the servicer determines that a short sale
would be appropriate, the borrower will have at least 90
days\239\ to market and sell the property, using a licensed
real estate professional experienced in selling properties in
the vicinity.\240\ No foreclosure sale can occur during the
agreed-upon marketing period, provided that the borrower is
making good-faith efforts to sell the property.\241\ Servicers
are not permitted to charge borrowers any fees for
participating in the FAP.\242\ Participating servicers must
comply with program requirements so long as they do not
conflict with contractual agreements with investors.
---------------------------------------------------------------------------
\235\ Secretaries Geithner, Donovan Announcement, supra note 78;
MHA May Update, supra note 79.
\236\ MHA May Update, supra note 79.
\237\ For the property to be sold as a short sale or deed-in-lieu,
all junior liens, mortgages or other debts against the property must be
cleared, unless the servicer has a ``reasonable belief'' that all liens
on the property can be cleared. MHA May Update, supra note 79.
\238\ MHA May Update, supra note 79.
\239\ There is a maximum marketing period of one year for the
property in order to ensure that steps are being taken as quickly as
possible to complete the short sale and deed-in-lieu process. MHA May
Update, supra note 79.
\240\ MHA May Update, supra note 79.
\241\ MHA May Update, supra note 79.
\242\ MHA May Update, supra note 79.
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The FAP facilitates both short sales and deeds-in-lieu by
providing incentive payments to borrowers, junior-lien holders,
and servicers, similar in structure and amount to MHA incentive
payments. Servicers can receive incentive compensation of up to
$1,000 for each successful completion of a short sale or deed-
in-lieu.\243\ Borrowers are eligible for a payment of $1,500 in
relocation expenses in order to effectuate short sales and
deeds-in-lieu of foreclosure.\244\ The short sale agreement,
upon the servicer's option, may also include a condition that
the borrower agrees to ``deed the property to the servicer in
exchange for a release from the debt if the property does not
sell within the time specified in the Agreement or any
extension thereof.''\245\ In such cases, the borrower agrees to
vacate the property within 30 days and, upon performance,
receives $1,500 from Treasury to assist with relocation
costs.\246\ Treasury has also agreed to share the cost of
paying junior lien holders to release their claims by matching
$1 for every $2 paid by investors, for a maximum total Treasury
contribution of $1,000.\247\ Payments are made upon the
successful completion of a short sale or deed-in-lieu.
---------------------------------------------------------------------------
\243\ MHA May Update, supra note 79.
\244\ MHA March Update, supra note 80; MHA May Update, supra note
79.
\245\ MHA May Update, supra note 79.
\246\ MHA May Update, supra note 79. This amount is in addition to
any funds the servicer may provide to the borrower.
\247\ MHA May Update, supra note 79.
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The Program also contains a streamlined process for
completing short sale transactions. Treasury will provide
standardized documentation, including a short sale agreement
and an offer acceptance letter, which will outline marketing
terms, the rights and responsibilities of all parties, and
identify timeframes for performance.\248\ With the use of
standardized documents, Treasury expects that the complexity of
these transactions will be minimized, increasing the number of
short sale transactions. Other program features include limits
on commission reductions.
---------------------------------------------------------------------------
\248\ MHA May Update, supra note 79.
---------------------------------------------------------------------------
The remaining details of the program are still being
finalized, and Treasury plans to announce them once they are
completed.\249\ Treasury has also not announced the number of
borrowers it anticipates will be assisted under FAP.
---------------------------------------------------------------------------
\249\ House Testimony of Dave Stevens, supra note 71.
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6. HOPE for Homeowners
HOPE for Homeowners is part of the Housing and Economic
Recovery Act of 2008 (HERA), signed into law in July 2008.\250\
It is intended to help borrowers who are having difficulty
making payments on their mortgages but who can afford an FHA-
insured loan by refinancing the borrower into an FHA loan.\251\
The program also directly addresses the problem of underwater
mortgages by requiring reduction in the principal balance of
the loan.\252\ Like MHA, it is a federal program, but is not
part of TARP and is run through HUD, not Treasury, although it
has subsequently utilized some TARP funding. Unfortunately, it
has had little impact thus far.
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\250\ Pub. L. No. 110-289 Sec. Sec. 1401-04.
\251\ The purpose of the program is:
(1) to create an FHA program, participation in which is voluntary
on the part of homeowners and existing loan holders to insure
refinanced loans for distressed borrowers to support long-term,
sustainable homeownership; (2) to allow homeowners to avoid foreclosure
by reducing the principal balance outstanding, and interest rate
charged, on their mortgages; (3) to help stabilize and provide
confidence in mortgage markets by bringing transparency to the value of
assets based on mortgage assets; (4) to target mortgage assistance
under this section to homeowners for their principal residence; (5) to
enhance the administrative capacity of the FHA to carry out its
expanded role under the HOPE for Homeowners Program; (6) to ensure the
HOPE for Homeowners Program remains in effect only for as long as is
necessary to provide stability to the housing market; and (7) to
provide servicers of delinquent mortgages with additional methods and
approaches to avoid foreclosure.
12 U.S.C. Sec. 1715z-23(b). The mortgage must have been taken out
prior to January 1, 2008, all information on the original mortgage must
be true, and the homeowner must not have been convicted of fraud. Id.
\252\ White House Office of Press Secretary, President Obama Signs
the Helping Families Save Their Homes Act and the Fraud Enforcement and
Recovery Act (May 20, 2009) (online at www.whitehouse.gov/
the_press_office/Reforms-for-American-Homeowners-and-Consumers-
President-Obama-Signs-the-Helping-Families-Save-their-Homes-Act-and-
the-Fraud-Enforcement-and-Recovery-Act/); Jessica Holzer, Dispute With
Banks Continues To Dog U.S. Mortgage Relief Program, Wall Street
Journal (Sept. 23, 2009) (online at online.wsj.com/article/BT-CO-
20090923-709566.html) (hereinafter ``Holzer Mortgage Relief Article'').
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HUD announced the original program details in October 2008.
Voluntary for all participants, it requires lenders to write
down the principal of the mortgage to 90 percent of the value
of the property.\253\ Though the original program did not
provide any monetary incentives for principal reduction, a
lender would avoid the expenses of foreclosure and the
possibility that the home would sell for less than 90 percent
of its value. Also, as discussed below, under the current
program the lender will benefit from any equity created as well
as future appreciation in the home. EESA amended the Housing
and Economic Recovery Act, providing HUD with greater authority
under the program and providing borrowers with more flexibility
under the program. Revised program details were released in
November 2008, aiming to ``reduce the program costs for
consumers and lenders alike while also expanding eligibility by
driving down the borrower's monthly mortgage payments.''\254\
Among other things, these changes increased the LTV ratio to
96.5 percent and allowed lenders to extend the loan's term from
30 to 40 years.\255\
---------------------------------------------------------------------------
\253\ U.S. Department of Housing and Urban Development, Fact Sheet:
HOPE for Homeowners to Provide Additional Mortgage Assistance to
Struggling Homeowners (accessed Oct. 6, 2009) (online at www.hud.gov/
hopeforhomeowners/pressfactsheet.cfm).
\254\ U.S. Department of Housing and Urban Development, Bush
Administration Announces Flexibility for ``HOPE for Homeowners''
Program (Nov. 19, 2008) (online at www.hud.gov/news/
release.cfm?content=pr08-178.cfm).
\255\ Id.
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A unique feature of HOPE for Homeowners is that
participating homeowners are required to share with FHA both
the equity created at the beginning of the new mortgage and a
portion of the future appreciation in the home.\256\ FHA will
receive 100 percent of the equity if the home is sold during
the first year, and will reduce its claim by 10 percent each
year until after the fifth year of the agreement, when the
level settles at a 50 percent split between the FHA and the
homeowner.\257\ The program also requires the borrower to share
any future home price appreciation with the FHA in a 50/50
split that remains constant throughout the life of the
loan.\258\ If there is no equity or appreciation in the home
when the homeowner sells or refinances, the homeowner is not
required to pay anything to FHA.\259\
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\256\ Pub. L. No. 110-289 Sec. 257(k). Equity sharing is a little
known financing method by which a non-resident investor provides
capital and receives a portion of any equity in the home. The bottom
line in equity sharing is appreciation; if the home does not appreciate
in value, then the non-resident investor will receive no benefit from
the arrangement. Id.
\257\ U.S. Department of Housing and Urban Development, Basic
Consumer Facts about the HOPE for Homeowners Program (Oct. 2, 2008)
(online at www.hud.gov/hopeforhomeowners/consumerfactsheet.cfm). HUD
provides an example of how this will work. For a home currently worth
$200,000, the mortgage would be written down to $180,000, providing the
homeowner with $20,000 equity. If the homeowner sold or refinanced
within one year, he or she would have to pay 100 percent of the equity
received, or all $20,000, to FHA. If the home were sold or refinanced
in the second year, then FHA would receive 90 percent of the equity, or
$18,000. The percentages decrease by 10 percent a year, until they
level out after year five at 50 percent shared.
\258\ Id. In the example stated above, if the homeowner sold the
home for $250,000 at any point in the future, FHA would receive $25,000
of the $50,000 appreciation in the home.
\259\ Federal Housing Administration, HOPE for Homeowners Equity
Sharing (accessed Oct. 6, 2009) (online at www.fha.com/
hope_for_homeowners_equity.cfm).
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The Helping Families Save Their Homes Act of 2009 further
amended the program in May 2009.\260\ An impetus for the
amendments was the low participation in the program.\261\
Senator Dodd explained that, ``While the intentions for the
bill were high, the reality is, the bill didn't even come close
to achieving the goals those of us who crafted it thought it
would.''\262\ This bill added two incentives for servicers to
participate in the program. Prior to this, there had been no
incentive written into the law for servicer participation. The
Helping Families Save Their Homes Act added incentive payments
to servicers. These incentive payments closely approximate MHA
incentive payments.\263\ The incentive payments are funded
through TARP.\264\
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\260\ Pub. L. No. 111-22 Sec. 202.
\261\ Comments of Senator Harry Reid, Congressional Record--Senate:
S5184 (May 6, 2009).
\262\ Comments of Chris Dodd, Congressional Record--Senate: S5003
(May 1, 2009).
\263\ Pub. L. No. 111-22 Sec. 202(a)(11).
\264\ Pub. L. No. 111-22 Sec. 202(b).
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Second, the appreciation-sharing structure was changed: HUD
must now share with first or second lien holders the future
appreciation up to the appraised value of the property when the
existing loan was first issued. The portion of appreciation
shared with lien holders comes out of the 50 percent FHA
share.\265\ The lien holders do not, however, receive a portion
of the equity sharing. The appreciation sharing could be an
incentive to lenders otherwise wary of writing down the
principal of the loan. This compensation to second lien holders
could also be crucial to the success of the program. Second
lien holders are often the sticking point in mortgage
modifications, and providing them with a share of future
appreciation in the home could incentivize them to agree to the
modification. Without direct financial incentives, lenders had
limited reasons to participate in the program, as demonstrated
by the lack of participation. Because the loans are underwater,
junior lien holders are out of the money and only stand to gain
by holding out until prices increase, absent incentives; the
direct incentive payments and appreciation sharing may draw
more lender interest. Allowing lenders to also participate in
equity sharing could further increase lender participation.
---------------------------------------------------------------------------
\265\ Pub. L. No. 111-22 Sec. 202(a)(6)(C).
---------------------------------------------------------------------------
HOPE for Homeowners was originally predicted to help
400,000 homeowners. Though it is still in effect and running
concurrent to MHA, it has seen little success. It is doubtful
whether this goal will be reached. By January 24, 2009, it had
closed 22 loans, and had 442 applications for which the lender
intended to approve the borrower for the program.\266\ By
September 23, 2009, only 94 loans had closed, and lenders had
stated an intention to approve an additional 844
applications.\267\ These numbers do not reflect the program as
revised by the May 2009 amendments, as they have not yet been
enacted. Though the revised program will be rolled out soon,
HUD has still not reached agreement with large national banks
and their regulators about how much payment will be required to
extinguish second liens.\268\ HUD still believes that the
program will serve a ``substantial niche'' of borrowers,
especially those with no second mortgage.\269\ There is also a
concern that servicers, already overwhelmed with MHA
modification requests, will not be willing to complete the
additional work required by HOPE for Homeowners.\270\ Although
HUD continues to work on the program and has plans to re-launch
the program, it appears unlikely at this time that HOPE for
Homeowners will play more than a minor role in providing
foreclosure relief.
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\266\ U.S. Department of Housing and Urban Development, HOPE for
Homeowners Program Monthly Report to Congress (Jan. 2009) (online at
portal.hud.gov/portal/page/portal/FHA_Home/lenders/
h4h_monthly_reports_to_congress/
H4H%20Report%20to%20Congress%20January.pdf). Although HUD is
statutorily required to submit monthly reports to Congress on the
progress of the program, January 2009 appears to be the latest report
available. Id.
\267\ Holzer Mortgage Relief Article, supra note 252.
\268\ Holzer Mortgage Relief Article, supra note 252.
\269\ Holzer Mortgage Relief Article, supra note 252.
\270\ Holzer Mortgage Relief Article, supra note 252; Statistics
provided by U.S. Department of Housing and Urban Development to the
Panel. Interestingly, since June 2009, there are no applications which
lenders have announced an intention to approve. This could be because
lenders are waiting for formal implementation of the May amendments to
the program.
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7. Other Federal Efforts Outside of TARP
While the federal government's primary foreclosure
mitigation efforts are embodied in MHA or otherwise linked to
the MHA program through TARP funding, there are other
complementary federal efforts. The Federal Deposit Insurance
Corporation (FDIC) has established a loan modification program
that is a mandatory component of all FDIC residential mortgage
loss-sharing agreements with purchasers of failed banks'
assets.\271\ Between January 2008 and early September 2009, the
FDIC entered into 53 such loss-sharing agreements,\272\ which
cover potential losses on more than $50 billion in loans,
including both residential and commercial mortgages.\273\ Many
of the loss-sharing deals involve loans that were originated by
small banks that have since failed; however, some of the loans
were made by larger lenders, including IndyMac and Downey
Savings and Loan.\274\ Under the FDIC Mortgage Loan
Modification Program, delinquent borrowers who received
mortgages from those failed banks may be eligible for a
modification.
---------------------------------------------------------------------------
\271\ Loss sharing agreements allow the FDIC to sell loans that
otherwise would be difficult if not impossible to unload. Under these
agreements, the FDIC agrees to cover 80 percent of the acquiring bank's
losses on certain loans that it buys, up to a specified limit. On
losses above the limit, the FDIC agrees to cover 95 percent of the
acquiring bank's losses.
\272\ Tami Luhby, FDIC Pushes Mortgage Help for Jobless,
CNNMoney.com (Sept. 11, 2009) (online at money.cnn.com/2009/09/11/news/
economy/forbearance_unemployment/index.htm).
\273\ Federal Deposit Insurance Corporation discussions with Panel
staff, Sept. 10, 2009.
\274\ Binyamin Applebaum, FDIC Seizes Three Banks, Expanding Loan-
Relief Effort, Washington Post (Nov. 22, 2008) (online at
www.washingtonpost.com/wp-dyn/content/article/2008/11/21/
AR2008112104099.html).
---------------------------------------------------------------------------
The FDIC's program is generally quite similar to HAMP. Both
programs apply to residential mortgages that are more than 60
days delinquent. Both use an NPV test to determine the
estimated difference between the amount the lender would earn
from a foreclosure sale versus the amount that a loan
modification would yield. Both programs use standardized
methods--reducing interest rates, extending the term of the
loan, and forbearing principal--to reduce borrowers' mortgage
payments in order to decrease their debt-to-income ratio.\275\
Not all of the details of the two programs are the same,
though. For instance, HAMP allows interest rates to be reduced
to as low as 2 percent, while the lowest interest rate that can
be charged under the FDIC program is 3 percent.\276\ Also,
while the FDIC has released the model that it uses to calculate
net present value, Treasury has not publicly released its NPV
model for HAMP, a decision that has drawn criticism from some
homeowner advocates.\277\
---------------------------------------------------------------------------
\275\ Federal Deposit Insurance Corporation, FDIC Loan Modification
Program (online at www.fdic.gov/consumers/loans/loanmod/
FDICLoanMod.pdf) (accessed Oct. 6, 2009).
\276\ Id.
\277\ Alexandra Andrews & Emily Witt, The Secret Test That Ensures
Lenders Win On Loan Mods, ProPublica (Sept. 15, 2009) (online at
www.propublica.org/ion/bailout/the-secret-test-that-ensures-lenders-
win-on-loan-mods-915).
---------------------------------------------------------------------------
In September 2009, the FDIC, as part of its loan
modification program, made an effort to address the tide of
foreclosures caused by rising unemployment. The agency said
that it was encouraging banks with which it has entered loss-
sharing agreements to consider a temporary forbearance plan of
at least six months for borrowers whose default is primarily
due to unemployment or underemployment. ``With more Americans
suffering through unemployment or cuts in their paychecks, we
believe it is crucial to offer a helping hand to avoid
unnecessary and costly foreclosures,'' FDIC Chairman Sheila
Bair said in a statement. ``This is simply good business since
foreclosure rarely benefits lenders and would cost the FDIC
more money, not less.'' \278\
---------------------------------------------------------------------------
\278\ Federal Deposit Insurance Corporation, FDIC Encourages Loss-
Share Partners to Provide Forbearance to Unemployed Borrowers (Sept.
11, 2009) (online at www.fdic.gov/news/news/press/2009/pr09167.html).
---------------------------------------------------------------------------
It is not clear whether the FDIC's loan modification
program has been successful. The FDIC has yet to release data
on the number of loans covered by its loan modification
program; the number of modification offers that have been made
to borrowers; or the number of loans modified. FDIC has told
the Panel that it is compiling the data. Once the data are
released, it should be possible to compare the modification
rates under the FDIC program with similar programs, such as
HAMP.
8. State/Local/Private Sector Initiatives
a. State Law Governs the Foreclosure Process
In addition to the federal foreclosure mitigation efforts,
a number of state, local, and private sector initiatives are
supplementing federal efforts. State law continues for the most
part to determine when and how an individual can be subject to
foreclosure. Mediation, counseling, and outreach efforts at the
state and local levels are growing because of the mortgage
crisis.
State foreclosure laws vary, in many cases widely.\279\
Many predate the residential mortgage industry, let alone the
enormous changes that began in the 1980s.\280\ There are both
judicial and non-judicial (often called ``power-of-sale'')
foreclosure states.\281\ Judicial foreclosure requires a lender
to obtain court authority to sell a home. The lender must prove
that the mortgage is in default, and the borrower can put
forward any defenses he or she has; the court may also try to
foster a settlement. If the foreclosure goes forward, the
proceeds from sale of the property go first to satisfy the
outstanding mortgage balance.
---------------------------------------------------------------------------
\279\ John Rao & Geoff Walsh, Foreclosing a Dream: State Laws
Deprive Homeowners of Basic Protections, National Consumer Law Center,
at 3 (Feb. 2009) (online at www.consumerlaw.org/issues/foreclosure/
content/FORE-Report0209.pdf). A state's foreclosure process is usually
laid out in its civil code. Local variations, however, may exist; for
example, a locality might modify the state rules about the time period
allowed for parts of the process, the manner and places for publication
of foreclosure notices, and the location of sales of foreclosed
property. Id.
\280\ Id. at 8.
\281\ Some states permit both, and in many cases non-judicial
procedures include at least the due process rights contained in the
judicial foreclosure process. In 18 states, mortgages are most commonly
foreclosed by judicial action. The majority of foreclosures occur
through judicial procedures, and in 32 states plus the District of
Columbia, the majority of foreclosures occur through non-judicial
procedure. Id. at 12-13. See also an appendix to the same report,
Survey of State Foreclosure Laws, National Consumer Law Center (Feb.
2009) (online at www.consumerlaw.org/issues/foreclosure/content/
Foreclosure-Report-Card-Survey0209.pdf).
---------------------------------------------------------------------------
In a non-judicial foreclosure, a lender simply declares a
homeowner in default and provides him or her with a notice of
default and intent to sell the property. Most states treat a
completed sale as final,\282\ so that the homeowner's only
chance to assert any claims and defenses is to ask a court to
stop the sale before it occurs; the financial and sometimes
emotional condition of the borrower, and his or her potential
unfamiliarity with the legal system, may effectively limit that
option.
---------------------------------------------------------------------------
\282\ In states that do not regard either judicial or non-judicial
foreclosure sales as immediately final, borrowers may have a certain
period to repurchase the property for the amount owed and the sale only
becomes final when that ``redemption'' period ends.
---------------------------------------------------------------------------
States with judicial foreclosures can adopt or enforce
stricter burdens of proof for parties bringing foreclosure
actions. For example, if a lender cannot prove ownership of the
property, then it cannot foreclose on a residence. Requiring
mortgagees to provide the original paperwork would do more than
satisfy a legal technicality; it would often have practical
consequences. One 2007 study of more than 1,700 bankruptcy
cases involving home foreclosures found that the note was
missing in 41.1 percent of the cases.\283\ And without the
mortgage note and other key documents, it can be difficult to
assess the accuracy of the mortgagee's calculation of the
amount of debt owed. Disputes over these calculations are
common. As the same 2007 study noted, ``Without documentation,
parties cannot verify that the claim is correctly calculated
and that it reflects only the amounts due under the terms of
the note and mortgage and permitted by other applicable law.''
\284\
---------------------------------------------------------------------------
\283\ Porter Bankruptcy Mortgage Claims, supra note 173, at 127,
147.
\284\ Porter Bankruptcy Mortgage Claims, supra note 173, at 146.
---------------------------------------------------------------------------
b. Innovative Approaches by States, Localities, and the
Private Sector
Moratoria. Many states responded to the rise in
foreclosures during the Great Depression by imposing temporary
moratoria on both farm and nonfarm residential mortgage
foreclosures.\285\ Such moratoria were subsequently upheld by
the Supreme Court.\286\ With the number of foreclosures
currently on the rise, many states are revisiting this
concept.\287\ Proponents of moratoria argue that they provide
an incentive to make modifications by closing off the
possibility of a foreclosure for a long enough period of time
that lenders and servicers will consider other options,\288\
while opponents counter that delaying foreclosures simply
extends the crisis and postpones the eventual day of
reckoning.\289\
---------------------------------------------------------------------------
\285\ Starting in February 1933 and continuing over the subsequent
eighteen months, twenty-seven states imposed moratoria to help address
the number of mortgage foreclosures. These states included Arizona,
Arkansas, California, Delaware, Idaho, Illinois, Iowa, Kansas,
Louisiana, Michigan, Minnesota, Mississippi, Montana, Nebraska, New
Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, South Carolina, South Dakota, Texas, Vermont, and
Wisconsin. Other states made permanent changes to state laws governing
foreclosure by limiting the rights or incentives of lenders to
foreclose on mortgaged property. David C. Wheelock, Changing the Rules:
State Mortgage Foreclosure Moratoria During the Great Depression,
Federal Reserve Bank of St. Louis Review, at 573-75 (Nov./Dec. 2008).
\286\ The statute was upheld by the United States Supreme Court in
a 5-4 vote in Home Building & Loan Association v. Blaisdell, 290 U.S.
398 (1934). The Blaisdell decision has never been explicitly overruled,
and the decision has set the stage for current and future mortgage
moratoria.
\287\ In April 2007, Massachusetts enacted a 30-60 day foreclosure
moratorium. In August 2008, New York enacted similar legislation
requiring lenders to notify borrowers in writing at least 90 days
before commencing a foreclosure action. In North Carolina, Gov. Beverly
E. Perdue signed a bill into law on September 6 that allows a court
clerk to postpone a foreclosure hearing for up to 60 days in order to
provide homeowners with additional time to work out a payment plan with
their mortgage holder and remain in their home. This legislation goes
into law on October 1. Additionally, on February 20, 2009, California
Gov. Arnold Schwarzenegger signed a bill placing a 90-day moratorium on
some, but not all, foreclosures of California homes purchased between
January 1, 2003 and January 1, 2008. It went into effect in late May.
Current moratoria, such as these examples, are generally short-term,
especially as compared to the 1933 Minnesota statute's two-year
moratorium.
Compared with other states, Maryland's foreclosure prevention
measures have been forceful. In April 2008 Maryland instituted a law
that requires a 90-day period after default before lenders can file a
foreclosure action, plus a 45-day period between notice of a
foreclosure and a sale of the property. Maryland also requires
servicers to report data related to their loan modifications to the
state; to provide the state with lists of homeowners with adjustable
rate mortgages that will soon reset (to permit targeted outreach
efforts to those individuals); and to respond promptly to homeowners
and pursue loss mitigation where possible.
\288\ Jim Siegel, Ohio House Panel Passes Foreclosure Moratorium,
Columbus Dispatch (May 13, 2009) (online at www.dispatchpolitics.com/
live/content/local_news/stories/2009/05/13/copy/
noforeclosure.ART_ART_05-13-09_B1_ITDRI8L.html?adsec=politics&sid=101).
\289\ Jeremy Burgess, Effects of the Foreclosure Moratorium in
Wayne County, Urban Detroit Wholesalers LLC (Feb. 9, 2009) (online at
www.urbandetroitonline.com/detroit-real-estate/foreclosure-moratorium-
wayne-county/).
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Mediation. A borrower and a lender cannot modify a mortgage
without consultation. But servicers are often not equipped to
handle the volume of calls they receive. Borrowers complain
that servicers ignore them and that, even when they reach
someone, repeated requests for the same information produce
only silence. When they cannot reach a servicer or call
repeatedly and no one can help, borrowers may give up in
frustration, while the servicers may list the borrower as non-
responsive. In other cases, however, borrowers do not even try
to have their mortgages modified, often because they feel
financially or emotionally overwhelmed.\290\
---------------------------------------------------------------------------
\290\ Florida Supreme Court Task Force on Residential Mortgage
Foreclosure Crisis, Final Report and Recommendations on Residential
Mortgage Foreclosure Cases, at 27 (Aug. 17, 2009) (online at
www.floridasupremecourt.org/pub_info/documents/Filed_08-17-
2009_Foreclosure_Final_Report.pdf).
---------------------------------------------------------------------------
States have increasingly turned to mediation--the use of a
neutral third party to create a dialogue between lender and
borrower--to overcome these obstacles.\291\ Mandatory mediation
programs require both the lender and borrower to participate;
in voluntary programs mediation is triggered only if the
borrower chooses. There is a growing consensus that mandatory
programs are more effective.\292\
---------------------------------------------------------------------------
\291\ In New York, mandatory settlement conferences have been
instituted for high-cost, subprime and non-traditional home loans. In
New Jersey, the courts have established mandatory mediation for all
cases in which owner-occupants of homes contest foreclosure actions. In
Maine, a pilot project has been established in York County, under which
mediation is triggered in foreclosure cases where the owner-occupant
responds to the lender's complaint. The program is expected to be
expanded across the entire state in January. In North Carolina, a new
law requires lenders to describe the efforts they made to resolve the
case voluntarily prior to the foreclosure proceeding. And voluntary
mediation programs have been established in Ohio and Nevada, one of the
states most battered by foreclosures. State of New York Banking Dept.,
Help for Homeowners Facing Foreclosure (online at
www.banking.state.ny.us/hetp.htm) (accessed October 8, 2009); New
Jersey Judiciary, Judiciary Announces Foreclosure Mediation Program to
Assist Homeowners at Risk of Losing Their Homes (Oct. 16, 2008) (online
at www.judiciary.state.nj.us/pressrel/pr081016c.htm); Maine Judicial
Branch, Homeowner Frequently Asked Questions (online at
www.courts.state.me.us/court_info/services/foreclosure/home_faq.html)
(accessed Oct. 6, 2009); Maine Judicial Branch, Foreclosure Diversion
Project--York County Program Pilot Project (online at
www.courts.state.me.us/court_info/services/foreclosure/index.html)
(accessed Oct. 6, 2009); Andrew Jakabovics & Alon Cohen, It's Time We
Talked: Mandatory Mediation in the Foreclosure Process, Center for
American Progress, at 42 (June 2009) (online at
www.americanprogress.org/issues/2009/06/pdf/foreclosure_mediation.pdf);
General Assembly of North Carolina, Session Law 2009-573 (online at
www.ncga.state.nc.us/Sessions/2009/Bills/Senate/PDF/S974v5.pdf); The
Supreme Court of Ohio & The Ohio Judicial System, Foreclosure Mediation
Resources (online at www.supremecourtofohio.gov/JCS/disputeResolution/
foreclosure/default.asp) (accessed Oct. 6, 2009); Supreme Court of
Nevada, First Two Mediations Scheduled in Foreclosure Mediation Program
(Aug. 25, 2009) (online at www.nevadajudiciary.us/index.php/
foreclosure-mediation/471-first-two-mediations-scheduled-in-
foreclosure-mediation-program.html).
\292\ In June 2008, the Connecticut legislature established a
statewide voluntary mediation program covering all one- to four-unit
owner-occupied properties. The program was initially voluntary; in its
first nine months only 34 percent of eligible borrowers chose mediation
but they were successful almost 60 percent of the time. The results led
the legislature to act this year to require participation by borrowers.
---------------------------------------------------------------------------
The Philadelphia mediation program was featured at the
Panel's foreclosure mitigation field hearing. In April
2008,\293\ the Philadelphia courts created a Residential
Mortgage Foreclosure Diversion Pilot Program, which required
``conciliation conferences'' in all foreclosure cases involving
residential properties with up to four units that were used as
the owner's primary residence. The idea is that bringing
borrowers into the same room with lenders' representatives will
foster a compromise that is in both parties' best interests. As
Judge Annette Rizzo, the program's Philadelphia architect, said
in written testimony submitted at the Panel's foreclosure
mitigation field hearing, ``[o]ur Program is all about the
face-to-face between the lender and borrower.'' \294\ The
Philadelphia program has been hailed as a potential model for
how to deal with the foreclosure crisis in other localities.
And while officials in Philadelphia acknowledge a need to
collect more data,\295\ preliminary statistics indicate that
Philadelphia is having an unusually high level of success at
averting foreclosures. Since the program began, 25 percent of
all homes in the program have been saved from foreclosure,
while another 48 percent of cases are waiting for resolution as
negotiations between the two parties continue.\296\ Officials
in Philadelphia say the active involvement of the local
community has been an important part of the program's success.
This includes the efforts of mediators and lawyers who have
donated their time, as well as community groups that have
canvassed neighborhoods to ensure that distressed homeowners
are aware of the services that are available to them.\297\
---------------------------------------------------------------------------
\293\ Council of the City of Philadelphia, Resolution No. 080331
(March 27, 2008) (online at webapps.phila.gov/council/attachments/
5009.pdf).
\294\ Congressional Oversight Panel, Written Testimony of Judge
Annette Rizzo, Court of Common Pleas, First Judicial District,
Philadelphia County, Philadelphia Field Hearing on Mortgage
Foreclosures, at 4 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-rizzo.pdf).
\295\ Id. at 90-91.
\296\ Id. at 8.
\297\ Id. Congressional Oversight Panel, Written Testimony of
Philadelphia Legal Assistance Supervising Attorney, Consumer Housing
Unit, Irwin Trauss, Philadelphia Field Hearing on Mortgage Foreclosures
(Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-092409-
trauss.pdf) (hereinafter ``Trauss Philadelphia Hearing Written
Testimony'').
---------------------------------------------------------------------------
While state foreclosure mediation programs have the
potential to play an important role in preventing foreclosures
and in ensuring that homeowners receive the benefits of HAMP,
they have not been able to stem the full tide of foreclosures.
Many of the existing programs have been found to leave too much
discretion in the hands of the servicers and fail to impose
meaningful obligations on servicers to modify loans.\298\
---------------------------------------------------------------------------
\298\ National Consumer Law Center, State and Local Foreclosure
Mediation Programs: Can They Save Homes? (Sept. 2009) (online at
www.consumerlaw.org/issues/foreclosure_mediation/content/ReportS-
Sept09.pdf).
---------------------------------------------------------------------------
Counseling. Borrowers are often intimidated to speak
directly with a lender or have difficulty when they attempt
such contact. Housing counselors offer borrowers advice and an
understanding of their options. Forty states have adopted
counseling programs or appropriated funds for counseling
programs.
Outreach. No program can succeed if homeowners do not know
about it, so strong public outreach efforts are essential. At
least 17 state and local governments have established toll-free
foreclosure hotlines that refer callers to trained housing
counselors.\299\ At least 32 states have created websites to
inform the public about the available assistance programs.\300\
---------------------------------------------------------------------------
\299\ For example, Colorado, which had the nation's fifth-highest
foreclosure rate in 2008, has created one of the nation's strongest
outreach efforts. It includes (1) a toll-free telephone line sponsored
by state agencies, non-profit groups, lenders, and other private sector
businesses; (2) English- and Spanish-language television, radio, and
print public service announcements; and (3) a web campaign that makes
use of YouTube and Twitter. Between October 2006 and March 2008, the
Colorado hotline received 33,250 calls, which in turn produced 8,000
counseling sessions by the end of 2007; 67 percent of those who
received mortgage counseling were able to stay in their homes, at least
initially, 13 percent gave up their homes voluntarily, and 20 percent
were unable to avoid foreclosure.
\300\ National Governors Association Center for Best Practices,
Foreclosure Mitigation: Outreach (July 29, 2009) (online at
www.nga.org/portal/site/nga/menuitem. 9123e83a1f6786440ddcbeeb
501010a0/?vgnextoid= d02e19091b68f110VgnVCM1 000005e00100aRCRD).
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The Pew Center on the States found that, as of 2008, 11
states and the District of Columbia did not offer housing
counseling,\301\ and six states offered no foreclosure
prevention services at all.\302\ The private sector HOPE NOW
alliance among housing counselors, mortgage companies,
investors, and other participants in the mortgage market works
to increase outreach efforts nationwide, putting financially
distressed individuals in touch with 22 different counseling
agencies across the country, but its efforts are especially
important in areas that lack other options. The volume of cases
with which the alliance and its linked agencies have dealt rose
from 60,000 monthly in July 2007 to roughly 150,000 in July
2009.\303\ Subprime loan work-out plans have steadily increased
as well, from 80,000 in July 2007 to 100,000 in July 2009.\304\
---------------------------------------------------------------------------
\301\ The 11 states were Alabama, Arkansas, Hawaii, Kansas, New
Hampshire, North Dakota, Texas, Utah, Washington, West Virginia, and
Wyoming. Pew Defaulting on the Dream Article, supra note 10.
\302\ The six states, all of which had no state-funded refinance
program, no loan modification program, no effort to prevent rescue
scams and mortgage fraud, and no housing counseling available, were
Alabama, Arkansas, Kansas, North Dakota, West Virginia, and Wyoming.
Pew Defaulting on the Dream Article, supra note 10.
\303\ HOPE Now, Phase 1National Data: July 2007 to July 2009
(online at www.hopenow.com/industry-data/
Summary%20Charts%20Jul%202009%20v2.pdf) (accessed Oct. 6, 2009).
\304\ Id.
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Temporary Financing Programs. The current foreclosure
prevention efforts at the federal level do not specifically
target delinquencies caused by unemployment, despite evidence
that many of today's foreclosures are the result of a sudden
decline in income.\305\ However, the state of Pennsylvania does
run a program that provides a safety valve for homeowners who
have been laid off. Since 1983, the state has been operating an
emergency loan program for people who have lost their jobs or
been negatively impacted by another life event, such as illness
or divorce, and are subsequently unable to make their mortgage
payments. Pennsylvania's Homeowners' Emergency Mortgage
Assistance Program (HEMAP) offers mortgage relief for as long
as two years or for as much as $60,000.
---------------------------------------------------------------------------
\305\ Congressional Oversight Panel, Testimony of Federal Reserve
Bank of Boston Senior Economist and Policy Advisor, Research
Department, Dr. Paul Willen, Philadelphia Field Hearing on Mortgage
Foreclosures, at 109-110 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-willen.pdf) (hereinafter ``Willen
Philadelphia Hearing Written Testimony'').
---------------------------------------------------------------------------
The program helps not only people who are currently
unemployed, but also those who fell behind on their mortgage
payments during an earlier period of unemployment. Loan
recipients who currently have jobs are required to pay up to 40
percent of their net monthly income toward their housing
expenses,\306\ while loans to people who are currently jobless
do not accrue interest until their income is restored.\307\ As
part of the loan agreement, the Pennsylvania Housing Finance
Agency, which runs the program, takes a junior lien on the
property.\308\ Since the program was established, HEMAP has
actually earned money for the state of Pennsylvania, and
witnesses at the Panel's field hearing in Philadelphia endorsed
it as a model that should be considered at the national
level.\309\ The fact that state governments are currently
strapped financially means that this kind of temporary
assistance program is likely to need federal support.
---------------------------------------------------------------------------
\306\ Pennsylvania Housing Finance Agency, Pennsylvania Foreclosure
Prevention Act 91 of 1983--Homeowners' Emergency Mortgage Assistance
Program (HEMAP) (online at www.phfa.org/consumers/homeowners/
hemap.aspx) (accessed Oct. 6, 2009).
\307\ Trauss Philadelphia Hearing Written Testimony, at 3, supra
note 297, at 10.
\308\ Pennsylvania Housing Finance Agency, Homeowners' Emergency
Mortgage Assistance Program (HEMAP)--FAQ (online at www.phfa.org/
hsgresources/faq.aspx#hemap--q13) (accessed Oct. 7, 2009).
\309\ Trauss Philadelphia Hearing Written Testimony, at 3, supra
note 297, at 10.
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D. Big Picture Issues
1. Purpose of Foreclosure Mitigation
In the previous sections, the Panel has evaluated
foreclosure mitigation programs on their own terms. While it is
important to evaluate the progress of the federal foreclosure
mitigation programs in meeting their stated goals, it is
equally important to analyze the adequacy of those goals in
addressing the underlying foreclosure problem. Most programs
are designed to prevent foreclosures in specific circumstances,
but however successful programs might be on their own terms,
they must ultimately be judged on whether they succeed in
implementing major policy goals. Evaluating foreclosure
mitigation programs in this manner first necessitates a
determination of the ultimate purpose of foreclosure mitigation
programs.
A central purpose of foreclosure prevention efforts is to
protect the economy from the systemic consequences of home
foreclosures. Congress recognized as much when it declared the
protection of home values and the preservation of homeownership
one of the purposes of the EESA.\310\
---------------------------------------------------------------------------
\310\ Pub. L. No. 110-343 Sec. 2(2)(A)-(B).
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Foreclosure prevention efforts help preserve homeownership
and stabilize the housing market, which protects home values.
Stabilization of the housing market is also critical to overall
economic recovery. Not only is the housing market a major
component of the overall economy, but it has been at the center
of the economic crisis, and until it is stabilized, the economy
as a whole will remain in turmoil.
Housing markets have achieved some degree of stability
through massive federal support. The Federal Reserve's monetary
policy has produced low interest rates, which have stimulated
greater demand for mortgage-financed home purchases by lowering
the cost of capital, and federal government support for the
GSEs and the private-label MBS market has also contributed to
liquidity and thus lower costs of mortgage capital. This level
of support cannot continue indefinitely, however, and as long
as foreclosure and real estate owned (REO) inventory flood the
housing market and contribute to an oversupply of housing stock
for sale, there will be strong downward pressure on home
prices.
In these circumstances, volume and speed of foreclosure
prevention assistance are critical if there is to be sufficient
systemic impact. The key metric for evaluating foreclosure
prevention efforts overall is thus whether a sufficient number
of foreclosures are prevented--and not merely delayed--to allow
for a stable housing market when interest rate and secondary
market support are withdrawn.
Some have argued that attention and resources should be
devoted to a type of moral sorting to determine who is
deserving of government foreclosure prevention assistance.
Devoting attention and resources to moral sorting is at odds
with the goal of maximizing the macroeconomic impact of
foreclosure prevention. Trying to sort out the deserving from
the undeserving on any sort of moral criteria means that
foreclosure prevention efforts will be delayed and have a
narrower scope. Moreover, in other cases where the federal
government extended assistance under TARP--such as to banks and
auto manufacturers--no attempt was made to sort between
entities deserving and not deserving assistance. No inquiry was
made as to which investors in these entities knowingly and
willingly assumed the risks of the entities' insolvency.
Accordingly, the Panel must consider whether federal
foreclosure mitigation programs have sufficient scope to deal
with the crisis in macroeconomic terms, whether the programs
will produce long-term mortgage stability and sustainability,
and the costs and benefits of the programs. The Panel
recognizes that some of the foreclosure prevention programs,
like MHA, are relatively new, having been in place for only six
months. Other programs, however, like HOPE for Homeowners, have
been in place for over a year. In all cases, however, there is
now sufficient data to evaluate progress thus far, draw
preliminary conclusions, and make preliminary recommendations.
The Panel intends to continue to evaluate progress and make
recommendations as the programs evolve.
2. Scale of Programs
Are federal foreclosure mitigation initiatives sufficient
for responding to the scope of the foreclosure crisis? While
recognizing the relatively early nature of many of the
programs, the Panel has serious doubts in this regard. HOPE for
Homeowners was predicted to help 400,000 homeowners.\311\ Four
to five million homeowners are eligible for HARP refinancings
to achieve more affordable payments.\312\ For HAMP, Treasury
aims to reach three to four million loans.\313\ If these goals
are achieved, the Federal foreclosure mitigation initiative
might help as many as 9.5 million families reduce their
mortgage payments to affordable levels, including preventing 3-
4 million foreclosures, a substantial share of the 8.1 million
predicted by 2012.\314\ It is difficult to say, however,
whether that would be enough, because the Panel does not know
how many foreclosures must be prevented to stabilize the
housing market. However, if these programs achieve their
maximum potential, it would undeniably be a substantial step in
the right direction.
---------------------------------------------------------------------------
\311\ House Committee on Financial Services, Testimony of Director
of Office of Single Family Program Development, Meg Burns, Promoting
Bank Liquidity and Lending Through Deposit Insurance, HOPE for
Homeowners, and other Enhancements, 111th Cong., at 2 (Feb. 3, 2009)
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/
burns020309.pdf).
\312\ MHA March Update, supra note 80.
\313\ MHA March Update , supra note 80. GAO has questioned whether
this projection may be overstated due to some of the assumptions made
in its calculation. GAO HAMP Report, supra note 98.
\314\ Rod Dubitsky, Larry Yang, Stevan Stevanovic, and Thomas
Suehr, Foreclosure Update: Over 8 Million Foreclosures Expected, Credit
Suisse (Dec. 8, 2008) (online at www.nhc.org/
Credit%20Suisse%20Update%2004%20Dec%2008.doc).
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Unfortunately, there may be reason to doubt whether these
programs will ever achieve Treasury's numeric goals, but it is
still premature to make that judgment. HOPE for Homeowners has
met with minimal interest. As of September 23, 2009, only 94
refinancings had closed, and lenders had stated they intend to
approve an additional 844 applications.\315\ For HARP, there
have been 95,729 refinancings as of September 1, 2009. And for
HAMP, there have been 571,354 cumulative trial modification
offers extended, 362,348 HAMP trial modifications in progress
and 1,711 permanent modifications. (See Figure 27.)
---------------------------------------------------------------------------
\315\ Holzer Mortgage Relief Article, supra note 252.
\316\ Treasury Mortgage Marked Data, supra note 111.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
HOPE for Homeowners' performance has been so weak that the
HUD Secretary stated that it is ``tough to use.'' \317\
Treasury officials have made no statements on the success of
HARP but they are optimistic about HAMP. Based on the number of
trial modifications started, Treasury has declared that HAMP is
``on pace'' to meet its self-set goal of 500,000 cumulative
trial modifications by November 1, 2009.
---------------------------------------------------------------------------
\317\ Dina ElBoghdady, HUD Chief Calls Aid on Mortgages A Failure,
Washington Post (Dec. 17, 2008) (online at www.washingtonpost.com/wp-
dyn/content/article/2008/12/16/AR2008121603177.html).
---------------------------------------------------------------------------
While HAMP will likely achieve this more immediate goal,
the achievement is relatively small in relation to the
magnitude of the foreclosure crisis.
Trial modifications are a poor metric for evaluating the
success of HAMP. Not all trial modifications will become
permanent modifications. The roll rate from trial modifications
to permanent modifications is currently 1.26 percent, meaning
that of all trial modifications started at least three months
ago, only 1.26 percent have converted to permanent
modifications. As noted above, however, this is a very
preliminary statistic that should be interpreted with caution.
Additionally, Treasury has provided a two-month extension
during the program ramp-up.
Once modifications become permanent, however, they must
still be sustained in order to have an impact on foreclosure
prevention. There will be redefaults on HAMP-modified loans.
Treasury has refused to make public its redefault assumptions,
but other government entities have anticipated a redefault rate
of approximately 40 percent in their modification programs. The
time period for Treasury's undisclosed redefault assumption is
important. Should it only cover the first five years of the
loan, it would not account for the increases in interest rates
and thus monthly payments that kick in for HAMP-modified loans
starting in year six. Similarly, the LTV assumption for
Treasury's undisclosed redefault assumption is important. If
Treasury's redefault assumption was created at the beginning of
HAMP in winter 2009, it might assume LTVs that are
substantially lower than present, which could mean that it
underestimates probable redefaults. The Panel underscores that
redefault assumptions are data that should be public to ensure
the transparency of MHA, and are critical to the Panel's
ability to provide meaningful program evaluation and oversight.
Redefaults mean that foreclosures have been delayed, rather
than prevented. Therefore, the net impact of HAMP is best
measured by the number of permanent modifications that are
sustainable, rather than trial modifications. The Panel intends
to monitor carefully the permanent modifications produced by
the program over the coming months as the program begins to
produce a longer track record.
Using permanent modifications as the metric, HAMP's
performance to date is weak. Six months into the program, there
have only been 1,711 permanent modifications. This number is
low in part because it depends on the number of trial
modifications, and the initial volume of HAMP trial
modifications was quite low. The Panel is concerned about the
low rate of conversion from trial to permanent modifications,
but is hopeful that the conversion rate will increase
substantially; unless it does, HAMP will come nowhere close to
keeping up with foreclosures.
Even using trial modifications as the metric, however,
HAMP's broader effectiveness is in doubt. The country is on
pace to see a significant number of foreclosures this year, and
with rising unemployment, widespread deep negative equity, and
recasts on payment-option ARMs and interest-only mortgages
increasing in volume, there is no sign of the foreclosure
crisis letting up. As Figure 28 shows, there were 224,262
foreclosures started in August 2009. The same month only 94,312
trial modifications were begun, a shortfall of nearly 130,000.
HAMP trial modifications failed to even keep up with the number
of foreclosures started on prime mortgages. Cumulatively, from
March through August, there were 5 foreclosures started and 1.5
foreclosures completed for every trial modification. HAMP
modifications started slowly, however, and have grown in volume
every month. Thus in August 2009, there were 2.38 foreclosure
starts per trial modification, and trial modifications outpaced
completed foreclosure sales, with 1.25 trial modifications per
completed foreclosure sale. While this is cause for some
measured optimism, unless August trial modifications convert to
permanent modifications at a rate of 80 percent, a far cry from
current conversion rates, permanent modifications will not keep
pace with completed foreclosure sales.
A permanent modification, however, must be sustainable, if
it is to prevent a foreclosure. If permanent modifications
redefault at a rate of 40 percent, the rate used by the FDIC's
very similar modification program at Indy Mac, however, then
even if 100 percent of trial modifications successfully
converted to permanent modifications, there would still be a
substantial shortfall relative to completed foreclosure sales.
There is also reason to expect the number of HAMP trial
modifications per month to drop; servicers may initially move
to modify the easiest surest cases, and the most motivated and
organized homeowners are likely to be among the earlier
applicants. Further, because unemployment usually leaves a
borrower with insufficient income to be eligible for a HAMP
modification, the number of financially distressed homeowners
who will be HAMP-eligible is likely to decline.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The discussion of sufficiency of HAMP modification volume
ultimately hinges on the question of how many foreclosures must
be prevented to stabilize the housing market. This is a
question to which the Panel does not have an answer, but the
existing federal foreclosure prevention programs appear
unlikely to have a comprehensive, or even substantial impact,
and this makes it unlikely that they will succeed in
macroeconomic stabilization. Clearly these programs are better
than doing nothing, and for some families they will be a
lifeline. These programs may well prevent the housing market
from continuing a rapid decline, and that is an important
accomplishment. But as the following section discusses, it is
far from clear whether they will result in long-term housing
market stability or whether new programs may be needed. Unless
that is accomplished, the programs' success will be limited.
---------------------------------------------------------------------------
\319\ Servicer Performance Report, supra note 95; HOPE NOW, Workout
Plans and Foreclosure Sales, supra note 2.
---------------------------------------------------------------------------
3. Sustainability of Modifications and Refinancings
a. Negative Equity
While HAMP modifications and HARP refinancings are able to
improve the affordability of mortgages, the programs were not
designed to address negative equity, which raises concerns
about the sustainability of the modifications and refinancings.
HARP permits homeowners with negative equity to refinance
their mortgages into more affordable and sustainable mortgage
structures. The homeowner continues to have negative equity
after the refinancing. Similarly, many HAMP modifications
continue to have negative equity. While HAMP permits servicers
to forgive principal, it does not require it, and relatively
few modifications have involved principal forgiveness. The LTV
of permanent HAMP modifications indicates that most are deeply
underwater even post-modification. More modifications have
involved principal forbearance, but forbearance does not undo
negative equity. Instead, it tacks on a balloon payment of
forborne principal at the end of the mortgage. If housing
prices appreciate significantly, homeowners with forborne
principal may be able to refinance and avoid a balloon payment,
but that is very much dependent on an uncertain housing market
and the ability to avoid redefault until that point.
HAMP and HARP are premised upon a belief that if monthly
mortgage payments are affordable, borrowers will be less likely
to default, even if they are mired in negative equity. However,
the impact of negative equity is not clearly understood. As the
Panel has previously observed, and has since been confirmed by
additional studies,\320\ negative equity has a higher
correlation with default than any other factor that has been
identified other than affordability, which causes default.
While this does not prove a causal relationship, it is also
consistent with one.
---------------------------------------------------------------------------
\320\ Stan Liebowitz, New Evidence on the Foreclosure Crisis, Wall
Street Journal (July 3, 2009) (online at online.wsj.com/article/
SB124657539489189043.html).
---------------------------------------------------------------------------
Generally, negative equity has been presumed to be a
necessary, but not sufficient condition for foreclosure; in
addition to negative equity, there needed to be some factor
making payments unaffordable, as homeowners would usually
prefer to retain their home. Thus, in the New England economic
downturn during the late 1980s and early 1990s, negative equity
alone rarely resulted in foreclosures.\321\
---------------------------------------------------------------------------
\321\ Christopher L. Foote, Kristopher Gerardi, & Paul S. Willen,
Negative Equity and Foreclosure: Theory and Evidence, 64 Journal of
Urban Economics 234 (Sept. 2008) (abstract online at ideas.repec.org/a/
eee/juecon/v64y2008i2p234-245.html) (examining foreclosures in
Massachusetts in 1990s).
---------------------------------------------------------------------------
Yet a more recent study has cast doubt on this conventional
wisdom. A 2009 working paper by the staff of the Federal
Reserve Bank of Richmond has found that negative equity alone
does result in significantly higher default rates when
mortgages are non-recourse.\322\ Massachusetts is a recourse
mortgage state, which limits the ability to extrapolate
nationally from the situation in Massachusetts in the late
1980s and early 1990s.
---------------------------------------------------------------------------
\322\ States with nonrecourse mortgages do not allow lenders to
recover from other assets of the defaulted borrower, besides the home.
Andra C. Ghent & Marianna Kudlyak, Recourse and Residential Mortgage
Default: Theory and Evidence from the United States, Federal Reserve
Bank of Richmond Working Paper 09-10 (online at ssrn.com/
abstract=1432437) (accessed Oct. 7, 2009).
---------------------------------------------------------------------------
It is also not clear to what degree the current foreclosure
crisis will follow historical patterns. The housing bust in
Massachusetts was not nearly as severe as the current one. In
Massachusetts, housing prices fell 22.7 percent from peak.
Nationally, housing prices have fallen 33 percent from peak in
the current downturn, while in some regions the price declines
have been much sharper--54 percent from peak in Las Vegas and
Phoenix. If homeowners are more likely to wait out milder
negative equity, then negative equity will likely have a
stronger impact than in Massachusetts in the early 1990s.
There are two categories of negative equity defaults--
strategic and necessitated. Strategic defaults by homeowners
with negative equity--moving to a cheaper equivalent rental
property nearby rather than continuing to make more expensive
monthly mortgage payments--have been the stereotyped focus of
negative equity defaults, and in the short term they have
predominated.\323\ HAMP modifications reduce the discrepancy
between rental and mortgage payments, which means that
strategic defaults are unlikely for HAMP modifications.
---------------------------------------------------------------------------
\323\ Kenneth R. Harney, Homeowners Who `Strategically Default' on
Loans a Growing Problem, Los Angeles Times (Sept. 20, 2009) (online at
www.latimes.com/classified/realestate/news/la-fi-harney20-
2009sep20,0,2560658.story.
---------------------------------------------------------------------------
Necessitated defaults in negative equity situations,
however, will be unavoidable. There are essential life factors
that necessitate moves--the ``Four Ds,'' Death, Disability,
Divorce, and Dismissal--as well as childbirth, and improved
employment opportunities. While negative equity alone is
unlikely to produce redefaults for HAMP modifications, these
additional factors combined with negative equity raise the
likelihood of redefault.
A homeowner who loses a job with General Motors in Detroit
may need to relocate for work. If the homeowner has $40,000 in
negative equity and the homeowner cannot come up with that upon
sale of the property, then default is the only option for the
homeowner. Previous housing downturns have lasted over a
decade, so given that the average homeowner moves approximately
once every seven years \324\ a great many homeowners with MHA
modifications or refinancings will likely need to move at a
time when they still have negative equity. This casts grave
doubt on the sustainability of negative equity homeownership.
To be sure, foreclosures produced by the combination of
negative equity with life factors will not come in a rush, but
they will produce a steady stream of foreclosures as long as
there is negative equity.
---------------------------------------------------------------------------
\324\ U.S. Census Bureau, Geographical Mobility/Migration:
Calculating Migration Expectancy (online at www.census.gov/population/
www/socdemo/migrate/cal-mig-exp.html) (accessed Oct. 7, 2009).
---------------------------------------------------------------------------
b. Factors Affecting Loan Performance
It is difficult to predict the future performance of HAMP-
modified loans. There is no performance history for loans with
the HAMP-modified structure. OCC/OTS Mortgage Metrics indicate
that redefault rates are significantly lower for modifications
that reduce monthly payments, ``with greater percentage
decreases in payments resulting in lower subsequent redefault
rates.'' \325\ (See Figure 30, below.) Nonetheless, redefault
rates even on modifications reducing payments by 20 percent or
more were still a very high 34 percent.
---------------------------------------------------------------------------
\325\ OCC and OTS Second Quarter Mortgage Report, supra note 42, at
34.
---------------------------------------------------------------------------
OCC/OTS data do not break down into subcategories the
performance of modifications with monthly payment decreases of
more than 20 percent. Permanent HAMP modifications as of
September 1, 2009 have decreased monthly payments by a median
(mean) of 40 (39) percent, so this might indicate that
redefault rates will be lower than those in the OCC/OTS data
category for payment reductions of 20 percent or more.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The closest product for comparison is, ironically, the
subprime mortgage loans of recent years, particularly hybrid-
ARMs. Hybrid ARMs featured below-market introductory rates that
would last for 2-3 years, after which rates would adjust to an
index rate plus a premium. The rate reset would often result in
a 20 to 30 percent increase in payments.\327\ These loans were
typically underwritten based on the borrower's ability to
afford the initial introductory rate, rather than the rate
after reset. Hybrid ARMs were also typically underwritten at
near or up to 100 percent LTV. Many were also underwritten as
30-year mortgages with 40-year amortizations, meaning that
there would be a balloon payment due at the end.
---------------------------------------------------------------------------
\326\ OCC and OTS Second Quarter Mortgage Report, supra note 42, at
8.
\327\ Structured Credit Investor, Deeper and Deeper: Expiring ARM
Teaser Rates to Drive ABX Delinquencies (Oct. 31, 2007).
---------------------------------------------------------------------------
HAMP-modified mortgages have an initial median interest
rate of 2 percent, significantly below market. The rate is
fixed for five years, and then steps up over time to the lower
of the original contract rate or the Freddie Mac 30-year fixed
rate at the time of modification, currently around 5 percent.
This means monthly payments for mortgages currently being
modified could increase by over 45 percent between year five
and year eight. Based on current income levels, monthly
payments would go from 31 percent DTI to 45 percent DTI,
approximately where the loans were before modification; the
current median pre-modification DTI of HAMP modified loans is
45 percent.\328\ Under these conditions, assuming the
borrower's income has not changed, the affordability of the
loans will move back toward pre-HAMP levels eight years from
now. As noted by Deborah Goldberg of the National Fair Housing
Alliance at the Panel's foreclosure mitigation field hearing,
``We don't have really permanent modifications, right, we have
five year modifications . . .'' \329\
---------------------------------------------------------------------------
\328\ Presumably, income will increase, if only due to inflation.
Therefore, if income only kept pace with inflation, which it has failed
to do in recent years, then DTI would rise, unless inflation over those
eight years totaled 31 percent or nearly 4 percent per year. If
inflation only averaged 3 percent per year, then the DTI burden would
increase to 36 percent, while if inflation were 2 percent per year,
then DTI burdens would go up to 39 percent, and DTI would rise to 42
percent if inflation averaged 1 percent per year.
\329\ Goldberg Philadelphia Hearing Written Testimony, supra note
99, at 85.
---------------------------------------------------------------------------
While HAMP rate resets are more gentle and gradual than
those on subprime mortgages, HAMP modifications are also being
underwritten based on the affordability of the introductory
rate, not the affordability of the stepped-up rate. The maximum
interest rate for a HAMP modified loan after step-up is
currently low in absolute terms, but affordability is relative,
not absolute. Moreover, the median LTV for HAMP-modified
mortgages is 124 percent, significantly higher than that of a
newly originated subprime mortgage. And because of principal
forbearance and extensions of amortization periods beyond
original loan terms, many HAMP-modified loans have a balloon
payment due at the end of the mortgage. These factors could
explain why Treasury might use a 40 percent redefault rate like
other similar government programs in the first five years for
HAMP modifications and higher rates with deeper levels of
negative equity. If accurate, this sort of redefault rate calls
into question the long-term effectiveness of HAMP.
c. Principal Reductions
Negative equity can only be eliminated through principal
write-downs, but this raises a number of difficult and complex
issues. When principal is written down, it impairs the balance
sheets of the owners of the mortgages. In many cases, this
means the impairment of the balance sheets of the very
financial institutions whose stability is an essential goal of
the EESA. To be sure, if principal write-downs actually
increase the true value of the loans, by reducing redefault
rates, then principal write-downs might cause more immediate
losses, but they would produce more realistic, and therefore
more confidence-inspiring, balance sheets.
One concern related to the idea of principal reduction is
the incentives it may create. Witnesses at the Panel's
foreclosure mitigation field hearing were asked about this
matter. Dr. Paul Willen, Senior Economist at the Federal
Reserve Bank of Boston, testified that the ``problem with
negative equity is basically that borrowers can't respond to
life events.'' Borrowers with positive equity simply have
``lots of different ways they can refinance, they can sell,
they can get out of the transaction.'' \330\ He noted that
although most borrowers with negative equity are likely to make
their payments in the present or over the next couple of years,
they still remain ``at-risk homeowners'' and may face more
serious issues several years down the road should a life
changing event, such as unemployment, occur.\331\ In that
sense, Dr. Willen offered that principal reduction may have
some virtue. He also noted, however, that most borrowers with
negative equity make their mortgage payments, and that if
principal reduction is provided as an option, one runs the risk
of incentivizing borrowers, who would otherwise continue to
make their mortgage payments, ``to look for relief'' even when
it is not necessarily needed.\332\ In this sense, according to
Dr. Willen, mandating a principal reduction option under HAMP
could put additional pressures on the program, and ultimately
reduce its overall effectiveness. However, in response to a
question from the Panel, Dr. Willen agreed that revising
bankruptcy laws to permit principal modification was a clear
way to address the idea that there should be a cost for
receiving a principal reduction.
---------------------------------------------------------------------------
\330\ Willen Philadelphia Hearing Testimony, supra note 305, at
110, 135.
\331\ Id. at 135.
\332\ Id. at 135.
---------------------------------------------------------------------------
Other witnesses at the hearing also argued that the
incentive ``to look for relief'' may be reduced if the costs to
the borrower of opting for principal reduction were
significantly greater.\333\ For example, revising Chapter 13
bankruptcy to include a cramdown or a principal reduction
component could be one way to impose more significant costs.
Because of these costs, such a revision could provide borrowers
with the option of principal reduction without creating the
potential perverse incentives to other borrowers that may occur
by mandating principal reduction as an option under HAMP.
Filing for bankruptcy is not an appealing choice to any
borrower; however, to the borrower facing certain foreclosure
it may be the only choice. Whereas mandating principal
reduction as an option under HAMP may attract a larger than
desired group of borrowers, allowing principal reduction as an
option under Chapter 13 is more likely to attract only those
borrowers who are truly in need of such assistance. In this
sense, Chapter 13 bankruptcy could be used as a tool to employ
the benefits of principal reduction to borrowers in need
without attracting other borrowers and putting any additional
pressures on HAMP.
---------------------------------------------------------------------------
\333\ Trauss Philadelphia Hearing Testimony, supra note 297, at 67,
91, 106.
---------------------------------------------------------------------------
Likewise, concerns have been raised about whether Treasury
has the authority to mandate principal reductions if it thought
that to be a necessary action. While EESA does not give
Treasury the power to abrogate contracts by fiat, Treasury has
the power to place conditions on access to future TARP funds.
Treasury has already done so by requiring institutions to
participate in MHA, which mandates interest rate reductions and
principal forbearance in certain circumstances. Treasury could
therefore make principal reduction a condition for financial
institutions and their affiliates to receive TARP assistance.
Legally, there would be no distinction between Treasury
conditioning TARP assistance on principal reductions and
conditioning it on principal forbearance and interest rate
reductions. While there are major accounting differences--
principal reductions result in an impairment of assets, while
interest rate reductions result in a reduction of future
income, and principal forbearance has varied accounting
treatment (potentially charged off and treated as a recovery
when ultimately paid)--legally they are indistinguishable, as
they all involve an alteration of a right to payment. Thus, if
Treasury determined that principal reductions were essential
for the success of foreclosure mitigation efforts, it would
have a significant ability to achieve such reductions.
There are numerous ways in which negative equity could be
addressed. The Panel merely notes these options and does not
express an opinion at this time on their preferability:
Principal reduction could occur already through
HAMP modifications and HOPE for Homeowners refinancing.
HAMP incentive structure could be revised to
encourage principal reductions.
TARP funds could be spent to purchase principal
reductions.
Congressional action could encourage principal
reductions through a variety of methods:
Mandatory national foreclosure mediation program.
Tax and CRA credits to incentivize principal write-
downs.
Chapter 13 bankruptcy revisions.
New Deal-style repudiation of contracts as serving
public policy.\334\
---------------------------------------------------------------------------
\334\ During the Great Depression, the government abandoned the
gold standard and enacted large-scale debt relief for borrowers by
declaring that the courts would no longer enforce gold indexation
clauses in private contracts. Instead, borrowers were able to pay debts
with the recently devalued dollar. The net effect was to reduce the
debt burden of borrowers by nearly 70 percent. In enacting this policy,
the government believed the economic ``benefits of eliminating debt
overhang and avoiding bankruptcy for private firms more than offset the
loss to creditors.'' Randall Kroszner, Is It Better to Forgive Than to
Receive? Repudiation of the Gold Indexation Clause in Long-term Debt,
University of Chicago working paper (Oct. 1998) (online at
faculty.chicagobooth.edu/finance/papers/repudiation11.pdf).
---------------------------------------------------------------------------
d. Unemployment
Rising unemployment also presents a foreclosure driver to
which MHA was not designed to respond. Absent a source of
income, neither refinancing nor modifications are possible.
Historically, homes have been the single biggest source of
wealth accumulation for families.\335\ Millions of families
count on financing their retirements by paying off their homes
and using Social Security for daily expenses. In addition, home
equity has provided emergency funds to families hit by medical
problems, job losses, and divorce. An unemployed household
could extract equity from a home to bridge that gap between
jobs. Today, however, this is not possible because of negative
equity; the home piggybank is empty. An extended period of
negative home equity has grave implications for the middle
class, because it means that an important part of their
economic safety net is gone. This calls into question the long-
term economic stability of a sizeable portion of the middle
class. We are facing the threat of a vicious cycle:
unemployment-driven foreclosures could exert downward pressure
on real estate prices, depressed real estate prices dampen
consumer consumption demand because of the high share of
household wealth invested in real estate, and dampened consumer
demand feeds continued high unemployment.
---------------------------------------------------------------------------
\335\ Tracy M. Turner & Heather M. Luea, Homeownership, Wealth
Accumulation and Income Status, Journal of Housing Economics, at 1
(forthcoming 2009) (online at www.k-state.edu/economics/turner/
JHE2009ABTRACT.pdf).
---------------------------------------------------------------------------
Even in cases in which there is not negative equity,
however, unemployment lurks as a driver of foreclosures.
Unemployment-driven foreclosures exert downward pressure on
real estate prices and low real estate prices dampen consumer
demand, which feeds continued high unemployment. The MHA
programs, however, were not designed to deal with unemployment.
Instead, they were designed to address the foreclosure crisis
as it was understood in early 2009. Given the data lags on
foreclosures, that meant the program was designed using data
from the third quarter of 2008. A great deal has changed since
then, however. In the third quarter of 2008, foreclosures were
primarily a subprime problem; they had not yet become primarily
a prime problem, and defaults on payment-option and interest-
only mortgages were far off on the horizon. Moreover,
unemployment was substantially lower.\336\ The result is that
MHA programs may not be adequate for the present and coming
phases of the foreclosure crisis. While the program could be
criticized for failure of prescience, the real question is
whether federal foreclosure prevention programs will always be
playing catch-up. To date this has been the case, as the
federal government has consistently pursued the least
interventionist approach possible to foreclosures at any given
juncture.
---------------------------------------------------------------------------
\336\ Bureau of Labor Statistics, Data Retrieval: Labor Force
Statistics (accessed Oct. 6, 2009) (online at www.bls.gov/webapps/
legacy/cpsatab1.htm).
---------------------------------------------------------------------------
Crafting programs to assist unemployed homeowners retain
their homes is a crucial next step in foreclosure mitigation.
During the Panel's foreclosure mitigation field hearing, Dr.
Willen noted that ``an effective plan must address the problem
of unemployed borrowers'' because ``thirty-one percent of an
unemployed person's income is often thirty-one percent of
nothing and a payment of zero will never be attractive to a
lender.'' \337\ Dr. Willen also explained that his research
``shows that, contrary to popular belief, unemployment and
other life events like illness and divorce, much more than
problematic mortgages, have been at the heart of this crisis
all along even before the collapse of the labor market in the
fall of 2008.'' \338\ Although there was no surge in such life
events in the months or years leading up to the crisis, he
explained, falling real estate prices meant that foreclosure--
and not a profitable sale, as would be the result if prices
were rising--would be the result if a person became
unemployed.\339\ Other witnesses at the Panel's foreclosure
mitigation field hearing, including Joe Ohayon of Wells Fargo
Home Mortgage, agreed that the Making Home Affordable program
should directly address unemployment-related foreclosures.\340\
---------------------------------------------------------------------------
\337\ Congressional Oversight Panel, Testimony of Dr. Paul Willen,
Philadelphia Field Hearing on Mortgage Foreclosures, at 135 (Sept. 24,
2009).
\338\ Id. at 110.
\339\ Id. at 110.
\340\ Congressional Oversight Panel, Testimony of Joe Ohayon,
Philadelphia Field Hearing on Mortgage Foreclosures, at 109 (Sept. 24,
2009) (hereinafter ``Ohayon Philadelphia Hearing Testimony'').
---------------------------------------------------------------------------
There is precedent for such programs to assist the
unemployed. One such effort, the Homeowners' Emergency Mortgage
Assistance Program in Pennsylvania, was discussed above in
Section 8B. The idea has also been authorized at the federal
level. In 1975, Congress passed the Emergency Homeowners'
Relief Act.\341\ The Act provided standby authority for HUD to
implement a program that would provide emergency loans and
grants to help unemployed homeowners avoid foreclosure, and the
Department of Housing and Urban Development--Independent
Agencies Appropriations Act, 1976 (P.L. 94-116) appropriated
$35 million to the Emergency Homeowners' Relief Fund in order
to carry out this program. HUD's final rule on the standby
program stipulated that the HUD Secretary could implement the
Emergency Homeowners' Relief Program if a composite index of
mortgage delinquencies reached 1.20 percent, a threshold
several times lower than present delinquency rates. Because the
threshold was never reached, the program was never implemented.
Nonetheless, it provides a model of assistance to unemployed
homeowners to carry them through an economic downturn without
imposing the deadweight losses of foreclosures on the economy.
---------------------------------------------------------------------------
\341\ Pub. L. 94-50, codified at 12 U.S.C. 2701 et seq.
---------------------------------------------------------------------------
The ultimate policy success of federal foreclosure
prevention efforts hinges on whether they can produce
sustainable results on a sufficient scale. In both matters of
sustainability and scale, there are serious concerns about
whether the existing programs are up to the task. Because
circumstances have changed markedly since the roll-out of the
MHA in February, the Panel suggests that Treasury consider new
programs or make significant changes to existing programs to
address the issue of job loss and the temporary inability to
make mortgage loan payments.
4. Cost-benefit Analysis
In evaluating government programs, it is helpful to
consider the costs and benefits, therefore the Panel asked
Professor Alan White of Valparaiso University to conduct a cost
benefit analysis, included as Annex B. Treasury estimates it
will spend $42.5 billion for non-GSE Home Affordable
Modification programs (HAMP), of which $23 billion has been
contracted for, and that will buy about 2 to 2.6 million
modifications, i.e. an average per-modification cost between
$16,000 and $21,000. This includes the second lien modification
component and the home price decline protection payments.
Professor White's estimate of the probability-adjusted,
discounted cost per modification is somewhat lower, but found
an estimate in the range of $16,000 to $21,000 reasonable. Some
of these payments go to servicers, while some are used to pay
loan principal and interest, for the benefit of both homeowners
and investors.
Professor White's analysis noted that the benefits of HAMP
modifications include avoided investor losses and avoided
external costs, which include homeowner relocation costs,
neighboring property value effects and local government
expenditures, probably equal to double or triple the investor
benefits. He found that investor loss avoidance could
potentially exceed $50,000 per modification, and homeowner,
neighboring property and municipal foreclosure loss avoidance
could amount to double that or more. On the other hand,
Professor White indicated that the $16,000 to $21,000 payments
are being made for some modifications that would have occurred
anyway, and thus the benefits need to be discounted
accordingly. He concluded that it is too early in the program
to measure the magnitude of this displacement effect.
Other authors have considered that it is possible, of
course, that modifications are failing to keep pace with
foreclosures because modifications fail to maximize the present
value of mortgages, making foreclosure a rational economic
decision, even if it is not in the public interest. This theory
has been propounded most notably in a working paper published
by the Federal Reserve Bank of Boston.\342\ As the paper
explains, the net present value of modifying a defaulted loan
depends on the rate of redefaults, the extent to which losses
on redefaults exceed losses in foreclosure without a
modification, and the rate at which mortgagors cure their
defaults without modification. Likewise, the net present value
of a non-modified but defaulted loan depends on the self-cure
rate and the loss severities in foreclosure. The paper
correctly argues that if self-cure rates and redefault rates
are sufficiently high, modifications will not maximize net
present value.
---------------------------------------------------------------------------
\342\ Redefaults, Self-Cures, and Securitization Paper, supra note
142.
---------------------------------------------------------------------------
The paper, which uses a 10 percent random sample of data
from Lender Processing Services (formerly McDash) data from
2007-2008, which covers approximately 60 percent of the market,
also cites what appear to be quite high self-cure and redefault
rates of 25-30 percent and 30-50 percent respectively,
depending on loan, borrower, and modification
characteristics.\343\ These rates are not an accurate
description of present realities, however. According to Fitch
Ratings, the self-cure rate at present is between 4.3 percent
and 6.6 percent, depending on type of loan.\344\
---------------------------------------------------------------------------
\343\ Id. at table 8.
\344\ Fitch Release, supra note 22.
---------------------------------------------------------------------------
Moreover, redefault rates are highly contingent on the type
of modification, so basing NPV calculations on redefault rates
has a circular logic. As OCC/OTS Mortgage Metrics reports and
the Boston Fed study shows, modifications that reduce monthly
payment have a much lower redefault rate.\345\ It also stands
to reason that the manner in which monthly payments are reduced
(i.e. via interest rate reduction, term extension, principal
forbearance, principal forgiveness) might also impact redefault
rates. A borrower with positive equity and an affordable
mortgage will be much more incentivized to avoid a redefault
than a borrower with negative equity, who has already lost his
investment in the home. Additionally, the Boston Fed study
might underestimate losses on foreclosure and overestimate the
additional losses caused by redefault, especially if housing
markets have bottomed out.
---------------------------------------------------------------------------
\345\ OCC and OTS Second Quarter Mortgage Report, supra note 42;
Redefaults, Self-Cures, and Securitization Paper, supra note 142.
---------------------------------------------------------------------------
In any event, the Boston Fed study never actually tests the
rates it cites in the net present value calculation it
presents. The Panel's staff tested the Boston Fed staff's NPV
formula with very conservative assumptions, and found that even
when using the Boston Fed staff's much-higher-than-current
self-cure and redefault rates, there is still room to undertake
a NPV maximizing modification (see Annex A). When more
realistic assumptions about self-cure, redefault, and
foreclosure losses are used, there is significant room to
undertake NPV maximizing modifications for a wide range of loan
inputs.
Accordingly, it does not appear that foreclosure is usually
the decision that rationally maximizes value for mortgagees.
Foreclosure may be a rational, value-maximizing decision for
servicers, but it is often not for lenders. While there is a
range of cases in which foreclosure will maximize NPV for
mortgagees, these appear to be the exception, not the rule.
5. Servicer Compliance with HAMP Guidelines
While Treasury has broad policy issues to consider for the
evolution of the foreclosure mitigation initiative, it still
must administer the current programs in the most effective
manner possible. A key element to HAMP's success is the degree
to which servicers comply with the program's guidelines. If
borrowers face incorrectly rejected applications, unreasonably
long wait times for responses to questions and completed
applications, lost paperwork, and incorrect information, HAMP
will not reach its full potential. At the Panel's foreclosure
mitigation field hearing, Seth Wheeler, senior advisor at the
Treasury Department, testified, ``We are working to establish
specific operational metrics to measure the performance of each
servicer. These performance metrics are likely to include such
measures as average borrower wait time in response to inquiries
and response time for completed applications. We plan to
include these metrics in our monthly public report.'' \346\
---------------------------------------------------------------------------
\346\ Wheeler Philadelphia Hearing Testimony, supra note 88, at 6.
---------------------------------------------------------------------------
This is critical, as borrowers and advocates continue to
report numerous problems. Eileen Fitzgerald, chief operating
officer of NeighborWorks America (which provides funding to
housing counselors across the country) testified at the Panel's
foreclosure mitigation field hearing that a great deal of time
is wasted during the loan modification process because each
participating servicer uses different forms and imposes
different requirements. ``There is a huge process problem
here,'' she said. Housing counselors have reported other
problems, as well, including: (1) exceedingly long telephone
wait times before speaking to a servicer (2) inexperienced
personnel unfamiliar with program details; (3) misplaced
documentation often leading to delays in processing; (4) a
significant lag period between application and final approval
for trial modifications; and (5) the failure of servicers to
reach out to distressed homeowners.\347\ Preliminary
information also suggests some participating servicers violate
HAMP guidelines in a number of much more serious ways,
including requiring borrowers to waive legal rights, offering
non-compliant loan modifications, refusing to offer HAMP
modifications, charging borrowers a fee for the modification,
and selling homes at foreclosure while the HAMP review is
pending.\348\ Others have found such violations as ``[d]enials
of HAMP modifications for reasons not permitted in the
guidelines, such as--`insufficient income' and `too much back-
end debt,' '' assertions by participating servicers that they
are not bound by HAMP, and incorrect ``claims of investors
denying HAMP modifications.'' \349\
---------------------------------------------------------------------------
\347\ See Congressional Oversight Panel, Testimony of NeighborWorks
America Chief Operating Officer Eileen Fitzgerald, Philadelphia Field
Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online at
cop.senate.gov/hearings/library/ hearing-092409-philadelphia.cfm);
Goldberg Philadelphia Hearing Testimony, supra note 99; Tami Luhby, 5
Dumb Reasons You Can't Get Mortgage Help, CNNMoney (Aug. 11, 2009)
(online at money.cnn.com/2009/08/11/news/ economy/
dumb__.reasons__no__mortgage__modification/).
\348\ House Committee on Financial Services, Subcommittee on
Housing and Community Opportunity, Written Testimony of Alys Cohen,
National Consumer Law Center, Progress of the Making Home Affordable
Program: What Are the Outcomes for Homeowners and What are the
Obstacles to Success, at 3 (Sept. 9, 2009) (online at www.house.gov/
apps/list/hearing/financialsvcs__dem/cohen__-__nclc.pdf); National
Consumer Law Center, Desperate Homeowners: Loan Mod Scammers Step in
When Loan Servicers Refuse to Provide Relief, at 8 (July 2009) (online
at www.consumerlaw.org/issues/mortgage__servicing/content/
LoanModScamsReport0709.pdf) (``Stories abound of exasperated homeowners
attempting to navigate vast voice mail systems, being bounced around
from one department to another, and receiving contradictory information
from different servicer representatives.'').
\349\ NYC Anti-Predatory Lending Task Force, Letter to Assistant
Secretary Herb Allison (July 23, 2009) (online at www.nedap.org/
documents/HAMPtaskforceletter.pdf).
---------------------------------------------------------------------------
The Panel heard similar stories at its foreclosure
mitigation field hearing. Advocates on behalf of homeowners
testified that some servicers have erroneously been telling
homeowners that only Fannie Mae and Freddie Mac loans are
eligible for HAMP modification. Some servicers have been
wrongly claiming that only underwater loans are eligible. Some
servicers have been misinforming homeowners by saying that the
investors who own their loans have not given the servicers
permission to participate in the program. And these witnesses
also testified that some servicers have wrongly been asking
housing counselors to provide their own Social Security
numbers.\350\ Until specific compliance data become available,
news from the field provides the only picture of whether
modifications are conforming.\351\
---------------------------------------------------------------------------
\350\ Fitzgerald Philadelphia Hearing Testimony, supra note 147, at
71. Goldberg Philadelphia Hearing Testimony, supra note 99.
\351\ Chris Arnold, Major Banks Still Grappling With Foreclosures,
NPR (Sept. 9, 2009) (online at www.npr.org/templates/story/
story.php?storyId=112660935) (While the reporter shadowed a call center
worker, the worker incorrectly denied an application for HAMP
modification.).
---------------------------------------------------------------------------
HAMP has a built-in compliance structure. Treasury has
designated Freddie Mac as the compliance agent, and tasked the
agency with performing announced and unannounced onsite and
remote audits and reviews of participating servicers.\352\ As
part of its compliance duties, Freddie Mac is developing a
``second look'' process to audit modification applications that
have been declined by servicers.\353\ However, GAO has stated
its concern that Freddie Mac does not yet have ``procedures in
place to address identified instances of noncompliance among
servicers.'' \354\ Advocates have also noted that very little
is known about the schedule, nature, or outcome of Freddie
Mac's compliance reviews.\355\
---------------------------------------------------------------------------
\352\ GAO HAMP Report supra note 98, at 38, 42.
\353\ Congressional Oversight Panel, Questions for the Record from
the Congressional Oversight Panel at the Congressional Oversight Panel
Hearing on June 24, 2009, at 6. GAO HAMP Report, supra note 98, at 42.
\354\ GAO HAMP Report supra note 98, at 43. GAO was particularly
concerned that ``while Treasury has emphasized in program announcements
that one of HAMP's primary goals is to reach borrowers who are still
current on mortgage payments but at risk of default, no comprehensive
processes have yet been established to assure that all borrowers at
risk of default in participating servicers' portfolios are reached.''
Id.
\355\ Goldberg Philadelphia Hearing Testimony, supra note 99.
---------------------------------------------------------------------------
Some servicers, to their credit, concede that they must
improve their systems. After Treasury and HUD met with
servicers in late July to inform them that they must increase
the number of modifications, several servicers issued
statements in response. Bank of America's statement announced,
``Despite our aggressive efforts to find solutions for
homeowners in default, we must improve our processes for
reaching those in need.'' \356\ At a recent hearing, a
representative of Wells Fargo stated that ``some customers have
been challenged with getting clear, timely communication from
us, as the guidelines and the requirements for the various
programs have continued to change.'' \357\ Servicers must iron
out the wrinkles in their implementation of HAMP, and Treasury
must quickly put its compliance plan into place, in order for
all eligible borrowers to fully benefit from HAMP.
---------------------------------------------------------------------------
\356\ Andrea Fuller, U.S. Effort Aids Only 9% of Eligible
Homeowners, New York Times (Aug. 4, 2009) (online at www.nytimes.com/
2009/08/05/business/05treasury.html).
\357\ House of Representatives Committee on Financial Services,
Subcommittee on Housing and Community Opportunity, Testimony of Mary
Coffin, Wells Fargo, Progress of the Making Home Affordable Program:
What Are the Outcomes for Homeowners and What are the Obstacles to
Success, 111th Cong. (Sept. 9, 2009) (Video available online at
www.house.gov/apps/list/hearing/ financialsvcs__dem/coffin__-__wf.pdf).
---------------------------------------------------------------------------
As with all TARP programs, transparency is crucial.
Borrowers should understand why a modification is being denied.
On October 1, Treasury announced that it has met its goal of
establishing ``denial codes that will require servicers to
report the reason for modification denials, both to Treasury
and to borrowers.'' \358\ This is an important step, but the
denial codes must also contain borrower recourse should the
reason be invalid.
---------------------------------------------------------------------------
\358\ Wheeler Philadelphia Hearing Testimony, supra note 88;
Andrews Frustrated Homeowners, supra note 148.
---------------------------------------------------------------------------
While the Panel is pleased with Freddie Mac's commitment to
``using a number of fraud detection and compliance techniques
in their sampling and compliance reviews'' and a focus on
``borrower, servicer, and systemic fraud, as well as quality
control,'' \359\ this alone is insufficient. Monitoring alone
is ineffective unless accompanied by meaningful penalties for
failure to comply. This is particularly important to address
patterns of willful lack of compliance with program standards
by participants. At the Panel's foreclosure mitigation field
hearing, Irwin Trauss, supervising attorney of the consumer
housing unit at Philadelphia Legal Services, said there should
be immediate negative consequences for servicers that fail to
meet their obligations in the program. ``If you sign the
participation agreement, then you're supposed to follow the
rules,'' he said. ``But there's no teeth.'' \360\ Treasury has
provided servicers, investors, and borrowers with a set of
carrots to encourage participation in the program. It also
needs a full range of compliance tools, or sticks, to make sure
participants adhere to program guidelines and procedures.\361\
---------------------------------------------------------------------------
\359\ Congressional Oversight Panel, Written Testimony of Freddie
Mac Senior Vice President, Economics and Policy, Edward Golding,
Philadelphia Field Hearing on Mortgage Foreclosures, at 4 (Sept. 24,
2009) (online at cop.senate.gov/documents/testimony-092409-
golding.pdf).
\360\ Trauss Philadelphia Hearing Testimony, supra note 333, at 91.
\361\ Goldberg Philadelphia Hearing Testimony, supra note 99.
---------------------------------------------------------------------------
E. Conclusion and Recommendations
Treasury has created programs designed to address some of
the items on the Panel's March checklist for a successful
foreclosure mitigation program, with a focus on affordability.
Yet, despite the passage of six months, many of these programs
remain in their early stages and do not yet have a demonstrated
track record of success, especially on the points of second
liens, servicer incentives, borrower outreach, and servicer
participation. The Panel intends to monitor carefully all
available data on these and other points going forward to make
further recommendations regarding the effectiveness of MHA.
1. Areas Not Adequately Addressed by MHA
While MHA is making progress in meeting some of its
objectives, the current programs do not encompass the entire
scope of the foreclosure crisis, which has significantly
expanded in scope since MHA was announced seven months ago. To
maximize the effectiveness of the federal foreclosure
mitigation effort, Treasury should be forward looking and
attempt to address new and emerging problems before they reach
crisis proportions.
First, the current MHA framework appears to be inadequate
to address the coming wave of payment-option ARM and interest-
only loan rate re-sets that is looming in the near future, a
concern very specifically raised by the National Fair Housing
Alliance and by Litton Loan Servicing at the Panel's
foreclosure mitigation field hearing.\362\ This challenge
should be addressed now, before many families find that the
federal initiative offers them no relief from foreclosure.
---------------------------------------------------------------------------
\362\ Goldberg Philadelphia Hearing Testimony, supra note 99;
Litton Philadelphia Hearing Written Testimony, supra note 124, at 4.
---------------------------------------------------------------------------
Second, unemployment has continued to increase since the
inception of MHA, and job loss is a strong driver of
foreclosure. In particular, Treasury needs to find ways to
provide foreclosure mitigation for unemployed or underemployed
individuals, a point underscored by Dr. Paul Willen at the
Panel's foreclosure mitigation field hearing, and reiterated by
Joe Ohayon of Wells Fargo Home Mortgage Service.\363\ One
possible way to address the needs of those who are unemployed
would be to replicate Pennsylvania's successful Homeowner
Emergency Mortgage Assistance Program (a type of bridge loan
program for unemployed mortgagors) on a national scale.\364\ At
the Panel's foreclosure mitigation field hearing, virtually all
of the witnesses acknowledged the promise of this program.
---------------------------------------------------------------------------
\363\ Willen Philadelphia Hearing Written Testimony, supra note
305, at 109-110, 137-138; Ohayon Philadelphia Hearing Testimony, supra
note 340, at 137-139.
\364\ Trauss Philadelphia Hearing Written Testimony, supra note
297, at 3. At the foreclosure mitigation field hearing in Philadelphia,
the Panel received a proposal from the lawyers working at the
Pennsylvania program for a national scale project. See Hearing Record,
Congressional Oversight Panel, Philadelphia Field Hearing on Mortgage
Foreclosures (Sept. 24, 2009) (online at cop.senate.gov/hearings/
library/hearing-092409-philadelphia.cfm).
---------------------------------------------------------------------------
Third, the existing federal foreclosure mitigation effort
has also failed to deal with negative equity in a substantial
or programmatic way, possibly calling into question the long-
term sustainability of some modifications and refinancings.
Principal reduction is the primary way to eliminate negative
equity, and the Panel recognizes that there are serious legal
and bank safety and soundness considerations that accompany
each of the various options Treasury and Congress could employ
to achieve principal reduction.
2. MHA Program Improvements
As it administers MHA and any subsequent program
evolutions, Treasury must be mindful of several key points to
maximize success.
Transparency. First, the programs must be transparent.
Information on eligibility and denials should be clear, easily
understood and promptly communicated to borrowers. The denial
process should include appropriate appeals for those denied
incorrectly. Denial information should then be aggregated and
reported to the public. Treasury should also release the NPV
models, a point stressed by NeighborWorks and the National Fair
Housing Alliance,\365\ so that they can be used by borrowers
and borrowers' counselors. While Treasury has made marked
progress in its data collection, more data on HAMP borrowers
should be made public in a timely, useful way, similar to HMDA
data. Data collection should also be expanded to include
information on a broader universe of borrowers facing
foreclosure, beyond those eligible for HAMP. The Panel looks
forward to Treasury's fulfillment of its recent commitment to
provide greater and deeper disclosure of servicer quality,
responsiveness, capacity, and other performance data. These
transparency commitments should apply equally to HARP, for
which there has been a decided lack of data, and HAMP.
---------------------------------------------------------------------------
\365\ Goldberg Philadelphia Hearing Testimony, supra note 99, at 8-
9; Fitzgerald Philadelphia Hearing Testimony, supra note 147.
---------------------------------------------------------------------------
Streamlining process. Next, Treasury should implement
greater uniformity into the loan modification system.
Certainly, MHA was a significant step forward in creating an
industry standard for loan modification, but borrowers and
advocates continue to cite frustration with the differing forms
and procedures from lender to lender.\366\ Lenders have
expressed frustration as well, including Bank of America before
the Panel.\367\ Creating further uniformity in the process will
make it easier to educate borrowers on how the process works,
as well as promote greater effectiveness for housing
counselors. Treasury should continue current efforts to
streamline and unify the process through its planned web portal
and other means. Streamlining and standardizing the income
documentation that verifies a borrower's income will increase
the likelihood that modifications are executed in a timely
fashion. Additional efforts to improve case management and
customer communication are also needed.
---------------------------------------------------------------------------
\366\ Goldberg Philadelphia Hearing Testimony, supra note 99, at 8-
9; Fitzgerald Philadelphia Hearing Testimony, supra note 147.
\367\ Congressional Oversight Panel, Testimony of Bank of America
Home Loans Senior Vice President for Default Management, Allen Jones,
Philadelphia Field Hearing on Mortgage Foreclosures, at 144-49 (Sept.
24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-
philadelphia.cfm) (hereinafter ``Jones Philadelphia Hearing
Testimony'').
---------------------------------------------------------------------------
Program enhancement. Several witnesses at the Panel's
foreclosure mitigation field hearing made constructive
recommendations for program enhancement that Treasury should
consider. First, many of the NPV model standards rely on
statewide averages and there are instances in which these
averages can be inappropriate (home sales, foreclosure
timeframes, etc.). More granular local information should be
incorporated. Second, several witnesses, including borrowers
and servicers, expressed the need for the DTI eligibility test
to go below 31 percent in order to accommodate borrowers for
whom the modified capitalized arrearages would move them from
below 31 percent (ineligible) to above 31 percent DTI
(eligible), capturing additional borrowers at risk. Third,
there were useful suggestions for ombudsmen and designated case
staff to help borrowers cut through the red tape and have
consistency in who they speak to at the servicer.
Accountability. It is also critical for the success and
credibility of the foreclosure mitigation programs to have
strong accountability. Freddie Mac has been selected to oversee
program compliance, and this is an important step. Freddie Mac
and Treasury must outline a rigorous framework, including
procedures to address non-compliance. It is critical that the
program have strong, appropriate sanctions to ensure that all
participants follow program guidelines. The performance metrics
currently being developed by Treasury can play an important
role in providing accountability. To maximize their
effectiveness, the metrics should be comprehensive, and the
results should be made public, with results available by
lender/servicer.
ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES ON NET PRESENT
VALUE CALCULATIONS
The net present value (NPV) calculation for a servicer is a
comparison of the NPV of an unmodified delinquent loan to the
NPV of a modification of that same delinquent loan. A NPV is
the probability-weighted average of the various present values
of different outcomes. If the NPV of the modified loan is
greater than the NPV of the unmodified loan, then a
modification is value maximizing for the investors in the loan.
We can thus present a simple comparison of the NPV of the same
defaulted loan if modified and unmodified.
If a delinquent loan is not modified, there is a chance
(PC) that the borrower will cure without assistance. There is
also a possibility that there will be a foreclosure (PF). The
NPV of the unmodified delinquent loan is thus the weighted
average of the value of the self-cured loan and the value of
the loan in foreclosure.
If the delinquent loan is modified, there is a chance that
the loan will perform as modified, but only as modified (PM).
There is also a chance that the modification was unnecessary,
as the defaulted would have been cured without the modification
(PC-M). There is also a chance that the loan will redefault
(PR), which could cause greater losses to the mortgagee in a
falling market. Thus the NPV of the modified loan is the
weighted average of the values of the unnecessarily modified
loan, the redefaulted modified loan, and the performing
modified loan.
Thus the NPV of a modified loan is only greater than the
NPV of the unmodified loan if: PM + PC-M + PR + PC + PF
This model can be tested against various market
assumptions. A working paper published by the staff of the
Boston Federal Reserve found that in 2007-2008 the self-cure
rate (PC and PC-M) on a sample of loans from the LPS database,
covering approximately 60 percent of the mortgage market, was
30 percent.\368\ This means that the chance of foreclosure if
the loan is unmodified (PF) is 70 percent. The study also found
redefault rates (PR) on modified loans in the range of 40
percent. Therefore the rate of successful, necessary
modifications (PM) is 30 percent. Also assume that loss
severities in foreclosure are 50 percent and that loss
severities on redefault are 75 percent. These are,
respectively, optimistic and pessimistic assumptions. Finally,
assume that the mortgage in question, if it performed
unmodified, would have a NPV of $200,000.
---------------------------------------------------------------------------
\368\ Redefaults, Self-Cures, and Securitization Paper, supra note
142.
---------------------------------------------------------------------------
Using a stated NPV for an unmodified loan permits us to
avoid having to model the NPV of a loan and discount rate and
prepayment assumptions, etc. These factors are vitally
important in the NPV analysis that a servicer undertakes, and
depend on numerous factors like loan structure. To examine the
claim put forth in the Boston Federal Reserve study, however--
namely that foreclosure is in most cases a rational, value
maximizing response--we need nearly assume an NPV for an
unmodified loan. Given the nature of the formula, however, the
assumed NPV is ultimately immaterial to the outcome.
Given these assumptions, we can then solve for M, which is
the minimum NPV of the loan as modified that would still
maximize NPV relative to the defaulted loan unmodified:
PM = .3M
PC-M = .3M
PR = .4 * (1-.75) * $200,000 = $20,000
PC = .3 * $200,000 = $60,000
PF = .7 * (1-.5) * $200,000 = $70,000
Thus PM + PC-M + PR + PC + PF is: .3M + .3M + $20,000 >
$60,000 + $70,000
We can simplify this as: .6M + $20,000 $130,000 and solve
for M:
.6M $110,000
M $183,333.33
This means that even using the Boston Federal Reserves's
findings on self-cure and redefault rate plus very conservative
assumptions on redefault losses, the principal and/or interest
on the mortgage could be written down such that the NPV of the
loan would go to $183,333.33 and the modification would still
maximize net present value for the mortgagee. In other words, a
modification would still be value maximizing, even with an 8.33
percent reduction in NPV from the NPV of the loan performing
unmodified.
Notice that this outcome does not depend on the assumed NPV
of the unmodified loan if it performed. If we substituted a
variable X for the unmodified NPV of the loan if it performed,
we would find that M 55/60 * X. As there is always a positive
difference between X and 55/60 * X, there is some room for a
modification using these assumptions, regardless of the size of
the mortgage.
If we use more current assumptions, such as a 6 percent
self-cure rate (PC and PC-M) and a 35 percent redefault rate
(PR), then the unmodified loan will end up in foreclosure (PF)
94 percent of the time, and will perform as modified, but only
as modified (PM), 59 percent of the time. Let us also assume,
more plausibly, loss severities in foreclosure at 60 percent
and on redefault at 65 percent. With these assumptions, we see
a much greater modification is possible.
PM = .59M
PC-M = .06M
PR = .35 * (1-.65) * $200,000 =$24,500
PC = .06 * $200,000 = $12,000
PF = .94 * (1-.5) * $200,000 = $94,000
Thus PM + PC-M + PR + PC + PF is:
.59M + .06M + $24,500 > $12,000 + $94,000
We can simplify this as .65M + $24,500 $106,000 and solve
for M:
.65M $81,500
M $125,384.61
Using more realistic assumptions, the principal and/or
interest on the mortgage could be written down such that the
NPV of the loan would go to $125,384.61 and the modification
would still maximize net present value for the mortgagee. In
other words, a modification would still be value maximizing,
even with a 37 percent reduction in NPV from the NPV of the
loan performing unmodified. Again, once the assumptions about
redefault and self-cure rates are fixed, the outcome does not
depend on the size of the mortgage. While the Boston Federal
Reserve study is correct that self-cure and redefault rates
play a major role in servicers' NPV calculations, even with the
extremely high self-cure and redefault rates found in the LPS
data from 2007-2008, there was still room for value-maximizing
modifications for quite standard loans. With current default
and self-cure rates and further depressed foreclosure sale
markets, there is even greater room for modifications possible.
ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE HOME AFFORDABLE MORTGAGE
MODIFICATION PROGRAM
A. Alan M. White
1. Introduction
The following discussion of the costs and benefits of
homeowner assistance programs funded by TARP is necessarily
qualitative, rather than quantitative, and preliminary in light
of the very recent implementation of most of the initiatives
under study. The focus will be on the first lien modification
program, rather than the smaller deed-in-lieu and short sale
program, whose per-home and total costs are much smaller. The
GSE refinance program, which does not receive TARP funds
directly, is not discussed.
The continuing absence of mortgage performance data
collection and reporting by Treasury hampers the effort to
measure the costs and benefits of the programs and to evaluate
any progress being made in bringing the foreclosure crisis to
an end. The ultimate yardstick for evaluating any foreclosure-
relief program is reduction in the number of foreclosure
filings and foreclosure sales. Related indicators, such as
early delinquencies, as well as details about modification
application approvals and rejections, self-cure rates, and
redefault rates on modified loans, need to be reported on a
timely and regular (preferably monthly) basis.\369\
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\369\ This point was made in the Congressional Oversight Panel's
March 2009 report as well as in a July Government Accountability Office
report. Congressional Oversight Panel, March Oversight Report:
Foreclosure Crisis: Working Toward a Solution (Mar. 6, 2009) (online at
cop.senate.gov/documents/cop-030609-report.pdf); GAO HAMP Report, supra
note 98.
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2. Description of Taxpayer-Funded Mortgage Borrower, Servicer, and
Investor Assistance Programs Being Funded Through TARP
Treasury has allocated $50 billion to make incentive
payments and loan subsidies to servicers of non-GSE mortgages
under the Home Affordable Mortgage Program (HAMP). An
additional $25 billion will be spent by the GSEs for a similar
modification incentive program, but those funds are not TARP
funds.\370\ The incentive payments include extra compensation
to servicers for the work required to modify mortgage loans and
payments to reduce loan balances and interest rates. The former
payments benefit servicers, and the latter payments benefit
both investors and homeowners. Investors benefit by the reduced
risk of non-payment of their remaining balances and homeowners
benefit from reduction of their debt. Treasury has allocated
$10 billion to Home Price Decline Protection payments made to
reduce mortgage debt in areas where home prices are subject to
unusually high decline, such as in the sand states of Florida,
Nevada, Arizona, and California. These latter payments afford
an incentive to investors to agree to modifications and benefit
both investors and homeowners by repaying and reducing mortgage
debt.
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\370\ Fannie Mae and Freddie Mac have received large capital
infusions under TARP, and so any expenditure by the GSEs, to the extent
it reduces profits or erodes share values, indirectly reduces repayment
of TARP funds. Like Treasury, the GSEs should be reporting data on
mortgage modifications, servicer payments and foreclosures.
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Treasury has also announced two related HAMP initiatives:
to address second mortgages and to encourage foreclosure
alternatives for homeowners who are giving up their home (short
sale/deed in lieu program). The cost of these programs is
included in the $40 billion for HAMP. Servicers may receive
incentive compensation of up to $1,000 for successful
completion of short sale or deed-in-lieu, and borrowers may
receive incentive compensation of up to $1,500 for relocation
expenses. Treasury will also contribute up to $1,000, on a $1
to $2 basis, to assist investors in buying out second lien
holders to make a sale or deed-in-lieu workable and allow
recovery by the first mortgage investors.
3. The General Case for Promoting Mortgage Modifications
One in eight mortgages, representing nearly seven million
homes, is now delinquent or in foreclosure.\371\ Mortgage
servicers are starting new Foreclosures at a rate of 250,000
per month, or three million per year.\372\ foreclosures are at
roughly quadruple their pre-crisis levels.\373\ Each additional
foreclosure is now resulting in direct investor losses of more
than $120,000.\374\ In addition, each foreclosure results in
direct costs to displaced owners and tenants and indirect costs
to cities and towns, neighboring homeowners whose property
values are driven down, and the broader housing-related
economy. When we speak of investors to whom mortgage payments
are due, we are speaking in part about taxpayers, who now own a
major share of America's mortgages. Taxpayers are mortgage
investors directly through Treasury and Federal Reserve
investments in mortgage-backed securities (MBS), and indirectly
through FHA and VA insurance and through equity investments and
guarantees in Fannie Mae, Freddie Mac, and other financial
institutions that carry mortgages and MBS on their books. If
HAMP is successful in reducing investor losses, those savings
should translate to improved recovery on other taxpayer
investments.
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\371\ MBA National Delinquency Survey, supra note 4 (Reporting
8.86% of mortgages delinquent and 4.3% in foreclosure as of June 30,
2009, out of 44,721,256 mortgages, representing 85% of all first
mortgages).
\372\ HOPE NOW, Workout Plans and Foreclosure Sales, supra note 2
(reporting 254,000, 251,000, and 284,000 foreclosure starts for May,
June, and July 2009, respectively.).
\373\ Mortgage Bankers Association, National Delinquency Survey
(Apr. 2006).
\374\ The average loss recorded for foreclosure sale liquidations
in securitized subprime and alt-A mortgages in November 2008 was
$124,000. Alan M. White, Deleveraging the American Homeowner: The
Failure of 2008 Voluntary Contract Modifications, 41 Connecticut Law
Review 1107, at 1119 (2009) (hereinafter ``Deleveraging the American
Homeowner''). Losses per foreclosure have continued to rise since then.
Current monthly data on foreclosure losses are available at:
www.valpo.edu/law/faculty/awhite/data/index.php.
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Experience in prior debt crises and in the current crisis
has shown that well-designed mortgage restructuring programs,
in which borrowers in default or likely to default are offered
payment reductions or extensions rather than having their
property foreclosed, can significantly mitigate losses that
investors and taxpayers would otherwise suffer. The mortgage
servicing industry ramped up its levels of voluntary mortgage
modifications in 2007 and 2008, with mixed results. On one
hand, nearly two million mortgages were modified, avoiding
foreclosure at least temporarily and restoring some cash flow
for investors. On the other hand, modifications were limited
compared to the much larger number of mortgages in default and
foreclosure, and redefault rates on voluntary modifications
have been as high as 50 percent or more. Nevertheless, there is
convincing evidence that successful modifications avoided
substantial losses, while requiring only very modest
curtailment of investor income. In fact, the typical voluntary
modification in the 2007-2008 period involved no cancellation
of principal debt or of past-due interest, but instead
consisted of combining a capitalization of past-due interest
with a temporary (three to five year) reduction in the current
interest rate. Foreclosures, on the other hand, are resulting
in losses of 50 percent or more, i.e. upwards of $124,000 on
the mean $212,000 mortgage in default.\375\
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\375\ Deleveraging the American Homeowner, supra note 374.
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While modification can often result in a better investor
return than foreclosure, modification requires ``high-touch''
individualized account work by servicers for which they are not
normally paid under existing securitization contracts (pooling
and servicing agreements or PSAs).\376\ Servicer payment levels
were established by contracts that last the life of the
mortgage pools. Servicers of subprime mortgages agreed to
compensation of 50 basis points, or 0.5 percent from interest
payments, plus late fees and other servicing fees collected
from borrowers, based on conditions that existed prior to the
crisis when defaulted mortgages constituted a small percentage
of a typical portfolio. At present, many subprime and alt-A
pools have delinquencies and defaults in excess of 50 percent
of the pool. The incentive payments under HAMP can be thought
of as a way to correct this past contracting failure.
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\376\ Standard & Poor's, Servicer Evaluation Spotlight Report (July
2009) (online at www2.standardandpoors.com/spf/pdf/media/
SE_.Spotlight_.July09.pdf).
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Ideally, investors might have foreseen the need for
servicers to perform expensive loss mitigation work in order to
maximize the return on the mortgages and provided in PSAs for
servicers to be compensated for the extra work when the extra
work would be economically justified. However, PSAs do not make
such provisions. They have been aptly described as Frankenstein
contracts.\377\ Because mortgage servicers are essentially
contractors working for investors who now include the GSEs, the
Federal Reserve, and Treasury, we can think of the incentive
payments under HAMP as extra-contractual compensation for
additional work that was not anticipated by the parties to the
PSAs at the time of the contract. The additional compensation
is justified to the extent that the investors will receive more
than $1 in present value of additional mortgage cash flow for
every $1 paid to the servicer for the required loss mitigation
effort.
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\377\ Gelpern & Levitin Frankenstein Contracts, supra note 143.
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To illustrate the benefits of modification, we can use an
example based on actual mortgage modifications reported by
servicers in August 2009. The average August modification
reduced the homeowner's payment by $182 per month on a loan
with an average balance of $222,000. A foreclosure on mortgages
in this amount resulted in average investor losses of roughly
$145,000.\378\ Assuming a 10 percent self-cure rate,\379\ an
unmodified mortgage, currently in default, will result in a
probability-weighted present value loss of roughly $130,000. In
other words, if the servicer does NOT modify the loan, the
likely result on average is a $130,000 loss to the investor.
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\378\ Data tabulated by Prof. Alan M. White from Wells Fargo
Corporate Trust Services mortgage-backed securities investor reports
(online at www.valpo.edu/law/faculty/awhite/data/index.php).
\379\ The self-cure rate refers to the percentage of delinquent
mortgages being considered for modification that can be expected to
return to current status and eventually be paid in full without
modification. Prior to the crisis as many as 30 percent of delinquent
borrowers were able to catch up on payments on their own, but in recent
months the self-cure rate has declined dramatically and is currently
between 4 percent and 7 percent. Fitch Ratings, BusinessWire, Fitch:
Delinquency Cure Rates Worsening for U.S. Prime RMBS (Aug. 24, 2009)
(online at www.businesswire.com/news/home/20090824005549/en).
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In comparison, a modification that simply reduces interest
from seven percent to 5.1 percent, resulting in a $225 payment
reduction for five years (more than the typical August 2009
modification), would reduce the investor's cash flow by a
present value of $13,000. Even when we assume that 40 percent
of modified loans will redefault,\380\ the weighted, present
value loss from modifying such a loan would be around $48,000
(blending the small losses from successful modifications with
the large losses from the failed modifications that revert to
foreclosure).
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\380\ Redefault rates are an important factor in measuring the
costs and benefits of HAMP. OCC/OTS report that modifications made in
2008 have redefaulted at a rate of about 40 percent after six months.
Modifications that reduced monthly payments by 10 percent or more had
significantly lower default rates, in the range of 25 percent to 30
percent. HAMP modifications, by requiring reduction of the monthly
payment, should result in lower redefault rates than prior voluntary
modifications, which often increased payments and/or total debt.
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The bottom line to the investor is that any time a
homeowner can afford the reduced payment, with a 60 percent or
better chance of succeeding, the investor's net gain from the
modification could average $80,000 per loan or more. Two
million modifications with a 60 percent success rate could
produce $160 billion in avoided losses, an amount that would go
directly to the value of the toxic mortgage-backed securities
that have frozen credit markets and destabilized banks.\381\
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\381\ These calculations are based on the publicly available FDIC
loan modification present value model. An example calculation is set
forth in the spreadsheet in appendix 1. The results depend, of course,
on assumptions about loss severities, self-cure rates, and redefault
rates, among other things. This example is based on current FDIC
assumptions. If servicers can identify homeowners with enough income to
have at least a 60 percent chance of successful repayment, modification
can save investors significant amounts compared to allowing most
unmodified delinquent loans to go to foreclosure.
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4. Analysis of the Costs and Benefits of Homeowner Assistance Funded
through TARP
Any discussion of costs and benefits of the HAMP must begin
with a caveat. The benefits of any intervention to reduce
foreclosures necessarily involve predictions about repayment of
mortgages, whether they are unmodified, modified, or
refinanced. Predictions about probabilities of mortgage
repayments and defaults are inevitably subject to a large
margin of error, particularly in the current, unprecedented
market environment. On the other hand, some elements are known
with reasonable certainty, such as the likely losses that
result from an individual foreclosure sale.
To construct a very rough estimate of the costs and
benefits of the HAMP we proceed in two steps. First we estimate
the benefits and costs of intervention for each individual
modified mortgage. The per-modification estimate is adjusted by
the probability of successful repayment after modification
(HAMP payments are not made if the homeowner defaults in
payments on the modified loan). Second, we need to determine to
what extent HAMP has resulted or will result in additional
successful modifications, compared with the number of
modifications that would have occurred anyway without these
policy interventions. In other words, the second component of
the analysis requires an estimate of the replacement effect or
the extent to which HAMP will compensate servicers to do what
in some instances they might have done anyway.
5. Costs and Benefits of an Individual HAMP Subsidized Mortgage
Modification
Subsidy Costs. Treasury has allocated $50 billion for
servicer and investor payments for non-GSE loans, including the
$10 billion set aside for Home Price Decline Protection. As of
August, roughly $23 billion of this total had been committed
through contracts with individual servicers.\382\ Treasury
contemplates increasing these caps as servicers successfully
complete modifications and draw down funds.
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\382\ A current list of HAMP contracts and with servicers and their
cap amounts appears in U.S. Department of the Treasury, Troubled Asset
Relief Program, Monthly Progress Report for August 2009, at 59 (Sep.
10, 2009) (online at www.financialstability.gov/docs/
105CongressionalReports/105areport_082009.pdf).
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Thus, we know the potential cost of the program because it
has been capped by contract and by authorization. What we do
not know in order to make a meaningful cost-benefit comparison
is the number of successful modifications that the $23 billion
in contracts, or $50 billion authorized, will purchase.
Answering that question requires estimating the cost of an
individual modification.
Treasury has estimated that between two and 2.6 million
borrowers will receive loan modifications assisted by HAMP
payments funded by TARP, i.e., mortgages not held by the
GSEs.\383\ The total projected expenditure for these HAMP
modifications consists of the $50 billion total minus the
amounts spent for the non-modification foreclosure alternatives
(deed-in-lieu and short sale program). Allocations of the $50
billion are not fixed, and Treasury will adjust them depending
on utilization of the programs. Simple division yields a per-
modification cost of roughly $20,000, if 2.5 million borrowers
are helped with the maximum $50 billion in program funds.
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\383\ GAO HAMP Report, supra note 98, at 14.
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The subsidy costs can also be approximated by adding up the
components of HAMP assistance and estimating an average per-
modification subsidy. This estimation is complex because HAMP
payments are made over time and are not made for unsuccessful
modifications, so that redefault probability adjustment and
present value discounting are required.
HAMP payments are made over a five-year period. Treasury
has agreed to pay $1,000 or $1,500 initially, plus $1,000 per
year for up to three years to the servicer for each successful
modification, and also $1,000 per year for up to five years
towards principal debt reduction for each successful
modification (for a potential total of $9,000 or $9,500 of
incentives per modification). In addition, Treasury will pay a
Monthly Payment Reduction Subsidy (MPRS) to bring the
borrower's debt-to-income ratio down from 38 percent to 31
percent when necessary. The payment is equal to one-half the
amount required to reduce the borrower monthly payment to 31
percent DTI from 38 percent DTI.
The Home Price Decline Protection payments are in addition
to the $9,000 in incentives and the payment reduction subsidy,
and are more difficult to estimate. As the GAO report notes, it
is not clear why Treasury believes it will be necessary to
provide these additional subsidies for modifications that are
NPV positive, i.e., that the servicer should make without the
subsidy, when the other payments fully compensate the servicer
for the transaction costs of modifications.
Second lien modification program: Separate funds are
allocated to support the modification of second mortgages for
borrowers who receive a first mortgage modification. Although
Treasury has estimated that between one-third and one-half of
first mortgages modified under HAMP will need assistance for a
second mortgage, it is unlikely that all second mortgages will
be successfully modified.
Based on Treasury's estimates, the total amount required
for a single HAMP modification--combining the basic HAMP
payments with the cost estimates for payment reduction subsidy,
HPDP and second lien payments--average subsidies for a single
modification would be about $20,350.\384\ In order to compare
costs and benefits meaningfully, all program costs should be
reduced to present value. The $9,000 in basic incentive
payments over five years for an average individual modification
translates to roughly $7,800 in present value cost for a
successful modification, using the current Freddie Mac rate as
the discount rate, reducing the total to $18,150.
---------------------------------------------------------------------------
\384\ This includes the $9,000 in basic servicer and borrower
incentive payments, plus Treasury's discounted estimates for the
monthly payment reduction cost share, the Home Price Decline Protection
payments, and the average cost of second lien modification spread
across all first lien modifications. It does not include the non-
retention foreclosure alternatives program. Estimates of these costs
were obtained from Treasury.
---------------------------------------------------------------------------
Some modified loans will fail, and in those cases some of
the HAMP payments will not be made. It is therefore necessary
to adjust the program cost by a probability of redefault
factor. If we assume an average 30 percent redefault rate, and
that the mean time to redefault is six months, with virtually
all redefaults occurring within 12 months, the present value,
probability-adjusted cost of the program per modified loan
would be about $15,850.\385\ A lower redefault rate would mean
higher program costs. The present value and probability
adjustments must be made both for cost and for benefit
estimates in order for these estimates to be comparable.
Treasury's estimate of $16,000 to $21,000 per HAMP modification
is presumably based on more conservative assumptions, or more
optimistic projections about redefault rates.
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\385\ Assuming 70 percent of the modifications result in full
payment of the $9,000 basic subsidies, and 30 percent result in payment
of only the $1,000 initial payment and 6 months of interest subsidies
with no second lien or Home Price Decline Protection payment.
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To summarize, the total cost of the borrower, servicer, and
investor incentive payments for first and second mortgage HAMP
payments is projected to be in the range of $16,000 to $21,000
average per first mortgage modification, including both
successful and unsuccessful modifications. In other words, the
cost per successful modification will be higher. Treasury
should be in a position to report on actual per-modification
costs by November or December, when several months of permanent
modification data have been collected and some initial
redefault statistics can be calculated.
Note on Moral Hazard Costs. Moral hazard in this context
refers to the cost of losses on mortgages that would otherwise
perform but for the borrower's decision to default in order to
benefit from the program. Initially, it should be noted that
mortgage servicers are already modifying tens of thousands of
mortgages every month voluntarily, so the moral hazard cost of
HAMP would require a determination of the additional impetus,
if any, that HAMP might cause for voluntary defaults over and
above the effect of present servicer loss mitigation. This
could occur, for example, if homeowners regarded the chance of
obtaining $5,000 in potential principal reduction payments as a
sufficient incentive to default on their mortgage.
It is theoretically possible that some homeowners, who
would not become delinquent in the absence of either the
voluntary modification program or the enhanced program
stimulated by HAMP incentive payments, will choose to become
delinquent to benefit from the program. In this context, moral
hazard is nearly impossible to measure. Defaults and
delinquencies on mortgages that do occur are thought to result
from a combination of factors including mortgage product
features, borrower life events like unemployment, and negative
equity making it impossible to sell or refinance the home. If a
borrower were certain that any delinquency would automatically
result in a modification that saves the borrower money, he or
she might have an incentive to default.
There are three reasons moral hazard from HAMP
modifications is unlikely to play a significant role in
borrower defaults. First, the likelihood of obtaining a
modification involving permanent concessions is understood by
most borrowers to be low. Many modifications simply reschedule
payments, without reducing total debt. In fact, most
modifications to date have increased principal debt, because
unpaid arrears are added to the loan balance.\386\ HAMP
modifications reduce payments, but servicers may still
capitalize unpaid interest and fees and thereby increase total
debt. The average amount capitalized in 2008 was $10,800.\387\
The HAMP principal reduction payments would thus not be
sufficient to motivate a strategic default, especially in light
of the countervailing cost a strategic defaulter would pay in
impaired credit scores.
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\386\ Deleveraging the American Homeowner, supra note 374, at 1113,
1114. The OCC/OTS Mortgage Metrics Report for the Second Quarter of
2009 reports that of 142,362 modifications in the second quarter,
91,590 included capitalization of arrears.
\387\ Deleveraging the American Homeowner, supra note 374, at 1114.
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Second, the probability of obtaining any modification is
uncertain--there is a huge variation among servicers in the
number of modification requests that are being granted or
denied. Servicers are overwhelmed with applications, and many
homeowners and mortgage counselors report significant
difficulty in obtaining modifications. Thus a strategic
defaulter would take the risk that a modification would not be
approved or processed before foreclosure and loss of the
property.
Third, program eligibility rules are designed to prevent
borrowers who do not have genuine financial difficulties from
obtaining any loan concessions. In other words, borrowers are
screened to minimize moral hazard. Applicants for modifications
must document their income, in order to prove that they cannot
afford their full contract payment without modification.
Borrowers who can already afford their mortgage will not
receive a modification. The documentation requirements have
been demanded by investors precisely to prevent moral hazard
issues from arising. They can create difficulties for
homeowners with a genuine need, but the extra transaction cost
is justified on the basis that it will minimize moral hazard
for undeserving borrowers.
Further study and analysis beyond the scope of this
discussion would be necessary to determine whether existing
measures are sufficient to keep moral hazard costs at a
minimum. Thus far, there has been no reported empirical
evidence of significant moral hazard costs resulting from
either the voluntary mortgage modifications of 2007 and 2008 or
the HAMP modification program. In other words, the existence of
any mortgage defaults motivated solely or primarily by the
availability of either voluntary modifications or HAMP
modifications has not been demonstrated.
Benefits. The direct and most easily measured benefit of
HAMP modification assistance is the reduction in foreclosure
losses borne by investors, including notably Treasury, Federal
Reserve and GSEs. The direct investor savings from a successful
modification program are measured by comparing the present
value of a delinquent loan without modification to its value
after modification, the so-called net present value or NPV
test. Every modification must be subjected to the NPV test. It
will be vitally important for Treasury to monitor the NPV test
results for HAMP modifications, in order to see whether the
program costs are justified. If average investor savings,
discounted and probability-adjusted, are in excess of $50,000,
as in the hypothetical model discussed above, the benefits
would clearly outweigh the costs. On the other hand, if many
modifications are resulting in only a marginally positive NPV,
the wisdom of the subsidies may need to be revisited, unless
they can be justified based on other cost savings.
Apart from the investor savings, homeowners who
successfully repay a modified mortgage will realize significant
benefits in avoiding the moving costs, impaired credit, and
other measurable impacts of a foreclosure and eviction from
their homes. In addition, for every additional foreclosure
prevented by a successful modification, external costs of
foreclosures are avoided. These include the decline in home
values of neighboring properties and the lost tax revenue,
increased crime and other costs borne by local communities.
The benefits to homeowners and communities from preventing
a foreclosure are more difficult to quantify, but should not be
ignored in any plausible cost benefit analysis. The easiest
positive externality to measure is the impact of foreclosure
sales on surrounding home values. Immergluck and Smith
determined that each single foreclosure in Cook County,
Illinois drove down neighboring home values by a total of
$158,000.\388\ Another external cost that has been quantified
somewhat is the cost to cities, especially of concentrated
foreclosures. A municipality may spend as much as $30,000 per
vacant property as a result of a foreclosure.\389\ The amounts
lost by families who lose their homes, in moving costs,
replacement housing, and indirect effects, has not been
reliably estimated, but are clearly a significant cost that is
avoided when a modification is successful. Precision is
impossible in estimating these benefits from foreclosure
prevention. Nevertheless these benefits are real, and should
not be discounted. As a very rough approximation, the external
benefits of foreclosure prevention are at least double the
amounts of direct investor savings from a successful
modification. To put it another way, measuring only investor
savings will capture less than a third of the likely economic
benefits.
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\388\ Daniel Immergluck and Gregory Smith, The External Costs of
Foreclosure: The Impact of Single-Family Mortgage Foreclosure on
Property Values, Housing Policy Debate, Vol. 17, No. 1, at 57 (Jan.
2006) (online at www.mi.vt.edu/data/files/hpd%2017%281%29/
hpd_1701_immergluck.pdf); Vicky Been, Ingrid Gould Ellen, and Jenny
Schuetz, Neighborhood Effects of Concentrated Mortgage Foreclosures, 17
Journal of Housing Economics, at 306 (Dec. 2008) (online at
furmancenter.org/files/foreclosures08-03.pdf).
\389\ William Apgar, Mark Duda, and Rochelle Gorey, The Municipal
Costs of Foreclosure: A Chicago Case Study, Homeownership Preservation
Foundation (Feb. 27, 2005) (online at www.hpfonline.org/content/pdf/
Apgar_Duda_Study_Full_Version.pdf).
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6. Substitution Effect and Prior Voluntary Modifications
The second step in a cost benefit analysis would be to
measure the extent to which HAMP has increased modifications
over the number that were already occurring voluntarily. Data
for July and August suggest that HAMP has resulted in a net
increase of about 85,000 modifications per month. In August,
Treasury reports that there were about 120,000 temporary HAMP
modifications. Those were offset by a decline of around 35,000
in non-HAMP permanent modifications compared with prior
months.\390\ Because very few HAMP three-month temporary
modifications have become permanent, it is too early to tell
how many additional modifications HAMP has produced. In very
rough terms, it appears that at least in August, about 29
percent of HAMP modifications were replacing permanent
modifications that would have been put in place voluntarily
without subsidy payments. Thus, the net benefit of the program
(benefits minus costs) should realistically be discounted to
some extent to account for the substitution effect.
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\390\ For August 2009 HOPE NOW reported 86,000 permanent
modifications, which is a decline of 34,000 from the 120,000 monthly
range seen in months prior to HAMP implementation. HOPE NOW, HOPE NOW
Data Shows Increase in Workouts for Homeowners (Sept. 30, 2009) (online
at www.hopenow.com/press_release/files/
August%20Data%20Release_09_30_09.pdf).
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On the other hand, even HAMP modifications that might be
regarded as having substituted for prior, voluntary
modifications will be, on average, more likely to succeed and
more beneficial for homeowners. This is because of HAMP's
requirement to reduce borrower debt ratios to 31 percent. This
level of payment reduction has not been the norm prior to HAMP.
Significant payment reduction is likely to improve the chances
of borrower success and the resulting investor and public
savings. HAMP will thus improve the quality and uniformity of
mortgage modifications even to the extent it does not increase
their total number.
Nevertheless, Treasury will need to monitor closely the
conversion rate of temporary modifications to permanent
modifications, and the overall maintenance of effort by
servicers, to determine whether HAMP payments are stimulating a
net increase in permanent modifications.
7. Other Benefits
In addition to the incremental foreclosure prevention that
HAMP will buy, the program may have other long-term benefits
for the mortgage industry. By standardizing the calculation of
net present value, improving the likelihood of success and the
quality of loan modifications, and gathering better data on
modified loan performance, the Treasury intervention may
produce improvements in industry knowledge and practices.
Mortgage servicers may realize efficiencies from greater
uniformity in documenting modifications, applying uniform NPV
criteria, and may thus increase investor community confidence
in the modification and loss mitigation process. The HAMP
template could continue to be used after subsidy ends, and
continue to improve practices in the servicing industry.
If HAMP is successful in producing greater investor savings
and reduced foreclosures, Treasury should consider how and when
to phase out the incentive payments, or reduce them to the
minimum level needed to maintain the necessary servicer
incentives. The payments being made to servicers are
substantial, and perhaps more than are absolutely necessary to
compensate servicers for loss mitigation activity. Servicers
could be encouraged to reveal the marginal cost of good
modifications through a competitive bidding process, allowing
servicers to bid for the lowest compensation level necessary to
continue processing all feasible modifications.
Finally we should not overlook the macroeconomic benefits
that a successful foreclosure reduction program may achieve. If
the steadily growing inventory of foreclosed homes can be
reduced, home prices can begin to stabilize, and the housing
and mortgage industries can return to being a stimulus rather
than a drag on the economy. The true measure of whether the $50
billion HAMP investment pays off will be whether foreclosure
filings and the inventory of foreclosed homes begin returning
to normal levels.
ANNEX C: EXAMINATION OF TREASURY'S NPV MODEL
The Panel has examined Treasury's NPV model and notes that
it is highly sensitive to small changes in certain parameters
as well as quite inflexible in other regards. The Panel
conducted a sensitivity test on the HAMP NPV model by using a
baseline model where the variables of the loan are NPV neutral
such that the NPV of the modified loan is approximately equal
to the NPV of an unmodified loan. Starting with this control,
the Panel staff tested the sensitivity of six major variables:
1. Discount Rate--According to the HAMP Base NPV working
paper, a servicer can override the default discount rate (PMMS)
and add a risk premium up to 250 basis points for loans in
their portfolio or loans they manage on behalf of investors.
They may use only two risk premiums: one they apply to all
loans in portfolio, and another they apply to all PLS loans.
The discount rate impacts the present value of the projected
future cashflows of the loans--a higher discount rate increases
the extent to which the investor values near-term cash flows
more than the same cash flows in the future. Using the baseline
loan to conduct the test, the Panel's staff found that only a
one basis point change in the risk premium is necessary to
change the outcome of the test for the baseline loan from NPV
positive to NPV negative. As such, this risk premium is a very
sensitive variable that can change the NPV outcome from
positive to negative.
2. Geographical Region--The metropolitan statistical area
(MSA) in which a property is based affects the Housing Price
Index and the Home Price Depreciation Payment. Other variables,
such as foreclosure timeline, REO costs, and the REO sale
discount due to stigma, vary at the state level. Accordingly,
by changing the MSA of a property, the NPV value of the
modification (the difference between the NPV of cash flows in
the mod- and no-mod scenarios) varies by as much as $10,000 for
the example loan.
3. Mark-to-Market Loan-to-Value ratio (MTMLTV)--The MTMLTV
of a loan reflects the size of a borrower's debt relative to
the value of their house. The more the borrower owes relative
to the value of their house, the more likely they are to
default on the loan, the less likely they are to refinance or
sell the home (prepay), and the less of outstanding balance of
the loan the lender recovers in foreclosure. For these reasons,
the NPV model is sensitive to MTMLTV. Using the baseline loan,
which has an MTMLTV of 0.72, an increase in MTMLTV ratio by one
basis point holding all other variables constant turns the
example loan from NPV negative to NPV positive. This is because
an increase in MTMLTV increases the probability of default and
redefault and changes their relative magnitudes, and lowers the
recovery rate of the unpaid balance in foreclosure. In the case
of the example loan--holding all else constant--the NPV
increases as MTMLTV approaches 125 percent (the borrower owes
25 percent more than their house is worth) and declines
thereafter. The point at which increasing the MTMLTV would
change from raising to lowering the NPV depends on other
inputs, such as the discount rate, the level of delinquency,
foreclosure costs, FICO score, and the borrower's pre-mod debt-
to-income ratio.
4. FICO Score--Another variable tested was the FICO score.
The borrower's FICO score reflects their probability of default
and also their ability to borrow, which affects their ability
to refinance their home or to sell their existing home and buy
another--in other words, to prepay. The test found that when
the impact of the borrower's FICO score on the NPV value of the
modification varies with other inputs, most notably their
MTMLTV. For loans with relative low MTMLTV, there is an inverse
relationship between FICO score and the NPV value. This is
because for loans where the borrowers have significant equity
in the home, raising the FICO score lowers the probability of
default in the no-mod case more than it lowers the probability
of default in the mod case. For loans with relatively high
MTMLTVs, the NPV value of the modification increases with the
borrower's FICO score. This is because the high FICO score
lowers the probability of default in the mod case more than it
lowers the probability of default in the no-mod case.
5. Borrower's Income--The Panel staff also analyzed the
impact of the borrower's income on the NPV of the modified and
non-modified loan. The borrower's income affects how much their
monthly payments must be reduced to achieve a 31 percent DTI
ratio (ratio of monthly mortgage payments--including taxes,
insurance, and HOA fees--to monthly income). Increasing income
also reduces the probability of default and redefault (by
different amounts), since the borrower's starting DTI is an
input in the default-probability calculator. Delinquency of the
Loan--After a loan is 90+ days delinquent, default
probabilities, and cash flows upon default become fixed in the
HAMP NPV model--additional months of delinquency do not change
these values. The only variable factors for 90+ day delinquent
loans are the cash flows on the no-mod cure scenario and--to a
lesser extent--the cash flow on the mod-cure scenario. As a
loan becomes more delinquent, the past-due interest and escrow
amounts are assumed to be paid up-front in the no-mod cure
scenario and capitalized into the UPB in the cure scenario.
This means that in the HAMP model, the NPV of the no-mod
scenario increases relative to the NPV of the modification
scenario once a loan is 90+ days delinquent. Accordingly, once
a loan becomes 90+ days delinquent, the difference between the
no-mod scenario and the modification scenario will increasingly
favor not modifying the loan.
SECTION TWO: ADDITIONAL VIEWS
A. Richard H. Neiman
I voted for the Panel's October Report (the ``Report'') and
I agree with its central themes and recommendations. As
directed by the Congress in EESA, Treasury's foreclosure
mitigation efforts are vitally important to protecting
homeowners, strengthening the housing market, and aiding
economic recovery. I believe that much more needs to be done to
help people in need now and during the foreclosure surge that
will continue over the next several years.
I am providing these Additional Views to clarify some
points in the Report and amplify others.
1. It Is Too Early To Make Conclusive Judgments About HAMP, HARP and
MHA
MHA had many obstacles, problems, and operational and
technological challenges getting started and the HAMP program
is just now gaining momentum. Because we are in a period where
so many trial modifications are on the books and so few have
had time to convert to permanent modifications, I believe it is
too early to judge the program or to imply that HAMP will not
be successful.\391\
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\391\ See supra p. 98 and accompanying notes (HAMP is ``unlikely to
have a substantial impact'' and ``is better than doing nothing.'').
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I think that Treasury's current run rate goal of 25,000
trial modifications per week--or 1.3 million per year--is a
robust goal. If achieved and sustained with a solid conversion
rate of trial modifications to permanent modification, HAMP can
provide a tremendous benefit for millions of American
homeowners.
Early trial-to-permanent modification conversion rates have
been low, as the Report points out, but there are a range of
reasons (e.g., the temporary 60-day extension of the trial
modification period; early documentation and capacity issues;
etc.) why it is still several months too early to draw any
meaningful conclusions. I suggest that Treasury issue its own
projections for trial-to-permanent conversion rates as soon as
possible in order to provide guidance on this issue.
We should give the program time to work and re-visit HAMP
within six months when a better track record and better service
quality and performance results are available.
2. In Fact HAMP Has Great Potential
HAMP was designed to make loans more affordable for
homeowners by lowering monthly payments thereby giving the most
immediate and meaningful relief to the greatest number of
homeowners.
Thus far, HAMP modifications have resulted in a mean
interest rate reduction of 4.65 percent from approximately 7.58
percent to approximately 2.93 percent with mean monthly savings
of $740 per loan reducing payments from on average $1890 to
$1150, a 39-percent payment decline.\392\ These are very
impressive affordability numbers on a still-too-small base of
loans. As HAMP gains momentum the direct savings to homeowners
and investors and the benefits to society should be enormous.
In fact, the Report contains a cost benefits study of mortgage
modifications that found preliminarily, that the potential
direct and indirect benefits to borrowers, investors, and
society substantially outweigh the costs of HAMP loan
modifications.\393\
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\392\ See supra pp. 50, 53 and accompanying notes.
\393\ See supra Annex B, ``Potential Costs and Benefits of the Home
Affordable Mortgage Modification Program,'' by Professor Alan M. White.
---------------------------------------------------------------------------
3. Borrowers' Grievances Are Real
The Panel's September 20th Philadelphia hearing, which
featured lively testimony from servicers, borrower groups,
Treasury, Fannie Mae and Freddie Mac, demonstrated that there
is a lot of room for improvement in the programs. Borrowers
have been frustrated with unresponsive servicers, lost
documents, time delays, unclear reasons for denial, and a host
of other problems.
The scale up period is over. Servicers have had time to
make improvements and should by now be organized to handle the
case load in a highly professional and expeditious manner.
Consequently, there should be no further systemic excuses
regarding capacity.
4. HAMP Does Not Address Every Defaulted Loan--Other Issues Need Other
Policy Solutions
It is not a design shortcoming of HAMP that it does not
address every default-related issue. I agree with the Report
that HAMP was not primarily designed to address the issues of
negative equity, unemployment and option ARMs.
I endorse the view that Treasury should review these issues
carefully and explain whether it intends to pursue additional
policy solutions or program enhancements that are specifically
targeted to these problems. One recommendation to address
unemployment is to consider the use of TARP funds to support
existing state programs or to encourage states to develop new
programs that provide temporary secured loan payment assistance
to the recently unemployed.\394\ In considering possible
programs to address the effects of negative equity,
policymakers must address issues of moral hazard, bank safety
and soundness, contract, and fairness, including the fairness
issue related to sharing future equity appreciation.
---------------------------------------------------------------------------
\394\ See discussion of Pennsylvania's successful HEMAP program
supra pp. 90-91.
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5. We Can Only Measure Success With a Comprehensive National Metric
That Tracks Defaults and Foreclosures
The Report notes that even if HAMP modifies hundreds of
thousands of loans a year it may not be enough to stem the
rising tide of 2-3 million foreclosure starts a year. Yet, it
is difficult to know how many foreclosures are preventable
because we have poor national industry information. We need to
know more about foreclosure starts: How many result in
foreclosure sales? How many cure? How many go to short sale or
other solution that results in a lost home? How many are
modified and saved? How many cannot be prevented by any means?
There is a tremendous need for better residential mortgage
default and foreclosure metrics and I would like to see the
Treasury-GSE-MHA-Servicer partnership take the lead in
providing clear understandable and comprehensive metrics about
the housing market, especially delinquent loans and
foreclosures, on a national basis by state of residence.\395\
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\395\ Currently, for example, the OCC/OTS Mortgage Metrics Report
reports on the subset of bank-serviced loans. However the OCC/OTS
report (a) covers only 64% of the U.S. mortgage market, (b) is
published three months after quarter end, and (c) does not break out
information by state or servicer. Other databases have the same
shortcoming of incompleteness making comparability nearly impossible
and resulting in confusing and conflicting statistics.
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I previously encouraged Congress to enact a national
mortgage loan performance reporting requirement applicable to
all institutions who service mortgage loans, to provide a
source of comprehensive intelligence about loan performance,
loss mitigation efforts and foreclosure.\396\ Federal banking
or housing regulators should be mandated to analyze the data
and share the results with the public. A similar reporting
requirement exists for new mortgage loan originations under the
Home Mortgage Disclosure Act. Because lenders already report
delinquency and foreclosure data to credit reporting bureaus,
it would be feasible to create a tailored performance data
standard that could be put into operation swiftly.
---------------------------------------------------------------------------
\396\ House Joint Economic Committee, Testimony of Richard H.
Neiman on behalf of the Congressional Oversight Panel, TARP
Accountability and Oversight: Achieving Transparency (Mar. 11, 2009)
(online at jec.senate.gov/
index.cfm?FuseAction=Files.View&FileStore_id=38237b7d-74fe-4960-9fc6-
68f219a03c0f).
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The country and its policymakers desperately need this kind
of information and given the projections for a protracted
period of foreclosures, it is well worth the effort.
6. Pushing Ahead
Mortgage reforms are critical at the state and national
levels, reforms that I believe are necessary to aiding the
millions of homeowners for whom unachievable mortgage payments
and potential foreclosure are painful realities. We cannot turn
back now. We must push ahead with the borrower-lender-
government partnership that has been launched and build it out
and improve on it. We need more hands on the oars, we need
better cooperation and we need much better information and
default mitigation tools.
B. Congressman Jeb Hensarling
Although I appreciate the work the Panel and staff members
have done in preparing the October report, I do not concur with
the conclusions and recommendations presented and, accordingly,
dissent from the adoption of the report. Foreclosure mitigation
is mentioned in the Emergency Economic Stabilization Act, EESA
(P.L. 110-343), so it is an important mission for the Panel to
assess the effectiveness of loan modification programs as they
relate to this objective as well as to taxpayer protection.
1. Executive Summary
While I acknowledge the extensive research that went into
this report on foreclosure mitigation and wish to thank the
Panel for incorporating some of my edits and ideas, I believe
several areas are either overlooked completely or present
challenges to conducting proper oversight. In the following, I
hope to shine a light on key issues relating to the Panel's
analysis of housing policy and the Administration's foreclosure
mitigation programs.
A fair reading of the Panel's majority report and my
dissent leads to one conclusion--HAMP and the Administration's
other foreclosure mitigation efforts to date have been a
failure. The Administration's opaque foreclosure mitigation
effort has assisted only a small number of homeowners while
drawing billions of involuntary taxpayer dollars into a black
hole.
While the Congressional Budget Office estimates that
taxpayers will lose 100 percent of the $50 billion in TARP
funds committed to the Administration's foreclosure relief
programs, instead of focusing its attention on taxpayer
protection and oversight, the Panel's majority report implies
that the Administration should commit additional taxpayer funds
in hopes of helping distressed homeowners--both deserving and
undeserving--with a taxpayer subsidized rescue.
While there may be some positive signals in our economy,
recovery remains in a precarious position. Unemployment will
hit 10 percent in 2010, if not this year. This is unfortunate
because the best foreclosure mitigation program is a job, and
the best assurance of job security is economic growth and the
adoption of public policy that encourages and rewards capital
formation and entrepreneurial success. Without a robust
macroeconomic recovery the housing market will continue to
languish and any policy that forestalls such recovery will by
necessity lead to more foreclosures.
Regardless of whether one believes foreclosure mitigation
can truly work, taxpayers who are struggling to pay their own
mortgage should not be forced to bail out their neighbors
through such an inefficient and transparency-deficient program.
Both the Administration and the Panel's majority appear to
prioritize good intentions and wishful thinking over taxpayer
protection.
To date, despite the commitment of some $27 billion,\397\
only about 1,800 underwater homeowners have received a
permanent modification of their mortgage. If the
Administration's goal of subsidizing up to 9 million home
mortgage refinancings and modifications is met, the cost to the
taxpayers will almost surely exceed the $75 billion already
allocated to the MHA--Making Home Affordable--program,\398\ and
it is likely that most (if not all) of it will not be
recovered.
---------------------------------------------------------------------------
\397\ U.S. Department of the Treasury, TARP Transactions Report
(Oct. 2, 2009) (online at www.financialstability.gov/docs/transaction-
reports/transactions-report_10062009.pdf). This figure is defined by
the current ``Total Cap'' for the Home Affordable Modification Program:
$27,247,320,000.
\398\ The Making Home Affordable program presently consists of the
HAMP--Home Affordable Modification Program--and the HARP--Home
Affordable Refinancing Program--programs.
---------------------------------------------------------------------------
Taxpayers deserve a better return on their investment than
what they are set to receive from AIG, Chrysler, GM and the
Administration's flawed foreclosure mitigation efforts.
Professor Alan M. White, an expert retained by the Panel,
notes in a paper attached to the Panel's report: ``The bottom
line to the investor is that any time a homeowner can afford
the reduced payment, with a 60-percent or better chance of
succeeding, the investor's net gain from the modification could
average $80,000 per loan or more.''
Taxpayers--through TARP or otherwise--should not be
required to subsidize mortgage holders or servicers when
foreclosure mitigation efforts appear in many cases to be in
their own economic best interests. The Administration, by
enticing mortgage holders and servicers with the $75 billion
HAMP--Home Affordable Modification Program--and HARP--Home
Affordable Refinancing Program--programs (with a reasonable
expectation that additional funds may be forthcoming), has
arguably caused them to abandon their market oriented response
to the atypical rate of mortgage defaults in favor of seeking
assistance from the government.
Any foreclosure mitigation effort must appear fair and
reasonable to the American taxpayers. It is important to
remember that the number of individuals in mortgage distress
reaches beyond individuals who have experienced an adverse
``life event'' or been the victims of fraud. This complicates
moral hazard issues associated with large-scale modification
programs. Distinct from a moral hazard question there is an
inherent question of fairness as those who are not facing
mortgage trouble are asked to subsidize those who are facing
trouble.
In light of current statistics regarding the overall
foreclosure rate, an essential public policy question that must
be asked regarding the effectiveness of any taxpayer-subsidized
foreclosure mitigation program is: ``Is it fair to expect
approximately 19 out of every 20 people to pay more in taxes to
help the 20th person maintain their current residence?''
Although that question is subject to individual interpretation,
there is an ever-increasing body of popular sentiment that such
a trade-off is indeed not fair.
Since there is no uniform solution for the problem of
foreclosures, a sensible approach should encourage multiple
mitigation programs that do not amplify taxpayer risk or
require government mandates. Subsidized loan refinancing and
modification programs may provide relief for a select group of
homeowners, but they work against the majority who shoulder the
tax burden and make mortgage payments on time.
The following are topics that I will cover in my response.
The Congressional Budget Office estimates that
taxpayers will lose 100 percent of the $50 billion in TARP
funds committed to the Administration's foreclosure relief
programs.
Determination of costs is especially important if,
as Treasury Secretary Geithner has stated, TARP is interpreted
to be a ``revolving facility.'' Given the likelihood that he
will extend TARP to October 31, 2010, it's possible that a
substantial portion of the $700 billion TARP facility could be
directed to foreclosure mitigation efforts.
EESA charges the Panel with a clear duty to
provide information on foreclosure mitigation programs, but
with the caveat that it must be with an eye towards taxpayer
protection. The October report places policy recommendations
above this statutory duty.
In order to better appreciate the total all-in
costs of the Administration's various foreclosure mitigation
efforts and to ensure taxpayer protection, and to compensate
for the Panel's gaps in oversight, the Administration should
promptly provide the taxpayers with a thorough and fully
transparent analysis of the following matters:
(i) the total amount of funds the Administration has
advanced and committed to advance under its various
foreclosure mitigation efforts (including, without
limitation, under MHA, HAMP and HARP, the second lien
programs, as well as the programs adopted by Fannie Mae
and Freddie Mac);
(ii) the total amount of funds the Administration
reasonably expects to advance and commit to advance
over the next five years under all of its present and
anticipated foreclosure mitigation efforts; and
(iii) the total anticipated costs to all financial
institutions and other mortgage holders and servicers
under all of the Administration's present and
anticipated foreclosure mitigation efforts.
Treasury should be held accountable for key
performance metrics as well. With 360,000 trial modifications
underway, only 1,800 permanent modifications in place, and at
least $27 out of $50 billion committed to the MHA--Making Home
Affordable--program for loan modifications, by all appearances,
Treasury is still a long way from its goal of assisting 3 to 4
million homeowners.
All of the false starts with HAMP and the other
government programs may have exacerbated the foreclosure
mitigation process by keeping private sector servicers and
mortgage holders on the sidelines waiting on a better deal from
the government. By creating a perceived safety net, the
foreclosure mitigation efforts advocated by the Administration
may encourage economically inefficient speculation in the
residential real estate market with its adverse bubble
generating consequences.
Housing GSEs--Government Sponsored Enterprises--
Fannie Mae and Freddie Mac play key roles in the
Administration's new housing policies. Funds from the Preferred
Share Purchase Agreements, which allow the GSEs to draw up to
$400 billion from Treasury, are being deployed for foreclosure
mitigation and refinancing efforts. Since Fannie Mae and
Freddie Mac are now under the conservatorship of the Federal
Housing Finance Agency (FHFA), their concerns are now
officially the taxpayer's concerns--any losses they experience
through MHA should be a carefully considered part of a cost-
benefit analysis.
Fannie Mae and Freddie Mac should be more
forthcoming with respect to their foreclosure mitigation
efforts and use of taxpayer funds by addressing the questions
that I pose later in the report.
Due to flaws in the incentive structure for large-
scale, loan modification programs, the Panel seems to support
substituting federal bankruptcy judges for the traditional role
performed by servicers and mortgage holders in loan
modifications. Such a change in law will add to the increasing
burden borne by the vast majority of homeowners who meet their
mortgage obligations each month by encouraging non-recourse
speculative investment in the residential housing market.
Since one of Treasury's fundamental mandates is
taxpayer protection, the incorporation of a shared appreciation
right or equity kicker feature would appear appropriate.
Homeowners should not receive a windfall at the expense of the
taxpayers and mortgage lenders who suffered the economic loss
from restructuring their distressed mortgage loans.
Evaluation of a taxpayer-subsidized loan
modification must consider the tremendous government
interventions already underway. Private capital investment is
scarce in today's housing market, replaced by recent, rapid
growth in the government's share of the mortgage markets.
Subsidized loan refinancing and modification
programs may provide relief for a select group of homeowners,
while working against the majority who shoulder the tax burden
and make mortgage payments on time. Moral hazard is not just an
issue of fairness--programs that give no consideration to the
rightful, necessary link between risk and responsibility could
potentially create additional housing ``bubbles'' and result in
greater threats to stability.
Overall, the Panel continues to place policy
objectives above transparent and critical oversight. I
recommend an oversight plan with several requirements be
considered by the Panel.
2. Cost of the Foreclosure Mitigation Plans to Taxpayers
In order to have an informed debate on the foreclosure
mitigation issue it's critical that the American taxpayers
understand the all-in costs of all foreclosure mitigation
efforts. This is particularly significant since approximately
95 percent of taxpayers meet their monthly rental and mortgage
obligations and these taxpayers will be asked to subsidize the
cost of any foreclosure mitigation efforts directed for the
benefit of those who do not meet their obligations.
3. CBO--100 Percent Subsidy Rate for HAMP; Calculation of Total All-In
Cost
A key distinction between the TARP-funded Capital Purchase
Program and Treasury's foreclosure mitigation efforts is that
the latter will most likely carry a subsidy rate to the
taxpayers of 100 percent--that is, a 100 percent rate of loss
for the taxpayers from the Home Affordable Modification Program
(HAMP).\399\ The Congressional Budget Office (CBO) has applied
a 100 percent subsidy rate to the $50 billion of TARP funds
committed to HAMP. It has not performed subsidy rate analysis
for non-TARP financing of HAMP. According to CBO:
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\399\ Congressional Budget Office, The Troubled Asset Relief
Program: Report on Transactions Through June 17, 2009 ((June 2009)
(online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
The Treasury has committed $50 billion in TARP
funding for the Administration's foreclosure mitigation
plan, under which the TARP will make direct payments to
mortgage loan servicers to help homeowners refinance
their loans. Because no repayments will be required
from the servicers, the net cost of the program will be
---------------------------------------------------------------------------
the full amount of the payments made by the government.
Under these conditions, a 100 percent subsidy rate will be
applicable throughout the entire HAMP lifecycle. A 100 percent
subsidy rate becomes particularly problematic if--as announced
with respect to the MHA program--the Administration plans to
refinance and modify up to 9 million mortgages. Absent
meaningful input from Treasury, it's difficult to calculate the
all-in cost of the foreclosure mitigation programs to both the
taxpayers, and the holders of residential mortgages, investors
in securitized mortgage obligations, other investors and
mortgage servicers (which I refer to as the ``financial
community'').
For example, under a HAMP modification the mortgage lender
bears the cost of reducing each participant's monthly mortgage
payment to 38 percent of DTI (the participant's debt-to-
income), and the lender and the government share the cost of
reducing the participant's monthly mortgage payment from 38
percent to 31 percent of DTI. The Panel's report notes that
monthly principal and interest payments are reduced on average
by $598--from $1554 to $956--following a HAMP modification. If
you run the numbers over 12 months per year and for 4 million
modifications, the annual cost equals approximately $29
billion. Over a five-year period the (non-discounted) cost
equals approximately $145 billion. By adding, say, $9,000 of
incentive payments for 4 million modifications the total all-in
gross cost to the taxpayers and the financial community
increases by $36 billion to approximately $181 billion ($145
billion, plus $36 billion-non-discounted). If, instead, the
Administration elects to modify 9 million mortgages the total
all-in gross cost to the taxpayers and the financial community
jumps to approximately $407 billion (non-discounted). To these
estimates must be added the billions of dollars already
allocated to Fannie Mae and Freddie Mac as well as the write-
offs already taken by private sector mortgage lenders, holders
of securitized debt and servicers. These amounts reflect back-
of-the-envelope estimates of gross costs and must be considered
along with Professor White's cost-benefit testimony (discussed
below) and the analysis of other experts. If the Administration
promotes aggressive principal reduction, negative equity
abatement and second lien programs, the estimates may, however,
materially understate the all-in gross costs to the taxpayers
and the financial community.
Based upon the Panel's report, it's difficult to determine
how much of this cost will fall to the taxpayers and how much
will be borne by the mortgage holders under the DTI formula. It
is troubling that the Administration has made little effort to
disclose the all-in cost of these programs to the taxpayers and
the financial community. Did Treasury roll-out the MHA program
with its promise of refinancing or modifying up to 9 million
mortgages without providing a realistic estimate of the cost of
the program to the taxpayers and the financial community? \400\
Will Treasury commit to limit MHA to $50 billion of TARP funds?
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\400\ Any attempt to quantify the total costs and expenses that may
be incurred in restructuring mortgage loans should consider the
following: (i) fees paid to servicers, attorneys, appraisers,
surveyors, title companies and accountants, (ii) principal reductions,
(iii) interest rate reductions, (iv) second lien reductions, (v)
negative equity reductions, and the like.
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4. Repaid TARP Funds Available for Foreclosure Mitigation
Although the HAMP program is presently limited to $50
billion of TARP funds, I am not aware of any constraint on the
Secretary from allocating additional TARP funds to MHA or any
other existing or future foreclosure mitigation efforts. Since
the Secretary interprets TARP as a ``revolving facility'' and
given the likelihood that he will extend TARP to October 31,
2010, it's possible that a substantial portion of the $700
billion TARP facility could be directed to foreclosure
mitigation efforts. The MHA and the HAMP--Home Affordable
Modification Program--and HARP--Home Affordable Refinancing
Program--programs are subject to unilateral modification
pursuant to which Treasury may restructure the programs to the
detriment of the taxpayers. In addition, Treasury may introduce
new programs that are funded in whole or in part by TARP. Along
similar lines, it was recently reported that the Administration
is close to committing up to $35 billion to state and local
housing authorities to provide mortgages to low- and moderate-
income families.\401\ It's important to note again that CBO
will most likely assign a 100 percent taxpayer subsidy rate to
any new or expanded foreclosure mitigation programs thereby
acknowledging the vast transfer of taxpayer funds from the
taxpayers who meet their monthly mortgage and rental payments
to those who do not.
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\401\ Deborah Solomon, $35 Billion Slated for Local Housing Wall
Street Journal (Sept. 28, 2009) (online at online.wsj.com/article/
SB125409967771945213.html).
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5. Treasury Should Disclose the All-In Cost of the Foreclosure
Mitigation Plans
In order to better appreciate the total all-in costs of the
Administration's various foreclosure mitigation efforts, and to
compensate for the Panel's gaps in oversight, I request that
the Administration promptly provide the taxpayers with a
thorough and fully transparent analysis of the following
matters:
the total amount of funds the Administration
has advanced and committed to advance under its various
foreclosure mitigation efforts (including, without
limitation, under MHA, HAMP and HARP, the second lien
programs, as well as the programs adopted by Fannie Mae
and Freddie Mac);
the total amount of funds the Administration
reasonably expects to advance and commit to advance
over the next five years under all of its present and
anticipated foreclosure mitigation efforts; and
the total anticipated costs to all financial
institutions and other mortgage holders and servicers
under all of the Administration's present and
anticipated foreclosure mitigation efforts.
Like the recently completed ``stress tests'' conducted by
Treasury and other financial regulators with respect to bank
capital adequacy, the Administration should calculate the
foregoing estimates under a ``more adverse'' scenario (i.e.,
where conditions materially deteriorate) as well as under
current conditions. It is also imperative that the valuation
models adopted by Treasury employ reasonable input assumptions
and methodologies and make no effort to skew the results to the
high or low range of estimates.
The analysis should acknowledge the extent to which the
Administration's foreclosure mitigation efforts may create
capital shortfalls within the financial community. It's
somewhat ironic that at the same time the Administration is
encouraging financial institutions and mortgage holders to
boost their foreclosure mitigation efforts by restructuring
home loans and writing down loan portfolios, the Administration
is considering a new round of bailouts for the financial
community.\402\ Since money is fungible it's not unreasonable
to conclude that the Administration may be in effect
reimbursing--with taxpayer sourced funds--financial
institutions that adopt and follow the Administration's
foreclosure mitigation policies.
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\402\ Daniel Wagner, Fresh Bailouts for Smaller Banks Being
Weighed, The Observer (Sept. 25, 2009) (online at hosted.ap.org/
dynamic/stories/U/_ US_SMALL_BANKS_BAILOUT).
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One key function of effective oversight is to determine if
Treasury will be able to achieve its stated goals for the
stated price--the refinancing or modification of up to 9
million mortgage loans for $75 billion. It's not possible to
accomplish this task without a better understanding of the
anticipated all-in cost of the several foreclosure mitigation
programs.
6. Analysis by the Panel and Professor Alan M. White
In prior reports the Panel has retained the services of
nationally recognized academics to value, for example, warrants
issued to Treasury under the Capital Purchase Program as well
as toxic assets held by banks and other financial institutions.
In preparing the October report, I recommended that the Panel
again retain the services of top-tier academics and other
professionals to estimate the total cost to the taxpayers and
the financial community of the various housing foreclosure
mitigation plans and proposals including, without limitation,
all refinancing, modification and second lien plans and
proposals. Although the Panel's efforts do not reflect the same
robust analysis undertaken in prior reports, I wish to thank
Professor Alan M. White for his paper on the ``potential costs
and benefits'' of the HAMP program.
In calculating the total cost of each mortgage modification
to the taxpayers, Professor White concludes:
To summarize, the total cost of the borrower,
servicer and investor incentive payments for first and
second mortgage HAMP payments is projected to be in the
range of $16,000 to $21,000 average per first mortgage
modification, including both successful and
unsuccessful modifications. In other words, the cost
per successful modification will be higher. Treasury
should be in a position to report on actual per-
modification costs by November or December, when
several months of permanent modification data have been
collected and some initial redefault statistics can be
calculated.
Since these numbers apparently include up to $9,000 of
incentive payments it appears that the total cost to the
taxpayers of all interest rate and principal adjustments is
approximately $10,000 per modification, or approximately $2,000
per year ($167 per month) for the full five-year HAMP
modification period. Perhaps this is correct, but I question
whether mortgage loans may be successfully modified at such a
relatively modest cost to the taxpayers under the HAMP program.
It appears that Professor White did not independently calculate
these amounts, but, instead, generally relied upon estimates
provided by Treasury. It is unclear what methodology Treasury
employed except, perhaps, to divide the $50 billion of TARP
funds initially allocated to HAMP by 2.5 million modifications,
or $20,000 per mortgage modification. Such approach, although
suggested by Professor White, hardly reflects the application
of rigorous scientific methodology.
Professor White also expressly notes the effectiveness of
non-subsidized voluntary foreclosure mitigation when he states:
Nevertheless, there is convincing evidence that
successful modifications avoided substantial losses,
while requiring only very modest curtailment of
investor income. In fact, the typical voluntary
modification in the 2007-2008 period involved no
cancellation of principal debt, or of past-due
interest, but instead consisted of combining a
capitalization of past-due interest with a temporary
(three to five year) reduction in the current interest
rate. Foreclosures, on the other hand, are resulting in
losses of 50% or more, i.e. upwards of $124,000 on the
mean $212,000 mortgage in default.
Significantly, he also quantifies the overall benefit of
voluntary foreclosure mitigation to investors by concluding:
The bottom line to the investor is that any time a
homeowner can afford the reduced payment, with a 60% or
better chance of succeeding, the investor's net gain
from the modification could average $80,000 per loan or
more. Two million modifications with a 60% success rate
could produce $160 billion in avoided losses, an amount
that would go directly to the value of the toxic
mortgage-backed securities that have frozen credit
markets and destabilized banks.
If this is indeed the case, then why is it not in the best
interest of each mortgage holder to modify the mortgage loans
in its portfolio? Why would a mortgage holder risk breaching
its fiduciary duties to its investor group by foreclosing on
mortgaged property instead of restructuring the underlying
loans? Why should the taxpayers subsidize the restructuring of
mortgage loans--whether through the HAMP program or otherwise--
if the mortgage holders may independent of such subsidy realize
a net gain of approximately $80,000 per loan by voluntarily
restructuring their distressed mortgage loans?
Professor White and the Panel seem to imply that without
taxpayer-funded subsidies the mortgage servicers would be
economically disinclined to modify distressed mortgage loans
because of unfavorable terms included in typical pooling and
servicing agreements--the contracts pursuant to which servicers
discharge their duties to mortgage holders. Professor White
writes:
While modification can often result in a better
investor return than foreclosure, modification requires
``high-touch'' individualized account work by servicers
for which they are not normally paid under existing
securitization contracts (pooling and servicing
agreements or ``PSA''s.) \403\ Servicer payment levels
were established by contracts that last the life of the
mortgage pools. Servicers of subprime mortgages agreed
to compensation of 50 basis points, or 0.5% from
interest payments, plus late fees and other servicing
fees collected from borrowers, based on conditions that
existed prior to the crisis, when defaulted mortgages
constituted a small percentage of a typical portfolio.
At present, many subprime and alt-A pools have
delinquencies and defaults in excess of 50% of the
pool. The incentive payments under HAMP can be thought
of as a way to correct this past contracting failure.
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\403\ Standard & Poor's, Servicer Evaluation Spotlight Report (July
2009) (online at www2.standardandpoors.com/spf/pdf/media/
SE_Spotlight_July09.pdf).
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Because mortgage servicers are essentially
contractors working for investors who now include the
GSE's, the Federal Reserve and the Treasury, we can
think of the incentive payments under HAMP as extra-
contractual compensation for additional work that was
not anticipated by the parties to the PSAs at the time
of the contract.
Is the purpose of HAMP to bailout servicers from their
``contracting failure'' through the payment of ``extra-
contractual compensation''? The taxpayers should not be charged
with such a responsibility and I am disappointed that the
Administration, the Panel and Professor White would advocate
such an approach. Notwithstanding the inappropriate complexity
interjected into the foreclosure mitigation debate by the
Administration, a solution appears relatively straightforward.
If, as Professor White suggests, mortgage holders stand to
realize a net gain of approximately $80,000 from restructuring
each mortgage loan instead of foreclosing on the underlying
property, the mortgage holders themselves should undertake to
subsidize the ``contracting failure'' of their servicers out of
such gains. I appreciate that mortgage holders may not wish to
remit additional fees to their servicers, but, between mortgage
holders and the taxpayers, why should the taxpayers--through
TARP or otherwise--bear such burden? The Administration, by
enticing mortgage holders and servicers with the $75 billion
HAMP and HARP programs (with a reasonable expectation that
additional funds may be forthcoming), has arguably caused them
to abandon their market oriented response to the atypical rate
of mortgage defaults in favor of seeking hand-outs from the
government. It's difficult to fault mortgage holders and
servicers for their rational behavior in accepting bailout
funds that may enhance the overall return to their investors.
In addition, Professor White dismisses the importance of
considering future decisions homeowners and others will make
when entering into risky contracts when there is a perceived
safety net. It is insufficient simply to say, ``moral hazard
from HAMP modifications is unlikely to play a significant role
in borrower defaults,'' as viewed through the prism of ``the
cost of losses on mortgages that would otherwise perform but
for the borrower's decision to default in order to benefit from
the program.'' I appreciate that Professor White provides a
definition to support his analysis, but it is an inadequate
premise for such a sweeping conclusion. If the objective of the
Administration's MHA program is to correct failures in the
housing market so as to provide economic stabilization, then
any estimate of total cost provided by Professor White or
Treasury would by definition fail to consider the additional
costs that will no doubt ensue when homeowners are saved from
mortgage contracts they would not otherwise be able to shoulder
without a government backstop. It would also exclude future
risk-taking behavior that may necessitate future interventions.
The MHA program in effect incorporates the failed policy of
``implicit guarantee''--notoriously exploited by Fannie Mae and
Freddie Mac--into yet another aspect of federal housing policy.
By disregarding the distinct moral hazard risk, the MHA
encourages speculation in the residential real estate market
with its adverse bubble generating consequences.
7. Response to March Report on Foreclosures
In my response to the March Panel report, I commented on
several aspects of the housing crisis that I felt were omitted
or not thoroughly described by the Panel. These include further
contributing causes, the universe of individuals in distress,
the realized and unrealized costs of loan modification
programs, and additional alternatives to government-subsidized
foreclosure mitigation efforts.\404\
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\404\ Representative Jeb Hensarling, Foreclosure Crisis: Working
Toward a Solution, Additional View by Representative Jeb Hensarling,
(Mar. 9, 2009) (online at cop-senate.gov/documents/cop-030609-report-
view-hensarling.pdf).
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Below is a summary of some of the key points I discussed in
response that are relevant to the current discussion on
foreclosure mitigation:
Foreclosure relief should be centered around
borrowers in a fair, responsible, and taxpayer-friendly way.
Policymakers should take care to avoid the trap of
creating further market distortions that disrupt the law of
supply and demand, which is designed to ensure that qualified
borrowers have reliable access to mortgage products suitable to
their needs.
Government involvement in housing markets has
already created significant disruptions, chiefly through highly
accommodative monetary policy; federal policies designed to
expand home ownership; the congressionally-granted duopoly
status of housing GSEs, Fannie Mae and Freddie Mac; an anti-
competitive government-sanctioned credit rating oligopoly; and
mandates of certain policies and underwriting standards based
on factors other than risk.\405\
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\405\ One of the difficulties that some borrowers are facing has
been the general federal objective of enabling and encouraging people
to buy homes that were too expensive for them to otherwise afford. In a
perfect world, the laws of supply and demand would be the fundamental
driver of our mortgage markets, with qualified borrowers having
reliable access to suitable mortgage products that best fit their
needs. Yet, in reality, the cost of home ownership has in many places
so thoroughly outpaced the ability of borrowers to afford a home that
the government has chosen to intervene with various initiatives to
defray parts of the cost of a mortgage. That intervention has taken
many forms--affordable housing programs, federal FHA mortgage
insurance, tax credits and deductions, interest rate policies, etc.--as
part of a concerted effort to increase homeownership. For almost a
decade, those efforts succeeded, pushing homeownership rates steadily
up from 1994 through their all-time high in 2004. That increase in
demand, in turn, contributed to a corresponding increase in home
prices, which rose from the mid-1990s until hitting their peak in 2006.
Yet those price increases created a cycle of government intervention--
home price appreciation made homes less affordable, which in turn
spurred further government efforts to defray more of their cost--and
the involvement of the federal government in our housing markets only
grew deeper.
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As the 2009 deficit reaches an estimated $1.6
trillion, evaluation of foreclosure plans must consider the
all-in costs as well as the extraordinary federal assistance
that has been provided in response to the financial crisis.
The Panel should practice caution in estimating
the redefault rates that will occur three months to a year
after participation in the MHA--Making Home Affordable--
program. Historical, yearly data show that redefault rates have
been over 50 percent on modified loans.\406\
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\406\ Office of the Comptroller of the Currency and Office of
Thrift Supervision Mortgage Metric Report, First Quarter 2009 (online
at www.occ.treas.gov/ftp/release/2009-77a.pdf) . See chart on page 7,
which conveys a re-default rate of over 50 percent based on the most
recent data available.
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Foreclosure rates are concentrated in specific
states and areas, making one-size-fits all programs even more
difficult to execute.
It is important to remember that the number of
individuals in mortgage distress reaches beyond individuals who
have experienced an adverse ``life event'' or been the victims
of fraud. This complicates moral hazard issues associated with
large-scale modification programs.\407\
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\407\ These ``life event'' affected borrowers are noteworthy
because relatively few object to efforts to find achievable solutions
for trying to help keep these distressed borrowers in their current
residences whenever possible. Similarly, another sympathetic group of
distressed borrowers involves people who were legitimate victims of
blatant manipulation or outright fraud by unscrupulous lenders who
pressured them into homes they could not afford. To many, those
legitimate victims are certainly equally deserving of assistance. Of
course, such borrowers do have the added burden proving that they were
indeed victims of actual wrongdoing. However, they also have a
potential remedy of pursuing legal action against fraudulent lenders,
an option which is not available to others.
If the universe of individuals in mortgage distress included only
borrowers from ``life event'' and fraud victims groups, the task of
crafting an acceptable government-subsidized foreclosure mitigation
plan would be much easier. However, the number of individuals in
mortgage distress stretches far beyond those groups to include a much
larger section of people who, for a wide variety of reasons, are no
longer paying their mortgage on time. While certainly not an exhaustive
list, that larger group includes:
people who took out large loans to purchase more house
than they could have reasonably expected to afford;
borrowers who lied about their income, occupancy, or
committed other instances of mortgage fraud;
speculators who purchased multiple houses for their
expected value appreciation rather than a place to live;
individuals who decided to select an exotic mortgage loan
with fewer upfront costs, lower monthly payments, or reduced
documentation requirements;
borrowers who took advantage of refinance loans to strip
much or all of the equity out of their house to finance other
purchases;
those who simply made bad choices by incorrectly gambling
on the market or overestimating their readiness for homeownership; and
borrowers who have made a rational economic decision and,
given their particular circumstance, it no longer makes sense to them
to continue paying their mortgage.
Borrowers who fall into those categories are much less sympathetic
in the eyes of many, and attempting to develop a government-subsidized
foreclosure mitigation plan to assist them will inevitably raise
significant moral hazard questions for policymakers.
A fundamental measure of the effectiveness of a foreclosure
mitigation program is what steps the program has taken to sort those
risky borrowers out from their more deserving counterparts to avoid the
moral hazard of rewarding people or their bad behavior.
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Distinct from a moral hazard question there is an
inherent question of fairness as those who are not facing
mortgage trouble are asked to subsidize those who are facing
trouble. In light of current statistics regarding the overall
foreclosure rate, an essential public policy question that must
be asked regarding the effectiveness of any taxpayer-subsidized
foreclosure mitigation program is ``Is it fair to expect
approximately 19 out of every 20 people to pay more in taxes to
help the 20th person maintain their current residence?''
Although that question is subject to individual interpretation,
there is an ever-increasing body of popular sentiment that such
a trade-off is indeed not fair.\408\
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\408\ After all, why should a person be forced to pay for their
neighbor's mortgages when he or she is struggling to pay his or her own
mortgages and other bills? To many people, this question is the most
important aspect of the public policy debate. Given the massive direct
taxpayer costs that have already been incurred through TARP and the
potential costs that could be incurred through the assorted credit
facilities and monetary policy actions of the Federal Reserve, I
believe that it is difficult to justify asking the taxpayers to
shoulder an even greater financial burden from yet another government
foreclosure mitigation program that might not work.
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Since there is no uniform solution for the problem
of foreclosures, a sensible approach should encourage multiple
mitigation programs that do not amplify taxpayer risk or
require government mandates.
See the following link for my full response to the
Panel's March report: http://cop.senate.gov/documents/cop-
030609-report-view-hensarling.pdf.
8. Foreclosures and Macroeconomic Recovery
Indeed, the housing market is still on shaky ground and
homeowners face the turmoil of potential waves of foreclosures.
Although there are signs of life in the market--such as upward
movement in housing starts and nationwide home values--
unpredictable existing home sales figures \409\ and continued
increases in delinquencies and foreclosures mean underlying
indicators are still problematic. Mortgage interest rates
remain at low levels by historical standards, although much of
this may be intertwined with the Federal Reserve's program to
purchase up to $1.25 trillion in agency mortgage-backed
securities. The future may be even more ominous for housing
prices and recovery if concerns are realized about ``shadow
inventory,'' a term for the millions of homes that are waiting
to hit the market either because they are in foreclosure or for
other reasons.\410\
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\409\ Sara Murray, Existing Home Sales Dropped In August, Wall
Street Journal (September 24, 2009) (online at online.wsj.com/article/
SB125379520447237461.html#mod= WSJ_hps_LEFTWhatsNews).
\410\ Jody Shenn, ``Housing Crash to Resume on 7 Million
Foreclosures, Amherst Says, Bloomberg News (September 23, 2009) (online
at www.bloomberg.com/apps/news?pid=20601087&sid=aw6_gqc0EKKg).
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Even still, housing indicators cannot be studied in
isolation. The best insurance policy to protect homeowners from
foreclosure is having a job, and the best assurance of job
security is the engine of economic growth and the adoption of
public policy that encourages and rewards capital formation and
entrepreneurial success. The Blue Chip Consensus and other
forecasters predict that unemployment will hit 10 percent in
2010. Although a less-than-expected GDP drop for the second
quarter is a positive signal, the path to economic recovery is
expected to be sluggish, and further dragged down by record
debt and deficit levels.\411\
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\411\ U.S. Office of Management and Budget, Mid-Session Review,
Economic Assumptions (August 2009) (online at www.gpoaccess.gov/
USbudget/fy09/pdf/09msr.pdf).
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Whether or not MHA will lead to economic stabilization or
prevent further disruptions, two integral mandates of EESA, is
open for debate. The Panel's report suggests that the housing
market ``has been at the center of the economic crisis, and
until it is stabilized, the economy as a whole will remain in
turmoil.'' It is undisputed that the collapse of housing prices
ignited the financial crisis, which was linked to the risky
undertakings of multiple players: government, lenders,
borrowers and investors. Yet even if macroeconomic recovery
were irrevocably dependent on the revival of the housing
market--likely, the reverse is true--can this revival be
spurred by a large-scale loan modification program that has
committed $75 billion in taxpayer funding?
9. The Panel's Mandate With Respect to Taxpayer Protection
Taxpayer protection is a guiding principle of EESA
interwoven throughout the legislation, including for
foreclosure mitigation efforts. I recommend that Treasury and
the Panel define in measurable terms what is at stake--the
costs and the benefits--for taxpayers in implementing the MHA
plan.
EESA gives the Panel a clear duty to provide information on
foreclosure mitigation programs, but with the following caveat.
Reports must include:
The effectiveness of foreclosure mitigation efforts
and the effectiveness of the program from the
standpoint of minimizing long-term costs to the
taxpayers and maximizing the benefits for
taxpayers.\412\ [Emphasis added.]
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\412\ Emergency Economic Stabilization Act of 2008, Pub. L. No.
110-343 Sec. 125.
While the Executive Summary of the Panel's report discusses
this mandate as if it were a major theme of the paper, the
analysis that follows does not give due credence to taxpayer
considerations. Professor White's analysis does not assuage
concerns about taxpayer protection--in fact, it aggravates them
by suggesting there is actually a $50 billion ceiling on HAMP
costs and that investors stand to gain at the taxpayers'
expense.
The Panel's March report applies eight criteria in its
evaluation of loan modification programs, which is also
included in the most recent report:
Will the plan result in modifications that create
affordable monthly payments?
Does the plan deal with negative equity?
Does the plan address junior mortgages?
Does the plan overcome obstacles in existing
pooling and servicing agreements that may prevent
modifications?
Does the plan counteract mortgage servicer
incentives not to engage in modifications?
Does the plan provide adequate outreach to
homeowners?
Can the plan be scaled up quickly to deal with
millions of mortgages?
Will the plan have widespread participation by
lenders and servicers?
While these are valid criteria, the list, which serves as
the lynchpin for both the March and October reports, does not
include taxpayer considerations. The Congressional Budget
Office estimates that taxpayers will lose 100 percent of the
$50 billion in TARP funds committed to the Administration's
foreclosure relief programs.\413\ (It is reasonable to assume
that the entire $75 billion program carries a 100 percent
subsidy rate.) It also shows that the five-year MHA is not
surprisingly a major driving force behind the extension of TARP
costs well into 2013.\414\ MHA is not an investment with a
realizable return in the same sense as other TARP programs,
such as the Capital Purchase Program, where at least a portion
of the outlays are expected to be recouped, and many with
interest. The $75 billion program funds the array of incentive
payments to servicers and lenders/investors who participate in
the MHA program. It will not be returned to the Treasury
general fund as the program winds down, so in a sense, it is
equivalent to a $50 billion increase in deficits as the debt
level reaches $12.3 trillion by 2013.\415\
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\413\ U.S. Congressional Budget Office, The Troubled Asset Relief
Program: Report on Transactions Through June 17, 2009 (June 2009)
(online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
\414\ U.S. Congressional Budget Office, The Budget and Economic
Outlook: An Update (August 2009) (online at www.cbo.gov/ftpdocs/85xx/
doc8565/08-23-Update07.pdf ).
\415\ U.S. Office of Management and Budget, Mid-Session Review,
(August 2009) (online at www.gpoaccess.gov/usbudget/fy10/pdf/
10msr.pdf).
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According to Treasury's program description for MHA, the
payments to servicers, lenders and homeowners are as follows:
\416\
---------------------------------------------------------------------------
\416\ U.S. Department of Treasury, Making Home Affordable: Summary
of Guidelines, (March 4, 2009) (online at www.treas.gov/press/releases/
reports/guidelines_summary.pdf).
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Treasury will share with the lender/investor the
cost of reductions in monthly payments from 38 percent DTI to
31 percent DTI.
Servicers that modify loans according to the
guidelines will receive an up-front fee of $1,000 for each
modification, plus ``pay for success'' fees on still-performing
loans of $1,000 per year.
Homeowners who make their payments on time are
eligible for up to $1,000 of principal reduction payments each
year for up to five years.
The program will provide one-time bonus incentive
payments of $1,500 to lender/investors and $500 to servicers
for modifications made while a borrower is still current on
mortgage payments.
The program will include incentives for
extinguishing second liens on loans modified under this
program.\417\
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\417\ Announced in April, MHA's second lien program offers the
following:
Pay-for-Success Incentives for Servicers and Borrowers:
The Second Lien Program will have a pay-for-success structure
similar to the first lien modification program, aligning incentives to
reduce homeowner payments in a way most cost effective for taxpayers.
Servicers can be paid $500 up-front for a successful modification
and then success payments of $250 per year for three years, as long as
the modified first loan remains current.
Borrowers can receive success payments of up to $250 per year for
as many as five years. These payments will be applied to pay down
principal on the first mortgage, helping to build the borrower's equity
in the home. U.S. Department of Treasury, Making Home Affordable:
Program Update (April 28, 2009) (online at www.financialstability.gov/
docs/042809SecondLienFactSheet.pdf).
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No payments will be made under the program to the
lender/investor, servicer, or borrower unless and until the
servicer has first entered into the program agreements with
Treasury's financial agent.
Similar incentives will be paid for Hope for
Homeowner refinances.
Taxpayers and the Panel should demand no less than complete
transparency and accountability of funds. If no financing will
be repaid from the MHA program, Treasury must provide its own
assessment of how it measures benefits and risks for all
taxpayers, not just for participants of the program. For
example, even were the program to work for a select group of
homeowners, it may be working against the majority who shoulder
the tax burden and make mortgage payments on time. If evidence
can be provided to the contrary, it must be plausible enough to
diminish the risks of entering into a $50 billion investment
where direct funding will not be recovered.
10. Making Home Affordable Program--Making Sense of the Data
On March 4, 2009, the Department of the Treasury released a
program description of ``Making Home Affordable,'' or MHA, the
Administration's multi-tiered plan to prevent foreclosure for
``at-risk'' homeowners. When it was announced, the advertised
goal was to ``offer assistance to as many as 7 to 9 million
homeowners.'' \418\ Based on the information provided so far by
Treasury, only murky conclusions can be reached about the
program's progress, especially when taxpayer funds spent or
committed are considered.\419\
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\418\ U.S. Department of Treasury, Making Home Affordable: Updated
Detailed Program Description (March 4, 2009) (online at
www.ustreas.gov/press/releases/reports/housing_fact_sheet.pdf).
\419\ On October 8, GAO released its latest report on TARP, which
included a table of Treasury's actions in response to major GAO
recommendations. As an example, one recommendation is to ``Institute a
system to routinely review and update key assumptions and projections
about the housing market and the behavior of mortgage holders,
borrowers, and servicers that underlie Treasury's projection of the
number of borrowers whose loans are likely to be modified under HAMP
and revise the projection as necessary in order to assess the program's
effectiveness and structure.''
It is worth nothing that the status of all of the GAO
recommendations for HAMP is either ``not implemented'' or ``partially
implemented.''
Government Accountability Office, Troubled Asset Relief Program:
One Year Later, Actions Are Needed to Address Remaining Transparency
and Accountability Challenges (October 2009) (GAO-10-16) (online at
www.gao.gov/new.items/d1016.pdf).
---------------------------------------------------------------------------
11. Home Affordable Modification Program
The Administration committed $75 billion--$50 billion of
TARP financing and $25 billion of ``Housing and Economic
Recovery Act of 2008'' (HERA) \420\ financing--to the HAMP
program, a loan modification program aimed at reducing monthly
interest payments for 3 to 4 million homeowners who are either
close to defaulting on payments or are already delinquent. The
TARP funds used for HAMP are solely for private-label loans,
although Fannie Mae and Freddie Mac both have major roles in
the program, with Fannie Mae serving as the ``administrator''
and Freddie Mac serving as the ``compliance agent.'' HAMP uses
HERA funding for loans owned or guaranteed by Fannie Mae or
Freddie Mac.
---------------------------------------------------------------------------
\420\ Pub. L. No. 110-289.
---------------------------------------------------------------------------
Treasury has released some metrics on HAMP in its August
Monthly Progress Report.\421\ According to these data, just
over 360,000, 3-month trial modifications have begun. Assistant
Secretary Allison testified at a Senate Banking Committee
hearing on September 24, 2009, that only about 1,800 of the
total modifications have become permanent.\422\ Treasury
believes, however, that the HAMP program will exceed the newly-
set target of 500,000 trial modifications by November.\423\
---------------------------------------------------------------------------
\421\ U.S. Department of Treasury, Troubled Assets Relief Program:
Monthly Progress Report--August 2009 (September 10, 2009) (online at
www.financialstability.gov/docs/105CongressionalReports/
105areport_082009.pdf).
\422\ Senate Committee on Banking, Housing and Urban Affairs,
Testimony of U.S. Treasury Department Assistant Treasury Secretary,
Herb Allison, EESA: One Year Later (September 24, 2009) (online at
banking.senate.gov/public/index.cfm?FuseAction=
Hearings.Hearing&Hearing_ID=ff78e881-372e-41e3-915d-e4d5a93da22d).
\423\ This target has only recently been announced and was not part
of the MHA program's launch in March 2009.
---------------------------------------------------------------------------
The jury is still out on whether the program will
ultimately accomplish its goals, how long this may take and
what it will cost. There are many factors at work, including
the ability of servicers to perform the necessary
``counseling'' role, the willingness of homeowners to
participate, and much larger external forces such as the labor
market. Borrowers may enter into the trial modification process
only to be denied based on criteria like debt-to-income levels.
Even those whose modifications become permanent for several
months may redefault because of job loss, ``back-end'' debt
such as credit card obligations (which is not factored into
debt-to-income calculations) or other reasons that make
mortgage payments unsustainable.
Were all 360,000 trial modifications to succeed in not only
lowering payments but also in staving off foreclosure, Treasury
is still a long way from its goal of assisting 3 to 4 million
homeowners. Treasury's latest transaction report on TARP
indicates that a maximum of $27 billion out of $50 billion in
authority has been used for incentive payments, although it is
unclear how this corresponds to metrics on completed
modifications.\424\ Assistant Secretary Allison has said that
``very little'' of the funds have been spent, but unless the
proper data are provided to link funds spent or committed to
loan modifications that have become permanent, much is open to
interpretation.
---------------------------------------------------------------------------
\424\ U.S. Department of the Treasury, Troubled Assets Relief
Program: Transactions Report for Period Ending September 18, 2009
(Sept. 22, 2009) (online at www.financialstability.gov/docs/
transaction-reports/transactions-report_09222009.pdf).
---------------------------------------------------------------------------
Are we to assume that the outcome of committing $27 billion
in taxpayer funding has only yielded at most 360,000 loan
modifications? If not, what are we to assume? Will Treasury
commit additional TARP funds beyond the $50 billion in order to
make the program work as advertised? Will it use the
essentially boundless \425\ HERA authority as a back-door
approach to financing expansions in HAMP? What other measures
may be taken to deliver on the promise to reach millions of
homeowners? Will Treasury adjust the criteria?
---------------------------------------------------------------------------
\425\ See following section.
---------------------------------------------------------------------------
12. Home Affordable Refinance Program for Agency Mortgages
A separate platform of the Administration's MHA plan, the
``Home Affordable Refinance Program,'' or (HARP), targets up to
4 to 5 million homeowners with loans owned or guaranteed by
Fannie Mae and Freddie Mac. Homeowners can qualify who are up
to 125 percent ``underwater'' on their mortgages--a situation
where the borrower owes more on the loan than the value of the
home--but must have a track record of making payments on time.
Although Treasury has given assurances that no TARP funds will
be intermingled with HARP,\426\ the program's ability to
prevent millions of foreclosures and stabilize the housing
market is nevertheless intertwined with the TARP-funded
program, HAMP, and must be considered by the Panel.
---------------------------------------------------------------------------
\426\ Letter from Assistant Treasury Secretary for Financial
Stability Herb Allison, to the Honorable Jeb Hensarling, United States
Congressman (Sept. 14, 2009).
---------------------------------------------------------------------------
The HERA statute established the authority for Treasury to
purchase preferred stock in Fannie Mae and Freddie Mac in
amounts it or the GSEs deem necessary, providing the two
housing companies with equity injections. Although this
authority technically expires on December 31, 2009, Treasury
may increase the limit to any level through the expiration
date. Part of the Administration's housing plan involves
doubling the size of the purchase agreements from a maximum of
$200 billion to a maximum of $400 billion,\427\ which did not
require Congressional approval or budgetary review. So far,
Fannie and Freddie have drawn $95.6 billion in capital from the
agreements.\428\
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\427\ U.S. Department of the Treasury, Making Home Affordable:
Updated Detailed Program Description, (Mar. 4, 2009) (online at
www.ustreas.gov/press/releases/reports/housing_fact_sheet.pdf).
\428\ Fannie Mae, Second Quarter 2009 Form 10-Q (Aug. 6, 2009)
(online at phx.corporate-ir.net/phoenix.zhtml?c=108360&p=irol-
secQuarterly&control_SelectGroup=Quarterly%20Filings); Freddie Mac,
Second Quarter 2009 Form 10-Q (Aug. 7, 2009) (ir.10kwizard.com/
files.php?source=1372&welc_next=1&XCOMP=0&fg=23).
---------------------------------------------------------------------------
The powers granted by the HERA statute have been used to
fund the Administration's loan modification efforts through
HAMP and HARP, but there is no clear way to segregate the costs
of new housing policies from other expenditures as well as from
losses on Fannie's or Freddie's books of business (discussed
further in later section). Very few metrics on the success of
HARP have been released to date. Fannie Mae and Freddie Mac
executives testified before this Panel on September 24, 2009,
and although they did speak to the number of total refinances
performed by the agencies this year, they did not discuss HARP
specifically. Treasury and the GSEs should be held accountable
for making any loan modification program or refinancing program
as transparent as possible, since it involves a minimum of $25
billion of taxpayer dollars and there is no clear way to
understand whether or not programs supporting Fannie- or
Freddie-guaranteed mortgages will require additional funds.
13. Issues Enlisting Servicer Support of MHA
The Panel's October report spotlights several obstacles to
launching a massive loan modification program. One is whether
HAMP servicers will have the capacity or expertise to
successfully carry it out. Another involves whether they can
handle the volume of modifications MHA creates in a profitable
manner.
What the report does not emphasize is simply whether or not
the program can provide appropriate incentives that will
outweigh both the risk of borrower redefault as well as what
may be the enhanced return from foreclosure and sale to a
solvent buyer. Along these lines the report seems to accept
without comment the need for government sponsored-foreclosure
mitigation programs and generally disregards private sector
efforts without sufficient analysis. It's quite often in the
best interest of private sector servicers and mortgage holders
to restructure distressed loans but I am concerned that the
confusing array of government sponsored programs may have
chilled many creative private sector initiatives. Instead of
being proactive, private sector servicers and mortgage holders
may have been enticed to sit on their hands and wait for higher
fees, servicing payments, and interest and principal subsidies
courtesy of HAMP or some other government-sponsored foreclosure
mitigation program. Without these programs and the expectation
of future subsidies, servicers and mortgage holders would have
had little choice but to implement independent private sector
programs. It's ironic, but all the false starts with HAMP and
the other government programs may have exacerbated the
foreclosure mitigation process by keeping private sector
servicers and mortgage holders on the sidelines waiting on a
better deal from the government.\429\
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\429\ HOPE Now, a public-private foreclosure mitigation alliance in
existence since 2007, for example, has performed as many as 140,000
loan modifications per month. Since HARP is a first stop for at-risk
homeowners, programs like HOPE Now may be put on the back burner.
---------------------------------------------------------------------------
Such behavior is entirely rational if the servicers and
mortgage holders have a reasonable expectation that Treasury
will dedicate more TARP or other funds to foreclosure
mitigation efforts. Since Treasury asserts that repaid TARP
funds may be recycled to new programs it's not unrealistic to
expect that Treasury will offer more favorable programs to
servicers and mortgage holders in the relatively near future.
Since servicers perform their duties pursuant to complex
contractual arrangements that mandate they maximize the return
to the mortgage holders, it's quite possible that servicers
risk default under their contracts if they fail to capture the
greatest subsidy rate offered by the government. In addition,
servicers themselves may of course benefit by waiting for
enhanced payments. The only way to convince servicers and
mortgage holders that they will not forego additional
governmental largess is for Treasury to state clearly that the
MHA program will not be expanded and that no additional TARP or
government funds will be allocated to foreclosure mitigation
efforts.
In addition, there is simply no way of knowing whether or
not larger institutions receiving TARP funds were pressured
into participating in government-supported loan modification
programs against the best interest of other performance goals
(which would have the potential to restrict credit extension
elsewhere). Bank of America and Wells Fargo, receiving a
combined $70 billion in TARP aid, stepped up the rate of loan
modifications as part of MHA by 60 percent in August after
receiving criticism from lawmakers for ``not doing enough.''
\430\
---------------------------------------------------------------------------
\430\ Bloomberg, Banks Step Up Loan Modifications Under Obama
Program (Sept. 9, 2009) (online at www.bloomberg.com/apps/
news?pid=20601087&sid=aDFdlC9CYQEQ).
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14. Bankruptcy Cram Down
The report makes several supportive references to
substituting federal bankruptcy judges for the traditional role
performed by servicers and mortgage holders in loan
modifications. Under these plans bankruptcy judges would be
granted the unilateral right to change--that is, cram down--the
terms of mortgage loans over the express objections of mortgage
holders as part of a bankruptcy proceeding. Although Congress
rejected a bankruptcy cram down proposal a few months ago, I am
troubled that the Panel continues to ignore the unintended
consequences of such approach, especially the fee potential
homeowners will be asked to pay due to enhanced risks to
lenders of entering into mortgage contracts that could
unilaterally be unwound. The Mortgage Bankers Association
estimates that if bankruptcy cram down were to become law,
mortgage rates would increase by approximately 1.50 percent
resulting in annual additional mortgage payments of
approximately $3,970, $3,346 and $2,989 for typical homeowners
in California, Washington, D.C. and New York,
respectively.\431\ These phantom taxes will add to the
increasing burden borne by the vast majority of homeowners who
meet their mortgage obligations each month. It seems profoundly
unfair to ask these homeowners to subsidize the costs of any
bankruptcy cram down plan. The bankruptcy cram down proposal
would also adversely skew the typical rent v. buy analysis
undertaken by individuals and families.
---------------------------------------------------------------------------
\431\ Mortgage Bankers Association, Stop the Bankruptcy Cram Down
Resource Center (online at www.mortgagebankers.org/stopthecramdown)
(accessed Oct. 8, 2009).
---------------------------------------------------------------------------
15. State Anti-Deficiency Laws and Bankruptcy Cram Down May Encourage
Counterproductive Real Estate Speculation by Home Purchasers
An individual's or family's decision to rent or purchase a
residence requires a thoughtful balancing of an array of
economic factors. Renting provides flexibility with annual or
even month-to-month rental obligations while purchasing
requires a longer-term financial commitment. Rental payments
are not tax deductible but mortgage interest expense and
property taxes arising from an owned residence are deductible
subject to limitations. Renting offers scant investment
opportunity (absent long-term below market leases), yet home
ownership often yields favorable inflation adjusted returns. In
addition, beginning in the mid-1990s with the gradual
relaxation of underwriting standards and due diligence analysis
historically conducted by Fannie Mae, Freddie Mac, private
mortgage lenders and securitizers, many renters were encouraged
to opt in favor home ownership.
The seeming advantages of home ownership are nevertheless
tempered by the nature of the contractual agreements most home
purchasers undertake with their mortgage lender. While home
purchasers may consider themselves ``owners'' of their homes
they explicitly understand that if they fail to make their
monthly principal and interest payments on a timely basis they
run the distinct risk of losing the right to continue their
ownership. Such an appreciation of economic reality requires
little if any financial sophistication and few Americans would
challenge the overall fairness or necessity of such
consequences. From an historical perspective a substantial
majority of individuals and families have made the rent v. buy
decision with these factors in mind and, as such, have acted in
a rational manner by not overextending their financial
commitments.
Over the past several years, however, the rent v. buy
decision process has been arguably altered as homeowners have
become aware of the economic implications arising from
applicable ``anti-deficiency'' and ``single-action'' laws and
other rules adopted in many states that permit, if not
indirectly encourage, homeowners to avoid their contractual
mortgage obligations. In their basic form, anti-deficiency and
single-action statutes limit the debt collection efforts that
mortgage lenders may employ so as to render mortgage loans
effectively non-recourse obligations to the borrowers. Absent
these laws, mortgage lenders may sue their borrowers and
receive enforceable judgments for any deficiency arising from
the spread between the foreclosure sales price of the pledged
collateral and the outstanding balance of the mortgage loan. As
such, in jurisdictions where these laws do not apply, borrowers
understand that by signing mortgage loans they are
contractually responsible for the entire indebtedness even if
the fair market value of their home materially drops in value.
If anti-deficiency and single-action statutes are applicable,
it is not implausible to argue that the laws convert mortgage
contracts into put option agreements pursuant to which
borrowers may elect to satisfy their monthly mortgage
obligations so long as they hold equity in their homes, but
walk away from--or put--their mortgage obligations to their
mortgage holders with relative impunity if negative equity
develops.
16. Homeowners React in a Rational Manner to Economic Incentives
These laws create significant moral hazard risks that will
be exacerbated if Congress passes a cram down amendment to the
bankruptcy code. With these laws in effect, the risk-reward mix
underlying each mortgage and home equity loan will be
bifurcated with lenders assuming substantially all of the risks
regarding the underlying value of the mortgaged property and
homeowners receiving substantially all of the rewards. These
laws may have the unintended consequence of encouraging
homeowners to reject their contractual responsibilities and
service their mortgage obligations only when it's in their
economic self-interest. Since option contracts are inherently
more risky to lenders than traditional mortgage contracts,
lenders may have little choice but to incorporate such risks
into the interest rates and fees charged on mortgage loans. The
Panel should refrain from suggesting that Congress enact
legislation that encourages individuals and families to invest
in the housing market for speculative purposes while permitting
them to avoid their contractual obligations upon the occurrence
of adverse market conditions.
It is worth noting that the decision of individuals and
families to speculate in the housing market, while perhaps
unwise, is not entirely irrational. While some may contend that
the average consumer is too unskilled to comprehend seemingly
sophisticated financial products, I would argue to the
contrary. With anti-deficiency, single-action and, perhaps,
bankruptcy cram down laws in effect it does not take a Ph.D. in
corporate finance or an expert in bankruptcy law to appreciate
that borrowers will receive the bulk of any equity appreciation
while lenders will bear substantially all of the risk of loss
arising from home mortgage loans. Most consumers are rational
and react favorably to incentives that reward particular
behavior. Providing economic and legal incentives that
encourage inappropriate speculation in the housing market is
unwise and fraught with adverse unintended consequences. That a
bankruptcy cram down law could help re-inflate a housing bubble
by encouraging reckless speculation and cause lenders to raise
mortgage interest rates and fees justifies its rejection.
17. Shared Appreciation Rights and Equity Kickers Missing in
Administration's Foreclosure Mitigation Programs at the Expense
of Taxpayer Protection
It is my understanding that the foreclosure mitigation
programs announced by Treasury do not provide Treasury or the
mortgage lenders with the ability to participate in any
subsequent appreciation in the fair market value of the
properties that serve as collateral for the modified or
refinanced mortgage loans. For example, a $100,000, 6 percent
home mortgage loan may be modified by reducing the principal to
$90,000 and the interest rate to 5 percent. If the house
securing the mortgage loan subsequently appreciates by, say,
$25,000, the taxpayers and the mortgage lender who shared the
cost of the mortgage modification will not benefit from any
such increase in value. Such result seems inappropriate and
particularly unfair to the taxpayers. By modifying the mortgage
loan and avoiding foreclosure the taxpayers and the mortgage
lender have provided a distinct and valuable financial benefit
to the distressed homeowner which should be recouped to the
extent of any subsequent appreciation in the value of the house
securing the modified mortgage.
Homeowners should not receive a windfall at the expense of
the taxpayers and the mortgage lenders and should graciously
share any subsequent appreciation with those who suffered the
economic loss from restructuring their distressed mortgage
loans. Since one of Treasury's fundamental mandates is taxpayer
protection, the incorporation of a shared appreciation right or
equity kicker feature would appear appropriate.
18. Tremendous Federal Support of the Housing Market
Evaluation of a government-subsidized loan modification
plan cannot occur in a vacuum as if in the context of a case
study. Private capital has fled the housing market scene and we
have seen recent, rapid growth in the government's share of the
mortgage markets. This has yet to fully play out but is sure to
have adverse consequences if continued crowding out private-
sector participation. In addition, there are already
extraordinary measures being taken not only by Treasury, but
also by the Federal Reserve and others to provide stability in
the housing sector. While there are short-term gains to such
interventions, the longer-term hurdle of unwinding government
support creates many challenges for returning to sustainable
activity in the absence of such support.
19. Fannie, Freddie and FHA
In the market for new origination, Fannie, Freddie and the
Federal Housing Authority (FHA) are the dominant forces,
supporting 94 percent of mortgages.\432\ Loans backed by Fannie
and Freddie have grown from about 39 percent in 2006 to 72
percent in the first quarter of 2009.\433\ FHA loans, requiring
as little as 3.5 percent down, now account for 22 percent of
market share, up from just 3 percent in 2006.\434\ While Fannie
and Freddie currently have an automatic line of credit to
Treasury, there are reports that FHA may soon require a bailout
(which the agency denies), as its reserve fund dwindles below
the legal requirement.\435\
---------------------------------------------------------------------------
\432\ Source: Inside Mortgage Finance. Data on mortgage origination
by product as percentage of total Ex-HELOC, first quarter 2009.
\433\ Source: Inside Mortgage Finance.
\434\ Source: Inside Mortgage Finance.
\435\ Alan Zibel, Government Home Loan Agency Faces Cash Squeeze,
Associated Press (Sept. 18, 2009).
---------------------------------------------------------------------------
20. The Federal Reserve
The Federal Reserve has made an exceptional commitment to
purchase up to $1.25 trillion in agency mortgage-backed
securities, of which it has bought about $680 billion.
Currently, the Fed buys around 80 percent of all new issuance,
which is believed to play a significant role in keeping
interest rates low. The Wall Street Journal estimates that the
Fed MBS program has lowered spreads over Treasuries by about 70
basis points (so if the current mortgage interest rate is 5.2
percent, it estimates that without Fed purchases it would be
around 5.7 percent).\436\ Although Fed Chairman Ben Bernanke
has indicated the central bank will be slowing its purchases,
there are concerns about the effect slowing or stopping will
have on rates.
---------------------------------------------------------------------------
\436\ Mark Gongloff, Decision on Ending Housing Prop Can Wait, The
Wall Street Journal (Sept. 22, 2009) (online at online.wsj.com/article/
SB125357555750029391.html).
---------------------------------------------------------------------------
21. Summary of Government Programs
In addition to crisis-oriented programs, there are multiple
government initiatives that already facilitate mortgage credit
and provide other types assistance to homeowners. Below is a
table of major government actions and programs.
------------------------------------------------------------------------
Interventions in the Mortgage Markets
\437\ Description
------------------------------------------------------------------------
The Federal Reserve....................... Commitment to purchase a
total of $1.45 trillion of
agency MBS and housing-
agency bonds
Use of Section 13(3) of
Federal Reserve Act
authority to provide FRBNY
financing for Maiden Lane
LLC, consisting of mortgage-
related securities,
commercial mortgage loans
and associated hedges Bear
Stearns
Use of Section 13(3) to
provide FRBNY financing for
Maiden Lane II LLC,
consisting of residential
mortgage-backed securities
from AIG
Smaller-scale loan
modification program for
Maiden Lane LLC run by
Blackrock and Wells Fargo
Fannie Mae and Freddie Mac [GSEs]......... Guarantee mortgages in the
secondary market so that
investors will receive
their expected principal
and interest payments
Put into conservatorship
under the Federal Housing
Finance Agency [FHFA] in
September 2008
Total combined portfolios of
$5.46 trillion,\438\ which
includes mortgage-backed
securities and other
guarantees, as well as
gross mortgage portfolios
CBO brought Fannie and
Freddie onto the budget and
estimates they will cost
taxpayers $390 billion over
10 years, with a $248
billion cost occurring at
the time of conservatorship
\439\
Now represent 72 percent of
the loan origination market
\440\
Federal Housing Agency [FHA].............. Provides mortgage insurance
on loans made by private
lenders
Located in HUD; loans were
typically for low-income,
first-time homebuyers and
minorities
FHA now insures 5.3 million
mortgages, and represents
22 percent of the loan
origination market \441\
FDIC's IndyMac Program.................... The FDIC conducts a
comprehensive program to
provide loan modifications
and other assistance to
borrowers who have a first
mortgage owned or
securitized and serviced by
IndyMac
This program has served as
one model for the
Administration's MHA
program
The FDIC became the
conservator of failed
IndyMac bank and still
holds roughly $11 billion
in assets, many mortgage-
related
Federal Home Loan [FHL] Bank System....... 12 FHL Banks borrow funds in
debt markets and provide
loans to members
Loans are typically
collateralized by
residential mortgage loans
and government and agency
securities
Veterans Affairs [VA]..................... VA guarantees housing loans
for veterans and their
families
United States Department of Agriculture USDA/RD guarantees loans for
[USDA] / Rural Development [RD]. moderate-income individuals
or households to purchase
homes in rural areas.
Ginnie Mae................................ Corporation within HUD that
guarantees MBS with the
full faith of the
government
Guarantees 90% of FHA loans;
80% of Ginnie Mae's
portfolio is made up of FHA
loans
Additional HUD/FHA Programs, such as HOPE HOPE for Homeowners is an
for Homeowners. example of a HUD-run
program that allows
homeowners to refinance
into an FHA mortgage, with
certain restrictions on
debt-to-income ratios and
loan limits
Borrowers pay a premium of
3% of the original mortgage
amount and an annual
premium of 1.5% of the
outstanding mortgage amount
Fannie and Freddie reimburse
costs to FHA not covered by
premiums
HOPE has fallen
significantly short of the
goal of renegotiating
mortgage terms for 400,000
homeowners (100 served)
Community Reinvestment Act................ Passed in 1977 to prevent
``redlining,'' a term that
refers to the practice of
denying loans to
neighborhoods considered to
be higher economic risks,
by mandating that banks to
lend to the communities
where they take deposits
The current CRA law requires
the OCC, OTS, Federal
Reserve and FDIC as
regulators to assess each
bank and thrift's lending
records pursuant to CRA and
to apply this in evaluating
applications for charters,
mergers, acquisitions and
expansions
Mortgage Interest Tax Deduction........... Allows all homeowners to
deduct interest paid on
mortgages on income tax
returns
$8,000 First-time Homebuyer Credit........ Refundable tax credit equal
to 10 percent of the
purchase price up to a
maximum of $8,000
Only eligible for single
taxpayers with incomes up
to $75,000 and married
couples with combined
incomes up to $150,000
Passed as part of the
``American Recovery and
Reinvestment Act of 2009,''
but extension currently
being considered in
Congress
Treatment of Capital Gains................ Exemption from paying
capital gains tax on the
first $250,000 for
individual filers ($500,000
for joint filers) of
capital gains from the sale
of a primary residence
Mortgage Revenue Bonds.................... State or local agencies
issue tax-exempt bonds and
use the proceeds to offer
mortgages below the market
interest rate for first-
time homebuyers of certain
income levels
------------------------------------------------------------------------
\437\ Some background provided by GAO, ``Analysis of Options for
Revising the Housing Enterprises' Long-term Structures,'' September
2009.
\438\ Fannie Mae, Monthly Summary (July 2009) (online at
www.fanniemae.com/ir/pdf/monthly/2009/
073109.pdf;jsessionid=B4Q4GWTY555N3J2FECISFGA);, Freddie Mac, Monthly
Summary (July 2009) (online at www.freddiemac.com/investors/volsum/pdf/
0709mvs.pdf).
\439\ Congressional Budget Office, The Budget and Economic Outlook: An
Update (August 2009) (online at www.cbo.gov/ftpdocs/85xx/doc8565/08-23-
Update07.pdf ).
\440\ Source: Inside Mortgage Finance
\441\ Source: Inside Mortgage Finance.
22. Role of Fannie Mae and Freddie Mac in Administration's Housing Plan
The Administration's MHA plan aims to lower mortgage rates
by ``strengthening confidence in Fannie Mae and Freddie Mac.''
\442\ ``Strengthening confidence'' seems to mean increasing the
size of the taxpayer's commitment in Fannie and Freddie
significantly by $200 billion to $400 billion (not to mention
their portfolio limits), as well as making the GSEs a
centerpiece of housing policy. As mentioned, Fannie and Freddie
have already received $95.6 billion in capital injections from
Treasury to fill ``holes'' in their balance sheets where
liabilities exceed assets.\443\ The companies are required to
pay annual interest of 10 percent on the injections, although
this amounts to a sum that is larger than the historical
profits made by the GSEs (during years where they made
profits).
---------------------------------------------------------------------------
\442\ U.S. Department of Treasury, Making Home Affordable: Updated
Detailed Program Description (March 4, 2009) (online at www.treas.gov/
press/releases/reports/housing_fact_sheet.pdf).
\443\ Through September 30, 2009.
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Just as a history of bad management decisions did not
preclude GM and Chrysler from receiving TARP funds, the same is
true of Fannie Mae and Freddie Mac. It should be noted that
their financial insolvency materialized after years of
mismanagement--and after years of enjoying the gold seal of the
government's implicit guarantee. As I wrote in the March
addendum to the Panel's report:
Fannie and Freddie exploited their congressionally-
granted charters to borrow money at discounted rates.
They dominated the entire secondary mortgage market,
wildly inflated their balance sheets and personally
enriched their executives. Because market participants
long understood that this government created duopoly
was implicitly (and, now, explicitly) backed by the
federal government, investors and underwriters chose to
believe that if Fannie or Freddie touched something, it
was safe, sound, secure, and most importantly
``sanctioned'' by the government. The results of those
misperceptions have had a devastating impact on our
entire economy. Given Fannie and Freddie's market
dominance, it should come as little surprise that once
they dipped into the subprime and Alt-A markets,
lenders quickly followed suit. In 1995, HUD authorized
Fannie and Freddie to purchase subprime securities that
included loans to low-income borrowers and allowed the
GSEs to receive credit for those loans toward their
mandatory affordable housing goals. Fannie and Freddie
readily complied, and as a result, subprime and near-
prime loans jumped from 9 percent of securitized
mortgages in 2001 to 40 percent in 2006. In 2004 alone,
Fannie and Freddie purchased $175 billion in subprime
mortgage securities, which accounted for 44 percent of
the market that year. Then, from 2005 through 2007, the
two GSEs purchased approximately $1 trillion in
subprime and Alt-A loans, and Fannie's acquisitions of
mortgages with less than 10-percent down payments
almost tripled. As a result, the market share of
conventional mortgages dropped from 78.8 percent in
2003 to 50.1 percent by 2007 with a corresponding
increase in subprime and Alt-A loans from 10.1 percent
to 32.7 percent over the same period. These non-
traditional loan products, on which Fannie and Freddie
so heavily gambled as their congressional supporters
encouraged them to ``roll the dice a little bit more,''
now constitute many of the same non-performing loans
which have contributed to our current foreclosure
troubles.\444\
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\444\ See Congressional Oversight Panel, March Oversight Report:
Foreclosure Crisis: Working Toward a Solution, ``Additional View by
Representative Jeb Hensarling,'' (online at cop.senate.gov/documents/
cop-030609-report-view-hensarling.pdf).
---------------------------------------------------------------------------
In addition, GAO also noted in a September 2009 report:
While housing finance may have derived some benefits
from the enterprises' activities over the years, GAO,
federal regulators, researchers, and others long have
argued that the enterprises had financial incentives to
engage in risky business practices to strengthen their
profitability partly because of the financial benefits
derived from the implied federal guarantee on their
financial obligations.\445\
\445\ Government Accountability Office, Analysis of Options for
Revising the Housing Enterprises' Long-term Structures, September 10,
2009 (online at www.gao.gov/new.items/d09782.pdf).
In September 2008, Treasury put Fannie Mae and Freddie Mac
into conservatorship under the Federal Housing Finance Agency
[FHFA], effectively making taxpayers liable for their
portfolios which now total about $5.46 trillion (including
mortgage-backed securities and other guarantees, as well as
gross mortgage portfolios.\446\ According to CBO, the current
estimate of the cost of bringing Fannie's and Freddie's books
of business onto the federal budget is $390 billion.\447\
---------------------------------------------------------------------------
\446\ Fannie Mae, Monthly Summary, July 2009 (online at
www.fanniemae.com/ir/pdf/monthly/2009/
073109.pdf;jsessionid=GZALNHE45QP0LJ2FECISFGI); Freddie Mac, Monthly
Summary, July 2009 (online at www.freddiemac.com/investors/volsum/pdf/
0709mvs.pdf).
\447\ Congressional Budget Office, The Budget and Economic Outlook:
An Update, August 2009 (online at www.cbo.gov/doc.cfm?index=10521). The
Administration still considers Fannie Mae and Freddie Mac to be off-
budget entities.
---------------------------------------------------------------------------
In addition, the GSEs' support of Treasury's MHA loan
modification program is expected to amplify the risk of an
already-leveraged taxpayer investment. The following excerpt
from Freddie's second quarter 2009 filing to the SEC mentions
the dire financial situation, the probable need for additional
Treasury capital, and the possible negative effect on
financials caused by the MHA program:
We expect a variety of factors will place downward
pressure on our financial results in future periods,
and could cause us to incur GAAP net losses. Key
factors include the potential for continued
deterioration in the housing market, which could
increase credit-related expenses and security
impairments, adverse changes in interest rates and
spreads, which could result in mark-to-market losses,
and our efforts under the MHA Program and other
government initiatives, some of which are expected to
have an adverse impact on our financial results. We
believe that the recent modest home price improvements
were largely seasonal, and expect home price declines
in future periods. Consequently, our provisions for
credit losses will likely remain high during the
remainder of 2009 and increase above the level
recognized in the second quarter. To the extent we
incur GAAP net losses in future periods, we will likely
need to take additional draws under the Purchase
Agreement. In addition, due to the substantial dividend
obligation on the senior preferred stock, we expect to
continue to record net losses attributable to common
stockholders in future periods.'' \448\
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\448\ Federal Home Loan Mortgage Corporation, Form 10-Q to the
Securities and Exchange Commission, quarterly period ending June 30,
2009 (online at www.freddiemac.com/investors/er/pdf/10q_2q09.pdf).
GAO has also discussed specifically the impact to the GSEs
---------------------------------------------------------------------------
of participation in HAMP and HARP:
While these federal initiatives were designed to
benefit homebuyers, in recent financial filings, both
Freddie Mac and Fannie Mae have stated that the
initiative to offer refinancing and loan modifications
to at-risk borrowers could have substantial and adverse
financial consequences for them. For example, Freddie
Mac stated that the costs associated with large numbers
of its servicers and borrowers participating in loan-
modification programs may be substantial and could
conflict with the objective of minimizing the costs
associated with the conservatorships. Freddie Mac
further stated that loss-mitigation programs, such as
loan modifications, can increase expenses due to the
costs associated with contacting eligible borrowers and
processing loan modifications. Additionally, Freddie
Mac stated that loan modifications involve significant
concessions to borrowers who are behind in their
mortgage payment, and that modified loans may return to
delinquent status due to the severity of economic
conditions affecting such borrowers. Fannie Mae also
has stated that, while the impact of recent initiatives
to assist homeowners is difficult to predict, the
participation of large numbers of its servicers and
borrowers could increase the enterprise's costs
substantially. According to Fannie Mae, the programs
could have a materially adverse effect on its business,
financial condition, and net worth.\449\
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\449\ Government Accountability Office, Analysis of Options for
Revising the Housing Enterprises' Long-term Structures, September 2009
(online at www.gao.gov/new.items/d09782.pdf).
Since the GSEs are now under the conservatorship of the
Federal Housing Finance Agency [FHFA], their concerns are now
officially the taxpayers' concerns. Any losses the GSEs
experience through MHA programs should be a carefully
considered part of a cost-benefit analysis.
In addition, as noted in the March report additional views,
for well over twenty years, federal policy has promoted lending
and borrowing to expand homeownership, through incentives such
as the home mortgage interest tax exclusion, the FHA,
discretionary HUD spending programs, and the Community
Reinvestment Act [CRA]. CRA is an example of a program with the
best of intentions having adverse, unintended consequences on
exactly the population it hopes to serve. It was initially
authorized to prevent ``redlining,'' a term that refers to the
practice of denying loans to neighborhoods considered to be
higher economic risks, by mandating banks lend to the
communities where they take deposits. Since its passage into
law in 1977, however, CRA has advanced at least two undesirable
outcomes: (1) some financial institutions completely avoided
doing business in neighborhoods and restricted even low-risk
forms of credit, and (2) many institutions went the other way
and relaxed underwriting standards to meet CRA guidelines, thus
opening the door to certain risky products that have
contributed to the problem of foreclosures. These lax
underwriting standards spread to Fannie and Freddie and
ultimately to the private sector as the role of the GSEs
morphed from that of a liquidity provider to a promoter of home
ownership.
23. Questions for Fannie Mae and Freddie Mac
Representatives of Fannie Mae and Freddie Mac testified
before the Panel at a hearing on foreclosure mitigation held in
Philadelphia on September 24, 2009. I asked the following
questions for the record to Fannie Mae and Freddie Mac and
await their response.
Fannie Mae
1. Fannie Mae has so far received approximately $44.9
billion in equity injections from Treasury through the
Preferred Share Purchase Agreements authorized by the Housing
and Economic Recovery Act of 2008 [HERA].
Will Fannie Mae request additional funds from Treasury
through this program?
Will Treasury's commitment to purchase preferred shares in
Fannie Mae increase beyond the $200 billion limit announced in
March 2009?
2. How much of the funding that Fannie Mae has received
through HERA-authorized injections has been spent on the
Administration's ``Making Home Affordable'' plan?
How much has Fannie Mae committed from HERA-authorized
funds for ``Making Home Affordable'' efforts?
Specifically, how much of this funding has been and will be
used by Fannie Mae for the Administration's ``Home Affordable
Modification Program?''
How much of this funding has been and will be used by
Fannie Mae for the Administration's ``Home Affordable Refinance
Program?''
3. What is the average cost of modifying a home loan under
``Home Affordable Modification Program,'' according to Fannie
Mae's most recent data?
Out of this amount, how much has been financed through
Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
4. What is the average cost of refinancing a home loan
under ``Home Affordable Refinance Program,'' according to
Fannie Mae's most recent data?
Out of this amount, how much has been financed through
Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
5. In general, how do you expect Fannie Mae's participation
in the ``Making Home Affordable'' plan to affect financials for
the next quarter?
What about for the next year?
6. The Federal Reserve has already purchased about $860
billion of its $1.25 trillion commitment to buy Fannie Mae and
Freddie Mac-guaranteed mortgage-backed securities.\450\ To put
it in context, right now, the Federal Reserve buys the lion's
share of all new issuance, which is somewhere around 80
percent.
---------------------------------------------------------------------------
\450\ Federal Reserve, Press Release (Sept. 23, 2009) (online
atwww.federalreserve.gov/newsevents/press/monetary/20090923a.htm).
---------------------------------------------------------------------------
If the Federal Reserve stops purchasing Fannie Mae's
mortgage-backed securities then who will purchase the
securities and at what price?
Has the Federal Reserve or Fannie Mae attempted to sell
these securities to private sector participants and, if so,
what has been the response?
Have any significant purchasers of U.S. Treasuries asked
the Federal Reserve to cap its purchases of these securities?
Freddie Mac
1. Freddie Mac has so far received approximately $50.7
billion in equity injections from Treasury through the
Preferred Share Purchase Agreements authorized by the Housing
and Economic Recovery Act of 2008 [HERA].
Will Freddie Mac request additional funds from Treasury
through this program?
Will Treasury's commitment to purchase preferred shares in
Freddie Mac increase beyond the $200 billion limit announced in
March 2009?
2. How much of the funding that Freddie Mac has received
through HERA-authorized injections has been spent on the
Administration's ``Making Home Affordable'' plan?
How much has Freddie Mac committed from HERA-authorized
funds for ``Making Home Affordable'' efforts?
Specifically, how much of this funding has been and will be
used by Freddie Mac for the Administration's ``Home Affordable
Modification Program?''
How much of this funding has been and will be used by
Freddie Mac for the Administration's ``Home Affordable
Refinance Program?''
3. What is the average cost of modifying a home loan under
``Home Affordable Modification Program,'' according to Freddie
Mac's most recent data?
Out of this amount, how much has been financed through
Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
4. What is the average cost of refinancing a home loan
under ``Home Affordable Refinance Program,'' according to
Freddie Mac's most recent data?
Out of this amount, how much has been financed through
Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
5. In general, how do you expect Freddie Mac's
participation in the ``Making Home Affordable'' plan to affect
financials for the next quarter?
What about for the next year?
6. The Federal Reserve has already purchased about 860
billion of its 1.25 trillion-dollar commitment to buy Fannie
Mae and Freddie Mac-guaranteed mortgage-backed securities.\451\
To put it in context, right now, the Federal Reserve buys the
lion's share of all new issuance, which is somewhere around 80
percent.
---------------------------------------------------------------------------
\451\ Board of Governors of the Federal Reserve System, Press
Release (Sept. 23, 2009) (online at www.federalreserve.gov/newsevents/
press/monetary/20090923a.htm).
---------------------------------------------------------------------------
If the Federal Reserve stops purchasing Freddie Mac's
mortgage-backed securities then, who will purchase the
securities and at what price?
Has the Federal Reserve or Freddie Mac attempted to sell
these securities to private sector participants and, if so,
what has been the response?
Have any significant purchasers of U.S. Treasuries asked
the Federal Reserve to cap its purchases of these securities?
24. Net Present Value Analysis and the Risk of Redefault
The redefault rate is a key input cited by the Panel and
used by servicers to calculate the all-in net present value of
electing to pursue a loan modification versus a foreclosure. It
goes without saying that the chance of waves of redefaults
occurring enhances significantly the risk of the
Administration's $75 billion MHA program. The self-cure rate,
which refers to the ability for borrowers to catch up on loan
payments without assistance, is also an important factor in NPV
calculations. Understandably, under the current economic
conditions where unemployment is supposed to reach at least 10
percent, self-cure rates will be likely be lower than under
conventional circumstances. The Panel's report disputes the
findings of a paper released by the Federal Reserve Bank of
Boston, which cites self-cure rates of 25 to 30 percent, and
supports a recent study showing self-cure rates of closer to
between 4.3 percent and 6.6 percent. The reality is that
homeowners' ability to heal themselves is largely a function of
economic growth and the opportunities it affords. Another
reality not mentioned is the fact that homeowners may choose
not to self-cure because of the attractiveness of a government-
sponsored loan modification plan.
The Panel also calls into question the average redefault
rate of up to 50 percent cited by the Federal Reserve Bank of
Boston, which, is also approximately the level of redefaults
computed by the OCC and OTS one year after a loan modification
has been performed.\452\ It should be stressed that we simply
do not have enough evidence to show that the longer-term risk
of redefault on a loan modified by MHA is still not very high.
This is true by virtue of Assistant Secretary Allison's
statement that only 1,800 permanent modifications--that is,
those that have survived the minimum three-month threshold to
become permanent--have been put in place. Only time will tell
if this very costly investment will serve the number of
homeowners the Administration has assured without requiring
additional taxpayer funds. Since the data are ambiguous at
best, it should not be affirmed by the Panel that redefault and
self-cure rates are conclusively within one narrow range or
another in order to make the case that government-sponsored
loan modification is a more attractive option.
---------------------------------------------------------------------------
\452\ Office of the Comptroller of the Currency and Office of
Thrift Supervision, OCC and OTS Mortgage Metrics Report, First Quarter
2009 (online at www.occ.treas.gov/ftp/release/2009-77a.pdf) (June
2009). MHA has not been in operation for a year and it is not possible
to obtain yearly re-default data.
---------------------------------------------------------------------------
25. The Issue of Fairness
The Panel's report states, ``Devoting attention and
resources to moral sorting is at odds with the goal of
maximizing the macroeconomic impact of foreclosure prevention.
Trying to sort out the deserving from the undeserving on any
sort of moral criteria means that foreclosure prevention
efforts will be delayed and have a narrower scope. Moreover, in
other cases where the federal government extended assistance
under TARP--such as to banks and auto manufacturers--no attempt
was made to sort between entities deserving and not deserving
assistance. No inquiry was made as to which investors in these
entities knowingly and willingly assumed the risks of the
entities'`Insolvency.' ''
In fact, this distinction could be crucial to long-term
stabilization. Programs that create moral hazard by giving no
consideration to the rightful, necessary link between risk and
responsibility could potentially create additional housing
``bubbles'' and result in greater threats to stability.
It goes without saying that moral hazard has already played
out for some financial institutions that received billions in
TARP funds, even if capital was initially deployed with an eye
to prevent a global economic meltdown. The federal safety net
was spread wide as many who exhibited irresponsible behavior
were deemed ``too big to fail'' for systemic risk reasons,
qualifying them for protected status. This is a legacy the
banking system and the government will have to deal with for a
long time, even if taxpayers are receiving repayments in full
with interest from Capital Purchase Plan recipients. The
Panel's report implies that two moral hazards make a right, and
encourages an even wider number of homeowners to be bailed out
from what could be their own bad decisions simply because it is
the fair treatment. I question if the approximately 95 percent
of taxpayers who satisfy their rental and mortgage obligation
each month would consider such bailouts fair particularly if
they result in higher tax rates and mortgage interests costs.
The irony is that although the report concludes a moral
judgment should be immaterial when doling out taxpayer money, a
comparison of homeowners to Wall Street companies is in itself
a moral comparison used to justify subsidization of mortgage
payments.
By advocating a policy of additional bailouts the Panel has
chosen to burden a substantial majority of the taxpayers with
yet another subsidy-based program. It is difficult for me to
appreciate the inherent fairness or appropriateness of such an
approach.
26. Mortgage Fraud and Abuse
I am concerned that the Panel mentions fraud in its report
only to assert how broad publication of mortgage schemes may
deter homeowners from participating in MHA. SIGTARP, which has
been actively monitoring fraud, waste and abuse, is currently
in the process of conducting an audit on the ``Making Home
Affordable'' program which will focus on reviewing its current
status and the challenges it faces. This oversight body is sure
to take cases of fraud very seriously. Widespread scams are a
serious issue--the FBI estimates annual losses from mortgage
fraud to be between $4 and $6 billion--and one whose
significance should not be undermined in exchange for more
aggressive outreach to borrowers. Homeowners must be presented
with all of the facts on the serious risk of fraud as well as
given the encouragement to perform due diligence on all of the
options at their disposal if they cannot meet mortgage
payments.
27. Conclusions and Recommendations for an Oversight Plan and the
Adoption of a COP Budget
A fair reading of the Panel's majority report and my
dissent leads to one conclusion--HAMP and the Administration's
other foreclosure mitigation efforts to date have been a
failure. The Administration's opaque foreclosure mitigation
effort has assisted only a small number of homeowners while
drawing billions of involuntary taxpayer dollars into a black
hole.
While the Congressional Budget Office estimates that
taxpayers will lose 100 percent of the $50 billion in TARP
funds committed to the Administration's foreclosure relief
programs, instead of focusing its attention on taxpayer
protection and oversight, the Panel's majority report implies
that the Administration should commit additional taxpayer funds
in hopes of helping distressed homeowners--both deserving and
undeserving--with a taxpayer subsidized rescue.
While there may be some positive signals in our economy,
recovery remains in a precarious position. Unemployment will
hit 10 percent in 2010, if not this year. This is unfortunate
because the best foreclosure mitigation program is a job, and
the best assurance of job security is economic growth and the
adoption of public policy that encourages and rewards capital
formation and entrepreneurial success. Without a robust
macroeconomic recovery the housing market will continue to
languish and any policy that forestalls such recovery will by
necessity lead to more foreclosures.
Regardless of whether one believes foreclosure mitigation
can truly work, taxpayers who are struggling to pay their own
mortgage should not be forced to bail out their neighbors
through such an inefficient and transparency-deficient program.
Both the Administration and the Panel's majority appear to
prioritize good intentions and wishful thinking over taxpayer
protection.
To date, despite the commitment of some $27 billion,\453\
only about 1,800 underwater homeowners have received a
permanent modification of their mortgage. If the
Administration's goal of subsidizing up to 9 million home
mortgage refinancings and modifications is met, the cost to the
taxpayers will almost surely exceed by a material amount the
$75 billion already allocated to the Making Home Affordable
program, none of it recoverable.
---------------------------------------------------------------------------
\453\ U.S. Department of the Treasury, Troubled Assets Relief
Program Transactions Report (Oct. 6, 2009) (online at
www.financialstability.gov/docs/transaction-reports/transactions-
report_10062009.pdf). The commitment cited is as defined by the current
``Total Cap'' for the Home Affordable Modification Program,
$27,247,320,000.
---------------------------------------------------------------------------
Taxpayers deserve a better return on their investment than
what they are set to receive from AIG, Chrysler, GM and the
Administration's flawed foreclosure mitigation efforts.
Professor Alan M. White, an expert retained by the Panel,
notes in a paper attached to the Panel's report: ``The bottom
line to the investor is that any time a homeowner can afford
the reduced payment, with a 60 percent or better chance of
succeeding, the investor's net gain from the modification could
average $80,000 per loan or more.''
Taxpayers--through TARP or otherwise--should not be
required to subsidize mortgage holders or servicers when
foreclosure mitigation efforts appear in many cases to be in
their own economic best interests. The Administration, by
enticing mortgage holders and servicers with the $75 billion
HAMP and HARP programs (with a reasonable expectation that
additional funds may be forthcoming), has arguably caused them
to abandon their market oriented response to the atypical rate
of mortgage defaults in favor of seeking assistance from the
government.
Any foreclosure mitigation effort must appear fair and
reasonable to the American taxpayers. It is important to
remember that the number of individuals in mortgage distress
reaches beyond individuals who have experienced an adverse
``life event'' or been the victims of fraud. This complicates
moral hazard issues associated with large-scale modification
programs.\454\ Distinct from a moral hazard question, there is
an inherent question of fairness as those who are not facing
mortgage trouble are asked to subsidize those who are facing
trouble.
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\454\ These ``life event'' affected borrowers are noteworthy
because relatively few object to efforts to find achievable solutions
for trying to help keep these distressed borrowers in their current
residences whenever possible. Similarly, another sympathetic group of
distressed borrowers involves people who were legitimate victims of
blatant manipulation or outright fraud by unscrupulous lenders who
pressured them into homes they could not afford. To many, those
legitimate victims are certainly equally deserving of assistance. Of
course, such borrowers do have the added burden proving that they were
indeed victims of actual wrongdoing. However, they also have a
potential remedy of pursuing legal action against fraudulent lenders,
an option which is not available to others.
---------------------------------------------------------------------------
In light of current statistics regarding the overall
foreclosure rate, an essential public policy question that must
be asked regarding the effectiveness of any taxpayer-subsidized
foreclosure mitigation program is: ``Is it fair to expect
approximately 19 out of every 20 people to pay more in taxes to
help the 20th person maintain their current residence?''
Although that question is subject to individual interpretation,
there is an ever-increasing body of popular sentiment that such
a trade-off is indeed not fair.\455\
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\455\ After all, why should a person be forced to pay for their
neighbor's mortgages when he or she is struggling to pay his or her own
mortgages and other bills? To many people, this question is the most
important aspect of the public policy debate. Given the massive direct
taxpayer costs that have already been incurred through TARP and the
potential costs that could be incurred through the assorted credit
facilities and monetary policy actions of the Federal Reserve, I
believe that it is difficult to justify asking the taxpayers to
shoulder an even greater financial burden from yet another government
foreclosure mitigation program that might not work.
---------------------------------------------------------------------------
Since there is no uniform solution for the problem of
foreclosures, a sensible approach should encourage multiple
mitigation programs that do not amplify taxpayer risk or
require government mandates. Subsidized loan refinancing and
modification programs may provide relief for a select group of
homeowners, but they work against the majority who shoulder the
tax burden and make mortgage payments on time.
28. Oversight Plan
As I have stressed before, I believe the Panel continues to
make the mistake of putting policy objectives above transparent
and critical oversight. The October report on foreclosure
issues is a strong example of this. I am again dismayed that
the Panel's current release is driven by an approach that
appears to favor an expansion of government-subsidized
foreclosure mitigation plans over consideration of taxpayer
protections and prudent supervision.
The Panel has yet to present and adopt an oversight plan.
Until one is made official, reports and actions taken will not
adhere to standard guidelines. I recommend the following be
considered by the Panel.
The EESA statute requires COP to accomplish the following,
through regular reports:
Oversee Treasury's TARP-related actions and
use of authority
Assess the impact to stabilization of
financial markets and institutions of TARP spending
Evaluate the extent to which TARP
information released adds to transparency
Ensure effective foreclosure mitigation
efforts in light of minimizing long-term taxpayer costs
and maximizing taxpayer benefits.
In adherence to this mandate, the Panel should consider
adopting the following standards of oversight:
Analyzing programs proposed by Treasury to
determine if they are properly designed for their
intended purpose
Determining if the investment of TARP funds
in each program is permitted under EESA
Determining if the programs are being
properly implemented in a reasonable, transparent,
accountable and objective manner
Determining if taxpayers are being protected
Determining the success or failure of the
programs based upon reasonable, transparent,
accountable and objective metrics
Analyzing Treasury's exit strategy with
respect to each investment of TARP funds
Analyzing the corporate governance policies
and procedures implemented by Treasury with respect to
each investment of TARP funds
Holding regular public hearings with the
Secretary and other senior Treasury officials
Holding regular public hearings with TARP
recipients with special care taken to invite major
recipients to testify
Keeping a record of all invitations to
testify and responses
Determining how TARP recipients invest and
deploy their TARP funds
Reporting the results to the taxpayers in a
clear and concise manner
Avoiding public policy recommendations in
the reports released by the Panel
Conducting the Panel's oversight activities
in the most reasonable, transparent, accountable and
objective manner with measurable standards that hold
Treasury accountable, without limitation, for the
statutory mandate of EESA that taxpayer protection is
an upmost priority
Conducting the internal operations of the
Panel in the most reasonable, transparent, accountable
and objective manner.
29. Adoption of a Budget and Disclosure of Other Matters by COP
The Panel has a taxpayer protection based statutory
obligation to oversee the funds committed and spent by Treasury
on all TARP programs, as well as to ensure that there is
complete transparency and accountability in Treasury's
reporting practices. Taxpayers should demand no less than full
disclosure of how the Panel's own operations are financed. It
has been one year since the Panel's inception and a budget has
yet to be produced. The Panel should release a budget on
continuing operations by November 1, and should make available
detailed information on past uses of all funds received for
Panel activities by such date. These reports should disclose in
sufficient detail all operating expenses and other amounts
incurred or paid by the Panel for, without limitation, rent,
IT, travel, services, utilities, equipment as well as the
salary and other compensation paid to all Panel employees,
interns, consultants, advisors, experts and independent
contractors. In order to ensure the absence of any conflict of
interest, the Panel should disclose the names and affiliations
of all such consultants, advisors, experts and independent
contractors and the terms of the written or oral agreements
through which they render advice or counsel to the Panel (even
if they are not compensated for their services). The Panel
should update these matters each month and disclose the results
on its website.
In quarterly reports to Congress, not only does SIGTARP
publish its statutory mandate and how well the organization
follows EESA requirements, it also provides a detailed budget
and information on hired personnel. SIGTARP must formally
request funds from Treasury for any amounts beyond the initial
EESA grant. In the July report to Congress, its budget includes
a specific breakdown of financing requested for staff, rent,
services, transportation, advisory, etc.\456\
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\456\ SIGTARP, Quarterly Report to Congress, at 26 (July 21, 2009)
(online at www.sigtarp.gov/reports/congress/2009/
July2009_Quarterly_Report_to_Congress.pdf).
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SIGTARP also discloses on its website the contracts that it
enters into with outside vendors and other Governmental
agencies to obtain goods and services,\457\ a description of
its senior staff,\458\ and its organizational chart.\459\
Although the Panel's website contains a blog,\460\ it does not
disclose any of the other items.
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\457\ See Special Inspector General for the Troubled Asset Relief
Program (SIGTARP) website (online at sigtarp.gov/about_procure.shtml).
\458\ See Special Inspector General for the Troubled Asset Relief
Program (SIGTARP) website (online at sigtarp.gov/about_staff.shtml).
\459\ See Special Inspector General for the Troubled Asset Relief
Program (SIGTARP) website (online at sigtarp.gov/about_org.shtml).
\460\ See the Congressional Oversight Panel's website (online at
cop.senate.gov/blog/).
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The EESA statute calls on the Panel's Chair to present a
statement of expenses to the Treasury Secretary. Treasury then
transfers funding for reimbursement of the Panel into separate,
equal accounts in both the House of Representatives and the
Senate.\461\ Since the Panel runs on the fuel of taxpayer
dollars, it should be held to task for creating budgets and
statements of operations that are fully transparent to the
public, especially as Treasury makes the decision of whether or
not to extend TARP--and thus the Panel's oversight and costs--
beyond December 31, 2009.
---------------------------------------------------------------------------
\461\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L.
No. 110-343, Sec. 125:
FUNDING FOR EXPENSES.--
(1) AUTHORIZATION OF APPROPRIATIONS.--There is authorized to be
appropriated to the Oversight Panel such sums as may be necessary for
any fiscal year, half of which shall be derived from the applicable
account of the House of Representatives, and half of which shall be
derived from the contingent fund of the Senate.
(2) REIMBURSEMENT OF AMOUNTS.--An amount equal to the expenses of
the Oversight Panel shall be promptly transferred by the Secretary,
from time to time upon the presentment of a statement of such expenses
by the Chairperson of the Oversight Panel, from funds made available to
the Secretary under this Act to the applicable fund of the House of
Representatives and the contingent fund of the Senate, as appropriate,
as reimbursement for amounts.
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C. Paul Atkins
The October Report of the Panel regarding mortgage
foreclosure mitigation marks yet another commendable effort by
the staff and the Panel to treat a complex area of the economy
in a short amount of time. The October Report analyzes great
deal of information and helpfully cites a wealth of resources
and studies. I salute the staff and my colleagues for the hard
work represented by the report. Unfortunately, I cannot join in
supporting the October Report because of its extraneous
discussions and opinions unrelated to TARP.
Congress has charged this Panel with overseeing a $700
billion program that was enacted in a hurry with much
discretion placed in the Executive. Congress understandably was
sensitive to the opportunity of departure from legislative
intent and potential for improper activity that this situation
presents. Thus, Congress formed not only this Panel but also an
office of a special inspector general, independent of Treasury,
to oversee the program, provide transparency, and ensure
accountability to Congress and to the taxpayers. That unusual
level of oversight reflects the concern of Members of Congress
regarding the unusual nature of the program itself and its
political sensitivity.
The October Report contains some commentary and
recommendations that depart from the oversight role of this
Panel and, I believe, detract from the overall effectiveness of
the report's message. Congress empowered this Panel to watch
over the Treasury Department's use of the authority granted
under the Emergency Economic Stabilization Act. If the
Treasury's efforts at implementing TARP in general or in
particular areas are inchoate, unavailing, wasteful, illegal,
or corrupt, it is our job to report on those problems and seek
their correction.
On the other hand, it is not our role gratuitously to offer
advice or comment on additional legislation, matters of
behavioral economics, or academic studies. Consequently, it is
entirely appropriate for our report to analyze the HAMP and
HARP programs and judge them against the Administration's
rhetoric regarding them. I applaud the staff's seeking input
regarding costs and benefits. I view this research as a good
basis for further public debate. From our observations and
research, we are well positioned to offer advice as to needed
adjustments to increase efficiency and responsiveness from what
we have learned in the field or from public comment. We do not
need to deal extensively with speculation as to the effects of
negative equity, the desirability of a program of principal
reduction, or legislative empowerment of bankruptcy judges to
``cramdown'' changes to mortgages. We might point out areas for
additional academic research that we or policymakers might find
helpful in the future, but we should not use the report as a
means to challenge legitimate studies, such as a Federal
Reserve Bank of Boston Working Paper discussed in the report,
where we do not have sufficient time or expertise to do so.
Moreover, sweeping conclusions regarding the proper
allocation of taxpayer resources are not within our purview. We
are not policymakers and do not have the benefit of budget
studies, knowledge of budgeting history, or advantage of debate
regarding budgetary alternatives and priorities to make value
judgments as between programs. Since government resources
ultimately come from the taxpayers, government must be
sensitive to prudent and moral use of taxpayer funds. In our
role, we see only the matter and program before us. Thus, the
report's venturing into speculation regarding the purpose of
foreclosure mitigation and making value judgments regarding
spending taxpayer money, including the statement that
``[d]evoting attention and resources to moral sorting [as
between ``deserving'' mortgagors and deadbeats or speculators]
is at odds with the goal of maximizing the macroeconomic impact
of foreclosure prevention,'' is inappropriate. Moral sorting is
inherent in a legislator's consideration of support or
opposition to legislation. To ignore it invites citizen
cynicism and taxpayer outrage, which inevitably will be
registered at the ballot box. Despite the report's casual
treatment of this subject, I have confidence that Members of
Congress will be extremely wary of adopting this report's view
thereof.
My concern with the ``market stability'' argument to
``prevent'' foreclosures is that the policies are aimed at
essentially seeking to support prices at an artificially high
level. We have had a very large economic bubble in the housing
sector, and a bubble's consequences are the misallocation of
resources. The market--meaning people--needs to find the true
level of prices according to supply and demand. This is easily
seen in the residential housing market, where deals are closed
or fall apart, often on the basis of relatively small amounts
of money. Government intervention only prolongs the uncertainty
and the eventual day of reckoning. But, there is also the
forgotten person in the attempt to support prices. When the
government uses taxpayer resources, with various
justifications, to try to influence supply, the selling
homeowner gets the artificially high price. However, what
happens to the buyer who unwittingly pays a higher price than
he otherwise might have paid in a more transparent marketplace?
When the prices ultimately find equilibrium, and they settle
lower despite the government's efforts, has the government
helped to perpetrate a deception on the unwitting buyer who
paid the artificially high price?
The report makes the assertion that there was no moral
sorting as between good and bad financial institutions in the
Treasury's use of TARP funds under the Capital Purchase Program
and other programs and, thus, that there should be no need to
judge between homeowners in providing direct assistance. The
difference, however, is that the taxpayer has lent money to the
various financial institutions with an expectation that the
money will be returned. The propriety of that can be debated,
but Congress at least had the expectation that TARP funds would
be repaid with dividends, interest, and proceeds from sale of
warrants and stock. As Congressman Hensarling points out in his
accompanying statement, the Congressional Budget Office views
funds spent for foreclosure mitigation as a subsidy, with no
expectation of being repaid. For these efforts that entail
millions of individual cases, it is best left to private
parties and judges to sort out the issues to ensure some sort
of accountability, not another grand entitlement program funded
by the taxpayer that discounts legitimate concerns of propriety
of subsidies and moral hazard.
In this vein, Judge Annette M. Rizzo of the Pennsylvania
Court of Common Pleas, featured in our hearing on September
24th in Philadelphia, seems to have forged a positive
atmosphere of mediation and dialogue that enhances
communication between mortgagors and mortgagees. In many cases,
the process has helped to forestall foreclosures, for the
benefit of both parties. Sometimes, as Judge Rizzo forthrightly
stated, foreclosure is unavoidable and contracts must be
enforced. In this sense, the report also disappoints in its
seeming approbation of ``innovative'' measures taken by various
states that in some cases are arbitrary interference with
contracts in the name of foreclosure ``prevention'' rather than
``mitigation.'' The government should not be in the business of
preventing parties to a contract from enforcing that contract,
barring cases of fraud or other illegitimate factors.
With respect to mortgage foreclosure mitigation, it is
relatively easy to focus on only one side of the relationship
as between mortgagor and mortgagee, because the former is
currently the party in the weaker position and seeks
assistance. However, ours is a legal system of transparency,
due process, respect of private property rights, and
enforceability of contract. This rule of law separates the
United States from banana republics and has created a favorable
investment climate that has attracted capital from around the
world to be invested here. That has created jobs and built our
economy.
The best policy to minimize foreclosures is for the U.S.
government to create an environment conducive to saving and
investment, including tax and regulatory policy, that
encourages entrepreneurs to start businesses (the sector of
business activity that creates the most jobs) and existing
businesses to expand. The best mitigation of mortgage
foreclosures is a job. Subsidies are inherently unfair,
inefficient, expensive, and complicated. With soaring
unemployment in the United States, focusing on creating a good
environment for saving and investment becomes the most
important action that the Administration can take.
SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE
On behalf of the Panel, Chair Elizabeth Warren sent a
letter on September 15, 2009,\462\ to Secretary of the Treasury
Timothy Geithner requesting Treasury's inputs and formulae for
the stress tests. The letter further requests answers to
questions regarding how actual quarterly bank loss rates have
differed from Treasury stress test estimates. The Panel has not
received a response from Secretary Geithner.
---------------------------------------------------------------------------
\462\ See Appendix I of this report, infra.
SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. TARP Repayment
Since the Panel's prior report, additional banks have
repaid their TARP investment under the Capital Purchase Program
(CPP). A total of 39 banks have repaid their preferred stock
TARP investment provided under the CPP to date. Of these banks,
24 have repurchased the warrants as well. Additionally, during
the month of August, CPP participating banks paid $1.83 billion
in dividends and $8.4 million in interest on Treasury
investments.
B. CPP Monthly Lending Report
Treasury releases a monthly lending report showing loans
outstanding at the top 22 CPP-recipient banks. The most recent
report, issued on September 16, 2009, includes data up through
the end of July 2009 and shows that CPP recipients had $4.24
trillion in loans outstanding as of July 2009. This represents
a one percent decline in loans outstanding between the end of
June and the end of July.
C. Public-Private Investment Program
On September 30, 2009, Treasury announced the initial
closings of Public-Private Investment Funds (PPIFs) established
under the Legacy Securities Public-Private Investment Program
(PPIP). Two of the nine pre-qualified funds, Invesco Legacy
Securities Master Fund, L.P. and UST/TCW Senior Mortgage
Securities Fund, L.P. closed with a total of $1.13 billion of
committed equity capital. Treasury has ten days from September
30, to provide matching equity funding. Each fund is eligible
for additional debt financing of $2.26 billion, bringing the
total resources of the fund to $4.52 billion.
Additionally, on October 5, 2009, Treasury announced the
initial closings of three more pre-qualified funds managed by
AllianceBernstein, LP, BlackRock, Inc., and Wellington
Management Company, LLP, bringing the total number of closed
funds to five, and the cumulative total committed equity and
debt capital under the Legacy Securities program to $12.27
billion ($3.07 billion from the private sector and $9.2 billion
from Treasury).
Treasury expects the four remaining funds to close by the
end of October. Following an initial closing, each PPIF will
have the opportunity for two more closings over the following
six months to receive matching Treasury equity and debt
financing, with a total Treasury equity and debt investment in
all PPIFs equal to $30 billion ($40 billion including private
sector capital).
Although the legacy loan program has been shelved by the
FDIC for the time being, a pilot program to test the funding
mechanism for the loan program was launched in mid-September.
In a competitive bidding process, Residential Credit Solutions
(RCS) won the right to participate in the pilot program. Under
the pilot program, the FDIC will sell RCS half of the ownership
interests in an LLC created to hold a portfolio of legacy
``toxic'' securities from Franklin Bank, SSB, a failed bank
held in receivership by the FDIC. These legacy securities are
comprised of a pool of residential mortgage loans with an
unpaid principal balance of approximately $1.3 billion. At
closing, RCS will pay the FDIC $64.2 million in cash for its 50
percent ownership interest in the LLC, and will issue a $727.7
million dollar FDIC-guaranteed note to the FDIC in exchange for
the securities. The FDIC anticipates selling this note at a
later date. The FDIC will analyze the results of this test sale
to determine whether or not the legacy loans program is a
feasible approach to removing troubled assets from bank balance
sheets.
D. Making Home Affordable Program Monthly Servicer Performance Report
On October 8, 2009, Treasury released its third monthly
Servicer Performance Report detailing the progress to date of
the Making Home Affordable (MHA) loan modification program. The
report discloses that as of September 30, 2009, 85 percent of
mortgages are covered by a Home Affordable Modification Program
(HAMP) participating servicer. The report also indicates that
as of September 30, 2009, 487,081 trial loan modifications have
occurred out of 757,955 trial plan offers extended.
E. Term Asset-Backed Securities Loan Facility (TALF)
As previously reported, the Federal Reserve Board and
Treasury announced their approval of an extension to the Term
Asset-Backed Securities Loan Facility (TALF). With the
extension, the deadline for TALF lending against newly issued
asset-backed securities (ABS) and legacy commercial mortgage-
backed securities (CMBS) was extended from December 31, 2009 to
March 31, 2010. Additionally, the deadline for TALF lending
against newly issued CMBS was extended to June 30, 2010.
At the September 3, 2009 facility, $6.53 billion in loans
to support the issuance of ABS collateralized by loans in the
auto, credit card, equipment, property and casualty, small
business, and student loan sectors were settled (though $6.54
billion in loans were requested). There were no requests
supported by floorplan or residential mortgage loans. At the
September 17, 2009 legacy CMBS facility, $1.35 billion in loans
were settled (though $1.4 billion in loans were requested).
Additionally, at the October 2, 2009 facility, $2.47 billion in
loans to support the issuance of ABS collateralized by loans in
the auto, credit card, equipment, floorplan, small business,
and student loan sectors were requested. There were no requests
supported by residential mortgage loans.
F. Bank of America Guarantee Termination Payment
On January 15, 2009, Treasury, the Federal Reserve, and the
FDIC entered into a provisional agreement with Bank of America
to guarantee a pool of assets valued at about $118 billion,
which was predominately in the form of loans and securities
backed by residential and commercial real estate loans acquired
when Bank of America merged with Merrill Lynch. In exchange for
this guarantee, the federal government was to receive $4
billion of preferred stock paying dividends at eight percent,
warrants to purchase approximately $400 million of Bank of
America stock, and a commitment fee. The provisional agreement
was never finalized. On May 6, 2009, Bank of America notified
the federal government that it wished to terminate the
guarantee, and the parties negotiated a termination fee. On
September 21, 2009, Bank of America agreed to pay $425 million
to terminate the guarantee. Treasury received $276 million of
the total fee, while the FDIC and the Federal Reserve received
$92 million and $57 million, respectively. See infra note 505
(describing components of the termination fee). The government
agreed to adjust the fee to reflect: (1) the downsizing of the
guaranteed asset pool from $118 billion to $83 billion; and (2)
the abbreviated time period (about four months) during which
the guarantee was in effect.
G. Money Market Guarantee Program
On September 18, 2009, Treasury announced the end of its
Guarantee Program for Money Market Funds. Treasury designed the
program to stabilize markets after a large money market fund's
announcement that its net asset value had fallen below $1 per
share (``broke the buck'') in the wake of the failure of Lehman
Brothers in September of 2008. The program was initially
established for a three-month period that could be extended
through September 18, 2009. Since inception, Treasury has had
no losses under the program and earned approximately $1.2
billion in participation fees.
H. Metrics
The Panel continues to monitor a number of metrics that the
Panel and others, including Treasury, the Government
Accountability Office (GAO), Special Inspector General for the
Troubled Asset Relief Program (SIGTARP), and the Financial
Stability Oversight Board, consider useful in assessing the
effectiveness of the Administration's efforts to restore
financial stability and accomplish the goals of the EESA. This
section discusses changes that have occurred since the release
of the September report.
Interest Rate Spreads. Key interest rate spreads,
a measure of the cost of capital, have continued to decline.
Measures such as the LIBOR-OIS spread have largely returned to
pre-crisis levels. Other important metrics such as the
conventional mortgage rate spreads' 37 percent decrease since
October 2008 also represents a positive indicator for the
housing market and refinancing.\463\
---------------------------------------------------------------------------
\463\ White House Press Release, Executive Office of the
President's Council of Economic Advisors CEA Notes on Refinancing
Activity and Mortgage Rates (Apr. 9, 2009) (online at
www.whitehouse.gov/assets/documents/CEAHousingBackground.pdf) (``For
the week ended April 2, the conforming mortgage rate (the rate for
mortgages that meet the GSEs' standards) was 4.78%, the lowest weekly
rate since 1971 (when the data series begins), and likely the lowest
widely-available mortgage rate since the 1950s.'').
FIGURE 31: INTEREST RATE SPREADS
------------------------------------------------------------------------
Current Spread Percent Change
Indicator \464\ (as of 10/ Since Last Report
1/09) (9/1//09)
------------------------------------------------------------------------
3 Month LIBOR-OIS Spread \465\.... 0.13 -23.5
1 Month LIBOR-OIS Spread \466\.... 0.1 11.1
TED Spread \467\ (in basis points) 19.9 -3.7
Conventional Mortgage Rate Spread 1.51 -9.04
\468\............................
Corporate AAA Bond Spread \469\... 1.71 -2.48
Corporate BAA Bond Spread \470\... 2.84 -7.79
Overnight AA Asset-backed 0.26 8.33
Commercial Paper Interest Rate
Spread \471\.....................
Overnight A2/P2 Nonfinancial .14 -12.5
Commercial Paper Interest Rate
Spread \472\.....................
------------------------------------------------------------------------
\464\ Percentage points, unless otherwise indicated.
\465\ Bloomberg, 3 Mo LIBOR-OIS Spread (online at www.bloomberg.com/apps/
quote?ticker=.LOIS3:IND) (accessed Oct. 1, 2009).
\466\ Bloomberg, 1 Mo LIBOR-OIS Spread (online at www.bloomberg.com/apps/
quote?ticker=.LOIS1:IND) (accessed Oct. 1, 2009).
\467\ Bloomberg, TED Spread (online at www.bloomberg.com/apps/
quote?ticker=.TEDSP:IND) (accessed Oct. 1, 2009).
\468\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release H.15: Selected Interest Rates: Historical Data
(Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (accessed Oct. 1, 2009); Board of Governors of the
Federal Reserve System, Federal Reserve Statistical Release H.15:
Selected Interest Rates: Historical Data (Instrument: U.S. Government
Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency:
Weekly) (online at www.federalreserve.gov/releases/h15/data/
Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Oct. 1, 2009)
(hereinafter ``Fed H.15 10-Year Treasuries'').
\469\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release H.15: Selected Interest Rates: Historical Data
(Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: Weekly)
(online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
H15_AAA_NA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries,
supra note 468.
\470\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release H.15: Selected Interest Rates: Historical Data
(Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly)
(online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
H15_BAA_NA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries,
supra note 468.
\471\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: AA Asset-Backed Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed July 9, 2009); Board of Governors of the
Federal Reserve System, Federal Reserve Statistical Release:
Commercial Paper Rates and Outstandings: Data Download Program
(Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
Oct. 1, 2009) (hereinafter ``Fed CP AA Nonfinancial Rate'').
\472\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: A2/P2 Nonfinancial Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed Oct. 1, 2009); Fed CP AA Nonfinancial
Rate, supra note 471.
Commercial Paper Outstanding. Commercial paper
outstanding, a rough measure of short-term business debt, is an
indicator of the availability of credit for enterprises. Two of
the three measured commercial paper values increased since the
Panel's September report, and one decreased. Asset-backed,
financial and nonfinancial commercial paper have all decreased
with nonfinancial commercial paper outstanding declining by
over 46 percent, and asset-backed commercial paper outstanding
declining over 27 percent since October 2008.
FIGURE 32: COMMERCIAL PAPER OUTSTANDING
------------------------------------------------------------------------
Current Level Percent Change
(as of 9/30/ Since Last
Indicator 09) (Dollars Report (8/26/
in billions) 09)
------------------------------------------------------------------------
Asset-Backed Commercial Paper $522.3 14.09
Outstanding (seasonally adjusted) \473\
Financial Commercial Paper Outstanding 602.5 3.93
(seasonally adjusted) \474\............
Nonfinancial Commercial Paper 106.2 -9
Outstanding (seasonally adjusted) \475\
------------------------------------------------------------------------
\473\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: Asset-Backed Commercial Paper
Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009).
\474\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: Financial Commercial Paper Outstanding,
Frequency: Weekly) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed Oct. 1, 2009).
\475\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: Nonfinancial Commercial Paper
Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009).
Lending by the Largest TARP-recipient Banks. Treasury's
Monthly Lending and Intermediation Snapshot tracks loan
originations and average loan balances for the 22 largest
recipients of CPP funds across a variety of categories, ranging
from mortgage loans to commercial and industrial loans to
credit card lines. Commercial lending, including new commercial
real estate loans, continues to decline dramatically.
FIGURE 33: LENDING BY THE LARGEST TARP-RECIPIENT BANKS \476\
----------------------------------------------------------------------------------------------------------------
Most Recent
Data (July Percent Change
Indicator 2009) Percent Change Since October
(Dollars in Since June 2009 2008
millions)
----------------------------------------------------------------------------------------------------------------
Total Loan Originations................................... $204,847 -9.7 -6.11
C&I New Commitments....................................... 32,169 -21.5 -45.4
CRE New Commitments....................................... 3,444 -6.96 -67.3
----------------------------------------------------------------------------------------------------------------
\476\ U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary
Analysis for July 2009 (Oct. 2, 2009) (online at www.financialstability.gov/docs/surveys/
July%202009%20Tables.pdf). While the Treasury report is based upon the 22 largest CPP recipient banks, these
data exclude two institutions--PNC and Wells Fargo--because they have made significant acquisitions since
October 2008.
Loans and Leases Outstanding of Domestically-
Chartered Banks. Weekly data from the Federal Reserve Board
track fluctuations among different categories of bank assets
and liabilities. Loans and leases outstanding for large and
small domestic banks both fell last month.\477\ Total loans and
leases outstanding at large banks have dropped by nearly 9
percent since last October.\478\ Also, commercial and
industrial loans and leases outstanding at large banks have
continued to decline, having decreased over 15 percent since
the enactment of EESA.
---------------------------------------------------------------------------
\477\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.8: Assets and Liabilities of Commercial
Banks in the United States: Historical Data (Instrument: Assets and
Liabilities of Large Domestically Chartered Commercial Banks in the
United States, seasonally adjusted, adjusted for mergers, billions of
dollars) (online at www.federalreserve.gov/releases/h8/data.htm)
(accessed Oct. 1, 2009).
\478\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.8: Assets and Liabilities of Commercial
Banks in the United States: Historical Data (Instrument: Assets and
Liabilities of Small Domestically Chartered Commercial Banks in the
United States, seasonally adjusted, adjusted for mergers, billions of
dollars) (online at www.federalreserve.gov/releases/h8/data.htm)
(accessed Oct. 1, 2009).
FIGURE 34: LOANS AND LEASES OUTSTANDING
----------------------------------------------------------------------------------------------------------------
Percent Change Percent Change
Current Since Last Since EESA
Indicator (dollars in billions) Level (as Report (8/26/ Signed into
of 9/23/09) 09) Law (10/3/08)
----------------------------------------------------------------------------------------------------------------
Large Domestic Banks--Total Loans and Leases....................... $3,692 -2.34 -8.92
Small Domestic Banks--Total Loans and Leases....................... $2,474 -0.87 -1.73
Large Domestic Banks--Commercial and Industrial Loans.............. $683 -4.11 -15.14
Small Domestic Banks--Revolving Consumer Credit.................... $89 -3.71 9.01
----------------------------------------------------------------------------------------------------------------
Housing Indicators. Foreclosure filings fell
slightly from July to August; however, foreclosures are still
up by over 28 percent from October 2008 levels. Housing prices,
as illustrated by the S&P/Case-Shiller Composite 20 Index,
improved slightly in August, increasing by over 1.2 percent.
The index remains down nearly nine percent since October 2008.
FIGURE 35: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Most Percent Change From
Recent Data Available at Time Percent Change
Indicator Monthly of Last Report (9/1/ Since October
Data 09) 2008
----------------------------------------------------------------------------------------------------------------
Monthly Foreclosure Filings \479\........................ 358,471 -.47 28.2
Housing Prices--S&P/Case-Shiller Composite 20 Index \480\ 143.05 1.23 -8.9
----------------------------------------------------------------------------------------------------------------
\479\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
PressRelease.aspx) (accessed Oct. 1, 2009). The most recent data available is for August 2009.
\480\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: seasonally Adjusted Composite 20
Index) (online at www2.standardandpoors.com/spf/pdf/index/SA_CSHomePrice_History_092955.xls) (accessed Oct. 1,
2009). The most recent data available is for July 2009.
Asset-Backed Security Issuance. The ABS market
slowed slightly in the third quarter with total issuance
dropping by 1.25 percent. However, certain segments of the
securitization market continued to improve in the third
quarter. Auto ABS and home equity ABS have increased by over
700 and 180 percent respectively since October 2008. Through
the first three quarters of 2009 there have been over $118
billion in ABS issued compared with just under $140 billion
issued for the whole of 2008.\481\
---------------------------------------------------------------------------
\481\ Securities Industry and Financial Markets Association, US ABS
Issuance (accessed Oct. 1, 2009) (online at www.sifma.org/uploaded
Files/Research/Statistics/SIFMA_USABSIssuance.pdf).
FIGURE 36: ASSET-BACKED SECURITY ISSUANCE \482\
(Dollars in millions)
----------------------------------------------------------------------------------------------------------------
Percent change
Most recent Data available at from data
Indicator quarterly time of last available at
data (3Q report (2Q 2009) time of last
2009) report (9/1/09)
----------------------------------------------------------------------------------------------------------------
Auto ABS Issuance......................................... $19,056 $12,026.8 58.5
Credit Cards ABS Issuance................................. $16,229.7 $19,158.5 -15.3
Equipment ABS Issuance.................................... $578.8 $2,629.1 -78
Home Equity ABS Issuance.................................. $486.6 $707.4 -31.2
Other ABS Issuance........................................ $6,356.9 $6,444 -1.35
Student Loans ABS Issuance................................ $5,292.7 $7,643.8 -30.8
Total ABS Issuance.................................... \483\ $48,000. $48,609.6 -1.25
7
----------------------------------------------------------------------------------------------------------------
\482\ Securities Industry and Financial Markets Association, US ABS Issuance (accessed Oct. 1, 2009) (online at
www.sifma.org/uploadedFiles/ Research/Statistics/SIFMA_USABSIssuance.pdf).
\483\ $18.8 billion was requested under the Term Asset-Backed Securities Loan Facility during the third quarter
of 2009. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Announcements (accessed
August 5, 2008) (online at www.newyorkfed.org/markets/talf_announcements.html).
I. Financial Update
Each month since its April oversight report, the Panel has
summarized the resources that the federal government has
committed to economic stabilization. The following financial
update provides: (1) an updated accounting of the TARP,
including a tally of dividend income and repayments the program
has received as of August 31, 2009; and (2) an update of the
full federal resource commitment as of September 30, 2009.
1. TARP
a. Costs: Expenditures and Commitments \484\
---------------------------------------------------------------------------
\484\ Treasury will release its next tranche report when
transactions under the TARP reach $450 billion.
---------------------------------------------------------------------------
Treasury is currently committed to spend $531.3 billion of
TARP funds through an array of programs used to purchase
preferred shares in financial institutions, offer loans to
small businesses and automotive companies, and leverage Federal
Reserve loans for facilities designed to restart secondary
securitization markets.\485\ Of this total, $375.5 billion is
currently outstanding under the $698.7 billion limit for TARP
expenditures set by EESA, leaving $323.2 billion available for
fulfillment of anticipated funding levels of existing programs
and for funding new programs and initiatives. The $375.5
billion includes purchases of preferred and common shares,
warrants and/or debt obligations under the CPP, TIP, SSFI
Program, and AIFP; a $20 billion loan to TALF LLC, the special
purpose vehicle (SPV) used to guarantee Federal Reserve TALF
loans; and the $5 billion Citigroup asset guarantee, which was
exchanged for a guarantee fee composed of additional preferred
shares and warrants and has subsequently been exchanged for
Trust Preferred shares.\486\ Additionally, Treasury has
allocated $23.4 billion to the Home Affordable Modification
Program, out of a projected total program level of $50 billion.
---------------------------------------------------------------------------
\485\ EESA, as amended by the Helping Families Save Their Homes Act
of 2009, limits Treasury to $698.7 billion in purchasing authority
outstanding at any one time as calculated by the sum of the purchases
prices of all troubled assets held by Treasury. Pub. L. No. 110-343,
Sec. 115(a)-(b), supra note 2; Helping Families Save Their Homes Act of
2009, Pub. L. No. 111-22, Sec. 402(f) (reducing by $1.26 billion the
authority for the TARP originally set under EESA at $700 billion).
\486\ U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending September 30, 2009 (Oct.
4, 2009) (online at financialstability.gov/docs/transaction-reports/
Transactions_Report_09-30-09.pdf) (hereinafter ``September 30 TARP
Transactions Report'').
---------------------------------------------------------------------------
b. Income: Dividends, Interest Payments, and CPP Repayments
A total of 39 institutions have completely repaid their CPP
preferred shares, 24 of which have also repurchased warrants
for common shares that Treasury received in conjunction with
its preferred stock investments. There were over $375 million
in repayments made under the CPP during September.\487\ The
seven banks that repaid were comparatively small with the
largest repayment being for $125 million.\488\ In addition,
Treasury is entitled to dividend payments on preferred shares
that it has purchased, usually five percent per annum for the
first five years and nine percent per annum thereafter.\489\ In
total, Treasury has received approximately $86 billion in
income from repayments, warrant repurchases, dividends, and
interest payments deriving from TARP investments \490\ and
another $1.2 billion in participation fees from its Guarantee
Program for Money Market Funds.\491\
---------------------------------------------------------------------------
\487\ Id.
\488\ Id.
\489\ See, for example, U.S. Department of the Treasury, Securities
Purchase Agreement: Standard Terms (online at
www.financialstability.gov/docs/CPP/spa.pdf).
\490\ U.S. Department of the Treasury, Cumulative Dividends Report
as of August 31, 2009 (Oct. 1, 2009) (online at
www.financialstability.gov/docs/dividends-interest-reports/
August2009_DividendsInterestReport.pdf); September 30 TARP Transactions
Report, supra note 486.
\491\ U.S. Department of the Treasury, Treasury Announces
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009)
(online at www.financialstability.gov/latest/tg_09182009.html).
---------------------------------------------------------------------------
c. Citigroup Exchange
Treasury has invested a total of $49 billion in Citigroup
through three separate programs: the CPP, TIP, and AGP. On June
9, 2009, Treasury agreed to terms to exchange its CPP preferred
stock holdings for 7.7 billion shares of common stock priced at
$3.25/share (for a total value of $25 billion) and also agreed
to convert the form of its TIP and AGP holdings. On July 23,
2009, Treasury, along with both public and private Citigroup
debt holders, participated in a $58 billion exchange. The
company received shareholder approval for the exchange on
September 3, 2009.\492\ As of September 30, 2009, Treasury's
common stock investment in Citigroup had a market value of
$37.23 billion.\493\
---------------------------------------------------------------------------
\492\ Citigroup, Citi Announces Shareholder Approval of Increase in
Authorized Common Shares, Paving Way to Complete Share Exchange (Sept.
3, 2009) (online at www.citibank.com/citi/press/2009/090903a.htm).
\493\ The Panel continues to account for Treasury's original $25
billion CPP investment in Citigroup under the CPP until formal approval
of the exchange by Citigroup's shareholders and until Treasury
specifies under which TARP program the common equity investment will be
classified.
---------------------------------------------------------------------------
d. TARP Accounting
FIGURE 37: TARP ACCOUNTING (AS OF SEPTEMBER 30, 2009)
----------------------------------------------------------------------------------------------------------------
Anticipated Purchase Net current Net
TARP Initiative (in billions) funding price Repayments investments available
----------------------------------------------------------------------------------------------------------------
Total...................................... $531.3 $455.5 $72.8 $380.2 494 $318.5
CPP........................................ $218 $204.6 $70.7 $134.2 495 $13.7
TIP........................................ $40 $40 $0 $40 $0
SSFI Program............................... $69.8 $69.8 $0 $69.8 $0
AIFP....................................... $80 $80 $2.1 \496\ $75.4 \497\ $0
AGP........................................ $5 $5 $0 $5 $0
CAP........................................ TBD $0 N/A $0 N/A
TALF....................................... $20 $20 $0 $20 $0
PPIP....................................... $30 $9.2 N/A $9.2 $20.8
Supplier Support Program................... \498\ $3.5 $3.5 $0 $3.5 $0
Unlocking SBA Lending...................... $15 $0 N/A $0 $15
HAMP....................................... $50 \499\ $23 $0 $23.4 $26.6
.4
(Uncommitted).............................. $167.4 N/A N/A N/A \500\ $242.
7
----------------------------------------------------------------------------------------------------------------
\494\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion)
and the difference between the total anticipated funding and the net current investment ($155.8 billion).
\495\ This figure excludes the repayment of $70.7 billion in CPP funds. Secretary Geithner has suggested that
funds from CPP repurchases will be treated as uncommitted funds of the TARP overall upon return to the
Treasury.
\496\ This figure reflects the amount invested in the AIFP as of August 18, 2009. This number consists of the
original assistance amount of $80 billion less de-obligations ($2.4 billion) and repayments ($2.14 billion);
$2.4 billion in apportioned funding has been de-obligated by Treasury ($1.91 billion of the available $3.8
billion of DIP financing to Chrysler and a $500 million loan facility dedicated to Chrysler that was unused).
September 30 TARP Transactions Report, supra note 486.
\497\ Treasury has indicated that it will not provide additional assistance to GM and Chrysler through the AIFP.
Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in Support and Reorganization
of the Domestic Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-report.pdf.
The Panel therefore considers the repaid and de-obligated AIFP funds to be uncommitted TARP funds.
\498\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
billion, this reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion
to $1 billion. September 30 Transactions Report, supra note 486.
\499\ This figure reflects the total of all the caps set on payments to each mortgage servicer. September 30
Transactions Report, supra note 486.
\500\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion),
the repayments ($72.8 billion), and the de-obligated portion of the AIFP ($2.4 billion). Treasury provided de-
obligation information on August 18, 2009, in response to specific inquiries relating to the Panel's oversight
of the AIFP. Specifically, this information denoted allocated funds that had since been de-obligated.
FIGURE 38: TARP REPAYMENTS AND INCOME
--------------------------------------------------------------------------------------------------------------------------------------------------------
Warrant
TARP initiatives (in billions) Repayments (as Dividends \501\ Interest \502\ repurchases \503\ Total
of 9/30/09) (as of 8/31/09) (as of 8/31/09) (as of 9/30/09)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total.......................................................... $72.8 $9.74 $0.2 $2.9 $85.9
CPP............................................................ 70.7 7.3 N/A 2.9 80.9
TIP............................................................ 0 1.8 N/A 0 1.8
AIFP........................................................... 2.1 0.47 .2 N/A 2.77
ASSP........................................................... N/A N/A .004 N/A .004
AGP \504\...................................................... 0 0.17 N/A 0 0.17
Bank of America Guarantee...................................... - - - - \505\ .276
--------------------------------------------------------------------------------------------------------------------------------------------------------
\501\ U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online at www.financialstability.gov/docs/
dividends-interest-reports/August2009_DividendsInterestReport.pdf).
\502\ U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online at www.financialstability.gov/docs/
dividends-interest-reports/August2009_DividendsInterestReport.pdf).
\503\ This number includes $1.6 million in proceeds from the repurchase of preferred shares by privately-held financial institutions. For privately-held
financial institutions that elect to participate in the CPP, Treasury receives and immediately exercises warrants to purchase additional shares of
preferred stock. September 30 Transactions Report, supra note 486.
\504\ Citigroup is the lone participant in the AGP.
\505\ On September 21, 2009 Bank of America announced the termination of its Asset Guarantee term sheet with the Treasury Department. Bank of America
agreed to pay a total of $425 million to Treasury ($276 million), the Federal Reserve ($57 million), and the FDIC ($92 million) to terminate a
provisional agreement to guarantee about $118 billion (later downsized to $83 billion) of Bank of America assets. Bank of America, Termination
Agreement (Sep. 21, 2009) (online at online.wsj.com/public/resources/documents/bofa092109.pdf). Because Treasury's share of the termination fee
derives from the never formally consummated provisional agreement and the components of the termination fee do not match this figure's repayment and
income categories, we do not apportion the components here. Pursuant to the termination agreement, the government made retrospective valuations for
Treasury's portion of the fee covering the four months when the provisional agreement was in place of: (1) ``foregone dividends'' ($52 million) on the
preferred stock that would have been paid by Bank of America to Treasury had the federal government actually made the preferred stock investment
contemplated by the provisional agreement; (2) a ``pro-rated premium,'' ($119 million) representing the economic value to Bank of America of
Treasury's never consummated preferred stock investment; and (3) a ``warrants valuations,'' ($105 million) representing the economic value of the
warrants purchase contemplated by the provisional agreement. Id. The FDIC's portion of the termination fee was determined by the same retrospective
valuation methodology, but was proportionally smaller than Treasury's portion given the FDIC's more limited investment under the provisional
agreement. Id. (calculating FDIC to receive $17 million for foregone dividends, $40 million for pro-rated premium for preferred stock, and $35 million
for warrants investment). The Federal Reserve's $57 million portion of the termination fee is entirely composed on a pro-rated portion of the
commitment fee contemplated by the provisional agreement ($34 million) plus expenses ($23 million). Id.
Rate of Return
As of September 30, 2009, the average internal rate of
return for all financial institutions that participated in the
CPP and fully repaid the U.S. government (including preferred
shares, dividends, and warrants) is 17.2 percent. The internal
rate of return is the annualized effective compounded return
rate that can be earned on invested capital. In the case of the
CAP program under TARP the return on investment includes
dividends and warrants.
2. Other Financial Stability Efforts
Federal Reserve, FDIC, and Other Programs
In addition to the direct expenditures Treasury has
undertaken through TARP, the federal government has engaged in
a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs, such as
the interaction between PPIP and TALF. Other programs, like the
Federal Reserve's extension of credit through its section 13(3)
facilities and SPVs and the FDIC's Temporary Liquidity
Guarantee Program, operate independent of TARP. As shown in the
following table, the Federal Reserve has begun publishing its
interest earnings on its financial stability initiatives.
FIGURE 39: FEDERAL RESERVE CREDIT EXPANSION PROGRAMS (AS OF SEPTEMBER
2009) \506\
(Dollars in millions)
------------------------------------------------------------------------
Interest
Earned Jan. 1-
Federal Reserve Credit Expansion Programs July 30, 2009
------------------------------------------------------------------------
Federal agency debt securities.......................... $614
Mortgage-backed securities.............................. 4,968
Term auction credit..................................... 570
Primary credit.......................................... \507\ 134
Primary dealer and other broker-dealer credit........... 37
Mutual Fund Liquidity Facility.......................... 70
Central bank liquidity swaps............................ 1,880
Outstanding principal amount of loan extended to Maiden 102
Lane LLC...............................................
Commercial Paper Funding Facility....................... 546
Total............................................... 8,524
------------------------------------------------------------------------
\506\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release H.4.1: Factors Affecting Reserve Balances (Oct. 1,
2009) (accessed Oct. 1, 2009) (online at www.federalreserve.gov/
releases/h41/20091001/ (hereinafter ``October 1 Fed Balance Sheet'').
\507\ This figure includes interest earned on primary, secondary and
seasonal credit facilities.
3. Total Financial Stability Resources (as of September 30, 2009)
Beginning in its April report, the Panel broadly classified
the resources that the federal government has devoted to
stabilizing the economy through a myriad of new programs and
initiatives as outlays, loans, or guarantees. Although the
Panel calculates the total value of these resources at over
$3.2 trillion, this would translate into the ultimate ``cost''
of the stabilization effort only if: (1) assets do not
appreciate; (2) no dividends are received, no warrants are
exercised, and no TARP funds are repaid; (3) all loans default
and are written off; and (4) all guarantees are exercised and
subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. The FDIC, for example, assesses
a premium of up to 100 basis points on Temporary Liquidity
Guarantee Program (TLGP) debt guarantees. The premiums are
pooled and reserved to offset losses incurred by the exercise
of the guarantees and are calibrated to be sufficient to cover
anticipated losses and thus remove any downside risk to the
taxpayer. In contrast, the Federal Reserve's liquidity programs
are generally available only to borrowers with good credit, and
the loans are over-collateralized and with recourse to other
assets of the borrower. If the assets securing a Federal
Reserve loan realize a decline in value greater than the
``haircut,'' the Federal Reserve is able to demand more
collateral from the borrower. Similarly, should a borrower
default on a recourse loan, the Federal Reserve can turn to the
borrower's other assets to make the Federal Reserve whole. In
this way, the risk to the taxpayer on recourse loans only
materializes if the borrower enters bankruptcy. The only loans
currently ``underwater''--where the outstanding principal
amount exceeds the current market value of the collateral--are
two of the three non-recourse loans to the Maiden Lane SPVs
(used to purchase Bear Stearns and AIG assets).
FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 30, 2009)
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total....................................................... $698.7 $1,658 $846.7 iii$3,203.4
Outlays i............................................... 387.3 0 47.7 435
Loans................................................... 43.7 1,428.2 0 1,471.9
Guarantees ii........................................... 25 229.8 799 1,053.8
Uncommitted TARP Funds.................................. 242.7 0 0 242.7
AIG......................................................... iv 69.8 96.2 0 166
Outlays................................................. 69.8 0 0 69.8
Loans................................................... 0 v 96.2 0 96.2
Guarantees.............................................. 0 0 0 0
Bank of America............................................. 45 0 0 45
Outlays................................................. vii 45 0 0 45
Loans................................................... 0 0 0 0
Guaranteesvi............................................ 0 0 0 0
Citigroup................................................... 50 229.8 10 289.8
Outlays................................................. viii 45 0 0 45
Loans................................................... 0 0 0 0
Guarantees.............................................. ix 5 x 229.8 xi 10 244.8
Capital Purchase Program (Other)............................ 97.3 0 0 97.3
Outlays................................................. xii 97.3 0 0 97.3
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Capital Assistance Program.................................. TBD 0 0 xv TBD
TALF.................................................... 20 180 0 200
Outlays................................................. 0 0 0 0
Loans................................................... 0 xiv180 0 180
Guarantees.............................................. xiii 20 0 0 20
PPIP (Loans)xvi............................................. 0 0 0 0
Outlays................................................. 0 0 0 0
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
PPIP (Securities)........................................... xvii 30 0 0 30
Outlays................................................. 10 0 0 10
Loans................................................... 20 0 0 20
Guarantees.............................................. 0 0 0 0
Home Affordable Modification Program........................ 50 0 0 xix 50
Outlays................................................. xviii 50 0 0 50
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Automotive Industry Financing Program....................... 75.4 0 0 75.4
Outlays................................................. xx 55.2 0 0 55.2
Loans................................................... 20.2 0 0 20.2
Guarantees.............................................. 0 0 0 0
Auto Supplier Support Program............................... 3.5 0 0 3.5
Outlays................................................. 0 0 0 0
Loans................................................... xxi 3.5 0 0 3.5
Guarantees.............................................. 0 0 0 0
Unlocking SBA Lending....................................... 15 0 0 15
Outlays................................................. xxii 15 0 0 15
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Temporary Liquidity Guarantee Program....................... 0 0 789 789
Outlays................................................. 0 0 0 0
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 xxiii 789 789
Deposit Insurance Fund...................................... 0 0 47.7 47.7
Outlays................................................. 0 0 xxiv 47.7 47.7
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Other Federal Reserve Credit Expansion...................... 0 1,152 G19 1,152
Outlays................................................. 0 0 0 0
Loans................................................... 0 xxv 1,152 0 1,152
Guarantees.............................................. 0 0 0 0
Uncommitted TARP Funds...................................... 242.7 0 0 242.7
----------------------------------------------------------------------------------------------------------------
i The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays as used here represent investments and assets
purchases and commitments to make investments and asset purchases and are not the same as budget outlays,
which under section 123 of EESA are recorded on a ``credit reform'' basis.
ii While many of the guarantees may never be exercised or exercised only partially, the guarantee figures
included here represent the federal government's greatest possible financial exposure.
iii This figure is roughly comparable to the $3.0 trillion current balance of financial system support reported
by SIGTARP in its July report. SIGTARP, Quarterly Report to Congress, at 138 (July 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/July2009_Quarterly_Report_to_Congress.pdf). However, the Panel has
sought to capture additional anticipated exposure and thus employs a different methodology than SIGTARP.
iv This number includes investments under the SSFI Program: a $40 billion investment made on November 25, 2008,
and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
bonuses paid to AIG Financial Products employees). September 30 TARP Transactions Report, supra note 486.
v This number represents the full $60 billion that is available to AIG through its revolving credit facility
with the Federal Reserve ($39.1 billion had been drawn down as of September 2, 2009) and the outstanding
principle of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of September 24,
2009, $16.6 billion and $19.6 billion respectively). October 1 Fed Balance Sheet, supra note 441. Income from
the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers' exposure to losses
over time. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit
and Liquidity Programs and the Balance Sheet, at 16 (Aug. 2009) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport200909.pdf ) (hereinafter ``Fed September 2009 Credit and Liquidity
Report'').
vi Beginning in our July report, the Panel excluded from its accounting the $118 billion asset guarantee
agreement among Bank of America, the Federal Reserve, Treasury, and the FDIC based on testimony from Federal
Reserve Chairman that the agreement was never signed and was never signed or consummated and the absence of
the guarantee from Treasury's TARP accounting. House Committee on Oversight and Government Reform, Testimony
of Federal Reserve Chairman Ben S. Bernanke, Acquisition of Merrill Lynch by Bank of America, at 3 (June 25,
2009) (online at oversight.house.gov/documents/20090624185603.pdf) (``The ring-fence arrangement has not been
consummated, and Bank of America now believes that, in light of the general improvement in the markets, this
protection is no longer needed.''); Congressional Oversight Panel, July Oversight Report: TARP Repayments,
Including the Repurchase of Stock Warrants, at 85 (July 7, 2009) (online at cop.senate.gov/documents/cop-
071009-report.pdf). On September 21, 2009 Bank of America announced that it had reached an agreement with
Treasury to resolve the matter of the implied guarantee by paying $425 million to terminate the term sheet.
Bank of America, Bank of America Terminates Asset Guarantee Term Sheet (Sept. 21, 2009) (online at
newsroom.bankofamerica.com/index.php?s=43&item=8536). For further discussion of the Panel's approach to
classifying this agreement, see Congressional Oversight Panel, September Oversight Report: The Use of TARP
Funds in the Support and Reorganization of the Domestic Automotive Industry, at 209 (Sept. 9, 2009) (online at
cop.senate.gov/documents/cop-090909-report.pdf).
vii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $15 billion investment
made by Treasury on October 28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January
9, 2009 also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16,
2009.
viii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $25 billion investment
made by Treasury under the CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under
TIP on December 31, 2008.
ix U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
www.treasury.gov/press/releases/reports/cititermsheet--112308.pdf) (hereinafter ``Citigroup Asset Guarantee'')
(granting a 90 percent federal guarantee on all losses over $29 billion after existing reserves, of a $306
billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury,
the next $10 billion by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the
Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at
www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301
billion).
x Citigroup Asset Guarantee, supra note ix..
xi Citigroup Asset Guarantee, supra note ix.
xii This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50
billion investment in Citigroup ($25 billion) and Bank of America ($25 billion) identified above, and the
$70.7 billion in repayments that are reflected as uncommitted TARP funds. This figure does not account for
future repayments of CPP investments, nor does it account for dividend payments from CPP investments.
xiii This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. September 30 TARP
Transactions Report, supra note 486. Consistent with the analysis in our August report, only $43 billion
dollars has been lent through TALF as of September 23 2009, the Panel continues to predict that TALF
subscriptions are unlikely to surpass the $200 billion currently available by year's end. Congressional
Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 10-22 (August 11, 2009)
(discussion of what constitutes a ``troubled asset'') (online at cop.senate.gov/documents/cop-081109-
report.pdf).
xiv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
(Feb.10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
$100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
xv The CAP was announced on February 25, 2009 and as of yet has not been utilized. The Panel will continue to
classify the CAP as dormant until a transaction is completed and reported as part of the program.
xvi It now appears unlikely that resources will be expended under the PPIP Legacy Loans Program in its original
design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal
Deposit Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online
at www.fdic.gov/news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation, Legacy Loans
Program--Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html).
The sales described in these statements do not involve any Treasury participation, and FDIC activity is
accounted for here as a component of the FDIC's Deposit Insurance Fund outlays.
xvii U.S. Department of the Treasury, Joint Statement By Secretary of the Treasury Timothy F. Geithner, Chairman
of the Board Of Governors Of The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit
Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at www.financialstability.gov/
latest/tg_07082009.html) (``Treasury will invest up to $30 billion of equity and debt in PPIFs established
with private sector fund managers and private investors for the purpose of purchasing legacy securities.'');
U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4-5 (Mar. 23, 2009) (online
at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (hereinafter ``Treasury PPIP Fact Sheet'')
(outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program,
Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at
Treasury's discretion, an additional loan up to $1). In the absence of Treasury guidance, the Panel had
previously adopted a 1:1.5 ratio between Treasury equity co-investments and loans at a 1:2 ratio under the
program, reflecting an assumption that Treasury would frequently but not always exercise its discretion to
provide additional financing. However, Treasury's announcement of the initial round of completed PPIP legacy
securities agreements totaling $1.13 billion suggests that Treasury may routinely exercise its discretion to
provide $2 of financing for every $1 of equity. See U.S. Department of the Treasury, Treasury Department
Announces Initial Closings of Legacy Securities Public-Private Investment Funds (Sept. 30, 2009) (online at
www.ustreas.gov/press/releases/tg304.htm) (indicating that investors would be eligible for $2.26 billion of
financing on their investments and that total Treasury financing would be $20 billion on $10 billion on
investors' equity investments).
xviii U.S. Government Accountability Office, Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/
new.items/d09658.pdf) (hereinafter ``GAO June 29 Status Report''). Of the $50 billion in announced TARP
funding for this program, $23.4 billion has been allocated as of August 28, 2009, and no funds have yet been
disbursed. September 30 TARP Transactions Report, supra note 486.
xix Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the
Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
Making Home Affordable Program, of which the HAMP is a key component. MHAP Update, supra note 69. U.S.
Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009)
(online at www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).
xx September 30 TARP Transactions Report, supra note 486. A substantial portion of the total $80 billion in
loans extended under the AIFP have since been converted to common equity and preferred shares in restructured
companies. $20.2 billion has been retained as first lien debt (with $7.7 billion committed to GM and $12.5
billion to Chrysler). This figure represents Treasury's current obligation under the AIFP. There have been
$2.1 billion in repayments and $2.4 billion in de-obligated funds under the AIFP. Treasury De-obligation
Document. See also GAO June 29 Status Report, supra note xviii at 43.
xxi September 30 TARP Transactions Report, supra note 486.
xxii Treasury PPIP Fact Sheet, supra note xvii.
xxiii This figure represents the current maximum aggregate debt guarantees that could be made under the program,
which, in turn, is a function of the number and size of individual financial institutions participating. $ 307
billion of debt subject to the guarantee has been issued to date, which represents about 40 percent of the
current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Aug. 31, 2009) (online at www.fdic.gov/
regulations/resources/TLGP/total_issuance8-09.html) (updated Sep. 24, 2009). The FDIC has collected $9.35
billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal
Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee
Program (Aug. 31, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Sept. 24,
2009).
xxiv This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
failures in the third and fourth quarters of 2008 and the first and second quarters of 2009. Federal Deposit
Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (Fourth
Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html); Federal
Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement
(Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html);
Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income
Statement (First Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/
income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/
income.html). This figure includes the FDIC's estimates of its future losses under loss share agreements that
it has entered into with banks acquiring assets of insolvent banks during these three quarters. Under a loss
sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit
Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas,
FDIC and Compass Bank at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-
tx_p_and_a_w_addendum.pdf).In information provided to Panel staff, the FDIC disclosed that there were
approximately $82 billion in assets covered under loss-share agreements as of September 4, 2009. Furthermore,
the FDIC estimates the total cost of a payout under these agreements to be $36.2 billion. Since there is a
published loss estimate for these agreements, the Panel continues to reflect them as outlays rather than as
guarantees. By comparison, the TLGP does not have published loss-estimates and therefore remains classified as
guarantee program.
xxv This figure is derived from adding the total credit the Federal Reserve Board has extended as of August 27,
2009 through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer
Credit Facility (Primary Dealer and Other Broker-Dealer Credit), Central Bank Liquidity Swaps, loans
outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt Securities (Federal Agency Debt Securities),
Mortgage Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, and Commercial Paper Funding Facility LLC. Fed Balance Sheet October 1, supra note 506. The level of
Federal Reserve lending under these facilities will fluctuate in response to market conditions. Fed Report on
Credit and Liquidity, supra note v.
SECTION FIVE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced ten
oversight reports, as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. Since the release of the
Panel's September oversight report on the use of TARP funds in
support and reorganization of the domestic automotive industry,
the following developments pertaining to the Panel's oversight
of the Troubled Asset Relief Program (TARP) took place:
The Panel held a hearing in Washington, D.C. with
Secretary Geithner on September 10. This was Secretary
Geithner's second appearance before the Panel. Secretary
Geithner answered questions regarding the current state of the
economy and the progress TARP has made during the last year in
stabilizing the financial markets. During the hearing,
Secretary Geithner promised Panel Members that he would provide
additional information regarding several TARP programs and
would continue to appear before the Panel in an open public
hearing format at regular intervals.
The Panel held a field hearing in Philadelphia,
Pennsylvania on September 24, to examine foreclosure mitigation
efforts under TARP. The Panel heard testimony from
representatives of Treasury, the GSEs, community housing
organizations, loan servicers, an economist, and Judge Annette
M. Rizzo of the Philadelphia Court of Common Pleas. The
testimony revealed the successes and challenges of various
foreclosure mitigation programs. The hearing played an
important role in the Panel's evaluation of TARP foreclosure
mitigation efforts, as reflected in the October oversight
report.
On September 24, 2009, Treasury Assistant for
Financial Stability Secretary Herbert Allison testified before
the Senate Banking Committee regarding TARP's impact during its
first year. Assistant Secretary Allison discussed briefly the
status and impact of each of the major TARP initiatives and
indicated Treasury's intention to wind-down each program on a
case-by-case basis. During questions from the committee,
Assistant Secretary Allison declined to indicate whether
Treasury would extend TARP beyond December 31, 2009.
Chair Elizabeth Warren, on behalf of the Panel,
appeared before the Senate Banking Committee on September 24,
2009. Chair Warren testified regarding the positive effects and
shortcomings of TARP during its first year of existence.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
November. The report will provide an updated review of TARP
activities and continue to assess the program's overall
effectiveness. The report will also examine the Treasury
guarantees of bank assets.
The Panel will hold a hearing with Assistant Secretary
Allison on October 22, 2009. The Assistant Secretary last
testified before the Panel on June 24, 2009.
SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating crisis, on October 3, 2008,
Congress provided Treasury with the authority to spend $700
billion to stabilize the U.S. economy, preserve home ownership,
and promote economic growth. Congress created the Office of
Financial Stabilization (OFS) within Treasury to implement a
Troubled Asset Relief Program. At the same time, Congress
created the Congressional Oversight Panel to ``review the
current state of financial markets and the regulatory system.''
The Panel is empowered to hold hearings, review official data,
and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Through regular
reports, the Panel must oversee Treasury's actions, assess the
impact of spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Associate General Counsel of the American
Federation of Labor and Congress of Industrial Organizations
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law
at Harvard Law School to the Panel. With the appointment on
November 19, 2008 of Congressman Jeb Hensarling to the Panel by
House Minority Leader John Boehner, the Panel had a quorum and
met for the first time on November 26, 2008, electing Professor
Warren as its chair. On December 16, 2008, Senate Minority
Leader Mitch McConnell named Senator John E. Sununu to the
Panel. Effective August 10, 2009, Senator Sununu resigned from
the Panel and on August 20, Senator McConnell announced the
appointment of Paul Atkins, former Commissioner of the U.S.
Securities and Exchange Commission, to fill the vacant seat.
ACKNOWLEDGEMENTS
The Panel thanks Adam J. Levitin, Associate Professor of
Law at the Georgetown University Law Center, for the
significant contribution he made to this report. The Panel also
expresses its appreciation to Alan M. White, Assistant
Professor of Law, Valparaiso University School of Law, for his
cost benefit analysis of the federal foreclosure mitigation
initiative.
APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY
GEITHNER RE: THE STRESS TESTS, DATED SEPTEMBER 15, 2009
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