PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO 

FORECLOSURE 

S. HRG. 111–987 

PROBLEMS IN MORTGAGE SERVICING 

FROM MODIFICATION TO 

FORECLOSURE 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION 

TO FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD 

ON U.S. HOMEOWNERS AND THE HOUSING MARKET DURING THE 

ECONOMIC DOWNTURN 

NOVEMBER 16 AND DECEMBER 1, 2010 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

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65–258 PDF 2011

S. HRG. 111–987 

PROBLEMS IN MORTGAGE SERVICING FROM 

MODIFICATION TO FORECLOSURE 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION 

TO FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD 

ON U.S. HOMEOWNERS AND THE HOUSING MARKET DURING THE 

ECONOMIC DOWNTURN 

NOVEMBER 16 AND DECEMBER 1, 2010 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 
(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

MCGINNIS, Acting Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

JONATHAN MILLER, Professional Staff Member 

MARC JARSULIC, Chief Economist 

BETH COOPER, Professional Staff Member 

WILLIAM FIELDS, Legislative Assistant 

DREW COLBERT, Legislative Assistant 

MARK OESTERLE, Republican Deputy Staff Director 

JIM JOHNSON, Republican Counsel 

JEFF WRASE, Republican Chief Economist 

CHAD DAVIS, Republican Professional Staff Member 

ERIN BARRY, Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Legislative Assistant and Hearing Clerk 

BRETT HEWITT, Legislative Assistant and Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 
(III) 

C O N T E N T S 

TUESDAY, NOVEMBER 16, 2010 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statement of: 

Senator Shelby .................................................................................................. 5 

Prepared Statement .................................................................................. 50 

Senator Akaka .................................................................................................. 51 

Senator Brown .................................................................................................. 51 

WITNESSES 

Thomas J. Miller, Attorney General, State of Iowa .............................................. 7 

Prepared statement .......................................................................................... 53 

Response to written questions of: 

Senator Shelby ........................................................................................... 190 

Senator Brown ........................................................................................... 194 

Barbara J. Desoer, President, Bank of America Home Loans ............................. 8 

Prepared statement .......................................................................................... 56 

Response to written questions of: 

Chairman Dodd ......................................................................................... 195 

Senator Shelby ........................................................................................... 197 

Senator Brown ........................................................................................... 204 

R.K. Arnold, President and Chief Executive Officer, Merscorp, Inc. ................... 10 

Prepared statement .......................................................................................... 60 

Response to written questions of: 

Chairman Dodd ......................................................................................... 208 

Senator Shelby ........................................................................................... 209 

Senator Brown ........................................................................................... 212 

Adam J. Levitin, Associate Professor of Law, Georgetown University Law 

Center .................................................................................................................... 11 

Prepared statement .......................................................................................... 102 

Response to written questions of: 

Senator Shelby ........................................................................................... 218 

Senator Brown ........................................................................................... 221 

David B. Lowman, Chief Executive Officer for Home Lending, JPMorgan 

Chase ..................................................................................................................... 13 

Prepared statement .......................................................................................... 121 

Response to written questions of: 

Chairman Dodd ......................................................................................... 224 

Senator Shelby ........................................................................................... 225 

Senator Brown ........................................................................................... 230 

Diane E. Thompson, Counsel, National Consumer Law Center .......................... 15 

Prepared statement .......................................................................................... 126 

Response to written questions of: 

Senator Shelby ........................................................................................... 235 

Senator Brown ........................................................................................... 246 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from Gibbs & Bruns LLP to Countrywide Home Loans Servicing regarding Pooling Service Agreements .................................................................. 255 

Letter from Wachtell, Lipton, Rosen & Katz regarding Gibbs & Bruns LLP 

letter ...................................................................................................................... 270 
Page

IV 

Denver Post article, Foreclosure paperwork miscues piling, up, November 

14, 2010 ................................................................................................................. 274 

WEDNESDAY, DECEMBER 1, 2010 

Opening statement of Chairman Dodd .................................................................. 277 

Opening statements, comments, or prepared statement of: 

Senator Shelby .................................................................................................. 280 

Prepared statement ................................................................................... 340 

Senator Johnson 

Prepared statement ................................................................................... 340 

Senator Menendez ............................................................................................ 280 

Senator Akaka 

Prepared statement ................................................................................... 340 

Senator Tester .................................................................................................. 281 

Senator Bailey Hutchison 

Prepared statement ................................................................................... 341 

WITNESSES 

Phyllis Caldwell, Chief, Homeownership Preservation Office, Department of 

the Treasury ......................................................................................................... 283 

Prepared statement .......................................................................................... 342 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation .................... 284 

Prepared statement .......................................................................................... 352 

Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve 

System ................................................................................................................... 286 

Prepared statement .......................................................................................... 358 

John Walsh, Acting Comptroller of the Currency, Office of the Comptroller 

of the Currency ..................................................................................................... 288 

Prepared statement .......................................................................................... 368 

Response to written questions of: 

Chairman Dodd ......................................................................................... 475 

Senator Johnson ........................................................................................ 476 

Senator Brown ........................................................................................... 477 

Senator Merkley ........................................................................................ 481 

Edward J. DeMarco, Acting Director, Federal Housing Finance Agency ........... 289 

Prepared statement .......................................................................................... 381 

Response to written questions of: 

Senator Johnson ........................................................................................ 481 

Terence Edwards, Executive Vice President, Credit Portfolio Management, 

Fannie Mae ........................................................................................................... 321 

Prepared statement .......................................................................................... 386 

Response to written questions of: 

Senator Johnson ........................................................................................ 483 

Donald Bisenius, Executive Vice President, Single Family Credit Guarantee 

Business, Freddie Mac ......................................................................................... 323 

Prepared statement .......................................................................................... 392 

Tom Deutsch, Executive Director, American Securitization Forum .................... 324 

Prepared statement .......................................................................................... 399 

Kurt Eggert, Professor of Law, Chapman University School of Law .................. 326 

Prepared statement .......................................................................................... 451 

Response to written questions of: 

Senator Johnson ........................................................................................ 487 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Federal Housing Finance Agency Foreclosure Prevention & Refinance Report, 

August 2010 .......................................................................................................... 500 
(1) 

PROBLEMS IN MORTGAGE SERVICING FROM 

MODIFICATION TO FORECLOSURE 

TUESDAY, NOVEMBER 16, 2010 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 3:20 p.m., in room SD–538, Dirksen Senate Office Building, Hon. Christopher J. Dodd, Chairman of the 

Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. Let me first 

of all thank my colleagues and our witnesses for their patience and 

indulgence. This is a gathering today with the various caucuses 

meeting, unfortunately not at the same time, so it has made this 

a little awkward to try and schedule, Tim, the hearing. But you 

have all come a long way, my good friend Tom Miller, the Attorney 

General from Iowa as well, so I wanted to make sure we could have 

the hearing and yet accommodate the interests of all Members of 

the Committee. So we moved it to this time, Bob, and I am sure 

Senator Shelby will be here at some point shortly, and the idea 

being that I guess the Democratic caucus is sort of wrapping up, 

but there is a Republican caucus which is going to start in about 

an hour. 

Chairman DODD. To which you are not invited. 

[Laughter.] 

Chairman DODD. And so I am going to try, and what I would like 

to do—and I have already asked the witnesses to do this. I will 

make some brief opening comments. Senator Shelby obviously will 

do so as well. And then we will turn to our witnesses and ask them 

if they can to try and abbreviate their comments even further so 

I can then accommodate—and I know this is a bit awkward, but 

to accommodate our Republican colleagues who are here, who still 

have an obligation to get to that caucus, in which case our own 

Members as they come out of the caucus will be showing up here. 

So it is a little different than we would normally proceed, but I 

want to make sure we give all Members a chance to be heard, and 

the witnesses who have come a long way with prepared testimony 

are going to get a good, healthy discussion. 

I will also, at the appropriate time when we have a quorum, ask 

the Committee to fulfill its obligation of voting on the Diamond 

nomination to serve on the Federal Reserve Board. As my colleagues will recall, at the recess period the nomination under the 

law had to be—was sent back to the White House and resubmitted, 
2 

therefore requiring yet another vote by the Committee, even 

though we have had a hearing and voted on the Diamond nomination once before. And so when that time comes, I will interrupt the 

hearing to perform that function, knowing that a quorum could slip 

from time to time. 

So with that in mind, I would like to begin, and I will make my 

own opening comments, and then turn to Senator Shelby or Senator Bennett, whoever is here, for any thoughts they may have. 

And then we will turn to our witnesses. So I again thank all for 

participating. 

Richard, how are you? Good to see you. 

The hearing today, as you are all aware, is on the problems in 

mortgage servicing from modification to foreclosure. Obviously, it 

has received a great deal of attention over the last number of 

weeks in the media, and we thought it was appropriate that even 

in this lame duck session we invite those who have been involved 

in it, including our Attorneys General, represented by Tom Miller, 

and others including the institutions involved, to come and share 

their thoughts as to where we are with this matter and give us an 

opportunity to move forward. And, obviously, as I prepare to leave, 

Tim Johnson, Richard Shelby, and other Members here will pick up 

this issue. Evan Bayh will be traveling out the door with me, and 

then they will be moving to analyze this issue and respond accordingly. 

I want to welcome again and thank our witnesses for appearing 

today and for their testimony about the problems in mortgage servicing from modification, as I said, to foreclosure. As many of us 

know, or all of you know, we have had numerous hearings on the 

problems of the mortgage industry. In fact, the second hearing that 

I held as Chairman of this Committee in the first week of February 

2007 was on the residential mortgage markets and the problems. 

During that year of 2007, we had almost 80 different hearings on 

this subject matter at one time or another, including informal gatherings in this very room with some of the leading servicing companies in the Nation to talk about what plans they had to minimize 

the fallout from the mortgage crisis. So it is a subject matter over 

the last 4 years that this Committee has spent a great deal of time 

and attention on. 

In addition to today’s hearing, I intend to have another hearing— 

and, again, I will consult with Senator Shelby about timing to do 

this. We are only here for a couple of weeks. We have got the break 

for Thanksgiving. But if we can, we want to fit that hearing in to 

invite the regulators to come before us as well to share with us 

their thoughts on the subject matter. 

First let me explain what we mean by mortgage servicing. When 

a homeowner takes out a mortgage, that loan is often bundled with 

a pool of similar mortgages and sold in the secondary market as 

a mortgage-backed security, commonly known as MBSs. After the 

origination, all processing related to the loan is managed by a 

mortgage servicing company. The four largest banks—JPMorgan 

Chase, Wells Fargo, Bank of America, and Citi—are also the largest mortgage servicers. Mortgage servicers bill and collect monthly 

payments, operate customer service centers, maintain records of 

payments and balances, and distribute payments according to the 
3 

terms of a trust. Principal and interest are distributed to the investors of the mortgage-backed securities through a trustee. Taxes and 

insurance are paid to local governments and insurers—servicers retain a servicing fee. That is a brief description of how this is supposed to work. 

It is the problems that have arisen with this process that have 

led me to call the hearing today. It has not generally been my habit 

to quote the Wall Street Journal editorials in my Committee statements, but I thought the following from a column last month captured perfectly the essence of the issues we will examine today. 

The column is entitled ‘‘A Foreclosure Sitcom.’’ It starts by saying, 

‘‘First we learned America’s biggest banks could not properly lend.’’ 

It goes on to say: 

Then we learned they could not keep themselves solvent without taxpayer 

assistance. Then we learned they could not effectively work with troubled 

borrowers in a bursting housing bubble. And now we have learned they do 

not even know how to foreclose. 

‘‘This is more than just a little paperwork problem,’’ it went on. 

Ohio Attorney General Richard Cordray put it best: ‘This is about the private property rights of homeowners facing foreclosure and the integrity of 

our court system, which cannot enter judgments based on fraudulent evidence.’ 

This editorial provides a sharp description, in my view, of the situation in which millions of Americans find themselves today, 

whether we are talking about a homeowner facing possible eviction, 

an investor in an MBS, or simply an average American family 

watching the value of their home drop as more and more homes go 

into foreclosure around them. 

I want to provide a bit more context, if I can, for today’s proceedings. In April of 2007, after holding a number of hearings on 

predatory lending, as my colleagues will recall, and the foreclosure 

crisis to which it would lead, I hosted a meeting of large mortgage 

servicers in this very room, including regulators, civil rights and 

consumer groups, and others, to discuss ways that we could better 

prepare for the wave of loan defaults and foreclosures many of us 

expected. That summit that we held in this very room resulted in 

a statement of principles to which all participants agreed on May 

2nd of 2007. 

Among the items to which the servicers agreed were the following: early contact and evaluation, modification to create longterm affordability, and providing dedicated teams or resources to 

achieve the kind of scale many knew would be necessary to face the 

coming tidal wave of foreclosures. 

Unfortunately, rather than living up to these commitments, 

many in the industry wasted a lot of time denying culpability for 

the mortgage problems or arguing that the problems would not be 

as severe as they turned out to be. As a result, we see even today, 

more than 2 years later, a number of points: servicers struggling 

to keep up with demand; numerous and repeated cases of lost paperwork; serious allegations by investors, including the New York 

Federal Reserve, and advocates of self-dealing at some of the largest mortgage servicers in the country and people needlessly losing 

their homes, including, according to some press reports, people who 

have no mortgages on their homes at all. 
4 

More than a month ago, the robo-signing scandal, of course, hit 

the press. Many in the industry were too quick, in my view, to call 

the problems technical alone and to insist that nobody is losing a 

home to foreclosure without cause. 

However, the focus of the robo-signing problem is too limited, in 

my view. Many believe that the robo-signing errors are simply the 

tip of a much larger iceberg, that they are emblematic of much 

deeper problems at the mortgage servicing business, problems that 

have resulted in homeowners, of course, losing their homes and unjustifiable foreclosures. In fact, servicing practices may be putting 

homeowners at risk. 

Even the industry now acknowledges that the current mortgage 

servicing business model is broken and is simply not equipped to 

deal with the current crisis. Many observers point out that the interests of third-party mortgage servicers are not aligned with the 

interests of either homeowners or investors. So, for example, a permanent modification might result in a homeowner keeping the family’s home and the investor being assured of a better return. But 

that same modification could cause the servicer to lose money. 

The upshot is that there could be extensive problems throughout 

the servicing process that may have led to, in the words of the Federal Reserve Board Governor Sarah Bloom Raskin, and I quote her, 

‘‘a Pandora’s box of predatory servicing tactics.’’ 

According to Governor Bloom Raskin, these tactics include padding of fees, strategic misapplication of payments which can sometimes cause the loan to be considered in default, what some people 

call service-driven defaults, and the inappropriate assessment of 

forced placed insurance, which is extremely costly to the homeowner. 

To her list let me add other issues that have arisen, including 

failure to properly record transfer and ownership of notes and/or 

mortgages, failure to maintain proper custody of title, failure to 

properly administer the Home Affordable Modification Program, 

failure to meet the requirements of the foreclosure process, such as 

by the use of robo-signers, and failure to establish or administer 

mortgage trusts in accordance with applicable law or contractual 

agreements. This hearing will explore these potential problems and 

their implications. 

In addition, the Congressional Oversight Panel has raised concerns today that the failure of servicers and others to correctly handle mortgages and mortgage documents could create systemic risk 

for the financial system. Professor Levitin will also discuss this in 

his testimony this afternoon. 

This is a very important issue to explore, both here today and 

with the regulators at our next hearing. In my view, we created the 

Financial Stability Oversight Council to examine exactly this kind 

of issue. The FSOC needs to really drill down, in my view, and find 

out the scope of the problem and determine the steps that may 

need to be taken to prevent systemic problems from growing, if 

they conclude that there are systemic implications, in fact. 

Let me assure everyone here that I do not want this hearing to 

be simply about casting blame. It is extremely important to lay out 

the problems and challenges, and today’s hearing is designed to do 

exactly that. But I also hope we can work toward solutions. As we 
5 

do, we need to keep in mind that bad mortgage servicing is far 

more than a technical issue. At the same time, we must all acknowledge that not every delinquent borrower’s home ought to be 

saved or can be saved. In my view, we need to strike a balance; 

we need more robust loan modifications, including loan modifications that result in real principal forgiveness that will finally help 

put an end to our housing crisis. 

At the same time, I hope we can agree that we should expedite 

foreclosures that cannot be prevented. For example, a significant 

portion of homes awaiting foreclosure are vacant today in the country. There is no reason in the world to slow down the process on 

these homes. We will need to work together going forward if we 

hope to finally put an end to this housing crisis, and I look forward 

to these witnesses’ testimony and the comments and questions 

raised by my colleagues. 

We do have a quorum? Oh, good. 

[Whereupon, at 3:33 p.m., the Committee proceed to other business and reconvened at 3:44 p.m.] 

Chairman DODD. Richard, before you came in, what I said is I 

know you have got a caucus to go to as well, so we are going to 

do this a little differently. You make your opening statement; they 

are going to make brief comments, our witnesses. 

Senator SHELBY. OK. 

Chairman DODD. And then I am going to turn to my Republican 

colleagues for questions so that you can get your questions in before you have to go to the caucus. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you. You are charitable. We like you as 

Chairman right now. We are going to miss you. Thank you. 

Thank you, Mr. Chairman. I will go back to the subject matter 

now. On October the sixth, I called for an investigation into the 

growing controversy surrounding home foreclosures. At this point, 

there appear to be a number of key issues—Senator Dodd has 

raised a lot of them—that need to be examined very thoroughly. 

First, we need to determine the extent of the problem. It appears 

that thousands of so-called robo-signers working on behalf of banks 

to service loans signed foreclosure-related court documents swearing that they had personal knowledge of the facts of each foreclosure case. It now appears that few, if any, of these people had 

such knowledge that they swore to. 

Second, we need to determine whether the flaws in the process 

led to improper results. In other words, were any homeowners foreclosed upon when they should not have been? I think that is a big 

issue. 

Third, we need to examine the activities of the law firms that 

work for the servicers. Many questions have been raised regarding 

the conduct of these firms during their engagement in foreclosure 

proceedings. 

Fourth, what role did the GSEs and the larger securitization 

market play in this debacle? Did their actions contribute to the 

problem? Were Fannie and Freddie complicit in any way? 

Finally, we need to examine the role of the regulators here. 

Where were they in this process? What were they supposed to be 
6 

doing, and what were they doing, and if not, why not? I think these 

questions have got to be asked and answered. 

And in order to determine the extent of the problem, we need to 

speak with all of the major servicers. Unfortunately, we only have 

a small subset present today. For example, Allied Financial was 

the first major servicer to recognize that it had problems with its 

process. That firm, among others, Mr. Chairman, for some reason 

is not here today. 

Mr. Chairman, it is my understanding that many, if not all, of 

the law firms under investigation were selected by the housing 

GSEs. In order to best understand how and why these firms were 

chosen, I believe we need to hear from Fannie Mae and Freddie 

Mac. Unfortunately, they also did not make the witness list today. 

Perhaps the most complex facet of this examination involves 

securitization. As highlighted in the Congressional Oversight Panel’s most recent report, the most severe potential fallout from this 

will be found in the securitization market. According to that report, 

this could have a devastating effect on our broader financial system. 

On this critical topic, we have a professor from Georgetown University, the Iowa Attorney General, and finally the CEO of MERS. 

Each witness has an important viewpoint to share with the Committee, but none of them represent the views or perhaps the expertise of the securitizers. Given the complexity of this issue, perhaps 

the Committee should have invited others, and perhaps, as the 

Chairman said, maybe have another hearing or so regarding the 

securitization community to answer our questions. 

Finally, the regulators are also significant players here, or should 

be. Each of the major servicers have regulators onsite in their operations. How did those regulators miss the widespread foreclosure 

problems at the firms they were supposed to be regulating? That 

is the question. We could ask them, but unfortunately, they, too, 

are not here today, and Senator Dodd said he is going to have another hearing. 

Mr. Chairman, I expect this hearing to be focused on the foreclosure process. As I have already stated and you have mentioned, 

too, there is a great deal to examine on this topic alone. It appears 

that this hearing will also become a foreclosure mitigation hearing. 

Mortgage modifications is an important topic, to be sure, and certainly one that warrants its own hearing. But if we are going to 

examine the issue of foreclosure mitigation, I believe we should 

study the extent to which borrower fraud has distorted the modification process and inflated overall foreclosure numbers. This is a 

critical issue, considering that the U.S. taxpayer has spent more 

than $50 billion on foreclosure mitigation programs. We need to 

know where our mitigation efforts are best directed and where our 

money is being wasted as a result of fraud. I understand that there 

are no witnesses here today that can address the topic of borrower 

fraud, but we should have that. 

Mr. Chairman, I called for a full investigation on this matter in 

early October because I believe that those who face foreclosure 

should, at the very least, know that the process is being handled 

fairly and legally according to the law. While I believe that we will 

learn a great deal from this hearing, I hope that it does not rep-
7 

resent the Committee’s complete examination of this important 

issue and I commend you for saying you will look into it some 

more. 

Chairman DODD. Well, thank you very much, and obviously this 

is a matter that will go far beyond even the time constraints we 

have over the next couple of weeks in the lame duck session. I will 

be watching C–SPAN from hopefully some comfortable spot in January as Tim Johnson and Richard Shelby hold extensive hearings 

on the subject matter, and Bob Bennett may be joining me along 

with Evan Bayh from Indiana and watching you go forward. 

[Laughter.] 

Chairman DODD. Let me turn, first of all, to the Attorney General of Iowa. Tom, we thank you very much, and I know you have 

done a lot of work on this issue along with others. In fact, the new 

Senator from the State of Connecticut, of course, Dick Blumenthal, 

the Attorney General of my State for the last 18 years, I know has 

worked with you on this issue, as well, so we are anxious to hear 

what you have to say and we will move right along. 

I am not going to do extensive introductions of all of you. I will 

put that in the record so that your children and families can make 

sure you were recognized appropriately here for your contributions 

to mankind. Attorney General? 

STATEMENT OF THOMAS J. MILLER, ATTORNEY GENERAL, 

STATE OF IOWA 

Mr. MILLER. Thank you, Mr. Chairman, and thank you, Members 

of the Committee. I think that this hearing makes a lot of sense. 

These are very, very important issues that have difficult questions 

and difficult resolutions but are very, very important to Americans. 

The housing market, the home to individuals, very, very important 

to everybody. 

We have 50 Attorney Generals working together on this issue. 

We have more than half of the banking regulators working with us. 

We have developed over the last 10 years a remarkable working relationship with the State banking regulators. We have gone 

through three cases together, major cases, and we have worked 

since 2007 on the Foreclosure Prevention Task Force. It is a very 

important relationship and we work together. 

What the 50 of us and the banking regulators are looking at is 

a series of issues. It was triggered by the robo-signing. First of all, 

let me say very clearly that we do not view that as a technical 

issue. It is an issue that is an affront to State courts. Signing an 

oath to produce a judgment of foreclosure in a court is a very, very 

serious matter. 

We are following sort of the outline of the Chairman, Senator 

Dodd, in terms of looking at other aspects, as well, that have appeared in our investigation and we think are important. They include other servicing issues, the whole issue of the paperwork 

being lost and people having to start over and over again, not hearing from the servicers for two or 3 months. That is an issue. 

The modification, the decision concerning modification is an important issue. I think that after 3 years, the servicers, whoever is 

making the decision on modification, there should be a rhythm. 

There should be a pattern. They should see patterns developing, 
8 

and very quickly, people fall within modification or out or marginally. It is more ad hoc, we think, and that just has not come together. 

We are concerned about some of the fees that are charged, particularly the forced insurance. We are concerned about assignment 

issues. Those are something that we are looking at. The so-called 

dual track issue is something that is important, as well, and by 

that we mean a person who is working on modification and all of 

a sudden the foreclosure process starts at the same time. It is enormously frustrating. 

Second liens create a problem when the banks hold the second 

lien and also do the servicing. There is a dynamic there that does 

not work as well as it should. 

We are talking. We are working a lot with the Federal people. 

The level of cooperation with the Federal agencies, particularly 

Justice and Treasury, is like never before. I have been around for 

a while, worked with a lot of Administrations, Democrats and Republicans. We have never had a working relationship this good and 

this productive as we do with this Administration. 

We have opened up a dialogue with the investors. We think they 

are an important part of the solution of this whole problem and 

have started productive meetings with them. We have had sessions 

with Bank of America, two sessions recently. They have been productive. 

We view this as a chance to solve some or much of this problem 

that has hung on for over 3 years, as Senator Dodd outlined. It 

started as a mess, the robo-signing. We want to figure out a way 

that it leaves the whole situation much better than when the mess 

started, and there are a number of things we are working on to try 

and make sure that this is never repeated again. That is, in a way, 

the simplest and very basic, that there is some redress to consumers that are harmed. But then how do we develop a way to 

change the paradigm and the whole system so that it works and 

works much more productively, because, as I said before, there is 

so much at stake for the homeowner, for the investor, for the community and the overall economy. 

Chairman DODD. Thank you very much, General. I appreciate 

again your work on this effort and those of your colleagues around 

the country. 

Barbara Desoer is the President of the Bank of America Home 

Loans. She oversees the business that currently accounts for almost one in five mortgage originations. Bank of America Home 

Loans has $2 trillion in a servicing portfolio that serves 13 million 

customers. She also manages the Bank’s home equity business and 

insurance services organization. We thank you for joining us. 

STATEMENT OF BARBARA J. DESOER, PRESIDENT, BANK OF 

AMERICA HOME LOANS 

Ms. DESOER. Thank you, Chairman Dodd and Ranking Member 

Shelby and Members of the Committee. Thank you for the opportunity to testify. 

The economic downturn and sustained high unemployment, coupled with the housing market collapse, have led to challenges far 

more profound and complex than anyone ever anticipated. Impor-
9 

tantly, more than 86 percent of Bank of America’s customers are 

current on their mortgage. Unfortunately, others are in distress. At 

foreclosure sale, one of three properties are vacant, and there are 

far too many abandoned properties in our communities that drive 

down home values in neighborhoods across the country. 

Helping customers remain in their homes wherever possible remains Bank of America’s number one priority, as evidenced by our 

over 700,000 completed loan modifications. We have reached a 

crossroads between modification efforts and the reality of foreclosure. Despite our best efforts and numerous programs, for some 

customers, foreclosure is unavoidable. That has driven an increase 

in the concerns that you and we are hearing from our customers. 

It is our responsibility to be fair and to treat customers with respect as they transition to alternative housing. We have an obligation to do our best to protect the integrity of the proceedings of 

foreclosure, and when that has not happened, we accept responsibility for it and we deeply regret it. 

We were the only servicer who stopped foreclosure sales nationwide to review our procedures. We know the concerns are not just 

technical issues. We have confirmed that the basis for our foreclosure decisions has been correct and accurate, but we did not find 

a perfect process and we are already moving forward with the 

needed improvements. 

As a servicer, we have a responsibility to follow the guidelines 

established by our investors relating to modifications and other 

foreclosure alternatives. Where we can act to improve the process 

alone, we have and will continue to innovate. We also need to work 

with others, and we are committed to further improvements. 

First, improve the communication with our customers. A frequent source of customer frustration is they cannot deal with the 

same person two times during the process, let alone three or four. 

We have redesigned our loan modification process to offer a single 

point of contact to our customers, and we have more than 140,000 

customers who are experiencing this today. We are in discussions 

with key stakeholders, like the State Attorneys General, to determine how that approach can be expanded. 

Second, we know we need to provide greater clarity to our customers who are going through the process, and Attorney General 

Miller referenced the parallel foreclosure or dual track process of 

modification and foreclosure. We want to partner with you and 

other key stakeholders to find a way to eliminate that dual track 

to significantly improve the understanding of where a customer is 

in the process. 

Third, we are making improvements to the foreclosure process. 

We determined during our ongoing review that our process for preparing affidavits of indebtedness in the judicial foreclosure States 

did not conform to best practices in some cases. We have introduced a new affidavit form. We have added additional quality controls. And we are implementing new procedures for selecting and 

monitoring the performance of outside counsel. We are carefully restarting the affidavit process with these and other new controls in 

place. 

Again, our commitment is to ensure that no property is taken to 

foreclosure sale until our customer is given a fair opportunity to be 
10 

evaluated for all of the programs that exist under modification, or 

if that cannot be done, through a short sale or a deed execution. 

Foreclosure is the option of last resort. Thank you. 

Chairman DODD. Thank you very much. We appreciate your testimony. 

Mr. R.K. Arnold is the President and CEO of MERS Corporation 

and its subsidiary, Mortgage Electronic Registration, known as 

MERS. Most of you are familiar with it. MERS was created by the 

mortgage industry participants as a central electronic registry with 

the hopes of streamlining the mortgage process by eliminating the 

need to prepare and record paper assignments of mortgages. MERS 

now registers more than half of the mortgage loans originated in 

the United States. Mr. Arnold has been with MERS since its inception in 1996, and we thank you for joining us. 

STATEMENT OF R.K. ARNOLD, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, MERSCORP, INC. 

Mr. ARNOLD. Chairman Dodd, Ranking Member Shelby, Members of the Committee, I appreciate the opportunity to be here 

today. If it is all right with you, Mr. Chairman, I would submit my 

remarks for the record. 

Chairman DODD. That is true of all of you, by the way, and any 

documentation that any of you want to add to your testimony, we 

will just include as part of the record, so consider that done. 

ORAL STATEMENT OF R.K. ARNOLD, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, MERSCORP, INC. 

Chairman Dodd, Ranking Member Shelby and Members of the Committee, 

my name is R.K. Arnold. I am President and CEO of MERSCORP, Inc. 

Thank you for this opportunity to appear today. 

MERS is a member-based organization made up of about 3,000 mortgage 

lenders. It maintains a nationwide database that tracks changes in servicing rights and ownership interests in mortgage loans. Today MERS is 

keeping track of 31 million active loans. 

The MERS database is important to the mortgage industry because it is the 

only centralized registry in the industry that uniquely identifies each mortgage loan. 

The MERS database is important to individual borrowers because it provides a free and accessible resource where borrowers can locate their 

servicers, and in many cases, learn who their note-owner is as they change 

over time. 

The MERS database is important to communities because housing code enforcement officers use it to identify who is responsible for maintaining vacant properties. 

The MERS database aids law enforcement in the detection of mortgage 

fraud by tracking liens taken out utilizing the same borrower name, social 

security number, or property. 

MERS also performs another key function: It serves as the mortgagee of 

record, or the holder of mortgage liens, on behalf of its members as a common agent. MERS is designated as the mortgagee in the mortgage document, and this designation is approved by the borrower at loan closing and 

then recorded in the appropriate local land records. Serving as the mortgagee enables MERS to receive and maintain updated information as loan 

servicers and noteholders change over time because we are the central 

clearinghouse for receipt of mail as mortgagee. One thing that is always 

clear in a mortgage document is that if the borrower defaults on his obligation, the lender can foreclose. If MERS holds the mortgage lien, foreclosures 

can occur in two ways: Either the MERS mortgage interest is reassigned 

in the land records to the lender holding the note and the lender initiates 
11 

the action on its own, or MERS initiates the action as the mortgagee of 

record in the land records. 

To do this, MERS relies on specially designated employees of its members, 

called certifying officers, to handle the foreclosure. To be a MERS certifying 

officer, one must be an officer of the member institution who is familiar 

with the functions to be performed, and who has passed an examination administered by MERS. Generally, these are the same individuals who would 

handle the foreclosure if the lender was involved without MERS. The loan 

file remains with the servicer as it did before MERS. MERS is not a repository for mortgage documents or promissory notes. 

MERS derives its revenues entirely from fees charged to its members—it 

makes no money from foreclosures. And MERS does not decide when to 

foreclose. Foreclosure must be authorized by the note-owner (or noteholder), 

and it must be done in accordance with our strict rules and procedures, 

which we regularly enforce and refine. 

For example, it is a key MERS rule that the note must be presented in a 

foreclosure, which some States do not require. And we prohibited the use 

of lost note affidavits in foreclosures done by MERS once we learned they 

were being used as an excuse to not produce the note. 

Earlier this year, when we became aware of acceleration in foreclosure document processing, we grew concerned that some certifying officers might 

have been pressured to perform their responsibilities in a manner inconsistent with our rules. When we did not get the assurances we thought 

were appropriate to keep this from happening, we suspended our relationships with those companies. 

When we discovered that some so-called ‘‘robo-signers’’ were MERS certifying officers, we suspended their authority until they could be retrained 

and retested. We are asking our members to provide us with specific plans 

outlining how they intend to prevent such actions in the future. 

Mr. Chairman, all of us at MERS keenly understand that while owning 

your own home is a dream, losing that home is a nightmare. As professionals who have dedicated ourselves to helping people realize their dream, 

we are deeply dismayed by the current foreclosure crisis. We take our role 

as a mortgagee very seriously and we see our database as a key to moving 

toward better access to information and transparency for consumers. 

I am hopeful that as people understand more about MERS and the role we 

play, they will see that MERS adds great value to our nation’s system of 

housing finance in ways that benefit not just financial institutions, the 

broader economy and the Government, but—most of all—real people. 

Thank you for holding these hearings and inviting MERS to participate. 

Mr. ARNOLD. Thank you, and I am ready for your questions. 

Chairman DODD. Well, that was good testimony there. I appreciate it. 

[Laughter.] 

Chairman DODD. Professor, do you want to do the same? 

[Laughter.] 

Chairman DODD. Professor Levitin, we thank you very much for 

joining us. Professor Levitin is an Associate Professor of Law at 

Georgetown. He specializes in bankruptcy, commercial law, financial regulations. He has done extensive research on the role of financial institutions in consumer and business transactions, including mortgage finance payment systems and bankruptcy reorganizations. He also served as Special Counsel to the Congressional Oversight Panel, and is currently a Fellow at the Center of Law at 

George Washington University. We thank you for joining us. 

STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF 

LAW, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Well, I hope I can keep my comments as brief as 

Mr. Arnold. 
12 

I want to make clear that I am here today to testify only as an 

academic and not on behalf of the Congressional Oversight Panel. 

Over the last few months, the mortgage world has been roiled by 

a number of seemingly unconnected issues: The discovery that 

major mortgage servicers were submitting thousands of faulty or 

fraudulent affidavits in foreclosure cases, the emergence of concerns over securitization chain of title, and mortgage-backed securities investors put-back demands. Although seemingly disparate, 

these issues are, in fact, connected by two common threads, the necessity of proving standing in order to maintain a foreclosure action, and the severe conflicts of interest between mortgage servicers 

and MBS investors. 

It is axiomatic that in order to bring a foreclosure action, the 

plaintiff must have legal standing. Only the mortgagee has such 

standing. Many of the issues relating to foreclosure irregularities, 

ranging from procedural defects up to outright counterfeiting, relate to the need to show standing. Thus, problems like various 

types of false or faulty affidavits as well as backdated mortgage assignments and altered or wholly counterfeited notes, mortgages, 

and assignments all relate to the evidentiary need to prove standing. 

Concerns about securitization chain of title also go to the standing question. If the mortgages were not properly transferred in the 

securitization process, then the party bringing the foreclosure does 

not, in fact, own the mortgage and therefore lacks standing to foreclose. 

If the mortgage was not properly transferred, there are profound 

implications, too, for investors, as the mortgage-backed securities 

they believe they had purchased would, in fact, be non-mortgagebacked securities. If so, title on most properties in the United 

States would be clouded and there would also be a put-back liability that would greatly exceed the market capital of major U.S. 

banks. 

Put-back claims underscore the myriad conflicts of interest between mortgage services and investors. Servicers are responsible 

for prosecuting violations of representations and warranties made 

to investors in securitization deals. Servicers are loath to bring 

such actions, however, not least because they would often be bringing them against their own affiliates. Thus, Countrywide Home 

Mortgage Servicing would be bringing those claims against Countrywide itself. 

I am guessing that many of you received this morning a copy of 

the American Securitization Forum’s White Paper on residential 

mortgage-backed security chain of transfer. It is a good document 

and I agree with most of the legal analysis within it, as far as it 

goes, but that is the problem. The problem is that the ASF White 

Paper neglects to address three rather important points. 

First, it fails to address that parties can contract around the Uniform Commercial Code, which is what the ASF says governs transfers in securitization. Parties are allowed to contract around that 

by the terms of the Uniform Commercial Code, and arguably, that 

is exactly what mortgage securitization pooling and servicing 

agreements do. If that is correct, then the ASF White Paper is simply analyzing the wrong law. 
13 

Second, the ASF White Paper neglects to address the question of 

noncompliance with whatever the applicable law is, and there are 

a multitude of potential noncompliance problems, such as premature shredding of notes or the signing of assignments by purported agents of now-defunct companies. The scope of these problems is unclear, but noncompliance with transfer rules could void 

the transfers. 

Third, the ASF White Paper neglects to address the trust law 

issues in securitization. Most residential mortgage securitization 

trusts are governed by New York trust law, and New York trust 

law imposes additional requirements on transfers. Arguably, these 

requirements are not met by many securitization deals. New York 

trust law provides that if a transfer does not comport with the 

trust documents, that transfer is void even if the transfer would 

otherwise comply with law. And if the transfer is void, that would 

mean that the trusts do not own the mortgages and therefore lack 

standing to foreclose. 

I want to emphasize that I am not saying that this is the case, 

that there are many unresolved legal issues and there are also evidentiary questions. I am not predicting that there is a wholesale 

chain of title problem with residential mortgage-backed securities. 

Instead, my point is that there are unresolved questions and that 

the law is not as clear as either the American Securitization Forum 

or any law firm with outstanding securitization opinion letter liability would like you to believe. 

We do not know how these questions are going to be resolved, 

but some of the potential resolutions have dire systemic consequences and Congress should be aware of that possibility, because we would do much better being ahead of the ball than behind 

it on systemic risk. When the systemic risk aspect is taken into 

consideration within the context of all the other problems in the 

mortgage securitization world, I think it makes a compelling case 

for early intervention and for a global settlement of the foreclosure 

crisis and investor litigation against servicers and securitizers. 

Only a global settlement will help revive the mortgage market, will 

remove the debt overhang from consumers and financial institutions, and will help restart the U.S. economy. 

Thank you. 

Chairman DODD. Thank you very, very much. 

Mr. Lowman, we welcome you to the Committee, as well. Mr. 

Lowman is the Chief Executive Officer of Chase Home Lending, responsible for Chase’s mortgage and home equity lending business, 

including loan origination servicing and default, as well as credit 

risk management and capital markets. Chase Home Lending originates $200 billion in residential markets and home equity per year. 

The company services some six million loan customers, and we 

thank you for joining us. 

STATEMENT OF DAVID B. LOWMAN, CHIEF EXECUTIVE 

OFFICER FOR HOME LENDING, JPMORGAN CHASE 

Mr. LOWMAN. Thank you, Chairman Dodd, Ranking Member 

Shelby, and Members of the Committee. Thank you for inviting me 

to appear before you today. 
14 

We are committed to ensuring that all borrowers are treated fairly and with respect, that all appropriate measures short of foreclosure are considered, and that if foreclosure is necessary, the 

process complies with all applicable laws and regulations. We take 

these issues seriously. We regret the errors in our affidavit processes and we have worked hard to correct these issues. 

I want to emphasize that Chase strongly prefers to work with 

borrowers to reach a solution that permits them to keep their 

homes. Foreclosures cause significant hardship to borrowers and 

communities. Foreclosures—— 

[Interruption.] 

Chairman DODD. Officers? All right. 

[Interruption.] 

Chairman DODD. OK. Because of disruption subject to arrest, I 

ask that you—— 

[Interruption.] 

Chairman DODD. We stand in recess here for a few minutes. 

[Recess.] 

Chairman DODD. I would invite those who would like to hear the 

rest of the hearing to join us by sitting down so we can hear the 

rest of the witnesses, and I will just make a point here that those 

who engage in that kind of an outburst, we will have to ask you 

to clear the room. We will ask the officers to clear the room. I hope 

that is not necessary. We are delighted to have you here in the 

room to hear the testimony. It is an important hearing. 

With that, now we will go back to Mr. Lowman, your testimony. 

Mr. LOWMAN. Foreclosures cause significant hardship to borrowers and their communities. Foreclosures also inevitably result 

in severe losses for lenders and investors. Therefore, we always 

consider whether there are viable alternatives to foreclosure. 

Chase adopted its own modification programs in early 2007. 

Since 2009, Chase has offered almost one million modifications to 

struggling borrowers and has completed over 250,000 permanent 

modifications. 

Sustainable modifications are not always possible. There are 

some borrowers who simply cannot afford to stay in the homes or 

they have vacated their homes. While we make repeated efforts to 

modify a delinquent loan, sometimes we must proceed to foreclosure. A property does not go to foreclosure if a modification is 

in progress. But if the foreclosure has begun and a borrower later 

begins the modification process, our investors, including the GSEs, 

have instructed us to allow the two processes to run at the same 

time. However, we will not allow a foreclosure sale if a modification 

is in progress. 

I understand the focus of the Committee today is our recent decision to temporarily suspend foreclosures in a number of States. To 

be clear, we service millions of loans and we make mistakes. But 

when we find them, we fix them. It is important to note that the 

issues that have arisen in connection with the foreclosure proceedings do not relate to whether the foreclosures were warranted. 

We have not found issues that would have led to foreclosures on 

borrowers who were current. 

Our recent temporary suspension of foreclosures arose out of concerns about affidavits prepared by local foreclosure counsel, signed 
15 

by Chase employees, and filed in certain mortgage foreclosure proceedings. Specifically, our employees may have signed affidavits on 

the basis of file reviews and verifications performed by other Chase 

personnel, not by the affiants themselves. They may not have 

signed affidavits in the presence of a notary. But the facts set forth 

in the affidavits with respect to the borrower’s default and the 

amount of indebtedness, the core facts justifying foreclosure, were 

verified prior to execution of the affidavits. 

We take these issues seriously. Our process did not live up to our 

standards. While foreclosures have been halted, we have thoroughly reviewed our procedures and undertaken a complete review 

of our document execution policies. We have also rolled out extensive additional training for all personnel involved. 

I would be happy to answer any questions that you might have. 

Chairman DODD. Thank you very much. 

Our last witness, and certainly not the least, is Diane Thompson, 

who is a familiar face to many of us here. She is Counsel to the 

National Consumer Law Center. She has written numerous publications dealing with the integrity of the lending and foreclosure 

process. She worked from 1994 to 2007 at the Land of Lincoln 

Legal Assistance Foundation representing low-income homeowners 

in East St. Louis. She testified at our hearing on loan modifications 

in July of 2009 before this Committee, and I will be particularly 

interested to hear if she believes enough progress has been made 

since our last hearing in July of last year. I thank you again for 

joining us. 

STATEMENT OF DIANE E. THOMPSON, COUNSEL, NATIONAL 

CONSUMER LAW CENTER 

Ms. THOMPSON. Thank you, Chairman Dodd, Ranking Member 

Shelby, and Members of the Committee. Thank you for inviting me 

to testify today, and to answer your question, Chairman Dodd, no, 

enough progress has not been made. I was shocked, actually, when 

I took out my testimony from last July to look at it as I was getting 

ready for this, how much of that testimony was still relevant. 

I am an attorney with NCLC, and in my work at NCLC I provide 

training and support to hundreds of attorneys representing homeowners from all across the country. So I hear what is going on in 

Alaska and in Mississippi on a daily basis, as well as in New York 

and Illinois. 

The recent robo-signing scandal reveals the contempt that 

servicers have long exhibited for rules—the rules of court procedure 

flouted in the robo-signing scandal, the contract rules breached by 

servicers’ common misapplication of payments and imposition of illegal payments, and the rules for HAMP modifications honored, unfortunately, more often in the breach than in reality. 

Servicers do not believe that the rules that apply to everyone else 

apply to them. This lawless attitude, created in part by financial 

incentives and too often tolerated by regulators, is the root cause 

of the robo-signing scandal, the failure of HAMP, and the wrongful 

foreclosure of countless American families. 

In my written testimony, I provided dozens of examples of the 

harm caused to homeowners by servicers. Many of the foreclosure 

cases that have come to national attention involving robo-signing 
16 

allegations originated due to the unnecessary forced placement of 

insurance, sometimes at more than ten times the actual cost of the 

homeowner’s existing insurance policy. 

Often, servicers’ misrepresentations lead directly to foreclosure. 

In one case cited in my written testimony, a North Carolina woman 

was placed in foreclosure by Chase after 15 months of timely and 

full trial modification payments when she made the mistake of following the advice of a Chase representative to make a partial payment in the 16th month. 

In another case, Bank of America employees told a California attorney that the relevant pooling and servicing agreement prohibited all loan modifications. Bank of America employees went so far 

as to provide the attorney with what appeared to be an electronic 

snapshot of the relevant section of the PSA, but that snapshot converted a comma to a period and removed the immediately following 

clause which provided for loan modifications in most circumstances 

after default. 

These abuses occur because servicers have strong financial incentives to deny permanent modifications and in many cases to proceed with foreclosure. The illegal fees that push many homeowners 

into foreclosure are profit centers for servicers. Servicers usually 

recover their costs faster in a modification than in a foreclosure 

and servicers and their affiliates also profit from post-foreclosure 

REO sales. Ultimately, these actions by servicers strip wealth from 

investors as well as homeowners. 

Unless and until servicers are held to account for their behavior, 

we will continue to see fundamental flaws in mortgage servicing 

with cascading costs throughout our society. The lack of restraint 

on servicer abuses has created a moral hazard juggernaut that at 

best prolongs and deepens the current foreclosure crisis, and at 

worst threatens our global economic security. 

Solutions must address the affidavit and ownership issues raised 

most recently, but much more is urgently needed. We must require 

servicers to evaluate homeowners for loan modifications before 

foreclosure, offer modifications where doing so will provide a net 

benefit to the investors, and provide that the failure to do so is a 

defense to foreclosure. Funding for mediation and representation of 

low-income homeowners is desperately needed. Principal reduction 

must be mandated. Both Congress and Federal regulators must 

rein in servicer abuse and move toward restoring rationality to our 

mortgage markets. 

Thank you for the opportunity to testify here today. I am happy 

to answer any questions you may have. 

Chairman DODD. Thank you very much, Ms. Thompson. I appreciate your testimony. 

[Applause.] 

Chairman DODD. All right, please. Audience, please. This is not 

a rally here, it is a hearing. 

Let me turn to Senator Shelby. As I said earlier, I know my Republican colleagues have a caucus and so I have invited Senator 

Shelby and Senator Johanns to go ahead of us here, so I will defer 

any questions I have. Senator Shelby. 
17 

Senator SHELBY. Mr. Chairman, I have a number of written 

questions that I would like to be made part of the record for the 

panel. 

Chairman DODD. Consider it done. 

Senator SHELBY. And I have something I want to ask. I will start 

with you, Mr. Arnold, and Ms. Thompson maybe will chime in here, 

I hope. As I understand—I used to do some of this many years 

ago—let us say a bank anywhere in America—we will just use my 

home town of Tuscaloosa, Alabama—a bank makes a loan on a 

home, or a mortgage banker or whoever, and that mortgage, that 

note is signed and the mortgage is recorded at the courthouse and 

the bank owns the mortgage. That is the security for the loan. 

Now, it used to be, and correct me if it has changed, that they 

would sell that loan and then they would do an assignment of 

record, say X Bank would assign the record to Y Bank or whoever, 

or pension fund, and that would be recorded and they would own 

the mortgage of record. There would be a record of that in the 

courthouse there. And then if somebody missed four or five payments and they foreclosed, you would recite all of this in the foreclosure notice, of the default made in certain mortgage, dated so 

and so, to X Bank and subsequently assigned, or three or four 

times, and you would have to do that. 

What has changed? Electronically, what is the problem and what 

has caused it? Did you get away from the basic property laws of 

the State? I do not know. And has that caused some of the problem? I realize that in the securitization you might take a thousand 

of these mortgages that I have just talked about and you pool 

them, you securitize them. But still, the fundamentals of each one 

of those homeowners remains: They are in debt and the record of 

their indebtedness. Am I wrong or right, and what has changed? 

I will ask Ms. Thompson next. 

Mr. ARNOLD. Well, Senator, there has been a great deal that has 

changed. 

Senator SHELBY. Tell the Committee. 

Mr. ARNOLD. Part of that is that the sheer velocity of the transactions that you are talking about began to jam up the recorders’ 

offices. There would be mistakes in those assignments. They would 

be filed in the wrong order. 

Senator SHELBY. Wait a minute. Excuse me. You are saying 

there were mistakes in the courthouses? 

Mr. ARNOLD. No, Senator. 

Senator SHELBY. Well, where were the mistakes? 

Mr. ARNOLD. Mistakes in the assignments that the banks were 

preparing. 

Senator SHELBY. OK. The banks made the mistakes. 

Mr. ARNOLD. Yes. And that would ultimately cause title problems, breaks in the chain of title. It was unnecessary that those assignments would be recorded every time—— 

Senator SHELBY. Why would it be unnecessary to show who 

owned the mortgage before you foreclosed on it? Because heretofore 

you always foreclosed in the name of the holder of record, did you 

not? I guess. Is that right, Ms. Thompson? 

Ms. THOMPSON. Yes, that is the general rule in most States. 

Senator SHELBY. Go ahead, sir. 
18 

Mr. ARNOLD. And that still happens today even with the advent 

of MERS. What MERS is is a common agent for all of those banks, 

and that way when servicing changes hands, which is covered 

under the Truth In Lending Act, there is a hello/goodbye letter. 

Anytime that that changes, that is reflected on the MERS system. 

The MERS—— 

Senator SHELBY. But is it reflected—excuse me. It might be reflected on your computer, but is it reflected in the courthouse 

where the mortgage is recorded. 

Mr. ARNOLD. MERS is reflected in the courthouse at all times, 

and then if—— 

Senator SHELBY. Wait a minute. Do they record the assignment 

there at the courthouse? I could go look it up and see who owned 

the mortgage? 

Mr. ARNOLD. There is no assignment if MERS is the mortgagee. 

Senator SHELBY. That is what I am getting at. You just said 

there were, so you are correcting yourself. So actually what you are 

doing with the electronic transfer, you have taken the place of historically the property laws of the States. Is that wrong or right, Ms. 

Thompson? 

Ms. THOMPSON. That is correct, and it is true that MERS has the 

case from New York, Romaine; there have been several cases where 

clerks challenged the MERS recordation because it removes from 

the public record any chain of title, and it does complicate homeowners’ attempts to discover who the current holder of their mortgage is. 

Senator SHELBY. Well, isn’t this part of the problem in the foreclosure process? People are saying—I am asking you, Mr. Arnold— 

that you do not really own this mortgage; you have no—there is no 

record of you owning it, how can you foreclose on it? Is that part 

of it? 

Mr. ARNOLD. If there is a foreclosure in the name of MERS, 

which might happen as few as one in ten—— 

Senator SHELBY. Can you do that legally? Is that the law of the 

land? 

Mr. ARNOLD. The MERS mortgage can be foreclosed. 

Senator SHELBY. No, I asked you a question. Was that the law 

of the land—in other words, you can do this? Because you used to 

could not do that. You had to have the property assignment properly recorded in X county to show, would you not? 

Ms. THOMPSON. Whether or not MERS can foreclose in its own 

name is a hotly contested issue. 

Senator SHELBY. That is what I am raising. 

Ms. THOMPSON. It varies State by State. Some States have 

passed legislation allowing MERS to do that. In other States, there 

has been litigation that has allowed MERS to do that. In other 

States, there has been litigation that has forbidden MERS from 

foreclosing in its own name. 

Senator SHELBY. So MERS is part of the problem. 

Ms. THOMPSON. MERS certainly complicates determining who 

the actual ownership and what the correct standing is, and it can 

have the effect of concealing from the public the role of major lending institutions in foreclosures. 
19 

Senator SHELBY. I do not know if you have answered my question correctly or like I want you to, but I am looking for the truth 

of what the problem is. I think that when you deviated from the 

basic property laws of the country, you got yourself in trouble. 

Maybe I am wrong. 

Ms. THOMPSON. I think that MERS is one piece of the problem. 

I think there are more serious and more complicated pieces of the 

problem. 

Senator SHELBY. OK. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Shelby. 

I am going to turn, Bob, with your permission, to Senator 

Johanns. He has to go to that caucus. 

Senator JOHANNS. Well, thank you. I appreciate the courtesy 

from both Senators. 

Ms. Thompson, help me understand this, if you will. All of the 

abuses that you have described, somebody altering a document and 

trying to mislead someone, I do not think there is anybody in the 

room, probably anybody in the country, that would try to claim 

that that is right. It is not right. I mean, fundamentally it is just 

not right. But I want to kind of drill down on the mortgage foreclosure issue itself and try to get your help in me understanding 

this. 

I have done many mortgages through my life. My first mortgage 

was probably when I was in my 20s and bought my first house. 

And my understanding is, complex as those documents are—and, 

you know, they give you a stack about that thick to sign. My understanding was that somebody was giving me money that would 

at least partially buy the house—these days maybe buy most of the 

house—and that if I failed to repay that in a timely way, they 

would take the house. I mean, as sad and unfortunate as that is, 

that was kind of the bottom line. 

How many instances have you run into or is it a common practice that these foreclosure people are foreclosing on properties 

where, in fact, somebody has not failed to pay? Do you see what 

I am getting to? 

Ms. THOMPSON. I do, and in my written testimony I believe I 

have three examples of cases where people were not actually in default when the foreclosure was initiated. 

Senator JOHANNS. And let me say again, that is not right. But 

I am trying to figure out if it is 3 million or 3,000 or three, because—— 

Ms. THOMPSON. I think it is very—it is certainly more than 

three. I certainly had many examples like that in the course of my 

practice. It is a complicated question because sometimes the person 

is absolutely not in default and they initiate foreclosure; sometimes 

the wrong bank initiates foreclosure. And sometimes there is a 

placement of fees that then makes the payment double or triple, 

and at that point the person does go into default. Now, I submit 

that in that case it is the placement of the improper fees that 

causes the foreclosure, even though the person does technically go 

into default. 

Senator JOHANNS. Well, let me just say again I do not think that 

is right. And, again, I do not think you are going to get much de-
20 

bate from anybody about that. I just do not think that is right, and 

I want to make that clear. 

But, again, for the purposes of this Banking Committee, in this 

area it is so important that we understand what we are dealing 

with. And so at least today you can give me three cases where a 

default was initiated in a situation where the person was not in default. Three. 

Ms. THOMPSON. There are about 26 examples in the written testimony, and I believe three of them involve cases where there was 

no default; three of them involve cases where the homeowner submitted a partial payment in reliance on a representation by the 

servicer, and the servicer then declared a default; and at least 

three or four of them involve cases where people went into default 

solely because of the placement of improper fees. 

It is not uncommon—I think it is very difficult for us to assess 

the magnitude of it, in part because there is no meaningful 

verification of the affidavits that servicers submit in a foreclosure 

process. 

Senator JOHANNS. Well, you are going to have to—— 

Ms. THOMPSON. To determine whether or not the fees are actually correct and the default is correct requires hours, often, analysis of the payment histories. 

Senator JOHANNS. Ms. Thompson, I will make this request to 

you. Again, I am trying to get a notion of the scope of what we are 

dealing with here so we can understand what we are to fix. But 

if this is truly a case where you are telling me out of all of the 

work you have done in this area that you can bring to mind three 

cases where somebody was default—or sued and foreclosed upon, 

that is a whole different dynamic for me than if there are 300,000 

of them. 

Ms. THOMPSON. Out of all of the cases that I took, out of the hundreds of homeowners that I represented, in virtually every case I 

believe the homeowner was not in default when you looked at the 

surrounding facts. 

Senator JOHANNS. Would you be able to provide us with some information to back up that statement? You just made a statement: 

Out of all of these cases, in virtually every one the homeowner was 

not in default. That really—I find that troubling that there would 

be people out there foreclosing when the homeowner is not in default when there are—do you see how that does not—— 

Ms. THOMPSON. Yes, and as a legal services attorney, I had precious little time, and I only took cases where I believed that there 

was a meritorious defense to the foreclosure. I represented in court 

hundreds of homeowners. Every single one of those cases, I believed there was a strong defense that would defeat the foreclosure. 

You can only defeat the foreclosure ultimately if you establish that 

there is not a legal default. It is a widespread problem throughout 

the country. 

Senator JOHANNS. I am a lawyer myself, and although I did a little bit of this work in my career, I did not do a lot, so I start with 

that deficiency. But I will tell you there are legal defenses and then 

there are defenses to the fact that, look, my client is not in default. 

And that is what I am trying to get to here. How many of those 

are in defense where you actually filed an answer to the foreclosure 
21 

petition saying you made a mistake, my client is fully in compliance, at least in terms of the payment of this mortgage? 

Ms. THOMPSON. Well, again, I do not think that is a simple yes 

or no, because if you have these improper fees, that can cause a 

technical default under the note. But if we are looking at the cases 

where somebody was absolutely not in default, that would have 

been—you know, there is absolutely no question, no controversy 

about their payments, maybe 10 percent of the cases that I handled. If we are looking at cases where it was something that the 

servicer did, just the servicer, that triggered the default, maybe 

about 50 percent of the cases. 

Senator JOHANNS. OK. I will wrap up with this because I am 

over my time. You have even caused me more concern by your testimony because, again, if people are doing things that are not right, 

we should stop those things. We all agree to that. But what I am 

trying to get to is this issue of if you have not paid and somebody 

is suing you because you have not paid, then I need to know the 

scope of that problem. And if it is 10 percent, then, again, that 

causes me a great deal of concern about your testimony. 

So hopefully you can provide more information to this Committee 

to try to clarify what you are saying here, and I would welcome 

that. 

I thank the Chair. I have gone 3 minutes over, and I appreciate 

it. 

Chairman DODD. No, no, that is fine, Senator. Thank you. 

I would just note again—and then I will turn to Senator Bennett 

and then turn to my colleagues on the Democratic side. I had noted 

in the testimony of Ms. Desoer that 86 percent of homeowners are 

in compliance. Obviously, the number that is troubling to me is not 

the 86 percent, but the 14 percent who are not. Normally, as I understand it—and we have talked about this. Today, in fact, it is 

less than 1 percent or something around 1 percent under current 

underwriting standards and the like. Normally, though, in normal 

times, it would be around 2 percent, people in default. The fact 

that it is at 14 percent speaks of another larger—coming down to 

the point where whether or not someone is in default or not, that 

is the end of the process. There is a lot that occurs before that particular moment that really causes so much concern as well. But I 

would just make that point generally. 

Senator Bennett. 

Senator BENNETT. Thank you very much, Mr. Chairman. 

Unlike Senator Johanns, I am not a lawyer. My experience with 

mortgages, like his, started with getting one. I have defaulted on 

payments at various times in my career when I simply did not 

have the money. Fortunately, I got it in time to make up the payment before any legal proceedings were made. I was 60 days late, 

or whatever it might be. But I know the angst that comes with 

having missed a mortgage payment, worrying about what is going 

to happen if you cannot get the money to make it up with sick children and a foster child at home and a situation where your own 

economic circumstance is not good. So I have all kinds of emotional 

reactions to the testimony and to the emotional reactions to the 

testimony. But let me try to follow up on Senator Johanns with 

some of the things he was trying to get a hold of. 
22 

We have two people here who are in the business of home loans: 

the president of the Bank of America Home Loans and the CEO 

of Chase Home Lending. I would like your response to the testimony we got from Ms. Thompson. 

Ms. Thompson, either deliberately or otherwise, you gave us the 

impression that it was the policy of the servicers—that there is a 

built-in conflict of interest so that it is their policy to try to pile 

on extra fees, to try to force people into bankruptcy so they can 

make more money. And I would like those who were on the receiving end of that implication to have an opportunity to respond. 

As a businessman—I am not a lawyer, but I am a businessman— 

I would say to the business people in the room, if that is indeed 

your policy, it is a really stupid policy, because while you may 

make a little short-term revenue out of such a circumstance, you 

build in very serious long-term consumer resistance to dealing with 

you. And I do not suggest that there are not businessmen and 

women who are stupid and, therefore, that there are not businessmen and women who do that. I think there are some who are stupid and who do do that. But if I were an employee of any company 

that was involved with this or serving on the board of any company 

that was involved with this and found out that you were deliberately trying to maximize short-term profits with these kinds of 

fees, I would say that is about as dumb a thing as you could possibly be doing from a business point of view. 

So we have two business people here, and I would like to hear 

your response to this. Ladies first. 

Ms. DESOER. OK, thank you. Senator, we absolutely do not sacrifice the long-term brand of Bank of America for the opportunity 

to have short-term gains in fees. At the same time, and for what 

Ms. Thompson referenced relative to our inaccurately portraying a 

PSA that resulted in a bad consumer experience, that is an error 

on our part. We take errors very seriously. We do make them. We 

are not perfect. When they are brought to our attention, we work 

to resolve them just as quickly as we can. So I apologize for any 

error there may have been. But, when we do make them, we work 

quickly to correct them because our best financial outcome is 

aligned with keeping homeowners in their homes. And so we have 

been as creative as we can under the circumstances, and unfortunately there are 14 percent of customers who are delinquent on 

their mortgages, to attempt to reach out, to make offers of Government programs, of our own programs, of working with others to try 

to do everything that we can to keep customers in their homes. 

And where that has been possible, we have succeeded 700,000 

times with permanent modifications that have enabled customers 

to stay in their homes. We continue to work to do that by expanding programs, being one of the first in the industry to offer a principal reduction program, as an example, under a proprietary program to participate in the hardest-hit States of the Government 

funds and to participate in the principal reduction portion of that 

where it is important in States that have experienced the most severe depression in home prices. 

At the same time, there is no question that we have to balance 

interests. We put the interests of the customer front and center. 

That is part of the core value of Bank of America. But we have to 
23 

also consider the interests of the investors, whether that be Government agencies or private investors, as well as our role and responsibility of servicer. We take that balancing very seriously. We 

do not always get it right, but we certainly focus on trying to keep 

the customer in their home, and that is where our financial incentives are aligned. 

Senator BENNETT. Mr. Lowman. 

Mr. LOWMAN. Yes, I would echo Ms. Desoer. The fact is we do 

not make money when we foreclose on customers. It is in our best 

interest to figure out ways to make loans perform again. And as 

a result of that we have invested significant effort and resources 

to beef up our modification efforts. We have 6,000 customer-facing 

employees. We have 1,900 people that are the single point of contact for troubled borrowers. We go through an extensive analysis 

to determine whether or not a borrower is eligible for a modification, and as a result, modifications are in our best interest and in 

the interest of the investor. 

Like Ms. Desoer mentioned, we have a balancing act to do. We 

have to do what is right for the borrower, and at the same time 

do what is right for the investor who we have a duty to minimize 

their losses. 

Senator BENNETT. Yes, one last comment, Mr. Chairman. 

Chairman DODD. Yes. 

Senator BENNETT. Ms. Thompson, I am sure your information is 

accurate when you say employees of these companies have misled 

people and given them improper advice. If you call an IRS agent 

for advice on your taxes, there is a very good chance you will get 

wrong advice and end up in tax court. Human beings do make mistakes, and I would just say to the two representatives of the two 

banks, I hope you are checking your training at all times to make 

sure those kinds of mistakes are not made, because as I say, the 

IRS is a Government agency, but it has a history of misleading taxpayers, and they act on the basis of the advice they are getting, 

and then they end up in tax court. And it is not a defense to say, 

‘‘Well, I did what the IRS agent told me.’’ That does not matter. 

You are still—did you want to comment? 

Mr. LEVITIN. Yes, Mr. Bennett, I think it is also important to actually hear the words of another servicer, and this is a public document, Countrywide’s third quarter 2007 earnings call. 

Countrywide’s president, David Sambol, this is what he said, and 

I quote: 

Now, we are frequently asked what the impact on our servicing costs and 

earnings will be from increased delinquencies and loss mitigation efforts 

and what happens to costs. And what we point out is, as I will now, that 

increased operating expenses in times like this tend to be fully offset by increases in ancillary income from our servicing operation: greater fee income 

from items like late charges and, importantly, from in-sourced vendor functions that represent part of our diversification strategy. 

In 2010, Countrywide settled with the FTC for $108 million on 

charges that it overcharged delinquent homeowners for default 

management services, including mark-ups on some of these services that were in-sourced by over 100 percent. So that is the head 

of Countrywide in 2007 basically admitting, Yeah, we do sacrifice 

long term for short term. 
24 

Senator BENNETT. As I say, there are some people who are stupid. 

Ms. THOMPSON. Mr. Bennett, if I may, Mortgage Daily News, 

hardly a radical publication, reported in June of this year that 

servicers generally, their profit per loan had increased over the previous year despite the fact that foreclosures were rising. Servicers’ 

business model is not based on the long-term profitability of the 

loan. It is based on the fees. The fees make up a large chunk of 

their profits because they are allowed to retain the fees under the 

current business models. And that is a structural problem with the 

existing business model that incents them to charge and retain the 

fees. 

Senator BENNETT. I think that is something we ought to look at. 

Chairman DODD. Well, I was going to say, I am going to turn to 

Tim Johnson, then Senator Tester, and I am going to forgo any 

questions I have. But I am going to ask to include in the record 

a letter from the New York Fed to, I think it was, Bank of America, 

Bank of New York, and others on October 18th of this year. 

Chairman DODD. This one paragraph goes to the very question 

that Senator Bennett has asked. I will preface it by saying that the 

PSAs, the pooling and service agreements, provides that the master 

servicers shall be entitled to recover servicing advances that are: 

customary, reasonable, and necessary out-of-pocket costs and expenses incurred in the performance by the master servicer of its servicing obligation, 

including, but not limited to, the cost of preservation, restoration, and protection of the mortgaged property. 

That is the section of the law. 

The letter from the New York Fed goes on to say: 

Despite the requirements that servicing advances were to be incurred only 

for reasonable and necessary out-of-pocket costs, the master servicer instead utilized affiliated vendors who marked up their services to a level of 

100 percent or more above the market price to provide services related to 

the preservation, restoration, and protection of the mortgaged property in 

a fraudulent, unauthorized, and deceptive effort to supplement its servicing 

income. 

That is from the New York Fed. That is not from—you know, 

with all due respect, this is—so this whole letter, by the way—it 

is a lengthy letter but very worthy, and I think it ought to be part 

of the record because it goes to the heart of these issues as well. 

Senator Johnson. 

Senator JOHNSON. Mr. Levitin, we have heard criticism that laws 

regarding documentation have not evolved quickly enough to address innovations in business. Does the law need to be changed to 

ensure proper documentation throughout the mortgage process? 

Mr. LEVITIN. No, sir, I do not believe that is the case. I do not 

think the problem is the law. The law is actually pretty good. The 

problem is really one of compliance with the law, and there are, I 

think, two potential problems. 

According to the American Securitization Forum—and I would 

agree with them, there are two generic ways in which you would 

transfer the notes and the mortgages in a securitization. One is 

that you would negotiate the notes through the procedures set out 

in Article 3 of the Uniform Commercial Code. Just the way you 

would sign the back of the check to negotiate it to the bank when 
25 

you deposit it, similarly, you could sign it, endorse it to someone 

else. That way is fine. 

Alternatively, Article 9 of the Uniform Commercial Code allows 

for promissory notes and mortgages to be transferred as part of 

just a regular—under just a regular contract of sale. 

That system works fine. The first question is whether that system was actually the one that governed securitization. The answer, 

I believe—but I cannot say for certain, but I certainly believe the 

answer is now. Instead, I believe that what was governing 

securitization was private contractual law. The parties are allowed 

under Section 301 of Article 1 of the Uniform Commercial Code to 

contract around Article 3 or Article 9. And I believe that is exactly 

what they did in the pooling and servicing agreements. Pooling and 

servicing agreements are trust documents that create a trust, have 

a transfer of assets to the trust, set for the rights of the mortgagebacked security holders, because the trust pays for those assets by 

issuing mortgage-backed securities, and sets forth the rights and 

duties of the servicer. 

The securitization documents themselves, the pooling and servicing agreement, call for a rather specific method of transferring of 

mortgage notes. My understanding—and this is a secondhand understanding. I want to emphasize this because I have not seen 

more than a handful of loan files. My understanding is that generally the requirements set forth in the pooling and servicing 

agreements were not followed, and they were not followed in the 

following way: 

The pooling and servicing agreement says that there has to be— 

when the notes are transferred to the trust, there needs to be an 

endorsement in blank to the trust as well as a complete chain of 

endorsements for all preceding transfers. That means that the 

originator of the loan has to have a specific endorsement transferring it to the securitization sponsor, the sponsor to the depositor, 

and then the depositor in blank to the trust. 

What I am told is that in the majority of cases that chain of endorsements is not there. There is simply a single endorsement in 

blank. That creates a problem because it does not comply with the 

trust documents. That is a severe problem because most pooling 

and servicing agreements are trusts that are governed by New 

York law, and New York law says if you are not punctilious in following the trust documents for a transfer, the transfer is void. It 

does not matter if you intended it. It is void. 

In addition, there is a very good business reason for having that 

particular form of transfer. A critical concern in securitization is to 

ensure that the assets placed in the trust are bankruptcy remote, 

meaning that if any of the upstream transfers to the trust were 

itself to end up in bankruptcy, they could not claw the assets out 

of the trust. This is to protect the mortgage-backed security holders. 

If you do not have that specific chain of endorsements, you just 

have an endorsement in blank turning the note into bearer paper, 

it is going to be very difficult to prove that you have that chain of 

transfers necessary for bankruptcy remoteness. So this is the concern. 
26 

Now, I want to emphasize, this is not a problem with the law. 

This is a problem with following the law. So I do not think that 

there is a need to change the law to catch up with the market. I 

think this is, rather, a problem with the market. The law itself 

would have been fine, and historically, these procedures were followed. But as volumes grew during the housing bubble, 

securitization volumes, it just became easier to disregard the requirements. And you know, just as the underwriting standards fell, 

similarly the transfer diligence fell. 

Senator JOHNSON. Attorney General Miller, given that foreclosure is a judicial crisis in many States, what were the barriers 

to recognizing the documentation problems that existed? 

Mr. MILLER. Well, I think what happened was that recently in 

some litigation people that did the robo-signing were deposed and 

admitted that. And, you know, once that happened, then this investigation started in earnest. 

I do not think there was any way for the banking regulators just 

looking at the documents to know that they were robo-signed as opposed to done properly, as the affidavit said. So I think it was really sort of people coming forward, I think, in some foreclosure actions that were being defended in an aggressive, very capable way, 

that these disclosures became public, and then, you know, I think 

the Attorneys General, the banking regulators, the Federal authorities, class action lawyers, and the companies have been energized. 

So I think that what was sort of an unusual occurrence or maybe 

even a happenstance, if we can convert that problem into multiple 

solutions like the ones I talked about earlier, you know, we can 

come out of this much better than we came in. I just agree wholeheartedly with Senator Dodd saying that what we need is a broad 

brush, a broadly based look at all the problems that he described 

and I described and try and work with the companies and the investors and the Federal regulators to come up with a comprehensive resolution that gets us back on track and corrects as many 

problems as we can of those that are on the table. 

Senator JOHNSON. One last question for Ms. Desoer and Mr. 

Lowman. There have been serious questions, concerns raised that 

it is in the best interest not to modify—there have been serious 

concerns raised that it is in the servicer’s best interest not to modify a loan given the fee structure and potential conflict of interest 

regarding second liens owned by a servicer’s parent company. Can 

you address that criticism? 

Ms. DESOER. Certainly, I would be happy to start. We are a large 

servicer of first mortgages and also we have a large servicing portfolio, most of which we own, of second lien home equity loans and 

lines of credit at Bank of America, and in that context, we do not 

even take the second mortgage into consideration when modifying 

the first. So it is absolutely not an obstacle that stands in our way. 

We do modifications on second liens. We have done 95,000 of them 

independently of the first lien. Also, we were the first servicer to 

sign up for participation in the HAMP 2MP program, which is the 

second lien modification program that now others in the industry, 

as well, are participating in. So the second lien is not an obstacle, 

and has not been an obstacle and does not get taken into consider-
27 

ation when we look at modifying a first lien. So it does not stand 

in our way. 

Senator JOHNSON. Mr. Lowman? 

Mr. LOWMAN. I would echo Barbara Desoer’s comments. The second liens do not stand in the way of modifying the first. We, too, 

are participants in Treasury’s 2MP program, which has just recently been rolled out, which will allow for an automatic modification of the second when the first is modified and that first is held 

by another servicer. 

Senator JOHNSON. My time has expired. 

Chairman DODD. Thank you very much, Senator. 

Because we have a good number of our colleagues here, if we can 

try and keep it down to about 5 or 6 minutes. Senator Tester? 

Senator TESTER. I will do my best, Mr. Chairman. Thank you 

very much. 

I want to say, first of all, thank you all for being here. I very 

much appreciate your time. I am very deeply troubled about some 

of the allegations that have been made about improper fraudulent 

servicing and foreclosure processing, and what compounds this is 

the first-hand reports that my office has received in Montana. I 

have reached out to many foreclosure counseling agencies in Montana. I have read through some of the cases that my staff have 

worked on in recent months, and I will tell you, it is not a pretty 

picture. There is mismanagement that goes far beyond robo-signing 

and the chain of title issues. 

Since the foreclosure crisis began, we have urged constituents in 

danger of foreclosure to be proactive and to reach the servicer before they were in trouble. The foreclosure process is daunting, to 

say the least. It is a maze of paperwork, computer systems, conflict 

information. So it is a big deal. And the misalignment of the 

servicer incentives with homeowners and investors, I think, is a 

recipe for disaster. 

I have got a couple of examples and then I want to get to a couple of questions. In one example, a constituent of mine from Whitehall seeking a modification from Bank of America was told by a 

servicing associate that while the loan modification was in review, 

the homeowner should not make any mortgage payments. Let me 

repeat that. He was told by their servicer, Bank of America, not to 

make any payments, and that if they did, they would not qualify 

for modification. Ultimately, as a result of following the directions 

of their servicer, they were hit with interest and penalties and 

lapse in payments in addition to badly damaged credit. 

Then there is a case of a gentleman from Helena who has been 

fighting with BOA for over a year to prove that he should not be 

in foreclosure, despite having the paperwork to prove that his 

modification was approved. He never missed a payment, never late 

with his mortgage. After being told in August, this last August, 

that the bank has confirmed his modification, he received a letter 

2 weeks later telling him that he was in foreclosure along with a 

foreclosure notice in the paper. 

Now, I do appreciate Bank of America’s work to resolve the issue. 

Unfortunately, not everybody calls their U.S. Senator when they 

have a problem. And I am still trying to understand how this could 

go on for a year, in the case of the gentleman in Helena, to receive 
28 

an erroneous foreclosure notice, and this was received at a time 

when, Ms. Desoer, there was a self-imposed pause of foreclosures 

in Montana. So I need to know how this can happen. 

There are far, far, far too many stories out there, and it does not 

have anything to do with Ms. Thompson’s testimony, although I 

very much appreciate it. This is stuff that I am getting in my office. 

We have a State with 950,000 people and I have got staff members 

that are spending a ton of time on this issue. I think it is more 

than an isolated case. If it was the folks who were not paying their 

bills, I get that. I have empathy for them and I understand it and 

we will do what we can do to help them. But in this particular 

case, these folks never missed a payment and they are getting 

hammered. Can you tell me how a servicer could ever tell a homeowner not to pay their mortgage? 

Ms. DESOER. Thank you for bringing those to my attention, and 

I think our staff has met with your staff to get those details and 

to follow up. We apologize. That is not part of what we should be 

telling homeowners. Of course, homeowners who are current who 

are facing imminent default can be considered for the HAMP and 

other programs if they can demonstrate that their payments are at 

risk, and we take those into consideration and do those modifications and we should never be advising anyone to—— 

Senator TESTER. Do you attribute this to an employee who 

screwed up? 

Ms. DESOER. An employee who somehow—yes, unfortunately, 

and—after conversations with your staff, we have gone back and 

reinforced that aspect of our communication to our teammates. It 

is a critical part of our training. 

Senator TESTER. I think it is absolutely critical. If I take myself 

and put myself in that position, I mean, in these economic times, 

it is tough enough, and then you have something like this happen, 

it is pretty wild to even think it is possible. 

The gentleman from Helena, how is it possible he did not receive 

a letter indicating that he is in foreclosure before foreclosure processing has restarted in the State of Montana? 

Ms. DESOER. This goes back to what I referenced in my written 

testimony and my oral testimony about the dual track of if someone being delinquent and they go into the start of a foreclosure 

process, and then subsequently we engage in a conversation about 

a modification, the foreclosure sale will not take place, but that 

customer continues to get notices, and that is a requirement by certain investors that we do that on a parallel path. That is where we 

think there is an opportunity if we work together—and we are talking to the State Attorneys General under Attorney General Miller’s 

leadership, to try to amend that process because we understand 

how confusing it is. But a customer would not go to a foreclosure 

sale—— 

Senator TESTER. OK. And I have run out of time and I am just 

going to make a real quick statement, and I appreciate everybody 

being here today. These particular hearings are not particularly enjoyable for me, and I know they cannot be enjoyable for you. The 

fact is that why we are here is not an isolated incident, like the 

Senators before talked about. There is no doubt in my mind this 

is not isolated. Montana is not a State where people come to the 
29 

U.S. Senator just willy nilly. They end up in trouble and think they 

have been wronged, and I do not know how many people out there 

did not come to me and end up on the street and they never did 

anything wrong, and so it is crazy. 

So I just want to say in closing, I am going to remain very concerned about the scope of this problem, the impact it can have on 

our financial system and on the housing market. I know that the 

Fed is very much focused on it and I hope it is something that the 

Financial Stability Oversight Council will take a closer look at. It 

strikes me that some of the biggest servicers have been a little bit 

glib about their potential magnitude of these risks, particularly the 

risks to their own balance sheets. At a minimum, we need to understand these risks before the Fed moves forward with guidance 

on banks to increase dividends, because quite frankly, there are not 

going to be any more bailouts. And so it is important that we get 

this squared away simply from a fairness standpoint. I think both 

sides of the aisle can agree on that. 

Mr. Miller, you had a question or a comment? 

Mr. MILLER. Just one very quick comment. I agree with you. We 

hear about it more often than it be just isolated, and one of the 

things that is difficult that we hope we can do is get to the bottom 

of how often it happens, why it happens, and how it can be 

stopped. It is a daunting challenge but one that we want to work 

with the banks and with the Feds to figure out why this happens 

and how can be—— 

Senator TESTER. I just appreciate that. I think if you go to what 

Mr. Levitin said about what the Countrywide CEO said—I think 

it was the CEO that said that—this could be taken care of pretty 

quickly by the servicers, I mean, really quickly by the servicers. I 

mean, to be honest with you, some heads have to roll if they are 

giving that kind of advice. That is just the way it is. 

[Applause.] 

Chairman DODD. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

Mr. Lowman, you made a comment that, if I understood it correctly, I wanted to restate it, and that is that GSEs say if foreclosure has begun before the modification starts, the servicer 

should continue foreclosure proceedings while underway with the 

modification. Did I catch that correctly? 

Mr. LOWMAN. You did. 

Senator MERKLEY. OK. So we have so many folks coming to our 

office in Oregon who over here are working with the servicer to 

modify their loan, but then they are getting foreclosure notices, 

phone calls, agents coming to their door, and they keep calling up 

the servicer and saying, ‘‘I thought we had a loan modification underway.’’ Is this the result of these dual processes going forward together? 

Mr. LOWMAN. Yes, it is a result of the dual processes, and as I 

mentioned, at Chase, what we have put in place is a process that 

makes sure that if there is a modification in process and—if there 

is a foreclosure in process and you initiate a modification during 

that period of time, that we will not allow a foreclosure sale to happen. So we stop the foreclosure sale. 
30 

Senator MERKLEY. So you do not take the final step, but you continue kind of the steps leading up to that? 

Mr. LOWMAN. Correct. 

Senator MERKLEY. It is just short. This is a story from one of my 

constituents: 

My husband and I signed a loan modification. We were approved September 

of 2009. It was a steep loan rate and every year our interest went up. We 

sent in a payment of $577 in certified funds for the modification to become 

effective. We began making our new payment each time we called in, but 

there was confusion. 

We got a foreclosure notice in the mail. When we called to ask about it, 

they would assure us everything is OK. Keep on making your payment, is 

what they would tell us. We have made our new payment for over a year 

and are still receiving foreclosure notices. The bank told us our account has 

not been updated and not to worry. 

We went out of town in October 2010, so last month, and received a ‘Notice 

of Foreclosure’ on our door. When my husband called the bank, they told 

him the lender never signed off on our modification, so it was not valid. 

They were going to try and figure out something and let us know. When 

I called to check on the account in November, of course, this month, the 

bank said we are now delinquent. I told them what had happened and 

asked what we should do. She told me we may qualify for a loan modification. I said, we did that. I told the woman we were approved and had been 

paying our new payment for over a year. I asked her if she had seen this 

happen before. The woman said yes. I then asked what happened to the 

money we paid every month. She told me that it went toward our account, 

but only as a partial payment. 

Now my husband and I do not know what to do. We want to make a payment, but not if it is just a partial payment. We need help and advice but 

cannot afford an attorney. It is embarrassing to have your neighbor tell you 

you have a foreclosure notice on your door. We also had a man come to our 

house telling us that he was from the mortgage company and wanting to 

know if we were occupying the property. I said, yes, we live here. This has 

created a huge strain in our family and caused an enormous amount of 

stress. Our children have been affected by this, as well. 

I have stacks of these stories of this conflict between foreclosure—can’t we just change this policy and suspend the foreclosure proceedings when a modification is underway, not keep it 

going forward and create this enormous confusion and stress for 

America’s families? 

Mr. LOWMAN. So the new process prescribed by HAMP that was 

instituted this summer would necessitate that we enter into the 

modification process and engage with the customer to initiate a 

modification prior to the commencement of foreclosure. So that is 

the process that is happening today. 

The other major key difference today from in the past is at the 

beginning of the onset of the program, the HAMP program and 

other modification programs, we did things based on the statements from the borrower. So we entered into trial modification 

plans based on what they told us over the phone. And then we got 

into the game of collecting documents, not getting the documents, 

I am sure in many cases misplacing the documents. But at the end 

of the day, this period of time just took way too long. So the new 

process is such now that we collect the documents before we enter 

in the trial—set up a trial payment. And really the only thing that 

has to happen in order to make that—— 

Senator MERKLEY. Let me cut you off—— 

Mr. LOWMAN.——a permanent modification. 
31 

Senator MERKLEY. My time is almost out. Have you changed 

your practice to suspend the foreclosure proceedings, not the final 

step, but the whole stream of events? 

Mr. LOWMAN. We have not. 

Senator MERKLEY. I just want to put that forward. 

Ms. Desoer, how about with Bank of America? Would that be 

possible, to set aside the foreclosure operation while you are in the 

modification process? 

Ms. DESOER. That is what we are proposing to consider, but we 

cannot do it independently except on our own portfolio of loans, and 

that is why we are working with the State Attorneys General on 

a suggestion to do that. 

Senator MERKLEY. Well, I think that is one substantial, simple 

step that would have substantial positive consequences, because 

this—the homeowners are completely confused and completely 

stressed by these foreclosure notices, and then suddenly in some 

cases people find out the foreclosure has actually gone through, 

which leads us then to talk about MERS. 

In common law, if you had a stake in a house, you could put a 

lien against the house because you had that stake, and that is captured in our modern law with a contract that is a promissory note 

on the contract side and a mortgage lien on the property rights 

side, and the idea is that if your contract right is violated, you have 

a property right to go back and reclaim your damages, essentially. 

But the separation that has occurred in MERS between the property law and the contract law is creating a lot of court cases. 

We are trying to get the details, but we think there has been a 

case in Oregon that has said, in fact, MERS does not have standing 

if they are not in a situation where they actually have damage, and 

I have your testimony, Mr. Arnold, from last year, your deposition 

where you said MERS suffers no damages. They have no economic 

stake in these mortgages. 

I am very concerned about the legal issues getting resolved, in 

part because this poses a huge systemic risk to our banking system 

as a whole. We are talking here both about the rights of the homeowner being honored, but we are also talking about confusion that 

can throw shock waves through an already challenged system of 

home finance in our country that is important to all of our homeowners. 

Can any of you kind of comment on what needs to be done to 

make sure both homeowner rights are honored and we do not send 

shock waves through our entire economy with this question? 

Mr. ARNOLD. Well, Senator, I would say that one thing that 

MERS does is make all of that more clear. The public can look at 

the MERS system and, free of charge, find out who the servicer is 

and who the note holder was. That was never available in the public records prior to MERS. So that gives a homeowner the two key 

players that they would have to negotiate with for a modification. 

So with MERS and the land records and the MERS system keeping 

track of the servicers free of charge, consumers can get that information and go straight to a modification. With regard to the foreclosure, MERS, if the foreclosure is done in the name of MERS, we 

have a nationwide requirement that the promissory note be presented at the time of foreclosure. That is more strict than most 
32 

States. Likewise, there can be no lost note affidavit in a MERS 

foreclosure. 

Senator MERKLEY. So the person who represents MERS at the 

foreclosure proceeding is normally someone you have designated as 

a certifying officer of the company. How many folks have you designated as certifying officers, essentially temporarily made them 

members of your company in order to execute this process? 

Mr. ARNOLD. Well, it is not temporary. It is limited. They are 

limited to seven specific items that they can do for MERS. There 

are 20,000 of those nationwide. 

Senator MERKLEY. OK. I am sorry. I am out of time. But it has 

created legal confusion and that is an issue and I am sorry. Thank 

you all very much. 

Chairman DODD. Thank you, Senator. 

Senator Bennet. 

Senator BENNET. Thank you. Thank you, Mr. Chairman. Thank 

you for holding this hearing, although I have to say it is so depressing how little we have moved in the last 3 years on these questions. 

I wanted to just clear something up because I did not understand 

the answers to the question. On the HAMP program, I wrote in 

February to the Administration suggesting that servicers that were 

part of the HAMP program ought to not be able to pursue foreclosure while they were working on modifying loans, and it was my 

understanding that last June the Administration put forward a policy like that, and you just spoke to that. I am confused about what 

the status is from the servicers’ perspective. Are you in a position 

now to be able to say, we are not going to pursue foreclosures while 

we are doing modifications, or it sounds to me like it is not as simple as I may have imagined it was, or straightforward. 

Ms. DESOER. We are not in a position to say that we are not 

going to follow the foreclosure process in parallel to a modification. 

If there is a modification in the process of being considered, we will 

not proceed with the foreclosure sale. So the work that I suggested 

that we consider doing, which is eliminating that parallel process, 

has not yet taken place. 

Senator BENNET. What are the gating items there preventing you 

from being able to do that, or what—— 

Ms. DESOER. Investor requirements. 

Senator BENNET. OK, which brings me actually to my second 

point—— 

Ms. THOMPSON. Senator Bennet? 

Senator BENNET. Yes? 

Ms. THOMPSON. May I address the question about the HAMP? 

Senator BENNET. Sure. 

Ms. THOMPSON. That would be Supplemental Directive 10–02, 

which for HAMP does halt the foreclosure process, but only, in 

most circumstances, only for loans that are not yet in foreclosure 

at the time that the modification review is initiated, so that if the 

foreclosure process has already started proceeding for one reason or 

another, that process is allowed to continue to the point of sale 

while the loan modification review goes on. So while Supplemental 

Directive 10–02 was helpful, it did not relate back to cover loans 

that were already in the foreclosure process. 
33 

Senator BENNET. You have heard the stories here today, and I 

want to say that my office is facing exactly the same thing Senator 

Tester’s office is facing. I have had 22 months of town hall meetings, people bringing their documents and the transcripts of voice 

mails and e-mails from servicers telling them that what they are 

doing is OK, that they are in compliance with the loan, and then 

they find out that they have been hit by a penalty of some kind 

or another. 

Mr. Chairman, there was an article in Sunday’s Denver Post that 

I would ask to be included in the record, and I will not go through 

the two stories, but one of the people that were affected by all this 

sort of ‘‘through the looking glass’’ business, Wendy Diers, she said, 

‘‘We did everything we were supposed to do. This is such a boondoggle of a mess,’’ she described. 

Senator BENNET. And it is a boondoggle of a mess, and I think 

there is some—and the thing that I cannot understand is where 

the misalignment of interest is here, because we have millions of 

people in this country that are underwater in their mortgages. We 

know that. I, for one, do not believe that it is possible to prop up 

the value of all of these houses. That is impossible and it would be 

foolish public policy to do that. 

But it seems it is clearly in the interest of people that can pay 

on their loans at a reduced value and who want to stay in their 

home, it is clearly in their interest to do that, right? 

For investors in these securities, it would seem to me that it is 

clearly in their interest to have the homeowner be able to do that, 

because the value of the modified mortgage is worth more than the 

proceeds from a foreclosure sale would be, it would seem to me, 

and I could be wrong. Any of this that you want to correct, please 

correct. 

The third piece is that it is clearly in the interest of the adjacent 

homeowners that that loan be modified and that that person remain in their house, because if they do not, the value of their house 

is just going to go down, and that can be repeated over and over 

and over again until the neighborhood is actually the entire United 

States of America, not just one place or a State that has been particularly hard hit, but the entire economic recovery in many respects rests on our being able to get this sorted out. That is a selfinterest that would seem to be present. 

So the question I have is, and we have had this hearing and 

other hearings and here I am at the end still completely unclear 

where the misalignment is. Why can we not get all of the self-interest aligned in a way that will allow us to proceed expeditiously so 

that—not just so that my constituents can get on with their lives, 

which they desperately want to do, but so that we can get this 

economy moving again. Professor? 

Mr. LEVITIN. I think there are at least two problems. One problem is mortgage servicers, and I think you have heard a fair 

amount of testimony already at this hearing about the incentive 

alignment problem. Simply put, foreclosure is either less costly or 

more profitable than modification in many cases. 

The second problem—— 

Senator BENNET. Not as far as the investors are concerned, 

right? 
34 

Mr. LEVITIN. No. This is the servicers—— 

Senator BENNET. Right. 

Mr. LEVITIN.——representing their own financial interests, which 

are—the servicers’ financial interests do not match the investors’. 

The second problem comes with loans that are not being serviced 

by a third-party servicer but with loans that are actually on bank 

books. There is a strong disincentive for banks to recognize losses 

on mortgages quickly. 

Senator BENNET. What percentage would you say of—— 

Mr. LEVITIN. Around 40 percent of mortgages in this country are 

not securitized. We do not actually know how many mortgages 

there are in the United States, which is just kind of an astounding 

failure, regulatory failure to gather information. No one knows the 

number. Somewhere between 50 and 60 million. 

But of the mortgages that are on bank books, if the bank—if the 

loan defaults, the bank can stretch out the period of time before 

foreclosure. That means that the bank is stretching out the time 

before it has to recognize the loss. If the bank modifies the loan 

now, and let us say it writes down principal now, it is taking an 

immediate loss and this is particularly a problem with second liens 

because almost all second lien mortgages are on banks’ books. 

There are around $400 billion in second lien mortgages out there. 

That is roughly equal to—they are held by the four largest banks, 

Bank of America, Chase, Citi, and what am I forgetting—Wells. 

That is roughly equal to the market capitalization of those four 

banks. So if they started writing off their second lien mortgages, 

they would have no capital left. They would be insolvent. And that 

creates a strong incentive not to recognize losses and to just try 

and pretend that they are not there. 

Senator BENNET. Mr. Attorney General, did you want to respond? 

Mr. MILLER. Just briefly. First of all, you gave my speech, although you gave it better than I give it. I just agree with you completely on the fundamental alignment of interests that you describe. 

And I think there is a series of factors. Some were just mentioned, including the second lien and the recognition of loss. In addition, I think there is a question of putting enough resources into 

the servicing process. There has been an enormous demand on 

what they need to do. They have added a lot of people. I think they 

have to add more and add more resources. 

And then I think, additionally, the quality of decisionmaking 

that—it is hard to tell, and we hope to get to the bottom of this, 

as well, but I think that in the decisionmaking they make on modifications, they are not making some of the modifications that they 

should for a whole variety of reasons. In some cases, I think competency. In some cases, I am not sure. 

Also, there is a culture here to get over that servicers traditionally—their job was to collect money and turn it over to investors, 

and now they are being asked to do something totally different, to 

make these judgments, really to underwrite loans maybe for the 

first time. For someone that is used to collecting the full amount, 

to write off part of it, there is a hurdle there. And I think they are 

getting over that hurdle more and more all the time. 
35 

But our belief, the State Attorney Generals’ belief is that, like 

yours, that a lot more modifications should be made that are not 

being made. We are going to try and find out why that is happening, and as I say, we are working a lot with the servicers to figure out what the solution is. But I just—I could not agree more 

with the fundamentals of your question and your statement. 

Senator BENNET. Ms. Thompson? 

Chairman DODD. Could I, just quickly, I appreciate the Attorney 

General’s comment on that. But just quickly, I just want quick 

yeses or noes, or very brief answers. Do you disagree with what 

Senator Bennet has said, beginning with Barbara? 

Ms. DESOER. No. We are the largest U.S. consumer bank and our 

financial interests are aligned with consumers being healthy and 

the economy recovering. So I agree absolutely, when you look at a 

community and the impact that a foreclosure has on a community 

versus a household being able to stay together, a family being able 

to send their kids to school—— 

Chairman DODD. That is longer than a sentence, Barbara, but I 

appreciate it. 

Ms. DESOER. I am sorry, but we are very aligned. I agree. Yes. 

Chairman DODD. Just quickly, yes or no. I suspect everyone is 

going to agree with what Senator Bennet said. Is that true? 

Mr. ARNOLD. Yes, sir. 

Mr. LEVITIN. Yes. 

Mr. LOWMAN. Yes. 

Ms. THOMPSON. Yes. 

Chairman DODD. Again, here we are—— 

Ms. THOMPSON. If I may, we spent at the Center a lot of time 

last year trying to answer that question, why it is that servicers 

have failed to modify, and produced this report looking very carefully at the legal and financial incentives that they face, and the 

key charts from that are reproduced in the testimony submitted 

today. 

There are three key recommendations that we believe would do 

a great deal to align servicer incentives with homeowners, investors, and the American public at large, and those three are what 

both Senator Merkley and Senator Bennet have talked about, ending the two-track system and requiring in all cases that evaluation 

for a loan modification be performed before the foreclosure process 

is initiated and requiring that a loan modification be offered to the 

homeowner if, in fact, it is going to provide a net benefit to the investor. So if the investor will profit from a loan modification, it 

should be offered to the homeowner before fees start getting tacked 

on and the foreclosure process starts down the road. 

Chairman DODD. I agree with that. 

Ms. THOMPSON. That is one. Two is there are complicated rules 

imposed by the credit rating agencies and in the pooling and servicing agreements that make it—that reduce repayment of servicer 

expenses when there is a modification. So when there is a foreclosure, servicers get repaid off the top before the investors get 

anything, all of their fees and advances, all of those broker price 

opinions, their title work, their foreclosure fees, all of that gets 

paid back directly to the servicers when the home is sold in a postforeclosure sale. The repayment of those advances is delayed and 
36 

much less clear if there is a modification, and so that is almost certainly a significant disincentive in many cases to perform modifications and there ought to be guidance issued that would clarify that 

you can get repaid from the pool when you do a modification for 

your advances so that servicers would get their legitimate advances 

repaid. 

The third thing is we have talked about the role of fees in pushing people into foreclosure and encouraging servicers to have people in default because then there are these extra fees that they can 

tack on that they can then put in their pocket to offset the costs 

of foreclosure. And so we believe that you need to regulate those 

default fees to reduce the incentives to put homeowners into foreclosure. 

Chairman DODD. Thank you very much. 

Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. 

Too many homeowners in our country, they face the threat of—— 

Chairman DODD. Is your microphone on? 

Senator AKAKA. Thank you very much, Mr. Chairman. 

Too many homeowners in our country have faced the threat of 

foreclosures, and hearing our witnesses here, I think of Hawaii as 

suffering from this. At this time, the foreclosure rate in October 

was the 12th highest in the nation. In September of this year, families in Hawaii faced 67 percent more foreclosures than in September 2009, and 172 percent more than in September 2 years ago. 

This underlines how alarming the reported problems among mortgage service providers are, and so without question, we must do 

more than we are doing now, and our business here really is legislation. Mr. Levitin did mention it is not the law. It is not being 

complied to, and so that is not the problem. Many problems have 

been addressed here, and this issue is very complex. 

So let me cut this down to asking three of you, and that is Mr. 

Miller and Mr. Levitin and Ms. Thompson to help us in what we 

are trying to do, and that is what recommendations do you have 

to protect homeowners in foreclosure proceedings from abuse of 

legal practices? 

Chairman DODD. Ms. Thompson, you just answered that question, I thought, pretty well in your last three things you said. 

Ms. THOMPSON. Yes. 

Senator AKAKA. Do you have something to add to that? 

Ms. THOMPSON. I do. We have more recommendations in our testimony. One key point about compliance is that you can get much 

better compliance if you fund quality mediation programs and you 

fund legal services attorneys. The mediation programs in New York 

City and Philadelphia are reducing the foreclosures there by about 

50 percent. People that participate in the mediation programs, 

about 50 percent of those avoid foreclosure. So if you can get the 

servicers into a program where they are forced to focus on that particular loan and get it out of the automated processes, you are very 

likely to avoid many foreclosures and reduce the numbers dramatically. But those programs need to be funded. 

The other thing is that the Dodd-Frank Wall Street Reform Act authorized $35 million in funding for legal services for legal services programs to assist low-income homeowners and tenants facing 
37 

foreclosure, but that money has not been appropriated. All of the 

robo-signing allegations were only discovered, brought to light by 

aggressive, competent attorneys working very diligently to represent their clients. Homeowners cannot negotiate these kinds of 

issues without lawyers. Low-income homeowners particularly need 

the lawyers. Funding for legal services in foreclosure defense has 

taken several hits in recent years. We urgently need that funding. 

Senator AKAKA. Thank you for that. 

Mr. Miller. 

Mr. MILLER. I would underscore the funding set of issues. We 

have Federal funding for our hotline in Iowa that is working very 

well to try and help people modify loans and the whole system that 

supports that. Legal services also is terribly underfunded by the 

Congress for, I know, a variety of reasons. I am also a former legal 

services attorney. 

In terms of the substantive legislation, you know, it might depend on how we come out with our investigation and our resolution 

and what we find. Hopefully, we can solve these issues, but if we 

can’t, you might want to think about regulation on the fees—— 

Chairman DODD. Tom, can I jump in there? How long do you anticipate you Attorneys General are going to take on this? 

Mr. MILLER. It is hard to tell, Mr. Chairman, but we are thinking in terms of months rather than a year or longer. But it depends 

really on how far we get, how the negotiations get, and as we expand the scope, like you and I believe strongly we should, that expands the time somewhat, as well. 

Chairman DODD. Excuse me, Dan. I apologize. 

Senator AKAKA. Sure. 

Mr. MILLER. But maybe something on the fees that are allowed. 

I agree that the forced insurance, there has been a huge abuse 

there that need to either be corrected by agreement or by legislation. The same thing with the dual track of foreclosure and modification at the same time. If you all could solve the second lien 

problem, which I think is a daunting problem, we would all appreciate that. You might want to take a look at that, as well. 

Senator AKAKA. Thank you. 

Mr. Levitin. 

Mr. LEVITIN. All right. I would certainly support everything that 

Ms. Thompson and Attorney General Miller have suggested, but I 

would also suggest that you might want to consider an alternative 

that would go a bit farther, namely taking servicers out of the loan 

modification process altogether. Servicers were never in the loan 

modification business. They are in the transaction processing business and we are trying to get them to enter a business line that 

they are not used to doing, and to expect them to succeed in that 

is really asking too much. 

And the way to get them out of that would be having some federally administered loan modification program where—you could do 

this under the bankruptcy power. It would not necessarily have to 

be done through bankruptcy courts, even though that would certainly be one way, and it would not necessarily have to be a repeat 

of the Chapter 13 cram-down legislation that the Senate failed to 

pass a couple of years back. 
38 

You could do this instead through something like a mortgageonly bankruptcy chapter where you have an immediate triage between homeowners who can pay and those who cannot, and if they 

cannot, have an expedited foreclosure proceeding. So if it is an 

empty house, move it back on the market as fast as you can. But 

if the homeowner can pay, give them a cookie cutter modification, 

including principal reduction, and if you did something like that, 

that would certainly get rid of the second lien problem altogether. 

I mean, you would have another problem potentially, which is that 

you might have four very large insolvent banks, but that is a problem that exists whether or not you recognize the losses now or 

later. 

Senator AKAKA. Thank you. My time has expired. 

Chairman DODD. Thank you very much, Senator. 

Senator Reed. 

Senator REED. You anticipated my question, Professor Levitin, 

which is basically how do we deal with millions of individualized 

cases given the general model of the HAMP program, which applied to a specific case requires someone to weigh the ability of a 

borrower to pay, the job prospects, etc., which all comes down to 

some type of impartial—both sides respecting the impartiality of 

the decisionmaker saying, well, this is what we are going to do. 

You might be aware that I became aware through Senator 

Whitehouse’s hearings in Rhode Island that the Southern District 

of New York, their bankruptcy judges are participating in a program like this under their mediation procedures. They have taken 

a step forward, and apparently it is working in that they are quickly, as you suggest, finding debtors who in no way can pay given 

their job circumstances, and the pain and the uncertainty is over. 

The pain might linger, but at least the foreclosure is completed. 

But for others, the modifications go into effect, they get on with 

their lives, etc. So I think that suggestion is excellent. 

You mentioned previously, and I will get comments from others, 

too, that you were talking about some type of global settlement, because of the suggested implications on the balance sheets of the 

banks and the overall economy. What are the components, in addition to this bankruptcy-type approach, which you suggest should be 

in this global settlement? 

Mr. LEVITIN. You need to make sure that there is quiet title on 

real estate in the United States. That is also something that bankruptcy can do. That is something that bankruptcy courts routinely 

do, is award quiet title. So that is one way of sorting through any 

of the chain of title problems. 

I think, ultimately, our real problem is that there are losses in 

the system and we have to figure out how to allocate them. There 

is not a solution where everyone walks away happy with no losses. 

Right now, those losses are being put on mortgage-backed security 

holders and, frankly, on average homeowners, not just the ones in 

foreclosure but the ones who live next door and have the vacant 

property next to them where the lawn is not being watered and so 

forth. 

The losses have to go somewhere. They can go on the banks. 

They can go on the investors. They can go on the homeowners. Or 

they can go on the Government. Those are the four choices. I cer-
39 

tainly do not like the losses going on the Government. We made 

a move that way in 2008 and I do not think there is a lot of appetite to see that expand. The homeowners—— 

Chairman DODD. Very perceptive of you. 

[Laughter.] 

Mr. LEVITIN. That might get me tenure. 

[Laughter.] 

Mr. LEVITIN. I do not think anyone wants to see these losses 

borne by the homeowners, but that is where it is falling right now. 

So really, this is kind of a question between the investors and the 

banks, and frankly, I think the investors have really the—are the 

more innocent party in that they did not originate. There were a 

lot of problems on the origination end. That was not the investors’ 

fault. I mean, certainly they bought the stuff and they made a market for it, but in many cases, the investors are saying now, we 

thought we were buying better paper than you sold us. You said 

you were selling us B-plus paper and it turns out this was actually 

C-plus paper. We want our money back. 

But we need to recognize that we have to allocate the losses, and 

we can either just avoid that for a time, but recognize that as long 

as we do not specifically address the loss allocation, we are making 

a choice, and that choice is stick all the losses on the homeowners 

and the investors and that is really not where they should be. 

Senator REED. Let me just make one point, and I do want to ask 

the Attorney General about his comments regarding the direction 

his investigation is going and his recommendations and also give 

the opportunity for the financial representatives to respond. This 

phenomenon, and Ms. Thompson said it here, if you look back, it 

is deja vu. This situation was bad a year ago. It is worse today, and 

it might get worse. If the strategy is to just try to hope for a recovery independent of anything we do here of solving a problem, we 

could find ourselves coming back here in months or years from now 

with even a worse situation, and investors being more frustrated 

and more willing to sue the banks, etc. So there is, I think, a problem for all the institutions, the homeowners, the financial institutions, and we have to start moving toward a solution, not simply 

waiting, because it seems to be getting worse in my mind. I hope 

I am wrong, but that is the impression. 

Just quickly, General Miller, will your recommendations touch 

upon some of these discussions we have had in terms of a bankruptcy-like approach to settle these individual disputes between individual homeowners and banks, take the servicers out of the middle, if you will? Will it talk about some type of distribution or sharing of the losses, which Professor Levitin suggests could be substantial? Just give me an idea of where you think you are headed 

with your recommendations, not specifically, but what categories. 

Mr. MILLER. You know, there could be some recommendations, 

but the core of what we are trying to do will be an agreement with 

the servicers, with the banks that are servicers, and, you know, we 

are trying to figure out ways to change the paradigm with them 

staying in place. They are not going to agree to the kinds of fundamental change that you have talked about. 

So our goal is to change the paradigm within the current system 

so that it functions, and ideally, I think, from our point of view, so 
40 

it functions the way Senator Bennet described that it should function. That is certainly our goal, and what we want to do is have 

some provisions—what we are talking about now are some provisions, some requirements that they would have to live up to—only 

one contact person, deal with the dual track, and other issues, as 

well. 

And then I think there would have to be some way that it would 

be enforced, maybe a monitor is something we have talked a little 

bit about, maybe some penalties if they do not comply. But where 

we are at right now is to try and change the paradigm within the 

current system of the bank servicers that you see in front of you 

and the other large three. 

We talk about and we struggle with sort of the dysfunction of the 

system. We have not gotten to the point of the resolutions you have 

talked about, but it is a system that was designed, as I mentioned, 

to collect money and turn it over to investors and now it is a much 

different system that has some issues concerning reliance on fees 

to pay for some of the new resources they have to bring in that we 

talked a little bit about earlier. The conflict of the second liens are 

involved there. 

But I guess what we are still trying to do is have enough change 

within the current players to resolve some of the issues so that we 

have a much better system, the best system that we can have so 

that when that person comes before them and asks for a modification and the calculation is done quickly and fairly and accurately 

and the modification they are requesting produces more money for 

the investor than foreclosing, then that happens. I do not think it 

does happen that often now. I think there are some fundamental 

problems. 

So we are trying to do what I am trying to say. We are struggling 

with how to do that, and if the Committee and the Committee staff 

have any suggestions to us, we would love to hear from you. We 

are talking to the investors. Last week, Patrick Madigan, our Assistant who is the lead of this, talked to the consumer groups and 

said what we should do. This is a very serious attempt to solve a 

very difficult problem. We are going to do the best we can and let 

the chips fall where they may from that. We will need, ultimately, 

agreement from the banks, and so far, our discussions, as I said, 

have been productive. 

Senator REED. Well, I appreciate what you and your colleagues 

are doing. It is very important. But just again, your process, because of the negotiations, because of the complexity, we expect— 

you expect months from now to have recommendations which 

might take even further time to implement, and there is a real 

question, I think, of do we have that time, and not just in terms 

of the individual homeowners but the economy. And if the economy 

gets worse for reasons not directly related to this, such as the sovereign debt crisis overseas, etc., then the foreclosure problem we 

face today, you know, the bottom keeps slipping down, down, down, 

down, down, and this problem becomes really tremendous. 

I want to give an opportunity to—— 

Mr. MILLER. Yes, and we feel all that pressure, by the way. 

Senator REED. Good. So do we. 
41 

Mr. MILLER. I know you do. And again, there will not be recommendations. If there is an agreement, there will be an agreement and we will go forward right from there. 

Senator REED. But let me ask Ms. Desoer and then also Mr. 

Lowman this. Implicit in, I think, the comments, and I do not want 

to put words in your mouth, of Professor Levitin is that there could 

be potentially significant losses here, and the question really is are 

efforts being made to minimize your losses, which, frankly, if I was 

a business person, that might be my first goal on behalf of the 

shareholders, or to effectively deal with these home mortgage modifications to follow the HAMP guidelines, etc.? And I suspect in reality there is probably a constant tension and conflict to that. But 

I just want to give you an opportunity fairly to comment on this 

whole discussion with that. 

Ms. DESOER. Thank you for the opportunity. There is not conflict 

in our company. Any dollar, any resource, any capability that is 

needed, our business has the support of that. There is nothing 

more important to recovery of Bank of America’s brand than doing 

this right, listening to people like Ms. Thompson, understanding 

the Senators’ individual situations, dedicating people, training people to do it. 

We have moved people. As General Miller indicated, we have had 

to build a brand new capability, people, process, technology, to deliver it. We have moved as many resources, experienced underwriters, others who have experience into the servicing space to 

build that. We have made progress, but there is no question there 

is still great inconsistency that we are dedicated to eliminating. 

But it is not a constraint, or it is not that someone is saying, no, 

that will mean a lack of profit for the company. This is the most 

important issue in the company and there is no constraint on dollars that we will put against it. 

Senator REED. Mr. Lowman? 

Mr. LOWMAN. We have sustained billions of dollars of losses in 

this whole crisis as a bank, and I believe our interests are, in fact, 

aligned with other investors. The fact is, the best outcome is to 

keep a person in their home and to keep them paying, and we are 

all advantaged by doing that. We do not have anything to gain by 

having someone go into foreclosure. And so I would just echo Barbara’s comments. Our interests are aligned and we are doing everything we can. 

Senator REED. Just a final point, and I think this echoes one of 

the recommendations that Ms. Thompson has made and which is 

included in the legislation I have, which is basically to require that 

a full attempt to modify a loan be made prior to pursuing foreclosure. That might require renegotiating your agreements with 

the servicers and with the trusts. I do not know. But is that something that you would consider as a policy initiative for the bank to 

take immediately? 

Mr. LOWMAN. Well, I would say that as we have described in the 

HAMP program, it is a requirement today. So we have to offer a 

modification to a customer before we commence with the foreclosure process. So by definition, as time goes on, it will have to 

have happened before foreclosure. 

Senator REED. Ms. Thompson, any comments? 
42 

Ms. THOMPSON. As I said earlier to Mr. Bennet—first of all, Senator Reed, thank you so much for your work on supporting servicing reform. We greatly appreciate it and your bill, if enacted, 

would be a very important step forward. 

As I said in response to Mr. Bennet’s concerns earlier, in our 

view, the HAMP program—what Mr. Lowman just said is, over 

time, we will see that a modification will be offered, and the problem is that ‘‘over time’’ means that there are going to be tens and 

hundreds and perhaps millions of foreclosures that occur until you 

get to that point where a loan modification is, in fact, offered before 

a foreclosure, and over time, if you are waiting for over time, you 

are going to see millions of dollars of fees piled onto homeowners’ 

accounts, which makes a modification much more difficult. 

Senator REED. A final word. The Chairman has been very gracious here. 

Mr. LEVITIN. I think it is important just to remember that 

HAMP—that requirement that the modification be offered only applies to HAMP-eligible loans, and only about one in six loans that 

is currently 60-plus days delinquent is HAMP-eligible. So we have 

a problem of HAMP being a problem that just had too narrow of 

a focus and that really does not solve the problem. 

Senator REED. Thank you, Mr. Chairman. You are most kind. 

Chairman DODD. Thank you. Let me just—because these are important. Attorney General Miller, at the outset of my opening comments, I talked about the importance of getting this Financial Stability Council that we established in the financial reform bill to anticipate systemic risk and to collectively work as a body chaired by 

the Secretary of the Treasury, along with the FDIC and the OCC. 

There are 10 members of that, an independent member, and five 

others are part of it. This seems to me like a classic example, one 

that we did not anticipate necessarily when we drafted the legislation, but exactly—I mean, we are in a crisis with this. Now, you 

could argue that it is not yet a systemic crisis that poses the kind 

of risk we saw in the fall of 2008. But no one can argue we are 

not in the middle of a crisis. 

Now, the idea of this, of course, was to minimize crises so that 

they do not grow into the large systemic crises. Have you had any 

contact with the Secretary of the Treasury or is there any communication going on between the Attorneys General and this Council 

or the Chairman of it, the Secretary of the Treasury, or their office 

to begin to talk about what the role of the Federal Government 

might be in formulating an answer to all of this? 

Mr. MILLER. We have not had any contact with the Council. We 

have repeated contact with the Department of Treasury, with Assistant Secretary Michael Barr and his staff. We have developed a 

terrific ongoing relationship with them. We talk about these issues 

and try and help and support each other on these issues. So we 

have had a lot of discussions with Treasury, but not with that particular Council. 

Chairman DODD. Again, I talked privately with Senator Warner 

and others. I do not know if Senator Merkley has a similar 

thought. I am going to use this forum here obviously in a very public setting to urge the Secretary of the Treasury and others to convene that Council, to begin to work with you and others so that 
43 

there is a role here to examine this question in seeking broad solutions to this question. So my hope is they will hear this request to 

pick up that obligation that we have, I think, laid out in that legislation. 

I want to ask, if I can, also as well both you, Ms. Desoer and Mr. 

Lowman, to respond, if you could, to the suggestions that Ms. 

Thompson made regarding the three that were raised. And anyone 

else can jump in on this, but I would like to get your response to 

them. 

First, she argues the elimination of the two-track system, which 

we just discussed, and as Mr. Levitin pointed out, only one in six— 

and, again, having been very involved in the crafting of HAMP, you 

know, we were trying to put together a bill here in this Committee, 

and it was very awkward and obviously trying to get a majority, 

getting 60 votes and doing the best we could to have some answer 

to all of this at the time. It is not exactly what I would have written if I could have written it alone and passed it. But it is what 

we were able to get done through a very difficult mine field politically here in the institution. 

But I want to get your response to the elimination of the twotrack system. Forget whether HAMP requires it or not. What is in 

your interest, what would you like to see happen here in all of this, 

regarding that homeowners are fully evaluated for loan modification before the foreclosure is initiated? 

Second, she proposes that failure to offer loan modification where 

such a modification is net present positive—in other words, where 

the modification had a better return for investors than foreclosure, 

it would be allowed to be used as a defense against foreclosure? 

And, third, the principal reduction should be mandatory under 

HAMP. I have been advocating that for almost 4 years, that principal reduction would really address this issue very directly. But I 

would like to get—Mr. Lowman, why don’t we start with you? We 

always have Ms. Desoer going first. We will have you go first here. 

Give me your answer to these three. Are you in favor of them or 

not? And why? 

Mr. LOWMAN. So, first of all, with respect to the two-track system—— 

Chairman DODD. Right. 

Mr. LOWMAN. You know, as I mentioned, the HAMP program already requires—— 

Chairman DODD. I know, but forget that for a second. What 

would you like? Would you be willing to accept what she has argued for here? 

Mr. LOWMAN. I think we have to be careful with that, and I just 

believe that, you know, we have now a process inside of our company where every defaulted borrower gets linked up with a single 

person and there is single accountability—— 

Chairman DODD. Well, how do you address the point she raised 

earlier? If you are going through and you have got a foreclosure 

process going and all of these costs are mounting up, it seems to 

me you are working against yourself. In fact, if you are trying to 

get some modification here, would it not be wiser to go with the 

modification? Then if that falls apart, then go to foreclosure. 

Mr. LOWMAN. Right. So that is currently what we—— 
44 

Chairman DODD. But it is a dual track. You are going both at 

the same time. 

Mr. LOWMAN. We actually start the modification process much 

sooner than when a borrower goes—you know, is referred to foreclosure. We start the modification process literally with the first 

talk-off. 

Chairman DODD. OK. So you reject that. Tell me about number 

two. 

Mr. LOWMAN. So to make sure I understand number two, can you 

repeat it? 

Chairman DODD. Number two, she proposes—and correct me if 

I misspoke here. She points out that the modification has a better 

return for investors, to investors than foreclosure, they be allowed 

to use that as a defense against foreclosure. 

Mr. LOWMAN. So today, the way the process works is we, you 

know, run the net present value models that we use to determine 

whether or not we should foreclose or modify. And in the cases of 

where it is in the best interest of the investor to modify, we offer 

a modification. 

Chairman DODD. Well, if there is a net present value that makes 

it more valuable than foreclosure—I mean, using a model is one 

thing. But, I mean, in these individual cases, if that turns out to 

be the result—— 

Mr. LOWMAN. That we should modify the loan, then it should be 

modified. 

Chairman DODD. How about number three, principal reduction 

mandatory? 

Mr. LOWMAN. So principal reduction, first of all, we are participating in the HAMP principal reduction program which was recently rolled out. All of our analysis indicates that what is most important is that borrowers have affordable mortgage payments, and 

we have got lots of experience, having done many mods. And we 

do that by reducing the interest rate, by extending the term, and 

by deferring principal where necessary with, you know, no interest 

attached to that. We as a servicer have a duty to our investors to 

minimize losses, and obviously principal forgiveness potentially increases losses. 

And then, last, I think if we want to rebuild the U.S. mortgage 

market and continue to have investors and banks have confidence 

in the market, we need to ensure that the collateral values are 

there. 

Chairman DODD. Now, I understand that, but going back—and 

I recall 4 years ago making the case. There was a study done on 

a square block in the city of Chicago. One foreclosure in that 

square block immediately caused the lowering of value of every 

other property on that block immediately by 5 percent. You end up 

with two and three foreclosures in a city block, and you get, obviously, a larger impact. 

Why wouldn’t it make more sense just to go directly at that principal issue which makes a greater possibility that homeowner will 

be able to afford that mortgage and avoid the kind of cascading effect we see in these neighborhoods, which obviously can work to 

your interests? 
45 

Mr. LOWMAN. We are able to achieve affordability with the tool 

set that we have today, which includes the deferment of principal. 

So you get to the same end state. 

Chairman DODD. I wish that were the case. 

Ms. Desoer, how about responding to those three points? 

Ms. DESOER. As I have discussed, we are very open to discussing 

changes for the existing pipeline that is going through the dual 

track to take it away. I agree with Mr. Lowman that with everything we have done, hopefully nobody who is eligible for a modification ever gets to the start of a foreclosure, but we know we have 

got a pipeline to work through, and so we are amenable to that. 

On the second issue, I agree. And then on the third issue of principal reduction, we do have a proprietary program that we are now 

executing with 40 States on a principal reduction program, and we 

are participating in the principal reduction program of the hardesthit States with Government funding, and those are the places 

where it is the largest issue. 

Thank you. 

Chairman DODD. Senator Merkley, do you have any additional 

questions you would like to raise? 

Senator MERKLEY. Yes. 

Chairman DODD. I am going to leave the record open, by the 

way, for a few days—this is awkward, obviously, with caucuses 

around here and everything else—for other Members to submit 

questions to the panel. 

Senator MERKLEY. Thank you very much, Mr. Chair. I just wanted to clarify a couple of points. 

One is I know that we sought to create a safe harbor for the 

servicers from the investors so that they were following the HAMP 

program, that they would be in that safe harbor and not subject 

to suits. That is a real concern. Did the safe harbor not provide 

enough protection to disconnect the foreclosure track from the 

modification track? And do we need to take action here to provide 

an expanded safe harbor? 

Because of the constituents streaming in our doors with the enormous stress connected with working on a modification and yet 

some other group of folks somewhere within the same servicer are 

pursuing aggressively every single step on foreclosure, people are— 

it just seems like the two parts are not talking to each other, and 

they are enormously stressed over this. And it seems like if there 

is a good-faith modification effort under way, the foreclosure process ought to be shut down until it becomes clear that modification 

will not work, and then, OK, well, it gears up again. 

What do we need to do to help create the ability—and, Ms. 

Desoer, since you referred to that you are working on this, what 

do we need to do to—do we need to do anything? What needs to 

be done to help create the legal framework that will allow you to 

take a step that would be a tremendous step forward for American 

families? 

Ms. DESOER. Well, first, the safe harbor has enabled us to get to 

some of those 700,000 permanent modifications that we have done 

and certainly the 85,000 that we have done under HAMP, because 

without that not all of our investors would have agreed to those 

modifications as many do today. So that has been beneficial. 
46 

On the dual track, for about 23 percent of our servicing portfolio 

where Bank of America is the investor on those mortgages, we 

have the ability to do something about that because we have the 

authority as investor as well as servicer. But for the rest of the investors, it would take their approval to make a change, and that 

would include, you know, the Government-sponsored enterprises 

and other private investors as well. 

Senator MERKLEY. So that is a process you are actively pursuing? 

You are requesting those changes in the servicing contract? 

Ms. DESOER. That is what we are in the early discussions of with 

the State Attorneys General, seeing if we can use that forum to get 

investors to the table as well for consideration in that. 

Senator MERKLEY. So I did not hear you mention anything that 

we need to do here to provide an additional legal framework. Mr. 

Lowman, your sense, do you need additional legal authority to be 

able to set the foreclosure track aside while you are in good-faith 

modification—— 

Mr. LOWMAN. I am not certain that we have the right safe harbor, but, frankly, I would like to follow up on that question. 

Senator MERKLEY. That would be great. This is the last question 

I will ask, though everything we talk about is so complex and interrelated, I have 100 questions, but I will stick with this one. That 

is, Mr. Lowman, you noted that your services, your interests are 

aligned, and, Ms. Desoer, that as a community bank you have a 

huge stake in the success of families and so forth. But is it different when you are contracted to be the servicer but you do not 

own the loan? You do not have a stake in the success of the loan, 

if you will. You have a stake only in the fees generated by the servicing unit. In that situation, is it really the case, as Ms. Thompson 

has been laying out, that there are enormous financial incentives 

as a servicer to pursue this foreclosure track? She has all these 

charts and information that she has analyzed. Is her testimony 

fair? Or if it is not, what is she missing? 

Ms. DESOER. As I referenced, we are not perfect. We have inconsistencies as we have built our capabilities out, and there have 

been customer issues. I do not deny those, and we work every day 

and we have significantly increased the staff to support all of our 

customers who have those issues while we get to the point where 

we can eliminate the issues that we do have. 

What you have to remember is the financial cost is one aspect 

of it, but the reputation cost to the Bank of America brand is a 

very powerful driver of why we are working as hard as we are to 

get this right and why we listen to customers, community groups, 

yourselves, and certainly working with the State Attorneys General. Our interests are aligned in working to get this right, that is 

for a homeowner who has some ability to pay and a desire to stay 

in their primary residence, to stay there. It is in all of our best interests to get to a solution that enables them to do that by taking 

advantage of all the programs and capabilities and resources that 

are available. And that is what we are committed to make happen. 

Senator MERKLEY. If I can summarize what I just heard, you are 

not contesting her analysis of the financial incentives that certainly 

favor foreclosure, but that because the reputation of the bank is at 

stake, that balances that out. 
47 

Ms. DESOER. I have not looked at all of the analysis that I would 

need to so I can confirm or deny that with you. 

Senator MERKLEY. Yes, Professor. 

Mr. LEVITIN. I would just like to point out that many servicers 

are in a very different situation than Bank of America. Bank of 

America has a major lending business in its own name and servicing in its own name. There are plenty of servicers, though, that 

are a servicing unit of a major bank but service under a completely 

different name, and the consumer is unlikely to make any connection between any misdeeds brought by the servicer and the lending 

unit. 

Senator MERKLEY. So, Professor, in that case the financial incentives to pursue foreclosure are not offset by, if you will, defense of 

the reputation of the banking institution? 

Mr. LEVITIN. There would be no—you could not even make such 

a claim. That is correct. 

Senator MERKLEY. Mr. Lowman, do you want to share your 

thoughts on that? 

Mr. LOWMAN. Yes. As a servicer, the calculation that is used to 

determine whether to foreclose or to modify does not take into account our remuneration as a servicer. And I think it is important 

to note that, as I said earlier, we make money, we earn fees on performing loans. And when we modify a loan, we get the servicing 

stream because we have made it a performing loan. And to the extent it is a HAMP loan, we get an income stream as a result of payment from the Government for having successfully modified the 

loan. 

So I guess I do not agree that we are incented to foreclose. We, 

in fact, I believe, are incented to modify. 

Senator MERKLEY. Well, I just want to thank you all for addressing these complicated issues. I do not think we really got into the 

other big piece of this, which the Chair referred to, which is kind 

of the systemic risk that comes from some of the legal issues that 

are being raised and how we can really get our hands around that, 

which is important to both homeowners in terms of their rights and 

to our economy in terms of the availability of credit. But certainly 

I have learned a lot, and thank you very much. 

Chairman DODD. Let me just say that would hopefully be the 

subject matter of the next hearing on the subject matter because 

I think it is a critical point that we have to address. I say this respectfully of others—and I know the Oversight Panel made suggestions somehow this was much larger than a technical issue. And 

I am not disagreeing. That may be the conclusion. But it is just as 

premature to make that conclusion as it is to suggest it is only a 

technical problem. So in either case, language like that can cause 

its own distortions, and I get a little uneasy without knowing the 

implications of what we are doing, making predictions along those 

lines. 

I had a chance to talk to Ms. Desoer and just share—and correct 

me if I am wrong on some of these numbers, but I thought it was 

interesting. Thirty percent of all foreclosures nationwide are in the 

judicial States, I think it is 23 of the judicial States. Of that 30 percent, 68 percent of the foreclosures are in the State of Florida. Is 

that correct? 
48 

Ms. DESOER. Of the 23 judicial States in Bank of America’s portfolio of foreclosures, over 60—close to 60 percent are in Florida. 

Chairman DODD. And 70 percent of the foreclosures nationwide 

are in the non-judicial—the 27 States that are non-judicial States. 

And, of course, in the non-judicial, the burden is on the homeowner 

as opposed to—I mean, I am simplifying this. The Attorney General is probably rolling his eyes as I make that kind of broad, 

sweeping statement. But as I read it, basically the burdens shift 

in a non-judicial and a judicial State. And you correct me, Tom, if 

I am wrong on this, but in the non-judicial the burden is on the 

homeowner to make the case they are not able to make their payments and so forth; whereas, in the judicial, the burden is more on 

the servicing side of the equation? Am I oversimplifying that? 

Mr. MILLER. I think that is right, yes. 

Chairman DODD. So is there any indication to draw from these 

statistics that 70 percent of the foreclosures are in the non-judicial, 

that there is something about that equation that places the burden 

on the homeowners, why we are seeing so much more of the foreclosures occurring in the non-judicial States as opposed to the judicial States? Or am I just reading too much into these numbers? 

Ms. DESOER. Senator, I think it is more related to economic factors like unemployment or housing price declines as to the States 

that are experiencing the greatest level of foreclosures. So I do not 

think Florida is related to the fact that it is a judicial or a nonjudicial State, but to the extent of the economy—— 

Chairman DODD. Well, I agree with that. That would make some 

sense. But, otherwise, where that is not the case, does the judicial 

framework have any strong implication on the outcome in terms of 

a modification versus a foreclosure? 

Ms. THOMPSON. Senator? 

Chairman DODD. Yes. 

Ms. THOMPSON. One point is that, of course, California and Nevada are non-judicial foreclosure States. 

Chairman DODD. Right. 

Ms. THOMPSON. So that makes a big difference. There are some 

studies that show that being in a judicial foreclosure State increases—delays the time to foreclosure, that is obvious, and increases slightly the likelihood that you will end up with a modification. There is some evidence that being in a judicial—— 

Chairman DODD. But not the 37 numbers. 

Ms. THOMPSON. I would not think the numbers would be that 

high. 

Chairman DODD. One other point—and, again, I want to thank 

Ms. Desoer for her sharing this information with me. And, again, 

it is a separate subject matter but one that concerns me, and that 

is that when you are getting—the foreclosed homes that are 

bought—it was not 40 percent. They gave me some numbers—30 

percent. But 30 percent of the foreclosed homes that are bought are 

bought with cash. 

Ms. DESOER. Thirty percent of all U.S. home sales are cash purchases, not just the foreclosed. 

Chairman DODD. I thought it was just foreclosed. 

Ms. DESOER. No. 

Chairman DODD. Of all. 
49 

Ms. DESOER. Of all U.S. home sales, 30 percent are purchased 

with cash, and I can give you the study that is produced monthly 

that shows the mix of how many new homes purchased are purchased for cash or financed with a conventional mortgage or financed with an FHA mortgage as an example. But 30 percent of 

last month’s—and it has been running about that for several 

months—entire home purchases are cash purchases. 

Chairman DODD. And further—and, again, you correct me if I am 

interpreting these numbers in too broad a context. Of that number 

bought with cash, these are not owner-occupied; these are investment properties. 

Ms. DESOER. The vast majority of those purchases are investors 

as opposed to primary homeowners. That is correct. 

Chairman DODD. And any implications of what that means in 

terms of neighborhoods and so forth, as opposed to having owneroccupied versus rental properties? 

Ms. DESOER. If it is concentrated in terms of the mix of investors 

coming into a community, it could mean a shift from primary 

homeownership to rental. But I think the primary indication that 

I was trying to say is that there are investors with cash who think 

that the price of the property is right for them to earn a good return as a rental property. And I think in certain communities 

where, as we acquire the real estate for our own portfolio after a 

foreclosure sale, those properties do sell relatively quickly. 

Chairman DODD. And, again, I am a great advocate that we need 

to increase rental stock in the country. One of the problems is we 

have had so much of an emphasis on homeownership that we find 

a limitation of increasing rental stock, and that has created its own 

set of problems. So I would state that. But is there any correlation 

between having less owner-occupied properties and the value of 

other properties in that neighborhood? 

Ms. DESOER. I do not know the answer to that. 

Chairman DODD. Do you have any idea on that, Mr. Levitin? 

Mr. LEVITIN. No. 

Chairman DODD. Ms. Thompson, any idea? 

Ms. THOMPSON. No. 

Chairman DODD. OK. Well, thank you very, very much. This has 

been—it is a long time but I am glad we—sorry for starting late, 

but otherwise it would have been very difficult to hold all of you 

here. So let me thank all of you for your testimony. I will leave the 

record open so that Members can provide some additional questions. But it has been very, very helpful to hear what you have had 

to say, and I am very grateful to all of you for coming and sharing 

your thoughts with us. 

Tom Miller, the Attorney General, we thank you for what you 

are doing and how hard you are working at this. And I hope you 

might make that call to the Treasury Department and say you 

would like to be hearing what this Systemic Council is also—what 

their thoughts might be on this as well. 

The Committee will stand adjourned. 

[Whereupon, at 6:03 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
50 

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

Thank you Mr. Chairman. 

On October 6th, I called for an investigation into the growing controversy surrounding home foreclosures. This hearing represents what I understand will be the 

only examination the Committee intends to conduct. I hope that isn’t the case. 

At this point, there appear to be a number of key issues that need to be examined 

thoroughly. 

First, we need to determine the extent of the problem. It appears that thousands 

of so-called ‘‘robo-signers’’ working on behalf of banks that service loans, signed foreclosure related court documents swearing that they had ‘‘personal knowledge’’ of the 

facts of each foreclosure case. It now appears that few, if any, of these people had 

such knowledge. 

Second, we need to determine whether the flaws in the process led to improper 

results. In other words, were any homeowners foreclosed upon when they shouldn’t 

have been. 

Third, we need to examine the activities of the law firms that worked for the 

servicers. Many questions have been raised regarding the conduct of these firms 

during their engagement in foreclosure proceedings. 

Fourth, what role did the GSEs and the larger securitization market play in this 

debacle. Did their actions contribute to the problem? Were Fannie and Freddie 

complicit in any way? 

Finally, we need to examine the role of the regulators. Where were they in this 

process? What were they supposed to be doing and were they doing it? If not, why 

not? 

In order to determine the extent of the problem we need to speak with all of the 

major servicers. Unfortunately, we only have a small subset present today. For example, Ally Financial was the first major servicer to recognize that it had problems 

with its process. That firm, among others, is not here today. 

Mr. Chairman, it is my understanding that many, if not all, of the law firms 

under investigation were selected by the housing GSEs. In order to best understand 

how and why these firms were chosen, I believe we need to hear from Fannie and 

Freddie. 

Unfortunately, they also didn’t make the witness list. 

Perhaps the most complex facet of this examination involves securitization. As 

highlighted in the Congressional Oversight Panel’s most recent report, the most severe potential fallout from this will be found in the securitization market. According 

to that report, this could have a devastating affect on our broader financial system. 

On this critical topic we have a professor from Georgetown University, the Iowa 

Attorney General, and finally the CEO of MERS. 

Each witness has an important view point to share with the Committee, but none 

of them represent the views or expertise of the securitizers. Given the complexity 

of this issue, perhaps the Committee should have invited someone from the broader 

securitization community to answer our questions. 

Finally, the regulators are also significant players in this examination. Each of 

the major servicers have regulators onsite in their operations. 

How did those regulators miss the wide-spread foreclosure problems at the firms 

they were regulating? We could ask them, but, unfortunately they are not here 

today. 

Mr. Chairman, I expected this hearing to be focused on the foreclosure process. 

As I have already stated, there is a great deal to examine on this topic alone. 

It appears, however, that this hearing has also become a foreclosure mitigation 

hearing. Mortgage modification is an important topic to be sure, and certainly one 

that warrants its own hearing. 

Nonetheless, if we are also going to examine the issue of foreclosure mitigation, 

we should study the extent to which borrower fraud has distorted the modification 

process and inflated overall foreclosure numbers. 

This is a critical issue considering that the U.S. taxpayer has spent more than 

$50 billion on foreclosure mitigation programs. We need to know where our mitigation efforts are best directed and where our money is being wasted as a result of 

fraud. I understand that there are no witnesses here today that can address the 

topic of borrower fraud. 

Mr. Chairman, I called for a full investigation on this matter in early October because I believed that those who face foreclosure should, at the very least, know that 

the process is being handled fairly and according to the law. While I believe that 

we will learn a great deal from this hearing, I hope that it does not represent the 

Committee’s complete examination of this important issue. 

Thank you. 
51 

PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA 

Thank you, Mr. Chairman, for holding this timely hearing. Too many homeowners 

continue to lose their homes to foreclosure. For approximately one in five borrowers, 

the value of their home is less than what they owe on it. And, high unemployment 

rates suggest that even more families face difficult financial situations and even 

more borrowers may be at risk of foreclosure now or in the future. These challenges 

are not just isolated to the largest housing markets. Hawaii’s foreclosure rate in October was the 12th highest in the nation. 

Homeowners are under a tremendous amount of financial stress right now, which 

is what makes the recent reports of problems within the mortgage servicing industry all the more troubling. The ‘‘robo-signing’’ issue has shed light on other questionable mortgage servicing practices that my colleagues on this Committee and I have 

been hearing about from homeowners in our States for quite some time. They have 

reported that servicers are unresponsive, uncooperative, and disingenuous throughout the loan modification and foreclosure processes. 

Borrowers should expect mortgage lenders and servicers to put forth a good faith 

effort to help them keep their homes. Foreclosure should be servicer’s last resort, 

not its preferred outcome. However, servicers’ decisions to flaunt their protocols and 

contractual agreements indicate that this is not the case. 

We must do more to help distressed borrowers and preserve homeownership. This 

begins with ensuring that servicers are properly adhering to modification, refinance, 

and foreclosure procedures. Borrowers should expect servicers to be accessible and 

to refrain from obstructing homeowner assistance efforts. Mortgage modifications 

and refinances must be significant and meaningful so that homeowners do not find 

themselves in the same situation several months later. We also have a responsibility 

to those who have lost their homes—to ensure that they have access to alternative 

housing opportunities, that they have the knowledge and resources to meet their 

other debt obligations, and that they are able to rebuild their credit. 

Finally, these failures among mortgage service providers once again highlight the 

need for greater financial literacy. Homeowners are borrowers and consumers—they 

should be able to understand the terms of their mortgage agreements and the consumer protection resources available to them. They should also have the knowledge 

and skills to overcome foreclosure and other unforeseen financial obstacles. 

Mr. Chairman, I thank you for this opportunity for the Committee to examine the 

prevalence of foreclosures and the actions of mortgage service providers. I also 

thank the witnesses for appearing today, and I look forward to your testimonies. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF SENATOR SHERROD BROWN 

Thank you, Mr. Chairman. 

The predatory practices of the mortgage servicing industry are remarkably similar 

to the predatory practices that led to the subprime crisis. 

The biggest mortgage servicers have poorly maintained, lost, or forged documentation. They ignored the interests of homeowners in exchange for outsized profits. 

Each day Ohioans are failed by the modification process. Last month, my State 

had the eighth most foreclosures in the nation—and the most of any States represented on this Committee. 

Ohioans interested in merely attempting to modify mortgages often end up 

owing more principal on their loans or having their credit scores lowered. 

Instead of trying to stay in their homes, they are saddled with back payments, 

penalties, and late fees. 

And it’s happening across Ohio—in large cities and small towns, and urban and 

rural counties that are hit hard by the housing crisis. 

In Perry County, a homeowner was outraged to learn that her temporary modification was accompanied by late fees and negative marks on her credit report. 

It’s the tragic truth that she was luckier than other Ohioans because her servicer 

stopped collection efforts. 

In Cuyahoga County—which had the most foreclosures of any county in the 

State last month—a senior living on Social Security disability received collection notices while she was in her trial period. 

When my office contacted the bank about these notices, we were told that the 

mortgage department could not make the collection department stop until she got 

a permanent modification. 

We were told that she should just ignore their collection notices. 

But this same constituent also had her first trial payment double-billed, causing 

the bank to tack on $136 in overdraft fees. 
52 

In Geauga County one family asked about her servicer, ‘‘How is it possible for 

a bank, its computers, departments and representatives to be so out of touch 

with one another?’’ 

Another constituent from Geauga County told my office, ‘‘In 1999, I was diagnosed with cancer . I endured two surgeries and a brutal year of chemotherapy . . . My experiences with [my servicer] have been worse than having 

cancer.’’ 

Indifference, foreclosed homes, and broken neighborhoods shouldn’t be a formula 

for record profits. 

By far the most complaints that I receive from frustrated Ohioans relate to the 

four largest servicers, who account for more than 55 percent of all servicing contracts. 

After acquiring big subprime player like Countrywide, Wachovia, and Washington 

Mutual, the four biggest banks are now so large that their executives apparently 

don’t know what’s happening deep in their own securitization and servicing departments. 

In July, I sent these four largest servicers a letter describing Ohioans’ frustrations 

with their failed attempts at mortgage modifications. 

I received a response letter from one of the banks on September 29, affirming its 

commitment to keeping homeowners in their homes and out of foreclosure. 

But that very same day, that bank announced a moratorium on 56,000 foreclosures in 23 States—including Ohio—because of deficiencies with their 

foreclosure affidavits. 

These big banks tell us that mistakes are isolated and harmless. But these problems are not new. They are well documented and are part of a longstanding, ugly 

pattern of homeowner abuse. 

It’s a cycle of mistrust and misinformation that deprives families of their homes 

and neighborhoods of their vitality. 

According to a survey of foreclosure counselors released last month by the 

Cleveland Federal Reserve, most modifications take between 120–240 days 

to work out. 

In that period paperwork errors like multiple requests, incorrect evaluations, and 

poor internal communications are common. 

It’s common enough that last year, a bankruptcy judge in Ohio wrote in a decision 

that mortgage servicers are ‘‘unconcerned with the accuracy of records and 

information.’’ 

The Department of Treasury’s report on the Home Assistance Modification 

Program (HAMP) found compliance problems at three of the four biggest servicers. 

Yesterday, the GAO released a report that I had requested on bank walkaways. 

The report found that as a result of poor communication from servicers, between 

14,000 and 34,000 families in cities like Cleveland, Akron, and Columbus have 

been unnecessarily forced out of their homes. 

Vacant and abandoned homes not only diminish surrounding properties values, 

they drain city resources and present a series of public safety concerns and risks. 

Why are so many homeowners being kicked out of their houses—even when it is 

not economically beneficial to anyone? 

That’s why today’s hearing is so important—and why reform to the mortgaging 

servicing industry is long overdue. 

We’ve seen how ‘‘robo-signings’’ are a serious abuse of court processes—the Cuyahoga County courts are now asking lawyers to confirm that the information in their 

filings is true. 

Courts are considering whether banks have standing to foreclose or whether 

promissory notes were properly transferred and conveyed. 

There are strong possibilities that banks have wrongfully taken homes to which 

they had no secured claim. 

These are all symptoms of a mortgage servicing industry that is broken. 

Servicers claim that homeowners didn’t meet their legal obligations, so they don’t 

deserve to stay in their homes—that homeowners lack ‘‘personal responsibility.’’ 

But what about institutional responsibility? Should we not hold the banks to the 

same standards they impose on homeowners? 

A Federal judge in Cleveland pointed out 3 years ago, ‘‘Neither the fluidity of 

the secondary mortgage market, nor monetary or economic considerations 

of the parties, nor the convenience of the [banks,]’’ overrides the banks’ duty 

to follow the law. 

Money and profits should not trump the law. 

And while the courts are playing a role in checking abuse, it is Congress’s responsibility to empower regulators to oversee the mortgage servicing industry. 
53 

As the newly confirmed Fed Governor Sarah Bloom Raskin said last week, ‘‘Until 

a better business model is developed that eliminates the business incentives 

that can potentially harm consumers, there will be a need for close regulatory scrutiny of these issues and for appropriate enforcement action that 

addresses them.’’ 

The new Bureau of Consumer Financial Protection (CFPB) is a perfect illustration of how to empower regulatory scrutiny and appropriate enforcement. 

Instead of helping homeowners, regulators’ responses appear crafted to protect the 

balance sheets of the ‘‘too big to fail’’ servicers. 

The CFPB is designed to ensure someone serves American families and confronts 

abusive mortgage servicing practices. 

And stronger oversight means streamlined modification procedures and meaningful penalties when servicers fail to comply. 

We should be trying to find ways to keep people in their homes, not forcing more 

houses onto an already depressed housing market. 

This foreclosure crisis affects all of us—homeowners, families, neighbors, and 

State and local governments. 

It is clear that the current system isn’t working. 

And it’s clear that we won’t have economic recovery if our neighborhoods are full 

of foreclosed or vacant homes. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF THOMAS J. MILLER 

ATTORNEY GENERAL, STATE OF IOWA

NOVEMBER 16, 2010 

Chairman Dodd, Ranking Member Shelby and the other Members of the Committee, thank you for the opportunity to address you today on this important subject. 

I. Background and History of the States’ Efforts 

While the issues of foreclosures, mortgage loan servicing, and loss mitigation efforts are currently receiving substantial attention in the press, they are not new to 

the Attorneys General. Starting over a decade ago, the Attorneys General and our 

partners in the State banking departments began numerous enforcement efforts regarding fraudulent behavior by lenders in the origination of subprime mortgages. 

Beginning with First Alliance Mortgage Company (better known as FAMCO), then 

followed by the $484 million settlement with Household Finance, and finally the 

$325 million settlement with Ameriquest Mortgage Company, at that time the largest subprime lender, the States have had a front row seat to the fraud and misconduct in subprime originations. 

This fraud, however, was concealed for years by the unprecedented home price appreciation that many areas of the country were experiencing. Due to the race to the 

bottom in underwriting standards, as soon as borrowers got into trouble they would 

simply refinance, masking their inability to perform. Accordingly, we knew that as 

soon as the rapid and unprecedented home price appreciation began to stall, the 

fraudulent and fragile underpinnings of the market would be exposed and more 

loans than we could imagine would begin to fail. 

Knowing this, my staff began to explore servicing and foreclosure issues in the 

Spring of 2007. The more we learned, the more concerned we grew as it became apparent that servicers were not in any way prepared to deal with even a moderate 

volume of foreclosures. Accordingly, in July 2007 my office put out an invitation to 

every Attorney General in the country to attend a summit on foreclosures. The purpose was to warn our colleagues that a tidal wave was coming and they needed to 

begin to prepare. 

Out of this meeting, a working group of Attorneys General and State bank regulators was formed. This group was later named the State Foreclosure Prevention 

Working Group (‘‘State Working Group’’). At the beginning, a policy decision was 

made that this would not be a litigation based group, but rather the group would 

attempt to work collaboratively with the mortgage servicing industry in order to 

find solutions to the myriad problems standing in the way of effective loss mitigation. Because the problem was mostly contained to subprime loans at that point in 

time, we set up a meeting with the top 10 largest subprime servicers in September 

2007 and another meeting with the next 10 largest in November 2007. At these 

meetings, we were assured by many of the servicers that they were adequately 

staffed and prepared for what was coming. Obviously, this did not turn out to be 

the case. 
54 

In addition, it became clear to the States that we wanted to base our decisions 

on empirical data, not anecdotal stories. Thus, in October 2007, the State Working 

Group became the first governmental entity—state or Federal—to collect data on 

the servicers’ loss mitigation efforts and results. We used this data to publish five 

reports which provide analysis and commentary on a variety of issues. Reports were 

published in February 2008, April 2008, September 2008, January 2010, and August 

2010. Unfortunately, our data collection was not as robust as it could have been due 

to the extremely short-sighted direction of the Office of the Comptroller of the Currency which forbad national banks from providing loss mitigation data to the States. 

II. The Impact of Securitization on Servicing 

Many people still talk about ‘‘banks’’ generically when discussing foreclosure 

issues. Of course, the old model of a local bank making a loan and then keeping 

that loan on its books has largely disappeared. Instead, mass securitization of mortgage loans has become the norm. This has produced a radical change in the structure of loan servicing and a misalignment of incentives. Many pages can and have 

been written on this subject, and I will not attempt to repeat that discussion hear. 

Described in its simplest form, in most cases ownership of the mortgage loan is no 

longer aligned with the servicing of that loan. This change has introduced enormous 

complexity and has made the task of modifying loans and avoiding preventable foreclosures much more difficult. 

III. Common Loan Servicing Problems 

In order to understand what has been happening with mortgage loan servicing 

over the last 3 years, it is essential to understand one basic truth: the current mortgage servicing system was not designed for any of the tasks it is being asked to perform, and it certainly is not equipped to perform such tasks at anywhere near the 

scope and scale of the foreclosure crisis. Modern loan servicing was designed to be 

a no-touch or low-touch money collection system. Instead, servicers have been asked 

to re-underwrite, or in many cases underwrite for the first time, a massive number 

of loans. Asking servicers to solve the foreclosure crisis is akin to putting a square 

peg in a round hole. The servicers, no matter how good their intentions, were simply 

not designed for this problem. Put on top of that the unprecedented scope and scale 

of the foreclosure crisis, and the servicers have become completely overwhelmed. 

From this premise flow all of the problems which our office and other Attorneys 

General hear about on a regular basis. For example, we are constantly hearing 

about borrowers who are asked to resubmit their paperwork because it was lost 

multiple times. Because servicers are overwhelmed, loss mitigation requests are 

often delayed and stretched out over long periods of time. As a result, the financial 

documents originally submitted by the borrower become stale, triggering multiple 

requests for resubmission. While the servicer is free to lose documents as many 

times as they want or to take as long as they want, the servicer often demands 

strict compliance from the borrower. Thus, no matter how many times the borrower 

has previously submitted his or her paperwork, if the borrower fails one time, the 

loan modification is denied. Similarly, many borrowers report that after not hearing 

from their servicer for several months, they will receive a proposed loan modification but will be given a very short timeframe (several days) to sign and return the 

document (along with any required financial contribution). Again, strict compliance 

is enforced. 

Perhaps the biggest problem is that loss mitigation and foreclosure exist simultaneously on parallel tracks. This leads to problems when the left hand does not know 

what the right hand is doing. Thus, we all hear stories of borrowers who thought 

they were approved for a loan modification receiving a notice of a foreclosure sale. 

In short, the fundamental fact that servicing systems are being asked to perform 

a task for which they were not designed has predictably led to a wide range of problems in implementing loss mitigation solutions. 

IV. The Mortgage Foreclosure Multistate Group 

In a classic example of why it is wise to continue to support our constitutional 

framework of federalism, the States were able to react very quickly to the recent 

robo-signing reports. In very short order, all 50 Attorneys General and a committee 

of State banking regulators representing all 50 States formed a multistate group to 

address this problem. We were able to do this for several reasons. First, State officials are much closer to the problems in loan origination and servicing than our 

Federal counterparts. Quite simply, citizens know who their State Attorney General 

or banking department is and are much more likely to contact us than a 1–800 

number in some far away location, particularly when it comes to real estate and 

foreclosures, both of which are inherently local issues. Second, the long standing relationships formed over the past decade in our mortgage origination enforcement ac-
55 

tions and more recently, the work of the State Foreclosure Prevention Working 

Group, allowed us to mobilize quickly. As in our previous efforts, we are continuing 

our valuable partnership with our State bank regulator counterparts. 

Because we are in the midst of our investigation, I am necessarily constrained as 

to how much I can comment on the specifics. However, I can make some general 

comments. 

First, some have attempted to describe the issue of ‘‘robo-signing’’ as being a mere 

technicality. This argument shows a certain type of arrogance. The home is not only 

the centerpiece of family life, but it is by far the biggest purchase that many people 

will make in their life, and for many their biggest asset. The State foreclosure laws 

are the official method by which the family home can be taken away. Given such 

high stakes, strict compliance is expected. Others have suggested that the only relevant facts are that the borrower owes the money and has to pay it back. Such 

statements miss the point entirely. We do not say in a criminal prosecution that 

it is ok for the prosecutor to fabricate evidence, so long as the defendant is in fact 

guilty. The outrage over robo-signing is about due process, protection of private 

property rights, and the rule of law. In judicial foreclosure States, robo-signing is 

a fraud on the court. Such issues are of the highest importance. 

That being said, I would like to make it clear that the multistate investigation 

is about more than robo-signing. After all, robo-signing is only a symptom of the 

much larger problems with the mortgage servicing system. Thus, the multistate 

group intends to look at issues regarding the accuracy of the information used by 

servicers in the foreclosure process, as well as issues such as the imposition of various servicing related fees and force placed insurance. The multistate group is also 

interested in some of the issues that are being raised regarding the ability or inability of servicers and investors to show proper chain of title. 

However, the biggest issue is fixing the loan modification system. In many ways, 

there is not currently a coherent loss mitigation system. Instead, there exists a system of ‘‘Russian roulette’’ where whether or not a borrower receives a modification 

that will save the family home depends in large part on who picks up the phone 

on the other end. In essence, those who are lucky enough or persistent enough to 

get to the right person are the ones who receive quality modifications, regardless 

of the facts of their case. This has to change. 

To be clear, the States do not believe that every foreclosure is a tragedy that must 

be avoided. To the contrary, we have consistently stated over the last 3 years that 

we are only interested in modifications where the cash-flow from the modification 

exceeds the expected proceeds from a foreclosure sale. In industry parlance, this is 

a net present value positive modification. Such a modification is a win for the 

servicer, the investors who own the loan, the borrower, and the community at large. 

We strongly believe, however, that many borrowers, who under a strict economic 

analysis should receive a modification, are falling through the cracks. We must find 

a way to make sure that all borrowers who have the desire to keep the home and 

qualify for a modification, receive that modification. 

V. Conclusion 

In recent weeks, many have opined that the temporary halt on foreclosures and 

foreclosure sales by several servicers was greatly damaging the economy. With all 

due respect, it is the foreclosures in the first instance that pose the greatest threat 

to the economy. While certainly it does not make sense to allow vacant properties 

to linger, and such properties should be sold if possible, the looming shadow inventory of homes that will become real estate owned and the millions of foreclosures 

yet to come is the true threat that must be avoided. Foreclosures at the scale we 

are currently experiencing, and unfortunately will continue to experience for some 

time, are a public policy issue. It is well past time to once and for all tackle the 

issue of foreclosures and loan modifications with the resources and urgency it deserves. 

As set forth above, the Attorneys General and the State banking regulators have 

been discussing various issues and quite frankly warning the servicing industry for 

over 3 years. Unfortunately, the mortgage servicing industry has been slow to recognize the problems and instead responded with a series of half-steps, based on the 

hope that a recovery in the market was just around the corner. Instead, the situation has become worse and worse, forcing servicers and secondary market investors 

to take steps that a relatively short time earlier were off the table. We believe that 

there have been many missed opportunities over the past few years and are deeply 

disappointed that our many previous attempts at working with the servicers have 

not been as successful as we had hoped. However, the States are determined that 

this time, we will find lasting solutions to the foreclosure crisis. 
56 

PREPARED STATEMENT OF BARBARA J. DESOER 

PRESIDENT, BANK OF AMERICA HOME LOANS

NOVEMBER 16, 2010 

Introduction 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank 

you for the opportunity to discuss Bank of America’s loan modification performance 

and foreclosure process. 

The prolonged economic downturn and sustained high unemployment, coupled 

with the collapse of the U.S. housing market, have led to challenges that are more 

profound and complex than anyone anticipated. For a borrower, the prospect of falling behind on mortgage payments due to loss of income would be a wrenching personal situation in normal times. But these are not normal times, and the traditional 

solutions of the refinance of debt or the sale of a home at sufficient value to repay 

the debt, do not exist for many, which causes great anxiety and frustration for borrowers under economic stress. We know you are hearing from your constituents, because in many cases your constituents are also our customers. 

These customers depend on us—Treasury, GSE’s, lenders, and servicers to have 

a solution for their unprecedented needs. The good news: we have worked together 

at extraordinary speed to create solutions—like HAMP—and to retool mortgage 

servicing; adding new people, new processes, and new technology capabilities to 

meet the ever increasing needs. Unfortunately, those solutions have not met all of 

the needs nor have they been executed well in some cases. 

It’s important to note that despite the hardships most Americans are facing, more 

than 86 percent of Bank of America customers remain current and are making their 

mortgage payment each month. Others are unfortunately in distress. Helping these 

customers remain in their homes where possible is a top priority for Bank of America—as evidenced by our 700,000 completed loan modifications since 2008. 

Whether one of our customers has just missed his or her first mortgage payment 

or is many months delinquent and at the point of foreclosure—Bank of America believes the customer’s experience with us, from start to finish, must be consistent, 

accurate, and understandable. Our customers are entitled to an experience that 

gives them confidence they are being treated fairly. 

We have, however, reached a crossroads between loan modification efforts and the 

reality of foreclosure. Fortunately, early stage delinquencies are stabilizing. The majority of initial volume and backlog of customers seeking solutions have been evaluated for available programs. We’re reaching a peak where some customers will be 

dealing with the reality that despite the myriad of programs and our best efforts, 

foreclosure is unavoidable. That has driven an increase in the concerns you and we 

hear from distressed homeowners, and our increases in staffing and foreclosure alternative programs are directed at moving through this difficult period. We believe 

that these efforts are working, as every day we reduce the backlog in both modification decisions and customer complaints. 

It is our responsibility to be fair, to be responsive and, where a foreclosure is unavoidable, to treat customers with respect as they transition to alternative housing. 

We, and those who work with us in connection with foreclosure proceedings, also 

have an obligation to do our best to protect the integrity of those proceedings. When 

and where that has not happened, we accept responsibility for it, and we deeply regret it. We take seriously our obligation to the customer, the investor, the legal process and the economy. 

We also fully understand our obligation to evaluate customers for every way to 

make their payment more affordable, and we are continually improving our processes for working with customers. 

When industry concerns arose with the foreclosure affidavit process, we took the 

step to stop foreclosure sales nationwide and launch a voluntary review of our foreclosure procedures. Thus far, we have confirmed the basis for our foreclosure decisions has been accurate. At the same time, however, we have not found a perfect 

process. There are areas where we clearly must improve, and we are committed to 

making needed changes. 

We’ve also used this opportunity to further evaluate our modification program and 

identify additional enhancements we can make. We have done this based on feedback from you, our customers, community groups, investors, and from our regulators. We also are committed to a constructive dialogue with State Attorneys General, who have taken a leadership role on these issues. 
57 

Role of the Servicer 

Before I describe the changes we have made in the foreclosure and modification 

processes, I would like to provide some context regarding the role of mortgage 

servicers, the complexity of our portfolio and loan modification performance. This 

context relates directly to the changes we are making. 

Traditionally, a mortgage servicer’s primary function is to collect loan payments 

from customers and to distribute payments to the investors who own the loan. Until 

recent years, foreclosures were ancillary and loan modifications were essentially 

non-existent. Economic conditions—including the loss of income, inability of many 

consumers to pay their mortgages or, when in distress, to sell their property—have 

dramatically increased the volume of modifications and foreclosures, severely straining industry systems and resources designed around much lower volumes of activity. 

Moreover, Bank of America is constrained by our duties to investors; of the nearly 

14 million loans in our servicing portfolio: 

• 23 percent of the portfolio is owned by Bank of America; 

• 77 percent of the portfolio we service for the investors who own the loans— 

Fannie Mae and Freddie Mac are the investors on 60 percent of these loans, 

for example. 

Many investors limit Bank of America’s discretion to take certain actions. When 

working with delinquent customers, we aim to achieve an outcome that meets customer and investor interests, consistent with whatever contractual obligations we 

have to the investor. 

Duties to investors add complexities to the execution of modification programs and 

can result in confusion for customers. For example, Treasury, investors, and other 

constituencies often change the requirements of their modification programs. HAMP 

alone has had nearly 100 major program changes in the past 20 months. Fannie 

and Freddie, as investors, have layered on additional requirements, conditions and 

restrictions for HAMP processing. When these changes occur, we and other servicers 

have to change our process, train our staff, and update technology. These changes 

can also affect what is required of the customer, for example the need for new or 

different documentation. 

Basic Facts of the Bank of America Portfolio 

With the Countrywide acquisition, Bank of America became the nation’s largest 

mortgage servicer—with a servicing portfolio that more than tripled post-acquisition 

to nearly 14 million customer loans—1 in 5 of all U.S. mortgages. 

The majority—86 percent—of our customers are current and making their mortgage payments on time every month. Fortunately, that number is stabilizing. But 

the segments of the portfolio that are distressed include large numbers of customers 

who are seriously delinquent. Nearly 600,000 customers have not made a mortgage 

payment in more than a year; of these 195,000 have not made a mortgage payment 

in 2 years. 

Servicer Implementation of Loan Modification Solutions 

To address these drastic economic and industry changes, Bank of America has 

had to undertake a massive retooling since our acquisition of Countrywide in 2008 

to shift our servicing organization from one that simply services loans, to one that 

also manages customer requests for aid as the housing downturn and high unemployment persist. We also have built new processes, tools and partnerships with 

community organizations to reach customers who do not respond to loan modification offers. 

We’ve hired and trained more than 10,000 new employees—and now have a team 

of more than 26,000 helping customers who are delinquent. To reach customers 

we’ve opened bricks and mortar customer assistance centers; gone door to door with 

modification solicitations, and participated in more than 500 housing rescue fairs 

across the country. 

We have completed more than 614,000 proprietary modifications and 85,000 

HAMP modifications. Given the majority of our delinquent borrowers are not eligible for HAMP today, proprietary solutions have been critical to provide meaningful 

options for those who fall outside the requirements of HAMP. We have completed 

over 95,000 second lien modifications and were the first servicer to implement the 

Treasury’s second lien program—2MP. 

We have provided innovative solutions to meet evolving customer needs, including 

the launch of an industry-leading principal reduction program earlier this year. 

Bank of America is also a leader in the Hardest Hit Fund program development and 

is working with Treasury, the State Housing Finance Authorities, and others as we 
58 

attempt to find solutions and design programs including principal reduction in the 

most severely impacted States. 

If all home retention options are exhausted, and there is not a viable alternative 

to create an affordable payment, we offer short sale and deed-in-lieu solutions that 

allow customers to avoid foreclosure and ease the transition to alternative housing. 

Earlier this year, we launched a proprietary cooperative short sale program that 

proactively solicits customers in late stage delinquency to provide assistance. We are 

also fully operational with Treasury’s Home Affordable Foreclosure Alternatives 

(HAFA) program, which streamlines the short sale process for borrowers who have 

been considered for HAMP and offers customers relocation assistance of $3,000. 

We’ve completed nearly 70,000 short sales through the first three quarters of this 

year. 

We also provide deed in lieu programs that do provide an increased cash allotment for expenses such as moving and rental security deposits in exchange for the 

deed to the property in which the customer currently resides. 

Our intent is to exhaust all modification, short sale and other disposition options 

before foreclosure. Despite those efforts, far too many customers have been impacted 

by an economy that has left them unemployed or severely underemployed to a point 

that leaves even a modified mortgage payment out of reach. 

With that background in mind, I would like to inform you of some key decisions 

and commitments we have made to address concerns we have heard from our customers, your constituents and other stakeholders: 

Single Point of Contact 

A frequent source of frustration for customers is when they feel they are being 

passed around the system, seemingly never talking to the same person twice. We 

are addressing this by redesigning our modification process to offer a single point 

of contact for every eligible borrower. We are in the midst of implementation and 

more than 140,000 customers have already been assigned a single case manager to 

whom they can always turn with questions or concerns that arise throughout the 

process. We are also in discussions with key stakeholders, like the State Attorneys 

General, about how this approach can be expanded, and refined, to improve the customer experience and reduce borrower anxiety during the time they are being considered for modifications. We know this goes to the heart of many customer complaints that you have heard. 

Reform of Dual Track System 

Parallel foreclosure and modification processes are required by many investors, 

and reflect an industry-wide servicing practice. This so-called ‘‘dual track’’ process 

has been a source of confusion for customers. We want to be a partner with you, 

State Attorneys General, other servicers, and investors in looking for ways to 

change industry practice with respect to evaluation of borrowers for modifications 

after they have been referred to foreclosure to mitigate the very real concerns we 

have heard about that practice. 

Customer Status Checklist 

Customers are understandably frustrated when they are unsure where they are 

in the process of modification or foreclosure. To address this and provide greater 

clarity, we are working to create a Customer Status Checklist, so that customers 

will have a document in hand to understand their status, the steps they have completed, reasons decisions have been made and what additional steps remain. 

Housing Rescue Fairs and Outreach 

By establishing a presence in the community, we’ve had greater success reaching 

customers who have not been responsive to more traditional contact methods. We’ve 

deployed Customer Assistance Centers in areas most impacted by the housing downturn. We’ve also launched mobile home retention teams who travel around the country meeting with customers. 

We’ve had considerable success in working with non-profit partners such as 

Neighborhood Assistance Corporation of America (NACA), National Urban League, 

National Council of La Raza and the National Association of Asian Pacific Americans for Community Development. We established the Alliance for Stabilizing our 

Communities—the first national multicultural outreach and home retention effort to 

address foreclosure prevention in diverse communities. Through the Alliance, 34 

home rescue fairs have been completed serving more than 9,800 families. We find 

that the opportunity for customers to work with a trusted non-profit and get the 

chance to meet with their servicer face-to-face can enhance the response rates of 

borrowers and the chance for a successful modification, and we are committed to 
59 

increasing the resources committed to face to face contact in 2011—including doubling our outreach staff. 

Enhanced Transition Services: 

When we cannot change the foreclosure outcome, we can ensure the process is respectful. We have been in extensive conversations with the Neighborhood Preservation Foundation, the United Way, other non-profit agencies, and with HUD to determine how we can most effectively engage them to help customers in the transition 

of households to alternative, more affordable housing. We are working with these 

and other community partners to expand support services—relocation assistance, 

credit counseling, and other aid to help customers and rejuvenate neighborhoods. 

Other Reforms 

Additional reforms and process enhancements may be identified through our constructive and continuing conversations with State Attorney General Miller and the 

Executive Committee of the National Association of Attorneys General. 

Foreclosure Process 

Our commitment at Bank of America and its subsidiaries is to ensure that no 

property is taken to foreclosure sale until our customer is given a fair opportunity 

to be evaluated for a modification to an affordable payment or, if that cannot be 

done, a short sale or deed in lieu solution. Foreclosure is the option of last resort. 

We voluntarily launched a foreclosure hold in October 2008 and have participated 

in several others—as new programs were developed and launched, in order to ensure no customer goes to foreclosure who has a reasonable option to stay in their 

home. 

We re-evaluate borrowers for home retention options throughout the foreclosure 

process and check to determine whether a borrower is being evaluated for a modification all the way up until the day before the foreclosure sale. Subject to investor 

guidelines and the rules of the applicable court, we defer the sale dates of borrowers 

who are being evaluated for modifications. 

When a customer is referred to foreclosure sale, the process and requirements 

vary significantly among States. Courts have jurisdiction over foreclosures in 23 

States (called judicial States). In both judicial and non-judicial cases, it is our policy 

to refer a loan to foreclosure only after we have completed a review for modification 

eligibility, assessment of foreclosure alternatives and compliance with applicable 

State law requirements. Also included are several checks to ensure the data supporting the foreclosure is both accurate and accurately recorded. 

On average, it takes nearly a year from the time a customer receives a foreclosure 

notice until the actual foreclosure sale is completed; and for customers in judicial 

States like Florida that timeline can be closer to 2 years. This is not a process that 

is rushed and there are multiple checkpoints and controls along the way to prevent 

wrongful foreclosure—controls that have now been further strengthened. 

Foreclosure Review and Improvements 

After concerns emerged at other lenders regarding the foreclosure affidavit in judicial foreclosure States, Bank of America and its servicing subsidiary initiated a 

review of our foreclosure procedures. On October 1, we voluntarily suspended foreclosure judgments in the 23 judicial foreclosure States while we completed this review. 

One week later, we paused foreclosure sales nationwide as we launched a voluntary review of our foreclosure process in all 50 States. We believe this step was 

appropriate and responsible in order to give our customers confidence they are being 

treated fairly in the process. I would like to share some conclusions we’ve reached 

following our review, as well as some of our plans to improve our process going forward. Let me first offer a quick overview of the typical foreclosure process in a judicial foreclosure State. If the internal foreclosure review process concludes all other 

options are exhausted and that foreclosure is necessary, the loan is referred to our 

foreclosure operation and to outside foreclosure counsel, who prepare affidavits of 

indebtedness where required and ultimately handle the local foreclosure process. 

The decision to refer a loan to foreclosure is made by Bank of America after a 

foreclosure review process that is based on an evaluation of our servicing records. 

This evaluation precedes and is independent from the process used to create and 

execute affidavits of indebtedness. The foreclosure affidavit is a summary of the 

basic facts in the foreclosure case (for example, the borrower’s name, address and 

delinquent amount). For all GSE loans, we select the outside counsel from pre-approved lists created by each of Fannie Mae and Freddie Mac. 

Once Bank of America receives the affidavit from outside counsel, we conduct a 

multi-step quality assessment process to verify the key facts underlying the affi-
60 

1MERSCORP, Inc. is structured as a privately held stock company. Its principal owners are 

the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Bank of America, Chase, HSBC, 

CitiMortgage, GMAC, American Land Title Association, and Wells Fargo. MERS is 

headquartered in Reston, VA. 2Members tend to register only loans they plan to sell. Wells Fargo and JPMorgan Chase are 

the principal members in this regard. They service most of the loans they originate themselves, 

so registering their retail business on the MERS® System is of less practical value to them. 

However, when these institutions purchase loans from others, known as their correspondent 

business, they do require that those loans be registered on the MERS® System. 3MERS makes its money through an annual membership fee (ranging from $264 to $7,500) 

based on organizational size, and through loan registration and servicing transfer fees. MERS 

charges a one-time $6.95 fee to register a loan and have Mortgage Electronic Registration Systems, Inc. serve as the common agent (mortgagee) in the land records. For loans where Mortgage Electronic Registration Systems, Inc. will not act as the mortgagee, there is only a small 

one-time registration fee ($0.97). This is known as an iRegistration. Transactional fees (ranging 

from $1.00 to $7.95) are charged to update the database when servicing rights on the loan are 

sold from one member to another. 

davit. After this quality check, the verified affidavits are sent to a bank officer for 

a notarized signature and then returned to foreclosure counsel for filing. 

Even though our review has indicated the basis for our foreclosure decisions has 

been accurate, we have identified areas for improvement as a result of our intensive 

review. We are taking the need for improvement very seriously and are implementing changes accordingly. These changes in the foreclosure process include, 

among other things, a new affidavit form and additional quality control checks. 

Every affidavit will be individually reviewed by the signer, properly executed, and 

promptly notarized. We are carefully restarting the affidavit process with these controls in place. We are working to replace previously filed affidavits in as many as 

102,000 pending foreclosure cases that have not yet gone to judgment. Further, with 

regard to both judicial and non-judicial States, we are implementing new procedures 

for selecting and monitoring outside counsel. 

Conclusion 

If a Bank of America customer is eligible for a modification, we’ll help him or her 

stay in their home. That is in our interest as a mortgage servicer and as an owner 

of loans. And, when foreclosure is the necessary outcome, we will pursue it through 

a respectful process. As the loan servicer, the decision is not always in our hands, 

but ensuring a process that is fair, accurate and consistent is our accountability. We 

have worked for 2 years since our acquisition of Countrywide to aggressively respond to more than a million customers in distress. We don’t claim perfection, but 

we believe we have led with innovative ideas and continue to put forward solutions 

that respond to customer needs. That’s a responsibility that comes with being America’s leading consumer bank—and a responsibility every associate at Bank of America is working diligently to uphold. 

Thank you and I look forward to your questions. 

PREPARED STATEMENT OF R.K. ARNOLD 

PRESIDENT AND CHIEF EXECUTIVE OFFICER OF MERSCORP, INC. 

NOVEMBER 16, 2010 

Chairman Dodd, Ranking Member Shelby and Members of the Committee, my 

name is R.K. Arnold. I am President and CEO of MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc. I appreciate the opportunity 

to appear before the Committee today to explain what MERS is and isn’t, its critical 

role in our nation’s housing finance system, and how MERS has been affected by 

the current foreclosure crisis. 

I have written testimony and an oral statement that has already been delivered 

to the Committee that I would request be made part of the record. 

BACKGROUND 

MERS is owned by the mortgage industry1 and operated as a membership organization. Almost all mortgage lenders (about 3,000) are members of MERS, though not 

all members register all the loans they originate on the MERS® System.2 MERS 

derives its revenue solely from its members.3 MERS charges no fees and makes no 

money from mortgages, from the securitization or transfer of mortgages, or from 

foreclosures done in its name. 

MERS serves two important functions. First, it maintains a database or registry 

of mortgage loans, keeping track of changes in servicing rights and beneficial ownership interests over the life of the loan. Second, it can be designated by its members 
61 

4The originating lender may be the servicer in some cases. 

5 A copy of a sample mortgage document can be found in Attachment One. A short summary 

of MERS prepared by the Mortgage Bankers Association can be found in Attachment Two. 6This action tells the world that there is a lien against the property. This is done to protect 

the lender’s interest. The recording of the mortgage puts future purchasers on notice of any outstanding claims against the property. 7The promissory note is not (and never has been) recorded or stored with the county land 

records office. The note is a negotiable instrument that can be bought and sold by endorsement 

and delivery from the seller to the note purchaser. This activity is governed in all fifty States 

by the Uniform Commercial Code (UCC) Article 3. 8The MERS® System is the database; MERSCORP, Inc is the operating company that owns 

the database; and Mortgage Electronic Registration Systems, Inc (‘‘MERS’’) a subsidiary of 

MERSCORP, Inc., which serves as mortgagee in the land records for loans registered on the 

MERS® System. For discussion purposes, ‘‘MERS’’ may be used in this testimony to refer to 

all three entities unless specifically stated otherwise. 

to serve as the mortgagee, or the holder of the mortgage lien, in the public land 

records. This designation is what enables MERS to maintain its accurate database. 

MERS AND YOUR MORTGAGE 

The mortgage loan process can be confusing and complex to consumers. There is 

a lot of paperwork generated and many documents to be signed. However, two 

pieces of paper stand out from the rest as the most important pieces needed so that 

the consumer can get a mortgage loan. They are: (1) the promissory note, which is 

a promise by the borrower to repay the loan amount to the lender or noteholder; 

and (2) the mortgage (also referred to as the ‘‘deed of trust’’ in some States), which 

establishes a lien against the property as collateral for the loan and allows the lender (or noteholder) to foreclose on the property if the borrower does not repay the 

loan according to the terms of the promissory note. The person who borrows the 

money is called the ‘‘mortgagor’’ and the holder of the mortgage is called the ‘‘mortgagee.’’ Once the borrower signs both pieces of paper, the borrower receives the 

money to buy the house. To obtain a mortgage loan, the borrower must agree that 

the mortgagee has the right to foreclose in the event of a default. 

Another important party in the life of a mortgage loan is the loan servicer. The 

servicer is a company named (by the note-owner) to be the interface between the 

note-owner and the borrower to collect payments and remit them to the note-owner. 

It may become the noteholder for purposes of enforcing the terms of the note on behalf of the note-owner.4

MERS acts as the designated ‘‘common agent’’ for the MERS member institutions 

in the land records, which means that MERS holds the mortgage lien on behalf of 

its members and acts on their behalf as mortgagee. To accomplish this, at the time 

of the closing, the borrower and lender appoint MERS to be the mortgagee. The designation of MERS is prominently displayed on the mortgage document and is affirmatively approved by the borrower at closing.5 After the borrower executes the mortgage document, it is recorded in the public land records with Mortgage Electronic 

Registration Systems, Inc. noted in the index prepared by the recorder (or clerk) as 

the mortgagee. Mortgage loan information is then registered on the MERS database. 

These two key pieces of paper in a mortgage transaction follow very different 

paths after they are signed. The mortgage (or deed of trust) is recorded in the county land records where an imaged copy is stored.6 The original mortgage document, 

with recording data added by the county recorder, is returned to the servicer and 

goes into the servicer’s master loan file. The note is sent to a custodian (usually a 

regulated depository institution) and is typically bought and sold (and thus trades 

hands) in the normal course of financial activity.7 The servicer undertakes the obligations to service the loan, but servicing rights also may move from one servicing 

business to another because servicing rights are contract rights, which are bought 

and sold independent of any sale of the promissory note. MERS does not receive or 

maintain either the mortgage or the promissory note. 

Every time a note or servicer changes hands, a notation of that change is made 

(electronically) on the MERS® System by the members involved in the sale. In this 

way, changes in servicing rights and beneficial ownership interest in the promissory 

note are tracked over the life of the loan.8

A fundamental legal principle is that the mortgage follows the note, which means 

that as the note changes hands, the mortgage remains connected to it legally even 

though it is not physically attached. In other words, the promissory note is enforceable against the property because of the mortgage, but the mortgage instrument 

itself is not independently enforceable as a debt. This principle is not changed when 

MERS is the mortgagee because of the agency relationship between MERS and the 

lender. An agency relationship arises where one party is specifically authorized to 

act on behalf of another in dealings with third persons, and the legal definition of 
62 

9The design of the MERS® System always anticipated and required that borrowers would be 

able to access the system to determine the servicer of their loans. Providing such information 

to MERS is a requirement of membership and loan registration. When Congress acted last year 

to require that borrowers be told when their note is sold and the identity of the new note-owner, 

MERS established, within a matter of weeks, a new service called Investor ID. Of the 3,000 

members of MERS, 97 percent agreed to disclose the identity of the note-owner through the 

MERS® System. Fannie Mae opted to be disclosed. Freddie Mac chose not to be disclosed. 10The issue of whether transfers of residential mortgage loans made in connection with 

securitizations are sufficient to transfer title and foreclosure rights is the subject of a ‘‘View 

Point’’ article entitled ‘‘Title Transfer Law 101’’ by Karen Gelernt that appeared in the October 

19, 2010 edition of the American Banker. A copy can be found in Attachment Three. 

a ‘‘nominee’’ is a ‘‘party who holds bare legal title for the benefit of others.’’ Here, 

the language of the mortgage appoints MERS as nominee, or agent, for the lender 

and its successors and assigns for the purposes set forth therein. The mortgage also 

grants MERS broad rights, again as nominee for the lender and the lender’s successors and assigns, ‘‘to exercise any or all’’ of the interests granted by the borrower 

under the mortgage, ‘‘including but not limited to, the right to foreclose and sell the 

property; and to take any action required of the lender.’’ Thus, the language of the 

recorded mortgage authorizes MERS to act on behalf of the lender in serving as the 

legal titleholder under the mortgage and exercising any of the rights granted to the 

lender there under. 

MERS members affirm this agency relationship with MERS in their membership 

agreements, which provide that MERS ‘‘shall serve as mortgagee of record’’ with respect to each mortgage loan that the MERS member registers on the MERS® System and provide that ‘‘MERS shall at all times comply with the instructions of the 

holder of mortgage loan promissory notes.’’ 

THE MECHANICS OF MERS 

MERS tracks mortgage loans through an 18-digit identification number called the 

Mortgage Identification Number (MIN). With one notable exception, the MIN is to 

a specific home loan what the VIN (Vehicle Identification Number) is to an individual automobile. Like the VIN, the MIN can be assigned at the earliest stage of 

the product’s creation and stays with it for its entire life. However, unlike cars 

which all get a VIN, not all loans get MINs and are registered on the MERS® System. This is because some loan originators do not use MERS when they do not intend to sell the servicing rights. About half of all loans active in the United States 

are registered on the MERS® System. 

As the mortgagee of record, MERS receives all notices including legal pleadings 

on actions pertaining to the property such as foreclosure notices and complaints, tax 

sales and eminent domain actions, among the many other types of mail. MERS forwards those documents electronically to the relevant servicer who will then take the 

appropriate action to respond on behalf of the note-owner and MERS. 

MERS plays an important role for borrowers as the permanent link between borrowers and their servicers. If servicers change or if they declare bankruptcy, the 

borrower always has a knowledgeable point of contact in MERS. A toll free number, 

the unique Mortgage Identification Number (MIN) and mailing address are prominently included on the first page of the mortgage document. MERS also maintains 

a Web site, which serves as another resource for borrowers. MERS is also a means 

by which the borrower can easily identify the note-owner.9

MERS is not part of the decisionmaking process as to which mortgage loans the 

lenders make to borrowers, nor is MERS part of how mortgage loans get securitized. 

It is the note-owner who decides whether a note should be sold, or transferred to 

a trust, or ultimately securitized with a pool of other loans.10 Loans were securitized 

long before MERS became operational, and in fact, there are loans in securities 

today that do not name Mortgage Electronic Registration Systems, Inc. as the mortgagee. What MERS does is eliminate the expense of repeated assignments, resulting 

in lower cost for lenders when they sell the loans (represented by the promissory 

note) to investors. When the note is sold, MERS continues to act as the mortgagee 

for the new noteholder because the mortgage interest follows the note when it 

changes hands. 

OTHER FACTS ABOUT MERS 

The number of loans registered on the MERS® System is substantial. Since its 

establishment in 1997, about 66 million loans have been registered and tracked on 

the MERS® System. About half of those loans (about 31 million) are active mortgage loans. 
63 

11 A 1993, 36-page white paper entitled ‘‘Whole Loan Book Entry Concept for the Mortgage 

Finance Industry’’ addresses the concepts underlying MERS and the problems it was designed 

to address. It is available upon request. 

Measured by direct employment, MERS is a relatively small organization. About 

50 people work for MERSCORP, Inc. in our Reston, VA, office. Hewlett-Packard is 

the MERS technology partner and runs the database with an additional 150 people. 

In significant ways, MERS is analogous to the Depository Trust and Clearing Corporation (DTCC) that electronically records the assignment of stock and bond certificates, thus eliminating the need to create a new certificate each time a security is 

bought or sold. The benefit of MERS is similar to that of the DTCC: It reduces the 

errors associated with paper processes and increases system efficiency.11 Also like 

the DTCC, MERS is adjacent to the systems that create the data it tracks; it is integrated with, but independent of, its member organizations. The two primary differences between the organizations are that the DTCC holds title to the financial 

instrument and that it clears trades between its participants (including the exchange of funds between the counter-parties). 

MERS CERTIFYING OFFICERS 

Mortgage Electronic Registration Systems, Inc. takes the majority of its actions 

as the mortgagee through the use of officers commonly referred to as ‘‘certifying officers.’’ From inception, the concept of certifying officers has always been fundamental 

to the operations of MERS. In the white paper calling for the creation of MERS (referenced in footnote 11), it was recognized that members would need to have a form 

of authority to act on behalf of MERS when MERS is the mortgagee on their behalf. 

That authority took the form of electing persons (designated by the member) as officers with limited authority to take certain actions. The offices to which each of these 

individuals are officially appointed are vice president and assistant secretary. The 

authority granted to these officers is limited to: (1) executing lien releases, (2) executing mortgage assignments, (3) initiating foreclosures, (4) executing proofs of 

claims and other bankruptcy related documents (e.g., motions for relief of the automatic stay), (5) executing modification and subordination agreements needed for refinancing activities, (6) endorsing over mortgage payment checks made payable to 

MERS (in error) by borrowers, and (7) taking such other actions and executing documents necessary to fulfill the member’s servicing duties. 

It is important to note that the certifying officers are the same officers whom the 

lenders and servicers use to carry out these functions even when MERS is not the 

mortgagee. MERS has specific controls over who can be identified by its members 

as a certifying officer. To be a MERS certifying officer, one must be a company officer of the member institution, have basic knowledge of MERS, and pass a certifying 

examination administered by MERS. 

Under the corporate law in Delaware (where MERS is incorporated), there is no 

requirement that an officer of a corporation also be an employee of that corporation. 

A corporation is allowed to appoint individuals to be officers without having to employ those individuals or even pay them. This concept is not limited to MERS. Corporations cannot operate without officers; they can and often do operate without employees. It is not uncommon for large organizations to have all its employees employed by an operating company and for those employees to be elected as officers 

of affiliated companies that are created for other purposes (all corporations are required by law to have officers to act for it). Even for loans where MERS is not the 

mortgagee, employees of the servicer are generally delegated the power to take actions (e.g., initiate foreclosures) and execute documents (e.g., lien releases and assignments) on behalf of the owner of the loan (and the servicer, in turn, may further 

delegate such authority to a third-party vendor). 

MERS AND FORECLOSURE 

When Mortgage Electronic Registration Systems, Inc. is the mortgagee of record, 

and the borrower is in default on the mortgage, and the note-owner decides to foreclose, foreclosure can be undertaken in one of two ways: Either in the name of 

MERS, or in the name of the noteholder (which is usually the servicer). 

If the noteholder chooses to foreclose in its own name, under the MERS rules, it 

must be named as mortgagee in the land records. MERS, through the MERS member’s designated certifying officer, will execute an assignment to the foreclosing company and the assignment will be recorded in the land records. At this point, MERS 

no longer holds any legal interest in the mortgage, and it plays no further role in 

the foreclosure process. Most loans are assigned out of MERS in this way and not 

foreclosed in the name of MERS. 
64 

If the note-owner chooses to have Mortgage Electronic Registration Systems, Inc. 

foreclose, then the note-owner endorses the note in blank (if it has not already done 

so), making it bearer paper, and grants possession of the note to a MERS certifying 

officer. This makes MERS the noteholder. Since MERS is already the mortgagee in 

the land records, MERS is now able to legally begin the foreclosure process on behalf of the note-owner. The foreclosure is managed entirely by the member institution’s MERS certifying officer. This person typically works in the default department 

within the MERS member institution so they are familiar with the various State 

foreclosure requirements. The member manages the relationship with the law firm 

that is handling the foreclosure. The member retains the law firm on behalf of 

MERS and the member provides the necessary documents and information to the 

law firm. The member obtains these documents and information from the servicing 

files and system, which are maintained by the member. 

As noted earlier, the MERS certifying officers are the same employee officers who 

handle foreclosure functions for the MERS member institutions. Whether a foreclosure is initiated in the name of MERS and handled by the certifying officers, or 

by the lender in its own name, the same people would be doing the work. Likewise, 

the loan file remains with the servicer as it did before MERS existed. MERS is not 

a repository for mortgage documents or promissory notes. 

It is important to note that Mortgage Electronic Registration Systems, Inc. only 

initiates foreclosure when it has been instructed to do so by the servicer (acting on 

behalf of the note-owner) or directly by the note-owner. MERS has strict rules and 

procedures governing foreclosure, most notably a requirement that the certifying officer be in possession of the mortgage note when foreclosing in the name of MERS. 

In addition, pursuant to a 2006 MERS membership rule, no foreclosures in the 

name of MERS are allowed in the State of Florida. In the event a MERS member 

contracts out foreclosure operations to a vendor or a law firm, a separate contract 

is entered into by MERS, the MERS member and the contracted firm for the purpose of establishing our understanding of the obligations of the parties and for the 

purposes of designating certifying officers. The specific, authorized functions of 

MERS certifying officers are enumerated in a corporate resolution by which MERS 

makes the appointment. 

Because there is a choice whether a foreclosure is done in the name of the 

servicer, note-owner or MERS, one might wonder if there is an advantage in choosing one way or the other. The advantage to institutions by foreclosing in the name 

of MERS is that they do not need to record an assignment from MERS to themselves, saving them time and money. The advantage that some lenders see in not 

foreclosing in the name of MERS is that the MERS rules are strict and require that 

the note be produced. If the lender does not want to do this, the MERS member 

cannot commence a foreclosure action in the name of MERS, but must assign the 

mortgage out of MERS. This is a major reason why most loans are not foreclosed 

in the name of MERS. 

In 2005, when it became apparent to us that foreclosures undertaken in Florida 

were relying excessively on lost note affidavits, MERS adopted a rule forbidding the 

use of lost note affidavits when foreclosures were done in the name of MERS in 

Florida. That rule was extended nationally in 2006 and is still in effect today. 

MERS believes that borrowers are entitled to know that the company foreclosing 

has all of the necessary paperwork and rights to do so. Showing up with the original 

note provides the borrower and the court with proof that the foreclosing company 

is the proper party to foreclose. 

COMMON QUESTIONS ABOUT MERS STRUCTURE AND ROLE IN MORTGAGE MARKETS 

When servicing rights or promissory notes are sold for loans where MERS is not 

the mortgagee, the usual practice is for the seller to execute and record an instrument assigning the mortgage lien to the purchaser (commonly referred to as an ‘‘assignment’’). Assignments are not required by law to be recorded in the land records. 

The primary reason assignments are recorded (in cases where MERS is not the 

mortgagee), stems from the appointment of servicers to administer the loan on behalf of the mortgage loan owner. In which case, the servicer will be assigned the 

mortgage lien (thus becoming the mortgagee) in order to receive the service of process related to that mortgage loan. When Mortgage Electronic Registration Systems, 

Inc. is the mortgagee (i.e., holds the legal title to the mortgage lien), there is no 

need for an assignment between its members because MERS is the common agent 

for them. It is not the case that the assignments are now being done electronically 

through the MERS® System instead of being recorded in the land records. The need 

for an assignment is eliminated because title to the mortgage lien has been grounded in MERS. Moreover, transfers of mortgage notes and servicing rights are not re-
65 

12The essential elements of the legal principles underlying MERS can be found in ‘‘MERS 

Under Attack: Perspective on Recent Decisions from Kansas and Minnesota,’’ an article by Barkley and Barbara Clark in the February 2010 edition of Clark’s Secured Transactions Monthly. 

A copy of this article can be found in Attachment Four. 13On loans originated by correspondent lenders or brokers (where MERS is not the mortgagee), the costs of preparing assignments and the associated filing fees are listed on the HUD– 

1 and paid directly by the borrower. 

cordable transactions (and have never been reflected in the land records) because 

they are not a conveyance of an interest in real property that is entitled to be recorded; only the transfer of the lien is a conveyance. A promissory note is sold by 

endorsing the note, and delivering it to the purchasers. Servicing rights are nonrecordable contracts rights. Mortgage Electronic Registration Systems, Inc. remains 

the mortgagee regardless of the number of these non-recordable transfers that may 

occur during the life of the loan. Upon such sales, the seller and purchaser update 

the MERS® System of the transfer with an ‘‘electronic handshake.’’ If the purchaser 

does not confirm the transaction, it is flagged by the MERS® System for follow-up. 

MERS also audits its members for the accuracy of the information they provide to 

the MERS® System. 

The only reason servicers needed to appear in the county land records before 

MERS was so they could receive legal notices pertaining to the property. That role 

is now played by MERS as their common agent. MERS runs a massive mailroom 

and help desk operation to handle millions of legal notices for its members, which 

makes it far more efficient and certain that mail will go to the correct place. Today, 

if a servicer ‘‘boxes up’’ in the middle of the night and disappears, the homeowner 

can have confidence that legal notices will be delivered to the correct successor company without delay. 

The chain of title starts and stops with Mortgage Electronic Registration Systems, 

Inc. as the mortgagee. MERS, as the agent for the note-owner, can hold legal title 

for the note-owner in the land records.12 The basic concept of a recording statute 

is that a person or company claiming an interest in land protects its interest by recording that interest at the county recorder of deeds office. The recorded document 

provides constructive notice to the world of the claim. In many States, there is no 

requirement that a conveyance of real estate must be recorded in the land records. 

The concept of nominees appearing in the land records on behalf of the true owner 

has long been recognized. It has never been the case that the true owners of interests in real estate could be determined using the land records. 

The use of MERS is in compliance with the statutory intent of the State recording 

acts. When MERS is the mortgagee, the mortgage is recorded at the county land 

records, thereby putting the public on notice that there is a lien on the property. 

As the 1993 white paper describing MERS makes clear, at certain time periods, the 

flow of assignments were overwhelming the county recorder system, resulting in 

long backlogs, and in some cases, taking the county recorder over a year to record 

an assignment. Now that assignments are eliminated because a common agent like 

MERS is holding the mortgage lien, the land records can operate more efficiently. 

Multiple assignments can lead to errors and uncertainty in the chain of title because assignments were often missing, incomplete, inaccurate, or misfiled. In situations where the recorded assignment identified the wrong property, the lender had 

not perfected its lien on the right property but had clouded the title for some unrelated third party. 

The MERS® System also complements the county land records by providing additional information that was never intended to be recorded at the county level, namely the information about the mortgage loan servicer, and now, with the addition of 

MERS® InvestorID, the name of the investor. 

Some have raised questions about the reduction of recording fees that has accompanied the elimination of the need to record assignments, and there have been suggestions that these fees are somehow owed or outstanding. Fees are paid for a service performed, and if a document is eliminated because it is no longer legally necessary, no fee is due and owing because there is nothing to record. Another way to 

look at it is that, because MERS greatly reduces the workload of county recorders, 

the lower operating expenses of the county recorder’s office offsets the loss in fee 

income. Moreover, it would be the borrower, and not the lender, who ultimately pays 

the costs of recording assignments, either directly or indirectly.13

The use of MERS is based on sound legal principles. Its legal validity has been 

upheld as it was in the Cervantes, Jackson and In re Tucker cases, to just name 

a few. While there is much support by courts for the MERS role as a common agent, 

there have been cases where there have been evidentiary issues, which have resulted in outcomes that do not always let MERS, or its members, foreclose without 
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14 Individual States handle real estate foreclosures differently. In some States the foreclosure 

process is judicial, and in some States it is non-judicial. Under both systems, timeframes and 

terms vary widely from State to State. A brief, general, description of both processes prepared 

by the Mortgage Bankers Association can be found in Attachment Five. 15Some important recent cases upholding the rights of MERS include: 

In re Mortgage Electronic Registration Systems (MERS) Litigation, a multi-district 

litigation case in Federal court in Arizona where the court issued a favorable opinion, stating 

that ‘‘The MERS System is not fraudulent, and MERS has not committed any fraud.’’ 

In re Tucker (9/20/2010), where a Missouri bankruptcy judge found that the language of the 

deed of trust clearly authorizes MERS to act on behalf of the lender in serving as the legal title 

holder. 

Mortgage Electronic Registration Systems, Inc. v. Bellistri, 2010 WL 2720802 (E.D. Mo. 

2010), where the court held that Bellistri’s failure to provide notice to MERS violated MERS’ 

constitutional due process rights. 

Taylor v. Deutsche Bank Nat’l Trust Co., So. 3d, 2010 WL 3056612 (Fla. 5th DCA 2010), 

where the court held the MERS mortgage to be valid under Florida law, and held that MERS 

may assign its rights in the mortgage to the foreclosing company who holds the note. The Florida court also held that where MERS is described as the ‘‘mortgagee under the Security Instrument’’ the document grants to MERS legal status under the UCC, which MERS can assign to 

the foreclosing bank. 

Deutsche Bank Natl. Trust Co. v. Traxler, 2010–Ohio–3940, where the Ohio Court of Appeals recognizes MERS’ authority to assign a mortgage when designated as both a nominee and 

mortgagee. 

King v. American Mortgage Network, et al., United States District Court, District of Utah, 

Northern Division (Case No. 1:09–CV–125 TS), where the court, interpreting the language of 

the deed of trust, held that MERS had the authority to initiate foreclosure proceedings, appoint 

a trustee, and to foreclose and sell the property. 16 A review of the use of MERS in all 50 States was done by Covington and Burling in 1996 

and 1997 as part of the due diligence associated with the creation of MERS. It is available upon 

request. 

going back and proving up the right to take action. States have laws that govern 

foreclosures 14 and when the process is not followed, it can, and should result in a 

court not allowing it to go forward. In some of these cases, judges wanting more evidence or information about MERS have made comments about MERS. In light of 

the recent foreclosure crisis, it is probable that MERS will continue to be challenged. But we are confident that when courts are provided with all of the facts, 

MERS will continue to prevail.15 A MERS case law outline (current through October 

20, 2010) is available upon request.16

MERS CONTINUES TO IMPROVE ITS PROCESSES 

In 2009, when it came to our attention that some employees designated by member institutions to serve as MERS certifying officers were not entrusted by their own 

institutions with signing authority, MERS enhanced its procedures to require that 

each MERS certifying officer be a company officer of the member institution. In addition, MERS has developed a primer containing information to be reviewed by each 

prospective MERS certifying officer. To test this knowledge, MERS instituted an online examination to make sure prospective certifying officers had a basic knowledge 

of MERS and of their roles and responsibilities as MERS certifying officers. MERS 

requires that these certifications be renewed annually, and we also instituted a recertification process for current certifying officers who had been designated prior to 

establishment of the online examination. MERS will continue to enforce these policies and refine its testing and certification program in recognition of the responsibility involved in initiating a foreclosure on someone’s home. 

When we saw actions were being undertaken to accelerate foreclosure document 

processing, we became concerned that certifying officers might be pressured to perform their responsibilities in a manner inconsistent with the MERS rules. When we 

did not receive the assurances we thought appropriate that this would not happen, 

we suspended relationships with some prominent players involved in the foreclosure 

process. 

When we discovered that some ‘‘robo-signers’’ were MERS certifying officers, we 

contacted those certifying officers and suspended their authority. They will not be 

recertified until they retrain and submit to reexamination, and the members who 

employed them provide MERS with a plan on what will be changed within their 

companies to prevent this from happening again. 

The MERS management team is committed to the highest standards; we believe 

that MERS adds great value to our nation’s system of housing finance in a way that 

benefits financial institutions, borrowers and the Government. There are many benefits derived from the MERS database: 

• The MERS database is available to borrowers to locate their servicers, and in 

many cases, to identify note-owners. 
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• For local communities, MERS has become a much-needed link between code enforcement officers and the servicing community to help combat the blight that 

vacant properties bring to neighborhoods. Over 600 government institutions 

(cities, municipalities and States) utilize the MERS® System for free to look up 

the property preservation contacts for loans registered on the system. This 

helps save the code enforcement officers much needed time in searching for the 

company directly responsible for the upkeep of that vacant property. 

• For law enforcement agencies, MERS aids in combating mortgage fraud through 

the detection of undisclosed multiple liens taken out by fraudsters for the same 

social security number or property. 

Also, with MERS, lien releases occur quickly at the time of payoff for borrowers 

because there can be no break in the chain of title with MERS. And finally, foreclosures in the name of MERS are not allowed without the note. 

IDEAS FOR THE FUTURE 

The MERS database, coupled with the Mortgage Identification Number, is a powerful tool that can be harnessed by the Congress and the industry to improve the 

mortgage finance system. There are a number of ideas that are worth considering 

so that when we emerge from this current crisis we have a housing finance system 

that meets our needs. 

1. All residential home loans should be uniquely identified and tracked on a national database, which should include: 

a. Who is the borrower? 

b. What/Where is the property? 

c. Who is the owner of the loan’s promissory note (the originator/investor)? 

d. Who is the servicer of the loan (the mortgage company)? 

2. The cost of registration for the loan should be included with the other origination fees and disclosed on the HUD–1 at closing. 

3. The national database should also track who has physical custody of the original promissory note (the mortgages are always available in the county land records). 

4. The database should reflect both current and historical information regarding 

the home loan. 

5. The national unique identifier should be a full life-of-loan identifier, from origination through final satisfaction (payoff) and lien release. 

6. All Federal data systems that deal with home loans should be required to integrate the unique national identification number, so that information regarding loans 

can be linked across multiple data sources, e.g., the FHA should be able to look at 

HUD data, and FDIC should be able to look at SEC information, always knowing 

that they are comparing apples to apples. State and local government agencies 

should also be encouraged to adopt the number. 

Mr. Chairman, all of us at MERS keenly understand that while owning your own 

home is a dream, losing that home is a nightmare. As professionals who have dedicated ourselves to helping people realize their dream, we are deeply dismayed by 

the current foreclosure crisis. We take our role as a mortgagee very seriously and 

we see our database as a key to moving toward better access to information and 

transparency for consumers. 

I am hopeful that as people understand more about MERS and the role we play, 

they will see that MERS adds great value to our nation’s system of housing finance 

in ways that benefit not just financial institutions, the broader economy and the 

Government, but—most of all—real people. Thank you for holding these hearings 

and inviting MERS to participate. 

ATTACHMENTS: 

1) Sample mortgage document 

2) MBA Fact Sheet on MERS 

3) ‘‘Title Transfer Law 101,’’ by Karen Gelernt, American Banker, October 19, 

2010 

4) ‘‘MERS Under Attack: Perspective on Recent Decisions from Kansas and Minnesota,’’ by Barkley and Barbara Clark, Clark’s Secured Transactions Monthly, 

February 2010 

5) ‘‘Judicial Versus Non-Judicial Foreclosure,’’ Mortgage Bankers Association, October 2010 
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*Adam J. Levitin in an Associate Professor of Law at the Georgetown University Law Center, in Washington, D.C., and Robert Zinman Scholar in Residence at the American Bankruptcy 

Institute. He also serves as Special Counsel to the Congressional Oversight Panel, and has been 

the Robert Zinman Scholar in Residence at the American Bankruptcy Institute. 

Before joining the Georgetown faculty, Professor Levitin practiced in the Business Finance & 

Restructuring Department of Weil, Gotshal & Manges, LLP in New York, and served as law 

clerk to the Honorable Jane R. Roth on the United States Court of Appeals for the Third Circuit. 

Professor Levitin holds a J.D. from Harvard Law School, an M.Phil and an A.M. from Columbia University, and an A.B. from Harvard College. 

Professor Levitin has not received any Federal grants nor has he received any compensation 

in connection with his testimony. The views expressed in Professor Levitin’s testimony are his 

own and do not represent the positions of the Congressional Oversight Panel. 1 HOPE Now Data Reports. 

2 Id. 

3Mortgage Bankers Association, National Delinquency Survey. 

PREPARED STATEMENT OF ADAM J. LEVITIN * 

ASSOCIATE PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER

NOVEMBER 16, 2010 

Executive Summary 

The mortgage foreclosure process is beset by a variety of problems. These range 

from procedural defects (including, but not limited to robosigning) to outright counterfeiting of documents to questions about the validity of private-label mortgage 

securitizations that could mean that these mortgage-backed securities are not actually backed by any mortgages whatsoever. While the extent of these problems is unknown at present, the evidence is mounting that it is not limited to one-off cases, 

but that there may be pervasive defects throughout the foreclosure and 

securitization processes. 

The problems in the mortgage market are highly technical, but they are extremely 

serious. At best they present problems of fraud on the court, clouded title to property, and delay in foreclosures that will increase the shadow housing inventory and 

drive down home prices. At worst, they represent a systemic risk of liabilities in the 

trillions of dollars, greatly exceeding the capital of the United State’s major financial 

institutions. 

Congress would do well to ensure that Federal regulators are undertaking a thorough investigation of foreclosure problems and to consider the possibilities for a 

global settlement of foreclosure problems, loan modifications, and the housing debt 

overhang that stagnate the economy and pose potential systemic risk. 

Mr. Chairman, Members of the Committee: 

Good morning. My name is Adam Levitin. I am an Associate Professor of Law at 

the Georgetown University Law Center in Washington, D.C., where I teach courses 

in bankruptcy, commercial law, contracts, and structured finance. I also serve as 

Special Counsel to the Congressional Oversight Panel for the Troubled Asset Relief 

Program. The views I express today are my own, however. 

We are now well into the fourth year of the foreclosure crisis, and there is no end 

in sight. Since mid-2007 around 8 million homes entered foreclosure,1 and over 

three million borrowers lost their homes in foreclosure.2 As of June 30, 2010, the 

Mortgage Bankers Association reported that 4.57 percent of 1–4 family residential 

mortgage loans (roughly 2.5 million loans) were currently in the foreclosure, process 

a rate more than quadruple historical averages. (See Figure 1.) Additionally, 9.85 

percent of mortgages (roughly 5 million loans) were at least a month delinquent.3
103 

4Mortgage Bankers Association, National Delinquency Surveys. 

5See, e.g., Press Release, U.S. Dept. of Housing and Urban Development, Bush Administration 

to Help Nearly One-Quarter of a Million Homeowners Refinance, Keep Their Homes; FHA to 

implement new ‘‘FHASecure’’ refinancing product (Aug. 31, 2007), available at http:// 

www.hud.gov/news/release.cfm?content=pr07-123.cfm; Press Release, U.S. Dept. of Housing and 

Urban Development, FHA Helps 400,000 Families Find Mortgage Relief; Refinancing on pace 

to help half-million homeowners by year’s end (Oct. 24, 2008), available at http://www.hud.gov/ 

news/release.cfm?content=pr08-167.cfm. 6Michael Corkery, Mortgage ‘Cram-Downs’ Loom as Foreclosures Mount, Wall St. J., Dec. 31, 

2008. 7Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure, Wash. Post. Dec. 17, 2008, 

at A1. 8See FHA Single Family Outlook, Sept. 2010, at http://www.hud.gov/offices/hsg/rmra/oe/ 

rpts/ooe/olcurr.xls-2010-11-02, Row 263 (note that FHA fiscal years begin in October, so that 

Fiscal Year 2009 began in October 2008). 

Chart 1: Percentage of 1–4 Family Residential Mortgages in Foreclosure4

Private lenders, industry associations, and two successive Administrations have 

made a variety of efforts to mitigate the crisis and encourage loan modifications and 

refinancings. A series of much hyped initiatives, such as the FHASecure refinancing 

program and the Hope4Homeowners have all met what can charitably be described 

as limited success. FHASecure, predicted to help 240,000 homeowners,5 assisted 

only a few thousand borrowers before it wound down,6 while Hope4Homeowners, 

originally predicted to help 400,000 homeowners,7 had closed only 130 refinancings 

as of September 30, 2010.8 The Home Affordable Modification (HAMP) has also 

failed, producing 495,898 permanent modifications through September 2010. This 

number is likely to be a high water mark for HAMP, as new permanent modifications are decreasing rapidly while defaults on permanent modifications rise; if current trends continue, by year’s end the number of active permanent HAMP modifications will actually decline. 

A number of events over the past several months have roiled the mortgage world, 

raising questions about: 

(1) Whether there is widespread fraud in the foreclosure process; 
104 

9 I emphasize, however, that this testimony does not purport to be a complete and exhaustive 

treatment of the issues involved and that many of the legal issues discussed are not settled law, 

which is itself part of the problem; trillions of dollars of mortgage securitization transactions 

have been done without a certain legal basis. 

(2) Securitization chain of title, namely whether the transfer of mortgages in the 

securitization process was defective, rendering mortgage-backed securities into 

non-mortgage backed securities; 

(3) Whether the use of the Mortgage Electronic Registration System (MERS) creates legal defects in either the secured status of a mortgage loan or in mortgage assignments; 

(4) Whether mortgage servicers’ have defaulted on their servicing contracts by 

charging predatory fees to borrowers that are ultimately paid by investors; 

(5) Whether investors will be able to ‘‘putback’’ to banks securitized mortgages on 

the basis of breaches of representations and warranties about the quality of 

the mortgages. 

These issues are seemingly disparate and unconnected, other than that they all 

involve mortgages. They are, however, connected by two common threads: the necessity of proving standing in order to maintain a foreclosure action and the severe conflicts of interests between mortgage servicers and MBS investors. 

It is axiomatic that in order to bring a suit, like a foreclosure action, the plaintiff 

must have legal standing, meaning it must have a direct interest in the outcome 

of the legislation. In the case of a mortgage foreclosure, only the mortgagee has such 

an interest and thus standing. Many of the issues relating to foreclosure fraud by 

mortgage servicers, ranging from more minor procedural defects up to outright 

counterfeiting relate to the need to show standing. Thus problems like false affidavits of indebtedness, false lost note affidavits, and false lost summons affidavits, as 

well as backdated mortgage assignments, and wholly counterfeited notes, mortgages, and assignments all relate to the evidentiary need to show that the entity 

bringing the foreclosure action has standing to foreclose. 

Concerns about securitization chain of title also go to the standing question; if the 

mortgages were not properly transferred in the securitization process (including 

through the use of MERS to record the mortgages), then the party bringing the foreclosure does not in fact own the mortgage and therefore lacks standing to foreclose. 

If the mortgage was not properly transferred, there are profound implications too 

for investors, as the mortgage-backed securities they believed they had purchased 

would, in fact be non-mortgage-backed securities, which would almost assuredly 

lead investors to demand that their investment contracts be rescinded, thereby exacerbating the scale of mortgage putback claims. 

Putback claims underscore the myriad conflicts of interest between mortgage 

servicers and investors. Mortgage servicers are responsible for prosecuting on behalf 

of MBS investors, violations of representations and warranties in securitization 

deals. Mortgage servicers are loathe to bring such actions, however, not least because they would often be bringing them against their own affiliates. Servicers’ failure to honor their contractual duty to protect investors’ interest is but one of numerous problems with servicer conflicts of interest, including the levying of junk fees 

in foreclosures that are ultimately paid by investors and servicing first lien loans 

while directly owning junior liens. 

Many of the problems in the mortgage securitization market (and thus this testimony) are highly technical, but they are extremely serious.9 At best they present 

problems of fraud on the court and questionable title to property. At worst, they represent a systemic risk of liabilities in the trillions of dollars, greatly exceeding the 

capital of the United State’s major financial institutions. While understanding the 

securitization market’s problems involves following a good deal of technical issues, 

it is critical to understand from the get-go that securitization is all about technicalities. 

Securitization is the legal apotheosis of form over substance, and if securitization 

is to work it must adhere to its proper, prescribed form punctiliously. The rules of 

the game with securitization, as with real property law and secured credit are, and 

always have been, that dotting ‘‘i’s’’ and crossing ‘‘t’s’’ matter, in part to ensure the 

fairness of the system and avoid confusions about conflicting claims to property. 

Close enough doesn’t do it in securitization; if you don’t do it right, you cannot ensure that securitized assets are bankruptcy remote and thus you cannot get the ratings and opinion letters necessary for securitization to work. Thus, it is important 

not to dismiss securitization problems as merely ‘‘technical;’’ these issues are no 

more technicalities than the borrower’s signature on a mortgage. Cutting corners 
105 

10 A notable exception, however, is for cases where the default is caused by a servicer improperly force-placing insurance or misapplying a payment, resulting in an inflated loan balance that 

triggers a homeowner default. 11 Inside Mortgage Finance, 2010 Mortgage Market Statistical Annual. 12 Id. 13 Ivy L. Zelman et al., Mortgage Liquidity du Jour: Underestimated No More, 28 exhibit 21 

(Credit Suisse, Equity Research Report, Mar. 12, 2007). 14 Inside Mortgage Finance, 2010 Mortgage Market Statistical Annual. 15 Inside Mortgage Finance, 2010 Mortgage Market Statistical Annual. From 2001–2007, only 

14 percent of second lien mortgages originated were securitized. Id. Second lien mortgages create a conflict of interest beyond the scope of this paper. In many cases, second lien loans are 

owned by financial institutions that are servicing (but do not own) the first lien loan. See Hearing Before the House Financial Services Committee, Apr. 13, 2009, ‘‘Second Liens and Other 

Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program’’ (testimony of 

Barbara DeSoer, President, Bank of America Home Loans) at 6 (noting that Bank of America 

owns the second lien mortgage on 15 percent of the first lien mortgages it services); Hearing 

Before the House Financial Services Committee, Apr. 13, 2009, ‘‘Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program’’ (testimony of David 

Lowman, CEO for Home Lending, JPMorgan Chase) at 5 (noting that Chase owns the second 

lien mortgage on around 10 percent of the first lien mortgages it services). The ownership of 

the second while servicing the first creates a direct financial conflict between the servicer qua 

servicer and the servicer qua owner of the second lien mortgage, as the servicer has an incentive 

to modify the first lien mortgage in order to free up borrower cash flow for payments on the 

second lien mortgage. 16The structure illustrated is for private-label mortgage-backed securities. Ginnie Mae and 

GSE securitizations are structured somewhat differently. The private-label structure can, of 

course, be used to securitize any asset, from oil tankers to credit card debt to song catalogues, 

not just mortgages. 

may improve securitization’s economic efficiency, but it undermines its legal viability. 

Finally, as an initial matter, let me also emphasize that the problems in the 

securitization world do not affect the whether homeowners owe valid debts or have 

defaulted on those debts. Those are separate issues about which there is no general 

controversy, even if debts are disputed in individual cases.10

This written testimony proceeds as follows: Part I presents an overview of the 

structure of the mortgage market, the role of mortgage servicers, the mortgage contract and foreclosure process. Part II presents the procedural problems and fraud 

issues that have emerged in the mortgage market relating to foreclosures. Part III 

addresses chain of title concerns. Part IV considers the argument that the problems 

in foreclosures are mere technicalities being used by deadbeats to delay foreclosure. 

Part V concludes. 

I. BACKGROUND ON SECURITIZATION, SERVICING, AND THE FORECLOSURE PROCESS 

A. MORTGAGE SECURITIZATION 

Most residential mortgages in the United States are financed through 

securitization. Securitization is a financing method involving the issuance of securities against a dedicated cash flow stream, such as mortgage payments, that are isolated from other creditors’ claims. Securitization links consumer borrowers with capital market financing, potentially lowering the cost of mortgage capital. It also allows financing institutions to avoid the credit risk, interest rate risk, and liquidity 

risk associated with holding the mortgages on their own books. 

Currently, about 60 percent of all outstanding residential mortgages by dollar 

amount are securitized.11 The share of securitized mortgages by number of mortgages outstanding is much higher because the securitization rate is lower for larger 

‘‘jumbo’’ mortgages.12 Credit Suisse estimates that 75 percent of outstanding firstlien residential mortgages are securitized.13 In recent years, over 90 percent of 

mortgages originated have been securitized.14 Most second-lien loans, however, are 

not securitized.15

Although mortgage securitization transactions are extremely complex and vary 

somewhat depending on the type of entity undertaking the securitization, the core 

of the transaction is relatively simple.16

First, a financial institution (the ‘‘sponsor’’ or ‘‘seller’’) assembles a pool of mortgage loans. The loans were either made (‘‘originated’’) by an affiliate of the financial 

institution or purchased from unaffiliated third-party originators. Second, the pool 

of loans is sold by the sponsor to a special-purpose subsidiary (the ‘‘depositor’’) that 

has no other assets or liabilities. This is done to segregate the loans from the spon-
106 

17This intermediate entity is not essential to securitization, but since 2002, Statement of Financial Accountings Standards 140 has required this additional step for off-balance-sheet treatment because of the remote possibility that if the originator went bankrupt or into receivership, 

the securitization would be treated as a secured loan, rather than a sale, and the originator 

would exercise its equitable right of redemption and reclaim the securitized assets. Deloitte & 

Touche, Learning the Norwalk Two-Step, Heads Up, Apr. 25, 2001, at 1. 18The trustee will then typically convey the mortgage notes and security instruments to a 

‘‘master document custodian,’’ who manages the loan documentation, while the servicer handles 

the collection of the loans. 19 A REMIC is a real estate mortgage investment conduit, as defined under I.R.C. §§ 860A– 

860G. 20See Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage Backed Securities, 82 S. Cal. L. Rev. 1075, 1093–98. (2009). 21See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing Pol’y 

Debate 753, 754 (2004). 22The servicing of nonsecuritized loans may also be outsourced. There is little information 

about this market because it does not involve publicly available contracts and does not show 

up in standard data. 

sor’s assets and liabilities.17 Third, the depositor sells the loans to a passive, specially created, single-purpose vehicle (SPV), typically a trust in the case of residential mortgages.18 The SPV issues certificated securities to raise the funds to pay the 

depositor for the loans. Most of the securities are debt securities—bonds—but there 

will also be a security representing the rights to the residual value of the trust or 

the ‘‘equity.’’ 

The securities can be sold directly to investors by the SPV or, as is more common, 

they are issued directly to the depositor as payment for the loans. The depositor 

then resells the securities, usually through an underwriting affiliate that then 

places them on the market. (See Figure 2, below.) The depositor uses the proceeds 

of the securities sale (to the underwriter or the market) to pay the sponsor for the 

loans. Because the certificated securities are collateralized by the residential mortgage loans owned by the trust, they are called residential mortgage-backed securities (RMBS). 

A variety of reasons—credit risk (bankruptcy remoteness), off-balance sheet accounting treatment, and pass-through tax status (typically as a REMIC 19 or grantor 

trust)—mandate that the SPV be passive; it is little more than a shell to hold the 

loans and put them beyond the reach of the creditors of the financial institution.20

Loans, however, need to be managed. Bills must be sent out and payments collected. 

Thus, a third-party must be brought in to manage the loans.21 This third-party is 

the servicer. The servicer is supposed to manage the loans for the benefit of the 

RMBS holders. 

Every loan, irrespective of whether it is securitized, has a servicer. Sometimes 

that servicer is a first-party servicer, such as when a portfolio lender services its 

own loans. Other times it is a third-party servicer that services loans it does not 

own. All securitizations involve third-party servicers, but many portfolio loans also 

have third-party servicers, particularly if they go into default. Third-party servicing 

contracts for portfolio loans are not publicly available, making it hard to say much 

about them, including the precise nature of servicing compensation arrangements 

in these cases or the degree of oversight portfolio lenders exercise over their thirdparty servicers. Thus, it cannot always be assumed that if a loan is not securitized 

it is being serviced by the financial institution that owns the loan, but if the loan 

is securitized, it has third-party servicing. 

Securitization divides the beneficial ownership of the mortgage loan from legal 

title to the loan and from the management of the loans. The SPV (or more precisely 

its trustee) holds legal title to the loans, and the trust is the nominal beneficial 

owner of the loans. The RMBS investors are formally creditors of the trust, not owners of the loans held by the trust. 

The economic reality, however, is that the investors are the true beneficial owners. The trust is just a pass-through holding entity, rather than an operating company. Moreover, while the trustee has nominal title to the loans for the trust, it is 

the third-party servicer that typically exercises legal title in the name of the trustee. 

The economic realities of securitization do not track with its legal formalities; 

securitization is the apotheosis of legal form over substance, but punctilious respect 

for formalities is critical for securitization to work. 

Mortgage servicers provide the critical link between mortgage borrowers and the 

SPV and RMBS investors, and servicing arrangements are an indispensable part of 

securitization.22 Mortgage servicing has become particularly important with the 

growth of the securitization market. 
107 

23See ACE Sec. Corp. Home Equity Loan Trust, Series 2006–NC3, Prospectus Supplement 

(Form 424B5) S–11 (Nov. 21, 2006), available at http://www.sec.gov/Archives/edgar/data/ 

1380884/000114420406049985/v058926l424b5.htm. 24This section of my testimony comes from Adam J. Levitin & Larry Cordell, What RMBS 

Servicing Can Learn from CMBS Servicing, working paper, November 2010. 25See In re Taylor, 407 B.R. 618 (Bankr. E.D. Pa. 2009), rev’d 2010 WL 624909 (E.D. Pa. 

2010). 26 Arguably servicers have a fourth line of business—the management of real estate owned 

(REO). REO are foreclosed properties that were not purchased by third-parties at the foreclosure 

sale. REO management involves caring for and marketing the REO. It does not require negotiations with the homeowner (who is evicted) or junior lienholders (whose liens are generally extinguished by the foreclosure). 

Figure 2. Private-Label Mortgage Securitization Structure 23

B. THE MORTGAGE SERVICING BUSINESS24

The nature of the servicing business in general militates toward economies of 

scale and automation. Servicing combines three distinct lines of business: transaction processing, default management, and loss mitigation. Transaction processing 

is a highly automatable business, characterized by large economies of scale. Default 

management involves collections and activities related to taking defaulted loans 

through foreclosure. Like transaction processing, default management can be automated,25 as it does not require any negotiation with the homeowner, insurers, or 

junior lienholders.26

Loss mitigation is considered an alternative to foreclosure, and includes activities 

such as repayment plans, loan modifications, short sales and deeds in lieu of foreclosure. Loss mitigation is always a negotiated process and is therefore labor-intensive and expensive. Not only must the homeowner be agreeable to any loss mitigation solution, but so too must mortgage insurers and junior lienholders if they are 

parties on the loan. Because each negotiation is separate and requires a trained employee, there are very few opportunities for automation or economies of scale. Labor 

expenses are also considered overhead, which are all non-reimbursable expenses to 

servicers. And, to the extent that loss mitigation is in the form of a loan modification, redefault and self-cure risk always lurk in the background. Moreover, loss miti-
108 

27Servicing fees are generally 25–50 bps, which translates into $500–$1,000 per year in servicing fees. 28Generally the servicing fee is 25 bps for conventional fixed-rate mortgages, 37.5 bps for conventional ARM loans, 44 bps for Government loans and 50 bps for subprime. 29 In Agency securities, servicers generally stop advancing after borrowers owe their fifth payment, at 120 days past due. For GSE loans, they are then removed from the securities and 

taken on balance sheet. Servicer advances for the four payments are typically not reimbursed 

until termination. 

tion, redefault and self-cure risk always lurk in the background. Moreover, loss mitigation must generally be conducted in addition to default management; the servicer 

must proceed with foreclosure even if attempting to find an alternative, so the cost 

of loss mitigation is additive. Yet, while taking a loan through foreclosure is likely 

to involve lower costs than pursuing loss mitigation, it may not ultimately maximize 

value for RMBS investors because loss severities in foreclosure can easily surpass 

those on a re-performing restructured loan. 

The balance between these different parts of a servicer’s business changes over 

the course of the housing cycle. When the housing market is strong, the transaction 

processing dominates the servicing business, but when the housing market is weak, 

default management and loss mitigation become more important. 

The very short weighted average life (WAL) of RMBS trusts combined with very 

low defaults in most economic environments encouraged servicers to place disproportionate weight on performing loan servicing, which historically has been characterized by small servicing fees and enormous economies of scale. Thus, on a typical 

loan balance of $200,000 today, a servicer might earn between $500 and $1,000 per 

year.27 Given the low-level of annual income per loan, the short WAL of each loan, 

and low default rates in most economic environments before 2006, servicers had few 

incentives to devote resources to loss mitigation, but large incentives to invest in 

performing loan automation to capture the large economies of scale. This left 

servicers wholly unprepared for the elevated level of defaults that began in 2007. 

C. RMBS SERVICER COMPENSATION 

RMBS servicers’ duties and compensation are set forth in a document called a 

‘‘Pooling and Servicing’’ agreement (PSA) also governs the rights of the RMBS certificate holders. RMBS servicers are compensated in four ways. First, they receive 

a ‘‘servicing fee,’’ which is a flat fee of 25–50 basis points (bps) and is a first priority 

payment in the RMBS trust.28 This is by far the greatest portion of servicer income. 

This fee is paid out proportionately across all loans regardless of servicer costs 

through the economic cycle. 

Second, servicers earn ‘‘float’’ income. Servicers generally collect mortgage payments at the beginning of the month, but are not required to remit the payments 

to the trust until the 25th of the month. In the interim, servicers invest the funds 

they have collected from the mortgagors, and they retain all investment income. 

Servicers can also obtain float income from escrow balances collected monthly from 

borrowers to pay taxes and insurance during the course of the year. 

Third, servicers are generally permitted to retain all ancillary fees they can collect 

from mortgagors. This includes things like late fees and fees for balance checks or 

telephone payments. It also includes fees for expenses involved in handling defaulted mortgages, such as inspecting the property. Finally, servicers can hold securities themselves directly as investors, and often hold the junior-most, residual 

tranche in the securitization. 

Servicers face several costs. In addition to the operational expenses of sending out 

billing statements, processing payments, maintaining account balances and histories, and restructuring or liquidating defaulted loans, private label RMBS 

servicers face the expense of ‘‘servicing advances.’’29 When a loan defaults, the 

servicer is responsible for advancing the missed payments of principal and interest 

to the trust as well as paying taxes and insurance on the property. They continue 

to pay clear through liquidation of the property, unless these advances are not 

deemed recoverable. 

The servicer is able to recover advances it has made either from liquidation proceeds or from collections on other loans in the pool, but the RMBS servicer does not 

receive interest on its advances. Therefore, advances can be quite costly to servicers 

in terms of the time value of money and can also place major strains on servicers’ 

liquidity, as the obligation to make advances continues until the loan is liquidated 

or the servicer believes that it is unlikely to be able to recover the advances. In 

some cases, servicers have to advance years’ worth of mortgage payments to the 

trust. 

While RMBS servicers do not receive interest on servicing advances, they are compensated for their ‘‘out-of-pocket’’ expenses. This includes any expenses spent on 
109 

30 Investors also arguably lack a strong incentive to care about servicer performance. See 

Levitin & Twomey, supra note ll. (Noting that resecuritization and investor optimism bias 

means that investors are likely to either be invested only derivatively in subordinated tranches 

or believe that they have selected a tranche that will be ‘‘in-the-money’’ and therefore unaffected 

by marginal changes in servicer behavior). 31See, e.g., Wells Fargo Mortgage Backed Securities 2006–AR10 Trust § 8.01 (‘‘Prior to the 

occurrence of an Event of Default of which a Responsible Officer of the Trustee shall have actual 

knowledge and after the curing of all such Events of Default which may have occurred, the duties and obligations of the Trustee shall be determined solely by the express provisions of this 

Agreement, the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement, no implied covenants or obligations shall 

be read into this Agreement against the Trustee and, in the absence of bad faith on the part 

of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the 

Trustee, and conforming to the requirements of this Agreement.’’). See also Moody’s Investor 

Service, Structured Finance Ratings Methodology: Moody’s Re-examines Trustees’ Role in ABS 

and RMBS, Feb. 4, 2003, at 4. (noting ‘‘Some trustees have argued that their responsibilities 

are limited to strictly administrative functions as detailed in the transaction documents and 

that they have no ‘‘fiduciary’’ duty prior to an event of default.’’). 32MBIA Ins. Corp. v. Royal Indem. Co., 519 F. Supp. 2d 455 (2007), aff’d 321 Fed. Appx. 146 

(3d Cir. 2009) (‘‘Royal argues that Wells Fargo [the trustee] had the contractual obligation to 

analyze data using certain financial accounting principles and to detect any anomalies that 

analysis might have uncovered. As Royal suggests, this analysis may not have been very laborintensive. Yet, the contract did not call for any analysis at all. It simply required Wells Fargo 

to perform rote comparisons between that data and data contained in various other sources, and 

to report any numerical inconsistencies. Wells Fargo did just that.’’). 33Moody’s Investor Service, supra note 31, at 4. 

preserving the collateral property, including force-placed insurance, legal fees, and 

other foreclosure-related expenses. Large servicers frequently ‘‘in-source’’ default 

management expenses to their affiliates. 

D. MONITORING OF RMBS SERVICERS 

RMBS servicing arrangements present a classic principal-agent problem wherein 

the agent’s incentives are not aligned with the principal and the principal has limited ability to monitor or discipline the agent. 

1. Investors 

Investors are poorly situated to monitor servicer behavior because they do not 

have direct dealings with the servicer. RMBS investors lack information about 

servicer loss mitigation activity. Investors do not have access to detailed servicer expense reports or the ability to examine loss mitigation decisions. Investors are able 

to see only the ultimate outcome. This means that investors are limited in their 

ability to evaluate servicers’ performance on an ongoing basis. And even if investors 

were able to detect unfaithful agents, they have little ability to discipline them short 

of litigation.30

2. Trustees 

RMBS feature a trustee, but the name is deceptive. The trustee is not a common 

law trustee with general fiduciary duties. Instead, it is a limited purpose corporate 

trustee whose duties depend on whether there has been a default as defined U.N. 

the PSA. A failure to pay all tranches their regularly scheduled principal and interest payments is not an event of default. Instead, default relates to the financial condition of the servicer, whether the servicer has made required advances to the trust, 

whether the servicer has submitted its monthly report, and whether the servicer has 

failed to meet any of its covenants under the PSA. 

Generally, before there is an event of default, the trustee has a few specifically 

assigned ministerial duties and no others.31 These duties are typically transmitting 

funds from the trust to the RMBS investors and providing investors performance 

statements based on figures provided by the servicer. The trustee’s pre-default duties do not include active monitoring of the servicer. 

Trustees are generally entitled to rely on servicers’ data reporting, and have little 

obligation to analyze it.32 Indeed, as Moody’s has noted, trustees lack the ability to 

verify most data reported by servicers; at best they can ensure that the reported 

data complies with any applicable covenant ratios: 

The trustee is not in a position to verify certain of the numbers reported 

by the servicer. For example, the amount of delinquent receivables and the 

amount of receivables charged off in a given month are figures that are 

taken from the servicer’s own computer systems. While these numbers 

could be verified by an auditor, they are not verifiable by the trustee.33
110 

34Susan J. Macaulay, U.S.: The Role of the Securitisation Trustee, Global Securitisation and 

Structured Finance 2004. Macaulay further notes that: 

It is almost always an event of default under the indenture if the trustee does not receive 

a servicer report within a specified period of time, and the trustee must typically report such 

a failure to the investors, any credit enhancement provider, the rating agencies and others. 

However, the trustee generally has no duties beyond that with respect to the contents of the 

report, although under the TIA, the trustee must review any reports furnished to it to determine 

whether there is any violation of the terms of the indenture. Presumably this would include 

verifying that any ratios represented in any reports conform to financial covenants contained 

in the indenture, etc. It would not however, require the trustee to go beyond the face of the report, i.e., to conduct further investigation to determine whether the data underlying the information on the reports presented to it were, in fact, true. Virtually all indentures, whether or 

not governed by the TIA, explicitly permit the trustee to rely on statements made to the trustee 

in officers’ certificates, opinions of counsel and documents delivered to the trustee in the manner 

specified within the indenture. 

Id. 

35Moody’s Investor Service, supra note 31, at 4. 36 Id. 37 Eric Gross, Portfolio Management: The Evolution of Backup Servicing, Portfolio Financial 

Servicing Company (PFSC) (July 11, 2002) at http://www.securitization.net/knowledge/article.asp?id=147&aid=2047. 38Levitin & Twomey, supra note ll. 39See Ellington Credit Fund, Ltd. v. Select Portfolio, Inc., No. 1:07-cv-00421-LY, W.D. Tex., 

Plaintiffs’ First Amended Complaint, July 10, 2007 (RMBS residual tranche holder alleging that 

trustee was aware that servicer was in violation of PSA and failed to act). 40See Amherst Mortgage Insight, supra note ll, at 15. 41For MBS with separate master and primary servicers, the master servicer may monitor the 

primary servicer(s), but often the master and primary servicers are the same entity. 

Likewise, as attorney Susan Macaulay has observed: 

In most cases, even if the servicer reports are incorrect, or even fraudulent, 

absent manifest error, the trustee simply has no way of knowing that there 

is a problem, and must allocate the funds into the appropriate accounts, 

and make the mandated distributions, in accordance with the servicer reports.’’34

Similarly, trustees usually wait for servicers to notify them of defaults,35 and 

Moody’s has noted that trustees are often unresponsive to information from third 

parties indicating that an unreported default might have occurred.36 Thus, trustees 

enforce servicer representations and warranties largely on the honor system of 

servicer self-reporting. 

For private-label securities, trustees also lack the incentive to engage in more vigorous monitoring of servicer loss mitigation decisions. The trustee does not get paid 

more for more vigorous monitoring. The trustee generally has little ability to discipline the servicer except for litigation. Private-label RMBS trustees have almost 

no ability to fire or discipline a servicer. Servicers can only be dismissed for specified acts, and these acts are typically limited to the servicer’s insolvency or failure 

to remit funds to the trust. Occasionally servicers may be dismissed if default levels 

exceed particular thresholds. 

Trustees also have no interest in seeing a servicer dismissed because they often 

are required to step in as back-up servicer.37 In the event of a servicer default, the 

trustee takes over as servicer (which includes the option of subcontracting the duties), and assumes the duty of making servicing advances to the trust. The backup servicer role is essentially an insurance policy for investors, and activation of 

that role is equivalent to payment on a claim; a trustee that has to act as a backup servicer is likely to lose money in the process, especially when some of the trustees do not themselves own servicing operations. 

Trustees also often have close relationships with particular servicers. For example, Professor Tara Twomey and I have shown that Bank of America/Countrywide 

accounts for nearly two-thirds of Deutsche Bank’s RMBS trustee business.38 In such 

circumstances, trustees are unlikely to engage in meaningful monitoring and disciplining of servicers.39 Amherst Securities points out that early payment default 

provisions are not effectively enforced by trustees, to the point where in cases where 

borrowers did not make a single payment on the mortgage, only 37 percent were 

purchased out of the trust, much smaller amounts for loans making only one to six 

payments.40 Thus, for private-label RMBS, there is virtually no supervision of 

servicers.41

GSE and Ginnie Mae securitization have greater oversight of servicers. The GSEs 

serve as master servicers on most of their RMBS; they therefore have a greater ability to monitor servicer compliance. The GSEs require servicers to foreclose according 
111 

42PMI insurers have recently started to embed staff in servicer shops to monitor loss mitigation efforts. Harry Terris & Kate Berry, In the Trenches, Am. Banker, Aug. 27, 2009. 43 17 C.F.R. § 229.1108. 44The note and the mortgage can be combined in a single document, but that is not common 

practice, both because the mortgage can be granted subsequent to the creation of the debt and 

because of borrower privacy concerns about the terms of the note, which would become public 

if the note and mortgage were combined and recorded in local property records. 45See UCC 3–104. 46 UCC 3–203, Cmt. 1 (‘‘An instrument is a reified right to payment. The right is represented 

by the instrument itself.’’). 47There is a Federal foreclosure statute that can be utilized by FHA. 

to detailed timelines, and servicers that fail to comply face monetary penalties. Recognizing the benefits inherent in effective loss mitigation, Fannie Mae places staff 

directly in all of the largest servicer shops to work alongside loss mitigation staff 

at their servicers.42 Freddie Mac constructed servicer performance profiles to directly monitor servicers, sharing results directly with servicers and rating agencies. 

Since each GSE insures against credit losses on the loans, their ongoing monitoring 

provides consistent rules and a single point of contact to approve workout packages 

and grant exceptions, something absent in private label RMBS. 

3. Ratings and Reputation 

Like any repeat transaction business, servicers are concerned about their reputations. But reputational sanctions have only very weak discipline on servicer behavior. 

While Regulation AB requires servicers to disclose information about their experience and practices,43 they are not required to disclose information about performance of past pools they have serviced. In any event, reputational sanctions are ineffective because loss severities are more likely to be attributed to underwriting quality than to servicing decisions. Rating agencies also produce servicer ratings, but 

these ratings are a compilation of the evaluation of servicers on a multitude of characteristics. Rating agencies have been known to incorporate features of Freddie 

Mac’s servicer performance profiles in their servicer assessments and to incorporate 

loss mitigation performance into their ratings. But details of their methodology used 

to measure these assessments are not disclosed. They give no indication of whether 

a servicer is likely to make loss mitigation decisions based solely on the interests 

of the securitization trust. Ratings are also combined with other criteria, such as 

the servicer’s own financial strength and operational capacity. In other words, 

servicer ratings go to the question of whether a servicer will have to be replaced 

because it is insolvent or lacks the ability to service the loans, with much less 

weight given to whether the servicer acts in the investors’ interests. 

C. THE MORTGAGE CONTRACT AND FORECLOSURE PROCESS 

The mortgage contract consists of two documents, a promissory note (the ‘‘note’’ 

or the ‘‘mortgage loan’’) and a security instrument (the ‘‘mortgage’’ or the ‘‘deed of 

trust’’).44 The note is the IOU that contains the borrower’s promise to repay the 

money loaned. If the note is a negotiable instrument, meaning that it complies with 

the requirements for negotiability in Article 3 of the Uniform Commercial Code,45

then the original physical note is itself the right to payment.46

The mortgage is the document that connects the IOU with the house. The mortgage gives the lender a contingent right to the house; it provides that if the borrower does not pay according to the terms of the note, then the lender can foreclose 

and have the property sold according to the terms of the mortgage and applicable 

State and Federal law. The applicable law governing foreclosures is State law.47

State real estate law, including foreclosure law, is non-uniform, making it difficult 

to State what the law is as a generic matter; there is always the possibility that 

some jurisdictions may deviate from the majority rule. That said, no State requires 

a borrower’s note to be recorded in local land records for the note to be valid, and, 

as a general matter, State law does not require the mortgage to be recorded either 

in order for the mortgage to be enforceable against the borrower. Recording of the 

mortgage is necessary, however, to establish the mortgage’s priority relative to the 

claims of other parties, including other mortgagees, judgment lien creditors and tax 

and workmen’s liens against the property. The basic rule of priority is first in time, 

first in right; the first mortgage to be recorded has senior priority. An unrecorded 

mortgage will thus, generally have junior priority to a subsequently issued, but recorded mortgage. The difference between enforceability and priority is an important 

one, discussed in more detail below, in the section of this testimony dealing with 

MERS. 
112 

48Mortgages sometimes also include a power of sale, permitting non-judicial foreclosure. In 

a deed of trust, the deed to the property is transferred in trust for the noteholder to a deed 

of trust trustee, often a local attorney. The note remains the property of the lender (the deed 

of trust beneficiary). When there is a default on the note, the lender notifies the deed of trust 

trustee and the lender or its agent is typically appointed as substitute deed of trust trustee to 

run the foreclosure sale. 

State law on foreclosures is also non-uniform. Roughly, however, States can be divided into two groups: those where foreclosure actions are conducted through the 

courts (‘‘judicial foreclosure’’) and those where foreclosure actions are conducted by 

private sales (‘‘non-judicial foreclosure’’). This division maps, imperfectly, with 

whether the preferred security instrument is a mortgage or a deed of trust.48

Mortgage loans cost more in States that have judicial foreclosure; what this 

means is that borrowers in judicial foreclosure States are paying more for additional 

procedural rights and legal protections; those procedural rights are part of the mortgage contract; failure to honor them is a breach of the mortgage contract. Note, that 

a default on the mortgage note is not a breach of the contract per se; instead it 

merely triggers the lender’s right to foreclose per the applicable procedure. 

In a typical judicial foreclosure proceeding, the homeowner receives a notice of default and if that default is not cured within the required period, the mortgagee then 

files a foreclosure action in court. The action is commenced by the filing of a written 

complaint that sets forth the mortgagee’s allegations that the homeowner owes a 

debt that is secured by a mortgage and that the homeowner has defaulted on the 

debt. Rules of civil procedure generally require that legal actions based upon a writing include a copy of the writing as an attachment to the complaint, although there 

is sometimes an exception for writings that are available in the public records. 

While the mortgage is generally filed in the public records, assignments of the mortgage are often not (an issue complicated by MERS, discussed below), and the note 

is almost never a matter of public record. 

It is important to understand that most judicial foreclosures do not function like 

the sort of judicial proceeding that is dramatized on television, in which all parties 

to the case appear in court, represented by attorneys and judgment only follows a 

lengthy trial. Instead, the norm in foreclosure cases is a default judgment. Most borrowers do not appear in court or contest their foreclosures, and not all of those who 

do are represented by competent counsel, not least because of the difficulties in paying for counsel. Most borrowers that the borrower does not contest the foreclosure 

or appear in court. In most cases, only the lender’s attorney appears, and judges 

routinely dispatch dozens or hundreds of foreclosure cases in a sitting. Homeowners 

in foreclosure actions are among the most vulnerable of defendants, the least able 

to insist up on and vindicate their rights, and accordingly the ones most susceptible 

to abuse of legal process. 

II. PROCEDURAL PROBLEMS AND FRAUD 

The first type of problems in the mortgage market are what might generously be 

termed ‘‘procedural defects’’ or ‘‘procedural irregularities.’’ There are numerous such 

problems that have come to light in foreclosure cases. The extent and distribution 

of these irregularities is not yet known. No one has compiled a complete typology 

of procedural defects in foreclosures; there are, to use Donald Rumsfeld’s phrase, 

certainly ‘‘known unknowns’’ and well as ‘‘unknown unknowns.’’ 

A. AFFIDAVITS FILED WITHOUT PERSONAL KNOWLEDGE 

(ROBOSIGNING) 

Affidavits need to be based on personal knowledge to have any evidentiary effect; 

absent personal knowledge an affidavit is hearsay and therefore generally inadmissible as evidence. Accordingly, affidavits attest to personal knowledge of the facts 

alleged therein. 

The most common type of affidavit is an attestation about the existence and status of the loan, namely that the homeowner owes a debt, how much is currently 

owed, and that the homeowner has defaulted on the loan. (Other types of affidavits 

are discussed in sections II.B. and II.C., infra). Such an affidavit is typically sworn 

out by an employee of a servicer (or sometimes by a law firm working for a servicer). 

Personal knowledge for such an affidavit would involve, at the very least, examining 

the payment history for a loan in the servicer’s computer system and checking it 

against the facts alleged in a complaint. 

The problem with affidavits filed in many foreclosure cases is that the affiant 

lacks any personal knowledge of the facts alleged whatsoever. Many servicers, including Bank of America, Citibank, JPMorgan Chase, Wells Fargo, and GMAC, employ professional affiants, some of whom appear to have no other duties than to sign 

affidavits. These employees cannot possibly have personal knowledge of the facts in 
113 

49See Deposition of Jeffrey Stephan, GMAC Mortgage LLC v. Ann M. Neu a/k/a Ann Michelle 

Perez, No. 50 2008 CA 040805XXXX MB, (15th Judicial Circuit, Florida, Dec. 10, 2009) at 7, 

available at http://api.ning.com/files/s4SMwlZXvPu4A7kq7XQUsGW9xEcYtqNMPCm0a2hISJ 

u88PoY6ZNqanX7XK41Fyf9gV8JIHDme7KcFO2cvHqSEMcplJ8vwnDT/091210gmacmortgagevsannmneu1.pdf (stating that Jeffrey Stephan, a GMAC employee, signed approximately 10,000 

affidavits a month for foreclosure cases). 50 UCC 3–301; 1–201(b)(21) (defining ‘‘holder’’). 51 UCC 3–309. Note that UCC 3–309 was amended in the 2001 revision of Article 3. The revision made it easier to enforce a lost note. Not every State has adopted the 2001 revisions. Therefore, UCC 3–309 is non-uniform law. 52 UCC 3–309(b). 53 Cite NY Times. 54 According to the U.S. Census Bureau, Broward County’s population is approximately 1.76 

million, making it .57 percent of the total U.S. population of 307 million. Broward does have 

a significantly higher than average foreclosure rate, roughly 12 percent over the past 2 years, 

according to Core Logic Loan Performance data, making it approximately 3 times the national 

average. 55The 2001 version of UCC 3–309 permits not only a party that has lost a note but a buyer 

from such a party to enforce a lost note. 

their affidavits. One GMAC employee, Jeffrey Stephan, stated in a deposition that 

he signed perhaps 10,000 affidavits in a month, or approximately one a minute for 

a 40-hour work week.49 For a servicer’s employee to ascertain payment histories in 

a high volume of individual cases is simply impossible. 

When a servicer files an affidavit that claims to be based on personal knowledge, 

but is not in fact based on personal knowledge, the servicer is committing a fraud 

on the court, and quite possibly perjury. The existence of foreclosures based on 

fraudulent pleadings raises the question of the validity of foreclosure judgments and 

therefore title on properties, particularly if they are still in real estate owned (REO). 

B. LOST NOTE AFFIDAVITS FOR NOTES THAT ARE NOT LOST 

The plaintiff in a foreclosure action is generally required to produce the note as 

evidence that it has standing to foreclose. Moreover, under the Uniform Commercial 

Code, if the note is a negotiable instrument, only a holder of the note (or a 

subrogee)—that is a party in possession of the note—may enforce the note, as the 

note is the reified right to payment.50

There is an exception, however, for lost, destroyed, or stolen notes, which permits 

a party that has lost possession of a note to enforce it.51 If a plaintiff seeks to enforce a lost note, it is necessary ‘‘to prove the terms of the instrument’’ as well as 

the ‘‘right to enforce the instrument.’’52 This proof is typically offered in the form 

of a lost note affidavit that attests to the prior existence of the note, the terms of 

the note, and that the note has been lost. 

It appears that a surprisingly large number of lost note affidavits are filed in foreclosure cases. In Broward County, Florida alone, over 2000 such affidavits were filed 

in 2008–2009.53 Relative to the national population, that translates to roughly 

116,000 lost note affidavits nationally over the same period.54

There are two problems with the filing of many lost note affidavits. First, is a lack 

of personal knowledge. Mortgage servicers are rarely in possession of the original 

note. Instead, the original note is maintained in the fireproof vault of the 

securitization trustee’s document custodian. This means that the servicer lacks personal knowledge about whether a note has or has not been lost.55 Merely reporting 

a communication from the document custodian would be hearsay and likely inadmissible as evidence. 

The second problem is that the original note is frequently not in fact lost. Instead, 

it is in the document custodian’s vault. Servicers do not want to pay the document 

custodian a fee (of perhaps $30) to release the original mortgage, and servicers are 

also wary of entrusting the original note to the law firms they hire. Substitution 

of counsel is not infrequent on defaulted mortgages, and servicers are worried that 

the original note will get lost in the paperwork shuffle if there is a change in counsel. When pressed, however, servicers will often produce the original note, months 

after filing lost note affidavits. The Uniform Commercial Code (UCC) requires that 

a party seeking to enforce a note be a holder (or subrogee to a holder) or produce 

evidence that a note has been lost, destroyed, or stolen; the UCC never contemplates 

an ‘‘inconvenience affidavit’’ that states that it is too much trouble for a servicer to 

bother obtaining the original note. But that is precisely what many lost note affidavits are effectively claiming. 

Thus, many lost note affidavits are doubly defective: they are sworn out by a 

party that does not and cannot have personal knowledge of the alleged facts and 

the facts being alleged are often false as the note is not in fact lost, but the servicer 

simply does not want to bother obtaining it. 
114 

56Kurt Eggert, Comment on Michael A. Stegman et al.’s ‘‘Preventive Servicing Is Good for 

Business and Affordable Homeownership Policy’’: What Prevents Loan Modifications?, 18 Housing Policy Debate 279 (2007). 57 Eggert, Limiting Abuse, supra note 21, at 757. 58Katherine M. Porter, Mortgage Misbehavior, 87 Tex. L. Rev. 121, 162 (2008). 59 In re Stewart, 391 B.R. 327, 355 (Bankr. E.D. La. 2008). 60Matt Taibi, Courts Helping Banks Screw Over Homeowners, Rolling Stone, Nov. 25, 2010, 

at http://www.rollingstone.com/politics/news/17390/232611?RSlshowlpage=7. 61 Ashby Jones, U.S. Trustee Program Playing Tough With Countrywide, Others, Law Blog 

(Dec. 3, 2007, 10:01 AM), http://blogs.wsj.com/law/2007/12/03/us-trustee-program-playingtough-with-countrywide-others. 62 Complaint, Walton v. Countrywide Home Loans, Inc. (In re Atchely), No. 05–79232 (Bankr. 

N.D. Ga. filed Feb. 28, 2008). 63 Complaint, State v. Am. Home Mtg. Servicing, Inc., No. 2010–3307 (Tex. Dist. Ct. 448th 

Jud. Dist. filed Aug. 30, 2010). 64 Amherst Mortgage Securities, supra notell, at 23. 65 Id. 66 Center for Responsible Lending, Unfair and Unsafe: How Countrywide’s irresponsible practices have harmed borrowers and shareholders, CRL Issue Paper, Feb. 7, 2008, at 6–7. 

C. JUNK FEES 

The costs of foreclosure actions are initially incurred by servicers, but servicers 

recover these fees off the top from foreclosure sale proceeds before MBS investors 

are paid. This reimbursement structure limits servicers’ incentive to rein in costs 

and actually incentives them to pad the costs of foreclosure. This is done in two 

ways. First, servicers charge so-called ‘‘junk fees’’ either for unnecessary work or for 

work that was simply never done. Thus, Professor Kurt Eggert has noted a variety 

of abusive servicing practices, including ‘‘improper foreclosures or attempted foreclosures; imposition of improper fees, especially late fees; forced-placed insurance 

that is not required or called for; and misuse of escrow funds.’’56 Servicers’ ability 

to retain foreclosure-related fees has even led them to attempt to foreclose on properties when the homeowners are current on the mortgage or without attempting any 

sort of repayment plan.57 Consistently, Professor Katherine Porter has documented 

that when mortgage creditors file claims in bankruptcy, they generally list amounts 

owed that are much higher than those scheduled by debtors.58

There is also growing evidence of servicers requesting payment for services not 

performed or for which there was no contractual right to payment. For example, in 

one particularly egregious case from 2008, Wells Fargo filed a claim in the borrower’s bankruptcy case that included the costs of two brokers’ price opinions allegedly obtained in September 2005, on a property in Jefferson Parish, Louisiana when 

the entire Parish was under an evacuation order due to Hurricane Katrina.59

Similarly, there is a frequent problem of so-called ‘‘sewer summons’’ issued (or actually not issued) to homeowners in foreclosures. Among the costs of foreclosure actions is serving notice of the foreclosure (a court summons) on the homeowner. 

There is disturbing evidence that homeowners are being charged for summons that 

were never issued. These non-delivered summons are known as ‘‘sewer summons’’ 

after their actual delivery destination. 

One way in which these non-existent summons are documented is through the filing of ‘‘affidavits of lost summons’’ by process servers working for the foreclosure 

attorneys hired by mortgage servicers. A recent article reports that in Duval County, Florida (Jacksonville) the number of affidavits of lost summons has ballooned 

from 1,031 from 2000–2006 to over 4,000 in the last 2 years, a suspiciously large 

increase that corresponds with a sharp uptick in foreclosures.60

Because of concerns about illegal fees, the United States Trustee’s Office has undertaken several investigations of servicers’ false claims in bankruptcy 61 and 

brought suit against Countrywide,62 while the Texas Attorney General has sued 

American Home Mortgage Servicing for illegal debt collection practices.63

The other way in which servicers pad the costs of foreclosure is by in-sourcing 

their expenses to affiliates at above-market rates. For example, Countrywide, the 

largest RMBS servicer, force places insurance on defaulted properties with its captive insurance affiliate Balboa.64 Countrywide has been accused of deliberately extending the time to foreclosure in order to increase the insurance premiums paid 

to its affiliate, all of which are reimbursable by the trust, before the RMBS investors’ claims are paid.65 Similarly, Countrywide in-sources trustee services in deed 

of trust foreclosures to its subsidiary Recon Trust.66

Thus, in Countrywide’s 2007 third quarter earnings call, Countrywide’s President 

David Sambol emphasized that increased revenue from in-sourced default management functions could offset losses from mortgage defaults. 
115 

67Transcript, ‘‘Countrywide Financial Corporation Q3 2007 Earnings Call,’’ Oct. 26, 2007 (emphasis added) (also mentioning ‘‘Our vertical diversification businesses, some of which I mentioned, are counter-cyclical to credit cycles, like the lender-placed property business in Balboa 

and like the in-source vendor businesses in our loan administration unit.’’). 68FTC, Press Release, June 7, 2010, Countrywide Will Pay $108 Million for Overcharging 

Struggling Homeowners; Loan Servicer Inflated Fees, Mishandled Loans of Borrowers in Bankruptcy. 69Kathy D. Patrick, Letter to Countrywide Home Loan Servicing LP and the Bank of New 

York, dated Oct. 18, 2010, available at http://www.scribd.com/Bondholders-Letter-to-BofA-OverCountrywide-Loans-inc-NY-fed/d/39686107. 70 Amherst Mortgage Insight, 2010, ‘‘The Elephant in the Room-Conflicts of Interest in Residential Mortgage Securitizations’’, pp. 22–24, May 20, 2010. 71See Amherst Mortgage Insight, ‘‘Why Investors Should Oppose Servicer Safe Harbors’’, 

April 28, 2009. Excess spread is the difference between the income of the SPV in a given period 

and its payment obligations on the MBS in that period, essentially the SPV’s periodic profit. 

Excess spread is accumulated to supplement future shortfalls in the SPV’s cash flow, but is either periodically released to the residual tranche holder. Generally, as a further protection for 

senior MBS holders, excess spread cannot be released if certain triggers occur, like a decline 

in the amount of excess spread trapped in a period beneath a particular threshold. 72 Carrington would still have to make servicing advances on any delinquent loans if it 

stretched out the time before foreclosure, but these advances would be reimbursable, and the 

reimbursement would come from senior MBS holders, rather than from Carrington, if it were 

out of the money in the residual. 

Now, we are frequently asked what the impact on our servicing costs and 

earnings will be from increased delinquencies and loss mitigation efforts, 

and what happens to costs. And what we point out is, as I will now, is that 

increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income 

from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification strategy, a counter-cyclical 

diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services.67

In June, 2010, Countrywide settled with the FTC for $108 million on charges that 

it overcharged delinquent homeowners for default management services. According 

to the FTC: 

Countrywide ordered property inspections, lawn mowing, and other services 

meant to protect the lender’s interest in the property. But rather than simply hire third-party vendors to perform the services, Countrywide created 

subsidiaries to hire the vendors. The subsidiaries marked up the price of 

the services charged by the vendors—often by 100 percent or more—and 

Countrywide then charged the homeowners the marked-up fees.68

Among the accusations brought against Countrywide in a recent investor notice 

of default filed by the Federal Reserve Bank of New York along with BlackRock and 

PIMCO, is that Countrywide has been padding expenses via in-sourcing on the 115 

trusts covered by the letter.69

Countrywide is hardly the only servicer accused of acting in its interests at the 

expense of investors. Carrington, another major servicer, also owns the residual 

tranche on many of the deals it services. Amherst Mortgage Securities has shown 

that Carrington has been much slower than other servicers to liquidate defaulted 

loans.70 Delay benefits Carrington both as a servicer and as the residual tranche 

investor. As a servicer, delay helps Carrington by increasing the number of monthly 

late fees that it can levy on the loans. These late fees are paid from liquidation proceeds before any of the MBS investors. 

As an investor in the residual tranche, Carrington has also been accused of engaging in excessive modifications to both capture late fees and to keep up the excess 

spread in the deals, as it is paid directly to the residual holders.71 When loans were 

mass modified, Carrington benefited as the servicer by capitalizing late fees and advances into the principal balance of the modified loans, which increased the balance 

on which the servicing fee was calculated. Carrington also benefited as the residual 

holder by keeping up excess spread in the deals and delaying delinquency deal triggers that restrict payments to residual holders when delinquencies exceed specified 

levels. Assuming that the residual tranche would be out of the money upon a timely 

foreclosure, delay means that Carrington, as the residual holder, receives many 

more months of additional payments on the MBS it holds than it otherwise would.72

It is important to emphasize that junk fees on homeowners ultimately come out 

of the pocket of MBS investors. If the homeowner lacks sufficient equity in the property to cover the amount owed on the loan, including junk fees, then there is a deficiency from the foreclosure sale. As many mortgages are legally or functionally non- 
116 

73 Brief of Antonio Ibanez, Defendant-Appellee, U.S. Bank Nat’l Assn, as Trustee for the 

Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006–Z v. 

Ibanez; Wells Fargo Bank, N.A. as Trustee for ABFC 2005–Opt 1 Trust, ABFC Asset Backed 

Certificates Series 2005–OPT 1, No 10694, (Mass. Sept. 20, 2010), at 10 (detailing 3 different 

‘‘certified true copies’’ of a note allonge and of an assignment of a mortgage); http:// 

4closurefraud.org/2010/04/27/foreclosure-fraud-of-the-week-two-original-wet-ink-notes-submitted-in-the-same-case-by-the-florida-default-law-group-and-jpmorgan-chase/ (detailing a foreclosure file with two different ‘‘original’’ wet ink notes for the same loan). 74http://4closurefraud.org/2010/04/08/foreclosure-fraud-of-the-week-poor-photoshop-skills/. 75See WSTB.com, at http://www.wsbtv.com/video/25764145/index.html. 76Deposition of Cheryl Samons, Deutsche Bank Nat’l Trust Co., as Trustee for Morgan Stanley ABS Capital 1 Inc. Trust 2006–HE4 v. Pierre, No. 50–2008–CA–028558–XXXX–MB (15th Judicial Circuit, Florida, May 20, 2009, available at http://mattweidnerlaw.com/blog/wpcontent/ 

uploads/2010/03/depositionsammons.pdf. 77http://www.nassauclerk.com/clerk/publicrecords/oncoreweb/showdetails.aspx?id=809395& 

rn=0&pi=0&ref=search. 

recourse, this means that the deficiency cannot be collected from the homeowner’s 

other assets. Mortgage servicers recover their expenses off the top in foreclosure 

sales, before MBS investors are paid. Therefore, when a servicer lards on illegal fees 

in a foreclosure, it is stealing from investors such as pension plans and the U.S. 

Government. 

D. COMPLAINTS THAT FAIL TO INCLUDE THE NOTE 

Rule of civil procedure generally require that a compliant based on a writing include, as an attachment, a copy of a writing. In a foreclosure action, this means that 

both the note and the mortgage and any assignments of either must be attached. 

Beyond the rules of civil procedure requirement, these documents are also necessary 

as an evidentiary matter to establish that the plaintiff has standing to bring the 

foreclosure. Some States have exceptions for public records, which may be incorporated by reference, but it is not always clear whether this exception applies in 

foreclosure actions. If it does, then only the note, which is not a public record, would 

need to be attached. 

Many foreclosure complaints are facially defective and should be dismissed because they fail to attach the note. I have recently examined a small sample of foreclosure cases filed in Allegheny County, Pennsylvania (Pittsburgh and environs) in 

May 2010. In over 60 percent of those foreclosure filings, the complaint failed to include a copy of the note. Failure to attach the note appears to be routine practice 

for some of the foreclosure mill law firms, including two that handle all of Bank of 

America’s foreclosures. 

I would urge the Committee to ask Bank of America whether this was an issue 

it examined in its internal review of its foreclosure practices. 

E. COUNTERFEIT AND ALTERED DOCUMENTS AND NOTARY FRAUD 

Perhaps the most disturbing problem that has appeared in foreclosure cases is 

evidence of counterfeit or altered documents and false notarizations. To give some 

examples, there are cases in which multiple copies of the ‘‘true original note’’ are 

filed in the same case, with variations in the ‘‘true original note;’’73 signatures on 

note allonges that have clearly been affixed to documents via Photoshop;74 ‘‘blue 

ink’’ notarizations that appear in blank ink; counterfeit notary seals;75 backdated 

notarizations of documents issued before the notary had his or her commission;76

and assignments that include the words ‘‘bogus assignee for intervening asmts, 

whose address is XXXXXXXXXXXXXXXXX.’’77

Most worrisome is evidence that these frauds might not be one-off problems, but 

an integral part of the foreclosure business. A price sheet from a company called 

DocEx that was affiliated with LPS, one of the largest servicer support firms, lists 

prices for various services including the ‘‘creation’’ of notes and mortgages. While 

I cannot confirm the authenticity of this price sheet or date it, it suggests that document counterfeiting is hardly exceptional in foreclosure cases. 

While the fraud in these cases is not always by servicers themselves, but sometimes by servicer support firms or attorneys, its existence should raise serious concerns about the integrity of the foreclosure process. I would urge the Committee to 

ask the servicer witnesses what steps they have taken to ascertain that they do not 

have such problems with loans in their servicing portfolios. 

G. THE EXTENT OF THE PROBLEM 

The critical question for gauging the risk presented by procedural defects is the 

extent of the defects. While Federal Reserve Chairman Bernanke has announced 

that Federal bank regulators are looking into the issue and will issue a report this 

month, I do not believe that it is within the ability of Federal bank regulators to 
117 

78 Chain of title problems appear to be primarily a problem for private-label securitization, not 

for agency securitization because even if title were not properly transferred for Agency securities, it would have little consequence. Investors would not have incurred a loss as the result 

of an ineffective transfer, as their MBS are guaranteed by the GSEs or Ginnie Mae, and when 

a loan in an Agency pool defaults, it is removed from the pool and the owned by the GSE or 

Ginnie Mae, which is then has standing to foreclose. 79 Bankruptcy remote has a second meaning, namely that the trust cannot or will not file of 

bankruptcy. This testimony uses bankruptcy remote solely in the sense of whether the trust’s 

assets could be clawed back into a bankruptcy estate via an equity of redemption. The Uniform 

Commercial Code permits a debtor to redeem collateral at face value of the debt owed. If a pool 

of loans bore a now-above-market interest rate, the pool’s value could be above the face value 

of the debt owed, making redemption economically attractive. 

It can be very difficult to distinguish true sales from secured loans. For example, a sale and 

repurchase agreement (a repo) is economically identical to a secured loan from the repo buyer 

to the repo seller, secured by the assets being sold. 80This claim would not be a putback claim necessarily, but could be brought as a general contract claim. It could not be brought as a securities law claim under section 11 of the Securities 

Act of 1933 because the statute of limitations for rescission has expired on all PLS. 

gauge the extent of procedural defects in foreclosure cases. To do so would require, 

at the very least, an extensive sampling of actual foreclosure filings and their examination by appropriately trained personnel. I am unaware of Federal bank regulators undertaking an examination of actual foreclosure filings, much less having a 

sufficient cadre of appropriately trained personnel. Bank examiners lack the experience or training to evaluate legal documents like foreclosure filings. Therefore, any 

statement put forth by Federal regulators on the scope of procedural defects is at 

best a guess and at worse a parroting of the ‘‘nothing to see here folks’’ line that 

has come from mortgage servicers. 

I would urge the Committee to inquire with Federal regulators as to exactly what 

steps they are taking to examine foreclosure irregularities and how they can be sure 

that those steps will uncover the extent of the problem. Similarly, I would urge the 

Committee to ask the servicer witnesses what specific irregularities they examined 

during their self-imposed moratoria and by what process. It defies credulity that a 

thorough investigation of all the potential problems in foreclosure paperwork could 

be completed in a month or two, much less by servicers that have taken so long 

to do a small number of loan modifications. 

III. CHAIN OF TITLE PROBLEMS 

A second problem and potentially more serious problem relating to standing to 

foreclose is the issue of chain of title in mortgage securitizations.78 As explained 

above, securitization involves a series of transfers of both the note and the mortgage 

from originator to sponsor to depositor to trust. This particular chain of transfers 

is necessary to ensure that the loans are ‘‘bankruptcy remote’’ once they have been 

placed in the trust, meaning that if any of the upstream transferors were to file for 

bankruptcy, the bankruptcy estate could not lay claim to the loans in the trust by 

arguing that the transaction was not a true sale, but actually a secured loan.79

Bankruptcy remoteness is an essential component of private-label mortgage 

securitization deals, as investors want to assume the credit risk solely of the mortgages, not of the mortgages’ originators or securitization sponsors. Absent bankruptcy remoteness, the economics of mortgage securitization do not work in most 

cases. Recently, arguments have been raised in foreclosure litigation about whether the 

notes and mortgages were in fact properly transferred to the securitization trusts. 

This is a critical issue because the trust has standing to foreclose if, and only if it 

is the mortgagee. If the notes and mortgages were not transferred to the trust, then 

the trust lacks standing to foreclose. There are several different theories about the 

defects in the transfer process; I do not attempt to do justice to any of them in this 

testimony. 

While the chain of title issue has arisen first in foreclosure defense cases, it also 

has profound implications for MBS investors. If the notes and mortgages were not 

properly transferred to the trusts, then the mortgage-backed securities that the investors’ purchased were in fact non-mortgage-backed securities. In such a case, investors would have a claim for the rescission of the MBS,80 meaning that the 

securitization would be unwound, with investors receiving back their original payments at par (possibly with interest at the judgment rate). Rescission would mean 

that the securitization sponsor would have the notes and mortgages on its books, 

meaning that the losses on the loans would be the securitization sponsor’s, not the 

MBS investors, and that the securitization sponsor would have to have risk-weighted capital for the mortgages. If this problem exists on a wide-scale, there is not the 

capital in the financial system to pay for the rescission claims; the rescission claims 
118 

81 15 U.S.C. § 7021. 82 UCC 9–203. The language of Article 9 is abstruse, but UCC Revised Article 1 defines ‘‘security interest’’ to include the interest of a buyer of a promissory note. UCC 1–201(b)(35). Article 

9’s definition of ‘‘debtor’’ includes a seller of a promissory note, UCC 9–102(a)(28)(B ), and ‘‘secured party’’ includes a buyer of a promissory note, UCC 9–102(a)(72)(D). Therefore UCC 9–203, 

which would initially appear to address the attachment (enforceability) of a security interest 

also covers the sale of a promissory note. South Carolina has not adopted the revised Article 

1 definition of security interest necessary to make Article 9 apply to sales of promissory notes. 83 Note that common law sales and Article 9 sales do not affect the enforceability of the note 

against the obligor on the note. UCC 9–308, Cmt.6, Ex. 3 (‘‘Under this Article, attachment and 

perfection of a security interest in a secured right to payment do not of themselves affect the 

obligation to pay. For example, if the obligation is evidenced by a negotiable note, then Article 

3 dictates the person to whom the maker must pay to discharge the note and any lien security 

it.’’). UCC Article 3 negotiation and E–SIGN do affect enforceability as they enable a buyer for 

value in good faith to be a holder in due course and thereby cutoff some of the obligor’s defenses 

that could be raised against the seller. UCC 3–305, 3–306; 15 U.S.C. § 7021(d). 

would be in the trillions of dollars, making the major banking institutions in the 

United States would be insolvent. 

The key questions for evaluating chain of title are what method of transferring 

notes and mortgages is actually supposed to be used in securitization and whether 

that method is legally sufficient both as a generic matter and as applied. There is 

a surprising degree of legal uncertainty over these issues, even among banks’ attorneys; different arguments appear in different litigation. The following section outlines the potential methods of transfer and some of the issues that arise regarding 

specific methods. It is critical to emphasize that the law is not settled on most of 

the issues regarding securitization transfers; instead, these issues are just starting 

to be litigated. 

A. TRANSFERS OF NOTES AND MORTGAGES 

As a generic matter, a note can be transferred in one of four methods: 

(1) the note can be sold via a contract of sale, which would be governed by the 

common law of contracts. 

(2) if the note is a negotiable instrument, it could be negotiated, meaning that 

it would be transferred via endorsement and delivery, with the process governed by Article 3 of the Uniform Commercial Code (UCC). The endorsement. 

(3) the note could be converted into an electronic note and transferred according 

to the provisions of the Federal E–SIGN Act.81

(4) The note could be sold pursuant to UCC Article 9. In 49 States (South Carolina being the exception), Article 9 provides a method for selling a promissory 

note, which requires that there be an authenticated (signed) agreement, value 

given, and that the seller have rights in the property being transferred.82 This 

process is very similar to a common law sale. 

There is general agreement that as a generic method, any of these methods of 

transfer would work to effectuate a transfer of the note. No method is mandatory. 

Whether or not the chosen process was observed in practice, is another matter, however.83

There are also several conceivable ways to transfer mortgages, but there are serious doubts about the validity of some of the methods: 

(1) the mortgage could be assigned through the traditional common law process, 

which would require a document of assignment. 

a. There is general consensus that this process works. 

(2) the mortgage could be negotiated. 

a. This method of transfer is of questionable effectiveness. A mortgage is not 

a negotiable instrument, and concepts of negotiability do not fit well with 

mortgages. For example, if a mortgage were negotiated in blank, it should 

become a ‘‘bearer mortgage,’’ but this concept is utterly foreign to the law, 

not least as the thief of a bearer mortgage would have the ability to enforce 

the mortgage (absent equitable considerations). Similarly, with a bearer 

mortgage, a homeowner could never figure out who would be required to 

grant a release of the mortgage upon payoff. And, in many States (so-called 

title theory states), a mortgage is considered actual ownership of real property, and real property must have a definite owner (not least for taxation 

purposes). 

(3) the mortgage could ‘‘follow the note’’ per common law. 
119 

84 UCC 9–203(g). If the transfer is not an Article 9 transfer, then the Article 9 provision providing that the mortgage follows the note would not apply. 85 UCC 1–203. 86This provision is general found in section 2.01 of PSAs. 87 NY E.P.T.L. § 7–2.4. 88Tamara Keith & Renee Montaigne, Sorting Out the Banks’ Foreclosure Mess, NPR, Oct. 15, 

2010. 

a. Common law is not settled on this point. There are several instances where 

the mortgage clearly does not follow the note. For example, the basic concept of a deed of trust is that the security instrument and the note are separated; the deed of trust trustee holds the security, while the beneficiary 

holds the note. Likewise, the mortgage follows the note concept would imply 

that the theft of a note also constitutes theft of a mortgage, thereby giving 

to a thief more than the thief was able to actually steal. Another situation 

would be where a mortgage is given to a guarantor of a debt. The mortgage 

would not follow the debt, but would (at best) follow the guarantee. And finally, the use of MERS, a recording utility, as original mortgage (a/k/a 

MOM) splits the note and the mortgage. MERS has no claim to the note, 

but MERS is the mortgagee. If taken seriously, MOM means that the mortgage does not follow the note. While MERS might claim that MOM just 

means that the beneficial interest in the mortgage follows the note, a transfer of the legal title would violate a bankruptcy stay and would constitute 

a voidable preference if done before bankruptcy. 

(4) the mortgage could ‘‘follow the note’’ if it is an Article 9 transfer.84

a. There is consensus that this process would work if Article 9 governs the 

transfer of the note. 

Ultimately, there is lack of consensus as to the method of transfer that is actually 

employed in securitization transactions. In theory, the proper method should be 

UCC Article 9 transfer process was adopted as part of the 2001 revision of Article 

9 with the apparent goal of facilitating securitization transactions. Parties are free, 

however, to contract around the UCC.85 That is precisely what pooling and servicing 

agreements (PSAs) appear to do. PSAs provide a recital of a transfer of the notes 

and loans to the trust and then they further require that the as they set forth specific requirements regarding the transfer of the notes and mortgages, namely that 

there be a complete chain of endorsements followed by either a specific endorsement 

to the trustee or an endorsement in blank.86 The reason for this additional requirement is to provide a clear evidentiary basis for all of the transfers in the chain of 

title in order to remove any doubts about the bankruptcy remoteness of the assets 

transferred to the trust. Absent a complete chain of endorsements, it could be argued that the trust assets were transferred directly from the originator to the trust, 

raising the concern that if the originator filed for bankruptcy, the trust assets could 

be pulled back into the originator’s bankruptcy estate. 

As PSAs are trust documents, they must be followed punctiliously. Moreover, 

most RMBS are issued by New York common law trusts, and well-established New 

York law provides that a transaction that does not accord with the trust documents 

is void.87 Therefore, the key question is whether transfers to the trusts complied 

with PSAs. It appears that in recent years mortgage securitizers started to cut corners in order to deal with the increased deal volume they faced during the housing 

bubble, and they ceased to comply with the PSA requirements in many cases. Thus, 

in many cases, the notes contain either a single endorsement in blank or no endorsement whatsoever, rather than the chain of endorsements required by the PSA 

and critical for ensuring the trust’s assets’ bankruptcy remoteness. 

It bears emphasis that the validity of transfers to the trusts is an unsettled legal 

issue. But if the transfers were invalid, they cannot likely be corrected because of 

various timeliness requirements in the PSAs. 

IV. YES, BUT WHO CARES? THESE ARE ALL DEADBEATS 

A common response from banks about the problems in the securitization and foreclosure process is that it doesn’t matter as the borrower still owes on the loan and 

has defaulted. This ‘‘No Harm, No Foul’’ argument is that homeowners being foreclosed on are all a bunch of deadbeats, so who really cares about due process? As 

JPMorganChase’s CEO Jamie Dimon put it ‘‘for the most part by the time you get 

to the end of the process we’re not evicting people who deserve to stay in their 

house.’’88

Mr. Dimon’s logic condones vigilante foreclosures: so long as the debtor is delinquent, it does not matter who evicts him or how. But that is not how the legal system works. A homeowner who defaults on a mortgage doesn’t have a right to stay 
120 

89See Karen Pence, Foreclosing on Opportunity: State Laws and Mortgage Credit, 88 Rev. 

Econ. & Stat. 177 (2006) (noting that the availability—and hence the cost—of mortgages in 

States with judicial foreclosure proceedings is greater than in States with non-judicial foreclosures). 

in the home if the proper mortgagee forecloses, but any old stranger cannot take 

the law into his own hands and kick a family out of its home. That right is reserved 

solely for the proven mortgagee. 

Irrespective of whether a debt is owed, there are rules about who can collect that 

debt and how. The rules of real estate transfers and foreclosures have some of the 

oldest pedigrees of any laws. They are the product of centuries of common law wisdom, balancing equities between borrowers and lenders, ensuring procedural fairness and protecting against fraud. 

The most basic rule of real estate law is that only the mortgagee may foreclosure. 

Evidence and process in foreclosures are not mere technicalities nor are they just 

symbols of rule of law. They are a paid-for part of the bargain between banks and 

homeowners. Mortgages in States with judicial foreclosures cost more than mortgages in States without judicial oversight of the foreclosure process.89 This means 

that homeowners in judicial foreclosure States are buying procedural protection 

along with their homes, and the banks are being compensated for it with higher interest rates. Banks and homeowners bargained for legal process, and rule of law, 

which is the bedrock upon which markets are built function, demands that the deal 

be honored. 

Ultimately the ‘‘No Harm, No Foul,’’ argument is a claim that rule of law should 

yield to banks’ convenience. To argue that problems in the foreclosure process are 

irrelevant because the homeowner owes someone a debt is to declare that the banks 

are above the law. 

V. CONCLUSION 

The foreclosure process is beset with problems ranging from procedural defects 

that can be readily cured to outright fraud to the potential failure of the entire private label mortgage securitization system. 

In the best case scenario, the problems in the mortgage market are procedural 

defects and they will be remedied within reasonably quickly (perhaps taking around 

a year). Remedying them will extend the time that properties are in foreclosure and 

increase the shadow housing inventory, thereby driving down home prices. The costs 

of remedying these procedural defects will also likely be passed along to future 

mortgage borrowers, thereby frustrating attempts to revive the housing market and 

the economy through easy monetary policy. 

In the worst case scenario, there is systemic risk, as there could be a complete 

failure of loan transfers in private-label securitization deals in recent years, resulting in trillions of dollars of rescission claims against major financial institutions. 

This would trigger a wholesale financial crisis. 

Perhaps the most important lesson from 2008 is the need to be ahead of the ball 

of systemic risk. This means (1) ensuring that Federal regulators do a serious investigation as discussed in this testimony above and (2) considering the possible legislative response to a crisis. The sensible course of action here is to avoid gambling on 

unsettled legal issues that could have systemic consequences. Instead, we should 

recognize that stabilizing the housing market is the key toward economic recovery, 

and that it is impossible to fix the housing market unless the number of foreclosures 

is drastically reduced, thereby reducing the excess inventory that drives down housing prices and begets more foreclosures. Unless we fix the housing market, consumer spending will remain depressed, and as long as consumer spending remains 

depressed, high unemployment will remain and the U.S. economy will continue in 

a doldrums that it can ill-afford given the impending demographics of retirement. 

This suggests that the best course of action is a global settlement on mortgage 

issues, the key elements of which must be (1) a triage between homeowners who 

can and cannot pay with principal reduction and meaningful modifications for homeowners with an ability to pay and speedier foreclosures for those who cannot, (2) 

a quieting of title on securitized properties, and (3) a restructuring of bank balance 

sheets in accordance with loss recognition. 

I recognize that for many, the preferred course of action is not to deal with a problem until it materializes. But if we pursue that route, we may be confronted with 

an unmanageable crisis. We cannot rebuild the U.S. housing finance system until 

we deal with the legacy problems from our old system, and these are problems that 

are best addressed sooner, before an acute crisis, then when it is too late. 
121 

PREPARED STATEMENT OF DAVID B. LOWMAN 

CHIEF EXECUTIVE OFFICER FOR HOME LENDING, JPMORGAN CHASE

NOVEMBER 16, 2010 

Introduction 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank 

you for inviting me to appear before you today. My name is David Lowman, and 

I am the Chief Executive Officer for Home Lending at JPMorgan Chase. I am grateful for the opportunity to discuss Chase’s loan servicing business, our wide-ranging 

efforts to enable borrowers to keep their homes and avoid foreclosure where possible, and the recent issues that have arisen relating to affidavits filed in connection 

with certain foreclosure proceedings. 

JPMorgan Chase is committed to ensuring that all borrowers are treated fairly; 

that all appropriate measures short of foreclosure are considered; and that, if foreclosure is necessary, the foreclosure process complies with all applicable laws and 

regulations. As I will discuss in detail later in my testimony, we regret the errors 

that we have discovered in our processes, and we have worked hard to correct these 

processes so that we get them right. We take these issues very seriously. 

Chase services about 9 million mortgages across every State, representing over $1.2 trillion in loans to borrowers. In our role as servicer, we are responsible for 

administering loans on behalf of the owner of the loan, which sometimes is Chase 

itself, but more often is someone else—a Government-sponsored enterprise (GSE), 

a Government agency (such as the Federal Housing Administration or the Department of Veterans Affairs), a securitization trust, or another private investor. 

I will first discuss Chase’s extensive efforts to help borrowers avoid foreclosure 

and then discuss the issues that led to our temporary halt to some foreclosures, as 

well as Chase’s enhanced procedures for the foreclosure process. 

The past several years have been very difficult ones for many Americans. We have 

made extensive efforts during these difficult economic times to help borrowers who 

have fallen behind on their payments understand all of their options and, where feasible, to work with them in an effort to modify their loans and bring their accounts 

current so that they can keep their homes. 

At the outset, I want to emphasize that Chase strongly prefers to work with borrowers to reach a solution that permits them to keep their homes rather than foreclose on their properties. As we discuss below, solutions may include modification, 

temporary forbearance, short sales or deeds-in-lieu of foreclosure. Foreclosures cause 

significant hardship to borrowers, harm their credit profiles, and depress property 

values in the communities where they occur. Foreclosures also inevitably result in 

severe losses for lenders and investors. Therefore, we always consider whether there 

are viable alternatives to foreclosure before proceeding with a foreclosure. 

It is critical to note that the analysis we use in deciding whether to proceed with 

a modification or foreclosure does not take into account servicer compensation. Furthermore, if it were considered, servicer compensation would tend to favor modification over foreclosure. Indeed, the cost for servicers to take a loan to foreclosure generally is significantly greater than the cost of a modification. With a successful 

modification, Chase is able to continue to service the loan and earn servicer fees; 

but when a property is sold as a result of foreclosure, Chase’s role as servicer ends 

and Chase receives no further fees. 

Chase has established modification programs that collectively have allowed us to 

avoid many more foreclosures than we have completed. We established these programs starting in early 2007 in recognition of the difficult economic conditions that 

resulted in a growing number of our borrowers being unable to make their monthly 

payments. While we keep striving to do even better, our efforts to date have yielded 

significant results. Since January 2009, Chase has offered almost one million modifications to struggling borrowers and has completed over 250,000 permanent modifications under the Home Affordable Modification Program (HAMP), Chase’s own 

proprietary modification programs, and modification programs offered by the GSEs 

and FHA/VA. Combined with other programs designed to avoid foreclosure, we have 

prevented over 429,000 foreclosures since January 2009. Over that same period, we 

have completed over 241,000 foreclosures. In other words: during the last 2 years, 

Chase has successfully prevented about two foreclosures for each one we have completed. 

Sustainable modifications are not always possible; there are some borrowers who 

simply cannot afford to stay in their homes, notwithstanding the modification programs and other foreclosure prevention alternatives available. There are other borrowers who are not seeking modifications; in the majority of cases that went to foreclosure sale in the last quarter, the properties were vacant or not owner-occupied. 
122 

Our Investment in Foreclosure Prevention 

Our progress in foreclosure prevention derives in part from early and significant 

investments since late 2008. Currently, Chase employs over 6,000 customer-facing 

staff whose focus is working with distressed borrowers, and we have more than doubled the number of employees in this area in the last 2 years. For more than 6 

months, we have assigned each borrower a single point of contact who serves as a 

consistent touchpoint for the borrower as he/she seeks a loan modification. More 

than 1,900 dedicated relationship managers serve in this role for our borrowers. 

In addition, Chase has made major efforts to reach out personally to borrowers 

and offer assistance with modifications. Since early 2009, our employees have met 

with 115,000 struggling borrowers at the 51 Homeownership Centers we have created in 15 States and the District of Columbia. The Chase Homeownership Centers 

are a notable example of our early efforts to reach borrowers in need. We also have 

a Homeownership Preservation Office, which maintains relationships with national 

groups like HOPE NOW and NeighborWorks, as well as with hundreds of local nonprofit organizations across the country. Our team works closely with Government 

and community leaders on initiatives that focus on affordable housing, foreclosure 

prevention and community revitalization. The team also travels across the country 

and directs national outreach events. Over 3.7 million letters have been sent to borrowers inviting them to attend these events. More than 54,000 borrowers have attended one of the hundreds of events held to date. 

We expend great efforts to reach our borrowers and inform them about modification alternatives. In the last 2 years, Chase has made 341 million outbound calls 

to borrowers. Chase does not wait for borrowers to contact us; when we believe a 

borrower may be at risk, we affirmatively reach out to them early to discuss possible 

modification options. While requirements vary by State, generally our outreach to 

borrowers includes numerous calls from a customer service representative and letters detailing the nature of the delinquency and possible Government and other 

modification programs. Our borrowers also receive a Chase Homeownership and 

Outreach letter, including any information about local events that provide in-person 

help. When a loan becomes more delinquent, a Chase representative may visit the 

property; and generally at 90 days past due, the borrower receives notification of 

intent to foreclose. On average, we contact a borrower over 100 times before a foreclosure is completed. In addition, our loan counselors have fielded over 29 million 

inbound calls from borrowers seeking foreclosure prevention assistance in the last 

2 years and 5 million calls to our dedicated loan modification hotline. 

Loan Modification Programs 

Chase’s modification programs are focused on helping borrowers stay in their 

homes by making their monthly mortgage payments affordable. 

HAMP Modifications 

Chase has supported the Department of Treasury’s efforts to increase mortgage 

modifications industry-wide through HAMP, and Chase was one of the first major 

servicers to begin implementing the program. Chase mails a HAMP application to 

every borrower whose loan meets the program’s eligibility criteria at both 40 and 

70 days delinquency. To date, we have sent HAMP applications to 900,000 borrowers. 

Chase makes substantial efforts to help borrowers complete the necessary paperwork, and any decision denying a HAMP application is subject to a rigorous review. 

Chase also affords borrowers an opportunity to appeal denials of HAMP applications 

by supplementing the information in their file. When an application is pending, 

Chase suspends foreclosure sales; and if that application is denied, Chase ordinarily 

will not proceed with the foreclosure sale for a period of 30 days, provided that an 

investor does not instruct us to proceed sooner. 

If a borrower is eligible for participation in HAMP and is approved for a trial 

modification, we adjust the mortgage payment to 31 percent of the borrower’s total 

pretax income, as required by HAMP. To achieve this level, as a first step, the loan’s 

interest rate is reduced to as low as 2 percent. If this is not sufficient, then the term 

of the loan is extended to 40 years. Finally, if necessary, a portion of the principal 

is deferred until the loan is paid off, and no interest is charged on the deferred principal. 

The response to HAMP has been substantial. To date, we have offered HAMP 

trial plans to more than 270,000 borrowers and have over 60,000 borrowers in active 

permanent HAMP modification plans through October 2010. These modifications 

have benefited borrowers by reducing their monthly mortgage payments in most 

cases. Our borrowers who have taken advantage of HAMP modifications realized an 

average reduction of 28 percent in their monthly payment. 
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Modifications for Adjustable Rate Mortgages 

Prior to the introduction of HAMP, Chase implemented several of its own proprietary loan modification programs, including several programs for adjustable rate 

mortgages (ARMs). Chase-owned subprime hybrid ARMs scheduled to reset for the 

first time are modified to remain at the initial interest rate for the life of the loan. 

Borrowers qualify for this program if they have a clean payment history on a hybrid 

ARM with an interest rate that adjusts after the first two or 3 years. Borrowers 

do not need to contact Chase to benefit from this program; Chase implements the 

rate lock automatically, and borrowers are so advised. In cases of hybrid ARM loans 

that we service but do not own, we use the American Securitization Forum (ASF) 

Fast Track program to reduce payment shock. Under this program, qualifying borrowers will have their initial ARM rate frozen for 5 years. 

We also have taken action to help borrowers with Chase-owned Pay Option ARMs. 

Chase did not originate or purchase these loans, but assumed them through the 

2008 acquisition of the mortgage assets of Washington Mutual. Chase has developed 

proactive programs to assist current Pay Option ARM borrowers who may be at 

higher risk of default due to factors such as credit score, loan-to-value ratio (LTV), 

and future payment shock. To eliminate any potential payment shock, we offer to 

modify the loan to a fixed payment, keeping the borrower’s monthly payment at its 

current amount. For the majority of these modifications, the borrower’s payment is 

fixed for the life of the loan. Since 2009, Chase has proactively completed about 

22,000 Option ARM modifications on current loans, worth $8 billion in unpaid principal balance. 

Chase Custom Modifications 

Borrowers not eligible for HAMP are reviewed on a case-by-case basis to determine their suitability for an alternative modification. We evaluate these loans by 

developing an estimated target affordable payment of 31 percent to 40 percent of 

the borrower’s gross income. We use the lowest percentage for borrowers with the 

lowest incomes. Once the target payment is calculated for the borrower, we test 

each modification option to see if it will get the borrower to an affordable payment. 

As in the HAMP program, we apply a net present value (NPV) analysis to each option to determine whether the value of the modification exceeds the value expected 

to be recovered through a foreclosure. Chase recommends a modification when that 

option produces both an affordable payment and a positive NPV result. 

Despite our best efforts, not every loan can be modified, for a variety of reasons. 

Most of the mortgages we service are serviced on behalf of others; we do not own 

the loans. We generally owe those third parties, which include the GSEs, a contractual duty to maximize the return on the investment they made. As noted above, the 

high costs of foreclosure give them (and us) an incentive to consider meaningful payment reduction when necessary to effectively modify the loan, but modifications that 

do not maximize the return to investors are inconsistent with our duties as servicer. 

And even aside from our contractual duties, the U.S. mortgage market will never 

return to health if investors come to believe that the value of the collateral is unreliable. 

Other Loss Mitigation Efforts 

For a variety of reasons, loan modifications are not always a workable solution. 

Borrowers who cannot afford their homes, even if the payment is substantially reduced, need other solutions. So, in addition to loan modifications, Chase also offers 

borrowers other options to avoid foreclosure. These include: 

• Short Sales—For borrowers who do not qualify for loan modification or would 

qualify, but do not wish to stay in their homes, Chase has a program that 

makes available a short sale in which Chase agrees to a sale to a third party, 

arranged by the borrower, at a price below the outstanding amount of indebtedness. Since April 2010, Chase has had a program to proactively contact borrowers who have listed their homes for sale and who would be good candidates 

for short sales. Chase provides these borrowers with a minimum offer that 

Chase would accept to approve a short sale. Since 2009, Chase has completed 

more than 83,000 short sales. 

• Deed in Lieu—In cases where a short sale is not possible because a sale cannot be arranged within the prescribed period of time, Chase may offer borrowers the option of deeding the property to Chase in full satisfaction of their 

debt. Since 2009, Chase has completed more than 3,400 deeds-in-lieu. 

• In addition to short sales and deeds-in-lieu, since 2009, Chase has implemented 

over 55,000 forbearance, extension and repayment plans to help with a hardship and avoid foreclosure. 
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Foreclosures 

The decision to foreclose is always a difficult one, but there are unfortunately 

many cases where this alternative is unavoidable. In many cases, borrowers are unemployed or otherwise do not or cannot make any meaningful payment on their 

mortgages. In the average case where we foreclose, the borrower has not made any 

payment for 14 months; in Florida, where many of our foreclosures have occurred, 

the average period without payment prior to foreclosure sale is 22 months. In some 

cases, the borrower may not have an incentive to pursue a modification; of the properties on which we foreclose, a significant percentage is vacant or not the owner’s 

primary residence, but rather an investment property. In cases where the property 

is vacant, foreclosure may not only be the right economic decision—it also transfers 

the property into a new owner’s hands, improving community safety and stabilizing 

neighboring property values. 

We recently announced that we had temporarily suspended foreclosures, foreclosure sales, and evictions in a number of States to allow for a review and enhancement of our procedures. It is important to note at the outset that the issues that 

have arisen in connection with foreclosure proceedings do not relate to whether foreclosure proceedings were appropriately commenced. We have not found errors in our 

systems or processes that would have led foreclosure proceedings to be commenced 

when the borrower was not in default. 

Chase has substantial safeguards in place designed to ensure that foreclosures are 

both a last resort and instituted only in appropriate cases. A loan is referred to foreclosure only after Chase has made substantial attempts to provide the borrower 

with alternatives to foreclosure. Then, as part of the process that can ultimately 

lead to referring a loan to foreclosure, Chase policy requires that all delinquent 

loans be reviewed by its Independent Foreclosure Review team. The Independent 

Foreclosure Review confirms that the loan is past due and that Chase has complied 

with its pre-referral policies, including repeated efforts to contact the borrower to 

discuss alternatives. Under Chase’s policies, only after the Independent Foreclosure 

Review is complete can a loan be referred for foreclosure proceedings. The Independent Foreclosure Review is repeated 2 to 3 weeks prior to any scheduled sale, 

and a final check also is performed 72 hours prior to the sale. If any of these subsequent reviews suggests that a loan should not have been referred to foreclosure, we 

do not proceed with the sale. Under our policies, if a loan modification process has 

begun after the commencement of a foreclosure, we do not engage in a foreclosure 

sale if the modification succeeds or until the modification process fails. That is not 

to say we are perfect—we service millions of loans, and we sometimes do make mistakes. But when we find an error, we fix it. 

The Nature of the Affidavit Issues 

Chase’s recent temporary suspension of foreclosure operations in a number of 

States arose out of concerns about affidavits prepared by local foreclosure counsel, 

signed by Chase employees, and filed in certain mortgage foreclosure proceedings. 

Specifically, employees in our foreclosure operations area may have signed affidavits 

on the basis of file reviews and verifications performed by other Chase personnel, 

not by the affiants themselves. In addition, we discovered other related issues in 

connection with some of these affidavits, including instances in which notarized affidavits may not have been signed and affirmed in the physical presence of the notary. Nevertheless, the facts set forth in the affidavits with respect to the borrowers’ 

indebtedness and the amount of the debt—the core facts justifying foreclosure—were 

verified prior to the execution of the affidavits by Chase employees consulting the 

company’s books and records, which are themselves subject to extensive internal 

and external controls. Therefore, we believe the underlying information about default and indebtedness was materially accurate and the issues described above did 

not result in unwarranted foreclosures. 

We take these issues very seriously. Our process was not what it should have 

been; quite simply, it did not live up to our standards. To begin to address these 

issues, we temporarily halted foreclosure and related proceedings in certain States 

because our procedures may not have complied with personal knowledge and notarization requirements. In late September, Chase temporarily halted all foreclosure 

proceedings and property sales in the 23 States where foreclosure primarily occurs 

through a judicial process and where affidavits are generally filed as part of the 

process. Shortly thereafter, Chase also temporarily halted foreclosure proceedings in 

certain States where foreclosure primarily occurs through a non-judicial process in 

order to assess whether similar documentation issues might exist in those jurisdictions. As an additional safeguard, Chase also temporarily halted evictions in the 

States in which it suspended foreclosures, as well as in other States where Chasesigned affidavits might be used as part of the eviction process. 
125 

While these proceedings have been halted, Chase has thoroughly reviewed its 

foreclosure procedures and enhanced them to resolve these issues. Briefly, the remedial actions undertaken by Chase include: 

• A complete review of our document execution policies and procedures; 

• The creation of model affidavits that will comply with all local law requirements 

and be used in every case, and that will limit factual assertions to those within 

the personal knowledge of the signer and eliminate any legal conclusions that 

are outside the signer’s personal knowledge; 

• Implementation of enhanced procedures designed to ensure that the employees 

who execute affidavits personally verify their contents and that the affidavits 

are executed only in the physical presence of a licensed notary; 

• Extensive training for all personnel who will have responsibility for document 

execution going forward and certification of those personnel by outside counsel; 

• Implementation of a rigorous quality control double-check review of affidavits 

completed by Chase employees; and 

• Review and verification of our revised procedures by outside experts. 

In addition to enhancing procedures for future foreclosure filings, Chase also is 

working to remedy any issues with affidavits on file in pending proceedings. Although Chase’s approach will vary based on the procedures in individual States, in 

cases in which judgment has not yet been entered, Chase plans to re-verify the material information in filed affidavits and file replacement affidavits prepared under 

the new enhanced procedures to eliminate any possible defects in these affidavits. 

Chase is taking other appropriate measures in connection with foreclosure matters 

in which judgment has been entered but a sale has not yet occurred. 

We have worked hard over the past month and a half to review and strengthen 

our procedures to remediate the affidavit issues we found. We are committed to addressing these issues as thoroughly and quickly as possible. 

I hope that my testimony has explained our processes for dealing with cases of 

borrower default, as well as the issues surrounding the documentation filed in 

Chase’s foreclosure proceedings and the steps we have taken to address them. Foreclosure is a last resort for Chase, but when we do foreclose, we are committed to 

making sure that we do so in compliance with applicable law and with respect for 

the borrower. I would be happy to answer questions from the Committee. 
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM THOMAS J. MILLER 

Q.1. Attorney General Miller, on November 3, the Wall Street 

Journal reported that you and officials from other States told Bank 

of America executives that ‘‘State attorneys general would like additional aid to be offered to borrowers, such as further principal reductions on certain delinquent loans where people owe much more 

than what their homes are worth.’’ 

Is it correct that you have asked mortgage lenders or servicers 

that you, in your role as State attorney general, would like them 

to offer more aid to borrowers, such as principal reductions? 

If so, how did you balance the competing desires of borrowers 

and lenders to arrive at the conclusion that servicers should be offering modified mortgages with principal reductions? 

A.1. It is estimated that approximately 23 percent of the homes in 

this country have mortgage principal balances that are larger than 

the current fair market value of the property. This status is commonly referred to as being ‘‘underwater.’’ Many different groups, 

ranging from securities analysts, economists, investors in mortgage 

backed securities, to advocacy groups, have been calling for principal reductions for quite some time now. The simple proposition is 

that given the extremely high loss severities lenders and investors 

are suffering in certain markets when a home is taken to foreclosure sale, in some instances a modification with a significant 

principal reduction still produces more income than the foreclosure 

sale while giving the homeowner sufficient motivation to stay in 

the home. In other words, in appropriate circumstances, principal 

reductions produce a positive net present value for the owners of 

the loan. 

We have consistently stated since 2007 that we are only interested in modifications that are net present value positive. Principal 

reductions are just another tool to arrive at a sustainable net 

present value positive modification in those markets that have experienced a severe drop in home prices over the last 3 to 4 years. 

Q.2. Attorney General Miller, you testify, with respect to data collection efforts of your ‘‘State Working Group’’ which began in October 2007, that ‘‘our data collection was not as robust as it could 

have been due to the extremely short-sighted direction at the Office 

of the Comptroller of the Currency which forbad national banks 

from providing loss mitigation data to the States.’’ 

Has data sharing with the OCC improved since you began trying 

to collect data in 2007? 

A.2. No. While the OCC and OTS have provided a public service 

by publishing their quarterly Mortgage Metrics Report, they have 

not shared any data directly with the State Attorneys General. We 

do not receive anything in addition to the public Metrics Report. 

Q.3. Attorney General Miller, you testify that ‘‘We must find a way 

to make sure that all borrowers who have the desire to keep their 

home and qualify for a modification receive that modification.’’ 

Have you found cases in your jurisdiction in which homeowners 

who qualify for mortgage modifications have been illegally denied 

modifications? 

If so, have you pursued legal remedies in Iowa? 
191 

If not, what analysis can you provide that leads you to believe 

that ‘‘many borrowers, who under a strict economic analysis should 

receive a modification, are falling through the cracks’’? 

A.3. My office helped found and helps run the ‘‘Iowa Mortgage Help 

Hotline.’’ This is the premier loan modification effort in the State 

of Iowa. We have had over 13,000 Iowans open applications with 

Iowa Mortgage Help and many thousand more have contacted the 

Hotline without formally opening a file. In addition, my Consumer 

Protection Division received almost 600 complaints regarding mortgage origination and servicing in 2010 alone. In fact, mortgages are 

now the number one consumer complaint category in my office, representing 14.5 percent of all written complaints submitted to my office. The vast majority of these complaints involve loan servicing 

and requests for a loan modification. 

Through this front-line experience, we have seen many instances 

of borrowers who through a strict economic analysis should have 

received a loan modification, but for a variety of systemic failures 

by the servicers did not receive such a modification. Through the 

intervention of both the Iowa Mortgage Help mediators and my 

Consumer Protection Division, many of these borrowers have received modifications when they would have otherwise lost the family home to foreclosure. Keep in mind that these modifications were 

all in the best economic interests of the owners of the loan. 

Our experience in this regard is consistently echoed every time 

we talk to HUD approved housing counselors in both Iowa and 

other States, and by my fellow Attorneys General. In fact, several 

of the Senators during the hearing stated that their offices have received many complaints with a similar fact pattern. If you talk to 

anyone who has front-line experience working directly with borrowers attempting to get loan modifications, you will hear countless 

horror stories where the incompetence of the servicers prevented a 

modification from occurring. There is little doubt that many borrowers are indeed falling through the cracks. 

Q.4. Attorney General Miller, your testimony States that you believe ‘‘It is well past time to once and for all tackle the issue of 

foreclosures and loan modifications with the resources and urgency 

it deserves.’’ Your statement leads me to conclude that you do not 

believe that efforts by the Treasury Department and the Obama 

administration to address a large and potentially growing foreclosure wave have been successful. 

What would you recommend that the Administration do to 

achieve success in battling the issue of foreclosures, and what is 

the economic and distributional analysis upon which you base your 

recommendation? 

A.4. I commend the Obama administration for the wide variety of 

efforts it has undertaken to battle the issue of foreclosures. While 

the HAMP program has not been as successful as we all hoped, it 

must be given credit for creating a national standard for modifications and bringing considerable stability to a chaotic situation. 

HAMP must be placed in its proper historical context. Prior to 

HAMP there was no coherent national strategy with regard to loan 

modifications. The previous Administration’s response was the very 

tepid creation of the industry backed HOPE NOW group, consisting 
192 

of a 1–800 number and little else. In large part, the Obama administration’s efforts have been stymied by the failures of the loan 

servicers. Ultimately, all loan modification programs rely on the 

servicers to fulfill their duties and until the loan servicers put sufficient resources into loss mitigation and work out their numerous 

procedural problems, any modification program is going to have difficulties. 

Q.5. Attorney General Miller, in your testimony you state: ‘‘In recent weeks, many have opined that the temporary halt on foreclosures and foreclosure sales by several servicers was greatly damaging the economy. With all due respect, it is the foreclosures in 

the first instance that pose the greatest threat to the economy.’’ 

There is an absolute need for any servicer to proceed legally with 

a foreclosure sale. However, with blanket action, the vast majority 

of the delayed foreclosures likely were ones that would have been 

executed properly. 

Is it your position that delays in proper foreclosures or foreclosure sales do not represent a significant cost to our economy? 

What evidence have you examined to arrive at this conclusion? 

If you do believe there is an economic cost to delaying forecloses, 

what do you estimate that cost to be? Has this been a factor in 

your decisionmaking? 

A.5. It is my understanding that there has been no Government action in regard to any foreclosure delays. All such delays were done 

voluntarily by those servicers who determined on their own that 

they had possibly violated State law in their foreclosure procedures. In addition, there has been no blanket action. Delays were 

only instituted by those servicers that felt it necessary. It is further 

my understanding that the servicers who did institute delays did 

not do so for every single loan they serviced, but only for those 

loans where they thought violations of the law may have occurred. 

Finally, the State Attorneys General are in the midst of an ongoing 

investigation of multiple servicer practices and a variety of State 

and Federal regulators are also conducting multiple examinations 

and reviews. The early results suggest that multiple, serious problems exist within the mortgage servicing industry. For all of these 

reasons, it is hard to conclude that ‘‘the vast majority of the delayed foreclosures likely were ones that would have been executed 

properly.’’ 

Furthermore, given the historic levels of property that is already 

owned by the lenders (commonly known as ‘‘real estate owned’’ or 

‘‘REO’’) and the very large ‘‘shadow inventory’’ (homes that could 

be taken through the foreclosure process to completion but have deliberately been withheld by the servicers), it is likely that any additional REO properties would only further depress property values. 

Thus, any economic damage caused by a several month delay of 

some foreclosures is likely negligible. This is particularly true given 

the many loans that servicers could take all the way through a 

foreclosure sale right now, but the servicers have chosen instead to 

leave these properties in a legal limbo (a state of foreclosure purgatory if you will); out of a desire to avoid responsibility for the upkeep of these properties and to avoid putting any more foreclosed 

properties onto the real estate market. The fact that the servicers 
193 

themselves are avoiding putting more foreclosed properties onto the 

market severely undercuts any argument that a temporary, voluntary delay has or will cause significant economic damage. 

Q.6. Given the varying State laws that govern foreclosure, there 

must be the opportunity to observe both best and worst practices. 

While foreclosures are not the preferred option for any party at the 

onset of a loan, sometimes it is the path forward that presents the 

least harm to borrowers, lenders and the economy. In those instances, it is essential that our foreclosure process be effective. 

Which States do each of you feel provide the most efficient path 

forward in foreclosures, while providing borrowers proper legal 

channels in the event that there is a dispute? What is the average 

length of time between original delinquency and foreclosure sale in 

these States? 

Which States do each of you feel have the most problems in effectively executing foreclosures? What is the average length of time 

between original delinquency and foreclosure sale in these States? 

A.6. The fundamental problem in today’s mortgage servicing market is the policies and practices of the servicers themselves, not 

variations among State foreclosure laws. A broad range of financial 

institutions successfully comply with a broad range of differing 

State, not to mention international, laws in their daily operations. 

The recent servicing problems arise not from the differences among 

State foreclosures laws, but from a business model that is not 

equipped to manage the current volume of distressed loans. 

Q.7. To better gauge the level of violations surrounding the topic 

of this hearing it is necessary for us to understand who is being 

affected. Admittedly, this question is probably best suited for the 

regulators, and we hope to receive this information from them at 

some point. 

In your research and investigations, how many individuals were 

discovered to have been fully current on their mortgage payments 

but foreclosed upon by their servicer? Please provide the data and 

evidence that you evaluated to arrive at your conclusions. 

A.7. Harm is not limited to borrowers who are fully current on 

their payments but foreclosed upon. In fact, we are finding a wide 

variety of servicer misconduct and practices which harm borrowers 

in a variety of situations. Other areas of harm include, but are not 

limited to: 

1. The inability of some servicers to complete such simple tasks 

as properly applying the borrower’s monthly payment or properly boarding the loan upon receiving the servicing rights. 

2. The well publicized challenges some servicers are having with 

one of the mostfundamental facts: proving ownership of the 

note and the mortgage and the right to foreclose. 

3. The inability of servicers to properly handle loss mitigation requests, including such basic responsibilities as repeatedly losing borrower submitted financial documents and consequently 

requiring borrowers to repeatedly resubmit such documents. 

Other examples include foreclosing on borrowers when a loan 

modification is being considered (the so called ‘‘dual track’’ 

issue); loss mitigation representatives giving borrowers con-
194 

flicting or incorrect information; failure to respond to borrowers in a timely manner, and so on. In our conversations 

with housing counselors and legal aid lawyers we have been 

repeatedly told that there is no rhyme or reason why a particular loan modification request is granted or denied, that the 

system is arbitrary and capricious and depends mostly on who 

answers the phone on the other end, not on a principled basis. 

4. We have heard multiple complaints of borrowers who have the 

money necessary to reinstate their loan, yet cannot find a 

servicing employee who can accept and apply that money. 

5. We have heard multiple complaints of borrowers who have 

signed loan modifications, yet the servicer does not recognize 

the modification and continues to foreclose. My staff has personally intervened on several of these cases and without such 

intervention we believe a foreclosure would have likely occurred. 

6. Many borrowers have complained that they had a buyer willing to purchase their property for less than the principal balance on the loan, but considerably more than the lender would 

receive from a foreclosure sale (commonly known as a ‘‘short 

sale’’), but that the servicer was so disorganized that any response came much too late and the buyer walked away, resulting in a much more expensive foreclosure. 

7. We have heard complaints about the servicing of a loan being 

transferred to a new servicer and the new servicer refuses to 

recognize either a pending loan modification application or 

even a completed modification with the previous servicer. 

8. We have heard many, many complaints about servicers imposing thousands of dollars of unjustified fees as part of the foreclosure process. In some cases, these fees have pushed the 

borrower over the edge and made it impossible for the borrower to save the home. 

9. Similarly, we hear complaints about servicers imposing very 

expensive ‘‘force-placed’’ homeowners insurance, when the borrowers’ homeowners insurance was in place the entire time. 

In short, there are many different kinds of harm that borrowers 

suffer due to servicer misconduct and incompetence. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM THOMAS J. MILLER 

Q.1. What improvements should be made to Federal regulation of 

mortgage servicers? 

A.1 The number one thing is to elevate the importance of mortgage 

loan servicing. It is my understanding that traditionally most effort 

by Federal banking regulators has been focused on the origination 

of mortgage loans. What we have learned the hard way over the 

last three and a half years is that loan servicing is equally as important. Thus, the Federal regulators should give loan servicing 

much more attention in their examinations than they have previously. It is also clear to me that there is a need for more detailed 

regulation of servicing standards. 
195 

While I support increased Federal regulation of loan servicing, it 

must be made clear that any such efforts should be in addition to 

and not in place of regulation at the State level. Some have attempted to blame servicers’ current troubles on the fact that foreclosure is controlled by State law. Nothing could be further from 

the truth. The servicers’ troubles are not based on an inability to 

comply with differences in State law, they are much more basic. 

The simple fact is that the current servicing model was never designed for the high delinquency environment we are experiencing 

today and the system is fundamentally broken. 

Foreclosure is an inherently local transaction, with devastating 

effects on local neighborhoods and communities and serious impacts on city, county, and State budgets. Accordingly, State law has 

controlled foreclosure proceedings since the founding of this Nation. 

Any attempt to use the current crisis to preempt State law is deeply misguided. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM BARBARA J. DESOER 

Q.1. During discussion of the dual-track process, you mentioned 

that your ability to halt the practice of ‘‘dual tracking’’ of loans simultaneously through the modification and foreclosure processes 

could be constrained on loans you are servicing for outside trusts, 

but that you would have the ability to halt the dual-track process 

on loans held in portfolio by Bank of America. 

I understand that you are in negotiations with State AGs on a 

potential agreement on this and other aspects of servicing. In the 

meantime, however, many families could continue to be confused 

by this dual-track process. 

Have you unilaterally halted the dual-track process and suspended the foreclosure process for loans held by Bank of America 

that are in the review and modification processes? If not, do you 

plan to do so soon? If not, why not, and what would need to happen 

before BofA would halt dual-tracking on its loans? 

A.1. As your question acknowledges, parallel foreclosure and modification processes are required by many investors, and reflect an 

industry-wide servicing practice. The majority of the loans we service—approximately 77 percent—are for outside investors. We want 

to partner with Members of Congress, State Attorneys General, 

regulators, other servicers, and investors to agree on ways to improve industry practices with respect to the evaluation of borrowers 

for modifications after they have been referred to foreclosure. At 

the same time, we are actively working to reduce the borrower confusion that may result from dual tracking. 

For borrowers who are referred to foreclosure, Bank of America’s 

policies are designed to prevent a loan from going to a foreclosure 

sale, consistent with regulatory directives and investor requirements, if the borrower is being evaluated for a HAMP or proprietary modification. In addition, for borrowers who enter a trial plan 

after their loan has been referred to foreclosure, to the extent consistent with its legal and contractual obligations, Bank of America’s 

policy is to suspend the foreclosure process, including refraining 

from scheduling sales or causing judgments to be entered, on a 
196 

basis consistent with HAMP for proprietary or traditional loan 

modifications that are successfully performing under the trial plan. 

Bank of America also has introduced an additional review procedure to delay foreclosure sales if there is ongoing modification, 

short-sale, or deed-in-lieu activity. 

We are also addressing concerns about customer confusion by improving our communication with distressed borrowers. In particular, we are redesigning our modification process to assign eligible borrowers who have submitted to us at least one document in 

support of their modification application to an associate with relevant expertise for help at each particular stage of the modification 

process. We are implementing this new approach to modifications, 

and so far we have paired customers with an associate on this 

basis over 230,000 times. We are also implementing a similar 

model for our short sale and deed-in-lieu foreclosure alternatives. 

More generally, in the past 2 years, We have committed significant resources to helping distressed homeowners, including by hiring and training over 11,000 people, so that we now have a team 

of about 30,000 working with customers in default. We have also 

reached out to our customers by opening customer assistance centers, going door-to-door to reach customers with modification offers, 

and participating in more than 550 housing rescue fairs across the 

country. We are also partnering with non-profits to address foreclosure prevention in diverse communities. 

Q.2. In response to questions from Senator Johnson, Mr. Lowman 

and Ms. Desoer, you characterized the HAMP 2MP program as a 

good approach to second lien modification. You also noted your organizations’ participation in 2MP, with Ms. Desoer pointing out 

that Bank of America had been the first servicer to sign up for the 

program. Yet, as of Sept 30, only 21 second lien modifications 

worth $10,500 had been made under 2MP since its implementation 

in March 2010. 

Why, in your opinion, have so few modifications been made 

under 2MP so far? Do you see your organization increasing its 

number of 2MP modifications in the coming months? 

A.2. Bank of America was the first servicer to sign up to participate in the 2MP second lien modification program. This program 

is limited to borrowers whose first liens are modified under HAMP 

and who agree to a modification of the second lien under the terms 

of the program. If a borrower fails a trial HAMP modification, that 

borrower is not eligible for 2MP. In addition, 2MP requires a 3- 

month trial period for delinquent borrowers before the 2MP modification can become effective. 

Phyllis Caldwell, Chief of Homeownership Presentation Office of 

the Department of Treasury, explained to this Committee: 

The program uses a third-party database to match second lien loans with 

first lien loans permanently modified under HAMP . . . The implementation of this database began over the summer. Five 2MP Servicers have already begun matching modified first liens with their corresponding second 

liens, while the other 12 are in some phase of developing systems capacity 

to do so. 

Bank of America is one of five servicers that have led the way 

in matching modified first liens with corresponding second liens. As 

of the end of December 2010, we had matched approximately 
197 

29,000 Bank of America second lien customers to a permanent 

HAMP modification of a first lien. We are currently working 

through these matches and issuing modifications to 2MP-eligible 

customers. 

Bank of America also has proprietary modifications that it applies to second liens independently of 2MP. Since 2008, we have 

completed over 95,000 second lien modifications through proprietary or other programs. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM BARBARA J. DESOER 

Q.1. Mr. Levitin, your testimony States that a common response 

from banks—and I assume here you mean servicers—about problems in the foreclosure process is that it doesn’t matter to them because the borrower still owes on the loan and has defaulted. As you 

put it: ‘‘This ‘No Harm, No Foul’ argument is that homeowners 

being foreclosed on are all a bunch of deadbeats, so who really 

cares about due process?’’ You say that this argument, that you attribute loosely to ‘‘banks,’’ condones ‘‘vigilante foreclosures: so long 

as the debtor is delinquent, it does not matter who evicts him or 

how.’’ 

Does any representative of the servicer industry on the panel 

wish to comment on this? 

A.1. Bank of America is committed to treating our customers responsibly and fairly. We acknowledge our obligation to do our best 

to protect the integrity of the foreclosure proceedings. And when 

that has not happened, we accept responsibility for it, and we deeply regret it. 

We were the only servicer that stopped foreclosure sales nationwide to review our procedures. We also halted evictions and are 

only restarting them with 30 days advance notice to the borrower 

of the restart. We know that the concerns are not just technical 

issues. We are already well along in making improvements with respect to foreclosure documentation. We take seriously our obligation to the customer, the investor, the legal process, and the economy. 

Since suspending foreclosure sales and evictions, the Bank has 

implemented new or revised policies and procedures to strengthen 

controls over our foreclosure activities. We also have added and redeployed human resources to execute on our commitment to improve our processes. We hope that these new measures and controls give all stakeholders added confidence that foreclosure proceedings, when necessary, will move forward with integrity. 

Q.2. Ms. Desoer and Mr. Lowman, it is important that this Committee has an adequate understanding of the current state of affairs as it relates to delinquency and foreclosures. Please briefly 

discuss the following statistics as they relate to your companies: 

What is the total number of mortgages that your company services? 

How many mortgages are currently in foreclosure? 

What is the average number of days that a borrower is delinquent on his or her mortgage at the time of a foreclosure sale? 
198 

What percentage of homes are vacant at the time of a foreclosure 

sale? 

A.2. Bank of America services nearly 14 million mortgage loans. 

The majority of our customers—86 percent—are current and making their mortgage payments on time every month. Fortunately, 

that number is stabilizing. But the segments of the portfolio that 

are distressed include large numbers of customers who are seriously delinquent. Of Bank of America’s 1.3 million customers who 

are more than 60-days delinquent, nearly 600,000 have not made 

a mortgage payment in more than a year, and more than 190,000 

have not made a mortgage payment in 2 years. 

The following are delinquency statistics for completed foreclosure 

sales in the third quarter of 2010: 

• Eighty (80) percent of borrowers had not made a mortgage payment for more than 1 year. 

• The average loan had been in delinquent status for 560 days. 

• Thirty-three (33) percent of properties were vacant. 

• Fifteen (15) percent of properties were non-owner occupied at 

the time of origination. 

Helping our customers remain in their homes where possible is a 

top priority for Bank of America—as evidenced by our nearly 

750,000 completed loan modifications since 2008. This number includes over 250,000 mortgage modifications in 2010. 

Q.3. This Committee has a responsibility to ensure that actors on 

all sides of the foreclosure process, including servicers, are acting 

legally and in the best interest of our society. We must address and 

remedy situations where this is not the case. 

However, unnecessarily delaying foreclosures is not without cost. 

Representatives of the secondary mortgage market have told us 

that, on average, a delay in foreclosure costs approximately $30– 

40 per day, per home. This is in addition to any changes in home 

values during that time. 

Ms. Desoer and Mr. Lowman, could you discuss what additional 

costs your institutions may incur during a foreclosure process if 

that process is delayed? 

A.3. As we stated in our Third Quarter Form 10–Q filing with the 

SEC, Bank of America and its subsidiaries cannot predict the ultimate impact or cost of the temporary delay in foreclosure sales. If 

the time to complete foreclosure sales increases temporarily, that 

may result in an increase in nonperforming loans and the cash advances that as servicer we are required to make to taxing authorities, insurers, and other third parties, and may impact the collectability of such advances and the value of our mortgage servicing 

rights asset. Delays in foreclosure sales, including any delays beyond those currently anticipated, could increase the costs associated with our mortgage operations. Delays also may subject us to 

penalties for failing to meet investor foreclosure timelines. In addition, delays may adversely impact our held for investment portfolio 

due to real estate value declines resulting in decreased foreclosure 

sale prices. 
199 

Q.4. Given this Committee’s oversight responsibilities, it is vital 

that we examine the regulatory actions taken before and after reports surfaced detailing the problems surrounding some foreclosures. 

Ms. Desoer and Mr. Lowman, did your regulator contact you 

prior to any of these press reports to review your foreclosure procedures? 

What, if any, directives or recommendations were made by your 

regulator surrounding the definition of ‘‘personal knowledge’’ as it 

relates to those in your companies who must sign foreclosure documents? 

What, if any, directives or recommendations were made by your 

regulator with regard to the notary process for these documents? 

A.4. Under the rules and regulations of the Office of the Comptroller of the Currency (OCC), a national bank may not disclose information concerning examinations or investigations performed by 

the OCC. For example, pursuant to 12 CFR § 4.36(d), a national 

bank may not disclose non-public OCC information to third parties 

because it is considered the property of the OCC. 

Julie Williams, Chief Counsel and First Senior Deputy Comptroller, stated the following at a December 2, 2010 hearing of the 

House Judiciary Committee: 

[N]either banks’ internal quality control tests, internal audits, nor the 

OCC’s own consumer complaint data suggested foreclosure document processing was an area of systemic concern. 

. . . 

There were no warning signs from internal audit, quality control or even 

complaints relating to the foreclosure documentation aspect of mortgage 

servicing, that were triggering red lights for us. 

In addition, Ms. Williams stated: 

[Wlhen problems were identified at Ally Bank, which is not a national 

bank, we immediately directed the eighth largest national bank mortgage 

servicers to review their operations and take corrective actions. In concert 

with other regulatory agencies, OCC examiners are now reviewing samples 

of individual loan files where foreclosures have either been initiated or completed to test the validity of bank self assessments and corrective actions, 

whether foreclosed borrowers were appropriately considered for loss-mitigation alternatives such as loan modifications, and whether fees charged were 

appropriate, documents were accurate and appropriately reviewed, proper 

signatures were obtained and documents necessary to support a legal foreclosure proceeding were provided. 

. . . 

Where we find errors or deficiencies, we are directing national banks to 

take immediate corrective action. 

Q.5. Unfortunately, neither Fannie Mae, Freddie Mac, nor the Federal Housing Finance Administration were present at the hearing 

to discuss the ‘‘approved lenders’’ list that Fannie and Freddie publish to guide servicers as they select in-State counsels to act on 

their behalf. 

Given that, Ms. Desoer and Mr. Lowman, please describe what 

the GSE’s require of your firms with respect to these lists, and indicate whether there have been any changes to them since news of 

problems with ‘‘foreclosure mills’’ began to surface. 

A.5. The GSEs place numerous requirements on servicers for the 

loans the GSEs own. Certain of those requirements relate to the 
200 

hiring of outside counsel. With some exceptions, we ordinarily select outside counsel with respect to the foreclosure of GSE loans 

from Fannie Mae and Freddie Mac lists of preapproved counsel. 

The GSEs have modified those lists recently. 

Q.6. Ms. Desoer, your company must try to execute modification 

programs, but requirements of these programs are often changed 

by Treasury, investors, or other constituencies. You have identified 

in your testimony that in the HAMP program alone, there have 

been nearly 100 major program changes in the past 20 months. 

Do you believe that the constantly changing requirements and 

restrictions on the Government-sponsored mortgage modification 

programs are confusing to consumers and counterproductive to attaining actual mortgage modifications? 

A.6. When working with delinquent customers, we aim to achieve 

an outcome that meets both customer and investor interests, consistent with our obligations to the investor. Many investors limit 

Bank of America’s discretion to make modifications, and even when 

they do not, our legal duties to investors add complexities to the 

execution of modification programs. While very few investors have 

an outright prohibition on modifications, their eligibility criteria 

and requirements vary. 

The Treasury Department, investors, and other constituencies 

have frequently changed the requirements of their modification 

programs. These differences and changes significantly contribute to 

the complexity of the modification process, strain a servicer’s operations and systems, and may be a source of frustration and confusion felt by borrowers. 

As I previously testified, HAMP alone has had nearly 100 program changes in the past 20 months. In testimony before the 

House Judiciary Committee on December 2, 2010, Phyllis Caldwell, 

Chief of the Homeownership Preservation Office of the Department 

of the Treasury, testified that ‘‘we have made so many changes’’ to 

HAMP and that ‘‘some would say we’ve made too many changes 

that the system can’t absorb them.’’ Fannie Mae and Freddie Mac 

have layered on additional, and in many cases, different requirements, conditions and restrictions for HAMP processing of the 

loans they own. When these changes occur, we and other servicers 

have to change our processes, retrain our staff, and update our 

technology. These changes can also affect what is required of the 

customer, including requiring new or different documentation. In 

addition, States also have made statutory and regulatory changes 

to the foreclosure process, requiring various types of loss mitigation 

efforts, all of which have to be coordinated with the changing Federal directives. 

Q.7. Ms. Desoer, your company and other large mortgage servicers 

portray a mortgage-servicing industry that, confronted with enormous adjustment challenges, is responding well and with, as you 

say in your testimony, ‘‘extraordinary speed.’’ From the perspective 

of large mortgage-servicing firms, it sounds as though homeowners 

facing distress are treated with dignity, are offered a wide array of 

possible modification alternatives, and are treated fairly. In striking contrast, however, consumer activists portray mortgage 
201 

servicers as profit-centric firms with sloppy record keeping and little aversion to cutting corners in order to reach foreclosure. 

Ms. Desoer, with stories circulating that homeowners who should 

not have been foreclosed upon are finding their locks changed as 

a result of a sloppy foreclosure process, why should I believe industry claims that borrowers are being treated fairly and with respect? 

Do you have detailed data, preferably verified by an independent 

party, to show that you have not wrongfully foreclosed on homeowners? 

A.7. We do not claim perfection, and we address mistakes quickly 

and responsibly when they arise. We also appreciate and take seriously the perspective of consumer advocates. We would note that 

the cases reported in the press are often more complex than some 

reports suggest but financial privacy concerns prevent us from discussing the specifics of these cases publicly. 

After concerns emerged at other lenders regarding the foreclosure affidavit process in judicial foreclosure States, Bank of 

America initiated a review of our foreclosure procedures. On October 1, 2010, we voluntarily suspended foreclosure judgments in the 

23 judicial foreclosure States while we completed this review. One 

week later, we paused foreclosure sales nationwide as we launched 

a voluntary review of our foreclosure processes in those States as 

well. We believe these steps were appropriate and responsible. 

We have identified areas for improvement as a result of our review. We are taking these matters very seriously and are implementing changes accordingly. These changes in the foreclosure 

process include, among other things, a new affidavit form and additional quality control checks. 

We fully understand our responsibility to be responsive and, 

when a foreclosure is unavoidable, to treat customers with respect 

as they transition to alternative housing. We, and those who work 

with us in connection with foreclosure proceedings, also have an obligation to do our best to protect the integrity of those proceedings. 

When and where that has not happened, we accept responsibility 

for it, and we deeply regret it. 

Q.8. Attorney General Miller’s testimony today states the following: 

While the servicer is free to lose documents as many times as they want 

or to take as long as they want, the servicer often demands strict compliance from the borrower. Thus, no matter how many times the borrower has 

previously submitted his or her paperwork, if the borrower fails one time, 

the loan modification is denied. 

Do any representatives of the servicer industry wish to respond 

to Mr. Miller’s claims? 

A.8. Our commitment at Bank of America is to ensure that no 

property is taken to foreclosure sale until our customer is given a 

fair opportunity to be evaluated for a modification. If a modification 

is not possible, we explore a short sale or deed in lieu solution. 

Foreclosure is our last resort. 

We launched a foreclosure hold in October 2008 for borrowers potentially eligible for our National Home Ownership Retention Program and have participated in several others, as new programs 

were developed and launched, in order to ensure no customer who 
202 

has a reasonable option to stay in their home goes to foreclosure 

sale. 

It is not the case that borrowers are given only one opportunity 

to be considered for a modification. Subject to investor requirements, we re-evaluate borrowers for home retention options 

throughout the foreclosure process. Modifications can occur after 

borrowers have failed to respond to initial requests for documentation and borrowers are given more than one opportunity to provide 

documentation. We have worked hard to improve borrower response rates by partnering with non-profits such as the Neighborhood Assistance Corporation of America (NACA), the National 

Urban League, the National Council of La Raza and the National 

Association of Asian Pacific Americans for Community Development. It is also our policy to check to determine whether a borrower is being evaluated for a modification all the way up until the 

day before the foreclosure sale. 

In addition, as noted above in response to Senator Dodd’s first 

question, we are redesigning our modification process to assign eligible borrowers who have submitted to us at least one document 

in support of their modification application to an associate with relevant expertise for help at each particular stage of the modification 

process. We are implementing this new approach to modifications, 

and so far we have paired customers with an associate on this 

basis over 230,000 times. 

Q.9. Ms. Thompson testifies that, ‘‘ . . . the problems occasioned by 

mortgage servicer abuse run rampant.’’ That is a strong accusation. 

Ms. Thompson also frequently, though without definition, refers to 

‘‘abuses’’ committed by servicers and ‘‘excessive’’ fees. She accuses 

servicers of failing to negotiate in good faith and of preparing false 

affidavits. She states that ‘‘Servicers do not believe that the rules 

that apply to everyone else apply to them.’’ Their attitude, according to Ms. Thompson, is ‘‘lawless’’ and they commit ‘‘wrongful foreclosure on countless American families.’’ She also states that ‘‘The 

lack of restraint on servicer abuses has created a moral hazard juggernaut that at best prolongs and deepens the current foreclosure 

crisis and at worst threatens our global economic security.’’ 

Do any of the servicer representatives here wish to respond to 

Ms. Thompson’s allegations? 

A.9. We categorically reject Ms. Thompson’s characterization of our 

commitment to serving our customers. We have worked aggressively to respond to more than a million customers in distress. We 

don’t claim perfection, but we have led with innovative ideas and 

continue to put forward solutions that respond to customer needs. 

That’s a responsibility that comes with being America’s leading 

consumer bank—and a responsibility every associate at Bank of 

America is working diligently to uphold. We fully understand our 

responsibility to be fair, to be responsive and, where a foreclosure 

is unavoidable, to treat customers with respect as they transition 

to alternative housing. 

Unfortunately, we have reached a crossroads between loan modification efforts and the reality of foreclosure. The majority of our 

distressed customers have been evaluated for available programs or 

afforded a fair opportunity to be evaluated, and many customers 
203 

will be dealing with the reality that despite the range of loss mitigation solutions and our best efforts, foreclosure is unavoidable. 

This will drive an increase in the concerns you and we hear from 

distressed homeowners. Our increases in staffing and foreclosure 

alternative programs are directed at respectfully helping customers 

move through this difficult period. We believe that these efforts are 

working, as every day we reduce the backlog in both modification 

decisions and customer complaints. 

Q.10. Given the varying State laws that govern foreclosure, there 

must be the opportunity to observe both best and worst practices. 

While foreclosures are not the preferred option for any party at the 

onset of a loan, sometimes it is the path forward that presents the 

least harm to borrowers, lenders and the economy. In those instances, it is essential that our foreclosure process be effective. 

Which States do each of you feel provide the most efficient path 

forward in foreclosures, while providing borrowers proper legal 

channels in the event that there is a dispute? What is the average 

length of time between original delinquency and foreclosure sale in 

these States? 

Which States do each of you feel have the most problems in effectively executing foreclosures? What is the average length of time 

between original delinquency and foreclosure sale in these States? 

A.10. The processes and requirements governing foreclosure vary 

significantly among States, and in some cases, from one local jurisdiction to another. We have not undertaken a review to compare 

the relative efficiency and effectiveness of foreclosure regimes in 

the 50 States. We would note that States face varying challenges, 

including their respective volumes of delinquent borrowers and economic conditions. 

As to the average duration of the foreclosure process, for the loan 

population serviced by Bank of America, it takes nearly a year, on 

average, from the time a customer receives a foreclosure notice 

until the actual foreclosure sale is completed. The timeline in judicial States is generally longer. In Florida, for example, the timeline 

can be closer to 2 years. 

While Bank of America does not track this data across all 

servicers, we are aware of various third parties that do endeavor 

to provide State-by-State averages. For example, RealtyTrac 

(http://www.realtytrac.com/foreclosure-laws/foreclosure-laws-comparison.asp) provides information on State-by-State procedures and 

foreclosure timelines. The Mortgage Bankers Association also provides information on foreclosure timelines (see http:// 

www.mortgagebankers.org/IndustryResources/ResourceCenters/ 

ForeclosureProces). While we cannot verify the accuracy of this 

third party data, we share them with you as potential sources of 

information. 

Q.11. To better gauge the level of violations surrounding the topic 

of this hearing it is necessary for us to understand who is being 

affected. Admittedly, this question is probably best suited for the 

regulators, and we hope to receive this information from them at 

some point. 

In your research and investigations, how many individuals were 

discovered to have been fully current on their mortgage payments 
204 

but foreclosed upon by their servicer? Please provide the data and 

evidence that you evaluated to arrive at your conclusions. 

A.11. As noted in response to question 7 above, when industry concerns arose with the foreclosure affidavit process, we took steps to 

stop foreclosure sales nationwide and launch a voluntary review of 

our foreclosure procedures. While we don’t claim perfection, our review to date indicates that the issues with the affidavit process did 

not affect the basis of our foreclosure decisions. 

The decision to refer a loan to foreclosure is made by Bank of 

America after a foreclosure review process that is based on a careful evaluation of our servicing records. This evaluation precedes 

and is independent from the process used to create and execute affidavits of indebtedness. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM BARBARA J. DESOER 

Q.1. Please describe in detail the reviews that your organizations 

conducted pursuant to your announced moratoriums, including: 

how many employees were involved; how many files they reviewed; 

how much time, on average, an employee spent reviewing a file. 

How many errors did you uncover, and what was the nature of 

those errors? 

How did you inform homeowners that their foreclosure filings 

were being reviewed? 

A.1. When industry concerns arose with the foreclosure affidavit 

process, we took affirmative steps to stop foreclosure sales so that 

we could review our related foreclosure procedures. On October 1, 

2010, we voluntarily suspended foreclosure judgments in the 23 judicial foreclosure States while we completed this review. One week 

later, we paused foreclosure sales nationwide in order to extend our 

voluntary review of our foreclosure process to all 50 States. We determined that, out of an abundance of caution, we would replace 

every affidavit of indebtedness in every pending foreclosure case. 

The new affidavits will be prepared through an improved process, which includes, among other things, a new affidavit form to enhance the quality and uniformity of our process and additional 

quality control checks throughout the process in order to ensure 

that the accuracy of each affidavit is verified at several key points. 

We are also adding measures to validate that each affidavit is individually reviewed by the signer, properly executed, and promptly 

notarized. In addition, we are implementing new procedures for selecting and monitoring outside counsel. 

We are taking these matters very seriously and are carefully restarting the affidavit process with these controls in place. 

Q.2. How many files that you reviewed were missing the original 

note? 

A 2007 study found that 40 percent of bankruptcy filings involving mortgages were missing the original note. How many of your 

foreclosure filings are missing their original note? 

A.2. We believe that our investors hold notes for substantially all 

of the mortgage loans we service, and we rarely prepare and file 

lost note affidavits. It bears note that the fact that a note is lost 
205 

does not mean that the debt is extinguished or is unenforceable. 

The law in all States permits lost notes to be enforced and the related mortgages to be foreclosed subject to certain conditions. 

While rules and practice over the filing or submission of originals 

or copies of promissory notes vary significantly from court to court, 

if our local counsel is required to file or submit the original note 

or a copy of the original note, we request it from the applicable custodian or investor and send the original or a copy of the note (or, 

in those rare cases when a note has been lost, a lost note affidavit) 

to our local counsel to be filed or submitted. Your reference to a 

2007 study may be to an article by Katherine Porter entitled Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas 

Law Review 121 (2008). Ms. Porter did not study whether servicers 

had access to notes or whether they were filed or submitted in foreclosure actions. Her study was limited to assessing whether proofs 

of claim initially filed in bankruptcy cases included copies of notes 

(she did not look at any amendments or responses to requests). 

Q.3. Do all of your organization’s note endorsements comply with 

the requirements of your pooling and servicing agreements? 

A.3. Bank of America believes that it has complied in all material 

respects with the mortgage loan document delivery requirements of 

pooling and servicing agreements with respect to note endorsements. Trustees or their designated document custodian generally 

have a contractual obligation to review the loan documents provided by the seller for conformity with the delivery requirements 

of the pooling and servicing agreement. This process is called ‘‘certification.’’ If a seller did not deliver a proper note endorsement, in 

the ordinary course this error should be identified by the trustee 

or the document custodian as part of the certification process. 

Q.4. Have your regulators participated in or overseen your reviews, 

and if so, how? 

A.4. Under the rules and regulations of the Office of the Comptroller of the Currency (OCC), a national bank may not disclose information concerning examinations or investigations performed by 

the ace. For example, pursuant to 12 CFR § 4.36(d), a national 

bank may not disclose non-public OCC information to third parties 

because it is considered the property of the OCC. 

John Walsh, Acting Comptroller of the Currency, testified to this 

Committee on December 1, 2010 that ‘‘[w]hen problems were identified outside the national banking system at Ally Bank, we immediately directed the eighth largest national bank servicers to review their operations and take corrective action’’ and that the OCC 

‘‘began organizing onsite examinations at each of those major 

servicers which are now well underway, with more than 100 national bank examiners assigned to this task.’’ In addition, Mr. 

Walsh testified at a November 18, 2010 hearing of the House Financial Services Committee, Housing & Community Opportunity 

Subcommittee, that ‘‘[t]he examinations that we’re now undertaking on an interagency basis are going to just grind right down 

to the most granular detail to understand what has gone on in this 

process; to make sure that those processes are remedied so that 

they operate in a fair and legal manner.’’ 
206 

Q.5. There is some disagreement about whether the problems within the loan modification and foreclosure processes were isolated incidents, systemic failures, or were caused by rogue individuals following mistaken guidelines. Who determines your affidavit signing 

policies and procedures? 

Were your employees following company policy? If so, has any 

employee responsible for designing that policy been disciplined, and 

how? 

Were any employees disobeying company policy? If so, have they 

been disciplined, and how? 

A.5. As noted above in response to your first question, we are implementing a series of steps to improve our process for generating 

affidavits of indebtedness. Our new policies and enhancements to 

our judicial foreclosure process are designed to provide additional 

assurance that going forward, affidavits of indebtedness will be 

prepared in accordance with best practices and all applicable rules. 

Our efforts include an enhanced training program for all employees 

involved in the affidavit process, including affiants and notaries, on 

the revised process and their specific responsibilities. We are taking these matters very seriously. 

Q.6. An article published in the Cleveland Plain Dealer on October 

17 titled ‘‘Mortgage Foreclosure Uproar Sweeps Up Northeast 

Ohioans’’ told the stories of three Northeast Ohio families that had 

their houses taken from them despite not missing any mortgage 

payments. What is your response to this story, and do you believe 

that such a report is consistent with statements like that from Mr. 

Lowman’s written testimony that information in your files about 

‘‘default and indebtedness was materially accurate’’ and that foreclosure record-keeping and affidavit issues ‘‘did not result in unwarranted foreclosures’’? 

A.6. As noted above in response to Senator Shelby’s questions 7 

and 11, when industry concerns arose with the foreclosure affidavit 

process, we took steps to stop foreclosure sales nationwide and 

launch a voluntary review of our foreclosure procedures. While we 

don’t claim perfection, our review to date indicates that the issues 

with the affidavit process did not affect the basis of our foreclosure 

decisions. 

We would note that the cases reported in the press are often 

more complex than some reports suggest but financial privacy concerns prevent us from discussing the specifics of these cases publicly. 

Q.7. Mr. Lowman’s written testimony says that ‘‘servicer compensation would tend to favor modification over foreclosure,’’ and 

that ‘‘the cost for servicers to take a loan to foreclosure generally 

is significantly greater than the cost of a modification.’’ Please describe the compensation structure of your mortgage servicing business. 

A.7. At Bank of America, foreclosure is the last resort. From a 

business standpoint, a loan modification is the preferred solution 

because foreclosures are almost always more costly than modifications. 

For context, of the loans Bank of America has taken to foreclosure sale, the foreclosure typically takes 19 months to complete 
207 

from the time of delinquency to actual sale versus a loan modification that typically takes 4 months to complete from default to 

workout. The associated servicing-related costs to foreclose on average are four times higher than the cost to modify a loan. 

The cost of servicing a non-performing loan for an extended period of time exceeds any offsetting income from fees. In addition, 

Bank of America suffers the full loss on loans it holds for investment. 

Q.8. How many second liens do you hold on properties that you are 

also servicing? 

A.8. Bank of America owns the second lien on approximately 11 

percent of the portfolio of loans we service. 

Q.9. Please describe any barriers to mortgage modifications that 

servicers may encounter. 

A.9. As we discussed above in response to Senator Shelby’s question 6, when working with delinquent customers, we aim to achieve 

an outcome that meets both customer and investor interests, consistent with our obligations to the investor. Many investors limit 

Bank of America’s discretion to make modifications, and even when 

they do not, our legal duties to investors add complexities to the 

execution of modification programs. While very few investors have 

an outright prohibition on modifications, their eligibility criteria 

and requirements vary. 

The Treasury Department, investors, and other constituencies 

have frequently changed the requirements of their modification 

programs. These differences and changes significantly contribute to 

the complexity of the modification process, strain a servicer’s operations and systems, and may be a source of frustration and confusion felt by borrowers. 

As I previously testified, HAMP alone has had nearly 100 program changes in the past 20 months. In testimony before the 

House Judiciary Committee on December 2, 2010, Phyllis Caldwell, 

Chief of the Homeownership Preservation Office of the Department 

of the Treasury, testified that ‘‘we have made so many changes’’ to 

HAMP and that ‘‘some would say we’ve made too many changes 

that the system can’t absorb them.’’ Fannie Mae and Freddie Mac 

have layered on additional, and in many cases, different requirements, conditions and restrictions for HAMP processing of the 

loans they own. When these changes occur, we and other servicers 

have to change our processes, retrain our staff, and update our 

technology. These changes can also affect what is required of the 

customer, including requiring new or different documentation. In 

addition, States also have imposed statutory and regulatory 

changes to the foreclosure process requiring various types of loss 

mitigation efforts, all of which have to be coordinated with the 

changing Federal directives. 

Notwithstanding these challenges, Bank of America has completed nearly 750,000 loan modifications since 2008. 
208 

RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD 

FROM R.K. ARNOLD 

Q.1. Last year we enacted the Helping Families Save Their Homes 

Act. The Act added a provision to the Truth in Lending Act, known 

as TILA, which requires loan owners and assignees to disclose their 

identity to homeowners. Now, TILA requires the mortgage industry 

to keep homeowners informed—in writing—whenever their mortgage is sold, transferred or assigned. 

How does MERS’ core function—that of recording MERS as the 

mortgagee of record in public documents and then tracking future 

assignments in its internal, proprietary database—match up with 

the disclosure provisions of the Truth in Lending Act? 

How are homeowners notified about who owns or who services 

their loans—and who has the right to foreclose on them—when it 

is being tracked by MERS? 

A.1. The functions and operations of MERS are completely consistent with, and supportive of, the provisions of the Truth in Lending Act, and in particular, with the original requirement for 

servicers to notify homeowners when the servicing rights are transferred, and the new requirement implemented by the Helping Families Save Their Homes Act for notification of the homeowner when 

the ownership of a mortgage loan changes. 

While the primary responsibility in notifying the borrowers of 

changes in ownership and servicing of a mortgage loan fall (respectively) upon the owner and the servicer of the mortgage loan, 

MERS has always attempted to operate in conformance with the 

mandates and directives of TILA. From the outset, the MERS®

System has allowed borrowers to consult the database and determine the identity of the servicer for their loan if their loan is registered on the MERS® System. 

Following the passage of the Helping Families Save Their Homes 

Act, MERS introduced an optional new service called MERS 

InvestorID that took two steps to help further the Act’s objectives. 

First, it added a new feature to the system that allows its members 

to automatically generate an ‘‘Investor Transfer Notice’’ that informs homeowners of the change to their loan’s ownership. 

Second, MERS expanded its Web-based servicer look-up system 

(www.mers-servicerid.org) so that a borrower can also determine 

who owns their mortgage loan if their loan is registered on the 

MERS® System. Participation in the InvestorID program is optional for MERS members, and members may choose to keep the 

investor identity confidential. However, to date 97 percent of 

MERS’ 3,000 members have agreed to participate and disclose the 

identity of the owner of the loan. MERS continues to work with our 

remaining members and seeks to have 100 percent participation. In 

those cases where the investor information is not available, MERS 

is frequently willing and able to work with the borrower and help 

them secure this information through other sources (such as the 

Web site of Freddie Mac, which has opted not to participate in 

InvestorID at this time but has enabled their own Web site, 

www.freddiemac.com, to provide the same service). 

In addition to providing investor information online and free of 

charge, borrowers may also confirm the identity of their current 

servicer through MERS. The same service where borrowers can ob-
209 

tain the identity of their investor will also identify their current 

servicer (www.mers-servicerid.org). This is particularly useful in detecting fraud for borrowers by letting them confirm the content of 

any hello-and-goodbye letter they receive and preventing them 

from sending a loan to the wrong (and possibly fraudulent) address. 

Regardless of the availability of information on the MERS® System, the borrower still retains the right under TILA to obtain the 

ownership information from the servicer. The principle legal obligation to provide borrowers with this information rests with the 

servicer, and the naming of MERS as mortgagee does not diminish 

or change this duty in any way. MERS’ disclosure of investor information is and always was intended to be a supplement to, rather 

than a replacement of, this legal right. 

MERS strives to improve the availability and reliability of information for all participants in the mortgage finance process—borrowers, lenders, investors, servicers, and regulator—and we are 

open to any suggestions that further those goals. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM R.K. ARNOLD 

Q.1. Mr. Levitin, your testimony states that a common response 

from banks—and I assume here you mean servicers—about problems in the foreclosure process is that it doesn’t matter to them because the borrower still owes on the loan and has defaulted. As you 

put it: ‘‘This ‘No Harm, No Foul’ argument is that homeowners 

being foreclosed on are all a bunch of deadbeats, so who really 

cares about due process?’’ You say that this argument, that you attribute loosely to ‘‘banks,’’ condones ‘‘vigilante foreclosures: so long 

as the debtor is delinquent, it does not matter who evicts him or 

how.’’ 

Does any representative of the servicer industry on the panel 

wish to comment on this? 

A.1. MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc., is not a servicer or a representative of any 

servicer or the servicer industry. Mortgage Electronic Registration 

Systems, Inc. serves as a common agent for the mortgage finance 

industry for the limited purpose of holding and tracking mortgages. 

Neither company is involved in the servicing of loans and makes 

no decisions and has no role in the any decisions regarding loan 

modifications or loan foreclosures. As such, we have no comment on 

Mr. Levitin’s statements. 

Q.2. Attorney General Miller’s testimony today states the following: 

While the servicer is free to lose documents as many times as they want 

or to take as long as they want, the servicer often demands strict compliance from the borrower. Thus, no matter how many times the borrower has 

previously submitted his or her paperwork, if the borrower fails one time, 

the loan modification is denied. 

Do any representatives of the servicer industry wish to respond 

to Mr. Miller’s claims? 

A.2. MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc. is not a servicer or a representative of any 

servicer or the servicer industry. Mortgage Electronic Registration 

Systems, Inc. serves as a common agent for the mortgage finance 
210 

1 In 1993, a 36-page white paper entitled ‘‘Whole Loan Book Entry Concept for the Mortgage 

Finance Industry’’ addresses the concepts underlying MERS and the problems it was designed 

to address. It is available upon request. 

industry for the limited purpose of holding and tracking mortgages. 

Neither company is not involved in the servicing of the loan and 

makes no decisions and has no role in the any decisions regarding 

loan modifications or loan foreclosures. As such, we have no comment on Attorney General Miller’s statement. 

However, it should be noted that in 2005, when it became apparent to us that foreclosures undertaken in Florida were relying excessively on lost note affidavits, MERS adopted a rule forbidding 

the use of lost note affidavits when foreclosures were done in the 

name of MERS in Florida. That rule was extended nationally in 

2006 and is still in effect today. MERS believes that borrowers are 

entitled to know that the company foreclosing has all of the necessary paperwork and rights to do so. Showing up with the original 

note provides the borrower and the court with proof that the foreclosing company is the proper party to foreclose. 

Q.3. Mr. Arnold, your company relies on people who you refer to 

as ‘‘certifying officers.’’ These are people who work in companies 

that are members of your system and who your company grants 

certain authorities, such as the authority to initiate foreclosures. 

Please explain what authorities are granted to certifying officers 

and the mechanisms that your company has in place to monitor the 

performance and behavior of those officers. 

A.3. Mortgage Electronic Registration Systems, Inc. takes the majority of its actions as the mortgagee through the use of officers 

commonly referred to as ‘‘certifying officers.’’ From inception, the 

concept of certifying officers has always been fundamental to the 

operations of MERS. In the white paper 1 calling for the creation 

of MERS, it was recognized that members would need to have a 

form of authority to act on behalf of MERS when MERS is the 

mortgagee on their behalf. That authority took the form of appointing persons (designated by the member) as officers with limited authority to take certain actions. The offices to which each of these 

individuals are officially appointed to are vice president and assistant secretary. 

The authority granted to these officers is limited to: (1) executing 

lien releases, (2) executing mortgage assignments, (3) initiating 

foreclosures, (4) executing proofs of claims and other bankruptcy 

related documents (e.g., motions for relief of the automatic stay), 

(5) executing modification and subordination agreements needed 

for refinancing activities, (6) endorsing over mortgage payment 

checks made payable to MERS (in error) by borrowers, and (7) taking such other actions and executing documents necessary to fulfill 

the member’s servicing duties. It is important to note that the certifying officers are the same officers whom the lenders and 

servicers use to carry out these same functions above for their company even when MERS is not the mortgagee. 

MERS has specific controls over who can be identified by its 

members as a certifying officer. To be a MERS certifying officer, 

one must be a company officer of the member institution, have 

basic knowledge of MERS, and pass a certifying examination ad-
211 

ministered by MERS, which is renewed on an annual basis for each 

individual. 

Concerning the monitoring and oversight of certifying officers, as 

noted in our testimony (see p.19–21), MERS has taken actions in 

the past to help ensure that certifying officers were acting in a 

manner consistent with MERS rules. Earlier this year, when we 

became aware of acceleration in foreclosure document processing, 

we grew concerned that some certifying officers might have been 

pressured to perform their responsibilities in a manner inconsistent 

with our rules. When we did not get the assurances we thought 

were appropriate to keep this from happening, we suspended our 

relationships with those companies. 

When we discovered that some so-called ‘‘robo-signers’’ were 

MERS certifying officers, we suspended their authority until they 

could be retrained and retested. We are asking our members to 

provide us with specific plans outlining how they intend to prevent 

such actions in the future. 

Q.4. Mr. Arnold, does MERS derive any revenue from foreclosures? 

A.4. No. Neither MERSCORP, Inc. nor its subsidiary, Mortgage 

Electronic Registration Systems, Inc., receive any fees or other 

form of compensation from foreclosures. 

MERS derives its revenue solely from its members. MERS makes 

its money through an annual membership fee (ranging from $264 

to $7,500) based on organizational size, and through loan registration and servicing transfer fees. MERS charges a one-time $6.95 

fee to register a loan and have Mortgage Electronic Registration 

Systems, Inc. serve as the common agent (mortgagee) in the land 

records. For loans where Mortgage Electronic Registration Systems, Inc. will not act as the mortgagee, there is only a small onetime registration fee ($0.97). This is known as an iRegistration. 

Transactional fees (ranging from $1.00 to $7.95) are charged to update the database when servicing rights on the loan are sold from 

one member to another. 

MERS charges no fees and makes no money from mortgage origination or payments, from the securitization or transfer of mortgages, or from foreclosures done in its name. 

Q.5. Ms. Thompson testifies that, ‘‘ . . . the problems occasioned by 

mortgage servicer abuse run rampant.’’ That is a strong accusation. 

Ms. Thompson also frequently, though without definition, refers to 

‘‘abuses’’ committed by servicers and ‘‘excessive’’ fees. She accuses 

servicers of failing to negotiate in good faith and of preparing false 

affidavits. She states that ‘‘Servicers do not believe that the rules 

that apply to everyone else apply to them.’’ Their attitude, according to Ms. Thompson, is ‘‘lawless’’ and they commit ‘‘wrongful foreclosure on countless American families.’’ She also states that ‘‘The 

lack of restraint on servicer abuses has created a moral hazard juggernaut that at best prolongs and deepens the current foreclosure 

crisis and at worst threatens our global economic security.’’ 

Do any of the servicer representatives here wish to respond to 

Ms. Thompson’s allegations? 

A.5. MERSCORP, Inc. is not best suited to answer this question. 

MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc. is not a servicer or a representative of any 
212 

servicer or the servicer industry. Mortgage Electronic Registration 

Systems, Inc., serves as a common agent for the mortgage finance 

industry for the limited purpose of holding and tracking mortgages. 

Neither company is involved in the servicing of the loan and makes 

no decisions and has no role in the any decisions regarding loan 

modifications or loan foreclosures. As such, we have no comment on 

Ms. Thompson’s statements. 

Q.6. Given the varying State laws that govern foreclosure, there 

must be the opportunity to observe both best and worst practices. 

While foreclosures are not the preferred option for any party at the 

onset of a loan, sometimes it is the path forward that presents the 

least harm to borrowers, lenders and the economy. In those instances, it is essential that our foreclosure process be effective. 

Which States do each of you feel provide the most efficient path 

forward in foreclosures, while providing borrowers proper legal 

channels in the event that there is a dispute? What is the average 

length of time between original delinquency and foreclosure sale in 

these States? 

Which States do each of you feel have the most problems in effectively executing foreclosures? What is the average length of time 

between original delinquency and foreclosure sale in these States? 

A.6. MERSCORP, Inc. is not best suited to answer this question. 

MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc. is not a servicer or a representative of any 

servicer or the servicer industry. Mortgage Electronic Registration 

Systems, Inc. serves as a common agent for the mortgage finance 

industry for the limited purpose of holding and tracking mortgages. 

Neither company has any role in the decisions regarding loan modifications or loan foreclosures. 

Q.7. To better gauge the level of violations surrounding the topic 

of this hearing it is necessary for us to understand who is being 

affected. Admittedly, this question is probably best suited for the 

regulators, and we hope to receive this information from them at 

some point. 

In your research and investigations, how many individuals were 

discovered to have been fully current on their mortgage payments 

but foreclosed upon by their servicer? Please provide the data and 

evidence that you evaluated to arrive at your conclusions. 

A.7. MERSCORP, Inc. is not best suited to answer this question. 

MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems, Inc. is not a servicer or a representative of any 

servicer or the servicer industry. Mortgage Electronic Registration 

Systems, Inc. serves as a common agent for the mortgage finance 

industry for the limited purpose of holding and tracking mortgages. 

Neither company is involved in the servicing of the loan and makes 

no decisions and has no role in the any decisions regarding loan 

modifications or loan foreclosures. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM R.K. ARNOLD 

Q.1. How many individuals are employed by MERS, Inc. and 

MERSCORP, Inc., including vice presidents, assistant secretaries, 
213 

or other ‘‘certifying officers’’ designated pursuant to corporate resolution? 

Are these employees also employed by other organizations? If so, 

which ones? 

A.1. Measured by direct employment, MERSCORP, Inc. is a relatively small organization. About 50 people work for MERSCORP, 

Inc. in our Reston, VA, office. Hewlett-Packard and Genpact are 

our technology partners, and they run the database, the help desk 

and mailroom with an additional 150 people dedicated to the 

MERS account. 

MERS Certifying Officers 

Mortgage Electronic Registration Systems, Inc. takes the majority of its actions as the mortgagee through the use of officers commonly referred to as ‘‘certifying officers.’’ From inception, the concept of certifying officers has always been fundamental to the operations of MERS. In the white paper calling for the creation of 

MERS, it was recognized that members would need to have a form 

of authority to act on behalf of MERS when MERS is the mortgagee on their behalf. That authority took the form of electing persons (designated by the member) as officers with limited authority 

to take certain actions. The offices to which each of these individuals are officially appointed are vice president and assistant secretary. The authority granted to these officers is limited to: (1) executing lien releases, (2) executing mortgage assignments, (3) initiating foreclosures, (4) executing proofs of claims and other bankruptcy related documents (e.g., motions for relief of the automatic 

stay), (5) executing modification and subordination agreements 

needed for refinancing activities, (6) endorsing over mortgage payment checks made payable to MERS (in error) by borrowers, and 

(7) taking such other actions and executing documents necessary to 

fulfill the member’s servicing duties. 

It is important to note that the certifying officers are the same 

officers whom the lenders and servicers use to carry out these functions even when MERS is not the mortgagee. MERS has specific 

controls over who can be identified by its members as a certifying 

officer. To be a MERS certifying officer, one must be a company officer of the member institution, have basic knowledge of MERS, 

and pass a certifying examination administered by MERS. 

Under the corporate law in Delaware (where MERS is incorporated), there is no requirement that an officer of a corporation 

also be an employee of that corporation. A corporation is allowed 

to appoint individuals to be officers without having to employ those 

individuals or even pay them. This concept is not limited to MERS. 

Corporations cannot operate without officers; they can and often do 

operate without employees. It is not uncommon for large organizations to have all its employees employed by an operating company 

and for those employees to be elected as officers of affiliated companies that are created for other purposes (all corporations are required by law to have officers to act for it). Even for loans where 

MERS is not the mortgagee, employees of the servicer are generally 

delegated the power to take actions (e.g., initiate foreclosures) and 

execute documents (e.g., lien releases and assignments) on behalf 
214 

of the owner of the loan (and the servicer, in turn, may further delegate such authority to a third-party vendor). 

As of November 15, 2010, MERS has 20,302 certifying officers 

who work with the more than 31 million active loans registered on 

the MERS® System. 

Q.2. Is Mortgage Electronic Registration Systems (MERS) considered a nominee or mortgagee for the mortgages that it registers? 

A.2. MERS is a mortgagee who holds the mortgage lien in a nominee capacity for the lender and the lenders successors and assigns. 

When MERS is named as mortgagee in a mortgage document, it 

holds the legal title to that mortgage, while the beneficial interest 

in that mortgage flows to the owner of the promissory note. A 

MERS mortgage makes clear that MERS is acting as the nominee 

(agent) of the lender-the original owner of the beneficial interest in 

the mortgage-and holds the legal title to the mortgage in this capacity. 

Mortgage law is abundantly clear that a promissory note owner 

may empower an agent with the authority to hold and enforce a 

mortgage lien on behalf of the note owner, and that courts should 

make every effort to recognize this agency relationship. (See Restatement (Third) Property, § 5.4, comment e) 

The practice of having an agent hold legal title to the mortgage 

for a note-owner long pre-dates the creation of MERS in 1995. It 

became a standard practice in the mortgage finance industry. 

Q.3.–1. What is the status of a mortgage if a State court rules that 

MERS has not legally obtained or transferred title? 

A.3.–1. As a rule, the mortgage is said to follow the note, i.e., that 

the holder of the note also holds the beneficial and equitable (but 

not legal) title to the mortgage, and transfer of the promissory note 

conveys the beneficial and equitable interest in the mortgage. 

Therefore, the note-holder always has the right to foreclose. If a 

lender has possession of the note and seeks to foreclose, the noteholder will be viewed as having an equitable assignment of the 

mortgage because the mortgage follows the note. This general principle applies whether or not MERS is the mortgagee. 

We are not aware of any State where the law of that State prohibits MERS from being the mortgagee, or that MERS has not legally obtained or transferred title. There have been a few cases 

that turned on the specific facts of the case and some may mistakenly interpret these cases to hold that MERS cannot be the mortgagee (e.g., the Maine Supreme Judicial Court decision in Mortgage 

Electronic Registration Systems, Inc. v. Saunders, 2010 ME 79, 

Cum–09–640 (MESC), August 12, 2010). Such an interpretation is 

not correct, in Saunders or any other case that we are aware. 

For example, the Saunders court did not hold or state anywhere 

in the opinion that MERS cannot hold a mortgage lien. What the 

court actually concluded is that ‘‘MERS does not qualify as a mortgagee pursuant to [Maine’s] foreclosure statute, 14 M.R.S. §§ 6321– 

6325.’’ (par. 11 of the opinion, emphasis added). The statute outlines steps that a mortgagee must take to commence and complete 

a judicial foreclosure in that State. It does not specifically define 

the term ‘‘mortgagee’’ or in any way determine who may be a mortgagee under Maine’s broader real property law. As for the Saun-
215 

ders decision itself, it does not in any way conflict with or otherwise repudiates the basic legal principals upon which the MERS 

business model is based. 

When MERS is named as mortgagee in a mortgage document, it 

holds the legal title to that mortgage, while the beneficial interest 

in that mortgage flows to the owner of the promissory note. The 

Saunders opinion acknowledges this very same point. A MERS 

mortgage makes clear that MERS is acting as the nominee (agent) 

of the lender—the original owner of the beneficial interest in the 

mortgage—and holds the legal title to the mortgage in this capacity 

for the lender and successors-in-interest to the lender. 

A foreclosing party—be it MERS or anyone else—must both hold 

the note and be the mortgagee of record. As the Saunders court 

noted, Maine’s adoption of the Uniform Commercial Code (UCC) 

specifically allows the holder of the promissory note the right to enforce its terms. The note is the primary evidence of the borrower’s 

obligation to repay the debt, and the mortgage is subordinate to the 

note. 

For this reason, MERS rules require that before it will move forward with a foreclosure, MERS must be the mortgagee and MERS 

must be the holder of the note. MERS has established rules and 

procedures for foreclosures to ensure that the necessary evidence is 

presented to the court and the claim is clearly presented in the 

pleading. When these rules and procedures are followed, MERS 

foreclosures are successful. It has been noted in the press and elsewhere that some courts have held that MERS did not have the 

right to foreclose, despite the fact that MERS is named as mortgagee on the document. However, these cases are typically the result of a MERS member and/or certifying officer failing to follow 

the established rules and procedures for a foreclosure. The MERS 

member fails to provide the court the proper evidence and plead 

the case appropriately to establish the standing and claim for 

MERS. The most common failing in these cases is the failure to 

provide a copy of the note. 

The court specifically acknowledged—and we agree—that MERS 

holds legal title to the property. We are not aware of any court ruling or opinion where MERS has been the mortgagee and presented 

the note as the note holder where the court has found that MERS 

does not have standing to foreclose. Further, we are not aware of 

any court ruling or opinion holding that a mortgage naming MERS 

as the mortgagee is unenforceable or void. 

Q.3.–2. Who holds the mortgage? Who holds the right to foreclose? 

A.3.–2. When faced with the issue of whether MERS can hold the 

mortgage, numerous courts have concluded that pursuant to the 

language in the security instrument, MERS is the mortgagee and 

holds legal title to the mortgage. Courts have also held that as the 

mortgagee, MERS has the authority to commence foreclosure, 

whether judicially or non-judicially, under State statutes governing 

foreclosure. See In re Mortgage Electronic Registration Systems 

(MERS) Litigation, a Multi-district litigation case (D.Ariz., Sept. 

30, 2010, MDL Docket No. 09–2119–JAT); Pantoja v. Countrywide 

Home Loans, et al.—U.S. Dist. Ct., 5:09cv016015 (N.D. Cal., 2009); 

Mortgage Electronic Registration Systems, Inc. v. Azize, (965 So. 2d 
216 

2The issue of whether transfers of residential mortgage loans made in connection with 

securitizations are sufficient to transfer title and foreclosure rights is the subject of a ‘‘View 

Point’’ article entitled ‘‘Title Transfer Law 101’’ by Karen Gelernt that appeared in the October 

19, 2010 edition of the American Banker. A copy was provided as attachment 3 of MERS’ testimony. 

151, 153–54 Fla. Dist. Ct. App. 2007); Warque v. Taylor, Bean & 

Whitaker, MERS, et al, 09–1906 (D. Ga. 8/18/2010); Mortgage Electronic Registration Systems, Inc., v. Bellistri, 2010 WL 272080 *6, 

¶1A37 (E.D. Mo. July 1, 2010); Ramos v. Mortgage Electronic Registration Systems, Inc., et al., 2:08cv01089 (D. Nevada., 2009); 

Athey v. Mortgage Electronic Registration Systems, Inc., 2010 WL 

1634066 (Tex. App.—Beaumont; Burnett v. Mortgage Electronic 

Registration Systems, Inc., 09–69 (D. Ut. 2009); Ruben LarotaFlorez v. Goldman Sachs Mortgage Co., et al., #09cv1181, U.S. Dist. 

Ct., Eastern Dist. of VA (December 8, 2009); and Moon v. GMAC 

Mortgage Corporation, et al, No. C08–969Z, 2008 WL 4741492 

(W.D. Wash. Oct. 24, 2008). 

Likewise, numerous courts have held that when MERS is the 

mortgagee identified in the security instrument, it has the authority to assign its interest in the mortgage or deed of trust, and that 

the assignee of MERS has standing to commence foreclosure proceedings. See Lane vs. Vitek Real Estate Industries Group, et al., 

2:10cv335 (E.D. Cal., 2010); Trotter v. Bank of New York Mellon et 

al, Kootenai County District Court, Case No. CV–10–95 (July 2, 

2010); Deutsche Bank National Trust Co. v. Traxler, 2010–Ohio3490, the Ninth Judicial District Court of Appeal finding that 

MERS, as the mortgagee had the authority to assign the mortgagee 

and that Deutsche Bank, as the assignee, had standing to foreclose; 

US Bank National Assoc. v. Flynn, 897 N.Y.S. 2d 855 or LexisNexis 

at 2010 N.Y. Misc. Lexis 511 (March 12, 2010); and Griffin v. 

Wilshire Credit Corporation, et al., Case No. 4:09–CV–715–Y (U.S. 

Dist. Ct., N.D. Texas, June 8, 2010). 

Q.3.–3. What are the rights of the investors in the mortgage-backed 

security (MBS)? 

A.3.–3. With respect to the securitization process, MERS’ role is 

limited to assisting investors and servicers to reduce the need for 

assignments to be recorded in the local land records when MERS 

Members trade rights in mortgage loans. While we understand generally that investors in mortgage-backed securities own the underlying promissory notes which have been pooled and securitized, 

MERS does not participate in the actual process of pooling the 

mortgage loans and issuing the securities and is not in a position 

to comment in detail on the rights of the investors to these financial products. 

Q.4. If the trustees of the MBS never secured the assets from the 

originators because of their own failure to complete diligence, who 

holds the mortgage? 

What is the impact on the MBS? 

What are the rights of the investors in the MBS? 

A.4. MERS is not part of how mortgage loans get securitized. That 

role belongs to the note-owner who decides whether a note should 

be sold, or transferred to a trust, or ultimately securitized with a 

pool of other loans.2 Loans were securitized long before MERS be-
217 

came operational, and in fact, there are loans in securities today 

that do not name Mortgage Electronic Registration Systems, Inc. as 

the mortgagee. As such, MERSCORP, Inc. is not in a position to 

comment on some portions of this question. 

For mortgages where Mortgage Electronic Registration Systems, 

Inc. is the mortgagee, MERS holds legal title to the mortgage as 

nominee and common agent on behalf of the originator of the mortgage loan and any successors or assignees of the mortgage loan. 

This does not change regardless of whether the mortgage loan is 

assigned or securitized (successfully or unsuccessfully). The beneficial and equitable rights to the mortgage move with the promissory note, but the legal title remains grounded with MERS. 

The disposition of beneficial and equitable interests in the mortgage following a failed sale, transfer or negotiation of the promissory note will turn upon the facts of the case, but it is most likely 

that they will ultimately rest with the party found to hold the 

promissory note. However, MERS is not in a position to comment 

upon the specific hypothetical posed by this question. 

Other MBS-related aspects of this question are beyond the scope 

of MERS’ operation and knowledge. Senator Brown may wish to 

consult the American Securitization Forum’s November 16, 2010 

whitepaper, ‘‘Transfer and Assignment of Residential Mortgage 

Loans in the Secondary Mortgage Market.’’ 

Q.5. If the assets are never properly secured for an MBS, who is 

responsible, both legally and financially—the servicers, trustees, or 

investors? 

What is the liability of the law firms that failed to conduct proper due diligence? 

A.5. MERS and the MERS® System have limited involvement in 

the securitization process. MERS has no role in determining 

whether any loan will be securitized, into what asset pool or trust 

that loan might be placed, or the creation of any security that 

might be issued in reliance upon that loan. All of this activity is 

controlled by the owners of the loans and legally occurs outside of 

the MERS® System. It is the obligation of the trustee and its custodian to verify and ensure that the conveyance of loans to the trust 

is done correctly. MERS is fundamentally a database that tracks 

servicing rights and beneficial interests based on information provide by its members. The rating agencies, however, do require that 

the name of the trustee (or the trust) be registered in the investor 

field on the MERS® System following the sale of the loan to the 

securitization trust. 

As a result, this question is beyond the scope of MERS’ operation 

and knowledge, and MERS therefore has no comment. Senator 

Brown may wish to consult the American Securitization Forum’s 

November 16, 2010 whitepaper, ‘‘Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market.’’ 

Q.6. If States reach opposing legal conclusions regarding the mortgage holder of record in MERS transactions, what would be the impact on MBS that contain mortgages from multiple States? 

What are the rights of the investors in the MBS? 

A.6. MERS and the MERS® System have limited involvement in 

the securitization process. MERS has no role in determining 
218 

whether any loan will be securitized, into what asset pool or trust 

that loan might be placed, or the creation of any security that 

might be issued in reliance upon that loan. All of this activity is 

controlled by the owners of the loans and legally occurs outside of 

the MERS® System. It is the obligation of the trustee and its custodian to verify and ensure that the conveyance of loans to the trust 

is done correctly. MERS is fundamentally a database that tracks 

servicing rights and beneficial interests based on information provide by its members. The rating agencies, however, do require that 

the name of the trustee (or the trust) be registered in the investor 

field on the MERS® System following the sale of the loan to the 

securitization trust. 

As a result, this question is beyond the scope of MERS’ operation 

and knowledge, and MERS therefore has no comment. Senator 

Brown may wish to consult the American Securitization Forum’s 

November 16, 2010 whitepaper, ‘‘Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market.’’ 

Q.7. On Thursday, November 18, the Washington Post reported 

that ‘‘[t]he [financial services] industry is seeking legislation that 

would effectively affirm MERS’s legality and block any bill that 

would call into question what MERS does.’’ Is MERS or any of its 

members seeking Federal legislation? If so, please describe the proposed legislation sought by the industry. 

A.7. MERS has no knowledge of the source or basis for the Washington Post report. MERS has not proposed and is not seeking any 

Federal legislation. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ADAM J. LEVITIN 

Q.1. Mr. Levitin, you state that problems in the mortgage market 

potentially ‘‘represent a systemic risk of liabilities in the trillions 

of dollars, greatly exceeding the capital of the U.S.’s major financial 

institutions.’’ 

The Dodd-Frank Act sets up a Financial Stability Oversight 

Council. According to Section 112 of the Act, the Council is supposed to identify risks to the financial stability of the United 

States. You argue that existing mortgage market problems are potentially systemic. 

Do you believe that the Council has been appropriately engaged 

on the foreclosure issue, and, if so, what actions has it taken to 

help deal with the issue? If not, what do you believe the Council 

should be doing? 

A.1. I am not aware of the Financial Stability Oversight Council 

(FSOC) having taken any meaningful steps to engage with potential systemic risks from chain of title problems in mortgage 

securitization. Having clear title to property is among the most 

fundamental components of a modern, functioning economy, and 

any concerns about widespread clouds on title necessarily raise systemic risk concerns. 

There are two potential sources of chain of title problems for 

mortgage securitization. The first involves unresolved questions of 

law. There is little that the FSOC can do regarding these questions 
219 

other than note their existence and try to reach its own conclusions 

about how courts might rule. I would caution that the FSOC needs 

to be careful to ask how a court might rule, not what it believes 

to be the proper (or convenient) answer. The fact that there is little 

the FSOC can do about unresolved legal questions underscores just 

how troubling it is that a $1.2 trillion private label securitization 

market hinges on debatable legal presumptions in its product design. I would underscore that it was the unregulated, private-label 

securitization industry, not the GSEs or Ginnie Mae, that designed 

products lacking either clear statutory or caselaw support for their 

legal structures. 

The other source of chain of title problems for mortgage 

securitization is a compliance question—did mortgage 

securitizations actually get the signatures and move the paper the 

way they were supposed to do in order to be legally effective? 

FSOC can answer this question—if it wants to. To determine 

whether there are widespread compliance problems in mortgage 

securitization, financial regulators could have properly trained examiners look at a sufficiently broad sampling of loan files in mortgage securitizations. Currently, Federal bank regulators lack the 

expertise to perform this sort of examination; mortgage loan documentation is beyond the traditional scope of bank examiner duties. 

If the FSOC were so motivated, however, it could have examiner 

teams properly trained to sent to do unannounced, random sampling of securitized mortgage loan files. 

Q.2. Mr. Levitin, your testimony states that a common response 

from banks—and I assume here you mean servicers—about problems in the foreclosure process is that it doesn’t matter to them because the borrower still owes on the loan and has defaulted. As you 

put it: ‘‘This ‘No Harm, No Foul’ argument is that homeowners 

being foreclosed on are all a bunch of deadbeats, so who really 

cares about due process?’’ You say that this argument, that you attribute loosely to ‘‘banks,’’ condones ‘‘vigilante foreclosures: so long 

as the debtor is delinquent, it does not matter who evicts him or 

how.’’ 

Mr. Levitin, do you really believe that mortgage servicers do not 

care about due process? 

Does any representative of the servicer industry on the panel 

wish to comment on this? 

A.2. I do not believe that mortgage servicers care about due process, and I do not think it should be surprising to anyone that they 

do not. Due process has no value to mortgage servicers; it only 

adds to their costs. I believe that like any profit maximizing business, mortgage servicers care about their bottom line and that they 

evaluate compliance with the law according to this metric: is it 

more profitable to comply with the law or not? 

A sad, but basic reality of consumer finance is that it is often 

profitable for financial service provides to violate the law. Consumers are unaware of their legal rights or legal violations, and 

even when they are aware, they often lack the resources to stand 

up for their rights. Moreover, it simply is not worthwhile for a consumer to litigate over a violation that costs the consumer a few 

hundred or even a few thousanddollars. And when a consumer does 
220 

make a determined stand for his or her rights, it is very easy for 

the financial service provider to claim that the violation of the law 

was a mistake, apologize, and continue violating the law with other 

consumers. This makes it quite profitable to violate the law on a 

wide-scale, but in a manner than only harms individual consumers 

a relatively small amount. 

Seen against this background, it is hard to reach any conclusion 

other than that due process is a hindrance to servicers, not a value. 

It adds to the cost of foreclosures and slows down the process, 

which increases the length of time for which servicers must advance payments of principal and interest on the defaulted mortgage 

to their investors for which servicers are reimbursed, but without 

interest. No matter how loudly any of the servicers testifying protest that they would of course adhere to the law and would never 

knowingly violate consumers due process rights, the plain fact is 

that they routinely do so and will continue to do so as long as it 

is profitable. Servicers’ public protestations of morality and legality 

will hardly overcome the basic forces of economics. 

Q.3. Given the varying State laws that govern foreclosure, there 

must be the opportunity to observe both best and worst practices. 

While foreclosures are not the preferred option for any party at the 

onset of a loan, sometimes it is the path forward that presents the 

least harm to borrowers, lenders and the economy. In those instances, it is essential that our foreclosure process be effective. 

Which States do each of you feel provide the most efficient path 

forward in foreclosures, while providing borrowers proper legal 

channels in the event that there is a dispute? What is the average 

length of time between original delinquency and foreclosure sale in 

these States? 

Which States do each of you feel have the most problems in effectively executing foreclosures? What is the average length of time 

between original delinquency and foreclosure sale in these States? 

A.3. There is a tradeoff between efficiency and procedural due process. The States that have non-judicial foreclosure have a more efficient foreclosure process from the standpoint of lenders, in that 

foreclosures are quicker and less expensive, but this efficiency 

comes at the price of procedural protections. 

There is a study that indicates that mortgage availability is generally greater (and hence mortgage costs are lower) in States with 

non-judicial foreclosure procedures. See Karen M. Pence, Foreclosing on Opportunity, 88 Review of Economics and Statistics, 

177–82 (2006). This would imply that part of the savings from a 

more efficient foreclosure process are transmitted back to mortgage 

borrowers. 

The mere fact that non-judicial foreclosure results in somewhat 

lower costs of mortgage credit, however, is not alone sufficient reason to endorse non-judicial foreclosure. Homeowners in States with 

judicial foreclosure pay slightly more for their mortgages, but they 

gain procedural protections. While many homeowners would likely 

opt for lower up-front mortgage costs and fewer procedural protections, there is good reason to believe that homeowners are likely 

to undervalue procedural protections in foreclosures: homeowners 

rarely enter into a mortgage thinking that it will end up in fore-
221 

closure. Because homeowners are likely to think the likelihood of 

foreclosure is more remote than it is, they will underestimate the 

value of procedural protections, a phenomenon known as hyperbolic 

discounting. 

The myriad procedural problems that have become apparent in 

foreclosures today make clear just how valuable due process is in 

foreclosures; it is when homeowners are at their most vulnerable 

that they most need procedural protections. In non-judicial foreclosure States, a homeowner must bring a quiet title action to challenge a foreclosure. The result is really a burden shifting from 

lenders to homeowners. Given the disparity in resources between 

lenders and homeowners, particularly homeowners in foreclosure, 

this sort of burden shifting makes due process simply unaffordable 

for many homeowners. 

While judicial foreclosure adds costs, I believe they are worthwhile one from a social standpoint, as judicial foreclosure functions 

as a type of mandatory insurance designed to bolster homeownership preservation policies and address the adverse selection problem that would ensue if homeowners could decide if they wanted 

judicial or non-judicial foreclosure. 

Ultimately, we need foreclosure processes that strike the optimal 

balance between efficiency and procedural due process. I would 

submit that non-judicial foreclosure systems are so lacking in procedural due processes that they are unlikely to be the proper balance. Instead, the question is really one of the extent of procedural 

protections within a judicial foreclosure system. 

Q.4. To better gauge the level of violations surrounding the topic 

of this hearing it is necessary for us to understand who is being 

affected. Admittedly, this question is probably best suited for the 

regulators, and we hope to receive this information from them at 

some point. 

In your research and investigations, how many individuals were 

discovered to have been fully current on their mortgage payments 

but foreclosed upon by their servicer? Please provide the data and 

evidence that you evaluated to arrive at your conclusions. 

A.4. My research has not examined the issue of the number of 

homeowners who are current but have ended up in foreclosure, and 

I do not know of anyone who has examined this issue empirically. 

Anecdotally, however, there are a troublingly large number of examples of homeowners who have ended up in foreclosure while current on their mortgages, or who have ended up in foreclosure as 

the result of servicer induced defaults for reasons such as improper 

crediting of payments (such as to late fees first, and then to principal and interest) or by the imposition of exorbitantly priced forceplaced insurance. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM ADAM J. LEVITIN 

Q.1. Please describe any barriers to mortgage modifications that 

servicers may encounter. 

A.1. Beyond the problem of mortgage servicer incentives, which I 

address in response to Senator Brown’s third question for the 
222 

record, there are two major types of barriers to mortgage modifications for servicers. 

First, servicers are often contractually limited in their ability to 

perform modifications. Servicing contracts, known as pooling and 

servicing agreements (PSAs), frequently contain limitations on 

modifications. Most PSAs restrict modifications to loans that are in 

default or where default is reasonably foreseeable and limit 

servicers’ ability to extent the term of a loan more than a year or 

so (to the final maturity date of any other loan in the securitized 

pool). PSAs sometimes have further restrictions such as limiting 

the amount by which interest rates can be reduced, limiting the 

number of loans in a pool that may be modified, or limiting 

changes in amortization. 

The other major barrier is the presence of junior liens (‘‘second 

liens’’) on a property. Servicers are reluctant to modify a loan if 

there is a junior lien on the property because any cash flow freed 

up by the modification benefits the junior lien holder. While junior 

liens are not a per se obstacle, their presence makes servicers hesitant to perform modifications. 

Q.2. What systems should mortgage servicers implement to correct 

their mistakes and compensate the individual homeowners who 

have suffered through the actions of others? 

A.2. There is no simple way for servicers to correct their mistakes 

and compensate individual homeowners who have been harmed. A 

starting point would be a thorough review of foreclosure procedures 

to identify all possible mistakes. Unfortunately, I do not believe 

that servicers are capable of performing such a review. Servicers as 

companies and particularly servicer employees involved in foreclosure operations have very strong incentives not to identify possible mistakes. Unless servicers are given such an incentive or an 

honest-broker third party with expertise in the area examines hundreds of thousands of foreclosure filings from the past several 

years, it is impossible to truly know the extent of the problem or 

the harm caused. Let me underscore that I do not believe that any 

of the Federal bank regulators have the expertise to carry out such 

an examination, and that some of the regulators are frankly compromised when it comes to disciplining servicers. 

Once the scope of the problem is determined, then compensation 

questions can be considered. While there might be interest from 

the servicer side in simply creating a compensation fund for servicing victims, I am loathe to see Kenneth Feinberg as the solution 

to all of America’s problems, and am concerned that such an approach would fail to shine much needed sunlight on a seriously 

troubled industry. 

Q.3. What are the financial incentives encouraging mortgage 

servicers to foreclose on homeowners? 

A.3. There are several financial considerations that encourage 

mortgage servicers to foreclose rather than modify mortgages. 

First, in foreclosure servicers are often able to lard on various 

‘‘junk fees,’’ meaning either fees for services never performed, fees 

for which the homeowner is not actually liable, or inflated fees for 

in-sourced services or services outsourced to vendors that provide 

kickbacks. Because servicers are paid off the top of foreclosure sale 
223 

proceeds, it does not matter whether the sale brings in enough to 

cover the mortgage debt; the servicer’s claim for various servicing 

fees and expenses will be paid. This means, then, that in most 

cases—that is cases where the debt is actually or functionally nonrecourse—servicers’ junk fees are really coming out of the pocket 

of mortgage backed securities investors. 

While a foreclosed loan does not generate servicing fee and float 

income for servicers, junk fees can easily off-set this income. Thus, 

in Countrywide’s 2007 third quarter earnings call, Countrywide’s 

President David Sambol emphasized that increased revenue from 

in-sourced default management functions could offset losses from 

mortgage defaults. 

Now, we are frequently asked what the impact on our servicing costs and 

earnings will be from increased delinquencies and loss mitigation efforts, 

and what happens to costs. And what we point out is, as I will now, is that 

increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income 

from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification strategy, a counter-cyclical 

diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services. 

Transcript, ‘‘Countrywide Financial Corporation Q3 2007 Earnings 

Call,’’ Oct. 26, 2007 (emphasis added). Sambol also mentioned that 

‘‘Our vertical diversification businesses, some of which I mentioned, 

are counter-cyclical to credit cycles, like the lender-placed property 

business in Balboa and like the in-source vendor businesses in our 

loan administration unit.’’ 

Countrywide is now owned by Bank of America. I have no reason 

to believe that the fundamental economics of servicing acknowledged by Mr. Sambol changed when Countrywide was purchased 

by Bank of America. 

Second, loan modification is expensive. To modify (or attempt to 

modify) a loan is essentially to underwrite a new loan. There are 

costs for doing this in terms of personnel time and overhead, as 

well as pulling a credit report, etc. Servicing agreements do not 

generally provide reimbursement for modification expenses. Moreover, not all attempted modifications result in an actual modification. Attempted modifications still involve expenses, however, 

Thus, unless a servicer believes that its income from a modified 

loan—discounted for the likelihood that there will be a modification 

and that the modified loan will redefault—will outweigh both the 

costs of modification and the forgone junk fees that could be collected in foreclosure, attempting a modification is a losing economic 

proposition for the servicer. 

HAMP attempts to change these incentives by paying a $1,000 

modification bounty (and assorted other bounties) to servicers for 

each permanent modification. HAMP bounties have to be discounted, however, by the fact that only 39 percent of HAMP trial 

modifications successfully converted to permanent status. This 

means that 61 percent of the time servicers put in the time and 

expense to doing a HAMP modification, but receive no reimbursement. The net result is that HAMP incentives may simply be too 

small to have their desired effect. 

Finally, servicers are required to advance payments of principal 

and interest (and sometimes taxes and insurance) on defaulted 
224 

loans to mortgage investors. These payments are reimbursed out of 

foreclosure sale proceeds, but without interest. This means that 

there are considerable time value and liquidity costs to making advances. The faster a servicer can foreclose, the less advancing it 

has to do. Servicers are often concerned that if they modify a loan, 

the loan will redefault, which will increase the total number of 

months of advances they will have to pay. 

In short, residential mortgage servicers are subject to strong financial incentives that discourage mortgage modification and encourage foreclosure. I do not believe that Government foreclosure 

mitigation programs like the Home Affordable Modification Program offer servicers’ sufficient compensation to overcome these incentives, and I do not believe it is appropriate for the Government 

to be paying servicers to perform their contractual duty of maximizing the value of mortgages for RMBS investors. Residential 

mortgage servicing is a failed business model, and mortgage 

servicers are simply incapable of handling the current mortgage 

foreclosure crisis in a manner that mitigates the harm to the economy and society at large. In light of this, I think it is necessary 

to consider solutions to the foreclosure crisis that remove mortgage 

servicers from the decisionmaking process, be it through modification of mortgages in bankruptcy or through a Federal agency program modeled on the Home Owners Loan Corporation. 

RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD 

FROM DAVID B. LOWMAN 

Q.1. In response to questions from Senator Johnson, Mr. Lowman 

and Ms. Desoer, you characterized the HAMP 2MP program as a 

good approach to second lien modification. You also noted your organizations’ participation in 2MP, with Ms. Desoer pointing out 

that Bank of America had been the first servicer to sign up for the 

program. Yet, as of Sept. 30, only 21 second lien modifications 

worth $10,500 had been made under 2MP since its implementation 

in March 2010. 

Why, in your opinion, have so few modifications been made 

under 2MP so far? Do you see your organization increasing its 

number of 2MP modifications in the coming months? 

A.1. Response: Chase routinely modifies second liens, just as it 

does first liens, when appropriate to achieve affordable payments 

for borrowers. From January 2009 through November 2010, Chase 

offered over 65,000 second lien modifications of which 16,015 were 

made permanent. Through November 2010, Chase had offered 

2,319 HAMP 2MP modifications, of which 2,070 were completed. 

Chase implemented 2MP in May 2010, making Chase one of the 

first major servicers to do so, but the program did not become fully 

effective under the Treasury’s re-issued July Supplemental Directive until August 1, 2010. We believe that 2MP will become more 

effective over time, as more HAMP modifications are implemented 

on first liens—to be eligible for a 2MP modification, a homeowner 

must have first received a HAMP modification of their first mortgage—and as the process and common database continue to operate. 
225 

Because to be eligible for 2MP modification a homeowner must 

have received a HAMP modification on their first lien, information 

regarding both liens is necessary to initiate the process. Accordingly, Chase’s initial efforts under the 2MP program focused on 

borrowers for whom Chase serviced both the first and second liens. 

Once Treasury’s loan matching files—providing information regarding loans serviced by other servicers—became available in August 

2010, Chase was able to expand its efforts to borrowers for whom 

it serviced only the second lien. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM DAVID B. LOWMAN 

Q.1. Mr. Levitin, your testimony states that a common response 

from banks—and I assume here you mean servicers—about problems in the foreclosure process is that it doesn’t matter to them because the borrower still owes on the loan and has defaulted. As you 

put it: ‘‘This ‘No Harm, No Foul’ argument is that homeowners 

being foreclosed on are all a bunch of deadbeats, so who really 

cares about due process?’’ You say that this argument, that you attribute loosely to ‘‘banks,’’ condones ‘‘vigilante foreclosures: so long 

as the debtor is delinquent, it does not matter who evicts him or 

how.’’ 

Does any representative of the servicer industry on the panel 

wish to comment on this? 

A.1. We disagree with Mr. Levitin. Chase is committed to ensuring 

that all applicable laws are followed in the foreclosure process. We 

regret the errors that we have discovered in our foreclosure processes, and we are working hard to correct these processes so we get 

them right. At the same time, we do not believe that there have 

been unwarranted foreclosures as a result of these issues. Of 

course, if we have made any mistakes, we will fix them. 

Q.2. Ms. Desoer and Mr. Lowman, it is important that this Committee has an adequate understanding of the current state of affairs as it relates to delinquency and foreclosures. Please briefly 

discuss the following statistics as they relate to your companies: 

What is the total number of mortgages that your company services? How many mortgages are currently in foreclosure? What is 

the average number of days that a borrower is delinquent on his 

or her mortgage at the time of a foreclosure sale? 

What percentage of homes are vacant at the time of a foreclosure 

sale? 

A.2. As of November 30, 2010, Chase serviced approximately 8.6 

million home loans. As of November 30, 2010, Chase serviced 

349,586 loans that were in foreclosure, that is, approximately 4.07 

percent of the total loans serviced were in foreclosure. The average 

borrower’s loan is 448 days delinquent at the time of foreclosure 

sale. 

In the third quarter of 2010, 11 percent of foreclosure sales were 

of properties that had been owner-occupied, but were vacant at the 

time of sale. In addition, 57 percent of foreclosure sales in the third 

quarter of 2010 were of non-owner-occupied properties, some of 

which were also vacant at the time of sale. Our best estimate is 
226 

that 35–40 percent of properties are vacant at the time of foreclosure sale. 

Q.3. This Committee has a responsibility to ensure that actors on 

all sides of the foreclosure process, including servicers, are acting 

legally and in the best interest of our society. We must address and 

remedy situations where this is not the case. 

However, unnecessarily delaying foreclosures is not without cost. 

Representatives of the secondary mortgage market have told us 

that, on average, a delay in foreclosure costs approximately $30– 

40 per day, per home. This is in addition to any changes in home 

values during that time. 

Ms. Desoer and Mr. Lowman, could you discuss what additional 

costs your institutions may incur during a foreclosure process if 

that process is delayed? 

A.3. Delays in the foreclosure process could lead to additional fees 

on the property, such as taxes and insurance, maintenance costs of 

the property, and potentially additional attorneys fees, each of 

which is heavily dependent on the geography of the property, the 

condition of the property, and the loan amount. 

Q.4. Given this Committee’s oversight responsibilities, it is vital 

that we examine the regulatory actions taken before and after reports surfaced detailing the problems surrounding some foreclosures. 

Ms. Desoer and Mr. Lowman, did your regulator contact you 

prior to any of these press reports to review your foreclosure procedures? What, if any, directives or recommendations were made by 

your regulator surrounding the definition of ‘‘personal knowledge’’ 

as it relates to those in your companies who must sign foreclosure 

documents? What, if any, directives or recommendations were 

made by your regulator with regard to the notary process for these 

documents? 

A.4. Prior to September 30, 2010, when the referenced press reports were published, we did not receive specific directives from our 

regulators regarding the definition of ‘‘personal knowledge’’ or the 

notary process. 

Q.5. Unfortunately, neither Fannie Mae, Freddie Mac, nor the Federal Housing Finance Administration were present at the hearing 

to discuss the ‘‘approved lenders’’ list that Fannie and Freddie publish to guide servicers as they select in-State counsels to act on 

their behalf. 

Given that, Ms. Desoer and Mr. Lowman, please describe what 

the GSE’s require of your firms with respect to these lists, and indicate whether there have been any changes to them since news of 

problems with ‘‘foreclosure mills’’ began to surface. 

A.5. Although the question mentions an ‘‘approved lenders’’ list, we 

understand the Senator to be seeking information regarding the 

‘‘approved counsel’’ list, which relates to the selection of in-State 

counsel. Fannie Mae and Freddie Mac require servicers to use foreclosure counsel that are identified on the GSE’s lists of approved 

counsel for each State. Although GSE-approved foreclosure counsel 

have contracts directly with servicers and operate under the same 

agreements as non-GSE approved foreclosure counsel, they also 
227 

will take direction directly from the GSEs on GSE-owned loans. 

Over the last 90 days, we have been notified by the GSEs of 

changes to their approved counsel lists. 

Q.6. Attorney General Miller’s testimony today states the following: 

While the servicer is free to lose documents as many times as they want 

or to take as long as they want, the servicer often demands strict compliance from the borrower. Thus, no matter how many times the borrower has 

previously submitted his or her paperwork, if the borrower fails one time, 

the loan modification is denied. 

Do any representatives of the servicer industry wish to respond 

to Mr. Miller’s claims? 

A.6. Chase attempts to ensure that borrower paperwork is received 

and scanned into Chase’s imaging systems thoroughly and systematically. One potential reason for multiple requests for documents 

would be the submission of incomplete documents. For example, 

since HAMP regulations have very specific requirements for documentation, borrowers who make incomplete submissions may need 

to resubmit a complete set of documents in order to qualify for 

modification under the program. 

Chase has made significant investments in people, technology 

and process improvements to enhance the effectiveness of the modification process and reduce borrower frustration, especially with 

the documentation process. Specifically: 

• Chase has 51 Community Home Ownership Centers 

(‘‘CHOCs’’) throughout the country where borrowers can provide documentation in person and work with a Chase employee 

to ensure that their package is complete. 

• To improve our customer service and our modification process 

effectiveness, in May 2010 we created a new role—the Relationship Manager (‘‘RM’’)—to be accountable for each customer 

through the home retention process. As of November 2010, 

Chase employed 1,921 RMs, and we now assign an RM to each 

borrower as soon as they contact Chase for assistance due to 

financial hardship, such as loss of income or other major life 

event. The RM becomes the single point of contact with Chase 

for the borrower during the modification process. The RM tells 

the borrower about our foreclosure-avoidance solutions and 

helps the borrower complete the needed paperwork so a modification request can be submitted to underwriting. The RM 

continues to monitor the loan to ensure the process moves forward and will contact the borrower with the ultimate decision 

on modification. If the borrower is approved for a modification, 

the RM contacts the borrower to review the approval and assist them with the final steps in the process, which includes reviewing and executing the modification documents. If a modification is not approved, the RM may suggest a short sale or 

other alternative, depending on the underlying reasons for the 

denial, and if the borrower agrees, will transfer the borrower 

to the Chase’s Liquidation teams to further discuss other foreclosure avoidance solutions. 

• At the end of 2009, Chase implemented imaging technology 

and created a document repository to centralize the handling 

of all incoming customer documentation. Customers now are 
228 

directed to send all communications and documents to this location, which receives and indexes the document to the appropriate loan file for that borrower which is available electronically, eliminating the need to move paper files. Quality Control 

assures the thousands of unique documents received daily are 

uploaded in a timely fashion, properly indexed (assigned to the 

correct loan), and are legible. This new centralized system is 

available to employees throughout the loss mitigation process. 

Letters mailed by Chase to customers are also uploaded to this 

centralized repository, enabling customer-facing staff access to 

the most current and complete information about the loan. 

• Chase implemented the verified model, which requires borrowers to provide all necessary documents prior to being evaluated for a potential solution, across all the portfolios we service. This has slowed the rate at which modification trials are 

initiated, but it should significantly increase the percentage of 

trials that lead to permanent modifications. 

• Chase policy requires adherence to Treasury’s guidance regarding responsiveness to borrowers’ requests for modifications. 

With the implementation of verified trial plans, borrowers are 

to receive answers within 30 days of submitting a complete request, including all the necessary documents to evaluate the 

application. 

Q.7. Ms. Thompson testifies that, ‘‘ . . . the problems occasioned by 

mortgage servicer abuse run rampant.’’ That is a strong accusation. 

Ms. Thompson also frequently, though without definition, refers to 

‘‘abuses’’ committed by servicers and ‘‘excessive’’ fees. She accuses 

servicers of failing to negotiate in good faith and of preparing false 

affidavits. She states that ‘‘Servicers do not believe that the rules 

that apply to everyone else apply to them.’’ Their attitude, according to Ms. Thompson, is ‘‘lawless’’ and they commit ‘‘wrongful foreclosure on countless American families.’’ She also states that ‘‘The 

lack of restraint on servicer abuses has created a moral hazard juggernaut that at best prolongs and deepens the current foreclosure 

crisis and at worst threatens our global economic security.’’ 

Do any of the servicer representatives here wish to respond to 

Ms. Thompson’s allegations? 

A.7. Chase believes that Ms. Thompson’s allegations are entirely 

unfounded. Chase is committed to ensuring that all applicable laws 

are followed in the foreclosure process. We regret the errors that 

we have discovered in our foreclosure processes, and we are working hard to correct these processes so we get them right. At the 

same time, we do not believe that there have been unwarranted 

foreclosures as a result of these issues. Of course, if we have made 

any mistakes, we will fix them. 

As to Ms. Thompson’s reference to fees, the fees imposed by 

Chase are not excessive. Importantly, Chase does not foreclose on 

borrowers if their loan payments are current but they owe fees. 

Chase applies borrowers’ payments to their debt prior to applying 

them to any fees owed. 

It is also critical to note that the analysis we use in deciding 

whether to proceed with a modification or foreclosure—which involves a net present value analysis to determine what is in the best 
229 

interest of the investor—does not take into account servicer compensation over time. Furthermore, if it were considered, which it 

is not, servicer compensation would tend to favor modification over 

foreclosure. Indeed, with a successful modification, Chase is able to 

continue to service the loan and earn servicer fees; but when a 

property is sold as a result of foreclosure, Chase’s role as servicer 

ends and Chase receives no further fees. 

Q.8. Given the varying State laws that govern foreclosure, there 

must be the opportunity to observe both best and worst practices. 

While foreclosures are not the preferred option for any party at the 

onset of a loan, sometimes it is the path forward that presents the 

least harm to borrowers, lenders and the economy. In those instances, it is essential that our foreclosure process be effective. 

Which States do each of you feel provide the most efficient path 

forward in foreclosures, while providing borrowers proper legal 

channels in the event that there is a dispute? What is the average 

length of time between original delinquency and foreclosure sale in 

these States? 

Which States do each of you feel have the most problems in effectively executing foreclosures? What is the average length of time 

between original delinquency and foreclosure sale in these States? 

A.8. Each State has different procedures for foreclosures, and all 

provide some mechanism for the borrower to challenge the propriety of the foreclosure. Chase is not really in a position to weigh 

the relative efficiency of one State versus another. Nationwide, the 

average borrower’s loan is 448 days delinquent at the time of foreclosure sale. 

Q.9. To better gauge the level of violations surrounding the topic 

of this hearing it is necessary for us to understand who is being 

affected. Admittedly, this question is probably best suited for the 

regulators, and we hope to receive this information from them at 

some point. 

In your research and investigations, how many individuals were 

discovered to have been fully current on their mortgage payments 

but foreclosed upon by their servicer? Please provide the data and 

evidence that you evaluated to arrive at your conclusions. 

A.9. Thus far, we are not aware of any individuals who were current on their mortgage payments but were foreclosed upon by 

Chase. Chase has in place numerous safeguards designed to ensure 

that loans are not referred to foreclosure unless foreclosure is appropriate. To begin with, Chase communicates with a customer beginning at 5 days after a missed payment, and continuing through 

foreclosure. Outgoing letters and phone attempts to discuss modification options commence at 40 days past due and continue 

through foreclosure referral. The average number of contacts a borrower receives from Chase before a foreclosure sale is 111. These 

communications should help ensure that Chase becomes aware of 

any errors in its calculations of outstanding indebtedness. 

Further, an Independent Foreclosure Review team within Chase 

reviews each loan at two specific points to make sure that a loan 

has been appropriately referred for foreclosure. The Independent 

Foreclosure Review confirms that the loan is past due and that 

Chase has complied with its pre-referral policies, including re-
230 

peated efforts to contact the borrower to discuss alternatives. 

Under Chase’s policies, only after the Independent Foreclosure Review is complete can a loan be referred for foreclosure proceedings. 

The Independent Foreclosure Review is repeated 2 to 3 weeks prior 

to any scheduled sale. A final review is also conducted approximately 96 hours prior to a foreclosure sale to review the borrower’s 

payment history and to ensure that loss mitigation is closed and 

the borrower is not in bankruptcy. 

Of course, if Chase discovers that any foreclosures were initiated 

improperly, it will take action to correct any error. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DAVID B. LOWMAN 

Q.1 Please describe in detail the reviews that your organizations 

conducted pursuant to your announced moratoriums, including: 

how many employees were involved; how many files they reviewed; 

how much time, on average, an employee spent reviewing a file. 

How many errors did you uncover, and what was the nature of 

those errors? 

How did you inform homeowners that their foreclosure filings 

were being reviewed? 

A.1. Beginning in late September 2010, Chase temporarily halted 

foreclosures in 43 States and territories where documents signed by 

Chase may be required. Since that time, Chase has focused on reviewing and enhancing its document execution procedures, and 

training its document execution employees. 

Chase also has put in place a remediation plan designed to identify Chase-signed affidavits in each pending foreclosure file, and 

file substitute affidavits based on a reverification of the information 

in the affidavits by the individual executing those affidavits. Chase 

is still in the process of implementing this plan and is not able at 

this stage to provide the detailed loan level information sought by 

this question. 

Q.2. How many files that you reviewed were missing the original 

note? 

A 2007 study found that 40 percent of bankruptcy filings involving mortgages were missing the original note. How many of your 

foreclosure filings are missing their original note? 

A.2. We are not able at this stage in our remediation plan to provide numbers of instances in which original notes were missing in 

pending foreclosure proceedings. Chase has not historically tracked 

the frequency of lost note affidavits because there has been no need 

for such information in the past. Chase is generally unable to determine the total number of lost note affidavits submitted during 

the timeframe identified in the request. 

Two businesses acquired by Chase in 2008—EMC (which Chase 

acquired in March 2008) and Washington Mutual (certain assets of 

which Chase acquired in September 2008)—did use systems that 

kept track of affidavits that were submitted to Chase for execution 

that local counsel characterized as Lost Note Affidavits. However, 

Chase’s systems did not keep track of whether these affidavits were 
231 

actually executed and filed. Still, the 40 percent figure is extremely 

high based on our general experience. 

Chase is keeping track of the number of Lost Note Affidavits 

submitted in connection with foreclosure actions on a going forward 

basis. 

Q.3. Do all of your organization’s note endorsements comply with 

the requirements of your pooling and servicing agreements? 

A.3. As a general matter, when Chase functioned as the depositor 

for a securitization, it received a certification report from the custodian on the deal (often Chase Custody Services) certifying its possession of the documentation for the loans, including the note, 

mortgage, and any assignments. Generally, per the pooling and 

servicing agreement, a final trust receipt reflecting the certification 

with respect to the loans contained in the securitization was issued 

to the trustee by the custodian. We are not aware of instances in 

which there were material deviations from these procedures in connection with securitizations in which Chase was the depositor. 

Q.4. Have your regulators participated in or overseen your reviews, 

and if so, how? 

A.4. The Office of the Comptroller of Currency is Chase’s primary 

regulator and has been conducting an onsite audit of Chase (together with the Federal Reserve and the FDIC) since early November 2010. Chase has kept the OCC apprised of developments relating to foreclosure procedures. 

Q.5. There is some disagreement about whether the problems within the loan modification and foreclosure processes were isolated incidents, systemic failures, or were caused by rogue individuals following mistaken guidelines. Who determines your affidavit signing 

policies and procedures? 

Were your employees following company policy? If so, has any 

employee responsible for designing that policy been disciplined, and 

how? Were any employees disobeying company policy? If so, have 

they been disciplined, and how? 

A.5. With regard to the portion of your question relating to problems within the loan modification processes, we do not believe that 

there have been systemic issues in connection with Chase’s implementation of HAMP or its own proprietary programs. Chase has invested substantially in its loss mitigation efforts in recent years because, as I explained during my testimony, loan modifications are 

preferable to foreclosure from the servicer’s perspective. 

Specifically, with respect to loan modification, Chase has: 

• Added more than 9,000 new employees to the Default and Loss 

Mitigation organization since 2008, more than doubling our 

staff; 

• Chase assigns each new modification applicant to one of approximately 1,900 dedicated Relationship Managers, who are 

responsible for supporting borrowers who have asked for help 

throughout the entire mortgage modification process; 

• Opened 51 regional CHOCs and a Home Ownership Preservation Office to assist borrowers face-to-face with modification efforts. CHOCs were opened in geographic areas with the high-
232 

est rates of payment delinquencies and have assisted more 

than 118,480 borrowers through since their launch in early 

2009. 

• Handled over 32.3 million inbound calls to our call centers 

from homeowners seeking foreclosure prevention assistance 

since 2009, including 5.3 million calls to our dedicated customer hotline for modification inquiries; 

• Offered over 1 million modifications to struggling homeowners 

since the beginning of 2009, through HAMP, the GSEs and 

Chase modification solutions; converting 275,152 into permanent modifications; 

• Provided a graceful exit through a short sale for over 92,000 

borrowers where a homeownership retention solution was not 

an option; 

• Prevented over 467,000 foreclosures through various foreclosure avoidance programs since January 2009; 

• Sent more than 3.7 million letters inviting borrowers to attend 

outreach events; 

• Hosted or participated with community groups in more than 

1,284 local events since 2009, including multi-day events 

reaching over 60,000 homeowners to educate and inform homeowners about foreclosure prevention solutions and assist in the 

completion of required documents; 

• Helped the Hope Now Alliance establish a new Web-based portal to facilitate the loan modification process for homeowners 

working with Hope Now counseling agencies and the Hope 

Now Hotline. 

With respect to the issues that have arisen in connection with affidavits filed in foreclosure cases, at all times, Chase policy required that its employees verify the accuracy of the affidavits prior 

to their execution, and our understanding is that our employees followed this policy. Therefore, we do not believe that the affidavits 

contained material inaccuracies in terms of the amount of indebtedness. 

However, prior to approximately June 2010, our policies—which 

evolved over time and in the past, differed between Chase platforms—did not always require that the same employee who reviewed the business records to verify the information in the affidavit actually sign it. Rather, during certain periods, Chase’s policies instructed employees who verified the affidavits to bring them 

to an officer for signature. This policy developed in part because it 

was believed to be preferable for an officer of the company to sign 

the affidavit rather than an analyst. In cases where an officer 

signed the affidavit, he or she did so in reliance on the research 

that had been performed by the analyst who reviewed the document instead of their own review of the business records. 

Chase’s review is ongoing, but thus far we have not determined 

that discipline of our employees is warranted. Our review to date 

indicates that all of our employees believed in good faith that they 

were complying with legal requirements and complying with firm 

policy. 
233 

Q.6. An article published in the Cleveland Plain Dealer on October 

17 titled ‘‘Mortgage foreclosure Uproar Sweeps Up Northeast Ohioans’’ told the stories of three Northeast Ohio families that had their 

houses taken from them despite not missing any mortgage payments. What is your response to this story, and do you believe that 

such a report is consistent with statements like that from Mr. 

Lowman’s written testimony that information in your files about 

‘‘default and indebtedness was materially accurate’’ and that foreclosure recordkeeping and affidavit issues ‘‘did not result in unwarranted foreclosures’’? 

A.6. Chase did not service any of the loans discussed in the Cleveland Plain Dealer article. 

We believe that the information in the affidavits we have filed 

regarding the fact of default and the amount of indebtedness was 

materially accurate. This information was in fact verified by Chase 

personnel before the affidavits were filed. We are not aware of any 

individuals who were current on their mortgage payments but were 

foreclosed upon by Chase. 

Chase has in place numerous safeguards designed to ensure that 

loans are not referred to foreclosure unless foreclosure is appropriate. To begin with, Chase communicates with a customer beginning at 5 days after a missed payment, and continuing through 

foreclosure. Outgoing letters and phone attempts to discuss modification options commence at 40 days past due and continue 

through foreclosure referral. The average number of contact attempts a borrower receives from Chase before a foreclosure sale is 

111. These communications should help ensure that Chase becomes 

aware of any errors in its calculations of outstanding indebtedness. 

Further, an Independent Foreclosure Review team within Chase 

reviews each loan at two specific points to make sure that a loan 

has been appropriately referred for foreclosure. The Independent 

Foreclosure Review confirms that the loan is past due and that 

Chase has complied with its pre-referral policies, including repeated efforts to contact the borrower to discuss alternatives. 

Under Chase’s policies, only after the Independent Foreclosure Review is complete can a loan be referred for foreclosure proceedings. 

The Independent Foreclosure Review is repeated 2 to 3 weeks prior 

to the scheduled foreclosure sale. A final review is also conducted 

approximately 96 hours prior to a foreclosure sale to review the 

borrower’s payment history and to ensure that loss mitigation is 

closed and the borrower is not in bankruptcy. 

Of course, if Chase discovers that any foreclosures were initiated 

improperly, it will take action to correct any error. 

Q.7. Mr. Lowman’s written testimony says that ‘‘servicer compensation would tend to favor modification over foreclosure,’’ and 

that ‘‘the cost for servicers to take a loan to foreclosure generally 

is significantly greater than the cost of a modification.’’ Please describe the compensation structure of your mortgage servicing business. 

A.7. From both a revenue and cost perspective, servicers clearly 

have a greater incentive to enter into an appropriate modification 

rather than to foreclose. 
234 

First, a servicer derives the lion’s share of its servicing revenue 

from monthly servicer fees. For GSE loans, payment of servicer 

fees ceases upon borrower default. For other investor-owned loans, 

these monthly servicer fees cease upon foreclosure. By contrast, if 

a loan is modified and continues to perform, the servicer will receive servicer fees going forward. Even if the servicer fees are reduced—for example, as may be the case as a result of principal reduction—the continued revenue stream is greater than would be 

received in the case of foreclosure, after which there is obviously 

no servicer fee. 

Second, in the event of a HAMP or GSE modification, a servicer 

also receives an incentive fee in the event of a successful modification. A servicer receives no additional revenue or fees in the event 

of foreclosure. 

Third, the existence of certain fees charged or expenses incurred 

by the servicer in the event of delinquency—such as late payment 

fees or advances—are typically not incentives to favor foreclosure 

over modification because the servicer, provided it does not own the 

loan, typically receives repayment of these fees either way. 

Fourth, the cost of processing a modification is not materially different from the cost of foreclosing. Further, a modification typically 

will occur significantly more quickly than a foreclosure. Nationally, 

foreclosures take an average of 14 months to complete, and in some 

jurisdictions, much longer. 

Chase has incentive plans for employees involved in the modification process, and these plans are aligned with borrower-centric 

outcomes. The incentive plans strike a balance between the quality 

and productivity of these employees. Employees involved in foreclosure operations (e.g., affiants, notaries, attorney management) 

are not compensated through incentive plans. 

Q.8. How many second liens do you hold on properties that you are 

also servicing? 

A.8. Chase services 6.83 million first-lien mortgages; of those, 1.15 

million have a second lien, which also is serviced by Chase. 

Q.9. Please describe any barriers to mortgage modifications that 

servicers may encounter. 

A.9. The number one reason for foreclosure continues to be financial problems caused by illness, a job loss, underemployment, or 

other life-changing events. Foreclosures cut across all types of people, regardless of factors like income level, education or type of 

house. Simply put, foreclosure can affect anyone. 

Borrowers overwhelmed by their circumstances don’t know where 

to turn, and they often think that Chase can’t (or won’t) help them. 

Two of Chase’s bigger challenges in helping borrowers avoid foreclosure are getting them to call or meet with Chase to explain their 

situation as well as provide a complete set of documents to allow 

for an evaluation of their modification application. The majority of 

people rejected for modifications are rejected because they have 

failed to submit the complete set of documents required to evaluate 

their application. 

Chase recognized early in the current crisis that customers facing financial stress managing their mortgage payments require 

special attention and dedication to their needs. We acknowledged 
235 

1See, e.g., Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System, 

Speech at the Federal Reserve System Conference on Housing and Mortgage Markets: Housing, 

Mortgage Markets, and Foreclosures (Dec. 4, 2008) [hereinafter Bernanke, Speech at Federal 

Reserve], available at http://www.federalreserve.gov/newsevents/speech/ 

bernanke20081204a.htm (‘‘Despite goodfaith efforts by both the private and public sectors, the 

foreclosure rate remains too high, with adverse consequences for both those directly involved 

and for the broader economy.’’). 

the importance of enhancing customer access and service levels to 

help customers understand their foreclosure prevention options, either directly through Chase or through our partnerships with community leaders and non-profit credit counselors. Regardless of how 

the customer chooses to engage with Chase for homeownership assistance our commitment is to do everything in our power to assist 

in a respectful and timely fashion as described in response to question 5 from Senator Brown. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY OF 

DIANE E. FROM THOMPSON 

Q.1. Ms. Thompson, you conclude your testimony by calling for legislation or regulations to ‘‘reform the servicing industry, to allow 

for loan modifications in bankruptcy, and to address the tax consequences of loan modifications . . . ’’ These actions would, according to you, ‘‘aid in protecting homeowners from indifferent and 

predatory servicing practices and reducing the foreclosure surge.’’ 

When analyzing effects of alternative possible actions that would 

affect the mortgage and housing markets, you focus on protecting 

homeowners. Indeed, such a focus is welcome and warranted. 

There is also, of course, a need to consider effects of any action on 

securities holders, including retirement funds that help provide interest and other income to retirees who continue to struggle in the 

current zero-interest rate environment to live off of the assets they 

accumulated during their working years. 

Ms. Thompson, could you discuss the economic, financial, and 

distributional analysis you have performed to arrive at the policy 

recommendations that you provide in your conclusion? 

A.1. You correctly note that my analysis focuses on the homeowners. The interests of homeowners have been, in my view, almost entirely overlooked during the foreclosure crisis. This is particularly unfortunate since it is the failure to pay attention to those 

interests and reduce the foreclosure rate that has caused the economic recession.1 Preserving homeownership, where economically 

appropriate, has a net positive benefit for the society at large and 

the unnecessary destruction of homeownership hurts the rest of us 

from an economic and financial perspective. 

The impact of the foreclosure crisis has damaged the financial interests of many constituencies in this country, including securities 

holders. Aside from the indirect financial harm caused by the scale 

of the financial crisis—the weak economy, the slumping interest 

rates, the outright collapse of many securities—foreclosures hurt 

all homeowners in the communities in which they occur. Violent 

crime increases in neighborhoods with increased foreclosures—at 
236 

2Dan Immergluck & Geoff Smith, The Impact of Single-Family Mortgage Foreclosures on 

Neighborhood Crime, 21 Housing Studies 851 (2006), available at www.prism.gatech.edu/∼di17/ 

housingstudies.doc (calculating that for every 1 percent increase in the foreclosure rate in a census tract there is a corresponding 2 percent increase in the violent crime rate). 3See, e.g., Ctr. for Responsible Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 69.5 Million Homes Lose $7,200 on Average (2009), available at www.responsiblelending.org/mortgage-lending/research-analysis/soaringspilloveracceleratingforeclosures-to-cost-neighbors-436-billion-in-2009-alone-73-4-millionhomes-lose-5-900- 

onaverage.html (estimating losses to neighboring property values due to the foreclosure crisis at $1.86 trillion dollars); John P. Harding, Eric Rosenblatt, Vincent W. Yao, The Contagion Effect of Foreclosed Properties, J. of Urban Econ. (forthcoming), available at http://papers.ssrn.com/sol3/papers.cfm?abstractlid=1160354 (finding a 1.2 percent drop in market 

value for each additional neighboring home in foreclosure; effect drops to 0.6 percent if property 

in foreclosure is one-eighth of a mile away); Dan Immergluck & Geoff Smith, The External Costs 

of Foreclosure: The Impact of Single-Family Mortgage Foreclosures on Property Values, 17 Housing Pol’y Debate 57, 69, 75 (2006) (‘‘for each additional conventional foreclosure within an eighth 

of a mile of a house, property value is expected to decrease by 1.136 percent’’; estimating total 

impact in Chicago to be between $598 million and $1.39 billion). 4 See, e.g., Staff of the Joint Economic Comm., 110th Cong., 1st Sess., The Subprime Lending 

Crisis: The Economic Impact on Wealth, Property Values and Tax Revenues, and How We Got 

Here (2007), available at http://jec.senate.gov/index.cfm?FuseAction=Reports.Reports&Content 

Recordlid=c6627bb2-7e9c-9af9-7ac7 2b94d398d27&Regionlid=&Issuelid= (projecting foreclosed home owners will lose $71 billion due to foreclosure crisis, neighbors will lose $32 billion, 

and State and local governments will lose $917 million in property tax revenue); William Apgar 

& Mark Duda, Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure 

Boom, at 4 (May 11, 2005), available at www.hpfonline.org/PDF/ApgarDudalStudylFinal.pdf (estimating costs to the city of Chicago per foreclosure upwards of 

$30,000 for some vacant properties). 5 U.S. Census Bureau, Housing Vacancies and Homeownership T 17 (2009), available at 

http://www.census.gov/hhes/www/housing/hvs/annual09/ann09ind.html (reporting that the 

2009 homeownership rates for Americans 65 and over was 80.5 percent). 6 AARP Public Pol’y Inst., A First Look at Older Americans and the Mortgage Crisis 5 (2008), 

http://assets.aarp.org/rgcenter/econ/i9lmortgage.pdf. Cf. Ellen E. Schulz & Theo Francis, 

High-Interest Lenders Tap Elderly, Disabled, Wall St. J., Feb. 12, 2008 (reporting that payday 

lenders concentrate their outlets around subsidized elder housing). 7See, e.g., Jody Shenn, Mortgage Investors with $500 Billion Urge End of Practices, Lawyer 

Says, Bloomberg News, July 23, 2010, http://www.bloomberg.com/news/2010-07-23/mortgageinvestors-with-500-billion-urge-end-of-practices-lawyer-says.html (reporting on letters sent to 

trustees of mortgage pools on behalf of a majority of the investors in the pool); Complaint, 

Carrington Asset Holding Co., L.L.C. v. American Home Mortgage Servicing, Inc., No. FST–CV 

09–5012095–S (Conn. Super. Ct., Stamford Feb. 9, 2009) (complaint alleges that servicer’s practices regarding fees and post-foreclosure sales were costly to investors); Ass’n of Mortg. Investors 

Press Release, AMI Supports Long Term, Effective, Sustainable Solutions to Avert Foreclosure; 

Invites Bank Servicers to Join, Nov. 16, 2010 (citing servicers’ profit from fees and payments 

from affiliates as an impediment to loan modifications that would be in the interests of investors); Letter from Kathy D. Patrick to Countrywide Home Loans Servicing, Oct. 18, 2010 (notifying a trust and master servicer of breaches in the master servicer’s performance). 

twice the rate of the increase in the foreclosure rate.2 Surrounding 

neighbors watch their housing values plummet and their insurance 

costs increase.3 The losses to communities in taxes are staggeringly 

high, amounting to millions to billions of dollars in lost taxes.4 For 

securities holders who own homes, or pay taxes, or live in neighborhoods with increasing crime, their interests are not distinct from 

those of homeowners subject to foreclosure. 

Retirees are themselves often homeowners,5 and all too often 

subject to abusive lending and foreclosure.6 For many retirees, 

their home is their largest asset—of far more importance to their 

financial (not to mention psychological and social) well-being than 

their pension funds invested in derivatives. The interests of retirees, as a class, are not substantially different from the interests of 

homeowners, as a class. 

Retirees, like all securities holders, have watched servicers strip 

wealth from them by piling on unnecessary and excessive fees in 

foreclosure.7 The servicer can either collect these fees from the 

homeowner—reducing the likelihood of a successful modification— 

or collect them from monies otherwise payable to the trust upon 

the conclusion of a foreclosure. Either path leaves securities hold-
237 

8See Alan M. White, Sept. 26, 2010 Columbia Collateral File Summary Statistics, http:// 

www.valpo.edu/law/faculty/awhite/data/sep10lsummary.pdf. 9See, e.g., Prospectus Supplement, Chase Funding Loan Acquisition Trust, Mortgage Loan 

Asset-Backed Certificates, Series 2004–AQ1, at 34, (June 24, 2004), available at http:// 

www.sec.gov/Archives/edgar/data/825309/000095011604003012/four24b5.txt (‘‘[T]he servicer 

will be entitled to deduct from related liquidation proceeds all expenses reasonably incurred in 

attempting to recover amounts due on defaulted loans and not yet repaid, including payments 

to senior lienholders, legal fees and costs of legal action, real estate taxes and maintenance and 

preservation expenses.’’); Prospectus, CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust 2005–J12, 

Issuer 56 (Oct. 25, 2005) (‘‘In addition, generally the master servicer or a subservicer will retain 

all prepayment charges, assumption fees and late payment charges, to the extent collected from 

mortgagors); Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan 

Trust 2007–FLX5, at S–73 (June 27, 2007): 

Default Management Services 

In connection with the servicing of defaulted Mortgage Loans, the Servicer may perform certain default management and other similar services (including, but not limited to, appraisal 

services) and may act as a broker in the sale of mortgaged properties related to those Mortgage 

Loans. The Servicer will be entitled to reasonable compensation for providing those services, in 

addition to the servicing compensation described in this prospectus supplement. 

Letter from Kathy D. Patrick to Countrywide Home Loans Servicing, Oct. 18, 2010 (notifying 

a trust and master servicer of breaches in the master servicer’s performance). 10 E.g., Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter Troubled Loans, N.Y. 

Times, July 30, 2009. 11First American Core Logic Negative Equity Report Q22010, available at http:// 

www.corelogic.com/uploadedFiles/Pages/AboutlUs/ResearchTrends/CLlQ2l2010lNegative 

lEquitylFINAL.pdf. 12See, e.g., Jody Shenn, Mortgage Investors with $500 Billion Urge End of Practices, Lawyer 

Says, Bloomberg News, July 23, 2010, http://www.bloomberg.com/news/2010-07-23/mortgageinvestors-with-500-billion-urge-end-of-practices-lawyer-says.html (reporting on letters sent to 

trustees of mortgage pools on behalf of a majority of the investors in the pool); Complaint, 

Carrington Asset Holding Co., L.L.C. v. American Home Mortgage Servicing, Inc., No. FST–CV 

09–5012095–S (Conn. Super. Ct., Stamford Feb. 9, 2009) (complaint alleges that servicer’s practices regarding fees and post-foreclosure sales were costly to investors); Ass’n of Mortg. Investors 

Press Release, AMI Supports Long Term, Effective, Sustainable Solutions to Avert Foreclosure; 

Invites Bank Servicers to Join, Nov. 16, 2010 (citing servicers’ profit from fees and payments 

from affiliates as an impediment to loan modifications that would be in the interests of invesContinued 

ers poorer. Servicing reform benefits all stakeholders in the system-except, of course, to the extent that servicing reform prevents 

servicers themselves from profiting at the expense of both homeowners and securities holders. Our specific proposals focus on providing a net benefit to investors as well as homeowners. You cite 

three proposals: reform of the servicing industry, allowing loan 

modifications in bankruptcy, and addressing tax consequences for 

homeowners. Our recommendations include requiring servicers to 

modify loans where doing so would provide a net benefit to the investor. There is considerable evidence that servicers fail to modify 

loans, even when the investor would benefit from a modification. 

Investors, including pension funds, lose dramatically when 

servicers fail to modify loans and foreclose instead. The foreclosure 

will in many cases cutoff the flow of payments to the ultimate 

beneficiaries of the trust, who are often, as you note, retirees, dependent on that income to maintain a comfortable standard of living. Available data suggests that those retirees and other investors 

are losing, on average, over $145,000 per foreclosure.8 They would 

do much better if more loan modifications were made. 

Servicers’ fee-gouging hurts securities holders. Fees come off the 

top in a foreclosure: servicers get paid before the investors do.9

When times are good, and equity in homes is increasing, securities 

holders can afford to ignore fees. Indeed, until recently, the impact 

of servicers’ fee-skimming was largely invisible to investors.10 But 

with one in four homes underwater,11 and foreclosures at an all 

time high, the cost of those fees is reducing investors’ profits.12
238 

tors); Letter from Kathy D. Patrick to Countrywide Home Loans Servicing, Oct. 18, 2010 (notifying a trust and master servicer of breaches in the master servicer’s performance). 

The reforms we propose are either directly beneficial or neutral 

for securities holders, in addition to the important positive impacts 

these reforms would have in stabilizing the housing market and 

the larger economy. 

Comprehensive servicing reform has two primary components: 

requiring servicers to offer homeowners a modification where the 

modification would provide a net benefit to the securities holders 

and limiting fees to those both reasonable and necessary. Securities 

holders, as much as homeowners, stand to benefit from both those 

reforms. 

Currently, there is only one type of lien that bankruptcy judges 

can never modify in any way: first liens on single-family principal 

residences. Loans on vacation homes, boats, cars, and corporate collateral can be modified. Even junior liens on single-family principal 

residences can be modified if they are wholly underwater, as many 

are today. By contrast, first liens on principal residences cannot be 

reduced to the value of the security interest and the interest rate 

cannot be changed. Securities holders, however, have not suffered 

larger losses from the modification of these other secured loans 

than they have from the foreclosure of home loans: it is the large 

losses on home loans that have driven the current economic crisis. 

Judicial modification of secured liens often provides creditors 

(and any ultimate securities holders) with a better return than 

foreclosure. Creditors do not have to absorb the same losses in 

bankruptcy as they do with a forced foreclosure sale, with its below 

market price and out-of-pocket expenses. If bankruptcy courts were 

permitted to modify first-lien loans on primary residences by reducing the secured balance to the value of the property, securities 

holders would not be saddled with losses as a result of below market prices and mortgage servicers’ foreclosure costs. Instead, securities holders, who are suffering catastrophic losses now, would receive a stable flow of income from borrowers able to make ongoing 

payments on the reduced principal balance. Significantly, judicial 

modification in bankruptcy is limited to reducing the loan to the 

actual current value of the home; moreover, bankruptcy judges also 

have long experience balancing the claims of competing creditors to 

maximize returns to creditors. Losses to security holders, borrowers, and communities would likely be lower if bankruptcy 

judges had the power to modify residential home loans. 

Addressing the tax consequences of loan modifications is unlikely 

to have any significant impact on securities holders or on the fisc. 

Few lay people believe that a reduction in the value of a loan to 

its fair market value is taxable income; indeed, existing exceptions 

to the general rule that any reduction in the value of a loan is taxable income mean that homeowners who have access to a competent tax attorney or CPA are likely to be able to exclude that imputed value from income, but these exceptions, and the reporting 

forms are sufficiently complicated that unrepresented homeowners 

are unlikely to be able to avail themselves of the exception. The 
239 

13See, e.g., 2007 Nat’l Taxpayer Advocate Report to Congress 13–33, available at http:// 

www.irs.gov/pub/irs-utl/arcl2007lvoll1lcoverlmsps.pdf. 14Servicers Earn More Per Loan, MortgageDailyNews.com, June 29, 2010. 15See, e.g., Press Release, Paul A. Koches, Ocwen Fin. Corp. 2 (Feb. 25, 2010). 

National Taxpayer Advocate has repeatedly identified the treatment of cancellation of debt income as a serious problem.13

The proposals outlined in my November testimony are designed 

to align the interests of the servicers with those of investors and 

society at large, so that modifications will be made when doing so 

provides a net benefit. In this distributional analysis, it is only the 

servicers who lose. Servicers have made more money per loan in 

the recent times, precisely while securities holders are suffering 

steep losses from foreclosures.14 The servicers, when loan modifications that produce a net benefit to the investor are required before 

foreclosure, when servicing reform limits their ability to strip equity by piling on fees, and when bankruptcy judges have the power 

to force modifications that leave securities holders better off, will 

have to find a different business model. Instead of using default 

fees to cushion the cost of default, they will have to learn to make 

modifications and save money for both investors and homeowners. 

This is not an impossible goal: indeed, specialty servicers have long 

proclaimed their ability to make money by doing modifications.15

Servicers should not be allowed to strip wealth from both securities 

holders and homeowners but should be required to provide service 

to both groups in exchange for their substantial fees. 

Q.2. Given the varying State laws that govern foreclosure, there 

must be the opportunity to observe both best and worst practices. 

While foreclosures are not the preferred option for any party at the 

onset of a loan, sometimes it is the path forward that presents the 

least harm to borrowers, lenders and the economy. In those instances, it is essential that our foreclosure process be effective. 

Which States do each of you feel provide the most efficient path 

forward in foreclosures, while providing borrowers proper legal 

channels in the event that there is a dispute? What is the average 

length of time between original delinquency and foreclosure sale in 

these States? 

Which States do each of you feel have the most problems in effectively executing foreclosures? What is the average length of time 

between original delinquency and foreclosure sale in these States? 

A.2. The answer to this question depends a great deal on how one 

defines the appropriate goal for an effective foreclosure law. Speed 

is one goal; reducing losses to investors is another. A third is providing a fair and transparent process, to ensure that homeowners 

are not wrongfully deprived of their home. Speed by itself, as you 

suggest in the question, cannot be the ultimate measure of the effectiveness and efficiency of the foreclosure process in any State. 

Rather, the focus in most cases should be on providing a fair process for homeowners and reducing losses to investors. 

We should remember that it is not so much the State laws that 

make the foreclosure process efficient or effective as servicers’ compliance with those laws. Frequently, servicers are guilty of failing 

to process a foreclosure efficiently. When servicers fail to comply 

with long standing requirements for affidavit execution or notice to 
240 

16 John Rao & Geoff Walsh, Nat’l Consumer L. Ctr., Foreclosing a Dream: State Laws Deprive 

Homeowners of Basic Protections (2009), http://www.nclc.org/images/pdf/foreclosurelmortgage/statellaws/foreclosing-dreamreport.pdf. 17See National Consumer Law Center, Foreclosing a Dream: State Laws Deprive Homeowners 

of Basic protections February 2009, available at http://www.nclc.org/images/pdf/foreclosurelmortgage/statellaws/foreclosing-dream-report.pdf. This report contains State-by-State 

summaries of the States’ foreclosure laws, highlighting features related to court access and oversight of loss mitigation actions. 

borrowers, their procedures are neither effective nor efficient, as 

they call into jeopardy the successful completion of a foreclosure 

and often result in unnecessary and costly litigation. As discussed 

in my testimony, and in response to Senator Brown’s questions, 

servicers have significant incentives to process foreclosures inefficiently and often do so. That is not the fault of the laws (although 

it may reflect weak enforcement); it is the fault of the servicers. 

The effectiveness or lack thereof cannot be judged by the complications created by servicers’ willful noncompliance. 

NCLC is generally supportive of strengthening weak and ineffective State foreclosure laws; we do not believe that a Federal foreclosure process would be appropriate. The foreclosure process has 

historically been part of State real property law and should remain 

so. Necessary servicing reform can be conducted at the Federal 

level without undermining States’ rights in this area traditionally 

regulated by the States. Greater detail on these questions can be 

found in a recent study co-authored by my NCLC colleagues John 

Rao and Geoff Walsh.16

Protections for Homeowners: The foreclosure process in the 

United States falls into roughly two categories: the traditional, judicial foreclosure process, which has required courts since colonial 

times to supervise foreclosure proceedings and prevent unjust results and a comparatively recent ‘‘non-judicial’’ process, which allows lenders to foreclose without court involvement. Slightly less 

than one-half of the States mandate court supervision over residential mortgage foreclosures.17 In the remaining States, foreclosure 

sales may proceed without any oversight by a court or neutral third 

party. In non-judicial foreclosures, homeowners with valid complaints about their treatment by a lender or mortgage servicer 

must hire an attorney to prepare a cumbersome and expensive lawsuit in order to stop an imminent foreclosure. In some States, they 

may even be required to post bond in the amount of the mortgage 

loan before the homeowner’s challenge to the foreclosure can be 

heard in court. The direct and inexpensive access to the courts, as 

occurs now in the many States requiring judicial foreclosure, is essential to an effective foreclosure system—one that protects the 

rights and interests of all parties. 

State laws work best to prevent avoidable foreclosures when they 

include concrete options for the homeowner to terminate a foreclosure proceeding prior to a sale. For example, several State laws 

provide for a borrower’s right to ‘‘cure’’ a mortgage default before 

the mortgage holder may accelerate the loan and begin foreclosure 

proceedings. Before taking any action to foreclose, the mortgage 

holder must give the borrower a clear notice of the amount due and 

time within which to pay. This legal requirement promotes resolution of potential foreclosures before either party incurs any costs. 

Approximately 15 States now provide for this type of pre-accelera-
241 

18 National Consumer Law Center, Foreclosing a Dream: State Laws Deprive Homeowners of 

Basic protections February 2009, supra ll. 19 Id. 20 Id. 21 Alan M. White, September 26, 2010 Columbia Collateral File Summary Statistics, 

Valparaiso University School of Law, available at http://www.valpo.edu/law/faculty/awhite/ 

data/sep10lsummary.pdf. 22 Id. 23 Id. 24 Congressional Oversight Panel December 2010 Oversight Report, A Review of Treasury’s 

Foreclosure Prevention Programs 34.; OCC/OTS Mortgage Metrics Report, Third Quarter 2010 

at 37 (reporting a redefault rate on HAMP modifications after 6 months of 10.6 percent). 

tion notice of right to cure, with Massachusetts, New Jersey, New 

York, and Maryland having recently added clear statutory notice of 

right to cure provisions to their foreclosure laws.18

Twenty-two States provide for a right to cure an arrearage, pay 

costs and fees incurred, and reinstate the loan after commencement 

of foreclosure proceedings and up until the time of a foreclosure 

sale.19 When borrowers have clear notice of a right to reinstate, it 

is more likely that they will avail themselves of this opportunity. 

They will avoid foreclosure by restoring the loan to its original contract terms. In these post-acceleration reinstatements the mortgage 

holder ultimately suffers no loss because the borrower must reimburse foreclosure costs. 

In approximately half the States borrowers have some form of 

post-sale redemption right that allows them to pay the sale price 

plus costs and set the foreclosure sale aside.20 The post-sale redemption periods range from 60 days (North Dakota) to 1 year 

(Iowa, Kansas, Kentucky, Alabama, and Montana). In some States 

redemption rights and timeframes vary according to factors such as 

extent of the borrower’s equity in the property or whether a third 

party purchased at the sale. 

Reducing Losses to Investors: Investors lose enormous sums 

of money in foreclosure, $2.7 billion from foreclosure sales in the 

month of September 2010 alone.21 For that month the average loss per foreclosed property was $145,636, representing a loss of over 58 

percent of the original principal per loan.22 Loan modifications substantially reduce these losses. For example, when mortgages were 

modified to forgive a portion of loan principal during September 

2010, the recognized loss per loan averaged about 20 percent of the 

typical loan balance.23 Loans modified under the HAMP program, 

for example, show low redefault rates, less than half those of other 

loan modifications made at the same time, even though the HAMP 

modifications typically do not provide for principal reductions and 

only a temporary below-market interest rate reduction.24 These 

and similar modifications targeting borrower affordability provide 

investors with a steady stream of payments on the original loan 

principal. A foreclosure law that best facilitates sustainable loan 

modifications instead of foreclosures should be considered most ‘‘effective’’ in minimizing investor losses. 

State laws can set a requirement that mortgage holders consider 

loss mitigation options, including a loan modification, before a foreclosure sale will be allowed. For example, the South Carolina Supreme Court issued an administrative order in May 2009 requiring 

that all foreclosure complaints filed in the State describe how a 

servicer complied with any obligation it had to modify a loan under 
242 

25South Carolina Supreme Court Administrative Order 2009–05–22–01 (May 22, 2009) at 

http://www.judicial.state.sc.us/courtOrders/displayOrder.cfm?orderNo=2009–05–22–01. 26State of Connecticut Superior Court Mortgage Foreclosure Standing Order Federal Loss 

Mitigation Programs, JD–CV–117 Rev 8/10 (August 18, 2010) available at http:// 

www.jud2.ct.gov/webforms/forms/CV117.pdf. 27Links to the texts of these statutes can be found at the National Consumer Law Center 

Web site: http://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html. 28Links to the court Web sites describing these programs are available on the same NCLC 

Web page, http://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html. 29The foreclosure mediation programs in effect in Maine and Vermont require use of these 

net present value tests. 30Fannie Mae Servicing Guide (2010 version) Part VIII, sec. 104.05, Allowable Time Frames 

for Completing Foreclosure, https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/ 

svc1012.pdf and HUD Mortgagee Letter 2005–30 (July 12, 2005) with attachments, http:// 

www.hud.gov/offices/adm/hudclips/letters/mortgagee/2005ml.cfm. 31 Alabama, Arizona, Georgia, Mississippi, New Hampshire, Tennessee, and Virginia. 32 E.g. 17 months (Iowa), 14 months (New Jersey, Vermont), 13 months (New York), 12 

months (Illinois, Maine, Ohio, Wisconsin), 10 months (Indiana, Pennsylvania, South Dakota). 

the HAMP program.25 The Connecticut courts approved a similar 

order that went into effect in September 2010.26 In several judicial 

foreclosure States, including New York, Maine, Vermont, and Connecticut, legislatures have recently enacted statutes requiring mediation or supervised conferences in foreclosure cases.27 The goal of 

these sessions is to bring representatives of mortgage servicers and 

the borrowers together to consider loss mitigation options that mutually benefit all parties. Court-initiated programs in Ohio, Florida, 

Pennsylvania, Kentucky, New Mexico, New Jersey, Indiana, and 

Delaware are now offering similar mediation and conference programs.28 Particularly where these programs involve use of net 

present value tests to examine the relative benefit to investors of 

an affordable loan modification as opposed to foreclosure, the sessions can provide a quick and effective means to determine whether foreclosures make economic sense for investors under accepted 

industry standards.29

Recently, several State legislatures have incorporated mediation 

and conference requirements into non-judicial foreclosure procedures. For example, in Nevada, a traditionally non-judicial foreclosure State, the courts now supervise a statewide mediation program. In Maryland, homeowners may request hearings before a 

State agency to review the servicer’s loss mitigation activities. Parties to a foreclosure in Maryland may also appeal conference decisions to the courts. The District of Columbia, another non-judicial 

foreclosure jurisdiction, recently enacted a foreclosure mediation 

law that will go into effect in early 2011. 

Time Frames: Both Fannie Mae and HUD (on behalf of FHA) 

publish guidelines for what they consider to be the reasonable 

timeframes from the initiation of a foreclosure to a sale in each of 

the 50 States.30 The expected time to foreclosure varies depending 

on State law and court procedures. Fannie Mae and HUD use these 

guidelines to assess performance of attorneys who are paid to conduct foreclosures of FHA insured and Fannie Mae owned and guaranteed loans. The guidelines show wide variations in foreclosure 

timeframes from State to State. For example, HUD lists three nonjudicial foreclosure States (Missouri, Rhode Island, and Texas) with 

timeframes of 3 months from the commencement of foreclosure to 

sale. Nine non-judicial States have 4-month timeframes.31 On the 

other hand, HUD’s permissible timeframes in judicial foreclosures 

States typically run 10 months and longer.32 Actual times to fore-
243 

33 24 C.F.R. 203.355(a). 34One study by a Federal Reserve Board economist offered some limited data on this subject. 

Karen M. Pence, Foreclosing on Opportunity: State Laws and Mortgage Credit, 88 Review of Economics and Statistics 177 (February 2006). The author looked for variances in home mortgage 

credit terms in States with judicial and non-judicial foreclosure laws. The study concluded that 

borrowers in judicial foreclosure States tended to receive marginally smaller loan amounts than 

those in non-judicial foreclosure States, but found no significant disparities in loan terms such 

as interest rates. The report could not conclude that borrowers in judicial States were necessarily worse off than borrowers in non-judicial States. According to the report, ‘‘homeownership might even increase if the judicial protections help borrowers remain in their homes.’’ The 

Report noted that further study was needed to assess the balance between any minor negative 

effects on credit terms and the benefits that heightened homeowner protections create for a 

housing market. 

closure can vary wildly, depending on how aggressive and competently a servicer handles a foreclosure, ranging in the same State 

from 30 days to years to complete a foreclosure. 

Vagaries in the reporting of these timeframes exaggerates the 

discrepancy between non-judicial and judicial foreclosure States. 

The clock starts to run at a different point in time for judicial and 

non-judicial foreclosures. In non-judicial foreclosures the initial action is typically the publication of a notice of sale or the recording 

of a notice of default. In judicial foreclosures it is usually the filing 

of a foreclosure complaint in a court. But neither point in time 

measures how long it has been from default to the initiation of 

foreclosure. In many cases, the servicers will wait at least 3 

months after the initial default before commencing a foreclosure, 

either because of contract limitations in the mortgage, or because 

of loss mitigation requirements imposed on Government-insured 

loans and some loans insured with private mortgage insurance, or 

because of custom.33 Post-sale redemption periods in some non-judicial foreclosure States (Michigan, Alabama, Minnesota Missouri 

and Wyoming) can extend the process beyond the Fannie Mae 

numbers in periods lasting from 3 months to 1 year. The time to 

completed foreclosures in these non-judicial foreclosure States is actually more in line with those of judicial foreclosure States. 

Debates over changes to State foreclosure laws often focus on the 

relative speed of different foreclosure procedures. Some industry 

representatives suggest that longer foreclosure timeframes harm 

consumers because lenders must raise the cost of credit on a Stateby-State basis in response to lengthening of foreclosure timeframes. 

There is little empirical evidence indicating that this actually happens.34

On the other hand, we now have analytical tools that allow us 

to see how the costs of foreclosure compare to the costs of various 

alternatives to foreclosure. We can easily quantify the cost to investors in interest lost during the 5 months additional time that a judicial foreclosure may take in comparison to a non-judicial foreclosure. However this short term incremental cost pales in relation 

to the overall loss of $145,000 that investors incur in the typical 

foreclosure today. Foreclosure laws that allow for full consideration 

of loss mitigation can drastically reduce that loss. In today’s housing crisis, an analysis of State foreclosure laws that focuses on 

length of foreclosure time is dangerously outdated. An effective 

foreclosure system must provide a framework within which an 

evaluation of the true costs of foreclosure takes place in a timely 

and transparent manner. 
244 

35FHA’s ‘‘reasonable diligence’’ timelines for these States are: Vermont (14 months); New York 

(13 months); Maine (12 months); Connecticut (9 months). Vermont, Maine, and Connecticut provide for a redemption period between entry of judgment and sale. These redemption periods are 

included in the timelines. 36FHA’s ‘‘reasonable diligence’’ timelines for these States are: Georgia (4 months); Tennessee 

(4 months); Rhode island (3 months); Virginia (4 months); Missouri (3 months). In cases in 

which the mortgage holder purchases the property at the sale, Missouri permits a 1-year redemption period for a borrower who makes an appropriate request within 10 days of sale and 

posts a bond. 

States with Relatively Effective and Efficient Foreclosure 

Laws: The foreclosure laws in New York and Maine include: (1) judicial supervision over entry of judgments and sales; (2) clear preforeclosure notices to borrowers advising them of their rights in a 

potential foreclosure, including a right to cure before commencement of proceedings and during proceedings; (3) timely referrals to 

counseling resources; and (4) an opportunity for conferences or mediations supervised by neutral third parties who can enforce good 

faith participation by the borrower, mortgage holder, and servicer. 

The laws in Connecticut and Vermont similarly encourage efficient 

review of loss mitigation options. 

Because the State laws in New York, Maine, Connecticut, and 

Vermont require court orders to schedule and approve sales, and 

allow time periods to negotiate and cure defaults, the foreclosure 

timelines from initiation of foreclosure to sale in these States are 

longer than in most other States and run from 9 months to slightly 

over a year.35

States with Relatively Ineffective and Inefficient Foreclosure Laws: Several non-judicial foreclosure States, including 

Georgia, Tennessee, Rhode Island, Virginia, and Missouri combine 

ineffective notice and cure rights, no judicial oversight, and a timeframe that gives few homeowners a practical opportunity to participate actively in the foreclosure process. 

The timelines in Georgia, Tennessee, Rhode Island, Virginia, and 

Missouri are shorter, running about 4 months.36

Q.3. To better gauge the level of violations surrounding the topic 

of this hearing it is necessary for us to understand who is being 

affected. Admittedly, this question is probably best suited for the 

regulators, and we hope to receive this information from them at 

some point. 

In your research and investigations, how many individuals were 

discovered to have been fully current on their mortgage payments 

but foreclosed upon by their servicer? Please provide the data and 

evidence that you evaluated to arrive at your conclusions. 

A.3. Of course, I am not primarily a researcher, nor do I have access to the servicers’ proprietary databases or an ability to conduct 

a comprehensive review of their loan files. While I did provide examples where the servicer wrongfully initiated foreclosure in my 

written testimony, including five homeowners who were foreclosed 

upon while negotiating a loan modification and making payments 

as instructed by the servicer, two homeowners who were placed 

into foreclosure solely because of the servicers’ improper imposition 

of fees, three homeowners who were foreclosed upon although they 

were current in their required payments, and three cases where 

the servicer initiated foreclosure proceedings in the name of the 

wrong owner of the loan, these examples were illustrative and not 
245 

37See, e.g., Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 (7th Cir. 2003); Maxwell v. 

Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101 (Bankr. D. Mass. 2002); Chu v. Green 

Point Sav. Bank, 628 N.Y.S. 2d 527 (2nd App. Dist. 1995) (finding servicers’ conduct in foreclosing ‘‘frivolous’’ and imposing sanctions). 

exhaustive. As you note, regulators with supervisory authority are 

better positioned to review the millions of foreclosure filings than 

I. As we recommend in our testimony, it is essential that the regulators begin random sampling of servicers’ files to determine the 

extent of the problem we are facing. 

In an attempt to quantify the extent of the problem, absent the 

hard data only careful supervisory exams are likely to provide, the 

National Association of Consumer Advocates, in conjunction with 

NCLC, conducted a survey of attorneys representing homeowners 

in foreclosure. The 96 attorneys from 34 States reported representing over 1,200 homeowners who had been placed into foreclosure by a servicer when they were current on their payments. 

Those attorneys reported representing an additional 1,800 homeowners who had been placed into foreclosure by the servicer despite 

making payments as agreed under a plan. 

More importantly, this is not a question easily answered. By the 

time homeowners seek legal counsel, they have usually spent several months attempting to resolve their dispute with the servicer 

on their own, and sorting out the payment history is cumbersome 

and often uncertain. There are frequently divergences between the 

servicer’s records and the homeowner’s, and reconciling those 

records can take months, in my experience. Several courts have 

noted that the gross inaccuracies pervading servicers’ records often 

make it impossible to determine whether a homeowner is in default 

and the extent of any default.37

There is also the difference between the homeowner’s status at 

the time the servicer declares default and the time a foreclosure is 

formally filed. There is usually a lag of several months between the 

servicer’s declaring default and the filing of a foreclosure in a judicial foreclosure State; a homeowner who was current at the time 

of the declaration of default is unlikely to be current when the foreclosure is filed (the servicer will ordinarily refuse payments in that 

circumstance, or homeowners may give up making payments, assuming that they will lose the home). 

Moreover, whether homeowners are current on their payments or 

not may depend on whether the servicer accepted the homeowner’s 

payments, whether the servicer instructed the homeowner to stop 

making payments, whether the servicer properly applied the homeowner’s payments, whether the servicer charged improper fees or 

forceplaced insurance. An analysis that only looks to the servicers’ 

records as to the homeowners’ status at the time of foreclosure is 

likely to miss most if not all of these cases where the homeowner 

was, by any sensible measure, current in the payments at the time 

the servicer initiated foreclosure. In my experience representing 

homeowners, it is not uncommon for servicers to initiate foreclosure 

where the homeowner has a good faith basis to dispute the 

servicer’s accounting. Furthermore, problems in servicing cannot 

easily be disentangled from problems in origination: borrowers may 

fail to make payments because they were told not to, told that the 

amount owed was a different amount, or borrowers may make pay-
246 

38See, e.g., Karen Weise, ProPublica, One ‘‘Nightmare’’ Mortgage: Problems from Origination 

through Foreclosure Nov. 22, 2010, http://www.propublica.org/article/one-nightmare-mortgageproblems-from-origination-through-foreclosure (homeowner sent her payments to mortgage 

broker who failed to forward payments on). 39See, e.g., George Gombossy, Bank of America’s Christmas Present: Foreclose Even Though 

Not a Missed Payment, ctwatchdog.com, Dec. 24, 2010, http://ctwatchdog.com/2010/12/24/ 

bank-of-americas-christmas-present-foreclose-even-though-not-a-payment-missed; Jon Yates, Processing Mistake Leads to Erroneous Foreclosure, Chi. Trib. Nov. 23, 2010. 40See, e.g., Andrew Martin, In Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks, 

N.Y. Times, Dec. 22, 2010, at A1; Aldo Svaldi, Foreclosure Paperwork Miscues Piling Up, Denver 

Post, Nov. 14, 2010. 41See, e.g., Harriet Johnson Brackey, Lauderdale Man’s Home Sold Out From Under Him in 

Foreclosure Mistake, Sun Sentinel, Sept. 23, 2010; Tony Marrero, Bank of America Forecloses 

on House that Couple Had Paid Cash For, St. Petersburg Times, Feb. 12, 2010. 42 Andrew Martin, In Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks, N.Y. Times, 

Dec. 22, 2010, at A1. 43 12 U.S.C. §1701j–3. 

ments to the wrong entity.38 Fundamentally, if a loan modification 

would save the investors money, and the borrower qualifies for a 

loan modification, a servicer who initiates a foreclosure is acting 

wrongfully, in violation of their fiduciary obligations to the securities holders, in breach of the mortgage contract with the borrower, 

which requires good faith and fair dealing, and, often, in blatant 

disregard of regulatory guidance and HAMP Servicer Participation 

Agreements. 

There continue to be press accounts—unrelated to either my testimony or the survey—documenting baseless foreclosures. Press reports from around the country have documented cases where 

servicers have initiated foreclosure, even though the homeowner 

was current in payments.39 In some instances, servicers have foreclosed on mortgages that the homeowner had already paid off in 

full.40 In other cases, servicers have foreclosed on the wrong 

home.41 A recent story in The New York Times reports on four separate cases where the servicer completed a foreclosure illegally.42

In one of those cases, the mortgage was paid off; in two of those 

cases, the homeowner was attempting to sort out the confusion following a loved one’s death. Servicers will frequently refuse to accept payments from a spouse, partner, or child following a mortgagor’s death, despite the fact that Federal law forbids servicers from 

exercising their due-on-sale clauses in this context 43 and despite 

the fact that ordinary human feeling—or good business judgment— 

would suggest allowing the grieving survivor to continue making 

payments without hassle. 

Servicer abuses are widespread and unquestionably result in 

wrongful foreclosure. Determining the true extent of the problem 

will require careful, independent scrutiny of both servicers’ and 

homeowners’ records. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DIANE E. THOMPSON 

Q.1. Please describe any barriers to mortgage modifications that 

servicers may encounter. 

A.1. In general, the barriers servicers face to mortgage modifications have been overstated. The barriers servicers face are usually 

surmountable or of their own making. 

Servicers often complain about staffing shortages. Staffing is certainly expensive for servicers, particularly default staffing, al-
247 

1See, e.g., Mortg. Servicing News, Servicers’ Collection Profits May Outweigh Cost of Defaults, 

Dec. 28, 2010 (noting that while default servicing is expensive, servicing of performing loans is 

highly lucrative for large servicers, with the direct costs running perhaps $60 a year and the 

principal based mortgage servicing income paid by the trust running $450 a year on a midsized 

prime loan of $180,000). 2For example, in April of this year, Bank of America reported that it had over 15,000 people 

working in customer outreach. Jennifer Harmon, Am Banker, B of A Deploys More Resources 

from Origination to Servicing, Apr. 12, 2010. By October, Bank of America had fewer than 

80,000 HAMP permanent modifications in place. Making Home Affordable Program, Servicer 

Performance Report Through Oct. 2010. That suggests that it is taking Bank of America more 

than two full work days to process a homeowner for a HAMP modification-a highly standardized 

application that requires little individual underwriting. Jack Guttentag, New Plan to JumpStart Loan Mods: Web Portal Would Centralize Communication, Break Logjam, Inman News, 

July 20, 2009, available at http://www.inman.com/buyerssellers/columnists/jackguttentag/ 

new-plan-jump-start-loan-mods (noting that it should take no more than an hour for a servicer 

to process a loan modification request; at that rate, Chase’s 3500 loan modification counselors 

should be able to process at least 70,000 loan modifications a week-approximately the number 

of Making Home Affordable modifications that Chase has processed in the first 5 months of the 

HAMP program). 3 John P. Hunt, Berkeley Ctr. for Law, Business, and the Economy, Loan Modification Restrictions in Subprime Securitization Pooling and Servicing Agreements from 2006: Final Results 2 

(July 2010), available at http://www.law.berkeley.edu/files/bclbe/Subprimel SecuritizationlPaperlJohnlHuntl7.2010.pdf (only 8 percent of subprime contracts reviewed 

barred modifications); John P. Hunt, Berkeley Ctr. for Law, Business, and the Economy, What 

Do Subprime Securitization Contracts Actually Say About Loan Modification: Preliminary Results and Implications 7 (Mar. 25, 2009), available at http://www.law.berkeley.edu/files/bclbe/ 

SubprimelSecuritizationlContractsl3.25.09.pdf (discussing various limitations and quantifying the frequency of limitations); See Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, 

Fed. Reserve Bank of Boston, Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitizations 28 (Publicy Pol’y Paper No. 09–4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf. (summarizing several different studies finding no meaningful PSA restrictions in a majority of securitizations reviewed); 

Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen Mauskopf, Fed. Reserve 

Bd. Fin. & Econ. Discussion Series Div. Research & Statistical Affairs, The Incentives of Mortgage Servicers: Myths and Realities 22 (Working Paper No. 2008–46) (reporting that of 500 different PSAs under which a large servicer operated, 48 percent had no limitations on modifications other than that they maximize investor return; only 7.5 percent of the PSAs had meaningful limits on then types of modifications a servicer could authorize); Credit Suisse, The Day 

After Tomorrow: Payment Shock and Loan Modifications (2007), available at http:// 

www.creditsuisee.com/researchandanalytics (finding that 65 percent of survey PSAs contain no 

meaningful restrictions on ability to modify loans); American Securitization Forum, Statement 

of Principles, Recommendations, and Guidelines for the Modification of Securitized Subprime 

Residential Mortgage Loans 2 (June 2007) (‘‘Most subprime transactions authorize the servicer 

to modify loans that are either in default or for which default is either imminent or reasonably 

foreseeable.’’). 4See, e.g., Morgan Stanley Omnibus Amendment (Aug. 23, 2007) (on file with author). 5 Jody Shenn, Mortgage Investors with $500 Billion Urge End of Practices, Lawyer Says, 

Bloomberg News, July 23, 2010, http://www.bloomberg.com/news/2010-07-23/mortgage-investors-with-500-billion-urge-end-of-practices-lawyer-says.html (reporting on letters sent to trustees 

Continued 

though servicers continue to have enviable margins in their servicing of the majority of loans that are performing.1 By any reasonable measure though, servicers have sufficient staff to perform 

modifications.2 Training and supervision of staff may be an issue, 

as may the implementation of procedures to perform loan modifications correctly, but those are questions about servicers’ will to implement modifications, not their ability to do so. 

Servicers often assert that investors prohibit modifications. As 

detailed in my written testimony, often those representations are 

entirely false. Most PSAs permit modifications of loans in default 

freely.3 Where securitizations contain absolute bars to modifications, sponsors of those securitizations have successfully petitioned 

the trustee to amend the contract to allow modifications generally, 

so long as the loan is in default or at imminent risk of default.4

Increasingly, groups representing investors call on servicers to perform more loan modifications, including principal reductions, and 

assert that servicers are failing to perform modifications, contrary 

to servicers’ wishes.5
248 

of mortgage pools on behalf of a majority of the investors in the pool); Ass’n of Mortg. Investors 

Press Release, AMI Supports Long Term, Effective, Sustainable Solutions to Avert Foreclosure; 

Invites Bank Servicers to Join, Nov. 16, 2010 (citing servicers’ profit from fees and payments 

from affiliates as an impediment to loan modifications that would be in the interests of investors); Letter from Kathy D. Patrick to Countrywide Home Loans Servicing, Oct. 18, 2010 (notifying a trust and master servicer of breaches in the master servicer’s performance). 6 Brendan J. Keane, Moody’s Investor Services, Structural Nuances in Residential MBS Transactions: Advances 3 (June 10, 1994). 7Ocwen Fin. Corp., Annual Report (Form 10–K) 5 (Mar. 12, 2009).; Mary Kelsch, Stephanie 

Whited, Karen Eissner, Vincent Arscott, Fitch Ratings, Impact of Financial Condition on U.S. 

Residential Mortgage Servicer Ratings 2 (2007). 8Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, U.S. Residential Mortgage Servicer 

Advance Receivables Securitization Rating Criteria 4 (Sept. 10, 2009) (finding that modifications 

do not appear to accelerate the rate of recovery of advances, in part because of high rates of 

redefault). 9Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. Research & Statistical Affairs, The Incentives of 

Mortgage Servicers: Myths and Realities 11 (Working Paper No. 2008–46); Ocwen Fin. Corp., 

Annual Report (Form 10–K) 4 (Mar. 17, 2008) (advances are ‘‘top of the waterfall’’ and get paid 

first); Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, U.S. Residential Mortgage Servicer 

Advance Receivables Securitization Rating Criteria 1 (Sept. 10, 2009) (same); Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 2007–FLX5, at S–71 

(June 27, 2007) (servicers repaid all advances when foreclosure is concluded). 10See, e.g., Ocwen Fin. Corp., Annual Report (Form 10–K) 11 (Mar. 12, 2009) (‘‘[I]n the majority of cases, advances in excess of loan proceeds may be recovered from pool level proceeds.’’); 

Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 2007– 

FLX5, at S–71 (June 27, 2007) (permitting principal and interest advances to be recovered from 

the trust’s bank account); Prospectus, CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust 2005–J12, 

Issuer 47 (Oct. 25, 2005) (limiting right of reimbursement from trust account ‘‘to amounts received representing late recoveries of the payments for which the advances were made). 11Monica Perelmuter & Waqas Shaikh, Standard & Poor’s, Criteria: Revised Guidelines for 

U.S. RMBS Loan Modification and Capitalization Reimbursement Amounts 3 (Oct. 11, 2007). 12 But see Rod Dubitsky, Larry Yang, Stevan Stevanovic, Thomas Suer, Credit Suisse, 

Subprime Loan Modifications Update (2008) (discussing how some servicers exploited then existing imprecision in the accounting treatment of principal reduction modifications to use principal 

reduction modifications to halt interest advances). 

Servicers’ delayed recovery of expenses in modifications may create a barrier to performing modifications. Servicers have two main 

expenses when a loan is in default: advances of principal and interest to the trust and payments to third parties for default services, 

such as property inspections. The requirement for advances usually 

continues until a foreclosure is completed, a loan modification is 

reached, or the servicer determines that there is no realistic prospect of recovering the advances from either the borrower or the collateral.6 Financing these costs is one of servicers’ biggest expenses.7

Modifications in general do not allow servicers to recover their 

costs as quickly as foreclosures do.8 Servicers’ advances are taken 

off the top, in full, at the post-foreclosure sale, before investors receive anything.9 If advances of principal and interest payments remain beyond the sale value, servicers can usually collect them directly from the trust’s bank account (or withhold them from payments to the trust).10 In contrast, when there is a modification, 

servicers are usually limited to recovering their advances from the 

modified loan alone, after required payments to the trust, or, if the 

advances are deemed nonrecoverable, from only the principal payments on the other loans in the pool, not the interest payments.11

As a result, servicers can face a delay of months to years in recouping their advances on a modification. Modifications involving principal reductions compound the problem: they lengthen the time to 

recover advances on any individual modified loan as well as on 

other modified loans, by reducing the amount of principal payments available for application to recovery of advances.12 Limiting 
249 

13 Joseph R. Mason, Mortgage Loan Modification: Promises and Pitfalls 4 (Oct. 2007). A large 

subprime servicer noted in its 2007 annual report that although ‘‘the collectability of advances 

generally is not an issue, we do incur significant costs to finance those advances. We utilize both 

securitization, (i.e., match funded liabilities) and revolving credit facilities to finance our advances. As a result, increased delinquencies result in increased interest expense.’’ Ocwen Fin. 

Corp., Annual Report (Form 10–K) 18 (Mar. 17, 2008); see also Wen Hsu, Christine Yan, Roelof 

Slump, FitchRatings, U.S. Residential Mortgage Servicer Advance Receivables Securitization 

Rating Criteria 1 (Sept. 10, 2009) (‘‘Servicer advance receivables are typically paid at the top 

of the cash-flow waterfall, and therefore, recovery is fairly certain. However, . . . there is risk 

in these transactions relating to the timing of the ultimate collection of recoveries.’’). 14See Complaint at 11–15, ); Carrington Asset Holding Co., L.L.C. v. American Home Mortgage Servicing, Inc., No. FST–CV 09–5012095–S (Conn. Super. Ct., Stamford Feb. 9, 2009) (alleging that servicer conducted ‘‘fire sales’’ of foreclosed properties in order to avoid future advances and recover previously made advances); Kurt Eggert, Limiting Abuse and Opportunism 

by Mortgage Servicers, 15 Housing Pol’y Debate 753, 757 (2004) (reporting that servicers sometimes rush through a foreclosure without pursuing a modification or improperly foreclose in 

order to collect advances); Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter Troubled 

Loans, N.Y. Times, July 30, 2009. 15For some descriptions of all too typical bureaucratic bungling by servicers, see Peter S. 

Goodman, Paper Avalanche Buries Plan to Stem Foreclosures, N.Y. Times, June 29, 2009, and 

Jack Guttentag, New Plan to Jump-Start Loan Mods: Web Portal Would Centralize Communication, Break Logjam, Inman News, July 20, 2009, available at http://www.inman.com/buyerssellers/columnists/jackguttentag/new-plan-jump-start-loan-mods. 

recovery of servicer expenses when a modification is performed to 

the proceeds on that loan rather than allowing the servicer to recover more generally from the income on the pool as a whole, as 

is done in foreclosure, clearly biases servicers against meaningful 

modifications, particularly modifications with principal reduction or 

forbearance. 

Moreover, since the significant financing costs associated with 

making advances cannot be recovered,13 servicers are likely to push 

through a foreclosure quickly when the cost of financing advances 

is climbing, even at the expense of investors who might prefer a 

modification.14

The two-track system also impedes servicers’ ability to perform 

modifications. Proceeding with a foreclosure before considering a 

loan modification results in high costs for both investors and homeowners. These costs—which accrue primarily to the benefit of the 

servicer—can make an affordable loan modification impossible. 

Moreover, the two track system, of proceeding simultaneously with 

foreclosures and loan modification negotiations, results in many 

‘‘accidental’’ foreclosures, due to bureaucratic bungling by 

servicers,15 as one department of the servicer fails to communicate 

with another, or papers are lost, or instructions are not conveyed 

to the foreclosure attorney. To some extent, the two-track system 

is still mandated by large investors and the FHFA. Ending the twotrack system would facilitate servicers’ ability to complete loan 

modifications. 

Q.2. What systems should mortgage servicers implement to correct 

their mistakes and compensate the individual homeowners who 

have suffered through the actions of others? 

A.2. We believe that servicers must take steps to redress harm 

caused consumers, ensure fair and effective processing going forward, and begin complying with existing standards. 

Compliance. Compliance with existing rules and policies must 

come first. Any redress to harmed borrowers is undercut if 

servicers do not stop violating existing standards. We continue to 

hear examples of outright misrepresentations by all of the major 

servicers. Bank of America, for example, has continued to require 
250 

homeowners to sign waivers for its proprietary loan modification 

program, despite representations to the contrary. Chase has been 

sending out letters that implicitly discourage homeowners from applying for Pennsylvania’s HEMAP program. Servicers must comply 

with both the letter and the spirit of the law. 

Improved Processing. In addition to taking steps to comply 

with existing standards, servicers could implement the following 

systems to ease the process for homeowners going forward. 

• End dual track. Stop the foreclosure process during modification applications (and modifications), even for people already in 

foreclosure at the time of application. 

• Create a single point of contact for each homeowner, one with 

real decisionmaking authority and ability to follow through. 

• Process modification applications in hours instead of months or 

years. Expedited review. 

• Clear in-house escalations for homeowners who have been denied a modification or encountered difficulties in obtaining a 

modification. 

Redress. Providing redress for homeowners harmed will not be 

easy and would require a significant commitment on the part of 

servicers. There are two basic categories of homeowners who have 

been harmed by servicers’ malfeasance: 1) those who have lost 

their homes and 2) those who are still in their homes, but have 

been denied a loan modification, pushed into default, or merely had 

improper fees tacked onto their account. Addressing the former category, homeowners who lost their homes, is more complex than 

providing relief to those who have not yet lost their homes at a 

foreclosure sale. 

For homeowners who have not yet lost their home in a foreclosure sale, servicers should institute a supervised, full review of 

every file marked in default. This review must include a review of 

the payment history, including the timing and application of payments and the validity of fees charged. 

• Homeowners found not to be in default should be removed 

from foreclosure, corrections of credit reporting status must be 

provided to the credit bureaus, and accounts should be fully 

corrected. 

• All pending foreclosures should be halted while this review 

takes place, and dual track processing must be stopped on all 

loans so that the modification review can be completed. 

• Fees should be rolled back and limited to reasonable and necessary ones. 

• Recalculation of principal balances should be done to account 

for improperly assessed fees or overcharged interest. 

The servicers should also be required to undertake a review of 

all completed foreclosures. There are two large categories of cases 

for which servicers should attempt to make redress: first, cases 

where the foreclosure was executed on the wrong home or where 

the homeowner was not in default; and second, cases where the 

foreclosure was completed without completing the loan modification 

review process, providing a written denial to the homeowner, or 
251 

16Diane E. Thompson, Why Servicers Foreclose When They Should Modify and Other Puzzles 

of Servicer Behavior: Servicer Compensation and its Consequences (Oct. 2009), available at 

www.consumerlaw.org. 17See Complaint ¶ 15, Fed’l Trade Comm’n v. Countrywide Home Loans, Inc., No. CV–10– 

4193 (C.D. Cal. Jun. 7, 2010), available at http://www.ftc.gov/os/caselist/0823205/ 

100607countrywidecmpt.pdf; (alleging that Countrywide’s ‘‘countercyclical diversification strategy’’ was built on its subsidiaries funneling the profits from marked-up default fees back to 

Countrywide); Peter S. Goodman, Homeowners and Investors May Lose, But the Bank Wins, N.Y. 

Times, July 30, 2009 (describing Bank of America’s refusal to entertain three separate short sale 

offers during 2 years of non-payment while its affiliate continues to assess property inspection 

Continued 

failing to offer a qualifying homeowner an appropriate modification. 

• If the home has not yet been sold to a bona fide third party, 

the servicer should offer to restore the mortgage, with a reduction of the principal balance to account for all assessed foreclosure fees, as well as any improper fees. If the borrower is 

in default, the servicer also should provide a reduction of the 

interest rate to the Freddie Mac Prime Weekly Rate, if that is 

lower. Such homeowners further should be evaluated for a 

deeper modification where the monthly payment would be 

greater than 31 percent of the homeowner’s income. As part of 

those NPV positive modifications, servicers should be required 

to reduce the principal balance on the loan to the assessed 

value of the property that the servicer relied on in evaluating 

the loan for foreclosure originally. Servicers must further provide corrected credit reporting to the credit bureaus to mitigate 

the negative credit reporting. 

• If the home has already been sold to a third party or if the 

homeowner no longer wishes to retain the home, the servicer 

should be required to refund to the homeowner all foreclosure 

fees assessed against the homeowner’s account, plus the 

amount by which the valuation the servicer relied on exceeds 

the foreclosure sale price. Servicers must also take steps to repair the homeowner’s credit in these situations. 

No waiver of the homeowner’s rights should be required. 

If the homeowner who was subject to a wrongful foreclosure cannot be located, the servicer should be required to deposit the money 

that would otherwise be paid to the homeowner into a fund for 

legal services and housing counselors. Funding must be available 

to legal services lawyers to support foreclosure litigation, as well as 

counseling. 

Q.3. What are the financial incentives encouraging mortgage 

servicers to foreclose on homeowners? 

A.3. As detailed in my report, ‘‘Why Servicers Foreclose When They 

Should Modify,’’16 the balance of servicer incentives leans toward 

foreclosure over modification. 

Staffing costs: Servicers encounter increased staffing costs that 

are not reimbursed when they modify. In contrast, the staffing 

costs of foreclosures, which are often lower than those for modifications, may be outsourced and charged back to the trust. Many of 

those foreclosure staffing needs are provided by affiliates or other 

organizations that provide financial compensation to the servicers 

in exchange for repeat business.17
252 

fees); Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter Troubled Loans, N.Y. Times, 

July 30, 2009. 18See Home Affordable Modification Program, Supplemental Directive 09–01 (Apr. 6, 2009). 19Diane Pendley & Thomas Crowe, FitchRatings, U.S. RMBS Servicers’ Loss Mitigation and 

Modification Efforts 11, 15 (May 26, 2009); see also Michael Guttierez, Michael S. Merriam, 

Richard Koch, Mark I. Goldberg, Standard & Poors, Structured Finance: Servicer Evaluations 

15–16 (2004). The rating agencies do not set benchmarks for any of these, but expect servicers 

to develop timelines and standardized loss mitigation options for each loan product, with reference to the industry standards as developed by Fannie Mae and Freddie Mac. 20Fin. Accounting Standards Bd., Accounting by Creditors for Impairment of Loans, An 

Amendment of FASB Statement No. 5 and 15, Statement of Fin. Accounting Standards No. 114 

(1993). 21FASB has recently altered the rules protecting the bankruptcy-remote status of the trust. 

Instead of qualifying as a Special Purpose Entity, all ‘‘variable interest entities’’ now must be 

reviewed to determine the extent to which the transferring entity maintains control and appropriate disclosures provided. This is unlikely to impact the weight of the TDR rules directly, but 

it does change the formal mechanism by which bankruptcy-remote status is achieved and evaluated. See Transfers of Financial Assets, An Amendment to FASB Statement No. 140, Statement 

of Fin. Accounting Standards No. 166 (2009). 22Fin. Accounting Standards Bd., Accounting by Debtors and Creditors for Troubled Debt 

Restructurings, Statement of Fin. Accounting Standards No. 15 at §2 (1977). 

Fees: Servicers get paid off the top in a foreclosure for any costs 

and expenses, before the investors get paid. But when a loan is 

modified, servicers can only collect their fees and expenses from the 

payments on that loan. 

Servicers can charge homeowners and investors more fees in a 

foreclosure than in a modification. There are property preservation 

fees, REO sale costs, attorney fees, and title work, to name a few. 

For example, one servicer recently charged the account of a Maine 

homeowner $600 for cutting the grass, once. The servicer charged 

this ‘‘property preservation fee’’ multiple times over the course of 

a few months. The servicer tacked these fees onto a petition for deficiency judgment against the homeowner; had the homeowner not 

been able to force those fees to be waived, the servicer would likely 

have collected any unpaid amount from the trust, before the investors got paid. Additionally, HAMP and other loan modification programs may require waiver of late fees, which servicers are otherwise entitled to retain.18

Pressure from credit rating agencies to expedite foreclosures: Credit rating agencies rate servicers’ performance on the 

speed to conduct a foreclosure.19 Since servicers are dependent on 

the credit rating agencies for approval to enter into new mortgage 

servicing contracts and affordable financing, servicers have a 

strong financial incentive to push forward a foreclosure rather than 

allowing for the possibility of a loan modification. 

Troubled debt restructuring rules: The troubled debt restructuring rules discourage servicers from performing permanent modifications, as well as more generally discouraging those modifications most likely to be successful-modifications that provide deep 

payment reductions and modifications before default. While the 

TDR accounting rules only apply to loans held in portfolio,20 preserving the assets of the trust from the originators’ creditors has 

required that servicers generally categorize modifications using the 

TDR rules.21

FAS 15 generally requires all permanent modifications occasioned by the ‘‘borrower’s financial difficulties’’ to be treated as 

‘‘troubled debt restructurings.’’22 A TDR usually results in immediate loss recognition and, for loans held in portfolio, a cessation of 
253 

23Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Fed. Reserve Bank of Boston, Why 

Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitizations 

23–24 (Publicy Pol’y Paper No. 09–4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf. 24Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Fed. Reserve Bank of Boston, Why 

Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitizations 

23–24 (Publicy Pol’y Paper No. 09–4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf. 25Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. Research & Statistical Affairs, The Incentives of 

Mortgage Servicers: Myths and Realities 16 (Working Paper No. 2008–46). 26Ocwen Fin. Corp., Annual Report (Form 10–K) 5 (Mar. 12, 2009).; Mary Kelsch, Stephanie 

Whited, Karen Eissner, Vincent Arscott, Fitch Ratings, Impact of Financial Condition on U.S. 

Residential Mortgage Servicer Ratings 2 (2007). 27Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. Research & Statistical Affairs, The Incentives of 

Mortgage Servicers: Myths and Realities 11 (Working Paper No. 2008–46); Ocwen Fin. Corp., 

Annual Report (Form 10–K) 4 (Mar. 17, 2008) (advances are ‘‘top of the waterfall’’ and get paid 

first); Wen Hsu, Christine Yan, Roelof Slump, FitchRatings, U.S. Residential Mortgage Servicer 

Advance Receivables Securitization Rating Criteria 1 (Sept. 10, 2009) (same); Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 2007–FLX5, at 71 (June 

27, 2007) (servicers repaid all advances when foreclosure is concluded). 28See, e.g., Ocwen Fin. Corp., Annual Report (Form 10–K) 11 (Mar. 12, 2009) (‘‘[I]n the majority of cases, advances in excess of loan proceeds may be recovered from pool level proceeds.’’); 

Prospectus Supplement, IndyMac, MBS, Depositor, IndyMac INDX Mortgage Loan Trust 2007– 

FLX5, at 71 (June 27, 2007) (permitting principal and interest advances to be recovered from 

the trust’s bank account); Prospectus, CWALT, INC., Depositor, Countrywide Home Loans, Seller, Countrywide Home Loans Servicing L.P., Master Servicer, Alternative Loan Trust 2005–J12, 

Issuer 47 (Oct. 25, 2005) (limiting right of reimbursement from trust account ‘‘ to amounts received representing late recoveries of the payments for which the advances were made). 

interest payments.23 The FAS 15 rules apply whether the loan is 

current or delinquent when modified. A servicer who modifies a 

loan pre-default-say an adjustable rate mortgage in advance of a 

rate reset-will have to report that loan as a TDR. Many servicers 

prefer to postpone that paper loss, thus converting the paper loss 

into a real loss, at least for the homeowner and investors.24

Junior liens: Servicers who own junior liens will be reluctant to 

modify those loans. Homeowners often continue to pay on junior 

liens after they have defaulted on first mortgages, because the 

smaller payment associated with the junior lien feels more manageable. As long as that mortgage is performing, servicers will be reluctant to recognize a loss, even if doing so would enable a greater 

return on the first mortgage. 

Advances: Servicers’ requirement to advance the principal and 

interest payments on loans that are in default favors foreclosures. 

Servicers have two main expenses when a loan is in default: advances of principal and interest to the trust and payments to third 

parties for default services, such as property inspections. Servicers, 

under their agreements with investors, typically are required to 

continue to advance interest on loans that are delinquent until a 

foreclosure is completed.25 Financing these costs is one of servicers’ 

biggest expenses.26 Recovery of these fees (but not the financing 

costs) is more certain and often swifter via a foreclosure than a 

modification. 

Servicers’ advances are taken off the top, in full, at the post-foreclosure sale, before investors receive anything.27 If advances of 

principal and interest payments remain beyond the sale value, 

servicers can usually collect them directly from the trust’s bank account (or withhold them from payments to the trust).28 In contrast, 

when there is a modification, servicers are usually limited to recovering their advances from the modified loan alone, after required 

payments to the trust, or, if the advances are deemed nonrecover-
254 

29Monica Perelmuter & Waqas Shaikh, Standard & Poor’s, Criteria: Revised Guidelines for 

U.S. RMBS Loan Modification and Capitalization Reimbursement Amounts 3 (Oct. 11, 2007). 30 But see Rod Dubitsky, Larry Yang, Stevan Stevanovic, Thomas Suer, Credit Suisse, 

Subprime Loan Modifications Update 8 (2008) (discussing how some servicers exploited then existing imprecision in the accounting treatment of principal reduction modifications to use principal reduction modifications to halt interest advances). 31 Joseph R. Mason, Mortgage Loan Modification: Promises and Pitfalls 4 (Oct. 2007). A large 

subprime servicer noted in its 2007 annual report that although ‘‘the collectability of advances 

generally is not an issue, we do incur significant costs to finance those advances. We utilize both 

securitization, (i.e., match funded liabilities) and revolving credit facilities to finance our advances. As a result, increased delinquencies result in increased interest expense.’’ Ocwen Fin. 

Corp., Annual Report (Form 10–K) 18 (Mar. 17, 2008); see also Wen Hsu, Christine Yan, Roelof 

Slump, FitchRatings, U.S. Residential Mortgage Servicer Advance Receivables Securitization 

Rating Criteria 1 (Sept. 10, 2009) (same) (‘‘Servicer advance receivables are typically paid at the 

top of the cash-flow waterfall, and therefore, recovery is fairly certain. However, . . . there is 

risk in these transactions relating to the timing of the ultimate collection of recoveries.’’). 32See Complaint at 11–15, Carrington Asset Holding Co., L.L.C. v. American Home Mortgage 

Servicing, Inc., No. FST–CV 09–5012095–S (Conn. Super. Ct., Stamford Feb. 9, 2009) (alleging 

that servicer conducted ‘‘fire sales’’ of foreclosed properties in order to avoid future advances and 

recover previously made advances); Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 

Servicers, 15 Housing Pol’y Debate 753, 757 (2004) (reporting that servicers sometimes rush 

through a foreclosure without pursuing a modification or improperly foreclose in order to collect 

advances); Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter Troubled Loans, N.Y. 

Times, July 30, 2009. 

able, from only the principal payments on the other loans in the 

pool, not the interest payments.29 As a result, servicers can face a 

delay of months to years in recouping their advances on a modification. Modifications involving principal reductions compound the 

problem: they lengthen the time to recover advances on any individual modified loan as well as on other modified loans, by reducing the amount of principal payments available for application to 

recovery of advances.30

Although the cost of the advances themselves may be recovered, 

the significant financing costs associated with making advances 

cannot be.31 Thus, servicers are encouraged to reach a resolution 

of default as quickly and completely as possible, even at the expense of investors who might prefer a modification.32
255 

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274 

FORECLOSURE PAPERWORK MISCUES PILING UP

The Denver Post, Sunday, November 14, 2010 

By Aldo Svaldi 

Brent and Wendy Diers of Fruita thought their foreclosure nightmare would end 

in April when they sent a check to pay off their mortgage. 

But more than 6 months later, CitiMortgage hasn’t followed through on repeated 

assurances it would release the lien and give them title. 

And despite a judge’s ruling that they are not in default, the lender’s law firm, 

Castle Meinhold & Stawiarski, continues to pursue a foreclosure sale. 

‘‘We are not in default and they do not have authorization to sell our house,’’ a 

frustrated Wendy Diers said. 

Although the Diers case is extreme, it is just one of several stories of borrowers 

in Colorado and elsewhere who find themselves trapped in a frustrating state of 

limbo. 

A surge in foreclosures has strained the system across the country, creating problems of lost paperwork, uncertain ownership on mortgages, and sloppy processing 

that has forced some lenders in recent weeks to pull back. 

And those individuals who fall through the cracks like the Dierses find it hard 

to get out. 

In a phone conversation, the Dierses recorded a CitiMortgage employee in May 

telling them ‘‘rest assured, we do have the check. Everything is fine.’’ 

In July, the couple were told the title was being contested. Another CitiMortgage 

representative, named Jennifer, in late July tells them, ‘‘We have the title clear. The 

mortgage has been paid.’’ 

A Mesa County judge cited the recordings in rejecting Castle Meinhold’s request 

to sell the home at foreclosure auction. 

‘‘Under Colorado law, we cannot and will not take further action until we have 

authorization from the court,’’ Mesa County Public Trustee Paul Brown said. 

Still, the auction date has been postponed, not dismissed. The Dierses said they 

can’t figure out what is going on. Public trustees don’t have the authority to throw 

out foreclosure filings a judge has rejected or to sanction law firms pursuing illegitimate claims, Brown said. 

The inability of Castle Meinhold and CitiMortgage to straighten out the situation 

is bordering on harassment, the Dierses said. 

Neither firm responded to interview requests. 

The couple don’t deny missing payments after Brent suffered a work injury and 

lost his job in 2008. 

But unlike most people in that predicament, they had a relative willing to lend 

them enough to pay off the mortgage, more than $212,000 in their case. ‘‘We did 

everything we were supposed to do,’’ Wendy said. ‘‘This is such a boondoggle of a 

mess.’’ 

Fees of $1,000 added 

On a smaller scale, the Compo family of Colorado Springs also found out how difficult it can be to escape foreclosure. 

The family wanted to modify their mortgage payments after their business income 

dropped. A worker with GMAC Mortgage told them they couldn’t do so unless they 

had missed two payments, Susan Compo said. 

The Compos started missing payments, but set aside the mortgage money into 

savings. After three different rejections for a modification, the family, whose financial situation eventually improved, requested a reinstatement statement. 

That statement tells borrowers what they owe to get caught up and escape foreclosure. Compo said she sent a check for the amount law firm Castle Meinhold requested, about $17,200, due Sept. 30. 

But after the check was sent off, the law firm added about another $1,000 in 

charges. The payment didn’t arrive at GMAC Mortgage until Oct. 12. 

The Compo family didn’t find out about the added fees until GMAC rejected the 

check as insufficient. 

‘‘We don’t have the money for the fees,’’ Compo said. 

Castle Meinhold didn’t return a phone call from The Denver Post. But the firm 

did call the Compos offering to waive the additional fees, she said. 

‘‘I am giving them an opportunity to make this right,’’ Compo said. ‘‘Let’s see what 

they do.’’ 
275 

Confusion over true creditor 

Even when borrowers simply ask a lender to clear up confusion regarding who 

really owns their mortgage, they can face a major headache. 

Most mortgages are sold and resold and eventually land in investment pools 

owned by thousands of investors. Several lenders and investment banks also collapsed in 2007 and 2008, complicating ownership. 

A Longmont couple, William Hough and Jacqueline Resaul, faced that problem 

when they got behind on mortgages they took out with Washington Mutual for their 

home and two rental properties. 

They received letters from Washington Mutual, JPMorgan Chase and LaSalle 

Bank all claiming to be the creditor on their loans, said Michael Wussow, an attorney with Stigler Wussow & Braverman in Boulder. 

Hough, a developer, got into financial trouble after suffering a heart attack that 

put him into a coma. 

LaSalle Bank, trustee of the investment pools that claimed to be holding the 

mortgages in question, initiated the original foreclosures. 

Hough, who once worked as a mortgage broker, asked what he thought was a simple request—produce the original notes to clear up any confusion. 

LaSalle’s law firm in the case, Robert J. Hopp & Associates of Denver, failed to 

produce the notes, although it obtained an affidavit from JPMorgan Chase claiming 

LaSalle was the holder, Wussow said. 

A Boulder County judge had enough doubts to throw out two of the foreclosures 

filed in that county. After months of legal wrangling, the foreclosures were refiled 

under JPMorgan Chase, which had inherited the note from the failed WaMu. 

While Hopp was conceding in Boulder County court that JPMorgan Chase was the 

actual owner, Wussow alleges they didn’t tell a Larimer County judge, who approved a foreclosure under LaSalle. 

Wussow said he was so ticked off that he filed a motion for sanctions against the 

Hopp law firm and the lenders involved. 

He wants them to pay the $52,000 in attorney fees his clients incurred because 

the paperwork wasn’t straight. 

‘‘That is what I said all along—come with the notes and we are done. They made 

us go through a year of litigation,’’ he said. 

In a response to the motion, Denver law firm Kutak Rock, now representing the 

lenders, claims Wussow’s motion can’t be brought up under the limited scope of a 

Rule 120 hearing, where judges determine the merits of a foreclosure action. A call 

to the Hopp law firm was not returned. 

After losing their home, Hough and his wife moved to South America, where the 

cost of living was lower, Wussow said. 

But they fought because they felt it important to ensure the proper parties foreclose and to not let the big banks run roughshod over the system. 

‘‘I think there should be some sort of requirement that you show up with the 

original note or with a detailed document showing the transfers,’’ Wussow said. 

‘‘They should have the right parties foreclosing. They should have been recording 

documents.’’ 

(277) 

PROBLEMS IN MORTGAGE SERVICING FROM 

MODIFICATION TO FORECLOSURE 

WEDNESDAY, DECEMBER 1, 2010 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 9:34 a.m. in room SD–538, Dirksen Senate Office Building, Hon. Christopher J. Dodd, Chairman of the 

Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. Let me 

thank all of you for your presence here this morning, colleagues 

and guests and our witnesses who are being a part of this hearing 

this morning entitled ‘‘The Problems in Mortgage Servicing From 

Modification to Foreclosure.’’ And this is the second of two hearings 

we have had. I thought it was a good idea to do this, and Senator 

Shelby also advocated it. You can make a case that maybe we 

should have had you first and had the people we had first second, 

but either way I think it is going to be helpful to get the perspective of those of you at the table here today. 

Some of you have nothing to do with this other than your observations. I know particularly Sheila Bair, of the FDIC, this is not 

your particular responsibility, but you have been terrific on these 

issues, and so we wanted you to be a part of the discussion today 

as to how we ought to proceed, and I am grateful to you for that. 

I am going to make a brief couple of opening comments, and then 

I will turn to Senator Shelby and any of our colleagues who would 

like to be heard on some opening thoughts on this. We have two 

panels, so it will take a little time this morning to get through this, 

but I am very grateful to all of you. 

Before I begin, this is likely my—I hesitate to say likely my last 

hearing as Chairman of the Banking Committee, having taken over 

in January of 2007 for Paul Sarbanes, who did a wonderful job. As 

I have told many of you the story, I was sitting in the chair where 

Tim Johnson sits at a hearing in the fall of 2006 after Paul had 

announced the fact that he was no longer running—I guess in the 

spring of 2006—and he put his right arm around me at this chair 

here, and there was chaos going on in the Committee room. People 

were screaming and yelling over something that had been said. The 

police were coming in to remove people. And as the screaming was 

going on and the bellowing was occurring, he put his arm around 

you shoulder and said, ‘‘Just think, in 6 months all of this is 

yours.’’ 
278 

[Laughter.] 

Chairman DODD. I had no idea what he was predicting for me 

over the next 4 years on the subject matter. So to my colleagues 

and staff and all, I thank you immensely for the wonderful support 

and how enjoyable it has been to work with all of you over these 

past 4 years. In a sense, we are almost ending—I am ending here, 

at least, where we began. As Richard will recall in another Committee—I think our second hearing in February, the first week in 

February of 2007, was on the foreclosure issues, and we had a series of them, of course, all that year, and 2008. For those 2 years, 

we could not get anyone really to pay attention within the administration or others at the time. I do not know how many times I 

heard Bob Menendez say, coin the phrase ‘‘the tsunami’’ coming. I 

think that was in February or March of 2007, almost 4 years ago 

talking about this as well. And between the two of us up here, that 

is 54 years between Shelby and me. That is a long time here, Richard, going back to the days of—— 

Senator SHELBY. I am going to miss you. 

Chairman DODD. Well, I will miss you as well. I want you to 

know that. So I want to thank all of you, and I particularly want 

to say to all of you here, but particularly Dick Shelby, I know the 

assumption is that obviously people do not report about planes that 

fly, as we say in this business. You only hear about the planes that 

do not make it. But every single day people up here work together 

and get things done. Paul Sarbanes had the relationship with Dick 

Shelby, and I have had it as well. We are good friends, and we 

spend a lot of time together far beyond the confines of this Committee room. And for that, I will be eternally grateful to this great 

friend from Alabama who has been a good partner. We have not 

always agreed on every issue, but he has been a gentleman and always kept me informed as to where things were and how things 

were progressing, and I thank you immensely. 

Senator SHELBY. Thank you. 

Chairman DODD. Anyway, I want to welcome all of the witnesses 

who are here today for their testimony about the problem of mortgage servicing. This is a continuation, as I mentioned at the outset, 

of a hearing we held last month at which we heard from witnesses 

within the servicing industry and others. Today we will hear from 

some of the regulators responsible for overseeing the industry. 

First let me explain what we mean by mortgage servicing. I 

know all of our witnesses know this, but sometimes I think the audience and those who are following this might not understand what 

we are talking about by servicing. Individual mortgages are often 

bundled into pools of similar mortgages and sold in the secondary 

market as a mortgage-backed security. We have heard a lot about 

that over the last 4 years. 

After the origination, all processing—and this is where the servicing comes in. All processing related to the loan is managed by a 

mortgage servicing company. Now, the Nation’s four largest 

banks—JPMorgan Chase, Wells Fargo, Bank of America, and Citi 

are also the largest mortgage servicers. Mortgage servicers have a 

long list of administrative responsibilities from collecting monthly 

payments, maintaining detailed accounting records, paying taxes 

and insurance premiums, and distributing payments to the holders 
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of the mortgage security. And for this work, they receive a servicing fee. That is a rather abbreviated description, but basically 

that is the purpose and that is what servicing companies do. 

At the last hearing, we learned that many of the servicers have 

not been doing their jobs, and these servicers, including many of 

the Nation’s biggest banks, failed to maintain proper records, failed 

to properly administer the Home Affordable Modification Program, 

the HAMP program; hired so-called robo-signers, submitted thousands of false and possibly fraudulent affidavits and in some cases 

even foreclosed unfairly on people who should not have lost their 

homes. 

Since our last hearing, news reports have suggested that the 

problem may be actually a lot larger than we previously thought. 

I do not wish that to be the case, but evidence seems to be mounting that it may, in fact, be the case. An employee of the Bank of 

America testified in court that the bank’s standard mortgage servicing practices failed to meet basic loan documentation requirements—a failure that could call a huge number of loans into question. If there are more revelations of that nature, this situation 

could ultimately have ramifications for the safety and soundness of 

the financial system. Investors in the mortgage securities market, 

including the New York Fed Reserve Bank and Freddie Mac, are 

pushing banks to repurchase loans that may not have been originated as represented. 

Last month, the Congressional Oversight Panel estimated that 

these lawsuits and repurchasers would ultimately cost banks about 

$52 billion. Subsequent to that report, Barron’s Magazine used 

data from a research firm called CompassPoint and estimated that 

the losses to banks could be as high as $164 billion. Other estimates are even higher still. Now, even for Wall Street, that is a 

lot of money to be talking about. 

It is important also to remember that while it was servicers who 

caused this problem, it is borrowers who are, of course, paying the 

price. Confusion over sloppy and incomplete documentation has 

slowed the mortgage modification process for countless borrowers. 

Conflicts of interest in the industry may be incentivizing thirdparty servicers to actively seek to block modifications that would 

prevent foreclosures but cut into their profits. These problems may 

have resulted in problems for borrowers who otherwise may have 

been able to pay their mortgages or in pushing troubled borrowers 

to foreclosure who otherwise may have been able to save their 

homes with reasonable modification efforts. 

At any rate, this is a problem that the servicers should have seen 

coming, in my view. They had plenty of warnings from Congress. 

Sheila Bair, who is with us today, of the FDIC, also provided those 

warnings. Many Members up here—I mentioned Bob Menendez, 

among others in this Committee, going back a long time who talked 

about this literally—in fact, Jim Bunning and Jack Reed were talking about it in 2006 in hearings that they held in those days. So 

we are getting near 5 years that we have been talking about this 

issue, and yet here we are still watching a problem associated with 

all of that getting worse is possibly the case. 

Whether it was out of greed or ignorance or the failure to recognize the disaster on the horizon, we now are left, of course, to pick 
280 

up the pieces of this problem and to try and help homeowners 

caught up in the forces beyond their control and to do everything 

in our power to fix the system and prevent these problems again 

in the future. 

Today we are going to hear from regulators about what they did 

or did not do, what ideas you have as well, and I appreciate all of 

you being here, not only regulators but also from the academic 

world who have followed these questions. What do you recommend 

we do, the Congress do, done by Treasury, done by regulators? I 

do not want to argue and I do not want a lot of finger pointing 

going on as to how we are here. We all know where we are. The 

question now is, What do we do about it? And, obviously, this is 

my last hearing on all of this, but, obviously, this Committee will 

have to pick up this subject matter and work on it, and we would 

like to know what we can do to be a part of that solution. I suspect 

that all of us would agree with that conclusion. So today I appreciate, again, your participation, and let me turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Mr. Chairman, I ask that my written statement 

be made part of the record, and other than that, I look forward to 

the testimony of the witnesses. 

Chairman DODD. Thanks very much. 

Anyone else want to be heard in the opening? Yes, Bob. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Mr. Chairman, first of all, I do not know if 

this is or is not your last hearing, but in the eventuality that it is, 

I want to just say that I think history will record that you presided 

over some of the most tumultuous times in our financial system 

and that the response to that day when Chairman Bernanke came 

before Members of this Committee and members of leadership and 

described in 2008 the challenges and the consequences of the potential collapse of a series of financial institutions and what they 

would have meant to this country in terms of systemic risk to the 

entire Nation’s economy. And I will never forget asking the question: Well, we must have enough tools at the Federal Reserve? And 

his answer: If you do not act in the next 2 to 3 weeks, we will have 

a global financial meltdown. 

Chairman DODD. Yes. 

Senator MENENDEZ. That is what you chaired over, and I think 

history will record that the way in which you led in that period of 

time really helped save our Nation from what would have been a 

new depression, and I appreciate your service very deeply. 

Chairman DODD. Thanks, Bob. 

Senator MENENDEZ. Just a moment on an issue that I have been 

pursuing for some time. You are right, it was in March of 2007, I 

think it was Secretary Paulson who was sitting here, and I said, 

you know, I think we are going to have a tsunami of foreclosures. 

And I remember the response as ‘‘I think that is an exaggeration.’’ 

I wish he had been right and I had been wrong. The reality is that 

we ended up with we have not even seen fully the crest of that tsunami even yet. 
281 

And what I am concerned about is not just for all of those families who clearly are under a life-changing set of circumstances 

where their home will be taken away from them, but it is even for 

the greater risk to everyone in a community that faces the consequences of multiple foreclosures in their neighborhood, the loss 

of property values, the loss of ratables, and all of the consequences 

that flow from that. 

And so I appreciate that 18 of my colleagues signed with me a 

letter to the Treasury Secretary. One, about the whole issue you 

have discussed, is about the robo-signings, the rubber stamping of 

foreclosures by banks that exercise lax oversight. It is not certainly 

only shocking, but it is one example of how banks have mishandled 

both foreclosures and mortgage modification requests. And if the 

robo-signing is directly attributable to banks not doing proper due 

diligence, which is inexcusable when dealing with a matter as monumental as taking someone’s home away, I think the more important point might very well be that banks and servicers are not handling even basic foreclosure procedures correctly; it is that they are 

also not correctly evaluating homeowners for mortgage modifications. And I have serious concerns about that process. 

I have listened to constituents time and time again who talked 

to me about the horrors still today, even after this Committee has 

raised these issues time and time again, of the process that they 

have gone through. I am concerned that, despite the best efforts of 

the HAMP program, which estimated that 79 million families could 

restructure or refinance their homes, we have only had since January of 2010 about 495,000. That does not seem to be working in a 

way that we want it to. 

And, finally, you know, countless constituents have told us stories of being stonewalled by banks for very long periods of time, of 

not being told the reasons for their rejection of their modification 

request, of significant delays caused by banks losing their paperwork, and trial modifications canceled with no rationale. And that 

just cannot continue to happen, Mr. Chairman. So I appreciate that 

you are having this hearing today and the work the Committee will 

continue to do. 

Chairman DODD. Thanks very much, Senator. 

Anyone else want to make any opening comments on this? If not, 

we will turn—— 

Senator TESTER. Just very quickly, if I might, Mr. Chairman. 

Chairman DODD. Yes. 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. First of all, I want to express my appreciation 

for your comments on the floor yesterday. I thought they were spot 

on, and I thank you for your leadership on this Committee. You 

will be missed. 

Chairman DODD. Thank you. 

Senator TESTER. Thank you all for being here today, the folks on 

the panel. I appreciate you taking the time. I think these are an 

important set of hearings. It has been established, well established 

I think, that these are significant issues, that they are not isolated 

cases. My office has experienced a number of complaints, a significant number of complaints, by constituents who have had their 
282 

places foreclosed on and have not been treated fairly. So I think it 

is important that we pay attention to this issue because I do not 

think there has been adequate attention paid to this issue. 

Mortgage servicers have a trust placed in them, but there is not 

a lot of verification that what they are doing is—well, there is not 

a lot of requirements for verification. So hopefully these investigations will result in some changes that will ensure that homeowners 

are treated with honesty and respect and we can really get down 

to the root of what the magnitude of these problems really are. 

I know that last week many of you, as part of the Financial Stability Oversight Council, echoed the concerns and recognized the 

potential risks to our system by this processing problem. My hope 

is that through your investigations we will finally be able to understand the full size and scope and its potential impact to the financial markets. And then we can move forward in a sensible way 

from there. So thank you all for being here. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Tester, very, very much. 

Anyone else? Are we all set to go with the witnesses? Good. Very 

good. 

Let me introduce them, if I can, very briefly to you. First of all, 

Phyllis Caldwell is the Chief of the Homeownership Preservation 

Office at Treasury, leads the Administration’s efforts to assist with 

the home loan conversion process. She joined the Treasury in November of 2009, and we thank you very much for being with us 

today. 

Sheila Bair, you could almost sit up on this side of the dais, you 

have been here so often, but obviously with the FDIC, and I think 

all of us acknowledge, Sheila, your tremendous participation and 

efforts over the last 4 years that I have been grappling with this, 

as the Committee has. Again, we appreciate you being here today 

in a sense for your thoughts and observations on this as well. 

Dan Tarullo is well known. He used to sit on this side of the dais 

up here, not on this Committee but with Senator Kennedy going 

back years ago, and has been a good friend over the years. He is 

obviously one of the six current Governors of the Board of Governors of the Federal Reserve, served in that capacity since January of 2009, and was a professor of law at Georgetown University, 

among other things. We thank you, Dan, for your observations. 

John Walsh, again a frequent participant in our discussions, is 

the Comptroller of the Currency, oversees that office, supervises 

some 1,500 federally chartered commercial banks and about 500 

Federal branches of the agencies of foreign banks in the United 

States. He has been with the OCC since 2005 and previously 

served as chief of staff, and we thank you for your service as well. 

Ed DeMarco, the last witness in our first panel, is the Acting Director of the Federal Housing Finance Agency and has been doing 

a very good job, in my view, regulating Fannie and Freddie and the 

12 home loan banks within the United States. Prior to this capacity, he was the Chief Operating Officer of FHFA. 

Let me just say, by the way, that with a lot of the criticism going 

on, there is a lot of good news coming out of the management as 

well under this process that was put in place a number of years 

ago, so we thank you for your work as well. 
283 

With that, I would ask—by the way, I want to ask consent that 

all of the opening statements and comments of our colleagues will 

be included in the record, as will all of your statements and any 

supporting documents or information you think would be valuable 

for the Committee. 

With that, Ms. Caldwell, we will begin with you. If you could try 

and keep your statements down to about 5 minutes or less, then 

we can get to the questions and get to our second panel as well. 

STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP PRESERVATION OFFICE, DEPARTMENT OF THE 

TREASURY 

Ms. CALDWELL. Chairman Dodd, Ranking Member Shelby, and 

Members of the Committee, thank you for the opportunity to testify 

before you today on issues surrounding mortgage servicing and 

servicer performance in the Making Home Affordable program. 

The foreclosure problems that have recently come to light underscored the continued critical importance of the Making Home Affordable program launched by Treasury, of which HAMP is a part. 

Preventing avoidable foreclosures through modifications and other 

home retention opportunities continues to be critical priority. Foreclosures dislocate families, disrupt the communities, and destabilize local housing markets. 

Over the last 20 months, we have developed rules and procedures to facilitate meaningful modifications. We have urged 

servicers to increase staffing and improve customer service. We 

have developed specific guidelines and certifications on how and 

when homeowners must be evaluated for HAMP and other home 

retention options. HAMP has strong compliance mechanisms in 

place to ensure that servicers follow program guidelines. 

Treasury has built procedural safeguards and appropriate communication standards in HAMP to minimize those instances where 

borrowers are dual-tracked, where they are being evaluated for 

HAMP at the same time they are being put through the foreclosure 

process. Specifically, HAMP program guidelines require participating servicers of non-agency loans to: evaluate homeowners for 

HAMP modifications before referring those homeowners to foreclosure; suspend any foreclosure proceedings against homeowners 

who have applied for HAMP modifications while their applications 

are pending; evaluate whether homeowners who do not qualify for 

HAMP (or who have fallen out of HAMP) qualify for private modification programs; evaluate whether homeowners may qualify for a 

short sale or deed-in-lieu of foreclosure; and provide a written explanation to any homeowner not eligible for HAMP and to delay 

any foreclosure sale for at least 30 days afterwards to give the 

homeowner time to appeal. 

Servicers may not proceed to foreclosure sale unless they have 

tried these alternatives. Servicers must first issue a written certification to their foreclosure attorney or trustee stating that ‘‘all 

available loss mitigation alternatives have been exhausted and a 

non-foreclosure option could not be reached.’’ On October 6, Treasury clearly reminded servicers of this existing HAMP rule. 

We have instructed our compliance team to review the ten largest servicers’ processes and procedures for complying with that 
284 

guideline. If we find incidents of non-compliance, Treasury will direct those servicers to take corrective action, which may include 

suspending those foreclosure proceedings and re-evaluating the affected homeowners for HAMP. 

In terms of compliance, it is important to remember that although Treasury administers the Making Home Affordable program and HAMP, it does so through voluntary contracts with the 

servicer versus regulatory or enforcement agency authority. Thus, 

our compliance efforts are focused on ensuring that servicers are 

following the contractual requirements of their servicer participation agreements. 

We are looking to ensure that borrowers are being properly evaluated for HAMP. Compliance remedies have included: re-evaluating loans for HAMP eligibility; re-soliciting borrowers; enhancing 

servicer processes; and providing additional training to servicer 

staff. 

To date, almost 1.4 million homeowners have started trial modifications, and over 520,000 have started permanent modifications. 

These homeowners have experienced a 36-percent median reduction in their mortgage payments, or more than $500 a month. 

Consider that in the first quarter of 2009, nearly half of mortgage modifications increased borrowers’ monthly payments or left 

them unchanged. By the second quarter of 2010, 90 percent of 

mortgage modifications lowered payments for the borrower. Homeowners today have access to more sustainable foreclosure prevention solutions. 

HAMP uses taxpayer resources efficiently. Its pay-for-success design supports borrowers who are committed to staying in their 

homes by paying out servicer, borrower, and investor incentives 

over 5 years, and the investor, not the taxpayer, retains the risk 

of borrower payment. 

In conclusion, we believe that these foreclosure problems underscore the continued need for servicers to focus on evaluating borrowers for all home retention options, starting with HAMP. We appreciate the efforts of both the Members of this Committee and our 

partners in the housing community in holding servicers accountable and improving HAMP’s design and performance. 

I look forward to taking your questions. Thank you. 

Senator JOHNSON. [Presiding.] Ms. Bair. 

STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL 

DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Thank you. Senators Johnson and Shelby, and thank 

you, Members of the Committee, for requesting the views of the 

Federal Deposit Insurance Corporation on deficiencies in mortgage 

servicing and the impact on the financial system. It is unfortunate 

that problems in mortgage servicing and foreclosure prevention 

continue to require the scrutiny of this Committee. The robo-signing issue is symptomatic of persistent shortcomings in the foreclosure prevention efforts of our Nation’s largest mortgage 

servicers. 

While the FDIC is not the primary supervisor for these companies, we do have a significant interest as the insurer of many of 

these institutions. Through our back-up examination authority, our 
285 

examiners have been working on-site as part of an interagency review team at 12 of the 14 major mortgage servicers. The weaknesses that have been identified in mortgage servicing practices 

during the mortgage crisis are a by-product of both rapid growth 

in the number of problem loans and a compensation structure that 

is not well designed to support loss mitigation measures such as 

loan modifications. 

The traditional structure of third-party mortgage servicing fees, 

put in place well before the crisis, is based on a flat fee that is tied 

to the outstanding mortgage balance and does not provide additional compensation for the proper management of distressed loans. 

The flaws in the structure were not evident when the number of 

problem loans was low. Large servicers aggressively automated 

systems and consolidated servicing to maximize short-term returns. 

However, the historic rise in mortgage defaults in recent years has 

driven up servicing cost structures, creating incentives to cut corners just at a time that servicers needed to be devoting more careful individualized attention to their management of problem loans. 

The problems we are seeing go beyond robo-signing and other 

technical documentation issues to include questions regarding 

chain of title and the proper establishment of private sector 

securitization trusts. Their implications are potentially serious and 

damaging to the Nation’s housing recovery and to some of our largest institutions. 

One implication is the risk of a wider disruption to the foreclosure process. A transparent, functioning foreclosure process, 

while painful, is necessary to the recovery of our housing market 

and our economy. 

Another implication is that mortgage documentation problems 

cast a cloud of uncertainty over the ownership rights and obligations of mortgage borrowers and investors. Moreover, there are numerous private parties and Government entities that may have significant claims against firms central to the mortgage markets. 

While we do not see immediate systemic risk, the clear potential 

is there. The Financial Stability Oversight Council, or FSOC, was 

established under the Dodd-Frank Act to deal with just this type 

of emerging risk. It is in a unique position to provide needed clarity 

to the market by coordinating consistent interpretations of what 

standards should be applied to establishing the chain of title for 

mortgage loans and recognizing the true sale of mortgage loans in 

establishing private securitization trusts. 

While my written statement goes into more detail, there are 

principles, I believe, that should be part of any broad agreement 

among the stakeholders to this issue. 

One, establish a single point of contact for struggling homeowners. This will go a long way toward eliminating the conflicts 

and miscommunications between loan modifications and foreclosures in today’s dual-track system and will provide borrowers assurance that their application for modification is being considered 

in good faith. 

Two, simplify loan modification efforts to reduce the number of 

foreclosures. The modification process has become far too complicated given the volume of troubled loans and the shortage of 

mortgage servicing resources. The modification process needs to be 
286 

dramatically streamlined. Modifications need to be put in place at 

an early stage of delinquency and should provide for a significant 

reduction in the borrower’s monthly payment. Our experience at 

IndyMac shows that these are the key factors that determine the 

long-term success of modifications. In exchange, mortgage servicers 

should have a safe harbor that will assure them that their claims 

will be recognized if foreclosure becomes unavoidable. 

Three, invest appropriate resources to maintain adequate numbers of well-trained staff and strengthen quality control processes. 

Inadequate staffing, lax standards of care, and failure to follow 

legal requirements cannot be tolerated. Servicers need to strengthen their practices, and regulators must ensure that servicers adhere to the highest standards. 

Four, tackle the second lien issue head-on. Servicers should be 

required to take a meaningful write-down of any second lien if a 

first mortgage loan is modified or approved for short sale. All 

stakeholders must be willing to compromise if we are to find solutions to the foreclosure problem and lay the foundation for recovery 

in our housing markets. 

Thank you for the opportunity to testify, and I look forward to 

your questions. 

Senator JOHNSON. Thank you. 

Mr. Tarullo. 

STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. TARULLO. Thank you, Senator, and Senator Shelby and 

Members of the Committee. Let me build on some of what Sheila 

has said to add a few introductory comments. 

First, on the extent of the problem, which is the question Senator 

Shelby started with at your last hearing, I want to first caution 

that the three—or four, actually—agencies represented here are all 

still in the middle of investigating the firms themselves, whether 

the GSEs or the banking institutions. So we need to be provisional 

in any observations that we make. 

But I think with respect to the documentation issue, it is already 

pretty apparent that there are significant weaknesses in risk management, in quality control, in audit and compliance practices, in 

staff training, and in oversight of third-party providers, such as 

law firms. The extent of the problem appears to vary across firms, 

but my suspicion is that when all is said and done, we are going 

to find some problems in all servicers, large, medium, and small. 

The problem will be particularly acute in some servicers where the 

difficulties and the shortcomings have been the greatest. 

When we look at those problems in the context of all the difficulties associated with loan modifications that Senator Menendez referred to earlier, it seems to me that we do need to have some 

structural changes in how servicers are organized, monitored, and 

regulated. 

I also want to say a word about put-back exposure. This is something which is not directly related to the foreclosure documentation 

problem, but documentation problems have both drawn attention to 

the issue and maybe motivated some investors to pursue some additional arguments for why sponsors should take mortgages back. 
287 

The exposure here results from the interplay of default rates on 

the underlying mortgages which motivate the put-back efforts by 

the investors who hold the securities and the legal liability of a 

securitizer or originator. This liability could be quite significant for 

some firms, although particularly with respect to private-label 

securitizations, the losses may well be spread over a considerable 

period of time as litigation ensues. 

With respect to put-back liability, we had already started a process of requiring each of the major holding companies to produce to 

us their comprehensive capital plans, which we are supposed to get 

in early January. That is an exercise apart from mortgage foreclosure problems. But as part of that exercise, we have asked for 

an assessment by the firms of the put-back liability that they may 

be facing. 

Turning now to supervisory responses, I noted in my written testimony the range of supervisory and enforcement tools that are 

available to the three banking agencies here. I expect that many 

or all of these tools will be used as appropriate with respect to specific institutions. So I just note from the particular supervisory position of the Federal Reserve that our rating of management at the 

holding company level will be influenced by the extent of these 

problems even if the problems occurred in a banking subsidiary. 

As to how these problems have shaped our thinking about supervision more generally, I would say, again from our perspective, two 

points are already apparent. First, we need to use to its fullest the 

additional authority given the Federal Reserve in Dodd-Frank to 

send our examiners into non-bank affiliates of large holding companies. And second, I think we all need to find ways to leverage control process audits of some functions in firms into improvements in 

control processes across the firm, because we are never going to be 

able to audit every single control process in all of these institutions. 

Before closing, I want to say a few more words on the loan modification issue, but from more of a macroeconomic perspective, because I think there is a close relationship, as many of you have 

suggested already, between the foreclosure difficulties and the relatively sluggish pace of modifications. The race that frequently occurs between a modification of a particular mortgage and foreclosure proceedings has more often than not been won by the foreclosure process. And, of course, we now know that the race was 

often not being fairly run in the first place. But even if it is, there 

is a larger macroeconomic point to be made here. Foreclosures are 

costly not only for the parties involved, but for the housing market 

and the economy as a whole. And while there is no single simple 

method for gaining more of a balance between foreclosures and 

modifications, I wholeheartedly agree with Sheila’s perspective that 

it is incumbent on people in industry and at all levels of Government to renew attention to measures that can facilitate sensible 

modifications across the country and thereby to help create the conditions for a housing recovery which will be, in turn, important for 

supporting renewed stronger growth in our own economy. 

Thank you very much. 

Senator JOHNSON. Mr. Walsh. 
288 

STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE 

CURRENCY 

Mr. WALSH. Thank you, Senator, Ranking Member Shelby, and 

Members of the Committee. I appreciate the opportunity to discuss 

improprieties in the foreclosure process and the steps being taken 

by the Office of the Comptroller of the Currency to address them. 

When I appeared before the Committee in September, I described 

early steps to address the foreclosure problem at eight of the largest mortgage services the OCC supervises. I can report today that 

we have greatly expanded those efforts to address this critical problem, working with other Government agencies. 

Let me state clearly that the shoddy practices that have come to 

light, including improperly executed documents and attestations, 

are absolutely unacceptable. They raise questions about the integrity of the foreclosure process and concerns about whether some 

homes may have been improperly taken from their owners. The 

OCC is moving aggressively to hold banks accountable and fix the 

problem. 

In recent years, as problem loans surged, the OCC’s primary 

focus was on efforts to prevent avoidable foreclosures by increasing 

the volume and sustainability of loan modifications. When we saw, 

using loan-level data from our mortgage metrics project, that an inordinate number of modifications initiated in 2008 were re-defaulting, we directed national bank servicers to take corrective action. 

Since then, we have seen a sharp increase in modifications that 

lowered monthly payments and fewer re-defaults. While these efforts are preventing some foreclosures, many families are still 

struggling and face the prospect of losing their home. We owe these 

homeowners our best efforts to assure that they receive every protection provided under the law. 

Questions have arisen about the practice of continuing foreclosure proceedings even when a modification has been negotiated 

and is in force. We agree that the dual track is unnecessary confusing for distressed homeowners and the OCC is directing national bank servicers to suspend foreclosure proceedings for successfully performing modifications where they have the legal ability 

and are not already doing so. It is important to remember, however, that the GSEs and private investors dictate the terms for 

non-HAMP modifications, so this option may not always be available to servicers. 

It is also the case that foreclosures are governed by State law 

and requirements vary considerably across jurisdictions. As a result, most nationwide servicers hire local firms familiar with those 

requirements. Both Fannie Mae and Freddie Mac require servicers 

to use law firms they pre-approve for a given locality. 

The OCC reviews a bank’s foreclosure governance process to determine if it has appropriate policies, procedures, and internal controls necessary to ensure the accuracy of information relied upon 

in the foreclosure process and compliance with Federal and State 

law. We expect banks to test these processes through periodic internal audits and their ongoing quality control function. Examiners 

generally do not directly test standard business processes or practices, such as the validity of signed contracts or the processes used 
289 

to notarize documents absent red flags that indicate systemic flaws 

in those business practices. 

Unfortunately, neither internal quality control tests, internal audits, nor data from our consumer call center suggested foreclosure 

document processing was an area of systemic concern. When problems were identified outside the national banks at Ally Bank, we 

immediately directed the eight largest national bank servicers to 

review their operations and take corrective action. We began organizing onsite examinations at each of those major servicers, which 

are now well underway, with more than 100 national bank examiners assigned to the task. 

In concert with other regulatory agencies, these examiners are 

reviewing whether foreclosed borrowers were appropriately considered for loan modifications, whether fees charged were appropriate, 

documents were accurate and appropriately reviewed, and that 

proper signatures were obtained. We are reviewing whether 

servicers complied with State laws and whether they had possession and control over documents necessary to support a legal foreclosure proceeding. 

The OCC is also heading an onsite interagency examination of 

the Mortgage Electronic Registration System, or MERS, in coordination with the Federal Reserve, the FDIC, and the Federal Housing Finance Agency, and we are participating in an examination 

led by the Federal Reserve of lender processing services which provides third-party foreclosure services to banks. 

Where we find errors or deficiencies, we are directing banks to 

take immediate corrective action and we will not hesitate to take 

an enforcement action or impose civil money penalties, removals 

from banking, and criminal referrals if warranted. We expect to 

complete our examinations by mid- to late-December and to determine by the end of January whether additional supervisory or enforcement actions are needed. 

Thank you again for the opportunity to appear. I will be happy 

to answer questions. 

Chairman DODD. [Presiding.] Thank you very much, Mr. Walsh. 

Mr. DeMarco, welcome. 

STATEMENT OF EDWARD J. DEMARCO, ACTING DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. DEMARCO. Thank you. Good morning, Chairman Dodd, 

Ranking Member Shelby, Members of the Committee. 

The recently identified deficiencies in the preparation and handling of legal documents to carry out foreclosures are unacceptable. 

Those deficiencies undoubtedly reflect strains on a system that is 

operating beyond capacity, but they also represent a breakdown in 

corporate internal controls and management oversight. 

FHFA’s goals in this matter are twofold: To ensure that foreclosure processing is done in accordance with the servicer contract 

and applicable laws, and to protect taxpayers from further losses 

on defaulted mortgages. Of course, before any foreclosure is completed, we expect servicers to exhaust all alternatives. 

My prepared statement reviews the actions that FHFA has taken 

to date as well as those underway. It also provides context for understanding the problems that have arisen, including consideration 
290 

of the role of servicers and a description of the diverse range of 

foreclosure processing requirements. 

As I reported previously to the Committee, the Enterprises, 

Fannie Mae and Freddie Mac, minimize losses on delinquent mortgages by offering distressed borrowers loan modifications, repayment plans, or forbearance. These loss mitigation tools reduce the 

Enterprises’ losses on delinquent mortgages and help homeowners 

retain their homes. Servicers of Enterprise mortgages know that 

these tools are the first response to a homeowner who falls behind 

on their mortgage payments. 

Yet for some delinquent borrowers, their mortgage payments are 

simply not affordable due to unemployment or other hardship and 

a loan modification is not a workable solution. For these cases, the 

Enterprises offer foreclosure alternatives in the form of short sales 

and deeds in lieu of foreclosure. Despite these options for a graceful 

exit from a home, foreclosure remains the final and necessary option in many cases. 

As we know, foreclosure process deficiencies have emerged at 

several major servicers. Recently, FHFA provided the Enterprises 

and services a four-point policy framework for handling these deficiencies. The four points are rather simply stated. First, verify that 

the foreclosure process is working properly. Second, remediate any 

deficiencies identified in foreclosure processing. Third, refer suspicions of fraudulent activity. And fourth, avoid delay in processing 

foreclosures in the absence of identified problems. 

Pursuant to that guidance, the Enterprises continue to gather information on the full nature and extent of servicer problems. Only 

a small number of servicers have reported back to the Enterprises 

as having some problem with their foreclosure processing that 

needs to be addressed. Still, these firms represent a sizable portion 

of the Enterprises’ combined books of business. The Enterprises are 

currently working directly with their servicers to ensure that all 

loans are handled properly and corrections and refiling of paperwork are completed where necessary and appropriate. To be clear, 

FHFA does not regulate mortgage servicers and the Enterprises’ 

relationship with them is a contractual one. 

As conservator of the Enterprises, FHFA expects all companies 

servicing Enterprise mortgages to fulfill their contractual responsibilities, which include compliance with both the Enterprises’ seller servicer guides and applicable law. Also, FHFA remains committed to ensuring borrowers are presented with foreclosure alternatives. Still, it is important to remember that FHFA has a legal 

obligation as conservator to preserve and conserve the Enterprises’ 

assets. This means minimizing losses on delinquent mortgages. 

Clearly, foreclosure alternatives, including loan modifications, can 

reduce losses relative to foreclosure. But when these alternatives 

do not work, timely and accurate foreclosure processing is critical 

for minimizing taxpayer losses. 

To conclude, regulatory agencies, including FHFA, are carrying 

out important examination activities that will better inform the 

issue. Thus, identification of further actions or regulatory responses should await the results of these examinations and evaluation of the information being developed. 

Thank you. 
291 

Chairman DODD. Thank you very much, Mr. DeMarco. 

Again, I will ask the Clerk to time us on, say, 6 minutes, and 

we will try and stick with that a little bit. Again, we have got a 

large panel here and a second panel to get through, so we will try 

and keep to that time. 

Senator SHELBY. Mr. Chairman, is that 6 minutes of questions? 

Chairman DODD. That is 6 minutes of questions for you and me, 

and then for everyone else, it is 6 minutes of time. 

[Laughter.] 

Chairman DODD. Well, let me begin, Dan, with you, if I can. I 

thought your testimony was—I am sorry, I had to go down to a 

markup downstairs, but I actually read your testimony last evening 

so I am familiar with your point here. You described the banking 

agencies’ review of the mortgage crisis and state that preliminary 

findings suggest weaknesses in risk management, quality control, 

audit, compliance practices, shortcomings in staff, training, coordination among loan modification and foreclosure staff, and management and oversight and third-party providers, including legal 

servicers. Aside from that, there were not too many problems, I 

guess you said. 

Anyway, according to experts, including Professor Eggert, who 

will be testifying in the next panel, these problems have been documented for years, I think he claims since 2003, by actions taken 

by the FTC, for example. So there was some real background to all 

of this. 

First, I would like to ask you whether or not the other agencies 

that are at the table with you agree with Governor Tarullo’s conclusions in his testimony, whether or not you feel as though what 

he has said is an accurate description of the situation, and then 

given the apparent severity of these problems, I want to ask you, 

as well, why the various agencies that do have regulatory authority 

have not been taking action earlier, the obvious question for us 

here. Again, there has been a lot of evidence. This is not some new 

information we are getting. Why have the agencies not been more 

aggressive about this earlier on? We will start with that. 

Ms. CALDWELL. Thank you for the question. I will talk from the 

perspective of the HAMP program, and I think it is important, 

again, just to say that HAMP is a voluntary program and we have 

contractual relationships with the larger servicers to participate in 

the mortgage modification program. We are in those largest 

servicers every month. Certainly, our observations have been that 

they were ineffective in soliciting homeowners for HAMP. There 

was delayed processing of HAMP. There was improper use of the 

Treasury net present value model. 

And as a result of that, actions that we have taken have included 

sending the servicers back to re-solicit certain pools of borrowers 

where we identified they were not solicited. We have had them 

rerun the net present value model. And in January of this year, we 

instituted a temporary review period where we said servicers could 

not decline a homeowner from HAMP until they had reviewed and 

verified the status of their documentation, their payment, notified 

the homeowner of what their records showed, and gave the homeowner an opportunity to review. 
292 

So again, we agree that there has not been sufficient capacity in 

the servicing shops relative to the magnitude of this problem. 

Chairman DODD. Let me jump to the OCC. John, this is, again, 

not new information. Why have we not been more aggressive as 

regulators here in dealing with this? 

Mr. WALSH. Certainly, it is not new information that there have 

been capacity constraints going back to 2008. As I mentioned in my 

testimony, we had been both gathering more information but also 

conducting horizontal exams in the major servicers focused on the 

modification problems that were occurring, and clearly, we had 

seen a rise in the number of complaints through our own system 

that had indicated problems with mortgage modifications. We were 

in the exam process seeing that there were clear deficiencies that 

were otherwise being reported. We were consistently pushing the 

servicers to hire, to train, to adopt the succession of procedures 

that were coming forward from HAMP, to develop their own proprietary modification programs, but the push that was being made 

was always trying to get them to ramp up. 

As has been described, a very large surge of problem loans was 

coming into the system. They were clearly not ready for it. They 

have made substantial efforts to improve processing and deal with 

the problems that are there, but they clearly have not caught up 

with the modification piece of it. 

We have now seen the surge of cases move through to foreclosure. There was somewhat of a pause going back 6 to 9 months 

as HAMP and other programs, in fact, did ramp up and we saw 

increased modification activity. But the foreclosures that were coming were an inevitable piece of this. As I mentioned in my testimony, we relied upon internal audit quality assurance and the 

other things that are often relied upon to look at these large volume activities. But, the institutions failed in their oversight of, for 

example, third-party agents, law firms and others. They did not ensure quality assurance both in their own activities and in their use 

of third parties. Clearly, in hindsight, we should have seen that 

that problem was going to appear successfully in each link in the 

chain, but—and so now that is where we are focused. 

Chairman DODD. Dan, do you want to comment on this? 

Mr. TARULLO. So I asked the same question of our people that 

you just asked of us. 

Chairman DODD. Yes. 

Mr. TARULLO. Everybody has their own supervisees and so everybody has a specific story for the specific supervisee. But I came 

away with a few observations. 

One, as John has already said, I think there were a lot of supervisory resources focused on servicing and servicers, but they were 

dominantly focused on modification, or the slow pace of modifications. I actually asked our folks to pull the records of consumer 

complaints that we collect through the Community and Consumer 

Affairs Division of the Board, and dominantly, the complaints 

about foreclosure are complaints from people being foreclosed when 

they think they are eligible for, or should be in, a modification. And 

so that is where a lot of the attention was directed. 

The second thing is that the control process audit that I mentioned a moment ago is one that I have now concluded needs to be 
293 

rethought, because what you essentially do is pick out a particular 

function of an institution where you say, OK, there may be some 

problems here. We have heard of some problems here. Let us dig 

in, and you dig in and once you have finished digging in, you find 

difficulties—or do not, but usually do—and then you take some sort 

of supervisory action. 

You cannot audit all control process functions. You just do not 

have anywhere near the number of examiners you need. So in the 

absence of specific complaints about specific processes, the question 

is how do you use those audits that you do to try to identify or rectify problems elsewhere. 

And although I do not want to push this point too far, because 

I think it is pretty provisional in our own thinking, we do have 

some sense that in institutions where, for example, on the modification problems we had been doing a control process audit and 

asking for some changes, that we still see an incidence of problems 

on the strict documentation foreclosure side, but they do not seem 

to be quite as pervasive. 

And so what we are trying to figure out going forward is whether 

there is some sort of causal relationship between having done one 

kind of control audit on the one hand, and on the other getting the 

firm to pay more attention to what it does. Or, frankly, Senator, 

it may be that it was a coincidence. But that is my observation at 

this point. 

Chairman DODD. Well, thank you for that. Obviously, I have a 

lot more questions, but my time has expired. 

Senator Shelby? 

Senator SHELBY. Governor, I would like to follow up on something you talked about earlier, and that is risk management—— 

Mr. TARULLO. Yes. 

Senator SHELBY.——and quality control. You alluded to the fact 

that there are obviously weaknesses here. When did you or the 

Fed, or did the Fed realize that there were problems in this documentation process dealing with mortgages? 

Mr. TARULLO. For me personally, it was really not very long at 

all, maybe a day or so before the public, because, one institution 

that we are the primary supervisor for, Ally, did come in and tell 

the supervisors of the holding company that they had self-identified 

these problems. 

Senator SHELBY. What do you believe is the fundamental problem here that needs to be resolved? For example, for years and 

years, you know, we have got State property laws, we have got 

laws that if you buy a home, you execute a note and a mortgage. 

The mortgage is sold, say, to Fannie Mae or somebody and they 

historically used to record the assignment, you know, every time a 

mortgage was sold. Has this electronic system that we talk about, 

is that part of the problem? Or where are we, because we are trying to solve this problem. 

For example, if somebody is not paying their mortgage, my gosh, 

you know, I believe that you have got to foreclosure unless you 

agree to modify it or something like that. Now, to foreclose, you 

have got to own that mortgage, in a sense. That is the law, is it 

not? 

Mr. TARULLO. Right. 
294 

Senator SHELBY. So where are we, and what do you think needs 

to be done? 

Mr. TARULLO. So I can only give a provisional answer to that, 

Senator. 

Senator SHELBY. Sure. 

Mr. TARULLO. But I have to say, getting briefed on the extent of 

the problem, the complexities of national servicers doing not just 

foreclosures but servicing in every State, in many counties within 

particular States, the differences in requirements and the continued requirement for physical recording obviously is for them a substantially costly undertaking. 

Senator SHELBY. But those are State property laws, are they not? 

Mr. TARULLO. That is right, and, certainly we the regulators cannot do anything about them. I suppose you could if you decided 

that it was important to have a national system of—— 

Senator SHELBY. In other words, preempt the State in property 

and recording? That is a strong—— 

Mr. TARULLO. Exactly. So that is why I did not propose that in 

my testimony. What I proposed was thinking about national standards for servicers—— 

Senator SHELBY. Let us go back a few years, let us say seven, 

eight, or 10 years ago, 2001, or it will be. Did we have those problems then? I mean, for years, we did not have those problems. People executed the mortgage, they sold the mortgage, they recorded 

the assignment, they did the documentation, risk management, 

quality control. Did they get too risky, too sloppy, too shoddy in 

what they were doing although they were dealing in hundreds of 

thousands of dollars worth of mortgages—billions of dollars 

worth—and does that taint the securities, in a sense, that you sell? 

Mr. TARULLO. Well, so I—— 

Senator SHELBY. You securitize the mortgage—— 

Mr. TARULLO. Right. I would say a couple of things. One, in all 

honesty, we do not know what the situation actually was in 2001, 

or at least I certainly do not. We do not know whether, if an examination had been done of servicers in 2001, some of these issues 

might have been found. But because housing prices were rising and 

foreclosures were pretty contained, you did not have the opportunity for a potential problem in documentation to show up at the 

courthouse door, as it were. 

I do not think there is any doubt but that the enormous increase 

in the servicing operations—— 

Senator SHELBY. So the volume of the mortgages? 

Mr. TARULLO. A huge volume of the mortgages, absolutely, and 

more concentration in the servicing—— 

Senator SHELBY. Well, where do we go from here, today? This is 

December 1, 2010. 

Mr. TARULLO. Right. 

Senator SHELBY. We have still got this problem. Senator Dodd 

has had a number of hearings. We had other people. Are we close 

to solving this problem, or where are we? 

Mr. TARULLO. From my perspective, Senator, I would not say we 

are close to solving the problem for several reasons. One, as I said 

earlier, I think it is related to the relative balance between fore-
295 

closures and modifications. Two, I think that until you get a more 

or less integrated approach to—— 

Senator SHELBY. What do you mean by an integrated approach? 

Mr. TARULLO. I think you need a set of standards that apply to 

servicers whether they are in a national bank—— 

Senator SHELBY. OK. 

Mr. TARULLO.——an affiliate of a bank, or, and this may be increasingly the case in the future, or a non-bank institution. 

Senator SHELBY. And what kind of standards are you talking 

about? Are you talking about recording and showing ownership or 

stuff? But we have had that, have we not, for years? 

Mr. TARULLO. Yes. I do not know that we have had clearly articulated standards as opposed to requiring firms to have their own 

processes which assure that they abide by the law, and so I think 

what this has shown us is we do need more standards and particularly during a period in which there is, as I say, sometimes literally 

a race between foreclosure and modification within particular 

servicers. I think some sense of how that race is supposed to be 

conducted needs to be set forth on a standardized basis. 

Senator SHELBY. OK. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Shelby. 

Senator Reed? 

Senator REED. Thank you, Mr. Chairman. 

Chairman Bair, the HAMP program, as mentioned, is voluntary. 

It covers roughly, my guess is about 25 percent of the modifications. And as a result, for the vast majority of the loans, there is 

no requirement for banks or servicers to offer modifications or do 

most anything. Should we mandate that 100 percent of loans 

should at least be evaluated and offered a modification? 

Ms. BAIR. Well, I think that is a very important observation. 

What we have suggested is to try to have some type of global settlement where we could actually leverage all the deficiencies we 

are finding and procedural hurdles that are appearing to foreclosure because of lack of documentation and not following fully the 

State and local laws pertaining to foreclosure; that if they provide 

some type of streamlined mod and give it some period of time—say 

3 months—to see if you can rehabilitate the loan, they need to do 

that first. If the loan cannot be rehabilitated, then they could proceed to foreclosure, and perhaps law enforcement officials and borrowers would agree to waive procedural objections. So I think actually trying to take a lemon and make lemonade, this might actually 

provide some additional leverage to get a more streamlined modification process for the nongovernment modifications. 

Legislation would be an option. I do not know if this is possible, 

though. I guess I am looking for more things that we could perhaps 

implement immediately. 

Senator REED. Well, again, the legislative process, as we prove 

every day, unfortunately is slow. So—— 

Ms. BAIR. You are talking about bank regulators. 

Senator REED. So you are envisioning a regulatory solution initially which would use what authorities you have, which are substantial, to deal with a host of issues. One is making sure everyone 

is offered or at least evaluated for modification, not a small fraction, under half, not voluntary but everybody; dealing with issues 
296 

of quieting title and standing, etc., which may require legislation, 

but at least you could pursue it at a regulatory level. The other 

sets of issues would be the capacity of the institutions to do their 

jobs, which you would have to increase. But there is another issue 

here which is the individualized evaluation in the foreclosure process of the status of the person. And you are probably aware, I am 

sure, that at least in some districts, the bankruptcy trustees have 

become very active about requiring the paperwork be correct. Is 

that something that you would like to see broadened? Because it 

appears to be within the power, the existing power of bankruptcy 

trustees. 

Ms. BAIR. Well, it is not just bankruptcy trustees. In judicial 

States, it is the courts as well. Local courts, as well, increasingly 

are becoming much, much more stringent and exacting in terms of 

requiring proof of good chain of title, challenging the MERS process. So I think this is a real issue. 

And, again, as Dan said, we are still collecting the facts, but it 

is not clear to me, depending on how the case law goes, that all 

of these procedural problems can actually be cured. And if that is 

the case, it seems to me we need to think about some type of safe 

harbor provision, again, using that as leverage to try to get loan 

modifications early in the process, give the borrower a fighting 

chance, let them see if it can work; if not, then waive the procedural objections and permit proceeding to foreclosure. 

But I think this is—getting back to Senator Shelby’s question, 

you know, ‘‘how did we use to do it?’’ I think community banks are 

still doing it the way they used to do it, and, you know, when you 

are keeping your loans in portfolio, servicing them yourselves, you 

have every economic incentive to work out the loan to mitigate 

your losses. When you separate ownership from the loan through 

the securitization process, the same economic incentives are not 

there. You have this very high volume of troubled mortgages that 

these servicers are trying to deal with, with a compensation system 

that was based on benign times when there were very few troubled 

loans. 

So I think going forward, you know, the compensation structure—— 

Senator REED. My time is limited, but essentially what you are 

saying, the model that worked before does not work any longer. 

Ms. BAIR. It does not. It does not. 

Senator REED. And we are pursuing this model in the same old 

fashion, just do a little bit more and do a little of this and that. 

Ms. BAIR. It is not going to work. 

Senator REED. It is not going to work. Time is of the essence. 

There are huge sets of issues here with respect to the legal liabilities of large financial institutions, securities law violations, tax 

law violations, etc. And the sooner there is, I think, a coming together of the financial community and the regulator, with a coherent program that addresses these issues, the better off we will all 

be. But what I am concerned about is that the people who will be 

left out are the mortgage holders who are struggling to stay in 

their homes—not the flippers, not those folks, but people who have 

seen one spouse lose a job, tuition increases, etc., struggling. And 

until they are part of this solution, we are not going to get a total 
297 

solution. That goes to the bankruptcy issue, empowering bankruptcy trustees to be much more proactive. 

Let me just turn quickly to Mr. Walsh and Mr. Tarullo. What 

you have pointed out I think can be characterized as severe managerial failures in many of these companies. Would that be your conclusion, Governor Tarullo, in terms of the way they are operating, 

in terms of how they accumulated these mortgages? 

Mr. TARULLO. As I said earlier, I would want to withhold a final 

characterization, but as I also said, we have already seen a lot of 

problems. And when you see a lot of problems, there is some degree 

of management failure, and I would suspect in some institutions a 

rather substantial degree of management failure. 

Senator REED. Mr. Walsh, your conclusion from your banks? 

Mr. WALSH. I would have to second that. Clearly, when banks 

are self-reporting that they have had major problems, they have 

major problems. 

Senator REED. And let me ask you what steps you have taken 

in terms of ensuring that the resources are available, that the managerial skills are available, that the emphasis from the very top of 

the institution all the way down, and maybe in terms of the compensation arrangements which are doled out fit this critical national goal of stabilizing the mortgage markets, of fixing this issue 

of the securitization model and a servicing model that no longer 

works. What have you done? 

Mr. WALSH. As I had mentioned earlier, we have certainly leaned 

in hard on the modification part of this and done a series of exams 

and have been focused since 2008 on shortcomings in staffing and 

process and the rest. And the banks have improved. They have not 

improved enough. They have not improved fast enough. Now the 

problem has migrated on to the foreclosure process where they 

have again been caught short. 

Clearly there are deficiencies there, but the deficiencies that 

were laid bare by this surge of problems are ones that, should 

these problems pass through and the system returns to normal, it 

may look like its old self. But these problems will now have been 

exposed and the question is how do we deal with them over time. 

Senator REED. Thank you. My time has expired. 

Thank you, Mr. Chairman. Thank you, gentlemen. Thank you, 

Madam Chairman. 

Chairman DODD. Thank you very much. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. In keeping with the 

normal principle, I did not make any opening comments, but I 

want to thank you for your leadership on this Committee. I have 

been on the Committee 3 of your 4 years as Chairman. I asked 

about ten Senators, when I had the option of coming on this Committee, and 9 out of 10 said, ‘‘Whatever you do, do not go on the 

Banking Committee. It is the most boring Committee in the Senate.’’ 

[Laughter.] 

Senator CORKER. It has been anything but that. I thank you very 

much for the way that you have handled this Committee. I thought 

your comments yesterday on the floor were just outstanding, and 

for a person who sometimes scratches his head and asks is this 
298 

really worth a grown man’s time because of some of the issues we 

get involved in, I want to say that I thought it was inspiring; and 

I hope that we live up to those aspirational comments that were 

made yesterday. So I thank you for that, and I hope you will give 

me another minute in my questioning. 

Chairman DODD. You take as long as you would like. 

[Laughter.] 

Chairman DODD. The prerogative of the Chair. 

Senator CORKER. But, seriously, we have had, as Senator Menendez said, numbers of very difficult issues, and I think the way 

Committee Members have interacted with each other has been a 

reflection of your outstanding leadership, and I thank you for that. 

Chairman DODD. As I said, I said this about Senator Shelby as 

well, and my colleagues here know the tremendous job they have 

done on this side. But I would be remiss if I did not point out— 

and I have said this in so many venues and so many places, particularly on the financial reform package, the work of Senator Bob 

Corker, working with Mark Warner, working with so many people 

on this side over here made a major, major contribution to the effort. And while we all did not come to an agreement on it, the effort, I think, made a far better product than would otherwise have 

been the case. And so I will be eternally grateful to a guy from 

Tennessee named Bob Corker for your efforts. 

Senator CORKER. Thank you. And I plan to attend the Latin 

America hearing later today, having traveled with you to Central 

America and seeing that you could run for president of any of those 

countries. I plan on attending that as well. 

But with that, I will move on to our wonderful witnesses. I thank 

you all for being here. I know Senator Bunning is about to get nauseous over here with all of these comments. 

[Laughter.] 

Senator CORKER. But, in any event, I thank all of you for coming 

today. I wonder, as it relates to just the macroprudential issue of 

the institutions, the servicers that are involved, we have not really 

talked much about that. We have talked about some of the issues. 

All of us have offices that are being flooded with phone calls over 

problems with this. Candidly, you have all been very helpful to us 

as we have tried to navigate that. 

But as it relates to just the macroprudential issue, the strength 

of these organizations, what may happen over time to them financially, I would love for Chairman Bair and Mr. Tarullo and Mr. 

Walsh to just respond as to how they see this impacting our financial system in general. 

Ms. BAIR. Well, as I say in my testimony, we do not see a systemic impact at this point, but I think the potential is there. We 

need concerted, proactive action to get ahead of this to make sure 

it does not spin into something that we do not want to see. 

I think that there are two key issues. One is what this does to 

the housing market, which could more broadly impact a lot of institutions and others. We do need a functioning foreclosure process. 

That is just the unfortunate fact of it. And so I think getting this 

situation cleared up so that borrowers on the front-end are given 

a fair chance at a rehabilitated loan. But, if that does not work out, 

if foreclosure is unavoidable, that there is a process to proceed that 
299 

has certainty in terms of ownership and legal rights I think is important. 

There are also a lot of potential litigation exposures here, and potential for law enforcement actions. And, I do not think we have 

a good handle on that yet. I think we have asked the institutions 

to do their own risk assessment of the financial risks that are involved in this, but I think we are continuing to collect information 

and just do not have a good handle on it yet. 

Senator CORKER. I am aware of a number of those issues, but do 

you have any sense of the order of magnitude, though, of—I know 

you do not know exactly, but is this something that we should be 

concerned about as it relates to especially the large servicers and 

their organizations? Is the magnitude large? Or is this something 

that really does not matter and we ought to move on? 

Ms. BAIR. I think as Dan said, it could be very significant. It 

could occur over a period of years, but it could be quite significant. 

A lot of it relates to open legal issues and how they are resolved. 

And I think the put-back risk is something in particular that the 

Fed is taking the lead in analyzing. So I am sorry, we do not have 

all the facts yet. A lot of it would be determined by how courts 

might resolve various open legal issues, which is why I think that 

the FSOC can provide some leadership and coordinate interpretations now, at least where we have appropriate authorities. I think 

that would be helpful. 

Senator CORKER. And as you are answering, Mr. Tarullo, in 

these contracts, these servicing contracts, is there typically recourse back to servicers? Is there significant recourse back to 

them? 

Mr. TARULLO. Let me echo what Sheila said on the issue of the 

housing market and just add to that something I noted in my written testimony, which is until we get a handle on and reduction in 

the overhang of the foreclosed inventory in the housing markets, 

and until we have a process that is moving smoothly, I hope both 

with modifications and with foreclosures, there are going to continue to be problems in the housing market, and obviously thus for 

the rest of the economy. 

With respect to put-back risk, that is a function of several things. 

One is the default rate that one anticipates, because security holders only want to put back securities when there are enough defaults that they are not paying well. That we can at least model 

based on certain macro assumptions. 

Second is the legal set of issues. Those are harder to pull apart 

right now at least. I think Mr. DeMarco can probably give you a 

pretty straightforward answer about put-back liabilities with respect to the GSEs. But when you get to private label securities, 

those agreements vary enormously, and the representations and 

warranties in those agreements vary. So even if there is litigation 

over one, that may not tell you what the liabilities in others may 

be. 

The third factor is the particular configuration of the defaults 

and the legal exposure at a particular institution. So you could 

have an institution that securitized a bunch of mortgages that are 

not doing very well but had a set of representations and warranties 

which were either very weak or which they met. So it is just going 
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to take time to disentangle that. As I said, we are going to take 

a first stab at getting the firms themselves to do it in the capital 

plan, but that may not be final. 

In terms of order of magnitude, Senator, I do not want to give 

you a number. Senator Dodd noted that the order of magnitude in 

public or nongovernmental assessments differs by a factor of three 

or four. We do not have a better number than that, but I do think, 

as I said in my testimony, that with respect to some institutions, 

this could be a significant exposure. 

Senator CORKER. And before Mr. Walsh—my time is going to expire, so if you could maybe, all of you, even respond to whether 

pricing—you know, the servicing pricing seems to be—obviously, it 

was priced for no problems, and there are lots. What length of time 

is an appropriate length of time for foreclosure? I know in judicial 

States it is one length of time, in non-judicial another, both of 

which are incredibly long. But how long should a foreclosure process take? Is it 90 days, 100 days? It is probably not 492. And then, 

last, just the issue of conflicts, I know that we have been talking 

more about the mechanisms of servicers, but I know we had an 

amendment on the floor we were unsuccessful in passing over the 

last year and a half, but to me there is a built-in conflict with 

servicers who end up having home equity loans and others. That 

to me is a huge issue that we do need to deal with because the fact 

is I think in many cases they are putting their interests ahead of 

the first mortgage holder, which really inverts and greatly changes 

property rights. 

So with that, I will stop, Mr. Chairman. Thank you for the latitude, and hopefully there will be a little bit of a response. 

Chairman DODD. Absolutely. Thank you. 

Do you want to quickly respond to that at all, to Senator Corker’s 

point? Does anybody want to jump in on that just quickly? 

Mr. WALSH. I mean, I would just say on the systemic piece, there 

is a systemic risk here, but it is unlike the sort of market crisis 

in 2008 or 2009. It is something that appears to be something that 

will be drawn out as we sort through the problems that are there, 

as Governor Tarullo mentioned. 

On the length of the foreclosure process, it tended to average 8 

or 9 months. Now it is averaging 15 to 18 months. I mean, it takes 

a long time, but it takes a long time by design. I mean, it is not 

supposed to be easy to take somebody’s house away from them. But 

it has now become quite drawn out, and the question is, you know, 

do we need to streamline that in some way. 

Mr. TARULLO. If I could, Mr. Chairman. 

Chairman DODD. Certainly. 

Mr. TARULLO. Senator, I completely agree with your observation 

on the first and second liens, and I think that is one of the many 

reasons why we do need to have a more consolidated set of standards applicable to servicers, because there is an inherent conflict 

there, and when you observe a second lien doing quite well and a 

first lien moving toward default, you do raise your eyebrow a bit. 

Chairman DODD. Sheila? 

Ms. BAIR. Also, I just want to note when we have done our own 

securitization as part of mortgages that we have acquired from 

failed banks, we have tried to implement servicing reform so the 
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compensation structure does go up if a loan needs to be worked 

out. There is third-party servicer oversight. We have also included 

servicing reforms as part of our securitization safe harbor. And we 

have also engaged in discussions with our fellow regulators about 

defining qualified residential mortgages as part of the Dodd-Frank 

Act implementation, and whether servicing should also be addressed. And I think at the top of our list there is a second lien 

problem so that if a servicer is going to service a first lien and own 

the second lien, the securitization documents have to spell out in 

advance what is going to happen if that first lien gets into trouble 

so we do not get into this in the future. 

Chairman DODD. That is a good suggestion. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

You know, Ms. Caldwell, I mentioned in my opening statement 

that 17 of my colleagues joined with me in a letter to the Secretary, 

and it is our concern about HAMP. We are concerned about the 

servicers and the banks, and I will get to that in a minute. But we 

are also concerned about HAMP, which was originally projected to 

take care of 7 to 9 million homeowners. It has fallen far short with 

about 495,000 permanent modifications since January of 2009. At 

the same time, in 2010 we are estimating that there is going to be 

about 3.5 million homeowners who will receive foreclosure notices, 

and less than 2 percent of the funds allocated for HAMP have been 

expended. Now, something is wrong with that. 

We sent a letter that outlines a series of actions that can be done 

not with congressional approval, simply administratively by the 

Secretary, including a process of holding servicers accountable. 

Treasury offers incentives for their participation, but no disincentive or no consequence for mistakes. You know, the issue of a Office 

of Homeowner Advocate, the issue of automatic conversions if you 

have a successful trial modification, the issue of revised eligibility 

requirements, the documenting of investor base modification denials, the release of net present value analysis. Why can’t we get that 

done by Treasury? 

Ms. CALDWELL. Well, I heard a lot of suggestions there. Let me 

just first talk in general about the program. 

You know, I think it is important to remember that when we 

started the program, you know, 18 months ago, folks said, 

‘‘Servicers will never sign up for a voluntary program.’’ It went 

from zero to over 100 servicers signed up. Then it was, ‘‘We will 

never get homeowners in the program,’’ and we set a goal of getting 

500,000 homeowners to trial modifications by November. We hit 

that. 

Then we reached the conversion challenge, and at the beginning 

of 2010, we had about 31,000 permanent modifications and a backlog of close to 700,000 trials, and folks said, ‘‘They will not convert.’’ We have gone in the first three quarters of this year from 

31,000 modifications to over 500,000. And what we do know about 

those modifications is that they are affordable to the homeowner 

and based on the OCC OTS metrics, they perform better than historical modifications. So while we certainly have not hit the numbers we want and continue to focus on outreach efforts to homeowners through our call centers, through our events, what we do 
302 

know is that those homeowners that are in HAMP have affordable 

and sustainable modifications that have used taxpayer resources 

wisely. But we continue to focus our efforts on outreach, absolutely. 

Senator MENENDEZ. Well, I appreciate your defense of the program. I do not quite see it the way you see it. I do not think many 

Members see it the way you see it in terms of what our goals are 

and what the accomplishments are. And so I hope that we will get 

a response from Treasury toward these six, seven items that can 

be done internally administratively, and many of us, including 

many of us on this Committee, think that, in fact, would transform 

that into a much better, more successful program. So we would like 

to get a response from Treasury on it. 

Mr. Tarullo, a couple of weeks ago, your colleague on the Federal 

Reserve Board, Sarah Bloom Raskin, said that the numerous procedural flaws that have been unearthed are ‘‘part of a deeper systemic problem,’’ and that as long as the business incentives for 

bank and loan servicers run counter to the interest of homeowners, 

there is a need—and this is her word—‘‘a need for close regulatory 

scrutiny of these issues and for appropriate enforcement action 

that addresses them.’’ 

Now, to me that makes a lot of sense, and as long as the 

servicers are incentivized to quickly push foreclosures through, 

they will ignore, I think, very often the ordinary homeowner’s 

needs and the accompanying dead weight cost of foreclosures. How 

do we get those incentives somehow realigned? What steps should 

banks and regulators such as the Fed take, if any? 

Mr. TARULLO. This gets back, Senator, to my point about the 

need for a combined or generally applicable set of standards which 

are going to apply to servicers whether or not they are an insured 

depository institution, an affiliate of an insured depository institution, or completely independent. 

I do think that with respect to fair treatment of homeowners, 

with respect to the way in which a servicer deals with conflicts it 

may have as between one lien holder and another, with respect to 

the relationship between the servicer and the investors in a 

securitized mortgage, that the system as it is now was simply not 

developed with the prospect of a large number of foreclosures and 

troubled loans in mind. 

So I think that while you will see problems across the board, you 

are going to need more of an across-the-board approach, and that 

is why I said in my testimony and will repeat here, I think we do 

need more of a national effort to impose standards on everybody. 

We can do things as we are—I mean, with respect to one of our 

institutions where even partway through the examination we just 

see a lot of problems, we are pushing them to change now. We do 

not need to wait for the end of the examination. But that kind of 

step-by-step process, one institution by one institution, specific 

issues here, I do not think gets to the larger points that you and 

Senator Corker and others have been raising. 

Senator MENENDEZ. Mr. Chairman, I have one final one. Mr. 

DeMarco, both Freddie and Fannie are participants in the second 

loan modification program which helps a lot of homeowners who 

are struggling with multiple mortgages, and servicers are supposed 

to implement this program by January of this coming year. But 
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given the stories we have heard from homeowners and consumer 

advocates about servicers’ reluctance to engage in second loan 

modifications, let alone the first loan modifications, I am concerned 

about how the implementation of this program is going. 

What rules are in place for ensuring that servicers are knowledgeable about the second lien modification program, that they actually participate? And how does your agency plan to oversee this 

program to ensure that servicers are in compliance? 

Mr. DEMARCO. So, Senator, first, the second lien program you 

are talking about is part of the HAMP program, so that is administered by the Treasury Department. It is a Treasury program. 

But to the general point—and this goes back to some comments 

that were made just a few minutes ago in response to a question 

by Senator Corker—the existence of second liens has been very 

problematic for us in overseeing the Enterprises and their loss 

mitigation activities with respect to first liens. And it is really 

quite turning things upside down to find situations—and this is 

rather common—where borrowers are continuing to pay on their 

second mortgage, and they are not paying on their first mortgage. 

But the property rights here actually run first to the first lien holder, and this has been a true conundrum in this whole loan modification and loss mitigation effort that we have all been engaged in, 

is to figure out that the way this ought to work is that the second 

lien holder ought to be taking the first credit loss here, and yet we 

are continuing to do loan modifications on first liens that basically 

provide protection to second liens. 

So I would share the comments of my colleagues that as we think 

about our housing finance system going forward, I think that this 

is an area that clearly needs addressing. But as we go along right 

now, with second lien—with loan modifications, yes, it is very much 

our expectation as a conservator of Fannie and Freddie that the 

second lien holders be participants in providing relief to a troubled 

homeowner. If the first mortgage holder is going to provide relief 

through a reduced payment, an affordable payment, we certainly 

think that the second lien holder ought to be sharing in that. 

Senator MENENDEZ. Thank you. 

Chairman DODD. Thank you, Senator, very much. 

Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. 

I am going to say something that you all will not like, but in 

2006, we had a huge housing crisis in this country. And even before 

that, the mortgage crisis showed its face in 2001 and 2002 and everything. All you people here have not come up with a solution to 

solve it. All your brains, and you have got a lot of them, have not 

come up with a solution. And I have sat on this Committee for 12 

years and listened to the same absolute gobbledygook from everyone who has come up here. You have not had an answer to any of 

the questions. All you do is deal in hyperbole. You do not deal in 

fact. 

How do you solve the problem? How do you get out the first 

mortgage holder and the second mortgage holder, how do you get 

them out? I cannot believe that with all the brains that are sitting 

at that table that there is not one of you that can come up with 

the answer to solve this crisis—which is about to go the wrong way 
304 

again. If you saw the numbers in 2010 for October, you saw them 

minus 2 percent in housing. 

Now, I am telling you, if it goes badly in November and December—because all the programs that we had in place are no longer 

in place, I mean, that supplemented the mortgage market and the 

housing market. And until we get the housing market straightened 

out and the loan market straightened out, we are not going to get 

the economy straightened out. 

Chairman Bair, I know you have heard this before, but it is too 

important not to repeat to you again today. I continue to hear from 

well over 40 Kentucky community banks about the heavy hand of 

your examiners and their supervisors. I have talked to you about 

this before. These banks are not the ones that caused the housing 

mess. But your examiners are blocking them from making good 

loans and forcing them to treat good loans like bad ones. Your regional supervisors are even adding more requirements on banks beyond what the examiners think are necessary. And the biggest 

complaint is your agency is being inconsistent in applying the regulations day to day and bank to bank. 

When are you going to do something about this and get off the 

backs of our community bankers? 

Ms. BAIR. Well, Senator, whenever this issue comes up, and we 

were discussing it before, if you can give me specific names of 

banks that have had problems, we can review that and make sure 

that whatever our examiners are doing in the field is consistent 

with the policies we have issued in Washington. We have issued a 

lot of policies on this. We want a balanced examination approach. 

We want bankers making good loans. 

The community banks have been doing a better job lending than 

any other sector, certainly much better than the larger institutions. 

So the facts are the community banks have been lending. Their 

loan balances have been maintaining steady throughout this crisis. 

There are some community banks that have a lot of troubled commercial real estate loans, and if that is the case, they are going to 

be capital constrained because they are going to maintain their 

capital to absorb losses from their troubled commercial real estate 

loans. 

Senator BUNNING. But I am talking about people that have 30 

percent down on a home—— 

Ms. BAIR. Mm-hmm. 

Senator BUNNING.——and can go out—30 percent down used to 

be—— 

Ms. BAIR. If they have a 30 percent downpayment and have income to support the mortgage, they should be approved for the 

mortgage if—— 

Senator BUNNING. They are not being. 

Ms. BAIR. Well, please, give me specific examples. We will correct 

that very quickly. 

Senator BUNNING. I will be more than happy to give you 40 

names of 40 banks. 

Ms. BAIR. OK, good. We will take a look at all of them. 

Senator BUNNING. OK. Mr. Tarullo, Mr. DeMarco, what kinds of 

losses—and Sheila, you can also get in this—what kind of losses do 

you expect the Fed and the GSEs to take on their holdings of mort-
305 

gage and mortgage-backed securities as a result of mortgage servicing problems? 

Mr. TARULLO. I can say from our point of view, Senator, the 

mortgage-backed securities which we purchased as part of the 

large-scale asset purchase program last year are only those that 

are guaranteed by Fannie and Freddie. So we do not have an independent issue there. We have the guarantee of Fannie and Freddie. 

Senator BUNNING. OK. Then he will pick it up at Freddie and 

Fannie. 

Mr. DEMARCO. Right. So it is something that we are—both Enterprises are totaling up and it is a servicer-specific issue and it 

goes to the losses that result from delays in foreclosure processing 

because the individual servicer has a problem. 

Senator BUNNING. Four trillion, or where are we? 

Mr. DEMARCO. No, sir. It is nowhere near that amount. I mean, 

the fact that there is a loss already coming on the mortgage because it is seriously delinquent and it is in foreclosure has already 

been reserved for. What we are looking at in the foreclosure processing problem is the incremental cost of delay and possible litigation that results from this. So no, I do not think we are looking at 

any—— 

Senator BUNNING. Well, how many foreclosures, then, are we still 

engaged in? 

Mr. DEMARCO. I can get that number for you, Senator. We report 

it up here on a monthly basis to the Committee. But I would say 

that—— 

Senator BUNNING. Well, does somebody on the Committee staff 

have that number? 

Chairman DODD. We will get it for you. 

Senator BUNNING. OK. 

Mr. DEMARCO. We will certainly provide it again, Senator. We 

report—just so you understand, we report monthly to the Committee—— 

Senator BUNNING. Well, since you report it, I thought maybe 

they had it. 

Mr. DEMARCO. I understand. We report monthly what is called 

the Federal Property Managers’ Report in which we report for each 

Enterprise updated data on mortgage delinquencies as well as the 

whole range of loss mitigation activities that are taking place, loan 

modification—— 

Senator BUNNING. Well, I have got another question and you are 

talking me through it. Are the Fed and the GSEs going to aggressively pursue pull-back of mortgages to the originators and investment banks to reduce taxpayer losses? 

Mr. DEMARCO. I am very much in the process of doing that, Senator. At FHFA, we have been quite clear and public about that for 

months. The instruction to the Enterprises, and the mortgage 

servicers know this, is that we will—where there are representation and warranty violations by a servicer or loan originator, we 

are having the Enterprises put those loans back. In my prepared 

written statement, I provided data on how much was done last 

year and this year. 

And I would say further, Senator, your question about private 

label mortgage-backed securities, in July, the FHFA issued 64 sub-
306 

poenas to a range of institutions to gather data on mortgages in 

private label mortgage-backed securities that the Enterprises hold. 

This is to gather information to be able to assess whether there 

have been representation warranty violations in those securities. 

This is going to be a long process. But FHFA has been committed 

to it as a necessary part of being the conservator and having a responsibility to protect the taxpayer. 

Senator BUNNING. Sheila, let me explain why you have not heard 

from those bankers. They are afraid to put their names forward to 

figure that the FDIC will jump down their throats because they are 

in total and complete control of who and how they can lend money. 

So that is their reluctancy to come forward. 

Ms. BAIR. You have my personal assurance that would not happen. I have—— 

Senator BUNNING. I love that. 

Ms. BAIR.——to make sure that is not—no, you have my personal 

assurance that will not. I cannot respond, though, to generalized 

issues—— 

Senator BUNNING. Well, it is no big deal. I will get the 

names—— 

Ms. BAIR. OK. 

Senator BUNNING.——from the head of the Kentucky Bankers 

Association. 

Ms. BAIR. That would be fine. 

Senator BUNNING. Thank you. 

Chairman DODD. Thank you, Senator, very much. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you for your leadership on this Committee over the last 2 years 

that I have been on it. It has been an extraordinary exploration of 

the process by which we aggregate capital, disburse capital, and 

the many, many challenges that have arisen in the course of mortgage practices, both at the retail level and then at the 

securitization level, and these issues are going to continue to reverberate for a long time. We are addressing one little slice of it today. 

But thank you for your leadership on Dodd-Frank, a huge effort to 

try to stabilize our financial sector and have it serve our nation 

well in the decades ahead. It has been a pleasure to be a part of 

your team. 

Chairman DODD. Well, thank you, Senator, and you have made 

a wonderful contribution, as well, to the efforts and I want to publicly thank you. As a new Member of the Committee, you became 

very active and played a very important role in the process and I 

thank you for that effort. 

Senator MERKLEY. Thank you, Mr. Chair. 

I wanted to start, Mr. Tarullo, by asking you a little bit about 

the put-back risk. The numbers that you lay out in your testimony 

are that Freddie and Fannie between them have $13.3 billion in 

outstanding repurchase requests. The four largest banks have reserves of less than $10 billion. So the reserves are not expected to 

grow, and yet the repurchase requests are probably going to grow 

substantially over the $13.3 billion, and that is just Fannie and 

Freddie, not other investors that are—— 
307 

This situation, in terms of its systemic risk down the road, I believe that the Federal Reserve is conducting a detailed examination 

of this risk. When do you anticipate that there will be a point that 

you will have a report, and is the Systemic Risk Council also undertaking this issue? 

Mr. TARULLO. Senator, we have requested the comprehensive 

capital plans from the largest bank holding companies, whether or 

not they are mortgage servicers, I should say. This is an independent exercise. But for those which are big servicers, obviously, 

put-back is a significant risk. We have requested those plans by the 

first part of January, which will be the occasion, for us digging into 

each of them for each of the institutions with respect to specific 

issues, and where there are issues that may call for supervisory 

guidance or action, we would take those. 

I would not anticipate that we would release firm-specific information about that, but obviously we would be happy to communicate on our general evaluation of the level of put-back risk with 

respect to the institutions as a whole. 

Senator MERKLEY. On a scale of one to ten, how big of an issue 

do you anticipate this is going to be? 

Mr. TARULLO. Instead of being evasive, let me just say I am 

going to be evasive and that I will not—— 

[Laughter.] 

Mr. TARULLO. I do not want to give you a number on that because we really are in the middle of the process right now. But I 

will tell you, if I had to guess, that for a few institutions, that number would be reasonably high, and for many, it will actually be reasonably low, even if the dollar amount is significant, just because 

these are such big institutions. 

Senator MERKLEY. OK. Thank you very much. I think it is important that you flagged it in your testimony and that we continue to 

pay attention to it in a Congressional oversight fashion. 

Ms. Caldwell, I wanted to turn to your comments about the dual 

track. I am not sure if I have this word for word, but I think you 

said that you have done procedural safeguards to minimize dual 

track, that is, to make sure that the foreclosure process does not 

move ahead simultaneously with the loan modification process. Did 

I roughly capture your comment? 

Ms. CALDWELL. Yes, you did, and I just also want to acknowledge 

the work, Senator, of your staff in providing input into the HAMP 

program and some of those borrower protections that were announced in January that did put clarification around minimizing 

the dual-track program, so—— 

Senator MERKLEY. So thank you. We will continue to work with 

you all. But I must say, we are much more worried about this than 

I think perhaps Treasury is, based on your testimony. We had recently two major banks here, Chase and Bank of America, which 

said very clearly that it is their policy to pursue both tracks simultaneously, that the only factor that is kind of a caveat to that is 

that they do not go through with the sale if the modification process is still underway. 

But that process, the foreclosure process going forward simultaneously in which the homeowner is receiving notice after notice, 

phone calls, notices posted on their door—I read a letter, actually, 
308 

about one of the homeowners in Oregon—is enormously confusing 

and enormously stressful to our families. I wish there was, in fact, 

a rule in place that said the foreclosure track will not be pursued 

until the modification is completed because that would change the 

dynamic of the modification process enormously for the families involved. Is that a potential point that Treasury can back, completely 

suspend the foreclosure track until the modification track is completed? 

Ms. CALDWELL. Again, with respect to the HAMP program, 

servicers may not start the foreclosure process until loans have 

been evaluated for HAMP or until a certain measure of outreach 

efforts to the homeowner has been tried and exhausted. 

Senator MERKLEY. So—— 

Ms. CALDWELL. In the hearing—— 

Senator MERKLEY. I am going to interrupt you for just a second—— 

Ms. CALDWELL. OK. Sure. 

Senator MERKLEY.——because my time is out. Can I pursue this 

for just a second? 

Chairman DODD. Yes. 

Senator MERKLEY. Thank you, Mr. Chair. 

The situation is that often when folks seek a modification, they 

are told by the servicer, you need to be delinquent before you start 

this. You need to be one or two or 3 months delinquent. At 3 

months delinquent or 90 days, then that is kind of the official start 

of a foreclosure process. So now that the foreclosure process is underway and the modification is being initiated, the banks do not 

suspend the foreclosure process. 

And so essentially—I guess what I am saying is that technically, 

you are making a correct point, is that if no foreclosure process has 

begun, it cannot begin if they are in a modification. But so often, 

the interaction results in the family being 90 days behind and 

therefore triggering the foreclosure process before the bank will 

proceed with the modification, and then the foreclosure process is 

not suspended. That is the reality on the ground that all of us are 

seeing with our constituents. And so we need a much stronger position in regard to that situation. 

Ms. CALDWELL. You know, we completely agree with you that the 

dual-track process is confusing for homeowners, but I just want to 

make sure to clarify that within the HAMP program, we issued 

guidance that effective in June of this year, servicers had to stop 

the process in place and evaluate that homeowner for HAMP. 

In the last hearing that this Committee had, the two large 

servicers did testify that for those loans in their HAMP book, they 

do, in fact, stop that process, but that for those loans that are subject to other investor guidelines where they are not permitted to do 

so, they cannot. So HAMP does not have the authority to override 

existing investor contracts, but that is a specific HAMP guidance 

that was issued in January of 2010, effective in June, and it was 

done in response to the overwhelming complaints we heard during 

2009 about confusion among homeowners with the process. 

Senator MERKLEY. I will just conclude with this, then. Because 

of those existing agreements, what you are describing has little 

practical effect because Fannie and Freddie are telling those 
309 

servicers to continue with the foreclosure process, not the final sale 

but the foreclosure process, the intermediate steps to get there, and 

so we have a real problem on the ground that needs to be addressed. 

Mr. DEMARCO. Senator, if I may, to the extent that concerns are 

about GSE loans, Fannie Mae and Freddie Mac loans, I would like 

to say that it is under our authority. It is not—while it is run in 

tandem with and is meant to be in alignment with the HAMP program, those are not HAMP loans per se, and I will be glad to speak 

to the concern you have about dual-tracking with respect to what 

is said about the Enterprises because I think that this is a matter 

of confusion not just for homebuyers, or homeowners, but it is confusion in a lot of other places, as well. 

I think that the responsibility here and the way this is run for 

Enterprise loans, which is in harmony with what is done in the 

HAMP program, is that as soon as a borrower starts missing payments or reaches out and contacts their mortgage servicer that 

they have a difficulty with their mortgage, there is a single track, 

and that is to work on a loss mitigation option that is tailored to 

the particular circumstances of that borrower. Foreclosure does not 

begin, and that is what we should be working on. 

But at some point, foreclosure does need to begin, and that typically is at 4 months, and as has been reported in the testimonies 

of several of us and has been discussed at this hearing, the foreclosure process is extraordinarily long, and so I think that we have 

got to be a little bit careful about terms here—to have a dual-track. 

If you have got a foreclosure process that is going to take a year 

or more, it means that while you are going through that foreclosure 

process, there remains an opportunity for the homeowner to cure 

that loan or to qualify for some other kind of loss mitigation activity. 

I fully understand the concern about the confusion for the borrowers, and I think we all have a responsibility to be working on 

greater clarity for the borrowers. But at some point, once the foreclosure process starts, I am looking at having to conserve the assets of these Enterprises on behalf of the taxpayer and I do think 

that I have got a responsibility as conservator for the lengthy foreclosure process to be moving along if we are not making or hitting 

a meaningful milestone with respect to loss mitigation alternatives 

that are offered, and these offers are numerous. 

So I would just like to sort of leave it at we absolutely want the 

servicers of Fannie Mae and Freddie Mac loans to be doing everything possible to come up with an appropriate foreclosure alternative starting with a loan modification. That must start months 

before any foreclosure processing would start. And if there is meaningful progress and milestones met on those loan modification activities, foreclosure will not start. But once the foreclosure process 

does start, I do think that there is a responsibility to be moving 

that along, and when a successful trial modification is initiated, 

consistent with the terms of the HAMP program, then we will 

cease the foreclosure proceedings. 

I hope that that helped clarify. This is a very difficult issue and 

it is one we all share, the concern for both the homeowner and for 

the taxpayer. 
310 

Senator MERKLEY. I am completely dissatisfied. We will continue 

the conversation. And I apologize to my colleagues. I am deep into 

their time—— 

Chairman DODD. No, it is an important question. I thank you. 

Senator MERKLEY. Thank you. 

Chairman DODD. Senator Bunning asked Mr. DeMarco for numbers, and just to put these in the record, between January and the 

end of August, there were 278,409 completed foreclosures, and 

since January to date, the ones that are now in process of foreclosure are 761,611. So those are the two numbers, and I will put 

this whole graph in the record, Jim, as well. 

Senator BUNNING. Thank you. 

Chairman DODD. I just note, as well, by the way, in this chart, 

and maybe I ought to inquire here, the top five reasons for delinquency, and interestingly, the overwhelming number, almost 50 

percent of delinquencies are curtailment of income, and so—— 

Senator BUNNING. Loss of job? 

Chairman DODD. Well, you know, it is confusing, because one 

says curtailment of income. There is an unemployment statistic, 

and that only accounts for about 8 percent. I do not know what the 

difference between curtailment of income and unemployment is. I 

started to ask staff the question, what the distinction is. I do not 

want to take up the time of Senator Bennet, but someone else may 

answer that question for me, what the distinction is. How do 

you—— 

Mr. DEMARCO. Well, curtailment of income could be that there 

is a dual-income household and one person has lost—— 

Chairman DODD. All right. 

Mr. DEMARCO. It could also mean reduction in hours and so 

forth. 

Chairman DODD. But more than likely, it is loss of employment? 

OK. 

Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and thank you for 

your leadership of this Committee, for allowing me to participate 

and for your excellent, excellent speech yesterday. 

Chairman DODD. Thank you very much. 

Senator BENNET. I hope we hear a lot more like that one going 

forward. 

I wanted to go back to an observation Mr. Tarullo made at the 

very outset of this hearing, which were the macroeconomic implications of what we are talking about here, because I think they are 

potentially devastating. We had this housing bubble. We had this 

crash. We had a lot of people try to figure out, well, how do you 

preserve these home values, which you know is like holding back 

the ocean. 

But now I am very concerned that we are moving in exactly the 

opposite direction, that because of all of the issues that have been 

raised here, we find ourselves in a place where, though it is in the 

investors’ economic interest for a lot of these loans to be modified 

rather than houses foreclosed upon, because it is in the homeowners’ interest to get modifications done, not to be foreclosed 

upon, and because it is in the broader economic interest of this entire country that we do not drive housing prices down because we 
311 

are foreclosing in neighborhoods unnecessarily, somehow, we still 

find ourselves incapable of streamlining this process. And I think 

the dual track has a lot to do with it. I think that the observations 

that the servicers made when they were here was that because of 

Fannie and Freddie, they said, they cannot get out of this dual 

track. They cannot find a way to modify the loans in the way they 

want to. 

And I guess the question that I have—sorry for the long windup—is, is this really an issue about standards, which is what you 

said, national standards, or is it a broken system of incentives, and 

we do not understand the incentives in the marketplace here, or is 

it some combination of those two things, because, you know, for 

us—at least from my point of view, this entire conversation has 

been like watching a slow-moving train wreck for 22 months. And 

for the homeowners in my State, there have been devastating consequences as a result of this. And I am the first to say you cannot 

hold values up when the market drops. It is impossible. What I am 

worried about is that we are engaged in a process of value destruction and therefore creating a horrible potential economic consequence to the country. 

So I do not know if you want to respond to that, or if Sheila or 

anybody else—— 

Mr. TARULLO. I can start, Senator. I am sure others have something to say on that. 

Senator BENNET. OK. 

Mr. TARULLO. First of all, obviously, I agree with your point 

about the macroeconomic consequences here. 

Second, in response to your specific question, I think it is about 

standards, but the standards themselves can be about incentives. 

The first lien, second lien issue is a very good example of that. 

Senator BENNET. Right. 

Mr. TARULLO. But also, the standards are going to need to be 

about resources, because you have heard a number of us mention 

the inadequacy of resources to deal with foreclosure, with modifications, and perhaps even with the ongoing servicing of non-foreclosed mortgages. 

So the reason why I come at the standards is not because rules 

are going to be the end-all and be-all, but I think it will be an occasion for a consolidated group, whether it is in the FSOC or somewhere else, to think about how all these things interact and to try 

to get a more or less uniform set of standards and expectations for 

how this needs to proceed. 

But I do not want to take up more time, because I am sure others have more to say. 

Ms. BAIR. Well, I guess, as I have indicated before, I think we 

will not fix the securitization market going forward unless we deal 

with the huge economic incentives that have really been the key 

driver of this mess we have, with not having servicing done appropriately on these loans. I guess that is number one. 

Number two, I think the GSEs really do have a big role to play 

in setting standards in the short term and I think we can, as members of the FSOC, the FSOC can play a broader role in this process. 
312 

On the question of dual track specifically, one of the reasons we 

have suggested that all servicers be required to designate a single 

point of contact for the borrower is, to just acknowledge the reality 

that in some circumstances, it may be a legal requirement that 

they do dual track. If there is a huge backlog, there might be a 

valid reason to start the process. It may be legally required in some 

jurisdictions. 

But there needs to be somebody talking to the borrower, saying 

if we can get this modification to go through, you will not be foreclosed upon. We have a legal requirement to do this, but we are 

explaining it to you. Do not be scared by it. Give them a phone 

number and a real person who is going to answer the phone to call 

if they get confused because of this process. And I think this would 

be operationally challenging for the servicers, but I think they 

should do it, because borrowers are confused and scared. The thing 

that is happening now is that people in good faith who want to 

keep paying on their mortgage but cannot make the current payment, need to reduce their payment. They are getting caught in 

this confusing trap, and the people who want to game the system 

and just play it out for as long as they can without paying anything 

are benefiting. 

Senator BENNET. Right. 

Ms. BAIR. It is completely upside down. In the short term, that 

would be our solution, with the single point of contact. 

Mr. WALSH. Just to add to that, I think the two actually go together. A number of institutions have talked about instituting a 

single point of contact to eliminate confusion in that form. But we 

do agree, and in the conversations we are now all too frequently 

having with servicers, they share the concern that the dual track 

is confusing. If you have entered into a modification and are performing under it, you should not be getting things in your mailbox 

and things stuck on the door of your house and finding an ad in 

the paper about the home that you live in. 

So where we are—where the servicers have the flexibility to do 

so, we are directing them to halt the foreclosure process when 

there is a mortgage modification in place. But the fact is that it is 

a space that is dominated by contractual obligations because of the 

servicing arrangements, and so in many cases, what happens is either through private-label arrangements or the GSEs, there are 

particular rules that apply and I think we need to give some attention to sorting that out and trying to produce some uniformity. 

Senator BENNET. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

You know, let me ask you something. I am sitting here, and Senator Bunning in his usual, very forthright manner expressed his 

frustration that others of us have tried to express in less direct 

terms, and I thank my colleague sometimes for his directness—he 

gets to the point very quickly—every person represented on this 

table here today is a member of the Financial Services Oversight 

Commission, the one that we established in the Dodd-Frank legislation as one of the major points of this bill, to try and anticipate 

systemic problems, chaired by the Treasury. And I realize you are 

not the Secretary of the Treasury, Ms. Caldwell, but nonetheless, 

you are here. 
313 

I have raised it several times here, but the question of why we 

have not been able to come up with some answers, given your regulatory authority you have, and again, there may be contractual 

issues that limit even regulators’ capacity to be able to implement 

some of these very ideas that you seem to agree on would make 

some sense—a single point of contact, various other suggestions 

have been made—what is the FSOC doing? I mean, it is the law 

of the land now. Are you people meeting? 

It seems to me this was a classic case—we did not anticipate this 

one, but here we have, by all of your admitting, we have potentially 

a systemically risky problem that can put our economy once again 

in a tailspin. And the issue is, why are you not meeting on this 

thing? Why am I not reading about this Commission that we 

formed specifically for a purpose like this getting together and 

doing anything about it? What is going on? 

Mr. WALSH. In our last FSOC meeting, we had a discussion in 

the private session of the foreclosure issue and then there was a 

presentation by Assistant Secretary Barr in the public session on 

the state of play, and we have a number of efforts underway. It is 

certainly something that has been taken up by the Council, but I 

think with the thought that we need to complete the work that is 

underway, which is due to be completed within the next month in 

the institutions and then brought back to the Council at its January meeting. So it is certainly something that has been taken on 

by—— 

Chairman DODD. Well, John, did you talk about—for instance, 

Sheila Bair made some recommendations. Dan has made some suggestions. Were those talked about in that meeting, these ideas, or 

are we hearing them for the first time here today? 

Mr. WALSH. I do not think that we are hearing ideas for the first 

time, but I would characterize the discussions as being at a more 

general kind of systemic level, at least in that first discussion that 

we held. Once we have details of the nature of the problems, we 

will move on to solutions. 

Chairman DODD. I apologize. I have two of my colleagues who 

have not asked questions. But also, I realize that five of the Members of the ten Members are sitting at this table, and again, I have 

raised this at the past in other hearings. If I could have conjured 

up a fact situation—I did not think we would see one this quickly, 

quite candidly, when the law was signed a few weeks ago, that I 

would be sitting here with a bunch of witnesses talking about a 

systemic problem, and yet I do not hear much out of this very entity we created in that bill to exactly provide the kind of answers 

that Jim Bunning has raised. 

And I do not expect miracles out of it. Merely the fact that you 

all meet does not necessarily mean you are going to have an answer to a very complex problem. But, good Lord, I would expect 

something coming out of this operation other than what presently 

is the case. What better case could you have than this one to demonstrate the value of having a Commission like this? 

Senator Kohl. 

Senator KOHL. Thank you very much, Mr. Chairman. Like every 

other member—— 
314 

Chairman DODD. Sorry, I apologize. Herb, Evan was here before 

you. 

Senator BAYH. I will be mercifully brief, Herb. Thank you. You 

are very kind. 

First, Chairman, let me thank you, as the others have, for your 

service. I could not help but note that with your changing circumstances, mine, and Senator Bennet’s, the caucus of those of us 

who have followed our fathers into the Senate is going to be somewhat diminished, so we are going to have to count on Senator 

Pryor and—— 

Chairman DODD. Mark Pryor has got it all on his shoulders now. 

Senator BAYH. I had no idea until I was talking to Senator Bennet yesterday about his father’s long commitment to public service, 

so although not in the Senate, he will carry on in like spirit. But 

it has been a pleasure serving with you, and although our time 

here will come to a conclusion, our friendship will not. So thank 

you. 

And thanks to all of you for your service to the public. I know 

that you sacrifice in many ways personally, and I just want to— 

and particularly during the last couple of years and all we have 

been through, I am sure you have been putting in yeoman’s hours, 

and I want to thank you and your families for your devotion to our 

country and to meeting the challenges that face America. 

I just have two or three quick questions. Mr. Tarullo, I would 

like to start with you, and let me just give you some introductory 

comments. We avoided the worst possible outcome with the downturn. The Fed, though, is now engaged in some rather extraordinary efforts, which I support, to prevent a lapse back into a more 

sluggish economy. I am referring to the quantitative easing. And 

yet we have other drags on the economy. We have lack of consumer 

confidence. They are retrenching. Businesses are sitting on a couple trillion dollars because of their lack of clarity about future final 

demand. We have some of the problems of—the sovereign debt 

problems in Europe may have caused more sluggish growth there. 

China may be worried about increased inflation, so they may be 

raising their interest rate. There are a variety of things that may 

serve as a drag upon the economy. 

Where I am going with all this is obviously real estate has been 

a huge drag on the economy. We have been hoping that this clearing process would take place, that we would get footing under the 

real estate sector and that that could then not be a drag but perhaps contribute to economic growth going forward. And yet the 

dragging out of this whole process runs the risk of retarding that. 

From a macroeconomic standpoint, do you have an opinion about 

what kind of risk this presents to the overall economy, the fact that 

this will be a slower process and the clearing will take more time 

and, therefore, be less certainty in the real estate market? 

Mr. TARULLO. So, Senator, at this juncture our internal forecasts 

are for housing prices being stable to maybe slightly declining, depending on which forecaster you talk to over the course of the next 

year. That obviously is not providing an impetus to growth, and as 

Senator Bennet was suggesting earlier—he did not use this term, 

but I will—there are multiple ways in which the housing market 

can clear, some with greater costs, more neighborhood problems, 
315 

more lost value and foreclosures, lower-valued homes because of 

deterioration and the like; some with fewer costs. There are going 

to be costs in any case, and as Sheila said, we are not going to 

avoid all foreclosures by a long shot. But I do think that if we are 

to get housing to be a net addition to GDP growth, we are going 

to need to deal with the overhang of foreclosed homes which are 

undoubtedly having—— 

Senator BAYH. The sooner we clear, the better? 

Mr. TARULLO. Absolutely. 

Senator BAYH. More certainty. 

Mr. TARULLO. Depressing effect on the market, as—— 

Senator BAYH. Home prices can start rising again, people can be 

confident in purchasing—— 

Mr. TARULLO. Right now, Senator, if you just look objectively, 

based on past experience, conditions—finance and other conditions 

for home buying such as pricing and credit—are actually quite 

good. But home buying is obviously not nearly what people hope it 

will be. Well, why is that? It is for a couple of reasons. One, people 

may be uncertain about their own economic situations. Two, they 

may think housing prices are going to decline some more. And so 

until we strengthen the economy to help deal with number one and 

clear the market to deal with number two, we are going to have— 

we are not going to get—— 

Senator BAYH. And the more protracted this foreclosure problem, 

the more that delays—— 

Mr. TARULLO. It is an additional—— 

Senator BAYH.——recovery. 

Mr. TARULLO.——source of uncertainty. 

Senator BAYH. Right. And with regard to the put-back problem, 

you mentioned that for a couple of institutions this may be a material issue. You said that there was a variation in the estimates of 

a factor of three or four, which is a huge swing. 

Mr. TARULLO. Right. 

Senator BAYH. But for a couple of them, which I assume must 

be, you know, among the bigger ones, this may be a problem for 

them. If they become significantly affected by this, does that 

present a systemic risk of some kind? 

Mr. TARULLO. First, I want to again underscore the tentativeness 

of everything that I am saying about examinations or put-back 

analysis. But, second, I would say this is why we are trying to get 

ahead of the issue and do it in the context of an overall capital 

plan. So to the degree that any institution needs to be reserving 

more, needs to be doing capital preservation, that we are able to 

give that kind of guidance in a timely fashion. 

Senator BAYH. Well, and if they have to be focused on capital 

preservation, then obviously they are not lending, and that is yet 

another drag upon the recovery, isn’t it? 

Mr. TARULLO. Well, sure. At this juncture I wish that capital requirements were the principal drag upon lending. They do not 

seem to be. The demand factors that you mentioned earlier seem 

to be playing a greater role. But at some point they could be, sure. 

Senator BAYH. Right. My last question has to do with I think 

what many people are asking themselves, Chairman. When they 

pick up the paper and they see—there is an understandable sense 
316 

of outrage if someone who has been undeservedly foreclosed upon, 

if the underlying merits did not justify that person’s home being 

taken away from him, people say, ‘‘This is outrageous. How can 

this possibly happen?’’ 

At the same time you read these articles, and it would appear 

that a fair amount of this are just technical paper problems that 

ultimately will be resolved. And so my question is: Do any of you 

have any sense about the percentage of these cases that are miscarriages of justice, for lack of a better term, and how many of 

them are purely technical in nature and simply postponing the day 

of reckoning that will inevitably come? 

Mr. WALSH. Well, again, we keep mentioning the fact that we are 

still in the middle of these exams, but the indication—— 

Senator BAYH. Based upon what you have seen to date. 

Mr. WALSH. Right, but the indications that are coming in are 

that there are not—we are not seeing many cases where the wrong 

person has been identified, they were current on a mortgage or 

kind of working under a modification under which they were performing and that sort of thing. These are kind of long-dated foreclosure processes taking place where the problems are more technical. But, I mean, the fact of the matter is there are laws that require certain things to be done, and if there is a violation of law, 

then that is unacceptable and you have to cure that problem and 

remedy that situation. 

So even if the problems are more kind of technical in that sense, 

they are legal deficiencies, they have to be fixed. They are not legal 

foreclosures unless those problems—— 

Senator BAYH. Well, and those requirements are there for a reason. The reason for my two questions—and then I want to turn it 

over to Senator Kohl, who has been very patient—is that we are 

paying a macroeconomic price for the delay in resolving this issue. 

As much as those of us on this side of the aisle look for a painfree resolution—on this side of the dais look for a pain-free resolution—that is what politicians usually do. Economists remind us 

that is not possible at the end of the day. So the more efficiently 

we can resolve this, while still—you know, even if only one person 

has been unjustly foreclosed on, that is one person too many. So 

we have got to focus on how do you keep that from happening but 

do that in the most efficient way possible so we can allow the process to take place and avoid the overall drag to the economy that 

causes every American to suffer. I guess that is the underlying purpose of my two questions. 

And the final comment—and then, Chairman, thank you again— 

I really encourage you to look at the misalignment of incentives. If 

we are going to avoid a repetition—there is a wonderful saying in 

law school from many years ago. It is a problem susceptible of repetition and yet evading review. We do not want that here. This is 

susceptible of repetition if we do not appropriately align the incentives. That is the best way to avoid getting back into this morass 

again. So I would encourage your focus on that. 

Again, thank you for your service. Herb, thank you for your patience. And, Chairman, it has been a pleasure. 

Chairman DODD. Thank you very much. I want to thank you for 

your patience and your work on the Committee as well. You have 
317 

been a great asset to this effort over the last few years, and I am 

very grateful to you for that. 

Let me just say, by the way, in my last monologue there about 

the Financial Services Oversight Commission, this is a question for 

the Secretary of the Treasury. He is the Chairman of this Commission, and so while I have asked—sort of raised the issue to all of 

you at the table, the question goes back to the Secretary, and I 

would appreciate if you would carry it back to him. I would like to 

know what is going on right here. Again, I do not expect miracle 

answers because you merely convene meetings. But it seems to me, 

again, the idea of getting the collective wisdom of people around 

this table, this table that is in front of us as well as others, could 

really help, in my view. So please convey that message. 

Ms. CALDWELL. OK. 

Chairman DODD. Senator Kohl. 

Senator KOHL. Thank you very much, Mr. Chairman. Like everybody else on this Committee, I would like to offer my praise to you. 

It has been a pleasure and an honor to serve with you, and in my 

judgment, you are one of the very best Senators that the United 

States has ever had. So thank you for everything you have done. 

Chairman DODD. Thank you. 

Senator KOHL. Chairman Bair, I would like to talk to you. In addition to the current home foreclosure crisis, I am also concerned 

about two other crises potentially: farm lending and commercial 

real estate lending. According to the FDIC, farmers are falling behind on their loans at a 17-year high. Oftentimes collateral for 

farm operating loans is the farm itself. And so if a farmer defaults 

on an operating loan, not only are they at risk of losing their livelihood but also their home. Because of the economy and because 

some farm loans are indeed in trouble, several banks are telling us 

that regulators are seeing farm loans as suspect and discouraging 

community banks from carrying farm loans. This attitude is hurting rural America without making the banking system any safer. 

What is the FDIC doing to work with banks to make sure farmers have adequate access to credit? Would FDIC consider issuing 

guidance on farm loans similar to the commercial real estate guidance that was issued last year? 

Ms. BAIR. Well, Senator, thank you for that question. I think 

parts of the AG sector are obviously quite strong, but other parts, 

particularly the dairy industry, have been having some trouble, 

and we appreciate that. We do have guidance encouraging prudent 

lending and loan restructuring activities applying to small businesses generally and commercial loans generally. But I would be 

very open to doing something specific to lending. I think that is a 

point well taken, and there are parts of it that are troubled, and 

I think providing some clarification about our expectations would 

be something we would be very open to. 

Senator KOHL. So I heard you to say that you are willing to discuss—— 

Ms. BAIR. We will be happy to do this, yes. Yes. 

Senator KOHL.——specific guidance on farm loans. 

Ms. BAIR. Absolutely. Absolutely. 

Senator KOHL. Well, that is great to hear. Thank you. 
318 

Ms. Bair, because of the decrease in real estate prices, many 

commercial borrowers will not be able to refinance, possibly causing mass foreclosures and hurting banks nationwide. Community 

banks are known to have large real estate portfolios and will likely 

be hit hardest by this downturn. Community bankers are not certain how regulators will treat commercial loans that they have on 

their books, and this makes it very hard for them to lend to small 

businesses. 

Last year, FDIC and other regulators came up with guidelines 

for when a bank can modify a commercial real estate loan. These 

guidelines said that the lenders would not be penalized by examiners for pursuing prudent workout efforts with their borrowers. I 

have heard from bankers that the regulatory examiners are not always following these guidelines. What can be done to bridge the 

gulf between what is written here in Washington and what is actually happening at the local level? Is FDIC serious about giving 

banks and borrowers a chance to work out these loans without 

freezing a bank’s ability to make other loans? 

Ms. BAIR. Well, yes, for commercial real estate loans, we have 

very specific guidance that we issued with the other regulators, encouraging prudent loan workouts. We encourage that strongly, just 

as we have encouraged workouts of residential loans as well. 

If the collateral has gone down, that does not immediately mean 

that the loan needs to be criticized. If it is current, if the borrower 

has the capacity to keep making payments, we specifically told our 

examiners that they should not criticize the loan. If the borrower 

runs into trouble, we want it restructured. Obviously that needs to 

be disclosed, and if there is some loss taken on the restructuring, 

that needs to be recognized. That is an accounting rule. Even if we 

wanted that to not be the case, it would still be the case under the 

accounting rules. But we have tried to exercise a lot of flexibility 

and provide a lot of guidance in this area, but it is just very difficult right now. Parts of the country, particularly in several parts 

of the country, commercial real estate still has some troubles. 

The good news is that balance sheets are getting cleaned up, the 

construction development loans in particular, those balances have 

been coming down, and the credit quality of the delinquencies and 

charge-offs are improving. So we are emerging from this. But for 

some banks in particular that have heavy concentrations of troubled loans, they need to maintain and conserve capital and reserve 

heavily against expected losses. That can constrain their balance 

sheet capacity to lend. That is driven by the fact that they have 

troubled loans, not by the fact that there is an overly harsh supervisory process. But we have tried to be very flexible and prudent 

and continue to convey to community banks we want them to lend. 

As I indicated earlier, community banks’ loan balances have remained constant. Actually for the banks with $1 billion in assets 

and smaller, the loan balances have actually increased during this 

crisis. So community banks as a group have been lending. They are 

the strongest group in terms of size that have been lending through 

this crisis, and I think that should be acknowledged and appreciated for what they have been doing. 

So, again, I will make the same offer I gave Senator Bunning. 

If there are specific institutions that feel that our policies in Wash-
319 

ington have not been consistently applied, we would be happy to 

take a look at those. We welcome that. We have an ombudsman 

that is equipped to do just that. It is not a bad thing. We encourage 

that. We want to make sure our policies are appropriately applied. 

But, again, I do not want to raise expectations. There is just a 

lot of troubled commercial real estate loans out there, and it is 

going to take a while to work through them. 

Senator KOHL. Thank you very much. 

Ms. BAIR. You are welcome. 

Senator KOHL. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very, very much, and good 

questions. I am going to leave the record open for additional questions, but we do have a second panel, and I want to give them a 

chance to be heard. 

I was going to just quickly ask Dan Tarullo—Governor Tarullo 

raised the issue of standards, which I think is a terrific idea, personally. I obviously will not be around to try to move that along 

for you, but I like the idea. But I wanted to get just a quick acknowledgment or recognition whether or not just at first blush— 

and I would expect obviously you want some more details. To the 

rest of you, is that an idea—from Treasury down to FHFA, do you 

like that idea? Is that something you would agree with, you think 

you might agree with or not? I am just curious. 

Ms. CALDWELL. Servicing standards? 

Chairman DODD. Yes. 

Ms. CALDWELL. Yes—— 

Chairman DODD. Recommendations to Governor Tarullo. 

Ms. CALDWELL. It is something we support, and we have tried— 

as you know, when HAMP was set up, it was set up in part to set 

some servicing standards for the industry. 

Chairman DODD. Sheila, any thoughts about that? 

Ms. BAIR. Yes, very much so. We have tried to address this 

through our safe harbor for banks and would like it to be more 

broadly applied, perhaps through the rulemaking process that is 

going on right now. 

Chairman DODD. John? 

Mr. WALSH. Certainly given all that we have seen, we need to 

give serious thought to the model here and whether we can improve. There is this question of incentives. Are there perverse incentives that are operating? Can they be better aligned? It certainly is a good time to give that look. 

Chairman DODD. Mr. DeMarco? 

Mr. DEMARCO. Mr. Chairman, as this Committee takes up housing finance reform next month, I hope that part of that is absolutely standards, and go beyond servicing standards, and suggest 

that there are a range of things in the mortgage industry for which 

assuring where and how standards are established, overseen, and 

enforced should be part of that discussion. 

Chairman DODD. Tim Johnson will be chairing the Committee 

come January. He had to leave to go to a conference call, but I have 

checked with his staff on this. Let me make a request of all of you 

here to submit some very—more than just kind of the suggestions 

and ideas in testimony. And, Dan, obviously, with this—we would 

like to get maybe some very specific ideas. Maybe this is something 
320 

that the Financial Services Oversight Commission as a commission 

might submit to us, some legislative ideas and language that could 

be a part of this Committee’s consideration over the next month or 

so. It would be very, very helpful. So I will make that request of 

all of you and, again, through the Treasury suggest that maybe 

that Oversight Commission might not be a bad place to come up 

with these ideas to make a single presentation of a number of ideas 

that will allow us to make this more efficient and a single point 

of contact. But, Sheila, you have raised a number of ideas that I 

think have been terrific as well. 

So I thank all of you, and let me echo Senator Bayh’s comments 

as well since this will be my last opportunity for this particular 

panel to say thank you. I am very grateful to all of you. I have enjoyed immensely working with Treasury and FDIC and obviously 

the Board of Governors and OCC, and I want to commend again 

FHFA. You have done a wonderful job. People do not realize the 

conservatorship that you have taken on, and really without you 

there and without the housing financing system, we would be in a 

lot deeper problem. I think most people with knowledge of the 

issues recognize that. So I want to take this opportunity to thank 

you for the work that you and your staff are doing there as well. 

And, obviously, the Committee will look forward to working with 

you on this as they bring up the whole issue of housing finance reforms. So I thank all of you very, very much. 

Mr. DEMARCO. Thank you, Mr. Chairman, and congratulations. 

Chairman DODD. Thank you very much. 

Let me invite our second panel to come on up as the first panel 

departs. I will introduce you as chairs are being moved around so 

we get right to it. 

Terry Edwards is the Executive Vice President of Credit Portfolio 

Management for Fannie Mae. In this capacity, he is directly responsible for Fannie Mae’s foreclosure prevention, loss mitigation 

activities for the single family book business. His duties also include executing the Making Home Affordable for Fannie Mae, and 

we thank him. 

Donald Bisenius is the Executive Vice President of Single Family 

Credit Guarantee Business for Freddie Mac. In this position, he 

oversees the sourcing, pricing, and securitization of new business, 

as well as the strategic business process and technology redesign 

for single family credit guarantees. He has been with Freddie Mac 

since 1992 and is a member of Freddie Mac’s Management Committee. 

Tom Deutsch is the Executive Director of the American 

Securitization Forum. ASF is an organization that works to develop 

a consensus, a frame of thought, of legal, regulatory, accounting, 

and legislative activities for the securitization industry. It represents both servicers and investors. That is an interesting juggling 

act, I might point out. I am rather interested to hear his comments. 

And, last, Professor Kurt Eggert is professor of law at Chapman 

University School of Law. His expertise is in mortgage and lending 

issues, predatory lending, consumer protection, and securitization. 

And before becoming a law professor, Mr. Eggert was a member of 

the Federal Reserve Board’s Consumer Advisory Council where for 

2 years he chaired the Subcommittee on Consumer Credit. 
321 

So, again, I really am grateful to all of you for sitting through 

the last couple of hours. I hope it was somewhat helpful. And I will 

say to you what I said to the last panel. Your prepared statements 

will all be part of the record. I would urge you if you could to try 

and at least paraphrase your testimony for us here today, and then 

we will get to some questions for you. But I am very grateful to 

all of you for your willingness to participate in this second hearing 

on this very important and complicated subject matter, as we, I 

think, are all acknowledging here. We all like things to be efficient 

and move quickly, get resolution for people, clarity for people—either we can work something out for you or we cannot—so that we 

deal with all the issues that Senator Merkley and Senator Evan 

Bayh and others have raised as a result of this ongoing and growing problem, it seems, at least temporarily. 

So we will begin in the order that I have introduced you. Mr. Edwards, thank you for being with us. 

STATEMENT OF TERENCE EDWARDS, EXECUTIVE VICE 

PRESIDENT, CREDIT PORTFOLIO MANAGEMENT, FANNIE MAE 

Mr. EDWARDS. Thank you, Chairman Dodd, Members of the Committee. Thank you for the opportunity to testify today. My name is 

Terry Edwards, and I am Executive Vice President for Credit Portfolio Management at Fannie Mae. This includes foreclosure prevention and servicing oversight, which we have spent a lot of time on 

today. 

Fannie Mae is focused on resolving the mortgage crisis facing our 

country. Every day our people come to work with clear objectives: 

to keep mortgage funds flowing, to do everything possible to help 

families avoid foreclosure, while being responsible stewards of taxpayer money. 

The good news is these goals are aligned. Keeping people in their 

homes saves taxpayers’ money, as does working with people to exit 

the home without the pain of foreclosure of either a short sale or 

a deed in lieu of foreclosure. 

Since the start of 2009, we have helped more than 600,000 struggling Fannie Mae families avoid foreclosure. This number includes 

160,000 HAMP mods and 250,000 proprietary Fannie Mae mods. 

But the current foreclosure crisis has been difficult and unprecedented, and we are far from done. The U.S. housing finance system 

was not set up to handle this tidal wave of mortgage defaults, and 

loan servicers, who have the front-line responsibility to work with 

borrowers who need help have acknowledged they are struggling to 

keep up. So Fannie Mae has been taking aggressive actions to ensure borrowers get the help they need. 

Although servicers are the primary contact with borrowers, we 

have worked to expand our borrower outreach and education efforts 

so that homeowners who are in trouble know how to seek help, understand their options, work with their servicers, and avoid 

scammers. These efforts including launching our 

KnowYourOptions.com Web site and mortgage help centers and 

partnerships with housing counselors in hard-hit communities 

across the country. We have developed a series of workout options 

for servicers to help struggling families keep their homes. All of 

these workout options now dovetail with HAMP, meaning if the 
322 

servicer has collected the documentation required for HAMP and 

the borrower is not eligible for HAMP, more than likely they are 

eligible for a Fannie Mae mod. And if home retention is not possible, we offer servicers incentives to help homeowners exist 

through short sales and deed in lieu, reducing the burden on borrowers and taxpayers. Our servicers do not get any incentives for 

foreclosures. 

We are working every day with servicers to help them improve 

their performance, and we enforce our contract with them when 

they fall short. Our teams meet with senior servicing leadership on 

a regular and frequent basis to discuss the strengths and weaknesses of their operations, best practices that we are aware of that 

we think can help, challenges they are facing, plus give us ideas— 

plus we ask them for ideas where Fannie Mae can make their jobs 

easier so they can serve homeowners. 

I have submitted written testimony for the record that provides 

a fuller description of our foreclosure prevention efforts to date, but 

I would like to touch on two recent issues here. 

The first involves servicer completion of foreclosure affidavits. 

Fannie Mae’s guidelines require that servicers comply with all applicable laws and regulations in the foreclosure process. In the 

wake of reports that some servicers did not follow procedures, we 

have instructed our servicers to review their policies and procedures regarding affidavits, verifications, and other legal documents 

in connection with the foreclosure process. We are also coordinating 

with our regulator, FHFA, to seek appropriate corrective actions. 

As servicers said in recent hearings, they are working hard to fix 

the issue. 

The second issue has been called dual tracking, where a borrower 

receives a foreclosure notice during the loan modification process. 

To clarify, during the critical early stages of delinquency, Fannie 

Mae has a one-track process. Servicers have 3 months, and sometimes longer, to process a loan modification before starting the foreclosure process. In addition, our research shows that borrowers are 

more likely to succeed if a modification process begins early. So we 

expect our servicers to put forth the maximum level of effort to 

communicate with the borrower during the first 90 days of delinquency. This means staffing up and implementing the single point 

of contact you have heard servicers talk about. We are encouraged 

because in our meetings with servicers, they say that they are on 

board and committed to adding staff to put the single point of contact in place. 

In closing, this housing crisis cannot be solved overnight, and we 

are all frustrated with the time it has taken to get a smooth operating process in place for families facing very difficult circumstances. Fannie Mae is committed to doing everything we can 

to support the market and to ensure that servicers do their job in 

helping struggling borrowers. I look forward to discussing our work 

with the Committee. 

Thank you. 

Chairman DODD. Thank you very much. 

Mr. Bisenius. 
323 

STATEMENT OF DONALD BISENIUS, EXECUTIVE VICE PRESIDENT, SINGLE FAMILY CREDIT GUARANTEE BUSINESS, 

FREDDIE MAC 

Mr. BISENIUS. Chairman Dodd, Members of the Committee, 

thank you for inviting me to speak here today. I am Don Bisenius, 

head of Freddie Mac’s Single Family Credit Guarantee Business. I 

oversee the sourcing, pricing, securitization, and performance of 

single-family mortgages we purchase. 

Today’s hearing raises important issues about the integrity of the 

mortgage origination, securitization, and servicing practices. As detailed in my written testimony, I would like to highlight the following points: 

First, let me start by saying Freddie Mac expects servicers of our 

loans to treat borrowers fairly, with respect, and in full compliance 

with all applicable laws, regulations, and Freddie Mac policies. No 

homeowner with a mortgage owned or guaranteed by Freddie Mac 

should ever worry about losing his or her home to an unnecessary 

or wrongful foreclosure. 

Freddie Mac currently owns or guarantees approximately 12.4 

million single-family mortgages. In both the acquisition and ongoing servicing of these loans, Freddie Mac relies on sellers and 

servicers. We do not directly originate loans, and we do not directly 

service loans. Rather, Freddie Mac provides guidelines for the origination and servicing of our loans and contracts with sellers and 

servicers to carry out these operations. Companies conducting these 

activities represent and warrant to us that they are following our 

contractual requirements. Freddie Mac has ongoing monitoring programs in place to test compliance with these requirements. Failure 

to fulfill these obligations creates a liability for either the originator or the servicer, including the possibility that they will be required to repurchase the loan. 

Second, Freddie Mac has long had policies and initiatives in 

place to help financially troubled borrowers avoid foreclosures. In 

response to the unprecedented mortgage default crisis, we have created additional servicer incentives and home retention options. In 

addition to the $5 billion that Freddie Mac pays servicers each year 

for managing the servicing process, we offer additional financial incentives for servicers to help borrowers keep their homes. 

Third, while Freddie Mac currently owns almost 25 percent of all 

single-family mortgages outstanding in this country, we own fewer 

than 500,000 seriously delinquent mortgages compared to the approximately 5 million seriously delinquent mortgages nationwide. 

Our ability to assist troubled borrowers is limited to this 10-percent share of the delinquent borrower population. 

Having said that, I want to be very clear. We have redoubled our 

efforts to keep borrowers in their homes. Since the beginning of 

2009, we have helped nearly 370,000 families avoid foreclosure. 

Through the first 9 months of 2010 alone, nearly 211,000 delinquent borrowers with Freddie Mac mortgages avoided foreclosure. 

That is nearly twice the 114,000 who were foreclosed upon. 

Finally, the length of time for the average foreclosure of a 

Freddie Mac loan indicates that borrowers are not being rushed 

through the foreclosure process. We require our servicers to seek 

to resolve borrower delinquencies through a variety of foreclosure 
324 

alternatives, including forbearance, repayment plans, loan modifications, and short sales. If the borrower’s delinquency cannot be 

cured by these methods, servicers must move forward with the 

foreclosure to minimize further financial loss and risk to the taxpayer. Currently, the nationwide average for completion of foreclosures on a delinquent mortgage owned or guaranteed by Freddie 

Mac is 449 days, and borrowers whose properties are foreclosed 

upon are behind on their mortgage payments well over a year. 

Our guide does give servicers the authority to stop or suspend a 

foreclosure action whenever there is an opportunity for a viable 

workout. We are aware that the existing processes are confusing to 

some borrowers. We are working with the industry to find ways to 

improve communications and minimize any borrower confusion. 

As my testimony makes clear, Freddie Mac has put in place policies, procedures, and financial incentives to help borrowers avoid 

foreclosures. We continue to work with our conservator and 

servicers to enhance these efforts and improve their execution. 

I will be happy to answer any questions. 

Chairman DODD. Thank you very much, Mr. Bisenius. 

Mr. Deutsch, how are you? Thank you for being here. 

STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, 

AMERICAN SECURITIZATION FORUM 

Mr. DEUTSCH. Thank you. Chairman Dodd, Ranking Member 

Shelby, Members of the Committee, my name is Tom Deutsch, and 

as the Executive Director of the American Securitization Forum, I 

appreciate the opportunity to participate here today on behalf of 

the 330 ASF member institutions, including those who originate 

the collateral, structure the transactions, serve as trustees, trade 

the bonds, service the loans, and invest the capital in the preponderance of mortgage and asset-backed securities in the United 

States. 

In my prepared statement, I highlight some of the key aspects 

of securitization as well as its critical importance to the U.S. and 

global economy. Importantly for this hearing, there are nearly 55 

million first-lien mortgages in America today that total approximately $9.75 trillion of outstanding mortgage debt. Approximately 

three-quarters of that debt, or about $7 trillion, resides in mortgage 

securitization trusts and are beneficially owned by institutional investors in the United States and around the world, such as pension 

funds, mutual funds, and insurance companies. 

But in my remarks today, I seek to address the concerns raised 

by a few commentators that securitization trusts may not actually 

own the $7 trillion of mortgages that are contained within those 

trusts. For example, a recent Congressional Oversight Panel report 

has even suggested that these issues could create systemic risk to 

the banking sector if loans were not validly assigned to 

securitization trusts. 

But the concerns that have been raised have not been supported 

by substantiation that there are, in fact, signs of systemic fails in 

the process of assignments. Indeed, the origins of these concerns is 

not clear. They are not the result of a series of new court cases supporting the legal arguments advanced, but instead appear to be 

largely the result of academic theories. In fact, even the Congres-
325 

sional Oversight Panel report suggests that, quote, ‘‘the panel takes 

no position on whether any of these arguments are valid or likely 

to succeed.’’ 

So all of the consequences that flow directly and solely from a 

single mistaken core premise, that is that the trust and ultimately 

investors do not generally own the $7 trillion of loans in the trusts, 

is discussed in great detail in my prepared remarks. This core 

premise is incorrect, and therefore the dire consequences of this 

faulty premise will not follow. 

Just 2 weeks ago, the ASF issued a White Paper on the subject 

that is part of our written testimony that puts to rest many of the 

questions that have previously been raised about the ownership of 

the mortgage loans. In that White Paper, the ASF exhaustively 

studied traditional legal principles and processes, including the 

Uniform Commercial Code and substantial case history throughout 

every one of the 50 United States and the District of Columbia and 

found that traditional legal principles and processes are fully consistent with today’s complex holding, assignment, and transfer 

methods for mortgage loans. In fact, 13 major U.S. law firms listed 

in Exhibit A to that ASF White Paper reviewed it and believe that 

the Executive Summary contained therein represents a fair summary of the legal principles presented. 

Although the ASF White Paper assured many of the concerns 

that had previously been presented, some new concerns have been 

raised since that White Paper was published. For example, one 

commentator has proposed that securitizers have not met the contractual requirements for a complete or unbroken chain of endorsement. In our written testimony, we rebut this academic theory in 

great detail with analysis of the key contractual provisions, the intent of the contracting parties, industry custom, independent thirdparty trustee acceptance, as well as the relevant case law and UCC 

applicability. In particular, this argument overlooks the key fact 

that each separate step in the chain of transfers of ownership by 

each party, from the originator to the securitization trust, is fully 

documented by a separate contract. 

The proposition itself, though, that the securitization legal professionals have uniformly opted out of the use of applicable laws, 

such as the UCC, to set up an even higher bar for transfers, but 

then subsequently and systematically ignore that higher bar, appear on the face to be illogical assertions and, in fact, as a legal 

analysis in our written testimony demonstrates, are patently false. 

From time to time, though, mistakes in process are certain to 

occur, particularly in a market where 55 million mortgages are 

transferred and/or serviced in the worst housing market since the 

Great Depression, and that is one reason why, in particular, typical 

language in the governing contracts provides the opportunity to 

cure these mistakes to prove ownership. 

In conclusion, the ASF greatly appreciates the invitation to appear before this Committee to share our views related to these current issues. I look forward to answering any questions that Committee Members may have. Thank you. 

Chairman DODD. Thank you very much. 

Professor, welcome. 
326 

STATEMENT OF KURT EGGERT, PROFESSOR OF LAW, 

CHAPMAN UNIVERSITY SCHOOL OF LAW 

Mr. EGGERT. Thank you, Chairman Dodd. I appreciate the opportunity to testify today. As a professor, I feel a little overwhelmed 

by the luminaries around me, but I will try to do my best to shed 

some light on what I think is a serious problem. 

In the first panel, I kept waiting to hear one of the regulators 

say, here is what we have done to sanction servicer misbehavior. 

We saw it and we acted and we did this. And I did not hear that. 

I hoped if I did not hear that, at least I would hear them say, well, 

here are the kinds of sanctions that we can do if servicers misbehave. I did not hear that, either. What I heard was, we are investigating it. We are on it. We hope to know more in a month or so 

and then we are going to do something. 

My concern is, this is not a new problem. I wrote an article on 

servicer abuse in 2004, and if I wanted to update it at this point, 

what I would need to do is change the name of the servicers and 

add a zero to most of the statistics. And otherwise, everything I 

talked about in 2004 is still happening. We have had this problem 

for a long time. It is not just the result of the foreclosure crisis. It 

is not just the result of the added number of defaults. It is a systemic problem in the way that servicers are organized and regulated and we have to fix it. We did not fix it in 2002. We did not 

fix it in 2003. We have not fixed it yet and it is time to do it. 

I say it is a systemic problem. I know that in the last version 

of this panel, there were questions about whether these were just 

anecdotal evidence of issues or whether there was proof that it was 

a larger problem. I would like to note that economists have been 

looking at this, have been looking to see, do servicers foreclose 

more if they are third-party servicers rather than if they are servicing stuff that they own. In other words, are borrowers more likely 

to get foreclosed if servicers are servicing on behalf of investors or 

themselves. 

And what the economists have concluded—I mean, there is some 

disagreement on it, but it seems like the trend of the investigation 

is that there is a foreclosure bias by third-party servicers, that they 

are more likely to foreclose for investors than they are for themselves. That is an important fact. Christopher Mayer, an important 

economist, said that the empirical evidence is compelling on this 

point. 

The next thing I would like to note is that things are getting 

worse. The servicing regulation industry has long been kind of unregulated. I think the Federal regulators at a certain point looked 

around and said, who has got the ball on this one? How much of 

this is mine? How much can I regulate? And they have not come 

up with a good answer for that. 

HAMP is a, I think, is a very well intentioned program, but as 

we have heard, it is a voluntary program and it is a program that 

is based on all carrots and no stick, and in fact, baby carrots at 

that. So it addresses only a small part of loans that are being serviced and I have not heard of a single servicer who has been sanctioned by the HAMP program for misbehaving. I mean, maybe that 

has happened, but that has not been broadly broadcast. 
327 

So if HAMP is not doing it and the regulators are not doing it, 

then you have to say, well, maybe the market is doing it. Maybe 

investors are saying, we are going to make the servicers do the 

right thing. But if you look at it, investors have very little control 

over servicers. Servicers I read a recent quote from an investor who 

said, servicers treat us like the Thanksgiving turkey. They just decide where to carve. 

And investors, I think, are getting tired of it, are now trying to 

figure out, how can we get together to force servicers to do the 

right thing, because it is important to note that this is not just a 

problem for borrowers. It is a problem for investors. Every time a 

servicer imposes bad junk fees on a borrower, every time a servicer 

forecloses when they should modify, there are two victims. There 

is the borrower and there is the investor who does not get the return that they should get. 

So we need to—we have to address this if we want to have a robust mortgage market, which many people are saying we cannot 

just have the mortgage market run by the Government. We have 

to have a robust private market, and the only way to have that 

happen is to fix the servicer problem and now is the time. 

Thank you. 

Chairman DODD. Well, thank you very, very much, and let me— 

Senator Merkley and I are here together. In fact, Jeff, do you want 

to move up here? We are going to sit and be comfortable, so you 

are not going to be back in the corner there. You are going to be 

moving up anywhere here come January, so get used to those 

seats. 

You framed my first question, for our two first witnesses in this 

panel, first Freddie and Fannie. During the debate on the issue of 

whether or not we should have had GSE reform as part of the financial reform package—I am not going to invite that kind of debate again, but nonetheless, there were reasons why we did at the 

time, but pointed out during those debates, and you can both correct me if I am wrong, but somewhere between 95 and 96, maybe 

an even higher percent of all mortgages are financed and backed 

by Fannie and Freddie. That number is pretty much right, am I 

correct? 

Mr. BISENIUS. Well, that would include FHA, as well. 

Chairman DODD. That is what I mean. But, roughly, those numbers are correct. Well, Professor Eggert has raised an interesting 

question and one that I would have in a sense that because of the 

power you have, and again, we talked about regulators doing this 

or finding out whether or not they do not have the authority, what 

Congress needs to give them to do it, but it would seem to me that 

just FHA and yourselves would have a tremendous ability on 

servicers, given how critically important you are to them, that were 

they to be stripped of GSE business, I suspect that might get their 

attention. 

And so the question becomes, why not? Why have you not done 

more to insist upon servicer reform in dealing with these matters 

since you are directly affected by it, as well? Why have you not 

done this? Why would you not do that? 

Mr. EDWARDS. So our approach has been to understand the problem, get behind the problem, and try to solve the problem. 
328 

Chairman DODD. Well, we know what the problem is. 

Mr. EDWARDS. Well—— 

Chairman DODD. The question is, you have got power to do this, 

market power, I mean, to do this. 

Mr. EDWARDS. We have been trying to do it with influence. We 

have been trying to define the problem for the servicers. As I said 

in my testimony, we—— 

Chairman DODD. If you told them you were going to strip those— 

you no longer are going to get GSE protection, do you not think 

they would jump back through hoops to respond to your concerns? 

Mr. EDWARDS. In some instances, sir, Senator, we have moved 

servicing away from servicers who are not performing. We have 

moved hundreds of thousands of loans where servicers were not 

getting it done. They were at the bottom of the barrel, if you will, 

in terms of servicer performance and we moved servicers to where 

there was capacity in the industry. At the end of the day, this problem is a capacity problem. The servicers have not staffed up where 

they need to staff up and they have not fixed their process. The 

process that we have been suggesting since the beginning of the 

year is this approach that you have heard a lot about today, the 

single point of contact. 

And the point is, servicers/originators, large financial institutions, have plenty of resources when you need a loan. When it 

comes time to—a difficult time, your most difficult time in your financial situation, when you potentially have to leave your house, 

the resources are not there to take care of the problem. And what 

we have suggested is the single point of contact where a counselor, 

in effect, puts their arms around the person who is in a jam and 

explains to them what is going on, what do you have to do to stay 

in your house. If we cannot keep you in your house, this is what 

needs to happen for a graceful exit. What is the best thing to do 

to manage your credit report. Literally counsel people on what they 

need to know and understand. 

And the good news is we see our servicers starting to move there. 

It has taken far too long, but the large servicers are now using 

words that we have been using, single point of contact. We are 

hearing them say it. In meetings with us, they are saying that they 

are going there and we are—we know there is a solution. Time is 

our enemy and now it is a function of getting the resources in place 

so the solution can be fixed. 

Chairman DODD. Well, I appreciate you saying that. I will give 

you a chance to respond, as well. Lost paperwork, misapplied payments, and conflicts of self-dealing, I mean, there are just a myriad 

of problems there. And again, we talk about market power, but, 

boy, there is no better market power than the two of you have, in 

my view, with FHA, in being able to influence this process, short 

of a regulatory and Congressional mandates. 

What is the answer to this? 

Mr. BISENIUS. I would offer just two additional observations in 

addition to what Terry said. One would be I think the market 

power you suggested has clearly come through on the front end of 

the business. Origination quality and performance has improved 

dramatically because of that dominance of the GSEs and FHA in 

the origination market. 
329 

Chairman DODD. Right. 

Mr. BISENIUS. I think in the servicing market it has improved 

some, but as I noted in my testimony and as noted in the public 

facts, the amount of delinquent loans that are serviced by servicers 

for Freddie Mac or Fannie Mae is actually a small fraction of the 

total amount of delinquent loans. 

On our particular book, we have seen significant improvement. 

The number of modifications, the number of HAMP modifications 

on the Freddie Mac portfolio is actually a pretty large percentage. 

I think if you combine it with the ones on the Fannie Mae portfolio, 

it is a large share of the HAMP modifications have occurred on the 

GSE portfolios themselves. So I think on our loans, we are beginning to see improvement in the performance. I do not know if we 

are seeing the same improvements on loans outside of—— 

Chairman DODD. Well, let me urge you to keep at that. I mean, 

again, I have made the point and it just seemed to me that Professor Eggert raised a good question. Short of the regulators doing 

their job, it seems to me that market power here, which a lot of 

people agree with, and I do, as well, where it exists, utilization of 

it can make a big difference. 

Let me ask you, as well, something I wanted to ask the regulators, but we took a lot of time with as many Members who participated here and did not get to it, but in briefing with Fannie and 

Freddie earlier this week, it became apparent that the two of you 

have somewhat differing modification programs. Given the fact 

there is already too much confusion in the process, should you not 

adopt the same policies? Why are there not the same policies? 

Mr. EDWARDS. We each have different books. We, Fannie and 

Freddie, do not talk. We are in the field with our servicers trying 

to—— 

Chairman DODD. That is not a great answer here. 

Mr. EDWARDS. There are rules on—— 

Chairman DODD. Why are you not talking? 

Mr. EDWARDS. We talk through our regulator, but we are not 

able to talk directly because of antitrust issues. 

Chairman DODD. Well, do you talk to the regulator about this? 

Mr. EDWARDS. Yes, absolutely. 

Chairman DODD. And FHFA says, no, we are not going to let you 

have the same process? 

Mr. EDWARDS. We each have our own different books and our 

books perform a little bit differently. We take great pride in what 

we have now done at Fannie Mae, meaning once you have all of 

the HAMP documentation in hand, you do not have to ask the borrower for a single other document in order to complete a Fannie 

Mae modification. We think that is a best practice and perhaps one 

that should be adopted. But 

Mr. BISENIUS. I only had—— 

Chairman DODD. Well, I do not want to violate the law here, but 

let us say you are sitting next to each other. 

[Laughter.] 

Chairman DODD. You talk to me, but talk to him, OK? I will let 

you pretend here we are having a conversation together. Tell me 

why we are not doing this. I mean, the confusion, this seems like 

a fairly simple one we might resolve. 
330 

Mr. BISENIUS. So you raise an excellent point, and actually, we 

do work closely with FHFA, and in all those areas where we can 

align as closely as possible, we actually do. I think HAMP is a good 

example of that. I think the majority of our requirements under 

HAMP are identical. 

Chairman DODD. All right. But outside of HAMP, why not in the 

other areas? 

Mr. BISENIUS. I think they are relatively close. They are not 

identical. I think it is, in part, as Terry indicates, that there are 

some differences with individual services, individual loan types. 

But I think they are amazingly close in most aspects. 

Chairman DODD. Well, all right. Let me jump to Senator 

Merkley. I did not mean to dominate here. But let me get Mr. 

Deutsch, and I say this respectfully, but I could not help but resist 

that you seem to be a bit conflicted yourself, and I do not mean 

that personally but as a representative of both mortgage servicers 

and investors. Just wearing your hat as a representative of investors, let me put that hat on your head right now if I can here. How 

serious a problem do you think the servicer conflicts of interest are 

with regards to, example, charging excess fees or force-placing insurance, and do you have any suggested solutions? You heard Professor Eggert, or you may have read his testimony, that servicers, 

and I am quoting him, ‘‘are loathe to seek put-backs of loans where 

the put-backs would come from their parent companies.’’ I wonder 

if you agree with his comment in his testimony. 

Mr. DEUTSCH. Again, with the hat of investor on—— 

Chairman DODD. Yes. 

Mr. DEUTSCH. Again, with the hat of an investor on, I think our 

first lien investors are very concerned about servicer conflicts internally. They are very concerned about how loans are modified, and 

in particular how they are modified in relation to the second lien 

program. They have had significant concerns about how the 2MP 

program has performed. My understanding, the latest data I have 

seen is that 382 loans have gone through that program since its beginning. That number may have increased in the last month or two 

since the last data that I have seen. But investors are concerned 

about that conflict. That conflict obviously is seen much more prevalently now in a very down economy, particularly in the housing 

market, than we see in a normal time. So it certainly is strained 

by the existing housing market today. 

Chairman DODD. Do you agree with the comment of Professor 

Eggert I quoted to you, that the servicers are loathe to see putbacks at the parent company? 

Mr. DEUTSCH. Well, I do not think any originator would like to 

buy a put-back back. I mean, ultimately, they are buying something at par that is now either delinquent or defaulted, so it is 

worth less than par. So no economic institution—— 

Chairman DODD. But the alternative is worse, is it not? 

Mr. DEUTSCH. Pardon? 

Chairman DODD. The alternative of not getting anything back 

from it, it seems to me—— 

Mr. DEUTSCH. Oh, correct, but I think the banks who have sold 

the loans would prefer not to buy them back, and certainly investors would prefer them to be bought back if they are delinquent in 
331 

default. I think it is one of the core issues in the market right now, 

is how do we appropriately sell off credit risk from the banks’ balance sheets to effectively isolate that credit risk from the bank and 

at the same time make sure that the representations and warranties that are made to the investors, that those loans are actually 

the way they were originated in the manner that they were. 

Chairman DODD. Well, who is standing up? I think Professor 

Eggert said it. You have got the investor and the homeowner that 

are here, and the two entities here that are being taken to the 

cleaners in the process. Professor Eggert, do you want to comment 

on this? 

Mr. EGGERT. Well, I would like to first—Mr. Edwards said something very interesting which I have not heard many people say, 

which is we had some servicers who were not performing, so in essence, we fired them. They had servicers that they worked with 

that were not going up to snuff, so they fired the servicer. How different servicer behavior would be if more people could say that. 

Have you ever heard an investor saying, we fired our servicer? 

Mr. DEUTSCH. Yes. 

Mr. EGGERT. No. How often? 

Chairman DODD. Do they, Mr. Deutsch? Have you fired some? 

Mr. DEUTSCH. Investors do have the ability to fire servicers. It 

is challenging under the pooling and servicing agreements. You 

need a certain mass of investors, whether it is 25 percent or more, 

to be able to fire a servicer, but that can occur if—— 

Chairman DODD. But it has not yet occurred? 

Mr. DEUTSCH. It has occurred. 

Chairman DODD. Oh, it has? 

Mr. DEUTSCH. It has occurred in instances, and particularly—but 

it has not happened widespread because the question is who is a 

better servicer out there. 

Chairman DODD. Yes. And the pooling and services agreements 

are—are they too rigid in that sense? 

Mr. DEUTSCH. Well, the challenge of a pooling and servicing 

agreement is you have a mass, a diffuse set of investors in the marketplace—— 

Chairman DODD. Yes. 

Mr. DEUTSCH.——that have bought into the securitization trust. 

How do you effectively have a captain of that group of investors 

who can charge and lead for that group of investors but at the 

same time not be conflicted and serve their own best interest as opposed to the other group of investors. 

Chairman DODD. Let me turn to Senator Merkley. I have got a 

couple more, but let me turn to my colleague. 

Senator MERKLEY. Thank you very much, Mr. Chair, and I will 

follow up on your questions related to the put-back with our folks, 

Mr. Edwards and Mr. Bisenius from Fannie and Freddie. 

In the testimony we had earlier, Freddie and Fannie together 

have $13.3 billion of outstanding requests, put-back requests, if you 

will, repurchase requests. At what rate is that growing? If none of 

those were paid off, if that $13.3 billion sat there, what would the 

total be a year from now? Would we be looking at $20 billion? I 

want to get a sense of kind of a monthly or annual amount of put- 
332 

back requests that are potentially—what is the flow rate, if you 

will? 

Mr. BISENIUS. I do not know if I have the specific flow rate associated with that. What I would suggest is actually if we have 

looked over the last few quarters, the share of outstanding repurchases or put-backs from Freddie Mac has actually been declining. 

So we may well be kind of past the peak of mortgage put-backs and 

now on the downside of that. So for us, it has been declining at a 

fairly significant rate. 

Senator MERKLEY. And that would not be because the number of 

folks falling into foreclosure action is declining, so to what do you 

attribute that? 

Mr. BISENIUS. Well, I do think it is associated with the number 

of folks who are going seriously delinquent has begun to stabilize, 

and therefore the number of loans being reviewed and subsequent 

repurchase requests are going down. We have worked through a 

huge kind of pipeline of mortgage reviews and mortgage repurchases over the last 2 years. So I am simply suggesting that we are 

at the peak today, and I think it is declining over the—it has been 

declining over the last few quarters. 

Senator MERKLEY. OK. So, ballpark, can you tell me between the 

two institutions or for your institution how many more repurchase—are we talking a billion dollars a month or are we talking 

about a billion dollars every 6 months? 

Mr. BISENIUS. I think it would be hard for me to speculate at this 

point. We can do some analysis and provide those facts to you separately. 

Senator MERKLEY. OK. And Mr. Edwards, can you clarify it from 

your perspective? 

Mr. EDWARDS. Yes, Senator. So for the third quarter, we collected 

about $1.6 billion. We do not see that pace slowing down, and what 

we have said to—because we get asked this question all the time 

by our customers, our banks, where are we in this process, and our 

answer is we are about 40 percent of the way through the process. 

So we have got another 60 percent to go. 

Senator MERKLEY. OK. So let me lay it out this way, then. If the 

four largest banks have reserves for repurchase of about $10 billion, and if we are at $13.3 billion and crudely between the two, 

perhaps $3 billion a quarter additional, and 40 percent of the way 

through the process, that means we might have the equivalent of 

a couple of more years at $3 billion a quarter. Just back-of-the-envelope math, an additional $24 billion plus the $13 billion we have 

now. Are we looking at something akin to, over the next 2 years, 

a total of $30 billion in requests against $10 billion in reserves? 

Mr. EDWARDS. First and foremost, the way those reserves—when 

we talk about repurchases, we are talking about an unpaid principal balance. So original principal balance. So when a servicer 

buys one of those loans back, they do not need dollar-for-dollar reserves. That loan might be worth 60 or 70 cents on the dollar when 

they take it back, or if it has gone through foreclosure, it is more 

like 50 or 60 cents on the dollar. So you have to—we are talking 

apples and oranges here. 

Mr. BISENIUS. Yes. I think in addition to that, one of the things 

I want to highlight about that outstanding number is that is the 
333 

level of repurchase requests. It is not uncommon for an originator, 

once they get the repurchase request, to be able to provide information that leads us to rescind that repurchase request. So the original loan file gets sent in. We review it. We believe there is a defect. 

We request a repurchase. They see what the defect was and are 

able to cure that defect which means the loan is no longer subject 

to repurchase. So that really is a gross number from an exposure 

standpoint in addition to what Terry said. 

Senator MERKLEY. So I would appreciate some follow-up from 

both of you in giving us some analysis of this issue, because essentially the questions I am raising are should this put-back situation 

be considered a serious problem that we should pay attention to 

now because it could be a very sizable systemic risk issue for 

Fannie and Freddie, a risk for specific financial institutions, a risk 

that may not have reserves to cover it, but is there a systemic risk 

on top of that, kind of the three components. So often, we are coming into the story down the road when it has exploded. If we are 

at the front end of this and we are trying to understand the problem, we need a little more analysis to be able to get our hands 

around it. That would be very helpful. 

Mr. BISENIUS. I would be happy to provide that. 

Senator MERKLEY. That would be—— 

Mr. EDWARDS. Senator, if I may, I want to put one other thing 

in context. There is a lot of talk about the number of put-backs 

from the GSEs. When you add up our put-backs in terms of percentage of loans sold to us, for each of the years 2005, 2006, 2007, 

2008—those are the big years—we have not gone beyond 2 percent 

of the originations in any one particular year. 

Senator MERKLEY. Thank you for noting that. And these numbers that I have been citing are just Fannie and Freddie, so there 

is a lot of other pressure on the financial institutions coming from 

put-backs coming from other quarters that would have to be part 

of a comprehensive understanding of this issue. 

But let me turn to the dual-track issue. When my constituents 

were talking to the case workers on my team about the challenges 

of getting foreclosure notices, foreclosure phone calls, even foreclosure postings on their door in the process that they were in the 

middle of loan modifications, the explanations for a very long period of time were miscommunication within the bank, this unit, 

this unit. Not so long ago, a few weeks ago, we had testimony that 

essentially was along the lines of actually this is the consequence 

of a deliberate dual-track strategy and a couple of the major banks, 

B of A and Chase, testified that while they have the power to 

change that dual-track strategy and they recognize some of the 

shortfalls of it, they can only do so on loans that they have control 

over, but that a tremendous number of the loans they service are 

Fannie and Freddie loans, and that in that case, Fannie and 

Freddie are pushing very hard to pursue both tracks aggressively 

so that the foreclosure can take place as quickly as possible if the 

modification fails. 

I guess that general perspective seems to be supported in the testimony that both of you have put forward just from your written 

testimony on where you both address the dual track, and here is 

the dilemma. Everyone benefits, in general, from a modification 
334 

being successful. The investors benefit. Certainly the community 

benefits by having a family in that home. Certainly the children 

benefit from the stability of the family staying in that home. Everyone who has a stake in the surrounding community—it is not just 

those who live there, but the fact that the dropping home values 

are driving a national cycle that we have not seen the end of yet. 

That is all tied in together. 

So all these incentives, and yet Daniel Tarullo testifying earlier 

noted that despite the preference of modifications over foreclosure 

as a national strategy, that the deck is stacked the other direction, 

and he says that several possible explanations for the prominence 

of foreclosures: Lack of service or capacity to execute modifications, 

financial incentives for servicers to foreclose, what appears to be 

easier execution of foreclosures relative to modifications, limits on 

authority of securitization trustees, and conflicts between primary 

and secondary lien holders. So kind of big picture, modifications 

make a lot of sense from a lot of perspectives, but the complexity 

of the mortgage marketplace results in a lot of foreclosures in lieu 

of aggressive pursuit of modifications. 

And then we find Fannie and Freddie saying the same. Hey, 

folks, if you are servicing our loans, you have got to aggressively 

pursue foreclosure. And so families are completely stressed out and 

a substantial number—I do not really know the percent—but families start to get these foreclosure notices. Some of them are walking 

away from their homes because they cannot deal with the pressure 

of—they think they are trying to get a modification, but they have 

been on the phone four times. They have talked to four different 

people in the pursuit of that modification. They have submitted the 

paperwork three times. It has been lost repeatedly. They can never 

get the same story. They are told, make your payments, and they 

are told, we cannot pursue your modification unless you are a 

month late. Then somebody else says, no, we cannot pursue it unless you are 3 months late. And so in the middle of all that, then 

the foreclosure side starts pounding on their door and families, like 

we are not answering the phone anymore and we are not going to 

open the mail anymore and until the sheriff comes and moves us 

out, or we are just getting out of the house now. 

There is something counterproductive from every quarter about 

this aggressive pursuit of foreclosures at the same time that a 

modification is in process. Is it not possible, because since folks are 

saying that it is really Fannie and Freddie that are really helping 

to drive this dual track, is it not possible to find a way to recognize 

the importance that foreclosure may be the ultimate path, but to 

suspend some of the features of your tracking down that path during a period where there is legitimate good faith effort by the 

servicer and by the family to get a modification in place, and could 

that not help overall with this picture? 

So I guess I am asking each of you, Mr. Edwards and Mr. 

Bisenius. 

Mr. BISENIUS. Let me offer a couple of thoughts around that, if 

I could, Senator. First off, the challenge that you highlight, I believe is very real and one that can lead to, as you suggest, kind of 

counterproductive results. It is in our interest to have our servicers 

work with borrowers to try to seek a non-foreclosure alternative, to 
335 

seek a modification, to seek a repayment plan, to seek something 

other than a foreclosure. As I mentioned in my testimony, we actually provide financial incentives for them to do that and encourage 

them to do that. 

The balancing act we feel, though, is if a non-foreclosure alternative cannot be found, every day, every month I wait to start that 

foreclosure process costs. It costs a lot. If you do back-of-envelope 

math, as I suggested in my written statement, it is $30 to $40 a 

day. If we have 300,000 loans sitting in foreclosure, that can start 

to run into the hundreds of millions of dollars a month from those 

delays. 

We have to find a way to remove the confusion, because I understand it is a painful process and a confusing process. Simultaneously, though, I need to find a way to ensure that I am not adding more losses to the taxpayers as a result of our actions. 

Senator MERKLEY. So before I turn to Mr. Edwards, let me just 

pursue that for a moment. And, by the way, I think I am way over 

my time, Mr. Chair—— 

Chairman DODD. That is OK. 

Senator MERKLEY. Thank you. So essentially, you say when there 

is recognition that a modification cannot be completed, then we 

need to push through to foreclosure. I understand that. But what 

about a policy where you said, if this standard is met, a family has 

applied in good faith for a modification, they are in negotiation of 

that modification, there is perhaps a 120-day limit or a 90-day window or something, can you not just say, listen, suspend the foreclosure notifications and that track. Tell the customer that for the 

next 90 days or the next 120 days while this gets worked out, we 

are setting that aside. Recognize, Mr. and Mrs. Customer, that if 

it does not get worked out, that we will have to restart the foreclosure track. But create a window in which the whole emphasis 

of the institution, of the servicer institution, is upon getting that 

modification in place and done. Is something like that workable 

that could be done as a policy? 

Mr. BISENIUS. So let me suggest one thing. It is our policy that 

if we have begun some type of a modification, some type of a workout strategy, then we will not initiate the foreclosure proceedings 

until we can work through that. So that is our policy. The difference that we have, though, is as the servicer has tried to contact 

the borrower and made good faith effort to contact the borrower 

and yet the delinquency has extended, at a point, we begin that 

foreclosure process. Oftentimes, that is the initiator that now gets 

the borrower to be able to make contact with the servicer and some 

type of work-out option gets started. At this point, we have not delayed that. It is something we can look at, but if we have begun 

the foreclosure process, we think it is important to continue that. 

Senator MERKLEY. Right. Well, I would love to continue this conversation because I think in some degrees we are passing each 

other, because we are really talking here—I think all the Members 

of this Committee have constituents who are in the modification 

process. We hear from them every single day, and yet they are getting those foreclosure notices. They are not folks who are ignoring 

your calls and not responding. 

Mr. Edwards? 
336 

Mr. EDWARDS. Senator, you made a very key point in that the 

borrower/family is making a legitimate effort, but more importantly 

that the servicer is making a legitimate effort to effect the modification. And as I have said in my testimony, servicers are not 

staffed adequately. The issue is inadequate staffing, the reason for 

multiple phone calls, the reason that we all read and hear about. 

Why did I have to tell my story to different people over and over 

and over again? 

And you made another key point, the stress on the family. Our 

work, our focus groups have said that once you get past three or 

4 months of delinquency, borrowers start to—families emotionally 

start to detach from the home and they are not coming back and 

they are not seeking a modification. 

We need to do everything we can to make sure the servicers follow up with their commitment to provide a single point of contact. 

Fannie’s and Freddie’s process is there is no foreclosure track during the first 90 days. There needs to be a legitimate effort by both 

the borrower and the servicer within those first 90 days. The 

servicers need to put forth a legitimate effort. They need more 

staffing. That will allow the system to run appropriately. 

Senator MERKLEY. Thank you very much for your testimony, and 

I encourage every possible effort to try to make this modification 

track work better because it is an abysmal failure in terms of national policy right now and our economy and our families are going 

to—are suffering and will continue to suffer if we do not figure out 

how to do it better. Thank you. 

Chairman DODD. Let me pick up on Senator Merkley’s line of 

questioning. I am just thinking out loud here with you, and I wanted to ask you about—I presume you have seen or heard some of 

the suggestions that were made by Sheila Bair and Dan Tarullo regarding standards and, well, you have obviously embraced the notion of a single point of contact and others. But let me state the 

conclusion, and you disagree with me. Do you agree—I presume 

you agree with these suggestions being made, or do you disagree 

with any of the suggestions being made? 

Mr. EDWARDS. Absolutely agree. 

Mr. BISENIUS. I have not looked at as much detail to them. The 

point I would add to that one, Mr. Chairman, is Freddie Mac has 

very clear written standards on servicing. So it is not as though 

they are nebulous. They are very clear about—— 

Chairman DODD. Well, we are talking about national standards, 

in a sense. Mr. Deutsch? 

Mr. DEUTSCH. I would have to look at—— 

Chairman DODD. Well, let me know what you think. I would like 

to hear back because you represent an organization. 

Mr. EDWARDS. I think it is important to have two things. One is 

it is important to have national standards, but it is also important 

to have one regulatory agency that takes this on as its job with an 

eye to protecting consumers. And I think the new Bureau of Consumer Financial Protection, this should be its baby. It should say, 

we are taking over. We are going to write the regulations. We are 

going to make sure that there are standards, that standards are 

enforced, and that servicers who do not comply with the standards, 

who do not live up to the standards, will be sanctioned and might 
337 

even lose their license to service. I mean, we have to get serious 

about that and that is the only way to do it. 

Chairman DODD. It will be good for the investor and the borrower. 

Let me ask something, because Jeff Merkley has raised an interesting set of questions regarding the dual tracking. It seemed to me 

that one of the major problems we saw underlying the mortgage 

crisis that led to the near financial collapse in the country was a 

lack of underwriting standards that went on through the subprime 

lending. And maybe—I hope I am not naive about this. I presume 

at some point, and obviously facts and circumstances can change, 

that person has lost a job. The income is not there. It could also 

be they did not get a job in the middle of all of this. But in addition 

to hoping something can turn around or there is maybe a work-out 

at a level that would allow that family to meet that obligation and 

stay in that home. It is obviously important. 

Is there some capacity in all of this—because obviously, I think 

all of us agree, as well, look, if someone just is not going to be able 

to do this no matter how hard you try in all of this, it is better 

probably to move along because the other values of properties in 

that neighborhood suffer. All the other tangential problems that 

emerge get exacerbated by delaying, obviously, a situation. So 

striking that balance is not easy. None of us are suggesting you are 

going to find a perfect way to do this. 

But I wonder if there is any consideration of making a determination as to whether or not there is, in a number of these cases, 

just no likelihood, given the economic circumstances, beyond the 

capacity of that family to meet an obligation. Do you consider that? 

Mr. EDWARDS. First and foremost, for people who are unemployed—— 

Chairman DODD. Yes? 

Mr. EDWARDS.——our first offering is 6 months of forbearance. 

So we do not require any payments for that 6-month period and 

hope that the individual will get employed. To the extent they get 

employed, and in all likelihood it is going to be at less of an income 

that they had earlier, we will first run them through HAMP, evaluate the documentation, and then determine whether or not a 

HAMP modification or a Fannie Mae modification is feasible. 

Chairman DODD. Yes. I presume you consider other sources of income that may be coming in—family support, others that could be 

supporting that conclusion, as well. So it is not just a question of 

a job, necessarily. Is that true, or am I—can a homebuyer provide 

evidence that they have other sources of support economically that 

will allow them to meet a modified—— 

Mr. EDWARDS. Absolutely. Other sources of income would need to 

be documented—— 

Chairman DODD. Yes. 

Mr. EDWARDS.——and then we would set the modification appropriately. Let me leave it at that. 

Mr. BISENIUS. All I would add to that is we encourage our 

servicers to actually reach out to the borrower just a few days after 

that first missed payment in order to begin to evaluate the financial circumstances that the borrower has. 
338 

Chairman DODD. So you encourage them to do it. But again, I 

come back to the first question I asked you. Why do you not demand it of them? They need you. They do not survive without you. 

Mr. BISENIUS. It is in our servicer guidelines. It is in our servicing contract that they reach out to borrowers in those first few 

days after it. So it is demanded as part of our contract. 

Chairman DODD. I would like to see it be tougher than that. 

Professor Eggert, I will give you the last word on this. Anything 

else you want to add to this conversation? 

Mr. EGGERT. Well, I wanted to add something about the put-back 

issue, if I could. 

Chairman DODD. Yes. 

Mr. EGGERT. And I worry that during the course of the day, the 

discussion of the put-backs has all been in terms of safety and 

soundness of the financial institutions that would have to repurchase it. I think it is important to recognize that put-backs where 

there has been a breach of representations and warranties is an 

important market discipline for originators of loans. Lenders 

should not be selling loans and breaching their representations and 

warranties. 

Chairman DODD. Yes. 

Mr. EGGERT. And right now, what we are seeing is lenders fighting off put-backs, saying, oh, it is—you are just putting this back 

because the loan is in default, but we should not have to buy it 

back. You were a sophisticated investor. You knew what you were 

buying. 

But if you do not enforce representations and warranties, the 

market breaks down. I mean, that is an important part of market 

discipline. I think it is important that Fannie and Freddie enforce 

representations and warranties and put back all loans that are appropriate. 

Chairman DODD. Yes. 

Mr. EGGERT. As a taxpayer, I think that is important, and also 

for market discipline, it is a crucial thing. 

Chairman DODD. Well, thank you. There are other questions I 

was going to—— 

Mr. EDWARDS. Excuse me, Senator. 

Chairman DODD. Yes? 

Mr. EDWARDS. Can I make one final point? 

Chairman DODD. Certainly, you may. Yes. 

Mr. EDWARDS. I do not want to make any headlines here today, 

so earlier Professor Eggert indicated that Fannie Mae had fired 

servicers. When we moved this servicing, we actually got together 

and worked out an arrangement where the servicer agreed to move 

some of these loans to a place where we had better capacity. We 

did it in such a way that it was a win-win for Fannie Mae and the 

servicer and ultimately for the families. 

Chairman DODD. Well, good. That is encouraging. More of that 

evidence would help us. 

And I am going to submit—there are a couple of other questions 

that I have, but we have kept everyone a long time here. 

Jeff, any additional comments you want to make at all, or—— 

Senator MERKLEY. I will just close with this comment, and that 

is that the perspective presented by major banks before this Com-
339 

mittee was that they are suspending the dual track for loans that 

they carry, but they are being forced by Fannie and Freddie not to 

suspend the dual track. You all have come and testified, oh, no, we 

create this window, this 90 days. There is either a serious misunderstanding or a serious discrepancy, but I would just urge you 

to try to find a path that is as supportive of the modification process as the major banks are for their own portfolio loans. Despite 

your attestations that you are doing it, something seems amiss and 

could be improved. 

Chairman DODD. It might be, and Jeff, again, we tried this 4 

years ago, or 3 1⁄2 years ago, where we talked about it in this room, 

where we gathered together a lot of the mortgage lenders to talk 

about this very issue, and we had a set of principles that we adopted in this room that went nowhere, unfortunately, despite the commitments to the contrary. And it might not be a bad idea to gather, 

and you could raise this with Tim or others, as a way of gathering 

both these lending institutions, the servicers in a room like this 

and sit down and have that kind of conversation, what is going on, 

because that gap that we are getting—in these hearings, we have 

one panel and then another panel. Getting people together and find 

out where the gaps are here that we are hearing in the testimony 

might be very valuable. That is just a suggestion. 

I thank all of you. Thank you for being here. It is very gracious 

of you to participate in this. Obviously, this is a problem that is 

not going to be resolved in the short term, but one that we have 

got to get behind us for all the reasons that have been articulated 

today. So the Committee thanks you for your presence. 

The Committee will stand adjourned. 

[Whereupon, at 12:50 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
340 

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

Thank you, Mr. Chairman, for holding a second hearing on this very important 

topic. 

As I stated in my opening remarks at our last meeting, it is important to hear 

from our regulators. 

They are responsible for overseeing financial institutions, detecting these types of 

problems and formulating credible solutions. 

With that in mind, I look forward to hearing from them on when they first discovered these problems, how serious they believe they are, and how quickly they can 

be resolved. 

Additionally, I am interested in hearing from the members of the Financial Stability Oversight Council. I would like to know how they believe that body has performed and whether it has a role to play in addressing these issues. 

Thank you Mr. Chairman. 

PREPARED STATEMENT OF SENATOR TIM JOHNSON 

Thank you for calling this hearing, Mr. Chairman. There have been many disturbing media reports about careless foreclosure practices. During our last hearing 

on this topic, the Attorney General from Iowa, Mr. Miller, stated that the regulators’ 

review of documents couldn’t have caught the robo-signing problems. 

However, I am interested in learning about the steps that have been taken to ensure that taxpayers and homeowners get a fair shake in this process. I was particularly disturbed by reports of homeowners who were in the process of a modification 

being foreclosed upon. The perception that the system is stacked against the individual will further erode confidence in our housing markets and delay stability not 

just for housing but potentially for the economy as a whole. 

I look forward to hearing from our witnesses about the steps they are taking to 

ensure that servicing, modification and foreclosure guidelines are being followed. 

PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA 

Thank you, Mr. Chairman. During our first hearing to examine shortcomings in 

the mortgage servicing industry, we heard directly from the servicers about the 

steps that they were taking to address recent servicing issues. It was helpful to hear 

our panel’s recommendations to remedy the situation and provide long overdue relief to homeowners. I left concerned with the extent of the problem, but hopeful that 

the servicers would continue to work with Federal and State regulators toward a 

swift resolution. 

Unfortunately, in the short time between our last hearing and today, I continue 

to hear from homeowners in Hawaii that are facing foreclosure and having difficulty 

working with servicers. Borrowers are still faced with unresponsive and obstructive 

mortgage servicers, and they continue to receive conflicting and inaccurate information when they contact their lenders and servicers for information about loan modifications and other loss mitigation options. 

Borrowers rightly expect their mortgage lenders and servicers to work in good 

faith to help them keep their homes. Instead, servicers have flaunted their protocols 

and ignored contractual agreements in favor of foreclosures. It is our responsibility 

and that of our witnesses today to correct these problems in order to preserve homeownership and provide much needed relief to distressed borrowers. 

This begins with ensuring that servicers are properly adhering to modification, refinance, and foreclosure procedures. Borrowers should expect servicers to be accessible, cooperative, and helpful through loss mitigation and foreclosure. Mortgage 

modifications and refinances must be significant and meaningful so that homeowners do not re-default or find themselves delinquent again several months later. 

When foreclosure is unavoidable, it should proceed in accordance with the law in 

order to avoid documentation defects and proof of title uncertainties that have become too common. 

These failures among mortgage service providers also highlight the need for greater financial literacy in our country. A lack of financial literacy is problematic even 

before foreclosure. Many borrowers fell behind on their mortgage payments because 

they did not understand the terms and features of their loans and they failed to 

anticipate increases in their monthly payments. Others are facing foreclosure because they did not plan for unforeseen financial hardships and were unable to make 

their monthly payments when they lost their jobs. Homeowners that are delinquent 

on their mortgages are often unaware of the counseling and education resources 
341 

that are available to assist them throughout the loss mitigation and foreclosure 

processes. Even after foreclosure, individuals need a better understanding of how to 

manage their other debt obligations, rebuild their credit once it has been damaged, 

and access alternative housing opportunities. 

Mortgage lenders and servicers must be held accountable for their poor business 

practices, but we should also provide individuals with the skills and tools they need 

to protect themselves. I worked to establish and secure funding for a pilot program 

that provides access to pre-homeownership counseling services for prospective homebuyers. The program is one example of what must be done to prepare individuals 

for the financial responsibilities that come with homeownership. We must continue 

to invest in financial education and counseling services that can develop individuals 

into more empowered and responsible consumers, borrowers, and homeowners. 

It is clear that more must be done to improve mortgage servicing practices and 

the effectiveness of Federal homeowner assistance initiatives. I thank the witnesses 

for joining us today and look forward to continuing to work together to improve 

homeowner protection and financial literacy. Thank, Mr. Chairman. 

PREPARED STATEMENT OF SENATOR KAY BAILEY HUTCHISON 

Thank you Chairman Dodd. 

As we continue to investigate allegations of fraud in the foreclosure process, we 

must remember that these issues are only a part of even greater problems with our 

nation’s broader mortgage finance system. While today we consider mortgage servicing and compliance with foreclosures laws, we must not neglect the need to address and restructure our mortgage finance system that to date has cost taxpayers 

more than $150 billion. 

In October, Greg Abbott, the Attorney General of Texas, called on 30 mortgage 

loan servicing companies in our State to halt new home foreclosures, sales of foreclosed homes, and evictions of people living in foreclosed homes. The purpose of this 

plea was to determine whether or not any mortgage loan company employees had 

participated in unlawful practices. 

The Attorney General’s request was not made lightly. In fact, it was made after 

several national lenders, including Bank of America, JP Morgan Chase, and Ally Financial, halted foreclosures outside of Texas to determine whether their practices 

were sound. And Attorney General Abbott was not alone. Attorneys general and regulators in all 50 states have joined together to investigate home foreclosures procedures on allegations of fraudulent practices. 

As we have all come to learn, the issue at hand is ′′robosigning,′′ a practice used 

by mortgage loan servicers to expedite foreclosure proceedings. Through this practice, employees signed and swore to thousands of loan documents and affidavits 

without so much as verifying the information in the document, or, in some cases, 

without reading the information. 

In any economic climate, allegations of foreclosure fraud should never be taken 

lightly. However, these allegations are magnified in our nation’s ongoing economic 

downturn. From July 2007 to August 2009, 5.3 million homeowners saw foreclosure 

proceeds begin, and 2.5 million of these homeowners ended up losing their homes. 

Over the past year, the rate of foreclosure has only accelerated, and we have seen 

predictions that the number of foreclosures across the country may reach 12 million 

before the economy recovers. 

In Texas, one in every 738 housing units is a foreclosure property, compared with 

1 in every 389 nationally. While Texas has fared better than many other states, and 

the foreclosure and delinquency rates have respectively slowed across our State in 

recent months, there is nothing to celebrate. Many of our neighbors in Texas and 

across the country have already endured a foreclosure, and the threat of delinquency and foreclosure looms for many others. 

Addressing allegations of fraud in mortgage servicing is very important. It is my 

hope that this hearing will be enlightening and I welcome the testimony of these 

distinguished witnesses. 

However, Mr. Chairman, in addressing mortgage servicing, we must not lose sight 

of the larger elephant in the room: the need to reform our broader residential mortgage finance system. While we need to ensure that mortgage loan servicing companies are adhering to the law in the foreclosure process, we must address what led 

to the crisis in the first place. 

In the wake of this crisis, American taxpayers have poured more than $150 billion 

into Fannie Mae and Freddie Mac, the secondary mortgage giants who have traded 

their Government charter for Government control through Federal conservatorship. 

It is estimated that the total cost to taxpayers of this bailout for Fannie Mae and 
342 

Freddie Mac may reach as high as $259 billion. When the bailout of Fannie Mae 

and Freddie Mac is combined with the $700 billion Troubled Asset Relief Program 

ultimately used to inject capital into banks weighed down by bad mortgages, and 

Federal stimulus and spending packages aimed at lifting the tattered economy 

brought down by the mortgage crisis, taxpayers have fronted trillions of dollars. 

Taxpayers have paid an even greater amount in lost jobs, lost homes, and lost savings. 

Despite the significant effects of the mortgage crisis, Congress has done nothing 

to address the mortgage finance system, except to throw Fannie Mae and Freddie 

Mac the lifeline of their bailout which we have seen grow to more than $150 billion 

and counting. Mr. Chairman, we must not wait any longer to investigate issues that 

have arisen as a result of the mortgage crisis. We must address the root causes of 

this crisis: Fannie Mae, Freddie Mac, and the rest of nation’s flawed mortgage finance system. 

PREPARED STATEMENT OF PHYLLIS CALDWELL 

CHIEF OF HOMEOWNERSHIP PRESERVATION OFFICE

DEPARTMENT OF THE TREASURY

DECEMBER 1, 2010 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank 

you for the opportunity to testify today regarding issues surrounding mortgage servicing. This testimony will cover two key areas: first, the steps we are taking to ensure that servicers participating in the Making Home Affordable (MHA) program 

are adhering to program guidelines in light of the recent foreclosure issues, and second, the accomplishments of MHA to date and its impact on mortgage servicing. 

The reports of ‘‘robo-signing’’, faulty documentation and other improper foreclosure practices by mortgage servicers are unacceptable. If servicers have failed to 

comply with the law, they should be held accountable. The Administration is leading 

a coordinated interagency effort to investigate misconduct, protect homeowners and 

mitigate any long-term effects on the housing market. While Treasury does not have 

the authority to regulate the foreclosure practices of financial institutions, nor to ensure that those practices conform to the law, it is working closely with agencies that 

do have such authority. 

The Financial Fraud Enforcement Task Force, a broad coalition of law enforcement, investigatory, and regulatory agencies that brings together more than 20 Federal agencies, 94 U.S. Attorneys Offices, and dozens of State and local partners, is 

working to ensure that foreclosure practices are thoroughly investigated and any 

criminal behavior is prosecuted. The Federal Housing Administration (FHA) has 

been reviewing servicers of loans it insures for compliance with loss mitigation requirements. Additionally, the Office of the Comptroller of the Currency has directed 

all large national bank servicers to review their foreclosure management processes—including file reviews, affidavit processing, and signatures—to ensure that 

the processes are fully compliant with all applicable State laws. The other independent banking regulatory agencies are doing similar reviews of institutions under 

their jurisdiction. Attached to my testimony is a fact sheet providing more detail 

concerning the activities of the coordinated interagency effort. 

Because MHA and its first lien program, the Home Affordable Modification Program (HAMP), are pre-foreclosure programs, the recent reports of robo-signing of affidavits and improper foreclosure documentation do not directly affect the implementation of HAMP. But these documentation failures reflect the fact that servicers 

did not have the proper resources in place, nor did they have procedures and controls in place to prevent this crisis. As we have learned in implementing HAMP, 

servicers were historically structured and staffed to perform a limited role-primarily 

collecting payments. They did not have the systems, staffing, operational capacity 

or incentives to engage with homeowners on a large scale and offer meaningful relief from unaffordable mortgages. 

The foreclosure problems underscore the continued critical importance of the Making Home Affordable Program launched by the Obama administration. Preventing 

avoidable foreclosures through modifications and other alternatives to foreclosure 

continues to be a critical national priority. Foreclosure is painful for homeowners; 

it is also costly to servicers and investors. Foreclosures dislocate families, disrupt 

the communities, and destabilize local housing markets. For this reason, the Obama 

administration launched the Making Home Affordable program in the spring of 

2009, of which HAMP is a key component. HAMP is intended to prevent avoidable 

foreclosures by providing financial incentives to servicers, investors and borrowers 
343 

to voluntarily undertake modifications of mortgages for responsible homeowners in 

a way that is affordable and sustainable over time. In cases where a modification 

is not possible, the participating servicers must consider other alternatives to foreclosure. As a result, throughout the last 20 months, we have worked to develop systems and procedures to ensure that responsible homeowners are offered meaningful 

modifications and other foreclosure alternatives. To remedy servicer shortcomings, 

we have urged servicers to rapidly increase staffing and improve customer service. 

We have developed specific guidelines and certifications on how and when borrowers 

must be evaluated for HAMP and other loss mitigation options prior to foreclosure 

initiation. We have also continued our compliance efforts to ensure borrowers are 

fairly evaluated and that servicers conduct their operations in accordance with 

Treasury guidelines. MHA has strong compliance mechanisms in place to ensure 

that servicers follow our program’s guidelines. 

HAMP Procedural Safeguards and Compliance Efforts 

Treasury has built numerous procedural safeguards in HAMP to avoid foreclosure 

sales. Specifically, program guidelines require participating mortgage servicers of 

non-GSE loans to: 

• Evaluate homeowners for HAMP modifications before referring them for foreclosure. The focus here is on early intervention. Servicers must reach out to all 

potentially eligible borrowers when they are only 2 months delinquent and 

there is a still a viable opportunity to save the loan; 

• Suspend any foreclosure proceedings against homeowners who have applied for 

HAMP modifications, while their applications are pending; 

• Evaluate whether homeowners who do not qualify for HAMP (or who have fallen out of HAMP) qualify for alternative loss mitigation programs or private 

modification programs; 

• Evaluate whether homeowners who cannot obtain alternative modifications may 

qualify for a short sale or deed-in-lieu of foreclosure; and 

• Provide a written explanation to any borrower who is not eligible for modification and delay foreclosure for at least 30 days to give the homeowner time to 

appeal. 

Servicers may not proceed to foreclosure sale unless and until they have tried 

these alternatives. They must also first issue a written certification to their foreclosure attorney or trustee stating that ‘‘all available loss mitigation alternatives 

have been exhausted and a non-foreclosure option could not be reached.’’ On October 

6, Treasury clearly reminded servicers of non-GSE loans of this existing requirement that they are prohibited from conducting foreclosure sales until these pre-foreclosure certifications are executed. It should be noted that the GSEs have similar 

guidelines for their HAMP modifications. 

The MHA compliance program is designed to ensure that servicers are meeting 

their obligations under the MHA servicer contracts for loans where Fannie Mae or 

Freddie Mac is not the investor, and uses a variety of compliance activities to assess 

servicers from different perspectives. Treasury has engaged a separate division of 

Freddie Mac, Making Home Affordable—Compliance (MHA–C), to perform these 

compliance activities. Employing a risk-based approach, compliance activities are 

performed ranging generally monthly for servicers with the largest percentages of 

potentially eligible borrowers, to at least twice annually for the smaller-sized 

servicers. 

Our compliance activities focus on ensuring that homeowners are appropriately 

treated in accordance with MHA guidelines. As the program has evolved, servicers 

have adapted their processes to incorporate MHA programs. Treasury has implemented non-financial remedies that have shaped servicer behavior in order to address the most vital issue: the ultimate impact on the homeowner. 

As information regarding irregularities in servicer foreclosure practices arose, 

Treasury acted swiftly and instructed MHA–C to review the ten largest servicers’ 

internal policies and procedures for completing these pre-foreclosure certifications 

before initiating the foreclosure proceedings, and to assess a limited sample of foreclosure sales that have occurred since the effective date of the guidance. The results 

of the review are not yet available. However, if MHA–C identifies any incidents of 

non-compliance with HAMP guidelines, Treasury will direct servicers to take appropriate corrective action, which may include suspending foreclosure proceedings and 

re-evaluating the affected homeowners for HAMP, as well as undertaking changes 

to servicing processes to help ensure that HAMP guidelines are followed prior to initiating the foreclosure process. 
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HAMP’s Accomplishments and Its Impact on the Mortgage Industry 

To date, HAMP has achieved three critical goals: it has provided immediate relief 

to many struggling homeowners; it has used taxpayer resources efficiently; and it 

has helped transform the way the entire mortgage servicing industry operates. 

Twenty months into the program, close to 1.4 million homeowners have entered into 

HAMP trials and experienced temporary reductions in their mortgage payments. Of 

these, almost 520,000 homeowners converted to permanent modifications. These 

homeowners are experiencing a 36 percent median reduction in their mortgage payments-averaging more than $500 per month-amounting to a total, program-wide 

savings of nearly $3.7 billion annually for homeowners. 

Early indications suggest that the re-default rate for permanent HAMP modifications is significantly lower than for historical private-sector modifications—a result 

of the program’s focus on properly aligning incentives and achieving greater affordability. For HAMP modifications made in the fourth quarter of 2009, at 6 months, 

fewer than 10 percent of permanent modifications are 60+ days delinquent. According to the OCC’s Mortgage Metrics Report, the comparable delinquency rates for 

non-HAMP modifications made in the same quarter were 22.4 percent. Regarding 

HAMP re-defaults, the OCC states, ‘‘These lower early post-modification delinquency rates may reflect HAMP’s emphasis on the affordability of monthly payments and the requirements to verify income and complete a successful trial period.’’ 

Borrowers who do not ultimately qualify for HAMP modifications often receive alternative forms of assistance. Based on survey data from the eight largest servicers, 

approximately one-half of homeowners who apply for HAMP modifications but do 

not qualify have received some form of private-sector modification. Less than 10 percent have lost their homes through foreclosure sales. 

HAMP uses taxpayer resources efficiently. HAMP’s ‘‘pay-for-success’’ design utilizes a trial period to ensure that taxpayer-funded incentives are used only to support borrowers who are committed to staying in their homes and making monthly 

payments, and the investor retains the risk of the borrower re-defaulting into foreclosure. No taxpayer funds are paid to a servicer or an investor until a borrower 

has made three modified mortgage payments on time and in full. The majority of 

payments are made over a 3- to 5-year period only if the borrower continues to fulfill this responsibility. These safeguards ensure that spending is limited to highquality modifications. 

MHA Has Been a Catalyst—Setting the Benchmark for Sustainable 

Modifications 

MHA has transformed the way the mortgage servicing industry deals with alternatives to foreclosure. Because of MHA, servicers have developed constructive private-sector options. Where there was once no consensus plan among loan servicers 

about how to respond to borrowers in need of assistance, HAMP established a universal affordability standard: a 31 percent debt-to-income ratio, which dramatically 

enhanced servicers’ ability to reduce mortgage payments to sustainable levels while 

simultaneously providing the necessary justification to investors for the size and 

type of modification. 

In the year following initiation of HAMP, home retention strategies changed dramatically. According to the OCC/ OTS Mortgage Metrics Report, in the first quarter 

of 2009, nearly half of mortgage modifications increased borrowers’ monthly payments or left their payments unchanged. By the second quarter of 2010, 90 percent 

of mortgage modifications lowered payments for the borrower. This change means 

borrowers are receiving better solutions. Modifications with payment reductions perform materially better than modifications that increase payments or leave them unchanged. 

Moreover, even holding the percentage payment reduction constant, the quality of 

modifications made by servicers appears to have improved since 2008. For modifications made in 2008, 15.8 percent of modifications that received a 20 percent payment reduction were 60 days or more delinquent 3 months into the modification. 

For modifications made in 2010, that delinquency rate has fallen almost in half, to 

8.2 percent. The OCC’s Mortgage Metrics Report from 2010:Q2 attributes the improvement in mortgage performance to ‘‘servicer emphasis on repayment sustainability and the borrower’s ability to repay the debt.’’ 

Spurred by the catalyst of the HAMP program, the number of modification arrangements was nearly three times greater than the number of foreclosure completions between April 2009 and August 2010. More than 3.7 million modification arrangements were started, including the close to 1.4 million trial HAMP modification 

starts, more than 568,000 FHA loss mitigation and early delinquency interventions, 

and more than 1.6 million proprietary modifications by servicing members of the 

HOPE NOW Alliance. 
345 

Further, it is important to keep in mind that MHA is only one of many Administration housing efforts targeting these challenges: the Administration has also provided substantial support for the housing markets through support for Fannie Mae 

and Freddie Mac to help keep mortgage rates affordable; purchase of agency mortgage-backed securities; and an initiative to provide support and financing to State 

and local Housing Finance Agencies (HFAs). These HFAs provide, in turn, tens of 

thousands of affordable mortgages to first time homebuyers and help develop tens 

of thousands of affordable rental units for working families. 

Responding to a Changing Housing Crisis 

MHA was designed to be a versatile program. MHA includes a second lien modification program, a foreclosure alternatives program that promotes short sales and 

deeds-in-lieu of foreclosures, and an unemployment forbearance program. Treasury 

expanded HAMP to include FHA and Rural Development mortgage loans through 

the FHA–HAMP and RD–HAMP program, and also introduced a principal reduction 

option. Finally, Treasury introduced a program to allow the hardest-hit states to tailor housing assistance to their areas, and worked with FHA to introduce an option 

for homeowners with high negative equity to refinance into a new FHA loan if their 

lender agrees to reduce principal on the original loan by at least 10 percent. 

Second Lien Modification Program 

The Second Lien Modification Program (referred to as 2MP) requires that when 

a borrower’s first lien is modified under HAMP and the servicer of the second lien 

is a 2MP participant, that servicer must offer to modify the borrower’s second lien 

according to a defined protocol. 2MP provides for a lump sum payment from Treasury in exchange for full extinguishment of the second lien, or a reduced lump sum 

payment from Treasury in exchange for a partial extinguishment and modification 

of the borrower’s remaining second lien. Although 2MP was initially met with reluctance from servicers and investors who did not want to recognize losses on their second lien portfolios, as of October 3, 2010, Treasury has signed up seventeen 2MP 

servicers, which includes the four largest mortgage servicers, who in aggregate service approximately 60 percent of outstanding second liens. The program uses a thirdparty data base to match second lien loans with first lien loans permanently modified under HAMP. Servicers are required to modify second lien loans within 120 

days from the date the servicer receives the first lien and second lien matching information. The implementation of this data base began over the summer. Five 2MP 

Servicers have already begun matching modified first liens with their corresponding 

second liens, while the other twelve are in some phase of developing systems capacity to do so. Information on the second lien program will be included in upcoming 

Monthly Servicer Performance Reports as data becomes available. 

Home Affordable Foreclosure Alternatives Program 

Any modification program seeking to avoid preventable foreclosures has limits, 

HAMP included. HAMP does not, nor was it ever intended to, address every delinquent loan. Borrowers who do not qualify for HAMP may benefit from an alternative program that helps the borrower transition to more affordable housing and 

avoid the substantial costs of a foreclosure. Under HAFA, Treasury provides incentives for short sales and deeds-in-lieu of foreclosure for circumstances in which borrowers are unable to complete the HAMP modification process or decline a HAMP 

modification. Borrowers are eligible for a relocation assistance payment, and 

servicers receive an incentive for completing a short sale or deed-in-lieu of foreclosure. In addition, investors are paid additional incentives for allowing some short 

sale proceeds to be distributed to subordinate lien holders. The Home Affordable 

Foreclosure Alternatives (HAFA) Program became effective on April 5, 2010. 

Unemployment Program 

In March 2010, the Obama administration announced enhancements to HAMP 

aimed at unemployment problems by requiring servicers to provide temporary mortgage assistance to many unemployed homeowners. The Unemployment Program 

(UP) requires servicers to grant qualified unemployed borrowers a forbearance period during which their mortgage payments are temporarily reduced for a minimum 

of 3 months, and up to 6 months for some borrowers, while they look for a new job. 

Servicers are prohibited from initiating a foreclosure action or conducting a foreclosure sale (a) while the borrower is being evaluated for UP, (b) after a foreclosure 

plan notice is mailed, (c) during the UP forbearance or extension, or (d) while the 

borrower is being evaluated for or participating in HAMP or HAFA following the 

UP forbearance period. UP went in to effect August 1, 2010. Because no incentives 

are paid under UP, data reports will be based on servicer surveys. 
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Principal Reduction Alternative 

The Administration announced further enhancements to HAMP in March 2010 by 

encouraging servicers to write down mortgage debt as part of a HAMP modification 

(the Principal Reduction Alternative, or PRA). Under PRA, servicers are required 

to evaluate the benefit of principal reduction and are encouraged to offer principal 

reduction whenever the net present value (NPV) result of a HAMP modification 

using PRA is greater than the NPV result without considering principal reduction. 

The principal reduction and the incentives based on the dollar value of the principal 

reduced will be earned by the borrower and investor based on a pay-for-success 

structure. Under the contract with each servicer, Treasury cannot compel a servicer 

to select PRA over the standard HAMP modification even if the NPV of PRA is 

greater than the NPV of regular HAMP. However, Treasury has required servicers 

to have written policies for PRA to help ensure that similarly situated borrowers 

are treated consistently. The program became operational October 1, 2010 and the 

four largest servicers have indicated an intention to offer PRA to homeowners. 

FHA Refinance 

Also in March 2010, the Administration announced adjustments to existing FHA 

refinance programs that permit lenders to provide additional refinancing options to 

homeowners who owe more than their homes are worth because of large declines 

in home prices in their local markets. This program, known as the FHA Short Refinance option, will provide more opportunities for qualifying mortgage loans to be restructured and refinanced into FHA-insured loans. 

In order to qualify for this program, a homeowner must be current on their existing first lien mortgage; the homeowner must occupy the home as a primary residence and have a qualifying credit score; the mortgage owner must reduce the 

amount owed on the original loan by at least 10 percent; the new FHA loan must 

have a balance of no more than 97.75 percent of the current value of the home; and 

total mortgage debt for the borrower after the refinancing, including both the first 

lien mortgage and any other junior liens, cannot be greater than 115 percent of the 

current value of the home—giving homeowners a path to regain equity in their 

homes and affordable monthly payments. Program guidance was issued to participating FHA servicers in September 2010. 

HFA Hardest-Hit Fund 

On February 19, 2010, the Administration announced the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest-Hit Fund) 

for State HFAs in the nation’s hardest-hit housing markets to design innovative, locally targeted foreclosure prevention programs. In total, $7.6 billion has been allocated to 18 states (Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, 

Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, and Tennessee) and the District of Columbia 

under the HFA Hardest-Hit Fund. As of November 1, 2010, four states were either 

accepting applications or providing assistance (Arizona, Michigan, Ohio and Rhode 

Island). By the end of 2010 another three states are expected to begin providing assistance. The remaining states are expected to begin providing assistance in the first 

half of 2011. 

Allocations under the HFA Hardest-Hit Fund were made using several different 

metrics. Some of the funds were allocated to states that have suffered average home 

price drops of more than 20 percent from their peak, while other funds were allocated to states with the highest concentration of their populations living in counties 

with unemployment rates greater than 12 percent or unemployment rates that were 

at or above the national average. In addition, some funds were allocated to all the 

states and jurisdictions already participating in the HFA Hardest-Hit Fund to expand the reach of their programs to help more struggling homeowners. The applicable HFAs designed the State programs themselves, tailoring the housing assistance 

to their local needs. A minimum of $2 billion of the funding is required to be used 

by states for targeted unemployment or under-employment programs that provide 

temporary assistance to eligible homeowners to help them pay their mortgages 

while they seek re-employment or additional employment or undertake job training. 

Treasury also required that all of the programs comply with the requirements of 

EESA, which include that they must be designed to prevent avoidable foreclosures. 

All of the funded program designs are posted online at http:// 

www.FinancialStability.gov/roadtostability/hardesthitfund.html. 

Transparency, Accountability, and Compliance 

I would like to provide you with further detail regarding the compliance efforts 

regarding HAMP. To protect taxpayers and ensure that TARP dollars are directed 
347 

toward promoting financial stability, Treasury established rigorous transparency 

and accountability measures for all of its programs, including all housing programs. 

In addition, every borrower is entitled to a clear explanation if he or she is determined to be ineligible for a HAMP modification. Treasury requires servicers to report the reason for modification denials in the HAMP system of record. MHA–C’s 

compliance activities, through Second Look loan file reviews and other onsite assessments, evaluate the appropriateness of the denials as well as the timeliness and accuracy of the denial notification to the affected borrowers. 

In order to improve transparency of the HAMP NPV model, which is a key component of the eligibility test for HAMP, Treasury increased public access to the NPV 

white paper, which explains the methodology used in the NPV model. To ensure accuracy and reliability, MHA–C conducts periodic audits of servicers’ NPV practices. 

MHA–C conducts two types of reviews related to NPV. For those servicers that have 

re-coded the requirements of the NPV model in their processing systems, MHA–C 

conducts onsite and offsite reviews of model accuracy, model management, and data 

integrity and inputs. For those servicers using the MHA Servicer Portal, MHA–C 

conducts reviews of data integrity and inputs. Where non-compliance is found, 

Treasury requires servicers to take remedial actions, which can include re-evaluating borrowers with appropriate inputs, process changes, corrections to recoded 

NPV implementations, and, for servicers who have re-coded the NPV model, reverting back to the MHA Servicer Portal for loans with negative NPV results from the 

servicers’ re-coded NPV model until necessary corrections have been re-evaluated by 

MHA–C. In addition, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury is preparing to establish a Web portal that borrowers can access to run a NPV analysis using input data regarding their own mortgages, and to provide to borrowers who are turned down for a HAMP modification 

the input data used in evaluating the application. 

As stated above, servicers are subject to various other compliance activities, including periodic, onsite compliance reviews as well as onsite and offsite loan file reviews. These various compliance activities performed by MHA–C assess servicers’ 

compliance with HAMP requirements. Treasury works closely with MHA–C to adapt 

and execute our risk based compliance activities quickly based on changes in the 

program as well as observed trends. The current assessment of the top ten servicers’ 

adherence to our pre-foreclosure certifications and requirements is one example of 

how we adapt our compliance activities. MHA–C provides Treasury with the results 

from each of the various compliance activities conducted. Treasury performs quality 

reviews of these activities and evaluates the nature and scope of any instances of 

non-compliance, and assesses appropriate responses, including remedies, in a consistent manner. As stated earlier, during the beginning of the program, and as additional features (e.g., the Second Lien Program) are introduced, Treasury’s compliance activities and associated remedies focus on shaping servicers’ behavior and improving processes as servicers ramp up or modify their implementation of HAMP. 

As the program and servicers’ processes mature, financial remedies may become 

more appropriate and effective in reinforcing Treasury’s compliance and performance expectations. 

Looking Ahead for Housing 

Servicers need to increase efforts in helping borrowers avoid foreclosure through 

modification, as well as other alternatives to foreclosure, such as short sales. Furthermore, as we have learned through HAMP, servicers must be held accountable 

for ensuring that their foreclosure processes have integrity and are used after all 

loss mitigation options have been exhausted. Treasury’s main priority is to ensure 

that first, participating servicers are doing everything that they can to reach, evaluate, and start borrowers into HAMP modifications, second, if a HAMP modification 

is not possible, every servicer is properly evaluating each homeowner for all other 

potential options to prevent a foreclosure, including HAFA or one of their own modification programs, and third, servicers are utilizing programs such as UP or the 

HFA Hardest-Hit Fund to their fullest ability in order to prevent avoidable foreclosures. 

Over the past 20 months, we have been actively engaged with stakeholders from 

across the housing sector to find ways to increase the pace of new HAMP modifications, improve the characteristics of those modifications, and improve the borrower 

experience. We sincerely appreciate the assistance that we have gotten from Members of Congress and the advocacy community in strengthening borrower protections, incentivizing principal reduction, and assisting the unemployed. And most importantly, we value the efforts that Members of Congress, counselors and advocates 

have made in holding servicers accountable. 
348 

Yet, as we deploy a comprehensive suite of loss mitigation options, we must remember, as the President noted, not every foreclosure can be prevented. Any broadbased solution must aim at achieving both an efficient and equitable allocation of 

resources. This means a balance must be struck between affording homeowners opportunities to avoid foreclosure while expeditiously easing the transition in those 

cases where homeownership is not an economically sustainable alternative. This is 

especially important in order to lay the foundation for future appreciation which will 

provide a meaningful path to sustainable homeownership. 

In the coming months, we will begin to see the impacts of the newly launched 

MHA programs. These programs will reach more distressed homeowners and provide additional stability to the housing market going forward. In much the same 

way that HAMP’s first lien modification program has provided a national blueprint 

for mortgage modifications, these new programs will continue to shape the mortgage 

servicing industry and act as a catalyst for industry standardization of short sale, 

refinance and principal reduction programs. The interplay of all these programs will 

provide a much more flexible response to changes in the housing market over the 

next 2 years. 
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350 
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PREPARED STATEMENT OF SHEILA C. BAIR. 

CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

DECEMBER 1, 2010 

Chairman Dodd, Ranking Member Shelby and Members of the Committee, thank 

you for requesting the views of the Federal Deposit Insurance Corporation on deficiencies in mortgage servicing and their broader potential impact on the financial 

system. It is unfortunate that problems in mortgage servicing and foreclosure prevention continue to require the scrutiny of this Committee. While ‘‘robo-signing’’ is 

the latest issue, this problem is symptomatic of persistent shortcomings in the foreclosure prevention efforts of our nation’s largest mortgage servicers. As such, I believe that major changes are required to stabilize our housing markets and prevent 

unnecessary foreclosures. 

The FDIC continues to review the mortgage servicing operations at banks we supervise and also those institutions that have purchased failed-bank loans under loss 

share agreements with the FDIC. To date, our review has revealed no evidence that 

FDIC-supervised State-chartered banks directly engage in robo-signing, and it also 

appears that they have limited indirect exposure through third-party relationships 

with servicers that have engaged in this practice. However, we remain concerned 

about the ramifications of deficiencies in foreclosure documentation among the largest servicers, most of which we insure. We will continue to work with the primary 

supervisors of these servicers through our backup examination authority. In addition, we are coordinating our work with the State Attorneys General (AG) and the 

Financial Fraud Enforcement Task Force—a broad coalition of Federal, State, and 

local law enforcement, regulatory, and investigatory agencies led by the Department 

of Justice—to support efforts for broad based and consistent resolution of servicing 

issues. 

The robo-signing and foreclosure documentation issues are the natural result of 

the misaligned incentives that pervade the entire mortgage process. For instance, 

the traditional, fixed level of compensation for loan servicing has been wholly inadequate to cover the expenses required to implement high-touch and specialized servicing on the scale needed in recent years. Misaligned incentives have led to significant underinvestment in the systems, processes, training, and staffing necessary to 

effectively implement foreclosure prevention programs. Similarly, many servicers 

have failed to update their foreclosure process to reflect the increased demand and 

need for loan modifications. As a result, some homeowners have received conflicting 

messages from their servicers and have missed opportunities to avoid foreclosure. 

The failure to effectively implement loan modification programs can not only harm 

individual homeowners, but the resulting unnecessary foreclosures put downward 

pressure on home prices. 

As serious as these issues are, a complete foreclosure moratorium is ill-advised, 

as it would unduly prolong those foreclosures that are necessary and justified, and 

would slow the recovery of housing markets. The regrettable truth is that many of 

the properties currently in the foreclosure process are either vacant or occupied by 

borrowers who simply cannot make even a significantly reduced payment and have 

been in arrears for an extended time. 

My hope is that the newly established Financial Stability Oversight Council 

(FSOC) will take the lead in addressing the latest issues of foreclosure documentation deficiencies and proposing a sensible and broad-based approach to reforming 

mortgage servicer processes, promoting sustainable loan modifications and restoring 

legal certainty to the foreclosure process where it is appropriate and necessary. 

In my testimony, I will begin with some background on the robo-signing and related foreclosure documentation problems and connect theses issues to other deficiencies in the mortgage servicing process. Second, I will discuss the FDIC’s efforts 

to address identified servicing problems within our limited jurisdiction. Finally, I 

will discuss the central role that I believe the FSOC can play in facilitating broad 

agreements among major stakeholder groups that can help resolve some of these 

issues. 

I. Robo-Signing and Foreclosure Documentation Problems and Shortfalls in 

Mortgage Servicing 

The FDIC is concerned about two related, but separate, problems relating to foreclosure documentation. The first is referred to as ‘‘robo-signing,’’ or the use of highly 

automated processes by some large servicers to generate affidavits in the foreclosure 

process without the affiant having reviewed facts contained in the affidavit or having the affiant’s signature witnessed in accordance with State laws. Recent depositions of individuals involved in robo-signing have led to allegations of fraud based 
353 

1FDIC estimate based on data from the Mortgage Bankers Association data and the American 

Housing Survey. 2 ‘‘The Impact of Distressed Sales on Repeat-Transactions House Price Indexes,’’ FHFA, May 

27, 2009, http://www.fhfa.gov/webfiles/2916/researchpaperldistress%5B1%5D.pdf. 3Source: Federal Reserve Board, Flow of Funds, Table L.218. 

on contentions that these individuals signed thousands of documents without knowledge or verification of the information contained in the filed affidavits. 

The second problem involves demonstrating the chain of title required to foreclose. 

Some servicers have not been able to establish their legal standing to foreclose because, under current industry practices, they may not be in possession of the necessary documentation required under State law. In many cases, a servicer is acting 

on behalf of a trustee of a pool of mortgages that have been securitized and sold 

to investors in a mortgage-backed securities (MBS) transaction. In MBS transactions, the promissory note and mortgage signed by the borrowers are held by a 

custodian on behalf of the securitization investors. 

In many cases today, however, the mortgage held by the custodian indicates that 

legal title to the mortgage has been assigned from the original lender to the Mortgage Electronic Registration System (MERS), a system encompassing some 31 million active mortgage loans that was designed to facilitate the transfer of mortgage 

claims in the securitization process. Securitization often led to multiple transfers of 

the mortgage through MERS. Many of the issues raised about the authority of 

servicers to foreclose are a product of potential defects in these transfers and the 

requirements for proof of the servicer’s authority. Where MERS is involved, foreclosures have been initiated either by MERS, as the legal holder of the lien, or by 

the servicer. In both cases, the foreclosing party must show that it has possession 

of the note and that its right to foreclose on the mortgage complies with State law. 

Robo-signing and chain of title issues may create contingent liabilities for mortgage servicers. Investors who contend that servicers have not fulfilled their servicing responsibilities under the pooling and servicing agreements (PSAs) argue that 

they have grounds to reassign servicing rights. In addition, concerns have been 

raised by investors as to whether the transfer of loan documentation in some private 

MBS securitization trusts fully conform to the requirements established under applicable trust law and the PSAs governing these transactions. While the legal challenges under the representations and warranties trust requirements remain in their 

early stages, they could, if successful, result in the ‘‘putback’’ of large volumes of 

defaulted mortgages from securitization trusts to the originating institutions. The 

FDIC has been working with the FRB and the Comptroller of the Currency (OCC), 

in our backup capacity, to gather information from the large servicers to evaluate 

the potential financial impact of these adverse outcomes. 

Long-Standing Weaknesses in Third-Party Mortgage Servicing 

The weaknesses that have been identified in mortgage servicing practices during 

the mortgage crisis are a byproduct of both rapid growth in the number of problem 

loans and a compensation structure that is not well designed to deal with these 

loans. As recently as 2005, when average U.S. homes prices were still rising rapidly, 

fewer than 800,000 mortgage loans entered foreclosure on an annual basis.1 By 

2009, the annual total had more than tripled to over 2.8 million, and foreclosures 

through the first three quarters of 2010 are running at an annualized pace of more 

than 2.5 million. Moreover, the proportion of foreclosure proceedings actually resulting in the repossession and sale of collateral appears to have increased even more 

rapidly over this period in some of the hardest-hit markets. Data published by the 

Federal Housing Finance Agency show that the percent of total homes sales in California resulting from foreclosure-related distressed sales increased more than eightfold, to over 40 percent of all sales, between 2006 and 2008.2

The share of U.S. mortgage loans held or securitized by the Government-sponsored enterprises (GSEs) and private issuers of asset-backed securities has doubled 

over the past 25 years to represent fully two-thirds of the value of all mortgages 

currently outstanding.3 One effect of this growth in securitization has been parallel 

growth in third-party mortgage servicing under PSA agreements. By definition, a 

large proportion of the mortgages sold or securitized end up serviced under PSAs. 

The traditional structure of third-party mortgage servicing fees, put in place well 

before this crisis, has created perverse incentives to automate critical servicing activities and cut costs at the expense of the accuracy, reliability and currency of loan 

documents and information. Prior to the 1980s, the typical GSE mortgage pool paid 

a servicing fee of 37.5 basis points annually, or .375 percent of the outstanding principal balance of the mortgage pool. Since the 1980s, the typical servicing fee for 

prime loans has been 25 basis points. When Alt-A and subprime mortgages began 
354 

4Source: Inside Mortgage Finance. 5 Analysis of Mortgage Servicing Performance,’’ Data Report No. 4, January 2010, State Foreclosure Prevention Working Group, http://www.ohioattorneygeneral.gov/ForeclosureReport 

Jan2010. 

to be securitized by private issuers in the late 1990s, the standard servicing fees 

for those loans were set higher, typically at 37.5 basis points for Alt-A loans and 

50 basis points for subprime loans. While this fee structure provided a steady profit 

stream for servicers when the number of defaulted loans remained low, costs rose 

dramatically with the rise in mortgage defaults in the latter half of the last decade. 

As a result, some mortgage servicers began running operating losses on their servicing portfolios. One result of a compensation structure that did not account for the 

rise in problem loans was a built-in financial incentive to minimize the investment 

in back office processes necessary to support both foreclosure and modification. The 

other result was consolidation in the servicing industry. The market share of the 

top 5 mortgage servicers has nearly doubled since 2000, from 32 percent to almost 

60 percent.4 The purpose and effect of consolidation is to cut costs and achieve 

economies of scale, but also to increase automation. 

Most PSAs allow for both foreclosure and modification as a remedy to default. But 

servicers have continuously been behind the curve in pursuing modification as an 

alternative to foreclosure. A survey of 13 mortgage servicers conducted by the State 

Foreclosure Prevention Working Group shows that the annual percent of all past 

due mortgages that are being modified has risen from just over 2 percent in late 

2007 to a level just under 10 percent as of late 2009.5 At the same time, the percentage of past due loans entering foreclosure each year has also steadily risen over this 

same time period, from 21 percent to 32 percent. 

One example of the lack of focus on loss mitigation strategies is the uncoordinated 

manner in which many servicers have pursued modification and foreclosure at the 

same time. Under such a ‘‘dual-track’’ process, borrowers may be attempting to file 

the documentation needed to establish their qualifications for modification and waiting for a favorable response from the servicer, even while that servicer is at the 

same time executing the paperwork necessary to foreclose on the property. While 

in some cases it may be reasonable to begin conducting preliminary filings for seriously past due loans in states with long foreclosure timelines, it is vitally important 

that the modification process be brought to conclusion before a foreclosure sale is 

scheduled. Failure to coordinate the foreclosure process with the modification process risks confusing and frustrating homeowners and could result in unnecessary 

foreclosures. 

As described in the concluding section, we recommend that servicers establish a 

single point of contact that can work with every distressed borrower and coordinate 

all activities taken by the servicer with regard to that particular case. 

II. FDIC Efforts to Address Problems in Mortgage Servicing and Foreclosure 

Prevention 

Since the early stages of the mortgage crisis, the FDIC has made a concerted effort to promote the early modification of problem mortgages as a first alternative 

that can spare investors the high losses associated with foreclosure, assist families 

experiencing acute financial distress, and help to stabilize housing markets where 

distressed sales have resulted in a lowering of home prices in a self-reinforcing 

cycle. 

In 2007, when the dimensions of the subprime mortgage problem were just becoming widely known, I advocated in speeches, testimony and opinion articles that 

servicers not only had the right to carry out modifications that would protect 

subprime borrowers from unaffordable interest-rate resets, but that doing so would 

often benefit investors by enabling them to avoid foreclosure costs that could run 

as high as 40 percent or more of the value of the collateral. In addition, the FDIC, 

along with other Federal regulators jointly hosted a series of roundtables on the 

issues surrounding subprime mortgage securitizations to facilitate a better understanding of problems and identify workable solutions for rising delinquencies and 

defaults, including alternatives to foreclosure. 

More recently, the FDIC has been actively involved both in investigating and addressing robo-signing and documentation issues at insured depository institutions 

and their affiliates, ensuring that its own loss-share partners are employing best 

practices in their servicing operations, and implementing reforms that will better 

align the financial incentives of servicers in future securitization deals. 
355 

Supervisory Actions 

The FDIC is exercising both its primary and backup authorities to actively address the issues that have emerged regarding banks’ foreclosure and ‘‘robo-signing’’ 

practices. The FDIC is the primary Federal supervisor for nearly 5,000 State-chartered insured institutions, where we monitor compliance with safety and soundness 

and consumer protection requirements and pursue enforcement actions to address 

violations of law. While the FDIC is not the primary Federal regulator for the major 

loan servicers, our examiners are working onsite under our backup authority as part 

of an interagency horizontal review team at 12 of the 14 major mortgage servicers 

along with their primary Federal regulators. This interagency review is also evaluating the roles played by MERS and Lender Processing Services, a large data processor used by many mortgage servicers. 

The FDIC is committed to active participation in horizontal reviews and other 

interagency efforts so we are able to have a comprehensive picture of the underlying 

causes of these problems and the lessons to be learned. The onsite reviews are finding that mortgage servicers display varying degrees of performance and quality controls. Program and operational deficiencies may be correctable in the normal course 

of business for some, while others may need more rigorous system changes. The 

level and adequacy of documentation also varies widely among servicers. Where 

chain of title is not sufficiently documented, servicers are being required to make 

changes to their processes and procedures. In addition, some servicers need to 

strengthen audit, third-party arrangements, and loss mitigation programs to cure 

lapses in operations. However, we do not believe that servicers should wait for the 

conclusion of the interagency effort to begin addressing known weaknesses in internal controls and risk management. Corrective actions on problems identified during 

a servicer’s own review or the examiners’ review should be addressed as soon as possible. We expect each servicer to properly review loan documents prior to initiating 

or conducting any foreclosure proceedings, to adhere to applicable laws and regulations, and to maintain appropriate policies, procedures and documentation. If necessary, the FDIC will encourage the use of formal or informal corrective programs 

to ensure timely action is taken. 

Actions Taken as Receiver for Failed Institutions 

In addition to our supervisory efforts, the FDIC is looking at the servicing practices of institutions acquiring failed institutions under loss-share agreements. To 

date there are $159.8 billion in loans and securities involved in FDIC loss share 

agreements, of which $56.7 billion (36 percent) are single family loans. However, the 

proportion of mortgage loans held by acquiring institutions that are covered by loss 

share agreements is in some cases very small. For example, at One West Bank, the 

successor to Indy Mac, only 8 percent of mortgages serviced fall under the FDIC loss 

share agreement. 

An institution that acquires a single-family loss-share portfolio is required to implement a loan modification program, and also is required to consider borrowers for 

a loan modification and other loss mitigation alternatives prior to foreclosure. These 

requirements minimize the FDIC’s loss share costs. The FDIC monitors the lossshare agreements through monthly and quarterly reporting by the acquiring bank 

and semiannual reviews of the acquiring bank. The FDIC has the right to deny or 

recover any loss share claim where the acquiring institution is unable to verify that 

a qualifying borrower was considered for loan modification and that the least costly 

loss mitigation alternative was pursued. 

In connection with the recent foreclosure robo-signing revelations, the FDIC contacted all of its loss-share partners. All partners certified that they currently comply 

with all State and Federal foreclosure requirements. We are in the process of conducting a Loan Servicing Oversight audit of all loss-share partners with high volumes of single-family residential mortgage loans and foreclosures. The FDIC will 

deny any loss-share payments or seek reimbursement for any foreclosures not compliant with State laws or not fully remediated, including noncompliance with the 

loss-share agreements and loan modification requirements. 

Regulatory Actions to Reform Mortgage Securitization 

We also are taking steps to restore market discipline to our mortgage finance system by doing what we can to reform the securitization process. In July of this year, 

the FDIC sponsored its own securitization of $471 million of single-family mortgages. In our transaction, we addressed many of the deficiencies in existing 

securitizations. First, we ensured that the servicer will make every effort to work 

with borrowers in default, or where default is reasonably foreseeable. Second, the 

servicing arrangements in these structured loan transactions have been designed to 

address shortcomings in the traditional flat-rate structures for mortgage servicing 
356 

fees. Our securitization pays a base dollar amount per loan per year, regardless of 

changes in the outstanding balance of that loan. In addition, the servicing fee is increased in the event the loan becomes more complex to service by falling past due 

or entering modification or foreclosure. This fee structure is much less likely to create incentives to slash costs and rely excessively on automated or substandard processes to wring a profit out of a troubled servicing portfolio. Third, we provided for 

independent, third party oversight by a Master Servicer. The Master Servicer monitors the Servicer’s overall performance and evaluates the effectiveness of the 

Servicer’s modification and loss mitigation strategies. And, fourth, we provided for 

the ability of the FDIC, as transaction sponsor, the Servicer and the Master Servicer 

to agree on adapting the servicing guidelines and protocols to unanticipated and significant changes in future market conditions. 

The FDIC has also recently taken the initiative to establish standards for risk retention and other securitization practices by updating its rules for safe harbor protection with regard to the sale treatment of securitized assets in failed bank receiverships. Our final rule, approved in September, establishes standards for disclosure, 

loan quality, loan documentation, and the oversight of servicers. It will create a 

comprehensive set of incentives to assure that loans are made and managed in a 

way that achieves sustainable lending and maximizes value for all investors. In addition, the rule is fully consistent with the mandate under the Dodd-Frank Act to 

apply a 5 percent risk-retention requirement on all but the most conservatively underwritten loans when they are securitized. 

We are currently working on an interagency basis to develop the Dodd-Frank Act 

standards for risk retention across several asset classes, including requirements for 

low risk ‘‘Qualifying Residential Mortgages,’’ or QRMs, that will be exempt from risk 

retention. These rules allow us to establish a gold standard for securitization to encourage high-quality mortgages that are sustainable for the long term. This rulemaking process also provides a unique opportunity to better align the incentives of 

servicers with those of mortgage pool investors. 

We believe that the QRM rules should authorize servicers to use best practices 

in mitigating losses through modification, require compensation structures that promote modifications, and direct servicers to act for the benefit of all investors. We 

also believe that the QRM rules should require servicers to disclose any ownership 

interest in other whole loans secured by the same real property, and to have in 

place processes to deal with any potential conflicts. Some conflicts arise from socalled ‘‘tranche warfare’’ that reflects the differing financial interests among the 

holders of various mortgage bond tranches. For example, an investor holding the residual tranche typically stands to benefit from a loan modification that prevents default. Conversely, the higher rated tranches might be better off if a servicer foreclosed on the property forcing losses to be realized at the expense of the residual 

tranche. A second type of conflict potentially arises when a single company services 

a first mortgage for an investor pool and the second mortgage for a different party, 

or for itself. Serious conflicts such as this must be addressed if we are to achieve 

meaningful long-term reform of the securitization process. 

Therefore, the FDIC believes it would be extremely helpful if the definition of a 

QRM include servicing requirements that, among other things: 

• grant servicers the authority and provide servicers compensation incentives to 

mitigate losses on residential mortgages by taking appropriate action to maximize the net present value of the mortgages for the benefit of all investors rather than the benefit of any particular class of investors; 

• establish a pre-defined process to address any subordinate lien owned by the 

servicer or any affiliate of the servicers; and 

• require disclosure by the servicer of any ownership interest of the servicer or 

any affiliate of the servicer in other whole loans secured by the same real property that secures a loan included in the pool. 

Risk retention rules under the Dodd-Frank Act should also create financial incentives that promote effective loan servicing. The best way to accomplish this is to require issuers—particularly those who also are servicers—to retain an interest in the 

mortgage pool that is directly proportional to the value of the pool as a whole. Frequently referred to as a ‘‘vertical slice,’’ this form of risk retention would take the 

form of a small, proportional share of every senior and subordinate tranche in the 

securitization, creating a combined financial interest that is not unduly tilted toward either senior or subordinate bondholders. 

III. The FSOC Should Play a Central Role in Developing Solutions 

What started a few months ago as technical documentation issues in the foreclosure process has grown into something more serious and potentially damaging to 
357 

the nation’s housing recovery and to some of our largest institutions. First, a transparent, functioning foreclosure process is unfortunately necessary to the recovery of 

our housing market and our economy. Second, the mortgage documentation problems cast a cloud of uncertainty over the ownership rights and obligations of mortgage borrowers and investors. Further, there are numerous private parties and government entities that may have significant claims against firms central to the mortgage markets. 

While we do not see immediate systemic risk, the clear potential is there. The 

FSOC was established under the Dodd-Frank Act to deal with just this type of 

emerging risk. Its mandate includes identifying risks to financial stability and potential gaps in regulation and making recommendations for primary regulators and 

other policymakers to take action to mitigate those risks. As such, these issues represent just the type of problem the FSOC was designed to address. In addition, the 

difficulties that have been experienced to date in coordinating a Government policy 

response speak to the need for central role by the FSOC in negotiating workable 

solutions with the major parties that have a stake in the outcome. 

The FSOC is in a unique position to provide needed clarity to the market by coordinating consistent interpretations of what standards should be applied to establishing the chain of title for mortgage loans and recognizing the true sale of mortgage loans in establishing private securitization trusts. The constituent agencies 

that make up the FSOC also have their own authorities that can be used to provide 

clarity of this type. Examples include rulings on standards that determine the taxexempt status of mortgage trusts and standards for the recognition of true sale in 

a failed bank receivership, which the FDIC recently updated in its safe harbor regulation. 

We need broad agreements between representatives of the major stakeholders affected by this issue so that the uncertainties associated with this issue can be resolved as quickly as possible. Outlined below are some of the principles I believe 

should be part of any broad agreement among the stakeholders to this issue. 

1. Establish a single point of contact for struggling homeowners. Servicers should 

identify a single person to work with homeowners once it becomes evident the 

homeowner is in distress. This single point of contact must be appropriately 

authorized to provide current, accurate information about the status of the borrower’s loan or loan modification application, as well as provide a sign-off that 

all loan modification efforts have failed before a foreclosure sale. This will go 

a long way toward eliminating the conflicts and miscommunications between 

loan modifications and foreclosures in today’s dual-track system and will provide borrowers assurance that their application for modification is being considered in good faith. 

2. Expand and streamline private loan modification efforts to increase the number 

of successful modifications. To accomplish this end, servicers should be required to intervene with troubled borrowers from the earliest stages of delinquency to increase the likelihood of success in foreclosure mitigation. Modifications under such programs should significantly reduce the monthly payment 

through reductions in the interest rate and principal balance, as needed, to 

make the mortgage affordable over the long term. Analysis of modifications undertaken in the FDIC program at Indy Mac Federal Bank has shown that 

modifying loans when they are in the early stages of delinquency and significantly reducing the monthly payment are both factors that promote sustainable 

modifications that perform well over time. In exchange for the creation of highly simplified modification programs, mortgage servicers should have a ‘‘safe 

harbor’’ that would give them assurance that their claims will be recognized 

if foreclosure becomes unavoidable. In addition, streamlined modification programs should be recognized as a best practice in adjudicating disputes with 

mortgage investors. 

3. Invest appropriate resources to maintain adequate numbers of well-trained 

staff. Broad agreements should require servicers to hire and train sufficient 

numbers of staff to professionally process applications for loan modifications. 

Further, servicers should be required to improve information systems to help 

manage and support the workload associated with loan modifications. 

4. Strengthen quality control processes related to foreclosure and loan servicing activities. Some servicers need to make fundamental changes to their practices 

and programs to fulfill their responsibilities and satisfy their legal obligations. 

Lax standards of care and failure to follow longstanding legal requirements 

cannot be tolerated. Regulators must vigorously exercise their supervisory tools 

to ensure that mortgage servicers operate to high standards. Servicers need to 

institute strong controls to address defective practices and enhance programs 
358 

to regain integrity of their operations. Where severe deficiencies are found, the 

servicers should be required to have independent third-party monitors evaluate 

their activities to ensure that process changes are fully implemented and effective. Servicers must also fully evaluate and account for their risks relating to 

their servicing activities, including any costs stemming from weaknesses in 

their operations. 

5. Resolve the challenges created by second liens. Since the early stages of the 

mortgage crisis, second liens have been an obstacle to effective alternatives to 

foreclosure, including loan modification and short sales. We must tackle the 

second lien issue head on. One option is to require servicers to take a meaningful write-down of any second lien if a first mortgage loan is modified or approved for a short sale. All of the stakeholders must be willing to compromise 

if we are to find solutions to the foreclosure problem and lay the foundation 

for a recovery in our housing markets. 

Conclusion 

We must restore integrity to the mortgage servicing system. We need a mandate 

for dramatically simplified loan modifications so that unnecessary foreclosures can 

be avoided. Servicers need to establish a single point of contact to coordinate their 

communication with distressed borrowers. They also need to invest appropriate resources and strengthen quality control processes related to loan modification and 

foreclosure. We must finally tackle the second liens head on, by requiring servicers 

to impose meaningful write-downs on second lien holders when a first mortgage is 

modified or approved for a short sale. 

This is the time for all parties to come together and arrive at broad agreements 

that will reduce uncertainty and lay the foundation for long-term stability in our 

mortgage and housing markets. The FSOC has a unique role to play in addressing 

the situation and can provide needed clarity on issues such as standards for recognizing true sale in securitization trusts. 

Again, thank you for the opportunity to testify on this important issue. I look forward to your questions. 

PREPARED STATEMENT OF DANIEL K. TARULLO 

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

DECEMBER 1, 2010 

Mr. Chairman, Ranking Member Shelby, and other Members of the Committee, 

thank you for your invitation to this morning’s hearing on problems in mortgage 

servicing. 

In the first portion of my testimony, I will explain our current understanding of 

the nature and extent of the deficiencies in mortgage documentation that have been 

so apparent in the robo-signing misconduct, as well as what the banking agencies 

are doing in support of a broader interagency effort to develop a full picture of these 

problems. I also want to address the issue of so-called put backs of mortgage-backed 

securities (MBS) to mortgage originators or securitization sponsors. Though only indirectly related to robo-signing and associated servicing flaws, financial exposure resulting from put backs could be more significant for some institutions than that 

from documentation flaws. 

In the second portion of my testimony, I will turn to the question of appropriate 

policy responses—with respect to specific regulated financial institutions, to supervisory practices more generally, and to the structural problems we have observed 

in the mortgage servicing industry, including the discouragingly sluggish pace of 

mortgage modifications. This last point is a matter of concern not only because of 

its significance for the millions of American families who are unable to maintain 

their mortgage payments on homes that have lost considerable value in recent 

years, but also because of the importance from a macroeconomic perspective of realizing as quickly and efficiently as possible a clearing of housing prices, which would 

help create the conditions for a market recovery. 

Mortgage Documentation and other Servicing Issues 

Foreclosure is a legal process initiated to terminate a borrower’s interest in a 

property and is permitted only when the borrower has defaulted on the debt obligation for a specified period. The process allows the lender to sell the property and 

use the proceeds to satisfy the borrower’s unpaid debt to the extent it is secured 

by the property. Foreclosure requirements are generally established by State laws 

and each State has its own statutes, rules, and court decisions pertaining to foreclosures. 
359 

Some 23 states, known as judicial foreclosure states, require foreclosures to be reviewed and approved by a court. Nonjudicial foreclosure states have different processes for foreclosures that do not require the creditor to obtain court approval for 

a foreclosure, but instead impose varying waiting periods and documentation, filing, 

and notice requirements after a default occurs and before a foreclosure sale may 

take place. In nonjudicial foreclosure states, the homeowner typically has access to 

the court in a foreclosure matter only if the homeowner initiates a suit to stop the 

foreclosure process or seeks protection in a bankruptcy court. 

Because mortgage servicers maintain the official accounting of all amounts paid 

and owed by borrowers, they serve as the critical link between borrowers and mortgage holders. In addition, servicers manage loan defaults, including the negotiation 

of loan modification and repayment plans with borrowers. Should the servicer decide 

to initiate foreclosure, it would often do so as the agent for third parties, such as 

securitization trusts. In this regard, servicers have responsibilities to investors holding residential MBS. Servicers also have responsibilities to borrowers to maintain 

accurate and complete records of payments received, amounts advanced, notifications made to borrowers, and changes of payment terms with respect to any mortgage modification discussions. 

Foreclosure documentation typically requires an assertion that the agent bringing 

forth the action has the legal right to foreclose and that the loan is in default. The 

document filings contain details of the transactions and the amounts owed. These 

documents typically include attestations signed by individuals who have personal 

knowledge of the facts and who are properly authorized to make such assertions. 

In most jurisdictions, the documents must be signed by these individuals in the 

presence of a notary, following proper notarization procedures. Lenders and 

servicers are responsible for ensuring that the individuals who sign these documents 

are duly authorized and have appropriate knowledge of the facts and circumstances. 

In addition, lenders and servicers are responsible for ensuring the accuracy of 

records and the facts recited in the foreclosure documents. 

State and local laws govern the recordation process for real estate transfers and 

mortgage filings and assignments. Given the multiple sales and assignments of 

mortgage loans that often occur, concerns have been raised regarding investors’ or 

servicers’ rights to initiate foreclosure actions. Although State-by-State practices 

vary considerably, generally the noteholder has the right to initiate foreclosure, once 

default has occurred, if an original note can be produced and the current holder’s 

ownership is verified. If there is no controversy concerning ownership of the note, 

but rather an inability to locate original documents, processes usually allow for foreclosure to proceed, albeit at some cost and delay. If there is some question of ownership, the investor or servicer may be required to produce evidence of ownership before a foreclosure can proceed. 

Since matters regarding real estate titles and foreclosures are generally governed 

by State law, State attorneys general are undertaking a joint review of lenders and 

servicers focusing on the reported problems in foreclosures. In addition, numerous 

Federal agencies have launched investigations, including the examinations in process by the Federal financial regulators. 

The Office of the Comptroller of the Currency, the Office of Thrift Supervision, 

the Federal Deposit Insurance Corporation, and the Federal Reserve are conducting 

an in-depth review of practices at the largest mortgage servicing operations. The 

interagency examinations and reviews focus on foreclosure practices generally, but 

with an emphasis on the internal control breakdowns that led to inaccurate affidavits and other questionable legal documents being used in the foreclosure process. 

The agencies are reviewing firms’ policies, procedures, and internal controls, including sampling loan files. We have also solicited the views of consumer organizations 

to help detect problems at specific servicers. The agencies expect the initial onsite 

portion of our work to be completed by the end of the year. The agencies plan to 

publish a summary overview in early 2011 that will describe the range of industry 

practices found in the examinations and identify weaknesses requiring remediation. 

The Federal Reserve has supervisory and regulatory authority for bank holding 

companies and their nonbank subsidiaries, as well as for approximately 800 Statechartered banks that are members of the Federal Reserve System (State member 

banks), and certain other financial institutions and activities. We work with other 

Federal and State supervisory authorities to ensure the safety and soundness of the 

banking industry, foster the stability of the financial system, and provide for fair 

and equitable treatment of consumers in their financial transactions. The Federal 

Reserve is engaged in both regulation, which involves establishing the rules within 

which banking organizations must operate, and supervision, which involves reviewing the efforts of banking organizations to abide by those rules and remain, overall, 

in safe and sound condition. 
360 

The Federal Reserve serves as the primary Federal regulator for two of the 10 

largest servicers affiliated with banking organizations, one a holding company affiliate and the other a State member bank. The Federal Reserve is participating with 

the other Federal banking agencies in examining the foreclosure policies and practices of the other large institutions. For additional information on foreclosure processes, we have sent a self-assessment questionnaire to other Federal Reserve-regulated institutions that engage in mortgage servicing but are not part of the interagency examination effort. 

While quite preliminary, the banking agencies’ findings from the supervisory review suggest significant weaknesses in risk-management, quality control, audit, and 

compliance practices as underlying factors contributing to the problems associated 

with mortgage servicing and foreclosure documentation. We have also found shortcomings in staff training, coordination among loan modification and foreclosure 

staff, and management and oversight of third-party service providers, including 

legal services. It is for this reason that we expanded the review to include an examination of pre-foreclosure loans, or those past due but not yet in the foreclosure process, and certain third-party service providers. As examiners identify weaknesses, 

they will require firms to take remedial action and, when necessary, require 

servicers to address resource shortfalls, training and coordination problems, and 

control failures. 

It is important to recognize that the extent of these problems is not the same 

across all firms. Nonetheless, the problems are sufficiently widespread that they 

suggest structural problems in the mortgage servicing industry. The servicing industry overall has not been up to the challenge of handling the large volumes of distressed mortgages. The banking agencies have been focused for some time on the 

problems related to modifying mortgage loans and the large number of consumer 

complaints by homeowners seeking loan modifications. It has now become evident 

that significant parts of the servicing industry also failed to handle foreclosures 

properly. 

While we are still in the process of determining the extent of these problems and 

the required supervisory response, it is clear that the industry will need to make 

substantial investments to improve its functioning in these areas and supervisors 

must ensure that these improvements occur. Moreover, fixing the problems in the 

mortgage servicing industry may also require thinking about some fundamental 

structural changes to the current mortgage system. I will discuss the issue of structural solutions to these issues in more detail later in my testimony. 

Investor Repurchase Requests 

The cost associated with foreclosure documentation problems, including robo-signing, are not the only potential liabilities facing financial institutions in the wake of 

the mortgage and housing crisis. As losses in MBS have been escalating, investors 

in MBS and purchasers of unsecuritized whole loans are more frequently exploring, 

and in some cases asserting, contractual and securities law claims against the parties that originated the loans, sold the loans, underwrote securities offerings, or had 

other roles in the process. The essence of these claims is that mortgages in the 

securitization pools, or sold as unsecuritized whole loans, did not conform to representations and warranties made about their quality—specifically that the loan applications contained misrepresentations or the underwriting was not in conformance 

with stated standards. 

The potential liability associated with contract claims in securitizations is usually 

called put back risk because many of the relevant agreements permit the buyer of 

the mortgages to put them back to the seller at par. Buyers can demand that the 

seller or another party that makes representations repurchase the mortgages if defects are found in the underlying loan documentation or in the underwriting that 

conflict with the sale agreements. Although the representations and warranties in 

the various agreements vary considerably, they frequently require that the defect 

materially and adversely affect the value of the loan before put back rights can be 

exercised. At the time of the put back, the mortgage loan may have become seriously delinquent or entered into default. Because underperforming mortgages are 

typically valued substantially less than par, the put back transfers any potential 

loss from the buyer back to the original seller or mortgage securitizer. 

Given the poor performance of the mortgage assets, investors, including the Government Sponsored Enterprises (GSEs), have sought to pursue put back claims 

through various legal avenues, including requesting that mortgage servicers provide 

underlying mortgage files and the requisite documents. A GSE will generally buy 

a loan out of an MBS pool when the loan becomes 120 days delinquent. The GSE 

will then conduct a review of the delinquent loan file, and if it finds that the loan 

did not comply with its underwriting standards, it will request that the loan be re-
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purchased by the originator/seller or that the GSE be made whole on any credit 

losses incurred. 

During the third quarter of 2010, Fannie Mae collected $1.6 billion in unpaid 

principal balance (UPB) from originators, and currently has $7.7 billion UPB in outstanding repurchase requests, $2.8 billion of which has been outstanding for more 

than 120 days. Freddie Mac has $5.6 billion UPB in outstanding repurchase requests, $1.8 billion of which has been outstanding for more than 120 days. As of 

the third quarter of 2010, the four largest banks held $9.7 billion in repurchase reserves, most of which is intended for GSE put backs. 

There are also pending claims by some investors alleging that underwriters and 

sponsors of securitizations failed to comply with the Federal securities laws covering 

the offering documents and registration statements. These suits specifically reference descriptions of the risks to investors, the quality of assets in the 

securitization, the order in which investors would be paid, or other factors. Most of 

these lawsuits are in the early stages, and it is difficult to ascertain the probability 

that investors will be able to shift a substantial portion of the losses on defaulted 

mortgages back to the parties that sold the loans or underwrote the offerings. 

While the full extent of put back exposure is for this reason hard to specify with 

precision, the risk has been known for some time and has been an ongoing focus 

of supervisory oversight at some institutions. However, in light of recent increased 

investor activity, the Federal Reserve has been conducting a detailed evaluation of 

put back risk to financial institutions. We are asking institutions that originated 

large numbers of mortgages or sponsored significant MBS to assess and provide for 

these risks as part of their overall capital planning process. 

Supervisory Responses 

The revelation of documentation flaws in foreclosure processes raise two kinds of 

questions for supervisors: First, what actions are appropriate and sufficient to respond to problems identified at specific regulated banking organizations? Second, 

what does the failure of supervisory examinations to uncover these flaws counsel for 

future supervisory practice? 

With respect to the question of actions aimed at specific institutions, the Federal 

Reserve and the other Federal banking agencies have significant supervisory and 

enforcement tools that can be used to address certain types of deficiencies in the 

foreclosure and mortgage transfer process. For example, numerous enforcement 

tools are available to address safety and soundness issues such as inadequate controls and processes, weaknesses in risk-management and quality control, and certain types of compliance weaknesses in foreclosure operations. These tools include 

supervisory enforcement actions that require an institution to correct deficient operations in a prescribed period of time and Civil Money Penalties (CMPs) for egregious 

actions. The agencies may also lower examination ratings, which can result in limiting the permissible activities and affiliations of financial firms and trigger other 

supervisory reviews and limitations, and restrict the ability of institutions to expand. The agencies also have the authority to assess CMPs on individuals who are 

responsible for violations, to issue cease and desist orders on responsible individuals, or, if the statutory criteria are met, to remove them from banking. In addition, 

we may make referrals to law enforcement agencies, or require institutions to file 

Suspicious Activity Reports, as appropriate. 

Although the examinations are not yet fully completed, based on what we have 

already learned, the Federal Reserve expects to use many or all of these tools 

through the course of our review of foreclosure and other mortgage matters. In particular, the Federal Reserve has already emphasized to the industry and to institutions we supervise the importance of addressing identified weaknesses in risk-management, quality control, audit, and compliance practices. The problems that are 

evident to date raise significant reputation and legal risk for the major mortgage 

servicers. These weaknesses require immediate remedial action. They will also affect the rating assigned by Federal Reserve supervisors to management of bank 

holding companies, even where the servicing activity was in a banking subsidiary 

of a holding company. In addition, the Federal banking agencies expect that employees are adequately trained and have sufficient resources to appropriately review the 

facts and circumstances of files when preparing documents, and that legal processes 

are fully and properly followed. Banking organizations also must ensure quality control for third-party service providers, including legal services. 

With respect to future supervisory practice more generally, two points for increased emphasis are already apparent. First, this episode has underscored the importance of our using the new authority given the Federal Reserve in the DoddFrank Wall Street Reform and Consumer Protection Act to send our examiners into 
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1The proposed Basel III capital rules would simultaneously introduce a specific minimum 

common equity ratio and define ‘‘common equity’’ so as to limit or exclude consideration of items 

that may not provide the loss absorbing capacity that common equity is supposed to represent. 

non-bank affiliates of large bank holding companies, including those in large institutions that have become bank holding companies only in the last couple of years. 

Second, our experience suggests that the utility of examining and validating internal control processes within firms may extend beyond improvements to the specific 

processes subject to the exam. We have found that problems in foreclosure practices 

do not seem as pervasive in institutions in which we had previously examined other 

internal control processes, found shortcomings, and insisted on corrective action. 

While we would not draw strong conclusions from such a limited experience, it 

seems possible that a firm may improve its general approach to control processes 

once it has been required to remedy problems in discrete areas. If this relationship 

is borne out, it could be a significant advance in supervisory practice, insofar as resource constraints will always limit the number of supervisory examinations. 

Possible Need for Structural Solutions 

Beyond remedial or punitive measures directed at specific firms and future-oriented changes in supervisory practice, structural solutions may be needed to address the range of problems associated with mortgage servicing. Similarly, the foreclosure documentation problems are another reminder of the degree to which foreclosure has been preferred to mortgage modification, notwithstanding various efforts 

to change this imbalance. Here again, a more structural solution may be needed. 

The explosive growth of securitization as a vehicle for financing mortgages was 

accompanied by the emergence of a sizable mortgage servicing industry—that is, a 

group of firms servicing mortgages that they did not own or, in many cases, that 

they had not originated. While there have surely been economies associated with 

this industry, there have also been chronic problems. It has been increasingly apparent that the inadequacy of servicer resources to deal with mortgage modifications—an area that was a point of supervisory emphasis—was actually a reflection 

of a larger inability to deal with the challenges entailed in servicing mortgages in 

many jurisdictions and dealing with a complicated investor base. For example, foreclosure procedures are specifically the province of real property law governed by the 

states, and can vary not only by State, but also within states and sometimes even 

within counties. With or without regulatory changes, it is quite probable that 

servicer fees to securitization trusts will increase to reflect the costs associated with 

the complexities of the contemporary mortgage model. 

The impetus for change in the mortgage servicing industry is likely only to increase as the advantages of servicing rights for regulatory capital purposes become 

limited after the new Basel III requirements are implemented.1 It is possible that 

servicing issues can be satisfactorily addressed through the actions of the various 

primary regulators. However, in light of the range of problems already encountered, 

and the prospect of further changes in the industry—including the possible migration of more servicing activity to non-banking organizations—it seems reasonable at 

least to consider whether a national set of standards for mortgage servicers may be 

warranted. 

The case for concerted, coordinated action is much clearer with respect to the 

slow-moving pace of mortgage modifications. Regardless of the findings that emerge 

from the examinations underway, and remedial actions required to correct past mistakes, this episode has again drawn attention to what can only be described as a 

perverse set of incentives for homeowners with underwater mortgages. Homeowners 

who try to obtain a modification of the terms of their mortgages are all too frequently subject to delay and disappointment, while those who simply stop paying 

their mortgages have found that they can often stay in their homes rent free for 

a time before the foreclosure process moves ahead. Moreover, many homeowners believe, reportedly on the basis of communications from servicers, that the only way 

they can qualify for modifications is by stopping their mortgage payments and thus 

becoming delinquent. 

Quite apart from the impact upon families who lose their homes, the dominance 

of foreclosures over modifications raises macroeconomic concerns. The number of 

foreclosures initiated on residential properties has soared from about 1 million in 

2006, the year that house prices peaked, to 2.8 million last year. Over the first three 

quarters of this year, we have seen a further 2 million foreclosure filings, and an 

additional 2.3 million homes were in foreclosure at the end of September. All told, 

we expect about 2.5 million foreclosure filings this year and next year and about 

2.4 million more in 2012. While our outlook is for filings to decline in coming years, 

they will remain high by historical standards. Currently, more than 4.5 million 
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2Written testimony of Phyllis Caldwell, Chief of Homeownership Preservation Office, U.S. Department of the Treasury, before the House Financial Services Subcommittee on Housing and 

Community Opportunity hearing on ‘‘Robo-Signing, Chain of Title, Loss Mitigation and Other 

Issues in Mortgage Servicing,’’ November 18, 2010. 

mortgage loans are 90 days or more past due or in foreclosure. These numbers compare to just 520,000 permanent loan modifications executed under the Treasury Department’s Home Affordable Modification Program (HAMP) and an additional 1.6 

million proprietary loan modifications by servicers participating in the HOPE NOW 

Alliance program.2

The Federal Reserve believes that in most cases the best way to assist struggling 

borrowers is a mortgage modification allowing them to retain their home with an 

affordable mortgage payment. In a housing market where values have declined so 

much, following a period in which all actors relied upon rising house prices to sustain mortgage practices, foreclosures simply do not make sense as a preferred response. Foreclosures are costly to all parties and more broadly to our economy. 

Lenders and investors incur financial losses arising from the litigation expenses associated with the foreclosure process and the loss on the defaulted mortgage when 

the foreclosed property sells at a liquidation price that is substantially less than the 

loan balance. Local governments must contend with lower property tax revenue and 

the ramifications of neglected properties that may threaten public safety. Additionally, neighbors and neighborhoods suffer potential spillover effects from foreclosure 

sales because foreclosures may reduce the attractiveness of the neighborhood or may 

signal to potential buyers a forthcoming decline in neighborhood quality. In the end, 

an overhang of homes awaiting foreclosure is unhealthy for the housing market and 

can delay a recovery in housing markets and the broader economy. 

Several possible explanations have been suggested for the prominence of foreclosures: the lack of servicer capacity to execute modifications, purported financial 

incentives for servicers to foreclose rather than modify, what until recently appeared 

to be easier execution of foreclosures relative to modifications, limits on the authority of securitization trustees, and conflicts between primary and secondary lien holders. Whatever the merits and relative weights of these various explanations, the social costs of this situation are huge. It just cannot be the case that foreclosure is 

preferable to modification for a significant proportion of mortgages where the deadweight costs of foreclosure, including a distressed sale discount, are so high. While 

some banks and other industry participants have stepped forward to increase the 

rate of modifications relative to foreclosures, many have not done enough. We need 

renewed attention in many quarters of government and the financial industry, and 

among investors in mortgage-backed securities, to the lagging incidence of modifications. 

Conclusion 

In conclusion, I regret to say that the hangover from the housing bubble of this 

past decade is still very much with us, as revealed both in the inadequate capacity 

of mortgage servicers and the continued impact of foreclosed homes on the housing 

market. While bank regulatory agencies can and should respond to specific failings 

that are being identified in our interagency examination, there is a strong case to 

be made that broader solutions are needed both to address structural problems in 

the mortgage servicing industry and to accelerate the pace of mortgage modifications or other loss mitigation efforts. Thank you very much for your attention. I 

would be happy to answer any questions you might have. 
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*Statement Required by 12 U.S.C. § 250: 

The views expressed herein are those of the Office of the Comptroller of the Currency and 

do not necessarily represent the views of the President. 1 Bank of America, Citibank, JPMorgan Chase, HSBC, MetLife, PNC, Wells Fargo, and U.S. 

Bank. 

PREPARED STATEMENT OF JOHN WALSH * 

ACTING COMPTROLLER OF THE CURRENCY

COMPTROLLER OF THE CURRENCY

DECEMBER 1, 2010 

Introduction 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, I appreciate this opportunity to discuss recently reported improprieties in the foreclosure processes used by several large mortgage servicers and actions that the Office of the Comptroller of the Currency (OCC) is taking to address these issues 

where they involve national banks. The occurrences of improperly executed documents and attestations raise concerns about the overall integrity of the foreclosure 

process. The loss of one’s home is personally and financially traumatic for a borrower. Laws in each State establish the requirements and process by which that action may be taken. When that due process is not followed, it is not a technicality; 

it goes to the propriety of the foreclosure itself. The unacceptable practices that have 

been identified in the past several months warrant the thorough investigation that 

is now underway by the OCC, other Federal bank regulators, and other agencies, 

and demand an appropriate and vigorous response. 

The OCC supervises all national banks and their operating subsidiaries, including 

their mortgage servicing operations. The servicing portfolios of the eight largest national bank mortgage servicers1 account for approximately 63 percent of all mortgages outstanding in the United States—nearly 33.3 million loans totaling almost 

$5.8 trillion in principal balances as of June 30, 2010. 

To date, six large national bank servicers have publicly acknowledged procedural 

deficiencies in their foreclosure processes. The lapses that have been reported represent a serious operational breakdown in foreclosure governance and controls that 

national banks should maintain. These lapses are unacceptable, and we are taking 

aggressive actions to hold national banks accountable, and to get these problems 

fixed. As soon as the problems at Ally Bank came to light, we directed the largest 

national bank mortgage servicers under our supervision to review their operations, 

to take corrective action to remedy identified problems, and to strengthen their foreclosure governance to prevent reoccurrences. At the same time, we initiated plans 

for intensive, onsite examinations of the eight largest national bank mortgage 

servicers. Through these examinations we are independently testing the adequacy 

of governance over their foreclosure processes to ensure foreclosures are completed 

in accordance with applicable legal requirements and that delinquency affidavits 

and claims that are the basis for the foreclosure are accurate. 

As part of our examinations we also are reviewing samples of individual loan files 

where foreclosures have either been initiated or completed to test the validity of 

bank self assessments and corrective actions, and to determine whether troubled 

borrowers were considered for loss mitigation alternatives such as loan modifications prior to foreclosure. We have likewise instructed examiners to be alert to, and 

document, any practices such as misapplied payments, padded fees, and inappropriate application of forced placed insurance as part of these file reviews. Should 

we find evidence of such occurrences, we will take appropriate action. Our examinations are still on-going. 

My testimony provides a brief discussion of how the OCC regulates national bank 

mortgage servicing operations, the recently publicized foreclosure problems, and our 

most recent findings on trends in modifications, alternatives to modifications, and 

foreclosures from the OCC and OTS Mortgage Metrics Report. I then describe the 

OCC’s actions with respect to loan modifications and problems that have arisen in 

the foreclosure process. 

OCC Supervision of Mortgage Servicers 

The Committee’s invitation letter requested that my testimony include an explanation of how the OCC regulates national bank mortgage servicing operations. 

Mortgage banking at the largest national banks is a high-volume, operationally intensive business that requires specialized supervision. The majority of the mortgage 

banking assets in the national banking system fall under our Large Bank Supervision program, characterized by a continuous onsite examiner presence that in-
369 

cludes specialists in the mortgage banking, retail credit, consumer compliance, and 

operational risk areas. Our resident examiner teams are supplemented by subject 

matter specialists in our Policy, Legal, and Economics divisions, each of whom 

brings specialized expertise to supervision of our mortgage companies. 

Direct supervision is largely based upon supervisory strategies developed for each 

institution that are risk-based and focused on the more complex issues. The first 

step is to identify the most significant risks and determine whether a bank has systems and controls to identify and manage exposures. Next, we assess the integrity 

and effectiveness of the bank’s internal risk management systems and audit, with 

appropriate validation through transaction testing. This is accomplished through a 

combination of ongoing monitoring and targeted examinations. The targeted examinations validate that risk management systems and processes are functioning as expected and do not present significant supervisory concerns. Supervisory strategies 

will be revised, as necessary, to expediently address newly identified or emerging 

risks or concerns, whether at an individual bank or systemically across the banking 

system. 

Examiners generally do not directly test standard business processes or practices, 

such as the validity of signed contracts, or the processes used to notarize documents 

or the actual physical presence of notes with document custodians, unless there is 

evidence of a material weakness or breakdown in governance and internal controls 

over these activities. In making such a determination, examiners will review ongoing quality control activities, internal or third-party audits, consumer complaints 

and relevant publicly available information. As warranted, our supervisory activities 

at individual banks will often be supplemented with horizontal reviews of targeted 

areas of heightened risk across a group of banks, as with the horizontal review of 

foreclosure processes currently underway. 

Our supervisory conclusions, including any risk management deficiencies, are 

communicated directly to bank senior management. Thus, not only is there ongoing 

evaluation, but also a process for timely and effective corrective action when needed. 

If warranted, these concerns are communicated to management and the Board as 

‘‘Matters Requiring Attention’’ (‘‘MRAs’’) in supervisory communications. If these 

concerns are not appropriately addressed within a reasonable period, we have a variety of tools with which to respond, ranging from informal supervisory actions directing corrective measures to formal enforcement actions. 

Current Foreclosure Problems 

The current foreclosure problems represent another painful chapter of the recent 

financial crisis, stemming from a record number of borrower defaults which has 

strained servicer capacity to provide loss mitigation activities to troubled borrowers 

and ensure a large and growing number of foreclosures are properly processed. 

The concerns about improper foreclosure practices initially centered on two issues 

that deal with the documentation required to effect foreclosure actions. The first 

issue involves requirements under some State laws for individuals to sign affidavits 

attesting personal knowledge of the accuracy and completion of required documentation essential to a valid foreclosure proceeding. The second issue is whether, in similar situations where required by State law, individual notaries may have violated 

procedures in notarizing documentation by, for example, notarizing the documents 

after they had been signed, rather than in the presence of the individual signing 

the affidavit. As the situation has evolved, concerns have broadened to include the 

accuracy of all information underlying the foreclosure process, and the physical possession and control over documents necessary to foreclose on a home. Our examinations are investigating all of these issues. 

The signing and attestation of foreclosure documents are steps required by various State laws that govern the legal completion of a foreclosure proceeding-and as 

such, typically represent the final steps in what is a very lengthy and resource intensive process that banks undertake to deal with seriously delinquent borrowers. 

The time to complete a foreclosure process in most states can take 15 months or 

more and in many cases can be as long as 2 years. Foreclosure completion timelines 

are generally set by investors such as Fannie Mae and Freddie Mac, and there are 

penalties that they may impose on servicers that do not meet the timelines mandated by these investors. 

The specific requirements and the legal standards applied for determining personal knowledge vary across judicial foreclosure states, and thus require servicers 

to ensure that their processes conform to individual State, or in some cases, local 

law. To assist with meeting these requirements, mortgage servicers often outsource 

some of the requisite legal work to law firms familiar with local standards and other 

third parties for input and review. Fannie Mae and Freddie Mac in fact require 

servicers to use law firms approved for particular geographies when preparing fore-
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2Short sales refer to sales of mortgaged properties at prices that net less than the total 

amount due on the loans. Servicers and borrowers negotiate repayment programs, forbearance, 

or forgiveness for any remaining deficiency on the debt. Short sales typically have less adverse 

impact than foreclosures on borrowers’ credit records. Deed-in-lieu-of-foreclosure actions refer to 

actions in which borrowers transfer ownership of the properties (deeds) to servicers in full satisfaction of the outstanding mortgage debt to lessen the adverse impact of the debt on borrowers’ 

credit records. 3 A full copy of the OCC and OTS Mortgage Metrics Report, Second Quarter 2010 is available 

at: http://www.occ.gov/publications/publications-by-type/other-publications/mortgage-metricsq2092010/mortgagemetrics-q2092010-pdf.pdf. 4Seriously delinquent loans are those mortgages that are 60 or more days past due and all 

mortgages held by bankrupt borrowers whose payments are 30 or more days past due. 

closure filings. For large mortgage servicers that operate nationwide, this often has 

resulted in use of a significant number of third parties—lawyers and other service 

providers—and a panoply of documents used in their mortgage foreclosure processes: one large mortgage servicer has indicated that they use over 250 different affidavit forms. These operational challenges, however, do not absolve the banks from 

their responsibilities to have the appropriate staff, quality controls, and an effective 

audit process in place to ensure that documents are accurate and the foreclosure 

process is conducted in compliance with applicable State and local laws. 

Servicers typically move forward with foreclosure proceedings only after thoroughly evaluating a borrower’s eligibility for loan modifications and other alternatives, such as short sales or deed-in-lieu-of-foreclosures.2 As a practical matter, 

many investors for whom loans are serviced, including Fannie Mae and Freddie 

Mac, require servicers to attempt loss mitigation actions, including modifications, 

prior to foreclosing on a home. The largest national bank mortgage servicers are 

participants in Treasury’s Home Affordable Modification Program (HAMP) and are 

required to evaluate troubled borrowers to determine their eligibility for a HAMP 

modification. For borrowers that fail to qualify for a HAMP loan modification, 

servicers also typically consider whether the borrowers would qualify for a modification under their proprietary programs, which generally have more flexible criteria. 

In the vast majority of cases, it is only after these loan modification efforts have 

been exhausted that final foreclosure actions are taken. 

Recent Trends in Mortgage Modifications and Foreclosure Activity 

Since 2008, the OCC has collected loan level data from the large national banks 

we supervise and published this information in quarterly mortgage metrics reports. 

We have since expanded our data collection and reporting efforts and joined with 

the Office of Thrift Supervision (OTS) to publish data on the performance of loans 

and loan modifications, and to highlight trends in loss mitigation activities, foreclosures, and re-defaults occurring on mortgages serviced by large national banks 

and federally regulated thrifts. Our most recent report, released in September, provides data through second quarter 2010 for nearly 34 million first-lien mortgages, 

totaling nearly $6 trillion in outstanding balances—representing approximately 65 

percent of all first-lien residential mortgages in the country.3 Key trends from that 

report are summarized below. 

Overall Mortgage Performance 

As shown in Table 1, the percentage of current and performing mortgages remained unchanged from the previous quarter at 87.3 percent. The percentage of 

mortgages 30 to 59 days delinquent increased to 3.1 percent at the end of the second 

quarter of 2010, compared with 2.8 percent at the end of the previous quarter and 

3.2 percent a year ago. The percentage of seriously delinquent mortgages 4 was 6.2 

percent, a decrease of 5.3 percent from the previous quarter but up 16.1 percent 

from a year ago. Foreclosures in process were 3.4 percent of the total portfolio, a 

1.4 percent decrease from the previous quarter but a 16.1 percent increase from a 

year ago. 
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Home Retention Actions 

As shown in Table 2, servicers implemented 902,800 permanent loan modifications (shown as ‘‘Other Modifications’’ and ‘‘HAMP Modifications’’) over the past five 

quarters with HAMP modifications accounting for approximately 26 percent of this 

total. During the second quarter 2010, servicers initiated or implemented 504,292 

home retention actions. This included 273,419 HAMP and other permanent loan 

modifications, an increase of 18.1 percent from the first quarter of 2010. Loan modifications implemented in second quarter 2010 represent 13.1 percent of seriously delinquent borrowers, up from 7.9 percent in the second quarter 2009. While the number of permanent modifications increased, the number of trial modifications and 

other payment plans declined as servicers worked through their portfolio of seriously delinquent mortgages to determine borrower eligibility under HAMP and each 

servicer’s own proprietary loan modification programs. 
372 

5See OCC and OTS Mortgage Metrics, Second Quarter, page 7. 

Changes to Borrowers’ Monthly Payments Resulting From Modifications 

Early in the mortgage crisis, servicers’ informal payment plans and loan modifications were done in low volume and often resulted in mortgage payments that increased or did not change. This traditional approach to loss mitigation gave delinquent borrowers experiencing temporary financial problems a chance to catch-up on 

making their loan payments. However, as the mortgage crisis deepened, unemployment climbed, and the number of delinquent borrowers increased to unprecedented 

levels, it became clear that more formal and permanent modifications were needed. 

The OCC’s mortgage metrics data provided factual evidence that loan modifications 

completed in 2008 were experiencing high re-default rates. As a result of those high 

re-default rates, in March 2009, the OCC directed the largest national banks to take 

corrective action to implement loan modification programs designed to achieve more 

sustainable modifications. 

As a result, servicers have focused efforts on improving the quality of their loan 

modifications and the performance of those modifications over time. This is evidenced by the increase in modifications that are reducing borrowers’ monthly mortgage payments and the corresponding decline in re-defaults (as measured by serious 

delinquencies) subsequent to modification since the OCC’s direction to servicers in 

2009. As shown in Table 3, mortgage modifications that lowered monthly principal 

and interest payments increased to more than 90 percent of all modifications during 

the second quarter 2010. The emphasis on payment affordability and sustainability 

has resulted in a 62 percent increase in the average monthly savings in mortgage 

payments from mortgage modifications from a year ago. As shown in Table 4, modifications made during the second quarter of 2010 reduced monthly payments by an 

average of $427. Further, 56 percent of the modifications made during the second 

quarter reduced the borrower’s monthly payment by 20 percent or more, representing an average savings to the consumer of $698 a month. These actions for 

more sustainable payments are also reflected in lower re-default rates for more recently modified loans. Modifications made after the end of the first quarter of 2009 

have experienced about half the re-default rates of modifications made prior to that 

time.5
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Home Forfeiture Actions—Short Sales, Deed-in-Lieu-of-Foreclosures, and Foreclosures 

As previously noted, mortgage servicers generally do not proceed with home forfeiture actions until they have evaluated the borrower’s eligibility for a loan modification that would allow the borrower to stay in his or her home. Unfortunately, 

loan modification programs cannot help borrowers who simply cannot make even reduced mortgage payments. In these cases, servicers turn to home forfeiture actions 

to protect the interests of lenders and investors. 

Completed home forfeiture actions—foreclosure sales, short sales, and deed-inlieu-of-foreclosure actions—totaled 221,474 during the second quarter, an increase 

of 14.2 percent from the previous quarter (see Table 5). Short sales and deed-in-lieuof-foreclosure actions increased significantly during the quarter, but they remain 

only 26 percent of home forfeiture actions overall. While home forfeiture actions increased in the second quarter, servicers implemented about 2.3 times more home 

retention actions—loan modifications, trial period plans, and payment plans—than 

total home forfeiture actions. 

The number of newly initiated foreclosures decreased by 21.2 percent, to 292,072, 

during the second quarter of 2010, the lowest level in more than a year. The lower 

number is partly attributable to the increase in permanent modifications made during the quarter. In addition, HAMP guidelines now preclude the servicer from initiating a foreclosure action until the borrower has been determined to be ineligible 

for a HAMP modification. Similarly, the number of loans in process of foreclosure 

decreased by 1.8 percent from the previous quarter to 1,149,770, reflecting the increases in permanent modifications and completed foreclosures during the quarter 

as well as the drop in newly initiated foreclosure actions. Notwithstanding these 

positive trends, we expect the number of foreclosure actions will remain elevated as 

the large inventory of seriously delinquent loans and loans in process of foreclosure 

works through the system. 
375 

OCC Supervisory Efforts 

Emphasis on Sustainable Loan Modifications and Accurate Financial Reporting 

As the volume of problem loans surged to record levels and has worked its way 

through the financial system, servicers have struggled to maintain the needed capacity and resources to effectively deal with the number of consumers who require 

assistance. We have used our examination process and our Customer Assistance 

Group (CAG) to address issues as they have arisen. 

Our primary supervisory focus in assessing how servicers work with borrowers experiencing payment problems over the past 2 years has centered on their efforts to 

offer sustainable loan modifications that avoid foreclosure and allow troubled borrowers to remain in their homes. As previously noted, when our mortgage metrics 

data showed that an inordinately high percentage of loan modifications made in 

2008 were re-defaulting, we directed large national bank mortgage servicers to take 

corrective action and revise their loan modification programs to produce loan modifications that resulted in more sustainable loan payments. In most cases, this requires concessions on the terms of the loan, rather than simply granting a borrower 

a payment deferral that capitalizes arrearages, which was typical in many traditional modifications. In addition, in our supervision of national bank mortgage 

servicers we have issued numerous ‘‘Matters Requiring Attention,’’ requiring improvements in servicers’ loan modification operations and staffing. 

Some observers have stated that mortgage servicers have an inherent conflict of 

interest in working with borrowers to modify a first lien where the servicer holds 

the second lien on the property. In general, all other creditors benefit from a modification of the first lien since the modification puts the borrower in a stronger cashflow position, and makes the borrower more likely to be able to make payments on 

other debts. A conflict of interest could arise if the second lien holder were trying 

to overstate the second lien’s carrying value (and under-allocate loan loss reserves) 

for a troubled borrower. The OCC has addressed this potential conflict by directing 

that second lien holders must take steps necessary to understand any potential 

issues with the first lien and ensure that carrying values and loan loss reserve levels reflect all risk in the transaction—including any problems the borrower might 

be having on the first lien, even if the second lien is performing as agreed. 

The volume of current and performing second liens held by national banks behind 

delinquent or modified first liens remains relatively small. The OCC analyzed second liens held by national banks and matched more than 60 percent of them ($293 

billion) to first-lien mortgages. Of these 5,000,000 matched second mortgages, about 

6 percent, or 235,000, were current and performing but behind delinquent or modified first liens. The balance of those current and performing second liens behind delinquent or modified first mortgages totaled less than $18 billion. The OCC has directed national banks that hold such performing second liens to properly reflect the 

associated credit impairment for those second liens through an increase in the allowance for loan losses, or in many cases, a charge-off of the loan where appropriate. 

Oversight of and Responses to Foreclosure Documentation Issues 

When reviewing a bank’s foreclosure governance process, such as practices involved with the preparation and filing of affidavits for foreclosure proceedings, examiners determine if the bank has appropriate policies, procedures, and internal 

controls in place to ensure the accuracy of information relied upon in the foreclosure 

process and compliance with Federal and State laws. An appropriate governance 

process would include the testing of those policies and procedures through periodic 
376 

internal audits and the bank’s on-going quality control function. In this instance, 

neither internal quality control, internal or third party audits at the largest 

servicers, nor our CAG data revealed that foreclosure document processing was an 

area of concern. 

When the problems at Ally Bank—an institution that is not supervised by the 

OCC—became public, the OCC took immediate action to determine if procedural 

breakdowns at national bank servicers could be resulting in similar foreclosure affidavit problems. On September 29, 2010, we ordered the eight largest national bank 

servicers to conduct a comprehensive self-assessment of their foreclosure management processes, including file review and affidavit processing and signature. We 

also made clear that where deficiencies were identified, the servicers needed to take 

prompt action to remedy any improper documentation, including as applicable, making appropriate re-filings with local courts. Equally important, we also directed 

banks to strengthen foreclosure governance to ensure the accuracy of the information relied upon in the foreclosure process and prevent re-occurrences of documentation problems. 

Concurrent with this directive, we began planning onsite examinations at each of 

these large servicers and their mortgage servicing operational centers. Our objectives are to independently test and verify the adequacy and integrity of bank selfassessments and corrective actions; the adequacy and effectiveness of governance 

over servicer foreclosure processes to ensure foreclosures are completed in accordance with applicable legal requirements and that affidavits and claims are accurate; 

and to determine whether troubled borrowers were considered for loss mitigation alternatives such as loan modifications prior to foreclosure. 

These examinations are now underway at each of the eight servicers. The Federal 

Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) are participating in these examinations. The examination teams include examiners from the 

OCC, FRB, and FDIC. The OCC has approximately 100 examiners working on this 

effort. Legal support is provided by staff attorneys from both the OCC and FRB. 

We have established an interagency foreclosure review team to provide oversight 

and direction to onsite examination teams to ensure consistency in our examination 

work. 

As noted above, a key objective of our examinations is to determine the adequacy 

and effectiveness of governance over the foreclosure process. The scope of work to 

assess governance is extensive and includes an assessment of each servicer’s foreclosure policies and procedures, organizational structure and staffing, vendor management, quality control and audit, loan documentation including custodial document management, and foreclosure work flow processes. As part of these reviews, 

examiners are conducting interviews with personnel involved in the preparation, review, and signing of foreclosure documents. Our objective in conducting these interviews is to understand current and past practices with respect to preparation of 

foreclosure documents, whether the staff conducting these functions had sufficient 

knowledge and training, including training in relevant requirements, to effectively 

complete and sign-off on foreclosure affidavits, and to help assess the underlying 

cause of any identified deficiencies. 

Examiners will also be reviewing samples of individual borrower foreclosure files 

from judicial and non-judicial states that include both in-process and completed foreclosures. In reviewing these files, examiners will determine whether foreclosed borrowers were appropriately considered for alternative loss mitigation actions such as 

a loan modification. Examiners will also check for the following: 

• A documented audit trail that demonstrates that data and information (e.g., 

amount of indebtedness and fees) in foreclosure affidavits and claims are accurate and comply with State laws; 

• Possession and control over the underlying, critical loan documents such as 

original note, mortgage, and deed of trust to support legal foreclosure proceedings; and 

• Evidence that the affidavit and documents were independently and appropriately reviewed, and that proper signatures were obtained. 

In addition to these loan file reviews, examiners will review the nature, volume, and 

resolution of foreclosure-related complaints. These will include complaints received 

by the OCC’s Customer Assistance Group as well as complaints received by the 

banks. 

Finally, examiners will assess the adequacy of each bank’s analysis and financial 

reporting for the potential adverse impact on the bank’s balance sheet and capital 

that may arise from the increased time and costs needed to correct any procedural 

errors; losses (if any) resulting from inability to access collateral; and expected liti-
377 

gation costs. We are directing banks to maintain adequate reserves for potential 

losses and other contingencies and to make appropriate disclosures, consistent with 

applicable Securities and Exchange Commission disclosure rules. 

Using our authority under the Bank Service Company Act, we also are conducting 

interagency examinations of two major non-bank mortgage service providers. The 

OCC, in coordination with the FRB, FDIC, and Federal Housing Finance Agency, 

is leading an onsite examination of the Mortgage Electronic Registration System 

(MERS). A key objective of the MERS examination is to assess MERS corporate governance, control systems, and accuracy and timeliness of information maintained in 

the MERS system. Examiners assigned to MERS will also visit onsite foreclosure 

examinations in process at the largest mortgage servicers to determine how 

servicers are fulfilling their roles and responsibilities relative to MERS. 

We are also participating in an examination being led by the FRB of Lender Processing Services, Inc., which provides third-party foreclosure services to banks. We 

expect to have most of our onsite examination work completed by mid to late December. We then plan to aggregate and analyze the data and information from each 

of these examinations to determine whether or what additional supervisory and regulatory actions may be needed. We are targeting to have our analysis completed by 

the end of January. 

We recognize that the problems associated with foreclosure processes and documentation have raised broader questions about the potential effect on the mortgage 

market in general and the financial impact on individual institutions that may result from litigation or other actions by borrowers and investors. Obviously, for a 

host of reasons—from fair treatment of borrowers to the fundamentals of the mortgage marketplace—mortgage servicers must get this right. We are directing banks 

to take corrective action where we find errors or deficiencies, and we have an array 

of informal and formal enforcement actions and penalties that we will impose if 

warranted. These range from informal memoranda of understanding to civil money 

penalties, removals from banking, and criminal referrals. 

Conclusion 

The OCC is focused on identifying and rectifying problems so that the basic function and integrity of the foreclosure process is restored; the rights of all homeowners 

subject to the foreclosure process are protected; and the basic functioning of the U.S. 

mortgage market is stabilized. As we move forward we will continue to cooperate 

with the many inquiries and investigations that are taking place and provide updates to the Congress. 

OFFICE OF THE COMPTROLLER OF THE CURRENCY OUTLINE FOR UNIFORM SERVICING STANDARDS 

General Standards 

Servicers should act responsibly and adhere to the highest standards of professionalism in their dealings with borrowers. These include: 

• Safeguarding and accounting for borrower’s funds; 

• Acting in accordance with the underlying contractual documents in servicing 

the loan; 

• Striving to act in the best interest of the owner of the loan and the borrower 

in servicing the loan, including by pursuing loss mitigation options as appropriate; 

• Maintaining trained personnel appropriate to servicing workload; 

• Maintaining compensation schedules for staff and third party vendors that promote adherence to these standards; 

• Maintaining compensation schedules that provide effective incentives to work 

with troubled borrowers, including early outreach and counseling; to pursue loss 

mitigation and foreclosure avoidance strategies, to maximize the net present 

value of the loan; and to maintain adequate levels of appropriately trained staff 

to respond to current and anticipated demand, including to respond to increases 

in loan delinquencies. 

• Maintaining fee schedules that are reasonable and appropriate to the type, level 

and cost of the service that is provided, or purpose of the fee; 

• Providing timely information to the borrower about the account, including periodic statements of the account; 

• Providing timely and comprehensive information to borrowers on matters related to the account, including in response to borrower requests for information 
378 

or complaints and, as appropriate, about loan counseling and loss mitigation options and services; 

• Force-placing hazard, homeowners, or flood insurance on a mortgaged property 

only when required, to the extent required, and in the amount required after 

reasonable advance notice to the borrower; 

• Adopting internal controls appropriate to the nature and complexity of the servicing operations and conducting periodic assessments to ensure adherence to 

these standards; and 

• Avoiding conflicts of interest. 

Payments 

Servicers should adopt and adhere to reasonable procedures for handling borrower 

payments, including: 

• Clearly describing the payment amount, and the date, time, and location for 

payments to be received under the terms of the loan agreement; 

• Imposing reasonable cutoff times; 

• Crediting payments in a prompt and timely manner, ordinarily on the date of 

receipt; 

• Applying payments, including partial payments, to scheduled principal and interest, before they are applied to fees; 

• Avoiding payment allocation processes designed primarily to increase fee income; 

• Not imposing late or delinquency fees when the delinquency is attributable solely to nonpayment of late or delinquency fees on an earlier payment; 

• Notifying a borrower of the fact that, and reasons why, any payment may not 

have been credited to the account and how the borrower may make the loan 

current; 

• Correcting any misapplication of borrower funds in a prompt and timely manner; 

• Not commingling borrowers’ payments with the servicer’s own funds except for 

the time needed to process and clear borrower payments; 

• Adopting reasonable policies and procedures for handling payment overages and 

shortages; and 

• Conducting periodic audits of payment processing functions. 

Borrower Notices 

Servicers should provide borrowers with full and accurate information about their 

accounts and payment records, including by providing the following notices: 

• Periodic and annual statements—Servicers should provide borrowers with 

monthly and annual statements of the borrower’s account activity for the preceding period, including information about total amount due; payments of principal and interest; remaining principal balance; itemization of any late or other 

fees imposed; escrow payments, balances, and deficiencies; any advances made, 

such as for force-placed insurance; and remaining term of the loan. 

• Payment history—Upon request, servicers should provide borrowers within a 

reasonable time of the request, a statement of the recent payment history of the 

loan. 

• Mortgage servicing transfer—Servicers should provide borrowers with appropriate account and contact information upon transfer of servicing. 

• Payoff statement—Upon request, servicers should provide borrowers within a 

reasonable time of the request, a statement of the total amount required to pay 

off the loan as of a specified date. 

• Late payment notice—Servicers should send borrowers a payment reminder notice after a payment is past due, unpaid, and a late fee has been imposed. 

Servicers need not send separate notices for each consecutive month in which 

the loan remains unpaid. 

• Schedule of fees—Servicers should provide reasonable disclosure of a current 

schedule of standard or common fees it may impose. Service fees should be imposed only as authorized in the loan instruments and applicable law or where 

the consumer expressly requests a specific service at that fee; 

• Delinquencies, loss mitigation, and foreclosure notices—Servicers should provide 

borrowers with timely information in the event of a delinquency or default 

about loss mitigation options offered by the servicers, as well as clear and un-
379 

derstandable notices about the pendency of loan modification and foreclosure 

proceedings. Such information includes the following: 

• The nature and extent of any delinquency; 

• A list of documentation or other information and any third party approvals the 

borrower must provide; 

• The anticipated or average length of time it may take to process any loss mitigation option or loan modification; and 

• The actions the servicer, lender, or owner of the loan may take during the applicable process, such as the circumstances in which the borrower may receive collection and/or foreclosure notices and in which any foreclosure action may be 

stayed. 

Borrower Complaints and Inquiries 

Servicers should act promptly and reasonably in responding to borrower inquiries, 

requests, and complaints, including by taking the following actions: 

• Maintaining adequate levels of trained customer service personnel to handle 

complaints and inquiries; 

• Providing an address and toll-free number for such complaints and inquiries; 

• Providing contact information for the owner of the loan; 

• Providing a single and easily accessible point of contact for special inquiries, information and services, such as loss mitigation and loan modifications services, 

and for delinquent and at risk borrowers; and 

• Responding and resolving borrower inquiries and complaints in a prompt and 

appropriate manner; 

• Providing an avenue for escalation or appeal of any disputes; 

• Correcting customer accounts, correcting credit report information, and making 

refunds, as applicable; and 

• Maintaining adequate tracking information for such inquiries and complaints. 

Delinquencies, Loss Mitigation, Loan Modifications, and Foreclosure 

Abeyance 

Delinquent loans—Servicers should follow an appropriate set of special protocols 

for servicing delinquent loans that include: 

• Promptly alerting the appropriate functional unit(s) that a loan is delinquent; 

• Working with borrowers at risk of foreclosure, including early outreach and 

counseling; 

• Employing specially trained staff to work with delinquent loans and borrowers; 

• Implementing appropriate procedures regarding notices of delinquencies, assessing late charges, handling partial payments, maintaining collection records, and 

reporting to credit bureaus; 

• Pursuing loss mitigation and foreclosure prevention measures; 

• Ensuring compliance with legal requirements; 

• Providing for quality assurance review of decisions concerning loss mitigation 

options or commencement of foreclosure actions. 

Loss mitigation—Servicers should make reasonable and good faith efforts, consistent with customary business standards and in accordance with applicable laws 

and contracts, to engage in loss mitigation activities and foreclosure prevention for 

delinquent loans, where appropriate. Such activities include considering a deed-inlieu of foreclosure; forbearance; and short sale. 

Loan modification procedures—Servicers also should make reasonable and good 

faith efforts, in accordance with specific protocols established by contract and with 

applicable laws, to modify loans to provide affordable and sustainable payments 

when: 

• The borrower is in default or at imminent risk of default on a loan due to financial hardship and is unable to maintain the payments or is unable to make up 

any delinquent payments, and 

• The net present value of cash-flows from the modified loan will exceed that expected from foreclosure. 

Servicers should implement appropriate procedures to ensure that documents provided by borrowers and third parties are appropriately maintained and tracked and 

that borrowers generally will not be required to resubmit the same documented in-
380 

formation that has already been provided; that such requests are acknowledged, 

processed, and evaluated in a timely manner; and that borrowers are notified 

promptly of the approval or denial of their modification requests or of the need for 

additional information. Such procedures include: 

• Acknowledging receipt of requests for loan modifications and providing information about the designated point of contact for further communications about the 

request or for appeals; 

• Reviewing such requests for documentary sufficiency and notifying a borrower 

if an application or request is incomplete and describing any additional information that is necessary to complete any application or otherwise enable an evaluation of the borrower’s loan modification request; 

• Implementing procedures and systems to ensure that reasonable steps are 

taken, without undue delay, to procure and safeguard all information needed 

to evaluate and act on a consumer’s request for a mortgage modification; 

• Completing the evaluation of the borrower’s eligibility for a loan modification 

or other loss mitigation option; 

• Notifying the borrower of approval of any modified loan terms being offered or, 

if applicable, the reasons for denial, such as information on the NPV calculation, and where to obtain additional information or information about housing 

counseling assistance; 

• Implementing and maintaining reasonable procedures and sufficient staffing to 

ensure full compliance with policies, procedures, and timelines affecting loan 

modification requests; 

• Ensuring that borrowers are not required to waive any claims or defenses as 

a condition of a loan modification; and 

• Implementing policies and procedures to notify foreclosure attorneys and trustees regarding a borrower’s status for consideration of a loss mitigation option, 

including whether the borrower has requested and is being considered for loss 

mitigation and whether the borrower is in a trial or permanent loan modification and is not in default under the agreement. 

Foreclosure abeyance—Servicers should avoid taking steps to foreclose on a property, including referring a mortgage to foreclosure, continuing the foreclosure process—whether judicial or non-judicial, conducting a scheduled mortgage foreclosure 

sale, or incurring costs for foreclosure-related services that will be imposed on the 

borrower, if the borrower is in a trial or permanent modification and is not in default under the modification agreement. A servicer may initiate or proceed with the 

foreclosure process when: 

• The borrower has declined to pursue loss mitigation or loan modification actions; 

• The borrower is not responding to reasonable requests for information or outreach related to loss mitigation or loan modification efforts; 

• The borrower has not submitted information necessary to evaluate the borrower 

for a loan modification; 

• The borrower has been determined to be ineligible for a loan modification; or 

• The borrower is in default under the terms of a trial or permanent modification 

period plan. 

Acting in accordance with guidelines, directives, and notice requirements developed by the U.S. Department of Treasury and in effect for the Home Affordable 

Mortgage Program (HAMP) will be deemed to meet these standards for loss mitigation, loan modification and foreclosure prevention. 

Foreclosure Governance 

Servicers should adhere to reasonable procedures in managing the foreclosure 

process including with respect to compliance with legal standards and documentation requirements, oversight of third parties, staffing and training, and audits. In 

general, servicers should institute controls and procedures that will ensure that 

foreclosures occur only when appropriate and taking into account the status of any 

foreclosure abeyance actions, the facts are documented to support the action, and 

in compliance with applicable laws and investor requirements. 

Compliance with legal requirements—Servicers should ensure compliance with 

State law requirements when preparing foreclosure affidavits and claims. 

Documentation procedures—Servicers should ensure maintenance of sufficient documentation and servicing systems to support foreclosure decisions and actions. For 

example, servicers should adopt internal controls and procedures to ensure: 
381 

• The accuracy and completeness of the borrower’s loan history; 

• The accuracy and completeness of representations to courts and other parties 

in connection with foreclosure or bankruptcy proceedings; 

• Compliance with legal requirements; 

• Retention of documents that support the foreclosure action in a centralized 

records system; and 

• Remediation of any errors, misrepresentations, or other deficiencies including, 

for example, correcting errors in a borrower’s account. 

Third party/vendor management—Servicers should ensure appropriate oversight 

of third party vendors, including outside legal counsel, by: 

• Performing minimum due diligence on the vendor’s qualifications, expertise and 

capacity; reputation and complaints; information security; business continuity; 

and viability; 

• Conducting capacity and concentration analysis of external law firms; 

• Ensuring adequacy of third party staffing levels, training, work quality, and 

workload balancing; 

• Ensuring that contracts provide for adequate oversight, including audits and 

termination upon default, and require third party adherence to these standards; 

• Maintaining and evaluating reports on third party compliance with contractual 

obligations; 

• Reviewing any customer complaints about the services of the third party; 

• Conducting qualitative assessments and audits of third party work for timeliness and accuracy of filings and completed actions, including foreclosure processes and documentation. External law firms should be treated as third party 

vendors and standards appropriate for oversight of third party vendors should 

be applied to such firms; and 

• Following up on any performance failures in a timely manner. 

Staffing and training—Servicers should ensure adequate staffing levels and training, including: 

• Ensuring staffing levels that are appropriate to the current and projected volumes, workload, and technical requirements of foreclosures; 

• Providing comprehensive technical training for staff, notaries, and affiants and 

signors, sufficient to the nature and levels of foreclosure work; and 

• Emphasizing accuracy and completeness of work in staff performance, not solely 

production and volume. 

Quality control and audit—Servicers should ensure comprehensive quality control 

and audit coverage, including: 

• Obtaining annual independent attestations of compliance with quality assurance plans; 

• Ensuring independent oversight of the foreclosure process; 

• Ensuring adequate assessments of all aspects of the foreclosure process, including through reporting metrics that identify trends and potential problems; 

• Assessing loan modification and loss mitigation efforts, appropriateness of fees 

and charges to borrowers, and application of payments and credits; 

• Ensuring that foreclosure filing documents and fees, costs, and indebtedness associated with the foreclosure are accurate; 

• Evaluating controls and processes used by third party vendors and law firms; 

• Evaluating foreclosure-related consumer complaints for indications of any systemic problems; and 

• Identifying non-compliance with State laws or rules concerning completion, filing, and notarization of foreclosure affidavits and claims. 

PREPARED STATEMENT OF EDWARD J. DEMARCO 

ACTING DIRECTOR, FEDERAL HOUSING FINANCE AGENCY

DECEMBER 1, 2010 

Introduction 

Chairman Dodd, Ranking Member Shelby and Members of the Committee, thank 

you for inviting me to speak with you today about weaknesses in the foreclosure 
382 

process. The recently identified deficiencies in the preparation and handling of legal 

documents to carry out foreclosures are unacceptable. While those deficiencies undoubtedly reflect strains on a system that is operating beyond capacity and was 

never designed to handle the volume of nonperforming loans that we are seeing 

today, they also represent a breakdown in corporate internal controls and the integrity of mortgage servicing and foreclosure processing. Servicers and others within 

the industry may have attempted to expand the resources available to deliver appropriate loss mitigation services, including timely and accurate foreclosure processing, 

but in some instances those efforts have been inadequate. 

Since this latest set of difficulties was identified, I have had a team of managers 

and staff from the Federal Housing Finance Agency (FHFA) working closely with 

Fannie Mae and Freddie Mac (the Enterprises) to gauge the full scope of the foreclosure processing problem and to move forward on foreclosures where appropriate. 

Our goals are two-fold: to ensure that foreclosure processing is done in accordance 

with the servicer contract and applicable laws, and to protect taxpayers from further 

losses on defaulted mortgages. Moving forward on foreclosures where appropriate 

limits taxpayer losses and contributes to the ultimate recovery of domestic housing 

markets. Of course, before any foreclosure is completed, we expect servicers to exhaust all alternatives. 

With those objectives in mind, I will review the actions that FHFA has taken to 

date, as well as those underway. Before doing so, I will provide context for understanding the problems that have arisen, including consideration of: 

• the role of the servicers, attorneys, and their contractual relationship with the 

Enterprises when performing loss mitigation and foreclosures and 

• the complexities of the system in which State and local laws create a diverse 

range of requirements that can extend foreclosure timelines, leaving homeowners and homebuyers in limbo, putting home values at risk in neighborhoods 

with abandoned or vacant properties and slowing the recovery of the housing 

market. 

Today, Fannie Mae and Freddie Mac own or guarantee 30 million mortgages; of 

those, more than 1.3 million are more than 90 days seriously delinquent. As I have 

reported to the Committee on prior occasions, the Enterprises have sought to minimize losses on delinquent mortgages by offering distressed borrowers loan modifications, repayment plans, or forbearance. These loss mitigation techniques reduce the 

Enterprises’ losses on delinquent mortgages and help homeowners retain their 

homes. Servicers of Enterprise mortgages know that these loss mitigation options 

are the first response to a homeowner who falls behind on their mortgage payments. 

Yet, for some delinquent borrowers, their mortgage payments are simply not affordable due to unemployment or other hardship and a loan modification is not a 

workable solution. In other cases, homeowners have decided not to continue payment on their mortgages, perhaps because of the decline in value of their house or 

because personal circumstances have changed their desire or ability to retain their 

home. For these cases, the Enterprises offer foreclosure alternatives in the form of 

short sales and deeds-in-lieu of foreclosure. Such foreclosure alternatives generally 

are better for the homeowner, the neighborhood, and the Enterprise. Despite these 

options for a graceful exit from a home, foreclosure remains the final and necessary 

option in many cases. 

The sheer volume of delinquent homeowners has put intense pressure on 

servicers, including their loan workout efforts and their foreclosure processes. Other 

hearings and studies have analyzed how and why this has happened. The subject 

of this hearing and our challenge today is to identify the full scope and implications 

of foreclosure processing problems and to improve the integrity of the foreclosure 

process at servicers and related parties that are failing to perform to required standards. 

Breakdowns in the Foreclosure Process and FHFA’s Initial Response 

As reports of foreclosure documentation deficiencies emerged at several major 

servicers, FHFA sought to ascertain the full scope and nature of the problem. On 

October 1, I issued a statement that said, in part: 

FHFA, as conservator for Fannie Mae and Freddie Mac, supports efforts by 

the Enterprises to remind servicers and other parties engaged in processing 

foreclosures to do so in accordance with their seller-servicer agreements and 

applicable laws and regulations. Where deficiencies have been identified, 

FHFA has directed the Enterprises to work collectively to develop and implement a consistent approach to address any problems. In addition, FHFA 

is coordinating with appropriate regulators on this issue. Our goal is to assure the integrity of the foreclosure process and to see that any corrections 
383 

in processes be tailored to the problem, protecting the rights of borrowers 

and investors without causing any undue disruption to the mortgage markets. 

On October 13, FHFA built upon its earlier statement by providing the Enterprises and servicers a four-point policy framework for handling foreclosure process 

deficiencies, including specific steps FHFA expects them to take to assess and remedy the problems. The four points are simply stated: 

1. Verify that the foreclosure process is working properly; 

2. Remediate any deficiencies identified in foreclosure processing; 

3. Refer suspicions of fraudulent activity; and 

4. Avoid delay in processing foreclosures in the absence of identified problems. 

Pursuant to that guidance, the Enterprises continue to gather information on the 

full nature and extent of servicer problems. Since then, only a small number of 

servicers have reported back to the Enterprises as having some problem with their 

foreclosure processing that needs to be addressed. Still, these firms represent a sizable portion of the Enterprises combined books of business. The issues identified todate range in size and scope, and may not affect every delinquent mortgage that 

a particular servicer is handling. Thus, it is difficult to say just how many delinquent Enterprise mortgages may be affected and the degree of difficulty in remediating the deficiencies. The Enterprises are currently working directly with their 

servicers to ensure that all loans are handled properly and corrections and refiling 

of paperwork are completed where necessary and appropriate. Because the file reviews are being performed case-by-case, the full evaluation will take a substantial 

amount of time and resources. 

As made clear in FHFA’s October 13th policy framework, if wrongful acts in foreclosure processing are discovered, the appropriate remedies should be undertaken 

by servicers, regulators, and law enforcement. Simply put, it is not acceptable that 

servicers and other parties involved in foreclosure processing may not have adhered 

to State and local laws. As Conservator of the Enterprises, FHFA expects all companies servicing Enterprise mortgages to fulfill their contractual responsibilities, 

which include compliance with both the Enterprises’ seller/servicer guides and applicable law. We expect the same of other parties as well, including law firms working 

on foreclosure processing of Enterprise loans. Finally, to reinforce the duties undertaken by servicers, the Enterprises have indicated that they may pursue remedies 

for contractual violations. 

The Role of the Servicer 

When an Enterprise purchases a mortgage from an originating lender, it contracts 

with that lender or another bank or financial institution to service the loan. The 

servicer is the main communication point for the borrower, accepting all payments 

and crediting the borrower’s account. 

When homeowners get behind in payments, the servicer is expected to work with 

the delinquent borrower to set up a repayment plan, modify the loan, or, if foreclosure alternatives are not viable, begin foreclosure proceedings. Although the Enterprises hold the actual promissory notes through document custodians who maintain these records separate from the servicers, Fannie Mae and Freddie Mac do not 

themselves accept or process payments or move to modify or foreclose. 

For their work, the servicers get paid by the Enterprises and, under the terms 

of their contracts, each servicer is obligated to follow the procedures established by 

the Enterprise, including compliance with all appropriate laws. The Enterprises also 

provide policy guidelines to their seller/servicers. A servicer is contractually bound 

to comply with this guidance; however, the Enterprises do not review loan files for 

each and every mortgage they guarantee or purchase. Instead, the Enterprises rely 

on a representation and warranty (rep and warrant) model under which the loan 

originator and loan servicer commit that the loan origination and servicing complies 

with the Enterprise’s seller/servicer guide. Under the terms of the servicer contracts, 

the Enterprises can require the servicer to pay damages if the servicer does not follow the seller/servicer guidelines or force the servicer to buy back the loan if the 

loan fails to meet the Enterprises’ eligibility guidelines. 

The majority of Enterprise loans are serviced by a few very large banks. However, 

there are hundreds of servicers that hold contracts with each Enterprise; many are 

relatively small institutions. Each servicer typically works on behalf of many investors, including trustees for private label securities, and must follow the procedures 

and processes set forth in each investor contract. As I will describe further below, 

we are working with other government agencies to review foreclosure servicing prac-
384 

tices and operations, and where we find firms with operational deficiencies, these 

must be remedied. 

Attorneys Specializing in Foreclosure Processing 

In order to complete foreclosures, particularly in judicial foreclosure states, 

servicers often contract with law firms from the Enterprises’ approved attorney networks (for servicers of one Enterprise this is required, for the other, it is optional 

to use the approved network). These law firms have been evaluated by the Enterprises before being added to that Enterprise’s attorney network. By adding a firm 

to its network, the Enterprise has concluded the firm has sufficient capacity and expertise to assist a servicer in need of foreclosure processing services. Recently the 

capacity of some of these law firms has also been strained by the volume of foreclosures and the burden on the court systems. In light of processing problems we 

are discussing today, it is evident that both Enterprises must take steps to improve 

their selection and oversight of the attorneys in their networks. 

State Foreclosure Processes and Foreclosure Timelines 

Foreclosure proceedings and requirements are established at the State level. Almost half of the states have a judicial foreclosure process that relies on the court 

system. By contrast, foreclosures in non-judicial states are managed according to 

State and local laws but handled outside of the court system. 

Both systems have protections for homeowners, and to a large extent the essential 

paperwork and documentation elements are the same across all states, although 

particular requirements vary from jurisdiction to jurisdiction. In judicial foreclosure 

states, individual judges may set specific requirements within their courtrooms that 

are in addition to, or differ from, terms established by other judges in that State. 

Servicers and law firms involved in processing foreclosures must be aware of and 

responsive to such particular requirements. 

Both judicial and non-judicial states are experiencing growing numbers of foreclosures, which are contributing to long delays between a borrower’s default and the 

completion of an associated foreclosure. 

Currently, the time from start to completion of a foreclosure for Enterprise loans 

in non-judicial states typically takes 6 months to a year. In judicial foreclosure 

states, it takes even longer, often 6 months longer than in non-judicial states and 

in certain judicial states the difference is even greater. Bear in mind, these foreclosure periods begin after the loan becomes seriously delinquent, typically about 4 

months. 

Some reasonable delays in the foreclosure process have been expected, appropriately so over the past 2 years, as new loss mitigation programs, such as loan 

modifications, have been introduced. These programs have often been accompanied 

by temporary foreclosure moratoria so that homeowners in the foreclosure process 

could be assessed for a modification. Servicers are obligated to follow Enterprise 

guidelines, including evaluating homeowners’ for eligibility for the various foreclosure mitigation programs I described earlier. 

While FHFA remains committed to ensuring borrowers are presented with foreclosure alternatives, it is important to remember that FHFA has a legal obligation 

as Conservator to preserve and conserve the Enterprises’ assets. As I have said before, this means minimizing losses on delinquent mortgages. Clearly, foreclosure alternatives, including loan modifications, can reduce losses relative to foreclosure and 

benefit homeowners and neighborhoods, adding some measure of stability to local 

housing markets. But when these alternatives do not work, timely and accurate 

foreclosure processing is critical for minimizing taxpayer losses. The direct effect on 

taxpayers is thus: when an Enterprise-guaranteed mortgage is delinquent 4 months, 

the Enterprise removes the mortgage from the mortgage-backed security in which 

it was funded, paying off the security investors at par. The delinquent mortgage 

then goes on the balance sheet of the Enterprise, funded with debt issued by the 

Enterprise, debt supported by the Treasury Department’s Senior Preferred Stock 

Purchase Agreement. While awaiting foreclosure (or some foreclosure alternative), 

that loan is generating no revenue because the borrower has stopped paying, but 

the Enterprise must keep paying interest on the debt supporting the mortgage. The 

cost of the delay is why it is critical to FHFA’s responsibilities as Conservator to 

ensure timely processing of foreclosure actions—the cost is ultimately borne by the 

taxpayer. 

When a homeowner falls behind on their mortgage payments, servicers operate 

on a single track, working through loss mitigation options with the homeowner, 

typically beginning with the HAMP program and followed by other loan modification 

programs or other foreclosure alternatives. When all loss mitigation alternatives 

have been exhausted, the servicers are expected to initiate the foreclosure process. 
385 

Furthermore, the Enterprises have instructed servicers to suspend foreclosure processing when loss mitigation activities reach certain milestones. At times, simultaneous actions are necessary because of the long timeframes of the foreclosure process and because borrowers are not always responsive to foreclosure alternative offers. 

While the Enterprises have established foreclosure time limits in their seller/ 

servicer guides, no servicers have been penalized in recent years for exceeding those 

limits, largely because State and local legal requirements, loan modification efforts, 

the unprecedented volume, and various foreclosure moratoria have greatly contributed to delays. During this year, FHFA has been working with each Enterprise to 

improve servicers’ adherence to these timelines, and to apply penalties where justified, but the recent set of issues have further complicated that effort. 

Deficiencies in the foreclosure process, including problems with affidavits, notaries, and improper practices, appear to be the result of inadequate resources for and 

oversight of servicing operations. The pressure from high volumes of foreclosures 

working through the system has surfaced fault lines in the foreclosure process that 

remain the responsibility of management at these companies to identify and fix. 

Other Actions Being Taken & Matters for Consideration 

All of us—regulators, lawmakers, investors, and the general public—want answers to the questions raised by this most recent breakdown in our housing finance 

market and we want them now. Much work is underway to assess the characteristics, extent, and location of these problems and conclusions must await the completion of this work. Regulatory agencies including FHFA are carrying out important 

examination activities that will better inform the issue. Thus, identification of further actions or regulatory responses must await the results of these examinations 

and evaluation of the information developed. 

My colleagues can speak to the examination activities they are leading, some of 

which include FHFA participation. In particular, FHFA is participating in a multiagency examination of the Mortgage Electronic Registration Systems (MERS). 

FHFA is reviewing the Enterprises’ practices with regard to oversight of their 

counterparties, which have been lacking in the past. Neither FHFA nor the Enterprises have any regulatory authority with regard to mortgage servicers. FHFA’s authority is limited to the Enterprises and, as I have noted, the Enterprises’ relationships with mortgage servicers are contractual, not regulatory. 

I do not support a blanket moratorium on foreclosures. The adverse consequences 

of a moratorium outweigh the argued benefits. The costs to neighborhoods, taxpayers, and investors would be enormous. Our focus should be on fixing problems 

where they are found and then moving forward expeditiously with foreclosure proceedings where foreclosure alternatives have been exhausted and where no process 

deficiencies have been identified or they have been remedied. Delay is costing taxpayers money and creates undesirable incentives for homeowners to stop paying 

their contracted mortgage obligations. 

To date, Fannie Mae and Freddie Mac, as well as other parts of the housing finance industry, have relied on a rep and warrant model, whereby one party commits to follow a set of standards and the other party trusts that commitment, unless 

and until a clear violation or breach is identified. FHFA is reviewing the Enterprises’ practices in enforcing reps and warrants and FHFA expects adherence to 

those contract terms with regard to mortgages they purchase and with regard to 

mortgage servicing. 

You have asked me to explain the Enterprises’ policies regarding repurchases of 

loans the companies believe to have been originated in violation of representations 

and warranties and the volume of loans you expect will be put back to the originators or other parties as well as what the FHFA is doing to oversee this process and 

the implications for the financial conditions of the Enterprises. 

With regard to mortgage repurchases, I have also been clear that the Enterprises 

should actively enforce lender compliance with their contractual obligations, which 

includes pursuing repurchases from those institutions whose loans did not meet the 

Enterprises’ underwriting and eligibility guidelines. Lenders are obligated by the 

representations and warranties they made to the Enterprises to repurchase loans 

that did not meet contractual selling requirements. 

The Enterprises have continued to make progress in enforcing lenders’ representation and warranty obligations, but outstanding repurchase requests continue to be 

of concern to FHFA. During 2009, the Enterprises’ lenders repurchased $8.7 billion 

of single-family mortgages, and slightly higher volumes are being repurchased in 

2010. However, as of the end of the third quarter 2010, Fannie Mae had $7.7 billion 

in outstanding repurchase requests, and Freddie Mac had $5.6 billion in outstanding repurchase requests. 
386 

More than one-third of these repurchase requests have been outstanding for more 

than 90 days. Many of the lenders with aged, outstanding repurchase requests are 

among the largest financial institutions in the United States. The delays by lenders 

in repurchasing these loans are a significant concern to FHFA. There are ongoing 

discussions between the Enterprises and lenders to reach a workable solution and 

FHFA is examining its options should these requests not be resolved in the normal 

course of business. 

FHFA remains committed to working with fellow regulators to enhance our oversight of the foreclosure process and to ensure market participants adhere to State 

and Federal laws. To further our efforts at bringing stability to housing finance, our 

approach needs to continue to focus on offering troubled homeowners an opportunity 

to remedy their payment difficulties. Failing that, homeowners should be offered 

foreclosure alternatives but, after that, foreclosure must proceed in a legal and timely manner for the sake of neighborhoods, investors, and taxpayers. 

Thank you for this opportunity to testify. I would be glad to answer any questions. 

PREPARED STATEMENT OF TERENCE EDWARDS 

EXECUTIVE VICE PRESIDENT

CREDIT PORTFOLIO MANAGEMENT, FANNIE MAE

DECEMBER 1, 2010 

Chairman Dodd, Ranking Member Shelby, Members of the Committee, thank you 

for the opportunity to testify today. My name is Terry Edwards, and I serve as Executive Vice President for Credit Portfolio Management at Fannie Mae, which involves 

foreclosure prevention and servicing oversight. 

I came to Fannie Mae in 2009 from PHH Corporation, where I served for three 

decades in a variety of executive roles, including as President and CEO of PHH 

Mortgage, one of the nation’s top ten mortgage servicers. My experience with PHH 

gives me a unique perspective on Fannie Mae’s expectations for servicers and an 

understanding of servicer operations. 

Let me begin by underscoring Fannie Mae’s commitment to providing liquidity, 

stability and affordability to America’s housing market, and our appreciation for the 

Government’s support that allows us to carry out our mission and mandate. 

We fulfill our mission and mandate by purchasing or securitizing mortgage loans 

originated by lenders in the primary mortgage market. Since the start of 2009, 

Fannie Mae has provided over $1 trillion in funding for nearly 5 million loans for 

home purchase, refinancing and rental housing. 

As private securitization of mortgages has pulled back dramatically over the past 

2 years, Fannie Mae recognizes that our commitment to serve the market is critical. 

We are also intensely focused on doing everything we can to address the foreclosure crisis and keep people in their homes. That includes taking affirmative steps 

to ensure that mortgage servicers carry out their responsibilities under our mortgage servicing contracts and guidelines—especially in helping borrowers pursue our 

foreclosure prevention alternatives and properly handling the foreclosure process. 

Preventing foreclosures is a top priority for Fannie Mae. Foreclosures hurt families and destabilize communities. Neighborhoods deteriorate when properties are 

abandoned or neglected. Vacant homes depress nearby property values. Condominium and homeowner associations are not paid, creating hardships for those communities. And loans that result in foreclosure typically cost taxpayers tens of thousands of dollars. 

So our first focus is on keeping borrowers in their homes or providing foreclosure 

alternatives, and we are making measurable progress. Since the start of 2009, more 

than 600,000 borrowers with loans owned or guaranteed by Fannie Mae received 

workouts through either Treasury’s Home Affordable Modification Program or our 

own additional foreclosure-prevention programs. 

The foreclosure-prevention and resolution operations I lead include nearly 1,200 

personnel dedicated to working with servicers to help borrowers avoid foreclosure 

and stabilizing communities by putting foreclosed homes back into service. 

We are sparing no efforts in helping servicers process hundreds of modifications 

every working day. Not since the Great Depression have so many people fallen behind on their mortgages. We have learned a lot along the way. 

In addressing our response to the foreclosure crisis, I want to underscore that 

Fannie Mae does not service loans. We rely on the loan servicing divisions of major 

banks and other financial institutions as the primary front-line operators and points 

of contact with the borrowers. We pay servicers significant fees during the life of 
387 

a loan to work with borrowers. Servicers are required under our servicing contracts 

to help borrowers in trouble, not just collect payments. 

But as many servicers have acknowledged, they have struggled to keep up with 

the volume of delinquent loans. This is frustrating to borrowers. It is unacceptable 

to Fannie Mae. We are taking significant steps to improve servicer performance and 

enforce their contractual obligations to help borrowers. 

I also wish to note that while Fannie Mae owns or guarantees more than 35 percent of the single-family mortgages in America, we have a significantly smaller percentage of borrowers who are seriously delinquent than the industry does as a 

whole—roughly 4.5 percent of our borrowers are 90 days or more behind on their 

payments, as compared to the serious delinquency rate of nearly 9 percent across 

the industry. Still, by historical standards our serious delinquency rate represents 

an extremely large number of borrowers facing difficult circumstances, so we continue to focus significant efforts on addressing this situation. 

In my testimony, I will describe our foreclosure-prevention programs and efforts 

to ensure loan servicers do everything possible to help struggling borrowers and prevent needless foreclosures. I will also touch on our efforts to work with servicers as 

they address and remedy the foreclosure processing issues that have come to light 

in recent weeks. 

Foreclosure prevention process 

Since the start of the housing crisis, Fannie Mae has adopted a wide range of 

foreclosure prevention initiatives that are the responsibility of our servicers to implement. 

These initiatives include the Treasury Department’s Home Affordable Modification Program, or HAMP. We also have provided additional solutions for servicers to 

offer Fannie Mae borrowers when they do not qualify for the Treasury program. 

Since the start of the Treasury program in February 2009, more than 160,000 

struggling borrowers with Fannie Mae mortgages have received HAMP permanent 

modifications. And since the start of 2009, about 250,000 Fannie Mae borrowers 

have received our modifications outside of HAMP. So in total, we have helped more 

than 410,000 Fannie Mae borrowers modify their loans and stay in their homes. 

We have continued to update and improve these borrower-help initiatives to incorporate what works, what borrowers need in order to take advantage of their options 

to keep their homes, and what servicers need in order to carry out their responsibilities. 

We have a series of steps that we require servicers to take when borrowers fall 

behind on their mortgages and need help—and sometimes even before they miss a 

payment. 

Let me briefly walk through these steps. 

First, we require servicers to determine whether the borrower qualifies for a 

HAMP modification, which will take their monthly payment to a level where their 

first-lien mortgage debt-to-income ratio is 31 percent. These modifications can cut 

hundreds of dollars from their monthly loan payments. HAMP also offers modification for second-lien loans to bring the entire mortgage payment down to a more affordable level. 

Then, if the borrower doesn’t qualify for HAMP, we require the servicers to determine what kind of hardship the borrower is facing—is it a short-term hardship, 

caused by, for example, medical bills? Or is it a long-term hardship, such as a reduction in income? 

If the borrower is facing a short-term hardship, then a servicer is required to offer 

forbearance or a repayment plan. We permit up to 6 months of payment relief for 

homeowners who are struggling to make their mortgage payments because of unemployment. 

If the borrower is facing a long-term hardship, then we require servicers first to 

offer a HAMP modification. Then they may offer a non-HAMP modification that 

may take the borrower’s debt-to-income ratio down to 24 percent without requiring 

the borrower to pay down bank credit cards and other debt. 

If none of these modification plans can help the borrowers afford their loans, then 

servicers are required to offer the borrowers several options that will help the borrower to avoid foreclosure. 

These foreclosure alternatives include short sales, where the lender permits the 

borrower to sell the property at a price that is less than the mortgage debt, and 

deeds-in-lieu of foreclosure, where the borrower essentially deeds the home back to 

the lender. For deeds-in-lieu, the borrower is also offered a financial incentive to 

help them relocate to alternative housing under these circumstances, and we offer 

to rent homes back to borrowers. 
388 

While it can be difficult for homeowners to relinquish their homes through short 

sales or deeds-in-lieu of foreclosure, these options ultimately are much better for the 

borrower over the long run than foreclosure. The borrower is taking action rather 

than getting locked out of the home, there is less impact on the borrower’s credit, 

and the borrower increases his ability to finance a home in the future. 

For example, Fannie Mae has changed our underwriting guidelines for borrowers 

who work with their servicers and take advantage of our foreclosure alternatives. 

If they do, they could qualify for a new Fannie Mae-backed mortgage in 2 to 3 years. 

We were also the first to put policies in place to protect renters—more than 6,000 

of whom have been able to continue to live and rent their homes or apartments. 

We provide financial incentives to servicers who are successful in getting a borrower to enter into a foreclosure-alternative program. We do not pay any incentive 

fees unless the servicer completes a workout. 

An important element of these foreclosure-prevention alternatives is robust borrower-outreach and education. It is in everyone’s best interest to ensure borrowers 

understand their options and take advantage of the help that is available. This outreach and education can help borrowers work more effectively with their servicers 

and avoid scams that unfortunately have arisen in this difficult time. 

Even though the servicers are responsible for borrower contact, Fannie Mae has 

rolled out a number of initiatives to help borrowers understand their options and 

take advantage of available foreclosure alternative programs when working with 

servicers. Let me name just a few of these initiatives: 

In August this year, we launched KnowYourOptions.com—a consumer Web site 

that explains every option we have available to avoid foreclosure in both English 

and Spanish. This interactive Web site urges the borrower to take action and provides contact information for U.S. Housing and Urban Development-approved housing counselors and mortgage servicers. So far the site has had over 100,000 unique 

visitors and has been well-received by independent reviewers and industry experts. 

We’re opening Fannie Mae Mortgage Help Centers where we are experiencing seriously delinquent loans in the hardest hit markets around the country. These Centers enable Fannie Mae borrowers to walk in and receive counseling, provide documentation of their hardship and financial documentation to allow them to be considered for a modification without the fear of the documents getting lost. We also establish a single point of contact to work with the borrower until his or her situation 

is resolved. We’ve opened these centers so far in Miami, Chicago, Atlanta, Los Angeles and Phoenix, and have plans to open more centers in Dallas, Philadelphia, Jacksonville and Tampa. 

We also have arrangements with counseling agencies—in Orlando and Homestead, Florida, Cleveland, Las Vegas, Detroit and Fort Worth—that work on our behalf to counsel borrowers and assist with preparation of modification related documents, all with a single point of contact. We anticipate expanding these efforts even 

further over the coming months. 

In addition, we’ve joined with Treasury to hold borrower outreach events nationwide in hard-hit communities. So far we’ve supported Treasury’s events in 49 cities 

and had nearly 50,000 visitors. 

We’re also taking steps to make sure Fannie Mae borrowers who do reach out to 

their loan servicers get the response and help they need. 

In the event that Fannie Mae borrowers feel their servicers are not properly addressing their mortgage needs, they can contact Fannie Mae’s call center where 

cases are reviewed by our ‘‘Second Look’’ team. 

We have learned from experience during the past 2 years that hand offs in the 

workout process lead to borrower confusion and costly delays. We have informed 

servicers of what we have learned and a few of them are voluntarily moving to deploy a single-point-of-contact model. We’re in the process of changing our policy to 

require all servicers to use this approach. Our efforts to help borrowers are gaining 

traction. Since the start of 2009, we’ve helped more than 600,000 Fannie Mae borrowers avoid foreclosure by completing more than 410,000 modifications; 90,000 repayment plans, forbearance plans and other help for temporary hardships; and 

nearly 100,000 foreclosure alternatives—short sales and deeds-in-lieu of foreclosure. 

While these foreclosure prevention measures are intended to include every borrower that needs help, unfortunately not every borrower can be helped. 

Some borrowers simply do not reach out for help despite all efforts to educate 

them about their options and make right-party contact. Some properties are owned 

by investors who got overextended. Some borrowers simply carry too much nonmortgage debt or do not have sufficient income to make even modified mortgage 

payments. 

In spite of all our efforts to keep people in their homes, unfortunately there will 

be foreclosures. 
389 

When there is no choice but to foreclose on a mortgage, once the property comes 

onto our inventory, we work expeditiously to maintain and repair the properties and 

sell them to new homeowners. Our policy is to first find people who will live in the 

homes because owner occupancy tends to help stabilize neighborhoods. 

One of our neighborhood stabilization initiatives is called ‘‘First Look.’’ It gives 

buyers who intend to live in the homes, and public entities that want to create affordable housing, a 15-day head-start on buying the properties before investors can 

buy them. We also offer both the buyers and the real estate agents financial incentives in these owner-occupant transactions. Our Web site listing of homes in our inventory, called Homepath.com, includes a countdown number on each property indicating how many days remain in the First Look grace period. 

Since inception through October of this year, we have sold more than 35,000 

Fannie Mae properties through First Look, and we plan to ramp up that number 

in the coming year. 

In summary, we’re taking aggressive steps to ensure that servicers provide borrowers with alternatives to foreclosures and reduce the impact of the housing and 

economic crisis on families, communities, the economy and taxpayers. Foreclosure 

prevention is a top priority for our company. We have much work ahead of us, and 

we are fully committed to getting it done. 

Servicer assistance, accountability and enforcement 

Let me now return to the critical role of servicers in this process. 

As I noted earlier, our success depends on the efforts of the banks and financial 

institutions in the mortgage servicing industry. Their role is a critical element in 

addressing the foreclosure crisis and in some of the issues that have arisen recently. 

In describing the role of servicers, I would like to quote the Acting Director of the 

Federal Housing Finance Agency (FHFA), Edward DeMarco, in his Congressional 

testimony on November 18, 2010. He stated: 

When an Enterprise purchases a mortgage from an originating lender, it 

contracts with that lender or another bank or financial institution to service 

the loan. The servicer is the main communication point for the borrower, 

accepting all payments and crediting the borrower’s account. 

When homeowners get behind in payments, the servicer is expected to work 

with the delinquent borrower to set up a repayment plan, modify the loan, 

or, if foreclosure alternatives are not viable, begin foreclosure proceedings. 

Although the Enterprises hold the actual promissory notes through document custodians who maintain these records separate from the servicers, 

Fannie Mae and Freddie Mac do not themselves accept or process payments 

or move to modify or foreclose. 

For their work, the servicers get paid by the Enterprises and, under the 

terms of their contracts, each servicer is obligated to follow the procedures 

established by the Enterprise, including compliance with all appropriate 

laws. 

To put it another way, Fannie Mae has a vested interest in ensuring that our borrowers get help. But we must rely on our loan servicers, who have a binding, contractual obligation to meet our servicing guidelines and help borrowers take advantage of our foreclosure-prevention options. 

Servicers have acknowledged that they have struggled to carry out their role and 

keep up with the volume of borrowers who need help. Fannie Mae continues to take 

a number of steps to help servicers meet our guidelines and get the job done. 

First, we pay servicers an incentive based on the type and number of modifications they successfully complete. Let me reiterate my earlier statement—servicers 

receive an incentive only if they complete a workout—we do not provide any financial incentive to foreclose. 

Second, we have about 200 Fannie Mae personnel dedicated to managing our 

servicer relationships. Many are on the ground at servicer shops working with their 

personnel to answer questions, help them understand our guidelines and options for 

borrowers and to escalate issues as they arise. 

Third, we conduct monthly meetings with leadership of servicers. We provide extensive training through live Web seminars, recorded tutorials, checklists and job 

aids. We are in constant contact with our servicers, listening to their suggestions 

and offering our own as to how the process can be made better. 

In short, we strive to do everything possible to ensure that our servicers carry out 

their responsibilities to help struggling borrowers. 

We also hold servicers accountable for carrying out their responsibilities. We 

evaluate individual servicers’ strengths and weaknesses on a monthly basis. In some 
390 

cases when our servicers cannot meet their obligations, we will transfer the servicing to specialty servicers that can do the job more efficiently and effectively. 

Finally, I would like to address the issue known as ‘‘dual tracking’’—where borrowers may receive foreclosure notices while their loan modification applications are 

in process. 

Let me clarify Fannie Mae’s policy. Borrowers are on a single track—the homeretention workout track—until they are more than 3 months behind on their mortgages. During this 3-month period, which can be even longer if a modification is in 

progress, our servicing guide permits servicers to delay putting a loan into the foreclosure process. Servicers may begin the foreclosure process in fewer days if the borrower is not communicating regarding a modification or foreclosure alternative. 

We set a timeline for the servicers for an important reason—the modification or 

workout process needs to be completed in a timely way. The longer the process 

takes, and the further in arrears the borrower becomes, the less likely it is that the 

borrower will succeed with a modification—and the greater potential there is for 

loss to Fannie Mae and the U.S. taxpayer. 

We know from our research that loans worked out earlier, rather than later, in 

the process are much more likely to succeed. On the other hand, each payment the 

borrower misses increases the likelihood of foreclosure. 

To summarize our approach to servicers and borrowers, the home-retention process functions properly when all participants in the process do their parts: 

The borrower needs to reach out to the servicer as soon as he or she has a hardship. The borrower also needs to answer and return calls from the servicer and provide all of the financial and hardship documentation the servicer needs to verify the 

borrower’s situation. 

The servicer needs to assign one person for the borrower to work with who is accountable for that borrower until a resolution is reached. 

And Fannie Mae provides an array of solutions the servicer can offer the borrower, balancing the need to help as many borrowers as possible while being responsible stewards of public funds. 

Foreclosure process issues 

Finally today, let me address what Fannie Mae is doing about the foreclosure 

process issues that the Committee has reviewed during recent hearings, including 

servicers misapplying payments, losing documents, and most recently using ‘‘robosigners’’ to execute foreclosure-related affidavits. 

When servicers do not properly follow Fannie Mae guidelines and meet their contractual obligations, we take those failures very seriously, and we act to address 

them. 

With respect to the recent foreclosure affidavit issue, Fannie Mae’s guidelines require that servicers comply with all applicable laws and regulations when foreclosing on a property securing a loan that we own. Specifically, servicers are required under law to submit affidavits in connection with foreclosure proceedings in 

a number of states, primarily those that have a judicial foreclosure process. These 

affidavits are subject to the law of individual states, which generally requires the 

signer to State in the affidavit that he/she has ‘‘personal knowledge’’ of the facts set 

forth in the affidavit. The affidavit typically must be signed in the presence of a notary. 

Following reports that some servicers did not follow proper procedures in the administration of the foreclosure process, we have taken a number of remedial steps: 

We have issued guidance to our servicers instructing them to review their policies 

and procedures relating to the execution of affidavits, verifications, and other legal 

documents in connection with the foreclosure process. 

We are also coordinating with FHFA to seek appropriate corrective actions that 

are in line with the four-point policy framework issued by FHFA on October 13, 

2010, which calls for actions to 1) verify the process; 2) remediate the actual problem; 3) refer suspicion of fraudulent activity; and, 4) avoid delay. 

We are tracking delays in order to be in a position to demand indemnification 

from servicers that breach the requirements. We are in continuous contact with 

servicers in order to track and oversee their progress. 

We have a number of remedies we may exercise against servicers that do not 

service loans in accordance with our requirements. We have the right to require 

servicers to repurchase the loans they improperly serviced, or to pay us damages 

based on delays caused by their actions. We have reiterated with servicers their contractual obligations to us for failing to comply with applicable laws and the foreclosure process delays. We are preparing to pursue servicers for compensatory fees 

for the costly delays we and the taxpayers are incurring as a result of their failure 

to meet their servicing responsibilities. 
391 

On another front, we are closely monitoring the work performed by our Retained 

Attorney Network. This is a network of law firms across the Nation that we have 

approved to handle our foreclosure proceedings. We established the network in 1997. 

In 2008 we expanded the network and made it mandatory for the handling of 

Fannie Mae foreclosure cases in 31 jurisdictions. We are now expanding it to all 50 

states. 

Having the retained attorney network allows us to improve our oversight and 

management of both the servicers and the attorneys’ actions during the default 

process. The network provides the framework to hold the attorneys accountable for 

their performance while giving us the authority to provide guidance to the firms, 

implement new policies and cost-saving structures, and audit actions by the firms. 

Firms are selected based on their experience, commitment to diversity and in 

many cases based on recommendations by servicers. 

We expect all cases to be handled in accordance with local law and practice, as 

well as the ethics rules of the applicable bar association. When we become aware 

that the law firms fall short of our standards or these requirements, we take action. 

For example, through an internal review of some of the firms handling the foreclosure process for our servicers in Florida, we confirmed allegations of issues with 

one of the law firms in our network. Working with FHFA, we terminated our relationship with that firm. Simultaneously, we expanded our approved attorney network in Florida to address capacity needs. We’re also enhancing oversight of our approved attorney network. 

It is important to note that servicers, in their contractual duties to manage the 

foreclosure process, are required to oversee the day-to-day activities of the law firms 

handling our foreclosure and bankruptcy cases. We have taken a number of steps 

this year to establish a more robust regimen for monitoring our approved attorney 

network to ensure compliance with proper procedures and operations. 

These steps include frequent onsite monitoring and in-depth training. We currently have more than 40 Fannie Mae personnel assigned to monitoring the network. 

This year, we hired a third-party law firm to perform audits of the firms in our 

approved network on a regular basis. We focused those audits on items such as 

proper pleading of ownership of the loan and compliance with local practice with 

respect to charging of fees and costs. The third-party firm has completed preliminary audits of the Florida firms and also those in California, and is in the process 

of auditing the Georgia, New York and Michigan retained attorney firms. We also 

hired an additional third-party firm to review the foreclosure process generally to 

identify any high risk areas where we face legal, financial, or reputational risk. The 

third-party firm will examine all inputs to the foreclosure process for which the 

firms are receiving data and documentation from external stakeholders. Our oversight and audit function will continue to evolve as we identify issues and develop 

best practices. 

Let me make a final point about the foreclosure process and the role of attorneys 

and servicers. Completion of the foreclosure process involves the coordination between the mortgage servicer and the foreclosure attorney. Fannie Mae set policies 

and guidelines to which both parties must adhere. In cases where the servicer fails 

to perform, Fannie Mae would be entitled to damages related to the delays. Our 

strategy has been to work with the servicer and the attorney to encourage them to 

perform. 

We have found that we can be most helpful when there is a commitment from 

the servicer’s management to perform and there is adequate staffing. We are urging 

our servicers to strengthen both management commitment and staffing. 

Securitization Trusts—Chain of Title 

There have been reports of various issues involving private-label securities, including mortgage document chain of title issues that call into question whether the 

foreclosing party had proper legal authority to foreclose. We do not believe that this 

problem exists for Fannie Mae securities. 

The manner in which Fannie Mae requires sellers to transfer mortgage notes and 

mortgages to our company, and in which we further transfer those mortgage loans 

to MBS trusts, is based on established law. Fannie Mae’s practice with regard to 

the transfer of mortgage notes is designed to ensure an unbroken chain of assignments to Fannie Mae from the originating lender. 

In addition, Fannie Mae requires that the original note be delivered to Fannie 

Mae-approved custodians. As part of the acquisition process, the custodian certifies 

that the note has been received, contains the proper endorsement, and that other 

additional requirements have been met. The custodian maintains the note and re-
392 

lated documents on Fannie Mae’s behalf in a vault meeting specific fire and security 

requirements. 

Repurchases 

The Committee also has asked about our loan repurchase requests to lenders. We 

conduct reviews of delinquent loans and, when we discover loans that do not meet 

our underwriting and eligibility requirements, we require lenders to repurchase 

these loans or compensate us for losses sustained on the loans. We also require 

lenders to repurchase or compensate us for loans for which the mortgage insurer 

rescinds coverage. 

In 2009 and during the first 9 months of 2010, the number of repurchase and reimbursement requests remained high. During the third quarter of 2010, lenders repurchased from us or reimbursed us for losses on approximately $1.6 billion in 

loans, measured by unpaid principal balance, pursuant to their contractual obligations. 

As of September 30 of this year, we had outstanding requests for lenders to repur- chase from us or reimburse us for losses on $7.7 billion in loans, of which 36 percent 

had been outstanding for more than 120 days. 

Many servicers work with us to resolve repurchase requests. When they do not, 

we are working to recover these payments in accordance with our contractual rights. 

Conclusion 

In conclusion, Fannie Mae is committed to balancing its dual role—to help struggling homeowners avoid foreclosure, and be responsible stewards of the public funds 

that support our work and make it possible to reduce foreclosures. 

The good news is that the more foreclosures we can prevent, the more taxpayer 

funds we can save. 

To date, we have helped hundreds of thousands of struggling homeowners across 

the country stay in their homes or avoid foreclosure. This progress shows that foreclosure prevention efforts can and do work. And when they do, it is victory for everyone—the homeowner, the neighborhood, the industry and the nation. We also recognize, however, that not every foreclosure can be avoided. 

If we can motivate borrowers to work with their servicers, get servicers to help 

them through the broad range of solutions available today, we can help more families keep their homes and work through this very challenging housing crisis. 

That is Fannie Mae’s job. We know we have much more work to do, and we are 

committed to getting it done. We welcome and appreciate the thoughts and guidance 

of the Committee, as we move forward with our vital mission to help America’s 

housing market. 

PREPARED STATEMENT OF DONALD BISENIUS 

EXECUTIVE VICE PRESIDENT

SINGLE FAMILY CREDIT GUARANTEE BUSINESS, FREDDIE MAC

DECEMBER 1, 2010 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee: thank 

you for inviting me to speak today on servicing and foreclosure issues. I am Don 

Bisenius, head of Freddie Mac’s Single Family Credit Guarantee Business. I have 

been with Freddie Mac since 1992. In my current role, I oversee the sourcing, pricing, securitization and performance of single-family mortgages we purchase. 

Today’s hearing raises important issues about the integrity of the mortgage origination, securitization and servicing processes. To understand Freddie Mac’s role in 

these processes, the Committee should consider the following: 

• Freddie Mac currently owns and guarantees approximately 12.4 million singlefamily mortgages. In both the acquisition and ongoing servicing of these loans, 

Freddie Mac relies on its sellers and servicers. We don’t originate loans, and 

we don’t service loans. Rather, Freddie Mac provides guidelines for the origination and servicing of our loans, and contracts with sellers and servicers to carry 

out these operations. Institutions conducting these activities with respect to 

Freddie Mac loans represent and warrant to us that they are following our contractual requirements. Failure to fulfill these obligations creates a liability for 

either the originator or the servicer, including the possibility that they will be 

required to repurchase the loan. Freddie Mac actively requires repurchases of 

mortgages sold to us in violation of representations and warranties, as appropriate. We pay the servicing industry about $5 billion per year to service our 

mortgages. 
393 

• Freddie Mac expects servicers of our loans to treat borrowers fairly, with respect, and in full compliance with all applicable laws, regulations and Freddie 

Mac policies. No homeowner with a mortgage owned or guaranteed by Freddie 

Mac should ever worry about losing his or her home to an unnecessary or 

wrongful foreclosure. 

• While Freddie Mac currently owns almost 25 percent of total single-family 

mortgages outstanding in our nation, we own less than 10 percent of seriously 

delinquent loans (90 days or more past due). Freddie Mac owns fewer than 

500,000 seriously delinquent mortgages, compared to approximately 5 million 

across the mortgage industry. Freddie Mac’s disproportionately small share of 

seriously delinquent mortgages directly results from our low mortgage delinquency rates relative to the mortgage industry as a whole. As of September 30, 

2010, our single-family serious delinquency rate was 3.8 percent—less than onehalf of the mortgage industry average of 8.7 percent. Our ability to assist troubled borrowers is limited to this small share of seriously delinquent loans we 

own. 

• Freddie Mac has long had policies and initiatives in place to help financially 

troubled borrowers avoid foreclosure. In response to the unprecedented mortgage default crisis, we have created additional servicer incentives and loss mitigation options. In addition to $5 billion that Freddie Mac pays servicers each 

year for managing the servicing process, we offer additional financial incentives 

for servicers to avoid foreclosure, pay credit counselors to work with at-risk borrowers, and even had an initiative for door-to-door contact of borrowers who are 

behind on their mortgage payments to inform them of options for resolving their 

delinquency. Since the beginning of 2009, we have helped nearly 370,000 families avoid foreclosure. Through the first 9 months of 2010 alone, nearly 211,000 

delinquent borrowers with Freddie Mac-owned or guaranteed mortgages avoided foreclosure—nearly twice the 114,000 who were foreclosed on. The number 

of loan modifications alone during the first 9 months of this year (132,000) exceeded foreclosures. At the same time, we recognize more remains to be done 

to help at-risk families. 

• The length of time for the average foreclosure of a Freddie Mac loan indicates 

that borrowers are not being rushed through the foreclosure process. We require 

our servicers to seek to resolve borrower delinquencies through a variety of foreclosure alternatives offered by both the Obama administration’s Making Home 

Affordable Program and Freddie Mac’s traditional foreclosure avoidance initiatives. However, if the borrower’s delinquency cannot be cured by these methods, 

servicers must move ahead with foreclosure to minimize further financial risk 

to taxpayers. Currently the nationwide average for completion of a foreclosure 

on a delinquent mortgage owned or guaranteed by Freddie Mac is 449 days, and 

borrowers whose properties are foreclosed are behind on their payments, on average, well over 1 year. 

Freddie Mac’s support of the housing market during the crisis 

Freddie Mac is both mindful and appreciative of the Federal financial support we 

have received, and as an institution in conservatorship, we are highly focused on 

being good stewards of this support. Accordingly, I would like to begin by briefly 

summarizing how, throughout the worst housing and financial crises since the Great 

Depression, Freddie Mac has provided a stable and constant source of mortgage 

funding for our nation. From the beginning of 2009 through October 2010, Freddie 

Mac purchased or guaranteed $864 billion in mortgage loans and mortgage-backed 

securities. Our purchases have helped 3.9 million American families own or rent a 

home. This includes 2.7 million homeowning families who have been able to refinance into lower rate mortgages—saving those families $5.2 billion annually. 

Together with Fannie Mae, we have provided the vast majority of conventional 

mortgage liquidity during the past 2 years as other sources of capital have left the 

market. With continued weakness in the housing sector, our support remains critical. During the third quarter of 2010, Freddie Mac and Fannie Mae purchased or 

guaranteed about 70 percent of mortgage originations. FHA comprised most of the 

remainder of the market. 

As we have maintained liquidity in the residential mortgage market, we believe 

the credit quality of the single-family loans acquired in 2009 and the first 9 months 

of 2010 (excluding relief refinance mortgages) is better than that of loans acquired 

from 2005 through 2008 as measured by original LTV ratios, FICO scores, and income documentation standards. We are working together with our regulator and 

conservator, the Federal Housing Finance Agency (FHFA), and our mortgage lending partners to strengthen the foundation of responsible lending practices to produce 
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better quality loans. Our goal is to create sustainable homeownership opportunities 

for America’s families, ensure fewer unexpected costs for our lenders, drive better 

loan performance, and reduce Freddie Mac’s dependence on taxpayer dollars. While 

these and other changes involve costs for the lender—and in some cases, tighter 

credit requirements for borrowers—we believe they are essential to placing the 

housing finance system on a better foundation going forward. 

Freddie Mac continues to help families avoid foreclosure 

Helping financially troubled families avoid foreclosure is the right thing to do for 

homeowners and communities, and it reduces losses to Freddie Mac. Since the beginning of 2009, we have helped nearly 370,000 families facing financial hardship 

to keep their homes or sell their properties, through both our own foreclosure avoidance initiatives and the Making Home Affordable (MHA) programs, such as the 

Home Affordable Modification Program (HAMP). During the first 9 months of this 

year, more than 121,000 Freddie Mac-owned loans were modified through HAMP. 

Additionally, we have enabled nearly 223,000 homeowners to refinance into lowercost mortgages through MHA’s Home Affordable Refinance Program (HARP). HARP 

was designed to assist borrowers who have remained current on their mortgage obligations but have been unable to refinance because the values of their homes have 

declined. Borrowers with mortgages up to 125 percent of the current value of their 

homes are eligible for refinancing through HARP. The program enables financially 

stressed borrowers to reduce their monthly mortgage payments by refinancing into 

lower rate mortgages, fixed-rate mortgages, or mortgages with longer terms. As a 

result of HARP, fewer borrowers fall behind in their mortgage payments in the first 

place. 

We provide our servicers with a variety of financial incentives to resolve borrower 

defaults by means other than foreclosure, including forbearance, repayment plans, 

loan modifications, short payoffs, make-whole pre-foreclosure sales and deeds-in-lieu 

of foreclosure. The result is that during the first 9 months of 2010, delinquent borrowers with Freddie Mac-owned or guaranteed mortgages were more likely to receive loan modifications (132,000) than to lose their homes to foreclosure (114,000). 

Nearly 211,000 borrowers in total avoided foreclosure during the first 9 months of 

this year—184,000 through home retention actions including modifications, repayment plans and forbearance agreements, and 27,000 through short sales and deedin-lieu transactions. Freddie Mac has long been recognized as an industry leader in 

identifying and addressing delinquencies before they become foreclosures, and in devising ways to identify, contact and help delinquent borrowers navigate the loss 

mitigation process. In addition to helping borrowers through our loss mitigation 

tools, for years, we have worked closely with national nonprofits to educate borrowers about foreclosure prevention and mortgage fraud. We support these efforts 

through a number of online resources, including an award-winning financial literacy 

curriculum. We have also sponsored targeted marketing campaigns, in-home counseling, walk-in community events and permanent help centers. Our goal is to foster 

a strong communication link between the borrower and the servicer, which is critical to successful home retention and loss mitigation. 

As noted earlier, Freddie Mac’s ability to stem the tide of foreclosures on our own 

is limited, simply because we own a small proportion of seriously delinquent mortgages. As the chart below shows, Freddie Mac owns or guarantees nearly one-quarter of outstanding first mortgages but only one-tenth of seriously delinquent loans. 

Freddie Mac’s disproportionately small share of seriously delinquent mortgages directly results from our low mortgage delinquency rates relative to the mortgage industry as a whole. As of September 30, 2010, our single-family serious delinquency 

rate was 3.8 percent—less than one-half of mortgage industry average of 8.7 percent. When loans owned or guaranteed by Freddie Mac and Fannie Mae are excluded, the industry’s serious delinquency rate rises into double digits. 
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The role of Freddie Mac’s servicers and our relationship with them 

Like most other mortgage investors, Freddie Mac is not a servicer. Instead, we 

contract with either the mortgage originator or another financial institution to service the mortgages we purchase. In general, servicers collect loan payments from the 

borrowers and remit them to Freddie Mac each month. They are paid for their services on a monthly basis by retaining the difference between the interest rate on the 

note and the interest rate paid to Freddie Mac. This difference, commonly known 

as the ‘‘servicing spread,’’ averages one-quarter of 1 percent (25 basis points). In the 

aggregate, the servicing industry is paid about $5 billion per year to service Freddie 

Mac-owned or guaranteed mortgages. 

As discussed above, servicers’ duties also include working with borrowers who fall 

behind in making payments on their mortgages. In the event that loss mitigation 

efforts are unsuccessful and there is no reasonable likelihood of curing the borrower’s delinquency by means other than foreclosure, servicers must finalize foreclosure in accordance with our timelines and begin helping the borrower transition 

out of homeownership. At that point, we must place greater emphasis on minimizing 

further financial risk to taxpayers. In recent years, our foreclosure timelines have 

been extended to allow for additional months of loss mitigation activities, and under 

current standards, borrowers who lose their homes to foreclosure are behind on 

their payments, on average, well over a year prior to the completion of a foreclosure 

sale. 

Freddie Mac sets forth a comprehensive set of requirements for servicers in our 

Seller/Servicer Guide (‘‘the Guide’’). The Guide provides detailed instructions and 

guidelines for servicing both performing and non-performing mortgages, including 

the compensation and incentives paid to servicers. Notably, the Guide also requires 

servicers to fully comply with all applicable laws relating to the mortgages they 

service. 
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Freddie Mac owns or guarantees millions of mortgages, and we rely primarily 

upon the contractual representations and warranties provided by servicers that 

their activities and actions are in full compliance with our requirements. We conduct targeted reviews of servicers that focus on evaluating processes, procedures, 

and controls. We also have a dedicated team that provides support and guidance to 

servicers as needed. 

If a servicer is found to be in violation of the Guide, we have a number of remedies at our disposal. Our response in most cases is to require servicers to correct 

identified violations of Guide requirements and/or deficiencies in their operations, 

and to reimburse us or indemnify us for our losses. As circumstances warrant, we 

also have the option of imposing financial penalties on servicers, issuing a repurchase request for the loan, or, in extreme cases, suspending or terminating a 

servicer’s contract to service Freddie Macowned mortgages and transferring the 

loans to other servicers. 

Requiring servicers to meet their obligations under HAMP 

Freddie Mac requires that servicers seek a HAMP modification for HAMP-eligible 

delinquent borrowers with Freddie Mac-owned loans before foreclosing on the property. To monitor servicers’ compliance with this obligation, Freddie Mac conducts 

operational reviews of selected servicers. In these reviews, Freddie Mac conducts 

interviews with the appropriate servicer employees, and then tests a sample of loans 

in various stages of default. Freddie Mac requests and reviews the applicable 

records (collection, loss mitigation, foreclosure, bankruptcy) for each sample loan. 

We then determine whether the servicer properly determined eligibility and solicited 

the borrower for a HAMP modification and whether the servicer followed the correct 

steps (including retaining applicable documentation) throughout the process. 

Freddie Mac’s response to foreclosure process deficiencies 

Recent reports of improperly executed affidavits and faulty notarizations have 

raised serious concerns about the integrity of the foreclosure process. Freddie Mac 

is deeply concerned by these reports and, in coordination with FHFA, we are working with our servicers to address these issues. 

On October 1, we instructed all our servicers to review their processes to determine whether documents used in foreclosures on Freddie Mac-owned mortgages are 

being executed in accordance with applicable laws. We are requiring servicers who 

have identified deficiencies in their foreclosure documentation to remediate the deficiencies. We also are continuing to determine the extent and scope of this problem, 

including the total number of loans that may be affected. It is critical to note, however, that all servicers who have identified documentation problems have determined the underlying information within the documents is correct, i.e., the indebtedness amounts as presented to the court in each case in support of the foreclosure 

are accurate. The problem appears to have largely been that the individual executing the affidavit did not have personal knowledge of the facts described in the 

affidavit even though the affidavit said he or she had such knowledge. 

Freddie Mac will continue to work with FHFA and our servicers to require that 

the foreclosure process is conducted appropriately and in compliance with applicable 

laws, and that borrowers’ rights are fully protected. 

Freddie Mac’s use of law firms in foreclosure proceedings 

In 1994, Freddie Mac established our Designated Counsel Program to manage the 

costs and quality of essential legal services involved in taking a property through 

foreclosure. Today, the program operates in 20 states. 

Law firms are selected for inclusion in the program based on their demonstrated 

abilities to handle foreclosures and other legal work in a professional, efficient and 

cost-effective manner. We expect our lawyers to conduct their practices in accordance with applicable legal and ethical requirements. 

In response to recent reports that some law firms handling foreclosure cases may 

have failed to follow appropriate legal standards in preparing or filing documents 

used in the prosecution of foreclosure cases, Freddie Mac on October 15 directed all 

firms in the Designated Counsel Program to review their processes regarding the 

preparation and execution of such documents and the integrity of the contents of 

those documents, and to notify Freddie Mac of any deficiencies found. Our reviews 

of these firms remain ongoing. 

Freddie Mac recently terminated the participation of the Law Offices of David J. 

Stern, P.A., in the Designated Counsel Program, resulting from our review of the 

firm’s processes following reports of certain deficiencies in its operations. We have 

instructed our servicers to no longer refer cases to the firm, and we have placed 

cases previously assigned to this firm with new counsel. 
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Document custody 

Concerns have been raised about the custody of mortgage notes and other documents. When a mortgage is sold to Freddie Mac, the seller must deliver the original 

note for each mortgage loan, together with any power of attorney or modifying instrument (such as a modification agreement, conversion agreement, assumption of 

liability or release of liability agreement), to a document custodian, which holds the 

documents in trust for Freddie Mac. Currently, Freddie Mac uses approximately 125 

document custodians, with much of the volume concentrated in a relatively small 

number of large companies. 

Our Guide sets forth eligibility standards and various other requirements for document custodians. Each document custodian enters into a tri-party custodial agreement with Freddie Mac and the servicer that is servicing a mortgage for which the 

custodian holds note files. Each document custodian files an annual certification report to Freddie Mac, and is required to notify Freddie Mac between reports of any 

significant personnel, operational or financial changes. Freddie Mac also conducts 

periodic onsite reviews of document custodial operations. 

Dual track 

Numerous concerns have been raised in this Committee and elsewhere about pursuing loan modifications or other alternatives to foreclosure while also moving forward with the foreclosure process. These concerns arise from widespread reports of 

delinquent borrowers receiving foreclosure notices from their servicers as they are 

being considered for loan modifications. As a result, some policymakers have expressed a desire to end this ‘‘dual track’’ process and allow servicers to initiate foreclosure actions only after all other resolution options have been exhausted. While 

we believe that borrowers who already are under significant stress arising from 

their financial situations should not be subjected to needless confusion, we also believe that unnecessary delays in an already lengthy foreclosure process would be 

counterproductive. 

Contrary to popular impression, foreclosures are a very lengthy process, and 

Freddie Mac’s requirements do not result in rushing delinquent loans to foreclosure. 

Freddie Mac requires servicers to contact borrowers at the first indication of a problem, starting when a payment has not been received 10 days after the due date— 

20 days before the borrower becomes delinquent. Foreclosure proceedings are instituted 120 days following a missed payment, and under our guidelines servicers continue to consider borrowers for workouts until the foreclosure sale. Currently, the 

nationwide average number of days from the initiation of a foreclosure action to a 

foreclosure sale for a mortgage owned or guaranteed by Freddie Mac is 449 days. 

In states with judicial foreclosures, the average currently is 565 days. 

Freddie Mac also gives servicers the authority to stop or suspend a foreclosure 

action whenever there is an opportunity for a viable workout, short sale or deedin-lieu of foreclosure as a result of verifiable changes in the borrower’s financial situation. Our servicers have had this authority for more than 20 years. 

The dual track process allows for a delicate balance between the need to minimize 

losses and protect communities while protecting borrower interests. Lengthy foreclosure delays impose substantial losses on Freddie Mac and taxpayers—by some estimates, $30–$40 per day and $10,000 to $15,000 per year for every defaulted loan. 

These costs do not include additional losses resulting from depreciation in the value 

of the property. Furthermore, delays in foreclosures can lead to increased property 

blight, reduced neighborhood property values, and loss of revenues for local governments, utilities and homeowners associations. 

The dual track process enables commencement of the foreclosure process, so that 

in those cases in which non-foreclosure alternatives are determined to be not viable 

for the borrower, the servicer can move forward with the foreclosure as expeditiously as possible, reducing losses to Freddie Mac and, ultimately, taxpayers. It is 

important to note that the dual track process leaves sufficient time both before and 

after the initiation of a foreclosure action to explore foreclosure alternatives, and 

even after the foreclosure process begins, it remains in everyone’s interest—including Freddie Mac’s—to keep viable homeowners in their homes. For this reason, we 

believe it is not in the borrower’s interest for the process to drag on indefinitely. 

The longer the borrower’s delinquency goes uncured, the farther behind he or she 

gets and the harder it becomes to bring the loan current. 

At the same time, I want to emphasize that we do recognize how confusing and 

distressing it can be for borrowers to receive what appear to be mixed messages 

from their servicers. We want to work with the industry to find a way to improve 

communication and minimize confusion for borrowers. 
398 

Conclusion 

In conclusion, I would like to reiterate Freddie Mac’s full commitment to seek alternatives to foreclosure; to require that financially troubled borrowers are treated 

in accordance with the law and set expectations for servicers to make every effort 

to treat borrowers fairly, with respect; and, most of all, make certain that no borrower with a mortgage owned or guaranteed by Freddie Mac should ever lose his 

or her home to an unnecessary or wrongful foreclosure. 

Thank you again for this opportunity to testify today. 
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RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD 

FROM JOHN WALSH 

Oversight of the Protecting Tenants at Foreclosure Act 

Q.1. The Protecting Tenants at Foreclosure Act (PTFA) requires 

mortgage holders to permit renters in foreclosed properties to remain in their homes for at least 90 days, and, in many cases, for 

the remaining terms of their leases. I was pleased to work with 

Senator Kerry on this legislation, which prevents disruptive evictions and homelessness among tenants who have done nothing 

wrong and helps protect neighborhoods against the blighting influence of additional vacancies. It has come to my attention that many 

renters are not receiving the protections of PTFA. Given the many 

problems banks and servicers are having as they implement basic 

aspects of the foreclosure process, I am not confident that they are 

protecting renters as provided in the PTFA. 

What steps has your organization taken to implement the PTFA? 

Have you monitored compliance with the PTFA? If so, what have 

you found? If you have not yet examined compliance with PTFA, 

when do you plan to begin doing so? 

A.1. The OCC has taken a number of specific steps to ensure that 

banks, bank examiners, and the public have been provided information about the provisions of the Protecting Tenants at Foreclosure Act of 2009. Shortly after the Helping Families Save their 

Homes Act of 2009 was signed into law, the OCC issued guidance 

to national banks and bank examiners to explain that new protections from eviction were now in effect for tenants, if the property 

they were renting was foreclosed upon. The guidance explained the 

protections of the law and was followed in January 2010, with updates to the OCC Compliance Handbook and new examination procedures that included a worksheet that banks and examiners could 

use to review audit work papers, evaluate bank policies, and ensure appropriate training was provided. Finally, the OCC developed three different public service announcements for the radio and 

print media to explain the provisions of the law. 

The OCC expects national bank examiners to test compliance 

with the provisions of the PTFA when they review loan foreclosures. Beginning in the first quarter of 2010, OCC supervisory 

teams held focused discussions with the large national bank mortgage lenders which revealed: 

• National banks have policies and procedures in place that address the Act and, in some instances, they continue to enhance 

processes; 

• Most national banks use third party/outside counsel when providing information to renters regarding their rights and eviction processes; and 

• Six national banks have relocation programs that provide 

funds to help tenants offset the cost of moving. Two banks also 

allow tenants to stay rent free if their lease expires in 90 days 

or less or for a minimum of 90 days if the tenant does not have 

a valid lease. 

Our supervision will continue to include ensuring compliance 

with the provisions of the PTFA in 2011 and beyond. 
476 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON 

FROM JOHN WALSH 

Q.1. What role do your Agencies play in ensuring that the documentation process, including the transfer of the note, is done properly? 

A.1. The OCC expects national banks to have the necessary policies 

and operating procedures to ensure an appropriate and legally compliant chain of title to the note, as well as the security interest in 

the collateral. This entails proper endorsement of the note upon 

transfer of ownership and, where required and as dictated by State 

or local law, proper assignment of the mortgage/deed of trust. 

Where national banks serve as document custodians for themselves 

or other investors, we also require controls and tracking systems 

to properly safeguard the physical security and maintenance of 

these critical documents. The OCC typically relies on the bank’s internal control functions, including line of business operating procedures, quality control and internal audit, and audits by third-party 

investors to ensure that correct and compliant endorsements and 

assignments are accomplished. 

As part of the recently completed horizontal review of bank foreclosure management processes, we also tested individual files, and 

conducted onsite inspections at document custodian facilities to 

validate bank controls over note endorsements, mortgage/deed assignments, and physical control of critical documents. We found 

that banks had physical control of the documents and, with some 

exceptions, notes were properly endorsed and mortgages/deeds of 

trust were properly assigned. We have instructed banks to address 

all noted exceptions and strengthen control processes where warranted. 

Q.2. In your written testimony, you state that ‘‘HAMP guidelines 

preclude servicers from initiating a foreclosure action until the borrower is determined to be ineligible for a HAMP modification.’’ In 

your opinion, should this prevent the two track process where a 

homeowner could be in negotiations for a modification and also 

foreclosed upon? 

A.2. The OCC is concerned that the two track process of loan modification and simultaneous foreclosure proceedings may be unnecessarily confusing for distressed or troubled homeowners, and may 

expose servicers to increased reputation risk. Immediately following my testimony, the OCC directed the eight largest national 

bank mortgage servicers to develop and implement policies and 

procedures to suspend foreclosure proceedings for borrowers in all 

successfully performing trial period modifications where the bank 

as servicer has the legal ability to do so, similar to current Home 

Affordable Modification Program (HAMP) guidelines. The OCC also 

believes that HAMP guidelines that preclude servicers from initiating a foreclosure action until the borrower is determined ineligible for a HAMP modification will prevent initiation of the two 

track process for eligible loans while active negotiations for a 

HAMP modification are proceeding. HAMP guidelines do, however, 

allow for initiation of foreclosure actions under various defined circumstances, including when the servicer has satisfied the reasonable effort solicitation standard and/or when the borrower has been 
477 

offered a trial period plan but fails to make required payments. Additionally, it should be noted that HAMP guidelines apply only to 

loans eligible for the Treasury HAMP program, and only when the 

guidelines do not otherwise conflict with other investor contract requirements. Some servicers have procedures for suspending foreclosure referrals similar to HAMP guidelines for loans held in their 

own portfolios. However, other third-party investors, including 

Fannie Mae and Freddie Mac, may impose other requirements for 

initiating foreclosure actions prior to the loans having been considered for non-HAMP modifications. Servicers are contractually required to follow these requirements, which may result in the two 

track process. Nevertheless, we will continue to call on servicers to 

implement operating procedures and controls to better communicate with borrowers and minimize the confusion of the two track 

process. 

Q.3. Can you discuss the occurrence of a performing second lien 

when the first lien is delinquent? Does the OCC consider whether 

a homeowner would be able to afford a modified first and second 

lien when issuing guidance? 

A.3. The volume of current and performing second liens held by national banks behind delinquent or modified first liens remains relatively small. In the second quarter of 2010, the OCC analyzed second liens held by national banks and matched more than 60 percent of them ($293 billion) to first-lien mortgages. Of these 5 million matched second mortgages, about 6 percent, or 235 thousand 

were current and performing, but behind delinquent or modified 

first liens. The balance of those current and performing second 

liens behind delinquent or modified first mortgages totaled less 

than $18 billion. 

The OCC does expect mortgage modifications to be structured in 

a manner that improves the likelihood that a borrower can repay 

the entire debt, including any restructured credit and existing loan 

obligations. As part of Supervisory Memorandum 2009–7: Guidance 

for the Treatment of Residential Real Estate Loan Modifications, examiners have been directed to review the reasonableness of banks’ 

loan modification programs and ensure mortgage modifications are 

designed to improve the likelihood that a borrower can repay the 

restructured credit under the modified terms and in accordance 

with a reasonable repayment schedule. The guidance also instructs 

examiners to ensure impairment analyses incorporate the borrower’s troubled condition and consider combined debt obligations 

and repayment capacity. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JOHN WALSH 

Q.1. You have suggested that the OCC is ‘‘aggressively’’ taking 

steps to ‘‘hold banks accountable and fix the problem.’’ 

What is the OCC’s process for reviewing the banks’ files? 

A.1. In October 2010, the OCC, together with the FRB, the FDIC 

and the OTS, commenced onsite examinations at the 14 largest federally regulated mortgage servicers, including the eight largest national bank mortgage servicers. The primary objective of the exami-
478 

1The foreclosure file sample was selected independently by examination teams based on preestablished criteria. Foreclosure files at each bank were selected from the population of in-process and completed foreclosures during 2010. In addition, the foreclosure file sample at each bank 

included foreclosures from both judicial states and nonjudicial states. 

nations was to evaluate the adequacy of controls and governance 

over bank foreclosure processes, including compliance with applicable Federal and State law. Examiners also evaluated bank self assessments and remedial actions as part of this process, assessed 

foreclosure operating procedures and controls, interviewed bank 

staff involved in the preparation of foreclosure documents, and reviewed approximately 2,800 borrower foreclosure cases 1 in various 

stages of foreclosure. Examiners focused on foreclosure policies and 

procedures, organizational structure and staffing, vendor management including use of third parties, including foreclosure attorneys, 

quality control and audits, accuracy and appropriateness of foreclosure filings, and loan document control, endorsement, and assignment. When reviewing individual foreclosure files, examiners 

checked for evidence that servicers were in contact with borrowers 

and had considered alternate loss mitigation efforts, including loan 

modifications, in addition to foreclosure. 

To ensure consistency in the examinations, the agencies used 

standardized work programs to guide the assessment and document findings of each institution’s corporate governance process 

and the individual case review. Specifically, work programs were 

categorized into the following areas: 

• Policies and Procedures—Examiners determined if the policies 

and procedures in place ensured adequate controls over the 

foreclosure process and that affidavits, assignments, and other 

legal documents were properly executed and notarized in accordance with applicable laws, regulations, and contractual requirements. 

• Organizational Structure and Staffing—Examiners reviewed 

the functional unit(s) responsible for foreclosure processes, including staffing levels, qualifications, and training programs. 

• Management of Third-Party Service Providers—Examiners reviewed the financial institutions’ governance of key third parties used throughout the foreclosure process. 

• Quality Control and Internal Audits—Examiners assessed foreclosure quality control processes. Examiners also reviewed internal and external audit reports, including Government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities, and institutions’ self-assessments to determine the adequacy of these compliance and risk management 

functions. 

• Compliance with Applicable Laws—Examiners checked compliance with applicable State and local requirements as well as 

internal controls intended to ensure compliance. 

• Loss Mitigation—Examiners determined if servicers were in direct communication with borrowers and whether loss mitigation actions, including loan modifications, were considered as 

alternatives to foreclosure. 
479 

• Critical Documents—Examiners determined whether servicers 

had control over the critical documents in the foreclosure process, including appropriately endorsed notes, assigned mortgages, and safeguarding of original loan documentation. 

• Risk Management—Examiners determined whether institutions appropriately identified financial, reputation, and legal 

risks, and whether these risks were communicated to the 

board of directors and senior management. 

In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document 

preparation processes, and oversight and monitoring of third-party 

law firms and vendors. These deficiencies have resulted in violations of State and local foreclosure laws, regulations, or rules and 

have had an adverse effect on the functioning of the mortgage markets and the U.S. economy as a whole. By emphasizing timeliness 

and cost efficiency over quality and accuracy, examined institutions 

fostered an operational environment that is not consistent with 

conducting foreclosure processes in a safe and sound manner. 

Despite these deficiencies, the examination of specific cases and 

a review of servicers’ custodial activities found that loans in foreclosure were seriously delinquent, and that servicers maintained 

documentation of ownership and had a perfected interest in the 

mortgage to support their legal standing to foreclose. In addition, 

case reviews evidenced that servicers were in contact with troubled 

borrowers and had considered loss mitigation alternatives, including loan modifications. A small number of foreclosure sales should 

not have proceeded because of an intervening event or condition, 

such as the borrower: (a) being covered by the Service members 

Civil Relief Act; (b) filing bankruptcy shortly before the foreclosure 

action; or (c) being approved for a trial period modification. 

While all servicers exhibited some deficiencies, the nature of the 

deficiencies and the severity of issues varied by servicer. The OCC 

and the other Federal banking agencies with relevant jurisdiction 

are in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions with respect to the 

servicers within their respective jurisdictions. We also continue to 

assess and monitor servicers’ self-initiated corrective actions. We 

expect that our actions will comprehensively address servicers’ 

identified deficiencies and will hold servicers to standards that require effective and proactive risk management of servicing operations, and appropriate remediation for customers who have been 

financially harmed by defects in servicers’ standards and procedures. 

Finally, to address concerns about the practice of continuing foreclosure proceedings, even when a trial modification has been negotiated and is in force, in December 2010, the OCC directed each of 

the eight largest national bank mortgage servicers to develop and 

implement policies and procedures to suspend foreclosure proceedings for borrowers in all successfully performing trial period 

modifications where legally possible. The intent of this directive 

was to reduce borrower confusion and potentially conflicting actions 

associated with two-track foreclosure/modification processing. 
480 

Q.2. Why is the OCC not complying with suggestions made by 

Members of Congress and the Congressional Oversight Panel to, for 

example, examine collateral files or consider the potential ramifications of re-valuations of second liens? 

A.2. The OCC requires that national banks recognize known impairment and maintain appropriate loss reserves commensurate 

with the credit risk in their junior lien mortgages. Our retail credit 

classification policy requires banks to classify and hold increased 

reserves for most junior lien mortgages when they become 90 days 

past due. Delinquent mortgages must be written down to the fair 

value of the collateral, net of any senior lien mortgages, when they 

become 180 days past due. In addition, we have notified national 

banks that performing junior lien mortgages that stand behind delinquent or modified first liens have an elevated risk of default and 

loss, and that appropriate loan loss reserves must be maintained 

to reflect this elevated risk. In recent quarters, we have also made 

additional information available to holders of junior lien mortgages 

on the delinquency and modification status of first lien mortgages 

serviced by other institutions to ensure that appropriate loss reserves are maintained. We require that bank internal risk management functions follow these guidelines and directives, and our field 

examiners will periodically evaluate compliance. 

Q.3. You have mentioned that ‘‘the OCC’s primary focus [is] on efforts to prevent avoidable foreclosures by increasing the volume 

and sustainability of loan modifications.’’ What actions is the OCC 

taking to increase the volume and sustainability of loan modifications? 

A.3. The OCC has issued several formal communications to national banks encouraging them to work with troubled borrowers on 

any of their residential real estate loans whenever possible. The 

largest national bank mortgage servicers have all committed to 

comply with Treasury’s HAMP as well as the Second Lien Modification Program (2MP). In recognition of the high re-default rate 

of modifications implemented through 2008, the OCC issued a Supervisory Letter in March 2009, to the largest mortgage servicers 

directing them to modify existing policies, procedures and programs 

to ensure affordable and sustainable mortgage modifications, and 

to look for opportunities to further restructure existing modifications where warranted to better ensure sustainability. 

During 2009, we examined the default management/loss mitigation functions of all major servicers and, where necessary, directed 

banks to correct identified deficiencies and strengthen operating 

procedures, programs, and data information systems. In addition, 

the OCC, along with the OTS, publishes quarterly the OCC and 

OTS Mortgage Metrics Report through which we make a considerable amount of data and analysis on mortgage delinquencies, foreclosures, modifications, and modification performance available for 

public review. This same information is provided to each participating servicer and our examining staff to better measure the volume and sustainability of loan modifications and identify issues requiring further attention or corrective action. 
481 

RESPONSE TO WRITTEN QUESTION OF SENATOR MERKLEY 

FROM JOHN WALSH 

Enforcement Actions 

Q.1. As you know, the Federal Reserve and the OCC have significant supervisory and enforcement tools that can be used to address 

deficiencies in the foreclosure and mortgage transfer process. Such 

actions can include the imposition of Civil Money Penalties (CMP’s) 

for more extreme violations of regulations. 

Please list the enforcement actions that your organization has 

taken in the last 2 years with regard to improper foreclosure and 

mortgage transfer activities, and please indicate the specific penalties imposed for each action. 

A.1. The OCC has a wide range of supervisory and enforcement 

tools that it can impose upon a national bank to address serious 

concerns or deficiencies. These tools range from informal supervisory actions, such as a communication to the bank management 

and Board documenting a deficiency, or the development of a 

Memorandum of Understanding to correct a problem, to formal enforcement action, which could include Cease and Desist Orders, 

Consent Orders, Formal Agreements, civil monetary penalties, removals from banking, or criminal referrals. During the past 2 

years, the OCC has taken informal, or non-public, actions and has 

required that national bank mortgage servicers take specific actions to address outlined errors or concerns identified in our supervisory processes. We also have enforcement actions under consideration as a result of our foreclosure examinations of the eight largest national bank servicers. We hope to bring those matters to a 

conclusion in the near future. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON 

FROM EDWARD J. DEMARCO 

Q.1. What role do your Agencies play in ensuring that the documentation process, including the transfer of the note, is done properly? 

A.1. Fannie Mae and Freddie Mac (Enterprises) have contractual 

agreements with seller/servicers to service their loans, including 

processing foreclosures. These agreements require that seller/ 

servicers meet the requirements outlined in each Enterprises’ seller/servicer guide and all legal requirements. The Enterprises monitor seller/servicer requirements and have a range of remedies 

available under the terms of the contract if the seller/servicers do 

not meet the terms of the contract. The Federal Housing Finance 

Agency (FHFA), as conservator and regulator of the Enterprises, 

does not directly monitor compliance of the seller/servicers, but 

does review and monitor the Enterprises’ oversight actions. 

Generally, when a seller/servicer sells a mortgage loan to either 

Enterprise, it must deliver the original note for each mortgage 

loan, together with any power of attorney or modifying instrument 

(such as a modification agreement, conversion agreement, assumption of liability or release of liability agreement) to a document custodian, which holds the documents in trust for the Enterprises. 
482 

These custodians are under contract with the Enterprises and must 

meet specific requirements in their seller/servicer guides. 

Due to the recent problems identified with processing foreclosures, FHFA has begun a targeted review of the Enterprises’ 

oversight programs for seller/servicers and related attorney networks. The goal of the review is to ensure proper oversight and 

therefore proper processing of foreclosures and loan servicing. 

Q.2. During our last hearing on this topic, it was pointed out that 

Fannie Mae and Freddie Mac require the foreclosure process to go 

forward once initiated even if the homeowner seeks a modification. 

Does this comply with the single-family seller servicer guides for 

Fannie Mae and Freddie Mac regarding HAMP and Home Affordable Foreclosure Alternatives Program? 

A.2. The Enterprises comply with the Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives (HAFA) guidelines and suspend foreclosure processing 

when certain milestones are reached. For example, the foreclosure 

process is suspended while a borrower is under a HAMP trial modification. The HAMP and HAFA guidelines do allow for continuing 

the foreclosure process, but not reaching the point of a foreclosure 

sale, while a modification is being negotiated. Due to the extended 

timeframe to complete foreclosure, anywhere from 6 months to 

more than a year depending on the State, the ability to continue 

the process is necessary to reduce the costs to the Enterprises. 

That said, the Enterprises’ servicers are expected to exhaust all 

possible foreclosure alternatives before initiating a foreclosure. 

Q.3. Would this include proceeding to a foreclosure sale while a 

modification is still being negotiated? 

A.3. Foreclosure sales at both Enterprises are suspended when a 

modification is under negotiation or pending. 

Q.4. As conservator, how does FHFA balance the benefits of mortgage modification with the benefits of a swift foreclosure process 

for homeowners and taxpayers, respectively? 

A.4. While FHFA remains committed to ensuring borrowers are 

presented with foreclosure alternatives, it is important to remember that FHFA has a legal obligation as Conservator to preserve 

and conserve the Enterprises’ assets. As I testified at the hearing, 

this means minimizing losses on delinquent mortgages. Clearly, 

foreclosure alternatives, including loan modifications, can reduce 

losses relative to foreclosure and benefit homeowners and neighborhoods, adding some measure of stability to local housing markets. 

But when these alternatives do not work, timely and accurate foreclosure processing is critical for minimizing taxpayer losses. 

The direct effect on taxpayers is thus: when an Enterprise-guaranteed mortgage is delinquent 4 months, the Enterprise removes 

the mortgage from the mortgage-backed security in which it was 

funded, paying off the security investors at par. The delinquent 

mortgage then goes on the balance sheet of the Enterprise, funded 

with debt issued by the Enterprise, debt supported by the Treasury 

Department’s Senior Preferred Stock Purchase Agreement. While 

awaiting foreclosure (or some foreclosure alternative), that loan is 

generating no revenue because the borrower has stopped paying, 
483 

but the Enterprise must keep paying interest on the debt supporting the mortgage. The cost of the delay is why it is critical to 

FHFA’s responsibilities as Conservator to ensure timely processing 

of foreclosure actions—the cost is ultimately borne by the taxpayer. 

I want to thank you for the time and effort that you and your 

staff have dedicated to this important issue. As conservator and 

regulator of the Enterprises, I am committed to working to resolving any issues in the foreclosure process. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON 

FROM TERENCE EDWARDS 

Q.1. There seems to be a good deal of confusion regarding what 

servicers are required to do when a borrower becomes delinquent. 

In your testimony, you state that servicers are required to offer 

HAMP eligible borrowers HAMP modifications before foreclosing on 

the property but you also defend the two track process. Can you 

clarify what the requirements are for modification and foreclosure? 

A.1. When a borrower falls behind on mortgage payments, Fannie 

Mae requires its servicers to follow a series of steps to develop and 

secure a solution that is tailored to the particular circumstances of 

the borrower. In doing so, Fannie Mae expects that servicers 

should specifically set out to borrowers how the modification process will work and in a manner that does not create confusion. 

Servicers are responsible for communicating with borrowers. We 

believe our efforts to encourage servicers to create a single point of 

contact with each borrower will improve communication. 

Set forth below are the foreclosure prevention alternatives that 

we require servicers to offer to borrowers and an explanation of 

when servicers are required to offer such alternatives. 

Foreclosure Prevention Alternatives 

When a borrower is delinquent, we require servicers to first determine whether the borrower qualifies for a HAMP modification. 

A HAMP modification will take a borrower’s monthly payment to 

a level where his or her first-lien mortgage debt-to-income (DTI) 

ratio is 31 percent. Servicers are required to offer a HAMP modification to any borrower that meets the eligibility requirements of 

that program. 

If the borrower does not qualify for HAMP, servicers are required 

to consider other home retention options. As discussed below, these 

other options include modification solutions developed by Fannie 

Mae specifically for borrowers who are not eligible for HAMP. 

Fannie Mae’s current modification options include opportunities to 

lower interest rates, forbear principal, or extend terms, and are all 

designed to help borrowers achieve an affordable, sustainable payment. 

• If the borrower is facing a short-term hardship (for example, 

temporary sick leave, seasonal furlough, or life transition), 

then a servicer is required to offer the borrower a forbearance 

or a repayment plan. These plans provide immediate relief to 

borrowers who need it. We also permit up to 6 months of payment relief for homeowners who are struggling to make their 
484 

mortgage payments because of unemployment with an extension up to 12 months under extreme circumstances. 

• If the borrower is facing a long-term hardship (for example, a 

reduction in income, long-term disability, or death of a co-borrower), and is not eligible for HAMP, servicers are required to 

offer a Fannie Mae proprietary modification that is designed to 

modify the borrower’s mortgage payment to an affordable level. 

There are two programs. First, Fannie Mae has developed a 

modification option that assists borrowers who did not qualify 

for HAMP but could achieve a DTI ratio of 24 percent. 

Servicers are directed to evaluate borrowers for this modification after the HAMP evaluation. Second, we also require 

servicers to offer a modification that uses a formula-driven approach to develop modification terms rather than meeting a 

particular DTI ratio. The approach seeks to offer meaningful 

payment relief for most borrowers and helps reduce re-default 

rates. This modification program has defined steps that start 

with a permanent rate reduction, then a term extension and finally, a non-interest bearing and non-amortizing principal forbearance of a portion of the total amount due. 

Our ultimate goal is to help borrowers avoid foreclosure. If none 

of our modification plans can help a borrower reach an affordable 

payment, servicers are required to offer other foreclosure avoidance 

options, including a short sale or a deed-in-lieu of foreclosure. With 

short sales, we permit the borrower to sell the property at a price 

that is less than the mortgage debt obligation and provides clear 

title at sale. The deed-in-lieu of foreclosure allows the borrower the 

ability to deed the home back to us and gives them time to transition out of the home. For deed-in-lieu, the borrower is also offered 

a financial incentive to help them relocate to alternative housing, 

and we also offer options for the borrower to rent the home back 

for a period of time if they wish to remain in the home and community. 

Foreclosure Prevention Process 

Our expectation is that servicers will explore HAMP and the alternative home retention options addressed above during the early 

stages of the borrower’s delinquency (typically within the first 90 

days or when three payments are missed). During this time, borrowers are on a single track and no foreclosure actions should be 

taken against the borrower. As addressed in the answer to the next 

question, our requirements set forth specific timelines for how and 

when a servicer is required to contact a delinquent borrower to determine their eligibility for a modification or other foreclosure prevention alternative. These guidelines require early intervention 

with a delinquent borrower so that foreclosure prevention alternatives are considered soon after the first missed payment and well 

before foreclosure referral. 

Given the length of time that the foreclosure process requires in 

many states, servicers are generally required to refer loans to foreclosure shortly after the borrower has missed three payments. This 

timeframe may be extended if necessary in order to comply with 

our requirements relating to the HAMP and HAFA programs or if 
485 

the borrower has implemented a workout arrangement, such as a 

forbearance or repayment plan. 

In addition, we require servicers to continue to solicit borrowers 

for modifications after the loan has been referred to foreclosure and 

while the foreclosure process is continuing. Despite our requirements for early intervention, in some cases it is not until a borrower faces the reality of a foreclosure proceeding that they are 

ready to consider a workout solution. Accordingly, in order to help 

these borrowers, there are circumstances where the foreclosure 

process may happen simultaneously with a borrower being considered for a modification. 

To avoid foreclosure sales where a modification may still be possible, Fannie Mae requires that 30 days prior to going to foreclosure sale, the servicer must review the borrower’s account to 

confirm all required communications have been sent and no payment or workout arrangements are pending. 

Again, servicers have the responsibility to communicate with borrowers. We expect servicers to discuss with borrowers the different 

steps that may occur during the modification process in a clear and 

concise manner to avoid confusion. 

(References: Fannie Mae Servicing Guide: VII, Section 610.04.04: 

Temporary Suspension of Foreclosure Proceedings) 

Q.2. If foreclosures are not initiated until after 90 days of delinquency, is there a requirement to contact the borrower with the option of a modification or remedy as soon as a borrower misses a 

payment? 

A.2. Fannie Mae has imposed a number of requirements on 

servicers on how and when they should contact delinquent borrowers. In April 2010, Fannie Mae released new requirements on 

this topic. At that time, servicers were instructed to implement 

them as soon as possible, but no later than January 1, 2011. 

Fannie Mae requires that servicers call delinquent borrowers 3 

to 15 days after the first missed payment. Starting on day 16 after 

a missed payment the servicer is required to make a minimum of 

two calls per week until: 

• The servicer has contacted the borrower and a promise to pay 

or payment is received; 

• The borrower has worked out a way to resolve their delinquency in accordance with Fannie Mae’s guidelines; or 

• The case is removed from the calling queue due to justifiable 

reasons based on a discussion with the borrower. 

If the initial calls have not resulted in a resolution of the delinquency or the initiation of a modification for the borrower, the 

servicer is instructed to send a letter soliciting the borrower for a 

modification or other foreclosure prevention alternative between 

day 35 and day 45 after the first missed payment. A reminder letter is sent 15 days after this solicitation letter. During the 30-day 

period after the servicer’s first solicitation letter, the servicer is required to make a minimum of six calls to the borrower in an attempt to discuss the letter with the borrower and to work with the 

borrower to determine the appropriate foreclosure prevention solution. 
486 

Prior to day 80, the servicer must send a second foreclosure solicitation letter. This letter must be sent via overnight mail, via 2-day 

delivery or via hand delivery. If a workout is still not pending, the 

servicer must send a third letter to the borrower within 45 days 

after referral to foreclosure offering a preapproved workout solution, which could be a HAMP modification, another modification or 

an alternative foreclosure prevention option. Fannie Mae also requires that additional solicitation letters must be sent every 90 

days until the delinquency is resolved or a foreclosure sale occurs. 

Finally, to avoid foreclosure sales where modifications may still 

be possible, Fannie Mae requires that 30 days prior to going to 

foreclosure sale, the servicer must review the borrower’s account to 

confirm all required communication have been sent and no payment or workout arrangements are pending. 

(References: Announcement SVC–2010–06 and Fannie Mae Servicing Guide Part VII, Chapter 2) 

Q.3. What kind of oversight does Fannie Mae have over its 

servicers and what kind of remedies are required if a servicer does 

not comply with the servicing agreement? 

A.3. We expect servicers to comply with our requirements. 

Servicers are required to maintain adequate internal audit and 

management control systems to ensure that the mortgages are 

serviced in accordance with sound mortgage banking and accounting principles; guard against dishonest, fraudulent, or negligent 

acts; and guard against errors and omissions by officers, employees, 

or other authorized persons. 

We oversee servicer operations in a number of ways: 

• We monitor servicers through weekly field reports and monthly 

onsite reviews into servicers’ operations, performance and compliance with guidelines; 

• We have increased our onsite presence from 104 to 204 people 

this year at the various servicer offices to train, provide guidance, oversee and make decisions on Fannie Mae cases, where 

appropriate; 

• We have officer-level employees assigned to servicers where 

our exposure is the greatest; and 

• Our internal Lender Assessment of Risk and Controls (LARC) 

team performs an independent assessment of seller/servicer 

compliance with Fannie Mae guide requirements and the assessment of seller/servicer operational risk and controls. 

If we determine that a servicer is failing to comply with our servicing guidelines, Fannie Mae can pursue a variety of options, including: 

• imposing compensatory fees or formal sanctions; 

• requiring the lender to repurchase a mortgage; 

• requiring the lender to indemnify Fannie Mae for losses; and/ 

or 

• terminating the servicer’s contract/servicing arrangement or 

the right to add new mortgage loans to its Fannie Mae portfolio. 
487 

However, our first priority is to work with servicers to improve 

their processes. When we see servicers are constrained, struggling, 

or not performing, we have implemented additional measures to 

address those issues. For example, we have transferred hundreds 

of thousands of loans in the last year to servicers that can do the 

job more efficiently and effectively. While we have taken this step, 

we are also limited in how much we can transfer or whether we 

can terminate servicer contracts because approximately 60 percent 

of mortgage loan servicing is controlled by five large financial institutions and there is not capacity in the remaining portion of the 

industry to handle the volume currently assigned to the largest 

servicers. 

In addition to transferring servicing, we also: 

• Provide more Fannie Mae review of loan files (rather than delegate such review to the servicers) in order to ensure that 

servicers are making the right decisions and assisting borrowers through potential roadblocks to a workout. 

• Contract with component servicing providers to help fill in capacity where our servicers lack resources and expertise and to 

help with door knocking, documentation collecting, fulfillment, 

and related borrower outreach activity. 

• Created several escalation desks within Fannie Mae for 

servicers to use to resolve issues related to mortgage insurers, 

subordinate liens/seconds and short sales that all help facilitate foreclosure prevention efforts. 

While Fannie Mae owns or guarantees more than 35 percent of 

the single-family mortgages in America, only about 4.5 percent of 

our borrowers are 90 days or more behind on their payments, as 

compared to the serious delinquency rate of nearly 9 percent across 

the industry. Accordingly, servicers are handling many more delinquent loans from other investors than those owned or guaranteed 

by Fannie Mae. Nevertheless, we expect our servicers to comply 

with our requirements as it relates to our loans and we are continuing to review other measures that we can take to improve 

servicer performance. 

(Reference: Fannie Mae Servicing Guide Part I, Section 301) 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON 

FROM KURT EGGERT 

Q.1. You speak with great conviction about the need for regulators 

to take action. What actions do you believe they should be taking? 

Q.2. One of the criticisms raised in this hearing is improper incentives. How would you structure incentives and disincentives to 

make the servicing, modification and if necessary foreclosure processes function better? 

A.1.–A.2. My name is Kurt Eggert, and I am a professor of law at 

Chapman University School of Law. I testified at the hearing, 

‘‘Problems in Mortgage Servicing From Modification to Foreclosure 

Part II’’ in front of the Senate U.S. Senate Committee on Banking, 

Housing, and Urban Affairs. After that hearing, I was asked to 

submit supplemental testimony to this Committee regarding what 
488 

1 A copy of that written testimony and a video archive of the oral testimony can be found at: 

http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&HearinglID=ea6 

d7672-f492-4b1f-be71-b0b658b48bef. 

actions regulators should be taking to resolve the current problems 

in mortgage servicing and how to correct the incentive structure for 

mortgage servicing. I appreciate being asked to respond to additional questions on this subject, and my supplemental testimony 

should be read in conjunction with my initial testimony for the 

above hearing, which laid out the servicer abuses and other problems we are currently seeing, and also the causes of those problems 

and why servicers are acting, and so far have been free to act, in 

those ways.1

Establishment of National Standards: 

The most important step that Federal regulators could take 

would be, as quickly as feasible, to: (a) establish national standards 

for mortgage servicers, and (b) give a Federal agency the power to 

enforce those standards, including the power to issue meaningful 

sanctions for the violation of those standards. Mortgage servicers 

should be licensed by a Federal regulator, and that regulator 

should have the authority to take action against servicers, including being able to suspend or revoke the servicers’ license to service 

in appropriate circumstances. For too long, mortgage servicing has 

been relatively unregulated, with no one agency given the task of 

overseeing servicing and preventing abuses by servicers by designing national regulations intended to prevent servicer abuse and 

failure to modify loans where appropriate. 

Instead of an organized system of regulation, what we have seen 

is haphazard and so far ineffectual regulation. The primary Federal 

protection for consumer debtors is the Fair Debt Collection Practices Act, which is designed to protect borrowers from overly aggressive debt collectors. However, the act does not apply to mortgage servicers, unless they are collecting on a mortgage that they 

received when it was already in default. Furthermore, the Fair 

Debt Collection Practices Act was not designed with mortgage servicing in mind, so even where it does apply, it is a poor fit to prevent many of the problems we see in the servicing industry. 

Other laws regulating servicers also do little to quell abusive 

practices by servicers. While the Truth in Lending Act until recently little affected servicers, it was amended in 2009 to provide 

servicers some safe harbor from liability to investors should 

servicers enter into loan modifications with borrowers. The goal 

was to lessen the effect of ‘‘tranche warfare,’’ whereby some investors could claim that their individual interests were harmed by a 

loan modification, even if the modification helped investors as a 

whole. While this amendment gives servicers protection against 

some claims as they modify loans, it does not give borrowers more 

leverage in obtaining such loan modifications. 

Another law that affects servicing is the Real Estate Settlement 

Procedures Act (RESPA), which is designed to inform borrowers 

when the servicing rights to their mortgage have been transferred, 

give them some disclosure of how that transfer will affect them, 

and provide some protection from late fees during transfer. In addition, RESPA allows borrowers to seek some information regarding 
489 

2 Adam J. Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. On Reg. (forthcoming 2011). 3For a discussion of Fairbanks’s actions and the FTC litigation against Fairbanks, see Kurt 

Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing Pol’y Debate 753, 

761–67 (2004), available at SSRN: http://ssrn.com/abstract=992095. 4See the Federal Trade Commission’s press release regarding this settlement modification, 

FTC, Subprime Mortgage Servicer Agree to Modified Settlement, August 2, 2007, available at 

http://www.ftc.gov/opa/2007/08/sps.shtm. 5See the Federal Trade Commission’s press release regarding this settlement, Bear Stearns and EMC Mortgage to Pay $28 Million to Settle FTC Charges of Unlawful Mortgage Servicing 

and Debt Collection Practices, September 9, 2008, available at http://www.ftc.gov/opa/2008/ 

09/emc.shtm. 6See the Federal Trade Commission’s press release regarding the Countrywide settlement, Countrywide Will Pay $108 Million for Overcharging Struggling Homeowners; Loan Servicer Inflated Fees, Mishandled Loans of Borrowers in Bankruptcy, June 7, 2010, available at http:// 

www.ftc.gov/opa/2010/06/countrywide.shtm. 

their loans’ payment history and current status and requires 

servicers to respond to those requests as well as requests that errors in the account be corrected. While RESPA can be useful for 

borrowers, its usefulness is relatively limited and does not reach 

many of the current issues embroiling the servicing industry. As 

noted by Adam Levitin and Tara Twomey: 

RESPA’s significance for servicing is not the rights it grants, but those it 

does not. RESPA does not allow borrowers to choose their servicer or have 

any say in how the servicer handles their loan beyond complaining of errors. If a borrower is dissatisfied with a servicer, the borrower can sue the 

servicer for specific acts, but has no ability to switch servicers, and there 

is no cause of action for a homeowner not offered a loss mitigation option 

instead of foreclosure.2

While the existing statutory framework provides little protection 

for borrowers from the improper fees, shoddy paperwork, and unnecessary foreclosures that have marked the mortgage servicing industry, some Federal agencies have the power to take steps against 

such practices and have on occasion used that power. For example, 

the Federal Trade Commission has reached important settlements 

with mortgage servicers accused of abusive treatment of borrowers, 

including a 2003 settlement with Fairbanks Capital providing a 

$40 million fund for injured borrowers, which included a set of 

‘‘best practices’’ guidelines for mortgage servicing,3 a 2007 modification of that settlement with additional guidelines,4 a 2008 settlement for $28 million with Bear Stearns and its servicers, that included the establishment of a data integrity system,5 and a settlement for $108 million with Countrywide’s loan servicing operation, 

which the FTC had accused of inflating loan fees.6 While such actions are helpful, the FTC’s actions have been too limited to have 

a significant effect on the servicing industry. 

Other Federal agencies or quasi-Federal organizations have significant power to affect servicing organizations under their regulatory jurisdiction but so far have focused more on the safety and 

soundness of their regulated institutions or on their own pecuniary 

gain than on preventing servicer misbehavior that primarily damages borrowers. In this December 1, 2010 hearing of the Senate 

Committee on Banking, Housing, and Urban Affairs, officials from 

the Office of the Comptroller of the Currency, the Homeownership 

Preservation Office of the United States Department of the Treasury, and the Federal Housing Finance Agency, as well as a Governor of the Board of Governors of the Federal Reserve System, all 

testified about problems in the mortgage and servicing industry. By 

and large, according to their testimony, they acknowledged that 
490 

7See Testimony of John Walsh, Acting Comptroller of the Currency, at a hearing before the 

U.S. Senate Committee on Banking, Housing, and Urban Affairs at a Hearing Entitled: ‘‘Problems in Mortgage Servicing From Modification to Foreclosure Part II.’’ Available at: http:// 

banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&HearinglID=ea6d7672- 

f492-4b1f-be71-b0b658b48bef. 8See Testimony of Daniel K. Tarullo, Member in the Board of Governors of the Federal Reserve System, at a hearing before the U.S. Senate Committee on Banking, Housing, and Urban 

Affairs At a Hearing Entitled: ‘‘Problems in Mortgage Servicing From Modification to Foreclosure Part II.’’ Available at: http://banking.senate.gov/public/index.cfm?FuseAction= 

Hearings.Hearing&HearinglID=ea6d7672-f492-4b1f-be71-b0b658b48bef. 

they had some authority over mortgage servicing, that they recognized that there was a significant problem with mortgage servicing 

as it stands today, and that they were currently investigating the 

scope of the problem and hoped to have some idea soon how widespread the problem was and what they could and should do about 

it. 

While such investigation is no doubt necessary and could be a 

crucial step in reining in servicer misbehavior, so long as it is followed by appropriate sanction and direction of servicers, it is telling that to a great extent, this widespread servicer abuse appears 

to have come as some surprise to these agencies, despite their 

power to investigate and regulate servicers. John Walsh, Acting 

Comptroller of the Currency noted, ‘‘The OCC supervises all national banks and their operating subsidiaries, including their mortgage servicing operations. The servicing portfolios of the eight largest national bank mortgage servicers account for approximately 63 

percent of all mortgages outstanding in the United States—nearly 

33.3 million loans totaling almost $5.8 trillion in principal balances 

as of June 30, 2010.’’7 With such broad supervisory powers over 

such a significant segment of the servicing industry, the OCC 

should have been in position to monitor ongoing servicer behavior, 

to detect servicer misbehavior as it happened, and to administer 

corrective measures, including real sanctions for servicer misbehavior. However, it appears that only now is the OCC making an 

intensive investigation into foreclosure misconduct by servicers and 

into ‘‘whether foreclosed borrowers were appropriately considered 

for alternative loss mitigation actions such as a loan modification.’’ 

According to this testimony, the OCC hopes to have analysis of its 

findings completed in January, 2011. Given the lackadaisical attitude that the OCC has demonstrated toward servicer misbehavior, 

it is reasonable to worry that the OCC will be using this investigation as a way to stall for time and in the end will not take meaningful action to deter and punish servicer misbehavior. 

Similarly, Daniel K. Tarullo, a Governor in the Board of Governors of the Federal Reserve System, noted that ‘‘The Federal Reserve serves as the primary Federal regulator for two of the 10 

largest servicers affiliated with banking organizations. . .’’ After 

noting that the Federal Reserve is participating with other Federal 

agencies in a review of servicer behavior, Tarullo notes the size of 

the problem they are discovering: 

While quite preliminary, the banking agencies’ findings from the supervisory review suggest significant weaknesses in risk-management, quality 

control, audit, and compliance practices as underlying factors contributing 

to the problems associated with mortgage servicing and foreclosure documentation. We have also found shortcomings in staff training, coordination 

among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services.8
491 

9See Testimony of Phyllis Caldwell, Chief of Homeownership Preservation Office of the U.S. 

Department of the Treasury, at a hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs At a Hearing Entitled: ‘‘Problems in Mortgage Servicing From Modification to Foreclosure Part II.’’ Available at: http://banking.senate.gov/public/ 

index.cfm?FuseAction=Hearings.Hearing&HearinglID=ea6d7672-f492-4b1f-be71-b0b658b48bef. 10See, for example, news of a letter signed by a group of academics, analysts, and investors 

urging the establishment of a set of national standards for mortgage servicing, described in Alan 

Zibel, Regulators Urged to Devise National Loan-Servicing Standards, Wall Street Journal, December 21, 2010, available at: http://blogs.wsj.com/developments/2010/12/21/regulatorsurged-to-devise-national-loan-servicing-standards. 11See, among other testimony, Diane E. Thompson, Counsel, National Consumer Law Center, 

before the Senate Committee on Banking, Housing & Urban Affairs, in a Hearing entitled ‘‘Problems in Mortgage Servicing From Modification to Foreclosure’’ November 16, 2010, Adam 

Levitin’s Testimony before the House Financial Services Committee Subcommittee on Housing 

and Community Opportunity in a hearing entitled ‘‘Robo-Singing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing’’ November 18, 2010, and Julia Gordon, Center 

for Responsible Lending, Before the Congressional Oversight Panel, in a hearing entitled 

‘‘HAMP, Servicer Abuses, and Foreclosure Prevention Strategies,’’ October 27, 2010. 

Again, the Federal Reserve is investigating the problems in mortgage servicing and hopes to do something about the problems it is 

finding in the near future, but does not appear to have acted aggressively to curb servicer misbehavior in the past. One wonders 

what confidence can one have that the Federal Reserve will take 

aggressive action to rein in such misbehavior in the future. 

When Phyllis Caldwell, Chief of Homeownership Preservation Office of the U.S. Department of the Treasury testified, she indicated 

that Treasury is taking at least some limited action, stating, 

‘‘While Treasury does not have the authority to regulate the foreclosure practices of financial institutions, nor to ensure that those 

practices conform to the law, it is working closely with agencies 

that do have such authority.’’ 

In addition, according to Caldwell, ‘‘The Federal Housing Administration (FHA) has been reviewing servicers of loans it insures for 

compliance with loss mitigation requirements.’’ However, it appears 

that even though the Making Home Affordable program, and its 

key component HAMP, are designed to encourage mortgage 

servicers to generate more loan modifications, in a key issue, which 

is ensuring that servicers hire sufficient staff to perform those 

hands-on loan modifications, Caldwell states, ‘‘To remedy servicer 

shortcomings, we have urged servicers to rapidly increase staffing 

and improve customer service.’’9 We should be well beyond the 

stage of merely ‘‘urging’’ servicers to take the steps needed to ensure appropriate loan modifications are being made. Servicers in 

the HAMP program should be mandated to have staffing adequate 

to fulfill their HAMP obligations. 

While some have been arguing for national mortgage standards 

for years, those calls have recently grown louder, and for good reason.10 As noted in my testimony to this Committee, as well as the 

recent testimony of others to this and other Congressional committees, the mortgage servicing industry is regularly engaging in abusive practices, such as pushing borrowers into foreclosure with junk 

fees, failing to credit their payments in a timely fashion, and foreclosing rather than implementing loan modifications that would 

benefit both investor and borrower alike.11 A recent survey of consumer attorneys indicates that a large percentage of the borrowers 

they represent have had foreclosure proceeding initiated either due 

to ‘‘improper fees or payment processing’’ or while the borrower is 
492 

12 National Association of Consumer Advocates and the National Consumer Law Center, Survey: Servicers Continue to Wrongfully Initiate Foreclosures, December 15, 2010, available at: 

http://www.naca.net/lassets/shared/634280136429845000.pdf. 13 U.S. Department of the Treasury, Financial Agency Agreement Between U.S. Department of 

the Treasury and Fannie Mae, Feb. 18, 2009, available at www.financialstability.gov/docs/ 

ContractsAgreements/Fannie%20Mae%20FAA%20021809%20.pdf. 14 Id., at Exhibit A, p. 1. 15 U.S. Department of the Treasury, Financial Agency Agreement Between the U.S. Department of the Treasury and Freddie Mac, Feb. 18, 2009, available at www.financialstability.gov/ 

docs/ContractsAgreements/Freddie%20Mac%20Financial%20Agency%20Agreement.pdf, at Exhibit A, p. 1. 16 Congressional Oversight Panel, December Oversight Report, December 14, 2010, at p.50. 

‘‘awaiting a loan modification.’’12 One reason that servicers have 

been able to continue such behavior is that there currently is no 

effective Federal regulation or supervision over them, so that 

servicers are free to act in their own best interests rather than in 

such a way that maximizes value to investors while avoiding unnecessary foreclosures. 

Central to this problem is that Fannie Mae and Freddie Mac, 

quasi-governmental bodies with their own pecuniary interests at 

stake, have been given much of the task of regulating servicer conduct, both directly for the loans they have purchased or guaranteed, and through the HAMP program. Treasury granted Fannie 

and Freddie this power by entering into contracts with Fannie and 

Freddie to oversee HAMP. Under those contracts, Fannie Mae is 

designated as the point of contact for servicers that participate in 

HAMP, not only to pay them for their HAMP modifications, but 

also to instruct them how loans should be modified.13 Fannie Mae 

is also supposed to be the HAMP program’s primary collector and 

keeper of data and other records regarding HAMP and loan modifications, and is supposed to ‘‘help design and execute a program 

that implements standardized, streamlined mortgage modifications 

for all types of servicers, regardless of the risk holder (e.g., bank, 

PLS, GSE MBS, etc.), and that lowers monthly payments for qualified borrowers.’’14

Freddie Mac, on the other hand, was hired by Treasury to be its 

program compliance agent, to examine and investigate mortgage 

servicers to ensure that servicers comply with the published rules 

of HAMP and to report to Treasury the results of its investigations.15 Freddie Mac has the authority to conduct onsite audits of 

servicers and, in consultation with Treasury, require certain corrective measures by servicers, such as suspending foreclosures. Treasury, through the actions of its MHA Compliance Committee, can 

impose penalties on servicers that fail to comply with their HAMP 

obligations, such as withholding or requiring repayment of incentive payments. Apparently, Treasury has not used this power to 

any significant extent, however. According to the Congressional 

Oversight Panel’s December report: 

. . . Treasury has seemed reluctant to do more than vaguely threaten the 

potential for clawbacks of HAMP payments. Despite rampant anecdotal stories of servicer errors, to date, no servicer has experienced a clawback or 

other financial repercussion. The steepest penalty Treasury has levied to 

date has been withholding payments to servicers due to data issues.16

At the time Treasury contracted with Fannie and Freddie to run 

HAMP, some thought that Fannie and Freddie would have greater 

expertise in servicer oversight than any in the Treasury Department, given Fannie and Freddie’s work with servicers for their own 
493 

17 Congressional Oversight Panel, December Oversight Report, December 14, 2010, at p.82, 

footnotes omitted. The Panel added, ‘‘The Panel condemns this sentiment. If Freddie Mac is 

hesitant to jeopardize their relationships with servicers to enforce their rights in their own book 

of business, it is reasonable to worry that they may be similarly unwilling to risk these relationships on Treasury’s behalf by aggressively overseeing HAMP servicers.’’ Id. 18 U.S. Department of the Treasury, Financial Agency Agreement Between the U.S. Department 

of the Treasury and Freddie Mac, Feb. 18, 2009, available at www.financialstability.gov/docs/ 

ContractsAgreements/Freddie%20Mac%20Financial%20Agency%20Agreement.pdf, at Exhibit F, 

at p. F–6. 

loans. However, it has become apparent that Fannie and Freddie 

are failing to perform their oversight function, likely in large part 

because their own financial interests conflict with regulating 

servicer behavior to protect borrowers from abusive practices. The 

Congressional Oversight Panel has noted Fannie and Freddie’s self 

interest in overseeing HAMP, and how that self-interest may limit 

Freddie’s willingness to engage in aggressive oversight of mortgage 

servicers. Regarding Freddie Mac, the Panel’s most recent report 

stated: 

In response to revelations that servicers have been using ‘‘robo-signers’’ to 

submit false affidavits in thousands of foreclosure cases, Freddie Mac noted 

that ‘‘we believe that our seller/servicers would be in violation of their servicing contracts with us to the extent that they improperly executed documents in foreclosure or bankruptcy proceedings.’’ Trying to enforce Freddie 

Mac contractual rights, however, ‘‘may negatively impact our relationships 

with these seller/servicers, some of which are among our largest sources of 

mortgage loans.’’17

If Freddie Mac is allowing the impact on seller/servicers, and hence 

its relationship with seller/servicers, to affect its enforcement of 

HAMP guidelines and contracts, Freddie Mac seems to be in direct 

violation of its obligation, under its contract with the Treasury Department, to avoid conflicts of interest between its duties under 

that contract and its own business interests. The agreement between Freddie Mac as ‘‘Financial Agent’’ and the Treasury Department specifically states: 

The Financial Agent will adopt an internal policy, to be approved by the 

Treasury Department, establishing the principles that, in the performance 

of the Financial Agent’s services under this FAA, (a) all decisions are to be 

made solely based on the objectives and applicable requirements of the program and that the program is to be administered uniformly, and (b) employees of the Financial Agent are not to consider (i) potential benefit to 

either mortgage sellers or mortgage servicers with whom the Financial 

Agent does business or (ii) potential benefit to the Financial Agent from 

modification of mortgages that it owns or that back Mortgage Participate 

Certifications that it has guaranteed.18

Also weakening the oversight of mortgage servicers is the voluntary nature of this HAMP oversight. While it is not clear what 

the servicers’ rights are, some are concerned that if Treasury 

through Fannie and Freddie crack down on servicer behavior, then 

servicers will attempt to leave the HAMP program to avoid sanction. 

Because of the great weakness of the current regulation of mortgage servicers, it seems clear that a new system of national mortgage servicer regulation is in order. A natural agency to draft such 

regulations would be the new Consumer Financial Protection Bureau, to be established as mandated by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. While this Bureau is 

ramping up, however, it is not clear how soon it will be in a position to draft national servicing regulations and to enforce them 
494 

19See Congressional Oversight Panel, December Oversight Report, December 14, 2010, at p. 

65. 20 Id., at p. 75–76. 

once it officially opens for business next July, 2011. In the more 

immediate short term, the FDIC could and should build servicing 

regulations into its risk retention requirements for asset-backed 

securitizations, as mandated by Section 941 of Dodd-Frank. The 

purposes of such risk retention requirements include to promote 

the public interest and to protect investors, and national servicer 

requirements could be designed to accomplish both goals. When 

mortgage servicing breaks down and servicers foreclose rather than 

providing loan modifications that would benefit both investors and 

borrowers, that action increases the risk of loss to investors and so 

runs counter to the goals of risk retention. 

Whatever agency drafts national regulations regarding mortgage 

servicing, they should follow several overarching principals. First of 

all, such Federal servicing regulations should constitute a floor 

rather than a ceiling of such regulation and should not preempt simultaneous State regulation of mortgage servicers. Some states 

have been much harder hit than others in the subprime mortgage 

meltdown, and so may require more strenuous regulation of mortgage servicers in order to protect the State from excessive foreclosures. One of the lessons we should have learned from the Federal preemption of State anti-predatory lending statutes in the last 

decade is the importance of allowing individual states to provide 

additional protections to their citizens when needed, especially 

where Federal agencies become captured by the industries that 

they are supposed to regulate. 

Another organizing principal should be attempting to ensure the 

transparency of the servicing and especially mortgage modification 

process. One problem borrowers have had is being in the dark 

about whether and when their loan modification might be granted, 

at what stage their modification decision is, whether the servicer 

claims that documents needed for a mortgage modification are 

missing and if so which documents, whether they are likely to meet 

the criteria for mortgage modifications, and if not, why they do not. 

If lenders have underwriting software that can determine whether 

a potential borrower is likely to be approved for a loan, it should 

not be that difficult to design a Web portal that allows loan counselors and even borrowers to discover this information. 

Apparently, such portals are on the drawing boards, with Treasury planning a borrower portal so that borrowers can conduct their 

own analysis to see if they should be eligible for a loan modification, applying the Net Present Value (NPV) analysis, seeing whether such a modification would make the most economic sense to 

their owners of their loan.19 The Congressional Oversight Panel 

‘‘has repeatedly recommended that Treasury and Fannie Mae develop a Web portal to allow borrowers to submit and track modification applications, to deliver application documents to servicers, 

and to centralize information.’’20 There currently exists a too-little 

used Web portal to allow loan counselors to manage loan modifications on behalf of borrowers, operated by HOPENOW, and this 
495 

21See Adam Levitin’s Testimony before the House Financial Services Committee Subcommittee on Housing and Community Opportunity ‘‘Robo-Singing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing’’ November 18, 2010, noting previous testimony 

from two bank officials that they own the second position mortgage on about 10 percent or more 

for the first position mortgages they services. 

should be expanded to allow borrowers to input documentation directly and made mandatory for mortgage servicers. 

Another overarching principal of servicer regulation should be to 

attempt to minimize servicer conflict of interest to the extent possible. Mortgage servicers currently act even in the face of a direct 

conflict of interest. For example, servicers will service first position 

mortgages even where the servicer or its parent organization owns 

a junior mortgage, so that the value of the junior mortgage is dependent on how the senior mortgage is serviced.21 This conflict of 

interest may affect the servicer’s willingness to engage in loan 

modifications, as it may be tempted to protect its parent company’s 

interest in the second mortgage. Similarly, it should be considered 

a conflict of interest for a servicer either to ‘‘short’’ the mortgagebacked securities for which it is acting as a servicer or to be affiliated with another company that is shorting those securities. 

Another conflict of interest that should be considered is when 

servicers service mortgages that they themselves originated, either 

directly or through an affiliated organization. Investors have 

learned, to their chagrin, the difficulty of convincing servicers to 

put back loans that do not meet underwriting standards when it 

is the servicer or the servicer’s affiliated organization that would 

have to repurchase the loans. 

Servicing mortgages is currently quite profitable, with a significant portion of the profits built into the servicers’ basic fees for collecting mortgage payments. Resolving problem loans, especially 

through mortgage modification, can be a significant expense, as it 

often requires significant hands-on activity by the servicers. 

Servicers have responded to this allocation of profit and cost by 

reaping the profits of economies of scale in the collection of mortgage payments, while minimizing the costs of hands-on loan modifications. 

Federal regulation should act to tie the profits of payment collection with the costs of appropriate mortgage modification, so 

servicers that fail to engage in the latter risk losing the former. 

Currently, this profit and cost are not effectively tied together, as 

investors have been unable to rein in servicer misbehavior, borrowers are unable to force servicers to make appropriate modifications, and Freddie, Fannie, and Federal regulators have done too 

little to force servicers to spend the money to engage in 

thenecessary widespread modifications. 

Specific Regulations 

The following are specific recommendations that are designed to 

realign servicer incentives to constrain abusive practices and encourage appropriate loan modifications. In course of drafting regulations governing servicers, whichever agency takes on that task 

should consider making rules such as the following: 

• Require servicers servicing more than a set number of loans to 

be licensed by the Federal agency given the task of overseeing 
496 

the servicing industry. Provide the Federal regulator with the 

power to suspend or revoke that license or otherwise sanction 

the servicers for abusive behavior or failure to perform its duties as servicer. 

• Require prompt crediting of payments and prompt correction of 

miscounted or misapplied payments, combined with rules mandating that payments made be first applied to principal and interest and only then to late fees. 

• Limit late fees and other fees to a sum commensurate with the 

actual additional cost to servicers and investors of the late payment or other action that engendered the fee, so that late fees 

are not a profit center, but rather are merely repayment for 

additional costs to servicers and investors. 

• Require that once a loan is a certain number of days delinquent, perhaps 90 days, that servicing of the loan be transferred to a special servicer, so that the servicer is motivated to 

work with borrowers to prevent them from becoming 90 days 

or more late and no longer benefits from late fees or other fees 

from borrowers with very delinquent loans that it has failed to 

resolve. 

• Ban the two-track system whereby servicers are processing 

both a loan modification and a foreclosure for borrowers simultaneously. Servicers should be required to evaluate homeowners for a loan modification before they can even initiate 

foreclosure proceedings. Without determining whether the investors’ return would be maximized through a loan modification, servicers cannot know whether a foreclosure is appropriate, and there appear to have been too many foreclosures 

that occur as borrowers are finalizing loan modifications. 

• Mandate a mediation and appeal system, whereby borrowers 

can request mediation with servicers before foreclosure and 

borrowers who meet a baseline test that indicates that they 

may be eligible for loan modifications that maximize the net 

present value to investors can appeal a denial by servicers of 

such loan modification. To be eligible for such appeal, borrowers should submit evidence of their current income and assets. 

• Mandate random samples of servicers’ fees, servicing and payment history, designed to detect abusive servicing fees. Make 

the results of servicer investigation public, after allowing response by servicer. 

• Require servicers to seek modification and/or waiver of any 

pooling and servicing agreement that limits the number or 

kinds of loan modifications, beyond those seeking to maximize 

investor return. 

• Where servicer claims that a loan modification was denied because of investor restrictions on loan modifications, require 

servicers to provide both the borrowers and the investors with 

documentation of such investor restrictions. 
497 

22See Supplemental Directive 10–15—Case Escalation Process/Dodd-Frank Act NPV Notices, 

issued November 3, 2010, available at: https://www.hmpadmin.com/portal/programs/docs/ 

hamplservicer/sd1015.pdf. 

Actions Federal Agencies Should Take Now, Pending Further Servicer Regulation 

While the creation of national servicing regulations is a crucial 

step toward limiting servicer abuse, and one that should be taken 

with all due speed, there are interim measures that existing Federal regulators can take in order to curb servicer abuses, minimize 

servicer conflicts of interest and correct misaligned servicer incentives. The primary entities that could immediately ramp up 

servicer regulation are Fannie Mae and Freddie Mac, under what 

should be beefed-up supervision by the Treasury Department. 

Fannie and Freddie have both the authority granted to them pursuant to their HAMP contracts with the Treasury Department, but 

also have direct powers over servicers through their own contracts 

with seller/servicers, both on the loan origination side and on the 

servicing side. Fannie and Freddie appear loathe to apply this authority sufficiently to force servicers to engage in sufficient loan 

modifications, no doubt at least in some part because they do not 

want to threaten their other business relationships with these seller/servicers. 

The Treasury Department should demand changes from Fannie 

and Freddie to strengthen their oversight of servicers, using all of 

the powers at its disposal. Fannie and Freddie should rigorously 

enforce HAMP guidelines and penalize servicers that violate these 

guidelines, and Treasury should, as necessary, step in to mandate 

such enforcement. Treasury should consider additional instruction 

that would develop clear guidelines on the penalties that should be 

imposed for failure to comply with HAMP guidelines, and then 

monitor Freddie Mac to see if has begun to impose such sanctions 

for failure to comply with HAMP guidelines. Freddie Mac should 

be aggressively monitoring whether servicers have fully and correctly implemented the NPV model to determine which loan modifications are appropriate. At the same time, Fannie Mae and 

Freddie Mac should consider increasing their rewards for servicers 

that engage in successful loan modifications, including those that 

involve principal reductions. 

One crucial area for strict enforcement of HAMP rules is in the 

Escalated Resolution Process, whereby borrowers can seek a redetermination or other resolution when they feel that they were 

wrongfully denied a loan modification. Borrower advocates have 

sought an independent review process for borrower appeals, and it 

appears that at least a partial such process has recently been created, though it is not yet in effect. According to a new supplemental directive, Supplemental Directive 10–15, under the HAMP 

Escalated Resolution Process, servicers ‘‘may not conduct a scheduled foreclosure sale unless and until the Escalated Case is resolved in accordance with the requirements of this Supplemental 

Directive, and all other MHA Program guidelines.’’22 While the 

Supplemental Directive appears to give servicers great discretion in 

resolving escalated cases, it also contains the following prohibition: 

‘‘If the case was referred by HSC or MHA Help, the servicer may 
498 

not consider the case resolved unless HSC or MHA Help concurs 

with the proposed resolution, with evidence of this concurrence retained in the servicing file.’’ MHA Help is, according to the Supplemental Directive, ‘‘a team of housing counselors dedicated exclusively to working with borrowers and servicers to resolve MHA escalated cases,’’ under the auspices of Fannie Mae, as Program Administrator for the MHA Program. HSC is a ‘‘similar resolution resource . . . to manage escalated cases received from housing counselors, government offices, and other third parties acting on behalf 

of a borrower.’’ If MHA Help and HSC have the authority to stop 

case resolution by refusing to concur with the proposed resolution, 

and servicers may not conduct a foreclosure sale unless and until 

the Escalated Case is resolved, that would provide MHA Help and 

HSC significant power to demand appropriate case resolutions instead of foreclosures. 

If MHA Help and HSC do not have the power to halt foreclosure 

sales by failing to concur with the servicer’s proposed resolution, 

than that power should be given to some entity, so that borrowers 

can seek an independent determination on whether they should receive a loan modification pursuant to HAMP. 

Actions by Other Governmental Housing Programs 

In addition to the Treasury Department, Fannie Mae, and 

Freddie Mac, other Federal housing programs should strictly enforce their servicing rules, and take appropriate action against 

servicers who violate those rules. From recent testimony by officials 

from the Federal Reserve Board and the OCC, it appears that several Federal agencies are coordinating a broad-ranging investigation of mortgage servicing practices and abuses. It is important 

that such investigation be thorough yet completed in a timely fashion. The Federal agencies should be cooperating with and sharing 

information on servicer misdeeds with the Attorneys General who 

are also currently investigation servicer misbehavior. 

When the OCC and the Federal Reserve complete their investigation, it is important that, after giving the servicers the right to respond, these agencies make their findings public, laying out in detail what they discovered, with reference to specific servicers. Also, 

the OCC and the Federal Reserve should state specifically what 

correctional instructions have been given to servicers and also what 

sanctions have been imposed. The danger is that the OCC and the 

Federal Reserve, which have regularly concerned themselves more 

fully with the safety and soundness of their regulated financial institutions than with borrowers or consumers, will fail to sanction 

servicers sufficiently for their misbehavior, and so encourage its 

continuation. Given the public nature of the servicer wrongdoing, 

the public has a right to know what the OCC and the Federal Reserve have discovered and what specifically they have done about 

it. 

Similarly, the FHA should complete its investigation of servicers 

to determine whether servicers have been following its guidelines 

regarding foreclosures and loan modifications, and make public its 

results and any sanctions suffered by servicers who failed to follow 

those guidelines. Recent reports indicate that FHA is discovering 

non-compliance with its servicing guidelines. 
499 

Conclusion 

What is needed most to limit abusive servicer practices is Federal regulation of mortgage servicers, along with a Federal regulatory agency tasked with monitoring servicer behavior and sanctioning servicer misbehavior, up to and, if necessary, including removing a business entity’s license to service. Until such Federal 

regulation is drafted and enacted, it is crucial that Federal agencies with existing power to oversee servicer behavior complete their 

current examinations and take aggressive action to rein in servicer 

misconduct, while making public what misbehavior they discovered 

and what action they took. At the same time, the Treasury Department should take strong steps to force Fannie Mae and Freddie 

Mac engage in more active and effective oversight of servicers, both 

in their own loans or those they guarantee, but also those servicers 

participating in the HAMP program. The misbehavior of servicers 

requires strong medicine, and these are some suggestions for such 

a prescription. 
500 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD
501