CONGRESSIONAL OVERSIGHT PANEL 

OCTOBER OVERSIGHT REPORT * 

AN ASSESSMENT OF FORECLOSURE 

MITIGATION EFFORTS AFTER SIX 

MONTHS 

OCTOBER 9, 2009.—Ordered to be printed 

* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 


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CONGRESSIONAL OVERSIGHT PANEL OCTOBER OVERSIGHT REPORT 


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1 

52–671 2009

CONGRESSIONAL OVERSIGHT PANEL 

OCTOBER OVERSIGHT REPORT * 

AN ASSESSMENT OF FORECLOSURE 

MITIGATION EFFORTS AFTER SIX 

MONTHS 

OCTOBER 9, 2009.—Ordered to be printed 

* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

REP. JEB HENSARLING

PAUL S. ATKINS

RICHARD H. NEIMAN

DAMON SILVERS


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(III) 

C O N T E N T S 

Page 

Executive Summary ................................................................................................. 1 

Section One: An Assessment of Foreclosure Mitigation Efforts after Six 

Months .................................................................................................................. 5 

A. Introduction: What Has Changed Since the Last Report ......................... 5 

B. March Checklist ........................................................................................... 23 

C. Program Evaluation .................................................................................... 32 

HARP .......................................................................................................... 35 

HAMP ......................................................................................................... 38 

Second Lien Program ................................................................................ 62 

Price Decline Protection ............................................................................ 65 

Foreclosure Alternatives Program ........................................................... 67 

HOPE for Homeowners ............................................................................. 69 

Other Federal Efforts Outside of TARP .................................................. 72 

State/Local/Private Sector Initiatives ...................................................... 73 

D. Big Picture Issues ........................................................................................ 78 

E. Conclusions and Recommendations ........................................................... 96 

Annexes to Section One: 

ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES 

ON NET PRESENT VALUE CALCULATIONS ........................................ 99 

ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE HOME AFFORDABLE MORTGAGE MODIFICATION PROGRAM ......................... 102 

ANNEX C: EXAMINATION OF TREASURY’S NPV MODEL ..................... 112 

Section Two: Additional Views ............................................................................... 114 

Richard Neiman ................................................................................................ 114 

Congressman Jeb Hensarling .......................................................................... 116 

Paul Atkins ....................................................................................................... 151 

Section Three: Correspondence with Treasury Update ........................................ 154 

Section Four: TARP Updates Since Last Report ................................................... 155 

Section Five: Oversight Activities .......................................................................... 169 

Section Six: About the Congressional Oversight Panel ........................................ 170 

Appendices: 

APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER RE: THE STRESS TESTS, DATED 

SEPTEMBER 15, 2009 ................................................................................. 171 


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* The Panel adopted this report with a 3–2 vote on October 8, 2009. Rep. Jeb Hensarling and 

Paul Atkins voted against the report. Additional views are available in Section Two of this report. 

OCTOBER OVERSIGHT REPORT 

OCTOBER 9, 2009.—Ordered to be printed 

EXECUTIVE SUMMARY * 

From July 2007 through August 2009, 1.8 million homes were 

lost to foreclosure and 5.2 million more foreclosures were started. 

One in eight mortgages is currently in foreclosure or default. Each 

month, an additional 250,000 foreclosures are initiated, resulting in 

direct investor losses that average more than $120,000. These investors include the American people. The combination of federal efforts to combat the financial crisis coupled with mortgage assistance programs makes the taxpayer the ultimate guarantor of a 

large portion of home mortgages. 

Each foreclosure further imposes direct costs on displaced owners 

and tenants, and indirect costs on cities and towns, and neighboring homeowners whose property values are driven down. High 

unemployment and depressed residential real estate values feed a 

foreclosure crisis that could pose an enormous obstacle to recovery. 

The Panel is specifically charged with conducting oversight of 

foreclosure mitigation efforts under the Emergency Economic Stabilization Act (EESA). In particular, the statute directs the Panel 

to assess the effectiveness of the programs from the standpoint of 

minimizing long-term costs and maximizing benefits for taxpayers. 

To that end, the Panel asked Professor Alan White of Valparaiso 

University to conduct a cost-benefit analysis. Although federal foreclosure mitigation programs are still getting off the ground, the 

benefits of foreclosure modification are likely to outweigh the cost 

to taxpayers. 

Since the Panel’s March report on the foreclosure crisis, Treasury 

has unveiled its Making Home Affordable (MHA) initiative, the federal government’s central tool to combat foreclosures. MHA consists 

of two primary programs. The Home Affordable Refinance Program 

(HARP) helps homeowners who are current on their mortgage payVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 E:\HR\OC\A671.XXX A671

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ments but owe more than their homes are worth, refinance into 

more stable, affordable loans. The larger Home Affordable Modification Program (HAMP) reduces monthly mortgage payments in 

order to help borrowers facing foreclosure keep their homes. As of 

September 1, 2009, HAMP facilitated 1,711 permanent mortgage 

modifications, with another 362,348 additional borrowers in a 

three-month trial stage. HARP has closed 95,729 refinancings, 

hopefully reducing the number of homeowners who may face foreclosure in the future. 

Treasury currently estimates it will spend $42.5 billion of the $50 billion in Troubled Asset Relief Program (TARP) funding for 

HAMP, which will support about 2 to 2.6 million modifications. If 

HAMP is successful in reducing investor losses, those savings 

should translate to improved recovery on other taxpayer investments. But if foreclosure starts continue their push toward 10 to 

12 million, as currently estimated, the remaining losses will be 

massive. 

The Panel has three concerns with the current approach. 

First is the problem of scope. Treasury hopes to prevent as many 

as 3 to 4 million of these foreclosures through HAMP, but there is 

reason to doubt whether the program will be able to achieve this 

goal. The program is limited to certain mortgage configurations. 

Many of the coming foreclosures are likely to be payment option 

adjustable rate mortgage (ARM) and interest-only loan resets, 

many of which will exceed the HAMP eligibility limits. HAMP was 

not designed to address foreclosures caused by unemployment, 

which now appears to be a central cause of nonpayment, further 

limiting the scope of the program. The foreclosure crisis has moved 

beyond subprime mortgages and into the prime mortgage market. 

It increasingly appears that HAMP is targeted at the housing crisis 

as it existed six months ago, rather than as it exists right now. 

The second problem is scale. The Panel recognizes that HAMP 

requires a significant infrastructure—both at Treasury and within 

participating mortgage servicers—that cannot be created overnight. 

Foreclosures continue every day as Treasury ramps up the program, with foreclosure starts outpacing new HAMP trial modifications at a rate of more than 2 to 1. Some homeowners who would 

have qualified for modifications lost their homes before the program could reach them. Treasury’s near-term target for HAMP— 

500,000 trial modifications by November 1, 2009—appears to be 

more attainable, but even if it is achieved, this may not be large 

enough to slow down the foreclosure crisis and its attendant impact 

on the economy. Once the program is fully operational, Treasury officials have stated that the goal is to modify 25,000 to 30,000 loans 

per week. Treasury’s own projections would mean that, in the best 

case, fewer than half of the predicted foreclosures would be avoided. 

The third problem is permanence. It is unclear whether the 

modifications actually put homeowners into long-term stable situations. Though still early in the HAMP program, only a very small 

proportion of trial modifications that were begun three or more 

months ago have converted into longer term modifications. In addition, HAMP modifications are often not permanent; for many 

homeowners, payments will rise after five years, which means that 

affordability can decline over time. Moreover, HAMP modifications 


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increase negative equity for many borrowers, which appears to be 

associated with increased rates of redefault. The result for many 

homeowners could be that foreclosure is delayed, not avoided. 

Whether current Treasury programs adequately address foreclosures also depends on the future condition of the housing market. Today, one-third of mortgages are underwater, and if housing 

prices continue to drop, some experts estimate that one-half of all 

mortgages will exceed the value of the homes they secure. Negative 

equity increases the likelihood that when these homeowners encounter other financial problems or when life events cause them to 

move, they may walk away from their homes and their over-sized 

mortgages. Others may be discouraged about paying off mortgages 

that greatly exceed the value of the property or give up their homes 

when they recognize that they would be ahead financially if they 

rented for a few years before buying again. If left unresolved, redefaults and future defaults related to negative equity could mean 

that the country experiences high foreclosure rates and housing 

market instability for years to come. 

While Treasury must consider programmatic changes to meet 

these challenges, so too must it adapt and improve the existing programs in several key ways. 

Given the issues facing MHA, Treasury must be fully transparent about the effectiveness of its programs, as well as the manner in which they operate. Although Treasury’s data collection has 

improved significantly since the Panel’s March report, it should be 

expanded, and the information should be made public. Treasury 

should release its Net Present Value (NPV) model, which is used 

to determine a homeowner’s eligibility for HAMP. The new denial 

codes should be implemented to provide borrowers with a specific 

reason for denying a modification and a clear path for appeal. Denial information should also be aggregated and reported to the public. 

Treasury should also make the loan modification process more 

uniform so that borrowers, servicers, and advocates can more easily 

navigate the system. Uniform documents and more uniform processes would benefit both lenders and borrowers, and would make 

the program easier to administer and oversee. Treasury should continue its efforts to streamline the system, including through development of a web portal as suggested in the Panel’s March report. 

The model for determining borrowers’ eligibility for the programs 

could be adapted to accommodate borrowers with arrearages and 

by incorporating more localized information when determining a 

mortgage loan’s value. 

In MHA, as in all of Treasury’s programs, accountability is paramount. Servicers who fail to comply with the program’s requirements should face strong consequences. Treasury must ensure that 

Freddie Mac, recently selected to oversee program compliance, has 

in place the proper processes to provide robust oversight. To further reinforce accountability, Treasury should continue to develop 

performance metrics and publicly report the results by lender or 

servicer. 

Rising unemployment, generally flat or even falling home prices, 

and impending mortgage rate resets threaten to cast millions more 

out of their homes, with devastating effects on families, local communities, and the broader economy. Ultimately, the American taxVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\A671.XXX A671

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payer will be forced to stand behind many of these mortgages. The 

Panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted. 


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1 U.S. Census Bureau, American Housing Survey for the United States: 2007 (2007) (Table 3– 

15. Mortgage Characteristics—Owner-Occupied Units) (online at www.census.gov/hhes/www/ 

housing/ahs/ahs07/tab3-15.pdf) (hereinafter ‘‘Census Housing Survey’’); U.S. Department of 

Housing and Urban Development, U.S. Housing Market Conditions, at 24 (Aug. 2009) (online 

at www.huduser.org/periodicals/ushmc/summer09/natldata.pdf). 2 HOPE NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales July 

2007—August 2009, at 1 (2009) (online at www.hopenow.com/industry-data/ 

HOPE%20NOW%20National%20Data%20July07%20to%20Aug09.pdf). (hereinafter ‘‘HOPE 

NOW, Workout Plans and Foreclosure Sales’’). 3Goldman Sachs Global ECS Research, Global Economics Paper No. 177, Home Prices and 

Credit Losses: Projections and Policy Options, at 16 (Jan. 13, 2009) (online at docs.google.com/ 

gview?a=v&q=cache%3AQlc0g0CzRpEJ%3Agarygreene.mediaroom.com%2Ffile.php%2F216% 

2FGlobal%2BPaper%2BNo%2B%2B177.pdf+Goldman+Sachs+Global+ECS+Research% 

2C+Global+Economics+Paper+No.+177%2C+Home+Prices+and+Credit+Losses%3A+Projections 

+and+Policy+Options&hl=en&gl=us&sig=AFQjCNGp3ZHbpbCgjpZh2l17Dv-BpFzCCg). 4Mortgage Bankers Association, National Delinquency Survey, at 1 (Aug. 2009) (hereinafter 

‘‘MBA National Delinquency Survey’’). Between 1996 and 2008, residential mortgage delinquency rates averaged an annual 4.8 percent surveyed. Id. 5 According to a July 2009 real estate agent survey, 14 percent of all home purchases stemmed 

from ‘‘short sales.’’ Campbell Surveys, Real Estate Agents Report on Home Purchases and Mortgages—2009 (online at www.campbellsurveys.com/AgentSummaryReports/ 

AgentSurveyReportSummary-June2009.pdf) (accessed Sept. 28, 2009) (hereinafter ‘‘Campbell 

Real Estate Agent Survey’’). 6The Center for Responsible Lending estimates that ‘‘in 2009 alone, foreclosures will cause 

69.5 million nearby homes to suffer price declines averaging $7,200 per home and resulting in 

a $502 billion total decline in property values.’’ Center for Responsible Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 69.5 Million Homes 

Lose $7,200 on Average (May 7, 2009) (online at www.responsiblelending.org/mortgage-lending/ 

research-analysis/soaring-spillover-3-09.pdf); John P. Harding et al., The Contagion Effect of 

Foreclosed Properties (July 13, 2009) (online at www.business.uconn.edu/Realestate/publications/ 

pdf%20documents/406%20contagionl080715.pdf). The Panel held a field hearing in Philadelphia, Pennsylvania on September 24, to examine foreclosure mitigation efforts under TARP. The 

Panel heard testimony from representatives of Treasury, the GSEs, community housing organizations, loan servicers, an economist, and Judge Annette M. Rizzo of the Philadelphia Court of 

Common Pleas. The Panel also heard statements from audience members, some of whom highContinued 

SECTION ONE: AN ASSESSMENT OF FORECLOSURE 

MITIGATION EFFORTS AFTER SIX MONTHS 

A. Introduction: What Has Changed Since the Last Report 

The United States is now in the third year of a foreclosure crisis 

unprecedented since the Great Depression, with no end in sight. Of 

the 75.6 million owner-occupied residential housing units in the 

United States, approximately 68 percent (51.6 million) of homeowners carry a mortgage to finance the purchase of their homes.1

Since 2007, 5.4 million of these homes have entered foreclosure, 

and 1.9 million have been sold in foreclosure.2 Absent a significant 

upturn in the broader economy and the housing market, another 

3.5 million homes could enter foreclosure by the end of 2010.3

Foreclosure rates are now nearly quadruple historic averages 

(see Figures 1 and 2). At the close of second quarter 2009, the 

Mortgage Bankers Association reported that 4.3 percent of mortgages, 15.05 percent of sub-prime loans, and 24.40 percent of subprime adjustable rate mortgages (ARMs) were currently in foreclosure. In addition, 9.24 percent of all residential mortgages were 

delinquent, a rate nearly double historic norms.4 Homeowners 

avoiding foreclosure, but still losing their homes in preforeclosure 

sales (short sales) or deeds-in-lieu (DIL) transactions further add to 

this crisis.5

Foreclosures, and in many respects the foreclosure alternatives 

mentioned above, have consequences beyond the families who lose 

their homes. They affect the neighbors who must live next to vacant homes and suffer decreased property values as a result.6 They 


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light this issue. Congressional Oversight Panel, Statements from the Audience, Philadelphia 

Field Hearing on Mortgage Foreclosures, at 154 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm). 7 An estimated 2 million children will lose their homes to foreclosure. ‘‘[C]hildren who experience excessive mobility, such as those impacted by the mortgage crisis, will suffer in school.’’ 

FirstFocus, The Impact of the Mortgage Crisis on Children (Apr. 30, 2008) (online at 

www.firstfocus.net/Download/HousingandChildrenFINAL.pdf) (citing Russell Rumberger, The 

Causes and Consequences of Student Mobility, Journal of Negro Education, Vol. 72, No. 1, at 

6–21, (2003)). 8 Congressional Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets (Aug. 11, 2009) (online at cop.senate.gov/documents/cop-081109-report.pdf); Laurie 

Kulikowski, Citi Execs Offer Optimism, Thin Details, TheStreet.com (Sept. 14, 2009) (online at 

www.thestreet.com/story/10598384/1/citi-execs-offer-optimism-thin-details.html) (Citigroup CEO 

Vikram Pandit ‘‘noted that two particularly troubling businesses for the company are the credit 

card and mortgage portfolios. ‘When we see those assets turn, I think you will start to see a 

change in the profitability of Citi.’ ’’). 9Lender Processing Services, LPS Releases Study That Demonstrates Impact of Foreclosure 

Sales on Home Prices (Sept. 3, 2009) (online at www.lpsvcs.com/NewsRoom/Pages/ 

20090903.aspx). 10 In April 2008, the Pew Charitable Trusts estimated that ‘‘10 states alone will lose a total 

of $6.6 billion in tax revenue in 2008 as a result of the foreclosure crisis, according to a 2007 

projection.’’ Pew Charitable Trusts, Defaulting on the Dream: States Respond to America’s Foreclosure Crisis (Apr. 2008) (online at www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Subprimelmortgages/defaultinglonltheldream.pdf) (hereinafter ‘‘Pew Default on the 

Dream Article’’). 11Federal Reserve Board of Governors, Remarks as Prepared for Delivery by Governor Randall 

S. Kroszner at NeighborWorks America Symposium (May 7, 2008) (online at 

www.federalreserve.gov/newsevents/speech/kroszner20080507a.htm) (‘‘[D]iscussion of the impact 

of foreclosures on neighborhoods and what can be done to mitigate those impacts is not only 

timely, it is essential to promoting local and regional economic recovery and growth. . . .’’). 

alter the composition of schools and religious institutions, which 

see children and congregants uprooted.7 They harm the foreclosing 

bank, depressing its balance sheet.8 They drive down housing 

prices by flooding the market with bank-owned properties.9 They 

negatively affect the economy as a whole by decreasing stability in 

banks, communities, and municipal and state tax bases.10 Successfully addressing the foreclosure crisis is key to reviving banks, reversing the fall in real estate prices, and promoting economic 

growth and stability.11


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13MBA National Delinquency Survey, supra note 4. 14 U.S. Department of Housing and Urban Development, Unequal Burden: Income and Racial 

Disparities in Subprime Lending in America (Apr. 2000) (online at www.huduser.org/Publications/pdf/unequallfull.pdf). 15MBA National Delinquency Survey, supra note 4. 16Michael Brush, Coming: A 3rd Wave of Foreclosures, MSN Money (June 3, 2009) (online at 

articles.moneycentral.msn.com/Investing/CompanyFocus/coming-a–3rd-wave-of-foreclosures.aspx). While speculators often took out loans with loan-to-value (LTV) ratios of 100 percent or more, other borrowers also utilized high LTV loans, such as borrowers in high cost areas, 

borrowers unable or unwilling to make a standard 20 percent down payment, and those utilizing 

cash-out refinancings. Some speculators may have made false assertions of primary residence 

or exaggerated income. 

1. Waves of Foreclosure 

There is still significant debate about the causes of foreclosure 

and the obstacles faced by foreclosure mitigation programs, but it 

is inescapable that a large number of American families are losing 

their homes. The foreclosure crisis began with home flippers, speculators, reach borrowers who purchased or refinanced properties 

with little money down and non-traditional mortgage products, and 

homeowners who were sold subprime refinancings.14 Increasingly, 

however, because of the severity of the recession, declines in home 

prices, and the persistence of job losses, foreclosures involve families who put down 10 or 20 percent and took out conventional, conforming fixed-rate mortgages to purchase or refinance homes that 

in normal market conditions would be within their means.15

a. Speculators 

The foreclosure crisis has gone in waves of defaults. While these 

waves are not entirely distinct, they are useful for understanding 

the course of the crisis and where it is headed. The first wave was 

centered around real estate speculators, who often borrowed 100 

percent or more of property values.16 When home sales slowed and 

then as property values began to drop, these speculators simply 

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17Michael LaCour-Little & Cynthia Holmes, Prepayment Penalties in Residential Mortgage 

Contracts: A Cost-Benefit Analysis, Housing Policy Debate (2008) (online at www.mi.vt.edu/data/ 

files/hpd%2019.4/little-holmeslweb.pdf). The authors’ literature review showed that most 

subprime loans carry a pre-payment penalty, and that ‘‘lenders and many economists view prepayment penalties as a mechanism to increase the predictability of cash flow from mortgage 

loans, thereby enhancing their value to investors and reducing the cost of credit to borrowers.’’ 

LaCour-Little and Holmes’ cost-benefit analysis found that prepayment penalties had significant 

economic value to lenders and investors, and that the ‘‘expected cost of prepayment penalties 

to borrowers is larger than the benefit, although this cost varies depending on the interest rate 

environment.’’ Id. at 668. For example, they found that ‘‘for a loan originated in 2002 with a 

two-year penalty period, . . . the average interest savings was $418, compared with an expected 

penalty cost of $3,923—an almost 10-fold difference.’’ Id. at 667. 

cause the carrying costs of the mortgages were greater than the appreciation they anticipated realizing on sale. 

b. Hybrid ARMs 

The second wave was caused by payment reset shock, primarily 

from the expiration of teaser rates on hybrid ARMs. Hybrid ARMs 

have a fixed low teaser interest rate for one to three years, and 

then an adjustable interest rate that is usually substantially higher. (These loans are often called 2/28s or 3/27s. The first number 

refers to the length of the teaser period in years, and the second 

number to the post-teaser term of the mortgage.) The teaser rates 

on hybrid ARMs made the mortgages for the teaser period quite affordable. 

Many hybrid ARMs were subprime loans, meaning that their 

post-teaser interest rate was substantially above-market. Most of 

these loans also carried stiff prepayment penalties, making refinancing expensive for the borrower.17 Sometimes this was because 

of the risk posed by the borrower. Sometimes the homeowner was 

willing to assume the high post-teaser rate in exchange for the 

below-market teaser, as the homeowner anticipated refinancing or 

selling the appreciated property before the teaser expired. To refinance a mortgage (or to sell the property without a loss) requires 

having sufficient equity in the property. Many hybrid ARMs were 

made at very high loan-to-value ratios, as both lenders and homeowners anticipated a rapid accumulation of home equity in the appreciating market of the housing bubble. When the market fell, 

however, these homeowners lacked the equity to refinance, and 

often faced prepayment penalties if they did, further decreasing 

their ability to refinance. Additionally, there are allegations that 

some prime borrowers were misled into taking out these mortgages. 

The result was that many homeowners with hybrid ARMs were 

unable to refinance out of their loans when the teaser period expired and had to start paying at the substantially higher post-teaser interest rate. Most of these loans had been underwritten based 

on an ability to pay only the teaser rate, and not the reset postteaser rate. In many cases, even the teaser rate underwriting was 

a stretch. When the rates reset, monthly payments on these mortgages often became unaffordable, resulting in defaults. 

The teaser rates on most of the hybrid ARMs made in 2005 and 

2006 have already expired, and low interest rates now mitigate 

some of the payment shock on the remaining resets. As a result, 

the defaults from this wave have already crested, although not all 

of the defaults have yet resulted in completed foreclosure sales. In 


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18First American CoreLogic, Summary of Second Quarter 2009 Negative Equity Data (Aug. 

13, 2009) (online at www.loanperformance.com/infocenter/library/ 

FACL%20Negative%20Equitylfinall081309.pdf) (hereinafter ‘‘CoreLogic Negative Equity 

Data’’). 19M.P. McQueen, Are Distressed Homes Worth It, Wall Street Journal (Oct. 1, 2009) (online 

at online.wsj.com/article/SB10001424052970203803904574430860271702396.html). 20 Id. 21 Congressional Oversight Panel, The Foreclosure Crisis: Working Toward a Solution, at 9 

(Mar. 6, 2009) (online at cop.senate.gov/documents/cop–030609–report.pdf) (hereinafter ‘‘COP 

March Oversight Report.’’) 

addition, some homeowners who have managed to make the postreset payments thus far may still default, elevating future foreclosure levels. 

c. Negative Equity 

A third and on-going wave of defaults has been related to negative equity. A homeowner with negative equity owes more in mortgage debt than his or her home is worth. Steep declines in housing 

prices below pre-crisis levels and the drag on neighborhood housing 

prices caused by nearby foreclosures have combined to force a 

growing number of homeowners into this category.18 In cases 

where homeowners have edged into negative equity, some may undertake home improvements to increase the sale price of their 

property or at least to offset further price erosion. Conversely, 

homeowners with substantial negative equity may reason that any 

money they invest in the property, including basic repairs, does not 

meaningfully add to their equity, but, rather, is value that accrues 

to the lender. Therefore, homeowners with substantial negative equity have diminished incentives to care for their properties, which 

further decreases property values.19 Until they regain positive equity, any money they invest in their properties, including basic repairs, is value that accrues to the lenders in terms of increased collateral value. Until that point, the homeowner becomes at best less 

underwater, although the homeowner will continue to get the consumption value of the property. Homeowners with negative equity 

thus have diminished incentives to care for their properties, which 

further decreases property values.20

Homeowners with negative equity are also constrained in their 

ability to move, absent abandoning the house to foreclosure. There 

is a wide range of inevitable life events that necessitate moves: the 

birth of children, illness, death, divorce, retirement, job loss, and 

new jobs. When one of these life events occurs, if a homeowner has 

negative equity, the primary choices are between forgoing the 

move, finding the cash to make up the negative equity, or losing 

the house in foreclosure. Many have chosen the foreclosure route. 

Unfortunately, as the Panel has previously observed, foreclosures 

push down the prices of nearby properties, which can in turn result 

in negative equity that begets more defaults and foreclosures.21 A 

negative feedback loop can develop between foreclosures and negative equity. To the extent that negative equity alone may produce 

foreclosures, progress in addressing loan affordability will have a 

limited impact on foreclosure rates over the long term. 

Negative equity may also be a factor (along with unemployment) 

contributing to historically low self-cure rates on defaulted mortgage loans. Historically, self-cure rates on mortgage defaults were 

fairly high; nearly half of all prime defaults would cure on their 


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22Fitch Ratings, Delinquency Cure Rates Worsening for U.S. Prime RMBS (Aug. 24, 2009) 

(hereinafter ‘‘Fitch Release’’). 23 CoreLogic Negative Equity Data, supra note 18. 24Deutsche Bank, Drowning in Debt—A Look at ‘‘Underwater’’ Homeowners, at 2 (Aug. 5, 

2009) (available online at www.sacbee.com/static/weblogs/reallestate/ 

Deutsche%20research%20on%20underwater%20mortgages%208-5-09.pdf) (hereinafter ‘‘Deutsche 

Bank Debt Report’’). 25 Id. 26 Henry Blodget, The Business Insider, Half of US Homeowners Will be Underwater by 2011 

(online at www.businessinsider.com/henry-blodget-half-of-us-homeowners-underwater-by-2011- 

2009-8#now-14-million-underwater-next-year-25-million-1) (accessed Oct. 5, 2009) (hereinafter 

‘‘Blodget Underwater Homeowners Report’’). 27The US Census Bureau estimates there to be 76 million home-owning households and approximately two-thirds of them (52 million) have mortgages. Census Housing Survey, supra note 

1. 

own. Currently, however, self-cure rates for all types of mortgage 

products are extremely low (Figure 3). A homeowner with negative 

equity may well decide that the financial belt-tightening necessary 

to cure a default simply is not worth it or not possible. The homeowner might rationally conclude that it is better for him or her to 

save the monthly payments and relocate to a less expensive rental. 

Estimates as to the number of households with negative equity 

vary, but they are all dire. Many estimates also exclude homeowners with minimal positive equity, borrowers who would likely 

take a loss upon a sale after paying brokers’ fees and taxes. Currently, around one-third of all residential mortgage borrowers have 

negative equity and another five percent have near negative equity.23 Deutsche Bank also estimated that 14 million homeowners 

had negative equity as of the first quarter of 2009,24 while Moody’s 

Economy.com placed the estimate at 15 million for that quarter.25

Looking forward, Moody’s projects that by 2011, some 18 million 

homeowners will have negative equity,26 while Deutsche Bank 

projects a figure of as many as 25 million, or one-half of all homeowners with a mortgage.27 The estimations vary by loan product 

type, but even for conventional, conforming prime mortgages, Deutsche Bank estimates that 41 percent of mortgagors will have negaVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00017 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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28Deutsche Bank Debt Report, supra note 24. 29Deutsche Bank Debt Report, supra note 24. 30 At the time, Dr. Keith Schwer testified that 50 percent of Nevada homeowners had negative 

mortgage equity. He also stated his belief that unemployment was likely to reach 10 percent 

in 2009. Congressional Oversight Panel, Testimony of Director of the University of Nevada, Las 

Vegas’ Center for Business and Economic Research, Dr. Keith Schwer, Clark County, NV: 

Ground Zero of the Housing and Financial Crises (Dec. 16, 2008) (online at cop.senate.gov/documents/transcript-121608-firsthearing.pdf). 

tive equity by the first quarter of 2011.28 As a comparison, Deutsche Bank estimates that 16 percent of borrowers with conventional, conforming prime mortgages currently have negative equity.29

The negative equity situation also varies significantly by state. 

(See Figure 4 below.) While some states like New York and Hawaii 

have low levels of negative equity, in others, like Nevada, Michigan, Arizona, Florida, California, Ohio, and Georgia, the situation 

is particularly grim, with anywhere from 30 percent to 59 percent 

of homeowners currently having little or no equity in their homes. 

As punctuated by expert testimony at the Panel’s Clark County 

field hearing in December 2008, such situations, when combined 

with a catalyst such as rising unemployment, pose ‘‘a great risk 

going forward if the economy does not pick up.’’ 30


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33 U.S. Securities and Exchange Commission, Countrywide Financial Corporation, Form 10– 

Q (June 30, 2008) (online at www.sec.gov/Archives/edgar/data/25191/000104746908009150/ 

a2187147z10–q.htm). 34 Inside Mortgage Finance Publications, Mortgage Market Statistical Annual, Volume I: The 

Primary Mortgage Market (2009). The dollar amount of these mortgages currently outstanding 

is unknown, but total originations from 2004–2007 were roughly equal to the total amount of 

mortgage debt outstanding at the end of 2007. It is therefore likely that even with some payoptions and interest only loans being refinanced in this time period, that they comprise about 

a fifth of the dollar amount of mortgages outstanding. Id. 35The problems associated with interest-only loans were the subject of a First American 

CoreLogic analysis commissioned by the New York Times. David Streitfeld, As an Exotic Mortgage Resets, Payments Skyrocket, New York Times (Sept. 8, 2009) (hereinafter ‘‘Streitfeld Mortgage Resets Article’’). 36Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 

Cornell L. Rev. 1073, 1086 (Nov. 2009) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1304744). 

d. Interest-Only and Payment-Option Mortgages 

Two additional, and simultaneous, waves of foreclosure still 

stand ahead of us. These are expected to come from payment 

shocks due to rate resets on two classes of non-traditional mortgage 

products: interest-only and payment option mortgages. Interestonly mortgages, whether fixed or adjustable rate, have an initial 

interest-only period, typically five, seven or ten years, during which 

the borrower’s required minimum monthly payments cover only interest, not principal. After the expiration of the interest-only period, the monthly payment rate resets with the principal amortized 

over the remaining loan terms (typically 20 to 25 years). The result 

is that after the interest-only period expires, the monthly payment 

may be significantly higher. 

Payment-option loans (virtually all ARMs keyed to an index rate) 

are similar. Payment-option ARMs permit the borrower to choose 

the level of monthly payment during the first five years of the loan. 

Typically there are four choices—(1) as if the loan were amortizing 

over 15 years; (2) as if the loan were amortizing over 30 years; (3) 

interest-only (non-amortizing); and (4) negatively amortizing. Payment-option ARMs generally have negative amortization limits. If 

there is too much negative amortization (usually 10–15 percent), 

then the loan will be recast into a fully amortizing ARM for the remaining term of the mortgage. If the negative amortization trigger 

is not tripped first, the loan will recast after five years into a fullyamortizing ARM with rates resetting every six to 12 months thereafter based on an index rate. In either case, the monthly payment 

will increase significantly. 

Historically, interest-only and payment-option loans were niche 

products, but they boomed during the housing bubble. Countrywide 

Financial, the nation’s largest mortgage lender, originated primarily payment-option ARMs during the bubble.33 Twenty percent 

of the dollar amount of mortgages originated between 2004 and 

2007 was either payment-option or interest-only.34 First American 

CoreLogic calculates that there are presently 2.8 million active interest-only home loans with an outstanding principal balance of 

$908 billion.35

Most interest-only and payment-option mortgages were not 

subprime loans.36 Instead, they were made to prime borrowers, but 

were often underwritten with reduced documentation, making 


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37 Credit Suisse, Research Report: Mortgage Liquidity du Jour: Underestimated No More (Mar. 

12, 2007) (online at www.scribd.com/doc/282277/Credit-Suisse-Report-Mortgage-Liquidity-duJour-Underestimated-No-More-March–2007) (hereinafter ‘‘CS Mortgage Liquidity Report’’). 38 Id. The conforming loan limit in certain high-cost areas was raised from $417,000 to $729,750 in 2008, which means that certain loans that would have been have previously been 

jumbo loans are now conforming and therefore eligible to be modified under the Home Affordability Modification Program (HAMP). Fannie Mae, Historical Conventional Loan Limits (July 

30, 2009) (online at www.fanniemae.com/aboutfm/pdf/historicalloanlimits.pdf). 39 CS Mortgage Liquidity Report, supra note 37. 40 If long term interest rates rise, there could be higher numbers of defaults on these adjustable mortgages. One factor causing the low rates is the Federal Reserve’s buying of GSE securities. As part of its monetary policy, the Federal Reserve purchases GSE securities, therefore 

putting money into the economy and keeping interest rates low. David A. Moss, A Concise Guide 

to Macroeconomics, at 36–37 (Harvard Business School Press 2007) (providing a general overview of economic policy). It is unclear whether this intervention on the part of the Federal Reserve can sustain low mortgage interest rates through the 2010–2012 period when the next 

round of resets will occur. In addition, continued low interest rates will not protect holders of 

Alt-A mortgages who have negative equity and no savings with which to cover the gap between 

home value and mortgage. Other factors affecting interest rates include the condition of the U.S. 

economy (interest rates rise as the demand for funds increases and fall when the demand for 

funds is low), inflationary or deflationary pressures, the involvement of foreign investors willing 

to lend money to the United States, and fluctuations in exchange rates. Id. at 34–39. 

them so-called ‘‘Alt-A’’ loans.37 Many were also jumbos, meaning 

that the original amount of the loan was greater than the Fannie 

Mae/Freddie Mac conforming loan limit.38 (See Figure 5.) This 

means, among other things, that many of these homeowners are 

not eligible for assistance from the Making Home Affordable Program because their mortgages are above the maximum eligible 

amount, although recent increases in the conforming loan limit for 

certain high-cost areas have expanded eligibility. 

Payment-option and interest-only mortgages are typically 5/1s, 

meaning that they have a rate reset after five years and additional 

resets once each following year. This means that mortgages of this 

type originated in 2004–2007 will be experiencing rate resets in 

2009–2012. (See Figure 6.) Assuming that long-term low interest 

rates continue, they will mitigate the payment reset shock on adjustable rate payment-option and interest-only mortgages.40 But 

there will inevitably be a sizeable payment shock simply from the 

kick-in of the full amortization period, and the homeowners may 


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41Streitfeld Mortgage Resets Article, supra note 35. 42Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS 

Mortgage Metrics Report, Second Quarter 2009, at 17 (Sept. 21, 2009) (online at 

files.ots.treas.gov/482078.pdf) (hereinafter ‘‘OCC and OTS Second Quarter Mortgage Report’’). 43Deutsche Bank, Global Economic Perspectives: Housing Turning Slowly, at 8 (Sept. 9, 2009). 44 Blodget Underwater Homeowners Report, supra note 26. 45 Henry Blodget, Business Insider, The ‘‘Coming Alt-A Mortgage Reset Bomb’’ Is A Myth (Aug. 

28, 2009) (online at www.businessinsider.com/henry-blodget-the-coming-alt-a-mortgage-resetbomb-is-a-myth-2009-8). 

not have the income or savings to cover the increase in payments, 

and if they have negative equity, will not be able to refinance into 

a more stable product.41

The impact on the number of foreclosures from recasts of interest-only and payment-option mortgages is likely to be at least as 

great as those from subprime hybrid ARMs, as shown by Figure 7, 

a graph from Credit Suisse showing anticipated rate resets for different types of mortgages. These peaks might be softened only because a large number of payment-option ARM mortgagors are already in default; the Office of the Comptroller of the Currency and 

the Office of Thrift Supervision (OCC/OTS) Mortgage Metrics, 

which cover two-thirds of the market, indicate that a quarter of all 

payment-option ARMs are seriously delinquent or in foreclosure,42

while Deutsche Bank indicates nearly 40 percent of outstanding 

payment-option ARMs are already 60+ days delinquent.43 Not coincidentally, more than 77 percent of payment-option ARMs have 

negative equity presently.44


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46 CS Mortgage Liquidity Report, supra note 37. 

e. Unemployment 

A fifth wave of foreclosures is now occurring, driven by unemployment. The current unemployment rate of 9.8 percent has more 

than doubled since the beginning of 2007, when foreclosure rates 

began to rise. (See Figure 8, below.) As Figure 9 shows, unemployment and foreclosure rates have generally been moving together 

since 2000. When a household loses an income, even temporarily, 

the likelihood of a mortgage default rises sharply. Some households 

are able to continue making payments out of a second income, from 

savings, or from unemployment insurance payments, but most 

mortgage lenders will not accept partial payments. When reduced 

household income is combined with negative equity, payment reset 

shock, or both, default is nearly inevitable. Moreover, continued unemployment makes self-cure of defaults much less likely. (See 

supra section 1(c)). 

Unemployment does not discriminate by mortgage product type. 

Defaults are now affecting the conventional prime market, jumbo 

prime, second lien, and home equity line of credit (HELOC) markets; the defaults are being driven by unemployment and negative 


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47MBA National Delinquency Survey, supra note 4. Lender Processing Services, Lender Processing Services’ August Mortgage Monitor Report Shows Increased Foreclosure Starts But Greater 

Loss Mitigation Success (Sept. 1, 2009) (online at www.lpsvcs.com/NewsRoom/Pages/ 

20090901.aspx); American Bankers Association, Consumer Delinquencies Rise Again in First 

Quarter 2009: Composite Ratio Inches Higher, Sets New Record (July 7, 2009) (online at 

www.aba.com/Press+Room/070709DelinquencyBulletin.htm). 48 U.S. Bureau of Labor Statistics, Household Data Historical, A–1 Employment Status of the 

Civilian Non-Institutional Population 16 Years and Over, 1970 to Date (online at ftp://ftp.bls.gov/ 

pub/suppl/empsit.cpseea1.txt) (accessed Oct. 7, 2009). 

equity, rather than payment reset shock. Prime defaults and foreclosures began to surge at the close of 2008 and have continued to 

rise into 2009.47 (See Figure 10, below.) Even as foreclosures seem 

to be abating at the bottom of the market, defaults are soaring at 

the top of the market. What began as a subprime problem is now 

truly a national mortgage problem. 


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49MBA National Delinquency Survey, supra note 4. 50Kate Berry, American Banker, Postponing the Day of Reckoning (Aug. 26, 2009) (online at 

www.financial-planning.com/news/postponing-reckoning-foreclosure–2663681–1.html). 

2. Mixed Signs in the Housing Market 

Recently, there have been some positive signs in the housing sector. First, although foreclosure inventories have grown, the pace of 

foreclosure initiations remained static from the fourth quarter of 

2008 to the first quarter of 2009 (1.37 percent in Q4 2008 and 1.36 

percent in Q1 2009). (See Figure 10.) It is hard, however, to read 

too much into a particular quarter’s data, and foreclosure starts remain at a near record level. The static level of foreclosure starts 

does not represent the impact of the Making Home Affordable Program, as that program was not announced until late in the quarter 

and did not become operational until April 2009. To the extent that 

the slowed foreclosure starts are not simply a data fluke, one tenable explanation is that we have reached a limit in the legal system’s capacity to handle foreclosure initiations. Other possible reasons include good-faith efforts by servicers to enter into modifications, foreclosure moratoria, servicer capacity issues, and the possibility that mortgage servicers are intentionally postponing foreclosure filings to delay loss recognition for accounting purposes.50


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51MBA National Delinquency Survey, supra note 4. 52Standard & Poor’s, Broad Improvement in Home Price According to the S&P/Case-Shiller 

Home Price Indices (Sept. 29, 2009) (online at www2.standardandpoors.com/spf/pdf/index/ 

CSHomePricelReleasel092955.pdf). 53 By July 2009, foreclosure starts for jumbo mortgages were happening at more than three 

times the rate they were occurring in January 2008. Lender Processing Services (LPS), Mortgage 

Monitor: August 2009 Mortgage Performance Observations, at 21 (online at www.lpsvcs.com/ 

NewsRoom/IndustryData/Documents/09–2009%20Mortgage%20Monitor/ 

LPS%20Mortgage%20Monitor%20Aug09%20(2).pdf). The jumbo market will likely continue to 

underperform without increased activity in the private-label secondary market or bank lending. 

This means that foreclosure rates for jumbo mortgages are likely to stay higher than normal. 

Because Fannie and Freddie will not buy jumbo loans, and with the sharp decline of the privatelabel securities market, banks have little appetite for originating jumbos. Consequently, jumbos 

have fallen from around 15 percent of the mortgage market to a mere 2.3 percent. The diminished availability of credit for the purchase of expensive homes has been one factor in the decline in prices at the top end of the market. PMI, The Housing & Mortgage Market Review (July 

2009) (online at www.pmi-us.com/PDF/jull09lpmilhammr.html). 54 Nationally, a 10.21 percent decline in home prices in the 12 months ending in April 2009 

masked a wide range of trends in the states. The largest price declines were in Nevada (26.05 

percent), Florida (23.15 percent), California (22.72 percent), and Arizona (20.51 percent). The 

largest price increases were in West Virginia (5.27 percent), New York (3.88 percent), and Louisiana (3.10 percent). Id. 55The new homebuyer tax credit will expire on December 1, 2009. Some observers are concerned about the effect of this expiration. Dina ElBoghdady, Clock Is Ticking for First-Home 

Buyers, Washington Post (Sept. 25, 2009) (online at www.washingtonpost.com/wp-dyn/content/ 

article/2009/09/24/AR2009092404936.html). 

A more encouraging sign is that housing price indices are flattening and even moving upward, although there is significant regional and market sector variation.52 Even as prices rebound for 

the lower end of the housing market, defaults are increasing on the 

top end,53 and some markets, like Phoenix and Las Vegas, continue 

to see precipitous housing price declines.54

Several factors appear to have contributed to the price increases. 

Low interest rates and the new first-time home buyer tax credit 

have combined with declines in housing prices to make home purchases more affordable.55 Given such policies, the National Association of Realtors Affordability Index is at a historic high. Moreover, 

the glut in housing supply is slackening as the stock of new homes 

for sale is running off rapidly. Yet foreclosures and distressed sales 

continue to keep inventory levels high, which pushes down prices. 

In recent months, one-third of home sales have been foreclosures 


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56Diana Golobay, NAR Offers Realtors Certification for Short Sales, Foreclosures, Housing 

Wire.com, (Aug. 26, 2009) (online at www.housingwire.com/2009/08/26/nar-offers-realtors-certification-for-short-sales-foreclosures/). 

or short sales.56 Moreover, when government support for the housing market is withdrawn, there will also necessarily be more downward pressure on home prices. 

While there are encouraging signs, it is hard to read them as 

anything more than a possible bottoming out of the housing market, rather than a true recovery. Housing price index futures show 

that the market does not expect any significant gain in home prices 

for a few years. U.S. housing market futures based on the CaseShiller Composite 10 Home Price Index are traded on the Chicago 

Mercantile Exchange. The Index is pegged to January 2000 as 100. 

At its peak in April 2006, the Index was at 226.23. In April 2009, 

the Index was at 150.34, and as of July 2009 the Index stood at 

155.85, down 32 percent from peak. The futures market anticipates 

the Index falling again to a low of 145.00 in August 2010 (down 

36 percent from the peak and up 45 percent for the decade) and 

still not climbing above 160 (down 29 percent from peak) even in 

November 2013, the latest date on which futures are presently 

being traded. (The Index stood at 160 in January 2009 and October 

2003.) In other words, the market anticipates that the national average housing price will rise only 4 percent from current levels over 

the next four or five years. (See Figure 11.) While this is certainly 

better than a continued plunge in housing prices, it also means 

that the market anticipates that in another four years prices will 

remain near their seriously depressed values at the beginning of 

this year. 

Even if prices do not fall further, the downward pressure of continued mass foreclosures may also prevent housing prices from risVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00027 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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57 CoreLogic Negative Equity Data, supra note 18. U.S. Census Bureau, American Housing 

Survey—Frequently Asked Questions (online at www.census.gov/hhes/www/housing/ahs/ 

ahsfaq.html) (accessed Oct. 7, 2009). More than 15.2 million mortgages were in negative equity 

as of June 30, 2009, out of 75.6 million owner-occupied residences, or about 20 percent. More 

than 17.7 million, or about 23 percent of owner-occupied residences, were in or near negative 

equity. Id. 58 EESA § § 2(2)(B), 109, 110, 125(b)(1)(iv). The HOPE for Homeowners Act of 2008, part of 

the Housing and Economic Recovery Act, Pub. L. No. 110–289, was intended to address the foreclosure crisis, but met with little success. The 2007 FHASecure program was also not adequate 

to solve the problem. U.S. Department of Housing and Urban Development, Bush Administration to Help Nearly One-Quarter of a Million Homeowners Refinance, Keep Their Homes (Aug. 

31, 2007) (online at www.hud.gov/news/release.cfm?content=pr07–123.cfm). 59 EESA § 2(2). 60 EESA § 103(3). 61 EESA § 110. 

ing significantly during the next few years. Stagnant housing 

prices would result in continued negative equity, setting the stage 

for foreclosures if payments become unaffordable or households 

need to move. Using housing price futures as an approximate guide 

to what might be expected in the housing market, many of the families that took out mortgages between 2003 and 2008—even those 

that put down 20 percent or more and took out standard conforming loans—will have negative equity in their homes into the 

foreseeable future. If prices remain stagnant during the next four 

years, then at least one in five of today’s U.S. homeowners, if not 

many more, will have negative equity in their homes, and nearly 

one in four of them will have so little equity in their homes that 

they will not be able to cover the costs of selling their properties 

without a loss. These scenarios could potentially unfold for approximately 15 million and 18 million homeowners, respectively.57

Ongoing negative equity presents a problem not just for current 

foreclosures, but for years into the future. This means more families losing their homes in foreclosure, more losses for lenders and 

investors in mortgage securitizations (including entities whose 

debts are guaranteed by the United States government, such as 

Fannie Mae and Freddie Mac), and more blighted properties for 

communities. It also means that true stabilization of the U.S. housing market will be delayed, and investors will have difficulty pricing housing investments because of uncertainty about default 

rates. 

It is against this largely discouraging backdrop that the Panel 

now turns to consideration of foreclosure mitigation efforts. 

3. Congressional Efforts to Stem the Tide of Foreclosures 

In response to the waves of foreclosures, Congress made foreclosure mitigation an explicit part of the Emergency Economic Stabilization Act (EESA), designed to address the nation’s economic 

crisis.58 Two of EESA’s stated goals are to ‘‘preserve homeownership’’ and ‘‘protect home values.’’ 59 In addition, EESA instructs the 

Treasury Secretary to take into consideration ‘‘the need to help 

families keep their homes and to stabilize communities.’’ 60 It also 

includes express directions to create mortgage modification programs.61

Prior to passage of EESA, Senator Christopher Dodd stated that 

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62Statement of Senator Christopher Dodd, Congressional Record, S10223 (Oct. 1, 2008) (online 

at frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname= 

2008lrecord&page=S10224&position=all). 63Statement of Senator Jay Rockefeller, Congressional Record, S10433 (Oct. 2, 2008). 64Statement of Senator Judd Gregg, Congressional Record, S10217 (Oct. 1, 2008). 65Statement of Senator Max Baucus, Congressional Record, S10224 (Oct. 1, 2008). 66Statement of Senator Jack Reed, Congressional Record, S10228 (Oct. 1, 2008). 67See Sections C1–C5 for a fuller description and discussion of the MHA programs. 

closures that could devastate millions of homeowners and have a 

devastating impact on our economy.’’ 62

Senator John Rockefeller added: 

[T]he bill provides relief to homeowners who have been 

caught up in the current mortgage crisis and are trying to 

save their homes. The bill starts to address the root of this 

financial crisis—foreclosures—not by giving a pass to individuals who took out loans they could not afford, but by allowing the Government to renegotiate mortgage terms. 

Two million more foreclosures are projected in the next 

year and it is in everyone’s interest to bring that number 

down, keeping more families in their homes and paying off 

their debts.63

Senator Judd Gregg continued, ‘‘We focused a lot of attention on 

making sure that we could keep people in their homes. We don’t 

want people foreclosed on.’’ 64 Senator Max Baucus explained that 

home ownership ‘‘is not an ancillary objective; it is inherent . . . 

to our efforts to resolve this economic crisis.’’ 65 Senator Jack Reed 

added that ‘‘[i]t is only through helping the homeowners that we 

will we get to the bottom of the crisis.’’ 66

In early March 2009, Treasury unveiled the Making Home Affordable (MHA) initiative, implementing the foreclosure mitigation 

provisions of EESA. MHA consists of two primary programs, the 

Home Affordable Refinance Program (HARP) and Home Affordable 

Modification Program (HAMP), along with several subprograms.67

B. March Checklist 

In its March 2009 report, the Panel set forth a checklist by which 

it would evaluate future foreclosure modification efforts, particularly MHA. The checklist had eight criteria: 

1. Will the plan result in modifications that create affordable 

monthly payments? 

2. Does the plan deal with negative equity? 

3. Does the plan address junior mortgages? 

4. Does the plan overcome obstacles in existing pooling and servicing agreements that may prevent modifications? 

5. Does the plan counteract mortgage servicer incentives not to 

engage in modifications? 

6. Does the plan provide adequate outreach to homeowners? 

7. Can the plan be scaled up quickly to deal with millions of 

mortgages? 

8. Will the plan have widespread participation by lenders and 

servicers? 

In general, what progress has MHA made in addressing each 

point? 


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68Payments on junior liens are not included in the calculation of 31 percent front-end DTI 

under the HAMP first lien program. Front-end DTI is calculated by summing principal, interest, 

taxes, insurance, homeowners association fees, and condominium fees, and dividing the total by 

monthly gross income. Payments on junior liens, along with monthly insurance premiums, payments on credit card debt, alimony, car lease payments, and monthly mortgage payments on 

second homes, are included in the calculation of back-end DTI. 69 U.S. Department of the Treasury, Making Home Affordable: Program Update, at 1 (Apr. 28, 

2009) (online at wwwfinancialstability.gov/docs/042809SecondLienFactSheet.pdf). (hereinafter 

‘‘MHAP Update’’). 

1. Affordability 

MHA has focused primarily on achieving affordable monthly 

mortgage payments through a standard for modifications of a 31 

percent debt-to-income (DTI) ratio. Under HAMP, the program offering the most information on outcomes, on average, borrowers’ 

DTI went from 47 percent before the modification to 31 percent 

after, a drop of 34 percent. This translates to a drop in the average 

payment from $1,554.14 to $955.65, an average savings of $598.49 

per month. 

The more affordable payments were achieved primarily through 

reductions in interest rates. On average, rates dropped from 7.58 

percent to 2.92 percent. This is noteworthy because under the program, interest rates begin to rise in five years, raising questions 

about the effect on affordability down the road. The program does 

not include specific features that address the unemployed. At the 

current time, MHA has made significant progress in providing 

more affordable payments for many. For further discussion of affordability issues, see Section C. 

2. Negative Equity 

While HARP and HAMP can help achieve affordable payments 

for homeowners with negative equity, neither of MHA’s two primary components was primarily designed to address underlying 

negative equity, although they do have features that address the 

issue. For example, HAMP does not have a maximum LTV, HARP 

allows refinancings of performing loans above 100 percent LTV 

(currently up to 125 percent), and in both programs principal reductions are permitted although not required. HAMP appears to increase negative equity modestly by capitalizing arrearages. Accordingly, average LTV ratios under HAMP increased from 134.13 percent to 136.61 percent. For further discussion of negative equity, 

see Section D. 

3. Second Liens 

The MHA initiative contains a second lien program to help overcome the obstacles to modification presented by junior liens. Second 

liens can interfere with the success of loan modification in several 

ways. First, unless the second lien is also modified, modifying the 

first lien may not reduce homeowners’ total monthly mortgage payments to an affordable level.68 Even if the homeowner can afford 

a modified first mortgage payment, a second unmodified mortgage 

payment can make the total monthly mortgage payments 

unaffordable, increasing redefault risk.69 Second, holders of primary mortgages are often hesitant to modify the mortgage if the 

second mortgage holder does not agree to re-subordinate the second 

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70 Id. The Panel addressed the complexities and challenges caused by junior liens in its March 

Oversight Report. The Panel noted that there are multiple mortgages on many properties, and 

that across a range of mortgage products, many second mortgages were originated entirely separately from the first mortgage and often without the knowledge of the first mortgagee. In addition, millions of homeowners took on second mortgages, often as home equity lines of credit. 

Since those debts also encumber the home, they must be dealt with in any viable refinancing 

effort. As the Panel stated, ‘‘The existence of junior mortgages also significantly complicates the 

refinancing process. Unless a junior mortgagee consents to subordination, the junior mortgage 

moves up in seniority upon refinancing. Out of the money junior mortgagees will consent to subordination only if they are paid. Thus, junior mortgages pose a serious holdup for refinancings, 

demanding a ransom in order to permit a refinancing to proceed.’’ COP March Oversight Report, 

supra note 21. 71 Id. Apgar Senate Testimony, infra note 183; House Committee on Financial Services, Subcommittee on Housing and Community Opportunity, Written Testimony of FHA Commissioner 

and U.S. Department of Housing and Urban Development Assistant Secretary for Housing, Dave 

Stevens, Progress of the Making Home Affordable Program: What Are the Outcomes for Homeowners and What Are the Obstacles to Success? (Sept. 9, 2009) (online at www.hud.gov/offices/ 

cir/test090909.cfm) (hereinafter ‘‘House Testimony of Dave Stevens’’). 72 A PSA is a document that actually creates a residential mortgage-backed securitized trust 

and establishes the obligations and authority of the servicer as well as some mandatory rules 

and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. 73 John Patrick Hunt, What Do Subprime Securitization Contracts Actually Say About Loan 

Modification?, at 10–11 (Mar. 25, 2009) (online at www.law.berkeley.edu/files/bclbe/ 

SubprimelSecuritizationlContractsl3.25.09.pdf) (hereinafter ‘‘Hunt Subprime Contracts 

Paper’’). 

cedural obstacle to modifying a first lien.70 Third, second liens also 

increase the negative equity that can contribute to subsequent redefaults. 

According to Treasury, as many as 50 percent of at-risk mortgages also have second liens.71 Therefore, it is critical that second 

liens be addressed as part of a comprehensive mortgage modification initiative. Treasury announced a second lien program as part 

of HAMP. The program will offer incentive payments and cost 

sharing arrangements to incentivize modification or extinguishment of second liens. 

At this time, the Second Lien Program is not yet up and running. 

While Treasury is currently in negotiations with lenders and 

servicers covering more than 80 percent of the second lien market, 

it does not yet have any signed participation contracts for the program. Given the prevalence of second liens and the significant obstacle they can present to successful loan modification, it is critical 

that Treasury get the program up and running expeditiously. For 

further discussion of the Second Lien Program, see Section C. 

4. PSA Obstacles 

The Panel’s March 2009 report identified contractual restrictions 

on loan modification in securitization pooling and servicing agreements (PSAs) 72 as a factor inhibiting loan modification efforts. It 

is unclear whether Treasury has the authority to abrogate these 

private contracts, although Treasury could, and already has, conditioned TARP assistance to financial institutions on particular mortgage modification terms. HAMP requires servicers to undertake 

reasonable attempts to have any contractual obligations revised, 

but HAMP otherwise defers to contractual requirements imposed 

on mortgage servicers by PSAs. 

Many PSAs are simply vague,73 however, virtually every PSA restricts the ability to stretch out a loan’s term; loan terms may not 

be extended beyond the final maturity date of the other loans in 

the pool. Securitized loans are typically all from the same annual 

vintage give or take a year, which means that the ability to stretch 


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74MHAP Update, supra note 69, at 3; Introduction of the Second Lien Modification Program 

(2MP) (Aug. 13, 2009) (online at www.hmpadmin.com/portal/docs/secondllien/sd0905.pdf) (hereinafter ‘‘SLMP Supplemental Directive’’). 75MHAP Update, supra note 69, at 3; Id. 76MHAP Update, supra note 69, at 3; Id. 77 U.S. Department of the Treasury, Supplemental Directive 09–04, Home Affordable Modification Program—Home Price Decline Protection Incentives (July 31, 2009) (online at 

www.financialstability.gov/docs/press/SupplementalDirective7–31–09.pdf) (hereinafter ‘‘HAMP 

Supplemental Directive’’). 

out terms is usually limited to a year at most. Not surprisingly, 

HAMP modifications stretch out terms by about a year on average. 

The inability to stretch out terms for more than a year in most 

cases has a serious impact on HAMP modifications. The inability 

to do meaningful term extensions likely means that some homeowners who could afford mortgages if longer term extensions were 

available are unable to qualify for HAMP modifications. For further 

discussion of PSAs, see Section C. 

5. Servicer Incentives 

HAMP provides financial incentives to mortgage servicers, borrowers and investors to modify residential mortgages. Under the 

first lien program, servicers receive an up-front fee of $1,000 for 

each completed modification. Second, servicers receive ‘‘Pay-forSuccess’’ fees of up to $1,000 each year for up to three years. These 

fees will be paid monthly and are predicated on the borrower staying current on the loan. Borrowers are eligible for ‘‘Pay-for-Performance Success Payments’’ of up to $1,000 each year for up to 

five years, as long as they stay current on their mortgage. This 

payment is applied directly to the principal of their mortgage. The 

‘‘Responsible Modification Incentive Payment’’ is a one-time bonus 

payment of $1,500 to the lender/investor and $500 to servicers that 

will be awarded for modifications on loans that are still performing. 

These incentive payments are in addition to the shared cost of reducing the DTI from 38 to 31 percent. 

The Second Lien Program also contains a ‘‘pay-for-success’’ structure similar to the first lien modification program. Servicers of junior liens can be paid $500 up-front for a successful modification and 

then receive successive payments of $250 per year for three years, 

provided that the modified first loan remains current.74 If borrowers remain current on their modified first loan, they can receive 

payments of up to $250 per year for as many as five years.75 This 

means that borrowers could receive as much as $1,250 for making 

payments on time. These borrower incentives would be directed at 

paying down the principal on the first mortgage.76 These incentive 

payments are in addition to the cost sharing available for modifying a second lien or the lump sum payment available for extinguishing a second lien. 

Under the Home Price Decline Protection Program (HPDP), investors may be eligible for incentive payments when the value of 

mortgages that they have modified declines. The incentive payments are calculated based on a Treasury formula incorporating an 

estimate of the projected home price decline over the next year 

based on changes in average local market home prices over the two 

previous quarters, the unpaid principal balance of the mortgage 

loan prior to HAMP modification, and the mark-to-market loan-tovalue ratio of the mortgage loan prior to HAMP modification.77 InVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00032 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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78 U.S. Department of the Treasury, Secretaries Geithner, Donovan Announce new Details of 

Making Home Affordable Program, Highlight Implementation Progress (May 14, 2009) (online 

at www.treas.gov/press/releases/tg131.htm) (hereinafter ‘‘Secretaries Geithner, Donovan Announcement’’). 79 U.S. Department of the Treasury, Making Home Affordable: Update: Foreclosure Alternatives and Home Price Decline Protection Incentives (May 14, 2009) (online at www.treas.gov/ 

press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf). (hereinafter ‘‘MHA May 

Update’’). 80 Id.; U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program 

Description, at 5–6 (Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/housinglfactlsheet.pdf) (hereinafter ‘‘MHA March Update’’). 81 Id. 82 Id. This amount is in addition to any funds the servicer may provide to the borrower. 83 Id. 84Pub. L. No. 111–22, § 202(b). 85Pub. L. No. 111–22, § 202(a)(11). 86 COP March Oversight Report, supra note 21. 

centives are to be paid on the first- and second-year anniversaries 

of the borrower’s first trial payment due date under HAMP.78

The Foreclosure Alternatives Program facilitates both short sales 

and deeds-in-lieu by providing incentive payments to borrowers, 

junior-lien holders, and servicers, similar in structure and amount 

to HAMP incentive payments. Servicers can receive incentive compensation of up to $1,000 for each successful completion of a short 

sale or deed-in-lieu.79 Borrowers are eligible for a payment of 

$1,500 in relocation expenses in order to effectuate short sales and 

deeds-in-lieu of foreclosure.80 The Short Sale Agreement, upon the 

servicer’s option, may also include a condition that the borrower 

agrees to ‘‘deed the property to the servicer in exchange for a release from the debt if the property does not sell the time specified 

in the Agreement or any extension thereof.’’ 81 In such cases, the 

borrower agrees to vacate the property within 30 days and, upon 

performance, receives $1,500 from Treasury to assist with relocation costs.82 Treasury has also agreed to share the cost of paying 

junior lien holders to release their claims by matching $1 for every 

$2 paid by investors, for a maximum total Treasury contribution of 

$1,000.83 Payments are made upon the successful completion of a 

short sale or deed-in-lieu. Although the HOPE for Homeowners 

program is an FHA program rather than a Treasury program, The 

Helping Families Save Their Homes Act added incentive payments 

to servicers, funded through HAMP.84 These incentive payments 

closely approximate MHA incentive payments.85

It is not yet clear whether these incentive payments are sufficient to overcome the ramp-up costs for servicers to adapt their 

business models, including hiring and training new employees and 

creating new infrastructure, as well as other possible incentives not 

to modify mortgages. For further discussion of servicer incentives, 

see Section C. 

6. Homeowner Outreach 

One key to maximizing the impact of a foreclosure mitigation 

program is putting financially distressed homeowners in contact 

with someone who can modify their mortgages.86 Treasury has 

made significant progress in this area. Treasury’s efforts include 

launching a website (www.MakingHomeAffordable.gov), establishing a call center for borrowers to reach HUD-approved housing 

counselors, and holding foreclosure prevention workshops and 


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87 House Financial Services Committee, Subcommittee on Housing and Community Opportunity, Testimony of U.S. Department of Treasury Assistant Secretary for Financial Institutions 

Michael S. Barr, Hearing on Stabilizing the Housing Market (Sept. 9, 2009) (online at 

www.makinghomeaffordable.gov/prl09092009.html) (hereinafter ‘‘Barr Hearing Testimony’’). 88 Congressional Oversight Panel, Written Testimony of U.S. Department of Treasury Senior 

Advisor Seth Wheeler, Philadelphia Field Hearing on Mortgage Foreclosures, at 8 (Sept. 24, 

2009) (online at cop.senate.gov/documents/testimony–092409–wheeler.pdf) (hereinafter ‘‘Wheeler 

Philadelphia Hearing Testimony’’). 89 HAMP statistics provided by Treasury to the Panel. 90 Congressional Oversight Panel, Coping With the Foreclosure Crisis: State and Local Efforts 

to Combat Foreclosures in Prince George’s County, Maryland (Feb. 27, 2009) (S. Hrg. 111–10). 91 U.S. Department of the Treasury, Federal, State Partners Announce Multi-Agency Crackdown Targeting Foreclosure Rescue Scams, Loan Modification Fraud (Apr. 6, 2009) (online at 

makinghomeaffordable.gov/prl040609.html). 

counselor training forums in cities with high foreclosure rates.87

From early May to late August, web hits on Treasury’s MHA 

website doubled from 17 million to 34 million. Self-assessment tools 

to determine eligibility for the programs under MHA are the foundation of the website. Additionally, other resources on the website, 

such as the ‘‘Look Up Your Loan’’ tool, which allows a borrower to 

see if their mortgage is owned by Fannie Mae or Freddie Mac, 

serve as important resources in navigating the process. The website 

also offers numerous outlets for borrower education and homeowner outreach. At the Panel’s foreclosure mitigation field hearing, 

Seth Wheeler, senior advisor at the Treasury Department also 

highlighted the continuing efforts to enhance the capabilities of the 

HOPE Hotline, the informational call center, to meet the needs of 

the escalating number of borrowers participating in MHA programs.88

Lenders and servicers have also undertaken a campaign to contact distressed borrowers, as well as those whose loans are at risk 

of default. To date, 1,883,108 letter requests for financial information have been sent to borrowers.89 While this number still falls far 

short of Treasury’s announced availability to three to four million 

borrowers, considerable progress can be measured and observed in 

the first few months of MHA’s operation. 

Outreach to homeowners must be considered not just in terms of 

quantity, but also in terms of quality. Servicers must provide effective outreach. Outreach should include more than robo-calls and 

form letters, and should be provided in plain language that is accessible to all borrowers. Borrowers in financial distress are likely 

overwhelmed and intimidated, and might not be eager to pay close 

attention to the entreaties of their creditors. Partnership with community groups and borrower counseling groups is an important element of effective outreach. 

Another important consideration in Treasury’s outreach strategy 

involves the role that well-publicized cases of mortgage modification fraud have had in discouraging homeowners from participating 

in MHA.90 Although lenders and servicers have sent nearly 1.9 million request letters to distressed borrowers (as mentioned above), 

it is not clear how many leery recipients avoided opening these letters, or overlooked such responsible letters in the deluge of other 

fraudulent offers and notices. In a recent study by the Federal 

Trade Commission (FTC) of online and print advertising for mortgage foreclosure rescue operations, approximately 71 different companies were found to be running suspicious ads.91 To combat these 

scams and alleviate concerns for skeptical homeowners, the AdminVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00034 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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92Participants include: Treasury, the U.S. Department of Justice (DOJ), HUD, FTC, and the 

Attorney General of Illinois. Id. 93Wheeler Philadelphia Hearing Testimony, supra note 88. 94 Congressional Oversight Panel, Questions for U.S. Department of the Treasury Assistant 

Secretary for Financial Stability and Counselor to the Secretary, Herb Allison, at 7 (June 24, 

2009) (hereinafter ‘‘Allison COP Testimony’’). 

istration has started a coordinated multi-agency and federal/state 

effort, which includes the Department of the Treasury, the Department of Justice, the Department of Housing and Urban Development, the Federal Trade Commission, and state Attorneys General 

to coordinate investigative efforts, alert financial institutions and 

consumers to emerging schemes, and enhance enforcement actions.92 Seth Wheeler said in written testimony to the Panel in 

September that the federal government has ‘‘put scammers on notice that we will not stand by while they prey on homeowners seeking help under our program.’’ 93 These efforts must continue. 

Treasury could also consider taking the additional step of sending request letters to homeowners directly from either the Treasury 

Secretary or the President in order to bring further clarity and authenticity to the process. 

7. Scaled Up Quickly 

MHA was announced in February 2009, but the program’s details were not available until March 2009, and the first trial HAMP 

modifications did not begin until April 2009. As a result, there 

were no permanent HAMP modifications until July 2009. In any 

event, the scale up period should now be over. 

The ability of Treasury and servicers to meet demand adequately 

for the program is likely to have an effect on the overall borrower 

perception of the program, which could in turn impact the program’s effectiveness in future outreach to homeowners. Borrowers 

will not want to seek assistance from the program if they view it 

as ineffective or unresponsive. Therefore, the success of borrower 

outreach is closely linked to servicer capacity and the ability to 

scale up quickly. Treasury’s efforts to press ahead with massive 

borrower outreach without first addressing servicer capacity issues 

could hurt the public perception and credibility of the program. 

In response to a question from the Panel on this point, Treasury 

Assistant for Financial Stability Secretary Herbert Allison indicated that Treasury Secretary Timothy Geithner and Housing and 

Urban Development Secretary Shaun Donovan have ‘‘called on 

servicers to take specific steps to increase capacity, including adding more staff than previously planned, expanding call centers beyond their current size, providing an escalation path for borrowers 

dissatisfied with the service they have received, bolstering training 

of representatives, developing extra on-line tools, and sending additional mailings to borrowers who may be eligible for the program.’’ 94 It is critical that the efforts to increase capacity keep pace 

with the efforts to reach out to borrowers. 

8. Widespread Participation 

Widespread servicer participation is an essential part of a successful foreclosure mitigation program. Servicers of Fannie Mae 


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95 U.S. Department of the Treasury, Making Home Affordable Program, Servicer Performance 

Report through August 2009 (Oct. 8, 2009) (online at www.treas.gov/press/releases/docs/ 

MHA%20Public%20100809%20Final.pdf) (hereinafter ‘‘Servicer Performance Report’’). 96 U.S. Department of the Treasury, Fact Sheet Financial Stability Plan (February 9, 2009) 

(online at www.financialstability.gov/docs/fact-sheet.pdf) (hereinafter ‘‘Financial Stability Plan 

Fact Sheet’’). 97Servicer Performance Report, supra note 95. 98Government Accountability Office, Troubled Asset Relief Program: Treasury Actions Needed 

to Make the Home Affordable Modification Program More Transparent and Accountable, at 32 

(July 2009) (online at www.gao.gov/new.items/d09837.pdf) (hereinafter ‘‘GAO HAMP Report’’). 

and Freddie Mac mortgages are required to participate in HARP, 

covering approximately 2,300 servicers.95

HAMP has both a voluntary and mandatory participation component for lenders/servicers. Any participants in TARP programs initiated after February 2, 2009, are required to take part in mortgage modification programs consistent with Treasury standards.96

Since the Capital Purchase Program (CPP), the primary TARP vehicle for bank assistance, was established prior to this date, the 

majority of financial institutions are not obliged to participate. 

However, servicers of Fannie Mae or Freddie Mac mortgages are 

obligated to participate in HAMP for their Fannie Mae and Freddie 

Mac mortgages. 

On the voluntary servicer participation side, Treasury estimates 

that 85 percent of HAMP-eligible mortgage debt is serviced by participating servicers.97 This comes close to Treasury’s projection that 

HAMP will ultimately cover 90 percent of the potential loan population.98 Through October 6, 2009, 63 servicers are participating in 

the program. 

The Second Lien Program is not yet operational. According to 

testimony by Assistant Secretary Allison, Treasury is currently negotiating participation contracts with servicers covering more than 

80 percent of the second lien market. For further discussion of 

servicer participation issues, see Section C. 

9. Recommendation on Data 

In its March 2009 Report, the Panel noted a distressingly poor 

state of knowledge among federal regulatory agencies about the 

mortgage market, that constituted a full-blown regulatory intelligence failure. In particular, the Panel was concerned about the 

federal government’s limited knowledge regarding loan performance and loss mitigation efforts and foreclosure. These failures of 

financial intelligence collection and analysis have only been partially remedied; major gaps in coverage still exist. 

Treasury’s major advance in this area has been to start collecting 

a range of data on HAMP modifications, both those in trial periods 

and those made permanent. The data permit examination of the 

characteristics of the borrowers and property, the terms of the 

modification, the servicer involved, and payments to the servicer. 

The development of a robust database on HAMP modifications is 

an important step forward in addressing the foreclosure crisis. 

There are important limitations to these new data. Unlike 

HAMP, other MHA programs collect much more limited data. 

There are also two notable gaps in the HAMP modification data. 

First, the data exist only on loans for which a trial modification has 

commenced. As a result, the Panel lacks data on loans for which 

trial modifications have been denied, much less the performance of 


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99Deborah Goldberg, director of the Hurricane Relief Project at the National Fair Housing Alliance, made a similar point in her testimony during the Panel’s hearing on mortgage foreclosures in Philadelphia in September. Congressional Oversight Panel, Testimony of Director of 

the National Fair Housing Alliance’s Hurricane Relief Project, Deborah Goldberg, Philadelphia 

Field Hearing on Mortgage Foreclosures, at 78 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing–092409–philadelphia.cfm) (hereinafter ‘‘Goldberg Philadelphia Hearing Testimony’’). Ms. Goldberg urged improvements in ‘‘data that are collected and made public about 

how servicers are performing under the program’’ and noted that her organization ‘‘think[s] it’s 

very critical that loan level data, including information on the race, gender, and national origin 

of the borrower who’s applying for the HAMP modification be made available to the public and 

that [sic] be done at a geographic level that makes it possible for public officials, community 

organizations, individual borrowers, and the public at large to understand how the program is 

working in their communities, to be able to identify places where it may not be working equitably or efficiently and to be able to intervene to change that.’’ Id. 100 12 U.S.C. 1701p–1 (1983). 

the entire universe of loans. Further, the Panel lacks data for the 

programs not yet online, such as the Second Lien Program and 

Foreclosure Alternatives Program. This information is crucial for 

understanding the changing nature of the foreclosure crisis and 

crafting informed, targeted policy responses. Second, the data collected by Treasury are largely limited to HAMP modifications, so 

it does not allow easy integration with data on other modification 

programs. OCC/OTS have produced quarterly reports on mortgage 

modification efforts for 14 of the largest bank/thrift-servicers under 

their supervision, and this data includes HAMP and non-HAMP 

modifications, but it covers only 64 percent of the market. 

While data collection has improved, further improvement is necessary. Moreover, improved data collection alone is insufficient. 

While the Panel assumes that Treasury has engaged in its own internal analysis of HAMP data, Treasury has yet to produce any 

public detailed analysis of the HAMP data. The releases to date 

have contained only minimal information about the number of 

modifications and the level of servicer participation. The Panel is 

hopeful that more informative data releases will be forthcoming on 

a regular basis. The Panel is also hopeful that Treasury will enable 

outside parties to have easy access to the data; analysis of such 

government-produced data by academics and non-profits has 

helped improve countless government programs in the past, and 

there is no reason to believe HAMP is different. While the Panel 

recognizes that there are privacy concerns, the level of personally 

identifiable data could easily be limited to that found in Home 

Mortgage Disclosure Act (HMDA) data releases. 

In sum, Treasury has made progress on data collection, but because the data covers only loans that have been approved for a specific modification program, essential information about the foreclosure crisis remains unknown. Instead, the government is forced 

to continue to rely on imperfect private data sources. Better consumer finance intelligence gathering and analysis remains a critical gap in formulating policy responses.99

This is not the first instance in which the need for such data has 

been acknowledged. In response to the savings and loan crisis in 

the 1980s, Congress directed the Department of Housing and 

Urban Development (HUD) to produce national mortgage default 

and foreclosure reports.100 It appears that HUD never produced 

any such reports, and Congress eliminated the reporting requirement, along with many other agency reporting requirements in 


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101Federal Reports Elimination and Sunset Act of 1995 § 3003, Pub. L. No. 104–66. 102 U.S. Department of the Treasury, Making Home Affordable Summary of Guidelines (Mar. 

4, 2009) (online at www.treas.gov/press/releases/reports/guidelineslsummary.pdf) (hereinafter 

‘‘MHA Summary Guidelines’’). 

1995.101 Data collection has improved, but is still lacking in critical 

respects. 

Panel’s March checklist Progress of MHA after six months 

Will the plan result in modifications that create affordable 

monthly payments?.

Significant progress; some areas not addressed, including 

unemployment-related foreclosures 

Does the plan deal with negative equity? ................................ Not addressed in a substantial way 

Does the plan address junior mortgages? ............................... Unclear—program announced but not yet running 

Does the plan overcome obstacles in existing pooling and 

servicing agreements that may prevent modifications?.

Unclear 

Does the plan counteract mortgage servicer incentives not to 

engage in modifications?.

Unclear—incentive structures included, but payments just 

beginning 

Does the plan provide adequate outreach to homeowners? .... Significant progress; more needed 

Can the plan be scaled up quickly to deal with millions of 

mortgages?.

Some progress; more needed 

Will the plan have widespread participation by lenders and 

servicers?.

Significant progress 

Is data collection sufficient to ensure the smooth and efficient functioning of the mortgage market and prevent future crisis?.

Significant progress; more needed 

C. Program Evaluation 

MHA represents Treasury’s primary foreclosure mitigation effort. 

MHA’s main programs are HARP and HAMP. HAMP includes the 

Second Lien Program, the Home Price Decline Protection Program 

(HPDP), and the Foreclosure Alternatives Program (FAP). Treasury estimates that assistance under HARP and HAMP will be offered to as many as seven to nine million homeowners.102 Treasury 

has designed each program and subprogram to help in that effort, 

and in announcing each initiative outlined the specific ways in 

which it would help prevent foreclosures. In evaluating the programs, this section considers the goals articulated by Treasury, the 

programs’ design, the results achieved to date in light of the relatively early stages of most programs, and whether or not the programs are well designed to meet the stated objectives. Adequacy of 

the goals is considered separately in the subsequent section. 


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103MHA Summary Guidelines, supra note 102. 104Fannie Mae, Home Affordable Refinance FAQs, at 4 (July 24, 2009) (online at 

www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf) (hereinafter ‘‘Fannie Mae FAQs’’). 105Senate Banking, Housing and Urban Affairs Committee, Testimony of U.S. Department of 

Treasury Assistant Secretary Herb Allison, Preserving Homeownership: Progress Needed to Prevent Foreclosures, 111th Cong. (July 16, 2009) (hereinafter ‘‘Allison Senate Testimony’’). 106 U.S. Department of the Treasury, Making Home Affordable Summary of Guidelines (Mar. 

4, 2009) (online at www.treas.gov/press/releases/reports/guidelineslsummary.pdf). HARP is not 

limited to above 80 percent LTV refinancings. It is unclear, however, what would distinguish 

a HARP refinancing from a regular GSE refinancing if the LTV were under 80 percent. Therefore, the Panel is only counting GSE refinancings with LTV over 80 percent as HARP 

refinancings. The Panel emphasizes that regular course GSE refinancings are not counted as 

part of HARP in this report. 107MHA Summary Guidelines, supra note 102. 108Servicer Performance Report, supra note 95. 109Servicer Performance Report, supra note 95. 

1. HARP 

HARP was announced on March 4, 2009, and permits homeowners with current, owner-occupied, government sponsored enterprise (GSE)-guaranteed mortgages to refinance into a GSE-eligible 

mortgage.103 The program does not utilize TARP funding. At its 

core, HARP is aimed at providing low-cost refinancing to homeowners who have been negatively affected by the decline in home 

values. Unlike other portions of MHA, HARP is not directed toward 

homeowners who are behind on their mortgage payments. Instead, 

the program is intended for homeowners who are current on their 

mortgage payments, have not been delinquent by more than thirty 

days within the previous year and are not struggling to make their 

monthly payments.104 Assistant Secretary Allison explained that 

the program ‘‘helps homeowners who are unable to benefit from the 

low interest rates available today because price declines have left 

them with insufficient equity in their homes.’’ 105 Treasury estimates that HARP could assist between four to five million homeowners who would otherwise be unable to refinance because their 

homes have lost value, pushing their current loan-to-value ratios 

above 80 percent.106

Other than the requirement that the borrower is current on 

monthly mortgage payments, the program has relatively few restrictive requirements. All mortgages that are owned or guaranteed 

by either Fannie Mae or Freddie Mac may participate in HARP.107

Existing jumbo-conforming and high-balance loans may qualify for 

the program, in part because of higher temporary loan limits. However, there is not a cash-out component to the HARP refinance and 

as such, subordinated financing may not be paid with the proceeds 

from the refinancing. Finally, Treasury promotes the relative ease 

of this program since participants’ records are centralized with either Fannie Mae or Freddie Mac; as such, documentation requirements should be less onerous than other comparable programs.108

Servicers of Fannie Mae and Freddie Mac mortgages are required to participate in the program, covering approximately 2,300 

servicers.109

Initially, borrowers were eligible to refinance if they owed up to 

105 percent of the present value of their single-family residence. In 

response to the continued decline of home values, on July 1, 2009, 

Treasury announced an expansion of the program that included 

borrowers who owe up to 125 percent of the value of their homes. 

This expands the universe of homeowners potentially eligible for 


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110Fannie Mae FAQs, supra note 104. 

refinancing, and means that HARP could, in theory, assist more 

than the four to five million homeowners originally estimated. 

Fannie Mae and Freddie Mac will begin accepting deliveries of 

these refinanced loans on September 1 and October 1, respectively. 

Generally, the GSEs are prohibited from purchasing mortgages 

with loan-to-value (LTV) ratios above 80 percent unless there was 

private mortgage insurance coverage on the loan. HARP 

refinancings do not require the borrower to obtain additional private mortgage insurance coverage. If there was no coverage on the 

original loan, coverage is not required, and if there was coverage 

on the original loan, additional coverage is not required. 

There are two distinct borrower benefit requirements under 

HARP; the refinancing needs to satisfy only one of them to qualify. 

The first states that the requirement is met if the borrower’s mortgage payment is decreased. In this circumstance, it is acceptable 

for the borrower to extend the term of the loan or change the mortgage from a fixed-rate loan to an adjustable-rate. The second borrower benefit standard states that if the homeowner’s monthly payment remains flat, or increases, then the borrower must be moving 

to ‘‘a more stable mortgage product.’’ 110 Under the program guidelines, a transition out of interest-only and adjustable-rate mortgages would qualify as comparatively stable. Also, a shift to a 

shorter-term loan that would accelerate the amortization of equity 

would qualify. The borrower may not extend the term of the loan 

or switch to an ARM from a fixed-rate in order to be compliant 

under the second borrower benefit requirement. 

HARP refinancings permit eligible borrowers to refinance their 

mortgages despite negative equity. HARP does not dictate the 

terms of the refinanced mortgage other than prohibiting prepayment penalties and balloon payments. A refinanced mortgage could 

thus be fixed or adjustable rate, and at any interest rate. HARP 

refinancings aim for both affordability and sustainability, but 

sometimes the two goals will be at loggerheads. For example, borrowers with non-traditional mortgages that had introductory periods with low monthly payments, such as hybrid ARMs, interestonly mortgages, and payment-option ARMs, might refinance into 

fixed-rate, fully-amortizing mortgages. The shift from a non-traditional mortgage to a traditional fixed-rate mortgage may result in 

an increase in the borrower’s monthly payments, but it will improve the long-term sustainability of the loan. The assumption underlying HARP is that homeowners will refinance if they believe it 

makes their mortgage more affordable. 

Treasury was unable to provide the Panel with complete data on 

HARP refinancing applications. Application data was only available 

for one GSE. The only complete data available was on the total 

number of closed approved refinancings. 95,729 refinancings have 

been approved as of September 1, 2009. HARP has thus covered 

only 2 percent of the four to five million homeowners Treasury 

originally estimated would be eligible when the program was limited to loans with less than 105 percent LTV ratios. Moreover, for 

the one GSE for which Treasury provided data, HARP refinancing 


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111 It is not clear why HARP refinancing application data is unavailable for the other GSE. 

In response to Panel requests, Treasury provided a broad range of data related to the mortgage 

market. Although not all of the data are confidential, portions are. These data are cited in numerous places throughout the report, and are hereinafter cited as ‘‘Treasury Mortgage Market 

Data.’’ 

applications have fallen every month since May 2009.111 It is not 

clear why there have been relatively few HARP refinancings; beyond HARP’s eligibility requirements, one concern is that liquidityconstrained homeowners are unable to afford points and closing 

costs on the refinancings. 

If HARP ultimately reaches Treasury’s stated availability of four 

to five million borrower refinancings it will have a sizeable impact 

on the foreclosure problem. Moreover, if housing prices increase 

then more borrowers with higher levels of negative equity will 

come within HARP’s expanded LTV limit and thereby become eligible for HARP refinancing to lower more affordable rates and safer 

products. 

The decline in applications, however, coupled with the low total 

number of refinancings raises serious doubts about whether HARP 

will ever come close to assisting a significant percentage of the four 

to five million homeowners. Moreover, if interest rates go up during 

the duration of the HARP program, as will likely happen should 

housing prices stabilize, HARP refinancings will become relatively 

less appealing to many eligible homeowners. 

It is important to emphasize that although HARP allows underwater homeowners to refinance to a more affordable and/or sustainable loan despite negative equity, HARP does not cure negative equity; instead, it is focused on removing negative equity as an obstacle to improving affordability, permitting a homeowner with negative equity to continue to make payments. The majority of HARP 

refinancings, however, are loans with less than 90 percent LTV ratios. (See Figure 13.) For these loans, LTV ratios would not normally be an obstacle to refinancing. Therefore, the only reason 

these loans should have been refinanced through HARP, rather 

than through private channels, would have been if refinancing 

were impeded by other factors, such as curtailed income. Thus, 

while HARP underwriting standards allow not only for higher LTV 

refinancings without additional private mortgage insurance (PMI) 

coverage, they might also permit refinancings with reduced income 

levels. 


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112Treasury Mortgage Market Data, supra note 111. 113GAO has questioned whether these estimations may be overly optimistic due to key assumptions, such as borrower response rate and participation rate. GAO HAMP Report, supra 

note 98. 

2. HAMP 

HAMP, also announced on March 4, 2009, is another sub-program of MHA. HAMP is funded by a government commitment of 

$75 billion, which is comprised of $50 billion of TARP funds and 

$25 billion from the Housing and Economic Recovery Act (HERA). 

The $50 billion of TARP funds is directed toward modifying private-label mortgages, and the $25 billion from the Housing and 

Economic Recovery Act is dedicated to the modification of Fannie 

Mae and Freddie Mac mortgages. Treasury has estimated that 

HAMP will help three to four million homeowners.113 The goal of 

HAMP is to create a partnership between the government and private institutions in order to reduce borrowers’ gross monthly payments to an affordable level. The level has been set at 31 percent 

of the borrower’s gross monthly income. Lenders are expected to reduce payments to 38 percent of the borrower’s monthly income. The 

government and the private lender then share the burden equally 

of reducing the borrower’s monthly payment to 31 percent of his or 

her gross monthly income. In addition to providing monetary incentives for the modification of at-risk mortgages, HAMP standardizes 

loan modification guidelines in order to create an industry paradigm. 

a. Lender and Servicer Participation 

HAMP has both a voluntary and mandatory participation component for lenders/servicers. On February 9, 2009, the Administration 

announced that as part of its Financial Stability Plan, any participants in TARP programs initiated after that date would be required to take part in mortgage modification programs consistent 


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114Financial Stability Plan Fact Sheet, supra note 96. 115Servicer Performance Report, supra note 95. 116GAO HAMP Report, supra note 98, at 32. Citing an analysis of unnamed OFS documents 

that the Panel has been unable to recover as of the release of this report. 117 As discussed in section B5, infra, servicers receive incentives to participate. Servicers have 

until December 31, 2009 to opt in to the program. U.S. Department of Treasury, Borrower Frequently Asked Questions (July 16, 2009) (online at makinghomeaffordable.gov/borrowerfaqs.html). 118Servicer Performance Report, supra note 95. 119Treasury has designated Fannie Mae as its financial agent in connection with HAMP. 

Making Home Affordable Administrative Website for Servicers, Commitment to Purchase Financial Instrument and Servicer Participation Agreement, at 1 (online at www.hmpadmin.com/portal/docs/hamplservicer/servicerparticipationagreement.pdf) (accessed Oct. 7, 2009). 120Treasury explained that: 

Efforts include one-on-one meetings and presentations during which Fannie Mae personnel 

outline the program benefits, as well as requirements. Subsequent to the introductory meeting, 

members of the Fannie Mae HAMP team are assigned to serve as points of contact for prospective servicers, providing more detailed information, answering questions, and keeping in touch 

on a regular basis. We expect that this approach will result in the addition of more servicers 

to the program in the coming days and weeks. Fannie Mae also provides program training and 

tools designed to make servicer implementation as efficient as possible. Since the HAMP was 

announced, more than 300 servicers have downloaded packages from the Fannie Mae website. 

Fannie Mae will continue to actively solicit additional servicers for participation in order to 

maximize program impact. 

Allison COP Testimony, supra note 94. 121MHAP Update, supra note 69. 

with Treasury standards.114 Since the Capital Purchase Program 

(CPP), the primary TARP vehicle for bank assistance, was established prior to the Financial Stability Plan, the majority of financial institutions are not obligated to participate. However, servicers 

of Fannie Mae or Freddie Mac mortgages are obligated to participate in HAMP for their Fannie Mae or Freddie Mac mortgages. 

On the voluntary servicer participation side, Treasury estimates 

that 85 percent of HAMP-eligible mortgage debt is serviced by participating servicers.115 This comes close to Treasury’s projection 

that HAMP will ultimately cover 90 percent of the potential loan 

population.116 Servicer participation in HAMP, however, is voluntary.117 Through October 6, 2009, 63 servicers have signed 

servicer participation agreements for HAMP.118 Servicers begin the 

participation process by completing a registration form, and ultimately sign a Servicer Participation Agreement with Fannie 

Mae.119 Treasury, through Fannie Mae, is reaching out to servicers 

with large numbers of eligible loans that have not yet signed up 

with the program.120

HAMP provides financial incentives to mortgage servicers, borrowers and investors to modify residential mortgages. First, 

servicers receive an up-front fee of $1,000 for each completed modification for up to three years. Second, servicers receive ‘‘Pay-forSuccess’’ fees of up to $1,000 each year for up to three years. These 

fees will be paid monthly and are predicated on the borrower staying current on the loan. Borrowers are eligible for ‘‘Pay-for-Performance Success Payments’’ of up to $1,000 each year for up to 

five years, as long as they stay current on their payment. This payment is applied directly to the principal of their mortgage. The ‘‘Responsible Modification Incentive Payment’’ is a one-time bonus payment of $1,500 to the lender/investor and $500 to servicers that 

will be awarded for modifications on loans that are still performing. 

Finally, Treasury estimates that up to 50 percent of at-risk mortgages have second liens.121 In order to address second lien debts, 

such as home equity lines of credit or second mortgages, HAMP encourages servicers to contact second lien holders and negotiate the 


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122Treasury permits servicers to do so-called ‘‘verbal’’ or ‘‘no-doc’’ trial modifications. In these 

verbal modifications, the servicer halts foreclosure actions and allows the borrower to make reduced payments based on the borrower’s unverified representations about income and debt levels. Each servicer chooses the level of documentation required to commence a trial modification, 

but for the modification to become permanent and the servicer to receive compensation from 

Treasury, full documentation is required. While doing no-doc trial modifications brings more borrowers into HAMP more quickly and freezes the foreclosure process, it might have a detrimental 

effect on producing permanent HAMP modifications. Congressional Oversight Panel, Testimony 

of Freddie Mac Senior Vice President for Economics and Policy, Edward L. Golding, Philadelphia Field Hearing on Mortgage Foreclosures, at 29 (Sept. 24, 2009) (online at cop.senate.gov/ 

hearings/library/hearing-092409-philadelphia.cfm). 123The unpaid balance ceiling increases in relation to number of units on the property (2 units—$934,200; 3 units—$1,129,250; 4 units—$1,403,400). The effect of this limitation is most 

pronounced in high-cost areas, although recent changes to raise the conforming loan limit in certain high-cost areas have made more loans potentially eligible for HAMP modifications in these 

areas. 124 At the field hearing, Larry Litton cited servicers’ need for greater clarity around the definition of imminent default. Congressional Oversight Panel, Testimony of Litton Loan Servicing 

President and CEO, Larry Litton, Philadelphia Field Hearing on Mortgage Foreclosures, at 144– 

45 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm). 125 However, as noted by GAO, there is no mechanism to ensure that housing counseling happens, and Treasury does not plan to track borrowers systematically who are told that they must 

get counseling. GAO HAMP Report, supra note 98. 

extinguishment of the second lien. The servicers will receive a payment of $500 per second lien modification, as well as success payments of $250 per year for three years, as long as the modified first 

loan remains current. Borrowers also receive success payments for 

participating of $250 per year for up to five years that is used to 

pay down the principal on the first lien. 

b. Borrower Eligibility 

HAMP modifications begin with a three month trial modification 

period for eligible borrowers. After three months of successful payments at the modified rate and provision of full supporting documentation, the modification becomes permanent.122 To be eligible 

to participate in HAMP, the loan must have been originated on or 

prior to January 1, 2009, and the mortgage must be a first lien on 

an owner-occupied property with an unpaid balance up to 

$729,750.123 The loan must be in default or in imminent danger of 

default.124 Borrowers in bankruptcy or in active litigation regarding their mortgage can participate in the program without waiving 

their legal rights. 

Under the first lien program, the homeowner must certify a 

hardship causing the default. If the borrower has a back-end DTI 

ratio of 55 percent or more—meaning that the borrower’s total 

monthly debt payments, including credit cards and other forms of 

debt, are at least 55 percent of monthly income—he or she must 

enter a debt counseling program.125

A Net Present Value (NPV) test is required for each loan that is 

in ‘‘imminent default’’ or is at least 60 days delinquent. First, 

servicers determine the NPV of the proceeds from the liquidation 

and sale of a mortgaged property. Variables to take into account 

are: 

1. The current market value of the property as established 

by a broker’s price opinion, automated valuation methodology, 

or appraisal; 

2. The cost of foreclosure proceedings, repair and maintenance of the property; 

3. The time to dispose of the property if not sold at foreclosure auction; 


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126 Jordan D. Dorchuck, Net Present Value Analysis and Loan Modifications (Sept. 15, 2008) 

(online at www.mortgagebankers.org/files/Conferences/2008/RegulatoryComplianceConference08/ 

RC08SEPT24ServicingJordanDorchuck.pdf). 

4. Costs associated with the marketing and sale of the property as real estate owned; and 

5. The net sales proceeds.126

Second, servicers determine the proceeds from a loan modification. Treasury has established parameters for running the NPV for 

modification test. The servicer may choose the discount rate for the 

calculation although there is a ceiling set by the Freddie Mac Primary Mortgage Market Survey rate (PMMS), plus a spread of 2.5 

percentage points. The servicer may apply different discount rates 

to loans in investor pools versus loans in portfolio. Cure rates and 

redefault rates must be based on GSE analytics. Servicers having 

at least a $40 billion servicing book have the option to substitute 

GSE-established cure rates and redefault rates with the experience 

of their own aggregate portfolios. 

The NPV of the foreclosure scenario is then compared to an NPV 

for a modification scenario. If the NPV of the modification scenario 

is greater, then the servicer must offer to modify the loan. 

Prior to September 1, 2009, servicers were permitted to use either their own NPV calculation method or a standardized model 

created by Treasury. Since September 1, 2009, all servicers are required to use Treasury’s standard NPV model for HAMP modification purposes. See Annex C for an examination of Treasury’s NPV 

model. 

The Panel also notes that the NPV model of other government 

entities, such as the OCC, the OTS, and the FDIC for Indy Mac, 

assumes an average redefault rate of 40 percent, but Treasury 

would need to factor in significant variation depending on income, 

FICO, and LTV. Changes in assumed redefault rates (which may 

themselves be functions of the type of modification involved) will 

obviously affect the NPV calculus. The inputs for Treasury’s NPV 

model are not public, in part because of concerns that borrowers 

might be able to game the calculation. Unfortunately, the secrecy 

of Treasury’s NPV model means that it is not subject to robust 

scrutiny. The public unavailability of the NPV model also means 

that homeowners are unable to verify whether they have been appropriately denied a modification. Housing counselors frequently 

attempt to negotiate loan modifications based on having run an 

NPV comparison that they then present to the loan servicer. Making the model publicly available would facilitate negotiations and 

provide an important check against wrongful modification denials. 

A possible solution is to make the NPV calculator publicly available 

as a web application, which would limit the ability to engage in a 

systematic deconstruction of the model for purposes of gaming it. 

c. Lender Procedures 

The front-end DTI target is 31 percent. The lender will first have 

to reduce the borrower’s mortgage payments to no greater than 38 

percent front-end DTI ratio. Treasury will then match the investor/ 

lender dollar-for-dollar in any further reductions, down to a 31 percent front-end DTI ratio for the borrower. Treasury has established 

a 2 percent floor below which it will not subsidize interest rates. 


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Lenders and servicers could reduce principal rather than interest 

at any stage in the waterfall and would receive the same funds 

available for an interest rate reduction. 

Servicers follow the ‘‘standard waterfall’’ steps detailed below in 

order to achieve efficiently the 31 percent front-end DTI ratio: 

1a. Request monthly gross income of borrower; 

1b. Validate first lien debt and monthly payments. This information is used to calculate a provisional modification for the 

trial period. A trial modification typically lasts for three 

months, and then becomes permanent if the borrower has 

made the required trial payments, and the borrower’s debt and 

income documentation has been submitted and determined to 

be accurate. Servicers have discretion on whether to start trial 

modifications only after borrowers have submitted the written 

documentation, or based on verbal information that borrowers 

provide over the phone; 

2. Capitalize arrearage; 

3. Target front-end DTI of 31 percent and follow steps 4, 5, 

and 6 in order to reduce the borrower’s monthly payment; 

4. Reduce the interest rate to achieve target (two percent 

floor). The guidelines specify reductions in increments of 0.125 

percent that should bring the monthly payments as close to the 

target without going below 31 percent. If the modified interest 

rate is above the interest rate cap as defined by Treasury, then 

the modified interest rate will remain in effect for the remainder of the loan. If the modified interest rate is below the interest rate cap, it will remain in effect for five years followed by 

annual increases of one percent until the interest rate reaches 

the interest rate cap. The modified interest rate will then be 

in effect for the remainder of the loan; 

5. If the front-end DTI target has not been reached, the 

term or the amortization of the loan may be extended up to 40 

years; and 

6. If the front-end DTI target has still not been reached, it 

is recommended that the servicer forbear principal. If there is 

principal forbearance, then a balloon payment of that amount 

is due upon the maturity of the loan, the sale of the property, 

or the payoff of the interest bearing balance. 

d. HAMP Results to Date 

Because the program collects far more data than any other MHA 

program, HAMP reveals a fuller picture of the results to date. 

Based on certified data provided by Fannie Mae, Treasury’s agent 

for HAMP, the following statistical picture of HAMP emerges. As 

of September 1, 2009 there were 1,711 permanent modifications 

and 362,348 additional unique borrowers were in trial modifications. Only 1.26 percent of HAMP modifications had become permanent after the anticipated three-month trial. The Panel emphasizes 

that this does not mean that the other 98.74 percent of HAMP trial 

modifications have failed, merely that they have not yet become 

permanent. Many borrowers in trial modifications are in the process of submitting documentation, and Treasury has provided additional flexibility in the timeline through a two-month extension. It 


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127Treasury has authorized an additional two-month period for assembly for documentation 

beyond the 3-month trial period. 128Treasury Mortgage Market Data, supra note 111. 

is also important to remember that this is still a new program in 

a ramp-up period, and this statistic is preliminary. 

The Panel has not been able to determine why there is such a 

low rate of conversion from trial to permanent modifications. Possibilities identified to date include failure of borrowers to comply 

with the terms of the trial, including timely payments; the difficulties servicers have in assembling completed documentation on 

modifications commenced on a ‘‘verbal’’ or ‘‘no-doc’’ basis; 127 delays 

in servicers submitting data to Treasury; and data quality issues. 

There is also significant variation by servicer in terms of the percentage of trial modifications that become permanent after three 

months, an issue discussed below. 

As of September 1, 73 percent of the permanent modifications involved fixed-rate mortgages, with adjustable-rate mortgages making up 27 percent and a negligible number of step-rate mortgages. 

(See Figure 14, below.) 

A variety of hardship reasons were given by borrowers when requesting the modifications. By far the most common was ‘‘curtailment of income,’’ which was reported by 63 percent of borrowers 

and reflects reduced employment hours, wages, salaries, commissions, and bonuses. This is distinct from unemployment, reported 

by eight percent of borrowers. Other significant categories of hardship reported were ‘‘excessive obligation,’’ reported by nine percent 

of borrowers, ‘‘payment adjustment,’’ reported by four percent of 

borrowers, and illness of borrower, reported by two percent of borrowers. Six percent of borrowers reported ‘‘other.’’ (See Figure 15, 

below.) It is notable that curtailment of income is the majority 

hardship basis, as this implies that general economic conditions, 

rather than mortgage rate resets on subprime or payment-option or 

interest-only loans are driving the mortgage crisis at present. Because HAMP eligibility generally requires employment, this raises 


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129Treasury Mortgage Market Data, supra note 111. 

concerns as to whether HAMP, which was designed in the winter 

of 2009, is capable of dealing with emerging causes of foreclosure. 

For the modifications that have become official, the median 

(mean) front-end DTI declined 31 (34) percent, from 45.1 (47.2) percent to 31.1 (31.1) percent, in line with the program’s goal. The median (mean) back-end DTI ratio declined 47 (32) percent from 68.8 

(76.4) percent to 36.4 (51.8) percent. (See Figure 16, below.) 


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130Treasury Mortgage Market Data, supra note 111. 131Treasury Mortgage Market Data, supra note 111. 

The reduction in DTI in HAMP modifications was achieved almost exclusively through reductions in interest rate, rather than 

term extensions or principal reductions. Median (mean) interest 

rates were dropped by 4.25 (4.65) percentage points, from 6.85 

(7.58) percent to 2.00 (2.92) percent, a 71 (61) percent reduction in 

the rate. (See Figure 17, below.) 

Term extensions were de minimis; the median (mean) term remaining before modification was 330 (337) months, and after a 

three-month trial period, the median (mean) term remaining was 


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132Treasury Mortgage Market Data, supra note 111. 133The large number of <90 percent LTV loans in HAMP is likely a function of curtailment 

of income, as even if the LTV would not make the loan ineligible for refinancing, lack of sufficient income to support the loan would. 

338 (364) months, indicating a median (mean) term extension of 

five months (two years). 989 permanent modifications or 57 percent 

of total featured term extensions, while 645 or 38 percent of total 

involved reductions in remaining terms. A portion of the term reductions, however, is attributable to the time lapse between the 

start of the trial modification and the permanent modification date. 

Amortization periods changed relatively little. Before modification, the median (mean) amortization period was 360 (371) months, 

while post-modification, the amortization period was 342 (369) 

months. (See Figure 18, below.) The amortization period increased 

in 618 modifications or 36 percent of the total, while it was decreased in 1013 modifications or 59 percent of total. The Panel is 

puzzled by the prevalence of both amortization and term decreases. 

Principal forbearance was rare and principal forgiveness rarer 

still. Two hundred sixty-one permanent modifications (15 percent of 

total) had principal forborne, while only 5 (less than one percent 

of total) had principal forgiven. When calculated based on all permanent modifications, the median (mean) amount of principal 

forborne was zero ($9,434.58), and the median (mean) amount of 

principal forgiven was zero ($170.89). When calculated only for the 

modifications with principal forbearance, however, the median 

(mean) amount forborne was $47,367.61 ($61,848.92) or 22 (25) percent of post-modification unpaid principal balance, implying a sizeable balloon payment at the maturity of the mortgage. 

Before modification, the median (mean) LTV was 121 (134) percent. 471 (27 percent) loans had LTV ratios of under 100 percent 

before modification and 299 (17 percent) had LTV ratios of under 

90 percent before modification.133 Modification increased the median and mean LTV modestly due to capitalization of arrearages 

and escrow requirements; borrowers’ actual obligations did not inVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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134Treasury Mortgage Market Data, supra note 111. 

crease as the result of modifications. Thus, post-modification, the 

median (mean) LTV was 124 (137) percent. Post-modification, 424 

were calculated as having under 100 percent LTV and 274 with 

LTVs under 90 percent. (See Figure 19.) 

The net result of the modifications was that median (mean) 

monthly principal and interest payments dropped $500.25 

($598.49), from $1,419.43 ($1,554.14) to $849.31 ($955.65), a 35 (39) 

percent decline. As Figure 20 shows below, HAMP modifications resulted in a noticeable decrease in monthly principal and interest 

payments for many borrowers, but generally resulted in minimal 

changes in principal balances. 


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135Treasury Mortgage Market Data, supra note 111. 136 Congressional Oversight Panel, Written Testimony of Litton Loan Servicing President and 

CEO, Larry Litton, Philadelphia Field Hearing on Mortgages, at 2–3 (Sept. 24, 2009) (online 

at cop.senate.gov/documents/testimony-092409-litton.pdf) (hereinafter ‘‘Litton Philadelphia Hearing Written Testimony’’); Congressional Oversight Panel, Testimony of Bank of America Home 

Loans Senior Vice President for Default Management, Allen H. Jones, Philadelphia Field Hearing on Mortgage Foreclosures, at 5 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-0924090jones.pdf). 137 Hunt Subprime Contracts Paper, supra note 73. 

e. Meeting Affordability Goal 

While the Panel previously questioned whether 31 percent frontend DTI was the appropriate affordability target, a reduction in 

front-end DTI to 31 percent will undoubtedly make mortgages 

much more affordable, and in this regard the HAMP model is successful in meeting its affordability goal. As noted by major mortgage loan servicers Larry Litton of Litton Loan Servicing and Allen 

Jones of Bank of America at the Panel’s foreclosure mitigation field 

hearing, the requirement may need to be lowered, however, to assist borrowers in arrearages.136 In particular, it appears that interest rate reductions alone are typically sufficient to make monthly 

payments affordable. 

Possible Restrictions on Modifications. HAMP may be more restricted in its ability to achieve affordability through other means. 

A debate has emerged in the academic literature about the importance of the obstacles posed by PSAs to mortgage modification. An 

empirical study by John Patrick Hunt found that direct contractual 

prohibitions on modification are not common, although they do 

occur, and many PSAs are simply vague.137 The notable exception 

is that virtually every PSA restricts the ability to stretch out a 

loan’s term; loan terms may not be extended beyond the final maturity date of other loans in the pool. These provisions are designed 

to limit cash flow on securitized mortgages to the term of the securities issued against the mortgages. Securitized loans are typically 

all from the same annual vintage give or take a year, which means 

that the ability to stretch out terms is usually limited to a year at 

most. Not surprisingly, HAMP modifications stretch out terms by 

about a year on average. 

The inability to stretch out terms for more than a year in most 

cases has a serious impact on HAMP modifications because it removes one of the tools and instead encourages principal forbearance, which has the result of creating loans with amortization periods that are longer than the loan term, meaning that a balloon 

payment of principal will be due at the end of the loan. 

f. Securitized vs. Non-Securitized 

Non-HAMP modification data also indicate that there are significant differences in modifications between securitized and nonsecuritized loans. OCC/OTS’ joint Mortgage Metrics Reports for the 

first and second quarters of 2009 (not covering HAMP modifications) indicate that while the majority of modifications were on 

securitized loans, in particular those held in private-label pools (see 

Figure 21, below), very few loan modifications have involved principal balance reductions or even principal balance deferrals, and almost all principal reductions and deferrals were on non-securitized 


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138Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS 

Mortgage Metrics Report, First Quarter 2009 (online at www.occ.treas.gov/ftp/release/2009- 

77a.pdf) (June 2009) (hereinafter ‘‘OCC and OTS First Quarter Mortgage Report’’); OCC and 

OTS Second Quarter Mortgage Report, supra note 42. 139Treasury Mortgage Market Data, supra note 111. 

loans.138 (See Figure 22, below.) Out of 327,518 loan modifications 

in the OCC/OTS data in the first two quarters of 2009, only 17,574 

(5.4 percent) involved principal balance reductions. All but eight of 

those 17,574 principal balance reductions were on loans held in 

portfolio. (See Figure 23, below.) The other eight are likely data recording errors. 


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A similar discrepancy emerges for term extensions. Loans guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae/FHA can be 

bought out of a securitized pool and modified, making them more 

like portfolio loans. Thus in the OCC/OTS data for the first and 

second quarters 2009, 60 percent of portfolio loan, 49 percent of 

Fannie Mae, 69 percent of Freddie Mac, and 46 percent of Ginnie 

Mae modifications involved term extensions, but only 7 percent of 

private-label securitization did so. (See Figures 24 and 25, 


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140The ability to stretch out a term is separate from the ability to stretch out amortization 

periods and reduce monthly payments by creating a balloon payment at the end of the mortgage. 

A term extension produces a very different looking mortgage than an amortization extension 

alone. 141The data presented in the OCC/OTS Mortgage Metrics Reports has improved steadily from 

quarter to quarter and it provides one of the most valuable sources of information on modifications efforts. Currently, however, OCC/OTS data does not break down redefaults by type of 

modification beyond change in payment. Such data are critical for gaining an understanding of 

whether the type of modification affects redefaults. The Panel urges OCC and OTS to undertake 

this analysis in future Mortgage Metrics reports, as well as to present redefault rates beyond 

12 months. OCC and OTS First Quarter Mortgage Report, supra note 138; OCC and OTS Second Quarter Mortgage Report, supra note 42. 

below.)140 Whether the heterogeneity between modifications of 

securitized and nonsecuritized loans is a function of PSAs or of incentive misalignment between servicers and MBS holders is unclear, but there is clearly a difference, and this may be responsible 

for some of the difference in redefault rates.141 (See Figure 26, 

below.) 


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142Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why Don’t Lenders Renegotiate 

More Home Mortgages? Redefaults, Self-Cures, and Securitization, Federal Reserve Bank of Boston Working Paper 09–4 (July 6, 2009) (hereinafter ‘‘Redefaults, Self-Cures, and Securitization 

Paper’’). 143 Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout Prohibitions 

in Residential Mortgage-Backed Securities, 82 Southern California Law Reviewl(forthcoming 

2009) (hereinafter ‘‘Gelpern & Levitin Frankenstein Contracts’’). 144Tomasz Piskorski, Amit Seru, & Vikrant Vig, Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis, Chicago Booth School of Business Research 

Paper No. 09–02 (Aug. 2009) (online at ssrn.com/abstract=1321646) (hereinafter ‘‘Piskorski, 

Seru, & Vig Renegotiation Paper’’). 

Notwithstanding the significant PSA constraint on term extensions that means that HAMP modifications are likely to look quite 

different from portfolio loan modifications as well as the evidence 

from the OCC/OTS Mortgage Metrics Reports, a recent working 

paper from the Federal Reserve Bank of Boston argues that there 

is no difference in the rate at which securitized and nonsecuritized 

loans are being modified; both have been modified at exceedingly 

low rates.142 Two recent papers disagree with this finding. Professors Anna Gelpern and Adam Levitin contend that securitization 

creates obstacles to loan workouts that go beyond the formal contractual language analyzed by Hunt.143 Professors Tomasz 

Piskorski, Amit Seru, and Vikram Vig analyzed data through the 

first quarter of 2008 and concluded that securitized loans are as 

much as 32 percent more likely to go into foreclosure when delinquent than loans held directly by banks, and are 21 percent more 

likely to become current within a year of delinquency.144

g. Servicer Ramp-up Period 

Treasury has made significant progress towards its goal of broad 

servicer participation; however, signed participation agreements do 

not necessarily mean that servicers are fully ready to participate. 

The Panel recognizes that HAMP in particular requires a significant technological infrastructure to monitor modifications and 

servicer payments, and that this infrastructure is not something 


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145 Congressional Oversight Panel, Testimony of Judge Annette M. Rizzo, Court of Common 

Pleas, First Judicial District, Philadelphia County; Philadelphia Mortgage Foreclosure Diversion 

Program, Philadelphia Field Hearing on Mortgage Foreclosures, at 81–83 (Sept. 24, 2009) (online 

at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm). 146 Id. 147 Id. Congressional Oversight Panel, Testimony of NeighborWorks America Chief Operating 

Officer, Eileen Fitzgerald, Field Hearing in Philadelphia on Mortgage Foreclosures (Sept. 24, 

2009) (online at cop.senate.gov/documents/testimony-092409-fitzgerald.pdf) (hereinafter ‘‘Fitzgerald Philadelphia Hearing Testimony’’). 148 Alexandra Andrews, Frustrated Homeowners Turn to Media, Courts ProPublica (Oct. 1, 

2009) (online at www.propublica.org/ion/bailout/item/frustrated-homeowners-turn-to-mediacourts-on-making-home-affordable-101) (hereinafter ‘‘Andrews Frustrated Homeowners’’). 

that can be created overnight. The infrastructure has to allow 

many servicers to interface with Treasury and Fannie Mae, Treasury’s agent for HAMP modifications. Servicers use a variety of software platforms, and the standard servicing platform, distributed by 

Lender Processing Services, Inc., does not have the ability to process modifications. As a result, even as of the end of August 2009, 

servicers still needed to provide hand-extracted data to Treasury, 

which slowed the process. 

While the Panel is sympathetic to the difficulties in creating the 

infrastructure for HAMP, during the ramp-up period some homeowners who would have qualified for modifications did not have the 

opportunity. At this point, however, HAMP is up and running, and 

its ability to increase the number of modifications depends primarily on servicer staffing constraints and homeowner participation. When borrowers contact their servicers, either on their own 

or with the assistance of their lenders, they are often unable to 

make contact with someone who can provide accurate, timely information and help them obtain a modification. 

As servicers ramp up their programs, many borrowers are facing 

long hold times and repeated transfers and disconnections on the 

telephone, lack of timely responses, lost paperwork, and incorrect 

information from servicers. Judge Annette Rizzo of the Court of 

Common Pleas, First Judicial District for Philadelphia County, recently expressed her frustration with the lack of clear information 

about MHA during her testimony at the Panel’s September hearing.145 Judge Rizzo is the architect of a foreclosure prevention program in Philadelphia that has moved cases through the pipeline 

more quickly by requiring prompt, face-to-face mediation sessions. 

According to Judge Rizzo, there is a need at the national level for 

a hotline or another easy access point for quick resolution of questions regarding the interpretation of various aspects of the MHA 

program.146

There is also evidence that eligible borrowers are being denied 

incorrectly. Eileen Fitzgerald, chief operating officer of 

NeighborWorks America, provided insight into this problem during 

her testimony at the Panel’s foreclosure mitigation field hearing. 

Ms. Fitzgerald noted in both her written and oral testimony not 

only reports of such incorrect interpretations of the program, but 

also of delays in processing due to servicers misplacing documents 

or requesting duplicate documents, lack of uniform procedures and 

forms, and a need for access to servicers’ NPV models to assist borrowers and their counselors in understanding why an application 

may have been denied.147 Treasury’s new requirement that 

servicers provide a reason for denials to both Treasury and to borrowers could help to alleviate this.148 Denial codes can also help 


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149 Robert B. Avery, et al., The 2008 HDMA Data: The Mortgage Market during a Turbulent 

Year, Federal Reserve Bulletin, at 69 (online at www.federalreserve.gov/pubs/bulletin/2009/pdf/ 

hmda08draft.pdf) (accessed Oct. 6, 2009). 150 House Financial Services Committee, Subcommittee on Financial Institutions and Consumer Credit, Testimony of National Council of La Raza Legislative Analyst, Graciela Aponte, 

Mortgage Lending Reform: A Comprehensive Review of the American Mortgage System (Mar. 11, 

2009) (online at www.house.gov/apps/list/hearing/financialsvcsldem/aponte031109.pdf). 151Wheeler Philadelphia Hearing Testimony, supra note 88. 152 Campbell Real Estate Agent Survey, supra note 5. 153Servicer Performance Report, supra note 95. 154Servicer Performance Report, supra note 95. 155 U.S. Department of Treasury, Administration, Servicers Commit to Faster Relief for Struggling Homeowners through Loan Modifications (July 29, 2009) (online at financialstability.gov/ 

latest/07282009.html). 156 Allison COP Testimony, supra note 94, at 4–5. 

protect against discrimination in refinancing. HMDA data from 

2008 show that 61 percent of African-Americans were turned down 

for a refinancing, 51 percent of Hispanics were denied a refinancing, and 32 percent of Caucasians were denied.149 Clear, 

prompt denial codes with a right of appeal are one way to help prevent possible discrimination and disproportionate destabilization of 

minority neighborhoods. 

Externally, borrowers can face language or education barriers, 

both of which can be addressed by trustworthy and reliable housing 

counselors.150 Treasury also plans to create a web portal to provide 

information to borrowers and servicers, and is working with 

Freddie Mac, in the GSE’s role as compliance agent, to develop a 

‘‘second look’’ process by which Freddie Mac will audit a sample of 

MHA modification applications that have been denied.151

Performance Variations Among Servicers. Substantial variation 

among servicers in performance and borrower experience, as well 

as inconsistent results in converting trial modification offers into 

actual trial modifications, remain significant issues.152 Through 

August 2009, of the estimated HAMP-eligible 60+ day delinquencies, 19 percent were offered trial plans, and 12 percent entered trial modifications.153 The percentage of HAMP-eligible borrowers entering trial modifications varied widely by servicer, from 

0 percent to 39 percent.154 This means that more than two-thirds 

of eligible borrowers potentially missed their opportunity to avoid 

foreclosure. Treasury is taking steps to increase the number of eligible borrowers who may participate. On July 28, Treasury officials 

met with representatives of the 27 servicers participating at that 

time. At this meeting, servicers pledged to increase ‘‘significantly’’ 

the rate at which they were performing modifications.155 Treasury 

acknowledges that servicers have a ramp-up period: ‘‘Servicers are 

still working to incorporate program features in their systems and 

procedures, adding new program requirements as they are introduced.’’ 156

There has been considerable variation in the number of permanent HAMP modifications by servicer, with servicers that have required full documentation before commencing a modification having significantly higher rates of conversion from trial to permanent 

modifications. Because data on permanent modifications is still 

preliminary, and because of the two-month extension that Treasury 

has granted no/low-documentation trial modifications to assemble 

full documentation, the Panel is refraining at this point from presenting an analysis of servicer-by-servicer conversion rates from 


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157Letter from Secretaries Geithner and Donovan to Servicers (July 9, 2009) (online at 

www.housingwire.com/wp-content/uploads/2009/07/servicer-letter.pdf). 158 Barr Hearing Testimony, supra note 87. 159 Barr Hearing Testimony, supra note 87. 160 It is not yet known whether the publication of these reports will induce lenders to increase 

participation. For example, Bank of America and Wells Fargo’s borrower participation rose 

sharply after showing weak numbers in the first monthly report. However, this could have been 

due to the banks’ ramp-up period in implementing the program. Servicer Performance Report, 

supra note 95. 161 U.S. Department of the Treasury, Making Home Affordable Program on Pace to Offer Help 

to Millions of Homeowners (Aug. 4, 2009) (online at www.financialstability.gov/latest/ 

tg252.html). 162Surveys were sent to Accredited Home Lenders, American Home Mortgage Servicing, 

American General Finance Inc, Citizens Financial Group, Fifth Third Bancorp, HSBC, Home Eq 

Servicing, ING Bank, Litton Loan Servicing, PNC Financial Services Group, Sovereign Bancorp 

Inc., SunTrust Banks Inc., and U.S. Bancorp. Only Accredited Home Lenders failed to provide 

a response. As of August 13, nine of the servicers had either already signed up to participate 

in the program or were in the process of signing contracts to participate. Surveys Sent by the 

Panel to Various Loan Servicers (June 30, 2009) (hereinafter ‘‘Survey of Lenders’’). 

trial to permanent loans. This is an issue that the Panel plans to 

reexamine in a future report when more robust data is available. 

Treasury Efforts to Improve Performance. In recognition of this 

concern, Treasury has prioritized servicer capacity to respond to 

borrowers. While Treasury recognizes that ‘‘capacity is key to the 

success of HAMP,’’ 157 current servicer capacity remains an area of 

concern. In testimony before a House Financial Services subcommittee hearing, Treasury Assistant Secretary for Financial Institutions Michael Barr noted the following: 

On July 9, as a part of the Administration’s efforts to expedite implementation of HAMP, Secretaries Geithner and 

Donovan wrote to the CEOs of all of the servicers currently participating in the program. In this joint letter, 

they noted that there appears to be substantial variation 

among servicers in performance and borrower experience, 

as well as inconsistent results in converting trial modification offers into actual trial modifications. They called on 

the servicers to devote substantially more resources to the 

program in order for it to fully succeed.158

To combat this problem, Treasury has tasked Freddie Mac to 

conduct readiness reviews of participating servicers and report the 

results back to Treasury.159

Further, Treasury tracks outcomes as an incentive for servicers 

to scale up their operations to meet demand. Treasury publishes 

monthly statistics on HAMP that track, among other things, how 

many eligible borrowers to whom each servicer has offered a trial 

modification and how many have entered trial modifications.160 Additionally, Treasury is working to develop more exacting metrics to 

measure the quality of borrower experience, such as average borrower wait time for inbound inquiries, completeness and accuracy 

of information provided to applicants, as well as response time for 

completed applications.161

h. Servicer Concerns About the HAMP Program 

Servicers voice a number of criticisms and concerns regarding the 

HAMP program. Failure to address these concerns could limit the 

effectiveness of HAMP. In June, the Panel sent a questionnaire to 

the 14 largest servicers that were not yet participating in 

HAMP.162 Of the 13 servicers that responded, only two stated that 


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163Survey of Lenders, supra note 162. 164Survey of Lenders, supra note 162. 165Survey of Lenders, supra note 162. 166Survey of Lenders, supra note 162. 167Survey of Lenders, supra note 162. 168 It is possible that a significant number of HAMP-eligible borrowers are receiving modification through servicers’ non-HAMP programs. Treasury, possibly through Freddie Mac’s audit 

function, should compile and analyze this set of modifications, as it does for HAMP modifications. 

they did not plan to participate in HAMP. As primary justification, 

both of these servicers stated that they believed that their own 

modification programs provided borrowers with more aggressive 

and flexible relief than did HAMP, allowing more borrowers to receive modifications. One explained that under its own program, it 

uses ‘‘a more holistic review of income and expenses [as compared 

to] the MHA gross income versus primary mortgage debt model.’’ 

Another ‘‘performs a disposable income analysis rather than 

impos[ing] a fixed debt-to-income requirement.’’ It ‘‘subtract[s] 

mortgage payments, property taxes, homeowners’ insurance, 

verifiable utilities, and medical and day care expenses from the 

customer’s net income.’’ 

The questionnaire asked servicers what they believed to be barriers to full participation in HAMP. Among the most common responses was that the program required cumbersome documentation 

and trial periods. One servicer suggested amending documentation 

requirements ‘‘to mirror current bank-owned work-out options.’’163

A servicer that is choosing not to participate in HAMP believed 

that gathering the required documentation would take between 45 

to 50 days under HAMP, while under the servicer’s own program, 

the average decision time, including collection of documents, was 

10 to 12 days.164

Another perceived barrier to full participation is the concern that 

the program’s details continue to change. One servicer cited ‘‘ongoing clarifications of, and additions to, the requirements and 

guidelines issued by the Treasury and its agents, Fannie Mae and 

Freddie Mac.’’165 Another stated that ‘‘the ongoing evolution of program benefits and requirements has presented challenges (for example, [the] ability to timely recruit, hire, and train staff for functions that are still being defined).’’166 Some servicers reported that 

it took substantial manpower to implement the required system 

changes.167 Among the other perceived barriers to full participation 

are questions about servicer liability, difficulty in obtaining investor approval to amend servicing agreements, different reporting 

standards between GSEs and Treasury, and a lack of flexibility in 

the escrow requirement. 

Treasury has made substantial progress towards reaching its 

projection of having 90 percent of HAMP-eligible mortgage debt 

serviced by participating servicers, but more efforts are needed before significant percentages of eligible borrowers receive modifications.168 As servicers take time to implement their programs and 

fully train their staff, families are losing their homes. Treasury 

must encourage and provide support to enable servicers to make 

modifications available to as many borrowers as possible, as quickly as possible. 


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169 In contrast, the commercial mortgage servicing market is designed with the need for loan 

modifications in mind. Gelpern & Levitin Frankenstein Contracts, supra note 143. 170Senate Committee on the Judiciary, Testimony of Professor Adam J. Levitin, Helping Families Save Their Homes: The Role of Bankruptcy Law, 110th Cong., at 11 (Nov. 19, 2008) (online 

at www.law.georgetown.edu/faculty/levitin/documents/LevitinSenateJudiciaryTestimony.pdf). 171Goldberg Philadelphia Hearing Written Testimony, supra note 99. 

i. Prospects for Long-Term Effectiveness 

The program is completely dependent upon servicers to provide 

adequate capacity and quality in order to make HAMP a success. 

Therefore, it is important to consider the longer term prospects for 

servicers to provide that quality and capacity in evaluating the 

longer term outlook for HAMP. 

HAMP relies on mortgage servicers to perform the modifications. 

Residential mortgage servicers, however, are not normally in the 

modification business.169 Residential mortgage servicing combines 

a transaction processing business with a loss mitigation business. 

Transaction processing is a business given to automation and 

economies of scale. Loss mitigation, in contrast, involves intense 

discretion and human capital and is cyclic with the occurrence of 

severe recessions. In normal times, loss mitigation is a small part 

of any servicing operation. 

While there were some episodes of serious cyclic foreclosure, such 

as in New England in the early 1990s, on the whole, mortgage defaults were historically sparse and random, so it made little business sense for most servicers, other than subprime specialists, to 

invest in loss mitigation capacity. Investors did not want to pay for 

this capacity, and servicing fee arrangements did not budget for it, 

particularly in light of the lack of demand. Because servicers did 

not invest in loss mitigation capacity during boom times, they now 

lack sufficient loss mitigation capacity. There is a limited supply of 

trained, experienced loss mitigation personnel, although it is likely 

that there are many out-of-work underwriters and originations personnel available, and the standard servicing computer platform 

lacks the ability to process loan modifications. 

For HAMP to succeed, the entire servicing industry has had to 

shift into a new line of business. To incentivize this business model 

transformation, HAMP offers servicers payments for every modified 

mortgage. This incentive payment is paid on top of servicers’ regular compensation, which is supposed to cover appropriate loss 

mitigation. At this point, the transition and re-tooling period 

should be over, and servicers’ loss mitigation units should be expected to be operating at capacity. 

j. Incentive Payment Sufficiency 

Incentive payments might be insufficient to offset other servicer 

incentives that push for foreclosure even when modification increases the net present value of the loan.170 As noted by Deborah 

Goldberg at the Panel’s foreclosure mitigation field hearing, ‘‘there 

are many incentives for servicers to continue moving a loan toward 

foreclosure during the HAMP review process.’’171 Servicers typically purchase mortgage servicing rights (MSRs) for an upfront 

payment based on the outstanding principal balance of the loans in 

the servicing portfolio. The servicer’s pricing of the MSRs depends 

primarily on the servicing fee, anticipated prepayment rates (inVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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172Piskorski, Seru, & Vig Renegotiation Paper, supra note 144. 173Katherine M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas 

Law Review 121, 127—0928 (2008). (hereinafter ‘‘Porter Bankruptcy Mortgage Claims’’). 

cluding defaults), and on the anticipated costs of servicing the 

loans. The servicing fee is typically in the range of 25–50 basis 

points per annum of the outstanding principal balance of the loans 

in the portfolio and gets paid before investors in the mortgages are 

paid. 

Servicers are obligated to advance monthly payments of principal 

and interest on defaulted loans (‘‘servicing advances’’) to investors 

until the property is no longer in the servicing portfolio (as the result of a refinancing or sale) or if the servicer reasonably believes 

it will not be able to recover the servicing advances. While 

servicers are able to recover their servicing advances upon liquidation of the property, they are not able to recover the time value of 

the advances; given that timelines of default to foreclosure are now 

in the range of 18–24 months in most parts of the country, 

servicers have significant time-value costs in making servicing advances, particularly if they lack low-cost funding sources like a depositary base or access to the Federal Reserve’s Discount Window. 

Because servicers prepay for their MSRs, their profitability depends on prepayment speeds and maintaining low operations costs. 

Most servicers hedge their prepayment risk to the extent it is an 

interest rate risk. Some also hedge against prepayment speeds due 

to default risk through buying credit default swap protection on either their particular portfolios or on indices like the ABX. 

Servicers, however, are unable to hedge against servicing costs effectively, and foreclosures impose significant operational costs on 

servicers. 

Consider a servicer that receives 37.5 basis points per year on a 

mortgage loan with an unpaid principal balance of $200,000. The 

servicer might have paid $1,000 to acquire the MSR for that loan. 

The servicer’s annual servicing fee income is $750. The servicer 

will then add to this a much more modest amount of float income 

from investing the mortgage payments during the period between 

when the homeowner pays the servicer, and the servicer is required 

to remit the funds to the investors. This income might amount to 

$20-$40 per year. A typical performing loan might cost in the range 

of $500/year to service, which means that the servicer will turn a 

profit on the loan. 

If the loan becomes delinquent, however, it will cost the servicer 

$1,000/year to service, both because of additional time and effort 

involved as well as the cost of servicing advances.172 The sooner 

the servicer can foreclose on the loan, the sooner the servicer can 

cut loose a money-losing investment. Moreover, the foreclosure 

itself might present an opportunity to levy various ancillary fees 

that do not need to be remitted to investors, but which can instead 

be retained by servicers, such as late fees and property maintenance fees. Thus foreclosure can not only cut losses, but it can be 

an affirmative profit center.173

In contrast, if the servicer modifies the defaulted loan, the 

servicer will still lose the time-value of the servicing advances it 

made; will incur a significant administrative cost to performing the 


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174 Joseph Mason, Mortgage Loan Modification: Promises and Pitfalls, SSRN Working Paper 

Series (Oct. 3, 2007) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1027470). 175 Harry Terris and Kate Berry, Pipeline, American Banker vol. 174, no. 163 (Aug. 27, 2009). 176Piskorski, Seru, & Vig Renegotiation Paper, supra note 144. 177 Redefaults, Self-Cures, and Securitization Paper, supra note 142. 178 Under the terms of HAMP modification, interest rates are tied to the Freddie Mac Primary 

Mortgage Market Survey rate (market rate) on the date that the modification agreement was 

modification, estimated at as high as $1,500;174 will have no opportunity to levy additional fees; and will assume a risk that there will 

be a redefault, which will add to the servicer’s time-value and operations costs. While the precise calculations of servicers in these circumstances are not known, there is a strong inference that 

servicers’ incentives may not be aligned with those of investors in 

the mortgages. Indeed, private mortgage insurers, who bear the 

first loss on defaults on insured loans—making them like investors—have recently expressed sufficient concern about servicer loss 

mitigation practices that they have insisted on inserting personnel 

into servicing companies to supervise loss mitigation.175

HAMP provides servicers with taxpayer-funded modification incentive payments in addition to their preexisting contractual payments from investors in order to encourage servicers to perform 

more modifications, to the extent that they would maximize net 

present value. While servicers are contractually obligated to maximize value for mortgage investors and are already compensated for 

their services, HAMP provides additional, taxpayer-funded compensation for servicers to perform the same services. The goal of 

this extra compensation is to make the servicers’ incentives look 

like those of a portfolio lender, with the hope that this will negate 

any incentive misalignments that encourage servicers to seek foreclosure. If so, both investors and financially distressed homeowners 

will win, as well as the neighbors of the homeowners and their 

communities. 

By all estimates, HAMP incentive payments more than cover the 

cost of modifications, excluding overhead.176 The incentive payment 

amounts might still be insufficient, however, to counterbalance 

servicers’ incentive to pursue foreclosure because servicers are reluctant to invest in a loss mitigation business that is unlikely to 

have long-term value.177 Moreover, given the limited supply of 

modification specialists, who cannot be trained overnight, the capacity problem may simply be impervious to incentive payments of 

any reasonable level. The economics of servicing are still not fully 

understood, and this presents a challenge for any attempt to craft 

an incentive-based modification program. 

That said, successful HAMP modifications should result in an increase in the value of MSRs by reducing prepayment speeds, both 

due to defaults and to refinancings. Prepayments due to 

refinancings are largely a function of interest rates; as rates drop, 

prepayment speeds increase. Refinancings, however, are only possible when there is positive equity. 

HAMP modifications result in extremely low interest rates and 

negative equity. The combination means that HAMP-modified 

loans, to the extent they do not redefault, are unlikely to be refinanced. First, HAMP-modified loans have interest rates that are 

initially so low that it is unlikely that the borrower could find a 

lower interest rate.178 And second, even if a lower rate were availVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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prepared. If the modified rate is below the market rate on this date, the modified rate is fixed 

for the first five years. In the sixth year, the modified rate may increase up to one percentage 

point annually until it reaches the market rate listed in the modification agreement. If the modified rate equaled or exceeded the market rate when the modification agreement was prepared, 

the modified rate is fixed for the life of the loan. 179Mike Greggory, Chase Serves Itself First in Mortgage Modifications; MBS Bond Holders Up 

in ARMs, Financial Times (July 27, 2009) (online at www.ft.com/cms/s/2/a6f6db88- 

097aee0911de098c340900144feabdc0.html). 180Piskorski, Seru, & Vig Renegotiation Paper, supra note 144. 181 Redefaults, Self-Cures, and Securitization Paper, supra note 142. 

able, negative equity precludes refinancing. HAMP modifications 

thus have drastically slow prepayment speeds, which boosts the 

value of MSRs. 

For example, JPMorgan Chase has reduced interest rates in 

some modifications so they are just enough to cover its servicing 

fee, but left principal balances untouched.179 Modifications like this 

ensure that the value of MSRs to the servicer will be maximized, 

as servicing fee income will not be reduced (as would occur if principal balances were reduced) and refinancing is likely precluded 

both because of low rates and likely negative equity. Unfortunately, 

while a modification like this might maximize value for the 

servicer, it might not be the optimal modification for the homeowner or the investors. Thus, while HAMP is aimed at correcting 

misaligned incentive problems, it might actually overcorrect and result in sub-optimally structured modifications. 

The benefit HAMP could provide to servicers in the form of increased MSR values is tempered by the risk that servicers assume 

on a loan redefault. A defaulted loan is worse than a prepayment 

in terms of MSR value, because not only is the principal balance 

of the trust reduced, but the servicer must make servicing advances of principal and interest until the property is sold from the 

trust, either at a foreclosure sale to a third-party or from REO. 

While servicing advances are reimbursable, no interest is paid on 

them, resulting in a time-value loss for the servicer. The time-value 

costs of a defaulted mortgage are one of the largest costs for a 

servicer, especially in a depressed market where foreclosures are 

taking longer and properties are sitting in REO for months if not 

years. 

HAMP payments may well offset the cost of redefault risk for 

servicers, in addition to the costs of modification, which are estimated in the $1,000 range.180 This raises the question of why 

servicers are not engaged in more modifications. The answer may 

simply be a capacity constraint, but another consideration is that 

it is difficult for servicers to determine ex-ante whether a loan will 

redefault post-modification and thus figure out the net benefit of 

modification.181 If servicers do not believe that modifications as a 

whole are sustainable, they will be reluctant to engage in them beyond the likely sustainable ones they can cherry-pick. Again, 

HAMP is designed to address servicer reluctance to engage in 

modifications through incentive payments, but this sort of targeted 

incentive payment only makes sense when an economic structure 

is fully understood. 

Servicer capacity remains a weak link in the system, and it is 

unclear whether HAMP incentive payments are sufficient to 

change the situation. Servicers may be reluctant to invest in modification capacity that will have a limited useful lifespan. In addiVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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182 U.S. Department of the Treasury, Supplemental Documentation FAQs (Aug. 19, 2009) (online at www.hmpadmin.com/portal/docs/hamplservicer/hampfaqs.pdf). These two directives can 

be seen as inconsistent. 183MHAP Update, supra note 69. Senate Committee on Banking, Housing, and Urban Affairs, 

Written Testimony of U.S. Department of Housing and Urban Development Senior Advisor for 

Mortgage Finance, William Apgar, Preserving Homeownership: Progress Needed to Prevent Foreclosures (July 16, 2009) (online at www.hud.gov/offices/cir/test090716.cfm) (hereinafter ‘‘Apgar 

Senate Testimony’’); House Testimony of Dave Stevens, supra note 71. 184 Although HAMP reduces mortgage payments to 31 percent of the borrower’s monthly income, payments on junior liens are not included in that calculation. 185MHAP Update, supra note 69, at 1. 

tion, there might simply be an inelastic supply of modification capacity, which would make modification capacity impervious to incentives. Ensuring that modification efforts are not hobbled by lack 

of capacity is essential if HAMP is to be successful, but it does not 

appear that Treasury has undertaken any concrete steps to ensure 

that the capacity issue is resolved. 

One possible solution to the problem of servicer incentives or capacity constraints is to provide supplemental capacity, such as contracting with third-party originators to modify the loans as if they 

were underwriting new loans. Loan modification is essentially loan 

underwriting, which is not where servicer talents and expertise lie. 

While there are coordination and privacy issues involved with utilizing third-party originators for modifications, third-party originators could provide an effective option. 

k. Possible Litigation Risk for Servicers 

HAMP may itself be creating litigation risk for servicers, as there 

is a question about how principal forbearance is to be treated by 

securitization trusts for the purposes of allocating cash flow among 

investors. Treasury has advised that principal forbearance should 

be treated as a loss to the trust, with any later payment as a loss 

recovery, but Treasury has also noted that the trust documents 

control.182 Many servicers and securitization trustees are therefore 

reviewing the trust documents to determine the appropriate interpretation. To the extent that principal forbearance is treated as a 

loss, however, it would reduce the outstanding principal balance in 

the trust, which would reduce the servicer’s servicing fee compensation. 

3. Second Lien Program 

One component of HAMP is the Second Lien Program. Originally 

released in mid-February, the plan to assist homeowners included 

an initiative to lower monthly mortgage payments, but it failed to 

address in detail a related issue that threatens to undo troubled 

borrowers: second liens. Treasury states that as many as 50 percent of at-risk mortgages also have second liens.183 Second liens 

can interfere with the success of loan modification programs for 

three reasons. First, modifying the first lien may not reduce homeowners’ total monthly mortgage payments to an affordable level if 

the second mortgage remains unmodified.184 While some homeowners might be able to afford a modified first mortgage payment, 

a second unmodified mortgage payment can make monthly mortgage payments unaffordable, increasing redefault risk.185 Second, 

when a first mortgage is refinanced, the lender doing the refinancing will have a junior lien to any previously existing mortgaVerDate Nov 24 2008 05:17 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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186MHAP Update, supra note 69, at 1. The Panel addressed the complexities and challenges 

caused by junior liens in its March Oversight Report. The Panel noted that there are multiple 

mortgages on many properties, and that across a range of mortgage products, many second 

mortgages were originated entirely separately from the first mortgage and often without the 

knowledge of the first mortgagee. In addition, millions of homeowners took on second mortgages, 

often as home equity lines of credit. Since those debts also encumber the home, they must be 

dealt with in any viable refinancing effort. COP March Oversight Report, supra note 21. 187MHAP Update, supra note 69, at 1. 188 U.S. Department of Housing & Urban Development, Prepared Remarks for Secretary of 

Housing and Urban Development Shaun Donovan at the Mortgage Bankers Association National 

Policy Conference (Apr. 24, 2009) (online at www.hud.gov/news/speeches/200909040929.cfm); 

MHAP Update, supra note 69, at 4. 189MHAP Update, supra note 69, at 4. 190SLMP Supplemental Directive, supra note 74. 191 Id. It should be noted that Supplemental Directive 09–05 provides guidance to servicers for 

implementation of the Second Lien Program for second liens that are not owned or guaranteed 

by Fannie Mae or Freddie Mac—that is, so-called ‘‘non-GSE second liens.’’ The Directive explicitly directs servicers of second liens owned or guaranteed by Fannie Mae or Freddie Mac to refer 

to the Second Lien Program guidance provided by those entities. 192 Id. A trial period is not required if a borrower is current on the existing second lien and 

the current payment amount is equal to or more then the monthly payment that will be due 

following the second lien modification. 193 Id. 

gees unless they agree to resubordinate their liens to the refinanced mortgage. Second liens, therefore, have the potential to 

hinder or prevent efforts to refinance a first mortgage.186 Third, 

second liens also increase the negative equity that can contribute 

to subsequent redefaults. 

Treasury established the Second Lien Program with two primary 

goals in mind: (1) to allow 1 to 1.5 million homeowners to benefit 

from reduced payments on their second mortgages—equaling up to 

50 percent of HAMP participants; and (2) to maximize and enhance 

the effectiveness of Treasury’s first lien modification program.187

Under the Second Lien Program, when a HAMP modification is 

initiated on a first lien, servicers participating in the Second Lien 

Program will automatically reduce payments on the associated second lien by modifying or extinguishing the second lien.188 Accordingly, Treasury has emphasized that modification of a second lien 

should not delay modification of a first lien, but will occur as soon 

as the second lien servicer is able to formulate the terms and make 

contact with the borrower.189 However, since the Second Lien Program is voluntary, automatic modification of the second lien is not 

required if the second lien servicer chooses not to participate in the 

Second Lien Program. According to the Second Lien Program 

guidelines, the amount of funds available will be capped based 

upon each servicer’s Servicer Participation Agreement (SPA).190

Treasury will formulate each servicer’s initial program participation cap by ‘‘estimating the number of modifications and 

extinguishments expected to be performed by each servicer’’ during 

the life of HAMP.191 Second lien modification does not go into effect 

‘‘until the first lien modification becomes effective under HAMP’’ 

and the borrower has made each second lien trial period payment 

‘‘by the end of the month in which it is due.’’192

The Second Lien Program has several eligibility factors. First, 

only second liens originated on or before January 1, 2009 are eligible for a modification or extinguishment under this program.193

Second, only second liens with an unpaid principal balance equal 

to or greater than $5,000 are eligible for modification or cost share 

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194 Id. 195 Id. 196 Allison Senate Testimony, supra note 105. 197SLMP Supplemental Directive, supra note 74. 198MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74. 199MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74. 200SLMP Supplemental Directive, supra note 74. 201MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74. 202MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74. 203MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74. 204MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74. 205MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74. 206MHAP Update, supra note 69, at 2–3; SLMP Supplemental Directive, supra note 74. 

tinguishment of second liens.194 Third, borrowers can participate in 

the program provided that they have fully executed a Second Lien 

Program modification agreement or entered into a trial period plan 

with the servicer by December 31, 2012.195

During his testimony before the Senate Committee on Banking, 

Housing, and Urban Affairs in July, Assistant Secretary Allison 

noted that the five banks that aggregately account for over 80 percent of the second liens are in negotiations to participate in the 

Second Lien Program.196

The Second Lien Program also contains a ‘‘pay-for-success’’ structure similar to the first lien modification program. Servicers can be 

paid $500 up-front for a successful modification and then receive 

successive payments of $250 per year for three years, provided that 

the modified first loan remains current.197 If borrowers remain current on their modified first loan, they can receive payments of up 

to $250 per year for as many as five years.198 This means that borrowers could receive as much as $1,250 for making payments on 

time. These borrower incentives would be directed at paying down 

the principal on the first mortgage, helping borrowers build equity 

in their home.199

The program gives participating servicers two options: (1) reduce 

borrower payments, or (2) extinguish the lien. The servicer’s decision as to which option to pursue is based solely on the financial 

information provided by the borrower in conjunction with the 

HAMP modification.200

Under the first option, the MHA Program will share with lenders 

the cost of reducing second mortgage payments for homeowners.201

For amortizing loans (loans with monthly payments of interest and 

principal), Treasury shares the cost of reducing the interest rate on 

the second mortgage to one percent.202 The servicer reduces the 

loan interest rate to one percent, forbears principal in the same 

proportion as in the first lien modification, and extends the repayment and amortization schedule to match the modified first lien.203

In turn, Treasury pays the servicer the incentive and success fees 

for making the modification, plus pays the lender half the difference between the interest rate on the first lien and one percent.204 For interest-only loans, MHA shares the cost of reducing 

the interest rate on the second mortgage to two percent.205 The 

servicer reduces the interest rate to two percent, forbears principal 

in the same proportion as in the first lien modification, and extends 

the repayment and amortization schedule to match the first lien.206

Treasury pays the servicer an amount equal to half of the difference between (a) the lower of the contract rate on the second 

lien and the interest rate on the first lien as modified and (b) two 


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207MHAP Update, supra note 69, at 2–3; SLMP Supplemental Directive, supra note 74. 208MHAP Update, supra note 69, at 2–3; SLMP Supplemental Directive, supra note 74. 209MHAP Update, supra note 69, at 2. 210MHA March Update, supra note 80, at 5–6. 211MHAP Update, supra note 69, at 3. 212MHA March Update, supra note 80, at 5–6. 213MHA March Update, supra note 80; SLMP Supplemental Directive, supra note 74. 214MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74. 215MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74. 216 HAMP Supplemental Directive, supra note 77; Allison Senate Testimony, supra note 105. 217 House Testimony of Dave Stevens, supra note 71. 

percent.207 For both amortizing and interest-only loans that have 

been modified, the interest rate rises after five years, just as happens under HAMP. At the five-year mark, the interest rate in the 

Second Lien Program increases to the rate that is being charged 

at that time on the modified first mortgage.208

As an alternative to modifying the second lien, lenders/investors 

have the option to extinguish second liens in exchange for a lumpsum payment from Treasury under a pre-set formula.209 While eligible first lien modifications will not require any participation by 

second lien holders, these incentives to extinguish second liens on 

loans modified under the program are intended to reduce the borrower’s overall indebtedness and improve loan performance.210 This 

option is intended to allow second lien holders ‘‘to target principal 

extinguishment to the borrowers where extinguishment is most appropriate.’’211 Servicers will be eligible to receive compensation 

when they contact second lien holders and extinguish valid junior 

liens (according to a schedule formulated by Treasury, depending 

in part on combined loan-to-value).212 Servicers will be reimbursed 

for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.213

For example, for loans that are more than 180 days past due at the 

time of modification, the lender/investor will be paid three cents 

per dollar extinguished.214 For loans less than 180 days past due, 

Treasury will pay second lien holders a specified amount for each 

dollar of unpaid principal balance extinguished.215

The program is not yet operational, therefore no loans have been 

modified under the initiative. Without officially participating 

servicers and lenders and any preliminary data, the Panel is unable to determine whether or not the Second Lien Program will be 

able to eliminate the significant obstacle that second liens can 

present to loan modification. 

4. Home Price Decline Protection Program 

Building on ideas from the FDIC, Treasury has also developed a 

price decline protection initiative with the primary purpose of increasing the number of modifications completed under HAMP in 

those markets hardest hit by falling home prices.216

Treasury’s articulated purpose for the Home Price Decline Protection (HPDP) is to encourage HAMP modifications in areas where 

homes have lost the most value. It does this by working to alleviate 

mortgage holder/investor concerns that recent home price declines 

may persist and ‘‘offset any incremental collateral losses on modifications that do not succeed.’’217 Lenders may be more willing to 

offer modifications if potential losses are partially covered. 


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218 U.S. Department of the Treasury, Treasury Announces Home Price Decline Protection Incentives (July 31, 2009) (online at www.financialstability.gov/latest/tgl07312009.html). 219 Barr Hearing Testimony, supra note 87. 220 HAMP Supplemental Directive, supra note 77. 221 HAMP Supplemental Directive, supra note 77. 222 HAMP Supplemental Directive, supra note 77. 223MHA March Update, supra note 80, at 5. 224MHA May Update, supra note 79. According to the HPDP guidelines, the amount of funds 

available to pay HPDP will be capped based upon each servicer’s servicer participation agreement. Treasury will formulate each servicer’s initial program participation cap by estimating the 

number of modifications expected to be performed by each servicer during the life of HAMP. 

HAMP Supplemental Directive, supra note 77. 225MHA May Update, supra note 79. 226 HAMP Supplemental Directive, supra note 77. 227 HAMP Supplemental Directive, supra note 77; Secretaries Geithner, Donovan Announcement, supra note 78. 228Secretaries Geithner, Donovan Announcement, supra note 78. 

There are several factors relating to HPDP eligibility. First, all 

HAMP loan modifications begun after September 1, 2009 are eligible for HPDP payments.218 As of September 1, HPDP payments became operational and were included in NPV calculations.219 Treasury has made clear that no incentives will be provided if: (1) the 

servicer has not entered into a HAMP Servicer Participation Agreement; (2) the borrower did not successfully complete the trial period and execute a HAMP modification agreement; or (3) the 

HAMP loan modification did not reduce the borrower’s monthly 

mortgage payment by at least six percent.220 In addition, HPDP incentive compensation will terminate if the borrower loses good 

standing under HAMP (i.e., if he or she misses three successive 

payments on a HAMP modification) or if the borrower pays off the 

mortgage loan balance in full.221 Second, mortgage loans that are 

owned or guaranteed by Fannie Mae or Freddie Mac are not eligible for HPDP incentive compensation.222

Program incentive payments are based upon the total number of 

modified loans that successfully complete the modification trial period and remain in the HAMP program. The HPDP incentive is 

structured as a simple cash payment on all eligible loans.223 Each 

successful loan modification will be eligible for an HPDP incentive, 

up to a total cap for HPDP incentives of $10 billion (from the $50 

billion designated for HAMP using TARP funding), but the actual 

amount spent will be dependent upon housing price trends.224

Upon the completion of a successful trial modification, the lender/ 

investor accrues 1/24th of the HPDP incentive per month for 24 

months.225 Incentive payments are calculated based on a Treasury 

formula incorporating an estimate of the projected home price decline over the next year based on changes in average local market 

home prices over the two previous quarters, the unpaid principal 

balance of the mortgage loan prior to HAMP modification, and the 

mark-to-market loan-to-value ratio of the mortgage loan prior to 

HAMP modification.226 Incentives are to be paid on the first- and 

second-year anniversaries of the borrower’s first trial payment due 

date under HAMP.227 In other words, the incentive payments on 

all modified mortgages will help cover the ‘‘incremental collateral 

loss on those modifications that do not succeed.’’228

Because the program became active quite recently, performance 

data are not available. Treasury has not specified the number of 

loans it estimates will be covered by HPDP. All loans eligible for 

HPDP payments are also covered by incentive payments under the 


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229GAO HAMP Report, supra note 98, at 23. 230MHA March Update, supra note 80. 231The servicer will independently establish both property value and the minimum acceptable 

net return on the property, and will notify the borrower of an acceptable list price and any permissible price reductions. The price can be determined based on one of two factors: (1) a property appraisal, or (2) one or more broker price opinions dated within 120 days of the short sale 

agreement. MHA May Update, supra note 79. 232MHA May Update, supra note 79. 233MHA May Update, supra note 79. 234MHA May Update, supra note 79. 

first lien program. As the Government Accountability Office (GAO) 

has noted, loans requiring a mandatory modification under the first 

lien program would nonetheless be eligible for additional payments 

under this program.229 Treasury has not offered any estimates of 

the incremental modifications created by this program—that is to 

say, the number of lenders who agree to participate only because 

of the additional coverage against losses available through the 

HPDP program, plus the number of non-mandatory modifications 

that lenders may be willing to make because of the additional protection against losses. Without such information, it is unclear why 

the program should provide additional payments for modifications 

that would have been made anyway. 

5. Foreclosure Alternatives Program (FAP) 

Treasury has also developed an initiative to limit the impact of 

foreclosure when loan modifications cannot be performed. On May 

14, Treasury Secretary Geithner and HUD Secretary Donovan announced new details on the Foreclosure Alternatives Program, an 

additional MHA program to help homeowners facing foreclosure. 

Under the FAP, Treasury will provide servicers with incentives to 

pursue alternatives to foreclosures, such as short sales or the taking of deeds-in-lieu of foreclosure.230 A short sale occurs when the 

borrower is unable to pay the mortgage and the servicer allows the 

borrower to sell the property at its current value, regardless of 

whether the sale covers the remaining balance on the mortgage. 

The borrower must list and actively market the home at its fair 

value,231 and the sales transaction must be conducted at arm’s 

length, with all proceeds after selling costs going towards the discounted mortgage payoff.232 If the borrower lists and actively markets the home but is unable to sell within the agreed-upon time 

frame, the servicer may resort to a deed-in-lieu transaction, where 

the borrower voluntarily transfers ownership of the property to the 

servicer, so long as the title is unencumbered.233

Since Treasury recognizes that the MHA program will not help 

every at-risk homeowner or prevent all foreclosures, Treasury’s primary objective for the FAP is to assist homeowners who cannot afford to remain in their homes by developing an alternative to foreclosure that results in their successful relocation to an affordable 

home.234 While short sale and deed-in-lieu transactions may avoid 

depressing home prices in an individual neighborhood, as foreclosures do, this may be offset by the effect of putting more inventory on the broader housing market when there is already a substantial overhang. 

Treasury designed the FAP to be used in those cases where the 

borrower is generally eligible for an MHA loan modification, such 

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235Secretaries Geithner, Donovan Announcement, supra note 78; MHA May Update, supra 

note 79. 236MHA May Update, supra note 79. 237For the property to be sold as a short sale or deed-in-lieu, all junior liens, mortgages or 

other debts against the property must be cleared, unless the servicer has a ‘‘reasonable belief’’ 

that all liens on the property can be cleared. MHA May Update, supra note 79. 238MHA May Update, supra note 79. 239There is a maximum marketing period of one year for the property in order to ensure that 

steps are being taken as quickly as possible to complete the short sale and deed-in-lieu process. 

MHA May Update, supra note 79. 240MHA May Update, supra note 79. 241MHA May Update, supra note 79. 242MHA May Update, supra note 79. 243MHA May Update, supra note 79. 244MHA March Update, supra note 80; MHA May Update, supra note 79. 245MHA May Update, supra note 79. 246MHA May Update, supra note 79. This amount is in addition to any funds the servicer 

may provide to the borrower. 247MHA May Update, supra note 79. 

occupied property in default, but does not qualify or is unable to 

maintain payments during the trial period or modification.235 Eligible borrowers can participate until December 31, 2012. Prior to resorting to foreclosure, servicers participating in HAMP must evaluate eligible borrowers to determine if a short sale is appropriate.236

This determination is based on a number of factors, including property condition and value, average marketing time in the community 

where the property is located, the condition of title including the 

presence of any junior liens,237 along with the servicer’s finding 

that the net sales proceeds of the property are anticipated to exceed its recovery through foreclosure.238 If the servicer determines 

that a short sale would be appropriate, the borrower will have at 

least 90 days239 to market and sell the property, using a licensed 

real estate professional experienced in selling properties in the vicinity.240 No foreclosure sale can occur during the agreed-upon 

marketing period, provided that the borrower is making good-faith 

efforts to sell the property.241 Servicers are not permitted to charge 

borrowers any fees for participating in the FAP.242 Participating 

servicers must comply with program requirements so long as they 

do not conflict with contractual agreements with investors. 

The FAP facilitates both short sales and deeds-in-lieu by providing incentive payments to borrowers, junior-lien holders, and 

servicers, similar in structure and amount to MHA incentive payments. Servicers can receive incentive compensation of up to $1,000 

for each successful completion of a short sale or deed-in-lieu.243

Borrowers are eligible for a payment of $1,500 in relocation expenses in order to effectuate short sales and deeds-in-lieu of foreclosure.244 The short sale agreement, upon the servicer’s option, 

may also include a condition that the borrower agrees to ‘‘deed the 

property to the servicer in exchange for a release from the debt if 

the property does not sell within the time specified in the Agreement or any extension thereof.’’245 In such cases, the borrower 

agrees to vacate the property within 30 days and, upon performance, receives $1,500 from Treasury to assist with relocation 

costs.246 Treasury has also agreed to share the cost of paying junior 

lien holders to release their claims by matching $1 for every $2 

paid by investors, for a maximum total Treasury contribution of 

$1,000.247 Payments are made upon the successful completion of a 

short sale or deed-in-lieu. 


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248MHA May Update, supra note 79. 249 House Testimony of Dave Stevens, supra note 71. 250Pub. L. No. 110–289 §§ 1401–04. 251The purpose of the program is: 

(1) to create an FHA program, participation in which is voluntary on the part of homeowners 

and existing loan holders to insure refinanced loans for distressed borrowers to support longterm, sustainable homeownership; (2) to allow homeowners to avoid foreclosure by reducing the 

principal balance outstanding, and interest rate charged, on their mortgages; (3) to help stabilize 

and provide confidence in mortgage markets by bringing transparency to the value of assets 

based on mortgage assets; (4) to target mortgage assistance under this section to homeowners 

for their principal residence; (5) to enhance the administrative capacity of the FHA to carry out 

its expanded role under the HOPE for Homeowners Program; (6) to ensure the HOPE for Homeowners Program remains in effect only for as long as is necessary to provide stability to the 

housing market; and (7) to provide servicers of delinquent mortgages with additional methods 

and approaches to avoid foreclosure. 

12 U.S.C. § 1715z–23(b). The mortgage must have been taken out prior to January 1, 2008, 

all information on the original mortgage must be true, and the homeowner must not have been 

convicted of fraud. Id. 252White House Office of Press Secretary, President Obama Signs the Helping Families Save 

Their Homes Act and the Fraud Enforcement and Recovery Act (May 20, 2009) (online at 

www.whitehouse.gov/thelpressloffice/Reforms-for-American-Homeowners-and-ConsumersPresident-Obama-Signs-the-Helping-Families-Save-their-Homes-Act-and-the-Fraud-Enforcement-and-Recovery-Act/); Jessica Holzer, Dispute With Banks Continues To Dog U.S. Mortgage 

Relief Program, Wall Street Journal (Sept. 23, 2009) (online at online.wsj.com/article/BT-CO20090923-709566.html) (hereinafter ‘‘Holzer Mortgage Relief Article’’). 253 U.S. Department of Housing and Urban Development, Fact Sheet: HOPE for Homeowners 

to Provide Additional Mortgage Assistance to Struggling Homeowners (accessed Oct. 6, 2009) (online at www.hud.gov/hopeforhomeowners/pressfactsheet.cfm). 

The Program also contains a streamlined process for completing 

short sale transactions. Treasury will provide standardized documentation, including a short sale agreement and an offer acceptance letter, which will outline marketing terms, the rights and responsibilities of all parties, and identify timeframes for performance.248 With the use of standardized documents, Treasury expects 

that the complexity of these transactions will be minimized, increasing the number of short sale transactions. Other program features include limits on commission reductions. 

The remaining details of the program are still being finalized, 

and Treasury plans to announce them once they are completed.249

Treasury has also not announced the number of borrowers it anticipates will be assisted under FAP. 

6. HOPE for Homeowners 

HOPE for Homeowners is part of the Housing and Economic Recovery Act of 2008 (HERA), signed into law in July 2008.250 It is 

intended to help borrowers who are having difficulty making payments on their mortgages but who can afford an FHA-insured loan 

by refinancing the borrower into an FHA loan.251 The program also 

directly addresses the problem of underwater mortgages by requiring reduction in the principal balance of the loan.252 Like MHA, it 

is a federal program, but is not part of TARP and is run through 

HUD, not Treasury, although it has subsequently utilized some 

TARP funding. Unfortunately, it has had little impact thus far. 

HUD announced the original program details in October 2008. 

Voluntary for all participants, it requires lenders to write down the 

principal of the mortgage to 90 percent of the value of the property.253 Though the original program did not provide any monetary 

incentives for principal reduction, a lender would avoid the expenses of foreclosure and the possibility that the home would sell 

for less than 90 percent of its value. Also, as discussed below, 

under the current program the lender will benefit from any equity 


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254 U.S. Department of Housing and Urban Development, Bush Administration Announces 

Flexibility for ‘‘HOPE for Homeowners’’ Program (Nov. 19, 2008) (online at www.hud.gov/news/ 

release.cfm?content=pr08-178.cfm). 255 Id. 256Pub. L. No. 110–289 § 257(k). Equity sharing is a little known financing method by which 

a non-resident investor provides capital and receives a portion of any equity in the home. The 

bottom line in equity sharing is appreciation; if the home does not appreciate in value, then 

the non-resident investor will receive no benefit from the arrangement. Id. 257 U.S. Department of Housing and Urban Development, Basic Consumer Facts about the 

HOPE for Homeowners Program (Oct. 2, 2008) (online at www.hud.gov/hopeforhomeowners/ 

consumerfactsheet.cfm). HUD provides an example of how this will work. For a home currently 

worth $200,000, the mortgage would be written down to $180,000, providing the homeowner 

with $20,000 equity. If the homeowner sold or refinanced within one year, he or she would have 

to pay 100 percent of the equity received, or all $20,000, to FHA. If the home were sold or refinanced in the second year, then FHA would receive 90 percent of the equity, or $18,000. The 

percentages decrease by 10 percent a year, until they level out after year five at 50 percent 

shared. 258 Id. In the example stated above, if the homeowner sold the home for $250,000 at any point in the future, FHA would receive $25,000 of the $50,000 appreciation in the home. 259Federal Housing Administration, HOPE for Homeowners Equity Sharing (accessed Oct. 6, 

2009) (online at www.fha.com/hopelforlhomeownerslequity.cfm). 260Pub. L. No. 111–22 § 202. 261 Comments of Senator Harry Reid, Congressional Record—Senate: S5184 (May 6, 2009). 262 Comments of Chris Dodd, Congressional Record—Senate: S5003 (May 1, 2009). 263Pub. L. No. 111–22 § 202(a)(11). 264Pub. L. No. 111–22 § 202(b). 

created as well as future appreciation in the home. EESA amended 

the Housing and Economic Recovery Act, providing HUD with 

greater authority under the program and providing borrowers with 

more flexibility under the program. Revised program details were 

released in November 2008, aiming to ‘‘reduce the program costs 

for consumers and lenders alike while also expanding eligibility by 

driving down the borrower’s monthly mortgage payments.’’254

Among other things, these changes increased the LTV ratio to 96.5 

percent and allowed lenders to extend the loan’s term from 30 to 

40 years.255

A unique feature of HOPE for Homeowners is that participating 

homeowners are required to share with FHA both the equity created at the beginning of the new mortgage and a portion of the future appreciation in the home.256 FHA will receive 100 percent of 

the equity if the home is sold during the first year, and will reduce 

its claim by 10 percent each year until after the fifth year of the 

agreement, when the level settles at a 50 percent split between the 

FHA and the homeowner.257 The program also requires the borrower to share any future home price appreciation with the FHA 

in a 50/50 split that remains constant throughout the life of the 

loan.258 If there is no equity or appreciation in the home when the 

homeowner sells or refinances, the homeowner is not required to 

pay anything to FHA.259

The Helping Families Save Their Homes Act of 2009 further 

amended the program in May 2009.260 An impetus for the amendments was the low participation in the program.261 Senator Dodd 

explained that, ‘‘While the intentions for the bill were high, the reality is, the bill didn’t even come close to achieving the goals those 

of us who crafted it thought it would.’’262 This bill added two incentives for servicers to participate in the program. Prior to this, there 

had been no incentive written into the law for servicer participation. The Helping Families Save Their Homes Act added incentive 

payments to servicers. These incentive payments closely approximate MHA incentive payments.263 The incentive payments are 

funded through TARP.264


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265Pub. L. No. 111–22 § 202(a)(6)(C). 266 U.S. Department of Housing and Urban Development, HOPE for Homeowners Program 

Monthly Report to Congress (Jan. 2009) (online at portal.hud.gov/portal/page/portal/FHAlHome/ 

lenders/h4hlmonthlylreportsltolcongress/ 

H4H%20Report%20to%20Congress%20January.pdf). Although HUD is statutorily required to 

submit monthly reports to Congress on the progress of the program, January 2009 appears to 

be the latest report available. Id. 267 Holzer Mortgage Relief Article, supra note 252. 268 Holzer Mortgage Relief Article, supra note 252. 269 Holzer Mortgage Relief Article, supra note 252. 270 Holzer Mortgage Relief Article, supra note 252; Statistics provided by U.S. Department of 

Housing and Urban Development to the Panel. Interestingly, since June 2009, there are no applications which lenders have announced an intention to approve. This could be because lenders 

are waiting for formal implementation of the May amendments to the program. 

Second, the appreciation-sharing structure was changed: HUD 

must now share with first or second lien holders the future appreciation up to the appraised value of the property when the existing 

loan was first issued. The portion of appreciation shared with lien 

holders comes out of the 50 percent FHA share.265 The lien holders 

do not, however, receive a portion of the equity sharing. The appreciation sharing could be an incentive to lenders otherwise wary of 

writing down the principal of the loan. This compensation to second 

lien holders could also be crucial to the success of the program. 

Second lien holders are often the sticking point in mortgage modifications, and providing them with a share of future appreciation 

in the home could incentivize them to agree to the modification. 

Without direct financial incentives, lenders had limited reasons to 

participate in the program, as demonstrated by the lack of participation. Because the loans are underwater, junior lien holders are 

out of the money and only stand to gain by holding out until prices 

increase, absent incentives; the direct incentive payments and appreciation sharing may draw more lender interest. Allowing lenders to also participate in equity sharing could further increase lender participation. 

HOPE for Homeowners was originally predicted to help 400,000 

homeowners. Though it is still in effect and running concurrent to 

MHA, it has seen little success. It is doubtful whether this goal will 

be reached. By January 24, 2009, it had closed 22 loans, and had 

442 applications for which the lender intended to approve the borrower for the program.266 By September 23, 2009, only 94 loans 

had closed, and lenders had stated an intention to approve an additional 844 applications.267 These numbers do not reflect the program as revised by the May 2009 amendments, as they have not 

yet been enacted. Though the revised program will be rolled out 

soon, HUD has still not reached agreement with large national 

banks and their regulators about how much payment will be required to extinguish second liens.268 HUD still believes that the 

program will serve a ‘‘substantial niche’’ of borrowers, especially 

those with no second mortgage.269 There is also a concern that 

servicers, already overwhelmed with MHA modification requests, 

will not be willing to complete the additional work required by 

HOPE for Homeowners.270 Although HUD continues to work on 

the program and has plans to re-launch the program, it appears 

unlikely at this time that HOPE for Homeowners will play more 

than a minor role in providing foreclosure relief. 


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271Loss sharing agreements allow the FDIC to sell loans that otherwise would be difficult if 

not impossible to unload. Under these agreements, the FDIC agrees to cover 80 percent of the 

acquiring bank’s losses on certain loans that it buys, up to a specified limit. On losses above 

the limit, the FDIC agrees to cover 95 percent of the acquiring bank’s losses. 272Tami Luhby, FDIC Pushes Mortgage Help for Jobless, CNNMoney.com (Sept. 11, 2009) (online at money.cnn.com/2009/09/11/news/economy/forbearancelunemployment/index.htm). 273Federal Deposit Insurance Corporation discussions with Panel staff, Sept. 10, 2009. 274 Binyamin Applebaum, FDIC Seizes Three Banks, Expanding Loan-Relief Effort, Washington Post (Nov. 22, 2008) (online at www.washingtonpost.com/wp-dyn/content/article/2008/11/ 

21/AR2008112104099.html). 275Federal Deposit Insurance Corporation, FDIC Loan Modification Program (online at 

www.fdic.gov/consumers/loans/loanmod/FDICLoanMod.pdf) (accessed Oct. 6, 2009). 276 Id. 277 Alexandra Andrews & Emily Witt, The Secret Test That Ensures Lenders Win On Loan 

Mods, ProPublica (Sept. 15, 2009) (online at www.propublica.org/ion/bailout/the-secret-test-thatensures-lenders-win-on-loan-mods–915). 

7. Other Federal Efforts Outside of TARP 

While the federal government’s primary foreclosure mitigation efforts are embodied in MHA or otherwise linked to the MHA program through TARP funding, there are other complementary federal efforts. The Federal Deposit Insurance Corporation (FDIC) has 

established a loan modification program that is a mandatory component of all FDIC residential mortgage loss-sharing agreements 

with purchasers of failed banks’ assets.271 Between January 2008 

and early September 2009, the FDIC entered into 53 such losssharing agreements,272 which cover potential losses on more than 

$50 billion in loans, including both residential and commercial 

mortgages.273 Many of the loss-sharing deals involve loans that 

were originated by small banks that have since failed; however, 

some of the loans were made by larger lenders, including IndyMac 

and Downey Savings and Loan.274 Under the FDIC Mortgage Loan 

Modification Program, delinquent borrowers who received mortgages from those failed banks may be eligible for a modification. 

The FDIC’s program is generally quite similar to HAMP. Both 

programs apply to residential mortgages that are more than 60 

days delinquent. Both use an NPV test to determine the estimated 

difference between the amount the lender would earn from a foreclosure sale versus the amount that a loan modification would 

yield. Both programs use standardized methods—reducing interest 

rates, extending the term of the loan, and forbearing principal—to 

reduce borrowers’ mortgage payments in order to decrease their 

debt-to-income ratio.275 Not all of the details of the two programs 

are the same, though. For instance, HAMP allows interest rates to 

be reduced to as low as 2 percent, while the lowest interest rate 

that can be charged under the FDIC program is 3 percent.276 Also, 

while the FDIC has released the model that it uses to calculate net 

present value, Treasury has not publicly released its NPV model 

for HAMP, a decision that has drawn criticism from some homeowner advocates.277

In September 2009, the FDIC, as part of its loan modification 

program, made an effort to address the tide of foreclosures caused 

by rising unemployment. The agency said that it was encouraging 

banks with which it has entered loss-sharing agreements to consider a temporary forbearance plan of at least six months for borrowers whose default is primarily due to unemployment or underemployment. ‘‘With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a 


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278Federal Deposit Insurance Corporation, FDIC Encourages Loss-Share Partners to Provide 

Forbearance to Unemployed Borrowers (Sept. 11, 2009) (online at www.fdic.gov/news/news/press/ 

2009/pr09167.html). 279 John Rao & Geoff Walsh, Foreclosing a Dream: State Laws Deprive Homeowners of Basic 

Protections, National Consumer Law Center, at 3 (Feb. 2009) (online at www.consumerlaw.org/ 

issues/foreclosure/content/FORE-Report0209.pdf). A state’s foreclosure process is usually laid out 

in its civil code. Local variations, however, may exist; for example, a locality might modify the 

state rules about the time period allowed for parts of the process, the manner and places for 

publication of foreclosure notices, and the location of sales of foreclosed property. Id. 280 Id. at 8. 281Some states permit both, and in many cases non-judicial procedures include at least the 

due process rights contained in the judicial foreclosure process. In 18 states, mortgages are most 

commonly foreclosed by judicial action. The majority of foreclosures occur through judicial procedures, and in 32 states plus the District of Columbia, the majority of foreclosures occur through 

non-judicial procedure. Id. at 12–13. See also an appendix to the same report, Survey of State 

Foreclosure Laws, National Consumer Law Center (Feb. 2009) (online at www.consumerlaw.org/ 

issues/foreclosure/content/Foreclosure-Report-Card-Survey0209.pdf). 282 In states that do not regard either judicial or non-judicial foreclosure sales as immediately 

final, borrowers may have a certain period to repurchase the property for the amount owed and 

the sale only becomes final when that ‘‘redemption’’ period ends. 

helping hand to avoid unnecessary and costly foreclosures,’’ FDIC 

Chairman Sheila Bair said in a statement. ‘‘This is simply good 

business since foreclosure rarely benefits lenders and would cost 

the FDIC more money, not less.’’ 278

It is not clear whether the FDIC’s loan modification program has 

been successful. The FDIC has yet to release data on the number 

of loans covered by its loan modification program; the number of 

modification offers that have been made to borrowers; or the number of loans modified. FDIC has told the Panel that it is compiling 

the data. Once the data are released, it should be possible to compare the modification rates under the FDIC program with similar 

programs, such as HAMP. 

8. State/Local/Private Sector Initiatives 

a. State Law Governs the Foreclosure Process 

In addition to the federal foreclosure mitigation efforts, a number 

of state, local, and private sector initiatives are supplementing federal efforts. State law continues for the most part to determine 

when and how an individual can be subject to foreclosure. Mediation, counseling, and outreach efforts at the state and local levels 

are growing because of the mortgage crisis. 

State foreclosure laws vary, in many cases widely.279 Many predate the residential mortgage industry, let alone the enormous 

changes that began in the 1980s.280 There are both judicial and 

non-judicial (often called ‘‘power-of-sale’’) foreclosure states.281 Judicial foreclosure requires a lender to obtain court authority to sell 

a home. The lender must prove that the mortgage is in default, and 

the borrower can put forward any defenses he or she has; the court 

may also try to foster a settlement. If the foreclosure goes forward, 

the proceeds from sale of the property go first to satisfy the outstanding mortgage balance. 

In a non-judicial foreclosure, a lender simply declares a homeowner in default and provides him or her with a notice of default 

and intent to sell the property. Most states treat a completed sale 

as final,282 so that the homeowner’s only chance to assert any 

claims and defenses is to ask a court to stop the sale before it occurs; the financial and sometimes emotional condition of the borVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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283Porter Bankruptcy Mortgage Claims, supra note 173, at 127, 147. 284Porter Bankruptcy Mortgage Claims, supra note 173, at 146. 285Starting in February 1933 and continuing over the subsequent eighteen months, twentyseven states imposed moratoria to help address the number of mortgage foreclosures. These 

states included Arizona, Arkansas, California, Delaware, Idaho, Illinois, Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Montana, Nebraska, New Hampshire, New York, 

North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South 

Dakota, Texas, Vermont, and Wisconsin. Other states made permanent changes to state laws 

governing foreclosure by limiting the rights or incentives of lenders to foreclose on mortgaged 

property. David C. Wheelock, Changing the Rules: State Mortgage Foreclosure Moratoria During 

the Great Depression, Federal Reserve Bank of St. Louis Review, at 573–75 (Nov./Dec. 2008). 286The statute was upheld by the United States Supreme Court in a 5–4 vote in Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934). The Blaisdell decision has never been 

explicitly overruled, and the decision has set the stage for current and future mortgage moratoria. 287 In April 2007, Massachusetts enacted a 30–60 day foreclosure moratorium. In August 2008, 

New York enacted similar legislation requiring lenders to notify borrowers in writing at least 

90 days before commencing a foreclosure action. In North Carolina, Gov. Beverly E. Perdue 

signed a bill into law on September 6 that allows a court clerk to postpone a foreclosure hearing 

for up to 60 days in order to provide homeowners with additional time to work out a payment 

plan with their mortgage holder and remain in their home. This legislation goes into law on 

October 1. Additionally, on February 20, 2009, California Gov. Arnold Schwarzenegger signed 

a bill placing a 90–day moratorium on some, but not all, foreclosures of California homes purchased between January 1, 2003 and January 1, 2008. It went into effect in late May. Current 

moratoria, such as these examples, are generally short-term, especially as compared to the 1933 

Minnesota statute’s two-year moratorium. 

Compared with other states, Maryland’s foreclosure prevention measures have been forceful. 

In April 2008 Maryland instituted a law that requires a 90–day period after default before lenders can file a foreclosure action, plus a 45–day period between notice of a foreclosure and a sale 

of the property. Maryland also requires servicers to report data related to their loan modifications to the state; to provide the state with lists of homeowners with adjustable rate mortgages 

that will soon reset (to permit targeted outreach efforts to those individuals); and to respond 

promptly to homeowners and pursue loss mitigation where possible. 

rower, and his or her potential unfamiliarity with the legal system, 

may effectively limit that option. 

States with judicial foreclosures can adopt or enforce stricter burdens of proof for parties bringing foreclosure actions. For example, 

if a lender cannot prove ownership of the property, then it cannot 

foreclose on a residence. Requiring mortgagees to provide the original paperwork would do more than satisfy a legal technicality; it 

would often have practical consequences. One 2007 study of more 

than 1,700 bankruptcy cases involving home foreclosures found 

that the note was missing in 41.1 percent of the cases.283 And without the mortgage note and other key documents, it can be difficult 

to assess the accuracy of the mortgagee’s calculation of the amount 

of debt owed. Disputes over these calculations are common. As the 

same 2007 study noted, ‘‘Without documentation, parties cannot 

verify that the claim is correctly calculated and that it reflects only 

the amounts due under the terms of the note and mortgage and 

permitted by other applicable law.’’ 284

b. Innovative Approaches by States, Localities, and the 

Private Sector 

Moratoria. Many states responded to the rise in foreclosures during the Great Depression by imposing temporary moratoria on both 

farm and nonfarm residential mortgage foreclosures.285 Such moratoria were subsequently upheld by the Supreme Court.286 With the 

number of foreclosures currently on the rise, many states are revisiting this concept.287 Proponents of moratoria argue that they provide an incentive to make modifications by closing off the possibility of a foreclosure for a long enough period of time that lenders 


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288 Jim Siegel, Ohio House Panel Passes Foreclosure Moratorium, Columbus Dispatch (May 13, 

2009) (online at www.dispatchpolitics.com/live/content/locallnews/stories/2009/05/13/copy/ 

noforeclosure.ARTlARTl05–13–09lB1lITDRI8L.html?adsec=politics&sid=101). 289 Jeremy Burgess, Effects of the Foreclosure Moratorium in Wayne County, Urban Detroit 

Wholesalers LLC (Feb. 9, 2009) (online at www.urbandetroitonline.com/detroit-real-estate/foreclosure-moratorium-wayne-county/). 290Florida Supreme Court Task Force on Residential Mortgage Foreclosure Crisis, Final Report and Recommendations on Residential Mortgage Foreclosure Cases, at 27 (Aug. 17, 2009) (online at www.floridasupremecourt.org/publinfo/documents/Filedl08–17– 

2009lForeclosurelFinallReport.pdf). 291 In New York, mandatory settlement conferences have been instituted for high-cost, 

subprime and non-traditional home loans. In New Jersey, the courts have established mandatory mediation for all cases in which owner-occupants of homes contest foreclosure actions. In 

Maine, a pilot project has been established in York County, under which mediation is triggered 

in foreclosure cases where the owner-occupant responds to the lender’s complaint. The program 

is expected to be expanded across the entire state in January. In North Carolina, a new law 

requires lenders to describe the efforts they made to resolve the case voluntarily prior to the 

foreclosure proceeding. And voluntary mediation programs have been established in Ohio and 

Nevada, one of the states most battered by foreclosures. State of New York Banking Dept., Help 

for Homeowners Facing Foreclosure (online at www.banking.state.ny.us/hetp.htm) (accessed October 8, 2009); New Jersey Judiciary, Judiciary Announces Foreclosure Mediation Program to 

Assist Homeowners at Risk of Losing Their Homes (Oct. 16, 2008) (online at 

www.judiciary.state.nj.us/pressrel/pr081016c.htm); Maine Judicial Branch, Homeowner Frequently Asked Questions (online at www.courts.state.me.us/courtlinfo/services/foreclosure/ 

homelfaq.html) (accessed Oct. 6, 2009); Maine Judicial Branch, Foreclosure Diversion Project— 

York County Program Pilot Project (online at www.courts.state.me.us/courtlinfo/services/foreclosure/index.html) (accessed Oct. 6, 2009); Andrew Jakabovics & Alon Cohen, It’s Time We 

Talked: Mandatory Mediation in the Foreclosure Process, Center for American Progress, at 42 

(June 2009) (online at www.americanprogress.org/issues/2009/06/pdf/foreclosurelmediation.pdf); 

General Assembly of North Carolina, Session Law 2009–573 (online at www.ncga.state.nc.us/ 

Sessions/2009/Bills/Senate/PDF/S974v5.pdf); The Supreme Court of Ohio & The Ohio Judicial 

System, Foreclosure Mediation Resources (online at www.supremecourtofohio.gov/JCS/ 

disputeResolution/foreclosure/default.asp) (accessed Oct. 6, 2009); Supreme Court of Nevada, 

First Two Mediations Scheduled in Foreclosure Mediation Program (Aug. 25, 2009) (online at 

www.nevadajudiciary.us/index.php/foreclosure-mediation/471–first-two-mediations-scheduled-inforeclosure-mediation-program.html). 292 In June 2008, the Connecticut legislature established a statewide voluntary mediation program covering all one- to four-unit owner-occupied properties. The program was initially voluntary; in its first nine months only 34 percent of eligible borrowers chose mediation but they 

were successful almost 60 percent of the time. The results led the legislature to act this year 

to require participation by borrowers. 293 Council of the City of Philadelphia, Resolution No. 080331 (March 27, 2008) (online at 

webapps.phila.gov/council/attachments/5009.pdf). 

and servicers will consider other options,288 while opponents 

counter that delaying foreclosures simply extends the crisis and 

postpones the eventual day of reckoning.289

Mediation. A borrower and a lender cannot modify a mortgage 

without consultation. But servicers are often not equipped to handle the volume of calls they receive. Borrowers complain that 

servicers ignore them and that, even when they reach someone, repeated requests for the same information produce only silence. 

When they cannot reach a servicer or call repeatedly and no one 

can help, borrowers may give up in frustration, while the servicers 

may list the borrower as non-responsive. In other cases, however, 

borrowers do not even try to have their mortgages modified, often 

because they feel financially or emotionally overwhelmed.290

States have increasingly turned to mediation—the use of a neutral third party to create a dialogue between lender and borrower— 

to overcome these obstacles.291 Mandatory mediation programs require both the lender and borrower to participate; in voluntary programs mediation is triggered only if the borrower chooses. There is 

a growing consensus that mandatory programs are more effective.292

The Philadelphia mediation program was featured at the Panel’s 

foreclosure mitigation field hearing. In April 2008,293 the PhiladelVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00081 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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294 Congressional Oversight Panel, Written Testimony of Judge Annette Rizzo, Court of Common Pleas, First Judicial District, Philadelphia County, Philadelphia Field Hearing on Mortgage 

Foreclosures, at 4 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409– 

rizzo.pdf). 295 Id. at 90–91. 296 Id. at 8. 297 Id. Congressional Oversight Panel, Written Testimony of Philadelphia Legal Assistance Supervising Attorney, Consumer Housing Unit, Irwin Trauss, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409– 

trauss.pdf) (hereinafter ‘‘Trauss Philadelphia Hearing Written Testimony’’). 298 National Consumer Law Center, State and Local Foreclosure Mediation Programs: Can 

They Save Homes? (Sept. 2009) (online at www.consumerlaw.org/issues/foreclosurelmediation/ 

content/ReportS-Sept09.pdf). 299For example, Colorado, which had the nation’s fifth-highest foreclosure rate in 2008, has 

created one of the nation’s strongest outreach efforts. It includes (1) a toll-free telephone line 

sponsored by state agencies, non-profit groups, lenders, and other private sector businesses; (2) 

English- and Spanish-language television, radio, and print public service announcements; and 

(3) a web campaign that makes use of YouTube and Twitter. Between October 2006 and March 

2008, the Colorado hotline received 33,250 calls, which in turn produced 8,000 counseling sesphia courts created a Residential Mortgage Foreclosure Diversion 

Pilot Program, which required ‘‘conciliation conferences’’ in all foreclosure cases involving residential properties with up to four units 

that were used as the owner’s primary residence. The idea is that 

bringing borrowers into the same room with lenders’ representatives will foster a compromise that is in both parties’ best interests. 

As Judge Annette Rizzo, the program’s Philadelphia architect, said 

in written testimony submitted at the Panel’s foreclosure mitigation field hearing, ‘‘[o]ur Program is all about the face-to-face between the lender and borrower.’’ 294 The Philadelphia program has 

been hailed as a potential model for how to deal with the foreclosure crisis in other localities. And while officials in Philadelphia 

acknowledge a need to collect more data,295 preliminary statistics 

indicate that Philadelphia is having an unusually high level of success at averting foreclosures. Since the program began, 25 percent 

of all homes in the program have been saved from foreclosure, 

while another 48 percent of cases are waiting for resolution as negotiations between the two parties continue.296 Officials in Philadelphia say the active involvement of the local community has been 

an important part of the program’s success. This includes the efforts of mediators and lawyers who have donated their time, as 

well as community groups that have canvassed neighborhoods to 

ensure that distressed homeowners are aware of the services that 

are available to them.297

While state foreclosure mediation programs have the potential to 

play an important role in preventing foreclosures and in ensuring 

that homeowners receive the benefits of HAMP, they have not been 

able to stem the full tide of foreclosures. Many of the existing programs have been found to leave too much discretion in the hands 

of the servicers and fail to impose meaningful obligations on 

servicers to modify loans.298

Counseling. Borrowers are often intimidated to speak directly 

with a lender or have difficulty when they attempt such contact. 

Housing counselors offer borrowers advice and an understanding of 

their options. Forty states have adopted counseling programs or appropriated funds for counseling programs. 

Outreach. No program can succeed if homeowners do not know 

about it, so strong public outreach efforts are essential. At least 17 

state and local governments have established toll-free foreclosure 

hotlines that refer callers to trained housing counselors.299 At least 


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sions by the end of 2007; 67 percent of those who received mortgage counseling were able to 

stay in their homes, at least initially, 13 percent gave up their homes voluntarily, and 20 percent were unable to avoid foreclosure. 300 National Governors Association Center for Best Practices, Foreclosure Mitigation: Outreach 

(July 29, 2009) (online at www.nga.org/portal/site/nga/menuitem. 9123e83a1f6786440ddcbeeb 

501010a0/?vgnextoid= d02e19091b68f110VgnVCM1 000005e00100aRCRD). 301The 11 states were Alabama, Arkansas, Hawaii, Kansas, New Hampshire, North Dakota, 

Texas, Utah, Washington, West Virginia, and Wyoming. Pew Defaulting on the Dream Article, 

supra note 10. 302The six states, all of which had no state-funded refinance program, no loan modification 

program, no effort to prevent rescue scams and mortgage fraud, and no housing counseling 

available, were Alabama, Arkansas, Kansas, North Dakota, West Virginia, and Wyoming. Pew 

Defaulting on the Dream Article, supra note 10. 303 HOPE Now, Phase 1National Data: July 2007 to July 2009 (online at www.hopenow.com/ 

industry-data/Summary%20Charts%20Jul%202009%20v2.pdf) (accessed Oct. 6, 2009). 304 Id. 305 Congressional Oversight Panel, Testimony of Federal Reserve Bank of Boston Senior Economist and Policy Advisor, Research Department, Dr. Paul Willen, Philadelphia Field Hearing 

on Mortgage Foreclosures, at 109–110 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409-willen.pdf) (hereinafter ‘‘Willen Philadelphia Hearing Written Testimony’’). 306Pennsylvania Housing Finance Agency, Pennsylvania Foreclosure Prevention Act 91 of 

1983—Homeowners’ Emergency Mortgage Assistance Program (HEMAP) (online at 

www.phfa.org/consumers/homeowners/hemap.aspx) (accessed Oct. 6, 2009). 307Trauss Philadelphia Hearing Written Testimony, at 3, supra note 297, at 10. 

32 states have created websites to inform the public about the 

available assistance programs.300

The Pew Center on the States found that, as of 2008, 11 states 

and the District of Columbia did not offer housing counseling,301

and six states offered no foreclosure prevention services at all.302

The private sector HOPE NOW alliance among housing counselors, 

mortgage companies, investors, and other participants in the mortgage market works to increase outreach efforts nationwide, putting 

financially distressed individuals in touch with 22 different counseling agencies across the country, but its efforts are especially important in areas that lack other options. The volume of cases with 

which the alliance and its linked agencies have dealt rose from 

60,000 monthly in July 2007 to roughly 150,000 in July 2009.303

Subprime loan work-out plans have steadily increased as well, from 

80,000 in July 2007 to 100,000 in July 2009.304

Temporary Financing Programs. The current foreclosure prevention efforts at the federal level do not specifically target delinquencies caused by unemployment, despite evidence that many of 

today’s foreclosures are the result of a sudden decline in income.305

However, the state of Pennsylvania does run a program that provides a safety valve for homeowners who have been laid off. Since 

1983, the state has been operating an emergency loan program for 

people who have lost their jobs or been negatively impacted by another life event, such as illness or divorce, and are subsequently 

unable to make their mortgage payments. Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Program (HEMAP) offers 

mortgage relief for as long as two years or for as much as $60,000. 

The program helps not only people who are currently unemployed, but also those who fell behind on their mortgage payments 

during an earlier period of unemployment. Loan recipients who 

currently have jobs are required to pay up to 40 percent of their 

net monthly income toward their housing expenses,306 while loans 

to people who are currently jobless do not accrue interest until 

their income is restored.307 As part of the loan agreement, the 

Pennsylvania Housing Finance Agency, which runs the program, 


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308Pennsylvania Housing Finance Agency, Homeowners’ Emergency Mortgage Assistance Program (HEMAP)—FAQ (online at www.phfa.org/hsgresources/faq.aspx#hemap—q13) (accessed 

Oct. 7, 2009). 309Trauss Philadelphia Hearing Written Testimony, at 3, supra note 297, at 10. 310Pub. L. No. 110–343 § 2(2)(A)–(B). 

takes a junior lien on the property.308 Since the program was established, HEMAP has actually earned money for the state of 

Pennsylvania, and witnesses at the Panel’s field hearing in Philadelphia endorsed it as a model that should be considered at the national level.309 The fact that state governments are currently 

strapped financially means that this kind of temporary assistance 

program is likely to need federal support. 

D. Big Picture Issues 

1. Purpose of Foreclosure Mitigation 

In the previous sections, the Panel has evaluated foreclosure 

mitigation programs on their own terms. While it is important to 

evaluate the progress of the federal foreclosure mitigation programs in meeting their stated goals, it is equally important to analyze the adequacy of those goals in addressing the underlying foreclosure problem. Most programs are designed to prevent foreclosures in specific circumstances, but however successful programs 

might be on their own terms, they must ultimately be judged on 

whether they succeed in implementing major policy goals. Evaluating foreclosure mitigation programs in this manner first necessitates a determination of the ultimate purpose of foreclosure mitigation programs. 

A central purpose of foreclosure prevention efforts is to protect 

the economy from the systemic consequences of home foreclosures. 

Congress recognized as much when it declared the protection of 

home values and the preservation of homeownership one of the 

purposes of the EESA.310

Foreclosure prevention efforts help preserve homeownership and 

stabilize the housing market, which protects home values. Stabilization of the housing market is also critical to overall economic 

recovery. Not only is the housing market a major component of the 

overall economy, but it has been at the center of the economic crisis, and until it is stabilized, the economy as a whole will remain 

in turmoil. 

Housing markets have achieved some degree of stability through 

massive federal support. The Federal Reserve’s monetary policy 

has produced low interest rates, which have stimulated greater demand for mortgage-financed home purchases by lowering the cost 

of capital, and federal government support for the GSEs and the 

private-label MBS market has also contributed to liquidity and 

thus lower costs of mortgage capital. This level of support cannot 

continue indefinitely, however, and as long as foreclosure and real 

estate owned (REO) inventory flood the housing market and contribute to an oversupply of housing stock for sale, there will be 

strong downward pressure on home prices. 

In these circumstances, volume and speed of foreclosure prevention assistance are critical if there is to be sufficient systemic impact. The key metric for evaluating foreclosure prevention efforts 

overall is thus whether a sufficient number of foreclosures are preVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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311 House Committee on Financial Services, Testimony of Director of Office of Single Family 

Program Development, Meg Burns, Promoting Bank Liquidity and Lending Through Deposit Insurance, HOPE for Homeowners, and other Enhancements, 111th Cong., at 2 (Feb. 3, 2009) (online at www.house.gov/apps/list/hearing/financialsvcsldem/burns020309.pdf). 312MHA March Update, supra note 80. 313MHA March Update , supra note 80. GAO has questioned whether this projection may be 

overstated due to some of the assumptions made in its calculation. GAO HAMP Report, supra 

note 98. 314 Rod Dubitsky, Larry Yang, Stevan Stevanovic, and Thomas Suehr, Foreclosure Update: 

Over 8 Million Foreclosures Expected, Credit Suisse (Dec. 8, 2008) (online at www.nhc.org/ 

Credit%20Suisse%20Update%2004%20Dec%2008.doc). 

vented—and not merely delayed—to allow for a stable housing 

market when interest rate and secondary market support are withdrawn. 

Some have argued that attention and resources should be devoted to a type of moral sorting to determine who is deserving of 

government foreclosure prevention assistance. Devoting attention 

and resources to moral sorting is at odds with the goal of maximizing the macroeconomic impact of foreclosure prevention. Trying 

to sort out the deserving from the undeserving on any sort of moral 

criteria means that foreclosure prevention efforts will be delayed 

and have a narrower scope. Moreover, in other cases where the federal government extended assistance under TARP—such as to 

banks and auto manufacturers—no attempt was made to sort between entities deserving and not deserving assistance. No inquiry 

was made as to which investors in these entities knowingly and 

willingly assumed the risks of the entities’ insolvency. 

Accordingly, the Panel must consider whether federal foreclosure 

mitigation programs have sufficient scope to deal with the crisis in 

macroeconomic terms, whether the programs will produce longterm mortgage stability and sustainability, and the costs and benefits of the programs. The Panel recognizes that some of the foreclosure prevention programs, like MHA, are relatively new, having 

been in place for only six months. Other programs, however, like 

HOPE for Homeowners, have been in place for over a year. In all 

cases, however, there is now sufficient data to evaluate progress 

thus far, draw preliminary conclusions, and make preliminary recommendations. The Panel intends to continue to evaluate progress 

and make recommendations as the programs evolve. 

2. Scale of Programs 

Are federal foreclosure mitigation initiatives sufficient for responding to the scope of the foreclosure crisis? While recognizing 

the relatively early nature of many of the programs, the Panel has 

serious doubts in this regard. HOPE for Homeowners was predicted 

to help 400,000 homeowners.311 Four to five million homeowners 

are eligible for HARP refinancings to achieve more affordable payments.312 For HAMP, Treasury aims to reach three to four million 

loans.313 If these goals are achieved, the Federal foreclosure mitigation initiative might help as many as 9.5 million families reduce 

their mortgage payments to affordable levels, including preventing 

3–4 million foreclosures, a substantial share of the 8.1 million predicted by 2012.314 It is difficult to say, however, whether that 

would be enough, because the Panel does not know how many foreclosures must be prevented to stabilize the housing market. HowVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00085 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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315 Holzer Mortgage Relief Article, supra note 252. 316Treasury Mortgage Marked Data, supra note 111. 317Dina ElBoghdady, HUD Chief Calls Aid on Mortgages A Failure, Washington Post (Dec. 

17, 2008) (online at www.washingtonpost.com/wp-dyn/content/article/2008/12/16/ 

AR2008121603177.html). 

ever, if these programs achieve their maximum potential, it would 

undeniably be a substantial step in the right direction. 

Unfortunately, there may be reason to doubt whether these programs will ever achieve Treasury’s numeric goals, but it is still premature to make that judgment. HOPE for Homeowners has met 

with minimal interest. As of September 23, 2009, only 94 

refinancings had closed, and lenders had stated they intend to approve an additional 844 applications.315 For HARP, there have 

been 95,729 refinancings as of September 1, 2009. And for HAMP, 

there have been 571,354 cumulative trial modification offers extended, 362,348 HAMP trial modifications in progress and 1,711 

permanent modifications. (See Figure 27.) 

HOPE for Homeowners’ performance has been so weak that the 

HUD Secretary stated that it is ‘‘tough to use.’’ 317 Treasury officials have made no statements on the success of HARP but they 

are optimistic about HAMP. Based on the number of trial modifications started, Treasury has declared that HAMP is ‘‘on pace’’ to 

meet its self-set goal of 500,000 cumulative trial modifications by 

November 1, 2009. 

While HAMP will likely achieve this more immediate goal, the 

achievement is relatively small in relation to the magnitude of the 

foreclosure crisis. 

Trial modifications are a poor metric for evaluating the success 

of HAMP. Not all trial modifications will become permanent modifications. The roll rate from trial modifications to permanent modifications is currently 1.26 percent, meaning that of all trial modifications started at least three months ago, only 1.26 percent have 

converted to permanent modifications. As noted above, however, 

this is a very preliminary statistic that should be interpreted with 


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caution. Additionally, Treasury has provided a two-month extension during the program ramp-up. 

Once modifications become permanent, however, they must still 

be sustained in order to have an impact on foreclosure prevention. 

There will be redefaults on HAMP-modified loans. Treasury has refused to make public its redefault assumptions, but other government entities have anticipated a redefault rate of approximately 40 

percent in their modification programs. The time period for Treasury’s undisclosed redefault assumption is important. Should it only 

cover the first five years of the loan, it would not account for the 

increases in interest rates and thus monthly payments that kick in 

for HAMP-modified loans starting in year six. Similarly, the LTV 

assumption for Treasury’s undisclosed redefault assumption is important. If Treasury’s redefault assumption was created at the beginning of HAMP in winter 2009, it might assume LTVs that are 

substantially lower than present, which could mean that it underestimates probable redefaults. The Panel underscores that redefault assumptions are data that should be public to ensure the 

transparency of MHA, and are critical to the Panel’s ability to provide meaningful program evaluation and oversight. 

Redefaults mean that foreclosures have been delayed, rather 

than prevented. Therefore, the net impact of HAMP is best measured by the number of permanent modifications that are sustainable, rather than trial modifications. The Panel intends to monitor 

carefully the permanent modifications produced by the program 

over the coming months as the program begins to produce a longer 

track record. 

Using permanent modifications as the metric, HAMP’s performance to date is weak. Six months into the program, there have only 

been 1,711 permanent modifications. This number is low in part 

because it depends on the number of trial modifications, and the 

initial volume of HAMP trial modifications was quite low. The 

Panel is concerned about the low rate of conversion from trial to 

permanent modifications, but is hopeful that the conversion rate 

will increase substantially; unless it does, HAMP will come nowhere close to keeping up with foreclosures. 

Even using trial modifications as the metric, however, HAMP’s 

broader effectiveness is in doubt. The country is on pace to see a 

significant number of foreclosures this year, and with rising unemployment, widespread deep negative equity, and recasts on payment-option ARMs and interest-only mortgages increasing in volume, there is no sign of the foreclosure crisis letting up. As Figure 

28 shows, there were 224,262 foreclosures started in August 2009. 

The same month only 94,312 trial modifications were begun, a 

shortfall of nearly 130,000. HAMP trial modifications failed to even 

keep up with the number of foreclosures started on prime mortgages. Cumulatively, from March through August, there were 5 

foreclosures started and 1.5 foreclosures completed for every trial 

modification. HAMP modifications started slowly, however, and 

have grown in volume every month. Thus in August 2009, there 

were 2.38 foreclosure starts per trial modification, and trial modifications outpaced completed foreclosure sales, with 1.25 trial modifications per completed foreclosure sale. While this is cause for 

some measured optimism, unless August trial modifications convert 


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to permanent modifications at a rate of 80 percent, a far cry from 

current conversion rates, permanent modifications will not keep 

pace with completed foreclosure sales. 

A permanent modification, however, must be sustainable, if it is 

to prevent a foreclosure. If permanent modifications redefault at a 

rate of 40 percent, the rate used by the FDIC’s very similar modification program at Indy Mac, however, then even if 100 percent 

of trial modifications successfully converted to permanent modifications, there would still be a substantial shortfall relative to completed foreclosure sales. 

There is also reason to expect the number of HAMP trial modifications per month to drop; servicers may initially move to modify 

the easiest surest cases, and the most motivated and organized 

homeowners are likely to be among the earlier applicants. Further, 

because unemployment usually leaves a borrower with insufficient 

income to be eligible for a HAMP modification, the number of financially distressed homeowners who will be HAMP-eligible is likely to decline. 


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319Servicer Performance Report, supra note 95; HOPE NOW, Workout Plans and Foreclosure 

Sales, supra note 2. 

The discussion of sufficiency of HAMP modification volume ultimately hinges on the question of how many foreclosures must be 

prevented to stabilize the housing market. This is a question to 

which the Panel does not have an answer, but the existing federal 

foreclosure prevention programs appear unlikely to have a comprehensive, or even substantial impact, and this makes it unlikely 

that they will succeed in macroeconomic stabilization. Clearly these 

programs are better than doing nothing, and for some families they 

will be a lifeline. These programs may well prevent the housing 

market from continuing a rapid decline, and that is an important 

accomplishment. But as the following section discusses, it is far 

from clear whether they will result in long-term housing market 

stability or whether new programs may be needed. Unless that is 

accomplished, the programs’ success will be limited. 

3. Sustainability of Modifications and Refinancings 

a. Negative Equity 

While HAMP modifications and HARP refinancings are able to 

improve the affordability of mortgages, the programs were not designed to address negative equity, which raises concerns about the 

sustainability of the modifications and refinancings. 

HARP permits homeowners with negative equity to refinance 

their mortgages into more affordable and sustainable mortgage 

structures. The homeowner continues to have negative equity after 

the refinancing. Similarly, many HAMP modifications continue to 

have negative equity. While HAMP permits servicers to forgive 

principal, it does not require it, and relatively few modifications 

have involved principal forgiveness. The LTV of permanent HAMP 

modifications indicates that most are deeply underwater even postVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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320Stan Liebowitz, New Evidence on the Foreclosure Crisis, Wall Street Journal (July 3, 2009) 

(online at online.wsj.com/article/SB124657539489189043.html). 321 Christopher L. Foote, Kristopher Gerardi, & Paul S. Willen, Negative Equity and Foreclosure: Theory and Evidence, 64 Journal of Urban Economics 234 (Sept. 2008) (abstract online 

at ideas.repec.org/a/eee/juecon/v64y2008i2p234–245.html) (examining foreclosures in Massachusetts in 1990s). 322States with nonrecourse mortgages do not allow lenders to recover from other assets of the 

defaulted borrower, besides the home. Andra C. Ghent & Marianna Kudlyak, Recourse and Residential Mortgage Default: Theory and Evidence from the United States, Federal Reserve Bank 

of Richmond Working Paper 09–10 (online at ssrn.com/abstract=1432437) (accessed Oct. 7, 

2009). 

modification. More modifications have involved principal forbearance, but forbearance does not undo negative equity. Instead, it 

tacks on a balloon payment of forborne principal at the end of the 

mortgage. If housing prices appreciate significantly, homeowners 

with forborne principal may be able to refinance and avoid a balloon payment, but that is very much dependent on an uncertain 

housing market and the ability to avoid redefault until that point. 

HAMP and HARP are premised upon a belief that if monthly 

mortgage payments are affordable, borrowers will be less likely to 

default, even if they are mired in negative equity. However, the impact of negative equity is not clearly understood. As the Panel has 

previously observed, and has since been confirmed by additional 

studies,320 negative equity has a higher correlation with default 

than any other factor that has been identified other than affordability, which causes default. While this does not prove a causal relationship, it is also consistent with one. 

Generally, negative equity has been presumed to be a necessary, 

but not sufficient condition for foreclosure; in addition to negative 

equity, there needed to be some factor making payments 

unaffordable, as homeowners would usually prefer to retain their 

home. Thus, in the New England economic downturn during the 

late 1980s and early 1990s, negative equity alone rarely resulted 

in foreclosures.321

Yet a more recent study has cast doubt on this conventional wisdom. A 2009 working paper by the staff of the Federal Reserve 

Bank of Richmond has found that negative equity alone does result 

in significantly higher default rates when mortgages are non-recourse.322 Massachusetts is a recourse mortgage state, which limits 

the ability to extrapolate nationally from the situation in Massachusetts in the late 1980s and early 1990s. 

It is also not clear to what degree the current foreclosure crisis 

will follow historical patterns. The housing bust in Massachusetts 

was not nearly as severe as the current one. In Massachusetts, 

housing prices fell 22.7 percent from peak. Nationally, housing 

prices have fallen 33 percent from peak in the current downturn, 

while in some regions the price declines have been much sharper— 

54 percent from peak in Las Vegas and Phoenix. If homeowners are 

more likely to wait out milder negative equity, then negative equity 

will likely have a stronger impact than in Massachusetts in the 

early 1990s. 

There are two categories of negative equity defaults—strategic 

and necessitated. Strategic defaults by homeowners with negative 

equity—moving to a cheaper equivalent rental property nearby 

rather than continuing to make more expensive monthly mortgage 

payments—have been the stereotyped focus of negative equity deVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00091 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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323Kenneth R. Harney, Homeowners Who ‘Strategically Default’ on Loans a Growing Problem, 

Los Angeles Times (Sept. 20, 2009) (online at www.latimes.com/classified/realestate/news/la-fiharney20–2009sep20,0,2560658.story. 324 U.S. Census Bureau, Geographical Mobility/Migration: Calculating Migration Expectancy 

(online at www.census.gov/population/www/socdemo/migrate/cal-mig-exp.html) (accessed Oct. 7, 

2009). 325OCC and OTS Second Quarter Mortgage Report, supra note 42, at 34. 

faults, and in the short term they have predominated.323 HAMP 

modifications reduce the discrepancy between rental and mortgage 

payments, which means that strategic defaults are unlikely for 

HAMP modifications. 

Necessitated defaults in negative equity situations, however, will 

be unavoidable. There are essential life factors that necessitate 

moves—the ‘‘Four Ds,’’ Death, Disability, Divorce, and Dismissal— 

as well as childbirth, and improved employment opportunities. 

While negative equity alone is unlikely to produce redefaults for 

HAMP modifications, these additional factors combined with negative equity raise the likelihood of redefault. 

A homeowner who loses a job with General Motors in Detroit 

may need to relocate for work. If the homeowner has $40,000 in 

negative equity and the homeowner cannot come up with that upon 

sale of the property, then default is the only option for the homeowner. Previous housing downturns have lasted over a decade, so 

given that the average homeowner moves approximately once every 

seven years 324 a great many homeowners with MHA modifications 

or refinancings will likely need to move at a time when they still 

have negative equity. This casts grave doubt on the sustainability 

of negative equity homeownership. To be sure, foreclosures produced by the combination of negative equity with life factors will 

not come in a rush, but they will produce a steady stream of foreclosures as long as there is negative equity. 

b. Factors Affecting Loan Performance 

It is difficult to predict the future performance of HAMP-modified loans. There is no performance history for loans with the 

HAMP-modified structure. OCC/OTS Mortgage Metrics indicate 

that redefault rates are significantly lower for modifications that 

reduce monthly payments, ‘‘with greater percentage decreases in 

payments resulting in lower subsequent redefault rates.’’ 325 (See 

Figure 30, below.) Nonetheless, redefault rates even on modifications reducing payments by 20 percent or more were still a very 

high 34 percent. 

OCC/OTS data do not break down into subcategories the performance of modifications with monthly payment decreases of more 

than 20 percent. Permanent HAMP modifications as of September 

1, 2009 have decreased monthly payments by a median (mean) of 

40 (39) percent, so this might indicate that redefault rates will be 

lower than those in the OCC/OTS data category for payment reductions of 20 percent or more. 


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326OCC and OTS Second Quarter Mortgage Report, supra note 42, at 8. 327Structured Credit Investor, Deeper and Deeper: Expiring ARM Teaser Rates to Drive ABX 

Delinquencies (Oct. 31, 2007). 328Presumably, income will increase, if only due to inflation. Therefore, if income only kept 

pace with inflation, which it has failed to do in recent years, then DTI would rise, unless inflation over those eight years totaled 31 percent or nearly 4 percent per year. If inflation only averaged 3 percent per year, then the DTI burden would increase to 36 percent, while if inflation 

were 2 percent per year, then DTI burdens would go up to 39 percent, and DTI would rise to 

42 percent if inflation averaged 1 percent per year. 

The closest product for comparison is, ironically, the subprime 

mortgage loans of recent years, particularly hybrid-ARMs. Hybrid 

ARMs featured below-market introductory rates that would last for 

2–3 years, after which rates would adjust to an index rate plus a 

premium. The rate reset would often result in a 20 to 30 percent 

increase in payments.327 These loans were typically underwritten 

based on the borrower’s ability to afford the initial introductory 

rate, rather than the rate after reset. Hybrid ARMs were also typically underwritten at near or up to 100 percent LTV. Many were 

also underwritten as 30-year mortgages with 40-year amortizations, meaning that there would be a balloon payment due at the 

end. 

HAMP-modified mortgages have an initial median interest rate 

of 2 percent, significantly below market. The rate is fixed for five 

years, and then steps up over time to the lower of the original contract rate or the Freddie Mac 30-year fixed rate at the time of 

modification, currently around 5 percent. This means monthly payments for mortgages currently being modified could increase by 

over 45 percent between year five and year eight. Based on current 

income levels, monthly payments would go from 31 percent DTI to 

45 percent DTI, approximately where the loans were before modification; the current median pre-modification DTI of HAMP modified loans is 45 percent.328 Under these conditions, assuming the 

borrower’s income has not changed, the affordability of the loans 

will move back toward pre-HAMP levels eight years from now. As 

noted by Deborah Goldberg of the National Fair Housing Alliance 

at the Panel’s foreclosure mitigation field hearing, ‘‘We don’t have 


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329Goldberg Philadelphia Hearing Written Testimony, supra note 99, at 85. 330Willen Philadelphia Hearing Testimony, supra note 305, at 110, 135. 331 Id. at 135. 332 Id. at 135. 

really permanent modifications, right, we have five year modifications . . .’’ 329

While HAMP rate resets are more gentle and gradual than those 

on subprime mortgages, HAMP modifications are also being underwritten based on the affordability of the introductory rate, not the 

affordability of the stepped-up rate. The maximum interest rate for 

a HAMP modified loan after step-up is currently low in absolute 

terms, but affordability is relative, not absolute. Moreover, the median LTV for HAMP-modified mortgages is 124 percent, significantly higher than that of a newly originated subprime mortgage. 

And because of principal forbearance and extensions of amortization periods beyond original loan terms, many HAMP-modified 

loans have a balloon payment due at the end of the mortgage. 

These factors could explain why Treasury might use a 40 percent 

redefault rate like other similar government programs in the first 

five years for HAMP modifications and higher rates with deeper 

levels of negative equity. If accurate, this sort of redefault rate calls 

into question the long-term effectiveness of HAMP. 

c. Principal Reductions 

Negative equity can only be eliminated through principal writedowns, but this raises a number of difficult and complex issues. 

When principal is written down, it impairs the balance sheets of 

the owners of the mortgages. In many cases, this means the impairment of the balance sheets of the very financial institutions 

whose stability is an essential goal of the EESA. To be sure, if principal write-downs actually increase the true value of the loans, by 

reducing redefault rates, then principal write-downs might cause 

more immediate losses, but they would produce more realistic, and 

therefore more confidence-inspiring, balance sheets. 

One concern related to the idea of principal reduction is the incentives it may create. Witnesses at the Panel’s foreclosure mitigation field hearing were asked about this matter. Dr. Paul Willen, 

Senior Economist at the Federal Reserve Bank of Boston, testified 

that the ‘‘problem with negative equity is basically that borrowers 

can’t respond to life events.’’ Borrowers with positive equity simply 

have ‘‘lots of different ways they can refinance, they can sell, they 

can get out of the transaction.’’ 330 He noted that although most 

borrowers with negative equity are likely to make their payments 

in the present or over the next couple of years, they still remain 

‘‘at-risk homeowners’’ and may face more serious issues several 

years down the road should a life changing event, such as unemployment, occur.331 In that sense, Dr. Willen offered that principal 

reduction may have some virtue. He also noted, however, that most 

borrowers with negative equity make their mortgage payments, 

and that if principal reduction is provided as an option, one runs 

the risk of incentivizing borrowers, who would otherwise continue 

to make their mortgage payments, ‘‘to look for relief’’ even when it 

is not necessarily needed.332 In this sense, according to Dr. Willen, 

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333Trauss Philadelphia Hearing Testimony, supra note 297, at 67, 91, 106. 

ditional pressures on the program, and ultimately reduce its overall 

effectiveness. However, in response to a question from the Panel, 

Dr. Willen agreed that revising bankruptcy laws to permit principal modification was a clear way to address the idea that there 

should be a cost for receiving a principal reduction. 

Other witnesses at the hearing also argued that the incentive ‘‘to 

look for relief’’ may be reduced if the costs to the borrower of opting 

for principal reduction were significantly greater.333 For example, 

revising Chapter 13 bankruptcy to include a cramdown or a principal reduction component could be one way to impose more significant costs. Because of these costs, such a revision could provide 

borrowers with the option of principal reduction without creating 

the potential perverse incentives to other borrowers that may occur 

by mandating principal reduction as an option under HAMP. Filing 

for bankruptcy is not an appealing choice to any borrower; however, to the borrower facing certain foreclosure it may be the only 

choice. Whereas mandating principal reduction as an option under 

HAMP may attract a larger than desired group of borrowers, allowing principal reduction as an option under Chapter 13 is more likely to attract only those borrowers who are truly in need of such assistance. In this sense, Chapter 13 bankruptcy could be used as a 

tool to employ the benefits of principal reduction to borrowers in 

need without attracting other borrowers and putting any additional 

pressures on HAMP. 

Likewise, concerns have been raised about whether Treasury has 

the authority to mandate principal reductions if it thought that to 

be a necessary action. While EESA does not give Treasury the 

power to abrogate contracts by fiat, Treasury has the power to 

place conditions on access to future TARP funds. Treasury has already done so by requiring institutions to participate in MHA, 

which mandates interest rate reductions and principal forbearance 

in certain circumstances. Treasury could therefore make principal 

reduction a condition for financial institutions and their affiliates 

to receive TARP assistance. Legally, there would be no distinction 

between Treasury conditioning TARP assistance on principal reductions and conditioning it on principal forbearance and interest rate 

reductions. While there are major accounting differences—principal 

reductions result in an impairment of assets, while interest rate reductions result in a reduction of future income, and principal forbearance has varied accounting treatment (potentially charged off 

and treated as a recovery when ultimately paid)—legally they are 

indistinguishable, as they all involve an alteration of a right to 

payment. Thus, if Treasury determined that principal reductions 

were essential for the success of foreclosure mitigation efforts, it 

would have a significant ability to achieve such reductions. 

There are numerous ways in which negative equity could be addressed. The Panel merely notes these options and does not express 

an opinion at this time on their preferability: 

• Principal reduction could occur already through HAMP modifications and HOPE for Homeowners refinancing. 

• HAMP incentive structure could be revised to encourage principal reductions. 


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334During the Great Depression, the government abandoned the gold standard and enacted 

large-scale debt relief for borrowers by declaring that the courts would no longer enforce gold 

indexation clauses in private contracts. Instead, borrowers were able to pay debts with the recently devalued dollar. The net effect was to reduce the debt burden of borrowers by nearly 70 

percent. In enacting this policy, the government believed the economic ‘‘benefits of eliminating 

debt overhang and avoiding bankruptcy for private firms more than offset the loss to creditors.’’ 

Randall Kroszner, Is It Better to Forgive Than to Receive? Repudiation of the Gold Indexation 

Clause in Long-term Debt, University of Chicago working paper (Oct. 1998) (online at faculty.chicagobooth.edu/finance/papers/repudiation11.pdf). 335Tracy M. Turner & Heather M. Luea, Homeownership, Wealth Accumulation and Income 

Status, Journal of Housing Economics, at 1 (forthcoming 2009) (online at www.k-state.edu/economics/turner/JHE2009ABTRACT.pdf). 

• TARP funds could be spent to purchase principal reductions. 

• Congressional action could encourage principal reductions 

through a variety of methods: 

Æ Mandatory national foreclosure mediation program. 

Æ Tax and CRA credits to incentivize principal write-downs. 

Æ Chapter 13 bankruptcy revisions. 

Æ New Deal-style repudiation of contracts as serving public 

policy.334

d. Unemployment 

Rising unemployment also presents a foreclosure driver to which 

MHA was not designed to respond. Absent a source of income, neither refinancing nor modifications are possible. Historically, homes 

have been the single biggest source of wealth accumulation for families.335 Millions of families count on financing their retirements by 

paying off their homes and using Social Security for daily expenses. 

In addition, home equity has provided emergency funds to families 

hit by medical problems, job losses, and divorce. An unemployed 

household could extract equity from a home to bridge that gap between jobs. Today, however, this is not possible because of negative 

equity; the home piggybank is empty. An extended period of negative home equity has grave implications for the middle class, because it means that an important part of their economic safety net 

is gone. This calls into question the long-term economic stability of 

a sizeable portion of the middle class. We are facing the threat of 

a vicious cycle: unemployment-driven foreclosures could exert 

downward pressure on real estate prices, depressed real estate 

prices dampen consumer consumption demand because of the high 

share of household wealth invested in real estate, and dampened 

consumer demand feeds continued high unemployment. 

Even in cases in which there is not negative equity, however, unemployment lurks as a driver of foreclosures. Unemployment-driven foreclosures exert downward pressure on real estate prices and 

low real estate prices dampen consumer demand, which feeds continued high unemployment. The MHA programs, however, were not 

designed to deal with unemployment. Instead, they were designed 

to address the foreclosure crisis as it was understood in early 2009. 

Given the data lags on foreclosures, that meant the program was 

designed using data from the third quarter of 2008. A great deal 

has changed since then, however. In the third quarter of 2008, foreclosures were primarily a subprime problem; they had not yet become primarily a prime problem, and defaults on payment-option 

and interest-only mortgages were far off on the horizon. Moreover, 


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336 Bureau of Labor Statistics, Data Retrieval: Labor Force Statistics (accessed Oct. 6, 2009) 

(online at www.bls.gov/webapps/legacy/cpsatab1.htm). 337 Congressional Oversight Panel, Testimony of Dr. Paul Willen, Philadelphia Field Hearing 

on Mortgage Foreclosures, at 135 (Sept. 24, 2009). 338 Id. at 110. 339 Id. at 110. 340 Congressional Oversight Panel, Testimony of Joe Ohayon, Philadelphia Field Hearing on 

Mortgage Foreclosures, at 109 (Sept. 24, 2009) (hereinafter ‘‘Ohayon Philadelphia Hearing Testimony’’). 341Pub. L. 94–50, codified at 12 U.S.C. 2701 et seq. 

unemployment was substantially lower.336 The result is that MHA 

programs may not be adequate for the present and coming phases 

of the foreclosure crisis. While the program could be criticized for 

failure of prescience, the real question is whether federal foreclosure prevention programs will always be playing catch-up. To 

date this has been the case, as the federal government has consistently pursued the least interventionist approach possible to foreclosures at any given juncture. 

Crafting programs to assist unemployed homeowners retain their 

homes is a crucial next step in foreclosure mitigation. During the 

Panel’s foreclosure mitigation field hearing, Dr. Willen noted that 

‘‘an effective plan must address the problem of unemployed borrowers’’ because ‘‘thirty-one percent of an unemployed person’s income is often thirty-one percent of nothing and a payment of zero 

will never be attractive to a lender.’’ 337 Dr. Willen also explained 

that his research ‘‘shows that, contrary to popular belief, unemployment and other life events like illness and divorce, much more than 

problematic mortgages, have been at the heart of this crisis all 

along even before the collapse of the labor market in the fall of 

2008.’’ 338 Although there was no surge in such life events in the 

months or years leading up to the crisis, he explained, falling real 

estate prices meant that foreclosure—and not a profitable sale, as 

would be the result if prices were rising—would be the result if a 

person became unemployed.339 Other witnesses at the Panel’s foreclosure mitigation field hearing, including Joe Ohayon of Wells 

Fargo Home Mortgage, agreed that the Making Home Affordable 

program should directly address unemployment-related foreclosures.340

There is precedent for such programs to assist the unemployed. 

One such effort, the Homeowners’ Emergency Mortgage Assistance 

Program in Pennsylvania, was discussed above in Section 8B. The 

idea has also been authorized at the federal level. In 1975, Congress passed the Emergency Homeowners’ Relief Act.341 The Act 

provided standby authority for HUD to implement a program that 

would provide emergency loans and grants to help unemployed 

homeowners avoid foreclosure, and the Department of Housing and 

Urban Development—Independent Agencies Appropriations Act, 

1976 (P.L. 94–116) appropriated $35 million to the Emergency 

Homeowners’ Relief Fund in order to carry out this program. 

HUD’s final rule on the standby program stipulated that the HUD 

Secretary could implement the Emergency Homeowners’ Relief Program if a composite index of mortgage delinquencies reached 1.20 

percent, a threshold several times lower than present delinquency 

rates. Because the threshold was never reached, the program was 

never implemented. Nonetheless, it provides a model of assistance 

to unemployed homeowners to carry them through an economic 


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342 Redefaults, Self-Cures, and Securitization Paper, supra note 142. 

downturn without imposing the deadweight losses of foreclosures 

on the economy. 

The ultimate policy success of federal foreclosure prevention efforts hinges on whether they can produce sustainable results on a 

sufficient scale. In both matters of sustainability and scale, there 

are serious concerns about whether the existing programs are up 

to the task. Because circumstances have changed markedly since 

the roll-out of the MHA in February, the Panel suggests that 

Treasury consider new programs or make significant changes to existing programs to address the issue of job loss and the temporary 

inability to make mortgage loan payments. 

4. Cost-benefit Analysis 

In evaluating government programs, it is helpful to consider the 

costs and benefits, therefore the Panel asked Professor Alan White 

of Valparaiso University to conduct a cost benefit analysis, included 

as Annex B. Treasury estimates it will spend $42.5 billion for nonGSE Home Affordable Modification programs (HAMP), of which 

$23 billion has been contracted for, and that will buy about 2 to 

2.6 million modifications, i.e. an average per-modification cost between $16,000 and $21,000. This includes the second lien modification component and the home price decline protection payments. 

Professor White’s estimate of the probability-adjusted, discounted 

cost per modification is somewhat lower, but found an estimate in 

the range of $16,000 to $21,000 reasonable. Some of these payments go to servicers, while some are used to pay loan principal 

and interest, for the benefit of both homeowners and investors. 

Professor White’s analysis noted that the benefits of HAMP 

modifications include avoided investor losses and avoided external 

costs, which include homeowner relocation costs, neighboring property value effects and local government expenditures, probably 

equal to double or triple the investor benefits. He found that investor loss avoidance could potentially exceed $50,000 per modification, and homeowner, neighboring property and municipal foreclosure loss avoidance could amount to double that or more. On the 

other hand, Professor White indicated that the $16,000 to $21,000 

payments are being made for some modifications that would have 

occurred anyway, and thus the benefits need to be discounted accordingly. He concluded that it is too early in the program to measure the magnitude of this displacement effect. 

Other authors have considered that it is possible, of course, that 

modifications are failing to keep pace with foreclosures because 

modifications fail to maximize the present value of mortgages, 

making foreclosure a rational economic decision, even if it is not in 

the public interest. This theory has been propounded most notably 

in a working paper published by the Federal Reserve Bank of Boston.342 As the paper explains, the net present value of modifying 

a defaulted loan depends on the rate of redefaults, the extent to 

which losses on redefaults exceed losses in foreclosure without a 

modification, and the rate at which mortgagors cure their defaults 

without modification. Likewise, the net present value of a nonmodified but defaulted loan depends on the self-cure rate and the 


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343 Id. at table 8. 344Fitch Release, supra note 22. 345OCC and OTS Second Quarter Mortgage Report, supra note 42; Redefaults, Self-Cures, and 

Securitization Paper, supra note 142. 

loss severities in foreclosure. The paper correctly argues that if 

self-cure rates and redefault rates are sufficiently high, modifications will not maximize net present value. 

The paper, which uses a 10 percent random sample of data from 

Lender Processing Services (formerly McDash) data from 2007– 

2008, which covers approximately 60 percent of the market, also 

cites what appear to be quite high self-cure and redefault rates of 

25–30 percent and 30–50 percent respectively, depending on loan, 

borrower, and modification characteristics.343 These rates are not 

an accurate description of present realities, however. According to 

Fitch Ratings, the self-cure rate at present is between 4.3 percent 

and 6.6 percent, depending on type of loan.344

Moreover, redefault rates are highly contingent on the type of 

modification, so basing NPV calculations on redefault rates has a 

circular logic. As OCC/OTS Mortgage Metrics reports and the Boston Fed study shows, modifications that reduce monthly payment 

have a much lower redefault rate.345 It also stands to reason that 

the manner in which monthly payments are reduced (i.e. via interest rate reduction, term extension, principal forbearance, principal 

forgiveness) might also impact redefault rates. A borrower with 

positive equity and an affordable mortgage will be much more 

incentivized to avoid a redefault than a borrower with negative equity, who has already lost his investment in the home. Additionally, the Boston Fed study might underestimate losses on foreclosure and overestimate the additional losses caused by redefault, 

especially if housing markets have bottomed out. 

In any event, the Boston Fed study never actually tests the rates 

it cites in the net present value calculation it presents. The Panel’s 

staff tested the Boston Fed staff’s NPV formula with very conservative assumptions, and found that even when using the Boston Fed 

staff’s much-higher-than-current self-cure and redefault rates, 

there is still room to undertake a NPV maximizing modification 

(see Annex A). When more realistic assumptions about self-cure, redefault, and foreclosure losses are used, there is significant room 

to undertake NPV maximizing modifications for a wide range of 

loan inputs. 

Accordingly, it does not appear that foreclosure is usually the decision that rationally maximizes value for mortgagees. Foreclosure 

may be a rational, value-maximizing decision for servicers, but it 

is often not for lenders. While there is a range of cases in which 

foreclosure will maximize NPV for mortgagees, these appear to be 

the exception, not the rule. 

5. Servicer Compliance with HAMP Guidelines 

While Treasury has broad policy issues to consider for the evolution of the foreclosure mitigation initiative, it still must administer the current programs in the most effective manner possible. 

A key element to HAMP’s success is the degree to which servicers 

comply with the program’s guidelines. If borrowers face incorrectly 

rejected applications, unreasonably long wait times for responses to 


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346Wheeler Philadelphia Hearing Testimony, supra note 88, at 6. 347See Congressional Oversight Panel, Testimony of NeighborWorks America Chief Operating 

Officer Eileen Fitzgerald, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009) 

(online at cop.senate.gov/hearings/library/ hearing–092409–philadelphia.cfm); Goldberg Philadelphia Hearing Testimony, supra note 99; Tami Luhby, 5 Dumb Reasons You Can’t Get Mortgage 

Help, CNNMoney (Aug. 11, 2009) (online at money.cnn.com/2009/08/11/news/ economy/ 

dumbll.reasonsllnollmortgagellmodification/). 348 House Committee on Financial Services, Subcommittee on Housing and Community Opportunity, Written Testimony of Alys Cohen, National Consumer Law Center, Progress of the Making Home Affordable Program: What Are the Outcomes for Homeowners and What are the Obstacles to Success, at 3 (Sept. 9, 2009) (online at www.house.gov/apps/list/hearing/ 

financialsvcslldem/cohenll-llnclc.pdf); National Consumer Law Center, Desperate Homeowners: Loan Mod Scammers Step in When Loan Servicers Refuse to Provide Relief, at 8 (July 

2009) (online at www.consumerlaw.org/issues/mortgagellservicing/content/ 

LoanModScamsReport0709.pdf) (‘‘Stories abound of exasperated homeowners attempting to navigate vast voice mail systems, being bounced around from one department to another, and receiving contradictory information from different servicer representatives.’’). 349 NYC Anti-Predatory Lending Task Force, Letter to Assistant Secretary Herb Allison (July 

23, 2009) (online at www.nedap.org/documents/HAMPtaskforceletter.pdf). 

questions and completed applications, lost paperwork, and incorrect 

information, HAMP will not reach its full potential. At the Panel’s 

foreclosure mitigation field hearing, Seth Wheeler, senior advisor 

at the Treasury Department, testified, ‘‘We are working to establish specific operational metrics to measure the performance of 

each servicer. These performance metrics are likely to include such 

measures as average borrower wait time in response to inquiries 

and response time for completed applications. We plan to include 

these metrics in our monthly public report.’’ 346

This is critical, as borrowers and advocates continue to report 

numerous problems. Eileen Fitzgerald, chief operating officer of 

NeighborWorks America (which provides funding to housing counselors across the country) testified at the Panel’s foreclosure mitigation field hearing that a great deal of time is wasted during the 

loan modification process because each participating servicer uses 

different forms and imposes different requirements. ‘‘There is a 

huge process problem here,’’ she said. Housing counselors have reported other problems, as well, including: (1) exceedingly long telephone wait times before speaking to a servicer (2) inexperienced 

personnel unfamiliar with program details; (3) misplaced documentation often leading to delays in processing; (4) a significant lag 

period between application and final approval for trial modifications; and (5) the failure of servicers to reach out to distressed 

homeowners.347 Preliminary information also suggests some participating servicers violate HAMP guidelines in a number of much 

more serious ways, including requiring borrowers to waive legal 

rights, offering non-compliant loan modifications, refusing to offer 

HAMP modifications, charging borrowers a fee for the modification, 

and selling homes at foreclosure while the HAMP review is pending.348 Others have found such violations as ‘‘[d]enials of HAMP 

modifications for reasons not permitted in the guidelines, such as— 

‘insufficient income’ and ‘too much back-end debt,’ ’’ assertions by 

participating servicers that they are not bound by HAMP, and incorrect ‘‘claims of investors denying HAMP modifications.’’ 349

The Panel heard similar stories at its foreclosure mitigation field 

hearing. Advocates on behalf of homeowners testified that some 

servicers have erroneously been telling homeowners that only 

Fannie Mae and Freddie Mac loans are eligible for HAMP modification. Some servicers have been wrongly claiming that only underwater loans are eligible. Some servicers have been misinforming 


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350Fitzgerald Philadelphia Hearing Testimony, supra note 147, at 71. Goldberg Philadelphia 

Hearing Testimony, supra note 99. 351 Chris Arnold, Major Banks Still Grappling With Foreclosures, NPR (Sept. 9, 2009) (online 

at www.npr.org/templates/story/story.php?storyId=112660935) (While the reporter shadowed a 

call center worker, the worker incorrectly denied an application for HAMP modification.). 352GAO HAMP Report supra note 98, at 38, 42. 353 Congressional Oversight Panel, Questions for the Record from the Congressional Oversight 

Panel at the Congressional Oversight Panel Hearing on June 24, 2009, at 6. GAO HAMP Report, 

supra note 98, at 42. 354GAO HAMP Report supra note 98, at 43. GAO was particularly concerned that ‘‘while 

Treasury has emphasized in program announcements that one of HAMP’s primary goals is to 

reach borrowers who are still current on mortgage payments but at risk of default, no comprehensive processes have yet been established to assure that all borrowers at risk of default 

in participating servicers’ portfolios are reached.’’ Id. 355Goldberg Philadelphia Hearing Testimony, supra note 99. 356 Andrea Fuller, U.S. Effort Aids Only 9% of Eligible Homeowners, New York Times (Aug. 

4, 2009) (online at www.nytimes.com/2009/08/05/business/05treasury.html). 357 House of Representatives Committee on Financial Services, Subcommittee on Housing and 

Community Opportunity, Testimony of Mary Coffin, Wells Fargo, Progress of the Making Home 

Affordable Program: What Are the Outcomes for Homeowners and What are the Obstacles to Success, 111th Cong. (Sept. 9, 2009) (Video available online at www.house.gov/apps/list/hearing/ 

financialsvcslldem/coffinll-llwf.pdf). 

homeowners by saying that the investors who own their loans have 

not given the servicers permission to participate in the program. 

And these witnesses also testified that some servicers have wrongly 

been asking housing counselors to provide their own Social Security numbers.350 Until specific compliance data become available, 

news from the field provides the only picture of whether modifications are conforming.351

HAMP has a built-in compliance structure. Treasury has designated Freddie Mac as the compliance agent, and tasked the agency with performing announced and unannounced onsite and remote 

audits and reviews of participating servicers.352 As part of its compliance duties, Freddie Mac is developing a ‘‘second look’’ process 

to audit modification applications that have been declined by 

servicers.353 However, GAO has stated its concern that Freddie 

Mac does not yet have ‘‘procedures in place to address identified instances of noncompliance among servicers.’’ 354 Advocates have also 

noted that very little is known about the schedule, nature, or outcome of Freddie Mac’s compliance reviews.355

Some servicers, to their credit, concede that they must improve 

their systems. After Treasury and HUD met with servicers in late 

July to inform them that they must increase the number of modifications, several servicers issued statements in response. Bank of 

America’s statement announced, ‘‘Despite our aggressive efforts to 

find solutions for homeowners in default, we must improve our 

processes for reaching those in need.’’ 356 At a recent hearing, a 

representative of Wells Fargo stated that ‘‘some customers have 

been challenged with getting clear, timely communication from us, 

as the guidelines and the requirements for the various programs 

have continued to change.’’ 357 Servicers must iron out the wrinkles 

in their implementation of HAMP, and Treasury must quickly put 

its compliance plan into place, in order for all eligible borrowers to 

fully benefit from HAMP. 

As with all TARP programs, transparency is crucial. Borrowers 

should understand why a modification is being denied. On October 

1, Treasury announced that it has met its goal of establishing ‘‘denial codes that will require servicers to report the reason for modiVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00101 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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358Wheeler Philadelphia Hearing Testimony, supra note 88; Andrews Frustrated Homeowners, supra note 148. 359 Congressional Oversight Panel, Written Testimony of Freddie Mac Senior Vice President, 

Economics and Policy, Edward Golding, Philadelphia Field Hearing on Mortgage Foreclosures, 

at 4 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409–golding.pdf). 360Trauss Philadelphia Hearing Testimony, supra note 333, at 91. 361Goldberg Philadelphia Hearing Testimony, supra note 99. 

fication denials, both to Treasury and to borrowers.’’ 358 This is an 

important step, but the denial codes must also contain borrower recourse should the reason be invalid. 

While the Panel is pleased with Freddie Mac’s commitment to 

‘‘using a number of fraud detection and compliance techniques in 

their sampling and compliance reviews’’ and a focus on ‘‘borrower, 

servicer, and systemic fraud, as well as quality control,’’ 359 this 

alone is insufficient. Monitoring alone is ineffective unless accompanied by meaningful penalties for failure to comply. This is particularly important to address patterns of willful lack of compliance 

with program standards by participants. At the Panel’s foreclosure 

mitigation field hearing, Irwin Trauss, supervising attorney of the 

consumer housing unit at Philadelphia Legal Services, said there 

should be immediate negative consequences for servicers that fail 

to meet their obligations in the program. ‘‘If you sign the participation agreement, then you’re supposed to follow the rules,’’ he said. 

‘‘But there’s no teeth.’’ 360 Treasury has provided servicers, investors, and borrowers with a set of carrots to encourage participation 

in the program. It also needs a full range of compliance tools, or 

sticks, to make sure participants adhere to program guidelines and 

procedures.361

E. Conclusion and Recommendations 

Treasury has created programs designed to address some of the 

items on the Panel’s March checklist for a successful foreclosure 

mitigation program, with a focus on affordability. Yet, despite the 

passage of six months, many of these programs remain in their 

early stages and do not yet have a demonstrated track record of 

success, especially on the points of second liens, servicer incentives, 

borrower outreach, and servicer participation. The Panel intends to 

monitor carefully all available data on these and other points going 

forward to make further recommendations regarding the effectiveness of MHA. 

1. Areas Not Adequately Addressed by MHA 

While MHA is making progress in meeting some of its objectives, 

the current programs do not encompass the entire scope of the foreclosure crisis, which has significantly expanded in scope since MHA 

was announced seven months ago. To maximize the effectiveness of 

the federal foreclosure mitigation effort, Treasury should be forward looking and attempt to address new and emerging problems 

before they reach crisis proportions. 

First, the current MHA framework appears to be inadequate to 

address the coming wave of payment-option ARM and interest-only 

loan rate re-sets that is looming in the near future, a concern very 

specifically raised by the National Fair Housing Alliance and by 

Litton Loan Servicing at the Panel’s foreclosure mitigation field 


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362Goldberg Philadelphia Hearing Testimony, supra note 99; Litton Philadelphia Hearing 

Written Testimony, supra note 124, at 4. 363Willen Philadelphia Hearing Written Testimony, supra note 305, at 109–110, 137–138; 

Ohayon Philadelphia Hearing Testimony, supra note 340, at 137–139. 364Trauss Philadelphia Hearing Written Testimony, supra note 297, at 3. At the foreclosure 

mitigation field hearing in Philadelphia, the Panel received a proposal from the lawyers working 

at the Pennsylvania program for a national scale project. See Hearing Record, Congressional 

Oversight Panel, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online 

at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm). 365Goldberg Philadelphia Hearing Testimony, supra note 99, at 8–9; Fitzgerald Philadelphia 

Hearing Testimony, supra note 147. 

hearing.362 This challenge should be addressed now, before many 

families find that the federal initiative offers them no relief from 

foreclosure. 

Second, unemployment has continued to increase since the inception of MHA, and job loss is a strong driver of foreclosure. In particular, Treasury needs to find ways to provide foreclosure mitigation for unemployed or underemployed individuals, a point underscored by Dr. Paul Willen at the Panel’s foreclosure mitigation field 

hearing, and reiterated by Joe Ohayon of Wells Fargo Home Mortgage Service.363 One possible way to address the needs of those 

who are unemployed would be to replicate Pennsylvania’s successful Homeowner Emergency Mortgage Assistance Program (a type of 

bridge loan program for unemployed mortgagors) on a national 

scale.364 At the Panel’s foreclosure mitigation field hearing, virtually all of the witnesses acknowledged the promise of this program. 

Third, the existing federal foreclosure mitigation effort has also 

failed to deal with negative equity in a substantial or programmatic way, possibly calling into question the long-term sustainability of some modifications and refinancings. Principal reduction is the primary way to eliminate negative equity, and the Panel 

recognizes that there are serious legal and bank safety and soundness considerations that accompany each of the various options 

Treasury and Congress could employ to achieve principal reduction. 

2. MHA Program Improvements 

As it administers MHA and any subsequent program evolutions, 

Treasury must be mindful of several key points to maximize success. 

Transparency. First, the programs must be transparent. Information on eligibility and denials should be clear, easily understood 

and promptly communicated to borrowers. The denial process 

should include appropriate appeals for those denied incorrectly. Denial information should then be aggregated and reported to the 

public. Treasury should also release the NPV models, a point 

stressed by NeighborWorks and the National Fair Housing Alliance,365 so that they can be used by borrowers and borrowers’ 

counselors. While Treasury has made marked progress in its data 

collection, more data on HAMP borrowers should be made public 

in a timely, useful way, similar to HMDA data. Data collection 

should also be expanded to include information on a broader universe of borrowers facing foreclosure, beyond those eligible for 

HAMP. The Panel looks forward to Treasury’s fulfillment of its recent commitment to provide greater and deeper disclosure of 

servicer quality, responsiveness, capacity, and other performance 


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366Goldberg Philadelphia Hearing Testimony, supra note 99, at 8–9; Fitzgerald Philadelphia 

Hearing Testimony, supra note 147. 367 Congressional Oversight Panel, Testimony of Bank of America Home Loans Senior Vice 

President for Default Management, Allen Jones, Philadelphia Field Hearing on Mortgage Foreclosures, at 144–49 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409- 

philadelphia.cfm) (hereinafter ‘‘Jones Philadelphia Hearing Testimony’’). 

data. These transparency commitments should apply equally to 

HARP, for which there has been a decided lack of data, and HAMP. 

Streamlining process. Next, Treasury should implement greater 

uniformity into the loan modification system. Certainly, MHA was 

a significant step forward in creating an industry standard for loan 

modification, but borrowers and advocates continue to cite frustration with the differing forms and procedures from lender to lender.366 Lenders have expressed frustration as well, including Bank 

of America before the Panel.367 Creating further uniformity in the 

process will make it easier to educate borrowers on how the process 

works, as well as promote greater effectiveness for housing counselors. Treasury should continue current efforts to streamline and 

unify the process through its planned web portal and other means. 

Streamlining and standardizing the income documentation that 

verifies a borrower’s income will increase the likelihood that modifications are executed in a timely fashion. Additional efforts to improve case management and customer communication are also 

needed. 

Program enhancement. Several witnesses at the Panel’s foreclosure mitigation field hearing made constructive recommendations for program enhancement that Treasury should consider. 

First, many of the NPV model standards rely on statewide averages and there are instances in which these averages can be inappropriate (home sales, foreclosure timeframes, etc.). More granular 

local information should be incorporated. Second, several witnesses, 

including borrowers and servicers, expressed the need for the DTI 

eligibility test to go below 31 percent in order to accommodate borrowers for whom the modified capitalized arrearages would move 

them from below 31 percent (ineligible) to above 31 percent DTI (eligible), capturing additional borrowers at risk. Third, there were 

useful suggestions for ombudsmen and designated case staff to help 

borrowers cut through the red tape and have consistency in who 

they speak to at the servicer. 

Accountability. It is also critical for the success and credibility of 

the foreclosure mitigation programs to have strong accountability. 

Freddie Mac has been selected to oversee program compliance, and 

this is an important step. Freddie Mac and Treasury must outline 

a rigorous framework, including procedures to address non-compliance. It is critical that the program have strong, appropriate sanctions to ensure that all participants follow program guidelines. The 

performance metrics currently being developed by Treasury can 

play an important role in providing accountability. To maximize 

their effectiveness, the metrics should be comprehensive, and the 

results should be made public, with results available by lender/ 

servicer. 


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368 Redefaults, Self-Cures, and Securitization Paper, supra note 142. 

ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES ON NET PRESENT VALUE CALCULATIONS 

The net present value (NPV) calculation for a servicer is a comparison of the NPV of an unmodified delinquent loan to the NPV 

of a modification of that same delinquent loan. A NPV is the probability-weighted average of the various present values of different 

outcomes. If the NPV of the modified loan is greater than the NPV 

of the unmodified loan, then a modification is value maximizing for 

the investors in the loan. We can thus present a simple comparison 

of the NPV of the same defaulted loan if modified and unmodified. 

If a delinquent loan is not modified, there is a chance (PC) that 

the borrower will cure without assistance. There is also a possibility that there will be a foreclosure (PF). The NPV of the unmodified delinquent loan is thus the weighted average of the value of 

the self-cured loan and the value of the loan in foreclosure. 

If the delinquent loan is modified, there is a chance that the loan 

will perform as modified, but only as modified (PM). There is also 

a chance that the modification was unnecessary, as the defaulted 

would have been cured without the modification (PC-M). There is 

also a chance that the loan will redefault (PR), which could cause 

greater losses to the mortgagee in a falling market. Thus the NPV 

of the modified loan is the weighted average of the values of the 

unnecessarily modified loan, the redefaulted modified loan, and the 

performing modified loan. 

Thus the NPV of a modified loan is only greater than the NPV 

of the unmodified loan if: PM + PC-M + PR + ≥ PC + PF

This model can be tested against various market assumptions. A 

working paper published by the staff of the Boston Federal Reserve 

found that in 2007–2008 the self-cure rate (PC and PC-M) on a sample of loans from the LPS database, covering approximately 60 percent of the mortgage market, was 30 percent.368 This means that 

the chance of foreclosure if the loan is unmodified (PF) is 70 percent. The study also found redefault rates (PR) on modified loans 

in the range of 40 percent. Therefore the rate of successful, necessary modifications (PM) is 30 percent. Also assume that loss 

severities in foreclosure are 50 percent and that loss severities on 

redefault are 75 percent. These are, respectively, optimistic and 

pessimistic assumptions. Finally, assume that the mortgage in 

question, if it performed unmodified, would have a NPV of 

$200,000. 

Using a stated NPV for an unmodified loan permits us to avoid 

having to model the NPV of a loan and discount rate and prepayment assumptions, etc. These factors are vitally important in the 

NPV analysis that a servicer undertakes, and depend on numerous 

factors like loan structure. To examine the claim put forth in the 

Boston Federal Reserve study, however—namely that foreclosure is 

in most cases a rational, value maximizing response—we need 

nearly assume an NPV for an unmodified loan. Given the nature 

of the formula, however, the assumed NPV is ultimately immaterial to the outcome. 


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Given these assumptions, we can then solve for M, which is the 

minimum NPV of the loan as modified that would still maximize 

NPV relative to the defaulted loan unmodified: 

PM = .3M 

PC-M = .3M 

PR = .4 * (1-.75) * $200,000 = $20,000 

PC = .3 * $200,000 = $60,000 

PF = .7 * (1-.5) * $200,000 = $70,000 

Thus PM + PC-M + PR + ≥ PC + PF is: .3M + .3M + $20,000 > 

$60,000 + $70,000 

We can simplify this as: .6M + $20,000 ≥ $130,000 and solve for 

M: 

.6M ≥ $110,000 

M≥ $183,333.33 

This means that even using the Boston Federal Reserves’s findings on self-cure and redefault rate plus very conservative assumptions on redefault losses, the principal and/or interest on the mortgage could be written down such that the NPV of the loan would 

go to $183,333.33 and the modification would still maximize net 

present value for the mortgagee. In other words, a modification 

would still be value maximizing, even with an 8.33 percent reduction in NPV from the NPV of the loan performing unmodified. 

Notice that this outcome does not depend on the assumed NPV 

of the unmodified loan if it performed. If we substituted a variable 

X for the unmodified NPV of the loan if it performed, we would find 

that M ≥55/60 * X. As there is always a positive difference between 

X and 55/60 * X, there is some room for a modification using these 

assumptions, regardless of the size of the mortgage. 

If we use more current assumptions, such as a 6 percent self-cure 

rate (PC and PC-M) and a 35 percent redefault rate (PR), then the 

unmodified loan will end up in foreclosure (PF) 94 percent of the 

time, and will perform as modified, but only as modified (PM), 59 

percent of the time. Let us also assume, more plausibly, loss 

severities in foreclosure at 60 percent and on redefault at 65 percent. With these assumptions, we see a much greater modification 

is possible. 

PM = .59M 

PC-M = .06M 

PR = .35 * (1-.65) * $200,000 =$24,500 

PC = .06 * $200,000 = $12,000 

PF = .94 * (1-.5) * $200,000 = $94,000 

Thus PM + PC-M + PR + ≥ PC + PF is: 

.59M + .06M + $24,500 > $12,000 + $94,000 

We can simplify this as .65M + $24,500 ≥ $106,000 and solve for 

M: 

.65M ≥ $81,500 

M ≥ $125,384.61 

Using more realistic assumptions, the principal and/or interest 

on the mortgage could be written down such that the NPV of the 

loan would go to $125,384.61 and the modification would still maximize net present value for the mortgagee. In other words, a modification would still be value maximizing, even with a 37 percent reduction in NPV from the NPV of the loan performing unmodified. 

Again, once the assumptions about redefault and self-cure rates are 


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fixed, the outcome does not depend on the size of the mortgage. 

While the Boston Federal Reserve study is correct that self-cure 

and redefault rates play a major role in servicers’ NPV calculations, even with the extremely high self-cure and redefault rates 

found in the LPS data from 2007–2008, there was still room for 

value-maximizing modifications for quite standard loans. With current default and self-cure rates and further depressed foreclosure 

sale markets, there is even greater room for modifications possible. 


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369This point was made in the Congressional Oversight Panel’s March 2009 report as well 

as in a July Government Accountability Office report. Congressional Oversight Panel, March 

Oversight Report: Foreclosure Crisis: Working Toward a Solution (Mar. 6, 2009) (online at 

cop.senate.gov/documents/cop-030609-report.pdf); GAO HAMP Report, supra note 98. 370Fannie Mae and Freddie Mac have received large capital infusions under TARP, and so 

any expenditure by the GSEs, to the extent it reduces profits or erodes share values, indirectly 

reduces repayment of TARP funds. Like Treasury, the GSEs should be reporting data on mortgage modifications, servicer payments and foreclosures. 

ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE 

HOME AFFORDABLE MORTGAGE MODIFICATION PROGRAM 

A. Alan M. White 

1. Introduction 

The following discussion of the costs and benefits of homeowner 

assistance programs funded by TARP is necessarily qualitative, 

rather than quantitative, and preliminary in light of the very recent implementation of most of the initiatives under study. The 

focus will be on the first lien modification program, rather than the 

smaller deed-in-lieu and short sale program, whose per-home and 

total costs are much smaller. The GSE refinance program, which 

does not receive TARP funds directly, is not discussed. 

The continuing absence of mortgage performance data collection 

and reporting by Treasury hampers the effort to measure the costs 

and benefits of the programs and to evaluate any progress being 

made in bringing the foreclosure crisis to an end. The ultimate 

yardstick for evaluating any foreclosure-relief program is reduction 

in the number of foreclosure filings and foreclosure sales. Related 

indicators, such as early delinquencies, as well as details about 

modification application approvals and rejections, self-cure rates, 

and redefault rates on modified loans, need to be reported on a 

timely and regular (preferably monthly) basis.369

2. Description of Taxpayer-Funded Mortgage Borrower, 

Servicer, and Investor Assistance Programs Being Funded Through TARP 

Treasury has allocated $50 billion to make incentive payments 

and loan subsidies to servicers of non-GSE mortgages under the 

Home Affordable Mortgage Program (HAMP). An additional $25 

billion will be spent by the GSEs for a similar modification incentive program, but those funds are not TARP funds.370 The incentive payments include extra compensation to servicers for the work 

required to modify mortgage loans and payments to reduce loan 

balances and interest rates. The former payments benefit servicers, 

and the latter payments benefit both investors and homeowners. 

Investors benefit by the reduced risk of non-payment of their remaining balances and homeowners benefit from reduction of their 

debt. Treasury has allocated $10 billion to Home Price Decline Protection payments made to reduce mortgage debt in areas where 

home prices are subject to unusually high decline, such as in the 

sand states of Florida, Nevada, Arizona, and California. These latter payments afford an incentive to investors to agree to modifications and benefit both investors and homeowners by repaying and 

reducing mortgage debt. 


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371MBA National Delinquency Survey, supra note 4 (Reporting 8.86% of mortgages delinquent 

and 4.3% in foreclosure as of June 30, 2009, out of 44,721,256 mortgages, representing 85% of 

all first mortgages). 372 HOPE NOW, Workout Plans and Foreclosure Sales, supra note 2 (reporting 254,000, 

251,000, and 284,000 foreclosure starts for May, June, and July 2009, respectively.). 373Mortgage Bankers Association, National Delinquency Survey (Apr. 2006). 374The average loss recorded for foreclosure sale liquidations in securitized subprime and altA mortgages in November 2008 was $124,000. Alan M. White, Deleveraging the American Homeowner: The Failure of 2008 Voluntary Contract Modifications, 41 Connecticut Law Review 1107, 

at 1119 (2009) (hereinafter ‘‘Deleveraging the American Homeowner’’). Losses per foreclosure 

have continued to rise since then. Current monthly data on foreclosure losses are available at: 

www.valpo.edu/law/faculty/awhite/data/index.php. 

Treasury has also announced two related HAMP initiatives: to 

address second mortgages and to encourage foreclosure alternatives 

for homeowners who are giving up their home (short sale/deed in 

lieu program). The cost of these programs is included in the $40 

billion for HAMP. Servicers may receive incentive compensation of 

up to $1,000 for successful completion of short sale or deed-in-lieu, 

and borrowers may receive incentive compensation of up to $1,500 

for relocation expenses. Treasury will also contribute up to $1,000, 

on a $1 to $2 basis, to assist investors in buying out second lien 

holders to make a sale or deed-in-lieu workable and allow recovery 

by the first mortgage investors. 

3. The General Case for Promoting Mortgage Modifications 

One in eight mortgages, representing nearly seven million 

homes, is now delinquent or in foreclosure.371 Mortgage servicers 

are starting new Foreclosures at a rate of 250,000 per month, or 

three million per year.372 foreclosures are at roughly quadruple 

their pre-crisis levels.373 Each additional foreclosure is now resulting in direct investor losses of more than $120,000.374 In addition, 

each foreclosure results in direct costs to displaced owners and tenants and indirect costs to cities and towns, neighboring homeowners whose property values are driven down, and the broader 

housing-related economy. When we speak of investors to whom 

mortgage payments are due, we are speaking in part about taxpayers, who now own a major share of America’s mortgages. Taxpayers are mortgage investors directly through Treasury and Federal Reserve investments in mortgage-backed securities (MBS), and 

indirectly through FHA and VA insurance and through equity investments and guarantees in Fannie Mae, Freddie Mac, and other 

financial institutions that carry mortgages and MBS on their 

books. If HAMP is successful in reducing investor losses, those savings should translate to improved recovery on other taxpayer investments. 

Experience in prior debt crises and in the current crisis has 

shown that well-designed mortgage restructuring programs, in 

which borrowers in default or likely to default are offered payment 

reductions or extensions rather than having their property foreclosed, can significantly mitigate losses that investors and taxpayers would otherwise suffer. The mortgage servicing industry 

ramped up its levels of voluntary mortgage modifications in 2007 

and 2008, with mixed results. On one hand, nearly two million 

mortgages were modified, avoiding foreclosure at least temporarily 

and restoring some cash flow for investors. On the other hand, 

modifications were limited compared to the much larger number of 


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375Deleveraging the American Homeowner, supra note 374. 376Standard & Poor’s, Servicer Evaluation Spotlight Report (July 2009) (online at 

www2.standardandpoors.com/spf/pdf/media/SEl.Spotlightl.July09.pdf). 377Gelpern & Levitin Frankenstein Contracts, supra note 143. 378Data tabulated by Prof. Alan M. White from Wells Fargo Corporate Trust Services mortgage-backed securities investor reports (online at www.valpo.edu/law/faculty/awhite/data/ 

index.php). 379The self-cure rate refers to the percentage of delinquent mortgages being considered for 

modification that can be expected to return to current status and eventually be paid in full withmortgages in default and foreclosure, and redefault rates on voluntary modifications have been as high as 50 percent or more. Nevertheless, there is convincing evidence that successful modifications 

avoided substantial losses, while requiring only very modest curtailment of investor income. In fact, the typical voluntary modification in the 2007–2008 period involved no cancellation of principal 

debt or of past-due interest, but instead consisted of combining a 

capitalization of past-due interest with a temporary (three to five 

year) reduction in the current interest rate. Foreclosures, on the 

other hand, are resulting in losses of 50 percent or more, i.e. upwards of $124,000 on the mean $212,000 mortgage in default.375

While modification can often result in a better investor return 

than foreclosure, modification requires ‘‘high-touch’’ individualized 

account work by servicers for which they are not normally paid 

under existing securitization contracts (pooling and servicing agreements or PSAs).376 Servicer payment levels were established by 

contracts that last the life of the mortgage pools. Servicers of 

subprime mortgages agreed to compensation of 50 basis points, or 

0.5 percent from interest payments, plus late fees and other servicing fees collected from borrowers, based on conditions that existed 

prior to the crisis when defaulted mortgages constituted a small 

percentage of a typical portfolio. At present, many subprime and 

alt-A pools have delinquencies and defaults in excess of 50 percent 

of the pool. The incentive payments under HAMP can be thought 

of as a way to correct this past contracting failure. 

Ideally, investors might have foreseen the need for servicers to 

perform expensive loss mitigation work in order to maximize the 

return on the mortgages and provided in PSAs for servicers to be 

compensated for the extra work when the extra work would be economically justified. However, PSAs do not make such provisions. 

They have been aptly described as Frankenstein contracts.377 Because mortgage servicers are essentially contractors working for investors who now include the GSEs, the Federal Reserve, and 

Treasury, we can think of the incentive payments under HAMP as 

extra-contractual compensation for additional work that was not 

anticipated by the parties to the PSAs at the time of the contract. 

The additional compensation is justified to the extent that the investors will receive more than $1 in present value of additional 

mortgage cash flow for every $1 paid to the servicer for the required loss mitigation effort. 

To illustrate the benefits of modification, we can use an example 

based on actual mortgage modifications reported by servicers in 

August 2009. The average August modification reduced the homeowner’s payment by $182 per month on a loan with an average balance of $222,000. A foreclosure on mortgages in this amount resulted in average investor losses of roughly $145,000.378 Assuming 

a 10 percent self-cure rate,379 an unmodified mortgage, currently in 


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out modification. Prior to the crisis as many as 30 percent of delinquent borrowers were able 

to catch up on payments on their own, but in recent months the self-cure rate has declined dramatically and is currently between 4 percent and 7 percent. Fitch Ratings, BusinessWire, Fitch: 

Delinquency Cure Rates Worsening for U.S. Prime RMBS (Aug. 24, 2009) (online at 

www.businesswire.com/news/home/20090824005549/en). 380 Redefault rates are an important factor in measuring the costs and benefits of HAMP. 

OCC/OTS report that modifications made in 2008 have redefaulted at a rate of about 40 percent 

after six months. Modifications that reduced monthly payments by 10 percent or more had significantly lower default rates, in the range of 25 percent to 30 percent. HAMP modifications, 

by requiring reduction of the monthly payment, should result in lower redefault rates than prior 

voluntary modifications, which often increased payments and/or total debt. 381These calculations are based on the publicly available FDIC loan modification present 

value model. An example calculation is set forth in the spreadsheet in appendix 1. The results 

depend, of course, on assumptions about loss severities, self-cure rates, and redefault rates, 

among other things. This example is based on current FDIC assumptions. If servicers can identify homeowners with enough income to have at least a 60 percent chance of successful repayment, modification can save investors significant amounts compared to allowing most unmodified delinquent loans to go to foreclosure. 

default, will result in a probability-weighted present value loss of 

roughly $130,000. In other words, if the servicer does NOT modify 

the loan, the likely result on average is a $130,000 loss to the investor. 

In comparison, a modification that simply reduces interest from seven percent to 5.1 percent, resulting in a $225 payment reduction 

for five years (more than the typical August 2009 modification), 

would reduce the investor’s cash flow by a present value of $13,000. 

Even when we assume that 40 percent of modified loans will redefault,380 the weighted, present value loss from modifying such a loan would be around $48,000 (blending the small losses from successful modifications with the large losses from the failed modifications that revert to foreclosure). 

The bottom line to the investor is that any time a homeowner 

can afford the reduced payment, with a 60 percent or better chance 

of succeeding, the investor’s net gain from the modification could 

average $80,000 per loan or more. Two million modifications with 

a 60 percent success rate could produce $160 billion in avoided 

losses, an amount that would go directly to the value of the toxic 

mortgage-backed securities that have frozen credit markets and destabilized banks.381

4. Analysis of the Costs and Benefits of Homeowner Assistance Funded through TARP 

Any discussion of costs and benefits of the HAMP must begin 

with a caveat. The benefits of any intervention to reduce foreclosures necessarily involve predictions about repayment of mortgages, whether they are unmodified, modified, or refinanced. Predictions about probabilities of mortgage repayments and defaults 

are inevitably subject to a large margin of error, particularly in the 

current, unprecedented market environment. On the other hand, 

some elements are known with reasonable certainty, such as the 

likely losses that result from an individual foreclosure sale. 

To construct a very rough estimate of the costs and benefits of 

the HAMP we proceed in two steps. First we estimate the benefits 

and costs of intervention for each individual modified mortgage. 

The per-modification estimate is adjusted by the probability of successful repayment after modification (HAMP payments are not 

made if the homeowner defaults in payments on the modified loan). 

Second, we need to determine to what extent HAMP has resulted 


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382 A current list of HAMP contracts and with servicers and their cap amounts appears in U.S. 

Department of the Treasury, Troubled Asset Relief Program, Monthly Progress Report for August 

2009, at 59 (Sep. 10, 2009) (online at www.financialstability.gov/docs/105CongressionalReports/ 

105areportl082009.pdf). 383GAO HAMP Report, supra note 98, at 14. 

or will result in additional successful modifications, compared with 

the number of modifications that would have occurred anyway 

without these policy interventions. In other words, the second component of the analysis requires an estimate of the replacement effect or the extent to which HAMP will compensate servicers to do 

what in some instances they might have done anyway. 

5. Costs and Benefits of an Individual HAMP Subsidized 

Mortgage Modification 

Subsidy Costs. Treasury has allocated $50 billion for servicer and 

investor payments for non-GSE loans, including the $10 billion set 

aside for Home Price Decline Protection. As of August, roughly $23 

billion of this total had been committed through contracts with individual servicers.382 Treasury contemplates increasing these caps 

as servicers successfully complete modifications and draw down 

funds. 

Thus, we know the potential cost of the program because it has 

been capped by contract and by authorization. What we do not 

know in order to make a meaningful cost-benefit comparison is the 

number of successful modifications that the $23 billion in contracts, 

or $50 billion authorized, will purchase. Answering that question 

requires estimating the cost of an individual modification. 

Treasury has estimated that between two and 2.6 million borrowers will receive loan modifications assisted by HAMP payments 

funded by TARP, i.e., mortgages not held by the GSEs.383 The total 

projected expenditure for these HAMP modifications consists of the 

$50 billion total minus the amounts spent for the non-modification 

foreclosure alternatives (deed-in-lieu and short sale program). Allocations of the $50 billion are not fixed, and Treasury will adjust 

them depending on utilization of the programs. Simple division 

yields a per-modification cost of roughly $20,000, if 2.5 million borrowers are helped with the maximum $50 billion in program funds. 

The subsidy costs can also be approximated by adding up the 

components of HAMP assistance and estimating an average permodification subsidy. This estimation is complex because HAMP 

payments are made over time and are not made for unsuccessful 

modifications, so that redefault probability adjustment and present 

value discounting are required. 

HAMP payments are made over a five-year period. Treasury has 

agreed to pay $1,000 or $1,500 initially, plus $1,000 per year for 

up to three years to the servicer for each successful modification, 

and also $1,000 per year for up to five years towards principal debt 

reduction for each successful modification (for a potential total of 

$9,000 or $9,500 of incentives per modification). In addition, Treasury will pay a Monthly Payment Reduction Subsidy (MPRS) to 

bring the borrower’s debt-to-income ratio down from 38 percent to 

31 percent when necessary. The payment is equal to one-half the 

amount required to reduce the borrower monthly payment to 31 

percent DTI from 38 percent DTI. 


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384This includes the $9,000 in basic servicer and borrower incentive payments, plus Treasury’s discounted estimates for the monthly payment reduction cost share, the Home Price Decline Protection payments, and the average cost of second lien modification spread across all 

first lien modifications. It does not include the non-retention foreclosure alternatives program. 

Estimates of these costs were obtained from Treasury. 385 Assuming 70 percent of the modifications result in full payment of the $9,000 basic subsidies, and 30 percent result in payment of only the $1,000 initial payment and 6 months of 

interest subsidies with no second lien or Home Price Decline Protection payment. 

The Home Price Decline Protection payments are in addition to 

the $9,000 in incentives and the payment reduction subsidy, and 

are more difficult to estimate. As the GAO report notes, it is not 

clear why Treasury believes it will be necessary to provide these 

additional subsidies for modifications that are NPV positive, i.e., 

that the servicer should make without the subsidy, when the other 

payments fully compensate the servicer for the transaction costs of 

modifications. 

Second lien modification program: Separate funds are allocated 

to support the modification of second mortgages for borrowers who 

receive a first mortgage modification. Although Treasury has estimated that between one-third and one-half of first mortgages modified under HAMP will need assistance for a second mortgage, it is 

unlikely that all second mortgages will be successfully modified. 

Based on Treasury’s estimates, the total amount required for a 

single HAMP modification—combining the basic HAMP payments 

with the cost estimates for payment reduction subsidy, HPDP and 

second lien payments—average subsidies for a single modification 

would be about $20,350.384 In order to compare costs and benefits 

meaningfully, all program costs should be reduced to present value. 

The $9,000 in basic incentive payments over five years for an average individual modification translates to roughly $7,800 in present 

value cost for a successful modification, using the current Freddie 

Mac rate as the discount rate, reducing the total to $18,150. 

Some modified loans will fail, and in those cases some of the 

HAMP payments will not be made. It is therefore necessary to adjust the program cost by a probability of redefault factor. If we assume an average 30 percent redefault rate, and that the mean time 

to redefault is six months, with virtually all redefaults occurring 

within 12 months, the present value, probability-adjusted cost of 

the program per modified loan would be about $15,850.385 A lower 

redefault rate would mean higher program costs. The present value 

and probability adjustments must be made both for cost and for 

benefit estimates in order for these estimates to be comparable. 

Treasury’s estimate of $16,000 to $21,000 per HAMP modification 

is presumably based on more conservative assumptions, or more 

optimistic projections about redefault rates. 

To summarize, the total cost of the borrower, servicer, and investor incentive payments for first and second mortgage HAMP payments is projected to be in the range of $16,000 to $21,000 average 

per first mortgage modification, including both successful and unsuccessful modifications. In other words, the cost per successful 

modification will be higher. Treasury should be in a position to report on actual per-modification costs by November or December, 

when several months of permanent modification data have been 

collected and some initial redefault statistics can be calculated. 


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386Deleveraging the American Homeowner, supra note 374, at 1113, 1114. The OCC/OTS 

Mortgage Metrics Report for the Second Quarter of 2009 reports that of 142,362 modifications 

in the second quarter, 91,590 included capitalization of arrears. 387Deleveraging the American Homeowner, supra note 374, at 1114. 

Note on Moral Hazard Costs. Moral hazard in this context refers 

to the cost of losses on mortgages that would otherwise perform but 

for the borrower’s decision to default in order to benefit from the 

program. Initially, it should be noted that mortgage servicers are 

already modifying tens of thousands of mortgages every month voluntarily, so the moral hazard cost of HAMP would require a determination of the additional impetus, if any, that HAMP might cause 

for voluntary defaults over and above the effect of present servicer 

loss mitigation. This could occur, for example, if homeowners regarded the chance of obtaining $5,000 in potential principal reduction payments as a sufficient incentive to default on their mortgage. 

It is theoretically possible that some homeowners, who would not 

become delinquent in the absence of either the voluntary modification program or the enhanced program stimulated by HAMP incentive payments, will choose to become delinquent to benefit from the 

program. In this context, moral hazard is nearly impossible to 

measure. Defaults and delinquencies on mortgages that do occur 

are thought to result from a combination of factors including mortgage product features, borrower life events like unemployment, and 

negative equity making it impossible to sell or refinance the home. 

If a borrower were certain that any delinquency would automatically result in a modification that saves the borrower money, he or 

she might have an incentive to default. 

There are three reasons moral hazard from HAMP modifications 

is unlikely to play a significant role in borrower defaults. First, the 

likelihood of obtaining a modification involving permanent concessions is understood by most borrowers to be low. Many modifications simply reschedule payments, without reducing total debt. In 

fact, most modifications to date have increased principal debt, because unpaid arrears are added to the loan balance.386 HAMP 

modifications reduce payments, but servicers may still capitalize 

unpaid interest and fees and thereby increase total debt. The average amount capitalized in 2008 was $10,800.387 The HAMP principal reduction payments would thus not be sufficient to motivate 

a strategic default, especially in light of the countervailing cost a 

strategic defaulter would pay in impaired credit scores. 

Second, the probability of obtaining any modification is uncertain—there is a huge variation among servicers in the number of 

modification requests that are being granted or denied. Servicers 

are overwhelmed with applications, and many homeowners and 

mortgage counselors report significant difficulty in obtaining modifications. Thus a strategic defaulter would take the risk that a 

modification would not be approved or processed before foreclosure 

and loss of the property. 

Third, program eligibility rules are designed to prevent borrowers who do not have genuine financial difficulties from obtaining any loan concessions. In other words, borrowers are screened 

to minimize moral hazard. Applicants for modifications must document their income, in order to prove that they cannot afford their 


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388Daniel Immergluck and Gregory Smith, The External Costs of Foreclosure: The Impact of 

Single-Family Mortgage Foreclosure on Property Values, Housing Policy Debate, Vol. 17, No. 1, 

at 57 (Jan. 2006) (online at www.mi.vt.edu/data/files/hpd%2017%281%29/ 

hpdl1701limmergluck.pdf); Vicky Been, Ingrid Gould Ellen, and Jenny Schuetz, Neighborhood 

Effects of Concentrated Mortgage Foreclosures, 17 Journal of Housing Economics, at 306 (Dec. 

2008) (online at furmancenter.org/files/foreclosures08-03.pdf). 

full contract payment without modification. Borrowers who can already afford their mortgage will not receive a modification. The 

documentation requirements have been demanded by investors precisely to prevent moral hazard issues from arising. They can create 

difficulties for homeowners with a genuine need, but the extra 

transaction cost is justified on the basis that it will minimize moral 

hazard for undeserving borrowers. 

Further study and analysis beyond the scope of this discussion 

would be necessary to determine whether existing measures are 

sufficient to keep moral hazard costs at a minimum. Thus far, 

there has been no reported empirical evidence of significant moral 

hazard costs resulting from either the voluntary mortgage modifications of 2007 and 2008 or the HAMP modification program. In 

other words, the existence of any mortgage defaults motivated solely or primarily by the availability of either voluntary modifications 

or HAMP modifications has not been demonstrated. 

Benefits. The direct and most easily measured benefit of HAMP 

modification assistance is the reduction in foreclosure losses borne 

by investors, including notably Treasury, Federal Reserve and 

GSEs. The direct investor savings from a successful modification 

program are measured by comparing the present value of a delinquent loan without modification to its value after modification, the 

so-called net present value or NPV test. Every modification must 

be subjected to the NPV test. It will be vitally important for Treasury to monitor the NPV test results for HAMP modifications, in 

order to see whether the program costs are justified. If average investor savings, discounted and probability-adjusted, are in excess of 

$50,000, as in the hypothetical model discussed above, the benefits 

would clearly outweigh the costs. On the other hand, if many modifications are resulting in only a marginally positive NPV, the wisdom of the subsidies may need to be revisited, unless they can be 

justified based on other cost savings. 

Apart from the investor savings, homeowners who successfully 

repay a modified mortgage will realize significant benefits in avoiding the moving costs, impaired credit, and other measurable impacts of a foreclosure and eviction from their homes. In addition, 

for every additional foreclosure prevented by a successful modification, external costs of foreclosures are avoided. These include the 

decline in home values of neighboring properties and the lost tax 

revenue, increased crime and other costs borne by local communities. 

The benefits to homeowners and communities from preventing a 

foreclosure are more difficult to quantify, but should not be ignored 

in any plausible cost benefit analysis. The easiest positive externality to measure is the impact of foreclosure sales on surrounding 

home values. Immergluck and Smith determined that each single 

foreclosure in Cook County, Illinois drove down neighboring home 

values by a total of $158,000.388 Another external cost that has 


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389William Apgar, Mark Duda, and Rochelle Gorey, The Municipal Costs of Foreclosure: A 

Chicago Case Study, Homeownership Preservation Foundation (Feb. 27, 2005) (online at 

www.hpfonline.org/content/pdf/ApgarlDudalStudylFulllVersion.pdf). 390For August 2009 HOPE NOW reported 86,000 permanent modifications, which is a decline 

of 34,000 from the 120,000 monthly range seen in months prior to HAMP implementation. 

HOPE NOW, HOPE NOW Data Shows Increase in Workouts for Homeowners (Sept. 30, 2009) 

(online at www.hopenow.com/presslrelease/files/August%20Data%20Releasel09l30l09.pdf). 

been quantified somewhat is the cost to cities, especially of concentrated foreclosures. A municipality may spend as much as 

$30,000 per vacant property as a result of a foreclosure.389 The 

amounts lost by families who lose their homes, in moving costs, replacement housing, and indirect effects, has not been reliably estimated, but are clearly a significant cost that is avoided when a 

modification is successful. Precision is impossible in estimating 

these benefits from foreclosure prevention. Nevertheless these benefits are real, and should not be discounted. As a very rough approximation, the external benefits of foreclosure prevention are at 

least double the amounts of direct investor savings from a successful modification. To put it another way, measuring only investor 

savings will capture less than a third of the likely economic benefits. 

6. Substitution Effect and Prior Voluntary Modifications 

The second step in a cost benefit analysis would be to measure 

the extent to which HAMP has increased modifications over the 

number that were already occurring voluntarily. Data for July and 

August suggest that HAMP has resulted in a net increase of about 

85,000 modifications per month. In August, Treasury reports that 

there were about 120,000 temporary HAMP modifications. Those 

were offset by a decline of around 35,000 in non-HAMP permanent 

modifications compared with prior months.390 Because very few 

HAMP three-month temporary modifications have become permanent, it is too early to tell how many additional modifications 

HAMP has produced. In very rough terms, it appears that at least 

in August, about 29 percent of HAMP modifications were replacing 

permanent modifications that would have been put in place voluntarily without subsidy payments. Thus, the net benefit of the program (benefits minus costs) should realistically be discounted to 

some extent to account for the substitution effect. 

On the other hand, even HAMP modifications that might be regarded as having substituted for prior, voluntary modifications will 

be, on average, more likely to succeed and more beneficial for 

homeowners. This is because of HAMP’s requirement to reduce borrower debt ratios to 31 percent. This level of payment reduction 

has not been the norm prior to HAMP. Significant payment reduction is likely to improve the chances of borrower success and the 

resulting investor and public savings. HAMP will thus improve the 

quality and uniformity of mortgage modifications even to the extent 

it does not increase their total number. 

Nevertheless, Treasury will need to monitor closely the conversion rate of temporary modifications to permanent modifications, 

and the overall maintenance of effort by servicers, to determine 

whether HAMP payments are stimulating a net increase in permanent modifications. 


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7. Other Benefits 

In addition to the incremental foreclosure prevention that HAMP 

will buy, the program may have other long-term benefits for the 

mortgage industry. By standardizing the calculation of net present 

value, improving the likelihood of success and the quality of loan 

modifications, and gathering better data on modified loan performance, the Treasury intervention may produce improvements in industry knowledge and practices. Mortgage servicers may realize efficiencies from greater uniformity in documenting modifications, 

applying uniform NPV criteria, and may thus increase investor 

community confidence in the modification and loss mitigation process. The HAMP template could continue to be used after subsidy 

ends, and continue to improve practices in the servicing industry. 

If HAMP is successful in producing greater investor savings and 

reduced foreclosures, Treasury should consider how and when to 

phase out the incentive payments, or reduce them to the minimum 

level needed to maintain the necessary servicer incentives. The 

payments being made to servicers are substantial, and perhaps 

more than are absolutely necessary to compensate servicers for loss 

mitigation activity. Servicers could be encouraged to reveal the 

marginal cost of good modifications through a competitive bidding 

process, allowing servicers to bid for the lowest compensation level 

necessary to continue processing all feasible modifications. 

Finally we should not overlook the macroeconomic benefits that 

a successful foreclosure reduction program may achieve. If the 

steadily growing inventory of foreclosed homes can be reduced, 

home prices can begin to stabilize, and the housing and mortgage 

industries can return to being a stimulus rather than a drag on the 

economy. The true measure of whether the $50 billion HAMP investment pays off will be whether foreclosure filings and the inventory of foreclosed homes begin returning to normal levels. 


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ANNEX C: EXAMINATION OF TREASURY’S NPV MODEL 

The Panel has examined Treasury’s NPV model and notes that 

it is highly sensitive to small changes in certain parameters as well 

as quite inflexible in other regards. The Panel conducted a sensitivity test on the HAMP NPV model by using a baseline model 

where the variables of the loan are NPV neutral such that the NPV 

of the modified loan is approximately equal to the NPV of an unmodified loan. Starting with this control, the Panel staff tested the 

sensitivity of six major variables: 

1. Discount Rate—According to the HAMP Base NPV working 

paper, a servicer can override the default discount rate (PMMS) 

and add a risk premium up to 250 basis points for loans in their 

portfolio or loans they manage on behalf of investors. They may use 

only two risk premiums: one they apply to all loans in portfolio, 

and another they apply to all PLS loans. The discount rate impacts 

the present value of the projected future cashflows of the loans— 

a higher discount rate increases the extent to which the investor 

values near-term cash flows more than the same cash flows in the 

future. Using the baseline loan to conduct the test, the Panel’s staff 

found that only a one basis point change in the risk premium is 

necessary to change the outcome of the test for the baseline loan 

from NPV positive to NPV negative. As such, this risk premium is 

a very sensitive variable that can change the NPV outcome from 

positive to negative. 

2. Geographical Region—The metropolitan statistical area (MSA) 

in which a property is based affects the Housing Price Index and 

the Home Price Depreciation Payment. Other variables, such as 

foreclosure timeline, REO costs, and the REO sale discount due to 

stigma, vary at the state level. Accordingly, by changing the MSA 

of a property, the NPV value of the modification (the difference between the NPV of cash flows in the mod- and no-mod scenarios) 

varies by as much as $10,000 for the example loan. 

3. Mark-to-Market Loan-to-Value ratio (MTMLTV)—The 

MTMLTV of a loan reflects the size of a borrower’s debt relative 

to the value of their house. The more the borrower owes relative 

to the value of their house, the more likely they are to default on 

the loan, the less likely they are to refinance or sell the home (prepay), and the less of outstanding balance of the loan the lender recovers in foreclosure. For these reasons, the NPV model is sensitive 

to MTMLTV. Using the baseline loan, which has an MTMLTV of 

0.72, an increase in MTMLTV ratio by one basis point holding all 

other variables constant turns the example loan from NPV negative to NPV positive. This is because an increase in MTMLTV increases the probability of default and redefault and changes their 

relative magnitudes, and lowers the recovery rate of the unpaid 

balance in foreclosure. In the case of the example loan—holding all 

else constant—the NPV increases as MTMLTV approaches 125 percent (the borrower owes 25 percent more than their house is worth) 

and declines thereafter. The point at which increasing the 

MTMLTV would change from raising to lowering the NPV depends 

on other inputs, such as the discount rate, the level of delinquency, 

foreclosure costs, FICO score, and the borrower’s pre-mod debt-toincome ratio. 


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4. FICO Score—Another variable tested was the FICO score. The 

borrower’s FICO score reflects their probability of default and also 

their ability to borrow, which affects their ability to refinance their 

home or to sell their existing home and buy another—in other 

words, to prepay. The test found that when the impact of the borrower’s FICO score on the NPV value of the modification varies 

with other inputs, most notably their MTMLTV. For loans with relative low MTMLTV, there is an inverse relationship between FICO 

score and the NPV value. This is because for loans where the borrowers have significant equity in the home, raising the FICO score 

lowers the probability of default in the no-mod case more than it 

lowers the probability of default in the mod case. For loans with 

relatively high MTMLTVs, the NPV value of the modification increases with the borrower’s FICO score. This is because the high 

FICO score lowers the probability of default in the mod case more 

than it lowers the probability of default in the no-mod case. 

5. Borrower’s Income—The Panel staff also analyzed the impact 

of the borrower’s income on the NPV of the modified and non-modified loan. The borrower’s income affects how much their monthly 

payments must be reduced to achieve a 31 percent DTI ratio (ratio 

of monthly mortgage payments—including taxes, insurance, and 

HOA fees—to monthly income). Increasing income also reduces the 

probability of default and redefault (by different amounts), since 

the borrower’s starting DTI is an input in the default-probability 

calculator. Delinquency of the Loan—After a loan is 90+ days delinquent, default probabilities, and cash flows upon default become 

fixed in the HAMP NPV model—additional months of delinquency 

do not change these values. The only variable factors for 90+ day 

delinquent loans are the cash flows on the no-mod cure scenario 

and—to a lesser extent—the cash flow on the mod-cure scenario. As 

a loan becomes more delinquent, the past-due interest and escrow 

amounts are assumed to be paid up-front in the no-mod cure scenario and capitalized into the UPB in the cure scenario. This 

means that in the HAMP model, the NPV of the no-mod scenario 

increases relative to the NPV of the modification scenario once a 

loan is 90+ days delinquent. Accordingly, once a loan becomes 90+ 

days delinquent, the difference between the no-mod scenario and 

the modification scenario will increasingly favor not modifying the 

loan. 


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391See supra p. 98 and accompanying notes (HAMP is ‘‘unlikely to have a substantial impact’’ 

and ‘‘is better than doing nothing.’’). 392See supra pp. 50, 53 and accompanying notes. 

SECTION TWO: ADDITIONAL VIEWS 

A. Richard H. Neiman 

I voted for the Panel’s October Report (the ‘‘Report’’) and I agree 

with its central themes and recommendations. As directed by the 

Congress in EESA, Treasury’s foreclosure mitigation efforts are vitally important to protecting homeowners, strengthening the housing market, and aiding economic recovery. I believe that much 

more needs to be done to help people in need now and during the 

foreclosure surge that will continue over the next several years. 

I am providing these Additional Views to clarify some points in 

the Report and amplify others. 

1. It Is Too Early To Make Conclusive Judgments About 

HAMP, HARP and MHA 

MHA had many obstacles, problems, and operational and technological challenges getting started and the HAMP program is just 

now gaining momentum. Because we are in a period where so 

many trial modifications are on the books and so few have had 

time to convert to permanent modifications, I believe it is too early 

to judge the program or to imply that HAMP will not be successful.391

I think that Treasury’s current run rate goal of 25,000 trial 

modifications per week—or 1.3 million per year—is a robust goal. 

If achieved and sustained with a solid conversion rate of trial modifications to permanent modification, HAMP can provide a tremendous benefit for millions of American homeowners. 

Early trial-to-permanent modification conversion rates have been 

low, as the Report points out, but there are a range of reasons (e.g., 

the temporary 60-day extension of the trial modification period; 

early documentation and capacity issues; etc.) why it is still several 

months too early to draw any meaningful conclusions. I suggest 

that Treasury issue its own projections for trial-to-permanent conversion rates as soon as possible in order to provide guidance on 

this issue. 

We should give the program time to work and re-visit HAMP 

within six months when a better track record and better service 

quality and performance results are available. 

2. In Fact HAMP Has Great Potential 

HAMP was designed to make loans more affordable for homeowners by lowering monthly payments thereby giving the most immediate and meaningful relief to the greatest number of homeowners. 

Thus far, HAMP modifications have resulted in a mean interest 

rate reduction of 4.65 percent from approximately 7.58 percent to 

approximately 2.93 percent with mean monthly savings of $740 per 

loan reducing payments from on average $1890 to $1150, a 39-percent payment decline.392 These are very impressive affordability 

numbers on a still-too-small base of loans. As HAMP gains momenVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00120 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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393See supra Annex B, ‘‘Potential Costs and Benefits of the Home Affordable Mortgage Modification Program,’’ by Professor Alan M. White. 394See discussion of Pennsylvania’s successful HEMAP program supra pp. 90–91. 

tum the direct savings to homeowners and investors and the benefits to society should be enormous. In fact, the Report contains a 

cost benefits study of mortgage modifications that found preliminarily, that the potential direct and indirect benefits to borrowers, 

investors, and society substantially outweigh the costs of HAMP 

loan modifications.393

3. Borrowers’ Grievances Are Real 

The Panel’s September 20th Philadelphia hearing, which featured lively testimony from servicers, borrower groups, Treasury, 

Fannie Mae and Freddie Mac, demonstrated that there is a lot of 

room for improvement in the programs. Borrowers have been frustrated with unresponsive servicers, lost documents, time delays, 

unclear reasons for denial, and a host of other problems. 

The scale up period is over. Servicers have had time to make improvements and should by now be organized to handle the case 

load in a highly professional and expeditious manner. Consequently, there should be no further systemic excuses regarding 

capacity. 

4. HAMP Does Not Address Every Defaulted Loan—Other 

Issues Need Other Policy Solutions 

It is not a design shortcoming of HAMP that it does not address 

every default-related issue. I agree with the Report that HAMP 

was not primarily designed to address the issues of negative equity, 

unemployment and option ARMs. 

I endorse the view that Treasury should review these issues carefully and explain whether it intends to pursue additional policy solutions or program enhancements that are specifically targeted to 

these problems. One recommendation to address unemployment is 

to consider the use of TARP funds to support existing state programs or to encourage states to develop new programs that provide 

temporary secured loan payment assistance to the recently unemployed.394 In considering possible programs to address the effects 

of negative equity, policymakers must address issues of moral hazard, bank safety and soundness, contract, and fairness, including 

the fairness issue related to sharing future equity appreciation. 

5. We Can Only Measure Success With a Comprehensive National Metric That Tracks Defaults and Foreclosures 

The Report notes that even if HAMP modifies hundreds of thousands of loans a year it may not be enough to stem the rising tide 

of 2–3 million foreclosure starts a year. Yet, it is difficult to know 

how many foreclosures are preventable because we have poor national industry information. We need to know more about foreclosure starts: How many result in foreclosure sales? How many 

cure? How many go to short sale or other solution that results in 

a lost home? How many are modified and saved? How many cannot 

be prevented by any means? 

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395 Currently, for example, the OCC/OTS Mortgage Metrics Report reports on the subset of 

bank-serviced loans. However the OCC/OTS report (a) covers only 64% of the U.S. mortgage 

market, (b) is published three months after quarter end, and (c) does not break out information 

by state or servicer. Other databases have the same shortcoming of incompleteness making comparability nearly impossible and resulting in confusing and conflicting statistics. 396 House Joint Economic Committee, Testimony of Richard H. Neiman on behalf of the Congressional Oversight Panel, TARP Accountability and Oversight: Achieving Transparency (Mar. 

11, 2009) (online at jec.senate.gov/index.cfm?FuseAction=Files.View&FileStorelid=38237b7d74fe-4960-9fc6-68f219a03c0f). 

GSE-MHA-Servicer partnership take the lead in providing clear 

understandable and comprehensive metrics about the housing market, especially delinquent loans and foreclosures, on a national 

basis by state of residence.395

I previously encouraged Congress to enact a national mortgage 

loan performance reporting requirement applicable to all institutions who service mortgage loans, to provide a source of comprehensive intelligence about loan performance, loss mitigation efforts and foreclosure.396 Federal banking or housing regulators 

should be mandated to analyze the data and share the results with 

the public. A similar reporting requirement exists for new mortgage loan originations under the Home Mortgage Disclosure Act. 

Because lenders already report delinquency and foreclosure data to 

credit reporting bureaus, it would be feasible to create a tailored 

performance data standard that could be put into operation swiftly. 

The country and its policymakers desperately need this kind of 

information and given the projections for a protracted period of 

foreclosures, it is well worth the effort. 

6. Pushing Ahead 

Mortgage reforms are critical at the state and national levels, reforms that I believe are necessary to aiding the millions of homeowners for whom unachievable mortgage payments and potential 

foreclosure are painful realities. We cannot turn back now. We 

must push ahead with the borrower-lender-government partnership 

that has been launched and build it out and improve on it. We 

need more hands on the oars, we need better cooperation and we 

need much better information and default mitigation tools. 

B. Congressman Jeb Hensarling 

Although I appreciate the work the Panel and staff members 

have done in preparing the October report, I do not concur with the 

conclusions and recommendations presented and, accordingly, dissent from the adoption of the report. Foreclosure mitigation is mentioned in the Emergency Economic Stabilization Act, EESA (P.L. 

110–343), so it is an important mission for the Panel to assess the 

effectiveness of loan modification programs as they relate to this 

objective as well as to taxpayer protection. 

1. Executive Summary 

While I acknowledge the extensive research that went into this 

report on foreclosure mitigation and wish to thank the Panel for incorporating some of my edits and ideas, I believe several areas are 

either overlooked completely or present challenges to conducting 

proper oversight. In the following, I hope to shine a light on key 


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397 U.S. Department of the Treasury, TARP Transactions Report (Oct. 2, 2009) (online at 

www.financialstability.gov/docs/transaction-reports/transactions-reportl10062009.pdf). This figure is defined by the current ‘‘Total Cap’’ for the Home Affordable Modification Program: 

$27,247,320,000. 398The Making Home Affordable program presently consists of the HAMP—Home Affordable 

Modification Program—and the HARP—Home Affordable Refinancing Program—programs. 

issues relating to the Panel’s analysis of housing policy and the Administration’s foreclosure mitigation programs. 

A fair reading of the Panel’s majority report and my dissent 

leads to one conclusion—HAMP and the Administration’s other 

foreclosure mitigation efforts to date have been a failure. The Administration’s opaque foreclosure mitigation effort has assisted only 

a small number of homeowners while drawing billions of involuntary taxpayer dollars into a black hole. 

While the Congressional Budget Office estimates that taxpayers 

will lose 100 percent of the $50 billion in TARP funds committed 

to the Administration’s foreclosure relief programs, instead of focusing its attention on taxpayer protection and oversight, the Panel’s majority report implies that the Administration should commit 

additional taxpayer funds in hopes of helping distressed homeowners—both deserving and undeserving—with a taxpayer subsidized rescue. 

While there may be some positive signals in our economy, recovery remains in a precarious position. Unemployment will hit 10 

percent in 2010, if not this year. This is unfortunate because the 

best foreclosure mitigation program is a job, and the best assurance 

of job security is economic growth and the adoption of public policy 

that encourages and rewards capital formation and entrepreneurial 

success. Without a robust macroeconomic recovery the housing 

market will continue to languish and any policy that forestalls such 

recovery will by necessity lead to more foreclosures. 

Regardless of whether one believes foreclosure mitigation can 

truly work, taxpayers who are struggling to pay their own mortgage should not be forced to bail out their neighbors through such 

an inefficient and transparency-deficient program. Both the Administration and the Panel’s majority appear to prioritize good intentions and wishful thinking over taxpayer protection. 

To date, despite the commitment of some $27 billion,397 only 

about 1,800 underwater homeowners have received a permanent 

modification of their mortgage. If the Administration’s goal of subsidizing up to 9 million home mortgage refinancings and modifications is met, the cost to the taxpayers will almost surely exceed the 

$75 billion already allocated to the MHA—Making Home Affordable—program,398 and it is likely that most (if not all) of it will not 

be recovered. 

Taxpayers deserve a better return on their investment than what 

they are set to receive from AIG, Chrysler, GM and the Administration’s flawed foreclosure mitigation efforts. 

Professor Alan M. White, an expert retained by the Panel, notes 

in a paper attached to the Panel’s report: ‘‘The bottom line to the 

investor is that any time a homeowner can afford the reduced payment, with a 60-percent or better chance of succeeding, the investor’s net gain from the modification could average $80,000 per loan 

or more.’’ 


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Taxpayers—through TARP or otherwise—should not be required 

to subsidize mortgage holders or servicers when foreclosure mitigation efforts appear in many cases to be in their own economic best 

interests. The Administration, by enticing mortgage holders and 

servicers with the $75 billion HAMP—Home Affordable Modification Program—and HARP—Home Affordable Refinancing Program—programs (with a reasonable expectation that additional 

funds may be forthcoming), has arguably caused them to abandon 

their market oriented response to the atypical rate of mortgage defaults in favor of seeking assistance from the government. 

Any foreclosure mitigation effort must appear fair and reasonable to the American taxpayers. It is important to remember that 

the number of individuals in mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the 

victims of fraud. This complicates moral hazard issues associated 

with large-scale modification programs. Distinct from a moral hazard question there is an inherent question of fairness as those who 

are not facing mortgage trouble are asked to subsidize those who 

are facing trouble. 

In light of current statistics regarding the overall foreclosure 

rate, an essential public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is: ‘‘Is it fair to expect approximately 19 out of every 

20 people to pay more in taxes to help the 20th person maintain 

their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular 

sentiment that such a trade-off is indeed not fair. 

Since there is no uniform solution for the problem of foreclosures, 

a sensible approach should encourage multiple mitigation programs 

that do not amplify taxpayer risk or require government mandates. 

Subsidized loan refinancing and modification programs may provide relief for a select group of homeowners, but they work against 

the majority who shoulder the tax burden and make mortgage payments on time. 

The following are topics that I will cover in my response. 

• The Congressional Budget Office estimates that taxpayers will 

lose 100 percent of the $50 billion in TARP funds committed to the 

Administration’s foreclosure relief programs. 

• Determination of costs is especially important if, as Treasury 

Secretary Geithner has stated, TARP is interpreted to be a ‘‘revolving facility.’’ Given the likelihood that he will extend TARP to October 31, 2010, it’s possible that a substantial portion of the $700 billion TARP facility could be directed to foreclosure mitigation efforts. 

• EESA charges the Panel with a clear duty to provide information on foreclosure mitigation programs, but with the caveat that 

it must be with an eye towards taxpayer protection. The October report places policy recommendations above this statutory duty. 

• In order to better appreciate the total all-in costs of the Administration’s various foreclosure mitigation efforts and to ensure taxpayer protection, and to compensate for the Panel’s gaps in oversight, the Administration should promptly provide the taxpayers 

with a thorough and fully transparent analysis of the following 

matters: 


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(i) the total amount of funds the Administration has advanced and committed to advance under its various foreclosure 

mitigation efforts (including, without limitation, under MHA, 

HAMP and HARP, the second lien programs, as well as the 

programs adopted by Fannie Mae and Freddie Mac); 

(ii) the total amount of funds the Administration reasonably 

expects to advance and commit to advance over the next five 

years under all of its present and anticipated foreclosure mitigation efforts; and 

(iii) the total anticipated costs to all financial institutions 

and other mortgage holders and servicers under all of the Administration’s present and anticipated foreclosure mitigation 

efforts. • Treasury should be held accountable for key performance 

metrics as well. With 360,000 trial modifications underway, only 

1,800 permanent modifications in place, and at least $27 out of $50 

billion committed to the MHA—Making Home Affordable—program 

for loan modifications, by all appearances, Treasury is still a long 

way from its goal of assisting 3 to 4 million homeowners. • All of the false starts with HAMP and the other government 

programs may have exacerbated the foreclosure mitigation process 

by keeping private sector servicers and mortgage holders on the 

sidelines waiting on a better deal from the government. By creating 

a perceived safety net, the foreclosure mitigation efforts advocated 

by the Administration may encourage economically inefficient speculation in the residential real estate market with its adverse bubble generating consequences. • Housing GSEs—Government Sponsored Enterprises—Fannie 

Mae and Freddie Mac play key roles in the Administration’s new 

housing policies. Funds from the Preferred Share Purchase Agreements, which allow the GSEs to draw up to $400 billion from 

Treasury, are being deployed for foreclosure mitigation and refinancing efforts. Since Fannie Mae and Freddie Mac are now under 

the conservatorship of the Federal Housing Finance Agency 

(FHFA), their concerns are now officially the taxpayer’s concerns— 

any losses they experience through MHA should be a carefully considered part of a cost-benefit analysis. 

• Fannie Mae and Freddie Mac should be more forthcoming with 

respect to their foreclosure mitigation efforts and use of taxpayer 

funds by addressing the questions that I pose later in the report. 

• Due to flaws in the incentive structure for large-scale, loan 

modification programs, the Panel seems to support substituting 

federal bankruptcy judges for the traditional role performed by 

servicers and mortgage holders in loan modifications. Such a 

change in law will add to the increasing burden borne by the vast 

majority of homeowners who meet their mortgage obligations each 

month by encouraging non-recourse speculative investment in the 

residential housing market. 

• Since one of Treasury’s fundamental mandates is taxpayer protection, the incorporation of a shared appreciation right or equity 

kicker feature would appear appropriate. Homeowners should not 

receive a windfall at the expense of the taxpayers and mortgage 

lenders who suffered the economic loss from restructuring their distressed mortgage loans. 


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399 Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions 

Through June 17, 2009 ((June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29- 

TARP.pdf). 

• Evaluation of a taxpayer-subsidized loan modification must 

consider the tremendous government interventions already underway. Private capital investment is scarce in today’s housing market, replaced by recent, rapid growth in the government’s share of 

the mortgage markets. • Subsidized loan refinancing and modification programs may 

provide relief for a select group of homeowners, while working 

against the majority who shoulder the tax burden and make mortgage payments on time. Moral hazard is not just an issue of fairness—programs that give no consideration to the rightful, necessary link between risk and responsibility could potentially create 

additional housing ‘‘bubbles’’ and result in greater threats to stability. • Overall, the Panel continues to place policy objectives above 

transparent and critical oversight. I recommend an oversight plan 

with several requirements be considered by the Panel. 

2. Cost of the Foreclosure Mitigation Plans to Taxpayers 

In order to have an informed debate on the foreclosure mitigation 

issue it’s critical that the American taxpayers understand the allin costs of all foreclosure mitigation efforts. This is particularly significant since approximately 95 percent of taxpayers meet their 

monthly rental and mortgage obligations and these taxpayers will 

be asked to subsidize the cost of any foreclosure mitigation efforts 

directed for the benefit of those who do not meet their obligations. 

3. CBO—100 Percent Subsidy Rate for HAMP; Calculation of 

Total All-In Cost 

A key distinction between the TARP-funded Capital Purchase 

Program and Treasury’s foreclosure mitigation efforts is that the 

latter will most likely carry a subsidy rate to the taxpayers of 100 

percent—that is, a 100 percent rate of loss for the taxpayers from 

the Home Affordable Modification Program (HAMP).399 The Congressional Budget Office (CBO) has applied a 100 percent subsidy 

rate to the $50 billion of TARP funds committed to HAMP. It has 

not performed subsidy rate analysis for non-TARP financing of 

HAMP. According to CBO: 

The Treasury has committed $50 billion in TARP funding for the Administration’s foreclosure mitigation plan, 

under which the TARP will make direct payments to mortgage loan servicers to help homeowners refinance their 

loans. Because no repayments will be required from the 

servicers, the net cost of the program will be the full 

amount of the payments made by the government. 

Under these conditions, a 100 percent subsidy rate will be applicable throughout the entire HAMP lifecycle. A 100 percent subsidy 

rate becomes particularly problematic if—as announced with respect to the MHA program—the Administration plans to refinance 

and modify up to 9 million mortgages. Absent meaningful input 

from Treasury, it’s difficult to calculate the all-in cost of the foreVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00126 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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400 Any attempt to quantify the total costs and expenses that may be incurred in restructuring 

mortgage loans should consider the following: (i) fees paid to servicers, attorneys, appraisers, 

surveyors, title companies and accountants, (ii) principal reductions, (iii) interest rate reductions, (iv) second lien reductions, (v) negative equity reductions, and the like. 

closure mitigation programs to both the taxpayers, and the holders 

of residential mortgages, investors in securitized mortgage obligations, other investors and mortgage servicers (which I refer to as 

the ‘‘financial community’’). 

For example, under a HAMP modification the mortgage lender 

bears the cost of reducing each participant’s monthly mortgage payment to 38 percent of DTI (the participant’s debt-to-income), and 

the lender and the government share the cost of reducing the participant’s monthly mortgage payment from 38 percent to 31 percent 

of DTI. The Panel’s report notes that monthly principal and interest payments are reduced on average by $598—from $1554 to 

$956—following a HAMP modification. If you run the numbers over 

12 months per year and for 4 million modifications, the annual cost 

equals approximately $29 billion. Over a five-year period the (nondiscounted) cost equals approximately $145 billion. By adding, say, 

$9,000 of incentive payments for 4 million modifications the total 

all-in gross cost to the taxpayers and the financial community increases by $36 billion to approximately $181 billion ($145 billion, 

plus $36 billion-non-discounted). If, instead, the Administration 

elects to modify 9 million mortgages the total all-in gross cost to 

the taxpayers and the financial community jumps to approximately 

$407 billion (non-discounted). To these estimates must be added 

the billions of dollars already allocated to Fannie Mae and Freddie 

Mac as well as the write-offs already taken by private sector mortgage lenders, holders of securitized debt and servicers. These 

amounts reflect back-of-the-envelope estimates of gross costs and 

must be considered along with Professor White’s cost-benefit testimony (discussed below) and the analysis of other experts. If the Administration promotes aggressive principal reduction, negative equity abatement and second lien programs, the estimates may, however, materially understate the all-in gross costs to the taxpayers 

and the financial community. 

Based upon the Panel’s report, it’s difficult to determine how 

much of this cost will fall to the taxpayers and how much will be 

borne by the mortgage holders under the DTI formula. It is troubling that the Administration has made little effort to disclose the 

all-in cost of these programs to the taxpayers and the financial 

community. Did Treasury roll-out the MHA program with its promise of refinancing or modifying up to 9 million mortgages without 

providing a realistic estimate of the cost of the program to the taxpayers and the financial community? 400 Will Treasury commit to 

limit MHA to $50 billion of TARP funds? 

4. Repaid TARP Funds Available for Foreclosure Mitigation 

Although the HAMP program is presently limited to $50 billion 

of TARP funds, I am not aware of any constraint on the Secretary 

from allocating additional TARP funds to MHA or any other existing or future foreclosure mitigation efforts. Since the Secretary interprets TARP as a ‘‘revolving facility’’ and given the likelihood 

that he will extend TARP to October 31, 2010, it’s possible that a 


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401Deborah Solomon, $35 Billion Slated for Local Housing Wall Street Journal (Sept. 28, 

2009) (online at online.wsj.com/article/SB125409967771945213.html). 

substantial portion of the $700 billion TARP facility could be directed to foreclosure mitigation efforts. The MHA and the HAMP— 

Home Affordable Modification Program—and HARP—Home Affordable Refinancing Program—programs are subject to unilateral 

modification pursuant to which Treasury may restructure the programs to the detriment of the taxpayers. In addition, Treasury may 

introduce new programs that are funded in whole or in part by 

TARP. Along similar lines, it was recently reported that the Administration is close to committing up to $35 billion to state and 

local housing authorities to provide mortgages to low- and 

moderate- income families.401 It’s important to note again that 

CBO will most likely assign a 100 percent taxpayer subsidy rate 

to any new or expanded foreclosure mitigation programs thereby 

acknowledging the vast transfer of taxpayer funds from the taxpayers who meet their monthly mortgage and rental payments to 

those who do not. 

5. Treasury Should Disclose the All-In Cost of the Foreclosure Mitigation Plans 

In order to better appreciate the total all-in costs of the Administration’s various foreclosure mitigation efforts, and to compensate 

for the Panel’s gaps in oversight, I request that the Administration 

promptly provide the taxpayers with a thorough and fully transparent analysis of the following matters: 

• the total amount of funds the Administration has advanced 

and committed to advance under its various foreclosure mitigation efforts (including, without limitation, under MHA, HAMP 

and HARP, the second lien programs, as well as the programs 

adopted by Fannie Mae and Freddie Mac); 

• the total amount of funds the Administration reasonably expects to advance and commit to advance over the next five 

years under all of its present and anticipated foreclosure mitigation efforts; and 

•the total anticipated costs to all financial institutions and 

other mortgage holders and servicers under all of the Administration’s present and anticipated foreclosure mitigation efforts. 

Like the recently completed ‘‘stress tests’’ conducted by Treasury 

and other financial regulators with respect to bank capital adequacy, the Administration should calculate the foregoing estimates 

under a ‘‘more adverse’’ scenario (i.e., where conditions materially 

deteriorate) as well as under current conditions. It is also imperative that the valuation models adopted by Treasury employ reasonable input assumptions and methodologies and make no effort to 

skew the results to the high or low range of estimates. 

The analysis should acknowledge the extent to which the Administration’s foreclosure mitigation efforts may create capital shortfalls within the financial community. It’s somewhat ironic that at 

the same time the Administration is encouraging financial institutions and mortgage holders to boost their foreclosure mitigation efforts by restructuring home loans and writing down loan portfolios, 

the Administration is considering a new round of bailouts for the 


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402Daniel Wagner, Fresh Bailouts for Smaller Banks Being Weighed, The Observer (Sept. 25, 

2009) (online at hosted.ap.org/dynamic/stories/U/l USlSMALLlBANKSlBAILOUT). 

financial community.402 Since money is fungible it’s not unreasonable to conclude that the Administration may be in effect reimbursing—with taxpayer sourced funds—financial institutions that adopt 

and follow the Administration’s foreclosure mitigation policies. 

One key function of effective oversight is to determine if Treasury will be able to achieve its stated goals for the stated price— 

the refinancing or modification of up to 9 million mortgage loans 

for $75 billion. It’s not possible to accomplish this task without a 

better understanding of the anticipated all-in cost of the several 

foreclosure mitigation programs. 

6. Analysis by the Panel and Professor Alan M. White 

In prior reports the Panel has retained the services of nationally 

recognized academics to value, for example, warrants issued to 

Treasury under the Capital Purchase Program as well as toxic assets held by banks and other financial institutions. In preparing 

the October report, I recommended that the Panel again retain the 

services of top-tier academics and other professionals to estimate 

the total cost to the taxpayers and the financial community of the 

various housing foreclosure mitigation plans and proposals including, without limitation, all refinancing, modification and second 

lien plans and proposals. Although the Panel’s efforts do not reflect 

the same robust analysis undertaken in prior reports, I wish to 

thank Professor Alan M. White for his paper on the ‘‘potential costs 

and benefits’’ of the HAMP program. 

In calculating the total cost of each mortgage modification to the 

taxpayers, Professor White concludes: 

To summarize, the total cost of the borrower, servicer 

and investor incentive payments for first and second mortgage HAMP payments is projected to be in the range of 

$16,000 to $21,000 average per first mortgage modification, including both successful and unsuccessful modifications. In other words, the cost per successful modification 

will be higher. Treasury should be in a position to report 

on actual per-modification costs by November or December, when several months of permanent modification data 

have been collected and some initial redefault statistics 

can be calculated. 

Since these numbers apparently include up to $9,000 of incentive 

payments it appears that the total cost to the taxpayers of all interest rate and principal adjustments is approximately $10,000 per 

modification, or approximately $2,000 per year ($167 per month) 

for the full five-year HAMP modification period. Perhaps this is 

correct, but I question whether mortgage loans may be successfully 

modified at such a relatively modest cost to the taxpayers under 

the HAMP program. It appears that Professor White did not independently calculate these amounts, but, instead, generally relied 

upon estimates provided by Treasury. It is unclear what methodology Treasury employed except, perhaps, to divide the $50 billion 

of TARP funds initially allocated to HAMP by 2.5 million modifications, or $20,000 per mortgage modification. Such approach, alVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00129 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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403Standard & Poor’s, Servicer Evaluation Spotlight Report (July 2009) (online at 

www2.standardandpoors.com/spf/pdf/media/SElSpotlightlJuly09.pdf). 

though suggested by Professor White, hardly reflects the application of rigorous scientific methodology. 

Professor White also expressly notes the effectiveness of non-subsidized voluntary foreclosure mitigation when he states: 

Nevertheless, there is convincing evidence that successful modifications avoided substantial losses, while requiring only very modest curtailment of investor income. In 

fact, the typical voluntary modification in the 2007–2008 

period involved no cancellation of principal debt, or of pastdue interest, but instead consisted of combining a capitalization of past-due interest with a temporary (three to five 

year) reduction in the current interest rate. Foreclosures, 

on the other hand, are resulting in losses of 50% or more, 

i.e. upwards of $124,000 on the mean $212,000 mortgage 

in default. 

Significantly, he also quantifies the overall benefit of voluntary 

foreclosure mitigation to investors by concluding: 

The bottom line to the investor is that any time a homeowner can afford the reduced payment, with a 60% or better chance of succeeding, the investor’s net gain from the 

modification could average $80,000 per loan or more. Two 

million modifications with a 60% success rate could 

produce $160 billion in avoided losses, an amount that 

would go directly to the value of the toxic mortgage-backed 

securities that have frozen credit markets and destabilized 

banks. 

If this is indeed the case, then why is it not in the best interest 

of each mortgage holder to modify the mortgage loans in its portfolio? Why would a mortgage holder risk breaching its fiduciary duties to its investor group by foreclosing on mortgaged property instead of restructuring the underlying loans? Why should the taxpayers subsidize the restructuring of mortgage loans—whether 

through the HAMP program or otherwise—if the mortgage holders 

may independent of such subsidy realize a net gain of approximately $80,000 per loan by voluntarily restructuring their distressed mortgage loans? 

Professor White and the Panel seem to imply that without taxpayer-funded subsidies the mortgage servicers would be economically disinclined to modify distressed mortgage loans because of unfavorable terms included in typical pooling and servicing agreements—the contracts pursuant to which servicers discharge their 

duties to mortgage holders. Professor White writes: 

While modification can often result in a better investor 

return than foreclosure, modification requires ‘‘high-touch’’ 

individualized account work by servicers for which they 

are not normally paid under existing securitization contracts (pooling and servicing agreements or ‘‘PSA’’s.) 403

Servicer payment levels were established by contracts that 

last the life of the mortgage pools. Servicers of subprime 


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mortgages agreed to compensation of 50 basis points, or 

0.5% from interest payments, plus late fees and other servicing fees collected from borrowers, based on conditions 

that existed prior to the crisis, when defaulted mortgages 

constituted a small percentage of a typical portfolio. At 

present, many subprime and alt-A pools have delinquencies and defaults in excess of 50% of the pool. The incentive payments under HAMP can be thought of as a way 

to correct this past contracting failure. 

Because mortgage servicers are essentially contractors 

working for investors who now include the GSE’s, the Federal Reserve and the Treasury, we can think of the incentive payments under HAMP as extra-contractual compensation for additional work that was not anticipated by 

the parties to the PSAs at the time of the contract. 

Is the purpose of HAMP to bailout servicers from their ‘‘contracting failure’’ through the payment of ‘‘extra-contractual compensation’’? The taxpayers should not be charged with such a responsibility and I am disappointed that the Administration, the 

Panel and Professor White would advocate such an approach. Notwithstanding the inappropriate complexity interjected into the foreclosure mitigation debate by the Administration, a solution appears 

relatively straightforward. If, as Professor White suggests, mortgage holders stand to realize a net gain of approximately $80,000 

from restructuring each mortgage loan instead of foreclosing on the 

underlying property, the mortgage holders themselves should undertake to subsidize the ‘‘contracting failure’’ of their servicers out 

of such gains. I appreciate that mortgage holders may not wish to 

remit additional fees to their servicers, but, between mortgage 

holders and the taxpayers, why should the taxpayers—through 

TARP or otherwise—bear such burden? The Administration, by enticing mortgage holders and servicers with the $75 billion HAMP 

and HARP programs (with a reasonable expectation that additional 

funds may be forthcoming), has arguably caused them to abandon 

their market oriented response to the atypical rate of mortgage defaults in favor of seeking hand-outs from the government. It’s difficult to fault mortgage holders and servicers for their rational behavior in accepting bailout funds that may enhance the overall return to their investors. 

In addition, Professor White dismisses the importance of considering future decisions homeowners and others will make when entering into risky contracts when there is a perceived safety net. It 

is insufficient simply to say, ‘‘moral hazard from HAMP modifications is unlikely to play a significant role in borrower defaults,’’ as 

viewed through the prism of ‘‘the cost of losses on mortgages that 

would otherwise perform but for the borrower’s decision to default 

in order to benefit from the program.’’ I appreciate that Professor 

White provides a definition to support his analysis, but it is an inadequate premise for such a sweeping conclusion. If the objective 

of the Administration’s MHA program is to correct failures in the 

housing market so as to provide economic stabilization, then any 

estimate of total cost provided by Professor White or Treasury 

would by definition fail to consider the additional costs that will no 

doubt ensue when homeowners are saved from mortgage contracts 


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404 Representative Jeb Hensarling, Foreclosure Crisis: Working Toward a Solution, Additional 

View by Representative Jeb Hensarling, (Mar. 9, 2009) (online at cop-senate.gov/documents/cop– 

030609-report-view-hensarling.pdf). 405One of the difficulties that some borrowers are facing has been the general federal objective 

of enabling and encouraging people to buy homes that were too expensive for them to otherwise 

afford. In a perfect world, the laws of supply and demand would be the fundamental driver of 

our mortgage markets, with qualified borrowers having reliable access to suitable mortgage 

products that best fit their needs. Yet, in reality, the cost of home ownership has in many places 

so thoroughly outpaced the ability of borrowers to afford a home that the government has chosen to intervene with various initiatives to defray parts of the cost of a mortgage. That intervention has taken many forms—affordable housing programs, federal FHA mortgage insurance, tax 

credits and deductions, interest rate policies, etc.—as part of a concerted effort to increase homeownership. For almost a decade, those efforts succeeded, pushing homeownership rates steadily 

up from 1994 through their all-time high in 2004. That increase in demand, in turn, contributed 

to a corresponding increase in home prices, which rose from the mid–1990s until hitting their 

peak in 2006. Yet those price increases created a cycle of government intervention—home price 

appreciation made homes less affordable, which in turn spurred further government efforts to 

defray more of their cost—and the involvement of the federal government in our housing markets only grew deeper. 

they would not otherwise be able to shoulder without a government 

backstop. It would also exclude future risk-taking behavior that 

may necessitate future interventions. The MHA program in effect 

incorporates the failed policy of ‘‘implicit guarantee’’—notoriously 

exploited by Fannie Mae and Freddie Mac—into yet another aspect 

of federal housing policy. By disregarding the distinct moral hazard 

risk, the MHA encourages speculation in the residential real estate 

market with its adverse bubble generating consequences. 

7. Response to March Report on Foreclosures 

In my response to the March Panel report, I commented on several aspects of the housing crisis that I felt were omitted or not 

thoroughly described by the Panel. These include further contributing causes, the universe of individuals in distress, the realized 

and unrealized costs of loan modification programs, and additional 

alternatives to government-subsidized foreclosure mitigation efforts.404

Below is a summary of some of the key points I discussed in response that are relevant to the current discussion on foreclosure 

mitigation: • Foreclosure relief should be centered around borrowers in a 

fair, responsible, and taxpayer-friendly way. • Policymakers should take care to avoid the trap of creating further market distortions that disrupt the law of supply and demand, 

which is designed to ensure that qualified borrowers have reliable 

access to mortgage products suitable to their needs. • Government involvement in housing markets has already created significant disruptions, chiefly through highly accommodative 

monetary policy; federal policies designed to expand home ownership; the congressionally-granted duopoly status of housing GSEs, 

Fannie Mae and Freddie Mac; an anti-competitive governmentsanctioned credit rating oligopoly; and mandates of certain policies 

and underwriting standards based on factors other than risk.405

• As the 2009 deficit reaches an estimated $1.6 trillion, evaluation of foreclosure plans must consider the all-in costs as well as 

the extraordinary federal assistance that has been provided in response to the financial crisis. • The Panel should practice caution in estimating the redefault 

rates that will occur three months to a year after participation in 

the MHA—Making Home Affordable—program. Historical, yearly 


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406Office of the Comptroller of the Currency and Office of Thrift Supervision Mortgage Metric 

Report, First Quarter 2009 (online at www.occ.treas.gov/ftp/release/2009–77a.pdf) . See chart on 

page 7, which conveys a re-default rate of over 50 percent based on the most recent data available. 407These ‘‘life event’’ affected borrowers are noteworthy because relatively few object to efforts 

to find achievable solutions for trying to help keep these distressed borrowers in their current 

residences whenever possible. Similarly, another sympathetic group of distressed borrowers involves people who were legitimate victims of blatant manipulation or outright fraud by unscrupulous lenders who pressured them into homes they could not afford. To many, those legitimate 

victims are certainly equally deserving of assistance. Of course, such borrowers do have the 

added burden proving that they were indeed victims of actual wrongdoing. However, they also 

have a potential remedy of pursuing legal action against fraudulent lenders, an option which 

is not available to others. 

If the universe of individuals in mortgage distress included only borrowers from ‘‘life event’’ 

and fraud victims groups, the task of crafting an acceptable government-subsidized foreclosure 

mitigation plan would be much easier. However, the number of individuals in mortgage distress 

stretches far beyond those groups to include a much larger section of people who, for a wide 

variety of reasons, are no longer paying their mortgage on time. While certainly not an exhaustive list, that larger group includes: • people who took out large loans to purchase more house than they could have reasonably 

expected to afford; • borrowers who lied about their income, occupancy, or committed other instances of mortgage 

fraud; • speculators who purchased multiple houses for their expected value appreciation rather 

than a place to live; • individuals who decided to select an exotic mortgage loan with fewer upfront costs, lower 

monthly payments, or reduced documentation requirements; • borrowers who took advantage of refinance loans to strip much or all of the equity out of 

their house to finance other purchases; • those who simply made bad choices by incorrectly gambling on the market or overestimating 

their readiness for homeownership; and • borrowers who have made a rational economic decision and, given their particular circumstance, it no longer makes sense to them to continue paying their mortgage. 

Borrowers who fall into those categories are much less sympathetic in the eyes of many, and 

attempting to develop a government-subsidized foreclosure mitigation plan to assist them will 

inevitably raise significant moral hazard questions for policymakers. 

A fundamental measure of the effectiveness of a foreclosure mitigation program is what steps 

the program has taken to sort those risky borrowers out from their more deserving counterparts 

to avoid the moral hazard of rewarding people or their bad behavior. 408 After all, why should a person be forced to pay for their neighbor’s mortgages when he 

or she is struggling to pay his or her own mortgages and other bills? To many people, this question is the most important aspect of the public policy debate. Given the massive direct taxpayer 

costs that have already been incurred through TARP and the potential costs that could be incurred through the assorted credit facilities and monetary policy actions of the Federal Reserve, 

I believe that it is difficult to justify asking the taxpayers to shoulder an even greater financial 

burden from yet another government foreclosure mitigation program that might not work. 

data show that redefault rates have been over 50 percent on modified loans.406

• Foreclosure rates are concentrated in specific states and areas, 

making one-size-fits all programs even more difficult to execute. 

• It is important to remember that the number of individuals in 

mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the victims of fraud. This 

complicates moral hazard issues associated with large-scale modification programs.407

• Distinct from a moral hazard question there is an inherent 

question of fairness as those who are not facing mortgage trouble 

are asked to subsidize those who are facing trouble. In light of current statistics regarding the overall foreclosure rate, an essential 

public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is 

‘‘Is it fair to expect approximately 19 out of every 20 people to pay 

more in taxes to help the 20th person maintain their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular sentiment that 

such a trade-off is indeed not fair.408


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409Sara Murray, Existing Home Sales Dropped In August, Wall Street Journal (September 24, 

2009) (online at online.wsj.com/article/SB125379520447237461.html#mod= 

WSJlhpslLEFTWhatsNews). 410 Jody Shenn, ‘‘Housing Crash to Resume on 7 Million Foreclosures, Amherst Says, 

Bloomberg News (September 23, 2009) (online at www.bloomberg.com/apps/ 

news?pid=20601087&sid=aw6lgqc0EKKg). 411 U.S. Office of Management and Budget, Mid-Session Review, Economic Assumptions (August 2009) (online at www.gpoaccess.gov/USbudget/fy09/pdf/09msr.pdf). 

• Since there is no uniform solution for the problem of foreclosures, a sensible approach should encourage multiple mitigation 

programs that do not amplify taxpayer risk or require government 

mandates. 

• See the following link for my full response to the Panel’s 

March report: http://cop.senate.gov/documents/cop–030609-reportview-hensarling.pdf. 

8. Foreclosures and Macroeconomic Recovery 

Indeed, the housing market is still on shaky ground and homeowners face the turmoil of potential waves of foreclosures. Although 

there are signs of life in the market—such as upward movement 

in housing starts and nationwide home values—unpredictable existing home sales figures 409 and continued increases in delinquencies and foreclosures mean underlying indicators are still 

problematic. Mortgage interest rates remain at low levels by historical standards, although much of this may be intertwined with the 

Federal Reserve’s program to purchase up to $1.25 trillion in agency mortgage-backed securities. The future may be even more ominous for housing prices and recovery if concerns are realized about 

‘‘shadow inventory,’’ a term for the millions of homes that are waiting to hit the market either because they are in foreclosure or for 

other reasons.410

Even still, housing indicators cannot be studied in isolation. The 

best insurance policy to protect homeowners from foreclosure is 

having a job, and the best assurance of job security is the engine 

of economic growth and the adoption of public policy that encourages and rewards capital formation and entrepreneurial success. 

The Blue Chip Consensus and other forecasters predict that unemployment will hit 10 percent in 2010. Although a less-than-expected 

GDP drop for the second quarter is a positive signal, the path to 

economic recovery is expected to be sluggish, and further dragged 

down by record debt and deficit levels.411

Whether or not MHA will lead to economic stabilization or prevent further disruptions, two integral mandates of EESA, is open 

for debate. The Panel’s report suggests that the housing market 

‘‘has been at the center of the economic crisis, and until it is stabilized, the economy as a whole will remain in turmoil.’’ It is undisputed that the collapse of housing prices ignited the financial crisis, 

which was linked to the risky undertakings of multiple players: 

government, lenders, borrowers and investors. Yet even if macroeconomic recovery were irrevocably dependent on the revival of the 

housing market—likely, the reverse is true—can this revival be 

spurred by a large-scale loan modification program that has committed $75 billion in taxpayer funding? 


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412 Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343 § 125. 413 U.S. Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions Through June 17, 2009 (June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06- 

29-TARP.pdf). 414 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update (August 

2009) (online at www.cbo.gov/ftpdocs/85xx/doc8565/08-23-Update07.pdf ). 

9. The Panel’s Mandate With Respect to Taxpayer Protection 

Taxpayer protection is a guiding principle of EESA interwoven 

throughout the legislation, including for foreclosure mitigation efforts. I recommend that Treasury and the Panel define in measurable terms what is at stake—the costs and the benefits—for taxpayers in implementing the MHA plan. 

EESA gives the Panel a clear duty to provide information on 

foreclosure mitigation programs, but with the following caveat. Reports must include: 

The effectiveness of foreclosure mitigation efforts and 

the effectiveness of the program from the standpoint of 

minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.412 [Emphasis added.] 

While the Executive Summary of the Panel’s report discusses 

this mandate as if it were a major theme of the paper, the analysis 

that follows does not give due credence to taxpayer considerations. 

Professor White’s analysis does not assuage concerns about taxpayer protection—in fact, it aggravates them by suggesting there 

is actually a $50 billion ceiling on HAMP costs and that investors 

stand to gain at the taxpayers’ expense. 

The Panel’s March report applies eight criteria in its evaluation 

of loan modification programs, which is also included in the most 

recent report: 

• Will the plan result in modifications that create affordable 

monthly payments? • Does the plan deal with negative equity? 

• Does the plan address junior mortgages? 

• Does the plan overcome obstacles in existing pooling and servicing agreements that may prevent modifications? 

• Does the plan counteract mortgage servicer incentives not to 

engage in modifications? 

• Does the plan provide adequate outreach to homeowners? 

• Can the plan be scaled up quickly to deal with millions of 

mortgages? 

• Will the plan have widespread participation by lenders and 

servicers? 

While these are valid criteria, the list, which serves as the 

lynchpin for both the March and October reports, does not include 

taxpayer considerations. The Congressional Budget Office estimates that taxpayers will lose 100 percent of the $50 billion in 

TARP funds committed to the Administration’s foreclosure relief 

programs.413 (It is reasonable to assume that the entire $75 billion 

program carries a 100 percent subsidy rate.) It also shows that the 

five-year MHA is not surprisingly a major driving force behind the 

extension of TARP costs well into 2013.414 MHA is not an investment with a realizable return in the same sense as other TARP 


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415 U.S. Office of Management and Budget, Mid-Session Review, (August 2009) (online at 

www.gpoaccess.gov/usbudget/fy10/pdf/10msr.pdf). 416 U.S. Department of Treasury, Making Home Affordable: Summary of Guidelines, (March 

4, 2009) (online at www.treas.gov/press/releases/reports/guidelineslsummary.pdf). 417 Announced in April, MHA’s second lien program offers the following: 

Pay-for-Success Incentives for Servicers and Borrowers: 

The Second Lien Program will have a pay-for-success structure similar to the first lien modification program, aligning incentives to reduce homeowner payments in a way most cost effective for taxpayers. 

Servicers can be paid $500 up-front for a successful modification and then success payments 

of $250 per year for three years, as long as the modified first loan remains current. 

Borrowers can receive success payments of up to $250 per year for as many as five years. 

These payments will be applied to pay down principal on the first mortgage, helping to build 

the borrower’s equity in the home. U.S. Department of Treasury, Making Home Affordable: Program Update (April 28, 2009) (online at www.financialstability.gov/docs/ 

042809SecondLienFactSheet.pdf). 

programs, such as the Capital Purchase Program, where at least 

a portion of the outlays are expected to be recouped, and many 

with interest. The $75 billion program funds the array of incentive 

payments to servicers and lenders/investors who participate in the 

MHA program. It will not be returned to the Treasury general fund 

as the program winds down, so in a sense, it is equivalent to a $50 

billion increase in deficits as the debt level reaches $12.3 trillion 

by 2013.415

According to Treasury’s program description for MHA, the payments to servicers, lenders and homeowners are as follows: 416

• Treasury will share with the lender/investor the cost of reductions in monthly payments from 38 percent DTI to 31 percent DTI. 

• Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus ‘‘pay for 

success’’ fees on still-performing loans of $1,000 per year. 

• Homeowners who make their payments on time are eligible for 

up to $1,000 of principal reduction payments each year for up to 

five years. 

• The program will provide one-time bonus incentive payments 

of $1,500 to lender/investors and $500 to servicers for modifications 

made while a borrower is still current on mortgage payments. 

• The program will include incentives for extinguishing second 

liens on loans modified under this program.417

• No payments will be made under the program to the lender/ 

investor, servicer, or borrower unless and until the servicer has 

first entered into the program agreements with Treasury’s financial 

agent. 

• Similar incentives will be paid for Hope for Homeowner refinances. 

Taxpayers and the Panel should demand no less than complete 

transparency and accountability of funds. If no financing will be repaid from the MHA program, Treasury must provide its own assessment of how it measures benefits and risks for all taxpayers, 

not just for participants of the program. For example, even were 

the program to work for a select group of homeowners, it may be 

working against the majority who shoulder the tax burden and 

make mortgage payments on time. If evidence can be provided to 

the contrary, it must be plausible enough to diminish the risks of 

entering into a $50 billion investment where direct funding will not 

be recovered. 


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418 U.S. Department of Treasury, Making Home Affordable: Updated Detailed Program Description (March 4, 2009) (online at www.ustreas.gov/press/releases/reports/housinglfactlsheet.pdf). 419On October 8, GAO released its latest report on TARP, which included a table of Treasury’s 

actions in response to major GAO recommendations. As an example, one recommendation is to 

‘‘Institute a system to routinely review and update key assumptions and projections about the 

housing market and the behavior of mortgage holders, borrowers, and servicers that underlie 

Treasury’s projection of the number of borrowers whose loans are likely to be modified under 

HAMP and revise the projection as necessary in order to assess the program’s effectiveness and 

structure.’’ 

It is worth nothing that the status of all of the GAO recommendations for HAMP is either 

‘‘not implemented’’ or ‘‘partially implemented.’’ 

Government Accountability Office, Troubled Asset Relief Program: One Year Later, Actions Are 

Needed to Address Remaining Transparency and Accountability Challenges (October 2009) 

(GAO–10–16) (online at www.gao.gov/new.items/d1016.pdf). 420Pub. L. No. 110–289. 421 U.S. Department of Treasury, Troubled Assets Relief Program: Monthly Progress Report— 

August 2009 (September 10, 2009) (online at www.financialstability.gov/docs/ 

105CongressionalReports/105areportl082009.pdf). 422Senate Committee on Banking, Housing and Urban Affairs, Testimony of U.S. Treasury 

Department Assistant Treasury Secretary, Herb Allison, EESA: One Year Later (September 24, 

2009) (online at banking.senate.gov/public/index.cfm?FuseAction= Hearings.Hearing&HearinglID=ff78e881-372e-41e3-915d-e4d5a93da22d). 423This target has only recently been announced and was not part of the MHA program’s 

launch in March 2009. 

10. Making Home Affordable Program—Making Sense of the 

Data 

On March 4, 2009, the Department of the Treasury released a 

program description of ‘‘Making Home Affordable,’’ or MHA, the 

Administration’s multi-tiered plan to prevent foreclosure for ‘‘atrisk’’ homeowners. When it was announced, the advertised goal 

was to ‘‘offer assistance to as many as 7 to 9 million homeowners.’’ 418 Based on the information provided so far by Treasury, 

only murky conclusions can be reached about the program’s 

progress, especially when taxpayer funds spent or committed are 

considered.419

11. Home Affordable Modification Program 

The Administration committed $75 billion—$50 billion of TARP 

financing and $25 billion of ‘‘Housing and Economic Recovery Act 

of 2008’’ (HERA) 420 financing—to the HAMP program, a loan 

modification program aimed at reducing monthly interest payments 

for 3 to 4 million homeowners who are either close to defaulting on 

payments or are already delinquent. The TARP funds used for 

HAMP are solely for private-label loans, although Fannie Mae and 

Freddie Mac both have major roles in the program, with Fannie 

Mae serving as the ‘‘administrator’’ and Freddie Mac serving as the 

‘‘compliance agent.’’ HAMP uses HERA funding for loans owned or 

guaranteed by Fannie Mae or Freddie Mac. 

Treasury has released some metrics on HAMP in its August 

Monthly Progress Report.421 According to these data, just over 

360,000, 3-month trial modifications have begun. Assistant Secretary Allison testified at a Senate Banking Committee hearing on 

September 24, 2009, that only about 1,800 of the total modifications have become permanent.422 Treasury believes, however, that 

the HAMP program will exceed the newly-set target of 500,000 

trial modifications by November.423

The jury is still out on whether the program will ultimately accomplish its goals, how long this may take and what it will cost. 

There are many factors at work, including the ability of servicers 


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424 U.S. Department of the Treasury, Troubled Assets Relief Program: Transactions Report for 

Period Ending September 18, 2009 (Sept. 22, 2009) (online at www.financialstability.gov/docs/ 

transaction-reports/transactions-reportl09222009.pdf). 425See following section. 426Letter from Assistant Treasury Secretary for Financial Stability Herb Allison, to the Honorable Jeb Hensarling, United States Congressman (Sept. 14, 2009). 

to perform the necessary ‘‘counseling’’ role, the willingness of homeowners to participate, and much larger external forces such as the 

labor market. Borrowers may enter into the trial modification process only to be denied based on criteria like debt-to-income levels. 

Even those whose modifications become permanent for several 

months may redefault because of job loss, ‘‘back-end’’ debt such as 

credit card obligations (which is not factored into debt-to-income 

calculations) or other reasons that make mortgage payments 

unsustainable. 

Were all 360,000 trial modifications to succeed in not only lowering payments but also in staving off foreclosure, Treasury is still 

a long way from its goal of assisting 3 to 4 million homeowners. 

Treasury’s latest transaction report on TARP indicates that a maximum of $27 billion out of $50 billion in authority has been used 

for incentive payments, although it is unclear how this corresponds 

to metrics on completed modifications.424 Assistant Secretary Allison has said that ‘‘very little’’ of the funds have been spent, but unless the proper data are provided to link funds spent or committed 

to loan modifications that have become permanent, much is open 

to interpretation. Are we to assume that the outcome of committing $27 billion in 

taxpayer funding has only yielded at most 360,000 loan modifications? If not, what are we to assume? Will Treasury commit additional TARP funds beyond the $50 billion in order to make the program work as advertised? Will it use the essentially boundless 425

HERA authority as a back-door approach to financing expansions 

in HAMP? What other measures may be taken to deliver on the 

promise to reach millions of homeowners? Will Treasury adjust the 

criteria? 

12. Home Affordable Refinance Program for Agency Mortgages 

A separate platform of the Administration’s MHA plan, the 

‘‘Home Affordable Refinance Program,’’ or (HARP), targets up to 4 

to 5 million homeowners with loans owned or guaranteed by 

Fannie Mae and Freddie Mac. Homeowners can qualify who are up 

to 125 percent ‘‘underwater’’ on their mortgages—a situation where 

the borrower owes more on the loan than the value of the home— 

but must have a track record of making payments on time. Although Treasury has given assurances that no TARP funds will be 

intermingled with HARP,426 the program’s ability to prevent millions of foreclosures and stabilize the housing market is nevertheless intertwined with the TARP-funded program, HAMP, and must 

be considered by the Panel. 

The HERA statute established the authority for Treasury to purchase preferred stock in Fannie Mae and Freddie Mac in amounts 

it or the GSEs deem necessary, providing the two housing companies with equity injections. Although this authority technically expires on December 31, 2009, Treasury may increase the limit to 


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427 U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description, (Mar. 4, 2009) (online at www.ustreas.gov/press/releases/reports/housinglfactlsheet.pdf). 428Fannie Mae, Second Quarter 2009 Form 10-Q (Aug. 6, 2009) (online at phx.corporate-ir.net/ 

phoenix.zhtml?c=108360&p=irol-secQuarterly&controllSelectGroup=Quarterly%20Filings); 

Freddie Mac, Second Quarter 2009 Form 10-Q (Aug. 7, 2009) (ir.10kwizard.com/ 

files.php?source=1372&welclnext=1&XCOMP=0&fg=23). 

any level through the expiration date. Part of the Administration’s 

housing plan involves doubling the size of the purchase agreements 

from a maximum of $200 billion to a maximum of $400 billion,427

which did not require Congressional approval or budgetary review. 

So far, Fannie and Freddie have drawn $95.6 billion in capital from 

the agreements.428

The powers granted by the HERA statute have been used to fund 

the Administration’s loan modification efforts through HAMP and 

HARP, but there is no clear way to segregate the costs of new 

housing policies from other expenditures as well as from losses on 

Fannie’s or Freddie’s books of business (discussed further in later 

section). Very few metrics on the success of HARP have been released to date. Fannie Mae and Freddie Mac executives testified 

before this Panel on September 24, 2009, and although they did 

speak to the number of total refinances performed by the agencies 

this year, they did not discuss HARP specifically. Treasury and the 

GSEs should be held accountable for making any loan modification 

program or refinancing program as transparent as possible, since 

it involves a minimum of $25 billion of taxpayer dollars and there 

is no clear way to understand whether or not programs supporting 

Fannie- or Freddie-guaranteed mortgages will require additional 

funds. 

13. Issues Enlisting Servicer Support of MHA 

The Panel’s October report spotlights several obstacles to launching a massive loan modification program. One is whether HAMP 

servicers will have the capacity or expertise to successfully carry it 

out. Another involves whether they can handle the volume of modifications MHA creates in a profitable manner. 

What the report does not emphasize is simply whether or not the 

program can provide appropriate incentives that will outweigh both 

the risk of borrower redefault as well as what may be the enhanced 

return from foreclosure and sale to a solvent buyer. Along these 

lines the report seems to accept without comment the need for government sponsored-foreclosure mitigation programs and generally 

disregards private sector efforts without sufficient analysis. It’s 

quite often in the best interest of private sector servicers and mortgage holders to restructure distressed loans but I am concerned 

that the confusing array of government sponsored programs may 

have chilled many creative private sector initiatives. Instead of 

being proactive, private sector servicers and mortgage holders may 

have been enticed to sit on their hands and wait for higher fees, 

servicing payments, and interest and principal subsidies courtesy 

of HAMP or some other government-sponsored foreclosure mitigation program. Without these programs and the expectation of future subsidies, servicers and mortgage holders would have had little choice but to implement independent private sector programs. 

It’s ironic, but all the false starts with HAMP and the other govVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00139 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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429 HOPE Now, a public-private foreclosure mitigation alliance in existence since 2007, for example, has performed as many as 140,000 loan modifications per month. Since HARP is a first 

stop for at-risk homeowners, programs like HOPE Now may be put on the back burner. 430 Bloomberg, Banks Step Up Loan Modifications Under Obama Program (Sept. 9, 2009) (online at www.bloomberg.com/apps/news?pid=20601087&sid=aDFdlC9CYQEQ). 431Mortgage Bankers Association, Stop the Bankruptcy Cram Down Resource Center (online 

at www.mortgagebankers.org/stopthecramdown) (accessed Oct. 8, 2009). 

ernment programs may have exacerbated the foreclosure mitigation 

process by keeping private sector servicers and mortgage holders 

on the sidelines waiting on a better deal from the government.429

Such behavior is entirely rational if the servicers and mortgage 

holders have a reasonable expectation that Treasury will dedicate 

more TARP or other funds to foreclosure mitigation efforts. Since 

Treasury asserts that repaid TARP funds may be recycled to new 

programs it’s not unrealistic to expect that Treasury will offer more 

favorable programs to servicers and mortgage holders in the relatively near future. Since servicers perform their duties pursuant 

to complex contractual arrangements that mandate they maximize 

the return to the mortgage holders, it’s quite possible that servicers 

risk default under their contracts if they fail to capture the greatest subsidy rate offered by the government. In addition, servicers 

themselves may of course benefit by waiting for enhanced payments. The only way to convince servicers and mortgage holders 

that they will not forego additional governmental largess is for 

Treasury to state clearly that the MHA program will not be expanded and that no additional TARP or government funds will be 

allocated to foreclosure mitigation efforts. 

In addition, there is simply no way of knowing whether or not 

larger institutions receiving TARP funds were pressured into participating in government-supported loan modification programs 

against the best interest of other performance goals (which would 

have the potential to restrict credit extension elsewhere). Bank of 

America and Wells Fargo, receiving a combined $70 billion in 

TARP aid, stepped up the rate of loan modifications as part of 

MHA by 60 percent in August after receiving criticism from lawmakers for ‘‘not doing enough.’’ 430

14. Bankruptcy Cram Down 

The report makes several supportive references to substituting 

federal bankruptcy judges for the traditional role performed by 

servicers and mortgage holders in loan modifications. Under these 

plans bankruptcy judges would be granted the unilateral right to 

change—that is, cram down—the terms of mortgage loans over the 

express objections of mortgage holders as part of a bankruptcy proceeding. Although Congress rejected a bankruptcy cram down proposal a few months ago, I am troubled that the Panel continues to 

ignore the unintended consequences of such approach, especially 

the fee potential homeowners will be asked to pay due to enhanced 

risks to lenders of entering into mortgage contracts that could unilaterally be unwound. The Mortgage Bankers Association estimates 

that if bankruptcy cram down were to become law, mortgage rates 

would increase by approximately 1.50 percent resulting in annual 

additional mortgage payments of approximately $3,970, $3,346 and 

$2,989 for typical homeowners in California, Washington, D.C. and 

New York, respectively.431 These phantom taxes will add to the inVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00140 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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creasing burden borne by the vast majority of homeowners who 

meet their mortgage obligations each month. It seems profoundly 

unfair to ask these homeowners to subsidize the costs of any bankruptcy cram down plan. The bankruptcy cram down proposal would 

also adversely skew the typical rent v. buy analysis undertaken by 

individuals and families. 

15. State Anti-Deficiency Laws and Bankruptcy Cram Down 

May Encourage Counterproductive Real Estate Speculation by Home Purchasers 

An individual’s or family’s decision to rent or purchase a residence requires a thoughtful balancing of an array of economic factors. Renting provides flexibility with annual or even month-tomonth rental obligations while purchasing requires a longer-term 

financial commitment. Rental payments are not tax deductible but 

mortgage interest expense and property taxes arising from an 

owned residence are deductible subject to limitations. Renting offers scant investment opportunity (absent long-term below market 

leases), yet home ownership often yields favorable inflation adjusted returns. In addition, beginning in the mid-1990s with the 

gradual relaxation of underwriting standards and due diligence 

analysis historically conducted by Fannie Mae, Freddie Mac, private mortgage lenders and securitizers, many renters were encouraged to opt in favor home ownership. 

The seeming advantages of home ownership are nevertheless 

tempered by the nature of the contractual agreements most home 

purchasers undertake with their mortgage lender. While home purchasers may consider themselves ‘‘owners’’ of their homes they explicitly understand that if they fail to make their monthly principal 

and interest payments on a timely basis they run the distinct risk 

of losing the right to continue their ownership. Such an appreciation of economic reality requires little if any financial sophistication 

and few Americans would challenge the overall fairness or necessity of such consequences. From an historical perspective a substantial majority of individuals and families have made the rent v. 

buy decision with these factors in mind and, as such, have acted 

in a rational manner by not overextending their financial commitments. 

Over the past several years, however, the rent v. buy decision 

process has been arguably altered as homeowners have become 

aware of the economic implications arising from applicable ‘‘antideficiency’’ and ‘‘single-action’’ laws and other rules adopted in 

many states that permit, if not indirectly encourage, homeowners 

to avoid their contractual mortgage obligations. In their basic form, 

anti-deficiency and single-action statutes limit the debt collection 

efforts that mortgage lenders may employ so as to render mortgage 

loans effectively non-recourse obligations to the borrowers. Absent 

these laws, mortgage lenders may sue their borrowers and receive 

enforceable judgments for any deficiency arising from the spread 

between the foreclosure sales price of the pledged collateral and the 

outstanding balance of the mortgage loan. As such, in jurisdictions 

where these laws do not apply, borrowers understand that by signing mortgage loans they are contractually responsible for the entire 

indebtedness even if the fair market value of their home materially 


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drops in value. If anti-deficiency and single-action statutes are applicable, it is not implausible to argue that the laws convert mortgage contracts into put option agreements pursuant to which borrowers may elect to satisfy their monthly mortgage obligations so 

long as they hold equity in their homes, but walk away from—or 

put—their mortgage obligations to their mortgage holders with relative impunity if negative equity develops. 

16. Homeowners React in a Rational Manner to Economic 

Incentives 

These laws create significant moral hazard risks that will be exacerbated if Congress passes a cram down amendment to the bankruptcy code. With these laws in effect, the risk-reward mix underlying each mortgage and home equity loan will be bifurcated with 

lenders assuming substantially all of the risks regarding the underlying value of the mortgaged property and homeowners receiving 

substantially all of the rewards. These laws may have the unintended consequence of encouraging homeowners to reject their contractual responsibilities and service their mortgage obligations only 

when it’s in their economic self-interest. Since option contracts are 

inherently more risky to lenders than traditional mortgage contracts, lenders may have little choice but to incorporate such risks 

into the interest rates and fees charged on mortgage loans. The 

Panel should refrain from suggesting that Congress enact legislation that encourages individuals and families to invest in the housing market for speculative purposes while permitting them to avoid 

their contractual obligations upon the occurrence of adverse market 

conditions. 

It is worth noting that the decision of individuals and families 

to speculate in the housing market, while perhaps unwise, is not 

entirely irrational. While some may contend that the average consumer is too unskilled to comprehend seemingly sophisticated financial products, I would argue to the contrary. With anti-deficiency, single-action and, perhaps, bankruptcy cram down laws in 

effect it does not take a Ph.D. in corporate finance or an expert in 

bankruptcy law to appreciate that borrowers will receive the bulk 

of any equity appreciation while lenders will bear substantially all 

of the risk of loss arising from home mortgage loans. Most consumers are rational and react favorably to incentives that reward 

particular behavior. Providing economic and legal incentives that 

encourage inappropriate speculation in the housing market is unwise and fraught with adverse unintended consequences. That a 

bankruptcy cram down law could help re-inflate a housing bubble 

by encouraging reckless speculation and cause lenders to raise 

mortgage interest rates and fees justifies its rejection. 

17. Shared Appreciation Rights and Equity Kickers Missing 

in Administration’s Foreclosure Mitigation Programs at 

the Expense of Taxpayer Protection 

It is my understanding that the foreclosure mitigation programs 

announced by Treasury do not provide Treasury or the mortgage 

lenders with the ability to participate in any subsequent appreciation in the fair market value of the properties that serve as collateral for the modified or refinanced mortgage loans. For example, a 


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432Source: Inside Mortgage Finance. Data on mortgage origination by product as percentage 

of total Ex-HELOC, first quarter 2009. 433Source: Inside Mortgage Finance. 434Source: Inside Mortgage Finance. 435 Alan Zibel, Government Home Loan Agency Faces Cash Squeeze, Associated Press (Sept. 

18, 2009). 

$100,000, 6 percent home mortgage loan may be modified by reducing the principal to $90,000 and the interest rate to 5 percent. If 

the house securing the mortgage loan subsequently appreciates by, 

say, $25,000, the taxpayers and the mortgage lender who shared 

the cost of the mortgage modification will not benefit from any such 

increase in value. Such result seems inappropriate and particularly 

unfair to the taxpayers. By modifying the mortgage loan and avoiding foreclosure the taxpayers and the mortgage lender have provided a distinct and valuable financial benefit to the distressed 

homeowner which should be recouped to the extent of any subsequent appreciation in the value of the house securing the modified 

mortgage. 

Homeowners should not receive a windfall at the expense of the 

taxpayers and the mortgage lenders and should graciously share 

any subsequent appreciation with those who suffered the economic 

loss from restructuring their distressed mortgage loans. Since one 

of Treasury’s fundamental mandates is taxpayer protection, the incorporation of a shared appreciation right or equity kicker feature 

would appear appropriate. 

18. Tremendous Federal Support of the Housing Market 

Evaluation of a government-subsidized loan modification plan 

cannot occur in a vacuum as if in the context of a case study. Private capital has fled the housing market scene and we have seen 

recent, rapid growth in the government’s share of the mortgage 

markets. This has yet to fully play out but is sure to have adverse 

consequences if continued crowding out private-sector participation. 

In addition, there are already extraordinary measures being taken 

not only by Treasury, but also by the Federal Reserve and others 

to provide stability in the housing sector. While there are shortterm gains to such interventions, the longer-term hurdle of 

unwinding government support creates many challenges for returning to sustainable activity in the absence of such support. 

19. Fannie, Freddie and FHA 

In the market for new origination, Fannie, Freddie and the Federal Housing Authority (FHA) are the dominant forces, supporting 

94 percent of mortgages.432 Loans backed by Fannie and Freddie 

have grown from about 39 percent in 2006 to 72 percent in the first 

quarter of 2009.433 FHA loans, requiring as little as 3.5 percent 

down, now account for 22 percent of market share, up from just 3 

percent in 2006.434 While Fannie and Freddie currently have an 

automatic line of credit to Treasury, there are reports that FHA 

may soon require a bailout (which the agency denies), as its reserve 

fund dwindles below the legal requirement.435

20. The Federal Reserve 

The Federal Reserve has made an exceptional commitment to purchase up to $1.25 trillion in agency mortgage-backed securities, 


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436Mark Gongloff, Decision on Ending Housing Prop Can Wait, The Wall Street Journal (Sept. 

22, 2009) (online at online.wsj.com/article/SB125357555750029391.html). 

of which it has bought about $680 billion. Currently, the Fed buys 

around 80 percent of all new issuance, which is believed to play a 

significant role in keeping interest rates low. The Wall Street Journal estimates that the Fed MBS program has lowered spreads over 

Treasuries by about 70 basis points (so if the current mortgage interest rate is 5.2 percent, it estimates that without Fed purchases 

it would be around 5.7 percent).436 Although Fed Chairman Ben 

Bernanke has indicated the central bank will be slowing its purchases, there are concerns about the effect slowing or stopping will 

have on rates. 

21. Summary of Government Programs 

In addition to crisis-oriented programs, there are multiple government initiatives that already facilitate mortgage credit and provide other types assistance to homeowners. Below is a table of 

major government actions and programs. 

Interventions in the 

Mortgage Markets 437 Description 

The Federal Reserve ................ Commitment to purchase a total of $1.45 trillion of agency MBS and housing-agency 

bonds 

Use of Section 13(3) of Federal Reserve Act authority to provide FRBNY financing for Maiden Lane LLC, consisting of mortgage-related securities, commercial mortgage loans and 

associated hedges Bear Stearns 

Use of Section 13(3) to provide FRBNY financing for Maiden Lane II LLC, consisting of residential mortgage-backed securities from AIG 

Smaller-scale loan modification program for Maiden Lane LLC run by Blackrock and Wells 

Fargo 

Fannie Mae and Freddie Mac 

[GSEs].

Guarantee mortgages in the secondary market so that investors will receive their expected 

principal and interest payments 

Put into conservatorship under the Federal Housing Finance Agency [FHFA] in September 

2008 

Total combined portfolios of $5.46 trillion,438 which includes mortgage-backed securities 

and other guarantees, as well as gross mortgage portfolios 

CBO brought Fannie and Freddie onto the budget and estimates they will cost taxpayers 

$390 billion over 10 years, with a $248 billion cost occurring at the time of conservatorship 439

Now represent 72 percent of the loan origination market 440

Federal Housing Agency [FHA] Provides mortgage insurance on loans made by private lenders 

Located in HUD; loans were typically for low-income, first-time homebuyers and minorities 

FHA now insures 5.3 million mortgages, and represents 22 percent of the loan origination 

market 441

FDIC’s IndyMac Program ......... The FDIC conducts a comprehensive program to provide loan modifications and other assistance to borrowers who have a first mortgage owned or securitized and serviced by 

IndyMac 

This program has served as one model for the Administration’s MHA program 

The FDIC became the conservator of failed IndyMac bank and still holds roughly $11 billion 

in assets, many mortgage-related 

Federal Home Loan [FHL] 

Bank System.

12 FHL Banks borrow funds in debt markets and provide loans to members 

Loans are typically collateralized by residential mortgage loans and government and agency securities 

Veterans Affairs [VA] .............. VA guarantees housing loans for veterans and their families 

United States Department of 

Agriculture [USDA] / Rural 

Development [RD].

USDA/RD guarantees loans for moderate-income individuals or households to purchase 

homes in rural areas. 

Ginnie Mae .............................. Corporation within HUD that guarantees MBS with the full faith of the government 

Guarantees 90% of FHA loans; 80% of Ginnie Mae’s portfolio is made up of FHA loans 


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442 U.S. Department of Treasury, Making Home Affordable: Updated Detailed Program Description (March 4, 2009) (online at www.treas.gov/press/releases/reports/housinglfactlsheet.pdf). 443Through September 30, 2009. 

Interventions in the 

Mortgage Markets 437 Description 

Additional HUD/FHA Programs, 

such as HOPE for Homeowners.

HOPE for Homeowners is an example of a HUD-run program that allows homeowners to refinance into an FHA mortgage, with certain restrictions on debt-to-income ratios and 

loan limits 

Borrowers pay a premium of 3% of the original mortgage amount and an annual premium 

of 1.5% of the outstanding mortgage amount 

Fannie and Freddie reimburse costs to FHA not covered by premiums 

HOPE has fallen significantly short of the goal of renegotiating mortgage terms for 

400,000 homeowners (100 served) 

Community Reinvestment Act Passed in 1977 to prevent ‘‘redlining,’’ a term that refers to the practice of denying loans 

to neighborhoods considered to be higher economic risks, by mandating that banks to 

lend to the communities where they take deposits 

The current CRA law requires the OCC, OTS, Federal Reserve and FDIC as regulators to assess each bank and thrift’s lending records pursuant to CRA and to apply this in evaluating applications for charters, mergers, acquisitions and expansions 

Mortgage Interest Tax Deduction.Allows all homeowners to deduct interest paid on mortgages on income tax returns 

$8,000 First-time Homebuyer 

Credit.

Refundable tax credit equal to 10 percent of the purchase price up to a maximum of 

$8,000 

Only eligible for single taxpayers with incomes up to $75,000 and married couples with 

combined incomes up to $150,000 

Passed as part of the ‘‘American Recovery and Reinvestment Act of 2009,’’ but extension 

currently being considered in Congress 

Treatment of Capital Gains .... Exemption from paying capital gains tax on the first $250,000 for individual filers 

($500,000 for joint filers) of capital gains from the sale of a primary residence 

Mortgage Revenue Bonds ....... State or local agencies issue tax-exempt bonds and use the proceeds to offer mortgages 

below the market interest rate for first-time homebuyers of certain income levels 

437 Some background provided by GAO, ‘‘Analysis of Options for Revising the Housing Enterprises’ Long-term Structures,’’ September 2009. 438 Fannie Mae, Monthly Summary (July 2009) (online at 

www.fanniemae.com/ir/pdf/monthly/2009/073109.pdf;jsessionid=B4Q4GWTY555N3J2FECISFGA);, Freddie Mac, Monthly Summary (July 2009) (online at www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf). 439 Congressional Budget Office, The Budget and Economic Outlook: An Update (August 2009) (online at 

www.cbo.gov/ftpdocs/85xx/doc8565/08-23-Update07.pdf ). 440 Source: Inside Mortgage Finance 441 Source: Inside Mortgage Finance. 

22. Role of Fannie Mae and Freddie Mac in Administration’s 

Housing Plan 

The Administration’s MHA plan aims to lower mortgage rates by 

‘‘strengthening confidence in Fannie Mae and Freddie Mac.’’ 442

‘‘Strengthening confidence’’ seems to mean increasing the size of 

the taxpayer’s commitment in Fannie and Freddie significantly by 

$200 billion to $400 billion (not to mention their portfolio limits), 

as well as making the GSEs a centerpiece of housing policy. As 

mentioned, Fannie and Freddie have already received $95.6 billion 

in capital injections from Treasury to fill ‘‘holes’’ in their balance 

sheets where liabilities exceed assets.443 The companies are required to pay annual interest of 10 percent on the injections, although this amounts to a sum that is larger than the historical 

profits made by the GSEs (during years where they made profits). 

Just as a history of bad management decisions did not preclude 

GM and Chrysler from receiving TARP funds, the same is true of 

Fannie Mae and Freddie Mac. It should be noted that their financial insolvency materialized after years of mismanagement—and 

after years of enjoying the gold seal of the government’s implicit 

guarantee. As I wrote in the March addendum to the Panel’s report: 


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444See Congressional Oversight Panel, March Oversight Report: Foreclosure Crisis: Working 

Toward a Solution, ‘‘Additional View by Representative Jeb Hensarling,’’ (online at 

cop.senate.gov/documents/cop-030609-report-view-hensarling.pdf). 

445Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Long-term Structures, September 10, 2009 (online at www.gao.gov/new.items/d09782.pdf). 

Fannie and Freddie exploited their congressionallygranted charters to borrow money at discounted rates. 

They dominated the entire secondary mortgage market, 

wildly inflated their balance sheets and personally enriched their executives. Because market participants long 

understood that this government created duopoly was implicitly (and, now, explicitly) backed by the federal government, investors and underwriters chose to believe that if 

Fannie or Freddie touched something, it was safe, sound, 

secure, and most importantly ‘‘sanctioned’’ by the government. The results of those misperceptions have had a devastating impact on our entire economy. Given Fannie and 

Freddie’s market dominance, it should come as little surprise that once they dipped into the subprime and Alt-A 

markets, lenders quickly followed suit. In 1995, HUD authorized Fannie and Freddie to purchase subprime securities that included loans to low-income borrowers and allowed the GSEs to receive credit for those loans toward 

their mandatory affordable housing goals. Fannie and 

Freddie readily complied, and as a result, subprime and 

near-prime loans jumped from 9 percent of securitized 

mortgages in 2001 to 40 percent in 2006. In 2004 alone, 

Fannie and Freddie purchased $175 billion in subprime 

mortgage securities, which accounted for 44 percent of the 

market that year. Then, from 2005 through 2007, the two 

GSEs purchased approximately $1 trillion in subprime and 

Alt-A loans, and Fannie’s acquisitions of mortgages with 

less than 10-percent down payments almost tripled. As a 

result, the market share of conventional mortgages 

dropped from 78.8 percent in 2003 to 50.1 percent by 2007 

with a corresponding increase in subprime and Alt-A loans 

from 10.1 percent to 32.7 percent over the same period. 

These non-traditional loan products, on which Fannie and 

Freddie so heavily gambled as their congressional supporters encouraged them to ‘‘roll the dice a little bit more,’’ 

now constitute many of the same non-performing loans 

which have contributed to our current foreclosure troubles.444

In addition, GAO also noted in a September 2009 report: 

While housing finance may have derived some benefits 

from the enterprises’ activities over the years, GAO, federal regulators, researchers, and others long have argued 

that the enterprises had financial incentives to engage in 

risky business practices to strengthen their profitability 

partly because of the financial benefits derived from the 

implied federal guarantee on their financial obligations.445

In September 2008, Treasury put Fannie Mae and Freddie Mac 

into conservatorship under the Federal Housing Finance Agency 


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446Fannie Mae, Monthly Summary, July 2009 (online at www.fanniemae.com/ir/pdf/monthly/ 

2009/073109.pdf;jsessionid=GZALNHE45QP0LJ2FECISFGI); Freddie Mac, Monthly Summary, July 2009 (online at www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf). 447 Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2009 

(online at www.cbo.gov/doc.cfm?index=10521). The Administration still considers Fannie Mae 

and Freddie Mac to be off-budget entities. 448Federal Home Loan Mortgage Corporation, Form 10–Q to the Securities and Exchange 

Commission, quarterly period ending June 30, 2009 (online at www.freddiemac.com/investors/ 

er/pdf/10ql2q09.pdf). 

[FHFA], effectively making taxpayers liable for their portfolios 

which now total about $5.46 trillion (including mortgage-backed securities and other guarantees, as well as gross mortgage portfolios.446 According to CBO, the current estimate of the cost of 

bringing Fannie’s and Freddie’s books of business onto the federal 

budget is $390 billion.447

In addition, the GSEs’ support of Treasury’s MHA loan modification program is expected to amplify the risk of an already-leveraged taxpayer investment. The following excerpt from Freddie’s 

second quarter 2009 filing to the SEC mentions the dire financial 

situation, the probable need for additional Treasury capital, and 

the possible negative effect on financials caused by the MHA program: 

We expect a variety of factors will place downward pressure on our financial results in future periods, and could 

cause us to incur GAAP net losses. Key factors include the 

potential for continued deterioration in the housing market, which could increase credit-related expenses and security impairments, adverse changes in interest rates and 

spreads, which could result in mark-to-market losses, and 

our efforts under the MHA Program and other government 

initiatives, some of which are expected to have an adverse 

impact on our financial results. We believe that the recent 

modest home price improvements were largely seasonal, 

and expect home price declines in future periods. Consequently, our provisions for credit losses will likely remain high during the remainder of 2009 and increase 

above the level recognized in the second quarter. To the 

extent we incur GAAP net losses in future periods, we will 

likely need to take additional draws under the Purchase 

Agreement. In addition, due to the substantial dividend 

obligation on the senior preferred stock, we expect to continue to record net losses attributable to common stockholders in future periods.’’ 448

GAO has also discussed specifically the impact to the GSEs of 

participation in HAMP and HARP: 

While these federal initiatives were designed to benefit 

homebuyers, in recent financial filings, both Freddie Mac 

and Fannie Mae have stated that the initiative to offer refinancing and loan modifications to at-risk borrowers could 

have substantial and adverse financial consequences for 

them. For example, Freddie Mac stated that the costs associated with large numbers of its servicers and borrowers 

participating in loan-modification programs may be substantial and could conflict with the objective of minimizing 


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449Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Long-term Structures, September 2009 (online at www.gao.gov/new.items/d09782.pdf). 

the costs associated with the conservatorships. Freddie 

Mac further stated that loss-mitigation programs, such as 

loan modifications, can increase expenses due to the costs 

associated with contacting eligible borrowers and processing loan modifications. Additionally, Freddie Mac stated 

that loan modifications involve significant concessions to 

borrowers who are behind in their mortgage payment, and 

that modified loans may return to delinquent status due to 

the severity of economic conditions affecting such borrowers. Fannie Mae also has stated that, while the impact 

of recent initiatives to assist homeowners is difficult to 

predict, the participation of large numbers of its servicers 

and borrowers could increase the enterprise’s costs substantially. According to Fannie Mae, the programs could 

have a materially adverse effect on its business, financial 

condition, and net worth.449

Since the GSEs are now under the conservatorship of the Federal 

Housing Finance Agency [FHFA], their concerns are now officially 

the taxpayers’ concerns. Any losses the GSEs experience through 

MHA programs should be a carefully considered part of a cost-benefit analysis. 

In addition, as noted in the March report additional views, for 

well over twenty years, federal policy has promoted lending and 

borrowing to expand homeownership, through incentives such as 

the home mortgage interest tax exclusion, the FHA, discretionary 

HUD spending programs, and the Community Reinvestment Act 

[CRA]. CRA is an example of a program with the best of intentions 

having adverse, unintended consequences on exactly the population 

it hopes to serve. It was initially authorized to prevent ‘‘redlining,’’ 

a term that refers to the practice of denying loans to neighborhoods 

considered to be higher economic risks, by mandating banks lend 

to the communities where they take deposits. Since its passage into 

law in 1977, however, CRA has advanced at least two undesirable 

outcomes: (1) some financial institutions completely avoided doing 

business in neighborhoods and restricted even low-risk forms of 

credit, and (2) many institutions went the other way and relaxed 

underwriting standards to meet CRA guidelines, thus opening the 

door to certain risky products that have contributed to the problem 

of foreclosures. These lax underwriting standards spread to Fannie 

and Freddie and ultimately to the private sector as the role of the 

GSEs morphed from that of a liquidity provider to a promoter of 

home ownership. 

23. Questions for Fannie Mae and Freddie Mac 

Representatives of Fannie Mae and Freddie Mac testified before 

the Panel at a hearing on foreclosure mitigation held in Philadelphia on September 24, 2009. I asked the following questions for the 

record to Fannie Mae and Freddie Mac and await their response. 


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450Federal Reserve, Press Release (Sept. 23, 2009) (online atwww.federalreserve.gov/ 

newsevents/press/monetary/20090923a.htm). 

Fannie Mae 

1. Fannie Mae has so far received approximately $44.9 billion in 

equity injections from Treasury through the Preferred Share Purchase Agreements authorized by the Housing and Economic Recovery Act of 2008 [HERA]. 

Will Fannie Mae request additional funds from Treasury through 

this program? 

Will Treasury’s commitment to purchase preferred shares in 

Fannie Mae increase beyond the $200 billion limit announced in 

March 2009? 

2. How much of the funding that Fannie Mae has received 

through HERA-authorized injections has been spent on the Administration’s ‘‘Making Home Affordable’’ plan? 

How much has Fannie Mae committed from HERA-authorized 

funds for ‘‘Making Home Affordable’’ efforts? 

Specifically, how much of this funding has been and will be used 

by Fannie Mae for the Administration’s ‘‘Home Affordable Modification Program?’’ 

How much of this funding has been and will be used by Fannie 

Mae for the Administration’s ‘‘Home Affordable Refinance Program?’’ 

3. What is the average cost of modifying a home loan under 

‘‘Home Affordable Modification Program,’’ according to Fannie 

Mae’s most recent data? 

Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers? 

If you do not have these data, please explain why not. 

4. What is the average cost of refinancing a home loan under 

‘‘Home Affordable Refinance Program,’’ according to Fannie Mae’s 

most recent data? 

Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers? 

If you do not have these data, please explain why not. 

5. In general, how do you expect Fannie Mae’s participation in 

the ‘‘Making Home Affordable’’ plan to affect financials for the next 

quarter? 

What about for the next year? 

6. The Federal Reserve has already purchased about $860 billion 

of its $1.25 trillion commitment to buy Fannie Mae and Freddie 

Mac-guaranteed mortgage-backed securities.450 To put it in context, right now, the Federal Reserve buys the lion’s share of all new 

issuance, which is somewhere around 80 percent. 

If the Federal Reserve stops purchasing Fannie Mae’s mortgagebacked securities then who will purchase the securities and at 

what price? 

Has the Federal Reserve or Fannie Mae attempted to sell these 

securities to private sector participants and, if so, what has been 

the response? 

Have any significant purchasers of U.S. Treasuries asked the 

Federal Reserve to cap its purchases of these securities? 


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451 Board of Governors of the Federal Reserve System, Press Release (Sept. 23, 2009) (online 

at www.federalreserve.gov/newsevents/press/monetary/20090923a.htm). 

Freddie Mac 

1. Freddie Mac has so far received approximately $50.7 billion in 

equity injections from Treasury through the Preferred Share Purchase Agreements authorized by the Housing and Economic Recovery Act of 2008 [HERA]. 

Will Freddie Mac request additional funds from Treasury 

through this program? 

Will Treasury’s commitment to purchase preferred shares in 

Freddie Mac increase beyond the $200 billion limit announced in 

March 2009? 

2. How much of the funding that Freddie Mac has received 

through HERA-authorized injections has been spent on the Administration’s ‘‘Making Home Affordable’’ plan? 

How much has Freddie Mac committed from HERA-authorized 

funds for ‘‘Making Home Affordable’’ efforts? 

Specifically, how much of this funding has been and will be used 

by Freddie Mac for the Administration’s ‘‘Home Affordable Modification Program?’’ 

How much of this funding has been and will be used by Freddie 

Mac for the Administration’s ‘‘Home Affordable Refinance Program?’’ 

3. What is the average cost of modifying a home loan under 

‘‘Home Affordable Modification Program,’’ according to Freddie 

Mac’s most recent data? 

Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers? 

If you do not have these data, please explain why not. 

4. What is the average cost of refinancing a home loan under 

‘‘Home Affordable Refinance Program,’’ according to Freddie Mac’s 

most recent data? 

Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers? 

If you do not have these data, please explain why not. 

5. In general, how do you expect Freddie Mac’s participation in 

the ‘‘Making Home Affordable’’ plan to affect financials for the next 

quarter? 

What about for the next year? 

6. The Federal Reserve has already purchased about 860 billion 

of its 1.25 trillion-dollar commitment to buy Fannie Mae and 

Freddie Mac-guaranteed mortgage-backed securities.451 To put it in 

context, right now, the Federal Reserve buys the lion’s share of all 

new issuance, which is somewhere around 80 percent. 

If the Federal Reserve stops purchasing Freddie Mac’s mortgagebacked securities then, who will purchase the securities and at 

what price? 

Has the Federal Reserve or Freddie Mac attempted to sell these 

securities to private sector participants and, if so, what has been 

the response? 

Have any significant purchasers of U.S. Treasuries asked the 

Federal Reserve to cap its purchases of these securities? 


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452Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS 

Mortgage Metrics Report, First Quarter 2009 (online at www.occ.treas.gov/ftp/release/2009– 

77a.pdf) (June 2009). MHA has not been in operation for a year and it is not possible to obtain 

yearly re-default data. 

24. Net Present Value Analysis and the Risk of Redefault 

The redefault rate is a key input cited by the Panel and used by 

servicers to calculate the all-in net present value of electing to pursue a loan modification versus a foreclosure. It goes without saying 

that the chance of waves of redefaults occurring enhances significantly the risk of the Administration’s $75 billion MHA program. 

The self-cure rate, which refers to the ability for borrowers to catch 

up on loan payments without assistance, is also an important factor in NPV calculations. Understandably, under the current economic conditions where unemployment is supposed to reach at 

least 10 percent, self-cure rates will be likely be lower than under 

conventional circumstances. The Panel’s report disputes the findings of a paper released by the Federal Reserve Bank of Boston, 

which cites self-cure rates of 25 to 30 percent, and supports a recent study showing self-cure rates of closer to between 4.3 percent 

and 6.6 percent. The reality is that homeowners’ ability to heal 

themselves is largely a function of economic growth and the opportunities it affords. Another reality not mentioned is the fact that 

homeowners may choose not to self-cure because of the 

attractiveness of a government-sponsored loan modification plan. 

The Panel also calls into question the average redefault rate of 

up to 50 percent cited by the Federal Reserve Bank of Boston, 

which, is also approximately the level of redefaults computed by 

the OCC and OTS one year after a loan modification has been performed.452 It should be stressed that we simply do not have enough 

evidence to show that the longer-term risk of redefault on a loan 

modified by MHA is still not very high. This is true by virtue of 

Assistant Secretary Allison’s statement that only 1,800 permanent 

modifications—that is, those that have survived the minimum 

three-month threshold to become permanent—have been put in 

place. Only time will tell if this very costly investment will serve 

the number of homeowners the Administration has assured without requiring additional taxpayer funds. Since the data are ambiguous at best, it should not be affirmed by the Panel that redefault 

and self-cure rates are conclusively within one narrow range or another in order to make the case that government-sponsored loan 

modification is a more attractive option. 

25. The Issue of Fairness 

The Panel’s report states, ‘‘Devoting attention and resources to 

moral sorting is at odds with the goal of maximizing the macroeconomic impact of foreclosure prevention. Trying to sort out the 

deserving from the undeserving on any sort of moral criteria means 

that foreclosure prevention efforts will be delayed and have a narrower scope. Moreover, in other cases where the federal government extended assistance under TARP—such as to banks and auto 

manufacturers—no attempt was made to sort between entities deserving and not deserving assistance. No inquiry was made as to 

which investors in these entities knowingly and willingly assumed 

the risks of the entities’‘Insolvency.’ ’’ 


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In fact, this distinction could be crucial to long-term stabilization. 

Programs that create moral hazard by giving no consideration to 

the rightful, necessary link between risk and responsibility could 

potentially create additional housing ‘‘bubbles’’ and result in greater threats to stability. 

It goes without saying that moral hazard has already played out 

for some financial institutions that received billions in TARP funds, 

even if capital was initially deployed with an eye to prevent a global economic meltdown. The federal safety net was spread wide as 

many who exhibited irresponsible behavior were deemed ‘‘too big to 

fail’’ for systemic risk reasons, qualifying them for protected status. 

This is a legacy the banking system and the government will have 

to deal with for a long time, even if taxpayers are receiving repayments in full with interest from Capital Purchase Plan recipients. 

The Panel’s report implies that two moral hazards make a right, 

and encourages an even wider number of homeowners to be bailed 

out from what could be their own bad decisions simply because it 

is the fair treatment. I question if the approximately 95 percent of 

taxpayers who satisfy their rental and mortgage obligation each 

month would consider such bailouts fair particularly if they result 

in higher tax rates and mortgage interests costs. The irony is that 

although the report concludes a moral judgment should be immaterial when doling out taxpayer money, a comparison of homeowners 

to Wall Street companies is in itself a moral comparison used to 

justify subsidization of mortgage payments. 

By advocating a policy of additional bailouts the Panel has chosen to burden a substantial majority of the taxpayers with yet another subsidy-based program. It is difficult for me to appreciate the 

inherent fairness or appropriateness of such an approach. 

26. Mortgage Fraud and Abuse 

I am concerned that the Panel mentions fraud in its report only 

to assert how broad publication of mortgage schemes may deter 

homeowners from participating in MHA. SIGTARP, which has been 

actively monitoring fraud, waste and abuse, is currently in the 

process of conducting an audit on the ‘‘Making Home Affordable’’ 

program which will focus on reviewing its current status and the 

challenges it faces. This oversight body is sure to take cases of 

fraud very seriously. Widespread scams are a serious issue—the 

FBI estimates annual losses from mortgage fraud to be between $4 

and $6 billion—and one whose significance should not be undermined in exchange for more aggressive outreach to borrowers. 

Homeowners must be presented with all of the facts on the serious 

risk of fraud as well as given the encouragement to perform due 

diligence on all of the options at their disposal if they cannot meet 

mortgage payments. 

27. Conclusions and Recommendations for an Oversight 

Plan and the Adoption of a COP Budget 

A fair reading of the Panel’s majority report and my dissent 

leads to one conclusion—HAMP and the Administration’s other 

foreclosure mitigation efforts to date have been a failure. The Administration’s opaque foreclosure mitigation effort has assisted only 


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453 U.S. Department of the Treasury, Troubled Assets Relief Program Transactions Report 

(Oct. 6, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactions-reportl10062009.pdf). The commitment cited is as defined by the current ‘‘Total Cap’’ for the Home Affordable Modification Program, $27,247,320,000. 

a small number of homeowners while drawing billions of involuntary taxpayer dollars into a black hole. 

While the Congressional Budget Office estimates that taxpayers will lose 100 percent of the $50 billion in TARP funds committed 

to the Administration’s foreclosure relief programs, instead of focusing its attention on taxpayer protection and oversight, the Panel’s majority report implies that the Administration should commit 

additional taxpayer funds in hopes of helping distressed homeowners—both deserving and undeserving—with a taxpayer subsidized rescue. 

While there may be some positive signals in our economy, recovery remains in a precarious position. Unemployment will hit 10 

percent in 2010, if not this year. This is unfortunate because the 

best foreclosure mitigation program is a job, and the best assurance 

of job security is economic growth and the adoption of public policy 

that encourages and rewards capital formation and entrepreneurial 

success. Without a robust macroeconomic recovery the housing 

market will continue to languish and any policy that forestalls such 

recovery will by necessity lead to more foreclosures. 

Regardless of whether one believes foreclosure mitigation can 

truly work, taxpayers who are struggling to pay their own mortgage should not be forced to bail out their neighbors through such 

an inefficient and transparency-deficient program. Both the Administration and the Panel’s majority appear to prioritize good intentions and wishful thinking over taxpayer protection. To date, despite the commitment of some $27 billion,453 only 

about 1,800 underwater homeowners have received a permanent 

modification of their mortgage. If the Administration’s goal of subsidizing up to 9 million home mortgage refinancings and modifications is met, the cost to the taxpayers will almost surely exceed by 

a material amount the $75 billion already allocated to the Making 

Home Affordable program, none of it recoverable. 

Taxpayers deserve a better return on their investment than what 

they are set to receive from AIG, Chrysler, GM and the Administration’s flawed foreclosure mitigation efforts. 

Professor Alan M. White, an expert retained by the Panel, notes 

in a paper attached to the Panel’s report: ‘‘The bottom line to the 

investor is that any time a homeowner can afford the reduced payment, with a 60 percent or better chance of succeeding, the investor’s net gain from the modification could average $80,000 per loan 

or more.’’ 

Taxpayers—through TARP or otherwise—should not be required 

to subsidize mortgage holders or servicers when foreclosure mitigation efforts appear in many cases to be in their own economic best 

interests. The Administration, by enticing mortgage holders and 

servicers with the $75 billion HAMP and HARP programs (with a 

reasonable expectation that additional funds may be forthcoming), 

has arguably caused them to abandon their market oriented response to the atypical rate of mortgage defaults in favor of seeking 

assistance from the government. 


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454These ‘‘life event’’ affected borrowers are noteworthy because relatively few object to efforts 

to find achievable solutions for trying to help keep these distressed borrowers in their current 

residences whenever possible. Similarly, another sympathetic group of distressed borrowers involves people who were legitimate victims of blatant manipulation or outright fraud by unscrupulous lenders who pressured them into homes they could not afford. To many, those legitimate 

victims are certainly equally deserving of assistance. Of course, such borrowers do have the 

added burden proving that they were indeed victims of actual wrongdoing. However, they also 

have a potential remedy of pursuing legal action against fraudulent lenders, an option which 

is not available to others. 455 After all, why should a person be forced to pay for their neighbor’s mortgages when he 

or she is struggling to pay his or her own mortgages and other bills? To many people, this question is the most important aspect of the public policy debate. Given the massive direct taxpayer 

costs that have already been incurred through TARP and the potential costs that could be incurred through the assorted credit facilities and monetary policy actions of the Federal Reserve, 

I believe that it is difficult to justify asking the taxpayers to shoulder an even greater financial 

burden from yet another government foreclosure mitigation program that might not work. 

Any foreclosure mitigation effort must appear fair and reasonable to the American taxpayers. It is important to remember that 

the number of individuals in mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the 

victims of fraud. This complicates moral hazard issues associated 

with large-scale modification programs.454 Distinct from a moral 

hazard question, there is an inherent question of fairness as those 

who are not facing mortgage trouble are asked to subsidize those 

who are facing trouble. 

In light of current statistics regarding the overall foreclosure 

rate, an essential public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is: ‘‘Is it fair to expect approximately 19 out of every 

20 people to pay more in taxes to help the 20th person maintain 

their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular 

sentiment that such a trade-off is indeed not fair.455

Since there is no uniform solution for the problem of foreclosures, 

a sensible approach should encourage multiple mitigation programs 

that do not amplify taxpayer risk or require government mandates. 

Subsidized loan refinancing and modification programs may provide relief for a select group of homeowners, but they work against 

the majority who shoulder the tax burden and make mortgage payments on time. 

28. Oversight Plan 

As I have stressed before, I believe the Panel continues to make 

the mistake of putting policy objectives above transparent and critical oversight. The October report on foreclosure issues is a strong 

example of this. I am again dismayed that the Panel’s current release is driven by an approach that appears to favor an expansion 

of government-subsidized foreclosure mitigation plans over consideration of taxpayer protections and prudent supervision. 

The Panel has yet to present and adopt an oversight plan. Until 

one is made official, reports and actions taken will not adhere to 

standard guidelines. I recommend the following be considered by 

the Panel. 

The EESA statute requires COP to accomplish the following, 

through regular reports: 

• Oversee Treasury’s TARP-related actions and use of authority 


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• Assess the impact to stabilization of financial markets and 

institutions of TARP spending • Evaluate the extent to which TARP information released 

adds to transparency • Ensure effective foreclosure mitigation efforts in light of 

minimizing long-term taxpayer costs and maximizing taxpayer 

benefits. 

In adherence to this mandate, the Panel should consider adopting the following standards of oversight: • Analyzing programs proposed by Treasury to determine if 

they are properly designed for their intended purpose • Determining if the investment of TARP funds in each program is permitted under EESA • Determining if the programs are being properly implemented in a reasonable, transparent, accountable and objective 

manner • Determining if taxpayers are being protected • Determining the success or failure of the programs based 

upon reasonable, transparent, accountable and objective 

metrics • Analyzing Treasury’s exit strategy with respect to each investment of TARP funds • Analyzing the corporate governance policies and procedures implemented by Treasury with respect to each investment of TARP funds • Holding regular public hearings with the Secretary and 

other senior Treasury officials • Holding regular public hearings with TARP recipients with 

special care taken to invite major recipients to testify • Keeping a record of all invitations to testify and responses • Determining how TARP recipients invest and deploy their 

TARP funds • Reporting the results to the taxpayers in a clear and concise manner 

• Avoiding public policy recommendations in the reports released by the Panel 

• Conducting the Panel’s oversight activities in the most 

reasonable, transparent, accountable and objective manner 

with measurable standards that hold Treasury accountable, 

without limitation, for the statutory mandate of EESA that 

taxpayer protection is an upmost priority 

• Conducting the internal operations of the Panel in the 

most reasonable, transparent, accountable and objective manner. 

29. Adoption of a Budget and Disclosure of Other Matters by 

COP 

The Panel has a taxpayer protection based statutory obligation 

to oversee the funds committed and spent by Treasury on all TARP 

programs, as well as to ensure that there is complete transparency 

and accountability in Treasury’s reporting practices. Taxpayers 

should demand no less than full disclosure of how the Panel’s own 

operations are financed. It has been one year since the Panel’s inception and a budget has yet to be produced. The Panel should reVerDate Nov 24 2008 01:39 Nov 11, 2009 Jkt 052671 PO 00000 Frm 00155 Fmt 6602 Sfmt 6602 E:\HR\OC\A671.XXX A671

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456SIGTARP, Quarterly Report to Congress, at 26 (July 21, 2009) (online at www.sigtarp.gov/ 

reports/congress/2009/July2009lQuarterlylReportltolCongress.pdf). 457See Special Inspector General for the Troubled Asset Relief Program (SIGTARP) website 

(online at sigtarp.gov/aboutlprocure.shtml). 458See Special Inspector General for the Troubled Asset Relief Program (SIGTARP) website 

(online at sigtarp.gov/aboutlstaff.shtml). 459See Special Inspector General for the Troubled Asset Relief Program (SIGTARP) website 

(online at sigtarp.gov/aboutlorg.shtml). 460See the Congressional Oversight Panel’s website (online at cop.senate.gov/blog/). 461 Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343, § 125: 

FUNDING FOR EXPENSES.— 

(1) AUTHORIZATION OF APPROPRIATIONS.—There is authorized to be appropriated to the 

Oversight Panel such sums as may be necessary for any fiscal year, half of which shall be derived from the applicable account of the House of Representatives, and half of which shall be 

derived from the contingent fund of the Senate. 

(2) REIMBURSEMENT OF AMOUNTS.—An amount equal to the expenses of the Oversight 

Panel shall be promptly transferred by the Secretary, from time to time upon the presentment 

of a statement of such expenses by the Chairperson of the Oversight Panel, from funds made 

available to the Secretary under this Act to the applicable fund of the House of Representatives 

and the contingent fund of the Senate, as appropriate, as reimbursement for amounts. 

lease a budget on continuing operations by November 1, and should 

make available detailed information on past uses of all funds received for Panel activities by such date. These reports should disclose in sufficient detail all operating expenses and other amounts 

incurred or paid by the Panel for, without limitation, rent, IT, travel, services, utilities, equipment as well as the salary and other 

compensation paid to all Panel employees, interns, consultants, advisors, experts and independent contractors. In order to ensure the 

absence of any conflict of interest, the Panel should disclose the 

names and affiliations of all such consultants, advisors, experts and 

independent contractors and the terms of the written or oral agreements through which they render advice or counsel to the Panel 

(even if they are not compensated for their services). The Panel 

should update these matters each month and disclose the results 

on its website. 

In quarterly reports to Congress, not only does SIGTARP publish 

its statutory mandate and how well the organization follows EESA 

requirements, it also provides a detailed budget and information on 

hired personnel. SIGTARP must formally request funds from 

Treasury for any amounts beyond the initial EESA grant. In the 

July report to Congress, its budget includes a specific breakdown 

of financing requested for staff, rent, services, transportation, advisory, etc.456

SIGTARP also discloses on its website the contracts that it enters into with outside vendors and other Governmental agencies to 

obtain goods and services,457 a description of its senior staff,458 and 

its organizational chart.459 Although the Panel’s website contains 

a blog,460 it does not disclose any of the other items. 

The EESA statute calls on the Panel’s Chair to present a statement of expenses to the Treasury Secretary. Treasury then transfers funding for reimbursement of the Panel into separate, equal 

accounts in both the House of Representatives and the Senate.461

Since the Panel runs on the fuel of taxpayer dollars, it should be 

held to task for creating budgets and statements of operations that 

are fully transparent to the public, especially as Treasury makes 

the decision of whether or not to extend TARP—and thus the Panel’s oversight and costs—beyond December 31, 2009. 


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C. Paul Atkins 

The October Report of the Panel regarding mortgage foreclosure 

mitigation marks yet another commendable effort by the staff and 

the Panel to treat a complex area of the economy in a short amount 

of time. The October Report analyzes great deal of information and 

helpfully cites a wealth of resources and studies. I salute the staff 

and my colleagues for the hard work represented by the report. Unfortunately, I cannot join in supporting the October Report because 

of its extraneous discussions and opinions unrelated to TARP. 

Congress has charged this Panel with overseeing a $700 billion 

program that was enacted in a hurry with much discretion placed 

in the Executive. Congress understandably was sensitive to the opportunity of departure from legislative intent and potential for improper activity that this situation presents. Thus, Congress formed 

not only this Panel but also an office of a special inspector general, 

independent of Treasury, to oversee the program, provide transparency, and ensure accountability to Congress and to the taxpayers. That unusual level of oversight reflects the concern of 

Members of Congress regarding the unusual nature of the program 

itself and its political sensitivity. 

The October Report contains some commentary and recommendations that depart from the oversight role of this Panel 

and, I believe, detract from the overall effectiveness of the report’s 

message. Congress empowered this Panel to watch over the Treasury Department’s use of the authority granted under the Emergency Economic Stabilization Act. If the Treasury’s efforts at implementing TARP in general or in particular areas are inchoate, 

unavailing, wasteful, illegal, or corrupt, it is our job to report on 

those problems and seek their correction. 

On the other hand, it is not our role gratuitously to offer advice 

or comment on additional legislation, matters of behavioral economics, or academic studies. Consequently, it is entirely appropriate for our report to analyze the HAMP and HARP programs 

and judge them against the Administration’s rhetoric regarding 

them. I applaud the staff’s seeking input regarding costs and benefits. I view this research as a good basis for further public debate. 

From our observations and research, we are well positioned to offer 

advice as to needed adjustments to increase efficiency and responsiveness from what we have learned in the field or from public 

comment. We do not need to deal extensively with speculation as 

to the effects of negative equity, the desirability of a program of 

principal reduction, or legislative empowerment of bankruptcy 

judges to ‘‘cramdown’’ changes to mortgages. We might point out 

areas for additional academic research that we or policymakers 

might find helpful in the future, but we should not use the report 

as a means to challenge legitimate studies, such as a Federal Reserve Bank of Boston Working Paper discussed in the report, where 

we do not have sufficient time or expertise to do so. 

Moreover, sweeping conclusions regarding the proper allocation 

of taxpayer resources are not within our purview. We are not policymakers and do not have the benefit of budget studies, knowledge 

of budgeting history, or advantage of debate regarding budgetary 

alternatives and priorities to make value judgments as between 


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programs. Since government resources ultimately come from the 

taxpayers, government must be sensitive to prudent and moral use 

of taxpayer funds. In our role, we see only the matter and program 

before us. Thus, the report’s venturing into speculation regarding 

the purpose of foreclosure mitigation and making value judgments 

regarding spending taxpayer money, including the statement that 

‘‘[d]evoting attention and resources to moral sorting [as between 

‘‘deserving’’ mortgagors and deadbeats or speculators] is at odds 

with the goal of maximizing the macroeconomic impact of foreclosure prevention,’’ is inappropriate. Moral sorting is inherent in 

a legislator’s consideration of support or opposition to legislation. 

To ignore it invites citizen cynicism and taxpayer outrage, which 

inevitably will be registered at the ballot box. Despite the report’s 

casual treatment of this subject, I have confidence that Members 

of Congress will be extremely wary of adopting this report’s view 

thereof. 

My concern with the ‘‘market stability’’ argument to ‘‘prevent’’ 

foreclosures is that the policies are aimed at essentially seeking to 

support prices at an artificially high level. We have had a very 

large economic bubble in the housing sector, and a bubble’s consequences are the misallocation of resources. The market—meaning 

people—needs to find the true level of prices according to supply 

and demand. This is easily seen in the residential housing market, 

where deals are closed or fall apart, often on the basis of relatively 

small amounts of money. Government intervention only prolongs 

the uncertainty and the eventual day of reckoning. But, there is 

also the forgotten person in the attempt to support prices. When 

the government uses taxpayer resources, with various justifications, to try to influence supply, the selling homeowner gets the artificially high price. However, what happens to the buyer who unwittingly pays a higher price than he otherwise might have paid 

in a more transparent marketplace? When the prices ultimately 

find equilibrium, and they settle lower despite the government’s efforts, has the government helped to perpetrate a deception on the 

unwitting buyer who paid the artificially high price? 

The report makes the assertion that there was no moral sorting 

as between good and bad financial institutions in the Treasury’s 

use of TARP funds under the Capital Purchase Program and other 

programs and, thus, that there should be no need to judge between 

homeowners in providing direct assistance. The difference, however, is that the taxpayer has lent money to the various financial 

institutions with an expectation that the money will be returned. 

The propriety of that can be debated, but Congress at least had the 

expectation that TARP funds would be repaid with dividends, interest, and proceeds from sale of warrants and stock. As Congressman Hensarling points out in his accompanying statement, the 

Congressional Budget Office views funds spent for foreclosure mitigation as a subsidy, with no expectation of being repaid. For these 

efforts that entail millions of individual cases, it is best left to private parties and judges to sort out the issues to ensure some sort 

of accountability, not another grand entitlement program funded by 

the taxpayer that discounts legitimate concerns of propriety of subsidies and moral hazard. 


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In this vein, Judge Annette M. Rizzo of the Pennsylvania Court 

of Common Pleas, featured in our hearing on September 24th in 

Philadelphia, seems to have forged a positive atmosphere of mediation and dialogue that enhances communication between mortgagors and mortgagees. In many cases, the process has helped to 

forestall foreclosures, for the benefit of both parties. Sometimes, as 

Judge Rizzo forthrightly stated, foreclosure is unavoidable and contracts must be enforced. In this sense, the report also disappoints 

in its seeming approbation of ‘‘innovative’’ measures taken by various states that in some cases are arbitrary interference with contracts in the name of foreclosure ‘‘prevention’’ rather than ‘‘mitigation.’’ The government should not be in the business of preventing 

parties to a contract from enforcing that contract, barring cases of 

fraud or other illegitimate factors. 

With respect to mortgage foreclosure mitigation, it is relatively 

easy to focus on only one side of the relationship as between mortgagor and mortgagee, because the former is currently the party in 

the weaker position and seeks assistance. However, ours is a legal 

system of transparency, due process, respect of private property 

rights, and enforceability of contract. This rule of law separates the 

United States from banana republics and has created a favorable 

investment climate that has attracted capital from around the 

world to be invested here. That has created jobs and built our economy. 

The best policy to minimize foreclosures is for the U.S. government to create an environment conducive to saving and investment, including tax and regulatory policy, that encourages entrepreneurs to start businesses (the sector of business activity that 

creates the most jobs) and existing businesses to expand. The best 

mitigation of mortgage foreclosures is a job. Subsidies are inherently unfair, inefficient, expensive, and complicated. With soaring 

unemployment in the United States, focusing on creating a good 

environment for saving and investment becomes the most important action that the Administration can take. 


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462See Appendix I of this report, infra. 

SECTION THREE: CORRESPONDENCE WITH TREASURY 

UPDATE 

On behalf of the Panel, Chair Elizabeth Warren sent a letter on 

September 15, 2009,462 to Secretary of the Treasury Timothy 

Geithner requesting Treasury’s inputs and formulae for the stress 

tests. The letter further requests answers to questions regarding 

how actual quarterly bank loss rates have differed from Treasury 

stress test estimates. The Panel has not received a response from 

Secretary Geithner. 


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SECTION FOUR: TARP UPDATES SINCE LAST REPORT 

A. TARP Repayment 

Since the Panel’s prior report, additional banks have repaid their 

TARP investment under the Capital Purchase Program (CPP). A 

total of 39 banks have repaid their preferred stock TARP investment provided under the CPP to date. Of these banks, 24 have repurchased the warrants as well. Additionally, during the month of 

August, CPP participating banks paid $1.83 billion in dividends 

and $8.4 million in interest on Treasury investments. 

B. CPP Monthly Lending Report 

Treasury releases a monthly lending report showing loans outstanding at the top 22 CPP-recipient banks. The most recent report, issued on September 16, 2009, includes data up through the 

end of July 2009 and shows that CPP recipients had $4.24 trillion 

in loans outstanding as of July 2009. This represents a one percent 

decline in loans outstanding between the end of June and the end 

of July. 

C. Public-Private Investment Program 

On September 30, 2009, Treasury announced the initial closings 

of Public-Private Investment Funds (PPIFs) established under the 

Legacy Securities Public-Private Investment Program (PPIP). Two 

of the nine pre-qualified funds, Invesco Legacy Securities Master 

Fund, L.P. and UST/TCW Senior Mortgage Securities Fund, L.P. 

closed with a total of $1.13 billion of committed equity capital. 

Treasury has ten days from September 30, to provide matching equity funding. Each fund is eligible for additional debt financing of 

$2.26 billion, bringing the total resources of the fund to $4.52 billion. 

Additionally, on October 5, 2009, Treasury announced the initial 

closings of three more pre-qualified funds managed by 

AllianceBernstein, LP, BlackRock, Inc., and Wellington Management Company, LLP, bringing the total number of closed funds to 

five, and the cumulative total committed equity and debt capital 

under the Legacy Securities program to $12.27 billion ($3.07 billion 

from the private sector and $9.2 billion from Treasury). 

Treasury expects the four remaining funds to close by the end of 

October. Following an initial closing, each PPIF will have the opportunity for two more closings over the following six months to receive matching Treasury equity and debt financing, with a total 

Treasury equity and debt investment in all PPIFs equal to $30 billion ($40 billion including private sector capital). 

Although the legacy loan program has been shelved by the FDIC 

for the time being, a pilot program to test the funding mechanism 

for the loan program was launched in mid-September. In a competitive bidding process, Residential Credit Solutions (RCS) won 

the right to participate in the pilot program. Under the pilot program, the FDIC will sell RCS half of the ownership interests in an 

LLC created to hold a portfolio of legacy ‘‘toxic’’ securities from 

Franklin Bank, SSB, a failed bank held in receivership by the 

FDIC. These legacy securities are comprised of a pool of residential 


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mortgage loans with an unpaid principal balance of approximately 

$1.3 billion. At closing, RCS will pay the FDIC $64.2 million in 

cash for its 50 percent ownership interest in the LLC, and will 

issue a $727.7 million dollar FDIC-guaranteed note to the FDIC in 

exchange for the securities. The FDIC anticipates selling this note 

at a later date. The FDIC will analyze the results of this test sale 

to determine whether or not the legacy loans program is a feasible 

approach to removing troubled assets from bank balance sheets. 

D. Making Home Affordable Program Monthly Servicer 

Performance Report 

On October 8, 2009, Treasury released its third monthly Servicer 

Performance Report detailing the progress to date of the Making 

Home Affordable (MHA) loan modification program. The report discloses that as of September 30, 2009, 85 percent of mortgages are 

covered by a Home Affordable Modification Program (HAMP) participating servicer. The report also indicates that as of September 

30, 2009, 487,081 trial loan modifications have occurred out of 

757,955 trial plan offers extended. 

E. Term Asset-Backed Securities Loan Facility (TALF) 

As previously reported, the Federal Reserve Board and Treasury 

announced their approval of an extension to the Term AssetBacked Securities Loan Facility (TALF). With the extension, the 

deadline for TALF lending against newly issued asset-backed securities (ABS) and legacy commercial mortgage-backed securities 

(CMBS) was extended from December 31, 2009 to March 31, 2010. 

Additionally, the deadline for TALF lending against newly issued 

CMBS was extended to June 30, 2010. 

At the September 3, 2009 facility, $6.53 billion in loans to support the issuance of ABS collateralized by loans in the auto, credit 

card, equipment, property and casualty, small business, and student loan sectors were settled (though $6.54 billion in loans were 

requested). There were no requests supported by floorplan or residential mortgage loans. At the September 17, 2009 legacy CMBS 

facility, $1.35 billion in loans were settled (though $1.4 billion in 

loans were requested). Additionally, at the October 2, 2009 facility, 

$2.47 billion in loans to support the issuance of ABS collateralized 

by loans in the auto, credit card, equipment, floorplan, small business, and student loan sectors were requested. There were no requests supported by residential mortgage loans. 

F. Bank of America Guarantee Termination Payment 

On January 15, 2009, Treasury, the Federal Reserve, and the 

FDIC entered into a provisional agreement with Bank of America 

to guarantee a pool of assets valued at about $118 billion, which 

was predominately in the form of loans and securities backed by 

residential and commercial real estate loans acquired when Bank 

of America merged with Merrill Lynch. In exchange for this guarantee, the federal government was to receive $4 billion of preferred 

stock paying dividends at eight percent, warrants to purchase approximately $400 million of Bank of America stock, and a commitment fee. The provisional agreement was never finalized. On May 


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463White House Press Release, Executive Office of the President’s Council of Economic Advisors CEA Notes on Refinancing Activity and Mortgage Rates (Apr. 9, 2009) (online at 

www.whitehouse.gov/assets/documents/CEAHousingBackground.pdf) (‘‘For the week ended April 

2, the conforming mortgage rate (the rate for mortgages that meet the GSEs’ standards) was 

4.78%, the lowest weekly rate since 1971 (when the data series begins), and likely the lowest 

widely-available mortgage rate since the 1950s.’’). 

6, 2009, Bank of America notified the federal government that it 

wished to terminate the guarantee, and the parties negotiated a 

termination fee. On September 21, 2009, Bank of America agreed 

to pay $425 million to terminate the guarantee. Treasury received 

$276 million of the total fee, while the FDIC and the Federal Reserve received $92 million and $57 million, respectively. See infra 

note 505 (describing components of the termination fee). The government agreed to adjust the fee to reflect: (1) the downsizing of 

the guaranteed asset pool from $118 billion to $83 billion; and (2) 

the abbreviated time period (about four months) during which the 

guarantee was in effect. 

G. Money Market Guarantee Program 

On September 18, 2009, Treasury announced the end of its Guarantee Program for Money Market Funds. Treasury designed the 

program to stabilize markets after a large money market fund’s announcement that its net asset value had fallen below $1 per share 

(‘‘broke the buck’’) in the wake of the failure of Lehman Brothers 

in September of 2008. The program was initially established for a 

three-month period that could be extended through September 18, 

2009. Since inception, Treasury has had no losses under the program and earned approximately $1.2 billion in participation fees. 

H. Metrics 

The Panel continues to monitor a number of metrics that the 

Panel and others, including Treasury, the Government Accountability Office (GAO), Special Inspector General for the Troubled 

Asset Relief Program (SIGTARP), and the Financial Stability Oversight Board, consider useful in assessing the effectiveness of the 

Administration’s efforts to restore financial stability and accomplish the goals of the EESA. This section discusses changes that 

have occurred since the release of the September report. • Interest Rate Spreads. Key interest rate spreads, a measure of 

the cost of capital, have continued to decline. Measures such as the 

LIBOR–OIS spread have largely returned to pre-crisis levels. Other 

important metrics such as the conventional mortgage rate spreads’ 

37 percent decrease since October 2008 also represents a positive 

indicator for the housing market and refinancing.463

FIGURE 31: INTEREST RATE SPREADS 

Indicator Current Spread 464

(as of 10/1/09) 

Percent Change 

Since Last Report 

(9/1//09) 

3 Month LIBOR–OIS Spread 465 ................................................................................... 0.13 ¥23.5 

1 Month LIBOR–OIS Spread 466 ................................................................................... 0.1 11.1 

TED Spread 467 (in basis points) ................................................................................ 19.9 ¥3.7 

Conventional Mortgage Rate Spread 468 ..................................................................... 1.51 ¥9.04 

Corporate AAA Bond Spread 469 .................................................................................. 1.71 ¥2.48 

Corporate BAA Bond Spread 470 .................................................................................. 2.84 ¥7.79 


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FIGURE 31: INTEREST RATE SPREADS—Continued 

Indicator Current Spread 464

(as of 10/1/09) 

Percent Change 

Since Last Report 

(9/1//09) 

Overnight AA Asset-backed Commercial Paper Interest Rate Spread 471 .................. 0.26 8.33 

Overnight A2/P2 Nonfinancial Commercial Paper Interest Rate Spread 472 .............. .14 ¥12.5 

464 Percentage points, unless otherwise indicated. 465 Bloomberg, 3 Mo LIBOR–OIS Spread (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed Oct. 1, 2009). 466 Bloomberg, 1 Mo LIBOR–OIS Spread (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed Oct. 1, 2009). 467 Bloomberg, TED Spread (online at www.bloomberg.com/apps/quote?ticker=.TEDSP:IND) (accessed Oct. 1, 2009). 468 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at 

www.federalreserve.gov/releases/h15/data/WeeklylThursdayl/H15lMORTGlNA.txt) (accessed Oct. 1, 2009); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government 

Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency: Weekly) (online at 

www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lTCMNOMlY10.txt) (accessed Oct. 1, 2009) (hereinafter ‘‘Fed H.15 10-Year 

Treasuries’’). 469 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned AAA, Frequency: Weekly) (online at 

www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lAAAlNA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries, supra note 468. 470 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned BAA, Frequency: Weekly) (online at 

www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lBAAlNA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries, supra 

note 468. 471 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009); Board of Governors of the Federal Reserve System, Federal 

Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate, 

Frequency: Daily) (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009) (hereinafter ‘‘Fed CP AA Nonfinancial Rate’’). 472 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: A2/P2 Nonfinancial Discount Rate, Frequency: Daily) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009); Fed CP AA Nonfinancial Rate, supra note 471. 

• Commercial Paper Outstanding. Commercial paper outstanding, a rough measure of short-term business debt, is an indicator of the availability of credit for enterprises. Two of the three 

measured commercial paper values increased since the Panel’s September report, and one decreased. Asset-backed, financial and nonfinancial commercial paper have all decreased with nonfinancial 

commercial paper outstanding declining by over 46 percent, and 

asset-backed commercial paper outstanding declining over 27 percent since October 2008. 

FIGURE 32: COMMERCIAL PAPER OUTSTANDING 

Indicator 

Current Level 

(as of 9/30/09) 

(Dollars in billions) 

Percent Change 

Since Last 

Report (8/26/09) 

Asset-Backed Commercial Paper Outstanding (seasonally adjusted) 473 .............................. $522.3 14.09 

Financial Commercial Paper Outstanding (seasonally adjusted) 474 ..................................... 602.5 3.93 

Nonfinancial Commercial Paper Outstanding (seasonally adjusted) 475 ................................ 106.2 ¥9 

473 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: Asset-Backed Commercial Paper Outstanding, Frequency: Weekly) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009). 474 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: Financial Commercial Paper Outstanding, Frequency: Weekly) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009). 475 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: Nonfinancial Commercial Paper Outstanding, Frequency: Weekly) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct. 1, 2009). 

Lending by the Largest TARP-recipient Banks. Treasury’s 

Monthly Lending and Intermediation Snapshot tracks loan originations and average loan balances for the 22 largest recipients of CPP 

funds across a variety of categories, ranging from mortgage loans 

to commercial and industrial loans to credit card lines. Commercial 

lending, including new commercial real estate loans, continues to 

decline dramatically. 


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477 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8: 

Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument: 

Assets and Liabilities of Large Domestically Chartered Commercial Banks in the United States, 

seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/ 

releases/h8/data.htm) (accessed Oct. 1, 2009). 478 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8: 

Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument: 

Assets and Liabilities of Small Domestically Chartered Commercial Banks in the United States, 

seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/ 

releases/h8/data.htm) (accessed Oct. 1, 2009). 

FIGURE 33: LENDING BY THE LARGEST TARP-RECIPIENT BANKS 476

Indicator 

Most Recent Data (July 2009) 

(Dollars in 

millions) 

Percent Change 

Since June 2009 

Percent Change 

Since October 2008 

Total Loan Originations .............................................................. $204,847 ¥9 .7 ¥6 .11 

C&I New Commitments ............................................................... 32,169 ¥21 .5 ¥45 .4 

CRE New Commitments .............................................................. 3,444 ¥6 .96 ¥67 .3 

476 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary Analysis for July 2009 

(Oct. 2, 2009) (online at www.financialstability.gov/docs/surveys/July%202009%20Tables.pdf). While the Treasury report is based upon the 22 

largest CPP recipient banks, these data exclude two institutions—PNC and Wells Fargo—because they have made significant acquisitions since October 2008. 

• Loans and Leases Outstanding of Domestically-Chartered Banks. Weekly data from the Federal Reserve Board track 

fluctuations among different categories of bank assets and liabilities. Loans and leases outstanding for large and small domestic 

banks both fell last month.477 Total loans and leases outstanding 

at large banks have dropped by nearly 9 percent since last October.478 Also, commercial and industrial loans and leases outstanding at large banks have continued to decline, having decreased over 15 percent since the enactment of EESA. 

FIGURE 34: LOANS AND LEASES OUTSTANDING 

Indicator (dollars in billions) 

Current Level 

(as of 

9/23/09) 

Percent Change 

Since Last 

Report (8/26/09) 

Percent Change 

Since EESA 

Signed 

into Law 

(10/3/08) 

Large Domestic Banks—Total Loans and Leases ......................................... $3,692 ¥2.34 ¥8.92 

Small Domestic Banks—Total Loans and Leases ......................................... $2,474 ¥0.87 ¥1.73 

Large Domestic Banks—Commercial and Industrial Loans .......................... $683 ¥4.11 ¥15.14 

Small Domestic Banks—Revolving Consumer Credit .................................... $89 ¥3.71 9.01 

• Housing Indicators. Foreclosure filings fell slightly from July 

to August; however, foreclosures are still up by over 28 percent 

from October 2008 levels. Housing prices, as illustrated by the 

S&P/Case-Shiller Composite 20 Index, improved slightly in August, 

increasing by over 1.2 percent. The index remains down nearly 

nine percent since October 2008. 


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481Securities Industry and Financial Markets Association, US ABS Issuance (accessed Oct. 1, 

2009) (online at www.sifma.org/uploaded Files/Research/Statistics/SIFMAlUSABSIssuance.pdf). 484Treasury will release its next tranche report when transactions under the TARP reach $450 billion. 

FIGURE 35: HOUSING INDICATORS 

Indicator 

Most 

Recent 

Monthly 

Data 

Percent Change 

From Data Available 

at Time of Last 

Report (9/1/09) 

Percent 

Change Since 

October 2008 

Monthly Foreclosure Filings 479 ..................................................... 358,471 ¥.47 28.2 

Housing Prices—S&P/Case-Shiller Composite 20 Index 480 ........ 143.05 1.23 ¥8.9 

479 RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed Oct. 1, 

2009). The most recent data available is for August 2009. 480 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (Instrument: seasonally Adjusted Composite 20 Index) (online at 

www2.standardandpoors.com/spf/pdf/index/SAlCSHomePricelHistoryl092955.xls) (accessed Oct. 1, 2009). The most recent data available is 

for July 2009. 

• Asset-Backed Security Issuance. The ABS market slowed 

slightly in the third quarter with total issuance dropping by 1.25 

percent. However, certain segments of the securitization market 

continued to improve in the third quarter. Auto ABS and home equity ABS have increased by over 700 and 180 percent respectively 

since October 2008. Through the first three quarters of 2009 there 

have been over $118 billion in ABS issued compared with just 

under $140 billion issued for the whole of 2008.481

FIGURE 36: ASSET-BACKED SECURITY ISSUANCE 482

(Dollars in millions) 

Indicator 

Most recent 

quarterly 

data (3Q 

2009) 

Data available at 

time of last report 

(2Q 2009) 

Percent change 

from data available 

at time of last 

report (9/1/09) 

Auto ABS Issuance .......................................................................... $19,056 $12,026 .8 58 .5 

Credit Cards ABS Issuance ............................................................ $16,229.7 $19,158 .5 ¥15 .3 

Equipment ABS Issuance ................................................................ $578.8 $2,629 .1 ¥78 

Home Equity ABS Issuance ............................................................. $486.6 $707 .4 ¥31 .2 

Other ABS Issuance ........................................................................ $6,356.9 $6,444 ¥1 .35 

Student Loans ABS Issuance .......................................................... $5,292.7 $7,643 .8 ¥30 .8 

Total ABS Issuance ................................................................ 483 $48,000.7 $48,609 .6 ¥1 .25 

482 Securities Industry and Financial Markets Association, US ABS Issuance (accessed Oct. 1, 2009) (online at www.sifma.org/uploadedFiles/ 

Research/Statistics/SIFMAlUSABSIssuance.pdf). 483 $18.8 billion was requested under the Term Asset-Backed Securities Loan Facility during the third quarter of 2009. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Announcements (accessed August 5, 2008) (online at 

www.newyorkfed.org/markets/talflannouncements.html). 

I. Financial Update 

Each month since its April oversight report, the Panel has summarized the resources that the federal government has committed 

to economic stabilization. The following financial update provides: 

(1) an updated accounting of the TARP, including a tally of dividend income and repayments the program has received as of August 31, 2009; and (2) an update of the full federal resource commitment as of September 30, 2009. 

1. TARP 

a. Costs: Expenditures and Commitments 484

Treasury is currently committed to spend $531.3 billion of TARP 

funds through an array of programs used to purchase preferred 

shares in financial institutions, offer loans to small businesses and 


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485 EESA, as amended by the Helping Families Save Their Homes Act of 2009, limits Treasury 

to $698.7 billion in purchasing authority outstanding at any one time as calculated by the sum 

of the purchases prices of all troubled assets held by Treasury. Pub. L. No. 110–343, § 115(a)– 

(b), supra note 2; Helping Families Save Their Homes Act of 2009, Pub. L. No. 111–22, § 402(f) 

(reducing by $1.26 billion the authority for the TARP originally set under EESA at $700 billion). 486 U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for 

Period Ending September 30, 2009 (Oct. 4, 2009) (online at financialstability.gov/docs/transaction-reports/TransactionslReportl09-30-09.pdf) (hereinafter ‘‘September 30 TARP Transactions Report’’). 487 Id. 488 Id. 489See, for example, U.S. Department of the Treasury, Securities Purchase Agreement: Standard Terms (online at www.financialstability.gov/docs/CPP/spa.pdf). 490 U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 

1, 2009) (online at www.financialstability.gov/docs/dividends-interest-reports/ 

August2009lDividendsInterestReport.pdf); September 30 TARP Transactions Report, supra 

note 486. 491 U.S. Department of the Treasury, Treasury Announces Expiration of Guarantee Program 

for Money Market Funds (Sept. 18, 2009) (online at www.financialstability.gov/latest/ 

tgl09182009.html). 

automotive companies, and leverage Federal Reserve loans for facilities designed to restart secondary securitization markets.485 Of 

this total, $375.5 billion is currently outstanding under the $698.7 

billion limit for TARP expenditures set by EESA, leaving $323.2 

billion available for fulfillment of anticipated funding levels of existing programs and for funding new programs and initiatives. The 

$375.5 billion includes purchases of preferred and common shares, 

warrants and/or debt obligations under the CPP, TIP, SSFI Program, and AIFP; a $20 billion loan to TALF LLC, the special purpose vehicle (SPV) used to guarantee Federal Reserve TALF loans; 

and the $5 billion Citigroup asset guarantee, which was exchanged 

for a guarantee fee composed of additional preferred shares and 

warrants and has subsequently been exchanged for Trust Preferred 

shares.486 Additionally, Treasury has allocated $23.4 billion to the 

Home Affordable Modification Program, out of a projected total program level of $50 billion. 

b. Income: Dividends, Interest Payments, and CPP Repayments 

A total of 39 institutions have completely repaid their CPP preferred shares, 24 of which have also repurchased warrants for common shares that Treasury received in conjunction with its preferred stock investments. There were over $375 million in repayments made under the CPP during September.487 The seven banks 

that repaid were comparatively small with the largest repayment 

being for $125 million.488 In addition, Treasury is entitled to dividend payments on preferred shares that it has purchased, usually 

five percent per annum for the first five years and nine percent per 

annum thereafter.489 In total, Treasury has received approximately $86 billion in income from repayments, warrant repurchases, dividends, and interest payments deriving from TARP investments 490

and another $1.2 billion in participation fees from its Guarantee 

Program for Money Market Funds.491

c. Citigroup Exchange 

Treasury has invested a total of $49 billion in Citigroup through 

three separate programs: the CPP, TIP, and AGP. On June 9, 2009, 

Treasury agreed to terms to exchange its CPP preferred stock holdings for 7.7 billion shares of common stock priced at $3.25/share 


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492 Citigroup, Citi Announces Shareholder Approval of Increase in Authorized Common Shares, 

Paving Way to Complete Share Exchange (Sept. 3, 2009) (online at www.citibank.com/citi/press/ 

2009/090903a.htm). 493The Panel continues to account for Treasury’s original $25 billion CPP investment in 

Citigroup under the CPP until formal approval of the exchange by Citigroup’s shareholders and 

until Treasury specifies under which TARP program the common equity investment will be classified. 

(for a total value of $25 billion) and also agreed to convert the form 

of its TIP and AGP holdings. On July 23, 2009, Treasury, along 

with both public and private Citigroup debt holders, participated in 

a $58 billion exchange. The company received shareholder approval 

for the exchange on September 3, 2009.492 As of September 30, 

2009, Treasury’s common stock investment in Citigroup had a market value of $37.23 billion.493


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d. TARP Accounting 

FIGURE 37: TARP ACCOUNTING (AS OF SEPTEMBER 30, 2009) 

TARP Initiative 

(in billions) 

Anticipated 

funding 

Purchase 

price Repayments Net current investments 

Net 

available 

Total .................................................................. $531.3 $455.5 $72.8 $380.2 494 $318.5 

CPP .................................................................... $218 $204.6 $70.7 $134.2 495 $13.7 

TIP ..................................................................... $40 $40 $0 $40 $0 

SSFI Program ..................................................... $69.8 $69.8 $0 $69.8 $0 

AIFP ................................................................... $80 $80 $2.1 496 $75.4 497 $0 

AGP .................................................................... $5 $5 $0 $5 $0 

CAP .................................................................... TBD $0 N/A $0 N/A 

TALF ................................................................... $20 $20 $0 $20 $0 

PPIP ................................................................... $30 $9.2 N/A $9.2 $20.8 

Supplier Support Program ................................. 498 $3.5 $3.5 $0 $3.5 $0 

Unlocking SBA Lending ..................................... $15 $0 N/A $0 $15 

HAMP ................................................................. $50 499 $23.4 $0 $23.4 $26.6 

(Uncommitted) ................................................... $167.4 N/A N/A N/A 500 $242.7 

494 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion) and the difference between 

the total anticipated funding and the net current investment ($155.8 billion). 495 This figure excludes the repayment of $70.7 billion in CPP funds. Secretary Geithner has suggested that funds from CPP repurchases 

will be treated as uncommitted funds of the TARP overall upon return to the Treasury. 496 This figure reflects the amount invested in the AIFP as of August 18, 2009. This number consists of the original assistance amount of 

$80 billion less de-obligations ($2.4 billion) and repayments ($2.14 billion); $2.4 billion in apportioned funding has been de-obligated by 

Treasury ($1.91 billion of the available $3.8 billion of DIP financing to Chrysler and a $500 million loan facility dedicated to Chrysler that 

was unused). September 30 TARP Transactions Report, supra note 486. 497 Treasury has indicated that it will not provide additional assistance to GM and Chrysler through the AIFP. Congressional Oversight 

Panel, September Oversight Report: The Use of TARP Funds in Support and Reorganization of the Domestic Automotive Industry (Sept. 9, 2009) 

(online at cop.senate.gov/documents/cop-090909-report.pdf. The Panel therefore considers the repaid and de-obligated AIFP funds to be uncommitted TARP funds. 498 On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5 billion, this reduced GM’s por- tion from $3.5 billion to $2.5 billion and Chrysler’s portion from $1.5 billion to $1 billion. September 30 Transactions Report, supra note 486. 499 This figure reflects the total of all the caps set on payments to each mortgage servicer. September 30 Transactions Report, supra note 

486. 500 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion), the repayments ($72.8 bil- lion), and the de-obligated portion of the AIFP ($2.4 billion). Treasury provided de-obligation information on August 18, 2009, in response to 

specific inquiries relating to the Panel’s oversight of the AIFP. Specifically, this information denoted allocated funds that had since been de-obligated. 

FIGURE 38: TARP REPAYMENTS AND INCOME 

TARP initiatives 

(in billions) 

Repayments 

(as of 9/30/09) 

Dividends 501

(as of 8/31/09) 

Interest 502

(as of 8/31/09) 

Warrant repurchases 503

(as of 9/30/09) 

Total 

Total .............................. $72.8 $9.74 $0.2 $2.9 $85.9 

CPP ................................ 70.7 7.3 N/A 2.9 80.9 

TIP ................................. 0 1.8 N/A 0 1.8 

AIFP ............................... 2.1 0.47 .2 N/A 2.77 

ASSP .............................. N/A N/A .004 N/A .004 

AGP 504 ........................... 0 0.17 N/A 0 0.17 

Bank of America Guarantee ......................... ¥ ¥ ¥ ¥ 505 .276 

501 U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online at 

www.financialstability.gov/docs/dividends-interest-reports/August2009lDividendsInterestReport.pdf). 502 U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online at 

www.financialstability.gov/docs/dividends-interest-reports/August2009lDividendsInterestReport.pdf). 503 This number includes $1.6 million in proceeds from the repurchase of preferred shares by privately-held financial institutions. For 

privately-held financial institutions that elect to participate in the CPP, Treasury receives and immediately exercises warrants to purchase additional shares of preferred stock. September 30 Transactions Report, supra note 486. 504 Citigroup is the lone participant in the AGP. 


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505 On September 21, 2009 Bank of America announced the termination of its Asset Guarantee term sheet with the Treasury Department.

Bank of America agreed to pay a total of $425 million to Treasury ($276 million), the Federal Reserve ($57 million), and the FDIC ($92 million) to terminate a provisional agreement to guarantee about $118 billion (later downsized to $83 billion) of Bank of America assets. Bank 

of America, Termination Agreement (Sep. 21, 2009) (online at online.wsj.com/public/resources/documents/bofa092109.pdf). Because Treasury’s 

share of the termination fee derives from the never formally consummated provisional agreement and the components of the termination fee 

do not match this figure’s repayment and income categories, we do not apportion the components here. Pursuant to the termination agreement, the government made retrospective valuations for Treasury’s portion of the fee covering the four months when the provisional agreement 

was in place of: (1) ‘‘foregone dividends’’ ($52 million) on the preferred stock that would have been paid by Bank of America to Treasury had 

the federal government actually made the preferred stock investment contemplated by the provisional agreement; (2) a ‘‘pro-rated premium,’’ 

($119 million) representing the economic value to Bank of America of Treasury’s never consummated preferred stock investment; and (3) a 

‘‘warrants valuations,’’ ($105 million) representing the economic value of the warrants purchase contemplated by the provisional agreement. 

Id. The FDIC’s portion of the termination fee was determined by the same retrospective valuation methodology, but was proportionally smaller 

than Treasury’s portion given the FDIC’s more limited investment under the provisional agreement. Id. (calculating FDIC to receive $17 million 

for foregone dividends, $40 million for pro-rated premium for preferred stock, and $35 million for warrants investment). The Federal Reserve’s 

$57 million portion of the termination fee is entirely composed on a pro-rated portion of the commitment fee contemplated by the provisional 

agreement ($34 million) plus expenses ($23 million). Id. 

Rate of Return 

As of September 30, 2009, the average internal rate of return for 

all financial institutions that participated in the CPP and fully repaid the U.S. government (including preferred shares, dividends, 

and warrants) is 17.2 percent. The internal rate of return is the 

annualized effective compounded return rate that can be earned on 

invested capital. In the case of the CAP program under TARP the 

return on investment includes dividends and warrants. 

2. Other Financial Stability Efforts 

Federal Reserve, FDIC, and Other Programs 

In addition to the direct expenditures Treasury has undertaken 

through TARP, the federal government has engaged in a much 

broader program directed at stabilizing the U.S. financial system. 

Many of these initiatives explicitly augment funds allocated by 

Treasury under specific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or operate in tandem 

with Treasury programs, such as the interaction between PPIP and 

TALF. Other programs, like the Federal Reserve’s extension of 

credit through its section 13(3) facilities and SPVs and the FDIC’s 

Temporary Liquidity Guarantee Program, operate independent of 

TARP. As shown in the following table, the Federal Reserve has 

begun publishing its interest earnings on its financial stability initiatives. 

FIGURE 39: FEDERAL RESERVE CREDIT EXPANSION PROGRAMS (AS OF SEPTEMBER 2009) 506

(Dollars in millions) 

Federal Reserve Credit Expansion Programs 

Interest Earned 

Jan. 1–July 30, 

2009 

Federal agency debt securities ............................................................................................................................ $614 

Mortgage-backed securities ................................................................................................................................. 4,968 

Term auction credit .............................................................................................................................................. 570 

Primary credit ....................................................................................................................................................... 507 134 

Primary dealer and other broker-dealer credit .................................................................................................... 37 

Mutual Fund Liquidity Facility ............................................................................................................................. 70 

Central bank liquidity swaps ............................................................................................................................... 1,880 

Outstanding principal amount of loan extended to Maiden Lane LLC ............................................................... 102 

Commercial Paper Funding Facility ..................................................................................................................... 546 

Total ............................................................................................................................................................. 8,524 

506 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances (Oct. 1, 

2009) (accessed Oct. 1, 2009) (online at www.federalreserve.gov/releases/h41/20091001/ (hereinafter ‘‘October 1 Fed Balance Sheet’’). 507 This figure includes interest earned on primary, secondary and seasonal credit facilities. 


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3. Total Financial Stability Resources (as of September 30, 

2009) 

Beginning in its April report, the Panel broadly classified the resources that the federal government has devoted to stabilizing the 

economy through a myriad of new programs and initiatives as outlays, loans, or guarantees. Although the Panel calculates the total 

value of these resources at over $3.2 trillion, this would translate 

into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets 

do not appreciate; (2) no dividends are received, no warrants are 

exercised, and no TARP funds are repaid; (3) all loans default and 

are written off; and (4) all guarantees are exercised and subsequently written off. 

With respect to the FDIC and Federal Reserve programs, the 

risk of loss varies significantly across the programs considered 

here, as do the mechanisms providing protection for the taxpayer 

against such risk. The FDIC, for example, assesses a premium of 

up to 100 basis points on Temporary Liquidity Guarantee Program 

(TLGP) debt guarantees. The premiums are pooled and reserved to 

offset losses incurred by the exercise of the guarantees and are calibrated to be sufficient to cover anticipated losses and thus remove 

any downside risk to the taxpayer. In contrast, the Federal Reserve’s liquidity programs are generally available only to borrowers 

with good credit, and the loans are over-collateralized and with recourse to other assets of the borrower. If the assets securing a Federal Reserve loan realize a decline in value greater than the ‘‘haircut,’’ the Federal Reserve is able to demand more collateral from 

the borrower. Similarly, should a borrower default on a recourse 

loan, the Federal Reserve can turn to the borrower’s other assets 

to make the Federal Reserve whole. In this way, the risk to the 

taxpayer on recourse loans only materializes if the borrower enters 

bankruptcy. The only loans currently ‘‘underwater’’—where the outstanding principal amount exceeds the current market value of the 

collateral—are two of the three non-recourse loans to the Maiden 

Lane SPVs (used to purchase Bear Stearns and AIG assets). 

FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 30, 2009) 

[Dollars in billions] 

Program Treasury 

(TARP) 

Federal 

reserve FDIC Total 

Total ............................................................................................... $698.7 $1,658 $846.7 iii$3,203.4 

Outlaysi ................................................................................. 387.3 0 47.7 435 

Loans ..................................................................................... 43.7 1,428.2 0 1,471.9 

Guaranteesii ......................................................................... 25 229.8 799 1,053.8 

Uncommitted TARP Funds .................................................... 242.7 0 0 242.7 

AIG .................................................................................................. iv 69.8 96.2 0 166 

Outlays .................................................................................. 69.8 0 0 69.8 

Loans ..................................................................................... 0 v 96.2 0 96.2 

Guarantees ............................................................................ 0 0 0 0 

Bank of America ............................................................................ 45 0 0 45 

Outlays .................................................................................. vii 45 0 0 45 

Loans ..................................................................................... 0 0 0 0 

Guaranteesvi ......................................................................... 0 0 0 0 

Citigroup ........................................................................................ 50 229.8 10 289.8 

Outlays .................................................................................. viii 45 0 0 45 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ ix 5 x 229.8 xi 10 244.8 

Capital Purchase Program (Other) ................................................ 97.3 0 0 97.3 


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FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 30, 

2009)—Continued 

[Dollars in billions] 

Program Treasury 

(TARP) 

Federal 

reserve FDIC Total 

Outlays .................................................................................. xii 97.3 0 0 97.3 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ 0 0 0 0 

Capital Assistance Program .......................................................... TBD 0 0 xv TBD 

TALF ....................................................................................... 20 180 0 200 

Outlays .................................................................................. 0 0 0 0 

Loans ..................................................................................... 0 xiv180 0 180 

Guarantees ............................................................................ xiii 20 0 0 20 

PPIP (Loans)xvi .............................................................................. 0 0 0 0 

Outlays .................................................................................. 0 0 0 0 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ 0 0 0 0 

PPIP (Securities) ............................................................................ xvii 30 0 0 30 

Outlays .................................................................................. 10 0 0 10 

Loans ..................................................................................... 20 0 0 20 

Guarantees ............................................................................ 0 0 0 0 

Home Affordable Modification Program ......................................... 50 0 0 xix 50 

Outlays .................................................................................. xviii 50 0 0 50 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ 0 0 0 0 

Automotive Industry Financing Program ....................................... 75.4 0 0 75.4 

Outlays .................................................................................. xx 55.2 0 0 55.2 

Loans ..................................................................................... 20.2 0 0 20.2 

Guarantees ............................................................................ 0 0 0 0 

Auto Supplier Support Program ..................................................... 3.5 0 0 3.5 

Outlays .................................................................................. 0 0 0 0 

Loans ..................................................................................... xxi 3.5 0 0 3.5 

Guarantees ............................................................................ 0 0 0 0 

Unlocking SBA Lending .................................................................. 15 0 0 15 

Outlays .................................................................................. xxii 15 0 0 15 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ 0 0 0 0 

Temporary Liquidity Guarantee Program ....................................... 0 0 789 789 

Outlays .................................................................................. 0 0 0 0 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ 0 0 xxiii 789 789 

Deposit Insurance Fund ................................................................. 0 0 47.7 47.7 

Outlays .................................................................................. 0 0 xxiv 47.7 47.7 

Loans ..................................................................................... 0 0 0 0 

Guarantees ............................................................................ 0 0 0 0 

Other Federal Reserve Credit Expansion ....................................... 0 1,152 G19 1,152 

Outlays .................................................................................. 0 0 0 0 

Loans ..................................................................................... 0 xxv 1,152 0 1,152 

Guarantees ............................................................................ 0 0 0 0 

Uncommitted TARP Funds ............................................................. 242.7 0 0 242.7 

iThe term ‘‘outlays’’ is used here to describe the use of Treasury funds under the TARP, which are broadly classifiable as purchases of 

debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). The outlays figures are based on: (1) Treasury’s actual 

reported expenditures; and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to 

further change. Outlays as used here represent investments and assets purchases and commitments to make investments and asset pur- chases and are not the same as budget outlays, which under section 123 of EESA are recorded on a ‘‘credit reform’’ basis. iiWhile many of the guarantees may never be exercised or exercised only partially, the guarantee figures included here represent the fed- eral government’s greatest possible financial exposure. iiiThis figure is roughly comparable to the $3.0 trillion current balance of financial system support reported by SIGTARP in its July report. 

SIGTARP, Quarterly Report to Congress, at 138 (July 21, 2009) (online at 

www.sigtarp.gov/reports/congress/2009/July2009lQuarterlylReportltolCongress.pdf). However, the Panel has sought to capture additional 

anticipated exposure and thus employs a different methodology than SIGTARP. iv This number includes investments under the SSFI Program: a $40 billion investment made on November 25, 2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). September 30 TARP Transactions Report, supra note 486. 


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v This number represents the full $60 billion that is available to AIG through its revolving credit facility with the Federal Reserve ($39.1 

billion had been drawn down as of September 2, 2009) and the outstanding principle of the loans extended to the Maiden Lane II and III 

SPVs to buy AIG assets (as of September 24, 2009, $16.6 billion and $19.6 billion respectively). October 1 Fed Balance Sheet, supra note 

441. Income from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers’ exposure to losses over time. 

Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance 

Sheet, at 16 (Aug. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200909.pdf ) (hereinafter ‘‘Fed September 

2009 Credit and Liquidity Report’’). vi Beginning in our July report, the Panel excluded from its accounting the $118 billion asset guarantee agreement among Bank of America, 

the Federal Reserve, Treasury, and the FDIC based on testimony from Federal Reserve Chairman that the agreement was never signed and 

was never signed or consummated and the absence of the guarantee from Treasury’s TARP accounting. House Committee on Oversight and 

Government Reform, Testimony of Federal Reserve Chairman Ben S. Bernanke, Acquisition of Merrill Lynch by Bank of America, at 3 (June 25, 

2009) (online at oversight.house.gov/documents/20090624185603.pdf) (‘‘The ring-fence arrangement has not been consummated, and Bank of 

America now believes that, in light of the general improvement in the markets, this protection is no longer needed.’’); Congressional Oversight 

Panel, July Oversight Report: TARP Repayments, Including the Repurchase of Stock Warrants, at 85 (July 7, 2009) (online at 

cop.senate.gov/documents/cop–071009–report.pdf). On September 21, 2009 Bank of America announced that it had reached an agreement 

with Treasury to resolve the matter of the implied guarantee by paying $425 million to terminate the term sheet. Bank of America, Bank of 

America Terminates Asset Guarantee Term Sheet (Sept. 21, 2009) (online at newsroom.bankofamerica.com/index.php?s=43&item=8536). For 

further discussion of the Panel’s approach to classifying this agreement, see Congressional Oversight Panel, September Oversight Report: The 

Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry, at 209 (Sept. 9, 2009) (online at 

cop.senate.gov/documents/cop–090909–report.pdf). vii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $15 billion investment made by Treasury on October 

28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9, 2009 also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16, 2009. viii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $25 billion investment made by Treasury under the 

CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under TIP on December 31, 2008. ix U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at 

www.treasury.gov/press/releases/reports/cititermsheet—112308.pdf) (hereinafter ‘‘Citigroup Asset Guarantee’’) (granting a 90 percent federal guarantee on all losses over $29 billion after existing reserves, of a $306 billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at 

www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301 billion). x Citigroup Asset Guarantee, supra note ix.. xi Citigroup Asset Guarantee, supra note ix. xiiThis figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50 billion investment in Citigroup 

($25 billion) and Bank of America ($25 billion) identified above, and the $70.7 billion in repayments that are reflected as uncommitted TARP 

funds. This figure does not account for future repayments of CPP investments, nor does it account for dividend payments from CPP investments. xiiiThis figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. September 30 TARP Transactions Report, supra note 

486. Consistent with the analysis in our August report, only $43 billion dollars has been lent through TALF as of September 23 2009, the 

Panel continues to predict that TALF subscriptions are unlikely to surpass the $200 billion currently available by year’s end. Congressional 

Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 10–22 (August 11, 2009) (discussion of what constitutes 

a ‘‘troubled asset’’) (online at cop.senate.gov/documents/cop–081109–report.pdf). xiv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan (Feb.10, 2009) (online at 

www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treas- ury is responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans, the Federal Reserve Board’s maximum potential exposure under the TALF is $180 billion. xv The CAP was announced on February 25, 2009 and as of yet has not been utilized. The Panel will continue to classify the CAP as dormant until a transaction is completed and reported as part of the program. xvi It now appears unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a joint 

Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance Corporation, FDIC Statement on the 

Status of the Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation, Legacy Loans Program—Test of Funding Mechanism (July 31, 2009) (online at 

www.fdic.gov/news/news/press/2009/pr09131.html). The sales described in these statements do not involve any Treasury participation, and 

FDIC activity is accounted for here as a component of the FDIC’s Deposit Insurance Fund outlays. xvii U.S. Department of the Treasury, Joint Statement By Secretary of the Treasury Timothy F. Geithner, Chairman of the Board Of Governors 

Of The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset Pro- gram (July 8, 2009) (online at www.financialstability.gov/latest/tgl07082009.html) (‘‘Treasury will invest up to $30 billion of equity and debt 

in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities.’’); U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4–5 (Mar. 23, 2009) (online at 

www.treas.gov/press/releases/reports/ppiplfactlsheet.pdf) (hereinafter ‘‘Treasury PPIP Fact Sheet’’) (outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a 

$1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). In the absence of Treasury guidance, the Panel had previously adopted a 1:1.5 ratio between Treasury equity co-investments and loans at a 1:2 ratio under the program, reflecting an assumption 

that Treasury would frequently but not always exercise its discretion to provide additional financing. However, Treasury’s announcement of the initial round of completed PPIP legacy securities agreements totaling $1.13 billion suggests that Treasury may routinely exercise its discretion to provide $2 of financing for every $1 of equity. See U.S. Department of the Treasury, Treasury Department Announces Initial Closings of Legacy Securities Public-Private Investment Funds (Sept. 30, 2009) (online at www.ustreas.gov/press/releases/tg304.htm) (indicating that investors 

would be eligible for $2.26 billion of financing on their investments and that total Treasury financing would be $20 billion on $10 billion on 

investors’ equity investments). xviii U.S. Government Accountability Office, Troubled Asset Relief Program: June 2009 Status of Efforts to Address Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/new.items/d09658.pdf) (hereinafter ‘‘GAO June 29 Status Report’’). Of the $50 billion in announced TARP funding for this program, $23.4 billion has been allocated as of August 28, 2009, and no funds 

have yet been disbursed. September 30 TARP Transactions Report, supra note 486. xix Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the Federal Housing Finance 

Housing Agency on September 7, 2009, will also contribute up to $25 billion to the Making Home Affordable Program, of which the HAMP is a 

key component. MHAP Update, supra note 69. U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description 

(Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/housinglfactlsheet.pdf). xx September 30 TARP Transactions Report, supra note 486. A substantial portion of the total $80 billion in loans extended under the AIFP 

have since been converted to common equity and preferred shares in restructured companies. $20.2 billion has been retained as first lien 

debt (with $7.7 billion committed to GM and $12.5 billion to Chrysler). This figure represents Treasury’s current obligation under the AIFP. 

There have been $2.1 billion in repayments and $2.4 billion in de-obligated funds under the AIFP. Treasury De-obligation Document. See also 

GAO June 29 Status Report, supra note xviii at 43. xxi September 30 TARP Transactions Report, supra note 486. xxiiTreasury PPIP Fact Sheet, supra note xvii. 


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xxiiiThis figure represents the current maximum aggregate debt guarantees that could be made under the program, which, in turn, is a

function of the number and size of individual financial institutions participating. $ 307 billion of debt subject to the guarantee has been 

issued to date, which represents about 40 percent of the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt 

Issuance Under the Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Aug. 31, 2009) (online at 

www.fdic.gov/regulations/resources/TLGP/totallissuance8–09.html) (updated Sep. 24, 2009). The FDIC has collected $9.35 billion in fees and 

surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly Reports on 

Debt Issuance Under the Temporary Liquidity Guarantee Program (Aug. 31, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) 

(updated Sept. 24, 2009). xxiv This figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank failures in the third and fourth 

quarters of 2008 and the first and second quarters of 2009. Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to 

the Board: DIF Income Statement (Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfolreportl4qtrl08/income.html); 

Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008) (online 

at www.fdic.gov/about/strategic/corporate/cfolreportl3rdqtrl08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (First Quarter 2009) (online at 

www.fdic.gov/about/strategic/corporate/cfolreportl1stqtrl09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s 

(CFO) Report to the Board: DIF Income Statement (Second Quarter 2009) (online at 

www.fdic.gov/about/strategic/corporate/cfolreportl2ndqtrl09/income.html). This figure includes the FDIC’s estimates of its future losses 

under loss share agreements that it has entered into with banks acquiring assets of insolvent banks during these three quarters. Under a 

loss sharing agreement, as a condition of an acquiring bank’s agreement to purchase the assets of an insolvent bank, the FDIC typically 

agrees to cover 80 percent of an acquiring bank’s future losses on an initial portion of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty 

Bank, Austin, Texas, FDIC and Compass Bank at 65–66 (Aug. 21, 2009) (online at 

www.fdic.gov/bank/individual/failed/guaranty-txlplandlalwladdendum.pdf).In information provided to Panel staff, the FDIC disclosed 

that there were approximately $82 billion in assets covered under loss-share agreements as of September 4, 2009. Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $36.2 billion. Since there is a published loss estimate for these agreements, 

the Panel continues to reflect them as outlays rather than as guarantees. By comparison, the TLGP does not have published loss-estimates 

and therefore remains classified as guarantee program. xxv This figure is derived from adding the total credit the Federal Reserve Board has extended as of August 27, 2009 through the Term 

Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer Credit Facility (Primary Dealer and Other Broker-Dealer 

Credit), Central Bank Liquidity Swaps, loans outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt Securities (Federal Agency Debt Securities), Mortgage Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Commercial Paper Funding Facility LLC. Fed Balance Sheet October 1, supra note 506. The level of Federal Reserve lending under these facilities 

will fluctuate in response to market conditions. Fed Report on Credit and Liquidity, supra note v. 


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SECTION FIVE: OVERSIGHT ACTIVITIES 

The Congressional Oversight Panel was established as part of 

the Emergency Economic Stabilization Act (EESA) and formed on 

November 26, 2008. Since then, the Panel has produced ten oversight reports, as well as a special report on regulatory reform, 

issued on January 29, 2009, and a special report on farm credit, 

issued on July 21, 2009. Since the release of the Panel’s September 

oversight report on the use of TARP funds in support and reorganization of the domestic automotive industry, the following developments pertaining to the Panel’s oversight of the Troubled Asset Relief Program (TARP) took place: 

• The Panel held a hearing in Washington, D.C. with Secretary 

Geithner on September 10. This was Secretary Geithner’s second 

appearance before the Panel. Secretary Geithner answered questions regarding the current state of the economy and the progress 

TARP has made during the last year in stabilizing the financial 

markets. During the hearing, Secretary Geithner promised Panel 

Members that he would provide additional information regarding 

several TARP programs and would continue to appear before the 

Panel in an open public hearing format at regular intervals. 

• The Panel held a field hearing in Philadelphia, Pennsylvania 

on September 24, to examine foreclosure mitigation efforts under 

TARP. The Panel heard testimony from representatives of Treasury, the GSEs, community housing organizations, loan servicers, 

an economist, and Judge Annette M. Rizzo of the Philadelphia 

Court of Common Pleas. The testimony revealed the successes and 

challenges of various foreclosure mitigation programs. The hearing 

played an important role in the Panel’s evaluation of TARP foreclosure mitigation efforts, as reflected in the October oversight report. 

• On September 24, 2009, Treasury Assistant for Financial Stability Secretary Herbert Allison testified before the Senate Banking 

Committee regarding TARP’s impact during its first year. Assistant 

Secretary Allison discussed briefly the status and impact of each of 

the major TARP initiatives and indicated Treasury’s intention to 

wind-down each program on a case-by-case basis. During questions 

from the committee, Assistant Secretary Allison declined to indicate whether Treasury would extend TARP beyond December 31, 

2009. 

• Chair Elizabeth Warren, on behalf of the Panel, appeared before the Senate Banking Committee on September 24, 2009. Chair 

Warren testified regarding the positive effects and shortcomings of 

TARP during its first year of existence. 

Upcoming Reports and Hearings 

The Panel will release its next oversight report in November. The 

report will provide an updated review of TARP activities and continue to assess the program’s overall effectiveness. The report will 

also examine the Treasury guarantees of bank assets. 

The Panel will hold a hearing with Assistant Secretary Allison 

on October 22, 2009. The Assistant Secretary last testified before 

the Panel on June 24, 2009. 


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SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT 

PANEL 

In response to the escalating crisis, on October 3, 2008, Congress 

provided Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and promote 

economic growth. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement a Troubled Asset 

Relief Program. At the same time, Congress created the Congressional Oversight Panel to ‘‘review the current state of financial 

markets and the regulatory system.’’ The Panel is empowered to 

hold hearings, review official data, and write reports on actions 

taken by Treasury and financial institutions and their effect on the 

economy. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure 

mitigation efforts, and guarantee that Treasury’s actions are in the 

best interests of the American people. In addition, Congress instructed the Panel to produce a special report on regulatory reform 

that analyzes ‘‘the current state of the regulatory system and its 

effectiveness at overseeing the participants in the financial system 

and protecting consumers.’’ The Panel issued this report in January 

2009. Congress subsequently expanded the Panel’s mandate by directing it to produce a special report on the availability of credit 

in the agricultural sector. The report was issued on July 21, 2009. 

On November 14, 2008, Senate Majority Leader Harry Reid and 

the Speaker of the House Nancy Pelosi appointed Richard H. 

Neiman, Superintendent of Banks for the State of New York, 

Damon Silvers, Associate General Counsel of the American Federation of Labor and Congress of Industrial Organizations (AFL–CIO), 

and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard 

Law School to the Panel. With the appointment on November 19, 

2008 of Congressman Jeb Hensarling to the Panel by House Minority Leader John Boehner, the Panel had a quorum and met for the 

first time on November 26, 2008, electing Professor Warren as its 

chair. On December 16, 2008, Senate Minority Leader Mitch 

McConnell named Senator John E. Sununu to the Panel. Effective 

August 10, 2009, Senator Sununu resigned from the Panel and on 

August 20, Senator McConnell announced the appointment of Paul 

Atkins, former Commissioner of the U.S. Securities and Exchange 

Commission, to fill the vacant seat. 

ACKNOWLEDGEMENTS 

The Panel thanks Adam J. Levitin, Associate Professor of Law at 

the Georgetown University Law Center, for the significant contribution he made to this report. The Panel also expresses its appreciation to Alan M. White, Assistant Professor of Law, Valparaiso 

University School of Law, for his cost benefit analysis of the federal 

foreclosure mitigation initiative. 


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APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN 

TO SECRETARY TIMOTHY GEITHNER RE: THE STRESS 

TESTS, DATED SEPTEMBER 15, 2009 


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