ROBO–SIGNING, CHAIN OF TITLE, 

LOSS MITIGATION, AND OTHER ISSUES 

IN MORTGAGE SERVICING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

NOVEMBER 18, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–166 

( 

ROBO–SIGNING, CHAIN OF TITLE, LOSS MITIGATION, 

AND OTHER ISSUES IN MORTGAGE SERVICING 

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63–124 PDF 2011

ROBO–SIGNING, CHAIN OF TITLE, 

LOSS MITIGATION, AND OTHER ISSUES 

IN MORTGAGE SERVICING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

NOVEMBER 18, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–166 

( 

(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: 

November 18, 2010 ........................................................................................... 1 

Appendix: 

November 18, 2010 ........................................................................................... 75 

WITNESSES 

THURSDAY, NOVEMBER 18, 2010 

Anastasi, Anne, President, American Land Title Association ............................. 64 

Arnold, R.K., President and CEO, Mortgage Electronic Registration Systems, 

Inc. (MERS) .......................................................................................................... 47 

Caldwell, Phyllis, Chief, Homeownership Preservation Office, U.S. Department of the Treasury ........................................................................................... 7 

DeMarco, Edward J., Acting Director, Federal Housing Finance Agency .......... 14 

Duke, Hon. Elizabeth A., Governor, Board of Governors of the Federal Reserve System ......................................................................................................... 9 

Fisher, Linda E., Professor of Law, Seton Hall University School of Law ......... 62 

Gordon, Julia, Senior Policy Counsel, Center for Responsible Lending .............. 60 

Jones, Alan, Manager of Operations, Wells Fargo Home Mortgage Servicing ... 44 

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

Center .................................................................................................................... 56 

Lewis, Harold, Managing Director, Citi Mortgage ................................................ 46 

Mairone, Rebecca, Default Servicing Executive, Bank of America Home 

Loans ..................................................................................................................... 40 

Marano, Thomas, CEO of Mortgage Operations, Ally Financial Inc. .................. 41 

Mudick, Stephanie, Head, Office of Consumer Practices, JPMorgan Chase ...... 43 

Sanders, Anthony B., Professor of Finance, and Distinguished Professor of 

Real Estate Finance, School of Management, George Mason University ........ 58 

Stevens, Hon. David H., Assistant Secretary for Housing/FHA Commissioner, 

U.S. Department of Housing and Urban Development ..................................... 11 

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

of the Currency ..................................................................................................... 13 

APPENDIX 

Prepared statements: 

Anastasi, Anne .................................................................................................. 76 

Arnold, R.K. ...................................................................................................... 91 

Caldwell, Phyllis ............................................................................................... 174 

DeMarco, Edward J. ......................................................................................... 186 

Duke, Hon. Elizabeth A. .................................................................................. 199 

Fisher, Linda E. ................................................................................................ 213 

Gordon, Julia .................................................................................................... 219 

Jones, Alan ........................................................................................................ 252 

Levitin, Adam J. ............................................................................................... 262 

Lewis, Harold .................................................................................................... 292 

Mairone, Rebecca .............................................................................................. 300 

Marano, Thomas ............................................................................................... 307 

Mudick, Stephanie ............................................................................................ 316 

Sanders, Anthony B. ........................................................................................ 323 

Stevens, Hon. David H. .................................................................................... 328 

Walsh, John ...................................................................................................... 336 

Page

VI 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Waters, Hon. Maxine: 

Written responses to questions submitted to Edward J. DeMarco .............. 355 

Written responses to questions submitted to Harold Lewis ......................... 357 

Written responses to questions submitted to Thomas Marano .................... 360 

Written responses to questions submitted to Stephanie Mudick ................. 363 

Written responses to questions submitted to John Walsh ............................ 367 

(1) 

ROBO–SIGNING, CHAIN OF TITLE, 

LOSS MITIGATION, AND OTHER ISSUES 

IN MORTGAGE SERVICING 

Thursday, November 18, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

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

Members present: Representatives Waters, Lynch, Cleaver, 

Green, Ellison, Donnelly, Kilroy, Himes; Biggert, Miller of California, and Neugebauer. 

Ex officio present: Representatives Frank and Bachus. 

Also present: Representatives Watt, McCarthy of New York, Miller of North Carolina, and Speier. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. 

Good morning, ladies and gentlemen. I would like to thank our 

ranking member and other members of the Subcommittee on Housing and Community Opportunity for joining me today for this hearing entitled, ‘‘Robo-Signing, Chain of Title, Loss Mitigation, and 

Other Issues in Mortgage Servicing.’’ 

This hearing is about the failure of the mortgage service industry 

to uphold due process, to obey the law, and to live up to its oftstated goal of preventing foreclosures. This hearing is about the 

aftermath of what happens when an industry is essentially broken. 

It is also about what happens when our regulators do nothing to 

pick up the pieces. 

Since foreclosures started to spin out of control in 2007, I have 

been sounding the alarm about problems in the mortgage servicing 

industry. Working directly with homeowners, I have seen firsthand 

the problems they create for borrowers trying to obtain a loan 

modification, lost paperwork, incorrect information, incorrect fax 

numbers, and flat-out lies. Therefore, the recent allegations of foreclosure fraud and robo-signing don’t surprise me at all. In fact, I 

believe that we are seeing foreclosure fraud and robo-signing for 

the same reasons that we are seeing problems with homeowners 

unable to receive loan modifications; it is because it is in the 

servicers’ financial interest to foreclose. They want to foreclose as 

quickly as possible no matter the consequences. 

2 

The financial incentive that pushes servicers to foreclose is the 

very reason why the Treasury Department designed the Home Affordable Modification Program, that is the HAMP program, which 

was supposed to remove that incentive to foreclose by paying 

servicers to modify loans. However, it appears that HAMP is delaying foreclosures just long enough for the banks to improve their 

balance sheets. Of the 1.6 million homeowners who have been offered trial modifications through HAMP, only 36 percent have obtained permanent modifications. In the meantime, foreclosure rates 

are virtually unchanged since this time last year when HAMP was 

supposed to be in full swing. 

I think it is safe to say that HAMP isn’t meeting its goal of preventing foreclosures. 

There is significant evidence to suggest that the speed-driven, 

corner-cutting operations endemic in the mortgage servicing industry have produced systemic and damaging consequences for the Nation’s homeowners and for our housing and financial markets. 

First, I am very concerned about reports that in the rush to 

securitize loans, many promissory notes may have never been properly transferred into their trust. Without properly transferred 

notes, servicers could lack standing to foreclosure and mortgage securities lose their favorable tax treatment. I agree with my colleagues on this committee, the Congressional Oversight Panel, and 

Senator Dodd that the Financial Stability Oversight Council created by the Dodd-Frank Act should access the extent to which this 

poses a systemic risk to the Nation’s financial system. 

Second, and more importantly, a broken servicing industry 

means that borrowers are likely denied due process. They got the 

runaround. They waited for loan modification requests to be processed only to be served with foreclosure notices. They faxed and refaxed paperwork which was repeatedly lost. They were told to skip 

payments in order to receive help only to be placed into foreclosure 

when they followed that advice. 

Third, investors in mortgages are growing increasingly dissatisfied with services for not meeting their contractual obligations to 

negotiate profit-maximizing loan modifications. Some of them are 

suing originators for misrepresenting the original loan packages, 

and some are uneasy that servicers may never have standing to 

foreclose on thousands of homes in the first place. I am very anxious to hear from our witnesses about these issues. Frankly, I want 

to know, given the problems in the mortgage servicing industry— 

problems which have been apparent for years—what our government and industry witnesses intend to do to fix these problems and 

why any of them should keep their jobs. 

I would now like to recognize our subcommittee’s ranking member to make an opening statement. Mr. Neugebauer, you will be 

doing that today; is that correct? 

Mr. NEUGEBAUER. Yes. 

Chairwoman WATERS. Thank you. 

Mr. NEUGEBAUER. I thank Chairwoman Waters for holding this 

important hearing. 

While we cannot lose sight of the fact that losing a home is an 

emotional and gut-wrenching experience for any homeowner, it is 

our job as Members of Congress to remove that emotion and 

3 

thoughtfully analyze the foreclosure process to determine the best 

way to move forward for the American people as a whole. 

Currently, the average foreclosure process takes nearly 16 

months. To state it simply, a homeowner can live in a house for 

16 months without making a single mortgage payment. Furthermore, there are examples of homeowners who are actually making 

money by renting out their homes during the foreclosure process. 

I think we can all agree that is probably not appropriate. 

On the other side of the question, I have yet to hear any victims 

who have been evicted while meeting all or most of their mortgage 

payment obligations. In fact, some of the banks that do business 

in my district have stated that they attempt to contact homeowners 

an average of 100 times before they make any foreclosure action. 

There is no doubt that mortgage servicers should be accountable 

for sloppy paperwork in the foreclosure process. It is also inexcusable for any employees of a mortgage servicer to sign off on foreclosure affidavits without diligently reviewing each case filed. I am 

pleased with most of the remedial steps taken by the financial institutions to address paperwork problems in the foreclosure process 

in place to work with the Federal regulators to ensure that this 

progress is built upon. 

With all that being said, I am concerned that the paperwork 

problems are being used as a tool to deliberately slow down the 

mortgage foreclosure process. Lawyers see an opportunity to extract fees by gaming the system to avoid foreclosures. While borrowers are in default, then the foreclosures, for all intents and purposes, are appropriate. State Attorneys General are threatening to 

prolong legal action as a way of intensifying pressure on lenders to 

modify mortgages as a part of a potential settlement. Because of 

these actions, foreclosure processes have slowed significantly. In 

the State of Florida alone, for example, listings of foreclosed homes 

have dropped 24 percent since late September. 

I am also concerned about the ballooning foreclosure this backlog 

will prevent the market from clearing, which could lead to a further decline in housing prices. Delays are also costing some banks 

as much as a couple of hundred million dollars per month, according to some analysts. On top of that, mortgage servicers are facing 

mounting legal expenses that have increased servicing cost for 

lenders. 

Over the long run, responsible borrowers will undoubtedly face 

hundreds of dollars in additional fees or slightly higher interest 

rates while delinquent borrowers enjoy, unfortunately, free housing. That is just not right. As I study this issue more closely, I am 

convinced that more than ever, we need to work together to improve all aspects of the mortgage financial system, and reduce the 

amount of opportunistic and frivolous lawsuits so that our businesses and capital markets can be more competitive globally. I look 

forward to working with my colleagues on both sides of the aisle 

to address these issues in the 112th Congress. 

With that, thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

Without objection, Representatives Brad Miller, Jackie Speier, 

and Carolyn McCarthy will be considered members of the subcommittee for the duration of this hearing. 

4 

I will now turn to the chairman of the Financial Services Committee, Mr. Barney Frank, for 2 minutes. 

The CHAIRMAN. Thank you, Madam Chairwoman. And thank you 

for the diligence with which you have been pursuing this issue. 

The first thing I want to say is that I hope going forward in a 

bipartisan way—because while there are issues that divide us, this 

shouldn’t be one—we will be able to adopt legislation that will prevent this mess from occurring again. 

It ought to be an important principle of the law that there should 

not be important decisions that need to be made in the private sector, and no one has the authority to make them. That is where we 

are, to some extent, in the mortgage area. 

Unthinkingly, we all allowed a system to grow up—and all participants have some responsibility here because no one foresaw 

this—in which there are disputes among servicers, investors, and 

originators of the loan, and second lienholders—and sometimes 

those are the same party wearing different hats—and that has 

enormously complicated things. Yes, there have been some perverse 

financial incentives as well, but even where there is a will to move, 

we have a tangle that is very daunting. 

So I would hope that we would, going forward, be able, in a bipartisan way, to pass laws that say—and I think the principle 

should be simple—for every residential mortgage—perhaps we go 

beyond that—there ought to be one party that is responsible for 

making the decision. People who want to invest in pools of mortgages ought to be told that they are doing that subject to the right 

of that individual in charge to make decisions so as long as no one’s 

legitimate economic interests are totally disregarded, but we also 

have to note that there will be cases where inevitably there will be 

a conflict of interest as to what should be done, and that is the important thing to do going forward. 

As to the paperwork, yes, I think those who have ignored the law 

are culpable. I would hope that every financial institution would be 

doing everything possible to straighten out that paperwork problem. I think we do have to distinguish between paperwork problems and substantive problems. And I don’t want people to get 

false hopes that this is going to lead to a substantial number of 

foreclosures being permanently forgotten. 

There are people out there who got loans that they shouldn’t 

have gotten, and there is a lot of responsibility for why they got 

them. And I would note that the legislation that we got signed into 

law makes it very much less likely that will happen in the future 

because of the rules we have about these things. But we have to 

have a situation in which we move as quickly as possible and is 

distinguished between paperwork problems and those cases where 

there has been misjudgment and fraud and get this cleared up because it is bad for the economy, from all perspectives, to have this 

continue. 

Chairwoman WATERS. Thank you very much. 

Mr. Miller for 4 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, Madam Chairwoman, 

and Mr. Ranking Member, for convening this hearing today. 

Many of the problems we got into in recent years, as all of you 

know, were due to the lack of due process in the underwriting procVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
5 

ess. I have been involved in the real estate industry for almost 40 

years, and normally, when you go through a process of underwriting, an individual takes a loan and processes it from inception 

to closure of the loan. That is not happening today in the foreclosure process, and that has to be addressed. Many of them out 

there are doing a good job at it, the burden that is placed on them 

is making it very difficult, but there are some that are short-cutting the process, and that is pretty much why we are here today. 

It is apparent more must be done to reach all who are in need 

of assistance in the foreclosure process. Everyone needs to have a 

better hand on the process. I have heard from many back home in 

California, consumers are confused and don’t know where to go for 

information; the information they receive is unbelievable. The confusion is not surprising given why we are here today. I have talked 

to my constituents who provide foreclosure assistance. The departments for servicing and loss mitigation are not prepared to handle 

the volume of the types of issues that are being raised by homeowners. 

While I commend servicers for responding to the foreclosure crisis by hiring more staff, additional bodies don’t really resolve the 

underlying process unless they are qualified to handle that process. 

For instance, I have been told by consumers that they have each 

received different information, instructions and advice basically 

from each individual they talk to on the phone; and every time 

they talk to somebody on the phone, the information is different. 

I understand this is a daunting process. Mr. Neugebauer made 

a very good point that the delay in the normal process is going to 

have a huge impact on the recovery of the housing industry in the 

long run if we don’t handle this in a professional and efficient way. 

What we need to know is how can servicers, regulators, GSEs, 

and securitization markets do a better job of coordinating so that 

consumers are fully aware of all their options and that there isn’t 

any mismanagement in the foreclosure process? A few years ago, 

the California Association of Mortgage Brokers testified on this 

very issue, and I am frustrated that after all these years talking 

about many of the things that we were worried about then have 

come to fruition today. 

For instance, the Feds recently issued guidance pursuant to the 

language I amended in the Dodd-Frank replacing harmful and punitive HVCC laws on appraisals. I was pleased that the Feds 

issued a rule that would allow consumers a maximum amount of 

flexibility when working through an agent. Once again, consumers 

were able to shop for the most affordable loan without having to 

order appraisal after appraisal in the process. 

However, FHFA has allowed both Fannie Mae and Freddie Mac 

to put conflicting guidance in place. Denying the consumers the 

right to flexibility in the appraisal process, the regulators are continuing to end the cycle of uncertainty in the marketplace. Housing 

recovery will be delayed if there continues to be a lack of continuity 

in the system and a lack of certainty in the process. 

I thought we dealt with that issue because the issue of appraisals proved to be very defective in the process, and I don’t know why 

Freddie and Fannie haven’t accepted those same guidelines. Perhaps you can inform me privately later about it, but it seems like 

6 

a process should be a process, and if it is acceptable, it should be 

applied on a broad basis. 

There needs to be certainty on the part of servicers, investors, 

and homeowners, and regulators must do a better job in providing 

that. I do look forward to your testimony. Hopefully, everybody will 

be candid today, and we can try to resolve this issue in a fruitful 

way that will benefit homeowners and lenders both. 

I yield back the balance of my time. 

Chairwoman WATERS. Thank you very much. 

Mr. Lynch for a minute and a half. 

Mr. LYNCH. Thank you, Madam Chairwoman, for holding this 

hearing. 

Unfortunately, the effects of the foreclosure crisis are still with 

us. As we have seen lately, the most recent hurdles to mortgage 

modification continue with this robo-signing and related title fraud. 

I believe the complications we now see in the modification process 

are a direct result of the complexity of our mortgage securitization 

practices. The opaque nature of the bundling and the marketing 

and the slicing and dicing of mortgage-based securities had made 

the process of mortgage modification and foreclosure extremely difficult. The most recent problems, so-called robo-signing, which is 

nothing more than civil law, in some cases criminal fraud, indemnification of title insurers in determining who has standard to foreclose are just echoes of the complicated process by which these 

mortgages originated. 

I would like to hear from the servicers on the second panel, especially about the process by which they manage the parts of the 

loans that have failed and how certain tranches of the toxic assets 

since affected the remaining management of income on the loan for 

both the investors and the homeowners. 

I appreciate the opportunity to look into these matters, Madam 

Chairwoman, and I thank you for the time. I yield back. 

Chairwoman WATERS. Thank you very much. 

Mr. Green for a minute and a half. 

Mr. GREEN. Thank you, Madam Chairwoman. 

I would like to do two things: I would like to, first, thank you 

and the staff. The staff has been absolutely excellent in preparing 

materials for this hearing, and I would like to thank you for your 

leadership. I do this for fear that I may not have another formal 

opportunity to do so in a setting such as this. 

The second thing that I would like to do is mention that we have 

two significant phases of this process that create a great deal of 

consternation. We have the alpha of it, which is where the loans 

originate, and I think we have worked to try to clear this up, but 

we have persons who originated loans and would pass all of the liability onto others. And then at the omega part of the process, we 

have persons who are identified as servicers who don’t suffer a lot 

of loss if delinquencies are not properly handled, or if the modifications don’t take place as some think they should. 

So with this in mind, I am curious as to how we will handle this 

omega part, the end of the process, such that the loans that are in 

delinquency can be appropriately handled such that there can be 

loan modifications, and the servicers, of course, are where this 

takes place. 

7 

So I am interested in hearing how we can make the necessary 

adjustments and how the Consumer Financial Protection Bureau is 

going to fit into this process. I thank you, and I yield back the balance of my time. 

Chairwoman WATERS. Thank you very much. 

The CHAIRMAN. Madam Chairwoman, I would ask unanimous 

consent to make a brief statement. I am not going to be able to 

stay, and there was one point that I rambled on more than I 

thought, and I understand my light was on. 

Chairwoman WATERS. Without objection. 

The CHAIRMAN. I would like to, if I could, leave a question that 

I hope will be addressed, and it is for the FHFA and others, and 

that is, one argument that was suggested to me is that one thing 

that could help with this substantively is for there to be a requirement of third-party notification of anyone who is about to be foreclosed, because we have read these stories about errors. I do not 

see any objection to a requirement—some States require it, but I 

would hope, too, that those agencies that are under Federal supervision, they could implement it. 

And it does seem to me that third-party notification would go a 

long way—it is a lot easier to prevent something from happening 

that shouldn’t happen than to try to undo it. So I would hope that 

people would comment on that, tell us what their practices are 

with regard to an independent, third-party notification and what, 

if any, objection there would be to making it a requirement. I 

thank you, and I thank the members for allowing me that. 

Chairwoman WATERS. Mr. Chairman, I want to thank you. 

I am pleased to welcome our distinguished first panel. 

Our first witness will be Ms. Phyllis Caldwell, Chief, Homeownership Preservation Office, U.S. Department of the Treasury. Our 

second witness will be the Honorable Elizabeth A. Duke, Governor, 

Board of Governors of the Federal Reserve System. Our third witness will be the Honorable David Stevens, Assistant Secretary for 

Housing and Federal Housing Administration Commissioner, U.S. 

Department of Housing and Urban Development. Our fourth witness will be Mr. John Walsh, Acting Comptroller of the Currency, 

Office of the Comptroller of the Currency. And our fifth witness 

will be Mr. Edward DeMarco, Acting Director, Federal Housing Finance Agency. 

I 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. Let us get started first with Ms. Phyllis Caldwell. 

STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP PRESERVATION OFFICE, U.S. DEPARTMENT OF THE 

TREASURY 

Ms. CALDWELL. Thank you, Chairwoman Waters, Ranking Member Capito, and members of the subcommittee. Thank you for the 

opportunity to testify before you today on robo-signing and servicer 

performance in the Making Home Affordable Program. 

The reports of robo-signing, faulty documentation, and other improper foreclosure practices by mortgage servicers are unacceptable. If servicers fail to comply with the law, they should be held 

8 

accountable. The Administration is leading a coordinated interagency effort that includes many of the agencies represented on 

this panel to investigate misconduct, protect homeowners, and mitigate any long-term effects on the housing market. 

The foreclosure problems underscore the continued critical importance of the Making Home Affordable Program launched by 

Treasury of which HAMP is a part. Preventing avoidable foreclosures through modifications and other alternatives to foreclosure 

continues to be a critical priority. Foreclosures dislocate families, 

disrupt the community, and destabilize local housing markets. 

Over the last 20 months, the HAMP program has developed rules 

and procedures to ensure that responsible homeowners are offered 

meaningful modifications and other foreclosure alternatives. To 

remedy servicer shortcomings, we have urged servicers to rapidly 

increase staffing and improve customer service. We have helped develop guidelines and certifications on how and when borrowers 

must be evaluated for HAMP before starting a foreclosure. We have 

also continued our compliance efforts to ensure borrowers are fairly 

evaluated and that all servicer operations reflect Treasury guidance. 

Making Home Affordable has strong compliance mechanisms in 

place to ensure that servicers follow our program’s guidelines. 

Treasury has built numerous procedural safeguards in HAMP to 

avoid foreclosure sales. Specifically, program guidelines require 

participating mortgage servicers to: evaluate homeowners for 

HAMP modifications before referring those homeowners for foreclosure; suspend any foreclosure proceedings against homeowners 

who have applied for HAMP modifications while their applications 

are pending; evaluate whether homeowners who do not qualify for 

HAMP or who have fallen out of HAMP qualify for other loss mitigation programs or private modification programs; evaluate whether homeowners who cannot obtain alternative modifications may 

qualify for a short sale or deed-in-lieu of foreclosure; and finally, 

provide a written explanation to any borrower who is not eligible 

for a HAMP modification and to delay any foreclosure for at least 

30 days afterwards to give the homeowner time to appeal. 

Servicers may not proceed to foreclosure sale unless they have 

tried these alternatives. They must also first issue a written certification to their foreclosure attorney or trustee stating that ‘‘all 

available loss mitigation alternatives have been exhausted and a 

non-foreclosure option could not be reached.’’ On October 6th, 

Treasury clearly reminded servicers of this existing rule, that they 

are prohibited from conducting foreclosure sales until these preforeclosure certifications are properly completed. 

In addition, we have instructed our compliance team to review 

the 10 largest servicers’ internal policies and procedures for complying with these guidelines. If we find incidents of noncompliance, 

Treasury will direct these servicers to take corrective action which 

may include suspending those foreclosure proceedings and reevaluating the affected homeowners for HAMP. 

HAMP has achieved three critical goals; it has provided immediate relief to struggling homeowners; it has used taxpayer resources efficiently; and it has helped transform the way the mortgage servicing industry operates. To date, almost 1.4 million borVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
9 

rowers have started trial modifications, and over 520,000 homeowners have started permanent modifications. These homeowners 

have experienced a 36 percent median reduction in their mortgage 

payments, or more than $500 a month. 

By establishing modifications and affordability standards, HAMP 

has dramatically changed the way servicers treat borrowers at risk 

of foreclosure. In the first quarter of 2009, nearly half of mortgage 

modifications increased monthly payments. By the second quarter 

of 2010, 90 percent of mortgage modifications lowered payments for 

the borrower. 

In conclusion, we believe that foreclosure problems underscore 

the continued need for servicers to focus on evaluating borrowers 

for all loss mitigation options, starting with HAMP. They must continue to be the servicers’ first priority. 

We sincerely appreciate the efforts of both the members of this 

committee and our partners in the housing community in holding 

servicers accountable and improving the program’s design and performance. I look forward to taking your questions. 

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

174 of the appendix.] 

Chairwoman WATERS. Thank you. 

Our next witness is the Honorable Elizabeth A. Duke. 

STATEMENT OF THE HONORABLE ELIZABETH A. DUKE, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Ms. DUKE. Thank you. 

Chairwoman Waters and members of the subcommittee, I am 

pleased to appear today to discuss issues related to mortgage loan 

servicing and the mishandling of documentation in foreclosure proceedings. 

As you know, the Office of the Comptroller of the Currency, the 

Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Reserve are conducting an in-depth review of practices at the largest mortgage servicing operations. In 

our examinations, the agencies are reviewing firms’ policies, procedures, and internal controls related to foreclosure practices and are 

sampling loan files to test the effectiveness of those policies, procedures and internal controls. We are prepared to take supervisory 

action where necessary and appropriate to hold institutions accountable for poor practices. 

Losing a home is a tragic event for a family and the community 

in which they live. It is imperative that lenders and servicers provide borrowers every opportunity to modify their loans and retain 

their homes. If modification is not possible, borrowers must be assured of all the protections afforded by due process as required by 

law. 

The issues raised as foreclosure improprieties came to light have 

cast a pall of uncertainty across the entire housing market. Any response must ensure that actions taken with respect to borrowers 

and their homes are valid and in accordance with the law. At the 

same time, those actions should remove uncertainty and restore 

smooth functioning to housing and financial markets. While it is 

difficult to determine the incremental impact of further procedural 

10 

delays in foreclosures, delays and uncertainty resulting from flaws 

in the foreclosure process have the potential to delay recovery in 

housing markets and to undermine confidence in our financial and 

legal systems. 

Consumers and consumer counselors have been quite vocal in 

their frustration over unreturned phone calls, lost documents, and 

changing decision criteria that have plagued the loan modification 

process. In light of such experiences, evidence of improper procedures in foreclosure cases causes consumers, at a minimum, to further mistrust the loan servicing process. At worst, it can result in 

the improper loss of a home or premature eviction from that home. 

For individual borrowers, uncertainty about the prospect or timing 

of foreclosure makes everyday decisions difficult. Borrowers who 

are uncertain about their ability to keep their homes have little incentive to invest in or maintain those homes, resulting in damage 

to neighborhoods and lowering the value of surrounding properties. 

And with widespread stories of foreclosure improprieties, families 

in the process of buying a home or considering the purchase of a 

home have become concerned about the validity of their titles. Others who have purchased homes in foreclosure have had their closings delayed while documents are reviewed. Consumers have already fallen victim to foreclosure rescue scams as charlatans posing 

as mortgage counselors claim to be able to obtain mortgage modifications for a fee. In light of new stories of mortgage abuse, new 

incarnations of these scams are sure to proliferate. 

Financial institutions face a number of risks if inadequate controls result in faulty foreclosure documents or failure to follow legal 

procedures. Recent events have shown that even the possibility of 

problems leads to costly delays and reviews. In cases where actual 

problems are found, regulators will require lenders and servicers to 

correct not only the faulty documents themselves, but the faulty 

systems that made them possible. Institutions with widespread 

problems may be subject to fines and fees in addition to the costs 

associated with correcting the errors. 

The Federal Reserve believes the best way to assist struggling 

borrowers is with a mortgage modification that allows borrowers to 

retain their homes with an affordable mortgage payment. Foreclosures are costly to all parties, and more broadly to our economy. 

Prudent modifications that are consistent with safe and sound 

lending practices are generally in the long-term best interest of 

both financial institutions and borrowers. 

In summary, the Federal Reserve has been actively working to 

mitigate the harm to consumers and markets caused by problems 

in mortgage loan origination, securitization, and loan foreclosures. 

We are participating in interagency examinations of the foreclosure 

processes in the financial institutions that control the majority of 

the Nation’s mortgages. We are conducting examinations of lenders 

and servicers’ loan modification efforts. These efforts reflect a continuation of actions undertaken by the Federal Reserve System 

since the start of the financial crisis. We remain committed to the 

goal of stabilized financial markets that promote economic recovery. 

Thank you for holding this important hearing today, and I would 

be happy to answer any questions you may have. 

11 

[The prepared statement of Governor Duke can be found on page 

199 of the appendix.] 

Chairwoman WATERS. Thank you. 

Next, the Honorable David Stevens. 

STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT SECRETARY FOR HOUSING/FHA COMMISSIONER, U.S. 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. STEVENS. Chairwoman Waters, and members of the subcommittee, thank you for the opportunity to testify before you 

today on behalf of HUD and the FHA regarding foreclosure processing concerns that have been raised about certain servicers. 

Since taking office, helping families and the economy recover 

from the worst economic crisis in 80 years has been the top priority 

of this Administration. And with your help, we have taken a comprehensive approach to addressing the housing crisis that has 

helped more than 3.5 million families since April of 2009 receive 

restructured mortgages with more affordable monthly payments 

and only 3 times the number of foreclosures completed during the 

same period. 

But the job is far from over. Recent reports of faulty documentation and fraudulent affidavits in the foreclosure process remind us 

that we continue to pay a very steep price for nearly a decade of 

abuses and bad behavior. 

The notion that many of the very same institutions that helped 

caused this housing crisis may well be making it worse is not only 

frustrating; it is shameful. That is why HUD is working with Federal agencies and regulators joining me today to fully review the 

issues that recent foreclosure revelations have raised. I appreciate 

the opportunity to discuss how the Federal Housing Administration 

is responding to these challenges and holding servicers accountable. 

As you know, FHA requires the servicers it approves to actively 

engage struggling homeowners to prevent avoidable foreclosures; 

we call it loss mitigation. We do this to ensure that help is being 

provided before homeowners get into trouble, not just after the fact, 

by which time it is much less likely that the families will be able 

to stay in their homes. FHA’s loss mitigation program has helped 

more than half a million homeowners keep their homes in the last 

year alone, protecting families, but also the taxpayer by reducing 

the number of defaults in the FHA portfolio. 

But at the time I took office, we found that significant reviews 

of servicer performance were not being done at the level of detail 

required. Last November, we implemented very specific monitoring 

around servicer performance. This new, more detailed reporting 

system enabled FHA to provide peer group comparisons of servicers 

in their utilization of loss mitigation options to allow us to identify 

which tools servicers are using, how frequently, and how consistently. 

Initial findings showed significant variations in the performance 

of different servicers, triggering a much more in-depth review of 

servicer operations. These early returns suggest that some 

servicers are falling short in varying degrees of meeting HUD’s expectations in assisting borrowers through the loss mitigation procVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
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ess. Fielding analyst reviews suggest that some servicers appear to 

lack knowledge of FHA’s loss mitigation process while others may 

lack the correct technology necessary to expedite loss mitigation requests. And some seem to lack a sufficient number of experienced 

staff necessary to clear loan modification request backlogs. 

FHA is ensuring these servicers address these issues through 

customized training and planning assistance, ongoing evaluation of 

servicers’ progress in correcting deficiencies, improving compliance, 

and extensive consultation with servicers’ senior management and 

assigned work groups. 

While FHA was focused well before these recent revelations on 

the mortgage servicing process as a whole, we have expanded our 

lender review to look into specific compliance with the foreclosure 

process. In order to fully evaluate servicers compliance, FHA is 

conducting onsite servicer inspections. Specifically, FHA is reviewing how servicers track affidavits, security instruments, and promissory notes, and whether servicers verify the validity of these documents and have controls in place to identify failures in the process. Should it become clear that these early indications are, in fact, 

part of a much broader problem of unacceptable behavior on the 

part of servicers participating in FHA programs, these servicers 

will face the full strength of our enforcement authority. This is all 

taking place as FHA is implementing the most sweeping reforms 

to credit policy, risk management and consumer protections in the 

Agency’s history, and that includes lender enforcement. 

Since I became Commissioner, we have drawn approval for over 1,500 institutions and imposing over $4.25 million in civil money 

penalties and administrative payments to noncompliant lenders. 

We are sending a signal that if you don’t operate ethically and 

transparently, we won’t do business with you, and we will not hesitate to act. 

We appreciate the full support of the committee for giving FHA 

the authority to increase its premiums and for supporting broader 

FHA reform legislation that will provide additional tools to hold 

lenders accountable. 

Madam Chairwoman, we appreciate the lead you took on these 

efforts, and we urge Congress to follow your lead to enact these enforcement elements of that legislation as quickly as possible. 

So as you can see, the FHA is providing tools and enforcement 

mechanisms essential to protecting families and restoring trust in 

America’s mortgage markets. And as I noted at the outset, HUD 

protects consumers in additional ways through RESPA and the 

SAFE Act and other provisions, but government can’t do the job 

alone. Throughout this controversy and this crisis, the banks have 

lost an enormous amount of trust from the American people. 

Whether it is reducing principal for underwater homeowners, 

adopting responsible underwriting practices that ensure fair access 

to credit or ensuring greater transparency and accountability in 

their own business practices, banks need to take steps to earn the 

trust back. 

With that, I thank you for the opportunity to testify. 

[The prepared statement of Commissioner Stevens can be found 

on page 328 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

13 

Next, Mr. Walsh. 

STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. WALSH. Thank you. Chairwoman Waters, Mr. Neugebauer, 

and members of the subcommittee, I appreciate the opportunity to 

discuss improprieties in the foreclosure process and the steps being 

taken by the Office of the Comptroller of the Currency to address 

them. The OCC supervises most of the Nation’s large banks, including eight of the largest mortgage servicers, so this is a matter 

of great concern to us. 

Let me say clearly, the shoddy practices that have come to light, 

including improperly executed documents and attestations, are absolutely unacceptable. They raise questions about the integrity of 

the foreclosure process and concerns about whether some homes 

may have been improperly taken from their owners. The OCC is 

moving aggressively to hold banks accountable and to fix the problem. 

As problem loans surged in recent years, the OCC’s primary 

focus was on efforts to prevent avoidable foreclosures by increasing 

the bank’s volume and sustainability of loan modifications. The 

transparency and clarity provided by our Mortgage Metrics project 

helped in that effort by providing thorough, accurate data on the 

performance of mortgages and modifications. When we saw, for example, that an inordinate number of modifications initiated in 2008 

were re-defaulting, we directed national bank servicers to take corrective action. Since then, we have seen a sharp increase in modifications that lowered monthly payments and fewer delinquencies 

subsequent to modification. While these efforts are helping some 

families avoid foreclosure, many are still struggling and face the 

prospect of losing their hone. We owe these homeowners our best 

efforts to assure that they receive every protection provided under 

law. 

Foreclosures are governed by State law and the requirements 

vary considerably across jurisdictions. As a result, most nationwide 

servicers hire local firms familiar with those requirements, and 

both Fannie Mae and Freddie Mac require servicers to use law 

firms they pre-approve for a given locality. The OCC reviews a 

bank’s foreclosure governance process to determine if it has appropriate policies, procedures, and internal controls to ensure the accuracy of information relied upon in the process in compliance with 

Federal and State laws. We expect banks to test these processes 

through periodic internal audits, and their ongoing quality control 

function. 

Examiners generally do not directly test standard business processes or practices, such as the validity of signed contracts or the 

process used to notarize documents absent red flags that indicate 

systemic flaws in those business processes. 

Unfortunately, neither internal quality control tests, internal audits, nor data from our consumer call center suggested foreclosure 

document processing was an area of systemic concern. When problems at Ally Bank, which is not supervised by the OCC, first came 

to light, we immediately directed the eight largest national bank 

14 

servicers to review their operations and take necessary corrective 

action while we prepared to launch onsite examinations at each of 

the major servicers. Those exams are well underway and we have 

more than 100 national bank examiners assigned to that task. 

In concert with other regulatory agencies, examiners are reviewing samples of individual borrower foreclosure files from judicial 

and non-judicial States that include both in process and completed 

foreclosures. They will determine whether foreclosed borrowers 

were appropriately considered for alternative home retention actions such as loan modification. In addition, examiners are looking 

for evidence that financial information in affidavits is accurate and 

complies with State laws and that the fees charged are correct. 

They will determine whether the servicer has possession and control over critical loan documents needed to support a legal foreclosure proceeding and are seeking evidence that affidavits and 

documents were independently and appropriately reviewed and 

that proper signatures were obtained. 

Turning to those that provide service to the servicers, the OCC 

is heading an onsite interagency examination of the Mortgage Electronic Registration System, or MERS, in coordination with the Federal Reserve, the FDIC, and the Federal Housing Finance Agency, 

and we are participating in an examination led by the Federal Reserve of Lender Processing Services which provides third-party 

foreclosure services to banks. 

Where we find errors or deficiencies, we are directing banks to 

take immediate corrective action, and we have an array of enforcement actions and penalties that we will not hesitate to impose if 

warranted. These can include civil money penalties, removals from 

banking, and criminal referrals. We expect to complete our examinations by mid to late December, and by the end of January, we 

hope to have our analysis of the exams completed to determine 

what additional supervisory actions may be needed, and enforcement as well. 

Thank you again for the opportunity to appear today. I will be 

happy to answer questions. 

[The prepared statement of Acting Comptroller Walsh can be 

found on page 336 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

And finally, Mr. DeMarco. 

STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. DEMARCO. Thank you. 

Good morning, Chairwoman Waters, Ranking Member Neugebauer, Ranking Member Bachus, and members of the subcommittee. Thank you for having me here today. 

The recently identified deficiencies in the preparation and handling of legal documents to carry out foreclosures are unacceptable. 

Those deficiencies undoubtedly reflect strains on a system that is 

operating beyond capacity, but they also represent a breakdown in 

corporate internal controls and management oversight. 

FHFA’s goals in this matter are twofold: To ensure that foreclosure processing is done in accordance with the servicer contract 

and applicable laws; and to protect taxpayers from further losses 

15 

on defaulted mortgages. Of course, before any foreclosure is completed, we expect servicers to exhaust all alternatives. 

My prepared statement reviews the actions that FHFA has taken 

to date, as well as those underway. It also provides context for understanding the problems that have arisen, including consideration 

of the role of servicers and a description of the diverse range of 

foreclosure processing requirements. 

As I reported to the full committee, the Enterprises—Fannie Mae 

and Freddie Mac—minimize losses on delinquent mortgages by offering distressed borrowers loan modifications, repayment plans, or 

forbearance. These loss mitigation tools reduce the Enterprise’s 

losses on delinquent mortgages and help homeowners retain their 

homes. Servicers and Enterprise mortgages know that these tools 

are the first response to a homeowner who falls behind on their 

mortgage payment, yet for some delinquent borrowers, their mortgage payments are simply not affordable due to unemployment or 

other hardship, and a loan modification is not a workable solution. 

For these cases, the Enterprises offer foreclosure alternatives in 

the form of short sales and deeds-in-lieu of foreclosure. Despite 

these options for a graceful exit from the home, foreclosure remains 

the final and necessary option in many cases. 

As we know, foreclosure process deficiencies have emerged in 

several major servicers. Recently, FHFA provided the Enterprises 

and their servicers a four-point policy framework for handling 

these deficiencies. The four points are simply stated: Verify that 

your foreclosure process is working properly; remediate any deficiencies identified in foreclosure processing; refer suspicions of 

fraudulent activity; and avoid delay in processing foreclosures in 

the absence of identified problems. 

Pursuant to that guidance, the Enterprises continue to gather information on the full nature and extent of servicer problems. Only 

a small number of servicers have reported back to the Enterprises 

as having some problem with their foreclosure processing that 

needs to be addressed. Still, these firms represent a sizable portion 

of the enterprises’ combined books and business. The Enterprises 

are currently working directly with their servicers to ensure that 

all loans are handled properly, and corrections and refiling of paperwork are completed where necessary and appropriate. To be 

clear, FHFA does not regulate mortgage servicers, and the Enterprise’s relationship with them is a contractual one. 

As conservator of the Enterprises, FHFA expects all companies 

servicing Enterprise mortgages to fulfill their contractual responsibilities, which includes compliance with both the Enterprise’s 

seller servicer guides and applicable law. Also, FHFA remains committed to ensuring borrowers are presented with foreclosure alternatives. 

Still, it is important to remember that FHFA has a legal obligation as conservator to preserve and conserve the Enterprise’s assets. This means minimizing losses on delinquent mortgages. 

Clearly, foreclosure alternatives, including loan modifications, can 

reduce losses relative to foreclosure, but when these alternatives do 

not work, timely and accurate foreclosure processing is critical for 

minimizing taxpayer losses. 

16 

To conclude, regulatory agencies, including FHFA, are carrying 

out important examination activities that will better inform this 

issue. Thus, identification of further actions or regulatory responses should await the results of these examinations and an 

evaluation of the information developed. 

Thank you. 

[The prepared statement of Acting Director DeMarco can be 

found on page 186 of the appendix.] 

Chairwoman WATERS. Thank you very much for your testimony; 

it was tremendously informative. And I certainly have a few questions. 

Let me start with Ms. Phyllis Caldwell, Chief, Homeownership 

Preservation Office, U.S. Department of the Treasury. I have a 

press release from November 30, 2009, from the Treasury Department. The press release says, ‘‘Servicers failing to meet performance obligations under the servicer participation agreement will be 

subject to consequences which could include monitory penalties and 

sanctions.’’ That was November 30, 2009. Have you levied any penalties or sanctions? 

Ms. CALDWELL. Madam Chairwoman, thank you for that question. We take the servicer performance under HAMP very seriously— 

Chairwoman WATERS. I know you do, but have you levied any 

penalties or sanctions? 

Ms. CALDWELL. We have. In terms of penalties to the servicers, 

we have required that servicers go back and re-solicit homeowners 

that they may not have solicited. We have required servicers to 

change their process and reevaluate homeowners for HAMP. In addition, we have required servicers to suspend foreclosures— 

Chairwoman WATERS. Have you levied any penalties or sanctions? 

Ms. CALDWELL. We have not levied monetary clawbacks— 

Chairwoman WATERS. Any penalties or sanctions, have you levied any? 

Ms. CALDWELL. We have levied many non-monetary penalties on 

the servicers. 

Chairwoman WATERS. Have you levied any penalties or sanctions? I understand what you are saying; you have required them 

to do some things. 

Ms. CALDWELL. Correct. 

Chairwoman WATERS. You have asked them to change some of 

their procedures, etc., but my question is, have you levied any penalties or sanctions? 

Ms. CALDWELL. We have not levied major monetary remedies 

which— 

Chairwoman WATERS. So you have not levied any penalties or 

sanctions; is that your answer? 

Ms. CALDWELL. That is not correct. We have given several penalties under the servicer performance agreement. 

Chairwoman WATERS. Okay, fine, that is okay. Can you describe 

those penalties to us? 

Ms. CALDWELL. As I described earlier, the remedies available 

under the servicer performance agreement are limited to directing 

servicers to do additional things, withholding compensation for 

17 

those permanent modifications that have been made, or going back 

and clawing back incentives that have already been paid. To date, 

we have not gone back to take back incentives that have already 

been paid, but we have pursued many of the nonmonetary remedies, including further actions and evaluations and reevaluations. 

Our focus in the first year of our compliance was making sure 

that servicers were implementing the program correctly and that 

homeowners had every opportunity to— 

Chairwoman WATERS. I understand that. I was just interested, 

because of the press release that you released on November 30, 

2009, where you said servicers failing to meet performance obligations under the servicer participation agreement will be subject to 

consequences which could include monetary penalties. There have 

been no monetary penalties from what I am hearing from you, and 

no sanctions, but you have done some work in instructing them 

that they have to change their practices and procedures. 

With over 1 percent of the money obligated to HAMP spent, do 

you think servicers have met performance obligations? 

Ms. CALDWELL. As we go in and review the compliance, what we 

have found is that less than 5 percent of the time, servicers have 

not met those requirements. When they do, we have instructed 

them that they may not decline a homeowner from HAMP and that 

they must go back and fix the process. Again, in the first year, our 

focus was making sure that homeowners had every opportunity to 

be considered for HAMP modification. Certainly, in the second 

year, we need to— 

Chairwoman WATERS. Thank you very much. 

Let me turn to Mr. Walsh, Acting Comptroller of the Currency, 

Office of the Comptroller of the Currency. Let me read you a paragraph from a recent Washington Post article from November 8th: 

‘‘When two banks, JPMorgan Chase and Wells Fargo, declined to 

cooperate with the State banking investigation into their foreclosure practices, the State officials asked the bank’s Federal regulator for help, according to a letter they sent, but the Office of the 

Comptroller of the Currency, which oversees national banks, denied 

the State’s request saying the firm should answer only to inquiries 

from Federal officials. 

‘‘But even as it closed the door on State oversight, the OCC chose 

itself not to scrutinize the foreclosure operations of the largest national banks, foregoing any examination of their procedures and 

paperwork. Instead, the agency relied on the bank’s in-house assessments.’’ 

Are you familiar with this? 

Mr. WALSH. I read that story, yes. I don’t agree with the facts. 

Chairwoman WATERS. Besides reading the story, do you have 

knowledge of what took place? 

Mr. WALSH. I do. Would you like me to recount? 

Chairwoman WATERS. Yes. That is what I am asking you. 

Mr. WALSH. Okay. At that period, the States had gone to one 

bank seeking information about subprime loans and their performance. We were in the process at that time of developing what is 

now our Mortgage Metrics report, which involved a more extensive 

body of information than what the States had asked the banks 

about developing. 

18 

We, in fact, began gathering that information and releasing a 

more detailed report of that information on a broader range of information on mortgages. In fact, the report has become sufficiently 

robust that in the Dodd-Frank Act, we were directed by Congress 

to make that information available State By State and on an aggregate basis, and we have been doing so. 

Chairwoman WATERS. I am going to turn to our ranking member 

of the Financial Services Committee, Mr. Bachus, for questions. 

Mr. BACHUS. Thank you. I appreciate the testimony of the regulators. And it does look as if you are doing a pretty thorough review of the internal policies of the institutions at this time. 

I had this question: Members of Congress first learned about 

these robo-signings, which I assume were used by the mortgage 

companies to speed through the paperwork. But they are a violation of procedures, so they are serious. We were not aware of the 

news reports, and I think the news reports were based on a deposition that someone was giving in response to the deposition that 

they used robo-signing. Were you aware of these problems before 

the news report? I may ask the Federal Reserve, or just maybe 

from left to right. Were any of you aware of it before you read it 

in the newspaper? 

Ms. DUKE. We were not aware of it significantly before we read 

it in the newspaper. Right about that time, because we supervise 

Ally, we had a meeting with Ally, so I am not sure whether it was 

the same day or the day before, but it was about the same time. 

Mr. BACHUS. And I am glad you read the newspapers. 

Mr. WALSH. Just to follow up on that, it is the case that we were 

not aware of the robo-signing issue until it came to light, and that 

was the trigger then for proceeding to the reviews. 

Mr. BACHUS. But in a way, they would have been visible to you, 

or should have been, would they not? If they were visible to the 

bank’s internal controls, the regulators were also in some of those 

banks looking. I wonder why they weren’t visible. 

Mr. STEVENS. I think that is an absolutely valid question. We 

were very concerned about servicers’ compliance with the entire 

foreclosure process, and we identified this through some fairly indepth reporting back in November. We actually sent teams in this 

year to a number of the larger servicers to do loan level reviews 

of their entire foreclosure processes on the loss mitigation front. It 

didn’t go up to the final check of who is signing the affidavit, but 

it did indicate to us there was some variability. We were not specific with the robo-signing particular piece, but as this has broadened out, it clearly is highlighting broader concerns that we had 

about how servicers are handling the foreclosure process in total. 

And we have already completed several in-depth research reviews of several larger servicers, and we are working through the 

process as to what kind of action that will result in. 

Mr. BACHUS. I think your main concern is the same concern we 

have, which is that borrowers who are current or who should not 

be foreclosed on, in other words, a wrongful foreclosure, someone 

who was paying their mortgage or had the ability, and procedural 

irregularities or the lack of documentation, as long as the documentation of the mortgage is not current, I can see why your main 

concern would be—and there have been, as I understand, very few 

19 

reports, at least to date, of people who were current or almost current being foreclosed on; is that true? 

Mr. DEMARCO. I believe it is for the Enterprise loans, Congressman. I am not aware of people who are current being foreclosed 

upon. 

Mr. BACHUS. Okay. I would say this; I think going forward, we 

need to all look at this. I think one thing I hope you are concerned 

about, which we are, is that maybe the lack of documentation or 

these procedural irregularities—I will call them those, as long as 

they don’t indicate more—and I think, Mr. Walsh, or Comptroller, 

you mentioned whether they affect more significant problems within the mortgage financing. Are you concerned that these disclosures 

may indicate that there may be potential for a larger problem? 

Mr. WALSH. Any time you identify a problem of this kind, it 

makes you concerned about the integrity of the process within the 

particular bank. Obviously, there are institutions that were not 

complying with applicable requirements of State law, so of course, 

that is the purpose of going in and doing this sort of hard scrub 

of the process. We are not aware of a reason to believe that there 

is some systematic or systemic reason to doubt the functioning of 

the system, but certainly, there were some systematic failures 

within the individual servicers. 

Mr. BACHUS. Okay. Thank you. 

Let me just close by saying, I think we all agree and I think the 

banks agree, obviously borrowers agree, regulators and the Congress that the decision to foreclose on a homeowner is very serious, 

it not only affects them, it affects their families, and their neighbors. I think all our interests going forward is to make sure that 

the foreclosure process is handled properly, and that concern won’t 

end today. I look forward to working with all of you, with the institutions and in the next Congress as we monitor this process and 

work through it. 

Thank you. 

Chairwoman WATERS. Thank you very much. 

Mr. Lynch. 

Mr. LYNCH. Thank you, Madam Chairwoman. 

I am going to follow up on your questions from earlier. I want 

to thank all the witnesses for their willingness to help the committee with its work. 

The Treasury has existing contracts with a large number of 

mortgage servicers representing a majority of outstanding mortgages in our country through the Making Homes Affordable Program. Each of these contracts imposes various duties that the 

chairwoman has pointed out on the financial institutions that are 

parties to the agreements, and those including requirements that 

they perform certain servicing duties in compliance with applicable 

State and Federal law. And it also says, as the Chair has noted, 

‘‘failure to adhere to the agreement could result in the termination 

of the contract and withholding of payments, reductions of payments, or recoupment of payments already made.’’ 

Now, however, I have a GAO report here that says that, ‘‘Treasury has yet to fine any servicer for noncompliance or even establish 

any specific penalties or consequences for noncompliance.’’ I am 

troubled by that. And I know you say that you are reevaluating 

20 

and doing things like that, but Ms. Caldwell, do you have evidence 

that you are actually—GAO says you are not penalizing, you are 

not—let me see what their word is—‘‘Treasury has yet to fine any 

servicer for noncompliance or even establish any specific penalties 

or consequences for noncompliance.’’ Do you have evidence to refute 

that? Can you share that with the committee? 

Ms. CALDWELL. Certainly. Treasury takes the compliance under 

the Making Homes Affordable and HAMP programs very seriously— 

Mr. LYNCH. Okay. I only have limited time. I understand, you 

said that previously. And I respect that, I just need some evidence 

of that. 

Ms. CALDWELL. I will speak about a few of the main things. In 

January— 

Mr. LYNCH. No, no, no, no, no. I don’t have that much time. Off 

the record, can you just supply the committee with the evidence 

that you actually are enforcing this and are providing penalties, because I have another thing I want to ask you about. 

Ms. CALDWELL. Yes, absolutely. In January of 2010, we told 

servicers that they may not decline any homeowner from HAMP 

until they have— 

Mr. LYNCH. No, no, no. That is not a penalty though. That is not 

a penalty. You are readjusting things. I will reclaim my time. 

We do have a report here, back in, let’s see, back in September, 

Ambac Insurance sued Bank of America. Ambac had conducted a 

review of 6,533 loans that it reviewed across 12 securitizations 

sponsored by Countrywide—this was before Bank of America took 

over. They said that 97 percent of those 6,533 loans did not conform to underwriting guidelines. And here is my question: Treasury 

is paying these servicers—that you are not penalizing, you are also 

paying them enhanced payments in connection with modifications 

and other services. 

We are finding that there are gaps, gaps in the chain of title, 

gaps in a lot of documents that are fraudulent. So what I am asking you is, are you concerned that you are paying servicers who 

don’t actually own the properties that they are modifying or foreclosing on; that there is no clear chain of title for the properties, 

and you are paying—Treasury is paying the servicers. 

Ms. CALDWELL. Our contract—Treasury’s contract with the 

servicers only pays when a loan is modified permanently. And certainly we are very concerned about the issues regarding chain of 

title in the mortgages in the foreclosure process. However, none of 

those issues to date have been a part of the servicers’ contract with 

the homeowner to collect payments. And our focus has been on 

making sure that the homeowner has an opportunity to modify 

that payment agreement with the servicer so that they may stay 

in the home and avoid foreclosure. 

Mr. LYNCH. You said something that was news to me. A servicer 

only gets paid from Treasury if the modification is made permanent? 

Ms. CALDWELL. Correct. 

Mr. LYNCH. So they don’t get any of their work unless the modification— 

21 

Ms. CALDWELL. Unless the modification is permanent, and then 

they only get partial payment. The HAMP program has a pay for 

success design, the servicers are paid over 3 years, each year that 

the modification remains current, and investors retain all of the 

risk of eventual redefault. 

Mr. LYNCH. Okay. Thank. 

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

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. Just an observation before I start my questioning here. I have sat here for a 

number of years now and when we have had our regulators come 

before this group during what has become called the ‘‘financial crisis,’’ the overriding theme is, we didn’t know that was going on. We 

didn’t know that people were making these kind of loans. We didn’t 

know this, we didn’t know that. To me it gets a little frustrating 

that the people that we have put in charge are supposed to know 

what is going on in the financial markets, regulating the financial 

markets, continuing to be their testimony is we didn’t know. But 

when we bring you in, then the testimony is, but we are on it now. 

I think the American people have a greater expectation that you 

know it before it happens rather than reacting to it after it happens. And I would hope going forward that we can begin to—we 

passed a historic financial regulation in this Congress. And a lot 

of us felt that what we didn’t need was more regulation; we needed 

regulators who were doing their jobs. And I think coming forward, 

I think one of the things that we are going to have to ascertain is, 

do we have the competency level in our regulatory structure, and 

do we have a regulatory structure that can function as regulators 

and not necessarily burden these financial institutions with more 

regulation. 

Mr. DeMarco, recently I think the Florida Attorney General, Mr. 

McCollum, launched an investigation into the allegations of unfair 

and deceptive actions by a Florida law firm that has been handling 

foreclosure cases. And I think that particular firm is one of the 

Fannie Mae-retained attorney network approved attorneys. 

A couple of questions come to mind. How much money has 

Fannie Mae paid this entity? And if it turns out that the Attorney 

General can bring action on this, I am looking out after the taxpayers here because as you know, they are on the hook for whatever happens to Freddie and Fannie. And so I am kind of wondering what kind of financial implication that is going to have on 

the Enterprises. 

Mr. DEMARCO. Thank you, Congressman. Yes, in fact not just 

Fannie Mae but Freddie Mac also had mortgages for which 

servicers were utilizing this same law firm. I can’t tell you, sitting 

here today—I can try to get that information for you in terms of 

how much this firm has been paid in the past. The ultimate additional cost resulting from the failures of this law firm are to be determined. 

The one thing I could add in a positive way on this is that we 

have been—both FHFA and the two Enterprises have been working 

in close cooperation with the State Attorney General in Florida on 

this matter. And we have a very good, cooperative relationship 

with regard to the documents and with regard to the ongoing investigation. 

22 

Mr. NEUGEBAUER. One of the concerns is, I have read where 

some of these attorneys general are trying to reach settlement 

agreements where part of that settlement agreement is a writedown of principal. The question I have is, if a law firm has done 

something that is inappropriate or didn’t follow the law, and part 

of the settlement agreement is for a write-down in the principal, 

who is going to pick up that tab? 

Mr. DEMARCO. All I know about that is a few things I have seen 

in the newspaper, Congressman. The connection does seem a bit 

tenuous to me. I think in terms of our work here, that law firm is 

in a contractual relationship with the Enterprises, and the remedies that we would seek would be those that are available through 

the contract, if there is something there to be recovered. But I can’t 

speak to what the collection of State Attorneys General are considering right now, and I have not discussed any such thing with 

them at this point. 

Mr. NEUGEBAUER. On the same note of lawsuits, I understand— 

I believe there was a securities fraud case that was brought against 

Fannie Mae, Frank Raines, Timothy Howard, and Leanne Spencer 

about the Ohio Public Employees Retirement System in 2004, and 

to my knowledge that case has not been resolved; is that correct? 

Mr. DEMARCO. That is correct. 

Mr. NEUGEBAUER. And do you know how much—are we still paying the legal fees for Mr. Raines and Mr. Howard and Ms. Spencer? 

Mr. DEMARCO. Fannie Mae is advancing legal fees to them. 

Fannie Mae is advancing legal fees to them under an existing indemnification agreement. 

Mr. NEUGEBAUER. Would you repeat that? 

Mr. DEMARCO. Yes. Fannie Mae is advancing legal fees to those 

three individuals. 

Mr. NEUGEBAUER. Could you get me the amounts of money that 

have been spent defending those folks, because obviously that is 

another tab that the taxpayers are now picking up, and I don’t 

know if they are going to be excited about picking up the tab of 

legal defense for those individuals. Can you furnish it to us? 

Mr. DEMARCO. I certainly can, Congressman. I will be glad to follow up with you with the context of that, because I share a concern 

about what the implications of this are for the taxpayers. But I 

would just like to assure you as a general matter, this is something 

that has been carefully weighed at the agency, and I will get back 

to you with that information. 

Mr. NEUGEBAUER. Thank you. 

Chairwoman WATERS. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Mr. Walsh, in response to I think the ranking member or Mr. 

Bachus earlier, you said that there was no systematic operation, so 

you don’t think there was any intent to do wrong. 

Mr. WALSH. No, I didn’t mean to imply that. I was— 

Mr. CLEAVER. I am not suggesting that you were. I just want 

some clarification. 

Mr. WALSH. Right. The distinction I was drawing there was that 

there were clearly some systematic failures within servicers to observe requirements of law that were necessary to the effective completion of a foreclosure. I was simply pointing out that we were not 

23 

aware to this point of any broader systemic issue associated with 

the kind of nonperformance of these documents and processes, although that is an issue that many have suggested should perhaps 

be looked at more. 

Mr. CLEAVER. So the RICO method of dealing with this issue 

would be inappropriate, going too far? The racketeering? 

Mr. WALSH. That will depend on what the enforcement agencies, 

including our own enforcement people and the State AGs, determine in their investigation. I couldn’t presume to comment. 

Mr. CLEAVER. So do any of you believe that this issue or this crisis has metastasized to the point where there is a need for a deeper 

look, that there was intentionality to defraud? We have been using 

a lot of words. Foreclosure fraud is probably a better term. Do any 

of you think that goes deeper than what we are discussing? 

Ms. DUKE. I don’t think we have any information on that, but I 

can assure you that we regularly refer cases to the Justice Department when we find those in our examinations. So if we found that, 

we would make those referrals. 

Mr. CLEAVER. Since we are communicating, do you support the 

creation of a compensation fund similar to what was done in the 

Gulf Coast after the oil spill that would make people whole? 

Ms. DUKE. I have heard some reports that is one of the things 

that the 50 State AGs are looking at. And I think it would be very 

positive if there was a mechanism to deal with these problems as 

they came forward, and also to come to some resolution so that the 

mortgage functioning and the housing markets can continue. So 

yes, I would. 

Mr. CLEAVER. One final question. You had mentioned earlier that 

there is the possibility of at least 4 million additional foreclosures 

that are seriously moving toward foreclosure between now and 

2012. Do you believe that what we are trying to find information 

about today, the foreclosure fraud, will have any bearing at all on 

making the 4 million homeowners an inextricable part of the mess 

that we are hoping to clear up? 

Ms. DUKE. I think the issues related to documentation would 

probably impact the timing of those foreclosures more than the 

number of the foreclosures. And you know, these are the estimates 

that we are making based on the number of loans today that are 

past due for nonperforming, as well as those that are in some process of foreclosure. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

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

Mr. MILLER OF CALIFORNIA. Thank you, Madam Chairwoman. 

I enjoyed hearing from each of you, and I wish we had a lot more 

time because I know there is a lot more that could be discussed. 

It sounds like you are trying to deal with the continuity of process 

where the system overall works as it should. You are trying to 

make sure the misinformation is dealt with, that foreclosure avoidance occurs when it can. 

I guess one problem I am having is if fraud has been committed 

on the part of lenders and as it applies to foreclosures, they should 

be held independently responsible for each and every one of them 

without a doubt. But the concept of just arbitrarily assessing everybody who ever made a loan to pay into a pool to fund something 

24 

in the future is unreasonable based on those who are trying to do 

the right thing. And the concept that there hasn’t been some cost 

or punitive action towards everybody, whether it be a homeowner 

who took out a bad loan, they pay tremendously. The individuals 

who made loans, lenders, have paid tremendously. Investors have 

made huge investments and they have paid tremendously through 

loss of assets. Many who bought mortgage-backed securities at 

groups like Countrywide tried to format to look like a GSE mortgage-backed security, which it wasn’t, those investors lost tremendous amounts of money. 

So there has been hardship on everybody throughout this, if you 

want to call it a depression in the housing industry, whatever you 

want to call it. This debacle that occurred, everybody has paid a 

price. But if people are being unreasonably foreclosed upon, those 

individuals who have made those actions should be held accountable for those actions. And the part of Freddie and Fannie who 

hired attorneys who did something improperly, hopefully their errors and omissions insurance requirements are so great and the 

damage assessed against them are going to be enough that others 

in the future would want to avoid that. 

But we have to say things have gone wrong in the past. We are 

dealing, trying to deal with them now. But how do we look to the 

future? 

Mr. Stevens, you and Mr. Walsh made some very good comments. How much impact do you think your efforts are having on 

the system today as applies to rectifying some of these problems 

that have occurred? 

Mr. STEVENS. Thank you for the question. We have seen a significant change in servicer behavior since we began our reviews. 

And as these work through the process of our formal procedures 

through the Mortgagee Review Board, I believe we will see even 

greater response. To date, we have already fined $41⁄4 million dollars in penalties, we suspended— 

Mr. MILLER OF CALIFORNIA. For those responsible for misdeeds? 

Mr. STEVENS. That is correct; specific cases, those institutions. 

Mr. MILLER OF CALIFORNIA. I support that. 

Mr. STEVENS. And we have eliminated 1,500 other institutions 

and it has without question elevated the awareness of all institutions in this country about the need to adhere to processes, just as 

clearly as has taken place right now through what has happened 

with the recent state of news around robo-signing and the various 

other issues. 

Mr. MILLER OF CALIFORNIA. You think your actions that are taking place are effective and they are working? 

Mr. STEVENS. I think we need a trust-but-verify approach, or at 

this point not even necessarily complete trust. I think we are doing 

what we think is appropriate. We are sending teams into the 

servicers right now, and we are expanding our reviews. We are 

going to look at the remaining stages of the foreclosure process beyond what we looked at at the last set of set of reviews. And if they 

are not compliant, we will take our authority, which we have some 

significant ability to assess penalties legally, and we will take that 

authority. 

25 

Mr. MILLER OF CALIFORNIA. You have to verify that your actions 

and implementations have taken place and there will be a consequence for that. 

Mr. STEVENS. That is correct. 

Mr. MILLER OF CALIFORNIA. Mr. Walsh, do you agree with that? 

Mr. WALSH. Certainly when we took action a couple of years ago 

with the servicers to identify problems in their modification programs, they greatly improved the quality and effectiveness of the 

modifications. The examinations that we are now undertaking on 

an interagency basis are going to just grind right down to the most 

granular detail. 

Mr. MILLER OF CALIFORNIA. Good. 

Mr. WALSH. We need to understand what has been going on in 

the process, and to make sure the processes are remedied so that 

they operate in a fair and legal manner. And to the extent that 

there are systematic problems, there will be both remediation and 

there may be penalties. 

Mr. MILLER OF CALIFORNIA. I applaud you on that. 

Mr. DeMarco, I have a question for you. We had a debacle on 

HVCC and appraisals in the past year we proved that that did not 

work, and we put new guidelines in place, and FHFA basically is 

liable with Freddie and Fannie to put out conflicting guidance that 

applies to appraisal processes in the future. And I am bothered by 

that because they are the largest holder of the trust deeds. Why 

are they not complying with the same performance we have placed 

upon banks? 

Mr. DEMARCO. Congressman, I am going to find out exactly what 

this discrepancy is that you are concerned with. Fannie and 

Freddie have maintained the positive elements of the HVCC. Now 

that that has gone away, principally focused on appraiser independence. The Federal Reserve has just recently— 

Mr. MILLER OF CALIFORNIA. But they have not done that, that is 

my problem. I am out of time, but will you check into that and get 

back, because from what I am hearing that has not occurred. 

Mr. DEMARCO. Okay, I certainly will. 

Mr. MILLER OF CALIFORNIA. Thank you, sir. 

Chairwoman WATERS. Thank you. Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. Dr. King reminded 

us that for every complicated problem, there is a simple solution 

that is usually wrong. And what I would like to do is first examine 

how complicated this problem is and try to get beyond the superficial solutions if at all possible. 

At one time, we had a mortgage circumstance wherein we had 

a borrower, a lender, and a lien or a mortgage. Currently that has 

metamorphosed into a lender, the borrower, the lien, the mortgage. 

But also we now have a sponsor who turns the mortgage into a 

bond and then sells it to a depositor. We have a depositor that sells 

the mortgage to a trust. And then the trust hires a servicer. This 

doesn’t include the MERS and other entities that have become a 

part of this process. With all of these various entities in the process, the question becomes: Are there impediments to sustainable 

mortgage modifications with reference to this current crisis? 

And I would just like to mention a couple of issues that have 

been called to my attention. Many of my issues have been satisfied. 

26 

I have had an opportunity to meet with some of the witnesses and 

have some of my issues addressed, but these I would like to just 

call to your attention this morning. The first has to do with 

servicers holding junior liens. Does a servicer holding a junior lien 

present an impediment to our having sustainable mortgage modifications? 

I will just start with, first, Ms. Caldwell. Can you give me some 

intelligence on this, please? 

Ms. CALDWELL. Thank you for raising second liens. The second 

liens, regardless of who they are held by, increase the homeowner’s 

debt on the property and can sometimes prevent a sustainable 

modification. And so getting the second liens addressed, particularly on those loans where the mortgage is for more than the home 

is worth, it is a very, very important part of the modification process. 

We tried to address that with the second lien program in HAMP, 

but we certainly need more focus on second liens to sustain modifications. 

Mr. GREEN. Ms. Duke, if you would please? 

Ms. DUKE. I would echo that the existence of the second liens 

themselves, further complicates the process. I don’t think I would 

say anything different. 

Mr. STEVENS. I agree that the more investors involved in the ultimate ownership of the obligations against a particular home complicates the process further, because it is another set of decisions 

that has to be concurred with when you are trying to do a modification. 

Mr. GREEN. Mr. Walsh? 

Mr. WALSH. Certainly as described, the additional debt burden 

would be an issue. But in terms of the second liens themselves, as 

a supervisory matter we certainly insist that the banks address the 

overall debt burden modification status of the first lien and to take 

that into account in reserving for and addressing the risks of the 

second lien. So we try to make sure that it is not an impediment 

in that way. 

Mr. GREEN. Mr. DeMarco? 

Mr. DEMARCO. Congressman, what I would say is that overseeing, again, towards a first mortgage, a second means a substantial problem for us and have been an impediment in some of the 

modification activity. And I would go further to suggest that as this 

committee considers housing finance reform in the coming year, 

that since it is, as I understand, going to take a comprehensive 

look at things, I would hope that we would reconsider some of the 

practices that have been put in place with regard to second liens. 

Mr. GREEN. Now, quickly, because time is running out and I 

have received intelligence indicating that we have had about 21, 

that is ‘‘2-1,’’ second lien modifications completed. But tell me this 

with reference to the second liens. What percentage are we dealing 

with with reference to the products that servicers have to negotiate, what percentage would be second liens? 

Ms. CALDWELL. I can—in the HAMP portfolio, about 50 percent 

of the loans have second liens. In terms of our second lien program, 

which is voluntary, we have 17 servicers signed up to participate. 

And in this program they, the servicers, agree to modify the second 

27 

loan, the second lien, when they get knowledge that the first was 

modified. 

Mr. GREEN. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. There is a vote 

pending on the Floor, so this committee will be in recess so that 

members may go vote and return in about 15 minutes. I think I 

am going to forego the vote and I am going to stay. I will be here 

when you return. This will give me an opportunity to figure out a 

couple of things that have not been made clear while we were in 

session. So, please, you may take your vote. 

The panel will stay. We have not finished the questioning of this 

panel, so this panel will be here when you return. 

Thank you very much. While our members are voting, I would 

like to raise some questions that take a little bit more time to answer, that you may be able to help me with. How many of you who 

are here today representing your agencies have ever walked 

through a loan modification process? Do you know what happens 

when the average citizen calls into their bank where they thought 

their loan was being held at least, where they think they are paying their mortgage to? How many of you know what happens from 

the time that homeowner calls the bank? How many have walked 

through that process? 

Ms. CALDWELL. Madam Chairwoman, I will start and say just in 

terms of my role at Treasury, almost a year ago we had a campaign 

where we sent Treasury staff on site to the servicer shops to listen 

to the calls that came in and to try to address issues and clarify 

guidance where possible. 

But I would also add, more importantly on a personal note, prior 

to joining Treasury I had to work with a family member to renegotiate a very inappropriate mortgage product, subprime product that 

had been sold to her and to many of the senior citizens on her 

block, just devastating the neighborhood. And I also had to walk 

another family through a short sale, and both of those were very 

difficult and were part of why I made the decision to join Treasury 

and try to address this. 

Chairwoman WATERS. I appreciate that. 

How many people know what happens when you first call the 

bank and you say, I am Ms. Jones, I have a problem, I lost my job, 

or I don’t have as much income. I would like to talk with someone 

about a loan modification because I don’t think I am going to be 

able to make my payments. Maybe I can make my payments for 

1 month, 2 months, but I am not going to be able to make them 

after 2 or 3 months. How many of you know what happens at that 

point? 

Mr. DEMARCO. Madam Chairwoman, you have actually posed a 

couple of different scenarios there, and so what happens depends 

upon exactly what the scenario is. The borrower calls and says, I 

have just lost my job, I am still current on my mortgage. I have 

lost my job, I am going to have a disruption in income. Then there 

is one script that is used, because that is a particular situation. 

In the situation where a borrower has missed several payments— 

Chairwoman WATERS. No, I didn’t go to where a borrower had 

missed several payments yet. 

28 

Mr. DEMARCO. That is fine, I just want to understand. 

Chairwoman WATERS. What I am saying is, Ms. Jones is calling. 

She is saying, ‘‘I have a problem, I may not be able to or won’t be 

able to make my payments after next month in the same amount 

that I have been paying. Can you help me? I need to talk with you 

about a loan modification.’’ What happens then? 

Mr. DEMARCO. The servicer should have a script with a set of 

questions to ask to understand the particular circumstances of the 

borrower. 

Chairwoman WATERS. Who is the person talking to at that point? 

Mr. DEMARCO. They may be talking to the mortgage servicer. 

Chairwoman WATERS. A what? 

Mr. DEMARCO. The servicer of their mortgage. 

Chairwoman WATERS. No, the person does not get to the servicer 

of the mortgage on that first call. Are most of you aware that there 

is a loss mitigation department that may screen that call prior to 

it getting to a servicer, if they ever get to a servicer? Are you aware 

of that? 

Mr. DEMARCO. Servicers have loss mitigation departments, yes. 

The banks have loss mitigation departments. 

Chairwoman WATERS. Banks—when you call the bank with this 

problem you go to the loss mitigation department first; is that correct? 

Mr. DEMARCO. What different servicer companies call their different departments, Madam Chairwoman, rather than get into 

that, I think that the servicers should be well equipped to direct 

the call to the right place—from a borrower. 

Chairwoman WATERS. Are you aware that it is almost impossible 

for a homeowner to get to the servicer; that the systems now have 

screeners, this first contact person, and they have a cookie-cutter 

sheet, and they ask a number of questions. And if they determine 

that the ratio of debt to earnings does not comply with what they 

have on the sheet, that they can never get to discuss that modification? They never get to the servicers necessarily? Are you aware of 

these systems? 

Mr. DEMARCO. I am aware that servicers have instructions from 

their various investors in terms of the series of questions to ask, 

the information to gather, and the assessments to make regarding 

those loans. And no, not everyone that calls that has a problem 

with their loan is going to be eligible for a particular modification 

program. There are many variables at play here. What is the mortgage? Who is the investor in the mortgage? Is this particular circumstance of the borrower eligible for a HAMP or not? These are 

the screening questions that are asked when an individual calls. 

Chairwoman WATERS. When the individual calls and they are 

talking to this person who is not a service—who can not really negotiate a modification, this person simply can go down the questions that are prearranged to determine whether or not they are 

meeting the investor’s requirement, for example. So if Ms. Jones 

would like to talk about a reduction in interest rates or asked a 

question about reduction in principal, that person is not able to discuss that with them. Are you aware of that? 

29 

Mr. DEMARCO. How each individual servicer handles that process, I wouldn’t want to speak to there being a single answer to that 

question. 

Chairwoman WATERS. If you knew and understood what takes 

place when Ms. Jones first calls and Ms. Jones cannot discuss a reduction in interest rate or principal outside of the cookie cutter arrangement that the first person that they encounter uses, what 

would you advise Ms. Jones to do? 

Mr. DEMARCO. I believe most of the major servicers encourage 

borrowers and make available to borrowers home counselors in 

their local area who can assist the troubled homeowner in evaluating their entire situation and also to assist them in working with 

their mortgage servicer with regard to options that might be available to assist them with that mortgage and to help facilitate the 

gathering of appropriate and needed information for the mortgage 

servicer to do an appropriate and full assessment of the alternative— 

Chairwoman WATERS. How many of you know that if Ms. Jones 

would like to talk about a modification and ask questions about a 

reduction in interest rates or write-down in principal, how many of 

you know that Ms. Jones is being referred to someplace else, some 

counselor somewhere for help? How many of you know that is taking place? 

Mr. STEVENS. Madam Chairwoman? 

Chairwoman WATERS. Yes. 

Mr. STEVENS. Two things. One, you are highlighting a part of the 

reason why we went through the servicer reviews we just started, 

we just completed with the top five. You are specifically addressing 

the disconnects that are occurring and cause such delays for solving the problem. And I believe it is an issue, we believe at FHA 

it is. And just to highlight it, in many cases, actually the first call 

goes into a collections department to determine if they can get payments made, and then it might go from there to a loss mitigation 

area after that. 

And while it varies by servicer in terms of how to implement solutions, that is precisely why we did a servicer-by-servicer loanlevel review, on site in their operations, to go through the process. 

We literally just completed that and we are taking action on those 

servicers that are not meeting the expectations, because to your 

point it is the frustration that we get daily e-mails and phone calls 

from families who are desperate. 

We have a call center at FHA that is overwhelmed with calls 

from families in crisis. And it is why we sent in teams to look at 

that. And we do have monetary penalties provided to us by Congress that can be ultimately treble damages for not complying with 

the process to provide a solution to a family early on in the early 

stages of delinquency. So we did not know it until we sent our 

teams in. 

We are now recognizing the gaps. And we have to be much more 

vigilant and aggressive with the servicers that make it hardest on 

families in crisis to connect the results, a solution for them when 

they can have it provided to them without having to go through all 

those calls. 

30 

Chairwoman WATERS. How many of you know what banks have 

their loss mitigations offshore? And that when American taxpayers 

are calling their banks to get some help on a loan modification, if 

they are first encountering the loss mitigation department, how 

many of you know that they may be talking to somebody in India? 

Mr. STEVENS. Just a quick—we do know it exists for some 

servicers. FHA has a provision that does not allow any customer 

service to be handled offshore, contracted out. 

Chairwoman WATERS. Treasury? 

Ms. CALDWELL. Treasury operates in partnership with the Home 

Preservation Foundation, the 1–888–995 HOPE hotline that is 100 

percent onshore. 

Chairwoman WATERS. No, that is not my question. My question 

is how many of you know that banks have loss mitigation departments offshore? And this Ms. Jones that I am describing, her first 

contact to discuss whether or not she is eligible for a loan modification may be talking with someone in India, Taiwan, or someplace. 

Ms. CALDWELL. I know that it exists within the servicing industry. I can confirm whether or not it is a requirement in the HAMP 

program or not. 

Chairwoman WATERS. I beg your pardon? 

Ms. CALDWELL. My understanding is the same as Mr. Stevens, 

that within some of the servicing industry, calls are handled offshore. I do know that in the Making Home Affordable hotline, it 

is onshore. I don’t know about the other servicers. 

Chairwoman WATERS. But don’t forget Ms. Jones doesn’t know 

anything about anything. She is calling the bank where she sends 

her payments and she is talking with someone whom she thinks 

can help her with a loan modification. And it turns out that she 

is talking with the call center offshore, with someone with the 

cookie-cutter sheet that asks her some questions and basically tells 

her she is not eligible for the loan modification. How many of you 

understand that? 

Ms. CALDWELL. I think there is—I think we do understand that 

and it is very, very frustrating. And the issue— 

Chairwoman WATERS. If you understand it, why can’t you do 

something about it? 

Ms. CALDWELL. One of the things that we continue to do—first 

of all, it is endemic of the still lack of capacity to respond to the 

magnitude of this crisis. But we have held—recognizing the importance of person-to-person contact, we in conjunction with HUD and 

some of the others have held outreach events in over 50 cities 

where homeowners and servicers are on site, they are meeting in 

person, and they have the opportunity to talk about the modification one on one. 

What continues to be very disturbing is that when we survey, we 

still find many of the homeowners who stand in line, who come to 

these events and meet with their servicer, the first time they are 

making a connection with their servicer is at that event. And so it 

is a daily reminder to us that there continues to be some disconnect in the call and contact environment. 

Chairwoman WATERS. Big disconnects. 

Let me ask another question of you. When the contact person for 

the bank, who is not a servicer, who is answering Ms. Jones on this 

31 

first call, looks at the debt and they look at the income and they 

look at—they are looking at whether or not this person qualifies for 

a loan modification. Basically Ms. Jones now has a property that 

is underwater. It is not worth what she purchased it for, what she 

thought they had purchased, it is not the same thing. And so Ms. 

Jones really will never qualify for a loan modification based on a 

difference in income, less income. 

And she wants to talk about what can she do with the income 

that she has, that does not meet the criteria that the loss mitigation person is describing. But she has income, and she wants to 

stay in her house, so what should she do? 

Ms. CALDWELL. I will go ahead and start. Certainly within the 

HAMP program, the servicer would have to see if Ms. Jones or the 

person is eligible for a HAMP modification and in many—and the 

median homeowner who gets a modification has had their payment 

reduced by a third. In those cases where there is not enough income, the servicer has to look for other home retention opportunities— 

Chairwoman WATERS. This person Ms. Jones is talking to in the 

loss mitigation department, are they going to say, oh, Ms. Jones let 

me refer to you the HAMP program. Let me help you go through 

a program by the Federal Government that may give you an opportunity to pay what you can, I guess, for the first 3 months or so, 

and let’s see if you can qualify for a loan modification. Is that what 

this person is supposed to do? 

Ms. CALDWELL. If the servicer is participating in HAMP, they are 

required— 

Chairwoman WATERS. Don’t forget, Ms. Jones hasn’t gotten to a 

servicer yet, the screen now that is set up to keep Ms. Jones from 

getting to a servicer so the servicer doesn’t have to be bothered 

with someone who does not meet the underwriting criteria as they 

know it. 

OCC, you have all of the major servicers, you have the majors, 

you have the ‘‘too-big-to-fail,’’ you have all of them. Do you know 

and understand what I am talking about? 

Mr. WALSH. I certainly understand the situation that you are describing and I have not myself walked through that process, but we 

have examiners in the large banks who review the servicing process. And, somewhat akin to the FHA project, we did a horizontal 

review of mortgage modifications processes, I guess in 2008, 2009, 

to look at the practices across the firms where there were deficiencies. As a result, we issued a letter to the CEOs of the banks 

indicating deficiencies in the process and calling for improvements. 

Certainly there has been a systemic effort to get the institutions 

to bring on more staff and to train them and otherwise make more 

service available to the people who are calling. But the process, 

bank to bank, may vary. There may be an intake process and there 

will be a loss mitigation process that will be part of the overall 

servicing process. 

Chairwoman WATERS. Of course. Let me point you to page 13 of 

your testimony where you say, examiners generally do not directly 

test standard business process or practices, such as the validity of 

signed contracts or the processes used to notarize documents or the 

actual physical presence of notes, with document of custodians, unVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
32 

less there is evidence of a material weakness or breakdown in governance and internal controls. 

I have a New York Times article from January 2008, detailing 

how Countrywide was fabricating documents, and how the Chapter 

13 bankruptcy trustee in western Pennsylvania was concerned 

about it. There are many, many articles like this, and Members of 

Congress have been talking about the failures of mortgage 

servicers for years. Was all of this evidence not enough to qualify 

as a material weakness or breakdown? 

Mr. WALSH. We very specifically went in and examined the modification process and demanded improvements. That is not the kind 

of routine matter that I was referring to on page 13. The re-underwriting of a loan is a substantial issue for a bank; it involves people with skill and understanding of the process. It is part of the 

safety and soundness of a bank. That is not the kind of technical 

matter that was referred to in that statement. 

Chairwoman WATERS. What Members of Congress are trying to 

figure out is why regulators are not able to pick up on, identify 

these weaknesses and these big problems? What takes so long, and 

why is it you don’t know how these systems really operate as regulators? That is the big question among Members on both sides of 

the aisle. 

Mr. WALSH. We— 

Chairwoman WATERS. Do you believe that Ms. Jones should be 

able to get to a servicer who can really negotiate a loan modification, or should she be stuck with a clerk who basically follows this 

cookie-cutter sheet and tells her you don’t qualify, or unless you 

have X amount of dollars, I can’t help you? Do you think that really 

should happen that way? 

Mr. WALSH. It would be hard to say, without understanding the 

circumstance of the individual. But if someone is having difficulty 

getting the relief that they think they should have, as was mentioned. I think it is quite important to rely upon counseling which 

is an important part of helping people navigate the system. It is 

also the case at the OCC that if someone feels the process is unfair 

or is not working, they can file a complaint with our customer assistance group. And it is true that mortgage complaints have become the number one— 

Chairwoman WATERS. They can file a complaint with whom? 

Mr. WALSH. Our customer assistance group. 

Chairwoman WATERS. What is that? 

Mr. WALSH. It is a unit that is based in Houston, Texas, that has 

an 800 number and a Web site to assist people with— 

Chairwoman WATERS. How would Ms. Jones know about that? 

Mr. WALSH. We are on the Internet. We periodically do public 

service announcements about what we do. We have an 800 number. 

Chairwoman WATERS. So you think the average citizen really 

knows that? 

Mr. WALSH. The effort to create a nationwide point of contact, 

the 1–800 number, was actually part of legislation that was reported out of this committee, I believe in the last Congress, to sort 

of expand upon this thought. And I think it is kind of central to 

what the consumer bureau was about, to have a single place 

where— 

33 

Chairwoman WATERS. Do any of you require the loss mitigation 

department or the bank or anybody to walk through with Ms. 

Jones what she should do following the contact with them? They 

can’t go any further, that is all they can do. And now, Ms. Jones, 

I am going to give you a telephone number, I am going to point you 

in a direction, I am going to tell you how you can get in touch with 

your servicer. Do any of you require that? 

Mr. STEVENS. We do require it. It is mandatory to be an approved FHA insurer that contact be made no later than 120 days, 

that loss mitigation programs provided by FHA are offered, and we 

track them in detailed reporting that we have created over the last 

year, by institution, by month, how many have gone through the 

program of their delinquent borrowers, and what the total outcome 

is. And there have been gaps as I said earlier. And gaps do exist 

today, so that is why we are using our authority in our reviews. 

And should we not get to resolution, we will assess the penalties 

that are within our legal rights and, again, granted by Congress recently, that can be fairly damaging. 

Chairwoman WATERS. I asked— 

Mr. DEMARCO. Chairwoman Waters, if I could— 

Chairwoman WATERS. I asked earlier about whether or not fines 

had been levied from the Treasury Department. Let me turn to 

you, the OCC. Since we started experiencing the fallout from the 

subprime boom, has the OCC taken any enforcement actions 

against servicers? 

Mr. WALSH. We have certainly issued supervisory requirements 

on them, matters requiring attention and other things— 

Chairwoman WATERS. Have you levied any fines? 

Mr. WALSH. I do not believe that we have. 

Chairwoman WATERS. Have you issued any cease-and-desist orders? 

Mr. WALSH. I don’t believe that there have been any public actions against them. 

Chairwoman WATERS. Have you threatened to revoke any charters? 

Mr. WALSH. No. 

Chairwoman WATERS. Do you think the servicers really believe 

that you mean business if they don’t have to fear any consequences? 

Mr. WALSH. I think the consequences are quite clear and present 

to them, in that we can compel action and the threat of more serious penalties. 

Chairwoman WATERS. But you haven’t done that, you haven’t 

done any of that. Why should they take you seriously? 

Mr. WALSH. The supervisory process does not mainly happen in 

the public spotlight. It happens in the dealings directly with the institution through the process of examination, matters requiring attention and other things. Only when a particular problem is identified that rises to the appropriate level do we get into the area— 

Chairwoman WATERS. Let’s talk about examiners. If you have examiners onsite, can you explain how you don’t know about all the 

problems that have recently come to light? What do the examiners 

do? 

34 

Mr. WALSH. As I mentioned, our attention was focused on the 

modification process. It would be quite unusual for us to be in the 

room or present at the point where an affidavit is being signed or 

a notarization is taking place. We do rely on the systems and controls of the financial institution, its own internal audit, and any red 

flags that arise, like through our consumer complaint function. Unfortunately, those systems and controls did not raise an alarm 

about this process. 

Chairwoman WATERS. I know that as top leaders in your agencies, you are not doing day-to-day work. You don’t necessarily know 

details. But I think it is important for somebody to understand how 

it really works. And I don’t get the impression in talking with most 

of you here today that you really do understand what the homeowner is confronted with when they are seeking help and loan 

modification and wishing to talk with someone who can make decisions. 

I think that if that was well understood, that you have the power 

by which to help make systems work so that homeowners can really get some assistance. This problem is so big, so many families are 

devastated because they got into the subprime loans, these exotic 

products, without knowing or understanding thoroughly what they 

were all about. And some people would like to say they are just irresponsible homeowners. But I have said to anybody who would listen, you don’t have this many Americans all irresponsible; something happened in the system. 

We all know what it is. We all know that these exotic products, 

no documentation loans, these ARMs, these interest only, all of 

these products came on to the market and simply placed homeowners in the position of trying to follow the American dream and 

get that home, because they are now told that I can get you in a 

house, and they are following the lead of those who are initiating 

the loans. And we have this problem that has been going on for a 

long time and it is not getting any better. 

What can you tell us today that you can do to straighten this 

out? What can you tell us? What is your answer? 

Mr. DEMARCO. Madam Chairwoman, I think that all of us have 

made it quite clear that we have a lot of active targeted work going 

on, examination work with regard to the specific matters that have 

recently arisen, and that it is prudential for us to complete that examination work so that we are operating with facts, so we know 

the scope and magnitude of particular issues, either generally, or 

particular firms. And at that point we will be in a better place to 

make informed judgments about appropriate responses. 

But in the meantime, I think there has been a tremendous 

amount of work done by all the agencies represented here to stand 

up, develop, and enhance multiple programs to allow troubled 

homeowners to retain their homes. And I think that these particular matters about the foreclosure processing, we are gathering 

this information and we will certainly have the improvements in 

place once we have a firm grasp where the problems are, and what 

they specifically are, and I am sure the servicers will as well. 

Chairwoman WATERS. I would like to thank you for basically— 

I am going to call on Mr. Miller. I would like to thank you for basically just reiterating what you have said over and over again, and 

35 

what Mr. Neugebauer warned you about: coming here saying we 

are working on it. 

Yes, we are moving on it. And you can’t show us that in this 

length of time you have done anything to bring about penalties or 

to levy fines or to show us that you are serious about assisting the 

homeowners. 

Mr. Miller, please. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Madam Chairwoman. I asked Secretary Geithner in September if the stress test 

done early last year had taken into account potential liability by 

the servicers of the residential mortgage-backed securities, essentially the biggest banks, for put-backs. And at that time, we were 

hearing more about underwriting, whether the underwriting of the 

mortgages really met, really satisfied the representations and warranties of the pooling and servicing agreements or PSAs. 

Since then, we have heard more about the documentation and 

whether the documentation maintained by the servicers in the files 

is sufficient under those representations and warranties as well. 

Secretary Geithner said he wasn’t sure. Since then, I have heard 

from a variety of sources that they have been not including from 

employees of the Fed. 

Ms. Duke, earlier this week, I think just yesterday in fact, the 

Board of Governors announced a new round of stress tests, but it 

seemed to be geared towards capital requirements under Basel III 

and to take into account macroeconomic forces. There was not one 

word about potential liability. 

And also, earlier this week, the Congressional Oversight Panel 

issued a report that said that the Treasury’s assurances that there 

is no evidence that there was any systemic risk arising out of the 

documentation issues was premature and called for tests that 

would look specifically at potential liability for put-backs. 

Ms. Duke, will the new stress test examine potential liability for 

put-backs either for underwriting failures or for failures of proper 

documentation? 

Ms. DUKE. Yes. We are requiring 19 institutions to provide capital plans and included in that would be estimates of losses under 

stress scenarios, both scenarios that they developed and scenarios 

that we have developed. And included in that would be estimates 

of liability out there for put-back risk. We have actually done some 

estimates on it. 

Mr. MILLER OF NORTH CAROLINA. I hope you are not taking their 

word for it. 

Ms. DUKE. No. We are asking for their estimates and comparing 

them to our estimates, but we are doing our own independent estimates. 

Mr. MILLER OF NORTH CAROLINA. Are you examining the collateral loan files or representative samples that are selected at random and not by the servicers, to see if those files have all the documents required under the PSAs? 

Ms. DUKE. In the exams we are doing right now, we are pulling 

specific loan files both for loans that are in foreclosure, have been 

foreclosed, and for loans that have not been foreclosed, and requesting that they produce the documentation for those loans that 

have not been foreclosed. 

36 

Mr. MILLER OF NORTH CAROLINA. And those are all at random. 

Are you comparing the documents that exist in the files, that are 

in the files with the requirements of the PSAs? 

Ms. DUKE. I don’t know whether that specific step is taken, but 

can I check on that and get back to you? 

Mr. MILLER OF NORTH CAROLINA. That would be great. 

I also understand the PSAs are very specific that the failure to 

have that documentation does give rise to a requirement to repurchase, a put-back right. Could you confirm that as well, because 

one—I have heard or read in the press, as most of us have, that 

the potential liability is enormous. The banks say on one hand, this 

is all overblown, it is no big deal, these are technical issues, this 

is all just little paperwork stuff cross Ts, dotting Is, it will be easily 

contained. 

And then we hear, no, this is very serious and probably threatens their solvency and presents systemic risk issues. It very much 

reminds me the one-up to the financial crisis of 2 years ago and 

how important or how significant the subprime mortgages were. 

Mr. DeMarco, you sent 63 subpoenas, I think it was in July, to 

the private label securitizers for the private label mortgage-backed 

securities that the agencies purchased. Did that go to documentation issues or did that go only to underwriting issues? 

Mr. DEMARCO. The subpoenas were focused principally on underwriting issues, and so we have issued that to gather the data on 

these particular loans so that they can be reviewed and evaluated. 

Mr. MILLER OF NORTH CAROLINA. Mr. Green asked a question 

earlier about servicers holding second mortgages, and he talked 

generally about the problems second liens created. But I think the 

gist of Mr. Green’s question was really about whether it is a conflict of interest for servicers of firsts held by others being serviced 

and also holding seconds on the same property. What possible justification would there be for having that alignment of interest, of 

having a server who has a fiduciary duty to the beneficial owners 

of the first mortgages also holding or being affiliates of companies 

that hold second liens on the same properties? Is there any justification for it? It appears to be a conflict of interest. Is there any 

countervailing advantage in doing it that way? 

Mr. Walsh, you seem to be— 

Mr. WALSH. The question you are asking or the suggestion is 

that, by virtue of the fact that they are holding the second, that 

they would potentially not modify a first or— 

Mr. MILLER OF NORTH CAROLINA. Or just delay, extend and pretend. 

Mr. WALSH. As we supervise the loans, to the extent that a company has a portfolio of first mortgages and second mortgages, we 

look at the condition of the loans and the loss experienced with the 

firsts and seconds. In the small number of cases where, for example, there is a modified first and a performing second, we would require the holder of the second to mark down or to reserve against 

that second, even though there are payments being received by virtue of the fact that there is an impairment of the underlying. 

Chairwoman WATERS. Thank you. 

Ms. Kilroy? 

37 

Ms. KILROY. Thank you, Chairwoman Waters. I appreciate the 

fact that you called this important hearing. 

I also want to thank the panelists for coming today to help our 

committee sort out these difficult issues. 

Like many of my colleagues, I was deeply disturbed by recent 

revelations of, at best, shoddy paperwork by mortgage servicers 

working for the Wall Street banks that own an overwhelming percentage of our residential mortgage market. Some of the panelists 

have described this as a weakness in the foreclosure process and 

also submit that it is a weakness or a deliberate noncompliance 

with various State laws regarding the recording of titles and liens 

that has definitely affected not only the residential mortgage market but also perhaps affected State and local governments and 

their efforts to send the appropriate party the bill for property 

taxes and to collect the same. And contrary to what some on Wall 

Street and even the Administration have suggested, these problems, these robo-signings are not superficial or harmless. They 

could, in the worst-case scenario, put a cloud on the title to millions 

of properties across the country and send more shock waves into 

the residential mortgage-backed securities market. 

It is important that Congress does what it can to ensure that 

this does not happen and to make sure that the rules of law and 

due process are given the respect that they are entitled to in our 

country of laws, a country based on respect for due process and the 

rule of law. That is why I think it is more than just weakness in 

the foreclosure process. There is something very fundamentally 

American at stake here. 

But I don’t want to focus entirely on the dangers that the industry brought on itself with the slicing and dicing of mortgages but 

on the homeowners. Homeowners are entitled to our attention as 

well. The mortgage industry has complained in recent years that 

the legal requirement of physically recording each change of ownership in a piece of property needlessly impedes its ability to innovate or modernize the real estate market. That is not so. These 

laws exist to protect each participant in the real estate market— 

the mortgage holders, the servicers, the originators, the homebuyer, potential homebuyers, homeowners, and other lienholders, 

including State and local government. 

In many cases, homeowners who are unable to keep up with 

their payments will have inevitably faced foreclosure regardless of 

the faulty paperwork. I certainly recognize that. But servicers have 

been too quick to proclaim that each and every foreclosure they 

pursued that suffered from robo-signing and shoddy paperwork is 

legitimate. I believe we must verify that no one unlawfully lost 

their homes because a corporate or government bureaucrat cut a 

few corners or that homeowners in the process of modification 

found themselves suddenly in foreclosure. Any solution to this 

problem must ensure that homeowners who are improperly foreclosed on are compensated for their loss. These homeowners are entitled the full measure of due process and equal protection of the 

law. So I am very concerned, in terms of these various revamping, 

various programs, of what the impacts are on these. 

Mr. DeMarco, you indicated that it is the same law firm that is 

involved in these issues, one law firm? 

38 

Mr. DEMARCO. I indicated, in response to an earlier question, 

that there is a particular law firm in the State of Florida which 

was on the approved attorney network of Fannie Mae and thus was 

processing foreclosures of Fannie Mae loans. I observed that it was 

both Fannie Mae and Freddie Mac loans that were being worked 

through that particular law firm. That is not the only law firm in 

the State of Florida that is working on foreclosures of Fannie Mae 

and Freddie Mac loans. 

Ms. KILROY. Thank you. I certainly did not hear that earlier testimony along the same lines, so I appreciate that clarification. 

In terms of respecting the rule of law, homeowners now are not 

able to protect their properties in the bankruptcy court. They can’t 

ask the bankruptcy court to align their various debts or their payments and protect that home. Of course, they could if they had a 

yacht or a boat or a vacation home, but they are not able to ask 

the court to address their debts and address that first mortgage. 

Do any of the panelists believe that a bankruptcy court would be 

in a good position to take a look at all of these issues, help put 

pressure on the servicers of mortgagers and others to engage in a 

modification but also that the court would protect the rule of law 

and the appropriate mortgage— 

Chairwoman WATERS. Let’s let them answer that question. 

Ms. KILROY. Nobody has an opinion on that? 

Thank you, Madam Chairwoman. 

Nobody chose to respond, which I think is interesting that nobody has an opinion one way or another on that. 

Mr. DEMARCO. I am sorry. I will venture into this. 

I think that there is reason to rethink some of this, but I would 

suggest that if there was a change in longstanding practice about 

mortgages being outside of the bankruptcy process, it would have 

to be considered in a way in which the fact that this is a secured 

lien would need to be greatly respected, and that would include if 

the bankruptcy court actually had access to the mortgage that 

there would be guidance here to reflect the priority of lien and how 

that would be managed by a bankruptcy judge. And that is not to 

say that this should or shouldn’t be done, but I would simply say 

that if a change to longstanding practice were made I would hope 

that it would be made with clear legislative direction about the priority of a secured lien and also, within multiple liens on a residence, the relative priority of position. 

Chairwoman WATERS. Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. 

I was going to wait for the next panel, but since this issue just 

came up I wanted to ask something about it. And that is, for quite 

a while I have been asking and questioning the FHFA about the 

list of approved law firms that—some are now labeled as foreclosure mills, and the chosen few firms that Fannie Mae and 

Freddie Mac have picked to process foreclosures. And, to this date, 

I haven’t really gotten the answers to why there are so few law 

firms. This obviously continues to be a problem. So I introduced a 

bill last February to require the FHFA Inspector General to report 

to Congress on this matter, including the eligibility criteria used 

for such approval or retention. 

39 

And then, in October or November, the Wall Street Journal reported about the Florida law firm that had 1,000 employees processing more than 70,000 foreclosures last year, and that firm allegedly—whether they forged notarized documents and the employees 

signed files without reviewing them. So is there anything more 

that you can tell me, Mr. DeMarco? 

Mr. DEMARCO. I can tell you that both companies have been expanding their network of law firms. In particular, in the State of 

Florida, it had been capping the share of business going to any one 

firm, so there is progress in that way. 

I believe we have gotten back to you, but if we have not gotten 

back to you with all the answers to your questions, Congresswoman, I will make sure that we do and provide some follow-up 

information for you with regard to the change that has been taking 

place over the course of this year regarding both the oversight of 

law firms and the expansion of the approved networks of each company. 

Mrs. BIGGERT. Do you think that we should have the Inspector 

General report to Congress on this matter? 

Mr. DEMARCO. That would be your call, not mine. But I would 

be happy to cooperate with my new Inspector General on any inquiry that he has or that you all would like him to have. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairwoman WATERS. Is that a request that you are making, 

Congresswoman? 

Mrs. BIGGERT. Yes. 

Chairwoman WATERS. Without objection, that request is duly recorded, and we would expect a response. 

Do you have a timeframe by which you would like to hear from 

them? 

Mrs. BIGGERT. Two weeks. 

Chairwoman WATERS. Two weeks. Is that understood? 

Mr. DEMARCO. I will get back to Congresswoman Biggert in 2 

weeks. Thank you. 

Chairwoman WATERS. Thank you. 

I would like to thank the panel for being with us today. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

This panel is now dismissed, and I would now like to call upon 

our second panel. Thank you very much. 

Our first witness will be Ms. Rebecca Mairone, default servicing 

executive, Bank of America. Our second witness will be Mr. Thomas Marano, CEO of Mortgage Operations, Ally Financial Incorporated. Our third witness will be Ms. Stephanie Mudick, executive 

vice president, Office of Consumer Practices, JPMorgan Chase. Our 

fourth witness will be Mr. Alan Jones, manager of operations, 

Wells Fargo Home Mortgage Servicing. Our fifth witness will be 

Mr. Harold Lewis, managing director, Citi Mortgage. Our sixth witness will be Mr. R.K. Arnold, president and CEO, Mortgage Electronic Registration Systems, Inc., commonly known as MERS. 

40 

Without objection, your written statements will be made a part 

of the record. 

I think that when you were asked to come, you were notified that 

we may want to swear you in, so, before you begin your oral testimony, I would like each of you, if you would, to rise, raise your 

right hands, and answer the following by saying, ‘‘I do.’’ 

[Witnesses sworn.] 

Chairwoman WATERS. Thank you. Would you please be seated? 

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

We will start with you, Ms. Mairone. 

STATEMENT OF REBECCA MAIRONE, DEFAULT SERVICING 

EXECUTIVE, BANK OF AMERICA HOME LOANS 

Ms. MAIRONE. Thank you, Chairwoman Waters, and members of 

the subcommittee. Thank you for the opportunity to testify today. 

The economic downturn and sustained high unemployment, coupled with the collapse of the housing market, have led to challenges much more profound and complex than anyone anticipated. 

For a borrower, the prospect of falling behind on a mortgage payment due to loss of income would be a wrenching personal situation 

in any times, but these are not normal times. 

Every day we talk to tens of thousands of customers who are facing hardship and looking for our help. Importantly, more than 86 

percent of our customers are current on their mortgage payments 

today. Unfortunately, others are not. At a foreclosure sale, one in 

three properties are vacant, and there are far too many abandoned 

properties, driving down home values in neighborhoods across our 

country. 

Helping customers remain in their homes, wherever possible, is 

a top priority for Bank of America, as evidenced by nearly 725,000 

modifications completed. We have reached a crossroads between 

modification efforts now and the reality of foreclosure. Despite our 

best efforts and numerous programs, for some customers, foreclosure will be unavoidable. That has driven an increase in the concerns that both we and you have, and we are hearing from our distressed customers. 

It is our responsibility to be fair and to treat customers with respect as they transition to alternative housing. We, and those who 

work with us in connection with foreclosure proceedings, have an 

obligation to do our best to protect the integrity of those proceedings. When and where that has not happened, we accept responsibility for that, and we deeply regret that. 

When industry concerns arose with the foreclosure affidavit process, we were the only servicer who stopped foreclosure sales nationwide to review all of our procedures. We know concerns aren’t just 

those that are technical, and we are taking this matter extremely 

seriously. We have confirmed that the basis for our foreclosure decisions has been accurate, but we did not find a perfect process. We 

are already moving forward with needed improvements, but engagement of others is also required. 

As a servicer, we must follow the guidelines established by our 

investors relating to modification and other foreclosure alternatives. Where we can act to improve the process alone, we will 

41 

and we have. We will continue to innovate on behalf of our customers. 

Here are just a few of the things we are doing based on feedback 

from you and our customers as well as other stakeholders. 

First, we will improve the communication with our customers. A 

frequent source of customer frustration is when they feel they do 

not speak to the same person twice or more than twice. We are and 

have redesigned our loan modification process to offer a single 

point of contact for every eligible customer who desires modification. More than 140,000 customers have already been assigned to 

a case owner to whom they can always turn. 

To reach more customers, we have held more than 500 housing 

fairs throughout the United States, partnering with nonprofits and 

Members of Congress. We have found that the opportunity for customers to meet face to face is important and can enhance both response from our customers as well as a successful modification outcome. In particular, we value the leaders and members of this committee who have provided their communities to organize outreach 

efforts and look forward to working with members in the future. 

Second, we will provide greater clarity to customers going 

through the process. Another source of frustration for our customers is the parallel foreclosure and modification process that is 

required by many investors. We want to partner with you and 

other stakeholders, including the AGs, in looking for ways to 

change this so-called dual track process and mitigate the very real 

concerns that we have heard about that practice. 

Third, we are making improvements to the foreclosure process. 

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

not conform to the best practices in some cases. We have introduced a new affidavit form and additional quality controls. We are 

also implementing new procedures for selecting and monitoring 

outside foreclosure counsel. We are carefully restarting the affidavit process with these and other new controls in place. 

Our commitment at Bank of America is to ensure that no property is taken to foreclosure sale until the customers are given a fair 

opportunity to be evaluated for a modification or, if that cannot be 

done, a short sale or a deed in lieu of foreclosure happens. Foreclosure is the option of last resort. 

Thank you. 

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

300 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Let us go to our next witness who is seated there, Mr. Thomas 

Marano. 

STATEMENT OF THOMAS MARANO, CEO OF MORTGAGE 

OPERATIONS, ALLY FINANCIAL INC. 

Mr. MARANO. Thank you. 

Chairwoman Waters, Ranking Member Biggert, and members of 

the subcommittee, I thank you for the opportunity to appear before 

you today. My name is Tom Marano, and I am the CEO of Ally Financial’s Mortgage Operations. 

42 

Ally’s mortgage business is conducted through GMAC Mortgage. 

As you have heard, there were certain unacceptable flaws in our 

execution and notarization of certain affidavits in the judicial foreclosure process. The errors we have found should not have happened, and we have undertaken a significant and expansive remediation effort. 

Initially, our remediation efforts focused on those affidavits. We 

then decided to go further. We have a dedicated team, independent 

of the foreclosure department, that is taking a second look at each 

loan to ensure that a homeownership preservation option was offered. In addition, we have retained national counsel to oversee the 

remediation efforts and to review our policies and procedures related to foreclosure in all 50 States. We also brought in 

PricewaterhouseCoopers to evaluate those policies and procedures 

across-the-board. We have increased staffing and provided additional training. 

At this point in our review, we have not discovered a single instance where the foreclosure sale was unjustified. By that, I mean 

our ongoing review has shown that by the time a case has gone to 

foreclosure, a borrower is in default, and we have reached out to 

offer a homeownership solution. 

I have long been an outspoken advocate of loan modifications. I 

believe foreclosure is a last resort and is not economically advantageous for anyone. It is devastating for consumers and provides no 

additional benefit for servicers, investors, or communities over a 

workout solution. 

I brought my perspective on homeownership preservation to 

GMAC Mortgage when I came to the organization in 2008. At that 

time, GMAC Mortgage was a company in severe distress. Today, 

we have turned the corner and continue to focus our efforts to help 

consumers find an affordable and sustainable alternative to default. 

While some of the home preservation programs were in place before I arrived, I have worked to increase these efforts. I have always believed that we have a much better chance of helping consumers stay in their homes when we reach a consumer at the early 

stages of default, seek complete financial information early in the 

foreclosure process, and work on solutions at the early stage. 

We can do better, and I have tried to instill a sense of urgency 

in our company to find workout solutions where possible. Since 

2008, we have achieved 565,000 workout solutions, which is more 

than 3 times the number of actual foreclosure sales. Many of these 

families would have otherwise lost their home. Even if a homeowner does not qualify for a loan modification, there are many alternatives to foreclosure, such as forbearance and repayment plans. 

With your help, principal forgiveness may become a more widely 

available solution. 

Rest assured, I know this process is devastating for homeowners. 

The paperwork required is cumbersome and the strain of meeting 

monthly obligations can be difficult for a family who has experienced financial hardship. 

The most important objective for loans we service is to work with 

consumers and our investors to achieve a solution that reduces the 

risk of default and foreclosure. I am committed to finding innovaVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
43 

tive ways to help streamline the process and to assist even more 

borrowers. I regret the errors that have occurred, and we have 

been working hard to fix them across-the-board. 

I also believe that we must work hard to avoid foreclosures, particularly during the early stages of default. Of course, there are 

still going to be times when foreclosure is unavoidable. My 25 years 

of experience in the mortgage industry has led me to believe that 

we must work harder to find solutions for homeowners who want 

to remain in their homes or sell their property. We reach out to 

homeowners several dozen times throughout the lengthy foreclosure process to find a workout option if one is available. I strive 

to ensure that no American loses their home without an opportunity to obtain a loan modification or an alternative to foreclosure. 

Thank you. 

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

307 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Next, we will have Ms. Stephanie Mudick, executive vice president, Office of Consumer Practices, JPMorgan Chase. 

STATEMENT OF STEPHANIE MUDICK, HEAD, OFFICE OF 

CONSUMER PRACTICES, JPMORGAN CHASE 

Ms. MUDICK. Thank you. 

Madam Chairwoman, Congresswoman Biggert, and members of 

the subcommittee, thank you for inviting me to appear before you 

today. My name is Stephanie Mudick, and I am the head of the Office of Consumer Practices at JPMorgan Case. 

JPMorgan Chase is committed to ensuring that all borrowers are 

treated fairly and with respect, that all appropriate measures short 

of foreclosure are considered, and that if foreclosure is necessary, 

the process complies with all applicable laws and regulations. We 

take these issues seriously. As I discuss in detail in my written testimony, we regret the errors in our affidavit processes, and we are 

actively correcting those issues. 

At the outset, I would like to emphasize that Chase strongly prefers to work with borrowers to reach a solution that permits them 

to keep their homes. Foreclosures cause significant hardships to 

borrowers and to their communities. Foreclosures also inevitably 

result in severe losses for lenders and investors. Therefore, we always consider whether there are viable alternatives to foreclosure. 

Chase adopted its own modification program starting in 2007, 

and in 2009 was an early adopter of the government’s HAMP program. Our efforts to date have yielded significant results. Since 

January of 2009, Chase has offered almost 1 million modifications 

to struggling borrowers and has completed over 250,000 permanent 

modifications. 

Sustainable modifications are not always possible. There are 

some borrowers who simply cannot afford to stay in their homes, 

notwithstanding the modification programs and other foreclosure 

prevention alternatives. There are other borrowers who are not 

seeking modifications. 

While we make repeated efforts to modify delinquent loans, 

sometimes we must proceed to foreclosure. A property does not go 

to foreclosure if a modification is in process. But if the foreclosure 

44 

has begun and a borrower later begins the modification process, 

our investors, including the GSEs, have instructed us to allow the 

two processes to run at the same time. However, we will not allow 

a foreclosure sale if a modification is in progress. 

I understand the folks at the committee today have reached a decision to temporarily suspend foreclosures in a number of States. 

It is important to note that the issues that have arisen in connection with foreclosure proceedings do not relate to whether those 

foreclosures were warranted. We have not found issues that would 

have led to foreclosures on borrowers who are current. In addition, 

we have substantial safeguards to ensure that foreclosures are both 

a last resort and occur only in appropriate cases. To be clear, we 

service millions of loans and sometimes we make mistakes, but 

when we find them, we fix them. 

Our recent temporary suspension of some foreclosure operations 

arose out of concerns about affidavits prepared by local foreclosure 

counsel, signed by Chase employees, and filed in certain mortgage 

foreclosure proceedings. Specifically, employees in our foreclosure 

operations area may have signed affidavits on the basis of file reviews and verifications performed by other Chase personnel, not by 

the affiants themselves. But the facts set forth in the affidavits 

with respect to the borrowers’ default and the amount of indebtedness, the core facts justifying foreclosure, were verified prior to the 

execution of the affidavits. 

Let me repeat. We take these issues very seriously. Our process 

was not what it should have been, and it did not live up to our 

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

of our document execution policies. We have also enhanced training 

for all personnel involved. 

In addition to strengthening our procedures for future foreclosure 

filings, we are also working to remedy any issues with affidavits 

on file in pending matters. We are working diligently to complete 

our review and strengthen our procedures. We are committed to 

addressing these issues as thoroughly and as quickly as possible. 

I would be happy to answer any questions you may have. 

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

316 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Alan Jones. 

STATEMENT OF ALAN JONES, MANAGER OF OPERATIONS, 

WELLS FARGO HOME MORTGAGE SERVICING 

Mr. JONES. Thank you, Chairwoman Waters, Congresswoman 

Biggert, and members of the subcommittee. I am Alan Jones, and 

I manage operations for Wells Fargo Home Mortgage Servicing. I 

appreciate the time to discuss our efforts related to the housing crisis and keeping American families in their homes. 

As a company, Wells Fargo has followed three fundamental tenets: First, we view foreclosure as a measure of last resort—in unfortunate cases where a customer simply cannot afford their property even with a modification, we actively look at other remedies, 

such as short sales, to prevent foreclosure and protect the surrounding community; second, we hold ourselves accountable for the 

45 

quality of our foreclosure data and work to ensure that our borrowers are protected from wrongful foreclosures; and third, we understand the necessity of having procedures that ensure our documents comply with the laws and regulations that govern our industry. 

As the economy has continued to present challenges, our goal has 

been to keep customers in their home. Since January 2009, we 

have provided nearly 2.5 million customers with home payment relief through refinances and modifications, including more than $3.5 

billion of principal reductions. More than 92 percent of our servicing portfolio has remained current on their home payments, and 

fewer than 2 percent of our owner-occupied servicing portfolio has 

gone to foreclosures now, statistics that have remained the best 

among our peers over time. 

With the goal of exhausting all options before moving a property 

to foreclosure sale, we have invested heavily in hiring and training 

10,600 home preservation staff, for a current total of 16,000 people, 

and we expect all of them to follow our policies and procedures 100 

percent of the time. 

Here are some key aspects of our approach: 

First, we create an electronic system of record for each mortgage 

customer that includes data such as the customer’s name, address, 

number of payments, and notes about home retention efforts. We 

attempt to contact our customers on average more than 125 times 

by phone and letter during the period of first delinquency to foreclosure sale. Investors often require that we initiate foreclosure 

proceedings at a certain point in the loan delinquency, but we continue to work with these customers on foreclosure prevention options. 

When customers continue to work with us, we prevent foreclosures for 7 of every 10 customers who are 60 days or more past 

due. Unfortunately, some customers are in homes they just cannot 

afford, even with substantially reduced payments. In September, 

customers who completed foreclosure were, on average, 16 months 

payments delinquent and could not sustain their mortgage contracts. 

When there is no reasonable alternative, we believe it is best for 

people to transition to affordable housing, and we repair and/or sell 

25 percent of properties already vacant to alleviate further burden 

on a community. 

Wells Fargo has a rigorous system designed to ensure quality in 

the data used to make foreclosure decisions. As mentioned before, 

it includes an electronic system of record as well as controls to lessen the chances of error. As just one example, we pull a daily sample of the data we send electronically to external foreclosure attorneys and do a manual check for accuracy. 

We continually work on improvements to reduce the likelihood of 

errors and address all errors when found. For example, we identified instances where we did not adhere to a final step relating to 

the execution of foreclosure affidavits, including a final review of 

the affidavit as well as some aspects of the notarization process. 

While we do not believe these issues resulted in foreclosures that 

should not have otherwise occurred, we voluntarily opted to provide 

additional assurance by executing supplemental foreclosure affidaVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
46 

vits in the judicial States. We retain and rely on the guidance provided by outside foreclosure attorneys who are licensed by each 

State to ensure that we comply with State law and regulation. 

In conclusion, Wells Fargo will continue to help homeowners to 

stay in their homes, including better explaining the home retention 

process. For example, earlier this year, we introduced a one-to-one 

model to enable at-risk customers to work with one person from beginning to end on their options. Additionally, we have met face to 

face with 15,000 customers at 15 large-scale home preservation 

events and 25,000 customers at our 27 home preservation centers 

across the country. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Jones can be found on page 252 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Harold Lewis. 

STATEMENT OF HAROLD LEWIS, MANAGING DIRECTOR, CITI 

MORTGAGE 

Mr. LEWIS. Thank you, Chairwoman Waters, Congresswoman 

Biggert, and subcommittee members. I am Harold Lewis, head of 

Citi’s Homeowners Assistance Program. I am pleased to speak with 

you today about Citi’s efforts to assist our distressed homeowners. 

At Citi, we are working tirelessly to help families stay in their 

homes. Since 2007, we have helped more than 1 million distressed 

borrowers in their efforts to avoid potential foreclosure, but we 

know there is more to be done. We have redoubled our efforts toward helping customers who are facing financial challenges. We 

have a well-trained and dedicated staff of approximately 5,000 employees who work with at-risk borrowers to help them find solutions to avoid foreclosure. In addition, we have partnered with a 

number of community groups across the country to further these 

efforts, including NACA, the National Council of La Raza, and 

NeighborWorks. 

We believe we have been a leader in HAMP. We actively identify 

eligible borrowers, conduct extensive outreach to make contact, and 

then guide them through the process of applying for trial modifications and obtaining permanent modifications. We make housing 

counselors available to borrowers, provide detailed instructions for 

completing required documents, and follow up with applicants by 

phone, e-mail, text messages, and in-home visits. By the end of 

September, 44 percent of our eligible borrowers had obtained a permanent modification under HAMP. 

Further, Citi’s re-default rate is well below that of our peers. 

Borrowers who do not qualify for HAMP modification may be eligible for one of Citi’s proprietary programs to address their specific 

challenges. For example, we have an Unemployment Assist program that provides temporary lowered payments to borrowers who 

have lost their jobs. Further, we offer a supplemental modification 

program for eligible borrowers who have completed a 3-month trial 

period. For those borrowers who simply cannot sustain homeownership, we have in place short sale and deed of lieu of foreclosure programs which provide alternatives to foreclosures and allow families 

to relocate with dignity. 

47 

All of us at Citi recognize the hardship that can be suffered by 

a family losing its home. Indeed, foreclosures are a terrible outcome 

for both families and communities. As such, foreclosure is always 

the last resort for us. In the event that a foreclosure cannot be 

avoided, we do everything possible to make sure that the process 

for our customers is as smooth as possible. 

Now, regarding your specific concerns about the foreclosure process, we undertook a thorough review of our process beginning in 

the fall of 2009. Subsequently, we implemented a series of steps to 

strengthen existing practices and add additional resources to ensure foreclosures were being processed correctly. 

We centralized our foreclosure operations into one unit, added 

staff, and enhanced training for greater efficiency and control. We 

limited the volume of documents that staff is permitted to process 

at any given time and now require our employees to be recertified 

on proper procedures every year. For their part, managers remain 

accountable for regularly reviewing files to ensure that employees 

comply with the procedures. 

As an additional quality control measure, we have been reviewing affidavits that were executed and pending judicial foreclosures 

initiated prior to the full implementation of our improved practices. 

We expect to re-file a number of our affidavits. Should defects be 

found, no foreclosure will be completed until a new affidavit is 

filed. This exercise will help us to ensure that these affidavits are 

accurate and properly executed. 

The changes we have made this year give us confidence that 

there are no systemic issues in our existing foreclosure processes. 

While we have made important progress in helping keep Americans in their homes, there is more work to be done. As CEO of Citi, 

Vikram Pandit, has said, we owe a debt of gratitude to the American taxpayer for providing Citi with TARP funds. We believe it is 

our responsibility to help American families in financial distress. In 

particular, Citi remains committed to helping our customers with 

homeownership challenges they face. 

Thank you. 

[The prepared statement of Mr. Lewis can be found on page 292 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Arnold. 

STATEMENT OF R.K. ARNOLD, PRESIDENT AND CEO, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. (MERS) 

Mr. ARNOLD. Chairwoman Waters, Congresswoman Biggert, and 

members of the subcommittee, my name is R.K. Arnold, and I am 

president and CEO of MERS. Thank you for this opportunity to appear today. 

MERS is a member-based organization made up of 3,000 mortgage lenders. It maintains a nationwide database that tracks 

changes in servicing rights and ownership interests in mortgage 

loans. 

Today, MERS is keeping track of more than 31 million active 

loans. That is about 50 percent of all the loans in the United 

States. 

48 

The MERS database is important to the mortgage industry because it is the only centralized registry in the industry that uniquely identifies each mortgage loan. 

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

can locate their servicers and, in many cases, learn who their note 

owner is. 

The MERS database is important to communities because housing code enforcement officers use it to identify who is responsible 

for maintaining vacant properties. 

The MERS database aids law enforcement in the detection of 

fraud by tracking liens taken out utilizing the same borrower 

name, Social Security number, and property. 

MERS also performs another key function. It serves as the mortgagee of record or the holder of the mortgage liens on behalf of its 

members as a common agent. MERS is designated as the mortgagee in the mortgage document, and this designation is approved 

by the borrower at the closing by signing the mortgage, and then 

the mortgage is recorded in the appropriate local land records. 

Serving as the mortgagee enables MERS to receive and maintain 

updated information as loan servicers and loan holders change over 

time because we are the central clearinghouse for receipt of mail 

pertaining to the mortgage. 

One thing that is always clear in a mortgage document is that 

if the borrower defaults on his or her obligation, the lender can 

foreclose. If MERS holds the mortgage lien, foreclosures can occur 

in two ways: either the mortgage lien is reassigned in the land 

records to the lender holding the note, which is the vast majority 

of cases, and a lender initiates the action on its own; or MERS initiates the action as the mortgagee of record in the land records. Either way, the note and mortgage come together at foreclosure. 

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

members called certifying officers to handle the foreclosure. To be 

a MERS certifying officer, one must be an officer of the member institution who is familiar with the functions to be performed and 

who has passed an examination administered by MERS. Generally, 

these are the same individuals who would handle the foreclosure 

if the lender was involved without MERS. The loan file remains 

with the servicer as it did before MERS. 

MERS is not a repository for mortgage documents or promissory 

notes. MERS derives its revenues entirely from fees charged to its 

members. It makes no money from foreclosures. And MERS does 

not decide when to foreclose. Foreclosure must be authorized by the 

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

and procedures which we regularly enforce and refine. For example, it is a key rule that the note must be presented in foreclosure, 

which some States do not require; and we prohibit the use of loss 

note affidavits and foreclosures done by MERS once we saw they 

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

Earlier this year, when we became aware of the acceleration in 

foreclosures, we asked for assurances; and when we did not receive 

assurances that our rules would be followed, we suspended relationships with some companies. When we discovered that so-called 

49 

robo-signers might be officers of MERS, we suspended their authority until they could be retrained and retested. 

Madam Chairwoman, all of us at MERS keenly understand that 

while owning your own home is a dream, the American dream, losing that home is a nightmare. As professionals, we are dedicated 

and deeply dismayed by the current foreclosure crisis. We believe 

that MERS can be a national tool to better access information 

about mortgages and provide transparency for consumers. 

Most of all, it doesn’t just benefit financial institutions, the 

broader economy, and the government; MERS benefits real people, 

real homeowners. 

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

[The prepared statement of Mr. Arnold can be found on page 91 

of the appendix.] 

Chairwoman WATERS. Thank you all very much. 

I would like to ask a few questions, and I yield myself 5 minutes 

to do that. 

I have here a stack of depositions. In these depositions, your employees—I think except for MERS; I don’t think we have MERS— 

admit to things, including robo-signing, false notarizations, not 

being trained in how to prepare affidavits, not having manuals to 

follow on how to complete foreclosure paperwork. The list goes on 

and on. Each of these depositions are dated well before you initiated your moratorium, started your comprehensive reviews, or 

issued press releases about the changes you have made to your systems. 

My question is, these depositions were taken months ago. What 

has taken so long to institute changes? 

Could I just start with Bank of America? Why did it take so 

long? 

Ms. MAIRONE. Sure. Thank you, Madam Chairwoman. 

For the last 2 years, our focus has clearly been on dealing with 

the extreme volume and capacity requirements and staffing requirements. As we have worked through these issues, our primary 

focus has been around data and controls as well as serving the customers and the modification as well as foreclosure prevention 

space. 

We were, as a management team, not aware of the inconsistencies around the affidavit process until very recently. Unfortunately, we did have associates who were relying on upstream processes and data controls and ended up signing high volumes of affidavits inappropriately. They did not adhere to the procedures and 

policies, and we are changing that process significantly as a result 

and taking this very seriously. 

We have also, at the same time, made the decision to halt and 

pause foreclosures across the Nation in order to ensure that we 

could do a fairly dramatic review in all State cases, both judicial 

and non-judicial, to ensure that we are in compliance. 

Chairwoman WATERS. Thank you very much. 

I am not going to be able to get to each of you to ask you why 

it has taken so long, but let the record show that it is a real concern that it has taken so long when we have so many of these problems that exist. 

50 

I want to put something up on the screen, if I could get some 

help from the staff. I want to put a price sheet from Lender Processing Services Subsidiary. 

This price sheet advertises services like creating collateral files, 

among other document creation services. We do not know when 

this price sheet was drafted or for how long it was used, but the 

very fact that it exists is very alarming. 

I did want everyone to address this in their testimony, but I 

didn’t really get that feedback that I thought was necessary to address it. Would you consider document creation in a foreclosure 

case to be fraud? 

Let me just go down really quickly and ask each one of you, 

starting with Bank of America, just yes or no. Do you consider document creation in a foreclosure case to be fraud? 

Ms. MAIRONE. A new document creation to find files, I don’t believe that would be fraud. 

Chairwoman WATERS. Yes, right down the line. 

Mr. MARANO. You raise a good point. Again, we do not use 

DOCX. 

Chairwoman WATERS. Okay. Next. 

Ms. MUDICK. Chase does not use DOCX. We have some companies that we have acquired in the last 2 years, Washington Mutual 

and Bear Stearns, who did, but even for those companies, we 

stopped using DOCX a year ago. 

Chairwoman WATERS. So do you do document creation now? Are 

you doing that with the companies that you have alluded to? 

Ms. MUDICK. No, we do not. 

Chairwoman WATERS. Would you consider it fraud? 

Ms. MUDICK. I think that the question about when documents 

are replaced is very specific to the case involved. 

Chairwoman WATERS. Okay. Mr. Jones. 

Mr. JONES. We also do not use DOCX for those things that are 

listed on there, on the board. We used them for lien releases for 

mailing documents, and that was it, and that stopped in January. 

Chairwoman WATERS. Do you use any services to do document 

creation? 

Mr. JONES. I think you have to ask, as the previous witness said, 

exactly what you mean by document creation. We don’t fabricate 

documents for foreclosure. 

Chairwoman WATERS. Let me just put it this way: Is creating an 

entire collateral file fraud? Would you consider that fraud? 

I will just move to Mr. Lewis. What about you? 

Mr. LEWIS. We do not use DOCX. 

Chairwoman WATERS. Do you use anybody to do document creation? 

Mr. LEWIS. As the other members have said, it depends on what 

you mean by doc creation. 

Chairwoman WATERS. Let me ask this: Is creating an entire collateral file fraud? 

Mr. LEWIS. An entire collateral file that doesn’t exist or a reproduction from a database? 

Chairwoman WATERS. Let me go to MERS. 

You see what the concern is, and we are basically out of time. 

So let me just go to Mrs. Biggert. 

51 

Mrs. BIGGERT. Thank you, Madam Chairwoman. 

I have one quick question for Mr. Lewis. You mention in your 

testimony that you work with Neighborhood Assistance Corporation of America, NACA. 

Mr. LEWIS. Yes, ma’am. 

Mrs. BIGGERT. We have had some strange things happen in 

DuPage County. Things have been coming to my office where we 

received papers faxed to me, and it would be somebody’s mortgage 

papers, their Social Security, a lot of personal information from 

them, and it has on it to call NACA. Has this happened—these are 

formal papers for mortgages or for foreclosures. 

Mr. LEWIS. I am not aware of what you are speaking of, ma’am, 

but I would be happy to follow up and get some more information. 

Mrs. BIGGERT. If you could, since you work with them. But it is 

information, and then the clients have signed off the privacy, but 

this is something that is going around. And it is as if we are supposed to be helping them with their mortgages. 

Mr. LEWIS. Just to make sure I am clear, the question that I am 

following up on is why NACA would send private information to 

your office? 

Mrs. BIGGERT. That is correct. 

Mr. LEWIS. I will follow up with that. 

Mrs. BIGGERT. Thank you. 

Just a yes or no question: How many of you use Fannie and 

Freddie? 

Ms. MAIRONE. At Bank of America, we do, yes. 

Mr. MARANO. At GMAC Mortgage, we do as well. 

Ms. MUDICK. The same is true for Chase. 

Mr. JONES. At Wells Fargo, we service loans for Fannie Mae and 

Freddie Mac. 

Mr. LEWIS. Yes, we sell off to Fannie and Freddie and service 

groups. 

Mrs. BIGGERT. Maybe I should have asked, who doesn’t? 

Mr. ARNOLD. Fannie and Freddie are very large users of MERS. 

Mrs. BIGGERT. And you probably heard my question of Mr. 

DeMarco asking for more information. Can any of you describe the 

problems that you have had working with the—and what I am concerned about is the very limited number of Fannie and Freddie approved law firms that process for foreclosures. 

Mr. MARANO. I can take that. 

We raised the issues with these law firms with both Fannie and 

Freddie from the very beginning when the issues came to my attention. The issues are really twofold. One issue is simply a lack of 

capacity. There are a limited number of firms on their list. One of 

the GSEs in particular has not added a substantial number of 

firms in more than 2 years, the other GSE has added firms, and 

now they are both actively adding firms. 

The second issue appears to be one surrounding the behavior of 

their firms. And I would say initially, while there was oversight 

present, I don’t think that they were fully aware of all the activities. And once we assisted them in understanding what our concerns were, they both reacted very quickly. 

Mrs. BIGGERT. Anyone else? Nobody has any problems? 

Mr. Jones? 

52 

Mr. JONES. We have experienced the same as the previous witness. 

Mrs. BIGGERT. In a Wall Street Journal article about the issue, 

I am going to quote here that, ‘‘While Fannie conducts regular audits of its approved attorneys, it said that the mortgage servicers 

that select the firms are ultimately responsible for ensuring that 

foreclosures are done properly. Fannie also said it was preparing 

to add more attorneys in Florida.’’ Would you think that is true, 

that it is the mortgage servicers who are really responsible for the 

approved attorneys? 

Ms. Mairone? 

Ms. MAIRONE. At Bank of America, we are requested to use both 

Fannie and Freddie specific outside counsel. We do so at their direction. We clearly are responsible ultimately for quality of foreclosure, but we are directed specifically to those firms. 

Mrs. BIGGERT. Mr. Marano? 

Mr. MARANO. Mrs. Biggert, we take responsibility for our actions. 

However, I would also say that we are using counsel. They are referred to as directed counsel. And we are in a constant battle of 

managing the timeline of our investors, including Fannie Mae and 

Freddie Mac, and the needs of our consumers. We do everything we 

can to facilitate what we can do for the consumers, but it should 

not be lost on this committee that our investors put enormous pressure on us to follow timelines and processes, and we often push 

back very hard so that we can meet the consumer’s need. 

Mrs. BIGGERT. Ms. Mairone, it also talks about your bank as having suspended thousands of foreclosures. Was that due to the limited attorneys or was that a different problem? 

Ms. MAIRONE. We have suspended about 102,000 or more foreclosures in judicial States primarily due to the affidavit issue that 

came up and process improvements, but, at the same time, we are 

looking at end to end, including foreclosure counsel quality and 

controls. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairwoman WATERS. Thank you. 

Ms. Kilroy. 

Ms. KILROY. Thank you, Madam Chairwoman. And thank you to 

the witnesses for appearing here this morning. One of the testimonies talked about the hard reality of homeowners who can’t afford the mortgages that they engaged in, and that maybe implicitly 

in that statement is a comment that it really doesn’t matter whether the rule of law and due process were filed in moving to foreclose 

against these homeowners. 

I think there is also a hard reality that a lot of investors bought 

toxic paper, paper that may have been rated by a rating agency as 

triple A or a viable investment, sometimes not depending on different tranches that were bought. But these investors also are playing a role in the decision of whether to foreclose or not to foreclose. 

And there are various people who may have conflicting interests. 

And I think there’s also a hard reality here that the Wall Street 

banks—Lehman’s, Goldman Sachs, and others that were encouraging this securitization of mortgages—also played a role in getting 

this to the place where we are today here; and that perhaps some 

interests here, like MERS, facilitated all of this to happen, making 

53 

it easy to get around State requirements for actually filing mortgages and other liens. 

My concern really is where should the public interest lie in all 

of this; whether it should be the community which is seeing mortgages and home values decline; people who maybe have bought a 

house in these communities and are making their payments, but 

nevertheless because of what’s going on with their neighbors in 

their neighborhood is finding that their investments now are underwater. 

Should we protect the homeowners or should we be looking to be 

concerned with the investors who have invested in these mortgages 

and now find those investments not paying off? 

One of my concerns is this process of talking to the homeowners 

about home modifications and engaging the homeowners in making 

those payments, but at the same time engaging in a dual track in 

which foreclosure proceedings are already begun against that very 

same homeowner. 

I’m curious about the response from Chase, and Citi, and Bank 

of America as to whether or not you are engaging in this track, and 

what you see as the value or who is hurt, who gains, who loses in 

this dual-track process. 

Ms. Mairone, do you want to start? 

Ms. MAIRONE. Sure. And you have raised a number of very valid 

concerns that we share as well. Specifically, to the dual-track piece, 

our concerns are very specific and include the customer experience 

along the way. From a customer’s perspective, as they move into 

the foreclose process and then at the same time are reviewed for 

a modification, that can be extremely confusing. We have worked 

hard, including putting single point of contact in, and extra communications and to help the customers understand, but nonetheless it continues to be a problem. 

At Bank of America specifically, we are re-reviewing the process 

where we own those loans themselves, to reconsider how we are 

handling that dual track, to make that potentially a significantly 

better experience for the customers. Outside of those loans that we 

own ourselves, which are nearly 80 percent of our portfolio, we are 

directed by investor requirements to do so. So we do that dual 

track. 

Ms. KILROY. So your role as a servicer with these mortgages is 

one that goes one direction with the customer, but you have a different obligation to the investors that requires you to move faster 

on a foreclosure, despite the modification process. 

Ms. MAIRONE. That’s correct. 

Ms. KILROY. Mr. Marano? 

Mr. MARANO. As you did raise several good points, what I would 

like to make sure is clear is that my firm and I believe that foreclosure is a very poor choice in this entire equation. The problem 

we have as an industry is that the mortgage market is one where 

you have servicers who service for their own portfolio and also for 

others. You have a long legacy of rules and securitization processes 

that were not designed for the current environment. 

We actually only own less than 5 percent of the loans that we 

service. So what we try to do is make sure that we serve the conVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
54 

sumer and encourage the investors to do what’s right for them, 

which is to prevent foreclosures. 

In particular in the past year, I have attempted to notify investors that the existing private label servicing contracts need to be 

changed to give us even greater flexibility. We have received virtually no support from that. 

Ms. KILROY. Do you think— 

Mr. MARANO. What I would hope is that through your efforts and 

through the efforts of the chairwoman that we can begin a process 

of rewriting these rules and moving this industry forward. It has 

been 3 years of this. We need to change the process. 

Ms. KILROY. Thank you. 

Chairwoman WATERS. Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you. I’m afraid I missed 

your testimony earlier, I had to step out, but I understand that the 

witnesses for servicers earlier this week in the Senate Banking 

Committee testified that a major reason there were not modifications that reduced principal was the objections of investors, the 

holders of the residential mortgage-backed securities. 

I have heard no such thing from investors. They would like nothing more than to reduce principal on mortgages if that meant that 

you could avoid foreclosure. It would be far better for them if that 

was the case. And they further say that they believe the reason the 

servicers are not doing it is because the servicers have interests 

that are different from theirs: their interest in avoiding liability, 

their interest pertaining to second liens. There are different interests in the failure to foreclose—a failure, rather, to modify when 

it is in their interest to modify is a violation of the fiduciary duty 

of the servicers to the holders of the residential mortgage-backed 

securities. 

If you contend that investors’ objections, that the objection of an 

investor is a reason for not modifying and reducing principal, can 

you identify for me and for the committee the investors who have 

objected? And provide us with documents with the letters that 

state their objections, with memoranda that state their objections, 

with e-mails or whatever documentation they have provided you, 

that they do object and what their objections are. Can you do that 

for us, Ms. Mairone? 

Ms. MAIRONE. Sure. On the modification side overall, what I 

would say is— 

Mr. MILLER OF NORTH CAROLINA. No, I just want you to—would 

you give us the names, identify those investors who have objected? 

Ms. MAIRONE. We can definitely get you the names of investors 

who do not allow modifications and there are very, very few of 

those. I think from a principal reduction perspective, that’s where 

it has gotten a little more difficult in those discussions. At Bank 

of America overall, we do have very specific principal reductions, 

but do not have it more broadly outside of the HAMP program as 

well as the hardest hit. 

Mr. MILLER OF NORTH CAROLINA. If you could give us those investors and the reason for their objection. As to the rest of you, can 

you provide that information? 

Ms. MAIRONE. Yes. 

55 

Mr. MILLER OF NORTH CAROLINA. Okay, I have a lot of nodded 

heads there that you would get that to us. 

Second, there were questions before the last panel, which I’m 

sure you heard about, whether there was a conflict of interest for 

servicers of first held by others, owned by others, beneficial owners 

or somebody else also to own on their own or to be an affiliate of 

a firm that owned seconds on the same property. 

We have also heard about conflicts of interest for servicers or 

trustees or others involved in servicing securitized mortgages to be 

affiliated with firms that securitize the mortgages in the first place. 

They have control of information that’s important for litigation that 

the investors want access to. There should be a fiduciary duty to 

those investors. They say that they are not getting that information 

because the servicers or the trustees are protecting affiliates. 

Without addressing whether there is a conflict of interest or 

whether it really results in a breach of fiduciary duties, what possible advantage is there for a servicer being affiliated with a 

securitizer? Is there—if there’s any reason at all not to have them 

be affiliated, if there is any possible conflict of interest, what is the 

countervailing consideration that should allow it? Does anyone 

have a reason? What’s the advantage? 

Mr. Jones, the name of your firm is Wells Fargo Home Mortgage 

Servicing. I assume you’re an affiliated corporation of Wells; is that 

correct? 

Mr. JONES. That’s correct. 

Mr. MILLER OF NORTH CAROLINA. Could you not perform all of 

your functions as well if you were completely independent and not 

an affiliate of Wells? What’s the advantage of being affiliated with 

Wells? 

Mr. JONES. Thank you for your question. Wells Fargo is a full financial services firm. And we offer our banking customers loans, 

right? 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. JONES. And to do—and the securitization process is important for us to be able to make that happen. We don’t own all the 

loans that we service. Therefore, those customers who come to us, 

come to us in a bank branch, who have other relationships, want 

a home loan, we are able to take care of that home loan need and 

service that loan and work with the bank to make that occur. So 

it is a customer convenience item for us. 

Mr. MILLER OF NORTH CAROLINA. Customer convenience. 

Mr. JONES. A customer convenience, absolutely, because our customers who have mortgages with us have many other products as 

well as banking, etc. 

Mr. MILLER OF NORTH CAROLINA. My time has expired. 

Chairwoman WATERS. Thank you very much. The Chair notes 

that some members may have additional questions for this panel, 

which they may wish to submit in writing. Without objection, the 

hearing record will remain open for 30 days for members to submit 

written questions to these witnesses and to place their responses 

in the record. 

Before dismissing this panel, I would like to say that this hearing is but the tip of the iceberg. We did not get a chance for all 

of our members to raise their questions they would like to raise. 

56 

This business of document production is a serious question. 

There are other serious questions about MERS and what authority 

it operates under and whether or not it should be regulated, but 

I think that we will consult with the chair of our committee and 

others, so that we can continue to hold hearings so that we can understand better what we can do to help our citizens who are faced 

with the tremendous problems that they have with foreclosures 

and other interactions with the bank’s financial institutions, the 

servicers in particular. 

Thank you very much. This panel is now dismissed, and I would 

like to welcome our distinguished third panel. 

I am pleased to welcome our distinguished third panel and thank 

you for being here and thank you for your patience. Our first witness will be Mr. Adam Levitin, associate professor of law, Georgetown University Law Center. Our second witness will be Mr. Anthony B. Sanders, professor of finance, and distinguished professor 

of real estate finance, school of management, George Mason University. Our third witness will be Ms. Julia Gordon, senior policy 

counsel, Center for Responsible Lending. Our fourth witness will be 

will be Ms. Linda Fisher, professor of law, Seaton Hall School of 

Law. And our final witness will be Ms. Ann Anastasi, president, 

American Land Title Association. 

Let me just alert you that we’re nearing the time when we will 

be called to the Floor and we may have to leave the panel for a 

short period of time, but let’s get started and see how far we can 

get. We’ll start with Mr. Adam Levitin. 

STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF 

LAW, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Good afternoon, Chairwoman Waters, and members 

of the subcommittee. My name is Adam Levitin, and I am an associate professor of law at Georgetown University where I teach 

courses in bankruptcy, commercial law, contracts, and structured 

finance. I also served as special counsel to the Congressional Oversight Panel, but I’m testifying today solely in my capacity as an 

academic. 

In my prepared statement, I wish to make three points: 

First, it’s crucial that the committee understand that mortgage 

servicer incentives are badly misaligned with those of both investors and homeowners. 

Second, there are real harms from procedural fraud that should 

not be ignored. It is not a case of no harm, no foul. 

And third, there is a very serious chain of title issue in mortgage 

securitization that could pose an immense systemic risk to the financial system. 

Mortgage servicers’ incentives are not aligned with that of investors and homeowners. There are numerous conflicts of interest, but 

perhaps the most fundamental is that investors want to maximize 

the value of a loan, whereas servicers merely want to maximize the 

amount of their fee income. And that fee income does not correlate 

with the ultimate performance of the loan. So unlike investors, 

mortgage servicers are indifferent to the ultimate loss on the loan. 

Servicers can often make more money in foreclosure than by 

doing a loan modification. This gives servicers an incentive to foreVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
57 

close regardless of whether the modification would be value-enhancing for investors. Moreover, servicers’ fees and reimbursements are paid off the top from any foreclosure sale proceeds. This 

gives servicers a strong incentive to lard on junk fees and to insource foreclosure costs to their affiliates at exorbitant markups. 

Countrywide, I would note, recently settled with the FTC over precisely such issues. 

Servicers are primarily in the transaction processing business. 

That’s a business that’s all about automation and economies of 

scale. There generally would be a stretch to expect servicers to perform lots of successful loan modifications, which require discretion 

and manpower. But when one considers the misaligned incentives, 

it is no surprise that loan modifications that depend on servicers 

have failed miserably. 

My second point is that the argument that foreclosure irregularities cause no harm because borrowers are deadbeats is fallacious. 

First, in many cases the only evidence that the borrower is in default is the false affidavit, so we don’t actually know if the borrower is in default. The fact that the servicer initiates a foreclosure 

action cannot create such a presumption. 

Second, there are borrowers in foreclosure who are not in fact in 

default. And there are others who are in default only because of 

servicer malfeasance such as misapplication of payments or because of overpriced force placed insurance. We simply don’t know 

how many cases involve real defaults, how many involve servicerinduced defaults, and how many don’t involve a default at all. 

Third, there are very clear economic harms. The mortgage bargaining involves a bundle of rights, including procedures in the 

event of default. We know those procedural rights have value because mortgages cost more in States with judicial foreclosures than 

States with non-judicial foreclosures. In essence, borrowers are 

paying more to get legal process in judicial foreclosure States. 

Robo-signing cheats those borrowers of that value, and rampant 

fraud ultimately undermines confidence in markets generally. 

In truth, economic harm is just irrelevant to the issue. Violation 

of procedure rules is a harm to society that is never excused by the 

substantive merits of a case. Even if we all know that a defendant 

is guilty of a heinous crime, that can never excuse perjury or lynching. 

Earlier this week, the American Securitization Forum put out a 

white paper on how residential mortgages are transferred in the 

securitization process. The paper aims to soothe concerns about 

chain-of-title issues. The analysis in the ASF white paper is good 

as far as it goes. It argues that as a generic matter there are two 

alternate ways mortgage notes could have been transferred to 

securitization trusts under the Uniform Commercial Code. Unfortunately, the ASF white paper neglects to address that these generic 

processes are not what actually control in securitization transactions, which leads to four observations: 

First, parties are allowed to contract around the Uniform Commercial Code. 

Second, residential mortgage-backed securities are issued by 

trusts, and the transacting authority of those trusts is limited by 

their trust documents. 

58 

Third, the trust documents set forth a more restrictive legal 

standard than the generic one addressed by ASF. 

And fourth, under New York law, which governs most RMBS 

trusts, failure to comply with the trust documents voids the transaction, meaning the transfer into the securitization trust never occurred. 

The trust documents usually require a complete chain of endorsements that document every transfer of the mortgage note before a 

final endorsement in blank. Unfortunately, it appears that there is 

widespread noncompliance with the requirements for transfers set 

forth in the trust documents. The full chain of endorsements is 

often lacking on notes, and sometimes there are no signatures 

whatsoever. 

I emphasize that these signatures are no more technicalities 

than that of the borrower on the note. And they are in fact an important part of making the trust assets bankruptcy remote. 

Just this Tuesday, in a case captioned Kempf and Countrywide 

Home Loans Incorporated, a Federal judge in the United States 

Bankruptcy Court for the District of New Jersey disallowed a 

securitization trust mortgage claim because the note in question 

lacked an endorsement and was never delivered to the trustee. 

If I may conclude, I would suggest that I want to be clear, I am 

not saying that there is a systemic problem, I’m saying that there 

very well could be one, and Congress would do well to be ahead of 

the ball on the systemic risk rather than behind it. Thank you. 

[The prepared statement of Professor Levitin can be found on 

page 262 of the appendix. ] 

Chairwoman WATERS. Thank you. 

Our next witness is Mr. Anthony B. Sanders. 

STATEMENT OF ANTHONY B. SANDERS, PROFESSOR OF FINANCE, AND DISTINGUISHED PROFESSOR OF REAL ESTATE 

FINANCE, SCHOOL OF MANAGEMENT, GEORGE MASON UNIVERSITY 

Mr. SANDERS. Chairwoman Waters, and members of the subcommittee, thank you for the opportunity to testify before you 

today. The U.S. mortgage market grew at a phenomenal pace from 

1998 to 2009 with the GSEs, Fannie and Freddie, and the Federal 

Home Loan Banks alone accounting for $5 trillion in debt to fund 

mortgage growth. 

As we sit here today, there are over 42 million mortgages outstanding in the United States. Of the 42 million mortgages, approximately 60 percent were securitized or assigned to another 

party. Loan assignments have occurred in the United States since 

before the Great Depression, yet only now have Congress and the 

Administration taken notice of the loan assignments. 

What is particularly interesting is the myriad of Federal housing 

agencies, pseudo agencies, and financial system regulators that 

have been in existence since the Great Depression. The Federal 

Government has ignored the fundamental problem of loan assignment regarding location of title or other potential document problems pertaining to foreclosure. 

What is the economic harm to borrowers of alleged document defects pertaining to foreclosure? The answer is none. First, the loans 

59 

are in default. Second, the average length of time for foreclosure 

and liquidation is over 17 months. If each borrower was living in 

the dwelling and not paying interest, say $1,000 a month, that 

translates to $17,000 in lost earnings to the lenders/investors. 

Suppose that 3 million are in the foreclosure process. That trans- lates to a potential loss of $51 billion to lenders/ investors over and 

above the loss incurred by lenders/investors. 

Insofar as the foreclosure process takes 17 months, lenders/investors are not receiving any payment for interest and principal and 

are incurring transaction costs. In the meantime, borrowers are not 

making payments on the house in which they are still living, effectively receiving over a year of housing rent free. 

In the case of loan default, the lender has the right to take the 

asset and sell it in order to recoup the amount owed if possible. 

Document defects pertain to foreclosure if material can slow down 

the foreclosure process. Therefore, lenders/investors have the economic incentive to clear up any material document defects pertaining to foreclosure as soon as possible. 

Any proposed solution such as a moratorium on foreclosures with 

the Federal-State levels represents the dangers of the stability of 

the housing market. Government intervention in the housing market, such as HAMP and tax credits, have failed to slow and have 

merely delayed defaults. 

The housing market needs to heal and it can only do so if defaulted loans can be brought to the market through foreclosure. 

Preventing foreclosures extends losses to lenders/investors, and allows nonpaying households to continue staying in the dwelling. 

If material document defects were pervasive in the economy, why 

weren’t our regulatory agencies on top of the problem seeking solutions? It is notable that the leading thrifts that securitized loans 

were Countrywide, Indy Mac, and WaMu, all supervised by the Office of Thrift Supervision, OTS, which is the regulatory body of the 

thrift industry. 

As defaults and foreclosures mounted, OTS should have been 

painfully aware that the problem of foreclosure could arise if title 

and accurate supporting loan documentations could not be produced. It should be determined if the OTS was aware of the problem and considered it to be trivial. Or if there was a problem, why 

did they choose to do nothing about it, or were they just unaware 

of the problem? 

Of course the same question should be asked of the FDIC, the 

regulated State charter banks, the OCC that regulates nationally 

chartered banks, and the Federal Reserve that regulates State 

charter member banks. And then there are the State and bank 

thrift regulators. 

With so much regulatory power were the FDIC, the OCC, and 

the Fed not investigating the potential foreclosure documents and 

taking corrective action if it was material? For those solutions I 

have, all relevant loan documents should be immediately scanned 

and a digital file created. This file which would be called 

‘‘securitization packet’’ would travel with the loan when it is sold. 

The digitized file could be kept either at the Federal Reserve or private market enterprise with regulatory oversight. The regulatory 

bodies, whether it’s the Federal Reserve, the FDIC or the OCC 

60 

should develop requirements for the assignment of loans requiring 

notification of when an entity has purchased a loan or new service 

is applicable. 

That is, the regulatory bodies can either set the standards or 

work with the industry on setting such standards that would alleviate problems in the future regarding this loan documentation 

issue. Thank you very much. 

[The prepared statement of Professor Sanders can be found on 

page 323 of the appendix.] 

Chairwoman WATERS. Thank you. 

Ms. Gordon. 

STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, 

CENTER FOR RESPONSIBLE LENDING 

Ms. GORDON. Good morning, Chairwoman Waters, and members 

of the subcommittee. Thank you for inviting me today. And I also 

want to thank the chairwoman for your tireless attention to these 

problems in mortgage servicing. If folks had been listening to you 

all along, maybe we wouldn’t keep having this similar hearing over 

and over. 

As we sit here, 2 million families are in the middle of losing their 

homes. More than 3 million more are on the verge of default. Over 

the next several years, the toxic combination of unsustainable 

loans, high unemployment, and underwater mortgages could mean 

a stunning total of more than 13 million foreclosures. AfricanAmerican and Latino families are much more likely than Whites to 

lose their home. And we estimate that communities of color will 

lose over $360 billion in wealth. 

The fate of foreclosed homeowners impacts all of us. Foreclosures 

bring down home values across-the-board and devastate communities and municipal budgets. Continued weakness in the housing 

sector hangs like an albatross around the neck of our economic recovery. Things did not need to be this bad. If government had acted 

quickly and forcefully, we could have significantly limited the fallout. But instead, some policymakers believed servicers’ early assurances that they would handle the crisis on their own. When that 

turned out to be wrong, we provided legislative tools such as the 

Investor Safe Harbor, we added financial incentives through HAMP 

and related programs. We cajoled and begged and threatened. None 

of those strategies has worked. It’s quite clear that servicers will 

not do what needs to be done, unless someone makes them do it. 

It may be that they can’t do it at all under the current structure. 

Everyone agrees that homeowners not in default should not lose 

their home. There is also little disagreement that sustainable loan 

modifications can keep families in their homes and provide greater 

returns to investors. Similarly, there is consensus that for vacant 

homes and situations where the homeowner cannot possibly remain, it is best to move a new family into that home. 

With all of this consensus, why are we here today? It’s because 

the servicing system is running an outmoded model, crippled by 

cross-cutting incentives and overwhelming volume, and it can no 

longer reliably sort out which foreclosure should happen and which 

should not. How to get this done right is the crucial question. 

61 

Under the exiting dual-track system, borrowers get foreclosed on 

even when they are in the middle of being reviewed for other solutions. Once in foreclosure, we now know that servicers have been 

cutting corners and inventing paperwork, sometimes because they 

simply don’t have the recordkeeping ability to do otherwise. 

The principal government response to the foreclosure crisis, 

HAMP, has proved very disappointing. In the face of nearly 8 million foreclosure starts, the HAMP program has produced fewer 

than half a million permanent modifications. More than 60 percent 

of borrowers in trouble, though, have had no evaluation of their situation at all, because the fact is the HAMP program has not had 

what it needed to succeed. 

A key part of the original Administration foreclosure prevention 

plan was to involve the bankruptcy courts who serve as our Nation’s comprehensive resolution authority when debt goes bad. 

Failed subprime originators got bankruptcy protection. So did Lehman Brothers. Bankruptcy courts can modify mortgages on vacation homes, farms, and commercial properties. 

If servicers knew that homeowners had bankruptcy court as a 

backstop, that might have spurred the necessary workouts to happen. But although this Chamber saw that need for reform early, industry pressure derailed the effort. Those bankruptcy laws should 

still be changed. 

In the meantime, let’s broaden and enforce a commonsense practice, requiring servicers to review all loans for alternatives to foreclosure, either loan modifications when that makes financial sense, 

or short sales and deeds in lieu. Most important, let’s get that review done before foreclosure proceedings are even started. 

To make such a system work in practice, homeowners need a 

chance to stop their foreclosure if they haven’t been properly reviewed. In many cases, homeowners will need access to legal help 

to do so. Congress should appropriate the $35 million authorized in 

the Dodd-Frank Act for foreclosure prevention legal assistance. 

While this is a very small amount compared to what will be spent 

on the corporate lawyers for the other side, it will make a real 

meaningful difference for people who can’t afford an attorney. In 

addition, banking regulators should enforce existing roles and establish any additional duties and standards necessary to prevent 

predatory servicing practices. 

I look forward to working with you to make our mortgage servicing system work, both for families and for those who invest in our 

economy. Thank you for your time and I look forward to your questions. 

[The prepared statement of Ms. Gordon can be found on page 219 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

As I mentioned earlier, we have votes, and we only have a few 

minutes left. It’s very important that our members get up there. 

Unemployment benefits expansion is on the Floor. 

If you would be so kind as to remain, we would like very much 

to continue to hear from you and to raise some questions. I would 

appreciate it very much. The committee is in recess. 

[recess] 

Chairwoman WATERS. We will now resume the hearing. 

62 

STATEMENT OF LINDA FISHER, PROFESSOR OF LAW, SETON 

HALL UNIVERSITY SCHOOL OF LAW 

Ms. FISHER. I am a law professor at Seton Hall Law School in 

New Jersey. Part of my duties include teaching a civil litigation 

clinic in which third year law students and I represent low- and 

moderate-income borrowers in urban north New Jersey, particularly the Newark area, in cases involving foreclosure defense, predatory lending, and mortgage fraud. I am here largely in that capacity today. 

My testimony will focus primarily on one point, and that is a refutation of the argument that we have heard raised many times in 

recent weeks, including earlier today by one of the members, that 

it doesn’t really matter if servicers committed what are called technical violations of law because the borrowers are in default anyway; so why not just foreclose so they won’t get a free house out 

of the deal. 

This argument relies on a number of erroneous assumptions. 

First, that virtually all of these people or no more than a negligible number are actually in default. Many are not. We don’t 

know the exact numbers because the system is extremely opaque, 

as Professor Levitin pointed out a little earlier. There are many, 

many anecdotes out there. Just a recent media search would raise 

a lot of those. 

And, furthermore, we can reasonably infer from our knowledge 

of the level of error in the system generally that many more errors 

must have been made than have come to light of late. Errors include, of course, listing arrears that don’t exist in part because payments are not credited in time or inflated fees have been tacked 

onto amounts due. 

As an example of that, a colleague of mine in New Jersey told 

me just a couple of days ago that recently she has seen many 

broker price opinions (BPOs) that is, quick appraisals that are done 

on houses in foreclosure, periodically charged at $800 per BPO 

when $200 until recently was the going rate. 

Second, even if there are defaults, it is far from the end of the 

story. The law is clear that a default alone does not a foreclosure 

make. For example, I have recently had a couple of cases where the 

wrong entity filed a foreclosure alleging it held the note in a trust 

when it was not a trustee and that did not prove to be the case. 

Of course, nobody can deny it is not right that a nonowner of a 

mortgage can collect on an obligation. Without legal representation, 

however, I am afraid many of the mistakes are never discovered. 

Which leads to a further point, and that is that very, very few 

borrowers in foreclosure are able to obtain counsel. Until quite recently, well over 95 percent of all New Jersey foreclosures were defaults because counsel was not involved. The numbers have gone 

down into the 80-plus percent more recently. A lot of this is because legal services offices are overwhelmed, and most people in 

foreclosure just cannot afford the legal representation that would 

be necessary to find those valid claims and defenses that do exist. 

Another set of examples illustrating what might appear on its 

face as a default is not necessarily so, involve origination fraud, 

which can render the obligation itself on the loan void or voidable. 

Origination fraud was very, very frequent during the peak 

63 

subprime years of 2004 to 2007. We are still seeing a lot of foreclosures resulting from this because of ARMs resetting. 

A few examples from my practice: A mortgage broker loan officer 

fills in a mortgage application based on mostly fictional information 

regarding income, assets, and employment without consulting the 

borrower, resulting in a higher loan amount than they can afford. 

The application is bolstered by an inflated appraisal, which happened almost across-the-board in the cases I have seen. The borrower doesn’t discover this until closing when they may also discover that the actual purchase price of the property is higher than 

what had been quoted to them. They are told at this point they 

have to go through with the closing or be liable for the entire 

amount, which is of course not the case legally. So, pressured, they 

continue. And they are also told, you can refinance in a couple of 

years anyway because housing prices always go up. 

In conjunction with these practices, I also litigated many claims 

in the Newark area over the last few years involving a large predatory property flipping and loan operation in which unscrupulous 

mortgage brokers worked with a developer, a local developer, who 

would buy distressed houses and do a few shoddy repairs and then 

flip them at much higher prices to unsuspecting buyers. 

In many of these instances, even when the repairs were not done, 

the flipper would promise the buyers that he would make the mortgage payments on the property until everything was complete and 

the second and third units in these properties could be rented out. 

He did not do that. Almost inevitably, these people fell into foreclosure, yet almost all of them had good claims and defenses based 

on origination fraud. 

In appropriate cases, securitizers can be held liable for this as 

well if they are not holders in due course. 

While we did settle virtually all of those claims, it just provides 

another set of examples of the sorts of things that can go wrong 

here, and ultimately even if a default occurs, provide valid defenses 

to foreclosure. These are not technical violations, obviously. 

So default is only the beginning of the story. And of course we 

have heard much today, and in the Senate Banking Committee the 

other day, about outright fraud in servicing processes. The most 

prominent examples, of course, include forged signatures and the 

like over and above legal violations involved when a robo-signing 

occurs. As a result, I believe we are not going to make any progress 

here unless serious mortgage modifications are required, including 

principal write-down in appropriate cases. 

I think also independent auditors and monitors should be appointed to review the foreclosure practices and sample loan files of 

servicers, rather than having them do it themselves. I did hear 

some testimony that that is starting to be done. 

And then, finally, just as an example, a final example of why the 

modifications are necessary. Last night, a cab driver, when I was 

coming to my hotel here in D.C., told me he had been trying to get 

a mortgage modification all year now since his wife lost her job of 

14 years late last year. He doesn’t want a principal reduction. He 

wants an interest rate reduction. He can pay. He is making money 

as a cab driver. But he asked me then, as he is handing a suitcase 

off to me and I am proceeding to go into the hotel, ‘‘Why did we 

64 

bail out the banks with our tax money when they won’t even give 

us a break, homeowners don’t get a break? All I want is an interest 

rate reduction. Why can’t I get that?’’ Why indeed? 

Thank you. 

[The prepared statement of Professor Fisher can be found on 

page 213 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

We are going to now move to Ms. Anastasi. Thank you for your 

patience. 

STATEMENT OF ANNE ANASTASI, PRESIDENT, AMERICAN 

LAND TITLE ASSOCIATION 

Ms. ANASTASI. Thank you. Madam Chairwoman and members of 

the subcommittee, thank you for your patience today. 

I am Anne Anastasi, president of Genesis Abstract, in Hatboro, 

Pennsylvania. For the past 33 years, I have worked in the land 

title industry, and I am the current president of the American 

Land Title Association. 

Integrity in real estate transactions is of the utmost importance 

to the land title industry. I appreciate that you have asked ALTA 

to testify today regarding the American system of land ownership 

so that we may better understand the effects of foreclosure irregularities and deficient documentation on housing markets and 

property rights. 

For centuries, our public recording structure has provided transparency, efficiency, and security that is unimaginable in countries 

where governmental approval is required for the transfer of ownership from one owner to the next. Our system of land transfer provides individuals with a strong protection of their property rights 

within a relatively short settlement transaction time, saving borrowers and sellers money. This system, combined with the confidence that consumers and lenders have in the work of the land 

title and settlement service professionals, allows the United States 

to have the strongest real property transfer system in the world. 

The accuracy of the public records is extraordinarily important 

for this confidence to exist. Land title and settlement service professionals maintain accuracy in our public record by curing defects 

to the benefit of sellers and buyers and lenders and the public. Our 

research has found that curing public record defects alone was necessary in over 35 percent of all transactions. This is one of the most 

valuable services the land title industry offers and is an inherent 

part of the underwriting process. 

As we hear about document irregularities and question the validity and credibility of foreclosures, it is important to make the distinction that the reported problems are about how safeguards that 

are already built in the legal system were treated. To appreciate 

whether errors in the foreclosure documentation extend to the public records and what can be discovered in the preparation of a title 

insurance policy, one must understand what documents are included in the public record and what documents are not. 

When consumers purchase a home and finance their purchase 

with a mortgage loan, three major documents are executed. In our 

country, real property is conveyed by a private contract most commonly called a deed which conveys ownership from one party to anVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
65 

other. This document is publicly recorded. These records are administered by public officials, and they give notice that the property ownership is transferred. 

The second document is the mortgage. In some of your States, it 

is called a Deed of Trust. This document is also recorded in the 

public records in order to secure the priority of the lender’s lien 

and to give notice to the world that there is a debt on the property. 

The third document is the promissory note. It is the personal 

promise to pay the loan back. And within the promissory note, the 

principal interest rate repayment schedule and other terms of the 

loan are noted. The note is not put on the public record for a variety of reasons, most importantly to protect the purchaser’s right to 

privacy. 

Whether a property has gone through a judicial or a non-judicial 

foreclosure, land title agents examine the recorded documents before a title policy is issued. With many of the issues in question 

today they are not discoverable by simply reviewing the recorded 

documents. 

It is important to note, however, that homeowners and lenders 

who obtain title insurance are protected under their policy if a 

claim arises. In addition, title insurers are responsible for the cost 

of defense for those policyholders if a claim arises. 

Let me conclude by saying that while risks appear to be in the 

foreclosure process, they do not appear to extend to the public 

records and should not generate a systemic risk to the title industry. However, the title industry, if a policy is purchased, will be responsible to defend the homeowner’s property rights at the cost 

being borne by the title insurers. It is one of the most important 

parts, most important components of owning a title insurance policy. 

In addition, we should not lose sight of the fact that our property 

transfer system is successful because the work of the land title industry provides the trust and confidence to allow people to buy and 

sell homes. What is important to note is that homeowners have to 

understand that buying a lender’s title insurance policy at the time 

they finance does not protect them. They have to understand that 

in order to have the protection of the industry, and in order to have 

an insurance company defending their right, they need to have 

their own owner’s title insurance policy. 

We are eager to serve as resources and so thankful to be here 

today. Thank you, Madam Chairwoman. 

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

76 of the appendix.] 

Chairwoman WATERS. Thank you very, very much. 

And, again, I would like to thank you all for your patience and 

your understanding and your willingness to come here to try and 

help us figure out what this is all about and what we do, what can 

we do. 

I would like to take 5 minutes and ask a few questions. 

I want to ask you to comment on this document production. As 

I understand it, a lot of the servicers outsource to firms that recreate or reproduce documents. Do you know anything about this and 

what this means in terms of fraudulent materials being produced 

66 

in order to have documents that you can then foreclose with because they are not in the system anywhere? What do we know? 

Does anybody know anything about this? If so, just speak up. 

Have you had any experience with this fraudulent documentation 

production? Do you know anything about it? 

Ms. FISHER. I can answer some aspects of that question. 

It is not susceptible of an easy answer. I am sure you won’t be 

too surprised to hear that. But in my own practice I frequently litigate against securitized trusts that are attempting to foreclose on 

my clients. Of course, in order to prove that they have a right to 

foreclose, they need both, in most cases, to show that they possessed the original note at the time that they filed the foreclosure— 

otherwise, they lack standing—as well that the mortgage was properly assigned per our State’s property law and that other State law, 

including foreclosure law, was complied with. 

I have had a very difficult time getting the documentation in 

many cases. Sometimes when I do get it, say when I do see the 

original note, its chain of custody is entirely unclear, even apart 

from the question whether the PSA was complied with, thus allowing the REMIC requirements to have been met and bankruptcy remoteness to be met. 

And apart from the question whether New York trust law was 

violated, we don’t even know whether the original note was possessed at the time of foreclosure. In many cases, it is my understanding that the original notes are kept in a warehouse operated 

by the originator. The servicer may have access to those. In many 

cases, the servicer is affiliated with the originator, but that is not 

necessarily enough to confer standing on a later trust that alleges 

that it acquired the note and whose documents related to the PSA 

may indicate that it acquired the note at the time of closing so that 

it can foreclose. 

These problems are enormously time consuming to address in 

discovery in cases. Part of the reason foreclosures are being held 

up is because of these. I have had a number of cases where discovery has gone on for at least 2 years, notwithstanding what 

seemed to be good-faith efforts by all to comply. The level of complexity, the number of agents involved, a servicer’s inability to 

track where things are, where they were, when they were there, so 

complicates the process that it has almost broken down. 

Chairwoman WATERS. Yes? 

Mr. LEVITIN. I just want to add a few points to that. 

There are, I think, two distinct issues. One is whether documents 

are lost and, therefore, need to be—there is just a question whether 

documents are lost. And then secondly is the problem of creation 

of documents. 

The question of whether documents are lost, we have seen an 

awful lot of so-called lost note affidavits being filed, saying that the 

purported owner of the note had the note and somehow lost it, ‘‘the 

dog ate my homework’’ kind of thing. It turns out in a lot of cases 

the note isn’t actually lost, even though the servicer will file an affidavit saying so. It is often that the servicer just doesn’t want to 

bother getting the note. Because the note is not usually in the 

servicer’s custody. Usually, it is in a warehouse in, as Professor 

Fisher was saying, like Iron Mountain warehouse somewhere outVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
67 

side of Denver. And the servicer doesn’t want to have to pay $30 

to get the note, and the servicer also doesn’t trust his attorneys 

with the note. 

There is very often substitution of counsel in foreclosure cases, 

and what servicers are very concerned about is if they give the precious original note to counsel and there is substitution of counsel, 

that note is going to get lost in the transfer and then they are 

going to have a bigger problem. So rather than trying to solve this 

problem the correct way, which would be maybe appearing themselves even, in some cases, it seems that either servicers or their 

counsel have taken some shortcuts and had actual notes counterfeited. 

There are a pair of companies that have come to light in this regard. One is a company called DOC–EX, that is ‘‘D–O–C-E–X.’’ 

Now, DOC–EX, it is my understanding that it had some sort of affiliation with a company called LPS. LPS is one of the major sort 

of service providers to mortgage servicers. They provide everything 

from the standard software platform used for mortgage servicing to 

all kinds of document services. LPS apparently shut down DOC– 

EX as soon as its activities came to light. But you can see floating 

around on the Internet, and I can’t vouch for its voracity, but you 

can see a DOC–EX pricing sheet. And that pricing sheet has lines 

for creation of note, creation of mortgage. And $12.95 will buy you 

a counterfeit— 

Chairwoman WATERS. We have it up on the screen today, yes. 

Mr. LEVITIN. You can actually see in the official—in the county 

land records in—let’s see which county it is—Nassau County in 

Florida, you can see an assignment that includes the words ‘‘assigned to.’’ Then it says, bogus assignee for interventing assignments whose address is, and then there is a chain of Xs. It seems 

that someone filed this assignment and didn’t bother removing the 

placeholder language of fill in above the bogus name. 

Additionally, there was—just this last week I saw a new story 

that emerged—there seems to be another DOC–EX-like company 

based in the Atlanta area which was actually using a counterfeit 

notary seal made out in the name of the former Fulton County recorder of deeds. 

So here is the problem. There is definitely some misbehavior 

going on in the servicing industry. We don’t know the extent of it. 

And that is kind of what is scary, that we don’t know if these are 

one-off cases or this is endemic. 

Chairwoman WATERS. Thank you very much. 

Ms. Kilroy. 

Ms. KILROY. Thank you very much, Madam Chairwoman. I appreciate the testimony. I thank all of you for joining us this afternoon. 

Again, I just see this as a continuing playing out of the greed 

that Wall Street drove with the securitization, with the rating 

agencies stamping triple A on stuff that turned out to be junk, a 

lot of greed driving the system and a lot of mortgages that probably 

never should have been written, and now we have this big mess. 

My State of Ohio is one of the hardest hit States in the country. 

And it is affecting our local governments, our tax revenues. It is 

affecting the safety of our communities. It is affecting the values 

68 

of my constituents whose home might be their single biggest investment and seeing that even though they are paying their mortgage lowered in price because of problems that their neighbors 

might be having of problems with this whole issue of servicing of 

mortgages and modifications. 

I have engaged in some conversations and letter writing with 

Treasury regarding the need for legal services, and I so agree with 

that, Ms. Fisher, that we need to do something to help fund legal 

aid. And it is a shame that Treasury will not allow the hardest hit 

funds in all our States to apply some of that money for legal services. 

Representative Kaptur has a bill that would address that issue. 

I hope she introduces it in the next Congress, and I hope that it 

passes. 

And I am also just stunned that, Professor Sanders, that you 

would be so disregarding of due process and the rule of law. This 

crisis was brought about when regulators frequently looked the 

other way. The laws might have been there, but they weren’t enforced, that they didn’t put real meaning into the laws and regulations that Congress had passed and regulators had enacted. We 

can’t continue to just look the other way and shrug our shoulders. 

Yet think about if it had been the government that was doing 

this and robo-signing stuff and taking property away from individuals, there would be people who would be screaming about that 

about denial of property rights and not protecting that bedrock 

principle in our government, that you can’t take private property 

without due process. 

But we do have this big mess here right now, and sometimes I 

think that even though maybe it doesn’t affect directly because the 

borrower might actually be in foreclosure, it might affect an investor who might have lost their investment as well because of these 

affidavits and these robo-signings and the lack of title and making 

up documents. So it is not just a borrower in default that might 

be hurt by this. 

And some of the investors, particularly those who hold the most 

toxic paper, might be holding up loan modifications because they 

want to get paid and that modification wouldn’t hit their lower 

tranche. And they might actually not have a property interest in 

that mortgage, but they just don’t know who owns it, we don’t 

know where all this paper is. So it really disturbs me, all of this. 

I greatly appreciate the suggestions from Ms. Gordon and wholeheartedly wish we would have passed the cramdown that would 

have allowed the bankruptcy courts to be able to put that pressure 

on our banking industry to modify mortgages, but, if they didn’t, 

to allow the bankruptcy courts to marshal the assets and to take 

a look at ownership and to hopefully get a plan so that borrower 

could protect that home and be able to make payments and stay 

in that home and do it within the rule of law. 

I think we need to fix—I urge Congress to fix the abuses in the 

securitization industry, the conflict of interest in the servicing industry, and to look for where is the public interest in all of this. 

The public interest in our communities, our local government, our 

taxpayers, the people who borrowed money, the people who inVerDate Nov 24 2008 10:33 Feb 01, 2011 Jkt 063124 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 K:\DOCS\63124.TXT TERRIE
69 

vested, our banking industry, all of that. I think it is a huge task 

that we undertake. 

Again, I thank you so much for the suggestions that you made. 

I certainly would like to understand from the panelists if there is 

one thing that Congress could do in the next Congress what would 

you suggest that be. 

Mr. SANDERS. Let me address this. 

First of all, I agree with Mr. Levitin that—I am not saying— 

being dismissive—that rule of law is not appropriate. I just want 

to see what it is first. I want to see how many of these loans went 

into foreclosure by accident. And if that is true, that is terrible. If 

people were current on their loans and went into foreclosure, that 

is not a good thing. I absolutely agree. What I was trying to say 

is, to agree with Chairwoman Waters, is that the government knew 

about a lot of these problems coming up, although— 

Ms. KILROY. But I want to take a look at going forward. 

Mr. SANDERS. But I am saying that— 

Ms. KILROY. What should Congress undertake going forward to 

address this? 

Mr. SANDERS. I would say a modernization of the lending industry. We are still operating with a lending industry that looks like 

the Bailey family’s S&L in the movie, ‘‘It’s a Wonderful Life.’’ 

Ms. KILROY. I agree with that. If the banking industry and all 

these servicers had actually done that and advocated for modernization, again, maybe there would have been a fix here within 

the rule of law. But, instead, corners were cut and law wasn’t followed. To allow people to say that they, under penalty of perjury, 

believe this to be true and just shrug our shoulders at it, I am really bothered by that. But one suggestion, Mr. Levitin? 

Mr. LEVITIN. Take the servicers out of the modification business. 

The servicers are just hopelessly compromised. 

Ms. KILROY. Who would do it? 

Mr. LEVITIN. I think you have three possibilities. One is bankruptcy courts, and that does not necessarily have to be through 

Chapter 13. 

Ms. KILROY. Right. 

Mr. LEVITIN. You could have a streamlined mortgage only resolution process. That would be another way to deal with bankruptcy 

courts. 

The second possibility would be through a government agency, 

something similar to what we had during the Depression, the 

Homeowners Loan Corporation, except you don’t necessarily have 

to take the loans to do that. 

And the third possibility would be conceivably finding some 

unconflicted third parties that could—basically outsourcing it, not 

to the existing servicers. I am not sure who that would be, but in 

theory that would be a way to pursue it. 

Ms. KILROY. Thank you. 

Ms. Gordon? 

Ms. GORDON. What Congress can do is, short of giving the job to 

someone else, make the servicers do their job. And which form that 

takes—the bankruptcy reform is ideal, because it solves every problem out there. It solves the second lien problem. It solves the consumer back end debt problem. It solves the need to have a third 

70 

party in there overseeing the whole thing. It solves any investor 

tranche-warfare-type issues. It solves all of that. So it is ideal. 

There may be ways to do it other than the way we tried. Whether it is something other than Chapter 13 or there are a bunch of 

other new ideas floating around there. But, aside from that, we can 

still require that servicers conduct loss mitigation prior to instituting foreclosure. 

Ms. KILROY. If we can let the other two quickly answer, because 

I think I am out of time here. 

Ms. FISHER. I can answer very quickly. I agree with all of Ms. 

Gordon’s suggestion and Mr. Levitin’s as well; and, of course, we 

do need to modernize the banking industry, as Mr. Sanders suggested. 

Chairwoman WATERS. Thank you very much. 

We are going to go to Mr. Miller now. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Madam Chairwoman. 

Mr. Levitin just used the term ‘‘unconflicted third party.’’ There 

has been a lot of discussion earlier about whether servicers in fact 

do have a conflict in servicing mortgages for whom the beneficial 

lenders are someone else. There seemed to be a lot of conflicts or 

potential conflicts in all the various roles involved in securitization. 

At the very least, the interests of the various parties are not identical. Even if it is not always possible to tell exactly how the conflict would play out, the servicer versus the beneficial owners, the 

investors, who hold the mortgage-backed securities, the trustees, 

the securitizers or sponsors, whatever the current terminology is. 

There seems to be a great many potential conflicts there. 

What is the advantage? Why should a servicer be an affiliate of 

a larger financial institution? Why should a trustee be an affiliate 

of a larger—if they are going to be the ones who control the information that the investors, the people to whom they owe a fiduciary 

duty, must depend upon information about whether they have a 

put-back claim against the securitizer, the lender, what sense does 

it make for them to be an affiliate of the company that may be the 

defendant in that lawsuit? What advantage? 

You heard Wells’ representative earlier say that they like to be 

a full service company, but do you see any advantages in having 

the same firms play all those roles? 

Mr. Levitin? 

Mr. LEVITIN. Sure. There are several reasons, and I don’t want 

to represent that these are necessarily all of them. This is just 

what comes to mind. 

The first is that servicing is a countercyclical business to loan 

origination, that when loan originations are down that means 

refinancings are down which increases the value of servicing rights. 

So that is a very good reason to combine servicing with an origination practice. 

Secondly, it doesn’t necessarily mean you have to service thirdparty loans. The second thing is to service—keeping servicing secure when you securitize loans, but to keep a pretty good revenue 

stream while moving the credit risk onto someone else’s books. 

Another reason is that mortgage servicing rights are very useful 

to banks as a way to smooth out earnings. Servicing rights are very 

71 

difficult to value, and, therefore, they are quite easy to manipulate. 

So if a bank wants to increase earnings in one quarter, it can basically increase the multiples that it uses to calculate its servicing 

rights or vice versa. 

And, finally, there is an aspect of keeping a customer relationship. That the bank may want to have further dealings, often refinancing the homeowner. That was one thing we saw during the 

housing bubble, was we make you a loan and we are going to try 

and refinance you 3 months later and get fees on that. And keeping 

that relationship I think is one reason that servicing is often retained. 

Mr. MILLER OF NORTH CAROLINA. Not all those reasons sound 

like wholesome reasons that we should encourage. 

Mr. LEVITIN. They are not, especially mortgage servicing right 

valuation. If you look at bank failures, quite often there are vastly 

overvalued mortgage servicing rights on those banks’ books. 

Mr. MILLER OF NORTH CAROLINA. Ms. Gordon, do you see any— 

what advantages do you see in allowing servicers to be affiliated 

with companies doing other things than securitization, most notably the securitizers themselves? 

Ms. GORDON. I agree with Professor Levitin about the reasons, 

and I do think that customer relationship is important. It is also— 

in some instances in this environment we are seeing a usefulness 

in that certain investors may be unwilling to come down on the 

company for its servicing when it is depending on them for originations. 

What is missing in all of this is that in this business relationship, unlike many other relationships, such as the origination relationship, calling the homeowner the customer is a little bit misleading. The homeowner does not have the ability to switch 

servicers if they don’t like their servicer. So that is kind of a fundamental problem with using any kind of market analysis here. The 

customers are just captive. And, again, because this is the home 

loan which they have no rights in bankruptcy court and there are 

very little other particular powers, they are disadvantaged vis-a-vis 

all of the other stakeholders. 

Mr. MILLER OF NORTH CAROLINA. Professor Levitin, I notice you 

are also counsel to the Congressional Oversight Panel. It is striking 

how much we are groping in the dark for information about this, 

just as we were for the couple of years before the financial crisis, 

about how big a deal subprime mortgages and foreclosures really 

were going to be. The industry was telling us it was nothing to 

worry about, it was a mild hiccup. And now we are still trying to 

figure out 2 years later just how big a deal this is. How big a deal 

are the documentation issues and requirements in the pooling servicing agreements, the PSAs, and the put-back liability that may result from not having the documents required by the PSAs. And it 

again appears that the information is controlled by a party that 

has some motive to conceal information if it points to insolvency or 

significant solvency issues for themselves or for an affiliate. 

Is it a problem with systemic risk or identifying systemic risk 

that the trustees and the servicers are affiliates of the securitizers 

of the biggest banks? 

72 

Mr. LEVITIN. It certainly is. And there is a ‘‘Groundhog Day’’ aspect of this hearing that we are facing the same issues we have 

been facing for the last 4 years in dealing with foreclosures. And 

it seems like servicers come up and say, look at all the modifications we have made, even though I think they often double count, 

the same loan might get multiple modifications. But here we are. 

Every year we have another set of hearings, and we can add another 2 million foreclosure sales to the count. 

I think there is a real problem, information problem, as you identify, that the information that we need to evaluate modification 

programs, to evaluate chain of title issues and so forth is all in the 

hands of the servicers who are not going to reveal any of it voluntarily. There is virtually no oversight of servicers. 

When you hear that there is a trustee, that is not like a trustee 

for a child’s college fund. These are corporate trustees who have 

very, very narrow contractual duties and no others. They are not 

general fiduciaries, and they are paid almost nothing, and they 

have no incentive to look for trouble, not least because they often 

have very close business relationships with the servicers. 

So we have a situation where we are not going to get the information unless Federal regulators go after it, and there is the problem. And here I very much agree with Professor Sanders. Federal 

regulators don’t want to get this information. They don’t want to 

see if there is a problem because they are too scared that if there 

is a problem they are going to have to do something about it. And 

that is rather disturbing. But, basically, this is, let’s stick our head 

in the sand and hope there isn’t a problem. Because the prime directive coming out of Treasury is protect the banks. Don’t let anything happen that will prevent the banks from kind of recognizing 

their losses over retained earnings over the next decade. And, unfortunately, I am not sure that is a strategy that is really good for 

the U.S. economy as a whole. 

Mr. MILLER OF NORTH CAROLINA. One of the lessons of the financial crisis is that it is better to recognize problems sooner than 

later. Thank you. 

Chairwoman WATERS. I would like to thank the members who 

came back and stayed with the committee. I know that a lot of our 

members are rushing out to get to those airplanes and to get out 

of here, but I really appreciate your interest in the time that you 

have put in. 

I would really like to thank the panel. You have been here for 

a long time. You have been very patient. You have been very helpful to us. We recognize that a lot more has to be done, but we want 

to thank you for looking at what we are attempting to do with loss 

mitigation work and demanding our legislating, attempting to legislate the work of the servicers. 

One of the things that we are finding out that has happened in 

this industry is, whether you are talking about servicers or MERS, 

all of these ancillary type businesses popped up with no regulation, 

and we don’t know a lot about them and how they operate, and we 

keep finding out more and more and more. So not only do I appreciate the attention you have given us already, we are going to call 

on you to help us as we try and figure this out and make it right 

for our homeowners. 

73 

So thank you all again so very much. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

Before we adjourn, the written statements of the following organization will be made a part of the record of this meeting: The 

Council of State Bank Supervisors. 

This hearing is now adjourned. Thank you all very much. 

[Whereupon, at 3:05 p.m., the hearing was adjourned.] 

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A P P E N D I X 

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