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PRIVATE SECTOR COOPERATION WITH 

MORTGAGE MODIFICATIONS—ENSURING 

THAT INVESTORS, SERVICERS, AND 

LENDERS PROVIDE REAL HELP 

FOR TROUBLED HOMEOWNERS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

NOVEMBER 12, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–144 

( 

(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: 

November 12, 2008 ........................................................................................... 1 

Appendix: 

November 12, 2008 ........................................................................................... 55 

WITNESSES 

WEDNESDAY, NOVEMBER 12, 2008 

Allensworth, Benjamin, Senior Legal Counsel, Managed Funds Association 

(MFA) .................................................................................................................... 15 

Deutsch, Thomas, Deputy Executive Director, American Securitization Forum 

(ASF) ..................................................................................................................... 21 

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

Bank of America ................................................................................................... 19 

Sheehan, Molly, Senior Vice President, Home Lending Division, JPMorgan 

Chase ..................................................................................................................... 17 

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 56 

Kanjorski, Hon. Paul E. ................................................................................... 58 

Allensworth, Benjamin ..................................................................................... 59 

Deutsch, Thomas .............................................................................................. 63 

Gross, Michael .................................................................................................. 75 

Sheehan, Molly ................................................................................................. 85 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Written statement of Harvey B. Allon, President, Braddock Financial 

Corporation .................................................................................................... 92 

Report by Credit Suisse entitled, ‘‘Subprime Loan Modifications Update,’’ 

dated October 1, 2008 ................................................................................... 96 

Letter from William Frey, Principal and CEO, Greenwich Financial Services, dated November 12, 2008 .................................................................... 105 

Bachus, Hon. Spencer: 

Follow-up letter from Benjamin Allensworth containing additional information for the record, dated November 25, 2008 ....................................... 113 

LaTourette, Hon. Steven C.: 

New York Times article by Joe Nocera, dated November 11, 2008, entitled, ‘‘Can Anyone Solve the Securitization Problem?’’ .............................. 115 

(1) 

PRIVATE SECTOR COOPERATION WITH 

MORTGAGE MODIFICATIONS—ENSURING 

THAT INVESTORS, SERVICERS, AND 

LENDERS PROVIDE REAL HELP 

FOR TROUBLED HOMEOWNERS 

Wednesday, November 12, 2008 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:11 a.m., in room 

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

Members present: Representatives Frank, Kanjorski, Maloney, 

Watt, Sherman, Meeks, Capuano, Lynch, Green, Cleaver, Donnelly, 

Foster, Speier; Bachus, LaTourette, Biggert, Neugebauer, and 

Price. 

Also present: Representative Marshall. 

The CHAIRMAN. I apologize for the lateness of this hearing. The 

period of repose that I had looked forward to for this committee has 

been one of the less important victims of the current economic turmoil, and I therefore had to cram more things into a shorter period 

of time than I had hoped. I apologize for keeping people waiting. 

This hearing has evolved in some extent in its orientation. It was 

originally concerned about what was reported in the newspaper as 

two hedge funds saying that they were going to instruct their 

servicers not to take advantage of legislation that could reduce 

mortgages. We have since gotten letters and statements from the 

funds that—and I would ask unanimous consent to put into the 

record the statement from Harvey Allon, president of Braddock 

Corporation, and then also a letter from William Frey, who is the 

principal and CEO of Greenwich Financial Services. Mr. Frey notes 

he is not a hedge fund. Mr. Allon mentions that he is. But the letter from Mr. Allon—let me just read some excerpts in fairness— 

‘‘Braddock urges all services to fully acquaint themselves with the 

text and guiding principles of the act, the HOPE for Homeowners 

bill that we passed, and are actively undertaking efforts to ensure 

that qualifying homeowners participate in this program and that 

the homeowner loans are modified in a timely fashion pursuant to 

the letter and intent of the act.’’ 

We believe this letter is constructive and sets forward what we 

believe to be the appropriate policy. That is not an issue that is before us. We had never intended the legislation for modifications to 

be imprudently granted to entities—to individuals who couldn’t 

2 

sustain it. And whatever there was in terms of a misunderstanding 

in the communication, that has now been resolved, and we acknowledge that the Braddock Corporation is urging servicers to 

take full advantage in an appropriate way of the legislation on the 

books. 

Mr. Frey notes for the record: ‘‘I would like to clarify that I do 

not manage a hedge fund as erroneously assumed in a letter. I add 

there is nothing wrong with hedge funds.’’ We agree obviously with 

both cases. He was inappropriately included in the article, and because he was inappropriately included in the article, he was inappropriately the recipient of the letter. So in one case, there was 

mistaken information on which we acted, and in the second case— 

or the first case that I mentioned, the situation has been resolved 

and the Braddock Fund is instructing its servicers to go forward. 

Now I will begin with the opening statements. 

The problem of servicers has become clearer and clearer. We 

have had some encouraging steps taken recently with regard to reducing foreclosures. And again we stress that reducing foreclosures 

is one of three things that I believe has to happen if we are to get 

out of the economic mire in which we find ourselves: One, the reduction of foreclosures; two, having the rescue plan that this Congress voted used efficiently, specifically to get the maximum 

amount of funds out into the economy that can be lent; and, three, 

an economic recovery program that would include funding to the 

States and others to do job creation. This committee has jurisdiction over the first two, but not over the third. 

As to foreclosures, the argument needs to reemphasized that 

foreclosures damage the whole economy. Diminishing foreclosures 

is not entirely—maybe not for many people even a matter of examination for those who may be foreclosed. As long as you have the 

foreclosure cascade, as long as you have mortgage-based securities 

decreasing in value so rapidly, you do not get out of the problem 

we are in. So diminishing foreclosures—and clearly some people 

who took loans are beyond any assistance that could reasonably be 

extended, but diminishing foreclosures is an important part of helping us get out of this problem. 

Now there have been assertions that the way to do that is—and 

there have been some plans floated to have taxpayer money go in, 

buy up the loans, and then reduce the amount paid. I think it 

should be very clear. No matter what people have argued, there is 

in my judgment zero likelihood that Federal taxpayer dollars will 

go to those who hold loans that never should have been made in 

the first place. People who have advocated this as a solution which 

involves Federal assumption of the risks of 100 percent of loans 

that should not have been made do not understand the mood of 

this country, and do not understand what rules will apply. Similarly, I do not think you are going to see taxpayer funds, nor 

should you, go to people to help them pay their mortgages. We 

have had some proposals; the FDIC has been very constructive in 

this regard, particularly Chairwoman Sheila Bair. The role of the 

Federal Government is appropriate, it seems to us, to do this in 

various forms. To induce those who hold the loans to recognize that 

they are holding loans that are not going to be repaid in full, to 

calculate that in many cases this would be a worse economic probVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
3 

lem if they foreclosed, and to write down the terms of the loan, either by interest or principal or some combination, to a point where 

that borrower could repay, doing so because it would be in their 

economic interest to get something rather than to go through foreclosure. 

The role of the Federal Government in the bill we passed and, 

as I understand it, what Sheila Bair is talking about, although it 

is muffled by intra-administration concerns, is similar to saying to 

the lender, if you recognize that you are holding loans that cannot 

be realized and take a loss, we will then, through Federal instruments, the FHA and our bill in appropriate cases, guarantee the 

new level of loan. There will be a refinancing to a lower level. What 

it says to the lender is you take your loss, the Federal Government 

is not going to make you whole for loans that shouldn’t have been 

made in the first place. The inducement is once you have recognized the loss, that will be the extent of your loss. You will then 

have some stability and some ability to tell people what you owe 

and don’t owe. There will be some risk for the Federal Government 

in that because we will be guaranteeing these loans for people who 

had some problems before. And in the bill we passed, that is accompanied by a requirement that any profit that is made on those 

loans be returned to the Federal Government in varying percentages for the first 5 years and even more by the fact that the Federal Government takes the house. This is not a free ride for that 

new borrower. There will be some losses, we were told by OMB, in 

a fairly small amount. I am hoping that Sheila Bair will be able 

to come up with a further approach. 

We have also seen some encouraging efforts by the Bank of 

America and by JPMorgan Chase. I would say I feel vindicated. I 

am going to take a little extra time and, if there is no objection, 

we will allocate it equally. I will say I feel vindicated. When the 

Bank of America announced it was buying Countrywide, a number 

of my friends were concerned this would be a problem, that Bank 

of America was too big, and I was asked with some consternation 

by one person with whom I have worked on some issues how I 

could justify supporting the Bank of America buying Countrywide. 

My answer is at that point I would have supported Syria buying 

Countrywide. The disaster that was inflicted on the country by 

Countrywide was deep-seated. I think Bank of America did a useful 

thing. Obviously, they are trying to make money, but I think society will benefit. And so Bank of America, JPMorgan Chase, and 

now I am told Citicorp, as well, are taking constructive steps. We 

got an announcement yesterday that Fannie Mae and Freddie Mac 

will be doing more to improve the situation by reducing foreclosures, again from the standpoint of helping us deal with the economic problem. 

But here is the problem that remains and will be on our agenda 

when we reconvene. So far all of the advances in losses being recognized by those who imprudently either made or bought loans that 

shouldn’t have been made, they have all been by the owners. That 

is of course how we got into this. We have not seen servicers participating in any significant way. And I believe we now have a situation that requires legislation. We have been told by a number of 

people that the servicers do not have the legal authority and we 

4 

have asked this question in general. We said to the servicers and 

to the owners, is there enough legal authority to act on modifications—again, if it is in the economic interest of the holder of the 

loan? I don’t want to see us throwing more money to the side. If 

you would be better off reducing the loan than foreclosing, you 

have the authority to do that. We were told yes in general, but we 

are now being told no in particular. We have a serious obstacle apparently and it is true with Fannie Mae and Freddie Mac and others. We are getting some progress where the loans are owned in 

a definable way. All the more reason why it is a good thing to some 

extent that Fannie and Freddie had a portfolio and went ahead and 

securitized everything. But where we have servicers administering 

these securities, we apparently cannot get much done and it is a 

problem. 

There should not be a public policy which allows important decisions that should be made in the economic interest of society to be 

unmakeable. You should not have a legal form in which the authority to make important decisions is so spread out and split up that 

no one can make them. I think what we have is the equivalent of 

what all of us have seen from time to time, a very nice home in 

a neighborhood which is left by a deceased to several siblings who 

hate each other. And you get a situation where the quarrel among 

the siblings means that the house cannot be disposed of and you 

come by what used to be a very nice home in the neighborhood that 

is now crumbling and in disrepair and you say, what is that all 

about, and the answer is, well, there are four sisters and brothers, 

and they can’t agree, so the whole neighborhood suffers, I think. 

The gentlewoman from California, Ms. Waters, has been very active in arguing this. I think this committee has to now act and 

hopefully the whole Congress on restructuring that servicing mechanism. Someone has to have the authority to make a decision and 

we face a situation now as we said in the case. So it is bifurcated. 

We are getting some progress where the legal authority to modify 

is clear. It took a while, but it is coming. We have not had that 

with our servicers. 

The last point is this: When this Congress passed the Economic 

Stabilization Act and created the troubled assets program, we explicitly put in that big authority to the Secretary of the Treasury 

to buy whole loans or mortgage-backed securities to make us the 

owner so we could do these kind of reductions. Again, the distinction seems to be obviously owners and servicers. To date, the Secretary hasn’t used that authority. A large amount of the first $350 

billion that was available is being used up for other purposes; $290 

billion is now accounted for by the grants to banks and advances 

to AIG, the loan to AIG. That is a question now that we will have 

to address, and it will involve using the second $350 billion. But 

I believe that we still have a need for that funding to be used to 

put the Federal Government in the position of being the owner so 

we can do the kind of sensible writedown of mortgage payments to 

avoid foreclosure. That is in the interest of the economy as a whole, 

and we will be talking further about that as well because we will 

have a hearing next week on the 18th on the administration of that 

program. 

5 

And with that, I will now recognize the gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. Mr. Chairman, how much 

time are we going to have on both sides? Are we going to extend 

that time? 

The CHAIRMAN. Yes. What is the maximum we can get—20 and 

20 because we have a fairly small panel? Is that acceptable? 

Mr. BACHUS. That is fine. 

The CHAIRMAN. Yes, we will do 20 minutes on each side. We only 

have the one panel and hopefully we won’t have that much to do 

later. 

Mr. BACHUS. Thank you, Mr. Chairman. I yield myself 7 minutes. 

Mr. Chairman, first let me respond to the subject matter of this 

hearing. I have prepared a written statement which I have released and that goes into some detail. I would like to respond to 

some of the things that the chairman has said. It is in everyone’s 

best interest as a general rule to prevent foreclosures. Foreclosures 

are a negative impact on not only the family in that home, but also 

their neighbors, their property values, the community, and the 

local government. A number of foreclosures as well as homeownership are relatively good predictors of criminal activity and economic 

development. Having said that, I think we should be very careful 

in saying that we need to prevent all foreclosures. 

Number one, if the homeowner is underwater, if the house is 

worth less than the mortgage, I don’t believe it is in the best interest of the homeowner in most cases to continue to pay the note. In 

fact, what we are seeing all over the country and most—I don’t 

know whether it is most or a good number or a good percentage 

of foreclosures—are homeowners who are underwater and they are 

walking away, and that is why they are walking away, not so much 

that they can’t pay it or they couldn’t come up with the money. It 

is that they simply are not going to do that. And I don’t see any 

practical way of preventing that. 

Second, when you have a bank and a borrower, the traditional 

arrangement, it is easy to work out deals and it is normally in people’s interest. Where we are running into a problem is with 

securitizations, and that is really the great majority of the mortgages that are in foreclosure or threatening foreclosure, is where 

you have multiple parties. Now that is, I think, what we are dealing with as much as anything in this hearing. Obviously we are 

talking about hedge funds, so you are talking about securitized 

mortgages. In those cases, I am all for encouraging the parties to 

work together, if they are willing. Often, they are not willing, and 

in those cases I am very hesitant to do two things. One, I am very 

hesitant to try to force the parties to an agreement. One reason— 

and let us say a willing buyer but an unwilling lender or hedge 

fund or whomever is holding the securitized mortgage, it affects future funding of future mortgages. I mean, if you are going to start 

interfering with contracts, you may get away with it with these, 

but how about mortgages in the future? Are people going to be willing to buy securitized mortgages? And the answer is, no, they are 

not, because if they think that the Congress or the government can 

come in there and change that contract, they are just not going to 

6 

be willing to put their money at risk. So we have to be very careful 

in that case. 

The only other thing I would say is that I am also skeptical of 

any proposal which requires the borrower to be 90 or 120 days late 

on their payment. That to me is going to almost encourage people 

who may be current and struggling, since they don’t qualify unless 

they are 90 days later—I actually had a constituent who called us 

and said we are not going to qualify for this program because we 

are current, what should we do, should we miss three payments? 

Having said that, let me say that I commend the chairman for 

holding this hearing. 

Now, let me change the subject to what we are dealing with overall and that is government intervention into the private sector 

through either we call it intervention, a bailout, a rescue plan, etc., 

etc. We have all as members had 3 weeks to go home. And if you 

are like me, I basically will boil down the questions my constituents ask me to two question. The first question is basically—I can 

boil it down to how do you justify giving my money to somebody 

else as a taxpayer? How do you justify that? How—in a case of 

mortgages, hey, I went out, I negotiated a good price for a house, 

I bought it, I put 20 percent down, I put 10 percent down. I was 

very careful on the terms, I got a good interest rate. I am paying 

my mortgage, I am paying it on time. I don’t think it is fair that 

you are going to take my tax dollars and subsidize or change a loan 

for someone else who wasn’t as careful as I was or wasn’t as responsible. Not that I—my constituents don’t think they are necessarily bad people. They just don’t want their money going to 

them. 

Now, we are now talking about a bailout to the automobile companies. I know the questions we are going to have because of the 

questions we had with financial services. I have automobile plants 

in my district. Those automobile plants pay $25 to $35 per employee per hour. I am sure that I am going to be asked, Congressman, I work at Honda or I work at Mercedes, I get $40 an hour, 

why are you going to take my tax dollars and pay it to a company 

that is paying their employees $75 an hour? And these are questions we need to anticipate and need to be prepared to answer. 

Even, I think, people who are going to be more hostile are that 

sawmill worker in my district who is making $15 an hour and he 

is working hard every day and he gets very dirty every day and it 

is a risky, hot job. Or it is very cold. It is usually very cold or very 

hot. He is making $15 an hour, and we are taking his money and 

we are paying it to a company that is paying $75 an hour. We are 

going to get those questions, and we need to be prepared to answer 

them. 

How do I know we are going to get those questions? Because 

with the financial services companies, the Wall Street companies, 

we have already gotten those questions. If you didn’t get those 

questions, you are not listening to your constituents. They are already beginning to ask—my constituents usually get about a $250 

bonus at Christmas. They are already asking me, Congressman, 

did you take my money and give it to a company that is paying 

some of their employees $250,000 at Christmas, or year-end bonus 

or incentive or whatever you want to call it, and I get $250? It is 

7 

a fairness issue and it is something that we are going to have to 

answer. 

The second question is very simple, where does this stop, how do 

we get out of this mess, when are we going to quit, when are we 

going to end it? Well, we started with financial services. We went 

from banks to insurance companies and I will tell you this, I for 

one realize—and I think we all did—we could not let our financial 

structure of this country, our financial infrastructure, our banking 

system, we could not let it collapse. That was something that we 

could not allow. But now we are talking about manufacturing companies, automobiles. You start there. Does it end there? It didn’t 

with financial services. We kept expanding that. And does it end 

with manufacturing? What about retail? What about Circuit City? 

I have read now that a lot of Circuit City employees are even more 

angry this week than they were last week that they are losing their 

jobs and they are seeing what is going on, on Capitol Hill, where 

we have intervened or bailed out on behalf of a lot of financial services companies and manufacturing companies. And I am afraid if 

we don’t answer the question very soon, when does this stop, that 

it is going to stop when we run out of money, when we are unable 

to print more money, when foreign countries are unable to lend to 

us at a reasonable interest rate and quite frankly we need to stop 

before then. If we don’t, I think the American people will simply 

rise up and stop us. And I, for one, hope that we are rational and 

reasonable enough to in going forward, being very, very careful. 

I want to conclude on a positive note. We did something that I 

think was very good. In the last intervention, it was originally proposed that we buy $750 billion of the very worst assets in the financial system, and the proposal was that we actually buy those 

assets and that we manage them. Now, we would have had to have 

hired thousands of people to do that. Thank goodness, I believe we 

have almost dodged that bullet. Instead, what we did was a much 

more reasonable and rational approach, something that protects 

the taxpayers to a greater extent, not to a total extent, and that 

was we took preferred shares. We did the same thing Warren 

Buffett did; we made a deal. And we don’t have to manage those 

assets, we don’t have to set a price, we don’t have to buy them, we 

don’t have to sell them. We simply took preferred shares and that 

was a much better approach. We are still talking about buying 

some of these—call them worthless assets, call them impaired assets—and that is not going to be as good a deal. But so far we have 

made a terrible situation better. 

But let us not—let us have an exit strategy, let us now agree 

that it has to stop and it has to stop soon. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Pennsylvania is recognized 

for 4 minutes. 

Mr. KANJORSKI. Good morning, Mr. Chairman. 

While the mortgage loan modifications theory remains sound, the 

practice has fallen short of expectations that many of us have. 

Keeping Americans in their homes should be a priority. Unfortunately, this view does not appear to be shared by all. 

Today we will hear from several parties in the private sector to 

better understand the ever-widening gap between what ought to 

8 

happen and what is happening. We will also discuss some of the 

proactive steps taken to date to address this important issue. This 

issue is not a partisan one. Back in March, Mr. Castle and I introduced the Emergency Loan Modification Act of 2008, H.R. 5579. 

The bill aimed to clarify the responsibilities of and provide a safe 

harbor from legal liability for mortgage servicers who helped troubled borrowers remain in their homes by engaging in loan modifications and workouts according to specific criteria. While pieces of 

that legislation did become law through the enactment of the larger 

housing package, the safe harbor provision fell by the wayside. 

At the hearing, Mr. Castle stated, ‘‘I believe Congress can take 

specific steps to ensure loan servicers work with homeowners to 

keep mortgages solvent wherever practical.’’ I shared that sentiment then and I believe it today. Congress last spoke to the issue 

when passing the Emergency Economic Stabilization Act which 

provided guidance and authority for the Treasury Department to 

increase the number of loan modifications. Despite our actions, certain industry players and, in fairness, the current Administration 

and government housing agencies simply have not pursued modifications with the urgency our Nation’s financial crisis demands. 

This reality must change quickly. As homeowners continue to 

find themselves underwater, we must all work to keep them afloat. 

More and more foreclosures have led to ever-declining home values 

and spiking foreclosure rates have also decimated some communities. Pointing fingers about which borrowers irresponsibly took 

out loans they could not afford or which lenders recklessly doled 

out money to unqualified borrowers does absolutely nothing to 

solve the problem. Instead of placing blame, we must work together 

toward a solution. 

In this regard, I am pleased that entities like the Bank of America and JPMorgan Chase have stepped forward with their own initiatives for expediting mortgage modifications. Our lenders and 

servicers can learn from these actions and model their mortgage 

modification programs on these efforts. 

In sum, our witnesses will help us all understand why loan modifications have not already increased and what can be done to ensure that a greater number of loan modifications occur in the days 

ahead. I look forward to their testimony and thank them for being 

here. 

The CHAIRMAN. The gentleman from Texas is recognized for 4 

minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. First of all, I want 

to associate myself with the ranking member’s remarks on a number of fronts, but certainly on the direction that we are headed in 

this country as far as this major intervention into our markets by 

the Federal Government. 

Interesting, before the first vote over the weekend before that, I 

was sitting in my office and I decided to take some calls from people in my district, but we have never had as many calls on one specific issue as we did on that one. And interestingly enough, at 5:00 

on a Sunday afternoon, a young man who attends Texas Tech University called me from his dorm room, and he and three or four of 

his buddies were sitting around the dorm watching the news and 

they said, ‘‘Congressman, we are not quite sure we understand all 

9 

the things that are going on in these markets, but we do understand that you are about to mortgage our future even more than 

it has already been mortgaged.’’ And, in fact, we did do that. We 

had to increase the debt ceiling to $11.3 trillion. 

I think what Ranking Member Bachus was saying is that Members of Congress all have these voting cards. Right now we are 

using them as credit cards and what we are doing is we are subsidizing the living and the lifestyle that we have today and we are 

asking the next generation to pay that back. I am not sure that is 

good for them. I am not sure that is good for us. 

In relation to this hearing today, I have had a number of conversations with people who are involved in mortgage workouts and 

mortgage servicing over the last few months, and one of the first 

things that they tell me is foreclosure is the last resort for both the 

borrower and the lender because what happens at that particular 

point in time is somebody loses their house and the lender loses a 

lot of money. And what I have also heard from them is that many 

mortgage servicers and banks and institutions are working aggressively with borrowers who will work with them. Interestingly, the 

statistic that I am hearing is that if you take, say, 10 people who 

are behind on their mortgage, that you send a letter and the first 

4 get current. The next four get current after a couple of letters 

have been sent, and of the last two, one of those people will most 

likely not return a phone call, answer a letter, or work with the 

lender in any way, leaving the lender with very little opportunities. 

But one of the things that most of those folks told me, and I am 

sure we are going to hear from the witnesses today, is that if somebody will enter into a dialogue with the lender, there will be some 

effort to try to keep those people in the home because, again, the 

lender does not want that property back, particularly in this real 

estate environment. 

I think the second point is—and I think the ranking member was 

alluding to that—overall our mortgage finance structure in this 

country has worked relatively well for a number of years. Yes, we 

had some people who abused it and for that the market has been 

punished. But one of the things I think we have to be very careful 

of moving forward is that in looking at the short term, what are 

we doing to the long term? The best thing we can do for America 

and people who own homes today is to get the housing market back 

functioning again. And the way you get the housing market back 

functioning again is you get the housing finance market back functioning again. We have to be very careful that we do not do things 

here that impact the ability of the mortgage finance market to get 

back up and running again. For example, creating some doubt in 

the minds of people who are insuring mortgages, the PMI companies, that somehow the contractual relationship causes them to lose 

more money than the risk that they realized they are taking; also, 

making sure that we get securitization back up and going again. 

Securitization has become a nasty word, but quite honestly has 

provided an opportunity for us to provide a lot of housing finance 

in the future. And also we don’t want to encourage borrower behavior that is not appropriate and, like the ranking member, constituents calling in saying the plan is we get 90 days behind and then 

we get a piece of the pie. That is an entitlement mentality that is 

10 

permeating our country today, and I think we have to be very careful as we move in that direction. 

So while I think these discussions will be productive, we should 

be very careful in moving in a direction where we are going to 

mandate that mortgage companies have certain behavior. I think 

we want to encourage good behavior. Quite honestly, I believe that 

behavior is probably already taking place in the market today. 

Thank you. 

The CHAIRMAN. The gentlewoman from New York is recognized 

for 2 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman, for holding this important hearing. In my view, this Congress has been pushing and 

dragging a reluctant Administration to help homeowners in the 

same way and on the same scale that the Treasury rushed to help 

Wall Street. Yesterday, the Administration announced that Fannie 

and Freddie would help several hundred thousand homeowners restructure their loans using a systemic loan modification that was 

developed by the FDIC at IndyMac. Systemic loan modification is 

a good step in the right direction, but this program is only a tiny 

one. We need to be thinking in an order of magnitude that is much 

bigger, not hundreds of thousands, but millions. Some economists 

estimate that 2 to 5 million Americans may lose their homes. It is 

said that new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages, and I 

hope to hear of their efforts today. 

I do want to say that I am encouraged by the steps that were 

reported recently from JPMorgan Chase, Bank of America and 

Citibank on efforts that they are doing to help people stay in their 

homes. All economists say that we will not solve this problem until 

we stabilize home prices and housing in America. It is very vital 

for stabilizing our economy. 

I look forward to hearing your testimony today on ways we can 

expand the program, not to hundreds of thousands, but to literally 

millions of Americans. Thank you. 

The CHAIRMAN. The gentlewoman from Illinois is recognized for 

4 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I thank you for holding today’s hearing, and I will offer a few quick thoughts so that 

we can proceed. 

First, I am pleased that the private sector continues to work 

independently and with government entities to keep qualified 

homeowners in their homes, and I am particularly pleased that 

these initiatives don’t involve taxpayer dollars. However, I do remain concerned about the issue of fairness when it comes to homeowners who may have lived beyond their means or not saved for 

a rainy day who are getting a deal versus prudent homeowners, 

and that is most homeowners, who are making their mortgage payments and not getting a deal on a mortgage modification. 

That aside, I think it has become increasingly clear that with a 

little lender and servicer flexibility as well as one-on-one counseling, many American homeowners in trouble can make their 

mortgage payment, can live within their means, and can stay in 

their homes. To many of my constituents, they see mortgages and 

other financial counselors as a critical lifeline and I would like toVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
11 

day’s witnesses to comment and offer ideas on how we can increase 

troubled borrowers’ access to HUD certified counselors and increase 

financial literacy. 

Second, FDIC Chairwoman Sheila Bair offered an idea to use the 

$50 billion of TARP money to guarantee mortgages, and I would 

like today’s witnesses to comment on that. 

In addition, I would be interested in any reaction to Chairwoman 

Bair’s statement ‘‘that there are questions that remain about implementation’’ of the new GSA mortgage modification plan which 

was announced yesterday. 

And finally, I think it is no secret that industry participants represented today by ASF and in part by MFA are purportedly stuck 

between a rock and a hard place. We will hear testimony that 

clearly indicates the willingness of the members of ASF and MFA 

to do whatever is possible to keep homeowners in their homes, and 

the problem that has been mentioned is that some industry participants with this willingness also hold contractual obligations to investors, which include our seniors with retirement funds and workers with pensions, so they will be able to maximize the value of 

troubled mortgage loans. 

Well, as the saying goes, where there is a will, there is a way, 

and I would like to hear from today’s witnesses exactly and specifically about how, and how quickly, the industry can collaborate, put 

together new guidelines to establish a floor for a net present value, 

and ultimately improve the process of mortgage modifications. It is 

important that sooner rather than later, the right balance is struck 

so that: One, qualified homeowners can stay in their homes; two, 

investors clearly understand and accept a mortgage modification 

process; three, servicers can obligate sufficient resources to modify 

the mortgages; four, fraudulent actors are exposed and prosecuted; 

and five, underwriting standards are strengthened so that a similar boom and bust cycle is not repeated. 

I look forward to hearing from today’s witnesses and I thank you, 

Chairman Frank. I yield back. 

The CHAIRMAN. The gentleman from New York, Mr. Meeks, for 

2 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. I just want to thank you 

for the great job that you are doing in conducting this hearing this 

morning and just dealing with this whole crisis that we have. We 

are very proud of you and what you have been doing. I will be very 

brief. We all know about the economic crisis that we are going 

through. And the one way that when we talked about TARP and 

the $700 billion that we will often talk about is this is where Wall 

Street meets Main Street. And the way that we can show our constituents that Wall Street is meeting Main Street, and how we are 

not only just trying to fix the situation in regards to our financial 

institution, is to show that we are also trying to keep Americans 

in their homes. Reworking these mortgages, etc., becomes extremely important in doing that because absent that, then, of 

course, we have this problem and I could go on with a litany of statistics in my district for example, in Queens, which is leading the 

City of New York in foreclosure rates, in the price of homes that 

are going down, in how long it takes to sell a house now and on 

12 

and on and on. But the key is trying to make sure that we keep 

people in their homes. 

I have assembled in my office now on a weekly basis counselors, 

financial advisors, and attorneys every week on a Wednesday from 

1:00 to 5:00. I have these counselors in my office and we set up appointments and they have been jampacked, and we are packed up 

now for the next, I think it is 6 weeks, with people. I will ask some 

questions when we get to the question period. But I just want to 

say that the key to this—in getting out of this crisis that we are 

in is keeping people in their homes and I want to compliment those 

individuals in the programs that I recently heard in regards to Citi, 

and I think Chase and a few others and I want to get into that. 

You know, as we ask questions. But—and that is why hearing from 

you and what your testimony and how we can make sure this is 

working is extremely important. So I thank you for being here 

today and I await your testimony. 

The CHAIRMAN. The gentleman from Ohio, Mr. LaTourette, for 3 

minutes. 

Mr. LATOURETTE. Thank you, Mr. Chairman. And thank you for 

having this hearing, and I especially look forward to the next hearing that you are going to have on the 18th and thanks also for 

chatting with me over the break about National City Bank in 

Cleveland. All I can say is what a mess this is. And, Mr. Chairman, 

I have the highest respect for you and I think my plea is, after this 

morning and these hearings are over, you use all of the wisdom 

that you have to help us think outside of the box. And the reason 

I say that, if you go to the bill that we passed in July which Chairman Frank really did Yeoman-like work on, and I fully supported 

that piece of legislation, I have been told that only 42 mortgages 

have been submitted to date for modification and none have been 

granted because it takes 60 days, and that the regulators are saying that by next fall, it will only be 20,000, far short of the 400,000 

that we envisioned when we passed that legislation. 

I would ask unanimous consent to include into the record an article written by—and I never read this fellow before—Joe Nocera 

from the New York Times of November the 11th. 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. LATOURETTE. Mr. Nocera makes the argument that is the 

subject of the hearing and that is everybody sees the wisdom of 

mortgage modifications, except nobody talked to Wall Street. And 

he makes the point that I think is good, that Fannie and Freddie 

have jumped up and they are going to come up to 38 percent of the 

gross income modification, Citigroup is good, JPMorgan is good. 

But if we don’t do something on the liability that the fiduciaries 

have, we are not going to be able to refinance or modify anything. 

And so I would hope that the witnesses today, the title of Mr. 

Nocera’s article yesterday is, ‘‘Can anyone solve the securitization 

problem?’’ 

So I would hope that maybe the witnesses can chat about that 

with us and we can solve the securitization problem to actually 

have modification of mortgages. 

And then lastly, the hearing next week is going to talk about 

TARP and I have to tell you, Mr. Chairman, that we have to get 

to the bottom of this and think outside the box because this TARP 

13 

business, again, Mr. Nocera and others have pointed to the fact 

that rather than buying troubled assets, rather than buying preferred stock, now banks are hoarding the money, maybe they don’t 

want to lend it. 

In the case of PNC and National City Bank, they have used 

TARP money from one bank to buy another bank. And being from 

Cleveland, a PIS bank buying a Cleveland bank is a bad, bad, bad 

thing. And that is not what I thought the bill was supposed to be 

about. But that is where we are headed. So again, I appreciate 

your leadership, Chairman Frank and Ranking Member Bachus, 

but I really urge us to get this right and get this done so that we 

can move this forward and keep people in their homes. 

The CHAIRMAN. The gentleman from Texas, Mr. Green, is recognized for 2 minutes. 

Mr. GREEN. Thank you, Mr. Chairman, and Ranking Member 

Bachus. I find myself in accord with the previous speaker. The situation seems to be such that the home buyers are indicating that 

they would like to avoid foreclosure. The lenders and servicers are 

indicating that foreclosure avoidance is a good thing. In fact, information that I have indicates that it costs about $40- to $50,000 in 

attorneys fees and fees for property management when a foreclosure takes place. And that is per unit. It seems that we all are 

in agreement that foreclosure is not a good thing and that it should 

be avoided. But it is not happening. 

And the question becomes, how do we connect the disconnect between the servicer and the borrower such that the foreclosure 

avoidance can actually take place? I have not, to date, heard of any 

legislation that would be mandatory, requiring write-downs of principle, requiring interest rates to be reduced. I have just not heard 

of such legislation; it may exist, but it has not been presented in 

a forum such that it can be debated and discussed, especially here 

at this committee level. And my fear is that if we continue to fight 

that which does not exist, it would make it difficult to deal with 

that which does exist, which is the necessity to connect this disconnect and try to avoid foreclosure without a mandatory requirement of a write-down or a reduction of interest rates. I am absolutely convinced that this is a solvable problem. It is one that requires careful thought, but it is something that can be resolved. I 

thank you for the time, Mr. Chairman, and I yield back. 

The CHAIRMAN. The gentleman from Georgia is granted 3 minutes. 

Mr. PRICE. I want to thank the chairman for holding this hearing 

as well and I had to step out for a moment. I don’t know that anybody has mentioned what happened last Tuesday, but it seems like 

it would be inappropriate not to at least congratulate the chairman 

and his party on the election last Tuesday and just say that I think 

that the American people are now ready for us to move on on this 

issue and others and work together and solve these challenges and 

I for one look forward to that as well. We are all very concerned 

with the critical situation of homeownership and foreclosures. I 

think it is imperative, though, that we also recognize that over 90 

percent of Americans either own their home or are current on their 

current payment schedule. There is a major problem without a 

doubt and it needs to be addressed. Of those that are challenged, 

14 

it is my understanding as has been mentioned that over 50 percent 

of them—the borrower hasn’t contacted the lender to determine 

how they might be able to work on voluntarily changing the parameters of the agreement and see if they could remain in their home. 

So I am hopeful that we concentrate on those voluntary activities 

as some on the other side have mentioned. I want to commend— 

there is so much that has been done and can be done. I want to 

commend Mr. Meeks for what he is doing in his community. Obviously, there are a lot of folks who are working trying to get borrowers and lenders together to talk when there are concerns that 

are occurring. Some have said that we should not have, however, 

a public policy where decisions that are in the best interest of society are not makeable and I would suggest that the concern about 

that statement is that the best interest of society is movable or is 

changeable or is maybe different depending on where one sits. The 

squabbling siblings who were mentioned before and not able to find 

out what the disposition of the home ought to be unless it is a condemnation situation and there are laws that are in place to, especially in that area, but unless it is a condemnation situation, there 

are other laws in the courts of law to determine what ought to 

occur, to have the notion or the sense that it is the Federal Government’s responsibility to step in in that situation and be the owner 

of the home, I think, is a step that frankly the American people are 

not interested in taking. 

I would ask the witnesses specifically to talk about the moral 

hazard argument or the moral hazard situation that we find ourselves in. I want to thank the chairman for correcting the record 

regarding Greenwich Financial and I look forward to the testimony. 

The CHAIRMAN. The gentleman from Massachusetts is recognized 

for 2 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Chairman, I want 

to make it clear as to what my understanding of why this hearing 

is today because it I believe it is the best way for us to get our message out and to hear from some people in the industry that some 

of us think the industry hasn’t gotten the message yet, that we 

want individual homeowners helped. Now, I don’t think the people 

here today didn’t get that message, but I think some people in the 

financial services industry didn’t get it. I don’t think anybody believes that every single homeowner can or should be helped. That 

is not the point. But something more than 42, maybe a few hundred thousand, pick a number, but something. And there are many 

of us who feel that the industry hasn’t gotten the message and this 

is one way to do it, and also for us to find out if there are technical 

ways for us to assist the industry in implementing the message. 

But I also want to make it very clear that I hope, and I am looking 

forward and I am sure there will be other hearings. 

I am actually, frankly, getting a little tired of having the chairman have to get on TV and tell the industry we don’t want them 

to use money for mergers, we don’t want them to use taxpayer 

monies for vacation, we don’t want them to use taxpayer moneies 

for outrageous bonuses. I am not saying they can’t do those things, 

but use their own money. And if they don’t get it, I think we are 

going to have to have some further discussions with both the 

Treasury Department and I actually take last Tuesday’s result as 

15 

a comment by the American people that they want a more activist 

government to be involved in these things. Actually, we don’t want 

to tell anyone what they have to do. That not the desire that may 

be necessary. 

Now, my hope is that between now and then, the industry gets 

the message that we want more individual help, that we don’t want 

taxpayer money being used for these ludicrous purposes, we want 

it used for one purpose and one purpose only, which is to get the 

American economy back on its feet and moving in the right direction. Again, I don’t mean to address my remarks to this particular 

panel. I think from what I know you are all on the right page in 

trying to get in the same direction at the same time and it is one 

of the few opportunities that we get to allow the American people 

and more importantly the financial services industry to hear us 

and hear us as clearly as can and with that, thank you, Mr. Chairman, for the opportunity. 

The CHAIRMAN. The last allocation of time, 2 minutes for the 

gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. I am most concerned in this thing that we somehow 

don’t get into this mess again. One of the things I would be very 

interested in hearing about is whether or not there is well-understood language that would be incorporated into future 

securitization contracts and so on that would make them easier to 

unwind in times of financial stress, so that we really have an understanding that if—you know, as the securitization industry reemerges from the current crisis, that when this happens again, 

that everyone understands the rules on how we get out of this 

quickly and simply. I would be very interested in hearing your 

comments on that. That is it. 

The CHAIRMAN. We will now proceed with the panel. 

We will begin with Mr. Benjamin Allensworth, who is the senior 

legal counsel with the Managed Funds Association. 

STATEMENT OF BENJAMIN ALLENSWORTH, SENIOR LEGAL 

COUNSEL, MANAGED FUNDS ASSOCIATION (MFA) 

Mr. ALLENSWORTH. Chairman Frank, Ranking Member Bachus, 

and members of the committee, my name is Benjamin Allensworth, 

and I am senior legal counsel for the Managed Funds Association 

(MFA). MFA represents the management of the world’s largest 

hedge funds and is a primary advocate for sound business practices 

and industry growth. MFA appreciates the opportunity to testify 

today about efforts by private sector participants to work with Federal, State, and local officials in seeking to mitigate the current 

wave of foreclosures and defaults. 

Our fundamental belief is that effective mortgage modifications 

are preferable to foreclosures whenever possible. As we have all 

learned over the past 12 to 18 months, our Nation’s housing market is critical to the social and financial wellbeing of families and 

communities throughout our country and essential to the health 

and vitality of our capital markets and our economy. The wave of 

foreclosures has placed downward pressure on home prices, eroded 

home equity, and shattered confidence which, in turn, has led to 

a freezing-up of the mortgage backed securities market, a major 

source of liquidity and credit to our capital markets. That casVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
16 

cading effect has led to the tightening of the broader credit markets 

as financial institutions and market participants have been forced 

to satisfy redemption requests of investors and hold more capital. 

To stem the effects of this crisis, bold proactive steps need to be 

taken. MFA and our members are committed to working with policymakers on effective remedies to address these serious economic 

challenges. Over the past few months, Congress has enacted a 

number of measures in response to the ongoing crisis in our mortgage and credit markets, specifically the Emergency Economic Stabilization Act and Housing and Economic Recovery Act. The central 

element of HERA is HOPE for Homeowners, a program that seeks 

to help those at risk of default and foreclosure move into more affordable loans insured by the FHA. MFA believes that with additional time and continued collaboration, HOPE for Homeowners 

can serve as a valuable tool to mitigate foreclosure and help inject 

much needed liquidity back into the mortgage and credit markets. 

While MFA does not have a formal association policy regarding 

the terms and conditions for modifying MBS contracts, our association and our members strongly support effective mortgage modifications over foreclosure whenever possible. Loss mitigation is a challenge for all MBS market participants and investors. That includes 

hedge funds, which do invest in mortgage backed securities, though 

comprise a relatively small part of the MBS market as compared 

to other investors. There are a number of legal, fiduciary, and practical issues that must be taken into account when considering 

mortgage modifications. Mortgage servicers and institutional investors have fiduciary duties to their investors and clients respectively. Fiduciaries must weigh the effect of mortgage modifications 

on the earnings of their investors, which include pension funds and 

retail mutual funds, among others. Other factors, including the 

likelihood of a subsequent default, are also considered when making these important determinations. 

As market participants consider these obligations in the context 

of loan modifications, one of the primary determinations is whether 

the net present value of a modified loan is greater than the NPV 

of a foreclosure. In preparation for this hearing, MFA sought out 

the views of our members and other stakeholders to help us better 

understand the impediments to more robust loan modification efforts. Among the concerns most commonly cited were: The process, 

technology, and accuracy in calculating NPV for modifications to 

groups of mortgages as opposed to the calculation of NPV when 

done on a mortgage-by-mortgage basis; the higher rates of subsequent default and the impact of that likelihood in the NPV calculation for non-HERA modified loans; the capacity of servicers, some 

of whom may be overwhelmed by having to make NPV determinations for so many troubled mortgages; and also constraints on the 

parts of some servicers who may be willing but unable to do loan 

modifications under HERA because they lack the ability to originate FHA-insured mortgages. While each of these challenges has 

the potential to undermine loan modification efforts, none are so 

daunting that they should deter us from our shared interest in 

keeping more families in their homes and restoring stability and 

confidence to our mortgage and credit markets. 

17 

In this regard, we believe there are some important measures 

that can be considered to help accomplish this important objective. 

These include: Developing a set of standardized protocols that 

would enable servicers to more efficiently calculate NPV. Yesterday’s announcement by the Administration that, as part of the 

HOPE NOW Initiative, it will implement protocols to help streamline the loan modification process is a hopeful sign, though more 

is needed. Encouraging more owner servicers to do loan modifications and finding ways to have mortgage backed securities held and 

administered by a single entity, rather than a variety of entities 

with competing interests, which should provide for a more efficient 

loan modification process. And finally, examining the implications 

of higher subsequent default rates for non-HERA modified loans. 

We believe it is in the best social and economic interest to find 

ways to reduce the risk of future defaults on mortgage modifications of all types. 

Mr. Chairman, as I stated at the outset, MFA and our members 

appreciate the social and economic importance of preventing mortgage foreclosures, and we are committed to working collaboratively 

with policymakers and other market participants on preserving the 

American dream of homeownership for millions of at-risk families. 

Thank you for the opportunity to testify before this committee. 

I would be happy to answer any questions you may have. 

[The prepared statement of Mr. Allensworth can be found on 

page 59 of the appendix.] 

Mr. KANJORSKI. [presiding] Thank you very much. And now we 

will hear from Ms. Molly Sheehan, senior vice president of the 

home lending division, JPMorgan Chase. 

STATEMENT OF MOLLY SHEEHAN, SENIOR VICE PRESIDENT, 

HOME LENDING DIVISION, JPMORGAN CHASE 

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

members of the Financial Services Committee, we appreciate the 

opportunity to appear before you today on this most important 

topic of helping homeowners. We recognize that no one benefits in 

a foreclosure. 

My name is Molly Sheehan, and I work for the home lending division of JPMorgan Chase as a senior housing policy advisor. Chase 

is one of the largest residential mortgage servicers in the United 

States, serving over 10.5 million customers on the platforms of 

Chase, and more recently WaMu and the EMC unit, formerly affiliated with Bear Stearns, with mortgage and home equity loans of 

approximately $1.5 trillion in every State of the country. 

We are proud to be part of one of this country’s preeminent financial institutions with a heritage of over 200 years. Chase services about $332 billion in mortgages and home equity loans it originated and owns. It also services or subservices an additional $1.1 

trillion of first lien mortgage loans for investors. 

As you know, we announced 2 weeks ago several significant enhancements to our foreclosure prevention and loan modification efforts. We would like to share those with you today. 

While we have helped many families already, we feel it is our responsibility to provide additional help to homeowners during these 

challenging times. We will work with families who want to save 

18 

their homes but are struggling to make their payments. That is 

why we announced on October 31st that we are undertaking multiple new initiatives designed to keep more families in their homes. 

We will open regional counseling centers, hire additional loan 

counselors, introduce new financing alternatives, proactively reach 

out to borrowers to offer prequalified modifications, and commence 

a new process to independently review each loan before it moves 

into the foreclosure process. We expect to implement these changes 

within the next 90 days. 

While implementing these enhancements, we will stop additional 

portfolio loans from entering the foreclosure process. This will give 

potentially eligible homeowners in owner-occupied properties an opportunity to take advantage of the new enhancements. Chase has 

worked diligently and will continue to work diligently with investors to get their approval to bring these enhancements to loans 

that we service on behalf of others so our efforts can have the 

broadest possible impact. 

The enhanced program is expected to help an additional 400,000 

families, with $70 billion in loans in the next 2 years. Since early 

2007, Chase, WaMu and EMC have helped about a quarter of a 

million families avoid foreclosure, primarily by modifying their 

loans and payments. 

So more specifically what we will do is systematically review our 

entire portfolio to determine proactively which homeowners are 

most likely to require help and try to provide it before they are unable to make payments; proactively reach out to homeowners to 

offer prequalified modifications, such as interest rate reductions, 

term extensions and principal forbearance where needed. The 

prequalified offers will streamline the modification process and 

help homeowners understand that Chase is offering a specific option to make their monthly payments more affordable. 

We will establish 24 new regional counseling centers across the 

country to help provide face-to-face help in areas with high delinquency and foreclosure rates, building on the success of the 1- and 

2-day HOPE NOW reach-out days, and we will partner with community counselors to reach more borrowers. 

We intend to add 300 more loan counselors, bringing the total to 

more than 2,500, so that delinquent homeowners can work with the 

same counselor throughout the process, improving follow-through 

and success rates. 

We will expand the range of financing alternatives offered to 

modified pay-option ARMs, which we inherited when we acquired 

the mortgage portfolios of WaMu and the EMC unit, to an affordable monthly payment including 30-year fixed rate loans, interest 

rate reductions, principal deferral, and interest-only payments. All 

of these alternatives will eliminate negative amortization. 

We will also offer a substantial discount on or donate 500 homes 

to community groups, or through nonprofit or governmental programs designed to stabilize communities to deal with the growing 

inventory of REO. These enhancements reflect Chase’s commitment 

to continue to seek additional ways to help homeowners. 

Thank you for your attention, and I will be happy to answer any 

questions you may have. 

19 

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

85 of the appendix.] 

Mr. KANJORSKI. Thank you. Now we will hear from Mr. Gross, 

managing director of loan administration loss mitigation, Bank of 

America. 

STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, 

LOAN ADMINISTRATION LOSS MITIGATION, BANK OF AMERICA 

Mr. GROSS. Good morning, Mr. Chairman and committee members. Thank you for the opportunity to appear again to update you 

on our efforts to help families stay in their homes. 

Bank of America fully appreciates its role in helping borrowers 

through these difficult economic times. We are committed to being 

a responsible lender and servicer and facilitating homeownership 

and retention. 

First I want to provide you a brief update on our mortgage business. We are open for business across America. From July through 

September, we funded more than $50 billion in home mortgage 

loans, financing over 250,000 homes. We are also working hard to 

help customers who may be in trouble. 

We have developed important programs that are projected to provide relief for over $100 billion in loans, enough over 3 years to 

help keep up to 630,000 borrowers in their homes. Included in the 

$100 billion is Bank of America’s ambitious new Homeownership 

Retention program announced on October 6th, potentially impacting and assisting up to 400,000 homeowners. It is designed to 

achieve affordable and sustainable mortgage payments for customers who finance their homes with subprime or pay-option adjustable rate mortgages serviced by Countrywide and originated by 

Countrywide prior to December 31, 2007. 

Our 5,600 home retention professionals will be equipped to serve 

eligible borrowers with these new programs by December 1st of 

this year. Please know that the foreclosure process will not be initiated or advanced for a customer likely to qualify until we have 

made a decision on the customer’s eligibility. 

The centerpiece of the program is a proactive loan modification 

process to provide relief to eligible customers who are seriously delinquent or are likely to become seriously delinquent as a result of 

loan features such as rate resets or payment recasts. Various options will be considered for eligible customers to ensure modifications are affordable and sustainable. First-year payments of principal, interest, taxes, and insurance will be targeted to equate to 

34 percent of the borrower’s gross monthly income. 

Modified loans feature limited step rate interest-rate adjustments to ensure annual principal and interest payment increases 

at levels with minimal risk of payment shock. The program’s foreclosure alternatives provide a win for homeowners and investors 

and are intended to assist in the effort to stabilize the country’s deteriorating housing market. Loan modifications will be made in accordance with servicing contracts, and where servicing contracts 

limit or prohibit modification, Countrywide will seek consent from 

investors and the other associated third parties. 

20 

Finally, I would like to highlight a couple of continuing impediments to loan modifications for the committee’s consideration. 

Bank of America today services approximately 15 million mortgage loans. Some of these loans are held for investment in our own 

portfolio, but others are serviced on behalf of investors, including 

GSEs, government entities, and private investors. Our servicing is 

governed by the underlying pool and servicing of contracts and related rules of these investors. For loans that are held for investment, we have broad flexibility to modify the loans. For other categories, however, investor rules and underlying servicing contracts 

with respect to modifications are not uniform and may prevent us 

from doing modifications that would benefit both borrowers and investors. 

Under some arrangements, for example, servicers have express 

or implied authority to make loan modifications, while under other 

arrangements loan modifications are expressly disallowed. Even 

within categories of investors such as the GSEs, there is a significant variation in the rules that apply. Servicers are frequently unable to effect loan modifications because of contractual prohibitions. 

Another challenge is the lack of uniformity in approaches to loan 

modifications. Servicers increasingly are accelerating their and our 

loan modification practices. Examples include voluntary loan modification programs like ours, as well as government programs like 

the FDIC IndyMac program. 

Servicers are employing usual and customary loan modification 

techniques such as interest rate and principal reductions and term 

extensions, and they are developing underwriting and other guidelines to determine when and what type of loan modification is appropriate that benefits both homeowners and investors. Bank of 

America supports government and industry efforts to develop 

greater consensus regarding these elements of loan modification 

programs. 

Yesterday’s announcement by the Treasury Department, the Federal Housing Finance Agency, and GSEs to adopt systematic loan 

modification programs will help drive uniformity amongst these entities in the approach to loan modifications. We believe industry organizations, including those appearing before you today, also 

should play a role by issuing additional standards for loan modifications that will encourage servicers to do more. 

There are certainly other challenges, and we would be glad to 

discuss those with the committee subsequent to the hearing. 

Thank you again for this opportunity to discuss Bank of America’s efforts to keep our customers in their homes. Today’s market 

conditions demand expedient, affordable loan modifications that 

help customers while protecting returns to investors. This is a critically important undertaking that must be done right if we as an 

industry are going to preserve the flow of capital of mortgage credit 

to support housing and at the same time protect communities and 

neighborhoods from avoidable foreclosures. 

Thank you for this opportunity to appear. 

[The prepared statement of Mr. Gross can be found on page 75 

of the appendix.] 

The CHAIRMAN. Next, Mr. Thomas Deutsch, who is deputy executive director of the American Securitization Forum. 

21 

STATEMENT OF THOMAS DEUTSCH, DEPUTY EXECUTIVE 

DIRECTOR, AMERICAN SECURITIZATION FORUM (ASF) 

Mr. DEUTSCH. Chairman Frank, Ranking Member Bachus, and 

distinguished members of the House Financial Services Committee, 

my name is Tom Deutsch and I am the deputy executive director 

of the American Securitization Forum (ASF). I very much appreciate the opportunity to testify before this committee again on behalf of the more than 330 member institutions of the ASF, including mortgage lenders, servicers, and all institutional investors regarding loan modifications and how our industry and the Federal 

Government can work together to prevent avoidable foreclosures. 

I testify here today with one simple overarching message: Industry participants have been and will continue to deploy aggressive 

and streamlined efforts to prevent as many avoidable foreclosures 

as possible. But macroeconomic forces bearing down on an already 

troubled housing market are simply too strong for private sector 

loan modifications alone to counteract the nationwide increase in 

mortgage defaults and foreclosures. In my testimony here today, I 

look to outline a number of ways the industry and the government 

can work together to target relief to troubled homeowners while simultaneously helping to restore credit to mortgage borrowers. 

Economic and housing market conditions have clearly deteriorated over the last 18 months, with that deterioration intensifying 

as of late. Job losses, declining home values, and borrowers’ consumer debt have all put extreme strain on homeowners’ abilities to 

pay their mortgage debts. 

Given these unprecedented challenges, servicers have responded 

with unprecedented efforts as no securitization market constituency—lenders, servicers, or institutional investors—benefits from 

loan defaults or foreclosures. 

As a result, the number of loan modifications, for example, has 

increased by over 6 times the rate at which they were being provided to borrowers at this time last year. One driving force behind 

this exponential increase was the streamlined framework the ASF 

put together and developed last year that all major servicers have 

implemented to provide efficient loan modification decisions to 

subprime ARM borrowers facing interest rate resets. 

Let me emphasize here, very clearly, servicers do have the legal 

authority, right, and responsibility to modify loans in appropriate 

circumstances, even if those loans are in mortgage-backed security 

pools. But in light of the deterioration in the broader economy and 

housing market, ASF has been working aggressively to develop an 

expanded framework that will give servicers even more latitude to 

modify loans in a streamlined manner. 

Modifications generally in this framework must also be in line 

with the contractual rights and commercial expectations of institutional investors such as pension funds and mutual funds who depend on investments in mortgage-backed securities to help workers 

and families achieve their savings and retirement goals. As part of 

this effort, we are actively reviewing criteria and other loan modification approaches that have recently been announced, such as the 

plan implemented by the FDIC on the IndyMac portfolio and the 

Federal Housing Finance Agency protocol announced yesterday. 

22 

Ultimately though, we must recognize the seismic economic challenges in the United States, the epicenter of which is in the housing market, are too great for purely private sector loan modification 

solutions. As such, evolving servicer loan modification activities, 

though playing an important part of the solution, have limits to 

their effectiveness in addressing the extraordinary challenges in 

the housing market and should not be seen as a panacea for housing market ills. 

As such, we believe expanded voluntary government programs 

will be very effective in helping bridge the gap to address the potential foreclosures that commercial and contractual arrangements 

cannot prevent. 

We applaud you, Mr. Chairman, and the hardworking members 

of this committee for being a driving force in developing and enacting the voluntary HOPE for Homeowners program last summer. 

The program has a number of innovative elements to help homeowners refinance into a new FHA loan and it does provide incentives for servicers and loan holders to allow those homeowners to 

refinance. Unfortunately, the program has met with limited market 

reaction, as only 42 loans have been put through the program in 

its first month of operation. 

We believe there are a number of impediments to HUD’s implementation of this program, including the limitations on borrowers’ 

total debt outstanding and the significant equity writedown that 

loan holders are asked to take. We believe a number of modifications to the program could allow many more borrowers access to 

the program and ultimately prevent their foreclosure. 

In addition to refinancing opportunities, the newly enacted 

TARP, or Troubled Asset Relief program, allows the Federal Government to use guarantees to incentivize additional loan modifications for distressed borrowers. We believe there have been some 

positive proposals put forth, for example, by the Chairman of the 

FDIC and that which you outlined at the outset, Chairman Frank, 

that would allow the Federal Government, through TARP, to provide credit guarantees for redefaults on modified loans that we believe would substantially increase the number of loan modifications 

granted and ultimately foreclosures avoided. 

Finally, we believe there are significant opportunities also for 

TARP to purchase individual distressed loans out of mortgagebacked security trusts, which could give the Treasury Department 

unlimited discretion to modify loans in whatever way the government feels fit. 

The ASF has recently undertaken a review of the various opportunities and obstacles for servicers to sell individual distressed 

loans out at a discount to the Treasury Department. We expect to 

report out some initial progress on this initiative at the end of this 

week. 

Let me just note one of the things that was mentioned in the 

opening statement by the ranking member is that securitization to 

some has become a dirty word; but let me emphasize and provide 

a quote from the finance ministers of the largest economies in the 

world that articulated last month that one of their top five global 

priorities is to, ‘‘take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets.’’ SimVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
23 

ply, without securitization, the credit markets in America have 

dried up, and people don’t have an ability to purchase new homes, 

to purchase autos, or to use their credit cards. 

I thank you for the opportunity to testify on this important and 

timely issue today. ASF looks forward to continuing to work with 

this committee and the new Administration in our collective pursuit of avoiding preventable foreclosures. 

[The prepared statement of Mr. Deutsch can be found on page 63 

of the appendix.] 

The CHAIRMAN. Thank you. 

I am going to have to, when this hearing is over, ask the maintenance people to come up with some large rooms, because we are 

awash in straw up here from the number of strawmen that have 

been constructed and then demolished by my Republican colleagues. 

Let me start with securitization. I don’t know anybody who is 

trying to abolish securitization. I don’t know anybody who is trying 

to substantially limit it. What I have said in every speech I have 

given on the subject is that securitization reminds me of the formation of large enterprises called trusts in the late 19th Century, and 

then of the broadening of the stock market, an innovation that produces a great deal of good for society but, because it is an innovation, is not always accompanied at the outset by appropriate regulation. And regulation helps enhance the innovation. 

In fact, one of the problems we have now is that some people who 

bought things they shouldn’t have bought now won’t buy things 

they should buy. That is an obstacle to the securitization market. 

And just as the establishment of the Securities and Exchange Commission, over the objection of the conservatives of the day, helped 

the stock market flourish, the right rules here will encourage people to get in it. 

The next one is retroactivity. No one has proposed—I take that 

back—a couple of people have proposed it. We haven’t come close 

to enacting anything retroactive. We are talking, as Mr. Deutsch 

correctly said, about voluntary inducements. So this retroactivity 

scarecrow—I guess I just switched metaphors—is just a shimmer. 

Nor are we talking—when the gentleman from Georgia, in talking about decisions being made, said well, but you don’t want the 

government to own the house. No, we don’t. Nobody has proposed 

it. That is why we didn’t propose it, because no one wants it. 

We are saying this: We have heard from a number of people, and 

he said correctly it isn’t always clear what is the best answer. 

There does appear to be a consensus that in many, many cases— 

and, again, somebody said well, you can’t protect everybody against 

foreclosure. True. And again, I don’t know of a single human being 

who has said anything other than we are trying to diminish the 

number of foreclosures. There are people who are not going to be 

able to make their payments, and nobody is trying to stop it. 

What we are talking about is in those situations where we are 

told there is agreement that foreclosure would be a worse case than 

some modification, we have been told that there are problems in 

getting there. So what we talk about is not the government making 

the decision; but, yes, I do think it is important and it has been 

24 

an important matter of public policy to have somebody make the 

decision. 

The gentleman from Georgia said, well, they can go to court. My 

conservative friend’s preference for litigation ebbs and flows. I 

think leaving something to the courts, without adequate statutory 

guidance, is not an appropriate thing for us to do. 

Let me just ask, Mr. Deutsch, please submit to us specifically 

those modifications on HOPE for Homeowners. But here is the nub 

of it to me. On page 5 of your written statement you say, ‘‘Although 

there is variation among individual transactions, most 

securitizations provide servicers with significant flexibility to engage in loan modification and other loss mitigation techniques subject to contractual obligations if the particular loss mitigation alternative selected maximizes the net present value or recovery.’’ That 

is clearly the case. 

We are told that in principal, but we are also told by many people that they can’t get this worked out, that the servicer in fact is 

deterred from doing it. We tried to pass legislation to deal with 

that. We passed legislation—bipartisan—the gentleman from Delaware and the gentleman from Pennsylvania. 

Certainly it is the case statistically, I am told, and we saw this 

again with Fannie and Freddie, that entities as holders have been 

able to do more modifications than mortgages where there is a 

servicer. 

So if this is the case, I guess to some extent—and I want to believe what you say and I acknowledge that may be what is in the 

contract—but there still may be this fear. 

You tell me that the securitizers, the servicers, have the power 

to do this, but we get every indication anecdotally and statistically 

that it is not being done as much. So I guess I am in the position 

of posing the question that Groucho opposed to Chico: ‘‘Who am I 

going to believe, you or my own eyes?’’ 

I want this to be the case, but are you aware that there is this 

disparity in the actual number of modifications, that we get more 

when there are owners, the holders servicers? And if that is the 

case, are there further things we can do? What would account for 

what seems to me the gap between what I believe is an accurate 

statement by you of the legal situation and the actual experience? 

Mr. DEUTSCH. Well, hopefully my name won’t be referred to as 

Chico hereafter, but I think— 

The CHAIRMAN. A side point, by the way. It was Chico, because 

it was based on his predilection for female companionship. 

Mr. DEUTSCH. You are going to make me blush, Mr. Chairman. 

Servicers have indicated that they believe and are very concerned that if they do overmodifications of mortgage loans, that 

they would be subject to lawsuits. Those same servicers should also 

be scared if they are subject to lawsuits for undermodification as 

well. 

The CHAIRMAN. Is there anything we could do to alleviate the 

first fear, other than what we have already done? I do know this. 

The question of indemnification, you get taxpayer dollars there. Is 

there anything we can do, short of 100 percent indemnification, to 

alleviate the first fear? 

25 

Mr. DEUTSCH. I think the best thing we can do is what the ASF 

is actively working on right now, and that is bringing together all 

of the institutional investors, the pension funds, the mutual funds, 

the hedge funds, the banks, the financial guarantors, the insurance 

companies, all those that own mortgage-backed securities, and creating a more streamlined solution that ultimately gives a standard 

market practice for servicers to be able to modify in accordance 

with that. There is significant precedence for that. The ASF created 

last December a streamlined framework that allows servicers even 

before a borrower— 

The CHAIRMAN. My time is up. I am glad to hear that. If it helps 

you, tell them that to the extent they are worried that we will intrude too much legislatively on this method that they believe is 

now working well, they can make us go away, but they can only 

make us go away if this effort you are talking about is successful 

and leads to significant modifications. 

The gentleman from Texas is next on the list I was given. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Deutsch, what would you say is the status of the secondary 

or the securitization market for mortgages today? You said nonexistent. Is it totally nonexistent, or is there some activity going 

on? 

Mr. DEUTSCH. I can provide you stats that were in my written testimony, that in October of 2008, there was approximately $500 

million of securitized product that was put out into the market. It 

sounds like a big number for those of us. But last year at the same 

time, it was approximately $50 billion in October of 2007. In previous cycles, it was much, much higher than that. 

There is absolutely zero activity right now in the securitization 

credit markets, which ultimately leads banks not to have the available credit to lend to consumers. 

Mr. NEUGEBAUER. Mr. Gross, you indicated, though, that you all 

had made a substantial number of mortgage loans in the last quarter. 

Mr. GROSS. That is correct, sir. 

Mr. NEUGEBAUER. What did you do with those mortgages? 

Mr. GROSS. They are either portfolio product, or these would 

have been product delivered through the GSEs. I believe that the 

market Mr. Deutsch was referencing was the private securitization 

market. 

Mr. NEUGEBAUER. So, Mr. Deutsch, the $500 million would be 

delivery outside of Fannie or Freddie. This would have been in the 

private markets. 

Mr. DEUTSCH. Correct. And that encompasses consumer asset 

securitization as well—credit cards, auto loans, consumer loans, 

etc. 

Mr. NEUGEBAUER. The chairman talks about the servicers and 

the portfolio managers and the trustees and all of the people who 

are involved in the securitization family there. Moving forward, in 

other words, we have some of these old contracts that are in place. 

What is the industry doing as we are moving forward to look at 

where some things in those documents could have been made better and bring some uniformity? Has anything taken place, or is the 

meeting that you are proposing where that should take place? 

26 

Mr. DEUTSCH. We have had a separate effort from beyond the existing—how to address existing contractual arrangements, an existing modification policy, a separate effort throughout all of 2008 

called ASF Project RESTART, where we are examining all areas of 

securitization and ways to enhance the process of securitization. 

I would point you to a request for comment that we put out this 

summer, that we will shortly be updating, where we note a number 

of different ways where we are trying to create a much more 

strengthened securitization process which ultimately will create 

market discipline. 

One of the gentleman’s comments over here was can we create 

servicing provisions that will ultimately allow more discretion, 

more flexibility into the future for servicers who are experts at 

servicing to be able to do that on behalf of investors who are experts in investing. Absolutely, we believe we will get to new standards that will even further create better securitization into the future. 

But we all know it is going to be some months before 

securitization returns, and obviously none of us want securitization 

to return in the exact same form that it occurred in previous years. 

Mr. NEUGEBAUER. One of the issues that I have about moving 

down to some kind of modification road here, of Congress stepping 

in the room again, is what that does to the private mortgage insurance industry, because I think they are going to have a much 

stronger role, probably already have been, as people are looking to 

go back in to make sure that if you are making above a 75 or 80 

percent loan you are using, in many cases, some private mortgage 

insurance to do that. 

What are the implications to those entities if we start going 

down a road where the potential loss could be made larger if that 

modification in fact doesn’t really turn out to be appropriate? How 

do we address that? 

Mr. DEUTSCH. Well, I think there are two ways we can address 

it. I think it is an important comment to note it is critical for people to have certainty of contracts moving forward. 

You don’t want to put capital to work if you are afraid somebody 

will change the rules after the fact. I do think there is a very positive way that the Federal Government through TARP can provide 

guarantees. And this will be a benefit to mortgage insurers, to the 

institutional investors, to financial guarantors, where this guarantee policy could apply if servicers were today even more 

proactive steps on loan modifications; that if those modifications 

would fail, ultimately that credit risk would flow to the troubled 

asset relief program rather than back to the ultimate holder or 

those borrowers. 

Mr. NEUGEBAUER. Mr. Gross, over the last quarter, you originated a number of loans. Are you seeing that in any particular part 

of the country, or is the activity that you are reporting pretty much 

nationwide? 

Mr. GROSS. That is a nationwide number, sir. 

Mr. NEUGEBAUER. I would say what the chairman said. I think 

it would be in the best interests of the industry if you could sit 

down and work this out among yourselves, without asking or reVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
27 

ceiving any encouragement from this committee to do that. I think 

a better solution comes from the industry working it out. 

One, you know more about the transaction than anybody in this 

room; and, two, I think it would be more of a market-based, market-driven solution that would accomplish the ultimate goal, and 

that is get these markets functioning again. 

The CHAIRMAN. I am going to ask unanimous consent at this 

point to put into the record a very good report by Credit Suisse 

dated October 1st, ‘‘Subprime Loan Modifications Update.’’ With 

your indulgence, I want to read just a couple of their conclusions, 

because it is relevant to what we are talking about. 

First, it says that loan modification is a growing but perhaps underutilized tool to reduce lawsuits and prevent foreclosures; that 

redefault rates for some types of modifications are better than expected. Not surprisingly, principal reductions or interest rate reductions work better than simply sort of putting off the day of reckoning. 

But here is a very important point that is relevant maybe to 

what Mr. Deutsch says. It probably gives some support to what you 

are talking about: ‘‘We show that there is a dramatic difference between how intensively servicers are using mods. Some servicers 

have already modified more than 10 percent of all outstanding 

2005-and-later vintage loans. Others have modified less than 5 percent.’’ Then it says servicers are finding the sweet spot between too 

many and too few that will improve bond values. 

So the fact that there is this variation does argue for the point 

there is this authority. And, again, I think the success of that operation that you are talking about will have a major impact on this 

committee’s legislative agenda. 

Without objection, I will put in this report, and I recommend it 

to people. It does say they are increasing, ‘‘Actually subprime loan 

modifications have increased significantly since we published our 

first report on this topic. No one program has done what we would 

like.’’ There are a whole bunch of them, including some individual 

things. So I do recommend this report to people. 

The gentleman from Pennsylvania is recognized for 5 minutes. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Mr. Deutsch, maybe you can straighten us out. Do you see over 

the horizon any certainty that deflation in the real estate market 

is going to stop and come to an end? 

Mr. DEUTSCH. The deflation in the real estate market? 

Mr. KANJORSKI. The devaluation of real estate. 

Mr. DEUTSCH. My personal view is that we will continue to see 

price declines throughout 2009, particularly in the most troubled 

markets: California; Nevada; Arizona; Michigan; Ohio; and Florida. 

Mr. KANJORSKI. Well, if that is the case, how will rewriting mortgages and making modifications really change that reality? At 

some point, every week or every month, more mortgages will be 

going underwater, not because they are speculative, not because 

they were improperly made, but just with the real estate evaluation. 

Does that look like it will be a perpetual problem now for the 

next year, year-and-a-half? And then I wonder of what value mortgage modification is. 

28 

Mr. DEUTSCH. Well, as I indicated in my testimony, I do think 

loan modifications for the targeted and appropriate borrowers will 

be very helpful in helping stem the tide of delinquencies and defaults. But as I also indicated, given that dramatic decline and a 

lot of that being nationwide in home prices, is that you will also 

need to see additional efforts by the Federal Government to be able 

to help stabilize that housing market, because ultimately declining 

home values are an indication and cause of increasing foreclosures, 

delinquencies, and defaults. Part of that is because credit is simply 

not available today for either new mortgage borrowers to be able 

to get into homes for the first time, and also for existing borrowers 

to be able to refinance into different loans. 

Mr. KANJORSKI. I notice there is a tremendous difference in the 

laws that apply to real estate and mortgages, say between California and Pennsylvania. In California, you just hand in the keys 

and you are out from under the obligation; in Pennsylvania, there 

is actually no way that you can escape the obligation that you 

made on the mortgage. So it would seem to me less likely for Pennsylvanians to be able to escape relative to Californians. 

Now, the problem with that is whatever we do at the Federal 

level at the present disjointure of the real estate laws across the 

country, we advantage or disadvantage one State over another. 

Would you think it may be wise at this point to adopt, at least for 

temporary purposes, a uniform national standard of handling mortgage foreclosures and mortgage rights? 

Mr. DEUTSCH. A national standard for— 

Mr. KANJORSKI. A national standard so Pennsylvania and California are the same. 

Mr. DEUTSCH. If we are talking about the ability for borrowers 

to walk away from their financial obligations, whether you view 

that as an investment in a home or a mortgage of sorts, I do think 

it would be very important to be able to provide incentives for 

those borrowers to stay in their homes or to reduce their ability to 

leave those homes and walk away from those obligations. 

Mr. KANJORSKI. Wouldn’t applying the laws of Pennsylvania to 

the State of California decrease the likelihood that Californians 

would walk when they are underwater? 

Mr. DEUTSCH. Absolutely. From the way you have characterized 

it, I think that would further disincent people from walking away 

from their homes. 

Mr. KANJORSKI. Should we think of doing that? 

Mr. DEUTSCH. I think it would be very helpful to prevent those 

walk-away borrowers. If you have additional walk-away borrowers, 

more foreclosures on the market, that would certainly increase the 

number of homes available on market, which ultimately drives 

home prices down. 

Mr. KANJORSKI. Very good. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Illinois, in the absence of 

the gentleman from Ohio, is recognized for 5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

There seems to be a sense of urgency and seriousness of the 

mortgage crisis to have creative thinking to address the anticipated 

foreclosures. Is there a danger that by responding to this crisis, 

29 

regulators in Congress may damage investor confidence, leading to 

longer-term problems? 

Mr. DEUTSCH. I would say that investor confidence is already 

damaged. There are significant concerns in the investment community about different proposals that are more mandatory in nature 

rather than voluntary, that has created significant volatility in the 

market and has ultimately depressed mortgage-backed security 

prices. By depressing those prices, you continue to prolong the inability for issuers to put new mortgage-backed securities out into 

the market, which ultimately takes their ability from being able to 

originate the same volumes in the past. 

Mrs. BIGGERT. Do you think that there is also a lack of investor 

scrutiny when it came to the mortgage-backed securities? 

Mr. DEUTSCH. Absolutely. There were investors who did not do 

the full amount of due diligence they should have done before purchasing a mortgage-backed security. I think there are a lot of investors who have learned their lesson. Some of those are no longer 

investing; they are selling shoes or doing something else because 

of their poor performance. 

I think what you are seeing now in the market is a lot of reevaluation, and a lot of this is occurring through the ASF Project 

RESTART, about how to create more market discipline for those investors and ultimately provide them the information and certainty 

of the products that they would be purchasing. 

Mrs. BIGGERT. So we might need some financial literacy for the 

investors as well as the borrowers? 

Mr. DEUTSCH. I think it is not just financial literacy. We also 

have to keep in mind that in 2005 and 2006, we had enormous liquidity available in the market. There was capital flowing in from 

all parts of the globe into purchasing different assets, and mortgage-backed securities had very strong performance up until 2006. 

So you had a lot of investors putting money into securities where 

they were very hopeful about very positive returns. 

Mrs. BIGGERT. Could you talk a little bit about your Project RESTART? Will that build investor confidence? 

Mr. DEUTSCH. Yes. There are multiple prongs to Project RESTART. The first and priority prong is providing additional information to investors so that they understand all the different characteristics of an underlying mortgage loan within a security. 

So if you are buying a conforming set of loans, say from Fannie 

or Freddie, they are very fungible, if you will. If you are buying 

nonconforming loans, those from Alt-A, subprime or others, there 

are all kinds of differentiation or variation. 

We are trying to be able to effectively put the institutional investors as close to that closing table for all of those mortgages as possible. Obviously, given thousands of mortgage loans in a particular 

pool, we have to do that through data-driven exercises, and that is 

extremely costly. But ultimately, it is going to be necessary to increase the investor confidence in securitization going forward. 

Mrs. BIGGERT. Thank you. This is a general question. The centerpiece of the HOPE for Homeowners program is a writedown of 

mortgage principal. Are servicers and investors not able to do this 

without government intervention? 

30 

Mr. DEUTSCH. Absolutely not. Servicers have historically and 

continue to write down principal in appropriate circumstances. 

What I have indicated in my testimony is that the current requirement to write down to an 87 percent loan-to-value ratio, effectively 

providing 13 percent equity into the home, is in many cases simply 

too far of a writedown, where servicers or investors don’t find that 

to be an appropriate use. If that loan-to-value ratio were increased, 

it would provide substantially more refinances into the HOPE for 

Homeowners program. 

Mrs. BIGGERT. Thank you. Would anybody else like to comment 

on that? Mr. Gross? 

Mr. GROSS. Yes. Just amplifying on what Mr. Deutsch just said, 

with regard to HOPE for Homeowners, servicers are contractually 

obligated to choose the home retention or loss mitigation option 

which provides the best return to the investors. That is a contractual obligation. To the extent that we can do an interest rate reduction or term extension which will provide the homeowner with that 

affordable and sustainable payment, without doing the principal reduction, we are obligated to choose that option. 

In most cases when we are looking at the hierarchy of options 

here, the HOPE for Homeowners program, with the effectively 13 

percent writedown, at least that amount, would provide for a much 

greater immediate loss to the investor than the interest rate reduction or term extension would allow. 

Mrs. BIGGERT. Thank you. I yield back. 

The CHAIRMAN. If the gentlewoman would yield, I would note the 

distinction in Credit Suisse was a different one, and that was between either principal modification or loan reduction and the extension. Because what they reported was that there was a significantly higher redefault rate with regard to simply an extension of 

the term as opposed to either an interest or principal writedown. 

So, as I said, they drew the line in their argument about the extension was in their experience there is a higher redefault rate. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you. I would like to follow up on my colleague’s questioning, Mrs. Biggert, on the mortgage-backed securities, where she pointed out that we need more due diligence on 

these products. 

I would like to ask the panelists how much of the financial crisis 

is caused by the fact that the mortgage-backed securities were 

given to people who couldn’t afford them under terms that were 

very unfavorable; teaser rates of 3 percent, that after 3 years 

jumped to 9 percent; that they were no-doc loans, no documents 

needed. Actually, the word in New York was that it was easier to 

buy a house than to rent an apartment, because they didn’t ask 

about your income, they didn’t ask anything. They just gave you a 

mortgage you couldn’t afford. 

How much of the problem we are confronting now was really 

mismanagement, abuse, and horrible behavior in an economy that 

has slowed down? How much of the problem that we are confronting in the housing crisis that Chairman Bernanke and others 

say are the prime goal, we have to stabilize the housing before we 

can move forward with our economy? 

31 

We have to understand how this happened. How much of it was 

caused because of mortgage-backed securities that people couldn’t 

afford, and were sold to them knowingly that they couldn’t afford 

them, and how much of it is an economic downturn in our economy? Anyone or everyone, I would like to hear your comments on 

it. 

Mr. DEUTSCH. I guess I am being volunteered to go first. 

I would say borrowers, lenders, and institutional investors all 

had irrational exuberance about the direction of home prices into 

2004, 2005 and 2006 based on the significant uptick in home prices 

in that period. I believe everybody became very excited about the 

equity that was available through that. 

Mrs. MALONEY. If I could add, then, because you were talking 

about the prices going up so they were very excited about it. So 

they didn’t care if they sold a house to someone at a 3 percent interest rate, because they knew when they took the house back from 

them after having collected all that money, that they could then resell the house. Now, the problem is we can no longer resell the 

house because of a financial problem and the houses have fallen in 

price. So that, I think, is an important point. So continue. 

Mr. DEUTSCH. I think as we have been discussing all this morning, no lender wants to take a home back in an appreciating or depreciating home price market because the costs of foreclosure are 

extremely high. The expectation of many borrowers and many lenders was that home prices, by continuing to increase, is that those 

borrowers would be able to either refinance or be able to use the 

equity that was growing in that appreciation. 

Mrs. MALONEY. And it is clear they cannot. To my question, do 

you think this financial housing crisis is caused by the faulty, deceptive mortgage-backed securities, or a general downturn in our 

economy? 

Mr. DEUTSCH. I believe there is a combination of both a downturn in the economy, job loss, etc., as well as the epicenter of 

which, of course, is being in the housing market where you did 

have a lot of irrational exuberance on the direction of home prices. 

Mrs. MALONEY. How much of the problem do you think was 

caused because no one was held responsible? You could sell a 

house, get your fee, and immediately securitize it and move to Florida; unlike the old times, when the bank gave you a loan, they held 

that loan, and they were responsible. I used to work for a bank. I had a loan line of $10,000, and let 

me make sure, I was absolutely positive I never gave a loan to anyone who couldn’t pay that back, that $10,000, or I would have lost 

my job. But now you just securitize it, you sell it to the next one, 

the next one and the next one, and no one is responsible. So should 

we build some responsibility back into this, some accountability? If 

so, how would you suggest we do that? 

I might ask, if I could add to that question, I want to sincerely 

applaud everyone who has moved forward with Fannie Mae and 

Freddie Mac. They say that is only 2 percent of the defaulted loans. 

Most, 20 percent are the adjustable rate subprime loans. So that 

is where the real problem is. We are relying on voluntary actions, 

and by all accounts the problem is millions, not hundreds of thousands. 

32 

So how can we encourage industry? Not that we are not very appreciative of the efforts you have taken so far, but how can we encourage you to adopt as a standard the systemic loan modification 

protocol that was used by the FDIC at the IndyMac takeover that 

was so successful? 

The CHAIRMAN. We will get an answer. Does anyone want to answer? 

Mr. GROSS. Well, I would like to say a couple of things. Number 

one, I think everyone is in agreement that there were loan programs available in prior years which in hindsight should not have 

been available. I am happy to say that Bank of America did not 

engage in those loan programs at that time. 

With regard to the voluntary loan programs that are there today, 

Bank of America has closed approximately 225,000 home retention 

workouts thus far this year. So the voluntary aspects of this for the 

major servicers engaged in the HOPE NOW Alliance and other initiatives are working. Are they working fast enough? No. We need 

to do more. 

The announcement yesterday with the GSEs, with Fannie Mae 

and Freddie Mac, will go a very long way in assisting in this, because this was, quite frankly, one of the areas where all servicers 

struggled. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. I want to thank all the 

members of the panel for their testimony. I am impressed with all 

that is being done. I know it is not fast enough for anybody, but 

I think it is imperative that we appreciate all that is being done. 

It has been said that the goal that has been put on the table is 

that we diminish the number of foreclosures, and we all agree with 

that. I am heartened, Mr. Chairman, because I believe that we may 

be closer than folks might think. A commitment to a volunteer program and no retroactivity is a positive place to start. So I am hopeful that as we move forward, we will in fact be able to realize that 

significant decrease in the number of foreclosures. 

The falling home values has been mentioned as being at the core 

of our current challenges, and I would agree, I think, that nobody 

would discount that at all. There have been some solutions offered 

by others out there that haven’t been discussed this morning. I 

wonder if, Mr. Gross and Ms. Sheehan, if you might comment on 

solutions that are put on the table, like mortgage rate buydown 

and expanded home buyer tax credit. 

Would you care to comment on whether or not you believe that 

those items can appropriately address the problem or would be part 

of the solution? 

Ms. SHEEHAN. I think we all recognize that there needs to be a 

variety of different types of any initiatives in order to be able to 

sort of promote homeownership in the future. Some of it is looking 

at how we do our underwriting and lending. Some of it is incentives. 

I know there was an incentive that was put into the stimulus 

package that was adopted over the course of the summer, and I 

think, frankly, part of the issue we have right now is sort of the 

balance in terms of credit underwriting. 

33 

We have been criticized for becoming too liberal. I think we now 

have the issue where everybody has come back in the other direction. So in order for our first-time home buyers to really take advantage of these programs, whether it is a tax credit or a State 

housing finance agency program, we need to think about how the 

tightened credit impacts that transaction. 

So one of the things we see a lot of potential for, and a number 

of the major lenders have been working and talking to the State 

housing finance agencies, using their funds that they have gotten 

through the stimulus package to put together programs for firsttime home buyers, that would be able to sort of bridge that gap between what is available realistically by way of downpayment, because that is one of the issues we see. So the market that exists 

today has moved toward a larger downpayment. First-time home 

buyers generally don’t have that available. 

Mr. PRICE. Would a tax credit help that? 

Ms. SHEEHAN. A tax credit would help it to the extent it is refundable and it becomes sort of part of the underwriting of the 

package. But I do think that having the participation of the States, 

with their ability to put some guarantees around, if not all, a portion of the loan is really going to help. Because what we have seen 

happen certainly in the last 6 months at Chase is that there has 

been a lot more activity in the FHA programs, both basic FHA and 

FHASecure. We are building a pipeline for the FHA homeowner. So 

the market is still looking to get that sort of government backing, 

if you will, until we bring the private market back. 

Mr. PRICE. Mr. Gross, a comment on the tax credit? 

Mr. GROSS. No. 

Mr. PRICE. No comment? Getting a little too liberal has become 

a disease around here, Ms. Sheehan, so I appreciate your comment 

regarding that. 

Many of my constituents believe that the capital flowing into the 

market has stopped significantly, as has been mentioned by you, 

Mr. Deutsch, and that until there is some sense of certainty about 

the Federal Government stopping its actions, that the capital sitting on the sidelines is going to stay on the sidelines. 

Is that an accurate assessment of what is going on? 

Mr. DEUTSCH. I think it is very accurate that many investors, 

until they see how a situation plays out—and part of that is the 

home price market and the housing market, but also it is the new 

response of a new Administration, of a new Congress—if there are 

steps that would significantly disadvantage them. They are quite 

concerned about that and are effectively taking a wait-and-see approach. 

So it is not just the act of doing something, it is the threat or 

concern of doing something; and it is preventing many investors to 

come back into the market. 

Mr. PRICE. Do you have any thoughts about how we shorten that 

timeline for that point when there is certitude in the market, 

where money can get back in? 

Mr. DEUTSCH. Part of it is the volatility in question as to how 

the home price depreciation market will go down. And as Representative Kanjorski was asking about, how many borrowers will 

34 

effectively walk away from their homes, how many Jose Cansecos 

will we have who will just simply pick up and leave? 

Mr. PRICE. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

One of the benefits of a hearing at this stage in the process is 

to try to make an assessment of what else, if anything, we need 

to be doing. It seems to me that there are four options: We can just 

wait on what we have already done to play itself out; we can aggressively push and jawbone for industry action based on industry’s 

own interest and based on legislation that we have already passed; 

we can wait on regulators to take action based on legislation that 

we have already passed; or we can consider additional legislation. 

And obviously, one of the things we need to consider is additional 

legislation. That is within our prerogative. 

And one of the things I guess is pointed to on page 9 of Mr. 

Gross’ testimony where he talks about changed circumstances of 

borrowers being a real problem when people become unemployed, 

can’t find jobs, and the economy doesn’t work like it is supposed to. 

So I know our responsibility in the stimulus area is one, but both 

Mr. Allensworth and Mr. Gross pointed to some impediments that 

are still out there; and it wasn’t clear to me whether you are looking for us, as legislators, to solve those impediments or whether 

you are looking to the regulators to solve those impediments or you 

are looking to the industry to solve those impediments. 

Mr. Allensworth outlined three problems on page 4 of his testimony; Mr. Gross outlined a series of problems and kind of danced 

around the solutions to them on pages 8 and 9 of his testimony. 

I guess what I am trying to figure out is the same thing I was trying to figure out from the people who came to talk to us about setting up the new regulatory framework: What is it that you are proposing that we need to do, if anything, as legislators, as this committee, at this point? 

Or is this a function of waiting on this to play itself out, waiting 

on the regulators to push you and give you a framework to operate 

in? Waiting on, as Mr. Deutsch has indicated, the industry to set 

some protocols and uniform standards for services? 

Who should be doing that and what should our role as this committee be in it? I will start with Mr. Allensworth, since he has been 

sitting down there during the questioning without much participation. And then, I want to go over to Mr. Gross next, and if I don’t 

run out of time, the other two witnesses also. 

Mr. ALLENSWORTH. I think, as I outlined and as Mr. Gross outlined, there are a number of challenges that the market faces. I 

think one of the first solutions is the collaboration of market participants. I think you see with the panelists up here a willingness 

and a desire to work constructively to solve a lot of the issues that 

are outlined. And I think a lot of the issues we discussed can be 

addressed through collaborative efforts of the industry. That being 

said, there are a number of market participants who are not on the 

panel today, and I think the important thing is to bring everybody 

together, have everybody discuss it. 

I think we have a shared interest in— 

35 

Mr. WATT. Maybe I should revise my question, since I am running out of time, and have you tell us what you think we ought 

to be doing, if anything, to move this process forward and stem the 

tide of foreclosures and get us out of this mess. 

Mr. ALLENSWORTH. As the Hedge Fund Association, I don’t think 

we— 

Mr. WATT. No, ‘‘we’’ as members of this committee. 

Mr. ALLENSWORTH. Right. On behalf of the Hedge Fund Association, we don’t have any specific policy recommendations that this 

committee or that Congress needs to undertake at this point. Our 

primary recommendation is collaboration of industry participants 

to solve a lot of these issues. 

Mr. WATT. Mr. Gross. 

Mr. GROSS. I would suggest that there is a dramatic need for 

modernization of HUD. I know that the HUD staff is working feverishly to come up with new solutions, but because of their own 

regulations, they were unable to fully participate in the announcement that the GSEs came forward with yesterday. They cannot 

modify their loans to a 40-year term. They cannot modify loans 

that are less than 4 months delinquent. 

Mr. WATT. Is that by statute or by their own ineptitude? 

Mr. GROSS. My understanding is, it is by statute. And again, we, 

as an industry, would look forward to working with you on HUD 

modernization because it is dramatically needed. 

Mr. WATT. I think I am out of time, unless anybody has some 

compelling answers to the question already asked. 

I yield back, in that case. 

Mr. KANJORSKI. We will hear from the gentleman from Alabama, 

Mr. Bachus. 

Mr. BACHUS. This may be out of your field of expertise to the 

panel, but the vice chairman of the committee, Mr. Neugebauer, is 

from Lubbock, Texas, where Texas Tech is. I represent Tuscaloosa, 

Alabama, which is the University of Alabama. 

They are number one and number two in all the football polls. 

And he has recommended that I wear this Texas Tech hat and jersey when I go home. What do you think? Do you think that would 

be advisable? Or do you think he is serious, this is a serious proposal on his part? 

Mr. GROSS. I think that the ranking member is smarter than 

that. 

Mr. DEUTSCH. We might have a new ranking member in the next 

Congress. 

Mr. BACHUS. Mr. Vice Chairman, I’m smarter than that. That 

was very good advice. Let’s try another one. 

There has been a sharp rise in foreclosure. And President-Elect 

Obama and many of my Democratic colleagues have proposed giving bankruptcy judges the right to modify the terms of the primary 

mortgages. And also, they have proposed a forbearance or moratorium on mortgage foreclosures. 

Mr. Deutsch, let me start with you and Mr. Allensworth, since, 

Mr. Gross, I think you gave a very good answer you couldn’t improve on. So if you all would answer that question for me. 

Mr. DEUTSCH. In short, as I indicated earlier, finance ministers 

from around the world have indicated the flow of credit to the 

36 

United States, to other countries, is one of the top five priorities 

to address. By enacting something like a foreclosure moratorium— 

which would effectively change the rules after mortgages have been 

made—or to create a situation where bankruptcy judges could cram 

down the principal values of mortgages, both of those would have 

an extraordinary chilling effect on institutional investors’ bringing 

capital back into the markets and ultimately would prolong the 

credit crisis that we are in. 

Mr. BACHUS. And I guess it would obviously, if that happened— 

and I agree with you—it would increase mortgage costs for all 

other borrowers. 

Mr. DEUTSCH. It would either increase the cost or simply not 

make either refinancing or new credit available. 

Mr. BACHUS. Thank you. 

Mr. Allensworth. 

Mr. ALLENSWORTH. I would agree. I think that the challenges 

that Mr. Deutsch outlined are some of the things that need to be 

considered. 

Certainly, we have seen that the foreclosures in the housing market and the tying up of mortgage markets has had a huge spillover 

effect into credit markets and to the economy generally. So we are 

very supportive and want to be actively engaged in addressing the 

foreclosure problem. 

But I do think we need to consider whatever solutions we undertake, what the effects will be not just on the current foreclosure 

issue, but going forward, and the availability of credit going forward. 

Mr. BACHUS. But I think it is your answer that either a moratorium or allowing bankruptcy judges to change the terms of the primary mortgages would restrict credit and drive up cost? 

Mr. ALLENSWORTH. For both of those issues we have not focused 

with our members on those issues up to this point. We would need 

to go back to our members to see what kind of effect they think 

that would have. 

Mr. BACHUS. Would you do that and let us know? 

Mr. ALLENSWORTH. Yes. 

Mr. BACHUS. This question I will ask Mr. Gross and Ms. 

Sheehan. One thing we keep hearing, and in your testimony, is 

that you are trying to contact the borrowers and they are not responding to you; you have been unable to establish contact. We at 

least have heard that from institutions in some of the programs 

that have already been deployed. Is that a problem? Are you hearing from all of them? 

Mr. GROSS. I think I would agree with the assessment that frequently contacting a borrower who is in default is often challenging. It requires very dedicated efforts, and it is done 7 days a 

week. 

I would, I guess, argue a little bit with some of the statistics that 

have been used. In our own case, for loans that have gone through 

the foreclosure process, and we have looked back, we have had contact with over 90 percent of those borrowers during that specific 

default cycle. And we have had contact with, I believe, about 65 

percent of those borrowers within the immediate 45 days prior to 

the foreclosure event. 

37 

And going back to a question that you raised a moment ago with 

regard to foreclosure moratoriums, one of the reasons why I don’t 

believe that a foreclosure moratorium is either appropriate or needed is that any borrower who reaches out to their lender and says, 

I need help, if that loan is in the foreclosure process and we believe 

that they, number one, want to retain ownership of the property, 

number two, have a reasonable source of income or that it is reasonably foreseeable that they are going to be back to work soon, 

then we will work with those homeowners and we will stall the 

foreclosure action. 

We have absolutely no incentive, we have no wish to have one 

more foreclosure than is absolutely required. 

Mr. BACHUS. Thank you. 

Can I get Ms. Sheehan to respond? 

The CHAIRMAN. Quickly. Sure. 

Ms. SHEEHAN. I think our experience has been that, depending 

on the method of contact, we get varying degrees of feedback from 

our borrowers, though I do agree with Mr. Gross that by the time 

you get through the foreclosure process, by and large, you have had 

at least one or two active contacts. But one thing we definitely 

have learned is that the more we can interface with counselors, the 

more we can have people on the ground to respond to borrowers, 

the much better outcomes we get much earlier in the game before 

they get too far underwater. 

Mr. BACHUS. And let me just make a comment, and I will wrap 

it up. 

I am concerned about in the delinquency stage before the foreclosures. And I have noticed that when third parties are hired, or 

counselors, sometimes it doesn’t have Bank of America or 

JPMorgan Chase on it. That might be more effective, and I would 

just urge you to maybe look at that. There are studies that show 

if it has that bank name on there, they may not even open it, or 

certainly wouldn’t respond. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. I want to commend some of the lenders here for 

having congressional liaisons because very often the people in the 

most trouble who aren’t opening your mail are calling our offices; 

and it is good for our staff to have somebody to call. 

I am particularly drawn to solutions to this problem that don’t 

involve risk or cost to the U.S. taxpayer or do not unduly imperil 

future investments in mortgage instruments. And so I hear Mr. 

Gross saying, well, we have loans in our portfolio, we will work reasonably with the borrower. 

And then I hear horror story after horror story where people 

can’t figure out who their servicer is. When they figure out who 

their servicer is, the servicer says, I would like to help you, but I 

might get sued. And so the question is whether Congress should 

act to make sure that servicers have all the legal rights to act on 

behalf of their various, in effect, trust beneficiaries taken as a 

whole. 

Or are we going to have this perverse game where people say, 

well, we would like to help you, and it would be in the interest of 

the investors that we help you, but we can’t help you because there 

is this risk of lawsuit? The way to deal with that, of course, is for 

38 

Congress to pass a law empowering trustees and protecting them 

from lawsuits. 

Mr. Deutsch, do you support that clarification? 

Mr. DEUTSCH. We would not support Congress taking legislative 

action that would— 

Mr. SHERMAN. And so you want to continue to be in this circumstance where you can come here and say you want to help people, and then on the ground the servicer says, oh, I would like to, 

but— 

Mr. DEUTSCH. No. I disagree with the characterization that 

servicers are saying, I would like to help you, but I am afraid I 

might get sued. 

Mr. SHERMAN. Are you saying that never happens? Do you want 

to come to my district? 

Mr. DEUTSCH. I am saying, under their contractual obligation, 

they have a responsibility to modify those loans in the appropriate 

circumstances. And if they don’t modify those loans in those appropriate circumstances, they will equally find themselves at legal 

peril. 

Mr. SHERMAN. Okay. So we have two legal perils and total fear 

of lawsuits. 

Why would you oppose a statute that would clarify that the 

world is in fact as you describe it to be, that is to say that servicers 

are free to provide workouts, etc.? 

Mr. DEUTSCH. Because in those circumstances, you will take the 

one effective way that investors have to control what servicers do 

on their behalf. 

Mr. SHERMAN. So you would have a circumstance where a mortgage might be owned by 10 different investors, and you have 1 investor out of the 10 who wants to oppress the homeowner and disadvantage their fellow investors, and you want them empowered to 

be able to do so, and you don’t want Congress to take away that 

power? 

Mr. DEUTSCH. They don’t have the power to influence the 

servicer by any contractual or legal means. If they would choose to 

sue the servicer—anybody in America is free to sue anybody—the 

question is, if the servicer takes a reasonable loss mitigation action, 

that servicer will not be held liable by— 

Mr. SHERMAN. So why would you oppose a statute that said if the 

servicer takes reasonable loss mitigation action, that servicer will 

not be liable? 

Mr. DEUTSCH. That has been approved already through EESA 

and through the HOPE for Homeowners program this summer. 

Mr. SHERMAN. So when the servicers say they can’t take reasonable action because they have a realistic risk of being sued by one 

of the investors, they are not telling you the truth? 

Mr. DEUTSCH. I think the point is that that has already been 

passed by Congress. 

Mr. SHERMAN. That is what I am saying. So you are saying the 

law is already as I describe it, and those servicers who describe it 

to me as being different are not telling me the truth? 

Mr. DEUTSCH. I guess it was unclear as to whether you are suggesting something additional should be passed on top of what has 

already been passed. 

39 

Mr. SHERMAN. I am suggesting that Congress do whatever is necessary so the next time I am talking to a servicer they are not telling me they would like to and it would be in their interest, but 

they fear being sued. 

You are convinced that the existing statutes give the servicers 

the power to do that, and the servicers who are telling me they are 

not empowered are just hiding. 

Mr. DEUTSCH. I can’t speak for what servicers are telling you in 

those private conversations. 

The CHAIRMAN. Would the gentleman yield? 

Mr. SHERMAN. I will yield. 

The CHAIRMAN. The gentleman from California was very diligent 

in this. If he got such a comment from a servicer, would it be helpful if he gave you those specifics you talk about, trying to bring 

people together? I mean, could we report, frankly, to you and see 

if you can resolve this conflict? 

Mr. DEUTSCH. Absolutely. 

The CHAIRMAN. Because it is one that he reports that almost everybody has encountered, this gap, as I said, between your statement and what happens. 

I thank the gentleman. 

Mr. DEUTSCH. I think we would very much appreciate that. 

In particular, we would be happy to have those institutional investors who own that security that that servicer is choosing not to 

maximize the net present value by not modifying in those appropriate circumstances. Those institutional investors will certainly— 

Mr. SHERMAN. Where you have 10 investors, and any one of them 

can allege by a mere negligence standard that the value of the 

portfolio has not been maximized, you provide the servicer with 

safety through inaction. And I look forward to working with the 

committee to try to provide servicers with as much insulation as 

possible from lawsuits when they act in good faith to try to maximize the situation for both homeowners and for investors. And you 

can always make the allegation that a servicer has not maximized 

the portfolio value, and perhaps we need a higher legal standard, 

a gross negligence legal standard in order to make them feel secure. 

I yield back. 

The CHAIRMAN. I am going to ask for unanimous consent just for 

1 minute to just say I am intrigued that they are also liable to be 

sued if they are too tough. 

Who has standing? I mean, if I had a mortgage, could I sue them 

for not reducing it, or is it some other investor? I understand the 

theoretical possibility. I know who the plaintiffs are in the case of 

the people who think they are not getting enough money; but seriously, who would be the plaintiff in a case that said, you haven’t 

been doing enough reduction? 

Mr. DEUTSCH. The institutional investors who own the mortgagebacked securities would— 

The CHAIRMAN. We have heard threats on the one. Frankly, I tell 

you this: It could be very helpful if you could talk to a few of them 

and have them threaten to bring such lawsuits. That might help 

with the problem we have all encountered. 

40 

Mr. DEUTSCH. I am not aware of any institutional investor suing 

any servicer either for overmodifying or undermodifying mortgage 

loans right now. 

The CHAIRMAN. And I guess I just asked you to engage in barratry, so I can’t do that. I retract it. 

The gentleman from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. And let me thank those 

of you who are here. 

I think that some of the atmosphere—and maybe you are leading 

it, or part of it—is going to change around here, the elections that 

were just concluded. Change is on the way. And I think that what 

President-Elect Obama is talking about is that we are going to 

have some civility, but we are going to talk and try to figure out 

how we can really make a difference for the American people. And 

I still, for one, believe in the statement that the American dream 

is alive, and I think that homeownership is an integral part of that. 

I still believe that we will get back to the point where, as I have 

always said, it is better to own a house than rent a car because 

a house is an appreciating asset—it is not today, but it has been 

and I think we will get back to that—and a car is a depreciating 

asset. And I think that will continue. 

So I still think that one has pride when they own their home, 

and the objective here is to keep those individuals who have lived 

with the dream of owning a home, as my parents did. And the key 

is, when you are in this situation that we are currently in, and we 

talk about helping Wall Street, now it is critical to show that we 

can help Main Street and these homeowners. 

And so, to that end, as I indicated in my opening statement, I 

have gotten together with individuals in my district—counselors, 

lawyers, etc., with people coming in—and one of the problems that 

I observed is, when they are talking, the homeowners and the advocates to individuals that call up banks, some of the time what 

they receive are individuals where the servicing has been 

outsourced. And the people that they are talking to, their call centers, are in foreign countries; and that seems to hamper responsiveness and ultimately the ability to help the distressed homeowner. 

We have had one situation where the person’s home was ready to 

go on the auction block, and as a result of trying to get somebody 

to do something timely, there was just—you know, they couldn’t 

navigate the system. 

So I was wondering whether or not you have seen the impact of 

outsourcing call centers to foreign countries on the responsiveness 

of lenders to the distressed homeowners, and is there a system 

where you can provide immediate foreclosure prevention and loan 

modification solutions on the ground with the local banks that are 

there—you know, maybe the branch managers that are in the districts? 

I am calling a meeting with them tomorrow to see if we can call 

them directly and put something together to help these folks that 

are about to lose their homes. 

I will start with Mr. Gross. 

Mr. GROSS. Yes. Bank of America has not outsourced any call 

center activities to any third parties. We do have call centers in 

India and Costa Rica. These call centers are focused on very preVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
41 

liminary delinquency types of activity, but they are not handling 

any of the home retention, more seriously delinquent accounts. At 

no time are these accounts allowed to get through to the India call 

centers. 

Mr. MEEKS. What about at Chase? 

Ms. SHEEHAN. The answer is essentially the same. We do have 

a call center in the Philippines, and that handles only what we call 

‘‘early stage delinquency’’ within the first 30 days. All the loss mitigation specialists are at Chase. 

Mr. MEEKS. I am going to check, because I personally was sitting 

there when we got the runaround. And some of the homeowners 

that I know—I am not saying whether it was Chase or Bank of 

America, I will verify, but I know that the homeowners oftentimes 

had been frustrated themselves when they were trying to rework 

some of the modifications, and that is why I got these advocates 

in there that is making a difference. 

Let me ask, was there any consideration, also further, because 

what we are trying to do is to help provide to these homeowners 

some financial literacy, some counseling with reference to how to 

budget, budget classes and debt management, so that if they do 

have the mortgages reset, then they can make sure that they keep 

them and understand them. I was wondering if there was any 

thought of the banks doing similar—and/or contracting, working 

collaboratively with community-based organizations to help provide 

further financial literacy and others to some of these people who 

are about to lose their homes? 

Mr. GROSS. Bank of America has a very active and large neighborhood stabilization program that does go into homebuyer and 

consumer financial education, as well as working with local neighborhood groups on REO properties and dispositions. We are very 

actively involved in those activities you outlined. 

Mr. MEEKS. And with Chase? 

Ms. SHEEHAN. Yes. I would just say that we are in the same position in the sense that we have a lot of prepurchase counseling that 

is available, we have homebuyer seminars. We have a lot of work 

that we do with our neighborhood groups and community counselors. 

I would agree with one statement that you made, and it is something we have been actually looking at, which is, what is the best 

way to sort of handle the total debt picture, postmodification, to ensure that, you know, once that modification is made sustainable, 

that we don’t have additional new debt coming into the picture, to 

sort of have the situation recur. And that is a budgeting issue. I 

agree with that, and I think we should focus more on that. 

The CHAIRMAN. The gentleman from Massachusetts. 

Mr. LYNCH. Thank you, Mr. Chairman, and I want to thank the 

ranking member and also the panelists; I appreciate you coming 

here before the committee and trying to help us with our work. 

I have somewhat of a confession to make. I also serve on the 

Government Oversight Committee, which is looking backward at 

this crisis, looking at AIG and Bear Stearns and some other firms, 

Lehman, that have had problems, as well as being on this important committee with Mr. Frank and looking forward. 

42 

But I have to confess to an irony. About 10 days ago, I was in 

a hearing room just down the corridor here criticizing roundly some 

lenders who were not careful enough in their lending practices and 

thereby contributing greatly, I think, to our current crisis. And 

here I am today about to press lenders for not being aggressive 

enough in this modification process and in their lending practices. 

I know that someone once said that, ‘‘consistency is the last refuge of the unimaginative,’’ and so I guess I cannot be accused of 

that. 

We have talked about the HOPE for Homeowners program, and 

you are all familiar with that. And we had original hopes that 

there might be 400,000 folks who might be helped by this program. 

The most recent report—and I think the chairman has submitted 

the Credit Suisse Report, and also HUD has reported—that instead 

of 400,000, we have helped 20,000. 

And what I would like to know from you, are there characteristics within that 20,000 that we have been able to help that would 

be instructive to us, going forward? Or are those just all whole 

mortgages, individually owned? Is that the profile of the person 

that we have been able to help? 

Mr. Deutsch. 

Mr. DEUTSCH. I would have to see exactly which loans are going 

out. I haven’t reviewed which loans have gone into the HOPE for 

Homeowners program. I think what we have outlined are three different ways that the HOPE for Homeowners program can be expanded and modified to be able to increase the number of loans 

that would be able to go into that. And it encompasses a number 

of the things discussed today about being able to acknowledge that 

consumers have a lot more consumer debt than I think has been 

previously acknowledged, that widening that debt-to-income ratio, 

widening that net would allow more borrowers to go in. 

There is also some hesitancy of the servicers from getting sued 

by State and local governments based on consumer privacy laws 

that we can all use some clarification on. 

Mr. LYNCH. Mr. Gross, I don’t know if you can help us on this, 

but there have been 20,000 people whom we have been able to 

help. And perhaps it is the characteristics of those people that are 

different from the group that we haven’t been able to help thus far 

that might be instructive for us to be more productive. 

Are there other people in the same category as the 20,000 that 

we have helped that we are not reaching out to? Is that part of our 

problem? 

Mr. Gross. 

Mr. GROSS. I apologize, sir, I am not familiar with the characteristics of the 20,000 borrowers that you are referencing. 

Mr. LYNCH. All right. Ms. Sheehan, take a shot. 

Ms. SHEEHAN. I would say—and I think we talked about this a 

little bit earlier—and I am not familiar necessarily with the profile 

of the borrowers, but they will have certain characteristics in common, meaning that they will probably be more seriously delinquent. And the reason it is important to mention that is that it 

plays into the debt-to-income ratios which are a constraint on the 

program. 

43 

And so we have found that it is easier to put people into modifications, frankly, than to put them into HOPE for Homeowners, 

given some of the characteristics of the program that those borrowers don’t fit. 

Mr. LYNCH. Okay. 

Mr. Allensworth. 

Mr. ALLENSWORTH. I am not in a position to be able to talk about 

the characteristics of any of the underlying loans that are going 

into it or not going into it. 

I think one of the things we have heard is consistent with what 

Ms. Sheehan just stated, which is that alternative methods of 

modification have seemed to be an easier path or more successful 

path at this point than HOPE for Homeowners. 

Mr. LYNCH. Thank you. I yield back. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. 

Let me thank the witnesses for appearing today. And let me 

start with Ms. Sheehan. Ma’am, what percentage of your workouts 

wherein you have modifications are portfolio loans? 

Ms. SHEEHAN. I don’t have that exact data with me. 

Mr. GREEN. Would you say the majority are? 

Ms. SHEEHAN. I would not be prepared to say the majority. I 

would actually want to get you good data, because the reality is, 

we do modifications today both for our own portfolio as well as for 

loans that are in securities. 

Mr. GREEN. So the answer is, you don’t know at this moment? 

You can acquire the intelligence at a later time? 

Ms. SHEEHAN. Yes. 

Mr. GREEN. Mr. Gross and Ms. Sheehan, are servicers compensated for costs incurred by the servicer when a mortgage is 

foreclosed upon? 

Mr. GROSS. Servicers are reimbursed for third-party expenses 

that are incurred in the foreclosure process, yes. 

Mr. GREEN. And would you concur, Ms. Sheehan? 

Ms. SHEEHAN. Yes, I do. 

Mr. GREEN. Must servicers make payments from the servicer’s 

coffer to a mortgage holder pending a foreclosure? 

Mr. GROSS. As a general rule, yes. We must advance the scheduled principal and interest payment to the investor through the 

foreclosure process and generally through the disposition of the 

REO property. 

Mr. GREEN. Do you concur, Ms. Sheehan? 

Ms. SHEEHAN. Yes. 

Mr. GREEN. Now, the question becomes, finally—given that I 

only have 5 minutes—what reward does a servicer receive for restructuring a loan? 

Mr. GROSS. Well, number one, we now have a performing loan 

on our books that hopefully will be sustained over a period of 

months or years— 

Mr. GREEN. Excuse me, Mr. Gross, I have to interrupt because 

time is of the essence. 

What reward does the servicer receive? 

Mr. GROSS. The servicing fee that we collect on performing loans. 

44 

Mr. GREEN. So you will receive the same reward that you would 

receive if the loan were not going into foreclosure, correct? 

Mr. GROSS. That is correct. 

Mr. GREEN. Okay. 

Now, if this is true, if the servicer receives some benefit in the 

sense that if a loan is going to foreclosure, the servicer benefits by 

getting that done as quickly as possible because you are paying 

money out of your coffer, you are incurring expenses that have to 

be reimbursed, if that can be seen as a benefit to move this to foreclosure and you don’t receive a reward for restructuring, it seems 

to me that we have a circumstance where servicers will say, yes, 

I really do want to restructure these loans for various and sundry 

reasons. But the actual fact and the truth is that servicers have 

somewhat of a burden in the process; they have their cost that they 

are incurring, and then they have these out-of-coffer fees that they 

have to pay pending foreclosure. 

The question is this: Given that the yield spread premium—now, 

this is a stretch and you are going to have to really follow me 

here—given that the yield spread premium helped us to get into 

this program—which means that the originator got a fee for causing a person to take out a loan for a percentage higher than the 

person actually qualified for—and I am sorry if the people at home 

don’t follow this, but you and I know what I am talking about— 

why not reward the servicers for restructuring the loans, a reward 

above and beyond what the servicer will ordinarily get if the loan 

continues to be paid? 

Why not simply reward the servicer? 

Mr. GROSS. In many cases, there is an incentive— 

Mr. GREEN. I believe the ‘‘many cases’’ theory, but we are talking 

about now a wholesale problem that I keep hearing retail solutions 

to. 

Let’s talk about a wholesale solution. Why not, on a wholesale 

basis, reward servicers—make it known, publish it that they are 

rewarded, just as we do with yield spread premium—they are rewarded for a solution that involves a restructuring of the loan? 

This would cause them to have reason to move to the table aggressively and try to restructure the loan, meaning work with principal, work with interest. They would have reason to do this. 

Why not reward them for doing it? 

Mr. GROSS. The reward that you are referencing is not contained 

within the pooling and servicing agreement— 

Mr. GREEN. I understand it is not in the contract, and I would 

not abrogate contracts. I think that there are some constitutional 

problems whenever we start to talk about the government imposing 

itself into contracts. 

But if I may just say this, Mr. Chairman, it seems to me that 

the system, as constructed, provides no incentive other than the 

servicers making commentary, no incentive for the servicers to do 

what the servicers say they would like to do. 

I yield back the balance of my time. 

Mr. WATT. [presiding] I thank the gentleman. 

Just to make a point to the gentleman, I believe in the thing that 

was adopted yesterday with Fannie and Freddie and the governVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
45 

ment there is a move in this direction, where they pay servicers to 

do the modification; isn’t that right? 

Mr. GROSS. Yes. 

Mr. WATT. Okay. I thought that was the case. 

Mr. Cleaver is recognized. 

Mr. CLEAVER. I will yield 10 seconds to my colleague. 

Mr. GREEN. I thank the chairman for the commentary. 

My comment went more to the private institutions that are currently working with the servicers as opposed to what the government might do. That was why I tried to encourage something that 

might be more suitable along having private enterprise work out 

the problem. 

Mr. CLEAVER. I am going to have to move quickly. 

First of all, have we been in this mode of workouts long enough 

to have any kind of data on modified loan redefaults? Do any of you 

have any information on that, please? 

Mr. DEUTSCH. If you look at the Credit Suisse report that I think 

was passed around, there is data on the redefault rates. They run 

anywhere from 20 to 40 to 50 percent, depending on the type of 

loan you are looking at, the type of modification, part of the country, declining home prices, a whole set of variations depending on 

those factors. 

Mr. CLEAVER. So would the 50 percent redefault rate—is that a 

point of discouragement for servicers to spend time in trying to do 

a workout? 

Mr. GROSS. No, it is not. We will continue to work with those 

homeowners, and if they redefault, then we will work with them 

again. We are dedicated to finding ways to keep them in their 

homes. 

Mr. CLEAVER. Okay. That is where I want to move next anyway. 

We have the cost of the modification, as I understand it, rolled 

into the loan, albeit at the end; am I correct? 

Mr. GROSS. I am sorry, I don’t understand. 

Mr. CLEAVER. The cost of the modification, there is a cost. 

Mr. GROSS. There are no modification fees generally charged to 

homeowners for these, with some small exceptions. 

Mr. CLEAVER. Do all of you agree with that? 

Ms. SHEEHAN. Yes, I agree with that statement. 

Mr. CLEAVER. Now, if a person wants to have his or her home 

loan modified, they are going to probably need an attorney? 

Mr. GROSS. No. 

Ms. SHEEHAN. No. 

Mr. CLEAVER. So they can walk straight to the servicer and get 

the workout? 

Mr. GROSS. Yes. 

Ms. SHEEHAN. Yes. 

Mr. CLEAVER. Okay. But servicers don’t always have the loan 

documents. And if a servicer possesses the loan documents, how do 

we know that the documents are not fraud ridden? Because that 

has been one of the problems that created the current turmoil in 

the financial markets. 

Mr. GROSS. If you are referring to fraudulent loans, those are 

handled outside of our normal modification processes. 

46 

Mr. CLEAVER. Yes, but how would a servicer know whether he 

or she is involved in trying to do a workout on a loan that is fraudulent? And considering the fact that the servicer does not always 

have the loan documents—am I right? 

Mr. GROSS. Well, generally, I believe that the servicer does have 

the loan documents. And I assure you that homeowners that find 

themselves the victims of fraudulent loans are usually pretty vocal 

about telling us what the fraudulent aspects are that they believe. 

Mr. CLEAVER. Yes. Okay. I am sometimes inarticulate. I don’t 

know how to ask it any other way. 

How will the servicer know that the mortgage is fraudulent or 

not? 

Ms. SHEEHAN. Is there a particular type of fraud that you are 

concerned with? I mean, there are different types of fraud in mortgage transactions. 

Mr. CLEAVER. Well, I am asking real, live questions that I am 

running into whereby a person was able to get a mortgage and 

his—in this case, his income was ratcheted up so that he would 

qualify for a loan. So he goes in to get a workout, and 30 or 40 days 

later he gets a knock on the door from the FBI and now they want 

to talk about how he had a fraudulent loan. He had no knowledge 

that his income had been increased by $25,000 on the loan documents. 

Are you with me? 

Mr. DEUTSCH. I think the answer is, the servicer does have access to all of the loan documentation originally so that they can go 

back and look at the paperwork to say, here it was, and do the 

forensics on who signed it, whether it was the mortgage broker or 

others. 

Mr. CLEAVER. Let me ask the question another way: How does 

the servicer know whether or not the loan is fraudulent? 

Mr. GROSS. From direct communication from the homeowner. 

Mr. CLEAVER. I need somebody smarter to ask the question because I know you are smart enough to answer it. 

I have a real, live situation where somebody ended up trying to 

get a workout and they find out, without their knowledge, the loan 

documents—everything that has transpired in the mortgage is 

fraudulent. And he is working out an agreement with the servicer, 

trying to get— 

Well, now he has a new problem that the FBI is involved in, and 

the loan servicer didn’t recognize it. They ended up—I guess the 

subprime lender was under investigation—maybe in another lifetime, he can get his house back or something. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Indiana. 

Mr. DONNELLY. When you are putting your foreclosure information together to Bank of America or to Chase, do you have a formula that you use when you look at these documents and you say, 

can’t make it, we are not going to be able to help; can make it, let’s 

put a program together on this one? 

Mr. GROSS. Generally, yes, there are formulas and underwriting 

criteria that are used, as we have seen in recent months and 

weeks—days in the case of the GSEs. Many of those criterion 

standards are being greatly simplified from what they have been 

47 

in the past, and this is usually predicated upon information that 

we receive from the homeowner as to their present financial circumstances so that we can create this affordable and sustainable 

payment for them. 

Mr. DONNELLY. Ms. Sheehan. 

Ms. SHEEHAN. Yes. The process that we go through in working 

with the homeowner is to get information from them on a stated 

basis in terms of their income. 

We do have a housing ratio. We set up targets in terms of how 

much of their gross monthly income ought to be toward their housing expense payment. And so the ratio moves based on income, so 

it is lower for lower incomes. 

Mr. DONNELLY. And is that information available? For instance, 

if we have a family sitting at home wondering, we don’t know if 

we can make this or not, and if it is even worth trying, I wonder 

if Chase will work with me or Bank of America or Citi will work 

with me, and before they make the call, is there any way that they 

can know, here are the standards by which you judge? 

Mr. GROSS. The standard that we have published in our recently 

announced programs says that the first year’s principal, interest, 

taxes, and insurance should roughly equate to 34 percent of the obligated borrower’s gross monthly income. 

Mr. DONNELLY. And when that decision is made by your organization, where along the chain does that call get made? When they 

look at this family’s particular situation, who makes that call for 

you as to whether you are going to try to work this out or whether 

it is beyond hope? 

Mr. GROSS. Generally, we, the servicer, would make that call. 

Ms. SHEEHAN. That would be the parties who are charged, the 

counselors who are charged with working with the borrowers on 

the loan workout. 

So, in other words, they would gather the income information, 

they would verify the income information, they would test it 

against the housing ratio to see if it was sustainable, and then they 

would work with the homeowner. 

Mr. DONNELLY. But I guess what I am saying is, when the homeowner makes that first call and says can we put this together, is 

it like the second or the third or the fourth person that they talk 

to? 

Is there a particular division charged with that? 

Mr. GROSS. I think we would all try to make that decision and 

communicate the answer to the homeowner as early in the process 

as possible—hopefully, with the first person that they talk to, but 

it may require follow-up conversations. 

Mr. DONNELLY. And I know we are trying to make this as simple 

as possible. For the homeowner who looks at this, many of them 

will say, I don’t know if I can handle putting this together and getting the best possible situation, and they will get legal counsel or 

other help. 

Can one of the homeowners working with you receive the same 

kind of deal, the same kind of workout that they could with legal 

representation or other help? 

Mr. GROSS. Yes. 

48 

Ms. SHEEHAN. Absolutely. In fact, we encourage them to work 

with our community credit counselors to make sure that they are 

comfortable in dealing with the servicer to get the best workout. 

Mr. DONNELLY. Thank you very much. 

And, Mr. Deutsch, when you mentioned that 87 percent, that 

range doesn’t really get it done for the investors; and I was reading—in your documentation, you talk about 97 percent, and at that 

point, you know, it may not get it done for the other side. 

Is there a happy medium in this where you look at combining a 

different number along with maybe changing the terms a little bit? 

What are the other variables at play that can make this work? 

Mr. DEUTSCH. I think there are multiple variables. And by ‘‘other 

side,’’ do you mean the government or the borrower? 

Mr. DONNELLY. Probably both. 

Mr. DEUTSCH. Because there is a happy medium there of having 

some equity in the home for the borrower, some desire to stay beyond its just being their home, which should be sufficient on its 

face. But having some equity there is quite helpful. 

I think 87 percent—as we have indicated, I think there are 42 

loans that have been put into the program so far; and we are not 

talking just securitized loans here, but securitized as well as portfolio-held loans, GSA loans, etc., that have been put into the program. I think servicers have been reticent to put anything in there 

because of that significant write-down, so that number—maybe it 

is not 97, there is a range of different numbers there, but clearly 

what we are seeing so far is, the 87 is simply too low. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. FOSTER. The first question, I guess—both Mr. Deutsch and 

Mr. Gross have mentioned the possible benefits of having standardization in the mortgage modification language in these things. Do 

you have at this point agreed-upon, well-understood language that 

could be included in all future securitization contracts that would 

make them easier to unwind in this and future situations like this? 

Mr. DEUTSCH. I will take the first shot. 

We are working on that right now. Given our expectations that 

securitization NBS volume won’t really revive or restart in the next 

couple of months or few months, we are focusing our efforts more 

on the loan modifications, effectively getting through the night before we start working into the dawn. 

Mr. GROSS. Bank of America is a very active participant in working with the ASF and other industry parties to construct that language. 

Mr. FOSTER. And one of the issues in some of the written testimony had to do with the different risk tranches and the conflicts 

of interest between the riskier and the less riskier tranches, and 

they may have different points of view on mortgage modification 

and how early and aggressively you should pursue it. 

And I was wondering if there were institutions, in general, that 

specialized in the highest or lowest tranches of these that might 

have very different points of view and might make it difficult to get 

an industry-wide consensus on this. 

Mr. ALLENSWORTH. Well, I think that different market participants tend to go into different tranches of the pools. Hedge funds 

49 

tend to be in the more junior classes of the tranches, as a general 

statement. Mutual funds, pension plans, and insurance companies 

tend to be in the more senior tranches. 

There are differences in terms of the risk profiles there, but I 

think there is a lot of common ground where all investors working 

together with the servicers can come to a conclusion that mortgage 

modifications are in the best interests of all of the investors. Obviously, I can speak on behalf of hedge funds, not on behalf of the 

other investors, but we do believe that effective modifications are 

the preferable course of action and strongly encourage that. 

Mr. FOSTER. So you don’t see it as an insurmountable object to 

getting an industry-wide consensus? 

Mr. ALLENSWORTH. Not an insurmountable object, no. It requires 

discussion. 

Mr. FOSTER. And my last question is, there has been a lot of attention recently towards the concept of what is called ‘‘dynamic 

provisioning,’’ which in the case of banks would automatically adjust the bank capitalization requirements according to market conditions. My question is, is there something analogous that could or 

should be applied to the mortgage and securitization industries to 

automatically adjust the origination and securitization standards 

according to market conditions, to not have simply static requirements, but make them have an eye towards whether we are in an 

asset bubble or so on? 

Anyone who wants to field that can. 

Mr. GROSS. I am sorry, that is outside my area of expertise. 

Mr. FOSTER. Fair enough. I yield back. 

The CHAIRMAN. The gentlewoman from California. 

Ms. SPEIER. Thank you, Mr. Chairman, and thank you to our 

witnesses this afternoon. 

I would like to say that, while the word ‘‘securitization’’ is not a 

dirty word, I don’t think it is a clean word. And if you were the 

recipient of as many letters as I have received from constituents 

over the last 2 months, many of which I am signing here this afternoon, they are hopping mad about what has happened because 

they feel like they are holding the bag and a lot of people were able 

to walk. 

When you don’t have any skin in the game, it is really easy to 

conduct yourself in a risky and irresponsible manner; and I think 

the securitization that went on in its heyday was very much like 

that. 

Now, one of the things that you said, Mr. Gross, that I thought 

was worthy of us reviewing: It appears that many of the servicers 

have a whole level of subjectivity in terms of making the decision 

as to whether or not they are pursuing their fiduciary duty in 

terms of making sure the investors are maximizing their return 

and the determination that they must modify because they can’t be 

unreasonable in modifying, and that we would be best served by 

having something that was standardized for all servicers. 

Did I understand you to say that? 

Mr. GROSS. If I understand your question correctly, I believe that 

would be fair, yes. 

Ms. SPEIER. Now, if what Mr. Lockhart proposed yesterday is 

embraced, where the program that is being implemented now 

50 

would be initiated if there were three missed payments, where it 

was a home that was a primary residence and where there had not 

been bankruptcy filed yet, and this program is going to be implemented in which they will be reducing the interest rates, extending 

the life of the loan or deferring payments on the principal, then it 

makes sense, does it not, that we must mandate that for all 

servicers in this country? 

Mr. GROSS. Well, number one, that program is specific to, at this 

point, Fannie Mae and Freddie Mac. 

Ms. SPEIER. Correct. 

Mr. GROSS. Who have different servicing guidelines than what is 

often contained in the mortgage securitization market. 

And if I could give you an example, in a private security, generally speaking, I can modify a loan that is either in default or 

where I find that default is reasonably foreseeable or imminent; 

which means, in theory, I can modify a loan that is contractually 

current or that is delinquent only one payment. 

Yet the GSEs have dramatically different guidelines than that 

and, as you just read, where it is owing three or more payments; 

so it is much later in the default cycle that we are allowed to give 

these modifications than what we could in the private 

securitizations. 

Ms. SPEIER. Okay, but we could in fact—I guess what I am getting at, I want some servicer principles that are going to be used 

throughout the marketplace so the consumers and homeowners in 

this country can feel confident in talking to their servicer and saying wait a minute, there is a law now that says if I miss up to 

three payments and I live in my home and I haven’t filed bankruptcy, that you need to talk to me and we need to try to work this 

out. And I think if we sent that kind of a message out, you are 

going to have, you know, defaulting homeowners more willing to 

come forward and to negotiate. Because I don’t necessarily think 

that they are in a position to negotiate. 

Mr. GROSS. Okay. I believe that the American populace, the 

homeowners, are aware of the fact that they have the right to call 

their servicer and that the servicers are ready, willing, and able. 

We are ready to talk to them and to try to reach solutions to this. 

I also believe that there is a legal obligation that is already there 

for the servicer to undertake the actions that you are already referencing. 

Ms. SPEIER. All right. One last question to all of you. I read recently where homeowners who have been absolutely current, they 

have a prime mortgage, are now looking at their scenario and 

thinking, am I a fool to not walk away from this loan because the 

house is now worth less than the loan that I have? What do we say 

to those individuals who have been playing by the rules but now 

are looking around them and saying, wait a minute, am I a fool to 

be doing this? 

Mr. GROSS. For owner occupants, I do not believe that the lack 

of equity or declining property values is the primary reason for default. These homeowners who are defaulting that are owner occupied are defaulting because of employment issues, unemployment 

issues, medical issues, divorce, life events that are occurring that 

made these homes unaffordable for the properties that are being 

51 

walked away from. It is my belief that those are largely nonowner 

occupied properties where someone bought them as an investment 

and they have simply said I am not going to put any more good 

money into this deal. 

Ms. SHEEHAN. I would agree with Mr. Gross. I think that has 

been our experience also at Chase. I mean, people who live in their 

homes are in the community, their children are in school, they 

don’t just walk. It is usually because there is some other economic 

event that has happened to them. 

Ms. SPEIER. My time has expired. 

The CHAIRMAN. Thank you. I am glad you elicited that answer. 

I ask unanimous consent that one of our most distinguished, and 

I hope temporary alumni, the gentleman from Georgia, be allowed 

to participate. Without objection, I recognize the gentleman for 5 

minutes. 

Mr. MARSHALL. Thank you, Mr. Chairman. How many people do 

you run into whom you simply can’t work things out with because 

they have other debt problems that can’t get resolved? 

Mr. GROSS. That is a very real issue. And I think—as you have 

noticed in most of the recent announcements, whether it be from 

FDIC and IndyMac program that we have announced, they generally deal with the payment for the first mortgage principal, interest, taxes, and insurance. And we are now hearing some people 

say, well, that doesn’t take into consideration the homeowners’ 

other obligations, auto loan payment, credit cards. And our belief 

is that it is unfair and not contractually viable for us to say that 

we are going to reduce interest rates or principal on first mortgage 

debt in order to subsidize other homeowner obligations. 

Mr. MARSHALL. Do you ever encourage individuals to consider filing a Chapter 13 or a Chapter 7 bankruptcy to resolve the other 

debt issues as part of the process of getting them to a point where 

they are able to service a modified loan? 

Mr. GROSS. No, that would not be part of our discussions with 

them. 

Mr. MARSHALL. Do you work with people who have already filed? 

Mr. GROSS. Yes, we do. 

Mr. MARSHALL. So an individual could choose to file a 7 or a 13, 

clean up their debt, and then come to you and say, hey look, I want 

to keep my house, I can’t keep it under the current circumstances, 

will you modify? 

Mr. GROSS. We work with those homeowners every day. 

Mr. MARSHALL. What percentage would you say? 

Mr. GROSS. Percentage of— 

Mr. MARSHALL. Do you have an idea of what percentage of individuals you are working with now to modify debt are individuals 

who have filed a 7 or 13 and dealt with their other debt that way? 

Mr. GROSS. Probably—and this is a guess on my part, but I 

would say less than 2 percent. 

Mr. MARSHALL. Less— 

Mr. GROSS. Yes, less than 2 percent. And I would also note of 

homeowners who have filed bankruptcy, the last number I saw 

somewhere, 60 to 70 percent of those homeowners are contractually 

current on their mortgage obligations. 

Mr. MARSHALL. At the time they filed bankruptcy? 

52 

Mr. GROSS. That is correct. 

Mr. MARSHALL. What is the overall percentage of folks that you 

think you are going to be able to reach? The estimate that we have 

had is there are literally millions. I don’t know what the current 

estimate is, and precisely, but millions of individuals who are going 

to default if they haven’t already defaulted and who are going to 

go through a foreclosure process unless some other remedy is available to them? They are simply not going to be in a position to pay 

these loans. What percentage do you think you are going to be able 

to address using the programs that you currently have in place? 

Mr. GROSS. I believe the programs that we currently have in 

place will handle the vast majority of homeowners. And I would 

stress again that we have contact with over 90 percent of the 

homeowners who do go through a foreclosure action. We will work 

with every homeowner who wants to— 

Mr. MARSHALL. Do you have any statistics, the percentage of individuals that you just can’t work with because they are just not 

able to meet— 

Mr. GROSS. I don’t have the statistics with me. We could work 

with the committee afterwards. 

Mr. MARSHALL. It would be helpful to have those statistics. The 

impression I am left with is that there are an awful lot of individuals who, because of other debt issues, are simply not going to be 

able to take advantage of the programs that are currently offered 

without some other form of help. And you already identified a fairness issue yourself, saying why should we be modifying first mortgage obligations and yet all these other obligations are not being 

modified? There is no practical mechanism, outside of a bankruptcy 

setting, to deal with the multiple creditors that the typical consumer has. And simply the fact that we see an awful lot of recidivism, you know, follow-on defaults as a result of the report that I 

guess Deutsch Bank has provided us, evidence is the fact that a lot 

of people are struggling; they really want to keep their house, they 

will do the deal with you, but practically speaking, that deal is one 

they won’t be able to live up to because of their other problems. It 

would be very helpful to have some statistical studies on this to see 

to what extent this program can actually be expected to be effective 

or do we have to take some other action. 

The action I would suggest is not to have us step in and try to 

prop up borrowers, prop up lenders, etc., the folks who have gotten 

them into this mess. It is to force them to deal with it perhaps by 

permitting a modification of a certain type of mortgage for a certain period of time in a Chapter 13 setting. If you have evidence 

that is not necessary because you are going to be able to deal with 

all of this, then I think that would help all of here in Congress to 

get past this question of whether or not we should be modifying 

bankruptcy law in order to address this issue. 

I have nothing further, Mr. Chairman. 

The CHAIRMAN. With that, the hearing is adjourned with our 

thanks. And there will be follow-up. 

Mr. Deutsch, in particular we would like to be able to stay in 

touch with you on this effort you have mentioned, because that 

could have a great impact on what we do moving forward. MemVerDate Aug 31 2005 12:50 Feb 06, 2009 Jkt 046592 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\46592.TXT TERRIE
53 

bers may have the appropriate time to extend their remarks on the 

record. 

[Whereupon, at 1:08 p.m., the hearing was adjourned.] 

(55) 

A P P E N D I X 

November 12, 2008 

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