[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
APRIL OVERSIGHT REPORT *
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EVALUATING PROGRESS ON TARP FORECLOSURE MITIGATION PROGRAMS
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
April 14, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL APRIL OVERSIGHT REPORT
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CONGRESSIONAL OVERSIGHT PANEL
APRIL OVERSIGHT REPORT *
__________
EVALUATING PROGRESS ON TARP FORECLOSURE MITIGATION PROGRAMS
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
April 14, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul S. Atkins
Richard H. Neiman
Damon Silvers
J. Mark McWatters
C O N T E N T S
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Page
Executive Summary................................................ 1
Section One: Foreclosure Mitigation.............................. 4
A. Introduction.............................................. 4
B. State of the Housing Markets and General Economy.......... 4
C. Discussion and Evaluation of Program Changes Since October 5
1. Changes to Previously Announced Programs.............. 6
2. New Program Announcements............................. 23
D. Data Updates Since October Report......................... 25
1. General Program Statistics............................ 25
2. HAMP Data Analysis.................................... 32
E. Foreclosure Mitigation Program Success.................... 51
1. Treasury's Definition of ``Success'' and Program Goals 51
2. Ineligible Borrowers.................................. 54
3. Best Estimates for Program Reach...................... 56
4. Short-term vs. Long-term Success...................... 57
F. How Disincentives for Servicers and Investors Undermine
HAMP....................................................... 58
1. Why Servicers may be Ambivalent about HAMP............ 59
2. Accounting Rules Provide Investors a Disincentive to
Modify Loans........................................... 61
3. Servicers and Investors may be Waiting for a Better
Offer from the Government.............................. 63
G. Treasury Progress on Key Recommendations from the October
Report..................................................... 64
1. Transparency.......................................... 64
2. Streamlining the Process.............................. 67
3. Program Enhancements.................................. 69
4. Accountability........................................ 72
5. General Data Availability............................. 76
H. Conclusions and Recommendations........................... 79
Annex I: State of the Housing Markets and General Economy........ 82
1. Housing Market Indicators................................. 82
2. Economic Indicators....................................... 112
Annex II: What Is Going on in Arizona, California, Florida,
Nevada, and Michigan?.......................................... 121
Annex III: Legal Authority....................................... 124
Annex IV: Update on Philadelphia Residential Mortgage Foreclosure
Diversion Pilot Program........................................ 147
Annex V: Private Foreclosure Mitigation Efforts.................. 148
Section Two: Additional Views.................................... 149
A. Richard H. Neiman......................................... 149
B. J. Mark McWatters......................................... 152
Section Three: Correspondence with Treasury Update............... 170
Section Four: TARP Updates Since Last Report..................... 171
Section Five: Oversight Activities............................... 187
Section Six: About the Congressional Oversight Panel............. 188
Appendices:
APPENDIX I: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIR
ELIZABETH WARREN RE: FOLLOWUP QUESTIONS ON TARP-RECIPIENT
BANKS, DATED APRIL 13, 2010................................ 189
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APRIL OVERSIGHT REPORT
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April 14, 2010.--Ordered to be printed
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EXECUTIVE SUMMARY*
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* The Panel adopted this report with a 3-1 vote on April 13, 2010.
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When the Panel last examined the foreclosure crisis in
October of 2009, the picture was grim. About one in eight
mortgages was already in foreclosure or default, and an
additional 250,000 foreclosures were beginning every month. The
Panel's report raised serious concerns about Treasury's efforts
to address the problem, noting that six months after the
programs had been announced and two years into the foreclosure
crisis, the Home Affordable Modification Program (HAMP) had
permanently modified the mortgages of only 1,711 homeowners,
that it had failed to address foreclosures caused by such
factors as unemployment and negative equity, and that it
appeared unlikely to help any significant fraction of the
homeowners facing foreclosure.
Since then, Treasury has taken steps to address these
concerns and to stem the tide of foreclosures. HAMP began
requiring loan servicers to explain to homeowners why their
applications for loan modifications had been declined, and
Treasury launched a drive to convert temporary modifications
into long-term, five-year modifications. In keeping with Panel
recommendations, Treasury also announced new programs to
support unemployed borrowers and to help ``underwater''
homeowners--those who owe more on their mortgages than their
homes are worth--regain equity through principal write-downs.
Despite Treasury's efforts, foreclosures have continued at
a rapid pace. In total, 2.8 million homeowners received a
foreclosure notice in 2009. Each foreclosure has imposed costs
not only on borrowers and lenders but also indirectly on
neighboring homeowners, cities and towns, and the broader
economy. These foreclosures have driven down home prices,
trapping even more borrowers in a home that is worth less than
what they owe. In fact, nearly one in four homeowners with a
mortgage is presently underwater. Although housing prices have
begun to stabilize in many regions, home values in several
metropolitan areas, such as Las Vegas and Miami, continue to
fall sharply.
Treasury's response continues to lag well behind the pace
of the crisis. As of February 2010, only 168,708 homeowners
have received final, five-year loan modifications--a small
fraction of the 6 million borrowers who are presently 60+ days
delinquent on their loans. For every borrower who avoided
foreclosure through HAMP last year, another 10 families lost
their homes. It now seems clear that Treasury's programs, even
when they are fully operational, will not reach the
overwhelming majority of homeowners in trouble. Treasury's
stated goal is for HAMP to offer loan modifications to 3 to 4
million borrowers, but only some of these offers will result in
temporary modifications, and only some of those modifications
will convert to final, five-year status. Even among borrowers
who receive five-year modifications, some will eventually fall
behind on their payments and once again face foreclosure. In
the final reckoning, the goal itself seems small in comparison
to the magnitude of the problem.
After evaluating Treasury's foreclosure programs, the Panel
raises specific concerns about the timeliness of Treasury's
response to the foreclosure crisis, the sustainability of
mortgage modifications, and the accountability of Treasury's
foreclosure programs.
Timeliness. Since early 2009, Treasury has initiated
half a dozen foreclosure mitigation programs, gradually
ramping up the incentives for participation by
borrowers, lenders, and servicers. Although Treasury
should be commended for trying new approaches, its
pattern of providing ever more generous incentives
might backfire, as lenders and servicers might opt to
delay modifications in hopes of eventually receiving a
better deal. In addition, loan servicers have expressed
confusion about the constant flux of new programs, new
standards, and new requirements that make
implementation more complex.
The long delay in dealing effectively with
foreclosures underscores the need for Treasury to get
its new initiatives up and running quickly, but it also
underscores the need for Treasury to get these programs
right. Even if Treasury's recently announced programs
succeed, their impact will not be felt until early
2011--almost two years after the foreclosure mitigation
program was first launched--and more than three years
after the first foreclosure mitigation program was
undertaken.
Sustainability. Although HAMP modifications reduce a
homeowner's mortgage payments, many borrowers continue
to experience severe financial strain. The typical
post-modification borrower still pays about 59 percent
of his total income on debt service, including payments
on first and second mortgages, credit cards, car loans,
student loans, and other obligations. Furthermore, HAMP
typically does not reduce the total principal balance
of a mortgage, meaning that a borrower who was
underwater before receiving a HAMP modification will
likely remain underwater afterward. The typical HAMP-
modified mortgage has a balance 25 percent greater than
the value of the underlying home.
Most borrowers who proceed through HAMP will face a
precarious future, but their resources will be severely
constrained. With a majority of their income still tied
up in debt payments, a small disruption in income or
increase in expenses could make repayment almost
impossible. Many will have no equity in their homes and
are likely to question whether it makes sense to
struggle so hard and for so long to make payments on
homes that could remain below water for years. Many
borrowers will eventually redefault and face
foreclosure. Others may make payments for five years
under a so-called ``permanent modification,'' only to
see their payments rise again when the modification
period ends. The redefaults signal the worst form of
failure of the HAMP program: billions of taxpayer
dollars will have been spent to delay rather than
prevent foreclosures.
Accountability. As always, Treasury must take care to
communicate clearly its goals, its strategies, and its
specific metrics for success for its programs. The
Panel is concerned that the sum total of announced
funding for Treasury's individual foreclosure programs
exceeds the total amount set aside for foreclosure
prevention. It is unclear whether this indicates that
Treasury will scale back particular programs or will
scale up its financial commitment to the foreclosure
prevention effort. Treasury must be clearer about how
much taxpayer money it intends to spend. Additionally,
Treasury must thoroughly monitor the activities of
participating lenders and servicers, audit them, and
enforce program rules with strong penalties for failure
to follow the requirements.
Treasury has made progress since the Panel's last
foreclosure report, and the Panel applauds those efforts. But
the Panel also notes that even now Treasury's programs are not
keeping pace with the foreclosure crisis. Treasury is still
struggling to get its foreclosure programs off the ground as
the crisis continues unabated.
SECTION ONE: FORECLOSURE MITIGATION
A. Introduction
The Emergency Economic Stabilization Act (EESA), which
established the Panel, charged it with providing periodic
reports on foreclosure mitigation efforts. In March 2009, the
Panel issued its first report on foreclosure mitigation, in
which it offered a checklist of key items that are necessary
for a successful foreclosure mitigation effort. Coinciding with
the release of the report, Treasury announced a foreclosure
mitigation initiative known broadly as Making Home Affordable
(MHA). MHA includes various programs and subprograms, including
the Administration's signature Home Affordable Modification
Program (HAMP).
Seven months later, the Panel revisited the foreclosure
mitigation programs in its October 2009 report. The MHA
programs were measured against the March checklist, but further
assessment was limited because many of the programs were still
in their early stages and did not have a demonstrated track
record. The Panel noted its intention to monitor carefully all
available data going forward and to make further
recommendations.
Now, more than one year after the announcement of the
foreclosure mitigation programs, the Panel turns once again to
the programs. What have the programs accomplished in the last
year? Have they demonstrated a track record of success since
the October report? Has Treasury implemented the findings and
recommendations identified by the Panel in the last six months?
B. State of the Housing Markets and General Economy
In order to evaluate Treasury's efforts at foreclosure
mitigation, it is necessary to understand the broader context
of the housing market and the economy as a whole.
In Annex I, the Panel reviews recent trends in the major
housing market statistical indicators. The current market
prices and the level of activity in the housing sector provide
context for understanding the nature and scale of the
foreclosure issue, and metrics for evaluating the progress of
Treasury's foreclosure mitigation initiatives. As the
information in the annex shows, on the whole, the U.S. housing
market remains extremely weak, although there are some signs of
stabilization. While several indicators of housing market
health have shown improvement in recent months, others are
trending in the opposite direction. Housing price levels are
crucial for foreclosure prevention, as default rates have a
strong negative correlation with changes in housing prices from
the time of financing. Depressed housing prices contribute to
negative equity, which impedes refinancings and encourages
strategic defaults. A slow recovery of housing prices means
that default and foreclosure rates are likely to remain
elevated for some time into the future, and also threatens the
sustainability of HAMP permanent modifications.
Some observers view recent improvements as grounds for
optimism. Jay Brinkmann, the Mortgage Bankers Association's
chief economist, recently said that ``[w]e are likely seeing
the beginning of the end of the unprecedented wave of mortgage
delinquencies and foreclosures that started with the subprime
defaults in early 2007 . . .'' \1\ Others, however, are more
skeptical. Peter Flint, CEO of the online home listing database
Trulia, expects that ``government interventions will start to
disappear, shadow inventory will hit the market and mortgage
rates will start to rise . . . We're in a false state of
stability.'' \2\
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\1\ Mortgage Bankers Association, National Delinquency Survey
(Fourth Quarter 2009) (online at www.mbaa.org/ResearchandForecasts/
ProductsandSurveys/NationalDelinquencySurvey.htm) (hereinafter ``MBA
National Delinquency Survey'') (subscription required). See also
Mortgage Bankers Association, Delinquencies, Foreclosure Starts Fall in
Latest MBA National Delinquency Survey (Feb. 19, 2010) (online at
www.mortgagebankers.org/NewsandMedia/PressCenter/71891.htm)
(hereinafter ``February MBA Survey Results'').
\2\ Lynn Adler, Foreclosure Buyer Demand Dips as Supply Mounts,
Reuters (Dec. 15, 2009) (online at www.reuters.com/article/
idUSTRE5B90JZ20091215).
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The second portion of the annex discusses general economic
indicators. The state of the broader economy has a great
influence on the housing market, and therefore on foreclosure
mitigation efforts. After all, the best foreclosure mitigation
initiative is a sound economy with low unemployment. Certain
economic indicators, such as unemployment, have a direct effect
on the housing market; people without jobs are rarely able to
pay their mortgages for long, even if they receive favorable
concessions from their lender. The unemployed are also often
forced to move to take advantage of better job opportunities.
This can undermine many loan modifications designed to prevent
foreclosure, since these modifications are generally based on
an assumption that the borrower will stay in place for several
years.
Opinions are mixed on the outlook for the economy. Some,
such as Richard Bernstein, chief investment strategist at
Merrill Lynch, are encouraged by recent economic growth, and
believe that the economy is charging ahead as if ``on steroids
. . . because of the huge amount of credit and leverage.'' \3\
Others are less sanguine, and see structural problems with the
recovery. Former Federal Reserve Chairman Alan Greenspan calls
the current recovery ``extremely unbalanced . . . because we're
dealing with small businesses who are doing badly, small banks
in trouble, and of course there is an extraordinarily large
proportion of the unemployed in this country who have been out
of work for more than six months and many more than a year.''
Instead, he believes the recovery is being driven by high-
income consumers and corporations benefitting from rising stock
prices.\4\
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\3\ Michelle Lodge, U.S. Recovery ``On Steroids'': Bernstein, CNBC
(Mar. 25, 2010) (online at www.cnbc.com/id/36036362).
\4\ David Lawder, Greenspan: U.S. Recovery Extremely Unbalanced,
Reuters (Feb. 23, 2010) (online at www.reuters.com/article/
idUSTRE61M4B120100223).
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C. Discussion and Evaluation of Program Changes Since October
The Panel, in its October report, described and evaluated
the MHA program, with a focus on HAMP, the largest segment that
uses Troubled Asset Relief Program (TARP) funds. Treasury,
through HAMP, provides servicers, borrowers and investors/
lenders with a series of financial incentives and cost-sharing
measures to modify loans, bringing the borrowers' first-lien
mortgage debt-to-income (DTI) ratio down to 31 percent.
In describing and evaluating MHA, the Panel also made a
number of recommendations as to how Treasury could improve the
program and how success could be defined. The Panel revisits
those recommendations in Section G. This section of the report
discusses and evaluates the changes that Treasury and the
Administration have made to MHA since the Panel's October
report.
1. Changes to Previously Announced Programs
a. Denial Letters
In early November Treasury released guidance that took a
step toward transparency in the process of determining whether
a borrower is eligible for HAMP. The guidance requires
servicers to provide borrowers with a reason for any denial
from the program. Treasury now requires servicers, within 10
days of their determination of a denial, to send the borrower a
Borrower Notice that sets out the reason for the denial and
describes other foreclosure alternatives for which the borrower
might be eligible.\5\ Treasury requires that the servicers
write the letters in ``clear, non-technical language, with
acronyms and industry terms such as `NPV' explained in a manner
that is easily understandable.'' \6\ If the borrower is denied
because the transaction has a negative net present value (NPV),
meaning that the lender could earn more from a foreclosure than
from a HAMP modification, the Borrower Notice must also include
a list of certain input fields that went into the NPV
calculation. Upon the borrower's request, the servicer must
also provide the values for these fields, so that the borrower
might correct any inaccuracies. If the borrower requests the
input data, and the home is scheduled for foreclosure sale, the
servicer may not conduct the sale until 30 days after it
provides the borrower with the input data. This provides the
borrower with an opportunity to correct the data. If the
borrower corrects the data by a material amount, the servicer
must re-run the NPV calculation. Announced in early November,
this directive was effective January 1, 2010.\7\
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\5\ U.S. Department of the Treasury, Home Affordable Modification
Program--Borrower Notices, Supplemental Directive 09-08, at 1-2 (Nov.
3, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/
sd0908.pdf) (hereinafter ``HAMP Borrower Notices'').
\6\ Treasury included in the supplemental directive model clauses
for the letter. HAMP Borrower Notices, supra note 5, at 2.
\7\ HAMP Borrower Notices, supra note 5, at 3.
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Treasury has stated that servicer reporting of the denial
codes was only starting to happen in February 2010, but that
Treasury expects this reporting to improve in the next several
months.\8\ When asked why Treasury is not requiring servicers
to include the values of certain input fields (rather than just
a list of input fields considered) due to an NPV-negative
denial, Treasury stated that requiring servicers to set out the
data from the input fields in the initial denial letter would
have been too burdensome on servicers, as it would have
required customized letters for each borrower.\9\
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\8\ Treasury conference call with Panel staff (Mar. 24, 2010). The
data supports that servicers have not been reporting denial codes
consistently. For additional discussion on the extent of reported data,
see Section D(2)c.
\9\ Treasury conference call with Panel staff (Mar. 24, 2010).
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The Panel appreciates that Treasury has tried to reduce the
implementation burden on servicers, but it is unclear how
burdensome such a requirement would have been. The Panel notes
that many of the model clauses for denial letters allow
servicers to simply check the box of the reason for denial
(e.g., ``You did not obtain your loan on or before January 1,
2009'' or your property was ineligible because it is
``Vacant''). However, many of the model clauses require
servicers to fill in the blanks or customize the letter for the
borrower (e.g., you are ineligible because your income ``which
[you told us is $___] OR [we verified as $___]'' does not meet
debt-to-income ratio (DTI) eligibility requirements, ``Your
loan was paid in full on ___,'' or ``you notified us on ___
that you did not wish to accept the offer''). Even the list of
certain NPV inputs requires some customization because the
servicer must provide the data collection date for unpaid loan
balance, pre-modification interest rate, and number of months
delinquent.\10\
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\10\ See HAMP Borrower Notices, supra note 5, at A-1.
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The Panel is concerned that some of the reported denial
codes are incorrect or erroneous. For example, the data show
that HAMP applications were denied because of a trial plan
default. However, a trial plan default can only occur if a
borrower is already participating in a trial modification;
these borrowers received such denials before they were in a
trial modification.\11\ Treasury needs an appropriate
monitoring mechanism in place to ensure that servicers are
accurately reporting the reasons for denial or cancellation and
those who are not receive meaningful sanctions for
noncompliance.
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\11\ See Section G(1) for additional information on reported denial
codes.
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b. Conversion Campaign
Under HAMP, eligible borrowers are given trial
modifications in which first-lien mortgage payments are reduced
to 31 percent of income. Generally, after three months of
successful payments and provision of certain documentation, the
modification is converted to a permanent modification. Although
Treasury uses the term ``permanent modification,'' the Panel
believes it is important to be clear that these are only five-
year modifications; after five years the interest rate and
payments on the modified loan can rise,\12\ therefore the
modification is not truly ``permanent.'' However for clarity
and consistency with Treasury's terms, this report will use the
term permanent modification.
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\12\ If the modified rate is below the market rate as determined
from the Freddie Mac Primary Mortgage Market Survey rate on the date
the modification agreement is prepared, the modified rate will be fixed
for a minimum of five years as specified in the modification agreement.
Beginning in year six, the rate may increase no more than one
percentage point per year until it reaches the market rate at the time
the modification agreement is prepared. The rate can never be higher
than the market rate as indicated in the modification agreement. If the
modified rate is at or above the market rate at the time the
modification agreement is prepared, however, the modified rate is fixed
for the life of the loan.
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At the end of 2009, Treasury began a conversion campaign
focused on homeowners still in trial status who were eligible
for permanent modifications.\13\ Treasury took this step in
order to move along a backlog of approximately 375,000 eligible
borrowers who were still in trial modifications. As part of
this campaign, Treasury required the seven largest HAMP
servicers to submit plans showing their ability to make and
communicate decisions on the eligibility of each borrower
before the end of January 2010. Treasury also required
servicers to provide a strategy for borrowers who were current
on their payments but had not submitted certain documentation.
Treasury evaluated servicers' plans with on-site servicer
reviews by Treasury and Fannie Mae, enhanced borrower
communication tools, and the engagement of all levels of
government to assist in outreach.\14\
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\13\ U.S. Department of the Treasury, Obama Administration Kicks
Off Mortgage Modification Conversion Drive (Nov. 30, 2009) (online at
www.financialstability.gov/latest/tg_11302009b.html) (hereinafter
``Administration Kicks Off Modification Drive'').
\14\ House Oversight and Government Reform, Subcommittee on
Domestic Policy, Written Testimony of Phyllis R. Caldwell, chief,
Homeownership Preservation Office, U.S. Department of the Treasury,
Foreclosures Continue: What Needs to Change in the Administration's
Response?, at 11 (Feb. 25, 2010) (online at oversight.house.gov/images/
stories/Hearings/Domestic_Policy/2010/022510_Foreclosure/
022410_Caldwell_Treasury_OGR_DP_022510.pdf) (hereinafter ``Testimony of
Phyllis Caldwell'').
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During this review period, servicers were to convert
eligible borrowers as quickly as possible. In doing so,
servicers had to confirm the status of all borrowers in active
trial modifications that were set to expire by January 31,
2010. If appropriate, servicers had to send borrowers written
notice that the borrowers had failed to make all scheduled
trial plan payments, had failed to submit required paperwork,
or both. Borrowers had 30 days (or until January 31, 2010,
whichever was later) to submit the required documentation and/
or payments.\15\ Servicers that did not meet performance
expectations detailed in the Servicer Participation Agreements
could be subject to withholding or clawbacks of incentives or
additional oversight from Treasury.\16\
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\15\ U.S. Department of the Treasury, Home Affordable Modification
Program--Temporary Review Period for Active Trial Modifications
Scheduled to Expire on or before January 31, 2010, Supplemental
Directive 09-10 (Dec. 23, 2009) (online at www.hmpadmin.com/portal/
docs/hamp_servicer/sd0910.pdf).
\16\ Administration Kicks Off Modification Drive, supra note 13.
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The conversion campaign appears to have had some success.
As of the Panel's October report, modifications were converting
at a mere 1.26 percent,\17\ but the percentage of trial
modifications converted within three months peaked at a rate of
11.84 percent in the most recent data received from Treasury.
The percentage converted within six months reached 23.72
percent.\18\ These figures are encouraging but still relatively
low considering the enormity of the foreclosure problem.
Treasury must remain focused on continuing to increase the
conversion rate.
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\17\ Congressional Oversight Panel, October Oversight Report: An
Assessment of Foreclosure Mitigation Efforts After Six Months, at 74
(Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909-
report.pdf) (hereinafter ``October Oversight Report'').
\18\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
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Unfortunately, Treasury has been unable to provide data to
the Panel regarding the status of the 375,000 borrowers who
were the prime focus of the conversion campaign, and indicated
that such data would not be available for several months.
Treasury should clarify the outcomes for these borrowers and
continuously work to improve its systems, as a lack of relevant
program data in a timely manner prevents adequate analysis and
evaluation.
c. Verified Documentation
In late January 2010, Treasury released a directive that
altered borrower documentation requirements ``to simplify and
speed up the modification process for both borrowers and
servicers.'' \19\ This new directive requires servicers to
obtain written, or ``verified,'' income before offering trial
period plans with effective dates on or after June 1, 2010.\20\
Currently, servicers can offer trial period plans based on
stated or verified income.\21\ This new directive was intended
to make the HAMP modification process more efficient as well as
to streamline documentation requirements. Under the new
directive, borrowers must submit an ``Initial Package'' that
includes a Request for Modification and Affidavit (RMA) Form
(which includes the reason the borrower needs a modification,
such as ``curtailment of income'' or ``loss of job''), an
authorization for the servicer to obtain borrower tax records
from the IRS, and written evidence of income.\22\
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\19\ Testimony of Phyllis Caldwell, supra note 14.
\20\ U.S. Department of the Treasury, Home Affordable Modification
Program--Program Update and Resolution of Active Trial Modifications,
Supplemental Directive 10-01, at 1 (Jan. 28, 2010) (online at
www.hmpadmin.com/portal/docs/hamp_servicer/sd1001.pdf) (hereinafter
``HAMP--Update and Resolution of Active Trial Modifications'').
\21\ See U.S. Department of the Treasury, Introduction of the Home
Affordable Modification Program, Supplemental Directive 09-01, at 5-7
(Apr. 6, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/
sd0901.pdf) (hereinafter ``Introduction of HAMP'').
\22\ HAMP--Update and Resolution of Active Trial Modifications,
supra note 20, at 1-2.
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With this directive, Treasury has taken a significant step
to improve the documentation process. The directive followed
Treasury's initial decision to allow servicers to offer trial
period plans based on stated or verified income so that the
program could reach a larger number of borrowers in the
shortest amount of time in order to stem the flood of
foreclosures that many saw coming. This was part of a general
decision to roll out HAMP very quickly. Treasury has since
modified the program several times to address problems
encountered by servicers, borrowers, and housing counselors and
in response to recommendations of its TARP oversight bodies-
COP, the Special Inspector General for TARP (SIGTARP), and the
Government Accountability Office (GAO). For example, Treasury
found that allowing servicers to base HAMP eligibility
determinations on verbal financial information provided trial
modifications to many borrowers who would not ultimately
qualify for permanent modifications.\23\ (Treasury has always
required servicers to review written documentation to evaluate
borrowers' conversion to permanent modifications.)\24\ Although
attempts to streamline and standardize the mortgage
modification process can result in uniformity and efficiency,
SIGTARP and GAO have found that Treasury's repeated changes to
program guidelines (including changing documentation
requirements and repeated changes and clarifications in net
present value models) were some of the main problems with HAMP
or some of the primary reasons that Treasury's progress has
been slow and disappointing.\25\ Treasury is to be commended
for efforts to improve the programs, but when attempting to do
so, Treasury should be aware that the slow drip of additional
program requirements has been a major challenge in program
implementation for servicers that may lack nimbleness to
respond to programmatic changes.\26\ There have been 13 new
supplemental directives and two revisions of existing
supplemental directives in the last 12 months.
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\23\ When providing stated incomes, a number of borrowers
inadvertently or intentionally under- or over-stated their incomes, or
misrepresented that the property was owner occupied. Treasury
conversations with Panel staff (Mar. 24, 2010).
\24\ Introduction of HAMP, supra note 21, at 6-7.
\25\ Government Accountability Office, Home Affordable Modification
Program Continues to Face Implementation Challenges, GAO-10-556T (Mar.
25, 2010) (online at www.gao.gov/new.items/d10556t.pdf); Office of the
Special Inspector General for the Troubled Asset Relief Program,
Factors Affecting Implementation of the Home Affordable Modification
Program (Mar. 25, 2010) (online at sigtarp.gov/reports/audit/2010/
Factors_Affecting_Implementation--
of_the_Home_Affordable_Modification_Program.pdf) (hereinafter ``Factors
Affecting Implementation of HAMP'').
\26\ Factors Affecting Implementation of HAMP, supra note 25.
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It is yet to be seen how the transition to verified income
will impact program results. However, a few conclusions can be
drawn. The change to verified income is unlikely to result in a
net increase in the number of permanent modifications. It
should increase the conversion rate from trial to permanent
modification, as servicers will have already evaluated the
borrower's documentation for modification at the time of trial
offer, thus the only reason for failure to convert would be the
borrower's failure to make the required payments. But, it also
should result in fewer HAMP trial modifications being offered,
as the documentation requirements are more stringent and
similar to the previous requirements for conversion.\27\ It is
important to note that this documentation change will give
borrowers a stronger, more realistic expectation that they will
be able to convert to a permanent modification.
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\27\ Treasury conversation with Panel. As discussed in Section
D(2)e, the data supports this conclusion. The data shows that stated-
income servicers have enrolled more borrowers in trial modifications
but have converted a smaller number into permanent modifications. The
data also shows that verified-income servicers have been offering fewer
trial period plans but have converted a larger percentage of those
trial modifications to permanent modifications.
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d. Second-Lien Program
Second liens often present legal and financial obstacles to
the successful, sustainable modification of first mortgages.
Whether they are originated at the same time as the first
mortgage, or, in the case of home equity loans, at a later
date, second liens often contribute to affordability problems
for borrowers. Even with a modified first-lien mortgage, the
borrower's total mortgage payments may remain unaffordable
after accounting for the borrower's second-lien payment
obligations. Second liens also contribute to negative equity,
which increases the likelihood that the borrower will default.
In addition, second liens complicate the process of getting
an agreement among the various interested parties on a mortgage
modification. As part of a modification, holders of first-lien
mortgages give up their position as having the first claim on
the property, unless the second-lien holder agrees otherwise,
and securing this agreement can be difficult.\28\ The second-
lien holder may be reluctant to remain in the second position
because of a concern that its claim on payments from the
borrowers will be wiped out by the first-lien modification.\29\
So, in exchange for agreeing to keep the junior claim on the
property, the second-lien holder may demand money from the
first-lien holder.\30\ Furthermore, the holder of the first-
lien mortgage will be reluctant to make concessions to the
borrower unless the second-lien holder does so too. Otherwise,
the second-lien holder would effectively free-ride off the
first-lien holder's concessions; to the extent that the
borrower's cash flow is freed up by the first-lien holder's
concessions, it would accrue to the benefit of the second-lien
holder.
---------------------------------------------------------------------------
\28\ October Oversight Report, supra note 17, at 24-25.
\29\ House Oversight and Government Reform, Subcommittee on
Domestic Policy, Written Testimony of David Berenbaum, chief program
officer, National Community Reinvestment Coalition, Foreclosures
Continue: What Needs to Change in the Administration's Response?, at 23
(Feb. 25, 2010) (online at oversight.house.gov/images/stories/Hearings/
Domestic_Policy/2010/022510_Foreclosure/
022310_DP_David_Berenbaum_022510.pdf) (hereinafter ``Testimony of David
Berenbaum'').
\30\ October Oversight Report, supra note 17, at 25 fn 70.
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To address these issues, last year Treasury announced the
Second Lien Program (2MP) as part of HAMP. Under this program,
Treasury uses incentive payments to encourage second-lien
servicers to voluntarily reduce the cost of these loans to
borrowers who participate in first-lien modifications under
HAMP.\31\ As announced, the program gave participating
servicers two options: reduce borrower payments or extinguish
the lien.\32\ Under the first option, Treasury would pay
servicers incentive payments of up to $1,250 to modify second-
lien loans to a lower interest rate--one percent on amortizing
loans and two percent on interest-only loans. Borrowers also
would receive up to $1,250 in incentive payments to stay
current on the second lien. Investors also would receive an
incentive payment from Treasury equal to half of the difference
between (i) the interest rate on the first lien as modified and
(ii) either one or two percent, depending on the loan type.\33\
The maturity date of the second lien was to be extended to
match the modified first lien.\34\ Under the second option,
investors would receive a lump sum incentive payment to
extinguish the loan.
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\31\ U.S. Department of the Treasury, Update to the Second Lien
Modification Program, Supplemental Directive 09-05 Revised (Mar. 26,
2010) (online at www.hmpadmin.com/portal/docs/second_lien/sd0905r.pdf)
(hereinafter ``Update to the Second Lien Modification Program'').
\32\ For a complete discussion of the Second Lien Program, see the
Panel's October report. October Oversight Report, supra note 17, at 74.
\33\ U.S. Department of the Treasury, Making Home Affordable
Program Update (Apr. 28, 2009) (online at www.financialstability.gov/
docs/042809SecondLienFactSheet.pdf) (hereinafter ``Apr. 2009 MHA
Update'').
\34\ Update to the Second Lien Modification Program, supra note 31.
---------------------------------------------------------------------------
The Second Lien Program was announced more than a year ago,
but in its initial form it did not attract much participation
from second-lien holders, and consequently failed to get off
the ground. More recently, Treasury announced a number of
changes to the program, and the four largest second-lien
servicers (Bank of America, Citigroup, JPMorgan Chase, and
Wells Fargo) have now enrolled.\35\ Together, Bank of America,
Citigroup, JPMorgan Chase, and Wells Fargo hold approximately
58 percent of the $1.03 trillion in outstanding second
liens.\36\
---------------------------------------------------------------------------
\35\ Bank of America had enrolled before the new changes were
announced, but had not yet implemented the program. After the changes
were announced, Wells Fargo, J.P. Morgan Chase, and Citigroup signed
up. Bank of America, Bank of America Becomes First Mortgage Servicer to
Sign Contract for Home Affordable Second-Lien Modification Program
(Jan. 26, 2010) (online at newsroom.bankofamerica.com/
index.php?s=43&item=8624); Wells Fargo, Wells Fargo Signs Home
Affordable Second-Lien Modification Program Agreement With U.S.
Treasury (Mar. 17, 2010) (online at www.wellsfargo.com/press/2010/
20100317_2MP); Chase, Chase Joins Second-Lien Program to Keep More
Families in Homes (Mar. 22, 2010) (online at investor.shareholder.com/
jpmorganchase/releasedetail.cfm?ReleaseID=453682); Citigroup, Citi
Expands Efforts to Keep Families in Their Homes With Commitment to
Second-Lien Program (Mar. 25, 2010) (online at www.citigroup.com/citi/
press/2010/100325a.htm).
\36\ Amherst Securities Group LP, Amherst Mortgage Insight, Second
Liens--How Important?, at 10 (Jan. 29, 2010) (hereinafter ``Second
Liens--How Important?''). For further discussion of the banks' second-
lien holds see Annex I, Section 1.g, infra.
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Previously, for interest-only loans, servicers were to
reduce the interest rate to two percent, and retain the
interest-only feature.\37\ Under the revisions, servicers have
the option of reducing the rate to two percent and converting
the loan to a fully amortizing loan. Servicers are also now
permitted to extend the amortization term to 40 years. In
addition, second liens for borrowers in bankruptcy must be
modified.\38\ Treasury increased the lump sum incentive
payments to between 10 percent and 21 percent of the unpaid
principal balance of the second lien to investors that agree to
extinguish loans.\39\ None of these revisions alter the basic
structure of the Second Lien Program; the program still uses
TARP funds as an incentive for second-lien modifications or
extinguishments.
---------------------------------------------------------------------------
\37\ Update to the Second Lien Modification Program, supra note 31,
at 5.
\38\ This is only a sampling of the revisions to the Second Lien
Program.
\39\ Update to the Second Lien Modification Program, supra note 31.
---------------------------------------------------------------------------
The Panel has been highlighting the need for the
modification and removal of second liens since March 2009, and
Treasury has acknowledged the issue's importance for just as
long, so it is a positive sign that the Second Lien Program now
appears to be gaining traction. The Panel will monitor the
program closely to evaluate its progress.
Specifically, the Panel plans to monitor the effect of
second-lien write-downs on the capital levels of the banks
holding second liens. As discussed previously, Bank of America,
Citigroup, JPMorgan Chase, and Wells Fargo have large second-
lien portfolios. The stress tests conducted last year by
federal banking regulators found that under adverse economic
conditions, those four banks could lose a total of $68.4
billion in 2009 and 2010 on their second-lien portfolios; \40\
those losses were based on estimated loss rates of 13.2 percent
to 19.5 percent, rates that could go higher because so many
first liens are underwater.\41\ There is a tension between
Treasury's goal of removing second liens as an obstacle to
mortgage restructurings and Treasury's stated interest in
maintaining bank capital levels.\42\
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\40\ Under the stress tests' more adverse scenario, estimated
losses on second liens were $21.4 billion for Bank of America, $20.1
billion for JPMorgan Chase, $14.7 billion for Wells Fargo, and $12.2
billion for Citigroup. Board of Governors of the Federal Reserve
System, The Supervisory Capital Assessment Program: Overview of
Results, at 9 (May 7, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/bcreg20090507a1.pdf).
\41\ See Letter from Rep. Barney Frank, chairman, Committee on
Financial Services, U.S. House of Representatives, to Brian Moynihan,
Vikram Pandit, James Dimon, and John Stumpf, Mar. 4, 2010 (online at
online.wsj.com/public/resources/documents/BFranksLttr100307.pdf)
(hereinafter ``Letter from Rep. Barney Frank'') (``Large numbers of
these second liens have no real economic value--the first liens are
well underwater, and the prospect for any real return on the seconds is
negligible'').
\42\ See e.g., 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, Chairman of
the Federal Deposit Insurance Corporation Sheila Bair, and Comptroller
of the Currency John C. Dugan: The Treasury Capital Assistance Program
and the Supervisory Capital Assessment Program (May 6, 2009) (online at
financialstability.gov/latest/tg91.html).
---------------------------------------------------------------------------
The Panel also believes that Treasury should consider
incorporating borrowers' second-lien payments into the formula
used to calculate mortgage affordability under HAMP. Currently,
only the first-lien payment is used in the calculation,\43\
which may provide a skewed picture of whether the borrower can
afford to pay the modified mortgage. Second liens have a high
correlation with poorer loan performance; delinquencies are
higher on properties with multiple liens.\44\ Treasury must
account for this reality if HAMP is going to produce
modifications that are sustainable over the long run.
---------------------------------------------------------------------------
\43\ The debt-to-income ratio (DTI) used in HAMP establishes that
the borrower's first-lien mortgage payments each month must not exceed
31 percent of the household income.
\44\ See, e.g., Second Liens--How Important?, supra note 36, at 1.
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e. Extension of HARP
Part of MHA, but not funded by TARP dollars, the Home
Affordable Refinance Program (HARP) allows borrowers who hold
mortgages guaranteed by government-sponsored entities (GSEs)
Fannie Mae and Freddie Mac to refinance into new GSE-eligible
mortgages. This program allows borrowers whose loan-to-value
(LTV) ratios have risen above 80 percent, and therefore would
generally have insufficient equity for a traditional
refinancing, to take advantage of the current lower mortgage
interest rates.\45\ The program extends to borrowers with LTV
ratios of up to 125 percent. HARP is administered by the
Federal Housing Finance Agency (FHFA), the government agency
that regulates Fannie Mae and Freddie Mac, which recently
announced plans to extend it by one year, to June 30, 2011.
FHFA acting director Ed DeMarco explained that it had
``determined that the market conditions that necessitated the
actions taken last year have not materially changed.'' \46\
---------------------------------------------------------------------------
\45\ U.S. Department of the Treasury, Making Home Affordable:
Summary of Guidelines, at 1 (Mar. 4, 2009) (online at www.treas.gov/
press/releases/reports/guidelines_summary.pdf).
\46\ Federal Housing Finance Agency, FHFA Extends Refinance Program
By One Year (Mar. 1, 2010) (online at www.fhfa.gov/webfiles/15466/
HARPEXTENDED3110[1].pdf).
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When announced, Treasury expected HARP to reach four to
five million homeowners eligible to refinance.\47\ More than a
year later, only 221,792 borrowers have refinanced their
mortgages under the program. Despite the lower than projected
participation, HARP remains a good refinancing opportunity for
borrowers of underwater GSE-guaranteed mortgages who are
current in their payments. The program can help borrowers
refinance into a more stable 30-year fixed rate product. The
30-year fixed rate mortgage, created during the Great
Depression as the standard to protect the housing market and
economy, provides households with a predictable housing cost.
In addition, HARP refinancings do not involve any direct
taxpayer expenditures.
---------------------------------------------------------------------------
\47\ 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)
(hereinafter ``MHA Detailed Program Description'').
---------------------------------------------------------------------------
f. Borrower Outreach and Communication
On March 24, 2010, Treasury announced additional guidance
for HAMP servicers related to borrower outreach and
communication. Most significantly, servicers must now
proactively solicit borrowers who have missed two mortgage
payments and meet the basic HAMP eligibility conditions.\48\ If
a borrower meets these criteria, the servicer must reach out to
the borrower to determine whether he or she is eligible for
HAMP. The new guidance sets out a series of steps and
timeframes that the servicer must follow before initiating
foreclosure proceedings.\49\ The servicer may not refer the
borrower to foreclosure until the borrower has been evaluated
and determined not to be eligible for HAMP, unless the borrower
did not respond to the servicer's solicitations.
---------------------------------------------------------------------------
\48\ U.S. Department of the Treasury, Supplemental Directive 10-02:
Home Affordable Modification Program--Borrower Outreach and
Communication at 2 (Mar. 24, 2010) (online at www.hmpadmin.com/portal/
docs/hamp_servicer/sd1002.pdf) (hereinafter ``Supplemental Directive
10-02''). See Section E.2 for a description of HAMP eligibility
criteria.
\49\ Supplemental Directive 10-02, supra note 48, at 2-4.
---------------------------------------------------------------------------
This guidance also sets out a defined regime that
establishes timely performance for each party to a
modification, which is intended to establish clear steps that
the servicer and borrower must take to proceed with the
modification or move into foreclosure. In addition, the
guidance requires servicers to consider the HAMP eligibility of
borrowers who have filed for bankruptcy. Prior to this
guidance, consideration of those who had filed for bankruptcy
was optional.\50\ All of these changes will be effective June
1, 2010.
---------------------------------------------------------------------------
\50\ Id., at 7-8.
---------------------------------------------------------------------------
The Panel applauds Treasury's new guidance promoting
borrower outreach, with three aspects standing out as a
positive evolution of Treasury assistance to distressed
homeowners: (1) the enunciation of clear expectations and
timelines for both borrower and servicer obligations; (2) the
clarification with regard to the eligibility of homeowners who
are facing bankruptcy; and (3) the required evaluation of
borrowers for HAMP before foreclosure can commence. In
particular, the Panel is pleased that Treasury is prioritizing
early intervention in the new guidance. As discussed in Section
D.2.d, statistics show that early intervention modifications
are more successful than modifications on loans in default.
The clarification of good faith efforts to contact a
borrower is an important point. The Panel is aware that many
servicers currently conduct efforts beyond the newly
articulated standard and hopes that they will continue with
such efforts. The standard should be viewed as a floor rather
than a measure of maximum servicer effort.
g. Help for Unemployed Homeowners
When HAMP was announced in March 2009,\51\ the U.S.
unemployment rate was 8.6 percent; it is currently 9.7 percent.
Just as important, the median length of a period of
unemployment has risen in that same time from under 12 weeks to
nearly 20 weeks.\52\ So, unemployment today generally means a
sharp curtailment of income for 4-5 months, with a mortgage
becoming delinquent after just 60 days without full payment. A
recent Freddie Mac survey notes that 58 percent of conforming
borrowers who have made contact with their servicers cite
``unemployment or curtailment of income'' as the principal
cause of hardship.\53\ In a survey of distressed homeowners by
the National Community Reinvestment Coalition, 39 percent of
respondents cited the loss of a job as the reason for their
inability to make their mortgage payments. Another 44 percent
of respondents cited a reduction in work hours.\54\ The
curtailment of income caused by unemployment may lead to a rise
in household debt and, consequently, an increase in redefaults
on modified mortgages.\55\
---------------------------------------------------------------------------
\51\ U.S. Department of the Treasury, Relief for Responsible
Homeowners One Step Closer Under New Treasury Guidelines (Mar. 4, 2009)
(online at financialstability.gov/latest/tg48.html).
\52\ See Figure 50, infra.
\53\ Freddie Mac, Featured Perspectives with Chief Economist Frank
Nothaft: What's Driving Mortgage Delinquencies? (Mar. 22, 2010) (online
at www.freddiemac.com/news/featured_perspectives/
20100322_nothaft.html?intcmp=1004FPFN).
\54\ National Community Reinvestment Coalition, HAMP Mortgage
Modification Survey 2010, at 7 (online at www.ncrc.org/images/stories/
mediaCenter_reports/hamp_report_2010.pdf).
\55\ Factors Affecting Implementation of HAMP, supra note 25, at
15-16.
---------------------------------------------------------------------------
It has generally been quite difficult for unemployed
borrowers to qualify for HAMP because affordable monthly
mortgage payments for people without a paycheck are usually too
low to make economic sense for the investor. Originally under
HAMP, unemployment insurance payments were counted in the
calculation of the borrower's income,\56\ but only if the
servicer determined that the assistance would last for nine
months.\57\ Nonetheless, unemployment benefits were often
insufficient to make a modified mortgage affordable.
---------------------------------------------------------------------------
\56\ U.S. Department of Treasury, Home Affordable Modification
Program Guidelines (Mar. 4, 2009) (online at www.ustreas.gov/press/
releases/reports/modification_program_guidelines.pdf).
\57\ Introduction of HAMP, supra note 21, at 7-8.
---------------------------------------------------------------------------
In response to the problem of foreclosures caused by
unemployment, Treasury in March 2010 announced changes to HAMP
that will provide temporary assistance to unemployed
homeowners. This feature aims to assist unemployed homeowners
as they search for new employment. It is available to any
eligible borrower whose servicer participates in HAMP;
borrowers do not need to be evaluated for a trial modification
to participate. To be eligible, the borrower must (1) have a
mortgage that meets HAMP's eligibility requirements; \58\ (2)
submit evidence that he or she is receiving unemployment
benefits; and (3) request the temporary assistance within the
first 90 days of delinquency. Servicers that participate in
HAMP are required to provide these temporary modifications to
eligible borrowers.
---------------------------------------------------------------------------
\58\ Introduction of HAMP, supra note 21. See Section E.2 for a
further description of HAMP eligibility criteria.
---------------------------------------------------------------------------
The new unemployment assistance sets the borrower's monthly
payment at up to 31 percent of monthly income (which in most
cases will be unemployment insurance). The 31 percent payment
is reached via forbearance; no taxpayer dollars will be spent
on the forbearance plans. The borrower's payment will stay at
the unemployment forbearance amount for at least three months
and can be extended up to six months, subject to investor and
regulatory guidelines. If the borrower becomes re-employed
during this period, his or her temporary assistance will stop.
If, when the borrower finds a new job, the mortgage payment is
more than 31 percent of gross monthly income, the servicer must
evaluate the borrower for HAMP. If at the end of the six-month
period the borrower has not yet found a new job, the servicer
must evaluate the borrower for a HAMP short sale or deed-in-
lieu.\59\
---------------------------------------------------------------------------
\59\ U.S. Department of the Treasury, Making Home Affordable
Program Enhancements to Offer More Help for Homeowners, at 2 (Mar. 26,
2010) (online at makinghomeaffordable.gov/docs/
HAMP%20Improvements_Fact_%20Sheet_032510%20FINAL2.pdf) (hereinafter
``MHA Enhancements to Offer More'').
---------------------------------------------------------------------------
Considering the high and persistent level of unemployment,
the Panel believes that Treasury is right to focus on assisting
unemployed borrowers. Treasury must create a plan that can meet
the needs as presented, such as giving people enough time. As
with all foreclosure mitigation programs, it is important to
create sustainable situations rather than simply delaying a
foreclosure. The implementation of the program raises a number
of issues. Because it only applies to unemployed new entrants
into HAMP, borrowers already in HAMP modifications at the time
they lose their jobs are omitted from participation. Treasury's
rationale for this is not clear. Averting a HAMP redefault
prevents not only a foreclosure but also the waste of taxpayer
dollars that accompanies a HAMP redefault. Also not clear is
how Treasury will reliably determine when participants have
found new work and are no longer eligible. Self-reporting,
which seems to be the current mechanism, carries the potential
for abuse.
As with all forms of foreclosure mitigation, federal
efforts to assist unemployed borrowers can be supplemented by
innovative state and local government initiatives as well as
private sector initiatives. There are a number of proposals
that hold promise in combating the problem of foreclosures
caused by unemployment. One idea that the Panel discussed in
October involves establishing a fund to provide emergency loans
to unemployed homeowners. Since 1983, the state of Pennsylvania
has operated such a fund, known as the Homeowners' Emergency
Mortgage Assistance Program (HEMAP). It offers loans for as
long as two years or for as much as $60,000. Unemployed
borrowers do not have to pay interest on the loans until they
start working again.\60\ This program actually earned money for
the state of Pennsylvania between 1983 and 2009.\61\ A second
idea, proposed by University of Wisconsin School of Business
Professor Morris Davis, is to provide housing vouchers to
unemployed homeowners. These vouchers would supplement
traditional unemployment benefits. Under Davis' proposal, the
size of the housing voucher would vary depending on the
mortgage payment owed each month and the amount of traditional
unemployment benefits being collected by the homeowner. The
housing voucher and 30 percent of the homeowner's traditional
unemployment benefits together would be large enough to cover
the monthly mortgage payment.\62\ A third idea comes from the
Federal Reserve Bank of Boston. Under this proposal, unemployed
borrowers would receive a limited-duration monthly grant or
loan based on their loss of household income and the size of
their monthly mortgage payments.\63\ While the Panel does not
endorse any particular proposal, it does believe there is a
clear need for assistance targeted at unemployed borrowers, and
innovative proposals can play a role in supplementing federal
efforts; the Panel urges Treasury in its new Hardest Hit Fund
programs (discussed below in Section C.2) to help develop
promising ideas in this area.
---------------------------------------------------------------------------
\60\ Pennsylvania Housing Finance Agency, Pennsylvania Foreclosure
Prevention Act 91 of 1983 (online at www.phfa.org/consumers/homeowners/
hemap.aspx) (accessed Apr. 12, 2010).
\61\ See Congressional Oversight Panel, Written Testimony of the
Honorable Annette M. Rizzo, Court of Common Pleas, First Judicial
District, Philadelphia County, Philadelphia Field Hearing on Mortgage
Foreclosures, at 10 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-rizzo.pdf).
\62\ Morris A. Davis, The Foreclosure Problem and the WI-FUR Plan
Solution, Wisconsin School of Business, James A. Graaskamp Center for
Real Estate (Nov. 19, 2009) (online at morris.marginalq.com/WIFUR/
2009_11_17 WI-FUR Overview.ppt).
\63\ Morris A. Davis, Jeff Fuhrer, Chris Foote & Eileen Mauskopf,
Staff Briefing on Reducing Foreclosures (Dec. 4, 2009) (online at
morris.marginalq.com/WIFUR/2009_12_04%20House%20Briefing.ppt); Federal
Reserve Bank of Boston, A Proposal to Help Distressed Homeowners
(Winter 2010) (online at www.bos.frb.org/commdev/c&b/2010/winter/
Foote_Fuhrer_Mauskopf_Willen_foreclosure.pdf).
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h. FHA Refinancings
On March 26, 2010, the Administration announced a number of
changes to its foreclosure mitigation efforts. One of these
changes was the announcement of a Federal Housing
Administration (FHA) refinance option, which offers HAMP
incentive payments to encourage the extinguishment of existing
second-lien loans in order to encourage the voluntary
refinancing of underwater mortgages into FHA mortgages.\64\
This refinancing option is available for all mortgages meeting
FHA underwriting standards and is not restricted to refinancing
existing FHA loans.
---------------------------------------------------------------------------
\64\ MHA Enhancements to Offer More, supra note 59, at 1.
---------------------------------------------------------------------------
The new initiative, which should be available by the fall,
alters the required loan-to-value ratios of the refinanced
mortgage, provides incentives for principal write-downs on
second liens, and provides TARP-funded protection for the new
FHA loan. Under the changes, participating original first-lien
holders must write down the principal of the existing first-
lien loan by at least 10 percent; but the existing first-lien
loan holder may subordinate a portion of the remaining original
first-lien loan up to a combined LTV ratio of 115 percent
combined LTV (in other words, the new second-lien loan may be
between 97.75 percent and 115 percent combined LTV). The first
lien LTV ratio of the new loan must be no higher than 97.75
percent after modification. If there was an original second
lien, it must be written down to ensure a maximum of 115
percent combined LTV in new mortgage debt. Treasury will pay
from TARP funds the original second-lien servicer between 10
and 21 percent of the extinguished amount, the same level of
payments mentioned above under the Second Lien Program. For the
newly refinanced first-lien loans, FHA insurance will only
cover approximately 90.00 percent of the value of the home, and
TARP funds will cover an approximate additional 7.75 percent of
the value of the home (resulting in a combined insurance of
97.75 percent of the value of the home, equivalent to standard
FHA-insured loans). To be eligible, borrowers must (1) be
current on their mortgage, (2) occupy the home as a primary
residence, (3) qualify under FHA underwriting guidelines, (4)
have a FICO credit score of at least 500, and (5) document
their income.\65\
---------------------------------------------------------------------------
\65\ U.S. Department of the Treasury, FHA Program Adjustments to
Support Refinancings for Underwater Homeowners (Mar. 26, 2010) (online
at makinghomeaffordable.gov/docs/
FHA_Refinance_Fact_Sheet_032510%20FINAL2.pdf) (hereinafter ``FHA
Program Adjustments'').
---------------------------------------------------------------------------
Up to $14 billion in TARP funds will support these changes
through incentives to second-lien holders, incentive to
servicers and the provision of a letter of credit to cover a
share of any losses FHA might experience.\66\ It is unclear how
the $14 billion will be divided between incentives and the
letter of credit. This is especially important, as second liens
are concentrated in four banks, and thus the majority of
incentive payments will go to those same four banks. Treasury
and FHA need to be transparent regarding how the funds will
ultimately flow.
---------------------------------------------------------------------------
\66\ The use of TARP funds for the program is authorized by the
Helping Families Save their Homes Act. Pub. L. No. 111-22 Sec. 202(b).
---------------------------------------------------------------------------
While the Panel has expressed concern over the growing
scope and scale of negative equity for the past year, it is
unclear whether this program will be able to make significant
headway against the problem. First, like HARP and Hope For
Homeowners, the FHA refinance option targets underwater
borrowers who are current on their mortgages. It is unclear how
this program would entice sizable additional participation from
the same general group of borrowers. Unlike HAMP, though,
lenders and servicers would not sign broad commitments to
participate in the program, but rather would be able to decide
on a case-by-case basis whether to participate. Because
refinancings move loans out of servicers' portfolios, and thus
eliminate a source of servicing income, servicers would not
have strong incentive to participate. Further, first-lien
holders, unlike second-lien holders, do not receive incentive
payments; therefore, their motivation to participate is
questionable. The similar Hope For Homeowners program did not
attract widespread participation, despite the added lender
incentive of equity sharing. Thus, especially in light of
uncertainty about key parties' desire to participate, the
coordination between borrower, servicer, first-lien holder, and
second-lien holder poses a significant challenge to the
program's effectiveness and is a potential program weakness
that Treasury and FHA need to address.\67\
---------------------------------------------------------------------------
\67\ FHA acknowledged the current lack of a clear plan to address
the coordination challenge in conversation with Panel staff (Apr. 1,
2010).
---------------------------------------------------------------------------
Unlike modification programs, the FHA refinance option will
refinance the mortgage into an FHA mortgage, providing explicit
taxpayer backing for the loan. Treasury and FHA have yet to
specify fully the loss sharing arrangements between the two
entities. It will be extremely important to have transparent
accounting for the joint program; FHA has faced serious
mounting losses recently and is currently below its statutorily
mandated reserve levels.
Treasury has indicated that some portion of the $14 billion
will be used to purchase a letter of credit to cover losses.
Where does Treasury plan to obtain such a letter of credit, and
how will the pricing be effective? If Treasury has to obtain
the letter of credit from the very banks it so recently bailed
out, it is unclear how the risk has been shifted, since
Treasury has been acting as a backstop for the financial
sector.
As noted above, the FHA refinance option provides a
foreclosure alternative for underwater borrowers current on
their loans, yet many key elements remain unclear, including
the allocation of the $14 billion, the loss-sharing arrangement
between the TARP and FHA, the degree of risk the taxpayers may
bear, and the coordination challenge. Treasury and FHA need to
continue to provide clearer details and a more developed
program.
i. Principal Write-Down Incentives
Negative equity, which occurs when the current market value
of a home is less than the amount owed on the mortgage,
continues to be an important factor driving foreclosure rates.
In fact, it is more highly correlated with foreclosure than any
other factor besides a lack of affordability. The primary way
to eliminate negative equity is a principal write-down. The
importance of negative equity will persist, especially given
the large number of option ARMs and interest-only loans
scheduled to reset to higher interest rates in the next few
years.\68\ While negative equity alone will not create an
imminent default, when combined with other financial factors
and life events of the borrower, the possibility of default and
foreclosure increases.
---------------------------------------------------------------------------
\68\ See Annex I(1)a, infra.
---------------------------------------------------------------------------
When homeowners owe more than their homes are worth, they
are ill-equipped to respond to major life events, such as the
loss of a job or divorce. In addition, they may struggle to
deal with an unaffordable mortgage payment or other constraint
on their incomes. Under normal circumstances, a homeowner would
be able to sell his or her home and buy another near the
location of his or her next job; but moving because of a job
opportunity becomes more difficult when the homeowner is
underwater. Homeowners with negative equity have the choice of
either walking away from their loans, thereby depressing nearby
property values, or honoring the loans' terms and turning down
the job, thus disrupting the labor market. In either case, the
economic impact is negative. In addition, underwater homeowners
are more inclined to postpone decisions that might improve the
labor force, such as enrolling in continuous learning programs,
job training programs, or graduate school.
Principal reductions are the primary method of addressing
the problem of negative equity, because they incentivize a
borrower to stay in his or her home. Up until the most recent
HAMP program changes, servicers lacked any incentive to make
modifications through principal reductions, as servicers'
primary compensation is a percentage of the outstanding
principal balance on a mortgage.\69\ Thus, principal reductions
reduce servicers' income, whereas interest reductions do not,
and forbearance and term extensions actually increase
servicers' income because there is greater principal balance
outstanding for a longer period of time. Servicers that
participate in HAMP have been allowed but not required to
reduce principal as part of the effort to reduce the borrower's
monthly mortgage payment to 31 percent of their monthly income.
Because servicers so far have lacked incentives to write down
principal, principal reductions under HAMP to date have been
rare.\70\
---------------------------------------------------------------------------
\69\ See Section C(2)b, infra.
\70\ See Section D(2)a, infra.
---------------------------------------------------------------------------
In late March 2010, Treasury announced new conditions and
incentive payments for HAMP servicers to write down principal.
This change requires servicers to consider a modification that
utilizes a principal write-down if the borrower has an LTV
ratio that exceeds 115 percent. The servicer must run the
standard NPV test and an alternative NPV test that includes the
incentive payments for principal write-down. If the alternative
NPV is higher, the servicer then has the option to use it, but
is not required to do so.\71\ If a principal write-down proves
to be the optimal modification option based on the two NPV
analyses, and the servicer chooses to use the principal write-
down option, the servicer forbears principal that exceeds 115
percent of the home's value to bring the borrower's monthly
payment to 31 percent of his or her monthly income. The entire
amount is initially treated as forbearance, and it is forgiven
in three equal installments over three years as long as the
borrower remains current on mortgage payments.
---------------------------------------------------------------------------
\71\ MHA Enhancements to Offer More, supra note 59, at 2 (``Under
alternative approach, servicers assess the NPV of a modification that
starts by forbearing principal balance as needed over 115 percent loan-
to-value (LTV) to bring borrower payments to 31 percent of income; if a
31 percent monthly payment is not reached by forbearing principal to
115 percent LTV, the servicer will then use standard steps of lowering
rate, extending term, and forbearing additional principal'').
---------------------------------------------------------------------------
Servicers must retroactively consider for the program
borrowers who are already in trial or permanent modifications
and are current on payments at the time of the change's
implementation. Treasury has stated that additional guidance
for second liens is forthcoming but that second-lien holders
must agree to extinguish principal if principal is written down
on the first lien. Treasury will provide second-lien holders
with incentives equal to between 10 percent and 21 percent of
the principal written down.\72\ Treasury will also provide
these same incentives for the write down of principal on the
first lien.
---------------------------------------------------------------------------
\72\ The level of incentive varies depending on the LTV of the
initial loan, from 10 percent incentive for a 140 or greater LTV, 15
percent for between 115 and 140, and 21 percent for less than 115.
---------------------------------------------------------------------------
The Panel is encouraged by Treasury's increased incentives
for servicers to employ principal write-downs in mortgage
modifications. It provides a potential for underwater borrowers
to avoid foreclosure and also, in its retroactive application,
has the potential to lower redefault rates in underwater loans
currently in HAMP trials. As with other aspects of HAMP,
however, uncertainty remains as to whether the incentives will
be enticing enough to encourage servicers to forgo income and
actually write down principal.
Finally, Treasury must continue to be mindful of the matter
of moral hazard. When Treasury Secretary Timothy Geithner was
asked at a Panel hearing in December 2009 about the problem of
underwater borrowers, he cited moral hazard for borrowers as
one reason why Treasury had not prioritized principal
reduction. ``And the problem in doing that, apart from its
expense,'' Secretary Geithner said, ``is the basic sense of
fairness and what it does to incentives in the future.'' \73\
---------------------------------------------------------------------------
\73\ Congressional Oversight Panel, Transcript: Testimony of
Secretary Timothy F. Geithner (Dec. 10, 2009) (publication forthcoming)
(online at cop.senate.gov/hearings/library/hearing-121009-
geithner.cfm).
---------------------------------------------------------------------------
Treasury's recently announced principal reduction program
has two important features that may help minimize the moral
hazard problem. First, because lenders are not required to
write down principal, even if a borrower could qualify for the
modification program, he or she would have absolutely no
assurance that the lender would be willing to employ principal
reduction. Second, the program does not provide the principal
reduction upfront; rather, it must be earned over three years
with timely payments. Treasury must monitor data carefully
going forward to watch for early signs of abuse and take
necessary steps to prevent it from recurring. The Panel will
also monitor the program's performance in this area.
j. Increased Incentive Payments
Treasury in late March 2010 increased incentive payments to
lenders, servicers, and borrowers in a variety of situations.
HAMP and its various subprograms are structured to provide
incentive payments to borrowers, lenders, and servicers in
order to encourage modifications or other foreclosure
prevention activities.
For example, under the Home Affordable Foreclosure
Alternative Program (HAFA), subordinate lien holders that agree
to release borrowers from debt will receive up to six percent
or $6,000 of the outstanding loan balance, with the amount
reimbursed by TARP increased to a maximum of 2 percent or
$2,000. Servicer incentive payments under the program will
increase from $1,000 to $1,500 to encourage additional outreach
to homeowners who are unable to complete a modification and to
increase the use of short sales and deeds-in-lieu. Borrowers
who successfully complete a deed-in-lieu or short sale will
receive $3,000, up from $1,500, for relocation assistance.\74\
---------------------------------------------------------------------------
\74\ MHA Enhancements to Offer More, supra note 59, at 3.
---------------------------------------------------------------------------
It is unclear whether these and other increased incentive
payments--discussed in Sections C(1)d and C(1)i, supra--will be
enough to offset the additional costs that servicers incur
under HAMP. Servicers have a variety of additional costs,
including hiring and training new employees and overhauling
their processing systems. Prior to the recent sharp decline in
housing prices, servicers were primarily in the business of
processing transactions. They have had to shift resources from
that business, which relies heavily on automation, to the loss-
mitigation business, which depends much more on employees with
underwriting expertise.\75\ More than a year has passed since
HAMP's inception, so participating servicers that have failed
to retool their businesses lack a good excuse, but the costs to
servicers of implementing these changes may nonetheless be
impeding HAMP modifications.\76\
---------------------------------------------------------------------------
\75\ See, e.g., Paul A. Koches, Ocwen Financial Corporation, Mods
Make Sense, DSNews (Feb. 25, 2010) (online at www.dsnews.com/articles/
mods-make-sense-2010-02-25) (hereinafter ``Mods Make Sense'').
\76\ See October Oversight Report, supra note 17, at 66-67.
---------------------------------------------------------------------------
Further complicating the calculus on modifications are a
variety of payments that servicers receive and outlays they
must make while a loan is delinquent. When a loan defaults, the
servicer is able to collect significant ancillary fees from the
borrower, such as late fees and fees for various in-sourced
activities like collateral inspection; a monthly late fee is
typically five percent of the payment due. In addition, the
servicer continues to accrue its monthly servicing fee--25-50
basis points annually of the outstanding principal balance of
the loans serviced. These fees are recovered off the top from
foreclosure or real estate owned (REO) sale proceeds, before
any payments are made to investors. Offsetting this income,
however, is the requirement that the servicer advance all
delinquent payments to investors from its own funds. While the
servicer is able to recover the advances from foreclosure or
REO sale proceeds, it does not receive any interest on the
advances. Thus, to a servicer without a low-cost funding
channel like deposits, advances can be quite costly.\77\ After
several months, the cost of advances will outweigh the
servicer's income from the defaulted loan.\78\ Thus, while
servicers can often initially profit from a defaulted loan, if
the loan is delinquent for too long, the servicer will start to
lose money on it. Accordingly, servicers are under particular
financial pressure as foreclosure timetables have lengthened
due to court backlogs caused by the rise in foreclosures.
---------------------------------------------------------------------------
\77\ Servicers that are also banks (e.g., Bank of America or Wells
Fargo) have access to low-cost funding channels while other servicers
that are just servicers (e.g., Ocwen Financial Corporation) do not have
access to this low-cost funding source.
\78\ Adam J. Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J.
on Reg. (forthcoming 2011) (hereinafter ``Levitin & Twomey'').
---------------------------------------------------------------------------
Servicer compensation structures may also make servicers
reluctant to attempt loan modifications.\79\ Servicers incur
significant costs when undertaking a loan modification--
estimated at between $1,000 and $1,500 per modification. These
are sunk costs for the servicer. If the modified loan continues
to perform, the servicer will recoup the costs of the
modification and earn more than if it had proceeded directly to
foreclosure. But if the modified loan redefaults before the
servicer recoups the costs of the modification, then the
servicer will incur a larger loss than if it had proceeded
directly to foreclosure.
---------------------------------------------------------------------------
\79\ Id.
---------------------------------------------------------------------------
Thus, as a recent article by Paul A. Koches, general
counsel for Ocwen Financial, a leading subprime servicer,
notes, ``servicers make money when delinquent loans become
reperforming. Servicers collect the most servicing fees and
incur the lowest costs when this is the case.'' \80\ Koches
also notes, however, that sustainability is key and that
``picking the right people pays off.'' While a reperforming
loan is the optimal outcome for a servicer, a servicer must
weigh the chance that a loan will reperform against the chance
that it will redefault. The critical question for the servicer
is not whether the loan will redefault, but when. If the
servicer anticipates early redefaults, the servicer will be
disinclined to attempt modifications, lest it incur greater
losses.
---------------------------------------------------------------------------
\80\ Mods Make Sense, supra note 75, at 104.
---------------------------------------------------------------------------
For most mortgage modifications, not just those within
HAMP, it takes a servicer between 12 and 24 months to recoup
the cost of a modification.\81\ Given that redefault rates on
all loans modified by OCC/OTS institutions have been in the 60-
percent range for a single year, and at 30 percent just in the
first three months post-modification,\82\ servicers have a
strong incentive not to attempt modifications, especially of
loans they think are likely to redefault quickly. Most
servicers, however, lack predictive capabilities regarding
redefault, and therefore, if they are risk-averse, are likely
to assume that all loans are likely to be early redefaulters.
---------------------------------------------------------------------------
\81\ Levitin & Twomey, supra note 78.
\82\ Office of the Comptroller of the Currency and Office of Thrift
Supervision, OCC and OTS Mortgage Metrics Report (Fourth Quarter 2009),
at 7 (Mar. 2010) (online at www.occ.treas.gov/ftp/release/2009-
163a.pdf) (hereinafter ``OCC and OTS Mortgage Metrics Report--Q4
2009'').
---------------------------------------------------------------------------
In light of the redefault timing problem, HAMP incentive
payments so far may have been too low to have a significant
effect.\83\ HAMP servicer incentive payments of $1,000 barely
cover the cost of a modification. HAMP incentive payments are
only made when a loan modification converts to a permanent
modification. If a trial modification's costs are similar to a
permanent modification's costs, then a payment of $1,000 per
permanent modification will fail to come anywhere close to
offsetting servicers' costs when only one in four trial
modifications becomes a permanent modification. With trial to
permanent roll rates at around 23 percent, servicers are on
average receiving incentive payments of $1,000 for every
$4,000-$5,000 of modification costs they incur. If so, then
HAMP incentive payments may have simply been too small to
correct misaligned servicer incentives. It remains to be seen
whether the recently announced payment increases will change
servicers' decision-making.
---------------------------------------------------------------------------
\83\ Levitin & Twomey, supra note 78; House Judiciary, Subcommittee
on Commercial and Administrative Law, Written Testimony of Adam J.
Levitin, associate professor of law, Georgetown University Law Center,
Home Foreclosures: Will Voluntary Mortgage Modifications Help Families
Save Their Homes? Part II (Dec. 11, 2009) (online at
judiciary.house.gov/hearings/pdf/Levitin091211.pdf) (hereinafter
``Testimony of Adam Levitin'').
---------------------------------------------------------------------------
To the extent that the new payment schedules increase
modifications, Treasury should be careful that monetary
incentives encourage but do not overpay for increased servicer
participation.
2. New Program Announcements
On February 19, 2010, the White House announced a new
initiative, the Help for the Hardest Hit Housing Markets
(Hardest Hit Fund) program.\84\ To date, Treasury has committed
to the Hardest Hit Fund $2.1 billion of the $50 billion in TARP
funds allocated for foreclosure mitigation.
---------------------------------------------------------------------------
\84\ White House, Help for the Hardest Hit Housing Markets (Feb.
19, 2010) (online at www.whitehouse.gov/the-press-office/help-hardest-
hit-housing-markets).
---------------------------------------------------------------------------
Originally five states--Arizona, California, Florida,
Michigan, and Nevada--qualified for Hardest Hit Fund
assistance.\85\ State and local housing finance agencies (HFAs)
in these states have been allocated caps totaling $1.5 billion.
The states must submit proposals using these allocations, which
will be evaluated by Treasury, before funds are disbursed.
States were eligible if home prices had fallen by at least 20
percent from their peaks; in each of the five recipient states,
borrowers who made traditional downpayments of 20 percent
during the boom years are now at or near negative equity. The
$1.5 billion is to be allocated among the five states based on
a two-part formula that takes into account both home price
declines and unemployment.\86\ For each state, two ratios are
summed: (1) the ratio of the state's unemployment rate to the
highest unemployment rate in any state and (2) the ratio of the
state's price decline to the largest price decline in any
state. The sum of these two ratios is then multiplied by the
number of delinquent loans in the state, and the funds are then
distributed based on each state's resulting weighted share of
delinquent borrowers.\87\
---------------------------------------------------------------------------
\85\ U.S. Department of the Treasury and U.S. Department of Housing
and Urban Development, Housing Finance Agency Innovation Fund for the
Hardest Hit Housing Markets (``HFA Hardest-Hit Fund''): Frequently
Asked Questions, at 3 (online at www.makinghomeaffordable.gov/docs/
HFA%20FAQ%20--%20030510%20FINAL%20(Clean).pdf) (hereinafter ``Hardest-
Hit Fund: FAQs'').
\86\ Hardest-Hit Fund: FAQs, supra note 85, at 1, 3.
\87\ The allocation is: Nevada $102.8 million, California $699.6
million, Florida $418 million, Arizona $125.1 million, and Michigan
$154.5 million. Hardest-Hit Fund: FAQs, supra note 85, at 3. Data for
these calculations is derived from the Bureau of Labor Statistics
unemployment data, the FHFA Purchase Only Seasonally Adjusted Index,
and the MBA National Delinquency Survey; Treasury conversation with
Panel staff (Mar. 5, 2010).
---------------------------------------------------------------------------
On March 29, 2010, Treasury announced a second allocation
to provide assistance to HFAs in Rhode Island, South Carolina,
Oregon, North Carolina, and Ohio. This second set of states was
chosen because they had large percentages of their populations
living in high-unemployment counties, which were defined as
those counties having an unemployment rate over 12 percent. For
example, 60 percent of Rhode Island residents live in such
distressed counties, as opposed to 15 percent of the population
nationwide. This second allocation will make available $600
million, which on a per-capita basis is the same amount
provided under the first allocation.\88\ The $600 million will
be split among Rhode Island, North Carolina, South Carolina,
Ohio, and Oregon based on a formula that uses the product of
the state's total population and the percentage of that
population that is located in high-unemployment counties.\89\
---------------------------------------------------------------------------
\88\ U.S. Department of the Treasury, Update to the HFA Hardest Hit
Fund Frequently Asked Questions (Mar. 29, 2010) (online at
financialstability.gov/docs/
Hardest%20Hit%20public%20QA%200%2029%2010.pdf) (hereinafter ``Hardest
Hit Fund: Updated FAQs'').
\89\ Ohio's allocation cap is $172 million, followed by $159
million for North Carolina, $138 million for South Carolina, $88
million for Oregon, and $43 million for Rhode Island. Hardest Hit Fund:
Updated FAQs, supra note 88.
---------------------------------------------------------------------------
According to Treasury, the Hardest Hit Fund's purpose is
``to support new and innovative foreclosure prevention efforts
in the areas hardest hit by housing price declines and high
unemployment rates.'' \90\ The Hardest Hit Fund is expected to
be used to modify mortgages that HFAs hold, to provide
incentives for financial institutions, servicers, or investors
to modify mortgages, to refinance mortgages in whole or part,
to facilitate short-sales and deeds-in-lieu of foreclosure, to
pay down principal for borrowers with severe negative equity,
to provide assistance to unemployed borrowers, and to provide
incentives for the reduction or modification of second-lien
loans.\91\
---------------------------------------------------------------------------
\90\ Hardest-Hit Fund: FAQs, supra note 85, at 3.
\91\ Hardest-Hit Fund: FAQs, supra note 85, at 4-5.
---------------------------------------------------------------------------
Because of EESA's requirement that TARP funds be used to
purchase troubled assets from financial institutions,\92\
Hardest Hit Fund money will be available to qualifying entities
(the entities must be financial institutions) that will
implement state HFA programs. HFAs in the eligible states are
expected to submit proposals for how they will use their
Hardest Hit Fund allocations. To be eligible, the funding
recipient ``must be a regulated entity that is incorporated
separately from the state government itself, which has the
corporate power to receive [Hardest Hit Fund money] from
Treasury and to work with the related state HFA in implementing
that state's HFA Proposal(s). Agencies of state governments are
not considered Eligible Entities for purposes of the HFA
Hardest-Hit Fund.'' \93\ Proposals for the first round of
Hardest Hit Fund grants are due April 16, 2010; \94\ proposals
for the second round are due June 1, 2010.
---------------------------------------------------------------------------
\92\ 12 U.S.C. Sec. 5211(a)(1).
\93\ U.S. Department of the Treasury, Housing Finance Agency
Innovation Fund for the Hardest Hit Housing Markets (``HFA Hardest-Hit
Fund''): Guidelines for HFA Proposal Submission, at 6 (online at
www.makinghomeaffordable.gov/docs/HFA%20Proposal%20Guidelines%20-
%20030510%20FINAL%20(Clean).pdf) (hereinafter ``Hardest-Hit Fund:
Proposal Guidelines'').
\94\ Hardest-Hit Fund: Proposal Guidelines, supra note 93, at 3.
---------------------------------------------------------------------------
Treasury has developed guidelines for approval of Hardest
Hit Fund grants and is requiring all funded program designs and
program effectiveness metrics to be posted online. All programs
funded by the Hardest Hit Fund are subject to Treasury's direct
oversight as well as the full range of EESA oversight. Because
the Hardest Hit Fund is a grant program, Treasury does not
expect HFAs or their program partners to repay to Treasury any
of the $2.1 billion that is to be distributed.\95\
---------------------------------------------------------------------------
\95\ Id., at 5.
---------------------------------------------------------------------------
The Hardest Hit Fund is not, in and of itself, a solution
to the foreclosure crisis, a point acknowledged by Treasury.
Instead, Treasury bills it as a targeted use of TARP funds for
particularly hard-hit markets that is meant to encourage local
experimentation and innovation. While the Panel applauds
Treasury for seeking to encourage local initiatives, it is
unsure how much local expertise can bring to bear on a
foreclosure problem that is national in scope and nature.
D. Data Updates Since October Report
1. General Program Statistics
MHA is the umbrella program under which HARP, HAMP, and a
number of other foreclosure mitigation efforts are housed. HAMP
is a $75 billion program that provides lenders, servicers, and
investors with incentive payments in order to entice them to
modify mortgages, thereby creating affordable monthly payments
for the borrower. In tandem with other initiatives such as the
HPDP, the HAFA, Hope for Homeowners (H4H), and the newly
announced Hardest Hit Fund, the Administration has announced
that MHA will provide assistance to as many as 7 to 9 million
borrowers.
Figure 1, below, compares the number of loans in the
foreclosure process, by month, with the number of permanent
HAMP modifications and HARP refinances. For several reasons,
these statistics are not directly comparable and do not provide
an accurate measure of Treasury's progress in preventing
foreclosures. They do, however, offer a sense of the scale of
the foreclosure problem and the scale of Treasury's efforts.
FIGURE 1: MHA FORECLOSURE PREVENTION ACTIONS VS. FORECLOSURES \96\
---------------------------------------------------------------------------
\96\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010); HOPE NOW Alliance; RealtyTrac, Foreclosure Activity Press
Releases (online at www.realtytrac.com//ContentManagement/
PressRelease.aspx) (hereinafter ``RealtyTrac Foreclosure Press
Releases'') (accessed Apr. 12, 2010). ``HARP + HAMP'' is comprised of
permanent HAMP modifications began as well as all HARP refinancings.
[GRAPHIC] [TIFF OMITTED] T5737A.001
Of the $75 billion allocated to HAMP, $50 billion comes
from the TARP and the remaining $25 billion comes from the
Housing and Economic Recovery Act of 2008 (HERA).\97\ Of the
$50 billion of TARP funds allocated to HAMP, the Office of
Management and Budget (OMB) has approved $45.5 billion in
apportionments. The following table provides a breakdown of
these apportionments by program.
---------------------------------------------------------------------------
\97\ Congressional Oversight Panel, Questions for the Record from
the Congressional Oversight Panel Philadelphia Field Hearing on
September 24, 2009: Questions for Seth Wheeler, Senior Advisor U.S.
Department of the Treasury (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-wheeler-qfr.pdf) (hereinafter ``Seth Wheeler
QFRs'').
FIGURE 2: MHA PROGRAM APPORTIONMENTS BY OMB AS OF MARCH 29, 2010 \98\
[Dollars in billions]
------------------------------------------------------------------------
Program Amount
------------------------------------------------------------------------
HAMP First-Lien Modifications................................. $31.7
Second Lien Modification Program (2MP)........................ 5.7
Home Affordable Foreclosure Alternatives Program (HAFA)....... 4.6
Home Price Depreciation Program (HPDP)........................ 3.4
---------
Total..................................................... $45.5
------------------------------------------------------------------------
98Treasury mortgage market data provided to Panel staff (Mar. 23, 2010).
Adding the combined stated value of newly announced
programs--$1.5 billion and $0.6 billion for the first and
second Hardest Hit Fund installments \99\ and $14 billion for
the FHA principal reduction program\100\--to the total
apportionments above, the budgeted amount would exceed the $50
billion in TARP funds allocated to foreclosure mitigation
efforts by around $11.6 billion. However, Treasury has
explained that the numbers announced for future programs are in
the process of being developed into finalized program models
that will be sent to the OMB for the apportionment process and
that Treasury will ensure that total apportionments will not
exceed $50 billion.\101\ This raises the question of whether
Treasury intends to scale back the spending announced for
individual programs or scale up the total spending announced
for foreclosure mitigation.
---------------------------------------------------------------------------
\99\ Hardest Hit Fund: Updated FAQs, supra note 88, at 1.
\100\ FHA Program Adjustments, supra note 65, at 1.
\101\ Treasury conversation with Panel staff (Mar. 31, 2010).
---------------------------------------------------------------------------
Of the total amount apportioned to HAMP, $36.9 billion had
been obligated to servicers by Servicer Participation
Agreements through February.\102\ This represents the maximum
amount each servicer could receive, not the amount that has
actually been paid. The following table shows the HAMP cap for
the top 16 servicers, a total for remaining servicers, and the
overall total.
---------------------------------------------------------------------------
\102\ Treasury provided that $39.89 billion had been obligated to
servicers by Servicer Participation Agreements as of March 29, 2010.
This adjusted HAMP cap amount was included in Treasury's April 6, 2010
TARP Transactions Report. U.S. Department of the Treasury, Troubled
Asset Relief Program: Transactions Report For Period Ending April 2,
2010, at 20-28 (Apr. 6, 2010) (online at www.financialstability.gov/
docs/transaction-reports/4-6-10%20Transactions%20Report%20as%20of%204-
2-10.pdf) (hereinafter ``Treasury Transactions Report'').
FIGURE 3: HAMP CAP BY SERVICER AS OF FEBRUARY 2010 \103\
------------------------------------------------------------------------
Servicer Current Cap Amount
------------------------------------------------------------------------
Countrywide Home Loans Servicing LP............ $7,206,300,000.00
Wells Fargo Bank, N.A.......................... 5,738,626,343.90
JPMorgan Chase Bank, N.A....................... 3,863,050,000.00
Bank of America, N.A........................... 2,433,020,000.00
OneWest Bank................................... 2,170,170,000.00
CitiMortgage, Inc.............................. 1,984,190,000.00
GMAC Mortgage, Inc............................. 1,875,370,000.00
American Home Mortgage Servicing, Inc.......... 1,469,270,000.00
Litton Loan Servicing.......................... 1,363,320,000.00
Saxon Mortgage Services, Inc................... 1,242,130,000.00
EMC Mortgage Corporation....................... 1,209,800,000.00
Ocwen Financial Corporation, Inc............... 933,600,000.00
Select Portfolio Servicing..................... 913,840,000.00
National City Bank............................. 700,430,000.00
Home Loan Services, Inc........................ 639,850,000.00
HomEq Servicing................................ 516,520,000.00
Other Servicers................................ 2,612,893,656.10
------------------------
Total...................................... $36,872,380,000.00
------------------------------------------------------------------------
\103\ Treasury mortgage market data provided to Panel staff (Mar. 23,
2010). Some of the listed servicers have been acquired by, or are
related to, other institutions on the list. For example, Bank of
America includes Countrywide and Home Loan Services and JPMorgan Chase
includes EMC Mortgage in Treasury's Monthly Servicer Performance
Reports. See Levitin & Twomey, supra note 78, at 4. In addition,
Litton Loan Servicing is a subsidiary of Goldman Sachs; Saxon Mortgage
Services is a subsidiary of Morgan Stanley; Select Portfolio Servicing
is a subsidiary of Credit Suisse; and HomeEq Servicing is a subsidiary
of Barclays. Bloomberg Data.
Of the amount obligated to servicers, very little was
actually spent through February 2010. Payments occur only once
a trial has converted to permanent modification status, and
further, the payments occur over a five-year schedule rather
than all at once. Treasury explained that all payments made
through February relate to the first-lien modification program
only; no money had been paid out for the other programs (2MP,
HAFA, HPDP). The following table shows the breakdown of the
money spent for the top 16 servicers, the total for remaining
servicers, and the overall total.
FIGURE 4: HAMP INCENTIVES BY SERVICER AS OF FEBRUARY 2010 \104\
------------------------------------------------------------------------
Servicer Servicer Total
------------------------------------------------------------------------
Ocwen.......................................... $10,070,232.00
Select Portfolio Servicing, Inc................ 8,232,946.57
Saxon Mortgage Services, Inc................... 6,243,121.40
GMAC Mortgage, LLC............................. 5,665,573.60
JPMorgan Chase Bank, N.A....................... 4,845,384.27
CitiMortgage Inc............................... 4,525,867.83
Bank of America Home Loans..................... 3,292,936.74
Litton Loan Servicing, LP...................... 3,284,724.01
EMC Mortgage Corporation....................... 1,728,646.74
Nationstar Mortgage, LLC....................... 1,678,104.03
Wells Fargo Bank, N.A.......................... 1,614,533.04
Carrington Mortgage Services, LLC.............. 1,378,869.20
Aurora Loan Services, LLC...................... 1,270,372.18
Wilshire Credit Corporation.................... 885,064.02
HomEq Servicing................................ 693,276.95
OneWest Bank................................... 665,207.25
Other Servicers................................ 1,676,249.93
------------------------
Total...................................... $57,751,109.76
------------------------------------------------------------------------
\104\ Treasury mortgage market data provided to Panel staff (Mar. 23,
2010). Some of the listed servicers have been acquired by, or are
related to, other institutions on the list. In addition to the
relationships noted in footnote 103 above, Bank of America includes
Wilshire Credit Corporation. See Levitin & Twomey, supra note 78, at
4.
a. Home Affordable Refinance Program
HARP was established to provide borrowers current on their
mortgage payments, with loans owned or guaranteed by Fannie Mae
and Freddie Mac, an outlet to reduce their monthly payments
through refinancing, as well as an opportunity to refinance
into a more stable fixed-rate mortgage product. Borrowers
receive assistance through refinancing--not modifications. The
program does not employ incentive payments, and there are no
TARP expenditures for HARP. Unlike other components of MHA,
HARP is not intended for borrowers who are behind in their
mortgage payments. Instead, HARP is aimed at eligible borrowers
suffering from little equity or negative equity due to the
decline in home price values.
All mortgages that are either owned or guaranteed by Fannie
Mae or Freddie Mac are eligible for this program. 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 declining 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. Treasury
estimated that 4 to 5 million borrowers would be eligible for
the program. Since the program began on April 1, 2009, there
have been 221,792 HARP refinancings. This total is comprised of
over 218,000 homeowners with LTVs between 80 percent and 105
percent that received refinancing through HARP and more than
3,000 borrowers with LTVs between 105 percent and 125
percent.\105\
---------------------------------------------------------------------------
\105\ Federal Housing Finance Agency, HAMP Modifications Up in
January; HARP Growing, at 4 (Mar. 24, 2010) (online at fhfa.gov/
webfiles/15570/FPR32410F.pdf).
---------------------------------------------------------------------------
b. Home Affordable Modification Program
HAMP utilizes TARP funds as a match to lender funds to
reduce borrowers' monthly payments and as servicer and borrower
incentives. Once a lender reduces a HAMP-eligible borrower's
front-end DTI ratio to 38 percent, Treasury will match further
reductions in monthly payments dollar-for-dollar with the
lender/investor to achieve a 31 percent DTI ratio.\106\
Treasury also utilizes HAMP funds to provide incentives for
servicer participation and borrower performance. Servicers
receive a one-time payment of $1,000 for each eligible
modification meeting program guidelines, as well as $1,000 per
year (for up to three years) as long as the borrower stays in
the program. Borrowers receive up to $1,000 per year (for up to
five years) as long as he or she remains current on monthly
payments within the program; the borrower funds go directly to
the servicer/lender as principal balance reduction. A one-time
bonus of $1,500 to lenders/investors and $500 to servicers is
paid for modifications made while a borrower is still current
on monthly payments, again, with the borrower bonus going
towards principal balance reduction.\107\
---------------------------------------------------------------------------
\106\ U.S. Department of the Treasury, Home Affordable Modification
Program Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/modification_program_guidelines.pdf) (hereinafter
``HAMP Guidelines'').
\107\ HAMP Guidelines, supra note 106.
---------------------------------------------------------------------------
A total of $50 billion in funding has been allocated from
TARP funds to finance the non-GSE segment of HAMP. As of
February 2010, there were 835,194 active trial modifications
under HAMP.\108\ During the same period, there were 168,708
active permanent modifications, or modifications that have
passed beyond the trial modification phase into the permanent
modification phase under HAMP.\109\ In total, over 1.35 million
trial period plan offers have been extended to borrowers. The
non-GSE segment of HAMP is based upon voluntary servicer
participation. Currently, there are 106 servicer participants
in HAMP.\110\ A detailed analysis of HAMP program data follows
in Section D.2, after the general program overviews.
---------------------------------------------------------------------------
\108\ Active trial modifications include all modifications
currently in place but exclude modifications that were cancelled or
converted to permanent status. Active permanent modifications include
all permanent modifications currently in place but exclude redefaults
and loans that have been paid off.
\109\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
\110\ U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through February 2010 (Mar. 12,
2010) (online at www.makinghomeaffordable.gov/docs/
Feb%20Report%20031210.pdf) (hereinafter ``MHA Servicer Performance
Through February 2010'').
---------------------------------------------------------------------------
FIGURE 5: HAMP ACTIVE TRIAL MODIFICATIONS STARTED VS. ACTIVE PERMANENT
MODIFICATIONS STARTED BY MONTH \111\
---------------------------------------------------------------------------
\111\These figures include trials converted to permanent and
pending permanent modifications. Treasury mortgage market data provided
to Panel staff (Mar. 23, 2010).
[GRAPHIC] [TIFF OMITTED] T5737A.002
c. GSE-HAMP
In total, $25 billion in funding was apportioned under HERA
to fund the GSE portion of HAMP.\112\ The $25 billion portion
of funds derived from HERA is dedicated to Fannie Mae and
Freddie Mac for providing incentive payments in HAMP loan
modifications. As of December 2009, Fannie Mae and Freddie Mac
completed 23,500 and 19,500 permanent modifications,
respectively.\113\ These agencies account for approximately 38
percent of the active permanent modifications under HAMP.
---------------------------------------------------------------------------
\112\ Seth Wheeler QFRs, supra note 97, at 1.
\113\ Federal Housing Finance Agency, Foreclosure Prevention &
Refinance Report, at 2 (Jan. 29, 2010) (online at fhfa.gov/webfiles/
15389/Foreclosure_Prev_release_1_29_10.pdf) (hereinafter ``FHFA
Foreclosure Report'').
---------------------------------------------------------------------------
FIGURE 6: FANNIE MAE AND FREDDIE MAC HAMP TRIAL AND PERMANENT
MODIFICATIONS STARTED BY MONTH THAT WERE ACTIVE AS OF FEBRUARY 2010
\114\
---------------------------------------------------------------------------
\114\ FHFA Foreclosure Report, supra note 113, at 2.
[GRAPHIC] [TIFF OMITTED] T5737A.003
d. Home Price Decline Protection Program
HPDP was established in order to facilitate additional
mortgage modifications in those areas hardest hit by home price
declines. HPDP provides the mortgage investor with further
incentives to modify mortgages on properties in areas that have
suffered from price declines. The HPDP incentive payment is a
cash payment on all eligible loans and is linked to the rate of
recent home price declines in the particular area, the unpaid
principal balance, and the mark-to-market LTV of the
mortgage.\115\ Following a successful HAMP trial modification,
the lender/investor accrues 1/24th of the HPDP incentive per
month for 24 months. Treasury has allocated $10 billion of the
$50 billion in TARP funds dedicated to HAMP for this
subprogram; however, the actual amount expended will depend
upon participation and housing price trends.\116\ Although some
servicers may be offering this program to borrowers, Treasury
does not yet have a system of record to which the servicers can
submit records. Therefore, no borrowers are yet officially
considered to have been assisted by HPDP, and no money has been
paid out under the program.
---------------------------------------------------------------------------
\115\ U.S. Department of the Treasury, Home Affordable Modification
Program--Home Price Decline Protection Incentives, Supplemental
Directive 09-04, at 1 (July 31, 2009) (online at
www.financialstability.gov/docs/press/SupplementalDirective7-31-
09.pdf).
\116\ See U.S. Department of the Treasury, Making Home Affordable:
Update: Foreclosure Alternatives and Home Price Decline Protection
Incentives, at 4 (May 14, 2009) (online at www.treas.gov/press/
releases/docs/05142009FactSheet-MakingHomesAffordable.pdf) (hereinafter
``Foreclosure Alternatives and Home Price Decline Protection
Incentives'').
---------------------------------------------------------------------------
e. Home Affordable Foreclosure Alternatives Program
In some circumstances a modification that keeps the
borrower in the home is not possible or preferable. HAFA is
intended to widen the scope of mitigation options by providing
incentives to servicers that pursue short sales or deeds-in-
lieu of foreclosure. While this may not keep the borrower in
the home, it avoids foreclosure and provides a more orderly
transition for both the borrower and lender. A short sale takes
place when a borrower is unable to make the mortgage payment,
and the servicer allows the borrower to sell the property at
the current value, regardless of whether the proceeds from the
sale would cover the remaining balance of the mortgage. It is
necessary for the borrower to list and market the property;
however, if the borrower is unable to sell the property, the
servicer may choose to pursue a deed-in-lieu transaction, where
the borrower willingly transfers ownership of the property to
the servicer.\117\
---------------------------------------------------------------------------
\117\ See Foreclosure Alternatives and Home Price Decline
Protection Incentives, supra note 116.
---------------------------------------------------------------------------
HAFA facilitates short sales as well as deed-in-lieu
transactions by offering incentive payments to borrowers,
junior lien holders, and servicers that are similar to the
structure and amounts of MHA incentive payments.\118\ While
servicers are required to evaluate borrowers for the program,
they are not required to offer foreclosure alternatives.
Although some servicers may be offering this program to
borrowers, Treasury does not yet have a system of record to
which the servicers can submit records. Therefore, no borrowers
are yet officially considered to have been assisted by HAFA,
and no money has been paid out under the program.
---------------------------------------------------------------------------
\118\ U.S. Department of the Treasury, Introduction of Home
Affordable Foreclosure Alternatives--Short Sale and Deed-in-Lieu of
Foreclosure, Supplemental Directive 09-09 (Nov. 30, 2009) (online at
www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf) (hereinafter
``Introduction of Home Affordable Foreclosure Alternatives'').
---------------------------------------------------------------------------
f. Hope for Homeowners
H4H was created by HERA and is voluntary for lenders.\119\
Although the program is not a TARP program and is run by the
Department of Housing and Urban Development (HUD), it is still
considered part of the Administration's umbrella MHA
foreclosure mitigation initiative. The program is now more
closely linked to the TARP because subsequent legislation
apportioned TARP funds to the H4H program. Due to low servicer
participation, the Helping Families Save Their Homes Act of
2009 added TARP-funded servicer incentive payments similar to
those under HAMP to the structure of the H4H program.\120\ H4H
is intended to provide borrowers who are having trouble making
their monthly payments the opportunity to refinance into an
FHA-insured loan. H4H requires the participant's lender to
decrease the principal of the loan to 90 percent of the newly
appraised value, thereby addressing the issue of underwater
mortgages.\121\ As of February 2010, 35 loans had closed.\122\
No TARP dollars have been used for the recently added servicer
incentive payments under H4H.\123\
---------------------------------------------------------------------------
\119\ Housing and Economic Recovery Act, Pub. L. No. 110-289
Sec. Sec. 1401-04 (2008).
\120\ Preventing Mortgage Foreclosure and Enhancing Mortgage
Credit, Pub. L. No. 111-22 Sec. 202(b) (2009).
\121\ U.S. Department of Housing and Urban Development, Fact Sheet:
HOPE for Homeowners to Provide Additional Mortgage Assistance to
Struggling Homeowners (online at www.hud.gov/hopeforhomeowners/
pressfactsheet.cfm) (accessed Apr. 13, 2010).
\122\ U.S. Department of Housing and Urban Development, Letter from
Assistant Secretary for Housing David H. Stevens to The Honorable
Richard C. Shelby, Ranking Member, Committee on Banking, Housing, and
Urban Affairs, United States Senate enclosing the February HOPE for
Homeowners Program monthly report (Mar. 29, 2010).
\123\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
2. HAMP Data Analysis
Based on certified data provided by Fannie Mae, Treasury's
agent for HAMP, the following statistical picture of HAMP
emerges. As of March 8, 2010, there were 170,207 permanent
modifications, of which 168,708 were active. This represents a
conversion rate of 23.1 percent of eligible trials to permanent
modifications. Only 9.7 percent of eligible trials (71,397
trials) converted to permanent modifications within the typical
anticipated three-month trial period; many more converted after
extended trial forbearance. Of the 1,499 permanent
modifications that ceased to be active, 1,473 had redefaulted,
and 26 were paid off. An additional 835,194 unique borrowers
were actively in trial modifications.\124\
---------------------------------------------------------------------------
\124\ Id.
---------------------------------------------------------------------------
a. HAMP Modified Loan Characteristics
Most active HAMP modifications (trial and permanent) have
been on loans in GSE pools. There are 572,650 active
modifications on GSE loans, 340,877 on loans in private-label
securitization pools, and 90,375 on whole loans held in
portfolio. Unfortunately, this data has little analytical use
because there is no baseline for comparison, such as the number
of each type of loan that is HAMP-eligible, or controls for
loan characteristics.\125\
---------------------------------------------------------------------------
\125\ Id.
---------------------------------------------------------------------------
As of March 1, 2010, 67 percent of trials and 70 percent of
permanent modifications involved fixed-rate mortgages, with
adjustable-rate mortgages making up 32 percent of trials and 28
percent of permanent modifications. There were also a
negligible number of step-rate mortgages. (See Figure 7,
below.)
FIGURE 7: PRE-MODIFICATION LOAN TYPE OF COMPLETED HAMP MODIFICATIONS
\126\
---------------------------------------------------------------------------
\126\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.004
Borrowers listed a variety of hardship reasons when
requesting HAMP modifications. By far the most common was
``curtailment of income,'' which was reported by 41 percent of
borrowers in trial modifications and 52 percent of borrowers
with permanent modifications. This category reflects reduced
employment hours, wages, salaries, commissions, and bonuses and
is distinct from unemployment, which was reported by six
percent of trial modification borrowers and five percent of
permanent modification borrowers. Other significant categories
of hardship reported were ``excessive obligation,'' reported by
eight percent of trial modification borrowers and 11 percent of
permanent modification borrowers. Additionally, 35 percent of
trial modifications and 21 percent of permanent modifications
reported ``other'' for the hardship reason.\127\ (See Figures 8
and 9, below.)
---------------------------------------------------------------------------
\127\ Id.
---------------------------------------------------------------------------
It is notable that curtailment of income is the predominant
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. Until recent program changes, HAMP
eligibility generally required employment. This raised concerns
as to whether HAMP, which was designed in the winter of 2009
when unemployment rates were lower, was capable of dealing with
emerging causes of foreclosure.\128\
---------------------------------------------------------------------------
\128\ For further discussion of the impact of the newly announced
changes designed to assist unemployed borrowers, see Section C(1)g.
---------------------------------------------------------------------------
FIGURE 8: TOP FIVE HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT
MODIFICATIONS \129\
---------------------------------------------------------------------------
\129\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
[GRAPHIC] [TIFF OMITTED] T5737A.005
FIGURE 9: ALL HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT
MODIFICATIONS \130\
------------------------------------------------------------------------
Trial Permanent
------------------------------------------------------------------------
Abandonment of property....................... 54 29
Business failure.............................. 6,091 1,199
Casualty loss................................. 961 97
Curtailment of income......................... 339,751 88,014
Death of borrower............................. 2,361 987
Death of borrower family member............... 2,024 922
Distant employment transfer................... 323 55
Energy environment costs...................... 949 199
Excessive obligation.......................... 72,216 18,295
Fraud......................................... 841 1,200
Illness of borrower family member............. 3,494 1,521
Illness of principal borrower................. 20,031 4,498
Inability to rent property.................... 911 212
Inability to sell property.................... 287 42
Incarceration................................. 230 31
Marital difficulties.......................... 12,569 2,431
Military service.............................. 207 135
Other......................................... 291,427 35,826
Payment adjustment............................ 6,203 1,455
Payment dispute............................... 1,569 518
Property problem.............................. 552 104
Servicing problems............................ 1,095 205
Transfer of ownership pending................. 273 25
Unable to contact borrower.................... 20,118 1,810
Unemployment.................................. 50,657 8,898
------------------------------------------------------------------------
\130\ Id.
FIGURE 10: TOP FIVE HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT
MODIFICATIONS AS PERCENTAGE OF TRIAL AND PERMANENT MODIFICATIONS \131\
---------------------------------------------------------------------------
\131\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.006
FIGURE 11: ALL HARDSHIP REASONS FOR HAMP TRIAL AND PERMANENT
MODIFICATIONS AS PERCENTAGE OF TRIAL AND PERMANENT MODIFICATIONS \132\
------------------------------------------------------------------------
Trial Permanent
Modification Modification
------------------------------------------------------------------------
Abandonment of property......... 0.01 0.02
Business failure................ 0.73 0.71
Casualty loss................... 0.12 0.06
Curtailment of income........... 40.68 52.17
Death of borrower............... 0.28 0.59
Death of borrower family member. 0.24 0.55
Distant employment transfer..... 0.04 0.03
Energy environment costs........ 0.11 0.12
Excessive obligation............ 8.65 10.84
Fraud........................... 0.1 0.71
Illness of borrower family 0.42 0.9
member.........................
Illness of principal borrower... 2.4 2.67
Inability to rent property...... 0.11 0.13
Inability to sell property...... 0.03 0.02
Incarceration................... 0.03 0.02
Marital difficulties............ 1.5 1.44
Military service................ 0.02 0.08
Other........................... 34.89 21.24
Payment adjustment.............. 0.74 0.86
Payment dispute................. 0.19 0.31
Property problem................ 0.07 0.06
Servicing problems.............. 0.13 0.12
Transfer of ownership pending... 0.03 0.01
Unable to contact borrower...... 2.41 1.07
Unemployment.................... 6.07 5.27
------------------------------------------------------------------------
\132\ Id.
For the modifications that have converted to permanent
modifications, the median (mean) front-end DTI--the ratio of
monthly housing debt payments to monthly income--declined by 14
(17.11) percent, from 45.02 (47.97) percent to 31.02 (30.86)
percent, in line with the program's goal. Under HAMP, the
front-end DTI is calculated based on the first-lien payment
only and does not include housing costs resulting from second
liens. The median (mean) back-end DTI ratio--the ratio of total
monthly debt payments to monthly income--declined by 16.6
(16.6) percent from 76.44 (86.52) percent to 59.84 (69.92)
percent.\133\ Back-end DTI calculations include all payments to
creditors, which in addition to first-lien payments could
include payments on debts such as home equity lines of credit,
credit cards, auto loans, and student loans. (See Figures 12
and 13, below.) These changes indicate that HAMP modifications
are substantially reducing borrowers' monthly debt service
burdens and making homeownership relatively more affordable,
yet even with reduced mortgage payments, the typical HAMP
modification recipient still has an extremely high debt burden
overall and a relatively high housing debt burden. A 31 percent
front-end DTI is a fairly high percentage of monthly income to
spend on housing, particularly if a homeowner carries a second
lien, as junior liens are not considered in the 31 percent
front-end DTI calculation. More notably, the program can still
leave borrowers saddled with very high levels of total debt, as
back-end debt is not even considered in the HAMP modification.
HAMP is improving affordability, but it leaves many borrowers
with permanent modifications still paying a large percentage of
income for housing and other debts. This calls into question
the sustainability of many permanent modifications,
particularly as the loan payments rise after the five-year
modification period expires.
---------------------------------------------------------------------------
\133\ Id.
---------------------------------------------------------------------------
FIGURE 12: FRONT-END DEBT-TO-INCOME RATIOS PRE- AND POST-HAMP
MODIFICATIONS \134\
---------------------------------------------------------------------------
\134\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.007
FIGURE 13: BACK-END DEBT-TO-INCOME RATIOS PRE- AND POST-HAMP
MODIFICATIONS \135\
---------------------------------------------------------------------------
\135\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.008
The reduction in DTI in HAMP modifications was achieved
almost exclusively through reductions in interest rate, rather
than term extensions or principal reductions. In fact, 100
percent of HAMP modifications involved interest rate
reductions. Median (mean) interest rates were dropped by 4
(3.54) percentage points, from 6.625 (6.52) percent to 2 (2.98)
percent, a 70 (54) percent reduction in the rate.\136\ (See
Figure 14, below.) Interest rates may rise after five years,
however, calling into question the long-term sustainability of
HAMP permanent modifications.
---------------------------------------------------------------------------
\136\ Id.
---------------------------------------------------------------------------
FIGURE 14: INTEREST RATES PRE- AND POST-HAMP MODIFICATIONS \137\
---------------------------------------------------------------------------
\137\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.009
Term extensions were de minimis; the median (mean) term
remaining before modification was 332 (334.48) months, and
after the trial period, the median (mean) term remaining was
334 (367.15) months, indicating a median (mean) term extension
of 2 (32.67) months. There were 78,906 permanent modifications
or 47 percent of total featured term extensions, while 8,674 or
5 percent of total modifications involved reductions in
remaining terms.\138\ For loans with term extensions the median
extension was 92 months, while the median term reduction was
only one month.\139\ Terms remained unchanged for 81,128
permanent modifications or 48 percent of all permanent
modifications.\140\ 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, so the
actual number and percentage of modifications with term
extensions excluding the trial period might be lower.
---------------------------------------------------------------------------
\138\ Id.
\139\ Id.
\140\ Id.
---------------------------------------------------------------------------
Amortization periods changed relatively little. Before
modification, the median (mean) amortization period was 360
(361.44) months, and post-modification, the median amortization
period dropped to 341 months while the mean rose to 376.49
months, indicating that amortization periods on a small number
of permanent modifications were significantly increased.\141\
(See Figure 15, below.) The amortization period increased in
78,906 modifications or 47 percent of the total and decreased
in 8,674 modifications or 5 percent of the total, and remained
unchanged for 81,128 modifications or 48 percent of the
total.\142\
---------------------------------------------------------------------------
\141\ Id.
\142\ Id.
---------------------------------------------------------------------------
FIGURE 15: TERM AND AMORTIZATION PERIODS FOR PERMANENT HAMP
MODIFICATIONS \143\
---------------------------------------------------------------------------
\143\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.010
Principal forbearance was rare and principal forgiveness
rarer still. Principal was forborne on 46,959 permanent
modifications (27.8 percent of total) while only 10,521 (6.2
percent of total) had principal forgiven. Additionally, 10,381
or 6.15 percent of modifications had both principal forgiven
and forborne. When calculated based on all permanent
modifications, the median (mean) amount of principal forborne
was $0 ($18,836.48), and the median (mean) amount of principal
forgiven was $0 ($3,572.06). When calculated only for the
modifications with principal forbearance, however, the median
(mean) amount forborne was $49,003.10 ($67,673.19) of post-
modification unpaid principal balance, implying a sizable
balloon payment at the maturity of the mortgage.\144\ When
calculated only for the permanent modifications with principal
forgiveness, the median (mean) amount forgiven was $42,020.06
($57,279.32) of the post-modification unpaid principal balance.
---------------------------------------------------------------------------
\144\ Id.
---------------------------------------------------------------------------
FIGURE 16: UNPAID PRINCIPAL BALANCE FORGIVEN AND FORBORNE IN PERMANENT
MODIFICATIONS \145\
---------------------------------------------------------------------------
\145\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.011
Before modification, the median (mean) LTV was 119.31
(134.83) percent. 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 125.88 (143.19) percent.\146\ (See Figure
17.) Post-modification, 127,890 or 75.8 percent of permanent
modifications were calculated as having an LTV of greater than
100, meaning the vast majority of borrowers receiving a HAMP
permanent modification still have negative equity. Indeed, most
HAMP permanent modification recipients remain deeply
underwater. Fifty-one percent of HAMP permanent modifications
have a first lien LTV of greater than 125 percent.\147\ If
junior liens were to be included, the percentage would be
significantly higher. The continuing deep level of negative
equity for many HAMP permanent modification recipients makes
the modifications' sustainability questionable; even with more
affordable payments, deeply underwater borrowers may remain
tempted to strategically default or may be compelled to because
core life events, such as death, divorce, disability, marriage,
child birth, job loss, or job opportunities necessitate a move.
---------------------------------------------------------------------------
\146\ Id.
\147\ Id.
---------------------------------------------------------------------------
FIGURE 17: LOAN-TO-VALUE RATIOS PRE- AND POST-HAMP FIRST-LIEN
MODIFICATIONS \148\
---------------------------------------------------------------------------
\148\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.012
The net result of the modifications was that median (mean)
monthly principal and interest payments for the first lien
dropped $518.88 ($627.74), from $1,430.96 ($1,560.06) to
$837.86 ($932.32), a 41 (40) percent decline. As Figure 18
below shows, HAMP modifications resulted in a noticeable
decrease in monthly principal and interest payments on first-
lien mortgages for many borrowers, but as shown earlier, they
generally resulted in minimal changes in principal
balances.\149\
---------------------------------------------------------------------------
\149\ Id.
---------------------------------------------------------------------------
FIGURE 18: MONTHLY PRINCIPAL & INTEREST PAYMENT PRE- AND POST-HAMP
MODIFICATIONS \150\
---------------------------------------------------------------------------
\150\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.013
Overall, HAMP modifications succeed at making homeownership
more affordable by reducing payments. But the Panel has
concerns as to whether the modifications make homeownership
sufficiently affordable to avoid foreclosure, given borrowers'
broader circumstances. As noted previously, the program payment
target of 31 percent DTI, without considering the existence of
junior liens, leaves borrowers still paying a significant
percentage of their income for housing. This is particularly
problematic because most HAMP modification recipients are
underwater. They are thus paying for the consumption value of
housing and what amounts to a currently out-of-the-money put
option on the house.\151\
---------------------------------------------------------------------------
\151\ Id.
---------------------------------------------------------------------------
This points to the problem with the lack of principal
forgiveness in HAMP up to this point. Lack of principal
forgiveness means that homeowners will continue to be
underwater. It also means that more of each payment will be
going to interest, rather than paying down principal, and it
may mean that some borrowers have to pay for a longer period of
time. All of these factors increase the redefault risk on
modified mortgages, and to the extent that a permanent
modification is not sustainable, it merely delays a foreclosure
and the stabilization of the housing market.
HAMP's original emphasis on interest rate reduction, rather
than principal reduction, benefits lenders and servicers at the
expense of homeowners. Lenders benefit from avoiding having to
write down assets on their balance sheets and from special
regulatory capital adequacy treatment for HAMP modifications.
Mortgage servicers benefit because a reduction in monthly
payments due to an interest rate reduction reduces the
servicers' income far less than an equivalent reduction in
monthly payment due to a principal reduction. Servicers are
thus far keener to reduce interest rates than principal. The
structure of HAMP modifications favors lenders and servicers,
but it comes at the expense of a higher redefault risk for the
modifications, a risk that is borne first and foremost by the
homeowner but is also felt by taxpayers funding HAMP.
b. Impact of Loan Ownership on Modifications
Data from the OCC/OTS Mortgage Metrics Report indicate that
ownership of loans affects the features of modifications done
outside of HAMP. There are important variations in pre-
modification characteristics depending on loan ownership--
Fannie Mae securitized pools, Freddie Mac securitized pools,
private-label securitized pools, and loans held directly by
financial institutions. Portfolio loans accounted for 43
percent of the modifications despite being a smaller share of
all loans. Private-label securitized loans accounted for
another 31 percent of all modifications, again a percentage
disproportionately large to market share. Yet on the OCC/OTS
data from the first three quarters of 2009, 90 percent of
principal forgiveness modifications were on loans held directly
in financial institutions' portfolios, rather than securitized,
while 70 percent of principal forbearance modifications were
done on private-label securitized loans, with the rest being
almost entirely portfolio loans.\152\ (See Figure 19, below.)
---------------------------------------------------------------------------
\152\ See, e.g., Office of the Comptroller of the Currency and
Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report
(First Quarter 2009), at 23 (June 2009) (online at files.ots.treas.gov/
4820471.pdf) (hereinafter ``OCC and OTS Mortgage Metrics Report--Q1
2009''); Office of the Comptroller of the Currency and Office of Thrift
Supervision, OCC and OTS Mortgage Metrics Report (Second Quarter 2009),
at 25 (Sept. 2009) (online at files.ots.treas.gov/482078.pdf)
(hereinafter ``OCC and OTS Mortgage Metrics Report--Q2 2009''); Office
of the Comptroller of the Currency and Office of Thrift Supervision,
OCC and OTS Mortgage Metrics Report (Third Quarter 2009), at 25 (Dec.
2009) (online at files.ots.treas.gov/482114.pdf) (hereinafter ``OCC and
OTS Mortgage Metrics Report--Q3 2009''). The OCC/OTS data do not
generally include HAMP modifications because very few were permanent in
the first three quarters of 2009.
---------------------------------------------------------------------------
FIGURE 19: MODIFICATION TYPE BY LOAN OWNERSHIP \153\
---------------------------------------------------------------------------
\153\ OCC and OTS Mortgage Metrics Report--Q3 2009, supra note 152,
at 23-25. The OCC/OTS data do not generally include HAMP modifications
because very few were permanent in the first three quarters of 2009.
[GRAPHIC] [TIFF OMITTED] T5737A.014
The OCC/OTS data indicate that securitization status
affects the type of modification: securitized loans are more
likely to have principal forborne rather than forgiven relative
to portfolio loans. This is likely a function of servicer
incentives. A servicer of a securitized loan is compensated
primarily based on the principal balance outstanding.
Therefore, the servicer has an incentive to forbear rather than
forgive principal. Forbearing actually increases the servicer's
income, while forgiveness decreases it. For loans held in
portfolio, the concern is simply maximizing the value of the
loan itself.
By and large, among modifications that have been approved,
ownership of loans does not appear to affect HAMP
modifications. There are notable variations in pre-modification
characteristics depending on loan ownership. Yet, with two
exceptions, these variations in pre-modification
characteristics do not seem to have a noticeable effect on the
modification process or on loans' post-modification
characteristics.
The first exception is that the median time for conversion
from trial to permanent modification is about a month shorter
for loans held in portfolio than for any type of securitized
loans.\154\ Mean conversion times, however, are roughly
comparable.\155\ This would indicate that while some portfolio
loans are taking a significant time to convert, most of them
are converting much more quickly than securitized loans. The
quicker conversion of portfolio loans presents an opportunity
to learn about factors affecting conversion speed and thus for
improving HAMP.\156\ The Panel, therefore, urges Treasury to
investigate this variation in conversion speed in more depth.
---------------------------------------------------------------------------
\154\ The median Fannie Mae and Freddie Mac loan takes 122 days to
convert to permanent status, while the median private-label securitized
loan takes 120 days. Treasury mortgage market data provided to Panel
staff (Mar. 23, 2010). The median portfolio loan takes only 92 days to
convert. Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
\155\ Mean conversion times are 132 days for Fannie Mae, 128 days
for Freddie Mac, 133 days for private-label securitized loans, and 132
days for portfolio loans. Treasury mortgage market data provided to
Panel staff (Mar. 23, 2010).
\156\ This may be a function of financial institutions simply being
able to manage processes and make decisions with loans in their
portfolios more quickly.
---------------------------------------------------------------------------
The other noticeable difference is that servicers are
constrained in their ability to extend the term of private-
label securitized loans. The mean term extension on private-
label securitized permanent modifications is five months,
whereas the mean term extension for Fannie Mae, Freddie Mac,
and portfolio loan modifications is between 44 and 48
months.\157\ This is likely a function of contractual
restrictions on private-label servicers in the pooling and
servicing agreements (PSAs) governing the servicing of the
securitized mortgages. Virtually all PSAs restrict servicers'
ability to extend the term of a mortgage beyond the final
maturity date of any other loan in the pool.\158\ As most
mortgages in a pool are originated within a year of each other,
this means that private-label securitized loans have little
flexibility in terms of term extension. Thus, as Figure 20
shows, private-label securitized loans represented a
substantially smaller percentage of permanent modifications
with term extensions than they do of total permanent
modifications.
---------------------------------------------------------------------------
\157\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
\158\ Levitin & Twomey, supra note 78.
---------------------------------------------------------------------------
FIGURE 20: TERM EXTENSION BY LOAN OWNERSHIP COMPARED WITH OVERALL
DISTRIBUTION OF LOAN OWNERSHIP
[GRAPHIC] [TIFF OMITTED] T5737A.015
Limitations on the ability to extend maturity dates do not
appear to affect the ability of servicers to reduce DTI to 31
percent; even when maturity dates cannot be extended,
amortization periods often can be. Curiously, however, mean and
median amortization terms on private-label securitized loans
dropped for permanent modifications, whereas medians were
largely flat and means increased substantially for other types
of loans. This movement, however, likely reflects variations in
pre-modification loan characteristics as private-label
securitized loans had, on average, substantially longer
amortization periods pre-modification, likely reflecting the
inclusion of so-called 30/40 loans, with 30-year terms and 40-
year amortization periods.\159\
---------------------------------------------------------------------------
\159\ See OCC and OTS Mortgage Metrics Report--Q3 2009, supra note
152, at 24.
---------------------------------------------------------------------------
If amortization extensions are compensating for lack of
term extensions in private-label securitized loans, it raises
the concern that these loans are being restructured to have
balloon payments at the end. An important lesson of the housing
market crash of the Depression, recognized by the 1931
President's Conference on Home Building and Home Ownership, was
that balloon loans pose inherent default risks because of the
sizable backloaded payment.\160\ To the extent that HAMP
encourages forbearance or amortizations longer than terms, it
increases the default risk on the modified loans.
---------------------------------------------------------------------------
\160\ Home Finance and Taxation, President's Conference on Home
Building and Home Ownership, at 7 (James M. Gries & James Ford eds.,
1932).
---------------------------------------------------------------------------
c. HAMP Modification Application Denials and Trial
Modification Cancellations
Starting in February 2010, servicers began to report the
reason why HAMP trial modifications were denied or cancelled;
however, the data have not been reported consistently. Treasury
indicates that fallout reasons are reported only for 31 percent
of disqualified or cancelled modifications, and some reported
data appear to be erroneous, such as ``trial plan default''
being reported as a reason for a modification application being
denied, when a default can only occur once a trial modification
has commenced. There is also particularly thin data on
modification denials. Denial reasons were reported for only
4,900 modification applications as opposed to 83,763 cancelled
trial modifications.\161\
---------------------------------------------------------------------------
\161\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
The leading denial reason, accounting for 61 percent of
denials, is ``trial plan default,'' a clearly erroneous
designation for a denial code, because a borrower can only
default once a trial has started; these borrowers were not in a
trial modification. Another 19 percent of applications were
denied because the property was not owner occupied at the time
of origination, and 9 percent because the loan was already paid
off or the default cured. No reason for denial was submitted
for 10 percent of denials. This means that for 71 percent of
denials, no valid reason was provided.\162\ (See Figure 21,
below.)
---------------------------------------------------------------------------
\162\ Id.
---------------------------------------------------------------------------
Similarly, for modification cancellations, no reason was
provided in 72 percent of the cases. In 11 percent of the
cases, the borrower turned out to have a current DTI ratio of
under 31 percent; in 7 percent of cancellations, the borrower
failed to submit complete paperwork; in 4 percent of
cancellations the borrower defaulted on the trial modification;
in less than 3 percent of cancellations, the NPV calculation
was negative.\163\ (See Figure 21, below.) The cancellations
due to ineligible DTI or NPV outcomes are a function of some
servicers doing stated-income trial modifications. For those
servicers doing verified income trial modifications, the
modifications would be denied, rather than initially approved
and then subsequently cancelled.
---------------------------------------------------------------------------
\163\ Id.
---------------------------------------------------------------------------
Notably, the reported data do not indicate that borrowers
were responsible for most trial modification failures. Payment
defaults, failure to submit paperwork, and borrower refusal of
modification offers accounted for 12 percent of trial
modification cancellations. HAMP program parameters--mortgage
type eligibility, property type requirements, occupancy
requirements, DTI requirements, NPV requirements, and excessive
forbearance--accounted for 16 percent of trial modification
cancellations.\164\ (See Figure 22, below.)
---------------------------------------------------------------------------
\164\ Id.
---------------------------------------------------------------------------
The Panel is deeply concerned about the unacceptable
quality of the denial and cancellation reasons and strongly
urges Treasury to take swift action to ensure that homeowners
are not denied the opportunity for a modification and shuffled
off to foreclosure without a servicer at least accounting for
why the modification was denied or cancelled. If a HAMP
participating servicer operating under a contract with the
federal government cannot provide a valid reason for a trial
modification denial, the servicer should be subject to
meaningful monetary penalties for noncompliance and the
foreclosure stayed until an independent analysis of the
application or trial can be performed, with the servicer paying
the cost of that independent evaluation necessitated by its
noncompliance. It is not enough that a servicer is not paid
when a modification fails to convert to permanent modification
status. If a servicer fails to comply with program
requirements, it should be subject to meaningful penalties.
Collection and analysis of HAMP denial and cancellation data is
critical for both ensuring the program's fairness and improving
the program.
FIGURE 21: TOP FIVE HAMP CANCELLATION AND DISQUALIFICATION REASONS
\165\
---------------------------------------------------------------------------
\165\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.016
FIGURE 22: ALL HAMP CANCELLATION AND DISQUALIFICATION REASONS \166\
------------------------------------------------------------------------
Cancelled Disqualified
------------------------------------------------------------------------
Default not imminent.............. 5 0
Excessive forbearance............. 885 0
Ineligible borrower, current DTI 9,590 1
less than 31%....................
Ineligible mortgage............... 554 0
Investor guarantor not 18 0
participating....................
Loan paid off or reinstated....... 14 422
Negative NPV...................... 2,228 4
Offer not accepted by borrower, 707 2
request withdrawn................
Other ineligible property (i.e., 16 34
property condemned, property
greater than 4 units)............
Previous permanent HAMP 2 0
modification.....................
Property not owner occupied....... 91 952
Request incomplete................ 5,983 1
Trial plan default................ 3,338 2,986
Unknown (no ADE submitted)........ 60,332 498
------------------------------------------------------------------------
\166\ Id.
d. Conversion Rates
In its previous foreclosure report in October 2009, the
Panel underscored serious concern about the low rate at which
trial modifications were converting to permanent modification
status. The Panel emphasized that the volume of sustainable,
permanent modifications was the metric by which HAMP should be
evaluated, not the volume of temporary trial modifications or
permanent, but unsustainable modifications.\167\
---------------------------------------------------------------------------
\167\ October Oversight Report, supra note 17, at 93.
---------------------------------------------------------------------------
HAMP trial-to-permanent modification conversion rates have
improved drastically since the October 2009 report and have
been higher for more recent vintages of trial modifications
(see Figure 23 below), but they are still far too low for the
program to help a significant number of homeowners, much less
stabilize the housing market. In October 2009, the conversion
rate was 1.26 percent.\168\ As of the beginning of April, the
rate stood at 23.13 percent. Although the improvement is
dramatic, less than one in four trial modifications has
converted to permanent modification status after the requisite
three-month trial period. Moreover, it has taken substantially
longer than three months for most of the conversions to occur.
Conversions, when they have occurred, have taken 4.36 months on
average. Only 9.7 percent of eligible trial modifications
converted to permanent modifications after three months. The
reasons for delayed conversion are unclear to the Panel.\169\
(See Figure 23, below.)
---------------------------------------------------------------------------
\168\ Id., at 48.
\169\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
FIGURE 23: CUMULATIVE CONVERSION RATE BY VINTAGE BY MONTHS FROM TRIAL
COMMENCEMENT (HMP 1 AND HMP 2 COMBINED) \170\
---------------------------------------------------------------------------
\170\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.017
FIGURE 24: CUMULATIVE PERCENTAGE OF CONVERSION-ELIGIBLE TRIAL
MODIFICATIONS CONVERTED TO PERMANENT MODIFICATION STATUS BY MONTHS
POST-TRIAL COMMENCEMENT \171\
---------------------------------------------------------------------------
\171\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.018
There is a notable difference in conversion rates between
the HMP 2 program for loans that are current, but where default
is imminent, and the HMP 1 program for loans that are 60+ days
delinquent.\172\ HMP 2 modifications have had substantially
better conversion rates than HMP 1 modifications. (See Figure
24, above.) HMP 2 modifications also converted more quickly
than HMP 1 modifications. The average HMP 2 modification took
3.86 months to convert, whereas the average HMP 1 modification
took 4.49 months to convert.\173\ This suggests that early
intervention, before a borrower is seriously delinquent, is
more likely to be successful in terms of conversion.
---------------------------------------------------------------------------
\172\ To date, there have been 842,022 HMP 1 modifications
commenced, of which 611,862 are eligible for conversion to permanent
status. For HMP 2, there have been 252,042 modifications commenced, of
which 124,128 have become eligible for conversion to permanent status.
\173\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
The Panel is hopeful that Treasury will continue to improve
HAMP conversion rates but emphasizes that unless conversion
rates continue to rise dramatically, the total number of
borrowers assisted by HAMP will be low--in the hundreds of
thousands, not millions. At the current conversion rate, the
835,194 active trial modifications as of the end of February
2010 will yield only 193,431 permanent modifications.\174\ This
would mean that in the course of its first year, HAMP would
have commenced trial modifications that would yield a total of
363,638 permanent modifications. If conversion rates were at
100 percent, HAMP would only have commenced trial modifications
yielding around 1 million permanent modifications.
---------------------------------------------------------------------------
\174\ Id.
---------------------------------------------------------------------------
e. Use of Stated vs. Verified Income
The 22 largest servicers participating in HAMP can be
divided into two groups. Twelve servicers currently ask
borrowers to state their incomes at the start of a trial
modification. This group includes the nation's four largest
mortgage servicers--Bank of America, JPMorgan Chase, Wells
Fargo, and CitiMortgage. The other servicers in the stated-
income group are Aurora Loan Services, Bayview Loan Servicing,
Green Tree Servicing, Nationstar Mortgage, OneWest Bank, Saxon
Mortgage Services, Select Portfolio Servicing, and Wachovia
Mortgage, which is owned by Wells Fargo. The 10 remaining large
servicers that participate in HAMP verify borrowers' income
prior to the start of a trial modification. The servicers in
this group are: American Home Mortgage Servicing, Bank United,
Carrington Mortgage Servicing, CCO Mortgage, GMAC Mortgage,
HomEq Servicing, Litton Loan Servicing, Ocwen Financial Corp.,
PNC Bank, and U.S. Bank.\175\
---------------------------------------------------------------------------
\175\ Id.
---------------------------------------------------------------------------
Using data through February 2010, the Panel compared the
performance of servicers that use stated income with that of
servicers that use verified income. Unsurprisingly, the data
show that stated-income servicers have been enrolling a larger
percentage of eligible borrowers in trial modifications, but
they have also been converting a smaller percentage of those
trial modifications into permanent modifications. In aggregate,
the stated-income servicers have enrolled 35 percent of
eligible borrowers in trial modifications, compared with 24.3
percent for the verified-income servicers. But, the stated-
income servicers have only converted 12.6 percent of those
trial modifications into permanent modifications, while the
verified-income servicers have converted 28.0 percent.\176\
These data suggest that Treasury's decision to begin requiring
all participating servicers to verify borrowers' income upfront
will result in fewer trial modifications but a higher
conversion rate.
---------------------------------------------------------------------------
\176\ These conversion rates were calculated using total active
modifications, rather than active modifications that are currently
eligible for conversion because the Panel did not receive the latter
data for each servicer. Conversion rates that are calculated using only
active modifications that are eligible for conversion will be higher
than the rates shown here. MHA Servicer Performance Through February
2010, supra note 110, at 7; Treasury mortgage market data provided to
Panel staff (Mar. 23, 2010).
---------------------------------------------------------------------------
Looking at the data on a servicer-by-servicer basis,
however, reveals a picture that is significantly more
complicated than the aggregate data might indicate. Servicers
that are lagging behind the rest of their respective groups
include Bank of America, which collects stated income, and
American Home Mortgage Servicing, which verifies income.
Servicers that are significantly outpacing their respective
groups include Select Mortgage Servicing, a stated-income
servicer, and GMAC Mortgage, a verified-income servicer.\177\
So while in aggregate there appears to be a correlation between
how servicers collect income and their performance results,
other factors that vary by servicer also appear to be having a
large effect, a matter Treasury should investigate.
---------------------------------------------------------------------------
\177\ MHA Servicer Performance Through February 2010, supra note
110, at 7; Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
f. Redefaults
Treasury has stated that its estimate for HAMP permanent
modification redefaults is 40 percent within the five
years,\178\ and the Panel has previously expressed concern that
the redefault rate could be significantly higher, if
adjustments for actual market conditions are made to Treasury's
models.\179\
---------------------------------------------------------------------------
\178\ Congressional Oversight Panel, Questions for the Record for
U.S. Department of the Treasury Assistant Secretary Herbert M. Allison,
Jr., at 3 (Oct. 22, 2009) (online at cop.senate.gov/documents/
testimony-102209-allison-qfr.pdf) (hereinafter ``Assistant Secretary
Herbert Allison QFRs'').
\179\ See October Oversight Report, supra note 17, at 93.
---------------------------------------------------------------------------
It is generally too early to draw firm conclusions about
the performance of HAMP permanent modifications. The initial
signs are not encouraging, however. Overall, for permanent
modifications for which there is full information,\180\ 16.85
percent of HAMP modifications were 30-59 days delinquent, 5.94
percent were 60-89 days delinquent, and 1.3 percent were 90+
days delinquent. (See Figure 25, below.) Additionally 1,473
permanent modified mortgages, or 0.8 percent of permanent
modifications were foreclosed. These rates reflect only a few
months of loan performance; they are not annual rates.\181\
---------------------------------------------------------------------------
\180\ Treasury provided the Panel with data as of March 1, 2010.
Because some permanent modifications are commenced mid-month, there is
only full data on delinquency rates starting a month beyond the
delinquency period. Thus, 30-day delinquency rates are for
modifications commenced through January 2010, 60-day rates are through
December 2009, and 90+ day rates are through November 2009.
\181\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
FIGURE 25: REDEFAULT RATES BY VINTAGE OF PERMANENT MODIFICATIONS \182\
---------------------------------------------------------------------------
\182\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.019
Because servicers do not follow uniform foreclosure
timelines in handling defaulted loans, the foreclosure rate is
not the best measure of HAMP permanent modifications'
performance at present. Instead, 90+ days delinquency combined
with foreclosure is the most uniform metric available.\183\
This measure covers all seriously delinquent loans. There are
only data available on this level of delinquency for
modifications commenced before December 2009; modifications
commenced in December 2009 or later have not yet had three
payments come due.
---------------------------------------------------------------------------
\183\ Id.
---------------------------------------------------------------------------
There were 31,164 modifications commenced before December
2009. All but 20 were commenced in the four months between
August and November 2009. Of these, 1,715 were 90+ days
delinquent or foreclosed as of March 1, 2010.\184\ This means
the combined serious delinquency and foreclosure rate is 5.5
percent for a third of a year. Annualized on a straight-line
basis, this translates to a 16.5-percent serious delinquency
and foreclosure rate.
---------------------------------------------------------------------------
\184\ Id.
---------------------------------------------------------------------------
If the trend is projected over five years, this translates
to a high cumulative serious delinquency and foreclosure rate.
This projection, however, assumes that redefault rates will
remain constant over time. There is no experience yet to show
whether that assumption is too pessimistic or optimistic. There
are factors that could potentially weigh in either direction.
For example, if unemployment lessens or the real estate market
recovers or there is significant inflation, redefault rates
will likely decline. Moreover, it is possible that the
redefaults will be front-loaded and taper off as the weakest
cases redefault quickly, leaving sounder borrowers remaining.
On the other hand, there are factors that suggest the
straight-line projection is reasonable or even overly
optimistic. The recovery in employment rates and rise in real
estate values are likely to be measured in years, not months,
which means that help may not come until after the home is
lost. Indeed, unemployment may continue to rise and real estate
values may continue to fall, either of which would increase the
odds of redefault. As strategic defaults increase, social
inhibitions against walking away from underwater properties may
lessen, thereby increasing the rate of redefaults. While weaker
borrowers might be more likely to redefault quickly, a
redefault rate of one in 20 within just the first three months
of modifications converting to permanent modification status is
particularly worrisome because these families have just passed
a financial screening and have not had time for other things to
go wrong. Moreover, beyond a five-year horizon, the very
structure of HAMP modifications might lead to increased
redefaults, as the fixed low-interest rate will start to
increase, whereas borrowers' income and other expenses will not
necessarily keep step.\185\
---------------------------------------------------------------------------
\185\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
---------------------------------------------------------------------------
There is still too little data to draw firm conclusions
about redefault rates on HAMP permanent modifications, but the
existing data are worrisome. When the total picture of HAMP is
taken into account, low conversion rates plus potentially high
redefault rates mean that the total number of sustainable,
permanent modifications generated by HAMP will be quite
limited. Even if Treasury's estimates for conversion and
redefault rates--75 percent and 40 percent, respectively--are
accurate, and HAMP met Treasury's goal of making trial offers
to 4 million borrowers, the program would only result in 1.2
million sustainable permanent modifications.
E. Foreclosure Mitigation Program Success
1. Treasury's Definition of ``Success'' and Program Goals
The MHA program's chief objective is to ``help borrowers
avoid foreclosure by modifying troubled loans to achieve a
payment the borrower can afford.'' \186\ Treasury estimates
that HARP may reach up to four to five million eligible
homeowners for loan refinancing.\187\ Its goal for HAMP is to
offer three to four million home owners lower mortgage payments
through modifications through 2012.\188\
---------------------------------------------------------------------------
\186\ U.S. Department of the Treasury, Borrower Frequently Asked
Questions_What is ``Making Home Affordable'' all about? (July 16, 2009)
(online at www.financialstability.gov/docs/borrower_qa.pdf).
\187\ MHA Detailed Program Description, supra note 47.
\188\ U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through January 2010, at 2 (Feb.
18, 2010) (online at www.financialstability.gov/docs/press/
January%20Report%20FINAL%2002%2016%2010.pdf) (hereinafter ``MHA
Servicer Performance Through January 2010'').
---------------------------------------------------------------------------
While the targeted number is clear, the meaning of the
target itself has shifted over time. Treasury was initially
elusive in stating whether the goal was three to four million
permanent modifications (a substantial impact), three to four
million trial modifications (a short-term solution), or three
to four million trial modification offers (a relatively
meaningless measure of program effectiveness, as a modification
offer alone does nothing to prevent a foreclosure or promote
affordability unless a trial commences). As noted earlier in
Section C, the modification is for only a five-year period and
not effectively a permanent modification over the entire life
of the loan.
In his speech announcing the Making Home Affordable
program, President Obama noted that the plan ``will help
between seven and nine million families restructure or
refinance their mortgages so they can . . . avoid
foreclosure,'' and of this amount ``as many as three to four
million homeowners [will be able] to modify the terms of their
mortgages to avoid foreclosure.'' \189\ On the same day as
President Obama's speech, HUD Secretary Shaun Donovan also
stated that ``this modification plan does a number of things to
make sure that up to 3 to 4 million families can stay in their
homes and have affordable mortgages.'' \190\ Thus, it can
reasonably be inferred from these initial statements of the
program's scope that the goal was to not just offer the
potential for a mortgage modification but actually ensure that
three to four million families remained in their homes through
permanent modifications. In the latter half of the program's
first year, however, Treasury finally clarified (or changed)
the definition of its target as ``allow[ing] 3 to 4 million
families the chance to stay in their homes'' \191\ and began
including the more defined target in its MHA Monthly Program
Reports. Indeed, Treasury acknowledged the confusion around its
target and the lack of precision in its own statements in a
response to the most recent SIGTARP report.\192\
---------------------------------------------------------------------------
\189\ The remaining four to five million were estimated to be
helped through HARP. White House, Remarks by the President on the Home
Mortgage Crisis (Feb. 18, 2009) (online at www.whitehouse.gov/the-
press-office/remarks-president-mortgage-crisis).
\190\ White House, Press Briefing (Feb. 18, 2009) (online at
www.whitehouse.gov/the-press-office/press-briefing-with-treasury-
secretary-geithner-hud-secretary-donovan-and-fdic-chai) (hereinafter
``White House Press Briefing'').
\191\ Congressional Oversight Panel, Testimony of Timothy F.
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP
Hearing with Treasury Secretary Timothy Geithner, at 47-48 (Sept. 10,
2009) (hereinafter ``September COP Hearing Transcript'') (publication
forthcoming).
\192\ Factors Affecting Implementation of HAMP, supra note 25.
---------------------------------------------------------------------------
Seth Wheeler, Treasury senior advisor, testified before the
Panel that the trial modification goal would mean a run rate of
20,000 to 25,000 trial modification starts per week.\193\
Treasury's use of trial modification starts per week as a
benchmark goal discounts the importance of a trial
modification's conversion to a permanent modification. Treasury
and HUD recognize the importance of permanent mortgage
modifications in ensuring long-term foreclosure prevention, as
they announced a joint Mortgage Modification Conversion Drive
in November 2009 to provide further assistance to homeowners
navigating the paperwork required for conversion. At the time,
Treasury noted that 375,000 of the borrowers in trial
modification were scheduled to convert by year-end, but
permanent modifications remained at a mere 66,465 through
December 2009.\194\
---------------------------------------------------------------------------
\193\ Congressional Oversight Panel, Written Testimony of Seth
Wheeler, senior advisor, U.S. Department of the Treasury, Philadelphia
Field Hearing on Mortgage Foreclosures, at 3 (Sept. 24, 2009) (online
at cop.senate.gov/documents/testimony-092409-wheeler.pdf) (hereinafter
``Testimony of Seth Wheeler'').
\194\ Administration Kicks Off Modification Drive, supra note 13;
U.S. Department of the Treasury, Making Home Affordable Program:
Servicer Performance Report Through December 2009, at 3 (Jan. 19, 2010)
(online at financialstability.gov/docs/report.pdf) (hereinafter ``MHA
Servicer Performance Through December 2009'').
---------------------------------------------------------------------------
As of the MHA Program update through February 2010, the
number of active HAMP modifications is 835,194, with 168,708 of
these being permanent modifications, more than double the
December 2009 number but still below the conversion drive
target.\195\ In a recent interview, Secretary Geithner was
asked explicitly if he considered the number of permanent
modifications as of December 2009 to be a mark of program
success, to which he avoided a clear answer and merely
indicated the importance of noting the ``substantial cash flow
relief [being provided to] . . . more than three quarters of a
million Americans.'' \196\ Three quarters of a million
Americans on a primarily trial basis, that is.
---------------------------------------------------------------------------
\195\ Treasury mortgage market data provided to Panel staff (Mar.
23, 2010).
\196\ This Week with Jake Tapper (ABC News television broadcast
Feb. 7, 2010) (online at abcnews.go.com/ThisWeek/week-transcript-
treasury-secretary-timothy-geithner/story?id=9758951).
---------------------------------------------------------------------------
HAMP is providing many homeowners with cash flow relief,
but if that relief is only temporary, then the potential for
continued foreclosures remains high. Also, temporary
modifications that fail to convert prevent homeowners from
using the time to prepare themselves legally and financially
for foreclosure, and they then owe the difference between the
original payment amount and the reduced trial payment amount
for their time in a trial modification.\197\ The low conversion
rates have been driven by misstated owner-occupied status and
income, as borrowers may have overstated or understated income
depending on their motives, and servicers were not required to
obtain documentation until the permanent modification stage.
Further, some borrowers may be deciding that foreclosure or
other alternatives are better options than the permanent
modification.
---------------------------------------------------------------------------
\197\ Factors Affecting Implementation of HAMP, supra note 25, at
15 fn 13.
---------------------------------------------------------------------------
The Panel is also concerned with Treasury's presentation of
MHA performance data. Previously, the performance data listed
``permanent modifications;'' however, Treasury's recent reports
have combined ``permanent modifications'' with ``pending
permanent modifications'' in the calculation or presentation of
some data. Pending modifications should not be counted as if
they are already permanent. If, as Treasury suggests, virtually
all of the pending modifications will convert, then they should
be reflected as ``permanent modifications'' only when the
expected conversion occurs. If Treasury wishes to note the
number of ``pending permanent modifications,'' it should do so
in a separate entry and not combine them with fully converted
modifications, including in the calculation of related numbers,
such as conversion rates. Similarly, Treasury should be more
explicit in its presentation of ``permanent modifications
cancelled.'' The reports should explicitly state the number of
modifications that have redefaulted and the number that have
been paid off, rather than combining the two.
2. Ineligible Borrowers--What about the remaining delinquent loans?
In its most recent HAMP update report, Treasury noted that
not all 60+ days delinquent loans qualify for modification
under HAMP.\198\ This raises the question of how a borrower
becomes HAMP-eligible. To apply for a HAMP mortgage
modification, a borrower must meet the following
characteristics: be the owner-occupant of a one- to four-unit
house, have an unpaid principal balance that is equal to or
less than $729,750,\199\ have a first-lien mortgage originated
on or before January 1, 2009, have a monthly mortgage payment
greater than 31 percent of monthly gross (pre-tax) income, and
be able to document that the monthly mortgage payment lacks
affordability due to financial hardship.\200\ The loan also has
to be delinquent, or default must be reasonably
foreseeable.\201\
---------------------------------------------------------------------------
\198\ MHA Servicer Performance Through February 2010, supra note
110, at 5.
\199\ This unpaid principal balance relates to a one unit house.
The balance limit increases with each additional unit. A two unit,
three unit, and four unit house must have unpaid principal balances no
more than $934,200; $1,129,250; and $1,403,400, respectively.
Introduction of HAMP, supra note 21, at 3.
\200\ U.S. Department of the Treasury, Making Home Affordable
Program, Borrower Frequently Asked Questions (Mar. 9, 2010) (online at
www.makinghomeaffordable.gov/borrower-faqs.html#19).
\201\ Introduction of HAMP, supra note 21, at 2.
---------------------------------------------------------------------------
In recent testimony before the House Committee on Oversight
and Government Reform's Domestic Policy Subcommittee, Phyllis
R. Caldwell, chief of Treasury's Homeownership Preservation
Office, noted that HAMP provides homeowners with the
opportunity to stay in their homes and aids in community
stability. In addressing those who do not meet HAMP
eligibility, she stated:
However, it will not reach the many borrowers who do
not meet the eligibility criteria and was not designed
to help every struggling homeowner. We unfortunately
should expect millions of foreclosures that HAMP cannot
prevent due to long-term unemployment, jumbo mortgages,
and other factors, as President Obama made clear when
he announced the program last February.\202\
---------------------------------------------------------------------------
\202\ Testimony of Phyllis Caldwell, supra note 14, at 6.
As noted in Figure 26, below, Treasury's internal estimates
reveal that of the 6.0 million borrowers who are currently 60+
days delinquent, only 1.8 million, or 30 percent of those in
delinquency, are even eligible for HAMP.\203\ The exclusions
from HAMP participation are also noted in Figure 26. FHA and
Veterans Affairs (VA) loans are excluded, as they have separate
programs aimed at providing modification options to
borrowers.\204\ The non-owner occupied home loan and vacant
properties exclusions ensure that speculators or house flippers
do not benefit from poor investing decisions.\205\ Jumbo loans
are excluded to prevent benefits going to wealthy homeowners,
those who have enough home equity to refinance, or those who
irresponsibly purchased more house than they could afford.\206\
The exclusion of loans originated after January 1, 2009 is
likely due to tighter underwriting standards in place at that
time, and loans with negative NPV are excluded since servicers
are not required to modify such loans.
---------------------------------------------------------------------------
\203\ MHA Servicer Performance Through February 2010, supra note
110.
\204\ U.S. Department of the Treasury and U.S. Department of
Housing and Urban Development, Press Release: HUD Secretary Donovan
Announces New FHA-Making Home Affordable Loan Modification Guidelines
(July 28, 2009) (online at www.makinghomeaffordable.gov/
pr_07302009.html); U.S. Department of Veterans Affairs, VA HAMP
Frequently Asked Questions (Jan. 27, 2010) (online at
www.homeloans.va.gov/docs/VA_HAMP_FAQ_for_Servicers.pdf).
\205\ MHA Detailed Program Description, supra note 47, at 3.
\206\ White House Press Briefing, supra note 190.
FIGURE 26: HAMP INELIGIBLE 60+ DAYS DELINQUENT LOANS AS OF FEBRUARY 2010
\207\
------------------------------------------------------------------------
------------------------------------------------------------------------
First lien, 60+ days delinquent loans.................. 6,000,000
Less: Non-participating HAMP servicer loans........ (800,000)
Less: FHA or VA loans.............................. (800,000)
Less: Non-owner occupied at loan origination....... (800,000)
----------------
Total HAMP eligible 60+ days delinquent loans.......... 3,600,000
Less: Jumbo non-conforming loans and loans (200,000)
originated after 1/1/2009.........................
Less: DTI less than 31 percent..................... (800,000)
Less: Negative NPV................................. (400,000)
Less: Vacant properties and other exclusions....... (400,000)
----------------
Total estimated HAMP eligible 60+ days delinquent loans 1,800,000
------------------------------------------------------------------------
The exclusions for non-participating HAMP servicers and
homeowners with DTI less than 31 percent are more questionable.
Currently, there are 800,000 homeowners with delinquent loans
unable to modify their loans through HAMP because their
servicers are not participating in the program.\208\ This
number is nearly four times larger than the number of HAMP
permanent modifications achieved to date. The voluntary nature
of HAMP means that a large number of homeowners are unable to
receive assistance because of the identity of their servicer.
The identity of a borrower's servicer is completely out of the
borrower's control; borrowers cannot select their servicer or
bargain for the terms under which their loan is serviced.
Treasury should encourage participation by all servicers or
offer alternatives to borrowers with non-participating
servicers.\209\ HAMP excludes borrowers whose pre-modification
front-end DTI is below 31 percent as well as borrowers who
cannot lower their DTI to 31 percent without decreasing their
NPV to less than what it would be in foreclosure. From the pre-
modification perspective, DTI is assessed on a per loan basis;
thus, if a borrower has multiple loans with DTI less than 31
percent, the borrower is ineligible for HAMP, even though the
total mortgage debt burden is greater than the 31 percent
threshold.\210\ These two ``disqualifiers'' would allow for an
additional 1.6 million eligible HAMP loans. If Treasury
estimates that in its present state HAMP can assist a maximum
of 1.8 million borrowers, then the basis for its current goal
of three to four million trial modification offers becomes
questionable.\211\ Doubt then emerges as to the attainability
of Treasury's goal, as the scope of borrowers even eligible is
roughly half of the target.
---------------------------------------------------------------------------
\207\ MHA Servicer Performance Through February 2010, supra note
110.
\208\ MHA Servicer Performance Through February 2010, supra note
110.
\209\ For data on three mortgage modification programs established
by servicers that chose not to participate in HAMP, see Annex V, infra.
\210\ Testimony of Adam Levitin, supra note 83.
\211\ MHA Detailed Program Description, supra note 47.
---------------------------------------------------------------------------
3. Best Estimates for Program Reach
Treasury's stated target of offering 3 to 4 million trial
modifications has spurred government agencies to formulate
their own estimates for the number of homeowners who will
actually receive permanent modifications and lasting assistance
based on Treasury's estimates and their own assumptions. The
Congressional Budget Office (CBO) and OMB have estimated that
$22 billion and $49 billion, respectively, will be disbursed
through HAMP to servicers for permanent modifications. CBO also
estimates that each permanent modification will cost between
$20,000 to $40,000. Thus, using CBO's estimate per permanent
modification and both CBO's and OMB's total HAMP outlay
estimates, the number of permanent modifications through HAMP
will be approximately 550,000-1.1 million (CBO) and 1.22-2.45
million (OMB).\212\ These estimates are less than the number of
foreclosures in 2009 alone. With nearly two million foreclosure
filings in 2008, 2.8 million in 2009, and the expectation for
even more in 2010, the comparatively much smaller estimates for
foreclosures prevented by HAMP becomes a central part of the
discussion of HAMP's effectiveness.\213\
---------------------------------------------------------------------------
\212\ Congressional Budget Office, Report on the Troubled Asset
Relief Program--March 2010 (Mar. 2010) (online at www.cbo.gov/ftpdocs/
112xx/doc11227/03-17-TARP.pdf). Panel Staff calculation of $49 billion
and $22 billion divided by 20,000 and 40,000.
\213\ Factors Affecting Implementation of HAMP, supra note 25.
---------------------------------------------------------------------------
SIGTARP reported that a Treasury official has estimated a
total of 3 million trial modifications will be initiated and
between 1.5 and 2 million will become permanent modifications.
If there are 3 million trial modification starts, of which 50
to 75 percent convert and 40 percent (trial and permanent)
redefault, then potentially HAMP will produce only 900,000 to
1.2 million permanent modifications, which is not even half of
the number of foreclosures in 2009 alone. SIGTARP noted the
importance of using Treasury's current 1.5 to 2 million
permanent modification estimate as a basis for program
effectiveness.\214\
---------------------------------------------------------------------------
\214\ Id.
---------------------------------------------------------------------------
The Panel has also made estimates. Treasury's own internal
assumptions are that 50 to 66 percent of trial modifications
will convert to permanent status and 40 percent of all
modifications will redefault within five years.\215\ As stated
above, using Treasury's own assumptions, as of February 2010
the Panel's best estimate for foreclosures prevented by HAMP is
approximately 900,000 to 1.2 million, or 15 to 20 percent of
the total population of 60+ day delinquencies. Assuming the
current roll rate of 23 percent holds and redefaults of 60
percent--comparable to the levels seen in OCC/OTS statistics
over five-year periods\216\--Treasury will prevent only 276,000
foreclosures, or less than four percent of the total 60+ day
delinquencies. The Panel is hopeful that the recently announced
program expansions and initiatives will help expand MHA's
reach. But as the array of estimates noted above on the number
of permanent modifications likely to stem from HAMP shows,
foreclosures prevented by HAMP will still likely be eclipsed by
the number of actual foreclosures filed in any given year of
the program's existence.
---------------------------------------------------------------------------
\215\ Assistant Secretary Herbert Allison QFRs, supra note 178, at
26.
\216\ Sixty percent represents the redefault rate for all
modifications by OCC/OTS institutions. Although the most robust
historical data are available for this combined metric, the eventual
redefault rate within HAMP could prove to be lower or higher than this
general number. Many of the modifications in the OCC/OTS calculation
did not reduce payments. Data included in the Q4 2009 OCC/OTS report
indicate that payment decreases are correlated with lower redefault
rates. For loans with payment reductions, the redefault rate was 38.6
percent, with a redefault rate of 26 percent for loans with a payment
decrease of ten percent or more. It should be noted, however, that
these redefault rates only cover the first nine months of the loan
modification. On the other hand, the OCC/OTS number may underestimate
HAMP's eventual redefault rate, as the OCC/OTS calculation does not
take into consideration sustained high unemployment and negative
equity.
---------------------------------------------------------------------------
4. Short-term vs. Long-term Success
As mentioned above, Treasury's numerical targets focus on
short-term results, which they are largely on track to achieve.
However, short-term results do not necessarily guarantee long-
term mortgage foreclosure mitigation success. Just as the
target for trial modifications initiated per week and trial
modifications offered reflect short-term successes, redefaults
and low rates of conversion to permanent modification reveal
short-term failures. To gauge accurately the long-term success
of its foreclosure mitigation programs, Treasury must assess
all available metrics, both short- and long-term, ultimately
ensuring that taxpayer dollars spent produce sustainable
changes.
As discussed in Section D, HAMP utilizes various cost
sharing and incentive payments. The key factor in these payment
streams and incentives is that the loan must convert from trial
to permanent modification before funds are disbursed. Thus,
trial modification offers that never reach active status and
trial modifications that fail to convert to permanent status
involve costs to only the borrower and lender--time and forgone
original loan amounts in favor of preventing foreclosure.
Redefaults, on the other hand, also involve direct costs to
taxpayers, as TARP funds have already been expended once the
modification has become permanent.
Redefault risk is the possibility that a borrower will
still default despite initial mortgage modification.\217\
Treasury has estimated the average initial redefault rate for
HAMP-modified loans to be 40 percent and defines redefault as a
loan being 90+ days past due at any point during the five-year
life of the HAMP modification. Treasury utilized the 40 percent
redefault estimate in its cost estimates for both trial and
permanent modifications and for all five years of potential
HAMP participation.\218\
---------------------------------------------------------------------------
\217\ Federal Reserve Bank of Boston, Why Don't Lenders Renegotiate
More Home Mortgages? Redefaults, Self-Cures, and Securitization, Public
Policy Discussion Papers, No. 09-4, at 18 (July 6, 2009) (online at
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf).
\218\ Assistant Secretary Herbert Allison QFRs, supra note 178, at
26.
---------------------------------------------------------------------------
For non-HAMP mortgages serviced by national banks and
federally regulated thrifts, the average redefault rates were
36 percent, 45 percent, and 53 percent for redefault
occurrences six months, nine months, and twelve months after
modification, respectively.\219\ Treasury utilized a lower
overall rate of 40 percent based on its belief that other
modification programs did not result in payment reductions,
whereas HAMP does.\220\ While Treasury has pushed servicers to
increase the number of trial modifications offered in order to
meet the stated targets of the program, these efforts do little
good if few reach permanent modification status, and for those
that do, the projected redefault rate is such that nearly half
could end up exactly where they started--facing foreclosure. As
a result of redefaults, the final cost-per-permanent
modification will be much higher than actual dollars spent on
those modifications, as the funds spent on redefaulted loans
will need to be included in total cash outlay.
---------------------------------------------------------------------------
\219\ The OCC and OTS report covers approximately 65 percent of all
mortgages outstanding in the United States at the time of publication.
HAMP modification data will be included in future OCC and OTS Mortgage
Metric Reports. OCC and OTS Mortgage Metrics Report--Q4 2009, supra
note 82, at 32.
\220\ Assistant Secretary Herbert Allison QFRs, supra note 178, at
26.
---------------------------------------------------------------------------
As the HAMP results to date have shown, a sole focus on
producing positive numbers for one metric hurts other data
indicators of success. In the program's early stages, Treasury
pushed for large numbers of trial modifications offered. While
the trial offers and loans in trial modification jumped, the
conversion rate suffered, as the bulk of time and energy was
being spent on getting borrowers in the door but not on moving
them to permanent status. Thus, in November 2009, Treasury and
HUD kicked off a Mortgage Modification Conversion Drive aimed
at improving the numbers for conversion from trial to permanent
modification.\221\ As noted above, conversion rates have
improved in recent months. The push for conversions, though,
will likely impact redefault rates in the future. If servicers
and lenders have focused on conversion of all trials instead of
conversion of those best prepared for long-term modification,
it is possible and likely that some borrowers in permanent
modification still do not have loan terms that can allow them
to remain current on their monthly payments.
---------------------------------------------------------------------------
\221\ Administration Kicks Off Modification Drive, supra note 13.
---------------------------------------------------------------------------
Treasury must ensure that its analysis of HAMP's
effectiveness is not limited to one data point over another but
incorporates an extensive analysis of all data--trial
modifications, conversions, and redefaults. Short-term
successes are only good when coupled with long-term sustainable
results. Even if Treasury reaches its newly restated target of
three to four million trial modifications offered, it will be
for naught if conversion rates are not significant and
redefault rates are too high, ultimately creating a foreclosure
mitigation program that does not effectively mitigate
foreclosures. Long-term success requires long-term changes to
the mortgage burdens that homeowners in or near default
currently face.
F. How Disincentives for Servicers and Investors Undermine HAMP
When borrowers lose their homes to foreclosure, they are
not the only people who suffer. Neighbors see the values of
their own homes decline. Local governments lose property tax
revenue. And the investors who own these mortgages also take a
large loss, in many cases equal to about half of their
investment,\222\ because homes in foreclosure tend to sell for
less money than would be generated either by a performing
mortgage or from a pre-foreclosure sale.
---------------------------------------------------------------------------
\222\ Board of Governors of the Federal Reserve System, Speech by
Chairman Ben S. Bernanke at the Federal Reserve System Conference on
Housing and Mortgage Markets: Housing, Mortgage Markets, and
Foreclosures, Washington, D.C. (Dec. 4, 2008) (online at
www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm).
---------------------------------------------------------------------------
HAMP was explicitly designed to ensure that modified loans
provide a larger return to investors than a foreclosure sale
would. Servicers participating in the program run a test, known
as the NPV test, that determines whether the modification is
economically advantageous to the investors. If it is not, the
servicer is not required to modify the loan.\223\ In addition
to that test, HAMP provides various additional financial
incentives to servicers and investors to provide loan
modifications.\224\ In short, HAMP offers incentives to do what
should already be in the investors' financial interests. So the
following question arises: why is HAMP not resulting in more
loan modifications? It appears that in many cases the program's
incentive structure is not sufficient to overcome other
disincentives that are affecting the decisions made by
servicers and investors. This section of the report discusses
how those disincentives may be undermining HAMP's
effectiveness.
---------------------------------------------------------------------------
\223\ HAMP Guidelines, supra note 106, at 5.
\224\ Id., at 11-12.
---------------------------------------------------------------------------
1. Why Servicers may be Ambivalent about HAMP
Since HAMP began, housing counselors and borrowers have
recounted stories of servicers losing their paperwork, lacking
adequate staff, failing to tell borrowers why they are being
denied, and in some cases failing to follow the program's
rules.\225\ Although this information is anecdotal, it has come
with enough frequency and consistency to raise questions about
whether servicers are fully committed to HAMP's success. As
David Berenbaum, chief program officer of the National
Community Reinvestment Corporation (NCRC), which provides
housing counseling to at-risk borrowers, testified at a recent
congressional hearing: ``NCRC counselors observe that the
haphazard quality of loan modifications reflects financial
institution ambivalence about the HAMP program.'' \226\
---------------------------------------------------------------------------
\225\ See, e.g., 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); Congressional Oversight Panel, Written Testimony Deborah
Goldberg, director, Hurricane Relief Project, National Fair Housing
Alliance, Philadelphia Field Hearing on Mortgage Foreclosures (Sept.
24, 2009) (online at cop.senate.gov/documents/testimony-092409-
goldberg.pdf) (hereinafter ``Testimony of Deborah Goldberg'');
Testimony of David Berenbaum, supra note 29, at 23.
\226\ Testimony of David Berenbaum, supra note 29, at 23.
---------------------------------------------------------------------------
There are several potential reasons why this may be. First,
a servicer's financial interest in a defaulted loan is based on
very different criteria than an investor's. The servicer is
indifferent to the net present value of the loan; instead, the
servicer is concerned with maximizing its revenue stream from
the loan and minimizing its expenses on the loan. This means
that residential mortgage servicing suffers from a severe
principal-agent problem, particularly in the case of private-
label securitization.\227\ Residential mortgage servicer
compensation structures fail to align servicers' incentives
with investors'.\228\ The incentive payments to servicers under
HAMP are themselves an acknowledgment that servicers are not
properly incentivized to perform modifications even when
modifications would yield a positive net present value for
investors.
---------------------------------------------------------------------------
\227\ Levitin & Twomey, supra note 78. See also National Consumer
Law Center, Why Servicers Foreclose When They Should Modify and Other
Puzzles of Servicer Behavior: Servicer Compensation and Its
Consequences (Oct. 2009) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1502744) (hereinafter ``Puzzles of Servicer
Behavior''). It should be noted that securitization can be done without
this sort of principal-agent problem. For example, in commercial
mortgage securitization (or CMBS structures), loans are transferred to
a special servicer if they go 60 days delinquent, and the default
servicer's compensation is based on the ultimate recovery of the
defaulted loan. Thus, if the default servicer can get the loan to
reperform, it will be worth more than if it redefaults. See Anna
Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout
Prohibitions in Residential Mortgage-Backed Securities, 82 S. Cal. L.
Rev. (2010).
\228\ Servicers usually have some ``skin in the game'' through
their relationship as an affiliate of the securitization sponsor. In
these cases, the servicers have liability for early payment defaults
and the residual tranche. The residual, however, is often
resecuritized, and when the defaults surpass a minimum level, the
residual will be out of the money and will not align servicer and
investor incentives.
---------------------------------------------------------------------------
In addition, as the Panel discussed in its October 2009
report, servicers may face impediments to loan modifications in
the form of contractual barriers. Servicers of securitized
loans operate under the terms of PSAs, which are contracts
between the servicers and the investors.\229\ These contracts
contain provisions that may encourage servicers, working with
the securitization trustee, to disqualify certain homeowners
who would otherwise qualify for a HAMP modification. For
example, although PSAs rarely prohibit loan modifications,\230\
they typically restrict the servicer's ability to extend the
term of a loan, usually to a maximum of one year.\231\ Such a
restriction might preclude HAMP modifications that would
otherwise allow the borrowers to stay in their homes. In
addition, PSAs often restrict the servicer's ability to grant
principal reductions.\232\ Under HAMP, servicers must make
reasonable efforts to have such contractual restrictions
revised, but the program otherwise defers to the PSAs'
terms.\233\ Treasury should make public information regarding
servicers' efforts to have contractual restrictions revised.
---------------------------------------------------------------------------
\229\ See October Oversight Report, supra note 17.
\230\ Testimony of Adam Levitin, supra note 83, at 10.
\231\ October Oversight Report, supra note 17.
\232\ Testimony of Adam Levitin, supra note 83, at 10.
\233\ HAMP Guidelines, supra note 106.
---------------------------------------------------------------------------
Furthermore, second-lien mortgages are sometimes held by
the same institution that is acting as servicer for the first-
lien loan. It is unknown how frequently this is the case; many
second-lien loans might be held by a bank other than the
servicer of the first-lien loan. But when a servicer both
services the first lien and holds the second lien, and the
first lien defaults, there is an inexorable conflict of
interest, as the same financial institution is representing two
adverse interests, one of which is its own. In such a
situation, however, the conflict of interest is actually more
likely to result in a modification of the first-lien loan, as
it benefits the bank at the expense of the mortgage-backed
security investors.\234\
---------------------------------------------------------------------------
\234\ Levitin & Twomey, supra note 78.
---------------------------------------------------------------------------
To the extent that servicer conflicts of interest are
inhibiting mortgage modifications, it is important to note that
there is little supervisory structure for servicers. Servicers
are nominally supervised by securitization trustees, but
securitization trustees have little ability or incentive to
intervene. The securitization trustee has no way of knowing
whether a servicer also holds a second lien on a property it is
servicing. Accordingly, there is no way a securitization
trustee can monitor servicers for conflicts of interest, and
even if the trustee could, the trustee has little ability to
fire a servicer over a conflict of interest; at most, the
trustee could bring litigation against the servicer, but would
have to front the expenses of the litigation for the trust and
would receive no benefit from doing so.\235\
---------------------------------------------------------------------------
\235\ Id.
---------------------------------------------------------------------------
Securitization trustees are large corporate trust
departments at a handful of financial institutions. They have
very limited duties prescribed by contract, and they do not
have general fiduciary duties to mortgage-backed securities
(MBS) investors. Moreover, securitization trustees often have
close, long-standing business relationships with particular
servicers and securitization sponsors. Securitization trustees
might, therefore, be reluctant to jeopardize these
relationships by aggressively monitoring servicer behavior.
There is only downside to a securitization trustee for bringing
action against a servicer, not upside. Thus, servicers are
largely left to their own devices in dealing with conflicts of
interest.\236\
---------------------------------------------------------------------------
\236\ Id.
---------------------------------------------------------------------------
Finally, outside parties such as credit rating agencies and
bond insurers may provide servicers with additional
disincentives to modify mortgages. Credit rating agencies rate
mortgage servicers, as they do other financial institutions,
based on a variety of factors, including their financial
condition and their management.\237\ These ratings can impact a
servicer's profitability. If the servicer's ratings fall, it
will have to pay a higher price for mortgage servicing rights.
As a result, servicers have a strong incentive to follow the
performance criteria established by the credit rating agencies.
The National Consumer Law Center has concluded that while the
credit rating agencies have generally been supportive of more
loan modifications, they also encourage servicers to move loans
quickly through the foreclosure process.\238\ This may explain
why borrowers have frequently reported receiving foreclosure
notices in the midst of the modification process,\239\ even
though HAMP prohibits foreclosure sales while borrowers are
being evaluated for modifications.\240\ Bond insurers, which
stand to lose money when securitized mortgages stop paying, may
also have influence over servicers. Their interventions can
lead servicers to make decisions regarding modifications that
might not otherwise be in their own financial interests.\241\
---------------------------------------------------------------------------
\237\ See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage
Servicers, at 764, 15 Housing Policy Debate (2004) (online at
www.msfraud.org/Articles/abuseopportunism.pdf).
\238\ Puzzles of Servicer Behavior, supra note 227, at 2.
\239\ Testimony of David Berenbaum, supra note 29, at 19.
\240\ Testimony of Phyllis Caldwell, supra note 14, at 11.
\241\ For a more detailed discussion of the role played by bond
insurers, see Puzzles of Servicer Behavior, supra note 227, at 15-16.
---------------------------------------------------------------------------
2. Accounting Rules Provide Investors a Disincentive to Modify Loans
Because of the accounting treatment of loan modifications,
investors may also have cause to be ambivalent about HAMP.
Under generally accepted accounting principles (GAAP), once the
terms of a loan are contractually modified, the modified loan
is accounted for as a ``troubled debt restructuring.'' A
troubled debt restructuring occurs when the terms of a loan
have been modified due to the borrower's financial
difficulties, and a long-term concession has been granted to
the borrower. Examples of such concessions include interest
rate reductions, principal forbearance, principal forgiveness,
and term extensions, all of which may be used to modify loans
in HAMP.\242\ Under GAAP, a loss is to be recognized if the
difference in cash flows to be received under the modified loan
is less than the cash flows of the original loan.\243\ In
addition, the loss is required to be recognized at the time the
loan is contractually modified as opposed to being recognized
over the term of the loan. The accounting for loans that are
not accounted for as troubled debt restructurings is generally
less severe, since under those circumstances GAAP provides an
entity more discretion to determine when a loan should be
written off.\244\
---------------------------------------------------------------------------
\242\ See Accounting Standard Codification (ASC) 310-40-15,
Troubled Debt Restructurings by Creditors (formerly Statement of
Financial Standards (SFAS) 15) (online at asc.fasb.org/
section&trid=2196900%26analyticsAssetName=subtopic_page_section%26nav_ty
pe=subtopic page). ASC 310-40-15-5 states that a loan the terms of
which have been modified is a troubled debt restructuring ``if the
creditor for economic or legal reasons related to the debtor's
financial difficulties grants a concession to the debtor that it would
not otherwise consider.''
\243\ By nature of the modified terms of the loan under HAMP,
(i.e., reduction of interest to be received and/or principal
forbearance or forgiveness) the entity's future cash flows to be
received will be less than the current loan payoff amount. See ASC 310-
10-35, Receivables--Measurement of Impairment (formerly SFAS 114). ASC
310-10-35-24 states that ``[i]f the present value of expected future
cash flows (or, alternatively, the observable market price of the loan
or the fair value of the collateral) is less than the recorded
investment in the loan (including accrued interest, net deferred loan
fees or costs, and unamortized premium or discount), a creditor shall
recognize an impairment by creating a valuation allowance with a
corresponding charge to bad-debt expense or by adjusting an existing
valuation allowance for the impaired loan with a corresponding charge
or credit to bad-debt expense.'' (online at asc.fasb.org/
section&trid=2196791%26analyticsAssetName=subtopic_page_section%26nav_ty
pe=subtopic_page).
\244\ Except if the loan is classified as troubled debt
restructuring, the accounting for loan losses for residential mortgage
loans is provided by ASC 450-20-25, Contingencies-Loss Contingencies
(formerly SFAS 5). An estimated loss from a loss contingency shall be
accrued by a charge to income if both of the following conditions are
met (emphasis added):
Information available before the financial statements are
issued or are available to be issued indicates that it is probable that
an asset had been impaired or a liability had been incurred at the date
of the financial statements. Date of the financial statements means the
end of the most recent accounting period for which financial statements
are being presented. It is implicit in this condition that it must be
probable that one or more future events will occur confirming the fact
of the loss.
The amount of loss can be reasonably estimated. In
addition, banking regulatory guidelines have instituted an initial loan
review whereby loans are classified as either special mention,
substandard, doubtful or loss. If the loan is 180 cumulative days past
due, the loan should be classified as a loss and the loan balance is
either charged off or a reserve is established equal to 100% of the
loan balance (with a corresponding charge to bad debt expense). See,
e.g., Federal Deposit Insurance Corporation, Uniform Retail Credit
Classification and Account Management Policy (Dec. 3, 2009) (online at
www.fdic.gov/regulations/laws/rules/5000-1000.html).
---------------------------------------------------------------------------
Depository institutions that own mortgages are generally
reluctant to take write-downs because doing so requires them to
boost their regulatory capital ratios, which hurts both their
ability to make new loans and their profitability. That is
particularly true today, since banks' capital structures have
already been weakened by a variety of factors, including write-
downs already taken on residential and commercial real estate
loans, losses taken on other loans due to the recession, and
recent actions by Fannie Mae and Freddie Mac to require banks
to buy back mortgages that the banks had previously sold to
them.\245\
---------------------------------------------------------------------------
\245\ Agreements between banks and government-sponsored enterprises
such as Fannie Mae and Freddie Mac include provisions that require the
banks to buy back mortgages that do not meet Fannie Mae's and Freddie
Mac's underwriting standards.
---------------------------------------------------------------------------
Accounting issues are not exclusive to first liens. There
have been calls for the holders of second-lien loans to write
off those loans, at least to the extent they are
underwater.\246\ Such calls may mistakenly presume that the
entire value of an underwater second-lien loan is its hold-up
value--the value that could be extracted from homeowners or
first-lien holders by being able to block a refinancing of the
first-lien mortgage. There is additional value, however, beyond
hold-up value, to the extent that the loan is still
performing--a realistic possibility, especially for Home Equity
Lines of Credit (HELOCs), where balances are simply allowed to
accrue. If the lien were to be discharged in a foreclosure
sale, and the debt charged off for regulatory accounting
purposes, the bank would still hold an enforceable unsecured
debt. The market value of such debt is far less than face
value, but to the extent the debt were sold or recovered, it
would represent a recovery on charged-off debt.
---------------------------------------------------------------------------
\246\ See Letter from Rep. Barney Frank, supra note 41.
---------------------------------------------------------------------------
There is tension between Treasury's goals of mitigating
foreclosures and Treasury's goal of maintaining adequate
capital levels at large banks. Bank of America, Citigroup,
JPMorgan Chase, and Wells Fargo have all signed up for the
Second Lien Modification Program. Combined, as of the third
quarter in 2009, these four banks held $442.1 billion in
second-lien mortgages. At the end of that same quarter, these
four banks' total equity capital was $459.1 billion.\247\
---------------------------------------------------------------------------
\247\ Federal Deposit Insurance Corporation, Statistics of
Depository Institutions (online at www2.fdic.gov/sdi/). This figure is
based on reporting by the banks, not their holding companies, and
therefore may not include all second liens held by affiliates.
---------------------------------------------------------------------------
3. Servicers and Investors may be Waiting for a Better Offer from the
Government
One additional disincentive, which may affect the actions
of both servicers and investors, involves the possibility that
the government will offer them a better deal at some point in
the future. When HAMP was first announced in February and March
2009, it referenced but included little specificity about plans
to modify second liens, to modify loans in geographic areas
where home prices have fallen precipitously, and to encourage
alternatives to foreclosure in cases where modifications are
infeasible.\248\ Additional incentive payments were announced
later.\249\
---------------------------------------------------------------------------
\248\ MHA Detailed Program Description, supra note 47.
\249\ Apr. 2009 MHA Update, supra note 33; Foreclosure Alternatives
and Home Price Decline Protection Incentives, supra note 116.
---------------------------------------------------------------------------
Given this history, it was not unreasonable for the
mortgage industry to wonder whether Treasury would again offer
a better deal at some point in the future. As Mr. Berenbaum of
the National Community Reinvestment Coalition testified at a
recent congressional hearing, ``Some institutions may be going
through the motions and not seeking permanent modifications in
which they have to make significant financial sacrifices
because they may be waiting for additional government subsidies
or even outright purchases of their distressed loans.'' \250\
About a month after those comments, Treasury announced in late
March that participating servicers and investors will be
eligible to receive numerous additional incentive
payments,\251\ and they will be paid retroactively.\252\ Such
changes could inadvertently bolster the perception that a
better offer may again be forthcoming, although to be fair it
is probably impossible for Treasury to avoid this perception as
long as it is taking actions aimed at preventing more
foreclosures. Treasury must be mindful of this tension as it
moves forward in implementing the recently announced changes.
---------------------------------------------------------------------------
\250\ Testimony of David Berenbaum, supra note 29, at 23.
\251\ MHA Enhancements to Offer More, supra note 59.
\252\ Treasury conversation with Panel staff (Mar. 26, 2010).
---------------------------------------------------------------------------
G. Treasury Progress on Key Recommendations from the October Report
The Panel has been examining various issues of the
foreclosure crisis and the adequacy of Treasury's responses to
these issues for the last year. Foreclosures started rising in
July 2007, and by the end of 2008, 1.24 million homes had been
lost to foreclosure, and 3.28 million more foreclosures had
started.\253\ Treasury announced its first major foreclosure
mitigation initiative--the Homeowner Affordability and
Stability Plan--in February 2009. Since then, the foreclosure
problem has continued to grow. In response, Treasury has
introduced or expanded six major MHA programs (HAMP, 2MP, HPDP,
HAFA, Hardest Hit Fund, and the FHA refinance option) and
released 13 new supplemental directives or additional MHA
program guidelines as well as two revised supplemental
directives. These additional programs and guidelines have
helped moderate certain aspects of the foreclosure crisis, but
Treasurys response to the overall problem has not kept pace
with the growing number of foreclosures, and more importantly,
significant issues remain.
---------------------------------------------------------------------------
\253\ See HOPE NOW, 1.77 Million Homeowners Receive Mortgage Loan
Workout Solutions According to the HOPE NOW Alliance, at 4 (Sept. 1,
2009) (online at www.hopenow.com/press_release/files/
July%20Data%20Release_Final.pdf) (providing numbers of foreclosure
starts and foreclosure sales that include Q3 2007 through Q4 2008).
---------------------------------------------------------------------------
The Panel explained in its October report that the key
problems of the MHA programs related to scope, scale, and
permanence. The Panel then provided a list of specific
recommendations for addressing these problems: transparency,
streamlining the process, program enhancements, and
accountability.\254\ This section will review the Panel's key
recommendations from the October report, new programs and
changes to existing programs that Treasury has implemented in
the last six months related to these key recommendations, and
the extent to which these changes address the Panel's key
findings and recommendations. Overall, although Treasury has
made some progress in addressing the Panel's concerns,
additional changes are needed in order to address the
foreclosure crisis in a sufficient, comprehensive way. However,
the Panel notes that many of Treasury's new programs and
program changes are still in the process of being implemented
or are in their early stages. The Panel will continue to
monitor these programs as data become available in order to
evaluate the effectiveness of the MHA.
---------------------------------------------------------------------------
\254\ October Oversight Report, supra note 17, at 111-12.
---------------------------------------------------------------------------
1. Transparency
Panel Recommended. In October, the Panel reported evidence
of eligible borrowers being denied HAMP modifications
incorrectly, misinterpretations of program guidelines, and
difficulties encountered by borrowers and their counselors in
understanding the NPV models as well as the reasons that HAMP
applications were being denied. As a result, the Panel made
several recommendations related to the transparency of the MHA
programs in order to promote fairness and clarity. The details
of the programs should be completely above board both
internally and externally so that servicers, borrowers, and
housing counselors understand their roles or responsibilities
within the program and so that the public, Congress, and
oversight bodies can meaningfully evaluate the structure,
effectiveness, and success of the MHA programs.
The Panel recommended that Treasury should be more
transparent by disclosing denial codes, providing additional
information on the appeals process for loan modification
denials, and releasing its NPV model so that borrowers and
their housing counselors can easily determine if the borrowers
were eligible for HAMP modifications and can appeal if they
believe the borrowers were denied incorrectly. Information on
program eligibility, denials, and the appeals process should be
clear, meaningful, easily understood, and communicated in a
timely manner.\255\
---------------------------------------------------------------------------
\255\ October Oversight Report, supra note 17, at 47, 62-63, 111.
The Panel noted that this recommendation applied equally to HARP.
---------------------------------------------------------------------------
Treasury Action Since October. In September, Treasury
released denial codes or ``Not Approved/Not Accepted Reason
Codes,'' which servicers must provide to Fannie Mae, as
Treasury's program administrator, for each mortgage loan
evaluated for HAMP that did not enter a trial period, fell out
of a HAMP trial, or did not result in a permanent HAMP
modification on or after December 1, 2009.\256\ In November,
Treasury further clarified that whenever servicers are required
to provide denial codes to Fannie Mae, servicers must also
provide written notification to borrowers of the reasoning for
their program eligibility determinations (sending the notice
within 10 business days of making their decision), effective
January 1, 2010.\257\ Treasury noted that explanations should
relate to one or more of the denial codes and must be written
in clear, non-technical language, and it included model clauses
for various denial codes as examples.\258\ When a borrower is
denied because the NPV calculation is negative, the servicer
must include a list of certain input fields that were
considered in the NPV decision and must explain that the
borrower can request the values used to populate these NPV
fields. However, Treasury did not provide additional guidance
on the appeals process available to borrowers that were
ultimately denied HAMP modifications. And, although Treasury
has planned to release an augmented version of its NPV
calculator for housing counselor use only--the Counselor HAMP
Screen or CHAMPS--it is unclear when or whether such release
will occur. Treasury explained that the current version of
CHAMPS had a high rate of false positives and false negatives
because of the sensitivity of the model to certain inputs such
as LTV (a value which will likely be different for the borrower
and the servicer and that can lead to dramatically different
results) so that it has trepidation around providing the model
and has not reached a firm conclusion on whether it will
ultimately release CHAMPS.\259\
---------------------------------------------------------------------------
\256\ U.S. Department of the Treasury, Home Affordable Modification
Program--Data Collection and Reporting Requirements Guidance,
Supplemental Directive 09-06, at 2, 14-15 (Sept. 11, 2009) (online at
www.hmpadmin.com/portal/docs/hamp_servicer/sd0906.pdf).
\257\ HAMP Borrower Notices, supra note 5, at 2. See also
Introduction of Home Affordable Foreclosure Alternatives, supra note
118, at 5 (requiring servicers to provide written communication of its
decision not to offer a HAFA short sale or deed-in-lieu of foreclosure
in accordance with the guidelines in Supplemental Directive 09-08);
HAMP--Update and Resolution of Active Trial Modifications, supra note
20, at 5 (requiring servicers to provide written communication of its
ineligibility decision in accordance with the guidelines in
Supplemental Directive 09-08 and to provide Incomplete Information
Notices with a specific date by which the information must be received
from the borrower that is not less than 30 days from the date of the
notice).
\258\ HAMP Borrower Notices, supra note 5, at 2-4.
\259\ Treasury conference call with Panel staff (Mar. 24, 2010).
---------------------------------------------------------------------------
Evaluation. Treasury has made significant progress in
establishing guidelines for written communications from
servicers to borrowers of the reasons for ineligibility
determinations including denials of HAMP trial periods, HAMP
permanent modifications, and HAFA short sales or deeds-in-lieu
of foreclosure. Servicers are directed to send these borrower
notices within 10 business days of the date of their
determinations, making these notices timely. Treasury also
explained that these notices must be written in clear, non-
technical language and provide examples or model clauses that
are straightforward and easy to understand. These guidelines
should bring greater clarity to the reasons for servicer
denials of HAMP trial periods or permanent modifications or
HAFA short sales or deeds-in-lieu of foreclosure. However, the
denial code and borrower notice guidelines are still in the
process of being implemented. Although the denial codes were
released in September 2009 and the borrower notice guidelines
were released in November 2009 and were effective January 1,
2010, Treasury told the Panel that servicer reporting of denial
codes was only beginning to happen. In February 2010, Treasury
reiterated to servicers the need to report denial codes, and it
expects to have the numbers in the next few months.\260\ In
addition, it is unclear whether borrowers have actually been
receiving borrower notices in a timely manner or whether the
denial codes have been useful or sufficient in addressing
fairness concerns; have provided greater understanding to
borrowers; or have resulted in a simpler, more straightforward,
or more efficient appeals process. It is important for
Treasury, either directly or through its program contractors
(Fannie Mae as program agent and Freddie Mac as compliance
agent), to monitor the activities of the program participants,
audit them, and enforce program rules, guidelines, and
requirements.\261\ Only when the rules are enforced in a
thorough and even-handed manner will the transparency that the
structure of the MHA programs attempts to achieve come to
fruition. The Panel will continue to monitor these program
updates as additional information becomes available.
---------------------------------------------------------------------------
\260\ Id.
\261\ For additional discussion of accountability and program
compliance, see Section G.4.
---------------------------------------------------------------------------
Regarding the net present value model, the Panel applauds
Treasury's efforts to rigorously test the augmented version of
its NPV calculator and agrees with Treasury's assessment that
it should not release a model that results in misleading false
positives and false negatives. However, the Panel continues to
believe that borrowers and counselors should have access to an
accurate version of the NPV model and is hopeful that Treasury
redoubles its efforts to make such access possible in the near
future. Also, although Treasury has released a white paper
related to its base net present value model,\262\ borrowers and
housing counselors still only have limited access to the inputs
used by servicers (who only have to release certain inputs) and
have very little insight into how material these inputs are or
whether corrections to any inaccurate values are likely to
change the outcome of the NPV calculation (servicers only have
to re-run NPV calculations if the correction is material).\263\
Thus, Treasury has not made meaningful progress in addressing
the Panel's concern about the secrecy around the NPV model.
---------------------------------------------------------------------------
\262\ See U.S. Department of the Treasury, Home Affordable
Modification Program: Base Net Present Value (NPV) Model v3.0 Model
Documentation (Dec. 8, 2009) (online at www.hmpadmin.com/portal/docs/
hamp_servicer/npvmodeldocumentationv3.pdf).
\263\ HAMP Borrower Notices, supra note 5, at 3; see also Testimony
of David Berenbaum, supra note 29, at 24, 29 (voicing continued
frustration with the opacity of the NPV analysis and stating that the
Administration should establish rules for a fair appeals process);
House Oversight and Government Reform, Subcommittee on Domestic Policy,
Written Testimony of Julia Gordon, senior policy counsel, Center for
Responsible Lending, Foreclosures Continue: What Needs to Change in the
Government Response?, at 12, 15 (Feb. 25, 2010) (online at
oversight.house.gov/images/stories/Hearings/Domestic_Policy/2010/
022510_Foreclosure/022410_Gordon_COGR_testimony_022510_final.pdf)
(hereinafter ``Testimony of Julia Gordon'') (stating that Treasury
needs to provide homeowners and their advocates access to the NPV
analysis and an independent, formal appeals process for those that
believe their HAMP applications were not handled correctly); State
Foreclosure Prevention Working Group, Analysis of Mortgage Servicing
Performance: Data Report No. 4, at 4 (Jan. 2010) (online at
www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport4Jan202010FINAL.pdf) (hereinafter ``State Foreclosure
Prevention Working Group: Data Report No. 4'').
---------------------------------------------------------------------------
2. Streamlining the Process
Panel Recommended. In October, the Panel found significant
variation among servicers in terms of program implementation,
performance, borrower experience, and the numbers of successful
trial and permanent modifications. As a result, the Panel
recommended that Treasury should standardize and streamline the
loan modification process to ensure uniformity as well as to
enhance the effectiveness of its programs. Greater uniformity
will help ease frustration for borrowers, housing counselors,
and lenders/servicers. In addition, standardization will remedy
different forms and procedures from lender to lender,
facilitate borrower education, enhance the effectiveness of
housing counselors, and promote program efficiency (e.g., by
increasing the likelihood or timeliness of mortgage
modifications).\264\
---------------------------------------------------------------------------
\264\ See October Oversight Report, supra note 17, at 63-64, 111.
---------------------------------------------------------------------------
Treasury Action Since October. Treasury has issued several
supplemental directives related to streamlining and
standardizing income documentation that make it easier for
borrowers to compile documentation packages, for borrowers to
understand the HAMP modification process, and for servicers to
process HAMP applications. In October, Treasury updated
borrower underwriting requirements and introduced revised model
documentation (e.g., a standard MHA Request for Modification
and Affidavit form), effective March 1, 2010.\265\ In November,
Treasury standardized the amount of information that must be
communicated in writing to borrowers whenever servicers made
HAMP eligibility decisions, effective January 1, 2010.\266\ In
January 2010, Treasury made a significant program change
requiring full verification of borrower eligibility prior to
the offer of any HAMP Trial Period Plan with an effective date
on or after June 1, 2010 (servicers can currently offer HAMP
Trial Periods to borrowers based on stated or verified
income).\267\ And, in March 2010, Treasury provided additional
guidance on borrower outreach and communication (e.g.,
clarifying the requirement for servicers to proactively solicit
all borrowers that are potentially eligible for HAMP prior to
initiating foreclosure actions, defining reasonable
solicitation efforts for servicers, providing a timeframe for
borrowers to return the necessary HAMP documentation,
explaining servicers' responsibilities for borrowers already in
foreclosure, and requiring servicers to consider borrowers in
bankruptcy for HAMP if the borrower requests such
consideration) with an effective date of June 1, 2010.\268\
---------------------------------------------------------------------------
\265\ See U.S. Department of the Treasury, Home Affordable
Modification Program--Streamlined Borrower Evaluation Process,
Supplemental Directive 09-07 (Oct. 8, 2009) (online at
www.hmpadmin.com/portal/docs/hamp_servicer/sd0907.pdf).
\266\ See HAMP Borrower Notices, supra note 5.
\267\ See HAMP--Update and Resolution of Active Trial
Modifications, supra note 20; see also Testimony of Phyllis Caldwell,
supra note 14, at 3 (providing that greater upfront documentation will
ensure that HAMP does not experience a backlog of trial modifications
going forward).
\268\ Supplemental Directive 10-02, supra note 48.
---------------------------------------------------------------------------
Evaluation. Treasury has taken several steps to streamline
the HAMP modification process and bring greater uniformity and
standardization to the MHA programs. Treasury has standardized
several HAMP requirements by providing model documentation and
model clauses for borrowers and servicers, clarifying
underwriting requirements for servicers including several clear
examples of acceptable forms of income verification, clarifying
responsibilities and timelines for borrowers and servicers, and
defining ambiguous terms such as ``reasonable solicitation
efforts.'' In addition, Treasury's recent announcement
requiring servicers to verify income before offering borrowers
trial plans with effective dates on or after June 1, 2010
should improve the process by reducing the backlog of HAMP
trial periods awaiting permanent modification, increasing the
conversion rate, and reducing false expectations for
borrowers.\269\ However, it is unclear whether borrowers are
benefiting from these program changes at this time.
---------------------------------------------------------------------------
\269\ HAMP--Update and Resolution of Active Trial Modifications,
supra note 20.
---------------------------------------------------------------------------
In attempting to streamline its process and increase the
number of borrowers being assisted, Treasury should be
cognizant that the potential exists for the program to end up
propping up bad loans to unqualified borrowers, who will
ultimately redefault. Although the Panel does not believe this
is currently the case, it does believe that the problems that
created the current housing problems should not be repeated in
the name of foreclosure prevention. However, Treasury must also
balance this caution with the need to design foreclosure
prevention programs that will actually be used by servicers,
lenders, and borrowers, and that reflect the circumstances
these groups face. Whether or not Treasury is able to strike
this balance of effectiveness and fiscal prudence will greatly
determine the success or failure of HAMP.
Some housing counselors note continued frustration and
problems regarding the HAMP program: Foreclosure proceedings do
not always stop during the modification process, communication
is difficult, servicers continue to lose information,
transitions from trial periods to permanent modifications have
been slow, the quality of loan modifications have been
haphazard, the NPV analysis is still not transparent, and
denials appear to be arbitrary and hamper appeals.\270\ Many of
these programs are still in the process of being implemented or
are in their early stages and should address some of the
continued borrower concerns or complaints in the next several
months. It should be noted that repeated changes to program
guidelines can place implementation burdens on servicers.\271\
Treasury must monitor and audit the activity of program
participants, and it must ensure compliance with new programs,
rules, and requirements.\272\ The issues that these program
changes were designed to target will not be addressed,
adequately or at all, if the new rules are not followed. The
Panel will continue to monitor these program changes as
additional results become available.
---------------------------------------------------------------------------
\270\ Testimony of David Berenbaum, supra note 29, at 19, 21-24,
28-29 ; see also State Foreclosure Prevention Working Group: Data
Report No. 4, supra note 263, at 4 (noting that Treasury's new HAMP
requirements were added to an already overloaded system; the secrecy of
the NPV model makes it difficult for homeowners, counselors, and states
to evaluate the likelihood of HAMP eligibility and to monitor
implementation; and homeowners still need access to a real-time
escalation and appeals process).
\271\ See, e.g., Factors Affecting Implementation of HAMP, supra
note 25, at 21-24.
\272\ For additional discussion of accountability and program
compliance, see Section G.4.
---------------------------------------------------------------------------
3. Program Enhancements
Panel Recommended. The Panel noted several specific areas
of concern in its October report related to meeting
affordability goals and reaching a larger number of at-risk
borrowers. The Panel suggested that Treasury should consider
specific program improvements or modifications such as
incorporating more local information into its NPV models (where
reliance on statewide average would be inappropriate),
modifying DTI eligibility requirements to accommodate more
borrowers (i.e., borrowers that would be above the 31 percent
DTI eligibility threshold when including modified capitalized
arrearages), and appointing ombudsmen or designating case staff
to help borrowers communicate more effectively with
servicers.\273\ The Panel also suggested the development of a
web portal to improve borrower-servicer communication in both
its March and October reports.\274\
---------------------------------------------------------------------------
\273\ October Oversight Report, supra note 17, at 6, 55, 111-12.
\274\ See October Oversight Report, supra note 17, at 6, 111. Such
a web portal would also help streamline and unify the loan modification
process.
---------------------------------------------------------------------------
Treasury Action Since October. Treasury does not appear to
have made any program changes related to incorporating more
local information into NPV calculations or allowing DTI
flexibility with arrearages.\275\ The current NPV calculation
remains unchanged. And, Treasury has decided to peg the DTI at
31 percent over the next five years, without flexibility for
modified capitalized arrearages. However, Treasury has made a
program change to accommodate more at-risk borrowers by
modifying DTI flexibility in order to assist more unemployed
homeowners that will be implemented ``in the coming months.''
\276\
---------------------------------------------------------------------------
\275\ Testimony of Phyllis Caldwell, supra note 14, at 1 (``HAMP
defines a standard for an affordable and sustainable modification
across the industry, set at 31% of gross monthly income'').
\276\ MHA Enhancements to Offer More, supra note 59, at 1.
---------------------------------------------------------------------------
In addition, Treasury has made some progress in
facilitating communications between borrowers and servicers. In
November 2009, Treasury released guidelines requiring servicers
to provide a written notification to every borrower explaining
its determinations regarding HAMP program eligibility (e.g.,
its decision not to offer a Trial Period Plan, its decision not
to offer a permanent HAMP modification, or the risk to the
borrower of losing eligibility), effective January 1,
2010.\277\ These notices must include both ``a toll-free number
through which the borrower can reach a servicer representative
capable of providing specific details about the . . . reasons
for a non-approval determination'' and the HOPE Hotline Number
so that the borrower knows how to reach a HUD-approved housing
counselor for assistance at no charge.\278\ The Making Home
Affordable website also clearly says that borrowers can speak
with HUD-approved housing counselors at no cost when they need
help with the Making Home Affordable program.\279\
---------------------------------------------------------------------------
\277\ HAMP Borrower Notices, supra note 5, at 1.
\278\ Id., at 4.
\279\ U.S. Department of the Treasury, MakingHomeAffordable.gov:
Help for American's Homeowners (online at makinghomeaffordable.gov)
(accessed April 13, 2010) (hereinafter ``MHA Website'').
---------------------------------------------------------------------------
At the Panel's Philadelphia Field Hearing in September
2009, Mr. Wheeler testified that Treasury planned to work with
servicers and Fannie Mae to develop a web portal that would
``serve as a centralized point for modification and
applications'' and allow ``borrowers to check the status of
their applications.'' \280\ In March 2010, Treasury stated that
it had not released and was still considering whether it should
release such a web portal. Treasury cited the availability of
other solutions to the lost document problems such as increased
servicer capacity or private market programs as reasons that a
web portal might not be necessary.\281\ For example, Phyllis
Caldwell, chief of Treasury's Homeowner Preservation Office,
testified before the House Committee on Oversight and
Government Reform that HUD-approved housing counselors would be
able to take advantage of HOPE NOW's new web portal--the HOPE
LoanPort--``to help borrowers collect the necessary HAMP
documents, upload the completed package directly to servicers
and track the status of a borrower's application.'' \282\
---------------------------------------------------------------------------
\280\ Testimony of Seth Wheeler, supra note 193, at 6.
\281\ Treasury conference call with Panel staff (Mar. 24, 2010).
\282\ Testimony of Phyllis Caldwell, supra note 14, at 12. HOPE NOW
launched its web portal--HOPE LoanPort--in December 2010 and announced
the expansion of the web portal to over 100 key markets in February
2010. See HOPE NOW, HOPE NOW Expanding HOPE LoanPort Housing Counselor
Web Portal To Over 100 Key Markets (Feb. 24, 2010) (online at
www.hopenow.com/press_release/files/
HOPE%20LoanPort%20Release_02_24_10.pdf); HOPE NOW, HOPE NOW Launches
the HOPE LoanPort To Assist At-Risk Homeowners (Dec. 10, 2010) (online
at www.hopenow.com/press_release/files/
HOPE%20%20LoanPort%20National%20Release%20_12_10_09.pdf). HOPE NOW is
an industry-created alliance between housing counselors, mortgage
companies, investors, and other mortgage market participants.
---------------------------------------------------------------------------
Evaluation. Treasury still needs to address the Panel's
recommendation to include more appropriate information in NPV
calculations (and thus, more proper determinations of HAMP
eligibility). Treasury has made some progress in reaching more
at-risk borrowers through its assistance to unemployed
homeowners, but Treasury could accommodate even more at-risk
borrowers by allowing more flexibility in its DTI requirements
(i.e., by considering modified capitalized arrearages).\283\ In
addition, Treasury has made some progress in facilitating
communications between borrowers and servicers and in helping
borrowers understand the reasons their HAMP applications have
been denied. However, it is unclear whether borrowers are
receiving Borrower Notices or how many people are following up
on the additional information in the Borrower Notices by
contacting either the servicers directly through the toll-free
number provided or HUD-approved housing counselors through the
HOPE Hotline for explanations or assistance in communicating
with servicers. It is also unclear whether the HUD-approved
housing counselors have sufficient capacity or adequate
training to properly handle borrower requests for assistance.
---------------------------------------------------------------------------
\283\ For additional discussion of the problems of unemployment and
the temporary assistance to unemployed homeowners, see Section C(1)g.
---------------------------------------------------------------------------
Some housing counselors say that the special counselor
hotline and institutional reforms such as the HAMP escalation
process ``have not been effective.'' \284\ These housing
counselors claim that communication with servicers is
difficult. For example, counselors are only able to talk with
servicers' customer service representatives that often have
erroneous information regarding the loan or are unable to
properly convey the details of the conversation or the
complexities of the loan modifications to the negotiators who
have underwriting discretion and can modify the loan. In
addition, many financial institutions are selling distressed
loans after modifications have started, further complicating
counselors' efforts.\285\
---------------------------------------------------------------------------
\284\ Testimony of David Berenbaum, supra note 29, at 22.
\285\ Testimony of David Berenbaum, supra note 29, at 21-22.
---------------------------------------------------------------------------
In addition, as noted above, Treasury has not yet released
and is still considering whether it should release a web portal
to enhance borrower-servicer communication because of the
availability of private market programs as well as increased
servicer capacity. It is unclear, however, whether solutions
such as the HOPE LoanPort are sufficient to address the
numerous complaints from borrowers and servicers about
documents not being submitted or documents being lost,
misplaced, or mishandled. It is also unclear how servicers have
sufficient capacity to prevent problems with lost
documentation, slow conversions, or slow response times
considering the backlog of HAMP trial period plans awaiting
conversion to permanent modifications and continued complaints
with servicer competence and capacity.\286\ Treasury has
acknowledged these problems and the need for a solution, and
Treasury's plan to develop a web portal provided a viable
solution.\287\ Treasury has been working toward this goal since
at least September 2009, and the Panel hopes that Treasury
continues its efforts to develop and release a web portal to
enhance the modification process.
---------------------------------------------------------------------------
\286\ House Oversight and Government Reform, Subcommittee on
Domestic Policy, Written Testimony of Ronald M. Faris, president, Ocwen
Financial Corporation, Foreclosures Continue: What Needs to Change in
the Administration's Response?, at 2 (Feb. 25, 2010) (online at
oversight.house.gov/ images/stories/Hearings/Domestic_Policy/2010/
022510_Foreclosure/022210_DP__Ronald_M._Faris_OCWEN_022510.pdf)
(reasoning that many homeowners are having problems obtaining HAMP
modifications because of ``a lack of sufficient capacity and expertise
in the industry to effectively handle the unprecedented numbers of
distressed homeowners in need of assistance''); State Foreclosure
Prevention Working Group: Data Report No. 4, supra note 263, at 2, 12-
13 (discussing the apparent backlog of loss mitigation efforts and
resolutions, even after servicers increased the number of employees
dedicated to loss mitigation efforts).
\287\ Treasury conference call with Panel staff (Mar. 24, 2010).
---------------------------------------------------------------------------
Overall, despite making some progress in facilitating
borrower-servicer communication, even Treasury officials admit
that they ``need to do more'' and that they ``continue to work
with servicers to improve their capacity to both evaluate
eligible borrowers and provide conversion decisions in a timely
manner.'' \288\ As part of its continued efforts to improve
borrower-servicer communications, Treasury should monitor and
audit participating servicers to ensure that they are complying
with the Borrower Notice rules that became effective on January
1, 2010. The structure that Treasury has implemented will not
be able to facilitate borrower-servicer communications or
address the concerns, or improve the experiences of, borrowers
or servicers in the absence of compliance by program
participants.
---------------------------------------------------------------------------
\288\ Testimony of Phyllis Caldwell, supra note 14, at 3.
---------------------------------------------------------------------------
4. Accountability
Panel Recommended. The Panel recommended that strong
accountability was necessary for the success and credibility of
the foreclosure mitigation programs.\289\ Treasury must clearly
define and communicate its goals and requirements as well as
its measurements for success. Without clear goals and
measurements, Treasury and its agents and third parties (e.g.,
oversight bodies, Congress, and the public) will not be able to
evaluate the adequacy or success of its programs overall or of
individual participants. Treasury must also effectively monitor
or oversee program participants and ensure compliance through
established enforcement mechanisms that provide a clear message
of the consequences (both positive and negative) for servicer
actions. Only then will servicers be able to understand the
link between cause and effect. Toward this goal of enhanced
credibility, Treasury has chosen to use Fannie Mae as financial
agent and HAMP program administrator and Freddie Mac as
compliance agent.\290\ These agents provide structural
accountability to its MHA programs.
---------------------------------------------------------------------------
\289\ October Oversight Report, supra note 17, at 112.
\290\ See Introduction of HAMP, supra note 21, at 1, 25; see also
U.S. Department of the Treasury, Making Home Affordable Program,
Housing Counselor: Frequently Asked Questions, at 1-2 (Dec. 29, 2009)
(online at www.hmpadmin.com/portal/docs/counselor/counselorfaqs.pdf)
(hereinafter ``MHA Housing Counselor: FAQs''); Government
Accountability Office, Treasury Actions Needed to Make the Home
Affordable Modification Program More Transparent and Accountable, GAO-
09-837, at 38 (Jul. 2009) (online at www.gao.gov/new.items/d09837.pdf)
(hereinafter ``GAO Report on HAMP'').
---------------------------------------------------------------------------
In its capacity as financial agent and HAMP program
administrator, Fannie Mae must register and execute servicer
participation agreements with servicers.\291\ Fannie Mae must
collect a variety of loan-level data from servicers related to
HAMP trial periods (to establish loans for processing and
report activity during the trial period), loan setup for
approved HAMP modifications, monthly activity for all HAMP
loans, and additional data elements such as borrower
information (e.g., full name, race, ethnicity, sex, and credit
score), NPV model inputs, loan data, property characteristics,
reasons for any denial of HAMP eligibility for trial periods or
permanent modifications, and the status of loans that did not
receive HAMP modifications.\292\ Servicers and investors must
seek approval from Fannie Mae if they want to deviate from the
standard payment reduction guidance when offering HAMP loan
modifications.\293\ Finally, following the modification of an
eligible mortgage, Fannie Mae is responsible for making
incentive compensation payments and reimbursements upon the
request of the servicers and in accordance with HAMP guidelines
and directives.\294\
---------------------------------------------------------------------------
\291\ See Introduction of HAMP, supra note 21, at 1, 19.
\292\ Id., at 19-21, 27-38.
\293\ MHA Housing Counselor: FAQs, supra note 290, at 9.
\294\ Id., at 1-2.
---------------------------------------------------------------------------
In its capacity as HAMP compliance agent, Freddie Mac must
conduct independent compliance assessments (both on-site and
remote) to evaluate loan-level data and confirm adherence to
HAMP requirements including evaluation of borrower and property
eligibility, compliance with underwriting guidelines, execution
of the NPV model/modification processes, completion of borrower
incentive payments, investor subsidy calculations, and data
integrity.\295\ Freddie Mac must provide its servicer
assessment to Treasury after the completion of the review.
Freddie Mac also provides its assessment to the servicer, who
will be able to submit concerns or disputes through an issue/
resolution appeal process.\296\ Finally, Freddie Mac must
penalize those servicers that fail to comply with HAMP
requirements (or manage any corrective action) and report
compliance violations to Treasury and other regulatory
agencies.\297\
---------------------------------------------------------------------------
\295\ See Introduction of HAMP, supra note 21, at 25-26; see also
Testimony of Phyllis Caldwell, supra note 14, at 6-7.
\296\ See Introduction of HAMP, supra note 21, at 26.
\297\ See GAO Report on HAMP, supra note 290, at 38.
---------------------------------------------------------------------------
As the Panel noted in the October report, Treasury should
release comprehensive performance metrics, the results of these
performance metrics by lender/servicer, and a rigorous
framework including appropriate, meaningful sanctions or
procedures to address non-compliance.\298\ The public release
of information by lender/servicer--and the impact of that
release on their motivation in modifying mortgages--provides an
element of procedural accountability. At the time of the
October report, such data were unavailable. Treasury chose not
to release information collected by Fannie Mae as the HAMP
program administrator that would give the public a sense of
individual servicer performance, such as average conversion
time, the types of modifications being offered, redefault
rates, and call response time. In October, Treasury was still
in the process of implementing the compliance programs with
Freddie Mac so compliance data were not available. The Panel
requested the data so that it could evaluate lender/servicer
performance as well as the details or effectiveness of the
compliance review process, its enforcement mechanisms or
sanctions, and the results of compliance audits or findings.
The Panel also noted that the public release of such
information was important so that third parties could conduct
independent analyses and, as a result, contribute to the
improvement of HAMP.
---------------------------------------------------------------------------
\298\ October Oversight Report, supra note 17, at 112.
---------------------------------------------------------------------------
Treasury Action Since October. Related to structural
accountability, Treasury has still not publicly released
information related to its selection and use of Fannie Mae as
financial agent and HAMP program administrator or Freddie Mac
as compliance agent. For example, Treasury has still not
disclosed the framework of procedures or performance metrics,
specific compliance data, or the results of performance metrics
by lenders/servicers. According to GAO, ``Treasury has not yet
finalized remedies, or penalties, for servicers who are not in
compliance with HAMP guidelines,'' but plans to do so in April
2010, and has a HAMP compliance committee in place to review
compliance issues and enforce appropriate remedies.\299\
---------------------------------------------------------------------------
\299\ House Committee on Oversight and Government Reform, Written
Testimony of Gene L. Dodaro, acting comptroller general of the United
States, Government Accountability Office, Foreclosure Prevention: Is
the Home Affordable Modification Program Preserving Homeownership?
(Mar. 25, 2010) (online at oversight.house.gov/images/stories/Hearings/
Committee_on_Oversight/2010/032510_HAMP/TESTIMONY-Dodaro.pdf).
---------------------------------------------------------------------------
Related to procedural accountability, Treasury has released
additional information by lender/servicer: aggregate numbers of
HAMP modification activity including estimated number of
eligible loans, trial plan offers extended, HAMP trials
started, active trial modifications, permanent modifications,
permanent modifications pending borrower acceptance, and
modifications (including active trials and permanent
modifications) by investor type (GSE, private, and
portfolio).\300\
---------------------------------------------------------------------------
\300\ See MHA Servicer Performance Through January 2010, supra note
188. For additional discussion of the data provided by Treasury in its
monthly reports, see Section G.5.
---------------------------------------------------------------------------
Evaluation. Treasury still needs to provide detailed public
information related to its selection and use of Fannie Mae as
financial agent and HAMP program administrator and Freddie Mac
as compliance agent. The effectiveness of the financial agent/
program administrator and compliance agent is instrumental to
the success and accountability of HAMP, making the selection
process for these agents especially important.
When considering the selection process, it should be noted
that apart from their administrative responsibilities, Fannie
Mae and Freddie Mac initiated more than 485,000 loan mortgage
modifications as of December 2009.\301\ These dual roles--as
``doers'' of mortgage modifications for loans that they own or
guarantee and ``overseers'' of Treasury's mortgage modification
program--may present competing interests or diminish the
overall effectiveness of Fannie Mae's and Freddie Mac's ability
to modify mortgages, engage in HAMP administration or
oversight, or both.
---------------------------------------------------------------------------
\301\ FHFA Foreclosure Report, supra note 113, at 1.
---------------------------------------------------------------------------
In addition, Treasury must effectively monitor its HAMP
contractors to ensure that its programs or guidelines are being
properly followed or enforced.
Treasury should publicly release more data collected by
Fannie Mae and Freddie Mac so that Congress, the TARP oversight
bodies, and the public can better evaluate the effectiveness of
HAMP. Review and analysis of the substantial amount of data
being collected by Fannie Mae as program administrator and
Freddie Mac as compliance agent are important in understanding
the strengths and weaknesses of HAMP as well as particular
areas in need of improvement.
The Panel cannot evaluate the effectiveness of Treasury's
use of Fannie Mae as financial agent and HAMP program
administrator or Freddie Mac as compliance agent without a
better understanding of Treasury's selection and use of Fannie
Mae and Freddie Mac. Unfortunately, it appears that compliance
issues remain. For example, some housing counselors are still
having difficulty with servicers that continue with foreclosure
proceedings while modifications are in progress, ``continue to
exhibit widespread incompetence in receiving forms and storing
information,'' are not equipped to deal with the foreclosure
crisis, and delay the transition from trial modifications to
permanent modifications.\302\ Because of Fannie Mae's and
Freddie Mac's crucial roles in administering and enforcing HAMP
requirements, it is especially important that Treasury release
data on the compliance audits done by Freddie Mac to show
whether servicers are properly following HAMP guidelines or
whether Treasury and Freddie Mac are ensuring that HAMP
requirements are enforced. Taxpayers should be able to see the
consequences that result both from HAMP compliance and non-
compliance.
---------------------------------------------------------------------------
\302\ Testimony of David Berenbaum, supra note 29, at 19, 21-24,
28-29. See also Testimony of Julia Gordon, supra note 263, at 9-10
(providing that HAMP's ``effectiveness has been hampered by lack of
servicer capacity, a piece-by-piece rollout of complementary programs
addressing second liens and short sales, inadequate compliance review,
minimal public data available, and--perhaps most disturbingly--
widespread violation of HAMP guidelines by participating servicers'');
State Foreclosure Prevention Working Group: Data Report No. 4, supra
note 263, at 3.
---------------------------------------------------------------------------
Although Treasury has made some progress in increasing
accountability through the amount of information that is
publicly available by lender/servicer, the available data are
cursory and need to be further refined. The Panel applauds
Treasury for releasing information on the percentage of
portfolios converting and the aggregate number of trial and
permanent modifications by lender/servicer, but Treasury should
release the results of performance metrics by lender/servicer
so that the oversight bodies, Congress, and the public can
measure how rigorously each participant is engaged in the
program.\303\
---------------------------------------------------------------------------
\303\ See additional discussion of general data availability in
Section G.5.
---------------------------------------------------------------------------
When Secretary Geithner testified before the Panel in
September 2009, in response to a question about the wide
disparities among modification rates by servicers, he
emphasized the importance of publicly releasing data on the
number of modifications by servicer and the impact of such
disclosure on the occurrence and timeliness of modifications:
It is very helpful . . . to put into the public
domain every month detailed numbers that allow the
American people to see how many people these banks are
reaching. And I am quite confident that will produce
much, much faster modifications much more quickly
because institutions do not want to live with the
consequences of being so far behind the curve in what
is possible in helping families get through this
exceptional set of problems.\304\
---------------------------------------------------------------------------
\304\ September COP Hearing Transcript, supra note 191, at 47-48.
According to the tables in the monthly servicer reports,
identifying aggregate information by lender/servicer may have
had an impact on increasing the number of trial modifications
and the conversion of trial modifications to permanent
modifications over the last six months. For example, in the
October report on servicer performance, only eight servicers
had active modifications that represented 20 percent or more of
estimated HAMP-eligible loans, and only three servicers had
active modifications that represented 33 percent or more of
estimated HAMP-eligible loans.\305\ By the March report on
servicer performance, 18 servicers had active modifications
that represented 20 percent or more of estimated HAMP-eligible
loans, and 9 servicers had active modifications that
represented 33 percent or more of estimated HAMP-eligible
loans.\306\ Further, the data show that the number of permanent
modifications is growing for almost every servicer.\307\ The
absolute numbers in the monthly snapshot provide a sense of
program success, but they do not provide particularly good data
for measuring a servicer's progress from the previous month or
a servicer's performance in terms of the speed or timeliness of
conversions.
---------------------------------------------------------------------------
\305\ See U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through September 2009 (Oct. 8,
2009) (online at www.treas.gov/press/releases/docs/
MHA%20Public%20100809%20Final.pdf) (hereinafter ``MHA Servicer
Performance Through September 2009'').
\306\ See MHA Website, supra note 279.
\307\ See Id.
---------------------------------------------------------------------------
The data in the monthly servicer reports do not show the
increase in the number of active trial modifications from the
previous month or the increase in the permanent modifications
from the previous month by servicer, although these numbers can
be ascertained by comparing the monthly reports. The data also
do not show the number of new or cancelled trial or permanent
modifications from the current month by servicer; these numbers
are embedded in the total active trial modifications and
permanent modifications and in the difference in the active
modifications and the HAMP trials started. The pending
permanent modification number is not particularly helpful,
especially when the data do not show whether and to what extent
the number of pending permanent modifications from the previous
month successfully converted into permanent modifications in
the current month. Finally, the data do not reveal how quickly
servicers are converting loans from trial to permanent
modifications. Thus, the data are of questionable value in
motivating servicers to produce faster modifications.\308\
Providing aggregate information is not responsive to the
Panel's recommendation that Treasury should make available the
results of performance metrics by lender/servicer.
---------------------------------------------------------------------------
\308\ For example, the increase in the numbers of active trial and
permanent modifications could have resulted simply from servicer
compliance with HAMP guidelines or requirements (either voluntarily or
as a result of audits of servicer performance). Or, servicers motivated
to enhance their public image through their commitment to the HAMP
program or the number of successful modifications (HAMP or otherwise)--
such as Citigroup or GMAC--can do so through their own press releases,
public statements, or favorable press, rather than relying on
Treasury's monthly snapshots. See, e.g., Congressional Oversight Panel,
Written Testimony of Vikram Pandit, chief executive officer, Citigroup,
COP Hearing on Assistance Provided to Citigroup under TARP, at 11 (Mar.
4, 2010) (online at cop.senate.gov/documents/testimony-030410-
pandit.pdf).
---------------------------------------------------------------------------
5. General Data Availability
Panel Recommended. The Panel stressed in both its March and
October reports that Treasury should make additional
information available to the public to make the mortgage
modification programs more credible, transparent,
understandable, and effective. The Panel noted that Treasury
should continue to enhance disclosures related to servicer
participation and the number of loans that have been modified
or denied modifications through HAMP or that have benefited
from other Treasury programs such as the 2MP and the HAFA. In
addition, Treasury should release more specific loan-level
data, comparable to Home Mortgage Disclosure Act (HMDA) data
releases, in a manner that is widely available and useful (or
easily accessible) to the general public.\309\
---------------------------------------------------------------------------
\309\ See October Oversight Report, supra note 17, at 34-36, 109-
12.
---------------------------------------------------------------------------
Treasury Action Since October. Treasury has made additional
information available in its monthly reports for the MHA loan
modification program.
As of October, Treasury was including basic
information on the number of trial modifications, the number of
trial period plan offers, and HAMP modification activity by
servicer (e.g., estimated number of eligible loans, trial plan
offers extended, and trial modifications started).\310\
---------------------------------------------------------------------------
\310\ See MHA Servicer Performance Through September 2009, supra
note 305.
---------------------------------------------------------------------------
In November, Treasury included state-specific
trial modification and delinquency rate numbers; the number of
active trial modifications; an overview of Administration
Housing Stability Initiatives; and basic housing trends in
mortgage rates, housing inventory, home prices, and sales since
1999.\311\
---------------------------------------------------------------------------
\311\ Levitin & Twomey, supra note 78.
---------------------------------------------------------------------------
In December, Treasury added the number of
permanent HAMP modifications (cumulative and by servicer); HAMP
modifications by investor type for the 20 largest servicers
(GSE, private, portfolio); and the number of active trial and
permanent HAMP modifications in the 15 metropolitan statistical
areas (MSAs) with the highest program activity (with a citation
to a website listing HAMP activity in all MSAs).\312\
---------------------------------------------------------------------------
\312\ U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through November 2009 (Dec. 10,
2009) (online at www.financialstability.gov/docs/
MHA%20Public%20121009%20Final.pdf).
---------------------------------------------------------------------------
In January, Treasury included the number of
permanent modifications pending borrower acceptance (cumulative
and by servicer) and the number of total permanent
modifications approved by servicers; information on permanent
modifications by waterfall step (i.e., the percent of
modifications involving interest rate reductions, term
extensions, and principal forbearance), the predominant
hardship reasons for permanent modifications (including
curtailment of income, excessive obligation, unemployment, and
illness of principal borrower), select median characteristics
of permanent modifications (i.e., median percentage decrease in
front-end DTI, median percentage decrease in back-end DTI, and
dollar decrease in median monthly payments), and a breakdown of
modification numbers for states and the 15 MSAs with highest
HAMP activity (showing active trials, permanent modifications,
and totals).\313\
---------------------------------------------------------------------------
\313\ MHA Servicer Performance Through December 2009, supra note
194.
---------------------------------------------------------------------------
In February, Treasury added a report highlights
section to describe overall progress, a graph showing the
waterfall of HAMP-eligible borrowers, and an appendix of all
non-GSE participants in HAMP.\314\
---------------------------------------------------------------------------
\314\ MHA Servicer Performance Through January 2010, supra note
188.
---------------------------------------------------------------------------
In March, Treasury added the total number of HAMP
trials that converted to permanent modifications, the number of
permanent modifications pending, and the percentage to goal of
3-4 million modification offers to the HAMP snapshot; a comment
that 32 percent of trials that started at least three months
ago have been converted to permanent modifications by the
servicer to the bar graph of cumulative HAMP trial started by
month; and a graph of selected outreach measures (servicer
solicitation of borrowers by servicers (cumulative) and page
views on MHA.gov (in February 2010 and cumulative)).\315\
---------------------------------------------------------------------------
\315\ MHA Website, supra note 279.
---------------------------------------------------------------------------
Treasury intends to provide additional information on
servicer performance later in the year, including the results
of performance metrics such as average time to answer borrower
calls and the percentage of borrowers personally contacted, as
such information becomes available.\316\
---------------------------------------------------------------------------
\316\ Treasury conference call with Panel staff (Mar. 24, 2010);
see also House Committee on Oversight and Government Reform, Written
Testimony of Herbert M. Allison, assistant secretary, Office of
Financial Stability, U.S. Department of the Treasury, Foreclosure
Prevention: Is The Home Affordable Modification Program Preserving
Homeownership?, at 8-9 (Mar. 25, 2010) (online at oversight.house.gov/
images/stories/Hearings/Committee_on_Oversight/2010/032510_HAMP/
TESTIMONY-Allison.pdf).
---------------------------------------------------------------------------
Evaluation. Treasury's release of additional aggregate data
by lender/servicer, aggregate data on the percentage of trials
that started at least three months ago that have been converted
to permanent modifications, aggregate data on the predominant
reasons for HAMP modification, and aggregate data on
modification characteristics is a positive step in providing
greater transparency regarding the scope and effectiveness of
the MHA programs. Treasury still needs to provide the public
with significantly more information to ensure MHA transparency,
accountability, and effectiveness.
As discussed above, Treasury should continue to enhance the
amount of information available by lenders and servicers.
Treasury could commit to release publicly the following:
cumulative rate of conversion for eligible
trials;
monthly rate of conversion for eligible
trials: percentage of trials eligible to convert in
month X that converted;
conversion rate by vintage of trial
modifications and the percentage of modifications
commenced in any given month that have converted;
cumulative default rate and the number of
defaults on permanent modifications;
monthly rate of default and the number of
defaults on permanent modifications;
breakdown of reason for defaults on
permanent modifications (if known);
mean and median LTV of all permanent
modifications;
mean and median LTV of permanent
modifications that have defaulted;
percentage of permanent modifications with
first-lien LTV that is (a) <100 percent, (b) 100-125
percent, and (c) >125 percent;
percentage of permanent modifications where
there is a junior lien on the property;
number of second liens eliminated under 2MP;
ownership breakdown of (a) trials, (b)
permanent modifications, and (c) defaulted
modifications (Fannie/Freddie/private label/portfolio);
mean and median pre-modification front- and
back-end DTI on permanent modifications;
mean and median post-modification front- and
back-end DTI on permanent modifications;
mean and median post-modification front- and
back-end DTI on defaulted permanent modifications;
breakdown of trial modification denial and
cancellation reasons by number and percentage on a
cumulative and monthly basis; and
information on any HAMP compliance actions
taken, including the identity of the servicer, the
reason for the action, and the sanctions imposed.
In addition, Treasury should disclose loan-level data,
comparable to that provided in HMDA data releases, in a manner
that allows easy access for outside parties. Treasury must
ensure that modification application denial and cancellation
data are fully and accurately reported by servicers. Congress
and oversight bodies must have full access to program data to
evaluate properly the success of HAMP. It is also critical that
Treasury commit to providing regular publicly available data
reports on the performance of all HAMP permanent modifications
through the end of their five-year permanent modification
period--that is, extending through 2017. The Panel looks
forward to Treasury's release of more detailed public reports.
H. Conclusions and Recommendations
The Panel applauds Treasury for beginning to address the
problems that the Panel has highlighted over the last year and
in particular for taking steps to support borrowers dealing
with unemployment, second liens, or negative equity. However,
the Panel remains concerned about the timeliness of Treasury's
response, the sustainability of mortgage modifications, and the
accountability of Treasury's foreclosure programs.
Timeliness
The foreclosure crisis has thus far outpaced Treasury's
efforts to deal with it. Since early 2009, Treasury has
initiated half a dozen foreclosure mitigation programs,
gradually ramping up the incentives for participation by
borrowers, lenders, and servicers. Although Treasury should be
commended for trying new approaches, its pattern of providing
ever more generous incentives might backfire, as lenders and
servicers might opt to delay modifications in hopes of
eventually receiving a better deal. Further, loan servicers
have expressed confusion about the constant flux of new
programs, new standards, and new requirements.
The long delay in dealing effectively with foreclosures
underscores the need for Treasury to get its new initiatives up
and running quickly, but it also underscores the need for
Treasury to get these programs right. Even if Treasury's
recently announced programs succeed, their impact will not be
felt until early 2011--almost two years after the foreclosure
mitigation program was first launched.
Sustainability
Treasury's success will ultimately be measured not by the
number of mortgages modified but by the number of homeowners
who avoid foreclosure. The programs have made progress in
helping some whose loans can be prudently modified. It appears,
however, that Treasury's programs are vulnerable to several
weaknesses that could undermine the long-term sustainability of
mortgage modifications.
Treasury needs to support all three elements of successful
modifications: commencing modifications, converting
modifications to permanent status, and sustaining
modifications. Of these three elements, the last has received
the least attention, even though it is in many ways the most
important. A modification that eventually redefaults represents
only a stay, not a reprieve--a stay purchased at significant
taxpayer expense.
Yet, even those families who are able to qualify for a
modification and manage to make every payment on time may face
difficulty after five years; although the modifications are
called permanent, in fact, the interest rates and therefore the
payments can rise after five years. The phase-out of
modification terms could create significant sustainability
challenges for families who have otherwise been successful
under the terms of the modification, especially for those
families still underwater on their properties. Unless housing
prices recover to a sufficient degree--which appears unlikely--
or the economy rebounds notably, these families may find
themselves back in an all too familiar situation of
desperation.
Although the federal government has played and will
continue to play a key role in foreclosure prevention, it
cannot solve the problem alone, and it should embrace a broad
sense of partnership with state, local, and private programs.
At the same time, Treasury must consider whether its
definition of ``affordability'' adequately captures the many
financial pressures facing families today. It should examine
the appropriateness of the present 31 percent DTI requirement
and should consider whether DTI standards should account for
local conditions, arrearages, second liens, and other borrower
debt.
Accountability
As always, Treasury needs to take care to communicate its
goals, its strategies, and its measures of success for its
programs. Its stated goal of modifying three to four million
mortgages has proven too vague, since a modification offer does
not always translate into a foreclosure prevented. Treasury's
goals should include specific metrics to measure the success of
each of its foreclosure prevention programs.
The Panel is concerned that the sum total of announced
funding for Treasury's individual foreclosure programs exceeds
the total amount set aside for foreclosure prevention. It is
unclear whether this indicates that Treasury will scale back
particular programs or will scale up its entire foreclosure
prevention effort. Treasury must be clearer about how much
taxpayer money it intends to spend and where.
Treasury should also clarify the answers to important
questions about the FHA refinancing program. If the program
allows private lenders to offload their poorly performing
mortgages onto taxpayers, then this would represent an
inappropriate backdoor bailout. Treasury should ensure that the
program does not simply shift risk from private lenders to the
federal government.
The Panel also offers the following operational
recommendations to Treasury:
Focus on launching the long overdue CHAMPS system
and the foreclosure web portal as soon as possible.
Release more information to borrowers about how
their eligibility for HAMP is calculated, including the inputs
used when borrowers are denied due to having an NPV-negative
loan.
Prohibit HAMP-participating servicers from
proceeding with a foreclosure unless a valid denial or
cancellation reason is reported, and impose meaningful monetary
sanctions for failure to properly report denial and
cancellation reasons.
Exercise greater oversight of Fannie Mae and
Freddie Mac on compliance and oversight issues. In particular,
the inconsistent use of denial codes has made it difficult to
gather reliable data on the programs' effectiveness. Servicers
should be subject to strong penalties for failure to follow
denial code reporting guidelines.
Thoroughly monitor the activities of participating
lenders and servicers, audit them, and enforce program rules,
guidelines, and requirements.
Release greater information on compliance results
and sanctions.
Enforce new borrower outreach and communication
standards and timelines.
Continue to expand and improve data collected and
publicly reported, specifically the list of items included in
Section G.5. Treasury should also release information on the
status of borrowers who received the January 31 notice of the
expiration of the trial modification period; a new category for
those who are appealing their status under the January 31
notice; a new category for borrowers offered contingent
permanent modifications, pending receipt of their hardship
affidavit or tax verification form per the January 28
supplemental directive; the number of trial modifications that
have been in place for three months or more, broken down by
month; the reasons why trial and permanent modifications were
canceled; the reasons why homeowners were denied permanent
modifications after initiating trial modifications; and a
separate category on escalation reviews and the results of
Fannie Mae audits.
Treasury has made progress since the Panel's last
foreclosure report, but its programs still are not keeping pace
with the foreclosure crisis. Even as Treasury struggles to get
its foreclosure programs off the ground, the crisis continues
unabated. In 2009, 2.8 million homeowners received a
foreclosure notice. The long delay in successfully addressing
the foreclosure crisis has served no one well, and further
delays would cause even more pain.
ANNEX I: STATE OF THE HOUSING MARKETS AND GENERAL ECONOMY
1. Housing Market Indicators
An analysis of Treasury's foreclosure mitigation efforts
must consider broader questions: Is the housing market
recovering? What is the supply and demand situation? What are
the trends in delinquencies and foreclosures? How many more
foreclosures can we expect in coming years? What other factors
could change the foreclosure situation? Without the answers to
these questions, it is hard to say whether or not Treasury is
conducting an effective foreclosure mitigation effort that will
make a significant difference. Unfortunately, the data
described here paint a fairly bleak picture of the future of
the housing market and call into question whether Treasury's
efforts are likely to have a large impact, considering the vast
scale of the housing market's problems.
a. Home Prices
The present level and trends in home prices greatly affect
the success of any foreclosure mitigation effort.
The following section looks at three home value indices--
the highly regarded S&P/Case-Shiller and FHFA indices, and a
more recent and controversial but still useful index from the
online real estate database Zillow. It then considers home
price trends in historical context by comparison to other
housing booms and busts. Although the results differ because of
different data sets, methodology, and assumptions, it is
possible to see some broad trends in home prices. Nationally,
home prices have fallen from a peak in 2006. Nationally, price
declines continued in 2009, although the rate of decline has
slowed and in recent months become essentially flat. There is
significant local variation in housing price trends. Some
metropolitan areas continue to see home prices fall, but other
areas have seen upticks in prices. In all areas, however,
housing prices are still significantly down from their peaks.
The S&P/Case-Shiller Home Price Index estimates price
trends using repeat sales of the same homes (including sales of
foreclosed properties) in order to control for differences in
the tested sample. For this reason, it is often referred to as
a ``constant quality'' index. However, because the index is
based on repeat sales, it excludes new construction. S&P/Case-
Shiller's national home price index rose 0.3 percent in January
2010 on a seasonally adjusted basis. While the index has now
risen for four months in a row, it has declined 0.7 percent
over the past year.\317\
---------------------------------------------------------------------------
\317\ Standard & Poor's, Home Prices in the New Year Continue the
Trend Set in Late 2009 According to the S&P/Case-Shiller Home Price
Indices (Mar. 30, 2010) (online at www.standardandpoors.com/spf/
CSHomePrice_Release_033056.pdf).
---------------------------------------------------------------------------
The FHFA Purchase Only House Price Index is also a constant
quality index with a similar methodology, although its sample
is based only on properties with mortgages that were acquired
by government-sponsored entities (GSEs) Fannie Mae and Freddie
Mac. FHFA data are therefore based only on homes conforming to
GSE standards, excluding properties that are either too
expensive or those with less stringent standards, as well as
excluding new construction. As the name implies, the Purchase
Only House Price Index includes only data from actual
purchases, not appraisals conducted in advance of refinancings.
This index declined by 0.6 percent between December 2009 and
January 2010 on a seasonally adjusted basis.\318\ However, the
index fell only 0.1 percent in the fourth quarter of 2009
overall and was down 1.2 percent for the entire year, somewhat
less than the annual decline for the Case-Shiller index. The
FHFA's All Transactions House Price Index, which includes
property values from refinancing appraisals as well, declined
0.7 percent in the fourth quarter and 4.7 percent during all of
2009.\319\
---------------------------------------------------------------------------
\318\ Federal Housing Finance Agency, U.S. Monthly House Price
Index Declines 0.6 Percent From December to January (Mar. 23, 2010)
(online at www.fhfa.gov/webfiles/15565/MonthlyHPI32310.pdf).
\319\ Federal Housing Finance Agency, House Prices Fall Modestly in
the Fourth Quarter (Feb. 25, 2010) (online at www.fhfa.gov/webfiles/
15454/finalHPI22510.pdf). For a discussion of the differences between
the Case-Shiller and FHFA indices, see Charles A. Calhoun, OFHEO House
Price Indexes: HPI Technical Description (Mar. 1996) (online at
www.fhfa.gov/webfiles/896/hpi_tech.pdf).
---------------------------------------------------------------------------
The online real estate database Zillow.com compiles an
index based on their home value estimates that covers
approximately 75 percent of all homes in the United States,
more than 80 million properties in all.\320\ Unlike the other
indices mentioned here, Zillow's index is based not on actual
sales but on an appraisal-like methodology that uses comparable
sale prices, characteristics of the individual home, past sales
history, and tax-assessment data. Although Zillow's estimates
have been criticized as being inaccurate for valuing individual
homes,\321\ the extremely large sample covered (including new
construction) makes the index useful for comparison to the
often widely divergent Case-Shiller and FHFA indices. The
Zillow Home Value Index showed declines of 0.5 percent from
January to February 2010, 1.5 percent from November 2009 to
February 2010, and 5.4 percent from February 2009 to February
2010.\322\
---------------------------------------------------------------------------
\320\ Stan Humphries, Home Value Index vs FHFA and Case-Shiller,
Zillow (Feb. 19, 2010) (online at www.zillow.com/wikipages/Zillow-Home-
Value-Index-vs-FHFA-and-Case-Shiller/) (accessed Apr. 12, 2010). Zillow
provides estimates only for homes in areas where there is available and
timely transaction data. Since there is no apparent common factor among
the uncovered areas besides a lack of data, there is no reason to
believe that the housing situation in these areas is significantly
different from the situation in the covered areas.
\321\ James Hagerty, How Good are Zillow's Estimates?, Wall Street
Journal (Feb. 14, 2007) (online at online.wsj.com/public/article/
SB117142055516708035-O6WPplch_duU0zq_
zhjQaI19vIg_20080214.html).
\322\ Zillow, Real Estate Market Reports (Feb. 1, 2010) (online at
www.zillow.com/local-info/).
---------------------------------------------------------------------------
Figure 27, below, shows the trends in national home prices
over the past 10 years for the three indices.
FIGURE 27: CHANGES IN HOME PRICE INDICES, 2000-2009
------------------------------------------------------------------------
S&P/Case-
Shiller \323\ FHFA \324\ Zillow \325\ Average
------------------------------------------------------------------------
2000 11.14% 5.89% 8.22% 8.42%
2001 6.74% 6.12% 6.53% 6.46%
2002 11.58% 7.07% 9.34% 9.33%
2003 10.48% 7.13% 10.62% 9.41%
2004 14.72% 8.72% 14.37% 12.60%
2005 13.88% 8.57% 11.70% 11.38%
2006 (0.15)% 2.37% 0.13% 0.78%
2007 (9.17)% (2.13)% (5.41)% (5.57)%
2008 (17.27)% (7.56)% (11.63)% (12.15)%
2009 (1.02)% (2.78)% (4.53)% (2.78)%
------------------------------------------------------------------------
\323\ Data calculated from Standard & Poor's, S&P Case-Shiller Homeprice
Indices (Seasonally Adjusted Values for January 2010) (Mar. 30, 2010)
(online at homeprice.standardandpoors.com) (free registration
required). See also Standard & Poor's, Home Prices Continue to Send
Mixed Messages as 2009 Comes to a Close According to the S&P/Case-
Shiller Home Price Indices (Feb. 23, 2010) (online at
www.standardandpoors.com/servlet/BlobServer?blobheadername3= MDT-
Type&blobcol=urldocumentfile&blobtable=
SPComSecureDocument&blobheadervalue2=
inline%3B+filename%3Ddownload.pdf&blobheadername2= Content-
Disposition&blobheadervalue1= application%2Fpdf&blobkey=
id&blobheadername1=content-
type&blobwhere=1245206345483&blobheadervalue3=
abinary%3B+charset%3DUTF-8 &blobnocache=true) (hereinafter ``Home
Prices Continue to Send Mixed Messages'').
\324\ Data compiled by Panel staff from Federal Housing Finance Agency,
HPI Historical Reports (2000-2009) (online at www.fhfa.gov/
Default.aspx?Page=195) (hereinafter ``HPI Historical Reports (2000-
2009)'') (accessed Apr. 13, 2010).
\325\ Data provided by Zillow staff.
Real estate is highly local, and individual areas can have
home price trends that differ greatly from each other and the
national average. Figure 28 shows the December 2009 changes in
home prices for the top 20 metropolitan areas as measured by
each of the three indices. It is apparent from these tables
that certain metropolitan areas, such as Las Vegas and Miami,
have suffered far greater drops in value than others, such as
Dallas and Denver.
FIGURE 28: YEAR-OVER-YEAR CHANGE IN HOME PRICES, DECEMBER 2009
----------------------------------------------------------------------------------------------------------------
S&P/Case- City
Shiller \326\ FHFA \327\ Zillow \328\ Average
----------------------------------------------------------------------------------------------------------------
Atlanta..................................................... (4.00)% (6.69)% (1.11)% (3.93)%
Boston...................................................... 0.50% (3.62)% 2.05% (0.36)%
Charlotte................................................... (3.80)% (5.97)% (3.51)% (4.43)%
Chicago..................................................... (7.20)% (8.38)% (7.90)% (7.83)%
Cleveland................................................... (1.20)% (2.71)% (2.97)% (2.29)%
Dallas \329\................................................ 3.00% (1.27)% - 0.87%
Denver...................................................... 1.20% (1.37)% 0.72% 0.18%
Detroit..................................................... (10.30)% (9.13)% (19.70)% (13.04)%
Las Vegas................................................... (20.60)% (19.30)% (21.22)% (20.37)%
Los Angeles................................................. 0.00% (4.59)% 0.64% (1.32)%
Miami....................................................... (9.90)% (14.02)% (10.33)% (11.42)%
Minneapolis................................................. (2.30)% (7.85)% (4.78)% (4.98)%
New York.................................................... (6.30)% (5.84)% (2.45)% (4.86)%
Phoenix..................................................... (9.20)% (16.01)% (14.85)% (13.35)%
Portland.................................................... (5.40)% (4.93)% (5.77)% (5.37)%
San Diego................................................... 2.70% (3.64)% 0.14% (0.27)%
San Francisco............................................... 4.80% (5.72)% 0.59% (0.11)%
Seattle..................................................... (7.90)% (9.60)% (5.40)% (7.63)%
Tampa....................................................... (11.00)% (10.75)% (11.04)% (10.93)%
Washington.................................................. 1.90% (4.61)% (1.41)% (1.37)%
Index Average............................................... (4.25)% (7.30)% (5.70)%
----------------------------------------------------------------------------------------------------------------
\326\ Home Prices Continue to Send Mixed Messages, supra note 323.
\327\ Federal Housing Finance Agency, Changes in FHFA Metropolitan Area House Price Indexes (Feb. 25, 2010)
(online at www.fhfa.gov/Default.aspx?Page=216&Type=summary).
\328\ Data provided by Zillow staff.
\329\ Zillow does not report data for Dallas because the transactions reported in that area are insufficient to
ensure accuracy.
Figure 29, below, shows the FHFA Purchase Only Home Price
Index, compared with the number of foreclosure completions over
time. As might be expected, foreclosure completions and home
prices tend to have an inverse relationship. It is not clear to
what extent foreclosures drive housing price declines or vice
versa, although it seems likely that the causation works in
both directions, creating a negative feedback loop of
foreclosures and housing price declines.
FIGURE 29: FORECLOSURE COMPLETIONS COMPARED TO CASE-SHILLER AND FHFA
\330\
---------------------------------------------------------------------------
\330\ Foreclosure completion data provided by the HOPE NOW
Alliance. Standard & Poor's, S&P/Case-Shiller Home Price Indices
(Instrument: Seasonally Adjusted Composite 20 Index) (online at
www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/
us/?indexId=spusa-cashpidff_p-us_) (hereinafter ``S&P/Case-Shiller Home
Price Indices'') (accessed Apr. 12, 2010); Federal Housing Finance
Agency, U.S. and Census Division Monthly Purchase Only Index
(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (hereinafter ``U.S. and Census Division Monthly
Purchase Only Index'') (accessed Apr. 12, 2010). The most recent data
available for the housing indices are as of January 2010.
[GRAPHIC] [TIFF OMITTED] T5737A.020
It is interesting to note, though, that despite the high
and rising level of foreclosure completions last year, home
prices declined relatively little during 2009, implying that
there is significant demand counteracting the downward pressure
on prices caused by foreclosures. It is likely that government
interventions in the housing market, such as the homebuyer tax
credits, support for Fannie Mae and Freddie Mac, a large
increase in FHA insurance underwriting, and Treasury and
Federal Reserve purchases of mortgage-backed securities, as
well as the Federal Reserve monetary policy aimed at keeping
interest rates low, have fostered increased demand for home
purchases by making them more affordable and by reducing the
cost of mortgage finance. Some of these government
interventions in the housing market are being scaled back or
eliminated. The FHA has tightened its underwriting standards in
response to reduced capitalization of its insurance fund,\331\
and the Federal Reserve has ended its direct support of
mortgage finance markets by winding down its purchases of
agency mortgage-backed securities. By supporting the secondary
mortgage market through its purchases of agency mortgage-backed
securities, the Federal Reserve facilitated lower mortgage
rates for both home purchasers and refinancers. The Federal
Reserve purchased approximately $1.25 trillion of agency
mortgage-backed securities since early 2009, but its program to
buy such securities came to an end on March 31, 2010. The
Federal Reserve's support for the MBS market has been described
by Susan M. Watcher, Richard B. Worley Professor of Financial
Management and Professor of Real Estate, Finance and City and
Regional Planning at the University of Pennsylvania's Wharton
School, as ``the single most important move to stabilize the
economy.''\332\ This support as well as Federal Reserve
monetary policy contributed to the interest rate on 30-year
mortgages declining from over six percent in late 2008 to below
five percent in March 2009.\333\ Lower rates have helped stave
off some foreclosures both by enabling refinancings and by
making interest rate resets on adjustable rate mortgages less
severe. As government support for the housing market is
withdrawn, the sustainability of home purchase demand is
questionable.
---------------------------------------------------------------------------
\331\ See U.S. Department of Housing and Urban Development, FHA
Announces Policy Changes to Address Risk and Strengthen Finances, HUD
No. 10-016 (Jan. 20, 2010) (online at portal.hud.gov/portal/page/
portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-016).
See also Bob Tedeschi, Mortgages--F.H.A. Lending Standards Tightened,
New York Times (Jan. 28, 2010) (online at www.nytimes.com/2010/01/31/
realestate/31mort.html); Steve Kerch, Shoring Up the FHA: Housing
Agency Tightens Underwriting Policies, Raises Mortgage Premiums,
MarketWatch (Jan. 20, 2010) (online at www.marketwatch.com/story/fha-
raises-fees-tightens-mortgage-underwriting-2010-01-20).
\332\ Sewell Chan, Fed Ends Its Purchasing of Mortgage Securities,
New York Times (Apr. 1, 2010) (online at www.nytimes.com/2010/04/01/
business/01fed.html) (hereinafter ``Fed Ends Its Purchasing of Mortgage
Securities'').
\333\ See Federal Home Loan Mortgage Corporation, Primary Mortgage
Market Survey: Convention, Conforming 30-Year Fixed Rate Mortgage
Series Since 1971 (online at www.freddiemac.com/pmms/
pmms_archives.html) (weekly and monthly 30-year fixed-rate data).
---------------------------------------------------------------------------
Many mortgage bankers feared that the ending of the Federal
Reserve MBS purchase program would cause the prices of the
securities to decrease and their yields relative to Treasury
securities to soar, causing mortgage interest rates to rise and
the demand for home loans in an already weak market to
fall.\334\ After the program ended, 30-year fixed mortgage
interest rates rose to 5.08 percent, the highest rate since the
first week of January 2010.\335\ However, analysts no longer
expect the close of the Federal Reserve MBS purchase program to
cause a major disruption in the housing market or a setback to
its recovery. The Federal Reserve was clear on its intention to
exit the market, and the market appears to have been able to
absorb this news. Fannie Mae and Freddie Mac have forecasted
that 30-year fixed mortgage interest rates should increase less
than a quarter of a percentage point in the next three
months.\336\ Lawrence Yun, chief economist at the National
Association of Realtors, has said that the private market for
mortgage-backed securities has sufficiently recovered for the
Federal Reserve program to end without much impact. He reasoned
that consumers should not see much of a change as long as there
are enough buyers on Wall Street, and it appears that private
investors are stepping in as the Federal Reserve exits.\337\
Several market participants, including Christian Cooper of
Royal Bank of Canada's RBC Capital Markets and Scott Colbert of
Commerce Trust Co., agree that there are a number of people on
the sidelines waiting to buy MBS securities.\338\ In addition,
Michael Fratantoni, vice president for single-family research
at the Mortgage Bankers Association, has said that sharp
increases in mortgage interest rates are not expected because
the supply of mortgage-backed securities has not increased
substantially. Messrs. Fratantoni and Yun have further stated,
however, that mortgage interest rates may rise late in the year
due to economic forces unrelated to the Federal Reserve
purchase program, such as recovery in the job market.\339\
---------------------------------------------------------------------------
\334\ See Sara Lepro, Why Fed's Exit Plan Isn't Roiling Mortgage
Bonds, American Banker (Mar. 22, 2010) (online at
www.americanbanker.com/issues/175_54/mortgage-bonds-1016184-1.html)
(hereinafter ``Why Fed's Exit Plan Isn't Roiling Mortgage Bonds'').
\335\ See Federal Home Loan Mortgage Corporation, 2010 Weekly
Mortgage Rates Data (online at www.freddiemac.com/dlink/html/PMMS/
display/PMMSOutputYr.jsp) (accessed Apr. 12, 2010).
\336\ See Federal Home Loan Mortgage Corporation, March 2010
Economic and Housing Market Outlook (Mar. 12, 2010) (online at
www.freddiemac.com/news/finance/docs/Mar_2010_public_outlook.pdf);
Federal National Mortgage Association, Economics and Mortgage Market
Analysis: Economic Forecast: March 2010 (Mar. 10, 2010) (online at
www.fanniemae.com/media/pdf/economics/2010/
Economic_Forecast_031710.pdf).
\337\ Fed Ends Its Purchasing of Mortgage Securities, supra note
332.
\338\ Why Fed's Exit Plan Isn't Roiling Mortgage Bonds, supra note
334.
\339\ Fed Ends Its Purchasing of Mortgage Securities, supra note
332.
---------------------------------------------------------------------------
Figure 30 highlights the behavior of real estate prices in
recent recessions, shown by the shaded bars. As mentioned
earlier, both the lag with the general economy and the slower
movement up and down can be seen.
FIGURE 30: FHFA HOME PRICE INDEX, 1975-2009 \340\
[Not seasonally adjusted]
---------------------------------------------------------------------------
\340\ Federal Housing Finance Agency, U.S. and Census Divisions
through 2009Q4 (All-Transactions Indexes: Not Seasonally Adjusted)
(accessed Apr. 4, 2010) (online at www.fhfa.gov/webfiles/15436/
4q09hpi_reg.txt) National Bureau of Economic Research, Business Cycle
Expansions and Contractions (accessed Apr. 5, 2010) (online at
www.nber.org/cycles/). The shaded areas represent periods of recession
as defined by the National Bureau of Economic Research (NBER). The NBER
has not yet determined whether the recession that began in December
2007 has ended nor established the date of its ending. The Panel's own
estimate is that this recession ended at the end of Q2 2009, the last
quarter of net decline in the U.S. Gross Domestic Product (GDP), and
that is the date that is assumed here. National Bureau of Economic
Research, Business Cycle Expansions and Contractions (accessed Apr. 5,
2010) (online at www.nber.org/cycles/); Bureau of Economic Analysis,
Gross Domestic Product (accessed Apr. 5, 2010) (online at www.bea.gov/
national/txt/dpga.txt).
[GRAPHIC] [TIFF OMITTED] T5737A.021
The United States has experienced several regional housing
price collapses over the past three decades. These past housing
busts provide some sense as to the length of time it will take
for housing prices to recover to their pre-collapse peaks.
Historically, it has often taken over a decade for regional
housing prices to recover from collapses, and on a time-value
and inflation adjusted basis, these recoveries have taken even
longer. Thus, it took over 13 years for housing prices in New
England to recover after their 1988 collapse, 12 years for
housing prices in California to rebound after falling from
their 1989 peak, 17 years for Michigan housing prices to return
to 1979 peak, and Texas housing prices have yet to recover from
a 15-year decline that began in 1982. According to an FHFA
study, the ``median time required to return to prior peak
prices was 10\1/2\ to 20 years.'' \341\
---------------------------------------------------------------------------
\341\ Federal Housing Finance Agency, A Brief Examination of
Previous Housing Price Declines, at 4 (June 2009) (online at
www.fhfa.gov/webfiles/2918/PreviousDownturns61609.pdf).
---------------------------------------------------------------------------
These historical precedents suggest that the housing price
recovery time frame on a national basis may take a decade or
more, and that in some particularly hard-hit areas, it may take
as long as two decades for housing prices to recover to their
pre-bust peaks. Moreover, if there is another collapse in
housing prices, a ``double-dip'' that some economists fear, the
housing price recovery could take even longer.
Historically, housing price recoveries have largely
paralleled overall regional economic recoveries; as regional
economies recovered, housing prices rebounded. But past
regional housing busts were also often closely connected with
regional employment conditions--the decline of defense
contracting in New England and California in the late 1980s,
the drop in oil prices in Texas in the mid-1980s, and the
decline of the U.S. auto industry in 1980s Michigan. While
unemployment is now a major factor contributing to mortgage
defaults and depressed housing values, the decline in housing
prices began in 2006, well before a national economic slowdown.
That is to say, only part of the current housing bust is
related to general economic conditions; part relates to housing
prices that were elevated because lax underwriting expanded the
pool of mortgage borrowers, thereby driving up demand and thus
prices. Economic recovery will help buoy housing prices, but it
is critical to recall that peak housing prices in 2006 were not
driven by fundamentals, so they are unlikely to be restored
solely by improvements in the overall economy.
b. Home Sales
The National Association of Realtors (NAR) reports that
existing home sales dropped 0.6 percent between January 2010
and February 2010, after suffering 0.5 percent and 16.5 percent
declines in January 2010 and December 2009, respectively. The
February seasonally adjusted annual sales rate of 5.02 million
units was down one percent from 5.05 million units in January,
though still 7 percent above the level of February 2009.\342\
In 2009 there were 5.2 million existing home sales, a 4.9
percent gain over the 4.9 million transactions recorded in
2008. This was the first annual sales gain recorded since
2005.\343\
---------------------------------------------------------------------------
\342\ National Association of Realtors, February Existing-Home
Sales Ease with Mixed Conditions Around the Country (Mar. 23, 2010)
(online at www.realtor.org/press_room/news_releases/2010/03/ehs_ease)
(hereinafter ``February Existing-Home Sales Ease'').
\343\ National Association of Realtors, December Existing-Home
Sales Down but Prices Rise; 2009 Sales Up (Jan. 25. 2010) (online at
www.realtor.org/press_room/news_releases/2010/01/december_down)
(hereinafter ``December Existing-Home Sales Down'').
---------------------------------------------------------------------------
The government's homebuyer tax credit programs, which will
end on April 30, 2010, appear to have attracted significant
interest from the home-buying public. Sales, however, did not
grow in the early months of 2010 as many had expected. The last
three months have seen declining existing home sales,
indicating a weakening demand for homes and possibly a lack of
qualified buyers. Bad weather in much of the country may have
also deterred buyers. Some observers have suggested that the
tax credits are not bringing new buyers into the market, but
are simply moving up the timing of sales that would have
happened anyway at a later date. If this is true, it is likely
that sales will remain low for several months after the
programs end.
FIGURE 31: EXISTING HOME SALES \344\
---------------------------------------------------------------------------
\344\ The shaded areas represent periods of recession as defined by
the National Bureau of Economic Research (NBER). National Bureau of
Economic Research, Business Cycle Expansions and Contractions (online
at www.nber.org/cycles/) (accessed Apr. 5, 2010) (hereinafter
``Business Cycle Expansions and Contractions''); U.S. Department of
Commerce, Bureau of Economic Analysis, Gross Domestic Product (accessed
Apr. 5, 2010) (online at www.bea.gov/national/txt/dpga.txt)
(hereinafter ``Bureau of Economic Analysis Data--Gross Domestic
Product''). The data is seasonally adjusted annual rate.
[GRAPHIC] [TIFF OMITTED] T5737A.022
The inventory of homes for sale improved in February,
increasing 9.5 percent after a 0.5 percent decline in January.
February's unsold inventory totaled 3.59 million units, up from
3.27 million units in January. Whereas January marked the
lowest unsold inventory level since March 2006, the February
inventory level has returned to levels seen in September 2009.
Inventory is now 5.5 percent below the February 2009 level, and
22 percent below the record high of 4.58 million units for sale
in July 2008.\345\ Due to the substantial amount of ``shadow
inventory'' that is not currently being offered for sale but
could be brought to market quickly, the potential exists for a
rapid increase in inventory levels. This issue is discussed
further in Annex I(1)i.
---------------------------------------------------------------------------
\345\ December Existing-Home Sales Down, supra note 343; National
Association of Realtors, Existing-Home Sales Down in January but Higher
than a Year Ago; Prices Steady (Feb. 26. 2010) (online at
www.realtor.org/press_room/news_releases/2010/02/ehs_january2010)
(hereinafter ``Existing-Home Sales Down in January''); February
Existing-Home Sales Ease, supra note 342.
---------------------------------------------------------------------------
FIGURE 32: HOME SALE INVENTORY
[GRAPHIC] [TIFF OMITTED] T5737A.023
Despite the lower raw inventory numbers, the slow pace of
sales in February means that unsold inventory represented an
8.6-month supply of unsold homes, up from 7.8 months in January
and 7.2 months in December. NAR reports that 35 percent of
existing home sales in February were ``distressed'' properties,
either short sales or foreclosure liquidations.\346\ Such a
large number of distressed sellers inevitably puts additional
downward pressure on home prices.
---------------------------------------------------------------------------
\346\ December Existing-Home Sales Down, supra note 343; Existing-
Home Sales Down in January, supra note 345; February Existing-Home
Sales Ease, supra note 342.
---------------------------------------------------------------------------
c. Construction
New home construction data are an indicator of the overall
state of the housing market, as well as a forecast of new
housing supply that will come to market in future months.
Indicators of new housing construction for February 2010 were
mixed. Building permits and housing starts were significantly
higher than similar figures for February of last year,
signaling a modest revival of new housing construction during
2009. Housing completions, on the other hand, were considerably
lower than in February 2009. This may be attributable to
housing developments started toward the end of the bubble
market. Figure 33, below, shows seasonally adjusted annual
rates of various construction statistics.
FIGURE 33: NEW HOUSING CONSTRUCTION DATA (ANNUALIZED) 347
----------------------------------------------------------------------------------------------------------------
February January Change from February Change from
Indicator 2010 2010 1/10-2/10 2009 2/09-2/10
----------------------------------------------------------------------------------------------------------------
Building Permits............................... 612,000 621,000 (1.6)% 550,000 11.3%
Housing Starts................................. 575,000 591,000 (5.9)% 574,000 0.2%
Housing Completions............................ 700,000 659,000 2.2% 828,000 (34.8)%
New Home Sales348.............................. 308,000 309,000 (2.2)% 354,000 (13.0)%
----------------------------------------------------------------------------------------------------------------
347 U.S. Department of Commerce, Bureau of the Census, New Residential Construction in January 2010 (Feb. 17,
2010) (online at www.census.gov/const/newresconst_201001.pdf); U.S. Department of Commerce, Bureau of the
Census, New Residential Construction in February 2010 (Mar. 17, 2010) (online at www.census.gov/const/
newresconst_201002.pdf).
348 U.S. Department of Commerce, Bureau of the Census, New Residential Sales in January 2010 (Feb. 24, 2010)
(online at www.census.gov/const/newressales_201001.pdf); U.S. Department of Commerce, Bureau of the Census,
New Residential Sales in February 2010 (Mar. 24, 2010) (online at www.census.gov/const/
newressales_201002.pdf).
Given the current housing market conditions, the rise in
new home construction is somewhat unexpected. While many view
this as an optimistic sign of a housing recovery, some would
argue that this new supply will only add to the worsening
inventory absorption situation described in the section above
and further depress home prices.
The discrepancy between the number of building permits
issued and housing starts (both roughly 600,000) and the number
of new homes sold (approximately 300,000) can be explained, in
part, by the metrics through which the data is measured.
Building permits and housing starts are measured by the total
number of permits issued or units constructed, but the number
of new home sales is only measured when a new home is sold to a
third party.\349\ Therefore, anyone who commissions a new home
to be built for themselves on land they already own will be
counted as having a building permit and a housing start, but
not as having a new home sale.
---------------------------------------------------------------------------
\349\ U.S. Department of Commerce, Bureau of the Census
conversations with Panel staff (Mar. 30, 2010).
---------------------------------------------------------------------------
d. Mortgage Rates
Prevailing mortgage interest rates are of interest to the
Panel's evaluation of foreclosure mitigation efforts because
these rates directly affect home affordability and indirectly
drive property values. Current housing recovery efforts are
being facilitated by historically low mortgage interest rates.
However, an increase in mortgage interest rates is inevitable.
Consequently, a housing recovery built on ultra-low long-term
interest rates is unlikely to be sustainable. Since the amount
that borrowers can afford to pay each month is relatively
fixed, property values may fall when interest rates rise,
because increasing interest rates put downward pressure on home
prices. An increase in rates will in most cases lead to a
decline in values and is likely to result in more delinquencies
and foreclosures, because declines in borrowers' equity are
correlated with defaults.\350\ While mortgage interest rates
are market-driven and influenced by many supply and demand
factors, Federal Reserve interest rate policy has considerable
influence. The yields on Treasury securities also influence
these rates, since Treasuries provide a competitive investment
for the bond buyers who provide funds for the mortgage market.
Both of these issues are discussed in Annex I(1)i.
---------------------------------------------------------------------------
\350\ See, e.g., Stan Liebowitz, New Evidence on the Foreclosure
Crisis, Wall Street Journal (July 3, 2009) (online at online.wsj.com/
article/SB124657539489189043.html).
---------------------------------------------------------------------------
As of April 8, 2010, the interest rate on a 30-year fixed
rate mortgage averaged 4.83 percent. This is similar to the
rate of just over 5 percent in early January 2010 and up from
the 4.65 percent average rate in late November 2009. Current
mortgage interest rates vary by state from a low of 4.88
percent in Maine to a high of 5.33 percent in Oklahoma.\351\
Nationwide, mortgage rates remain near historically low levels.
This can be seen in Figure 34, which shows the average interest
rates on 30-year fixed-rate mortgages since 1971. The shaded
areas indicate officially designated recessions.
---------------------------------------------------------------------------
\351\ Zillow, Mortgage Rates (online at www.zillow.com/
Mortgage_Rates) (accessed Apr. 8, 2010).
---------------------------------------------------------------------------
FIGURE 34: MORTGAGE INTEREST RATES \352\
---------------------------------------------------------------------------
\352\ Board of Governors of the Federal Reserve System,
Conventional Mortgages (Monthly) (online at www.federalreserve.gov/
releases/h15/data/monthly/h15_mortg_na.txt) (accessed Apr. 12, 2010).
The shaded areas represent periods of recession as defined by the
National Bureau of Economic Research (NBER). Business Cycle Expansions
and Contractions, supra note 344; Bureau of Economic Analysis Data--
Gross Domestic Product, supra note 344.
[GRAPHIC] [TIFF OMITTED] T5737A.024
Figure 35, below, illustrates the mortgage interest rate
spread over the yield of Treasury securities, an indicator of
the market's perception of risk. In times of great uncertainty,
such as late 2008, a classic financial panic, lenders demand
larger spreads over low-risk Treasury securities in order to
compensate for the increased risk of lending. Although the
housing market has not appreciably improved since that time,
the level of fear and confusion in the markets has subsided,
leading to a decrease in spreads.
FIGURE 35: RECENT 30-YEAR FIXED RATE MORTGAGE RATE SPREADS \353\
---------------------------------------------------------------------------
\353\ This spread is the difference between the 30-year fixed-rate
conventional mortgage rate and the yield on 10-year Treasury
securities. Board of Governors of the Federal Reserve System,
Conventional Mortgages (Weekly) (online at www.federalreserve.gov/
releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (hereinafter
``Conventional Mortgages (Weekly)'') (accessed Apr. 12, 2010); Board of
Governors of the Federal Reserve System, U.S. Government Securities/
Treasury Constant Maturities/Nominal (online at www.federalreserve.gov/
releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (hereinafter
``U.S. Government Securities/Treasury Constant Maturities/Nominal'')
(accessed Apr. 12, 2010).
[GRAPHIC] [TIFF OMITTED] T5737A.025
e. Introductory Rate Resets
The resetting of the introductory rates on mortgages
continues to be a major problem for the long-term prospects of
the housing market, as the Panel has noted in previous reports.
This concern was also raised by the National Fair Housing
Alliance and by Litton Loan Servicing at the Panel's September
24, 2009 foreclosure mitigation field hearing.\354\ Many loans
in recent years were originated with extremely low introductory
rates. After a period of several years, the rate would reset to
a significantly higher above-market rate for the remainder of
the term, either as a fixed-rate loan or more commonly as an
adjustable-rate loan. By making housing appear to be more
affordable, these low rates were a valuable marketing tool for
lenders.
---------------------------------------------------------------------------
\354\ Testimony of Deborah Goldberg, supra note 225, at 11;
Congressional Oversight Panel, Written Testimony of Larry Litton, chief
executive officer, Litton Loan Servicing, Philadelphia Field Hearing on
Mortgage Foreclosures, at 4 (Sept. 24, 2009) (online at cop.senate.gov/
documents/testimony-092409-litton.pdf).
---------------------------------------------------------------------------
Many borrowers assumed that at the end of the introductory
term, they would be able to refinance into another mortgage.
While this may have seemed like a reasonable assumption in a
rising market, refinancing is a difficult proposition when a
property has fallen in value. In such an environment, in order
to qualify for refinancing a borrower may have to contribute
additional equity in order to meet loan-to-value standards. The
recent decline in mortgage availability and the tightening of
underwriting standards means many borrowers cannot find lenders
to refinance their homes. Even if a lender is willing to
refinance a property, prepayment penalties can make refinancing
extremely expensive for the borrower.\355\
---------------------------------------------------------------------------
\355\ Prepayment penalties may be attached to loans, most often
subprime, as a means of reducing the lender's prepayment risk, or loss
of loan profitability and return predictability for investors; the
borrower generally receives a lower interest rate in exchange for the
penalty. Gregory Elliehausen, Michael E. Staten, and Jevgenijs
Steinbuks, The Effect of Prepayment Penalties on the Pricing of
Subprime Mortgages, 60 Journal of Economics and Business, Issues 1-2
(Jan.-Feb. 2008) (online at business.gwu.edu/research/centers/fsrp/
2009/EffectPrepayment.pdf).
---------------------------------------------------------------------------
Over $1 trillion in mortgages will reset during the next
three years, and resets will not peak until November 2011.\356\
Option Adjustable Rate Mortgages (Option ARMs), in which the
borrower chooses between different payment options, usually
including a negative amortization option that adds unpaid
interest to the loan balance, will make up a large percentage
of the resetting loans going forward. In the Panel's
Philadelphia Field Hearing on Foreclosures, Deborah Goldberg of
the National Fair Housing Alliance pointed out that many Option
ARM borrowers are severely underwater.\357\
---------------------------------------------------------------------------
\356\ Zach Fox, Credit Suisse: $1 Trillion Worth of ARMs Still Face
Resets, SNL Financial (Feb. 25, 2010) (online at www.snl.com/
interactivex/article.aspx?CDID=A-10770380-12086).
\357\ Testimony of Deborah Goldberg, supra note 225, at 11.
---------------------------------------------------------------------------
Option ARMs were not generally subprime loans, since they
were made to prime credit borrowers.\358\ Many, however, were
part of the larger ``Alt-A'' category of loans underwritten
with reduced documentation, including ``stated,'' i.e.
unverified, income.\359\ The terms subprime, prime, and Alt-A
are used to describe the creditworthiness of a borrower.
Creditworthiness of the borrower is, aside from mortgage type,
the most common method of categorizing mortgages. Prime
mortgages are loans to borrowers with good credit (typically
above FICO 620) and adequate income. Alt-A mortgages are also
loans to borrowers with prime (A) credit. However, Alt-As
usually do not require income documentation, which is useful
for small business owners and independent contractors who have
variable income, but makes the loans susceptible to fraud.
Subprime mortgages refer to loans to borrowers with poor credit
(below 620). The Prime, Alt-A, and Subprime categories do not
indicate the mortgage type (e.g., fixed or floating rate,
interest only or fully amortizing). Another system of
categorizing loans is by conformance with Fannie Mae/Freddie
Mac (GSE) standards. Conforming mortgages are, of course, loans
that meet these standards and are eligible for inclusion in GSE
securitization pools. Non-conforming loans can be excluded from
GSE pools for a variety of reasons, including loan size, loan
type, borrower credit, income, loan-to-value, and fees. One
common type of non-conforming loan is the Jumbo, a loan that
exceeds the conforming limit, which ranged from $417,000 to
$938,250 depending on location. Exotic products are typically
nonconforming, even if made to prime borrowers. Because there
are so many reasons a loan can be non-conforming, one cannot
judge a loan's riskiness on this factor alone, nor can one
equate the terms ``conforming'' with ``prime,'' or
``nonconforming'' with ``subprime.'' \360\
---------------------------------------------------------------------------
\358\ Oren Bar-Gill, The Law, Economics and Psychology of Subprime
Mortgage Contracts, 94 Cornell L. Rev. 1073, 1086 (Nov. 2009) (online
at www.law.virginia.edu/pdf/olin/conf08/bargill.pdf).
\359\ Credit Suisse, Research Report: Mortgage Liquidity du Jour:
Underestimated No More, at 16 (Mar. 12, 2007) (online at
www.scribd.com/doc/282277/Credit-Suisse-Report-Mortgage-Liquidity-du-
Jour-Underestimated-No-More-March-2007).
\360\ Kristie Lorette, What is a Non Conforming Mortgage Loan
(online at www.ehow.com/about_6062372_non_conforming-mortgage-
loan_.html) (accessed Apr. 12, 2010).
---------------------------------------------------------------------------
Interest-only loans comprise another category that will be
resetting in large numbers. These loans, like Option ARMs, were
a result of easy credit during the housing boom. Some of them
will recast into fixed-rate mortgages at the end of the
interest-only period, while others will become adjustable-rate
mortgages. Currently, prevailing mortgage rates are low, so
interest-only adjustable-rate borrowers facing resets this year
might experience only a slight rise or even a decline in
payments. However, the potential for rising interest rates as
more of these mortgages reset could cause further stress on
homeowners. A January 2010 report by Fitch Ratings estimated
that $80 billion in prime and Alt-A interest-only loans would
reset by the end of 2011. The report estimated that as a result
of these resets, the average monthly payment would rise by 15
percent, and more if interest rates rise.\361\ Data from First
American CoreLogic prepared for the Wall Street Journal show
that 500,000 interest-only loans are expected to reset in the
next two years.\362\
---------------------------------------------------------------------------
\361\ Levitin & Twomey, supra note 78.
\362\ Nick Timiraos, Mortgage Increases Blunted, Wall Street
Journal (Mar. 29, 2010) (online at online.wsj.com/article/
SB10001424052702303429804575150161178252530.html) (hereinafter
``Mortgage Increases Blunted'').
---------------------------------------------------------------------------
Figure 36, below, is an updated version of the Credit
Suisse interest rate reset chart that has appeared in earlier
Panel housing reports.\363\ Nearly all subprime mortgages have
already reset, meaning that the foreclosure problem has moved
from a subprime to a prime problem. It is worth noting the
mortgage market for prime borrowers is much larger than the one
for subprime, with prime loans comprising 68 percent of first-
lien residential mortgages serviced by most of the largest
mortgage servicers.\364\
---------------------------------------------------------------------------
\363\ See October Oversight Report, supra note 17, at 19.
\364\ OCC and OTS Mortgage Metrics Report--Q4 2009, supra note 82,
at 13.
---------------------------------------------------------------------------
FIGURE 36: MORTGAGE RATE RESETS \365\
[Dollars in billions]
---------------------------------------------------------------------------
\365\ Data provided by Credit Suisse Securities.
[GRAPHIC] [TIFF OMITTED] T5737A.026
Considering the large number of defaults caused by rate
resets so far in this recession, and that the average loan-to-
value ratio on option ARMs is 126 percent, meaning that these
borrowers often have significant negative equity, it is
reasonable to expect resets to be a major driver of
delinquencies and foreclosures through the end of 2012 at
least.\366\ Mutual fund manager John Hussman has observed that:
---------------------------------------------------------------------------
\366\ Fitch Ratings, Fitch: $47B Prime/Alt-A 2010 IO Loan Resets to
Place Added Stress on U.S. ARM Borrowers (Jan. 11, 2010) (online at
www.businesswire.com/portal/site/home/permalink/
?ndmViewId=news_view&newsId=20100111006615&newsLang=en).
. . . the 2010 peak doesn't really get going until
July-Sep (with delinquencies likely to peak about 3
months later, and foreclosures about 3 months after
that). A larger peak will occur the second half of
2011. I remain concerned that we could quickly
accumulate hundreds of billions of dollars of loan
resets in the coming months, and in that case, would
expect to see about 40% of those go delinquent based on
the sub-prime curve and the delinquency rate on earlier
Alt-A loans.\367\
---------------------------------------------------------------------------
\367\ John P. Hussman, Ordinary Outcomes of Extraordinary
Recklessness, Hussman Funds Weekly Market Comment (March 15, 2010)
(online at hussmanfunds.com/wmc/wmc100315.htm).
On the other hand, some observers believe that the problem of
defaults caused by interest rate resets will not be as severe
as had been anticipated, at least as long as mortgage rates
remain low, since many problematic loans have already
defaulted, while others have been modified.\368\
---------------------------------------------------------------------------
\368\ Mortgage Increases Blunted, supra note 362.
---------------------------------------------------------------------------
f. Negative Equity
The high percentage of borrowers with negative equity in
their homes (``underwater'' or ``upside down'') is a great
concern for the future of the housing market and for
foreclosure mitigation efforts. A recent study by First
American CoreLogic found that negative equity was closely
correlated with an increase in ``pre-foreclosure activity,''
that is, delinquency.\369\ The impact of negative equity,
including its ability to ``trap'' borrowers in their current
homes (discussed further in Section C.1(h)(i) and Annex I(1)k)
was highlighted in the Panel's foreclosure mitigation field
hearing by Dr. Paul Willen, senior economist at the Federal
Reserve Bank of Boston. He 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.'' Dr. Willen also noted
that even underwater borrowers who are current on their
payments must be viewed as ``at risk'' borrowers.\370\
---------------------------------------------------------------------------
\369\ First American CoreLogic, Underwater Mortgages On the Rise
According to First American CoreLogic Q4 2009 Negative Equity Data
(Feb. 23, 2010) (hereinafter ``Underwater Mortgages On the Rise'').
\370\ Congressional Oversight Panel, Testimony of Dr. Paul Willen,
senior economist, Federal Reserve Bank of Boston, Transcript:
Philadelphia Field Hearing on Mortgage Foreclosures, at 109-110 (Sept.
24, 2009) (publication forthcoming).
---------------------------------------------------------------------------
Although estimates vary, nearly one in four homeowners with
mortgages are likely to be underwater. First American CoreLogic
reported that more than 11.3 million, or 24 percent, of
borrowers had negative equity at the end of the fourth quarter
of 2009, up from 10.7 million, or 23 percent, at the end of the
third quarter of 2009. An additional 2.3 million mortgages had
less than five percent equity, or near negative equity.
Together, negative equity and near negative equity mortgages
accounted for nearly 29 percent of all residential properties
with a mortgage nationwide. The aggregate value of negative
equity in the fourth quarter of 2009 was $801 billion, up from
$746 billion in the third quarter. The average negative equity
of underwater borrowers in the fourth quarter was $70,700, up
from $69,700 in the third quarter.\371\ Thus, the problem of
negative equity continues to spread to additional borrowers,
and to intensify for those already facing negative equity.
---------------------------------------------------------------------------
\371\ Underwater Mortgages On the Rise, supra note 369.
---------------------------------------------------------------------------
Negative equity problems are worst in the Sunbelt bubble
markets, as discussed in Annex II--Arizona, California,
Florida, and Nevada. Recession-plagued Michigan, also discussed
in Annex II, is high on the list as well. Figure 37, below,
shows negative equity and near negative equity by state.
FIGURE 37: PERCENTAGE OF HOMES WITH NEGATIVE EQUITY \372\
---------------------------------------------------------------------------
\372\ There is no negative equity data available for Louisiana,
Maine, Mississippi, South Dakota, Vermont, West Virginia or Wyoming.
[GRAPHIC] [TIFF OMITTED] T5737A.027
In terms of individual metropolitan areas, cities in
Florida and California \373\ have the highest rates of negative
equity. The areas with lowest rates are not geographically
concentrated, but include many smaller cities in the Northeast,
Midwest, and Northwest that did not undergo a great deal of
housing appreciation during the bubble.\374\
---------------------------------------------------------------------------
\373\ Rates of negative equity are especially high in interior
areas of California, such as the Central Valley.
\374\ Negative equity data provided to the Panel by Stan Humphries,
chief economist, Zillow (Feb. 23, 2010).
---------------------------------------------------------------------------
g. Second Liens
Loans secured by second or subordinate liens on a property
can greatly complicate foreclosure mitigation. The loan balance
on the first-lien mortgage generally cannot be written down
unless the second lien is first extinguished.\375\ Because of
this, resolution of the second lien is a threshold issue in
many foreclosure mitigation situations. Even after foreclosure,
the borrower is often still liable for the second-lien debt.
Not surprisingly, second-lien holders are not eager to
extinguish these loans when there may be some residual value,
even if the loan is apparently worthless because the amount
owed on the first lien exceeds the current value of the
home.\376\
---------------------------------------------------------------------------
\375\ Second Liens--How Important?, supra note 36, at 1.
\376\ James R. Hagerty, Home-Saving Loans Afoot, Wall Street
Journal (Mar. 8, 2010) (online at online.wsj.com/article/
SB10001424052748704706304575107770265900644.html).
---------------------------------------------------------------------------
Currently, 43 percent of borrowers have second liens on
their homes. There is a strong correlation between the
existence of second liens and delinquency. Treasury estimated
in April 2009 that up to half of all at-risk borrowers had
second liens. Although there is great variation in the rate of
delinquency depending on the type of second lien, the year of
origination, and the credit category or type of the loan,
second-lien holders are consistently more likely to be
delinquent than borrowers with only a first lien. For example,
subprime loans made in 2006 with a simultaneous second lien
\377\ have a 62 percent rate of non-performance, while the same
sort of subprime first mortgage borrowers without a second lien
have a 52 percent rate of non-performance. In contrast, prime
loans made in 2004, when the market was lower, with a
subsequent second lien, have only a 5.6 percent rate of non-
performance. However, this is still higher than the rate for
the same sort of borrowers with only a single first mortgage,
who have a 2.1 percent rate of non-performance.\378\
---------------------------------------------------------------------------
\377\ Simultaneous second liens are second lien debt originated at
the same time as the first lien debt, as opposed to subsequent second
liens, which are originated later.
\378\ Second Liens--How Important?, supra note 36, at 6.
---------------------------------------------------------------------------
As of the end of 2009, the value of second-lien loans
outstanding, including HELOCs, was $1.03 trillion. That was a
decline of $100 billion from the peak outstanding balance of
$1.13 trillion in 2007.\379\ Due to accounting issues discussed
in Section F.2, these figures may not reflect the true market
value of the loans.
---------------------------------------------------------------------------
\379\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release Z.1, at 96 (Mar. 11, 2010) (online at
www.federalreserve.gov/releases/z1/Current/z1.pdf) (hereinafter
``Federal Reserve Statistical Release Z.1'').
---------------------------------------------------------------------------
Of the approximately $1.03 trillion of second liens
outstanding, 73.8 percent are held in banks' portfolios,\380\
rather than being securitized or held by other institutions. Of
those loans, approximately 58 percent are held by just four
large banks--Bank of America, Citibank, JPMorgan Chase, and
Wells Fargo.\381\ Figures 38 and 39 illustrate that these four
institutions all have significant exposure to second-lien
loans, though that exposure has fluctuated significantly in
recent years.
---------------------------------------------------------------------------
\380\ Federal Reserve Statistical Release Z.1, supra note 379, at
11 ($667.5 billion of $700 billion in second-lien loans held in bank
portfolio).
\381\ Second Liens--How Important?, supra note 36, at 10.
FIGURE 38: SECOND LIENS AS A PERCENTAGE OF TIER 1 CAPITAL \382\
----------------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
Citigroup................................................ 23.8% 42.6% 46.7% 28.9% 21.0%
JPMorgan Chase........................................... 10.6% 17.4% 19.6% 14.6% 9.7%
Wells Fargo.............................................. 58.3% 43.6% 50.0% 30.2% 22.4%
Bank of America.......................................... 11.9% 12.0% 26.1% 29.2% 18.1%
----------------------------------------------------------------------------------------------------------------
\382\ Data from SNL Financial. Second-lien data are limited to loans that do not revolve, such as home equity
lines of credit. These loans are excluded because the some of the bank's exposure to revolving loans may never
be tapped by the borrower.
FIGURE 39: SECOND LIENS AS A PERCENTAGE OF TIER 1 COMMON EQUITY\383\
----------------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
Citigroup................................................ 26.5% 48.9% 66.3% 149.6% 25.5%
JPMorgan Chase........................................... 12.9% 20.7% 23.6% 22.9% 12.2%
Wells Fargo.............................................. 68.5% 50.0% 58.7% 75.8% 32.1%
Bank of America.......................................... 14.5% 15.2% 36.4% 55.8% 24.1%
----------------------------------------------------------------------------------------------------------------
\383\ Data from SNL Financial. See note 381 for information regarding data limitations.
An interesting phenomenon that has come to light recently
is that borrowers are often choosing to pay debt service on
their second liens in preference to their first liens. This may
seem counterintuitive, since first mortgages are traditionally
thought to be much safer investments for lenders than second
mortgages. Several explanations have been proposed. The
recourse nature of many second mortgages makes it sensible for
borrowers to continue paying those loans. Some have theorized
that borrowers try to pay as many of their bills as possible,
and therefore are neglecting the large first mortgage bill in
order to pay other smaller expenses, such as a second mortgage.
Another possible explanation is that HELOC borrowers are trying
to maintain their access to credit by staying current on that
loan.\384\
---------------------------------------------------------------------------
\384\ Kate Berry, The Shoe That Refuses to Drop: Home Equity
Losses, American Banker (Mar. 10, 2010) (online at
www.americanbanker.com/issues/175_46/home-equity-losses-1015702-
1.html).
---------------------------------------------------------------------------
h. Delinquencies
Although not all delinquent borrowers end up in
foreclosure, delinquencies are an important indicator of future
foreclosures. They are also a useful indicator of the general
economic well being of homeowners. The seasonally adjusted
mortgage delinquency rate fell slightly during the fourth
quarter of 2009 from 9.64 percent to 9.47 percent, according to
the Mortgage Bankers Association.\385\ Delinquency rates for
the fourth quarter in 2006, 2007, and 2008 were 4.95 percent,
5.82 percent, and 7.88 percent, respectively. The modest
decline in the fourth quarter of 2009 is thought to be
significant because the rate usually increases in the fourth
quarter due to the financial stress of holiday expenses.\386\
However, the 2009 fourth quarter delinquency rate was still
1.59 percent higher on a year-over-year basis.\387\
---------------------------------------------------------------------------
\385\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
\386\ Jann Swanson, MBA Delinquency Survey Shows Signs of
Stabilization. Progress Depends on Labor Market, Mortgage News Daily
(Feb. 19, 2010) (online at www.mortgagenewsdaily.com/
02192010_mba_delinquency_survey_shows_signs_of_stabilization
_progress_depends_on_labor_market.asp).
\387\ 387 MBA National Delinquency Survey, supra note 1
(subscription required). See also February MBA Survey Results, supra
note 1.
---------------------------------------------------------------------------
The type of loans that are delinquent is also of
considerable interest to foreclosure mitigation efforts. The
90-day delinquency rate on prime loans, at 3.34 percent, is not
surprisingly much lower than the rate for subprime loans.
However, both rates rose in the fourth quarter of 2009. Figure
40 shows the 90-day delinquency rate over the last five years
for prime, subprime, FHA, and VA loans, as well as the rate for
all loans.\388\ Although the subprime delinquency rate is very
high, the rising delinquency rate on prime loans is more
troubling, since there are far more prime loans outstanding,
especially if Alt-A loans are included in the prime category,
and they were supposedly made to much more creditworthy
borrowers. ``Prime'' and ``subprime'' do not indicate loan
structure or overall risk, only the creditworthiness of the
borrower.\389\
---------------------------------------------------------------------------
\388\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
\389\ See further discussion in Annex I.1(e).
---------------------------------------------------------------------------
FIGURE 40: SERIOUS DELINQUENCY RATE, 2005-2009 \390\
---------------------------------------------------------------------------
\390\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.028
Figure 41, below, shows delinquency rates ranked by state.
Figure 42, also below, is a map of 90-day delinquencies by
county, with darker colors indicating higher delinquencies. It
is clear from these two charts that the areas that boomed the
most during the housing bubble, including most of Nevada,
Arizona, Florida, and California, have the worst problems with
delinquencies. Michigan also has a particularly high level of
delinquencies. (See Annex II for additional discussion of the
situation in these states.) It is also apparent that the areas
that did not experience an extreme housing boom, such as the
Plains states and portions of the Midwest and Northwest, are
better off in terms of delinquencies.
FIGURE 41: STATES RANKED BY DELINQUENCIES \391\
---------------------------------------------------------------------------
\391\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.029
FIGURE 42: MORTGAGE DELINQUENCY RATE 90+ DAYS (AS OF Q4 2009) \392\
---------------------------------------------------------------------------
\392\ Federal Reserve Bank of New York, U.S. Credit Conditions
(online at data.newyorkfed.org/creditconditions/) (accessed Apr. 13,
2010).
[GRAPHIC] [TIFF OMITTED] T5737A.030
i. Foreclosures
The foreclosure rate is the ultimate determinant of the
success or failure of foreclosure mitigation efforts. It is
also relevant because the REO by lenders as a result of
foreclosures will eventually be sold, often at low prices,
driving down comparable sale prices and overall property
values. Outside influences, such as the date of mortgage rate
resets, workloads at lenders, servicers, and foreclosure
courts, and the timing of job losses, can cause the foreclosure
rate to fluctuate.
The latest data indicate that February had the lowest year-
over-year increase in foreclosure starts in four years.\393\
While this may indicate an apparent improvement in market
conditions, it remains to be seen whether the lower level of
foreclosures can be sustained in the face of other trends, such
as increasing negative equity and continuing high unemployment.
It may also indicate that banks, courts, and others have
reached their capacity to process foreclosures.\394\
---------------------------------------------------------------------------
\393\ RealtyTrac, U.S. Foreclosure Activity Decreases 2 Percent in
February (Mar. 11, 2010) (online at www.realtytrac.com/
contentmanagement/pressrelease.aspx?channelid=9&itemid=8695).
\394\ See, e.g. Kimberly Miller, Florida's Foreclosure Backlog
among Nation's Worst, Palm Beach Post (Mar. 17, 2010) (online at
www.palmbeachpost.com/money/real-estate/floridas-foreclosure-backlog-
among-nations-worst-380990.html).
---------------------------------------------------------------------------
More complete data are available as of the end of 2009.
According to these data, the foreclosure process began on an
additional 1.2 percent of all loans in the fourth quarter.
While this was a significant drop from 1.42 percent in the
third quarter, and the lowest rate for the year, it was still a
considerably higher rate than any time during 2005-2008. Figure
43, below, shows foreclosure starts for various categories of
loans. The subprime category was the worst performer at 3.66
percent, and the VA loan category was the best performer at
0.81 percent. All categories showed a similar downward trend in
foreclosure starts in the fourth quarter.
FIGURE 43: FORECLOSURE STARTS BY LOAN CATEGORY, 2005-2009 \395\
---------------------------------------------------------------------------
\395\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.031
While starts have decreased across the board, the last
quarter also saw the total inventory of loans in foreclosure
rise from 4.47 percent to 4.58 percent of all loans.
Foreclosure inventory increased by 1.28 percent during 2009,
which indicates that foreclosure starts are adding to the stock
of inventory faster than lenders are selling their real estate
owned property. As Figure 44 below shows, subprime loans were
most likely to be in foreclosure (15.58 percent). VA loans were
least likely to be in foreclosure (2.46 percent), which
reflects the low level of VA foreclosure starts in prior
quarters.
FIGURE 44: FORECLOSURE INVENTORY BY LOAN CATEGORY, 2005-2009 \396\
---------------------------------------------------------------------------
\396\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.032
Figure 45 shows foreclosure inventory by state. Once again,
Florida (13.34 percent), Nevada (9.76 percent), and Arizona
(6.07 percent) topped the list, although New Jersey (5.82
percent) and Illinois (5.62 percent) edged out California (5.56
percent).\397\ Ohio (4.72 percent) was next, followed by
Michigan (4.56 percent).
---------------------------------------------------------------------------
\397\ Variations in local foreclosure procedures can significantly
affect foreclosure timetables and therefore foreclosure inventory. For
a given level of defaults, foreclosure inventory is likely to be higher
in states with slower foreclosure procedures because foreclosure
inventory accumulates rather than being converted into REO or sold to
third-party buyers. Accordingly, foreclosure inventory levels do not
necessarily correlate with default indicators, such as negative equity.
---------------------------------------------------------------------------
FIGURE 45: FORECLOSURE INVENTORY BY STATE \398\
---------------------------------------------------------------------------
\398\ MBA National Delinquency Survey, supra note 1 (subscription
required). See also February MBA Survey Results, supra note 1.
[GRAPHIC] [TIFF OMITTED] T5737A.033
Should lenders suddenly change their policies in a way that
results in more REOs on their books (such as foreclosing more
aggressively) or permit more short sales, the housing market
may be hit by a glut of distressed home sales. This will almost
certainly drive prices down further, and consequently, worsen
negative equity and lead to more defaults. This also raises
concerns about the capacity of lenders and servicers to work
through this backlog without overwhelming their staffs and
causing additional foreclosures and losses to investors that
could have been prevented had these delinquencies been dealt
with more promptly.
Some, such as Mr. Fratantoni, lay the blame at the feet of
Treasury. ``I think that it's been pretty clear that these
efforts to delay the foreclosure process--that's precisely what
they're doing: They're delaying; they're not resolving in many
cases. And at some point there is going to be an effort to
resolve these longer-run delinquencies,'' Mr. Fratantoni said.
``We're starting to see that now with Treasury's program to
streamline and encourage short sales. And I expect that's where
more of these resolutions are headed in the months and years
ahead.'' \399\
---------------------------------------------------------------------------
\399\ Zach Fox, With Foreclosures, Python Refuses to Digest Pig,
SNL Financial (Mar. 24, 2010).
---------------------------------------------------------------------------
j. Short Sales/Deed-in-Lieu
One of the alternatives to foreclosure available to lenders
is to allow an underwater borrower to complete a ``short
sale,'' or to sell the property for less than the loan
balance.\400\ Although the lender takes an immediate loss, a
short sale allows the lender to avoid the expense and
difficulty of a foreclosure. The lender also avoids the risks
of a loan modification plan, such as the possibility of
redefault, and the chance that the future state of the market
will not meet expectations. Short sales can be a satisfactory
solution for the borrower. The borrower is able to get out of
the underwater mortgage with less damage to his or her credit
rating, without putting up additional equity, and without being
burdened by a workout plan that does not reduce indebtedness.
---------------------------------------------------------------------------
\400\ A short sale applies only to borrowers with negative equity,
or near negative equity. Only when the sale proceeds (the value of the
property less sale costs) are less than the loan balance (i.e.,
negative equity) is the sale considered ``short.'' A borrower with
significant positive equity would have sale proceeds that are greater
than the loan balance; the sale would not be considered ``short.''
---------------------------------------------------------------------------
Short sales can be particularly beneficial to borrowers who
have reason to move anyway, perhaps to start a new job or go
back to school. In order to move, as discussed earlier in
Section B and below in Annex I(1), these borrowers would
otherwise have to either default or make up the negative equity
with cash. If homeowners are not able to move, they may have
difficulty finding work. Similarly, employers may have more
difficulty hiring qualified candidates if the labor market
lacks normal flexibility. Consequently, negative equity can
have a significant negative macroeconomic effect beyond its
effect on the housing market.
The National Association of Realtors reports that 14
percent of all January home sales were short sales.\401\ Figure
46 shows short sales as a percentage of total sales over the
past 16 months.
---------------------------------------------------------------------------
\401\ Data provided by National Association of Realtors.
---------------------------------------------------------------------------
FIGURE 46: SHORT SALES AS A PERCENTAGE OF ALL HOME SALES \402\
---------------------------------------------------------------------------
\402\ Data provided by National Association of Realtors.
[GRAPHIC] [TIFF OMITTED] T5737A.034
Another alternative to foreclosure is a deed-in-lieu of
foreclosure, in which the borrower voluntarily gives the house
to the lender in exchange for elimination of the mortgage. This
strategy also avoids the difficulties of foreclosure for both
lender and borrower. While data on deeds-in-lieu for the entire
market are not readily available, FHFA does release deed-in-
lieu data for approximately 30 million GSE-serviced loans,
which are a significant portion of the overall market. As of
October 2009, the GSEs had completed 382,848 foreclosure
prevention actions in the prior 12 months. Only 2,872, or 0.7
percent, of these actions were deed-in-lieu of foreclosure
transactions.\403\ It is unclear whether this minimal level of
activity is indicative of the use of deeds-in-lieu in the
broader housing market.
---------------------------------------------------------------------------
\403\ Federal Housing Finance Agency, Refinance Volumes and HAMP
Modifications Increased in December (Jan. 29, 2010) (online at
ofheo.gov/Default.aspx/cgi/t/text/webfiles/15389/
Foreclosure_Prev_release_1_29_10.pdf).
---------------------------------------------------------------------------
k. Strategic Defaults
Recently, there has been a surge of interest in the subject
of strategic defaults, in which borrowers choose to default on
their mortgages, despite the fact that they have the ability to
continue making payments.\404\ The term ``strategic default''
encompasses a number of different situations.
---------------------------------------------------------------------------
\404\ See, e.g., James R. Hagerty and Nick Timiraos, Debtor's
Dilemma, Wall Street Journal (Dec. 17, 2009) (online at online.wsj.com/
article/SB126100260600594531.html); Linda Lowell, Who, in the End, Will
Strategically Default?, Housing Wire (Mar. 1, 2010) (online at
www.housingwire.com/2010/03/01/who-in-the-end-will-strategically-
default/).
---------------------------------------------------------------------------
Some borrowers who are deep in negative equity may decide
that the consequences of default--having to move, damage to
their credit ratings, and, for some, feelings of guilt or
embarrassment--are less than the burden of negative equity that
they would remain responsible for paying. Owners of investment
properties and second homes may make more detached,
businesslike decisions in this regard than borrowers
contemplating default on their primary residences. Other
borrowers may strategically default out of what they believe to
be financial necessity. For example, if they believe they will
never be able to repay the debt, default may be the only
reasonable option left. The comparatively low cost of renting
as opposed to owning may also be an incentive to a strategic
default for some borrowers.
A borrower may also strategically default if he or she
needs to move, but does not have sufficient cash to pay off the
mortgage's negative equity. If the lender does not agree to a
principal write-down, short sale, or other form of debt
forgiveness, borrowers remain ``trapped'' in their homes and
have little choice but to default if they wish to move. There
is a wide range of inevitable life events that necessitate
moves: the birth of children, illness, death, divorce,
retirement, job loss, education, and new jobs. Without a way to
deal with the negative equity, many borrowers facing these
events will be forced to default.
The decision for a strategic default is often influenced by
the borrower's expectation of when property values will
recover, erasing the negative equity. Since some predictions do
not expect a full recovery in the hardest hit markets until
2030 or later,\405\ many borrowers have significant incentives
to default.
---------------------------------------------------------------------------
\405\ Fiserv, FHFA, and Moody's Economy.com, Hardest Hit Metros
Will Take Longer to Recover (2010). See also John Spence, Moody's
Bearish on Housing Recovery, MarketWatch (Sept. 18, 2009) (online at
www.marketwatch.com/story/home-prices-wont-regain-peak-this-decade-
moodys-2009-09-18). A map based on these predictions is shown at the
end of Annex I.
---------------------------------------------------------------------------
Because borrowers who strategically default do not usually
reveal that they have done so, it is hard to determine exactly
how many strategic defaults are occurring. Although estimates
of strategic defaults vary considerably, it is apparent that
these defaults are common and are, not surprisingly,
increasingly likely as borrowers sink deeper underwater.
Researchers at Northwestern University's Kellogg School of
Management have estimated that 26 percent of all defaults are
strategic. They also found a strong correlation between
negative equity and strategic default, and that ``below 10
percent negative equity people do not walk away, as it is too
costly and there is a moral consideration--a shame factor.''
Another interesting finding was that ``social pressure not to
default is weakened when homeowners live in areas with high
frequency of foreclosures or know other people who defaulted
strategically.'' \406\
---------------------------------------------------------------------------
\406\ Kellogg Insight, Walking Away: Moral, Social, and Financial
Factors Influence Mortgage Default Decisions (Jul. 2009) (online at
insight.kellogg.northwestern.edu/index.php/Kellogg/article/
walking_away).
---------------------------------------------------------------------------
A September 2009 study by credit bureau Experian and
consulting firm Oliver Wyman estimated that 18 percent of
delinquent borrowers strategically defaulted in 2008. That
study also found that borrowers with higher credit ratings were
50 percent more likely to strategically default, and that these
defaults were most common in markets with many borrowers who
are deeply underwater. The principal researcher of the study,
Piyush Tantia, has said that borrowers who strategically
default ``are clearly sophisticated'' and view the default as a
business decision.\407\
---------------------------------------------------------------------------
\407\ Experian-Oliver Wyman, Market Intelligence Report:
Understanding Strategic Default in Mortgages, Part I (Sept. 2009)
(online at www.marketintelligencereports.com) (subscription required);
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).
---------------------------------------------------------------------------
1. Shadow Inventory
``Shadow inventory'' in the housing market most commonly
refers to REOs held by banks but not yet put up for sale, homes
that are in the foreclosure process, and seriously delinquent
homes that are expected to enter foreclosure.
First American CoreLogic, a subsidiary of First American
Corp., has estimated a shadow inventory of 1.7 million homes as
of September 2009, an increase of 55 percent in one year.\408\
Bank Foreclosures Sale, an online foreclosure listing site,
estimates an additional 2.4 million foreclosures will occur in
2010.\409\ For comparison, as mentioned earlier, there are 3.3
million homes currently on the market.\410\
---------------------------------------------------------------------------
\408\ First American CoreLogic, ``Shadow Housing Inventory'' Put at
1.7 Million in 3Q According to First American CoreLogic (Dec. 17, 2009)
(online at www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/
FACL_Shadow_Inventory_121809.pdf).
\409\ PR Newswire, Shadow Inventory Properties May Contribute to
Next Wave of Foreclosures in 2010, MarketWatch (Jan. 11, 2010) (online
at www.marketwatch.com/story/shadow-inventory-properties-may-
contribute-to-next-wave-of-foreclosures-in-2010-2010-01-
11?siteid=nbkh).
\410\ Existing-Home Sales Down in January, supra note 345.
---------------------------------------------------------------------------
A recent study by Standard & Poor's, while not quantifying
the number of homes in shadow inventory, found that at the
current rate of disposal (``closing'') of REOs and delinquent
loans, there are currently 29 months of shadow inventory. When
recently cured delinquent loans that are expected to redefault
are added (using current redefault rates),\411\ the total
increases to 33 months of shadow inventory. Currently
performing loans that default in the future would only add to
this inventory.\412\
---------------------------------------------------------------------------
\411\ Currently modified loans may not redefault in the future at
the rate assumed here. However, some of these modified and performing
loans will certainly redefault, and should be considered as shadow
inventory.
\412\ Standard & Poor's, The Shadow Inventory of Troubled Mortgages
Could Undo U.S. Housing Price Gains (Feb. 16, 2010) (online at
www.standardandpoors.com/ratings/articles/en/us/
?assetID=1245206147429).
---------------------------------------------------------------------------
Some definitions of shadow inventory include homes that
homeowners want to sell, but are waiting to put on the market
until conditions improve. This is potentially a significant
number of homes. A survey conducted by Zillow found that almost
a third of homeowners have considered putting their homes up
for sale, but are waiting for market conditions to
improve.\413\ There is little reason to believe that this
number has shrunk substantially in the year since the survey
was conducted. Since there are 75 million privately owned homes
in the United States, this potential inventory could be as much
as 24 million homes.\414\
---------------------------------------------------------------------------
\413\ Stan Humphries, When the Bottom Arrives, A Flood of ``Shadow
Inventory''?, Zillow (May 19, 2009) (online at www.zillow.com/blog/
when-the-bottom-arrives-a-flood-of-shadow-inventory/2009/05/19/)
(hereinafter ``Stan Humphries, When the Bottom Arrives''). Zillow has
indicated to Panel staff that many of these homeowners who responded
that they were likely to sell may have wanted to sell during 2006-2010,
but decided to ``wait it out'' because of the low level of home prices.
Zillow also indicated that many of these may be homeowners ``trapped''
by negative equity, and therefore unable to move until prices recover
(or they default, as discussed in Annex I(1)(k).
\414\ U.S. Department of Commerce, Bureau of the Census, Census
Bureau Reports on Residential Vacancies and Homeownership, at 3 (Feb.
2, 2010) (online at www.census.gov/hhes/www/housing/hvs/qtr409/files/
q409press.pdf).
---------------------------------------------------------------------------
It would not be appropriate to count all these homes as
shadow inventory since many owners may not carry through with
their intention to sell, and those that do will not sell all at
once. Nevertheless, the number is so large that even a fraction
of this additional supply coming to market could easily tamp
down any recovery in property values. Figure 47 shows the
responses to Zillow's survey. Figure 48 shows what homeowners
who are considering selling would consider to be a
``turnaround'' in the housing market.
FIGURE 47: ZILLOW SURVEY SHADOW INVENTORY RESPONSES \415\
---------------------------------------------------------------------------
\415\ Stan Humphries, When the Bottom Arrives, supra note 413.
[GRAPHIC] [TIFF OMITTED] T5737A.035
FIGURE 48: ZILLOW SURVEY MARKET TURNAROUND RESPONSES \416\
---------------------------------------------------------------------------
\416\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.036
2. Economic Indicators
The state of the housing market and the state of the
overall economy are closely intertwined. While the growth of
the housing bubble and its subsequent collapse were key causes
of the recent recession, the linkage works in the other
direction as well--a weak economy can drag down the housing
market. Several economic indicators, especially unemployment
and interest rates, are of critical importance to housing
values and consequently to foreclosure mitigation. This section
explores recent trends in major economic indicators.
a. Unemployment
As mentioned at the beginning of Section I(B), unemployment
is a major driver of delinquencies, foreclosures, and
consequently, home values. Unemployed borrowers without
significant savings are unlikely to be able to pay their debt
service regardless of what loan modifications they receive.
According to the most recent data from the Bureau of Labor
Statistics (BLS), the unemployment rate held steady at 9.7
percent in March 2010 for the second month in a row. This
equates to 14.9 million unemployed workers. Although the
unemployment rate has fallen from its late 2009 highs, which
topped 10 percent, it remains considerably higher than the 8.6
percent rate a year earlier.\417\ The number of long-term
unemployed (jobless for 27 weeks or more) increased from 6.3
million in January to 6.5 million in March on a seasonally
adjusted basis. Since the start of the recession in December
2007, the number of long-term unemployed has risen by 5
million. The average duration of unemployment was 29.3 weeks,
slightly higher than in January, and almost 10 weeks higher
than in February 2009.\418\ The current long-term unemployment
rate of nearly 4 percent (41 percent of all unemployed) is
significantly higher than in other recent recessions. In June
1983, seven months after the official end of a recession, long-
term unemployment peaked at 3.1 percent, which until recently
was the highest long-term rate since before World War II.\419\
---------------------------------------------------------------------------
\417\ U.S. Department of Labor, Bureau of Labor Statistics, The
Employment Situation--March 2010, at 4 (Apr. 2, 2010) (online at
www.bls.gov/news.release/archives/empsit_04022010.pdf) (hereinafter
``The Employment Situation--March 2010'') (using seasonally adjusted
data).
\418\ Id.
\419\ U.S. Department of Labor, Bureau of Labor Statistics, A
Glance at Long-Term Unemployment in Recent Recessions, Issues in Labor
Statistics, Summary 06-01 (Jan. 2006) (online at www.bls.gov/opub/ils/
pdf/opbils53.pdf).
---------------------------------------------------------------------------
Figure 49, below, shows the percentage of workers
unemployed for 27 weeks or longer since 1980. The shaded areas
indicate recessions. As the chart shows, the current rate of
long-term unemployment is higher than at any other time during
this period, including the severe recession of 1981-1983.
FIGURE 49: LONG TERM UNEMPLOYMENT AS A PERCENTAGE OF TOTAL UNEMPLOYMENT
\420\
---------------------------------------------------------------------------
\420\ U.S. Department of Labor, Bureau of Labor Statistics, Total
Unemployed, Percent Unemployed 27 Weeks & Over (Instrument: Percent
Distribution, 27 Weeks and Over) (online at www.bls.gov/webapps/legacy/
cpsatab12.htm) (accessed Apr. 12, 2010). The shaded areas represent
periods of recession as defined by the National Bureau of Economic
Research (NBER). The NBER has not yet determined whether the recession
that began in December 2007 has ended nor established the date of its
ending. The Panel's own estimate is that this recession ended at the
end of Q2 2009, the last quarter of net decline in the U.S. Gross
Domestic Product (GDP), and that is the date assumed here. Bureau of
Economic Analysis, Gross Domestic Product (accessed Apr. 5, 2010)
(online at www.bea.gov/national/txt/dpga.txt).
[GRAPHIC] [TIFF OMITTED] T5737A.037
Unemployment is highest in Michigan (14.1 percent), Nevada
(13.2 percent), and Rhode Island (12.7 percent), and lowest in
North Dakota (4.1 percent), Nebraska (4.8 percent), and South
Dakota (4.7 percent).\421\
---------------------------------------------------------------------------
\421\ U.S. Department of Labor, Bureau of Labor Statistics,
Regional and State Employment and Unemployment Summary, at 3 (Mar. 26,
2010) (online at www.bls.gov/news.release/archives/laus_03262010.pdf).
This data is for February 2010, the latest available.
---------------------------------------------------------------------------
Unemployment increased in the past year across all
occupations. The job categories with the highest rates of
unemployment in March 2010 were construction and extraction
(24.6 percent), and farming, fishing, and forestry (21.8
percent). The occupations with the lowest rates were
professional and related (4.3 percent) and management,
business, and financial operations (5.4 percent).\422\
---------------------------------------------------------------------------
\422\ The Employment Situation--March 2010, supra note 417, at 24
(using data that is not seasonally adjusted).
---------------------------------------------------------------------------
The unemployment rate was significantly higher for men (10
percent) than for women (8.0 percent).\423\ Unemployment was
also higher among African Americans (16.5) \424\ and Latinos
(12.6 percent) \425\ than among Whites (9.3 percent) and Asians
(7.5 percent).\426\ All of these demographic groups had higher
rates of unemployment in March 2010 than a year earlier.
---------------------------------------------------------------------------
\423\ The Employment Situation--March 2010, supra note 417, at 4
(using seasonally adjusted data).
\424\ Id., at 12.
\425\ Id., at 14.
\426\ Id., at 12. Unlike the other racial categories in this
paragraph, the unemployment rate for Asians is not seasonally adjusted.
The BLS does not publish seasonally adjusted unemployment data for
Asians.
---------------------------------------------------------------------------
Workers with little education have fared the worst in this
recession. The unemployment rate is 14.5 percent for workers
with less than a high school diploma. High school graduates
have an unemployment rate of 10.8 percent. Workers with some
college have an 8.2 percent rate. Workers with a bachelor's
degree or higher are faring best, with only a 4.9 percent
unemployment rate.\427\ By contrast, in 1980, high school
graduates had an unemployment rate of 5.8 percent, the rate of
workers with some college was 4.7 percent, and the rate for
workers with a bachelor's degree was 2.1 percent, according to
the Department of Education.\428\
---------------------------------------------------------------------------
\427\ Id., at 15.
\428\ In the 2001 recession the unemployment rates for workers with
high school diplomas, some college, and bachelor degrees were 3.8, 2.6,
and 1.7 percent, respectively. See U.S. Department of Education,
National Center for Education Statistics, Employment Outcomes of Young
Adults by Race/Ethnicity (online at nces.ed.gov/programs/coe/2005/
section2/table.asp?tableID=264) (accessed Apr. 12, 2010). The most
recent economic downturn (2008-current) highlights the fact that
college-educated individuals are experiencing increasingly difficult
times finding work. See U.S. Department of Education, National Center
for Education Statistics, Digest of Education Statistics 2009, at 558
(Apr. 2010) (online at nces.ed.gov/pubs2010/2010013.pdf) (noting the
rise in unemployment among all individuals with a bachelor's or higher
degree from 2006-2008).
---------------------------------------------------------------------------
The number of people working part-time for economic reasons
grew from 8.8 million in February 2010 to 9.0 million in March
2010.\429\ An additional 2.3 million people not included as
``unemployed'' were considered ``marginally attached'' to the
labor force, an increase of 149,000 from a year earlier; these
are people who are available to work and have looked for work
sometime in the past year. Of these marginally attached
workers, 994,000 were considered ``discouraged,'' an increase
of 309,000 from a year earlier.\430\ Adding these people to the
number of people who are officially unemployed yields a 16.9
percent rate of unemployment/underemployment, up from 16.5
percent in January 2010.\431\
---------------------------------------------------------------------------
\429\ The Employment Situation--March 2010, supra note 417, at 19.
\430\ Id., at 27 (using data that is not seasonally adjusted).
\431\ Id., at 26.
---------------------------------------------------------------------------
FIGURE 50: UNEMPLOYMENT, UNEMPLOYMENT/UNDEREMPLOYMENT, AND DURATION OF
UNEMPLOYMENT \432\
---------------------------------------------------------------------------
\432\ The Employment Situation--March 2010, supra note 417, at 26
(citing to data in Table A-15. Alternative measures of labor
underutilization); Federal Reserve Bank of St. Louis, Median Duration
of Unemployment (online at research.stlouisfed.org/fred2/series/
UEMPMED/downloaddata) (accessed Apr. 12, 2010). The Bureau of Labor
Statistics defines the underemployment measure as ``[t]otal unemployed,
plus all persons marginally attached to the labor force, plus total
employed part time for economic reasons, as a percent of the civilian
labor force plus all persons marginally attached to the labor force.''
The Employment Situation--March 2010, supra note 417, at 26.
[GRAPHIC] [TIFF OMITTED] T5737A.038
On the positive side, the informal though well-regarded
report on layoffs compiled by the outplacement firm Challenger,
Gray, and Christmas showed a decline in layoffs in February
2010 to the lowest level since July 2006. In total, 42,090
planned layoffs were reported in February, down 41 percent from
71,482 in January, and down 71 percent from the 186,350 layoffs
announced in February 2009. The retail and automotive sectors
showed the biggest drops in layoffs compared to last year, down
75 percent and 90 percent, respectively.\433\ This is perhaps
not surprising, given the massive job losses these industries
suffered in 2009. It should be noted that the Challenger, Gray,
and Christmas report tracks announced layoffs only, and does
not include all job losses. Nevertheless, it indicates that the
rate of job losses is slowing.
---------------------------------------------------------------------------
\433\ Challenger, Gray & Christmas, Inc., Planned Job Cuts Drop 41%
(Mar. 3, 2010). See also Rex Nutting, Planned Layoffs Drop to Lowest
Level Since 2006, MarketWatch (Mar. 3, 2010) (online at
www.marketwatch.com/story/planned-layoffs-drop-to-lowest-level-since-
2006-2010-03-03).
---------------------------------------------------------------------------
However, there is negative news regarding employment by
state and local governments. This sector was traditionally
thought to be ``recession-proof,'' but more recently, extensive
layoffs have been announced. According to the Bureau of Labor
Statistics, the number of unemployed government workers in
March 2010 (not seasonally adjusted) is projected to be as high
as 881,000.\434\ Because the economy has not recovered to a
sufficient degree to boost tax revenues, more government
employees may be laid off in 2010 and beyond, absent further
federal support to state and local governments.
---------------------------------------------------------------------------
\434\ The Employment Situation--March 2010, supra note 417, at 25
(using data that is not seasonally adjusted).
---------------------------------------------------------------------------
b. Gross Domestic Product
The overall level of economic activity is most commonly
measured by the Gross Domestic Product (GDP). The GDP of the
United States continued to grow, and in fact accelerate,
through the end of 2009. Real GDP rose at an annualized rate of
5.9 percent in the fourth quarter of 2009, a considerable
increase from 2.2 percent growth in the third quarter \435\ and
a decrease of 0.7 percent in the second quarter.\436\ The
Bureau of Economic Analysis attributes the robust fourth
quarter growth to increases in exports, personal consumption
expenditures, nonresidential fixed investment, and private
inventory investment. Unfortunately, the rise in inventory
investment was likely due in large part to businesses
replenishing their stocks as they anticipated economic
recovery; this often happens toward the end of a recession
after businesses have reduced their inventories. Therefore, the
recent boost in inventory investment is unlikely to have a long
duration, which means it may be hard to sustain the level of
GDP growth seen in the fourth quarter. Also, while it is likely
that federal government stimulus spending has had some positive
effect on GDP growth, it is not clear to what degree it has
helped, or what impact the end of stimulus spending will have
on the economy.
---------------------------------------------------------------------------
\435\ U.S. Department of Commerce, Bureau of Economic Analysis, GDP
and the Economy: Second Estimates for the Fourth Quarter of 2009, at 1
(Mar. 2010) (online at www.bea.gov/scb/pdf/2010/03%20March/
0310_gdpecon.pdf) (hereinafter ``GDP and the Economy: Second Estimates
for the Q4 2009'').
\436\ Id., at 2.
---------------------------------------------------------------------------
FIGURE 51: GDP
[GRAPHIC] [TIFF OMITTED] T5737A.039
c. Interest Rates
Interest rates are, for many reasons, a matter of great
importance to the housing market. Lenders price mortgages at a
spread over a baseline interest rate, such as a Treasury
security with a comparable term. In addition to affecting
affordability and home prices, the mortgage payment on an
adjustable rate mortgage depends on prevailing market interest
rates. As interest rates on mortgages reset over the next three
years, as discussed in Section C, prevailing interest rates
could help determine whether the housing market recovers or
crashes again.
The section below looks at several interest rates that
affect the residential mortgage market. Although market forces
play a major role in determining most interest rates, the
Federal Reserve monetary policy also has a great effect on
rates in normal times, and is thus central to understanding the
prospects of the housing market and foreclosure mitigation
efforts. Short-term rates generally reflect the current supply
and demand for credit in the economy, as well as inflation,
government fiscal policy, monetary policy actions, market
sentiments, foreign exchange rates, and other factors. Longer-
term rates are influenced by these factors as well, but more
importantly, by expectations of future short-term rates. If
lenders expect rates to rise in the future, they will require a
higher interest rate on long-term loans. Long-term rates are
more market driven and less sensitive to central bank policies
than are short-term rates.
In general, interest rates remain extremely low in both
nominal and real terms. Rates set or targeted by the Federal
Reserve remain near the ``zero bound,'' beyond which nominal
rates cannot fall, constraining the ability of monetary policy
to stimulate the economy.
i. Discount Rate Increase
The discount rate is the interest rate charged to financial
institutions on the fully secured loans they receive from the
Federal Reserve--the ``discount window.'' Short-term discount
rate loans from the Federal Reserve are available to depository
institutions that offer eligible collateral, such as Treasury
securities, or more recently, certain mortgage-backed
securities. By setting the discount rate at a certain level,
the Federal Reserve can influence other market-set interest
rates.\437\ On February 18, 2010, the Federal Reserve Board
announced a 25-basis point increase in the discount rate to
0.75 percent. This was the first increase in the discount rate
since June 2006, near the height of the housing bubble.
Furthermore, the Federal Reserve shortened the maturity period
for borrowing under the primary credit window from 28 days to
overnight.\438\
---------------------------------------------------------------------------
\437\ Federal Reserve Bank of New York, The Discount Window (Aug.
2007) (online at www.newyorkfed.org/aboutthefed/fedpoint/ fed18.html).
\438\ Board of Governors of the Federal Reserve System, Federal
Reserve Approves Modifications to the Terms of Its Discount Window
Lending Programs (Feb. 18, 2010) (online at www.federalreserve.gov/
newsevents/press/monetary/ 20100218a.htm).
---------------------------------------------------------------------------
ii. Fed Funds Rate
The Fed Funds rate, the interest rate at which depository
institutions loan funds held at the Federal Reserve to other
depository institutions, was 0.20 percent on April 6, 2010.
Interbank borrowing at the Fed Funds rate is a major source of
liquidity in the banking system. Although the actual rate is
set by the market, it is greatly influenced by the Federal
Reserve, which uses open market operations to hold the rate at
a predetermined target as part of its monetary policy. These
actions to target a particular rate affect the amount of
reserves in the banking system, and consequently influence bank
lending policies and behavior.\439\ This rate has fluctuated
from 0.05 to 0.20 percent from October 2009 through March 2010.
This is down considerably from rates above 2 percent at the
height of the credit crunch in late 2008.\440\
---------------------------------------------------------------------------
\439\ Federal Reserve Bank of New York, Federal Funds (Aug. 2007)
(online at www.newyorkfed.org/aboutthefed/ fedpoint/fed15.html).
\440\ Board of Governors of the Federal Reserve System, Selected
Interest Rates, Fed Funds Rate, Daily Series (online at
www.federalreserve.gov/releases/h15/ data/Daily/H15_FF_O.txt) (accessed
Apr. 8, 2010). As of March 16, 2010, the Federal Open Market
Committee's target range for the federal funds rate was 0 to 1/4
percent. Board of Governors of the Federal Reserve System, FOMC
Statement (Mar. 16, 2010) (online at www.federalreserve.gov/
newsevents/press/monetary/ 20100316a.htm) (hereinafter ``FOMC
Statement'').
---------------------------------------------------------------------------
Many market observers have viewed the Federal Reserve's
recent decisions, including raising the discount rate,
shortening the maturity period for borrowing under the primary
credit window, and the decision to allow four Federal Reserve
programs established to provide liquidity at the height of the
crisis to expire as indicators that the Federal Reserve may
target an increase in the Fed Funds rate in the near
future.\441\ The current extremely low interest rates, with
short-term rates near zero, concern some members of the Federal
Reserve, who believe that extended periods of low rates fuel
speculative asset bubbles.\442\ A policy of continued monetary
tightening would inevitably drive up mortgage rates. On
February 24, 2010, however, Chairman of the Board of Governors
of the Federal Reserve System Ben S. Bernanke stated:
---------------------------------------------------------------------------
\441\ The four Federal Reserve facilities were the Primary Dealer
Credit Facility (PDCF), the Term Securities Lending Facility (TSLF),
the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility (AMLF), and the Commercial Paper Funding Facility (CPFF).
\442\ FOMC Statement, supra note 440 (noting the dissent of Kansas
City Fed President Thomas M. Hoenig); see also Peter Barnes Interview
with Kansas City Fed President Thomas Hoenig (Fox Business Network
television broadcast Mar. 24, 2010).
The FOMC [Federal Open Market Committee] continues to
anticipate that economic conditions--including low
rates of resource utilization, subdued inflation
trends, and stable inflation expectations--are likely
to warrant exceptionally low levels of the federal
funds rate for an extended period.\443\
---------------------------------------------------------------------------
\443\ House Committee on Financial Services, Written Testimony of
Ben S. Bernanke, chairman, Board of Governors of the Federal Reserve
System, Semiannual Monetary Policy Report to the Congress, at 3 (Feb.
24, 2010) (online atwww.house.gov/apps/list/hearing/financialsvcs_dem/
022410_mpr_house-financial-services.pdf).
Although the meaning of ``an extended period'' is
deliberately vague, Federal Reserve Bank of Chicago President
Charles Evans (who is not an FOMC voting member) has suggested
that this term means approximately six months, a considerably
shorter time than many observers had assumed the term
meant.\444\
---------------------------------------------------------------------------
\444\ Robert Flint, Defining Fed's Extended Period, Wall Street
Journal (Feb. 26, 2010) (online at blogs.wsj.com/marketbeat/2010/02/26/
defining-feds-extended-period/).
---------------------------------------------------------------------------
iii. Treasury Yields
The yields of Treasury securities trading in the secondary
market, that is, the effective rate of return from these
securities at market prices, are the most common benchmark
interest rates used by banks to determine the rates on loans,
including many mortgages (i.e., long-term market-determined
interest rates). The yield of 30-year Treasury bonds, the most
widely followed Treasury yield, was 4.74 percent as of April 7,
2010. Yields of all maturities are low in historical terms. The
yield curve, a graphical representation of the yields of
Treasury securities of all maturities, is ``normal'' (longer
maturities bear higher yields) and relatively steep. For
example, the difference between 2-year and 10-year Treasury
yields was 2.83 percent on April 7, 2010.\445\ Long-term and
short-term interest rates tend to move together but may react
differently to market or economic changes. Two-year notes and
other shorter term rates are impacted primarily by monetary
policy, responding quickly and precisely to actions taken by
the Federal Reserve such as changes to the discount rate. Long-
term interest rates, on the other hand, behave in a more
complicated manner, incorporating expectations for inflation
and future interest rates as well as supply and demand
conditions in the mortgage-backed securities market. Absent
Federal Reserve activity in Treasury markets or mortgage-backed
securities markets, long-term interest rates move somewhat
independently from Federal Reserve action. A steep yield curve
is considered a sign of economic optimism among bond investors,
and often precedes an economic recovery. In April 1992, for
example, the yield curve was relatively steep as the economy
emerged from recession and the savings and loan debacle. A
steeper yield curve indicates that investors expect higher
short-term interest rates in the future. Higher rates are
usually, though not always, a reaction to inflation driven by
increased economic activity.\446\
---------------------------------------------------------------------------
\445\ U.S. Department of the Treasury, Daily Treasury Yield Curve
Rates (online at www.ustreas.gov/offices/domestic-finance/debt-
management/interest-rate/yield.shtml) (accessed Apr. 8, 2010).
\446\ PIMCO, Yield Curve Basics (July, 2006) (online at
www.pimco.com/LeftNav/Bond+Basics/2006/ Yield_Curve_Basics.htm).
---------------------------------------------------------------------------
d. Economic Sector Surveys
Business surveys are often useful for illuminating trends
that are occurring in the economy or providing insight into the
thinking of business leaders. The Institute for Supply
Management's Report on Business (Non-Manufacturing), which
tracks the health of the service sector of the economy, showed
general improvement in its most recent report from March 2010.
Business activity/production and new orders both grew at
increasingly faster rates than in previous months. Inventories
fell again, but at a slower rate than February. However, these
positive signs were countered by the survey's results on
inventory sentiment, which indicated that for the 154th
straight month, service businesses believe that there is too
much inventory in the system. Reported service employment also
declined, albeit at a slowing rate.\447\ This continued lack of
hiring may indicate that service business owners lack
confidence in the strength of the economy.
---------------------------------------------------------------------------
\447\ Institute for Supply Management, March 2010 Non-Manufacturing
ISM Report on Business (Apr. 5, 2010) (online at www.ism.ws/ISMReport/
NonMfgROB.cfm).
---------------------------------------------------------------------------
The Philadelphia Federal Reserve's widely followed
manufacturing sector survey showed an increase in its
``diffusion index'' in March to a level of 18.9, up from 17.6
in February. This increase means that survey respondents
reported an increase in business activity. The diffusion index
has remained positive for seven consecutive months, indicating
a steady revival of the manufacturing sector. Survey responses
in specific business activity categories showed positive
numbers for new orders, shipments, and employment in March. The
report also concluded that manufacturers remain optimistic
about future business activity.\448\
---------------------------------------------------------------------------
\448\ Federal Reserve Bank of Philadelphia, March 2010 Business
Outlook Survey (Mar. 2010) (online at www.phil.frb.org/research-and-
data/regional-economy/business-outlook-survey/2010/bos0310.pdf).
ANNEX II: WHAT'S GOING ON IN ARIZONA, CALIFORNIA, FLORIDA, NEVADA, AND
MICHIGAN?
Although the troubles in the housing market have affected
all areas of the country, as shown by statistics in Annex I,
certain markets have been particularly struck by the downturn
in housing prices. This annex examines the dire housing market
conditions in Arizona, California, Florida, Michigan, and
Nevada. With the exception of Michigan, the states that boomed
the most during the bubble years are now suffering the most
severe bust.
a. What are their housing market and economic indicator statistics?
Figure 52 below shows some housing related indicators for
the five hardest hit states.
FIGURE 52: STATE INFORMATION
--------------------------------------------------------------------------------------------------------------------------------------------------------
FHFA
FHFA Housing Housing FHFA Percent of Unemployment
Price Index % Price Index Housing Borrowers in Delinquency Percentage of Rate (as of
Change 2001- % Change Price Index Negative Rate (90 Loans in 12/31/09)
2006 \449\ Since Q4 % Change Equity \452\ days+) \453\ Foreclosure \454\ \455\
2006 \450\ 2009 \451\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Arizona......................................... 97% (36)% (12.7)% 51.3% 7.13% 6.07% 9.1%
California...................................... 106% (38)% (0.4)% 35.1% 6.93% 5.56% 12.4%
Florida......................................... 107% (37)% (8.2)% 47.8% 6.99% 13.44% 11.8%
Nevada.......................................... 99% (48)% (17.3)% 69.9% 9.28% 9.76% 13.0%
Michigan........................................ 16% (20)% (2.8)% 38.5% 6.57% 4.56% 14.6%
National Average................................ 55% (10)% (1.2)% 23.8% 5.09% 4.58% 9.7%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\449\ HPI Historical Reports (2000-2009), supra note 324.
\450\ U.S. and Census Division Monthly Purchase Only Index, supra note 330 (accessed Apr. 13, 2010); U.S. and Census Division Monthly Purchase Only
Index, supra note 330 (accessed Apr. 13, 2010).
\451\ Federal Housing Finance Agency, Purchase Only Index: State HPI Summary (online at www.fhfa.gov/Default.aspx?Page=215&Type=summary) (accessed Apr.
13, 2010).
\452\ Underwater Mortgages On the Rise, supra note 369.
\453\ MBA National Delinquency Survey, supra note 1 (subscription required); see also February MBA Survey Results, supra note 1.
\454\ MBA National Delinquency Survey, supra note 1 (subscription required); see also February MBA Survey Results, supra note 1.
\455\ U.S. Department of Labor, Bureau of Labor Statistics, Regional and State Employment and Unemployment Summary--December 2009 (Jan. 22, 2010)
(online at www.bls.gov/news.release/archives/laus_01222010.pdf).
b. Why are things so bad there?
Although all five states have been severely affected by the
bursting of the housing bubble, Michigan's situation is
different from the other states. The drop in Michigan property
values has been largely due to the continued decline of the
state's economic engine, the big three American auto companies.
Although this downward trend has been going on for nearly 40
years, the acute difficulties the automakers faced in 2008 and
2009 led to massive layoffs and plant closings that crippled an
already weak housing market. As mentioned earlier, Michigan has
the nation's highest unemployment rate. Many homes in the
state's largest city, Detroit, are nearly worthless due to a
lack of employed, qualified buyers. Detroit has 33,000 vacant
homes, and over 90,000 abandoned lots. To cope with this
situation, the Mayor of Detroit has proposed bulldozing large
portions of the city to reduce the area that the city
government must serve.\456\
---------------------------------------------------------------------------
\456\ Michael Snyder, The Mayor of Detroit's Radical Plan to
Bulldoze One Quarter of the City, Business Insider (Mar. 10, 2010)
(online at www.businessinsider.com/the-mayor-of-detroits-radical-plan-
to-bulldoze-one-quarter-of-the-city-2010-3).
---------------------------------------------------------------------------
Arizona, California, Florida, and Nevada have the opposite
problem. They are high growth ``sunbelt'' areas, which have
attracted millions of new residents in recent decades from
declining areas such as Michigan, for instance. An excessive
level of optimism about the economic prospects of these states
led to many poorly planned investments and severe
overdevelopment of housing. These four states saw particularly
extreme versions of the trends that affected the country as a
whole during the housing bubble: easy credit, sloppy mortgage
underwriting, subprime and stated income lending, general
disregard for credit risk, the rampant use of exotic loans,
overdevelopment of new homes, and manic, speculative home
buying. The existence of a real estate market cycle was largely
disregarded, conservative underwriting standards were derided
as obsolete, and rising home prices drove a ``sky's the limit''
mentality.
For example, option ARMs, perhaps the most risky type of
mortgage generally available to the public, were particularly
common in these four states. Nearly 75 percent of all option
ARMs were originated in these four states.\457\ By contrast,
these states account for only 17 percent of all mortgages
outstanding in the United States.\458\
---------------------------------------------------------------------------
\457\ Levitin & Twomey, supra note 78.
\458\ MBA National Delinquency Survey, supra note 1 (subscription
required); see also February MBA Survey Results, supra note 1.
---------------------------------------------------------------------------
It is difficult to predict how long the decline will
continue in the five hardest-hit states, and how far prices
will ultimately fall, given the various external factors that
could affect the housing market. Such predictions are outside
the scope of this report. However, a research arm of the credit
rating agency Moody's, Economy.com, predicts home prices in
most parts of the five states will not return to their previous
highs until the year 2030 or later. Figure 53, below, shows
Economy.com's estimates of housing recovery dates by
metropolitan statistical area.
FIGURE 53: YEAR IN WHICH METRO AREA REGAINS PREVIOUS HOUSE PRICE PEAK
\459\
---------------------------------------------------------------------------
\459\ Fiserv, FHFA, and Moody's Economy.com, Hardest Hit Metros
Will Take Longer to Recover (2010).
[GRAPHIC] [TIFF OMITTED] T5737A.040
ANNEX III: LEGAL AUTHORITY
EESA authorizes the Secretary of the Treasury to establish
the TARP ``to purchase, and to make and fund commitments to
purchase, troubled assets from any financial institution.''
\460\ Treasury has structured HAMP to involve commitments to
purchase financial instruments from mortgage servicers, but the
underlying economics of the program are that Treasury is paying
not for financial instruments but for the servicing of loan
modifications. Members of the Panel have questioned Treasury as
to whether expenditures under HAMP are in fact authorized by
EESA.
---------------------------------------------------------------------------
\460\ 12 U.S.C. Sec. 5211(a)(1).
---------------------------------------------------------------------------
A. Treasury's Position
Treasury's General Counsel, George Madison, has shared with
the Panel a summary of his legal views on the authority for
HAMP, but Treasury has asserted that the letter containing that
summary would be subject to the attorney-client privilege as
applied to third parties, and is subject to the Panel's
confidentiality arrangements with Treasury.\461\ The General
Counsel's letter is addressed to Panel member Paul Atkins and
copied to Panel Chair Elizabeth Warren. Treasury has stated
that the Panel may summarize or quote from the letter but may
not reprint it in its original form.
---------------------------------------------------------------------------
\461\ The letter explains that ``[w]hile it is not our custom to
release internal legal analyses, [this letter] share[s] a summary of my
legal views with you.'' Letter from George Madison, general counsel,
U.S. Department of the Treasury, to Paul Atkins, member, Congressional
Oversight Panel (Jan. 12, 2010).
---------------------------------------------------------------------------
The letter states that HAMP is authorized by sections 101
and 109 of EESA. It argues that a HAMP Servicer Participation
Agreement involves Treasury's commitment to purchase a
``financial instrument'' that is a ``troubled asset,'' from a
financial institution and thus the commitment and purchase are
authorized by section 101. It adds that the payments Treasury
makes are ``credit enhancements'' authorized by section 109.
Treasury's primary assertion is that it is purchasing
``financial instruments'' from servicers. The HAMP Servicer
Participation Agreement is titled ``Commitment to Purchase
Financial Instrument and Servicer Participation Agreement,''
and includes an attachment titled ``Financial Instrument.''
\462\
---------------------------------------------------------------------------
\462\ U.S. Department of the Treasury, Commitment to Purchase
Financial Instrument and Servicer Participation Agreement (online at
www.hmpadmin.com/ portal/docs/hamp_servicer/
servicerparticipationagreement.pdf) (hereinafter ``Commitment to
Purchase Financial Instrument and Servicer Participation Agreement'')
(accessed on Apr. 5, 2010).
---------------------------------------------------------------------------
The General Counsel notes that EESA authorizes the
Secretary of the Treasury to establish a program to purchase
``troubled assets'' from financial institutions. He notes that
``troubled assets'' are defined under EESA to include ``any
other financial instrument that the Secretary, after
consultation with the Chairman of the Board of Governors of the
Federal Reserve System, determines the purchase of which is
necessary to promote financial market stability, but only upon
transmittal of such determination, in writing, to the
appropriate committees of Congress.'' \463\ (Emphasis added.)
---------------------------------------------------------------------------
\463\ Letter from George Madison, general counsel, U.S. Department
of the Treasury, to Paul Atkins, member, Congressional Oversight Panel
(Jan. 12, 2010) (citing 12 U.S.C. Sec. 5202(9)).
---------------------------------------------------------------------------
EESA does not define ``financial instrument,'' but the
letter outlines the view that:
In the absence of such a definition, the Supreme
Court has directed that a statutory term be construed
in accordance with its ordinary or natural meaning. The
ordinary and natural meaning of `financial instrument'
includes a written legal document that defines duties
and grants rights and is financial in nature. This
meaning is supported by dictionary definitions, federal
case law and published financial accounting
standards.\464\
---------------------------------------------------------------------------
\464\ The letter does not contain citations to dictionary
definitions, federal case law, or published financial accounting
standards.
---------------------------------------------------------------------------
The letter continues:
The instruments executed by the servicers easily fall
within the ordinary and natural meaning of the term
`financial instrument' in that each one is a written
legal document that defines duties and grants rights
and pertains to the receipt and use of money. The
instruments recite the servicers' respective promises
(i.e., duties) to Treasury to modify mortgages meeting
criteria set out in the instrument and to distribute
the funds paid by Treasury consistent with the
directions set out in the instruments.
The General Counsel explains that, while Treasury has
``generally used its authority under EESA to purchase financial
instruments in the form of shares of preferred stock or
promissory notes, the ordinary or natural meaning of the term
`financial instrument' is not limited to stock certificates and
promissory notes,'' given Treasury's authority, noted above, to
purchase ``any financial instrument that the Secretary, after
consultation with the Chairman of the Board of Governors of the
Federal Reserve System, determines the purchase of which is
necessary to promote financial market stability.'' The letter
states that EESA section 2(1), which says that the purpose of
EESA is ``to immediately provide authority and facilities that
the Secretary of the Treasury can use to restore liquidity and
stability to the financial system of the United States,'' gives
the Secretary ``broad authority'' to determine which type of
financial instrument can be purchased.
The General Counsel points to the legislative history to
support the interpretation that the Secretary has broad
authority to determine which type of financial instrument to
purchase \465\ and to use some of this authority to purchase
assets ``directly for foreclosure mitigation.'' \466\ His
letter explains that ``[t]he contract that the Secretary enters
into with each servicer is a `commitment' to purchase the
financial instrument executed by the servicer, and the
Secretary `purchases' the financial instrument by making the
payments to the servicer set out in the contract.'' It
continues that:
---------------------------------------------------------------------------
\465\ The letter cites to Senator Dodd's statement:
Section 101 of the legislation gives broad authority for
the Treasury Secretary, in consultation with other
agencies, to purchase and make and fund commitments to
purchase troubled assets from financial institutions on
terms and conditions that he determines. This legislation
does not limit the Secretary to specific actions, such as
direct purchases or reverse auctions but could include
other actions, such as a more direct recapitalization of
the financial system or other alternatives that the
Secretary deems are in the taxpayers' best interest and
---------------------------------------------------------------------------
that of the Nation's economy.
154 Cong. Rec. 10283 (daily ed. Oct 1, 2008) (statement of Sen. Dodd).
\466\ To support this, the letter points to a colloquy between
Representatives Edwards and Frank ``in which Representative Frank
clarified this important legislative intent that Treasury use a portion
of the spending authority in EESA to mitigate mortgage foreclosures:''
Ms. EDWARDS of Maryland. Madam Speaker, if I might make an
---------------------------------------------------------------------------
inquiry of the gentleman from Massachusetts.
In my reading of the bill, I am trying to understand
whether it is your belief that the Treasury has the
authority under this legislation to use some portion of
that $700 billion to deal directly with homeowners,
specifically with homeowners facing foreclosure. And could
you clarify for me the circumstances under which the
Treasury has that authority when it wholly owns the
mortgage, and when that mortgage is being serviced by loan
servicing centers?
Mr. FRANK of Massachusetts. If the gentlewoman will yield,
the answer is absolutely. And I can tell you that I have
spoken to the Treasury, to the Secretary, to tell him it is
very important; that many Members will be voting for this
bill only with the understanding that he will use that
authority. And I believe he accepts that fact and will act
on it.
154 Cong. Rec. H10770-10771 (daily ed. Oct 3, 2008) (statements of Rep.
Edwards and Rep. Frank).
[T]he purchase contracts . . . are enforceable
contracts that contain the servicers' agreement to
issue their financial instruments to the Secretary, and
the Secretary's agreement to purchase those financial
instruments. Treasury pays the purchase price for those
financial instruments, as valuable consideration, by
making the payments of money to the servicers set out
in the contracts. The contracts entered into by the
Secretary . . . with the servicers are plainly
`commitments to purchase troubled assets' authorized by
section 101(a)(1) of EESA and the Secretary is
`purchasing' financial instruments by making those
payments.
The letter also describes the purchase price of each contract
as the series of payments that Treasury makes to a servicer as
incentive payments for the servicer and for the servicer to
pass along to the lender/investor or borrower.
Finally, the General Counsel explains that the servicers
are ``financial institutions'' under section 3(5) of EESA. He
notes that the statutory definition of ``institution'' does not
contain an exclusive list, so long as the organization is
created and regulated under U.S. federal, state, possession or
territorial law, has substantial U.S. operations, and is not
operating as or owned by foreign central banks.
In addition, the General Counsel characterizes the payments
made to servicers as ``credit enhancements'' under EESA section
109(a). The letter states that EESA section 109(a) says that
``the Secretary may use loan guarantees and credit enhancements
to facilitate loan modifications to prevent avoidable
foreclosures.'' The letter notes that neither EESA nor Black's
Law Dictionary defines ``credit enhancement.'' The analysis in
this instance cites to the Encyclopedia of Banking and Finance
(10th ed. 1994), which ``defines `credit enhancement' as being
`[a] generic term for collateral, letters of credit,
guarantees, and other contractual mechanisms aimed at reducing
credit risk.' '' The letter explains how each payment is a
credit enhancement:
The Treasury commitment in the proposed contacts
[sic] to make interest-subsidy and principal-reduction
payments to lenders and investors plainly enhances the
creditworthiness of the homeowners; it therefore
constitutes a credit enhancement that facilitates loan
modifications by the servicers. The Treasury commitment
to make the `home price depreciation reserve' payments
is a contractual mechanism that operates to guarantee,
or at least mitigate loss to, the value of the
collateral for the credit transaction as a whole; it
therefore also constitutes a credit enhancement that
facilitates loan modifications. The Treasury commitment
to make the proposed payments to servicers to
extinguish junior liens reduces the homeowners' overall
indebtedness; it therefore plainly constitutes a credit
enhancement that facilitates loan modifications. The
Treasury commitment to make the proposed payments for
foreclosure alternatives minimizes the negative impact
that a foreclosure would have on the credit rating of a
borrower; it therefore constitutes a credit
enhancement, vis-a-vis foreclosure, that prevents
avoidable foreclosure. Lastly, it is highly
questionable that servicers would enter into thousands
of loan modifications under the HAMP, and therefore
doubtful that the HAMP could be successfully
implemented, if the HAMP did not include incentive and
`success' payments to servicers. Moreover, the
`success' payments increase the likelihood that
servicers will modify loans that are more likely than
other troubled loans to continue to be repaid.\467\
---------------------------------------------------------------------------
\467\ The letter is dated the day before the announcement of the
Hardest Hit Fund program, therefore it does not describe how the
payments to local housing finance agencies are financial instruments or
credit enhancements.
Finally, the letter points out that section 109(a) of EESA
instructs the Treasury that, ``to the extent that the Secretary
acquires mortgages and mortgage-backed securities,'' it shall
encourage the servicers of the underlying mortgages to take
advantage of existing programs to minimize foreclosures. The
letter explains that ``while Treasury has not acquired whole
mortgages or mortgage-backed securities under EESA, Treasury
has, in furtherance of the spirit of that provision, developed
and implemented the voluntary HAMP to encourage servicers to
minimize foreclosures on mortgages . . . that the Treasury does
not even own.''
B. Outside Legal Experts' Opinions
The Panel requested outside legal opinions from
independent, nationally recognized legal scholars. Professor
Eric Posner of the University of Chicago Law School and
Professors John A.E. Pottow and Stephen P. Croley from the
University of Michigan Law School provided the Panel with
opinions. The full text of the two opinions is included in this
Annex.
Professor Posner concluded that under clear administrative
law precedent, Treasury would be accorded deference in its
determination of what constitutes a financial instrument and
therefore a troubled asset under section 3(9)(B) of the EESA,
so long as its determination was ``reasonable.'' Professor
Posner noted, however, that even with such deference,
Treasury's determination that HAMP payments to servicers were
pursuant to the commitment to purchase a financial instrument
was in fact not reasonable, as the contracts with servicers
were not commitments to purchase financial instruments in any
sense that the term ``financial instrument'' is used elsewhere
in federal law or the Uniform Commercial Code. Professor Posner
noted, however, that it is unlikely that any party would have
legal standing to challenge HAMP's legality.
Professors Pottow and Croley concluded that HAMP is
implicitly authorized by EESA's purposes and design. They state
that section 109 of EESA applies expressly to loans in which
Treasury has an ownership interest, but does not preclude
Treasury from establishing a program for loans which it does
not own. They note that, despite Treasury's titling of the
``Servicer Participation Agreement'' as also being a
``Commitment to Purchase Financial Instrument,'' even under
``the most generous legal interpretation,'' the document is a
service contract and not a financial instrument. In doing so,
Professors Pottow and Croley examined a number of definitions
of ``financial instrument'' from the Uniform Commercial Code,
case law, the tax code, and the Office of Thrift Supervision.
Turning to EESA's statutory purpose, they explain that Congress
gave Treasury broad powers to stabilize the financial markets,
including the mortgage arena. They point to the purposes of
EESA as set out in section 2, as well as the Secretary's
``necessary and appropriate'' implementing power. Professors
Pottow and Croley conclude that Treasury's actions with regard
to HAMP would ``likely pass the `arbitrary and capricious' bar
of EESA section 119(a)(1)'' and would not constitute an ``abuse
of discretion'' under 119(a)(1).
The Panel takes no position on the ultimate legality of
HAMP and suggests that HAMP's legality is an issue best suited
for Congress to take up if it is in fact concerned by
Treasury's actions.\468\
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\468\ The Panel recognizes the possibility that even if Treasury's
actions are extra-legal, Congressional inaction could be interpreted as
ratification.
---------------------------------------------------------------------------
To: Professor Elizabeth Warren, Chair, Congressional Oversight
Panel
From: Eric A. Posner, University of Chicago Law School
Date: April 1, 2010
Re: Treasury's Authority Under the Emergency Economic Stabilization
Act to Implement the Home Affordable Modification Program
----------------------------------------------------------------------
------------------------------
You have asked me for my opinion as to whether Treasury has
the authority under the Emergency Economic Stabilization Act
(EESA) to use TARP funds to finance the Home Affordable
Modification Program (HAMP). I conclude that Treasury has no
such authority. However, because no one may have standing to
challenge HAMP, it seems unlikely that it will be struck down
by a court. I do not represent anyone, and have not received
compensation for this opinion from the Congressional Oversight
Panel or anyone else.
I. The Home Affordable Modification Program
HAMP is available to certain homeowners at risk of
foreclosure. The central feature of this program is a model
contract entitled the Commitment to Purchase Financial
Instrument and Servicer Participation Agreement (the
``Commitment''). Fannie Mae, as financial agent of the United
States, may enter this contract with any loan servicer eligible
to participate in the program. Under the contract, Fannie Mae
pays loan servicers to modify mortgage contracts in favor of
homeowners, using funds made available to Treasury under EESA.
In addition, Fannie Mae channels money through the loan
servicer to homeowners who stay current with HAMP modified
loans and investors whose contractual rights are modified. The
overall goal is to reduce mortgage payments without
compromising the rights of investors. This should both reduce
the incidence of foreclosure and strengthen the financial
condition of banks and other institutions that hold mortgages
and mortgage-related securities.
II. Treasury's Authority Under EESA
EESA grants Treasury the authority:
to purchase, and to make and fund commitments to
purchase, troubled assets from any financial
institution, on such terms and conditions as are
determined by the Secretary, and in accordance with
this Act and the policies and procedures developed and
published by the Secretary.
EESA, Sec. 101(a)(1). Under the Commitment, Treasury pays the
loan servicers to modify mortgage contracts and to transfer
funds to investors and homeowners. Accordingly, the issue is
whether Treasury's authority to ``purchase'' a ``troubled
asset'' entitles it to pay for a loan modification--or, in
short, whether a loan modification is a troubled asset.\469\
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\469\ A question could also be raised whether Treasury has the
authority to make payments to homeowners and investors, using loan
servicers as agents.
---------------------------------------------------------------------------
``Troubled assets'' are defined as:
(A) residential or commercial mortgages and any
securities, obligations, or other instruments that are
based on or related to such mortgages, that in each
case was originated or issued on or before March 14,
2008, the purchase of which the Secretary determines
promotes financial market stability; and
(B) any other financial instrument that the
Secretary, after consultation with the Chairman of the
Board of Governors of the Federal Reserve System,
determines the purchase of which is necessary to
promote financial market stability, but only upon
transmittal of such determination, in writing, to the
appropriate committees of Congress.
EESA, Sec. 3(9). Accordingly, a troubled asset is a mortgage, a
mortgage-related security, a mortgage-related obligation, a
mortgage-related instrument, or ``any other financial
instrument'' that satisfies the criteria in subsection (B).
This definition spells trouble for HAMP. Under HAMP, Fannie
does not purchase an ``asset,'' troubled or otherwise, from the
loan servicer. It purchases, in effect, a right to have loans
modified. Loan modification is a service: it is the performance
of a series of actions rather than a tangible or intangible
thing. Subsection A defines a troubled asset as, among other
things, a mortgage. A loan modification is not a mortgage--the
loan servicer is modifying other people's mortgages; it is not
selling mortgages that it owns or they own. Subsection A also
defines a troubled asset as a mortgage-related security or
obligation. A loan modification is a service, not a security or
other obligation.
Subsection A also defines a troubled asset as a mortgage-
related instrument and Subsection B broadens this definition to
include ``any other financial instrument.'' The Commitment is
clearly written with these definitions in mind. The Commitment
refers to the loan servicer's obligation to modify loans as a
``financial instrument'' in numerous places. Its title mentions
a ``commitment to purchase financial instrument'' (emphasis
added). Section 1(B) of the Commitment provides that ``Servicer
shall perform the Services described in (i) the Financial
Instrument attached hereto as Exhibit B (the `Financial
Instrument').'' Section 4(A) provides that ``Fannie Mae, in its
capacity as a financial agent of the United States, agrees to
purchase, and Servicer agrees to sell to Fannie Mae, in such
capacity, the Financial Instrument that is executed and
delivered by Servicer to Fannie Mae in the form attached hereto
as Exhibit B, in consideration for the payment by Fannie Mae,
as agent, of the Purchase Price.'' Exhibit B supplies the form
of the Financial Instrument. The Financial Instrument, as it
appears in Exhibit B, restates Fannie Mae's obligation to pay
for the Servicer's services; makes that obligation conditional
on prior performance of those services and other actions;
imposes various reporting requirements on the Servicer;
requires the Servicer to implement an internal control program;
states that the Servicer promises to comply with various laws,
regulations, business norms, and the like; and much else in
this vein.
Is the Financial Instrument a mortgage-related
``instrument'' or a ``financial instrument'' within the meaning
of Sec. 3(9) of EESA? If so, Treasury has the authority to fund
HAMP. If not, it does not have the authority under EESA.
EESA does not define ``financial instrument.'' Accordingly,
one must look outside the statute for definitions. The
legislative history is uninformative.\470\ One lay definition
of ``financial instrument'' is ``cash; evidence of an ownership
interest in an entity; or a contractual right to receive, or
deliver, cash or another financial instrument.''\471\ On this
definition, the Financial Instrument is not a financial
instrument because it is not cash; it is not evidence of an
ownership interest but instead a contractual right to services;
and it is not a contractual right to receive cash but a
contractual right to receive services. Nor is it a contractual
right to receive or deliver another financial instrument.
---------------------------------------------------------------------------
\470\ For the legislative history, see www.dechert.com/emailings/
fre-fmrpu/fre-fmrpu-1.html. One senator, in passing, gives the
following examples of ``financial instrument'': mortgage-related
assets, securities based on credit card payments or auto loans, and
common stock. See www.dechert.com/emailings/fre-fmrpu/docs/Senate-
Debate-1.pdf, p. S10240.
\471\ Wikipedia, en.wikipedia.org/wiki/Financial_instrument.
---------------------------------------------------------------------------
A legal definition of ``instrument'' can be found in the
Uniform Commercial Code:
``Instrument'' means a negotiable instrument or any
other writing that evidences a right to the payment of
a monetary obligation, is not itself a security
agreement or lease, and is of a type that in ordinary
course of business is transferred by delivery with any
necessary endorsement or assignment. The term does not
include (i) investment property, (ii) letters of
credit, or (iii) writings that evidence a right to
payment arising out of the use of a credit or charge
card or information contained on or for use with the
card.
U.C.C., Sec. 9-102(1)(47). Courts distill this definition into
two elements: (1) a writing that evidences a right to the
payment of a monetary obligation, (2) of a type that in
ordinary course of business is transferred by delivery with any
necessary endorsement or assignment. See, e.g., In re Omega
Environmental Inc., 219 F.3d 984, 986 (9th Cir., 2000) (holding
that a certificate of deposit is an instrument). See also In re
Commercial Money Center, Inc., 392 B.R. 814, 833-34 (Bankr.
App. 9, 2008) (holding that surety bonds are not instruments
because they are not transferrable by delivery in the ordinary
course of business and do not provide for the payment of any
sum certain); In re Matter of Newman, 993 F.2d 90 (5th Cir.,
1993) (holding that an annuity contract is not an instrument
because it is not transferred in the regular course of
business).
None of these courts would regard the Financial Instrument
as an ``instrument'' under the Uniform Commercial Code. The
Financial Instrument is a writing but it does not evidence a
right to the payment of a monetary obligation. Instead, it
evidences a right to the modification of mortgages held by
others. Someone who possess the Financial Instrument, whether
Fannie Mae or a transferee, would have no right to obtain money
from anyone. In addition, as far as I know, writings evidencing
rights to loan modifications are not transferred by delivery in
the ordinary course of business. Such rights may be assigned as
part of a contract, but their value is not embodied in a piece
of paper which is routinely transferred as a way of conveying
value, as is the case for checks, securities, and other
conventional financial instruments.
The U.S. Code contains a number of references to financial
instruments.
The term ``financial instrument'' includes stocks and
other equity interests, evidences of indebtedness,
options, forward or futures contracts, notional
principal contracts, and derivatives.
26 U.S.C. 731(c)(2)(C). This section does not define financial
instrument but lists a series of examples that are consistent
with the definition of instrument in the Uniform Commercial
Code. The term ``financial instrument'' also appears in 18
U.S.C. 514(a)(2), which criminalizes fraudulent use of phony
financial instruments, but does not define the term. Judicial
interpretations of the latter statute are consistent with the
U.C.C. definition and do not provide any support for a broader
interpretation that would encompass transactions like the
Financial Instrument in the Commitment. See, e.g., United
States v. Howick, 263 F.3d 1056 (9th Cir. 2001) (phony Federal
Reserve notes are fictitious instruments). See also United
States v. Sargent, 504 F.3d 767 (9th Cir. 2007) (postage
statements are not financial instruments).
HAMP is consistent with the purposes of EESA, which include
``protect[ing] home values'' and ``preserv[ing]
homeownership.'' EESA, Sec. 2(2)(A) and (B). However, EESA does
not authorize all kinds of transactions that might advance
these goals. Treasury can advance these goals only by
purchasing mortgages, mortgage-related obligations, and
financial instruments. Congress may well have limited Treasury
in this way for reasons expressed in Sec. 2(2)(C): to maximize
overall returns to the taxpayers of the United States.
Purchasing mortgages, securities, and other financial
instruments is plausibly a safer way to protect the public fisc
than paying for services and giving away money to homeowners,
since financial instruments are generally liquid and can be
resold or held to maturity in return for cash.\472\
---------------------------------------------------------------------------
\472\ The U.S. Department of Treasury's definition of ``financial
instrument''--``a written legal document that defines duties and grants
rights and is financial in nature''--would encompass virtually any
financial transaction. The U.S. Department of Treasury's definition
ignores the conventional meaning of ``instrument,'' which is narrower
than that of ``transaction.''
---------------------------------------------------------------------------
Treasury also argues that it has authority under
Sec. 109(a) of EESA, which provides:
To the extent that the Secretary acquires mortgages,
mortgage backed securities, and other assets secured by
residential real estate, including multifamily housing,
the Secretary shall implement a plan that seeks to
maximize assistance for homeowners and use the
authority of the Secretary to encourage the servicers
of the underlying mortgages, considering net present
value to the taxpayer, to take advantage of the HOPE
for Homeowners Program under section 257 of the
National Housing Act or other available programs to
minimize foreclosures. In addition, the Secretary may
use loan guarantees and credit enhancements to
facilitate loan modifications to prevent avoidable
foreclosures.
Treasury argues that the authority to use ``credit
enhancements to facilitate loan modification'' enables it to
pay loan servicers to modify mortgages and to make payments to
investors and homeowners.
However, Sec. 109(a) gives the Secretary this authority
only over mortgages it has acquired, and the HAMP program
involves privately owned mortgages, not mortgages owned by the
government or its agencies. Accordingly, Sec. 109(a) cannot
provide authority for HAMP. In addition, although ``credit
enhancement'' is not defined in EESA, it is a term of art in
the financial world. It refers to a number of conventional
transactions that are used to provide assurances to a creditor
that it will be repaid even if the debtor defaults.\473\ These
transactions include third-party guarantees, where a third
party promises to repay the creditor if the debtor defaults,
and the provision by the debtor of excess collateral, which
protects the creditor against default in case the market value
of the collateral declines. The placement of the term ``credit
enhancement'' next to ``loan guarantees'' in Sec. 109(a)
reinforces this conventional interpretation. Given limits on my
time, I have not been able to track down a definition of
``credit enhancement'' in U.S. statutes or judicial opinions,
but the term does appear (undefined) in a number of statutes
and a survey of the judicial opinions that involve
consideration of those statutes address standard examples of
credit enhancements such as loan guarantees.
---------------------------------------------------------------------------
\473\ See Wikipedia, en.wikipedia.org/wiki/Credit_enhancement.
---------------------------------------------------------------------------
Treasury's argument boils down to a claim that, in effect,
a third party ``uses a credit enhancement'' when it pays a
creditor to give better terms to the debtor because the risk
that the creditor will not be repaid will decline, just as it
does in the case of loan guarantees and excess
collateralization. I am not persuaded but I believe that
reasonable people could disagree on this issue, and that
therefore a court might be willing to defer to Treasury's
interpretation. However, as I noted above, this issue is moot
because Treasury does not have authority under EESA to use
credit enhancements on mortgages that the U.S. government does
not own.
III. Judicial Review
You have asked me whether parties may seek judicial review
of HAMP. This is a closer question.
Section 119 provides for judicial review of actions by the
Secretary pursuant to the authority of EESA under the
``arbitrary and capricious'' standard, but limits the
availability of injunctions. Conceivably, individuals could
also challenge HAMP under the general judicial review
provisions of the Administrative Procedure Act, 5 U.S.C.
Sec. Sec. 702-06, on the ground that the Secretary is acting
outside of EESA, with no authority at all.
However, anyone who seeks to challenge HAMP would need to
have standing, which requires, among other things, an injury.
Taxpayers might argue that HAMP injures them but courts tend to
deny standing where the injury is generalized or
undifferentiated. With the exception of establishment clause
challenges, taxpayers rarely if ever have standing to challenge
spending programs. Investors who are not adequately compensated
under HAMP for losses resulting from mortgage modifications
would have standing. But it is not clear whether such investors
exist.
If a challenge to HAMP reached the merits, Treasury's
interpretation of EESA would be subject to Chevron deference
under Chevron U.S.A. Inc. v. National Resources Defense
Council, 467 U.S. 837 (1984).\474\ However, this deference is
limited. Courts apply a two-step procedure. First, they
determine whether the statute addresses the question at issue.
Second, if not, they determine whether the agency's
interpretation of the statute is ``reasonable.'' For reasons
given in Part II, I do not believe that Treasury's
interpretation of ``financial instrument'' in Sec. 3(9) of EESA
is reasonable. A contractual right to loan modification is not
a financial instrument. Accordingly, if a court were to review
HAMP, it would hold that Treasury does not have the authority
to fund it.
---------------------------------------------------------------------------
\474\ There is disagreement about whether Chevron deference applies
to an agency's interpretation of the statute that confers jurisdiction
on it; for present purposes, I assume that it does.
---------------------------------------------------------------------------
The most serious obstacle to judicial review is standing.
If this obstacle cannot be overcome, then judicial review will
not take place.
To: Elizabeth Warren, Chair, TARP Congressional Oversight Panel
From: Steven Croley, John Pottow
Re: Requested Analysis of HAMP Authority
Date: April 5, 2010
We are two law professors at the University of Michigan
(one specializing in commercial law and the other in
administrative law), who have been asked to analyze the
statutory authority under which the Secretary of the Treasury
(``Secretary'') has promulgated the Home Affordable
Modification Program (``HAMP'') under the Emergency Economic
Stabilization Act of 2008, (``EESA'' or ``Act''), and the
Troubled Asset Relief Program (``TARP'') created by the
Act.\475\ We have been asked to address especially payments to
mortgage servicers.
---------------------------------------------------------------------------
\475\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L.
No. 110-343 Sec. 122.
---------------------------------------------------------------------------
1. Short Answer
(1) Encouraging mortgage servicers to participate in
mortgage modifications through financial incentives, where the
Secretary has taken a direct interest in the mortgages in
question (either through acquisition in whole or in part of the
loan or through investment in securities related to the loan),
is unquestionably authorized by the EESA.
(2) Encouraging servicers to modify mortgages in which the
Secretary has taken no direct interest is not explicitly
authorized by the EESA. Yet incentive payments to mortgage
servicers here seem implicitly consonant with the EESA's design
and purposes. Given the Secretary's considerable discretion
created by the EESA, such payments would most likely survive
any judicial challenge.
2. Scope of HAMP
HAMP is designed to facilitate the modification of
residential mortgage loans as a loss mitigation effort, with
the goal of preventing foreclosure and thus keeping financially
struggling Americans in their homes. We have reviewed the
summary of the HAMP guidelines from online sources, as none
have yet been promulgated in the Code of Federal
Regulations.\476\
---------------------------------------------------------------------------
\476\ MHA Detailed Program Description, supra note 47; HAMP
Guidelines, supra note 106.
---------------------------------------------------------------------------
In relevant part, HAMP sets forth a series of incentives to
encourage mortgage modifications. These include the following,
which we put in quotations for mnemonic ease: ``incentive''
payments of $1,000 for mortgage servicers who successfully
implement a mortgage modification (as well as follow-up
``success fees'' up to $1,000 for modifications that avoid
default for subsequent years); ``reward'' payments for
homeowners who stick to modified repayment schedules;
``insurance'' coverage for depreciating home prices (to
overcome the anxiety mortgagees have to modification in the
face of falling collateral values); ``surrender fees'' for
second-lien holders to give up their largely out-of-the-money
liens; and ``loss sharing'' payments for investors and lenders
who take principal and other reductions on modified loans.
Importantly, the scope of HAMP is broad. Loans eligible for
application seem to cover almost the entire universe of primary
residential mortgages: that is, both mortgages in which the
Secretary (1) has taken a direct interest, either through (a)
acquisition (partial or complete) of the underlying mortgage or
(b) investment in a mortgage-backed security related to the
underlying mortgage, and (2) has no direct financial stake
whatsoever. (Throughout this memo, we call the latter
``stranger'' loans and both of the former ``non-stranger''
loans vis. the Secretary.)
In addition to the summarized HAMP guidelines, we reviewed
what appears to be the implementing document for a HAMP-
participating mortgage servicer--the ``Commitment to Purchase
Financial Instrument and Servicer Participation Agreement''
(``SPA'').\477\ The SPA spells out the terms and conditions by
which a servicer must abide in order to receive its incentive
and other payments under HAMP (and related programs).
---------------------------------------------------------------------------
\477\ Commitment to Purchase Financial Instrument and Servicer
Participation Agreement, supra note 462 (accessed Apr. 5, 2010).
---------------------------------------------------------------------------
The SPA, by its own express terms (in its introductory
recitals) does not apply to so-called Government-sponsored
entity (``GSE'') loans, that is, loans ``owned, securitized, or
guaranteed by Fannie Mae or Freddie Mac.'' \478\ This is so,
according to the same recitals, because the guidelines for
those participating servicers are being promulgated by the
Federal National Mortgage Association (``Fannie Mae'') and the
Federal Home Loan Mortgage Corporation (``Freddie Mac'').\479\
Thus, the scope of the SPA we consider covers only mortgages
that have no connection to Fannie Mae or Freddie Mac.
---------------------------------------------------------------------------
\478\ Id.
\479\ Id.
---------------------------------------------------------------------------
Similarly, the guidelines instruct that ``FHA, VA and rural
housing loans will be addressed through standalone modification
programs run by those agencies.'' \480\ As such, HAMP appears
to be a residuum program that applies to (1) loans not covered
by, e.g., FHA, VA, USDA, Fannie Mae and Freddie Mac programs,
but nevertheless find themselves under the purview of the
federal government (through acquisition by TARP), as well as
(2) loans with a more tangential (if any) connection to the
federal government, i.e., purely private loans uninsured by
Fannie Mae or Freddie Mac. In sum, it appears that the SPA (and
hence HAMP) seems to cover both stranger and non-stranger
loans.
---------------------------------------------------------------------------
\480\ HAMP Guidelines, supra note 106, at 15.
---------------------------------------------------------------------------
3. Statutory Authority under the EESA
a. General Authority
The EESA contains at least three potential bases of textual
authority for HAMP. The first is found in the explicit mortgage
foreclosure prevention and homeowner assistance directives of
Title I, sections 109 and 110. The second relates to the
general authority to acquire (and insure) troubled assets under
Title I, sections 101 and 102. The third flows from the broader
structural objectives of the Act, expressed in its statement of
purposes in section 2.
These specific provisions of the Act are best interpreted,
however, not in a vacuum but rather mindful of what we perceive
to be distinctive characteristics of the EESA relevant to the
question of HAMP's authority. In the first place, the statute
delegates very broad authority to the Secretary, expressly
using statutory language generally understood to convey that
the Secretary will exercise discretion to achieve the purposes
of the Act and that the Secretary will enjoy deference in the
exercise of that discretion. Thus, section 101(c) states:
``Necessary Actions.--The Secretary is authorized to take such
actions as the Secretary deems necessary to carry out the
authorities in this Act, including, without limitation, the
following: . . . .'' (emphasis added).\481\
---------------------------------------------------------------------------
\481\ EESA Sec. 101(c); see also EESA Sec. 101(c)(5) (``Issuing
such regulations and other guidance as may be necessary or appropriate
to define terms or carry out the authorities or purposes of this
Act'').
---------------------------------------------------------------------------
Second, related to this wide discretion, the Act is sparse
in terms of just what the Secretary is supposed to do in
discharging his mandate under section 2 to ``restore liquidity
and stability to the financial system of the United States.''
This wide latitude may indeed be why Congress concomitantly
created this Oversight Panel--to keep a watch over this huge
grant of power (and money).
Third, the EESA repeatedly instructs the Secretary to focus
on the interests of homeowners, wholly apart from the duty to
help stabilize the financial markets. For example, section 2(B)
says that the purposes of the Act are to ``preserve
homeownership.'' Similarly, section 103(3) (``Considerations'')
says that the Secretary ``shall'' take into consideration ``the
need to help families keep their homes and to stabilize
communities.'' This focus on homeowners is consistent with the
legislative history. More than a few legislators were expressly
focused on how the bill would help American homeowners
struggling to stay in their homes.\482\
---------------------------------------------------------------------------
\482\ See, e.g., House Committee on Financial Services, Oversight
of Implementation of the Emergency Economic Stabilization Act of 2008
and of Government Lending and Insurance Facilities: Impact on the
Economy and Credit Availability, 110th Cong. (Nov. 18, 2008) (statement
of Rep. Waters) (online at www.house.gov/apps/list/hearing/
financialsvcs_dem/hr111808.shtml) (reminding ``we gave [the Secretary]
the authority . . . to deal with foreclosure mitigation efforts'' and
that ``I sold [members of my caucus and the Congressional Black Caucus]
this program and told them about my faith in your ability to carry out
this program'').
---------------------------------------------------------------------------
b. Specific Provisions
i. Section 109's Requirements
Captioned ``Foreclosure Mitigation Efforts,'' section 109
requires (``shall'') the Secretary to implement ``a plan that
seeks to maximize assistance for homeowners,'' and use the
authority of the Secretary to ``encourage'' the servicers of
those underlying mortgages to avail themselves to the ``HOPE
for Homeowners Program . . . or other available programs
[presumably such as HAMP] to minimize foreclosures.'' In
addition, the Secretary also ``may'' use loan guarantees and
credit enhancements to ``facilitate'' loan modifications ``to
prevent avoidable foreclosures.''
Section 109's operative term ``encourage'' of course does
not confine the Secretary to rhetorical encouragement. Economic
incentives, such as use of the Tax Code, are a common way the
federal government ``encourages'' desirable actions. And again,
the Secretary enjoys considerable discretion concerning how
best to implement those plans and provide that encouragement.
Nor does the Act restrict the tools the Secretary chooses to
deploy in the exercise of his statutory authority, assuming of
course that he is acting within the scope of that authority.
Therefore, the Secretary's decision to ``encourage'' servicers
through, for example, the $1,000 incentive payments under HAMP
seems easily authorized by section 109 of the Act.
The sticking point with reliance on section 109 to ground
all of HAMP is the section's introductory clause, ``To the
extent the Secretary acquires mortgages, mortgage backed
securities, and other assets secured by residential real estate
. . . the Secretary shall implement a plan [etc.].'' This means
that the section 109 powers are intended to apply only to
``non-stranger'' loans, i.e., mortgages where the Secretary has
purchased or otherwise come into possession of the loans
themselves (or securities based on the loans). There is no
basis, given this textual qualifier, for applying section 109
to ``stranger'' loans to which the Secretary has no connection.
That said, Congress's decision to use ``shall'' in
commanding the Secretary to undertake foreclosure mitigation
efforts regarding non-stranger loans should not be overlooked.
That is, by using mandatory language here, it is possible that
while foreclosure mitigation would be demanded for non-stranger
loans, the Secretary has discretion whether to extend his
foreclosure mitigation efforts to stranger loans (if he decided
it was a desirable use of his authority to deal with those
loans). In other words, requiring servicer encouragement for
non-stranger loans does not preclude servicer encouragement for
stranger loans, should the Secretary determine that the latter
would also further congressional purposes.
By contrast, if section 109 had, instead, said that to the
extent the Secretary acquires non-stranger loans, he ``may''
implement a plan to help the underlying homeowners, it would be
textually awkward to contend that he would also be authorized
to establish such a program for stranger loans, as the creation
of a servicer encouragement initiative would depend upon
acquisition of mortgages. But since Congress chose to give the
Secretary a specific mandate regarding non-stranger loans, we
find its silence on stranger loans more consistent with
ambivalence than with an implied restriction of authority.
To be clear, section 109 plainly does not authorize
servicer encouragement for stranger loans. The question is
whether it precludes it. In candor, the point could be argued
either way. But in light of section 109's hierarchically
inferior placement to section 101 and the significance of its
mandatory language, this provision certainly can be read not to
foreclose the inclusion of stranger loans under HAMP.
ii. Section 101(a)'s Authority to Purchase ``Troubled
Assets''
Apart from what the Secretary is obligated to do under
section 109, the Secretary has very broad powers under section
101 to establish TARP and to use TARP ``to purchase, and to
make and fund commitments to purchase, troubled assets from any
financial institution. . . '' \483\ ``Troubled assets'' are
defined as ``residential or commercial mortgages and any
securities, obligations, or other instruments that are based on
or related to such mortgages. . . .'' \484\ Thus, any non-
stranger loans in which the Secretary has made some sort of
purchase connection would clearly be troubled assets and have
explicit statutory authority.
---------------------------------------------------------------------------
\483\ EESA Sec. 101(a)(1).
\484\ EESA Sec. 3(9)(a).
---------------------------------------------------------------------------
But the definition of troubled asset also includes ``any
other financial instrument that the Secretary . . . determines
the purchase of which is necessary to promote financial market
stability.'' \485\ This definition raises the question whether
categorizing stranger loans as ``troubled assets'' might
provide an explicit statutory basis for HAMP's servicer
incentives for those loans. That is, if the stranger loans
could somehow be found to come under the purview of section 101
as troubled assets, then the Secretary would be given wide
latitude under section 101(c)(5) to ``issue such regulations
and other guidance as may be necessary or appropriate to carry
out the authorities or purposes of this Act'' (emphasis added).
---------------------------------------------------------------------------
\485\ EESA Sec. 3(9)(b).
---------------------------------------------------------------------------
The extension of HAMP to stranger loans is through the SPA.
The SPA, in turn, purports to be not just a ``Servicer
Participation Agreement'' (which it most clearly is) but also a
``Commitment to Purchase [a] Financial Instrument.'' Thus, the
financial instrument supposedly being purchased presumably
falls under the section 9(B) definition of ``troubled asset,''
thereby providing a basis under the EESA for incentivizing
servicer modification of stranger loans. The problem here is
that notwithstanding its caption, the SPA is not a ``financial
instrument,'' at least under traditional conceptions of
commercial law. It looks more like a services contract, or
perhaps an offer for a unilateral contract to be accepted by
performance, or maybe even just a term sheet of rules that a
servicer hoping to enjoy the fruits of a HAMP incentive must
follow. Even if it rises to the level of being a contract,
however, it is still not a conventional instrument (financial
or otherwise). True, an ``instrument'' can be and often is a
``contract,'' but that does not mean that a ``contract'' is an
``instrument.''
Commercial lawyers usually talk about ``instruments'' as
being ``negotiable instruments,'' such as drafts and
notes.\486\ And ``negotiable instrument'' is defined as ``an
unconditional promise or order to pay a fixed amount of money,
with or without interest or other charges described in the
promise or order . . . [listing requirements].'' (A draft is
typified by a check and a note by a promissory note.) \487\
This of course implies a residuum of non-negotiable
instruments, and that is true: an otherwise negotiable
promissory note can be rendered non-negotiable by the simple
inscription ``non-negotiable'' at the top, which presumably
would relegate it to being a mere instrument.\488\
---------------------------------------------------------------------------
\486\ See U.C.C. Sec. 3-104(b) (`` `Instrument' means a negotiable
instrument'').
\487\ U.C.C. Sec. 3-104(a).
\488\ Article 9 of the Uniform Commercial Code defines
``instrument'' more broadly: `` `Instrument' means a negotiable
instrument (defined in Section 3-104), or a certificated security
(defined in Section 8-102) or any other writing which evidences a right
to the payment of money and is not itself a security agreement or lease
and is of a type which is in ordinary course of business transferred by
delivery with any necessary indorsement or assignment.'' See U.C.C.
Sec. 9-105(1)(i) (emphasis added). Thus, even this broader definition
requires some element of negotiability.
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A ``financial instrument'' is typically understood to have
some bearing to a security or similar financial
obligation.\489\ For example, equity shares of a corporation
would be financial instruments, as would be debt issued by that
corporation. And of course, contracts of financial exotica
synthetically derived from those instruments are themselves
financial instruments (puts, swaps, repos, etc.). But the
underlying thread is that they are all related to financing. To
illustrate, here are three definitions (taken from a court
required to define ``financial instrument'' for terms of a
patent dispute):\490\
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\489\ Under Article 8 of the Uniform Commercial Code, a
``certificated security'' is represented by an instrument. See id.
Sec. 8-102(1)(a). Securities can also be uncertificated. See U.C.C.
Sec. 8-102(1)(b).
\490\ See EBS Dealing Res., Inc. v. Intercontinental Exch., Inc.,
379 F. Supp. 2d 521, 526 (S.D.N.Y. 2005).
A contractual claim held by one party on another,
such as a security, currency, or derivatives contract.
A financial instrument entitles the other to be paid in
cash or with another financial instrument.\491\
---------------------------------------------------------------------------
\491\ Dictionary of Banking and Finance, at 159 (Standard Chartered
Bank, 1st ed., 1998).
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Generic term for those securities or contracts which
provide the holder with a claim on an obligor. Such
instruments include common stock, preferred stock,
bonds, loans, money market instruments, and other
contractually binding obligations. The common feature
which differentiates a financial instrument from a
commercial or trade credit is the right to receive cash
or another financial instrument from the obligor and/or
the ability to exchange for cash the instrument with
another entity. The definition can also include
instruments where the claim is contingent, as with
derivatives.\492\
---------------------------------------------------------------------------
\492\ The Handbook of International Financial Terms, at 220 (Oxford
Univ. Press, 1st ed., 1997).
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[A]n enforceable contract obligating one party to pay
money or transfer property to another. Credit
documents, (e.g., drafts, bonds, etc.) are instruments,
as are documents of title, such as deeds or stock
certificates.\493\
---------------------------------------------------------------------------
\493\ The McGraw-Hill Dictionary of International Trade and
Finance, at 202 (McGraw-Hill, 1st ed., 1994).
Indeed, even the Tax Code defines financial instrument as
including ``stocks and other equity interests, evidences of
indebtedness, options, forward or futures contracts, notional
principal contracts, and derivatives.'' \494\ And Treasury's
Office of Thrift Supervision shared a report at a congressional
hearing that defined financial instrument (using the Financial
Accounting Standards Board's definition, although cautioning
that that definition was ``general'' and more broad than a
regulatory definition), ultimately summarizing: ``A fundamental
characteristic of all financial instruments is that they give
rise to cash flows. The value of any financial instrument can
be estimated by projecting the amount and timing of future net
cash flows associated with the instrument, and discounting
those cash flows with appropriate discount rates.'' \495\
---------------------------------------------------------------------------
\494\ I.R.C. Sec. 731(c)(2)(C).
\495\ House Committee on Banking, Finance and Urban Affairs, Safety
and Soundness Issues Related to Bank Derivatives Activities, Part I, at
217, 103rd Cong. (Oct. 28, 1993) (quoting Office of Thrift Supervision,
Risk Management Division, Methodologies for Estimating Economic Values
in the OTS Net Portfolio Value Model (May 1993)).
---------------------------------------------------------------------------
The SPA, by contrast, is not the issuance of debt or other
financing mechanism.\496\ Nor is it in any sense intended to be
a demand for payment. To break it down into its component
parts, the SPA purports to be a commitment by Fannie Mae to
``purchase'' a ``financial instrument'' from the servicer (thus
the servicer is apparently ``selling'' something to Fannie
Mae). What is being ``sold,'' in turn, is the self-styled
``financial instrument'' that appears as Exhibit B to the SPA.
And that Exhibit B--while most assuredly captioned ``Financial
Instrument''--at no place summarizes just exactly what the
servicer is ``selling'' (or, more precisely, ``issuing'') to
Fannie Mae. Surreally, the document merely recites that for
``good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, [the] Servicer agrees as
follows . . .'' \497\ and then proceeds to list a catalogue of
undertakings the servicer agrees to abide by, involving
auditing, data retention, and so forth.\498\
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\496\ In fact, the servicer is the ``issuer'' of the supposed
instrument, and the servicer does not obligate itself to provide any
cash flows to Fannie Mae, in the way the issuer of a real financial
instrument would make, say, bond coupon payments.
\497\ Commitment to Purchase Financial Instrument and Servicer
Participation Agreement, supra note 462 (accessed April 5, 2010).
\498\ See Commitment to Purchase Financial Instrument and Servicer
Participation Agreement, supra note 462, at Exhibit B (accessed April
5, 2010) (``Form of Financial Instrument'').
---------------------------------------------------------------------------
As mentioned, the most generous legal interpretation of
this document would be a service contract, whereby the
participating servicer agrees to undertake specific services
for Fannie Mae, although even that is unclear because it is
uncertain whether a servicer who wanted to discontinue
participation in HAMP would be subject to any damages for
breach. This furthers the interpretation of Exhibit B as
actually just a term sheet of rules that servicers must abide
by in order to get paid under HAMP. Using diction that sounds
related to financial instruments--for example, characterizing
the servicers as ``issuing'' Exhibit B (much like debt is
``Issued'' in a real financial instrument)--and using a caption
the declares a service contract (or term sheet) a ``financial
instrument'' does not make it a financial instrument.
Accordingly, it is difficult to shoehorn HAMP incentives for
stranger loans into ``troubled assets'' under the theory that
the SPAs transform them into financial instruments.
iii. Section 2's Statutory Purposes
The third possibility for finding statutory authority in
the EESA for HAMP's application to stranger loans is in the
intrinsic structure, design, and indeed fundamental purpose of
the law, given the wide implementing discretion accorded the
Secretary in section 101(c). Section 2 spells out the purposes
of the Act as follows:
(1) to immediately provide authority and facilities
that the Secretary . . . can use to restore liquidity
and stability to the financial system of the United
States; and
(2) to ensure that such authority and such facilities
are used in a manner that--
(A) protects home values, college funds,
retirement accounts, and life savings;
(B) preserves homeownership and promotes jobs
and economic growth;
(C) maximizes overall returns to the
taxpayers of the United States; and
(D) provides public accountability for the
exercise of such authority.
Crucially, the Secretary is admonished to fix the financial
collapse the markets experienced beginning in 2007-2008 as best
he can by price-stabilizing market intervention. This is a
broad and necessarily vague mandate, given the complexity of
the problem to which the EESA responds, but obviously an urgent
one. It is unsurprising that each individual tool the Secretary
might deploy (e.g., rewards for timely paying mortgagors) is
not spelled out with a specific legislative provision. Such
legislative brevity is far from novel. Congress routinely
leaves matters of implementation, including choice of
regulatory tools and devices, to the discretion of expert
administrative agencies (here, Treasury).
To be sure, even broad grants of discretion have limits.
Thus, the difficult question arises: if the Secretary is only
explicitly authorized in section 101 to acquire mortgages
(which become non-stranger loans in our taxonomy), which he in
turn can certainly regulate under HAMP, can he then also
regulate stranger loans under HAMP by relying upon his broader,
structural powers delegated by the EESA?
Arguably yes. The mortgage market the Secretary is trying
to stabilize is huge, with countless securities and underlying
loans. Some of the loans the Secretary will acquire, either in
whole or in part, and either directly or indirectly through
mortgage-backed securities based on those loans. These are the
non-stranger loans to which the Secretary has some direct
financial connection. One purpose of buying these loans and
securities is to help prop up their prices and hence try to
avoid a downward price spiral. But in trying to stabilize the
housing market, government-backed loans are unquestionably
affected by stranger loans too. The fate of housing prices and
the value of mortgages and mortgage-based securities are not
segregated according to stranger and non-stranger loans.
Accordingly, given that the success of TARP itself will
depend in part upon developments in the purely private mortgage
and mortgage-backed securities market--and thus upon
homeowners' abilities to modify their purely private
mortgages--the Secretary has a parallel need to provide an
incentive for private mortgage modifications. He is presumably
animated by ``defensive'' motivations--preventing a selloff of
foreclosed homes that would decimate real estate prices and in
turn make the process of price stabilizing the non-stranger
loans all the more difficult: the downward vector of prices the
Secretary would be trying to fight would be strengthened. Under
this analysis, then, incentivizing the modification of those
stranger loans to stabilize prices, as a safeguard against his
own non-stranger loans' pricing, is not only reasonable but
arguably necessary. Such a purpose would very likely pass the
``arbitrary and capricious'' bar; nor would modest servicer
incentives constitute an ``abuse of discretion.'' \499\
---------------------------------------------------------------------------
\499\ EESA Sec. 119(a)(1) (setting forth the standard of judicial
review).
---------------------------------------------------------------------------
Thus, the most viable basis for the valid inclusion of
stranger loans under the EESA stems from the broad market-
rescuing mandate of section 2 and the general structure and
goal of the statute as a whole (coupled with the expansive
``necessary or appropriate'' implementing power explicitly
conferred by section 101(c)).
4. Legislative History
There is little legislative history directly on point with
respect to servicer incentives, but there is some clear
understanding, at least by the Chairman of the House Financial
Services Committee, that servicer incentive payments were
anticipated. For example, at a November 18, 2008 hearing (after
the EESA's enactment, so perhaps ``subsequent legislative
history'') in discussing model foreclosure mitigation
guidelines, the Chairwoman of the FDIC (Sheila Bair) explained
she would provide ``a financial incentive for servicers and
investors'' and ``administrative expenses of $1,000 per
modification for servicers.'' \500\ The Chairman then responded
``I would note that, in the TARP, there is explicit
authorization to provide funding for servicers in appropriate
context.'' \501\
---------------------------------------------------------------------------
\500\ House Committee on Financial Services, Oversight of
Implementation of the Emergency Economic Stabilization Act of 2008 and
of Government Lending and Insurance Facilities: Impact on the Economy
and Credit Availability, 110th Cong. (Nov. 18, 2008) (statement of
Sheila Bair) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:46593.pdf).
\501\ House Committee on Financial Services, Oversight of
Implementation of the Emergency Economic Stabilization Act of 2008 and
of Government Lending and Insurance Facilities: Impact on the Economy
and Credit Availability, 110th Cong. (Nov. 18, 2008) (statement of Rep.
Frank) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:46593.pdf).
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In a hearing the next year, regarding legislation that
became known as ``TARP II,'' and shortly before HAMP's
guidelines were promulgated, Chairman Frank reiterated his
belief that servicer incentive priorities lay in TARP:
One proposal that has been floating around is that
there may be a requirement that if you want to make
[foreclosure mitigation programs] work, you will have
to pay the servicer something. Servicers were not set
up originally to do this. We believe there is authority
in the first TARP to do this. Some of the lawyers in
the Federal Government have told people that there
isn't. That is being discussed. If there were to be a
definitive decision that there wouldn't be, I think if
there is no such authority, then I think we should get
it.\502\
---------------------------------------------------------------------------
\502\ House Committee on Financial Services, Promoting Bank
Liquidity and Lending Through Deposit Insurance, HOPE for Homeowners,
and Other Enhancements, 111th Cong., at 3 (Feb. 3, 2009) (statement of
Rep. Frank) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=111_house_hearings&docid=f:48672.pdf).
To be clear, Chairman Frank's comments are silent about the
distinction between stranger and non-stranger loans, and so
cannot be relied upon to answer the most difficult question of
HAMP's statutory authority. It could be that he was simply
opining on the easier question whether incentive payments are a
specific tool the Secretary can use under TARP to ``encourage''
foreclosure relief. If this is what some ``Federal Government
lawyers'' were concerned about, we respectfully disagree and
think the broad discretion of the EESA would clearly give the
Secretary such power for government-backed loans. (Framed
another way, we see nothing in the EESA that would prohibit the
Secretary in the exercise of his broad authority from using
servicer incentive payments for non-stranger loans.)
The legislative history does not otherwise shed light on
the issues in question.
5. Other Statutes and Bills
a. TARP II
The ``TARP Reform and Accountability Act of 2009,'' H.R.
384 (so-called ``TARP II''), has passed the House and has been
referred to the Senate. In it, section 203(3) augments the EESA
by providing the Secretary with authority to establish ``[a]
program under which the Secretary may make payments to
servicers, including servicers that are not affiliated with a
depository institution, who implement modifications to
mortgages. . . .'' \503\ Accompanying legislative history
explains, ``The bill also provides several alternatives for
foreclosure mitigation, such as a systematic mortgage
modification program, whole loan purchasing, buy-down of second
mortgages, . . . and incentives and assistance to servicers to
modify loans.'' \504\
---------------------------------------------------------------------------
\503\ H.R. 384, 111th Cong. (2009).
\504\ Statement of Representative Maxine Waters, Congressional
Record, H289 (Jan. 14, 2009).
---------------------------------------------------------------------------
The timing and status of TARP II make it difficult
legislative authority to address. For example, the statements
made by Rep. Waters were made in January 2009, before HAMP had
even had its guidelines promulgated. So it is unclear whether
Congress thought these explicit conferrals of power (especially
the extension to servicers that were not affiliated with
depository institutions) were necessary to plug lacunae left
open in the EESA or whether were codifications and
clarifications of existing practice. Thus, the information to
be gleaned from TARP II regarding the Secretary's legislative
authority under the EESA is ambiguous at best.
b. HOPE for Homeowners
The Panel might be interested to know that the ``Helping
Families Save Their Homes Act of 2009,'' \505\ which amended
the ``HOPE for Homeowners Act of 2008,'' \506\ specifically
added a provision on mortgage servicer payments: ``The
Secretary may establish payment to the--(1) servicer of the
existing senior mortgage or existing subordinate mortgage for
every loan insured under the HOPE for Homeowners Program.''
\507\ According to Senators Dodd and Shelby, the bill
``expand[s] the access to the HOPE for Homeowners Act'' and
``allows for incentive payments to servicers . . . who
participate in the program.'' \508\ Similarly, Rep. Holt
remarked that the bill ``provide[s] greater incentives for
mortgage servicers to modify mortgages under [HOPE] '' and
``permit[s] payments to loan services.'' \509\
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\505\ Pub. L. No. 111-22, Div. A., 123 Stat. 1632 (2009).
\506\ 12 U.S.C. Sec. 1715z-23.
\507\ Pub. L. No. 111-22, Div. A, Sec. 202(a)(11), 123 Stat. 1632
(2009).
\508\ Statement of Senator Christopher Dodd, Congressional Record,
S5003 (May 1, 2009).
\509\ Id.
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This might at first blush imply the Secretary had no
authority under HOPE for Homeowners for incentive payments. But
an analysis of HOPE for Homeowners contrasting it with the EESA
is striking. HOPE for Homeowners establishes an FHA mortgage
modification program, but does so in extensive detail, with,
for example, the criteria for eligible loans and principal
reduction amounts described over several pages of legislation.
This is a far cry from the one-sentence blanket authorization
of the Secretary to ``encourage'' modifications under the EESA.
Under these circumstances, it is not surprising that Congress
felt the need to amend specifically HOPE by statute to add
another tool (servicer incentives).
c. VA Loans
A more illuminating example might be the VA loan
modification procedures prescribed by regulation. Although the
Secretary (of Veterans Affairs) has been paying servicer
incentives for some time, there is no explicit grant of
statutory authority for such payments. That is, although 38
U.S.C. 3720 spells out ``Powers of the Secretary,'' and
subsection (2) confers the power to ``consent to the
modification, with respect to rate of interest, time of payment
of principal or interest or any portion thereof'' of certain
loans acquired by the VA, there is no mention of servicer
payments. Nevertheless, the Secretary promulgated 38 CFR
Sec. 36.4819 (``Servicer loss-mitigation options and
incentives''), which does exactly that. (The cited authority
for this regulation is the general necessary-and-appropriate
power of 38 U.S.C. Sec. 501.) This program has apparently
proceeded without objection. Thus, the VA example shows how
Secretaries use a wide arsenal of tools even beyond those that
are expressly prescribed by statute. (Again, it does not speak
to whether the VA Secretary could address non-VA loans, but
that is where the analogy to a limited domain like VA loans
dissolves; the market-wide sweep of the EESA is a marked
contrast.)
There is not too much directly apposite to glean from
similar bills and laws. The closest is the VA servicer
incentives regulations promulgated by the Secretary of the VA,
which are noteworthy because they seem to emanate from the
general structure and power of the Secretary to modify loans,
not from any textually explicit grant of legislative power.
6. Other Considerations
Two additional points require brief comment. First, we
assume that the servicers are ``financial institutions.''
Second, we considered, and rejected, the idea that the SPAs
might be ``credit enhancements,'' which would bring them under
the scope of the last sentence of section 109(a). Standard
financial usage defines credit enhancements as, for example,
``techniques used by debt issuers to raise credit rating of
their offering, and thereby lower their interest costs.'' \510\
Similarly, the IRS uses the following: ``the term `credit
enhancement' refers to any device, including a contract, letter
of credit, or guaranty, that expands the creditor's rights,
directly or indirectly, beyond the identified property
purchased, constructed, or improved with the funds advanced
and, thus effectively provides as security for a loan the
assets of any person other than the borrower'' \511\ (emphasis
added). Its regulation further expands: ``The acquisition of
bond insurance or any other contract of suretyship by an
initial or subsequent holder of an obligation shall constitute
credit enhancement.'' \512\ The home depreciation insurance
payments under HAMP would most likely be credit enhancements,
as they provide a risk-reduction function similar to the
guarantee. The loss-sharing payments might also be similarly
classified, as too might the interest and principal reduction
payment subsidies. But such reliance for servicer incentives
would be too much of a stretch--and unnecessary, we believe, in
light of our ultimate conclusions regarding the Secretary's
broad powers already conferred by section 101(c).
---------------------------------------------------------------------------
\510\ Dictionary of Finance and Investment Terms, at 127 (5th ed.,
1998) (citing bond insurance or bank letters of credits as examples).
\511\ 26 C.F.R. Sec. 1.861-10T(b)(7) (2009).
\512\ 26 C.F.R. Sec. 1.861-10T(b)(7) (2009).
---------------------------------------------------------------------------
7. Conclusion
While the exercise of authority under HAMP for stranger
mortgages cannot fairly be shoehorned into the definition of
``financial instrument'' from section 9(B), it can be justified
as an exercise of the Secretary's wide discretion under section
2 in light of the structure, design, and purposes of the
statute as a whole. Moreover, the subset of HAMP incentives
properly classified as ``credit enhancements'' can plausibly be
justified by explicit textual reliance--not just implicit
textual support--based on the last sentence of section 109. As
for non-stranger loans to which the Secretary has some
financial connection, there is no problem with the wide array
of tools he has chosen to use to encourage mortgage
modifications, including servicer incentive payments. That
these powers are proposed to be spelled out with greater
specificity in TARP II does not alter our opinion, and we are
indirectly encouraged by the VA regulations as consistent with
our views. Finally, we note that the legislative debates after
the EESA and leading up to TARP II evince a clear congressional
desire to ``do more'' regarding foreclosure mitigation. As
such, an expansive reading of the Secretary's authority in this
area to cover servicer incentives for non-government loans is
consonant with the intended spirit of the statute.
ANNEX IV: UPDATE ON PHILADELPHIA RESIDENTIAL MORTGAGE FORECLOSURE
DIVERSION PILOT PROGRAM
The Panel's October report detailed an innovative mediation
program created by the Philadelphia courts. The Residential
Mortgage Foreclosure Diversion Pilot Program requires ``
`conciliation conferences' in all foreclosure cases involving
residential properties with up to four units that were used as
the owner's primary residence.'' \513\ The program is
effectively a requirement that the parties talk to one another,
face to face, and attempt to come to a solution.
---------------------------------------------------------------------------
\513\ October Oversight Report, supra note 17, at 87.
---------------------------------------------------------------------------
Philadelphia's Office of Housing and Community Development
reports that, between June and December 2009, approximately
9,079 homeowners had conciliation conferences scheduled. Of
these, 5,707 homeowners participated in the conferences.
Approximately 3,074, or 35 percent of the 9,079 homeowners, did
not participate. This 35 percent breaks down into 28 percent
who failed to appear, 2 percent who did not participate because
the homes were vacant, and 4 percent because the homes were not
owner-occupied.\514\
---------------------------------------------------------------------------
\514\ Not counted in the 35 percent are the five percent of
homeowners with scheduled conferences who filed bankruptcy.
---------------------------------------------------------------------------
Of the 5,707 homeowners who did participate, approximately
1,900 homes, or one third of participating homeowners, were
able to modify or refinance their mortgages through the
diversion program. Data are not available regarding the
modifications, including the type of modification,
affordability changes, and redefault rates. Over 3,600 cases,
or 63 percent, remain in active negotiation. Through August
2009, approximately 947 homes, or 16 percent were sold through
sheriff sales.\515\
---------------------------------------------------------------------------
\515\Data collected by the Philadelphia Office of Housing and
Community Development.
---------------------------------------------------------------------------
Although they have the same final goal, it is difficult to
compare HAMP's results to those of the Philadelphia program.
Other than the administrative costs of running the program, the
Philadelphia program does not use any taxpayer dollars.
In addition, the two programs feature very different
participation models; lenders and servicers volunteer to
participate in HAMP, choosing to subject themselves to a regime
requiring them to modify loans in certain circumstances. By
contrast, the lenders involved in the Philadelphia program
participate by court order, but a modification under the
Philadelphia program is entirely voluntary--the only
requirement is that the servicer participate in the
conciliation conference. Because the taxpayer costs of HAMP are
higher, and lenders and servicers affirm their desire to
participate, it should implicitly be held to more stringent
standards.
ANNEX V: PRIVATE FORECLOSURE MITIGATION EFFORTS
In its October 2009 foreclosure mitigation report, the
Panel included information from its survey of major servicers
that had not yet signed HAMP participation agreements. Several
servicers responded that they did not intend to sign up for
HAMP because they believed that their own foreclosure
mitigation programs were superior. More than one year later,
how do the results of these private sector programs compare to
the results of the taxpayer financed HAMP program? \516\ Fifth
Third, Sovereign Bank, and HSBC shared with the Panel data on
their own foreclosure mitigation programs.
---------------------------------------------------------------------------
\516\ It is difficult to directly compare the programs with the
data available to the Panel, as the programs might differ
significantly, and there are also constraints as to the data collected
by the servicers. The Panel would like to thank Fifth Third, Sovereign,
and HSBC for sharing this information.
---------------------------------------------------------------------------
During calendar year 2009, Fifth Third evaluated over 5,300
borrowers for modifications; of these, over 3,600 received
modifications, which included both term extensions and interest
rate reductions. Their borrowers' median front end debt-to-
income ratios went from 38 percent to 17 percent. Borrowers'
median interest rate declined from 6.72 percent to 3.54
percent. Although over 1,700 borrower's principal amount
increased, only 3.85 percent include a balloon payment. The
redefault rate is approximately 30 percent.
The Sovereign Home Loan Modification Program (SHLMP) is
newer, having only started in July 2009. As of February 2010,
SHLMP has evaluated almost 1,300 borrowers, and provided
modifications to 50, with over 300 more offered or in trial
plans. Of the final modifications, most received interest rate
reductions and term extensions, and most had an increase in
principal. Borrowers' median interest rate fell from 6.4
percent to 3.9 percent. Its redfault rate in its first eight
months is less than one percent. Although it does not currently
offer principal forgiveness or forbearance, it will roll out
changes in April that will include the availability of
forbearance.
Through its Foreclosure Avoidance Program, HSBC modified
the terms of 105,000 mortgages during calendar year 2009. Of
the mortgages that HSBC had modified since 2007 through this
program, 48 percent were delinquent or in default. HSBC
modified the mortgages of 36 percent of the borrowers who
applied for the program in 2009. HSBC's modified mortgages
carry an average 30 percent payment reduction. Since its
inception in 2003, the HSBC program provides a minimum $100
monthly payment reduction, and over a 10 percent reduction in
over 90 percent of modifications. HSBC did not provide data on
interest rate reductions, term extensions, principal
forgiveness or forbearance, or balloon payments.
SECTION TWO: ADDITIONAL VIEWS
A. Richard H. Neiman
Foreclosure prevention is not just the right thing to do
for suffering Americans, but it is the lynchpin around which
all other efforts to achieve financial stability revolve.
As the Panel notes, substantial challenges remain in terms
of the timeliness, accountability, and sustainability of
Treasury's foreclosure mitigation programs. Even so,
considerable progress has been made in crafting a responsible
and effective public response.
Treasury should be commended for its recent efforts to
address unemployment and negative equity as drivers of default.
The housing crisis began with subprime foreclosures, as many
borrowers had been given inappropriate products. However, as
the recession progressed, the crisis evolved to impact prime
borrowers whose loans were originally affordable. Loss
mitigation initiatives need to keep pace with the changing
nature of the problem, and Treasury has the difficult task of
casting a wider net while maintaining the integrity of their
programs.
Tension exists between expanding the scope of program
eligibility and issues of fairness and preventing future
defaults. In three key areas, I believe more can be done to
prevent foreclosures while balancing these competing concerns:
1. Assisting homeowners who are experiencing
temporary unemployment or other hardship;
2. Applying lessons learned from HAMP's low
conversion rates to permanent modifications to the
program changes that begin June 1st; and
3. Creating a national mortgage performance database.
1. The Country Needs a National Emergency Mortgage Support Program
(EMS)
Even prime borrowers with loans made on prudent terms are
facing increasing pressure as the crisis has continued. The
number one reason for prime defaults is unemployment and
reduced earnings according to Freddie Mac.
The State Foreclosure Prevention Working Group, a multi-
state effort of state attorneys general and state banking
supervisors, has conducted additional research that brings the
impact on prime loans into sharp focus. The number of prime
loans in foreclosure has doubled in each of the past two years
and now account for 71 percent of the increase in the total
number of loans in foreclosure.
The Administration's Help for the Hardest-Hit Housing
Markets is a step in the right direction, both in terms of
assisting those most in need and in leveraging states as
partners. The recent enhancements to HAMP will also help
unemployed borrowers through temporary payment reductions and
expanded eligibility for permanent modifications.
As positive as these steps are, these measures do not
replace the need for a nationwide Emergency Mortgage Support
system (EMS). The Help for the Hardest-Hit Housing Markets
program by design is limited to target geographies. And, the
recently announced three- to six-month reprieve for the
unemployed under HAMP, although very helpful, is an
insufficient time frame to stabilize household budgets that
have been ravaged by sharply reduced income. The scope of
impacted borrowers is simply too great for anything short of a
national program, which should be administered by the states
with the support of the nonprofit housing community.
The five states of Pennsylvania, Delaware, North Carolina,
New Jersey, and Connecticut currently have state programs to
assist the unemployed facing foreclosure that can help inform a
national model. They take different approaches to making short-
term loans accessible for those who need temporary help while
seeking to ensure that borrowers will repay their loans once
their hardship has passed.
An evaluation of these differing states' approaches
suggests that underwriting criteria should be based on bright
lines for easy administration and program sustainability, but
within a sufficiently flexible framework so that the program
can truly help those it is intended to. For example, the number
of past missed payments by a borrower should be evaluated on a
bright line basis as most of the states do. However, the states
differ on the number of missed payments that should be
permitted, thus demonstrating the need for a guiding principle.
The principal should perhaps be based on the age of the
mortgage loan, whereby newer loans allow for fewer missed
payments. This flexible framework, by incorporating a bright
line, better protects the program from early payment default or
fraud on newly originated mortgages while allowing appropriate
discretion for aged loans to take account of servicer delays in
payment processing or occasional borrower oversight.
A full set of underwriting criteria is beyond the scope of
this supplemental view, but I mention this one example of how
expanded assistance could be achieved within a prudent program
framework. Emergency mortgage support should also involve
lender and investor concessions, including eventual HAMP
modification and perhaps waiving arrearages for unemployed
borrowers.
2. HAMP Implementation Must Learn from HAMP's Low Conversion Rates to
Permanent Modifications
I strongly support the Panel's recommendations concerning
greater data collection on the HAMP process. We need improved
data access to identify the choke points in the process, and
then adapt to ensure that the new standards taking effect on
June 1st meet their objective.
Using this data, Treasury must fully consider whether there
are duplicative or burdensome document requests that could be
waived, for example, in requiring profit and loss statements.
More importantly, the data must address the most frequent
concern I have heard from borrowers and housing counselors as
Chair of New York State's foreclosure mitigation task force:
borrowers do not know the status of their submissions and are
not receiving timely updates as to whether submitted documents
have been received or are deemed adequate. These problems do
not go away on June 1st, but the number of people who will be
denied access to the program will go up if they are not
addressed.
I am troubled that Treasury's expanded web portal, where
borrowers could check their application status and see if
servicers have received necessary documentation, has so far
failed to launch. Although Treasury is seeking to improve the
servicers' notification process, borrowers should be encouraged
and enabled to be proactive in monitoring the processing of
their modification request. I urge Treasury to swiftly
implement this database.
3. A National Mortgage Performance Database Is Needed
The gaps in data access for borrowers seeking modifications
highlight the general lack of data about the mortgage market.
Access to complete information on existing mortgages does not
exist, and the reason is simple: there is no mortgage loan
performance data reporting requirement for the industry.
Once a new loan has been initially reported under the Home
Mortgage Disclosure Act (HMDA), it is no longer tracked in any
public database. HMDA has been a powerful tool for combating
housing discrimination and predatory lending in mortgage
origination, but a performance data reporting requirement would
provide a similar window on servicing practices. Because
lenders and servicers already report the payment status of open
loans to credit bureaus, a performance data standard could be
put into operation quickly.
Currently, Congress, banking regulators, consumer
advocates, and other policymakers are left with incomplete or
unreliable data purchased from third-party vendors or with
limited data provided voluntarily by the industry. This lack of
a public database has hindered the response to the housing
sector. Improved intelligence on the mortgage market is
critical to preventing future crises.
B. J. Mark McWatters
Although I concur with much of the analysis provided in the
April report and respect the sincere and principled views of
the majority, I dissent from the issuance of the report and
offer the observations noted below. I appreciate, however, the
spirit with which the Panel and the staff approached this
complex issue and incorporated suggestions offered during the
drafting process.
Executive Summary
I offer the following summary of my analysis:
The Administration's foreclosure mitigation
programs--including the HAMP and the HARP--have failed to
provide meaningful relief to distressed homeowners and,
disappointingly, the Administration has created a sense of
false expectation among millions of homeowners who reasonably
anticipated that they would have the opportunity to modify or
refinance their troubled mortgage loans under the HAMP and HARP
programs. It is exceedingly difficult not to conclude that
these programs have served as little more than window dressing
carefully structured so as to placate distressed homeowners.
In fairness to the tepid efforts of the
Administration, I remain unconvinced that government sponsored
foreclosure mitigation programs are necessarily capable of
lifting millions of American families out of their underwater
home mortgage loans. In my view, the best foreclosure
mitigation tool is a steady job at a fair wage and not a
hodgepodge of government-subsidized programs that create and
perpetuate moral hazard risks and all but establish the U.S.
government as the implicit guarantor of distressed homeowners.
If the economy is indeed improving, it would be
preferable to let the housing market recover on its own without
the expenditure of additional taxpayer funds and without
investors being forced unnecessarily to recognize huge losses
that will reduce or even deplete their capital base and
increase mortgage loan interest rates.
Insufficient taxpayer funds are available under
HAMP for the government to bail out millions of homeowners in
an equitable and transparent manner. The Administration should
not commit the taxpayers to subsidize any such bailouts where
there is no reasonable expectation for the timely repayment of
such funds.
If the taxpayers do not subsidize reductions in
first and second lien mortgage loan principal to the extent
required under HAMP and the Administration's other foreclosure
mitigation programs, the investors who own the distressed
mortgage loans and securitized debt instruments will bear the
financial burden of such modifications, and the regulatory
capital of many financial institutions will no doubt suffer
from the realization of losses triggered by the write-downs of
mortgage principal. As a result, such institutions may have
little choice but to seek to raise mortgage loan interest rates
and curtail their lending and other financial services
activities to the detriment of qualified individuals and
businesses in search of capital. It is also possible that the
taxpayers will be required to fund additional capital infusions
to those weakened institutions through TARP, a Resolution Trust
Corporation-type structure or otherwise.
In private sector foreclosure mitigation efforts,
however, the participating investors may readily determine the
extent to which voluntary reductions in mortgage principal will
reduce or impair their regulatory capital. As such, each
private sector investor will have the opportunity to develop
its own customized foreclosure mitigation program that
carefully balances the costs and benefits to the institution
that may arise from the write-down of outstanding mortgage
principal. Prudent investors and servicers recognize the
purpose and necessity of offering their borrowers voluntary
mortgage principal reductions in certain well-defined
circumstances, and the government should welcome and encourage
their active participation in and contribution to the
foreclosure mitigation process without the imposition of an
overarching one-size-fits-all mandate.
In the Panel's October report on foreclosure
mitigation, Professor Alan M. White reported to the Panel that,
subject to certain reasonable assumptions, the mortgage loan
investor's net gain from a non-subsidized mortgage modification
could average $80,000 or more per loan over the foreclosure of
the property securing the mortgage loan. If Professor White is
correct in his assessment, why should Treasury mandate that the
taxpayers fund payments so as to motivate investors in mortgage
loans and securitized debt instruments to take actions that are
in their own best interests absent the subsidies?
While many homeowners have recently lost equity
value in their residences, others have suffered substantial
losses in their investment portfolios including their 401(k)
and IRA plans. Why should the taxpayers bail out a homeowner
who has lost $100,000 of home equity value and neglect another
taxpayer who has suffered a $100,000 loss of 401(k) and IRA
retirement savings? This is particularly true if the homeowner
was able to cash out of some or all of the homeowner's equity
appreciation. That is, what public policy goal is served by
bailing out the homeowner who received a ski boat, trailer, and
all wheel drive SUV as proceeds from a $100,000 home equity
loan while neglecting the taxpayer who suffered a $100,000
investment loss in her 401(k) and IRA accounts?
Suppose, instead, two taxpayers purchased
condominiums in the same building for $200,000 each with 100
percent financing. After the condominiums appreciated to
$300,000 each, the first homeowner secured a $100,000 home
equity loan to pay the college tuition of the first homeowner's
son; the second homeowner declined to accept a home equity loan
(expressing a ``this is too good to believe'' skepticism) and
the second homeowner's daughter financed her college tuition
with a $100,000 student loan. If the condominiums subsequently
drop in value to $200,000 each, why should the taxpayers
subsidize the write-off of the first homeowner's home equity
loan and in effect finance the college tuition of the first
homeowner's son while the second homeowner's daughter remains
committed on her $100,000 student loan? I do not concur with
any public policy that would yield such an inequitable
treatment, particularly since the second homeowner acted in a
prudent and fiscally responsible manner by electing not to over
leverage the residence.
What about (i) the retired homeowner whose
residence drops in value by $100,000 after she has diligently
paid each installment on her $300,000 mortgage over 30 years,
(ii) the taxpayer who rents her primary residence and with a
$300,000 mortgage loan purchases real property for investment
purposes that subsequently drops in value by $100,000, and
(iii) the homeowner suffering from a protracted illness or
disability who loses $100,000 of equity value upon the
foreclosure of her residence for failure to pay property taxes?
HAMP and the other programs offered by the Administration offer
no assistance to these taxpayers.
Since it is neither possible nor prudent for the
government to subsidize the taxpayers for the trillions of
dollars of economic losses that have arisen over the past two
years, the government should not undertake to allocate its
limited resources to one group of taxpayers while ignoring the
equally (or more) legitimate economic losses incurred by other
groups.
Only a relatively modest (although certainly not
insignificant) percentage of Americans are facing foreclosure
after properly considering the number of taxpayers who are
current on their mortgage obligations, who are renting their
primary residence, and who own their home free of mortgage
debt. Is it fair to ask the overwhelming majority of Americans
who are struggling each month to meet their own financial
obligations to bail out the relatively modest group of
homeowners who are actually facing foreclosure?
What message does the government send to the
taxpayers by treating a discrete group of homeowners as per se
``victims'' of predatory lending activity and undertaking to
substantially subsidize their mortgage indebtedness at the
direct expense of the vast majority of taxpayers who meet their
financial obligations each month? Will the former group of
homeowners modify their behavior and become more fiscally
prudent, or will they continue to over-leverage their
households with the expectation that the government will offer
yet another taxpayer-funded bailout as needed?
I remain troubled that HAMP itself may have
exacerbated the mortgage loan delinquency and foreclosure
problem by encouraging homeowners to refrain from remitting
their monthly mortgage installments based upon the expectation
that they would ultimately receive a favorable restructure or
principal reduction subsidized by the taxpayers. The curious
incentives offered by HAMP arguably convert the concept of home
ownership into the economic reality of a ``put option''--as
long as a homeowner's residence continues to appreciate in
value the homeowner will not exercise the put option, but as
soon as the residence falls in value the homeowner will elect
to exercise the put option and walk away or threaten to walk
away if a favorable bailout is not offered.
The TARP-funded HAMP program carries a 100 percent
subsidy rate according to the GAO. This means that the U.S.
government expects to recover none of the $50 billion of
taxpayer-sourced TARP funds invested in the HAMP foreclosure
mitigation program. Since Treasury is charged with protecting
the interests of the taxpayers who funded HAMP and the other
TARP programs, I recommend that Treasury's foreclosure
mitigation efforts be structured so as to incorporate an
effective exit strategy by allowing Treasury to participate in
any subsequent appreciation in the home equity of any mortgagor
whose loan is modified under HAMP or any other taxpayer
subsidized program. An equity appreciation right--the
functional equivalent of a warrant in a non-commercial
transaction--will also mitigate the moral hazard risk of
homeowners who may undertake risky loans in the future based on
the assumption that the government will act as a backstop with
no strings attached.
In many instances it is unlikely that holders of
second lien mortgage loans are truly out-of-the-money since
today's fire-sale valuations are not representative of the
actual intermediate to long-term fair market value of the
residential collateral securing the underlying loans. I am not
unsympathetic to the argument that an 80-year historic low in
the housing market does not reflect a true representation of
fair market value, particularly given the tepid mortgage loan
and refinancing markets. If holders of second lien mortgage
loans previously advanced cash to their borrowers under home
equity loans, they may also be reluctant to write off such
loans since the homeowners received actual cash value from the
home equity loans and not just additional over-inflated house
value. It is also entirely possible that holders of second lien
mortgages are reluctant to write down their loans past a
certain level for fear of impairing their regulatory capital,
which could trigger another round of TARP funded bailouts or
worse.
Since the actions of Fannie Mae and Freddie Mac--
the GSEs--may directly influence Treasury's foreclosure
mitigation programs under the TARP, I recommend that the GSEs
conduct their own foreclosure mitigation efforts in an
equitable, fully transparent and accountable manner. The
Federal Reserve, Treasury and the GSEs should disclose on a
regular and periodic basis a detailed analysis of the amount
and specific use of all taxpayer-sourced funds they have spent
and expect to spend on their foreclosure mitigation efforts.
This analysis is in no way intended to diminish
the financial hardship that many Americans are suffering as
they attempt to modify or refinance their underwater home
mortgage loans, and I fully acknowledge and empathize with the
stress and economic uncertainty created from the bursting of
the housing bubble. It is particularly frustrating--although
not surprising--that many of the hardest hit housing markets
are also suffering from seemingly intractable rates of
unemployment and underemployment. As such, I strongly encourage
each mortgage loan and securitized debt investor and servicer
to work with each of their borrowers in good faith, in a
transparent and accountable manner, to reach an economically
reasonable resolution prior to pursuing foreclosure. If
Professor White is correct in his analysis, it is clearly in
the best economic interest of the investors and servicers to
modify the distressed mortgage loans in their portfolios rather
than to seek foreclosure of the underlying residential
collateral. It is regrettable that HAMP and the
Administration's other foreclosure mitigation programs create
disincentives for investors and servicers as well as homeowners
by rewarding their dilatory behavior with the expectation of
enhanced taxpayer-funded subsidies.
EESA authorizes Treasury ``to purchase, and to
make and fund commitments to purchase, troubled assets from any
financial institution.'' \517\ In response to a request from
Panelist Paul Atkins as to whether Treasury was authorized to
fund HAMP under EESA, Treasury's General Counsel delivered a
legal opinion to the Panel concluding that Treasury was so
authorized. Interestingly, Treasury has requested that the
Panel not publish the opinion in the Panel's report even though
Treasury has permitted the Panel to quote extensively from the
opinion in the report and deliver a copy of the opinion to
outside experts. It is my understanding that Treasury has not
asserted an attorney-client privilege regarding the opinion,
but, instead, has suggested that disclosure of the opinion may
impact its ability to assert attorney-client privilege over
related material in other contexts. After reviewing the opinion
and the basis upon which the opinion was rendered, I can think
of no legal theory in support of Treasury's assertion that an
attorney-client privilege could be waived by disclosure of the
opinion now that Treasury has agreed that the Panel may quote
extensively from the opinion in the Panel's report and deliver
a copy of the opinion to outside experts. Treasury's legal
analysis regarding the subject matter of the opinion is fully
disclosed and discussed by the Panel and the outside experts in
the Panel's report. I request that Treasury promptly abandon
any position--including the assertion of an attorney-client
privilege--that would keep the opinion confidential.
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\517\ 12 U.S.C. Sec. 5211.
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HAMP and HARP Have Failed
The Administration's foreclosure mitigation programs--HAMP
and HARP--have failed to provide meaningful relief to
distressed homeowners. Disappointingly, the Administration has
only structured approximately 169,000 ``permanent
modifications'' out of its stated goal of three to four million
modifications and, remarkably, 40 percent or more of such
homeowners will most likely redefault on their permanent
modifications. Worse yet, the Administration has created a
sense of false expectation among millions of homeowners who
reasonably anticipated that they would have the opportunity to
modify or refinance their troubled mortgage loans under the
HAMP and HARP programs. It is exceedingly difficult not to
conclude that these programs have served as little more than
window dressing carefully structured so as to placate
distressed homeowners.
In fairness to the tepid efforts of the Administration, I
remain unconvinced that government sponsored foreclosure
mitigation programs are necessarily capable of lifting millions
of American families out of their underwater home mortgage
loans. In my view, the best foreclosure mitigation tool is a
steady job at a fair wage and not a hodgepodge of government-
subsidized programs that create and perpetuate moral hazard
risks and all but establish the U.S. government as the implicit
guarantor of distressed homeowners. The tax and regulatory
policies of the Administration have injected a substantial and
relentless element of uncertainty into the private sector.
Significant job growth will arguably not return in earnest
until the business and investment communities have been
afforded sufficient opportunity to assess and assimilate the
daunting array of tax increases and enhanced regulatory burdens
that have arisen over the past 15 months. If the Administration
continues to introduce and actively promote new taxes and
regulatory changes, it is not unreasonable to suggest that the
recovery of the employment and housing markets will proceed at
a less than optimal pace.\518\
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\518\ See Burton Folsom Jr. and Anita Folsom, Did FDR End the
Depression?, The Wall Street Journal (Apr. 12, 2010) (online at
online.wsj.com/article/
SB10001424052702304024604575173632046893848.html?KEYWORDS=burt).
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Recovery of the Housing Market without Taxpayer-Funded Subsidies
The Administration suggests the economy is improving, and
there have been positive signs in the housing market. There is
still uncertainty, however, on whether the country is ``out of
the woods'' and can reach sustainable levels of economic growth
and job recovery. If the economy is indeed improving, it would
be preferable to let the housing market recover on its own
without the expenditure of additional taxpayer funds and
without investors being forced unnecessarily to recognize huge
losses that will reduce or even deplete their capital base and
increase mortgage interest rates.\519\ It is worth noting that
the S&P/Case-Shiller Index rose 0.3 percent, seasonally
adjusted, in January from December, its eighth consecutive
monthly increase, and that Los Angeles, San Francisco, San
Diego, Dallas, Washington, D.C., Boston, Denver and Minneapolis
have experienced year-over-year increases in housing prices
from January 2009 to January 2010.\520\ This trend indicates
that the housing market is beginning to recover in many
significant regions of the country on its own without
government assistance and the attendant expenditure of
taxpayer-sourced funds.\521\ The Administration should refrain
from developing its foreclosure mitigation policies by fixating
on the rear-view mirror when the road ahead shows signs of
clearing.
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\519\ Under such an approach, investors and servicers would be free
to exercise their independent business judgments regarding which
mortgage loans to modify or refinance, which to leave unchanged, and
which to foreclose without the influence of government-subsidized
programs and their ability to skew rational market-based economic
decisions. In addition, it is unlikely that the regulatory capital of
the investors will be impaired from the voluntary write-down of
mortgage loan principal.
\520\ See David Streitfeld, U.S. Home Prices Inch Up, But Worries
Remain, New York Times (Mar. 30, 2010) (online at www.nytimes.com/2010/
03/31/business/economy/31econ.html?hp); Javier C. Hernandez, Sharp Rise
in Home Sales in February, New York Times (Apr. 5, 2010) (online at
www.nytimes.com/2010/04/06/business/economy/06econ.html?hp); Lynn
Adler, US Subprime Delinquencies Drop 1st Time in 4 Years, Reuters
(Apr. 8, 2010) (online at www.reuters.com/article/
idUSN0715337220100407); Deborah Solomon, Light at the End of the
Bailout Tunnel, Wall Street Journal (Apr. 12, 2010) (online at
online.wsj.com/article/
SB10001424052702304846504575177950029886696.html?mod=googlenews_wsj).
\521\ It seems unlikely that the 169,000 permanent modifications
out of a projected three to four million HAMP modifications has
affected the housing market for the better.
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The Unaffordable Cost of the Administration's Foreclosure Mitigation
Programs
In my view, insufficient taxpayer funds are available under
HAMP for the government to bail out millions of homeowners in
an equitable and transparent manner. By suggesting otherwise
the Administration continues to propagate misguided
expectations and fuzzy accounting. For example, if the
taxpayers are required to fund $25,000 in payments to
servicers, investors and homeowners per mortgage modification,
the total cost of modifying four million mortgages will equal
$100 billion--exactly twice the amount of TARP funds presently
allocated to HAMP--with a projected 100 percent subsidy or loss
rate to the taxpayers.\522\ If the taxpayers also subsidize
first and second lien mortgage loan principal reductions of
another $50,000 per modification (which may understate the
issue), the total cost to the taxpayers will equal $300
billion\523\--six times the amount of TARP funds presently
allocated to HAMP--with a projected 100 percent subsidy or loss
rate to the taxpayers.\524\ The Administration should not
commit the taxpayers to subsidize any such bailouts where there
is no reasonable expectation for the timely repayment of such
funds.
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\522\ 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).
\523\ The $300 billion total cost figure is derived by multiplying
four million mortgage modifications by $75,000 total cost per mortgage
modification ($25,000 plus $50,000).
\524\ If the actual goal of the Administration is to modify, for
example, only one-million mortgage loans, the cost of the program will
total far less than $300 billion. Such a reduced mandate, however, will
most likely produce only modest results absent robust independent
efforts from private sector mortgage loan and securitized debt
investors and servicers.
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If the taxpayers do not ultimately subsidize reductions in
first and second lien mortgage loan principal to the extent
required under HAMP and the Administration's other foreclosure
mitigation programs, the investors who own the distressed
mortgage loans and securitized debt instruments will bear the
financial burden of such modifications, and the regulatory
capital of many financial institutions will no doubt suffer
from the realization of losses triggered by the write-downs of
mortgage principal. As a result, such institutions may have
little choice but to seek to raise mortgage loan interest rates
and curtail their lending and other financial services
activities to the detriment of qualified individuals and
businesses in search of capital. It is also possible that the
taxpayers will be required to fund additional capital infusions
to those weakened institutions through the TARP, a Resolution
Trust Corporation-type structure, or otherwise.
If the policies of the Administration result in the near-
term recognition of substantial losses by the holders of
mortgage loans and securitized debt instruments, and if the
housing market rebounds over the near to intermediate term, the
Administration will have accomplished little more than
orchestrating a huge transfer of wealth from the investment
community to that select group of homeowners who were able to
qualify for inclusion in HAMP or one of the Administration's
other foreclosure mitigation programs. The taxpayers will share
the burden of this wealth transfer to the extent that the
Administration subsidizes the write-off of mortgage principal
by investors and, if investors who help finance these home
loans anticipate a large risk that they will not be repaid,
homeowners will ultimately suffer through increased mortgage
interest rates.\525\ For example, a mortgage loan or
securitized debt investor will suffer a $50,000 economic loss
\526\ upon forgiving a homeowner's like amount of mortgage
principal, but the homeowner will realize a $50,000 economic
gain if the mortgaged residence subsequently appreciates by a
like amount.\527\ If four million home mortgage loans are
restructured in a similar manner and if the housing market
steadily recovers over the near to intermediate term, the
taxpayers and the investment community will suffer the burden
of transferring approximately $200 billion \528\ of value to
the homeowner participants in the Administration's foreclosure
mitigation programs.\529\
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\525\ It is entirely understandable that many taxpayers may have
little sympathy for the plight of struggling financial institutions
after the generous taxpayer-funded bailouts they received under the
TARP. I appreciate and do not disagree with this sentiment but note
that any action that impairs the capital of these financial
institutions or increases mortgage loan interest rates is not in the
best interest of the taxpayers.
\526\ The investor most likely will also incur additional costs and
expenses with respect to each mortgage loan modification.
\527\ If the contract that governs the mortgage modification
contains an equity participation feature, then some or all of the
$50,000 of subsequent appreciation will inure to the benefit of the
taxpayers and, perhaps, the investors.
\528\ The $200 billion transfer is derived by multiplying four
million mortgage modifications by a $50,000 principal reduction per
mortgage modification.
\529\ By comparison, TARP's Capital Purchase Program totaled $204.9
billion of which $129.8 billion has been repaid as of February 25,
2010. See Congressional Oversight Panel, March Oversight Report: The
Unique Treatment of GMAC under the TARP, at 139 (Mar. 10, 2010) (online
at cop.senate.gov/documents/cop-031110-report.pdf).
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In voluntary private sector foreclosure mitigation efforts,
however, the participating investors may readily determine the
extent to which voluntary reductions in mortgage principal will
reduce or impair their regulatory capital. As such, each
private-sector investor will have the opportunity to develop
its own customized foreclosure mitigation program that
carefully balances the costs and benefits to the investor that
may arise from the write-down of outstanding mortgage
principal. In my view, this approach is preferable to a
government mandated, across-the-board mortgage principal
reduction program where investors are required (or pressured)
to write off a certain amount of mortgage principal in
accordance with a static matrix or a generic ability-to-pay
formula. Prudent investors and servicers recognize the purpose
and necessity of offering their borrowers voluntary mortgage
principal reductions in certain well-defined circumstances, and
the government should welcome and encourage their active
participation in and contribution to the foreclosure mitigation
process without the imposition of an overarching one-size-fits-
all mandate.
Cost Benefit Analysis of Voluntary Mortgage Modification vs.
Foreclosure
In the Panel's October report on foreclosure mitigation,
the Panel retained Professor Alan M. White to conduct a cost-
benefit analysis of HAMP as well as an analysis of whether it
is more cost effective to modify a mortgage loan (without the
payment of any government sponsored subsidy to the servicer,
the investor or the homeowner) or foreclose the property
securing the mortgage loan.\530\ Professor White concluded
that, subject to certain reasonable assumptions, the investor's
net gain from a non-subsidized mortgage modification could
average $80,000 or more per loan versus the foreclosure of the
property securing the mortgage loan.\531\ If Professor White is
correct in his assessment, it is difficult to appreciate why
the government should undertake to subsidize mortgage loan
modifications. Why should Treasury mandate that the taxpayers
fund payments to motivate investors in mortgage loans and
securitized debt instruments to take actions that are in their
own best interests absent the subsidies?
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\530\ See Congressional Oversight Panel, October Oversight Report:
An Assessment of Foreclosure Mitigation Efforts After Six Months:
Additional Views of Congressman Jeb Hensarling (Oct. 9, 2009) (online
at cop.senate.gov/documents/cop-100909-report-hensarling.pdf);
Congressional Oversight Panel, January Oversight Report: Exiting TARP
and Unwinding Its Impact on the Financial Markets: Additional Views of
J. Mark McWatters and Paul S. Atkins (Jan. 13, 2010) (online at
cop.senate.gov/documents/cop-011410-report-atkinsmcwatters.pdf).
\531\ It is important to note that the modification versus
foreclosure analysis does not turn upon the realization of net gains
anywhere near $80,000 per mortgage loan modification. As long as the
mortgage lender breaks even (after considering all costs and expenses
including any addition fees paid to the mortgage servicer as well as
all cost savings from not foreclosing), the lender should prefer
modification.
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If the difficulty with respect to modifying mortgage loans
on a timely basis arises from the unwillingness of mortgage
servicers to discharge their contractual duties without the
receipt of additional fee income, investors may respond by
either suing the servicers for breach of their obligations
under their pooling and servicing agreements or--perhaps more
prudently--agreeing to share a portion of their $80,000 or so
net gain per modification with the servicers. In either event,
the taxpayers will not be required to subsidize the mortgage
loan modification process, the investors will receive a
substantial net gain from modifying their mortgage loans
instead of foreclosing the underlying collateral, the servicers
will receive the benefit of their contractual bargain as,
perhaps, amended, and the homeowners will not suffer the
foreclosure of their residences. If an investor stands to
benefit from the modification of a mortgage loan it seems
reasonable to ask the investor--and not the taxpayers--to share
part of its ``gain'' \532\ from the workout with the servicer
so as to ``motivate'' the servicer to restructure the
loan.\533\ Treasury should not gum up the works by offering to
subsidize the contractual commitments of mortgage servicers.
Any such action will only motivate the investors and servicers
to sit on their hands and wait for Treasury to turn on the TARP
money machine. In other words, why should the government offer
an expensive and needlessly complex taxpayer-funded subsidy
when a cost-effective private sector solution is readily
available?
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\532\ The investor's ``gain'' most likely will be realized in the
form of cash proceeds received and cash expenditures not made over an
extended period. As such, investors will need to balance their cash
flow against the additional cash fees paid to the mortgage servicers.
\533\ I certainly appreciate that mortgage servicers should not
merit the payment of additional fees in order to discharge their
contractual undertakings. Nevertheless, in order to provide prompt
relief to distressed homeowners, such approach is preferable to doing
nothing.
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I am troubled that the otherwise objective and transparent
mortgage loan modification process has been arguably derailed
by the enticement of TARP-funded subsidy payments and the
expectation that the government will increase the subsidy rate
if the mortgage loan and securitized debt investors and
servicers continue to drag their feet and all but refuse to
modify their portfolio of distressed mortgage loans. With the
passage of EESA and the expectation that Treasury would soon
introduce a foreclosure mitigation subsidy program, it is not
surprising that some investors and servicers apparently elected
to adopt a wait-and-see approach. Although unfortunate, such
action is entirely rational and presents the investors and
servicers with the opportunity to receive additional fee income
and net gains by deferring their foreclosure mitigation
efforts.\534\ Without HAMP or a similar program, the investors
and servicers would have arguably undertaken to modify many of
their distressed mortgage loans on an expedited basis so as to
benefit from Professor White's estimated $80,000 net gain. As
long as the government continues to offer investors and
servicers generous and ever-increasing subsidies to perform
actions that are already in their best economic interests it
should surprise no one if some of these recipients revert to
stand-by mode and wait for the best deal. Since the TARP does
not end until October 3, 2010, it is possible that some
investors and servicers will wait on the sidelines for Treasury
to again sweeten an already favorable offer.
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\534\ Although such approach may qualify as ``rational,'' I
strongly disagree with any mortgage lender or servicer who delays its
foreclosure mitigation actions based upon the expectation of additional
TARP-sourced subsidy payments.
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Principles of Equity, Moral Hazard Risks and Implicit Guarantees
The public policy rationale underlying taxpayer-funded
support for HAMP and the Administration's other foreclosure
mitigation efforts appears inequitable when compared to the
assistance offered other taxpayers who have suffered economic
reversals during the recession. While many homeowners have
recently lost equity value in their residences, others have
suffered substantial losses in their investment portfolios,
including in their 401(k) and IRA plans. Why should the
taxpayers bail out a homeowner who has lost $100,000 of home
equity value and neglect another taxpayer who has suffered a
$100,000 loss of 401(k) and IRA retirement savings?
This problem is exacerbated if the homeowner was able to
benefit from accrued home equity appreciation prior to the
decline in housing prices. For example, a homeowner may have
purchased a residence for $200,000 (with 100 percent
financing), taken out a $100,000 home equity loan as the
residence appreciated to $300,000, and used the $100,000 of
cash proceeds from the home equity loan to purchase a ski boat,
trailer, and all-wheel-drive SUV. If the residence subsequently
fell in value to $200,000 it makes little sense for the
taxpayers to subsidize any reduction in the outstanding
principal balance of the home equity loan since the homeowner
actually received the proceeds of the loan in the form of a ski
boat, trailer, and all-wheel-drive SUV and not as overinflated
house value. That is, what public policy goal is served by
bailing out the homeowner who received a ski boat, trailer, and
all-wheel-drive SUV as proceeds from a $100,000 home equity
loan while neglecting the taxpayer who suffered a $100,000
investment loss in her 401(k) and IRA retirement savings
accounts? \535\
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\535\ In other words, why should the homeowner who did not suffer
an economic loss (because she retains the ski boat, trailer, and all-
wheel-drive SUV) receive a $100,000 taxpayer-funded bailout, while the
401(k) and IRA investor who actually suffered a $100,000 economic loss
in her retirement savings receives nothing? More broadly stated, why
should those homeowners who benefitted from the use of their homes as
an ATM expect other taxpayers to offer a bailout?
See Alyssa Katz, How Texas Escaped the Real Estate Foreclosure
Crisis, Washington Post (Apr. 4, 2010) (online at
www.washingtonpost.com/wp-dyn/content/article/2010/04/03/
AR2010040304983.html?sub=AR) (``But there is a broader secret to
Texas's success, and Washington reformers ought to be paying very close
attention. If there's one thing that Congress can do to help protect
borrowers from the worst lending excesses that fueled the mortgage and
financial crises, it's to follow the Lone Star State's lead and put the
brakes on ``cash-out'' refinancing and home-equity lending. A cash-out
refinance is a mortgage taken out for a higher balance than the one on
an existing loan, net of fees. Across the nation, cash-outs became
ubiquitous during the mortgage boom, as skyrocketing house prices made
it possible for homeowners, even those with bad credit, to use their
home equity like an ATM. But not in Texas. There, cash-outs and home-
equity loans cannot total more than 80 percent of a home's appraised
value. There's a 12-day cooling-off period after an application, during
which the borrower can pull out. And when a borrower refinances a
mortgage, it's illegal to get even a dollar back. Texas really means
it: All these protections, and more, are in the state constitution. The
Texas restrictions on mortgage borrowing date from the first days of
statehood in 1845, when the constitution banned home loans.''
See also Did Consumer Protection Laws Prevent Texas Housing
Bubble?, Wall Street Journal (Apr. 6, 2010) (online at blogs.wsj.com/
developments/2010/04/06/did-consumer-protection-laws-prevent-texas-
housing-bubble/tab/print/) (``Texas avoided a bubble to begin with, in
part because it didn't have a rampant speculation and house flipping
that arguably sparked the bubble markets in Florida, Nevada and
Arizona. Indeed, real-estate investors have argued that higher property
taxes in Texas made it less attractive to hold properties as
investments versus states such as California, while urban planners have
argued that less restrictive land-use laws didn't drive up prices by
constraining supply. Texas, of course, may also have fresh memories of
a real-estate bubble, as housing economist Thomas Lawler notes, given
that the state had the ``absolute worst regional downturn in home
prices in the post-World War II period'' prior to the current downturn
during the ``oil patch'' boom and bust of the 1980s. (The bulk of
``default asset management'' operations--how to dispose of
foreclosures--for Fannie Mae and Freddie Mac are still headquartered in
Dallas as a byproduct of that era.) Mr. Lawler says while any actions
designed to discourage excessive borrowing is an ``incredibly good
idea, I'm not sure that Texas is an all around `good' example.''
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Suppose, instead, two taxpayers purchased condominiums in
the same building for $200,000 each with 100 percent financing.
After the condominiums appreciated to $300,000 each, the first
homeowner secured a $100,000 home equity loan to pay the
college tuition of the first homeowner's son; the second
homeowner declined to accept a home equity loan (expressing a
``this is too good to believe'' skepticism) and the second
homeowner's daughter financed her college tuition with a
$100,000 student loan. If the condominiums subsequently drop in
value to $200,000 each, why should the taxpayers subsidize the
write-off of the first homeowner's home equity loan and in
effect finance the college tuition of the first homeowner's son
while the second homeowner's daughter remains committed on her
$100,000 student loan? I do not concur with any public policy
that would yield such an inequitable treatment, particularly
since the second homeowner acted in a prudent and fiscally
responsible manner by electing not to over leverage the
residence.
Other examples come to mind. What about the retired
homeowner whose residence drops in value by $100,000 after she
has diligently paid each installment on her $300,000 mortgage
over 30 years? The homeowner has certainly suffered an economic
loss, but she does not qualify for relief under HAMP or
otherwise because she has repaid her mortgage in full. What
about the taxpayer who rents her primary residence and
purchases (with a $300,000 mortgage loan) real property for
investment purposes that subsequently drops in value by
$100,000? As in the prior example, the renter has certainly
suffered a $100,000 economic loss, but she does not qualify for
relief under HAMP or otherwise. What about the homeowner
suffering from a protracted illness or disability who loses
$100,000 of equity value upon the foreclosure of her residence
for failure to pay property taxes? Again, the taxpayer has
suffered a $100,000 economic loss, but HAMP and the
Administration's other foreclosure mitigation programs offer no
assistance.
These examples illustrate the inequity of assisting only
one group of Americans to the exclusion of others who have also
suffered from the recession. Since it is neither possible nor
prudent \536\ for the government to subsidize the taxpayers for
the trillions of dollars of economic losses that have arisen
over the past two years, the government should not undertake to
allocate its limited resources to one group of taxpayers while
ignoring the equally (or more) legitimate economic losses
incurred by other groups.
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\536\ If the government undertook to cover explicitly or implicitly
the investment losses of the taxpayers, such a policy would--in
addition to bankrupting the government--most likely encourage many
taxpayers to select high-risk investments for their portfolios with the
expectation that they will retain all of the upside from such
investments but that the government would subsidize any losses on the
downside.
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It is also worth noting that only a relatively modest
(although certainly not insignificant) percentage of Americans
are facing foreclosure after properly considering the number of
taxpayers who are current on their mortgage obligations, who
are renting their primary residences and who own their homes
free of mortgage debt.\537\ Is it fair to ask the overwhelming
majority of Americans who are struggling each month to meet
their own financial obligations to bail out the relatively
modest group of homeowners who are actually facing foreclosure?
This issue becomes far more compelling when considering the
economic difficulties facing many members of the majority
group--as noted in the foregoing examples--that have received
next to no attention from the Administration. I do not believe
that it is equitable to ask these taxpayers to shoulder the
burden of funding HAMP and the Administration's other
foreclosure mitigation programs.
---------------------------------------------------------------------------
\537\ See Congressional Oversight Panel, October Oversight Report:
An Assessment of Foreclosure Mitigation Efforts After Six Months:
Additional Views of Congressman Jeb Hensarling (Oct. 9, 2009) (online
at cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
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In addition to a compelling sense of inequity, the bailout
of distressed homeowners creates profound moral hazard risks
and all but establishes the U.S. government as the implicit
guarantor of homeowners who overextend their mortgage
obligations. What message does the government send to the
taxpayers by treating a discrete group of homeowners as per se
``victims'' of predatory lending activity and undertaking to
substantially subsidize their mortgage indebtedness at the
direct expense of the vast majority of taxpayers who meet their
financial obligations each month? Will the former group of
homeowners modify their behavior and become more fiscally
prudent, or will they continue to over-leverage their
households with the expectation that the government will offer
yet another taxpayer-funded bailout as needed? Will formerly
prudent homeowners look at the windfall others have received
and modify their behavior in an adverse manner? Such behavior,
while certainly not commendable, is by no means irrational and
only demonstrates that consumers will respond to economic
incentives that are in their own self-interest. If the
government offers to subsidize a homeowner's mortgage payments
(or credit card debt), it is arguably difficult to criticize
the homeowner for accepting the misguided offer, yet I would be
remiss if I did not question any government-sanctioned policy
that encourages taxpayers to act in a fiscally imprudent
manner.
This analysis is in no way intended to diminish the
financial hardship that many Americans are suffering as they
attempt to modify or refinance their underwater home mortgage
loans, and I fully acknowledge and empathize with the stress
and economic uncertainty created from the bursting of the
housing bubble. It is particularly frustrating--although not
surprising--that many of the hardest hit housing markets are
also suffering from seemingly intractable rates of unemployment
and underemployment. As such, I strongly encourage each
mortgage loan and securitized debt investor and servicer to
work with each of their borrowers in good faith, in a
transparent and accountable manner, to reach an economically
reasonable resolution prior to pursuing foreclosure. If
Professor White is correct in his analysis, it is clearly in
the best economic interest of the investors and servicers to
modify the distressed mortgage loans in their portfolios rather
than to seek foreclosure of the underlying residential
collateral. It is regrettable that HAMP and the
Administration's other foreclosure mitigation programs create
disincentives for investors and servicers as well as homeowners
by rewarding their dilatory behavior with the expectation of
enhanced subsidies.
Home Ownership as a ``Put Option''
I remain troubled that HAMP itself may have exacerbated the
mortgage loan delinquency and foreclosure problem by
encouraging homeowners to refrain from remitting their monthly
mortgage installments based upon the expectation that they will
ultimately receive a favorable restructure or principal
reduction subsidized by the taxpayers.\538\ This ``strategic
default'' issue is magnified by single-action and anti-
deficiency laws in effect in several states that permit
homeowners to walk away from their mortgage obligations with
relative impunity.\539\ These laws together with the curious
incentives offered by HAMP arguably convert the concept of home
ownership into the economic reality of a ``put option'' \540\--
as long as a homeowner's residence continues to appreciate in
value the homeowner will not exercise the put option, but as
soon as the residence falls in value the homeowner will elect
to exercise the put option and walk away or threaten to walk
away if a favorable bailout is not offered.\541\ I am also
concerned that Treasury's attempt to ``streamline'' the loan
modification process will result in materially lower
underwriting standards that may lead to the creation of a new
class of Treasury-sanctioned and subsidized subprime loans that
may inflate yet another housing bubble. Any inappropriate
loosening of prudent underwriting standards may also cause the
re-default rate to surpass the already distressing projected
rate of 40 percent.
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\538\ Although such approach may qualify as ``rational,'' I
strongly disagree with any homeowner who purposely declines to make a
mortgage payment based upon the expectation of a TARP-sourced bailout.
\539\ A ``bankruptcy cram down'' law pursuant to which a bankruptcy
judge would be authorized to change (i.e., cram down) the terms of a
mortgage loan over the objection of the mortgage loan holder could
arguably encourage homeowners to act in a similar manner.
\540\ A put option is a contract providing the owner with the
right--but not the obligation--to sell a specified amount of an
underlying security or asset at a specified price within a specified
period of time. The right afforded the homeowner in a jurisdiction with
an anti-deficiency or one-action law is arguably the functional
equivalent of a put option.
\541\ If a homeowner exercises the put option, her credit rating
will suffer and she may not qualify for another home mortgage loan for
several years. It may, however, be in the best long term financial
interest of the homeowner to walk away from her house and mortgage
obligations in favor of renting a residence until her credit rating
recovers.
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Taxpayer Protection--the Importance of Equity Participation Rights
\542\
---------------------------------------------------------------------------
\542\ See Congressional Oversight Panel, January Oversight Report:
Exiting TARP and Unwinding Its Impact on the Financial Markets:
Additional Views of J. Mark McWatters and Paul S. Atkins (Jan. 13,
2010) (online at cop.senate.gov/documents/cop-011410-report-
atkinsmcwatters.pdf). I have incorporated such Additional Views into my
analysis of equity participation rights.
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The TARP-funded HAMP program carries a 100 percent subsidy
rate according to the General Accounting Office (GAO).\543\
This means that the United States government expects to recover
none of the $50 billion of taxpayer-sourced TARP funds invested
in the HAMP foreclosure mitigation program.\544\ The projected
shortfall will become more burdensome to the taxpayers as
Treasury contemplates expanding HAMP or introducing additional
programs targeted at modifying or refinancing distressed home
mortgage loans. Since Treasury is charged with protecting the
interests of the taxpayers who funded HAMP and the other TARP
programs, I recommend that Treasury's foreclosure mitigation
efforts be structured so as to incorporate an effective exit
strategy by allowing Treasury to participate in any subsequent
appreciation in the home equity of any mortgagor whose loan is
modified under HAMP or any other taxpayer subsidized
program.\545\
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\543\ Government Accountability Office, Financial Audit: Office of
Financial Stability (Troubled Asset ReliefProgram) Fiscal Year 2009
Financial Statements, at 15 (Dec. 2009) (online at www.gao.gov/
new.items/d10301.pdf).
\544\ 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).
\545\ Doing so will also mitigate the moral hazard risk of
homeowners who could undertake problematic loans in the future based on
the assumption that the government will act as a backstop with no
strings attached. See Congressional Oversight Panel, December Oversight
Report: Taking Stock: What has the Troubled Asset Relief Program
Achieved?: Additional Views of Congressman Jeb Hensarling (Dec. 9,
2009) (online at cop.senate.gov/documents/cop-120909-report-
hensarling.pdf).
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In order to encourage the participation of mortgage lenders
in Treasury's foreclosure mitigation efforts, such lenders
could also be granted the right--subordinate to the right
granted Treasury--to participate in any subsequent equity
appreciation. Understandably, many feel little sympathy for
lenders on the other side of the mortgage contract. However, if
the lenders are not allowed to partake in a slice of the equity
appreciation after they agree to take an upfront loss in a
principal reduction, homeowners could suffer across-the-board
by being required to pay higher premiums for loans in the
future.
The mechanics of an equity participation right may be
illustrated by the following example of a typical home mortgage
loan modification.\546\
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\546\ The incorporation of an equity participation right may be
achieved by the filing of a one-page document in the local real
property records when the applicable home mortgage loan is modified.
---------------------------------------------------------------------------
Assume a homeowner borrows $200,000 and purchases a
residence of the same amount.\547\ The home subsequently
declines in value to $175,000; the homeowner and the mortgage
lender agree to restructure the loan under a TARP-sponsored
foreclosure mitigation program, pursuant to which the
outstanding principal balance of the loan is reduced to
$175,000, and Treasury advances $10,000 \548\ in support of the
restructure. Immediately after the modification the mortgage
lender has suffered a $25,000 \549\ economic loss and Treasury
has advanced $10,000 of TARP funds. If the homeowner
subsequently sells the residence for $225,000, the $50,000 of
realized equity proceeds \550\ would be allocated in accordance
with the following waterfall--the first $10,000 \551\ is
remitted to reimburse Treasury for the TARP funds advanced
under the foreclosure mitigation program; the next $25,000
\552\ is remitted to the mortgage lender to cover its $25,000
economic loss; and the balance of $15,000 is paid to the
homeowner.\553\
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\547\ These facts illustrate the zero ($0.00) down-payment
financings that were more common a few years ago.
\548\ The $10,000 of TARP-sourced funds advanced by Treasury may
be, for example, remitted to the mortgage loan servicer and the
homeowner under HAMP.
\549\ The $25,000 loss equals the $200,000 outstanding principal
balance of the original loan, less the $175,000 original principal
balance of the modified loan. The example does not consider the
consequences of modifying the interest rate on the loan.
\550\ The $50,000 of realized equity proceeds equals the $225,000
sales price of the residence, less the $175,000 outstanding principal
balance of the modified loan. The example makes certain simplifying
assumptions such as the absence of transaction and closing fees and
expenses.
\551\ In order to more appropriately protect the taxpayers, the
$10,000 advanced under the TARP-sponsored foreclosure mitigation
program could accrue interest at an objective and transparent rate. For
example, if the 30-year fixed rate of interest on mortgage loans equals
five percent when the mortgage loan is modified, the $10,000 advance
would accrue interest at such a rate, and Treasury would be reimbursed
the aggregate accrued amount upon realization of the equity proceeds.
If at such time $2,500 of interest has accrued, Treasury would be
reimbursed $12,500 ($10,000 originally advanced, plus $2,500 of accrued
interest) instead of only the $10,000 of TARP proceeds originally
advanced.
\552\ The mortgage lender may also argue that its $25,000 loss
should accrue interest in the same manner as provided Treasury. In such
event, the mortgage lender would be entitled to recover $25,000, plus
accrued interest upon the realization of sufficient equity proceeds.
\553\ Treasury, the mortgage lender, and the homeowner may also
agree to share the $50,000 net gain in a manner that is more favorable
to the homeowner. For example, the parties could agree to allocate the
net gain as follows--(i) 50 percent to Treasury, but not to exceed 75
percent of Treasury's aggregate advances; (ii) 25 percent to the
mortgage lender, but not to exceed 50 percent of the mortgage lender's
economic loss; and (iii) the remainder to the homeowner. Under such an
agreement the $50,000 net gain would be allocated as follows--(i)
$7,500 to Treasury (50 percent x $50,000 net gain, but not to exceed 75
percent x $10,000 aggregate advances by Treasury); (ii) $12,500 to the
mortgage lender (25 percent x $50,000 net gain, but not to exceed 50
percent x $25,000 economic loss of the mortgage lender); and (iii)
$30,000 to the homeowner ($50,000 net gain, less $7,500, less $12,500).
Treasury may also wish to structure its foreclosure mitigation
efforts so as to encourage the early repayment of TARP funds by
homeowners. Treasury, for example, could agree to a 20 percent discount
or waive the accrual of interest on the TARP funds advanced if a
homeowner repays such funds in full within three years following the
restructure. Any such sharing arrangements and incentives should appear
reasonable to the taxpayers and should not negate the intent of the
equity participation right. Mortgage lenders may also agree to similar
incentives.
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Prior to the repayment of all funds advanced by Treasury
and the economic loss suffered by the mortgage lender, the
homeowner should not be permitted to borrow against any
appreciation in the net equity value of the mortgaged property
unless the proceeds are applied in accordance with the
waterfall noted above. That is, instead of selling the
residence for $225,000 as assumed in the foregoing example, the
homeowner should be permitted to borrow against any net equity
in the residence, provided that $10,000 is remitted to Treasury
and $25,000 is paid to the mortgage holder prior to the
homeowner retaining any such proceeds.\554\ Such flexibility
allows the homeowner to cash out the interests of Treasury and
the mortgage lender without selling the residence securing the
mortgage loan. The modified loan documents should also permit
the homeowner to repay Treasury and the mortgage lender from
other sources such as personal savings or the disposition of
other assets.\555\
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\554\ Prudent underwriting standards should apply to all such home
equity loans.
\555\ As noted above, Treasury, the mortgage lender, and the
homeowner may agree to share the $50,000 of refinancing proceeds in a
manner that is more favorable to the homeowner.
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I also recommend that to the extent permitted by applicable
law Treasury consider structuring all mortgage loan
modifications and refinancings under HAMP and any other
foreclosure mitigation programs as recourse obligations to the
homeowners. If the loans are structured as non-recourse
obligations under state law or otherwise, the homeowners may
have a diminished incentive to repay Treasury the funds
advanced under TARP.
In my view, the incorporation of these specifically
targeted modifications into each TARP funded foreclosure
mitigation program will enhance the possibility that Treasury
will exit the programs at a reduced cost to the taxpayers.
The Overstated Case against Second Lien Mortgage Holders
Some advocate that holders of out-of-the-money second lien
mortgages walk away from their loans so as to facilitate the
timely modification of in-the-money first lien mortgage
loans.\556\ In my view, this approach--although certainly not
without merit--is generally unrealistic and inequitable to the
holders of second lien mortgage loans. In many instances it is
unlikely that holders of second lien mortgage loans are truly
out-of-the-money since today's fire-sale valuations are not
representative of the actual intermediate to long-term fair
market value of the residential collateral securing the
underlying loans.\557\ I am not unsympathetic to the argument
that an 80-year historic low in the housing market does not
reflect a true representation of fair market value,
particularly given the tepid mortgage loan and refinancing
markets.
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\556\ See James S. Hagerty, Banks Rebel Against Push to Redo Loans,
Wall
Street Journal (Apr. 13, 2010) (online at online.wsj.com/article/
SB10001424052702304506904575180320655553224.html?mod=rss_com_mostcomment
art) (``To write down loans enough to bring those debts down to no more
than the home values would cost $700 billion to $900 billion, JPMorgan
Chase estimated in its testimony. That would include costs of $150
billion to the Federal Housing Administration and government-controlled
mortgage investors Fannie Mae and Freddie Mac, the bank said. J.P.
Morgan also said broad-based principal reductions could raise costs for
borrowers if mortgage investors demand more interest to compensate for
that risk. Borrowers probably would have to increase down payments, and
credit standards would tighten further, the bank said. Wells Fargo said
principal forgiveness ``is not an across-the-board solution'' and
``needs to be used in a very careful manner.'' Bank of America said
that it supports principal reductions for some customers whose debts
are high in relation to their home values and who face financial
hardships but that ``solutions must balance the interests of the
customer and the (mortgage) investor'').
\557\ For example, if a homeowner has encumbered her residence with
a first lien mortgage of $200,000 and a second lien mortgage of
$100,000, the holder of the second lien mortgage loan is completely
out-of-the-money if the residence has a current--fire sale--market
value of only $175,000. If the holder of the second lien mortgage in
good faith anticipates that the residence will appreciate to $240,000
within the next year or so, I can understand why the holder may not be
inclined to write off $40,000 of its loan ($240,000 projected fair
market value of the residence, less $200,000 outstanding principal
balance of the first lien loan).
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Second lien lenders may refrain from writing down their
mortgage loans if their internal projections reasonably reflect
a recovery in the housing market within the next year or so. In
addition, if the second lien lenders previously advanced cash
to their borrowers under home equity loans, they may also be
reluctant to write off such loans since the homeowners received
actual cash value from the home equity loans and not just more
over-inflated house value. In both instances second lien
holders may argue that such analysis is based upon their
exercise of prudent business judgment as well as the discharge
of their fiduciary duties to their shareholders.
While these arguments are compelling, they perhaps mask the
real problem arising from the wholesale write-off of second
lien mortgage loans. It is entirely possible that holders of
second lien mortgages are reluctant to write down their loans
past a certain level for fear of impairing their regulatory
capital, which could trigger another round of TARP funded
bailouts, the failure of second lien holders or worse. This
problem may be particularly acute given the high concentration
of second lien mortgage loans held by a relatively few
financial institutions. Holders of first lien mortgage loans
and homeowners may have more success in motivating holders of
second lien mortgages to write off part or all of their loans
if they offer the holders a contractual equity participation
right that permits the subordinate lenders to share in any
subsequent appreciation in the fair market value of the
underlying residential collateral.
Government Support of Housing Programs through Fannie Mae and Freddie
Mac
Since the collapse in home values, the federal government
has undertaken extraordinary and unprecedented actions in the
housing market. Fannie Mae and Freddie Mac together own or
guarantee approximately $5.5 trillion of the $11.8 trillion in
U.S. residential mortgage debt and financed as much as 75
percent of new U.S. mortgages during 2009.\558\ On December 24,
2009, Treasury announced that it would provide an unlimited
amount of additional assistance to the two GSEs as required
over the next three years.\559\ Treasury also revised upwards
to $900 billion the cap on the retained mortgage portfolio of
the GSEs, which means the GSEs will not be forced to sell
mortgage-backed securities (MBS) into a distressed market just
as the Federal Reserve ends its program to purchase up to $1.25
trillion of MBS. Treasury apparently took these actions out of
concern that the $400 billion of support that it previously
committed to the GSEs could prove insufficient as well as to
provide stability to an industry still teetering. Additional
assistance by Treasury has allowed the GSEs to honor their MBS
guarantee obligations and absorb further losses from the
modification or write-down of distressed mortgage loans. It
also has provided an advantage by allowing them to raise
additional funds through the issuance of debt viewed by markets
as virtually risk-free.
---------------------------------------------------------------------------
\558\ See Congressional Oversight Panel, January Oversight Report:
Exiting TARP and Unwinding Its Impact on the Financial Markets:
Additional Views of J. Mark McWatters and Paul S. Atkins (Jan. 13,
2010) (online at cop.senate.gov/documents/cop-011410-report-
atkinsmcwatters.pdf). I have incorporated such Additional Views into my
analysis of the foreclosure mitigation programs of Fannie Mae and
Freddie Mac.
\559\ See U.S. Department of the Treasury, Treasury Issues Update
on Status of Support for Housing Programs (Dec. 24, 2009) (online at
treasury.gov/press/releases/2009122415345924543.htm).
---------------------------------------------------------------------------
The additional commitment and revised cap increase the
likelihood that the GSEs will undertake to make significant
purchases of distressed MBS for which they provided a
guarantee. Presumably, the GSEs may make such purchases from
TARP recipients and other holders and issuers, and it will be
interesting to note how the GSEs elect to employ the proceeds
of the unlimited Treasury facility. It does not seem
unreasonable to conclude that the GSEs may use the facility to
finance the modification of the residential mortgages they own
or guarantee. Since the actions of the GSEs may directly
influence Treasury's foreclosure mitigation programs under
TARP, I recommend that the GSEs conduct their own foreclosure
mitigation efforts in an equitable, fully transparent and
accountable manner. The Federal Reserve, Treasury and the GSEs
should disclose on a regular and periodic basis a detailed
analysis of the amount and specific use of all taxpayer-sourced
funds they have spent and expect to spend on their foreclosure
mitigation efforts.
In addition, it must be a clear goal that all of these
extraordinary actions taken to stabilize markets are temporary
in nature. If not, another crisis could result from an over-
inflated, government-backed housing market, led by the too-big-
to-fail--and getting bigger--GSEs, in which a TARP-like bailout
of equal or greater magnitude could occur. While stability is a
priority in the short-term, in the medium- to long-term
Treasury must make certain that its actions do not exacerbate
the same issues that caused the last meltdown and that it
enables the return of a viable private sector for housing.
Legal Authority for Treasury to Fund HAMP with TARP Proceeds
EESA authorizes Treasury ``to purchase, and to make and
fund commitments to purchase, troubled assets from any
financial institution.'' \560\ In response to a request from
Panelist Paul Atkins as to whether Treasury was authorized to
fund HAMP under EESA, Treasury's General Counsel delivered a
legal opinion to the Panel concluding that Treasury was so
authorized. Interestingly, Treasury has requested that the
Panel not publish the opinion in the Panel's report even though
Treasury has permitted the Panel to quote extensively from the
opinion in the report and deliver a copy of the opinion to
outside experts. It is my understanding that Treasury has not
asserted an attorney-client privilege regarding the opinion,
but, instead, has suggested that disclosure of the opinion may
impact its ability to assert attorney-client privilege over
related material in other contexts. After reviewing the opinion
and the basis upon which the opinion was rendered, I can think
of no legal theory in support of Treasury's assertion that an
attorney-client privilege could be waived by disclosure of the
opinion now that Treasury has agreed that the Panel may quote
extensively from the opinion in the Panel's report and deliver
a copy of the opinion to outside experts. Treasury's legal
analysis regarding the subject matter of the opinion is fully
disclosed and discussed by the Panel and the outside experts in
the Panel's report. I request that Treasury promptly abandon
any position--including the assertion of an attorney-client
privilege--that would keep the opinion confidential.
---------------------------------------------------------------------------
\560\ 12 U.S.C. Sec. 5211.
SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE
On behalf of the Panel, Chair Elizabeth Warren sent a
letter on April 13, 2010,\561\ to Secretary of the Treasury
Timothy Geithner, presenting a series of questions about the
failure of financial institutions which had received funds
under the Capital Purchase Program (CPP), and asking Treasury
to estimate its remaining exposure to future bank failures. The
Panel has requested a written response from Treasury by April
27, 2010.
---------------------------------------------------------------------------
\561\ See Appendix I of this report, infra.
SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. TARP Repayments
In March 2010, four institutions completely redeemed the
preferred shares given to Treasury as part of their
participation in the TARP's Capital Purchase Program (CPP).
Treasury received $5.9 billion in CPP repayments from these
institutions. Of this total, $3.4 billion was repaid by
Hartford Financial Services Group, Inc., and $2.25 billion was
repaid by Comerica Inc. A total of eight banks have fully
repaid their preferred stock TARP investments provided under
the CPP in 2010.
B. CPP Warrant Dispositions
As part of its investment in senior preferred stock of
certain banks under the CPP, Treasury received warrants to
purchase shares of common stock or other securities in those
institutions. During March, one institution repurchased its
warrants from Treasury for $4.5 million, and Treasury sold the
warrants of five other institutions at auction for $344 million
in proceeds. Treasury has liquidated the warrants it held in 48
institutions for total proceeds of $5.6 billion.
C. Treasury Named Two Appointees to AIG Board of Directors
On April 1, 2010, Treasury announced that it had exercised
its right to appoint two directors to the AIG board of
directors. Treasury was afforded this right because AIG did not
make dividend payments for four consecutive quarters on the
preferred stock held by Treasury. Treasury named Donald H.
Layton, the former chairman and chief executive officer of
E8Trade Financial Corporation, and Ronald A. Rittenmeyer,
former president, chairman and chief executive officer of
Electronic Data Systems, to the AIG board.
D. Term Asset-Backed Securities Loan Facility
At the March 19, 2010 facility, investors requested $1.25
billion in loans for legacy commercial mortgage-backed
securities (CMBS), of which $857 million settled. In
comparison, at the February facility, investors requested $1.25
billion in loans for legacy CMBS, of which $1.1 billion
settled. Investors did not request any loans for new CMBS in
March. The only request for new CMBS loans during TALF's
operation was for $72.2 million at the November facility.
The New York Federal Reserve's March 4, 2010 facility was a
non-CMBS facility, offering loans to support the issuance of
ABS collateralized by loans in the credit card, equipment,
floorplan, premium financing, small business, and student loan
sectors. In total, $4.1 billion in loans were requested at this
facility. There were no requests at this facility for auto or
servicing advance loans. At the February 5, 2010 facility, $974
million of the $987 million in requested loans settled.
E. Sale of Treasury's Interest in Citigroup
On March 29, 2010, Treasury announced that it intended to
fully dispose of the $7.7 billion shares of Citigroup, Inc.
common stock it owns during 2010. Treasury has employed Morgan
Stanley to act on its behalf in the sale of these securities.
F. Special Master Issues Executive Compensation Rulings
On March 24, 2010, the Special Master for TARP Executive
Compensation, Kenneth R. Feinberg, issued rulings on the 2010
pay packages for the ``Top 25'' executives at the five
remaining firms that received ``exceptional assistance'' from
the government: AIG, Chrysler, Chrysler Financial, General
Motors, and GMAC. The Special Master decreased total
compensation for the 119 executives who fell under this
distinction by 15 percent as compared to the 2009 levels.
G. Expansion of Housing Programs
On March 26, 2010, the Administration announced adjustments
to its foreclosure mitigation efforts. The adjustments to the
Home Affordable Modification Program (HAMP) allow for the
mortgage rates of an eligible unemployed borrower to be reduced
for a period of time while looking for work. Furthermore, the
Administration announced on this date that it would allow
lenders to expand the number of refinancing options for
eligible borrowers.
On March 29, 2010, Treasury announced a second initiative
directing aid to states suffering the most from the economic
downturn. As an expansion of the Hardest Hit Fund announced on
February 19, 2010, this program will allocate $600 million to
five additional states: North Carolina, Ohio, Oregon, Rhode
Island, and South Carolina. For further discussion of these
program expansions and adjustments, please see Section C.2 of
this report.
H. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, GAO,
SIGTARP, and the Financial Stability Oversight Board, consider
useful in assessing the effectiveness of the Administration's
efforts to restore financial stability and accomplish the goals
of EESA. This section discusses changes that have occurred in
several indicators since the release of the Panel's March
report.
Interest Rate Spreads. Interest rate spreads have
continued to flatten since the Panel's March report. The
conventional mortgage spread, which measures the 30-year
mortgage rate over 10-year Treasury bond yields, declined by
12.5 percent during March. The interest rate spread for AA
asset-backed commercial paper, which is considered mid-
investment grade, has decreased by 26.3 percent since the
Panel's March report.
FIGURE 54: INTEREST RATE SPREADS
----------------------------------------------------------------------------------------------------------------
Current Spread (as of 4/ Percent Change Since
Indicator 5/10) Last Report (3/11/10)
----------------------------------------------------------------------------------------------------------------
Conventional mortgage rate spread \562\....................... 1.19 (12.5)
Overnight AA asset-backed commercial paper interest rate 0.08 (26.3)
spread \563\.................................................
Overnight A2/P2 nonfinancial commercial paper interest rate 0.13 0.8
spread \564\.................................................
----------------------------------------------------------------------------------------------------------------
\562\ Conventional Mortgages (Weekly), supra note 353 (accessed Apr. 12, 2010); U.S. Government Securities/
Treasury Constant Maturities/Nominal, supra note 353 (accessed Apr. 12, 2010).
\563\ 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) (hereinafter ``Federal Reserve Statistical
Release: Commercial Paper Rates and Outstandings'') (accessed Apr. 12, 2010); Board of Governors of the
Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Apr. 12, 2010). In order to provide a more
complete comparison, this metric utilizes the average of the interest rate spread for the last five days of
the month.
\564\ Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings, supra note 519 (accessed
Apr. 12, 2010). In order to provide a more complete comparison, this metric utilizes the average of the
interest rate spread for the last five days of the month.
Housing Indicators. Both the Case-Shiller
Composite 20-City Composite as well as the FHFA Housing Price
Index remained relatively flat in January 2010. The Case-
Shiller and FHFA indices remain 6.5 percent and 4.3 percent
below the levels at the time EESA was enacted in October 2008.
Foreclosure filings decreased by 2.3 percent from December to
January, and are 10.4 percent above their October 2008 level.
FIGURE 55: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Percent Change from
Indicator Most Recent Monthly Data Available at Time Percent Change Since
Data of Last Report October 2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \565\.... 308,524 (2.3) 10.4
S&P/Case-Shiller Composite 20-City 146.3 0.31 (6.5)
Composite \566\.....................
FHFA Housing Price Index \567\....... 194 (1.1) (4.3)
----------------------------------------------------------------------------------------------------------------
\565\ RealtyTrac Foreclosure Press Releases, supra note 96 (accessed Apr. 12, 2010). Most recent data available
for February 2010.
\566\ S&P/Case-Shiller Home Price Indices, supra note 330 (accessed Apr. 12, 2010). Most recent data available
for January 2010.
\567\ U.S. and Census Division Monthly Purchase Only Index, supra note 330 (accessed Apr. 12, 2010). Most recent
data available for January 2010.
FIGURE 56: FORECLOSURE ACTIONS AS COMPARED TO THE HOUSING INDICES (AS
OF JANUARY 2010) \568\
---------------------------------------------------------------------------
\568\ Realty Trac Foreclosure Press Releases, supra note 96
(accessed Apr. 12, 2010); S&P/Case-Shiller Home Price Indices, supra
note 330 (accessed Apr. 12, 2010); U.S. and Census Division Monthly
Purchase Only Index, supra note 330 (accessed Apr. 12, 2010). The most
recent data available for the housing indices are as of January 2010.
[GRAPHIC] [TIFF OMITTED] T5737A.041
Bank Conditions. Fourth quarter data on the
condition of domestic banks continue to reflect the decline in
loan quality. As Figure 57 illustrates, loan loss reserves as a
percentage of all loans continued to increase during the fourth
quarter of 2009. This measure has increased over 43 percent
since the enactment of EESA and is at its highest level ever.
Figure 58 displays nonperforming loans as a percentage of total
loans for all U.S. banks. Nonperforming loans are defined here
as those loans 90+ days past due as well as loans in nonaccrual
status. This metric has increased over 86 percent since the
enactment of EESA and by nearly 580 percent since the first
quarter of 2007.
FIGURE 57: LOAN LOSS RESERVE/TOTAL LOANS FOR DOMESTIC BANKS \569\
---------------------------------------------------------------------------
\569\ Federal Reserve Bank of St. Louis, Loan Loss Reserve/Total
Loans for all U.S. Banks (accessed Apr. 12, 2010) (online at
research.stlouisfed.org/fred2/series/USLLRTL).
[GRAPHIC] [TIFF OMITTED] T5737A.042
FIGURE 58: NONPERFORMING LOANS/TOTAL LOANS \570\
---------------------------------------------------------------------------
\570\ Federal Reserve Bank of St. Louis, Nonperforming Loans (past
due 90+ days plus nonaccrual)/Total Loans for all U.S. Banks (accessed
Apr. 12, 2010) (online at research.stlouisfed.org/fred2/series/
USNPTL?cid=93).
[GRAPHIC] [TIFF OMITTED] T5737A.043
Commercial Real Estate. Conditions for commercial
real estate have continued to decline since the most recent
data contained in the Panels February report on the subject. As
Figure 59 shows, the vacancy rate for office properties was 17
percent at the end of 2009, nearly a 30 percent increase since
the first quarter of 2007. Conversely, the Moody's/REAL
Commercial Property Price Index for office properties declined
by nearly 29 percent since the same period.\571\
---------------------------------------------------------------------------
\571\ Vacancy rate data provided by Reis, Inc., a New York-based
commercial real estate research firm. Reis, Inc. provides quarterly
data on commercial real estate properties and trends in 169
metropolitan areas and this data reflect aggregation of Reis primary
markets. MIT Center for Real Estate, Moody's/REAL Commercial Property
Price Index (CPPI) (Instrument: Index_O_Natl_CY) (accessed Apr. 12,
2010) (online at web.mit.edu/cre/research/credl/rca.html) (hereinafter
``Moody's/REAL Commercial Property Price Index'').
---------------------------------------------------------------------------
FIGURE 59: OFFICE PROPERTIES VACANCY RATES AND CPPI INDEX VALUE \572\
---------------------------------------------------------------------------
\572\ Vacancy rate data provided by Reis, Inc., a New York-based
commercial real estate research firm. Reis, Inc. provides quarterly
data on commercial real estate properties and trends in 169
metropolitan areas and this data reflect aggregation of Reis primary
markets. The CPPI: Office data was provided by the MIT Center for Real
Estate. Moody's/REAL Commercial Property Price Index, supra note 527.
[GRAPHIC] [TIFF OMITTED] T5737A.044
Total Loans and Leases at Commercial Banks. The
total dollar amount of loans and leases outstanding at domestic
commercial banks has continued to decline. This measure reached
its peak of $7.3 trillion on October 22, 2008. Since that
point, the total amount of loans and leases outstanding
decreased by 11 percent to $6.5 trillion outstanding from
October 22, 2008 to March 24, 2010. However, the total dollar
amount of loans and leases outstanding increased by 6.5 percent
to $6.95 trillion from March 24, 2010 to March 31, 2010.\573\
---------------------------------------------------------------------------
\573\ Federal Reserve Bank of St. Louis, Total Loans and Leases of
Commercial Banks (accessed Apr. 12, 2010) (online at
research.stlouisfed.org/fred2/series/TOTLL?rid=22&soid=1) (hereinafter
``Total Loans and Leases of Commercial Banks'').
---------------------------------------------------------------------------
FIGURE 60: TOTAL LOANS AND LEASES OF COMMERCIAL BANKS \574\
---------------------------------------------------------------------------
\574\ Id.
[GRAPHIC] [TIFF OMITTED] T5737A.045
I. Financial Update
Each month, the Panel summarizes 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, repayments,
and warrant dispositions that the program has received as of
April 2, 2010; and (2) an updated accounting of the full
federal resource commitment as of March 31, 2010.
1. TARP
a. Costs: Expenditures and Commitments
Treasury has committed or is currently committed to spend
$520.3 billion of TARP funds through an array of programs used
to purchase preferred shares in financial institutions, provide
loans to small businesses and automotive companies, and
leverage Federal Reserve loans for facilities designed to
restart secondary securitization markets.\575\ Of this total,
$229 billion is currently outstanding under the $698.7 billion
limit for TARP expenditures set by EESA, leaving $408.2 billion
available for fulfillment of anticipated funding levels of
existing programs and for funding new programs and initiatives.
The $229 billion includes purchases of preferred and common
shares, warrants and/or debt obligations under the CPP, AIGIP/
SSFI Program, PPIP, and AIFP; and a loan to TALF LLC, the
special purpose vehicle (SPV) used to guarantee Federal Reserve
TALF loans.\576\ Additionally, Treasury has spent $57.8 million
under the Home Affordable Modification Program, out of a
projected total program level of $50 billion.
---------------------------------------------------------------------------
\575\ 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 purchase
prices of all troubled assets held by Treasury. 12 U.S.C. Sec. 5225
(a)-(b); 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).
\576\ Treasury Transactions Report, supra note 102.
---------------------------------------------------------------------------
b. Income: Dividends, Interest Payments, CPP Repayments,
and Warrant Sales
As of April 2, 2010, a total of 65 institutions have
completely repurchased their CPP preferred shares. Of these
institutions, 40 have repurchased their warrants for common
shares that Treasury received in conjunction with its preferred
stock investments; Treasury sold the warrants for common shares
for eight other institutions at auction.\577\ In March 2010,
one CPP participant repurchased its warrants for $4.5 million
and the warrants of five other institutions were sold at
auction for $344 million in proceeds. Treasury received $5.9
billion in repayments for complete redemptions from four CPP
participants during March. The largest repayment was the $3.4
billion repaid by Hartford Financial Services Group, Inc.\578\
In addition, Treasury receives dividend payments on the
preferred shares that it holds, usually five percent per annum
for the first five years and nine percent per annum
thereafter.\579\ Net of these losses under the CPP, Treasury
has received approximately $19.5 billion in income from warrant
repurchases, dividends, interest payments, and other
considerations deriving from TARP investments,\580\ and another
$1.2 billion in participation fees from its Guarantee Program
for Money Market Funds.\581\
---------------------------------------------------------------------------
\577\ Id.
\578\ Id.
\579\ U.S. Department of the Treasury, Factsheet on Capital
Purchase Program (Mar. 17, 2009) (online at www.financialstability.gov/
roadtostability/ CPPfactsheet.htm).
\580\ U.S. Department of the Treasury, Cumulative Dividends and
Interest Report as of December 31, 2009 (Jan. 20, 2010) (online at
www.financialstability.gov/docs/dividends-interest-reports/
December%202009%20Dividends%20and%20Interest%20Report.pdf); Treasury
Transactions Report, supra note 102.
\581\ U.S. Department of the Treasury, Treasury Announces
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009)
(online at www.treasury.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
c. TARP Accounting
FIGURE 61: TARP ACCOUNTING, AS OF APRIL 2, 2010 \582\
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Total
Anticipated Repayments/ Funding Funding
TARP Initiative Funding Actual Funding Reduced Outstanding Available
Exposure
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP) $204.9 $204.9 $135.8 \584\ $69.1 $0
\583\..........................
Targeted Investment Program 40.0 40.0 40 0 0
(TIP) \585\....................
AIG Investment Program (AIGIP)/ 69.8 \586\ 49.1 0 49.1 20.7
Systemically Significant
Failing Institutions Program
(SSFI).........................
Automobile Industry Financing 81.3 81.3 4.19 77.1 0
Program (AIFP).................
Asset Guarantee Program (AGP) 5.0 5.0 \588\ 5.0 0 0
\587\..........................
Capital Assistance Program (CAP)
\589\..........................
Term Asset-Backed Securities 20.0 \590\ 0.10 0 0.10 19.9
Lending Facility (TALF)........
Public-Private Investment 30.0 30.0 0 30.0 0
Partnership (PPIP) \591\.......
Supplier Support Program (SSP).. \592\ 3.5 3.5 0 3.5 0
Unlocking SBA Lending........... 15.0 \593\ 0.021 0 0.021 14.98
Home Affordable Modification \594\ 50 \595\ 0.06 0 0.06 49.9
Program (HAMP).................
Community Development Capital \596\ 0.78 0 0 0 0.78
Initiative (CDCI)..............
Total Committed................. 520.3 414 229 106.3
Total Uncommitted............... 178.4 185 \597\ 363.4
Total....................... $698.7 $414 $185 $229 $469.7
----------------------------------------------------------------------------------------------------------------
\582\ Treasury Transactions Report, supra note 102.
\583\ As of December 31, 2009, the CPP was closed. U.S. Department of the Treasury, FAQ on Capital Purchase
Program Deadline (online at www.financialstability.gov/docs/
FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
\584\ Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific
Coast National Bancorp ($4.1 million), as losses on the Transactions Report. Therefore, Treasury's net current
CPP investment is $66.8 billion due to the $2.3 billion in losses thus far. Treasury Transactions Report,
supra note 102.
\585\ Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under
the TIP on December 9 and December 23, 2009, respectively. Therefore, the Panel accounts for these funds as
repaid and uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
Wells Fargo and Citigroup (Dec. 22, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm)
(hereinafter ``Treasury Receives $45 Billion from Wells Fargo and Citigroup'').
\586\ AIG has completely utilized the $40 billion made available on November 25, 2008 and drawn-down $7.54
billion of the $29.8 billion made available on April 17, 2009. This figure also reflects $1.6 billion in
accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury's investment
from cumulative preferred shares to non-cumulative shares. American International Group, Inc., Form 10-K for
the Fiscal Year Ending December 31, 2009 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/5272/
000104746910001465/a2196553z10-k.htm); Treasury Transactions Report, supra note 102; Information provided by
Treasury staff in response to Panel request.
\587\ Treasury, the Federal Reserve, and the Federal Deposit Insurance Company terminated the asset guarantee
with Citigroup on December 23, 2009. The agreement was terminated with no losses to Treasury's $5 billion
second-loss portion of the guarantee. Citigroup did not repay any funds directly, but instead terminated
Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now
counted as uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
Wells Fargo and Citigroup (Dec. 23, 2009) (online at www.ustreas.gov/press/releases/20091229716198713.htm).
\588\ Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available,
Treasury did not receive a repayment in the same sense as with other investments. Treasury did receive other
income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 61.
\589\ On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC,
was in need of further capital from Treasury. GMAC received an additional $3.8 billion in capital through the
AIFP on December 30, 2009. U.S. Department of the Treasury, Treasury Announcement Regarding the Capital
Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html); Treasury
Transactions Report, supra note 102.
\590\ Treasury has committed $20 billion in TARP funds to a loan funded through TALF LLC, a special purpose
vehicle created by the Federal Reserve Bank of New York. The loan is incrementally funded and as of March 31,
2010, Treasury provided $103 million to TALF LLC. This total includes accrued payable interest. Treasury
Transactions Report, supra note 102; Federal Reserve Bank of New York, Factors Affecting Reserve
Balances(H.4.1) (Apr. 1, 2010) (online at www.federalreserve.gov/releases/h41).
\591\ On January 29, 2010, Treasury released its first quarterly report on the Legacy Securities Public-Private
Investment Program. As of that date, the total value of assets held by the PPIP managers was $3.4 billion. Of
this total, 87 percent was non-agency residential mortgage-backed securities and the remaining 13 percent was
commercial mortgage-backed securities. U.S. Department of the Treasury, Legacy Securities Public-Private
Investment Program, at 4 (Jan. 29, 2010) (online at www.financialstability.gov/docs/External%20Report%20-%2012-
09%20FINAL.pdf).
\592\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
billion. This action reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5
billion to $1 billion. GM Supplier Receivables LLC, the special purpose vehicle (SPV) created to administer
this program for GM suppliers, has made $290 million in partial repayments and Chrysler Receivables SPV LLC,
the SPV created to administer the program for Chrysler suppliers, has made $123 million in partial repayments.
These were partial repayments of drawn-down funds and did not lessen Treasury's $3.5 billion in total exposure
under the ASSP. Treasury Transactions Report, supra note 102.
\593\ On March 24, 2010, Treasury settled on the purchase of three floating rate Small Business Administration
7a securities. As of April 2, 2010 the total amount of TARP funds invested in these securities was $21.37
million. Treasury Transactions Report, supra note 102, at 29.
\594\ On February 19, 2010, President Obama announced the Help for the Hardest-Hit Housing Markets (Hardest Hit
Fund) program, his proposal to use $1.5 billion of the $50 billion in TARP funds allocated to HAMP to assist
the five states with the highest home price declines stemming from the foreclosure crisis: Arizona,
California, Florida, Nevada, and Michigan. The White House, President Obama Announces Help for Hardest Hit
Housing Markets (Feb. 19, 2010) (online at www.whitehouse.gov/the-press-office/president-obama-announces-help-
hardest-hit-housing-markets). On March 29, 2010, Treasury announced $600 million in funding for a second HFA
Hardest Hit Fund which includes North Carolina, Ohio, Oregon Rhode Island, and South Carolina. U.S. Department
of the Treasury, Administration Announces Second Round of Assistance for Hardest-Hit Housing Markets (Mar. 29,
2010) (online at www.financialstability.gov/latest/pr_03292010.html). Until further information on these
programs is released, the Panel will continue to account for the $50 billion commitment to HAMP as intact and
as the newly announced programs as subsets of the larger initiative. For further discussion of the newly
announced HAMP programs, and the effect these initiatives may have on the $50 billion in committed TARP funds,
please see Section D.1 of this report.
\595\ In response to a Panel inquiry, Treasury disclosed that, as of February 2010, $57.8 million in funds had
been disbursed under the HAMP. As of April 2, 2010, the total of all the caps set on payments to each mortgage
servicer was $39.9 billion. Treasury Transactions Report, supra note 102, at 28.
\596\ On February 3, 2010, the Administration announced an initiative under TARP to provide low-cost financing
for Community Development Financial Institutions (CDFIs). Under this program, CDFIs are eligible for capital
investments at a 2-percent dividend rate as compared to the 5-percent dividend rate under the CPP. In response
to Panel request, Treasury stated that it projects the CDCI program to utilize $780.2 million.
\597\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($178.4 billion)
and the repayments ($185 billion).
FIGURE 62: TARP PROFIT AND LOSS
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dividends \598\ Interest \599\ Warrant Other Losses \601\
TARP Initiative (as of 2/28/ (as of 2/28/ Repurchases \600\ Proceeds (as (as of 4/2/ Total
10) 10) (as of 4/2/10) of 2/28/10) 10)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total............................................... $13,236 $491 $5,609 $2,518 ($2,334) $19,520
CPP................................................. 8,820 28 4,338 - (2,334) 10,852
TIP................................................. 3,004 - 1,256 - .............. 4,260
AIFP................................................ 1,091 443 15 - .............. 1,549
ASSP................................................ N/A 14 - - .............. 14
AGP................................................. 321 - 0 \602\ 2,234 .............. 2,555
PPIP................................................ - 6 - \603\ 8 .............. 14
Bank of America Guarantee........................... - - - \604\ 276 .............. 276
--------------------------------------------------------------------------------------------------------------------------------------------------------
\598\ U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of February 28, 2010 (Mar. 17, 2010) (online at
www.financialstability.gov/docs/dividends-interest-reports/February%202010%20Dividends%20and%20 Interest%20Report.pdf) (hereinafter ``Cumulative
Dividends and Interest Report'').
\599\ Cumulative Dividends and Interest Report, supra note 598.
\600\ Treasury Transactions Report, supra note 102.
\601\ Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as
losses on the Transactions Report. A third institution, UCBH Holdings, Inc. received $299 million in TARP funds and is currently in bankruptcy
proceedings. Treasury Transactions Report, supra note 102.
\602\ As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks for trust preferred securities in June
2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with a
$2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. At the end of Citigroup's participation in the FDIC's
TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP
to the Treasury. Treasury Transactions Report, supra note 102.
\603\ As of February 28, 2010, Treasury has earned $8 million in membership interest distributions from the PPIP. Cumulative Dividends and Interest
Report, supra note 554.
\604\ Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
%20executed.pdf).
d. Rate of Return
As of March 26, 2010, 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) was 10.7 percent. The internal rate of
return is the annualized effective compounded return rate that
can be earned on invested capital.
e. TARP Warrant Disposition
FIGURE 63: WARRANT REPURCHASES FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS AS OF MARCH 26, 2010
----------------------------------------------------------------------------------------------------------------
Panel's Best
Investment Warrant Warrant Valuation Price/ IRR
Institution Date Repurchase Repurchase/ Sale Estimate at Est. (Percent)
Date Amount Repurchase Date Ratio
----------------------------------------------------------------------------------------------------------------
Old National Bancorp......... 12/12/2008 5/8/2009 $1,200,000 $2,150,000 0.558 9.3
Iberiabank Corporation....... 12/5/2008 5/20/2009 1,200,000 2,010,000 0.597 9.4
Firstmerit Corporation....... 1/9/2009 5/27/2009 5,025,000 4,260,000 1.180 20.3
Sun Bancorp, Inc............. 1/9/2009 5/27/2009 2,100,000 5,580,000 0.376 15.3
Independent Bank Corp........ 1/9/2009 5/27/2009 2,200,000 3,870,000 0.568 15.6
Alliance Financial 12/19/2008 6/17/2009 900,000 1,580,000 0.570 13.8
Corporation.................
First Niagara Financial Group 11/21/2008 6/24/2009 2,700,000 3,050,000 0.885 8.0
Berkshire Hills Bancorp, Inc. 12/19/2008 6/24/2009 1,040,000 1,620,000 0.642 11.3
Somerset Hills Bancorp....... 1/16/2009 6/24/2009 275,000 580,000 0.474 16.6
SCBT Financial Corporation... 1/16/2009 6/24/2009 1,400,000 2,290,000 0.611 11.7
HF Financial Corp............ 11/21/2008 6/30/2009 650,000 1,240,000 0.524 10.1
State Street................. 10/28/2008 7/8/2009 60,000,000 54,200,000 1.107 9.9
U.S. Bancorp................. 11/14/2008 7/15/2009 139,000,000 135,100,000 1.029 8.7
The Goldman Sachs Group, Inc. 10/28/2008 7/22/2009 1,100,000,000 1,128,400,000 0.975 22.8
BB&T Corp.................... 11/14/2008 7/22/2009 67,010,402 68,200,000 0.983 8.7
American Express Company..... 1/9/2009 7/29/2009 340,000,000 391,200,000 0.869 29.5
Bank of New York Mellon Corp. 10/28/2008 8/5/2009 136,000,000 155,700,000 0.873 12.3
Morgan Stanley............... 10/28/2008 8/12/2009 950,000,000 1,039,800,000 0.914 20.2
Northern Trust Corporation... 11/14/2008 8/26/2009 87,000,000 89,800,000 0.969 14.5
Old Line Bancshares Inc...... 12/5/2008 9/2/2009 225,000 500,000 0.450 10.4
Bancorp Rhode Island, Inc.... 12/19/2008 9/30/2009 1,400,000 1,400,000 1.000 12.6
Centerstate Banks of Florida 11/21/2008 10/28/2009 212,000 220,000 0.964 5.9
Inc.........................
Manhattan Bancorp............ 12/5/2008 10/14/2009 63,364 140,000 40.453 9.8
Bank of Ozarks............... 12/12/2008 11/24/2009 2,650,000 3,500,000 0.757 9.0
Capital One Financial........ 11/14/2008 12/3/2009 148,731,030 232,000,000 0.641 12.0
JP Morgan Chase & Co......... 10/28/2008 12/10/2009 950,318,243 1,006,587,697 0.944 10.9
TCF Financial Corp........... 1/16/2009 12/16/2009 9,599,964 11,825,830 0.812 11.0
LSB Corporation.............. 12/12/2008 12/16/2009 560,000 535,202 1.046 9.0
Wainwright Bank & Trust 12/19/2008 12/16/2009 568,700 1,071,494 0.531 7.8
Company.....................
Wesbanco Bank, Inc........... 12/5/2008 12/23/2009 950,000 2,387,617 0.398 6.7
Union Bankshares Corporation. 12/19/2008 12/23/2009 450,000 1,130,418 0.398 5.8
Trustmark Corporation........ 11/21/2008 12/30/2009 10,000,000 11,573,699 0.864 9.4
Flushing Financial 12/19/2008 12/30/2009 900,000 2,861,919 0.314 6.5
Corporation.................
OceanFirst Financial 1/16/2009 2/3/2010 430,797 279,359 1.542 6.2
Corporation.................
Monarch Financial Holdings, 12/19/2008 2/10/2010 260,000 623,434 0.417 6.7
Inc.........................
Bank of America.............. \605\ 10/28/ 3/3/2010 1,566,210,714 1,006,416,684 1.533 6.5
2008
\606\ 1/9/
2009
\607\ 1/14/
2009
Washington Federal Inc./ 11/14/2008 3/9/2010 15,623,222 10,166,404 1.537 18.6
Washington Federal Savings &
Loan Association............
Signature Bank............... 12/12/2008 3/10/2010 11,320,751 11,458,577 0.988 32.4
Total.................... ........... ........... $5,618,174,187 $5,395,308,333 1.041 10.7
----------------------------------------------------------------------------------------------------------------
\605\ Investment date for Bank of America in CPP.
\606\ Investment date for Merrill Lynch in CPP.
\607\ Investment date for Bank of America in TIP.
FIGURE 64: WARRANT VALUATION OF REMAINING STRESS TEST INSTITUTION WARRANTS
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Warrant Valuation
-----------------------------------------------
Low Estimate High Estimate Best Estimate
----------------------------------------------------------------------------------------------------------------
Stress Test Financial Institutions with Warrants Outstanding:
Wells Fargo & Company....................................... $501.15 $2,084.43 $813.70
Citigroup, Inc.............................................. 39.44 1,049.16 271.52
The PNC Financial Services Group Inc........................ 143.19 613.12 234.15
SunTrust Banks, Inc......................................... 25.51 366.75 142.05
Regions Financial Corporation............................... 19.70 233.11 102.31
Fifth Third Bancorp......................................... 122.37 385.90 179.47
Hartford Financial Services Group, Inc...................... 681.95 875.05 681.95
KeyCorp..................................................... 23.24 166.23 80.12
All Other Banks................................................. 1,265.00 3,565.99 2,564.68
-----------------------------------------------
Total....................................................... $2,821.55 $9,339.74 $5,069.95
----------------------------------------------------------------------------------------------------------------
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 independently of TARP.
Figure 65 below reflects the changing mix of Federal
Reserve investments. As the liquidity facilities established to
address the crisis have been wound down, the Federal Reserve
has expanded its facilities for purchasing mortgage related
securities. The Federal Reserve announced that it intended to
purchase $175 billion of federal agency debt securities and
$1.25 trillion of agency mortgage-backed securities.\608\ As of
March 31, 2010, $169 billion of federal agency (government-
sponsored enterprise) debt securities and $1.1 trillion of
agency mortgage-backed securities were purchased. The Federal
Reserve has announced that these purchases will be completed by
April 2010.\609\ These purchases are in addition to the $181.6
billion in GSE MBS that remain outstanding as of March 2010
under the GSE Mortgage-Backed Securities Purchase Program.\610\
---------------------------------------------------------------------------
\608\ Board of Governors of the Federal Reserve System, Minutes of
the Federal Open Market Committee, at 10 (Dec. 15-16, 2009) (online at
www.federalreserve.gov/newsevents/press/monetary/
fomcminutes20091216.pdf) (``[T]he Federal Reserve is in the process of
purchasing $1.25 trillion of agency mortgage-backed securities and
about $175 billion of agency debt'').
\609\ Board of Governors of the Federal Reserve System, FOMC
Statement (Dec. 16, 2009) (online at www.federalreserve.gov/newsevents/
press/monetary/20091216a.htm) (``In order to promote a smooth
transition in markets, the Committee is gradually slowing the pace of
these purchases, and it anticipates that these transactions will be
executed by the end of the first quarter of 2010''); Board of Governors
of the Federal Reserve System, Factors Affecting Reserve Balances (Feb.
4, 2010) (online at www.federalreserve.gov/Releases/H41/Current).
\610\ U.S. Department of the Treasury, MBS Purchase Program:
Portfolio by Month (accessed Apr. 12, 2010) (online at
www.financialstability.gov/docs/
Mar%202010%20Portfolio%20by%20month.pdf). Treasury received $39.1
billion in principal repayments $9.6 billion in interest payments from
these securities. U.S. Department of the Treasury, MBS Purchase Program
Principal and Interest (accessed Apr. 12, 2010) (online at
www.financialstability.gov/docs/
Mar%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf).
---------------------------------------------------------------------------
FIGURE 65: FEDERAL RESERVE AND FDIC FINANCIAL STABILITY EFFORTS AS OF
FEBRUARY 28, 2010 \611\
---------------------------------------------------------------------------
\611\ Federal Reserve Liquidity Facilities include: Primary credit,
Secondary credit, Central Bank liquidity swaps, Primary dealer and
other broker-dealer credit, Asset-backed Commercial Paper Money Market
Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Term
Asset-backed Securities Loan Facility. Federal Reserve Mortgage-related
Facilities include: Federal agency debt securities and mortgage-backed
securities held by the Federal Reserve. Institution Specific Facilities
include: Credit extended to American International Group, Inc., the
preferred interests in AIA Aurora LLC and ALICO Holdings LLC, and the
net portfolio holdings of Maiden Lanes I, II, and III. Board of
Governors of the Federal Reserve System, Factors Affecting Reserve
Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H41) (Mar. 31, 2010). For related presentations of
Federal Reserve data, see Board of Governors of the Federal Reserve
System, Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov.
2009) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200911.pdf). The TLGP figure reflects the monthly
amount of debt outstanding under the program. Federal Deposit Insurance
Corporation, Monthly Reports on Debt Issuance Under the Temporary
Liquidity Guarantee Program (Dec. 2008-Jan. 2010) (online at
www.fdic.gov/regulations/resources/TLGP/reports.html). The total for
the Term Asset-Backed Securities Loan Facility has been reduced by $20
billion throughout this exhibit in order to reflect Treasury's $20
billion first-loss position under the terms of this program.
[GRAPHIC] [TIFF OMITTED] T5737A.046
3. Total Financial Stability Resources as of February 28, 2010
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives as outlays, loans, or guarantees. Although the
Panel calculates the total value of these resources at nearly
$3 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. As discussed in the Panel's
November report, the FDIC assesses a premium of up to 100 basis
points on TLGP debt guarantees.\612\ 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 loan currently ``underwater''--
where the outstanding principal amount exceeds the current
market value of the collateral--is the loan to Maiden Lane LLC,
which was formed to purchase certain Bear Stearns assets.
---------------------------------------------------------------------------
\612\ Congressional Oversight Panel, Guarantees and Contingent
Payments in TARP and Related Programs, at 36 (Nov. 11, 2009) (online at
cop.senate.gov/documents/cop-110609-report.pdf).
FIGURE 66: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT AS OF MARCH 31, 2010 i
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total........................................... $698.7 $1,626.1 $670.4 $2,995.2
Outlays ii.................................. 272.8 1,288.4 69.4 1,630.6
Loans....................................... 42.5 337.7 0 380.1
Guarantees iii.............................. 20 0 601 621
Uncommitted TARP Funds...................... 363.4 0 0 363.4
AIG............................................. 69.8 92.3 0 162.1
Outlays..................................... iv 69.8 v 25.4 0 95.2
Loans....................................... 0 vi 66.9 0 66.9
Guarantees.................................. 0 0 0 0
Citigroup....................................... 25 0 0 25
Outlays..................................... vii25 0 0 25
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Purchase (Other)........................ 50.1 0 0 50.1
Outlays..................................... viii 50.1 0 0 50.1
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Assistance Program...................... N/A 0 0 ix N/A
TALF............................................ 20 180 0 200
Outlays..................................... 0 0 0 0
Loans....................................... 0 xi 180 0 180
Guarantees.................................. x 20 0 0 20
PIP (Loans) xii................................. 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
PIP (Securities)................................ xiii 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 50
Outlays..................................... xiv 50 0 0 50
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Automotive Industry Financing Program........... xv 77.1 0 0 77.1
Outlays..................................... 58.9 0 0 58.9
Loans....................................... 18.2 0 0 18.2
Guarantees.................................. 0 0 0 0
Auto Supplier Support Program................... 3.5 0 0 3.5
Outlays..................................... 0 0 0 0
Loans....................................... xvi 3.5 0 0 3.5
Guarantees.................................. 0 0 0 0
Unlocking SBA Lending........................... xvii 15 0 0 15
Outlays..................................... 15 0 0 15
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Community Development Capital Initiative........ xviii 0.78 0 0 0.78
Outlays..................................... 0 0 0 0
Loans....................................... 0.78 0 0 0.78
Guarantees.................................. 0 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 601 601
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 xix 601 601
Deposit Insurance Fund.......................... 0 0 69.4 69.4
Outlays..................................... 0 0 xx 69.4 69.4
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,353.8 0 1,353.8
Outlays..................................... 0 xxi 1,263 0 1,263
Loans....................................... 0 xxii 90.8 0 90.8
Guarantees.................................. 0 0 0 0
Uncommitted TARP Funds.......................... 363.4 0 0 363.4
----------------------------------------------------------------------------------------------------------------
i All data in this exhibit is as of March 31, 2010 except for information regarding the FDIC's Temporary
Liquidity Guarantee Program (TLGP). This data is as of February 28, 2010.
ii 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 used here represent investment and asset 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.
iii Although 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.
iv This number includes investments under the AIGIP/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). As of January 5, 2010, AIG had utilized $45.3 billion of
the available $69.8 billion under the AIGIP/SSFI and owed $1.6 billion in unpaid dividends. This information
was provided by Treasury in response to a Panel inquiry.
v As part of the restructuring of the U.S. Government's investment in AIG announced on March 2, 2009, the amount
available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for preferred
equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These SPVs were
established to hold the common stock of two AIG subsidiaries: American International Assurance Company Ltd.
(AIA) and American Life Insurance Company (ALICO). As of March 31, 2010, the book value of the Federal Reserve
Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $16.26 billion and $9.15 billion in
preferred equity respectively. Thereby the book value of these securities is $25.416 billion, which is
reflected in the corresponding table. Federal Reserve Bank of New York, Factors Affecting Reserve Balances
(H.4.1) (Apr. 1, 2010) (online at www.federalreserve.gov/releases/h41/).
vi This number represents the full $35 billion that is available to AIG through its revolving credit facility
with the Federal Reserve ($26.2 billion had been drawn down as of February 25, 2010) and the outstanding
principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of March 31, 2010,
$14.9 billion and $16.9 billion respectively). 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 17
(Oct. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). On December
1, 2009, AIG entered into an agreement with FRBNY to reduce the debt AIG owes the FRBNY by $25 billion. In
exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also reduced the debt
ceiling on the loan facility from $60 billion to $35 billion. American International Group, AIG Closes Two
Transactions That Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online
at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
vii As of April 2, 2010, the U.S. Treasury held $25 billion of Citigroup common stock under the CPP. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending April 2, 2010
(Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
10%20Transactions%20Report%20as%20of%204-2-10.pdf).
viii This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion
investment in Citigroup identified above, and the $135.8 billion in repayments that are reflected as available
TARP funds. This figure does not account for future repayments of CPP investments, dividend payments from CPP
investments, or losses under the program. U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period Ending April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/
transaction-reports/4-6-10%20Transactions%20Report%20as%20of%204-2-10.pdf).
ix On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
need of further capital from Treasury. GMAC, however, received further funding through the AIFP, therefore the
Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding the
Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
x This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. However, as of March 31,
2010, TALF LLC had drawn only $103 million of the available $20 billion. Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Mar. 31, 2010) (online at www.federalreserve.gov/
Releases/H41/Current/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
10%20Transactions%20Report%20as%20of%204-2-10.pdf). As of January 28, 2010, investors had requested a total of
$73.3 billion in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF
loans had been settled ($12 billion in CMBS and $59 billion in non-CMBS). Federal Reserve Bank of New York,
Term Asset-Backed Securities Loan Facility: CMBS (accessed Apr. 4, 2010) (online at www.newyorkfed.org/markets/
CMBS_recent_operations.html); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
non-CMBS (accessed Apr. 4, 2010) (online at www.newyorkfed.org/markets/talf--operations.html).
xi 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.
xii It is 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.
xiii As of February 25, 2010, Treasury reported commitments of $19.9 billion in loans and $9.9 billion in
membership interest associated with the program. On January 4, 2010, the Treasury and one of the nine fund
managers, TCW Senior Management Securities Fund, L.P., entered into a ``Winding-Up and Liquidation
Agreement.'' U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
Ending April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
10%20Transactions%20Report%20as%20of%204-2-10.pdf).
xiv Of the $50 billion in announced TARP funding for this program, $39.9 billion has been allocated as of April
2, 2010. However, as of February 2010, only $57.8 million in non-GSE payments have been disbursed under HAMP.
Disbursement information provided in response to Panel inquiry; U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for Period Ending April 2, 2010 (Apr. 6, 2010) (online at
www.financialstability.gov/docs/transaction-reports/4-6-10%20Transactions%20Report%20as%20of%204-2-10.pdf).
xv A substantial portion of the total $81 billion in loans extended under the AIFP have since been converted to
common equity and preferred shares in restructured companies. $18.2 billion has been retained as first-lien
debt (with $5.6 billion committed to GM, $12.5 billion to Chrysler). This figure ($77.1 billion) represents
Treasury's current obligation under the AIFP after repayments.
xvi See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
April 2, 2010 (Apr. 6, 2010) (online at www.financialstability.gov/docs/transaction-reports/4-6-
10%20Transactions%20Report%20as%20of%204-2-10.pdf).
xvii U.S. Department of the Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online
at www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit
Markets For Small Businesses By Purchasing Up to $15 Billion in Securities'').
xviii This information was provided by Treasury staff in response to Panel inquiry.
xix This figure represents the current maximum aggregate debt guarantees that could be made under the program,
which is a function of the number and size of individual financial institutions participating. $305.4 billion
of debt subject to the guarantee is currently outstanding, which represents approximately 51 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 (Dec. 31, 2009) (online at www.fdic.gov/
regulations/resources/tlgp/total_issuance12-09.html) (Feb. 28, 2010). The FDIC has collected $10.4 billion in
fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit
Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program (Nov.
30, 2009) (online at www.fdic.gov/regulations/resources/tlgp/total_issuance02-10.html) (updated Feb. 4, 2010).
xx 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, second and third 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); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/
income.html). This figure includes the FDIC's estimates of its future losses under loss-sharing agreements
that it has entered into with banks acquiring assets of insolvent banks during these five 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 $132 billion in assets covered under loss-sharing agreements as of December 18, 2009.
Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since
there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather
than as guarantees.
xxi Outlays are comprised of the Federal Reserve Mortgage Related Facilities and the preferred equity holdings
in AIA Aurora LLC and ALICO Holdings LLC. The Federal Reserve balance sheet accounts for these facilities
under Federal agency debt securities, mortgage-backed securities held by the Federal Reserve, and the
preferred interests in AIA Aurora LLC and ALICO Holdings LLC. Board of Governors of the Federal Reserve
System, Factors Affecting Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H41) (accessed Apr. 4, 2010). Although the Federal Reserve does not employ the outlays, loans
and guarantees classification, its accounting clearly separates its mortgage-related purchasing programs from
its liquidity programs. See Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the
Balance Sheet November 2009, at 2 (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200911.pdf).
On September 7, 2008, the Treasury announced the GSE Mortgage-Backed Securities Purchase Program (Treasury MBS
Purchase Program). The Housing and Economic Recovery Act of 2008 provided Treasury the authority to purchase
Government Sponsored Enterprise (GSE) MBS. Under this program, Treasury purchased approximately $214.4 billion
in GSE MBS before the program ended on December 31, 2009. As of March 2010, there was $181.6 billion still
outstanding under this program. U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month
(accessed Apr. 5, 2010) (online at www.financialstability.gov/docs/Mar%202010%20Portfolio%20by%20month.pdf).
Treasury received $39.1 billion in principal repayments and $9.6 billion in interest payments from these
securities. U.S. Department of the Treasury, MBS Purchase Program Principal and Interest (accessed Apr. 5,
2010) (online at www.financialstability.gov/docs/
Mar%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf).
xxii Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary
credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility
LLC, Seasonal credit, Term auction credit, Term Asset-Backed Securities Loan Facility, and loans outstanding
to Bear Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors Affecting
Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Apr. 4,
2010); see id.
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 16
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. The Panel's March
oversight report evaluated Treasury's exceptional assistance
provided to GMAC under the TARP as well as the approach taken
by GMAC's new management to return the company to profitability
and, ultimately, return the taxpayers' investment.
Upcoming Reports and Hearings
The Panel will release its next oversight report in May.
The report will examine the ongoing contraction in lending,
with a focus on small business lending, and discuss Treasury's
current initiatives and proposals to improve market liquidity
and access to credit for small businesses.
The Panel is planning a hearing in Phoenix, Arizona on
April 27, 2010, to discuss the topic of the May report. The
Panel will hear from local small business owners, community
bankers, and relevant government officials about the status of
small business lending and their perspectives on the current
proposals to improve access to credit.
SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating financial crisis, on October
3, 2008, Congress provided Treasury with the authority to spend
$700 billion to stabilize the U.S. economy, preserve home
ownership, and promote economic growth. Congress created the
Office of Financial Stability (OFS) within Treasury to
implement the 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, Director of Policy and Special Counsel of the
American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
Professor of Law at Harvard Law School, to the Panel. With the
appointment on November 19, 2008, of Congressman Jeb Hensarling
to the Panel by House Minority Leader John Boehner, the Panel
had a quorum and met for the first time on November 26, 2008,
electing Professor Warren as its chair. On December 16, 2008,
Senate Minority Leader Mitch McConnell named Senator John E.
Sununu to the Panel. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat.
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. Special thanks
also go to Professor Eric Posner of the University of Chicago
Law School and Professors John A.E. Pottow and Stephen P.
Croley from the University of Michigan Law School.
APPENDIX I: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIR ELIZABETH
WARREN RE: FOLLOW UP QUESTIONS ON TARP-RECIPIENT BANKS, DATED APRIL 13,
2010
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