U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

48–677 PDF 2009

LOAN MODIFICATIONS: ARE MORTGAGE 

SERVICERS ASSISTING BORROWERS 

WITH UNAFFORDABLE MORTGAGES? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

FEBRUARY 24, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–6 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

JOE DONNELLY, Indiana 

MICHAEL E. CAPUANO, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

LUIS V. GUTIERREZ, Illinois 

STEVE DRIEHAUS, Ohio 

MARY JO KILROY, Ohio 

JIM HIMES, Connecticut 

DAN MAFFEI, New York 

SHELLEY MOORE CAPITO, West Virginia 

THADDEUS G. McCOTTER, Michigan 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

RANDY NEUGEBAUER, Texas 

WALTER B. JONES, JR., North Carolina 

ADAM PUTNAM, Florida 

KENNY MARCHANT, Texas 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 24, 2009 ............................................................................................ 1 

Appendix: 

February 24, 2009 ............................................................................................ 61 

WITNESSES 

TUESDAY, FEBRUARY 24, 2009 

Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage Servicing ....................................................................................................................... 30

Erbey, William C., Chairman and Chief Executive Officer, Ocwen Financial 

Corporation ........................................................................................................... 28 

Evers, Joseph H., Deputy Comptroller for Large Bank Supervision, Office 

of the Comptroller of the Currency ..................................................................... 7 

Gardineer, Grovetta, Managing Director, Corporate and International Activities, Office of Thrift Supervision ......................................................................... 6 

Gross, Michael, Managing Director, Loan Administration Loss Mitigation, 

Bank of America ................................................................................................... 32 

Hemperly, Steven D., Executive Vice President, Real Estate Default Servicing, CitiMortgage, Inc. ...................................................................................... 35 

Lawler, Patrick J., Chief Economist, Federal Housing Finance Agency ............. 9 

Morris, Vance T., Director for Single Family Asset Management, U.S. Department of Housing and Urban Development ......................................................... 4 

Sheehan, Marguerite, Senior Vice President, Chase Home Lending, JPMorgan 

Chase ..................................................................................................................... 33 

APPENDIX 

Prepared statements: 

Waters, Hon. Maxine ........................................................................................ 62 

Ellison, Hon. Keith ........................................................................................... 66 

Coffin, Mary ...................................................................................................... 67 

Erbey, William C. ............................................................................................. 70 

Evers, Joseph H. ............................................................................................... 80 

Gardineer, Grovetta ......................................................................................... 100 

Gross, Michael .................................................................................................. 111 

Hemperly, Steven D. ........................................................................................ 120 

Lawler, Patrick J. ............................................................................................. 126 

Morris, Vance .................................................................................................... 146 

Sheehan, Marguerite ........................................................................................ 152 

(1) 

LOAN MODIFICATIONS: ARE MORTGAGE 

SERVICERS ASSISTING BORROWERS 

WITH UNAFFORDABLE MORTGAGES? 

Tuesday, February 24, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:42 p.m., in room 

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

Members present: Representatives Waters, Lynch, Cleaver, 

Green, Clay, Ellison, Donnelly, Driehaus, Kilroy, Maffei; Capito, 

Marchant, Jenkins, and Lee. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. Good 

afternoon, ladies and gentlemen. 

I would first like to thank the ranking member and the other 

members of the Subcommittee on Housing and Community Opportunity for joining me today for this hearing on loan modifications: 

‘‘Are mortgage servicers assisting borrowers with unaffordable 

mortgages?’’ 

Today’s hearing is the first in a series of hearings to provide Congress with an in-depth understanding of loan modifications, including their benefits and challenges. In the next few months, the subcommittee plans to hold further hearings on this issue, including 

an examination of the White House plan to modify loans and an 

investigation of the for-profit loan modification industry. 

Today we have before us several key regulatory agencies and 

mortgage servicers who are going to tell us about their efforts to 

assist borrowers with affordable mortgages. In addition to learning 

about their loan modification efforts, I hope this hearing will also 

serve to educate members about some of the fundamentals of the 

mortgage servicing industry, including how servicers are licensed, 

what kinds of contracts they have with investors, and how they receive payments for servicing loans. I believe that this basic information is critical to understanding how the number of loan modifications can be increased. I hope that our witnesses will be able 

to educate the subcommittee in this regard. 

Loan modifications changing the terms of the loan are essential 

to ending the foreclosure crisis. According to RealtyTrac, in 2008, 

2.3 million households were in some stage of the foreclosure procVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
2 

ess, an 81 percent increase from 2007 and a 225 percent increase 

from 2006. The foreclosure crisis shows no signs of slowing down, 

with Credit Suisse estimating that 8.1 million homes will enter 

foreclosure over the next 4 years. 

However, while the pace of loan modifications has increased, repayment plans which simply tack the missed payments onto a loan, 

thereby delaying the inevitable foreclosure until a later date, still 

offers more than other kinds of loan modifications. According to the 

Office of the Comptroller of the Currency and the Office of Thrift 

Supervision, in the third quarter of 2008, new loan modifications 

increased by more than 16 percent to 133,106, while new repayment plans increased by 11 percent to 154,649. 

I am concerned that mortgage servicers simply aren’t doing 

enough loan modifications. I am interested to hear the mortgage 

servicers before us today discuss what barriers or capacity issues 

are preventing them from performing more loan modifications and 

preventing foreclosures. And if capacity is an issue, I would like to 

hear about how we can streamline the modification process so that 

we can prevent foreclosures quickly and efficiently. 

Since day one, I have been a supporter of enacting a systematic 

modification program. On the first day of the 111th Congress, I introduced legislation, H.R. 37, the Systematic Foreclosure Prevention and Mortgage Modification Act of 2009, to put such a plan in 

action. 

I am also concerned about some of the redefault rates on modified loans. According to the OCC and the OTS, modified loans have 

been redefaulting at rates of 37 percent within 3 months after 

modification and 55 percent within 6 months after modification, 

with the rates of redefault seeming to vary by the type of loan and 

the entity servicing it. 

In modifying loans, servicers must ensure that the new loan is 

more affordable to the borrower than it was before the modification. It makes little sense and benefits no one to modify a loan and 

to have it still be unaffordable for the borrower. It also makes little 

sense to do a slight modification, such as lowering the interest rate 

by a quarter of a point, for example. That makes the loan slightly 

more affordable, but still out of the reach of the borrower. 

The type of loan modification being offered is also important to 

ensure that the modified loan is affordable for the borrower. Credit 

Suisse has found that principal reduction modifications have lower 

default rates than other kinds of modifications. If this is the case, 

I would expect for mortgage servicers to perform more of those 

kinds of modifications. I am aware that principal reduction comes 

with a significant cost for the investor; however, that cost is substantially less than letting the loan enter foreclosure. 

Before I close, I would like to comment on the modifications that 

have yet to occur. There are millions of families out there who are 

struggling with their mortgages. They have tried to contact some 

of the servicers who will be testifying today, and they have not 

been able to get through or to reach the right person. I have experienced firsthand the challenges faced by borrowers who want to stay 

in their homes and who want to get current on their mortgages, 

but they either can’t get their servicers to pick up the phone, or 

they get wrong, misleading, or unapproved information. I have 

3 

called the servicers myself and waited hours for someone to answer, I have been misdirected and disconnected, and I understand 

the frustration borrowers have. It is unacceptable, and I think 

homeowners deserve better. 

I am very interested in hearing from today’s witnesses on how 

they plan to improve their capacity and their outreach to ensure 

that the borrowers reaching out to them for help are able to receive 

the help they need. I am looking forward to hearing from our two 

panels of witnesses on the benefits, the challenges, and the expenses involved in modifying loans. 

I would now like to recognize our subcommittee’s ranking member to make an opening statement. 

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

to thank the chairwoman for convening this afternoon’s hearing. 

The difficulties in the housing market are central to the health 

of our overall economy. Some States have been affected more deeply by those difficulties than others. I know that many of my colleagues representing States that have been hardest hit by foreclosures have constituents who are struggling to make ends meet; 

however, we must be careful to those who are making their payments on time so that they would not be unfairly burdened. Whatever form of assistance this committee produces must be equitable 

to the almost 92 percent of American families still making those 

payments on time. 

I am looking forward to hearing from our second panel this afternoon to learn more about their efforts to do loan modifications. We 

will be hearing from five different institutions, many of whom have 

different approaches to working out loans and different problems 

with working out those loans. I believe it is important for this process to remain in the private sector as much as possible. 

Another proposal that has been put forth is to modify the terms 

of the loan in bankruptcy court, commonly referred to as 

cramdown. I have already expressed my concern in this committee 

about the effect this proposal will have on the Federal programs 

like FHA/VA and RHS. Additionally, I have concerns about the effect that this will have on the flow of credit on an already unsteady 

secondary market. 

Recently, I joined Mr. Bachus, the ranking member of the full 

committee, as well as our counterparts on the House Judiciary 

Committee, in sending a letter to the Treasury Secretary expressing our desire to work in a bipartisan manner to narrow changes 

in the bankruptcy law. 

Today’s hearing will shed greater light on the current status of 

loan modifications as well as to educate members about the process 

and any potential improvements. I would like to thank again the 

chairwoman for bringing us together this afternoon and I look forward to hearing the testimony of our witnesses. Thank you. 

Chairwoman WATERS. I now recognize Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. I would like to associate myself with the comments that you made. I thought that 

you were quite thorough in expressing concerns, and I adopt your 

language. 

I do want to add only this: That there is concern with reference 

to the defaults. When compared to loans held by servicing banks, 

4 

the default rate is 35.06 percent after 3 months. Loans held by private investors, the default rate is 42.28 percent after 3 months. 

There seems to be a disparity that I am sure we can examine and 

understand why it exists. I have my suspicions, but it will be more 

than appropriate to receive empirical evidence of what is actually 

going on from this panel. 

So I thank you very much, Madam Chairwoman, and I yield back 

the balance of my time. 

Chairwoman WATERS. Thank you very much. 

Ms. Jenkins for 2 minutes. 

Ms. JENKINS. Thank you, Madam Chairwoman. 

I know that many Americans are honestly struggling to pay their 

monthly mortgage payments. Unemployment is on the rise, yet 

more than 90 percent of homeowners are still able to scrimp and 

save enough each month to pay their mortgage. 

Congress and government agencies have thrown billions at the 

crisis, yet we have little to show for it. Many people inside the Beltway appear willing to reward lenders who sold irresponsible loans 

and reward people who purchased houses that were too expensive. 

How is this fair to those American families who made cuts in their 

monthly budget and still pay their mortgage on time? We may see 

later this week on the House Floor a proposal to allow bankruptcy 

judges to cramdown mortgages. While the goal of the proposal, to 

help more folks be able to stay in their homes, may be admirable, 

when we see redefault rates at 55 percent in only 6 months, is this 

really solving the problem? 

I am eager to hear from today’s witnesses to see what we can 

work toward to find effective solutions. I yield back the remainder 

of my time. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

We have no more opening statements. I am pleased to welcome 

our distinguished first panel. Our first witness will be Mr. Vance 

Morris, Director for Single Family Asset Management, U.S. Department of Housing and Urban Development. Our second witness will 

be Ms. Grovetta Gardineer, Managing Director, Corporate and 

International Activities, Office of Thrift Supervision. Our third witness will be Mr. Joseph H. Evers, Deputy Comptroller for Large 

Bank Supervision, Office of the Comptroller of the Currency. Our 

fourth witness will be Mr. Patrick J. Lawler, Chief Economist, Federal Housing Finance Agency. 

Thank you for appearing before the subcommittee today, and, 

without objection, your written statements will be made a part of 

the record. You will now be recognized for a 5-minute summary of 

your testimony. 

Mr. Morris. 

STATEMENT OF VANCE T. MORRIS, DIRECTOR FOR SINGLE 

FAMILY ASSET MANAGEMENT, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. MORRIS. Madam Chairwoman, Ranking Member Capito, and 

members of the subcommittee, on behalf of the Department of 

Housing and Urban Development, I would like to thank you for the 

opportunity to speak about FHA’s loss mitigation practices, and in 

particular loan modifications practices. 

5 

I am the Director of the Office of Single Family Asset Management. I am responsible for managing the servicing and loss mitigation activities of FHA-insured mortgages and also the Real Estate 

Owned activities. My office responsibilities include establishing and 

updating general servicing guidelines for FHA lenders, helping 

homeowners remain in their homes while overcoming difficulties 

that cause mortgage defaults, monitoring lenders for compliance 

with loss mitigation requirements, and managing and selling single-family properties acquired by HUD. These activities are instrumental in maintaining the FHA insurance fund, which currently 

has over 41⁄2 million insured loans at a value of $534 billion. 

In 1996, HUD completed a study titled, ‘‘Providing Alternatives 

to Mortgage Foreclosure: A Report to Congress,’’ which formed the 

basis of our loss mitigation program. During the same year we introduced our loss mitigation program with the primary objective of 

keeping homeowners in their home in the event of a serious default, finding effective solutions to cure defaults, and reduces to the 

losses to the government by effectively finding alternatives to foreclosure. 

HUD’s most utilized loss mitigation tool is loan modification. 

Loan modifications account for nearly 60 percent of FHA’s loss 

modification activity annually. Loan modifications are intended to 

bring the delinquent borrower current. This is done by either reamortizing the loan up to 30 years, changing the interest rate both 

up and down, and adding the delinquency into the loan modification. 

In most cases when a lender modifies the loan, they modify the 

term, and the rate is unchanged. In other cases the interest rate 

may increase or decrease. Typically, though, after the loan modification, the borrower’s payment increases slightly, on average $22. 

The increase is due to the fact that the arrearages were included 

into the loan balance, so it causes a slight increase in the mortgage 

payment. 

Over the past 12 years, through the end of January 2009, FHA 

lenders have completed over 324,000 loan modifications. The numbers vary from year to year. For example, in Fiscal Year 2008, 

58,000 loan modifications were done by FHA lenders. We estimate 

that there will be a 12 percent increase this year to 65,000 loan 

modifications. 

The loan modification process is fairly simple. The lender reviews 

the borrower’s qualifications prior to the loan becoming 4 months 

past due. The borrower sends financial information to the lender, 

who performs an analysis and determines that the information is 

independently verified as correct, and then determines if the loan 

modification would benefit the borrower. If so, the loan modification—the lender at that time sets the rate, and a term, and the 

terms of the modification. The lender then sends the documents to 

be executed by the borrower, and the modification is recorded, and 

the loan is brought current. For completing the loan modifications, 

HUD provides an incentive fee to the lender of $750, plus we pay 

up to $250 in title work. 

HUD measures the effectiveness of its loss mitigation action by 

determining if the loan ended in foreclosure 24 months following 

that action. According to our Office of Evaluation, this is the best 

6 

measure, because past 24 months, if a loan goes in default, there 

were other actions or activity that caused the default. By that 

measure, home applications are an effective tool, because over 85 

percent of our loans that were modified, 24 months following that 

loss mitigation action were still not submitted for foreclosure. 

This is not to say that our loans do not redefault. We do have 

an annual redefault rate of modified loans of 35 percent. However, 

we continue to work with the borrowers to avoid foreclosure. Just 

because a person has one loss mitigation action, that does not preclude us from continuing to work with the borrower. 

In closing, HUD is requesting new authority to enhance partial 

claim authority to enable FHA to buy down mortgage balances. The 

buydown amount would be reported as a second mortgage, but it 

would be a tool that would make the payment affordable to the borrower. The Administration is developing changes that would allow 

FHA to assist homeowners with reductions in income that are more 

than just temporary in nature. 

Again, I want to thank you for the opportunity to explain FHA 

loan modifications. I am prepared to answer your questions. 

[The prepared statement of Mr. Morris can be found on page 146 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Ms. Gardineer. 

STATEMENT OF GROVETTA GARDINEER, MANAGING DIRECTOR, CORPORATE AND INTERNATIONAL ACTIVITIES, OFFICE 

OF THRIFT SUPERVISION 

Ms. GARDINEER. Good afternoon, Chairwoman Waters, Ranking 

Member Capito, and members of the subcommittee. I am Grovetta 

Gardineer, Managing Director for Corporate and International Activities at the Office of Thrift Supervision. Thank you for the opportunity to testify on behalf of OTS about loan modifications and how 

best to keep more American families in their homes. 

The importance of this topic is hard to overemphasize. Turning 

back the tide of home foreclosures is an essential element in combating the economic crisis confronting this Nation and much of the 

rest of the world. Foreclosed homes spell tragedy for the uprooted 

families, they harm neighborhoods by driving down property values, and they add downward pressure to already depressed home 

values in communities. 

Although about 90 percent of all home mortgages in this country 

are being repaid on time, the remaining 10 percent that are delinquent or in foreclosure represent a historically high number and a 

contagion in our economic system. My written testimony goes into 

detail about the efforts the OTS has made, both in partnership 

with other Federal banking regulators and on its own, to prevent 

foreclosures. 

In the time I have this afternoon, I will emphasize just a few aspects of those efforts, but the key point I want to make is that OTS 

initiatives to reduce foreclosure are not new. They extend back 

nearly 2 years, and they are continuing today. 

Just 2 weeks ago, OTS Director Reich urged OTS-regulated institutions to suspend foreclosures on owner-occupied homes until the 

home loan modification program in the Administration’s financial 

7 

stability plan is finalized. Since then, OTS leaders have continued 

their work on the interagency team, led by the Treasury Department, to develop the details of this modification program. 

On February 20, 2008, almost 1 year ago to the day, the OTS unveiled the foreclosure prevention plan that identified three elements that are key to a successful loan modification program: an 

expedited process; an affordable monthly payment; and an approach to dealing with underwater mortgages in which borrowers 

owe more on their mortgages than their homes are worth. These 

elements were included in the legislation eventually passed by 

Congress. 

OTS has also been a central player first on its own and later in 

partnership with the Office of the Comptroller of the Currency in 

gathering for the first time extensive validated loan-level data on 

about 60 percent of all mortgages in the United States. The data 

have already yielded valuable insights and will enable us to gauge 

which modification strategies work best for affordable, sustainable 

solutions. With this useful yardstick for measuring progress, policymakers will know with greater precision where to focus scarce resources to achieve the most success. 

The next OCC–OTS Mortgage Metrics Report scheduled for release next month will reflect an expanded data collection effort to 

zero in on the elements that make loan modifications work. The 

scope of this effort is broad, covering more than 34 million loans. 

The two agencies have made sizable commitments to this project, 

and we intend to stick with it, especially since so many families are 

being forced to pack up their American dreams of homeownership. 

The OTS remains committed to continuing its efforts until the foreclosure crisis is over. 

Thank you again, Madam Chairwoman, for your commitment to 

this important issue, and I look forward to answering your questions. 

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

100 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Our next witness, please. 

STATEMENT OF JOSEPH H. EVERS, DEPUTY COMPTROLLER 

FOR LARGE BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. EVERS. Chairwoman Waters, and members of the subcommittee, on behalf of the Office of the Comptroller of the Currency, thank you for holding this hearing and inviting the OCC to 

testify on this important topic. 

My name is Joe Evers. I am a national bank examiner, and I currently serve as Deputy Comptroller for Large Bank Supervision. In 

that capacity, I am responsible for large bank analytics. Over the 

past year, I have led the OCC’s project to develop more comprehensive and timely data on mortgage lending and servicing activities 

of national banks. This project, known as Mortgage Metrics, is now 

a joint undertaking of the OCC and the Office of Thrift Supervision. 

Since as early as 2005, the OCC has encouraged national banks 

to work with troubled homeowners to prevent avoidable foreVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
8 

closures and meet the needs of creditworthy borrowers. Since then, 

the OCC has joined other regulators to urge banks to continue to 

implement effective programs to prevent avoidable foreclosures and 

to minimize potential losses. 

Several years ago, we realized the importance of obtaining more 

detailed information about the performance of mortgages held in 

the national banking system. This was done to both aid our supervisory activities and to incent servicers to implement effective programs to prevent avoidable foreclosures and to minimize potential 

losses. We have continued these efforts, particularly with respect to 

increasing affordable and sustainable modifications, and that improved information we are obtaining is helping in that effort. 

Clearly more must be done to address this challenge. The OCC 

supports the Administration’s Homeowner Affordability and Stability Plan. This new plan takes significant steps towards addressing these issues, and we are taking additional steps as well. The 

Mortgage Metrics project represents an unprecedented effort to collect detailed information on the performance of loans serviced by 

institutions supervised by the OCC and OTS. 

Our quarterly Mortgage Metrics Report was first published in 

2008. The Mortgage Metrics Report now covers approximately 90 

percent of the first-lien mortgages serviced by national banks and 

thrifts, and represents over 60 percent of all mortgages in the 

United States. 

Our report for the third quarter of 2008 gathered a vast amount 

of data on the effectiveness of loan modifications. It showed an unexpectedly high percentage of borrowers receiving loan modifications in the first and second quarters of 2008 were past due on the 

new loan modification payment terms. An examination of these results led to our decision that more detailed information was required to enhance our analysis. 

Since then we have been working to collect additional details on 

how different types of modifications have changed monthly principal and interest payments resulting from modifications. We plan 

to present expanded information on actual changes in monthly 

principal and interest payments resulting from loan modifications 

in the next quarterly Mortgage Metrics Report due out in March. 

Further details on modifications are planned for subsequent reports. 

My written testimony addresses these efforts in more detail and 

the specific issues raised in your letter of February 17th by describing: one, our efforts to improve the understanding of loan modification performance through our Mortgage Metrics data collection effort; two, findings from our most recent Mortgage Metrics Report, 

including what we have learned about loan modifications; three, 

current challenges facing effective loan modifications; and four, our 

ongoing efforts to encourage responsible lending and appropriate 

loss mitigation activities, particularly achieving affordable and sustainable loan modifications. 

Again, thank you for holding this important hearing. I look forward to answering your questions. 

[The prepared statement of Mr. Evers can be found on page 80 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

9 

Now, we will have Mr. Patrick Lawler. 

STATEMENT OF PATRICK J. LAWLER, CHIEF ECONOMIST, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. LAWLER. Chairwoman Waters, Ranking Member Capito, and 

members of the subcommittee, thank you for the opportunity to testify on behalf of the Federal Housing Finance Agency. My name is 

Patrick Lawler, and I am Chief Economist of the FHFA. 

Today the country faces an enormous challenge to stabilize the 

housing market. This morning we announced that our House Price 

Index declined 3.4 percent in the fourth quarter last year. That is 

twice the average rate of decline in the previous four quarters. 

Many borrowers are in trouble on their mortgages, or soon will 

be. To address this need, FHFA and the housing GSEs are actively 

working on foreclosure prevention. This is a major component of 

FHFA’s efforts to ensure the housing GSEs fulfill their mission of 

providing liquidity, stability, and affordability to the housing market. 

The housing plan outlined last Wednesday by President Obama 

includes a prominent role for Fannie Mae and Freddie Mac. My 

testimony today will summarize recent initiatives already underway to promote effective loan modifications and the new policies 

announced last week. 

FHFA began in September a foreclosure prevention report, which 

is a transparent review of key performance data on foreclosure prevention efforts. These monthly and quarterly reports present data 

for more than 3,000 approved servicers on 30.7 million first-lien 

residential mortgages serviced on behalf of Fannie Mae and 

Freddie Mac of which 84 percent are prime. 

The recently released November report shows that for the first 

2 full months of conservatorship, October and November, the number of loan modifications increased 50 percent from the previous 2 

months. These modifications were achieved using a customized, 

labor-intensive process. Currently, though, servicers are challenged 

by the sheer volume of borrowers requesting assistance in their 

ability to effectively and efficiently modify those loans. Accordingly, 

we have focused on new programs with the goal of reaching more 

borrowers more quickly and making it easier and faster to execute 

a loan modification. 

In November, FHFA announced the Streamlined Modification 

Program that was rolled out in December; 90,000 solicitations and 

modification offers were mailed to a targeted population of borrowers who had missed three payments. While responses to these 

letters are just starting to come in, early indications strongly suggest that several of the program guidelines should be liberalized to 

reach a broader population and to create a lower, more affordable 

payment. This feedback was shared with the Treasury Housing 

Team working on the Administration’s homeowner affordability 

plan. 

In addition to the streamline program announced in November, 

the enterprises have taken many additional steps to help avoid preventable foreclosures. They have suspended foreclosures and evictions and developed programs to protect renters living in foreclosed 

properties. They are pulling loan files back for a second look before 

10 

foreclosures, and they are working with credit and housing counselors. 

Recently FHFA has been pleased to work on the development of 

the Administration’s plan. It is a major step forward in reducing 

preventable foreclosures and stabilizing the housing market. It aggressively builds on the FDIC’s and our Streamlined Modification 

Programs. The key elements of the plan involve Fannie Mae and 

Freddie Mac. The enterprises will provide access to low-cost financing for loans they own or guarantee. This will help homeowners reduce their monthly payments and avoid foreclosure. It is designed 

for current borrowers who seek to refinance at a lower rate or into 

a safer mortgage, but who have experienced difficulties due to declining home values. Second, a $75 billion program will establish a national standard 

for loan modifications. Treasury will share a portion of the costs, 

which will provide financial incentives to borrowers, lenders and 

servicers. The enterprises will monitor servicer compliance with the 

plan’s rules, and for those loans owned or guaranteed by Fannie 

Mae or Freddie Mac, the enterprise will bear the full cost of the 

modifications. 

Third, the Treasury will support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac. The Treasury 

Department will double the size of its preferred stock purchase 

agreements to $200 billion each. This increase should remove any 

possible concerns that investors in debt- and mortgage-backed securities have about the strong commitment of the U.S. Government 

to support Fannie Mae and Freddie Mac. 

In addition, the Treasury Department will continue to purchase 

Fannie and Freddie MBS, and is increasing the size of the GSEs’ 

allowable mortgage portfolios by $50 billion each, to $900 billion, 

along with corresponding increases in allowable enterprise debt 

outstanding. Over the next several days, FHFA will continue working with the Administration and the enterprises to finalize the details and implement this program. 

I will be happy to answer questions. 

[The prepared statement of Mr. Lawler can be found on page 126 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

I will yield to myself 5 minutes for questions. My first question 

is to Mr. Vance Morris, Director for Single Family Asset Management, U.S. Department of Housing and Urban Development. You 

have, maybe not in your unit, but you have HUD counselors or certified counselors who are responsible for counseling and advising 

homeowners, first-time homebuyers, etc., and now they have included in their work working with homeowners who are in trouble 

and trying to help them get loan modifications. Do you think that 

the HUD-certified counselors have the training or expertise to really help with loan modifications? 

Mr. MORRIS. Well, Madam Chairwoman, to answer your question, it is a two-part answer. I think the housing counseling agencies have the training to effectively help the borrowers in trouble, 

because really they are advising, counseling, and providing alternatives. But the person who has the authority to effect the loss 

mitigation action is the servicer themselves. So you have a group 

11 

of counselors who are funded, active, and well-educated, but you 

still have to get the actual work completed. It still has to go to the 

servicer, the analysis has to be completed, and then the action has 

to be taken. 

Chairwoman WATERS. I understand that. And from what I have 

been able to see and understand about what is happening between 

the HUD counselor and the homeowner is the homeowners find the 

HUD counselors through nonprofits and churches and other kinds 

of things, but they have as many problems—the counselors have as 

many problems getting to the servicer and getting the servicer, if 

they get them, to do a loan modification. So I am trying to determine what is the most effective use of the HUD counselors, because 

my experience is they are not able to really facilitate the loan 

modifications. The servicers are not responding to them, I have discovered. So how can we best use these HUD counselors? 

Mr. MORRIS. I would hate to characterize it as not responding. 

What has happened from the feedback that I have gotten from the 

servicers is that we have established hotlines. There is a foreclosure crisis. So what happened is there is this gigantic influx of 

inquiries and activity that had been literally pushed on the 

servicers themselves. So as a result, based on this demand, it just 

seems like there is insufficient staffing to cope with all the inquiries and demands and loan modifications. 

So if you are asking what should we do with the housing counseling agencies, that is a hard question. Technically it is a separate 

section. It seems as though they are playing a proper role because 

the housing counseling agency does housing counseling for origination. 

Chairwoman WATERS. In those activities some of them are good, 

particularly with first-time homebuyers, but I have yet to see the 

effectiveness of their role in dealing with foreclosures and helping 

to facilitate loan modifications by getting in touch with the 

servicer, helping to interpret to the servicer the particular case before them. You have homeowners with all kinds of problems related 

to that mortgage, and oftentimes they do need some help in interpreting to the servicers, once you get them, what the problem is 

with this homeowner. 

But the reason I ask this is because I am thinking about what 

to do about the HUD counselors in relationship to foreclosures, because we shouldn’t fool each other that somehow they are being effective when it is not their fault, it is more the servicers’ fault, because, as you are saying, they are overloaded or what have you. 

Let’s move on to Ms. Gardineer. When did your agency begin to 

understand what was happening with the mounting foreclosures, 

and what took so long to get involved? 

Ms. GARDINEER. Well, Chairwoman Waters, I would say that our 

efforts began to really focus on the mounting loan foreclosures—in 

April of 2007, we issued a statement that encouraged financial institutions to work with homeowners who were having difficulty 

making their payments. We encouraged them to reach out to those 

homeowners to try to modify and engage in prepayment plans at 

this point. 

Chairwoman WATERS. Is that the extent of your authority to encourage? 

12 

Ms. GARDINEER. Well, with regard to that, Chairwoman Waters, 

we wanted to make sure that our regulated servicers understood 

that it was more prudent for them to reach out and make an effective modified loan as opposed to having a failure on both sides of 

the transaction that would result in a foreclosure. 

Chairwoman WATERS. And If they did not do this? 

Ms. GARDINEER. We would look through it through our supervisory process. 

Chairwoman WATERS. Look at what? 

Ms. GARDINEER. Look at their efforts to reach out to those homeowners. 

Chairwoman WATERS. And if they did not do it? 

Ms. GARDINEER. Are you asking would they be— 

Chairwoman WATERS. What is your authority? 

Ms. GARDINEER. With regard to enforcement of this? 

Chairwoman WATERS. Yes. 

Ms. GARDINEER. I don’t believe we have enforcement authority. 

Chairwoman WATERS. I see. So when you talk about encouragement and doing whatever you can do to get them to work closely 

with the homeowner, that is the best you can do with the authority 

that you have; is that right? 

Ms. GARDINEER. I would say that with respect to the creation of 

our Mortgage Metrics Report, which we have made a part of our 

supervisory process, we are looking to gain more information with 

regard to how effective the modifications are being done. And because it is a part of our supervisory process, and we will examine 

for this going forward, then I think our safety and soundness authority will cover our ability to take more effective action. 

When we look at the methodology and the data that we are gaining from this report, and by making it a part of supervision, we are 

helping to shape our supervisory expectations in understanding 

how servicers can do more and what they are doing in regard to 

what their current authority is, how we can look at how we can expand on that current authority, as well as helping them understand the parameters that we as supervisors and regulators expect. 

Chairwoman WATERS. How long is it going to take you to include 

that in your supervisory responsibilities? You know, a lot of foreclosures are happening every day, and I guess the numbers that we 

saw here today, 2.5, or something like that, million. So how long 

is this is going to take you? 

Ms. GARDINEER. As far as this being our third quarter, we released three quarters’ worth of data, and with every release of the 

report and our analysis of the report, it allows us to see the information that we need to continue to understand the supervisory 

process and help shape this. We are in the midst of helping the Administration work out the details of the loan modification streamlined efforts to impact these foreclosures to see if we can stave 

them off earlier. We want servicers— 

Chairwoman WATERS. What should we do in the future to get in 

front of a problem like this? We are late. 

Ms. GARDINEER. Well, I think in the past, Madam Chairwoman, 

we have looked at lagging indicators, we have looked at data that 

has been based on model estimates as opposed to what we are getting with our fellow regulator, the OCC, at this point. We are lookVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
13 

ing at original loan-level data, the actual loans of homeowners that 

are being serviced by these servicers, and enabled to do that, and 

our ability to now look at that data in real time, today, to see what 

is happening in a specific ZIP code, geographic location, FICO 

scores, income verification or employment, and how all of these impact an ability for a loan to perform for that borrower. This is the 

kind of information this helps us to get in front of the problem as 

opposed to looking at model estimates, which we have— 

Chairwoman WATERS. I have a great appreciation for that, but 

what you just told me gives me even greater worry. So I am going 

to move on to Ms. Capito. Thank you very much. 

Mrs. CAPITO. Thank you. 

Mr. Morris, can you explain to me, in your testimony you mentioned that in the refinancing, that $750 goes to the lender for a 

successful refinancing. 

Mr. MORRIS. $750 is just incentive payment for the cost of them 

doing the work. It has to be tied to cost by statute. So we have to 

be able to justify that they are experiencing the cost. It is the cost 

of them collecting the information, analyzing. 

Mrs. CAPITO. Is this similar, in your mind, to the incentive that 

the President has built into his program that he has put before 

Congress, or is this different, in addition to that? 

Mr. MORRIS. We have been operating our program since 1996. 

And I am just talking to you specifically about FHA’s authority. 

Based on FHA’s authority, according to our Office of General Counsel, when we pay an incentive fee, it has to be linked to some work 

that was actually performed. This is the fee structure for the work 

that was performed to complete the loan modification, plus the reimbursement for the title work. 

Mrs. CAPITO. If there is a 35 percent redefault rate recently, then 

every time, if you are redefaulting and you are going to come in 

to try to remanage the loan or refinance the loan, is there still a 

$750 payment every time that loan gets looked at? 

Mr. MORRIS. Yes, because the same analysis and due diligence is 

being done every time. A 35 percent default rate is not new. 

Mrs. CAPITO. That is over 10 years? 

Mr. MORRIS. Over the past 5 to 10 years that I have information, 

it is average, about that amount. 

Mrs. CAPITO. I would like to ask Mr. Lawler, you know, I think 

we encouraged folks who are in trouble, telling them, go to your 

lender, try to start working on a loan modification. My understanding of the President’s plan is that the loan modifications have 

to be done by those loans that are held by Fannie and Freddie. 

How does a regular person figure this out? And what kind of outreach are you doing to make sure people are aware that they actually have this connection to those institutions? 

Mr. LAWLER. There are two different parts to the President’s 

plan. One deals with loan modifications, and for those it is not restricted to loans held or guaranteed by Fannie Mae and Freddie 

Mac. There is another part that involves refinances by borrowers 

who are current on their loans. 

Mrs. CAPITO. Let me just stop you right there. If you are current, 

you are refinancing; if you are in arrears, you are modifying? 

14 

Mr. LAWLER. Yes. Although you could qualify for a modification 

in some cases if you are current if there is a hardship, for example. 

Mrs. CAPITO. What is the difference between a modification and 

a refinance? 

Mr. LAWLER. Refinance is just changing the interest rate, if the 

borrower qualifies for a new loan with a new maturity of 30 years 

or 15 years. 

Mrs. CAPITO. But you are modifying a loan? 

Mr. LAWLER. You are paying off the first loan, and you are getting a brand new loan. 

Mrs. CAPITO. Okay. 

Mr. LAWLER. The other is modifying the terms of an existing 

loan. 

Mrs. CAPITO. Which would change the interest rate or the length 

of time? 

Mr. LAWLER. Or the principal amount or the way the rates are 

computed. 

Mrs. CAPITO. In the President’s plan can you refinance or change 

the principal amount; is that within the purview of this plan? I 

don’t believe it is. 

Mr. LAWLER. It is within the loan modification plan, yes. There 

is a provision for that, and the Treasury will participate in some 

of the cost in that. 

Mrs. CAPITO. I see. 

Let me ask you another question about the kind of complaints I 

have heard. 

Mr. LAWLER. If I could finish? 

Mrs. CAPITO. Yes. 

Mr. LAWLER. If it is a refinance, then that part of the plan is only 

for loans that are held or guaranteed by Fannie Mae or Freddie 

Mac, and one way for the borrower to find out if that is the case, 

obviously, is to call Fannie Mae or Freddie Mac. But I think on 

March 4th, there will be more details about exactly how to find out. 

Mrs. CAPITO. I think that is confusing to a lot of people, because 

they naturally assume that wherever they got the loan or whoever 

they are sending the check to is going to be the person or the only 

person they will have to be aware of as they are moving through 

the process. 

I heard—and maybe you can help me with this. I heard complaints from people who are buying the first-time loan or trying to 

refinance, and they maybe have credit scores that are not up in the 

700s, but they are still good credit scores, and that Fannie and 

Freddie are assessing fees, and began assessing fees more here recently, that are putting, again, the price of refinancing that mortgage out of reach for a lot of people. Can you help me with this? 

Mr. LAWLER. Well, part of Fannie Mae and Freddie Mac’s problems most recently has been that this risk was underpriced, and 

so they are trying to make new loans that are priced fairly, but 

fairly to them and fairly to the borrowers. And they have made 

more use of distinctions of relative credit quality of borrowers. The 

difference between a very high credit rating and a good, but slightly lesser credit rating is a matter of basis points, but that is a distinction that they are making. 

15 

Mrs. CAPITO. Would that same standard be applied in the President’s plan? 

Mr. LAWLER. For the refinances, Fannie Mae and Freddie Mac 

will determine what terms those loans will be available on, and 

there will be more details March 4th. For the loan modifications, 

it is really a question of lowering payments, not raising anybody’s 

payments. 

Mrs. CAPITO. So the answer is, not really. 

Mr. LAWLER. Not for loan modifications. Thank you. 

Mrs. CAPITO. Thank you. 

Chairwoman WATERS. With that line of questioning, if you would 

like, I will yield you an additional minute, because you have an additional loan modification type in the HOPE for Homeowners program that is a refinancing program. Maybe knowing the difference 

between that, the GSEs refinancing and the loan modification may 

help us all. 

Mrs. CAPITO. Now you have totally confused me. 

Well, I guess I am getting to in my original statement looking 

at the fairness equation of people who are refinancing or loan modification or however. I am mixing them all up together, but I realize 

they are not the same; that if that borrower comes in and is held 

to one standard, and that person maybe has been doing all the 

right things, paying, working with their debt, paying all their credit cards on time, all these sorts of things, and then you have another person who is coming in under a different set of circumstances are not going to be assessed these fees, so it is going 

to be easier for that person to stay in their home than maybe this 

other person to purchase a home in the beginning or to refinance. 

Mr. LAWLER. Well, people who are current can qualify for the 

loan modifications if there is hardship, if there is a special need. 

Mrs. CAPITO. Beyond a poor credit score. 

Mr. LAWLER. Beyond a poor credit score, right. Losing a job, for 

example. 

Mrs. CAPITO. Or an illness or something to that effect. Thank 

you. 

Chairwoman WATERS. Thank you. 

Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman, and I thank the 

witnesses for appearing today. 

My frustration with this process emanates from an inability to 

understand why people won’t do what is in their best interests. All 

of the evidence seems to indicate that it is in the best interests of 

investors to restructure the loans and allow the borrowers to continue to make payments, but all of the actions are inconsistent 

with what is in the best interests of the investors. Would someone 

care to just give me a very terse comment on this in terms of why 

investors are not amenable to doing what is in their best interests? 

Ms. GARDINEER. Congressman, I think the difficulty lies in the 

pooling and servicing agreement contracts that govern the 

securitizations that many mortgages have ended up in. Those contracts in terms generally allow for losses that would be incurred 

under those securities to be borne by the junior persons who have 

purchased into those securities, with the investors protected 

against such losses such that it appears as though they would be 

16 

moving against their interest. But I think the contracts are written 

in such a way to guarantee that their interests are paramount and 

protected against those losses. 

Mr. GREEN. Is this when we have something called tranche warfare to develop? 

Ms. GARDINEER. Yes, Congressman. 

Mr. GREEN. If we provide a safe harbor for the servicer, do we 

now overcome the consternation that servicer has by virtue of liability and exposure; is that going to be a part of the key to safe 

harbor? 

Ms. GARDINEER. I think so, Congressman. Our servicers have 

communicated to us that there are both legal and accounting impediments to their ability to service those loans or modify those 

loans that are in those securitizations. Our reports have demonstrated that it is far easier and more effective to modify the 

loans that are in portfolio. There is great latitude and great ability 

to change all of those terms. However, there are legal concerns 

about the way the contracts govern what a servicer’s abilities to 

reach into those securities pools and modify those loans are. So 

providing that safe harbor to give them some protection against the 

legal liabilities and making—or having them being accused of doing 

something against the best interests of the trust I think would further the ability of the servicers to actually modify those types of 

loans. 

Mr. GREEN. Yes, sir? 

Mr. EVERS. A little different perspective, particularly thinking of 

it from an investor’s perspective. If an investor thinks the future 

path of home prices is going down, and if they are looking at modification activity, and those modifications are kind of just nipping 

and cutting at the edges, and there is a lot of redefaults on those, 

they are thinking they could have a bigger loss down the road. If 

the loan is modified and still ends up in foreclosure, and home 

prices still go down, they are thinking, I could have a bigger loss 

18 or 24 months down the road than if I just foreclosed today at 

the current prices. 

Mr. GREEN. I see. 

Mr. LAWLER. I can add one more. Investors typically analyze the 

problem from their own perspective, how many loan modifications 

is it in my interest to do, but we are in a situation now where the 

cost of foreclosures affect everybody else. There are substantial external costs that are not perhaps being fully taken into account, 

and the sort of broader social benefits of modifications may be 

greater than the benefits to the investor making the decision. 

Mr. GREEN. Because my time is about up, someone tell me quickly how or what percentage of the loans that are questionable and 

may go into default are ARMs that are about to reset? Does anyone 

know? Do we have a high percentage of ARMs that are about to 

reset, or have we gotten through the ARMs? 

Mr. LAWLER. We have mostly gotten through that, the 3/27s and 

2/28s. 

Mr. GREEN. Right. 

Mr. LAWLER. Most of those hit the first reset date through last 

year. That was at one time the main cause of problems. Now we 

17 

are past the hump on that, but we have a whole bunch of new 

problems. 

Mr. GREEN. Madam Chairwoman, I cannot see the clock. Do I 

have any time left? 

Chairwoman WATERS. The discussion about whether we have 

gotten over the hump of the resets? I have been led to believe that 

we have yet to hit the height of the resets. That should be coming 

in 2009 and 2010. So would you please go ahead and pursue that 

question? 

Mr. GREEN. Thank you, Madam Chairwoman. 

Simply restating what the chairwoman has called to our attention, and I think what we were trying to get to is this: The ARMS 

and 3/27s, 3 years prior to this would take us to 2006 or thereabouts. You would still have a good number of those resetting at 

this time; would you not? 

Mr. LAWLER. We still have some, but the biggest volume was in 

2/28s. There was a bigger volume of 2/28s than 3/27s. So it is not 

that we don’t have a good number coming up, it is that we are past 

the peak of them. That is what I meant. 

Mr. GREEN. I understand. 

My final question is this: If we provide the safe harbor, if we encourage loan modifications as opposed to refinance, if we provide an 

incentive by way of an emolument, meaning a payment of dollars 

for remodification, is this going to have a sizable impact on the 

problem, or will we find ourselves with so many loans to be modified that we won’t have enough servicers to accommodate the persons who are seeking modification? 

Mr. LAWLER. Certainly capacity constraints are a matter of concern. But we need to have a lot more modifications than we have 

been having. There is certainly room to do a lot more. We need to 

press that capacity. 

Mr. GREEN. Does that mean we will have to hire more people is 

the bottom line? 

Mr. LAWLER. I think servicers will find that in many cases they 

will have a need for more people, and the incentive should make 

it possible for them to hire more people. 

Mr. GREEN. Thank you, Madam Chairwoman. I yield back. 

Chairwoman WATERS. Thank you. 

Mr. Marchant. 

Mr. MARCHANT. Thank you for your testimony. If I were sitting 

back in my district watching this hearing, the summary that I 

would have taken away from the testimony is that HUD is studying and encouraging, the OTS is studying and encouraging, the Office of the Comptroller is studying and collecting data, and the Federal Housing Finance Agency is studying, evaluating, and implementing monthly and quarterly foreclosure reports. 

Now, nobody should be encouraged by that. In fact, there doesn’t 

seem to be a workable plan in place. In HUD’s case, they have a 

dual role of protecting; in fact, HUD cited a report in their study, 

and they cited a report that was made in 1996. And we are working off of a plan from 1996. In the case of the Office of Thrift Supervision, in many cases at the same time you are studying and 

urging your members and those that you supervise to modify, at 

the same time your examiners are out in those banks examining 

18 

the very portfolios and the very loans that you are urging them to 

modify. And, in fact, if they do modify them, then they are put on 

a watch list, and they are required to reserve against those loans. 

So the very thing that you are urging them to do your examiners 

could very well penalize them for following through and doing. 

In the case of the FHFA, the Federal Housing Finance Agency, 

it is important. I will not argue that we have statistics and knowledge of the redefaults, etc., etc., but, in fact, all of the information 

that is brought forward in these reports actually reinforces, in my 

view, a lender’s resolve probably not to modify and not to reset the 

mortgage, because what shareholder in any institution would urge 

its institution or board member would urge its institution to modify 

or extend or renew a loan that has one in three chances of relapsing? 

And, as was stated, it might be more beneficial to let them take 

the loss now, get the thing back on the market. 

So, Madam Chairwoman, the frustration on my part, and I know 

that everybody is concerned about it, is that we continue to pile 

study, letters, urgings, statistics, reports on top of reports, and in 

fact, your HUD counselors don’t have anybody to turn to because 

we have as many disincentives built into the system to not modify 

and not extend and to foreclose than we have to do that. And it 

has been proven in the fact; it has been proven in the failure. I 

don’t fault the attempts to come up with these programs, but it is 

very clear after, what, we have been working on it a year, that 

most of the things that we have tried have been counterproductive. 

So, thank you. 

Mr. MORRIS. Madam Chairwoman, am I allowed to—I just want 

to be accurate by my testimony. Can I make a comment? 

Chairwoman WATERS. Please, yes, go right ahead. 

Mr. MORRIS. I am Vance Morris from the Department of Housing 

and Urban Development. The 1996 study that was referenced in 

the testimony was the basis for our loss mitigation program. By 

statute, if a lender does not engage in loss mitigation and they file 

a claim with us and we find out, we charge them 3 times the claim 

amount. That means if we paid $30,000 and they failed to execute 

loss mitigation strategies, if we paid them $30,000, they would 

have to pay us $90,000. 

We monitor lenders electronically. We review thousands of loan 

files per year. So we do have an active loss mitigation program. We 

would like to have more expansive authorities, but we are not in 

the study mode. We have been active in modifying loans, doing partial claims which brings people’s arrearages current. We do special 

forbearances. And we have been very active with trying to actively 

manage our portfolio. 

So if I misspoke and made it seem that we are studying, we don’t 

have a study program. We have an active loss mitigation program. 

Lenders are penalized if they don’t follow the program. But we do 

like to see additional authority. 

Chairwoman WATERS. We didn’t misunderstand you. Mr. Marchant didn’t misunderstand you. But we are quite frustrated because 

of what this country is experiencing. And when you talk about loss 

mitigation, we have discovered what some of these loss mitigation 

19 

programs are in the banks. How do you regulate loss mitigation 

programs that are basically handled offshore? 

Mr. MORRIS. Well, the loss mitigation activities for FHA are currently not outsourced. It has to be done by an FHA-approved 

servicer. It is not an outsourced activity. 

Chairwoman WATERS. I am sorry. So you are only speaking for 

the FHA? 

Mr. MORRIS. Yes, ma’am. 

Chairwoman WATERS. Thank you very much. I am going to move 

on to Mr. Lynch. 

Thank you. 

Mr. LYNCH. Thank you, Madam Chairwoman, and Ranking Member Capito. 

I want to thank the witnesses on this panel and others for coming to help this committee with its work. 

I want to go back to a point that Madam Chairwoman raised a 

little earlier, a good point. The Federal Reserve does a very good 

job in my district in terms of the data that they provide me. They 

can actually, the Boston office of the Federal Reserve, can actually 

tell me the number of mortgage resets that are going to happen in 

my district. Actually, by town, they can tell me these mortgage 

resets. And while right now, the mortgage resets are for the most 

part very low because the rates are low, the volume of those mortgages, as the Chair pointed out, in 2009 and 2010 are very high, 

and we really don’t know what the picture will be at that point, 

although we heard Mr. Bernanke today say that rates would have 

to stay historically low for some time. 

More troubling for me, though, is what I am seeing now is, rather than reset-related defaults, I am seeing layoff-related defaults. 

People are getting thrown out of their jobs, and so a sound and stable mortgage is now in trouble. 

Here is my question. We have a provision that is being considered this week for a so-called cramdown provision, where a homeowner in bankruptcy would have the opportunity to have their 

mortgage modified in bankruptcy if the judge determined that was 

the right thing to do. 

If this cramdown provision succeeds, what impact do you see it 

having on the voluntary modification framework that you are dealing with, where—what I am saying is, are we going to see lenders 

and servicers incentivized to deal? Remember, it is all voluntary. 

Or are we going to see homeowners who are saying, I am so far 

underwater, I might as well just roll the dice, not go for a voluntary modification, and see what I can get out of the bankruptcy 

court? 

I know this is conjecture. It is opinion, but in your case, it is educated opinion. What do you think will happen if we do adopt that 

provision? 

Mr. MORRIS. Well, I looked at the legislation as well, and the net 

effect is still being ascertained by the Department. 

But your question refers to voluntary modifications. The authority that I talked about that we are requesting is additional authority to do larger voluntary modifications; it is actually called partial 

claim authority. We think with that authority, it gets us further 

20 

ahead so someone would avoid bankruptcy, because it would actually be an alternative. 

Currently, the way our loss mitigation programs work, it helps 

you if you have a temporary but not permanent disruption in income. That means 12, 14, 16 months. But what is happening now, 

as you pointed out, Congressman Lynch, is that families are having 

permanent reduction of income. So we have to have a tool to bring 

the payment down to an affordable level. We are hopeful that we 

will get the authority to have this voluntary modification, then it 

will not push people to bankruptcy, because that will just cause the 

cascading effect of all the borrower’s credit. 

Mr. LYNCH. That is helpful. Could I get a couple more opinions 

on that, just different perspectives? 

Ms. GARDINEER. Congressman, I think that what we are seeing 

with regard to the bill, I have looked at the Helping Families Save 

Their Homes Act, the proposal that will be on the Floor this week, 

and at OTS, we believe that another tool that would help us reach 

as many homeowners as possible if it is effectively done that can 

reach those homeowners would be a good thing. 

Whether or not this would incentivize servicers to engage in 

more modifications, I think that another point that Congressman 

Green raised is also important to note: Servicers are constrained by 

the contracts, the pooling of servicing agreements, that are in place 

with regard to securitizations. 

What we have seen from the data that we collect is that if there 

is a modification, a mortgage that is in portfolio, the modification 

is often far more sustainable because the powers to modify that 

loan are greater. Again, the ability to provide some legal insulation 

through additional legal action for the servicers would assist in 

that as well. So, again, the more tools that we see that can get to 

the most homeowners to effectively stave off the foreclosures is the 

better approach. 

Mr. LYNCH. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

Ms. Jenkins. 

Ms. JENKINS. Thank you, Madam Chairwoman, and thank you 

all for your testimony today. 

I would like to share with you an excerpt from an article I read 

recently in Business Week, and I would just ask maybe a few of 

you to comment on the problem it describes. Federal banking regulators reported in December 2008 that 53 percent of consumers receiving loan modifications were again delinquent on their mortgages after 6 months. 

A law professor, Allen M. White, says the redefault rates are 

high because modifications often lead to higher rather than lower 

payments. An analysis that White did of a sample of 21,219 largely 

subprime mortgages modified in November 2008 found that only 35 

percent of the cases resulted in lower payments. In 18 percent, payments stayed the same, and in the remaining 47 percent, they rose. 

The reason for this strange result was lenders and loan servicers 

were tacking on missed payments, taxes, and big fees to borrowers’ 

monthly bills. 

21 

Now, it seems to me that payments that rise after the loan is 

modified is counterproductive. Could some of you just comment on 

this particular problem? 

Mr. LAWLER. I would be glad to. The program that we have been 

working on with the Administration is designed specifically to 

avoid that kind of problem. It is specifically targeted at the debtto-income ratios of the borrowers and working them down to 31 

percent. In many cases, they will have been much higher. And so 

the whole focus is to make an affordable mortgage, not simply to 

tack on all the arrearages, to figure out how much that will amortize over to over the existing life of the loan. 

Mr. EVERS. I just would add, there may be some cases where the 

loan payment may increase, and that may be a situation where it 

is a temporary credit repair strategy going on where the borrower 

has a temporary situation and, fees and stuff are getting rolled into 

the loan getting reset. But we want to know the answer to that 

question. We want to know if this is a pattern of practice, just how 

many of these types of mods are out there. That is why we are collecting changes in monthly payments before and after the mod to 

know what is going on, and then looking at the redefault rates for 

the various classes for loans where there has been an increase in 

payment, where there has been no payment change, and where 

there has been a decrease to get a better understanding of that. 

Mr. MORRIS. Congresswoman Jenkins, as I mentioned in my testimony, that is a correct statement. On average, after the loan 

modification, the average increase is about $22. And that is the result of the past due amount being put into the new loan balance. 

The reason why I keep emphasizing this is the way that the loss 

mitigation program is set up currently is to help people who have 

temporary reductions in income. So what the servicers do is, when 

they do the financial analysis, they analyze the payments so that 

they can determine that it is an affordable payment. What is happening now, though, there is a permanent reduction in income, so 

we need a way to effectively reduce the payment in a tangible way, 

and that is why we are requesting the additional authority, so we 

will have additional tools to assess people in this situation. 

Chairwoman WATERS. I am going to turn to Mr. Cleaver at this 

point. Before I do, has there been a formal request for additional 

authority so that you could basically reduce the amount of the 

mortgage payment? 

Mr. MORRIS. I was looking at the legislation yesterday. It was 

written in the Help Families Save Their Homes Act. It was in that 

authority. But I don’t know exactly at what stage it is, and I will 

follow up. 

Chairwoman WATERS. We will take a look. 

Mr. Cleaver. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

With some concern, perhaps even fear, that the redefault rate 

will be used by opponents to fight most of what some of us are interested in doing with either cramdown or loan modification, is 

there anything that we can do to reduce the redefault rate, considering of course, I mean, obviously, if you go by the percentages 

with the subprime primers generally having a redefault rate highVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
22 

er, is there a way that we can undergird them or do something to 

reduce that? Anybody? 

Ms. GARDINEER. Congressman, I think that, as my colleague Mr. 

Evers said, one of the things that our mortgage metrics report after 

the release of the third quarter data showed the increase in the redefaults at the 30- and 60-day past due mark; we did go out for 

a broader data collection to look at how loans were modified that 

resulted in an increase in principal as well as payment, where 

there was no change to the payments, to reduce payments by 10 

percent or less, or reduce payments by more than 10 percent. And 

our goal in getting that information and then sharing it with the 

Administration’s working group, which our agencies are continually 

working to help find the right criteria that we believe we can get 

from looking at how these modifications were done so we can see 

which ones were more effective and what that structure was. 

In sharing that with the working group with the Administration 

and with Treasury, we hope to find that streamlined effort where 

we can show the most effective modifications as demonstrated from 

the information we get. And hopefully we will be able to look at the 

lower rates of redefaults and see a correlation between some of 

these criteria, and utilize that to give some structure to our 

servicers as far as trying to make the most affordable and sustainable modifications as opposed to the ones that could easily slip 

back into a redefault situation. 

In addition to that, I think it is important to note that we do see 

a correlation with unemployment as well as underwater mortgages. 

All of those things, I think, that we get the increased data and we 

share that with our fellow agencies, it allows us to have the ability 

to try to form that more sustainable mortgage and avoid those redefaults. 

Mr. CLEAVER. Mr. Evers. 

Mr. EVERS. I would just follow up on what Grovetta said. We 

have interagency retail credit company guidance, and in that guidance, it basically requires servicers to try to do one mod, not multiple mods for a borrower. And that is in there to make sure that 

they do the mod right and they are not doing multiple mods. And 

the only time they would do a multiple mod, if the borrower has 

some life-changing event, like loss of a job or unemployment or 

some medical problem or major loss of income. But the real issue 

is, do the mod right, install for affordable, sustainable payment, 

and structure it properly. 

Mr. CLEAVER. Is there way to do this with triage? That is, can 

it also be done in a just way? 

Mr. EVERS. In terms of doing more? 

Mr. CLEAVER. No, no. Is there a way—I mean, there are some 

loan modifications that we—I think Ms. Gardineer has just done a 

little, some loan modifications that we should know are not going 

to work. And so there is—it is pointless to try to force it to work, 

and we actually feed the people, we feed our opponents when we 

do that because they use that to, you know, say you are throwing 

away money, and the whole 9 yards. And I like to feed everybody, 

but I don’t want to feed my opponents. 

Mr. MORRIS. Congressman Cleaver, I think I can respond to that 

question. As I mentioned in my testimony, it is really not the reVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
23 

default rate. It is really that you end up foreclosing. The cost between throwing someone on the street and doing another modification through FHA is $750. So we will spend another $750 to try 

to keep somebody in the home, because what happens is, 2 years 

after the fact, more than 85 out of 100 people are still in their 

homes, and we are saving a lot of money as opposed to saying, oh, 

the redefault didn’t work this time; let’s not try it again. 

What happens is it takes time for people to recover from change 

in household income. It could be a disability. And it is—because, 

like I said, the current tools now, you have to go back to essentially 

your full payment. So we do have the redefaults, but still we work 

with them again to make certain that it sticks. And for another 

$750, if we can save another 60 families from losing their homes, 

that is what we are doing. So your opponent is going to look at the 

redefault rate, but my question is, has a person still been living in 

the house 2 years after the fact? Because 2 years really is the 

measure that says they fully recovered from any type of activity. 

If something happens 5 years down the road, it is probably another 

life event. 

So the question, this is just my opinion, is, what happens to the 

family? Are they ultimately foreclosed? And is it worth $750 to try 

to keep somebody in their house by doing another loan modification? FHA says it is worth another $750. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Mr. Lee. 

Mr. LEE. I will try to be brief, but it is such an important issue, 

and I just want to touch on a few points because this has been such 

a major issue in my district. I have a district between Buffalo and 

Rochester, New York, and a very hardworking community who this 

group, we never really had a boom to bust in the housing market. 

And in some way, that has been a blessing because people have 

been able to, up until now, been able to stay within their homes. 

But we are now starting to see the job losses, and people who, 

through no fault of their own, now are starting to have issues, be 

it a medical illness or they had two incomes and a wife or husband 

has been laid off. And these are people who have been paying their 

credit cards. Every day in and day out, they have been meeting 

their mortgage payments, but it has been harder and harder. 

And the calls that I am receiving by the dozens is the fact that 

they are making their payments, and they now go back to their 

service provider—and I won’t name names of the institutions—but 

some are finding, in some cases, are finding relief through a service 

provider A, but service provider B under no circumstances really 

has been willing to either remodify the loan amount, lower interest 

rates, or try to work with them. And it is very hard to go back to 

them and say, we don’t have a policy. 

I would be curious to know, can we—and I know most banks do 

have a process in place, but it doesn’t seem to be consistent. I 

would like to hear your views. Do we, without trying to hamstring, 

I am not a big believer in Big Brother, but do we have the ability 

to come with some standard uniform process so that we can tell 

those who are struggling that these are options that are available 

to you, those people who are struggling but are making their payVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
24 

ments right now, to try to assist them? And then I have a followup. 

Mr. LAWLER. This is something we are definitely trying to address in the program we have been working with the Administration on, and we will have further details on March 4th. 

What we are trying to do is set up a standardized program that 

can be adopted throughout the country, and that will include people who are extremely stressed and therefore in imminent danger 

of default even though they are currently making their payments. 

And we are very hopeful that this will work, as we are certainly 

directly trying to attack this problem. 

Mr. LEE. And in follow up to that, because that is the number 

one call, then the follow-up call is the fact that, again, these hardworking individuals are frustrated because I think they are worried 

a percentage of individuals who misrepresented their income who, 

be it in different parts of the country where there was escalating 

prices, where they took advantage of that system. And is there any 

way, because I don’t think there is anybody who wants to, if someone was trying to do this for personal gain versus those who have 

been truly hardworking citizens, how do we protect and make sure 

that we are not bailing out those who are trying to make a profit 

from this housing issue? 

Ms. GARDINEER. Just to follow up. We are also working with the 

Administration to develop this loan modification program. And key 

to that is going to be verification of things such as income and employment. We believe it is important not only to reach as many 

homeowners as we can to put them into sustainable affordable 

modifications, but to be able to verify the veracity of the information that the borrower provides to that servicer. 

But the uniformity that we are striving for, I think, gets to the 

heart of your first question, which is the disparity that may be incumbent upon different servicers and the approaches that they use 

to modify different loans, and going to servicer A, who is willing 

to use a certain set of criteria, but that may not be utilized by 

servicer B. 

Our hope is that we will be able to create the streamlined modification effort that is able to verify, to weed out fraud, to make sure 

that those who are owner-occupied properties are able to get that 

sustainable affordable modification that will allow them to stay in 

the home and avoid an avoidable foreclosure. 

Mr. LEE. Thank you. 

Chairwoman WATERS. Thank you very much. 

Before I call on Mr. Clay, keeping in line with that testimony, 

Ms. Gardineer, I have seen loans that—mortgages that people got 

involved in, in 2006 and 2007, where they were predatory loans, 

and the interest rates were 9 percent, 9.5 percent, and I had one 

at 10.5 percent. When you are constructing a model that can be 

used to do modifications, is there some consideration given to the 

high price of mortgages when the interest rates were basically at 

5 or 6 percent? I mean, could we say or is it advisable to recommend that all of those interest rates be reduced to 4.5 percent 

or something that would be consistent with somewhere what the 

mortgages would be today? 

25 

Ms. GARDINEER. Chairwoman Waters, I believe that part of the 

criteria that we are looking at may not be an across-the-board interest rate, but certainly looking at the home price depreciation as 

well as the interest rate at the time of origination and the payments that the borrower would be able to afford, looking at the 

debt-to-income ratio as well as the loan-to-value. So taking all of 

those things into consideration as well as the highest rates that 

may have been advanced at the origination, I think it is possible 

for us to come up with a streamlined approach that would indeed 

include a reduced interest rate in order to make that modification 

an affordable payment for that borrower. 

Chairwoman WATERS. I do understand that, now, with the modification efforts that I have been involved in helping some of my 

constituents, all of those things are taken into consideration for the 

most part. But I was really asking about the reduction of interest 

rates based on what appears to be a predatory interest rate that 

was given at a time when the market interest rates were 5 or 6 

percent, that you see, I mean, it just jumps out at you that this 

person is charged 10.5 or 9 percent. Wouldn’t that kind of be an 

automatic reduction without all the other considerations? 

Ms. GARDINEER. Congresswoman, I believe that you made an excellent point that I will take back to the working group this afternoon and include in our dialogue as we move towards our March 

4th deadline to provide that criteria and the parameters for the 

servicers. But that is an excellent point that we should be considering as we move forward. 

Chairwoman WATERS. I appreciate that, because I have run 

across a few of those. 

Mr. Clay. 

Mr. CLAY. Thank you, Madam Chairwoman, and I thank the 

panel for being here today. 

Let me start with Mr. Lawler. 

Mr. Lawler, in your testimony, you state that it is important to 

note that when calculating and analyzing redefault rates, common 

definitions are required, and there is much debate within the industry as to what those definitions are, how redefault rates should 

be measured, and over what timeframes. 

I am curious as to how you would define redefault terms and definition. When reporting your data, what do you consider a modification, and is a repayment plan a modification? 

Mr. LAWLER. A repayment plan that doesn’t change the terms of 

the mortgage but simply when it can be paid is not a modification. 

If it were a major change like a change in the term from a 30-year 

mortgage to a 40-year mortgage, that would be a modification. If 

it is simply taking the existing amount owed and saying, you can 

make up payments that you are behind at the end of the 30 years, 

that would just be a repayment plan or redistributing those 

amounts owed so that your payment goes up. Those are just repayment plans. 

As far as the definitions of redefault, the key things are, how 

many days delinquent, and over what timeframe? So, for example, 

Mr. Morris is suggesting that if you are still in your house 2 years 

later, that probably shouldn’t count as a redefault. Sometimes you 

don’t have as long a period. You don’t want to wait 2 years to see 

26 

how you are doing, so you compute how the loans are doing that 

you modified in a more recent time period and you want to know, 

well, how many 30-day delinquencies do I have, how many 60-day, 

how many 90-day and so forth. 

Mr. CLAY. Thank you for that response. 

Let me ask Mr. Evers. 

Mr. EVERS. I just want to follow up on that. We agree that there 

needs to be clear, standard definitions. You need to have a clear 

definition of what is a mod and what is not. A repayment plan, an 

informal repayment plan is not a mod. A mod is when the contractual terms of the payment have been changed in writing. And we 

only count that when it is done; nothing before that, nothing informal. And then we track subsequent performance, post-modification. 

And we look at the number of payments the borrower has made 

subsequent to that. That is, in our opinion, the best way to get an 

apples-to-apples comparison in terms of monitoring performance of 

post-modification loans. 

Mr. CLAY. Thank you for that response. How do we establish a 

guideline to ensure that we take into account the trend of the day 

that has several people in the household contributing to the mortgage payment? Many of these households stayed current in their 

payments until this current crisis. When considering a workout 

with the applicant, what do you include as gross income? Do you 

include the wife or other family members living in the home as additional sources of income if they are not on the mortgage? And 

anyone can take a stab at it on the panel. 

Ms. GARDINEER. Congressman, currently, the person who is actually on the note is the—or the couple or whoever is actually on the 

original note, that is the income that is the measure by which you 

are looking at how to modify that loan. There can be, and we recognize and it is a continued topic of discussion in the working groups 

right now working on the Treasury and Administration plan, recognizing that there are many households with contributors to the 

monthly mortgage income that are not actually on the note and 

how to recognize or work within that structure to create an affordable modification. But the current legal requirements would limit 

our ability to look at only those who are actually on the note for 

repayment modifications. 

Mr. CLAY. But you know that is not traditional. 

Ms. GARDINEER. I do recognize there are many households, as 

you described, and the working group is aware of that as well. 

Mr. CLAY. I think, Mr. Morris, you may be able to help me with 

this. Are we trying to force the choice of a modification over that 

of a refinance? The new charges added by Fannie Mae and Freddie 

Mac in December add up to about $15,000 to refinance costs for the 

borrower. Why is that? They have added up to 5 points. They have 

new terms like adverse market fee, adverse credit fee, and nonowner fee. Can you give me an answer to that? Do you know why? 

Mr. MORRIS. Candidly, Congressman Clay, I think Mr. Lawler 

would have to speak about the fees. 

Mr. CLAY. Mr. Lawler, could you tackle that? 

Mr. LAWLER. Certainly the fees on many mortgages have gone 

up. The risks have also gone up. It is a lot riskier to make a loan 

when the expectation is that the value of the collateral is going to 

27 

decline over the period of the loan, than in a time when you expect 

the value of the collateral to get greater. And in recognition of that 

risk, it is necessary to make some charges. 

At the same time, whenever it is possible, a refinance is probably 

on average going to be more successful than a modification if the 

borrower can qualify for the refinance. 

Mr. CLAY. But don’t we want to kind of look at what is reasonable here? I mean, what is actually doable for the average consumer? 

Mr. LAWLER. We certainly do. And the most important thing in 

that area that we can do is try to get the general level of mortgage 

interest rates down. 

Mr. CLAY. Without Fannie and Freddie adding onerous fees and 

arbitrary fees? 

Mr. LAWLER. I hope they are not arbitrary. 

Mr. CLAY. I bet they are. 

I yield back. 

Chairwoman WATERS. Thank you very much. 

As we wrap this up, and since you are making recommendations 

that supposedly will be unveiled on March 4th in the President’s 

plan, I would like you to give some thought to the fact that I have 

run into constituents who say they are the victims of fraud. Even 

though all of us would like to think we are all responsible and we 

know what we are doing, I am told that certain individuals had income that was noted on the documents that was much larger than 

their real income, and that that is not what they told the loan 

initiator; and they placed it on there in order to get the loan funded, the mortgage funded. I am told that people did not sign certain 

documents. 

What do we do where there is an indication of fraud? How do we 

follow that up? And how do we help the homeowner, and how do 

we penalize somebody? I mean, that is something I would like to 

give some consideration to. And FICO scores. If you have an adjustable rate mortgage and the margin is, I don’t know, 3 or 4 percentage points higher, and you obviously cannot pay that large a 

mortgage payment, and so you are delinquent, but you are trying 

to get a loan modification. If you were being considered, say, by, 

I don’t know, Fannie or Freddie or anybody else who would consider your FICO score as part of those things you consider before 

you do the loan modification, what do we do about that? Should 

you be penalized for that now having damaged your credit while 

you are trying and you have been working very hard to do a loan 

modification so that you could keep your home and you could make 

payments that you could afford? So I would like you to give some 

thought to that. 

I would like to note that some members may have additional 

questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

This panel is now dismissed. Thank you very much. 

I would like to welcome our distinguished second panel. Our first 

witness will be Mr. William C Erbey, chairman and CEO of Ocwen 

Financial Corporation. 

28 

Welcome. 

STATEMENT OF WILLIAM C. ERBEY, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, OCWEN FINANCIAL CORPORATION 

Mr. ERBEY. Thank you, Chairwoman Waters, Ranking Member 

Capito, and distinguished members of the subcommittee. My name 

is William Erbey, and I am chairman and chief executive officer of 

Ocwen Financial Corporation, an independent mortgage loan 

servicer. 

First, let me thank you for the opportunity to participate in this 

hearing today. I share your sense of urgency to find a lasting solution to our daunting foreclosure crisis, a crisis that lies at the very 

heart of our economic problems and threatens millions of families 

with the loss of their American dream, their home. 

I applaud the leadership of the chairwoman and subcommittee 

members in relentlessly advocating, ever since the inception of this 

crisis, the need for bold action to assist homeowners with 

unaffordable mortgages and to prevent avoidable foreclosures. 

I also applaud President Obama, Secretary Geithner, and the 

President’s economic team for answering the call for bold action in 

a matter of a few weeks into the new Administration by launching 

the Homeowner Affordability and Stability Plan. This plan includes 

a substantial loan modification component that is the subject of today’s hearing. 

Prior government-sponsored loan modification initiatives were all 

good first steps in the right direction, but the President’s new plan 

is exactly the kind of insightful and decisive action that is needed 

to make a material impact on the foreclosure crisis. 

As one of the few remaining independent mortgage servicers, 

Ocwen is very proud of our achievements in foreclosure prevention 

through loan modifications. We are not loan originators. We do not 

make mortgage loans. Rather, Ocwen is engaged as a loan servicer 

under contracts with mortgage investors, i.e., the securitized 

REMIC trusts. 

Currently, our servicing portfolio contains approximately 325,000 

mortgage loans of which approximately 85 percent are subprime. 

Beginning in early 2007, we proactively prepared for an increase 

in mortgage delinquencies by increasing our home retention consulting staff by 50 percent. When the mortgage meltdown hit with 

full force later that year, we increased staff by another 35 percent 

and were the first in the industry to adopt an aggressive and comprehensive loan modification program. Our program reengineers 

lower mortgage payments that are both: (A) affordable for the 

homeowner; and (B) will return greater cash flow to investors than 

the net proceeds that would otherwise be realized in a foreclosure. 

Loan modifications crafted in this way are consistent with our 

contractual obligations and result in a win-win-win solution for all 

involved. The homeowner keeps their home; the investor avoids a 

substantial loss; and the loan servicer retains the loan in the servicing portfolio. Since the inception of the crisis, we have saved over 

90,000 homes from foreclosure. And for investors, according to an 

industry study by Credit Suisse, Ocwen’s loan modification program generates the highest cash flows by any servicer on 90-plus 

29 

day delinquent loans, an amount that is twice the industry average. 

If loan modifications are to have an enduring impact, the reduced 

mortgage payments must be sustainable by the homeowners. The 

salient measure of success, therefore, is the redefault rate, i.e., the 

percentage of loans that go into default after modification. We are 

pleased to report that loan modifications engineered by Ocwen 

have a redefault rate of 19.4 percent compared to an industry average of 42.9 percent, according to the most recent report issued by 

the OCC and the OTS. 

The superior sustainability of Ocwen’s loan modifications is the 

result of our customized approach that addresses homeowners’ delinquencies on a loan-by-loan basis. By combining our proprietary 

loan analytics technology with behavioral science research, we first 

comprehensively re-underwrite each delinquent loan we service, 

i.e., the way it should have been done with the broker or the lender 

at origination. Second, we determine whether modification is both 

affordable by the homeowner on a sustainable basis and maximizes 

the net present value for the loan owner as compared to a foreclosure. And, third, we provide one-on-one financial counseling to 

the homeowner aided by interactive scripting engines to maximize 

the likelihood of their keeping current on the modified loan. 

Another key to sustainability is principal reductions where necessary to achieve affordability: 18.7 percent of our loan modifications include writing down of the loan balance. This allows us to 

help more distressed homeowners with solutions. As reported by 

Credit Suisse, Ocwen leads the industry with 70 percent of the industry’s principal reduction modifications. 

Early intervention is critical to foreclosure prevention. Prevailing 

industry standards, as confirmed by the American Securitization 

Forum, make it clear that it is permissible to modify loans not only 

when the borrower is actually in default but also when default is 

imminent or reasonably foreseeable in the good faith judgment of 

the servicer. Adopting this standard, our early intervention unit 

has successfully avoided upwards of 9,000 foreclosures through 

proactive modifications. 

If a loan modification program is to have a material impact to 

redress the national foreclosure crisis, it must be scalable. Ocwen 

has invested over $100 million in R&D in building an automated 

large-scale platform that incorporates artificial intelligence, 

decisioning models, and scripting engines. This robust technology 

allows us to take on many multiples of the volume of delinquencies 

we have already cured in our portfolio. 

I would be remiss if I did not recognize the critical assistance 

provided to us by our nonprofit consumer advocacy partners. When, 

for whatever reason, a homeowner in distress does not respond to 

our letters or phone calls, we are unable to help them. Through 

grassroots outreach and educational initiatives, community groups, 

such as the National Training Information Center, Home Free 

U.S.A., National Fair Housing Alliance, National Association of 

Neighborhoods, National Council of LaRaza, St. Ambrose Housing 

Aid Center, and so many others, have greatly assisted us in making that key communication link with our customers. We have also 

recently established a relationship with National Community ReinVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
30 

vestment Coalition to broaden our homeowner outreach, and we 

will continue to support the foreclosure prevention efforts of the 

HOPE NOW Alliance. 

[The prepared statement of Mr. Erbey can be found on page 70 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

I must move on to Ms. Mary Coffin, executive vice president of 

Wells Fargo Home Mortgage Servicing. 

STATEMENT OF MARY COFFIN, EXECUTIVE VICE PRESIDENT, 

WELLS FARGO HOME MORTGAGE SERVICING 

Ms. COFFIN. Chairwoman Waters, Ranking Member Capito, and 

members of the subcommittee, I am Mary Coffin, head of Wells 

Fargo Mortgage Servicing. 

Throughout this crisis, the mortgage industry and the government have collaborated on ways to reduce foreclosures and stabilize 

the economy. The homeowner affordability and stability plan is yet 

another positive step in addressing these challenges. As further details of the plan are defined, we fully support striking the delicate 

balance between providing aggressive solutions for those in need 

and guarding against moral hazard. 

Last year, we made it possible for half-a-million families to purchase a home, and we refinanced another half-a-million families 

into lower mortgage payments. At the end of 2008, for 8 million 

mortgage customers Wells Fargo services, 93 of every 100 were current on their mortgage payments; and for the 7 who were not, we 

have worked hard at keeping them in their homes. Since our servicing is predominantly held by other investors, this has required 

gaining consensus to honor our contracts. 

Over the past year-and-a-half, we have delivered more than 

706,000 foreclosure prevention solutions. We work with all of our 

customers, including those who are not in default, to determine if 

they qualify for a modification. They simply need to prove they 

have experienced a hardship that significantly changed their income and/or expenses. When we do modify a loan, about 7 of every 

10 customers remain current or less than 90 days past due 1 year 

later. We connect with 94 percent of our customers who have 2 or 

more payments past due. To be responsive to requests for help, we 

have more than doubled our staff to 8,000 default team members, 

all U.S.-based. 

These times are unprecedented, and we certainly are not perfect, 

but we do our best. And we thank you for taking your personal 

time to reach out to us when our servicer does not meet the standards we have set so that we can immediately work to correct the 

situation. 

When the foreclosure crisis began 21⁄2 years ago, the first customers challenged were those with subprime ARM loans. To address their needs, streamlined processes to modify these loans into 

fixed products were created. But, clearly, as the housing and economic crisis has compounded, servicers have needed to go deeper 

with modification tools to provide sustainable solutions. In the 

fourth quarter of 2008, we provided 165,000 solutions, including 

term extensions, interest rate reductions, and/or principal forgiveness. Also, given the unique nature of the Wachovia option ARM 

31 

loans, we used more aggressive solutions through a combination of 

means, including permanent principal reduction in geographies 

with substantial property declines. In total, 478,000 customers will 

have access to this program if they need it. 

As the number of customers in need rises, Wells Fargo has advocated the creation of a standardized modification process that is 

aligned across all investors. The one described in the Administration’s plan will significantly improve our ability to serve more customers and to set appropriate consumer expectations for a modification. According to third quarter 2008 FHA statistics, 56 percent 

of the Nation’s 55 million mortgage loans are owned by Fannie and 

Freddie who are already aligned with this process. But more critical are the 16 percent held by private investors, which represent 

62 percent of the serious delinquent mortgage loans. 

In the modifications we do today, loan terms are adjusted to 

achieve at least a 38 percent affordability target. By bringing borrowers to a 31 percent target as defined in the Administration’s 

plan, we further increase the odds they can better manage their 

overall debt, thereby lessening the likelihood of redefault. 

Even though the details are not finalized, Wells Fargo has already begun to operationalize the standard modification program. 

We stood ready to assist our customers with information immediately following the President’s announcement and our analysis to 

find those who may qualify is underway. We also will continue to 

stress the importance for FHA to be granted the authority to expand the 601 program to allow the assignment of mortgages to 

FHA and the payment of claims upon modification. We also support the recommended changes to HOPE for Homeowners. 

When asked what makes it difficult for us to help more borrowers, it is simply that their challenges are complex. Income disruption is at the root of the issue with many customers who are 

in variable or commissioned income situations that began destabilizing in the early part of the crisis, and the full impact of unemployment or underemployment is still unknown. While there are 

many tragic hardship cases, there are also people who got caught 

up in the excess of the growing economy and the real estate values 

who can no longer sustain the lifestyles to which they have become 

accustomed. No loan modification alone can solve this dilemma. In 

certain circumstances, counseling which considers full debt restructuring is required. 

In conclusion, we look forward to continuing to work with you on 

ways to turn the housing and mortgage industry around, and we 

will assist in any way possible to advance the issues we have addressed today. 

Thank you for your time. 

[The prepared statement of Ms. Coffin can be found on page 67 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Our next witness is someone who has been here more than once, 

Mr. Michael Gross, manager and director for loss mitigation, Bank 

of America. 

What do you have new to tell us today, Mr. Gross? 

32 

STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, 

LOAN ADMINISTRATION LOSS MITIGATION, BANK OF AMERICA 

Mr. GROSS. Madam Chairwoman, and Ranking Member Capito, 

I must confess, it is a pleasure to be here before you again. 

Chairwoman WATERS. I bet. 

Mr. GROSS. Good afternoon, and thank you for the opportunity 

to appear again to update you on our efforts to help families stay 

in their homes. 

As the country’s leading mortgage lender and servicer, Bank of 

America fully appreciates its role in helping homeowners through 

these difficult times. We want to ensure that any homeowner who 

has sufficient income and the intent to maintain homeownership 

will be assisted using any and all tools we have available. 

Bank of America applauds the Obama Administration’s Homeowner Affordability and Stability Plan’s focus on assisting financially distressed homeowners with their mortgage payments using 

their refinancing and loan modification program. Ken Lewis, our 

chairman, has assessed the plan as very thoughtfully constructed, 

and believes it has a very good chance to make a significant and 

positive impact on today’s crisis. We strongly support the Administration’s focus on affordability in the loan modification processes in 

order to achieve long-term mortgage sustainability for homeowners. 

Bank of America recently announced a moratorium on foreclosure 

sales that is in effect until receipt of guidelines for implementing 

the President’s plan. Simply put, we want to have every opportunity to help eligible homeowners who can be assisted by these 

new initiatives. We have already begun working with the Administration to develop guidelines for the implementation of the Homeowner Affordability and Stability Plan modification and refinance 

initiatives in order to ensure its success. 

The Administration’s focus on affordability and sustainability is 

consistent with the approach that we have implemented which has 

led to more than 230,000 loan modifications for our customers in 

2008 and 39,000 customers in January 2009 alone. In 2008, Bank 

of America committed to offer loan modifications to as many as 

630,000 customers over the next 3 years to help them stay in their 

homes, representing more than $100 billion in mortgage financing. 

I would also like to provide a brief update on our mortgage business. We strongly believe that long-term recovery in the economy 

and housing markets relies upon lenders’ responsibility and effectively providing loans to credit-worthy borrowers. In April, we will 

unveil our new Bank of America home loans brand. This launch 

will confirm our longstanding pledge to be a responsible lender and 

to help our customers achieve successful sustainable home ownership. 

Importantly, I want to emphasize that we are very much open 

for business and making new loans. In January, we produced $21.9 

billion in new mortgages. We are now routinely publishing public 

updates on the Internet regarding our lending activity. 

Since I last appeared before Congress, Bank of America launched 

the Homeownership Retention Program. The program, launched in 

December, is designed to achieve affordable and sustainable mortgage payments for borrowers who financed their homes with 

33 

subprime or pay-option adjustable-rate mortgages serviced and 

originated by Countrywide prior to December 31, 2007. 

The centerpiece of the program is a streamlined loan modification process designed to provide relief to eligible subprime and payoption ARM customers who are seriously delinquent or at the risk 

of imminent default as the result of loan features, such as rate 

resets or payment recasts. The program’s goal is the same as the 

President’s: to reduce monthly mortgage payments to affordable 

and sustainable levels. 

I would also like to update the committee on additional progress 

we have made to date on our entire home retention operations. 

Since early last year, the home retention staff for Bank of America 

has more than doubled to nearly 6,000 staff members. We also are 

continuously improving the training and quality of the professionals dedicated to home retention. 

As we have learned through experience, early and open communication with customers is the most critical step in helping prevent 

foreclosures. In 2008, we participated in more than 350 home retention outreach events across the country. We are also proactively 

reaching out to customers by making more than 10 attempts per 

month to contact delinquent homeowners. In January alone, we 

placed nearly 12 million outbound calls. 

In addition to sharply increasing the pace of workouts, we have 

been more aggressive in the types of workout plans completed. 

Loan modifications are now the predominant form of workout assistants. In 2008, loan modifications accounted for nearly 75 percent of all loan modification plans. Of these loans, interest rate 

modifications accounted for approximately 80 percent of all of the 

loan modifications. 

I want to thank you for the opportunity to describe our ongoing 

home retention efforts. We recognize there is still much more to be 

done, and we look forward to working with Congress and the Administration. 

Thank you. 

[The prepared statement of Mr. Gross can be found on page 111 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Ms. Molly Sheehan, senior vice president, Chase Home Lending, 

JP Mortgage Chase. 

STATEMENT OF MARGUERITE SHEEHAN, SENIOR VICE 

PRESIDENT, CHASE HOME LENDING, JPMORGAN CHASE 

Ms. SHEEHAN. Chairwoman Waters, Ranking Member Capito, 

and members of the Subcommittee on Housing and Community Opportunity, we appreciate the opportunity to appear before you 

today on this most important topic of helping homeowners. 

My name is Molly Sheehan. I work for the home lending division 

of JPMorgan Chase in housing policy. 

Chase is one of the largest residential mortgage servicers in the 

United States, serving more than 10 million customers located in 

every State of the country with mortgage and home equity loans 

totaling about $1.4 trillion. Chase is also one of the largest residential mortgage lenders, and we continue to make mortgage credit 

available even in these difficult times. We provide loans directly to 

34 

consumers, and we purchase loans from smaller lenders so that 

they can lend to their customers. In 2008, Chase originated or purchased more than $105 billion in mortgage loans, even as mortgage 

applications declined significantly. 

At Chase, we are not only continuing to lend; we are also doing 

everything we can to help families meet their mortgage obligations 

and keep them in their homes. We believe it is in the best interest 

of both the homeowner and the mortgage holder to take corrective 

actions as early as possible, in some cases even before default occurs. We apply our foreclosure prevention initiatives to both the 

$325 billion of loans that we own and service, and the $1.1 trillion 

of investor-owned loans that we service. 

We expect to help avert 650,000 foreclosures, for a total of $110 

billion worth of loans, by the end of 2010. We have already helped 

prevent more than 330,000 foreclosures, including modifying loan 

terms to achieve what we expect to be long-term sustainable mortgage payments. We are well underway to implementing the commitments we made in announcing our expanded foreclosure prevention plan last October. We have commenced mailing proactive 

modification offers to borrowers of Chase-owned option ARM loans 

at imminent risk of default. We have selected sites for 24 Chase 

homeownership centers in areas with high mortgage delinquencies 

where counselors can work face-to-face with struggling homeowners. We will have 13 of these centers in California and Florida 

open and serving borrowers by the end of this week. The other 11 

around the country will be open by the end of next month. 

We have added significantly to our staff, and we continue to add 

more capacity in our operations to help struggling homeowners. We 

initiated an independent review process to ensure each borrower is 

contacted properly and offered modification prior to foreclosure as 

appropriate. We have developed a robust financial modeling tool to 

analyze and compare the net present value of a home foreclosure 

to the net present value of a proposed loan modification, which allows us to modify loans proactively while still meeting contractual 

obligations to our investors. 

We believe programs like ours are the right approach for the consumer, all consumers, and for the stability of our financial system 

as a whole. We support the Administration’s proposal to adopt the 

uniform national standard for such programs and to encourage all 

sensible modification efforts short of bankruptcy as much as possible. 

As our CEO commented last week, we believe the Homeowner 

Affordability and Stability Plan announced by President Obama is 

good and strong, comprehensive and thoughtful. We think it will be 

successful in modifying mortgages in a way that is good for homeowners. Most particularly we applaud the fact that the plan focuses 

on making monthly payments affordable; will create a national 

standard and create fair and consistent treatment across the industry; and the standard will include verification of income and expense. We also applaud the partnership with government to reduce 

interest rates and payments for borrowers and the expanded ability 

of borrowers to take advantage of today’s lower rates through refinancing. We look forward to working with the Administration, Congress, and others as we work forward on this plan. 

35 

As we advised Chairman Frank and the members of the House 

Financial Services Committee on February 12th, we have stopped 

adding loans owned by Chase into the foreclosure process as the 

Administration’s plan is being developed. 

Thank you. 

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

152 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Steve Hemperly, executive vice president, real estate default 

servicing, CitiMortgage. 

STATEMENT OF STEVEN D. HEMPERLY, EXECUTIVE VICE 

PRESIDENT, REAL ESTATE DEFAULT SERVICING, 

CITIMORTGAGE, INC. 

Mr. HEMPERLY. Chairwoman Waters, Ranking Member Capito, 

and members of the subcommittee, thank you for the chance to appear before you today to discuss Citi’s loan modification efforts. My 

name is Steve Hemperly, and I am the executive vice president for 

CitiMortgage Real Estate Default Servicing. 

Citi services approximately 7 percent of the loans in the United 

States. In this enormous difficult housing market, Citi has moved 

aggressively to help distressed borrowers. We have a high degree 

of success in keeping borrowers in their homes when we are able 

to make contact with them and they want to remain there. 

Citi specifically focuses on finding long-term solutions for borrowers in need. In support of this, a key loss mitigation tool is loan 

modification. A modification agreement is typically used when a 

customer has a significant reduction of income that impacts his or 

her ability to pay and lasts beyond the foreseeable future. This 

agreement makes the mortgage more affordable for the customer. 

We have found modifications to be effective in helping borrowers 

manage through difficult times and avoid foreclosure. 

Citi has a specially trained servicing unit that works with at-risk 

homeowners to find solutions short of foreclosure and tries to ensure that, wherever possible, no borrower loses his or her home. 

Citi continuously evaluates each of its portfolios to identify those 

customers who can save money and reduce monthly payments and 

offers them timely loss mitigation solutions. We also provide free 

credit counseling, make loss mitigation staff available to borrowers 

or counseling organizations, and provide work-out arrangements 

and other options. 

In keeping with our commitment to help borrowers stay in their 

homes, we are implementing the FDIC streamline modification program for loans that we own where the borrowers are at least 60 

days delinquent or where the long-term modification is appropriate 

even if the borrower is not yet delinquent. 

In November of 2008, we announced the Citi Homeowner Assistance Program for families in areas of economic distress and sharply 

declining home values. For those borrowers who may be at risk although still current on the mortgages, we are deploying a variety 

of means to help them remain current on the mortgages and in 

their homes. 

Citi’s foreclosure prevention activities have good resolution rates 

for distressed borrowers whom we are able to reach. For example, 

36 

for those going through the foreclosure process with whom we are 

in contact, we are able to help approximately 70 percent of them. 

However, we are not able to reach every one, and in those circumstances, there are limits to what we can do. 

To better meet the increased needs of the struggling borrowers 

we service regardless of delinquency status, we have dedicated significant resources to our loss mitigation area. We have stepped up 

our loss mitigation staffing by almost 3 times from last year, since 

last year’s staffing levels, and we will be providing additional training to all of our staff. 

Additionally, as promised by our CEO, Vikram Pandit, to the 

House Financial Services Committee on February is 11th, Citi initiated a foreclosure moratorium on all Citi-owned first mortgages 

that are the principal residence of the customer as well as all loans 

Citi services where we have reached an understanding with the investor. The moratorium became effective February 12th and will 

continue until March 12th, before which time we expect finalized 

details on President Obama’s loan modification program. 

Citi will not initiate any new foreclosures or complete pending 

foreclosures on eligible customers during this time. This commitment builds upon our existing foreclosure moratorium for eligible 

borrowers who work with us in good faith to remain in their primary residence and have sufficient income to make affordable 

mortgage payments. 

In order for policy makers, regulators, consumers, and market 

participants to better understand the extent of the current situation and our efforts to ameliorate it, we think it is important to 

share what we know. To assist in this effort, for the past four quarters, we have produced and publicly released our mortgage servicing report, which provides specific detail on our originations, delinquency trends, ARM resets, loss mitigation efforts, loan modification, foreclosures in process, and new foreclosures initiated. Our 

soon-to-be-released fourth quarter report will also include detailed 

information on our modification redefault rates for the first time. 

Our report will show that distressed borrowers serviced by Citi 

who received modifications, reinstatements or repayment plans 

outnumbered those who were foreclosed on by more than six to one 

in the fourth quarter. The number of borrowers who were serviced 

by Citi who received long-term modifications in that quarter increased by approximately 51 percent as compared with the third 

quarter. 

Our redefault rates, meaning the percentage of borrowers who 

have become 60-plus or 90-plus days past due at a given period of 

time after the loans are modified, do not exceed 23 percent for 

loans modified over the past year. For example, of the loans modified in the second quarter of 2008. Only 14 percent were 90-plus 

days past due 6 months after the modification. The fact that these 

borrowers are delinquent does not mean that will result in foreclosure. In fact, we will continue to work with those borrowers to 

make sure that we are able to find some kind of a long-term solution to keep them in their homes. 

I want to assure the committee that we share your interest in 

helping homeowners, and we strongly support this committee’s 

37 

leadership in foreclosure prevention and its tireless efforts to solve 

the housing crisis. 

Thank you, I will be happy to answer any of your questions. 

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

120 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

I would like to start with Mr. Erbey. 

Mr. Erbey, you are an independent loan modification—a servicer, 

servicer, I am sorry. Who do you contract with? Who do you do 

business with? 

Mr. ERBEY. Our customers are the securitization— 

Chairwoman WATERS. I can’t hear you. 

Mr. ERBEY. Our customers are the securitization trust. When 

Wall Street put together securities, they would contract with 

servicers to service those loans. That was our main line of business. 

Chairwoman WATERS. And how do the customers who are in 

trouble find you? 

Mr. ERBEY. We are a servicer much like the other bank-owned 

servicers. In other words, we send out bills and statements. We 

have call centers. We are not affiliated with the bank, and we do 

not originate mortgages, but we actually, whenever you take over 

a portfolio, you send out hello letters and you call the people up 

and verify the information with regard to that. So there is extensive contact with our customer base much like any other servicer 

would have. 

Chairwoman WATERS. Have you found any claims of fraud by 

complaining mortgage holders that they were tricked, they were 

misled, that they did not sign certain documents, that they did not 

falsify, but it was done by a loan initiator? 

Mr. ERBEY. Yes. 

Chairwoman WATERS. And what do you do? 

Mr. ERBEY. We try to basically, in all those cases, we try to basically re-underwrite that loan specifically to the person’s ability to 

pay that for that loan and to get them on to a modification plan 

that is sustainable and get them going in a stabilized situation 

going forward. 

Chairwoman WATERS. We don’t have anything in the system to 

go after those loan initiators who appear to be guilty of some kind 

of fraudulent operation, do we? 

Mr. ERBEY. Unfortunately, we do not. 

Chairwoman WATERS. Do you think that is needed? 

Mr. ERBEY. Yes, I certainly do. 

Chairwoman WATERS. I appreciate that, thank you. 

Ms. Coffin, I thank you for being here today. You know of my experience with Wells Fargo. And I am appreciative for your CEO 

who sent us a letter apologizing for any inconveniences, saying this 

is not typical of the way your servicing operation works. 

Now let me understand that the Wells Fargo home mortgage 

servicing is separate from the bank; this is a separate institution 

or business, is that right? 

Ms. COFFIN. Well, we are part of Wells Fargo. 

Chairwoman WATERS. I cannot hear you. 

Ms. COFFIN. Is the microphone on? 

Chairwoman WATERS. Pull it closer. 

38 

Ms. COFFIN. We are definitely a part of Wells Fargo bank, so any 

customer who is in need of our services can either call our centers, 

can walk into any of our branches, can look through our Web sites. 

We are very connected with the banks. 

Chairwoman WATERS. So you are only servicing Wells Fargo 

loans, is that right? 

Ms. COFFIN. No, that is not correct. 

Chairwoman WATERS. What other loans do you service? 

Ms. COFFIN. We also service loans under ASE, which stands for 

America’s Servicing Company, or to the loans, just like the gentleman from Ocwen just mentioned— 

Chairwoman WATERS. So you have contracts with investors also. 

Ms. COFFIN. Right. 

Chairwoman WATERS. The contracts you have with the investors, 

do they have clauses that prevent you from doing loan modifications? Do they set that out in the contracts with you that you sign 

sometimes? 

Ms. COFFIN. There are a few. 

Chairwoman WATERS. What percentage? 

Ms. COFFIN. A very small percentage. 

Chairwoman WATERS. I have run across this where I am told, 

sorry, there is nothing we can do, because we signed a contract 

with this investor where we said we would not use loan modifications as a way of servicing the customers. 

Ms. COFFIN. When we do have those contracts today, in the current environment that we are operating under, we still reach out 

to those issuers and ask, based upon the net present value that we 

have calculated, if they would like us to do the modification. 

Chairwoman WATERS. How many say, go ahead and do it? 

Ms. COFFIN. Some do, and some don’t. 

Chairwoman WATERS. What do you think we should do about 

that? Should we support those kinds of contracts that will not give 

the servicer the opportunity to do a reasonable, credible loan modification? 

Ms. COFFIN. As I stated in my testimony, what I think is most 

important right now is the Administration’s plan that provides a 

standardized modification program that all investors should follow. 

Chairwoman WATERS. All right. 

Now have you reduced the wait time on customers calling in to 

get some help? I waited over an hour or more. You know, that is 

a deterrent To people trying to get loan modifications. 

Ms. COFFIN. I do understand. 

Chairwoman WATERS. Have you increased the employment, so 

that you have more servicers? 

Ms. COFFIN. Yes, we are. We continuing to hire all the time because of what is before us. And we strive for an 80 percent, which 

means within 3 to 4 rings, we hope to answer 80 percent of our 

calls, at all times, every day of the week. 

Chairwoman WATERS. Who trains your servicers? 

Ms. COFFIN. We do. 

Chairwoman WATERS. There is no licensing of servicers. This is 

kind of an unregulated part of the industry. Is that right? 

Ms. COFFIN. That is correct. We train them in-house. 

39 

Chairwoman WATERS. Describe their training. Do they train for 

1 month, 2 months, a year? What kind of training do you give 

them? 

Ms. COFFIN. 6 to 8 weeks, and what we normally do— 

Chairwoman WATERS. What kind of background do they have to 

have? 

Ms. COFFIN. In our default shop, it is a collections background. 

What we are looking for is people who have understood how to 

solve problems for people who are stressed, who are in these type 

of situations with affordability issues. When we bring them first on 

and they are trained, we do a buddy system. We make sure that 

they are sitting— 

Chairwoman WATERS. What is a typical job they would have had 

prior to coming to your businesses? 

Ms. COFFIN. A collections job or loss mitigation, which is people 

who help borrowers through modifying the terms of their loan. 

Chairwoman WATERS. Any particular education? 

Ms. COFFIN. No. 

Chairwoman WATERS. Any particular requirement that they 

would have worked in a bank or worked with loans, mortgages? 

Ms. COFFIN. What is most important to us is what we train them 

on in— 

Chairwoman WATERS. Yes, but that is not the question I asked 

you. I am asking about qualifications. I am trying to determine 

how you select and identify these people that you train for 6 to 8 

weeks. Do they have to have any background in finance or in working with mortgages or anything like that? 

Ms. COFFIN. We will always look for people with a background 

in finance. 

Chairwoman WATERS. But they don’t have to have one, is that 

right? 

Ms. COFFIN. No. 

Chairwoman WATERS. So you are training people who may come 

from almost anywhere for 6 to 8 weeks. Do you think they are able 

to take every aspect of this mortgage and make decisions about 

whether or not or what kinds of loan modifications? They have a 

lot of flexibility there. 

Ms. COFFIN. We normally don’t bring people straight in as we 

hire them and bring them straight into a loss mitigation area of 

our operation. What we will often do is bring them in, train them, 

put them in a buddy system, which means they will first answer 

what we call the easier questions, and what we do is continually 

move our well-trained people who now have had months, sometimes years, of experience and continue to move them to our area 

which takes more skill and is more complicated, which is actually 

working through the loan modifications. 

Chairwoman WATERS. Thank you. 

Mr. Gross, we have talked about this before, and you know, it is 

a particular little problem with me. Your loss mitigation, you still 

have some offshore? 

Mr. GROSS. Yes, we do. 

Chairwoman WATERS. Why? 

40 

Mr. GROSS. Because we find that the job responsibilities that we 

have assigned to that staff, which is primarily customer-service oriented, answering questions that homeowners may— 

Chairwoman WATERS. Give us an example of where these offshore operation are? India? 

Mr. GROSS. In India and Costa Rica. 

Chairwoman WATERS. In India, we have people who are helping 

Americans who are in trouble who understand the system and 

what we are doing and are able to make decisions? 

Mr. GROSS. No, that is not what I said. The people in India will 

receive calls from homeowners who are typically—the homeowner 

is calling in to make a promise to pay or to say a date specific on 

when a payment will be received. If they say, I am not able to 

make this payment this month and I am going to need long-term 

help, that call is immediately transferred back to State-side and 

will be worked by one of our State-side loss mitigation staff members. 

Chairwoman WATERS. Well, what if I said to you, if you are going 

to get TARP money, you have to hire people in this country to do 

loss mitigation? Would you agree with that, since we are trying to 

create jobs? 

Why are you smiling? 

Mr. GROSS. That was probably more of a grimace. I understand 

the question, but that is really outside my frame of reference. 

Chairwoman WATERS. No, you have been here long enough to 

know that you were going to get this question from me. You always 

do. And I am sure you anticipated it. 

Mr. GROSS. The— 

Chairwoman WATERS. It seems to me you would have come here 

today and said: You know, we appreciate the American citizens 

having given us so much money. We are coming back to ask you 

for more. We are going to take all of our offshore operations and 

bring them home and create jobs for the taxpayers who are underwriting us. Well, I have said that. 

The other thing about Bank of America, you talk about this home 

retention program. I discovered in doing loan modification implementation work with my constituents that you have several departments. Have you merged them all, or do I need to go through with 

you the different ways you can end up in several different departments at Bank of America when you are trying to get help? 

Mr. GROSS. They have not yet been merged, but we are actively 

working on our phone systems to make sure that when you call in 

or a homeowner calls in, that they are immediately connected with 

the appropriate individuals. 

Chairwoman WATERS. Well, how long is that going to take you? 

This has been going on for an awfully long time. If you call in and 

you say, I am late on my payment, you go one place. If you call 

in and say, I am not late on my payment, but I went to talk to 

somebody so I don’t get in default, you go another place. If you call 

in and you say, I have a loan modification, but I may reach a default on it, you go to another place. So what is this home retention 

consolidation that you have when you still have all of these different departments that you send people to. 

41 

Mr. GROSS. The process that you described, when a homeowner 

calls in and they are current on their mortgage, they are automatically routed to our customer service environment, since the vast 

majority of those calls do not deal with delinquent payments; they 

deal with other questions. 

So when a homeowner calls in and reaches the customer service 

staff and says, I am not going to be able to make a future payment, 

and they need in-depth assistance, then that call will then be 

transferred to the home retention department, and that staff member will then work with that current homeowner on what their 

issues are. That process I do not envision changing. 

Chairwoman WATERS. Well, let me just say this, the system that 

you use is confusing to constituents. I was on the phone with Bank 

of America for hours, and your people sent me all over the country 

to different departments. And nobody seemed to understand what 

I was asking. 

And if you have something called home retention, it seems to me 

it would be consolidated so that when someone called, they would 

not be transferred around to several different departments and 

that the people who were directing them to supposedly the correct 

department would know exactly what to do. 

So would you consider it fair for us to say to the President, you 

must do something to force the Bank of America to have a consolidated effort to help homeowners in trouble before they get any 

more TARP money? 

Mr. GROSS. I am not prepared to comment on the TARP funds. 

What I will commit to is that within a very short period of time, 

we will deliver back to the committee an in-depth description of 

what we do and how we do it, so that you have a complete written 

understanding of our processes. 

Chairwoman WATERS. Thank you very much. 

Ms. Sheehan, you—well, before I leave Mr. Gross, are you doing 

all of Countrywide’s loan modifications? 

Mr. GROSS. Yes, we are. There is still the Countrywide mortgage 

servicing operation that in April will be changing over to the Bank 

of America name. 

Chairwoman WATERS. But right now, Countrywide is still doing 

some of its own servicing, is that right? 

Mr. GROSS. They are, yes. 

Chairwoman WATERS. Okay, and Ms. Sheehan, you also contract 

with other entities to do their servicing, is that correct? 

Ms. SHEEHAN. Yes, we do service our own loans as well as loans 

for third parties, including Fannie and Freddie. 

Chairwoman WATERS. Would you give me an example of those 

third parties? 

Ms. SHEEHAN. Well, it is Ginnie Mae for FHA loans, obviously 

for our GSE loans, which the bulk of the portfolio is Fannie and 

Freddie. And then there are other private investors for whom we 

service— 

Chairwoman WATERS. So GSEs, Fannie and Freddie, are not 

doing their own? 

Ms. SHEEHAN. No, we do the servicing for them. They are the investor in the loan. 

Chairwoman WATERS. Okay, all right. 

42 

Mr. Hemperly, do you do servicing for anyone else other than 

Citigroup? 

Mr. HEMPERLY. We do. Our answer is very similar to Ms. 

Sheehan’s that she gave for Chase. We do a substantial amount of 

servicing for GSEs, Fannie and Freddie, in addition to loans we 

service for the FHA and also our loans that we hold on balance 

sheet. 

Chairwoman WATERS. My last question is, for those of you who 

do loan initiation and then sell those mortgages to Fannie and 

Freddie, you do the loan initiation, you sell it to Fannie or Freddie, 

then they give it back to you to do the servicing? 

Mr. HEMPERLY. Yes. We originate the loan. We deliver it to 

Fannie or Freddie, and we bore the loan on to our servicing system. 

So the loan is actually what we call servicing retained by us, and 

then we are responsible for all the servicing activities that occur 

on those loans. 

Chairwoman WATERS. Fine, we need to take a look at that. 

And I would like to thank my members for indulging me. I appreciate it so much. 

Ms. Capito. 

Mrs. CAPITO. Thank you, Madam Chairwoman. 

Mr. Erbey, in your testimony, you mentioned that in your modifications, that you did a write down of the loan balances. Does that 

mean you write down the principal in some? 

Mr. ERBEY. On 18.7 percent, yes. 

Mrs. CAPITO. 18.7 percent of your loan modifications you are 

writing down the— 

Mr. ERBEY. The principal. 

Mrs. CAPITO. Does anybody else here in their loan modifications 

write down the principal? 

Mr. HEMPERLY. We write down principal on occasion, not 18.7 

percent of the time, though. 

Mrs. CAPITO. Like how many? 

Mr. HEMPERLY. It is a minority of the time. I don’t have the percentages. It I think is probably less than 1 percent of the time. 

Mrs. CAPITO. Mr. Gross, you said you do? 

Mr. GROSS. Yes, it is on a small amount, and if I could expand 

on that answer. We are contractually bound in most cases to 

present the investor for whom we service the loans the best return 

or smallest loss that we can. And in most cases, we can achieve a 

smaller loss or better return to the investor by doing an interest 

rate reduction, having an affordable and sustainable payment for 

the homeowner without having the principal reduction. 

Mrs. CAPITO. I understand that, but you were looking at a program here in the next—first of all, let me ask another question. Of 

all of you all on the panel, who has used or worked with the HOPE 

for Homeowners Program? 

Ms. COFFIN. We have. 

Mrs. CAPITO. And how has that worked? 

Ms. COFFIN. We have set up a separate segmented group who 

were fully educated on the HOPE for Homeowners program. We 

dedicated and analyzed our portfolios to look for those borrowers 

who looked like they were eligible. We proactively reached out with 

letter campaigns and calls to those borrowers, and then we began 

43 

the screening process to find those borrowers who would actually 

be eligible. Unfortunately, we found very few under the current requirements of HOPE for Homeowners who met the standards. 

Mrs. CAPITO. My understanding is when you came, I am generalizing here, institutions have come before this committee before, 

showing great hope for the HOPE for Homeowners products as a 

way to help people who are in trouble. And it hasn’t turned out 

that way, and that is deeply troubling to all of us here. 

I think part of it, and correct me if I am wrong, is part of it the 

write-down on the balance has prevented, maybe contractually, but 

otherwise because it is considered financially to your disadvantage 

to go this direction, so now the President’s program is going to 

incent your institutions to do what Mr. Erbey’s does 18 percent of 

the time? Am I interpreting the new program correctly? 

Mr. HEMPERLY. The new program, as I understand it relative to 

loan modifications, is not going to be very different from the program that we are headed towards currently with our commitments 

to the FDIC modification program. The FDIC program is essentially an affordability-based model, which is not terribly different 

than what we have done in the past. So we are headed down that 

path where we are going to try to get customers with affordable 

payments and they prove to us how much they make, and then, as 

a percentage of that, 31 percent, as a housing ratio, we give them 

an affordable payment to keep them in their home. That program 

is not terribly different at all from what we have done historically, 

and our redefault rates, we believe, are quite good. 

Mrs. CAPITO. And on the FDIC program, is there a fee when you 

write down principal? 

Mr. HEMPERLY. No, there is not a fee. 

Mrs. CAPITO. I mean, a reward payment of $1,000; I believe that 

is the program we are looking at. 

Mr. HEMPERLY. Well, on the Administration’s program, my understanding is that there is an incentive fee to the servicers for 

booking loan modifications. 

The FDIC program is basically going to be for, our commitments 

there are for balance sheet held assets. There is no fee that we will 

collect under our current commitment to that program. The benefit 

that we get is, hopefully, we will get the kind of performance 

through that program that we have seen on our redefault rates 

that I shared in my testimony, that we believe keeping homeowners in their home is great for communities, and also we believe 

that it is the best way to minimize our own losses. 

Mrs. CAPITO. Let me ask you just a question out of the air, it just 

kind of hit me. You are talking to people every day who have mortgages who either are in trouble, anticipating being in trouble, and 

I am sure you are talking to your folks who are scrimping, saving, 

paying those mortgages everyday, are you hearing anything about 

what we are hearing in some fashion, is this fair? Is there a fairness quotient here? And I don’t know if I am asking too much of 

an opinion here, but I would like to see if you have one on that 

and if you are hearing from your customers on that, who obviously 

are not going to qualify for any of these loan modification categories. 

44 

Mr. GROSS. I would say, yes, that we do hear this from our customers, the questions about the fairness issue. 

On the flip side of that coin, we hear from the same customers 

regarding the trauma that is caused in their communities and in 

their neighborhoods with the foreclosure events. And ours is a balancing act to try and make sure that we are as fair to all parties 

as we can possibly be. 

Mrs. CAPITO. Does anybody have— 

Ms. SHEEHAN. I would say, we have had a similar experience in 

terms of hearing from current customers, but I also agree with Michael that we need to be focused on customers and communities. 

And I think we are concerned, all of us are concerned, about the 

impact of the foreclosed property destabilizing neighborhoods. 

Mrs. CAPITO. I share that concern as well. I think, and it is, as 

Mr. Gross said, it is a balancing act. It is difficult for the homeowner on the verge. It is difficult for the neighborhood. It is difficult for the family. And so we are trying to weave a solution here, 

and I appreciate you all coming here and testifying. 

Thank you very much. 

Chairwoman WATERS. Thank you very much. 

Mr. Cleaver. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

I would like to follow up on the Chair’s questioning. 

If I could start with you, Mr. Erbey, and move down, do all of 

you have operations offshore? 

Mr. ERBEY. Yes. 

Ms. COFFIN. No, not for customer-facing. 

Mr. GROSS. Yes. 

Ms. SHEEHAN. Not for customer-facing and loss mitigation. 

Mr. HEMPERLY. We have offshore operations, but we do not do 

any loss mitigation work offshore. 

Mr. CLEAVER. I don’t know if you realize how utterly disgusted 

the voters are with that. And it is ineffable, but I have to just say, 

it really creates a problem. 

Do you save money? Is this what the goal is? 

Ms. COFFIN. I will make a comment to this. Wells Fargo has always been very strong about creating American jobs. The place 

that we do have offshore is in some of the technological areas 

where we could not find the appropriate number of people to help 

us with some of the automation of our systems. 

Mr. CLEAVER. Like the dumb Americans couldn’t— 

Ms. COFFIN. No, sir. Not at all. 

Mr. CLEAVER. The stupid Americans? 

Ms. COFFIN. No. 

Mr. CLEAVER. I am not sure I understand. 

Ms. COFFIN. It was a supply and demand. 

Mr. CLEAVER. The demand was greater than the supply? 

Ms. COFFIN. And we don’t have it now, sir, but this was previously when there was a lot of infrastructure that we were rebuilding and looking for a lot of technological expertise, and everyone was in the demand for that at the same time. Many of our systems were all being retooled. 

Mr. CLEAVER. So it is not a financial issue where you save 

money? 

45 

Ms. COFFIN. We do not use it for that. 

Mr. CLEAVER. Is everybody else the same? 

Mr. GROSS. If I could comment, the global operations for essentially the Countrywide service portfolio, this operation has been in 

existence for 3 to 4 years now, I believe. It might be a little bit 

longer. The size of the operation is actually a little bit smaller than 

it was a year ago. And in terms of staff that we have added during 

the subsequent period has all been added State-side. 

Mr. CLEAVER. Okay. 

Mr. GROSS. But, yes, the initial motivation when we opened 

these call centers a few years ago was based upon cost. 

Mr. CLEAVER. Okay. 

I am going to tell Lou Dobbs on you people. 

But let me go back to the program as laid out by President 

Obama, the Administration, is herculean. What kind of beefing-up 

of the servicers will you need to accommodate this program? Has 

there been any look at the size of the staff that will be needed? I 

am thinking a part of this whole thing that we are doing is creating jobs. And I am wondering if jobs can be created also as we 

try to reduce this new burden on neighborhoods all over the country by hiring people to do the modifications. And obviously, based 

on what Chairwoman Maxine Waters is experiencing, there is a 

need for a larger staff. So has there been any time spent in trying 

to come up with an estimate on when the staffing needs will be? 

Mr. GROSS. If I could, as far as what the staffing needs will be, 

will be somewhat difficult to determine until the final rules are 

published on March 4th, but I would also suggest to you that in 

the mortgage servicing loss mitigation process, this home retention 

process that we are all engaged in, under the President’s plan, we 

should become much more efficient and effective than we are today 

because we are going to have a single standardized plan that we 

will be able to use across all different portfolios. 

Right now, we have a modification plan for FHA, a different one 

for Fannie Mae, a different one for Freddie Mac, and a different 

one for privately-issued securities. So this standardization should 

enable us to process many more modifications and workouts using 

the same staff, hopefully in a much faster timeframe. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Mr. Marchant. 

Mr. MARCHANT. My question is about the whole standardization 

of modification. It seems like Chase, have you gone to your biggest 

investors and gotten pre-authority to authorize, to do modifications, 

so that you don’t have to handle it on a case-by-case basis? 

Ms. SHEEHAN. We have spent a lot of time working with our investors to make sure that they understand the modifications options that we wanted to be able to make available. Two of our biggest investors are Fannie and Freddie. They have recently come 

out with a new streamlined modification program, very similar to 

what many of us offer for our own portfolio. That was sort of the 

first step towards standardization. 

I do agree with Mary, though, that we still have situations, not 

that many, but we still have situations where individual, you know, 

pooling and servicing agreements may hamper our ability, and in 

46 

those instances, we have to go out for permission on a case-by-case 

basis. 

Mr. MARCHANT. And the way I read the President’s proposal is 

that this will only affect the GSEs, and it well affect your private 

label investors, so it is going to force the private investors to accept 

these modifications. Mr. Erbey? 

Mr. ERBEY. That is still an open issue that was being discussed 

this morning. In our portfolio, more than 90 percent, we have no 

limitations on modification at all. There is about say 5 percent that 

it is affected by, you have to get approval by the related agencies; 

another 5 percent that you have to get individual investor approval. But the issue becomes one of, in terms of the implementation of the plan, are you required to apply it across your entire 

portfolio? And if so, what impact does that have on the contractual 

obligations that you have, no matter how small they may be? 

Mr. MARCHANT. So 90 percent of your investors or REMICs have 

already given you authority to modify? 

Mr. ERBEY. The structures in our part of the market, they have 

migrated over time, so that the standard pretty much for any of the 

modern ones would be that it is the servicer’s discretion to maximize that present value on the portfolio. 

Mr. MARCHANT. So, in your case, you have more discretion. Do 

you service any portfolio loans that you own? 

Mr. ERBEY. Nominal, I mean very, very insignificant to our balance sheet. 

Mr. MARCHANT. Well, it sounds to me like the question is still, 

that I have about the modification process, is the hit of principal 

and whether you are allowed, whether in the new plan, the President’s new plan, whether there will be a substantial write down in 

principal, or will all the modification be towards the 38, 31 percentages? Do you understand it could be a stepped process? You go to 

38 first, you go to 31, then you go to the principal reduction? Is 

there any kind of a look-back provision if one of the spouses is unemployed, and then a year later, that spouse becomes re-employed, 

is there then a recertification at some point where that person will 

call and say, ‘‘I have a job now, I no longer need this 31 percent 

or 38 percent?’’ Is there a look-back, or is this a once-in-a-lifetime 

snapshot that will be taken? 

Ms. COFFIN. There are, like Michael just spoke of, there are details of the program that still need to be completed. But there is— 

you don’t do a look-back, that if somebody then gets back a job, you 

kind of unwind the modification— 

Mr. MARCHANT. That is the way I read it. 

Ms. COFFIN. We don’t do that. But what we do in some cases is 

we may have to mod originally to a lower interest rate or other 

things to get to affordability, but then you can step that rate back 

up over a period of time. 

Mr. MARCHANT. So in the proposed, another piece of legislation 

that has the cramdown in it, how much more success—under what 

kind of a situation then would you put a person in a situation 

where they would not go this route instead of going to a bankruptcy route and put them in a position where they would make 

the decision to go the bankruptcy cramdown route as opposed to 

trying to go this route? 

47 

Ms. COFFIN. I would only tell someone they should go to bankruptcy as a last resort. What I applaud that the Administration 

has done is the standard modification program that should hold all 

of us accountable and provides expectations that say, if a borrower 

who is at risk comes to us, we now have the standard modification 

program. If, for some reason, that borrower cannot find a solution 

through that, then their final resort may be to go to bankruptcy, 

and this same standard modification program should be applied. 

Mr. MARCHANT. And this is an opinion question. Is a person who 

gets a modification at a greater risk of destroying long term their 

credit than a person who goes into bankruptcy? 

Mr. GROSS. No, I think the modification approach is actually to 

the homeowners’ benefit, that very quickly they will be showing 

current on their mortgage and that their credit score will improve 

dramatically. I think the bankruptcy option provides very serious 

negative implications for the homeowner on a long-term basis. 

Mr. MARCHANT. So if you were trying to prevent there from being 

a generation of borrowers who are forever doomed to be subprime 

borrowers in a world where there are no more subprime loans, 

would you go—if you were the government trying to push somebody 

towards a direction, you would push them more towards a modification, extended amortization instead of towards an easier route. 

Mr. GROSS. Absolutely, we would hope that whatever legislation 

is enacted would in fact require homeowners to seek these modifications and to, in fact, prove that the modification was not attainable before the bankruptcy reduction was allowed. 

Mr. MARCHANT. Thank you. 

Chairwoman WATERS. Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. 

Mr. Gross, let’s continue with what you were just addressing, the 

cramdown. Is that something that can work in concert with what 

you are currently doing or, is it at odds with what you are doing? 

Mr. GROSS. There are aspects of the current legislation which we 

find troubling. I would say that it can work as long as we put in 

sufficient safeguards that the homeowner works with their servicer 

and that the homeowner seeks available modifications before they 

do the bankruptcy cramdown route. 

Mr. GREEN. Is it your understanding that the current proposal 

has that language in it? 

Mr. GROSS. I believe that the current proposal, and I apologize, 

I am not an expert on this, but I believe that the current proposal 

does contain some reference to it. I don’t think that the requirements in there are as strong as we would like. There are probably 

a few too many holes in there that would allow homeowners to seek 

the bankruptcy option with minimal resistance. 

Mr. GREEN. If that aspect of it can be satisfied, would it then 

meet with your approval, ‘‘your,’’ meaning your company’s approval, not your personal approval? 

Mr. GROSS. Thank you. 

I think it would go a long way to that, because I think at that 

point what we would find is that we can effectively, especially 

under the President’s new plan that we are all working on desperately right now to write the rules for or to assist in that effort, 

we want to have this new plan have a chance and to show the 

48 

American public and to you that we can perform under this new 

plan and that the bankruptcy cramdown provisions that are currently being contemplated largely should not be needed. 

Mr. GREEN. Is your moratorium still in effect? 

Mr. GROSS. It is. 

Mr. GREEN. Let me just ask the other participants. Do you have 

a moratorium in effect? If so, would you kindly extend a hand into 

the air? Anyone. So we only have—and you would not have one, is 

that right Mr.—is it Erbey? 

Mr. ERBEY. It is Erbey. 

Mr. GREEN. You don’t have one? 

Mr. ERBEY. We don’t have our own loans. Under the contracts 

that we have, we don’t feel that we could have a moratorium. 

Mr. GREEN. Let me pause for a moment and thank all of you for 

the moratorium. It is something that I think is going to be a benefit to your businesses as well as to the consumers, so I thank you 

for the moratorium. 

How long will it stay in effect, Mr. Gross? 

Mr. GROSS. It will stay in effect until the rules are published, 

which should be March 4th. From that point, what we would do is 

take the final rules, evaluate our portfolio to determine which 

homeowners who are at risk of foreclosure would in fact qualify, 

and then we will actively seek out those homeowners, offering them 

this plan, and we would reinstitute foreclosure proceedings after 

we either hear from the homeowner and determine that they are 

not eligible, that we cannot do it, or if the homeowner does not respond. 

Mr. GREEN. Ms. Coffin, how does yours measure up? 

Ms. COFFIN. Our moratorium is in place until at least the 13th 

of March. We have announced that to our borrowers. And we have, 

as I said in my testimony, already proactively began to analyze our 

portfolio with the information and the data that we have about the 

program for both the refinance opportunities and the modifications. 

And what we will turn to first, once we understand more of details 

after the 4th of March, is we will first turn to the borrowers who 

are most seriously delinquent or on the verge of foreclosure sale 

and proactively reach out to them. 

Mr. GREEN. Mr. Hemperly? 

Mr. HEMPERLY. Our moratorium started on February 12th, and 

it will extend for 30 days through March 12th. We are also eager 

to see the Administration’s plans. Hopefully, we will see them on 

March 4th, which should give us time to understand them before 

we would schedule any additional foreclosure sales. 

Mr. GREEN. Ms. Sheehan? 

Ms. SHEEHAN. We also announced our moratorium on February 

12th. At that time, we announced it would be extended through 

March 6th. That was before we knew when the details of the program were going to come out. So we will this week reconvene and 

consider, based on the information we know now, what is the next 

step we should take to be fair to our homeowners. 

Mr. GREEN. Thank you. 

I yield back. 

Chairwoman WATERS. Thank you very much. 

Mr. Clay. 

49 

Mr. CLAY. Thank you, Madam Chairwoman. 

Let me start with Mr. Erbey. 

Mr. Erbey, in your testimony, you propose two solutions for advanced financing to servicers. One proposal is to provide a $1 billion government infusion to minority-owned Robert Johnson Urban 

Trust Bank to establish a new operating division to provide advanced financing to servicers who commit to aggressive foreclosure 

prevention and loan modification measures. Currently, how many 

communities does the UTB service, or do you know? 

Mr. ERBEY. I know of a handful, but I can’t accurately describe 

that. 

Mr. CLAY. Okay, give me examples of some. 

Mr. ERBEY. They are in Florida, in the Orlando area. 

Mr. CLAY. How would Mr. Johnson assist servicers with homeowner outreach to minority communities hardest hit, do you have 

any idea of how we he would pull that off? 

Mr. ERBEY. I believe Mr. Johnson thinks he has quite a wellknown name and reputation within the communities and that by 

being able to get out there and get the message out, that he would 

assist in that manner. 

Mr. CLAY. Okay, all right. Thank you for that response. 

Ms. Coffin, when considering your total number of modifications, 

what percentage of them are modifications that produced a decrease in monthly payment of at least 10 percent? Can you give us 

that percentage in your reported modifications that fit that category? 

Ms. COFFIN. I don’t have that data directly here in front of me, 

but to state I think what is important about these modifications, 

and I heard the discussions earlier today, what is important to understand about whether the payment reduces or not are the circumstances of each of the borrowers that we work with. We have 

cases of borrowers where they come to us, and if you take the 

President’s, the Administration’s plan that they just announced 

and the affordability targets they have set, I tell you today we have 

many borrowers who have come to us who are already below those 

targets. What we still try to do is help them. And sometimes that 

is taking those payments. Sometimes it is the taxes that they have 

not paid on their homes. Sometimes it is payments they are in arrearage, and we do capitalize those, we re-amortize the loan and 

try to get them back into a performing loan. So I think, more than 

just stating the numbers, it is important to understand when and 

why we do that particular type of modification. 

Mr. CLAY. So that may include making the terms longer? 

Ms. COFFIN. It could make the term longer, but it could actually 

increase their payment if they have not paid their real estate taxes 

and they have significantly missed many payments. If they made 

no payment on their homes for 8 months, lets say, and not paid 

their real estate taxes, to get them back in a performing loan and 

have them stay in that home, we he have to do something with 

those missed payments and those missed taxes. 

Mr. CLAY. Which means these people have to have employment, 

of course. 

Ms. COFFIN. That is correct. 

50 

Mr. CLAY. Given the size of the program being proposed by the 

Administration, and the need to look at the ability of homeowners 

to sustain a modification, how large of an increase in manpower do 

you believe would be needed to get this job done? Do you have any 

idea? 

Ms. COFFIN. I would support what Mr. Gross stated. We actually 

see the standard modification program, as laid out and what we 

know of it so far, will actually be much more efficient for us. We 

have never stopped and we didn’t just because of the plan decide 

then to start hiring. We are continually in this kind of environment 

reforecasting and preparing months ahead. As you heard, you don’t 

just hire these people and put them on the phone tomorrow. You 

have to go through the hiring and training phase. You want to 

make sure they have the expertise to actually help our borrowers. 

So we are forecasting months and months in advance, and we will 

continue to do that. 

But this actual plan, we believe, will make us more efficient for 

the reasons Mr. Gross stated. If we get a standard modification 

program, as we too serve Fannie, Freddie, FHA, multiple privates, 

if we got to one program and there was an accountability of what 

we were to move to a target of, it would be much more efficient for 

us. 

Mr. CLAY. Anyone else on the panel? 

Ms. Sheehan. 

Ms. SHEEHAN. I would agree with what Mary just said. I think 

we do have 8 to 10 flavors right now of loan modification programs 

that are very complex. We have to go into databases, it complicates 

the training we talked about earlier, to be sure that the individuals 

understand all the different programs. So I believe it will be a tremendous benefit to servicers. 

I also would like to say on behalf of Chase that we are trying 

to look at different ways to deal with our borrowers, which is why 

we have started to set up our homeownership centers around the 

country. Not everybody is going to work well in a call center. In 

some cases, you need to do face-to-face. And we actually have seen 

some very preliminary but very positive results from the centers 

that are opening right now. 

Mr. CLAY. Thank you very much for your responses. 

I yield back. 

Chairwoman WATERS. Thank you very much. 

Mr. Ellison. 

Mr. ELLISON. Thank you, Madam Chairwoman. 

And thank you to all of the witnesses. 

Is your servicing process different between cases where the 

servicers own the mortgage and where they don’t own the mortgage? 

Can we start with you, Mr. Erbey? 

Mr. ERBEY. Yes, certainly. 

We have almost no mortgages that we own ourselves. So essentially, our process is exactly the same. Every loan is treated individually. 

Mr. ELLISON. How about by you, Ms. Coffin? 

Ms. COFFIN. Yes, I will try to give you the spectrum. We obviously on, let’s take the Wachovia option ARMs that we just acVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
51 

quired, we are going aggressive. Those are loans that we own. We 

know the geography in which many of them are located is extremely distressed, and so we are going aggressive with modification programs. But as soon as we learn from the programs that we 

develop and implement on that, we reach out immediately to private investors and other investors to share our learnings and hope 

that they will deploy throwing programs also. 

Mr. ELLISON. Mr. Gross? 

Mr. GROSS. I would concur with what Ms. Coffin has just said. 

One of the standard provisions in service pooling and servicing 

agreements— 

Mr. ELLISON. Mr. Gross, forgive me, but when you said you concur with Ms. Coffin, do you mean, when the servicer owns the loan, 

you are aggressive, and when you don’t, you share the information 

because that is what I heard? 

Mr. GROSS. Yes, and I was amplifying on that. 

One of the standard provisions in a servicing contract generally 

is that we will service loans for that investor as we would for those 

in our own account, which means that we will not give loans in our 

own book of business, loans that we hold for investment, any preferential treatment over loans that we service for them. 

Mr. ELLISON. Ms. Sheehan, how do you view this issue? 

Ms. SHEEHAN. I would concur with both Mr. Gross and Ms. Coffin. Our core servicing processes are all the same. But when we 

come to loss mitigation and loan modification, we are more aggressive with our own portfolio loans for all of the reasons that we have 

been talking about today. 

Mr. ELLISON. Sir? 

Mr. HEMPERLY. A similar answer. We service for a lot of the 

same people that are our competitors do. And we also feel that we 

have more flexibility on our own portfolio. 

I didn’t get to answer the last question, but we also believe that 

a standardized approach that the Administration plan is proposing 

is also going to be a more effective way to deal with this situation, 

and it should be easier to train our folks on a standardized plan 

as well. 

Mr. ELLISON. Can you tell me about what your outcomes have 

been when you have the loans that you own, loans that you don’t, 

have you been able to—have you written down more or have you 

remodified more loans when you own them as opposed to the ones 

that you don’t own? What has your experience been, is what I am 

asking? 

Mr. Erbey, you only have one kind? 

Mr. ERBEY. Correct, we have modified about 20 percent of all 

loans in our portfolio. 

Ms. COFFIN. To answer your question, and as I just stated, we 

just acquired the Wachovia option ARMs, which is where we are 

going the most aggressive. I think what is important to a redefault, 

and I know there is a lot of analytics and a lot of speculation on 

redefaults, as was stated earlier, coming to a common industry definition of redefault, which we would stand by that any loan that 

has been modified, and seriously redefaults, which means 90 days 

delinquent within a year, is our definition of redefault. And because these are new procedures that we are developing and applyVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
52 

ing against this portfolio, it will take a while for us to determine 

what the true redefault is compared to historical redefault rates. 

Mr. ELLISON. Do you have any numbers so far on the difference 

between the remodified loans that you own and the ones that you 

don’t? 

Ms. COFFIN. Well, I want to be cautious that Freddie and Fannie 

and many of the privates who have worked with us are very aggressive. I don’t want to leave today that— 

Mr. ELLISON. I am just trying to get a statistical understanding. 

Do you understand what I mean? 

Ms. COFFIN. Between what we do in our portfolio, we are seeing 

a redefault rate that is probably lesser in our case that is lower 

than the 30 percent on average redefault, and you will so a little 

higher on those that do not go as significant in the modification 

terms. 

Mr. ELLISON. Maybe I don’t understand. Are you modifying more 

loans that you own than the ones that you don’t? 

Ms. COFFIN. I think the way I am interpreting this is we modify 

differently, not whether there is more or less; it is that we are 

modifying possibly differently. 

Mr. ELLISON. But is there a numerical difference between the 

ones you own and the ones you don’t? 

Ms. COFFIN. No. 

Mr. ELLISON. They are the same? 

Ms. COFFIN. By numbers, just sheer volume? 

Mr. ELLISON. Yes. 

Ms. COFFIN. No. I mean, you would have to do that in relationship to the size of the portfolio. No. We are modifying. Like I stated 

earlier, there are very few of our contracts that don’t allow us to 

modify. 

Mr. ELLISON. So you modify the same number for the loans that 

you own and the ones that you don’t? 

Ms. COFFIN. The majority of the time, yes. On a ratio of how 

many loans we have, you still have to—if you want sheer numbers 

like 100 to 100, it would depend on the size of the portfolio and the 

number of loans that are in distress as a ratio. 

Mr. ELLISON. All right. Well, do you have that information? 

Ms. COFFIN. I don’t have that right in front of me, but I can tell 

you that—I don’t think there is a difference between that we can’t 

modify. It is how we are modifying. What we are doing on the 

Wachovia loans is going more aggressive with the terms, such as 

principal forgiveness. 

Mr. ELLISON. Okay. Mr. Gross. 

Mr. GROSS. I apologize, I do not have the data that you are requesting at this time, but I would be glad to follow up with the 

committee afterwards. 

Mr. ELLISON. Thank you, Mr. Gross. 

And, Ms. Coffin, I am assuming you would supply the information? 

Ms. COFFIN. Yes. 

Mr. ELLISON. Ms. Sheehan. 

Ms. SHEEHAN. Our servicer loans are much larger than our 

owned loans, so even if we are doing it proportionately the same, 

53 

those numbers will be—the servicer numbers will be larger. But we 

would be happy to get that. 

Mr. ELLISON. Thank you. We would request that. Thank you. 

Sir? 

Mr. HEMPERLY. We will pull the exact data for you as well. I believe that on a percentage basis, we do more deals on the loans 

that we hold on balance sheets than we do for others; and I think 

it is because we can do them earlier in the process in some cases 

than we can. And I think we have a little bit more flexibility to do 

that. But we will be happy to pull the numbers. 

Chairwoman WATERS. Thank you very much. 

Mr. Donnelly. 

Mr. DONNELLY. Thank you, Madam Chairwoman. 

Ms. Coffin, under Wachovia ARMs, when you look at them, what 

interest rate are you putting people—what product are you primarily putting folks into or trying to put folks into? 

Ms. COFFIN. We are trying to get them into a fixed, but most importantly is when we see what the payment that they are currently 

able to afford, we are trying to keep them to that payment and 

modify the terms of the loan to get them to that payment. 

Mr. DONNELLY. That is the ARM payment? 

Ms. COFFIN. Yes. 

Mr. DONNELLY. What is the average interest rate on those ARMs 

at the present time? 

Ms. COFFIN. I am a little cautious in saying this because I don’t 

have— 

Mr. DONNELLY. Ballpark. 

Ms. COFFIN. I will say ballpark, 2 percent, maybe slightly higher. 

Mr. DONNELLY. So what you are doing is looking at that payment 

and saying, what kind of product can we produce that will keep 

them in the house at about that number? 

Ms. COFFIN. That is correct. 

Mr. DONNELLY. How many of those do you have, of these ARMs, 

of these mortgages, the Wachovia? 

Ms. COFFIN. The Wachovia that we inherited was $122 billion. 

Mr. DONNELLY. I am sorry, the total number of homes. 

Ms. COFFIN. The total of the portfolio, I believe it is approximately 350,000, I believe, 400,000. 

Mr. DONNELLY. And how long does it take you to get to all of 

them? I mean, how do you prioritize that? Is it you look and say, 

this one is in trouble, they missed a couple payments, we had better get together with them? How long will it be before you get that 

cleaned up? Is it, these ARMs go off next month, so we had better 

do those first? 

Ms. COFFIN. Let me be clear that much of this portfolio is performing. If they are current, we continue to look at them. We are 

looking for imminent default. We want to make sure that we are 

proactively trying to predict those loans that will probably have imminent default. But we are starting with the most serious and 

those that are close to foreclosure. We are looking at those whose 

ARMs are ready to recast, those who are delinquent, and those who 

look like we would predict imminent default. 

54 

Mr. DONNELLY. So say the ARM goes off in another month or 2 

months, but they are performing. Those ones you would already be 

working with to try to get into a new product. 

Ms. COFFIN. We are working across that entire portfolio very aggressively. 

Mr. DONNELLY. So there is not going to be folks who look up and 

their ARM is about to go off in a week, and they haven’t heard 

from you yet? 

Ms. COFFIN. That is correct. 

Mr. DONNELLY. Mr. Erbey, when you look at the loans that you 

have in your portfolio, are there red flags that you look at to indicate to you, this is one we have to work on? For instance, somebody 

who has been put into a 10.5 percent rate at 20 years, is that something you would look at and say, how do we rework this? Are those 

important figures to you, or is it only you look and you go, who is 

in trouble this month? 

Mr. ERBEY. Well, you certainly sort your portfolio based on characteristics to try to do imminent default, where you think somebody will try to default and try to deal with it ahead of time, such 

as a reset or a very high-interest-cost loans. So you would 

proactively be approaching those individuals. The vast majority of 

the work, however, because of the type of portfolio we have, is 

spent on basically people who are already in trouble. 

Mr. DONNELLY. I know you use mathematical models. Do your 

models tell you, here is the income that they have? Here is the interest rate? This isn’t going to—you know, they are paying it now, 

even people who are current; we have to get into this one and get 

this fixed? 

Mr. ERBEY. Yes. We run models that look at the person’s ability 

to pay over time. So it is not just a snapshot of what can they do 

today; what are they able to do in the future? You also look at redefault probabilities as well as prepay probabilities and future 

housing prices. And so you are looking at pretty much three-dimensional vectors on all those factors. 

Mr. DONNELLY. And this next question would be to the whole 

panel. I met with some mortgage folks earlier today and spent 

some time with them, and one of them was saying that one of the 

biggest problems they are having with modifying loans is some of 

the servicers. And, you know, this was not any of you folks, but 

some of the servicers that they would call, the servicers said, ‘‘I 

have a pile 5-foot high on my desk; I am trying to get through them 

as quickly as I can. I haven’t gotten to that one yet, and it may 

be a while.’’ 

Are you facing those kind of problems, where they are coming so 

fast, the requests for modification, or the screening that you are 

doing is indicating this should be modified, that timewise it is 

tough to get to all of them? Mr. Gross. 

Mr. GROSS. In all candor, yes. Obviously, the volumes of homeowners who are approaching us today looking for modifications at 

times can be overwhelming. One of the significant issues that I 

think most servicers are confronted with today is the volume of 

homeowners who are current on their payments, but are coming to 

us and seeking a modification, and trying to determine which of 

those homeowners is doing it based upon a true financial hardship 

55 

either now or in the near future based upon some event that may 

have taken place—unemployment, a rate increase, something has 

occurred—versus those people who have heard many statements in 

the media about all of the modifications and principal reductions 

that are coming forward. And, unfortunately, we have a lot of folks 

who are coming forward saying, where is my deal? 

Mr. DONNELLY. So you would have a form or like almost a test? 

Mr. GROSS. We would have to go through and perform the analytics on each loan, getting the income and expenses and trying to 

determine from the homeowner what is the hardship that causes 

you to make this request? 

Mr. DONNELLY. And would something like, I started out in an 

ARM, I am now locked in at 10 percent over the next 20 years, and 

it is very tight every month; is that the kind of situation? 

Mr. GROSS. Absolutely. Yes. 

Mr. DONNELLY. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

Ms. Kilroy. 

Ms. KILROY. Thank you, Madam Chairwoman. 

First, I would like to follow up on Ms. Coffin’s answer regarding 

offshore employment and moving operations offshore, that Wells 

Fargo moved operations overseas because of a lack of qualified 

available IT personnel. I would like to suggest that Wells Fargo 

might want to take a look in my district in central Ohio where we 

have hundreds of IT persons, well-qualified, who have been laid off 

from various businesses, but including being laid off from major national banks; and before they were laid off, they were sent to India 

to train their replacements. 

Ms. COFFIN. May I comment? I want to make sure that I am setting the right timeline of all this, and to be candid and honest with 

all of you, because I feel very strongly and I have known this, and 

have worked for Wells Fargo for over 11 years: It is one of their 

top principles that we create American jobs. And when I spoke, I 

wanted to make sure I was honest that it is that we do not go offshore. Where we have gone offshore in the past, not in this current 

unemployment environment—as a matter fact, I would probably 

have to state to you I would have to check whether we have anyone 

even in our technology today who is offshore. This was in our past, 

not maybe today. So I probably misstated that. 

Ms. KILROY. I am glad to hear that correction, because what I 

heard and what I heard follow-up questioning was a comment that 

there weren’t qualified people here. 

I also want to find out your philosophy or the emphasis of quickly liquidating assets that are deemed to be maybe unproductive 

versus working out with those homeowners. Of course, in my opinion, working out helps the community, stabilizes prices, and, to me, 

not only being a good social policy, I think ultimately in the long 

run is a good business policy. 

But I am concerned that Professor White at Vanderbilt recently 

told the New York Times that despite your testimony that you are 

aggressive on that, that Wells Fargo has modified few loans as a 

percentage of delinquent holdings. Would you like to comment on 

that? 

56 

Ms. COFFIN. Well, I am not sure if I remember that exact quote 

as you put it. I think you have to look at the nature of the makeup 

of our portfolio. Again, Wells Fargo’s portfolio is predominantly investor owned; we do not own the loans. There is very little of our 

portfolio that we own as a balance sheet. And as I stated earlier 

today, I can give you this as fact, 8 percent of our portfolio is held 

by private investors, but they represent almost 70 percent of our 

serious delinquents, and they represent 50 percent of our foreclosures. 

Ms. KILROY. And do you take a different approach to those loans 

than the loans that Wells Fargo has initiated? 

Ms. COFFIN. I think it is not the approach we take to it. There 

is some because of the contractual obligations I spoke of earlier. 

But more importantly is how these loans were originated and who 

was put into these loans to begin with, which is the importance of 

responsible lending. These are loans that we did not originate; they 

are loans that we did not underwrite. These are loans where the 

companies reached out to us to do the servicing, and that is what 

we are doing. But many of these borrowers, we are not capable of 

finding an affordable situation. 

Ms. KILROY. What period of time are you talking about for—let 

me strike that. 

Are you aware that there were 31 complaints filed with the Ohio 

attorney general in 2007 alleging that Wells Fargo had refused to 

accept homeowners’ offerings of their late mortgage payments? 

Ms. COFFIN. You said 31? 

Ms. KILROY. Thirty-one complaints filed with the Ohio attorney 

general. 

Ms. COFFIN. That we were unwilling to accept? 

Ms. KILROY. The late payments. That people were offering up 

their late payments, and Wells Fargo was refusing to accept their 

late payments. 

Ms. COFFIN. I don’t have the cases directly here in front of me, 

and I always love to state that it is very important, as I see in all 

the complaints that are brought to our attention, and I appreciate 

all of them that are, is that you have to look at the details case 

by case. Many of those that we find where if they are in a very serious or late stage of delinquency or foreclosure, and we are still 

looking at the income and expense analysis—every borrower that 

we look at is an income and expense analysis to find affordability. 

So just accepting late payments, if we still see that there is no 

chance of affordability with the modifications that we can do, we 

are avoiding the inevitable. 

Ms. KILROY. Let me give you an individual situation reported in 

one of the local newspapers with respect to Wells Fargo for John 

and Sharon Vasquez, who bought a home in 1994 in Clintonville. 

And they had some ups and downs, once or twice fell behind, but 

they would typically get their payments back on track until they 

had a significant health issue. But even when the wage earner 

went back to work at the Postal Service, and they tried to work out 

a situation with Wells Fargo, initially the company refused the 

$5,000 that she offered. And then after that situation was worked 

through with the help of attorneys, they were required to pay—instead of $5,000, pay up $3,900 before the company would talk to 

57 

them about restructuring the loan: A pre-payment of $3,900, and 

then we will talk to you about restructuring. They made that payment, and then the restructuring included terms that—included a 

balloon payment of $10,000 that was known that they can’t pay. 

They are now in foreclosure proceedings. 

Also, I just had a concern. We talked a little bit about some of 

the refinancings or modifications that ended up with lower principal, and also you mentioned many that ended up with higher 

principal. Of course, my concern is that a home modification with 

a higher payment is far more likely to end up back in a redefault 

situation. 

Again, in the New York Times on February 19, Wells Fargo declined comment on increased principal charged to a Mr. Mitchell 

with back fees—fees, back payments, penalties. His principal was 

raised to above $300,000, his payments virtually unchanged, and 

he had to make an immediate $5,000 payment. He has now again 

fallen behind on his payments. 

So I guess I am not sure what the—exactly the philosophy is 

here, but it seems it is not necessarily liquidating the assets quickly, it is not keeping the people in their homes, because the terms 

and conditions were such that people were not going to be able to 

keep up with them one way or the other. Is the philosophy more 

of maybe getting whatever you can out of the mortgagee before 

foreclosure is initiated? 

Ms. COFFIN. No. I can make that very clear, it is not trying to 

just take as much cash as we possibly can. And that is one of the 

reasons we won’t receive partial payments. We want to make sure 

that if we establish what a true modification that is sustainable 

with affordable payments, and that those payments are made, that 

is a performing loan. And we will not take just partial payments 

because, again, we could be taking payments on something that ultimately is going to end up in foreclosure. 

In all of the cases that you mentioned, I want to be protective 

of privacy rights and what I can and can’t say, so I would like to 

talk more generically. Any case that anyone brings to us, we will 

look under every detail and look at every piece of information. But 

until you understand the uniqueness of each of those cases, I think 

it is important to understand, for instance, there could be an example that the $3,900 being requested is for back real estate taxes. 

And if someone has not made a payment on their home in 6 

months, and they have not paid their back real estate taxes, and 

we are looking at their income and expenses, it could be that we 

see they cannot afford the home. 

Ms. KILROY. Let me ask you another question about refinancing 

and modifications, and that is, separate and apart from back taxes 

or penalty payments that were part of the mortgage, what kind of 

additional costs are there? We had some discussion of this with the 

earlier panel. What kind of additional fees are required of the home 

purchaser, the mortgager, in a refinancing in terms of title 

searches, title insurance, etc., things like that, appraisals? What requirements do you put on homeowners? 

Ms. COFFIN. First of all, I am not an originator. I am on the servicing side of the business. 

Ms. KILROY. But this would be for refinancing or modification. 

58 

Ms. COFFIN. I don’t know that I can quote every last fee that is 

done on a refinancing, but I think what is more important is, I 

want to make this clear, that on a modification there is never a fee, 

ever. And I want to make sure our borrowers understand. There 

are some for-profit companies out there starting to charge them to 

get modifications for them, and they should avoid those. There is 

never a charge. I think I can say that for myself and my colleagues 

sitting here at the table. 

Number two, I think it is important that when working on a 

modification, if—I can state this for us, if there are late fees that 

are part of the back, those are waived. 

Ms. KILROY. Is there a differentiation that you make in terms of 

a modification or refinancing in terms of those kind of fees? 

Ms. COFFIN. Yes. Because a modification is taking the current 

loan in the state that it is in, it is usually a customer who is in 

a distressed situation, and you are trying to modify the terms of 

the loan to reach affordability for them. A refinance is usually a 

customer who has good credit and who wants to refinance to a 

lower rate, and they are trying to get out of the current loan they 

are in to get into a lower-interest-rate loan. 

Ms. KILROY. So somebody who is working hard, playing by the 

rules, may be suffering some issues financially, but not in the foreclosure situation, not in the delinquency situation would be asked 

to pay these fees? 

Ms. COFFIN. And that is also where I believe the Administration’s plan is providing new guidelines to help more people to refinance into that program. And I believe the program in the Administration’s plan is a streamlined plan that has very few costs associated with it. I don’t believe it is even going to require an appraisal. 

Ms. KILROY. The situation that I was referencing was somebody 

who e-mailed me what they said was a Wells Fargo streamlined 

plan, and the closing costs that were associated with the loan 

which would increase their principal slightly, lower their monthly 

payments slightly, shorten the years left on the mortgage, but the 

closing costs were 9 percent of the value of the house. That seemed 

to me a little bit extreme. 

Ms. COFFIN. I would like—if you could, I would love to know the 

details of that e-mail and send it to us. I can have our staff look 

into it. That seems like something I would need to check with the 

group that does that. I am in charge of servicing. 

Ms. KILROY. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

I would like to thank all of our witnesses for participating today. 

I guess one thing that I heard was that everybody—you are all 

happy with the President’s proposal, and you are glad that standards are being set for loan modifications. Is that correct? And let 

me just close by asking this question: How many of you or your 

companies were involved with the HOPE NOW program that was 

originated, what, a year-and-a-half ago? How long ago was that voluntary program put together? 

Ms. SHEEHAN. That really started coming together in mid-2007. 

We kicked off initially that fall. 

59 

Chairwoman WATERS. And the idea of that program was that instead of trying to impose upon you rules, regulations, laws, that 

you would voluntarily get together and deal with this foreclosure 

problem; is that right? 

Ms. SHEEHAN. Yes. 

Chairwoman WATERS. That was the idea? 

I may be a little bit naive, but given your expertise and everything that you know about this industry, why has it taken so long 

and why has it taken the President’s initiative to get you all happy 

about standards? Why didn’t you come up with something? Why 

didn’t you propose standards? Why didn’t you all tell us how this 

should be done? That was the whole idea putting together HOPE 

NOW. Did HOPE NOW fail? 

Mr. HEMPERLY. The President’s plan encompasses the GSEs, and 

up to this point, we hadn’t had any kind of standardization where 

the GSEs were participating. And I think all of us probably 

served—the largest percentage of our servicing portfolios are 

Fannie and Freddie loans. 

Chairwoman WATERS. I don’t get the answer, because what I am 

asking is, you were at the table, and you were there to deal with 

this problem of foreclosures. What happened was you came up with 

a very, very weak program of using these HUD-approved counselors and nonprofits to counsel people and to help people, and that 

is about all you did. Why didn’t you use your expertise and your 

talent to shape and form a response to the foreclosure meltdown 

that we were having? I am trying to figure out why the voluntary 

effort didn’t work? 

Ms. COFFIN. I would like to comment on that. I think one thing— 

and many of us have worked together outside of HOPE NOW and 

with HOPE NOW, and when this program began and when we 

launched it in 2007, the most prominent problem—the problem was 

subprime ARMs that you spoke about earlier today, and also getting borrowers to call us. And where HOPE NOW was very successful in its initial efforts was a streamlined ASF which allowed 

us to proactively go after and modify those ARM loans into fixed 

products before their ARMs reset. 

Chairwoman WATERS. Let me say this, because our representative here representing Citi talked about having adopted Sheila 

Bair’s program that she put together after she took over IndyMac, 

which really for the first time showed us what you can really get 

done. And so Sheila Bair basically took the IndyMac portfolio without your input, without your help, and came up with standards and 

ways by which—and one of the things that she did was she constructed letters that went out to the homeowners that said, this is 

what we can do for you, you know, under these conditions. Some 

other attempts, I am told, were letters that went out and said, 

come in and talk to us. And people said, I am not going in there; 

they are going to take my home. But she constructed letters that 

basically said, if you are in this kind of situation, here are the kind 

of things that we can do to help you. 

So I guess I point that out to you, because we have struggled 

with this problem far too long, given you were all at the table 

under a voluntary program called HOPE NOW. I want to abolish 

HOPE NOW. And I know, even though the President may be relatVerDate Nov 24 2008 14:43 Jun 11, 2009 Jkt 048677 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\48677 TERRIE
60 

ing to it in his plan, I think that HOPE NOW did very little to deal 

with this crisis. And I would just like you to think about how you 

can get in front of these problems that is going to affect the entire 

industry and come up with resolutions if you are truly interested 

in helping the homeowners. 

I know that many of you can give me a lot of responses to that, 

but of course, we don’t have any more time. And because I am 

chairing, I get a chance to do this. So I thank you for having been 

here today, and I am hopeful that as the President unveils his program, we are going to have the kind of cooperation and input to 

implement something that is truly going to deal with what is the 

problem facing our entire economy at this time. Thank you all very 

much. 

I am reminded that I should tell you again that some members 

may have additional questions for this panel which they may wish 

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

these witnesses and to place their responses in the record. 

Now, the panel is dismissed. 

[Whereupon, at 6:10 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

February 24, 2009 

62 


48677.001
63 


48677.002
64 


48677.003
65 


48677.004
66 


48677.005
67 


48677.006
68 


48677.007
69 


48677.008
70 


48677.009
71 


48677.010
72 


48677.011
73 


48677.012
74 


48677.013
75 


48677.014
76 


48677.015
77 


48677.016
78 


48677.017
79 


48677.018
80 


48677.019
81 


48677.020
82 


48677.021
83 


48677.022
84 


48677.023
85 


48677.024
86 


48677.025
87 


48677.026
88 


48677.027
89 


48677.028
90 


48677.029
91 


48677.030
92 


48677.031
93 


48677.032
94 


48677.033
95 


48677.034
96 


48677.035
97 


48677.036
98 


48677.037
99 


48677.038
100 


48677.039
101 


48677.040
102 


48677.041
103 


48677.042
104 


48677.043
105 


48677.044
106 


48677.045
107 


48677.046
108 


48677.047
109 


48677.048
110 


48677.049
111 


48677.050
112 


48677.051
113 


48677.052
114 


48677.053
115 


48677.054
116 


48677.055
117 


48677.056
118 


48677.057
119 


48677.058
120 


48677.059
121 


48677.060
122 


48677.061
123 


48677.062
124 


48677.063
125 


48677.064
126 


48677.065
127 


48677.066
128 


48677.067
129 


48677.068
130 


48677.069
131 


48677.070
132 


48677.071
133 


48677.072
134 


48677.073
135 


48677.074
136 


48677.075
137 


48677.076
138 


48677.077
139 


48677.078
140 


48677.079
141 


48677.080
142 


48677.081
143 


48677.082
144 


48677.083
145 


48677.084
146 


48677.085
147 


48677.086
148 


48677.087
149 


48677.088
150 


48677.089
151 


48677.090
152 


48677.091
153 


48677.092
154 


48677.093
155 


48677.094
156 


48677.095