Background

As of June 2008, there were approximately 58 million first-lien home  mortgages outstanding in the United States. According to a Federal  Reserve estimate, outstanding home mortgages represented over $10  trillion in mortgage debt. The primary mortgage market has several  segments and offers a range of loan products:    The prime market segment serves borrowers with strong credit histories  and provides the most competitive interest rates and mortgage terms.
The subprime market segment generally serves borrowers with blemished  credit and features higher interest rates and fees than the prime market.
The Alternative-A (Alt-A) market segment generally serves borrowers  whose credit histories are close to prime, but the loans often have one or  more higher-risk features, such as limited documentation of income or  assets.
The government-insured or -guaranteed market segment primarily serves  borrowers who may have difficulty qualifying for prime mortgages but  features interest rates competitive with prime loans in return for payment  of insurance premiums or guarantee fees.
Across all of these market segments, two types of loans are common:  fixed-rate mortgages, which have interest rates that do not change over the  life of the loans, and adjustable-rate mortgages (ARM), which have interest  rates that change periodically based on changes in a specified index.
Delinquency, default and foreclosure rates are common measures of loan  performance. Delinquency is the failure of a borrower to meet one or more  scheduled monthly payments. Default generally occurs when a borrower is  90 or more days delinquent. At this point, foreclosure proceedings against  the borrower become a strong possibility. Foreclosure is a legal (and often  lengthy) process with several possible outcomes, including that the  borrower sells the property or the lender repossesses the home. Two  measures of foreclosure are foreclosure starts (loans that enter the  foreclosure process during a particular time period) and foreclosure  inventory (loans that are in, but have not exited, the foreclosure process  during a particular time period).
One of the main sources of information on the status of mortgage loans is  the Mortgage Bankers Association’s quarterly National Delinquency  Survey. The survey provides national and state-level information on  mortgage delinquencies, defaults, and foreclosures back to 1979 for first- lien purchase and refinance mortgages on one-to-four family residential  units. The data are disaggregated by market segment and loan type— fixed-rate versus adjustable-rate—but do not contain information on other  loan or borrower characteristics.
In response to problems in the housing and financial markets, the Housing  and Economic Recovery Act of 2008 was enacted to strengthen and  modernize the regulation of the government-sponsored enterprises  (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks— and expand their mission of promoting homeownership. The act  established a new, independent regulator for the GSEs called the Federal  Housing Finance Agency, which has broad new authority, generally  equivalent to the authority of other federal financial regulators, to ensure  the safe and sound operations of the GSEs. The new legislation also  enhances the affordable housing component of the GSEs’ mission and  expands the number of families Fannie Mae and Freddie Mac can serve by  raising the loan limits in high-cost areas, where median house prices are  higher than the regular conforming loan limit, to 150 percent of that limit.  The act requires new affordable housing goals for Federal Home Loan  Bank mortgage purchase programs, similar to those already in place for  Fannie Mae and Freddie Mac.
The act also established the HOPE for Homeowners program, which the  Federal Housing Administration (FHA) will administer within the  Department of Housing and Urban Development (HUD), to provide  federally insured mortgages to distressed borrowers. The new mortgages  are intended to refinance distressed loans at a significant discount for  owner-occupants at risk of losing their homes to foreclosure. In exchange,  homeowners share any equity created by the discounted restructured loan  as well as future appreciation with FHA, which is authorized to insure up  to $300 billion in new loans under this program. Additionally, the borrower  cannot take out a second mortgage for the first five years of the loan,  except under certain circumstances for emergency repairs. The program  became effective October 1, 2008, and will conclude on September 30,  2011. To participate in the HOPE for Homeowners program, borrowers  must also meet specific eligibility criteria as follows:    Their mortgage must have originated on or before January 1, 2008.
They must have made a minimum of six full payments on their existing  first mortgage and must not have intentionally missed mortgage payments.
They must not own a second home.
Their mortgage debt-to-income ratio for their existing mortgage must be  greater than 31 percent.
They must not knowingly or willfully have provided false information to  obtain the existing mortgage and must not have been convicted of fraud in  the last 10 years.
The Emergency Economic Stabilization Act, passed by Congress and  signed by the President on October 3, 2008, created TARP, which outlines  a troubled asset purchase and insurance program, among other things.  The total size of the program cannot exceed $700 billion at any given time.  Authority to purchase or insure $250 billion was effective on the date of  enactment, with an additional $100 billion in authority available upon  submission of a certification by the President. A final $350 billion is  available under the act but is subject to Congressional review. The  legislation required that financial institutions that sell troubled assets to  Treasury also provide a warrant giving Treasury the right to receive shares  of stock (common or preferred) in the institution or a senior debt  instrument from the institution. The terms and conditions of the warrant  or debt instrument must be designed to (1) provide Treasury with  reasonable participation in equity appreciation or with a reasonable  interest rate premium, and (2) provide additional protection for the  taxpayer against losses from the sale of assets by Treasury and the  administrative expenses of TARP. To the extent that Treasury acquires  troubled mortgage-related assets, the act also directs Treasury to  encourage servicers of the underlying loans to take advantage of the  HOPE for Homeowners Program. Treasury is also required to consent,  where appropriate, to reasonable requests for loan modifications from  homeowners whose loans are acquired by the government. The act also  requires the Federal Housing Finance Agency, the Federal Deposit  Insurance Corporation (FDIC), and the Federal Reserve Board to  implement a plan to maximize assistance to homeowners, that may  include reducing interest rates and principal on residential mortgages or  mortgage-backed securities owned or managed by these institutions.
The regulators have also taken steps to support the mortgage finance  system. On November 25, 2008, the Federal Reserve announced that it  would purchase up to $100 billion in direct obligations of the GSEs  (Fannie Mae, Freddie Mac, and the Federal Home Loan Banks), and up to  $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie  Mac, and Ginnie Mae. It undertook the action to reduce the cost and  increase the availability of credit for home purchases, thereby supporting  housing markets and improving conditions in financial markets more  generally. Also, on November 12, 2008, the four financial institution  regulators issued a joint statement underscoring their expectation that all  banking organizations fulfill their fundamental role in the economy as  intermediaries of credit to businesses, consumers, and other creditworthy  borrowers, and that banking organizations work with existing mortgage  borrowers to avoid preventable foreclosures. The regulators further stated  that banking organizations need to ensure that their mortgage servicing  operations are sufficiently funded and staffed to work with borrowers  while implementing effective risk-mitigation measures. Finally, on  November 11, 2008, the Federal Housing Finance Agency (FHFA)  announced a streamlined loan modification program for home mortgages  controlled by the GSEs.
Most mortgages are bundled into securities called residential mortgage- backed securities that are bought and sold by investors. These securities  may be issued by GSEs and private companies. Privately issued mortgage- backed securities, known as private label securities, are typically backed  by mortgage loans that do not conform to GSE purchase requirements  because they are too large or do not meet GSE underwriting criteria.  Investment banks bundle most subprime and Alt-A loans into private label  residential mortgage-backed securities. The originator/lender of a pool of  securitized assets usually continues to service the securitized portfolio.  Servicing includes customer service and payment processing for the  borrowers in the securitized pool and collection actions in accordance  with the pooling and servicing agreement. The decision to modify loans  held in a mortgage-backed security typically resides with the servicer.  According to some industry experts, the servicer may be limited by the  pooling and servicing agreement with respect to performing any large- scale modification of the mortgages that the security is based upon.  However, others have stated that the vast majority of servicing agreements  do not preclude or routinely require investor approval for loan  modifications. We have not assessed how many potentially troubled loans  face restrictions on modification.

	Default and Foreclosure Rates Have Reached Historical Highs and Are Expected to Increase Further

National default and foreclosure rates rose sharply during the 3-year  period from the second quarter of 2005 through the second quarter of 2008  to the highest level in 29 years (fig.1). More specifically, default rates  more than doubled over the 3-year period, growing from 0.8 percent to 1.8  percent. Similarly, foreclosure start rates—representing the percentage of  loans that entered the foreclosure process each quarter—grew almost  three-fold, from 0.4 percent to 1 percent. Put another way, nearly half a  million mortgages entered the foreclosure process in the second quarter of  2008, compared with about 150,000 in the second quarter of 2005. Finally,  foreclosure inventory rates rose 175 percent over the 3-year period,  increasing from 1.0 percent to 2.8 percent, with most of that growth  occurring since the second quarter of 2007. As a result, almost 1.25 million  loans were in the foreclosure inventory as of the second quarter of 2008.
Default and foreclosure rates varied by market segment and product type,  with subprime and adjustable-rate loans experiencing the largest increases  during the 3-year period we examined. More specifically:  In the prime market segment, which accounted for more than three- quarters of the mortgages being serviced, 2.4 percent of loans were in  default or foreclosure by the second quarter of 2008, up from 0.7 percent 3  years earlier. Foreclosure start rates for prime loans began the period at  relatively low levels (0.2 percent) but rose sharply on a percentage basis,  reaching 0.6 percent in the second quarter of 2008.
In the subprime market segment, about 18 percent of loans were in default  or foreclosure by the second quarter of 2008, compared with 5.8 percent 3  years earlier. Subprime mortgages accounted for less than 15 percent of  the loans being serviced, but over half of the overall increase in the  number of mortgages in default and foreclosure over the period.  Additionally, foreclosure start rates for subprime loans more than tripled,  rising from 1.3 percent to 4.3 percent (see fig. 2).
In the government-insured or -guaranteed market segment, which  represented about 10 percent of the mortgages being serviced, 4.8 percent  of the loans were in default or foreclosure in the second quarter of 2008,  up from 4.5 percent 3 years earlier. Additionally, foreclosure start rates in  this segment increased modestly, from 0.7 to 0.9 percent.
ARMs accounted for a disproportionate share of the increase in the  number of loans in default and foreclosure in the prime and subprime  market segments over the 3-year period. In both the prime and subprime  market segments, ARMs experienced relatively steeper increases in  default and foreclosure rates, compared with more modest growth for  fixed rate mortgages. In particular, foreclosure start rates for subprime  ARMs more than quadrupled over the 3-year period, increasing from 1.5  percent to 6.6 percent.
Default and foreclosure rates also varied significantly among states. For  example, as of the second quarter of 2008, the percentage of mortgages in  default or foreclosure ranged from 1.1 percent in Wyoming to 8.4 percent  in Florida. Other states that had particularly high combined rates of  default and foreclosure included California (6.0 percent), Michigan (6.2  percent), Nevada (7.6 percent), and Ohio (6.0 percent). Every state in the  nation experienced growth in their foreclosure start rates from the second  quarter of 2005 through the second quarter of 2008. By the end of that  period, foreclosure start rates were at their 29-year maximums in 17 sta As shown in figure 3, percentage increases in foreclosure start rates  differed dramatically by state. The foreclosure start rate rose at least  10  percent in every state over the 3-year period, but 23 states experienced a increase of 100 percent or more. Several states in the “Sun Belt” region,  such as Arizona, California, Florida, and Nevada, had among the highest  percentage increases in foreclosure start rates. In contrast, 7 states  experienced increases of 30 percent or less, including North Carolin Oklahoma, and Utah. tes.

	Treasury is Examining Options for Homeowner Preservation In Li ght of Recent Changes in the Use of TARP Funds

Treasury is currently examining strategies for homeownership  preservation, including maximizing loan modifications, in light of a refocus  in its use of TARP funds. Treasury’s initial focus in implementing TARP  was to stabilize the financial markets and stimulate lending to businesses  and consumers by purchasing troubled mortgage-related assets— securities and whole loans—from financial institutions. Treasury planned  to use its leverage as a major purchaser of troubled mortgages to work  with servicers and achieve more aggressive mortgage modification  standards. However, Treasury subsequently concluded that purchasing  troubled assets would take time to implement and would not be sufficient  given the severity of the problem. Instead, Treasury determined that the  most timely, effective way to improve credit market conditions was to  strengthen bank balance sheets quickly through direct purchases of equit in banks. y  The standard agreement between Treasury and the participating  institutions in the CPP includes a number of provisions, some in the  “recitals” section at the beginning of the agreement and other detailed  terms in the body of the agreement. The recitals refer to the participating  institutions’ future actions in general terms—for example, “the Company  agrees to work diligently, under existing programs to modify the terms of  residential mortgages as appropriate to strengthen the health of the U.S.  housing market.” Treasury and the regulators have publicly stated that  they expect these institutions to use the funds in a manner consistent with  the goals of the program, which include both the expansion of the flow of  credit and the modification of the terms of residential mortgages. But, to  date it remains unclear how OFS and the regulators will monitor how  participating institutions are using the capital injections to advance the  purposes of the act. The standard agreement between Treasury and the  participating institutions does not require that these institutions track or  report how they use or plan to use their capital investments. In our first   60-day report to Congress on TARP, mandated by the Emergency  Economic Stabilization Act, we recommended that Treasury, among other  things, work with the bank regulators to establish a systematic means for  determining and reporting on whether financial institutions’ activities are  generally consistent with the purposes of CPP.
Without purchasing troubled mortgage assets as an avenue for preserving  homeownership, Treasury is considering other ways to meet this  objective. Treasury has established and appointed an interim chief for the  Office of the Chief of Homeownership Preservation under OFS. According  to Treasury officials, the office is currently staffed with federal  government detailees and is in the process of hiring individuals with  expertise in housing policy, community development and economic  research. Treasury has stated that it is working with other federal  agencies, including FDIC, HUD, and FHFA to explore options to help  homeowners under TARP. According to the Office of Homeownership  Preservation interim chief, Treasury is considering a number of factors in  its review of possible loan modification options, including the cost of the  program, the extent to which the program minimizes recidivism among  borrowers helped out of default, and the number of homeowners the  program has helped or is projected to help remain in their homes.  However, to date the Treasury has not completed its strategy for  preserving homeownership.
Among the strategies for loan modification that Treasury is considering is  a proposal by FDIC that is based on its experiences with loans held by a  bank that was recently put in FDIC conservatorship. The former IndyMac  Bank, F.S.B., was closed July 11, 2008, and FDIC was appointed the  conservator for the new institution, IndyMac Federal Bank, F.S.B. As a  result, FDIC inherited responsibility for servicing a pool of approximately  653,000 first-lien mortgage loans, including more than 60,000 mortgage  loans that were more than 60 days past due, in bankruptcy, in foreclosure,  and otherwise not currently paying. On August 20, 2008, the FDIC  announced a program to systematically modify troubled residential loans  for borrowers with mortgages owned or serviced by IndyMac Federal.  According to FDIC, the program modifies eligible delinquent mortgages to  achieve affordable and sustainable payments using interest rate  reductions, extended amortization, and where necessary, deferring a  portion of the principal. FDIC has stated that by modifying the loans to an  affordable debt-to-income ratio (38 percent at the time) and using a menu  of options to lower borrowers’ payments for the life of their loan, the  program improves the value of the troubled mortgages while achieving  economies of scale for servicers and stability for borrowers. According to  FDIC, as of November 21, 2008, IndyMac Federal has mailed more than  23,000 loan modification proposals to borrowers and over 5,000 borrowers  have accepted the offers and are making payments on modified mortgages.  FDIC states that monthly payments on these modified mortgages are, on  average, 23 percent or approximately $380 lower than the borrower’s  previous monthly payment of principal and interest. According to FDIC, a  federal loss sharing guarantee on re-defaults of modified mortgages under  TARP could prevent as many as 1.5 million avoidable foreclosures by the  end of 2009. FDIC estimated that such a program, including a lower debt- to-income ratio of 31 percent and a sharing of losses in the event of a re- default, would cost about $24.4 billion on an estimated $444 billion of  modified loans, based on an assumed re-default rate of 33 percent. We  have not had an opportunity to independently analyze these estimates and  assumptions.
Other similar programs under review, according to Treasury, include  strategies to guarantee loan modifications by private lenders, such as the  HOPE for Homeowners program. Under this new FHA program, lenders  can have loans in their portfolio refinanced into FHA-insured loans with  fixed interest rates. HERA had limited the new insured mortgages to no  more than 90 percent of the property’s current appraised value. However,  on November 19, 2008, after action by the congressionally created Board  of Directors of the HOPE for Homeowners program, HUD announced that  the program had been revised to, among other things, increase the  maximum amount of the new insured mortgages in certain  circumstances. Specifically, the new insured mortgages cannot exceed  96.5 percent of the current appraised value for borrowers whose mortgage  payments represent no more than 31 percent of their monthly gross  income and monthly household debt payments no more than 43 percent of  monthly gross income. Alternatively, the new mortgage may be set at 90  percent of the current appraised value for borrowers with monthly  mortgage and household debt-to-income ratios as high as 38 and 50  percent, respectively. These loan-to-value ratio maximums mean that in  many circumstances the amount of the restructured loan would be less  than the original loan amount and, therefore, would require lenders to  write down the existing mortgage amounts. According to FHA, lenders  benefit by turning failing mortgages into performing loans. Borrowers  must also share a portion of the equity resulting from the new mortgage  and the value of future appreciation. This program first became available  October 1, 2008. FHA has listed on the program’s Web site over 200  lenders that, as of November 25, 2008, have indicated to FHA an interest in  refinancing loans under the HOPE for Homeowners program. See the  appendix to this statement for examples of federal government and private  sector residential mortgage loan modification programs.
Treasury is also considering policy actions that might be taken under CPP  to encourage participating institutions to modify mortgages at risk of  default, according to an OFS official. While not technically part of CPP,  Treasury announced on November 23, 2008, that it will invest an additional  $20 billion in Citigroup from TARP in exchange for preferred stock with an  8 percent dividend to the Treasury. In addition, Treasury and FDIC will  provide protection against unusually large losses on a pool of loans and  securities on the books of Citigroup. The Federal Reserve will backstop  residual risk in the asset pool through a non-recourse loan. The agreement  requires Citigroup to absorb the first $29 billion in losses. Subsequent  losses are shared between the government (90 percent) and Citigroup (10  percent). As part of the agreement, Citigroup will be required to use FDIC  loan modification procedures to manage guaranteed assets unless  otherwise agreed.
Although any program for modifying loans faces a number of challenges,  particularly when the loans or the cash flows related to them have been  bundled into securities that are sold to investors, foreclosures not only  affect those losing their homes but also their neighborhoods and have  contributed to increased volatility in the financial markets. Some of the  challenges that loan modification programs face include making  transparent to investors the analysis supporting the value of modification  over foreclosure, designing the program to limit the likelihood of re- default, and ensuring that the program does not encourage borrowers who  otherwise would not default to fall behind on their mortgage payments.  Additionally, there are a number of potential obstacles that may need to be  addressed in performing large-scale modification of loans supporting a  mortgage-backed security. As noted previously, the pooling and servicing  agreements may preclude the servicer from making any modifications of  the underlying mortgages without approval by the investors. In addition,  many homeowners may have second liens on their homes that may be  controlled by a different loan servicer, potentially complicating loan  modification efforts.
Treasury also points to challenges in financing any new proposal. The  Secretary of the Treasury, for example, noted that it was important to  distinguish between the type of assistance, which could involve direct  spending, from the type of investments that are intended to promote  financial stability, protect the taxpayer, and be recovered under the TARP  legislation. However, he recently reaffirmed that maximizing loan  modifications was a key part of working through the housing correction  and maintaining the quality of communities across the nation. However,  Treasury has not specified how it intends to meet its commitment to loan  modification. We will continue to monitor Treasury’s efforts as part of our  ongoing TARP oversight responsibilities.
Going forward, the federal government faces significant challenges in  effectively deploying its resources and using its tools to bring greater  stability to financial markets and preserving homeownership and  protecting home values for millions of Americans.
Mr. Chairman, this concludes my statement. I would be pleased to respond  to any questions that you or other members of the subcommittee may have  at this time.

Appendix I: Examples of Federal Government and Private Sector Residential Mortgage Loan Modification Programs

Eligible borrowers are those with loans owned or serviced by IndyMac Federal Bank  Affordable mortgage payment achieved for the seriously delinquent or in default borrower  through interest rate reduction, amortization term extension, and/or principal forbearance  Payment must be no more than 38 percent of the borrower’s monthly gross income  Losses to investor minimized through a net present value test that confirms that the  modification will cost the investor less than foreclosure  Borrowers can refinance into an affordable loan insured by FHA  Eligible borrowers are those who, among other factors, as of March 2008, had total  monthly mortgage payments due of more than 31 percent of their gross monthly income    New insured mortgages cannot exceed 96.5 percent of the current loan-to-value ratio  (LTV) for borrowers whose mortgage payments do not exceed 31 percent of their monthly  gross income and total household debt not to exceed 43 percent; alternatively, the program  allows for a 90 percent LTV for borrowers with debt-to-income ratios as high as 38  (mortgage payment) and 50 percent (total household debt)
Requires lenders to write down the existing mortgage amounts to either of the two LTV  Eligible borrowers are those who, among other factors, have missed three payments or  more  Servicers can modify existing loans into a Freddie Mae or Fannie Mac loan, or a portfolio  loan with a participating investor  An affordable mortgage payment, of no more than 38 percent of the borrower’s monthly  gross income, is achieved for the borrower through a mix of reducing the mortgage interest  rate, extending the life of the loan or deferring payment on part of the principal  Eligible borrowers are those with subprime or pay option adjustable rate mortgages  serviced by Countrywide and originated by Countrywide prior to December 31, 2007    Options for modification include refinance under the FHA HOPE for Homeowners program,  interest rate reductions, and principal reduction for pay option adjustable rate mortgages  First-year payments mortgage payments will be targeted at 34 percent of the borrower’s  income, but may go as high as 42 percent  Annual principal and interest payments will increase at limited step-rate adjustments  Affordable mortgage payment achieved for the borrower at risk of default through interest  rate reduction and/or principal forbearance    Modification may also include modifying pay-option ARMs to 30-year, fixed-rate loans or  interest-only payments for 10 years    Modification includes flexible eligibility criteria on origination dates, loan-to-value ratios, rate  floors and step-up adjustment features  This program was created in consultation with Fannie Mae, Freddie Mac, HOPE NOW and  its twenty-seven servicer partners, the Department of the Treasury, FHA and FHFA.

	Contacts and Staff Acknowledgement

For further information about this statement, please contact Mathew J.  Scire, Director, Financial Markets and Community Investment, on (202)  512-8678 or sciremj@gao.gov. In addition to the contact named above the  following individuals from GAO’s Financial Markets and Community  Investment Team also made major contributors to this testimony: Harry  Medina and Steve Westley, Assistant Directors; Jamila Jones and Julie  Trinder, Analysts-in-Charge; Jim Vitarello, Senior Analyst; Rachel  DeMarcus, Assistant General Counsel; and Emily Chalmers and Jennifer  Schwartz, Communications Analysts.
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Summary:
Why GAO Did This Study

A dramatic increase in mortgage loan defaults and foreclosures is one of the key contributing factors to the current downturn in the U.S. financial markets and economy. In response, Congress passed and the President signed in July the Housing and Economic Recovery Act of 2008 and in October the Emergency Economic Stabilization Act of 2008 (EESA), which established the Office of Financial Stability (OFS) within the Department of the Treasury and authorized the Troubled Asset Relief Program (TARP). Both acts establish new authorities to preserve homeownership. In addition, the administration, independent financial regulators, and others have undertaken a number of recent efforts to preserve homeownership. GAO was asked to update its 2007 report on default and foreclosure trends for home mortgages, and describe the OFS's efforts to preserve homeownership. GAO analyzed quarterly default and foreclosure data from the Mortgage Bankers Association for the period 1979 through the second quarter of 2008 (the most recent quarter for which data were available). GAO also relied on work performed as part of its mandated review of Treasury's implementation of TARP, which included obtaining and reviewing information from Treasury, federal agencies, and other organizations (including selected banks) on home ownership preservation efforts. To access GAO's first oversight report on Treasury's implementation of TARP, see GAO-09-161 .

What GAO Found

Default and foreclosure rates for home mortgages rose sharply from the second quarter of 2005 through the second quarter of 2008, reaching a point at which more than 4 in every 100 mortgages were in the foreclosure process or were 90 or more days past due. These levels are the highest reported in the 29 years since the Mortgage Bankers Association began keeping complete records and are based on its latest available data. The subprime market, which consists of loans to borrowers who generally have blemished credit and that feature higher interest rates and fees, experienced substantially steeper increases in default and foreclosure rates than the prime or government-insured markets, accounting for over half of the overall increase. In the prime and subprime market segments, adjustable-rate mortgages experienced steeper growth in default and foreclosure rates than fixed-rate mortgages. Every state in the nation experienced growth in the rate at which loans entered the foreclosure process from the second quarter of 2005 through the second quarter of 2008. The rate rose at least 10 percent in every state over the 3-year period, but 23 states experienced an increase of 100 percent or more. Several states in the "Sun Belt" region, including Arizona, California, Florida, and Nevada, had among the highest percentage increases. OFS initially intended to purchase troubled mortgages and mortgage-related assets and use its ownership position to influence loan servicers and to achieve more aggressive mortgage modification standards. However, within two weeks of EESA's passage, Treasury determined it needed to move more quickly to stabilize financial markets and announced it would use $250 billion of TARP funds to inject capital directly into qualified financial institutions by purchasing equity. In recitals to the standard agreement with Treasury, institutions receiving capital injections state that they will work diligently under existing programs to modify the terms of residential mortgages. It remains unclear, however, how OFS and the banking regulators will monitor how these institutions are using the capital injections to advance the purposes of the act, including preserving homeownership. As part of its first TARP oversight report, GAO recommended that Treasury, among other things, work with the bank regulators to establish a systematic means for determining and reporting on whether financial institutions' activities are generally consistent with program goals. Treasury also established an Office of Homeownership Preservation within OFS that is reviewing various options for helping homeowners, such as insuring troubled mortgage-related assets or adopting programs based on the loan modification efforts of FDIC and others, but it is still working on its strategy for preserving homeownership. While Treasury and others will face a number of challenges in undertaking loan modifications, including making transparent to investors the analysis supporting the value of modification versus foreclosure, rising defaults and foreclosures on home mortgages underscore the importance of ongoing and future efforts to preserve homeownership. GAO will continue to monitor Treasury's efforts as part of its mandated TARP oversight responsibilities.