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42–718 PDF 2008

H.R. 5579, THE EMERGENCY MORTGAGE

LOAN MODIFICATION ACT OF 2008

HEARING

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS,

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 15, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–106

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

DEBORAH PRYCE, Ohio 

JEB HENSARLING, Texas 

CHRISTOPHER SHAYS, Connecticut 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SHELLEY MOORE CAPITO, West Virginia 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 15, 2008 ................................................................................................... 1

Appendix: 

April 15, 2008 ................................................................................................... 25

WITNESSES 

TUESDAY, APRIL 15, 2008

Daloisio, Ralph, Managing Director, Natixis Structured Finance Group, on 

behalf of the American Securitization Forum .................................................... 4

Story, Robert E., Jr., CMB, President, Seattle Financial Group, and Vice 

Chairman, Mortgage Bankers Association, on behalf of the Mortgage Bankers Association (ABA) .......................................................................................... 6

Young, Marlo A., Partner, Thacher Proffitt & Wood LLP .................................... 7

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 26

Carson, Hon. Andre .......................................................................................... 27

Daloisio, Ralph .................................................................................................. 28

Story, Robert E., Jr. ......................................................................................... 44

Young, Marlo A. ................................................................................................ 49

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Letter from the National Association of Realtors, dated April 3, 2008 ....... 53

(1)

H.R. 5579, THE EMERGENCY MORTGAGE 

LOAN MODIFICATION ACT OF 2008

Tuesday, April 15, 2008

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Moore of 

Kansas, Miller, Scott, Davis of Tennessee, Donnelly; Hensarling, 

Castle, and Brown-Waite. 

Also present: Representative Watt. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

Without objection, all members’ opening statements will be made 

a part of the record. 

Good afternoon. We meet today to examine H.R. 5579, the Emergency Mortgage Loan Modification Act of 2008. 

I worked with Congressman Castle on revising his initial proposal and introducing this new bill. Nearly 6 percent of all loans 

on single family properties outstanding in the fourth quarter of 

2007 were delinquent, which is the highest total delinquency rate 

in 20 years. Moreover, slightly more than 2 percent of the homes 

are already in the process of foreclosure. That is the highest level 

ever. These numbers, coupled with the general anxiety and unease 

brought on by the housing crisis and the ongoing credit crunch underscore the importance of this hearing and the need for our bipartisan legislation. 

Many in Washington and throughout the country are preoccupied 

with playing the blame game and performing postmortems as to 

what caused the subprime fiasco. I believe that such exercises must 

wait for another day. We can try to figure out how it all went 

wrong some other time. The immediate problems faced by many 

borrowers demand our attention. The search for innovative solutions in an increasingly complex financial world should be our priority. This afternoon’s hearing represents part of that search. 

One of the main obstacles that we face in attempting to decrease 

the number of mortgage foreclosures is the reluctance of servicers 

to modify loans and conduct workouts because they fear investor 

2

lawsuits. The legislation under consideration today will provide 

servicers a safe harbor from legal challenges. If the servicers meet 

certain conditions, a safe harbor should embolden servicers to ramp 

up loan modifications. Without the fear of litigation, servicer efforts 

toward loss mitigation should also greatly increase. 

Some contend that adoption of this legislation will result in the 

abrogation of existing contracts. In drafting this new legislation, 

however, we addressed these concerns and sought to create a bill 

that honors the terms of existing contracts. Those parties who remain opposed to loan modifications on these grounds should remember that rigid principles sometimes must yield to urgent solutions that demand immediate action. This situation is one such instance. 

For every mortgage that does not fail but rather is saved by the 

servicer through loss mitigation, the value of the underlying loan 

pool should increase. After all, mortgages in foreclosure amount to 

much less than a modified loan. But more importantly, these modifications by the private sector will keep more families in their 

homes. To me, these benefits considerably outweigh the costs. 

Some may, however, continue to question certain provisions of 

this bill in good faith and on fair grounds. My mind is by no means 

closed on these matters. If a better way exists to address this issue 

or to write this legislation, I want to hear it. This hearing provides 

us with a forum for a thoughtful exchange of ideas and, I hope, a 

productive series of questions and answers. 

In closing, I look forward to hearing the thoughts of our witnesses on these matters. I also want to thank each of them for appearing. Their views will assist us as we navigate our way through 

this complicated situation. 

We must act where we can to lessen the severity of this crisis. 

Moreover, we should do so in a way that respects the efficiency of 

the capital markets, but which is not afraid to find solutions to redress its excesses. 

I yield back the balance of my time and recognize the gentleman 

from Delaware, Governor Castle, for an opening statement. 

Mr. CASTLE. Mr. Chairman, first, thank you very much for holding this hearing today, first, and second, I agree with your comments entirely, that we need to be as open-ended as possible about 

whatever changes are necessary to put into effect what we all think 

is in the best interest of everybody, which is to deal with the mortgage crisis which we have in our country today. I am anxious to 

hear what our panelists have to say, so I will be brief. 

The goal of this legislation has been straightforward from the 

very beginning to provide added assurance and thus safer legal 

footing for servicers modifying mortgage loans. To that end, it has 

been my belief that homeowners and investors alike could benefit 

by finding terms and conditions that would allow at-risk homeowners the opportunity to stay in their homes while providing the 

investors some rate of return on their investments. 

Today’s economic conditions are very challenging for both borrowers and investors. Borrowers didn’t enter homeownership and 

the mortgage market in the expectation of losing their home, and 

investors purchased mortgage-backed securities with anticipated 

rates of return. That was then and this is now. All along, I worried 

3

that lawsuits could become a drag on the loan modification process, 

or worse, bring it to a complete stop. Thankfully, we have not seen 

that materialize. 

However, the risk of that occurring still exists. In fact, the risk 

may be greater in the coming months as servicers move on to modify marginally more difficult loans. 

In closing, Mr. Chairman, I want to thank you, Chairman Frank, 

and Deb Silberman of the committee staff for assistance with this 

bill. I look forward to the testimony and suggestions for further improvement from the servicer and investment witnesses. 

Chairman KANJORSKI. Thank you very much, Mr. Castle. The 

gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. And I want to thank you, 

Mr. Chairman, and the ranking member for holding this important 

hearing. I am pleased that we have chosen to again address the 

mortgage meltdown and credit crunch in our markets, and as I 

have said repeatedly, I think it is very important that we move 

with the same urgency and aggressiveness to help homeowners and 

families as we have to help Wall Street and specifically Bear 

Stearns, which I concurred with. 

There are 2.2 million homeowners in this country who could lose 

their homes in the next few years. Many people are just barely 

hanging on by their fingernails. This is a call to all involved that 

we have to work together in a hurry with great urgency to find 

positive ways and long-term solutions to those facing foreclosures. 

We must have a policy that is grounded on, first and foremost, 

keeping people in their homes. We have to refinance, we have to 

restructure, we have to do what is necessary to keep people in their 

homes. 

I would like to know again, as I have asked before, why it has 

taken regulators, who were well aware of the subprime mortgage 

crisisand issue early on, long before it hit a peak, why it took them 

so long to act, despite the clear evidence of problems in the markets, evidence that was pointed out time and time again, if I may 

say so, Mr. Chairman, by this very committee in areas dealing with 

predatory lending, in areas dealing with extending credit to people 

who should not have gotten that credit, and in the lack of accountability and responsibility within the lending market. 

As more and more of our creditors are now cracking down on certain lending practices, we must ensure that there are sound underwriting of these loans, and that sound underwriting on these loans 

is rewarded, and those players who continue to prey on individuals 

with predatory practices realize that there are consequences. We 

have to put them out of business, and we should ensure that credit 

continues to be available to those who qualify, and are feasible candidates for home loans, such as first-time buyers, lower income 

households, and African-American and other minority families and 

communities. 

Not only are foreclosures causing problems for families financially, but they are placing undue pressures on city and local, municipal, and county services such as code enforcement. In my own 

district in Georgia, for example, there are certain neighborhoods 

with an inordinate number of foreclosures, and they have become 

magnets for crime. That is why we have to keep people in their 

4

homes. Vacant buildings bring about crime. They bring added 

downward pressures on local governments. 

I am concerned about the foreclosure numbers in Georgia, especially. We have a high rate of foreclosures. We rank 8th in the Nation, and one or two of our counties are right there within the top 

5 in terms of overall foreclosures and delinquencies. 

We must be alert to economic indicators and I hope to hear today 

more detail about the risk of a prolonged housing slump and potential ideas and solutions to the problems. 

I am very pleased that the Emergency Loan Modification Act will 

remove the legal liability roadblock for servicers that provide for 

specified loan modifications and workouts and will help borrowers 

to restructure and refinance their loans at a faster pace. That is 

the key, ladies and gentlemen: restructuring and refinancing at a 

faster pace with the underlying move at all costs to keep people in 

their homes. 

Thank you very much, Mr. Chairman. I look forward to the distinguished witnesses and their testimony. 

Chairman KANJORSKI. Thank you, Mr. Scott. 

We now move to our witnesses, and without objection, all witnesses’ written statements will be made a part of the record. Each 

of you will be recognized for a 5-minute summary of your testimony. 

First, we have Mr. Ralph Daloisio of Natixis Structured Finance 

Group, testifying on behalf of the American Securitization Forum. 

We have reserved 5 minutes for you, sir. 

STATEMENT OF RALPH DALOISIO, MANAGING DIRECTOR, 

NATIXIS STRUCTURED FINANCE GROUP, ON BEHALF OF THE 

AMERICAN SECURITIZATION FORUM 

Mr. DALOISIO. Chairman Kanjorski, Congressman Castle, and 

distinguished members of the subcommittee, as chair of the investor committee of the American Securitization Forum, I have been 

asked to share my views on H.R. 5579. 

I have reviewed a March 11th draft of the bill, and I can see 

great care was exercised in its construction. Those who were involved in this drafting should be commended for their thoughtfulness. There are, however, certain elements of the bill that give me 

pause, and I would like to share those with you today. 

The bill establishes a standard of care for servicers when effecting mortgage loan modifications, or workout plans, and a safe harbor for performing a qualified loan modification, or workout plan, 

provided there are no specific contractual provisions to the contrary. The contractual standards to which the bill relates, the duties of servicers with respect to modifying or otherwise mitigating 

losses on distressed mortgage loans are typically established 

through general provisions and securitization contracts rather than 

specific ones. Though the provisions are often framed in general 

terms, they create legally enforceable expectations of conduct by 

the parties to whom the provisions pertain, including duties and responsibilities of servicers to investors when engaging in loss mitigation activities. To the extent the bill would supersede these general provisions, it would be, in effect, overruling the contracts. 

5

Furthermore, the standard of care prescribed by the bill in its 

Section 2(a) may be weaker and less protective of investor interests 

than that found in most servicing contracts today, whereas the bill 

requires a servicer to compare the net present value of defaulted 

loan assuming foreclosure, with its net present value assuming 

modification. Typical servicing contracts require the net present 

value analysis to be performed across a wider range of modification 

and loss mitigation alternatives with the servicer being bound to 

choose action based on the alternative that maximizes MPV among 

the other alternatives, not just one of them. 

Finally, the bill would protect servicers complying with its standard of care who grant a qualified loan modification, or workout 

plan. By designating one kind of loan modification over other kinds 

of loan modifications, the bill creates a clear incentive for servicers 

to make only the protected modifications rather than other modifications which might be more beneficial to the securitization trust 

and to investors. That incentive itself would be contrary to the contractual standard of care to which servicers are generally bound by 

their contracts and would again introduce the possibility of a legislative overruling of preexisting contractual provisions. 

Overall, if the intent of the bill is to clarify the existing and customary contractual servicing standards and incentivize servicers to 

apply those standards to minimize losses and avoid foreclosures, I 

see nothing fundamentally wrong with that from an investor’s perspective. If this is the case, then some relatively simple drafting revisions to the bill would better align its wording to its intent. 

If, however, the intent is to replace the legal duties and commercial expectations of transaction parties with a different set of duties 

and expectations supplied by Congress, I am concerned that the 

passage of this bill would represent a de facto modification of existing contracts. Since all parties to a contract, including investors, 

rely on legal, valid, binding, and enforceable provisions of the governing contracts, any legislation that would dilute, amend, or modify such contractual obligations or prejudice how the obligor fulfills 

its obligations is considered by the American Securitization Forum 

and by a consensus of the investor constituency within the American Securitization Forum to represent dangerous policy. 

Legislative intervention into otherwise valid legal contracts could 

potentially threaten the stability and predictable operation of the 

contractual legal framework supporting our capital markets system, and carried to its logical conclusion, could have a chilling effect on the willingness of investors to make investments in our 

markets. 

Beyond the comments I have made, I would actually go so far as 

to question the premise and also the need for the bill. The underlying premise of the legislation appears to be the view that mortgage loan servicers are inhibited by a fear of investor lawsuits from 

doing more to avoid foreclosures. However, servicers are already 

reasonably well-protected from such lawsuits, since under typical 

servicing contracts, they are liable only if they are negligent in performing their duties. Usually, one of these duties is the duty to reduce losses by avoiding foreclosures wherever possible. I therefore 

generally believe that servicers have adequate legal protections for 

granting modifications and are uninhibited from doing so. The bill 

6

would neither change such duty nor would it allow servicers to 

avoid liability for their own negligence in performing that duty. 

If there are cases where the servicers do need to minimize loss 

by avoiding foreclosure is not clearly established, then servicers 

and investors would have an alignment of interest in making the 

necessary amendments and would seemingly have sufficient economic motivation for doing so, especially since foreclosure is usually the most costly means of resolving a defaulting mortgage loan, 

it is in everyone’s interest, including investors’, to avoid foreclosures wherever possible and the damage that foreclosure is causing to our balance sheets and to our communities. 

I hope that my comments here today will prove to be helpful to 

you, and I thank each of you for inviting me to share them and for 

taking the time to listen. 

[The prepared statement of Mr. Daloisio can be found on page 28 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Daloisio. 

Next we will hear from Mr. Robert E. Story, Jr., president of the 

Seattle Financial Group and vice chairman of the Mortgage Bankers Association. 

Mr. Story. 

STATEMENT OF ROBERT E. STORY, JR., PRESIDENT, SEATTLE 

FINANCIAL GROUP, AND VICE CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION, ON BEHALF OF THE MORTGAGE 

BANKERS ASSOCIATION (ABA) 

Mr. STORY. Mr. Chairman, and Congressman Castle, thank you 

for the opportunity to appear before you. MBA appreciates your attention to this important issue, and in particular, we appreciate the 

work of Congressman Kanjorski and Congressman Castle. We are 

all focused on the same goal: keeping people in their homes. 

H.R. 5579 would protect servicers from litigation risk if they engage in certain loss mitigation efforts. MBA identified litigation 

risk as a barrier to workouts some months ago, and we have been 

working as an industry to address this issue. We are focused on improving clarity between investors and servicers. Significant strides 

have already been made and continue to be made. 

The industry formed HOPE NOW to help homeowners avoid foreclosure. We are funding counseling and promoting the HOPE NOW 

hotline for borrowers, 1–888–995–HOPE. We have improved and 

standardized our servicing practices. 

The investor community has stepped up in many ways. For example, investors have created guidelines to define the term ‘‘foreseeable default’’ that helps us help more borrowers. This was a 

major advance. Many servicers have also instituted foreclosure 

pauses to help give borrowers and lenders more time to work out 

a solution that keeps borrowers in their homes. 

These industry practices allow servicers to do to more to help 

borrowers. Nearly 1.2 million repayment plans and modifications 

were executed from July 2007 through February 2008, according to 

HOPE NOW. This is an unprecedented response by the mortgage 

industry. Given what the industry has done already, we recognize 

that more needs to be done. H.R. 5579 is a thoughtful proposal to 

help us do more. 

7

Our concern, however, is that the potential harm may outweigh 

the potential benefits. Borrowers and mortgage companies desperately need greater stability and liquidity in the market. The 

best way to improve liquidity is through investor confidence. Any 

effort that increases investor risk, including protecting servicers 

from liability, hampers this goal. We are concerned this bill may 

create investor uncertainty similar to recent bankruptcy proposals, 

despite the care the drafters took in trying to balance the interests 

of investors and servicers. 

MBA believes policy efforts should be focused on giving lenders 

and borrowers more options to work together such as new loan 

products to allow borrowers behind on their payments or upside 

down on their mortgages to refinance. The committee is currently 

working on such a proposal, and we look forward to participating 

constructively throughout that process. MBA is also eager to partner with Congress to finish work on FHA modernization, GSE oversight reform, housing tax incentives, and expanded mortgage revenue bond authority. 

The Mortgage Bankers Association appreciates your efforts to 

help borrowers stay in their homes. Servicers will continue to use 

their contractual authority to perform loss mitigation to the extent 

permissible and prudent. It remains unclear to us, however, whether the benefits of H.R. 5579 outweigh the potential harm the bill 

may cause the mortgage market overall. 

Thank you for the opportunity to appear before you, and I look 

forward to answering your questions. 

[The prepared statement of Mr. Story can be found on page 44 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Story. 

And now we will hear from Marlo Young, partner, Thacher 

Proffitt & Wood, LLP. Mr. Young. 

STATEMENT OF MARLO A. YOUNG, PARTNER, THACHER 

PROFFITT & WOOD LLP 

Mr. YOUNG. Chairman Kanjorski, Congressman Castle, and distinguished members of the subcommittee, good afternoon and 

thank you for the opportunity to testify here today. I am honored 

to be here representing Thacher Proffitt & Wood to discuss the 

Emergency Mortgage Loan Modification Act of 2008 and ways to 

prevent foreclosures and mitigate losses. We commend you for calling this hearing and look forward to offering our views on these important matters. 

Although a substantial number of loans have been modified to 

date, servicers have been unable to complete the desired amount of 

loan modifications, primarily due to operational challenges. The 

servicers must choose among a variety loss mitigation alternatives 

to achieve a sustainable arrangement with the borrower that is 

also in the best interest of investors. This can be a very labor-intensive and time-consuming endeavor for the servicer and unfortunately, there is not one particular type of loan modification that is 

suitable in every circumstance. 

The loan modification process would benefit from more streamlined approaches and enhanced automation. The ASF framework 

released last December was a worthy attempt at streamlining the 

8

loan modification process. However, the recent reduction in short 

term rates lessened the anticipated payment shock and has resulted in a smaller number of adjustable rate loans that are eligible for modification under the streamline framework. 

We do not believe there are major legal or contractual impediments to making loan modifications. Rather, our study of typical 

servicing agreement provisions for the ASF concluded, generally, 

servicers of loans and securitizations have the authority to implement loan modifications and other forms of loss mitigation alternatives when the loan is in default, or default is reasonably foreseeable, provided that the action taken is in accordance with accepted service and practices and it is in the best interest of investors. 

The provisions of Section 2(a) of the Emergency Mortgage Loan 

Modification Act of 2008 employ concepts that are consistent with 

the servicing provisions found in most agreements. We support the 

inclusion of the provision in Secion 2(a) of the bill that reads, ‘‘Absent specific contractual provisions to the contrary, removing any 

requirement that a loan modification or other loss mitigation not 

contradict the terms of the servicing agreement may interfere with 

the existing contractual terms of servicing agreements and result 

in actions that are not necessarily in the best interests of investors.’’ We think Section 2(a) should clarify that the servicer should 

select from all available loss mitigation alternatives, the one that 

maximizes recovery, and not compare the alternative selected solely to foreclosure. 

In addition, as long as the servicer’s procedures for evaluating 

the net present value of a particular loss mitigation alternative are 

reasonable, the servicer’s decision should not be challenged on the 

grounds that other evaluation procedures might have led to a different result. 

We question whether the safe harbor in Section 2(b) is necessary 

or desirable if the standards in Section 2(a) are adopted. As Section 

2(a) requires that any loss mitigation action not contradict any 

terms in the servicing agreement, and sets forth standards that are 

generally consistent with existing servicing provisions, the safe 

harbor contained in Section 2(b) does not appear to be necessary. 

In fact, the safe harbor provision may interfere with existing contractual provisions and bring into question the rights of investors 

on the servicing agreements. 

We believe that portions of the bill, in particular Section 2(a), 

will be helpful in providing certainty regarding appropriate loss 

mitigation standards. Section 2(a) would clarify that the phrase ‘‘in 

the best interest of investors’’ refers to all investors in the given 

securitization trust in the aggregate without regard to the effect of 

any specific class. This would make the servicers task of determining the appropriate loss mitigation more manageable. 

We believe that a major impediment to a servicer utilizing the 

full range of loss mitigation alternatives is the absence of an available loan product for funding a short refinancing, or a refinancing 

that pays off only a portion of the existing first lien for borrowers 

who are in default or are in immanent default. Accordingly, we 

think that proposals to expand FHA Secure or create a new FHA 

program for this purpose can serve as a key role in reducing foreVerDate 0ct 09 2002 15:36 Jun 13, 2008 Jkt 042718 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\42718.TXT TERRIE
9

closures. My testimony includes some recommendations for such a 

program that I hope this committee will consider. 

I thank you for the opportunity to participate in today’s hearing. 

Finding solutions to the current mortgage and housing crises and 

preventing foreclosures should be a high priority for all market 

participants in our communities. 

Again, I commend your leadership on these important matters. 

Thank you. 

[The prepared statement of Mr. Young can be found on page 49 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Young, and all the members of the panel. 

Before I get into my questions, I ask unanimous consent that Mr. 

Watt be considered, for the purpose of this hearing, as a full member of the committee with all the rights and privileges thereto. Is 

there any objection? Hearing none, Mr. Watt is so recognized. Mr. 

Watt, do you have an opening statement? 

Mr. WATT. No, Mr. Chairman. 

Chairman KANJORSKI. Very good. It seems to me that the three 

witnesses, if I am hearing you correctly, really do not feel there is 

a need for this legislation. Is that a reasonable conclusion? 

Mr. DALOISIO. From what I have said, and what I have heard the 

others say, I think that is where we are coming out. 

Chairman KANJORSKI. Well, I think that is interesting. But the 

reason I am interested in seeing a safe harbor and other encouragements to redo modifications in the mortgage field is that, what 

kind of a signal are we sending? Just go along as we have gone 

along over the last year? And catch as catch can. How are we going 

to really encourage a lot of people who are working with failing 

mortgages at this point to do something about restructuring and 

modification of those mortgages? What would you suggest we do, 

in other words? 

Mr. STORY. One of the suggestions that mortgage bankers have 

is to find more products and new programs available so people who 

may be delinquent or upside down can refinance. We commend the 

House’s approval of the FHA modernization bill, as well as GSE reform, and that is one of the ways we can help this problem. 

Chairman KANJORSKI. Would you not think, though, that the 

easiest and fastest way to handle a million, million-and-a-half, or 

two million mortgages is to have the servicers contact these mortgage holders and say, ‘‘Look, before you get any further in, before 

we run into any further problems, come on down, we want to talk, 

we can do things to keep you in your home, reduce the price, reduce the strain, and get you there.’’ I mean, testimony that I am 

hearing from people and just general statements is that 40, 50, or 

60 percent of the people never contact the holder of their mortgage 

before they go into default and foreclosure. How are we going to encourage the servicer to get more aggressive and to work with these 

people who are tending to go toward default? 

Mr. STORY. Well, we actually have a couple of issues there. One 

is that there have been 1.2 million repayment plans and modifications that the servicers have accomplished at this point. Also, the 

servicers are actively trying to help this problem. They are sending 

letters, they are actually going out to people’s homes and knocking 

10

on doors. There is a number of people who choose not to respond 

to the calls that the servicers make to them because they are afraid 

of having to have that discussion with the mortgage company. That 

is one of the reasons that the HOPE NOW initiative has been put 

together, to help people so that they can call that number if they 

don’t want to talk to the servicer, they can also look on a Web site, 

the Mortgage Bankers’ homelearningcenter.org, which has numbers 

of all the servicers in there where they can make a phone call. 

Our goals, from the Mortgage Bankers Association, are pretty 

simple. You know, one is we want to stabilize the market. The second is obviously, to help homeowners stay in their homes. We also 

want to ensure that this doesn’t happen again, and we don’t want 

to do anything that would be a permanent damage as we go forward during this situation. 

Chairman KANJORSKI. Well, I am sure there is nobody on this 

committee or in the Congress or in the general public who wants 

to see it happen again. Going to that issue, I am astounded that 

it happened the way it happened, to be quite honest with you. I 

had the CEO of a monoline insurance company in my office a couple of weeks ago, and he showed me a study that his insurance 

company had undertaken of his five competitors in monoline insurance. In 2006, he found that, of the securitized loans or securitized 

mortgages that his competitors had written policies on, as many as 

18 percent of the mortgages did not have a first installment payment. 

Now, that is last year or 2 years ago, 2006. And why did a ‘‘tilt’’ 

bell not go off? Why did something not go up in the sky, fireworks 

or something to indicate, ‘‘We have a problem.’’ 

Before I got to Congress, I served on a little bank board, and 

when our default rate used to get up above one-half of one percent, 

we used to start sweating. When it got above 1 percent, blood was 

coming out. Why did the organizations and associations not start 

yelping? Why did the regulators not run in and shut some of these 

things down? 

I was hearing in 2007 that there were a bunch of cowboys out 

there selling any garbage that they can put together because Wall 

Street has all the money in the world. Come down with any packages and sell them. 

Now I know everybody did not do that. And I know there were 

very good operators, and they all should not get tarnished with the 

same brush, and I have a tendency to do that. But what I am saying is, we are in a situation now where we have the potential to 

surgically prevent what I would consider a depression or a meltdown of the financial system. I am all in favor of—and that is why 

I supported Mr. Castle’s position when he came up with the idea—

making sure that all the encouragement in the world is out there 

for people who are servicers of these mortgages to get involved to 

try to contain the problems. And if we just do what you are talking 

about, handling the things as they normally occur, letting the marketplace and the general market rules prevail, it seems to me we 

are going to end up probably with a tougher situation than we have 

right now or at least as bad as we have right now. I think that is 

intolerable. So how do you respond to that? 

11

Mr. STORY. Well, first of all, those are all very important comments, and the MBA isn’t opposed to this bill; we are more concerned about the possible litigation that may occur in the future, 

so it is a balancing act, it is a fine line in terms of our Association’s 

agreement as we go forward. 

Chairman KANJORSKI. Very good. And I know I am taking up all 

of my time now. Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. You know, I don’t mean 

to speak for everybody else, but I would imagine everybody here, 

and probably all of you, are of the mind that we would like to save 

people from going through the foreclosure process. I don’t know 

who wins in the foreclosure process, and we are all looking for answers to that, and I don’t think any of us are married to any particular proposal; we are just looking for the best solutions possible 

in order to reach that. 

I appreciate some of the suggestions which you made in your testimony. While I don’t necessarily agree with your full conclusions, 

I think you made some positive suggestions that we need to look 

at in terms of what we are doing. 

Mr. Story, in answer to the question Mr. Kanjorski asked you, 

you indicated the advantage of new products, but we all know that 

there are a couple million people who are facing foreclosure processes right now, and that is a matter of concern to all of us, not 

just how we might fix things as far as the future is concerned, and 

it seems to me, I am in favor of those proposals too, FHA and GSE 

or whatever, but all of that is going to be a little bit down the road 

in terms of getting both done and in place. 

But we are concerned about those who are going into default 

now, is what we are trying to deal with. Do you all have ideas as 

to how to deal with this beyond what we have already heard? I 

mean, we have heard about the servicers, and I don’t frankly put 

as much credence in what some of you said about the servicers 

going out and trying to accommodate people or whatever it may be. 

I am from Delaware and I have not seen a lot of that at home at 

this point. We don’t have a particularly significant percentage problem with this compared to other jurisdictions, but it is there, we 

see it, it has increased a great deal, and it just seems to me that 

we are doing a lot of sitting on our hands with respect to this, so 

we need to be more proactive. 

My question is, is there anything that Congress could be doing 

immediately, or anything further that can be done in the servicing 

banking community at this time, that would provide immediate 

help to those who may already be in default and getting ready for 

foreclosure? Any one of you can answer that. 

Mr. STORY. Well I think this, and I go back to what I said earlier, 

getting that FHA reform bill passed and approved as quickly as 

possible will help the whole market. Specifically, if there are some 

opportunities for people to refinance out of some of these situations. 

And secondly, I would offer new homeowners, new home buyers an 

opportunity to qualify for loans and therefore we need to work on 

the depreciation of home prices in the marketplace as well, which 

is causing some of these problems. So if we can get that to level 

out, and get new people into homes, that would help as well. 

12

Mr. CASTLE. I don’t mean to argue with you, but I am not really 

talking about new homeowners. I understand that, and that is one 

reason I am for the bill. But I am most concerned about those who 

are presently in default, and I am not sure all of that is, even if 

we move quickly through the Senate or whatever, all that is going 

to happen quickly enough to really be able to help and rescue those 

particular people in that circumstance. Some are in foreclosure, 

some are in default getting ready to go into foreclosure or whatever. 

What we are trying to do is do something that is much more immediate than that and deal with people on a faster basis, because 

we think that is needed at this point. 

Mr. STORY. I appreciate that. We feel that the 1.2 million people 

we have already helped is a significant positive stride moving forward, and we hope that we can help more people as we move forward. 

Mr. CASTLE. Well, I don’t know the exact numbers, but my estimates, based on what I have heard, would be that would be about 

1⁄3 of the people who might be having some problems, so that would 

mean 2⁄3 or a couple million have not yet been helped. And it seems 

to me that it has slowed down, and I am not sure what is happening now with respect to that. It seems to me we all have a responsibility to try to do something about it. 

And I would think the investor community would care a great 

deal about that. I don’t understand the investor community on the 

downside of mortgages. I always thought you took a mortgage out, 

and your bank held it forever, and then you find out about assigning mortgages and the securitization of them or whatever it may 

be, but I would think on the security aspect of it, you would be vitally concerned about the defaults and the foreclosures. I would assume, unless it is some sort of insured situation, that is a loss of 

principal on the investment, so I am a little concerned that the attitude is, ‘‘Let’s leave it alone, it is okay the way it is.’’ 

If you have problems with our legislation, I don’t mind fixing it. 

If you have problems with the concept, the way we are going, I 

don’t mind changing that, but I think the idea that these sort of 

longer term things we are talking out will eventually bail us all 

out, that may be true of the economy in a couple of years. In the 

meantime, another million people may have gone into foreclosure, 

which is, I think, our underlying concern. 

Mr. DALOISIO. If I may, I think the investor community is very 

concerned, you know, with the direction that things are moving 

right now within the free market system. Even though free markets do tend to self-correct, if allowed to self-correct, the pain of 

self-correction here may be more than most are willing or able to 

bear. 

The question becomes what are the most appropriate and most 

effective measures to implement. The question also becomes if implementing those measures would even be able to bring about a 

turn of events sooner. I think overall, there is a lot of focus on the 

direction home prices, and I have heard it said by others and I believe this myself, that I don’t think we will see a natural turn in 

events until we see expectations that home prices are falling 

change. 

13

And to the Congressman from Georgia’s point earlier, one of the 

concerns that investors have is exactly the kind of domino effect 

that we are seeing in communities where you have not just one or 

several foreclosures, but multiple foreclosures, which has the impact of reducing the willingness of others in that community to 

stay in their home, so even if they were given an affordable option 

to stay in that home, they may no longer have the desire to stay 

in that home. 

How we address that, I am not entirely sure. I definitely agree 

that servicers need to be encouraged to provide as much modification activity as is economically sensible. In the current environment, the economics of foreclosure cannot be superior to the economics of modifying to a payment or series of payments which in 

the aggregate are economically superior, and I don’t believe investors stand in the way of that happening, and I also don’t believe 

that it is the threat of litigation that is preventing servicers from 

doing that by and large. Maybe infrastructure issues, adaptation 

issues. I think the wave that has come upon us has come upon us 

so quickly that the time required to adapt to that is a bit longer 

than we had hoped. 

Mr. CASTLE. My time is up, and I will yield back, but I don’t disagree with you necessarily. I do feel that the threat of litigation is 

part of the problem, and the other things you mentioned are also, 

I think, a part of the problem. I don’t expect you to answer this, 

but I just remain vitally concerned about the issuance of mortgages 

in a market in which the appreciation of real estate was going up 

tremendously, and I think a lot of mortgagors were basically 

issuing mortgages without paying as much attention as they should 

have to the background of individuals on the basis that it doesn’t 

make any difference. The property will go up, and that is our asset, 

that is our lien, and so we are going to be okay. I think, hopefully, 

there is a lesson in all of this in terms of how we have to issue 

mortgages in the future. I yield back, Mr. Chairman, thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Castle. The 

gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I have a couple 

of questions. First, I would like to deal with what some of the opponents of this bill are saying, because I think it is good to make sure 

that we get the full perspective from you. What are your thoughts 

on opponents of the bill, when they claim it would abrogate the 

terms of existing contracts, but without providing legal recourse 

which they believe would have a detrimental effect on investors 

and set bad precedent? Do you believe this to be true, why, or why 

not, and further, they have noted that servicers already have a 

duty to engage in loss mitigation as part of the mortgages they 

oversee, and so they believe the legislation is unnecessary. Would 

you give me your thoughts on that please, quickly. Then I have another question. 

Mr. YOUNG. Congressman, I can first speak to the second point, 

which is that, in our review of most securitization documents, there 

is already the ability of servicers to look at all loss mitigation alternatives as well as foreclosure in trying to fulfill their obligation as 

I see it, which is to maximize proceeds to the investor. So I do believe that there are times where the documentation may not be 

14

clear and so there may be points and parts of the bill that may be 

worthy of implementing. 

Certainly, there was a concern at some point, what it meant to 

do what is best in the interest of the holders, the investors. And 

given the various interests of the investors at every part capital 

structure and the securitization, that raised concerns for investors 

that they would be subject to liability from those that would suffer 

most of the losses in these securitization structures. But I think 

given the volume of defaults and the magnitude of the losses that 

these investors are facing, I do not believe that is as much of a concern because I think that a lot of investors at all parts of the capital structure are being affected. 

However, I do believe that there are positives in clarifying exactly what it means to be acting in the best interest of investors 

as a whole as well as maybe pointing out what is reasonably foreseeable default or imminent default. I think those are positives in 

the bill in clarifying where there is a need for interpretation in 

these various documents, which there is a lot of variation. 

Mr. SCOTT. So basically, you see a need for the bill, but not as 

much of a need that is in the bill currently? 

Mr. YOUNG. Well, I think to the extent the bill advocates for a 

safe harbor from liability, servicers are already performing loan 

modifications, so I suspect that in doing so, that is not the main 

concern for servicers. As I noted, I think it is more about dealing 

with the large volume of defaults and modifications that need to be 

done that seems to be the focus now. 

Mr. SCOTT. Okay. That is fine. My time is ticking away, and I 

did have another question I wanted to get a response to, and that 

is, on the issue of moratoriums on foreclosures, very select, maybe 

60 days, what is the value of that? And it is particularly true because in some parts of the country, some move closer to have your 

home foreclosed in the county courthouse in a month or 2 months, 

you miss one payment, or 2 months’ payment, that there may be 

some value to that. 

I would like to get your thoughts on imposing a selected moratorium on foreclosures and mortgage payment resets for owner-occupied homes and what you believe would be an adequate time span, 

and wouldn’t this provide some time for establishing a well-rounded plan which would include establishing some sort of board to deal 

with this, which includes Secretary Paulson, the Fed Chairman, 

and financial experts and consumer groups? 

Mr. STORY. One of the concerns we have about the foreclosure 

moratorium is that would just increase the amount owed after that 

period of time, so it would create a more difficult situation for that 

person to deal with after the moratorium was over. And secondly, 

the uncertainty from the investor market whether or not this could 

happen in the future that would cause some liquidity issues that 

we are having right now. Thank you. 

Chairman KANJORSKI. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you. One of the major aspects of the bill 

we have under consideration is to clarify existing contracts between 

those who invest in mortgages and those who serve them. I will 

ask all three gentlemen here, are you confident, in the absence of 

15

this bill, that every servicer will understand with every pool they 

are administering whether their obligation is a separate fiduciary 

obligation to each class or investor or whether their obligation is 

to the pool as a whole? I will go right down the list starting with 

the gentleman here. In other words, in the absence of this bill, is 

everybody going to be really clear about what their fiduciary duties 

are? 

Mr. YOUNG. Congressman, I think the efforts of the ASF and 

other industry groups have provided some guidance about what it 

means to be— 

Mr. SHERMAN. If I can back off, I used to be a lawyer, some of 

my best friends are lawyers, I still admit it, and I can’t imagine 

you getting out of liability by waving around a paper from a private 

industry group and saying, ‘‘Hey, we meet these standards.’’ So, do 

you have any legal opinion that says that an unclear servicing contract or an unclear trust agreement can be made clearer by an ASF 

statement? 

Mr. YOUNG. No, Congressman. As I was going to proceed and 

say, I do believe, and I have stated in my testimony that I do think 

there is worth in part and portions of the bill being enacted, specifically that point, to clarify that when the servicers are acting in 

the best interest of investors, that they are acting in the best interest of investors as a whole, namely all the investors in that particular transaction. So I do believe there is worth in that particular 

portion of the bill. 

Mr. SHERMAN. I will ask the other two witnesses whether they 

disagree with your comments. 

Mr. STORY. We think that not everything is clear in some of 

these situations, and we would be supportive of this bill if the investor community was also supportive of the bill. 

Mr. DALOISIO. To answer your question, I think there is likely a 

group of contracts out there that could benefit from increased clarity that would be aligned with the interest of investors. There was 

a time, early in the development of this crisis, where I thought 

servicers would be more concerned whether or not their action 

would benefit a certain part of the capital structure at the expense 

of another part and therefore open themselves up to liability to the 

disadvantaged part of the capital structure. 

However, I think the losses that have been crystallized so far 

and the losses that are near certain to crystallize themselves as 

RIO converts into losses which are posted into these securitization 

structures are of sufficient magnitude to cause the permanent cash 

flow triggers in these deals to fail, and once they fail, that would 

be more of a permanent fail rather than a temporary one, and 

therefore that structural operation itself should cause servicers to 

think solely along the lines of what is in the best interest in the 

aggregate to the economics of the trust rather than to any class of 

investors because it is out of their hands. 

Mr. SHERMAN. I thank you for the tremendous compliment of assuming that I understand all the jargon that you just included. The 

record will reflect that I understood every word you said and every 

jargon. 

So I am trying to figure out what harm this bill would do, and 

I realize I may be taking up the time of my colleagues here, but 

16

I will just ask the third witness here, since this bill basically clarifies the rights of servicers to do things in the best interest of the 

investors as a community, how would this bill deter future investment in mortgage pools? 

Mr. DALOISIO. Yes, I am not saying that it would deter future investment in mortgage pools. I think what I am saying or what I 

am trying to say is that it runs the risk of deterring future investments in mortgage pools, and I think as Chairman Kanjorski 

opened, he opened with remarks that gave consideration to the 

practicality of doing something over the principle of not when it 

comes to looking at the contract law and legislative solutions that 

could be in partial opposition to the contract law. 

Mr. SHERMAN. I would just point out that if you want to deter 

investment in mortgage pools, just do nothing. Allow my friends, 

the lawyers, to sue on behalf of each of the different investor 

groups with regard to each of the different contracts. And I assure 

you that there will be more investment in law schools and less investment in mortgage pools as the years go forward. 

I realize with every bill there is a risk of having a bad effect, but 

I think doing nothing and leaving these contracts to be determined 

through litigation and determine the rights and the obligations of 

the trustees through litigation strikes me as also posing a risk. 

And I will ask—I have my reading glasses on, so I am just going 

to point to, I guess it is Mr. Young, on this end. I can’t read your 

name, believe it or not, because the reading glasses are that strong. 

Do you have any comment on how this bill, which is designed to 

simply clarify the rights and the duties of trustees and those doing 

the servicing, how this would deter investment in mortgage pools? 

Mr. YOUNG. Well, I think, as some of the other witnesses alluded 

to, the risk that legislation can be enacted after a contract has been 

affected runs the risk of uncertainty going forward for future investors in those particular transactions and so, given that, and given 

moratoriums on foreclosures and other legislation that will basically interfere with the understandings under the contract may 

have a chilling effect on future investment. 

Mr. SHERMAN. Well, I will point out there are a lot of bills that 

have been introduced in the House and the Senate that I could see 

investors really hating and State legislatures changing their foreclosure laws, etc. But I don’t know why you would oppose this bill 

because you are afraid of other bills. If anything, if we do this bill, 

we are less likely to pass bills that are more extreme. 

But the other thing that I will point out to you is, yes, you can 

say it is extraordinary for Congress to pass a law that defines 

vague elements of contracts. Usually that is done by the courts. As 

an investor, I would be more afraid of the courts redefining my contract or influencing how vague terms would be defined than the 

Congress, and I know that if somebody is going to have to define 

the rights and obligations of trustees, and if we do it, my lawyer 

friends will be considerably less wealthy, so I will yield back. 

Chairman KANJORSKI. Ms. Brown-Waite. 

Ms. BROWN-WAITE. Thank you, Mr. Chairman. Just this morning, my district office called and said that they had two constituents who were trying to work with the lenders and they were not 

getting very much response. These are people trying to avoid foreVerDate 0ct 09 2002 15:36 Jun 13, 2008 Jkt 042718 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\42718.TXT TERRIE
17

closures, and I would just ask, do you think that the industry has 

done enough to work with property owners? 

Mr. STORY. I think they are trying very hard to help everyone, 

and obviously they can do more. Some people discuss some issues 

with probably some technology issues maybe, or some staffing 

issues. It is a big concern for everyone in the mortgage industry. 

Nobody wins in a foreclosure. It is the worst-case scenario that nobody wants to get to, so there is always room for improvement. 

Ms. BROWN-WAITE. I certainly always thought that myself, sir, 

but when the property owner makes an attempt to pay off at least 

half the delinquent payments, and the servicing company won’t 

even accept it, they want everything or nothing, and this is someone who had previous loans and never ever was foreclosed on. 

Mr. STORY. Well, I can’t comment on an individual company’s 

procedures, but as I said earlier, there is a huge effort on the part 

of mortgage servicers to try to work with people as much as possible. There have been 1.2 million repayments and modifications 

since this last summer, so there is an effort out there, I can guarantee you, that people want to help these people out. 

Ms. BROWN-WAITE. Well, when they won’t return phone calls, 

and they won’t accept a large amount of the back money due, well 

over half, it certainly doesn’t appear that way to the taxpayer and 

the homeowner out there and certainly the neighbors who would 

not want foreclosed property in their neighborhood. I know I don’t. 

I have a neighbor who is very close to foreclosure. All that does is 

drive down the price of neighboring real estate at a time when we 

certainly cannot afford it. 

Can Congress’ approach to the loan modification issue address 

the concerns of individuals came to Congress who believe we need 

less government involvement in our lives, because that certainly is 

a philosophical conflict? 

Mr. STORY. That is a good question. I think that in certain times 

there are certain situations that need help from the Congress. As 

I discussed earlier, things like the FHA modernization bill, the 

GSE reform, all those things are very important for industry moving forward and hopefully helping the existing situation as well. 

Ms. BROWN-WAITE. I have a question which maybe Mr. Young 

or—I must need to wear my glasses because I apologize, I can’t 

read your name, Mr. Daloisio? 

Mr. DALOISIO. Close enough. 

Ms. BROWN-WAITE. I apologize. I always murder names, I apologize. Are we creating a situation of an echo problem. In other 

words, those who are in adjustable rate mortgages now don’t have 

the ability to go to a 30-year fixed so they enter into another adjustable loan. Are we going to have an echo problem when those 

ARMs come due again because I know a large number are going 

to the ARMs because they cannot afford to go to the traditional 30 

year? 

Mr. DALOISIO. I think there is a chance of that. It seems to me 

the way the rate markets have aligned with the property markets 

we are seeing home prices fall and short term interest rates come 

down. It might be likely to believe that as home prices stabilize 

and start rising, so too might interest rates then do that. But then 

18

the ability of those people in those homes to service an adjustable 

as it is resetting higher, I think would have a concomitant as well. 

Ms. BROWN-WAITE. So, is that ‘‘No, there won’t be an echo financial problem?’’ 

Mr. DALOISIO. It is not a ‘‘no,’’ because I think there is risk there. 

I think an increasing number of homeowners elected to take out an 

adjustable rate mortgage because it had the benefits of a lower initial rate. They left themselves with the risk that if rates went higher, they may end up in an unstable product. 

I think one thing we need to consider very carefully is making 

sure that the product offering is well-suited to the ability of the 

homeowner and the intention of the homeowner and whether or not 

they intend to stay in the home for a long period of time or whether or not they intend to move in a short period of time. 

Ms. BROWN-WAITE. Thank you. I yield back the balance of my 

time. 

Chairman KANJORSKI. Mr. Miller of North Carolina. 

Mr. MILLER. Thank you, Mr. Chairman, and I apologize for having missed the bulk of this hearing. I have a couple of questions 

based upon just the few minutes that I have heard. 

Mr. Story, you mentioned the cost of foreclosure as being something that would be a strong disincentive to your industry. And 

foreclosure, of course, is governed by State law. I don’t know the 

law in all States, but I am familiar with North Carolina law, and 

I understand it is similar to that of other States in that the cost 

of foreclosure is actually recoverable by the mortgagee out of the 

proceeds of the foreclosure sales so that if there is equity in the 

home, the mortgagee recovers their cost. Is that not correct? 

Mr. STORY. I believe that is correct. 

Mr. MILLER. Okay, so as long as there is equity in the home, it 

really isn’t an economic problem for the mortgagee, isn’t that right? 

Mr. STORY. That is correct, but most people who have equity in 

their homes don’t go into foreclosure because they can sell their 

home because they have equity in their home and they can reduce 

the price. 

Mr. MILLER. Right. It is only when a substantial number of mortgages are underwater, when people have more mortgage than they 

have house or have relatively little equity, that there is an economic problem for foreclosure. Let me put it differently: In an appreciating market, foreclosure cost is not really a problem for the 

lenders or for the mortgagees, is it? 

Mr. STORY. Most likely not. 

Mr. MILLER. And Mr. Daloisio? 

Mr. DALOISIO. Yes. 

Mr. MILLER. Okay. You said that the borrowers understood that 

they were getting a low rate initially, and it was an unstable product, but they couldn’t afford anything but the initial rate. The Wall 

Street Journal estimated that 55 percent of the people who took 

out or got subprime mortgages in 2006 and 2007 qualified for 

prime mortgages. Do you have any information that contradicts 

that? 

Mr. DALOISIO. I don’t necessarily have information that contradicts that, although I think there may have been preferences in 

those situations that led the borrower to elect a higher rate of inVerDate 0ct 09 2002 15:36 Jun 13, 2008 Jkt 042718 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\42718.TXT TERRIE
19

terest over a lower rate of interest, and although that sounds like 

it doesn’t make sense, for example, they may have qualified for a 

conforming prime mortgage given some of the criteria, but maybe 

they wanted a loan or a debt service amount that was larger than 

what would otherwise have qualified them because they were looking to buy a bigger home. It is very difficult to tell simply based 

on the kinds of surveys that are being performed in the marketplace today exactly what led those particular individuals into products that were non-prime products. 

Mr. MILLER. Quickly, you said buying a home. Isn’t it the case 

that more than 70 percent or about 70 percent, 72 percent I think 

is the statistic based on the Mortgage Bankers statistic, 72 percent 

of subprime loans are not home buyers, but are for refinance. Isn’t 

that correct? 

Mr. DALOISIO. Maybe you were looking at 18 percent were nonowner occupants, is a number that we have. So 18 percent of those 

loans were for investors. 

Mr. MILLER. The statistic I have heard on that is 6 percent. 

What is the origin of this 18 percent are non-owner occupants? 

Where does that come from? 

Mr. DALOISIO. It comes from a third quarter 2007 survey that the 

mortgage bankers do. 

Mr. MILLER. Mr. Daloisio, the Federal Trade Commission, among 

others, has done a study of people who had just gone through closing and then quizzed them with their closing documents in front 

of them. Essentially, very few people knew anything about their 

closing. Most people have observed this as an intentionally opaque 

process. So I know that you said that people chose, but in fact all 

the evidence to the contrary. The point that I really wanted to ask 

about, and I have used up most of my time, I hope there is some 

indulgence from the Chair. In the proposal, all of the justification 

for providing some certainty or some protection from liability is as 

against investors in the mortgage pools. Is there any justification 

or any other arguments that would apply to any kind of shield from 

borrower lawsuits, and do you understand that the legislation 

would apply to any kind of insulation from liability by borrowers? 

Mr. DALOISIO. Just to make sure we understand the question, 

you are asking if we are aware that this piece of legislation would 

insulate servicers and securitization trusts from litigation brought 

by borrowers? 

Mr. MILLER. Right. All of the justification has been that it is 

needed for insulation from liability by investors. And there has 

been not a word about insulation from liability by borrowers. Do 

you understand that it applies to borrower lawsuits? 

Mr. DALOISIO. I had not focused on that particular dimension of 

this legislation. 

Mr. MILLER. Have any of the justifications given for it, would any 

those extend to litigation by borrowers? 

Mr. DALOISIO. Any of the justifications for this legislation, you 

are asking if those justifications, in our view, are valid? 

Mr. MILLER. Or do they extend to borrowers? 

Mr. DALOISIO. Do they extend to borrowers? 

Mr. MILLER. Right. The justifications have all been why servicers 

need some assurance that they will not be liable to investors. InVerDate 0ct 09 2002 15:36 Jun 13, 2008 Jkt 042718 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\42718.TXT TERRIE
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vestors have different interests, they have different tranches, whatever, different risks and they may be affected differently by any 

kind of modification. None of those justifications appear to have applied to any kind of lawsuit by borrowers, isn’t that right? 

Mr. YOUNG. I did not focus on that particular aspect of the bill, 

but I do realize that there is protection for servicers for various 

parties, including borrowers. But we did not focus on that particular point. I think there was— 

Mr. MILLER. When you say you didn’t focus, you haven’t talked 

about that in terms of justifying the bill or explaining the need for 

it, but it isn’t part of your intent? What do you mean when you say 

haven’t focused? 

Mr. YOUNG. That was not a focus in my testimony. I did not 

focus on that particular aspect in my testimony. 

Mr. MILLER. Well, should the legislation then clarify that the 

limitation from liability is insulation from liability to investors, not 

to borrowers? 

Mr. YOUNG. I think most of the concern that at least has been 

publicized is the servicers’ concern against, or liability to the investor community. I think that is why the focus of my testimony was 

mainly on that particular aspect. And I do believe that the particulars of the bill speak to clarification of the servicing agreements as 

they related to obligations between the servicer and the investor, 

and so that was why my particular focus was on that aspect of the 

bill. 

Mr. DALOISIO. I might just add, in being able to consider it a bit, 

that it doesn’t seem like there would be a natural line of responsibility between the borrower and the servicer that would give rise 

to the need for that kind of protection in this piece of legislation 

since it does appear that the servicer is well within its rights to 

collect all principle and interest due from the borrower. 

Mr. MILLER. Okay. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you. Finally, Mr. Watt of North 

Carolina. 

Mr. WATT. Thank you, Mr. Chairman, and let me express my 

thanks to the Chair for allowing me to participate in today’s hearing as if I were a member of this subcommittee. 

I came because I knew this was a sensitive subject, but I am glad 

I came because after 16 years of service on the Judiciary Committee, I think this is the first time I have heard business groups 

say that they oppose limiting litigation against business groups, 

and after 16 years of service on the Financial Services Committee, 

I think it is the first time I have heard a business group say that 

they don’t support a safe harbor for business groups, so this is kind 

of a first for me. It leads me to a realization that litigation and legislation and politics is primarily about self-interest, so perhaps we 

have the wrong witnesses here. Who are these servicers? Are they 

members of the American Securitization Forum? 

Mr. DALOISIO. Yes, some of them are. 

Mr. WATT. Are they members of the Mortgage Bankers Association? 

Mr. STORY. Yes. 

Mr. WATT. Do they have their own organization? 

21

Mr. STORY. Some of them have members of other organizations 

as well. Banks— 

Mr. WATT. I mean, is there something called a servicers organization that would have—so, some of them are the same people who 

actually make the loans, they service the loans, some of them are 

securitizers of loans, is that what the case is? 

Mr. DALOISIO. That is correct. 

Mr. WATT. Okay. Alright. So, in a sense, this bill would be protecting servicers from lenders, one in the same person, left pocket, 

right pocket. 

Mr. DALOISIO. The bill would protect them in accordance with 

the provisions of the bill, yes. 

Mr. WATT. So if a lender was made a loan and the servicer was 

a subsidiary of that lender, basically it would be protecting liability 

against the lender side of the organization as opposed to the 

servicer side? 

Mr. DALOISIO. I don’t believe that is correct, because I think the 

protection would only be afforded to the servicer, not to an affiliated lender of the servicer for an act that took place prior to servicing. 

Mr. WATT. So you are saying a servicer in this case is always 

somebody other than the lender? 

Mr. DALOISIO. Well, I think the servicer in this case is the entity 

acting in its capacity as a servicer. They may have acted in another 

capacity as lender, but I don’t believe— 

Mr. WATT. Well, sir, I think we are saying the same thing. If a 

servicer is a subsidiary of a lender, it might be one and the same 

institution, expect that one is a subsidiary, but it is the same corporate entity and the bill would protect the servicer side from potential liability from the lender side. 

Mr. DALOISIO. I don’t think the bill would end up protecting the 

lending aspect, I think it would only protect the servicing aspect. 

Mr. WATT. Yes. I think we are saying the same thing. 

Mr. DALOISIO. Okay. 

Mr. WATT. Okay. Actually, I am on your side of this issue. I am 

not much on limiting liability, and I get suspect every time we 

have the legislative process interfere with the legal process, so you 

might find an ally on this, so I am glad to hear you say that you 

don’t like the bill. Because I am not sure if you don’t like it the 

servicers don’t like it—you are speaking for the servicers here, 

right? 

Mr. DALOISIO. I am not speaking for the servicers; I am speaking 

for investors. 

Mr. WATT. You are speaking for investors. You are speaking for 

servicers, Mr. Story? 

Mr. STORY. Yes. As I said before— 

Mr. WATT. You are not speaking for the mortgage lenders, the 

bankers side, you are speaking for the servicers side? 

Mr. STORY. Well they are the same, in a sense. 

Mr. WATT. Well, who are you here representing? 

Mr. STORY. The mortgage bankers who have members that are 

servicers and are also lenders— 

Mr. WATT. And your servicers oppose this bill too? 

22

Mr. STORY. Not necessarily, no. They have some concerns about 

parts of the bill, but as I said before, we would support the bill if 

the investors supported the bill. 

Mr. WATT. Investors are Mr. Daloisio’s group, so if they supported it, you all would support it? 

Mr. STORY. That is correct. 

Mr. WATT. Okay. Mr. Young is going to profit either way because 

he is in a law firm, so he is smiling regardless of how this comes 

out. 

So Mr. Daloisio, does the fact there may be some protection 

against borrower liability, that will make you go back and look at 

this a second time, won’t it? 

Mr. DALOISIO. I will go back and look at that, although I don’t— 

Mr. WATT. It might change your opinion. 

Mr. DALOISIO. I don’t think it will because in giving it consideration here and now— 

Mr. WATT. As I recall, you all weren’t too keen on any kind of 

potential liability vis-a-vis borrowers when we were doing the predatory lending bill. 

Mr. DALOISIO. Right. That is correct, and the concern there was 

investors are by and large passive recipients of the economics that 

are passed through these securitization trusts, they really had no 

active hand in whatever— 

Mr. WATT. But they had a responsibility to look at what they 

were buying, didn’t they? 

Mr. DALOISIO. It depends on which type of investors you are 

speaking of. If you are speaking of investors in asset-backed securities, by the time those loans are packaged in security format, what 

investors are looking at are somewhat different than what investors will be looking at— 

Mr. WATT. Which level is in your organization? All levels? 

Mr. DALOISIO. Within my organization, all of them are within the 

part of the organization that I am involved with, just the securities. 

Mr. WATT. So that is the secondary tertiary further down the 

line, not the original buyers of the loans. 

Mr. DALOISIO. That is correct. 

Mr. WATT. Okay, so that was your concern in the predatory lending bill, that we might be talking about some potential liability 

against secondary tertiary buyers of loans, not the people who 

should have had responsibility for looking at the loans themselves 

or the responsibility for looking at the quality of the loans that 

they were buying, only first purchase basis. 

Mr. DALOISIO. That is correct. 

Mr. WATT. That’s fine. That helps me because I have been trying 

over a long period time to understand what your concern was and 

how to address it since you all wouldn’t talk to me in that process. 

I will yield back. This has been helpful in a number of respects, 

so I thank the chairman for allowing me to participate. 

Chairman KANJORSKI. Thank you very much, Mr. Watt. 

Mr. Castle, do you have any further questions? 

Mr. CASTLE. I really don’t, but I will ask just one of Mr. Story. 

I am confused about who is in your organization or who you represent when you said that you were speaking for servicers. Are you 

speaking for pure servicers, or are you speaking for servicers who 

23

are also investors, or are you retracting that altogether as to 

whom— 

Mr. STORY. I am speaking for members of the Mortgage Bankers 

Association who are servicers. 

Mr. CASTLE. Are you saying 100 percent of them are servicers? 

Mr. STORY. No, I am saying— 

Mr. CASTLE. If the answer to that is ‘‘no,’’ are you saying that 

100 percent of the servicers you are speaking for are in opposition 

to this bill? 

Mr. STORY. No, I didn’t say that we were in opposition of this 

bill. I said we had some concerns about this bill, but we were not 

opposed to it. But I am only speaking for the members of the Association that are servicers. There are some servicers that are not 

members of our association. 

Mr. CASTLE. What would be the criteria for a servicer to be a 

member of your organization? 

Mr. STORY. Basically, a mortgage banking firm or a bank that 

wanted to be a member of our Association that paid dues based on 

the size of their company. They range from small companies to 

Bank of America, to big companies. My company used to be a 

servicer for a number of years. We were in the mortgage business 

since the 1940’s, and we serviced loans until probably 2000 or 

2001, so that was an example of a smaller company doing it. Most 

of the servicers now, the economy of scale and the business anymore, servicers are mostly larger mortgage banks, bank sorts of 

companies. 

Mr. CASTLE. Okay. I thank you. I am not sure I totally understand it, but that is something for me to work out. 

Mr. STORY. Well we can help you out if you have some more 

questions, certainly we can help you with that. 

Mr. CASTLE. Thank you very much. I yield back. 

Chairman KANJORSKI. Thank you, Mr. Castle. 

I want to thank the panel for helping us out today. I think you 

certainly straightened out Mr. Watt’s questions. We appreciate 

your presence and your offering all the good testimony that you 

did. Before we wind this up though, I have a statement addressed 

to the Chair from the National Association of Realtors, dated April 

3, 2008. Without objection, I am going to make it a part of the 

record. 

With that, we thank the panel for their participation and close 

the hearing. The chairman notes that some Members may have additional questions for today’s witnesses which they may wish to 

submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to 

any of today’s witnesses and to place their responses in the record. 

The panel is dismissed and this hearing is adjourned. 

[Whereupon, at 3:31 p.m., the hearing was adjourned.] 

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April 15, 2008

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