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44–905 PDF 2008

A REVIEW OF MORTGAGE SERVICING 

PRACTICES AND FORECLOSURE MITIGATION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 25, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–132 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 25, 2008 ..................................................................................................... 1 

Appendix: 

July 25, 2008 ..................................................................................................... 49 

WITNESSES 

FRIDAY, JULY 25, 2008 

Barber, James B., Chairman and CEO, Acacia Federal Savings Bank, on 

behalf of the American Bankers Association (ABA) .......................................... 14 

Bowdler, Janis, Associate Director, Wealth-Building Policy Project, National 

Council of La Raza ............................................................................................... 15 

Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage Servicing Division ........................................................................................................ 19 

Gordon, Julia, Policy Counsel, Center for Responsible Lending .......................... 23 

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

Bank of America ................................................................................................... 17 

Kittle, David G., CMB, Chairman-Elect, Mortgage Bankers Association 

(MBA) .................................................................................................................... 12 

Schwartz, Faith, Executive Director, HOPE NOW Alliance ................................ 21 

Shelton, Hilary O., Director, NAACP Washington Bureau .................................. 9 

APPENDIX 

Prepared statements: 

Barber, James B. .............................................................................................. 50 

Bowdler, Janis .................................................................................................. 58 

Coffin, Mary ...................................................................................................... 65 

Gordon, Julia .................................................................................................... 69 

Gross, Michael .................................................................................................. 85 

Kittle, David G. ................................................................................................. 93 

Schwartz, Faith ................................................................................................ 107 

Shelton, Hilary O. ............................................................................................. 136 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Written statement of Mary Harman, Chair, Community Services Committee, California Association of Mortgage Brokers .................................. 140 

Waters, Hon. Maxine: 

New York Times article entitled, ‘‘Dubious Fees Hit Borrowers in Foreclosures,’’ dated November 6, 2007 .............................................................. 145 

New York Times article entitled, ‘‘Struggling, but Staying in a Home,’’ 

dated July 20, 2008 ....................................................................................... 149 

(1) 

A REVIEW OF MORTGAGE SERVICING 

PRACTICES AND FORECLOSURE MITIGATION 

Friday, July 25, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Watt, Sherman, Miller of North Carolina, Cleaver, and Speier. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will come to order. 

I must tell you that I think this is as important a public hearing 

as I have attended—much less presided over—in 28 years. We are 

in the midst—and, obviously, the time constraints are going to be 

relaxed both for us and for yourselves because we are talking very 

serious business here. 

We are talking about something that is very important in terms 

of social fairness and the impact on all Americans, including predominantly lower-income Americans and the subset of people in the 

minority communities, because of the way these loans have gone 

forward. We are talking about the single most important thing we 

can do to help deal with the economic doldrums of this country. 

I think if there were to be an announcement at some point that 

the number of foreclosures on residential property was going to 

substantially decline from what is going to be expected, that would 

be about as good a piece of economic news as the country could get, 

from the standpoint of both sides of the aisle. 

Sometimes, we are told you have a conflict between social and 

economic equity and what is good for the overall economy. Today, 

we have a total reinforcement. Reducing foreclosures is an essential 

matter of justice, and it an essential matter of trying to deal with 

the economic situation. 

Now the House, as you know, has passed a bill which we know 

that the Senate is going to pass promptly; and I believe that by 

next week, you will see the picture that I think many people had 

not expected to see in which—among the people standing behind 

George Bush will be myself and my colleague from California. 

It is a very important issue for the country, and this hearing has 

one central purpose. We have passed a bill in consultation with 

people in the industry. Some seem to think that was a bad idea. 

I am going to take a little time. 

2 

We had, I think, four potential choices in dealing with trying to 

reduce foreclosures. 

The first choice was to do nothing. Some have advocated that. 

Let the market do it. 

A second choice would have been an effort legislatively to say no. 

Some advocate that. I think it has constitutional problems. I think 

it also has problems of how you discriminate between which foreclosures should go forward and which don’t. 

A third choice would be substantial Federal funding to defray the 

costs that people could make. That has serious obstacles, given the 

deficit, and it couldn’t get anywhere politically. 

That left us with one option that we have chosen: Providing inducements to those who hold the loans, who have the ability to say 

that we are going to restructure or not, to, in fact, help diminish 

foreclosures by reducing the terms so that people can pay them. 

And it is obviously voluntary. 

We have passed legislation that does that, we think, as well as 

we could. Actually, the House bill, I thought that it was somewhat 

better than the Senate bill, but we needed to get a bill passed. 

I want to make two points: 

First of all, because the Senate wanted to minimize the budgetary cost, they adopted some measures, and we were very happy 

that we finally got this done. But the Congressional Budget Office 

anticipated that under our House version, 500,000 foreclosures 

would have been avoided, and under the Senate version, 400,000 

foreclosures would have been avoided. But we are not required to 

live up to that. If you are eager to participate, we can pump that 

up. 

There is one particular thing I want to be very explicit about. I 

even asked my staff, which has done a magnificent job on this. 

I think the legislation that was just passed was excellent legislation, and it was unusual in one sense: It was written by the staff 

of this committee and the subcommittees, and it was written by the 

staff of the Ways and Means Committee. 

While we had some cooperation from the Administration, unlike 

most major pieces of legislation, it didn’t come up from them to us. 

It was drafted by the people you know and have worked with, with 

your cooperation. And I am very proud of that. But I asked them 

to make it very clear. 

The Hope for Homeowners program in our version of the House 

was going to be effective on enactment. For budgetary reasons, the 

Senate insisted that it be effective October 1st. Ironically, you 

heard Members of the Senate complaining of tactics that were holding this up, so many foreclosures happening every day, move quickly. But, in fact, given the way the Senate structured this technically, that didn’t make any difference, because it doesn’t take effect until October 1st. 

But nobody requires those of you who are servicers to foreclose. 

You know, we talk about how no one wants to be the last person 

to die in a war, and no one wants to be the first person to die in 

a war. But there is a particular tragic irony if someone dies after 

the war has kind of formally ended. And I want to urge those of 

you here and other servicers not to let people be victims of a budgetary maneuver that we took here. 

3 

You know this is going to be the law. I would hope that no one 

would be foreclosed upon between now and October 1st who would 

have qualified for this program had the effective date been immediate, and that is within your power to do. You can show some forbearance. 

October 1st is coming. Begin the planning. Begin talking with 

people. But I think it would be a shame and an embarrassment to 

all of us if people were to lose their homes and the neighborhood 

deterioration were to be advanced and the economy would suffer 

because, to satisfy CBO and other rules, we delayed this a couple 

of months. I earnestly hope we can have that kind of cooperation. 

The other point is, and now we’re here, we have done the best 

we could think of, the best anyone told us, to induce the holders 

of the loans, the servicers to take action to reduce foreclosures. We 

need you to tell us if you are going to take advantage of this. If 

you are not, why? 

I do want to make this one point: I hope that there will be efforts 

to take advantage of it. I believe there will be. I know many institutions want to do this. 

One of the things we have been told is look, there is this problem 

because the people who service the loans are not the people who 

own the loans. And there is this split between the people who have, 

we are told, the authority to make the decision to reduce, and the 

beneficial owners on whose behalf they are acting, or you can’t expect the beneficial owners to do this, people who own pieces of 

pools. 

I want to make something very clear, and this is something Ms. 

Waters and I have talked about a great deal, and she has addressed it in a separate piece of legislation that she has pending. 

If it turns out that our having done the best we could in consultation with these servicers to provide a set of incentives to reduce foreclosure, if it turns out that the structure of the servicing 

industry, the split between the decisionmakers and the ultimate 

beneficiaries is a significant interference with our taking advantage 

of this, then I am determined to change that structure. If we cannot get significant participation here because the structure of the 

industry is such that the servicers can’t do what they tell us they 

would like to do, then count on myself and other members of this 

committee—and I believe we will have a responsive Congress, we 

will change that situation. 

If it is the case that the servicers cannot respond appropriately, 

then that institution of a servicer acting on behalf of ultimate investors but with the only one decisionmaker, then that can’t continue. 

I am not looking to make that kind of disruption, but that is one 

of the things that is at stake here. We could not, in good conscience, in our responsibilities, allow that structure to continue. 

So we are going to proceed to the hearing after my two colleagues make their statements. 

We want you to tell us—we really want you to tell us, those of 

you who represent servicers, that you are going to be able to take 

full advantage of this. I am not saying we are solving everything. 

There are no silver bullets. I am not the Lone Ranger. But we have 

4 

done the best we could, based on conversations with you, to set this 

structure up. 

If there are obstacles to your taking advantage of it, tell us, and 

we will do what we can to remove the obstacles. If people tell us 

that it is just inherent in the nature of this industry that servicers 

simply cannot, not being the ultimate owners, do what we ask 

them to do, then by next year we will have to work on abolishing 

that form and putting something that has an ability to respond to 

these important social and economic problems in its place. 

I now recognize the gentlewoman from California, who has been 

a driving force in all this and who was one of the earliest to notice 

the centrality of the question of the servicers, the gentlewoman 

from California. 

Ms. WATERS. Thank you very much, Mr. Chairman, for this hearing today. But I also want to thank you for paying so much attention to this particular aspect of the subprime crisis in which we are 

involved. 

I cannot say enough, however, about the accomplishments that 

you are responsible for as we pass the tremendous legislation in 

this House that will go a long way toward helping the many American families who find themselves in foreclosure. It is absolutely 

amazing, when I think about it, that in that legislation not only did 

you have the Housing Trust Fund which you have worked so hard 

on that is going to go a long way toward expanding both ownership 

and opportunities for renters, but it is so timely in that it goes a 

long way toward helping to solve the problem of stopping this foreclosure meltdown. 

In addition to that, all of the work that we had done strengthening FHA and the work that we had begun on reforming the 

GSEs, all of it came together in that legislation. And aside from the 

fact that FHA is now in the position of refinancing properties that 

families are holding onto and not knowing how they were going to 

maintain them can now get some help. 

The other piece of legislation that had been just about ruled out 

or thought to be impossible also was successful in that we got not 

all that we wanted, but $4 billion that will help the cities deal with 

the boarded-up, foreclosed properties in their cities. 

So I am very pleased and I continue to think about all of the 

work that went into that comprehensive piece of legislation; and I 

am very proud that, with your leadership, we have been able to figure out some things. 

One of the things that I noticed in all of this was the servicing 

part of the industry. And I know I harangued a lot and talked a 

lot about that which I didn’t know, except I knew enough to know 

that, as we talked about restructuring some of these loans, that all 

of the counselors that we were funding could talk all they want, 

but if, in fact, the servicers did not cooperate in the modifications 

and the restructuring that nothing was going to happen. 

And the more I looked at the servicing part of the industry, the 

better I began to understand that we knew very little about them, 

about what their responsibilities are, who they are responsible to, 

all that they do; and I am convinced that not only must we learn 

more about them, we must be involved in regulating them. 

5 

So, having said that, now, if you don’t mind, I am going to launch 

into this prepared part of this statement that I have this morning. 

Again, I want to thank you for convening this hearing. 

I have been focused on the mortgage servicing industry since this 

committee first began addressing the subprime meltdown and foreclosure crisis. Like many, I had not previously understood the critical role mortgage servicers play in the modern mortgage market, 

where few loans remain with the financial institution that made 

them. 

Adding to the confusion is the fact that a number of large mortgage servicing industry players, including the financial institution 

formerly known as Countrywide, are both significant loan originators and loan servicers but not necessarily of the loans they originated. 

After two subcommittee hearings in Los Angeles last November, 

and here on April 16th, and a lot of additional study, I am still 

finding out more that I don’t yet know about this industry, but 

there are a few key things we have learned. 

First, this industry was woefully underregulated during the 

boom years and woefully unprepared for the challenges it confronted when the subprime meltdown hit. Depending on the type 

of financial institution they are, banks, etc., mortgage servicers are 

subject to regulation by the alphabet soup of agencies and other entities like the Federal Reserve that currently oversee our financial 

markets, but there is no coherence, statutory and regulatory framework for them. 

That is no surprise. The regulators failed to put together a decent body of law on making loans during the boom years. There is 

no reason to expect that they would think ahead to regulating the 

sector of the mortgage industry responsible for addressing those 

loans when things went south. 

When the crisis hit, it rapidly became clear that the mortgage 

servicing muscle of the industry had largely atrophied. Nobody was 

sufficiently staffed-up or trained to do the kind of workouts and 

modifications needed. I think this has changed a bit but not as 

much as it should. And the capacity to do loss mitigation at scale 

in a down market should never have been allowed by regulators to 

wither or, perhaps more accurately, not to be put in place at all. 

Most troubling to me is that, because of the underregulation, we 

have a near complete lack of transparency about what is going on 

with the servicers now. In contrast to loan origination, where data 

gives us a pretty clear and comprehensive picture of what is going 

on with loan origination, we are reliant in this crisis on industry 

provided data that I would agree is at best incomplete and somewhat opaque. 

Second, I continue to be concerned that we have what is known 

as an agency problem here. While the industry repeatedly says that 

nobody wins in a foreclosure, there is some evidence that a mortgage servicer, ostensibly the agent of the investment trust, may do 

better in terms of fees when it forecloses or at least keeps a borrower in a state of prolonged delinquency than it does a sustainable loan workout, even where to do so would be in the best interest of the trust. 

6 

I don’t pretend to have fully grasped yet the complex fee structure in mortgage servicing. I look forward to exploring that today. 

But a study by researchers from the University of Iowa and Stanford Law Schools which are described in a New York Times article—I ask unanimous consent to put that in the hearing record— 

showed that servicers generate sufficient revenues from late fees, 

delivery and fax charges, and other fees they can only charge if a 

borrower remains in distress and at foreclosure’s doorstep. 

Just a few days ago, in another article I would also ask unanimous consent to put into the record, New York Federal Home Loan 

Bank chief executive Alfred DelliBovi, not exactly an unsophisticated player in the market share market, was quoted as saying 

that servicers make more money on a foreclosure than when the 

loan is worked out. 

The CHAIRMAN. Without objection, those articles will be made a 

part of the record. 

Ms. WATERS. Let me just say that this is what I think we have 

to at least look carefully at; we have to know whether or not the 

incentives for servicers are really set up the way they ought to be 

to get us out of this crisis. 

I say this in part because, even after all of these months, I continue to hear things that suggest servicers aren’t acting as if they 

really want to help borrowers, rather than give them the runaround or squeeze them for late fees. 

Witnesses at hearings and town hall attendees paint a different 

picture of the mortgage servicers response to the subprime crisis 

than industry press releases. Homeowners, homeownership counselors, legal aid attorneys, and local government officials all testified to the difficulties they encountered in getting prompt, reasonable action by mortgage servicers. Too often, individual borrowers 

and even their trained advocates find it difficult to even find an actual person to speak to about loss mitigation, much less one authorized to offer the kind of loan modifications that the borrowers 

need to remain in their home for the long term. I had exactly this 

experience when I called the HOPE NOW Alliance myself from a 

town hall meeting that I held in Los Angeles. 

Finally, prior to the subprime crisis, the only Federal Reserve 

Governor to call attention to the growing problem, Ed Gramlich, 

asked why so many exotic loan products like the notorious 2/28 and 

3/27 subprime ARMs are being provided to the households least 

likely to understand or to be able to handle them financially. 

At this moment, in the midst of the greatest foreclosure crisis 

since the Great Depression, a variation of that question can be 

asked about loss mitigation by mortgage servicers: Why are the 

loans we know most likely to be worked out in a way that is affordable to the borrower, but the loan term, the safest loans in the 

market, while the most dangerous loans, Alt-A and subprime portfolios of the major servicers are the ones we know the least about 

when it comes to the affordability of loss mitigation offers that 

servicers are making to delinquent borrowers? 

To explain why I say this, I want to turn to the 40 percent or 

more of the servicing market that is subject to a Fannie Mae, 

Freddie Mac, FHA, or VA loan guarantee. These entities issued 

7 

clear guidance and set up compensation schemes to enforce affordability standards for their servicers’ loss mitigation activities. In Fannie’s case, the benchmark is $200 in monthly residential 

income after all debt service and household expenses, including 

emergency expenses, are taken into account. In Freddie’s case, 

there is a 20 percent residual income cushion, using a similar approach to assessing the borrower’s income and expenses. 

So we know what affordability standards govern the safest part 

of Wells Fargo’s, Bank of America’s, and other mortgage servicers’ 

portfolios. After all, the strict underwriting standards of VA, FHA, 

and the GSEs knew these loans are the least likely to be no doc 

loans or subprime ARMs. Yet, as it stands now, we have no idea 

what affordability standard has been applied to the Alt-A and 

subprime components of these servicers’ portfolios. Actually, we do 

have some idea: Ones that aren’t working. 

Moody’s reports that 42 percent of loans that were modified in 

the first half of 2007 were 90 or more days delinquent as of March 

31, 2008. This suggests that too many of the loan workouts being 

offered are simply kicking the can down the road, rather than making realistic assessments of what borrowers can afford for the long 

term. This clearly calls for Federal intervention. 

I will conclude by saying that the fundamental problem is that 

the mortgage servicers have no legal obligation to engage in reasonable loss mitigation efforts to keep a borrower in delinquency in 

his or her home even when the borrower may have been the victim 

of a predatory, unaffordable loan. Absent a statutory duty of some 

kind, I am concerned that consumers have little leverage with 

mortgage servicers in the current crisis and will continue to lack 

it in the future. 

The legislation I have introduced, H.R. 5679, the Foreclosure 

Prevention and Sound Mortgage Servicing Act of 2008, creates this 

enforceable legal duty. Although it has been mischaracterized in 

the industry press, I believe that H.R. 5679 is a prudent piece of 

legislation designed to balance the needs of lenders, investor 

servicers, and borrowers in an effort to reduce foreclosures. I also 

see it as an important first step in regulating what has been to 

date a largely below-the-radar-screen and underregulated sector of 

the mortgage industry. 

I look forward to the testimony today and especially the question-and-answer period, Mr. Chairman. 

And, Mr. Chairman, I may have kind of confused a little bit the 

mortgage servicing and the loss mitigation operations of these institutions. I am finding that they are two different things; and 

most of these institutions and many of the loss mitigation activities 

are offshore, not even within the United States; and I would like 

to have some clarification on that. 

The CHAIRMAN. If the gentlewoman would yield. 

Given that she is so well-informed on this because she made it 

as much a priority as anybody around, if there is any confusion in 

her mind, we can be sure it is also a very widespread confusion, 

and it is in our interest to clear it up. Because, yes, that is exactly 

the problem that we have. 

I am about to recognize the gentleman from North Carolina, and 

I don’t want to understate—I don’t think I can understate this. 

8 

This is a challenge to our ability to govern and to our economy. I 

mean, it cannot be that so many people say we want to reduce foreclosures and we can’t do that. So we just have a collective obligation to do better, or else I think some fundamental questions get 

raised. 

And now the gentleman from North Carolina, who 4 years ago 

was one of the ones trying to get this Congress to act in ways that 

would have prevented this problem, and who has been very deeply 

engaged in it, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. I will be brief because I 

know the witnesses want to go and a lot of the members left because we don’t have votes today, and that is unfortunate because 

this is an important hearing. 

I want to just make two points. The first point is to praise the 

yeoman efforts of the chairman of this full committee and the 

chairwoman of the Subcommittee on Housing in the passage, in all 

of the work they did to pull all of these pieces together to pass this 

piece of legislation that we passed the day before yesterday. I don’t 

think anybody could ever imagine the intricacies and the difficulty 

of the road that the Chair played in this process, so I want to congratulate him. That is the first point. 

The second point is that those of us, particularly who came out 

of the private sector or even those of us who came out of State legislatures or out of pulpits or local elective bodies, understand that 

passing a law doesn’t mean a thing if it is not applied in letter and 

spirit. And I think the Chair referred to this as a challenge. I really 

think it is an opportunity, particularly for servicers and lenders to 

take advantage of a framework which has now been set and sanctioned and funded and structured to take a lot of the uncertainties 

and difficulties out of this process that probably—HOPE NOW Alliance probably understands as much as anybody. I mean, they have 

a framework now and everybody has a framework that, if we just 

apply the letter and, more importantly, the spirit of what we have 

done, will just say magnitudes about the industry, about servicers, 

and it will pay tremendous dividends for our economy in getting us 

back on the right track. 

So it is important that all the work that the Chair did and all 

of us did to pass the legislation, but what is more important now 

is what you all do, what the market does, what the players in this 

market do to apply this legislation both in letter and, more importantly, in spirit to make it work and I am just going to challenge 

you to do that. 

I probably—once I hear the testimony, I may not even be able 

to stay for questions. I am just going to take it on faith that you 

all will use this important vehicle that has been provided to you 

to help our country move forward. 

And with that, Mr. Chairman, I yield back. 

The CHAIRMAN. Finally—and I have to say it is a small member 

panel today. But in terms of understanding of and concern about 

the issue, it is about as solid as I think it could be. Our final opening statement comes from the former Mayor of Kansas City, who 

has been seeing this problem from all ends. The gentleman from 

Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. I will be very brief. 

9 

I had dinner last evening with a constituent here in Washington. 

He was here on business. And as the conversation progressed, he 

eventually told me that he was on the verge of losing his home. Of 

course, that made dinner go down with a little more difficulty. 

But the thing that concerned me more than anything about the 

conversation was the unwillingness of the servicer to work with 

him. The servicer becomes Superman in this whole sordid mess. 

They are the ones who can leap tall buildings and are more powerful than locomotives. They are the ones that make the determination in here. 

And in my State of Missouri, we had notification that servicers 

had begun foreclosures on 4,500 homes in April and May. Only 

one-half of them reported that the servicer was actually working 

with them on a repayment plan. We have 8,000 foreclosures a day 

in the United States right now,—8,000 a day. I want to make certain that something positive is happening. 

HOPE NOW, I think—you know, I don’t want to question anybody’s motives. Maybe sometimes I do. But I do wonder, you know, 

there was a great fanfare when they talked about what they were 

going to do, and I am not quite sure that I see the benefit. I don’t 

know if that was a preemptive move in hopes that we would not 

bring to the Floor some legislation that would be regulatory in nature over them. So I am interested in hearing what you have to 

say, more than I am interested in expressing outrage at what is 

going on. 

I yield back the balance of my time. 

The CHAIRMAN. I thank the gentleman. 

At this point, I want to ask unanimous consent to insert into the 

record the testimony of Mary Harman, the Chair of the Community 

Services Committee of the California Association of Mortgage Brokers, in which they, among other things, express their gratitude for 

the legislation of the gentlewoman from California and focus on the 

problems they believe exist with the servicers. 

Without objection, that will be made a part of the record. 

We will now begin our statements with Mr. Hilary Shelton, who 

is the director of the Washington Bureau of the National Association for the Advancement of Colored People. 

STATEMENT OF HILARY O. SHELTON, DIRECTOR, NAACP 

WASHINGTON BUREAU 

Mr. SHELTON. Thank you, Mr. Chairman. 

As you mentioned, my name is Hilary Shelton, and I am the director of the NAACP’s Washington Bureau. The Washington Bureau is the Federal legislative and national public policy arm of our 

Nation’s oldest and largest grassroots-based civil rights organization. 

I would like to begin by thanking you, Chairman Frank, as well 

as Congresswoman Waters, Ranking Member Bachus, Congressman Watt, and Congressman Cleaver for the wonderful energy, 

time, and commitment to addressing these issues and addressing 

what faces our country in light of all these foreclosures. 

I come before you today because the mortgage foreclosure crisis 

has reached even more staggering proportions all across the Nation. In the month of June, more than 250,000 homes were at some 

10 

stage in the foreclosure process. This number is up by more than 

53 percent over June of 2007. 

Furthermore, African Americans and other racial and ethnic minority Americans are being disproportionately affected. Nobody disagrees that the foreclosure crisis is being driven by the high number of predatory loans made within the last few years; and according to the most recent study by the National Community Reinvestment Coalition, in 2005, African Americans of all income levels 

were more than twice as likely to receive a high-cost loan. 

Last year, in 2007, the NAACP held its 98th annual convention 

in Detroit, Michigan, the City with our Nation’s highest foreclosure 

rate. Earlier this month, we held our 99th annual convention in 

Cincinnati, Ohio, Ohio being the State with the highest foreclosure 

rate. Needless to say, for the last 2 years we have been hearing 

firsthand from people who are in one stage of foreclosure or another. These are real, hardworking people whose lives have been 

shattered; and the worst part is that are sadly only the beginning. 

For as long as I can remember, African Americans have been 

viewed as the canary in the coal mine. This has certainly proven 

to be true when it comes to the mortgage foreclosure crisis. 

For decades, predatory lenders targeted African Americans and 

other racial and ethnic minority Americans with their unscrupulous products. As study after study clearly demonstrated, and as I 

have previously stated in testimony before this committee, the 

African- American community in the United States has been and 

continues to be disproportionately devastated by predatory lenders. 

Thus, when the foreclosure problems began, it was African Americans who were again at the forefront of the crisis; and we continue 

to be disproportionately affected by what has already become a national catastrophe. 

So we have come to Capitol Hill, to this very room, as a matter 

of fact, many times in the past couple of years sharing our concerns 

and working with you to aggressively help address a problem 

which is so large in scope it is almost inconceivable. 

The purpose of today’s hearing, to look at the role of mortgage 

servicers, is laudable as they clearly play a significant role in both 

the creation of a constructive and sustainable loan modification as 

well as the foreclosure process. Yet I hope that we will look at the 

bigger picture and examine the relationship between servicers and 

the homeowner/consumer who is facing foreclosure. 

Currently, the servicer has most, if not all, of the power and control. There are several proposals currently before Congress to 

change that dynamic, proposals that the NAACP supports and 

views as necessary if we are going to offer real help to the millions 

of American families whose homes are at risk. 

First, there is the proposal by Congresswoman Waters, H.R. 

5679, the Foreclosure Prevention and Sound Mortgage Servicing 

Act of 2008. This legislation requires a homeowner or servicer to 

pursue specified priority loss mitigation activities such as waiving 

late fees and other charges, and establishing an affordable repayment plan or loan modification, forbearance, or a short refinancing 

before a home may become foreclosed upon. 

The NAACP also supports H.R. 6076, the Home Retention and 

Economic Stabilization Act of 2008 introduced by Congresswoman 

11 

Matsui of California. This legislation places a moratorium on home 

foreclosures for 9 months to allow homeowners to find and take remedial action. It also requires home mortgage servicers to provide 

advance notice of any upcoming reset of the mortgage interest rate. 

I would note that this moratorium or deference is similar to the 

one that was called for by the NAACP and other civil rights organizations more than a year ago, in April of 2007. 

Lastly, the NAACP strongly supports, as I know does the chairman and several members of this committee, H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 

2007. This important, bipartisan legislation would allow courts to 

supervise loan modifications, effectively mediating between lenders 

and homeowners. 

All three of these bills, taken together, will provide homeowners 

facing foreclosure with some much-needed tools, whether it be the 

requirement that mortgage servicers work with them to try to 

avoid foreclosure, or a cooling-out period to allow homeowners to 

try to modify their mortgages and stay in their homes, or allowing 

the courts to try to mediate a modification. 

All three of these bills will require the financial services industry 

to do more to help avoid foreclosures. Heretofore, all successful attempts to address this crisis, while laudable, have been based on 

the holders of the loan acting on a purely voluntary basis to try to 

avoid foreclosures. 

Furthermore, all three of these pending measures that the 

NAACP supports would not require a dime from the U.S. Treasury. 

No taxpayer money would be spent. So we would be helping homeowners facing foreclosure at no expense to the American public. 

Finally, a few words specifically about the mortgage services industry. As I said earlier, mortgage services are an integral part of 

both the process of developing constructive and sustainable loan 

modification as well as the foreclosure process. That is why, given 

the huge number of Americans whose lives these people will touch, 

the NAACP would like to see more regulation and monitoring of 

this industry. Specifically, we would like to note that not only are 

they trying to save Americans’ homes, but they are trying to save 

all Americans’ homes, regardless of the borrowers’ race or ethnic 

background or age, with the same vigor. 

Given the history of disparate treatment of African Americans by 

the financial services industry in our Nation, one cannot blame us 

for wanting more information on the number of loans that are 

being modified, the race of the borrowers who have received the 

loan modifications, and if those modifications actually result in the 

homeowner staying in their homes, or if a disproportionate number 

of African Americans and other Americans of color receive loan 

modifications that last a year or less and only serve to drain more 

equity from the consumer. 

In closing, I would like to again thank the chairman and all of 

the members of the committee for all that you have done to address 

the mortgage foreclosure crisis. I hope to continue to work with you 

to aggressively address this problem facing a growing number of 

Americans and, most importantly, to help keep our people and our 

families in their homes. 

Thank you very much. 

12 

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

136 of the appendix.] 

The CHAIRMAN. Thank you. 

I just want to note again that this is a day when we don’t have 

votes, and most members have left, so I do want to give a special 

acknowledgement to those members who probably altered their 

plans to be able to stay here. 

We have been joined by one of our newer members, the gentlewoman from California, who has a great interest in this and comes 

from a State where it has been an issue. She has recently been a 

leader in the State legislature. 

The gentlewoman, Ms. Speier, has joined us as well. 

Next, we have Mr. David Kittle, who is the chairman-elect of the 

Mortgage Bankers Association. We very much appreciate your 

being here—having worked with the Mortgage Bankers Association 

as we passed the legislation—and we look forward to working with 

you as we take full advantage of it. 

Please go ahead, Mr. Kittle. 

STATEMENT OF DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. KITTLE. Mr. Chairman, thank you for the opportunity to appear before you again. I am pleased to discuss solutions to the situation in the mortgage market and what servicers are doing to help 

keep families in their homes. 

None of us wants a family to lose its home, and MBA members 

are devoting significant time and resources to finding ways to help 

borrowers keep their homes. The tools used to avoid foreclosure 

and retain a borrower’s home include forbearance and repayment 

plans, advance claims, loan modifications, and refinances. Short 

sales and deeds in lieu of foreclosure are also used to avoid foreclosure in certain circumstances. 

It makes good economic sense for mortgage servicers to help borrowers who are in trouble. The increase in mortgage delinquencies 

and foreclosures has brought significant attention to the cost of 

foreclosure to homeowners, communities, and mortgage industry 

participants. While the impact of foreclosure upon homeowners and 

communities is clear to everyone, statements by some advocates 

and government officials indicate that confusion still exists about 

the impact of foreclosure upon industry participants, particularly 

lenders, servicers, and investors. 

Mortgage lenders and servicers do not profit from foreclosures. 

Every party to a foreclosure loses—the borrower, the community, 

the servicer, the mortgage insurer, and the investor. It is important 

to understand that profitability for the mortgage industry rests in 

keeping a loan current. As such, the interest of the borrower and 

the lender are mostly aligned. 

As a recent CRS paper notes, foreclosure is a lengthy and extremely costly process for the industry and, generally, a losing financial proposition. While losses can vary significantly, several 

independent studies have found the losses to be quite significant: 

Over $50,000 per foreclosed home or as much as 30 to 60 percent 

of the outstanding loan balance. 

13 

If a homeowner misses a payment and becomes delinquent, the 

mortgage servicer will attempt multiple contacts with the homeowner in order to help that borrower work out the delinquency. 

Servicers have several foreclosure prevention options that can get 

a borrower back on his or her feet. Informal forbearance and repayment plans are the first tools servicers use to help borrowers. 

Loan modifications are the next level of loss mitigation options. 

A loan modification is a change in the underlying loan document. 

It might extend the term of a loan, change the interest rate, change 

repayment terms, or make other alterations. Often features are 

combined, including rate reductions and term extensions. 

Servicers also use refinancing to assist borrowers who are current on their loan but are at risk of defaulting in the future or borrowers who are in the early stages of delinquency. 

FHASecure is one example of a program targeted to borrowers 

with adjustable rate mortgages who are unable to make payments 

due to an increase in rate. 

The housing bill that just passed enhances FHA’s products by 

creating the Hope for Homeowners program for delinquent borrowers who need to refinance their homes but find they owe more 

than their homes are worth. 

Servicers want to assist borrowers who are having difficulty paying their mortgages. Servicers and investors have an economic incentive to avoid foreclosure. As a result, servicers are performing 

a growing number of workouts, including modifications as evidenced by the HOPE NOW Alliance data. 

Servicers have increased staff, have funded new technology, and 

are sponsoring home retention workshops. They are using third 

parties to go to the borrower’s home to facilitate the workout and 

are funding advertising to educate borrowers about foreclosure prevention options. They are paying for housing counseling and are 

working with regulators and others to resolve legal impediments to 

loss mitigation. 

All of these efforts demonstrate the industry’s dedication to 

avoiding foreclosure and helping delinquent borrowers to get back 

on their feet. The industry is working to keep pace with changes 

and seeking new and financially responsible ways to increase workouts. The incentives of the mortgage servicers are generally in line 

with the family who is in trouble. 

Thank you for the opportunity to share our thoughts with the 

committee. I look forward to answering any questions that you may 

have. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Kittle can be found on page 93 

of the appendix.] 

The CHAIRMAN. Next, we have Mr. James Barber, who is the 

chairman and CEO of Acacia Federal Savings Bank. He is here on 

behalf of the American Bankers Association, another organization 

with whom we have worked closely in the preparation of this bill 

and with whom we hope to be able to continue cooperating. 

Mr. Barber. 

14 

STATEMENT OF JAMES B. BARBER, CHAIRMAN AND CEO, ACACIA FEDERAL SAVINGS BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. BARBER. Chairman Frank and members of the committee, 

my name is James Barber, and I am the chairman and CEO of 

Acacia Federal Savings Bank in Falls Church, Virginia. Acacia Federal is a federally chartered savings bank with $1.5 

billion in assets. We service 3,700 residential single family loans in 

the mid-Atlantic region that total about $1.1 billion. Most of these 

loans are owned by the bank. 

We share your concern about rising foreclosures and the need to 

limit them wherever possible. Everyone suffers when a foreclosure 

occurs—borrowers, lenders, investors, and the neighborhood where 

the property is located. Thus, it is no surprise that banks are actively engaged in voluntary modification programs on an individual 

basis and as part of an industry-wide effort such as the HOPE 

NOW initiative. 

Avoiding foreclosure is not a simple process. Many of the loans 

that we make look the same on paper, but, in my experience, each 

workout must be tailored to the borrower’s unique experience. This 

process is complicated by the fact that phone calls or letters from 

lenders may not be warmly welcomed by anxious borrowers who 

are having financial difficulties. Often, there is a tendency to ignore the problem which, unfortunately, limits borrowers’ options 

for finding solutions. It is no surprise then that 57 percent of the 

Nation’s late-paying borrowers still do not know their lenders may 

offer alternatives to help avoid foreclosure. 

Two other complications muddy the waters when considering if 

and how foreclosure can be avoided. 

First, not all borrowers have the desire or financial wherewithal 

to keep their property. Some borrowers are investors, others have 

hyperextended their credit, and still others have lost jobs or seen 

dramatic changes in their financial situation. 

Second, although Acacia Federal retains most of the mortgages 

we originate, often financial institutions choose instead to sell 

mortgages into the secondary market. This brings in other parties 

which adds time and complexity. Fortunately, these complications 

are being sorted out. 

We do, however, believe things could be improved. Legislation 

crafted by you and this committee, Mr. Chairman, contains a key 

component which ABA believes will provide additional tools for assisting more troubled borrowers. That legislation will create a voluntary program through which troubled borrowers will be able to 

work with servicers to reduce their indebtedness, gain some equity 

in their homes, and stabilize their financial situation. Immediately 

after the bill is enacted, ABA will send educational material to all 

of our members followed by telephone briefings on the bill and how 

this program can be implemented. 

The vast majority of banks, large and small, have long followed 

traditional, prudent underwriting models. Acacia Federal is no different. Our underwriting has been sound, so we have relatively few 

delinquencies and foreclosures. The few we had were the result of 

the usual things that destabilize borrowers, divorce and job loss, for 

example. 

15 

Since we declined to match the loose underwriting standards of 

many nonbank institutions, we lost market share. In today’s environment, we are trying to build that market share back without 

sacrificing the prudent lending underwriting standards most banks 

have always employed. 

Recent changes to regulations finalized by the Federal Reserve to 

implement the Home Ownership and Equity Protection Act emphasize the need for more prudent and traditional underwriting. ABA 

supports many of these changes, including regulations to strengthen the integrity of appraisals and prohibit deceptive advertising, 

changes that in some ways codify practices that most banks have 

employed. 

The banking industry is working to avoid foreclosures and prepare for the future. We appreciate the work of this committee to 

provide additional tools and solutions to achieve that end. 

I would be pleased to answer any questions. 

[The prepared statement of Mr. Barber can be found on page 50 

of the appendix.] 

The CHAIRMAN. Representing another organization that has been 

an important resource for us is Janis Bowdler from the National 

Council of La Raza. 

STATEMENT OF JANIS BOWDLER, ASSOCIATE DIRECTOR, 

WEALTH-BUILDING POLICY PROJECT, NATIONAL COUNCIL 

OF LA RAZA 

Ms. BOWDLER. Good morning. Thank you, Chairman Frank. Good 

morning, Congresswoman Waters, Mr. Watt. 

As you said, my name is Janis Bowdler. I oversee NCLR’s policy, 

research and advocacy on issues related to helping Latino families 

build and maintain wealth. 

I would like to thank you for holding this hearing; and I would 

like to thank you, Congresswoman Waters, specifically for your 

work on the servicing issue and for your leadership, because we 

really are convinced that this is one of the most important issues 

facing us now. As you will hear me say time and time again in my 

comments and in my written statement, it is not just timely. This 

issue is urgent. 

As you know, NCLR runs a network of 50 housing counseling 

agencies across the country. Every day, we hear about their struggles with mortgage servicers to keep the working families in their 

homes. Their stories, along with our research and partnerships, 

have informed NCLR’s views on the mortgage servicing industry. 

I also want to offer my congratulations to all the members of this 

committee for the passage of your foreclosure package. I urge you 

to see servicing as the next step in addressing the foreclosure crisis. Based on what we have seen on the ground, it is clear that 

sound servicing practices are the linchpin in a national foreclosure 

prevention strategy. 

This morning, I would like to share with you four major barriers 

built into the servicing system. These barriers prevent servicers 

from fully meeting the needs of families struggling to stay in their 

homes. Let me start by providing some background. 

The Latino community was hit hard by foreclosures. Of all loans 

made to Hispanic borrowers in 2005 and 2006, 1 in 12 are preVerDate Aug 31 2005 15:19 Nov 17, 2008 Jkt 044905 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\44905.TXT TERRIE
16 

dicted to end in foreclosure, whereas market indicators suggest 

that peak foreclosures amongst our community are still to come in 

2009 and 2010 when option ARMs reset. 

As the foreclosure crisis has unfolded over the last year, stakeholders across the country have stepped up efforts to work with atrisk borrowers. Unfortunately, these voluntary efforts are falling 

short. I am sure you know all the statistics by now. Subprime loans 

are twice as likely to be more than 90 days delinquent than a year 

ago, and 2 million loans are 60 days or more delinquent this 

month, a 43 percent increase over July 2007. 

After listening to community leaders, counselors, and other 

stakeholders, NCLR has identified four characteristics of servicers 

that leave them struggling to meet the needs of delinquent borrowers. 

First, servicers work for the investor. And this is where the obligations and duties lie, not with the borrower. Higher incentives 

exist to steer borrowers to short sale or foreclosure than engage in 

complex loss mitigation. This can be seen in the constant struggle 

between first and second lien holders. 

Second, mortgage holders routinely refuse to negotiate on loan 

modifications, even when it means that the borrower is more likely 

to default on the overall package. The business model focuses on 

the short term. This is consistent with traditional loss mitigation 

focused on borrowers with short-term challenges such as job loss or 

an unexpected expense. 

Despite the fact that today’s delinquent borrowers have much different problems, short-term solutions are still much more common 

than permanent ones. In 2007, 3- to 6-month workouts were the 

norm. For the majority of those families, their loans will be just as 

unaffordable 6 months from now. 

We have also seen that the mortgage servicing industry lacks capacity. Many of our housing counselors continue to have paperwork 

lost and wait for months to hear back on loan modification requests. In fact, two-thirds of loan modifications started are not 

completed inside the following month. 

These delays have consequences. One agency, for example, 

worked for months to get a loan workout approved for their client. 

Meanwhile, the loan continued on the path to foreclosure. The approval for the modification came after the home went to auction. 

Finally, loss mitigation efforts are not transparent. Servicers perform loss mitigation duties according to guidelines set by the investor. However, this information and the identity of the investor are 

often unavailable. The result is confusion and lack of accountability. 

Servicers and investors are pointing fingers at each other when 

asked why modifications are not happening. A misunderstanding 

around the term ‘‘imminent default,’’ for example, caused some 

servicers to mistakenly advise borrowers that they had to miss 2 

months of payments before they would be eligible for assistance. 

As demand continues to rise, we are concerned that these issues 

will become exacerbated. By one estimate, 7 out of 10 seriously delinquent borrowers haven’t even started the loss mitigation process 

yet. As the millions of homeowners with option ARMs expect to 

17 

reset over the next couple of years, it is clear that the problem isn’t 

going way. 

This also raises serious concerns about the potential for abuse. 

Forty-two percent of modifications—as Congresswoman Waters 

mentioned—made last year are already 90 days behind. These borrowers were not given an affordable, long-term solution. Unless 

something changes, this statistic will get worse. Frustrated borrowers will land in the hands of foreclosure rescue scam artists, 

and foreclosure prevention programs will suffer. 

To address the problem, NAACP offers the following recommendations: Create a duty for servicers to provide loss mitigation services to struggling borrowers; and require that loan modifications are sustainable over the long term. I want to mention that 

both of those recommendations are already included in H.R. 5679 

authored by Congresswoman Waters. And we would also recommend that servicers be required to disclose the investor upon request and that servicers be prohibited from moving forward with 

foreclosure if a case is still in the process of loss mitigation within 

their own company. 

In many ways, servicers are the gatekeepers to decisions made 

on delinquent loans. Their ability to adequately serve struggling 

families should be a concern to us all. 

Thank you, and I would be happy to answer any questions. 

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

58 of the appendix.] 

The CHAIRMAN. Thank you very much, Ms. Bowdler. That gets 

right to the heart of what we are going to be dealing with. 

Next, Mr. Michael Gross, who is the managing director for loan 

administration/loss mitigation, at the Bank of America. 

And I should note that earlier this year, I was approached by one 

of the high officials of the Bank of America informing me about the 

the intention to purchase Countrywide and, frankly, he wanted to 

make sure that we thought this was a good idea. I have been an 

advocate of that purchase and urged Federal regulators, in fact, to 

be supportive because it did seem to me that we would be in a better position. And I hope now that Bank of America is going to prove 

me correct in my confidence in having them instead of Countrywide, which is going to yield the kind of benefits we were hoping 

for in terms of diminution of foreclosure. 

Mr. Gross. 

STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, 

LOAN ADMINISTRATION/LOSS MITIGATION, BANK OF AMERICA 

Mr. GROSS. Good morning, Mr. Chairman, and committee members. 

I am Michael Gross, Bank of America’s managing director of loan 

administration/loss mitigation. Thank you for the opportunity to 

appear here today to discuss Bank of America’s efforts to help families prevent avoidable foreclosures. 

I would also like to congratulate the chairman and this committee for the vital Hope for Homeowners legislation that the 

House approved on Wednesday. This legislation will be important 

to the long-term viability of home financing and the short-term staVerDate Aug 31 2005 15:19 Nov 17, 2008 Jkt 044905 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\44905.TXT TERRIE
18 

bility of the housing market. We believe that it will help both 

homeowners and potential homeowners alike. And yes, we are 

eager to implement this program. 

Let me start by saying that our goal is to modify or work out at least $40 billion in mortgages by the end of 2009 and to keep all 

those families in their homes. As America’s largest home loan provider, Bank of America will lead a new era of home lending built 

on transparent, fair, and easily understood practices. We are working to reduce the number of foreclosures, to help families and communities impacted by foreclosure, and to continue to make affordable mortgages available to low- and moderate-income and minority households. 

The Countywide acquisition officially closed 3 weeks ago. Barbara Desoer, a 31-year veteran of Bank of America, has assumed 

the position of president of the combined mortgage, home equity, 

and insurance businesses. We understand that we now have the 

opportunity to renew America’s confidence in homeownership with 

unmatched capabilities. 

At the core of our combined operations are the substantial commitments we made to use responsible lending practices and home 

retention efforts. Bank of America is devoting substantial resources 

to modifying or working out loans for customers who are facing 

possible foreclosure. Many effective home retention practices are 

being improved and supplemented. We will continue to work with 

the investors, the GSEs, regulators, and community partners to 

reach customers with affordable home retention solutions. 

We are tailoring our workout strategies to a customer’s particular circumstance. Once we have been able to make contact, we 

work with distressed customers to match their repayment ability 

with the appropriate option, using tools such as loan modifications, 

lower rates, and repayment plans. 

In response to the needs of our customers, we have added more 

staff and improved the experience, quality, and training of the professionals dedicated to home retention. Over the past year, the 

home retention staff has more than doubled, to 4,700 staff members, and we will maintain this staff or increase it, if necessary, to 

ensure that we meet our customers’ needs. 

Bank of America remains committed to helping our customers 

avoid foreclosure whenever they have a desire to remain in the 

property and have a reasonable source of income. A key component 

of successful home retention initiatives includes partnerships with 

financial counseling advocates and community-based organizations. 

The data we are sharing today is from the legacy Countywide portfolio. So far in 2008, we have participated in nearly 200 home retention outreach events around the Nation. 

Early, open communication with customers is the most critical 

step in helping prevent foreclosures. For example, we reach out to 

customers who are delinquent an average of 17 times per month 

throughout the delinquency cycle to reach them to find a solution. 

In the first half of 2008, our Home Retention Division saved over 

117,000 homeowners from foreclosure, nearly double the pace from 

the last 6 months of 2007. I would emphasize that these are workouts in which the borrower enters into a plan that allows the customers to keep their homes. 

19 

Comparing June 2008, with June 2007, our Home Retention Division workouts are up nearly 420 percent, with the primary cause 

of that increase a 958 percent jump in loan modification plans. 

Since we announced a series of home retention initiatives last autumn, loan modifications have become the predominant form of 

workout assistance. 

Year to date, loan modifications have accounted for more than 70 

percent of all home retention plans. These loan modifications generally result in reducing the loan’s interest rate and are consequently reducing the borrower’s monthly payment. These plans 

offer affordable solutions to the financial challenges facing many 

homeowners. 

Interest rate relief modifications were extremely rare until late 

last year. Today, interest rate modifications account for 71 percent 

of all of the loan modifications in the second quarter of 2008. 

We are committed to helping our customers avoid foreclosure 

whenever they have a desire to remain in the property and the 

ability to make a payment. Foreclosure is always the last resort for 

lenders, servicers, and for the investors in the mortgage securities 

we service. We will lead the industry in meeting the challenge of 

today’s housing market with leading-edge foreclosure prevention 

technology, training programs, and partnerships. 

Thank you. I would be happy to answer any questions that you 

may have. 

[The prepared statement of Mr. Gross can be found on page 85 

of the appendix.] 

The CHAIRMAN. Next, we have Ms. Mary Coffin, who is the executive vice president of the Wells Fargo Home Mortgage Division. 

Ms. Coffin. 

STATEMENT OF MARY COFFIN, EXECUTIVE VICE PRESIDENT, 

WELLS FARGO HOME MORTGAGE SERVICING DIVISION 

Ms. COFFIN. Chairman Frank, Ranking Member Bachus, and 

members of the Financial Services Committee, thank you for this 

opportunity to share Wells Fargo’s perspective on our loan servicing practices in the current market conditions. 

I am Mary Coffin, head of Wells Fargo’s Mortgage Servicing Division. 

Wells Fargo services one of every eight mortgage loans in Amer- ica, or $1.5 trillion in loans that either we originated or were originated by others. Our national presence and the makeup of our 

portfolio provide a vantage point for critical insights that guide our 

company’s actions, as well as the industry initiatives we have advocated. 

Clearly, the foreclosure issue has expanded beyond its genesis 

with the subprime ARM resets to the full credit spectrum of customers, particularly in geographies facing the greatest market corrections. Declines in housing prices, rapidly rising costs of living, 

unemployment, and shifting consumer spending habits are driving 

the need for continued customized solutions. 

Our work has included a high-level cooperation between 

servicers, Fannie Mae and Freddie Mac, and other investors, to 

produce streamlined processes for distressed consumers through reduced documentation, simplified communication, and fast-track 

20 

loan modifications. Additionally, we have worked with not-for-profit 

counselors to help at-risk borrowers manage all of their debts. 

Working together on a comprehensive view of the borrower’s obligations enables us to reach affordability that is lasting. 

Because our company’s vision has long been to help our customers succeed financially and build lifelong relationships, we hold 

ourselves accountable for working with customers through various 

methods to reach affordability. Yet, as I am sure you are aware, 

there are limits to what we can do. As a responsible servicer, we 

must make certain each customized decision is economically sound 

for customers and investors, such as pension plans and employee 

401(k) owners. 

Foreclosures are a measure of absolute last resort. They destabilize communities and are devastating for the families involved. 

Servicers are not incented to foreclose. The lengthy foreclosure 

process exposes servicers to potential risks associated with unrecoverable advances, fees, and penalties. 

To further avert foreclosures, we have responded to the increased 

need to effectively help our customers manage their delinquencies 

by increasing our staffing. In 2005, the team dedicated to assisting 

at-risk borrowers consisted of 200 experts. Today, we have more 

than 1,000 and, I will add, in the United States. We monitor our 

volume of calls daily and shift experienced staff from one department to another in order to assist. 

Now, to ensure our overall effectiveness, we conducted a study of 

our customers 60 or more days past due, not in bankruptcy or foreclosure. The study showed that we connected with 94 percent of 

our customers. Of every ten, seven worked with us to find a solution, two declined our help, and the remainder were either 

unreachable or a solution simply could not be found. And we do 

have solutions that work: Refinances; payment deductions; repayment plans; short sales; and others. Most importantly, 60 percent 

of these customers improved their delinquency status and averted 

foreclosure. 

Mr. Chairman, and members of the committee, we want to thank 

you for your help in encouraging constituents to contact their 

servicers. Your efforts have played a critical role in our ability to 

assist more consumers in trouble. 

In addition, your leadership has resulted in the Housing and 

Economic Recovery Act of 2008. This crucial legislation will help return stability to the mortgage markets. This measure, coupled with 

the Federal Reserve’s new HOEPA rule, will ensure the continued 

availability of responsible, traditional mortgage products across the 

credit spectrum. 

Since we cannot arbitrarily erase a debt for consumers that they 

simply cannot afford, we also ask for your continued work in developing policies that ensure the growth of responsible homeownership 

versus speculative housing investments. 

In closing, Wells Fargo is firmly committed to continuing to lead 

the industry in advocating and conducting fair and responsible 

lending and servicing. 

Mr. Chairman, thank you again. It would be my pleasure to answer questions. 

21 

[The prepared statement of Ms. Coffin can be found on page 65 

of the appendix.] 

The CHAIRMAN. Next, Faith Schwartz, who has been laboring on 

this issue for some time as the executive director of the HOPE 

NOW Alliance. 

STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, 

HOPE NOW ALLIANCE 

Ms. SCHWARTZ. Chairman Frank, committee members, thank you 

for the opportunity to testify today. HOPE NOW is an unprecedented, broad-based, private-industry collaboration among housing 

counselors, lenders, investors, and mortgage participants that is 

achieving real results. We have 26 servicers representing over 90 

percent of the subprime market and over 70 percent of the prime 

market; and we have all HUD-approved intermediary counselors 

also as members of the HOPE NOW Alliance. Since last fall, we 

have been working aggressively to address the housing issues, and 

the goal of HOPE NOW is to keep more people in their homes. 

The result of these efforts culminated in the recently announced 

servicer guidelines. The first part of those guidelines is around performance measures and accountability. 

One of the most important components of the guidelines is that 

HOPE NOW servicers are committing to timelines to respond to 

homeowners and third-party housing counselors. These timelines 

represent a powerful commitment from servicers, and I will read 

them, as follows: 

The servicers will respond to homeowners who have requested 

loan workout requests within 5 days; 

The servicers will send homeowners an outline of key elements 

of the loss mitigation request to valuation process. The foreclosure 

prevention timeline and sample letters are submitted in my written 

testimony; 

Servicers will status the homeowners every 30 days; 

Servicers will make homeowners’ affordability central to loss 

mitigation; and 

Servicers will communicate with homeowners an approval or denial within 45 days. 

HOPE NOW servicers have agreed to adopt these guidelines 

within 60 days of release, which was June 17th. 

Also, we address subordination of second liens. In accordance 

with investor guidelines, HOPE NOW servicers servicing second 

liens should resubordinate their loans with respect to an existing 

first lien where the second lien-holder’s position is not worsened as 

a result of a refinance or modification. This is to ensure that no 

homeowner loses the opportunity to keep his or her home when 

they experience hardship, when they submit information to stay in 

their home, and then they can afford their home. 

The third area of the guidelines is around solutions for preventing foreclosures. HOPE NOW servicers are committing to assist homeowners through various foreclosure prevention options 

consistent with investor guidelines or approvals. Details of all relevant and available foreclosure options are included in these guidelines. This transparency around foreclosure prevention options is 

22 

critical for homeowners, servicers, and third parties for understanding all options that are available. 

Fourth, there is a commitment to reporting. HOPE NOW 

servicers agree to track and report performance to gauge industry 

progress towards reducing foreclosure and increasing options for 

distressed homeowners. From July 2007, through May 2008, nearly 

1.7 million homeowners avoided foreclosure through loan workouts. 

Mortgage servicers helped approximately 170,000 homeowners in 

May 2008 alone. 

Subprime modification workouts have increased significantly, as 

they now represent over half of all subprime workouts. In July, 

that same statistic reported by the same servicers was 18 percent. 

Reporting on our progress is critical, and we will continue to keep 

you abreast of these efforts, including more loan level reporting. 

Fifth, the communication and outreach is an important component of these guidelines. Reaching homeowners in distress, 

servicers commit to early contact of subprime ARM borrowers at a 

minimum of 120 days prior to the ARM reset. Servicers have 

agreed to a comprehensive, nationwide outreach-letter campaign 

for all noncontact borrowers who are 60 days or more delinquent. 

Servicers have a commitment to have 800 numbers, faxes, and 

e-mails for all housing counselors so they have better communications with the housing counselors, so there is better response. 

Sixth, they support the local homeownership preservation workshops. These workshops put at-risk homeowners directly in contact 

with a servicer and housing counselors. In 120 days, we have 

partnered on 14 different events, reached over 5,700 borrowers. 

This weekend, we are hosting events in New Jersey where Senator Menendez will join HOPE NOW and NeighborWorks America. 

In August, we are holding several events in Massachusetts and 

Florida. 

I do want to thank you, Chairman Frank, for agreeing to participate in our event at the Gillette Stadium in Boston on August 

12th. 

The CHAIRMAN. Excuse me. In Foxboro. 

Ms. SCHWARTZ. My apologizes. I wrote it down wrong. 

The Federal Reserve Bank of Boston and NeighborWorks America are working with us on that, and we are very thankful. 

Due to servicers and counselors being present at these events, 

many borrowers are offered solutions on the spot. The reactions of 

homeowners who have attended these events are overwhelmingly 

positive. We have hundreds and hundreds of surveys that we have 

taken, and we look forward to reaching even more homeowners. 

Some survey results from the homeowners are as follows: ‘‘It 

gave me hope that I will survive;’’ ‘‘Without your help, we would 

have lost our home.’’ 

Reaching noncontact borrowers remains a significant challenge. 

For example, our nationwide HOPE NOW letter campaign has 

mailed 1.5 million letters under the HOPE NOW letterhead, since 

November, to borrowers who have not answered those 17 attempts 

to reach them from a servicer shop; and 20 percent of those borrowers do respond to those letters. That does mean hundreds of 

thousands of borrowers are still very much at risk of foreclosure 

23 

unless they talk to their servicers or a third-party housing counselor. 

We ask this committee and all policymakers to encourage their 

constituents to respond to these letters by contacting their servicer, 

calling the homeowner HOPE hotline, 888–995–HOPE, or contacting any HUD-approved counseling agency. To ensure the free, 

nonprofit counseling will be available for homeowners in need, 

HOPE NOW is also committed to pay a fee for foreclosure-prevention counseling. 

In conclusion, this is a serious and a severely committed effort, 

and it will continue until the problems in the housing mortgage 

market abate. It is neither a silver bullet nor a magic solution, but 

this effort will continue to complement the efforts of legislators and 

regulators as they work through the housing issues. We will also 

continue to be responsive to you and to offer continuous improvement. 

Thank you for inviting HOPE NOW to participate. I am happy 

to answer your questions. 

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

107 of the appendix.] 

The CHAIRMAN. Next, we will hear from Julia Gordon. 

Let me say that all of the entities are representatives of entities 

that we have worked with closely and upon whose judgment we 

have relied to a considerable extent; and particularly through the 

work of our two colleagues from North Carolina, Mr. Watt and Mr. 

Miller, the Center for Responsible Lending has been a major source 

of information for us. 

So Julia Gordon from the Center for Responsible Lending. 

STATEMENT OF JULIA GORDON, POLICY COUNSEL, CENTER 

FOR RESPONSIBLE LENDING 

Ms. GORDON. Good morning, Chairman Frank, and members of 

the committee, and thank you for the very kind introduction. 

Please let me start by congratulating you and the other members 

of the committee on the passage of H.R. 3221. You have put in an 

extraordinary amount of work, and I believe that homeowners and 

the economy will be the better for it. But by calling today’s hearing, 

you are recognizing that there is still a lot more work to do done, 

and I thank you for that. 

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

protecting homeownership and family wealth. We are an affiliate 

of Self-Help, an organization which makes responsible, fixed rate 

home mortgage loans available to people with blemished or nontraditional credit. 

My core message here today is that if we keep doing the same 

thing, we can’t expect a different result. Voluntary efforts so far 

have not ramped up at a rate anywhere close to catching up with, 

let alone getting ahead of the foreclosure rate. So far, many of the 

voluntary efforts have consisted either of temporary workouts or 

modifications that just tack some arrearages and fees onto the end 

of the loan term. 

It concerns me that so many of last year’s modifications have already redefaulted. That is not a very good sign. 

24 

I want to flag one other concern about the loan modification process that hasn’t been mentioned yet this morning, which is the practice of many of the major servicers to refuse to provide 

forbearances or loan modifications unless homeowners sign waivers 

giving up their claims related to all illegal acts by the creditor, including illegal acts that have not yet been committed, but may be 

committed in the future. 

Sometimes the homeowners are even forced to waive State law 

claims that the State itself has deemed unwaivable. 

In all cases, these waivers mean that if the loan modification 

turns out to be unaffordable, the homeowners are unable to pursue 

the legal defenses to foreclosure that they otherwise would have 

had. 

I welcome Ms. Schwartz’s new initiatives discussed today, and I 

hope that one of the things that the servicers participating in 

HOPE NOW can agree to do is to stop these waivers. 

To help more families stay in their homes, we support several 

pending legislative initiatives that have already been discussed. 

First, of course, is H.R. 5679, the Foreclosure Prevention and 

Sound Mortgage Servicing Act of 2008, introduced by Chairwoman 

Waters, which requires servicers to pursue loss mitigation strategies before initiating foreclosure, but without dictating any particular result or outcome. Servicers who handle FHA and VA loans 

already work under this requirement. All we are asking is that it 

be extended to all servicers. 

Through our work at Self-Help, where we specifically focus on a 

very vulnerable customer population with minimal resources, we 

know that if given a fair, affordable solution, homeowners will 

make every effort to hold on to their homes. 

This bill also addresses the problems I have noted regarding 

waivers. It also addresses the issue of data reporting, and while 

again we very much welcome HOPE NOW’s data reporting, in 

order for it to be very useful, particularly to an organization like 

ours that does very high-level data analysis, we really need loan 

level data reporting, and we need information on demographic 

characteristics. HMDA doesn’t give us all that information that we 

need, and to plan for vulnerable populations, whether it is minority 

borrowers or one population that particularly concerns me, that we 

have very little information about, is the elderly. We really need 

better data on that. 

We also support the Home Retention and Economic Stabilization 

Act of 2008, H.R. 6076, introduced by Representative Matsui. This 

plan enables homeowners to defer foreclosure sales as long as they 

continue to pay a reasonable monthly mortgage payment. Essentially, it provides a time-out, much like the time-out that Chairman 

Frank has suggested in the past day to allow servicers to catch up 

with their backlogs and allow the new FHA program to be implemented. Again, although the new legislation is effective on August 

1st, the estimate I have heard from industry is that it will take at 

least 4 to 6 months to really ramp up that effort. 

This legislation actually does something to help a problem that 

some folks have mentioned here today, which is homeowners who 

do not reply to inquiries from their servicers. Under this legislation, if homeowners avail themselves of the deferment, they are 

25 

under an obligation to respond to reasonable inquiries from their 

servicer. The homeowner is also under an obligation to maintain 

the property, which is another problem we have seen in homes 

where the homeowners are behind. 

Finally, the Center for Responsible Lending strongly supports 

H.R. 3609, the Emergency Home Ownership and Mortgage Equity 

Protection Act. In our view, court-supervised loan modifications are 

a necessary complement to any voluntary efforts, and in many 

cases will provide the only available solutions to some of the challenges faced. 

Once again, I want to thank you for focusing on this national crisis and for the corrective steps you have already taken. It is ironic 

that it was so much easier for families to get into loans they 

couldn’t afford than it is for them to get a modification that they 

can afford. But I believe it is within our power to change that situation. We urge you to implement these additional commonsense solutions to break the downward spiral of losses, help put a floor 

under market declines, and restore stability and liquidity to the 

housing and mortgage markets. 

I look forward to your questions. 

[The prepared statement of Ms. Gordon can be found on page 69 

of the appendix.] 

The CHAIRMAN. I am going to do 10-minute rounds. I think we 

will be able to do that. 

Let me say, first, to the people who came, I appreciate your coming, but there is this disconnect. As I listen to the testimony from 

the financial institutions and HOPE NOW, if that is all I knew, I 

would wonder what we are all doing here on a Friday morning 

when we ordinarily wouldn’t be, because it sounds better than it 

is. 

I don’t think anybody is being deceptive, but here is the problem. 

Inevitably, you are dealing with the successes. It is kind of the flip 

side of what they say about police officers, who have to resist having a negative view of humanity because they only see people when 

they are at their worst. 

You are dealing with the successes. There are a great deal of 

problems out there. I understand you know the, but there needs to 

be a sense of urgency. Yes, I am glad you are doing what you are 

doing, but please don’t take any comfort from it because we have 

problems. 

I will tell you particularly, Ms. Coffin, I have heard specifically, 

as I told you, complaints about Wells Fargo. I was in Boston about 

a month ago, in the City, in the south end of Boston at Union 

Methodist Church, a center of activity for a long time; and they say 

we are having problems with Wells Fargo. Others have raised that. 

So I just want to begin with that. 

Secondly, I just want to say this with regard to further legislation. I can pretty much guarantee you that if things don’t—if the 

legislation we pass doesn’t have a good impact, the bill that Ms. 

Waters has sponsored will be the bottom, and we will go from 

there. We will be marking that up early next year, and we will 

maybe be doing more because I have concerns about the whole 

servicer industry. 

26 

Let me begin with this to those who are familiar with it: Do the 

servicers have, under the existing arrangement they have with the 

investors, the legal authority and the assurance that they have 

legal authority to take full advantage of the bill we passed? 

In other words, there was a reference to the fact that 71 percent 

of the homeowners got interest rate modifications. It is clear to 

many of us that interest rate modifications alone aren’t going to 

solve the problem. We need reductions in principal. We have given 

inducements to reduce the principal. 

And let me ask everybody, there were two suggestions, we have 

heard two points that have been made where there are obstacles 

where the loans have been securitized. The question is whether or 

not the servicers, who are separate from the beneficial owners, are 

constrained from reducing the principal because of fear that they 

will get sued by the owners and don’t have the authority. 

With regard to loans held in portfolios—and our colleague from 

North Carolina, Mr. Miller, was mentioning this because of an experience he had with a lawsuit—are there regulatory constraints? 

That is, is it the case that if you are a financial institution, a bank, 

and you hold these in your portfolio and you write them down, are 

the consequences of that then such, in terms of raising capital, etc., 

difficult? That is what I want. 

Let’s begin with the question of the investors, the servicers-investor relationship. Do servicers have sufficient authority to take advantage of what we have given them in the bill; that is, if I am 

the servicer, we all say, oh, foreclosure is not a good idea, and if 

it can be avoided, it can be avoided. 

Do the servicers have enough legal authority to take full advantage of the incentives we have given them rather than to foreclose? 

Ms. Coffin. 

Ms. COFFIN. Thank you, Chairman Frank. I will start with, absolutely. 

For the last 18 months that we have been working through this 

crisis, we have not just stood by what we interpreted in those contracts. We have been working daily, weekly, and monthly with 

Fannie, Freddie— 

The CHAIRMAN. Let me ask you specifically. Have you reduced 

the principal? 

Ms. COFFIN. Yes, we have. 

The CHAIRMAN. You are confident that if you do that on a reasonable economic analysis and they would be better off in foreclosure, 

there is no obstacle? 

Ms. COFFIN. Absolutely. 

The CHAIRMAN. Let me ask Bank of America. 

Mr. GROSS. I am in agreement with that position, Chairman 

Frank. We believe that the contracts that we have with investors 

require that the option, the loss mitigation option that we choose, 

would present the least loss to that investor. 

The CHAIRMAN. You both would anticipate being able to do more 

of this because of the bill and not be challenged by the investors; 

is that correct? 

Ms. COFFIN. Correct, especially in those areas where we have already been given delegated authority because of the decline in the 

housing market. 

27 

The CHAIRMAN. Are there areas where you are the servicer and 

don’t have delegated authority? 

Ms. COFFIN. We work in some of those areas, yes. 

But there are certainly ones— 

The CHAIRMAN. I understand that. 

From whom have you not gotten the delegated authority? From 

the investors? 

Ms. COFFIN. It is not whom, it is where—the areas of the United 

States. Obviously, everyone is aware of certain areas where they 

have just taken a delegated authority down so that we know where 

the declining housing market is, and we can react faster. 

The CHAIRMAN. Is this a legal concept, delegated authority? 

Ms. COFFIN. No. It is making sure we understand the particulars 

of that— 

The CHAIRMAN. So if it is within your power to do it, do you 

think it should be done? 

Mr. WATT. Would the chairman yield for clarification? 

The CHAIRMAN. Yes. 

Mr. WATT. Mr. Gross said that you have the authority to do this 

if it is the least—if it is going to generate the least amount of loss, 

or some variation of that. 

Mr. GROSS. That is correct, sir. 

Mr. WATT. What kind of documentation is a servicer required to 

provide? That seems to me to create a whole gray area there. I 

mean, if you have to generate reams and reams of paper to generate that kind of documentation, that could be a never-ending battle. 

Mr. GROSS. Not really, sir. 

The challenge that we have there and the question before us 

with homeowners is generally to create a monthly payment that is 

affordable for them. That is the basic premise, that together we can 

create a monthly payment that will allow them to sustain homeownership. 

Mr. WATT. But does the servicer have to provide some kind of 

documentation that this is the best available; I mean, that this is 

going to generate for a lender or somebody on up the line the least 

amount of loss? 

To whom do you have to document that? 

Mr. GROSS. That would be to the trustee and to the security holders. 

Mr. WATT. What kind of documentation is that? 

Mr. GROSS. They are not going to come and ask for this, but the 

fact that they aren’t asking for it does not relieve us of the contractual responsibility. 

If I could elaborate on that, if we have a choice between creating 

an affordable payment via reducing the interest rate for the borrower or reducing the principal balance, reducing the interest rate 

will generally result in a lower loss to the investor than reducing 

the principal balance. 

They may end up with the same monthly payment, but for the 

investor who owns these mortgages, the reduced interest rate is the 

preferred option, and it is the one under accounting principles and 

regulatory guidelines that results in the least loss; and that is the 

option that we are contractually bound to offer. 

28 

The CHAIRMAN. Well, then, that is a serious problem because 

what we have found is that interest rate reductions haven’t 

worked. And the bill, of course, was aimed—and we thought, frankly, Bank of America was interested in the ability to do principal reductions. So going forward, the bill having been passed, your institution had some input into that. 

Do you anticipate that there will be more principal reductions? 

Mr. GROSS. I absolutely do believe that there will be more principal reductions. This is a program—the bill that has been recently 

passed by the House opens up more refinancing abilities. 

The CHAIRMAN. Let me follow up. 

You are saying that you would be obligated—if you could get it 

to the point where the borrower could continue to pay by interest 

rate reduction, you are obligated to do that. But if interest rate reduction doesn’t keep that borrower in his or her home, then you are 

fully free to go to principal reduction? 

Mr. GROSS. Absolutely, sir. 

The CHAIRMAN. Let me ask Ms. Schwartz. 

You say you represent, or in HOPE NOW you have—I know you 

are not their formal representative—servicers amounting to over 90 

percent of the subprime. Are there any servicers who disagree with 

what we have just heard from Ms. Coffin and Mr. Gross? Are there 

any servicers who tell you, oh, I’m sorry, I have investors to worry 

about, and I can’t reduce the principal? 

Ms. SCHWARTZ. I haven’t spent a lot of time on the new legislation that has passed, but I have gotten informal feedback, such as 

from the people on the panel, that this will be very helpful and a 

useful tool. 

The CHAIRMAN. Let me ask you to survey all of the servicers and 

ask them the kinds of questions we have just asked now. In fact, 

my staff will be glad to work with you, because you will be helpful 

in getting from all the servicers the answer to that question. 

Let me just ask the ABA: Are there problems with loans held in 

portfolio, and are you constrained by regulatory consequences from 

writing down principal? 

Mr. BARBER. No. 

The CHAIRMAN. That is the best answer I have gotten in 28 

years: ‘‘No.’’ 

I am serious. I like that. I am glad to hear that for this reason, 

because as you know, some people use that as, oh, we can’t do it 

because of this and that. 

So we appreciate that. That is very helpful, and we will work to 

make sure that is the case. 

Mr. Kittle, from your standpoint? 

Mr. KITTLE. I can’t speak directly for all of our members because 

we have many—2,500 of them. But we congratulate you, first of all, 

for passing this bill. We were in support of that. We think our 

members are going to use this. 

The CHAIRMAN. And you are not aware of regulatory constraints 

against writing down the principal if, in fact, that is what is economically justified? 

Mr. KITTLE. I am not aware, but I am going to check. 

The CHAIRMAN. I would appreciate that. 

Let me turn to the gentlewoman from California. 

29 

Ms. WATERS. Thank you very much. There is so much here that 

we need to understand. I thank all of you for being here today. 

I will start with Mr. Gross. You have been with us before, and 

I appreciate very much your attendance here again today. 

Bank of America has acquired Countywide. Did you also acquire 

the servicing part of Countywide? Is Countywide still in existence, 

somehow servicing perhaps Bank of America’s loans or its own 

loans? What is the business acquisition here? What happened? 

Mr. GROSS. As of July 1st, Bank of America acquired Countywide 

Financial Corporation in its entirety, which includes the servicing 

portfolio and all roles and responsibilities that go with that. 

There are still—the loans that Countywide has serviced in its 

own name are still being serviced under the name of Countywide 

until the transition plan is complete, at which point the majority 

of the portfolio would then be serviced under the name of Bank of 

America. 

Ms. WATERS. In essence, Countywide is servicing its loans with 

the same personnel that they used prior to the acquisition, at this 

time; is that correct? 

Mr. GROSS. That is correct. 

Ms. WATERS. Who trains the servicers? 

Mr. GROSS. The Home Retention Division and Loan Servicing Division for Countywide, now Bank of America, has an extensive 

training department contained within it that works regularly with 

insurance companies and all of the major investors to make sure 

that our practices are at or exceeding industry standards. 

Ms. WATERS. Let me understand. With Bank of America, one of 

your clients that is in trouble, who anticipates that he or she will 

not be able to make their mortgage, would have an opportunity to 

call Bank of America and tell them they have problems, can they 

get some help, do they understand? 

Mr. GROSS. There is an established escalation process. 

Ms. WATERS. But you have a loss mitigation department that 

this person would go to or call to be connected to talk about the— 

that they are going to be late with their payment, they have some 

problems, they don’t have the income. That is the first step; is that 

right? 

Mr. GROSS. That is correct. 

Ms. WATERS. To whom do they speak? Do they speak to the same 

person who would be considered a servicer, who could do a loan 

workout if they got into worse problems, or is this a different department and person? 

Mr. GROSS. They would be talking with a home retention expert 

who, if they say, this is a long-term problem and I need help, that 

person is trained to help them with that problem. 

Ms. WATERS. Is this person the same person who could eventually be in the position of doing a loan modification in this loss mitigation department? 

Mr. GROSS. In most cases, it would not be. 

Ms. WATERS. Why don’t you just tell us how it works. I don’t 

want to have to drag it out of you. 

Mr. GROSS. Once the customer calls into our home retention 

area, they would speak with an initial staff member who would 

then be able to tell them what options are available. We would 

30 

gather the financial information from the homeowner, and based 

upon the particular needs that they have, that staff member is authorized to make what we would call a ‘‘contingent offer.’’ 

Ms. WATERS. What is that staff member called? What is their 

title? 

Mr. GROSS. I am sorry; I don’t know the exact title of that person. 

Ms. WATERS. Okay. 

Mr. GROSS. But they are authorized to make what we would call 

a ‘‘contingent offer’’ of a workout that, based upon, again, the financial circumstances surrounding that homeowner’s issues and provided that the homeowner provides us with minimal documentation 

that supports what they have told us, then that loan would—that 

case would then be transferred to a fulfillment area in our HOPE 

NOW department that would close that workout for us. 

Ms. WATERS. Okay. That staff person who does not have a title, 

who would be involved in helping to determine whether it goes to 

your fulfillment area, could be offshore; is that right? 

Mr. GROSS. No. 

Ms. WATERS. Do you have any loan mitigation operations offshore? 

Mr. GROSS. Yes, we do. 

Ms. WATERS. Tell me what they do. 

Mr. GROSS. The people offshore, those who are telephone-based, 

would handle more customer service-oriented calls on an overflow 

basis when our stateside call centers need assistance, to reduce 

hold times for the homeowner. 

Ms. WATERS. So this customer who calls, who anticipates that 

they are going to get in trouble, but they are not yet at the point 

of having a foreclosure, they could be talking to someone in your 

loss mitigation department that is offshore. 

Mr. GROSS. They could be, and they would be. And once we got 

to the point that you are describing— 

Ms. WATERS. Describe your offshore operation to me. Who may 

we be talking to? Somebody in India? 

Mr. GROSS. Yes. 

Ms. WATERS. What do they do when Ms. Jones in America calls 

about her house in Detroit to this person in India? What do they 

do for them? 

Mr. GROSS. The vast majority of calls that they would receive 

would be a homeowner who would be calling and saying, my payment was due on July 1st and I will be sending it to you on July 

18th. We would record that information, and that would be the end 

of the call. 

For those people who have more complicated transactions than 

what I just described, that call would be transferred back to a 

stateside representative in the home retention area. 

Ms. WATERS. So this person that is offshore, could they determine whether or not this person has to pay late fees? 

Mr. GROSS. Yes. 

Ms. WATERS. So the person offshore would say, okay, Ms. Jones, 

your payment is going to be late, but that’s going to cost you a late 

fee. 

31 

Mr. GROSS. They would make the homeowner aware of whatever 

late fee was associated. 

Ms. WATERS. If Ms. Jones says, I can’t pay it for 45 days, is this 

person offshore authorized to say that is okay, or do they have to 

transfer it to somebody else? 

Mr. GROSS. If you are saying the monthly payment can’t be paid 

for 45 days, that phone call would then be transferred to a stateside representative. 

Ms. WATERS. Okay. This stateside representative then would do 

what? 

Mr. GROSS. They would gather financial information from the 

homeowner as far as income goes. We would get their indebtedness 

and necessary information, and then we would be looking at it very 

quickly to determine if this is a short-term problem or a long-term 

issue. Is this a case of unemployment, medical issues, divorce; what 

is the underlying cause for the 45-day delay? 

Ms. WATERS. If this is a person who works every day, they have 

an income, but they are in a loan that is a little bit more than they 

can afford, is this person now in a position where they can talk 

about, or be offered, a workout or a modification? 

Mr. GROSS. Yes, they are. That person who is working with them 

would recognize the fact that the monthly payment that we are 

talking about is not sustainable. That would be supported by the 

income and expense information that we have now gathered from 

the homeowner, and we could make, based upon that information, 

a contingent offer of a modification to the homeowner that would 

then be supported by the documentation. 

Ms. WATERS. Does the possibility of a modification include more 

than one way by which this person could retain their home? 

For example, you talked about reduction in interest rates. Mr. 

Frank talked about reduction in principal. Could both things happen? 

Mr. GROSS. We would first be looking at the modification of the 

interest rate because, as I earlier stated, that results in the least 

loss to the holders of these mortgages. If that does not, in fact, 

solve the problem, then we would absolutely consider the reduction 

in principal balance. 

Ms. WATERS. Okay. As I understand it, there are some affordability standards that are used to judge whether a loan workout, 

be it a repayment plan or loan modification, would be affordable 

and sustainable for the bar—and I guess this happens with VA and 

FHA loans. 

Do you have an affordability standard that your servicers work 

by? 

Mr. GROSS. Yes, and it does vary in some cases by investor. You 

have just mentioned two. FHA and VA have their standards. 

Fannie Mae and Freddie Mac have their standards. 

You would find that the investors for whom we service, that are 

not included in those groups, our affordability standards are very 

close to, if not the same as, those others. 

Ms. WATERS. But investor standards could be different? 

Mr. GROSS. The Fannie Mae and Freddie Mac standards, along 

with FHA and VA, are all looking to ensure that at the end of the 

month, there is net unencumbered income available for the houseVerDate Aug 31 2005 15:19 Nov 17, 2008 Jkt 044905 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\44905.TXT TERRIE
32 

hold to take care of emergencies. That is the same thing that we 

use on all of our loans because we want to ensure that whatever 

workout plan we use, it is sustainable. 

Ms. WATERS. We need to take a look at that. 

You took over Countywide. Countywide probably has the largest 

number of foreclosures of any lender in this country. 

Bank of America, you have your own foreclosures prior to the 

takeover, having merged all of this. How much did you expand 

your servicing divisions in order to accommodate this huge foreclosure problem that you have? 

Mr. GROSS. I should clarify that the two servicing divisions have 

not yet been combined. That is part of the transition process. As 

I am sure you can imagine, when you are combining two rather 

massive corporations that now total approximately 250,000 employees, this is not a task that is easily accomplished— 

Ms. WATERS. So they have not been combined, but certainly 

Bank of America feels a real sense of responsibility— 

Mr. GROSS. We do. 

Ms. WATERS. —to deal with the Countywide problem? 

Mr. GROSS. Yes. 

Ms. WATERS. So if the servicers have not been expanded, how are 

you doing all of this wonderful work in doing workouts and modifications? 

Mr. GROSS. The staff within the Countywide servicing area that 

is devoted to home retention continues to grow on a monthly basis 

and will continue to grow on a monthly basis as more staff is needed, which is anticipated to deal with these issues and as I mentioned in my testimony. 

Ms. WATERS. How much has it grown in the last 3 months? 

Mr. GROSS. I believe it is in the neighborhood of 500 staff members—from 4,200 to about 4,700. 

Ms. WATERS. Have you determined whether or not this is sufficient to deal with this awesome problem that you have acquired? 

Mr. GROSS. The staffing that we currently have, we believe is 

sufficient to handle the volume of work that is before us today. 

I would also state that we have very sophisticated models that 

we use in our staffing analysis to ensure that the staffing that we 

will need in October, November, and December will be in place at 

the time that their services are needed. 

Ms. WATERS. Let me read something to you from today’s paper: 

‘‘U.S. foreclosure filings more than doubled in the second quarter 

from a year earlier as failing home prices left borrowers owing 

more on mortgages than their properties were worth. One in every 

171 households was foreclosed on, received a default notice, or was 

warned of a pending auction. That was an increase of 121 percent 

from a year earlier, and 14 percent from the first quarter. 

‘‘RealtyTrac, Inc., said today in a statement almost 740,000 properties were in some stage of foreclosure, the most since the Irvine, 

California-based data company began reporting in January, 2005.’’ 

I won’t continue. The chairman has been extremely generous. I 

would have liked to explore with HOPE NOW— 

The CHAIRMAN. Let me go to Mr. Watt, and then we can come 

back. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

33 

Mr. WATT. Thank you, Mr. Chairman. I had a whole series of 

questions, but I got caught up in the question that the chairman 

asked, and I am still not absolutely clear what happens in this scenario, Mr. Gross and Ms. Coffin. 

You are a servicer. You have one entity, the finance people. 

Whomever, packagers, whomever owns the mortgage, they would 

benefit more from not writing down the interest or would—yes, 

would benefit more from writing down—not writing down the interest—or not writing down the principal. I’m sorry. 

Mr. GROSS. Thank you. 

Mr. WATT. And you have somebody else who would benefit more 

from writing down the principal. How do you resolve that conflict, 

I guess. You have a contractual imperative to do what is in the interest of both of those people, or just one of them? 

Mr. GROSS. To start with, I think that the first obligation that 

we have and try to support is to try to keep the homeowner in their 

home. That will result in the best return and the least loss to all 

parties who are involved in this mortgage transaction. 

Obviously, the homeowner is— 

Mr. WATT. That actually poses my question even clearer then. 

Suppose the homeowner is most likely to be retained in their 

home with a principal write-down, yet the investor is most likely, 

they think, to get the best return if you don’t write down the principal; if you write down the interest. 

How do you resolve that conflict? I thought I heard you say you 

had a contractual obligation. 

Mr. GROSS. I do. 

Mr. WATT. To the servicer? 

Mr. GROSS. To the investors. 

Mr. WATT. I am sorry, servicer not investor. 

How do you resolve that conflict? That is what I am trying to figure out. 

Mr. GROSS. Generally speaking, the homeowner’s primary issue 

is how much is the monthly payment that I have to pay, and is 

that monthly payment sustainable. If the monthly payment is not 

sustainable, I can reduce that monthly payment in one of two 

methods, or possibly a combination of the two. 

One, I can reduce the interest rate, which would reduce the 

monthly payment. If that does not resolve the issue and arrive at 

a sustainable monthly payment, then the next option to be considered would be extending the term of the loan possibly from 30 to 

40 years, which would further reduce the monthly payment. Then 

the last option that I have is reducing the principal balance on the 

mortgage. 

So it could be a combination of those, but I would generally approach those in that hierarchy. 

Mr. WATT. That is fair. That is honest. Even if it might be in the 

long-term interest of the borrower to have the mortgage amount 

written down, that is not going to be your first driving force. 

Your first driving force is to create a sustainable payment. 

Mr. GROSS. That is correct. 

Mr. WATT. That is what I heard you say. That is fine. 

That is the same thing you would say, Ms. Coffin? 

34 

Ms. COFFIN. Thank you, Congressman. I was going to add a little 

more color to this. I don’t think we should see it as an either/or. 

Mr. WATT. But, you know, in a lot of cases it is an either/or, and 

that is the case I postulated to you, the long-term best interest of 

the borrower is to write down the principal balance on the loan, but 

the long-term best interest of the investor is to keep the interest 

rate. I don’t know how you reconcile those things. 

It’s okay. You are saying your first obligation is to the people 

who put up the money. 

Ms. COFFIN. No. I apologize. I misspoke. I didn’t mean either/or, 

investor or customer, I mean either/or rate or principal reduction, 

meaning that whether it is rate, term, principal reduction, all 

three, we have all of these tools available to us. And as we reach 

each borrower, I think what might help here are some examples. 

Where I believe the principal reduction, and especially the new 

bill that has been passed will help us is, take someone who has extenuating debt, a first and a second mortgage, because what you 

are going to see is that no matter how far we take the term or the 

rate reduction, we could not get to the affordability. 

Mr. WATT. I am not cutting you off because I am not interested 

in what you are saying, I am cutting you off because I am going 

to run out of time. 

The CHAIRMAN. Since he picked up from me and finished a question, he has more time. We are not in a rush here. 

Mr. WATT. There are a lot of internal decisions being made by 

the servicer here that could have some really interesting implications for the people who put up the money and the borrower; and 

it seems to me these are some tough areas. 

Let me extend what you all have said because one of the concerns some of my colleagues have posed about this bill that we 

passed out of the House—and we hope the Senate is going to pass 

at some point in the foreseeable future—is that we are going to end 

up with the worst loans being put into that program. 

Talk to me about whether that is true. Because it sounds like, 

based on what you all have said, that might be the case. 

Ms. COFFIN. I could not classify this as a worst loan. What we 

have already been doing, prior to the bill being passed, is, we have 

been analytically looking at our portfolio of those borrowers who 

are most likely going to be eligible for this. 

We have many borrowers who are already in a position of 90 percent, but they cannot refinance today, and they don’t have affordability. And so principal reduction, we have to look at the borrowers who are overextended and they need this principal reduction, they need the rate, they need the term, they need all the 

pieces of it. What is important is that willingness to remain in the 

home, the affordability, and the refinance should make it a good 

loan. 

Mr. WATT. I might have mischaracterized when I said ‘‘worst.’’ I 

mean the most distressed borrower, the people who are most likely 

to end up in this principal write-down situation. 

Would that be an accurate characterization? 

Mr. GROSS. I think a couple of things here. Number one, we also 

have been looking carefully at our portfolio on a preliminary basis 

trying to assess what portions of our portfolios might be eligible for 

35 

this program. Until the oversight board publishes final regulations 

surrounding this, which will truly give us the detailed underlying 

guidelines that must be used in granting these refinance mortgages, we won’t be able to do a final assessment. 

Mr. WATT. But you have some preliminary estimates? 

Mr. GROSS. I don’t have those with me. 

Ms. COFFIN. Congressman, there is another point I think that is 

an important part of the bill that was passed, and that is your 

debt-to-income ratio that you have put into the bill. That is going 

to protect you to make sure that there is a reasonableness that 

these borrowers will be able to sustain the payment. 

Mr. WATT. I am less concerned about that than some of my conservative colleagues, to be honest with you. I just wanted to make 

sure that we have a record on it here. It is a concern obviously, because we don’t want the absolute most distressed; we want this 

thing to work. 

The CHAIRMAN. If the gentleman would yield, nothing in this bill 

requires the FHA to take it. In fact, that was one of the reasons 

that we rejected the auction mechanism, because of the fear they 

might be overwhelmed. 

So the FHA, in any case, retains complete authority to say ‘‘no.’’ 

Mr. WATT. Now, the transition period you mentioned, Mr. Gross, 

the writing of these rules, I think that is something we wrote in 

some 60-day requirement on? Or is that what the industry was 

jumping up and down about needing a 60-day, at least, transition 

period during which FHASecure would remain? Tell me about that. 

Am I just missing the point here? 

Mr. GROSS. Number one, I apologize. I am not familiar with what 

industry positions might have been. In terms of the transition period here prior to the first of October, once the board has published 

their final regulations it is our intent to immediately take those 

final regulations and analyze our at-risk portfolios. And any borrower who is in the foreclosure process that we believe will be eligible for this refinance program, we will be in touch with them immediately so that we can use this as a very effective tool to stop 

that foreclosure from happening. 

Mr. WATT. Are you using FHASecure? 

Mr. GROSS. Yes, we are. 

Mr. WATT. Is there some transition period for it? 

Mr. GROSS. FHASecure and this particular bill really, I think, 

are geared toward two different populations. I think that the bill 

that you have just recently passed is far more encompassing than 

what FHASecure might have been. And especially it was just very 

recently in the May, effective July, timeframe that FHASecure was 

expanded. So I think that they will remain both effective tools. 

Mr. WATT. Even after October 1st? 

Mr. GROSS. I believe so. 

Mr. WATT. Let me just get a show of hands quickly on two issues 

so as not to belabor the point. There is a lot of controversy about 

whether—well, I shouldn’t say a lot of controversy. I suspect there 

will be differences on this panel, depending on the various perspectives of the panel, about whether there is still an ongoing need for 

predatory lending legislation after passage of this bill and the reguVerDate Aug 31 2005 15:19 Nov 17, 2008 Jkt 044905 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\44905.TXT TERRIE
36 

lations. Just show me who thinks there is still an ongoing need for 

predatory lending legislation. 

Seven. That is not bad. Mr. Barber, you are the only one who 

didn’t spring to the fore on that. 

Mr. BARBER. I guess my experience is such that I am not dealing 

with those type of loans. I am really not very familiar with the 

issue. 

Mr. WATT. So that is not an expression that it is not needed; it 

is an expression that you would rather not express an opinion 

about that? 

Mr. BARBER. I would concur with that. 

Mr. WATT. Okay. Ongoing need for servicer legislation. All who 

believe that there needs to be some legislation, whether Ms. Waters’ bill or some other bill, related to servicers and their obligations, all in favor, raise your right hand. 

Now, on the other side of that is the like of a right-hand then 

expression that it maybe is too early to say, or you are unalterably 

opposed to service legislation? Mr. Kittle first. 

Mr. KITTLE. Yes, sir. We would like to see the HOEPA rules 

work at this point before we have any further legislation. 

Mr. WATT. So your jury is still out? 

Mr. KITTLE. Yes, sir, it is. 

Mr. WATT. Okay. Mr. Barber. 

Mr. BARBER. I guess I would just say that the devil is in the details, and we are very interested in working with the committee on 

this issue. 

Mr. WATT. Who else didn’t express an opinion? There were two 

others. You all don’t have an opinion? Okay. All right. I thank you. 

The CHAIRMAN. Let me go to Ms. Speier, and then to Mr. Miller. 

Ms. SPEIER. Thank you, Mr. Chairman. 

Our distinguished chairman at the outset made, I think, a very 

important point. What we heard today is very reassuring, but it is 

not consistent with what many of us are hearing in the field. 

So this is a question to you, Mr. Barber, as the representative 

from the American Bankers Association. I think in the near term 

that the ABA would be well intended if it created an office of consumer services which Members of Congress could contact if we 

were having issues with particular constituents and their particular bank. We have done something very similar in California 

with the Department of Managed Health Care, where there is an 

office to which we can call, and they will negotiate with the health 

plans around particular questions that we have relative to constituents. Is that something that you would consider doing? 

Mr. BARBER. It is not an issue that I am familiar with. It sounds 

very reasonable, and I am sure that staff would have no problem 

getting back with you on the issue. 

Ms. SPEIER. Thank you. This question is to you, Mr. Barber, as 

well as to everyone else, but particularly to you because you made 

the point of saying that you didn’t get engaged in these risky loans 

and you did what we would expect most prudent bankers to do: 

Make sure that the customer has the appropriate income to be able 

to make the loan payments. And you also said that you had lost 

market share because of it, and you are trying now to build up that 

37 

market share. So you did the right thing and you lost, at least in 

the short term. 

My question is, what do we do, and how do we go after the bad 

actors who for all intents and purposes are walking right now? Do 

you have any suggestions to the committee in that regard? 

Mr. BARBER. I think in many cyclical financial businesses you 

have to walk away when price or risk does not make sense. And 

there are institutions that are aggressive and take other stances. 

Most of those entities are now out of business. 

Fundamentally, the subprime market was funded for many years 

by FHA-type products. There was a tremendous boom in FHA. A 

series of events took place, probably the most important of which 

was somebody, a young person on Wall Street, made a model that 

didn’t make any sense, many investors bought these things, and it 

blew up. Today that market share is being regained by the FHA 

product, and institutions like myself and people, others in the ABA, 

are using the FHA product to refinance people and use that product for low-income folks who have rather challenged credit scores. 

That is a great product for those people. It is a fixed-rate product, 

and it is much more appropriate. 

Ms. SPEIER. I guess my question is somewhat different. I was at 

a counseling program that was hosted by the Speaker of the House 

a couple of months ago, and I was able to listen in on a couple of 

counseling sessions and I was astonished by what I saw—a woman 

making $2,000 a month holding a $500,000 loan. Now, there was 

fraud associated with that application. Someone should be held accountable for that, and yet we are not holding anybody accountable 

except maybe the taxpayers of this country in trying to fix this scenario. 

So I guess I am asking you and others, do you have any ideas? 

It looks like Ms. Coffin does. 

Ms. COFFIN. Yes. Regulate brokers. Let me answer the question 

first. Because we have loans in our portfolio that we did not originate, I see exactly what you have seen. And we know some of the 

practices that were out there. Those practices need to be regulated. 

And, number two, some of them haven’t just walked, we are 

thankful, they are gone. They are out of business. Their model was 

not sustainable. And as was mentioned down here, you have to 

begin with responsible lending practices. That is where this all begins, making sure the borrower knows what product they are getting into, making sure they understand about the payment. That 

is what has to be regulated. 

Ms. BOWDLER. I would agree. NCLA has actually done a lot of 

work looking at the role of mortgage brokers and where that system broke down, and they definitely need more enforcement and 

accountability there. But that is not the only place where the system broke down. Those brokers originated loans for banks, and 

banks then approved those loans and took them in with the documentation that they had. 

All up and down, across-the-board, we are seeing that not only 

did the underwriting standards become weakened, but the enforcement standards at the State and the Federal levels just completely 

broke down. In cases like fraud that you are mentioning, a lot of 

those cases are done at the State level, and either their authority 

38 

has been undercut by positions that the national regulators have 

taken, or their enforcement bureaus are too small to go after all 

those cases, or the remedies are too insignificant to make it worth 

it for the borrower to pursue. 

So as far as those folks who have gone out of business for this, 

there are many, but this doesn’t mean that they are not going to 

come back. When the market rebounds, there is going to be another 

bad product out there, another company targeting our community 

trying to figure out how to make a buck off of them. 

Ms. SPEIER. Mr. Kittle. 

Mr. KITTLE. Yes, ma’am. Thank you. I am so happy that this bill 

passed, because for 10 years the Mortgage Bankers Association has 

wanted FHA reform. That is part of the issue. We are going to get 

that. We have been up here for the last 5 years asking for one national standard, one bill to fight predatory lending. That would include language to preempt the States, not 50 individual laws, but 

one that we could all follow and all have to adhere to. We want 

the brokers not only to be licensed, but we would like higher net 

worth requirements for brokers, educational requirements, and a 

national registry for all loan officers. By the way, both Bank of 

America and Wells agree to do that. 

So you put all this together, along with RESPA reform. Last 

year, MBA gave to HUD a new HUD–1 settlement statement and 

a new good faith estimate where every single line on both of those 

matched. 

You cannot have predatory lending until you lend, so it is at the 

closing where it takes place. And if all the lines match up perfectly 

between what is given at application and at closing, it is much 

more difficult for rates, closing costs, and other fees to be changed 

for the elderly, for Hispanics, for minorities, and for African Americans. 

We believe all these things combined can help fight this. 

Ms. SPEIER. Thank you. 

Mr. Gross, in acquiring Countrywide, they had a requirement 

that they would have to waive all rights to claims in State and 

Federal provisions that exist. And I think Ms. Gordon had referenced that earlier, maybe Ms. Schwartz, on the waiver provision 

that many are imposing. So the question I have is, are you continuing with that waiver provision in dealing with these customers? 

Mr. GROSS. I am not familiar with any waiver of a borrower’s or 

homeowner’s legal rights that has ever been associated with any 

workout transaction. The only waivers that I have seen that have 

been used have been in specific settlement of legal actions, where 

someone has brought a lawsuit, and as part of the settlement action that there could be a waiver. But I am not aware of any contractual waivers that are required as part of any workout processes. 

Ms. GORDON. I have a Countrywide waiver right here. I will read 

it to you. 

The CHAIRMAN. Let me ask, Mr. Gross, were you speaking for 

only the Bank of America, or are you commenting on Countrywide’s 

practices before this, too? 

39 

Mr. GROSS. Countrywide’s as well. I am not aware of the document. 

The CHAIRMAN. Then, Ms. Gordon, please go ahead. 

Ms. GORDON. I will try to read quickly. It is a little long: 

‘‘In consideration for Countrywide entering into this agreement, 

you agree to release and discharge Countrywide and all of its investors, employers, and related companies from any and all claims 

you have or may have against them concerning the loan. Although 

California law provides that ‘a general release does not extend to 

claims which the creditor does not know or suspect to exist in his 

favor at the time of executing the release which if known by him 

must have materially affected his settlement with the debtor’ you 

agree to waive that provision or any similar provision under any 

other State or Federal law, so that this release shall include all 

and any claim whatsoever of every nature concerning the loan, regardless of whether you know about or suspect such claims, including but not limited to claims arising under the Mortgage Disclosure 

Act, Electronic Fund Transfer Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair 

Housing Act and Fair Debt Collection Practices Act. This release 

shall remain effective even if this agreement terminates for any 

reason.’’ 

And I also want to read you another line from an Option One 

agreement we have which forces the homeowner to admit, ‘‘The arrearage is the borrower’s full responsibility and was produced solely by the actions or inactions of the borrower.’’ 

Mr. GROSS. I apologize to the committee. I was not aware of this 

release form. I can assure you that it will be under review by Bank 

of America very quickly. And I would assume that we will be 

adopting more industry standard practices such as what Fannie 

Mae or Freddie Mac might be using. 

Ms. SPEIER. Thank you. 

The CHAIRMAN. Let me just say, I am very glad the gentlewoman 

asked that question. I had made a note of it. And I appreciate the 

fact that you say it will be under review. I hope you will convey 

to Mr. Bulus and others that it is my expectation that it will soon 

be deeply underground, at least 6 feet, and that we won’t hear of 

it again. 

I thank the gentlewoman for raising the issue. 

Ms. SPEIER. I have two last questions. We have heard this morning that modifications haven’t worked, at least in a significant 

number of cases. So my question to you is, what are you going to 

be doing differently to make sure that these modifications do work? 

Ms. COFFIN. One of the things we have already been doing in the 

last several months, as a matter of fact probably close to a year, 

is what we call a trial mod. This originally began called a special 

forbearance mod that HUD introduced, but we have actually expanded it to all of our borrowers. And in the trial mod, we look for 

the qualifications that will bring affordability. And then once we 

achieve it, we just tell the borrower: If you can make this payment 

for 3 months, we will automatically mod your loan. Because we 

want to see first that they actually can make the payment. And if 

they can, the loan will be modified. 

40 

This has been very successful, and it actually helps us in the 

back end of not seeing that redefault. Now, what we will see is 

more redefault in the actual trial period, but we will not see it on 

the back end. So then we are still working with the borrower. So 

we come right back in and we begin the work all over again to say, 

okay, we were not able to achieve it during that trial mod. What 

are we missing here? Let’s look at your income and expenses again, 

and we rework it with the borrower once again. 

Mr. GROSS. I would concur. I think our practices are almost identical. I would also add that for the borrowers that redefault within 

the first year of the modification, in many cases this is not due to 

the fact that the modification was not affordable at the time; it is 

due to the fact that life events continue to occur even after the 

modification. And if subsequent life events happen and a new default occurs, we will start the practice all over again to find a sustainable payment to help them stay in their home. 

Ms. BOWDLER. Could I comment on that really quick? That hasn’t 

necessarily been our experience of what we have seen on the 

ground. And I can’t say it is the loans that we have heard from our 

counselors come from either one of your organizations. But the 

short-term loans that were defaulting were more like repayment 

plans or forbearance, which is a temporary fix. So, by nature, it 

was just sort of kicking the obligation down the road a little bit, 

and so it was very predictable that a lot of those were going to default because they were not actual modifications where they 

changed the terms of the loan, they were just temporary forbearance and repayment plans. 

One problem with that that we have started to see in the counseling network is that once that temporary fix does not work, and 

one caution I have about the trial, I don’t know if this is the case. 

But when the borrower goes back and says, whatever deal you gave 

me didn’t work, the response that they are getting from the agent 

on a routine basis is, well, we already gave you one modification. 

There is nothing I can do for you now. You are not eligible a second 

time around. 

The CHAIRMAN. Time is going to expire here, but let me just say 

this: We have gotten some very good answers. The question is practice. But what we are going to do, and the staff of the full committee and the subcommittee are here, we are going to be following 

up. And we will work with Ms. Schwartz, because she has these 

particular servicers, and we are going to say, look, this is what we 

were told. If this isn’t true, then you had better tell us. 

So I think everybody here—I don’t doubt anybody’s integrity 

here, but you don’t always know what is going on out in the field. 

But we intend to follow up by taking all of these good answers that 

we have gotten and write to people and say, please reaffirm for us 

that this is your practice. 

The gentleman from North Carolina, and then the gentleman 

from California. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I 

apologize for waltzing into this hearing 2 hours into it without having heard any of the testimony and then asking questions. 

The CHAIRMAN. I would say to the gentleman, I did raise the 

issue that you and I had discussed about regulatory constraints. I 

41 

got an answer that, if you want to go further, but that question 

that you and I had discussed— 

Mr. MILLER OF NORTH CAROLINA. Obviously, if redundancy were 

a sin in politics, we would all be going to hell. 

Twenty years ago during the savings and loan debacle, I was a 

lawyer in practice in Raleigh, and I took a very modest commercial 

litigation case, Re: Savings and Loan, in Iowa, that arose out of the 

foreclosure of a mortgage that the savings and loan had not originated but had purchased. I sent them a copy of the complaint that 

I filed. It was a question, internally it was a modest claim, internally a question of law that was a 50/50 proposition because there 

really was no deciding case directly on point. I called up, I had a 

settlement to offer basically splitting the difference of the actual 

damages with another commercial entity, a bank, which was 

$15,000. And the guy I dealt with at the savings and loan in Iowa 

said that they were carrying the lawsuit that I had filed on their 

books as a $90,000 asset. My view was that $15,000 was $15,000 

more than they had. Their view was that if they took $15,000 for 

the lawsuit to settle it, it would appear on their books as a $75,000 

loss. That made absolutely no economic sense. Sure enough, a few 

months after—and I ultimately lost. Despite great advocacy on behalf of the savings and loan, the position that I had argued for lost 

in the court of appeals. It won at the trial level and lost at the 

court of appeals. A few months later, sure enough I got something 

from the Resolution Trust Corporation telling me the savings and 

loan was not in receivership and wanting me to fill out a lot of 

forms about the case I had represented them on. 

We have heard wildly different things about how much modification is going on. We have heard from industry that they are modifying like crazy, left and right, modifying all over the place. And 

we have heard from consumer advocates that they are hardly modifying at all. 

The Washington Post this morning said that it varies dramatically bank to bank. And we have also heard after the failure of 

IndyMac Bank that there may be 150 banks that are in danger of 

becoming insolvent. That made me wonder if foreclosure, if foreclosure avoidance modification appears to be obviously economically 

logical conduct, but a lot of lenders aren’t doing it. It possibly has 

to do with how they are showing the mortgages on their books. 

Can you tell me how mortgages are being shown on the books? 

The mortgages that every lender knows has a reset coming in 3 or 

4 months or has already had a reset and is going to increase the 

monthly payment by 30 to 50 percent, which is apparently pretty 

typical of the subprime loans of 2005 and 2006, how are they being 

shown if there is some delinquency, some default, some slowness 

in payments? How are they being shown if they are modified? 

Anyone can take that. Obviously those who are here with lenders 

might be the ones who could answer that first. 

Ms. COFFIN. I heard lots of questions in there. The one question 

was on subprime loans. Correct? 

Mr. MILLER OF NORTH CAROLINA. No. For purposes of regulation, 

for solvency and the appearance of solvency before the OTS, the 

OCC, FDIC, or whomever, how are mortgages being shown on the 

books of financial institutions? 

42 

Ms. COFFIN. That is a big question. 

The CHAIRMAN. Let me—particularly what we need to know is, 

does the fear or the reality that the regulator will force you to raise 

more capital or otherwise constrain you if you write the loan down 

if it is in your portfolio, is that a constraint against making the 

kind of deals we are talking about? 

Ms. COFFIN. I am going to say this upfront. There are a lot of 

accounting laws when you are holding loans in portfolio, which 

means you own the loan. So one thing about Wells Fargo is there 

is a very small portion of our portfolio that we actually own the 

loan. Most of ours are sold into the securitized market, Fannie, 

Freddie, FHA. We are the largest FHA holder of loans. So there is 

a very small portion. And I am not an expert at all in all the accounting laws that come with nonperforming laws when you actually own the loan. But I know this upfront; that in a large portfolio 

such as ours where you are going to get the impact in the Nation, 

where so much is securitized. No—I am going to answer the question as we did earlier. No, we are not incented to foreclose. As a 

matter of fact, as a servicer—and I don’t want to go too deep in 

this. But if you actually move to the foreclosure, it costs the 

servicer more because we are advancing all of the funds throughout 

that foreclosure process and it lasts 12 to 18 months. To modify a 

loan, you are getting to a solution and get back to a paying and 

a performing loan very quickly. 

So I just want to make sure, does that make sense? 

Mr. MILLER OF NORTH CAROLINA. I would welcome hearing from 

others. I expected to hear different answers from different witnesses on this question. 

Mr. GROSS. I am not aware of any regulatory or accounting constraints that would in any way disincent a servicer from modifying 

a loan. 

Mr. BARBER. I would first say that, regarding a lawsuit, carrying 

lawsuits on the books as assets sounds imprudent to me. Regarding 

a loan— 

Mr. MILLER OF NORTH CAROLINA. And I think it proved to be. 

Mr. BARBER. So regarding a loan that we would own, that my institution would own that is delinquent, say 120 days, and let’s say 

that the market value of the house is significantly below what the 

loan balance is. In general, what GAAP accounting would do is you 

would make a fair assessment of the asset, that being the house, 

and you would discount that somewhat. So it should be shown on 

the books after it moves through the loan loss allowance accounts 

at 90 or 80 percent of fair market value of the asset. So that is essentially my understanding of GAAP accounting if the loan was on 

the books as a whole loan. 

Ms. COFFIN. I don’t think any of us are aware of any regulator 

or capital loan requirements that keep us from loan modifying. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

The CHAIRMAN. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. I will pick up where Mr. Miller left off. There may 

be some ‘‘see no evil’’ accounting, where you keep some loans on 

your books at a high level because you haven’t yet modified them. 

But whatever the accounting rules are, if the owners of the loans 

don’t tell the servicers about it, in some cases that may be another 

43 

department of Wells Fargo or Bank of America. If these accounting 

rules skew things the wrong way but don’t influence the behavior 

of servicers, then they shouldn’t be a problem. And has every 

servicer said that as far as you know you have not been told by 

the owners of the loans, which could again be another department 

of your own bank, hey, don’t work out a deal because that won’t 

be so good for our balance sheet? 

Hopefully, I could just get some ‘‘no’s’’ from all those involved in 

servicing it. 

Mr. GROSS. No, we have not. 

Ms. COFFIN. No, we have not. 

Mr. SHERMAN. Okay. Now, Congress has provided for $300 billion 

worth of FHA guaranteed loans. That is the goal, to use that. I 

don’t think anybody claims that is too big, far in excess of what is 

needed to handle the problem. Without additional pressure from 

Congress, are we on target to see writedowns of an FHA guarantee 

of $300 billion worth of loans? And I realize you guys work on the 

individual trees rather than the whole forest, but can you give me 

some indication? Are we going to use this whole program? 

Ms. COFFIN. Yes, we are going to use the program. And even 

prior to it being approved yesterday, we have been analyzing, 

working through our portfolio, trying to find the borrowers who 

look like they would qualify for the program. 

The one step in the process that yet has to happen is we have 

to actually speak to the borrowers, because what is required is a 

new debt-to-income ratio to understand all their other debts to 

make sure they totally qualify for the program. 

Mr. SHERMAN. Now, Wells Fargo services what percentage of the 

mortgages in the country? 

Ms. COFFIN. One out of every eight. 

Mr. SHERMAN. And do you think you will be using one out of 

every eight of those $300 billion? Do you have any guess? I know 

you are going to use the program. Any guess as to how much? 

Ms. COFFIN. No, I do not have the number with me today. And 

I don’t know that you can compare that, because what you have to 

see is the mix of your portfolio. Because if a portfolio is 100 percent 

prime, that is going to be different than a portfolio that has 

subprime and FHA in it. 

Mr. SHERMAN. In any case, do you expect this program to help 

tens of thousands of borrowers that you service, or hundreds of 

thousands? 

Ms. COFFIN. I don’t know that I can give you a number today. 

Mr. SHERMAN. Let’s see if Bank of America can be any more specific. 

Mr. GROSS. As I stated earlier, until the oversight board publishes its final rules, we will be unable to get you a specific answer 

as to how many loans in our portfolio we believe are eligible. But 

we do believe, my gut says that there are going to be tens of thousands of loans in our portfolio that should be eligible for refinance 

under this program. 

Mr. SHERMAN. And do you plan to take full advantage of the program? 

Mr. GROSS. Yes. We will be fully participating in the program. 

44 

Mr. SHERMAN. Do we have any other servicers? I know we have 

a representative of the Bankers Association, but I don’t know if Mr. 

Kittle can speak for his members. 

Mr. KITTLE. Congressman, I don’t think I can speak specifically. 

I only know that we supported the bill, and we expect our members 

to look at it and to ramp it up as quickly as possible. 

Mr. SHERMAN. Next issue: The politically correct view is that all 

of the fraud was done by mortgage brokers, some bad banks or 

lenders, and that every homeowner is as pure as the white driven 

snow. These are, however, people who paid a little bit more in interest in order to have the honor of not having to provide a W–2 

form or a paycheck stub. And when somebody agrees to pay hundreds of dollars a month more in order to not provide you with a 

paycheck stub, it is probably because they don’t want to give you 

the paycheck stub. 

What percentage of the loans made last year were low doc or no 

doc? Do any of you have that kind of broad view? 

Ms. COFFIN. I can only speak to our own portfolio, and that was 

none. 

Mr. SHERMAN. You have no low doc or no doc loans? 

Ms. COFFIN. You said in the last year. We actually came out of 

our subprime. We removed ourselves from the subprime markets. 

Mr. SHERMAN. And when you say subprime, you got out of the 

Alt-A market as well? 

Ms. COFFIN. We have some Alt-A. But one thing we never did, 

ever, not even just in the last year, was ever no doc or low doc 

below a 620 FICO score. 

Mr. SHERMAN. Okay. Bank of America, tell me to the extent you 

can speak for the Countrywide portfolio. I realize you just got your 

hands on it recently, and congratulations. 

Mr. GROSS. Thank you. I will have to qualify my answer a little 

bit. I am here. My primary focus is on home retention loan servicing issues. I do know that in the third quarter of 2007, that low 

doc, no doc underwriting standards and programs were very severely curtailed, all but eliminated, because, quite frankly, there 

was no investors who wanted to buy them. But as far as the actual 

dollar volumes or units, I do not have that information. 

Mr. SHERMAN. Let me now ask a district question. Countrywide 

has a lot of employees in the Calabasas area. Are they going to 

keep—are they going to have a job? And are you planning to move 

servicing and other office activities from the Calabasas area? 

Mr. GROSS. There are currently no plans to move any of the facilities or functions that are in California out of State. 

Mr. SHERMAN. Are there any plans to move them from one part 

of California, particularly the most important part, to some other? 

Mr. GROSS. No. We have very substantial infrastructure in 

Calabasas, West Lake, Thousand Oaks, Simi Valley, and those facilities are there to stay. 

Mr. SHERMAN. Now, this whole effort is going to dramatically increase the amount of work to be done by servicers. I mean, it is 

one thing to hire some people in the good times to just cash the 

check; it is another thing to be reanalyzing these loans. That is a 

tremendous amount of work to deal with problem loans and then 

to implement this law that Congress has just passed. 

45 

Are you planning to add employment in order—you are going to 

need people to do all this. Will this work be done in the Calabasas 

area, the greater Calabasas area? 

Mr. GROSS. Our staff has increased in the last year from about 

2,300 or 2,400 to about 4,700 people. And, yes, the staff in Simi 

Valley, which is the location that is focused on servicing activities, 

has increased as well. 

Ms. GORDON. Can I get back to your question about low doc 

loans? 

Mr. SHERMAN. In just a second. Because the chairman didn’t realize it, but for me that bill was a jobs bill. Actually, not the main 

reason. But let me get to the witness who just asked. 

Ms. GORDON. First of all, I don’t have the numbers right here, 

but I have them right on my desk at home and can get them to 

you. 

In the second half of last year while subprime origination volume 

is way down, percentage of no doc loans is still I think somewhere 

in the 20s or 30s, and there may be staffers up there who have it 

at their fingertips. But the other— 

The CHAIRMAN. But you don’t impute that to Wells Fargo. 

Ms. GORDON. No. No. That is from inside B&C— 

The CHAIRMAN. I didn’t want that to be a contradiction. That is 

our fault. 

Ms. GORDON. Yes. And the other thing is something that happened with no doc loans is that Wall Street was paying more for 

them. And we can give you any number of instances, we can give 

you— 

Mr. SHERMAN. Or Alt-A was better than A? 

Ms. GORDON. No doc loans were more valuable to Wall Street. 

The riskier loans were more—that is what has driven this whole 

thing. 

The CHAIRMAN. But in fairness, remember that a distinguished 

authority, the President of the United States, has pointed out that 

Wall Street was drunk during that period. I didn’t want to quote 

the President. 

Mr. SHERMAN. I think that is important. Also, when you say Wall 

Street was paying more, they were paying more because the yield 

was higher? 

Ms. GORDON. Absolutely. 

Mr. SHERMAN. They were paying more for a 6 percent loan 

versus a 6 percent loan. They were paying more for a no doc 7 percent loan as opposed to a documented 6 percent loan. 

Ms. GORDON. Right. So banks were telling their originators to 

push no doc loans. And we can give you numerous instances where 

the borrower proffered the W–2 statement, and they were talked 

into putting that W–2 statement away, where people were told to 

cross the salary information off of the loan application, and that 

where the rate sheets of the banks say: Be careful. Don’t look at 

any documentation whatsoever. 

Mr. SHERMAN. Because if they did, they would have to give somebody a prime rate. What is the difference between a low doc and 

a no doc? 

Ms. GORDON. I think it is like it sounds. I don’t really know. 

Mr. SHERMAN. Half a doc? 

46 

Ms. GORDON. We are basically talking about loans where you 

didn’t look at documents. 

The CHAIRMAN. If the gentleman would yield, my inference from 

this is that we had some irresponsible people, and that is why we 

have talked about more regulation, that the advantage of a no doc 

or a low doc loan was that you could report a fake income; and if 

it was documented, you had to have the real income. So to unaware 

investors, an undocumented higher income looked better than a 

documented lower income. 

Ms. GORDON. And as one of the more politically correct on the 

panel here, while I am not going to subscribe to the fact that all 

borrowers were as pure as the driven snow, this was driven by the 

lenders and the originators. The Wall Street Journal, again, not a 

bastion of political correctness, found that 6 out of 10 borrowers 

who were steered into subprime loans could have qualified for a 

prime loan. And if you can think of a reason why an individual borrower would have preferred a subprime loan— 

Mr. SHERMAN. Now, could they have qualified for a prime loan 

at the same? Take, we had the example of the woman who makes 

$2,000 a month. She might have qualified for an intelligent loan 

on a $100,000 house or a $150,000 house. I haven’t worked out the 

numbers. 

The CHAIRMAN. I assume we have now left your district, Mr. 

Sherman. 

Mr. SHERMAN. We have left my State. So, but if for some reason she is sold a $500,000 home or a 

$500,000 mortgage, I guess that is at least a $550,000 home, Wall 

Street is not going to lend the money to her. Wall Street would 

rather lend the money to somebody who won’t state their income 

than lend $500,000 to somebody who states that their income is 

$2,000 a month. So Wall Street was, what should we say, like a 

blood alcohol blood level of 0.1 percent. But you have to be at like 

0.4 percent, which is near death, in order to make a $500,000 loan 

to somebody whom you knew had a $2,000 income. 

Ms. GORDON. Well, I am not sure what blood alcohol level you 

would need for this, but the fact is that Wall Street was buying 

loans where they just didn’t want to know what was in them. And 

I think what we have learned from the New York Attorney General’s investigation and what we have heard from the due diligence 

firms is Wall Street just was—they were doing ‘‘don’t ask, don’t 

tell’’ on these loans. And the fact is that the liability that would 

accrue if we prosecuted one of these originators for fraud or one of 

these lenders, that right now, for the most part, is very hard to 

reach the assignees of these loans. And in our view, any predatory 

lending legislation is going to have to make the liability go up the 

chain. Because Wall Street may be sobering up right now, but the 

folks who are going to be working there 5 years from now are not 

watching this right now. They are still at home playing Guitar 

Hero on their Wiis. 

Mr. SHERMAN. I know my time has expired. I do want to put in 

a note for the bond rating agencies, because Wall Street was acting 

somewhat reasonably when they could sell the loan to some poor 

investor; and the investor was acting reasonably if they thought 

they were getting a nice 6 percent yield on a double A rated bond. 

47 

The rating agencies looked at liars’ loans, looked at the second or 

third tranche of a package of liars’ loans and gave it a double A 

or a single A. 

I will ask Mr. Kittle to wrap up, and then my time has expired. 

Mr. KITTLE. Just one point of reference: I think we really need 

to put some things into perspective here, and that is, every 

subprime loan that was made was not a bad loan. The loan instruments themselves were only bad when given inappropriately to the 

wrong people; 85 percent of the subprime loans are still paying on 

time. So if we line 100 people up here, are we going to tell 85 of 

them they shouldn’t have gotten their loan? I don’t think so. 

I might go further to say that limited documentation loans are 

still good products, again, when used appropriately. Small business 

people. Okay? Small business owners like myself, limited documentation loans, used appropriately, still help people attain good 

quality loans. 

Mr. SHERMAN. Are these people who don’t have a copy of their 

tax returns? 

Mr. KITTLE. No, I didn’t say no doc; I said limited documentation 

loans. There is a distinct difference. No doc shows that you just put 

down an income. A limited doc means you just bring in limited documentation, like maybe a pay stub instead of sending out an employment verification, that type of thing. 

I want to make one more point, if I may. If I brought up the term 

negative amortization today, everybody would shiver. Yet, if it 

wasn’t for the FHA 245 neg am loan program in 1978, I would not 

have been able to buy my first house. A neg am loan used appropriately to the right borrower is a good loan in a certain situation. 

So to blanket say that all subprime loans are always bad— 

Mr. SHERMAN. I am not saying that all subprime loans are bad; 

I said that people who could have qualified for a mortgage of equal 

amount with a prime and were steered into a subprime. 

And I am not condemning every loan that doesn’t involve four 

angels notarizing the income statement. But I am condemning 

those that do not involve a paycheck stub, a W–2 form, or a copy 

of the tax return. And I think that most people, if they saw one 

of those three documents, would call it a documented loan rather 

than a low doc loan. I guess you could always say it is not as documented as something else. 

But when a small business owner says, I won’t give you a copy 

of my tax return. Here’s what my income is. Either they are lying 

to the IRS, they are lying to the mortgage company, or both. 

Mr. KITTLE. Again, that is not what I said in my example. 

Mr. SHERMAN. And that is why I am drawing the line. I am 

drawing the line between insufficiently documented loans and sufficiently documented loans. 

I yield back. 

The CHAIRMAN. I thank the gentleman. I am glad we didn’t get 

into whether or not the borrower is documented. 

Three issues that I want to raise just in closing. One, when we 

talk about the people who could have gotten regular loans and they 

got subprime loans, to a great extent that is racial and ethnic prejudice. 

48 

In the City of Boston, at the University of Massachusetts at Boston, a very good study was done there that showed that Black and 

to a lesser but still significant extent Hispanic borrowers who were 

middle- to upper-middle-income were getting subprime loans. So 

racism has not left America. That is why it is good that we have 

the data and want to go beyond that. So, yes, there were people 

put into subprime loans because of race or discrimination. 

Secondly, to Ms. Gordon, we very much agree in terms of where 

the liability goes. Our view is that it goes best to the securitizer, 

because the investors are kind of passive. And we do in the bill 

that we passed, I would like to even increase it, because the activation here in assembling these packages obviously is the securitizer. 

But we did agree that there should be some liability, and we 

thought that was the best place to put it, because the active agent 

in assembling these loans and selling them was the securitizer. 

Finally, I would say with regard to Mr. Kittle, we don’t want people who are entitled to own homes not to get them. Although we 

should be very clear, we have had a policy in this country of not 

building affordable rental housing and pushing some people into 

homeownership who shouldn’t have been there for a variety of reasons. But to the extent they can be there, one of the most important parts of the bill we just passed, we agree with the Administration, is FHA modernization. 

In 2002, the FHA issued something like 700,000 guarantees. In 

2006, it was down to 290,000. One of the things we need to do is 

to put the FHA back as an alternative to subprime loans for people 

with limited income. That is one part of the bill that I think we 

all agreed to, and that will become law. 

I want to thank you. We are going to follow up with some questions. Let me say, I have no doubt about the integrity of anyone 

here. We like the answers that we got, on the whole. We are going 

to be working, and make sure we will enlist your services. We just 

want to make sure that we hope we will get other people giving us 

the same good answers. 

Also, I have to tell you that it is important we trust everybody, 

but this is such an important issue, both socially and macro-economically, that maybe not in your individual capacities but people, 

either yourselves or ones like you, we will see you in September. 

We will have a follow-up hearing. 

This hearing is adjourned. 

[Whereupon, at 12:48 p.m., the hearing was adjourned.] 

(49) 

A P P E N D I X 

July 25, 2008 

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