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H.R. 5679, THE FORECLOSURE PREVENTION 

AND SOUND MORTGAGE SERVICING ACT OF 2008 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

APRIL 16, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–108 

( 

(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 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

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 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin, 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

SHELLEY MOORE CAPITO, West Virginia 

STEVAN PEARCE, New Mexico 

PETER T. KING, New York 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 16, 2008 ................................................................................................... 1 

Appendix: 

April 16, 2008 ................................................................................................... 69 

WITNESSES 

WEDNESDAY, APRIL 16, 2008 

Allnut, Jason, Vice President for Credit Loss Management, Fannie Mae .......... 33 

Bailey, Steve, Chief Executive for Loan Administration, Countrywide Financial Corporation .................................................................................................... 53 

Beckles, Ingrid, Vice President, Servicing and Asset Management, Freddie 

Mac ........................................................................................................................ 34 

Caden, Judith, Director, Loan Guaranty Service, U.S. Department of Veterans 

Affairs (VA) ........................................................................................................... 9 

Deutsch, Tom, Deputy Executive Director, American Securitization Forum 

(ASF) ..................................................................................................................... 52 

Gordon, Julia, Policy Counsel, Center for Responsible Lending .......................... 27 

Kittle, David G., CMB, President and Chief Executive Officer, Principle 

Wholesale Lending, Incorporated, and Chairman-Elect, Mortgage Bankers 

Association (MBA) ................................................................................................ 50 

Maggiano, Laurie, Deputy Director, Office of Single Family Asset Management, Federal Housing Administration, U.S. Department of Housing and 

Urban Development ............................................................................................. 7 

Schwartz, Faith, Executive Director, HOPE NOW Alliance ................................ 48 

Stein, Kevin, Associate Director, California Reinvestment Coalition ................. 29 

Twomey, Tara, Senior Counsel, National Consumer Law Center (NCLC) ......... 25 

Wade, Kenneth, President and Chief Executive Officer, NeighborWorks America .......................................................................................................................... 31 

APPENDIX 

Prepared statements: 

Carson, Hon. Andre .......................................................................................... 70 

Allnut, Jason ..................................................................................................... 72 

Bailey, Steve ..................................................................................................... 77 

Beckles, Ingrid .................................................................................................. 87 

Caden, Judith ................................................................................................... 95 

Deutsch, Tom .................................................................................................... 101 

Gordon, Julia .................................................................................................... 114 

Kittle, David G. ................................................................................................. 124 

Maggiano, Laura A. .......................................................................................... 134 

Schwartz, Faith ................................................................................................ 139 

Stein, Kevin ...................................................................................................... 154 

Twomey, Tara ................................................................................................... 168 

Wade, Kenneth ................................................................................................. 183 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

‘‘Servicing Best Practices for Subprime Borrowers,’’ an insert from Countrywide and ACORN ..................................................................................... 188 

Additional information submitted for the record by Judith Caden .............. 193 

Additional information submitted for the record by Laurie Maggiano ........ 198 

Statement of Clifford J. White, III, Department of Justice .......................... 199 

Page

VI 

A Letter of Support for H.R. 5679 to Chairwoman Maxine Waters from 

various consumer law, civil law, and other organizations, dated March 

31, 2008 .......................................................................................................... 210 

Statement of the National Alliance of Community Economic Development 

Associations (NACEDA) ............................................................................... 212 

Statement of Professor Katherine Porter, University of Iowa College of 

Law ................................................................................................................. 214 

Statement of the American Bankers Association (ABA) ............................... 221 

(1) 

H.R. 5679, THE FORECLOSURE PREVENTION 

AND SOUND MORTGAGE SERVICING 

ACT OF 2008 

Wednesday, April 16, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the subcommittee] presiding. 

Members present: Representatives Waters, Cleaver, Green, 

Ellison; Capito, Shays, Miller of California, and Neugebauer. 

Also present: Representative Watt. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. Good 

morning, ladies and gentlemen. I would like to thank Ranking 

Member Capito and the members of the Subcommittee on Housing 

and Community Opportunity for joining me for today’s hearing on 

H.R. 5679, the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008. 

Yesterday, RealtyTrac released data on foreclosures for the 

month of March. The figures are sobering. Over 234,000 homeowners nationwide were hit with foreclosure filings, which include 

default notices, auction sale notices, and bank repossessions; this 

represents an increase of 5 percent since February, and 57 percent 

compared to March 2007. Of these filings, over 51,000 homes were 

actually repossessed by banks; in other words, actually foreclosed 

upon, a 10 percent increase over February. Year-to-date, such foreclosures have taken place at a rate that is a shocking 129 percent 

greater than during the same period last year. Clearly then we 

have not emerged from the biggest foreclosure wave to strike this 

country since the Great Depression. 

Today’s hearing is about strategies to prevent further increases 

in foreclosures. I took a careful and comprehensive look at the 

subprime mortgage and the subsequent foreclosure crisis before introducing H.R. 5679, the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008. It became clear to me early in this debacle that mortgage servicers hold the key to any foreclosure prevention strategy. Simply put, they are the direct point of contact 

for nearly all borrowers in the contemporary mortgage market. 

2 

The vast majority of home mortgage loans do not remain on the 

books of the bank or the financial entity that originated them. 

Rather, they are typically bundled together and securitized, and 

then sold in the secondary market as a part of investment trusts 

in which the investors hold financial interest in particular bundles 

or tranches of the underlying mortgages. The trust then contracts 

them with the mortgage servicer, which takes payments and is responsible for taking all steps to address delinquency, including 

foreclosing on behalf of the investment trust. Loss mitigation refers 

to a range of activities that a mortgage servicer may offer a homeowner as an alternative to foreclosure, including repayment plans, 

loan modification, short sales, and deeds in lieu of foreclosure. 

On November 30, 2007, this subcommittee convened a field hearing in Los Angeles entitled, ‘‘Foreclosure Prevention and Intervention: The Importance of Loss Mitigation Strategies in Keeping 

Families in Their Homes.’’ There homeowners, homeownership 

counselors, legal aid attorneys, and local government officials testified as to difficulties they encountered in getting prompt, reasonable loss mitigation action by the mortgage servicers. Witnesses described challenges in finding and speaking directly to a person at 

the servicers who was empowered to engage in meaningful loss 

mitigation. Additionally, individual borrowers and even their 

trained advocates found it difficult to obtain accurate information 

on the status of their loans. Those that did receive loss mitigation 

offers were sometimes required to waive their legal rights or agree 

to pursue further complaints only through arbitration. 

Unfortunately, since that hearing, I have not been satisfied with 

the progress made by the voluntary loss mitigation efforts undertaken by the industry. I think the rising foreclosure figures speak 

for themselves, although I look forward to hearing from our witness 

panels today on that issue. 

Meanwhile, the data provided by industry to date has struck me 

as opaque at best, in terms of whether distressed borrowers are 

being offered sustainable repayment plans or loan modifications 

that will remain affordable over the long term. In my view, the fundamental problem is that the mortgage servicers have no legal obligation to engage in reasonable loss mitigation efforts to keep a borrower in delinquency in his or her home even where that borrower 

may have been the victim of a predatory or unaffordable loan. The 

only duty is to the investment trust that holds the bundle of mortgages they service. Simply put, absent a statutory duty of some 

kind, I am concerned that consumers have little leverage with 

mortgage servicers in the current crisis and will continue to lack 

it in the future. 

H.R. 5679, the Foreclosure Prevention and Sound Mortgage Servicing Act, creates this enforceable legal duty. Specifically, the legislation amends the Real Estate Settlement Procedures Act, or 

RESPA, in the following ways: 

First, it would permit foreclosures to proceed only after reasonable loss mitigation. Loss mitigation analysis would be required to 

consider the long-term affordability of the home loans using the 

standard employed by the VA Loan Guaranty Program, including 

analysis of junior liens and the borrower’s other secured or unsecured debt. 

3 

Second, it would provide fair compensation for a servicer’s loss 

mitigation activities. The bill ensures that mortgage servicers have 

a monetary incentive to engage in loss mitigation by authorizing 

reasonable fees for these activities. 

Third, it would facilitate referrals to housing counselors. 

Servicers are required to refer homeowners who are late on their 

mortgage payments to HUD-certified housing counselors. 

Fourth, it would institute comprehensive loss mitigation activity 

data reporting. Servicers are required to report various loss mitigation activities with specific geographical designations just as lenders must report data on loan originations under the Home Mortgage Foreclosure Act. 

Fifth, it would strengthen the duty of servicers to respond to a 

homeowner’s request for information. Servicers must provide timely responses to requests from homeowners and housing counselors 

for payment histories, loan documents, and loss mitigation documents. In addition, all servicers must provide a toll-free or collectcall phone number that provides the borrower with direct access to 

a person with the information and authority to fully resolve issues 

related to loss mitigation and undertake all loss mitigation activities in the United States. 

Lastly, it would better protect borrowers’ legal rights. Servicers 

may not condition a loan modification on a borrower’s limitation or 

waiver of legal rights. The bill would also allow damage actions for 

individual violations and increases maximum damages. 

In sum, I believe that H.R. 5679 is a prudent piece of legislation 

designed to balance the needs of lenders and servicers and borrowers in an effort to reduce foreclosures. I also see it as an important step in regulating what has been to date a largely below-theradar-screen and underregulated sector of the mortgage industry. 

With that, I will now recognize Ranking Member Capito for her 

opening statement. 

Mrs. CAPITO. Thank you, Madam Chairwoman, for scheduling 

this hearing today on how to address the Nation’s rising foreclosure 

rates and whether the lending industry has all the tools necessary 

to perform loss mitigation activities. As a result of plunging home 

prices, many borrowers now find themselves underwater, owing 

more on their home than it is actually worth. Economists have estimated that some 8.8 million mortgages are now underwater and 

expect that figure to rise as housing prices decline further. 

Some analysts believe that even if a percentage of these borrowers can afford to make their mortgage payments, the difference 

between what they owe on their houses and the home’s market 

value, a difference that has become known as negative equity, may 

encourage these borrowers to walk away from their homes. Some 

commentators have even gone so far as to say that in these circumstances, it is in fact economically rational for borrowers to purposefully default on these mortgages. 

Investors have also found themselves affected by the decline in 

home prices. The values of the mortgage-backed securities they 

hold are not only threatened by greater risks of default and foreclosure, the collateral that secures these loans, these mortgages, is 

worthless, which in turn further increases the risk of loss. As a result, investors have found that the market for mortgage-based seVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
4 

curities has become increasingly illiquid with other investors reluctant to purchase these securities because of the increased risk of 

loss. 

The climb in home prices has moved the discussion from ARM 

resets, which have not been as sizeable as initially feared, to discussions of negative equity and its relationship to defaults and 

foreclosures. While I understand and share Chairwoman Waters’ 

goal of preventing foreclosures, it is important that we take care 

as we consider legislative remedies such as H.R. 5679 to not make 

the situation worse. 

Many who are testifying here today have significant concerns 

about the unintended consequences of the provisions included in 

this legislation; specifically, that H.R. 5679 could have a negative 

impact on the availability of credit and the willingness of industry 

to enter into new mortgage contracts. With investor appetite for 

U.S. mortgages in flux, any legislative solution must not do additional harm and further disrupt market liquidity. 

There is concern that the provisions in this bill are overly broad, 

burdensome, and could ultimately redefine existing mortgage contracts. There is certainly enough editorial comment on both sides 

of these issues, some urging quick action, others making the case 

that action would only further prolong the current mortgage crisis 

and exacerbate the problem. I realize it is difficult to know how 

best to proceed. 

Several weeks ago, much of the attention relating to the mortgage crisis was focused on the pending resets and the ability of 

homeowners to make their payments after the reset. But recent reduction in rates have made the resets less of a problem, although 

they are still a problem for some. 

Today, as I mentioned earlier, the focus is more on those homeowners who are underwater, families living in homes that are 

worth less due to declining markets than the current mortgage on 

their home. The change in focus serves to highlight the importance 

of being cautious before taking action that may only exacerbate the 

housing crisis and then weaken our economy. 

I am anxious to hear from our witnesses today on the current 

condition of the mortgage markets and foreclosure statistics and 

how you are addressing these problems, what kind of progress is 

being made to improve market conditions and to help stem the tide 

of families facing foreclosure, and what action is being taken by advocacy agencies and industry to address this current mortgage crisis. 

Again, I would like to thank Chairwoman Waters for her continued interest in this issue, and I look forward to the testimony of 

the witnesses. Thank you. 

Chairwoman WATERS. Thank you very much. I will now recognize members of the subcommittee for opening statements. First, 

we will have Mr. Cleaver for 2 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. I want to thank 

you and Ranking Member Capito for holding this hearing. The 

issues that are coming before us at this juncture are Herculean 

when you look at what is happening around the Nation. In particular, 20,000 foreclosures a week would suggest that we have 

more than a casual problem. I happen to be one who believes that 

5 

we have to take some dramatic and drastic actions to address a 

dramatic and drastic problem. 

I listened to Ambassador Crocker this past week on NPR, and 

one of the questions he responded to dealt with whether or not al 

Qaeda was in Iraq before we arrived. He said, ‘‘No, they were not, 

but the reality is that they are there now; we have troops there 

now and so what can we do except address the problem that we 

find ourselves in now.’’ 

Chairman Frank has laid out, I think, a very ambitious but 

workable plan to deal with a major problem. There are a lot of reasons we can choose not to do it. I mean, there are people who actually lied about their incomes and purchased a home far bigger than 

they could afford, and some people with terrible credit who repeatedly missed their mortgage payments and found themselves in 

trouble. But the truth of the matter is we are in it now and we 

have to figure out a way to get out. 

I think this happens to be the best way I have heard so far, and 

so I am anxious to engage in some dialogue with those of you who 

are testifying. Thank you for coming today, and I yield back the 

balance of my time. 

Chairwoman WATERS. Thank you very much, Mr. Cleaver. Mr. 

Green for 2 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman, and thank you to 

the ranking member as well. I am pleased and honored to be here 

today. I was also pleased to be in California when the subcommittee met and we delved into these issues. It was quite revealing because we had persons who actually had experiences who 

were sharing with us their personal stories. I am looking forward 

to hearing some of the concerns that were raised at that hearing 

addressed at this hearing. 

We heard concerns with reference to loss mitigation and the 

whole question of whether or not there is an incentive to perform 

loss mitigation or is there an inducement not to perform loss mitigation. That is a serious question that has to be addressed. 

Also, we heard concerns about the HOPE NOW Alliance, and the 

clarion call from the persons that we talked to was an indication 

of a need for help now. And the question became whether HOPE 

NOW was going to become a cure or was it some sort of a lure, was 

it a long-term cure or was it a short-term lure that would get persons to sign certain documents that might cause them to find 

themselves in a position that would not be to their best benefit in 

the long term, but doing so because there was some short-term 

gain, meaning that they could stay in their homes for a little while 

longer. 

I am also concerned about the whole question of tranche warfare. 

Apparently, there are some tranches that hold positions that are 

antithetical to allowing some sort of settlement, some sort of restructuring to take place, because they have these superior positions and foreclosure in effect can benefit some persons in certain 

tranches. So you have this tranche warfare; higher tranches having 

one position, lower tranches having another position. 

These are the kinds of concerns that I think we have to address 

at the hearing, but we need a bill, we need some sort of act of Congress to ultimately propose solutions for the questions that we can 

6 

address at a hearing but we cannot resolve without an actual piece 

of legislation from Congress. I yield back the balance of my time. 

Chairwoman WATERS. Thank you very much. Mr. Watt, do you 

have an opening statement for 2 minutes? 

Mr. WATT. Thank you, Madam Chairwoman. I won’t take 2 minutes. I just want to thank the Chair for allowing me to sit in on 

this hearing. The luck of the draw on our subcommittee assignments didn’t allow me to get on the Housing Subcommittee, but 

what I have been doing—I am not on the Capital Markets Subcommittee either, but yesterday I attended a Capital Markets Subcommittee hearing. I am here this morning because I want to hear 

every idea that is out there to try to address this crisis that we are 

in and try to get us out of it and try to save homes in my congressional district, and particularly homes in vulnerable communities. 

And while we have seen some progress, we certainly haven’t seen 

the kind of progress that we need to see. 

I think the chairwoman’s bill will push further in the direction 

that kind of impels all of the players to play a role in solving this 

crisis. And anything we can do to do that, I think, is advantageous. 

I thank the gentlelady for allowing me to be here. I won’t try to 

ask questions, but I did want to hear the testimony of some of the 

witnesses. Thank you, and I yield back. 

Chairwoman WATERS. Well, I thank you very much. And since I 

must follow procedures, I will ask unanimous consent to allow Mr. 

Watt to participate in today’s hearing. Without objection, certainly 

as much as he ought to. Also Mr. Watt, I want you to know that 

I thought I heard you voluntarily removed yourself from my Housing Subcommittee, and I take that personally. However, I did sign 

up for your Committee on Oversight and Investigations. 

Mr. WATT. If the gentlelady will yield, I will go out of my way 

to explain that. 

Chairwoman WATERS. I will yield to the gentleman so he can defend himself. 

Mr. WATT. I will defend myself. I think it was I had to either get 

off the subcommittee or go through another hour of rebidding the 

whole process, and I figured that I would come and participate in 

your subcommittee as often as I could anyway. You know I am 

your supporter and I will be here trying to protect your back even 

when some of your subcommittee members may not show up. 

Chairwoman WATERS. Well, I appreciate that. Thank you, Mr. 

Watt. Mr. Shays for 2 minutes. 

Mr. SHAYS. Thank you. I want to thank the chairwoman and our 

ranking member for conducting this hearing. This is a huge issue 

for the entire country and a very significant issue in my district. 

I have three urban communities. Bridgeport, where I live, is faced 

with the potential of many foreclosures. Subprime loans are basically loans that are extended to people whose credit may not be 

good or whose income may not be strong, and it was an effort to 

get more people into the marketplace as homeowners. So the general thrust of subprime loans is not the issue; the issue is how they 

were extended. I am deeply concerned that we do everything we 

can to minimize the number of foreclosures so that people who 

were truly never involved in this issue don’t get pulled down with 

it. 

7 

We have, I think, a national interest, a regional interest, in dealing with this issue and I am very grateful, Madam Chairwoman, 

that you are conducting this hearing, and I don’t think we should 

be afraid to go wherever the truth takes us. Thank you. 

Chairwoman WATERS. Thank you very much, Mr. Shays. At this 

time, I will introduce our first witness panel: Ms. Laura A. 

Maggiano, Deputy Director, Office of Single Family Asset Management, U.S. Department of Housing and Urban Development; and 

Ms. Judy Caden, Director, Loan Guaranty Service, U.S. Department of Veterans Affairs. I thank both of you for appearing before 

the subcommittee today. Without objection, your written statements will be made a part of the record, and you will now be recognized for 5 minutes. I will start with Ms. Maggiano. 

STATEMENT OF LAURIE MAGGIANO, DEPUTY DIRECTOR, OFFICE OF SINGLE FAMILY ASSET MANAGEMENT, FEDERAL 

HOUSING ADMINISTRATION, U.S. DEPARTMENT OF HOUSING 

AND URBAN DEVELOPMENT 

Ms. MAGGIANO. Thank you, Chairwoman Waters, Ranking Member Capito, and members of the subcommittee. On behalf of Secretary Jackson and Commissioner Montgomery, thank you for allowing the Federal Housing Administration to participate in this 

hearing to discuss the critical difference that sound servicing practices can make in preventing mortgage foreclosures. This dynamic 

is well-illustrated by looking at the highly successful FHA loss 

mitigation program, which encompasses a series of flexible workout 

options for managing seriously delinquent loans, which we define 

as those that are 90 days or more past due. These workout options 

are administered not by government staff, but by FHA servicers. 

FHA, however, provides monetary incentives to encourage servicers 

to use the program and carefully monitors their performance. It is 

important to stress, however, that although loan servicers have delegated authority, participation is not optional. 

Within 45 days of default, every delinquent borrower must be 

provided with comprehensive written information about workout 

options, including contact information for HUD-approved housing 

counselors. Each borrower must be evaluated for loss mitigation before the 90th day of default and servicers must consider loss mitigation right up until the day of the foreclosure sale if the borrower’s financial circumstances have changed. 

To ensure servicer compliance, FHA has developed a sophisticated ranking system. Top rank servicers are eligible to earn extra 

incentives. And servicing lenders that don’t use loss mitigation seriously are subject to sanctions, including fines equal to triple the 

cost of a foreclosure claim. 

FHA’s home retention workout options are targeted at delinquent 

borrowers who want to keep their homes but who require more 

than just a short-term payment plan to help them regain financial 

footing. These include special forbearance, a long-term repayment 

plan that provides one or more special provisions such as a temporary reduction or suspension of payments. 

Mortgage modification: This represents a permanent change in 

the mortgage that may include capitalization of delinquent payments, reamortization of the term, or a change in the interest rate. 

8 

And a partial claim: This is a loan provided by FHA in an 

amount necessary to reinstate the delinquent mortgage. The loan 

is interest free and is not due until the first mortgage is paid off. 

This option provides up to 12 months of mortgage payment assistance. Until recently this option was only available through FHA, 

but Fannie Mae has just introduced a home saver advance workout 

that is patterned on the FHA partial claim. 

For borrowers who are financially unable to keep their homes, 

FHA provides pre-foreclosure and deed in lieu of foreclosure options. These workouts relieve the borrower of the mortgage debt 

without the emotional and social stigma of a foreclosure sale. Unlike most investors, however, FHA provides borrowers who utilize 

these disposition options with compensation of up to $2,000 to help 

them transition to more affordable housing. 

The disposition options are important. FHA’s commitment and 

focus is on home retention. In Fiscal Year 2007, for example, 95 

percent of all loss mitigation workouts allowed borrowers to keep 

their homes. 

The dual goals of the FHA loss mitigation program are to help 

FHA borrowers and to maximize losses to the insurance funds. The 

program is successfully achieving both goals. Last year alone, FHA 

helped 85,500 seriously delinquent borrowers retain 

homeownerships. And these are not temporary fixes. FHA has an 

87 percent long-term success rate with loss mitigation. As foreclosure prevention has increased, there has been a corresponding 

reduction in foreclosure claims. 

Contrary to the incorrect report in last Sunday’s Washington 

Post, the percentage of FHA insured loans that terminated in foreclosure has decreased every year for the past 3 years, from 1.64 

percent of all FHA loans in 2004 to 1.42 percent in 2007. And in 

terms of preserving the financial integrity of the funds, the $158 

million paid in home retention claims last year resulted in $2 billion in loss avoidance. 

The FHA loss mitigation program is a prime reason that FHA 

loans are considered safe and affordable. For too long, however, 

borrowers who would have benefited from an FHA loan were 

steered to higher risk subprime products. Fortunately, many of 

these borrowers now have the option of refinancing into FHA Secure. Under this program borrowers who became delinquent as a 

result of an interest rate reset have the option to refinance to FHA. 

And as of April 15th, 158,000 borrowers have closed on a fixed rate 

FHA Secure loan. 

Just last week in this hearing room, Commissioner Montgomery 

announced additional mortgage assistance for subprime borrowers 

who are a few payments late or who have received a voluntary 

mortgage principle writedown. With this new flexibility, FHA Secure is expected to assist 500,000 at-risk borrowers by the end of 

December 2008. 

In closing, I would like to again thank the committee for its 

thoughtful consideration of loss mitigation. The Administration is 

committed not only to helping American families achieve homeownership, but also to helping them preserve it. 

[The prepared statement of Ms. Maggiano can be found on page 

134 of the appendix.] 

9 

Chairwoman WATERS. Thank you very much. Ms. Judy Caden. 

STATEMENT OF JUDITH CADEN, DIRECTOR, LOAN GUARANTY 

SERVICE, U.S. DEPARTMENT OF VETERANS AFFAIRS (VA) 

Ms. CADEN. Good morning, Madam Chairwoman, and members 

of the subcommittee. I appreciate the opportunity to appear before 

you today to discuss the underwriting standards used by VA’s Loan 

Guaranty Program, the loss mitigation tools available to our borrowers over the course of their loans, including guidance given to 

loan servicers, and performance data of loans guaranteed by VA 

over the past 10 years. 

Lenders underwriting VA loans must ensure that the contemplated terms of repayment bear a proper relation to the veteran’s present and anticipated income and expenses and that the 

veteran is a satisfactory credit risk. VA’s credit standards employ 

the use of residual income deadlines and debt-to-income ratios in 

determining the adequacy of the veteran’s income. 

Residual income is the amount of net income remaining after deduction of debts and obligations and monthly shelter expenses, to 

cover family living expenses such as food, health care, clothing, and 

gasoline. VA considers minimum residual income as a guide. It 

does not automatically trigger approval or rejection of a loan, instead, underwriters should consider it in conjunction with all other 

credit factors. If residual income is marginal, underwriters should 

look to other indicators, such as the applicant’s credit history and 

in particular whether and how the applicant has previously handled similar housing expenses. However, an obviously inadequate 

residual income alone can be a basis for disapproving a loan. 

We also use a borrower’s debt-to-income ratio to compare total 

monthly debt payments to gross monthly income. A ratio greater 

than 41 percent generally would require close scrutiny of the loan 

package. This is also a guide and lenders are to consider that in 

conjunction with all other credit factors. And in practice, it is a secondary underwriting factor to residual income. 

The committee also requested that I describe VA’s guidance 

given to mortgage servicers regarding loss mitigation for loans 

guaranteed under the VA Loan Guaranty Program. In 1994, we 

published a VA servicing guide which states that we expect every 

realistic alternative to foreclosure which may be appropriate in 

light of the facts in each case to be explored before a loan is terminated. The guide provides specific information on extended repayment plans, forbearance, loan modifications, short sales, and deeds 

in lieu of foreclosure. 

Over the years, VA has also taken an active role in 

supplementing the servicing of private loan holders by attempting 

to contact veteran borrowers when their loans are reported as 

being seriously delinquent. We provide financial counseling and assistance in developing reasonable repayment plans which are then 

proposed to the private loan servicers. Our efforts in fiscal year 

2007 resulted in foreclosure avoidance of more than 57 percent of 

the seriously delinquent loans. We helped arrange more than 8,000 

repayment plans or other forbearance agreements in cases that 

otherwise would have gone to foreclosure and thereby avoided 

claim payments estimated at more than $181 million. 

10 

In February of this year, we published an extensive regulatory 

package that was a result of a business reengineering effort to assess the servicing of VA loans. The goal was to improve service to 

veterans by standardizing our internal operations while also recognizing best practices within the mortgage servicing industry. We 

have developed procedures to ensure that servicers will utilize the 

full range of alternatives previously considered by VA in its supplemental servicing in order to help veterans mitigate potential losses. 

That new environment is called VALERI, which is VA Loan Electronic Reporting Interface. And under those regulations we have 

definitions for repayment plans, special forbearance assistance, and 

we have described the conditions for consideration of loan modifications, short sales, and deeds in lieu of foreclosure. We are also 

going to provide incentives to servicers who properly follow those 

guidelines and offer those alternatives. 

Lastly, the committee asked that I describe the performance of 

loans guaranteed under the Loan Guaranty Program under recent 

standards, including the number and percentage of loans ending in 

foreclosure. The numbers are in my written statement, but I will 

summarize by just saying that the VA program has fared well in 

recent years with regard to foreclosure rates. According to data 

from the Mortgage Bankers Association, the quarterly delinquency 

rate for VA loans during the past 5 years has steadily declined 

while the rate for other loan programs has increased. And during 

that same period, the percentage of VA foreclosures has decreased 

while the rates for other programs has increased. 

This concludes my testimony. I do appreciate the opportunity to 

speak before you today, and I would be pleased to answer any 

questions you may have. 

[The prepared statement of Ms. Caden can be found on page 95 

of the appendix.] 

Chairwoman WATERS. Thank you very much. I will recognize myself for 5 minutes for questioning. Ms. Maggiano, I would like to 

make sure that I understand exactly who the servicers are, as well 

as their relationship to FHA. Who do you contract with to provide 

servicing activities? 

Ms. MAGGIANO. FHA does not contract directly with anyone. 

FHA, unlike GSEs, doesn’t actually own loans. We insure those 

loans against default. So an originator would either service their 

own loans or they may sell the servicing rights to their loans. 

There are currently 1,200 FHA approved servicers in the United 

States. However, 8 of them have 75 percent of the business. 

Chairwoman WATERS. So if you are guaranteeing loans from 

Countrywide, for example, Countrywide would be responsible for 

servicing their own loans because they also provide servicing to 

other entities, is that right? 

Ms. MAGGIANO. Countrywide may service some of their own 

loans, they may sell the servicing rights to some loans that they 

actually own, or they may service on behalf of other holders of the 

mortgage. 

Chairwoman WATERS. Is Countrywide one of the big eight you 

just referred to? 

Ms. MAGGIANO. Yes, ma’am. 

Chairwoman WATERS. So they do a lot of servicing— 

11 

Ms. MAGGIANO. Yes, they do. 

Chairwoman WATERS. —of their own loans that were originated 

by Countrywide, is that right? 

Ms. MAGGIANO. That is correct. 

Chairwoman WATERS. All right. Now, having said that, you have 

a responsibility to ensure that the loan originator whose loans you 

are guaranteeing and whose loans are being serviced by the same 

originator are doing a credible job? 

Ms. MAGGIANO. Yes, ma’am. 

Chairwoman WATERS. And if not, you have the ability to fine 

them, is that right? 

Ms. MAGGIANO. That is correct. 

Chairwoman WATERS. Now, tell me who you fined in the last 2 

years and how much were those fines? 

Ms. MAGGIANO. Madam Chairwoman, I don’t have that information with me, but I can provide it. 

Chairwoman WATERS. Ms. Maggiano, have you fined anybody? I 

don’t want you to put me off. 

Ms. MAGGIANO. Yes. 

Chairwoman WATERS. You have had some fines? 

Ms. MAGGIANO. There have been servicing violations. 

Chairwoman WATERS. Just one second, because this is in the 

record. 

Ms. MAGGIANO. Yes, ma’am. 

Chairwoman WATERS. My question to you is, are you aware or 

do you know of any of your servicers who have been fined by you 

who were not in compliance with your rules and your guidelines? 

Ms. MAGGIANO. I personally cannot give you any names. However, we do have an aggressive servicing audit program. We audit 

servicers every 18 months. 

Chairwoman WATERS. Do you have anybody with you today who 

can help you with that information? 

Ms. MAGGIANO. I am sorry, but I don’t. 

Chairwoman WATERS. Did you bring anybody with you who could 

help you with that information? 

Ms. MAGGIANO. No, but I would be happy to provide it to the 

committee. 

Chairwoman WATERS. Do you think there have been any fines? 

Ms. MAGGIANO. Yes. 

Chairwoman WATERS. About how many do you think there have 

been? 

Ms. MAGGIANO. Madam Chairwoman, I can’t answer that question. 

Chairwoman WATERS. But you do think there have been some? 

Ms. MAGGIANO. Yes, ma’am. 

Chairwoman WATERS. All right. That is very good. Thank you. 

Let me ask you also, listening to Ms. Caden describe the servicing 

of veterans leads me to believe that they may have guidelines for 

their servicers that may be a little bit or much more directed and 

provided than you do. Let me ask Ms. Caden, who are your 

servicers? 

Ms. CADEN. Well, like FHA, we don’t contract. The loans are 

guaranteed, so it is whoever is holding the loans. Countrywide is 

12 

a large servicer. Wells Fargo has the most. They are our biggest 

servicers of VA loans. 

Chairwoman WATERS. And do you have the ability to fine? 

Ms. CADEN. I don’t believe we fine. We do audit. We do look at 

what they are doing. What we are trying to do now is build a program of incentives and disincentives for doing proper servicing. 

Chairwoman WATERS. So right now, while you are trying to build 

a program for incentives and disincentives, let us take Countrywide, for example, have your audits shown that they were not 

doing a good job or they could be doing a better job or did you caution them, did you do anything in working with Countrywide as a 

servicer to say something is wrong, we don’t think that you are 

doing the kind of mitigation that we think can help keep people in 

their homes? 

Ms. CADEN. I would have to go back and look and see, but I don’t 

think we have taken them to task. In fact, I think Countrywide has 

been doing an adequate job on the VA loans that they service. 

Chairwoman WATERS. That is why they have so many foreclosures? 

Ms. CADEN. Well, I don’t believe that so many foreclosures are 

on VA loans, on the VA guaranteed loans. It may be on other parts 

of their portfolio. 

Chairwoman WATERS. All right. I am going to turn to the ranking member. But let me just say to both of you, you knew you were 

coming here today, and it seems to me you would have come armed 

with the kind of information that can help us to learn about how 

this business works. Unfortunately, our regulators don’t have any 

responsibility to regulate the servicers, and we have to learn the 

best way that we can. We are picking information out of people to 

learn this servicing business, and I really don’t like the idea that 

you can’t tell me how you monitor and oversight your servicers. 

Mrs. Capito. 

Mrs. CAPITO. Thank you, Madam Chairwoman. I would like to 

make a bit of a distinction here the way I heard your testimony. 

Both FHA and VA, you both stated in your opening statements 

that the rate of foreclosure for both of your loans had actually gone 

down over the last, I think you both said, did you say 5 years? In 

light of the fact that many, and we heard earlier that 57 percent, 

you know nationwide 57 percent more mortgages are in foreclosure 

than were at this time than last year, am I correct to assume that 

these would not in a general way, not to say you don’t have foreclosures, but FHA and VA guaranteed loans are not a part of that 

57 percent increase? 

Do either of you have a comment on that? 

Ms. CADEN. I will go first. VA loans are not considered to be 

subprime, and that is where most of the problems are. We have always underwritten, as I described, using the credit underwriting 

standards that we have. So I don’t believe that we are part of the 

big problem right now. In fact, our loans have performed very well. 

Ms. MAGGIANO. FHA has a very standard loan product. And we 

don’t have balloon loans, we don’t do interest only, we don’t do stated income, we don’t allow many of the risk factors that were inherent in many of the subprime products that caused them to have the 

high default rates that they have. 

13 

Mrs. CAPITO. Are many of your loans then considered underwater? I think this may be a distinction here, because an FHA 

loan, a traditional one has been—what was the max on the property until we made it larger in the stimulus package? 

Ms. MAGGIANO. The standard was about $230,000 and then it 

was higher, up to $340,000 in high-cost areas. 

Mrs. CAPITO. But in consideration of, say, my area, that would 

certainly cover the grand majority of every home in my district. 

But I would say in a lot of places in California, that doesn’t even 

scratch the surface. 

Ms. MAGGIANO. We have a very small loan portfolio in California, 

so yes. 

Mrs. CAPITO. And then, a final question. In looking at the chairwoman’s bill and then in responding to what Ms. Maggiano had 

said about what you are moving forward with—and I hope we can 

get those statistics, maybe you can get them before the end of our 

hearing because we have two more panels on the servicers—would 

you say that the VA—oh, no, I wanted to ask about the VA loan 

guarantees, so I am going to switch over here. Would you say that 

the loan guarantee of 41 percent debt-to-value ratio—or what is it 

called, debt-to-loan ratio— 

Ms. CADEN. Debt-to-income ratio. 

Mrs. CAPITO. Yes, debt-to-income ratio. Has that worked well for 

you? Is that a little bit lower than what the VA has? What do you 

have to say about that, because I believe that is part of the chairwoman’s bill as well? 

Ms. CADEN. It is a little bit lower than what FHA—I think they 

have a 43 percent ratio. We think it has worked well. And I think 

in combination with that, with looking at the residual income 

guidelines that we use with the general underwriting standards 

that we use, as I said VA loans have performed very well so we 

think it has been working. 

Mrs. CAPITO. My final question: I actually forgot the other question. You probably figured that out. When you talked about your 

responses that you had, you talked about making sure that people 

are being directed toward FHA counselors, you talked about making sure that the servicers are paying attention and sitting down 

before you get into the 90 days of delinquency. Does that match 

pretty much what is already in this bill? I mean, do you feel like 

those are—and have you stepped up those rates since the spotlight 

has been on the foreclosure situation? 

Ms. MAGGIANO. There are many provisions in the bill that are 

extremely similar to written FHA policy with respect to loss mitigation, so yes, there is quite a bit of similarity. There are also some 

areas that are different. Have we stepped it up? We work very 

closely with our servicers to encourage them to continue to use loss 

mitigation, we do constant training of servicers and nonprofit housing counselors, and so we carefully monitor use of the program. 

Mrs. CAPITO. Is this a joint effort? Do FHA and Fannie Mae and 

Freddie Mac all get together and talk with the servicers at the 

same time, do you do it individually or is this an industrywide effort? 

Ms. MAGGIANO. There certainly is some amount of discussion between the GSEs and the agencies, but that tends to be not directly 

14 

related to the servicers. We talk together about various policies and 

where we are going and sharing best practices. But in terms of providing specific guidance, we have a very different program and we 

all have fairly unique loss mitigation characteristics. As I indicated 

earlier, we have a special program which has been incredibly effective for FHA borrowers where we will actually loan them the 

money to reinstate their loan and carry back a second note, but 

that note has no payments due. 

Mrs. CAPITO. Until the first one is paid off? 

Ms. MAGGIANO. Yes, until the first one is paid off. So it doesn’t 

impact the ability to service the first mortgage. 

Mrs. CAPITO. Thank you. 

Chairwoman WATERS. Thank you very much. Mr. Cleaver. 

Mr. CLEAVER. Thank you, Madam Chairwoman. The loss mitigation is, I think, very helpful to those who are trying to maintain 

their homes, and this is certainly a better option than foreclosure. 

I am becoming concerned as I read more about who is involved and 

the fact that there is no regulation of the servicers. And if there 

is no regulation of servicers, can you tell me what the fee schedule 

is like, what it is based on? When Countrywide, Bank of America, 

or Wells Fargo are engaged in loss mitigation, how do they develop 

their fee? 

Ms. MAGGIANO. My remarks on loss mitigation were specific to 

loans insured by the FHA. 

Mr. CLEAVER. I understand. 

Ms. MAGGIANO. And we do have regulation. 

Mr. CLEAVER. Let me ask it another way. 

Ms. MAGGIANO. Certainly. 

Mr. CLEAVER. Do you think we should have regulations over the 

servicers, those who are engaged in loss mitigation? 

Ms. MAGGIANO. The Administration has not taken a formal position on this bill. 

Mr. CLEAVER. Okay. Not the bill. Do you think we should have 

some kind of regulation? I mean, they are regulated because they 

are banks. But I am talking about for the particular services they 

provide, there are no regulations. 

Ms. MAGGIANO. I think it is a worthwhile discussion. I don’t 

think that we have an opinion on whether or not having a nationwide loss mitigation program of that magnitude is the appropriate 

course of action, but certainly it is a worthwhile discussion. 

Mr. CLEAVER. I want to go to the seminar that government employees go to that teach you how to do that; you know, go all the 

way around the question. That is really great. I mean, I admire almost all of the people who do it. There are a couple who can’t do 

it well, but you do it well. The loss mitigation program, which I 

support, and FHA’s loss mitigation program is required? 

Ms. MAGGIANO. Yes, sir. 

Mr. CLEAVER. How do you think a loss mitigation program would 

impact the current crisis if it were a nationwide mandatory loss 

mitigation program for all existing loans, including those not guaranteed by FHA? 

Ms. MAGGIANO. I believe very strongly in the importance of loss 

mitigation in keeping home buyers in their homes. 

15 

Mr. CLEAVER. Would it reduce foreclosures if we—this is the 

same question. Would it reduce foreclosures if we implemented it 

nationwide, including the existing loans and those not guaranteed 

by FHA? 

Ms. MAGGIANO. It certainly has reduced foreclosures in the FHA 

portfolio, absolutely. What is very different in this particular marketplace is the huge impact of substantial amounts of negative equity and what to do with that negative equity. And that is not an 

issue that we have had a problem with in the FHA portfolio specifically. 

Mr. CLEAVER. So, is that a ‘‘yes?’’ 

Ms. MAGGIANO. I don’t have a crystal ball. I can’t tell you what 

the outcome would be. 

Mr. CLEAVER. What do you think? 

Ms. MAGGIANO. Loss mitigation is very important. And clearly, 

the more loss mitigation the more likely we are to see borrowers 

be able to retain homeownership. 

Mr. CLEAVER. That is a yes. Thank you. I yield back the balance 

of my time. 

Chairwoman WATERS. Thank you very much. 

Mr. Shays. 

Mr. SHAYS. I am still formulating my question. You have more 

Democratic members, so I will wait two more rounds. I am sorry, 

I didn’t see you. I am going to pass. I am going to ask questions 

in a bit. 

Chairwoman WATERS. Mr. Neugebauer. 

Mr. NEUGEBAUER. Okay. Thank you. One of the things that I 

think is kind of interesting, that we have to kind of discriminate 

in terms of what the roles of servicers are in this process. And I 

think some people have been talking about certain companies that 

have higher foreclosure rates. That doesn’t necessarily have anything to do with their servicing capability. Would you say that is 

a true statement? 

Ms. MAGGIANO. Yes, I would say that. 

Mr. NEUGEBAUER. Because people who service mortgages may be 

servicing mortgages that they didn’t originate. And so a lot of the 

problems that are in our mortgage dilemma today really are more 

about origination than servicing. Would you say that is true? 

Ms. MAGGIANO. I think certainly origination is a major factor. I 

think good servicing can ameliorate some of the mistakes of origination, but certainly not all of them. 

Mr. NEUGEBAUER. But your relationship with a servicer generally only kicks in when they are beginning some process of loss 

mitigation at that particular point in time, is that right? 

Ms. MAGGIANO. Primarily. FHA certainly has guidelines that 

servicers must follow for all performing loan servicing functions as 

well. 

Mr. NEUGEBAUER. You have to be approved to be one of your 

servicers? 

Ms. MAGGIANO. Absolutely. 

Mr. NEUGEBAUER. So you have a certain criteria for them to follow? 

Ms. MAGGIANO. That is correct. 

16 

Mr. NEUGEBAUER. One of the things—I think we have all kind 

of been on a witch hunt here, I think some of us, not me particularly, but others who are looking for who is to blame for all of this, 

and we kind of started looking around trying to find that person 

to blame. I think the thing about the industry is that I haven’t 

heard of anybody saying that there is a huge problem with servicing in this country. In fact, over the break I sat down with a 

number of companies that say today, as far as loss mitigation goes 

that if someone, if a borrower will call their mortgage company 

today and make some effort to offer up some kind of a solution 

here, that most all of those companies are interested in working 

with the borrowers. But that primarily most of the people who are 

getting foreclosed on today, and this was a quote from a company 

that handles a lot of loss mitigation for some very big mortgage 

holders, that in most of the mortgages that they are foreclosing on, 

they never hear from the borrower, that the borrower just doesn’t 

return their call. And so it is really hard to do loss mitigation with 

someone who won’t—you know, that is a two-way street. 

Would you agree with that? 

Ms. MAGGIANO. I do agree with that. And in my remarks, when 

I said that servicers must evaluate a borrower for loss mitigation 

before they are 90 days past due, they can only do that if they have 

been able to reach the borrower. Most servicers, certainly FHA 

servicers, use a variety of techniques to attempt to reach borrowers 

including predictive dialers and unusual types of mailings. Most of 

our servicers, if not all, are members of the HOPE NOW Alliance— 

I believe you will hear from them later—and they have developed 

some really aggressive targeted mailings to delinquent borrowers to 

try to get them to contact the servicer, because without that contact you can’t do a workout in a vacuum. 

Mr. NEUGEBAUER. Are either one of you aware of, and maybe this 

question was asked a while ago, but I didn’t hear the answer, have 

you ever removed someone’s privileges to be a servicer while you 

have served in the capacity you are in? 

Ms. CADEN. For VA, no, we have not. 

Ms. MAGGIANO. I don’t know the answer to that. I have not been 

involved in removing someone’s privileges, although there have 

been a number of entities with FHA approval to originate and service that have been removed from our program. I haven’t been personally involved in that activity. 

Mr. NEUGEBAUER. What is the role that—maybe you can explain. 

In other words, you are the guarantor of these loans, but then 

other people hold and own these loans or made an investment in 

them. What latitude contractually do you have in working with the 

people who actually hold that note on being able to provide certain 

modifications or loss mitigation without violating the rights of the 

person who holds that note? 

Ms. CADEN. For VA, we work with the servicer and we would 

work with the veteran; and, as I said in my statement, we have 

been fairly successful in working with a veteran and the servicer, 

the holder of the loan, to work out loss mitigation efforts, loan 

modifications, repayment plans, that type of thing. Basically, we 

just do it in tandem with them. 

17 

Mr. NEUGEBAUER. But it has to be in concurrence with a 

servicer. 

Ms. CADEN. Yes. 

Chairwoman WATERS. Thank you very much. 

Ms. CADEN. I should say that there are some cases in which we 

evaluate the veteran and we will do what we call refund the loan, 

and we will buy the loan back, and then they will have a VA direct 

loan at that point. So we will do that in certain cases. 

Mr. NEUGEBAUER. May I just have a quick follow-up? 

Have you done that a lot here lately? 

Chairwoman WATERS. Mr. Cleaver. Please, we have to move on. 

We have to be out at a certain time. 

Mr. Green, I am sorry. Please go ahead. 

Mr. GREEN. That is quite all right. Thank you, Madam Chairwoman. 

Let me start by making a basic statement, and hopefully I will 

get some agreement on it. Is it true—and I am speaking to the representative from HUD, if you would kindly pronounce your last 

name for me, please? 

Ms. MAGGIANO. ‘‘Maggiano.’’ 

Mr. GREEN. Ms. Maggiano, is it true that while you don’t have 

a perfect paradigm, you have perfected a paradigm that produces 

lower foreclosures, in your opinion? 

Ms. MAGGIANO. Yes, sir. 

Mr. GREEN. And is it true that the reason you believe this paradigm works as effectively as it does is because the basic premise 

that it is built upon is one of home retention? 

Ms. MAGGIANO. Yes. 

Mr. GREEN. And is it true that you have a contractual agreement 

with your servicers, a codified agreement that requires certain 

things if a borrower falls into the class of possibly being foreclosed 

upon? 

Ms. MAGGIANO. Yes. 

Mr. GREEN. Would these things that are codified that must be 

done include special forbearance, mortgage modification, partial 

claim adjustments, pre-foreclosure sales, and deeds in lieu of foreclosure? Would these be the essence of what must be done when— 

or options that are available as opposed to foreclosure? 

Ms. MAGGIANO. Those are certainly the options that are available. It is important to make a distinction that we delegate to 

servicers the responsibility to evaluate the borrower. 

Mr. GREEN. Agreed, but let me intercede. You also have something else. Along with that delegation, you have the power to punish. 

Ms. MAGGIANO. That is correct. 

Mr. GREEN. Now, that is for an FHA loan. 

Ms. MAGGIANO. Yes, sir. 

Mr. GREEN. Let’s talk about a loan that is not FHA. For our conversation, we will call it conventional. In the conventional market, 

do we have the same paradigm in place? I assume your answer 

would be no? Same paradigm as FHA? 

Ms. MAGGIANO. FHA has no authority. 

Mr. GREEN. I agree with you. I am not asking now whether FHA 

has authority. I am asking if the paradigm that FHA employs is 

18 

the same paradigm that is employed in the conventional market. 

Or maybe it should be reversed. Is the conventional markets paradigm the same as FHA’s? I assume your answer is ‘‘no.’’ 

Ms. MAGGIANO. Actually, it is not ‘‘no.’’ All of the loans that are— 

where Freddie Mac and Fannie Mae are an investor, those loans 

also are subject to very, very similar loss mitigation programs with 

oversight and monitoring by the GSEs. As a matter of fact, we— 

Mr. GREEN. Is the power to punish there? 

Ms. MAGGIANO. Yes. 

Mr. GREEN. Is that power to punish employed? 

Ms. MAGGIANO. You’ll have to ask the representatives of the 

GSEs when they speak. 

Mr. GREEN. So, in your opinion, the paradigm that includes special forbearance, mortgage modification, partial claim, pre-foreclosure sale, and deed in lieu of foreclosure is the same paradigm 

being employed in the conventional market? 

Ms. MAGGIANO. Not exactly the same, but a similar paradigm. 

As I mentioned in my remarks, partial claim is a rather unique 

workout structure that, until very recently, was really only employed by FHA; and Fannie Mae has adopted something not exactly 

the same but similar. But both of the GSEs have very strong and 

aggressive workout tool boxes, and they do monitor. 

Mr. GREEN. Then the question becomes, if I may, if the paradigms are the same or similar, why are the results so vastly different? 

Your contention might be that you received a product that is not 

the same as the product that the GSEs received. Is that a fair 

statement? 

Ms. MAGGIANO. Yes. 

Mr. GREEN. Meaning 3/27s, 2/28s, prepayment penalties, and nodoc loans, you did not receive these products? Is that your contention? 

Ms. MAGGIANO. That is correct. 

Mr. GREEN. And as a result of the lack of those products, your 

contention is that the results are different? 

Ms. MAGGIANO. I believe that would be my conclusion, yes. 

Mr. GREEN. Do the GSEs, by way of conventional loans, monitor 

the servicers to the same extent that you do? You have indicated 

clearly that you have a very close relationship with the servicers. 

Ms. MAGGIANO. Yes. 

Mr. GREEN. Do we have that same circumstance? 

Ms. MAGGIANO. I don’t wish to speak for the GSEs. They will be 

testifying later in the morning. 

Mr. GREEN. Would that monitoring make a difference, in your 

opinion? 

Ms. MAGGIANO. Monitoring always make a difference, yes. 

Mr. GREEN. Finally, if I may, tell me quickly about your debt-toincome residual analysis, please. 

Ms. MAGGIANO. We—were you referring to VA or—I didn’t mention debt to income. 

Mr. GREEN. My time is up, and I will yield back. Thank you. 

Chairwoman WATERS. Thank you very much. 

Mr. Shays, are you ready now? 

Mr. SHAYS. Thank you. 

19 

Mr. Green, she is a tough chairman. 

Mr. Neugebauer, you had a question. 

Mr. NEUGEBAUER. I thank the gentleman. 

I just wanted to follow up, because I think you made a very good 

point a while ago, that you were about to make, which is that the 

Veterans Administration has the ability to repurchase a loan. That 

the servicer doesn’t agree to that, you think it is in the best interest of the veteran, and so that you can repurchase that. 

Ms. CADEN. Right, and we do that after going through an evaluation of the veteran’s financial picture, what is going on right now. 

If we think there is a chance for them to maintain that home and 

the loan payment, we can do that. 

Mr. NEUGEBAUER. Do you do that a lot? 

Ms. CADEN. I can provide for the record the numbers of what we 

have done. I wouldn’t say it is a lot, but it is fairly significant. 

Mr. NEUGEBAUER. Say that again? 

Ms. CADEN. Significant. 

Mr. NEUGEBAUER. I thank the gentleman. I yield back. 

Mr. SHAYS. Thank you. 

I want to get into this issue. I am deeply concerned, like the rest 

of us are, about the impact of foreclosures. I am deeply concerned 

that it strikes me the banks force you to go into foreclosure, to be 

delinquent before they negotiate with you, which seems nonsensical 

to me. So this is what I want to know first: If your loan is divided 

into three parts, the servicer has the right to negotiate loss mitigation. Is that correct, first? 

Ms. MAGGIANO. Yes. 

Mr. SHAYS. Leave your microphone on, thanks. 

Secondly, does that right extend to writing down the interest 

rate or writing down the principal? 

Ms. MAGGIANO. The servicer certainly is allowed to write down 

the interest rate, but FHA will not reimburse them for that interest rate, the cost of that interest rate reduction. They could also 

write down principal, but FHA does not have the authority to reimburse them for principal reduction. 

Mr. SHAYS. Let me understand. So there is no motive for them 

to do that? 

Ms. MAGGIANO. No, the motive for them to do that, and again— 

Mr. SHAYS. Give me the short version. 

Ms. MAGGIANO. There needs to be a real distinction between 

FHA and other products. Because FHA has nearly 100 percent loan 

guarantee. 

Mr. SHAYS. So there is really no incentive for the servicer to negotiate? 

Ms. MAGGIANO. Well, there is an incentive for the servicer to negotiate, because we provide them financial incentives, and we monitor their performance. 

Mr. SHAYS. I don’t know what ‘‘monitoring their performance’’ 

means, but let me ask you this: What right does the borrower 

have? Do I have the right to say that I want to negotiate before 

I am delinquent? 

Ms. MAGGIANO. For FHA-insured loans, a servicer may not refer 

a loan to foreclosure until they have evaluated the borrower for 

loss mitigation. 

20 

Mr. SHAYS. I don’t know what that means, but please answer my 

question. 

Ms. MAGGIANO. I am sorry. 

Mr. SHAYS. Does the borrower have the right to negotiate with 

the service provider before they go into default? 

Ms. MAGGIANO. The borrower always has the right to discuss 

whatever they wish with their service provider. 

Mr. SHAYS. Does the borrower have the right to demand that 

they negotiate with them before they go into default? Because we 

are hearing that they say, don’t call us until you are in default. 

Ms. MAGGIANO. Again, I am trying to relate this to an FHA insured— 

Mr. SHAYS. No, I hear you. 

Ms. MAGGIANO. And we don’t tend to have the interest rate reset 

issue where payments are going to skyrocket next week and people 

are concerned about the impact of those increased payments on 

their ability to make their— 

Mr. SHAYS. You have less potential foreclosures, right? 

Ms. MAGGIANO. We have potential foreclosures for different reasons. Our borrowers tend to have more issues with unemployment, 

with health— 

Mr. SHAYS. Someone is out of work. They can’t pay. Do they have 

the right to call up and expect that they will be treated humanely? 

Ms. MAGGIANO. Yes. 

Mr. SHAYS. And that the service provider will say, well, let’s talk 

about when we do about this, or do they say, we can’t help you 

until you are in default? 

Ms. MAGGIANO. I am sorry. I do understand your question, and 

they absolutely have the right to have the servicer treat them with 

respect. 

Mr. SHAYS. What happens if the service provider doesn’t? What 

if the service provider says, we are not talking to you until you are 

in default? 

Ms. MAGGIANO. I haven’t—that hasn’t been raised. 

Mr. SHAYS. I will tell you why it has been raised for me. It may 

not be your loans, but the bottom line is I had two forums on this 

in my district, and I have had people testify they wanted to not be 

in default, wanted to deal with this issue, and they were told, don’t 

call us until you are in default. It may not be an FHA loan, but— 

Ms. MAGGIANO. That is certainly not guidance we would ever 

give our servicers. 

Mr. SHAYS. Madam Chairwoman, I know my time has run out, 

and I don’t want you to treat me any nicer than anyone else. I hope 

that we really have a good discussion about this issue. 

Chairwoman WATERS. Thank you very much, Mr. Shays. 

Mr. Ellison. 

Mr. ELLISON. Thank you, Madam Chairwoman, for having this 

important hearing. 

Ms. Maggiano and Ms. Caden, one of the major goals of H.R. 

5679 is to ensure that loss mitigation efforts by servicers result in 

offers to distressed borrowers, be they repayment plans, loan modifications, or some other options that are sustainable for the longer 

term. The key to such long-term sustainability, it seems to me, is 

whether the resulting payment plan is affordable to the borrower, 

21 

barring some other significant drop in income. Can you help me 

understand if and how HUD and VA make this evaluation for their 

servicers? 

Ms. MAGGIANO. FHA has a financial evaluation requirement; and 

servicers, when they are evaluating a borrower for any of the options, even if it is a pre-foreclosure sale or a deed in lieu, must 

gather the borrower’s income and expenses and use that in a formula that we have published in writing to calculate what we call 

surplus income, and that is the income over and above their household living expenses and their other debts like car payments that 

they need to make that they have available to support a repayment 

plan. It is not acceptable in FHA to put a borrower into a repayment plan if you cannot demonstrate that they have sufficient surplus income to make that plan. 

Mr. ELLISON. I wonder if you could perhaps put a finer point on 

your response, and I am wondering if you could be very concrete 

in describing the debt-to-income and residual-income analysis your 

agencies undertake in determining whether a particular loss mitigation offer is workable. 

For example, I have heard the VA requires at least $200 in residual income be left over after a borrower’s household expenses, including payments on all secured and unsecured debt, are taken 

into account and that would be a good standard across the industry. So could both of you provide details of your agency’s DTI and 

residual-income analysis for loss mitigation? 

Ms. CADEN. I would be happy to provide that in more detail for 

the record. 

But, basically, we don’t have a standard such as the one you mentioned of the $200. There is no hard-and-fast rule, and residual 

income is looked at as a guide. It is mainly used, both residual income and the debt-to-income ratio, at the time of loan origination. 

That is part of the underwriting standards to make sure a veteran 

can afford the loan they are attempting to get for the house they 

are trying to buy. 

We would expect servicers to use the same guidelines, but there 

is no hard-and-fast rule of the $200 over or under. 

Mr. ELLISON. Thank you very much. 

I had more questions right in front of me, and they just disappeared. I don’t know what happened to them. I have too much 

stuff sitting here, I guess. 

I do have a question that I didn’t write out, and it is off the cuff. 

And that is, so FHA has a requirement to do mitigation services. 

That is FHA. But what about the rest of the industry? You guys 

only address about 40 percent of the industry, am I right about 

that? What other incentives are in place for the non-FHA mortgages, those trusts, those PSA trusts to do loss mitigation? 

Ms. MAGGIANO. Again, FHA provides loss mitigation for FHA-insured loans only. The GSEs have very similar programs for all of 

the loans that they either own or securitize, that are securitized 

through them. And then I am not aware of any formal overarching 

loss mitigation program for loans that don’t fall within those categories. However, most of the investors, also, it is clearly in their 

interest to keep borrowers in their homes. So there are loss mitigation requirements in many of the trusts. 

22 

Mr. ELLISON. One of the reasons I was kind of surprised when 

it sounded like there was the provision, the so-called cram-down 

provision—I am sure you guys know what I am talking about— 

when we were going to try to give bankruptcy judges the power to 

restructure debt going forward on a primary residence. There was 

a lot of resistance to that. 

My thought would be, you know, why would there be resistance 

to that? I mean, we want people to stay in their homes, and most 

people will, out of their own incentives, try to do loss mitigation. 

But for those who don’t, there is a social purpose in trying to make 

sure people can stay in their homes. Why then doesn’t Congress— 

why wouldn’t this be a good idea? 

Could you help me understand some of the push-back? Not that 

it is your responsibility, but just in terms of your expertise in the 

field, would you mind sharing your ideas on that with me? 

Ms. MAGGIANO. Well, I believe the primary objections that I have 

heard are that it would sort of undermine the sanctity of contracts 

and prevent mortgage originators from being willing to enter into 

contracts over which they thought other people then had control. 

Mr. ELLISON. But we have always—I think I’m done. 

Chairwoman WATERS. Thank you. 

Mr. Miller. 

Mr. MILLER. Thank you, Madam Chairwoman. 

Welcome. I know it is hard answering questions based on somebody else’s bill, but the bill requires the mortgagees of mortgages 

that are in default to basically do a number of things. These things 

are called ‘‘reasonable loss mitigation activities.’’ These activities 

can be waiving of late fees, penalty charges, engaging in prepayment plans, or writing down the principal for the loan. Does a lender have to basically fulfill one or all of these things to be in compliance with ‘‘reasonable mitigation activities?’’ 

Ms. MAGGIANO. Again, I can speak only to the FHA portfolio, and 

they absolutely must consider all of our options in a priority order 

in order to be considered to be doing— 

Mr. MILLER. Let’s say somebody bought a $300,000 home, and 

the rate was 61⁄4 percent, but now they can only afford a $250,000 

home at 51⁄4 percent. What are your options? 

Ms. MAGGIANO. I— 

Mr. MILLER. That is a tough one. You have to engage in reasonable loss mitigation activities based on the criteria that is defined 

and that is part of the criteria, so what will you do when that situation arises? 

Ms. MAGGIANO. FHA’s loss mitigation program is based on keeping as many borrowers in their homes as possible. 

Mr. MILLER. Based on this bill, as defined in this bill, the language, and that is the circumstance placed before you, what would 

you have to do? Not what you do currently, but what do you have 

to do based on this bill? That is what we are talking about. 

Ms. MAGGIANO. I am sorry. I don’t think I understand the question. 

Mr. MILLER. Do you understand the language in this bill? 

Ms. MAGGIANO. Yes, sir. 

Mr. MILLER. That is considered reasonable loss mitigation activities, and you have to do these things. 

23 

Now let’s say a person owns a $300,000 home. They bought it for $300,000, and they were paying 61⁄4 percent interest, and they are 

in default and 3 months behind in their payment. Now you are trying to deal with this. You look at their capability based on income, 

and they can only afford $250,000, and they can only afford to pay 

51⁄4 percent interest. How would you deal with that? 

Ms. MAGGIANO. The way I read the bill, it was not clear to me 

whether or not a servicer would be required to provide a repayment 

plan or a loan restructure based on the borrower’s ability to pay, 

regardless of what that ability was. 

Mr. MILLER. But the language says, such as waiving all late fees 

and their penalty charges, engaging in a repayment plan and writing down the principal for the borrower. That is in the language 

of the bill. 

Ms. MAGGIANO. Yes. 

Mr. MILLER. If you have to comply with that criteria, how will 

you do that? Because it says, writing down the principal for the 

borrower and engaging in a repayment plan. If they can only afford 

51⁄4 percent interest and they can only afford that on a $250,000 

loan, how do you accomplish that? 

Ms. MAGGIANO. FHA does not have a—it is not our intention to 

keep every borrower in their home. We do a very aggressive job in 

home retention, but the reality is that there are borrowers who 

can’t afford the home they have. 

Mr. MILLER. I am not trying to argue with you. I am trying to 

understand the language and how you can apply it. It says ‘‘includes writing down the principal for the borrower.’’ It includes 

that. 

Ms. MAGGIANO. Right. 

Chairwoman WATERS. Will the gentleman yield? 

Mr. MILLER. Sure. 

Chairwoman WATERS. Affordability is only one criteria that you 

have to consider. It does not mandate that you would have to write 

down that loan. It deals with reasonableness, business sense. That 

is what it deals with. 

Mr. MILLER. That is what I am trying to figure out, what is considered reasonableness? 

Chairwoman WATERS. I think to ask that in a vacuum without 

all of the information before you places the witness at a great disadvantage. 

Mr. MILLER. I have great respect for you, and you know that. 

And I have read this bill, and I can’t come to a reasonable conclusion of how we do it. And when I can’t come to a conclusion on how 

we do it, I try to ask a professional who is a witness in the industry 

based on language that is in the bill. And when the language in 

the bill says, such as waiving all late fees, penalty charges, engaging in repayment plans, and writing down principal for the borrower, that is very specific. But when I can’t determine how we do 

that— 

Chairwoman WATERS. We will have some people on another 

panel who will help to show you how it is done. While the witnesses before us today talk about the standards that they have developed in order to instruct their services, they are not doing the 

workouts themselves. 

24 

Mr. MILLER. Yes, but the standards that currently exist are 

being changed. 

Chairwoman WATERS. No, the standards are not being changed. 

You will find that the standards differ. We happen to have before 

us today FHA and VA, and we are hearing about their standards. 

You have servicers who are working with completely different 

standards, and we will hear some of that today. 

Mr. MILLER. Is HUD currently writing down the loan amounts? 

Ms. MAGGIANO. No, we do not have regulatory authority to do 

that. 

Mr. MILLER. Do you currently write down interest rates? 

Ms. MAGGIANO. FHA does not write down interest rates. 

Mr. MILLER. So, Madam Chairwoman, that is the problem. 

Chairwoman WATERS. No, it is not the problem. 

Mr. MILLER. Well, let me finish. The language says that they 

should do these things. 

Chairwoman WATERS. No, the language does not mandate that 

they do anything that is not reasonable. 

Mr. MILLER. But it defines reasonable as—that is what we need 

to get to. 

Chairwoman WATERS. All of those are different things that would 

be criteria that could be considered. 

Mr. MILLER. Then they are reasonable. 

Chairwoman WATERS. Your time is up. 

Mr. MILLER. Okay. 

Chairwoman WATERS. Thank you very much. 

Mr. Watt. 

Mr. WATT. Thank you, Madam Chairwoman. 

Ms. Maggiano, you know, Representative Green used to be a 

judge, and I love the precision of his questions. But Representative 

Cleaver earlier stated that witnesses who come over here must 

take a lesson at answer avoidance, and perhaps the most adept at 

doing that are the folks from HUD. Even with the precision of Representative Green’s questions, you managed to miss a category. 

You have FHA and VA loans. You have conforming loans that 

the GSEs back. All of those categories have some form of mitigation arrangement. And most of them, at least VA and FHA, have 

some specific guidelines to get the loan. Most of the GSE conforming loans have some specific guidelines. You have to document 

income. You have to do all the things. 

And then you have a third category—which is the one that you 

missed—which is the nonconforming loans that are not VA, not 

FHA, not GSE-backed at all. And those are the ones that have the 

highest rates of default in this crisis, isn’t that right? 

Ms. MAGGIANO. Yes. 

Mr. WATT. Those are the ones that have the least amount of obligation to mitigate in this market, isn’t that correct? 

Ms. MAGGIANO. I can’t speak to their obligation, because— 

Mr. WATT. You know they are not under FHA’s mitigation standards. 

Ms. MAGGIANO. That is correct. 

Mr. WATT. And you know they are not under the GSE mitigation 

standards, and we know that the loans were written outside—substantially outside any regulatory framework. They are the most 

25 

risky loans, and yet they have the least amount of obligation to 

mitigate, and that is the circumstance that we are in. 

So I guess the question I am asking is, under those circumstances, if you assume all of that to be the case—and it is okay 

for you to assume that, because it is true— 

Ms. MAGGIANO. Yes. 

Mr. WATT. —would a reasonable approach be to apply this, some 

standards of mitigation, perhaps the ones in this bill, perhaps the 

ones that FHA applies, perhaps the ones that the GSEs apply to 

that third category of people who have no obligation to mitigation? 

Would that be a reasonable approach, do you think? 

Ms. MAGGIANO. Yes. 

Mr. WATT. Okay, all right. 

With that, Madam Chairwoman, I am happy to yield back to the 

Chair. 

Chairwoman WATERS. Thank you very much. 

If there are no other members here to ask questions, we are 

going to thank our panel for being here today and thank them for 

helping us to learn more about how mitigation works, particularly 

in their own agencies, and helping us to understand the standards 

that you have set, and we certainly are going to use these as guidelines as we talk to some of the other persons responsible for servicing. Thank you very much. 

Some members may have additional questions for the panel 

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 these witnesses and to place their responses 

in the record. 

Thank you. The first panel is dismissed. 

I would like to call the second panel to the witness table. 

I am pleased to welcome our distinguished second panel: Ms. 

Tara Twomey, senior counsel, National Consumer Law Center; Ms. 

Julia Gordon, policy counsel, Center for Responsible Lending; Mr. 

Kevin Stein, associate director, California Reinvestment Coalition; 

Mr. Kenneth Wade, president and chief executive officer, 

NeighborWorks; Mr. Jason Allnut, vice president for credit loss 

management, Fannie Mae; and Ms. Ingrid Beckles, senior vice 

president, Freddie Mac. 

Thank you for coming today. We will ask you to keep your testimony to 5 minutes. You do not have to read the testimony if you 

do not wish. You can basically concise it. 

Ms. Tara Twomey, senior counsel, would you begin our panel? 

STATEMENT OF TARA TWOMEY, SENIOR COUNSEL, NATIONAL 

CONSUMER LAW CENTER (NCLC) 

Ms. TWOMEY. Yes. Good morning, Chairwoman Waters, and 

members of the subcommittee. Thank you for inviting me to testify 

today. 

My name is Tara Twomey and I am an attorney, currently of 

counsel at the National Consumer Law Center. On a daily basis, 

NCLC provides assistance on consumer law issues to legal services, 

government and private attorneys representing low-income clients. 

Prior to joining NCLC, I was a clinical instructor at Harvard Law 

School, where my practice focused on foreclosure prevention. 

26 

As we all know, we are facing the worst foreclosure crisis since 

the Great Depression. The statistics for 2007 are grim, and the outlook for 2008 is not any brighter. The consequences of the mortgage 

market meltdown have not only ripped through Wall Street, but 

they are taking a heavy toll or Main Street. 

For nearly a year now, the financial services industry has been 

encouraged to meet this growing foreclosure crisis by scaling-up 

voluntary loan modification efforts. Unfortunately, the magnitude 

of the problem continues to dwarf the industry response. And we 

would suggest to you that the reason that voluntary measures have 

fallen short is because the mortgage servicing industry, that is, the 

servicers and the industry to which they belong, is fundamentally 

broken when it comes to the needs of borrowers. 

Mortgage servicers have two primary goals: The first is to maximize their own profit; and the second is to maximize the return to 

the investors. In the name of cutting costs and maximizing profits, 

the needs of the borrowers are too often sacrificed. 

And what recourse do the borrowers have? Very little. They do 

not get to choose their mortgage servicer. They do not get to choose 

the subcontractors that the mortgage servicers hire to deal with 

the borrowers. They cannot vote with their wallets or their pocketbooks. They cannot change the mortgage servicer if they are dissatisfied. Even refinancing will not necessarily protect a borrower 

from a bad or abusive servicer, because they may end up with the 

same servicer again. 

For borrowers, the first hurdle in the loan modification process 

is finding a live person who can provide reliable and consistent information, a person who has the authority to make decisions about 

the homeowner’s loan. 

To date, industry efforts to staff loss mitigation departments 

have been woefully inadequate. We know that leaving homeowners 

to navigate a maze of voicemail is less expensive, that it cuts costs 

for the servicers and improves their bottom lines. But borrowers 

deserve better. We know that, under current regulations, mortgage 

servicers can ignore borrowers’ requests for information, they can 

ignore borrowers’ disputes about their accounts, and they can still 

proceed with collection activities, including foreclosure. 

We know that pushing homeowners into repayment plans is 

cheaper and easier for mortgage servicers. A recent Mortgage 

Banker’s Association report finds that repayment plans outnumber 

the loan modifications by an 8:1 ratio for subprime adjustable rate 

mortgages. Even recent numbers from HOPE NOW show little 

progress in long-term or life-of-loan modifications. We know the 

disparity and bargaining power between financially distressed 

homeowners and mortgage servicers present new opportunities for 

abuse. 

We are pleased to support H.R. 5679, which recognizes these industry shortcomings and will align mortgage servicers’ interest 

with those of borrowers trying to save their homes. 

Industry may say that the burdens of this bill are too great. We 

believe that the industry claims that H.R. 5679 will reduce market 

liquidity are overstated. Providing clear guidance to mortgage 

servicers on how to determine how much a borrower can afford to 

27 

pay should give investors comfort that long-term modification will 

be successful. 

H.R. 5679 requires servicers to provide borrowers with timely, 

competent, and consistent information about their loans. It requires that borrowers be permitted to speak to someone who has 

authority to modify their loan, if that is appropriate. Is it too much 

to ask that a borrower be able to obtain competent and consistent 

information about their loan? We say no. 

H.R. 5679 requires servicers to resolve borrowers’ disputes before 

foreclosing on them. We don’t think that is too much to ask. 

H.R. 5679 requires servicers to engage in reasonable loss mitigation, to focus on home savings options instead of home losing options. Is that really too much to ask? We don’t think so. 

We commend you, Chairwoman Waters, for introducing a bill 

that addresses some of the systemic problems in the mortgage servicing industry, for introducing a bill that will provide real benefits 

to homeowners, and for introducing a bill that can save millions of 

homes without costing the government a penny. We look forward 

to working with you and other members on the subcommittee on 

H.R. 5679 and other mortgage servicing issues. Thank you. 

[The prepared statement of Ms. Twomey can be found on page 

168 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Ms. Gordon. 

STATEMENT OF JULIA GORDON, POLICY COUNSEL, CENTER 

FOR RESPONSIBLE LENDING 

Ms. GORDON. Good morning, Chairwoman Waters, Ranking 

Member Capito, and members of the subcommittee. Thank you for 

inviting me to speak about the Foreclosure Prevention and Sound 

Mortgage Servicing Act of 2008, a bill that my organization supports. 

I am policy counsel at the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization dedicated to 

protecting homeownership and family wealth. We are an affiliate 

of Self-Help, which consists of a credit union and nonprofit loan 

fund. 

For the past 28 years, Self-Help has focused on creating ownership opportunities for low-wealth families, primarily through providing more than $5 billion of financing to 55,000 low-income and 

minority families who otherwise might not have been able to get 

loans. 

Self-Help’s experience suggests that the high rate of foreclosure 

in the subprime market cannot be explained solely by the slightly 

higher risk of lending to people with blemished credit. In our experience, while homeowners may fall behind temporarily on mortgage 

payments, they will make every effort to catch up and hold onto 

their home if the lender and servicer are committed to working 

with them. 

While Self-Help’s delinquency rate is similar to that of many 

other subprime lenders, its foreclosure rate is under 1 percent, far 

lower than other subprime lenders, in part because we only sell 30- 

year fixed-rate, fully amortizing loans, and in part due to our 

28 

strong corporate emphasis on loss mitigation aimed at keeping 

homeowners in their homes. 

The foreclosure crisis continues to gather steam. We are now seeing 20,000 subprime foreclosures every single week. Each foreclosure represents an incalculable loss to the individual family, but 

the effects go far beyond that. For each foreclosure, lenders and investors lose money, property values in neighborhoods decline, crime 

increases, community tax bases are eroded, and millions of Americans who depend on the housing sector lose jobs and income. What 

is more, the worst is yet to come. 

The rate of foreclosure on subprime hybrid ARMs will continue 

to rise throughout this year, but even after that rate begins to level 

out, we face a second and possibly even larger wave of problems. 

Beginning in 2009, we will see a large spike in reset in a type 

of loan called a payment option ARM. These loans permit homeowners to opt for a monthly payment that does not cover either 

principal or interest. They can continue to pay these rates for a set 

number of years or until the loan reaches what is called a negative 

amortization cap, usually 110 or 115 percent of the original loan. 

At that point, the loan resets, and the homeowner suddenly has to 

pay a much larger monthly payment. These resets are not tied to 

interest rates in the way that subprime hybrid ARMs are, and the 

current decline in interest rates is not likely to change the shock 

of these resets very much. 

The fact that these loan balances are growing while overall home 

prices are declining is a recipe for disaster. This wave of loans will 

be even harder to refinance than the current crop of hybrid ARMs, 

and most of these loans are the not confined to the subprime market. 

While we applaud the voluntary loss mitigations now taking 

place, as Ms. Twomey noted, they are simply not reaching the critical mass necessary to extend the tide of foreclosures. A working 

group of State attorneys general and bank commissioners estimates 

that only 24 percent of seriously delinquent borrowers receive the 

assistance they would need to prevent foreclosure. 

While the HOPE NOW Alliance reports that loss mitigation activity in the first quarter of this year has risen significantly from 

the first quarter of 2007, servicers have still not been able to get 

ahead of the escalating crisis. According to the numbers, although 

1.8 million loans were delinquent by 60 days or more in the first 

2 months of 2008, in that time, only 114,000 received permanent 

loan modifications, and just under 200,000 received a temporary repayment plan. 

There are many reasons why servicers don’t engage in loss mitigations. Many get paid more for doing foreclosures than for doing 

loss mitigation, some fear investor lawsuits and tranche warfare, 

and many simply face a staff’s training and capacity issue. But no 

party right now has the leverage to push them to do better. 

Homeowners have no choice in selecting a servicer. If the 

servicer doesn’t provide them with the help they need, they are not 

able to take their business to a different servicer. Typical market 

incentives are absent here. That is why this is an appropriate area 

for the government to step in with legislation. 

29 

As a final note, I would like to mention that even if this bill 

passes, there are going to be loans that cannot be modified by the 

servicer even when the homeowner qualifies for an affordable solution. Most frequently, this will be when there is a conflict between 

senior and junior lien holders. In those cases, we believe it is crucial to permit bankruptcy courts to adjust the mortgage if the borrower can afford a market rate loan. 

In conclusion, we believe that this legislation is a narrowly tailored proposal that will provide an effective tool for reversing the 

downward cycle of losses in the mortgage market. We commend the 

subcommittee for focusing on loss mitigation, and we urge the committee to include in this bill the broader foreclosure prevention 

package. Thank you. 

[The prepared statement of Ms. Gordon can be found on page 114 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Kevin Stein. 

STATEMENT OF KEVIN STEIN, ASSOCIATE DIRECTOR, 

CALIFORNIA REINVESTMENT COALITION 

Mr. STEIN. Madam Chairwoman and members of the subcommittee, I want to thank you very much for holding this important hearing today and for inviting us to testify. 

My name is Kevin Stein, and I am the associate director at the 

California Reinvestment Coalition. We are a statewide advocacy 

group comprised of 250 community-based organizations throughout 

California. We work to increase access to credit in underserved 

neighborhoods throughout the State and to fight predatory lending 

practices. 

The main point I want to make today is that our current framework for preventing subprime foreclosures which relies on voluntary industry efforts is not working, and our working families 

and their communities are suffering as a result. 

Today, one of the most important conversations that takes place 

day-to-day is between loan servicers and their borrowers or their 

representatives, and, amazingly, in the subprime market, there are 

virtually no rules and no oversight and no consistent data that relates to these critically important and life-changing conversations: 

Will a family be able to stay in their home or not? 

In light of a large disconnect we were hearing between what the 

loan servicers were telling us and what we were hearing from borrowers and from counseling agencies, we conducted a survey to find 

out what exactly was happening on the ground. We were able to 

talk to 38 home loan counseling agencies who had served over 

8,000 consumers in the month of December alone. The results of 

the survey were sobering, and I will share a few key findings: 

First, servicers were not modifying loans for long-term affordability. Not one counseling agency reported that the industry was 

modifying loans for the long term. Agencies reported that where 

they were able to get loan modifications, they were for about 1 

year, which merely postpones the problem. 

Second, and I guess most compellingly, the outcomes for borrowers are poor and unacceptable. Foreclosure was the number one 

outcome cited by counseling agencies. And, again, these are folks 

30 

who have expertise, hopefully have some relationship with 

servicers, have borrowers who have the wherewithal to come find 

them, and a shocking 72 percent of these agencies reported foreclosure as a very common outcome. Fifty percent reported short 

sales, which was the second most common outcome and, in our 

view, not a good outcome. Loan modifications came in with only 17 

percent of groups reporting that these were common outcomes. 

Third, outreach to borrowers is poor, despite what lenders have 

said. A surprising 91 percent of groups said that, in their experience, servicers were not reaching out to borrowers before rates 

reset, to the Congressman’s point. And when that happened, they 

were often told to call back when the borrower was in default. 

Fourth, servicers are hard to work with. We listed in our report—we reproduced the comments from counseling agencies. I will 

read some: 

One, they do not return calls; 

Two, they take 30 to 60 days to give us a written answer; 

Three, they require their own authorization to release information forms; 

Four, they take too long to assign cases; 

Five, they keep changing officers when cases are assigned; 

Six, they give wrong information regarding the loan; 

Seven, you always have to re-fax and explain the situation to different people; 

Eight, customer service sends us to the wrong department; 

Nine, they hang up; and 

Ten, they are never willing to work any details. 

In anticipation of this hearing, I tried to check back in with folks 

in the last few days to confirm, since the study was based on December experiences. Unfortunately, we hear a lot of the same problems repeating themselves. 

A few things I will pull out. Counseling agencies and legal services offices are reporting seeing a lot of loans which are clearly 

unaffordable and never should have been made, including an increasing prevalence of spotted broker fraud—being told to call back 

by the servicers when the borrowers are in default, despite industry pronouncements to the contrary—and being strung along by 

servicers who say a borrower can get a loan modification, only to 

later decline the modification right before foreclosure. 

And a growing concern in light of data that is being reported is 

that borrowers are being pushed into loan modifications and workouts that are, in the words of some of the counseling agencies, either ridiculous or make no sense. We are hearing more about this, 

of so-called loan modifications and workouts that are really not in 

the best interests of the borrower; and, unfortunately, we believe 

it would be reported as a loan modification by servicers. 

This experiment with voluntary industry initiatives has failed, 

and hundreds of thousands of borrowers are falling through the 

cracks into foreclosure. H.R. 5679 will help borrowers remain in 

their homes by creating an obligation on the part of loan servicers 

to act reasonably and by requiring detailed reporting on loan servicing outcomes. 

31 

I appreciate the analogy to the Home Mortgage Disclosure Act. 

We think that when light is shed on industry practices, the effect 

will be better industry practices. 

Madam Chairwoman, thank you for the opportunity to testify. 

We look forward to working with you to keep borrowers in their 

homes and to help communities. 

[The prepared statement of Mr. Stein can be found on page 154 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Kenneth Wade. 

STATEMENT OF KENNETH WADE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, NEIGHBORWORKS AMERICA 

Mr. WADE. Thank you, Chairwoman Waters, and members of the 

subcommittee. Thank you for inviting us to be here to share with 

you some of the things we are doing and our perspective on this 

very challenging issue we are all facing on the foreclosure front. 

We are involved in a broad variety of efforts out there. We are 

working with anybody and everybody, both nationally and locally, 

in order to address this very challenging problem. We are in partnership with the Housing Preservation Foundation to support the 

toll-free number that homeowners can call, and our network is one 

of the referral sources that they refer consumers to when they need 

a face-to-face counseling. 

We are members of the HOPE NOW Alliance which has been 

convened by the Department of the Treasury, and you will hear 

more about their efforts as well, recognizing that working with the 

industry is obviously something we felt we had to do to get a handle on this issue. 

We are encouraging borrowers to reach out through outreach efforts that we are conducting through our National Ad Council campaign, designed to reach those consumers who have been difficult 

to reach. And since the launch of that Ad Council effort in June 

of 2007, we have had more than 12,500 public service announcements. The estimated value of those ads are about $16 million, and 

they have been targeted in 126 of the 200 media markets that are 

hardest hit by foreclosure. 

We also were named in the Fiscal Year 2008 Consolidated Appropriations Act to administer a national foreclosure mitigation counseling program. We are pleased to be able to say that, within 60 

days of enactment, we were able to award $130 million to 130 organizations that were eligible through that legislation to support foreclosure prevention counseling. That is, basically, counseling that 

will be available all over the country. 

And then, we are working on a new tool that we think will greatly aid the counselors in their ability to develop solutions that will 

help keep borrowers in their home. We have a secondary market 

organization of ours called Neighbor Housing Services of America. 

They have developed what we are calling a best-fit tool that we are 

rolling out today. That tool will allow counselors to assess a borrower’s ability to pay in an automated way. 

It will also be able to provide an automated valuation of the borrower’s current property and allow the counselor to propose or to 

do a number of ‘‘what if’’ scenarios to help determine how you can 

32 

best create a loan solution that would keep that borrower in their 

home, including whether they qualify for any of the existing refinance products that might be out there, whether they be those offered by the FHA or local State housing finance agencies. 

And it will allow the counselor to do ‘‘what if’’ scenarios, so that 

if you reduce the interest rate by ‘‘X,’’ will that meet the borrower’s 

ability to pay? Or if you reduce the principal by ‘‘Y,’’ or do some 

combination thereof? 

One of the challenges that the counseling community has is their 

ability to develop an automated way to interface with the servicers 

and do this in a more efficient manner. 

Despite all that is going on, and the many things that we and 

others are doing, I would like to highlight five major challenges: 

One, I would concur that there is still a challenge that we hear 

from our members about servicer responsiveness. I think the scale 

and scope of the challenge obviously has grown much beyond what 

any of us would have imagined, and I think the challenge to the 

servicing industry to keep pace with that seems to be a challenge. 

Two, there does seem to be a language of standardization around 

approaches and rules to loan modifications that counselors will reasonably be able to expect that they can recommend to servicers and 

allow a consumer to stay in their home. 

Three, we also have identified that the counseling community 

does not have a sustainable funding model to help support quality 

counseling. Thus far, most of the counseling has been supported by 

public funds and charitable contributions. The industry—we are 

working very closely to come up with a means by which the industry will share some of the cost of this counseling. 

Four, we also are very concerned about the disparate impact that 

the foreclosure problem is having, and then we also recognize that 

there is a rising problem with foreclosure scams that are taking advantage of consumers while promising to try to keep them in their 

homes. 

Five, we also think that, basically, the best remedy is good prepurchase counseling. Our own loan performance bears that out. 

Loans from our network performed 10 times better than subprime 

loans, 4 times better than VA and HUD loans, and slightly on par 

with prime loans. 

Thank you for providing me the opportunity to say a few things 

today, and I look forward to answering any questions you might 

have in the course of this hearing. 

[The prepared statement of Mr. Wade can be found on page 183 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

We have two more witnesses to give their testimony, and then 

we are going to have to break for the vote, and we will return for 

the questions for this panel right after we take the votes on the 

Floor. I don’t know exactly what the time is for each of those votes. 

I will ask my staff to inquire so that I can give you some reasonable speculation about exactly when we will return. 

With that, we will go right to Mr. Jason Allnut. Thank you. 

33 

STATEMENT OF JASON ALLNUT, VICE PRESIDENT FOR 

CREDIT LOSS MANAGEMENT, FANNIE MAE 

Mr. ALLNUT. Thank you, Chairwoman Waters, Ranking Member 

Capito, and members of the subcommittee. I appreciate the opportunity to be here today to describe Fannie Mae’s foreclosure prevention practices. I will share with you our view on how our loan 

servicing practices can best be directed to reducing foreclosures 

that are damaging families, neighborhoods, and local communities 

across the country. 

Fannie Mae has been investing in mortgage credit for 70 years, 

through many housing cycles, and the collective knowledge and expertise of those many decades are reflected in our loss mitigation 

practices. Underlying all of our efforts in that area is a simple principle: As a holder of mortgage credit risk, our interests are, in fact, 

closely aligned with those of the borrower. 

Our loss mitigation efforts are undertaken in close partnership 

with our loan servicers, who have the most direct and meaningful 

contact with borrowers having trouble making monthly payments. 

I would like to outline the way in which our servicing relationships 

operate and how our policies and tactics around foreclosure prevention are working today. 

First, Fannie Mae continuously monitors and measures servicer 

loss mitigation activity. For Fannie Mae, that means granting 

servicers as much leeway as possible to prevent foreclosure, while 

at the same time monitoring and rewarding their activities to make 

sure foreclosure prevention is occurring in accordance with our 

policies. 

To accomplish this, we lay out the results we want and work 

with servicers to come up with the best possible tactics to achieve 

them. We do not require a standard one-size-fits-all workout. Rather, Fannie Mae leverages a combination of monthly servicer score 

cards and on-the-ground presence to ensure foreclosure prevention 

performance and compliance. 

Our close monitoring of servicers, setting targets for their results 

and the regular feedback we receive from them has led to some important changes in our policies. For instance, since the market turmoil began last summer, servicers have requested 18 operational 

changes to resolve prior loans without prior approval from Fannie 

Mae. We have granted all 18. These changes have helped streamline the process and empowered servicers to resolve problems more 

quickly. 

Second, we offer cash incentives to servicers to pursue alternatives to foreclosure, but we also pay foreclosure and bankruptcy 

attorneys to reach out directly to delinquent borrowers. As many 

have reported, borrowers don’t necessarily respond to letters from 

a servicer, but may respond to a letter from an attorney, and we 

pay the attorney to prevent a foreclosure, not just to conduct it. 

Third, we pursue a variety of ways to work with a delinquent 

borrower to prevent the foreclosure. 

But, historically, our most effective method has been a renegotiation of the terms of the loan or a loan modification. 

As noted in our annual report for 2007, Fannie Mae worked on 

more than 37,000 troubled loans last year. The majority, about 70 

percent, were loan modifications. 

34 

The choices we make with our servicers and borrowers on the 

types of loan workout options we pursue are designed for the best 

long-term outcome. In other words, they are not designed to ‘‘kick 

the problem down the road.’’ In fact, of the modifications, 

forbearances, and repayment plans we made between 2001 and 

2005, only 9 percent of those workouts ultimately went to foreclosure. 

The affordability standards we use when doing a loan workout 

is fairly straightforward. Our servicing guidance allows servicers to 

create an affordable plan whereby borrowers are required to have 

at least a $200 residual after monthly expenses are subtracted. The 

reworked loan needs to be sustainable, and it must allow for unexpected household expenses. A broken water heater is the rule of 

thumb. The final outcome must meet a basic test: Can the borrower 

sustain the payments over the long term? 

As I said in my opening, these loss mitigation practices reflect 

the long experience we have in preventing foreclosure. But they 

also are a reflection of the long-standing underwriting practices of 

Fannie Mae and the basic safety and sustainability of our loans. 

The vast majority of our business—close to 90 percent of our entire 

single family mortgage book—is made up of fixed-rate mortgages 

with strong credit scores and plenty of borrower equity. 

Before I close, I would like to offer a few points on the legislation 

currently under consideration by this committee, specifically H.R. 

5679. We share Congress’ concern that the tide of troubled loans 

has made it more difficult for servicers to address the growing need 

of borrowers who want foreclosure alternatives. 

My view on legislation remedies to this problem is informed by 

my own experience at Fannie Mae. We have dedicated the time, 

people and resources needed to work through tens of thousands of 

problem loans since the market turmoil began last year. Loans are 

made one at a time, and loss mitigation happens one loan at a 

time. Creating a legislative standard for loss mitigation activities 

prior to a foreclosure may actually have unintended consequences 

by making solid loss mitigation activities, negotiated between a 

borrower and a servicer, less flexible. It could create an added cost 

to an already expensive process and ultimately, we believe, make 

home mortgages more expensive. 

I want to thank the committee again for inviting me here today. 

With that, I would be happy to answer questions. Thank you very 

much. 

[The prepared statement of Mr. Allnut can be found on page 72 

of the appendix.] 

Chairwoman WATERS. Thank you. Ms. Ingrid Beckles. 

STATEMENT OF INGRID BECKLES, VICE PRESIDENT, 

SERVICING AND ASSET MANAGEMENT, FREDDIE MAC 

Ms. BECKLES. Madam Chairwoman, Ranking Member Capito, 

and members of the subcommittee, good morning. My name is Ingrid Beckles, and I am the Vice President of Servicing and Asset 

Management for Freddie Mac. As you know, historically Freddie 

Mac’s guarantee and securitization activities have centered around 

the conforming conventional prime market. Freddie Mac’s mortgages continue to perform very well relative to other market secVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
35 

tors despite the turmoil in the market. At year end 2007, only 1 

in about every 150 Freddie Mac mortgages were seriously delinquent or in foreclosure compared to about 1 in 7 subprime mortgages; this is less than 2⁄3 of 1 percentage point, or about 65 basis 

points. 

So while we may be experiencing relatively low delinquencies, 

Freddie Mac is not immune to the worsening conditions of the overall housing market. At Freddie Mac, we start from the proposition 

that a foreclosure is not in anyone’s best interest, not the lender, 

not the investor, and certainly not the homeowner or the community. This is also the proposition underlying H.R. 5679. We know 

from experience that the earlier the servicer and the borrower 

begin to work out their delinquency, the more likely the borrower 

will be able to avoid foreclosure. For that reason, we emphasize 

early and frequent intervention with delinquent borrowers as early 

as the first missed payment. In 2007, we worked out 2⁄3 or 31⁄2

times as many mortgages as we had to foreclose upon. 

Under our seller servicer guide, which is our basic contract with 

our servicer, we require, not just recommend, that our servicers 

work with borrowers to try to resolve troubled loans prior to foreclosure. As a result, in 2007, we entered into approximately 50,000 

workout situations last year, nearly 1,000 per week, where we prevented a family from losing their home. This is an exceptionally 

high proportion of our significantly delinquent portfolio which stood 

at 79,000 at the end of 2007. Our workouts fall into three categories: forbearances; repayment plans; and modifications. 

In every case, we want the borrower to be able to sustain the 

workout based on the circumstances at the time the family enters 

into that workout. When we do a loan modification, for example, 

we not only assess the borrower’s current income and other debts, 

but also whether the family’s other living expenses, such as food 

and fuel, are such that the modified loan will be sustainable. We 

want to ensure that the family has a sufficient cushion. Our guideline is 20 percent of disposable income, to cover unanticipated expenses that might otherwise force a loan back into default. Since 

a workout must be sustained based on the borrower’s present financial situation, we do not support H.R. 5679’s requirement that 

the affordability be assessed on the income information derived at 

origination. Rather, our approach, which uses current financial information, has given us a very low redefault rate. And in fact, our 

loans have a success rate of 80 percent. 

My staff and I work with our servicers every day to ensure that 

we can do the best job possible for our delinquent borrowers. We 

have found, however, that while mandates may provide clarity, the 

best way to encourage effective delinquency management is to combine carrots with sticks. We, therefore, reinforce good behavior by 

providing financial incentives on a per loan basis for completing repayment plans, modifications, and foreclosure alternatives. These 

incentives are in addition to the fees that we pay the servicers contractually for our mortgages. We also absorb these incentives rather than pass them on to our already distressed borrowers because 

we believe that they are cost effective in the long run. 

In 2007, we paid approximately $12 million in incentives to the 

servicers for performing this good work. We concur with the objecVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
36 

tive of H.R. 5679 to ensure that every delinquent borrower has a 

reasonable opportunity to work out his or her loan prior to foreclosure. We do not, however, believe that it is necessary to create 

an affirmative statutory duty that imposes particular loss mitigation activities on the entire mortgage market. Such a measure 

could add unneeded costs and complexity to delinquency management. 

And moreover, no matter what standard is chosen, be it Fannie 

Mae, Freddie Mac, FHA, or VA, the standard in the underlying 

principles may not be equally effective to all borrowers at a given 

point in time. In the long run, a Federal standard could chill innovation, discourage some investors from getting into the mortgage 

market, and ultimately raise costs for all borrowers. We are committed to working with Congress, the Administration, our customers, and other industry participants to find and implement effective solutions to this very difficult problem. Thank you for the 

opportunity to address the subcommittee and I look forward to 

questions. 

[The prepared statement of Ms. Beckles can be found on page 87 

of the appendix.] 

Chairwoman WATERS. Thank you very much. The committee will 

stand in recess. We ask you to be patient; we should return in 

about 30 minutes. 

[Recess] 

Mr. CLEAVER. [presiding] I think, as you can see, the chairwoman is on the Floor. She is managing a bill. And we are going 

to proceed with questioning. And hopefully, you heard me earlier 

apologize, as you can see, Chairwoman Waters is on the Floor and 

should be back shortly. But we are going to proceed. Your time is 

valuable and we wanted to go ahead and try to minimize the time 

away from saving people. Let me begin the questioning. I raised 

questions earlier with the first panel about whether or not there 

was any value in spreading a program across the country that 

seems to be valuable to FHA so far. And so loss mitigation seems 

to have some great value. Let me ask you, Ms. Twomey, do you 

think there would be value in us having such a mandatory program 

all over the country? 

Ms. TWOMEY. Yes. 

Mr. CLEAVER. You know, I like that ‘‘yes,’’ because we don’t get 

those normally. 

Ms. TWOMEY. I thought you might appreciate that. 

Mr. CLEAVER. I do. I think everybody does, including the Judge, 

I think. The other issue that I raised that I am interested in getting all of your feedback on is the whole issue of regulation. Those 

who are involved with the loss mitigation are not normally regulated in what they do, except for the banking portion of their portfolio. Is there any downside to some form of regulation? Ms. 

Beckles? 

Ms. BECKLES. I think that we have to be careful with how we go 

about applying regulation. We have practices at Freddie Mac that 

we find are doing a very good job at managing delinquencies and 

keeping people in their homes, which is the objective of your regulation. I do believe there are sectors of the market that would require further attention and possibly regulation. But I think that if 

37 

we spread a broad knife across all industry players, especially 

those who are performing the objective that you seek, it would be 

detrimental to those who are doing well. 

Mr. CLEAVER. Let me amend my question about whether or not 

the servicers should be regulated. Do any of you have any idea, as 

you answer the first question, how the fee schedule is developed for 

the servicers? 

Ms. TWOMEY. I might take a crack at that one. Servicers are generally compensated in three different ways through the pooling and 

servicing agreement, which is the agreement that governs the relationship between the servicer and the investors. And the three different ways that servicers are generally compensated are, one, a 

servicing fee. And the servicing fee is based on the outstanding 

principle balance of the loan pool. So they take a fractional interest 

in all the monies that they collect. And that is their primary source 

of income. Their second source of income is what is called float income, which is derived from short-term overnight investments of 

their deposits. And then they get fees; late charges, property inspection fees. All of these things servicers generally get to keep. I 

don’t think that there is in most pooling and servicing agreements 

a specific fee allocated, unlike some of the FHA or Freddie, some 

kind of fee incentive for doing loan modifications. 

There is not a line item in these pooling and servicing agree- ments that says if you do a modification, you get $500, or whatever 

it is. And so that has created a problem. There is no incentive for 

mortgage servicers, there is no financial incentive certainly in a 

majority of the market for them to do these types of work-out arrangements. They are focused on their servicing fee, their float income, and getting as much in these ancillary fees as they possibly 

can. I am not sure if that directly answers your question. 

Mr. CLEAVER. It does answer the question. Yes, Mr. Allnut. 

Mr. ALLNUT. I would only clarify by looking at the same revenues 

that were just outlined, the servicing fee is only paid on performing 

loans. The float is only paid when a borrower pays. And the late 

fees and other ancillary fees are only received when a borrower reinstates from a late status. If a borrower goes through to foreclosure there is a disincentive on servicing fees, a disincentive on 

float and a disincentive on ancillary fees. And on top of that Fannie 

Mae, as well as Freddie Mac, pay a servicer $200 if they do a repayment plan, $500 if they do a modification, and zero if they go 

to foreclosure. So from a revenue standpoint, I think the alignment 

is closer to what we all hope it is, which is keeping a borrower in 

their home, in their mortgage, versus taking that borrower to foreclosure. 

Mr. CLEAVER. Anyone else? 

Ms. BECKLES. I just want to agree with Mr. Allnut that our servicing structure is probably a little bit higher than that. But we do 

pay $250 for repayment plans. We pay $300 to $700 for our modifications. We even pay them to help a borrower in what H.R. 5679 

would call secondary loss mitigation for deeds in lieu and short 

sales when the borrower cannot remain in the home upwards of 

$1,100. So our incentive to the servicer is really to work this situation out and not go to foreclosure. And on top of that, like Mr. 

Allnut, Freddie Mac also incents their foreclosure attorneys beVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
38 

cause many times that is the only person that a distressed borrower will contact because they really see that the rubber is meeting the road here despite the efforts of the servicer. So we actually 

incent our foreclosure attorneys, not just to proceed with foreclosure. So take that incentive away, work with the borrower on 

working out the product and getting them back in touch and in a 

performing state with their servicer. 

Mr. CLEAVER. Yes, Mr. Stein. 

Mr. STEIN. So if your question was broader, if it is the case that 

what they describe relates to the GSE purchase loans, most of the 

loans that were problematic to begin with and that are going into 

foreclosure are these private label securities. And so if it is the case 

that there is no clear incentive for servicers on those loans to do 

modifications or engage in loss mitigation, and there are basically 

no rules to say that it should happen, then I don’t know that we 

should be surprised that it is not happening. 

I think that is why this bill that is being put forth is so important. And on kind of the general concern about regulation and access to credit, this is kind of a frustrating argument to hear, because we have been hearing it over and over again for years from 

the industry, that if there is too much regulation, it is going to dry 

up access to credit. And I think they have been very successful in 

making that argument. So successful that we have had a basically 

unregulated insufficiently regulated mortgage market for years. 

That is why we have the problems we have today; the loans that 

were originated weren’t sufficiently regulated. 

Now they have all gone into default and foreclosure. The investors are scared. And that is why we have a liquidity crisis, because 

there is a crisis of confidence on the part of the investors because 

we didn’t have sufficient regulation to begin with. So we think reasonable regulation around origination and reasonable regulation 

around servicing would bring back investors and bring back some 

sanity to the market. 

Mr. CLEAVER. Following that line of thinking, the brokers are not 

regulated either, which are the first people who, I will try to say 

this diplomatically, the people who, in many instances, took advantage of financially illiterate home buyers. What is to prevent—my 

final question, what is to prevent less desirable companies from becoming servicers? I mean, we have some reputable companies involved, like Wells Fargo, Citibank, and Bank of America. What is 

to prevent ‘‘Joe’s Home Company’’ from becoming involved? 

Ms. TWOMEY. I think the question is less desirable from whose 

perspective; the investors or the borrowers? The investors really 

control this game. And the investors want to make sure that a 

servicer is going to maximize their return. And so they are not 

going to let ‘‘Joe’s Servicing Agency,’’ that has no experience servicing loans, sign up to be the servicer in a pooling and servicing 

agreement. They want to make sure that that investor or that 

servicer has the institutional capabilities to meet their needs. The 

problem is that doesn’t necessarily help borrowers because borrowers don’t choose at all. 

Mr. CLEAVER. The paranoia exists today because of what has 

happened. And so I am just interested in, and I think our responsibility is not to do any damage to the lenders, but I think the ultiVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
39 

mate responsibility is just to protect the borrowers. That is why I 

am inclined to think that something related to regulation should 

occur. Every hearing we have, without exception, when we are 

dealing with this issue we hear recollections are a bad thing, that 

it will destroy the country, cause the Super Bowl to move to another continent. 

I mean, it is the worst thing to happen when we listen to people. 

By now, the mantra has become one that irritates. Congressman 

Green. 

Mr. GREEN. Thank you Mr. Chairman, and I commend you on 

how well you have acclimated to your new station in life. Let me 

ask questions to the panel as a whole, if I may. And if you would, 

you may respond by raising your hand. Does everyone agree that 

aside from FHA and the GSEs, we have other institutions that are 

involved in this market, what we are calling subprime, that are 

making loans and having homes foreclosed on and that these institutions—well, let us just find out if you agree that market exists. 

If you agree that it exists, would you raise your hand, please? 

Okay. Is there anybody who doesn’t agree that it exists? I am asking you aside from conforming conventional loans, do you also have 

nonconventional conforming, conforming nonconventional? 

Ms. TWOMEY. The answer is ‘‘yes.’’ What is interesting is that 

Countrywide or Wells Fargo or any of these lenders that you have 

heard service for GSEs and service for Fannie and FHA also service the subprime loans. 

Mr. GREEN. I understand. But we all agree that they exist. I just 

want to make sure that nobody assumes that they don’t exist. 

Ms. GORDON. Can I add one other comment? 

Mr. GREEN. Well, let me just do this. For the record, all persons 

agree that they exist. Do you agree that there are a substantial 

number of foreclosures in this market? Everybody agree? Raise 

your hand if you would, please? Good. For the record, everybody 

has raised their hand. Do you agree that this market is, when compared to FHA and the GSEs, not nearly as regulated? Do you agree 

that they are not as regulated as FHA and GSEs? Do you agree 

that they are not regulated? Yes, Ms. Holmes, do you agree that 

they are not regulated? Excuse me, that is Ms. Beckles. Do you 

agree that they are not regulated to the extent that GSEs and 

FHA? 

Ms. BECKLES. Based upon the outcome, they appear not to be. 

Mr. GREEN. Well, do you have any empirical evidence of actual 

regulation? 

Ms. BECKLES. I don’t spend time studying the other markets. 

Mr. GREEN. So your answer would be no, you don’t have it, is 

that correct? 

Ms. BECKLES. I do not have empirical evidence. 

Mr. GREEN. All right. That will be sufficient. Thank you. I did 

not hear from Mr. Allnut. You did not respond. 

Mr. ALLNUT. I have no empirical information one way or the 

other. 

Mr. GREEN. As to whether they are regulated or not, okay now, 

given that you have no empirical evidence, Mr. Allnut, why do you 

defend that of which you have no empirical knowledge? And I 

would ask the same thing of you, Ms. Beckles. You have no empirVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
40 

ical knowledge of their regulations, but you defend the notion that 

they should be regulated, or am I incorrect and you do not defend 

that? 

Ms. BECKLES. I am not making that assumption. 

Mr. GREEN. Excellent. Okay. You do not defend. So then let me 

ask now of the entire panel, if they are substantially unregulated 

when compared to the others, would you agree that some regulation can be of help? If so, would you kindly raise your hand? Okay. 

I have three persons. Are you a yes or a no or a maybe? That would 

be Mr. Wade, is that right? 

Mr. WADE. Yes. I just wanted to clarify that the way we experience it, there is no question the inconsistencies create a challenge 

for the consumer and those trying to help the consumer. 

Mr. GREEN. I understand. But do you agree that if all markets 

were regulated to the extent that FHA was regulated that we 

would probably have fewer foreclosures? 

Mr. WADE. Well, I do agree that if standards were in place— 

Mr. GREEN. You know how FHA is regulated? 

Mr. WADE. Absolutely. 

Mr. GREEN. Would we have fewer foreclosures? 

Mr. WADE. If the same products— 

Mr. GREEN. If FHA requires the same products. 

Mr. WADE. So, if— 

Mr. GREEN. Assume whatever you like as it relates to FHA. But 

if they were regulated to the same extent that FHA is regulated, 

would we have fewer problems? 

Mr. WADE. There would be fewer problems. 

Mr. GREEN. So again, let me ask, do you think that some regulation would help these markets, this market that is apparently not 

regulated to the extent that FHA and their GSEs are regulated? 

If so, would you raise your hand please. Okay. Now we will get 

back to Mr. Allnut. 

Mr. Allnut, you have no empirical evidence of what their standards are yet you conclude that no regulations should apply to them, 

is this correct? 

Mr. ALLNUT. No that is not my conclusion. 

Mr. GREEN. Well, if it is not your conclusion, and I say some regulations, and you don’t agree with some, then some would include 

a scintilla to some large amount. But you don’t—I have to conclude 

that you wouldn’t even want a scintilla of regulation? 

Mr. ALLNUT. That is not my conclusion. 

Mr. GREEN. So you would want some? 

Mr. ALLNUT. What I am suggesting is that the regulations that 

Fannie, Freddie, HUD, and VA abide by have to do with products 

that are available to the marketplace, and had those same regulations been applied to this other category that you are talking about, 

many of the products that are out there right now would not be out 

there and could have a positive impact on the rate of— 

Mr. GREEN. Well, you are in agreement with me then? 

Mr. ALLNUT. Yes. 

Mr. GREEN. All right. For the record, Mr. Allnut is in agreement. 

Now let us go to Ms. Beckles. Is it your opinion that there should 

be no regulations with reference to this market? 

41 

Ms. BECKLES. Freddie Mac’s opinion is probably that there 

should be some form of— 

Mr. GREEN. Well, if you say ‘‘some,’’ then your hand should have 

gone up with the others. 

Ms. BECKLES. I think there is a difference between regulation, 

statutory requirements and oversight. 

Mr. GREEN. In your mind, define it however you like. Should 

there be some regulation? 

Ms. BECKLES. There should be something. 

Mr. GREEN. Something. Can we call that thing ‘‘regulation?’’ 

Ms. BECKLES. I am not sure how you are going to define regulation. There should be some things— 

Mr. GREEN. You define regulation in your mind as it relates to 

your business and then apply it to this question. Some regulation 

of the market that has an overwhelming majority of problems, 

should there be some? 

Ms. BECKLES. I believe that there should be oversight and consequences. 

Mr. GREEN. Okay. Does oversight entail regulation and consequences? Isn’t that a form of regulation? Let me ask you this: Is 

it hard to say regulation as it applies to this market? 

Ms. BECKLES. It is hard to say regulation when at times regulation is taken with a broad brush and does impede practical business. 

Mr. GREEN. Okay. But let us not talk about impeding practical 

business. Let us just talk about a market that we conclude has not 

been regulated to the extent that FHA has and whether there 

should be some regulation given that this is the market where we 

have the problem? Should there be some? 

Ms. BECKLES. There should be some form of oversight and consequences in management. 

Mr. GREEN. Okay. I am going to define oversight and consequences as regulations. With that definition, should there be 

some regulation? 

Ms. BECKLES. Yes, there should. 

Mr. GREEN. Thank you. And I yield back, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. I would like to 

yield myself some time to raise some questions. Before I get into 

some of the questions that I prepared to ask you, I need to be educated some more about this business. Let me ask Fannie and 

Freddie. You have underwriting standards, is that right? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. And you have loan originators such as 

Countrywide, is that correct? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. And you buy the products, you buy the 

loans from Countrywide on the secondary market? 

Ms. BECKLES. Yes, ma’am. Those that meet our standards, yes, 

ma’am. 

Chairwoman WATERS. Those that meet your standards? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. And some of those loans—well, all of your 

loans are serviced by Countrywide and others, is that right? 

Ms. BECKLES. By Countrywide and others, yes, ma’am. 

42 

Chairwoman WATERS. So Countrywide is servicing some of the 

loans that you picked up from them? 

Ms. BECKLES. That we purchased from them. 

Chairwoman WATERS. That you purchased from them; they are 

servicing some of those? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. All right. They meet your standard for the 

loan origination? 

Ms. BECKLES. And for the loan servicing, ma’am. 

Chairwoman WATERS. How does the loan servicing that they do 

for you compare with loan servicing they do on loans that they 

would keep in their portfolio? Is there a difference? 

Ms. BECKLES. Well, I cannot comment as to what they do on the 

loans that they keep in their portfolio or that they sell to other people. But they are required to follow our strict standards. We monitor their performance. We actually model our loans loan-by-loan to 

determine their probability of default. We put those into their call 

campaigns. They use our models to drive their call campaigns to 

make sure that we are reaching out to borrowers. And then we 

compensate them when they do successful workouts to keep borrowers and loans. 

Chairwoman WATERS. Describe to me how the loans that you 

have picked up from Countrywide perform in relationship to foreclosure, what is the percentages? 

Ms. BECKLES. One moment, I do not have specific lender percentages. I have some State information. But on the whole, they are 

performing at par with their peer groups, I can tell you that. Because they are one of our largest customers and we do look at our 

larger customer performance. So our loans are performing on par 

with our peer groups. 

Chairwoman WATERS. Well, that is not good enough. Let me just 

say this. 

Ms. BECKLES. Our overall foreclosure rate is— 

Chairwoman WATERS. For Countrywide loans. 

Ms. BECKLES. If they are performing on par? 

Chairwoman WATERS. For Countrywide loans, that is all I want 

to know. 

Ms. BECKLES. Countrywide loans are performing on par, which 

is less than 100 basis points. 

Chairwoman WATERS. I want the exact information. And I guess 

I will have to write and ask you for it, because you obviously don’t 

have it with you today. 

Ms. BECKLES. I did not bring lender specific information, ma’am, 

but I can certainly get it. 

Chairwoman WATERS. This is important. We have a crisis out 

there in America. I have been to areas not only in my own city, but 

in Cleveland, Ohio, and Detroit, Michigan, where whole blocks are 

boarded-up, and other people who are living on those blocks, their 

values are being driven down, the homes are not being taken care 

of, they are being vandalized. We have a really serious problem. 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. Obviously, Countrywide emerges big in 

this problem. Do you understand that? 

Ms. BECKLES. I do understand that, ma’am. 

43 

Chairwoman WATERS. Okay. So it is reasonable that when you 

are coming here, you would know that we would want to ask you 

about your relationship with Countrywide and the performance 

level of Countrywide. 

Ms. BECKLES. Our relationship with Countrywide is very strong. 

They perform on par with their peers, and that is a very good 

group of folks. As they are a large customer, you would think that 

they would drive down our overall performance rate and they are 

not. So when I say that they are performing on par, they are not 

aberrant to our average or 90-plus foreclosure rate. 

Chairwoman WATERS. I am going to ask you some specific information that obviously you don’t have today. But let me ask you 

this, do you know whether or not the loans that were originated 

by Countrywide are originated by a combination of individuals who 

either are hired or contracted with by Countrywide in California? 

For example, we have licensed and unlicensed brokers. Were your 

loans, any of your loans, originated by unlicensed brokers with 

Countrywide? 

Ms. BECKLES. I will have to get that information for you, ma’am. 

I am focusing on the servicing side, so I will get that information 

to you. 

Chairwoman WATERS. Let us get to servicing. 

Ms. BECKLES. Okay. 

Chairwoman WATERS. You have standards? 

Ms. BECKLES. Yes, we do, ma’am. 

Chairwoman WATERS. And they are monitored? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. And they are audited? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. And you have written documentation on 

the auditing of the servicing that Countrywide is doing for you? 

Ms. BECKLES. Yes, ma’am. 

Chairwoman WATERS. And you can make that available to this 

committee? 

Ms. BECKLES. Yes ma’am. 

Chairwoman WATERS. We shall require of you, we will ask of 

Freddie and Fannie, to give us that information. We want to take 

a look at what you do. Now, how many times have you determined 

that Countrywide was not in compliance with your servicing standards? 

Ms. BECKLES. We haven’t found that—okay. How many times 

have we determined? They have an acceptable rate of performance 

on our audit. That means that they do have some outliers, just like 

any other mortgage servicer. And when we find outliers in the performance of the servicing duties, we develop work plans with them, 

we give them correspondence, and we go onsite and actually train 

them on how to improve or remediate that performance. Their inability to service properly for us also affects their ability to receive 

the incented compensation because they will not perform well on 

their workout status if any of our servicers are not following our 

standard. 

Chairwoman WATERS. Do they subcontract any of the servicing 

they do for you? 

Ms. BECKLES. I beg your pardon, ma’am? 

44 

Chairwoman WATERS. Do they subcontract any of the servicing 

they do for you? They service for you. Do they hire other people, 

do they have contractual relationships with others who are doing 

servicing for you? 

Ms. BECKLES. To my knowledge, Countrywide uses 

Countrywide’s employees on the Freddie Mac portfolio. 

Chairwoman WATERS. Fannie Mae? 

Mr. ALLNUT. Same question? 

Chairwoman WATERS. Same question. Do they subcontract, does 

Countrywide subcontract its servicing? 

Mr. ALLNUT. I focus on the borrower contact aspect of who Countrywide uses for servicing and those are Countrywide employees. 

Chairwoman WATERS. So your answer is either you don’t know 

or no they do not subcontract out their servicing? 

Mr. ALLNUT. The portions of the work that they do that I oversee 

are not subcontracted out. 

Chairwoman WATERS. Okay. Well, let us talk about the work 

that maybe you don’t oversee directly, but because you are a smart 

employee, you know what goes on around you. Do you know or 

have you heard that they subcontract out any of their servicing? 

Have you heard any of that from anybody, maybe from somebody 

who sits next to you, works in the same area that you work in, who 

is doing what maybe you don’t do, but it is connected to servicing? 

Mr. ALLNUT. No, I have not. 

Chairwoman WATERS. So you don’t know, is that it? 

Mr. ALLNUT. No. No, I have not heard through conversations or 

elsewhere that Countrywide subcontracts out the servicing portion 

of their responsibilities. 

Chairwoman WATERS. Okay. For either of you, whether it is 

Countrywide or any of your other servicers, have you heard that 

they utilize foreign operations to do some of the servicing? Have 

you heard that some of the servicing that is done by Countrywide 

or any of your other services is actually being done from India or 

anyplace else? 

Mr. ALLNUT. I have had conversations with servicing management at Countrywide relative to their desire to use offshore call 

centers. 

Chairwoman WATERS. Not their desire. I don’t care about their 

desire. I want to know whether or not they are doing it and whether or not you know about it? 

Mr. ALLNUT. I am not familiar with them doing it today, and I 

have voiced my perspective that they not do so. 

Chairwoman WATERS. So you had a conversation with them because you heard they were interested in doing it? 

Mr. ALLNUT. I heard that there was a possibility that Countrywide was looking into offshoring early borrower contact and voiced 

my concern and opinion that was not in the best interest of our 

borrowers. 

Chairwoman WATERS. Okay. So you know that they don’t do that 

for Fannie Mae; they are not doing offshore contracting for services? 

Mr. ALLNUT. That is correct. 

Chairwoman WATERS. And the same thing for Freddie Mac? 

Ms. BECKLES. Freddie Mac, yes, ma’am. 

45 

Mr. ALLNUT. That is my understanding. 

Chairwoman WATERS. Now, I want to hear about the incentives. 

Ms. BECKLES. Okay. 

Chairwoman WATERS. You have alluded to incentives, and this is 

one reason why you know they are doing the best job that they 

could do. Would you explain those incentives to us? 

Ms. BECKLES. Certainly, ma’am. We measure our loans and 

model our loans based upon their probability of default. Those models are used to drive call campaigns. So since we have access to all 

of our loan data and can track the progression of a loan we can determine how well or how the loans are moving through their performing cycle, as well as their default cycle. We measure our 

servicers based upon their ability to mitigate losses to the borrower 

and to the organization. 

Servicers are ranked according to their effectiveness at doing 

this. So on a loan-by-loan basis we watch the population of loans 

that become early stage default such as, you know, day one after 

30 and watch its movement through the pipeline. And based upon 

our models, we give them benchmarks that say you should not be 

exceeding these thresholds, and when you do you get disincented 

for exceeding thresholds at each of the major categories. 

Chairwoman WATERS. How do you get disincented? 

Ms. BECKLES. The first way they get disincented is that they 

don’t get as many points. I know that sounds pretty mundane, but 

the points add up to their tier ranking. If you maintain a Tier 1 

or Tier 2 standard, which is basically an industry standard, you are 

able to get delegations of authority, which means that you can respond to borrower situations more quickly. 

Chairwoman WATERS. Let us back up. Now, hold it for one second. I think it is very important, because like I said, since we have 

no regulation of mitigation services, we don’t know this stuff. 

Ms. BECKLES. That is fine. I am sorry. I did not mean to go so 

fast. I apologize. 

Chairwoman WATERS. When you talk about Tier 1 or whatever 

else you just said, you are basically explaining to us that if you do 

a good job, you get more flexibility— 

Ms. BECKLES. You get more flexibility. 

Chairwoman WATERS. —to work out— 

Ms. BECKLES. To work out product. 

Chairwoman WATERS. —and to do modifications? 

Ms. BECKLES. And to do other foreclosure alternatives, yes, 

ma’am. 

Chairwoman WATERS. So that if they are not in the top tier, as 

you alluded to, they are doing servicing and doing modifications 

with less flexibility and less authority, and some of those people 

whom they are servicing don’t have the advantage of the flexibility 

because this servicer is not in the right tier, is that correct? 

Ms. BECKLES. What happens, unfortunately, is that if they are 

in a lower tier, that means that they are not effective at mitigating 

losses and doing workouts for the borrowers. And in those cases, 

we work with them to bring them back up. So we look at case files 

to understand why they are missing hand-offs. In many cases, the 

reason that a servicer is not able to catch a borrower before foreclosure is because sometimes they miss the hand-off between the 

46 

collection call and the loss mitigation activity. So we go through all 

of that with a fine tooth comb to help them see where they can harvest more borrowers who want to stay in their homes and have the 

potential to stay in their homes through a workout of some kind 

of foreclosure alternative. 

Chairwoman WATERS. Okay. I get it. You don’t have to go any 

further. And I am going to—Mrs. Capito, I was out. Have you not 

had an opportunity? I am understanding more than I thought I 

was going to get out of understanding, of trying to understand how 

mitigation works. I have a lot more questions. I will ask some of 

the financial institutions that are here today. But I am more convinced than ever that mitigation needs regulation. Mrs. Capito. 

Mrs. CAPITO. Thank you, Madam Chairwoman. I would like to 

ask Mr. Wade a question about NeighborWorks America. This 

came up in a hearing we had last week when we were—you know, 

a lot of the emphasis is on good sound home counseling, financial 

counseling to keep people in their home, to get them into a mortgage, on the beginning, the end, the middle, the whole deal, and 

I know that you are very involved with this. The money that we 

put into the economic stimulus package, I believe, had financial 

counseling money. 

Mr. WADE. Yes. 

Mrs. CAPITO. Can you give me the amount of that? I can’t remember. 

Mr. WADE. $180 million. 

Mrs. CAPITO. $180 million. What has been the result of that? I 

will tell you what kind of disturbed me was the gentleman from 

Ohio said that NeighborWorks had gotten the money, then he applied on the benefit of 18 housing counseling agencies in Ohio for 

the money. And all I am thinking is administrative fee, administrative fee and what is going down to the actual person who needs the 

help. Can you explain to me how that works? 

Mr. WADE. Absolutely. That is a good question. The legislation 

was pretty specific about how the money could be allocated. Of the 

$180 million, we were required to only use 4 percent, up to 4 percent to administer the program. 

Mrs. CAPITO. That is just NeighborWorks, though? 

Mr. WADE. That is just NeighborWorks America. There were 

three classes of eligible applicants: State housing finance agencies; 

HUD-approved national intermediaries that do housing counseling; 

and then NeighborWorks organizations. We were required to set up 

an application process. Those folks applied. And we awarded within 

the 60 days that we were required to make at least $60 million 

worth of awards, we awarded a little more than $130 million of the 

$180 million. 

Mrs. CAPITO. And what was that deadline date? 

Mr. WADE. Well, it was 60 days from enactment, so it is 60 days 

from December 26th. We announced the awards within that timeframe. We were only required to get a minimum of $50 million 

awarded. We awarded $130 million. Of the awards that we made, 

the groups could only use a—well, let me just clarify. The amount 

that groups could use to administer the program was capped. 

So there were limitations on what any of the national organizations could use to administer the program. And then the funding 

47 

that went to the NeighborWorks organizations, there was no allowance for any administrative costs in that case. 

Mrs. CAPITO. Okay. Thank you. You mentioned in your, I think 

it was you who mentioned in your testimony, foreclosure scams? 

Mr. WADE. Yes. 

Mrs. CAPITO. Could you just give me a short—what should people 

be watching out for; things in the mail, on the telephone? 

Mr. WADE. It is always that people are being approached. Many 

times people go to the registry of deeds, the people who are perpetrating the scams, find out what people have been, where there 

have been foreclosure filings. They approach those folks. And there 

are two main things that end up happening at the end of the day 

on the negative. They either end up taking possession of the home 

from the borrower without their knowledge, usually with the 

premise that they can help save them from foreclosure, sometimes 

disclosing that they have to take short-term possession of the property in order to cure the foreclosure, oftentimes the consumer being 

asked to sign a paper not being clear that they are signing the 

home over to someone else. 

And then the other general circumstance that we see are people 

whose equity is taken from them in the context of the notion that 

they are going to help cure the foreclosure. So those are the two 

major things that we see. 

Mrs. CAPITO. A question for Ms. Gordon. 

Ms. GORDON. Yes. 

Mrs. CAPITO. I wasn’t here for your testimony. At least I didn’t 

hear all of it. In it, you mention a self-help organization where you 

actually do lend money separate and apart from your research? 

Ms. GORDON. Correct. 

Mrs. CAPITO. What is your foreclosure rate and delinquency rate 

on those loans? 

Ms. GORDON. The foreclosure rate on our loans, which are all to 

what you would consider a prime population, is under 1 percent. 

Mrs. CAPITO. Under 1 percent. And do you have a—does somebody service your loans for you? 

Ms. GORDON. Yes. We do have a company that does servicing for 

us. We work very closely with them. And in a situation where the 

servicing company is having trouble for whatever reason in helping 

the homeowner come to a resolution that will help them remain in 

the home, we will often step back in as the lender and try to help 

work it out as well. 

Mrs. CAPITO. Now, is that a servicing organization that is affiliated with you, or is it separate and apart? Is it one of the 1,200 

that are FHA approved? What is the name of it? 

Ms. GORDON. You know, I don’t know the name of that. I can get 

that to you. But they are a separate organization, although not one 

of the large servicers that we have been talking about. 

Mrs. CAPITO. Okay. I think that is it for me. Thank you. 

Chairwoman WATERS. Thank you very much. All members having—Mr. Cleaver, you had your chance too. Thank you very much, 

panel. Thank you for being patient and waiting for us to return 

after having gone to the Floor. Actually, we could do this for hours 

because there is so much information that we need to learn. I am 

pleased to have some of our consumer advocates here who are conVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
48 

cerned about this area of servicing and who have gathered a lot of 

information. We will continue to work with you and get advice from 

you about what we can do to assist our homeowners in staying out 

of foreclosure. 

To our friends here who do not think we need to do anything, let 

me just say that we have to pursue this. We have to pursue this 

because servicing is unregulated. And it appears that the complaints are overwhelming about the lack of being able to reach anybody on the telephone, the lack of being able to talk with anybody 

before a foreclosure actually takes place, and also what appears to 

be in some cases, we have to continue to investigate, that servicers 

are actually making a profit on foreclosures. So we have to continue to investigate this and see what we can do to provide some 

assistance to our homeowners. Thank you all very much for coming. 

The Chair notes that some members may have additional questions for this panel that 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 these witnesses, and to 

place their responses in the record. The panel is dismissed. 

I now welcome our third panel: Ms. Faith Schwartz, executive director, HOPE NOW Alliance; Mr. David G. Kittle, CMB, president 

and chief executive officer, Principle Wholesale Lending, Incorporated, in Louisville, Kentucky, and chairman-elect, Mortgage 

Bankers Association; Mr. Tom Deutsch, deputy director, American 

Securitization Forum; and Mr. Steve Bailey, senior managing director, Countrywide Financial. I would like to thank you all for being 

here today. I would like to ask you to present your testimony. You 

don’t have to read all of your testimony; you can condense it and 

concise it. You will have 5 minutes. 

We will start with Ms. Faith Schwartz. 

STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, 

HOPE NOW ALLIANCE 

Ms. SCHWARTZ. Chairwoman Waters, and Ranking Member 

Capito, thank you for the opportunity to testify today. My name is 

Faith Schwartz, and I want to tell you about the HOPE NOW Alliance’s real progress to reach out to at-risk borrowers and find solutions to prevent foreclosures. The HOPE NOW Alliance is an unprecedented broad-based collaboration among homeownership counselors, lenders, investors, mortgage market participants, and trade 

associations that is achieving real results. From July 2007 through 

February 2008, nearly 1.2 million homeowners have avoided foreclosure through the efforts of HOPE NOW members. 

HOPE NOW has also brought more of the industry together in 

this effort. And as of April 10th, the Alliance’s 27 loan servicers 

represent over 90 percent of the subprime market, a vast majority 

of the prime market. We have strong participation from respected 

nonprofits led by NeighborWorks America, the Homeownership 

Preservation Foundation, and HUD counseling intermediaries. 

HOPE NOW has a three-pronged approach to preventing foreclosure, and it is reaching homeowners in need, counseling homeowners in need, and assisting homeowners in need. 

49 

Under reaching homeowners in need, a major challenge is that 

borrowers in trouble are reluctant to ask for help; 50 percent of the 

borrowers who go into foreclosure never contacted their servicers 

for help. We are working to drastically reduce those numbers and 

help as many troubled homeowners as possible to avoid foreclosure. 

HOPE NOW has an aggressive monthly direct mail outreach campaign to at-risk borrowers. This effort is in addition to the thousands of letters already underway from individual companies to 

their customers. 

Since November, HOPE NOW has mailed out 1.2 million letters 

in an attempt to reach the most at-risk borrowers. On average, 20 

percent of those receiving the HOPE NOW letters do contact their 

servicer, and there was zero contact before these letters. In addition, the Homeownership Preservation Foundation reports that in 

the first quarter of 2008, over 11 percent of the people calling the 

hotline heard about it from a HOPE NOW letter. HOPE NOW has 

launched homeownership preservation workshops in a series of 

public outreach events across the country to reach more at-risk borrowers and provide them with an opportunity to meet in person 

with their loan servicer or a HUD-certified counselor to develop a 

workout solution. We have held three events in California, as well 

as forums in Ohio and Pennsylvania, reaching over 1,400 borrowers 

in person. In Philadelphia, HOPE NOW reached 328 homeowners 

at risk for foreclosure. 

Present were 14 mortgage servicers who participated and local 

counseling organizations, such as the Philadelphia Unemployment 

Project, the Urban League, Advocates for Financial Independence, 

and ACORN Housing. We have had very positive feedback from the 

homeowners who attended these events. Homeowners have shared 

the following: ‘‘It gave me hope that I will survive; we received a 

reduction in our payment and were not meant to be belittled or intimidated; without your help, we would have lost our home; and I 

am too choked up to talk.’’ This month, we are continuing the outreach in Atlantic, Milwaukee, Indianapolis, and Chicago, and we 

are working with Members of Congress and other officials from 

those areas to promote those events and will continue to do so. 

For counseling homeowners in need, HOPE NOW is actively providing nonprofit counseling to homeowners through the Homeownership Preservation Foundation’s HOPE Hotline, which connects the homeowners with 450 trained counselors at HUD-certified nonprofit counseling agencies. Counseling is free, and it is offered in English and Spanish 24 hours a day, 7 days a week. 

To date, the HOPE Hotline has received 632,000 calls, with over 

250,000 calls in the first quarter of 2008. We greatly appreciate the 

Dear Colleague letter that Chairwoman Waters, Ranking Member 

Capito, Chairman Frank, and Congressman Bachus sent to the 

House Members to remind them of the HOPE Hotline and the dedicated service or phone numbers for consumers. 

Assisting homeowners in need—HOPE NOW members are providing help to at-risk homeowners through loan modifications and 

repayment plans and targeted efforts such as Project Lifeline to 

freeze forecloses in a method for fast track modifications based on 

the American securitization framework. 

50 

From July 2007 through February 2008, again, nearly 1.2 million 

homeowners avoided foreclosure through these efforts of HOPE 

NOW members. Subprime workouts totaled 717,500 workouts, including 485,000 repayment plans and 232 loan modifications. 

HOPE NOW members do understand that workouts must be viable, more than a short period of time, workouts including loan 

modifications and repayments help borrowers avoid foreclosure and 

stay in their homes and servicers are rapidly increasing their efforts and were modifying subprime loans during the fourth quarter 

at triple the rate of that of the third quarter. 

The increase in the number of loan modifications shows that this 

effort is real and it is seeking the best solutions for borrowers. 

HOPE NOW is measuring and reporting on our results and helping 

homeowners. We are continuing to gather data on these results, 

and this is an enormous undertaking, but we are confident that we 

will be able to systematically inform you and that will help measure what servicers are doing to support homeowners. 

In conclusion, the members of HOPE NOW are committed to producing results. Loan servicers joining HOPE NOW agree to a statement of principles on reaching out and helping distressed homeowners remain in their homes. My written statements contains 

those principles which include contacting borrowers early, and having a dedicated hotline, e-mail address and fax number available 

to all HUD-approved counselors. 

In February, we released a list of loan numbers on HOPE NOW 

servicers that consumers can call to receive assistance. This is a serious effort and it will continue until the problems in the housing 

market and the mortgage market abate. It is neither a silver bullet 

nor a magic solution, but HOPE NOW is helping homeowners, and 

we will continue to report on that progress to assist homeowners 

in distress and to prevent foreclosures whenever possible. Thank 

you for inviting the HOPE NOW Alliance to testify today and I am 

happy to answer any questions. 

[The prepared statement of Ms. Schwartz can be found on page 

139 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Kittle. 

STATEMENT OF DAVID G. KITTLE, CMB, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, PRINCIPLE WHOLESALE LENDING, INCORPORATED, AND CHAIRMAN-ELECT, MORTGAGE 

BANKERS ASSOCIATION (MBA) 

Mr. KITTLE. Good afternoon, Chairwoman Waters, Ranking 

Member Capito, and members of the subcommittee. Thank you for 

the opportunity to discuss the loss mitigation process. The bill before us, H.R. 5679, seeks to specify and require certain procedures 

to reduce the level of foreclosures. All of us are focused on the same 

goal; keeping people in their homes. Such a goal serves the interest 

not only of borrowers, but also of our own members and the communities where they do business. That is why MBA is a founding 

member of the HOPE NOW Alliance. And as of the end of February, we have helped nearly 1.2 million troubled borrowers establish affordable mortgage payments. Mortgage servicers have done 

51 

this through informal forbearance, repayment plans, and loan 

modifications; all forms of loss mitigation. 

As we seek to do more to help ease this crisis, MBA is eager to 

partner with Congress to finish work on FHA modernization, GSE 

reform, housing tax incentives, and expanding the use of tax advantaged mortgage revenue bonds to include refinancing. When 

Congress completes work on these important initiatives, it should 

avoid taking action that would inadvertently increase interest rates 

or borrowing costs, constrain the availability of legitimate offers of 

credit, or that would encourage borrowers not to make mortgage 

payments. 

While a considerable effort is being made by lenders, borrowers, 

and public officials to avoid foreclosures, we all recognize there will 

be cases where the goal cannot be achieved. 

Ultimately, the mortgage contract rests on two pillars: First, the 

promise of the borrower to pay; and second, the ability of the lender to rely as a last resort on the value of the house the borrower 

has pledged as security for the loan. It is the pledging of the house 

as security that makes mortgage credit considerably less expensive 

than unsecured consumer debt. The rate of interest on mortgage 

loans is significantly lower than the rate on unsecured consumer 

loans. If borrowers are deprived by legislation of the ability to reliably pledge their homes as security for mortgage loans, it is probable that rates they pay for mortgage credit will approach the rates 

paid for unsecured credit. In evaluating the legislation, we believe 

that Congress should ensure it enhances borrowers’ chances to remain in their homes; does not deprive investors of the value of 

their investments; and preserves for all consumers the benefits of 

reasonably priced mortgage credit by maintaining the essential elements of the mortgage contract. 

Our review of H.R. 5679 revealed that there are a number of elements of the bill that fail one or more of these criteria. First, the 

bill would authorize borrowers’ counsel to use qualified written requests to block foreclosure indefinitely. Second, the bill’s overly prescriptive loss mitigation provisions could increase the cost of mortgage credit for future borrowers. Third, mandating debt-to-income 

ratios on first loans would require holders of first liens to subordinate their economic interest to the interest of junior lien holders 

and unsecured creditors, which may be the source of the borrower’s 

inability to stay current on the mortgage payments in the first 

place. Fourth, prescribed and detailed mitigation procedures would 

deprive lenders of the flexibility required to negotiate effectively 

with borrowers to achieve a manageable debt payment schedule. 

And finally, the bill would impose expensive and time consuming 

paperwork requirements on lenders without any corresponding 

benefit to the borrower. 

Though we are committed to working with you to improve H.R. 

5679, the harmful provisions in this bill currently outweigh its potential benefits. Thank you for the opportunity to appear before 

you, and I look forward to your questions. 

[The prepared statement of Mr. Kittle can be found on page 124 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Tom Deutsch. 

52 

STATEMENT OF TOM DEUTSCH, DEPUTY EXECUTIVE 

DIRECTOR, AMERICAN SECURITIZATION FORUM (ASF) 

Mr. DEUTSCH. Thank you, Madam Chairwoman, Ranking Member Capito, and distinguished members of the subcommittee. My 

name is Tom Deutsch, and I am the deputy executive director of 

the American Securitization Forum. I very much appreciate the opportunity to testify before this subcommittee again on behalf of the 

370 member institutions of the ASF and the 650 member institutions of the SIFMA. These members include all of the major lenders, servicers, underwriters, and institutional investors and all 

forms of mortgage and asset-backed securitization throughout the 

country. 

Since I last testified before this subcommittee on November 30, 

2007, in Los Angeles, California, a significant amount of progress 

has been made by the industry to help struggling homeowners stay 

in their homes. One very significant initiative was launched on December 6, 2007, less than a week after your hearing, Madam Chairwoman. On that day, the ASF announced, and President Bush and 

Secretary Paulson supported and endorsed, the ASF streamlined 

loan modification framework for industry servicers to fast track 

subprime ARM borrowers into interest rate loan modifications in 

certain circumstances. The ASF framework uses objective criteria 

to determine the continued affordability of subprime loans based on 

such factors as the borrower’s payment history, credit standing, 

owner occupancy, and amount of home equity. The primary purpose of the ASF framework was to address the rising tide of 

subprime ARM borrowers who may not have been able to meet 

their higher payments at their initial reset. 

Most subprime 2/28s and 3/27 borrowers pay a fixed introductory 

rate for say 2 or 3 years and then adjust to a floating rate, based 

on 6-month LIBOR thereafter. Importantly, since the ASF framework was announced, 6-month LIBOR has dropped precipitously 

from 5 percent on December 6, 2007, to 2.6 percent as of today, 

April 16, 2008. What has really changed then for subprime ARM 

borrowers since December 6th is that every single resetting 

subprime ARM borrower in America has experienced the equivalent of a 2.5 percent loan modification through the normal contractual functioning of their mortgage note. 

As a result, the average subprime ARM borrower has had little 

or no rate increase at their reset. Falling rates, then, have obviated 

the need to make systematic contractual rate modifications for 

these subprime ARM borrowers which largely explains why an 

even more significant increase in industry contractual rate modification activity hasn’t been observed over the past few months. 

But let me turn, Madam Chairwoman, to some of our views and 

perspectives on your proposed bill, H.R. 5679. 

We fully agree that all servicers should engage in reasonable loss 

mitigation activities, which is described above. Servicers are already contractually obligated to engage in these activities for the 

benefit of security holders. But the new Federal duty that the bill 

would propose is unreasonably compelling, all servicers nationwide 

to rewrite existing mortgage and pooling and servicing agreed contracts solely to benefit borrowers in default rather than to act in 

the best interest of security holders as the mortgage and PSA conVerDate Aug 31 2005 16:58 Jul 25, 2008 Jkt 042720 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\42720.TXT TERRIE
53 

tract specify. By analogy, it would suggest that all forms of repayment on consumer credit should be measured not by what the borrower has agreed to pay, but instead ultimately, by what the borrower can pay at any time during the life of the loan. This bill 

then, we believe, disregards the original loan terms to which the 

borrower agreed as well as the servicer’s obligations under the 

pooling and servicing agreements to institutional investors. 

Now as a general matter, we have very strong concerns with any 

legislation that would retroactively abrogate or interfere with previously established private contractual obligations. We believe the 

bill would do just that, and that it would fundamentally alter the 

contractual obligations of pooling and servicing agreements to require servicers to be the agent of the borrower, rather than the 

MBS institutional investors or loan portfolio manager. 

Changing the standard would alter the commercial expectations 

of investors and would seriously undermine the confidence of investors and the sanctity of contracts, which are the bedrock to extension of consumer credit in the process of securitization. Any legislative intervention into otherwise valid legal contracts threatens the 

stability and predictable operation of contractual legal framework 

supporting our capital markets system. 

While we fully support and encourage servicers to meet their 

contractual obligations to engage in reasonable loss mitigation, we 

have very significant concerns about this bill from the very premise 

that it starts from, that is, that mortgage contracts should be modified to serve solely the borrower’s interests rather than the interests of the original contractual obligations that the borrower has 

agreed to fulfill. 

A shared goal of participants in the mortgage financing markets 

is to keep people in their homes. Unfortunately, there is no comprehensive solution that will fix all the current problems in the 

mortgage market today and the current home price correction. 

Market participants have and continue to collaborate and work towards developing coordinated solutions to the current issues in the 

mortgage financing market. Recognize it is essential to balance the 

interests of borrowers and investors while preserving the significant benefit of the continued availability of mortgage and consumer 

credit. I thank you very much for the opportunity to testify here 

on behalf of our members, and we look forward to working with 

you, Madam Chairwoman, and this committee to develop even 

more solutions. 

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

101 of the appendix.] 

Chairwoman WATERS. Thank you. 

Mr. Steve Bailey. 

STATEMENT OF STEVE BAILEY, CHIEF EXECUTIVE FOR LOAN 

ADMINISTRATION, COUNTRYWIDE FINANCIAL 

Mr. BAILEY. Good morning, Madam Chairwoman, Ranking Member Capito, and subcommittee members. Thank you for the opportunity to appear here today to discuss the efforts of servicers like 

Countrywide to help families prevent avoidable foreclosures. Countrywide has long been a leader in providing home retention solutions to our borrowers. 

54 

Today’s market conditions have created unprecedented challenges for servicers and mortgage investors, in developing new approaches to mitigating losses for security holders while keeping as 

many borrowers in their homes as possible. We know that foreclosures are financially and emotionally damaging to our customers 

and very costly to us and the security holders. Because of the high 

financial costs of foreclosures, we cannot emphasize enough that as 

a matter of basic mortgage servicing economics, foreclosure is always and absolutely the last resort. The home retention personnel 

who report to me at Countrywide fully comprehend the human implications of foreclosure. 

They are committed to doing all they can to help keep families 

in their homes whenever possible. We don’t have a loss mitigation 

division. We have a home retention division. We don’t have a workout department. We have a hope department. There is a campaign 

in our home retention division called the Life Behind the Loan that 

focuses on connecting and humanizing conversations and circumstances, such as learning the names of the children. I know 

from personal experience that it is euphoric to tell a customer that 

you have a plan for them to save their home. It is equally heartbreaking to tell a borrower that they may lose their home. Last November, we testified before the House Financial Services Committee and before a housing subcommittee field hearing. At that 

time, they had just announced a number of new ground-breaking 

home retention programs. Today, I want to update you on the impact of those initiatives and what effect they have had on our efforts to keep families in their homes. 

During the last 6 months, we have completed more than 91,000 

home retention workouts, saving an average of more than 15,000 

homes each month from foreclosure. That compares to an average 

of 6,700 home retention workouts during the first 9 months of 

2007. In short, the pace of activity in the past 6 months is more 

than twice the pace of the first 3/4 of 2007. Just last month, we 

completed 16,500 home retention plans, a nearly 150 percent increase compared to March a year ago. Moreover, that increase was 

driven by an almost 600 percent jump in loan modification plans 

from 1,800 in March of 2007 to almost 13,000 last month. 

Clearly, the efforts of our home retention team are paying off. 

Let me explain. Through October of last year, the average number 

of completed foreclosures each month had been steadily increasing 

over an extended period. However, since October, when we announced our new programs, the number of completed foreclosures 

has actually leveled off and has slightly declined. While it is too 

soon to tell if this 5-month period will become a long-term trend, 

we will continue to do all we can to help every borrower we can. 

We directly associate the dramatic increases in workouts with the 

leveling and declining of the foreclosure completions in our portfolio. 

In addition to sharply increasing the pace of workout completions, we have also become more aggressive in the types of workout 

plans completed. During the last 6 months, loan modifications have 

become the predominant form of workout assistance at Countrywide, accounting for nearly 70 percent of all home retention workouts, while repayment plans accounted for less than 20 percent. 

55 

While previously rare, rate relief modifications now account for almost 43 percent of all loan modifications. The majority of these 

rate relief modifications have a duration of at least 5 years. They 

are targeted to borrowers experiencing payment difficulties caused 

by disruption of income or other financial stress as well as a result 

of rate resets. 

We have also continued to expand our outreach initiatives and 

partnerships in order to ensure that every customer who needs 

help is reached. In addition to our NACA partnership, which we 

discussed with the committee last fall, we have strengthened our 

relations with NeighborWorks America, the Home Ownership Preservation Foundation, and the National Foundation for Credit Counseling. And in February 2008, Countrywide signed a national counseling partnership and best practices agreement with ACORN. 

Countrywide remains committed to helping our borrowers avoid 

foreclosure whenever they have a reasonable source of income and 

a desire to remain in the property. Foreclosure is always a last resort for Countrywide and the investors in the mortgage securities 

we service. I am happy to respond to your questions at the appropriate time. 

[The prepared statement of Mr. Bailey can be found on page 77 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

I thank you, Ms. Capito, for allowing Mr. Cleaver to ask his 

questions first. He has to leave for another meeting. Mr. Cleaver. 

Mr. CLEAVER. Let me thank you, Madam Chairwoman, and the 

ranking member. I have another committee hearing. I apologize. 

Mr. Deutsch, this is a general question. What is objectionable 

about the Chair’s legislation? And say it in as few words as possible. 

Mr. DEUTSCH. Sure. I think the bill has been characterized as 

servicers being required to engage in reasonable loan modification 

activity. I think we share that goal. There is no question about 

that. 

Mr. CLEAVER. Okay. I have another committee hearing. Just tell 

me— 

Mr. DEUTSCH. Sure. But what the bill does is define what is reasonable loan modification activity and then it goes into great specificity. 

Mr. CLEAVER. Who should define that? 

Mr. DEUTSCH. I think what is defined currently under the contractual arrangements is that either the holders of those mortgage 

notes, whether that is in a loan portfolio or whether that is in a 

securitization trust, is those servicers are acting on behalf of the 

holders of those mortgage notes. 

Mr. CLEAVER. So you are saying, leave it like it is. 

Mr. DEUTSCH. Correct. 

Mr. CLEAVER. In spite of the fact that we have 20,000 foreclosures a week. 

Mr. DEUTSCH. I believe there is a lot of— 

Mr. CLEAVER. And we are having a negative impact on the world 

economy. And we are just going to continue the way things are 

going? 

56 

Mr. DEUTSCH. I believe there are a lot of solutions out there, and 

I believe the industry is working very hard on a number of different solutions. But this solution will restrict significantly the 

availability of credit on an ongoing forward basis. 

Mr. CLEAVER. Just give me one of your solutions. 

Mr. DEUTSCH. Well, I think the first one, as I mentioned in my 

testimony— 

Mr. CLEAVER. That is the Chair’s solution. That was the Chair’s 

solution that you were getting ready to mention. 

Mr. DEUTSCH. No. I was going to mention the solution that the 

ASF put out on December 6th, that would address any adjustable 

rate mortgages and any higher interest rate resets that those 

would address to be able to fast track or streamline those into loan 

modifications. Other areas that I might suggest would be FHA 

modernization, for Congress to complete the modernization of that 

Act. I would also suggest mortgage revenue bonds, that those be allowed to push through to allow more borrowers to be able to access 

affordable credit for refinancing. 

Mr. CLEAVER. Okay. Some people suggest that we may end up 

with as many as 8 million foreclosures. What about those 8 million 

people? 

Mr. DEUTSCH. Well, I think that is a very high estimate on the 

number of foreclosures. 

Mr. CLEAVER. Okay, let’s say there are 200. That means there 

are 200 human beings, families who no longer possess a home—200 

humans. 

Mr. DEUTSCH. Right. 

Mr. CLEAVER. I would say we are actively pursuing as many— 

to prevent as many foreclosures as possible. But I would be remiss 

if I didn’t say that not every foreclosure is preventable. 

Mr. CLEAVER. You said—I am sorry? 

Mr. DEUTSCH. I would be remiss in saying I didn’t believe every 

foreclosure was preventible. 

Mr. CLEAVER. Okay. I think everyone—well, I agree that they are 

not. Some people bought homes who shouldn’t. But I don’t know if 

you were here earlier when I talked about the fact that we are 

forced to deal with things the way they are. 

Mr. DEUTSCH. Correct. 

Mr. CLEAVER. And the way things are, we have millions of people 

who are going to lose their homes. Don’t you agree? 

Mr. DEUTSCH. I think there will be a significant number, as 

there historically has been a significant number of people who go 

through the foreclosure process. 

Mr. CLEAVER. And what do we do about those people? 

Mr. DEUTSCH. I think we continue working—to work with every 

one of those borrowers to be able to try to find a home—a sustainable solution for those homeowners to stay in their homes. But 

again, as we— 

Mr. CLEAVER. Okay. Because time is running out, what do we 

do? If you are suggesting to me that I shouldn’t support the Chair’s 

bill, what should I do? 

Mr. DEUTSCH. Right, well I just walked through a— 

57 

Mr. CLEAVER. I know you did. And I am asking you about the 

people whose homes are being foreclosed even as we speak. What 

do we do about them? 

Mr. DEUTSCH. I think if a number of those initiatives were 

passed through the Congress, that many of those borrowers would 

be helped. 

Mr. CLEAVER. If this bill is approved? 

Mr. DEUTSCH. If many of the other things that I discussed were 

to pass, many of those borrowers would receive assistance. 

Mr. CLEAVER. Have you made any attempt to work with the 

Chair and her staff about your recommendations? 

Mr. DEUTSCH. Absolutely. I think there has been a lot of activity 

by the industry to work with the House Financial Services Committee generally on a number of these—on all of these issues. 

Mr. CLEAVER. Yes. I have to go. You know, the frustration for me 

is that there does appear to be an absence of intentionality about 

dealing with people who are hurting. I mean, it seems as though 

many in your industry are interested in nothing that would regulate anything or anybody, which means that it can happen again. 

And it troubles me that we don’t seem to have the anxiousness to 

help people who are losing their homes every day. I mean, we did 

not receive much outrage from the financial services industry when 

Bear Stearns was bailed out. The objection comes when we begin 

to deal with human beings, those human beings who live down the 

street from me on Gregory Boulevard in Kansas City. What about 

them? What do I tell them in my neighborhood meetings? 

Mr. DEUTSCH. Well, Mr. Cleaver, my folks live in Kansas City, 

and I would be very concerned about any foreclosures in my folks’ 

neighborhood in Kansas City. I believe it is very important that 

any and all foreclosures be addressed by servicers in the best way 

they can and to do—to engage in a reasonable loss mitigation. But 

I don’t believe that those should be created and new standards and 

Federal duties of care should be created after the fact that would 

allow borrowers to potentially stay in their homes when they can’t 

simply afford at any payment to stay in those homes. 

Mr. CLEAVER. I am sorry. I have to go. Thank you. 

Chairwoman WATERS. Mrs. Capito. 

Mrs. CAPITO. Thank you, Madam Chairwoman. I thank the 

panel. I have a couple of questions. First, Mr. Bailey, in the panel 

before this one, there was quite a bit of conversation about 

servicers. And Countrywide is a major servicer of mortgages, yours 

and others, correct? 

Mr. BAILEY. That is correct. 

Mrs. CAPITO. The chairwoman made a statement or question that 

possibly servicers could make a profit from a foreclosure or profit 

by people going under. Could you respond to that statement and 

clarify that? Or your opinion on it? 

Mr. BAILEY. Sure. I will make two points. The first one, I think 

Mr. Allnut touched on pretty clearly. The way that servicers make 

money, it starts with borrowers making payments. So if you don’t 

have a borrower who makes a payment, you don’t obtain any service fee. And as they went through, you don’t obtain any income 

that continues through any sustainable time. If you just look at the 

general finances of foreclosure, whether it is your own loan and 

58 

portfolio or one that you are servicing for another, just the raw 

numbers, the credit loss that will be suffered through a foreclosure 

that is avoidable dramatically outweighs any kind of income that 

might come through a foreclosure, revenue of any kind. But in general, the fees and the compensation to a servicer and when payments are not flowing from a customer. So there is no general incentive to do that. 

Mrs. CAPITO. Thank you. So it would be an accurate statement 

to say that that if a person is delinquent or if a loan is going bad 

or a mortgage is going bad, that is really not to anybody’s advantage, certainly not to families and the individuals that we are all 

trying to keep in their homes. But you don’t see that as a profitmaking venture? 

Mr. BAILEY. Well, again first, it leads to a credit loss for someone, either if you hold it in your portfolio or whoever you are servicing for. That credit loss will be significant. Any short-term thinking that there would be some kind of desire or incentive to pursue 

a foreclosure when a workout was available, there isn’t any income 

from that. So you don’t get any payments, you don’t get any reimbursement. But you do build costs and those costs then are not reimbursed. You also are advancing payments to the investor generally. If you make significant errors in loss mitigation, you risk 

having your servicing pulled, your risk not being reimbursed for 

your advances. You risk punitive damages, depending on what the 

contract says. There is no incentive to stop the stream of income. 

Mrs. CAPITO. Okay. Thank you. Ms. Schwartz, quickly, on wonderful statistics on what you are all doing with the HOPE NOW 

Alliance, I have referred a lot of people and try to talk about it 

publicly quite a bit. When you are working on a workout or trying 

to help somebody, how do you get to the point that, this is a person 

who has lost a job or is having a tough time or they are in an adjustable mortgage and they can no longer make the payments, how 

can you differentiate that person from the person who maybe 

bought a house knowing that they weren’t ever going to be able to 

fulfill their commitment, but were relying on the real estate going 

up, or this was their second home, or they got a higher appraisal, 

took the money, and bought a boat. 

Well, these are the kind of people that I think taxpayers don’t 

want to see—well, there are two different types of folks there. How 

do you differentiate that? 

Ms. SCHWARTZ. Well, first of all, the HOPE NOW Alliance is just 

an aggregation of all these servicers and the contracts are with the 

servicers and the borrowers. And between them one by one. 

Mrs. CAPITO. How would you help them differentiate? 

Ms. SCHWARTZ. Typically, and why we are tracking repayment 

plans and modifications is that repayment plans might be for a 

temporary or short-term disruption, whether it is 3 months, 1 year, 

something has happened or changed in the borrower’s circumstance 

versus when a modification occurs, it could be at a higher rate. 

They can’t afford the higher rate, and it is clear. That is an affordability issue. That is more than a short-term disruption. And you 

may see some appropriate modifications happening in those circumstances. So the workouts, as Tom Deutsch spoke to, are on behalf of investors. And everyone’s interests are quite aligned right 

59 

now in that the best thing to do is work through avoiding foreclosure and keeping people in their homes. And we are outpacing 

foreclosures through these workouts, whether they are repayment 

plans or modifications. And it is loan level and I don’t speak for all 

the servicers, and that is very individual with the contracts. 

Mrs. CAPITO. Right. Okay. Thank you. And Mr. Kittle, next week, 

the committee will be considering legislation that provides a mechanism for lenders to write down problem loans and refinance and 

do a FHA loan. Are you familiar with that proposal? And could you 

make a comment on that? 

Mr. KITTLE. Excuse me. FHA Secure, FHA modernization? 

Mrs. CAPITO. Yes. 

Mr. KITTLE. We think it is an excellent program. We actually 

have—to go just slightly on a tangent—we have over 200 individual 

members in Washington, D.C., today and tomorrow who will be on 

Capitol Hill promoting Chairwoman Waters’ FHA modernization 

bill. So we have something here that we can agree on, something 

that we can support. And we think FHA modernization, GSE reform, FHA Secure, all of those programs will go a long way toward 

helping us. But it will help long term, not provide a quick short fix. 

Mrs. CAPITO. All right. Thank you. 

Chairwoman WATERS. Thank you very much. Let me just take a 

few minutes here to raise some questions. 

I think it was Mr. Kittle who just said—are you supporting the 

Barney Frank draft bill that would do a couple of things, it would 

support FHA being able to refinance when there has been a writedown on a mortgage? I think it is about 85 percent and it would 

also appropriate maybe up to $15 billion that would go to cities and 

maybe counties and States in order to assist in purchasing foreclosed properties, rehabbing them and putting them back on the 

market. Have you taken a look at that? 

Mr. KITTLE. Yes, ma’am. And we are still considering that. We 

have not come out with a position on it but we worked very closely 

with Congressman Frank over the years and have a great relationship with him. 

Chairwoman WATERS. So you are not supporting the bill as of 

now? 

Mr. KITTLE. We have not come to an opinion either pro or con 

for it. 

Chairwoman WATERS. Ms. Schwartz. 

Ms. SCHWARTZ. Yes. 

Chairwoman WATERS. Did I hear you in your testimony say you 

sent out 1.2 million notices or alerts of some kind? 

Ms. SCHWARTZ. The servicers agreed under HOPE NOW letterhead to send out to at-risk borrowers whom they have not been 

able to contact, 60 days or later in delinquency, the no-contact borrowers, and we sent in 4 months 1.2 million letters to those borrowers at risk of foreclosure, yes. 

Chairwoman WATERS. And that is the same number of borrowers 

that you have been able to help, 1.2 million? 

Ms. SCHWARTZ. Yes. In aggregate. And what we are measuring 

that is from July through February, just to get a snapshot of where 

the market was and where it is today and what is moving through 

60 

the loss mitigation. So those are additional at-risk borrowers who 

could be going into foreclosure. 

Chairwoman WATERS. Let me see if I understand how you work. 

We have an alliance of the financial services industry, which includes some nonprofits, banks, securitizers, everybody. And do you 

think you are doing an adequate job without any government support or intervention? 

Ms. SCHWARTZ. I think for an industry alliance that has come together— 

Chairwoman WATERS. No, no, no. Do you? 

Ms. SCHWARTZ. Yes. I think we are doing adequately. Can we do 

better? Sure, we can. 

Chairwoman WATERS. You don’t think the government needs to 

do more? Like Mr. Frank’s bill that would get these properties 

rehabbed and back on the market, helping to stabilize the market 

with the support of government, you don’t think you need that? 

Ms. SCHWARTZ. You know what, I actually don’t comment on any 

of the legislation because I represent a very broad variety of people. 

And what I do, my job is to keep HOPE NOW focused on what we 

can do today with today’s laws. 

Chairwoman WATERS. Well, every day—I don’t know what the 

numbers are. I wish someone would tell me. Every day we are getting information about increased numbers of foreclosures. It seems 

there is no end in sight. And you think you are handling that well 

enough and the American people should be appreciative and understanding of that because you are doing a great job? 

Ms. SCHWARTZ. Actually, in our testimony, I was quite clear that 

this is not a silver bullet. This is about people coming together and 

seeing what we can do to do better and to raise standards and 

bring more focus on the contacting borrowers who are not calling 

the servicers, working with housing counselors who will help— 

Chairwoman WATERS. Where do you get your numbers from 

about how many people you have served? Some of the organizations 

that you have worked with, you have asked them, some of the nonprofits, others you have asked them, how many, what did you do? 

How do you compile that? 

Ms. SCHWARTZ. The actual loss mitigation data is from the 

HOPE NOW servicers, which comprises the majority of the mortgage market. This is the most comprehensive set of mortgage industry data in loss mitigation that is available. And it is a voluntary alliance and I see it in aggregate. It is released monthly, 

and we will have State and national data. I am happy to walk 

through that any time with you. 

Chairwoman WATERS. Well, I am not so sure I want to do that 

because it is not audited information. I mean, I have asked some 

of our regulators: How do you know what HOPE NOW is doing? 

How do you document that? How do you audit that? Nobody is able 

to tell me how it is done. And I am getting some disjointed information about how you collect the information. First of all, you are 

telling me that you basically get it from the servicers— 

Ms. SCHWARTZ. Yes. 

Chairwoman WATERS. —who tell you what they are doing, and 

from others? 

Ms. SCHWARTZ. From their servicing system. 

61 

Chairwoman WATERS. A combination of the counseling and the 

modifications that have been done by some of the nonprofits and 

the workouts and modifications that are being done by the 

servicers. 

Ms. SCHWARTZ. Right. 

Chairwoman WATERS. This is where you are compiling this information. 

Ms. SCHWARTZ. That is right. 

Chairwoman WATERS. All right. Let me go over something. You 

state that 5,607 of 80,652 subprime ARMs rescheduled to reset in 

January or February are not paid in full through refinancing or 

sale received loan modifications, and 60 percent or 3,334 of them 

received modifications for 5 years or longer. And I guess I have two 

questions. First, do you think that a rate of long-term—of longterm loan modifications of subprime ARMs of 4 percent, 3,334 out 

of 80,652 is sufficient to stem the tide of foreclosures? 

Ms. SCHWARTZ. Well, those numbers, Chairwoman Waters, are 

because the rate environment has decreased, and that was based 

on the streamlined modifications that Tom Deutsch has testified to. 

We can do more, and we want to do more. But we are trying to 

report every month no matter what the data says. So whether we 

will be disappointed or not disappointed, we are going to report the 

actual data. So we inform the public and inform Congress and everyone what is going on in the market. I think that is additive. I 

think 5,000 borrowers who get a modification is better than no borrowers getting one under those circumstances. And more importantly, we showed in January and February that modifications and 

repayment plans exceeded 300,000 loans for prime and nonprime 

borrowers. 

Chairwoman WATERS. Let me stick with the ARMs that I am 

talking about. What evidence do you have that the remaining 

77,318 resetting ARMs, which presumably are subject to repayment plans, some other loss mitigation offer, or nothing at all, are 

affordable for the short and long term for the borrowers? 

Ms. SCHWARTZ. Well, all of the repayment plans or the modifications are presumed to be affordable because it is between the borrower and the servicer and they are reworking loans so that they 

are sustainable. It is in no one’s interest to have a redefaulting 

modified loan or a short-term repayment plan for servicers. It is a 

high cost to keep going back time and time again, and they will go 

back if it redefaults to look at another solution. But it is in no one’s 

interest to the first time have no one get it right. 

Chairwoman WATERS. Let me go to Countrywide and ask you, 

you heard a description from Freddie Mac about its servicing arrangements that they have with you. And they talked about the 

tiered system. Are you familiar with that? 

Mr. BAILEY. Yes. 

Chairwoman WATERS. And how many tiers are there in the contract? 

Mr. BAILEY. There are four possible tier rankings. 

Chairwoman WATERS. Describe those tier arrangements for us. 

Mr. BAILEY. Well, they are generally set off of points that you receive for different levels of effectiveness within a range of different 

servicing functions. So you receive points for or points against, 

62 

based on your performance in those different categories. And then 

depending on how many points you receive, it stacks up to which 

tier you would achieve. 

Chairwoman WATERS. Okay. What do you receive points for? 

Mr. BAILEY. Things like doing effective workouts, staying effective in the foreclosure process, reporting, things of that nature. 

Chairwoman WATERS. What you have is a tiered system. And I 

can’t tell from talking with you right now what the incentives or 

disincentives really are. But you get some points. And if you are 

high up in the system, the tiered system, you get points. You get 

a certain number of points. But if you are low in the system and 

you are not getting the points, let’s say, that means you are not 

doing a good job, whatever a good job is, but the people whom you 

service don’t know whether or not you are good, bad, or indifferent. 

But those people just get bad services. Those people don’t get fired, 

they don’t get the contract separated. You just go and work with 

them and try and make them better. Is that what you do? 

Mr. BAILEY. What Freddie Mac would do with us or any servicer, 

first the incentive reimbursement that you would get, for example, 

for doing workouts, if you were the top tier, you would get the full 

reimbursement— 

Chairwoman WATERS. Are you getting paid because you have 

stopped the foreclosure? 

Mr. BAILEY. Yes. Essentially if you do effective servicing, Freddie 

Mac, you are entitled to those incentives. 

Chairwoman WATERS. No. No. That is not my question. My question is, are you getting paid because you have stopped a foreclosure? Or are you getting paid because the criteria that is evaluated shows that you did a good job, whether you stopped the foreclosure or not? 

Mr. BAILEY. No. One of the key measurements in stopping foreclosures is performing loan workouts compared to the foreclosures 

that proceed. 

Chairwoman WATERS. Are these tiers spelled out in the contract? 

Mr. BAILEY. Yes. They are clear. 

Chairwoman WATERS. Okay. I would like to request from you 

copies of the contracts that you do with Freddie and Fannie. 

Mr. BAILEY. Sure. 

Chairwoman WATERS. And they should be one and the same. I 

think I have one more question that I would like to—well, I won’t 

raise a question at this time. We have other members who need to 

ask questions. Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. Let me go quickly 

to Mr. Deutsch. Am I pronouncing that correctly, sir? 

Mr. DEUTSCH. Correct. 

Mr. GREEN. It is good to see you again. We were together in California. You talked about the 3/27s and 2/28s, and you mentioned 

LIBOR and how under the current conditions with LIBOR having 

declined to the extent that it has, this means that when the ARMs 

adjust, people will be paying something lower than they actually 

are paying currently. And you seem to indicate that this will act 

as a means by which the mitigation that we are looking for will 

take place and hence, things are getting better and there is no 

need to do more. 

63 

My concern with your perception is this—the 3/27s and 2/28s 

don’t end right away. We are talking about 27 additional years of 

adjustable rates or 28 additional years of adjustable rates. And as 

a result, if we don’t do something now when these loans can adjust 

and have them refinanced into a fixed rate, all we do is say, you 

are really doing well now, but 2 years from now, you could very 

well be paying twice the rate that you are paying currently. Do you 

agree? 

Mr. DEUTSCH. I agree. And that is why I would say that right 

now, the American Securitization Forum is working feverishly to 

put together a proposal where our framework would be extended 

to where not only would existing rates but if LIBOR rates were to 

rise again on subsequent rates— 

Mr. GREEN. Well, I am glad you said that because you left the 

impression with me and I suspect many others that because of the 

current conditions, the 3/27s and 2/28s were going to be okay. They 

are really not okay. And we agree that they are not okay. There 

is still a problem there. All right. You and I are familiar with the 

term tranche warfare, aren’t we? 

Mr. DEUTSCH. Correct. 

Mr. GREEN. And you and I agree that in tranche warfare, we 

have some people who have positions that are superior to others. 

Mr. DEUTSCH. Correct. 

Mr. GREEN. And those people who have positions that are superior to others, there are some who literally don’t take the same— 

to use some highly technical terminology, the same hit that others 

will take if foreclosure takes place. 

Mr. DEUTSCH. Correct. 

Mr. GREEN. And when this occurs, then you have the tranche 

warfare which means you have people in different tranches who 

are at odds with each other. 

Mr. DEUTSCH. Correct. 

Mr. GREEN. And some will say, I am really not eager to see you 

do anything to adjust the loan such that it impacts my position because I paid more money to have a superior position. And if it goes 

to foreclosure, I really don’t want to see that happen. I love everybody. But I have already taken care of that by locating myself in 

a superior tranche. True? 

Mr. DEUTSCH. Is that a question? 

Mr. GREEN. Yes. Isn’t that true? Because you are in a superior 

tranche, you may not be—you can withstand foreclosure to a greater extent than a person in an inferior tranche. 

Mr. DEUTSCH. I think the general characterization is accurate. I 

would say there are two things that are different from that characterization, though. I think one is that a servicer who is acting on 

behalf of all of the security holders is making that decision, and 

they are doing that in the best interest of all the security holders. 

I think secondly, most of the loss triggers have been breached at 

this point. So it is irrelevant as to whether you would foreclose or 

not. The people in the lower tranches effectively will have nothing. 

Mr. GREEN. Exactly. But the people in the superior tranches still 

have a vested interest. 

Mr. DEUTSCH. I would disagree. 

64 

Mr. GREEN. You are saying people in the superior tranches don’t 

have a vested interest? 

Mr. DEUTSCH. I would say the lower-rate tranches— 

Mr. GREEN. Vested interest is the operative phrase. 

Mr. DEUTSCH. The lowered rate of tranches at this point has 

been extinguished. So there is no tranche warfare between somebody whose interest has been extinguished— 

Mr. GREEN. You are saying that there is no tranche warfare because you don’t have two— 

Mr. DEUTSCH. You don’t have two people fighting. You have one 

person left. 

Mr. GREEN. I agree. Let me go on quickly. And in that sense, yes. 

But in the sense that the person who still remains has an interest. 

Do you agree with that? 

Mr. DEUTSCH. The person who remains has a very strong interest at avoiding foreclosure. 

Mr. GREEN. Strong interest at avoiding foreclosure. But if that 

foreclosure takes place, that person still has some benefit from the 

foreclosure, some benefit not 100 percent of what the person may 

have had invested. 

Mr. DEUTSCH. They will still receive some proceeds but they are 

a lot lower proceeds than the loan would perform. 

Mr. GREEN. Okay. Let me go quickly now to another point. With 

reference to ex post facto regulation, Mr.—is it Bailey? 

Mr. BAILEY. Yes. 

Mr. GREEN. Mr. Bailey, you oppose ex post facto regulation, 

right? Ex post facto, meaning after the fact regulation. 

Mr. BAILEY. Yes. 

Mr. GREEN. Okay. Just for edification purposes, would you oppose—you opposed it because you don’t want to infringe on contracts that are already made, right? 

Mr. BAILEY. It would make it difficult to enforce. 

Mr. GREEN. Well, just for edification purposes, what about regulation that is not ex post facto? Do you oppose that as well? 

Mr. BAILEY. I don’t mean to run on. I will say no, I don’t. But 

I would back up. Regulation— 

Mr. GREEN. I only have a little bit of time. Ex post facto, you oppose. But if it is not ex post facto, you may be able to live with 

some kind of regulation if it is not ex post facto. 

Mr. BAILEY. Yes, absolutely. 

Mr. GREEN. Mr. Deutsch, you would be able to live with some 

kind of regulation that is not ex post facto? 

Mr. DEUTSCH. I would agree if, on a going forward basis, you 

look at something and it makes sense. 

Mr. GREEN. Madam Chairwoman, may I ask one more question? 

Chairwoman WATERS. Quickly. 

Mr. GREEN. To Countrywide, quickly, I want to ask you, in your 

servicing portfolio, what percentage of it emanates from GSEs? 

Mr. BAILEY. If I combine GSEs, FHA, VA, and prime— 

Mr. GREEN. I want GSE segregated along with the FHA and put 

them in one lump in the VA and then the others. 

Mr. BAILEY. Okay. Well, are you trying to get after what is 

subprime? 

Mr. GREEN. Yes. 

65 

Mr. BAILEY. Okay. Subprime makes up about 8 percent of our 

portfolio. 

Mr. GREEN. 8 percent. That 8 percent is not performing as well 

as the FHA and those that are through the GSEs, is that correct? 

Mr. BAILEY. Correct. 

Mr. GREEN. Okay. And sometimes when we talk about these 

things, we tend to confuse these with our questions and our answers, which causes us to have a convoluted opinion as to what is 

really happening in your portfolio. True? 

Mr. BAILEY. True. 

Mr. GREEN. Okay. Thank you. 

Chairwoman WATERS. Thank you very much. 

Mr. GREEN. I yield back. 

Chairwoman WATERS. Mr. Ellison. 

Mr. ELLISON. We are under a time constraint, so I am just going 

to go quickly. 

Ms. Schwartz, a few questions about HOPE NOW. HOPE NOW 

data reveals that about 1.8 million loans were delinquent by about 

60 days or more during the first 2 months of 2008, and about 

346,000 went into foreclosure. However, only about 114,000 received modifications. That means that more than 3 times as many 

borrowers entered foreclosure as received loan modifications. Further, HOPE NOW projects that more than 2 million loans are estimated to enter foreclosure in 2008, up 37 percent from 2007. Does 

this not suggest to you that the Administration’s programs designed to address this crisis are just dwarfed by the sheer magnitude of it? 

Ms. SCHWARTZ. We are clearly in a crisis, and there is a magnitude of housing issues to address. I would like to clarify two 

things. I think you are confusing foreclosure starts with actual 

foreclosures. Less than 50 percent of loans that go to foreclosure 

starts go into foreclosure and foreclosure sale, so actual workouts 

exceed foreclosures monthly. And certainly, year-to-date, that is the 

case. 

While the Administration, Secretary Paulson, and the Secretary 

of HUD strongly urged the industry to get together, I would like 

to comment that this is—there is no money from the government 

in this. This is everyone coming together. We do have industry 

trade groups coming together. We have disparate interests who 

seemingly didn’t always talk, talking together. We have workshops 

with nonprofit counselors. 

Mr. ELLISON. On that score, can you share data or provide data 

on who is paying for the services provided by HOPE NOW? Is that 

published data? 

Ms. SCHWARTZ. No. The only collections for HOPE NOW is from 

the servicers, and it is a very lean overhead. There are only three 

of us on payroll. This is all a voluntary effort. 

Mr. ELLISON. I know that. So who are the three servicers? 

Ms. SCHWARTZ. No. All servicers pay a nominal fee really to 

make sure that we have someone who is helping coordinate the effort. All of the committee work, all of the heavy-duty resources 

comes from the industry, across the industry to chair the committees, et cetera, to keep us moving in the same direction. It is not 

a— 

66 

Mr. ELLISON. I guess my question is that, so— 

Ms. SCHWARTZ. I would like to add, servicers also do pay for 

counseling sessions, and we are working with the investor market 

to also invent a new model to pay for servicing in the market in 

addition to the government funding that is coming. 

Mr. ELLISON. I am just asking, do you have a list of which 

servicers and how much they contribute? 

Ms. SCHWARTZ. I have a list of servicers, and the— 

Mr. ELLISON. That is fine. Could you share that with us? 

Ms. SCHWARTZ. 27 servicers. 

Mr. ELLISON. We will get together and get that then. 

Ms. SCHWARTZ. Okay. 

Mr. ELLISON. And then my last question before we have to run 

is, in your recent press release, you indicated that 1.2 million loan 

workouts have been completed by HOPE NOW servicers since July 

2007. 

Ms. SCHWARTZ. Right. 

Mr. ELLISON. How many of these workouts were permanent loan 

modifications? 

Ms. SCHWARTZ. You know, I don’t have that data. But of a recent 

survey on the 2/28, 3/27 ARMs from February backwards, we requested that servicers tell us how many of those were 5 years or 

greater, and we did get over 60 percent in that number. But just 

a point to make on that, whether it is 2 years, 3 years, or 5 years, 

if that has taken a pause in foreclosure, has adjusted somewhere 

someone has been in foreclosure and now is in a modification, a 

servicer can go back and will go back if circumstances need to, to 

go and work with that borrower 2 years later if need be. 

Mr. ELLISON. Are you willing to provide me with the information 

on how many were permanent loan modifications? 

Ms. SCHWARTZ. As I said, the answer I have is 60 percent or 

greater of the survey I took where I have no loan level data on 

that. 

Mr. ELLISON. Okay, well, we have 3 minutes to go vote, so I am 

going to submit some written questions to you. And Madam Chairwoman, can I count on some responses? 

Chairwoman WATERS. Oh, yes. We have questions that certainly 

are going to submitted, and we will get those responses. 

Mr. ELLISON. All right. I thank all the panelists. I had questions 

for everybody, but time ran short. 

Chairwoman WATERS. Thank you very much. I have just one 

question: Is there a fee for modification or workout to the borrower? From anybody? Servicers? 

Mr. BAILEY. No. Especially in subprime, there is no modification— 

Chairwoman WATERS. No. Don’t parse it. Is there a fee for modification to workout? 

Mr. BAILEY. There can be a fee in some investors, yes. 

Chairwoman WATERS. Thank you very much. Let me just thank 

all of you for your testimony. We are learning a lot. We have a lot 

more questions, so we will continue to have more hearings. 

The Chair notes that some Members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

67 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

I thank you. The panel is dismissed. 

But before we adjourn, without objection, the following written 

submissions will be made a part of the record of this hearing: A 

letter of support for H.R. 5679 from various consumer law, civil 

law, and other organizations; a statement from the American 

Bankers Association; a statement from Professor Kate Porter, University of Iowa; and a statement from the National Alliance of 

Community Economic Development Associations. 

We will have staff provide those submissions. Thank you very 

much. The hearing is adjourned. 

[Whereupon, at 2:28 p.m., the hearing was adjourned.] 

(69) 

A P P E N D I X 

April 16, 2008 

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